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Recent Sixth Circuit BAP Case Explains What “Court of Equity” Really Means

On Behalf of | Jul 24, 2019 | Bankruptcy, Business, Debt, Firm News, Litigation

By: Laura Day DelCotto

There are many cases that stand for the proposition that bankruptcy courts are “courts of equity,” but what
does that really mean?  To the lay person, this sounds like it means that bankruptcy courts have wide discretion to be fair and avoid injustices and abuses of the process in general.    The lay person would be wrong.  The Sixth Circuit Bankruptcy Appellate Panel recently reiterated this point.

A stated wisdom in circles of long-time bankruptcy lawyers and trustees is that no one will ever be more acrimonious and upset than divorcing spouses and divorcing business partners.  The case of In re Renegar Golf, LLC (BAP No. 18-8047, July 24, 2019) is a prime example.   One of three LLC members, alleging he was wrongfully forced out of a defunct LLC which then filed chapter 7, claimed that his other two members lied to him in fraudulently misrepresenting the company’s financial condition as part of the contentious buy-out of his membership interest.

Near the very end of the chapter 7 case, and acting pro se (without any legal counsel), this gentleman objected to the trustee’s proposed distribution of the estate assets because the “perpetrators of an abuse of the bankruptcy  process” were going to receive much of the net estate proceeds.   The BAP rejected the arguments in short order.   Unfortunately, this is a situation where hiring legal counsel may have ended with a different result.

Quoting the US Supreme Court case of Law v. Siegel, 571 U.S. 415 (2014), the BAP reiterated  the general rule that ‘whatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code.’ Id.   Section 105 does not permit broad and generalized searches for “what may be fair” under the circumstances.   In Renegar, the Bankruptcy Judge gave Mr. Renegar an opportunity for more time to bring proper claims, such as an adversary proceeding for equitable subordination of the other parties’ claims. He declined, yet pursued an appeal.  Case over, Court affirmed.

Pro se litigants often may have potential claims under the merits, but the proper procedures must be followed, which costs money in retaining competent counsel or finding an attorney to take the case on contingency.  The most “equitable” claims in the world must still be litigated by following proper legal procedures.

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DelCotto Law Group is Kentucky’s asset protection law firm known for its commitment to the lifetime success of its clients. With offices located in Lexington, Louisville and Danville, DLG serves Kentuckians with complicated financial matters, especially in the areas of bankruptcy, complex litigation, and estate planning. For more information about filing bankruptcy or DelCotto Law Group, please call (859) 231-5800 or email [email protected].