Los Angeles Bankruptcy Blog Re. Recent Cases and News
In re Cowen, F.3d , 2017 Westlaw 745596 (10th Cir. 2017)
In re Cowen, F.3d , 2017 Westlaw 745596 (10th Cir. 2017): The US Court of Appeals for the Tenth Circuit held in Cowen that when two creditors "passively retained" the debtor's property, that they did not violate the automatic stay by "passively retaining" debtor's property (which they had possession of at the time debtor filed bankruptcy), because the creditors did NOT engage in any affirmative acts to "control" the debtor's property. However, the creditors' post-petition forgery and perjury did violate the stay.
Note that (as stated in Cowen) the Second, Seventh, Eighth, and Ninth Circuits (California is in the Ninth Circuit) have all ruled that passive retention of an asset can constitute a violation of the statute, but the Tenth Circuit disagreed. The court construed the language of the statute in light of the 1984 amendments:
This issue is now a "Circuit Split" (Different US Courts of Appeals for Different Circuits have taken opposite positions), which at some point is likely to get decided by the US Supreme Court, by some party in interest, in some case, bringing a petition for certiorari, and the US Supreme Court granting same, to decide the issue.
FACTS: The owner of a commercial truck brought it in for repair; he could not afford to pay cash and instead executed a note secured by the truck. At around the same time, the owner defaulted on another note secured by a second truck; that note was held by the repairman's father-in-law. The second truck was repossessed under hostile circumstances. During the next few days, title to the first truck was supposedly transferred to the repairman, and the second truck was allegedly sold for cash to an unknown Mexican national in an undocumented transaction.
Ten days after the repossession, the owner of the trucks filed a Chapter 13 petition. He demanded the immediate return of the trucks. The bankruptcy court soon issued a turnover order and an order to show cause why the retention of the trucks was not a willful violation of the automatic stay. The repairman and his father-in-law failed to turn over the trucks.
The debtor brought an adversary proceeding seeking damages for violations of the automatic stay. The creditors argued that the debtor's rights in the trucks had terminated prior to the filing of the petition, as shown by the documents concerning the title transfer and the sale. After finding that that the creditors had forged those documents and had committed perjury, the court awarded compensatory and punitive damages. The district court affirmed the liability phase of the case, and the creditors appealed to the Tenth Circuit.
REASONING: On appeal, the creditors argued that 11 U.S.C.A. §362(a)(3) does not cover the act of passively holding onto an asset of the debtor, as distinguished from taking an affirmative act against that asset. The court candidly noted that the Second, Seventh, Eighth, and Ninth Circuits had all ruled that passive retention of an asset can constitute a violation of the statute, but the Tenth Circuit disagreed. The court construed the language of the statute in light of the 1984 amendments: As noted supra, the Second, Seventh, Eighth, and Ninth Circuits have all ruled that passive retention of an asset can constitute a violation of the 11 USC 362(a)(3) bankruptcy automatic stay, which prohibits "any act to obtain possession of property" or "any act to exercise control over property." "Act", in turn, commonly means to "take action" or "do something." ... This section, then, stays entities from doing something to obtain possession of or to exercise control over the estate's property. Per Cowen, it does not cover "the act of passively holding onto an asset," …, nor does it impose an affirmative obligation to turnover property to the estate.
The court then reasoned that if Congress had wanted to cover passive activity, as being a stay violation, it would have done so in the wording of 362(a)(3):
However, (not surprisingly) if the creditors had committed affirmative misconduct of forging title papers and lying, that conduct could be sanctioned. Per § 362(a)(3) and under § 105(a), which "grants bankruptcy courts the power to sanction conduct abusive of the judicial process." … The bankruptcy court here "found the Defendants' attitudes while testifying to be contemptuous of the bankruptcy process, the Debtor, and the Court." … It also found that Defendants "manufactured the paperwork ... after the bankruptcy filing." … And it noted that Defendants "likely forged documents and gave perjured testimony," and "coached their witnesses on what to testify to during [ ] breaks." …This was all done in an "attempt to convince the Court that [the debtor's] rights in the Trucks had been terminated prebankruptcy." (Id.) These would qualify as post-petition acts to exercise control over the debtor's property in violation of the automatic stay.
Midland Funding LLC v. Johnson
US Supreme Court on 5/15/17 issued a decision in Midland Funding LLC v. Johnson holding that Debtor Collectors That Pursue Stale Debt In Bankruptcy cases, by filing a proof of claim on a debt that is beyond the state law statute of limitations, do NOT violate the FDCPA (Fair Debt Collection Practices Act) federal consumer protection statute. US Supreme Court decision reversed an US Circuit Court, Eleventh Circuit, decision that had held that it DID violated the FDCPA for creditors to file proofs of claim in a bankruptcy case, that were past the non-bankruptcy law statute of limitations.
Giacchi v. U.S. (In re Giacchi), F.3d (3d Cir. 5/5/17)
Giacchi v. U.S. (In re Giacchi), F.3d (3d Cir. 5/5/17): US Court of Appeals for the Third Circuit, in 5/5/17 decision, Joins Majority of Circuits in the Split Over Whether Tax Can Ever be Discharged, that is owed on Late-Filed Tax Returns
The split widens on the one-day-late rule, where the First, Fifth and Tenth Circuits hold that a tax debt never can be discharged under Section 523(a)(1)(B)(i) if the underlying tax return was filed even one day late.
The Fourth, Sixth, Seventh, Eighth and Eleventh Circuits, on the other hand, employ the four-part test resulting from a 1984 Tax Court decision known as Beard. Addressing the question, the Third Circuit joined the majority in a May 5 opinion by adopting the Beard test.
Deepening the controversy over late-filed tax returns, the Third Circuit weighed in on a subordinate split by differing with the Eighth Circuit and considering the timing of the late-filed return as relevant to the question of dischargeability.
Circuit split widens on an issue the Supreme Court has been ducking.
The split widens on the one-day-late rule, where the First, Fifth and Tenth Circuits hold that a tax debt never can be discharged under Section 523(a)(1)(B)(i) if the underlying tax return was filed even one day late.
The Fourth, Sixth, Seventh, Eighth and Eleventh Circuits, on the other hand, employ the four-part test resulting from a 1984 Tax Court decision known as Beard. Addressing the question, the Third Circuit joined the majority in a May 5 opinion by adopting the Beard test.
Deepening the controversy over late-filed tax returns, the Third Circuit weighed in on a subordinate split by differing with the Eighth Circuit and considering the timing of the late-filed return as relevant to the question of dischargeability.
The Supreme Court has been ducking the split. Columbia University Law Professor Ronald J. Mann attempted to take a one-day-late case to the Supreme Court in 2015 in In re Mallo. The high court denied certiorari. In February, the justices denied certiorari in Smith v. IRS, where the petitioner's counsel raising the same issue was Prof. John A.E. Pottow from the University of Michigan Law School.
The Third Circuit Giacchi decision is a case where the debtor did not file three years' worth of tax returns until after the Internal Revenue Service made assessments. The bankruptcy court held that the tax debt was not dischargeable and was upheld in district court.
On appeal to the Third Circuit, the debtor argued that his late-filed returns nonetheless qualified as "returns," making the tax debt dischargeable under Section 523(a)(1)(B)(i). That section excepts a debt from discharge "for a tax... with respect to which a return... was not filed..." Added to Section 523(a) along with the amendments in 2005, the so-called hanging paragraph defines "return" to mean "a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements)."
The opinion by Third Circuit Judge Jane R. Roth declined to employ the one-day-late rule followed by three circuits and instead adopted the Beard test used by five others. She tersely alluded to the fact that the IRS does not endorse the one-day-late rule.
Among the four parts to the Beard test, only the fourth element was at issue: whether the debtor's late-filed return "represent[ed] an honest and reasonable effort to comply with the tax law."
Citing other circuits, Judge Roth said that a return filed after an IRS assessment will "rarely, if ever, qualify as an honest or reasonable attempt to satisfy the tax law."
The debtor relied on the Eighth Circuit's Colsen decision focusing "on the content of the form, not the circumstances of its filing." Judge Roth declined to follow the sister circuit but instead agreed "with the weight of authority that the timing of the filing of a tax form is relevant" in deciding whether the late-filed return was an "honest and reasonable attempt to comply with tax law."
Judge Roth therefore ruled that tax debts were not dischargeable under the Beard test because they did not qualify as "returns."
[as reported in ABI enewsletter "Rochelle Daily Wire" of 5/9/17]
Porter v. Nabors Drilling USA LP, F.3d (9th Cir. April 20, 2017), 9th Circuit case number 15-16985
Porter v. Nabors Drilling USA LP, F.3d (9th Cir. April 20, 2017), 9th Circuit case number 15-16985: Ninth Circuit Court of Appeals holds that Police Power Exception to bankruptcy automatic stay, 11 USC 362(b)(4), does NOT Apply to Suits by Private Attorneys General. Suits by private attorney generals (aka nongovernment individuals/entities suing as "private attorney generals"), against the bankruptcy debtor, are stayed by the bankruptcy automatic stay, and cannot proceed unless plaintiff moves for and receives relief from stay to proceed with the suit. Porter was a "private attorney general" suit seeking to enforce state labor laws.
A suit brought by an individual acting as a private attorney general is not a governmental police or regulatory action excepted from the automatic stay, according to an April 20 decision from the Ninth Circuit.
A worker complained to the California Labor & Workforce Development Agency, contending that his employer violated state labor law. When the state regulators did not act, the employee filed suit in state court under California's Private Attorney General Act, which allows individuals to sue seeking penalties for violating state labor law. If successful, the employee would recover 25% of the civil penalties and attorneys' fees, with the remainder earmarked for the state labor department.
The employer removed the case to federal court, where the district judge compelled arbitration and dismissed the suit. The employee appealed to the Ninth Circuit. While the appeal was pending, the employer filed a chapter 11 petition and filed a so-called suggestion of bankruptcy in the appeals court.
The employee responded with a motion arguing that the exception to the automatic stay in Section 362(b)(4) permitted the appeal to proceed. That section provides an exception to the automatic stay for a "governmental unit's… police and regulatory power."
In his opinion ruling that the automatic stay applied to the appeal, Circuit Judge Richard R. Clifton said that similar labor-law suits have been held to be a type of a qui tam action. He cited courts "consistently" holding that the exception for police and regulatory actions does not apply to qui tam suits, at least when the government has not intervened.
The employee's argument, according to Judge Clifton, reads the phrase "by a governmental unit" out of Section 362(b)(4). He therefore held that the automatic stay applied to privately prosecuted suits under state labor law.
Since the state had not intervened, he noted that the employee retained complete control over the suit, including the right to settle.
Circuit Split on Whether or Not Bankruptcy Courts Are "Courts of the United States"
Circuit split on whether or not bankruptcy courts are "courts of the United States". If they are, Bankruptcy Courts can use 28 USC 1927 (as well as 11 USC 105) to order misbehaving debtors, creditors, and their attorneys to pay monetary sanctions. If Bankruptcy Courts are NOT "courts of the United States", they cannot use 28 USC 1927, but can still use 11 USC 105. This Circuit split is reported in a 2016 not for publication 6th Circuit case, In re Royal Manor Management (6th Cir. 6/15/16), 652 Fed. App. 330, as follows:
There is a split of authority regarding whether a bankruptcy court is a "court of the United States" within the meaning of28 U.S.C. § 1927; the Ninth and Tenth Circuits answering in the negative and the Second, Third, and Seventh Circuits answering in the positive. Compare Miller v. Cardinale (In re Deville), 280 B.R. 483, 494 (B.A.P. 9th Cir. 2002), judgment aff'd, 361 F.3d 539 (9th Cir. 2004) ("the Ninth Circuit does not regard a bankruptcy court as a 'court of the United States' "); Jones v. Bank of Santa Fe (In re Courtesy Inns, Ltd., Inc.), 40 F.3d 1084, 1086 (10th Cir. 1994) ("bankruptcy courts are not within the contemplation of, with In re Schaefer Salt Recovery, Inc., 542 F.3d 90, 105 (3d Cir. 2008) (bankruptcy court has authority to impose sanctions under § 1927 because it is a unit of the district court, which is a "court of the United States"), Adair v. Sherman, 230 F.3d 890, 895 n.8 (7th Cir. 2000) (bankruptcy courts have authority to sanction attorneys under § 1927); Baker v. Latham Sparrowbush Assoc. (In re Matter of Cohoes Indus. Terminal, Inc.), 931 F.2d 222, 230 (2d Cir. 1991) (bankruptcy courts have authority to impose § 1927 sanctions). No published decision of this court addresses this question, but in Maloof v. Level Propane Gasses, Inc., 316 Fed.Appx. 373, 376 (6th Cir. 2008) (per curiam), this court affirmed a bankruptcy court's sanctions order under § 1927, observing that federal courts, including bankruptcy courts, have inherent and statutory authority to impose sanctions (citing Rathbun v. Warren City Schs. (In re Ruben), 825 F.2d 977, 982-84 (6th Cir. 1987)). And more recently, in Followell v. Mills, 317 Fed.Appx. 501, 513-14 (6th Cir. 2009), this court vacated the bankruptcy court's denial of sanctions under § 1927 and remanded for reconsideration of the appropriateness of sanctions without questioning the bankruptcy court's authority under the statute. ∗342 We find Followell and Maloof persuasive and follow them here.
Does Using a 'Mere Conduit' Invoke the 11 USC §546(e)?
US Supreme Court to Decide Whether Using a 'Mere Conduit' Invokes the 11 USC §546(e), so called 'Safe Harbor', provision of the Bankruptcy Code:
On 5/1/17, the US Supreme Court granted certiorari, to resolve a split of circuits and decide whether the "safe harbor" for securities transactions applies under Section 546(e), of the Bankruptcy Code, when a financial institution acts only as a "mere conduit" with no beneficial interest in the stock being sold in a leveraged buyout.
The Court will review the Seventh Circuit's decision in FTI Consulting Inc. v. Merit Management Group LP, 830 F.3d 690 (7thCir. July 28, 2016), where "mere conduit" is the only issue.
The justices are yet to act on the certiorari petition in Deutsche Bank Trust Co. Americas v. Robert R. McCormick Foundation, 16-317 (Sup. Ct.), which raises the "mere conduit" question along with several others under Section 546(e).
Fees to Recover Sanctions Are Permitted under 28 U.S.C. § 1927
Whether a court can award "fees on fees" is a hot topic, exemplified by the US Supreme Court's decision in Baker Botts LLP v. Asarco LLC , 135 S. Ct 2158 (2015) which holds that retained counsel cannot obtain compensation for successfully defending a fee application. In the appellate context, the Ninth Circuit laid down rules explaining when an injured party can recover fees incurred in obtaining a sanction against an adversary for a frivolous appeal.
Essentially, the expense of obtaining a monetary sanction can be recovered if the basis for the award is a fee-shifting statute. If the basis for the award is a rule that allows sanctions, "fees on fees" are not recoverable, according to a published-but-unsigned opinion by the Ninth Circuit on April 18.
US Supreme Court to Hear Oral Argument on 4/18/17 in Henson v. Santander Consumer USA, Inc.
The U.S. Supreme Court today will hear oral argument in a case that looks at whether a company that regularly attempts to collect debts it purchased after the debts had fallen into default is a "debt collector" subject to the Fair Debt Collection Practices Act.
U.S. Bank NA v. The Village at Lakeridge LLC
U.S. Bank NA v. The Village at Lakeridge LLC: US Supreme Court on 3/2717 Granted Petition for Certiorari on U.S. Bank NA v. The Village at Lakeridge LLC, to decide the issue of Appellate Standards for Non-Statutory Insider Status. However, does not appear that granting certiorari on U.S. Bank NA v. The Village at Lakeridge LLC will result in the US Supreme Court reviewing the more important question of INSIDER treatment.
Czyzewski v. Jevic Holding Corp., US 2017 WL 1066259
Czyzewski v. Jevic Holding Corp., US 2017 WL 1066259 (3/22/2017): US Supreme Court Strikes Down "Structured Dismissals" of Bankruptcy cases, if the terms of the "Structured Dismissal" of the bankruptcy case violate the priority scheme of the Bankruptcy Code: The United State Supreme Court in Czyzewski v. Jevic Holding Corp. held that "[a] distribution scheme ordered in connection with the dismissal of a Chapter 11 case cannot, without the consent of the affected parties, deviate from the basic priority rules that apply under the primary mechanisms the Code establishes for final distribution of estate value in business bankruptcies." Importantly, the Court, with Justice Breyer writing the majority opinion, emphasized that "a bankruptcy court does not have such a power." The "structured dismissals" of bankruptcy cases that the US Supreme Court decision prohibits were a threat to the Code's priority scheme is the allowance of "structured dismissals," which include a settlement as part of the dismissal of a chapter 11 case that would distribute estate assets in a manner that contravenes the Code's priority rules. Such priority-altering distributions could not be approved pursuant to a confirmed chapter 11 plan absent the consent of the class that is adversely affected, because of the absolute priority rule (§§ 1129(a)(8) and 1129(b)), nor would they be possible if the chapter 11 case were converted to a chapter 7 liquidation, because of the Code's strict distributional priority rules (§ 726). If such structured dismissals were permitted, a debtor and collaborating creditors effectively could do an end-run around the absolute priority rule by exiting chapter 11 via a "dismissal," before the confirmation cramdown rules are formally applied, but with final, binding distributions made as part of the "structured" dismissal in derogation of absolute priority.
Opt-Out Lenders v. Millennium Lab Holdings II LLC (In re Millennium Lab Holdings II LLC), F.Supp.3d (US District Court, District of Delaware 3/17/17):
Opt-Out Lenders v. Millennium Lab Holdings II LLC (In re Millennium Lab Holdings II LLC), F.Supp.3d (US District Court, District of Delaware 3/17/17): US District Court for District of Delaware held
Bankruptcy courts can't issue final orders approving non-consensual third-party releases of non-bankruptcy claims, even as part of a Chapter 11 plan confirmation order.
Without making a definitive ruling, a district judge in Delaware said that the US Supreme Court Stern v. Marshall case and its progeny preclude a bankruptcy court from entering a final order granting non-consensual third-party releases of non-bankruptcy claims, even as part of a chapter 11 confirmation order.
In his March 17 opinion, District Judge Leonard P. Stark implied that a bankruptcy court must submit proposed findings and conclusions to the district court, which would have the power to enter a final order approving third-party releases contained in a chapter 11 plan.
Judge Stark's opinion seems to mean that a creditor objecting to confirmation of a plan with third-party releases will have an automatic stay pending appeal while the district court conducts de novo review of the bankruptcy court's proposed findings and conclusions regarding non-consensual releases.
Judge Stark's opinion has another important consequence: The district court will review findings on third-party releases de novo and not use the clear-error standard, thus giving a district court theoretically wider latitude to reject releases.
Ruling on appeal from a confirmation order, Judge Stark remanded the case for the bankruptcy court in the first instance to rule on whether it has constitutional authority to enter a final order imposing third-party releases. If the bankruptcy court decides it does not have final adjudicatory authority, Judge Stark instructed the bankruptcy court to submit proposed findings and conclusions.
The Millennium Plan
The appeal arose from the reorganization of Millennium Lab Holdings II LLC, a provider of laboratory-based diagnostic testing services.
While being investigated by Medicare and Medicaid for fraudulent billing, the company obtained a $1.825 billion senior secured credit facility and used $1.3 billion of the proceeds to pay a special dividend to shareholders.
Thirteen months after the loan, the company agreed to settle with Medicare and Medicaid by paying $250 million. Unable to restructure its debt out of court, Millennium initiated a prepackaged chapter 11 reorganization six months later, in part to carry out the settlement.
The plan provided that the shareholders would contribute $325 million in return for releases of any claims that could be made by the lenders. The plan did not contain an opt-out provision allowing lenders to exempt themselves from the third-party releases given the shareholders.
The shareholders' $325 million contribution would be used to pay the government settlement. Some of the lenders would get $50 million in return for supporting the plan, while the remainder would be used for the reorganized company's working capital.
Before confirmation, lenders holding more than $100 million of the debt filed suit in district court in Delaware against the shareholders and company executives who would receive third-party releases under the plan.
The suit alleged fraud and RICO violations arising from misrepresentations inducing the lenders to enter into the credit agreement. The suit in district court was stayed pending appeal from plan confirmation.
The bankruptcy court confirmed the plan and approved the third-party releases. The dissenting lenders appealed, but the bankruptcy court denied a stay pending appeal. The lenders did not seek a stay from higher courts.
Having consummated the plan, Millennium filed a motion to dismiss the appeal on the ground of equitable mootness. The parties also briefed the merits of the appeal, in which the dissenting lenders alleged that no court in Delaware had ever approved such a broad third-party, non-debtor injunction.
Judge Stark's Opinion
In connection with the contested confirmation hearing, Judge Stark said the bankruptcy court ruled that it had "related to" jurisdiction to impose third-party releases. He said the bankruptcy judge also ruled that third-party releases were appropriate under Third Circuit authority.
Significantly, Judge Stark reviewed the proceedings in the lower court and concluded that the bankruptcy court had not decided whether it had power under Stern to enter a final order granting the releases.
Judge Stark conceded that the company made a "persuasive" argument that the appeal should be dismissed as equitably moot. Nonetheless, he sided with the dissenting lenders by saying he could not consider equitable mootness "without first determining whether a constitutional defect in the bankruptcy court's decision deprived that court of the power to issue that decision."
Turing to the jurisdictional and constitutional issues, Judge Stark agreed that the bankruptcy court had "related to" jurisdiction to issue non-consensual releases. However, he said it was not clear that the bankruptcy court "ever had the opportunity to hear and rule on the adjudicatory authority issue."
On the Stern question, Judge Stark said that the lenders' common law fraud and RICO claims involved public rights that were "not closely intertwined with a federal regulatory program." Consequently, he said, the dissenting lenders "appear entitled to Article III adjudication of these claims."
Judge Stark said he was "further persuaded" by the lenders' "argument that the Plan's release, which permanently extinguished [the lenders'] claims, is tantamount to resolution of those claims on the merits against" the lenders.
He rejected the company's contention that the releases in the plan "did not run afoul of Stern because it was not a final adjudication of the claims."
Next, Judge Stark said that a de novo review by him would not "resolve the constitutional concerns set forth in Stern."
Despite what he called the "seeming merits" of the dissenting lenders' arguments, Judge Stark said he "will not rule on an issue that the bankruptcy court itself may not have ruled upon."
He therefore remanded the case for the bankruptcy court to consider whether it had "constitutional adjudicatory authority" to approve non-consensual releases of the dissenting lenders' "direct-bankruptcy common law and RICO claims." If the bankruptcy court decides it does not have final adjudicatory authority, Judge Stark said the lower court should submit proposed findings and conclusions. Alternatively, Judge Stark said, the bankruptcy court could strike the releases from the confirmation order.
Judge Stark denied the equitable mootness motion without prejudice.
Assuming she feels compelled to issue proposed findings and conclusions, the bankruptcy judge on remand will presumably reach the same factual conclusions and again approve the releases, thus setting up the company to argue once again that the appeal is equitably moot. It is not clear that Judge Stark, the next time around, would dismiss the appeal as equitably moot if he were to differ with the bankruptcy court about the propriety of the releases, because he said that the bankruptcy judge on remand could strike the releases.
Confirmation Becomes Two-Step Process
Assuming Judge Stark is correct and plan releases are not core issues, plans like Millennium's will require two-step confirmation, first in the bankruptcy court, followed by de novo review in district court of non-consensual releases. Consequently, a plan could not be consummated until after district court review of proposed findings and conclusions about the releases. Presumably, the district court would review the merits of the appeal at the same time.
Given the lack of finality with regard to releases, a dissenter in effect gets an automatic stay of the confirmation order pending appeal to the district court.
[as reported in 3/21/17 ABI (American Bankruptcy Institute) e-newsletter "Rochelle's Daily Wire"]
Conflicting Outcomes, Between 2014 9th Circuit BAP Markosian v. Wu (In re Markosian), 506 B.R. 273 (9th Cir. BAP 2014), and 2 Bankruptcy Court Decisions from Other Circuits
Conflicting outcomes, between 2014 9th Circuit BAP Markosian v. Wu (In re Markosian), 506 B.R. 273 (9th Cir. BAP 2014), and 2 bankruptcy court decisions from other Circuits, which are In re Lincoln, BR , bky case number 16-12650 (Bankr. E.D. La. Feb. 8, 2017) and the 2015 Rogers v. Freeman (In re Freeman), 527 B.R. 527 (Bankr. N.D. Ga. 2015).
The issue in all 3 cases is the same, and is this: When an individual's chapter 11 case converts to chapter 7, does property acquired post-petition revert to the debtor or does it belong to the chapter 7 estate?
There is no explicit answer to that question, in the Bankruptcy Code, when conversion is from chapter 11 to chapter 7.
But for cases where conversion is from chapter 13 to chapter 7, Congress added Section 348(f)(1)(A) to provide that property in the converted case includes property of the estate at the time of the original filing that has remained in the debtor's control at the time of conversion. In other words, on conversion from chapter 13 to chapter 7, the debtor keeps after-acquired property and wages. Further buttressing the rights of the debtor, the Supreme Court decided Harris v. Viegelahn in 2015 by holding that undisbursed wages in possession of the chapter 13 trustee go to the debtor on conversion to chapter 7.
11 USC 1115 points in the other direction. Amended in 2005, that section says that money earned by an individual while in chapter 11 is part of the bankrupt estate, not separate property the individual can keep.
In Markosian v. Wu (In re Markosian), 506 B.R. 273 (9th Cir. BAP 2014) the Ninth Circuit BAP came down in favor of the debtor in 2014. The BAP saw no reason to treat bankruptcy debtors differently if their cases were converted from chapter 11 than if they were converted from chapter 13. The BAP also cited Section 541(a)(6), which provides that money earned after filing in chapter 7 belongs to the bankrupt.
In the case decided by Judge Manger on Feb. 8, the debtor had about $6,000, which he had acquired after filing his chapter 11 petition but before conversion to chapter 7.
The 2 bankruptcy decisions, Lincoln and Freeman, supra, disagreed with the BAP Markosian decision, and ordered the property acquired by the debtor after the Chapter 11 bankruptcy case was filed, and before the Chapter 11 case was converted to Chapter 7, which was still in debtor's possession, must be turned over to the Chapter 7 trustee, by debtor, when the case was converted from 11 to 7. Judge Manger (Lincoln case) was persuaded by the principle of statutory construction that Congress is presumed to act intentionally when it includes particular language in a statute but omits another. She therefore concluded that the money goes to the chapter 7 estate, by negative inference from Section 348(f)(1)(A).
This issue could someday go to the US Supreme Court, if this issue gets appealed up to US Circuit Courts, and the Circuit Courts of 2 or more Circuits disagree.
Greif & Co. v. Shapiro (In re Western Funding Inc.), 550 B.R. 841 (9th Cir.BAP 2016) ("Greif")
Greif & Co. v. Shapiro (In re Western Funding Inc.), 550 B.R. 841 (9th Cir.BAP 2016) ("Greif"): The U.S. Bankruptcy Appellate Panel for the Ninth Circuit (the "9th Circuit BAP") held that the standards for approving a settlement agreement under Fed. R. Bankr. P. 9019(a) did not apply per se to a post-confirmation settlement agreement between a creditor and the liquidating trustee (the "Liquidating Trustee"), as liquidating trustees do not constitute "trustees" for purposes of the Bankruptcy Code and Bankruptcy Rules.
Wolf Metals Inc. v. Rand Pac. Sales, Inc., 4 Cal. App. 5th 698
Wolf Metals Inc. v. Rand Pac. Sales, Inc., 4 Cal. App. 5th 698 (2016), a published California Court of Appeals decision, the California Court of Appeal held that a judgment creditor could not amend a default judgment to add an additional individual judgment debtor under an "alter ego" theory, because doing so would violate that person's due process rights, although adding a successor corporation to the judgment was permissible. Judgment creditors often want to add a nondebtor individual to a state court default judgment, because the corporation the judgment is against files bankruptcy, or is otherwise "uncollectible".
FACTS: Wolf Metals filed a complaint against Rand Pacific Sales, Inc. ("RPS") for open book account, account stated and breach of contract after RPS did not pay for solid sheet metal that Wolf Metals sold to RPS.
RPS answered the complaint, but then filed for bankruptcy under chapter 7. The state action was stayed. Wolf Metals asserted an unsecured claim in the bankruptcy proceedings. The case was fully administered and RPS, as a corporate debtor, did not receive any discharge.
After the bankruptcy case was closed, the trial court authorized Wolf Metals to resume the state court litigation. RPS's counsel repeatedly failed to appear at hearings. Ultimately the trial court struck RPS's answer and entered a default judgment against RPS. Wolf Metals conducted a debtor's examination of RPS's president, Donald Koh, and RPS's secretary and treasurer, Koh's wife. Following motions to compel responses, sanctions and another debtor's examination, Wolf Metals filed a motion under California Code of Civil Procedure section 187 to amend the default judgment to name Koh and South Gate Steel, Inc. ("SGS"), another company that Koh operated, as additional judgment debtors under alter ego and successor corporation theories. Concluding that Koh was RPS's alter ego and that SGS was RPS's successor corporation, the court amended the default judgment naming Koh and SGS as additional judgment debtors.
On appeal, the California Court of Appeal reversed the amended judgment as to Koh, and affirmed as to SGS.
REASONING: Under the California Supreme Court's precedent in Motores De Mexicali, S.A. v. Superior Court, 51 Cal. 2d 172 (1958) ("Motores"), adding Koh as an additional judgment debtor under an alter ego theory violated Koh's due process rights because the initial judgment against Wolf Metals was obtained by default.
California Code of Civil Procedure section 187 authorizes a trial court to amend a judgment to add additional judgment debtors. In some circumstances, it may be proper to add an additional judgment debtor under an alter ego theory. For example, when an individual abuses the corporate form to perpetrate a fraud, courts will ignore the corporate entity and adjudge the wrongful acts to be those of the persons controlling the corporation.
However, courts are sensitive to the application of the alter ego theory in connection with default judgments because it raises due process concerns. "[T]o amend a judgment to add a defendant, thereby imposing liability on the new defendant without trial, requires both (1) that the new party be the alter ego of the old party and (2) that the new party ... controlled the litigation, thereby having had the opportunity to litigate, in order to satisfy due process concerns. The due process considerations are in addition to, not in lieu of, the threshold alter ego issues." Triplett v. Farmers Ins. Exchange, 24 Cal. App. 4th 1415, 1421 (1994) (emphasis in original).
The court noted that it was bound by the rule first established over fifty years ago in Motores. There, the plaintiff obtained a default judgment against a corporation and sought to add as alter egos the three individuals who formed the corporation. In rejecting the request, the Motores court cited Fourteenth Amendment due process concerns, particularly because the individuals had no duty to participate in that action since no claims had been made against them personally. Likewise, in NEC Electronics, Inc. v. Hurt, 208 Cal. App. 3d 772 (1989) ("NEC"), the court relied on Motores to reverse the lower court's decision adding the defendant's CEO as an additional judgment debtor. The NEC court explained that there was no defense for the defendant's CEO to control because the corporate defendant did not appear to defend at trial.
This case is the same as Motores. Both the individuals behind the corporate defendants here and in Motores dominated their respective companies. However, in both cases, the corporate defendants offered no evidence-based defenses and the judgments against the corporate entities were entered by default. The cases upon which Wolf Metals relied were distinguishable, because they did not follow defaults. In those cases, the defendants presented evidence-based defenses before the court amended the judgment to add additional alter ego defendants. Thus, those cases involved defenses that the proposed alter ego judgment debtor potentially could control. In contrast, despite having filed its answer, which was later stricken, RPS did not present any evidence-based defense before default judgment was entered against it, and Koh was not proposed as an alter ego defendant before default judgment was entered. Thus, bound by Motores, the court reversed the lower court's decision as it applied to Koh.
Contrast the reversal of the trial court's alter ego decision with the portion of the decision affirming that the amended judgment could include SGS as a successor corporation. Due process is not contravened by amending the judgment to include a corporation that is the debtor defendant's "mere continuation." See McClellan v. Northridge Park Townhome Owners Ass'n, 89 Cal. App. 4th 746 (2001). The evidence presented to the trial court established that SGS was a mere continuation of RPS, because they shared the same officers, business location, employees, agent for service of process and equipment, the companies' funds and assets were commingled, and SGS did not pay adequate consideration for RPS's assets.
COMMENT from 2/6/17 enewsletter
Wolf Metals highlights the due process problem of adding an additional individual debtor to a default judgment under an alter ego theory. The lesson is that plaintiffs should consider whether an alter ego theory applies before moving forward to obtain a default judgment, and make sure to add the relevant individuals as additional named defendants before moving forward with a prove-up. Adding those individuals in advance may enable the plaintiff to obtain default judgments against them or may at least prompt the individuals to appear and respond (of course, where - as here - the defendants are not forthcoming with information about various relationships, it may be difficult for a plaintiff to determine in advance whether it should name additional defendants). Conversely, debtor-defendants should consider the advantages of defaulting when only a corporate defendant is named in the pleadings. As Wolf Metals demonstrates, waiting until after the default judgment is obtained against the entity forecloses the plaintiff's opportunity to obtain an amended judgment against an individual on an alter ego theory.
[as reported in State Bar of California, Business Law Section, Insolvency Law Committee e-newsletter of 2/6/17]
U.S. Bank N.A. v. The Village at Lakeridge, LLC
U.S. Bank N.A. v. The Village at Lakeridge, LLC (In re The Village at Lakeridge, LLC), 814 F.3d 993 (9th Cir. 2016): Held that purchasing a claim from an insider of the bankruptcy debtor does NOT necessarily result in the person/entity purchasing the claim becoming an insider. United States Court of Appeals for the Ninth Circuit held that a vote on a plan of reorganization submitted by a non-insider claimant was not to be disregarded under Bankruptcy Code section 1129(a)(10) merely because the claimant purchased the claim from an insider.
FACTS: The debtor owned a commercial real estate development in Reno, Nevada. There was only one secured claim in the debtor's case, amounting to about $10 million. There was also only one unsecured claim, listed on the debtor's schedules at $2,761,000. The holder of the unsecured claim at the outset of the case was the debtor's sole member, MBP Equity Partners 1, LLC ("MBP").
The debtor filed a plan and disclosure statement that addressed the two claims in the case. Before the hearing on the adequacy of the disclosure statement, MBP sold the unsecured claim to Dr. Robert Rabkin for $5,000. After the disclosure statement was approved, Rabkin voted in favor of the debtor's plan.
During a deposition conducted by the secured lender in connection with the plan confirmation proceedings, Rabkin testified that: (i) he had a business and a close personal relationship with Kathie Bartlett, a member of the board of MBP; (ii) he saw Bartlett regularly; (iii) he purchased the unsecured claim for $5,000 as a business investment; and (iv) other than the foregoing, he had no interest in the case or relationship to the debtor.
The secured lender then filed a motion to designate the unsecured claim purchased by Rabkin and disallow such claim for the purposes of voting on the debtor's plan.
The bankruptcy court found that the assignment of the unsecured claim was not in bad faith, and declined to designate Rabkin's unsecured claim on that basis. The bankruptcy court also found that Rabkin was not a non-statutory insider due to his relationship with Bartlett. However, the bankruptcy court did designate Rabkin's claim and disallowed Rabkin's vote on the plan because the bankruptcy court determined that Rabkin had become a statutory insider by purchasing the claim from MBP. The designation ruling prevented the debtor from obtaining an impaired consenting class of creditors as required by Section 1129(a)(10) of the Bankruptcy Code, thus blocking confirmation of the debtor's plan.
The debtor and Rabkin appealed the bankruptcy court's order. The secured lender cross-appealed the portions of the bankruptcy court's order finding that Rabkin was not a non-statutory insider and finding that Rabkin's vote should not be designated under Bankruptcy Code section 1126(e).
The Ninth Circuit Bankruptcy Appellate Panel reversed the bankruptcy court's ruling that Rabkin was a statutory insider merely by virtue of having purchased his claim from a statutory insider, and permitted Rabkin to vote on the plan. The secured lender appealed to the Ninth Circuit.
REASONING: This case concerns Bankruptcy Code section 1129(a)(10), which provides that if a class of claims is impaired, at least one class of impaired claims must accept the plan, "determined without including any acceptance of the plan by any insider." The term "insider" is defined in Bankruptcy Code section 101(31), which provides a non-exclusive list of parties that are deemed insiders. Parties deemed to be insiders by virtue of being on the non-exclusive list are referred to as "statutory insiders," and parties not on that list who nonetheless have a close enough relationship with the debtor to warrant special treatment are referred to as "non-statutory insiders." In this case, the parties did not dispute that MBP, as the sole member of the debtor, was a statutory insider.
The Ninth Circuit reversed the bankruptcy court's determination that Rabkin was a statutory insider such that his acceptance of the debtor's plan should be excluded under Bankruptcy Code section 1129(a)(10). The Ninth Circuit held that the bankruptcy court applied an erroneous standard when it concluded that Rabkin became a statutory insider merely because he acquired the unsecured claim from a statutory insider.
The Ninth Circuit explained that insider status is a property of a claimant, not of the claim, and thus does not flow to the assignee as a matter of assignment law when a claim is assigned. The Ninth Circuit acknowledged that this result conflicted with a prior unpublished Ninth Circuit ruling which had held that insider status does transfer with a claim under general assignment law, In re Greer W. Inv. Ltd. P'ship, No. 94-15670, 1996 WL 134293 (9th Cir. Mar. 25, 1996), but distinguished that decision by observing that it was unpublished and not binding.
The Ninth Circuit further explained that "insider status is a question of fact that must be determined after the claim transfer occurs." Lakeridge, 814 F.3d at 1000. This factual analysis is done on a "case-by-case basis," after considering various factors. Id. The Ninth Circuit held that the factual inquiry could not be bypassed by a per se rule such as that created by the bankruptcy court, which would bar even a third party that acquired the claim at arm's length from voting on a plan. The Ninth Circuit further noted that courts have held that when an insider acquires a claim from a non-insider, the claim loses its non-insider status because of the insider character of the purchaser. See In re Applegate Prop., Ltd., 133 B.R. 827 (Bankr. W.D. Tex. 1991); In re Holly Knoll P'ship, 167 B.R. 381 (Bankr. E.D. Pa. 1994). Thus, to hold that the claim keeps its insider status when transferred away from a statutory insider, but loses its non-insider status when transferred to a statutory insider, would create a procedural inconsistency in the Code.
The Ninth Circuit affirmed the finding that Rabkin was not a non-statutory insider. In doing so, the Ninth Circuit clarified the standard for becoming a non-statutory insider as a two-part, conjunctive test: "A creditor is not a non-statutory insider unless: (1) the closeness of its relationship with the debtor is comparable to that of the enumerated insider classifications of § 101(31), and (2) the relevant transaction is negotiated at less than arm's length." Lakeridge, 814 F.3d at 1001. The Ninth Circuit explained that while the secured creditor had demonstrated a close relationship between Rabkin and Bartlett, it had not shown a close relationship between Rabkin and Lakeridge, in part because Bartlett did not control either Lakeridge or its member, MBP.
COMMENT: The Lakeridge case both clarifies the law on the determination of insider status - which is relevant not just to the plan confirmation process, but also to preference actions - and also touches on the increasing area of claims trading. The ruling avoids what could have been a trap for the unwary claims trader, who, if the bankruptcy court ruling had stood, would have had to undertake due diligence as to the insider status of the assignor before purchasing a claim. Arguably, the case also gives debtors greater freedom in the plan confirmation effort by suggesting that a debtor's insiders may increase the debtor's chances of obtaining an impaired consenting class by transferring their claims to third parties. This prospect was raised by the secured creditor as a "slippery slope" type of argument, but the Ninth Circuit found that this effect would be mitigated by various protections in the plan confirmation process, including the requirements that the plan comply with the Bankruptcy Code, that the plan be proposed in good faith, that the plan disclose the identity of all insiders, that at least one class of impaired claims has accepted the plan, and that the plan is fair and equitable with respect to each class that did not accept it. In practice, a greater protection against that slippery slope may be the bankruptcy court's own discretion in undertaking the insider analysis, which is highly specific to the facts of each case and, as a factual determination, may be difficult to overturn on appeal.
[This review is from California State Bar Insolvency Committee e-newsletter of 020317]
In re Rexford Properties, LLC, BR , 2016 Westlaw 5416443 (Bankr. C.D.Cal.2016)
In re Rexford Properties, LLC, BR , 2016 Westlaw 5416443 (Bankr. C.D.Cal.2016): A bankruptcy court in California has held that the separate classification of a group of trade creditors in a Chapter 11 plan had to be based on a "legitimate business or economic justification," but the debtor did not have to show that the special treatment of that group was "critical, essential, or necessary" to the reorganization. [.]
FACTS: A Chapter 11 debtor negotiated a reorganization plan, under which certain of its unsecured creditors (primarily trade creditors) would be separately classified. The members of that class would be paid in full, provided that they promised to continue providing goods and services to the reorganized debtor on terms and conditions that were no less favorable than before the reorganization. Prior to seeking formal plan confirmation, the debtor brought a motion under Federal Rule of Bankruptcy Procedure 3013, seeking an advanced determination that its classification scheme was appropriate.
One of the debtor's largest unsecured creditors, which was not part of that special class, objected to the motion on the ground that preferential treatment for the class members was not "critical, essential, or necessary" to the reorganization. The debtor argued that as long as the separate classification and the separate treatment were supported by a "legitimate business or economic justification," the classification scheme was permissible.
REASONING: The court ruled in favor of the debtor but noted that there was no controlling Ninth Circuit authority that was exactly on point. Citing In re Johnston, 21 F.3d 323 (9th Cir. 1994), and In re Barakat, 99 F.3d 1520 (9th Cir. 1996), the court observed that "[s]ubstantially similar claims may be classified separately if there is a 'legitimate business or economic justification' for doing so:
The Court concludes that when a plan proposes separate classification of trade vendor claims in order to provide preferential treatment to those claims, a "legitimate business or economic justification" is established when (i) the vendors provide genuine operational or financial benefits to the debtor and (ii) the preferential treatment of vendor claims is reasonably calculated to induce the continued support of those vendors.
The court noted that the higher standard proposed by the objecting party went beyond the language of Barakat, supra:
A legal standard permitting separate classification of substantially similar claims only where the claims are "critical," "essential," or "necessary" would go far beyond the requirement of a legitimate business or economic justification. Use of these terms would suggest that separate classification is justified only when it is proven that a debtor's reorganization will not succeed without it . . . . The requirement of a "legitimate business or economic justification" does not impose such a high bar. If the Ninth Circuit had intended to do so, it certainly would not have held that a legitimate justification would suffice to permit the separate classification of substantially similar claims . . . . Instead, it would have held that such classification is permitted only when necessary to achieve the debtor's reorganization.
The court also observed that the stricter "necessity" standard would pose evidentiary and procedural problems:
[A] necessity standard would not be practicable. There is no question that when a debtor seeks to provide preferential treatment to a group of otherwise similar claims, it is necessary to separately classify those claims . . . . But how does a debtor show that the preferential treatment (i.e., the premise for the separate classification) is truly necessary (i.e., "inescapable," "unavoidable," "compulsory," "absolutely needed" and "required")? To meet such a standard-logically speaking- the debtor would need to demonstrate (1) the vendor provides necessary goods and services that are not available from alternative vendors, or that are not otherwise available on terms and conditions that will permit the business to reorganize and (2) the vendor will stop providing those goods and services or favorable terms after confirmation of a plan that does not include the preferential treatment of its claim.
The first proposition is readily capable of proof, but the second proposition is problematic. First, bankruptcy courts do not have a crystal ball. They do not predict what will or will not happen in the future. At best, they make reasoned judgments about the likelihood of future events based on existing circumstances and historical facts . . . . Second, as a matter of proof, it is inherently difficult to establish what a vendor will or will not do in the future. A vendor might be willing to testify that its continued support of the debtor depends on the proposed preferential treatment, but the self-serving nature of the testimony is not likely to yield a satisfying result. Any vendor asked whether preferential treatment of its prepetition claim is a prerequisite to its future support of the debtor is likely to say "yes." And even if this were not the case, the debtor would face a substantial (perhaps insurmountable) burden in soliciting and presenting the testimony of potentially dozens or hundreds of vendors to demonstrate that the proposed treatment, in each instance, is necessary (i.e., "inescapable," "unavoidable," "compulsory," "absolutely needed" and "required") to obtain the continued support of those vendors.
The court went on to hold, however, that although the class of trade creditors, taken as a whole, qualified under the "legitimate business or economic justification" test, a few of the claimants included by the debtor in the class of trade creditors had to be excluded because the debtor had not presented sufficient evidence to show justification as to those particular creditors.
After determining that the separate classification of the trade creditors was justifiable, the court then ruled that those creditors would qualify as "impaired" for purposes of the cramdown provisions in the Bankruptcy Code, which require that at least one "impaired class" consent to the plan. The court noted that under In re L & J Anaheim Assocs., 995 F.2d 940 (9th Cir. 1993), any alteration of a creditor's rights constitutes "impairment," even if the value of the rights is enhanced:
The proposed Trade Class described in the present motion is clearly "impaired" within the meaning of section 1124. Under the proposed treatment of the Trade Class claims, the holders of trade claims will be provided payment equal to 100% of the allowed amount of their claims, but as a condition to such treatment they will be required to agree to continue providing goods and services to [the debtor] on terms and conditions no less favorable than currently provided. The imposition of this condition is an alteration of the rights of the holders of the claims in the Trade Class, even if the treatment overall results in full payment.
COMMENT OF ATTORNEY MARCH: Don't count on higher courts agreeing with this decision. It guts the Bankruptcy Code's classification scheme if creditors of same priority can be separately classified
For discussions of recent opinions involving related issues, see 2014-08 Comm. Fin. News. NL 17, New Value Chapter 11 Plan Requires Genuine Market Test, Lender's Deficiency Claim Cannot Be Gerrymandered Where Guarantor is Insolvent, and Artificial Impairment Cannot Be Abusive; and 2012 Comm. Fin. News. 19, When Secured Lender Holds Non-Debtor Guarantees, Lender's Unsecured Deficiency Claim May Be Separately Classified, Thus Enabling Debtor to Confirm Cramdown Plan Using a Separate Class of Impaired Consenting Unsecured Creditors.
[this case discussion, but NOT attorney March's above comment, is from the California State Bar Insolvency Law Committee e-newsletter of 1/30/17}
Ho vs. ReconTrust Co., NA, 2016 Westlaw 6091564 (9th Cir. 2016)
SUMMARY: Ho vs. ReconTrust Co., NA, 2016 Westlaw 6091564 (9th Cir. 2016): Ninth Circuit Court of Appeals held that a foreclosure trustee's notice of default sent to a borrower was not an attempt to collect a debt for purposes of the FDCPA.
FACTS: A consumer defaulted on her home loan. Acting on behalf of the lender, the trustee sent her a notice of default ("NOD"), in anticipation of foreclosure. The notice stated that she owed approximately $20,000 and that she "may have the legal right to bring [her] account in good standing by paying all of [her] past due payments." The NOD also stated that the home "may be sold without any court action." The trustee then recorded a notice of sale.
Borrower sued lender under the Fair Debt Collection Practices Act ("FDCPA"), stating that the NOD had misrepresented the amount of the debt. The district court granted the trustee's motion to dismiss, and the Ninth Circuit affirmed.
REASONING: In a 2 to 1 opinion written by Judge Kozinski, the court reasoned that the trustee was simply seeking to proceed with the foreclosure in compliance with California law and was not attempting to collect a debt:
[The trustee] would only be liable if it attempted to collect money from [the borrower]. And this it did not do, directly or otherwise. The object of a nonjudicial foreclosure is to retake and resell the security, not to collect money from the borrower. California law does not allow for a deficiency judgment following non-judicial foreclosure. This means that the foreclosure extinguishes the entire debt even if it results in a recovery of less than the amount of the debt . . . . Thus, actions taken to facilitate a non-judicial foreclosure, such as sending the notice of default and notice of sale, are not attempts to collect "debt" as that term is defined by the FDCPA.
The prospect of having property repossessed may, of course, be an inducement to pay off a debt. But that inducement exists by virtue of the lien, regardless of whether foreclosure proceedings actually commence. The fear of having your car impounded may induce you to pay off a stack of accumulated parking tickets, but that doesn't make the guy with the tow truck a debt collector.
The court acknowledged that its result was contrary to those of two other circuit court decisions, Glazer v. Chase Home Fin. LLC, 704 F.3d 453 (6th Cir. 2013), and Wilson v. Draper & Goldberg, P.L.L.C., 443 F.3d 373 (4th Cir. 2006). The court was particularly critical of the Glazer opinion:
The Sixth Circuit's decision in Glazer rests entirely on the premise that"the ultimate purpose of foreclosure is the payment of money . . . ." But the FDCPA defines debt as an "obligation of a consumer to pay money . . . ."Following a trustee's sale, the trustee collects money from the home's purchaser, not from the original borrower. Because the money collected from a trustee's sale is not money owed by a consumer, it isn't "debt" as defined by the FDCPA.
The court carefully limited the scope of its opinion:
We do not hold that the FDCPA intended to exclude all entities whose principal purpose is to enforce security interests. If entities that enforce security interests engage in activities that constitute debt collection, they are debt collectors. We hold only that the enforcement of security interests is not always debt collection.
Later, the court invoked the underlying policy of the FDCPA to explain why the NOD was not a request for payment:
The notices at issue in our case didn't request payment from [the borrower]. They merely informed [her] that the foreclosure process had begun, explained the foreclosure timeline, apprised her of her rights and stated that she could contact [the lender] . . . if she wished to make a payment. These notices were designed to protect the debtor. They are entirely different from the harassing communications that the FDCPA was meant to stamp out.
There was a strong and lengthy dissent by Judge Korman, arguing that the weight of authority supported the application of the FDCPA to the foreclosure trustee.
COMMENT: Less than two weeks before the decision in Ho was issued, the Fourth Circuit reaffirmed its holding in Wilson, supra, in McCray vs. Federal Home Loan Mortgage Corp., 2016 Westlaw 5864509 (4th Cir.). (For a discussion of McCray, see 2016 Commercial Finance Newsletter - - , Lender and Law Firm Seeking Foreclosure Are "Debt Collectors" Under FDCPA.) There is now an irreconcilable circuit split that requires Supreme Court review. I predict that certiorari will be granted in both of these cases and that the Supreme Court will agree with the Fourth Circuit.I think that the Court will reason that one purpose of the NOD is to collect the debt. The mailing of an NOD tells the borrower that she has to pay up or else. Yes, it is true that the NOD does not expressly say "you must pay." But it does say "if you do not pay, bad things will happen," which is essentially the same thing. To use an ancient maxim in a new context, an NOD is as good as a wink.
I am certainly not saying that every NOD constitutes a violation of the FDCPA; the statute is violated only when a creditor engages in specific types of misconduct. But a creditor who violates the statute should not be able to hide behind the fact that the misbehavior was coupled with an effort to foreclose.
The counterargument, as articulated by Judge Kozinski, is that it would interfere with the foreclosure process, a creature of state law, to expose lenders to federal liability under the FDCPA. That is true, but I think that argument is overbroad. Many commercial transactions are governed by state law, often with a federal overlay, so that the creditor must comply with both sets of laws. That is the nature of federalism. See, e.g., Arizona v. United States, ---U.S. ----, 132 S.Ct. 2492, 2500, 183 L.Ed.2d 351 (2012): "Federalism, central to the constitutional design, adopts the principle that both the National and State Governments have elements of sovereignty the other is bound to respect."
Whether or not the Supreme Court overturns the Ninth Circuit on this issue, I am compelled to add that Judge Kozinski's writing is always a pleasure to read. His prose is so clear and so refreshingly informal that his meaning shines through. Very few other judges are such powerful writers; Judges Posner and Easterbrook of the Seventh Circuit are in the same elite class. [as reported California State Bar Business Law Section Insolvency e-newsletter of 1/25/17]
Retailers' Free Speech Challenge to Surcharge/discount Distinction for Describing Price Differences for Credit Card and Cash Sales
Retailers' Free Speech Challenge to Surcharge/discount Distinction for Describing Price Differences for Credit Card and Cash Sales (US Supreme Court docket certarari granted on 10-20-16, and US Supreme Court heard argument of case on 1/11/17 :U.S. Supreme Court on 1/11/17 struggled over how to decide a challenge to a state law barring retailers from charging more to buy with credit instead of cash, debating whether it merely regulates prices or violates merchants' constitutional rights. The eight justices heard an hour of arguments in an appeal brought by merchants to a lower court's ruling upholding the New York law, which is similar to statutes in nine other states. Merchants contend these laws infringe on their free speech rights guaranteed by the U.S. Constitution by dictating how they describe their pricing to customers. Retailers are forced to pay fees to credit card companies every time a customer buys with a card. The law bars retailers from imposing a surcharge on customers who make purchases with a credit card. It also makes it impossible for merchants to call fees paid to credit card companies a surcharge that is added to the price of a product. The law does not stop retailers from offering a discount for cash purchases. The justices debated whether the law even regulates speech or whether it is a traditional form of price regulation that is not subject to a free speech challenge. Several justices including Stephen Breyer indicated they did not think the law affects free speech, suggesting they may vote to uphold it. Breyer said the law simply requires retailers to post a price that includes the credit card surcharge. [as reported in Credit & Collection News e-newsletter of 1/12/17]
Midland Funding, LLC v. Johnson, St. Ct., No. 16-348
In Midland Funding, LLC v. Johnson, St. Ct., No. 16-348, appeal docketed Sept. 16, 2016: US Supreme Court in 2017 will hear and decide a bankruptcy case involving a debt collection agency and a consumer bankruptcy debtor.
Issue is whether the Consumer Financial Protection Act prohibits a debt collection agency/creditor from filing a proof of claim, in a bankruptcy case, that is barred by the statute of limitations. More than two years into a litigation effort challenging the credit and collection industry's practice of filing time-barred proofs of claim in consumer bankruptcy cases, all eyes are on the U.S. Supreme Court, which recently received a flood of "friend of the court" briefs arguing both sides of the debate - including amicus briefs from ACA International and the Consumer Financial Protection Bureau. In Midland Funding, LLC v. Johnson, St. Ct., No. 16-348, appeal docketed Sept. 16, 2016, a consumer is accusing a debt collector of engaging in deceptive, misleading, unfair, or unconscionable conduct in violation of the Fair Debt Collection Practices Act by knowingly filing an accurate bankruptcy proof of claim on a debt that is barred by the applicable statute of limitations. The district court judge in the Southern District of Alabama who considered the issue in Johnson granted the debt collector's motion to dismiss, finding the FDCPA and the Bankruptcy Code in "irreconcilable conflict" because the Code allows all creditors to file a proof of claim on any debt, even if that debt is barred by the statute of limitations, whereas the FDCPA prohibits a "debt collector" from "us[ing] any false, deceptive, or misleading representation or means in connection with the collection of any debt," including attempting to collect a debt that is not "expressly authorized by the agreement creating the debt or permitted by law" (i.e., a debt barred by the statute of limitations.) The district court found that the later-enacted Bankruptcy Code effectively repealed the conflicting provision under the FDCPA and precluded consumers from challenging the practice of filing time-barred proofs of claim as a violation of the FDCPA in a bankruptcy proceeding. [reported in 010517 Credit & Collection e-newsletter].
Beware of Online Bankruptcy Solicitations
BEWARE OF SUPPOSED "NATIONAL" LAW FIRM (PRINCE LAW FIRM, LLC) WHICH ADVERTISED ON INTERNET, SOLICITING FOR BANKRUPTCY CASES, BUT WHICH WAS NOT A NATIONAL LAW FIRM, AND WHICH WAS FARMING THE CASES OUT TO LAW FIRMS IN VARIOUS STATES, SOMETIMES WITH BAD RESULTS: In re Aimee Dawn Futreal and Judge A. Robbins, US Trustee for Region Four, Movant v. Brent Barbour and Barry Proctor and Prince Law Firm, LLC, Respondents; and In re Micah Jerimey Repass and Holly Leigh Repass, Debtors, and Judgy A. Robbins, US Trustee for Region Four, Movant v. Brent Barbour and Barry Proctor and Prince Law, LLC and Prince Law Firm, LLC, Respondents (US Bankruptcy Court, WD VA, 2016 WL 2609644, issued 5/2016) : Decision found that Prince Law Firm, LLC, was misrepresenting, in claiming to be a "national" law firm, and that its "agreements" for hiring counsel to handle cases was not proper, and ordered various sanctions.
In re Kimball, BR (Bankr. W.D. Okla. 12/13/16)
In re Kimball, BR (Bankr. W.D. Okla. 12/13/16): bankruptcy court decision explains the (complex) case law rules for determining which state's statute of limitations law applies where a creditor's claim in a bankruptcy case is based on a state court judgment/order. There is a split among federal Circuit courts on this issue.
ABI (American Bankruptcy Institute) described the case as follows: Spotting an issue that both parties missed, Bankruptcy Judge Janice D. Loyd of Oklahoma City avoided the circuit split on choice of law rules for cases with exclusive jurisdiction in federal courts. Her Dec. 13 opinion reads like a handbook for deciding which state's statute of limitations applies.
A former husband filed bankruptcy in Oklahoma. His former wife filed a priority claim for $27,000 in unpaid child support under a Utah divorce decree. The former husband-debtor objected to the claim, contending the allowable amount of the claim was only some $3,000 after applying Utah's statute of limitations for child support.
The wife agreed that the Utah statute applied but argued that the husband had waived the statute by making voluntary payments after the limitations period expired.
Judge Loyd did not adopt the parties' agreed choice of law. Instead, she said that neither party raised the "unsettled and potentially determinate choice of law issue."
Under the Supreme Court's Guaranty Trust and Klaxon decisions from the 1940s, federal courts sitting in diversity employ the forum state's choice of law rules to determine controlling substantive law; however, the Supreme Court has never extended the rule to cases under bankruptcy jurisdiction.
In federal question cases, four circuits use choice of law rules of the forum state. Three other circuits, including the Tenth, employ federal common law and the Restatement (Second) of Conflicts of Laws. Under the Restatement, Judge Loyd said that Utah law would apply because it had the most "significant relationship to the parties and the occurrence."
Judge Loyd decided, though, that federal common law did not apply in view of the federal Full Faith and Credit Child Support Orders Act of 1994, which includes choice of law rules for child support matters. In an action to enforce child support arrears, Section 1738(h) of FFCCOA provides for the application of the statute of limitations of the forum state or the state that issued the order, "whichever statute provides the longer period of limitation."
Both Utah and Oklahoma had adopted the Uniform Interstate Family Support Act, which similarly invokes the longer statute of limitations.
Oklahoma "clearly provides for the longer statute of limitations in child support actions," Judge Loyd said, because there is none in the Sooner state. In Oklahoma, child support is owed until it is paid in full, the judge said.
Since the statute will never expire, Judge Loyd directed the parties to recalculate the allowable claim.
Comment by KP March, Esq. of the Bankruptcy Law Firm, PC: Choice of law issues are often very tricky to figure out.
CFPB v. Chance Edward Gordon, 819 F.3d 1179 (9th Cir. 4/14/2016):
CFPB v. Chance Edward Gordon, 819 F.3d 1179 (9th Cir. 4/14/2016): Defendant Gordan on 11/17/16 filed his Petition for Certiorari, requesting the US Supreme Court to grant review by the US Supreme Court of the 9th Circuit's decision against defendant Gordon. The 9th Circuit decision affirmed Gordon's liability for Gordon having committed deceptive practices in connection with offering/providing/charging for mortgage modification services. The petition addresses the ratification of government action alleged to be ultra vires at the time the action was taken, as well as a subject-matter jurisdiction question regarding whether federal courts' Article III jurisdiction exists when the federal official heading the agency and bringing the case does not have the proper authority at the time the case is litigated. In his petition for a writ of certiorari, the defendant contends primarily that because CFPB Director Richard Cordray was not validly appointed as an Officer of the United States before his July 2013 confirmation by the Senate, Director Cordray's post-confirmation ratification of the Bureau's actions during the previous 18 months was invalid. The defendant argues that Director Cordray was not properly appointed under the President's recess appointment power, and, thus, Director Cordray was a "private citizen" who had no authority to initiate any pre-confirmation enforcement actions (including the federal court action against the defendant). The defendant then argues that Director Cordray's post-confirmation ratification - a four-sentence Federal Register notice - of all previous Bureau actions violated Article II of the Constitution. It will likely take the US Supreme Court several months to grant or deny Gordon's Petition for Certiorari, to say whether the US Supreme Court will, or will not, review the 9th Circuit's decision.
Blixseth v. Brown (In re Yellowstone Mountain Club, LLC), F.3d , 2016 WL6936595 (9th Cir. 11/28/2016):
Blixseth v. Brown (In re Yellowstone Mountain Club, LLC), F.3d , 2016 WL6936595 (9th Cir. 11/28/2016): In Blixseth, the Ninth Circuit Extends Barton doctrine, to Protect Creditors' Committee Members
In Blixseth, the Ninth Circuit Court of Appeals became the first US appeals court to hold that the Supreme Court's Barton doctrine, barring suits against receivers and trustees without permission from the appointing court, also protects creditors' committee members from claims based on actions taken within the scope of authority.
The appeal involved Timothy Blixseth, former owner of the bankrupt Yellowstone Mountain Club LLC, who used some proceeds from a loan to the club to pay personal debts. The same lawyer who advised Blixseth about the loan was also his divorce lawyer before the club's bankruptcy.
In re Archdiocese of Milwaukee (Official Committee of Unsecured Creditors v. Archdiocese of St. Paul and Minneapolis), BR , 2016 WL7115977 (US DC ED Wisconsin 2016):
In re Archdiocese of Milwaukee (Official Committee of Unsecured Creditors v. Archdiocese of St. Paul and Minneapolis), BR , 2016 WL7115977 (US DC ED Wisconsin 2016): US District Court affirmed, on appeal, the bankruptcy court's denial of substantive consolidation. The Bankruptcy Court decision is 483 BR 693, 2012 WL 6093494 (Bky Ct. ED Wisconsin 2012). The Bankruptcy Judge had denied motion of creditors committee to substantively consolidate non-bankrupt catholic schools and parishes into the bankruptcy case of the Catholic Archdiocese in which those non-bankrupt catholic schools and parishes were nocated. On appeal, the US District Court, ED Wis 2016, agreed that non-bankrupt parishes and schools cannot be drawn involuntarily into the bankruptcy of a Catholic archdiocese, via a Motion to substantively consolidate the nonbankruptcy parishes and schools into the bankruptcy case of the bankrupt archdiocese those parishes and schools are located in.
The case stands for the proposition that a motion for substantive consolidation is equivalent to an involuntary bankruptcy petition that cannot be filed against non-bankrupt schools, churches and charitable organizations as a consequence of Section 303(a) of the Bankruptcy Code, which prohibits filing an involuntary bankruptcy petition against a charitable entity (aka "eliomosinary institution").
The creditors' committee for the Archdiocese of St. Paul and Minneapolis attempted to increase the pool of assets for sexual abuse claimants by filing a motion for substantive consolidation with about 200 non-bankrupt parishes, schools and other non-bankrupt Catholic entities under control of the archbishop. Without even reaching the First Amendment or the Religious Freedom Restoration Act, Bankruptcy Judge Kressel dismissed the consolidation motion in July, noting that the Eighth Circuit has not decided whether Section 105(a) allows substantive consolidation of debtors with non-debtors. He was upheld on Dec. 6 by District Judge Ann D. Montgomery.
Judge Montgomery began from the proposition that equitable relief under Section 105, such as substantive consolidation, "is limited to actions which are consistent with the Bankruptcy Code." Dismissing the substantive consolidation motion was proper, she said, because "substantive consolidation is effectively involuntary bankruptcy" that is impermissible under Section 303(a), which bars involuntary bankruptcy proceedings against eleemosynary institutions.
Judge Montgomery upheld Judge Kressel's alternative ruling that the motion did not make a case for substantive consolidation, largely because the finances of the archdiocese and the other Catholic institutions were "distinct and not tangled or intertwined."
In re Kipnis, BF , 2016 Westlaw 4543772 (Bankruptcy Court. S.D. Fla. 2016).:
A bankruptcy court in Florida has held that a trustee had the power to borrow the Internal Revenue Service's 10 year statute of limitations in pursuing fraudulent transfer litigation on behalf of the estate.
FACTS: An individual owed back taxes to the Internal Revenue Service. In an attempt to avoid paying those assessments, he allegedly engaged in fraudulent transfers of his assets. Roughly 10 years after those transfers, he filed a bankruptcy petition. His trustee then asserted fraudulent transfer claims against his transferees under 11 U.S.C.A. §544(b). They moved to dismiss on the ground that the claims were time barred, since the alleged transfers have occurred more than seven years prior to the filing of the bankruptcy petition.
REASONING: The bankruptcy court denied the motion to dismiss on the ground that the trustee was empowered to step into the shoes of the IRS. Under federal law, the IRS enjoyed a 10 year window for the avoidance of transfers made by taxpayers. The court recognized that there was little authority on point and that there was a split among the lower federal courts on this issue.
The court acknowledged that this ruling could have a very substantial impact:
The IRS is a creditor in a significant percentage of bankruptcy cases. The paucity of decisions on the issue may simply be because bankruptcy trustees have not generally realized that this longer reach-back weapon is in their arsenal. If so, widespread use of § 544(b) to avoid state statutes of limitations may occur and this would be a major change in existing practice.
COMMENT: The court is absolutely right that this opinion, if widely followed, could be a game-changer. Further, I predict affirmance, since the plain language of §544(b) means exactly what it says:
[T]he trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim....
NOTE: Under California state law, transfers can only be avoided as fraudulent transfers if made within 4 years before the bankruptcy case is filed, and under rare circumstances up to 7 years, but NEVER 10 years back (except for self settled trusts set up by debtor, with debtor as beneficiary), so this would be a huge change in California.
[review of this case is from the California State Bar, Business Law Section, Insolvency Law Committee, but NOTE is added by attorney March]
National Association of Consumer Bankruptcy Attorneys files Amicus Brief, arguing against the 11th Circuit US Court of Appeals Judicial Estoppel Doctrine
NCBRC has filed an amicus brief in the Eleventh Circuit on behalf of the NACBA membership to address the issue of that circuit's approach to judicial estoppel. Slater v. U.S. Steel, No. 12-15568 (filed October 24, 2016).
Twenty one months after filing an employment discrimination suit in federal district court against her former employer, U.S. Steel, Sandra Slater filed for bankruptcy. (The original case was filed under chapter 7 and later converted to chapter 13). She failed to list the pending federal case in her bankruptcy schedules. U.S. Steel then moved the district court to bar the discrimination suit based on the doctrine of judicial estoppel. The district court granted the motion and Ms. Slater appealed.
The Eleventh Circuit affirmed with a concurring opinion by Judge Tjoflat in which he agreed that the holding was compelled by the Eleventh Circuit decisions in Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282 (11th Cir. 2002), and Barger v. City of Cartersville, 348 F.3d 1289 (11th Cir. 2003), but argued that those cases were wrongly decided. He maintained that application of Eleventh Circuit judicial estoppel precedent led to the resulted that: "U.S. Steel is granted a windfall, Slater's creditors are deprived of an asset, and the Bankruptcy Court is stripped of its discretion." Slater v. U.S. Steel Corp., 820 F.3d 1193, 1235 (11th Cir. 2016).
The court then vacated that decision and granted Ms. Slater's motion for reconsideration en banc.
In its brief, NACBA argues that, as interpreted by Burnes and Barger and their progeny, the doctrine of judicial estoppel has strayed from its original purpose of protecting the integrity of the judicial process and become an inappropriate remedy for debtor error or misconduct.
In re Intervention Energy Holdings, LLC, 553 B.R. 258 (Bankr. D. Del. 2016):
U.S. Bankruptcy Court for the District of Delaware ruled that a provision in a debtor's operating agreement that permitted its lender to block a bankruptcy filing by voting the lender's single Common Unit against a filing was unenforceable as a matter of federal bankruptcy policy. What restrictions on filing bankruptcy are/are not against bankruptcy public policy is the subject of many cases, with differing outcomes. An outright prohibition on a company filing bankruptcy IS unenforceable as being against federal bankruptcy policy.
In Castaic Partners II, LLC v. Daca-Castaic, LLC
In Castaic Partners II, LLC v. Daca-Castaic, LLC (In re Castaic Partners II, LLC), 823 F.3d 966 (9th Cir. 2016), the United States Court of Appeals for the Ninth Circuit dismissed the debtors' appeal of stay relief orders as constitutionally moot after the consensual dismissal of the debtors' underlying bankruptcy cases.
In re Quantum Foods, LLC, 554 B.R. 729 (Bankr. D. Del. 2016)
In re Quantum Foods, LLC, 554 B.R. 729 (Bankr. D. Del. 2016): The United States Bankruptcy Court for the District of Delaware held that a defendant could set off potential preference liability against its allowed administrative expense claim.
Heller Ehrman LLP, Liquidating Debtor v. Davis Wright Tremaine LLP
Heller Ehrman LLP, Liquidating Debtor v. Davis Wright Tremaine LLP (In re Heller Ehrman LLP), 830 F.3d 964 (9th Cir. July 27, 2016): The U.S. Court of Appeals for the Ninth Circuit certified to the California Supreme Court the question of whether a dissolved law firm has a property interest in hourly fee engagements in progress at the time of its dissolution such that the firm is entitled to compensation from law firms that later complete the work after employing an attorney of the dissolved firm post-dissolution to complete the engagement. The issue underlies the viability of the doctrine of Jewel v. Boxer, 156 Cal. App. 3d 171 (1984).
DeNoce v. Neff (In re Neff), 824 F.3d 1181 (9th Cir. 2016):
The U.S. Court of Appeals for the Ninth Circuit held that the ONE year period of 11 U.S.C. § 727(a)(2) is not subject to equitable tolling. 11 USC 727(a)92) states that a bankruptcy debtor may be denied a discharge, in a Chapter 7 bankruptcy case, if the debtor transferred property, within ONE year before the date the debtor filed bankruptcy, with an actual intent to hinder, delay or defraud creditors, by making that transfer.
Rivera v. Orange Cnty. Prob. Dep't (In re Rivera), 832 F.3d 1103 (9th Cir.
Aug. 10, 2016), the U.S. Court of Appeals for the Ninth Circuit held that fees owing to a governmental unit incurred for the criminal detention of a minor child were dischargeable in the chapter 7 bankruptcy of a parent.
This was not a domestic support obligation (domestic support obligations are always nondischargeable, per 11 USC 523(a)(5)).
In re Ritz, F.3d , 2016 Westlaw 4253552 (5th Cir. 2016)
In re Ritz, F.3d , 2016 Westlaw 4253552 (5th Cir. 2016): The US Fifth Circuit Court of Appeals held that when a corporations controlling shareholder "loots" (takes without right) money or assets of the corporation, that the controlling shareholder does that, that looting qualifies as an "actually fraudulent" transfer, which can be recovered from the insider, possibly by "piercing the corporate veil". In Ritz, a supplier sold merchandise to a corporation. The corporation's controlling shareholder siphoned off its assets for his own benefit. Following the shareholder's bankruptcy filing, the supplier sought to pierce the corporate veil in order to hold the shareholder (now the bankruptcy debtor) personally liable for the company's debt. After a tortuous procedural history (which included a trip to the United States Supreme Court), the Fifth Circuit essentially ruled in favor of the creditor. The Fifth Circuit held that under Texas law, if the creditor could establish that the transfer of the company's assets was a fraudulent transfer undertaken with actual fraudulent intent, that fact would be sufficient to justify veil-piercing, even in the absence of a direct misrepresentation made to the credito, stating:
[E]stablishing that a transfer is fraudulent under the actual fraud prong of [the Uniform Fraudulent Transfer Act] is sufficient to satisfy the actual fraud requirement of veil-piercing because a transfer that is made "with the actual intent to hinder, delay, or defraud any creditor" ... necessarily "involves 'dishonesty of purpose or intent to deceive.'
The court then remanded the case for further findings. Almost all states have adopted some version of the Uniform Fraudulent Transfer Act, or its successor, the Uniform Voidable Transactions Act. So though this case involved the Texas version of that statute, the case may be applicable to fraudulent transfers under CA state law, or most other states law, instead of just applying under Texas state fraudulent transfer law. If this rule is widely adopted, it will mean that fraudulent transfer defendants can be held liable not only for the value of the assets transferred but for all debts of the looted company, a potentially much greater exposure. In turn, that threat will empower bankruptcy trustees to force defendants to enter into larger and quicker settlements.
Midland Funding, LLC v. Hill
Midland Funding, LLC v. Hill: On 10/11/16, the US Supreme Court has granted a petition for certiorari, to hear creditor Midland Fundings' appeal to US Supreme Court, from 11th Circuit Court of Appeals, of Hill v Midland Funding, LLC, 823 F.3d 1334 (11th Cir 2016). By deciding Midland Funding, LLC v Hill, the US Supreme Court is expected to resolve the split in cases of various Circuits, as to whether or not it violates the Fair Debt Collection Practices Act (FDCPA), for a creditor to file a Proof of Claim in a bankruptcy case, to try to collect a claim which is barred from being collected by the applicable statute of limitations (time limit for suing), under applicable state law. The 11th Circuit Court Of Appeals decision hlds that the Bankruptcy Code provision allowing creditors to file proofs of claim for debts that appeared on their face to be time-barred did not preclude liability under FDCPA for debt collectors who filed proofs of claim for debts that they knew were time-barred.
Adinolfi v. Meyer (In re Adinolfi), BR (9th Cir. BAP 2016)
Adinolfi v. Meyer (In re Adinolfi), BR (9th Cir. BAP 2016): In a two judge with one judge dissenting decision, the Ninth Circuit's Bankruptcy Appellate Panel wrote an opinion that could be interpreted to mean that benefits received under most programs governed by the Social Security Act are not "disposable income" that must be devoted to payment of creditors' claims in a chapter 13 plan.
In Adinolfi, Chapter 13 debtor was receiving $1,400 a month to care for a child adopted from foster care.
Both the majority and the dissent based their opinions on the language of Sections 1325(b)(1) and 101(10A)(B). The latter provision defines "current monthly income" to exclude "benefits received under the Social Security Act."
The majority's opinion has the effect of allowing a parent to devote adoption benefits for the upbringing of a former foster child and not toward payment of creditors' claims. In terms of policy, the majority's opinion is in line with the Seventh Circuit's decision from April in In re Brooks holding that child support payments ordinarily are excluded from the calculation of disposable income.
For having adopted a child from foster care, the debtor received $1,400 a month in adoption assistance payments under the federal Adoption Assistance and Child Welfare Act of 1980. Half of the funding came from the federal government, 37.5% from the state, and 12.5% from the county. The payments were made by the county social services agency, not by the federal government.
The woman's chapter 13 plan excluded the adoption assistance payments from the calculation of her "disposable income." The bankruptcy judge sustained the chapter 13 trustee's objection to the plan, ruling that it was improper to exclude adoption benefits in calculating current monthly income.
Writing for the majority, Bankruptcy Judge Robert J. Faris of Honolulu said that no court had previously decided whether the Social Security exclusion covers adoption payments. In his Jan. 19 opinion, he said that most, but not all, courts have held that unemployment compensation is not excluded.
Judge Faris' opinion lays out various categories of programs governed by the Social Security Act with varying percentages of funding from the federal government.
The majority interpreted "benefits received under the Social Security Act" as meaning "benefits received subject to the authority of, and in accordance with, 42 U.S.C. §§ 301-1397mm." Although adoption benefits are paid by the county government, they are nonetheless "subject to the federal program requirements and standards of 42 U.S.C. §§ 670-679(c) and federal oversight," according to the majority opinion.
Because adoption benefits are "received under the Social Security Act," the majority reversed the bankruptcy court and held that they are excluded from the calculation of current monthly income.
Judge Faris admitted that the 2005 amendments "generally made bankruptcy more difficult and expensive for many debtors, but it does not follow that courts must interpret every one of BAPCPA's provisions in that manner," he said.
Bankruptcy Judge Meredith A. Jury of Riverside, Calif., dissented.
In re City of Detroit, Michigan, F.3d , 2016 WL 5682704 (6th Circ.10/3/16)
In re City of Detroit, Michigan, F.3d , 2016 WL 5682704 (6th Circ.10/3/16): The Sixth Circuit refused to reverse cuts to pensions of Detroit municipal retires. The retires pension benefits were cut as part of Detroit City chapter 9 bankruptcy plan. The retirees appealed to the 6th Circuit Court of Appeals. The Sixth Circuit based its ruling on the fact that too many significant or irreversible actions taken under the Chapter 9 plan, would have to be unraveled, for the cut pension benefits to be restored.
There was a dissent 2-1. The split decision of the 6th Circuit concurred with a finding in the US District Court of the Eastern District of Michigan, that the claims of the pensioners were foreclosed under equitable mootness (the retirees did not get a stay pending appeal, of the confirmed Chapter 9 plan being performed). Equitable mootness is more like waiver or forfeiture than getting a ruling on the merits of whether it was improper to cut the pension benefits. Note: the 9th Circuit Court of Appeal, which is the US Circuit Court for California and several additional states, is much more resistant to finding appeals to be "equitably moot", than was the 6th Circuit Court of Appeal, in this Detroit decision. Equitable mootness will very likely be taken up by, and decided by the US Supreme Court, in future.
Hernandez v. Williams Zinman & Parham, F3d (9th Cir. 7/20/16) (appeal no. 14-15672)
Hernandez v. Williams Zinman & Parham, F3d (9th Cir. 7/20/16) (appeal no. 14-15672): The U.S. Court of Appeals for the Ninth Circuit, in a case of first impression and the first published circuit court opinion to address the issue, recently held that each and every debt collector - not just the first one to communicate with a debtor - must send the debt validation notice required by the federal Fair Debt Collection Practices Act.A copy of the opinion in is available at: Link to Opinion.
A consumer financed the purchase of her automobile, but stopped making payments on the loan. A debt collection company sent her a letter trying to collect the debt, to which the debtor did not respond. The debt collector hired a law firm to collect the debt, which sent the debtor another collection letter.
The debtor filed a putative class action alleging that the law firm violated 15 U.S.C. § 1692g(a) of the FDCPA by not informing the debtor that if she disputed the debt, she had to do so in writing.
As you may recall, section § 1692g(a) requires a "debt collector" to notify a debtor either in the "initial communication" with a consumer incident to collecting a debt or within five days thereafter, of the amount of the debt, the name of the creditor, that the consumer can dispute the debt in writing within 30 days after receiving the initial notice, that if the consumer does so, the debt collector will obtain verification of the debt and mail a copy to the debtor, and that if the debtor requests it in writing within the 30-day period, the debtor collector will provide the name and address of the original creditor, if the debt has been sold.
The parties filed cross-motions for summary judgment. The law firm argued that it was not required to comply with § 1692g(a) because its letter was not the "initial communication" with the debtor. The district court agreed and granted summary judgment in its favor. The debtor appealed.
On appeal, the debtor argued that § 1692g(a) requires that each and every debt collector that communicates with a consumer send the "validation notice." The Consumer Financial Protection Bureau, the agency charged with rulemaking authority under the FDCPA, and the Federal Trade Commission, which has concurrent authority to enforce the FDCPA, filed an amicus curiae brief agreeing with the debtor's interpretation.
The Ninth Circuit began its analysis with the statutory text, explaining that under well-recognized rules of interpretation, "[i]f the operative text is ambiguous when read alongside related statutory provisions, we 'must turn to the broader structure of the Act,' ... and to its 'object and policy to ascertain the intent of Congress.'" If "'the plain language of the statute, its structure and purpose' clearly reveals" Congress's intent, the court's inquiry stops there. However, "if the plain meaning of the statutory text remains unclear after consulting internal indicia of congressional intent, [the court] may then turn to extrinsic indicators, such as legislative history, to help resolve the ambiguity."
The Court found that the text of § 1692g(a) is ambiguous because "Congress did not define the term 'initial communication' or the word 'initial.'" It noted, however, that "Congress did define 'communication' to mean 'the conveying of information regarding a debt directly or indirectly to any person through any medium... [and] [t]his definition ... is broad enough to sweep into its ambit both" the initial letter from the debt collector and the second one from the law firm.
After parsing the statutory language and still finding the text ambiguous, the Ninth Circuit turned "to the broader structure of the FDCPA to determine which initial communication triggers the validation notice requirement - the first ever sent or the first sent by any debt collector, whether first or subsequent."
The Court concluded that interpreting the text of § 1692g(a) "in the context of the FDCPA as a whole makes clear that the validation notice requirement applies to each debt collector that tries to collect a given debt," reasoning that its "interpretation is the only one that is consistent with the rest of the statutory text and that avoids creating substantial loopholes around both § 1692g(a)'s validation notice requirement and § 1692g(b)'s debt verification - loopholes that otherwise would undermine the very protections the statute provides."
Having found Congress intended to require that "each debt collector send a validation notice with its initial communication is clear from the statutory text," the Ninth Circuit reasoned that it was not necessary to consult "external sources to interpret § 1692g(a)," but even if any ambiguity remained, "the external indicia of Congress's intent eliminate it."
In particular, the Ninth Circuit stressed that the "Senate Report's description of the validation notice suggests that Congress intended it to apply to each debt collector's first communication." The Court also highlighted the FDCPA remedial nature and that "the legislative history also shows that Congress's sole goal in enacting § 1692g(a) was consumer protection. ... Nothing in this legislative history suggests that Congress thought consumers needed less protection from successive debt collectors or less information as their debts passed from hand to hand."
After applying "the tools of statutory construction," the Ninth Circuit held "that the FDCPA unambiguously requires any debt collector - first or subsequent - to send a § 1692g(a) validation notice within five days of its first communication with a consumer in connection with the collection of any debt."
Accordingly, the Ninth Circuit held that the trial court committed error by determining that because the law firm was not the first debt collector to communicate with the debtor, it did not have to send the validation notice, and the case was reversed and remanded. [as reported in Credit & Collection e-newsletter of 10/316]
Bourne Valley Court Trust vs. Wells Fargo Bank, N.A., F.3d , 2016 Westlaw 425498 (9th Cir. 2016)
Bourne Valley Court Trust vs. Wells Fargo Bank, N.A., F.3d , 2016 Westlaw 425498 (9th Cir. 2016): The Ninth Circuit has held that a Nevada statute that extinguished mortgage liens following HOA foreclosure sales was unconstitutional and violated the lenders' due process rights because the statutory notice provisions were inadequate.
Green Tree Servicing LLC v. Giusto, 2016 Westlaw 3383959 (N.D.Cal. 2016):
A US District Court in California held that a debtor could not receive an award of attorney's fees expended by debtor's attorney, to defeat the relief from stay motion brought by the DOT loan lender on debtor's house, because the motion was not an "action on a contract" under California law.
DJM Associates LLC v. Capasso, F.Supp.3d (DC ED NY 2016) case number 97-7285 (E.D.N.Y. Sept. 22, 2016)
US District Court held that Successor to Bankrupt Company was liable for Pre-Bankruptcy Environmental Claims
Although the facts existed and a statute had been adopted before bankruptcy giving rise to a claim that would be discharged, the claim was not discharged because the Supreme Court did not hand down a decision until years after bankruptcy recognizing a private right of action.
The Sept. 22 decision by Chief District Judge Dora L. Irizarry in Brooklyn, N.Y., means that a confirmed chapter 11 plan is no shield to environmental contribution claims not recognized by statute or case law until after bankruptcy. This principle might also apply to bar discharge of other types of successor liability claims created by legislation or recognized by the courts for the first time after bankruptcy. [as reported by ABI 9/27/16 e-newsletter]
Kirkland v. Rund (In re EPD Investment Co.), 821 F.3d 1146 (9th Cir. 2016):
The United States Court of Appeals for the Ninth Circuit affirmed the district court's decision affirming the bankruptcy court's denial of a motion to compel arbitration in a chapter 7 trustee's adversary proceeding seeking avoidance of fraudulent transfers and disallowance and subordination of claims.
Mortgage Servicer Saddled with $375,000 in Sanctions for Violating Rule 3002.1
In In re Gravel, BR (Bankr. D. Vt. Sept. 12, 2016, case no. 11-10112), the first reported decision of its kind under Bankruptcy Rule 3002.1, Bankruptcy Judge Colleen A. Brown, who is Vermont's chief bankruptcy judge, imposed $375,000 in sanctions on a mortgage servicer for billing debtors for fees without first filing the required notices under Rule 3002.1(c), which are required to be filed in a Chapter 13 bankruptcy case, by the secured DOT lender, stating any changes in mortgage payment, during the Chapter 13 bankruptcy case. Judge Brown directed that the sanctions be paid to Vermont's largest pro bono provider of legal services in bankruptcy cases. [as reported in 9/16/16 ABI Rochelle e-newsletter.
Regularly Conducted Tax Sales Cannot Be Fraudulent Transfer, Ninth Circuit Holds
In Tracht Gut LLC v. Los Angeles Country Treasurer & Tax Collector (In re Tracht Gut LLC), F.3d case no. 14-60007 (9th Cir. Sept. 8, 2016), the Ninth Circuit joined the Fifth and Tenth by holding that a tax sale conducted in accordance with state law cannot be set aside as a fraudulent transfer for less than reasonably equivalent value.
A company owned real property but did not pay real estate taxes for years. The company filed a chapter 11 petition a month after the county sold the property in a tax sale. The newly minted debtor in possession immediately sued the county and the buyer to set aside the tax sale as a fraudulent transfer under the Bankruptcy Code and California law.
The bankruptcy court dismissed the complaint and was upheld by the Bankruptcy Appellate Panel. Circuit Judge Richard R. Clifton agreed with the BAP that the debtor could not state a claim for relief since there was no allegation that procedures followed in the tax sale failed to comply with state law.
In 1994, the Supreme Court held in BFP v. Resolution Trust Corp. that a regularly conducted foreclosure sale cannot result in a fraudulent transfer.
Judge Clifton said that the "rationale and policy considerations" underlying BFP are "just as relevant in the California tax sale context."
Even though the price realized at the sale might be low, Judge Clifton upheld the lower courts and extended the holding in BFP to cover tax sales conducted in accordance with state law.
The complaint initially did not allege the amount of the inadequacy of the price. The debtor argued that the bankruptcy judge should have given leave to amend the complaint rather than dismiss the suit outright.
In his Sept. 8 opinion, Judge Clifton found no error in refusing to allow an amendment because the price was irrelevant since the complaint did not allege any procedural defect in the sale.
Judge Clifton distinguished several bankruptcy court decisions not extending BFP to tax sales because those cases entailed procedural deficiencies. [as reported by ABI Rochelle enewsletter of 9/14/16]
In re Diaz, 547 B.R. 329 (9th Cir. BAP 3/11/2016)
In In re Diaz, 547 B.R. 329 (9th Cir. BAP 3/11/2016), the U.S. Bankruptcy Appellate Panel for the Ninth Circuit (the "BAP") vacated the Bankruptcy Court's order sustaining the chapter 7 trustee's objection to the debtor's homestead exemption under Cal. Civ. Pro. Code §740.730(a) and remanded the case for further proceedings. Under California law, the relevant factors for determining if a debtor resides in a property are the physical fact of occupancy and the debtor's intent to live there. In ruling on the debtor's claimed homestead exemption, the bankruptcy court considered that the debtor had not resided in the property on the petition date and considered the debtor's inability to live in the property but failed to consider the debtor's intent to reside in the property. In that regard, the BAP held that the bankruptcy court had incorrectly interpreted California law.
Following is an analysis of the Diaz case that ran in the 8/22/16 California State Bar Insolvency Committee e-newsletter, written by a San Francisco attorney on that Committee, Stephen Finestone:
Prior to 2011, the debtor married Rebecca Wilson Diaz ("Rebecca"). The couple had one child. Before filing bankruptcy in 2013, debtor suffered through several personal setbacks. In 2011, he suffered two major brain aneurysms. The aneurysms required multiple surgeries and after the surgeries, he was in a coma for several weeks. As a result of his aneurysms, debtor suffered from stroke like symptoms rendering him unable to walk or talk. After months in a medical facility, debtor was released to the care of his mother, who lived on the same block where debtor owned a home, while relatives resided in debtor's home (the "Property"). Debtor and Rebecca divorced in 2011, though it is not clear from the opinion whether the divorce was before or after his health challenges.
Debtor continued with his recovery under the care of his mother but was unable to work and was receiving Social Security Disability benefits when he filed a chapter 7 bankruptcy in November 2013 (the "Petition Date"). At the time of filing, debtor was still under his mother's care at her home and his relatives lived in the Property.
Debtor initially claimed the wildcard exemptions, but after the chapter 7 trustee sought turnover of the Property, debtor amended his Schedule C to assert a homestead exemption of $175,000 under California Code of Civil Procedure section 704.730(a)(3). The trustee objected to the homestead exemption on the basis that debtor did not reside in the Property on the Petition Date and his absence was not temporary as debtor's health made it unlikely that he would resume living in the Property.
The trustee's objection was supported by a declaration from Rebecca (the largest creditor in the case), which stated, among other things, that 3 ½ years after his aneurysms, debtor still could not take care of himself; he requires constant care from his mother or brother; the Property was occupied by debtor's brother and sister-in-law; debtor has only spent a few nights at the Property since his release from medical care, and only then with the care of his mother or brother; the bulk of debtor's personal effects were at his mother's house; when debtor's son visits him, he does so at debtor's mother's house; and, all correspondence between Rebecca and debtor was sent to the mother's house and all interactions between them took place there.
Debtor responded to the trustee's objection by noting: he had made great strides in his recovery (attaching letters from his doctors to that effect); he used the Property address for voting registration, his driver's license and his mail; the mortgage and utilities for the Property were in his name; he still had his personal belongings at the Property and a separate bedroom there; and he was taking independent living classes.
The trustee filed a reply brief and the matter went to hearing before the bankruptcy court. The judge sustained the trustee's objection, noting that although the situation was a sad one, there was a large amount at stake with the exemption, the debtor had not lived at the Property for 3 ½ years as of the Petition Date, and it appeared the relatives were the ones who benefited from debtor's conduct in asserting the exemption.
In response to matters raised by debtor's counsel, the judge further clarified her remarks by noting that she was suspicious as to the facts and circumstances of the filing, whether debtor was capable of making the decision to file, and again focused on the benefit to the relatives occupying the Property and the size of the exemption. Debtor then timely appealed.
The BAP determined that physical occupancy of the property on the Petition Date was not central to the residency requirement for a homestead exemption under California law. The bankruptcy court did not consider debtor's intent respecting residency. Thus, the bankruptcy court had applied an incorrect legal standard. The BAP also held that the burden of proof was to be determined with reference to state law, which was relevant given that the BAP remanded the case for further hearing.
The BAP began by noting that the 1983 amendment to California's homestead provision changed the language of the statute from "actually resided" to "resided" in the homesteaded dwelling, making clear that a temporary absence from the home did not preclude assertion of the homestead. The BAP then cited California law for the proposition that the relevant factors for determining whether a debtor "resides" in a property are the "physical fact of the occupancy of the property and the debtor's intention to live there."
California law further provides that the lack of physical occupancy does not preclude establishing residency if the debtor intends to return to live there. The BAP referenced various California cases on that issue, including one holding that a three year absence from the homestead did not preclude claiming an exemption. On the other hand, the BAP also noted that simple occupancy without intent was insufficient to support a homestead exemption.
Turning back to the bankruptcy court's decision, the BAP noted that the bankruptcy court interpreted California law as requiring physical occupancy on the Petition Date. The BAP also commented on the bankruptcy court's focus on the amount of the exemption and the fact that debtor's relatives would benefit from allowance of the exemption. The BAP indicated that the bankruptcy court's considerations were misplaced, as its focus should be on debtor's intent, and there was no evidence that the court had considered the intent. Since evidence of debtor's intent was not "sufficiently developed", the BAP held that the record below should be reopened to permit additional evidence and guided the lower court by directing that the debtor's inability to live unassisted, the amount of the exemption at issue or the fact that family members may benefit from having the exemption allowed were not relevant factors.
The BAP next turned to the question of the burden of proof under Bankruptcy Rule 4003(c), which provides in pertinent part "the objecting party has the burden of proving that the exemptions are not properly claimed." The burden of proof in exemption disputes has received much discussion since the Supreme Court ruling in Raleigh v. Illinois Dep't of Revenue, 530 U.S. 15 (2000) ("Raleigh"). Raleigh, which involved the burden of proof on an objection to claim, held that the burden of proof regarding claims is an essential element of the underlying substantive claim and is, therefore, a substantive rather procedural matter. As a substantive matter, the burden of proof would be determined by reference to state law rather than federal bankruptcy law as the Bankruptcy Rules Enabling Act (28 U.S.C. section 2075) prohibits rules that alter substantive rights.
With respect to California law, CCP section 703.850(b) places the burden of proof on the party claiming the exemption. (See also CCP section 704.780 - specific to homestead exemptions). The BAP cited to various bankruptcy court level decisions on the issue, all of which determined that Raleigh requires the use of the California burden of proof in exemption litigation. See e.g. In re Tallerico, 532 B.R. 774, 788 (Bankr. E.D. Cal 2015) (decided by Judge Klein); In re Pashenee, 531 B.R. 834, 837 (Bankr. E.D. Cal 2015) (decided by Judge Jaime).
The BAP joined with the lower court decisions, in particular noting the Tallerico decision, and concluded that when a state court exemption statute allocates the burden of proof to a debtor, Bankruptcy Rule 4003(c) does not change the allocation (finding that the Ninth Circuit's decision in Carter v. Anderson (In re Carter), 182 F.3d 1027, 1029 (9thCir. 1999), had been effectively overruled or rendered inapplicable by Raleigh).
The two important rulings in the case involve the California homestead exemption and the burden of proof relating to exemption disputes. An objecting creditor or trustee must demonstrate that a debtor did not intend to occupy the property in question in order to prevail on exemption litigation. Where the debtor happened to be living at the filing date is of limited importance depending on the facts of a given case.
With respect to the burden of proof issue, one ought to review the extensive discussion by Judge Klein in In re Tallerico, which reviews the history of Bankruptcy Rule 4003 and concludes that Rule 4003(c) is invalid to the extent it shifts the burden contrary to state law (in cases where a state has opted out of the federal exemptions). Some courts have suggested that Raleigh may be distinguishable on the basis that it involved a claim objection rather than an objection to an exemption. See e.g. In re Greenfield, 289 B.R. 146 (Bankr. S.D. Cal. 2003) (Judge Bowie), but Judge Klein's discussion in Tallerico argues that there is no "principled difference" between objections to section 502 claims and objections to section 522 claims of exemption. This author could not find any circuit court level decisions on the issue of the burden of proof in exemption litigation. Obviously, which party bears the burden of proof is an important consideration in a close case.
In re Boates, BR (BAB case no. AZ-15-1279-KuJaJu) (9th Cir. B.A.P. July 8, 2016)
In re Boates, BR (BAB case no. AZ-15-1279-KuJaJu) (9th Cir. B.A.P. July 8, 2016). Published.
9th circuit BAP holds that a chapter 7 debtor's rights arising from a prepetition payment to a lawyer are estate property, even if the engagement agreement isn't executory. Comment: this opinion does not seem consistent with the Bankruptcy Code.
Caldwell v. DeWoskin, F.3d , case number 15-1962 (8th Cir. Aug. 5, 2016) and Flanders v. Lawrence (In re Flanders)
Caldwell v. DeWoskin, F.3d , case number 15-1962 (8th Cir. Aug. 5, 2016) and Flanders v. Lawrence (In re Flanders), F.3d , case number 15-1327 (10th Cir. Aug. 5, 2016): These 2 Circuit Court decisions, one by the 8th Circuit Court of Appeals, and one by the 10th Circuit Court of Appeals, both discuss and apply the Rooker-Feldman US Supreme Court doctrine. The US Supreme Court Rooker-Feldman doctrine, named after the US Supreme Court Rooker case, and the US Supreme Court Feldman case, holds that lower federal courts (includes US bankruptcy Courts, US District Courts, BAPs, US Circuit Courts)-in fact that any US Court except for the US Supreme Court-lacks subject matter jurisdiction to hear an appeal of a state court judgment, made by a state court that had jurisdiction to issue the state court judgment.
In Caldwell (the Eighth Circuit case), a man filed bankruptcy in the midst of a matrimonial dispute. Because he refused to pay spousal maintenance after bankruptcy, the wife's lawyer dragged him into state court. The state court jailed him for contempt until he paid overdue maintenance, ruling in the process that the automatic stay did not bar proceedings to compel payment of support. After his chapter 13 case was dismissed, the former husband sued his former wife and her lawyer in bankruptcy court for violating the automatic stay. The bankruptcy court dismissed the suit, believing there was no subject matter jurisdiction as a consequence of Rooker-Feldman. The Eighth Circuit Court of Appeals reversed, explaining that Rooker-Feldman applies when someone seeks relief from a state court judgment. The doctrine does not apply to an action seeking "relief from the allegedly illegal act or omission of an adverse party."Because the husband was not seeking to overturn the state court decision, Rooker-Feldman did not apply. Eighth Circuit, in Caldwell, did not say whether rules of issue or claim preclusion would still result in dismissal or summary judgment after remand.
In Flanders, the Tenth Circuit, however, explored the relationship in depth between Rooker-Feldman and claim preclusion in a non-precedential opinion, and explained why res judicata or issue preclusion would still result in dismissal even if Rooker-Feldman did not apply.
Cases from Different Circuits Conflict
Cases from different Circuits conflict, as to whether or not a creditor violates the federal Fair Debt Collection Practices Act ("FDCPA"), by filing a Proof of Claim, in a debtor's bankruptcy case, that the creditor knows is "time barred" (past the statute of limitations for time period in which creditor must sue, if creditor wants to seek to collect the debt from the debtor who owes the debt. The US Supreme Court will likely eventually rule on this issue:
Here are some of the cases in conflict:
The Eighth Circuit Court of Appeals held that a debt collector's filing an "accurate and complete" proof of claim for a time-barred debt does not constitute a practice forbidden under the Fair Debt Collection Practices Act.
See Nelson v. Midland Credit Management, Inc., --- F.3d ----, 2015 WL
5093437 (8th Cir., July 11, 2016) (text of opinion). The court concluded that such a proof of claim "is not false, deceptive, misleading, unfair, or unconscionable under the FDCPA."
To date only the Eleventh Circuit Court of Appeals has allowed a claim under the FDCPA for a debt collector's filing a proof of claim for a time-barred debt. See Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014) (by filing a proof of claim for a time-barred debt, the debt collector engaged in conduct that was "deceptive," "misleading," "unconscionable," or "unfair" under the FDCPA) (text of opinion) and Johnson v. Midland Funding, LLC, --- F.3d ----, 2016 WL 2996372 (11th Cir., May 24, 2016) (the Bankruptcy Code does not preempt the FDCPA in the context of a Chapter 13 bankruptcy case in which a debt collector files a proof of claim for a debt the collector knows to be time-barred).
Conversely, decisions in two other circuits disallow such a claim under the FDCPA. In Simmons v. Roundup Funding, LLC, 622 F.3d 93 (2nd Cir., Oct. 5, 2010) (text of opinion), which involved a debt collector's filing an allegedly inflated proof of claim, the Second Circuit Court of Appeals held that a creditor's filing an invalid proof of claim in a bankruptcy case does not constitute the sort of abusive debt collection practice proscribed by the Fair Debt Collection Practices Act.
Previously, in Walls v. Wells Fargo Bank, N.A., 276 F.3d 502 (9th Cir.
2002), which involved a claim under the FDCPA for a debt collector's attempting to collect a debt previously discharged in bankruptcy, the Ninth Circuit Court of Appeals held that a debtor's sole remedy is under the Bankruptcy Code for creditor misconduct for which the Code provides a remedy; this decision has been interpreted as generally disallowing a claim under the FDCPA for creditor conduct during or related to a bankruptcy case.
See also Rhodes v. Diamond, 433 Fed. Appx. 78 (3rd Cir., April 28, 2011) (text of opinion), an unreported case that is similar to Simmons, above.
This issue is currently before five Courts of Appeals. See Martel v. LVNV Funding, LLC, Case No. 16-1653 (1st Cir., filed May 25, 2016); Torres v. Cavalry SPV I, Case No. 15-2132 (3rd Cir., filed May 13, 2015); Dubois v. Atlas Acquisitions LLC, Case No. 15-1945 (4th Cir., filed August 21, 2015); In re Broadrick, Case No. 16-5042 (6th Cir., filed Jan. 14, 2016); and Owens v. LVNV Funding, LLC, Case No. 15-2044 (7th Cir., filed May 13, 2015). Oral argument has been held in the Dubois (4th Circuit) and Owens (7th Circuit) cases (on May 10 and June 1, respectively); briefing is ongoing in the others.
Southwest Airlines Co. v. Tidewater Finance Co. (In re Cole), BR 15-70960 (N.D. Ga. June 24, 2016)
Southwest Airlines Co. v. Tidewater Finance Co. (In re Cole), BR 15-70960 (N.D. Ga. June 24, 2016) is yet another bankruptcy case which rules on the issue of whether the Rooker-Feldman doctrine prohibits a bankruptcy court (or any other federal court except the US Supreme Court) from changing a ruling made by a state court, or whether the federal court can change/overrule the state court's ruling on an automatic stay. With cases going both ways on this issue, this will likely eventually be a "Circuit split" (conflicting decisions by various US Circuit Courts). Circuit splits usually eventually get ruled on by the US Supreme Court.
Here is a discussion of Southwest Airlines by ABI (American Bankruptcy Institute):
Bankruptcy Judge James R. Sacca of Atlanta came down on the side of the Third and Ninth Circuits by holding that bankruptcy courts can review decisions of state courts on the automatic stay. He disagreed with the Sixth Circuit Bankruptcy Appellate Panel and bankruptcy courts in New York and Florida.
Judge Sacca's case was more difficult because a non-bankrupt third party sought to revisit the state court's decision. Moreover, the debtor's liability evidently would not have been affected whichever way the courts ruled.
Judge Sacca began his analysis on June 24 by remarking that the stay "is one of the most fundamental protections" in the Bankruptcy Code. Significantly, he said, bankruptcy courts have exclusive jurisdiction to grant relief from the stay. In addition, state court suits in violation of the stay are void ab initio.
Thus, he concluded that he was not bound by the state court's ruling on the stay, although he conceded that state courts have concurrent jurisdiction to rule on the applicability of the stay.
On the merits of the alleged stay violation, Judge Sacca held that the stay did not apply because the suit in state court affected only the separate liability of a garnishee for failing to set aside the debtor's wages before bankruptcy.
Smith v. I.R.S. (In re Smith)
Smith v. I.R.S. (In re Smith), F.3d (9th Cir. July 13, 2016) Circuit case number 14-15857:
Ninth Circuit holds that taxes owed, pursuant to a tax return that the debtor files late - after the due date for the return - may still, under some circumstances be dischargeable in the debtor’s bankruptcy case, using a 4 part test known as the "Beard" test. The part of the Beard test that is most often contested by the tax agency is whether the debtor, in filing a late tax return, made an honest and reasonable attempt to satisfy the requirements of the tax law.
This adds the 9th Circuit to the 4th, 6th, 7th 8th and 11th Circuits, which have similar rulings.
The Ninth Circuit’s opinion is a vindication for the Ninth Circuit Appellate Panel’s December 2015 decision in U.S. v. Martin (In re Martin). There, the B.A.P. rejected the one-day-late rule by holding that the hanging paragraph did not alter two Ninth Circuit cases that adopted a version of the Beard test, which defines the term "return" in the context of determining nondischargeability of tax debts.
In Martin, the B.A.P. reversed and remanded for the bankruptcy judge to apply the Ninth Circuit’s modified Beard test, which inquires into whether the document purports to be a return that was signed under penalty of perjury, contained sufficient information to allow calculation of the tax, and was an "honest and reasonable" attempt to satisfy the requirements of tax law.
There is a "Circuit-Split" between those Circuits, and the 1st, 5th and 10th Circuits, each of which has held that if a tax return is filed even one day late, that the tax owed for that tax year is NOT dischargeable, ever.
It is extremely likely that at some point, the US Supreme Court will decide this issue, to resolve this "Circuit-Split".
The US Supreme Court Granted Certiorari in Czyzewski v. Jevic Holding Corp.
On 6/28/16, the US Supreme Court granted certiorari in Czyzewski v. Jevic Holding Corp., a 2015 Third Circuit Court of Appeals decision, to decide whether bankruptcy courts are allowed to dismiss chapter 11 cases when property is distributed in a settlement that violates the priorities contained in Section 507 of the Bankruptcy Code. Although Jevic deals with structured dismissals, the high court’s decision might also have the effect of allowing or barring so-called gift plans where a secured creditor or buyer makes a payment, supposedly from its own property, that enables a distribution in a chapter 11 plan not in accord with priorities.
Granting certiorari was not surprising because there has been a long-standing split of circuits. In Jevic, the Third Circuit approved a structured dismissal in May 2015 following the Second Circuit, which had ratified structured dismissals in its 2007 Iridium decision. Conversely, the Fifth Circuit barred structured dismissals in 1984 when it decided Aweco and held that the “fair and equitable” test must apply to settlements. Before acting on the certiorari petition, the Supreme Court sought comment from the Solicitor General. In May, the federal government’s counsel in the Supreme Court recommended granting review and reversing the Third Circuit. Expected timing of a US Supreme Court decision: first quarter of 2017
Structured dismissals occur when the sale of a company’s assets in chapter 11 will not generate enough cash to pay priority claims in full and permit confirmation of a plan. In the unsuccessful reorganization of Jevic Holding Corp., the official unsecured creditors’ committee had sued the secured lender and negotiated a settlement calling for the lender to set aside some money for distribution to unsecured creditors following dismissal. The distribution scheme did not follow priorities in Section 507 because wage priority claimants received nothing from the lender through a trust set aside exclusively for lower-ranked general unsecured creditors.
Over the wage claimant’s objection, the bankruptcy court’s approval of the settlement was upheld in the district court and the Third Circuit. The appeals court’s opinion was important because the Third Circuit makes law for Delaware, where many of the country’s largest chapter 11s are filed.
The Third Circuit’s opinion was 2-1, with the dissenter saying that while structured dismissals are permissible, Jevic was not a proper case.
Recommending that the Supreme Court review and reverse the Third Circuit, the Solicitor General said that “bankruptcy is not a free-for-all in which parties or bankruptcy courts may dispose of claims and distribute assets as they see fit.” He argued that “nothing in the Code authorizes a court to approve a disposition that is essentially a substitute for a plan but does not comply with the priority scheme set forth in Section 507.”
There are powerful arguments in support of the Third Circuit’s opinion. To begin with, there is nothing in the Bankruptcy Code explicitly saying that priorities govern settlements under Bankruptcy Rule 9019. Proponents of structured dismissals also rely on the notion that the distribution is the lender’s own property, not property of the estate, thus making priorities inapplicable.
The position of the Solicitor General came as no surprise because the government lost a similar case called In re LCI Holding Co., in which the Third Circuit sanctioned so-called gift plans that distribute estate property counter to bankruptcy priorities. The LCI and Jevic cases were argued the same day in January 2015, but before different panels of the Third Circuit. Although it was the primary objector in LCI, the government did not pursue a certiorari petition.
Grossman v. Wehrle (In re Royal Manor Management Inc., F3d , 15-3146 (6th Cir. June 15, 2016)
Grossman v. Wehrle (In re Royal Manor Management Inc., F3d , 15-3146 (6th Cir. June 15, 2016), In Grossman Sixth Circuit Joins the Split Among US Circuit Courts, on Whether Bankruptcy Courts Are ‘Courts of the U.S.’The Sixth Circuit Grossman decision joined the Second, Third and Seventh Circuits in holding that a bankruptcy court is a “court of the United States.The Ninth and Tenth, US Circuit Courts of Appeals, have held that bankruptcy courts are not courts of the U.S.
To decide another case where the outcome would either elevate or deprecate the status of bankruptcy courts, the Supreme Court should grant certiorari. Since he would remain liable even after winning in the Supreme Court, the lawyer who lost in the Sixth Circuit may not pursue a final appeal. The issue arose in the Sixth Circuit following the bankruptcy court’s imposition of $207,000 in sanctions against an attorney. Upheld in district court, the bankruptcy judge imposed sanctions under both 28 U.S.C. Section 1927 and the court’s inherent powers under Section 105 of the Bankruptcy Code. Section 1927 enables “any court of the United States” to impose sanctions on an attorney who “unreasonably and vexatiously” multiplies the proceedings. On appeal to the Tenth Circuit, the sanctioned attorney contended that the bankruptcy court is not a “court of the United States” and thus cannot sanction under Section 1927.
Noting the split among the circuits, Circuit Judge Helene N. White said in the opinion on June 15 that her circuit has not addressed the question in a reported opinion. In two unreported decisions, the Tenth Circuit said that bankruptcy courts are courts of the U.S.
Without elaboration, Judge White found those decisions “persuasive” and sided with the Second, Third and Seventh Circuits.
A contrary ruling on “court of the U.S.” would not have affected the outcome because Judge White also held that sanctions were proper under Section 105. She held that the lawyer’s conduct justified all the sanctions imposed by the bankruptcy court, because the lawyer’s baseless litigation and appeals delayed the trustee in making distributions to unsecured creditors and diminished the estate.
It is unknown whether the sanctioned attorney might file a certiorari petition, asking the US Supreme Court to grant certiorari, to hear and decide the split among US Circuit Courts of Appeals, on this issue.
In re Sunnyslope Housing Ltd. Partnership, F3d , 2016 Westlaw 1392318 (9th Cir. 2016)
In re Sunnyslope Housing Ltd. Partnership, F3d , 2016 Westlaw 1392318 (9th Cir. 2016), the Ninth Circuit Court of Appeals held that since affordable housing covenants encumbering a development were subordinated to the senior lender’s lien, the borrower’s valuation of the lender’s collateral in a bankruptcy case had to account for the potential extinguishment of those junior covenants in the event of foreclosure. One could quarrel with the Ninth Circuit’s reasoning which led to this result, because it could be argued that the affordable housing covenants “ran with the land”, and therefore would NOT be extinguished by a foreclosure, that they would still be on the land and would bind whoever was the buyer of the property in the foreclosure sale. However, unless there is a petition for certiorari to the US Supreme Court, and the US Supreme Court grants certiorari, the Ninth Circuit Sunnyslope decision is the controlling law in the Ninth Circuit, whether rightly or wrongly reasoned.
Clark's Crystal Springs Ranch LLC v. Gugino (In re Clark), --- B.R. --- (9th Cir. BAP March 2016)
Issue: Was substantive consolidation of the debtor, his LLC and trust into a single chapter 7 appropriate under the facts here?
Holding: Yes. creditors dealt with the entities as a single economic unit and did not rely on their separate identity in extending credit [and] the affairs of the debtor are so entangled that consolidation will benefit all creditors.
Judge Terry Myers, Idaho
Jury, Kirscher, Faris
Opinion by Jury
The chapter 12 debtor operated a family farm which was purportedly owned and managed by an LLC which was, in turn, purportedly owned by a trust. The case was converted to chapter 7 because there was "a showing that the debtor has committed fraud in connection with the case.” The trustee filed a complaint seeking substantive consolidation of the individual, the LLC and the trust. The bankruptcy court held a two day trial and granted the motion nunc pro tunc.
The BAP affirmed. The rule comes from a case called In re Bonham. "[W]hether creditors dealt with the entities as a single economic unit and did not rely on their separate identity in extending credit or whether the affairs of the debtor are so entangled that consolidation will benefit all creditors." Both factors were pretty obviously present here. The sloppiness was everywhere. The trust had provisions which contradicted other provisions, the debtor called himself the manager of the LLC and took a draw even though the docs said the trust was the manager. The bankruptcy schedules even listed assets which the debtor argued later were actually owned by the LLC. The debtor on the petition was “Jay P. Clark, DBA Crystal Springs Ranch.” This case has a nice summary of substantive consolidation.
The debtor argued on appeal that the court was required to use state law and since the trust had a spendthrift clause, that was binding on the court here. He also argued that alter ego with respect to an LLC under Idaho law must be followed. But the BAP said, "the law of substantive consolidation is federal bankruptcy law and is not dependent upon state law concepts."
The BAP wrote: "Substantive consolidation is an uncodified, equitable doctrine allowing the bankruptcy court, for purposes of the bankruptcy, to 'combine the assets and liabilities of separate and distinct - but related - legal entities into a single pool and treat them as though they belong to a single entity.' The doctrine 'enables a bankruptcy court to disregard separate corporate entities, to pierce their corporate veils in the usual metaphor, in order to reach assets for the satisfaction of debts of a related corporation.' The essential purpose behind the doctrine is one of fairness to all creditors, but it is a doctrine to be used sparingly."
California Senate Bill S380
California Senate Bill S380 seeks to increase the homestead exemption amounts to $100,000 for a single person; $150,000 for a family or head of household; and $300,000 for those over 65. Under existing law, the homestead exemption is $75,000 for a single person; $100,000 for a family; and $175,000 for a person over age 65, or who is over age 55 with very low income, or who is permanently disabled. The sponsors of S380 expect the California Senate to vote on the bill in the next few weeks. It is unknown at present whether this bill will become law or not. In previous years, similar bills have been defeated.
Sponsoring of the California Bankruptcy Forum Annual Continuing Legal Education Conference
The Bankruptcy Law Firm, PC was a sponsor of the California Bankruptcy Forum annual continuing legal education Conference, for lawyers and other bankruptcy professionals, held on May 22-22, 20016 in Indian Wells, California
Husky International Electronics, Inc. v. Ritz, S.Ct. , 2016 WL 2842452 (May 16, 2016) (case no. 15-145):
The United States Supreme Court, in Husky International Electronics, Inc. v. Ritz, on 5/16/16, reversed a 5th circuit Court of appeals case, In re Ritz, 787 F.3d 312 (5th Cir., May 22, 2015) and resolved a split among Circuit Courts nationwide, by the US Supreme Court ruling that the term "actual fraud" in Bankruptcy Code 11 USC § 523(a)(2)(A) encompasses forms of fraud, like fraudulent conveyance schemes, that can be effected without a false representation.
In Husky, the US Supreme Court ruled that anything that counts as "fraud" and is done with wrongful intent is "actual fraud," although "the term is difficult to define more precisely." However, there was "no need to adopt a definition for all times and all circumstances here because, from the beginning of English bankruptcy practice, courts and legislatures have used the term 'fraud' to describe a debtor's transfer of assets that, like [the debtor's] scheme, impairs a creditor's ability to collect the debt."
The US Supreme Court’s 7-1 decision, with only Justice Thomas dissenting, is consistent with In re Lawson, 791 F.3d 214 (1st Cir., July 1, 2015); McClellan v. Cantrell, 217 F.3d
890 (7th Cir. 2000); In re Vitanovich, 259 B.R. 873 (6th Cir. B.A.P. 2001) and In re Vickery, 488 B.R. 680 (10th Cir. B.A.P., March 13, 2013), all of which held that "actual fraud" under § 523(a)(2)(A) does not require a misrepresentation.
Whatley v. Stijakovich-Santilli (In re Stijakovich-Santilli), 542 B.R. 245 (9th Cir. BAP 2015)
The U.S. Bankruptcy Appellate Panel of the Ninth Circuit ("BAP") construed Rule 4003(b)(2) of the Federal Rules of Bankruptcy Procedure ("FRBP"), which extends the period for a trustee to object to exemptions where the exemption was fraudulently asserted, and held that a debtor fraudulently asserts an exemption when the debtor knowingly misrepresents a material fact that supports the claim of exemption and the trustee justifiably relies on a misrepresentation. A trustee can justifiably rely on that misrepresentation even if the trustee could have uncovered the fraud had the trustee carefully investigated. In determining whether a debtor fraudulently asserted an exemption, the court must look to the circumstances that existed when the exemption claim was made and, in doing so, can consider later statements made by the debtor regarding those circumstances.
Shalaby v. Mansdorf (In re Nakhuda) (B.A.P. 9th Cir. 2016)
Debtor's attorney sanctioned by Bankruptcy Court, sua sponte (sua sponte means on the Court's own motion, instead by a party bringing a Motion for sanctions) for multiple errors, including that debtor attorney did not have debtor client's original signature on the bankruptcy petition, schedules, other required bankruptcy documents, which is required if the debtor's attorney efiles the bankruptcy case with "/s/" signatures for debtor, instead of with ink signed signature. In addition, bankruptcy court sanctioned debtor attorney for: "(1) making arguments not warranted by existing law or non-frivolous arguments for its extension, modification or reversal; (2) failing to ensure that allegations and factual contentions had evidentiary support; (3) his inability or unwillingness to obtain the most basic knowledge of bankruptcy law or engage in the legal analysis necessary to competently represent debtor; (4) harming the estate by forcing Trustee to use limited estate assets to respond to the frivolous arguments and positions;..." Sanctions included bankruptcy court suspended attorney's ability to file electronically or appear in court in the Northern District of California, ordered debtor attorney to disgorge attorneys fees paid to him by client, and required attorney to take an ECF course. The 9th Circuit BAP affirmed some of the sanctions, but did not affirm others of the sanctions that the Bankruptcy Court had imposed, due to a difference in the standards of proof depending on the motion being made by another party, and a motion initiated sua sponte by the court, stating: "When assessing sanctions sua sponte under Rule 9011(c)(1)(B) and under the law of this Circuit, the bankruptcy court is required to issue an order to show cause to provide notice and an opportunity to be heard and to apply a higher standard "akin to contempt" than in the case of party-initiated sanctions. The reason behind the heightened standard is because, unlike party-initiated motions, court-initiated sanctions under Rule 9011(c)(1)(B) do not involve the 21-day safe harbor provision for the offending party to correct or withdraw the challenged submission. "Accordingly, at bottom, the "akin to contempt" standard seems to require conduct that is particularly egregious and similar to conduct that would be sanctionable under the standards for contempt."
Scheer v. State Bar of California (In re Scheer), F.3d , case no.14-56662 (9th Cir. April 14, 2016)
The Ninth Circuit wrote an opinion on April 14 indirectly saying that the Supreme Court should overrule Kelly v. Robinson, where the high court held in 1986 that criminal restitution imposed as a condition for probation is nondischargeable under Section 523(a)(7).
Writing for the appeals court, Circuit Judge John B. Owens said that Kelly "untether[ed] statutory interpretation from the statutory language." That approach, he said, "has gone the way of NutraSweet and other relics of the 1980s and led to considerable confusion." He then went on to cite circuit court decisions from around the country that distinguish Kelly to the vanishing point.
Section 523(a)(7) bars the discharge of "a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit" that is not compensation for "actual pecuniary loss."
Although restitution in Kelly was payable to the victim of the crime and therefore seemingly outside of the boundaries of Section 523(a)(7), the Supreme Court nonetheless held that the debt was nondischargeable based on a "deep conviction" that bankruptcy courts should not invalidate state criminal proceedings. The case before the Ninth Circuit involved a lawyer who violated state law by charging a client in advance for a mortgage modification. The client fired the lawyer and got an arbitration award requiring repayment of the entire fee. When the lawyer did not pay, the state bar suspended the lawyer's license to practice until she repaid the fee. Filing a chapter 7 petition, the lawyer sued the state bar in bankruptcy court under Section 525(a) for revoking a license "solely because" she had not paid a dischargeable debt. The bankruptcy court and the district court both held that the debt was nondischargeable.
On appeal, Judge Owens ruled that the fee was a dischargeable debt and reversed the lower courts. He relied in significant part on the Ninth Circuit's 2010 decision in Findley, which held that the costs associated with state bar disciplinary proceedings are nondischargeable.
In the case on appeal, Judge Owens said, there were no costs payable to the state that were assessed for disciplinary proceedings, only a debt for receiving a fee improperly from a client. Furthermore, the debt was "compensation for actual loss," not a fine or penalty.
If the debt were not dischargeable, Judge Owens said that fee disputes with other licensed professionals like doctors, dentists or barbers would lead to nondischargeable debts. [ analysis is from ABI 4/18/16 e-newsletter]
Revision of Certain Dollar Amounts in the Bankruptcy Code
(Effective April 1, 2016) - Source: 81 Fed. Reg. 8748-01, 2016 WL 684261 (Feb. 22, 2016)
|Affected sections of Title 28 U.S.C. and the Bankruptcy Code||Dollar amount to be adjusted||New (adjusted) dollar amount1|
|Section 1409(b)—a trustee may commence a proceeding arising in or related to a case to recover|
|(1)—money judgment of or property worth less than||$1,250||$1,300|
|(2)—a consumer debt less than||$18,675||$19,250|
|(3)—a non consumer debt against a non insider less than||$12,475||$12,850|
|Section 101(3)—definition of assisted person||$186,825||$192,450|
|Section 101(18)—definition of family farmer||$4,031,575 (each time it appears)||$4,153,150 (each time it appears)|
|Section 101(19A)—definition of family fisherman||$1,868,200 (each time it appears)||$1,924,550 (each time it appears)|
|Section 101(51D)—definition of small business debtor||$2,490,925 (each time it appears)||$2,566,050 (each time it appears)|
|Section 109(e)—debt limits for individual filing bankruptcy under chapter 13||$383,175 (each time it appears)
$1,149,525 (each time it appears)
|$394,725 (each time it appears)
$1,184,200 (each time it appears)
|Section 303(b)—minimum aggregate claims needed for the commencement of an involuntary chapter 7 or 11 petition|
|(1)—in paragraph (1)||$15,325||$15,775|
|(2)—in paragraph (2)||$15,325||$15,775|
|Section 507(a)—priority expenses and claims:|
|(1)—in paragraph (4)||$12,475||$12,850|
|(2)—in paragraph (5)(B)(i)||$12,475||$12,850|
|(3)—in paragraph (6)(B)||$6,150||$6,325|
|(4)—in paragraph (7)||$2,775||$2,850|
|Section 522(d)—value of property exemptions allowed to the debtor|
|(1)—in paragraph (1)||$22,975||$23,675|
|(2)—in paragraph (2)||$3,675||$3,775|
|(3)—in paragraph (3)||$575
|(4)—in paragraph (4)||$1,550||$1,600|
|(5)—in paragraph (5)||$1,225
|(6)—in paragraph (6)||$2,300||$2,375|
|(7)—in paragraph (8)||$12,250||$12,625|
|(8)—in paragraph (11)(D)||$22,975||$23,675|
|Section 522(f)(3)—exception to lien avoidance under certain state laws||$6,225||$6,425|
|Section 522(f)(4)—items excluded from definition of household goods for lien avoidance purposes||$650 (each time it appears)||$675 (each time it appears)|
|Section 522(n)—maximum aggregate value of assets in individual retirement accounts exempted||$1,245,475||$1,283,025|
|Section 522(p)—qualified homestead exemption||$155,675||$160,375|
|Section 522(q)—state homestead exemption||$155,675||$160,375|
|Section 523(a)(2)(C)—exceptions to discharge|
|(1)—in paragraph (i)(I)—consumer debts for luxury goods or services incurred < 90 days before filing owed to a single creditor in the aggregate||$650||$675|
|(2)—in paragraph (i)(II)—cash advances incurred < 70 days before filing in the aggregate||$925||$950|
|Section 541(b)—property of the estate exclusions:|
|(1)—in paragraph (5)(C)—education IRA funds in the aggregate||$6,225||$6,425|
|(2)—in paragraph (6)(C)—pre-purchased tuition credits in the aggregate||$6,225||$6,425|
|Section 547(c)(9)—preferences, trustee may not avoid a transfer if, in a case filed by a debtor whose debts are not primarily consumer debts, the aggregate value of property is less than||$6,225||$6,425|
|Section 707(b)—dismissal of a chapter 7 case or conversion to chapter 11 or 13 (means test):|
|(1)—in paragraph (2)(A)(i)(I)||$7,475||$7,700|
|(2)—in paragraph (2)(A)(i)(II)||$12,475||$12,850|
|(3)—in paragraph (2)(A)(ii)(IV)||$1,875||$1,925|
|(4)—in paragraph (2)(B)(iv)(I)||$7,475||$7,700|
|(5)—in paragraph (2)(B)(iv)(II)||$12,475||$12,850|
|(6)—in paragraph (5)(B)||$1,250||$1,300|
|(7)—in paragraph (6)(C)||$675||$700|
|(8)—in paragraph (7)(A)(iii)||$675||$700|
|Section 1322(d)—contents of chapter 13 plan, monthly income||$675 (each time it appears)||$700 (each time it appears)|
|Section 1325(b)—chapter 13 confirmation of plan, disposable income||$675 (each time it appears)||$700 (each time it appears)|
1Section 1326(b)(3)—payments to former chapter 7 trustee stays at $25, no change
Double Bogey, L.P. v. Enea, 794 F.3d 1047 (9th Cir. 2015) ("Double Bogey")
In Double Bogey, L.P. v. Enea, 794 F.3d 1047 (9th Cir. 2015) ("Double Bogey"), the U.S. Court of Appeals for the Ninth Circuit held in a published opinion that the debtors, who were the sole officers and shareholders of a corporation, could not have their debts determined non-dischargeable under 11 U.S.C. Section 523(a)(4) solely on the basis that the debtors were found to be the alter ego of the corporation under applicable California law. The Ninth Circuit determined that California's alter ego doctrine acts as a procedural mechanism rather than providing for "trust-like" obligations that would create a fiduciary relationship. To read the full opinion, click here: http://1.usa.gov/1RSkFzm.
Issues raised in Double Bogey as to whether California common law doctrines can impose a fiduciary relationship under 11 U.S.C. Section 523(a)(4) are of continuing importance. During January 2016, the Ninth Circuit, in an unpublished decision in Yin v. Tatung Co. (In re Houng), 2016 WL 145841 (9th Cir. 2016), interpreted Double Bogey and determined that the "trust fund doctrine," a California common law doctrine, creates a fiduciary relationship within the meaning of Section 523(a)(4).
Paul and Sylvester Enea created and owned Appian Construction, Inc. (the "Corporation"). The Eneas were also the Corporation's only officers. The Corporation managed two real estate development projects - 1221 Monticello L.L.P., as a general partner, and Monterrosa, L.L.C. as the managing member. Double Bogey, L.P. (the "Investor") invested $4 million in Monticello as its limited partner, and $1 million in Monterrosa as a non-managing member.
The Investor did not recover its investment, and after the Corporation failed to provide an accounting, the Investor filed a state court action against the Corporation and the Eneas. The Eneas ("Debtors") and the Corporation each filed bankruptcy under Chapter 7 approximately one year later.
The Investor initiated an adversary action against Debtors, alleging: (1) The Corporation was the Investor's fiduciary; (2) The Corporation was liable for the Investor's lost principal and profits; (3) such liabilities were created by the Corporation's defalcation; (4) liabilities created by a fiduciary's defalcation are non-dischargeable under Section 523(a)(4); and (5) the Debtors were liable for such non-dischargeable debt by way of their own defalcation or as alter egos of the Corporation.
The bankruptcy court found that the Corporation was a fiduciary of the Investor and that Debtors were alter egos of the Corporation. However, the bankruptcy court entered judgment in favor of Debtors – finding that a determination that the Debtors were the alter egos of the Corporation was insufficient to hold that Debtors were fiduciaries of the Investor. The district court affirmed the bankruptcy court, as did the Ninth Circuit.
The Ninth Circuit began its analysis noting that it has adopted a narrow definition of fiduciary – in that the fiduciary relationship must be one arising from an express or technical trust imposed before, and without reference to, the wrongdoing that caused the debt. See In re Cantrell, 329 F.3d 1119, 1125 (9th Cir. 2003). The Ninth Circuit stated that it may consult state law when interpreting whether one is a fiduciary under Section 523(a)(4), but such a relationship will only be found when the non-bankruptcy law clearly and expressly imposes trust-like obligations.
The Ninth Circuit further stated that common-law doctrines, such as California's alter ego doctrine, rarely impose trust-like obligations to create a fiduciary relationship under Section 523(a)(4) - and that constructive, resulting, or implied trusts never satisfy this element. As stated in the opinion, "California's alter ego doctrine does not explicitly create a trust relationship, either by raising existing legal duties or otherwise. Nor does it come into operation prior to wrongdoing - rather it merely operates to hold an individual liable for his corporation's already-existing debt. Instead of creating, enforcing, or expounding on substantive duties, California's alter ego doctrine merely acts as a procedural mechanism by which an individual can be held jointly liable for the wrongdoing of his or her corporate alter ego." Double Bogey at 1051-1052. The Ninth Circuit determined that since California's alter ego doctrine results in adding judgment debtors post-liability, and does not impose trust-like obligations prior to the liability, it does not create a fiduciary relationship under Section 523(a)(4).
Subsequent Ninth Circuit Case:
In Houng v. Tatung Co. (In re Houng), 2016 WL 145841 (9th Cir. 2016), the Ninth Circuit, in an unpublished decision, considered a non-dischargeability claim under 11 U.S.C. § 523(a)(4), and whether a fiduciary duty arising from the "trust fund doctrine" (the California doctrine holds that assets of a corporation become a trust fund for the benefit of creditors upon insolvency - see Berg & Berg Enter., LLC v. Boyle, 100 Cal.Rptr.3d 875, 893 (Cal. App. 2009)) creates a fiduciary relationship within the meaning of Section 523(a)(4). The Ninth Circuit determined in Houng that the trust fund doctrine did qualify as such a fiduciary relationship, notwithstanding dicta in Double Bogey that common law doctrines "rarely impose the trust-like obligations sufficient to create a fiduciary relationship" subject to nondischargeability in Section 523(a)(4). Houng at 2. The Ninth Circuit stated that Double Bogey simply states that cases "have long held-that for a fiduciary relationship to satisfy § 523(a)(4), it must exhibit characteristics of a traditional trust relationship and must arise prior to the wrongdoing at issue." Houng at 2.
Given the Ninth Circuit's narrow definition of a fiduciary under Section 523(a)(4), the court's reasoning and ultimate ruling is not surprising. However, the court's ruling was narrowly limited to a determination of whether California's alter ego doctrine alone can create a fiduciary relationship under the Bankruptcy Code - leaving open the possibility of using a finding of alter ego to support other grounds for nondischargeability - such as embezzlement or larceny under Section 523(a)(4), or willful and malicious injury to property under Section 523(a)(6). In addition, the Ninth Circuit's decision in the Houng case following on Double Bogey makes it likely that there will be more cases exploring whether other California common law doctrines qualify to create a fiduciary relationship within the meaning of Section 523(a)(4).
[this case analysis is reprinted from the State Bar of California Insolvency Committee e-newsletter, written by their authors]
In re Village Green I, GP, F.3d , 2016 Westlaw 325163 (6th Cir. 2016).
The Sixth Circuit has held that a cramdown plan of reorganization was not propounded in good faith due to the artificial impairment of small claims held by two creditors who were closely connected to the Chapter 11 debtor, especially since the debtor had sufficient funds on hand to pay those creditors in full immediately.
This is a circuit split issue: 9th Circuit and 6th Circuit are split on the issue of "artificial impairment." See, e.g., In re L & J Anaheim Associates, 995 F.2d 940 (9th Cir. 1993), holding that the definition of "impairment" under § 1124 did not necessarily mean "harmed." The Ninth Circuit reasoned that under § 1124(1), an unimpaired claim is one that is "unaltered." Therefore, any alteration, no matter how trivial, is sufficient to constitute impairment. The Village Green court conceded the issue of impairment but focused instead on the "bad faith" prong of the analysis. Perhaps the Supreme Court will ultimately resolve this question.
Facts and reasoning in Village Green: A partnership owned an apartment complex that was substantially "underwater" on its mortgage. It filed a Chapter 11 petition and eventually sought confirmation of a "cramdown" plan. Under 11 U.S.C.A. §1129(a)(10), a plan may be confirmed over the objections of most of the creditors ("crammed down") if there is at least one impaired consenting class of creditors. Under the proposed plan, the debtor's accountant and attorney were owed $2,400 but would not be immediately "cashed out" for 60 days, even though the debtor had sufficient cash to do so. By contrast, the plan proposed to pay its secured creditor over a 10 year span of time.
The debtor contended that those two creditors (its attorney and its accountant) constituted an "impaired consenting class," thus satisfying the cramdown requirements. After considerable litigation, the bankruptcy court eventually lifted the automatic stay and dismissed the bankruptcy case on the ground that it had not been filed in good faith. The district court affirmed, and so did the circuit court.
The court first agreed that the minor delay in payment to the debtor's accountant and attorney meant that they were technically "impaired" for purposes of §1124(1). However, the court went on to hold that the plan had been propounded in bad faith, in violation of §1129(a)(3), since the debtor had ample funds to pay the "impaired creditors" immediately: "[T]hat the minor claimants ([the debtor's] former lawyer and accountant) are closely allied with [the debtor] only compounds the appearance that impairment of their claims had more to do with circumventing the purposes of § 1129(a)(10) than with rationing dollars."
Ninth Circuit Rules That Debtor's Insider Can Sell Claims to Friendly Third Parties and Garner Critical Acceptance Votes on Its Plan
U.S. Bank N.A. v. The Village at Lakeridge, LLC (In re The Village at Lakeridge, LLC), F3d , 2016 WL 494592 (9th Cir. Feb. 8, 2016). Earlier this month, the Ninth Circuit ruled that an insider can sell its claim to a friendly third party, whose vote fulfills Bankruptcy Code section 1129(a)(10)'s requirement of an impaired consenting class, unless the third party has a close relationship with the debtor and negotiated the claim purchase at less than arm's length.
In re Murray
In re Murray, 543 B.R. 484 (Bankr. S.D. N.Y. 2016), issued an opinion dismissing an involuntary bankruptcy case brought by a single creditor.
In Murray, this creditor, the Wilk Auslander LLP law firm, was the assignee of a judgment obtained from its client (after the client did not pay its fees). The law firm sought to enforce upon its the judgment. To that end, the firm, as Murray's sole creditor, filed an involuntary chapter 7 bankruptcy proceeding. Shortly after, Murray, filed a motion to dismiss the case under section 707(a), alleging the firm brought the petition in bad faith. Murray also requested sanctions.
Murray had no income, and his sole material asset was an interest in a tenancy by the entirety with his wife in the apartment in which they resided. Under New York law, the creditor's sole remedy was to execute on Murray's interest in the apartment, but not the entire interest held by Murray and his non-debtor spouse. But the bankruptcy code, under Section 363, allows a forced sale of the entire apartment, providing Murray's non-debtor spouse only with the right of first refusal to match the sale offer.
The court began by noting that the facts of the case represent a "common" and abused practice: the filing of a bankruptcy petition in a two-party dispute. Though most commonly, the court stated, the abuser is the debtor and not the creditor. The question the court addressed was whether a single creditor could bring an involuntary bankruptcy case, admittedly as a judgment enforcement tool. The petitioning creditor law firm, the court noted, brought the case to as a means to exploit Section 363, in an attempt to monetize the spousal interest in the property jointly held with Murray.
The court reviewed several factors used to determine whether bankruptcy petitions constitute bad-faith filings: whether the dispute involved two-parties, whether the dispute could be resolved in a non-bankruptcy forum, and whether filing the petition was a mere litigation tacit.
Relying on these factors, the court found that the involuntary filing was indeed inappropriate. The goal of the bankruptcy system, it noted, is to achieve societal goals as a collective remedy, and to achieve distributions for all creditors. But in this case, the filing arose from a two-party dispute, and the petitioning creditor used the bankruptcy system "solely as a judgment enforcement mechanism" to achieve a result unavailable under non-bankruptcy law, and where no other creditors existed that needed protection. The court found this to be a misuse of the bankruptcy code.
Considering that 11 USC 303(a)(2) states a single creditor can file an involuntary bankruptcy petition, if there are fewer than 12 total creditors, the fact a single creditor filed the involuntary petition against Murray was allowed by Section 303(a)(2).
While the court did not award sanctions to Murray, creditors should consider the risks of using involuntary petitions as a litigation strategy aimed at obtaining remedies under the bankruptcy code not otherwise available under state law. On the other hand, the whole point of filing an involuntary bankruptcy case (or a voluntary bankruptcy case) is to obtain remedies not available under non-bankruptcy law.
In re TapangIn re Tapang, 540 B.R. 701 (Bankr. N.D. Cal. 2015): the U.S. Bankruptcy Court for the Northern District of California determined that a 5% interest rate on the secured creditor's claim met the standards set forth in Till v. SCS Credit Corporation, 541 U.S. 465 (2004) ("Till") for confirmation of the debtor's chapter 11 plan, by "cramdown" on the secured creditor who voted to reject the Chapter 11 plan.
The Tapang case concerned the limited question of the rate of interest required for the debtor to cram down her proposed plan of reorganization on a dissenting secured creditor, 523 Burlingame LLC ("Creditor"). The case is a bit unusual in that it was originally assigned to the Honorable Arthur Weissbrodt, who determined (1) the value of the property in question, (2) that Till applied, and (3) that Creditor had the burden of proof on the appropriate risk factors to be applied under the Till formula. When Judge Weissbrodt announced his retirement, the case was reassigned to the Honorable Charles Novack, though the interest rate issue was reserved to Judge Weissbrodt. Judge Weissbrodt presided over a trial and took the matter under submission; however, the issue was later reassigned to Judge Novack, who reviewed the record and testimony and issued the court's decision.
Creditor held a first deed of trust on the debtor's real property, which was a commercial property used as an elder living facility. As of the bankruptcy filing, Creditor held a claim of $1,829,167.33. The court determined the property's value to be $1,148,785, and there was a prepetition real property tax claim of $100,060.32 senior to Creditor's claim. The debtor proposed to pay the secured portion of Creditor's claim over 25 years with an annual interest rate of 5%. Creditor opposed confirmation, asserting that 5% interest did not provide for an adequate risk premium. Creditor did not, however, propose an alternate rate.
During the chapter 11 case, the debtor timely made adequate protection payments to Creditor and was current on postpetition real property taxes. In addition, the debtor (who owned a number of properties) had amassed cash of $200,000 in her checking account.
The debtor's expert, whose qualification as an expert was unsuccessfully challenged by Creditor via a motion in limine, opined that a risk premium of 1.75% over and above the prime rate of 3.25% was appropriate. He based his opinion on the following factors: the treatment of similarly situated creditors in the debtor's reorganization plan (all had agreed to a rate of 5% or less), the timeliness of the debtor's postpetition monthly payments to Creditor and to the County for real property taxes, and the debtor's cash on account.
Upon cross-examination by Creditor's counsel, the expert acknowledged that additional factors were relevant to the analysis. The factors included: the age and nature of the property; any necessary repairs and maintenance; the duration of the plan; the debtor's prepetition defaults; and the loan-to-value ratio. The expert did not consider the debtor's age a factor in his analysis.
Creditor did not offer any expert testimony. It did designate an expert witness on the interest rate issue, but at the hearing Creditor advised the court that its expert had left the industry. Creditor did not identify any other expert, instead relying on its cross-examination of the debtor's expert.
In accepting the debtor's proposed 5% interest rate on the objecting Creditor's claim, the court noted that under Till a creditor bears the burden of proof as to any risk factors that justify an upward adjustment of the interest rate. It appears that Judge Novack agreed with Judge Weissbrodt's prior ruling that Till applied in the chapter 11 context, citing, among other cases, In re Dunlop Oil Co., Inc., BAP No. AZ-14-1172-JuKiD, 2014 WL 6883069, at ∗19 (B.A.P. 9th Cir. Dec. 5, 2014).
The court noted that Creditor's trial brief argued that the debtor's proposed 5% interest rate failed to consider eight relevant concerns: (1) the initial contract rate of 7.213%; (2) the age and condition of the property, which Creditor alleged required several hundred thousand dollars of deferred maintenance; (3) accrued property taxes which were to be paid off in three years; (4) the debtor had no funds for capital improvements or deferred maintenance; (5) the property was co-owned by a debtor-controlled entity which presented another bankruptcy risk; (6) the debtor was elderly (she was 64), (7) the debtor's business was not subject to the court's jurisdiction; and (8) the debtor's income was historically inadequate to make debt service payments.
The court further noted, however, that Creditor either failed to introduce any evidence to support these arguments or failed to establish them as relevant risk factors. Moreover, Creditor did not introduce any evidence to justify a greater risk premium adjustment or identify any specific rate it believed would be more appropriate than the debtor's 5% interest rate. While Creditor solicited testimony from the debtor's expert that certain hypothetical factors might be relevant to consider in setting an appropriate interest rate, Creditor presented no evidence to establish that any of the hypothetical factors were actually present.
The court also made clear that the debtor's age could not be considered as a potential negative factor as to do so would violate the Equal Credit Opportunity Act. The court also noted that it did not believe Till required a 3% cap on the risk premium. Finally, the court noted that the amount Creditor paid for the note when it purchased it from the initial lender ($500,000) was irrelevant to the court's analysis.
There are numerous practice points of interest in this case. First, since a secured creditor has the burden to establish the appropriate risk factors, it must put on evidence of those risk factors. While this is possible without its own expert, a creditor is well advised to retain its own expert (and perhaps a back-up expert) in such a situation. While there were potential weaknesses in the debtor's expert opinion, those weaknesses went effectively unchallenged in this case.
Second, without a controlling decision from the Ninth Circuit on the applicability of
Third, even if Till applies, it appears that courts do not feel necessarily limited to the 1%-3% risk premium adjustment discussed therein.
[this case analysis appeared in the California State Bar Insolvency Committee e-newsletter of 02/16/16]
Zachary v. California Bank & Trust
Zachary v. California Bank & Trust, F.3d , 2016 WL 360519 (9th Cir. Jan. 28, 2016), the U.S. Court of Appeals for the Ninth Circuit ( "9th Circuit") held that the absolute priority rule, codified in section 1129(b)(2)(B)(ii) of the Bankruptcy Code, continues to apply to individual chapter 11 cases following the enactment, in 2005, of the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA 2005"). In so holding, the Ninth Circuit overruled the decision of the U.S. Bankruptcy Appellate Panel for the Ninth Circuit (the "BAP") in In re Friedman, 466 B.R. 471 (9th Cir. BAP 2012) ("Friedman"), and adopted the "narrow view" of the individual debtor exception to the absolute priority rule. The narrow view, which Zachary adopts as the rule in the 9th Circuit, is that, for individuals filing Chapter 11 bankruptcy, the individual debtor's Chapter 11 plan cannot be confirmed (approved by the Bankruptcy Court so it goes into effect, binding debtor and creditors) unless debtor puts into the Chapter 11 plan the value of all assets that the debtor had, at the time the debtor filed bankruptcy (all "prepetition" assets), except for those assets that the debtor claimed exempt (only individual debtors can claim exemptions). That has always been the rule for non-individual debtors' Chapter 11 cases - corporations, LLCs, etc. - except corporations and LLCs and other non-individual debtors cannot claim exemptions.
The result of the absolute priority rule applying in individual Chapter 11 cases is that the value of all non-exempt prepetition assets of the individual debtor must be paid into the Chapter 11 plan to help fund the plan, so debtor has to give up all those assets, usually achieved by selling those assets, in the bankruptcy case.
The only exception to this requirement is if the debtor "buys back" debtor's prepetition assets, by making a "new value" contribution in money or money's worth (debtor's promise of performing future labor does not constitute a "new value" contribution).
Per Zachary, an individual debtor does get to keep assets that the debtor acquires after debtor files bankruptcy (ie "postpetition").
However, in an individual Chapter 11 case, per 11 USC 1115, the individual debtor's earnings, earned by work the debtor does during the bankruptcy case belongs to the debtor's "bankruptcy estate". If any unsecured creditor objects to the individual debtor's proposed Chapter 11 plan, the individual debtor must pay debtor's "projected monthly disposable income" into debtor's Chapter 11 plan, every month of the plan (minimum Ch 11 plan length for an individual is 5 years), to help fund the plan, per 11 USC 1129(a)(15), or the plan cannot be confirmed.
Coker v. JP Morgan Chase Bank, N.A., Cal.
Coker v. JP Morgan Chase Bank, N.A., Cal. , 2015 Westlaw ----- (Supreme Court of the State of California, 2015.): The California Supreme Court held that a lender holding a residential purchase money obligation cannot obtain a deficiency from a borrower, even though the property was sold at a short sale and even though the borrower waived her antideficiency protection. Secured lender could not collect the deficiency owed after short sale of residence, from borrower.
FACTS: The owner of a residence encumbered by a purchase money deed of trust arranged for a "short sale," under which the proceeds of the sale would be less than the outstanding balance owed to the purchase money lender. The lender agreed to the sale, but only if the borrower would agree to be liable for any deficiency. She agreed to those terms.
After she went ahead with the sale, the lender sought recovery. The borrower then filed a complaint for declaratory relief to establish that the lender was barred by California Code of Civil Procedure §580b from obtaining a deficiency judgment against her. The trial court dismissed her complaint, but the appellate court reversed, on the ground that the statute prohibited a deficiency after any sale, whether by foreclosure or otherwise.
REASONING: The Supreme Court unanimously affirmed, holding that the California cases interpreting §580b had all adopted a broad reading of the statute in order to protect homeowners from deficiency liability on purchase money obligations, whether or not a foreclosure sale had been held. The lender argued that the pre-2012 version of the statute, which applied to the facts in this case, meant that its protections did not attach unless a foreclosure sale had taken place.
The court recognized that the pre-2012 version of the statute was not perfectly clear, noting that "[i]n 2012, the Legislature reformatted section 580b to expressly parse the text" to provide that a lender cannot collect a deficiency from a residential borrower under a purchase money obligation. But the court looked to its earlier decisions to guide its construction of the former statute.
The lender argued that the borrower had waived the protection of the statute, but the court held that contractual waivers of §580b are unenforceable. As a fallback, the lender argued that the recent enactment of §580e demonstrated that the prior law did not protect homeowners after short sales. (That new statute expressly protects residential borrowers in that situation.) The court reasoned that its construction of §580b was unaffected by the new statute because "the Legislature did not limit or otherwise alter section 580b when it enacted section 580e." The court declined to discuss whether non-residential borrowers would be protected by its reading of §580b, even after the enactment of §580e.
Finally, the court held that although the borrower's consent to the short sale constituted a de facto waiver of her right under §726(a) (the "one-action rule") to compel the lender to foreclose prior to seeking recovery from her, that did not constitute a valid waiver of her protections under §580b:
[T]he fact that [the borrower] waived her right to insist that [the lender] proceed via foreclosure does not mean that the short sale agreement destroyed the purchase money nature of the loan or that [the lender] became entitled to collect more than the value of its security. Once [the lender] realized and exhausted the full value of its security, section 580b prevented [it] from seeking to obtain [her] other assets. When a borrower waives her rights under section 726 by agreeing to a short sale, section 580b remains a barrier to any deficiency judgment after the lender collects the full value of its security from the sale.
AUTHOR'S COMMENT: This result is not a surprise. Even though newly-enacted §580e and newly-amended §580b were inapplicable to this case, the Legislature provided very strong policy guidance to the court: homeowners are to be protected from deficiency liability on purchase money loans. (Full disclosure: the court mentioned the "reformatted" post-2012 §580b. I was a member of a team of drafters sponsored by the Insolvency Law Committee of the Business Section of the California State Bar that proposed those amendments in order to clarify the earlier version of the statute.) Given the enactment of §580e and the "reformatting" of §580b, I do not think that this opinion will have a major impact in future litigation over the application of §580b, since new §580b and §580e now occupy the field.
The lender raised questions about the policy implications of a broad reading of §580b: Does the statute really protect against overvaluation of residential property, or does it cause borrowers to pay more than the market value, since they know they are insulated from liability? Does the statute really prevent the aggravation of an economic downturn by protecting homeowners from liability, or does it encourage strategic default? The court declined to reach either of those issues, stating that the earlier California cases have "implicitly rejected" both of those arguments. I believe that both of those arguments have merit but that the Legislature will never change the rule protecting homeowners from liability, for obvious political reasons.
For a discussion of the appellate opinion in this case, see 2013-32 Comm. Fin. News. NL 65, Despite Borrower's Agreement to Remain Liable, Borrower is Protected From Purchase Money Deficiency Liability After Short Sale.
[Note: this case analysis was written by Professor Dan Schechter of Loyola Law School, Los Angeles]
New Proof of Claim and Mortgage Attachment, effective December 1, 2015
New Proof of Claim and Mortgage Attachment, effective December 1, 2015: The national bankruptcy forms were revised as of December 1, 2015. One of the major changes in the national forms is a revision to the form (Form 410) that creditors use to file Proofs of Claims in bankruptcy cases. Effective 12/1/15, the Proof of Claim form (Form 410) and the Mortgage Proof of Claim Attachment form (Form 410A), were revised to require that DOT lenders/ mortgage lenders must now provide a loan payment history from the first date of default as part of the mortgage attachment form, which must include information about payments received and how they were applied, when fees and charges were incurred, when fees and charges were paid from what source, when escrow amounts were disbursed, and whether funds were held in an unapplied or suspense account. Requiring secured DOT/mortgage creditors to supply this information can be a big help to bankruptcy debtors' attorneys, in the debtors' attorneys analyzing whether the creditor's secured Proof of Claim is accurate, or whether the servicer may have misapplied payments or made other servicing errors before the bankruptcy was filed.
Eden Place LLc v. Perl (In re Perl)
Eden Place LLc v. Perl (In re Perl) F.3d (9th Cir. 1/8/16) (9th Cir. Appeal number14-70039): Creditor did NOT violate bankruptcy stay when creditor had law enforcement officers evict debtor, post-petition, from real property debtor was occupying, which had previously belonged to debtor, but which debtor no longer owned, at time debtor filed bankruptcy. Held mere fact that bankruptcy debtor had possession of a real property did NOT mean that new owner violated stay by having debtor evicted. The new owner of the real property had purchased debtor's real property at a nonjudicial foreclosure sale held pre-petition (before debtor filed bankruptcy). Also prepetition, the new owner sued to evict debtor from the property, in California state court, and, prepetition, obtained an eviction order from California state court, giving new owner right to evict debtor from the property. Debtor then filed Chapter 13 bankruptcy. New owner had law enforcement officers evict debtor, after debtor filed bankruptcy, and without seeking relief from stay in the bankruptcy case. Debtor claimed the eviction violated the bankruptcy automatic stay, because debtor's possession of the property was an interest protected by the automatic stay. Debtor lost in the Ninth Circuit, which held mere possession, without right to possess (there was no right to possess, due to new owner having obtained an eviction order in state court, BEFORE debtor filed bankruptcy), was NOT an interest protected by the bankruptcy automatic stay. Therefore, new owner did not have to seek or obtain relief from stay, to be able to have law enforcement officers evict debtor, post-petition, using the eviction order obtained prepetition. Case also presented issue of whether there was an appealable order.
Kostecki v. Sutton (In re Sutton)
Kostecki v. Sutton (In re Sutton)BR (9th Cir. BAP 12/3/15) (not for publication) (BAP case number EC014-1204-JuFD) held that a case-terminating sanction may not be imposed absent bad faith or consideration of a more moderate penalty, such as a continuance.
In re Free
In re Free, ... BR... (9th Cir. BAP 12/17/15) BAP case number WW-14-1395-JuKiF: Good decision for debtors. Debtors filed a chapter 7 and received their discharge. The discharge released them from personal liability on two wholly-unsecured junior liens that encumbered their real property. Before the chapter 7 was closed, Debtors file a chapter 13 intending to strip off the two junior liens in the in the chapter 13 plan. Trustee moved to dismiss, arguing they were ineligible for chapter 13 because their debt exceed the 109(e) limits. The bankruptcy court agreed. On appeal the BAP reversed, holding in personam liability on undersecured debt that is discharged in a chapter 7 is not counted toward the unsecured debt limit in a subsequent chapter 13 case.
Inst. of Imaginal Studies v. Christoff (In re Christoff) (B.A.P. 9th Cir., 2015)
Inst. of Imaginal Studies v. Christoff (In re Christoff) (B.A.P. 9th Cir., 2015): Held that debtor who was contractually obligated to pay a student loan, but did not actually receive funds, could discharge that contract obligation. May be case of first impression. Facts: Meridian is a for-profit California corporation which operates a private university licensed under California's Private Post Secondary Education Act of 2009, Cal. Educ. Code § 94800, et seq. If a graduate of Meridian fulfills other post-graduate requirements, the graduate may obtain a license from California to practice as an independent, unsupervised psychologist.
Debtor applied for admission to Meridian in 2002. Meridian agreed to admit Debtor and offered her $6,000 in financial aid to pay a portion of the tuition for that school year. Under this arrangement, Debtor did not receive any actual funds from Meridian, but instead she received a tuition credit. Debtor signed an enrollment agreement acknowledging Meridian's offer to "finance" $6,000 of the tuition, and she signed a promissory note in favor of Meridian evidencing her obligation. The promissory note provided that the debt for the tuition credit was to be paid by Debtor in installments of $350 per month after Debtor completed her course work or withdrew from Meridian. Interest accrued on the unpaid balance of the note at nine percent per annum, compounded monthly.
The bankruptcy court held the obligation discharged. On appeal, the 9th Cir. BAP held that under § 523(a)(8)(A)(ii), a student loan debt was excepted from discharge only for loans in which funds were actually received by the debtor.
Section 523(a)(8)(A)(ii) plainly provides that a bankruptcy discharge will not impact "an obligation to repay funds received as an educational benefit, scholarship, or stipend." It is undisputed that the agreements between Meridian and Debtor constitute an "obligation to repay" "educational benefits" provided by Meridian to Debtor. However, § 523(a)(8)(A)(ii) requires more.
To except a debt from discharge under this subsection, the creditor must demonstrate that the debtor is obliged to repay a debt for "funds received" for the educational benefits. The phrase "funds received" has been interpreted by the BAP, in an opinion which was as adopted by the Ninth Circuit as its own, to require "that a debtor receive actual funds in order to obtain a nondischargeable benefit." In re Hawkins, 317 B.R. at 112 (emphasis added); accord In re Oliver, 499 B.R. 617, 625 (Bankr. S.D. Ind. 2013) (holding under § 523(a)(8)(A)(ii), "[i]n order to be obligated to repay funds received, [the] [d]ebtor had to have received funds in the first place.")
Tetzlaff v. Educ. Credit Mgmt. Corp. (7th Cir., 2015) HELD: Evidence of debtor's paydown of one student loan is not evidence of good faith in regard to another loan for which no payments were made.
Seventh Circuit Court of Appeals held that the bankruptcy court was not required to consider Tetzlaff's payments to Florida Coastal as evidence of a good faith effort to repay Educational Credit, as his Florida Coastal debt was not included in the discharge action. Furthermore, as the bankruptcy court noted, it seems that Tetzlaff repaid his debt to Florida Coastal largely because he needed the school's cooperation in releasing his diploma and transcript. Thus, Tetzlaff was motivated by certain incentives to pay down his Florida Coastal debt that do not apply to the repayment of his debt held by Educational Credit.
Therefore, Seventh Circuit Court of Appeals declined to hold that the bankruptcy court erred when it refused to consider the repayment of debt not included in the loan discharge proceeding before it in making a determination of good faith under the Brunner test. Further, we affirm the bankruptcy court's conclusion that Tetzlaff has not made a good faith effort to pay down his student loan debt.
HELD: Hardship found were debtors' status affected by current economic realities
Court says " ... Brunner framework is an unfortunate relic."
Johnson v. Sallie Mae (Bankr. Kan. 2015)
In this case the court found hardship where the debtors were in good health and had college degrees (wife was actually 1 course away from a degree in biology), but had been unable to get employment with sustainable income, the expenses listed by the debtors were unrealistically low, their cars together were 40 years old, the debtors had made good faith efforts to pay the loans, had they had three minor children, and there was a recession.
Saying it would be " ... wrong to leave debtors in virtual lifetime servitude," the court found hardship, and said –
"The Court takes judicial notice of the Great Recession and the lumbering recovery of the United States' economy and slow growth since 2008. Debtors' projected expenses make no provision for the unexpected yet inevitable occurrences, in particular those associated with raising three young children. While such unexpected events impose additional hardship on any debtor, the resulting hardship on these Debtors would be undue because they would be incapable of affording essential expenses and deprived of the ability to maintain a minimal lifestyle if forced to repay the Loan."
"...a substantial percentage of Americans may not be able to buy homes and automobiles, start businesses, invest in capital ventures, educate their children, or save for a secure and dignified retirement because they are overly burdened with debt incurred in completing their postsecondary educations."
∗Robert C. Cloud and Richard Fossey, Facing the Student-Debt Crisis: Restoring the Integrity of the Federal Student Loan Program, 40 J.C. & U.L. 467, 495 (2014), citing to Jayne O'Donnell, Consumer Protection Chief Talks About Student Loans, USA Today, Aug. 15, 2013
McFarland v. Gen. Electric Capital Corp. (In re: Int'l Mfg. Grp., Inc.)
McFarland v. Gen. Electric Capital Corp. (In re: Int'l Mfg. Grp., Inc.), 538 B.R. 22 (Bankr. E.D. Cal. 2015), the Bankruptcy Court for the Eastern District of California denied defendant General Electric Capital Corporation's (GECC's) FRCP Rule 9 [FRBP Rule 7009] Motion to Dismiss Bankruptcy Trustee's Adversary Proceeding Complaint against GEEC, for failure to plead fraud with the specificity required by Rule 9. Trustee's Complaint alleged that GECC had received 2 million dollars (4 transfers of $500,000 each made by Olivehurst Glove Manufacturers, LLC, an entity which had been substantively consolidated into the IMG bankruptcy case) from the bankruptcy debtor, International Manufacturing Group, Inc. (IMG), and that those 4 transfers were in furtherance of the bankruptcy debtor's Ponzi scheme. considered the sufficiency of a complaint alleging fraudulent transfers in the Ponzi scheme context. Defendant General Electric Capital Corporation (GECC) moved to dismiss the complaint of the plaintiff and trustee, Beverly McFarland.) Per Rules 9(b) and 12(b)(1), all allegations pleaded in the Complaint must be accepted as true. The court denied GECC's Motion to Dismiss Trustee's Complaint.
First, the Bankruptcy Court ruled that the Complaint's allegations were sufficient to establish the transfers were made with actual intent to defraud creditors, as required in cases alleging actual fraudulent transfers. Specifically, the complaint alleged that each of the transfers were made in furtherance of IMG's Ponzi scheme, when it alleged that the principal of IMG, caused the transfers to appease GECC, in order to prolong the duration of the scheme by: (1) avoiding any adverse final judgment or findings of fact in litigation, (2) preventing knowledge of IMG's various fraudulent schemes, and (3) otherwise enabling IMG to remain in operation and for the fraud to continue. The court found these allegations sufficient to state a claim of actual fraudulent intent.
Second, the Bankruptcy Court ruled that even though the Complaint on its face properly alleged actual intent, (rendering the Ponzi Scheme presumption unnecessary), it found that in any case, that the Ponzi scheme presumption also applied. The Ponzi Scheme presumption, when it applies, permits a presumption of actual intent to defraud in all transactions in furtherance of a Ponzi scheme. The court found the trustee adequately alleged sufficient connections between the Ponzi scheme and the payments to GECC, triggering the presumption.
Comment: Courts are not friendly to alleged Ponzi schemes, and are unlikely to throw a Complaint alleging Ponzi scheme out on a pleading sufficiency technicality.
Ezra v. Seror (In re Ezra)
Ezra v. Seror (In re Ezra), 537 B.R. 924 (B.A.P. 9th Cir. 2015): The Ninth Circuit Bankruptcy Appellate Panel ruled that res judicata barred an appellant, who had raised one state law limitations argument at trial in defense of a trustee's fraudulent conveyance action, from raising a related but different limitations defense for the first time on appeal. Appellant could not raise the second limitations defense, for the first time on appeal, because an appellate court will not consider such an argument first raised on appeal, except under circumstances not present in the case. The court also decided that the fact that the new theory was generically related to a theory that the defendant did raise below did not rescue it from the no-review rule.
In re Penrod, F.3d , 2015 Westlaw 5730425 (9th Cir. 2015):
In re Penrod, F.3d , 2015 Westlaw 5730425 (9th Cir. 2015): The Ninth Circuit has held that a Chapter 13 debtor was entitled to recover $245,000 in fees from a secured lender because she defeated a $7,000 portion of the lender's claim. [.]
FACTS: A consumer borrowed $32,000 to buy a car worth $25,000. The difference ($7000) was used to pay off the "negative equity" in her old vehicle. Less than two years later, she filed a Chapter 13 petition. The lender asserted a secured claim for $26,000, the amount she still owed on the loan. The debtor proposed a Chapter 13 plan that bifurcated the lender's claim into a secured claim for the value of the car and an unsecured claim for the "negative equity."
The lender argued that its entire claim should be treated as a "purchase-money security interest" and should therefore be viewed as a secured claim. Construing the infamous "hanging paragraph" of 11 U.S.C.A. § 1325(a), the bankruptcy court ruled that the lender's claim was "purchase-money" only to the extent of the value of the car ($19,000) and was unsecured for the balance ($7,000) because the "negative equity" could not be included in the purchase-money characterization. Eventually, that ruling was affirmed by the BAP and then by the Ninth Circuit.
Having prevailed on that issue, the debtor then sought to recover $245,000 in attorney's fees from the lender, citing California Civil Code §1717, which transmutes unilateral fee clauses into reciprocal fee clauses for actions based on a contract. The clause contained in the lender's documentation stated: "You will pay our reasonable costs to collect what you owe, including attorney fees, court costs, collection agency fees, and fees paid for other reasonable collection efforts." But the bankruptcy court held that she could not collect her fees because she had not prevailed on the contract per se, since her success against the lender had turned on a question of federal bankruptcy law, rather than on an interpretation of the contract or on state law. The district court affirmed.
REASONING: The Ninth Circuit reversed, holding that her victory was indeed "on the contract" for purposes of § 1717 because the lender was seeking to enforce the contract against her:
[The lender] sought to enforce the provisions of its contract with [the debtor] when it objected to confirmation of her proposed Chapter 13 plan. The plan treated [the lender's] claim as only partially secured, but [the lender] insisted that it was entitled to have its claim treated as fully secured. The only possible source of that asserted right was the contract—in particular, the provision in which [the debtor] granted a security interest in her [new car] to secure "payment of all you owe on this contract." (Had the contract not granted [the lender] a security interest in the car, [the lender] could not have asserted a secured claim for any amount . . . .) The security interest conveyed by the contract covered not just the funds [the debtor] borrowed to pay for the [new car], but also the funds she borrowed to refinance the negative equity in [her old car]. The sole issue in the hanging-paragraph litigation was whether this provision of the contract should be enforced according to its terms, or whether its enforceability was limited by bankruptcy law to exclude the negative-equity portion of the loan . . . . By prevailing in that litigation, [the debtor] obtained a ruling that precluded [the lender] from fully enforcing the terms of the contract.
Citing Travelers Casualty & Surety Co. v. Pacific Gas & Electric Co., 549 U.S. 443, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007), the court noted that contractual fee clauses can be enforced in bankruptcy, even where the issues litigated are questions of federal law, rather than state law or factual issues. Further, under §1717, fees can be awarded even if the outcome depends on purely legal issues:
Nothing in the text of § 1717 limits its application to actions in which the court is required to resolve disputed factual issues relating to the contract. A party who obtains (or defeats) enforcement of a contract on purely legal grounds, as by prevailing on a motion to dismiss with prejudice or by showing that a defendant's contract-based defenses are barred by federal statute or federal common law, still prevails in an action "on a contract."
The court concluded its analysis by noting that the lender could have recovered its fees if it had prevailed, thus justifying a reciprocal recovery by the prevailing debtor:
The contract included—no doubt for [the lender's]—an attorney's fees provision quite broad in scope. The provision was not limited, for example, to actions to determine whether the terms of the contract had been breached. It instead stated that, in the event of default, [the debtor] would be obligated to pay the reasonable attorney's fees [the lender] incurred in attempting "to collect what you owe." That provision encompasses [the lender's] efforts . . . to establish that it held a fully secured rather than a partially secured claim. AmeriCredit wanted to prevail on that issue to ensure that it would collect 100% of what it was owed on the loan. [The lender] had no reason to litigate that issue other than as part of an attempt to collect from [the debtor] what she owed. Whether [the lender] actually would have sought attorney's fees had it prevailed (something it denies) is immaterial. What matters is whether it could have sought fees under the contract, and here it could indeed have done so.
COMMENT: Note that the Supreme Court's Travelers decision, cited by the circuit court, was nominally a victory for creditors. (For a discussion of that case, see 2007 Comm. Fin. News. 23, Unsecured Creditor May Claim Contractual Attorney's Fees Even Though Litigation Involves Purely Bankruptcy-Related Issues.) But many commentators (including myself) noted that Travelers was really a disguised defeat for creditors. This is from my 2007 discussion of that case:
In California, and in other states with reciprocal fee statutes such as Civil Code §1717, the decision in this case may result in an ironic result when the creditor is not the prevailing party in the bankruptcy litigation. Since the creditor would have been entitled to a fee award under the contractual fee provision, the debtor (as the prevailing party) should be able to invoke the reciprocal fee statute to obtain recovery from the creditor. The irony, of course, is that although the creditor's unsecured fee claim against the debtor would have been worth very little in most cases, the debtor's fee claim against the creditor will often be fully recoverable. In other words, if I am reading this opinion correctly, the real benefit of this opinion will flow to debtors, not to creditors.
As predicted, we now have the result in Penrod: the lender that unsuccessfully litigated a $7,000 claim is hit with a §1717 fee award of $245,000. As predicted, the rule in Travelers is not a two-edged sword. It is a sword with one sharp edge and one dull edge. If the creditor prevails, the fee clause is almost useless, since the debtor cannot pay the fees. If the debtor prevails, the creditor has to pay in real dollars.
I have long urged that it does not make sense for creditors to include broad contractual attorney's fee clauses that encompass fees incurred during bankruptcy proceedings. The only possible exception is in a commercial lending context when the lender is absolutely certain that it will be unassailably perfected and amply oversecured, if and when the borrower files a bankruptcy petition. And in the wake of the 2008 "mortgage meltdown," can anyone ever be certain of oversecured status?
For discussions of related issues, see 2015-30 Comm. Fin. News. NL 61, Debtor Receives Award of Attorney's Fees After Defeating Lender's Motion for Relief from Stay, Even Though Debtor is Not a Signatory to Loan Documents Containing Fee Clause, and 2015-15 Comm. Fin. News. NL 30, Secured Creditor's Successful Defense Against Avoidance Claims Constitutes "Enforcement" of Loan Agreements Under Attorneys' Fee Clause.
For a discussion of an earlier opinion in the Penrod saga, see 2008 Comm. Fin. News. 85, "Negative Equity" Does Not Destroy Purchase Money Status of Automobile Loan Under "Dual Status" Rule, but "Negative Equity" Cannot Enlarge Secured Claim of Purchase-Money Lender.
Foregoing analysis is as reported in 10/20/15 e-newsletter of California State Bar Business Law Section Insolvency Law Committee.
HSBC Bank v. Blendheim (In re Blendheim)
HSBC Bank v. Blendheim (In re Blendheim), F.3d , 2015 WL 5730015 (9th Cir. Oct. 1, 2015). 9th Circuit Court of Appeals joins Fourth Circuit, and Eleventh Circuit, in holding that a Chapter 13 debtor can strip from secured, to unsecured, a completely underwater junior DOT loan, owed on debtor's primary residence, in a "Chapter 20" bankruptcy case. "Chapter 20" is bankruptcy slang for a debtor first filing a Chapter 7 bankruptcy case, and receiving a discharge of unsecured debt in that Chapter 7 bankruptcy case, and then soon thereafter filing a Chapter 13 bankruptcy case (7 + 13 + 20), in which debtor is NOT eligible to receive a discharge (because the debtor has too recently had a discharge in Chapter 7) and then using the Chapter 13 case and plan to "lienstrip" the wholly underwater junior DOT loan from secured to unsecured. The US Supreme Court has not yet ruled on whether doing that is allowed.
Coyle v. United States (In re Coyle)
Coyle v. United States (In re Coyle), 524 B.R. 863 (Bankr. S.D.Fla., 2015) addresses issues regarding whether a tax can be dischargeable, per 11 USC 523(a)(1), when the debtor's tax return for that tax is filed later than when it was due, but is filed more than 2 years before debtor files bankruptcy.
In Coyle, the taxpayer filed his tax returns later than they were due, and filed the tax returns after the IRS had already assessed the taxes. In Coyle, the bankruptcy for the Southern District of Florida avoided following the so called McCoy rule (McCoy rule prevents late filed returns from being dischargeable), and instead, based its decision instead on the 4-prong Beard test. Citing Pendergast v. Mass. Dep't of Revenue 510 B.R. 1 (B.A.P. 1st Cir., 2014) the court wrote:
"The Pendergast court agreed with McCoy that the changes in BAPCPA replaced the Beard test but held that:
" if a tax return is never filed, then it is clear that the tax obligation is nondischargeable. If a return is filed late, dischargeability depends on the taxpayer's cooperation with the taxing authorities. In Massachusetts, if the debtor engages in self-assessment by filing a late return before the taxing authority assesses a deficiency (analogous to 26 U.S.C. § 6020(a)), then the tax liability may be dischargeable if the return was filed more than two years before the filing of the petition. If the Massachusetts tax authority assesses a deficiency before the debtor's self ... the debtor's tax liability will not be dischargeable.
"Although this Court is relying on the Beard test, the reasoning in Pendergast is instructive. The IRS Assessment occurred on May 11, 2009, without the Debtor's cooperation and input. After the IRS Assessment, the IRS began its collection efforts. The Debtor then, in response to the IRS's actions, filed her Form 1040 for tax year 2006 in February 19, 2010, roughly two years after a return was due.
The Debtor's filing of a Form 1040, according to counsel for the IRS ... was never considered a "tax return" by the IRS, but was rather taken as an administrative request to reconsider the IRS Assessment, which the IRS accepted and used to modify the Debtor's tax liability. In sum, because the Debtor filed her Form 1040 for 2006 after the IRS Assessment, it was not an honest and good faith effort to comply with the tax laws. Therefore, the tax owed on the late filed return, was not dischargeable in debtor's bankruptcy, even though debtor filed the late return more than 2 years before debtor filed bankruptcy.
Fed Interest Rate Countdown Begins Amid Deluge Of Data
Thursday, 9/17/15, is D-Day for the Federal Reserve to come to a decision on whether to increase interest rates. And the nation's central bank, which keeps insisting its decision is dependent on incoming economic data, will have to sort through an onslaught of data points before it goes public with its decision Sept. 17 at 2 p.m. ET. The Fed is weighing its first rate hike since 2006. The Janet Yellen-led Fed has emphasized that its decision-making is data-dependent. Well, recent U.S. data on jobs, the pace of economic growth, the health of the economy's services sector and sales of durable goods (refrigerators, etc.) all point to the Fed raising short-term rates, currently pegged at 0% to 0.25%, when they break from their two-day policy meeting Thursday. There's a catch, though. If the Fed views the recent financial market turbulence, sparked by a slowdown in China's economy, as a sign of market instability, that could override the strong data and keep the Fed on hold. But this week the Fed gets more fresh data before its closely watched meeting. Tuesday, the Fed will get readings on August retail sales and industrial production, as well as July business inventories and manufacturing in the New York region. Wednesday is critical, too, as the August report on inflation at the consumer level is set for release. Inflation, currently below the Fed's 2% mandate, is key to the Fed's decision-making. [Reported in 9/15/15 Credit & Collection e-newsletter]
In re Gatewood, a new case, by 8th Circuit BAP, and 11st Circuit Crawford case, disagree
In re Gatewood, a new case, by 8th Circuit BAP, and 11st Circuit Crawford case, disagree:
In Gatewood, a Bankruptcy Appellate Panel for the Eighth Circuit has held that a proof of claim filed by a creditor on an out-of-statute debt is not a violation of the Federal Fair Debt Collection Practices Act.
The debtors had urged the court to follow the Eleventh Circuit's holding in Crawford v. LVNV Funding, LLC, 738 F.3d 1254 (11th Cir. 2014), which said debt-collector creditors who file a time-barred proof of claim in a Chapter 13 bankruptcy case engage in deceptive, misleading, unconscionable, or unfair conduct under the FDCPA. The Crawford court focused on the harm to the debtors and the bankruptcy estate caused by such a filing, in that the onus would be on either the trustee or the debtor to object to the claim, and if they did not, the claim would automatically be allowed and paid, at least in part, to the detriment of other creditors. This potential outcome was deemed unfair, unconscionable, deceptive, and misleading under the "least-sophisticated consumer" standard used by the Eleventh Circuit in FDCPA cases.
Crawford has been criticized by a number of bankruptcy courts in different circuits, finding that filing a proof of claim on a stale (beyond the statute of limitations) debt does NOT violate FDCPA. Here the Eighth Circuit BAP followed the trend:
"Filing in a bankruptcy case an accurate proof of claim containing all the required information, including the timing of the debt, standing alone, is not a prohibited debt collection practice" concluded the panel.
COMMENTARY: Supreme Court Denies Law Firm Payment for Defending Right to be Paid
On 6/16/15, the US Supreme Court issued its decision in Baker Botts, LLP v. ASARCO, LLC. The US Supreme Court had granted certiorari to decide the issue of: "whether Sect. 330(a)(1) permits a bankruptcy court to award attorneys' fees for work performed in defending a fee application." By a vote of 6-3, with US Supreme Court Justice Thomas writing for the majority, the US Supreme Court held that Bankruptcy Code section 11 USC 330(a) does not give bankruptcy courts the discretion to award fee-defense fees under any circumstances. The Court reasoned that the plain text of the statute, which only permits "reasonable compensation for actual, necessary services rendered by" a professional retained by the estate, does not suffice in the context of fee-defense awards to override the "American Rule" that each party bears its own attorneys' fees. While fees may be awarded for work done in preparing a fee application (per the express language of 11 USC 330(a)(6), the Court found no comparable basis for authorizing compensation for fees incurred in defending an application. Although Baker Botts superintended a challenging reorganization and then successfully defended its fees against all challenges, it took a $5 million hit. According to Prof. Tabb, the law firm should have been allowed to recover compensation for that defense. Not allowing that compensation is unfair to estate professionals, according to Prof. Tabb, and weakens the incentives for the best and brightest professionals to work in the bankruptcy arena. Because the US Supreme Court's decision is based on the "plain language" (ie wording) of Bankruptcy Code section 11 USC 330(a), the decision would likely not apply to attorneys fees sought pursuant to fee shifting statutes, because it has long been the rule that when a prevailing plaintiff's attorney is entitled to be paid attorneys fees, pursuant to a federal fee shifting statute, that the attorney is entitled both to be paid for preparing the attorney's fee application, and for defending the attorney's fee application, if any party in interest objects to that fee application.
Debt Collection Report Captures Horror Stories
A new report by the Center for Responsible Lending has revealed what many consumers have known for years. Debt collectors often cross the line with abusive behaviors. From coercive language to outright lies about debt to forged documents, federal and state regulator investigations into debt buyers and debt collectors revealed a pattern of abuses prevalent within the industry. Recent investigations have forced debt collectors to pay tens of millions of dollars in fines for multiple instances of illegal activity. The report comes as several state legislatures are considering legislation to put in place new rules-of-the-road for debt collectors to protect consumers. "People should not be sued and they should not have their wages garnished for debts they do not owe or for stale debts," said Lisa Stifler, a policy counsel at the Center for Responsible Lending and one of the authors of the analysis. "Unfortunately, our analysis shows that consumers are often unfairly hurt by debt collectors making improper use of the court system to collect questionable debts. The burden of proof should be on debt collectors to document that a consumer owes a debt upfront before they initiate a lawsuit." Debt buyers and collectors purchase debt from consumer creditors and then attempt to collect. Unscrupulous collectors often engage in illegal and predatory behavior to pressure or force consumers to pay up. The abusive debt collector's business model often relies on pursuing quick court judgments against consumers. In many cases, consumers do not appear and the resulting default judgments result in wage garnishment. Consumers with similar names, John Smith, for example, have been sued and seen their wages garnished because of incorrect, inadequate or deliberately mistaken documentation.
Reported in 6/4/15 Credit & Collection e-newsletter
The Supreme Court issued a unanimous opinion in HARRIS v. VIEGELAHN
The Supreme Court issued a unanimous opinion, on 5/18/15, in HARRIS v. VIEGELAHN, in favor of the debtor and holding that debtor is entitled to return of any post-petition wages not already disbursed by the chapter 13 trustee, when debtor converts debtor's ch 13 case to ch 7, and the ch 13 trustee is holding plan payments paid to trustee by debtor to fund plan, which Trustee has not yet distributed to the creditors.
US Supreme Court rules on 6/1/15 that Chapter 7 debtors CANNOT "lienstrip" a junior lien, even if that junior lien is completely "under water", meaning there is not even $1 of equity available to pay the junior lien, after the senior lien(s) are paid in full.The U.S. Supreme Court on June 1, 2015, unanimously held in Bank of America, N.A. v. Caulkett that a chapter 7 debtor cannot "strip off" even a totally underwater mortgage under § 506(d), reversing the Eleventh Circuit. In so holding, the Court not only reaffirmed but extended its controversial decision in Dewsnup v. Timm, 502 U.S. 410 (1992), in which the Court had held that a chapter 7 debtor cannot "strip down" a partially underwater mortgage under § 506(d). Many observers had thought -- especially after oral argument in Caulkett -- that the Court might take this opportunity to overturn its much-criticized Dewsnup decision, or at the very least confine it to partially underwater mortgages. Instead, much as Mark Twain once quipped that "the reports of his death were greatly exaggerated," the reports of Dewsnup's demise proved premature. Writing for the Court, Justice Thomas concluded that "Dewsnup's construction of "secured claim" resolves the question presented here." The Court's decision in Caulkett now indicates that mortgage liens are sacrosanct in chapter 7, irrespective of whether they are partially or totally underwater. Whether they will be so in chapter 13 remains to be seen, but mortgagees have a plausible argument to extend Caulkett there as well.
New Life Adult Medical Day Care Center v. Failla & Banks, LLC, et al. (In re New Life Adult Medical Day Care Center, Inc.,
New Life Adult Medical Day Care Center v. Failla & Banks, LLC, et al. (In re New Life Adult Medical Day Care Center, Inc., BR , 2014 WL 6851258 (Bankruptcy Court, D. NJ 2014): Held that a fraudulent transfer, made by the debtor, could NOT be avoided and recovered from the recipient of the fraudulent transfer, because recovering the fraudulent transfer would not benefit the bankruptcy estate, and 11 USC 550(a), the Bankruptcy Code section governing recovering fraudulent transfers, only allows recovering a fraudulent transfer where recovering the fraudulent transfer would "benefit the bankruptcy estate" of the debtor. In Medical Day Care Center, recovering the fraudulent transfer would NOT benefit the "bankruptcyestate" of the debtor, because the debtor's chapter 11 joint liquidating plan provided for full payment of all creditor claims. The court noted that because all creditors had been paid in full, and because there would be no reorganized entity, the only entity that stood to benefit from the avoidance of the fraudulent transfer was the equity holder of the debtor. The court noted that recovery that solely benefits the equity owner does not constitute a "benefit for the estate" under § 550(a). Even applying the "broadest application of the ‘benefit of the estate' requirement [of section 550(a)], there is no conceivable benefit to the state, either directly or indirectly," id. at 6, when the debtor's plan will already pay 100% of creditor claims.
Supreme Court Backs Power of Bankruptcy Judges in Wellness Decision
On 5/26/15, the U.S. Supreme Court ruled, in Wellness International Network Ltd v. Sharif, that bankruptcy judges have the power to make final judgments in certain disputes if everyone involved consents to the arrangement, the Wall Street Journal reported today. In a 6-3 ruling, the Court reversed a Seventh Circuit finding that the bankruptcy court didn't have the constitutional authority to decide whether certain property belonged to the bankruptcy estate because the dispute also involved state law issues. Justice Sonia Sotomayor, writing for the court, said that bankruptcy courts can be the final arbiter of disputes so long as those involved consent to the arrangement. "Adjudication based on litigant consent has been a consistent feature of the federal court system since its inception," she said in the 19-page ruling. "Reaffirming that unremarkable fact, we are confident, poses no great threat to anyone's birthrights, constitutional or otherwise." It was the third time in the last four years that the Court has faced the question of the power of the bankruptcy court. Four justices joined Justice Sotomayor's opinion in full, with Justice Samuel Alito joining in part. Justices John Roberts, Antonin Scalia and Clarence Thomas dissented.
Ninth Circuit Court of Appeals Made a Ruling in Favor of Debt Collection Industry
On May 12, 2015, the Ninth Circuit Court of Appeals ruled 3-0 in favor of the credit and collection industry in the case of Kubler Corporation, dba Alternative Recovery Management v. Diaz, 14-55235 (9th Cir., May 12, 2015). The issue on appeal was the district court's decision that California law does not permit a creditor without a contractual interest provision to claim and collect interest prior to a court awarding prejudgment interest. The Ninth Circuit held that California law can entitle a creditor to interest even without a prior judgment. Consequently, the court found that the collection agency did not violate the Fair Debt Collection Practices Act when it sent a collection letter to the consumer seeking to recover the principal amount of the debt, plus prejudgment interest calculated at the statutory rate of 10 percent. The court reasoned that the collection agency would have been entitled to prejudgment under California state law because said law allows recovery of prejudgment interest on a debt that is certain or capable of being made certain, even if a judgment has not yet been obtained. The court ruled that"...just because prejudgment interest can be awarded if a plaintiff prevails in court does not mean the plaintiff was not entitled to prejudgment interest even before."
Supreme Court Holds that Denial of Confirmation of a Plan is Not an Appealable Final Order
On 5/4/15, the U.S. Supreme Court unanimously decided, in case Bullard v. Blue Hills Bank, Case No. 14-116, that a bankruptcy court's order denying confirmation of a debtor's proposed chapter 13 plan is not a final order that the debtor can immediately appeal under 28 U.S.C. Sect. 158(a)(1) and (d)(1). The Court resolved a split among the Courts of Appeals, adopting the majority view. Interestingly, the Court rejected the argument of the Solicitor General, who had joined the debtor in arguing that denial of plan confirmation should be treated as an appealable final order, just as confirmation of a plan is indisputably a final order. While the case involved a chapter 13 plan, the Court's reasoning should be equally applicable to denial of a chapter 11 plan. Furthermore, Bullard will be compelling authority to deny immediate appeal of other important rulings during a case denying requested relief, most notably perhaps requests for extensions of time, which the Court singled out as being non-final and therefore not appealable without leave of court. Read the full analysis.
Posted on 5/4/15 on the American Bankruptcy Institute e-website, written by Prof. Charles J. Tabb of University of Illinois College of Law
Will a Debtor with the Right to Appeal an Order Denying Confirmation of a Bankruptcy Plan be Less Likely to Negotiate with Creditors? Justices Examine in Bullard
The Supreme Court on April 1 heard oral argument in Bullard v. Blue Hills Bank, the second of two bankruptcy cases that the Court heard that day (an analysis of Harris v. Viegelahn appeared in Tuesday's edition of the ABI Bankruptcy Brief). In Bullard, the Court took up the question of whether an order denying confirmation of a chapter 13 plan with leave to file an amended plan is a final order appealable as of right. While several Justices were skeptical of the dire consequences cited by respondent Blue Hills Bank, they also recognized that a debtor with the right to appeal an order denying confirmation of his plan might have less incentive to negotiate an acceptable compromise with his creditors.
This report appeared in the 4/9/15 e-newsletter of ABI (American Bankruptcy Institute), written by by Prof. Anne Lawton ABI Resident Scholar
Who Gets Funds Held By Ch. 13 Trustee When Case Converts to Chapter 7? Supreme Court Looks to Policy, Equity and the Code During Oral Argument
On Wednesday, April 1, 2015, the U.S. Supreme Court heard oral argument in two bankruptcy cases: Harris v. Viegelahn and Bullard v. Blue Hills Bank. The issue for the Court in Harris is whether funds already paid to, but not yet disbursed by, the chapter 13 trustee should revert to the debtor or be distributed to creditors when the debtor converts his case to chapter 7 after confirmation of his chapter 13 plan. Many of the questions that the Justices asked at oral argument focused not on the nuances of statutory language, but rather on the usefulness of trust law principles in analyzing proposed distribution rules, the wisdom of creating a rule of distribution based on little more than happenstance, and the desire to adopt a rule consistent with Congress's intent to provide debtors with incentives to file for relief under chapter 13.
The above, written by Prof. Anne Lawton, ABI Resident Scholar, appeared in ABI (American Bankruptcy Institute) e-newsletter of 4/7/15. ABI reports that it will also publish an analysis of the the oral argument in Bullard, the companion case to Harris, in 4/9/15 ABI e-newsletter.
Supreme Court, Advocates Struggle with Dewsnup at Oral Argument on Lien Stripping
On Tuesday, March 24, 2015, the Supreme Court heard oral argument in the consolidated cases of Bank of America, N.A. v. Caulkett and Bank of America, N.A. v. Toledo-Cardona. The Supreme Court granted certiorari in Caulkett and Toledo-Cardona to decide whether a chapter 7 debtor may "strip off" a junior mortgage lien, pursuant to Sect. 506(d), when the debt owed to the senior lienholder exceeds the current value of the collateral. In its 1992 decision in Dewsnup v. Timm, the Supreme Court held that Sect. 506(d) did not permit the chapter 7 debtors to "strip down" a lien to the current value of the collateral. Finding the Code's text ambiguous, the Dewsnup Court explained that Congress did not intend to depart from the pre-Code rule that liens pass through bankruptcy unaffected. Because the creditors' claim in Dewsnup was allowed and secured by a lien, even though the claim amount exceeded the collateral's value, the Court concluded that the chapter 7 debtors could not "void" the lien, pursuant to Sect. 506(d). The issue in Caulkett and Toledo-Cardona is whether Dewsnup's holding in the context of a partially underwater mortgage applies to cases with totally underwater second mortgages.
This case discussion is from 4/1/15 ABA e-newsletter, written by an ABI resident Scholar, Prof. Anne Lawton.
US Supreme Court has heard argument in, and has "under submission" (awaiting Court ruling) on Court's THIRD case on jurisdiction of Bankruptcy Courts since 2011:
Since 2011, the Supreme Court has decided two cases relating to the constitutional authority of Bankruptcy Courts to enter final judgments in proceedings that are outside the resolution of the debtor-creditor relationship and that seek to augment the bankruptcy estate. Stern v. Marshall, 131 S. Ct. 2594 (2011) and Executive Benefits v. Arkison, 134 S. Ct. 2165 (2014). In January 2015, the Supreme Court heard arguments in its third bankruptcy jurisdiction case in four years. Wellness International v. Sharif, No. 13-935, places at issue both the constitutional authority of the bankruptcy court to enter final judgment that a chapter 7 debtor is the alter ego of a trust for which the debtor is the trustee but not a beneficiary, as well as the necessity and character of consent to enter such a final judgment.
The pivotal issue in Sharif is whether a state law alter ego claim against the chapter 7 debtor is a Stern claim. Depending on the Court's disposition of this issue, it may not reach the issue of consent.
Petitioner Wellness International has a long history of chasing Debtor Sharif, including obtaining default judgment against him as a plaintiff in Texas, which led to discovery in aid of collection efforts. Sharif allegedly evaded answering discovery and ultimately filed a chapter 7 petition. Debtor failed to list assets that he contends are assets of a trust his mother created and for which Debtor serves as trustee and his sister is the beneficiary. He testified about these assets, answered discovery relating to these assets but did not escape Wellness's complaint objecting to his discharge. Wellness included as Count V in its complaint a claim for determination that the trust is the alter ego of the Debtor and that trust assets are property of the estate pursuant to §541.
The parties do not dispute that a debtor's legal title over trust assets does not render those assets property of the estate. 11 U.S.C. §541(d).
From this starting point, the parties' views diverge. Unsurprisingly, the manner in which the parties frame the dispute is markedly different. Wellness presents its position in terms of the jurisdiction of the Bankruptcy Court to decide what is property of the estate. It asserts that the Bankruptcy Court indisputably has exclusive jurisdiction over property of the estate, which only arises when the Debtor filed his bankruptcy petition. Thus, a dispute with the Debtor over what is and what is not property of the estate "stems from bankruptcy," coining a phrase from Stern, and could only arise post-petition because the estate is created solely by the filing of a petition. §541(a). Thus, according to Wellness, the resolution of the alter ego theory derives entirely from §541. That state law is determinative does not transform the Bankruptcy Code action into a state law action, Wellness argues, if for no other reason than long-standing bankruptcy jurisprudence holds that the debtor's interest in property in bankruptcy is defined by state law.
In contrast, Debtor characterizes Count V solely as a common law alter ego claim that seeks to extinguish property interests of third parties (the trust and the sister) and to augment Debtor's estate by those trust assets, much like a fraudulent conveyance action. Because Debtor held bare legal title to the assets in trust, they never become part of the estate, Debtor argues, and because Wellnesse's effort to augment the Debtor's estate does not derive from or depend on bankruptcy law, Stern holds that the Constitution reserved these claims in the federal system to Article III courts rather than tribunals controlled by Congress or by the Executive. Leaning heavily on the reasoning of Stern upholding the separation of power between the branches of government, the Debtor argues that Count V is a Stern claim because, although it appears to arise under the rubric of §541, it nonetheless is a common law claim that seeks to augment the estate with assets owned by a third party. As such, the Bankruptcy Court did not have jurisdiction to enter final judgment.
The Seventh Circuit held in favor of the Debtor on this first issue. Its resolution in the Supreme Court may turn on whether the Court accepts Wellness's characterization of Count V as a core matter stemming from §541 or the Debtor's characterization that Count V is at most non-core as a purely state law claim that seeks to augment the estate with property in which third parties have an interest.
The second issue, which Wellness contends only arises if the Supreme Court concludes that Count V is a Stern claim, is whether the Bankruptcy Court could properly exercise the judicial power of the United States by the litigants' consent and, if so, whether implied consent is sufficient to satisfy Article III. Wellness argues that the Debtor admitted that the entire adversary proceeding was core and that the Debtor never raised the Stern claim until well into briefing at the Seventh Circuit. Wellness also argues that Article III protects primarily "personal" rights as opposed to "structural" rights and that personal rights are subject to waiver. Wellness contends that Article III is not structurally at issue because the Bankruptcy Court was operating within the judicial branch and exercising jurisdiction over Stern claims upon referral and with the litigants' consent.
Not so, proclaims the Debtor, who argues that the structural Article III issue may not be cured by consent, which may only be given expressly. F.R.B.P. 7012(b). The nature of the Article III violation is by definition structural, according to the Debtor, because of the separation of powers and the right of an individual to an independent judiciary in certain cases, not judges subject to legislative and executive manipulation. Accordingly, the violation of Article III could not be waived and was not waived.
The Court heard argument in January and is expected to render a decision before the end of the term.
This article was written by C. Lee and appeared in American Bankruptcy Institute Consumer Bankruptcy Committee e-newsletter in March 2015
Supreme Court Hears Oral Argument in Mortgage Lien-Stripping Cases
The Supreme Court heard oral argument today in the cases of Bank of America v. Caulkett and Bank of America v. Toledo-Cardona, and its decision later this year could have big implications for the U.S. housing market, the Financial Times reported today. The cases present the Supreme Court with the issue of whether, under Sect. 506(d) of the Bankruptcy Code (which provides that "[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void"), a chapter 7 debtor may "strip off" a junior mortgage lien in its entirety when the outstanding debt owed to a senior lienholder exceeds the current value of the collateral. The debate in the Supreme Court today centered on the 1992 case of Dewsnup in which the court ruled that a borrower could not reduce a primary mortgage to the value of the property. Bank of America argued that the same logic should apply whether a loan is a primary mortgage or a junior debt. While it was unclear from the judges' questions today how they would rule, several of the nine members, including Justice Antonin Scalia, who dissented in the original Dewsnup decision, hinted that the Court might need to limit or reconsider the Dewsnup ruling itself. At one point, Justice Elena Kagan interrupted Stephanos Bibas, the lawyer representing the people who owned the homes, to say: "My sort of reaction to this case is that these distinctions that you are drawing between partially underwater and fully underwater are not terribly persuasive. But the only thing that may be less persuasive is Dewsnup itself."
In re Hoilien
In re Hoilien, BR , 2015 WL 509564 (Bankr.D. Hawaii February 3, 2015): Bankruptcy Court held that creditor that proceeded with foreclosure of debtor's real property did not violate the bankruptcy automatic stay by doing so, because there was no stay, because the bankruptcy case in issue was the individual debtor's third bankruptcy case ongoing in 2014 (ie ongoing within a single year), and debtor had no obtained an order from the bankruptcy court, imposing a stay in the third case. Debtor hadn't even moved bankruptcy court to impose stay, in the third bankruptcy case. Per 11 USC 362(c)(4) of the Bankruptcy Code, where an individual debtor has 3 bankruptcy cases within a 1 year period, there is no bankruptcy automatic stay as to proceeding against debtor, in the third bankruptcy case of the 3, unless debtor moves to have a stay imposed, and the bankruptcy court grants debtor's motion. Such motions are difficult to get granted. Some cases say that for third case, no stay as to debtor, but there still is a stay as to property of the bankruptcy estate. Hoilien found no stay at all.
In re Motors Liquidation Co.
In re Motors Liquidation Co., F3d , 2015 Westlaw 252318 (2d Cir. 2015): The Second Circuit has held that a lender and its counsel had inadvertently authorized the filing of an erroneous termination statement, thus invalidating the lender's $1.5 billion security interest. This case is an additional "secured lenders better not make mistakes" case, which is truly terrifying for secured lenders.
Facts: A secured lender intended to file a termination statement (a "UCC-3") in order to release its lien securing a $300 million synthetic lease. Unfortunately, the termination statement also erroneously included language releasing a lien securing an unrelated $1.5 billion term loan, which was directly contrary to the intent of both the lender and the borrower. The Second Circuit's vivid recitation of the facts described how this disaster occurred:
A ... partner [in the borrower's law firm] assigned the work to an associate and instructed him to prepare a closing checklist and drafts of the documents required to pay off the Synthetic Lease and to terminate the lenders' security interests in [the borrower's] General Motors' property relating to the Synthetic Lease. One of the steps required to unwind the Synthetic Lease was to create a list of security interests held by [the borrower's] lenders that would need to be terminated. To prepare the list, the ... associate [in the borrower's law firm] asked a paralegal who was unfamiliar with the transaction or the purpose of the request to perform a search for UCC–1 financing statements that had been recorded against [the borrower] ... The paralegal's search identified three UCC–1s ... Neither the paralegal nor the associate realized that only the first two of the UCC–1s were related to the Synthetic Lease. The third [financing statement] related instead to the Term Loan.
When [the borrower's counsel] prepared a Closing Checklist of the actions required to unwind the Synthetic Lease, it identified the Main Term Loan UCC–1 for termination alongside the security interests that actually did need to be terminated. And when [the borrower's counsel] prepared draft UCC–3 statements to terminate the three security interests identified in the Closing Checklist, it prepared a UCC–3 statement to terminate the Main Term Loan UCC–1 as well as those related to the Synthetic Lease.
No one at [the borrower], [the borrower's law firm], [the lender], or [the lender'] counsel ... noticed the error, even though copies of the Closing Checklist and draft UCC–3 termination statements were sent to individuals at each organization for review ... All three UCC–3s were filed with the Delaware Secretary of State, including the UCC–3 that erroneously identified for termination the Main Term Loan UCC–1, which was entirely unrelated to the Synthetic Lease.
The borrower (General Motors) later filed a bankruptcy petition. Its unsecured creditors' committee filed an adversary proceeding, seeking a determination that the lender's $1.5 billion term loan was completely unsecured, as a result of the erroneous termination statement. The bankruptcy court granted summary judgment in favor of the lender. The Second Circuit Court of Appeals certified a question to the Delaware Supreme Court, asking if the subjective intent of the secured creditor was relevant. In Official Committee of Unsecured Creditors of Motors Liquidation Co. v. JPMorgan Chase Bank, N.A., - A.3d -, 2014 Westlaw 5305937 (Del.), the Delaware Supreme Court held that if a secured party authorizes the filing of a UCC–3 termination statement, then that filing is effective to terminate all UCC-1 financing statements covered by the termination statement, regardless of whether the secured party subjectively intends to do so or understands the effect of that filing.
In the wake of that opinion, the Second Circuit held that there was just one remaining question: "Did [the lender] authorize the filing of the UCC–3 termination statement that mistakenly identified for termination the Main Term Loan UCC–1?"
Reasoning: The lender argued strenuously that it never instructed anyone to file the UCC–3 in question, and the termination statement was therefore unauthorized and ineffective. The lender claimed that it authorized the borrower only to terminate security interests related to the synthetic lease; that it instructed its law firm and the borrower's law firm to take actions to accomplish that objective, and no other; and that therefore the borrower's law firm exceeded the scope of its authority when it filed the UCC–3 purporting to terminate the main term loan UCC–1.
The court disagreed, holding that the lender and its counsel never expressed any concerns about the transaction, even though they had supposedly reviewed it thoroughly:
After [the borrower's counsel] prepared the Closing Checklist and draft UCC–3 termination statements, copies were sent for review to a Managing Director at [the lender] who supervised the Synthetic Lease payoff and who had signed the Term Loan documents on [the lender's] behalf. [The borrower's law firm] also sent copies of the Closing Checklist and draft UCC–3 termination statements to [the lender's] counsel . . . to ensure that the parties to the transaction agreed as to the documents required to complete the Synthetic Lease payoff transaction. Neither directly nor through its counsel did [the lender] express any concerns about the draft UCC–3 termination statements or about the Closing Checklist. [An attorney in the lender's law firm] responded simply as follows: "Nice job on the documents ..."
After preparing the closing documents and circulating them for review, [the borrower's law firm] drafted an Escrow Agreement that instructed the parties' escrow agent how to proceed with the closing. Among other things, the Escrow Agreement specified that the parties would deliver to the escrow agent the set of three UCC–3 termination statements (individually identified by UCC–1 financing statement file number) that would be filed to terminate the security interests that [the borrower's] Synthetic Lease lenders held in its properties. The Escrow Agreement provided that once [the borrower] repaid the amount due on the Synthetic Lease, the escrow agent would forward copies of the UCC–3 termination statements to [the borrower's] counsel for filing. When [the borrower's law firm] e-mailed a draft of the Escrow Agreement to [the lender's] counsel for review, the same ... attorney [acting on behalf of the lender] responded that "it was fine" and signed the agreement.
From these facts it is clear that although [the lender] never intended to terminate the Main Term Loan UCC–1, it authorized the filing of a UCC–3 termination statement that had that effect.
Comment of Loyola Law School Professor Dan Schecter, who wrote this analysis, published in California State Bar Insolvency Committee e-newsletter of 2/11/15: This is the correct result from a legal standpoint, but it is so easy to imagine one's self in the position of the attorneys who failed to catch this error. As we now know, there were quite a few people who could have fixed the problem, but everyone's eyes glazed over when confronted with the long checklist of documents to review. There were so many people involved in the process that no one took "ownership" of the end result. This may be a corollary of the well-documented "bystander effect," a psychological phenomenon in which the greater the number of people present, the less likely any individual is to take responsibility for a problem.
There are two other hidden messages in this tragic fact pattern: first, counsel for a lender should not blindly trust the borrower's counsel to protect the lender's interests. Second, when junior staff has been given the task of preparing the first draft of a key document, a senior lawyer with intimate knowledge of the client's business affairs must carefully review the document before the document is put into final form.
Finally, I [Professor Schecter] will take the liberty of repeating something I wrote in my discussion of the Delaware Supreme Court's earlier ruling:
This opinion should be required reading for all first year law students, who are often astonished that law professors require them to read long cases, documents, and statutes in excruciating detail. Someone fell asleep at the switch in this case, and did not re-read the termination statement. Roughly $1.5 billion went up in smoke, possibly exposing a major law firm to a ruinous malpractice verdict. (I hope not.) I often tell my students that one key difference between laypeople and lawyers is that we lawyers develop the ability to read, understand, and think carefully about the fine print, hour after hour, day after day, year after year. If that sounds like hard work, that's because it is.
For a discussion of the Delaware Supreme Court's opinion, see 2014-44 Comm. Fin. News. NL 89, Lien Securing $1.5 Billion Debt is Invalid Because of Overbroad Termination Statement, Even Though Lender Did Not Intend to Release That Lien.
For discussions of other cases dealing with related issues, see:
- 2011 Comm. Fin. News. 44, Escrow Agent's Mistaken Filing of Overbroad Amendment to Financing Statement Is Not Binding on Secured Party, When Agent Exceeds Scope of Authority.
- 2012 Comm. Fin. News. 67, Filing of "Correction Statement" Is Insufficient to Revive Security Interest Following Erroneous Filing of Termination Statement; Belated Filing of New Financing Statement Is Avoided As Preferential.
In re Duckworth
In re Duckworth, F3d , 2014 Westlaw 7686549 (7th Cir. 2014): The Seventh Circuit has held that a lender's security interest in crops and equipment was void because the security agreement referred to a promissory note dated "December 13," instead of "December 15," the correct date of execution; further, incorporation by reference did not cure the defect because the definitions contained in the document were circular. Case is a warning to secured creditors to make sure that security agreements and other transactional documents are accurate.
In re Virgin Offshore U.S.A., Inc.
In re Virgin Offshore U.S.A., Inc., 2015 Bankr. LEXIS 233 (Bankr. E.D. La. January 26, 2015): The Bankruptcy Court for the Eastern District of Louisiana held that a Chapter 11 trustee's compensation is subject to the lodestar factors listed in 11 USC 330(a)(3) of Bankruptcy Code. when determining reasonable compensation, and that Section 330(a)(7) does not create a presumption that the statutory maximum provided for in Section 326 is reasonable compensation. Shows Courts are beginning to re-think blindly allowing Trustee's fees in the statutory maximum amount allowed by 11 USC 326. Even though this decision involved a Chapter 11 trustee, all trustees should be careful to keep detailed time sheets in case a court wants to review them in determining reasonable compensation.
A Chapter 11 trustee ("Trustee") submitted a third and final fee application for consideration by the Bankruptcy Court. The Trustee requested compensation calculated under Section 326 as a percentage of the funds distributed in the case to administrative, secured, and unsecured creditors. The court did not allow the full amount of the commission calculated under Section 326, but rather allowed fees in a reduced amount, taking into consideration the lodestar factors set forth in Section 330(a)(3), as well as other "relevant factors." The court considered other relevant factors such as: (1) the Trustee received an additional three percent of the fees awarded to the Trustee's counsel because the Trustee was a member of the law firm that represented him; and (2) the court had to force the case to conclusion despite counsel for the Trustee initially advising that the case would be concluded in a matter of months.
The court held that the factors listed in Section 330(a)(3) must be considered in determining reasonable compensation to a Chapter 11 trustee. The court examined the Trustee's billing statements, finding all of the time entries were reasonable. The court allowed compensation for all time billed but only at the lowest billing rate reflected on the Trustee's billing statements of $375 per hour. The amount allowed was less than the amount calculated under Section 326.
Section 330(a)(7) provides that a trustee's compensation shall be treated as a commission under Section 326. Section 326 states that in a Chapter 7 or 11 case, the court may allow reasonable compensation to a trustee under Section 330 not to exceed certain amounts based on a percentage of the assets distributed in the case. For a Chapter 11 trustee, Section 330(a)(3) sets forth certain factors the court must review in determining reasonable compensation.
The court held that the more specific Section 330(a)(3) controls, rather than the more general Section 326 and as such, the factors set forth in Section 330(a)(3) must be examined in determining a Chapter 11 trustee's compensation. Further, the court held that, contrary to the Trustee's position, Section 330(a)(7) does not create a presumption that a trustee should receive the maximum compensation allowed under Section 326. If it did, then Section 330(a)(3) would be unnecessary. Rather, Section 330(a)(7) merely "incorporates the limitations of section 326 on any determination made under section 330(a)(3)."
This review is from the California State Bar Insolvency Committee e-newsletter of 2/23/15
Elliott v. Weil (In re Elliott)
In Elliott v. Weil (In re Elliott), B.R. , 2014 WL 6972472 (9th Cir. BAP 2014), the U.S. Bankruptcy Appellate Panel of the Ninth Circuit ("BAP") held that Law v. Siegel, U.S. , 134 S.Ct. 1188 (2014), abrogated Ninth Circuit authority under which a debtor's exemption could be denied, or under which a debtor could be denied the right to amend his or her exemptions, on the basis of bad faith or prejudice to creditors.
In an effort to conceal his Los Angeles home from judgment lien creditors, Edward Elliott ("Elliott") transferred his residential real property to a business entity formed by the son of a former associate. The property was later transferred to another corporation formed and controlled by Elliott. Then, in December 2011, Elliott filed a chapter 7 petition. He failed to schedule any interest in the property or the corporation and he omitted certain judgment lien creditors. According to his schedules and testimony at his 341(a) meeting of creditors, he lived in Granada Hills and owned no real property. Relying on the schedules and Elliott's testimony, the trustee filed a "no asset" report, Elliott was granted a discharge, and the case was closed.
A few weeks later, Elliott's corporation quitclaimed the residence back to Elliott for no consideration. Elliott advised his judgment lien creditors that he acquired the property postpetition, and demanded that their judicial liens be removed. After an investigation, the judgment lien creditors successfully moved to reopen Elliott's bankruptcy case.
In June 2013, the trustee filed a complaint for turnover of the property and revocation of Elliott's discharge. In April 2014, the bankruptcy court granted summary judgment, revoked the discharge, vested title to the property in the trustee, and ordered that the property be turned over to the trustee. Elliott did not appeal the judgment.
While the adversary was pending, and almost one year after the case was reopened, Elliott amended his schedules to disclose an interest in the property and claim a $175,000 homestead exemption therein. The trustee objected to the claimed exemption due to Elliott's bad faith concealment of the asset. The trustee also argued that Elliott could not claim a homestead exemption because he did not hold title to the property on the petition date. The bankruptcy court sustained the trustee's objection on the basis that the debtor belatedly claimed the exemption in bad faith, but did not address the trustee's alternative argument. Elliott appealed. Less than one month after the appeal was filed, the U.S. Supreme Court issued its decision in Law v. Siegel.
The BAP first concluded that Law v. Siegel abrogated Ninth Circuit authority under which exemptions could be denied if a debtor acted in bad faith or creditors had been prejudiced. See Martinson v. Michael (In re Michael), 163 F.3d 526 (9th Cir. 1998); Arnold v. Gill (In re Arnold), 252 B.R. 778 (9th Cir. BAP 2000). Although the bankruptcy court's ruling was supported by then-existing Ninth Circuit law, under Law v. Siegel, unless statutory power exists to do so, a bankruptcy court may not deny a debtor's exemption claim – or bar a debtor from amending his or her exemptions - on the basis of bad faith or prejudice to creditors.
Second, the BAP addressed the trustee's argument that Elliott could not claim a homestead exemption because he did not own the property on the petition date. The BAP held that for purposes of CCP § 704.730, continuous residency, not continuous ownership, controls the analysis. That exemption applies to any interest in the property so long as the debtor satisfies the continuous residency requirement set forth in CCP § 704.710(c). Because the bankruptcy court's inquiry was confined to Elliott's bad faith, the BAP remanded for the bankruptcy court to determine whether Elliott was, in fact, entitled to a homestead exemption under CCP § 704.730.
Third, the BAP identified an alternative statutory basis for denying Elliott's homestead exemption on remand. Section 522(g) provides that a debtor may claim an exemption in previously-transferred property that a trustee recovers under sections 510(c)(2), 542, 543, 550, 551 or 553 if "such transfer was not a voluntary transfer of such property by the debtor" and "the debtor did not conceal such property." Since the trustee prevailed in her turnover action under section 542, Elliott's right to claim an exemption is limited by section 522(g), and the BAP suggested that the limitation be considered on remand.
Some bankruptcy courts interpret Law v. Siegel narrowly, limiting its holding to cases in which trustees seek to surcharge exemptions after the objection period has expired. These courts continue to follow Michael and Arnold, sustaining timely filed objections when debtors conceal assets and then amend their schedules to claim exemptions after trustees discover and incur expenses administering those assets. The trustee in Elliott conceded the point in her brief, so the BAP's decision was rendered without the benefit of a party advocating a contrary position. Before bankruptcy courts, this likely remains an open issue.
This analysis appeared in 2/20/15 California State Bar Insolvency Section e-newsletter, written by attorney John Tedford, Esq.
In re Genmar Holdings, Inc., 2015 Westlaw 350721 (8th Cir. 2015): Preference decision (11 USC 547 of Bankruptcy Code governs preferences). The Eighth Circuit Court of Appeals held that even though there was a very short lag between the date that the debtor incurred an obligation to pay and the actual date of payment, a preference recipient was unable to invoke the "substantially contemporaneous" defense because the parties did not intend that the payment would actually be contemporaneous.
Tamm v. U.S. Trustee (In re Hokulani Square, Inc.)
Tamm v. U.S. Trustee (In re Hokulani Square, Inc.), F.3d , 2015 WL 305540 (9th Cir. 2015): On 1/26/15, the U.S. Court of Appeals for the Ninth Circuit issued its decision in Tamm v. U.S. Trustee (In re Hokulani Square, Inc.),. On appeal from the U.S. Bankruptcy Appellate Panel of the Ninth Circuit, the Ninth Circuit affirmed the BAP's reversal of the bankruptcy court's compensation award to a chapter 7 trustee that included fees calculated on a secured creditor's credit bid on real property of the bankruptcy estate. The Ninth Circuit held that Bankruptcy Code section 326(a) allows reasonable compensation for "moneys" disbursed by the trustee, which does not include property disbursed to a secured creditor on a credit bid. This is a significant decision because secured creditors often "credit bid" (ie, bid the amount the bankruptcy debtor owes the creditor, secured by the property the debtor's property that the bankruptcy trustee is selling), to purchase the property, from the "bankruptcy estate" of the debtor.
The Ninth Circuit framed the issue on appeal as whether or not the trustee's compensation, per 11 USC 326(a), may reflect the value of a credit bid. The court stated that section 326(a) authorizes the bankruptcy court to award a trustee fees "up to a cap that is calculated as a percentage of ‘all moneys disbursed or turned over in the case by the trustee to parties in interest.'" (Emphasis added by the court). Applying the ordinary meaning to "moneys disbursed or turned over," the Ninth Circuit concluded that "moneys" means a medium of exchange, "disbursed" means to pay out, and "turned over" means to deliver or surrender. Thus, the statute seems to say that the trustee can only collect fees for those transactions where interested parties are paid "in some form of generally accepted medium of exchange."
In a credit bid transaction, only the property is "disbursed or turned over" to the secured creditor. "However broadly we define ‘moneys,' the term can't be expansive enough to encompass real estate, which is about as far from a ‘medium of exchange' as one can get." The statute, as written, specifically uses the narrow term "moneys." Congress could have used the broader terms "property" or "assets" but chose not to do so.
The court stressed that both the legislative history of section 326(a) and the decisions of other circuit courts that have analyzed the issue confirm the Ninth Circuit's interpretation. A House Judiciary Committee report explicitly states that section 326(a) does not include cases where the trustee turns over the property to the secured creditor or abandons the property permitting the secured creditor to foreclose. H.R. Rep. No. 95-595, at 327 (1977). Both the Fifth Circuit and Third Circuit held that section 326(a) does not allow the trustee to collect compensation based upon the value of property turned over to a secured creditor on a credit bid. See In re England, 153 F.3d 232, 235 (5th Cir. 1998); In re Lan Assocs. XI, L.P., 192 F.3d 109, 117-118 (3d Cir. 1999).
The trustee argued that pre-Bankruptcy Code cases demonstrated that section 326(a) should be interpreted to include compensation even where no money changes hands. The Ninth Circuit rejected that argument. Historical practice cannot overcome clear language in the Bankruptcy Code. Moreover, the historical practice showed conflicting evidence, with courts coming out on both sides of the issue with regards to a trustee being compensated for credit bids. No prior Ninth Circuit case had addressed the credit bid question. Finally, the Ninth Circuit disagreed with the trustee's argument that not counting credit bids resulted in the "absurd" result that the trustee could be compensated for a third party cash bid at auction, but not for a credit bid that exceed the cash bid by a dollar. Congress could have intended to motivate trustees to seek out third party buyers. The court will disregard the text of a statute only where it is impossible that Congress intended the result and where the alleged absurdity is so clear as to be obvious. That is not the situation here, where the text is rational.
Every circuit court that has decided this issue, to date, has refused to pay trustee fee on the "credit bid" amount. As the Ninth Circuit pointed out, this could motivate trustees to seek third party buyers, which would benefit bankruptcy estates.
In re Sui BR , 2014 WL 5840246
In re Sui BR , 2014 WL 5840246 (9th Cir. BAP 11/10/14), BAP case number 11-20448-CB: In Sui, Chapter 7 debtor Yan Sui ("Debtor") and non-debtor Pei-yu Yang ("Ms. Yang"), both acting pro se, appealed jointly from a bankruptcy court order barring each of them from filing "initiating documents" in the Debtor's bankruptcy case without advance review by the bankruptcy court and a determination that such documents were meritorious. The order also required the Debtor and Ms. Yang to obtain leave from the bankruptcy court before filing suit in any forum against the Chapter 7 trustee, Richard A. Marshack (the "Trustee"), or his professionals.
The U.S. Bankruptcy Appellate Panel for the Ninth Circuit ("BAP") upheld the general validity of the bankruptcy court's "pre-filing" relief, but vacated the original order and remanded it to the bankruptcy court for an amendment consistent with Ninth Circuit authority.
The BAP Sui decision is "not for publication", which means anyone citing that decision must state the decision is a "not for publication" decision. Not for publication decisions can have persuasive force, but are not precedent.
Supreme Court Doubleheader
The National Association of Consumer Bankruptcy Attorneys ("NACBA") reports, in its 2/3/15, e-newsletter to members, that NACBA has filed amicus briefs, in two bankruptcy cases on which the US Supreme Court has granted petitions of certiorari, as follows:
NACBA filed amicus briefs on Monday in two Supreme Court cases: Harris v. Veigelahn, 14-400, and Bullard v. Blue Hills Bank, 14-116.
Harris asks whether funds paid into a confirmed chapter 13 plan that are still in the trustee's possession when the bankruptcy is converted to chapter 7 should be refunded to the debtor or paid to creditors. At the time of conversion, the trustee was holding funds originally designated for the debtor's mortgagee, but more than $4,300 in funds were not disbursed because the mortgagee obtain relief from stay and foreclosed on the debtor's home. Neither the trustee nor the debtor sought to modify the plan. Instead, the debtor converted the case to Chapter 7. Several days after debtor filed his notice of conversion, the trustee distributed the funds she had on hand to unsecured creditors. Harris moved to compel a refund of the money. The bankruptcy court granted the motion, and the district court affirmed. The Fifth Circuit reversed and found that the monies were properly distributed to creditors. Harris, No. 13-50374 (July 7, 2014) (disagreeing with In re Michael, 699 F.3d 305 (3rd Cir. 2012).
NACBA's brief in Harris argues that the Code's plain text as well as the policies that animate the Code require that undisbursed funds be returned to the debtor. NACBA thanks Martin Totaro, Lucas Walker and their team at MoloLamken, LLP for their work on the brief.
Bullard asks whether denial of confirmation is a final appealable order. In Bullard, confirmation of the plan depended solely on the resolution of a disputed legal issue that has divided the bankruptcy courts. The bankruptcy court denied confirmation of debtor's proposed plan, and after granting leave to appeal, the bankruptcy appellate panel affirmed. The First Circuit held that because the debtor could theoretically, though not realistically, submit a new plan, the decision of the bankruptcy appellate panel was not final. By contrast, if the bankruptcy appellate panel had ruled in the debtor's favor and reversed the bankruptcy court, then its order would indisputably be final, and the First Circuit could conclusively determine the issue and resolve the split among the lower courts.
NACBA's brief in Bullard argues that giving creditors, but not debtors, the ability to appeal decisions relating to plan confirmation is unjustified, that the alternatives proposed by the court-dismissal or refile and object to debtor's own plan-are problematic, and that allowing such appeals are unlikely to overburden the courts. NACBA thanks Scott Nelson and Allison Zieve at Public Citizen for their work on the brief.
America's Servicing Company v. Schwartz-Tallard
The Ninth Circuit Court of Appeals has granted a rehearing en banc in America's Servicing Company v. Schwartz-Tallard, 765 F.3d 1096 (9th cir. 2014). The question presented in Schwartz-Tallard is whether debtor's counsel may obtain a fee award for defending creditor's appeal in stay violation cases. The Ninth Circuit's original opinion turned on the application of a wrongly decided Ninth Circuit opinion of Sternberg v. Johnston, 595 F.3d 937 (9th Cir. 2010). In Sternberg, the Court held that debtor's counsel could be awarded fees for ending a stay violation, but not for pursuing actual damages that resulted from the violation. The Sternberg decision has been emphatically rejected by every decision outside the Ninth Circuit. Its analysis has been described as "unpersuasive," "odd," and "simply wrong."
The National Association of Consumer Bankruptcy Attorneys (NACBA) has filed an amicus brief in Schwartz-Tallard asking the court to reconsider its Sternberg opinion. We argue that the decision conflicts with the language and logic of section 362(k), misreads the American rule, departs from multiple principles of statutory construction, and creates an unworkable system that frustrates Congress's objectives.
The rehearing en banc is set for argument in June, 2015.
Supreme Court to Hear Oral Argument, on 1/14/15, in Wellness International LTD. v. Sharif
The US Supreme Court will hear oral arguments, on 1/14/15, in the case of Wellness International Ltd. v. Sharif, in which the US Supreme Court granted certiorari. The Wellness case is the most recent opportunity for the Court to address the jurisdiction of the bankruptcy court. Certiorari was granted on July 1, 2014, from a Seventh Circuit decision. The court will hear argument on the following issues:
(1) Whether the presence of a subsidiary state property law issue in an 11 U.S.C. § 541 action brought against a debtor to determine whether property in the debtor's possession is property of the bankruptcy estate means that such action does not "stem from the bankruptcy itself" and therefore, that a bankruptcy court does not have the constitutional authority to enter a final order deciding that action; and
(2) whether Article III permits the exercise of the judicial powers of the U.S. by the bankruptcy courts on the basis of litigant consent, and if so, whether implied consent based on a litigant's conduct is sufficient to satisfy Article III.
In re The Mortgage Store, Inc., F.3d , 2014 Westlaw 6844630 (9th Cir. 2014). In a fraudulent transfer appeal, in a Chapter 7 bankruptcy case adversary proceeding, the Ninth Circuit Court of Appeals has held that an "initial transferee" of a fraudulent transfer made by an insolvent corporation was strictly liable under the "pure dominion" rule, even though the debtor corporation's insider was the party who exercised indirect control over the funds and even though the recipient of the money was unaware of its source.
Following is detail of the case, which appeared in the California State Bar's Insolvency Committee e-bulletin of 1/13/15:
Facts: The owner of a shopping center entered into a $3 million sales agreement with an individual purchaser, under which the purchaser would provide the owner with $300,000 in "earnest money" and would execute a promissory note for the balance, secured by a mortgage in favor of the vendor. The "earnest money" was to be funneled through an attorney, acting on behalf of both the vendor and purchaser. Unbeknownst to the vendor, the purchaser himself did not provide the "earnest money." Instead, the money came from a separate corporation controlled by the purchaser; the corporation was experiencing financial trouble at the time.
Less than two years later, that corporation filed a Chapter 7 petition. Its trustee brought a fraudulent transfer action against the vendor, claiming that the corporation received no value in exchange for the payment and that the vendor was the "initial transferee" of the earnest money payment. Under 11 U.S.C.A. §550(a)(1), an "initial transferee" is strictly liable for the receipt of a fraudulent transfer and cannot interpose a "good faith" defense under §550(b). The trustee moved for summary judgment. The bankruptcy court ruled in favor of the trustee, as did the District Court.
Reasoning: The Ninth Circuit affirmed. The vendor argued that the individual purchaser himself should be the viewed as the "initial transferee," citing In re Presidential Corp., 180 B.R. 233 (9th Cir. BAP 1995), for the proposition that a party should be deemed the initial transferee when another party receives and distributes funds on the first party's behalf. The court disapproved of the holding in Presidential because it relied on the flexible "dominion and control" test; the court held that In re Incomnet, 463 F.3d 1064 (9th Cir. 2006) had articulated a new test, the "pure dominion" test: "[T]he touchstones in this circuit for initial transferee status are legal title and the ability of the transferee to freely appropriate the transferred funds."
The vendor argued that since the purchaser had the ability to direct his corporation to pay money on his behalf, he was the person with dominion over that money and therefore he was the initial transferee, rather than the vendor. But the court disagreed, holding that the purchaser never had legal title to the funds in question. Furthermore, he had lost control over that money at the time the money was paid from the attorney (acting as an escrow agent) to the vendor: "Because the conditions precedent for the contract's consummation had been satisfied by the time [the insolvent corporation] transferred the funds to [the attorney], [the purchaser] had no right to control their distribution."
The vendor then protested that imposing strict liability on a completely innocent party was a very harsh result. The court responded with a long explanation of the policies justifying the imposition of liability on an initial transferee:
In virtually every case involving a bankrupt entity, a third party will be injured because the debtor's obligations to creditors, by definition, outstrip its assets. In the case of a debtor's fraudulent conveyance, injury must fall on either the transferee of the conveyance or the debtor's creditors . . . . The aim of §550 . . . must be to allocate risk such that the parties tending to have the lowest monitoring costs must bear the costs of a debtor's failings...
Unlike subsequent transferees, who "usually do not know where the assets came from and would be ineffectual monitors if they did," initial transferees tend to have relationships and influence with the debtor . . . . By placing the risk on initial transferees rather than creditors, Congress ensured that creditors "need not monitor debtors so closely," the idea being that "savings in monitoring costs make businesses more productive."
The court then explained that the vendor in this case was not helpless to protect itself against the risk of fraudulent transfer liability:
Although [the vendor] asserts it did not have direct contact with the debtor [corporation] until well after the transfer, [the vendor] was represented by counsel in the transaction and entered a contract that allowed [the purchaser] to satisfy his obligations under the contract through a third party. In so doing, [the vendor] accepted the risk that [the purchaser] obligation would be satisfied through an avoidable conveyance.
Professor Schector's Comment: It is telling that the court's policy defense of the strict "initial transferee" rule goes on for so many paragraphs; to quote Shakespeare, "The lady doth protest too much, methinks." (Hamlet, Act III, Scene II.) The court implicitly recognizes that this is a very harsh rule and that there is really no practical way for the vendor (or any other payee) to protect itself.
At one point, the court quotes Scholes v. Lehmann, 56 F.3d 750, 761 (7th Cir.1995), for the dubious proposition that "conveyance recipients could hold cash reserves or obtain liability insurance to hedge against the possibility of a fraudulent conveyance." But since the payee rarely knows that he or she is a "conveyance recipient" of a fraudulent transfer, this must mean that every payee of every check must always obtain some sort of insurance to hedge against the possibility of unforeseen fraudulent transfer liability. That is patently unworkable: the occasional catastrophic loss is apparently just a risk of doing business.
I am disappointed that the court did not discuss the ambiguous role of the attorney in this case. Recall that he acted as an escrow agent, apparently on behalf of both parties. One could argue that his receipt of the money from the insolvent corporation was on behalf of the purchaser, the corporate insider who set up the whole deal. Therefore, since the attorney was the agent of the purchaser, the purchaser would be viewed as the initial transferee. Alternatively, the attorney could be characterized as nothing more than a conduit acting on behalf of the insolvent corporation, thus transmuting the vendor into the initial transferee.
In hindsight, I suppose that the vendor could have insisted that the funds in question come directly from the purchaser's personal bank account, so as to eliminate the possibility that the purchaser was obtaining the funds from an unknown insolvent corporation; in that case, the purchaser would have been the initial transferee, and the vendor would have qualified as a "subsequent transferee." The vendor would have had to be simultaneously paranoid and prescient to insist on such an arrangement. Worse yet, one can easily envision that a bankruptcy court could seize on this awkward arrangement as evidence that the vendor, as a subsequent transferee, must have been on notice of the tainted source of the money, thus fatally impeaching its putative "good faith transferee" defense.
Note that as a result of the rejection of Presidential, the trustee in analogous cases has now gained another strictly liable defendant: if the corporate officer who directs the transaction but never receives the money is not a "transferee," he must the "entity for whose benefit" the transfer was made, under §550(a)(1). The trustee may obtain a judgment against both the controlling officer and against the hapless initial transferee.
For a detailed discussion of Incomnet, see 2006 Comm. Fin. News. 71, Preference Recipient Has "Dominion" over Funds, Even If Recipient Is under Statutory Duty to Transmit the Funds to a Third Party.
US Supreme Court has Recently Granted Petitions for Certiorari on Two Cases
The US Supreme Court has recently granted petitions for certiorari on two cases--Bank of America v. Calukett and Bank of America v. Toledo-Cardona--involving mortgage lien-stripping in bankruptcy. The fact that the US Supreme Court granted certiorari, regarding these two cases, means that the US Supreme Court will review, and could either affirm or reverse, the two US Courts of Appeal decisions. If the US Supreme Court were to reverse present law, which is that lienstripping is NOT allowed in Chapter 7, and is only allowed (under specific, limited, circumstances in Chapter 11, 12 and 13), that would be a HUGE change in Bankruptcy Law. The US Supreme Court will hear and decide these 2 cases sometime in 2015.
On 12/14/14, the US Supreme Court Granted Petitions for Certiorari (ie has agreed to review) in Two Different Bankruptcy Cases, Agreeing to Review Two Different Bankruptcy Issues
There is no right to appeal a bankruptcy issue from a US Court of Appeals, to the US Supreme Court. Instead, a party requests the US Supreme Court to review a bankruptcy decision (and most other kinds of decisions) of a US Court of Appeals, by filing a Petition for Certiorari with the US Supreme Court. Thousands of Petitions for Certiorari are filed each year, with the US Supreme Court, in various subject matters of cases. The US Supreme Court only grants certiorari (agrees to review the US Court of Appeals decision) in a tiny percent of those petitions for certiorari, granting certiorari in approximately 80 to 90 cases per year. As a result, conflicting decisions, by various US Courts of Appeal, can exist for years, before the US Supreme Court grants certiorari.
On 12/14/15, the US Supreme Court granted petitions for certiorari in two different bankruptcy appeals, thereby agreeing to review the US Court of Appeals decisions, on two different bankruptcy issues.
First, the U.S. Supreme Court on 12/15/14, granted certiorari (ie, agreed to review), the question of whether those who fail to win confirmation of their bankruptcy-exit plans, whether consumers or businesses, can appeal the loss, immediately, or whether orders denying confirmation of a proposed Chapter 11, 12 or 13 plan are interlocutory orders, which cannot be appealed until the end of the case. The appeal where the US Supreme Court granted certiorari was a chapter 13 bankruptcy case, of an individual homeowner Louis Bullard, who failed to win court approval of his proposed Chapter 13debt-repayment plan, then lost again when he asked an appeals court to review the decision. Denial of confirmation isn't a final order, it is an interlocutory order, the First Circuit Court of Appeals ruled, so it can't be appealed immediately. Bullard's lawyers asked the high court to weigh in on the question, to clear up the split of opinion among the nation's appeals courts, and to reverse rulings that they say feed an "inefficient and wasteful" process.
Second, in a different Chapter 13 case, converted from Chapter 13 to Chapter 7, the US Supreme Court, on 12/15/14, granted certiorari, to review what should happen to the pool of money that accumulates from a Chapter 13 debtor making monthly Chapter 13 plan payments, where, instead of continuing in Chapter 13, the debtor converts the debtor's Chapter 13 case to Chapter 7. In Chapter 13, the debtor makes the monthly plan payment, called for by debtor's proposed Chapter 13 plan, starting 30 days after the debtor's Chapter 13 bankruptcy case is filed, and monthly, each month thereafter. However, before the Chapter 13 plan is confirmed, the Chapter 13 trustee does not distribute the monthly plan payments to the creditors. Instead, the Chapter 13 Trustee holds all those monthly plan payments, until if and when the Bankruptcy Court confirms (approves, so it goes into effect) debtor's proposed Chapter 13 plan. The question is, who is entitled to receive the accumulated plan payments, where the debtor's case is converted from Chapter 13 to Chapter 7, before/without a Chapter 13 plan being confirmed? Is the Chapter 13 Trustee required to return all undistributed plan payments to the debtor? Or are the creditors entitled to be paid those accumulated plan payments, as specified in the (not confirmed) proposed Chapter 13 plan? Or is the Chapter 13 Trustee required to turn that accumulated plan payments over to the Chapter 7 Trustee. In the US Court of Appeals for the Ninth Circuit, at present, the paid to Chapter 13 Trustee, but not yet distributed, Chapter 13 plan payments are returned to debtor, by the Chapter 13 Trustee, if debtor's Chapter 13 plan is not confirmed, and debtor's Chapter 13 case is converted to Chapter 7.
Two certiorari grants are reported in the 12/15/14 ABI (American Bankruptcy Institute) e-newsletter
US Supreme Court has granted certiorari, to hear appeal on Baker Botts LLP v. ASARCO LLC
On Oct. 2, 2014, the U.S. Supreme Court granted certiorari in Baker Botts LLP v. ASARCO LLC, No. 14-103. Baker Botts, which represented debtor-in-possession ASARCO LLC in one of the largest and most complex chapter 11 bankruptcy cases ever, obtained a fee award from the bankruptcy court of $113 million for fees and costs, $4.1 million as an enhancement, and $5 million for defending its fee application. On appeal, the Fifth Circuit Court of Appeals reversed the $5 million award for defense of the fee application. Citing In re Pro-Snax Distributors Inc., 157 F.3d 414 (5th Cir. 1998), and Bankruptcy Code § 330(a)(3), (4) and (6), the Fifth Circuit held that compensation for defending fee applications was not allowable where the services provided were not likely to benefit the debtor's estate or necessary to the administration of the estate. The ruling deviates from prior Ninth Circuit rulings. Would a ruling barring professionals from being compensated for successfully defending against challenges to their fees give too much leverage to the fee examiners and other parties willing to use the adversary process?
Bankruptcy Judge's Ruling in City of Stockton Chapter 9 (Municipality) bankruptcy case, which allowed Stockton to reduce its pension debt owed to present and retired City Employees, Is Not a Free Pass for Cities to Cut Pensions, say Experts
Bankruptcy Judge's Ruling in City of Stockton Chapter 9 (Municipality) bankruptcy case, which allowed Stockton to reduce its pension debt owed to present and retired City Employees, Is Not a Free Pass for Cities to Cut Pensions, say Experts Although Judge Christopher M. Klein ruled on Wednesday in the Stockton, Calif., chapter 9 case that the city could use bankruptcy to wipe away its pension debt, experts do not view the bankruptcy judge's oral statement as a free pass for other California cities struggling with rising pension costs, the New York Times reported on Friday. "He did give us a tool," said Richard L. Barnett, mayor of Villa Park, Calif., and a bankruptcy lawyer. "But it's not a tool the city will be using in the immediate future." Other analysts said that they doubted there would be a stampede to the courts. CalPERS observed that what Judge Klein said was a signal, but not necessarily a precedent. "It's not binding on any other bankruptcy court," said Michael A. Sweet, a partner at the law firm of Fox Rothschild who represents California municipalities in chapter 9. Judge Klein made his remarks orally from the bench on Wednesday, adding that he reserved the right to issue a written opinion later. He adjourned the trial on Stockton's bankruptcy exit plan until Oct. 30. CalPERS said that it disagreed with what the judge had said, but without a written opinion, it has nothing to take on appeal to a higher court.
Reported in ABI (American Bankruptcy Institute) e-newsletter of 10/7/14
IN ASARCO CASE, SUPREME COURT WILL DECIDE WHETHER FEES AND COSTS INCURRED DEFENDING FEE APPLICATIONS ARE COMPENSABLE US
IN ASARCO CASE, SUPREME COURT WILL DECIDE WHETHER FEES AND COSTS INCURRED DEFENDING FEE APPLICATIONS ARE COMPENSABLE US Supreme Court has granted certiorari, to review the 5th Circuit Court of Appeals decision in Baker Botts L.L.P., et al. v. Asarco, LLC. The US Supreme Court will review and decide whether the 5th Circuit Court of Appeals was correct, or in error, in ruling that 11 USC §330(a) of the Bankruptcy Code does not authorize compensation for the fees and costs that counsel incur while defending their fee applications in bankruptcy court. The Supreme Court's decision should provide much-needed guidance on whether §330(a) of the Bankruptcy Code ever authorizes compensation for the costs borne by counsel and other professionals for defending their fee applications in bankruptcy court, and if so, under what circumstances.
US Supreme Court has Granted Certiorari, regarding Wellness Int'l Network, Limited v. Sharif, 727 F.3d 751 (7th Cir. 2013), cert. granted, 134 S.Ct. 2901 (2014)
US Supreme Court has Granted Certiorari, regarding Wellness Int'l Network, Limited v. Sharif, 727 F.3d 751 (7th Cir. 2013), cert. granted, 134 S.Ct. 2901 (2014), meaning that US Supreme Court, in its fall 2014 term, will hear and decide the issue raised by the 7th Circuit Court of Appeals decision, which is:
Whether the presence of a subsidiary state property law issue in a 11 U.S.C. § 541 action brought against a debtor to determine whether property in the debtor's possession is property of the bankruptcy estate means that such action does not "stem from the bankruptcy itself" and therefore, that a bankruptcy court does not have the constitutional authority to enter a final order deciding that action; and (2) whether Article III permits the exercise of the judicial power of the United States by the bankruptcy courts on the basis of litigant consent, and if so, whether implied consent based on a litigant's conduct is sufficient to satisfy Article III.
Rivera v. Orange County Probation Dep't (In re Rivera), Case No. CC-13-1476-PaKiLa, BR (9th Cir. BAP June 4, 2014)
Rivera v. Orange County Probation Dep't (In re Rivera), Case No. CC-13-1476-PaKiLa, BR (9th Cir. BAP June 4, 2014): Ninth Circuit Bankruptcy Appellate Panel held that amounts due to a county for food, clothing, and medical care for an incarcerated minor are nondischargeable "domestic support obligations" of the parents pursuant to 11 U.S.C. § 523(a)(5).
Facts and Procedural History:
The debtor's minor son was incarcerated in Orange County from 2008 through 2010, for a total of 593 days. California law requires parents of an incarcerated minor to pay "costs of support" of the minor, which are limited to food, food preparation, clothing, personal supplies, and medical expenses, not to exceed $30 per day. Cal. Welf. & Inst. Code § 903(a).
Orange County calculated the total cost of incarceration to be $420 per day, but charged the debtor only $23.90 per day for the allowed support items in accordance with the statute. Orange County also charged the debtor an additional $2,199 for the cost of legal representation pursuant to section of 901.1(a) of the California Welfare & Institutions Code.
The debtor paid Orange County $9,508.60 in May 2010. On July 20, 2011, the Juvenile Court entered judgment against the debtor and her husband for the balance of $9,905.40, which included the unpaid costs of support and the legal expenses.
The debtor filed a voluntary petition for relief under Chapter 7 on September 12, 2011. The debtor listed Orange County as a priority, unsecured creditor, but the case was a no-asset case. Following the entry of the discharge, Orange County resumed collection efforts.
The debtor filed a motion to issue an Order Show Cause for why Orange County should not be held in contempt for violation of the discharge injunction. The bankruptcy court initially sided with the debtor over the meaning of sections 101(14A) (defining the term "domestic support obligation") and 523(a)(5) of the Bankruptcy Code, but ultimately ruled in favor of Orange County. The debtor appealed.
The Ninth Circuit Bankruptcy Appellate Panel's Ruling and Reasoning:
The Ninth Circuit Bankruptcy Appellate Panel affirmed the bankruptcy court's ruling. In so doing, the Panel compared the pre-Bankruptcy Abuse and Consumer Protection Act ("BAPCPA") language in section 101(14A) and the new post-BAPCPA language. The Panel noted that pre-BAPCPA, the statute only encompassed debts owed to a "spouse, former, spouse, or child of the debtor . . ." but now the statute contained new categories of possible creditors such as the child's "parent, legal guardian, or responsible relative, or (ii) a governmental unit." Hence, governmental entities could assert nondischargeable claims.
The debtor argued the debt was not a "domestic support obligation" because it was not in the nature of "alimony, maintenance, or support." The Panel rejected this argument determining that the narrow category of expenses recoverable under the California statute (i.e., food, food preparation, clothing, and medical expenses) were quintessentially support expenses.
The Panel declined to rule on the dischargeability of the legal expenses as the debtor failed to challenge them, but stated in dicta that the fees would be discharged.
One could certainly argue that the addition of "governmental unit" to the list of potential "domestic support obligation" beneficiaries under section 101(14A) was intended to encompass family support reimbursement obligations formerly listed within section 523(a)(18), rather than a significant expansion of the support exception, as determined in this case.
Former section 523(a)(18) specifically allowed "governmental units" to pursue support enforcement claims where the state paid public assistance to the debtor's dependents. This exception is now within the language of 523(a)(5) and 101(14A), rather than a separate section. Further, the definition at section 101(14A)(B) includes a qualifier in describing a domestic support obligation: "alimony, maintenance or support (including assistance provided by a governmental unit)." (Emphasis added).
However, the statutory language supports the outcome here. California's statute governing the obligation to reimburse the State for costs narrowly limits the category of expenses for which the State can seek reimbursement, and they are, as the Panel emphasized, "quintessentially" support expenses.
This analysis is from the California State Bar Business Law Section's Insolvency Law Committee e-newsletter of 9/25/14
Wortley V. Chrispus Venture Capital LLC (In re Global Energies LLC), F.3d , 2014 WL 3974577 (11TH CIR. 8/15/2014)
The Eleventh Circuit Court of Appeals held that the bankruptcy court abused its discretion and applied the incorrect legal standard in denying Joseph G. Wortley's ("Wortley") FRCP Rule 60(b)(2) [incorporated into bankruptcy practice by FRBP Rule 9024] motion to set aside an order denying Wortley's motion to dismiss, with prejudice, an involuntary chapter 11 case that business partners of Wortley had filed, against Global Energies, LLC (the entity that Wortley, and Wortley's partners were partners in), as respondent. The Eleventh Circuit decision remanded the case, with instruction to the bankruptcy court to grant Wortley's Rule 60(b)(2) motion, and instructed the bankruptcy court to vacate the bankruptcy court's order that had approved the sale of Global Energies, LLC's assets to Chrispus Venture Capital, LLC The Eleventh Circuit also directed the bankruptcy court to conduct hearings to impose sanctions against Wortley's former business partners, Chrispus, and Chrispus' bankruptcy counsel for withholding email communications essential to Wortley's ability to provide evidentiary support for dismissing the involuntary bankruptcy case as a bad faith filing and his business partners' false deposition testimony with respect to their plan and intentions for filing the involuntary petition.
Secondary Debt Collectors Must Give Notice, Judge Says
The fair Debt Collection Practices Act requires subsequent debt collectors to notify consumers in writing, even if the prior holder or debt collector had already given notice, a federal judge has ruled. Deciding an issue that has divided courts, Southern District Judge William Pauley III said secondary collectors still must send a validation notice to avoid confusion by consumers over who holds the debt and whether they have the right to contest it. In Tocco v. Real Time Resolutions, 14-cv-810, Pauley said the requirement of a validation notice in 15 U.S.C. &1692g "applies to initial communications from each successive debt collector." Under &1692g, once a debt collector has initially contacted the consumer, it must send, within five days, a notice stating the amount of the debt, the name of the creditor and a statement that the debt will be assumed valid if the consumer does not dispute it within 30 days of receiving it. If any portion of the debt is disputed, the collector has to send verification of the debt to the consumer as well as a statement that, at the consumer's written request, the collector will send the name and address of the original creditor if it is different from the current creditor.
Schultze v. Chandler
Schultze v. Chandler, F.3d , 2014 WL 3537030 (9th Cir. July 18, 2014, amended August 1, 2014): In a published decision, the Ninth Circuit Court of Appeals held that a post-petition malpractice claim originally filed in state court against an attorney for an unsecured creditors' committee is a core proceeding. Agreeing with other circuits, the Ninth Circuit found that the malpractice lawsuit, which was removed to a bankruptcy court from state court, fell within the definition of a core proceeding because: (1) the attorney's employment and compensation was approved by the bankruptcy court; (2) his duties as committee counsel pertained solely to the administration of the bankruptcy estate; and (3) the claim asserted against him was based purely on acts that occurred in the administration of the estate.
Plaintiffs were individual investors in Colusa Mushroom, Inc. ("Debtor"), a mushroom enterprise that filed a voluntary chapter 11 petition in the United States Bankruptcy Court for the Northern District of California. The Bankruptcy Court appointed an unsecured creditors' committee ("Committee"), consisting of Plaintiffs, other individuals, and a business entity. The Committee obtained an order from the Bankruptcy Court authorizing it to employ David Chandler ("Committee Counsel") as its attorney.
The Debtor's confirmed plan of reorganization provided for the sale of its business and assets to a third party, Premier Mushroom, LP ("Buyer"). All unsecured creditors, including Plaintiffs, were to share pro-rata in the sale proceeds. Pursuant to the terms of the sale, Buyer paid a down payment and executed a promissory note for the payment of the remainder of the sale price ("Note"). Buyer was to make three annual payments and a final balloon payment.
Security for the Note was to be provided in the form of a deed of trust on real property and a secured interest on personal property, junior to three other liens. The Debtor and Buyer, not Committee Counsel, conducted the closing of the sale. Following the closing of the sale, the Bankruptcy Court entered a final decree and administratively closed the bankruptcy case.
Buyer defaulted on the balloon payment. Plaintiffs then learned that Debtor's counsel failed to file the financing statements necessary to perfect the estate's junior security interest in the personal property. Because the security interest was not perfected, Buyer was able to further encumber the purchased assets and the net recovery from post-default assets was significantly less than it would have been had the security interest been properly perfected.
Plaintiffs commenced a malpractice action in state court against Committee Counsel, contending that he was negligent in failing to ensure that Debtor's attorney properly perfected the security interest. Although the Committee had been dissolved, Committee Counsel removed the malpractice lawsuit to the Bankruptcy Court. Plaintiffs attempt to remand the case was denied. The Bankruptcy Court then granted Committee Counsel's motion to dismiss on the grounds that he owed no duty to Plaintiffs individually because he represented the Committee as a whole, and not its individual members. Plaintiffs appealed the Bankruptcy Court's dismissal to the district court, which affirmed. Plaintiffs then appealed to the Ninth Circuit.
As set forth below, the Ninth Circuit found that the district court properly concluded that the Bankruptcy Court possessed jurisdiction over the malpractice action because it was a core proceeding.
A bankruptcy court has jurisdiction over "all civil proceedings arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. § 1334(b). Claims that arise under or in title 11 are deemed to be core proceedings, while claims that are related to title 11 are noncore proceedings. Maitland v. Mitchell (In re Harris Pine Mills), 44 F.3d 1431, 1435 (9th Cir. 1995).
The Ninth Circuit explained that core proceedings arising in title 11 can be matters "that are not based on any right expressly created by title 11, but nevertheless, would have no existence outside of the bankruptcy." In contrast, where the post-petition proceeding involves rights unconnected to the bankruptcy, the Ninth Circuit stated that the proceeding is noncore.
Noting that all circuit courts are in agreement, the Ninth Circuit stated that "where a post-petition claim was brought against a court-appointed professional, we have held the suit to be a core proceeding." The rationale is that a court must be able to police the fiduciaries in restructuring the debtor-creditor relationship, whether it be a trustee, debtor-in-possession, or other court-appointed professional. In this case, Committee Counsel's employment and compensation were approved by the Bankruptcy Court, his duties pertained solely to the administration of the bankruptcy estate, and the claim asserted against him pertained to acts that occurred in the administration of the estate. Accordingly, the lawsuit fell within the definition of a core proceeding.
In reaching this conclusion, the Ninth Circuit rejected a number of arguments advanced by Plaintiffs. First, citing 28 U.S.C. § 157(b)(3), the Ninth Circuit explained that it did not matter that Plaintiffs' claim was predicated on state law. Second, the Court also rejected the notion that Plaintiffs' claim did not invoke any right created by federal bankruptcy law because "arising in" jurisdictional analysis looks at whether the matter has no existence outside of the bankruptcy. In this case, the basis for the claim occurred within the administration of the estate, and any alleged duties arose from obligations created under bankruptcy law.
The Ninth Circuit also affirmed the district court's grant of the motion to dismiss because Committee Counsel did not owe an individual duty of care to Plaintiffs. Rather, he represented the Committee only, and that is to whom his fiduciary duties ran. Moreover, in his capacity as Committee Counsel, he was not charged with the duty of recording the financing statement. That duty fell to Debtor's attorney.
The Supreme Court's recent decisions in Executive Benefits Insurance Agency v. Arikson (In re Bellingham Ins. Agency, Inc.), 134 S. Ct. 2165 (2014) and Stern v. Marshall, 131 S. Ct. 2594 (2011), illustrate that the distinction between core and noncore proceedings can provide for vexing ramifications affecting jurisdiction and the ability of a bankruptcy court to enter a final judgment. This decision provides some practical clarity by holding that a post-petition state law claim against professionals is a core proceeding. Further rulings such as this will help harmonize these recent Supreme Court rulings and the sometimes blurred-lines between core and noncore proceedings that can create jurisdictional instability.
This analysis is from CA State Bar Business Law Section's Insolvency Law Committee e-newsletter of 8/18/14
DeNoce v. Neff (In re Neff)
DeNoce v. Neff (In re Neff), 505 B.R. 255 (9th Cir. BAP 2014): In a published decision the U.S. Bankruptcy Appellate Panel of the Ninth Circuit ("BAP") affirmed a bankruptcy court's order granting a debtor partial summary judgment against a denial of discharge complaint that alleged debtor should be denied a discharge because debtor had, within 1 year before debtor filed bankruptcy, made a fraudulent transfer of some of debtor's property, and had made that transfer with an actual intent to hinder, delay, or defraud creditors. the BAP held that the one-year "lookback period" of Bankruptcy Code 11 USCn 727(a)(2)(A) is not a "statute of limitations", which would be subject to equitable tolling; but instead is a "statute of repose", and as such, was NOT subject to equitable tolling. In addition, the BAP held that the doctrine of continuing concealment is not applicable where the debtor conceals a transfer of property but does not attempt to conceal debtor's interest in the property.
On March 4, 2010, Appellee Ronald Neff (the "Debtor") filed his first chapter 13 petition. Shortly thereafter, on April 7, 2010 the Debtor recorded a quitclaim deed (the "Transfer") transferring certain real property (the "Subject Property") from himself to a revocable trust (the "Trust"). Two days later, the Debtor's bankruptcy case was dismissed. The Debtor filed his second chapter 13 petition on June 18, 2010 and reported on his Schedule B that the Subject Property was owned by the Trust but did not disclose the Transfer in his Statement of Financial Affairs. The second bankruptcy case was dismissed on November 14, 2011.
On October 24, 2011, the Debtor filed a third bankruptcy case, this time under chapter 7. Appellant Douglas DeNoce ("Appellant") filed a complaint to deny the Debtor's discharge under 11 U.S.C. § 727(a)(2) (the "Complaint") alleging the Transfer was fraudulent and done with the intent to avoid paying creditors. The Debtor answered, denying Appellant's allegations and asserting, among other things, that the Complaint was barred by the applicable statute of limitations.
The Debtor moved for partial summary judgment under section 727(a)(2)(A) on the grounds that the Transfer was made more than one year prior to the filing of the chapter 7 petition. Appellant argued that the statute of limitations should be equitably tolled during the chapter 13 cases. The bankruptcy court granted partial summary judgment in favor of the Debtor holding that the one-year "lookback period" of section 727(a)(2)(A) is not subject to equitable tolling because it is a "statute of repose" and not a "statute of limitations." Appellant moved for reconsideration, and the bankruptcy court denied the reconsideration motion. The bankruptcy court reasoned that the one-year period in section 727(a)(2)(A) was similar to the period in section 727(a)(8) rather than the statute of limitations periods found in section 523(a)(1)(A) and section 507(a)(8)(A). Appellant timely appealed to the BAP.
BAP's Holding and Analysis
In dealing with this matter of first impression, the BAP analyzed the decisions in Womble v. Pher Partners, 299 B.R. 810 (N.D. Tex. 2003), aff'd on other grounds, 108 F. App'x 993 (5th Cir. 2004) and Tidewater Fin. Co. v. Williams, 498 F.3d 249 (4th Cir. 2007). In Womble, the district court held that the one year period in section 727(a)(2)(A) is a statute of limitations that can be equitably tolled. In so holding, the Womble court relied on Young v. United States, 535 U.S. 43 (2002) for its reasoning that the one year lookback period in section 727(a)(2)(A) was similar to the three year statute of limitations set forth in section 507(a)(8)(A) because both statutes reference "the date of the filing of the petition" and therefore "dictate[d] similar treatment." In re Womble, 299 B.R. at 812.
The BAP disagreed with Womble because sections 523 and 727 serve two entirely different purposes. The purpose of section 523 is to except certain specified debts of a debtor from discharge but the purpose of section 727 is to deny the discharge of all debts based upon a debtor's wrongful conduct without trying to protect an individual creditor's claim from being discharged due to inaction. In short, creditors are not the intended beneficiaries of section 727.
In Tidewater, the issue was whether the lookback period in section 727(a)(8) was a statute of limitations subject to equitable tolling. The Tidewater court disagreed with Womble and questioned the applicability of Young in cases under section 727. The Tidewater court found that section 727(a)(8) does not contain the two required characteristics for a limitations period: (1) it does not prescribe a period of time within which a plaintiff must pursue a claim, and (2) the time period does not commence when a claimant has a complete and present claim for relief. Tidewater, 498 F.3d at 256. The BAP found the reasoning in Tidewater persuasive and concluded that section 727(a)(8) and section 727(a)(2) share two important similarities – (1) neither expressly provides for tolling and (2) neither contains the two required characteristics for a limitations period. Accordingly, the BAP affirmed the bankruptcy court finding that section 727(a)(2)(A) is a statute of repose not subject to equitable tolling.
The BAP also rejected the Appellant's argument that the doctrine of "continuing concealment" was applicable because "concealment" focuses on the debtor's intent to conceal any interest in transferred property, not whether the debtor intended to conceal the transfer. Hughes v. Lawson, 122 F.3d 1237, 1240 (9th Cir. 1997). Although the Debtor did not initially disclose the Transfer, no "concealment" of his interest in the Subject Property occurred within the meaning of the doctrine because the Debtor did nothing to change the title of his interest in the Subject Property in the year before he filed his Chapter 13 petition.
The opinion provides an excellent analysis of the different purposes of Sections 523 and 727. It also provides a useful discussion regarding the distinction between a statute of limitations and a statute of repose, a difference which can sometimes be obscure. The BAP's examination of the two required characteristics for a limitations period provides a helpful roadmap for practitioners.
This analysis is from the CA State Bar Insolvency Law Committee e-newsletter of 8/14/14
FDIC v. Siegel (In re Indymac Bancorp, Inc.), F.3d (9th Cir. 4/21/14)
FDIC v. Siegel (In re Indymac Bancorp, Inc.), F.3d (9th Cir. 4/21/14): The U.S. Court of Appeals for the Ninth Circuit ("Ninth Circuit") recently affirmed the decision of a district court finding that a $55 million tax refund paid to a bank holding company on account of losses suffered by a defunct subsidiary constituted an asset of the holding company's bankruptcy estate. Though this decision gives some insight into the Ninth Circuit's thinking on this issue, the decision is NOT binding authority, because it is an "unpublished" decision. Unpublished decisions can be cited in briefs, but must be identified as being a "not for publication" decision, if they are cited in briefs, to alert everyone that the decision is a "not for publication" decision.
Daniel Bock Jr. v Pressler & Pressler
Daniel Bock Jr. v Pressler & Pressler, Civ. No. 11-7593 (KM)(MCA), 2014 WL 2937929, (D.N.J. June 30, 2014), in which a US District Court held that a Law Firm violated the federal Fair Debt Collection Practices Act ("FDCPA") when a lawyer of that Law Firm signed the Complaint, which Law Firm then filed in Court, to commence a lawsuit against the consumer who owed the debt to plaintiff company, seeking to collect the debt from consumer, only spent a few seconds reviewing and signing the Complaint, before that Complaint was filed in Court. Four second review did not comply with FDCPA requirement that there must be "substantial attorney review" of a lawsuit Complaint, before it is filed, to comply with FDCPA's "meaningful involvement" rule, which requires that an attorney must meaningfully review the claim, before the law firm files collection lawsuit against the consumer.
Following is the analysis of this case that appeared in Credit and Collection News e-newsletter of 08/07/14: The U.S. District Court for the District of New Jersey recently ruled in Daniel Bock Jr. v Pressler & Pressler, Civ. No. 11-7593 (KM)(MCA), 2014 WL 2937929, (D.N.J. June 30, 2014) that New Jersey's largest debt collection law firm violated the Fair Debt Collection Practices Act when it signed, filed and served a state court complaint against a consumer in a civil suit without "substantial attorney review."
The court held that a consumer is unfairly misled and deceived under the FDCPA when an attorney who signs a complaint, thereby impliedly representing that he has meaningfully reviewed the claim, is not involved and familiar with the case against the consumer.
In Bock, a consumer filed suit against a debt collection law firm for violations under the FDCPA, alleging that the law firm made a false or misleading representation by filing a debt collection complaint against him without having an attorney perform any meaningful prior review.
The facts presented to the district court revealed that the law firm's collection process was administered by "dedicated employees," "who are not attorneys," using specialized software that electronically transmitted information relating to collection claims.
The law firm's attorney who signed the pleading in Bock testified at a deposition that, on average, he reviewed between 300 and 400 complaints per day, and some days as many as 1,000.
Likely most troubling to the district court was the fact that the law firm's computer records showed that its attorney spent a total of only four seconds reviewing the electronic case file before approving the complaint against the consumer. And no one at the law firm ever reviewed the consumer's credit card account (on which the collection claim was based) or the assignment of debt to the debt buyer the law firm represented.
Based upon substantially undisputed evidence, the district court decided against the law firm's ruling that it violated the FDCPA and is, therefore, liable for damages to the consumer. In doing so, the court determined that the "meaningful involvement" rule that applies to collection demand letters also applies to the filing of a civil complaint.
The district court held that a signed complaint is inherently false and misleading, in violation of the FDCPA (15 U.S.C. Section 1692e), where at the time of signing, the attorney signing it has not:
- Drafted, or carefully reviewed, the complaint; and
- Conducted an inquiry, reasonable under the circumstances, sufficient to form a good faith belief that the claims and legal contentions are supported by fact and warranted by law.
Considering this criteria, the district court found that law firm violated the FDCPA because its attorney's "rapid look-over the complaint against Bock, one of 673 complaints he reviewed that day, cannot really be considered careful review of the complaint, let alone an exercise of the professional skills of a lawyer." The court explained:
The process by which Pressler prepares complaints almost entirely involves automation and nonattorney personnel. There is nothing wrong with that; the FDCPA does not mandate drudgery or enshrine outmoded business methods. The state court complaint filed in the state action here, however, was reviewed by an attorney for approximately four seconds. The case law is sparse, and it is possible for reasonable people to disagree as to what constitutes reasonable attorney review. But whatever reasonable attorney review may be, a four-second scan is not it.
Practical Considerations: Courts are increasingly expanding the scope and application of the FDCPA. The U.S. District Court for the District of New Jersey has expanded the application of the FDCPA to the preparation and court filing of a civil complaint.
Collection attorneys should be aware that it is not only false and misleading, within the meaning of the FDCPA, for an attorney to send a debt collection letter without having meaningfully reviewed the case, but it is also an FDCPA violation to file a debt collection complaint without meaningful involvement for the same reason. Lesher v. Law Offices of Mitchell N. Kay, P.C., 650 F.3d 993, 1001-1003 (3rd Cir. 2011), cert. denied, 132 S.Ct. 1143 (2012); Daniel Bock Jr. v Pressler & Pressler, Civ. No. 11-7593 (KM)(MCA), 2014 WL 2937929, (D.N.J. June 30, 2014).
Crawford vs. LVNV Funding, LLC
Crawford vs. LVNV Funding, LLC, ___F.3d___, 2014 Westlaw 3361226 (11th Cir. 2014): held that a bulk debt buyer violated the federal Fair Debt Collection Practices Act ("FDCPA") by filing a proof of claim in a consumer bankruptcy, based on a time-barred debt. There is a multi-Circuit split on this issue. Crawford is directly contra to a Second Circuit Court of Appeals decision Simmons v. Roundup Funding, LLC, 622 F.3d 93 (2nd Cir. 2010) in which the Second Circuit held that filing a proof of claim (on an unenforceable debt) is not a violation of FDCPA, that FDCPA does not apply in bankruptcy cases.
Contra to Crawford and Simmons are decisions of the Third Circuit and Seventh Circuit. The Third Circuit Court of Appeal's decision Simon v. FIA Card Services, NA et al, 732 F.3d 259 (3rd Cir. 2013) held that a debt collector's letter to a debtor in bankruptcy can give rise to an FDCPA claim. Accord: Randolph v. IMBS, Inc., 388 F.3d 726 (7th Cir. 2004), holding Bankruptcy Code did not pre-empt or otherwise preclude using FDCPA in a bankruptcy case.
The Ninth Circuit Court of appeals is federal appeals court whose decisions are binding on all bankruptcy and other federal judges in California, except where the US Supreme Court has ruled. In Walls v. Wells Fargo Bank N.A., 276 F.3d 502 (9th Circ. 2002), the Ninth Circuit Court of Appeals affirmed dismissal of an FDCPA claim made by a bankruptcy debtor against a bank, which complaint alleged that the bank had violated the FDCPA, by attempting to collect a debt that had been discharged by the discharge that the debtor received in the debtor's bankruptcy case. In Walls, the Ninth Circuit Court of Appeals held that 11 USC 524 of the Bankruptcy Code was the exclusive (only) remedy for violation of the bankruptcy discharge, and therefore, though the debtor could seek damages for violation of debtor's bankruptcy discharge, pursuant to 11 USC 524, the debtor could not additionally seek damages, for violation of the debtor's discharge, pursuant to the FDCPA.
Whether FDCPA can be used to address (improper) creditor activity in, or in relation to, a bankruptcy case, appears to be ripe for the US Supreme Court to grant certiorari on, and decide, do to the conflicting Circuit level cases.
Wu v. Markosian (In re Markosia)
Wu v. Markosian (In re Markosian, 506 BR 273 (9th Cir. BAP 3/12/14). The United States Bankruptcy Appellate Panel of the Ninth Circuit ("BAP") has affirmed a bankruptcy court's ruling that an individual debtor's chapter 11 post-petition earnings, which are property of the debtor's Chapter 11 bankruptcy estate,per 11 USC § 1115, while the debtor is in Chapter 11, revert to debtor, if debtor's Chapter 11 case is later converted from Chapter 11 o Chapter 7. This is not a surprising result, because the same is true when an individual debtor's Chapter 13 case is converted from Chapter 13 to Chapter 7.
On February 7, 2009, debtors and appellees Ara and Anait Markosian filed a chapter 7 bankruptcy petition. The United States Trustee moved to dismiss their case for abuse based on high income and their ability to pay their creditors. In response, the Markosians converted their case to chapter 11 on February 11, 2010. The Markosians could not, however, confirm a plan due to a decrease in income owing to Mrs. Markosian's loss of her job. Thus, on March 7, 2012, the Markosians reconverted their case to chapter 7. In the following month, Mr. Markosian received a $102,498.421 bonus from his employer for personal services provided during the period that the case was under chapter 11.
The Markosians turned over the bonus to the Chapter 7 trustee and filed a motion to address whether the bonus was property of their chapter 11 estate, partially exempt property of the chapter 7 bankruptcy estate or property excluded from the chapter 7 estate. The Trustee opposed.
The bankruptcy court, adopting the reasoning of In re Evans, 464 B.R. 429, 438-41 (Bankr. D. Col. 2011), entered an order granting the Markosians' motion, finding that the bonus constituted earnings from personal services within the meaning of Bankruptcy Code §1115(a)(2), but the bonus ceased to be property of the estate upon conversion to chapter 7. The Trustee timely appealed to the Bankruptcy Appellate Panel ("BAP").
The issue on appeal was whether an individual debtor's chapter 11 post-petition earnings, which are property of the estate under § 1115, revert to him or her upon a subsequent conversion to chapter 7. The issue was a matter of first impression in the Ninth Circuit.
In affirming the bankruptcy court's order compelling the Trustee to return the bonus, the BAP initially focused on the distinction between estate and debtors' property delineated by Bankruptcy Code § § 541(a)(6) and (7). The BAP noted that "[u]nder § 541(a)(6), "earnings from services performed by individual debtors after the commencement of the case are the debtor's property which are excluded from property of the estate."
The BAP observed next that Bankruptcy Code §1115, added by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, makes an individual chapter 11 debtor's post-petition earnings property of the estate. The bankruptcy court found that the bonus received by Mr. Markosian post-conversion was property of the Markosians' chapter 11 estate under § 1115(a)(2). The BAP disagreed, though that finding was not appealed, stating that § 1115 does not apply upon conversion from chapter 11 to chapter 7.
The BAP focused instead upon Bankruptcy Code § 348, which governs the effect of a conversion. The BAP agreed with the bankruptcy court that § 348(f)(1)(A) excludes a debtor's post-petition earnings from property of a chapter 7 estate upon conversion from chapter 13 but that there is no parallel provision for chapter 11 debtors. As a consequence, the BAP held that it had to look more broadly to § 348(a) – a section that applies to all cases under Title 11. The BAP stated that "[w]here a case is converted from Chapter 11 to Chapter 7, property of the estate is determined by the filing date of the Chapter 11 petition, and not by the conversion date" citing Magallanes v. Williams (In re Magallanes), 96 B.R. 253, 255 (9th Cir. BAP 1988).
The BAP then simply applied the earnings exception of section 541 to a case that, for analytical purposes, it treated as having been commenced on the date of conversion: "[a]s of the petition date, § 541(a)(6) excludes from the chapter 7 estate earnings from services performed by individual debtors after the commencement of the case. Therefore, by operation of § 348(a), personal service income that came into Debtors' chapter 11 estate is recharacterized as property of the debtor under § 541(a)(6) when the case is converted to chapter 7. Accordingly, upon conversion, the bonus reverted to Debtors." The BAP spends the balance of its opinion explaining away contrary views espoused by other courts that have come to different conclusions.
The BAP provides sound policy reasons to explain why it elected not to stretch to fill a statutory void that Congress left in amending § 348 in 1994 to add subsection (f)(1)(A): "[i]n the end, there is no reason to treat chapter 11 debtors differently than chapter 13 debtors in this context. As the Evans court pointed out, at the time Congress enacted § 348(f), it ‘clearly conveyed its purpose to avoid penalizing debtors who first attempt a repayment plan . . . [t]here is no policy reason as to ‘why the creditors should not be put back in precisely the same position as they would have been had the debtor never sought to repay his debts . . . .' 464 B.R. at 441."
The failure by Congress to enact a provision parallel to § 348(f)(1)(A) for chapter 11 debtors so that all debtors' post-petition earnings from property of a chapter 7 estate upon conversion are treated identically can be viewed by debtors/debtor's attorneys as disappointing. Courts often abandon plain language statutory interpretation to try to make sense of BAPCPA, more often than not at the expense of a blameless debtor. Here, the BAP's refusal to attempt "to divine Congressional intent from congressional silence" and create a rule that works differently for Chapter 11 and Chapter 13 debtors in identical circumstances generated an equitable and consistent outcome. Until Congress decides to address the void in section 348, In re Markosian will serve as well-reasoned authority to assist practitioners in dispensing appropriate advice to individual Chapter 11 clients with ongoing income from employment who must convert their cases to Chapter 7.
This case, with analysis appeared in the American Bankruptcy Institute e-newsletter of 8/5/14.
Hoskins v. Citigroup
HOSKINS V. CITIGROUP (IN RE VIOLA; 9TH CIR., July 16, 2014) case 12-60032, not for publication The Ninth Circuit Court of Appeals ruled that a "transferee", as that term is used in Bankruptcy Code section 11 U.S.C. § 550(a)(1), is one who has legal title to the funds and the ability to use them as the recipient sees fit. This is the "dominion test." The Ninth Circuit ruled that allegations of open and exclusive control through fraudulent misappropriation of funds is insufficient to satisfy the dominion test. The case is "not for publication". But still sheds light on Ninth Circuit's thinking on this issue.
Robinson v. American Home Mortgage Servicing, Inc. (In re Mortgage Electronic Registration Systems, Inc.)., F/3d , 2014 WL 2611314 (9th Cir. 6/12/14):
On June 12, 2014, the 9th Circuit Court of Appeals issued its decision in). This decision is the result of multi-district litigation related to the operation of the MERS System and, with one exception, found in favor of the lenders on state law claims, such as, wrongful foreclosure, predatory lending, etc. The decision provides a good summary of the operation of the MERS System and prior case law on the topic. In this case, the 9th Circuit court of appeals held that:
- the District Court did not improperly convert a motion to dismiss for failure to state a claim into a motion for summary judgment;
- mortgagors' challenge to MERS was not time-barred;
- mortgagors had standing to bring false document claims against MERS;
- mortgagors stated a false filing claim against MERS;
- mortgagors could not bring wrongful foreclosure claims against MERS;
- split between a note and deed of trust did not preclude nonjudicial foreclosure; and
- the District Court did not abuse its discretion in denying mortgagors leave to amend their complaint.
Dismissed in part, affirmed in part, and reversed in part.
Anil Sachan v. Benjamin Moonkang Huh (In re Benjamin Moonkang Huh)
Anil Sachan v. Benjamin Moonkang Huh (In re Benjamin Moonkang Huh), 506 B.R. 257 (9th Cir. BAP March 11, 2014)--published en banc Oionion of the United States Bankruptcy Appellate Panel of the Ninth Circuit ("BAP"--held that imputing fraud to a debtor for purposes of exception to discharge under 11 U.S.C. § 523(a)(2), where the evidence does not show that the debtor knew or had reason to know of the agent's fraud, "...is not consistent with the provisions or objectives of the Bankruptcy Code."
Pre-petition, the debtor was a licensed real estate broker in California. While initially operating a sole proprietorship under a fictitious business name, the debtor subsequently incorporated his business but retained his broker license in his personal name. Associated with the debtor and his corporation was Jay Kim ("Kim"), who engaged in real estate activity under the debtor's license.
During that relationship, Anil Sachan ("Sachan") dealt with Kim in Sachan's efforts to purchase a market in Long Beach, California. Kim acted on behalf of the seller. Misrepresentations of fact were made to Sachan affirmatively and by omission regarding the revenues of the market and its physical condition not being in compliance with the City of Long Beach code provisions. Sachan acquired the market and suffered heavy losses, subsequently reselling the market at a loss.
Sachan commenced litigation against multiple defendants, including Kim and the fictitious business name for the debtor. A jury verdict in Sachan's favor was rendered, and in 2010, the superior court amended the judgment to include the debtor as jointly and severally liable for the judgment in Sachan's favor. The debtor thereafter filed a chapter 7 bankruptcy petition on October 13, 2010.Sachan timely filed a complaint to except his judgment against the debtor from discharge under 11 U.S.C. § 523(a)(2)(A). Following a trial, the bankruptcy court rendered judgment in favor of the debtor based on findings of fact that: (i) the debtor never directly communicated with Sachan; (ii) the debtor made no misrepresentations to Sachan; (iii) no misrepresentations were made on the debtor's behalf to Sachan; and (iv) the debtor was not aware of the condition of the market being sold. An appeal to the BAP followed.
The BAP, reviewing under a de novo standard as to issues of law, framed the question on appeal as whether or not the bankruptcy court (Hon. Barry Russell) erred in declining to impute the fraud of Kim to the debtor for purposes of the discharge exception. More precisely, the question was whether the provisions of 11 U.S.C. § 523(a)(2)(A), excepting a debtor's discharge for debts resulting from "false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition" may be applied to a debtor by imputation based on the fraud of the debtor's agent.
The BAP, reaching back to Neal vs. Clark, 95 U.S. 704 (1877), and Strang vs. Bradner, 114 U.S. 555 (1885) (both decisions under the Bankruptcy Act of 1867) noted the unwillingness of the Supreme Court to impute fraud as a basis to deny a discharge except in instances where the fraud was committed by a partner of the debtor. Recognizing that the evolving purposes of bankruptcy law have changed over time, the BAP reviewed several approaches to the issue of imputation of fraud taken by various Courts of Appeal outside the Ninth Circuit.
Under the BAP's analysis, these approaches generally fell along a spectrum ranging from Fifth Circuit's holding in Deodati v. M.M. Winkler § Associates, 239 F.3d 746 (5th Cir. 2001) (adopting an "absolute" approach that innocent partners could not discharge debts generated from their partners' fraud), through the the Sixth Circuit in BancBoston Mortg. Corp. v. Ledford, 970 F.2d 1556 (6th Cir. 1992) cert. denied, 507 U.S. 916 (1993) (holding that innocent partners could be denied a discharge because of partners' fraud where they received the financial benefits of that fraud) to the Eighth Circuit in Walker v. Citizens State Bank, 726 F.2d 452 (8th Cir. 1984) (holding that the agent's fraud can be imputed to the debtor only when there was proof that the principal "knew or should have known of the fraud"). Under the Eighth Circuit's approach, reckless indifference to the acts of the agent could also result in imputation. Finally, the BAP noted a fourth line of circuit authority which it described as "minimalist" – and which, relying on the Supreme Court's 1885 Strang decision, holds that fraud will not be imputed except in a specific partnership context.
The BAP went on to discuss recent Supreme Court decisions on related issues. In Kawaauhau v. Geiger, 523 U.S. 57 (1998), the Supreme Court, dealing with Section 523(a)(6)'s exception to discharge for "willful and malicious injury by the debtor to another" in the context of a medical malpractice case, held that non-dischargeability required a deliberate or intentional injury. Finally, in Bullock v. BankChampaign, N.A., 133 S.Ct. 1754 (2013), the Supreme Court considered Section 523(a)(4)'s exception to discharge "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." In this latter decision, the Supreme Court appeared to come full circle, reaching back to its 1877 decision in Neal in reiterating that the fiduciary defalcation by the debtor must be based on a showing of, "culpable state of mind". The BAP concluded that Geiger and Bullock cut strongly against the imputation of the fraud of another to the debtor for purposes of Section 523(a)(2)(A) without some further showing of the debtor's own culpability.
The BAP then reviewed related Ninth Circuit authority, discussing first Impulsora Del Territorio Sur, S.A. v. Cecchini, 780 F.2d 1440 (9th Cir. 1986), a case addressing Section 523(a)(6). Though it concluded this decision had been effectively overruled by Geiger, the BAP noted that Cecchini nonetheless seemed to place the Ninth Circuit in the Six Circuit's "receipt of benefits" camp (under the earlier-reviewed BancBoston Mortg. Corp. decision).
Turning next to Sherman v. Sec. § Exch. Comm'n, 658 F.3d 1009 (9th Cir. 2011), the BAP stated that the Ninth Circuit's discussion, though perhaps dicta, nonetheless seems to suggest that under Section 523(a)(2)(A) it is the debtor's conduct which must have been fraudulent to gain the exception to the discharge.
Finally, the BAP finally turned to a review of its prior decisions, including those in Tobin v. Sans Souci Ltd. P'ship, 258 B.R. 199 (9th Cir. BAP 2001) and Tsurukawa v. Nikon Precision, Inc., 258 B.R. 192 (9th Cir. BAP 2001), as well as a subsequent, second Tsurukawa opinion holding that fraud in an action under Section 523(a)(2)(A) could be imputed to a spouse only under partnership/agency principles. The BAP concluded that its prior authority is consistent with the adoption of the Eighth Circuit's "knew or should have known" standard in the earlier-reviewed Walker decision. The BAP then specifically adopted the Walker standard, holding that the imputation to a debtor of an agent's fraud, absent the debtor's knowledge or having reason to know of that fraud, was not consistent with the Bankruptcy Code's provisions or objectives. The BAP affirmed the bankruptcy court's dismissal.
The BAP's extensively researched and analyzed Opinion in Huh helps clarify the law on whether or not a debt can be held NONdischargeable (not discharged), pursuant to 11 USC 523(a)(2)(A) where the fraud was committed by the debtor's agent. The BAP held that such a debt could be excepted from discharge only when the agent's misconduct was known or should have been reasonably known by the debtor. This, the BAP held, is consistent with the purposes of the Bankruptcy Code: to give debtors a fresh start, and that the exceptions to discharge be strictly construed. This author agrees, and would add that under the Huh standard, evidence such as "receipt of benefits," though not dispositive, nevertheless remains relevant.
The Substance of this analysis is from the e-newsletter of the Insolvency Committee of the CA State Bar of 6/3/14.
Frates v. Wells Fargo Bank, N.A. (In re Frates)
Frates v. Wells Fargo Bank, N.A. (In re Frates), 507 B.R. 298, 2014 WL 982851 (9th Cir. BAP March 13, 2014)--The United States Bankruptcy Appellate Panel for the Ninth Circuit (the "BAP") ruled in a published decision that service under Federal Rule of Bankruptcy Procedure ("FRBP") 7004(h) governs service on an insured depository institution of a motion to avoid a judgment lien against the debtors' real property under Bankruptcy Code section 522(f) ("Code section 522(f)") rather than the service provisions of California Code of Civil Procedure ("CCP") section 684.010, which applies to proceedings affecting judgment. It also ruled that including the recording information for the judgment lien in the motion sufficiently identified the property at issue to satisfy procedural due process.
The debtors (the "Frates") moved under Code section 522(f) to avoid a judgment lien recorded against their residence by Wells Fargo Bank (the "Bank"). In making the motion, the Frates served the Bank "by certified mail addressed to an officer of the institution," as specified by FRBP 7004(h) for service on an insured depository institution. The Bank did not respond. The Frates moved for entry of default. The bankruptcy court declined to grant the motion, holding that the Frates should have served the Bank under CCP 684.010. CCP 684.010 requires service of papers regarding a judgment lien on the "judgment creditor's attorney of record if the judgment creditor has an attorney of record." The bankruptcy court also held that by not including a legal description of the property in the notice, the Frates failed to sufficiently identify the property to give the Bank notice of the rights at issue. The Frates appealed to the BAP.
The BAP reversed, holding that service in accordance with FRBP 7004(h) was proper and that CCP 684.010 was inapplicable. The BAP also held that the provision of recording information about the judgment lien gave the Bank sufficient notice of what was at issue.
In its central analysis, the BAP noted first that FRBP 1001 provides that "the Bankruptcy Rules and Forms govern procedure in cases under title 11 of the United States Code." Next, it observed that a lien avoidance proceeding is a "motion" under FRBP 9014, which applies to a "contested matter" per FRBP 4003(d). In turn, FRBP 9014(b) requires service under FRBP 7004. And, as noted above, FRBP 7004(h) regulates service on an insured depository institution such as the Bank. The BAP then noted that in Hanna v. Plumer, 380 U.S. 460 (1965), the United States Supreme Court had sanctioned service under Federal Rule of Civil Procedure 4(d)(1) (the civil cognate of FRBP 7004) in diversity actions, rather than state procedure, reasoning that to hold that state law governs procedure in federal courts when state law substantive rights are at issue would undermine the Constitution's bestowal of the power to determine procedure in federal courts and Congress' enactments thereunder.
In connection with its analysis, the BAP also observed that FBRP 7004 goes beyond the minimum notice requirements of Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306 (1950), thus addressing the concern in Jones v. Flowers, 547 U.S. 220 (2006) that Mullane might require more rigorous service in the context of proceedings that might eliminate property rights than in other kinds of proceedings. The BAP disagreed with dicta set forth in a concurring opinion in All Points Cap. Corp. v. Meyer (In re Meyer), 373 B.R. 84, 92 (9th Cir. BAP 2007) that opined that CCP 684.010 does apply to lien avoidance proceedings because of the extra assurance of successful service it may provide.
Finally, the BAP concluded that identifying the recording information was a sufficient guide to the Bank regarding the rights in play to satisfy the notice requirements of Mullane.
The opinion is correct--"No Brainer" that federal procedure (here Federal Rules of Bankruptcy Procedure) governs how to serve a Motion that is filed in a bankruptcy case. There is nothing in the federal power over procedure in federal courts in general or the FRBP in particular to indicate a deferral to state law absent an express exception in a federal rule or statute. Moreover, as stated in a separate concurring and dissenting opinion in In re Meyer that criticized the concurrence mentioned above, adopting a conceptual regime that sometimes defers to state procedure when not specified in federal rules or statutes would be a prelude to mass confusion and chaos as courts tried to figure out when state procedure applies and when it does not.
Report on this decision appeared in the California State Bar Insolvency Committee e-newsletter of 5/15/14
Law v. Siegel, Chapter 7 Trustee
Law v. Siegel, Chapter 7 Trustee, __ U.S. __, 134 S.Ct. 1188, 2014 WL 813702 (March 4, 2014): The Supreme Court of the United States held that a bankruptcy court exceeded the limits of its authority by imposing a surcharge on a debtor's homestead exemption to pay for a chapter 7 trustee's litigation fees and costs incurred in avoiding a fraudulent lien against estate property created by the debtor. In a unanimous opinion written by Justice Scalia, the Court held that a bankruptcy court cannot exercise its authority under 11 U.S.C. § 105(a) or its inherent equitable powers in contravention to a specific statutory provision, in this case 11 U.S.C. § 522. No power to surcharge debtor's exemption, even though debtor had done IMPROPER THINGS in debtor's bankruptcy case. This decision does NOT mean that debtor's can get away with doing improper things in their bankruptcy cases, because the US Supreme Court decision says that Bankruptcy Courts have OTHER provisions of the Bankruptcy Code that they can use to punish debtors who do bad things in their bankruptcy cases.
Debtor Stephen Law ("Debtor") filed for chapter 7 bankruptcy relief in 2004. On his schedules of assets and liabilities filed with the bankruptcy court, the Debtor listed his personal residence located in Hacienda Heights, California (the "Property"), stated the value of the Property to be $363,348, and claimed a homestead exemption in the Property of $75,000 under section 704.730(a)(1) of California Code of Civil Procedure. The Debtor further listed two creditors holding claims secured by deeds of trust against the Property. The first deed of trust was held by Washington Mutual Bank and secured a note in the amount of $147,156.52. The second deed of trust, securing a note in the amount of $156,929.04, named "Lin's Mortgage & Associates" ("Lin"), as beneficiary, and reflected a debt owed to someone named "Lili Lin" (the "Lin Deed of Trust"). Because the two stated liens against the Property exceeded the nonexempt value of the Property, it appeared that there was no value in the Property that would be available to pay the estate's creditors.
Alfred H. Siegel, the duly-appointed chapter 7 trustee (the "Trustee"), commenced an adversary proceeding to challenge the validity of the lien purportedly held by Lin. During the course of the litigation, two different individuals appeared claiming to be Lili Lin. The first Lili Lin, of Artesia, California, claimed to be a former acquaintance of the Debtor and described the Debtor's numerous attempts to involve her in sham transactions involving the Property and Lin Deed of Trust. Ms. Lin of Artesia denied ever loaning money to the Debtor and quickly entered into a stipulated judgment with the Trustee in which she disclaimed any interest in the Property. At some point, however, a second Lili Lin, who supposedly lived in China and spoke no English, appeared in the matter and claimed to be the true beneficiary under the Lin Deed of Trust. This second Ms. Lin engaged in extensive and costly litigation with the Trustee, including several appeals, over the avoidance of the Lin Deed of Trust and subsequent sale of the Property.
After five years of litigation, the bankruptcy court concluded that no person named Lili Lin made a loan to the Debtor and that the alleged loan was a fiction created by the Debtor to preserve the Debtor's equity in the Property beyond his homestead exemption. The bankruptcy court was unpersuaded that Lili Lin of China signed or approved any of the declarations or pleadings filed in her name, finding it more likely that the Debtor himself drafted, signed and filed such papers. The bankruptcy court further found that the Debtor submitted false evidence purporting to show that Lili Lin of China, and not Lili Lin of Artesia, was the beneficiary under the Lin Deed of Trust.
In the end, the Trustee had incurred over $500,000 in fees and costs in litigating the dispute and overcoming the Debtor's fraudulent misrepresentations. Based on the Debtor's misconduct, the Trustee moved to "surcharge" the entire $75,000 homestead exemption to defray the Trustee's attorney's fees. The bankruptcy court granted the Trustee's motion. The Ninth Circuit Bankruptcy Appellate Panel affirmed the bankruptcy court's decision. Citing Latman v. Burdette, 366 F.3d 774 (9th Cir. 2004), the BAP recognized a bankruptcy court's power to equitably surcharge a debtor's statutory exemption in exceptional circumstances, including where the debtor engages in inequitable or fraudulent conduct. The Ninth Circuit Court of Appeals also affirmed, holding that the surcharge was proper because it was "calculated to compensate the estate for the actual monetary costs imposed by the debtor's misconduct, and was warranted to protect the integrity of the bankruptcy process." The Debtor appealed.
Holding and Analysis
The Supreme Court found that the bankruptcy court exceeded the limits of its authority by surcharging the Debtor's homestead exemption and ultimately reversed and remanded the Ninth Circuit's decision.
The Court's opinion began by recognizing the bankruptcy court's statutory authority under Bankruptcy Code section 105(a) to issue any order, process, or judgment necessary to carry out the provisions of the Bankruptcy Code, along with the bankruptcy court's inherent power to sanction parties engaging in abusive litigation conduct. The Court, however, held that the bankruptcy court may not exercise either its statutory power under section 105(a) or its inherent equitable powers in contravention to any specific statutory provisions. In this case, the Court found that the bankruptcy court's surcharge of the Debtor's homestead exemption contravened Bankruptcy Code section 522, which: (1) allowed the Debtor to claim a California homestead exemption (sub-section 522(b)(3)(A)) and (2) provided that such exemption could not be liable for the payment of any administrative expenses of the estate (section 522(k)).
The Court was not persuaded by the Trustee's argument that section 522 merely establishes the procedure for a debtor to claim an exemption in property, and does not require the bankruptcy court to allow such exemption regardless of the circumstances. This argument was supported by the United States, which filed an amicus brief asserting that section 522 "neither gives debtors an absolute right to retain exempt property nor limits a court's authority to impose an equitable surcharge on such property." The Court read these arguments as equating a bankruptcy court's right to surcharge an exemption with the bankruptcy court's right to deny or limit the Debtor's homestead exemption under section 522. In this case, the Court held that such arguments fail for two reasons.
First, the Court held that the Trustee did not timely object to the Debtor's claimed homestead exemption, and, therefore, the exemption became final prior to the imposition of the surcharge. The Court noted that it previously held that a trustee's failure to object timely to a claimed exemption prevents him from later challenging the exemption, citing Taylor v. Freeland & Kronz, 503 U.S. 638, 643-644 (1992).
Second, the Court reasoned that, even if the bankruptcy court could reconsider the Debtor's ability to claim the exemption, section 522 does not give the bankruptcy court discretion to grant or withhold exemptions based on any factors the bankruptcy court deems appropriate. The statute specifies the criteria that will allow the debtor to claim an exemption, and it is the debtor's discretion whether to elect to take the exemption. If the debtor chooses to do so, the Court reasoned, a bankruptcy court may not refuse to honor such exemption without a valid statutory basis. The Court explained that section 522 sets forth a number of specific exceptions and limitations to exemptions, some of which relate to a debtor's misconduct, and stated that section 522's "meticulous...enumeration of exemptions and exceptions to those exemptions confirms that courts are not authorized to create additional exceptions." While the Court acknowledged that there may be circumstances where state law may be applied to disallow a state-created exemption based on the debtor's misconduct, the Court held that "federal law provides no authority for bankruptcy courts to deny an exemption on a ground not specified in the Code." (emphasis in original).
The Court concluded by recognizing that its ruling will leave the Trustee with a great financial burden as a result of the Debtor's egregious misconduct, and may also result in inequitable outcomes in future cases as well. Ultimately, however, the Court determined that Congress already balanced the interests of debtors and creditors in section 522, and the courts cannot alter the statute's balance. The Court also reassured the bankruptcy courts that this decision does not strip or otherwise alter the bankruptcy court's authority to impose other authorized means of discipline on a dishonest debtor, such as sanctions, a denial of discharge, and, in cases of fraudulent conduct in a bankruptcy case, criminal prosecution.
Although the bankruptcy court in this case admirably tried to achieve an equitable result and to lessen the substantial financial burden to be borne by the Trustee as a result of outrageous and egregious conduct on the part of the Debtor, all in the best interests of the creditors, the Supreme Court's decision appropriately requires that any actions taken by the bankruptcy court be consistent with specific provisions of the Bankruptcy Code. To the extent any trustees have relied on Ninth Circuit law allowing for surcharging of a debtor's exemption in certain circumstances, this decision may impact the strategic considerations of litigating contested property disputes because the trustees would not be able to reach any property subject to a debtor's exemption. In this particular case, the fees incurred by the Trustee in fighting over the Debtor's exemption exceeded the value of the Property—so certainly Trustees need to keep this decision in mind when commencing litigation and in evaluating the costs and benefits of extensive litigation.
Substance of this analysis was published in Insolvency Law Committee of the California State Bar e-newsletter.
Gray1 CPB, LLC vs. SCC Acquisitions, Inc
Gray1 CPB, LLC vs. SCC Acquisitions, Inc., ___ CA3d___, 2014 Westlaw 1388697 (California State Court Court of Appeals 2014): A California appellate court has held that once a judgment creditor has accepted a cashier's check from a judgment debtor, the creditor no longer has the right to collect post-judgment attorneys' fees.
Comment: Take the money!! A judgment creditor should ALWAYS accept full payment of the judgment, if the judgment debtor sends it to judgment creditor. Lucky (and rare) judgment creditor who gets paid judgment, without struggling to collect the judgment. Unless the attorneys fees claim is a very large claim, in comparison to the judgment amount, the creditor holding the judgment is almost certainly better off to accept the cashiers check paying the full amount of the judgment, even though doing so cuts off the right to, thereafter, make a claim for attorneys fees incurred by the judgment creditor, post judgment, trying to collect the judgment. Creditors should remember that a judgment is just a piece of paper with a number on it, and that doing things to seek to collect a judgment (defending judgment on appeal, if there is an appeal, applying for writ of execution, applying for wage garnishment, obtaining and recording an abstract of judgment in the county recorder's office (to create judgment lien on the judgment debtor's property), moving to do execution sale of debtor's real property, after obtaining judgment lien on the real property, are all expensive to do, and may result in driving the debtor to file bankruptcy, where the judgment may be dischargeable, or if secured by a judgment lien, may be undersecured and subject to lienstripping, and even if it is a judgment is for something (e.g., fraud judgment) that would be nondischargeable in bankruptcy, per 11 USC 523(a)(2), (4), or (6), the creditor will have to bring and win a "nondischargeability" adversary proceeding, in the bankruptcy, to keep the judgment from being discharged, which takes more time, and costs more of the creditor's money to do.
Facts: After many years of bitter litigation, a creditor obtained a large judgment against a debtor. The judgment creditor incurred millions of dollars in attorneys' fees in attempting to enforce that judgment. Unexpectedly, the debtor's counsel tendered a cashier's check for the entire face amount of the judgment plus interest, not including the post-judgment attorneys' fees. The judgment creditor's counsel accepted the check but did not cash it. When the judgment creditor filed a motion for post-judgment costs, the trial court denied the motion, ruling that the judgment had been satisfied by the cashier's check.
Reasoning: The appellate court affirmed. The creditor claimed that the judgment had not really been satisfied, since the post-judgment fees had not been covered by the cashier's check. The court disagreed, holding that the applicable statutes clearly provided that the acceptance of the cashier's check had satisfied the judgment, which (at that time) did not include an award of fees.
The creditor complained that this result was prejudicial, since the debtor's surprise tender of the cashier's check had deprived the creditor of its chance to obtain a fee award. The court disagreed:
The rule we announce today does no disservice to judgment creditors who have incurred postjudgment costs they wish to add to the judgment . . . . [I]f they have not yet filed a motion for postjudgment costs at the time the judgment debtor tenders a cashier's check in full payment of the outstanding judgment, they are free to reject the payment and to file a motion for postjudgment costs.
The court recognized that the creditor's argument "is not without sympathetic appeal" because the expensive collection was caused by the debtor's "slippery efforts to evade paying the judgment . . . ." But the court held that the creditor could have made interim motions for fees: "[The creditor] could have made a motion or motions for postjudgment costs, including attorney fees, prior to defendants fully satisfying the judgment nearly two years after entry of the judgment."
The first paragraph of the court's opinion vividly describes the creditor's dilemma:
You cross continents and spend years trying to collect a judgment for your client. Late one Friday afternoon, the debtor's lawyer walks into your office and hands you a cashier's check for almost $13 million, covering the entire judgment and all accumulated interest. Do you accept the check or say, "no thank you, I need to make a motion for attorney fees first?" Put another way, is a bird in the hand worth two in the bush?
In the real world, who would ever turn down a check for $13 million? And yet the Enforcement of Judgments Act, as currently written, essentially forces the creditor to do exactly that. As the Court notes, the only other alternative is to file repetitive interim motions for fees during the collection process, which is costly not only to the creditor but also to the judicial system. Worse yet, when the debtor finally tenders the money, there will almost always be additional fees and costs that have not been picked up in one of those interim motions.
The court reached the correct result under the statutes as they are currently written. But the heart of the problem is that the judgment is deemed to be "fully satisfied" for all purposes as soon as the cashier's check is accepted, thus cutting off the creditor's ability to obtain an additional fee award under that judgment. Perhaps the Legislature could amend the statute to cover the precise problem identified by the court in this case: although the tender of the check would be deemed to satisfy the judgment (thus cutting off the accrual of post-judgment interest), the judgment creditor would still have the right to make a final motion for post-judgment fees and costs.
Portion of this analysis appeared in the California State Bar Insolvency Committee e-newsletter
In re SW Boston Hotel Venture, LLC
In re SW Boston Hotel Venture, LLC, ___ F.3d___, 2014 Westlaw 1399418 (1st Cir. 2014):The First Circuit Court of Appeals held that bankruptcy courts may choose to use a flexible approach when selecting a "measuring date" for the accrual of an over secured creditor's right to postpetition interest, and the value assigned to the property during the creditor's relief from stay motion is not necessarily binding at later stages of the bankruptcy case.
Facts: A lender held a first priority mortgage on a hotel and related properties. A few months after the borrower's Chapter 11 filing, the lender moved for relief from the automatic stay; the debtor successfully contended that the creditor was oversecured, precluding relief from the stay.
Less than a year later, the hotel property was sold for a very good price. The oversecured lender filed a motion under 11 U.S.C.A. §506(b), seeking the recovery of postpetition interest accruing during the pendency of the reorganization at the default rate set forth in the loan documents. The bankruptcy court granted the lender's motion but held that postpetition interest began to accrue only as of the date of the sale of the property, rather than from the petition date. The First Circuit BAP reversed on that point, but the First Circuit reversed the BAP.
Reasoning: The court held that when viewed as a whole, the language of §506 permits a flexible approach to the date for determining whether a creditor is oversecured. The court noted that although §506(b) does not provide a specific measuring date, an exception to the rule contained in §506(a)(2) does specify the date of the filing of the petition as the measuring date: "The fact that Congress mandated particular measuring dates in the exception without mandating a particular measuring date in the general rule suggests that it intended flexibility . . . ."
The court also noted that using the petition date as the sole measuring date would lead to absurd results:
[R]ather than yielding the fairest result, a rigid single-valuation approach guarantees an all-or-nothing result that hinges more on fortuity than reality. For example, if the petition date were the required measuring date, a creditor that first became oversecured even one day later would be allowed no post-petition interest, even though it was oversecured throughout almost the entire bankruptcy and even though it could receive substantial post-petition interest under a flexible approach. Conversely, if the confirmation date were the required measuring date, a creditor that first became oversecured just one day earlier would be allowed post-petition interest for the entirety of the bankruptcy proceeding (up to the amount of the equity cushion). We do not believe that Congress intended entitlement to post-petition interest to depend so heavily on chance.
In a footnote, however, the court held that although the statute permits a flexible approach to valuation, it does not necessarily require flexibility:
We do not suggest that bankruptcy courts must, or even should, adopt the flexible approach whenever collateral values and/or claim amounts fluctuate. We simply recognize that a bankruptcy court may, in the exercise of its discretion, determine that, on the particular facts before it, equity and fairness would be best served by application of a flexible approach.
The creditor then argued that since the bankruptcy court had earlier found that the creditor was oversecured at the time it moved for relief from the automatic stay, thus justifying the denial of the creditor's motion, that finding was binding upon the bankruptcy court when considering the creditor's entitlement to postpetition interest. The court disagreed: "[A] valuation made for one purpose at one point in a bankruptcy proceeding has no binding effect on valuations performed for other purposes at other points in the preceding."
Comment: The court's "contextual" approach to valuation under §506(b) is messy but unavoidable. The court's linguistic argument is appropriate: if Congress had wanted to ossify the valuation date as of the commencement of the case, Congress would have included that precise phrase, just as it did in (e.g.) § 544(a). Also, I think the court's policy argument is very insightful, since a rigid "petition date" standard would deprive the creditor of the opportunity to seek postpetition interest, when the property has appreciated during the bankruptcy proceeding.
But I am troubled by the court's treatment of the findings made during the creditor's motion for relief from stay. The debtor successfully contended that the secured creditor was oversecured, a common tactic. When the creditor later moved for postpetition interest, shouldn't the debtor's successful defense of the relief from stay motion have given rise to a classic example of judicial estoppel? If the debtor was able to persuade the court at the outset of the case that the creditor was substantially oversecured at that time, how could the court have triggered postpetition interest as of any later date? The appellate court's reasoning on this issue comes down to "that was then, this is now," which is not very satisfying. Debtors are therefore encouraged to play fast and loose with property appraisals, submitting high appraisals at the outset of the case and then low appraisals later.
For a discussion of the First Circuit BAP's opinion in this case, see 2012 Comm. Fin. News. 85, Date of Accrual of Oversecured Creditor's Right to Postpetition Interest Is Determined under Flexible Approach.
Substance of this analysis appeared on California State Bar Insolvency Committee e-newsletter
Goldstein V. Diamond (In Re Diamond), 8TH CIR. 2014
The Eighth Circuit Court of Appeals recently ruled that a creditor which wants to file a "nondischargeability" complaint against a debtor, brought pursuant to 11 USC §523(a)(3)(B) is not required to move to reopen the underlying bankruptcy case, and get the underlying bankruptcy case re-opened, before filing the 523(a)(3)(B) nondischargeability adversary proceeding. The 8th Circuit reasoned that the bankruptcy court's jurisdiction arises from § 1334 and does not terminate simply because a bankruptcy case is closed.
A 523(a)(3)(B) adversary proceeding can be brought by a creditor where the creditor was NOT properly scheduled, in the debtor's bankruptcy schedules, and so that the creditor was not notified by the Bankruptcy Court that the debtor had filed bankruptcy, AND if the creditor did not from any other source find out debtor had filed bankruptcy, in time for the creditor to bring a timely nondischargeability adversary proceeding pursuant to 11 USC 523(a)(2) (fraud, misrepresentation by debtor), 523(a)(4) (breach of fiduciary duty, larcency, embezzlement by debtor) or 523(a)(6) (wilful and malicious act by debtor), within the 60 days after date first set for 341a meeting of debtor time-deadline for filing 523(a)(2), (4), (6) "nondischargaebility" adversary proceedings.
However, California is NOT part of the 8th Circuit. California, Washington, Oregon, Idaho New Mexico, Alaska and Hawaii are all in the area where the federal Circuit Court is the 9th Circuit Court of Appeals.
Bankruptcy Judges in CD CA California (and in many other bankruptcy courts) require that a creditor who wants to bring an 11 USC 523(a)(3)(B) "nondischargeability" adversary proceeding move to reopen the debtor's bankruptcy case, if that case has been closed, and get the bankruptcy case reopened, before filing the 523(a)(3)(B) adversary proceeding.
New Bankruptcy Filing Fee Increases to Take Effect June 1
April 17, 2014
The Judicial Conference of the United States has approved several bankruptcy related fee increases to take effect starting June 1. Based on the chapter, the cost to file will be:
Chapter 12: $275
The fee schedule changes project to raise about $35 million per year for the courts, based on current case loads.
It's hard to get a Court to Change an Already Entered Order: Tevis v. Burkart, et al. (In re Tevis)
It's hard to get a Court to Change an Already Entered Order: Tevis v. Burkart, et al. (In re Tevis), Case No. EC-13-1211-KiKuJu (9th Cir. BAP Jan. 30, 2014), the Ninth Circuit Bankruptcy Appellate Panel affirmed an order of the bankruptcy court denying a chapter 13 debtor's motion for relief from a prior order under Fed. R. Civ. P. 60(d)(3), demonstrating the high burden to satisfy the grounds of Rule 60(d)(3) and holding that the bankruptcy court did not abuse its discretion in denying the motion. The decision is "not for publication", meaning it has no precedential value, only persuasive value, if other judges agree with the decision's reasoning. "Not for publication" cases can be cited, but must be cited stating "not for publication" decision, to alert reader to the "not for publication" status.
Before filing their chapter 7 bankruptcy case on June 21, 2004, Larry and Nancy Tevis ("Tevises") were entrenched in three legal battles. First, Tevises had initiated state court construction defect litigation regarding a modular home they had purchased with a loan from the State of California Department of Veteran Affairs ("Cal Vet"), secured by Tevises' real property (the "Modular Home Litigation"). After the state court approved a $65,000 settlement that Mr. Tevis agreed to in open court, Tevises later reneged and refused to sign the settlement. The state court granted an order enforcing the settlement order over Tevises' objections, and later dismissed the case. Second, Tevises initiated a malpractice suit against the attorneys who represented them in the Modular Home Litigation, who then filed attorney's liens against the settlement proceeds from the Modular Home Litigation (the "Malpractice Litigation"). Third, Cal Vet initiated an unlawful detainer action against Tevises after they defaulted on their loan.
The chapter 7 trustee and his counsel, Daniel Egan ("Egan"), negotiated a settlement between the trustee, the Modular Home Litigation defendants, and the Malpractice Litigation defendants (the "Settlement Agreement"). During a hearing to approve the Settlement Agreement, Egan represented to the bankruptcy court that: (i) Cal Vet was not a party to the Settlement Agreement; (ii) the trustee was separately negotiating a settlement with Cal Vet (the "Cal Vet Proposal"); and (iii) the trustee anticipated seeking the court's approval of the Cal Vet Proposal. Over Tevises' objection, the bankruptcy court entered an order approving the Settlement Agreement.
The bankruptcy court's approval of the Cal Vet Proposal by November 30, 2004 was a condition precedent to the effectiveness of the Settlement Agreement. On November 16, 2004, the trustee filed a motion to approve the Cal Vet Proposal. The court never heard the motion, however, because Tevises moved to convert their case to chapter 13, and the case was converted on December 1, 2004. The Tevises' chapter 13 plan, which assumed the Settlement Agreement as part of the plan, was confirmed on July 18, 2005.
On March 26, 2013, Tevises filed a motion seeking relief under Fed. R. Civ. P. 60(d)(3) (the ("Civil Rule 60(d) Motion") for fraud on the court with respect to the bankruptcy court's approval of the Settlement Agreement, asserting that the Settlement Agreement was invalid because the court never approved the Cal Vet Proposal. Tevises claimed that Egan's false statement that Cal Vet was not a party to the Settlement Agreement misled the court into approving the Settlement Agreement. The bankruptcy court denied the Civil Rule 60(d) Motion, specifically finding that Tevises had failed to show any fraud on the court because Egan's statements were accurate when made, and further, that it would not have arrived at a different conclusion even if Egan's statements had been false.
Holding and Analysis
The Ninth Circuit Bankruptcy Appellate Panel affirmed the bankruptcy court's order, holding that the court did not abuse its discretion in denying the Civil Rule 60(d) Motion.
Fed. R. Civ. P. 60(d)(3), incorporated by Fed. R. Bankr. P. 9024, permits a court to "set aside a judgment for fraud on the court." To prevail in the Ninth Circuit, the BAP noted that a plaintiff must establish to a clear and convincing standard, egregious conduct aimed to defile or improperly influence the court—perjury alone does not normally constitute fraud on the court. Further, the denial of a motion for relief under Rule 60(d)(3) is reviewed only for abuse of discretion. This standard can only be satisfied if the bankruptcy court applied the wrong legal standard or its findings of fact were illogical, implausible or without support in the record.
The BAP determined Egan accurately stated that Cal Vet was not a party to the Settlement Agreement and that the Cal Vet Proposal was being negotiated separately. Egan's statements were later confirmed when the chapter 7 trustee filed a motion for approval of the Cal Vet Proposal. The Panel held that the bankruptcy court's finding that Egan's statements were accurate was supported by the record. The Panel further noted that the bankruptcy court was not given the opportunity to consider the Cal Vet Proposal prior to the November 30, 2004 deadline because Tevises' motion to convert was granted a day after the deadline. Finally, the Panel noted that Tevises assumed the Settlement Agreement in their confirmed chapter 13 plan.
This decision illustrates the high bar set for parties seeking to set aside an order for fraud on the court under Fed. R. Civ. P. 60(d)(3). The bar is not only difficult to meet in the lower court where the standard is "clear and convincing," but the decision to overturn the lower court's ruling is viewed for an abuse of discretion.
Note: the foregoing analysis appeared on the California State Bar Insolvency Committee e-newsletter of 4/16/14.
Menjivar v. Wells Fargo Bank, N.A.
Menjivar v. Wells Fargo Bank, N.A. (9th Cir. BAP January 28, 2014)(Unpublished): The United States Bankruptcy Appellate Panel (the "BAP") upheld a bankruptcy court's dismissal of the debtors' claims against Wells Fargo Bank ("WFB") without leave to amend. The claims sought to invalidate a trust deed against the debtors' residence relating to a refinance transaction. The BAP found that: (1) any amended allegations in regard to the fraudulent transfer claims were preempted as inconsistent with the Home Owners' Loan Act of 1933 ("HOLA"); (2) the actual fraudulent transfer allegations improperly focused on the transferee's intent; and (3) the constructive fraudulent transfer claims could not survive given that the satisfaction of an antecedent debt through a refinance transaction would constitute reasonably equivalent value.
This decision is marked by BAP as being a "Not for Publication" decision. "Not for Publication" decisions can still be accessed on Westlaw or Lexis, and they can be cited, but when they are cited, the cite must state the decision is "Not for Publication". However, because the decision is marked by the BAP as "not for publication", the decision has no precedential value, though it can have "persuasive" value, if the reader agrees with the case's analysis. It is unclear what the BAP is trying to accomplish, by issuing this decision, on a "hot" topic, yet marking this decision as "not for publication. Mixed message for sure.Facts:
In October 2005, Benjamin and Sarah Menjivar ("Debtors") obtained a loan from WFB's predecessor, World Savings Bank ("World Savings"), to refinance the first and second deeds of trust on their residence. The Debtors refinanced again in January 2007, using most of the loan proceeds to pay off their 2005 home loan.
In July 2007, World Savings persuaded the Debtors to refinance their residence for a third time. The Debtors alleged that World Savings represented they would receive a home loan with a fixed interest rate. The loan documents the Debtors executed stated otherwise. The Debtors claimed World Savings pressured them to close quickly and that the stress of the refinancing resulted in personal tragedies.
WFB became the successor by merger to World Savings. As part of an effort to obtain yet another refinance, the Debtors defaulted on their 2007 loan. WFB recorded a notice of default in August 2010 and a notice of trustee's sale in November 2010.
After filing and dismissing an initial lawsuit against WFB, the Debtors filed a second action against WFB in state court seeking a temporary restraining order ("TRO") to stop a sale of the property. Ultimately, after two earlier filings, the Debtors filed their third bankruptcy case and removed the state court action to the bankruptcy court, commencing the adversary proceeding at issue.
On July 31, 2012, the Debtors filed their First Amended Complaint ("FAC"). Among the multiple claims for relief, the Debtors alleged: (1) that the 2007 notes and trust deeds were constructive fraudulent transfers under California's Uniform Fraudulent Transfer Act ("UFTA"); (2) that the 2007 notes and trust deeds were actual fraudulent transfers under UFTA; and (3) Word Savings gave them no consideration in exchange for the 2007 notes and trust deeds. The bankruptcy court dismissed all claims, with prejudice.Ruling and Reasoning:
The BAP affirmed the bankruptcy court's ruling. First, the BAP held that the Debtor's UFTA claims were inconsistent with the HOLA. In Silvas v. E∗Trade Mortg. Corp., 514 F.3d 1001 (9th Cir. 2008), the Ninth Circuit held that claims for relief based on the California Business and Professions Code were preempted by HOLA. In holding the California statutes were preempted, the Ninth Circuit in Silvas found that the specific factual allegations contained in the complaint referenced activities and conduct subject to the exclusive regulation of the Office of Thrift Supervision ("OTS"). Applying the reasoning in Silvas, the BAP concluded that the factual allegations supporting the UFTA claims – that World Savings misrepresented the terms of the 2007 loans, overcharged for settlement fees, and ultimately extended credit to the Debtors under terms they considered unfavorable – constituted conduct and activities exclusively regulated by the OTS and, in turn, were preempted by HOLA.
Second, as to the Debtors' actual fraudulent transfer claims, the BAP held that, whereas UFTA focuses on the transferor's intent, the Debtors focused on the transferee's intent (see Cal. Civ. Code § 3934.04(a)(1)). More specifically, the Debtors alleged World Savings duped them into entering into the refinance; not that the Debtors effectuated the transfers at issue with any fraudulent intent.
Finally, the BAP held that the Debtors' constructive fraudulent transfer claims were fatally inconsistent with the UFTA, which requires an absence of reasonably equivalent value. The determination of reasonably equivalent value is determined objectively, from the perspective of the transferor's creditors. The BAP found that, from the creditors' perspective, the satisfaction of an antecedent debt through a refinance transaction constituted reasonably equivalent value.Comment:
If it had been marked "for publication", this case would extend the Ninth Circuit's Silvas opinion, which could impact many fraudulent transfer claims in the consumer debtor arena. It is not surprising that the BAP upheld the bankruptcy court's finding that the Debtors' fraudulent transfer allegations were factually inconsistent with the UFTA. This opinion offers an important reminder to practitioners to pay very close attention to ensure that their claims are consistent with the statutes they are relying on, and to ensure that their claims are not preempted by other statutes.
Note: The substance of the foregoing analysis appeared on the California State Bar Insolvency Section e-newsletter of 4/9/14
Analysis: Supreme Court Hears Arguments on Whether an Inherited IRA is Exempt
March 25, 2014
By Charles J. Tabb
Mildred Van Voorhis Jones Chair in Law, University of Illinois, and Resident Scholar for the American Bankruptcy Institute
The United States Supreme Court yesterday heard oral arguments in the case of Clark v. Rameker, on the issue of whether an inherited IRA is exempt. The Seventh Circuit had denied the debtor's exemption, disagreeing with the Fifth Circuit in the Chilton case, as well as the clear majority of lower courts, which had held that an inherited IRA is exempt under section 522(b)(3)(C) or 522(d)(12) (depending on whether the debtor elects the state or federal exemptions). On balance, while it is a close question, the oral arguments appear to indicate that the Court is likely to reverse the Seventh Circuit and hold for the debtor. My sense is that the Justices do not really like the result as a policy matter but think the Code dictates a pro-exemption reading.
After Heidi Heffron-Clark and her husband Brandon Clark filed chapter 7, Heidi claimed an exemption under section 522(b)(3)(C), for an IRA valued at close to $300,000 that she had inherited from her mother Ruth. The trustee (Rameker) objected. If the trustee wins, the Clarks' creditors get that money. If the debtor wins, she keeps all of the money for herself, and indeed does not even have to wait until she is retirement age to start enjoying the funds. It would just be a $300,000 windfall for her (albeit with some tax implications), free from her creditors. Clearly, this was the point at oral argument that most troubled the Justices if they were to hold for the debtor. Justices Ginsburg, Alito, and the Chief Justice all found it quite odd that Congress would have allowed a debtor who had not herself saved the money for retirement to keep such a huge pile of money for herself, ripe for immediate enjoyment. Why Congress would have wanted a debtor to be able to keep all of an inherited IRA, but none of other inherited funds, puzzled them.
Yet, the questioning suggested that a majority of the Justices - led most vociferously by Justice Breyer - found the statutory reading to favor the debtor. The relevant statutory exemption language is for "retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under" certain enumerated sections of the Internal Revenue Code, including the ones for IRAs. The inherited funds indisputably satisfied the latter part of the statutory test, as they were exempt from taxation under a listed section. The battle is over whether they are "retirement funds" within the meaning of the exemption. The debtor argued that they are, as they had that status when set aside initially in the account by the debtor's mother, and nothing in the statute limited the exemption to "the debtor's" retirement funds. The trustee countered by arguing that after being inherited, in the hands of the non-spousal debtor, they no longer constituted retirement funds at all. While still tax exempt, the attributes relevant to retirement had changed significantly so as to negate that characterization; for example, the debtor could withdraw the money immediately (before age 59½), and indeed was not even permitted to wait until she was 59½, but had to start withdrawals within a short time. Also, she could neither make new retirement contributions to the fund nor roll it over.
The Justices, though, seemed persuaded by the plain meaning of the unqualified reference to "retirement funds," especially given the telling omission of any further requirement that they be "the debtor's" retirement funds. This omission was notable, the Justices thought, since all of the other enumerated exemption provisions in section 522(d) do include a specific reference to "the debtor's" interest in the property at issue, be it a car, a tool of the trade, a homestead, or whatever. The Justices also seemed to agree with the debtor that the qualifying language "to the extent" in the exemption favored a broader reading of the "retirement funds" language. Further, the Court worried about the administrative complexity that would result if "retirement funds" was not given a broad meaning. In short, several of the Justices thought that the phrase "retirement funds" was not necessarily and definitionally limited to funds set aside originally by the debtor (or inherited only by a spouse), but could include a retirement fund that was inherited from its creator by someone other than a spouse.
Economically and demographically, this is a huge issue. Massive amounts of wealth are being passed down to future generations via inherited retirement vehicles as both "the greatest generation" and baby boomers are dying. Whether creditors get to share in that largesse or not is a very significant question; the magnitude is staggering. Forty percent of U.S households have IRAs, totaling over $5 trillion in value. Indisputably, in the hands of the person who set up the IRA, creditors cannot touch the money in bankruptcy. Is that protection lost if the creator of the IRA dies and the funds are inherited by someone other than her spouse? When the Court hands down its decision in Clark v. Rameker, we will know the answer. After the oral arguments, it appears likely that the Court will hold for the debtor and maintain the exemption; in short, the exempt status of "retirement funds" in bankruptcy will not die with the creator of the account.
Fowler vs. U.S. Bank, N.A., 2014 Westlaw 850527 (District Court S.D. Tex. 2014).
Facts: Two homeowners facing foreclosure filed an action against their mortgage lender under the Truth in Lending Act ("TILA"), alleging a variety of violations. One of the plaintiffs' theories was that the mortgage had been assigned and that the assignee had failed to inform the borrowers of the assignment. The lender moved to dismiss the complaint, arguing that the borrowers themselves had disputed whether the assignment had actually taken place.
Reasoning: Although the court dismissed some of the plaintiffs' claims, the court upheld the claim under 15 U.S.C.A. §1641(g), enacted in 2009, which provides that "not later than 30 days after the date on which a mortgage loan is sold or otherwise transferred or assigned to a third party, the creditor that is the new owner or assignee of the debt shall notify the borrower in writing of such transfer . . . ." The court reasoned that the borrowers could plead (in the alternative) either that the assignment had not taken place or that the assignee had failed to provide the proper notification of the assignment. The court further noted that the borrowers had alleged that they had conducted a title search, which failed to reveal any recorded assignment of the mortgage.
Comment: Although the potential damage award for violation of this new statute is relatively small, the effect of this rule could be significant. It provides a convenient "hook" upon which many distressed homeowners can hang a TILA claim, thus temporarily forestalling foreclosure. As everyone now knows, the documentation surrounding the assignment of mortgages has been slipshod, and violations of §1641(g) are quite common.
This analysis is from the California State Bar Insolvency Committee e-newsletter of 3/14
Preview: Scope of Protections for Retirement Funds in Bankruptcy at Issue in Case Before Supreme Court on Monday
Scheduled for oral argument on Monday, Clark v. Rameker presents the Supreme Court with a case that has a clean and straightforward question of statutory interpretation, with no looming shadow of oppressive media scrutiny, according to a SCOTUSBlog preview of the argument. Among the assets exempt from the estate of a debtor in bankruptcy, Congress has with steadily increasing generosity included a wide variety of retirement funds. The specific question in this case is whether those provisions exempt the $450,000 IRA that petitioner Heidi Clark inherited upon the death of her mother. If the IRA is exempt, she can keep it and use it for support after her bankruptcy; if it is not exempt, the bankruptcy court will take it and use it to pay creditors. The relevant statute is Bankruptcy Code § 522(b)(3)(C), which exempts "retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under [seven listed sections] of the Internal Revenue Code." The parties agree that the inherited IRA is exempt from taxation under one of those sections. The sole issue in dispute is whether the inherited IRA constitutes "retirement funds" for purposes of paragraph (C). Note that for bankruptcy debtors who have resided in California continuously for over two years, as of the date the debtor's bankruptcy case is filed, such debtors (which is the great majority of individuals who file bankruptcy in California), do NOT used the federal (11 USC 522(b)(3)(C) exemptions. Instead California residents for over 2 years who file bankruptcy use the California state exemptions, which are CA CCP 703 and 704 sets of exemptions (debtors get to choose which). For such debtors, though the soon to be decided US Supreme Court case might be helpful by analogy, that case will NOT be controlling. Rather, the language of the California exemption statutes will be controlling.
Law v. Siegel (In re Law)
Law v. Siegel (In re Law), No. 12-5196, 571 U.S. (United States Supreme Court 3/4/14): In a unanimous decision authored by Justice Scalia, the Supreme Court found that a bankruptcy court may not surcharge the homestead exemption as a result of the debtor's misconduct.
The bankruptcy court found that the debtor created a fictional loan "to preserve his equity in his residence beyond what he was entitled to exempt" by perpetrating "a fraud on his creditors and the court." That court surcharged the debtor's $75,000 homestead exemption to reimburse the trustee's attorney fees. The surcharge was upheld on appeal to the Bankruptcy Appellate Panel, 2009 WL 7751415 (Oct. 22, 2009) (per curiam), and the Ninth Circuit Court of Appeals, In re Law, 435 Fed. Appx. 697 (2011) (per curiam), on the basis that the surcharge reimbursed actual costs incurred by reason of the fraud, and would protect the integrity of the bankruptcy process. The Supreme Court reversed.
The National Consumer Bankruptcy Rights Center filed an amicus brief in the Supreme Court on behalf of the NACBA membership in which it set out the arguments ultimately relied on by that Court in reversing the decision.
In re NNN Parkway 400 26, LLC, 2014 Westlaw 309734 (Bankr. C.D. Cal. 2014).
In re NNN Parkway 400 26, LLC, 2014 Westlaw 309734 (Bankr. C.D. Cal. 2014). A bankruptcy court in California has held that a "new value" Chapter 11 reorganization plan requires a genuine market test of the value of the equity, that the lender's deficiency claim could not be gerrymandered where the guarantor was insolvent, and that the artificial impairment of a consenting class cannot be the result of abusive conduct.
Facts: A group of Chapter 11 debtors sought confirmation of a plan of reorganization that sought to invoke an exception to the "absolute priority rule" of 11 U.S.C.A. § 1129(b)(2)(B)(ii). That rule requires, in essence, that if the non-consenting unsecured creditors are not paid in full, the equity holders cannot retain anything following the reorganization. Under the plan, the equity holders would retain some interest in the reorganized companies, in exchange for the contribution of some "new value." In addition, the plan separately classified (or "gerrymandered") the multimillion dollar deficiency claim of the secured lender. The plan also identified a very small single-creditor class as an "impaired consenting class," for purposes of plan cramdown. The lender objected to the plan on a variety of grounds, and the court denied confirmation.
Reasoning: The court first explained that under Bank of America Nat. Trust and Sav. Ass'n v. 203 North LaSalle Street Partnership, 526 U.S. 434, 119 S. Ct. 1411, 143 L. Ed. 2d 607 (1999), the plan proponent must show that the proposed "new value" is quantitatively sufficient:
LaSalle requires that the quantum of new value be market tested; otherwise the parties and the court cannot know whether the amount of new value proposed in the debtor's plan is the most available. And if more (or better) could be gotten elsewhere, then the equity is effectively keeping a form of property or interest in the debtor despite not paying the dissenting creditors in full, by exercising its exclusive "option" to direct/determine the source of the new value. But LaSalle is frustratingly vague as to what exactly a debtor must do to "market test" the interest ...
Given that vagueness, the debtors attempted to show that their private marketing efforts had constituted a de facto "market test," since they had tried to reach out to investors to purchase the equity. The court was unimpressed, noting that "[n]o contact log was kept . . . [n]o advertisements of any kind were undertaken . . . whether in commercial real estate investor-oriented magazines or otherwise." The court held that the debtors' marketing program fell far short of the required due diligence:
This court does not hold that in every case an investment banker must be hired, whose fee is tied to success in finding the most money on the best terms. But engagement of such a person with that goal and motivation would help. The court does not hold that advertisements in targeted local and national newspapers are always required, or that they would even be appropriate in every case. But the court does hold that debtors bear the burden of showing that the new money offered is the most and best reasonably obtainable after some "market testing" in order to cram down over the objections of a non-consenting class of unsecured creditors. This probably requires, at a minimum, demonstration of a systematic effort designed to "market test" the deal.
Moving to the issue of claims classification, the debtors argued that the lender's deficiency claim could be separately classified because the lender held a guarantee, unlike other unsecured creditors, in conformity with the holding in In re Loop 76, LLC, 465 B.R. 525 (9th Cir. BAP 2012). But the court held that the debtor had failed to show that the guarantor was insolvent, thus casting doubt on the basis for gerrymandering:
[S]ince this entire question of separate classification is one addressed to separating reality from façade, it follows that the basis for the distinction must be one that is meaningful. . . . [T]his court holds that a guaranty from an insolvent guarantor provides nothing meaningful and so it becomes a distinction without a difference and cannot alone support separate classification.
Finally, the debtor claimed that it had provided a plausible "impaired consenting class" for purposes of cramdown, since it owed approximately $10,000 to one creditor for the purchase of a truck. The court noted that there was testimony that the truck had been unnecessary, that the debtor had no place to store it, and that its purchase was simply a strategy. The court held that this was a case of impermissible "artificial impairment:"
This smells to the court like a device to create an impaired consenting class. Moreover, the parties apparently agree that there are and have been at all times since the petition hundreds of thousands on deposit [in funds available to the debtors], so it is entirely unclear why this creditor is impaired at all. A doctrine has emerged that "artificial impairment" is a form of gerrymandering and when abusively used is held to be antithetical to the good faith which must be at the center of any reorganization effort.
Comment: This opinion is significant because it adds a healthy dose of common sense to the murky jurisprudence surrounding the cramdown process. First, the court required genuine efforts by the debtors to "market test" their new value plan, going so far as to spell out the investor outreach program that a debtor must undertake. As far as I know, no other reported opinion has provided such detailed guidance.
Second, the court's rejection of gerrymandering in this case adds an important qualification to the rule in Loop 76, supra: it is not enough to show that the lender holds a guarantee. Instead, the debtor must also show that the guarantor is solvent. Otherwise, there is no good reason to separately classify the lender's deficiency claim. I do not know whether this "friendly amendment" to the holding in Loop 76 will survive appeal, but I hope that it will. Otherwise, the holding in Loop 76 will create a huge loophole in the cramdown process: many (and perhaps most) lenders hold guarantees, thus setting the stage for routine gerrymandering.
Third, the court's "reality-based" rejection of "artificial impairment" is refreshing. The court was able to look at the circumstances surrounding the collusive creation of the "impaired consenting class" and to reject the debtors' transparent gamesmanship. However, I am not sure that the court's ruling on this point would withstand appeal in light of In re L & J Anaheim Associates, 995 F.2d 940 (9th Cir. 1993), which permitted a creditor that propounded a plan of the organization to "impair" itself by accelerating its own recovery. If the blatantly collusive impairment in that case was sufficient, then I don't see why the purchase of the truck in this case would not pass muster.
Finally (and pedantically), I am delighted to see that the court capitalized the word "Chapter" in "Chapter 11," perhaps following the lead of the Ninth Circuit in In re Bellingham Ins. Agency, Inc., 702 F.3d 553 (9th Cir. 2012). I continue to believe that the bankruptcy bar's ostentatious use of the lower case form is without statutory justification and is nothing more than artificial orthographic impairment.
For a critical discussion of the Loop 76 opinion, see 2012 Comm. Fin. News. 19, When Secured Lender Holds Non-Debtor Guarantees, Lender's Unsecured Deficiency Claim May Be Separately Classified, Thus Enabling Debtor to Confirm Cramdown Plan Using a Separate Class of Impaired Consenting Unsecured Creditors.
This analysis is from CA State Bar Insolvency Committee e-newsletter
Janura et. al. v. Saridakis (In re Saridakis), BR
Janura et. al. v. Saridakis (In re Saridakis), BR , 2013 WL 6488276, 9th Cir.BAP (Cal.), 12/10/13): The U.S. Bankruptcy Appellate Panel of the Ninth Circuit ("BAP") held that post-trial discovery of a default judgment, that apparently was entered in a state court action contemporaneously with, or immediately following, a trial in the bankruptcy court was not newly discovered evidence "of such magnitude that production of it earlier would likely have changed the outcome of the case." What to learn from this decision: Whatever evidence you have, present that evidence before the Court rules for the first time, because its very hard to get reconsideration of an already issued decision, based on "newly discovered evidence", or on any other ground.
Brown v. Ferroni, BR , 2014 WL 695090 (District Court, ED PA 2014)
Brown v. Ferroni, BR , 2014 WL 695090 (District Court, ED PA 2014): U.S. District Court, Eastern District of Pennsylvania (Philadelphia), has become an additional court holding that the "absolute priority rule" applies in individual Chapter 11 bankruptcy cases, and that the 2005 BAPCPA amendments to the Bankruptcy Code did NOT eliminate the absolute priority rule from applying in Chapter 11 cases of individuals.
Courts are split nationwide at all levels (Bankruptcy Court, District Court, BAP, and Court of Appeals), as to whether or not the 2005 BAPCPA Amendments eliminated the absolute priority rule, in Chapter 11 bankruptcy cases of individuals (as opposed to Chapter 11 bankruptcy cases of corporations and partnerships, where everyone agrees the absolute priority rule applies). It seems inevitable that this nationwide split will eventually be ruled on by the US Supreme Court.
Brown v. Ferroni holds that Congress didn't repeal the so-called absolute priority rule for individuals in chapter 11 when it amended the Bankruptcy Code in 2005, according to a recent ruling by a district judge in Philadelphia, Bloomberg News reported yesterday. The issue has divided federal courts, as three circuit courts of appeal and 17 bankruptcy courts follow the narrow view that absolute priority survives in individuals' chapter 11s. One bankruptcy appellate panel, one district court and seven bankruptcy courts read the amendments broadly and contend that the absolute priority rule no longer applies to individuals in chapter 11, according to U.S. District Judge Timothy J. Savage in Philadelphia. The case turns on language added in 2005 to §1129(b)(2)(B)(ii) of the Bankruptcy Code and §1115.
The majority take the view that the plain meaning of the two statutes together only allows an individual using cramdown to keep property that was obtained after filing for bankruptcy. In his Brown v. Ferronia decision, US District Judge Savage found the language unambiguous, and even if it weren't, he nonetheless subscribed to the narrow view.
He said that there is nothing in the statute or legislative history to indicate that Congress intended to abrogate absolute priority for individuals. Because repeal by implication is "disfavored," Judge Savage concluded that absolute priority remains because nothing in the statute shows an intention to repeal the rule that existed before 2005.
The most recent appeals court decision on the issue came down in May from the circuit court in New Orleans in a case called Lively.
Hudson v. Martingale Investments, LLC (In re Hudson), B.R. , 2014 WL 128965 (9th Cir. BAP January 14, 2014)
Hudson v. Martingale Investments, LLC (In re Hudson), B.R. , 2014 WL 128965 (9th Cir. BAP January 14, 2014): The U.S. Bankruptcy Appellate Panel of the Ninth Circuit ("BAP") reversed the bankruptcy court's ruling to annul the automatic stay. The BAP held that the bankruptcy court abused its discretion by basing the ruling on inadmissible evidence.
On March 5, 2013 at 10:28 a.m. (the "Petition Date"), John E. Hudson (the "Debtor") filed a chapter 13 bankruptcy petition. Martingale Investments, LLC ("Martingale") alleged that at 10:01 a.m. on the same day, Martingale bought the Debtor's home at a foreclosure sale. The Debtor did not vacate his home and Martingale moved to lift the automatic stay in order to proceed with its unlawful detainer action pending in a state court.
In its motion, Martingale sought to annul the automatic stay retroactive to the Petition Date by arguing that the foreclosure sale occurred pre-petition. In support of its motion, Martingale submitted two declarations. The first declaration, by Martingale's property manager Olivia Reyes ("Reyes"), stated that she was the custodian of Martingale's books and records with "personal knowledge" of the Debtor's account. To support that Martingale purchased the property at 10:01 a.m., before the bankruptcy filing, Reyes attached a report (the "Sale Report") from the trustee who conducted the sale. The Sale Report was actually an email with essential information about the foreclosure sale, prepared by a third party, Priority Posting & Publishing, Inc. ("Priority"). The Debtor objected to the motion, arguing in part, that because the Sale Report was hearsay and not authenticated, Martingale failed to submit any admissible evidence. In response, Martingale submitted a second declaration. The second declaration was from the trustee's employee, Ric Juarez ("Juarez"), who declared that the foreclosure sale was completed at 10:01 a.m. Juarez's declaration also relied on the email message from Priority.
The bankruptcy court granted Martingale's motion and found that the evidence was admissible. The bankruptcy court ordered annulment of the automatic stay. The Debtor timely appealed to the BAP, arguing that the Sale Report was inadmissible evidence.
The BAP reversed the bankruptcy court's ruling because there was no admissible evidence to support the bankruptcy court's ruling. The BAP reviewed various Federal Rules of Evidence ("FRE") to conclude that the Sale Report was inadmissible hearsay.
The BAP first noted that the Sale Report, which supported the bankruptcy court's ruling, was hearsay pursuant to FRE 801(c). The BAP noted the requirement of FRE 802 that hearsay evidence must be excluded unless an exception applies. Reviewing FRE 803(6), which sets forth the "business record exception," the BAP noted that Reyes and Juarez qualified as custodians and other qualified witnesses. Reyes and Juarez's declarations, however, contained no foundation for admissibility of the Sale Report, which was not Martingale's or the trustee's record, but Priority's record.
The BAP went on to note that the business record exception can apply to records and documents received from another business. In order for the exception to apply, there must be testimony that (1) the document was kept in the regular course of business and (2) the business regularly relied on the document. Thus, in order for the business record exception to apply to the Sale Report, the BAP reasoned that Martingale should have shown that Martingale or the trustee (1) kept the Sale Report in the regular course of business and (2) regularly relied on the Sale Report.
Having explained what was required for the Sale Report to be admissible evidence, the BAP concluded that Martingale failed to make such showing in this case. The BAP held that Reyes and Juarez's declarations failed to state that Martingale or the trustee (1) kept the Sale Report in the regular course of business and (2) regularly relied on the Sale Report. Because the declarations failed to provide these two foundational showings, the BAP held that the business records exception did not apply to the Sale Report.
The BAP concluded that the bankruptcy court's ruling must be reversed because there was no other evidence on the record regarding the timing of the foreclosure sale. Thus, the admission of the Sale Report was prejudicial error requiring reversal of the ruling.
Bradley vs. Franklin Collection Service, Inc.
Bradley vs. Franklin Collection Service, Inc., F.3d , 2014 Westlaw 23738 (11th Cir. 2014). The Eleventh Circuit Court of appeals held that an attempt by a collection agency to collect a 33% "collection fee" violates the Federal Debt Collection Practices Act, unless the consumer has agreed in advance to pay "reasonable collection agency fees."
Facts: Two patients incurred medical expenses. One of the patients signed an agreement stating that he would pay "all costs of collection including ... reasonable collection agency fees." The other patient's agreement stated that he would pay "all costs of collection," but that agreement did not contain any reference to collection agency fees. Both accounts were unpaid; the healthcare provider referred the accounts to a collection agency, which tacked on a fee of roughly 33%.
After the collection agency contacted each patient, each patient brought suit under the Federal Debt Collection Practices Act ("FDCPA"), claiming that the extra fee had violated the statute. The District Court dismissed both suits.
Reasoning: The appellate court affirmed the dismissal of one of the claims but reversed as to the other. Noting that this was a question of first impression in the Eleventh Circuit, the court held that in the case of the patient who had not specifically agreed to pay "collection agency fees," the collection agency had no right to impose the fee, since the fee bore no relation to the actual cost of the collection effort. However, the court noted that "a percentage-based fee can be appropriate if the contracting parties agreed to it."
Comment: Law Professor Dan Schechter, of Loyola Law School, who wrote this analysis, says: This ruling may be significant far beyond the arena of consumer debt collection. First, it provides some drafting guidance: whenever an agreement contains a "costs and fees" clause, it may be advisable to include specific language referring to "reasonable collection agency fees." Second, the court's decision seems to mean that even if those fees exceed the actual costs of collection, those fees can still be collected.
I am not sure, however, whether that second point would be valid in all jurisdictions. For example, in California, the courts frequently strike down collection costs (such as late fees) that are in excess of the creditor's actual administrative costs, on the theory that those extra charges are really disguised liquidated damages, even if the debtor has agreed in writing to pay those charges.
For discussions of earlier decisions dealing with the relationship between liquidated damages and the prevailing party's actual costs, see:
– 2012 Comm. Fin. News. 78, 2012 Liquidated Damages Provision in Commercial Lease Is Unenforceable Because It Bore No Relationship to Actual Damages Suffered by Tenant Due to Landlord's Failure to Complete Redevelopment Project.
– 2008 Comm. Fin. News. 68, Prepayment Premium in Commercial Promissory Note Is Not Invalid as Liquidated Damages Provision Because It Reflects Lender's Actual Loss Resulting from Prepayment.
– 2007 Comm. Fin. News. 52, Creditor May Not Collect Late Charge As a Percentage of Final Balloon Payment Because Late Charge Does Not Represent Actual Administrative Costs and Is Therefore Unlawful Penalty.
This case report appeared in the CA State Bar Insolvency Committee e-newsletter of 2/4/14
First-Citizens Bank & Trust Co. v. Reikow
First-Citizens Bank & Trust Co. v. Reikow, 313 P.3d 1208 (Wash.App. 2013) An appellate court in Washington has held that despite a broad waiver of antideficiency protections contained in a guarantee, the guarantor was nevertheless protected by the "fair value" limitation on the lender's right to recover. Though this is a Washington state court decision, not a federal court decision, it is useful because it highlights certain issues relating to liability of persons who GUARANTEE they will pay debts owed by some other person/entity.
Facts: A lender funded a $6.7 million construction loan to a development company. The equity holders execute personal guarantees, which contained waivers stating that the guarantors waived "any and all rights or defenses arising by reason of (A) any 'one action' or 'anti-deficiency' law or any other law which may prevent Lender from bringing any action, including a claim for deficiency, against Guarantor . . . . "
The lender eventually foreclosed nonjudicially, submitting a successful credit bid for $5.2 million, and then sought to recover the balance due from the guarantors. When the lender moved for summary judgment, the guarantors produced an Internal Revenue Service form filed by the lender, listing the fair market value of the property as $7.8 million. The trial court, on its own motion, ordered a "fair value" hearing and found that the value of the property exceeded the amount due on the loan. The trial court entered judgment for the guarantors, and the lender appealed.
Reasoning: On appeal, the lender argued that the guarantors had waived the Washington "fair value" statute, RCW 61.24.100(3), which states that a guarantor's deficiency liability is limited to the difference between the outstanding loan balance and the "fair value" of the collateral. The court held that no waiver "would entitle the bank to a larger deficiency judgment than the statute allows." Further, the court doubted whether the language of the guarantee constituted an adequate waiver: "[T]he broad boilerplate waiver in the guarantees' fine print could hardly defeat the explicit and specific provisions of [the statute], which plainly aimed to protect guarantors from having their obligations enlarged."
Comment: Law Professor Dan Schechter, of Loyola Law School, who wrote this analysis, says: I am going to go way out on a limb and predict reversal by the Washington Supreme Court. I know of no authority that says that the protection of the antideficiency statutes can never be waived by a sophisticated guarantor; therefore, if there were an adequate waiver in the guarantees, that waiver should be enforceable. Second, I think that there was a proper waiver in this case. The guarantors waived "any and all rights or defenses arising by reason of (A) any 'one action' or 'anti-deficiency' law or any other law which may prevent Lender from bringing any action, including a claim for deficiency, against Guarantor . . . . " The "fair value" statute is unquestionably included within the scope of that sweeping language.
However, whether this opinion is reversed or not, I predict two more outcomes. First, the Washington lending community will soon seek the enactment of a statute comparable to California Civil Code §2856(c), which specifically authorizes the following "safe harbor" waiver:The guarantor waives all rights and defenses that the guarantor may have because the debtor's debt is secured by real property. This means, among other things:
(1) The creditor may collect from the guarantor without first foreclosing on any real or personal property collateral pledged by the debtor.
(2) If the creditor forecloses on any real property collateral pledged by the debtor:(A) The amount of the debt may be reduced only by the price for which that collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price.This is an unconditional and irrevocable waiver of any rights and defenses the guarantor may have because the debtor's debt is secured by real property. These rights and defenses include, but are not limited to, any rights or defenses based upon Section 580a, 580b, 580d, or 726 of the Code of Civil Procedure.
(B) The creditor may collect from the guarantor even if the creditor, by foreclosing on the real property collateral, has destroyed any right the guarantor may have to collect from the debtor.
Second, I predict that even if no such legislation is enacted in Washington, lenders will now draft guarantees using language similar to the "safe harbor" wording of the California statute.
This case report appeared in the CA State Bar Insolvency Committee e-newsletter of 2/4/14
In re H Granados Communications, Inc.
In re H Granados Communications, Inc., 2013 Westlaw 6838709 (9th Cir. BAP 2013. Creditor and creditor attorney ordered to pay monetary sanctions for violating bankruptcy automatic stay. The United States Bankruptcy Appellate Panel of the Ninth Circuit ("BAP") recently upheld sanctions of $23,072.09 against a creditor and its counsel in civil contempt under 11 U.S.C. § 105(a) for violation of the bankruptcy automatic stay.
In September 2011, Rediger Investment Corporation ("Rediger") through its counsel, the Duringer Law Group, PLC ("Duringer Firm" and, jointly, the "Appellants") commenced an unlawful detainer action in state court against H Granados Communications, Inc. ("debtor") and its president, Henry Granados. Four months later, on January 8, 2012, the debtor filed for bankruptcy relief under Chapter 11.
Debtor listed Rediger on its list of 20 largest creditors and thus Rediger promptly received a Notice of Bankruptcy as well as notices throughout the bankruptcy case. Debtor also filed the Notice of Bankruptcy in the state court action on or about the petition date. Despite these notices, the Duringer Firm continued to prosecute the state court action against debtor during the first three months of 2012: it obtained a default judgment against debtor, filed a declaration of accrued interest, and obtained a writ of execution.
On November 1, 2012, debtor's counsel, apparently unaware of the state court proceedings beforehand, filed a notice of stay in the state court. One month later, however, the Duringer Firm caused the Los Angeles Sheriff to levy on debtor's DIP bank account which deprived the debtor of the use of $27,941.26. In response, debtor's counsel wrote the Sheriff and the Duringer Firm advising of the pending bankruptcy and demanding the release of the levy. Appellants refused.
In December 2012, debtor moved for an order to show cause ("OSC") why Appellants should not be found in contempt under Section 105(a) for willfully violating the automatic stay. The bankruptcy court issued and then heard the OSC. It found that both Rediger and the Duringer Firm willfully violated the stay and therefore held them in contempt. After a continued hearing on the sanctions issue, the court awarded compensatory sanctions for costs incurred as a result of the stay violation, which included attorneys' fees.
On appeal, the BAP upheld the ruling of the bankruptcy court.
The BAP found that because the Duringer Firm conceded that the Notice of Bankruptcy was filed in the state court action at the commencement of the bankruptcy, it consequently also conceded that the stay was willfully violated. A party willfully violates the automatic stay if (1) it knew of the automatic stay, and (2) the actions that violated the automatic stay were intentional. In re Dyer, 322 F.3d 1178, 1191 (9th Cir. 2003). As to the second prong, the BAP found that the "Duringer Firm, on behalf of its client Rediger, pursued relief in the State Court Action that violated the stay: namely, moving for and then obtaining a default judgment; filing a declaration of accrued interest; obtaining a writ of execution; and causing the Los Angeles Sheriff to levy on the debtor's DIP bank account." The BAP also found that the "Duringer Firm also failed to take affirmative action to undo the effects of stay violative action after receiving the November 2, 2012 notice; it did not vacate, and it did not cancel, the default judgment."
Appellants challenged the sanctions award on three grounds: (1) under Sternberg v. Johnson, 595 F.3d 937 (9th Cir. 2010), damages for stay violations under Section 105(a) are limited to efforts to enforce the stay or remedy the violation, (2) debtor must show the Appellants' actions interfered with the debtor's reorganization efforts, and (3) the charges awarded were beyond the scope authorized by Ninth Circuit and United States Supreme Court authority and were otherwise unreasonable.
The BAP flatly rejected each argument. First, the bankruptcy court awarded sanctions under Section 105(a). Sternberg did not address that statute and therefore "does not limit the availability of contempt sanctions, including attorney fees, for violation of the automatic stay, where otherwise appropriate." Sternberg, 595 F.3d at 946. Second, when calculating damages for civil contempt violations under Section 105(a), it is irrelevant whether a creditor's stay violation interferes with a debtor's reorganization efforts. The several cases cited by Appellants in support address damages under the predecessor of Section 362(k) and are therefore inapposite. Third, attorneys' fees and costs incurred in litigating issues which flow from the stay violation are proper under Section 105(a). Moreover, based on the detailed records submitted in support by debtor, and the bankruptcy court's prior approval, the BAP found the debtor's requested fees and costs reasonable and supported by evidence.
It is hardly surprising that the BAP upheld the bankruptcy court's finding that Appellants willfully violated the automatic stay. Even if Appellants had not conceded the point, the record clearly demonstrates that Appellants knew of the stay and that pressing forward with the unlawful detainer complaint and eventually levying on debtor's DIP account, were intentional acts.
It is equally unsurprising that the BAP rejected debtor's arguments concerning the validity and reasonableness of debtor's fee requests. The authority cited by Appellants was either inapposite or, worse, contrary to the point they were trying to make. In challenging fees, the Ninth Circuit requires that a party expressly identify the time entries that are objectionable. This opinion offers an important reminder to practitioners to identify and address the relevant underlying statutes. Here, Appellants seem to attack debtor's sanction request with authority analyzing Section 362(k) rather than Section 105(a).
Finally, this opinion offers another reminder that if you prevail on a contested motion which will likely be appealed, you should consider preparing an order setting forth findings of fact and conclusions of law. The bankruptcy court did not make detailed findings of fact and conclusions of law but the record here provided the BAP with a "full, complete, and clear view of the issues on appeal." That may not always be the case. First Yorkshire Holdings, Inc. v. Pacifica L 22, LLC (In re First Yorkshire Holdings, Inc.), 470 B.R. 864, 871 (9th Cir. BAP 2012). A party can avoid a lot of problems on appeal by putting forth a little effort crafting detailed findings of fact and conclusions of law at the trial court level.
This case report is from the California State Bar Insolvency Committee e-newsletter of 2/3/14
Public Comment Period Ending Soon for Proposed Amendments to the Federal Rules of Bankruptcy Procedure
The Judicial Conference Advisory Committee on Bankruptcy Rules has proposed amendments to the Federal Rules of Bankruptcy Procedure and Official Forms, and requested that the proposals be circulated to the bench, bar, and public for comment. On August 15, 2013, the public comment period opened for the proposed amendments to Bankruptcy Rules 2002, 3002, 3007, 3012, 3015, 4003, 5005, 5009, 7001, 9006, and 9009, and Official Forms 17A, 17B, 17C, 22A-1, 22A-1Supp, 22A-2, 22B, 22C-1, 22C-2, 101, 101A, 101B, 104, 105, 106Sum, 106A/B, 106C, 106D, 106E/F, 106G, 106H, 106Dec, 107, 112, 113, 119, 121, 318, 423, and 427. The public comment period closes on February 15, 2014.
Blade Energy Pty Ltd. et al. v. Rodriguez (In re Rodriguez)
Blade Energy Pty Ltd. et al. v. Rodriguez (In re Rodriguez)—9th Cir. BAP 12/19/13. This is an "unpublished" decision. The United States Bankruptcy Appellate Panel of the Ninth Circuit (the "BAP") has affirmed a bankruptcy court's (Bankruptcy Judge Scott Clarkson, Bankruptcy Court, CD CA) dismissal of an adversary proceeding as a discovery sanction for failure to comply with initial discovery rules and the court's procedural rules.
The plaintiffs and appellants (the "Appellants") in this case brought an action against appellee and debtor Jacqueline Rodriguez (the "Appellee" or "Ms. Rodriguez") seeking a determination that their claims against her were non-dischargeable in bankruptcy pursuant to 11 U.S.C. §§ 523(a)(2)(A), (a)(2)(B), (a)(4), and (a)(6). As required by a local bankruptcy rule ("LBR"), Appellants served with the summons and complaint a copy of the bankruptcy court's "Early Meeting of Counsel and Status Conference Instructions" ("Rule 26 Instructions"). The Rule 26 Instructions require, among other things: (1) compliance with LBR 7026-1, (2) a meet and confer at least 21 days before the status conference, and (3) the filing of a joint status conference statement if an answer has been filed, or the filing of a unilateral status conference statement if an answer has not been filed.
Instead of filing an answer, Ms. Rodriguez moved to dismiss. The Appellants filed a response to the motion but failed to respond to multiple correspondence and inquiries from Ms. Rodriguez's counsel about setting the Federal Rule of Civil Procedure ("Federal Rule") 26 meeting. A limited telephonic meeting took place 18 days after the deadline for a meeting, and an untimely unilateral report was filed on the same day indicating that the required Federal Rule 26 meeting had finally occurred.
The bankruptcy court dismissed the action due to the failure to comply with the Rule 26 Instructions, as well the court's civil and local rules in lieu of monetary sanctions that had previously proven ineffective in the case.
In affirming the lower court's dismissal, the BAP examined Federal Rule 16(a), applicable in adversary proceedings pursuant to Federal Rule of Bankruptcy Procedure 7016, and LBR 7016-1. The BAP found it undisputed that the Appellants had failed to participate in a Federal Rule 26 meeting or timely file either a joint or unilateral status conference statement.
The BAP then explained that to overturn a dismissal ordered as a discovery sanction, the appellate court must "have a definite and firm conviction that it was clearly outside the acceptable range of sanctions," citing Malone v. U.S. Postal Service, 833 F.2d 128, 130 (9th Cir. 1987). The BAP enunciated the five factors a trial court must weigh before an action is dismissed as a sanction for lack of prosecution: "(1) the public's interest in expeditious resolution of litigation; (2) the court's need to manage its docket; (3) the risk of prejudice to the defendant; (4) the public policy favoring disposition of cases on their merits; and (5) the availability of less drastic sanctions." Citing Malone, 833 F.2d at 130; and Thompson v. Hous. Auth., 782 F.2d 829, 832 (9th Cir.), cert. denied, 479 U.S. 829 (1986).
In upholding the selection of the sanction of dismissal over monetary sanctions, the BAP strongly supported Judge Clarkson's issuance of a harsher penalty, finding that "[w]hen challenged by the bankruptcy court on his missteps [counsel ] had difficulty understanding, in effect, what all the fuss was about [and adding] [t]his lack of comprehension of the impact of dilatory practice on the operation of a trial court is exactly why a sanction stronger than a monetary sanction was warranted in this case."
In upholding the dismissal of adversary proceedings for failure to comply with the weighty requirements of Federal Rule 26, the least of which are obligations to meet and confer and file status conference statements on a timely basis, it seems apparent that the BAP was supportive of an effort by Judge Clarkson to change "[t]he practice culture of the bar [appearing before the bankruptcy court that] appears to have relegated monetary sanctions for noncompliance with procedural rules to a cost of doing business."
Federal Rule 26 contains requirements for early initial disclosures "without awaiting a discovery request" supportive of a party's claims. Absent a stipulation or court order to the contrary (often contained in a standard order setting dates and deadlines in a proceeding) or an objection during the Federal Rule 26(f) conference to the rule's deadlines, litigants can be substantially prejudiced if their counsel is not alert to his or her obligations. Federal Rule 26(a)(3)(B) for example provides that all objections to the admissibility of materials identified under Federal Rule 26(a)(3)(A)(ii) not made within 14 days after disclosures are made are (with the exception of objections under Federal Rules of Evidence 402 and 403) waived unless the court orders otherwise. Practitioners are well advised to ascertain before filing an action the extent to which Federal Rule 26 is in force in any particular court, identify all dates set by local rule or practice, and avoid the untimely and incomplete compliance that bankruptcy courts, given ever dwindling judicial resources, are less and less likely to overlook.
The dismissal was a punishment bigger than the crime, and should have been viewed by the BAP as an abuse of discretion. Most judges would NOT have dismissed the adversary proceeding.
Tronox v. Kerr-McGee, BR , 2013 WL6596696(Bankr SD NY Dec 12, 2013)
Tronox v. Kerr-McGee, BR , 2013 WL6596696(Bankr SD NY Dec 12, 2013): adversary proceeding fraudulent transfer decision, referred to as being a "Game Changing Ruling on Fraudulent Transfer and Spin-Offs to Shed Legacy Liabilities"
In a ground-breaking environmental fraudulent transfer case, a New York Bankruptcy court held that Kerr-McGee's transfer of valuable oil and gas assets to a new company and (attempted) spin-off of the legacy liabilities to newly-formed Tronox constituted fraudulent transfer and that the transaction, which left Tronox insolvent, was not made for reasonably equivalent value.
Damages between $5.1 and $14.1 billion are anticipated, payable to the debtor (Tronox) bankruptcy estate. This ruling has a considerable impact on companies with substantial liabilities that attempt to restructure outside of bankruptcy, and is a blow to attempts to create "bankruptcy remote" entities and put assets into the bankruptcy remote entity, before a bankruptcy is filed, even years before a bankruptcy is filed. The statute of limitations under state law (such as CA state law) for seeking to recover fraudulent transfers, can be as much as 7 years from when the transfer occurred.
Opinion also discusses the Stern v. Marshall issue of consent to the bankr. court's jurisdiction, holding that the Bankruptcy Court had authority to enter final order because Kerr-McGee filed proofs of claims against the debtors for not honoring terms of the spin-off, including failure defend environmental litigation against Tronox.
Key issues in Tronox include:
- What facts and circumstances led the court to conclude that the eventual spin-off of Tronox was both an actual and constructive fraudulent transfer?
- What reasonably equivalent value arguments put forth by Kerr-McGee were rejected by the court?
- What statute of limitations issues arose under the state UFTA and Bankruptcy Code fraudulent transfer provisions?
- How did the court rule on the Stern v. Marshall issue of consent when a creditor files a proof of claim?
Vazquez v. AAA Blueprint & Digital Reprographics (In re Vazquez)
Vazquez v. AAA Blueprint & Digital Reprographics (In re Vazquez), 2013 WL 6571693 (9th Cir. BAP December 13, 2013): The Ninth Circuit Bankruptcy Appellate Panel ("BAP") recently upheld summary judgment in favor of a creditor under Bankruptcy Code Section 523(a)(6), excepting from discharge debts for willful and malicious injury, in which the bankruptcy court applied issue preclusion to a California trial court's findings of actual fraudulent transfer.
Dennis Adrian Vazquez (the "Debtor") owned a document printing, copying and digital reproduction business known as Alliance Reprographics ("Alliance"). A former employee of AAA Blueprint & Digital Reprographics ("AAA") left AAA and immediately went to work for Alliance, taking with him a confidential customer list that he then used to solicit AAA's customers. AAA sued the employee and Alliance (but not Vazquez) in state court for misappropriation of trade secrets, conversion and several other causes of action. AAA prevailed upon all causes of action except conversion, and the court awarded approximately $280,000 in compensatory and exemplary damages and attorney's fees.
In post-judgment settlement discussions, Vazquez stated that he would close Alliance and open a new business across the street if AAA would not accept $100,000 in full satisfaction of the judgment. Shortly thereafter, Vazquez wound down most of the operations and transferred virtually all of the business to a new company, named All Blueprint, Inc. ("All Blueprint"). AAA sued All Blueprint, Vazquez and his live-in girlfriend Melissa Huerta in state court for actual and constructive fraudulent transfers. After trial, the court entered its findings in a minute order, as follows:
Dennis Adrian Vazquez and Melissa Huerta conspired to fraudulently transfer assets from Alliance Reprographics Inc to All Blueprint Inc for the purpose of hindering judgment creditor AAA from collecting its judgment against Alliance.
The court also found, among other findings, that (1) Huerta and Vazquez formed All Blueprint and transferred the assets "for the sole purpose of hindering [AAA's] efforts to collect its judgment" and (2) "by conducting himself in this manner, 'Vazquez committed the wrongful act of hindering AAA in trying to collect the judgment.'" Vazquez appealed the second judgment.
Thereafter, Vazquez commenced a chapter 13 bankruptcy case. AAA filed an adversary proceeding to except the second judgment from discharge under Bankruptcy Code Section 523(a)(6). AAA filed a motion for summary judgment, relying upon issue preclusion and the findings in both state court lawsuits. Bankruptcy Judge Catherine E. Bauer granted the motion over the Debtor's opposition, holding that the state court's actual fraudulent transfer findings establish that the debt arose from willful and malicious injury.
The BAP reviewed de novo the bankruptcy court's grant of summary judgment as well as the non-dischargeability of a particular debt as this is a mixed question of law and fact. The BAP reviewed de novo the determination that issue preclusion was available and, upon making that determination, the panel reviewed the bankruptcy court's decision to apply it under an abuse of discretion standard. Lopez v. Emergency Serv. Restoration, Inc. (In re Lopez), 367 B.R. 99, 103 (9th Cir. 2007).
Bankruptcy Code Section 523(a)(6) excepts from discharge debts "for willful and malicious injury by the debtor to another entity or to the property of another entity..." California's issue preclusion law requires that:
1) the issue sought to be precluded . . . must be identical to that decided in the former proceeding; 2) the issue must have been actually litigated in the former proceeding; 3) it must have been necessarily decided in the former proceeding; 4) the decision in the former proceeding must be final and on the merits; and 5) the party against whom preclusion is being sought must be the same as the party to the former proceeding.
Honkanen v. Hopper (In re Honkanen), 446 B.R. 373, 382 (9th Cir. BAP 2011); Lucido v. Super. Ct., 51 Cal.3d 335, 341 (1990). The court must also determine "whether imposition of issue preclusion in the particular setting would be fair and consistent with sound public policy." Khaligh v. Hadaegh (In re Khaligh), 338 B.R. 817, 824-825 (9th Cir. BAP 2006).
The Debtor argued that the issues decided in the state court were not identical to the elements of section 523(a)(6), which requires that his conduct be both "willful" and "malicious." The BAP disagreed.
With respect to willfulness, the BAP held that a debtor's conduct is "willful" under section 523(a)(6) "only if he or she actually intended to cause injury or actually believed that injury was substantially certain to occur." See Ormsby v. First Am. Title Co. of Nev. (In re Ormsby), 591 F.3d 1199, 1206 (9th Cir. 2010). The BAP found that AAA alleged in state court that the Debtor actually intended to hinder its efforts to collect, consistent with the elements of California Civil Code Section 3439.04(a)(1) requiring that the debtor acted "[w]ith actual intent to hinder, delay, or defraud" a creditor. Moreover, the state court determined that the Debtor and Huerta transferred the business "for the sole purpose of hindering" AAA's collection efforts. The BAP agreed with the bankruptcy court's determination that these findings satisfied the willfulness requirement of section 523(a)(6) as they were "tantamount to a finding that Vazquez intended to harm AAA by transferring" the assets.
Malice is present when the debtor's conduct "involves (1) a wrongful act, (2) done intentionally, (3) which necessarily causes injury, and (4) is done without just cause or excuse." In re Ormsby, 591 F.3d at 1207. "Malice may be inferred based on the nature of the wrongful act." Id. The BAP found malice based upon the state court's finding that the Debtor's conduct was wrongful. As discussed above, the state court found that "by conducting himself in this manner, 'Vazquez committed the wrongful act of hindering AAA in trying to collect the judgment.'" The BAP further found that wrongfulness "is self-evident given the very nature of Vazquez's conduct in transferring Alliance's assets for the purpose of hindering AAA." Finally, the BAP found support for malice in the state court's determination that the Debtor's conduct was intentional, commenting that "[t]he intentional nature of Vazquez's conduct is reflected in the state court's account of Vazquez conspiring and plotting with Huerta to interfere with AAA's collection efforts. That the act of hindering AAA's collection efforts necessarily harmed AAA also is self-evident."
The Debtor argued that he had a just cause or excuse in that he desired to set up Huerta with her own reprographics business independent from Alliance. However, the state court previously rejected this assertion, and the BAP found that it does not constitute a just cause or excuse in light of the Debtor's specific intent to harm AAA. See In re Sicroff, 401 F.3d 1101, 1107 (9th Cir. 2005) (specific intent to injure negated proffered just cause or excuse); see also Murray v. Bammer (In re Bammer), 131 F.3d 788 (9th Cir. 1997) (debtor's subjective desire to help mother with financial difficulties was not just cause or excuse for knowing participation in fraud against her creditors).
The Debtor's final argument was that he was not aware that the fraudulent transfer findings could serve as a basis for a section 523(a)(6) judgment. The panel was perplexed by this, noting that the Debtor was represented by counsel and the findings featured prominently in the complaint and summary judgment pleadings. Although the Debtor raised no public policy concerns against applying issue preclusion, the BAP commented that "the bankruptcy court's application of issue preclusion here strikes us as a commonplace and appropriate usage of the doctrine."
It appears that the panel considers a California state court actual fraudulent transfer judgment to be per se non-dischargeable under section 523(a)(6). It is hard to imagine a judgment under California Civil Code Section 3439.04(a)(1), which requires that a debtor act with "actual intent to hinder, delay, or defraud" a creditor, that does not imply willfulness as construed by the panel. In turn, this necessarily suggests that the debtor "committed the wrongful act of hindering" collection efforts. In fact, the BAP found malice to be "self-evident" by virtue of the Debtor's conduct in transferring assets for the purpose of hindering collection. Accordingly, the BAP's decision appears to allow creditors to extract the elements of willfulness and malice as having been decided in any California state court judgment of actual fraudulent transfer.
The BAP focused upon whether the state court judgment satisfied the elements of section 523(a)(6) and gave very little attention to the elements of issue preclusion. The author suggests that the Debtor may have consumed his resources in briefing and arguing his appeal from a related order denying his motion for reconsideration, which was subject to several problems, including his failure to include it in his notice of appeal and to order transcripts.
The BAP's opinion appears to be in line with at least two courts in other circuits. In In re Kovler, 249 B.R. 238 (Bankr. S.D.N.Y. 2000), corrected, 329 B.R. 17 (2005), the court found (after a relatively terse analysis) that a transfer from the chapter 7 debtor to his wife with intent to hinder, delay or default his creditor supported a judgment of non-dischargeability under Section 523(a)(6). Id. at 261-262. Likewise, in In re Shore, 317 B.R. 536 (10th Cir. BAP (Kan.) 2004), the court applied issue preclusion and ruled that a state court's findings of "willful conduct and fraud" in awarding punitive damages awarded in a judgment for actual fraudulent transfer under the UFTA supported both willfulness and malice. Id. at 542-544.
This analysis is from the California State Bar Insolvency Section e-newsletter of 1/28/14
In re Energytec, Inc., 2013 Westlaw 6868618 (5th Cir. 2013)
In re Energytec, Inc., 2013 Westlaw 6868618 (5th Cir. 2013). A sale of pipeline system, which was property of the bankruptcy estate, "free and clear of liens and encumbrances", in a bankruptcy case, per 11 USC 363(f), might NOT get rid of covenants relating to pipeline system
Facts: In connection with the sale of a pipeline system, the purchaser executed covenants in favor of the vendor. Those covenants required the purchaser to pay a transportation fee based upon the amount of gas flowing through the pipeline and required the purchaser to obtain consent prior to assigning its interest in the pipeline. The agreement stated that the covenants would "run with the land" and would be enforceable by the vendor's assignees and affiliates.
The vendor's beneficial interest in the covenants was assigned to an affiliate (the "beneficiary"), and the pipeline itself was assigned to a new purchaser (the "burdened party"), which expressly assumed the obligations under the covenants. Eventually, the burdened party (the new owner of the pipeline) filed a Chapter 11 petition. It later sought to sell the pipeline to a third party free and clear of the burden of the covenants, pursuant to 11 U.S.C.A. § 363(f)(5). The bankruptcy court approved the sale, and the district court affirmed, both holding that the covenants in question were not property interests running with the land.
Reasoning: The Fifth Circuit vacated and remanded, holding that the covenants did run with the land but that there were unresolved issues concerning the effect of the sale on the enforceability of the covenants. After holding that the issue was not moot despite the beneficiary's failure to obtain a stay, the court discussed whether the covenants ran with the land under applicable state law.
The court first held that there was "vertical privity" between the original covenantor and its successor (the ultimately burdened party), as well as between the original covenantee and its successor (the beneficiary seeking to enforce the covenant); the vertical privity requirement is satisfied where the assignees of both of the original covenanting parties have succeeded to the estates or interests held by those parties.
The court then noted that Texas law was unclear as to whether "horizontal privity" between the original covenanting parties is necessary; the horizontal privity requirement is satisfied when a separate interest in real property has passed between the original covenanting parties at the time of the execution of the accompanying covenants. The court held that even if horizontal privity is required, it did exist in this case, since a property interest passed between the original covenantor and the original covenantee:
[T]he transportation fee and other benefits for [the beneficiary] were created at the time of a conveyance of real property. [The original covenantee] . . . conveyed the pipeline and rights-of-way and carved out of that conveyance the rights at issue in [this case] . . . . [The original covenanting parties] were in horizontal privity, and a later assignment by [the vendor to its assignee] satisfies vertical privity.
The court then discussed whether the covenant in question "touched and concerned" the property; the "touch and concern" requirement imposes an independent subject-matter test to determine whether the covenant really affects the use of the property or is independent of it. The court first acknowledged that the tests of the "touch and concern" requirement were "far from absolute" but that some Texas courts had held that this requirement takes into account the covenant's impact on the property's value:
If the promisor's legal relations in respect to the land in question are lessened—his legal interest as owner rendered less valuable by the promise—the burden of the covenant touches or concerns that land; if the promisee's legal relations in respect to that land are increased—his legal interest as owner rendered more value by the promise—the benefit of the covenant touches or concerns the land.
The court then held that these covenants did "touch and concern" the pipeline property:
The real property at issue here is a gas pipeline system . . . . [The beneficiary's] interest in transportation fees is for the use of real property, i.e., the traveling of natural gas from a starting point along the length of the pipeline to an endpoint. The pipeline is a sub-surface road for natural gas, and a fee for the use of that road was retained by [the original covenantee] and assigned to [the beneficiary]. Another restriction on use is that the pipeline cannot be assigned without [the beneficiary's] consent. These rights impact the owner's interest in the pipeline. Furthermore, as burdens on the property, they also impact the pipeline's value in the eyes of prospective buyers. Indeed, the impact on the sale in bankruptcy has been clear, though the financial impact has not been quantified.
Having held that the covenants satisfied all of the requirements, the court held that the lower courts had erred in deciding that the covenants did not "run with the land." The court then turned to a discussion of §363(f)(5), which provides:
The trustee may sell property . . . free and clear of any interest in such property of an entity other than the estate, only if . . . such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.
The beneficiary of the covenant argued that since the monetary value of its right to future transportation fees was impossible to estimate, monetization of its interest in the transportation fees was impossible. Therefore, no "money satisfaction" was possible, and the statute was inapplicable. The court declined to reach this issue, however, since the lower courts had failed to reach the question of valuation, and it remanded the case on that basis. The court noted a split of authority on that issue and admitted that the Fifth Circuit "has yet to consider what constitutes a qualifying legal or equitable proceeding" for purposes of the statute."
Comment: Property professors all over the country are rejoicing: the rule in Spencer's case still lives! "Touch and concern," horizontal privity, vertical privity: these are precious nuggets of ancient lore revived by the Fifth Circuit in the 21st Century. Alas, the court may have botched the analysis.
First, its discussion of the "touch and concern" requirement is hopelessly circular:
(a) The covenant runs only if it touches and concerns the property.
(b) It touches and concerns only if it affects the property's value.
(c) It affects the value only if it runs.
(d) See (a).
Second, the court missed the fact that the issue of privity (both horizontal and vertical) may have been dicta. The burdened party in this case (the Chapter 11 debtor) expressly assumed the obligation of the covenant; a contractual assumption is a valid substitute for a failure of privity. And the beneficiary of the covenant was a named third-party beneficiary of the original agreement. Therefore, under ordinary contract doctrine, the beneficiary was entitled to assert the benefit of the agreement, whether vertical privity existed or not.
It is really too bad that the court did not discuss the "monetization" issue, at least to give guidance to the bankruptcy court upon remand. Merely acknowledging the circuit split is not the same thing as providing guidance. For whatever it's worth, I believe that the claim of the beneficiary will be factually capable of monetization; the bankruptcy court can take testimony on the estimated stream of income and then reduce that stream to a discounted present value. However, that still doesn't answer the second prong of the statute, an issue of law: could the beneficiary of the covenant "be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest?" Him
Under the facts of this case, the only "legal or equitable proceeding" that I can imagine that would have "compelled" the beneficiary to accept a money satisfaction would have been an eminent domain proceeding. Is that what Congress had in mind: a hypothetical condemnation, deus ex machina? If that is true, isn't every interest in real property subject to compensable extinguishment?
Certainly, the bankruptcy case itself cannot satisfy the "legal or equitable proceeding" requirement, since that would make the statute completely circular: every time a trustee seeks a sale, the trustee seeks to extinguish claims against the property and to force the holders of those claims to accept money. For the same reason, the theoretical availability of a "cramdown" plan under Chapter 11 should not be sufficient to satisfy the statute, although the court noted that a few bankruptcy courts had so held. I predict that this fascinating case will be back before the Fifth Circuit within 18 months, and some of the unanswered questions will be resolved.
For a discussion of a recent decision holding that a §363 sale cannot be used to extinguish real covenants encumbering the property, see 2013-50 Comm. Fin. News. NL 102, Bankruptcy Trustee Cannot Use Sale "Free and Clear" to Extinguish Equitable Servitudes Because Holder of Servitude Would Not Have Received Any Money If Senior Lienholder Had Foreclosed.
This analysis is from the CA State Bar Insolvency Committee e-newsletter of 1/24/14
In re Tronox, Inc., 2013 Westlaw 6596696 (Bankr. S.D.N.Y 2013).
In re Tronox, Inc., 2013 Westlaw 6596696 (Bankr. S.D.N.Y 2013). A bankruptcy court decision, but the reasoning as to why there was a fraudulent conveyance could be very important, in future, if additional courts in future agree with this reasoning:
Facts: An oil, gas, and chemical company was burdened with enormous "legacy liabilities," primarily due to environmental contamination. The company developed a plan to spin off its viable assets, leaving the legacy liabilities with a newly-formed successor entity. The complex asset divestiture proceeded over a period of several years. A few years after the completion of the transaction, the successor entity responsible for the legacy liabilities filed a Chapter 11 petition and then brought suit against the spinoff participants, claiming that the entire series of transactions had constituted fraudulent transfers under Oklahoma law. The estate asked for roughly $15 billion in damages.
Reasoning: Following a lengthy trial, the court held that the transactions, when collapsed, constituted fraudulent transfers, under both the "actual fraud" and "constructive fraud" prongs of the fraudulent transfer statutes:
[The former corporate entity] acted to free substantially all its assets—certainly its most valuable assets—from 85 years of environmental and tort liabilities. The obvious consequence of this act was that the legacy creditors would not be able to claim against "substantially all of the [former company's] assets," and with a minimal asset base against which to recover in the future, would accordingly be "hindered or delayed" as the direct consequence of the scheme. This was the clear and intended consequence of the act, substantially certain to result from it . . . . [A] principal goal of the separation of the [petrochemical exploration and production] assets from the chemical business was to cleanse [those] assets of every legacy liability resulting from the 85–year history of the company and to make the cleansed company more attractive as a target of an acquisition.
The defendants argued that there was nothing in the record to show that the participants specifically intended to leave the "legacy creditors" without recourse. But the court held that the absence of certain evidence in the record was highly significant: "[O]ne of the most compelling facts in the enormous record of this case is the absence of any contemporaneous analysis of [the successor entity's] ability to support the legacy liabilities being imposed on it." The court later reiterated that key point: "[N]either the Board nor management ever reviewed a contemporaneous analysis of the effect of the transactions on the legacy liability creditors, and there is no evidence that one was ever prepared."
The court later held that the company did not receive "reasonably equivalent value" in exchange for the assets and that it was insolvent as a result of the transfers, thus justifying liability under the "constructive fraud" prong of the statute.
Turning to the issue of damages, the court held that the gross liability of the defendants was roughly $14.5 billion. However, the defendants claimed the right to an offset under 11 U.S.C.A. §502(h). That statute permits defendants in avoidance-powers claims to assert offsetting claims against the estate under certain circumstances. The court declined to decide whether the defendants in this case were entitled to such an offset and, if so, how much of an offset would be appropriate, seeking further briefing. The court noted, however, that even under the best-case scenario, the defendants would still be liable for more than $5 billion. In discussing the offset, the court pondered the problem of whether the §502(h) claim should be valued at its face amount (as the defendants urged) or whether the dilution of the total pool of creditors' claims due to the inclusion of the offset should be used to discount the effect of the claim. Under the latter scenario the defendants' liability would still exceed $14 billion.
Finally, the court discussed the defendants' belated assertion of the "settlement payment" defense under §546(e), which some courts have used to insulate transfers made during complex corporate transactions. The court refused to allow the defendants to assert this defense, holding that it had been waived due to the defendants' failure to timely assert it and that the defense would not have applied in any event. In a footnote, the court mentioned that although the §546(e) settlement payment defense would not protect a fraudulent transfer defendant in an "actual fraud" case prosecuted under §548 (the federal fraudulent transfer statute), the statute "inexplicably" protects a defendant prosecuted in an "actual fraud" case under §544(b), which empowers the trustee to avoid transfers under state fraudulent transfer statutes.
Comment: Here, the participants in the asset spinoff prepared elaborate documentation regarding the fairness of the transaction, in anticipation of fraudulent transfer litigation; yet they did not prepare any analysis of the post-transaction entity's ability to pay the "legacy liabilities." The court seized upon that gap in the record to show that the participants either knew or must have known that the "legacy creditors" would end up with nothing at the end of the day. Given the multi-billion dollar magnitude of this transaction, one can be sure that the participants received top-notch legal advice and that the attorneys specifically recommended that the participants not prepare such an analysis because the result would have been overwhelmingly unfavorable.
For whatever it's worth, could end up that the court will later adopt the "dilution solution," resulting in a total liability of roughly $14 billion. Prediction is based on dicta contained in footnote 130. The court (in text) noted that the courts should not "reassess equity among the parties based on subsequent events." Then, in footnote 130, the court stated:
Valuation of a claim on the basis of subsequent information unknown at the time of confirmation of [the debtor's] plan would also appear inconsistent with the argument that Defendants' §502(h) claim should be valued without inclusion of its claim included in the creditor base, or stated differently, that it should have the benefit of the facts known and relied on at the time of confirmation, and not as they developed subsequently.
The court's observation that the §546(e) "settlement payment" defense might "inexplicably" protect "actual fraud" defendants prosecuted under state law is both acute and disturbing. It is almost certain that Congress never intended such an anomalous result, but the plain language of the statute seemingly denies protection to "actual fraud" defendant prosecuted under federal law but not under state law. Perhaps this statutory glitch could be cured with a minor amendment to the statute. This technical issue would not appear to be one that would divide Congress along partisan lines.
This analysis appeared in the CA State Bar Insolvency Committee e-newsletter of 1/24/14
Hazelrigg v. United States Trustee (In re Hazelrigg)
Hazelrigg v. United States Trustee (In re Hazelrigg), BAP No. WW-13-1230-TaDJu (Nov. 19, 2013). This is a "not for publication" decision of the Bankruptcy Appellate Panel for the Ninth Circuit, in which the BAP affirmed the entry of summary judgment against the debtor in an objection to discharge proceeding based in part on the debtor's invocation of the privilege against self-incrimination under the Fifth Amendment to the United States Constitution.
Debtor Thomas R. Hazelrigg, III (cDebtor"), was a well-known financier and businessman in the Seattle area, who, along with another associate and developer, was put into an involuntary chapter 7 in 2011. The order for relief was entered in February 2012. The Debtor then filed Schedules and a Statement of Financial Affairs ("Schedules") that were essentially blank other than the assertion of a blanket Fifth Amendment privilege against self-incrimination.
The Office of the United States Trustee ("OUST") moved to compel the filing of amended and completed schedules, or, alternatively, to require a specific Fifth Amendment invocation in response to each question and category of information required by the Schedules. The Court granted the OUST's motion, and in response, the Debtor filed amended Schedules that disclosed ownership of a PT cruiser and the pre-petition sale of two vehicles.
The OUST then issued a subpoena pursuant to a Rule 2004 Order based on the discovery of additional valuable assets identified in a balance sheet that were not disclosed in either set of Schedules. The Debtor did not produce responsive documents, and instead, asserted a blanket Fifth Amendment privilege. In response, the OUST commenced an adversary proceeding objecting to the Debtor's discharge under 11 U.S.C. sections 727(a)(2), (a)(3), (a)(4) and (a)(5) based, in part, on the Debtor's failure to disclose assets and to account for their transfer, disposition, or ownership.
The OUST moved for summary judgment on the section 727(a)(3) and (a)(5) claims, relying on the subpoena, the Debtor's response, and the balance sheet. The Debtor's response to the motion raised some procedural issues, blamed his failure to produce information and documents on the crash of his bookkeeper's computer, and addressed the disposition of certain assets.
The Court granted the summary judgment motion on the section 727(a)(5) claim, certified it as final, and denied the Debtor's motion for reconsideration in which he argued he had properly invoked the Fifth Amendment privilege.
Holding and Analysis
The BAP reviewed the burden of proof and elements of a section 727(a)(5) claim. The BAP explained that the objector bears the burden of proof to show by a preponderance of the evidence that the debtor's discharge should be denied, even though the grounds for denial of discharge under subsection (a)(5) describe the debtor's failure "to explain satisfactorily . . . any loss of assets or deficiency of assets to meet the debtor's liabilities." The BAP also outlined the elements of this claim as requiring the objector to demonstrate that (1) at a time not too remote from the instant proceeding the debtor owned identifiable assets, (2) the debtor no longer owned the assets on the petition date, and then (3) the Schedules or other pleadings do not adequately explain their disposition.
The BAP found that, as the bankruptcy court did in this case, a court may make a negative inference that corroborating evidence exists to support a claim when a debtor (in a civil matter only) asserts a Fifth Amendment privilege.
The BAP held that the OUST met its burden in demonstrating its prima facie case under section 727(a)(5) in reliance on the balance sheet, including its contents and apparent date of its preparation, and the Debtor's subsequent failure to explain the loss of or to schedule those assets. Once that burden was met, the burden then shifted to the Debtor to offer a satisfactory explanation for the disposition of the missing assets. The Debtor did not do so as the bookkeeping problem was not a satisfactory explanation.
This case demonstrates the elements of, and shifting burdens related to, an objection to discharge. And making the adverse inference does not often arise in bankruptcy court, but, at least according to the BAP, it does have vitality in an objection to discharge proceeding. This case had some difficult facts from the Debtor's perspective, including, as noted by the BAP, that there were "undisputed facts of the extraordinary quantum of luxury items" unaccounted for, and clearly the Debtor was a sophisticated and able businessman who nonetheless was unable to carry his burden to explain the loss of those assets. Since a court has discretion to make the adverse inference in a civil case, some of these facts may have played a part here.
Commentary of The Bankruptcy Law Firm, PC:
11 USC §727(a)(6)(B) expressly states that debtor can be denied a discharge if: "(6) the debtor has refused, in the [bankruptcy] case--(B) on the ground of privilege against self-incrimination, to respond to a material question approved by the court or to testify, after the debtor has been granted immunity with respect to the matter converning which such privilege was invoked". The BAP decision appears to be unaware of 11 USC 727(a)(6)(B), and therefore erroneously reasoned.
Jones v. U.S. Trustee, Eugene
Jones v. U.S. Trustee, Eugene, ___ F.3d ___, 2013 WL 6224330 (9th Cir. 2013 Dec. 2, 2013): Debtors who omit assets from their bankruptcy schedules, and/or undervalue their assets in their bankruptcy schedules, can be denied any discharge, or have discharge revoked, if discharge has alreadby been granted: The United States Court of Appeals for the Ninth Circuit held that fraud which would have justified the bankruptcy court denying a discharge under 11 U.S.C. §727(a)(4)(A) will support an action to revoke a discharge under 11 U.S.C. §727(d)(1).
In his initially filed bankruptcy schedules and in his testimony at the meeting of creditors under 11 U.S.C. §341(a), Jerry Jones (debtor) omitted a number of assets and undervalued other assets, largely valuing them at zero. The debtor received his discharge in due course. Within a year of the date the discharge was granted, the United States Trustee discovered the debtor had omitted and undervalued assets in his bankruptcy schedules, and brought an adversary action to revoke the discharge. After two days of hearings, the bankruptcy court ruled that the debtor's omissions and undervaluations violated 11 U.S.C. §727(a)(4) and revoked the discharge. On appeal, the Ninth Circuit affirmed.
Before the bankruptcy court the debtor argued that his omissions and undervaluations had been inadvertent or on advice of counsel, and that several were corrected through schedule amendments. The bankruptcy court rejected these defenses, found the omissions and undervaluations had been made knowingly and fraudulently, and determined they constituted a violation of 11 U.S.C. §727(a)(4), justifying revocation of the discharge pursuant to 11 U.S.C. §727(d)(1).
On appeal, the debtor argued that it was error to revoke a discharge under 11 U.S.C. §727(d)(1) based on a violation of 11 U.S.C. §727(a)(4). Quoting Nielsen v. White (In re Nielsen), 383 F.3d 922, 925 (9th Cir. 2004) that to revoke a discharge due to the debtor's fraud it had to be shown that "but for the fraud, the discharge would not have been granted" the debtor argued that some fraud other than his fraudulent schedules had to be proven, and it had to be proven that but for the additional fraud, the discharge would not have been granted. The debtor argued that since he would have received his discharge even without the fraud, that is, he would have received a discharge had he filed accurate schedules, it could not be said he would not have obtained a discharge "but for" his fraud. The debtor further argued, citing Nielsen, 383 F.3d at 925-26, that to revoke the discharge it had to be proven the outcome of the case would have been different had the fraud not occurred. According to the debtor, the alleged fraud did not affect the outcome of his case. The chapter 7 trustee investigated all the assets on the debtor's schedules and was liquidating them for the benefit of creditors. As a result, the debtor believed that creditors would get paid and there was no harm caused by his actions.
The Ninth Circuit rejected these arguments. The Ninth Circuit cited two Ninth Circuit Bankruptcy Appellate Panel cases, In re Gilliam, 2012 WL 1191854 (9th Cir. BAP 2012, Dkt. no. 11-1248) and In re Wahl, 2009 WL 7751412 (9th Cir. BAP 2009, Dkt. no. 08-1218), and a district court case, In re Guadarrama, 284 B.R. 463 (C.D. Cal. 2002), all holding that pre-discharge fraud which would have justified denial of a discharge had it been discovered prior to the grant of a discharge, will justify revocation of the discharge when it is discovered post-discharge. Jones at *2. As for the requirement in Nielsen that "but-for" the fraud the discharge would not have been granted, the Ninth Circuit stated this is "properly read as establishing the rule that the fraud must be material, i.e., must have been sufficient to cause the discharge to be refused if it were known at the time of discharge." Here, the Ninth Circuit concluded that had the fraud been discovered prior to issuance of the discharge, the debtor could have been denied a discharge, satisfying the suggestion in Nielsen that the fraud must have affected the outcome of the bankruptcy.
There were two strands to the debtor's argument, neither of which was accepted by the Ninth Circuit. First, by noting that he would have received a discharge had he properly disclosed the assets, the debtor argued that his fraud did not procure the discharge; he would have received the discharge had he properly disclosed and valued the assets. The Ninth Circuit rejected interpreting the "but-for" language of Nielsen as a requirement that the fraud must have directly procured the discharge, instead interpreting it as a materiality requirement, that the fraud must have been sufficient to justify denying a discharge had it been known at the time of the discharge. Jones at ∗2. The Ninth Circuit implicitly adopted the holding of Guadarrama and the other cited cases that the fraud need only have occurred "in the procurement" of the discharge. It is not required to be the direct cause of the debtor obtaining a discharge.
The second strand of the debtor's argument was that since the debtor was not questioned about the omissions and undervaluations on his schedules. He therefore did not engage in a second fraud to conceal the first to procure a discharge. The Ninth Circuit rejected a requirement there be two frauds, the second consisting of concealing the first. Only the initial fraud need be shown.
Although not addressed by the Ninth Circuit, the debtor also argued that because 11 U.S.C. §727(d)(3) explicitly makes a violation of 11 U.S.C. §727(a)(6) a ground for revocation of a discharge, it is error to revoke a discharge under 11 U.S.C. §727(d) by reason of a violation of any other subsection of 11 U.S.C. §727(a). The debtor argued that by explicitly making a violation of 11 U.S.C. §727(a)(6) a ground for discharge under 11 U.S.C. §727(d)(1), Congress implicitly rejected making the violation of any other subsection of 11 U.S.C. §727(a) a basis for revocation of the discharge. If any violation of 11 U.S.C. §727(a) justified revocation under 11 U.S.C. §727(d)(1), the debtor argued, there was no need for 11 U.S.C. §727(d)(3), rendering the subsection superfluous. Presumably, however, because 11 U.S.C. §727(d)(1) requires a showing of fraud, only those violations of 11 U.S.C. §727(a) which implicate fraud, e.g., 11 U.S.C. §727(a)(2), would be the basis for an action to revoke a discharge under 11 U.S.C. §727(d)(1). Section §727(a) is not wholly incorporated into 11 U.S.C. §727(d).
The case establishes that a debtor who has committed pre-discharge fraud is not safe once the discharge is obtained. The debtor remains exposed to possible revocation proceedings under 11 U.S.C. §727(d)(1) for one year from the date of discharge. 11 U.S.C. §727(e)(1).
Interestingly, the opinion did not address the debtor's materiality argument. The debtor did not dispute that he listed many of his assets as having no value. However, according to the debtor, the bankruptcy court never made a finding as to the specific value of his assets. Because the bankruptcy court did not determine the value of his assets, the bankruptcy court could not find that the debtor's undervaluation was material, i.e. sufficient to cause the discharge to be refused if it were known at the time of the discharge.
Finally, the opinion did not address the debtor's argument that even if the debtor undervalued his assets, the chapter 7 trustee investigated each asset and determined that he could liquidate them. Because the chapter 7 trustee was liquidating the assets, the debtor's non-disclosure or undervaluation had no impact on the case. Perhaps the Ninth Circuit did not want to lessen the debtor's burden to be truthful regarding the information reported in the schedules.
Analysis is from the Insolvency Committee of the State Bar of California, reported in e-newsletter of Insolvency Committee.
Bellingham Oral Argument Recap: Bankruptcy and the Slippery Slope
The Supreme Court's recent strong record of confining bankruptcy judges within a tight sphere of power seemed a bit shaky on Tuesday, but mainly because the Court spent significant time looking beyond bankruptcy law, according to a SCOTUSBlog analysis of Tuesday's oral argument in Executive Benefits Insurance Agency v. Arkison (In re Bellingham) currently before the Supreme Court. Concerns about the impact that a decision in a chapter 7 case may have on the ranks of federal magistrate judges, and even on arbitrators who keep a lot of private disputes out of courts, were evident during the argument on In re Bellingham. That case was about the power that federal law appears to give to a bankruptcy judge, and it is a test of whether, if that power contradicts the limits of the Constitution's Article III, the power can be exercised anyway because the parties consent to it. It was immediately clear that if insurance firm Executive Benefits wins the case, the chances are good that bankruptcy judges will have less power than Congress wanted them to have, and that the lost power would not be revived just because the parties agreed that it should exist. With Justice Scalia, the Court's strongest proponent of a strict construction of the Constitution, taking the lead, there were fervent comments from the bench suggesting that bankruptcy judges who are not appointed under Article III might well wind up with a diminished role: they would not be able to issue final decisions on many disputes, and might not even be able to propose decisions for adoption by an Article III judge. That impression was consistent with the Court's most recent major decision on bankruptcy court authority, the 2011 decision in Stern v. Marshall. Chief Justice Roberts, the author of the main Stern opinion, bluntly suggested on Tuesday that if Congress cannot act to beef up the roles of bankruptcy judges without violating Article III, why would the Court permit "people taken off the street" to do so just because they were parties to a case and had consented to enlarged bankruptcy court authority? Click here to read the full SCOTUSBlog analysis.
In Heritage Pac. Fin., LLC v. Montano (In re Montano)
In Heritage Pac. Fin., LLC v. Montano (In re Montano), __ B.R. __, 2013 WL 5890681 (9th Cir. BAP Nov. 1, 2013), the U.S. Bankruptcy Appellate Panel of the Ninth Circuit held that California's anti-deficiency statutes barred the successor to a mortgage lender from obtaining a nondischargeability judgment for a purportedly fraudulently induced loan against a borrower who misrepresented his financial condition. Specifically, the successor could not enforce the loan against the borrower despite the borrower's alleged misrepresentations in his loan application because: (1) the loan was for less than $150,000, (2) the loan was secured by residential real property, and (3) the borrower occupied the property as his home. Furthermore, the BAP affirmed an award for attorneys' fees to the borrower because it found that the plaintiff's position was not substantially justified pursuant to 11 U.S.C. § 523(d).
In November 2006, Jesus Edgar Montano ("Montano") purchased a California home using a first loan of $348,750 and a second loan of $89,990 from WMC Mortgage Corporation ("WMC"). The loan application stated that Montano earned over $8,000 per month, over half of which came from Montano's purported business, Montano Moving Services. The loan application contained three letters from satisfied customers of Montano Moving Services and a letter from a tax preparer that she had performed accounting services for the business for the past three years. Montano, a native of El Salvador, who could not read or write English, later contended that the loan broker fabricated the documents. The application also contained an audit form prepared by an individual who stated that he spoke with the tax preparer, who represented that Montano filed Schedule C (a profit and loss schedule for a sole proprietorship) tax information for the prior three years. Otherwise, the income in the application was not verified. After making only five payments on the loans, Montano defaulted on the loans, and WMC non-judicially foreclosed under the first loan on October 22, 2007. During that time, Montano occupied the property. Heritage Pacific Financial, LLC ("Heritage") purchased the now-unsecured note for the second loan over a year later on January 20, 2009.
In April 2010, Heritage filed a complaint in the Alameda County Superior Court alleging that Montano misrepresented his income in the loan application. On October 13, 2010, Montano filed a chapter 7 bankruptcy petition. Heritage timely filed a complaint to determine that its $89,990 claim against Montano was excepted from discharge for fraud under 11 U.S.C. § 523(a)(2)(A) and (B). Montano moved to dismiss and cross-claimed against Heritage seeking to recover his attorneys' fees and cost pursuant to section 523(d).
The bankruptcy court denied Montano's motion to dismiss. However, the bankruptcy court noted the difficulty Heritage would face in establishing that WMC, now a defunct company, reasonably relied upon Montano's purported misrepresentations in the loan application.
Montano then moved for summary judgment contending, among other things, that California's anti-deficiency statutes (in particular section 726 of the California Code of Civil Procedure) barred Heritage's claim. Montano also requested attorneys' fees. Heritage responded, arguing among other things, that the anti-deficiency statutes do not apply to claims against a borrower for fraud and do not apply to "sold-out" junior lienholders.
The bankruptcy court disagreed with Heritage and found that the anti-deficiency statutes applied to this case. The bankruptcy court noted that the loan was used to purchase an owner-occupied property and the loan amount fell within the limit in section 726(g) of the California Code of Civil Procedure. Accordingly, the bankruptcy court granted Montano's motion for summary judgment because section 726(g) barred Heritage's claim. However, the bankruptcy court denied Montano's request for attorneys' fees.
Montano then moved for reconsideration for his attorneys' fees. In considering the motion, the bankruptcy court focused on the reliance element of Heritage's fraud claim and questioned whether Heritage had shown that WMC, the original lender, actually relied on Montano's misrepresentation. Ultimately, the bankruptcy court found that Heritage failed to meet its burden and granted Montano's motion for reconsideration of his attorneys' fees under 11 U.S.C. § 523(d). Heritage timely appealed both judgments on the motions for the summary judgment and reconsideration.
The BAP affirmed the bankruptcy court's rulings. The BAP held that the bankruptcy court correctly granted Montano's motion for summary judgment because section 726(g) of the California Code of Civil Procedure barred Heritage's claim.
The BAP analyzed section 726 of the California Code of Civil Procedure. Under this statute, often referred to as the one-action rule, a lender's primary remedy to collect a loan secured by a mortgage or deed of trust is to foreclose. Section 726(f), however, provides an exception to the one-action rule; a creditor may bring an action to recover damages based on a borrower's fraudulent conduct that induced the original lender to make a loan. Section 726(g), provides an exception to this exception, making it clear that the lender may not pursue such fraud claim if (1) the loan was secured by "owner-occupied residential real property," (2) the property was actually occupied by the borrower, and (3) the loan was for $150,000 or less.
The BAP found that the facts in this case satisfied the exception set forth in section 726(g). Heritage argued that the bankruptcy court should have aggregated the dollar amount of first and second loans in determining the dollar limit of section 726(g), thereby making Montano's loans total $438,740. However, the BAP rejected Heritage's argument because it contradicted the plain meaning of the statute. In reaching this conclusion, the BAP highlighted that the amount and method of calculating the cap in section 726(g) was never amended, even though the California Legislature has amended section 726 four different times.
Additionally, the BAP affirmed the bankruptcy court's grant of Montano's motion for reconsideration and award of attorneys' fees under 11 U.S.C. § 523(d). The BAP explained that to support a request for attorneys' fees under section 523(d), a debtor initially needs to prove that: (1) the creditor sought to except a debt from discharge under section 523(a); (2) the debt was a consumer debt; and (3) the debt ultimately was discharged. Once these elements are established, the burden of proof shifts to the creditor to prove that its action was substantially justified.
The BAP found that Montano satisfied the three factors. The bankruptcy court, however, did not initially require Heritage to satisfy its burden of proof. Thus, because the burden of proof shifted to Heritage who was not required to prove its burden, the BAP held that the reconsideration was proper.
The BAP affirmed the bankruptcy court's ruling that Heritage failed to prove that WMC reasonably relied on Montano's misrepresentation. Though the case had lasted a year since the bankruptcy court first raised the issue at the hearing on Montano's motion to dismiss, Heritage provided no proof of reliance, which was a necessary element of Heritage's claim. Because Heritage failed to prove that its fraudulent claim against Montano was substantially justified, the award for attorneys' fees to Montano was proper.
The opinion explores overlooked exceptions to California's one-action rule. The opinion is more influential, however, as a cautionary tale for debt purchasers rather than for its exploration of the arcana of the one-action rule. Underlying the BAP's decision is the bankruptcy court's astute foresight early in the case that it would be difficult for the creditor to find the right person in the prior lender's organization, a lender which is now defunct, who could credibly testify that the lender reasonably relied upon the borrower's representations in order to satisfy section 523(a)(2)(B). This evidentiary difficulty is buttressed by poor underwriting. Had the original lender actually required the borrower's filed tax returns, payment advices, receipts, invoices, bank statements, and any other documented sources of income to verify the information in the loan application, the creditor may have had a better chance at showing that it was substantially justified in pursuing the action. The perils of this failure are not inconsequential. The creditor now owes the borrower all of its attorneys' fees and costs in defending against the action, over $70,000, not including the costs of the appeal, nearly the same amount as the loan at issue, which may alter the cost-benefit analysis for pursuing such actions.
The foregoing analysis is from the California State Bar Business Law Section's INSOLVENCY LAW COMMITTEE's e-newsletter.
In re BP RE, LP, 735 F.3d 279 (5th Cir. 2013)
In re BP RE, LP, 735 F.3d 279 (5th Cir. 2013): 5th Circuit rules parties CANNOT consent to jurisdiction in bankruptcy court, where there is no jurisdiciton in bankruptcy court. Chapter 11 Debtor's Consent to Jurisdiction Cannot Cure Bankruptcy Court's Lack of Jurisdiction to Enter Final Judgment. [In re BP RE, LP (5th Cir. 2013).] The Fifth Circuit has held that a Chapter 11 debtor's consent to the jurisdiction of a bankruptcy court cannot cure the court's lack of jurisdiction to enter a final judgment under Article III of the Constitution.
Facts: A Chapter 11 debtor asserted common-law claims against a non-debtor defendant. Following a bench trial in the bankruptcy court, a final judgment was entered against the debtor. The debtor appealed, and the district court affirmed. The debtor then appealed to the Fifth Circuit, arguing that the bankruptcy court lacked constitutional authority to enter a final judgment.
Reasoning: On appeal, the prevailing defendant argued that the debtor had consented to the bankruptcy court's jurisdiction. But the circuit court vacated and remanded the case, holding that since the bankruptcy court lacked jurisdiction under Article III of the Constitution, the parties' consent was insufficient to cure that defect. The court noted a split of authority among the circuits on this issue.
Comment: The conflict is not only among the circuits – it is even within one of the circuits (the Seventh). Compare Peterson v. Somers Dublin Ltd., 729 F.3d 741 (7th Cir. 2013) (holding that consent can cure the jurisdictional problem) with Wellness Intern. Network, Ltd. v. Sharif, 727 F.3d 751 (7th Cir. 2013) (holding to the contrary). The Supreme Court will soon clear this up for us, since certiorari was granted in In re Bellingham Ins. Agency, Inc., 702 F.3d 553 (9th Cir. 2012), cert. granted sub nom. Executive Benefits Ins. Agency v. Arkison, 133 S.Ct. 2880 (2013).
Even though I believe that this entire jurisdictional charade is a complete waste of time (since the bankruptcy courts will simply issue their "reports," to be rubberstamped by the district courts), I predict that the Supreme Court's opinion in Bellingham will spell the end of "Article III jurisdiction by consent." Note that in Stern v. Marshall, 131 S. Ct. 2594, 180 L. Ed. 2d 475 (2011), the non-bankrupt litigant filed a claim in the bankruptcy, certainly consenting to the adjudication of that claim. Nevertheless, the Supreme Court held that this consent did not extend to a claim asserted by the estate against him.
For a discussion of Peterson, see 2013-38 Comm. Fin. News. NL 78, Parties' Express Consent Confers Jurisdiction Upon Bankruptcy Court, Despite Contrary Ruling By Another Panel of Same Circuit.
For a discussion of Wellness, see 2013-33 Comm. Fin. News. NL 69, Debtor's Objection to Bankruptcy Court's Constitutional Authority to Enter Final Judgment Cannot Be Waived.
For a discussion of Bellingham, see 2012 Comm. Fin. News. 100, Although Bankruptcy Courts Lack Jurisdiction to Hear and Determine Fraudulent Transfer Claims, They May Issue Reports and Recommendations, and Defendant May Waive Objection to Lack of Jurisdiction.
For a discussion of Stern, see 2011 Comm. Fin. News. 51, Statutory Power of Bankruptcy Courts to Hear and Determine Compulsory State-Law Counterclaims Against Non-Bankrupt Claimants is Unconstitutional.
This analysis was published by the California State Bar Business Law Section's INSOLVENCY LAW COMMITTEE 12/13
Alakozai v. Citizens Equity First Credit Union (In re Alakozai)
Alakozai v. Citizens Equity First Credit Union (In re Alakozai), 499 BR 698 (9th Cir. BAP 10/2/13). The Bankruptcy Appellate Panel of the Ninth Circuit ("BAP") affirmed the bankruptcy court's order in the debtor's sixth bankruptcy case granting a lender relief from stay to continue with its state court unlawful detainer action. The BAP found that the lender's foreclosure on the debtor's real property during the fifth case did not violate the automatic stay and was not void because the lender's relief from stay order in the debtor's fourth bankruptcy case was effective as to the property.
Mohamed Alakozai (Husband) executed a promissory note secured by a deed of trust on California residential real property owned by the Husband. Debra Alakozai (Wife) held a community property interest in the property. Husband defaulted on the note, a notice of default was recorded and a trustee's sale was scheduled. The property then became the subject of six bankruptcy cases filed between 2008 and 2012; three were filed jointly by Husband and Wife; two were filed by Husband; and one was filed by Wife.
After Husband filed the fourth bankruptcy case, the lender requested and was granted relief from the automatic stay under 11 U.S.C. § 362(d)(4). The order granting relief provided that it was binding upon the property for 180 days after entry of the order and upon the Husband (the "In Rem Order"). No appeal was filed. Shortly after the fourth case was dismissed, the lender recorded the In Rem Order in the county recorder's office.
Wife then filed a fifth case and, later the same day, the lender purchased the property at a trustee's sale. The foreclosure sale was held within 180 days after entry of the In Rem Order as required by such order. A month later, the bankruptcy court dismissed the fifth case. Husband and Wife refused to vacate the property and the lender commenced an unlawful detainer action in state court.
Approximately seven months later, Husband and Wife filed a sixth case. The lender filed a motion for, and was granted, relief from stay to continue to prosecute its state court unlawful detainer action. Wife appealed this relief from stay order.
Wife's only argument on appeal was that the bankruptcy court in the fourth case (filed by Husband only) did not make the necessary findings of fact to support in rem relief. Wife argued that, as a result, the bankruptcy court in the sixth case erred in granting the lender relief from stay to continue with its unlawful detainer action because the foreclosure sale during the fifth bankruptcy case violated the automatic stay and was void.
The BAP found that the bankruptcy court did not abuse its discretion when it granted the lender relief from stay to to continue with its unlawful detainer action. Under the BAP's reasoning, the In Rem Order was effective against the property when Wife filed the fifth bankruptcy case. Moreover, the BAP opined, Wife could not challenge the factual findings by collaterally attacking the prior, final and unappealed In Rem Order in Husband's fourth case.
The BAP discussed the special relief fashioned by Congress when BAPCA added Sections 362(d)(4) and 362(b)(20) to the Bankruptcy Code to protect creditors against serial bankruptcy filings. Section 362(d)(4) provides that "if the court finds that the filing of the petition was part of a scheme to delay, hinder, or defraud creditors that involved . . . multiple bankruptcy filings affecting such real property" and the creditor records such order "in compliance with applicable State laws governing notices of interests or liens in real property" such order "shall be binding in any other case under this title purporting to affect such real property filed not later than 2 years after the date of the entry of such order. . . ." Id. For such two year period, under section 362(b)(20), the automatic stay imposed in a bankruptcy case does not prohibit a creditor from enforcing its lien that is the subject of a 362(d)(4) order entered in a prior case. Alakozai at ∗15.
In response to Wife's argument that she was not a debtor in Husband's bankruptcy case when the In Rem Order was entered, the Court made clear that an order under Bankruptcy Code section 362(d)(4) "binds any party asserting an interest in the affected property, including every non-debtor, co-owner, and subsequent owner of the property." Alakozai at ∗14.
This case demonstrates precisely why Congress amended the Bankruptcy Code to provide for in rem relief from stay as to real property. Once granted, the relief remains effective for two years after the in rem order is entered, so long as the creditor records the order where real property liens are recorded under state law. This prevents a debtor, co-owner or purchaser of such real property from reimposing the automatic stay in subsequent bankruptcy filings for such two-year period except upon "changed circumstances or for other good cause shown, after notice and a hearing." 11 U.S.C. § 362(b)(20). Here, Husband and Wife were "tactical serial filers" who used bankruptcy as a means to prevent the lender from enforcing its lien.
Any lender obtaining in rem relief should make sure that it records the order in the real property records in accordance with state law as soon as possible. Otherwise, it may find itself subject to the automatic stay in a subsequent bankruptcy filing by the debtor, co-owner, or subsequent purchaser of the property.
In re Gasprom, 500 B.R. 598 (9th Cir. BAP 2013)
In re Gasprom, 500 B.R. 598 (9th Cir. BAP 2013). The Ninth Circuit Bankruptcy Appellate Panel held that a secured creditor violated the automatic stay by foreclosing on collateral abandoned by the Trustee of a corporate chapter 7 debtor before the bankruptcy case was closed.
In Gasprom, after the corporation's case was converted from chapter 11, the Trustee moved to abandon the debtor's sole asset - an non-operational gas station for which there were troublesome issues concerning permitting, hazardous waste and underground storage compliance, and which was fully encumbered to a secured creditor. The debtor objected to the abandonment and asked for a continuance to avoid any sudden actions by the secured creditor against the property. Relying on In re D'Annies Restaurant, 15 B.R. 828 (Bankr. D.M.N. 1981), the bankruptcy court granted the motion to abandon, noting that the effect of the abandonment would be to vacate the automatic stay. The bankruptcy court entered an order for the abandonment of the property.
As the debtor feared, the secured creditor conducted the foreclosure sale later that day. Thereafter, the chapter 7 trustee issued a final "no asset" report, and the case was closed about two weeks later.
The debtor then filed a motion to reopen the bankruptcy case so that it could set aside the foreclosure sale and commence contempt proceedings for violation of the automatic stay. The bankruptcy court reopened the case, but denied the yet unfiled motions. It held that upon entry of the abandonment, the automatic stay no longer enjoined the sale of the gas station, and that the court would annul the automatic stay sua sponte to the extent necessary to validate the foreclosure. The debtor appealed.
The BAP's Holding And Reasoning
The BAP reversed, holding that the bankruptcy court erred when in found that the foreclosure did not violate the automatic stay. Although the abandonment made the collateral no longer property of the estate, the automatic stay remained in effect to bar enforcement of liens against "property of the debtor" under section 362(a)(5). The BAP declined to follow the holding of D'Annes which held that after abandonment of estate property, Section 365(a)(5)only protects a debtor from foreclosure of that property if that debtor is an individual. The BAP found that nothing in the statutory language would permit it to read "of an individual" into the statutory language of Section 362(a)(5). The BAP found that references in prior Supreme Court and Ninth Circuit decisions that the effect of abandonment was to revert property to the debtor "nunc pro tunc" "as if no bankruptcy petition had been filed" concerned the effect on title, and not whether the property was subject to the automatic stay.
The BAP also held that it was an abuse of discretion for the bankruptcy court to annul the automatic stay sua sponte without affording the debtor an opportunity to brief and be heard on the appropriate factors for such an order.
As a result of Gasprom, even though the property has been abandoned, a secured creditor should always either: (1) file a motion for stay relief; or (2) wait to conduct the foreclosure sale until the case has been closed.
Opinion does not state any reason why the automatic stay should protect abandoned property of a corporate debtor in the period between abandonment and the closing of the case. For an individual debtor, the reasons are clear; the Code grants the individual debtor the right to avoid certain judicial liens and certain nonpossessory, nonpurchase-money security interests and to redeem some collateral by paying the value of the property when less than the claim. There are no such rights for a corporate debtor. Indeed, one could question: (a) why GASPROM should have standing to object; (b) why the bankruptcy court would have subject matter jurisdiction to address the debtor's claim regarding abandoned property where the debtor has no remaining rights under the Bankruptcy Code; or (c) why any bankruptcy court would deny a motion for stay relief if brought by a secured creditor under these circumstances?
U.S. Supreme Court to Hear Case on Inherited IRAs in Bankruptcy
November 27, 2013
The U.S. Supreme Court will hear a dispute in the bankruptcy of a small-town pizza shop owner, taking on a case that could dictate how inherited individual retirement accounts are treated in bankruptcy, Reuters reported yesterday. The Supreme Court said yesterday that it would hear arguments in Clark v. Rameker in a fight over whether Heidi Heffron-Clark and her husband, Brandon Clark, can keep creditors from going after $300,000 in an IRA inherited from Heffron-Clark's late mother. The Clarks declared bankruptcy in 2010 after the pizza shop they opened in their home town of Soughton, Wis., fell victim to economic hardship, said Michael Murphy, the couple's lawyer. The Clarks owed about $700,000 to their landlord, mortgage lenders, trade creditors and others, Murphy said. That means the roughly $300,000 in the IRA could make a big difference in overall creditor recoveries. William Rameker, the trustee in charge of administering the couple's bankruptcy estate, took the position that the IRA was fair game for creditors, but the Clarks argued that it was exempt under bankruptcy laws, which generally protect retirement funds. After an initial victory for Rameker was reversed by a district court, the matter went before a three-judge panel in the 7th Circuit U.S. Court of Appeals. In an April opinion written by Chief Judge Frank Easterbrook, the panel sided with Rameker, saying creditors could access the inherited IRA. Easterbrook held that while bankruptcy laws exempt retirement funds from creditor claims, IRAs cease to be "retirement funds" when inherited from a deceased owner. Under existing law, distributions under an inherited IRA must begin within a year of the prior owner's death and finish within five years. The ruling clashes with decisions in both the Fifth and Eighth Circuits, where judges have held that IRAs do not cease to be retirement funds when they change hands.
In re Rowe, 2013 U.S. Dist. LEXIS 11970
In In re Rowe, 2013 U.S. Dist. LEXIS 11970 (E.D. Va., January 29, 2013), the United States District Court for the Eastern District of Virginia (the "District Court") affirmed the decision of the United States Bankruptcy Court for the Eastern District of Virginia (the "Bankruptcy Court"), wherein the Bankruptcy Court reduced the requested compensation of the chapter 7 trustee significantly below the amount requested, which was calculated in accordance with Bankruptcy Code section 326 (a). the Bankruptcy Court concluded that the trustee had failed to "properly or timely complete his duties as trustee." In re Rowe, 484 B.R. 667 (Bankr. E.D. Va. 2012). On appeal, the trustee argued that he was entitled to the requested compensation under the 2005 amendment to Bankruptcy Code section 330(a)(7) and the Bankruptcy Court had wrongfully refused to grant his request on that basis. The District Court affirmed the Bankruptcy Court holding that the Bankruptcy Court did not abuse its discretion as the Bankruptcy Court had made factual findings sufficient to justify its decision and the findings were not clearly erroneous.
Cal-Western Business Services, Inc. v. Corning Capital Group
Cal-Western Business Services, Inc. v. Corning Capital Group, 2013 DJAR 14887 (California Court of Appeal, 2nd Dept 11/6/13) holds that a California corporation that was suspended, for failure to pay its corporation taxes, is disqualified from exercising any right, power or privilege of a corporation, including a suspended corporation may not prosecute or defend a lawsuit, appeal from a judgment, seek a writ, or take any other similar legal action. Because Pacific West was a suspended CA Corp, it lacked power to assign a judgment, that it owned, in its favor, against Corning Capital Group, to Cal -Western Business Services. Because the assignment to Cal-Western Business Services of the judgment was invalid, due to Pacific West being suspended, Cal-Western (the purported assignee of the judgment) could not proceed to try to collect that judgment from Judgment Debtor Corning Capital.
How this relates to bankruptcy: There is conflicting case law on whether or not a suspended corporation can file bankruptcy. As a practical matter, when a corporation is suspended, there is no one to pass a corporate resolution that the corporation should file bankruptcy, and having such a corporate resolution, directing the corporation to file bankruptcy, is a requirement before a corporate bankruptcy can be filed. Solution: Pay the taxes, get the corporation UN-suspended (ie back in active corporate status), then pass the corporate resolution, then file bankruptcy.
US Supreme Court to hear and decide 2 appeals in two different bankruptcy cases:
The United States Supreme Court has granted "certiorari" on two bankruptcy cases, meaning that the United States Supreme Court will hear and decide the the appeals of the following 2 bankruptcy cases, in the Court's 2013-2014 session The two cases are the appeals of (1) Law v. Siegel, which questions whether the court may use its general equitable authority under §105 of the Bankruptcy Code to surcharge a debtor's exempt assets, and (2) Executive Benefits Insurance Agency v. Arkison (In re Bellingham), which will address the bankruptcy court's authority to adjudicate Article III matters. Whenever the US Supreme Court rules on an issue, every federal court in the US, including every Bankruptcy Court in the US, is REQUIRED to do what the US Supreme Court rules. This is referred to as lower federal courts being "bound" by US Supreme Court rulings, whether or not the Circuit Judge, District Judge, Bankruptcy Appellate Panel Judge, or Bankruptcy Judge agrees or disagrees with the US Supreme Court's decision.
Zadrozny vs. Bank of New York Mellon
Zadrozny vs. Bank of New York Mellon, 2013 Westlaw – – (9th Cir. 2013): Applying Arizona law, the Ninth Circuit has held that a foreclosing creditor need not produce the original promissory note before pursuing nonjudicial foreclosure. [See immediately below].
Facts: A married couple executed a note and deed of trust in favor of a lender. The deed of trust authorized the lender to transfer the note and authorized MERS (Mortgage Electronic Registration Systems, Inc.) to act as the nominee on behalf of the lender. MERS ultimately transferred the rights to the note and trust deed to an assignee.
The assignee eventually sought nonjudicial foreclosure. The borrowers filed suit, claiming that MERS lacked authority to act on behalf of the lender and that the original promissory note had not been produced prior to foreclosure. Following removal of their case to federal court, the district court dismissed their complaint, and the Ninth Circuit affirmed.
Reasoning: On appeal, the borrowers relied upon in In re Veal, 450 B.R. 897 9th Cir. BAP 2011), for the proposition that the note and the deed of trust cannot be separated; therefore, the party seeking nonjudicial foreclosure under the deed of trust had to establish that it also had rights to the underlying note. But the Ninth Circuit distinguished Veal on the ground that it construed Illinois law, rather than Arizona law. The Arizona Supreme Court had recently held that there is no statutory requirement that a foreclosing creditor produce the original promissory note prior to foreclosure.
The Ninth Circuit also distinguished Veal on the ground that it was limited to cases involving relief from the automatic stay in bankruptcy and did not necessarily control nonjudicial foreclosure under state law.
As a fallback, the borrowers argued that following the securitization of the promissory note, the assignee lacked a valid security interest under the Uniform Commercial Code, because it did not obtain actual possession of the note. But again quoting Arizona authority, the court noted that the Arizona foreclosure statutes "do not require compliance with the UCC before a trustee commences a nonjudicial foreclosure."
Comment: Except in isolated jurisdictions and isolated procedural contexts, the "show me the note" theory is becoming more and more marginalized. In a perfect world, assignees would indeed obtain the original promissory notes prior to commencing foreclosure; but the recent trend in the case law recognizes that this is not a perfect world and that the disastrous mortgage securitization schemes hatched during the early years of this century must be unwound in a quick and orderly way, so that the banking system can recover and so that the "shadow inventory" of pending foreclosures can be cleared out of the real estate market.
The Ninth Circuit's opinion in this case makes it clear that the holding in Veal does not supersede state law; indeed, the Veal court itself (perhaps in dicta) made a similar observation in footnote 34:
Ultimately, the minimum requirements for the initiation of foreclosures under applicable nonbankruptcy law will shape the boundaries of real party in interest status . . . with respect to relief from stay matters. As a consequence, the result in a given case may often depend upon the situs of the real property in question. [Id., 450 B.R. at 917, fn. 34.]
For a discussion of Veal, see 2011 Comm. Fin. News. 52, Purported Assignee of Mortgage Lacks Standing to Obtain Relief from Automatic Stay Because Assignment Transferred Mortgage Without Underlying Note. For discussions of decisions dealing with closely-related issues, see 2012 Comm. Fin. News. 30, Assignee Of Senior Trust Deed Seeking Nonjudicial Foreclosure Need Not Show Possession of the Underlying Promissory Note, Despite Commercial Code Provisions Governing Enforcement Of Negotiable Instruments, and 2011 Comm. Fin. News. 95, Assignee of Mortgage May Not Have Standing to Pursue Foreclosure Unless It Can Establish Assignment of Corresponding Promissory Note.
This analysis was published by the California State Bar Business Law Section's INSOLVENCY COMMITTEE e-newsletter
Beware of Breadth of Attorneys Fees Clauses in Contracts:
Maynard vs. BTI Group, Inc., 2013 Westlaw 2322608 (California Court of Appeals 2013):
Facts: An individual owned a retail business and retained a broker to help her sell it. Although the business was sold, the purchaser soon filed a bankruptcy petition, leaving a portion of the purchase price unpaid. Supposedly, the broker failed to obtain security from the purchaser, despite the seller's instructions to do so.
Following the purchaser's default, the seller brought suit against the broker, asserting claims for breach of contract and negligence. She prevailed on her negligence claim but not on her contract claim. The trial court also awarded her attorney's fees. The broker appealed, claiming that it had prevailed over her on the contract claim and that the seller should not have received an award of fees.
Reasoning: The appellate court affirmed, citing the fee clause in the listing agreement, which provided that the "prevailing party in the event of . . . litigation shall be entitled to costs and reasonable attorney fees . . . ." The court reasoned that this language meant that since the purchaser received a net recovery, she was entitled to fees, even though she had not prevailed on the contract:
Unlike some attorney fee provisions that restrict the right to recover attorney fees to the party prevailing on a breach of contract claim, in which case the outcome of other claims does not affect the right to recover attorney fees, the agreement in this case entitles the party who prevails in the overall dispute to recover its attorney fees.
The court noted that a fee provision can be narrowly drafted to focus solely on contractual claims:
[W]hen the attorney fee provision provides that the party who prevails on the contract claim shall recover its attorney fees, only that party may recover its fees even if the other party obtains greater relief under a noncontractual cause of action.
However, the fee clause at issue in this case was not expressly restricted to contractual claims:
If the attorney fee provision does encompass noncontractual claims, the prevailing party entitled to recover fees normally will be the party whose net recovery is greater, in the sense of most accomplishing its litigation objectives, whether or not that party prevailed on a contract cause of action.
Finally, the court held that "[i]f the attorney fee provision is broad enough to encompass contract and noncontract claims, in awarding fees to the prevailing party it is unnecessary to apportion fees between those claims."
As a fallback, the broker argued that even if the seller were entitled to recover fees for the tort claim, the broker should have been entitled to recover fees because it prevailed on the contract claim. The court disagreed:
This contention disregards the terms of the contractual attorney fee provision. That provision does not entitle the party prevailing on a particular cause of action to recover its fees incurred in connection with that cause of action. Rather . . . , the agreement is that the party who prevails in arbitration or litigation of 'any dispute' shall recover its costs and reasonable attorney fees.
Comment: This case illustrates the hidden risk of fee clauses. I have long argued that fee clauses are dangerous because they can result in paradoxical (and asymmetrical) liability for commercially-sophisticated drafters (such as lenders). The drafting party is rarely able to collect a fee award from the less-sophisticated party, who is often judgment-proof. Thus, the fee clause provides no meaningful protection for the drafting party in the event of victory, while still exposing that party to substantial liability in case of a loss.
Nevertheless, if the drafter really wants to include a fee clause despite those risks, this case provides some drafting tips. First, the clause should expressly restrict the scope of the clause to contractual claims and should specifically exclude tort claims. Second, the clause may provide that the prevailing party on the contract claim may recover its fees, even if the opposing party prevails on noncontractual claims. At a minimum, the contractual fee award may offset any tort damages recovered by the non-drafting party.
There is one passage in this opinion that may need clarification. The court stated that "when the attorney fee provision provides that the party who prevails on the contract claim shall recover its attorney fees, only that party may recover its fees even if the other party obtains greater relief under a noncontractual cause of action." Note, however, that if the prevailing party invokes a noncontractual theory (such as fraud) in order to prevail on both the tort and contract claims, the trial court may award fees to that party incurred in connection with all of the claims, if the issues were "inextricably intertwined." See, e.g., PM Group, Inc. v. Stewart, 154 Cal.App.4th 55, 69-70, 64 Cal.Rptr.3d 227, 238 (2007).
For discussions of earlier cases involving comparable "asymmetrical fee liability" situations, see:
- 2011 Comm. Fin. News. 103, Broadly Worded Attorney's Fee Clause Contained in Asset Transfer Agreement May Be Asserted Against Nonsignatory, After Nonsignatory Unsuccessfully Seeks to Enforce Agreement against Asset Transferee.
- 2011 Comm. Fin. News. 92, Guarantor Who Is Not a Signatory to Underlying Agreement Is Nevertheless Entitled to Assert Attorney's Fee Clause in Agreement, Even Though Guaranty Contains No Fee Clause.
- 2010 Comm. Fin. News. 95, Debtor May Recover Attorney's Fees Incurred During Prosecution of Creditor for Violation of Automatic Stay.
- 2009 Comm. Fin. News. 76, Assignee of Contract That Does Not Contain Attorney's Fee Clause Cannot Invoke Fee Clause Contained in a Related Contract That Was Not Assigned, Despite Broad Wording of Fee Clause.
- 2007 Comm. Fin. News. 84, Broadly Worded Attorney's Fee Clause Encompasses Fees Incurred in Connection with Both Contract and Tort Claims.
- 2005 Comm. Fin. News. 66, Lender Is Liable for Attorney's Fees Incurred by Nonsignatory Account Debtor, Even Though Underlying Agreement between Account Debtor and Borrower Did Not Contain a Fee Clause.
- 2004 Comm. Fin. News. 61, Narrowly-Drafted Attorney Fee Clause Does Not Encompass Fees Incurred in Contract Defense to Tort Action.
This analysis was published by the California State Bar Business Law Section's INSOLVENCY LAW STANDING COMMITTEE
Wellness International n Network, Ltd. v. Sharif, ___ F.3d ___, 2013 Westlaw 4441926 (7th Circuit 2013)
In Wellness International n Network, Ltd. v. Sharif, ___ F.3d ___, 2013 Westlaw 4441926 (7th Circuit 2013) , disagreeing with the Ninth Circuit, the Seventh Circuit has held that a debtor's objection to a bankruptcy court's constitutional authority to enter a final judgment cannot be waived.
Facts: After a creditor obtained a judgment against a debtor, the debtor filed a Chapter 7 bankruptcy petition. The creditor then brought an adversary complaint seeking to block his discharge and seeking a declaratory judgment that a trust administered by the debtor was actually his alter ego. As the result of discovery violations, the court entered a default judgment against the debtor.
Following the publication of the Supreme Court's opinion in Stern vs. Marshall, – U.S. –, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), sharply limiting the authority of bankruptcy judges to enter final judgments, the debtor in the Wellness case appealed to the district court but failed to challenge the bankruptcy judge's authority to enter a final judgment in his opening brief. After the Stern issue was later raised, the district court nevertheless affirmed the bankruptcy court's decision, ruling that the debtor had effectively waived the Stern issue. On appeal to the Seventh Circuit, the debtor successfully argued that the Stern issue was not waivable.
Reasoning: The court noted that the Ninth Circuit had held that the Stern issue could be waived, in In re Bellingham Ins. Agency, Inc., 702 F.3d 553 (9th Cir. 2012), cert. granted sub nom. Executive Benefits Ins. Agency v. Arkison,133 S.Ct. 2880 (2013). On the other hand, the Sixth Circuit had held that this issue was not waivable, in Waldman v. Stone, 698 F.3d 910 (6th Cir. 2012), cert. denied, 133 S.Ct. 1604, 185 L.Ed.2d 581 (2013).
After an exhaustive review of Stern, and after a careful discussion of the subtle differences between subject matter jurisdiction and constitutional authority, the court held that Stern, despite its discussions of the doctrine of waiver, had never explicitly authorized the waiver of a constitutional defect: "We discern nothing in Stern that supports the proposition that a party may waive an Article III objection to a bankruptcy judge's entry of final judgment."
Comment: Commentator is not sure that the court's analysis of the differences between subject matter jurisdiction and constitutional authority are supported by the reasoning in Stern; commentator does not think that Stern articulated that distinction clearly. Nevertheless, commentator predicts affirmance, if certiorari is granted. It is one thing to consent to jurisdiction by filing a claim, as discussed in Stern. It is quite another to have that consent infect that same party's ability to defend against a claim. That distinction was the basis for commentator's prediction that Bellingham will be reversed; see 2012 Comm. Fin. News. 100, Although Bankruptcy Courts Lack Jurisdiction to Hear and Determine Fraudulent Transfer Claims, They May Issue Reports and Recommendations, and Defendant May Waive Objection to Lack of Jurisdiction:
The discussion in Stern . . . , addressing the issue of consent, dealt with the act of the litigant in affirmatively filing a claim in the bankruptcy court; when he did so, he consented to an adjudication of that claim.
But the Stern court emphatically did not say that a litigant who has not filed a claim and who is simply a target of a claim filed by the estate can waive the jurisdictional defect. When one considers the facts in Stern, the opposite is evidently true. The non-bankrupt litigant in that case did file a claim in the bankruptcy, consenting to the adjudication of that claim. Nevertheless, the Supreme Court held that this consent did not extend to a claim asserted by the estate against him.
Looking beyond the fascinating metaphysical questions posed by Stern, this whole issue is a deplorable waste of time and money. Even if (as seems likely) Stern is broadly construed and applied, it will result in nothing more than an elaborate charade. The district courts, facing their own crowded dockets, will almost invariably rubber-stamp the bankruptcy courts' "Reports and Recommendations," properly deferring to the bankruptcy judges' expertise in such matters. For an excellent analysis of the practical consequences of Stern and its progeny, see J. Tanner, Stern v. Marshall: the Earthquake that Hit the Bankruptcy Courts and the Aftershocks that Followed, 45 Loy. L.A. L. Rev. 587 (2012).
Finally, a truly pedantic note: the Bellingham court capitalized the word "Chapter," as in "Chapter 7." So did the Seventh Circuit in the Wellness decision. So does the heading to Chapter 7 of Title 11 of the United States Code. I know that bankruptcy petitioners generally don't capitalize that word, but I do not understand why that word should be singled out for capital punishment. As far as I can tell, no published treatise or reported case has made a persuasive case for lower case.
The foregoing analysis is from the Insolvency Law Committee - Business Law Section of the State Bar of California, from the Insolvency Law Committee's 082813 e-newsletter
The U.S. Bankruptcy Appellate Panel of the Ninth Circuit ("BAP") has held that a recorded abstract of judgment attached to the proceeds from the sale of a debtor's residence even though the abstract was recorded after the debtor's fraudulent transfer of her interest in the residence to her daughter. Daff v. Wallace (In re Cass), BAP No. CC-12-1513-KiPaTa (9th Cir. BAP, Apr. 11, 2013)(unpublished). To read the full decision, click (Cass) http://cdn.ca9.uscourts.gov/datastore/bap/2013/04/11/Cass%20Memo%2012-1513.pdf
Facts and Procedural Background
Creditors sued the Debtor for nuisance and defamation. To prevent the potential seizure of her half million dollar home, the Debtor transferred her residence to her daughter for no consideration and reserved a life estate therein. The Debtor and her daughter then entered into a separate agreement where the daughter promised to reconvey the home ("Residence") back to the Debtor upon the Debtor's request (the "Fraudulent Transfer"). The Fraudulent Transfer gave rise to further litigation, as Creditors then filed a second action alleging that the Debtor fraudulent transferred the Residence to her daughter. Creditors obtained a judgment in the nuisance lawsuit, including an award of punitive damages, from which the Debtor appealed. Judgment Creditors then recorded an abstract of judgment against the Debtor (although the Debtor had already transferred title to her Residence).
While the fraudulent transfer litigation progressed, the Debtor filed a chapter 7 petition. The chapter 7 trustee ("Trustee") substituted into the fraudulent transfer action, removed it to the bankruptcy court, and subsequently obtained a stipulated judgment avoiding the Fraudulent Transfer of the Residence. The Debtor opposed the stipulated judgment but her death rendered both her objections and appeals moot.
The Judgment Creditors and the Trustee agreed to sell the Residence. However, the parties disputed whether the Judgment Creditors' lien attached to the sale proceeds. The Trustee argued that the lien was invalid because the Debtor transferred title to her daughter before the Judgment Creditors perfected their lien. The Judgment Creditors took the position that the Fraudulent Transfer was void such that it never occurred. As a result, the Judgment Creditors argued, title and ownership in the Residence remained in the Debtor and their judgment was superior to any interest held by the Trustee. The bankruptcy court ruled in favor of the Judgment Creditors. On appeal, the Trustee argued, among other things, that the stipulated judgment avoiding the Fraudulent Transfer also avoided the Judgment Creditors' lien.
Holding and Analysis
The BAP began its analysis by reviewing the California Uniform Fraudulent Transfer Act ("CUFTA"), which law permits defrauded creditors to reach property in the hands of a transferee. The transferee holds only nominal or bare title while the transferor retains a beneficial and equitable interest. A perfected judgment lien therefore attaches to all of a debtor's interests in real property, including equitable interests.
Both the bankruptcy court and the BAP focused on the daughter's agreement to reconvey the Residence back to the Debtor at the Debtor's request. The daughter's promise to transfer the Residence back meant that the Debtor did not relinquish all of her interests in the Residence; the Debtor retained an equitable interest. Because the Debtor retained an equitable interest, the BAP concluded that the Judgment Creditors' judgment lien attached to that equitable interest. As a result, the Judgment Creditors' lien was valid and attached to the Residence and its sale proceeds.
In reaching its determination, the BAP rejected the Trustee's argument that the stipulated judgment avoiding the Fraudulent Transfer extinguished the judgment lien. According to the BAP, under California law perfected judgment liens are extinguished only by satisfaction of the underlying judgment or a release. Judgment liens are not extinguished through sections 550 and 551 of the Bankruptcy Code.
The BAP also affirmed the rulings of the bankruptcy court that issue preclusion and judicial estoppel did not prevent the Judgment Creditors from enjoying the status of perfected secured creditors as to the sale proceeds of the Residence.
A chapter 7 trustee generally seeks to avoid liens in order to take property that is otherwise another creditor's collateral and allow the funds to be used to pay administrative expenses and unsecured creditors. In this case, the opinion mentions but does not discuss the fact that the Trustee was unable to avoid the lien but nevertheless was permitted to pay administrative expenses from the sale proceeds. The administrative expenses were incurred in significant part fighting with the judgment creditor, so a surcharge theory would not seem to apply; nor does it appear that the judgment creditors agreed to the payment. Thus, the Cass opinion seems to split the baby in the sense that the court held that the sale proceeds were collateral of the wronged judgment creditors, but at the same time apparently available to pay administrative expenses.
Prepared by the Insolvency Law Committee - Business Law Section of the State Bar of California
Quasi-judicial Immunity of Bankruptcy Trustees: A bankruptcy court in Eastern District of Tennessee has held that a chapter 7 trustee and his auctioneer enjoy quasi-judicial immunity against allegations of theft, embezzlement, conversion and fraud when selling property pursuant to a court order. Lunan v. Jones (In re Lunan), In re Lunan, 2012 WL 77491912 (Bankr. E.D. Tenn. Mar. 22, 2013) To read the full decision, click here.
Factual Background and Procedural History
The chapter 7 trustee ("Trustee") moved to sell the debtor's million dollar home, luxury vehicles and artwork. Insisting that the sale price was too low, the debtor opposed the sale motion. After losing in the bankruptcy court, the debtor appealed to the district court and to the Sixth Circuit. Her appeals were eventually dismissed. In tandem with the debtor's efforts, her non-debtor husband ("Plaintiff") sued the Trustee and the court appointed auctioneer in state court to stop the sale. Plaintiff alleged that the trustee was attempting to sell non-estate property for personal gain and alleged state and federal civil rights violations, conversion, theft, embezzlement and fraud. Among other allegations, Plaintiff asserted that some of the property subject to the Trustee's sale belonged solely to Plaintiff and to his son. Plaintiff also contended that certain of the property at issue was jointly-held by Plaintiff and the debtor.
The Trustee removed the state court litigation to the bankruptcy court and moved to dismiss Plaintiff's claims because (i) Plaintiff did not obtain court permission as required by the Barton doctrine, and (ii) the Trustee and his auctioneer were protected by quasi-judicial immunity. Plaintiff opposed dismissal, asserting that neither the Barton doctrine nor immunity applied because the Trustee's and auctioneer's actions were outside the scope of their authority.
Holding and Analysis
In evaluating the Barton doctrine contentions, the bankruptcy court looked to the Sixth Circuit's definition of the doctrine. The Barton doctrine requires a party to obtain the permission of the bankruptcy court before commencing an action in a state forum against a trustee, for acts committed in the trustee's official capacity and within the trustee's authority as an officer of the court. Barton also applies to those who are the "functional equivalent" of trustees, such as court appointed auctioneers. While the court agreed with Plaintiff's legal position that Barton does not apply to acts outside of a trustee's official duties, Plaintiff's husband failed to provide any evidence that the Trustee and the auctioneer were acting outside of the court's order authorizing them to sell the property. Mere allegations of improper conduct, the court concluded, do not take Plaintiff's claims outside the Barton doctrine. Nonetheless, the court declined to dismiss the case for a violation of the Barton doctrine, since removal of state court litigation to the bankruptcy court cures any Barton violations.
Turning to the immunity issue, the court held that, similar to the Barton doctrine, trustees and court-appointed auctioneers are entitled to special protections when they are acting within the scope of their official duties and pursuant to court orders. A trustee's conduct is not immune if a trustee acts outside his authority - such as seizing non-estate property. But, according to the court, the property allegedly converted was taken pursuant to court order. As a result, the Trustee's and the auctioneer's acts were protected. Further, their acts were immune even from allegations of bad faith, malice or gross error. The court further determined that the Trustee's and auctioneer's statements and speech were protected by immunity, in addition to their conduct. Granting the Trustee's motion, the bankruptcy court dismissed the litigation.
The Lunan opinion, issued by a bankruptcy court in the Sixth Circuit, appears consistent with Ninth Circuit precedent.
In Harris v. Wittman (In re Harris), 590 F.3d 730, 742-44 (9th Cir. 2009), the U.S. Court of Appeals for the Ninth Circuit affirmed the district court's and bankruptcy court's orders granting quasi-judicial immunity to the chapter 7 trustee and "functional equivalents" of the chapter 7 trustee - the trustee's counsel, and an unsecured creditor assigned the right to pursue avoidance litigation - against a debtor's breach of contract claims. Parties who would seek judgment against a bankruptcy trustee for alleged malfeasance arising from acts taken by the trustee in his or her official capacity should note that such suits are unlikely to succeed in the Sixth and Ninth Circuits.
This case write up was prepared by The Insolvency Law Committee of the Business Law Section of the California State Bar.
Recent 9th Circuit Court of Appeals Decision re Judicial Estoppel: Usually, where a debtor fails to list (schedule) a claim/cause of action/lawsuit in which debtor is plaintiff, and in which other persons/entities are defendants, the punishment is that the debtor is NOT allowed to pursue that claim, after the bankruptcy case is over (debtor is estopped to pursue claim after bankruptcy, because debtor failed to schedule the existence of the claim, in debtor's bankruptcy schedules.
However, in Ah Quin v. County of HI, F.3d, 2013 DAR 9634 (9th Cir. 7/25/13), the 9th Circuit Court of Appeals held that the Debtor/plaintiff was not estopped from pursuing discrimination law suit, despite fact debtor had failed to list that suit as an asset, in debtor's bankruptcy schedules. 9th Cir., 2-1 decision, reverses summary judgment for Defendant determining that lower court did not apply correct standard as mistake or inadvertence exception to application of judicial estoppel. Perhaps the most relevant fact, not really discussed in the opinion, is that the debtor/plaintiff reopened her case and the Ch 7 trustee abandoned the claim.
If the claim had not been abandoned, by the Trustee, back to the debtor, when the bankruptcy case was reopened, the unscheduled claim would have remained part of the bankruptcy estate, after case was over, forever, and therefore debtor would NOT have been able to pursue the unscheduled claim after debtor's case was over.
Anti-Deficiency Protection, on Purchase Money DOT Residential Loans, Expanded by new CA statute signed into law on 7/11/13 by governor, to Include Short Sale Done with DOT Lender Consent, not Just Non-Judicial Foreclosure Sale by Lender
On July 11, 2013 Governor Brown signed into law SB 426 which expands the anti-deficiency language in Code of Civil Procedure ("C.C.P.") sections 580b and 580d by expressly prohibiting not only: (i) a deficiency judgment against the borrower in connection with either a "purchase money" deed of trust covered under C.C.P. §580b or following a non-judicial foreclosure of a deed of trust covered under C.C.P. §580d, but now also (ii) any liability for any deficiency in the foregoing situations. However, SB 426 expressly recognizes the right of a lender to collect any such deficiency from any additional collateral held or from any third-party guarantor.
As discussed herein, the new statute could be viewed as "clarifying" rather than "amending" existing California law so that when it becomes effective, it will apply to deficiency obligations then existing and held by any lender or its assignee.
A. New Legislation (C.C.P. §§580b and 580d)
Prior to the enactment of SB 426, C.C.P. § 580b prohibited a deficiency judgment in connection with the following: (1) any sale of real property for failure of the purchaser to complete the contract of sale;(2) under a deed of trust given to the vendor to secure repayment of the purchase price of the encumbered property; (3) under a deed of trust on residential property given to a lender to secure repayment of a loan ("purchase money loan") used in whole or in part to pay for the purchase price of a residence to be occupied, in whole or in part, by the purchaser; or (4) a loan used to refinance a purchase money loan except to the extent that the lender advanced new principal to the borrower which was not used to repay existing principal or interest or loan fees and costs.
Similarly, prior to the enactment of SB 426, C.C.P. §580d prohibited a deficiency judgment on a note secured by a deed of trust on real property in any case in which the property had been sold under a power of sale (i.e. a non-judicial foreclosure).
SB 426 clearly provides that not only is a deficiency judgment prohibited, but that no deficiency shall be collected or even owed in such situations. However, such protections apply only to the borrower and to its non-encumbered assets. The statute expressly provides that although a deficiency may not be collected from the borrower, the new provisions do not affect the liability: (i) of any guarantor, pledgor or any other surety might have with respect to the deficiency; or (ii) that might be satisfied in whole, or in part, from other collateral pledged to secure the obligation that is the subject of the deficiency.
B. C.C.P. §580e
Although SB 426 does not expressly address C.C.P. §580e, any deficiency subject to C.C.P. §580e will be similarly affected.
C.C.P. §580e (a)(1) provides that no deficiency may be collected and no deficiency judgment may be requested for a loan secured solely by a residence in any case where the lender agrees to a short sale and receives any agreed portion of the sale proceeds. However, C.C.P. §580e(a)(2) simply prohibits a deficiency judgment, and does not prohibit collection of any deficiency in those situations where the lender has other collateral securing its loan in addition to the residence.
Although SB 426 does not address C.C.P. §580e(a)(2), its prohibition of the collection of any deficiency will apply to a short sale covered under §580e(a)(2) because C.C.P. §580e(a)(2) expressly provides that the "rights, remedies, and obligations of any holder, beneficiary, trustor, mortgagor, obligor, obligee or guarantor of the note ... shall be treated and determined as if the dwelling had been sold through foreclosure under a power of sale contained in deed of trust ... in the manner contemplated by Section 580d".
In other words, the lender's right to collect a deficiency under C.C.P. §580e(a)(2) will be treated (i.e. prohibited) just as if the lender had conducted a foreclosure under C.C.P. §580d.
C. Extent of Application of SB 426
If a statute is merely declaratory of or clarifies existing law, it will be applicable to all existing covered transactions that exist as of the date that the statute goes into effect. From the present case law, it could be concluded that under existing case law a lender would be precluded not only from obtaining a deficiency judgment under C.C.P. §§580b and 580d, but also would be prohibited from collecting any deficiency owed under the subject obligation.
First, case law is clear that C.C.P. §§580b and 580d do not prevent a secured creditor from collecting the deficiency from additional collateral. Freedland v. Greco (1995) 45 Cal.2d 462, 466; Hatch v. Security-First Nat. Bank (1942) 19 Cal.2d 254, 260-61; Mortgage Guarantee Co. v. Sampsell (1942) 51 Cal.App.2d 180, 183-86; see also Paradise Land and Cattle Co. v. McWilliams Enterprises, Inc., 959 F.2d 1463 (9th Cir. 1992) (permitting a secured creditor to collect against a third party guarantor or surety).
Second, a number of California decisions have expressly acknowledged that the purpose of C.C.P. §§580b and 580d was to prevent a borrower from being obligated to repay the unpaid balance of a loan (i.e. the deficiency) following any foreclosure on the real property collateral. The oft-repeated explanation is stated in Cadlerock Joint Venture L.P. v. Lobel (2012) 206 Cal. App.4th 1531:
The anti-deficiency statutes are to be construed liberally to effectuate the legislative purposes underlying them, including the policies ' "... (2) to prevent an overvaluation of the security, (3) to prevent the aggravation of an economic recession which would result if [debtors] lost their property and were also burdened with personal liability, and (4) to prevent the creditor from making an unreasonably low bid at the foreclosure sale, acquire the asset below its value, and also recover a personal judgment against the debtor." ' " (emphasis added)(internal citations omitted)
Similarly there is other oft-repeated language from the California Supreme Court in Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226:
Thus, the anti-deficiency statutes in part "serve to prevent creditors in private sales from buying in at deflated prices and realizing double recoveries by holding debtors for large deficiencies." (Commonwealth Mortgage Assurance Co. v. Superior Court (1989) 211 Cal.App.3d 508, 514 (emphasis added)
Further, it has regularly been held in cases such as Walters v. Marler (1978) 83 Cal.App.3d 1147 that C.C.P. §580b has the additional public policy of putting the risk of loss from a shortfall in the value of the collateral on the lender. Therefore, it would be illogical to permit recovery of the deficiency from the borrower:
Section 580b of the Code of Civil Procedure prohibits a foreclosing mortgagee from proceeding personally against a mortgagor to recover a deficiency after the security is exhausted, and places the full risk of inadequate security on the purchase money lender. (internal citations omitted)
Case law is clear that the anti-deficiency laws under C.C.P. §§580b and 580d are to be interpreted broadly to accomplish the purposes of the statutes. Thus, the conclusion could be drawn that the chief purpose of C.C.P. §580d and one of the chief purposes of C.C.P. §580b is to prevent the borrower from being liable for any deficiency. As a result, it is likely that SB 426 could be held to be declaratory of existing law. A credible argument therefore could be made that immediately upon SB 426 becoming effective, it will apply to all outstanding deficiency obligations, regardless whether the deficiency was created before or after the enactment of SB 426. This conclusion remains to be confirmed by the case law interpreting this new statute.
D. Applicability to Assignees of Deficiency Obligations
Finally, it is currently not uncommon for certain lenders which hold notes or loans subject to C.C.P. §§580b and 580d to sell such notes/loans following the foreclosure on the underlying residences to debt collection agencies at a discount. Usually this is done without representation or warranty as to collectability of such assets. It is also not uncommon for the assignees to press the borrowers for payment on the deficiency.
However, California case law makes it clear that if a loan is subject to C.C.P. §§580b or 580d, the prohibition against deficiency judgments will apply to any third-party assignee of the note/loan. Costanzo v. Ganguly (1993) 12 Cal.App.4th 1085. It would be prudent for lenders and their assignees to take account of this prohibition in their actions.
These materials were written for, and disseminated by, the Insolvency Law Committee - Business Law Section of the State Bar of California
Split Among Court Decisions re whether or not the absolute priority rule applies in an individual Chapter 11 case and individual Chapter 11 plan:
The United States Court of Appeals for the Tenth Circuit (the "10th Circuit") has held that, notwithstanding the BAPCPA's amendments to the Bankruptcy Code, individual chapter 11 debtors must still comply with the absolute priority rule (adopting the so-called "narrow view"). Dill Oil Company, LLC v. Arvin E. Stephens (In re Stephens), 704 F.3d 1279 (10th Cir., Jan. 15, 2013). To view the full decision, click: http://www.ca10.uscourts.gov/opinions/11/11-6309.pdf.
The debtors, Mr. and Mrs. Stephens (the "Stephens"), owned a chain of convenience stores and filed a voluntary individual chapter 11 case because the stores were operating at a loss. The Stephens sought confirmation of a plan of reorganization (the "Plan") that paid approximately 1% to allowed unsecured claims over a five-year period, but allowed for the Stephens to retain possession and control of their convenience stores.
Dill Oil Company, owned by Mr. and Mrs. Dill (the "Dills"), was the primary supplier of gasoline and gas station products to the Stephens' stores. At the time the chapter 11 case was filed, the Stephens owed the Dills approximately $1.8 million. Repayment of the debt was partially secured by mortgages the Stephens granted to the Dills in various tracts of real estate. However, the mortgages were subject to more senior mortgages.
In the Stephens' Plan, the Dills' claims were classified as partially secured in the amount of $15,000, with the balance of the debt classified as unsecured. The Dills' unsecured debt amounted to approximately 96% of the allowed unsecured claims class. The Dills objected to confirmation of the Plan and voted to reject it. Given the Dills' vote of their unsecured claims, the only way the Stephens could confirm their Plan was by way of a "cram down," under Bankruptcy Code section 1129(b)(2)(B)(ii).
The Dills argued that the Plan could not be confirmed via cram down, because it violated the "absolute priority rule" of section 1129(b)(2)(B)(ii) (e.g., that a chapter 11 debtor cannot keep any pre-petition property unless the Plan provides for payment of all creditors in full), which they argued survived the 2005 enactment the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA") (thereby asserting the so-called "narrow view" of the BAPCPA's effect on the absolute priority rule in individual chapter 11 cases).
The bankruptcy court nevertheless crammed down the Plan over the Dills' objections, adopting the "broad view," which concludes that the plain language of the BAPCPA abrogated the absolute priority rule in individual chapter 11 cases.
The Dills timely appealed the bankruptcy court's decision to the Bankruptcy Appellate Panel ("BAP"), which, on its own motion, certified the case for direct appeal to the 10th Circuit, on the basis that the case presented a question of public importance for which there was no controlling law. The 10th Circuit accepted the appeal.
Holding and Reasoning
The 10th Circuit reversed the bankruptcy court and remanded the case for further proceedings. In doing so, the court adopted the "narrow view," by ruling that post-BAPCPA, the absolute priority rule remains valid and enforceable in individual chapter 11 cases, and therefore the Stephens' Plan could not be confirmed because it violated the absolute priority rule.
The 10th Circuit's analysis was twofold:
First, the Court examined the language of the operative statutes giving rise to the debate as to whether the absolute priority rule survived enactment of BAPCPA – namely 11 U.S.C. sections 1115 and 1129(b)(2)(B)(ii) – to determine whether the statutory language was clear and unambiguous. After recognizing the divergent views expressed by other courts adopting the broad or narrow views, the Court determined that the statutes were ambiguous because both views were plausible.
Second, the Court noted that, because the statutory language and the sparse legislative history are ambiguous, there was no clear evidence that Congress intended through BAPCPA to repeal the absolute priority rule in individual chapter 11 cases. Without a clearly stated intention to repeal the absolute priority rule, the Court adopted the presumption against "implied repeal," stating that, "[R]epeals by implication are not favored and will not be presumed unless the intention of the legislature to repeal is clear and manifest."
There are now two post-BAPCPA circuit court rulings on the absolute priority rule, both adopting the majority "narrow view" that the absolute priority rule remains valid and enforceable: (i) the 10th Circuit opinion in the Stephens case; and (ii) the 4th Circuit opinion in the case of In re Maharaj, 681 F.3d 558 (4th Cir. 2012) However, neither the 4th Circuit's Maharaj opinion nor the 10th Circuit's Stephens opinion is binding on bankruptcy courts in the 9th Circuit.
As it presently stands, the 9th Circuit's BAP decision in In re Friedman, 466 B.R. 471 (9th Cir. BAP 2012), where the BAP's majority adopted the minority "broad view," remains good law. Depending on the particular bankruptcy judge, however, the Friedman decision may or may not constitute binding authority in the 9th Circuit. See In re Arnold, 471 B.R. 578 (Bankr. C.D. Cal. 2012) (ruling that the Friedman decision was wrongly decided, and is not binding authority in the 9th Circuit).
Creditors--DON'T BE LATE
Creditors--DON'T BE LATE--Creditor Being a Few MINUTES Late in Filing Creditor's Nondischargeability Adversary Proceeding against Debtor, in Debtor's Bankruptcy Case, Resulted in Complaint being Thrown Out, as AFTER DEADLINE. In Anwar v. Johnson, ___ F.3d.___, 2013 DJDAR 8725 (9th Cir. 7/3/2013). Same reasoning would apply to cause Bankruptcy Court to have to throw out a creditor's, trustee's, or US Trustee's Complaint seeking to deny the debtor any discharge, if filed after the deadline that the Bankruptcy Code sets for filing "nondischargeability" or "denial of discharge" complaints.
There are certain excuses that may excuse untimely filing of Complaint, but none of those excuses applied in Johnson, and The 9th Circuit held that the Federal Rules of Bankruptcy Procedures did NOT afford the Bankruptcy Court the discretion to extend, retroactively (after deadline had passed) the dealine for filing nondischargeability complaints when an attorney's computer difficulties cause him to miss the electronic filing deadline. The 9th Circuit Court of appeals held that the Federal Rules of Bankruptcy Procedure to NOT allow retroactive extension of the deadline.
Wells Fargo Bank, N.A. v. Texas Grand Prairie Hotel Realty, LLC (In the Matter of Texas Grand Prairie Hotel Realty, LLC), No. 11-11109 (5th Cir. Mar. 1, 2013).
Fifth Circuit Court of Appeals rules contra to how 9th Circuit Court of Appeals determines "cram down" interest rate to be used in Chapter 11 bankruptcy cases, to "cram down" Chapter 11 plan on objecting secured creditor. "Cram down" means that the Bankruptcy Judge confirms (approves) Chapter 11 plan over objection of secured creditor)The U.S. Court of Appeals for the Fifth Circuit has held that, in chapter 11 cases, the bankruptcy court decides the formula to use to determine the appropriate "cram down" rate under a plan, and the bankruptcy court's decision is reviewed for clear error rather than de novo. In doing so, the Fifth Circuit rejected the universal application of Till v. SCS Credit Corp., 541 U.S. 465 (2004), in chapter 11 cases, which is the way cram down interest rate is calculated in the Ninth Circuit (includes California Bankruptcy Courts).
Facts and Procedural Background
The debtors owned a number of hotels on which Wells Fargo Bank (the "Bank") held a lien to secure a loan balance of about $49 million. Unable to pay the loan when it came due, the debtors filed chapter 11 cases. The bankruptcy court valued the property and the Bank's secured claim at $39 million. The debtors proposed a cram down plan under which they proposed to pay the Bank's claim with interest at 5% per annum (1.75% over prime). The parties agreed that Till controlled the interest rate issue. The bankruptcy court confirmed the plan at the debtors' proposed interest rate. The district court affirmed and the Bank appealed.
Presuming that Till applied in all chapter 11 cases as a matter of law, the Bank contended that a de novo standard of review was required.The Firth Circuit's Ruling and Analysis
The Fifth Circuit disagreed with the Bank. Although Till suggested that the prime-plus methodology applicable in chapter 13 cases also should apply in chapter 11 cases (at least absent an efficient market for the loan at issue), the Court of Appeals concluded that Till is not binding on the issue.
Moreover, the Fifth Circuit declined to adopt any specific legal standard for determining cram down rates in chapter 11 cases, preferring instead to leave it to the bankruptcy court to adopt a formula appropriate for the particular case. With the appropriate formula left for the bankruptcy court to decide, the court's cram down analysis is reviewed for clear error, not de novo.
In this instance, the parties stipulated that the Till formula should be used. Applying a clear error standard of review to the bankruptcy court's application of the Till formula, the Fifth Circuit affirmed the bankruptcy court's ruling.
In re Blixseth, 484 B.R. 360 (9th Cir. BAP Dec. 17, 2012)
Reversing the Bankruptcy Court, the U.S. Bankruptcy Appellate Panel of the Ninth Circuit Court of Appeals (the "BAP") has ruled that even though the law generally provides that intangible assets have no physical location or are located where their owner resides, for purposes of determining the proper venue of an involuntary chapter 7 petition against a Washington resident whose principal assets were intangibles comprising interests in Nevada entities, those assets were located in Nevada.
Facts and Procedural Background
The debtor, a Washington state resident, held his principal assets through a Nevada limited liability company and a Nevada limited partnership (the "Nevada Entities"). The Nevada Entities owned other entities that owned real estate around the country, none of which was located in Nevada. Other than existing in Nevada, the Nevada Entities did no business in Nevada. In addition, the Nevada Entities' offices and books and records were located in Idaho. Nevada law provides that a creditor seeking to execute against an interest in a Nevada entity must proceed in Nevada courts and that a person seeking to dissolve a Nevada entity must likewise proceed in Nevada courts.
Three non-Nevada state tax agencies filed an involuntary petition against the debtor in Nevada upon learning that he had transferred substantially all his assets to the Nevada Entities. Noticing the debtor's Washington residence address in the involuntary petition, the bankruptcy court raised the issue of whether venue was proper sua sponte, and the debtor later filed a motion to dismiss the petition on the grounds of improper venue.
Under 28 U.S.C. section 1408, venue of a bankruptcy case is proper where the debtor (1) resides, (2) is domiciled, (3) has his principal place of business or (4) has his principal assets. Clearly the first three locations would not support venue of the involuntary petition in Nevada, leaving the location of the debtor's principal assets as the only venue candidate. According to the bankruptcy court, intangible assets, such as the debtor's interests in the Nevada Entities, generally have no physical location or are located where the owner resides or is domiciled. Thus, the bankruptcy court found that venue in Nevada was improper because the debtor's principal assets, the Nevada Entities, were not located in Nevada and dismissed the involuntary petition. It is not clear why the bankruptcy court did not exercise its discretion under Bankruptcy Rule 1014(a)(2) to transfer the case to a proper venue rather than ordering dismissal. One of the petitioning creditors appealed.
The BAP's Ruling and Analysis
The BAP reversed. According to the BAP, the purpose of the venue statute is to identify a jurisdiction that is both convenient for parties in interest and to enhance effective administration of the case. The BAP acknowledged that intangible property generally either has no location or is located (by a fiction) at the owner's residence or domicile. However, it observed that "courts frequently have ascribed a location to intangible assets for various purposes." Blixseth, 484 B.R at 366-67. The BAP noted that there were no cases on the issue for purposes of bankruptcy venue.
Citing Office Depot, Inc. v. Zuccarini, 596 F.3d 696, 702 (9th Cir. 1010) the BAP ruled that an analysis of the location of intangibles for venue purposes involves a "'context specific'" inquiry. Id. at 367. The court likened a chapter 7 involuntary petition to a collection action by creditors. In light of that fact and the rules regarding execution against an interest in or dissolution of Nevada entities, it reasoned that Nevada would be the "location" of the debtor's interests in the Nevada Entities for purposes of the chapter 7 trustee. Accordingly, it held that Nevada was a proper venue for the involuntary petition.
One member of the BAP panel dissented, arguing that the majority has engaged in a "case specific" (emphasis added) rather than a "context specific" exercise.
The dissent's "case specific" vs. "context specific" comment is justified. The Office Depot opinion distinguishes context by the nature of the proceeding, not by the specific facts of a particular case. By focusing on what may serve a case well based on its particulars, the BAP may open a Pandora's box. For example, the court's reliance on the notion that an involuntary chapter 7 petition is like a collection action suggests that the result could be different if the facts were the same except that the debtor filed a voluntary chapter 7. What if Nevada law authorized out-of-state execution but only in-state dissolution? While the opinion may be justified as supporting jurisdiction in the venue most convenient for this debtor's chapter 7 trustee to function, it is less compelling as standard for determination of where the debtor's principal assets are located.
Samuels vs. Midland Funding, LLC, 2013 Westlaw 466386 (S.D. Ala. 2013)
A United States District court in Alabama has held that a consumer debtor may bring a suit against a debt collector for malicious prosecution after the debt collector showed up for trial with no witnesses and no evidence.
Facts: An individual debtor was sued by a debt collector. The debtor appeared at trial, but the debt collector had no evidence to prove the creation of the alleged debt, the date of the default, the amount due, or any other crucial fact. The debt collector also had no witnesses at trial.
After the trial court entered judgment for the individual debtor, the debtor brought suit under the Fair Debt Collection Practices Act ("FDCPA") and also brought a claim under state law for malicious prosecution. The debt collector moved to dismiss the complaint, but the district court denied the motion.
Reasoning: The court held that under well-established FDCPA authority, the debt collector's behavior was actionable. In addition, the court noted that the debt collector's alleged modus operandi (i.e., filing suit in order to obtain a settlement, without actually intending to litigate the case on its merits) constituted an "improper manipulation of the legal system to obtain payment," thus supporting the state law claim for malicious prosecution and abuse of process.
Comment: Judging by the published opinions in this area, the behavior of "bulk purchasers" of consumer debt is a national scandal. Whenever these outfits are challenged by consumer debtors, the outcome is overwhelmingly in favor of the debtor, due to the complete absence of documentation to support the debt collector's claim. Unfortunately, very few consumer debtors are aware of their rights, and they cannot afford representation, which is exactly what the debt collectors are apparently counting on. Unlikely that the tiny percent of consumers who do so will cause the "debt buyer" industry to clean up its practices, unless it gets hit with some huge punitive damage tort awards.
The U.S. Bankruptcy Appellate Panel of the Ninth Circuit ("BAP") held that a judgment awarding the value of a withdrawing member's interest in an LLC constitutes "damages arising from the purchase or sale of... a security" under 11 U.S.C. § 510(b), and therefore is vulnerable to mandatory subordination. O'Donnell, et. al. v. Tristar Esperanza Properties, LLC (In re Tristar Esperanza Properties, LLC), BAP No. CC-12-1340-KlPaDu (9th Cir. BAP Mar. 8, 2013). To read the opinion, click here: (Tristar) http://cdn.ca9.uscourts.gov/datastore/bap/2013/03/08/Tristar12-1340.pdf
US Supreme Court decision, Bullock v. BankChampaign
Bullock v. BankChampaign (United States Supreme Court, decided 5/13/13), decision on nondischargeability of debt pursuant to 11 USC 523(a)(4), which is nondischargeability of debt based on debt arising from debtor committing "fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny".
Unanimous United States Supreme Court decision, holding that "defalcation" under 11 USC 523(a)(4) of the Bankruptcy Code requires that the debtor, at time of the debtor's defalcation, had "scienter". "Scienter" element requires knowledge of, or gross recklessness in respect to, the improper nature of the fiduciary behavior.
Bullock was decided in the context of a proceeding commenced to deny the debtor a discharge for certain state law judgments arising from his appointment as a nonprofessional trustee. Pursuant to Code section 523(a)(4), debts arising from defalcation while acting in a fiduciary capacity are excepted from discharge. Such an exception from discharge has been codified since 1867 and subject to varying interpretations. In coming to its decision, the Supreme Court employed various tenets of statutory construction.
The term "defalcation" appears in the Code only once, in section 523(a)(4). An analysis of the Bullock opinion would be valuable for members of our Committee, exploring its potential impact on burdens of pleading and proof in bankruptcy and how this opinion fits with established state and federal law.
New Bankruptcy Court Decision about law firm that filed bankruptcy: Heller Ehrman LLP, Liquidating Debtor v. Jones Day (In re Heller Ehrman, LLP), Bankr. Case No. 08-32514DM, Adv. No. 10-3221DM (Bankr. N.D. Cal. March 11, 2013).
Judge Dennis Montali, of the Bankruptcy Court for the Northern District of California, recently granted partial summary judgment in favor of the plaintiff debtor, a dissolved law firm, on the basis that the debtor's waiver of rights under Jewell v. Boxer, 156 Cal. App. 3d 171 (1994) constituted an avoidable transfer under 11 U.S.C. section 548 and the California Uniform Fraudulent Transfer Act, entitling the debtor to recover profits from unfinished business.
In its dissolution plan, Heller included a provision ("the Jewel Waiver") purporting to waive the firm's rights to payment of the profits from unfinished matters which former shareholders were expected to take to their new firms. These payment rights were established by the California Supreme Court in its seminal Jewel v. Boxer decision. The debtor filed adversary proceedings against law firms that hired former Heller shareholders on the theory that the Jewel Waiver constituted actually or constructively fraudulent transfers to the shareholders and their new law firms.
With regard to the debtor's constructively fraudulent transfer argument, the court found that the shareholders did not provide reasonably equivalent value in exchange for the Jewel Waiver. The defendants had argued that Heller received various indirect benefits. For example, they claimed that the Jewel Waivers encouraged shareholders to move clients to new law firms, which helped ensure that client matters were attended to and that existing accounts receivable were collected. It also assisted associates and staff in finding new jobs, thereby limiting WARN Act liability. However, the defendants did not show that these indirect benefits were given in exchange for the Jewel Waiver, and thus the debtor prevailed on this issue.
The defendants also asserted the safe harbor defenses of Section 550(b)(1), available to subsequent transferees who take for value, in good faith, and without knowledge of the voidability of the transfers. Some of the defendants took in good faith and without knowledge of the avoidability of the Jewel Waiver. Nevertheless, these defenses are cumulative and, because the defendants could not prove that they took for value, they were not shielded by Section 550(b)(1).
The court reserved for trial the amount of Heller's damages.
This decision discusses extensively In re Brobeck, Phleger & Harrison LLP, 408 B.R. 318 (Bankr. N.D. Cal. 2009), also presided over by Judge Montali, in which the bankruptcy court found that a waiver designed to avoid the consequences of Jewel was a transfer of the debtor's property for which it received less than reasonably equivalent value. To law firms acquiring talent from dissolving former competitors: caveat emptor.
The U.S. Court of Appeals for the Ninth Circuit has held that: (1) a motor vehicle, including a luxury vehicle, may fall within California's "wildcard" or "grubstake" exemption; and (2) if an exempt vehicle is a "tool of the debtor's trade," the debtor can avoid a non-possessory, non-purchase money lien against it under 11 U.S.C. § 522(f)(1)(B). Orange County's Credit Union v. Angie M. Garcia (In re Garcia) ___ F. 3d ___ (9th Cir. 2013). To read the full opinion, click here (Garcia).http://cdn.ca9.uscourts.gov/datastore/opinions/2013/03/05/11-56076.pdf
In November 2006, real estate agent Angie Garcia ("Debtor") borrowed $22,160 from Orange County's Credit Union ("OCCU"), using her Mercedes Benz automobile as collateral. OCCU properly perfected its non-possessory, non-purchase money lien on the Mercedes.
When the Debtor later filed for Chapter 7 relief, she listed the car's value at $5,350, with an outstanding balance of $12,715.50 owed to OCCU. The Debtor claimed that the car was exempt from her bankruptcy estate under California Code of Civil Procedure section 703.140(b)(5), known as California's "wildcard" exemption. The bankruptcy court ruled that the Debtor could not exempt her Mercedes under the wildcard exemption, because there are other sections in the California exemption statutes that explicitly deal with vehicles, e.g. Section 703.140(b)(2), which has a significantly lower statutory cap intended specifically for vehicles.
The Debtor also sought to avoid OCCU's lien on the car pursuant to 11 U.S.C. section 522(f)(1)(B), claiming that as a realtor her Mercedes is a "tool of the trade". The bankruptcy court ruled that the Debtor could not use Section 522(f)'s lien avoidance provisions because motor vehicles are explicitly mentioned in other portions of the statute (e.g., Section 522(d)(2)), and because the legislative history did not support avoiding liens on luxury items.
The district court reversed and remanded the case to the bankruptcy court, and OCCU appealed.
The Appellate Court's Holding and Reasoning
Noting that the issues presented are purely legal, the appellate court affirmed the district court's ruling. It first held that, as a matter of law, the Debtor is permitted to claim a wildcard exemption in a motor vehicle, under California Code of Civil Procedure section 703.140(b)(5). After it examined that section's language, which permits a debtor to exempt the allowable amount in "any property," the appellate court reasoned that, "'[a]ny means any, and fancy cars are not excluded." (Emphasis in original).
The appellate court also affirmed the district court's ruling that a debtor may use 11 U.S.C. section 522(f)(1)(B) to avoid a lien on an exempt motor vehicle as a tool of the debtor's trade. Without discussing the legislative history of the section or the implications of applying it to a luxury vehicle, the court of appeals relied on In re Taylor, 861 F.2d. 550, 553 (9th Cir. 1988), which held that in opt-out states, like California, lien avoidance on cars as "tools of the trade" is generally allowable if the vehicle in question is "necessary to the debtor's trade". The Garcia Court remanded the action to the bankruptcy court to decide whether the Debtor's Mercedes does in fact qualify as a tool of her trade as a realtor.
The Ninth Circuit's decision takes a literal approach in interpreting the California wildcard exemption statute: "'any property' means just that - any property... ." Under this interpretation, a debtor in 2013 has free reign to claim a wildcard exemption up to an additional $25,340 in her car (or any property she owns), and is not limited to the exemption section specifically intended for cars.
The Ninth Circuit remains silent, however, on the nebulous issue that remains - to what extent does a luxury item, like a Mercedes automobile, qualify as a "tool of the trade"? Notably, the Debtor's profession in Garcia was a real estate agent, not a chauffeur, for which she claims her Mercedes was a tool of her trade. It is to be expected that, especially in California, debtors in various professions will subjectively assert that their luxury cars are necessary to their trades. If a bankruptcy court agrees with such an assertion, it will presumably also allow the debtors to avoid certain liens under Section 522(f)(1)(B), up to the wildcard exemption amount claimed. This leaves substantial room for California bankruptcy courts to be creative in their interpretation of what assets are objectively necessary for various professions for purposes of lien avoidance.
In re Stockton municipal bankruptcy case, 4/1/13 Ruling of Bankruptcy Judge Christopher Klein, ruling that City of Stockton Is Eligible to be in Chapter 9 (Municipal) Bankruptcy
On Monday, April 1, 2013, U.S. Bankruptcy Judge Christopher Klein of the Eastern District of California ruled the City of Stockton to be eligible for chapter 9 bankruptcy protection and issued the Order for Relief necessary for the case to proceed pursuant to Bankruptcy Code §921(d). The decision came nine months after the city initially filed for bankruptcy and followed a three-day evidentiary hearing pitting the city against the Capital Markets Creditors who represent the holders of tens of millions of dollars in municipal bonds.
The bondholders had argued, among other things, that the city was not eligible for bankruptcy because it did not take all possible steps to reduce costs and it did not negotiate in good faith prior to filing bankruptcy because it had not sought a reduction of its obligation to make payments to CalPERS - the state's employee pension fund.
Lengthy Decision Supports City's Position
Judge Klein took two hours to present his detailed findings of facts and conclusions of law from the bench. A transcript of the hearing is posted on the City of Stockton website and can be viewed by clicking HERE. The court went through a lengthy description of the city's financial state as far back as 2008, noting the difficulties plaguing the city in recent years. Despite several declarations of fiscal emergencies and numerous attempts to reduce costs through furloughs and reduction of staffing and benefits, the city still watched revenues drop so low that it faced a deficit of more than $8 million for the current fiscal year with a projected $20 million to $38 million deficit in the next fiscal year.
The city showed that it was insolvent by three different measures: (1) from a "service delivery" perspective (the city was unable to pay for all of the costs of providing services at the level necessary to maintain the health, safety and welfare of the community); (2) from a budgetary perspective (the city could not create a budget under which it would be able to have sufficient revenues to pay expenses that would occur over the budget period); and (3) on a cash basis (the city was not able to generate and maintain cash balances allowing it to pay expenditures as they become due).
Judge Klein concluded – by a preponderance of the evidence – that the city meets each of the threshold eligibility requirements in Bankruptcy Code §109(c), specifically that it (1) is a municipality (2) is authorized by the state to be a debtor under Chapter 9; (3) is insolvent; (4) desires to implement a plan to adjust its debts; and (5) has negotiated with its creditors to the greatest extent possible.
Judge Klein also noted that the petition was filed in good faith and therefore did not run afoul of Bankruptcy Code §921(c).
What Happens Next?
With this decision in hand, the city now must formulate a plan of adjustment that can be confirmed by the court. In that vein, Judge Klein forewarned the city of potential difficulties it may face in attempting to present a plan of adjustment that impairs the bondholders but leaves CalPERS payments intact. The court reminded the city that the "day of reckoning" would come at plan confirmation, noting that plan confirmation is governed by Bankruptcy Code §1129(b)(1) and that a plan could not succeed if it unfairly discriminates against a class of creditors.
In re Welsh, ___ F.3d___ , 2013 U.S. App. LEXIS 5880 (9th Cir. 3/25/2013):
Ninth Circuit Court of Appeals joined the Fifth and Tenth Circuits in holding that it was not bad faith for a debtor to decline to devote social security income to paying unsecured creditors in a chapter 13 plan. The court rejected the trustee's argument that this allowed the debtor to have money left over that could be used to pay creditors, stating that:
Congress chose to remove from the bankruptcy court's discretion the determination of what is or is not "reasonably necessary." It substituted a calculation that allows debtors to deduct payments on secured debts in determining disposable income. That policy choice may seem unpalatable either to some judges or to unsecured creditors. Nevertheless, that is the explicit choice that Congress has made. We are not at liberty to overrule that choice.
In fact, the court followed the Eighth Circuit in holding that the issue of how much creditors are paid should not even be a part of the good faith analysis, now that Congress has adopted the disposable income test.
Equally as important, the court rejected the trustee's argument that the debtors should not be permitted to continue to pay for "luxury" secured debts (on two ATVs and an Airstream trailer) "at the expense" of their unsecured creditors. Again, the court found that the statutory language is clear:
The calculation of "disposable income" under the BAPCPA requires debtors to subtract their payments to secured creditors from their current monthly income. In enacting the BAPCPA, Congress did not see fit to limit or qualify the kinds of secured payments that are subtracted from current monthly income to reach a disposable income figure. Given the very detailed means test that Congress adopted, we cannot conclude that this omission was the result of oversight. Moreover, even if it were, we would not be justified in imposing such a limitation under "the guise of interpreting 'good faith.'"
In re Patriot Coal Corp., No. 12-12900, --- B.R. --- (Bankr. S.D.N.Y. Nov. 29, 2012):
Patriot Coal Corporation and its ninety-eight subsidiaries (collectively, "Patriot") is one of the largest coal companies in the nation. Patriot has its headquarters in Missouri, and most of its entities are domiciled in West Virginia and Missouri. Prior to its chapter 11 bankruptcy, Patriot had no contacts in New York. On the eve of bankruptcy, Patriot formed two entities in New York for the sole purpose of establishing venue—a fact that to which Patriot stipulated. These New York entities conducted no business operations, had no substantial assets in New York, and the other entities had no meaningful contacts with New York. Only one month after the formation of these entities, Patriot commenced chapter 11 proceedings in the Southern District of New York, bootstrapping ninety-seven of its related bankruptcy cases to those filed by the New York entities.
Two motions seeking transfer of venue were filed. The mine union sought to transfer venue of the cases to West Virginia, where many of its retirees resided, citing convenience of the parties. The U.S. Trustee sought to transfer the cases to wherever venue is proper "in the interest of justice". The court ultimately granted the U.S. Trustee's motion, and transferred venue to the Eastern District of Missouri, the location of the debtor's headquarters, key employees, and books and records.
In a bold policy-shaping opinion, the court asserted that Patriot's formation of the two New York affiliates for the sole purpose of establishing venue was a subversion of the spirit of the bankruptcy venue statute and the integrity of the bankruptcy system. Citing In re Winn-Dixie Stores, Inc., Case No. 05-11063 (RDD) (Bankr. S.D.N.Y. April 12, 2005), the Patriot Coal court maintained that the debtor's conduct of forming new entities to satisfy venue requirements, notwithstanding literal compliance with the black letter of the statute, constituted an exploitation of a loophole in the statute, which the court refused to condone.
Tishgart v. Hoffman (In re Tishgart), BAP No. 12-1160-PaMkH, --- B.R. --- (9th Cir. Nov. 13, 2012):
After filing for chapter 7 bankruptcy, Tishgart, an attorney-debtor, received over $130,000 in contingent legal fees in fifteen cases. The trustee brought an adversary proceeding to determine the estate's interest in the post-petition fees, wherein the bankruptcy court deemed Tishgart to have admitted that he provided little or no legal services in those cases after entering bankruptcy. The bankruptcy court analogized the facts of the case to a situation where Tishgart's clients had terminated his legal services as of the petition date. On that basis, the court surmised it would be justified to award nearly everything to the trustee, but ultimately allowed the debtor to retain half, "in the spirit of fairness."
On appeal, Tishgart argued that the trustee was entitled only to the number of pre-petition hours actually worked on those cases, at his billable rate. The BAP addressed California jurisprudence on property interests, and rejected the notion that the value attributed to pre-petition and post-petition services is quantifiable by the billable hour. Rather, the BAP maintained that courts must look beyond the number of hours worked and consider factors like results achieved. The BAP affirmed the bankruptcy court's ruling, finding that Tishgart was not prejudiced by keeping only 50% of his post-petition fees.
Author's Comment: The Tishgart opinion provides a nice theoretical discourse of property rights as it relates to the value of services, and provides greater room for chapter 7 trustees to link post-petition payments to pre-petition services and increase their ability to recover for the estate.
Newman v. Schwartzer (In re Newman) 2013 DJDAR 1609 (9th Cir. BAP 2/4/2013)
Newman v. Schwartzer (In re Newman) 2013 DJDAR 1609 (9th Cir. BAP 2/4/2013): held debtor's tax refund, which debtor received during the bankruptcy case, and which was for tax year before debtor's bankruptcy case was filed (ie was refund for pre-petition tax period), was subject to being turned over to the Chapter 7 bankruptcy trustee, even if the debtor had already spent the tax refund. Tax refund was subject to turnover, even if debtor had already spent the refund, because debtor had possession, custody or control of the tax refund during the bankruptcy case.
Black v. Bonnie Sptrings Family Ltd. partnership (In re Black), 9th Circuit
BAP, ___ BR___, 2013 Daily Appellate Reports 2041 (2/13/12): debts arising from satate court judgment against debtor for abuse of process (judgment against debtors for 1.6 million, for abuse of process, and nuisance) were NOT dischargeable in debtor's Chapter 7 bankruptcy case, because debtors' conduct had caused "wilful and malicious injury" to plaintiffs, as those terms are used in 11 USC 523(a)(6) definition of
In a case of first impression in the Ninth Circuit, the U.S. Bankruptcy Appellate Panel has ruled that a debtor is not entitled to avoid a creditor's judicial lien under 11 U.S.C. section 522(f)(for impairing the debtor's homestead exemption) when the debtor didn't maintain a continuous ownership interest in the property after the judicial lien had fixed. McCoy v. Kuiken, Jr. (In re Kuiken, Jr.), BAP No. SC-12-1218-JuMkPa (B.A.P. 9th Cir. Jan. 4, 2012). To read the full decision, click: Kuiken
In 2003, Conrad Kuiken, Jr. purchased certain real property ("Property"). In 2009, one of Kuiken's creditors, Daniel McCoy ("Creditor"), obtained a judgment against Kuiken in the amount of $16,838, and recorded an Abstract of Judgment. Thereafter, on July 5, 2011, Kuiken transferred title in the Property to Bayview Resources, LLC ("Bayview") "for valuable consideration." Kuiken held a membership interest in this entity at the time of the transfer. Bayview recorded the grant deed from Kuiken on July 15, but re-conveyed title to Kuiken as a gift on September 28, 2011. This grant deed was duly recorded on October 11, thirteen days before Kuiken ("Debtor") filed his chapter 7 petition.
Debtor filed a motion to avoid Creditor's judicial lien, pursuant to 11 U.S.C. section 522(f). In his motion, Debtor declared that he resided at the Property when his petition was filed, and therefore he qualified for a homestead exemption. Creditor objected, arguing that the nature of his judicial lien changed when the Debtor transferred his ownership interest to Bayview, resulting in a consensual lien. In the alternative, Creditor claimed that under California law his lien received priority over Debtor's homestead rights and ownership interest at the time Bayview transferred ownership interest back to Debtor.
The bankruptcy court ruled in Debtor's favor, concluding that Creditor's lien remained a judicial lien despite the back and forth ownership transfers. Moreover, the court reasoned that since Debtor qualified for a homestead exemption on the petition date, he also had the right to avoid Creditor's lien under Section 522(f).
Creditor timely appealed the bankruptcy court's ruling to the U.S. Bankruptcy Appellate Panel of the Ninth Circuit ("BAP"). Interestingly, Debtor did not participate in the appeal.
The BAP's Holding and Reasoning:
Noting that section 522(f) allows a debtor to avoid a lien if he can establish that (1) the lien was fixed on the debtor's interest in property, (2) the lien impairs an exemption to which the debtor is entitled, and (3) the lien is a judicial lien, see Culver, LLC v. Kai-Ming Chiu (In re Chiu), 304 F.3d 905, 908 (9th Cir. 2002), the BAP concluded that Debtor failed to establish the first requirement for setting aside a judicial lien.
It was undisputed in this case that Debtor qualified for a homestead exemption. The BAP further dispatched Creditor's argument that his lien became consensual, and therefore not a judicial lien, when Debtor transferred the Property to Bayview. Thus, the only issue remaining was whether "there was a fixing of a lien" on Debtor's interest in the Property. Observing that the Ninth Circuit cases relied upon by the lower court failed to address a situation where a debtor's interest in property at the time a lien attached was extinguished, and subsequently replaced by a different ownership interest before the debtor's ultimate bankruptcy filing, the BAP concluded that the more relevant legal analysis to these facts was found in Farrey v. Sanderfoot, 500 U.S. 291 (1991) and Stephens v. Walter E. Heller W., Ltd. (In re Stephens), 15 B.R. 485 (Bankr. W.D. N.C. 1981), cited with favor in the Farrey case.
In Farrey, the U.S. Supreme Court stated, "[I]t is settled that a debtor cannot use § 522(f) to avoid a lien on an interest acquired after the lien attached." Farrey, at 299. Thus, to avoid a lien under section 522(f), the debtor must have "possessed an interest to which a lien attached, before it attached." Farrey, at 301.
The BAP noted that the facts in the present case are very similar to those in the Stephens case. There, judgments attached to real property owned by the debtor who subsequently transferred the property to his brother. Four days before the debtor filed for bankruptcy, his brother re-conveyed the property to him. The Stephens court denied a motion to avoid the liens under Section 522(f), holding that the transfer to the brother divested the debtor of all interest in the property. When the property was re-conveyed, it was done subject to the judgment liens. Therefore, the first element of Section 522(f) was not established.
Distinguishing on the facts the cases relied upon by the trial court, the BAP concluded that Debtor herein could not avoid Creditor's judicial lien, because:
the debtor's interest in the property when he filed bankruptcy was a different and discontinuous interest from the one he held when [the creditor's] lien affixed. When the interest once held is entirely extinguished by transfer, voluntary or as a matter of law, a judicial lien which attached when a debtor had that interest cannot be avoided when the debtor acquires a new interest. The interest held when the lien fixed is gone and the debtor reacquires a different interest subject to the judicial lien . . . . (emphasis supplied.)
The BAP acknowledged in a footnote that the Stephens case, and others relied upon in the present decision, based their reasoning at least in part on bad faith or fraudulent conduct by the debtor. The BAP noted that the record in this case did not support such discussion, and therefore its decision did not rely on this theory.
The BAP's decision seems correct and obvious, until one notes that it reverses the lower court's opposite view. Contrary to the appellate court's analysis, the Farrey ruling is not so clear, and Law Offices of Moore & Moore v. Stoneking (In re Stoneking), 225 B.R. 690, 696 (9th Cir. BAP 1998) is not so easily distinguishable. In fact, in Stoneking, the BAP held that Farrey's holding is limited "to liens created simultaneously with the creation of the 'new' property interests." Id., at 695. As such, Stoneking suggests that once a lien fixes to a debtor's preexisting ownership interest, subsequent changes to that interest do not necessarily affect the debtor's rights under Section 522(f).
Also interesting is the BAP's disavowal of any reliance on bad faith or fraudulent conduct by Debtor, unlike other cases relied upon by the BAP in its present decision. Though the record here is limited on this subject, circumstances of Debtor's transfer of the Property to Bayview and its re-conveyance to Debtor shortly before his bankruptcy filing sound very similar to the circumstances in Stephens, wherein the court stated:
The fruits of the debtor's frauds have come home to rest, and such rest should go undisturbed by a court of equity. He sought to cheat and got cheated, and must now know that as he set out to cheat and deceive, a tangled web he did weave, thereby canceling his authority to benefit from Section 522(f). Stephens, supra, 15 B.R. at 486.
One wonders whether such facts or lack thereof would influence future bankruptcy courts evaluating this issue.
This analysis published by the California STate Bar Business Law Committee Insolvency Section on 2/8/13
The Bankruptcy Appellate Panel of the 10th Circuit has held that a trustee in bankruptcy cannot avoid a mortgage lien, even though the underlying note was held by a lender, while the mortgage was recorded in the name of MERS, a separate entity. In re Trierweiler, 2012 Westlaw 6725589 (10th Cir. BAP (Wyo.))
Facts: Following a home mortgage transaction, the underlying promissory note was sold to a new lender. However, the mortgage was recorded in the name of Mortgage Electronic Registration Systems ("MERS"), as agent for the holder of the note.
When the borrowers filed a bankruptcy petition, their trustee in bankruptcy filed an adversary complaint against the new lender and MERS, seeking to avoid the mortgage. The trustee claimed that the mortgage was unenforceable because of the separation between the promissory note and the mortgage. The trial court ruled in favor of the new lender, and the trustee appealed.
Reasoning: The Bankruptcy Appellate Panel ruled in favor of the lender, reasoning that the mortgage was merely an incident of the underlying debt. Therefore, the transfer of the note carried with it the mortgage security and operated as an equitable assignment of the mortgage. Further, the recording of the mortgage in the name of MERS did not violate the state recording statute, since MERS acted as the agent for the lender.
Author's Comment: This case is consistent with the emerging trend to validate the role of MERS (although there are some decisions to the contrary). The trustee's "split note" argument was very clever, but it would make sense only if the holder of the mortgage were completely unconnected with the holder of the underlying note. In all of the MERS transactions, MERS has expressly agreed to act as the agent on behalf of the note holder.
The foregoing analysis was published by the California State Bar Business Law Committee Insolvency Section on 2/8/13
In re Sundance Self-Storage El Dorado LP, ___ B.R. ___, 2012 WL 5471141 (Bankr. E.D. Cal. Nov. 6, 2012)
Summary: After finding that counsel for the chapter 11 debtor in possession had failed to disclose a lack of disinterestedness and disqualifying conflicts as required by Rule 2014(a) of the Federal Rules of Bankruptcy Procedure, the U.S. Bankruptcy Court for the Eastern District of California ordered counsel to disgorge all postpetition fees previously awarded in the present case, as well as prepetition fees the debtor had paid him in connection with this case and even fees the court had awarded counsel in the debtor's prior bankruptcy case. To read the full Sundance decision, click (Sundance)http://www.caeb.uscourts.gov/documents/Judges/Opinions/Published/Sundance(OSCHughes-Memo).pdf
Factual Background: Sundance filed a chapter 11 in 2010. Earlier that year, Sundance had filed a separate bankruptcy case, which was dismissed quickly due to the debtor's failure to file its schedules.
Sundance's principal asset was real property upon which it operated a self-storage business. Don Smith managed Sundance's business in all respects. Smith's principal source of personal income was from Sundance, although Smith also had an accounting practice. About the same time as Sundance filed its second bankruptcy case (in which this opinion was issued), Smith filed his own chapter 13 to try to save his home.
Counsel represented Sundance in both bankruptcy cases and also represented Smith in his personal bankruptcy case. In seeking approval of his employment in Sundance's current bankruptcy case, counsel failed to disclose that Sundance still owed him fees from the first bankruptcy and that he was concurrently representing Smith in his personal chapter 13 (pending before a different judge).
After Sundance failed to confirm a plan, the court granted relief from stay to Sundance's secured creditor to allow it to foreclose on Sundance's real property. Just days before the foreclosure sale, Smith effectuated a transfer of the subject property to West Coast, an entity of which Smith was president.
West Coast then filed for bankruptcy six days later using one of the other lawyers recommended by counsel. One short-term effect of this strategy was to preserve for Smith the income from his employment in the business that Smith so desperately needed to comply with his chapter 13 plan.
Upon discovering the transfer of Sundance's real property, the court issued an order to show cause regarding counsel's involvement was in the transfer. In the course of the order to show cause proceedings, the court discovered the following facts that counsel failed to disclose in his application to be employed in this case or at any time during the course of his employment: (a) counsel held a prepetition claim against Sundance for unpaid fees from the first Sundance case and that those fees were paid as an administrative expense in the second case, (b) even if counsel may not have known about the transfer of Sundance's property to West Coast before it occurred, he had reason to believe such a scheme was in the works and, in turn, was required, but failed, to advise against it, (c) counsel represented Sundance in the prior bankruptcy case, (d) counsel was representing Smith in his personal chapter 13 and (e) counsel had another business relationship with Smith in that counsel personally employed Smith to give him tax advice and prepare at least one tax return for him.
The Bankruptcy Court's Ruling: As noted above, the court ordered counsel to disgorge not only all fees he had received in Sundance's second case, but also all fees he received "in connection with" that case (that is, fees for prepetition work leading up to the case), in addition to all fees he had been paid in Sundance's first case. Emphasizing the breadth of disclosure required under Rule 2014(a) and the importance of that rule to the actual and perceived integrity of the bankruptcy system, the court found that counsel had miserably failed to comply with that Rule. Based on the undisclosed facts identified above, the court also found that counsel was not disinterested and held and represented an interest adverse to the estate.
Author's Commentary: The court's legal analysis is unremarkable. Some of counsel's transgressions are obvious (e.g., holding a prepetition claim against the estate, accepting payment of his prepetition claim). And even though it is not clear that counsel could have stopped the transfer to West Coast, it appears that, far from doing what he could to discourage it, at best he looked the other way and enabled it by failing to give express advice that such a transfer would be improper. Indeed, he could (and perhaps should) have threatened to withdraw unless he got assurances that there would be no such transaction. What is interesting about the case is that the court's disgorgement order extended to Sundance's previously-dismissed case, which was no longer before the court. Even then, the court's sanctions seem mild compared to what they might have been.
The above write up done by the California State Bar Business Law Section Insolvency Law Committee
Pfeifer vs. Countrywide Home Loans, 2012 Westlaw 6216039 (Cal.App.):
A California appellate court has held that a nonjudicial foreclosure could be enjoined due to the lender's failure to conduct a face-to-face interview with the borrower prior to the sale, pursuant to HUD regulations. [Pfeifer vs. Countrywide Home Loans, 2012 Westlaw 6216039 (Cal.App.).] Summary of facts, and Court's reasoning:
Facts: After two homeowners defaulted on their mortgage, the lender commenced a nonjudicial foreclosure. Prior to the sale, the borrowers sought injunctive relief on the ground that the lender had failed to conduct a face-to-face interview prior to foreclosure, as required by HUD regulations. The trial court sustained the lender's demurrer, but the appellate court reversed.
Reasoning: The court held that the HUD servicing regulations were incorporated by reference into the deed of trust. The lender argued that requiring a face-to-face interview would defeat the California policy favoring quick and inexpensive nonjudicial foreclosures, but the court disagreed:
Requiring compliance with the HUD face-to-face interview would not deprive the lenders of a quick and inexpensive remedy; it merely would ensure that the lenders comply with the express terms set forth in the HUD regulations and incorporated into the FHA deeds of trust prior to seeking this quick and inexpensive remedy. Furthermore, the goal of protecting the borrower from a wrongful loss of property is enhanced as the interview may prevent the need for foreclosure. The lenders voluntarily agreed to purchase these FHA loans in exchange for the government's backing against default. Thus, ... , they voluntarily subjected themselves to the additional requirements designed to avoid the necessity for foreclosure.
The court additionally held that the trustee conducting the foreclosure sale could not be held liable under the Fair Debt Collection Practices Act as a "debt collector." Also, the court held that the borrowers could not assert a claim for damages based on the lender's noncompliance with the HUD regulations.
Author's Comment: This decision provides borrowers with another delaying tactic, but it is no panacea. Just like leading the proverbial horse to water, you can lead a lender to an interview, but you can't make him listen. Although the court did not address the issue of the borrower's remedy following a completed sale, my guess is that if the foreclosure had already taken place, the borrower could not assert the absence of a face-to-face interview in order to nullify the sale.
This analysis is from the California state bar insolvency committee.
In re Deitz (9th Cir BAP 042312)
BAP holds bky court can liquidate the amount of debt, as part of ruling whether the debt is nondischargeable or not
The United States Bankruptcy Appellate Panel of the Ninth Circuit has held that Stern v. Marshall does not limit the bankruptcy court's jurisdiction to enter a final nondischargeable money judgment. In re Deitz (9th Circuit BAP Docket No. EC-11-1427, April 23, 2012).
Facts and Procedural History.
Creditors hired the Debtor to build a handicap-assisted home for $444,105. After change orders, Creditors paid the Debtor a total of $511,800, but the house was still only 65% complete. The Debtor's contractor's license was suspended at the time the contract was signed (and later re-instated and then revoked). After consideration of the Creditors' evidence, including testimony and documents showing that the Debtor also misrepresented the status of his contractor's license and particular skills to several other parties (admitted as evidence of habit under FRE 406), the bankruptcy court entered a nondischargeable money judgment against the Debtor in the amount of $386,092.76, under 11 U.S.C. section 523(a)(2), (4), and (6).
Jurisdictional Argument under Stern rejected.
Affirming the lower court's judgment, the BAP held that, in accordance with dictum in the opinion itself, Stern v. Marshall 131 S. Ct. 2594 (2011) is a narrow limitation on bankruptcy jurisdiction, and that the BAP was bound by pre-Stern Ninth Circuit Court of Appeals authority, which holds that the bankruptcy court has jurisdiction not only to determine the nondischargeability of debts, a classic bankruptcy function created by bankruptcy law, but also to liquidate the amount of the claim and enter a final money judgment against the debtor. In connection with the latter point, citing to In re Sasson, 424 F.3d 864 (9th Cir. 2005) and In re Kennedy, 108 F.3d 1015, 1017 (9th Cir. 1997) ("it is impossible to separate the determination of dischargeability function from the function of fixing the amount of the nondischargeable debt," [quoting from another case]), the BAP noted that, consistent with one test formulated in Stern, the determination of whether a claim was dischargeable is "inextricably" tied up with determining whether there is a debt and the amount of the debt.
The BAP found that the bankruptcy court did not clearly err on the merits of its decision that the Creditors' claims against the Debtor were nondischargeable, noting that the bankruptcy court made detailed factual findings that the Debtor intended to deceive the Creditors and keep money that should otherwise have been used in the construction. The Debtor appeared pro se at the trial, but hired an attorney for his appeal.
Judge Markell issued a concurring opinion, in which he agreed that the BAP was bound by Ninth Circuit Court of Appeals authority (Sasson and Kennedy) , concerning the jurisdictional dispute. The concurrence goes on, however, to explain the jurisdictional problems raised by Stern, which Judge Markell indicates will need to be addressed by the Court of Appeals not only in the nondischargeability context, but in other contexts such as claims objections. Judge Markell opines that in a "no asset" chapter 7 case, a bankruptcy court generally would not have "related to" jurisdiction (28 U.S.C. § 1334(b)) over the liquidation of a nondischargeability claim, since such liquidation would not affect the bankruptcy estate at all. He also discusses the fact that, in the Sasson case, the Ninth Circuit Court of Appeals endorsed the use of "supplemental jurisdiction" under 28 U.S.C. section 1367 (claims that are part of the same case or controversy) and 11 U.S.C. section 105, to shore up the "related to" jurisdictional foundation for the bankruptcy court's entry of a money judgment against the debtor, but that this analysis may be flawed in the wake of the Stern decision.
This analysis is from the California State Bar Insolvency Law Committee
A Bankruptcy Court in Hawaii has issued a decision that the defense of in pari delicto ("equal fault") cannot be asserted against a bankruptcy Trustee, where the Trustee is the Plaintiff in an avoiding power (e.g. fraudulent transfer suit), even where the defense of in pari delicto could have been asserted against the bankruptcy debtor, in a tort suit, outside of bankruptcy, brought by the debtor as plaintiff:
In re Hawaiian Telcom Communications, Inc., 2012 Westlaw 6019094 (Bankr. D. Hawai'i):
Facts: A litigation trust, acting on behalf of a Chapter 11 estate, brought statutorily-based avoidance claims against an insider of the prepetition debtor. He asserted the defense of in pari delicto ("equal fault"), arguing that the prepetition debtor actively participated in the alleged wrongdoing. The litigation trust brought a motion to strike that defense, on the theory that it was inapplicable to avoidance claims arising under the Bankruptcy Code.
Reasoning: The court ruled in favor of the litigation trust, reasoning that although the defense of in pari delicto would apply to ordinary tort claims that belonged to the prepetition debtor, that defense does not apply to statutory claims arising under the Code, since the estate is not the successor of the prepetition debtor for purposes of those claims.
Author's Comment: The holding is right, but the dicta is (or are?) questionable. It is true that courts from other circuits have held that in pari delicto applies to causes of action derived from the prepetition debtor, but the Ninth Circuit has not ruled on that issue definitively. Further, those cases from the other circuits (mostly the Second and Third) are based primarily on state law, rather than federal law; and the court in this case did not discuss state law.
I would argue that the Ninth Circuit has at least hinted that it would not follow the other circuits on this issue. See F.D.I.C. v. O'Melveny & Myers, 61 F.3d 17 (9th Cir. 1995). There, the court held that the "unclean hands" or "in pari delicto" defense might not apply to a trustee:
While a party may itself be denied a right or defense on account of its misdeeds, there is little reason to impose the same punishment on a trustee, receiver or similar innocent entity that steps into the party's shoes pursuant to court order or operation of law. Moreover, when a party is denied a defense under such circumstances, the opposing party enjoys a windfall. This is justifiable as against the wrongdoer himself, not against the wrongdoer's innocent creditors.
I have heard from practitioners that there are at least two in pari delicto cases now before the Ninth Circuit; if that is true, perhaps we will get additional guidance soon. For the reasons expressed by the O'Melveny court, I hope that the Ninth Circuit rejects the in pari delicto defense definitively, for all purposes.
For discussions of other cases dealing with this issue, see:
- 2008 Comm. Fin. News. 34, Even Though Corporation Is Incorporated in Delaware, Delaware's "In Pari Delicto" Imputation Rules Do Not Apply to Cause of Action Arising in Another State.
- 2007 Comm. Fin. News. 49, Lenders Who Assist Corporate Looters May Be Held Liable to Estate, Despite "In Pari Delicto" Defense.
- 2005 Comm. Fin. News. 81, Doctrine of "Unclean Hands" Bars Bankruptcy Trustee's Suit against Law Firm That Represented Ponzi Schemers.
The foregoing analysis is from the Insolvency Law Committee - Business Law Section of the State Bar of California
Ninth Circuit Rules Only Article III Judge Can Rule on Fraudulent Transfer Claims; Bankruptcy Judges Cannot Rule on Fraudulent Transfer Claims, Because They Are Not Article III Judges
In re Bellingham Insurance Agency, Inc. (Executive Benefits Insurance Agency v. Peter H. Arkinson), ___F.3d ___, 2012 WL 6013836 (9th Circuit Court of Appeals, 12/4/12) Ninth Circuit Court of Appeals holds that only an Article III Judge, such as a US District Judge, or a Circuit Judge, or a US Supreme Court Justice, can adjudicate (rule on) fraudulent transfer claims, and holds that Bankruptcy Judges (which are NOT Article III Judges, they are only ARticle I Judges, appointed for 14 year terms, instead of being appointed for life, as Article III judges are) CANNOT rule on fraudulent transfer claims. Decision is based on the US Supreme Court case, Stern v. Marshall, 131 S. Ct. 2594 (2011), in which the US Supreme Court ruled, inter alia, that bankruptcy judges do not have jurisdiction over some kinds of "core" bankruptcy matters, including bankruptcy judges do not have jurisdiction to rule on state law counterclaims, because it is constitutionally impermissible to give such power to non-Article III judges. Copy of Bellingham attached, copy of 12/13/12 article analyzing Bellingham attached.
Divorce attorney and bankruptcy debtor each convicted of federal crimes related to bankruptcy case in which debtor, assisted by an attorney, concealed assets:
US v. Stern, F.Supp.3d___, 2012 WL 843637 (US District Ct, ED Wis 2012): Attorney was divorce attorney for his girlfriend. Girlfriend filed bankruptcy, using another attorney as her counsel. Debtor received $95,000 marital settlement in debtor's divorce, but did not disclose that asset (the $95,000) in her bankruptcy case. To help debtor hide the $95,000, the divorce lawyer put $60,000 of the $95,000 divorce settlement into certificates of deposit, held in the name of the divorce attorney. Debtor was indicted and convicted of bankruptcy fraud, but then was granted immunity, to testify against her divorce lawyer who had hidden the $60,000 for her. Divorce lawyer was charged with, and convicted of, federal crime of money laundering, for hiding the $60,000 for the debtor. Debtor still had not learned her lesson, and next lied to grand jury about the fact that the divorce lawyer had referred debtor to the bankruptcy lawyer, who had filed the bankruptcy case as counsel for the debtor. Debtor was convicted of perjury, for lying under oath to the grand jury.
In re Flores (9th Cir. 8/31/2012)--- F.3d ----, 2012 WL 3803936
In re Flores is a pro debtor decision by the 9th Circuit Court of Appeals. In Flores, the 9th Circuit Court of Appeals held that it was proper for bankruptcy judge to confirm a 3 year Chapter 13 plan, instead of a 5 year Chapter 13 plan, because, though the debtors had above-median income, they had no projected disposable income on Form 22C. Form 22C (Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income)--which was added by the BAPCPA 2005 amendments to the Bankruptcy Code--is required to be filled out and filed in every Chapter 13 case, and generally requires that Chapter 13 debtors with income above the median income of the state debtor resides in, for a family group the size of debtor's family group, to do a 5 year (60 month) Chapter 13 plan, NOT a 3 year (36 month) Chapter 13 plan. In Flores, the 9th Circuit Court of Appeals held that the US Supreme Court Hamilton v. Lanning decision did NOT overrule that portion of the 9th Circuit's Kagenveama decision, that allowed over median income Chapter 13 debtors, who had no or negative projected disposable income on form 22C, to propose and confirm a 3 year chapter 13 plan, instead of a 5 year chapter 13 plan that is usually required for over median income Chapter 13 debtors.
Pursuant to 11 USC §523(a)(8), student loan debt
Pursuant to 11 USC §523(a)(8), student loan debt-- as defined by that Section (which is almost all student loan debt, whether loan is by government, by a school directly, or by a bank)--is only dischargeable in bankruptcy if the debtor brings an adversary proceeding, in the debtor's bankruptcy case, and wins that adversary proceeding, by proving that it would be an undue hardship on the debtor, or on debtor's dependents, if debtor had to repay student loan debt the debtor owes, over the debtor's whole remaining working life. It has been reported in the news that about 1/4 of all student loan debt in the US is in default. Recently, in In re Jorgensen __BR__, 2012 WL 3963339 (9th Cir. BAP 9/11/2012), the Ninth Circuit Bankruptcy Appellate Panel affirmed partial discharge of student loan debt, under 11 USC §523(a)(8)'s "undue hardship" standard, due to the fact that the debtor got cancer, and because the debtor got cancer, the debtor could only work fewer hours, even after the cancer was cured. Case discusses the 3 prong Bruner test for dischargeability of student loan debt.
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