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In re Litton,   BR    23-10189 (Bankr. W.D. La. Sept. 18, 2023)

In re Litton,   BR    23-10189 (Bankr. W.D. La. Sept. 18, 2023): holds nonpurchase money debt service on a car is NOT a deductible ‘ownership of vehicle’ cost in ‘13’, which debtor can deduct in determining debtor’s monthly disposable income which debtor must generally pay into chapter 13 plan, each month, to fund chapter 13 plan

Courts aren’t fully in agreement, but most hold that non-purchase money debt service on a car isn’t an ‘ownership cost’ deducted from current monthly income to arrive at disposable income in chapter 13.

On a question where the courts are divided, Bankruptcy Judge John S. Hodge of Shreveport, La., ruled that debt service for a non-purchase money lien on an automobile is not deductible in calculating a chapter 13 debtor’s disposable income.

The chapter 13 debtors purchased a truck nine years before filing and had paid off the original auto loan. A year before filing, they borrowed $4,600 from their credit union, took down the cash and gave the lender a perfected, non-purchase money security interest in the truck. They scheduled the truck as worth $5,000.

Above median income, the debtors calculated their monthly disposable income on Official Form 122C-2. They claimed three deductions: (1) the monthly payment on the note to the credit union; (2) the standardized monthly IRS deductions for operating costs; and (3) the standardized IRS ownership costs.

No one objected to (1) and (2). In his September 18 opinion, Judge Hodge sustained the objection by the chapter 13 trustee to (3), the standardized IRS ownership costs, thereby increasing the debtor’s plan payments by $534.80 a month.

Judge Hodges trudged through the Bankruptcy Code’s definitional maze and the Code’s reliance on IRS guidelines, which determine how much the government can collect from a taxpayer for delinquent taxes.

While projected disposable income is not defined in the Code, disposable income is defined in Section 1325(b)(2) to mean “current monthly income received by the debtor . . . less amounts reasonably necessary to be expended.”

The IRS guidelines are incorporated into the Bankruptcy Code by Section 8707(b)(2)(A)(ii)(I). It defines “amounts reasonably necessary to be expended” as follows:

The debtor's monthly expenses shall be the debtor’s applicable monthly expense amounts specified under the National Standards and Local Standards, and the debtor's actual monthly expenses for the categories specified as Other Necessary Expenses issued by the Internal Revenue Service for the area in which the debtor resides, as in effect on the date of the order for relief, for the debtor . . . . [Emphasis added.]

The “key word” is “applicable,” Judge Hodges said.

The IRS Local Standards include transportation allowances for both ownership costs and operating costs. In the case at hand, the issue revolved around ownership costs.

In Ransom, the Supreme Court said that ownership costs “encompass[] the costs of a car loan or lease and nothing more.” Ransom v. FIA Card Servs., N.A., 562 U.S. 61, 70 (2011).

Because the non-purchase money lien on the truck might loosely be considered a “car loan,” Judge Hodges delved deeper into the IRS guidelines.

In Ransom, the Supreme Court said that ownership costs were derived from new and used car financing data compiled by the Federal Reserve. He then held “that the amounts listed in the current Ownership Costs table are based on the five-year average of new and used car financing data.”

Judge Hodges noted that Federal Reserve data separately classifies loans made for non-purchase money obligations.

Although courts are divided, Judge Hodges followed the majority and held that “expense amounts listed in the Ownership Costs category are applicable to a debtor only if he incurs monthly expenses associated with acquiring use of the vehicle, either through a lease or a purchase-money loan.” He sustained the chapter 13 trustee’s objection because debt service on the non-purchase money loan was not “reasonably necessary to be expended.”

Scholarly Commentary

Former Bankruptcy Judge Keith Lundin told ABI that “Bankruptcy Judge Hodges takes the noncontroversial view that only purchase money loans trigger entitlement to the ownership expense deduction. A few courts say otherwise, but not many.”

Judge Lundin is considered to be one of the country’s leading commentators on chapter 13. See his treatise,

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Auto Loans Pass Student Loans in Consumer Debt Load, Fed Data Shows

Auto loans have moved past student loans this year as the second-largest debt burden for consumers, at $1.582 trillion compared with $1.569 trillion for student loans, according to Federal Reserve Bank of New York data, WSJ Pro Bankruptcy reported. At $12 trillion, mortgages are the largest debt for consumers. Consumers had owed more in student loans than auto loans since early 2010, when a surge of college students, some of whom lost jobs in the financial crisis and sought education and new training, led to big student loan borrowing. But the U.S. government froze payments and interest on federal student loans for the pandemic, an emergency measure that is now ending. Meanwhile, consumers bought vehicles at inflation-juiced prices. In June 2021, new- and used-vehicle inflation hit 20.4% and stayed elevated until late 2022. Some cracks are now appearing in the auto loan market. Auto loan delinquencies climbed to 3.59% in August on a seasonally adjusted basis, their highest level since April 2010, shortly after the financial crisis, according to Moody’s Analytics. [As reported in the American Bankruptcy Institute [ABI] e-newsletter of 9/21/23]

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In re Elassal,    BR   , 2023 WL 5537061 (Bankr. E.D. Mich. Aug. 28, 2023).

This new bankruptcy court decision notes that cases use 5 different procedures (with differing outcomes) regarding who gets to keep the money (above money to pay of liens on house) when a chapter 13 debtor sells the debtor’s house, in chapter 13, after the bankruptcy court has confirmed (approved) debtor’s chapter 13 plan, and the confirmed chapter 13 plan provides debtor keeps the house.

When, post-confirmation, a chapter 13 debtor sells his or her home, who gets the benefit of the appreciation: the debtor, or his or her creditors? Judge Randon in Michigan adopted the so-called “estate replenishment approach” and held that sale proceeds derived from post-confirmation appreciation of a home belong to the debtor.

Bill Rochelle is on vacation. Please enjoy this piece written by Guest Writer Paul R. Hage, who co-chairs Taft, Stettinius & Hollister, LLP’s Bankruptcy and Restructuring practice group in Southfield, Mich., and is an executive editor of the ABI Journal.

Hon. Mark Randon of the U.S. Bankruptcy Court for the Eastern District of Michigan recently weighed in on an issue that has divided bankruptcy courts over the past few years. Debtors who opt for chapter 13 often do so to save their homes. Because of the appreciation in home values in recent years, debtors frequently find themselves with equity in their homes that was not contemplated at the time of plan confirmation. When, post-confirmation, a chapter 13 debtor sells his or her home, who gets the benefit of the appreciation: the debtor, or his or her creditors? In In re Elassal, Judge Randon adopted the so-called “estate replenishment approach” and held that sale proceeds derived from post-confirmation appreciation of a home belong to the debtor.

An Unexpected Asset

In 2021, the debtor confirmed a chapter 13 plan, committing three years of disposable income to keep her assets, including a $250,000 home. The home was encumbered by $228,000 in liens. Although unsecured creditors would have received nothing in a chapter 7 liquidation (the debtor could have exempted the equity in the home), the debtor’s plan contemplated payment of a minimum of $1,227.16 toward $93,805.83 in general unsecured claims.

Two years later, the debtor sold her home for $435,000. The sale netted $177,695.13 in proceeds after payment of liens. The debtor filed a motion seeking authorization to use the sale proceeds to buy a new home, while continuing to make her promised plan payments to creditors. The chapter 13 trustee objected, arguing that the debtor could only keep the net proceeds from the sale after she had paid her unsecured creditors in full.

A Deep Split in the Case Law

In all chapters of the Bankruptcy Code, Section 541(a) creates a bankruptcy estate that broadly sweeps in “all legal or equitable interests of the debtor in property as of the commencement of the case” and all “[p]roceeds, product, offspring, rents, or profits of or from property of the estate….” Section 1306(a)(1) expands on the property-of-the-estate concept by pulling in, among other things, all property “that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted.”

Based on the foregoing, one might assume that post-petition appreciation in a chapter 13 debtor’s home becomes property of the estate. However, Section 1327(b) generally provides that the confirmation of a plan vests all of the property of the estate in the debtor.” Moreover, Section 1327(c) provides that the vested property is generally “free and clear of any claim or interest of any creditor provided for by the plan.” The argument is frequently raised that because, upon confirmation of the plan, the home is vested in the debtor, then the proceeds from the sale of such home do not become property of the estate.

In an effort to reconcile the apparent contrasting language in Sections 1306 and 1327, courts have come up with no fewer than five different approaches to the question of how the post-confirmation vesting of property in the debtor affects the entitlement to the appreciation from a post-confirmation sale of a home. Some approaches result in the appreciation becoming property of the estate and being distributed to creditors. Others allow the debtor to retain the appreciation. There is a deep split in the caselaw.

The Estate-Replenishment Approach Dictates that the Debtor Retains the Proceeds

Judge Randon adopted the so-called “estate-replenishment approach” to harmonize Sections 1306 and 1327, which, unlike other approaches in the caselaw, avoided rendering any statutory provision superfluous. Under that approach, property that vests in the debtor cannot re-enter the estate, but property later acquired by the debtor becomes property of the estate, which continues to exist throughout the duration of the plan.

Applying the “estate replenishment approach,” the court held that the sale proceeds did not replenish the estate because they were not newly acquired property. The proceeds, the court stated, “cannot be untethered” from the home, which the debtor was permitted to keep under the plan. This result, the court reasoned, was consistent with the policies of chapter 13 and the bargain struck between the debtor and her creditors. The court further reasoned that, because chapter 13 debtors assume the risk of depreciation in their revested assets, “It stands to reason they should also enjoy the benefit of any post-confirmation appreciation of revested property when sold.”

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Americans’ Credit Card Balances Hit New Peak:

Credit & Collection e-newsletter of 8/28/23 reports that Americans’ credit card balances rose briskly in the second quarter of 2023, hitting a sobering milestone of more than $1 trillion, the Federal Reserve Bank of New York reported this month. Credit cards are the most prevalent type of household debt, New York Fed researchers wrote in a blog post, and saw the biggest increase of all debt types. More than two-thirds of Americans had a credit card in the second quarter, up from 59% roughly a decade earlier, the researchers found. And, they noted, card balances were more than 16% higher in the second three months of this year compared with a year earlier. “It’s easy to become overwhelmed by credit card debt, and $1 trillion tells us that many Americans are making purchases with money they don’t necessarily have,” said Ben Alvarado, executive vice president and director of core banking at California Bank & Trust. Car loan defaults are up also. Both these things usually result in more bankruptcies being filed by individuals.

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Credit Card And Car Loan Delinquencies Surpass Pre-Pandemic Levels

Credit & Collection e-newsletter of 8/15/23 reports that Credit Card And Car Loan Delinquencies Surpass Pre-Pandemic Levels

More Americans are falling behind on their credit card payments.

Driving the news: The rate of new credit card delinquencies has surpassed its pre-COVID level, clocking in at 7.2% in the second quarter, per a report out this month from the New York Fed.

  • Auto loan delinquencies were at 7.3% in Q2, also higher than pre-pandemic levels.
  • Meanwhile, mortgage delinquencies remain very low.

Why it matters: Even as inflation declines, Americans are increasingly relying on credit cards to make their budgets work — or maintain their “levels of consumption,” as Moody’s Investors Service put it in a note out last week.

  • And higher interest rates on credit cards push balances up higher.

Stunning stat: Credit card balances rose by $45 billion in the second quarter, rising past $1 trillion for the first time in the NY Fed survey’s history.

Zoom out: Returning to pre-COVID delinquency levels isn’t something to stress over at the moment — delinquency rates on credit cards before 2020 were relatively low thanks to the strong job market.

What to watch: Millions of Americans will soon have to start making student loan payments again, and undoubtedly some will rely more on credit cards to maintain their spending levels. That could potentially drive these delinquency rates higher.

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On 8/10/23 the U.S. Supreme Court announced it will review confirmation of the Purdue Pharma LP chapter 11 plan and decide:

"Whether the Bankruptcy Code authorizes a court to approve, as part of a plan of reorganization under Chapter 11 of the Bankruptcy Code, a release that extinguishes claims held by nondebtors against nondebtor third parties, without the claimants’ consent."

This issue does not only affect the Purdue Pharma Ch11 plan, where the non-debtor Sackler family members received non-consensual releases in exchange for contributing several billion dollars to fund the Purdue Pharma Ch11 plan. Cases where a subsidiary is created and the subsidiary files bankruptcy (like J&J, which twice set up, and had a subsidiary file bankruptcy, to seek to discharge talc cancer claims) will likely also be affected by the US Supreme Court’s decision

Following is an article on the US Supreme Court website, regarding this subject:

The Supreme Court on Thursday put a bankruptcy plan for Purdue Pharma, the manufacturer of the highly addictive opioid painkiller OxyContin, on hold while it reviews a challenge to the legality of the plan, which would shield the Sackler family, the owners of the drug company, from lawsuits. In the brief order the justices agreed to hear oral arguments this December in the Biden administration’s appeal of a lower-court ruling approving the plan. There were no recorded dissents.

U.S. Solicitor General Elizabeth Prelogar had told the justices that if the ruling by the U.S. Court of Appeals for the 2nd Circuit confirming the plan were allowed to stand, it “would leave in place a roadmap for wealthy corporations and individuals to misuse the bankruptcy system to avoid mass tort liability.” But lawyers for Purdue Pharma countered that if the implementation of the plan is delayed, it would result in “potentially grievous” harm for hundreds of thousands of victims of the opioid epidemic.

OxyContin first came on the market in 1996. In the years that followed, the painkiller generated more than $35 billion in revenue for Purdue Pharma. But the use and abuse of opioid painkillers, including OxyContin, also led to a serious public health crisis: During the 20-year period between 1999 and 2019, nearly a quarter-million people died from overdosing on prescription opioids like OxyContin.

Purdue Pharma twice pleaded guilty, in 2007 and 2020, to federal criminal charges arising from its marketing of OxyContin. The company was also the targets of thousands of lawsuits accusing the Sackler family and it of being a catalyst for the opioid epidemic through its deceptive marketing of OxyContin. To shield against those lawsuits, Purdue filed for bankruptcy in 2019. Purdue then proposed a reorganization plan that would remake the company as a nonprofit dedicated to addressing the problems created by the opioid epidemic. The Sacklers, who had withdrawn approximately $11 billion from the company, agreed to contribute approximately $4.5 billion to fund the plan; in exchange, the Sackler family would be released from liability.

In Sept. 2021, a bankruptcy court in the Southern District of New York confirmed the reorganization plan, over the objection of (among others) the U.S. Trustee, the division of the Department of Justice that oversees the administration of bankruptcy cases. U.S. Bankruptcy Judge Robert Drain called the confirmation a “bitter result,” but said that the settlement was the only way to provide funding for communities to address the problems caused by opioids. However, a federal district judge rejected the plan a few months later.

Purdue appealed to the 2nd Circuit, which in May of this year reversed the district court’s order and approved the plan. The court of appeals declined to put its judgment on hold to give the federal government time to seek review in the Supreme Court, prompting the U.S. Trustee to come to the justices to seek a stay of that ruling at the end of July.

Representing the U.S. Trustee, Prelogar told the justices that the plan provides the Sackler family with a “release from liability that is of exceptional and unprecedented breadth.” If the plan is approved, Prelogar warned, it will create a back door that will allow the “wealthy and powerful” to evade liability for wrongdoing without having to declare bankruptcy themselves. But more broadly, Prelogar cautioned, nothing in the Bankruptcy Code gives bankruptcy courts this kind of “sweeping power.” Moreover, she added, allowing the plan to go forward would “raise serious constitutional questions by extinguishing private property rights” – potential claims against the Sackler family – “without providing an opportunity for the rights holders to opt in or out of the release.”

Prelogar acknowledged that the government’s appeal could postpone the implementation of the plan, which would in turn delay funding for state and local governments and opioid victims. But the “delay is of the Sacklers’ own making,” Prelogar wrote, and in any event the government’s appeal would have relatively limited impact on the payments, which are scheduled to be spread out over several years. She suggested that the court could expedite the appeal by treating the government’s request to freeze the 2nd Circuit’s ruling as a petition for review.

Calling the government’s request “baseless,” Purdue Pharma countered that there is no need for the Supreme Court to intervene. There is no chance, the company assured the justices, that the reorganization plan will be substantially carried out before the Supreme Court can act on the government’s petition for review. Even after the 2nd Circuit’s ruling upholding the confirmation plan, Purdue Pharma explained, there are still additional steps to be taken when the case returns to the lower courts, so that “the earliest the Debtors could emerge from bankruptcy is January 2024, well after this Court is likely to act on the Trustee’s certiorari petition.”

Purdue Pharma downplayed the reorganization’s benefits to the Sacklers, describing them as the “only individuals who have benefitted from the two-year-and-counting delay in implementing the plan.” Instead, the company stressed, there is “overwhelming victim and governmental support for the plan.”

The company suggested that the U.S. Trustee is acting as a “rogue” agent, and it questioned whether the government actually has any interest in the case that would justify the trustee’s request, particularly when the federal government has itself already settled with Purdue. But in any event, it agreed with the government that the “best course” would be for the justices to treat the government’s request for a stay as a petition for review – and then quickly deny it. “[E]very day of delay in distributing” benefits to the victims, the company contended, “exacerbates the harms and literally risks lives.”

A group of individual victims also opposed the government’s request to block the plan from taking effect, telling the justices that the “notion that the U.S. Trustee speaks on behalf of Personal Injury Victims could not be further from the truth.” The victims, they write, acknowledged that releasing the Sacklers from liability was “necessary to a global settlement that delivers critical value to all opioid-affected communities in America through direct payments to those injured and billions of dollars of abatement funds to prevent further injuries.”

In an order issued on Thursday afternoon, the justices granted the Biden administration’s request to temporarily freeze the 2nd Circuit’s ruling and set the case for oral argument in December. A decision is likely to follow sometime next year.

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Kirkland v. U.S. Bankruptcy Court (In re Kirkland),    F.4th    (9th Cir. July 27, 2023), appeal 22-70092

Kirkland v. U.S. Bankruptcy Court (In re Kirkland),    F.4th    (9th Cir. July 27, 2023), appeal 22-70092: Ninth Circuit Court of Appeals holds that Trial Subpoenas Can’t Compel Zoom Testimony of a witness subpoenaed to testify, where the Court is located more than 100 Miles Away from where the witness is located. Comment of attorney KPMarch, Esq: Rules should be updated to allow this

The court’s ability to compel trial testimony by video doesn’t eradicate the 100-mile limitation on issuance of trial subpoenas.

The Ninth Circuit used a bankruptcy case to grant a writ of mandamus and quash a subpoena that would have compelled a witness to testify at trial via contemporaneous video transmission from the witness’s home, more than 100 miles from the location of the trial.

In short, the Ninth Circuit won’t permit a trial court to use Federal Rule 43(a) to subvert the 100-mile limitation in Federal Rule 45(c)(1). In other words, a subpoena cannot compel a witness to appear and testify at trial via Zoom from a location more than 100 miles from the courthouse.

In her July 27 opinion, Circuit Judge Danielle J. Forrest said it was a “novel issue” that pitted two Federal Rules against one another and has divided the lower courts. The Ninth Circuit, she said, has “not previously addressed the application of Rule 45(c)’s geographical limitations to testimony provided via remote video transmission, which is a question of increasing import given the recent proliferation of such technology in judicial proceedings.”

The Remote Witness

The trustee contended that a potential witness was the source of indispensable testimony to support the trustee’s claim in an adversary proceeding pending in bankruptcy court in Los Angeles. The witness lived in the Virgin Islands and refused to appear voluntarily at trial in Los Angeles.

The bankruptcy court authorized the trustee to serve a trial subpoena by certified mail commanding the witness to testify remotely from the Virgin Islands by video transmission. The bankruptcy court denied the witness’s motion to quash the subpoena.

The witness moved the bankruptcy court to certify an interlocutory appeal to the district court or the circuit court. The bankruptcy court denied the motion. The witness then filed a petition for mandamus, asking the Ninth Circuit to direct the bankruptcy court to quash the subpoena.

Mandamus Granted

Judge Forrest granted the petition in an opinion concluding that the 100-mile limitation in Rule 45(c) controls, not Rule 43(a).

Rule 54(c)(1) provides:

A subpoena may command a person to attend a trial, hearing, or deposition only as follows: (A) within 100 miles of where the person resides, is employed, or regularly transacts business in person.

The second sentence in Rule 43(a) says:

For good cause in compelling circumstances and with appropriate safeguards, the court may permit testimony in open court by contemporaneous transmission from a different location.

The trustee contended that “compelling circumstances,” such as the indispensability of the witness, can justify taking testimony “by contemporaneous transmission from a different location,” namely, the witness’s home in the Virgin Islands.

Before deciding whether Rule 43(a) would permit trial testimony remotely, Judge Forrest laid out the requirements for the issuance of a writ of mandamus, which she called an “extraordinary remedy” that only issues in exceptional circumstances amounting to judicial usurpation of power or a clear abuse of discretion. The writ, she said, “can be appropriate to resolve novel and important procedural issues.”

In the Ninth Circuit, five factors govern the issuance of the writ. See Bauman v. U.S. Dist. Ct., 557 F.2d 650, 654–55 (9th Cir. 1977). The most pertinent for the appeal was the third factor: whether the district court’s order was clearly erroneous. Under the differential standard of clear error, Judge Forrest framed the question as “whether Federal Rule of Civil Procedure 45(c)’s 100-mile limitation applies when a witness is permitted to testify by contemporaneous video transmission.”

Focusing on Rule 45(c)(1)(Audge Forrest said that “the plain meaning of this rule is clear: a person cannot be required to attend a trial or hearing that is located more than 100 miles from their residence, place of employment, or where they regularly conduct in-person business.” She said that Bankruptcy Rule 7004(d) incorporates the same limitation.

“Thus,” Judge Forrest said:

we have no difficulty concluding that the [witness] could not be compelled to testify in person at a trial in California. The question here is how Rule 45(c) applies when a person is commanded totify at trial remotely. [Emphasis in original.]

The trustee contended that Rule 43(a) circumvents the 100-mile limitation when the testimony is remote because remote testimony moves the “place of compliance” to wherever the witness is located.

To decide which rule dominates, Judge Forrest said that “determining the limits of the court’s power to compel testimony precedes any determination about the mechanics of how such testimony is presented.”

Consulting the advisory committee notes and drawing an analogy from Rule 32(a)(4), Judge Forrest concluded “that the [witness] fall[s] outside the bankruptcy court’s subpoena power because it defines witnesses who are ‘more than 100 miles from the place of . . . trial’ as ‘unavailable.’” She found no indication in this rule that the geographical limitation can be recalibrated under Rule 43(a) to the location of a remote witness rather than the location of trial, nor is there any indication that courts can avoid the consequences of a witness’s unavailability by ordering remote testimony.

Describing how the two rules work together, Judge Forrest held:

Rule 43 does not give courts broader power to compel remote testimony; it gives courts discretion to allow a witness otherwise within the scope of its authority to appear remotely if the requirements of Rule 43(a) are satisfied. [Emphasis in original.]

Next, Judge Forrest said that interpreting the “place of compliance” to be the location of the witness “is contrary to Rule 45(c)’s plain language that trial subpoenas command a witness to ‘attend a trial.’” [Emphasis in original.] Indeed, if the place of compliance were the location of the witness, there would be no reason to consider a long-distance witness “unavailable” or for the rules to provide an alternative means for presenting evidence from long-distance witnesses that are not subject to the court’s subpoena power.

Finding that the witness satisfied the third Bauman factor, Judge Forrest held “that the bankruptcy court ‘misinterpreted the law’ in its construction of Rule 45(c) as applied to witnesses allowed to testify remotely under Rule 43(a).

Proceeding to find that the witness had also satisfied the other Bauman factors, Judge Forrest issued the writ of mandamus, ordering the bankruptcy court to quash the trial subpoena.

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Castleman v. Burman (In re Castleman),    F.4th     (9th Cir. July 28, 2023), appeal #22-35604

Castleman v. Burman (In re Castleman),    F.4th     (9th Cir. July 28, 2023), appeal #22-35604: Splitting with the Tenth Circuit, the Ninth Circuit holds that chapter 13 debtors lose post-petition appreciation in a home if the case converts to chapter 7. Such “Circuit splits” usually eventually get decided by the US Supreme Court.

Splitting with the Tenth Circuit, a divided panel on the Ninth Circuit held that the post-petition appreciation in the value of a home belongs to creditors when a chapter 13 debtor converts the case to chapter 7.

The dissenter on the Ninth Circuit said that the majority “effectively punishes the [debtors] for filing under Chapter 13 with the forced sale of their home. Because that outcome is not the best reading of the Bankruptcy Code or our precedents,” the dissenter said he would have held, “consistent with the Tenth Circuit, that postpetition, preconversion appreciation belongs to the [debtors] rather than the converted Chapter 7 estate.”

Forced to Sell the Home

Eighteen months after confirming a chapter 13 plan, a couple were forced to convert their case to chapter 7 because the husband developed Parkinson’s Disease and could no longer work.

In the chapter 13 case, the debtors had scheduled their home as being worth $500,000. There was no equity in the home given the $375,000 mortgage and the debtor’s claimed homestead exemption of $125,000.

After conversion, the chapter 7 trustee alleged that the property was worth $700,000 and filed a motion for authority to sell the home. The debtors argued that the valuation at conversion didn’t matter because appreciation during chapter 13 belonged to them.

Bankruptcy Judge Marc Barreca of Seattle disagreed with the debtors and held that post-petition, pre-conversion appreciation belongs to the chapter 7 estate. In re Castleman, 631 B.R. 914 (Bankr. W.D. Wash. June 4, 2021). To read ABI’s report, click here.

The debtors appealed and lost again in district court. In re Castleman, 21-00829, 2022 BL 229708, 2022 US Dist. Lexis 116941, 2022 WL 2392058 (W.D. Wash. July 1, 2022). To read ABI’s report, click here. The debtors appealed to the circuit.

The Majority Opinion

For the majority, Circuit Judge Michael D. Hawkins said that the courts are “heavily divided.” He cited the Tenth Circuit for holding that post-petition appreciation in a nonexempt asset belongs to the debtor on conversion from chapter 13 to chapter 7. See In re Barrera, 22 F.4th 1217 (10th Cir. 2022). To read ABI’s report, click here. However, he did not cite his own Ninth Circuit Bankruptcy Appellate Panel for reaching the same result as the Tenth Circuit by giving appreciation to the debtor. See Black v. Leavitt (In re Black), 609 B.R. 518 (B.A.P. 9th Cir. Dec. 31, 2019). To read ABI’s report, click here.

Among the courts bestowing appreciation on creditors, Judge Hawkins cited the bankruptcy court’s opinion in In re Goetz, 647 B.R. 412 (Bankr. W.D. Mo. Nov. 10, 2022). To read ABI’s report, click here. [Note: Judge Hawkins did not cite the Eighth Circuit Bankruptcy Appellate Panel’s affirmance in Goetz v. Weber (In re Goetz), 651 B.R. 292 (B.A.P. 8th Cir. June 1, 2023). To read ABI’s report, click here. Note also that Goetz is on appeal to the Eighth Circuit.]

Several statutes are in play. Section 348(f)(1), which underwent substantial amendment in 1994, provides that “property of the estate in the converted case shall consist of property of the estate, as of the date of filing of the petition, that remains in the possession of or is under the control of the debtor on the date of conversion.”

The amendment was intended to overrule caselaw holding that property obtained after filing a chapter 13 petition becomes estate property once the case converts to chapter 7.

Primarily relied on by the majority, Section 541(a)(6) provides that estate property includes “[p]roceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case.”

Citing In re Goins, 539 B.R. 510, 516 (Bankr. E.D. Va. 2015), Judge Hawkins said that the equity is “inseparable” from the real estate. Citing previous Ninth Circuit opinions and Section 541(a)(6), he said that post-petition appreciation in real estate belongs to the estate, not the debtor. Schwaber v. Reed (In re Reed), 940 F.2d 1317, 1323 (9th Cir. 1991); and Wilson v. Rigby, 909 F.3d 306, 309 (9th Cir. 2018). [Note: Judge Hawkins did not mention that the two Ninth Circuit opinions dealt with cases in chapter 7, not conversions from chapter 13.]

Although the two opinions were chapter 7 cases, Judge Hawkins found “no textual support for concluding that § 541(a) has a different meaning upon conversion from Chapter 13.”

Judge Hawkins said that “many” cases reached a different conclusion by reference to the legislative history surrounding the 1994 amendment to Section 348(f). Those courts read the amendment’s legislative history as saying that appreciation after filing in chapter 13 belongs to the debtor.

Judge Hawkins did “not look to legislative history for guidance” because he concluded that the statute was not ambiguous.

Citing the Tenth Circuit’s Barrera decision, Judge Hawkins said that “some” courts give appreciation to the debtor by relying on Section 1327(b), the statute that revests estate property in the debtor on chapter 13 confirmation. However, he said that “§ 348(f) only clarified that newly acquired, post-petition property would not become part of the converted estate.”

“In sum,” Judge Hawkins said, “the plain language of §348(f)(1) dictates that any property of the estate at the time of the original filing that is still in [the] debtor’s possession at the time of conversion once again becomes part of the bankruptcy estate, and our case law dictates that any change in the value of such an asset is also part of that estate. In this case, that property increased in value.”

In a footnote after affirming the lower court’s holding that appreciation enhanced the chapter 7 estate, Judge Hawkins said that the decision did not resolve the debtors’ argument to have an administrative claim for payments they made on the mortgage after confirmation of the chapter 13 plan.

The Dissent

Circuit Judge Richard C. Tallman opened his dissenting opinion by saying that the majority created “a circuit split and effectively punishes the [debtors] for filing under Chapter 13 with the forced sale of their home.” As a result, he said that “the majority sacrifices the text of the bankruptcy statutes on the altar of simplicity.”

Judge Tallman characterized the majority as reaching a “simple resolution” by holding that appreciation in chapter 13 goes to the estate “because we have held [that] appreciation becomes part of the estate in a Chapter 7 case.”

“But simplicity,” Judge Tallman said, “cannot take precedence over the text of the Bankruptcy Code, and if we read § 348(f) in light of the Code ‘as a whole’ — rather than just § 541(a) — [Wilson v. Rigby] is not dispositive.” The “remainder” of the Bankruptcy Code, he said, “clarifies” that “property of the estate” is defined differently in chapter 13 than it is in chapter 7.

In view of Section 1327(b), Judge Tallman said that the debtor once again becomes the owner of the home on confirmation. “It follows,” he said, “that when a Chapter 13 plan has been confirmed, appreciation accrues to the debtor.”

Judge Tallman quoted the decision by “our Bankruptcy Appellate Panel” in Black for “holding that ‘the revesting provision of the confirmed plan means that the debtor owns the property outright and that the debtor is entitled to any postpetition appreciation.’” Black, supra, 609 B.R. at 529. The Tenth Circuit, he said, “reached a similar conclusion” in Barrera.

Judge Tallman went on to cite Barrera for holding that Section 541(a)(6) is only operative before confirmation because confirmation revests property in the debtor. He then quoted the Tenth Circuit for saying that proceeds generated from property after confirmation do not become estate property.

Consistent with the Tenth Circuit, Judge Tallman said that he “would hold . . . that postpetition, preconversion appreciation belongs to the [debtors] rather than the converted Chapter 7 estate.”

On top of the majority’s erroneous interpretation of the statute, Judge Tallman said that “the majority’s reading of § 348(f)(1)(A) is also inconsistent with the statute’s structure, object, policies, and legislative history.” Citing the legislative history accompanying the adoption of Section 348(f)(1)(A) in 1994, he said, “Clearly, Congress believed that home equity which accrued during Chapter 13 proceedings should not be included in the converted estate.”

Where the majority declined to take guidance from legislative history, Judge Tallman said it was “consistent with the text of the Bankruptcy Code, directly relevant to the case at hand, and unequivocally confirms that appreciation in the value of the [debtors’] home should not become part of the converted estate.”

To this writer, Judge Tallman cast his reading of the statute in terms of fairness. Had the debtors originally filed in chapter 7, he said that all of their home equity would have been exempt. By having taken a shot at chapter 13, he said they were left in a “worse position,” which he called “the situation Congress sought to prevent.”

Although he recommended that Congress once again amend Section 348(f) “to make the answer clear,” Judge Tallman said he “would hold that the appreciation belongs to the [debtors].”

Work around for debtors: In the 9th Circuit, debtors have a (pretty much) absolute right to dismiss their chapter 13 cases, and a debtor with appreciation in the debtor’s house, which is NOT protectable by the homestead exemption (which in California is usually $600,000 or more), may be better off dismissing their Chapter 13 case, instead of having it converted to chapter 7.

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Evans v. McCallister (In re Evans),    F.4th   , 2023 WL 3939837(9th Cir. June 12, 2023)

In an issue that has caused a split in the bankruptcy courts, the Ninth Circuit Court of Appeals held that a Chapter 13 Trustee is not entitled to its percentage fee of plan payments as compensation in a Chapter 13 when a plan is not confirmed. The Ninth Circuit joined the Tenth Circuit as the only federal court of appeals that has addressed this issue. See Goodman v. Doll (In re Doll), 57 F.4th 1129 (10th Cir. 2023). This issue is also currently pending in the Second and Seventh Circuit Court of Appeals. SeeSoussis v. Macco, 20-05673, 2022 WL 203751 (E.D.N.Y. Jan. 24, 2022) and In re Johnson, 650 B.R. 904 (Bankr. N.D. Ill. May 12, 2023)

The debtors in Evans filed a Chapter 13. Before the plan was confirmed, the debtors voluntarily dismissed their case, and then filed a motion to disgorge the Chapter 13 fees collected from their payments. The bankruptcy court agreed and ordered the 13 Trustee to return its fees. The 13 Trustee then appealed and the district court reversed, and then the debtors appealed to the Ninth Circuit Court of Appeals.

The 13 Truste argued that interpretation of the word “collect” under 28 U.S.C. § 586(e)(2) would resolve this dispute. Section 586 describes the duties of the standing trustee and that the subchapter V, 11, 12, and 13 trustees “…shall collect [a] percentage fee from all payments received by such individual under plans…” And the Debtors argued that reading § 586(e)(2) and 11 U.S.C. § 1326(a) together supported their argument. The Debtors argument was adopted by the Tenth Circuit in Doll. Under the 13 Trustee’s argument, she should be entitled to keep her commission because the word “collect” means to irrevocably keep the fees taken. The Debtors opined that the word “collect” means to collect and hold “pending confirmation, while Section 1326(a) tells the trustee how to disburse payments” once a decision on confirmation is made." Section 1326(a)(2) provides that payments made by the debtor “shall be retained by the trustee until confirmation or denial of confirmation” and if the plan is not confirmed then the trustee shall return “any such payments not previously paid” after deducting any unpaid claim allowed under section 503(b).

Rather than adopt the main reasoning of the Tenth Circuit, the Ninth Circuit opined that when reading § 586(e)(2) and § 1326(a) together that the phrase payments under the plan pursuant to § 586(e)(2) referred to payments under confirmed plans. This is because § 1326(a)(1) says the debtor shall make payments in the amount “proposed by the plan to the trustee.”, and § 1326(a)(2) provides the trustee shall hold onto those payments “until confirmation or denial of confirmation.” So only when a plan is confirmed does § 1326(b) require the 13 trustee to be paid its fee.

Like the Tenth Circuit, the Ninth Circuit also bolstered its holding using the cannon of statutory construction applying the rule against superfluities. The Bankruptcy Code provisions § 1226(a) and 1194(a) that govern trustee payments for subchapter V, 11, and 12 trustees explicitly tell the trustees if a plan is not confirmed to deduct its fee, whereas § 1326 does not. This showed that Congress knew how to use language in § 1326 to explicitly make sure 13 trustees were paid like it did in §§ 1226 and 1194, but it did not.

Lastly the Evans court rejected policy arguments from the Chapter 13 Trustee. The 13 Trustee contended that not allowing a trustee to be paid its fee when a case is not confirmed would cause financial strains and incentive 13 Trustees to violate their duty to object to plans. The Ninth Circuit explained that policy arguments were not enough to overcome the plain language of the relevant provisions that were created by Congress.

With this current issue pending in the Seventh and Second Circuits, a circuit split may be imminent.

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East Coast Foods Inc. v. Development Specialists Inc. (East Coast Foods Inc.),    BR    23-1034 (B.A.P. 9th Cir. July 19, 2023): BAP holds 28 USC 959(a) Isn’t an Exception to the Barton Doctrine

28 USC 959(a) doesn’t permit suing a trustee for breach of fiduciary duty outside of bankruptcy court.

A nonprecedential opinion by the Ninth Circuit Bankruptcy Appellate Panel explains that 28 U.S.C. § 959(a) doesn’t mean what its words seem to say.

The section says:

Trustees, receivers or managers of any property, including debtors in possession, may be sued, without leave of the court appointing them, with respect to any of their acts or transactions in carrying on business connected with such property.

A chapter 11 trustee retained a management consultant to operate the business. Allegedly, the consultant didn’t disclose that he purchased merchandise from companies he owned and overcharged the debtor by hundreds of thousands of dollars.

The confirmed chapter 11 plan created a plan trust and conveyed all estate claims to the trust. The plan also gave the plan trustee exclusive authority and responsibility for investigating and prosecuting estate claims.

After confirmation, the bankruptcy court granted final compensation to the trustee.

Not long after confirmation, the plan trustee discovered the consultant’s alleged misrepresentations and overcharges. Following the plan trustee’s objection to the consultant’s fee applications, the bankruptcy court required the consultant to disgorge some $375,000 in previously paid fees.

Four years later, the corporate debtor sued the chapter 11 trustee and the consultant in state court. The claims included fraud, negligent misrepresentation and breach of fiduciary duty.

A month later, the debtor filed a motion in bankruptcy court for leave to bring the suit that it had already filed. In the hearing on the motion, the debtor argued it was suing the trustee under Section 959(a) and that Section 959(a) was an exception to the Barton doctrine.

The plan trustee opposed the motion, saying that the plan trustee alone had authority to sue the chapter 11 trustee and the consultant. The bankruptcy court denied the debtor’s motion for leave to sue on several grounds. The debtor appealed to the BAP.

Section 959(a)

Citing Barton v. Barbour, 104 U.S. 126 (1881), the BAP’s memorandum opinion on July 19 quoted the Ninth Circuit for saying that the Barton doctrine means that a party must first obtain leave of the bankruptcy court before it initiates an action in another forum against a bankruptcy trustee or other officer appointed by the bankruptcy court for acts done in the officer’s official capacity.

Beck v. Fort James Corp. (In re Crown Vantage Inc.), 421 F.3d 963, 970 (9th Cir. 2005).

Citing Crown Vantage, the BAP said it “is broadly accepted that 28 U.S.C. § 959(a) does not apply to alleged wrongdoing during the normal course of a trustee’s administration of the bankruptcy estate.” The BAP quoted the circuit court for saying that Section 959(a) applies only if the trustee . . . is actually operating the business, and only to acts or transactions in conducting the debtor’s business in the ordinary sense . . . or in pursuing that business as an operating enterprise. Section 959(a) does not apply to suits against trustees for administering or liquidating the bankruptcy estate. Actions taken in the mere continuous administration of property under order of the court do not constitute an “act” or “transaction” in carrying on business connected with the estate. The few examples of suits that have been allowed under [28 U.S.C.] § 959(a) include a wrongful death action filed against an operating railroad trustee and suits for wrongful use of another’s property.

Id. at 971-972.

The BAP said it had held in a prior case that a “breach of a fiduciary duty in the administration of the estate does not fall within the exception provided by 28 U.S.C. § 959(a).” Kashani v. Fulton (In re Kashani), 190 B.R. 875, 884 (B.A.P. 9th Cir. 1995). To sue in another court in a case of the sort, the BAP held that the debtor must obtain leave from the bankruptcy court.

In the case on appeal, the BAP said that the complaint dealt with the trustee’s acts in administering the estate and “not torts committed in the course of running the business.” Likewise, the claims for misrepresentation and breach of fiduciary duty “do not seek relief for independent torts while operating” the business.

The BAP therefore held that Section 959(a) was not an exception to the Barton doctrine.

The Debtor Lacked Standing

Having held that Section 959(a) itself did not permit the debtor to sue the trustee, the BAP proceeded to rule that the debtor lacked standing to sue, because all claims vested in the plan trustee. The BAP also concluded that the bankruptcy court had not abused its discretion in denying leave to sue, for several reasons mostly based on the Barton doctrine.

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Washington v. Kijakazai,    F4th     (9th Cir. July 3, 2023), case 22-35320

Washington v. Kijakazai,    F4th     (9th Cir. July 3, 2023), case 22-35320: Ninth Circuit Court of Appeals holds that a Pro Se (not represented by attorney) Litigant consented to magistrate judge hearing and deciding litigant’s case (there a social security case), by litigant not timely objecting to magistrate judge hearing and eciding litigant’s case. Expect that this “did parties consent to non-article III judge hearing and finally deciding case” issue will be applied in bankruptcy adversary proceedings—such as fraudulent transfer adversary proceedings--where bankruptcy judges (who, like magistrate judges--which are Article I judges, not Article III judges--lack jurisdiction to issue a final decision, absent consent of all parties to the bankruptcy judge doing so. Without consent of all parties, bankruptcy judges must do a “Report and Recommendation” to the US District Court and the US District Court must make the final decision. This issue could go up to the US Supreme Court, to resolve conflict between 9th Circuit and 2nd circuit cases.

Wellness International may have undercut prior Second Circuit authority giving pro se litigants a loophole for arguing there was no implied consent to final adjudication by an Article I judge.

Building on the Supreme Court’s decision in Wellness International, the Ninth Circuit closed loopholes to preclude a pro se litigant from reneging on implied consent to final adjudication by a non-Article III judge.

An individual filed suit in federal district court after having been denied disability benefits by the Social Security Administration. The district court assigned the case to a magistrate judge under 28 U.S.C. § 636(c), which provides that a magistrate judge may conduct “all proceedings” in a civil jury or non-jury case and enter judgment if the parties voluntarily consent.

Under a local rule, the clerk sent the parties a form establishing a deadline by which the parties may decline to consent to entry of final judgment by the magistrate judge. The notice said that each party “will be deemed to have knowingly and voluntarily consented” to proceeding before the magistrate judge absent signing and filing the form by the deadline.

The plaintiff did not sign or file the form. The clerk made a docket entry confirming that the parties consented to proceeding before the magistrate judge. Notably, the plaintiff had registered to receive electronic communications from the court before the deadline.

After the consent deadline, the government conceded that the proceedings in the Social Security Administration were in error. The magistrate judge entered a final order remanding the matter to the agency for further proceedings.

The plaintiff appealed, contending it was error for the magistrate judge not to have ruled him immediately entitled to disability benefits without further proceedings before the agency. The plaintiff’s appeal also argued that the magistrate judge was without jurisdiction to enter a final order.

The district court ruled that the plaintiff had consented to jurisdiction before the magistrate judge and affirmed on the merits. The plaintiff appealed to the Ninth Circuit.

Circuit Judge Richard R. Clifton devoted most of his July 3 opinion to the question of consent to the magistrate judge’s power to enter a final order. He said that consent may be “express or implied.” Quoting the Supreme Court, he said that consent may be implied if the party “was made aware of the need for consent and the right to refuse it, and still voluntarily appeared to try the case before the” magistrate judge. Roell v. Withrow, 538 U.S. 580, 590 (2003).

Judge Clifton said that Wellness International Network, Ltd. v. Sharif, 575 U.S. 665 (2015), extended the notion of implied consent to bankruptcy cases where the bankruptcy court would not have authority to enter a final order absent actual or implied consent. He said that Wellness International advocated increased judicial efficiency and “checking gamesmanship.” Id.

Based on several factors, Judge Clifton held that the consent form satisfied the requirements of Roell and Wellness International. First, the plaintiff did not object when the clerk made the docket entry saying that the parties had conceded to proceeding before the magistrate judge. Instead, the plaintiff proceeded to litigate on the merits and did not object. The pro se plaintiff only objected after the district court held that he had consented.

According to Judge Clifton, not finding consent would reward “gamesmanship” that Roell had warned against.

As a pro se litigant, the plaintiff argued that he believed he was only consenting to the issuance of a report and recommendation because he did not grasp the jurisdictional issue.

Judge Clifton pointed to the Second Circuit for having held that pro se status may bear on the party’s implied consent. In Yeldon v. Fisher, 710 F.3d 452, 453 (2d Cir. 2013) (per curiam), however, the pro se litigant continued to litigate on the merits after expressly declining to consent.

Judge Clifton declined to follow Yeldon because the plaintiff had not objected. He went on to say that “we have never held that pro se litigants are incapable of knowingly or voluntarily consenting to magistrate judge jurisdiction.” He affirmed the ruling of the district court that the plaintiff had consented to “magistrate judge jurisdiction.”

Circuit Judge William A. Fletcher concurred, recommending that the district judges modify the form “to make its meaning crystal clear” that failure to file the form results in consent.


Bankruptcy judges typically warn the parties that they will have consented to final adjudicatory power without a timely objection. Language in Judge Clifton’s opinion supports the conclusion that those warnings will amount to implied consent.

On a different subject, is the Second Circuit’s Yeldon decision still good law following Wellness International, which came two years later?

Yeldon could be read to mean that continuing to litigate might amount to a pro se party’s waiver of a previous refusal to consent to final adjudicatory power before a non-Article III judge.

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In re MacMillan,    BR   , case23-30159 (Bankr. D. Ore. June 29, 2023)

A bankruptcy judge in Oregon points out that the Ninth Circuit Court of Appeals does NOT allow bankruptcy judges to grant so-called “critical vendor” Motions, though bankruptcy judges in other parts of the US (that are NOT in the Ninth Circuit) grant critical vendor motions.

A decision by Bankruptcy Judge Teresa H. Pearson of Portland, Ore., reminds us that so-called critical vendor orders are not permitted in the Ninth Circuit, even when payment of a prepetition claim is critical.

Judge Pearson was bound by Ninth Circuit authority from 1983, even though critical vendor orders are de rigueur in other circuits.

The debtor was a rancher in chapter 11 with a dozen general, unsecured creditors. The debtor grew hay as feed for his own cattle.

The debtor had been using a neighbor to cut his hay. On filing, the debtor owed about $12,000 to the neighbor for cutting his hay. The neighbor refused to cut the debtor’s hay unless the prepetition claim were paid in full.

No one else would cut his hay, the debtor said. The debtor therefore filed a critical vendor motion seeking court authority to pay the neighbor’s $12,000 general, unsecured claim in full, but no other unsecured claims.

Citing Sections 363(b) and 105 as authority, the debtor said that the estate would lose value if he were forced to purchase feed for his cattle.

Judge Pearson denied the critical vendor motion in an opinion on June 29, citing B & W Enters. Inc. v. Goodman Oil Co. (In re B & W Enters Inc.), 713 F.2d 534 (9th Cir. 1983). Under B & W’s “binding authority,” she said that “the Ninth Circuit Court of Appeals considered whether the claims of certain unsecured creditors could be elevated over other creditors of the same class and concluded that ‘[t]his is not a power given the courts by the 1978 Act.’” Id. at 537.

Surveying authorities outside the Ninth Circuit, Judge Pearson cited a 1989 decision by Burton R. Lifland of New York and a 2002 opinion by Bankruptcy Judge D.M. Lynn of Forth Worth for approving critical vendor motions under the so-called doctrine of necessity, also known as the necessity of payment rule. Those courts found authority under Sections 105, 363(b) or 1107(a). See In re Ionosphere Clubs Inc., 98 B.R. 174 (Bankr. S.D.N.Y. 1989); and In re CoServ L.L.C., 273 B.R. 487 (Bankr. N.D. Tex. 2002).

Judge Pearson said that the doctrine arose in railroad reorganizations under the former Bankruptcy Act and was continued under the Bankruptcy Code in Section 1171(b). She cited the Ninth Circuit for having “squarely held” in B & W “that the Necessity of Payment Rule and the Six Months Rule cannot be applied to cases other than railroad cases.” B & W, supra, 713 F.2d at 537.

Judge Pearson also cited a 1991 Ohio bankruptcy court decision for having approved a critical vendor motion under Section 105, but said it was written “well before” the Supreme Court’s 2014 decision in Law v. Siegel, 571 U.S. 415, 420-21 (2014). She paraphrased the Court for holding that Section 105 “may not be used to contravene the Code’s specific statutory provisions.” Id. at 1194-95.

The debtor argued by analogy that courts allow payment of employees’ prepetition wage claims. In response, Judge Pearson said there are “good reasons under the Bankruptcy Code to treat the payment of prepetition priority employee obligations differently than allegedly critical general unsecured claims.”

Judge Pearson said that priority wage claims must be paid in full as a condition of chapter 11 plan confirmation and that all employees are paid up to the statutory limit on each employee’s priority claim. The debtor, she said, was aiming to pay only one creditor who had no priority claim.

Finding no authority “that it finds persuasive that would allow the court to pay the prepetition claim of one general unsecured creditor in full immediately,” Judge Pearson denied the critical vendor motion, because “the Bankruptcy Code does not authorize this proposed payment.”

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U.S. v. Miller,    F.4th    21-4135 (10th Cir. June 27, 2023), appeal 21-4135

U.S. v. Miller,    F.4th    21-4135 (10th Cir. June 27, 2023), appeal 21-4135: US Tenth Circuit Court of Appeal holds that IRS Has No Sovereign Immunity to Bar a Fraudulent Transfer Suit Under Section 544(b). Therefore, a bankruptcy trustee can sue the IRS to seek to recover a fraudulent transfer from the IRS, that was made to the IRS by a person or entity who/which later files bankruptcy.

The circuits are now split 3 Circuits, to 1 Circuit, with the majority finding a waiver of sovereign immunity under Section 544(b)(1) for lawsuits by a trustee based on claims that an actual creditor could not have brought outside of bankruptcy.

Siding with the majority on a split of circuits, the Tenth Circuit joined the Ninth Circuit, and the Fourth Circuit, in holding that the waiver of sovereign immunity, by Bankruptcy Code 11 USC106(a), permits a bankruptcy trustee to sue the government for receipt of a fraudulent transfer under Section 544(b)(1), even though an actual creditor could not have sued the government outside of bankruptcy.

The Tenth Circuit found guidance from the sovereign immunity decision handed down by the Supreme Court in June. Lac du Flambeau Band of Lake Superior Chippewa Indians v. Coughlin, 22-227, 2023 BL 204482, 2023 US Lexis 2544 (June 15, 2023). To read ABI’s report, click here.

The Fraudulent Transfer to the IRS

The case arose from a typical fraudulent transfer to the Internal Revenue Service: A corporation paid federal income taxes owed by one of its owners.

The corporation’s chapter 7 trustee invoked Section 544(b)(1) to sue the IRS for receipt of a fraudulent transfer under Utah law. The section allows a trustee to “avoid any transfer of an interest of the debtor in property . . . that is voidable under applicable law by a creditor holding an [allowable] unsecured claim.”

The government agreed there was an actual creditor and admitted the elements of a constructively fraudulent transfer. However, the government contended that sovereign immunity would have prevented an actual creditor from suing the IRS outside of bankruptcy, thus disabling the trustee from suing under Section 544(b)(1).

In response, the trustee argued that the waiver of sovereign immunity as to Section 544 contained in Section 106(a) allowed suit based on a state-law claim.

On cross motions for summary judgment, Bankruptcy Judge R. Kimball Mosier of Salt Lake City ruled in favor of the trustee and entered judgment for about $145,000. The IRS appealed to the circuit after the district court affirmed. See U.S. v. Miller, 20-00248, 2021 BL 340200 (D. Utah Sept. 08, 2021). To read ABI’s report on the district court affirmance, click here.

The Circuit Split

In his June 27 opinion, Tenth Circuit Judge Bobby R. Baldock laid out the split of circuits.

The Seventh Circuit first tackled the question in 2014 by ruling that the immunity waiver in Section 106(a) did not allow suit against the state, reasoning that Section 106(a) did not modify the actual creditor requirement in Section 544(b). In re Equip. Acquisition Res. Inc., 742 F.3d 743 (7th Cir. 2014). Judge Baldock said that the Chicago-based appeals court “never meaningfully addressed the scope of § 106(a) as reflected in its text.”

Judge Baldock interpreted the Seventh Circuit’s opinion as “effectively” erecting a “total ban” on fraudulent transfer suits against governmental units under Section 544(b)(1).

On the other side of the fence, the Ninth and Fourth Circuits both held that the waiver of immunity in Section 106(a) covers claims against the government under state law. See In re DBSI, Inc., 869 F.3d 1004 (9th Cir. 2017); and Cook v. U.S. (In re Yahweh Center Inc.), 27 F.4th 960 (4th Cir. 2022). To read ABI’s reports, click here and here.

To decide which faction had the better reasoning, Judge Baldock took counsel from Lac du Flambeau, where the Court said that the intent of Congress to waive sovereign immunity must be “unmistakably clear,” although there is no requirement for the statute to use “magic words.” Focusing on the language in Section 106(a), Judge Baldock noted that Congress “abrogated” immunity “with respect to” Section 544. The Supreme Court, he said, held that “with respect to” has a “broadening effect.”

Like the Fourth and Ninth Circuits, which were “faithful to the text of Code § 106(a),” Judge Baldock held:

[T]he critical phrase “with respect to” in § 106(a)(1) clearly expresses Congress’s intent to abolish the Government’s sovereign immunity in an avoidance proceeding arising under § 544(b)(1), regardless of the context in which the defense arises.

Judge Baldock found support for his holding in Section 106(a)(2), which says that the court “may hear and determine any issue arising with respect to the application of” Section 544. [Emphasis in original.]

Judge Baldock made “short work” of the government’s alternative argument based on field preemption. Had Congress believed that Section 544(b) posed an obstacle to the collection of income taxes, he said that “Congress surely would have added an express preemption provision to § 544(b) exempting the Government from its operation just as it provided an exemption for a transfer of charitable contributions in subsection (b)(2).”

Contrary to the Seventh Circuit, Judge Baldock held:

Code § 106(a) waives the Government’s sovereign immunity both as to the Trustee’s proceeding under Code § 544(b)(1) and the underlying Utah state law cause of action subsection (b)(1) authorizes the Trustee to rely on to avoid the debtor’s tax transfers made on behalf of its principals in this case.

A 3 to 1 Circuit split practically insures that the US Supreme Court will eventually rule on this issue.

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In re Mack,    BR   , 2023 WL 2397345

In re Mack,    BR   , 2023 WL 2397345 (B.A.P. 9th Cir. Mar. 7, 2023), that demonstrates the dangers of trying to use a state court default judgment as basis for nondischargeability. Practice pointer: Be sure the default judgment says everything it needs to say, to prove up all elements you need to prove, to prove whichever kind of nondischargeability you are trying to prove via the state court default judgment. If the default judgment does NOT have everything you need, your nondischargeability complaint needs to request for trial in bky ct. In Mack, the state court default judgment did NOT say everything that judgment needed to say, to allow it to be used as basis for a nondischargeability complaint, by issue preclusion, when the debtors filed bankruptcy, after the state court default judgment was entered. The 9th Circuit BAP decision affirmed the bankruptcy court’s dismissal of a complaint under 11 U.S.C. §523(a)(4) for failure to state a claim under Federal Rules of Civil Procedure (FRCP) 12(b)(6). The BAP’s discussion of the law with respect to issue preclusion essentially reiterated what the law has been in connection with default judgments in this circuit. Learn from this decision: when a creditor is seeking a default judgment in a state court action in which some form of fraud (or conversion) has been pled, and may later want to use the state court default judgment, in a bankruptcy case, to prove nondischargeability of that default judgment, based on “issue preclusion”, be sure that the judgment contains findings that satisfy the issue preclusion elements, especially the “actually litigated,” “necessarily decided,” and public policy prongs. If not, the creditor seeking nondischargeability will need to have a trial in bankruptcy court, in the nondischargeability adversary proceeding. Warn the creditor client of this problem. Trials are expensive and risky.


This case involved a complaint by creditor El Dorado Liquidation Associates, LLC (“El Dorado”) for determination that the debt owed to it pursuant to an assignment of a state court judgment in favor of Carter and Julie Unruh (the “Unruhs”) by the debtors Darin and Deborah Mack (“Debtors”) was nondischargeable on grounds of embezzlement under § 523(a)(4). The bankruptcy court dismissed the complaint for failure to state a claim upon which relief may be granted under FRCP Rule 12(b)(6) and El Dorado appealed to the BAP.

The Debtors owned Absolute Archery LLC (“Archery”). In 2013 and 2014, Archery borrowed a total of $140,000 from the Unruhs pursuant to a series of promissory notes (the “Notes), which obligations were secured by a lien on Archery’s inventory. The Debtors personally guaranteed the obligations. The Notes provided that Archery would be in default if any disposition of inventory resulted in a total inventory value of less than $150,000.

Archery provided to the Unruhs monthly financial statements that indicated it was maintaining the agreed amount of inventory. Archery’s December 2015 financial statements – the last one provided to the Unruhs – indicated that Archery had $205,687 of inventory on hand. In or around March 2016, Archery ceased its business operations. Debtors offered Archery’s inventory as partial payment on the notes and proposed a plan for repayment of the remainder of the debt owed to the Unruhs. The parties disagreed as to the cost value of the inventory, but the Unruhs accepted the turnover of collateral. Later, they determined that the inventory had a cost value of only $60,932.44 – approximately $35,000 less than the Debtors estimated.

The Unruhs then demanded payment in full of the notes’ balances and asserted fraud due, in part, to the $35,000 discrepancy in the cost value of the surrendered inventory. The Unruhs filed a complaint in state court against Debtors and Archery, asserting claims for breach of contract, fraud, money had and received, conversion, unfair business practices, and negligent misrepresentation. The state court entered a default judgment against Debtors and Archery for $150,616.30. The default judgment included no findings and made no attempt to specify which causes of action formed the basis for the award of damages, attorneys’ fees and interest.

After the Debtors filed their chapter 7 case in August 2018, the Unruhs filed an adversary complaint to except the default judgment from discharge under §§523(a)(2)(A) and (B). The bankruptcy court entered summary judgment in favor of the Unruhs. Debtors appealed that ruling, and the BAP reversed and remanded. The BAP found that the state court record was insufficient to warrant issue preclusion because the “actually litigated” and “necessarily decided” elements were not met, and the bankruptcy court had not analyzed the public policy prong of the issue preclusion analysis. See In re Mack, 2020 WL 4371887, at ∗ 8.

On remand, the Unruhs amended their complaint to name El Dorado as plaintiff pursuant to the Unruhs’ assignment of the state court judgment and alleged claims under §§523(a)(2)(A), (a)(2)(B), and (a)(4), alleging that the Debtors executed the Notes and personal guarantees with the intent to deceive the Unruhs by representing that they would maintain a minimum inventory of $150,000 and that the Debtors embezzled approximately $88,439 in mortgaged inventory.

The bankruptcy court granted the Debtors’ motion dismiss the §523(a)(4) embezzlement claim without leave to amend, agreeing that the Unruhs and El Dorado lacked standing to assert such a claim because the allegedly embezzled property was owned by Archery and not the Debtors. The Debtors moved for summary judgment on the §523(a)(2) claims, which the bankruptcy court granted. El Dorado timely appealed only the dismissal of the §523(a)(4) claim.

BAP’s analysis

The BAP affirmed the bankruptcy court’s dismissal of the §523(a)(4) claim. El Dorado argued that the bankruptcy court erred by ignoring the state court default judgment and by disregarding “binding California law” imposing criminal liability upon a party that sells mortgaged property without permission.

The BAP disagreed, finding that the bankruptcy court did not err in disregarding the state court default judgment in its dismissal of the §523(a)(4) embezzlement claim. The BAP referred specifically to its reversal of the initial finding by the bankruptcy court (2020 WL 4371887) and also discussed the “actually litigated” and “necessarily decided” prongs of the issue preclusion analysis, and its finding that those prongs were not met by the bankruptcy court (also finding that its 2020 decision “is now law of the case, and the matters we previously decided dispose of El Dorado’s arguments that the state court default judgment established elements of its §523(a)(4) claim.”) Id. At ∗2.

After reviewing the allegations of the amended complaint[1], the BAP discussed the requirements to plead a viable embezzlement claim. In particular, citing numerous Ninth Circuit and other cases, it stated that a plaintiff asserting an embezzlement claim under §523(a)(4) must establish that the property at issue belonged to the plaintiff. It then noted that the inventory did not belong to either the Unruhs or El Dorado and instead was owned by Archery, such that the security interest held by the Unruhs was insufficient to support an embezzlement claim under §523(a)(4) [citation omitted]. Id. At ∗3. Finally, the BAP concluded that regardless of whether the Debtors were correct – that El Dorado did not have standing to assert an embezzlement claim under §523(a)(4) – or otherwise, the bankruptcy court did not err in dismissing the embezzlement claim with prejudice.

Finally, El Dorado had argued that California law provides that it is the crime of larceny to sell mortgaged goods without the permission of the mortgagee (citing California Penal Code Section 538.3[2]). The BAP found this statue and argument irrelevant and reminded El Dorado that the bankruptcy court had previously rejected El Dorado’s attempt to plead a cause of action for conversion under §523(a)(6) and that El Dorado did not appeal that denial.

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RS Air LLC v. NetJets Aviation Inc. 9th Circ BAP, 6/2/23, published:

An Alter Ego Suit Doesn’t Violate the Discharge Injunction, BAP Says

At least where nondebtor releases are prohibited, and if Delaware law controls, a suit against an alter ego doesn’t violate the discharge injunction, the Ninth Circuit BAP says.

At least when Delaware law controls, suing an alter ego does not violate the discharge injunction protecting a corporate debtor, according to the Ninth Circuit Bankruptcy Appellate Panel.

The corporate debtor owned a partial interest in aircraft. The corporation filed a petition under Subchapter V of chapter 11. The entity that sold the aircraft to the corporate debtor had a claim for about $2 million.

The corporate debtor confirmed a plan that paid a small fraction of the seller’s claim. Before the corporate debtor received a discharge, the seller filed a lawsuit in federal district court against the individual who was the corporate debtor’s owner. The complaint alleged that the individual was the corporate debtor’s alter ego.

In his opinion for the BAP on June 2, Bankruptcy Judge Robert J. Faris said that the complaint did not name the corporate debtor as a defendant but did allege that the corporate debtor was liable for the underlying debt. The complaint had one cause of action alleging that the individual and the corporate debtor were alter egos.

After the corporation received a discharge, the corporate debtor filed a complaint in bankruptcy court alleging a violation of the discharge injunction under Section 524(a)(2). The debtor believed there was a discharge violation because it characterized the alter ego complaint as contending that the individual and the corporate debtor were one and the same.

Initially, Bankruptcy Judge M. Elaine Hammond of San Jose, Calif., denied the contempt motion, saying there was a “fair ground of doubt” about a discharge violation arising from the suit in district court. On the debtor’s motion for reconsideration, the bankruptcy judge expanded her conclusions by finding no discharge violation because the alter ego allegations did not violate the discharge injunction as to the corporate debtor.

The debtor appealed to the BAP.

Only the Debtor Was Discharged

The outcome turned on Section 524. Subsection (a)(2) says that the discharge “operates as an injunction against the commencement or continuation of an action . . . to collect, recover or offset any such debt as a personal liability of the debtor.” Subsection (e) says that the “discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt.”

“By the plain terms of the statute,” Judge Faris said, “the discharge only protects the debtor from personal liability” and “not any other person who is liable with the debtor.”

Parsing the complaint in district court, Judge Faris said that it did not name the debtor as a defendant and sought no relief against the debtor. He said that it “only seeks to hold [the nondebtor individual] liable for [the corporate debtor’s] debt.”

“Neither § 524(a)(1) nor (a)(2) prohibits this,” Judge Faris said. He buttressed his holding by quoting the Ninth Circuit for saying, “This court has repeatedly held, without exception, that § 524(e) precludes bankruptcy courts from discharging the liabilities of non-debtors.” Resorts Int’l, Inc. v. Lowenschuss (In re Lowenschuss), 67 F. 3d 1394, 1401 (9th Cir. 1995).

The alter ego claims were controlled by Delaware law. State law was to no avail, because Judge Faris said that Delaware law does not “deem the entities the same but [holds] one liable for the other’s debt.”

Furthermore, Judge Faris said that the discharge “does not extinguish the debt.” Instead, the debtor “continues to owe the full amount of the debt; the discharge injunction precludes collection of that debt from [the debtor], but not from anyone else.”

Similarly, Judge Faris rejected the idea that Section 524(e) only applies to guarantors or co-obligors, not to alter egos.

Finally, the debtor contended that taking discovery from the debtor would violate the discharge. Judge Faris responded:

But the discharge injunction only enjoins personal collection of a discharged debt and does not relieve a discharged debtor from all forms of imposition or inconvenience. We have repeatedly held that a discharged debtor’s obligation to participate in discovery is not an effort to personally collect a debt and does not violate the discharge injunction.

Judge Faris affirmed the bankruptcy court’s order denying the contempt motion.

The Ninth Circuit is one of three circuits that bar nonconsensual, nondebtor third-party releases in chapter 11 plans. Would the result be the same in circuits that permit nondebtor releases? Presumably yes, if the nondebtor received a release pursuant to the Chapter 11 debtor’s confirmed plan.

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Bledsoe v. Cook, 22-1328 (4th Cir. June 14, 2023): appeal direct to Circuit, published decision, appeal No. 22-1328

Bledsoe v. Cook, 22-1328 (4th Cir. June 14, 2023): appeal direct to Circuit, published decision, appeal No. 22-1328: holds Chapter 13 Debtors May Deduct their Actual Mortgage Expenses to Arrive at Disposable Income, in calculating their “disposable monthly income” that is to be paid monthly to fund Chapter 13 plan

The Fourth Circuit agreed with the Sixth and Ninth Circuits by allowing chapter 13 debtors to deduct their actual mortgage expenses, not limited by the local standard mortgage deduction.

The chapter 13 debtors’ monthly mortgage payment was $1,100 more than the local standard mortgage deduction. Abjuring a split of circuits, the Fourth Circuit held that debtors with above-median income can deduct the actual amount of their mortgage payments when calculating disposable income.

Upholding Bankruptcy Judge Stephanie W. Humrickhouse on direct appeal, the June 14 opinion by Circuit Judge Toby J. Heytens sided with the Sixth and Ninth Circuits.

The Mortgage and Official Form 122C-2

A couple filed a chapter 13 petition, owning a home with a monthly mortgage payment of some $2,200. They calculated their disposable income on Official Form 122C-2. Subtracting the entire monthly mortgage payment, they ended up with disposable monthly income of $253 earmarked for creditors.

The chapter 13 trustee objected, contending that the debtors could only deduct about $1,100, the local standard deduction for home mortgages. The trustee believed that the debtors should be paying another $1,100 to their creditors every month.

Bankruptcy Judge Humrickhouse of Raleigh, N.C., overruled the objection and confirmed the plan. When the trustee appealed, Judge Humrickhouse certified a direct appeal to the Fourth Circuit. The appeals court accepted the direct appeal.

The Complex Statute

Judge Heytens said that the “relevant statutory provisions — though intricate — are straightforward.” The answer to the appeal lay in the complex interrelationship among the subdivisions in Section 707(b)(2).

Without tracking all of the detail meticulously laid out by Judge Heytens, the answer is buried in Section 707(b)(2)(A)(iii)(I). The subsection says that debtors’ “average monthly payments on account of” their mortgages “shall be calculated” based on the amounts “contractually due to secured creditors.”

Next, Section 707(b)(2)(A)(i) says that debtors “reduce[]” their “current monthly income” “by the amount[] determined under” Section 707(b)(2)(A)(iii)(I).

The answer, Judge Heytens said, is “easy-peasy” and yields disposable income of $253.

The trustee offered “a flurry of arguments against this straightforward reading,” Judge Heytens said. He described the arguments as failing “multiple times over.”

In addition to allowing a deduction for the contractually due mortgage payments, Judge Heytens explained that Section 707(b)(2)(A)(iii)(I) “allows debtors to deduct ‘any additional payments to secured creditors necessary for the debtor . . . to maintain possession of the debtor’s primary residence.’” He said that the provision “cannot be squared with the trustee’s view that the means test could leave debtors . . . with insufficient funds to pay their mortgage in the first place.”

As a matter of public policy, the trustee wanted the court to impose a reasonableness test. Like the Ninth Circuit, Judge Heytens recognized that his interpretation of the statute could allow debtors to retain expensive homes and luxury items, yielding little disposable income for creditors.

Judge Heytens saw “at least” two sides to the policy argument. On the other side of the coin, he said that the statute supplanted the previous practice allowing courts to evaluate the reasonableness of expenses. The result, he said, was inconsistent determinations.

Affirming Bankruptcy Judge Humrickhouse, Judge Heytens declined “to interpret the statute to restore the very power Congress removed.”

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Lac du Flambeau Band of Lake Superior Chippewa Indians v. Coughlin

In Lac du Flambeau Band of Lake Superior Chippewa Indians v. Coughlin, case 22-227, the U.S. Supreme Court, on 6/15/23, held that Native American tribes' sovereign immunity does not shield them from suits brought by debtors who declare bankruptcy, finding the question of whether the U.S. Bankruptcy Code abrogates tribal immunity "remarkably straightforward."

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In re Purdue Pharma, 2023 WL 3700458,    F.4th   (2nd Cir. 5/30/23)

In re Purdue Pharma, 2023 WL 3700458,    F.4th   (2nd Cir. 5/30/23): Second Circuit US Court of Appeals approves Chapter 11 plan in the Purdue Pharma bankruptcy case, which grants releases to non-debtors (the Sackler family, equity holders of bankruptcy debtor Purdue Pharma, which contributed 6 BILLION dollars to fund debtor Purdue Pharma’s Chapter 11 plan.

The Second Circuit US Circuit Court reversed the District Court (which had refused to allow the non-debtor releases, which creditors of Purdue Pharma had not consented to. The Second circuit held that nonconsensual third-party releases of such direct claims are statutorily permitted under 11 U.S.C. §§ 105(a) and 1123(b)(6) of the Bankruptcy Code.

In Purdue, the Sacklers (equity holders of Purdue Pharma, but NOT the bankruptcy debtors, put in 6 BILLION dollars to help fund bankruptcy debtor Purdue’s Chapter 11 plan and got reslease There is a split on this issue among US Courts of Appeal. The Ninth Circuit Court of Appeal does not allow non-debtor third parties to be given a release, even where the non-debtor third party gives money to the bankruptcy debtor to help fund the bankruptcy debtor’s chapter 11 plan, unless all creditors agree to that. The rule in the Ninth Circuit (which includes all of California) is if you want a bankruptcy discharge, or a release, you need to be a bankruptcy debtor.

This Circuit split is almost certain to end up being decided by the US Supreme Court.

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Debt Owed by America's Consumers Hits New Record Of More Than $17 Trillion

As Americans dealt with high inflation and recession fears, they also faced record debt, according to the latest data by the New York Fed. Total household debt increased to $17.05 trillion in the first quarter of 2023, the NY Fed reported. That marked an increase of $148 billion quarter-over-quarter. Overall, America’s debt balance now stands about $2.9 trillion above where it was at the close of 2019, right before the COVID-19 recession. Credit card balances remained flat at $986 billion, the NY Fed said. Nonetheless, credit card debt remains at record highs, according to the Consumer Financial Protection Bureau (CFPB). “Credit cards are one of the most common financial products in our country, providing the bulk of short-term credit for families,” the CFPB said in a post. “Interest rates on credit cards have risen substantially, with average interest rates going over 20%. Given the trends for the 175 million Americans with credit cards, the CFPB estimates that outstanding credit card debt may continue to set records and could even hit $1 trillion.” But credit cards aren’t the only source of debt that is weighing on many Americans. Auto loan balances increased by $10 billion in Q1 2023, the NY Fed found. And mortgage balances increased by $121 billion to reach $12.04 trillion by the end of March. [as reported by Credit & Collection e-newsletter of 5/23/23]

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Texxon Petrochemicals LLC v. Getty Leasing Inc. (In re Texxon Petrochemicals LLC),    F.4th    (5th Cir. May 3, 2023), appeal 22-40537:

US 5th Circuit Court of Appeals holds, in an appeal in a bankruptcy case, that federal appellate Courts May Bypass Equitable Mootness to Rule on the Merits

Even if an appeal is equitably moot, the appellate court nonetheless has appellate jurisdiction. Equitable mootness is prudential, not jurisdictional.

When equitable mootness is a close question on appeal, the Fifth Circuit has ruled that an appellate court can bypass a motion to dismiss for equitable mootness and address the appeal on the merits.

Why is that so? Because an appellate court does not lack constitutional or Article III jurisdiction, even if the appeal is equitably moot.

The debtor operated a gasoline station and claimed to have an unperformed contract to buy the property from the owner. Finding there was no enforceable contract, the bankruptcy court denied the debtor’s motion to compel the owner to sell the property to the debtor. The debtor appealed.

While the appeal was pending in district court, the bankruptcy court dismissed the underlying case. After losing in district court, the debtor appealed to the Fifth Circuit.

For the first time in the court of appeals, the property owner claimed that the appeal was equitably moot because the underlying case had been dismissed. Even if denial of the motion to sell were to be reversed on appeal, the owner reasoned that the appeal was equitably moot because the bankruptcy court could not compel the owner to sell the property.

The debtor contended that there was still a live controversy, since the debtor and the owner disagreed about the enforceability of the contract regardless of the status of the bankruptcy case.

In his opinion on May 3, Circuit Judge Stephen A. Higginson first addressed equitable mootness. Citing In re Pac. Lumber Co., 584 F.3d 229, 240 (5th Cir. 2009), he described equitable mootness as a judicially created version of appellate abstention that favors finality in reorganizations and protects multi-party expectations.

The property owner submitted that dismissal of the bankruptcy case was similar to consummation of a chapter 11 plan, thus foreclosing appellate relief. The debtor countered by saying that equitable mootness did not apply because the enforceability of the contract was ancillary to the bankruptcy and was still a live controversy.

In the Fifth Circuit, the owner conceded that enforceability of the contract remained a live controversy and that the debtor retained an interest in the outcome of the dispute.

Judge Higginson therefore characterized the owner as contending that the case was equitably moot because there could be no effective relief, even though there was a live controversy.

“Resolution of this dispute raises unsettled questions in bankruptcy law,” Judge Higginson said. However, he cited the Third, Fifth and Seventh Circuits for having bypassed equitable mootness to rule on the merits. In particular, he cited then-Circuit Judge Samuel A. Alito, Jr. for having said in dissent that equitable mootness does not present a question of jurisdiction to resolve before reaching the merits. In re Continental Airlines, 91 F.3d 553, 568–72 (3d Cir. 1996) (en banc).

Judge Higginson decided to “leave those issues for another day” because he could affirm on the merits.

On the merits, Judge Higginson upheld denial of the motion to compel sale, because the “brief email exchange did not demonstrate an offer or acceptance, as required for a contract to be binding under Texas law.”

An ABI commentator asks the following questions about this 5th Circuit Decision:

  1. Begin with the assumption that the appellate court has constitutional or Article III jurisdiction because there was a live dispute between the parties regarding enforceability of the contract. Further assume that the appellate court reverses by finding there was an enforceable contract. On remand, would the bankruptcy court have jurisdiction?
  2. Given that the underlying case had been dismissed and the bankruptcy court could not compel the owner to sell, would the parties be asking the bankruptcy judge to give an advisory opinion?
  3. If a trial court is being asked to give an advisory opinion, does the trial court nevertheless possess Article III or constitutional jurisdiction? Would there be no constitutional jurisdiction because there was no “live” controversy at the time?
  4. Had the Fifth Circuit drilled down deeper, would there have been no Article III jurisdiction given the constraints on what the trial could do on remand?

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IRS Plans To Resume Collection Notices

As of April 29, 2023, the IRS said it had 3.8 million unprocessed individual returns. These include tax year 2022 returns, 2021 returns that need review or correction, and late filed prior-year returns. Of these, 2.4 million returns require special handling such as correcting errors. The agency has another 1.4 million paper returns to review and process. It takes the IRS over 21 days to issue a refund in these cases because they require special handling although an employee typically does not have to contact the taxpayer, the agency said. The General Accounting Office said in a report issued in December 2022 that the IRS had a backlog of about 10.5 million paper returns and returns stopped for errors. While the IRS addressed the backlog of 2021 paper returns, the GAO said that as of late September 2022, the agency "had about 12.4 million returns to process, resulting in refund delays for millions of taxpayers." IRS Commissioner Danny Werfel said during his ceremonial swearing-in in April that the IRS staff was "already delivering on the promise of the Inflation Reduction Act. During the 2023 tax filing season, the IRS has provided taxpayers with a dramatically better experience than they have seen for several years. We have answered more calls from taxpayers, helped more people at our Taxpayer Assistance Centers and provided new online services for taxpayers who want to interact with us in this way."

[as reported in Credit & Collection 5/12/23 e-newsletter]

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Student Loans Didn’t Qualify as Commercial Debt for Sub V Eligibility

To be eligible to file a “SubV” Chapter 11 bankruptcy case, that “not less than 50% of the total debt” of the debtor must be “business debt”.

But what constitutes “business debt”?

In re Reis, - BR - (Bankruptcy Court, D. Idaho 5/2/23) discusses that question, and ruled two things:

  (1) The business debt necessary to qualify for Subchapter V need not to have arisen from the debtor’s business at the time of filing, Bankruptcy Judge Meier says.
  (2) Debtor’s student loan debt did NOT constitute business debt. Educational loans obtained to earn a professional degree will not qualify as arising from “commercial or business activities” unless the debtor becomes the owner of a business not long after obtaining the degree.

The debtor in the Idaho case was precluded from pursuing reorganization under Subchapter V because her student loans weren’t commercial or business debt and she was mostly an employee before filing in chapter 11.

However, the May 2 opinion by Chief Bankruptcy Judge Joseph M. Meier of Boise, Idaho, says that for debt to qualify for Subchapter V, it need not have arisen from the business that the debtor was conducting at filing.

The Student Loan Debt

The debtor had been an addiction counselor. Aiming to increase her income and provide more comprehensive services for her patients, she decided to attend medical school. After obtaining her medical degree and serving a residency, the debtor practiced medicine as an employee for several organizations over a space of 13 some years before bankruptcy. More than 10 years after obtaining her medical degree, the debtor opened her own practice for the first time, but it failed within a year. She was an employee at the time of filing.

The debtor filed a chapter 11 petition and elected to proceed under Subchapter V. By that time, the debtor’s student loan debt, all obtained for the medical degree, had grown from $325,000 to almost $650,000 with interest. The student loans were substantially more than half of the debtor’s total debt.

The U.S. Trustee objected to confirmation of the debtor’s chapter 11 plan, arguing that the debtor was not entitled to proceed under Subchapter V. According to the objection, the student loan debt did not arise from “commercial or business activities.”

What Are Business Debts?

In his opinion on May 2, Judge Meier said that the plan met all of the prerequisites for confirmation, aside from eligibility for Subchapter V.

Section 1182(1)(A) governs eligibility. It says that a person is eligible for Subchapter V if the person is engaged in business or commercial activity and has debts not exceeding $7.5 million. The section goes on to provide that “not less than 50 percent of” the debt must have arisen “from the commercial or business activities of the debtor.”

The U.S. Trustee conceded that the debtor was engaged in commercial or business activities on the petition date and that the debt did not exceed the ceiling for Subchapter V. If the student loans were commercial debt, more than half of the debt would have arisen from business activities.

With regard to eligibility and plan confirmation, Judge Meier said that the outcome would turn on whether the student loan debt was derived from commercial or business activities.

The debtor won a notable, preliminary skirmish. Judge Meier decided that the debt and the commercial activities need not be contemporaneous. He said, “[I]t would be rare for all of a debtor’s commercial or business debts to have been incurred on or around the petition date.”

Furthermore, the debt need not have arisen from the business that the debtor was conducting on the filing date. Judge Meier explained:

Congress left open the possibility that the commercial or business activities which gave rise to the debt might be different from the commercial or business activities the debtor was engaged in on the day the petition was filed.

Are Student Loans Commercial Debt?

Having decided that debt from years earlier was not disqualifying in itself, Judge Meier turned to the next question: Was the debtor was engaged in commercial or business activities on the filing date?

There was no disagreement, because the U.S. Trustee admitted that the debtor was engaged in business on the filing date. Judge Meier also said it was “not realistic” for the debtor to have opened her own practice after completing her residency.

Next, Judge Meier inquired as to “whether the debts arose from the Debtor’s commercial or business activities.” He framed the question as whether there must be a “nexus” between the “Debtor’s medical school student loan debt and the commercial or business activity she engaged in while she operated her own practice.” The case law, he said, “goes both ways.”

Judge Meier cited Bankruptcy Judge Thomas B. McNamara of Denver for the idea that the debt and the commercial activity must be contemporaneous. See In re Ikalowych, 629 B.R. 261, 275–76 (Bankr. D. Colo. 2021). To read ABI’s report on Ikalowych, click here.

To decide whether the student loan debt arose from business activity, Judge Meier adopted the approach taken by Bankruptcy Judge Benjamin A. Kahn of Durham, N.C., who said that a debtor is engaged in business and commercial activity when the debtor is participating in the purchasing or selling of goods or services for a profit. See In re Blue, 630 B.R. 179, 189 (Bankr. M.D.N.C. May 7, 2021). To read ABI’s report on Blue, click here. See also In re Johnson, 2021 WL 825156 at ∗7–8 (Bankr. N.D. Tex. March 1, 2021). To read ABI’s report on Johnson, click here.

Judge Meier said it was “hard to conceive . . . that the debt incurred to attend medical school fully ten years before opening a business can be construed as ‘purchasing or selling of goods or services for a profit.’”

Although attending medical school “could potentially be construed” as purchasing goods or services, Judge Meier said that “such an interpretation would be a stretch.” He added:

The Debtor’s education had nothing to do with buying, selling, financing, or using goods, rather it gave Debtor the opportunity, as a person, to practice a profession.

For Judge Meier, it was “germane” that the Debtor did not operate a private business before going to medical school and did not operate a business after obtaining her medical degree until more than a decade had passed. Rather, she was a student who hoped to gain employment following the conclusion of her studies and had aspirations of opening her own practice at some future time.

Judge Meier quoted Bankruptcy Judge Thomas P. Agresti of Erie, Pa., for saying that employment by someone else “would [not] be understood as thereby engaging in a commercial or business activity.” In re Rickerson, 636 B.R. 416, 426 (Bankr. W.D. Pa. 2021). To read ABI’s report on Rickerson, click here.

“Here,” Judge Meier said, “the gap between incurring the debt and actually engaging in any sort of commercial or business activity as an owner is simply too great to find that the student loans at issue arose from Debtor’s commercial or business activities.” He therefore denied confirmation, holding that the “Debtor’s student loans do not qualify as business debts, rendering her ineligible to proceed as a Sub V debtor.”

Limitations on the 2 rulings

Judge Meier ended the opinion by narrowing the holding. He did “not foreclose all debt which arises prior to a business opening, [because] supplies, product, and a space for the business often must be acquired prior to the actual opening.”

Nor did Judge Meier “announce any sort of per se rule that student loan debt can never qualify as debt arising from commercial or business activities to satisfy Sub V eligibility.” In the case before him, though, the student loan debt, “incurred over ten years prior to opening the medical practice, is simply too far removed for Debtor to qualify for Sub V relief.”

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US Supreme Court 4/19/23 decision

US Supreme Court 4/19/23 decision, in MOAC Mall Holdings LLC v. Transform Holdco LLC,     US    , 2023 WL 2992693, at ∗1 (U.S. Apr. 19, 2023) holds that Bankruptcy Code section 11 U.S.C. § 363(m) is not jurisdictional, reversing the Second Circuit Court of Appeals and resolving a Circuit split over whether section § 363(m) limits appellate jurisdiction over § 363 sale orders or instead just limits the appellant’s remedies on appeal in the event there is a sale or lease to a good-faith purchaser or lessee.

11 USC 363(m) is the bankruptcy code section where the bankruptcy court makes a finding that the purchaser of an asset from a bankruptcy estate purchased in “good faith”


Sears leased retail space at the Mall of America in Minnesota from MOAC Mall Holdings LLC. In 2018, Sears filed a voluntary Chapter 11 petition. In 2019, Sears sold substantially all of its assets to Transform Holdco LLC outside the ordinary course of business under § 363(b). The Bankruptcy Court entered an order approving the sale agreement (the “Sale Order”).

As part of the sale, Transform purchased “designation rights” to the leases for which Sears was the lessee. These rights allowed Transform to designate assignees for the leases, including the lease with Mall of America.

As applicable here, § 365 requires that an assignment of an unexpired lease be to an assignee with “adequate assurance of future performance by the assignee.” § 365(f)(2)(B). Section 365(b)(3) provides additional adequate assurances, among other things, that the financial condition and operating performance of the proposed assignee be similar to that of the debtor, that the percentage of rent not decline substantially, and that the assignment will not disrupt any tenant mix or balance in the shopping center.

After the entry of the Sale Order, Transform designated the Mall of America lease for assignment to its wholly owned subsidiary. MOAC objected on grounds that the Transform subsidiary did not meet the adequate assurance of future performance requirement of § 365(b)(3). The bankruptcy court overruled MOAC’s objection and entered an order approving the assignment (the “Assignment Order”).

MOAC, concerned that § 363(m) would limit or bar any appeal of the Assignment Order by Transform, asked the bankruptcy court to stay the order. The bankruptcy court denied the request to stay the appeal, reasoning that an appeal of the “Assignment Order did not qualify as an appeal of an authorization described in § 363(m).” The bankruptcy court emphasized that Transform “had explicitly represented that it would not invoke § 363(m) against MOAC's appeal.” Id., at ∗4. The Assignment Order became effective, and Sears assigned the lease to Transform.

MOAC appealed the Assignment Order to the District Court. The District Court agreed with MOAC, and held that Transform did not satisfy the adequate assurance requirements of § 365. To the extent the Assignment Order approved the assignment of the MOAC lease to Transform, it vacated the order.

Transform sought rehearing. Notably, it walked back its previous representation not to invoke § 363(m), arguing for the first time that § 363(m) deprived the District Court of jurisdiction to hear the appeal. “The District Court was ‘appalled’ by Transform's gambit of waiting to invoke § 363(m) until after losing the merits of the appeal, but determined that Second Circuit precedent bound it to treat § 363(m) as jurisdictional, and thus not subject to ‘waiver [or] judicial estoppel.’” Sears II, 616 B.R. at 624–625. The District Court held that § 363(m) applied and required it to dismiss the appeal. MOAC, at ∗4.

The Supreme Court granted MOAC's petition for certiorari to resolve a circuit split. Compare In re Stanford, 17 F.4th 116 (11th Cir. 2021) (§ 363(m) is not jurisdictional), and In re Energy Future Holdings Corp., 949 F.3d 806, 820 (3rd Cir. 2020) (same), with In re WestPoint Stevens, Inc., 600 F.3d 231, 248 (2nd Cir. 2010) (§ 363(m) is jurisdictional). It ultimately held that (§ 363(m) is not jurisdictional.



Transform first argued that the case was moot because the lease had already been transferred out of the estate. According to Transform, relief was impossible because avoidance under § 549 provided the only vehicle for reconstitution – and Sears’s right to utilize § 549 was waived in the Sale Order and also the time to use § 549 expired.

The Supreme Court stated that its “cases disfavor these kinds of mootness arguments” – that go to “the legal availability of a certain kind of relief,’ and thus ‘confuse mootness with the merits.’” Id., at ∗5. It clarified that a “case becomes moot only when it is impossible for a court to grant any effectual relief whatever to the prevailing party.” Chafin v. Chafin, 568 U.S. 165, 172 (2013) (internal quotation marks omitted). “The case remains live ‘[a]s long as the parties have a concrete interest, however small, in the outcome of the litigation.” Ibid., [internal citations omitted.] Here, according to the Court, MOAC simply sought “typical appellate relief: that the Court of Appeals reverse the District Court and that the District Court undo what it has done.” Ibid.


Statutes may contain preconditions, such as filing deadlines and exhaustion requirements, which do not necessarily mean that the rule is jurisdictional. “The ‘jurisdictional’ label is significant because it carries with it unique and sometimes severe consequences. An unmet jurisdictional precondition deprives courts of power to hear the case, thus requiring immediate dismissal.” Id., at ∗6. Jurisdictional rules relate to the power of the court rather than the rights or obligations of the parties. “And jurisdictional rules are impervious to excuses like waiver or forfeiture. [internal citations omitted]. Courts must raise and enforce jurisdictional rules sua sponte.” Id. at ∗7.

As such, the Court will only treat a Congressional statute as jurisdictional if Congress “clearly states as much,” as jurisdictional character is an exception to our system of litigation which can sometimes result in “harsh consequences.” Id., at ∗6, internal citations omitted.

Against this backdrop, the Court did not see anything in § 363(m) that purported to limit a court’s “adjudicatory capacity.” [internal citations omitted]. Id., at ∗9. § 363(m) states:

The reversal or modification on appeal of an authorization under [§ 363(b) or § 363(c)] of a sale or lease of property does not affect the validity of a sale or lease under such authorization to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and such sale or lease were stayed pending appeal.

Looking to the statute’s plain language, § 363(m) contemplates that appellate courts might “revers[e] or modif[y]” any covered authorization, except that the decision would not affect the sale or lease to a good faith purchaser or lessee. Id. at ∗9. The “caveat itself is caveated” – the constraint does not apply if the sale or lease were stayed pending appeal. The Court also pointed out that the appellate court could do something other than “revers[e] or modif[y]” the order, in which case § 363(m) would not apply. Ibid. There is nothing in § 363(m) to suggest that Congress intended to include a jurisdictional precondition.

The Court remarks about the §363(m): “[t]his is not the stuff of which clear statements are made.” Ibid. The lack of clarity, concludes the Court, evidences the non-jurisdictional nature of the statute and also suggests that it was designed to give good-faith purchasers or lessees protection of their newly acquired property interest, even if a party appeals. In other words, §363(m) is simply a “statutory limitation” that requires a party to take certain steps at certain times. The Court further supports its interpretation of § 363(m) by noting that is not linked to other jurisdictional provisions such as 28 U.S.C. §§ 1334(a)—(b), (e), 157 and 158.

The Court rejects two “creative retorts” offered by Transform. First, Transform insists that “§ 363(b) sales of estate assets must proceed under a court's in rem jurisdiction,” and that “the transfer to a good-faith purchaser removes it from the bankruptcy estate” and thus from the court’s in rem jurisdiction. Id at 11-12. The Court concludes that Transform’s arguments ignore § 363(m)’s text and context, and its “relationship to traditional in rem jurisdiction merely offer a reason to think Congress intended § 363(m) to be jurisdictional,” which is not enough. Id. at 12.

Next, the Court summarily rejected Transform’s final plea that § 363(m) was “transplanted” from former Federal Rule of Bankruptcy Procedure 805 and therefore “imbibed the jurisdictional character that Rule 805 incorporated from the historic practice.” Id at 14.

MOAC is a prime example of why the “jurisdictional” label is so important. The District Court expressly stated that the doctrine of judicial estoppel would have been applied to preclude Transform from belatedly raising the § 363(m) bar on appeals arising from sale orders, especially after Transform promised the lower court it would not invoke the argument. Holding its nose, the Court ruled that “not even such egregious conduct by a litigant could permit the application of judicial estoppel as against a jurisdictional rule.” Id at 8.

The opinion relies on the plain text of the statute, contrasting it to clearly jurisdictional provisions like § 305, which provides that an order under § 305(a) “is not reviewable by appeal . . .”

Further, MOAC will likely impact the “statutory mootness” doctrine, which the Second Circuit Court relied upon in holding that § 363(m) was indeed jurisdictional. The Second Circuit Court of Appeals held that “[b]y restricting the exceptions to the application of section 363(m) to an entry of a stay or a challenge to the ‘good faith’ aspect of the sale, section 363(m) moots a broader range of cases than are barred under traditional doctrines of mootness.” In re WestPoint Stevens, Inc., 600 F.3d 231, 247 (2d Cir. 2010), abrogated by MOAC Mall Holdings LLC v. Transform Holdco LLC, No. 21-1270, 2023 WL 2992693 (U.S. Apr. 19, 2023). MOAC impliedly limits the availability of the statutory mootness doctrine to cases where the parties have no interest in the outcome of the litigation or where the result “will not matter” – a standard unlikely to be met in most cases.

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CashCall, Inc. loses in 9th Circuit Court of Appeals decision

After years of litigation, lender “CashCall, Inc.” loses in 9th Circuit Court of Appeals decision, in case where Consumer Financial Protection Bureau (“CFPB”) wins, with result CashCall is Fined $167 Million For CFPA Violations [as reported in Credit & Collection e-newsletter of 4/13/23]

This litigation between CFPB and CashCall, Inc. goes back to 2016, when a US District Court, Central District of California, granted judgment in favor of the Consumer Financial Protection Bureau (CFPB) in its long-running challenge to CashCall, Inc.’s tribal-lending operation. Specifically, the court found that CashCall engaged in unfair, deceptive, and abusive acts or practices in violation of the Consumer Financial Protection Act (CFPA) when it serviced and collected on loans made by Western Sky Financial, a lending operation owned by an enrolled member of the Cheyenne River Sioux Tribe. Invoking a contested doctrine, the court found that CashCall was the “true lender” of the loans and, therefore, had deceived consumers by creating the false impression that the loans were enforceable and that borrowers were required to repay them.

However, in the damages phase of the litigation, the court rejected the CFPB’s request for $236 million in restitution, finding that the CFPB failed to present any evidence that CashCall “set out to deliberately mislead consumers” or “otherwise intended to defraud them.” The court also rejected the CFPB’s request for a $52 million penalty finding that the CFPB failed to prove that CashCall knowingly engaged in any misconduct. The CFPA imposes penalties in three tiers depending on the defendant’s level of culpability. Applicable in this case, a first-tier penalty requires no showing of scienter whereas a second-tier penalty applies to “any person that recklessly engages in a violation” of the CFPA. Each penalty tier provides a maximum penalty for each day during which a violation continues. Ultimately, the court awarded the CFPB a tier-one civil money penalty of $10,283,886. Both parties appealed.

The Ninth Circuit affirmed in part and reversed in part, concluding that the court correctly found liability but erred in determining the penalty. The appellate court determined that CashCall’s conduct was reckless beginning in September 2013, which would require a tier-two penalty award for violations beginning that month. The Ninth Circuit remanded the action instructing the court to: (1) reassess the civil penalty; and (2) re-evaluate whether restitution is appropriate in a manner consistent with the CFPA.

On remand, the district court assessed the maximum tier-one penalty from the time period beginning on July 21, 2011 and ending on August 31, 2013 and the maximum tier-two penalty for the time period beginning on September 1, 2013 and ending on August 31, 2016, resulting in a civil penalty of $33,276,264. The court further ordered restitution in the amount of $134,058,600 to ensure that consumers are made whole and protected from deceptive practices. “As the Ninth Circuit held, ‘CashCall harmed consumers by deceiving them about a major premise underlying their bargain: that the loan agreements were legally enforceable.’ Accordingly, consumers paid interest and fees to Defendants that they had no legal obligation to pay.”

Notably, both before the Ninth Circuit and on remand CashCall, relying on the Fifth Circuit’s decision in Community Financial Services Association of America v. CFPB, requested the court enjoin prosecution of the case on the grounds that the CFPB’s funding structure violates the Appropriations Clause. Both courts denied Cashcall’s motion. The Ninth Circuit determining that the constitutional challenge had been forfeited and the law of the case doctrine binding the district court. Notwithstanding, the district court noted that it would still reject the Fifth Circuit’s ruling as inconsistent with “‘every other court to consider’ the validity of the CFPB’s statutory funding provisions.”

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Mazloom v Navient Solutions, LLC (In re Mazloom)

Mazloom v Navient Solutions, LLC (In re Mazloom), 648 B.R. 1 (Bankr. N.D.N.Y. 2023) is a 2023 bankruptcy case dealing with the question of whether private student loans made by Navient Credit Finance Corporation (Navient) are nondischargeable under Bankruptcy Code 11 USC § 523(a)(8). On cross summary judgment motions, by debtor and Navient, the Bankruptcy Court for the Northern District of New York (the Court) ruled (1) for the debtor that the loans were not “part of a program funded in part by the government” as required for nondischargeability under § 523(a)(8)(A)(i) but (2) for the creditor that the debtor’s loan was nondischargeable under § 523(a)(8)(B).


Debtor and plaintiff in this adversary, Stephanie Mazloom (Debtor), attended medical school in Antigua at the Kasturba Medical College (KMC), a Title IV institution affiliated with American University of Antigua. (A Title IV institution is authorized under Title IV of the Higher Education Act to process federal student aid.) To fund this education, Debtor took out a private student loan from Nellie Mae Bank, a predecessor of Navient. In conjunction with the loan, called an EXCEL Grad Loan (EXCEL loan), Debtor executed a promissory note that stated the “loan is an educational loan and is made under a program that includes Stafford Loans and other loans and which is funded in part by non-profit org§nizations, including governmental units, and, therefore, is not dis§hargeable in bankruptcy.”

In 2018 Debtor filed a chapter 7 bankruptcy and received a discharge of dischargeable debt in due course. In 2020, Debtor reopened the case to file this adversary complaint which asserted that EXCEL loans did not qualify as student loans under § 523(a)(8) and therefore were not excepted from discharge. The adversary purported to be a class action, with Debtor suing on behalf of herself and all others similarly situated. Both Debtor and Navient filed early summary judgment motions, which were denied because the record was not fully developed. After extensive discovery, the motions were refiled and resulted in this ruling, partially in favor of Navient – making Debtor’s loan nondischargeable under § 523(a)(8)(B) – but partially in favor of Debtor’s arguments under § 523(a)(8)(A)(i), since she purported to represent other class members whose facts might make their loans not subject to § 523(a)(8)(B) nondischargeability.


Per 523(a)(8) a loan made, insured, or guaranteed by a governmental unit, or made un§er any program funded in whole or in part by a governmental unit or nonprofit institution, is nondischargeable. Because it was undisputed that Debtor’s EXCEL loan was not funded by a nonprofit institution, the relevant inquiry for the Court was whether a government§l unit was involved. The Court quite simply concluded that Navient had failed to present any relevant evidence to prove that fact. Navient’s only arguments relied on the boilerplate language in the promissory note, quoted above, along with self-serving statements of an employee stating the same. Navient had made this same argument in its earlier motion which had been denied for insufficient evidence. After extensive discovery, Navient provided nothing more concrete to establish that the loan was reliant on the government. Navient asserted that EXCEL loans were in a “program” related to Stafford loans, which are nondischargeable as linked to governmental guarantees, but failed to provide any proof that such “program” actually existed. Its motion was denied a second time for this failure of proof; the boilerplate language alone was insufficient.

The Court then addressed the reasons Debtor’s EXCEL loan was nondischargeable under § 523(a)(8)(B), which excepts from discharge “any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.” The Court walked through the definition in § 221(d)(1) and related fede§al statutes to pose the question: “the Court must determine if either party has established whether the Private Student Loan was incurred to pay a qualified education expense.” If so, the EXCEL loan was nondischargeable.

The Court noted the parties agreed that the “purpose test” governed the outcome of this question. That test holds that the proper analysis is to look at the initial purpose of the loan rather the actual use of the funds. The Court adopted a bright-line approach, which looked only t§ the purpose of the loan stated in the agreement to decide whether it fell within the scope of § 523(a)(8)(B). Any other construction would create uncertainty about the nondischargeable nature of such loans when made, which would not be conducive to the confidence lenders require when deciding to make such loans. Also, the bright-line test would prevent arbitrary application of the terms of the statute on a case-by-case basis.

The parties did not dispute that KMC was a Title IV institution and that the money was sent directly there, so on its face the funds were used for education. Debtor presented no evidence that the loan was not made for Debtor to attend medical school. Therefore, the requirements of § 523(a)(8)(B) were satisfied and Debtor’s EXCEL loan was nondischargeable.

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Credit & Collection e-newsletter reports that all sides could be losers in the litigation about the legality/lack of legality of how the federal agency, the Consumer Protection Financial Bureau (“CFPB”) is funded:

The Consumer Financial Protection Bureau (CFPB) is at a crossroads. Rather than live up to its “independent” promise, the agency has been nothing short of a political football. There is plenty of blame to go around on both sides of the CFPB battle, but the legal maneuvering and the race to the Supreme Court is not the solution. Rather, now is the time for Congress to act like adults and find the remedy for the CFPB that will allow the agency to be true to its mission of protecting consumers while at the same time ensuring a robust and compliant consumer financial services industry.

On February 27, 2023, the United States Supreme Court granted the CFPB’s petition for a writ of certiorari in the case CFPB v. Community Financial Services Association of America, Limited, et al. ( the “CFSA case”), and agreed to review a U.S. Fifth Circuit Court of Appeals decision finding that the CFPB’s funding structure, through the Federal Reserve rather than the congressional appropriations process, violates the U.S. Constitution’s separation of powers and appropriations clause. This is the second time in less than three years that the Supreme Court has agreed to address the constitutionality of the federal agency that was created over a decade ago by the Dodd-Frank Act in the wake of the financial crisis and mortgage meltdown.

The last time, in Seila Law v CFPB, the Supreme Court struck down the language of the Dodd-Frank Act that provided for a single director removable only for inefficiency, neglect or malfeasance. The court found this structure to be unconstitutional and a violation of the Constitution’s separation of powers. The court provided no remedy in the Seila case as none was requested beyond striking the removal provision. Seila did nothing to change the agency, its mission or its work. Prior rules remained in place, and enforcement, supervision and new rulemaking continued. Many tried to argue that the unconstitutional finding by the Supreme Court invalidated the agency’s work, but that argument has been rejected by multiple appeals courts and numerous district courts.

So, here we go again. The Supreme Court may very well agree with the Fifth Circuit and say that the CFPB’s funding structure, outside of congressional appropriations, is unconstitutional, but will that help anyone? That finding, alone, would cause the funding portion of the Dodd-Frank statute to be stricken, and Congress will be forced to figure out a solution. But the Fifth Circuit decision also held that as a result of the unconstitutional funding structure, the regulation at issue (the Payday Lender Rule) was invalid. If the Supreme Court affirms, there is a risk that all of the regulations enacted with unconstitutional funding would be invalidated. Opponents of the CFPB risk throwing out the good with the bad, as many of those regulations have provided much-needed clarity to the business sectors that they regulate. Industry would be foolish to think that life would be better without many of the regulations for which the CFPB is responsible. At the same time, supporters of the CFPB must recognize that the refusal to compromise on structure or funding could lead to ruin. Whether there are appropriations or even a commission (instead of a single director), the mission remains the same. Nothing about the CFPB’s work will change nor should it. Spending the next two years on a risky gamble of “our way or the highway” could, at the end of the day, harm consumers the most.

The court will probably not render a decision until early 2024. It is highly unlikely that a divided Congress, in an election year, will touch such a toxic subject. So, if the CFPB suffers a bad enough loss, both the financial services industry and consumers will ultimately pay the price of a powerless, unfunded agency in utter limbo. Of course, the Supreme Court could reject the Fifth Circuit’s analysis, but that will only prolong the fight.

As attorneys who deal with regulatory issues on a daily basis, we understand the frustrations of regulatory burden. However, the investment in compliance for the past decade has proven positive. Certain verticals, like debt collection, have become more standardized with formal expectations, which ultimately has driven down complaints. Until this past year, the mortgage market has thrived, and foreclosure levels are down. The entire consumer financial services industry successfully weathered the onset of the pandemic. At the same time, the CFPB has, with what seems like growing frequency, unfairly leveraged its lack of accountability to circumvent legislation and the rulemaking process in its enforcement and supervision activities. The agency’s failure to undertake legitimate cost-benefit analysis as mandated under the Administrative Procedures Act is concerning and has been harmful to businesses large and small.

Unless the adults in the room come together and find a legislative fix before a decision by the Supreme Court, this financial services limbo risks harm to all constituencies and everyone will lose. [enewsletter of 4/6/23]

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Ryan v. Branko Prpa MD, LLC, 55 F.4th 1108 (7th Cir. 2022)

Ryan v. Branko Prpa MD, LLC, 55 F.4th 1108 (7th Cir. 2022): The US Seventh Circuit Court of Appeals (the Court) recently held that an order, which arose from a workers’ compensation action, directing a debtor’s employer to deposit funds in debtor’s lawyer’s trust account for payments to medical creditors created an express trust such that the funds were excluded from the debtor’s chapter 7 bankruptcy estate and he was not entitled to claim an exemption in them.


Debtor Rodney Ryan (Ryan) was injured on the job and sought worker’s compensation in Wisconsin for his injuries. He settled the action with a Compromise Agreement (the “Settlement”) which provided that the employer and insurer would pay $120,000 to Ryan, $30,000 to his lawyers, and $400,000 (the “Fund”) to the trust account of his lawyers “for disbursement to medical providers and lienholders.” A state administrative law judge (ALJ) approved the Settlement and ordered the payments as set forth above.

Less than a month later, and before any money in the Fund was disbursed to medical providers, Ryan filed a chapter 7 bankruptcy and attempted to exempt the entire Fund from the bankruptcy estate. He used an exemption available under Wisconsin law, Wisc. Statutes § 102.27(1), which provides “no claim for [worker’s]compensation, or compensation awarded, or paid, [may] be taken for the debts of the party entitled thereto.” His schedules reflected that he owed more than $800,000 in unpaid medical bills. One of his medical creditors, Branko Prpa, objected to the exemption, asserting that the Fund in the attorney’s trust account was not Ryan’s property, but instead was created to pay his medical providers exclusively. At most, Ryan had legal, but not equitable, title to the Fund.

On summary judgment, the bankruptcy court ruled in favor of Prpa, concluding that the ALJ order created an express trust in favor of Prpa and other providers and, if not, that a constructive trust would be imposed because Ryan would be unjustly enriched if allowed to keep the Fund. Ryan appealed to the district court, which affirmed, and then to the Court, which also affirmed, finding that the ALJ order created an express trust and the Fund was not property of the estate under Bankruptcy Code § 541(d).


Section 541(d) of the Bankruptcy Code provides that if a debtor holds legal, but not equitable, title to property, it is excluded from the bankruptcy estate. To determine whether Ryan had equitable title to the Fund, the Court considered whether the ALJ order created an express trust. Under Wisconsin law, an express trust is created when three things converge: “(1) a trustee, who holds the trust property and it subject to equitable duties to manage it for the benefit of another; (2) a beneficiary to whom those duties are owed; and (3) trust property, which is held by the trustee for the beneficiary.” (citations omitted) The Court looked to the terms of the Settlement, as ordered by the ALJ, and found all three elements satisfied. The trustee was the law firm and its trust account, who had a duty to use the Fund for disbursements to the medical providers who were the beneficiaries, and the Fund was the trust property.

The Court rejected Ryan’s arguments that the magic words ‘for the benefit of” or “to be held in trust” were absent in the order. The use of the words “for disbursement to” was more telling than those terms to confirm that Ryan had no equitable interest in the Fund. In addition, the fact that the amount owed the medical providers was double the money in the Fund was no defense, since a state court interpleader action was available to resolve the appropriate distribution of the Fund among the providers.

Since Ryan had no equitable interest in the Fund, it was excluded from the bankruptcy estate. Because exemptions are only available to protect property of the estate from creditors, Ryan was not entitled to exempt the Fund.

Comment of The Bankruptcy Law Firm, PC: This decision is the correct result, because the $400,000 of money in the Fund was earmarked for payment to the medical providers only and never belonged to Ryan. Ryan could not exempt what he did not own. Here, the law of express trusts in Wisconsin (which seems to have universal elements) and Bankruptcy Code § 541(d) resulted in the right ruling.

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Consumer Financial Protection Bureau (CFPB) has taken action against one of the largest debt collectors in the United States

Credit & Collection e-newsletter of 3/30/23 reports: On March 23, 2023, the Consumer Financial Protection Bureau (CFPB) has taken action against one of the largest debt collectors in the United States, Portfolio Recovery Associates (PRA), for various violations of law, including a 2015 CFPB order. In the complaint, the CFPB accused Portfolio Recovery Associates of violating numerous requirements of the 2015 order as well as engaging in deceptive conduct in violation of the Fair Debt Collection Practices Act and the Consumer Financial Protection Act, and violating the Fair Credit Reporting Act and its implementing Regulation V. The CFPB filed a proposed order requiring Portfolio Recovery Associates to pay $12 million in consumer redress and a $12 million penalty, which will go to the CFPB’s victims’ relief fund. Portfolio Recovery Associates is a wholly-owned subsidiary of the publicly traded PRA Group, and its principal headquarters is in Norfolk, Virginia. The recent action is apparently part of the CFPB’s recent efforts to hold repeat offenders accountable. By way of background, in 2015, the CFPB ordered Portfolio Recovery Associates to pay over $27 million in consumer refunds and penalties for deceptive debt collection tactics. The 2015 order required Portfolio Recovery Associates to adhere to various prohibitions, including collecting debts without a reasonable basis, selling debt, and filing false or misleading affidavits in debt-collection actions.

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Did One, or More than One, of the Many regulators--DFPI, FRB, FDIC, CFPB, FINRA and Nasdaq—which each had some responsibility for supervising/regulating the now failed Silicon Valley Bank, fall down on the job?

Silicon Valley Bank was chartered by the State of California and was subject to the supervision of the California Department of Financial Protection & Innovation. The DFPI was not the bank’s regulator. The bank had adopted a bank holding company structure and elected financial holding company status. Thus, the bank’s holding company, SVB Financial Group, was subject to primary regulation, supervision, and examination by the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended. The bank was subject to supervision and examination by the Federal Reserve and the DFPI. But wait, there’s more. The bank was also required to meet the requirements of the Federal Deposit Insurance Corporation which insured the bank’s deposits (to the limited extent provided by law). The bank’s activities were also subject to oversight by the Consumer Financial Protection Bureau. But wait, there’s even more, the holding company and its non-bank was also subject to regulation by the Securities and Exchange Commission as well as at least two self-regulatory organizations – the Financial Industry Regulatory Authority, Inc. and The Nasdaq Stock Market LLC.

An obvious question is whether any in this alphabet soup of regulators (DFPI, FRB, FDIC, CFPB, FINRA and Nasdaq) fell down on the job. The DFPI at least has committed itself to some introspection. On Monday, it announced:

“The Department of Financial Protection and Innovation is conducting a comprehensive review of the department’s oversight and regulation of Silicon Valley Bank and will issue a report by early May 2023. Through this review, we will examine how we can strengthen and update our system of financial regulation to meet emerging and evolving challenges.”

Self-assessments are difficult as there is a natural tendency to defend, deflect and deny. I look forward to reading the DFPI’s report, which may have significant implications for the future of dual banking system of federal and state charters in the United States.[published by Credit & Collection e-newsletter of 3/22/23, with different title]

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American Bankruptcy Institute 3/21/23 e-article reports that Anxiety Strikes $8 Trillion Mortgage-Debt Market After Silicon Valley Bank (“SVB”) Collapse Last Week

Strains in the banking sector are roiling a roughly $8 trillion bond market considered almost as safe as U.S. government bonds, the Wall Street Journal reported. So-called agency mortgage bonds are widely held by banks, insurers and bond funds because they are backed by the mortgage loans from government-owned lenders Fannie Mae and Freddie Mac. The bonds are far less likely to default than most debt and are easy to buy and sell quickly, a crucial reason they were Silicon Valley Bank’s biggest investment before it foundered. But agency mortgage-backed securities, like all long-term bonds, are vulnerable to rising interest rates, which pushed their prices down last year and saddled banks such as SVB SIVB -60.41%decrease; red down pointing triangle with unrealized losses. Now that the Federal Deposit Insurance Corp. has taken over SVB, investors expect the bonds to be sold off in coming months, adding supply to the weakened market and pushing prices lower. Last week, the risk premium on a widely followed Bloomberg index of agency MBS hit its highest level since October, when climbing interest rates turned global markets topsy-turvy. The move reflected fears that other regional banks might have to sell their holdings, bond-fund managers said.

Comment of The Bankruptcy Law Firm, PC, by Kathleen P. March, Esq.: People who think mortgage backed bonds are “considered almost as safe as U.S. Government bonds”, have amnesia, which is causing those people to completely forget the Countrywide Bank. Washington Mutual Bank crashes of 2007/2008, which produced the very deep, very painful, 2008-2010 recession. Private bonds are NEVER as safe as US Government bonds.

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Summerlin v. Turnage, a 3/14/23 USDC, WDNC, District Court decision in a bky appeal, in which US District Ct affirms refusal of Bky Judge to allow a (nasty) trustee tactic, by which Trustee sought, by a deal with a junior secured lender, to achieve a sale of debtor’s home, but Eradicate debtor’s Homestead Exemption

District Court decision holds that subordinated lenders can’t take a ‘haircut,’ give a ‘tip’ to the trustee, sell a home and eradicate the debtor’s homestead exemption.

Employing the most vituperative language employed so far to nix the strategy, a district judge in North Carolina affirmed Bankruptcy Judge Laura T. Beyer, who had barred secured creditors from taking haircuts so the trustee could pay his commission and make a small distribution to general creditors while cheating the debtor out of her homestead exemption.

In his March 13 opinion, Statesville, N.C.’s District Judge Kenneth D. Bell called the proposal a “backroom deal,” a “sham” and a “bastardization of the bankruptcy process.”

The chapter 7 debtor was a 72-year-old widow whose only source of income was Social Security benefits. She owned a home with a scheduled value of $125,500 and claimed a $55,000 homestead exemption under North Carolina law.

The home was subject to a $52,700 first mortgage. The IRS had a valid tax lien on the house for $113,000 alongside a valid state tax lien of almost $48,000. The total encumbrances were almost $214,000.

The trustee believed the house was actually worth $180,000 and wanted to sell. Regardless of the actual value of the house, Judge Bell said there was no equity in the home above the secured indebtedness. Under the circumstances, “This would typically prevent a sale of the Property,” he said.

The trustee hatched a deal with the IRS and the state taxing authority. (Note: The tax liens likely would be wiped out in foreclosure by the holder of the first mortgage.)

The IRS and the state taxing authority agreed to a 40% “haircut” on their liens, generating about $68,000 for the trustee. The trustee would use the leftover first to pay administrative expenses and his commission, totaling some $30,000.

From the $38,000 remainder of the carveout, $33,000 would go to the taxing authorities on their priority claims, leaving $5,000 for general unsecured creditors and $2,000 for the debtor. (Remember, her state home exemption was $55,000.)

Judge Bell said that deal would have left the debtor with “no meaningful source of income” and no home in which to live.

The trustee filed an objection to the debtor’s homestead exemption together with a motion to sell the property and implement the deal with the taxing authorities. Bankruptcy Judge Beyer denied the motion. The trustee appealed.

The trustee argued that the deal was kosher under Section 724(b), the complex provision in the Bankruptcy Code dealing with distribution of the proceeds from the sale of encumbered property when a trustee has been appointed. Basically, the section subordinates tax liens to the payment of the trustee’s administrative expenses.

Under Section 724(b), sale proceeds go to (1) the mortgage holder, (2) administrative creditors (i.e., the trustee), (3) holders of tax liens to the extent their liens exceeded administrative expenses, (4) the unpaid portion of tax liens, and (5) the estate.

Judge Bell said that Section 724(b) “allows for encumbered property to be sold.” (Respectfully, it does not. Section 365 authorizes sales. Section 724 allocates the distribution from proceeds of authorized sales.)

“Conspicuously absent from § 724(b)’s distribution scheme is any mention of exemptions,” Judge Bell said. As a result, courts have reached “inconsistent results for varying rationales.”

In North Carolina, exemptions are construed “liberally with an eye in favor of exemptions,” Judge Bell said. With “liberal construction in mind,” he found that “the carved-out funds are subject to the Debtor’s homestead exemption.” He said that the “Trustee and tax agencies cannot defeat the Debtor’s homestead exemption by agreement absent any authority from the Code or North Carolina law.”

“Put another way, once the tax agencies agree to the carve-out they cannot direct the allocation of the value created by such carve-out,” Judge Bell said.

Judge Bell found support in Law v. Siegel, 571 U.S. 415 (2014), where the Supreme Court held that exemptions can be denied only for reasons set forth in the Bankruptcy Code or state law. In the appeal before him, he said that the trustee wanted “to deprive the Debtor of her homestead exemption on a basis that is not enumerated in the Code or North Carolina law.”

“Even more to the point,” Judge Bell said, “the Trustee’s Motion must be denied because it substantially benefits no one other than himself and the tax agencies.” Citing a district judge in his own district, he said that “property may not be sold solely to benefit secured creditors or the Trustee.”

Affirming Bankruptcy Judge Beyer, Judge Bell said that the deal was “not intended to benefit the general unsecured creditors but it was concocted to allow the tax agencies to ‘tip’ the Trustee for selling the Debtor’s home.”

Note that the 9th Circuit Bankruptcy Appellate Panel (“BA””), in In re KVN, 514 BR 1 (9th Cir. BAP 2014) is hostile to chapter 7 trustees selling a debtor’s overencumbered property by making a deal with a junior secured creditor, in which the secured creditor pays the trustee some $$ amount (referred to as a carve out) in exchange for trustee selling debtor’s property. KVN holds that when a Chapter 7 trustee seeks to sell fully-encumbered estate property pursuant to such a carve-out agreement, a rebuttable presumption of impropriety arises. Unfortunately for bankruptcy debtors, Bankruptcy Judges in Bankruptcy Court, CD CA, often allow Chapter 7 Trustees to sell debtor’s home or other real property, which is property of the debtor’s Chapter 7 bankruptcy estate, pursuant to such “carve out” deals with junior secured creditors.

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Fidelity & Deposit Co. of Maryland v. TRG Venture Two LLC (In re Kimball Hill Inc.),   F4th    (7th Cir. March 3, 2023), appeal 22-1724

Fidelity & Deposit Co. of Maryland v. TRG Venture Two LLC (In re Kimball Hill Inc.),   F4th    (7th Cir. March 3, 2023), appeal 22-1724: US Court of Appeals for the Seventh Circuit Upholds Bankruptcy Court Order that orders a creditor to pay $9.5 Million in Sanctions, for creditor knowingly and intentionally violating the Plan Injunction in a confirmed Chapter 11 bankruptcy plan. The bonding company creditor was sanctioned $9.5 million dollars because it “ignored the confirmation order, which, by its terms, extinguished any rights to seek to recover, outside of the bankruptcy proceedings, the liabilities that the bankruptcy debtor owed the bonding company,.”

When there was a knowing violation of injunctions in the plan and confirmation order, the Seventh Circuit said that the appeal bordered on frivolous. With no hesitation, the Seventh Circuit upheld Bankruptcy Judge Timothy A. Barnes of Chicago and the $9.5 million in damages he imposed for “a knowing, intentional violation of the plan order” that the creditor had no “objectively reasonable basis to pursue.”

The decision by Bankruptcy Judge Barnes and the affirmance by the Seventh Circuit show it’s not good litigation strategy to violate an injunction in hopes of coercing the protected party to settle.

Creditor Violates a Plan Injunction

Before bankruptcy, a bonding company had issued bonds in favor of municipalities to secure the completion of residential projects being built by the debtor. The debtor indemnified the bonding company were it to be held liable on the bonds.

The debtor confirmed a liquidating chapter 11 plan and sold the development rights to a buyer. The development rights went to the buyer free and clear of all liens, claims and interests.

The bonding company filed a claim and voted in favor of the plan. The plan and the confirmation order contained injunctions prohibiting those who voted for the plan from pursuing claims.

Municipalities sued the bonding company for failure to complete the project. After confirmation, the bonding company sued the buyer that had purchased the debtor’s development rights free and clear. The bonding company reasoned that the buyer somehow became liable on the debtor’s discharged indemnification obligations, even though the development rights had been sold free and clear.

The purchaser filed a motion in bankruptcy court asking Judge Barnes to hold the bonding company in contempt of the plan and the confirmation order.

The Two Opinions

Bankruptcy Judge Barnes found the bonding company in contempt. In a second opinion, he imposed a sanction of more than $9.5 million in actual damages.

While the appeal was pending from the two orders, the Supreme Court handed down Taggart v. Lorenzen, 139 S. Ct. 1795, 1799 (2019), which held that a court “may impose civil contempt sanctions [for violating the discharge injunction] when there is no objectively reasonable basis for concluding that the creditor’s conduct might be lawful under the discharge order.” To read ABI’s report, click here.

The district court remanded for Judge Barnes to decide whether a finding of contempt was proper under Taggart.

The Record Satisfied Taggart

On remand, Bankruptcy Judge Barnes said that the record was sufficient to decide whether the Taggart standard had been satisfied. Regarding liability, Judge Barnes said that the bonding company had “repeatedly and knowingly violated the terms” of the injunction in the plan. He also said that the bonding company “pursued claims that it knew were released on theories where it knew the law was settled against it.” The bonding company’s actions, he said, “unequivocally violate the injunction in the Plan and thus the court’s Confirmation Order.”

Bankruptcy Judge Barnes stuck to his guns, reinstated his original contempt findings and again imposed $9.5 million in sanctions against the bonding company. In re Kimball Hill Inc., 620 B.R. 894 (Bankr. N.D. Ill. Sept. 30, 2020). To read ABI’s report, click here.

The district court affirmed. The bonding company appealed again.


Although the bankruptcy court was enforcing its own confirmation order, the bonding company contended in the Seventh Circuit that the bankruptcy court lacked jurisdiction.

Circuit Judge Michael Y. Scudder made short shrift of the jurisdictional argument in his opinion on March 3. Finding jurisdiction, he said it was a “textbook example” of where “the bankruptcy court can interpret its own plan confirmation order to decide whether [the bonding company’s] claim against [the buyer] is one extinguished by the [confirmation] order.”

The Merits

Judge Scudder upheld the decision by Bankruptcy Judge Barnes that Taggart had been satisfied. The buyer, he said, “brought evidence of Fidelity’s ‘record of continuing and persistent violations’ of the plan confirmation order,” and the “bankruptcy court understood and applied Taggart’s teachings.”

More particularly, Judge Scudder said that the bonding company “ignored the confirmation order, which, by its terms, extinguished any rights to recover those liabilities outside of the bankruptcy proceedings.” The bonding company’s “contentions to the contrary border on frivolous,” he said, because the plan released the buyer.

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Department of Justice and Department of Education Released New Guidance for Stipulating to the Discharge of Federal Student Loans in Bankruptcy

NACBA (National Association of Consumer Bankruptcy Attorneys) reports that in November of 2022, the Department of Justice and Department of Education released new guidance for stipulating to the discharge of federal student loans in bankruptcy. These new guidelines direct DOJ attorneys to stipulate to the facts demonstrating that a debt would impose an undue hardship and recommend to the court that a debtor’s student loans be discharged under certain circumstances under a much less draconian standard and on a much more predictable basis.

Comment of The Bankruptcy Law Firm, PC on 3/5/23: Attorneys who predict what the US Supreme Court will rule, are predicting that the US Supreme Court will rule that President Biden lacked the power to--by issuing an Executive Order--decree that $400 plus billions of dollars of student loan debt would be forgiven, and will rule that the US Congress would have to pass a law ordering this. It appears unlikely that the present US Congress would pass such a law.

If the US Supreme Court so rules, then attempts to discharge student loan debt will continue to be governed by Bankruptcy law, and the above November 2022 new guidelines will (supposedly) help more bankruptcy debtors who owe student loan debt to be able to discharge their student loan debt (or some of it) in bankruptcy.

At present, per Bankruptcy Code 11 USC 523(a)(8),a bankruptcy debtor can only seek to discharge the debtor’s student loan debt in bankruptcy, if the debtor proves it would be an undue hardship on debtor/debtor’s dependents, if the debtor had to pay that student loan debt back over the debtor’s whole working life.

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Bartenwerfer v. Buckley, 598 U. S.     (United States Supreme Court 2/22/2023):

Bartenwerfer v. Buckley, 598 U. S.     (United States Supreme Court 2/22/2023): On February 22, 2023, the U.S. Supreme Court issued its unanimous opinion in Bartenwerfer v. Buckley, 598 U. S.     (2023) (honest debtor/business partner/wife could not discharge claim arising from fraud of dishonest partner/husband under 11 U.S.C. §523(a)(2)(A), even though the debtor did now know of the partner's fraud). In the opinion of The Bankruptcy Law Firm, PC, this decision is very surprising, and we think is wrong, because the more reasonable interpretation of 11 U.S.C. §523(a)(2)(A) is to interpret that section of the Bankruptcy Code as only holding a debt nondischargeable for fraud, where the bankruptcy debtor knew about, or participated in the fraud. The solution to this US Supreme Court decision would be to amend 11 U.S.C. §523(a)(2)(A) to state expressly that a debt can only held to be nondischargeable for fraud, where the bankruptcy debtor committed or was involved in committing the fraud, or whether the bankruptcy debtor had knowledge that a fraud was being committed, and did nothing to stop the fraud from being committed.

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In re Piskiel,    BR    (Bankr. D.N.Mex 2-10-23), bky case no. 21-10717, discusses that Survivor’s Benefits Under a Pension Plan Might Not Become Property of the Bankruptcy Debtor’s “bankruptcy estate”

Unlike Clark v. Rameker, where an inherited IRA wasn’t exempt, the inheritance of benefits under a pension plan might not become estate property under Section 541(c)(2).

Although the Supreme Court held in Clark v. Rameker, 573 U.S. 122 (2014), that an inherited individual retirement account is not exempt, the inheritance of survivor’s benefits under a pension plan can be excluded from a debtor’s bankrupt estate, for reasons explained by Bankruptcy Judge David T. Thuma of Albuquerque, N.M.

In his February 10 opinion, Judge Thuma wasn’t required to decide whether the debtor’s survivor’s benefit was exempt.

The debtor’s father worked for the City of New York for three decades and was the beneficiary of a defined-benefit pension plan under the city’s retirement system. Upon retirement, the father elected to receive smaller benefits in return for survivor’s benefits for his son. When his father died in 2013, the son applied for and began receiving survivor’s benefits of about $1,100 a month.

The son filed a chapter 7 petition in 2021 and claimed that his survivor’s benefits were exempt under Section 522(b)(3)(C). He also asserted that the benefits were not estate property.

The trustee objected to the exemption claim. Judge Thuma described the trustee as arguing that the “Debtor’s inherited interest in the [pension] Plan is comparable to the inherited IRA in Clark, should not be considered a retirement fund under § 522(b)(3)(C), and therefore is not exempt.”

Judge Thuma never ruled on the exemption claim because he found that the survivor’s benefits were not taken into estate property. He focused instead on Section 541(c)(2), which provides that a “restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title.” In other words, valid spendthrift trusts do not become estate property.

The word “trust” not defined in the Bankruptcy Code, Judge Thuma recited the four elements required under New York law for the validity of a trust. He found that all were present in the father’s retirement plan. In addition, he cited another provision in New York law stating that the benefits under the retirement plan were not subject to execution or garnishment.

Judge Thuma therefore held “that Debtor’s interest in the [pension] Plan comes within the § 541(c)(2) exclusion and did not become part of Debtor’s bankruptcy estate when he filed this case.” Having found that the debtor’s survivor’s benefits were not estate property, he had no reason to rule on whether the benefits were also exempt under Section 522(b)(3)(C). That section exempts certain types of retirement funds that are exempt from taxation under specified provisions in the IRS Code.

A Bigger Exclusion under Patterson v. Shumate?

Because Judge Thuma found that the father’s pension plan came from a trust, he stopped short of ruling in the debtor’s favor under the Supreme Court’s decision in Patterson v. Shumate, 504, U.S. 753 (1992).

Section 541(c)(2) excludes property from the bankrupt estate if it is subject to a “restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law . . . .” [Emphasis added.] Note that the section refers only to a trust and not to a pension plan.

Judge Thuma quoted the unanimous Court in Patterson for saying that “[t]he natural reading of [Section 541(c)(2)] entitles a debtor to exclude from property of the estate any interest in a plan or trust that contains a transfer restriction enforceable under any relevant nonbankruptcy law.” Id. at 578. [Emphasis added.]

Given the Court’s reference to “a plan or trust,” Judge Thuma said that “some courts have held that Patterson expanded the definition of trust beyond a literal reading or, at least, focused on the substance of the legal arrangement rather than its label.” He cited the Third Circuit for saying that Patterson’s language “could be interpreted to mean that § 541(c)(2) is not limited to literal trusts or trusts formed explicitly.” In re Laher, 496 F.3d 279, 287 (3d Cir. 2007).

Because Judge Thuma found that the father’s pension plan came from a trust under New York law, he had no need to decide whether Patterson would have allowed him to employ a more expansive definition of “trust.

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American Bankruptcy Institute reports the following on 02/23/23:

Additional Chapter 7 Trustee Payments Suspended for FY 2022

The Department of Justice (DOJ) has advised the Administrative Office of the U.S. Courts that it has insufficient funds available to transfer to the Judiciary to make additional payments to eligible chapter 7 bankruptcy trustees for fiscal year 2022, according to a U.S. Courts press release. Trustees interested in receiving the additional payments for fiscal year 2023 should still file payment eligibility certifications. The Bankruptcy Administration Improvement Act of 2020 (BAIA) established an additional payment for eligible chapter 7 trustees for fiscal years 2021 to 2026. The payments are funded by excess collections in the DOJ’s U.S. Trustee System Fund. Eligible chapter 7 trustees received an additional payment of $60 for each applicable case in fiscal year 2021. However, the DOJ has indicated that it lacks sufficient funds for the additional payment in applicable fiscal year 2022 cases.

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United States Federal Reserve reports that U.S. Household Debt Jumps to $16.90 Trillion in 4th Quarter of 2022

U.S. household debt jumped to a record $16.90 trillion from October through December last year, the largest quarterly increase in 20 years, as mortgage and credit card balances surged amid high inflation and rising interest rates, a Federal Reserve report showed on Thursday, Reuters reported. Household debt, which rose by $394 billion last quarter, is now $2.75 trillion higher than just before the COVID-19 pandemic began while the increase in credit card balances last December from one year prior was the largest since records began in 1999, the New York Fed's quarterly household debt report also said. Mortgage debt increased by $254 billion to $11.92 trillion at the end of December, according to the report, while mortgage originations fell to $498 billion, representing a return to levels last seen in 2019. Meanwhile credit card balances increased by $61 billion in the fourth quarter while auto loan balances rose by $28 billion, the report said.

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CFPB: 18% Drop Since 2020 in People with Reported Medical Debt

The number of people with medical debt on their credit reports fell by 8.2 million — or 17.9% — between 2020 and 2022, according to a report Tuesday from the U.S. Consumer Financial Protection Bureau (CFPB), the Associated Press reported. White House officials said in a separate draft report that the two-year drop likely stems from their policies. Among the programs they say contributed to less debt was an expansion of the Obama-era health care law that added 4.2 million people with some form of health insurance. In addition, local governments are leveraging $16 million in coronavirus relief funds to wipe out $1.5 billion worth of medical debt. There has also been a persistent effort by the CFPB to reduce medical debt. The major credit rating agencies said last year that they will no longer include in their reports medical debts under $500 or debts that were already repaid. The agencies will also extend the time it takes to add medical debt to reports from six months to one year, possibly giving families more time to repay before being penalized with lower credit scores. While economic measures such as the unemployment rate and inflation can swing up and down, the decline in medical debt shows that steady progress is being made. Some 13.5% of the 279 million people with credit reports had at least one medical debt, down from 16.4% in 2020 and 19.4% in 2014. Still, unpaid medical bills account for more than half of all debt in collections, according to the White House report. As a result, medical debt exceeds credit cards, personal loans and utilities and phone bills combined. There is also evidence that the decline predates the Biden presidency. The amount of medical debt on credit reports fell to $111 billion from $143 billion between 2018 and the first half of 2021, according to a March 2022 report by the CFPB. [as reported by the American Bankruptcy Institute (ABI) e-newsletter]

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CFPB Targets Credit Card Late Fees As Junk Fees, Proposes Significant Reduction In Safe Harbor

For Card Issuers:

The Consumer Financial Protection Bureau’s (the “CFPB” or the “Bureau”) latest move in its crusade against “junk fees” may hit closer to home for companies charging common fees that are considered, to date, to be lawful and valid. On February 1, the Bureau issued a Notice of Proposed Rulemaking1 (the “Proposed Rule”) targeting credit card late fees that would have substantial implications for the consumer credit card industry across essentially all credit bands and submarkets. Consumer credit card issuers currently are subject to a statutory prohibition against unreasonable penalty fees such as late fees.2 However, regulations implementing that prohibition provide a safe harbor for card issuers charging fees not in excess of certain inflation-adjusted thresholds for initial and subsequent violations of account terms. The Federal Reserve Board initially set the threshold in 2010 at $25 for a first violation and $35 for a subsequent violation of the same type within the next six billing cycles. The CFPB most recently increased the threshold to $30/$41, respectively, as of January 1, 2022.3 In addition, the regulations tie unreasonableness to the costs borne by the card issuer in avoiding or mitigating the violation resulting in the penalty fee. Current regulations also prohibit a card issuer from charging a penalty fee exceeding the amount of the violation resulting in the fee4 (i.e., a consumer late on a payment of $10 cannot be charged a late fee exceeding $10), even if a greater charge normally would fall within the safe harbor. [as reported in 2/10/23 Credit & Collection e-newsletter]

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Unlike in the Eleventh Circuit, Barton doctrine Is Alive and Well in the Fifth Circuit

In a case irreconcilable with two recent opinions from the Eleventh Circuit, the Fifth Circuit invokes Barton to bar a lawsuit against a trustee after the bankruptcy case had been closed.

A stalwart defender of the Barton doctrine (that bankruptcy trustees cannot be sued without permission of bankruptcy court that appointed the trustee), the US Fifth Circuit Court of Appeal parted company with the US Eleventh Circuit Court of Appeal, by permitting a bankruptcy trustee to invoke Barton v. Barbour, 104 U.S. 126 (1881), and prevail on the bankruptcy court to dismiss a suit brought against the trustee in state court.

In Barton, the Supreme Court held that receivers cannot be sued without permission from the appointing court. After adoption of the Bankruptcy Act of 1898, the doctrine was extended to cover bankruptcy trustees. Barton was subsequently broadened by many circuits to protect court-appointed officials and fiduciaries, such as trustees’ and debtors’ counsel, real estate brokers, accountants, and counsel for creditors’ committees.

In two recent cases, the Eleventh Circuit theorized (incorrectly?) that bankruptcy jurisdiction is solely in rem, meaning that Barton protection expires when the bankruptcy case has been closed and there are no more estate assets. See Tufts v. Hay, 977 F.3d 1204 (11th Cir. Oct. 20, 2020), and Chua v. Ekonomou, 1 F.4th 948 (11th Cir. 2021).

Bound by the two Eleventh Circuit cases, a bankruptcy court in Florida rebuffed a trustee’s invocation of Barton and subjected the trustee to the tender mercies of state court when the bankruptcy case had been closed. See In re Keitel, 636 B.R. 845 (Bankr. S.D. Fla. Jan. 28, 2022). To read ABI’s report, click here.

The Fifth Circuit didn’t let the same thing happen in a nonprecedential, per curiam opinion on January 3.

Similar Facts, Different Result

A wife filed a chapter 7 petition, listing three real properties among her assets. Three days later, she filed for divorce. Both by intervention in the matrimonial proceeding and by proceedings in bankruptcy court, the trustee contended that the properties belonged to the estate. Eventually, the bankruptcy court decided that the properties did belong to the estate and authorized a sale.

Years passed, the trustee filed a final report, and the bankruptcy court approved final fee allowances and the final report, discharged the trustee and closed the case. By definition, there were no remaining estate assets when the case closed. Under the Eleventh Circuit’s view, there could be no Barton protection.

Ten months later, the wife-debtor attempted to reopen the bankruptcy case to set aside the judgment regarding the properties. The bankruptcy court refused to reopen the case.

Without permission from the bankruptcy court, the wife-debtor filed suit in state court against the trustee, the trustee’s counsel and her (former) husband. The trustee reopened the bankruptcy case and, along with the other defendants, removed the suit to bankruptcy court.

The bankruptcy court disagreed with the wife, found jurisdiction, and dismissed the suit against the trustee and counsel. For lack of jurisdiction, the bankruptcy court remanded the suit to state court with respect to the husband. The district court affirmed.

Plentiful Jurisdiction

The Fifth Circuit panel said there was “related to” jurisdiction and that claims against the trustee and counsel were “core,” since they could not have arisen outside of bankruptcy. Because the claims by the wife arose from the trustee’s exercise of duties, the panel said it was “meritless” to argue that the bankruptcy court had no power to enter final judgment.

The wife contended that removal was untimely because the defendants did not file notices of removal within 30 days of the mailing of the state court complaint. The circuit panel rejected the argument, because removal occurred less than 30 days after receipt of the complaint, the deadline imposed by Bankruptcy Rule 9027(a)(3).

Applicability of Barton

The bankruptcy and district courts both concluded that Barton applied and that the defendants had immunity. The Fifth Circuit agreed about Barton — first, because the bankruptcy court had jurisdiction, and second, because the trustee’s actions were not ultra vires, given that they were part of the trustee’s official duties and were undertaken in accordance with court orders.

The panel affirmed, holding that dismissal was proper under Barton. Having dismissed, the panel saw no reason to analyze whether the trustee and counsel were entitled to immunity.


The Fifth Circuit’s opinion cited neither of the Barton-limiting decisions from the Eleventh Circuit. The results nonetheless seem irreconcilable, especially in view of Keitel, which declined to invoke Barton on similar facts.

The Fifth Circuit doesn’t merely apply Barton reverentially to cases factually on point. Indeed, the Fifth Circuit recently cited Barton as authority for a dramatic expansion of the bankruptcy court’s power to supervise and dismiss state court lawsuits after the conclusion of a chapter 11 case. See NexPoint Advisors LP v. Highland Capital Management LP (In re Highland Capital Management LP), 21-10449, 2022 BL 291525, 2022 US App Lexis 23237, 2022 WL 3571094 (5th Cir. Aug. 19, 2022).

In a circuit that does not permit nondebtor releases in chapter 11 plans, the Fifth Circuit in Highland Capital held that a chapter 11 plan may give the bankruptcy court a gating function to approve or disapprove the commencement of lawsuits against participants in the reorganization, even those not entitled to exculpation. Furthermore, Highland Capital said that the bankruptcy court has power, should there be jurisdiction, to pass on the merits of a suit someone would wish to bring outside of bankruptcy court.

As authority for gatekeeping, Highland Capital cited Barton, saying that “[c]ourts have long recognized [that] bankruptcy courts can perform a gatekeeping function.”

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Harris v. Creditmax Collection Agency Inc. (In re Warsco),    F4th   (7th Cir. Jan. 9, 2023) appeal 22-1733

Date of a Garnishment Order Doesn’t Matter for Preferences, Seventh Circuit Says; Its date of payment that determines whether payment is made in more than or less than 90 days before bky filed

Circuit Judge Frank Easterbrook tersely held that the Supreme Court’s Barnhill opinion overruled prior Seventh Circuit precedent.

Overruling the Seventh Circuit’s own 1984 precedent in deference to the later-decided Barnhill v. Johnson, 503 U.S. 393 (1992), Circuit Judge Frank H. Easterbrook held that a judgment creditor is liable for a preference if the creditor collects on a garnishment within the 90-day preference window.

Even though the garnishment order was obtained outside of the preference period, it’s still a preference, because the “transfer” occurs when the payment is made, Judge Easterbrook held in a typically concise, four-page opinion on January 9.

The creditor held a judgment and obtained a garnishment order more than 90 days before the debtor filed bankruptcy. Within the preference period, the creditor collected $3,700 from the garnishment of the debtor’s wages in Indiana.

The bankruptcy trustee sued the creditor to recover $3,700 as a preference under Section 547. Relying on the Seventh Circuit’s 1984 decision in In re Coppie, 728 F.2d 951 (7th Cir. 1984), the creditor moved to dismiss on the ground that the transfer occurred outside of the preference period when the garnishment order was issued.

Indeed, Coppie held that the definition of a “transfer” is governed by state law and that Indiana law defines a “transfer” as having taken place when a garnishment order is entered, not when money is paid.

Bound by Coppie, Chief Bankruptcy Judge Robert E. Grant of Fort Wayne, Ind., granted the motion to dismiss. The trustee filed an appeal and a motion for a direct appeal to the Seventh Circuit.

Citing Barnhill, Judge Grant granted the motion for a direct appeal and said that Coppie “should be revisited.”

The Seventh Circuit accepted the direct appeal. The appeal was submitted on January 6, and Judge Easterbrook handed down his decision three days later, saying that “Coppie is indeed wrongly decided” in view of the Supreme Court’s later opinion in Barnhill.

Barnhill involved a regular check that was issued outside of the preference period but paid within 90 days of bankruptcy. Judge Easterbrook paraphrased the Supreme Court’s 7/2 decision as holding “that federal rather than state law defines the meaning of ‘transfer’ in § 547” and “that the date of the check is irrelevant and that only payment of the check marks a ‘transfer.’”

Judge Easterbrook went on to say that the “rule that the ‘transfer’ occurs when money changes hands is as applicable to garnishment as it is to checks.” He described the majority opinion by Chief Justice William H. Rehnquist as having “identified as the date of transfer the time at which the money passes to the creditor’s control.”

Saying that “only the date of payment matters when defining a transfer under § 547,” Judge Easterbrook reversed dismissal of the complaint and remanded the case for resolution on the merits.

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American Bankruptcy Institute (“ABI”) reports that as of 1/1/23, 3 different lower level Courts have ordered the Office of US Trustee to Refund, to Bankruptcy Debtors, Increased US Trustee Fees that the Office of US Trustee charged debtors, but which the US Supreme Court held to be illegal in Siegel v. Fitzgerald (2022 decision)

All three courts to confront the question have now ordered the government to refund overpayments of U.S. Trustee fees.

Last term, the Supreme Court held in Siegel v. Fitzgerald, 142 S. Ct. 1770 (Sup. Ct. June 6, 2022), that the 2018 increase in fees paid by chapter 11 debtors to the U.S. Trustee System was unconstitutional because it was not immediately applicable in the two states with Bankruptcy Administrators rather than U.S. Trustees.

The Supreme Court left open the question of whether debtors are entitled to refunds. Id. at 1783. To read ABI’s report on Siegel, click here. Now, three courts have held that chapter 11 debtors are entitled to refunds.

In August and November, the Tenth and Second Circuits summarily granted refunds to debtors who had challenged the increase. See John Q. Hammons Fall 2006 LLC v. U.S. Trustee (In re John Q. Hammons Fall 2006 LLC), 20-3203, 2022 BL 284318, 2022 US App Lexis 22859, 2022 WL 3354682 (10th Cir. Aug. 15, 2022); and Clinton Nurseries Inc. v. Harrington (In re Clinton Nurseries Inc.), 53 F.4th 15 (2d Cir. Nov. 10, 2021). To read ABI’s reports, click here and here.

After the reversal and remand from the Supreme Court in Siegel, the Fourth Circuit in turn remanded the case to Bankruptcy Judge Kevin R. Huennekens in Richmond, Va., to determine the proper remedy.

In Siegel v. U.S. Trustee Program (In re Circuit City Stores Inc.),    BR     (Bankr. E.D. Va. Dec. 15, 2022), case number 19-03091, said to be the most comprehensive opinion so far on remedy, Judge Huennekens held that “[i]t is a core duty of the federal courts to provide remedies for legal injuries.” In an opinion on December 15, he ruled that the debtor is entitled to a refund, “the only relief [the court] has power to provide.”

The Procedural Posture

The debtor in Judge Huennekens’ court was Circuit City Stores, which had been in chapter 11 a decade before the increase in U.S. Trustee fees. Indeed, the debtor had confirmed a plan with a liquidating trust.

For the period in question after the increase, the liquidating trust paid $632,500 in fees. Had there been no increase, the fees during the period would have been only $56,400. After paying the increase, the liquidating trustee sued to recover the overpayment for being in violation of the uniformity aspect of the Bankruptcy Clause of the Constitution.

Bankruptcy Judge Huennekens held the increase to be unconstitutional. On a certified appeal, the Fourth Circuit reversed 2/1. Siegel, of course, reversed the Fourth Circuit, putting the question of remedy back in Judge Huennekens’ lap.

The Proper Remedy

Judge Huennekens stated the question: “[W]hat is the appropriate remedy to redress the Unconstitutional Overpayment?”

The government argued that prospective relief was sufficient because Congress soon had amended the statute to mandate the same higher fees in Bankruptcy Administrator districts. Judge Huennekens distinguished two Supreme Court opinions finding prospective relief to be sufficient for certain types of constitutional violations.

Judge Huennekens cited other Supreme Court authority for the idea that mandating equal treatment is the remedy when the plaintiff was seeking equal treatment.

Alternatively, the government argued that the courts should pursue debtors in the two Bankruptcy Administrator states to force them to pay the higher fees. According to Judge Huennekens, the government “concede[d] that any such collection attempts may be unsuccessful.”

Judge Huennekens observed that he had no power to compel payments by debtors in other states. Even if there were jurisdiction, he said that “impotently ordering collection in BA Districts is far too speculative and ineffective to accord proper relief to the [liquidating] Trustee.”

There was “ample precedent,” Judge Huennekens said, for ordering a refund; relief already had ordered by the Second and Tenth Circuits. He therefore granted “the only relief [the court] has the power to provide — a refund.”

Judge Huennekens ruled that the liquidating trustee was entitled to a refund for the first three quarters of 2018, when the fees were higher.

Section 549(a) Relief

Section 549(a) permits avoidance of unauthorized post-petition transfers. Citing the section, Judge Huennekens said that the “Bankruptcy Code also provides a means of recovery of the Unconstitutional Overpayment.”

Although the court had authorized the payment, Judge Huennekens said that he had not authorized the payment of unconstitutional fees. Likewise, the Bankruptcy Code does not authorize payment of unconstitutional fees.

Because the liquidating trustee transferred property during the case that was not authorized, Judge Huennekens said that the trustee could avoid the transfers and recover the overpayments. The government has filed an appeal.

Good News for the Class Action Plaintiffs

The decision by Judge Huennekens is particularly good news for the class plaintiffs in the Court of Federal Claims in Washington, D.C., in Acadiana Management Group LLC v. U.S., 19-496 (Ct. Cl.). The suit seeks a refund on behalf of all chapter 11 debtors around the country who paid the increase.

Originally, the Court of Claims sided with the government and dismissed the suit, believing there was no constitutional violation. Siegel came down while the class plaintiffs’ appeal was pending in the Federal Circuit. In September, the Federal Circuit vacated the lower court’s decision and remanded for further proceedings in light of Siegel.

By late September, the class plaintiffs had filed a motion for partial summary judgment, asking the Court of Claims to rule that class members are entitled to refunds. Like the defendants in the case before Judge Huennekens, the government filed a cross motion to dismiss, contending there is no relief available.

On the cross motions, briefing should be completed in the Court of Claims early in the first quarter of 2023.

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Credit Card Debt Reaches A Record High Among U.S. Consumers reports 1/9/23 Credit & Collection E-Newsletter:

Personal loans and credit card debt reached record levels in 2022 due to financial pressures brought on by high inflation and climbing interest rates, according to third-quarter data from a consumer credit reporting agency. Credit balances reached a record-setting $866 billion in the third quarter of last year – and they are expected to keep climbing, the report from TransUnion said. Meanwhile, personal loan originations are expected to return to pre-pandemic levels in 2023, after experiencing record growth in the last 12 months. Michele Raneri, vice president of research and consulting at TransUnion, said that despite mounting financial pressures, there’s optimism among consumers. A Consumer Pulse study conducted by the credit bureau found that more than half of Americans expressed confidence about their financial health in 2023. Among the most optimistic were those in younger generations, with around two-thirds of Gen Z and Millennial consumers reporting that they felt positive about their financial future. “I think that’s because of the wage factor,” Raneri said. “They’re getting more increases, they’re getting more promotions quicker than people who might be more established in the workforce.” The debt increase was also heavily driven by Gen Z and Millennial borrowers in 2022, according to a November press release by TransUnion. Other drivers include high inflation and increased lending to “below prime consumers,” or those with lower credit scores.

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The New Report of the Consumer Financial Protection Bureau (“CFPB”), a US Government Agency, Finds Household Financial Health Is Declining After Several Years Of Increased Savings

In December 2022, a US federal agency, the Consumer Financial Protection Bureau (CFPB) released a new Making Ends Meet report that reports on the financial health of American households. Since 2019, the annual Making Ends Meet consumer surveys showed improvement in financial health during the first few years of the COVID-19 pandemic, due in part to a tight labor market, reductions in consumer spending, and access to pandemic-related relief programs. However, data from early 2022 revealed a decline in several key measures, as well as a rapid deterioration in financial health for Hispanic consumers, consumers under the age of 40, and low-income renters. In addition, even though unemployment remains low, more than 37% of households were unable to cover expenses for longer than one month if they lost their main source of income. The 2022 survey was mailed to a sample of consumers in January, with responses collected between January and March. Utilizing data collected from the survey, as well as from the CFPB’s Consumer Credit Panel, today’s report focused on several measures of consumer financial health, including: The CFPB’s financial well-being score, which serves as a comprehensive measure of overall subjective financial well-being. Whether households had difficulty paying bills and expenses in the previous year. How long households could cover expenses if the main source of income was lost. Bottom line: Many consumers are not financially prepared for a disruption to their main source of income, even though unemployment remains low, according to Report findings. Nearly 37% of households report that they could not cover expenses for longer than one month, even with accessing savings, borrowing money, selling assets, or seeking help from family and friends.

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LTA Claimholders Group v. LATAM Airlines Group S.A. (In re LATAM Airlines Group S.A.),    F.4th    (2d Cir. Dec. 14, 2022)

LTA Claimholders Group v. LATAM Airlines Group S.A. (In re LATAM Airlines Group S.A.),    F.4th    (2d Cir. Dec. 14, 2022), appeal 22-1940: Second Circuit Court of Appeal agrees with Ninth, Fifth and Third Circuits, that a claim is only “impaired” if a bankruptcy 13 or 11 plan changes that claims rights; and that an unsecured creditor of an insolvent debtor is not entitled to be paid post-petition interest by the debtor’s plan, where the plan treatment of that unsecured creditor’s claim is “unimpaired” Unimpaired, Unsecured Creditors Don’t Get Post-Petition Interest

No “Circuit Split” occurred, because, because the Second Circuit agrees with the Third, Fifth and Ninth Circuits that debtor’s plan does NOT have to pay post-petition interest to a general unsecured creditor’s claim, where the debtor is insolvent, and where the debtor’s plan treatment of that general unsecured creditor leaves the creditor’s claim “unimpaired” pursuant to 11 USC 1124(1) (ie, does NOT alter the alters the creditor’s “legal, equitable, or contractual rights”, that the unsecured creditor is NOT entitled to be paid post-petition interest.

Consequently, an unsecured creditor of an insolvent debtor is not entitled to post-petition interest even though the claim is unimpaired by the plan. In other words, an unsecured creditor remains unimpaired because 11 USC 502(b)(2) disallows post-petition interest as being unmatured on the petition date.

The Second Circuit did not reach the question of whether unsecured creditors of a solvent debtor are entitled to post-petition interest. That question is going to the Third Circuit on direct appeal.

The Plan

The debtor was a holding company for several Latin American airlines. All were in chapter 11. With an equity infusion of more than $5.4 billion, the debtor proposed a plan where the unsecured claims of a Brazilian subsidiary would not be impaired.

More specifically, the plan said that the unsecured creditors would receive the full allowed amount of their claims or whatever treatment was necessary for them to be unimpaired. The debtors interpreted the plan to mean that it would pay $300 million on the subsidiary’s unsecured claims, but not an additional $150 million in post-petition interest.

The creditors objected to confirmation, contending that they would not be unimpaired under Section 1124(1) without post-petition interest. The creditors also argued that their debtor was solvent and that they should be paid post-petition interest under the so-called solvent-debtor exception to the general rule that interest for unsecured creditors ceases on filing. The debtors contended that the relevant debtor was insolvent. A valuation battle ensued where the creditors posited evidence and argument to show solvency. The debtors countered with an analysis showing insolvency.

Bankruptcy Judge James L. Garrity, Jr. of New York sided with the debtors and found insolvency. He also overruled the creditors’ objection and confirmed the plan. The district court affirmed. LATAM Airlines Grp. S.A., 20-11254, 2022 WL 2206829 (Bankr. S.D.N.Y. June 18, 2022), as amended, 2022 WL 2541298 (Bankr. S.D.N.Y. July 7, 2022); aff’d In re LATAM Airlines Grp. S.A., 643 B.R. 741 (S.D.N.Y. 2022).

The creditors appealed to the Second Circuit.

No Circuit Split

Circuit Judge Pierre N. Leval began his analysis of the merits by stating the general rule that interest ceases to accrue on a bankruptcy filing. Before enactment of the Bankruptcy Code in 1978, the Second Circuit had adopted the solvent-debtor exception allowing post-petition interest to creditors of a solvent debtor before a surplus is returned to the debtor.

Judge Leval said that “the rule against post-petition interest is codified at 11 U.S.C. §502(b)(2).” He described the subsection as disallowing “unmatured interest.”

Unlike the Fifth and Ninth Circuits, which recently ruled that the solvent-debtor exception did not survive adoption of Section 502(b)(2), Judge Leval said that his court had “not yet addressed” the question. See Ad Hoc Committee of Holder of Trade Claims v. Pacific Gas & Electric Co. (In re Pacific Gas & Electric Co.), 46 F.4th (9th Cir. Aug. 29, 2022); and Ultra Petroleum Corp. v. Ad Hoc Committee of OpCo Unsecured Creditors (In re Ultra Petroleum Corp.), 51 F.4th (5th Cir. Oct. 14, 2022).

[Note: After ruling that the exception did survive the Code, a bankruptcy judge in Delaware recently certified the same question for direct appeal to the Third Circuit. See Wells Fargo Bank NA v. Hertz Corp. (In re Hertz Corp.), 21-50995 (Bankr. D. Del. Nov. 21, 2021). For the notion that they were entitled to post-petition interest, the creditors relied primarily on Section 1124(1) and its description of the requisites of unimpairment. The section says a claim is unimpaired “under a plan” if it “leaves unaltered the [creditor’s] legal, equitable, and contractual rights” and “does not otherwise alter the legal, equitable, or contractual rights to which such claim or interest entitles the holder of such claim or interest.”

Although other circuits have held that the section “sweeps broadly,” Judge Leval said:

[T]he Third, Fifth, and Ninth Circuits have noted a significant caveat: Because Section 1124(1) refers to impairment imposed by a “plan,” these circuits have held it inapplicable to modifications which occur by operation of the Code.

The creditors implored Judge Leval not to follow the three circuits but instead to adopt the rationale of two bankruptcy courts in the late 1990s that held that post-petition interest must be allowed to render a claim unimpaired. Judge Leval declined the invitation in favor of following the three circuits.

Finding the three circuits’ opinions to be “persuasive,” Judge Leval held “that a claim is impaired under Section 1124(1) only when the plan of reorganization, rather than the Code, alters the creditor’s legal, equitable, or contractual rights.” In other words, creditors’ “claims are not impaired simply because they did not receive post-petition interest.”

Creditors’ Arguments Rejected

The creditors posited arguments based on statutory language, the same arguments that did not persuade the three circuits.

The creditors pointed to the statute’s use of “claims” rather than “allowed claims.” Like the three circuits, Judge Leval said the section does not state that “claims” are unaltered but that “instead, it protects ‘the legal, equitable, and contractual rights to which such claim or interest entitles the holder of such claim or interest.’ 11 U.S.C. § 1124(1) (emphasis added).”

Judge Leval also rejected the creditors’ argument based on statutory history and, in particular, the elimination of Section 1124(3). He explained that it was deleted in response to In re New Valley Corp., which read the subsection to mean that solvency alone wasn’t enough to require post-petition interest for unsecured creditors.

Judge Leval cited the legislative history for the subsection’s repeal to “ensure that solvent debtors pay post-petition interest on their claims.”

Solvent or Insolvent?

On a different line of attack, the creditors argued that the debtor was solvent, not insolvent as the bankruptcy court had found. On appeal in the circuit, the creditors did not advance arguments about the facts, but rather about legal issues underpinning the proper method of valuation.

The creditors argued that the absolute priority rule invokes the solvent-debtor exception. In particular, they relied on the Supreme Court’s Consolidated Rock opinion from 1941 and its statements about absolute priority. In response, Judge Leval cited the Second Circuit for having said in 1998 that the Code did not codify any pre-Code version of the absolute priority rule. Looking at absolute priority as it reads today in Section 1129(b)(2)(B), one of the alternatives says that cramdown requires creditors to receive “the allowed amount of such claim.”

Because the creditors are receiving the allowed amount of their claims, Judge Leval said that they “cannot insist on compliance with the absolute priority rule. Because such a plan satisfies Section 1129(b)(2)(B)(i), there is no need for it to satisfy Section 1129(b)(2)(B)(ii).”

Judge Leval concluded by saying:

We therefore do not believe that the absolute priority rule provides the relevant test for solvency. We accordingly reject the argument that the Bankruptcy Court was required, as a matter of law, to apply the solvent debtor exception under these circumstances.

Judge Leval ruled that the bankruptcy court had correctly found the debtor to be insolvent and had correctly ruled that the creditors were not impaired because the plan did not impair the claims. He affirmed.

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Barclay vs. Boskoski,    F.4th   , 2022 WL 16911862 (9th Circuit Court of Appeals. November 14, 2022)

In Barclay, a published decision, the United States Court of Appeals for the Ninth Circuit found that the bankruptcy court correctly applied the $600,000 homestead exemption in effect on the filing date of the bankruptcy petition, rather than the significantly lower homestead exemption available when the judgment lien was recorded seven years prior. As a result, the judgment lien was avoided in its entirety.


In 2014, Greek Village, LLC, Konstantinos Manassakis, and Aimilia Manassakis recorded a $256,075.95 judgment lien (“Greek Village Judgment Lien”) against Debtor Dejan Boskoski’s Carlsbad, California home. Because the debtor was married in 2014, the maximum homestead exemption applicable to the Greek Village Judgment Lien was $100,000. See Cal. Civ. Proc. Code § 704.730 (2013). Following the perfection of the judgment, in 2021 California amended its exemption statute to allow debtors to claim the greater of (1) the “median sale price for a single-family home” in the debtor’s county the year before the debtor claims the exemption, “not to exceed” $600,000; or (2) $300,000. See Cal. Civ. Proc. Code § 704.730(a) (2021).

In August 2021 (seven years after the Greek Village Judgment Lien was perfected and eight months after California enacted the new homestead exemption), the debtor filed a chapter 7 case. The debtor claimed the $600,000 homestead exemption in his schedules and sought to avoid the Greek Village Judgment Lien, which exceeded $477,000 as of the petition date. The debtor argued that the Bankruptcy Code required the court to look to the exemption the debtor could have claimed, but for the lien, at the time he filed his bankruptcy petition, not when the judgment lien was created. The Greek Village Judgment Lien therefore impaired his homestead exemption by $543,897.20, as the home was subject to two deeds of trust totaling $551,720.47, the Greek Village Judgment Lien, and the $600,000 homestead exemption. In total, these equaled $1,629,647.20, an amount exceeding the value of the debtor’s home by $543,897.20. The Chapter 7 trustee objected, arguing that the maximum homestead exemption available to the debtor was $100,000 because under California law the exemption the debtor could claim was fixed at the 2014 amount. See Cal. Civ. Proc. Code § 703.050(a).

The bankruptcy court agreed with the debtor’s argument that the exemption amount is fixed on the date of filing the petition. The net result was the avoidance of the entire amount of the Greek Village Judgment Lien. Because the bankruptcy court believed it to be a “close call on an important question,” the decision was immediately certified to the Ninth Circuit as a case of first impression. 2022 WL 16911862 at ∗6.


The Ninth Circuit affirmed the decision of the bankruptcy court and held that the debtor’s exemption amount was fixed on the date the petition was filed.

The Ninth Circuit based its decision on the meaning of 11 U.S.C. Section 522(f), which provides that a debtor may avoid a judgment lien to the extent that the lien “impairs an exemption to which the debtor would have been entitled.” Boskoski, 2022 WL 16911862 at ∗ 8 (emphasis in original). In interpreting Section 522(f), the panel reviewed the U.S. Supreme Court’s decision Owen v. Owen, 500 U.S. 305 (1991), in which it held that an exemption is fixed on the date of filing the petition. The Ninth Circuit acknowledged that in Owen the Supreme Court held that Section 522(f) established that the “baseline” against which impairment should be measured is not the exemption to which a debtor “is entitled” but is the exemption to which a debtor “would have been entitled.” Id. Relying on Owen, the panel therefore held that in deciding whether a judgment lien impairs a debtor’s California homestead exemption under Section 522(f), the Bankruptcy Code requires courts to determine the amount of the exemption to which the debtor would have been entitled in the absence of the lien at issue. The Ninth Circuit also noted that the exemptions available to the debtor are generally fixed as of the filing date of the bankruptcy petition, citing White v. Stump, 266 U.S. 310, 313 (1924) (describing the “snapshot rule”). Boskoski, 2022 WL 16911862 at ∗4.

The Ninth Circuit rejected the trustee’s argument that the bankruptcy court should have applied all of the limitations that states place on their exemptions as part of the calculation necessary to determine whether a judgment lien could be avoided. In doing so, it noted that the Supreme Court in Owen had addressed that very issue when it held that an applicable state exemption law “must be applied along with whatever other competing or limiting policies the Bankruptcy Code contains.” Id. at ∗9 (cleaned up). In this case, that meant the court applied the state exemption law in effect on the filing date of the bankruptcy petition, rather than on the creation date of the lien.


1. This Ninth Circuit’s decision highlights the following: judgment liens affect exemption claims differently depending upon whether you are in state court or in bankruptcy court. Had the trustee been attacking the debtor’s exemption claim amount in state court, chances are good that he would have prevailed, based upon the application of California Code of Civil Procedure section 703.050(a), which states that “the amount of an exemption shall be made by application of the exemption statutes in effect . . . at the time the judgment creditor’s lien on the property was created.” While the Ninth Circuit did not specifically state that this was not relevant to its determination, it stated that “[a]nticipating the issue we address today, the Court held that it is not inconsistent for the Code to allow states to define their own exemptions but to have a policy disfavoring the impingement of certain types of liens upon exemptions, whether federal- or state- created.” Boskoski, 2022 WL 16911862 at ∗4 (citing Owen, 500 U.S. at 313) (cleaned up). In light of controlling on-point U.S. Supreme Court authority, the Ninth Circuit’s decision appears to be correct.

2. The rationale of this Ninth Circuit decision is easy to follow—the panel, based on previous Supreme Court precedent, follows the Code’s requirement to determine an exemption to which the debtor would have been entitled in the absence of the lien at issue. Simply put: the date of filing rather than the date of recording the lien controls the application for the amount of the exemption used. Despite the trustee’s argument that Wolfe v. Jacobson (In re Jacobson), 676 F.3d 1193, 1198 (9th Cir. 2012) controlled and the “entire state law” should be followed with respect to the application of the exemption at the time of recording, the Ninth Circuit found such logic unconvincing. The panel was compelled by the Owen decision which was precisely on point: The Court must look to the amount of the homestead exemption that the debtor could have claimed “in the absence of the lien” at issue. Always keep in mind "opt out," by its plain terms, applies only to the exemptions in 522(d). It's not an abdication of section 522 to the states.

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Amendments to Federal Bankruptcy Rules and Forms Effective 12/1/22

The following amended and new Bankruptcy Rules and Forms became effective on 12/1/22, in bankruptcy cases, motions, and adversary proceedings, nationwide:

Bankruptcy Rules 1007, 1020, 2009, 2012, 2015, 3002, 3010, 3011, 3014, 3016, 3017.1, 3018, 3019, 5005, 7004 and 8023; new Rule 3017.2; and Official Forms 101, 309E1 and 309E2.

The Judicial Conference of the United States on Sept. 28, 2021, approved the proposed amendments to the Federal Rules of Bankruptcy Procedure Bankruptcy Rules and official Bankruptcy Forms. The proposed amendments were transmitted to the Supreme Court on October 18, 2021. The Supreme Court adopted these proposed amendments and transmitted them to Congress on April 11, 2022.

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U.S. Supreme Court To Review Biden Student Debt Relief Plan In February 2023:

Can a president (here President Biden), by executive order, cancel $400 billion dollars of student loan debt? Or can only the US Congress, by legislation passed by US Congress, and signed into law by the President, cancel that $400 billion dollars of student loan debt. The U.S. Supreme Court said Thursday it will hear oral arguments in February 2023 on this issue: Six Republican-led states have sued in federal court, saying that President Biden’s so called “student borrower relief plan” (cancelling $400 billion dollars of student loan debt by an executive order, without legislation passed by the US Congress, allowing president to do this). Until the arguments are heard and the court issues a ruling, the $400 billion Biden plan is on hold due to a nationwide injunction ordered in the lawsuit by the six GOP-led states — Nebraska, Missouri, Arkansas, Iowa, Kansas and South Carolina. The Supreme Court declined to lift the order from the lower courts, but decided to fast-track arguments for the case. In November, the Department of Education announced it was extending the pandemic-era pause on federal student loan repayments while legal battles are fought over it in the courts, so borrowers for now won’t be on the hook for payments. “We welcome the Supreme Court’s decision to hear the case on our student debt relief plan for middle and working class borrowers this February. This program is necessary to help over 40 million eligible Americans struggling under the burden of student loan debt recover from the pandemic and move forward with their lives,” White House press secretary Karine Jean-Pierre said in a statement. “The program is also legal, supported by careful analysis from administration lawyers. President Biden will keep fighting against efforts to rob middle class families of the relief they need and deserve.” Comment: It's NOT free to cancel $400 billion dollars of debt. The taxpayers of America will eventually be paying for that $400 billion dollars of debt that is cancelled, by higher taxes, if it is cancelled.

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Federal Trade Commission (FTC) Halts Debt Relief Scheme That Bilked Millions From Consumers While Leaving Many Deeper In Debt:

Credit & Collection 12/1/22 e-newsletter reports that the FTC has temporarily shut down a credit card debt relief scheme operated by Sean Austin, John Steven Huffman, and John Preston Thompson and their affiliated companies that allegedly took millions from people by falsely promising to eliminate or substantially reduce their credit card debt. “These defendants preyed on older Americans already struggling with credit card debt and caused them to fall into even worse debt, with lasting harm to their credit,” said Samuel Levine, Director of the FTC’s Bureau of Consumer Protection. “We will continue going after companies that take advantage of people in financial distress.” Since 2019, Austin, Huffman, and Thompson have operated a network of companies incorporated in Tennessee, Nevada, New Mexico, and Wyoming that have worked together as a common enterprise to support the defendants’ deceptive credit card debt relief scheme, the FTC alleged. Their companies have operated under multiple names such as ACRO Services, American Consumer Rights Organization, Consumer Protection Resources, Reliance Solutions, Thacker & Associates, and Tri Star Consumer Group.

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It Is Very Difficult to Discharge Student Loans In Bankruptcy

Credit & Collection e-newsletter reports that on 11/16/22, the Biden administration on Thursday unveiled unprecedented policy changes designed to make it easier for federal student loan borrowers to discharge their student debt in bankruptcy. Here are the details, as reported in the Article: It Is Very Difficult to Discharge Student Loans In Bankruptcy

While it is by no means impossible for borrowers to discharge their student loans in bankruptcy, it can be quite difficult.

Student loans are treated differently in bankruptcy from other consumer debts, like medical bills and credit card debts. Under the bankruptcy code, student loan borrowers generally have to show that they have an “undue hardship” which is a challenging legal standard to meet. Federal statute does not expressly define in detail “undue hardship” actually means, so bankruptcy courts have established standards, rules and tests (which can vary by jurisdiction) to allow judges to make a determination. In many states, student loan borrowers must demonstrate that there is a “certainty of hopelessness” — an extremely difficult hurdle.

Furthermore, even the process of trying to prove that a borrower meets the undue hardship standard an be a huge obstacle. A borrower must initiate an “adversary proceeding” — which basically involves suing your student loan lender in bankruptcy court. In most cases, student loan lenders, including the federal government (if it is a lender) will oppose the borrower. Adversary proceedings can be a lengthy and draining experiences for borrowers, as well as expensive if the borrower hires private counsel. The government and private lenders, meanwhile, have significant resources that can be utilized against the borrower. The result is that many undue hardship claims fail, and more don’t even get started because of the challenges.

Biden Administration Announces Changes to Federal Student Loan Bankruptcy Policies

This week, the Education Department and Justice Department announced new policy guidance that would alter how the Biden administration handles undue hardship bankruptcy discharge requests by federal student loan borrowers.

“The new process will leverage Department of Education data and a new borrower-completed attestation form to assist the government in assessing a borrower’s discharge request,” according to the U.S. Department of Justice in a press release on Thursday. “The Justice Department, in consultation with the Department of Education, will review the information provided, apply the factors that courts consider relevant to the undue-hardship inquiry and determine whether to recommend that the bankruptcy judge discharge the borrower’s student loan debt.” In other words, there may be some cases — specific to a borrower’s overall circumstances — in which the federal government may decide not to oppose a federal student loan bankruptcy discharge, clearing the way for a borrower to eliminate their federal student loan debt without having to initiate an adversary proceeding.

“The new guidelines advise Department of Justice attorneys to stipulate to the facts demonstrating that a debt would impose an undue hardship and recommend to the court that a debtor’s student loan be discharged under certain circumstances,” according to a statement by the National Consumer Law Center (NCLC), which has been advocating for bankruptcy reform for student loan borrowers for years. “The guidance provides a framework for Justice [Department] attorneys to apply in evaluating the factors that courts typically consider in determining undue hardship.”

Advocacy groups praised the administration’s reform.

“The current undue hardship method of student loan discharge is random, arbitrary and unfair,” said NCLC Staff Attorney John Rao in a statement. “Even though a borrower is in such desperate financial circumstances as to need to file bankruptcy, the government would typically argue that the borrower is not suffering ‘undue hardship’—a requirement for discharging student loans. This additional barrier to debt relief for student loan borrowers was put in place by Congress and was not the result of careful analysis and thoughtful policy debate. Instead it was based on the false premise that student borrowers were more likely to abuse the bankruptcy system, even compared to other consumers with debts owed to the government. The government’s prior approach of fighting borrowers’ claims of hardship indiscriminately exacerbated the problem.”

“For years, federal student loan borrowers in financial distress have sought relief from crushing debt loads through bankruptcy courts, only to be defeated by the Departments’ policies and litigation choices,” said Student Borrower Protection Center (SBPC) Deputy Executive Director Persis Yu in a statement. “Borrowers deserve a consistent and predictable pathway towards relief. Relief should not depend on the whim of individual judges and attorneys.”

Student Loan Bankruptcy Reform Legislation Would Provide More Permanent Changes

While the Biden administration’s policy reforms regarding the treatment of undue hardship bankruptcy cases for federal student loan borrowers is significant, it would take an act of Congress to change the bankruptcy code on a broader and more permanent basis.

Last year, a bipartisan group of senators unveiled the Fresh Start Through Bankruptcy Act. The bill, sponsored by Senator Richard Durbin (D-IL) and Senator John Cornyn (R-TX), would more easily permit federal student loan bankruptcy loan discharges. However, the bill has not advanced, and it would not have addressed the dischargeability of private student loans in bankruptcy.

“This is a great interim step,” said Yu regarding the Biden administration’s new bankruptcy guidelines. “But Congress must act to provide complete bankruptcy reform.”

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Avion Funding LLC v. GFS Industries LLC (In re GFS Industries LLC), 22-05052 (Bankr. W.D. Tex. Nov. 10, 2022)

Avion Funding LLC v. GFS Industries LLC (In re GFS Industries LLC), 22-05052 (Bankr. W.D. Tex. Nov. 10, 2022): discusses that there is a “split” (ie disagreement) among Judges as to whether or not a corporation that files Subchapter V of Chapter 11 bankruptcy case can be sued to hold a debt “nondischargeable”, pursuant to 11 USC 523(a)(2), (4) or (6), where the debt is a debt arising from debtor committing fraud, embezzlement, breach of fiducisary duty, or is a debt from debtor committing a “willful and malicious act” (except a Chapter 13 debtor can seek to discharge a “willful and malicious act”, if the debtor confirms and fully performs a chapter 13 plan, and gets a Chapter 13 discharge. Individuals who file bankruptcy in SubV Chapter 11, regular chapter 11, Chapter 7, or Chapter 13, can be sued to hold a debt to be nondischargeable).

Here is discussion, in Avion Funding LLC case, of the “split”:

NOVEMBER 16, 2022

Judge Gargotta Splits with the Fourth Circuit on Nondischargeability in Subchapter V

The Fourth Circuit had recently held that both individuals and corporations in subchapter V of chapter 11 are barred from discharging debts that are nondischargeable under Section 523(a).

To justify holding that “corporate debtors electing to proceed under Subchapter V of Chapter 11 are not subject to complaints to determine dischargeability pursuant to § 523(a),” Bankruptcy Judge Craig A. Gargotta of San Antonio issued a 25-page, line-by-line refutation of the recent, contrary holding by the Fourth Circuit in Cantwell-Cleary Co. v. Cleary Packaging LLC (In re Cleary Packaging LLC), 36 F.4th 509 (4th Cir. June 7, 2022).

Resolving what it called a “close” question, the Fourth Circuit held in June that “fairness and equity” required making the debts nondischargeable for a corporation, since a small business debtor in Subchapter V has an easier road to confirmation given the absence of the absolute priority rule. To read ABI’s report on Cleary.

Judge Gargotta’s Facts

Judge Gargotta’s debtor was a corporation in Subchapter V of chapter 11. A secured lender filed a complaint contending that its claims were nondischargeable under Sections 523(a)(2)(A), 523(a)(2)(B), 1141(d) and 1192.

The lender’s complaint alleged that the debtor made a misrepresentation by not disclosing that bankruptcy was imminent. The complaint also asserted that the debtor failed to disclose that the debtor had other, more senior lenders.

The debtor responded with a motion to dismiss for failure to state a claim under Rule 12(b)(6), based on the idea that corporations in Subchapter V of chapter 11 are allowed to discharge debts that would be nondischargeable by individual debtors in Subchapter V. The debtor won dismissal of the complaint in Judge Gargotta’s November 10 opinion.

The Statutory Language

The question before Judge Gargotta came down to this: Is Section 523(a) applicable to corporate debtors in Subchapter V?

Of pertinence to the case at hand, Section 523(a) says, “A discharge under section 727, 1141, 1192, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt” for money obtained by false pretenses or fraud.” [Emphasis added.]

Governing discharge for Subchapter V debtors, Section 1192 states that “the court shall grant the debtor a discharge of all debts provided in section 1141(d)(1)(A).” Subsection (2) of Section 1192 goes on to say that a discharge in Subchapter V does not cover “any debt . . . of the kind specified in section 523(a) of this title.”

Finally, Section 1141(d)(1)(A) says that a “discharge under this chapter [11] does not discharge a debtor who is an individual from any debt excepted from discharge under section 523 of this title.” [Emphasis added.]

Judge Gargotta summarized the interplay among the sections as follows:

[T]he language of § 1192(2) does not intend to except from discharge any debts that § 523(a) does not already except. Because § 523(a) unequivocally applies only to individuals, the language of § 1192(2) does not empower § 523(a) to cast a wider net than the text of § 523(a) permits. Had Congress included a phrase in § 1192(2) explicitly stating that the list found in § 523(a) applies to all debtors proceeding in Subchapter V, then the interpretation would be straightforward. Congress’s choice not to insert this language is instructive.

In drafting Section 1192, Judge Gargotta said that Congress knew how to distinguish dischargeability based on the nature of the debtor but “did not make this distinction in § 1192(2).”

Judge Gargotta said that “interpreting § 523 as excepting from discharge debts of corporate debtors in Subchapter V would be to ignore the import of § 1192 into § 523(a).” He went on to say that “corporate debtors proceeding under Chapter 11 historically have been immune to dischargeability actions under § 523(a).” He added, “For Congress to suddenly depart from this well-established principle when it enacted Subchapter V defies reason.”

Adding “§ 1192 into § 523 demonstrates that Congress intended § 1192(2) to limit the § 523 exceptions in Subchapter V to individuals only,” Judge Gargotta said. “This conclusion is mandated by the canon of statutory construction against surplusage.”

“In sum,” Judge Gargotta said, “the statutory language along with the broader Chapter 11 statutory scheme mandate this Court’s holding that corporate debtors proceeding under Subchapter V cannot be made defendants in § 523 dischargeability actions.”

JRB Distinguished

The lender threw New Venture Partnership v. JRB Consolidated, Inc. (In re JRB Consolidated, Inc.), 188 B.R. 373, 374 (Bankr. W.D. Tex. 1995), into Judge Gargotta’s face.

In JRB, a different bankruptcy judge in the same district had held in 1995 that similar language in Chapter 12 made debts nondischargeable as to corporate debtors, not only individual debtors. JRB had been cited approvingly by the Fourth Circuit in Cleary.

Judge Gargotta said that Chapter 12’s incorporation of Section 523 is “broader.” He also noted that unlike chapter 12 cases, “Subchapter V is not its own chapter of bankruptcy, but rather is a subchapter of Chapter 11.”

Cleary and Other Cases

The case before him was an issue of first impression in the Fifth Circuit, Judge Gargotta said. He cited four bankruptcy courts that confronted the same question, and all held that corporate debtors in Subchapter V cannot be saddled with nondischargeable debts.

However, one of the four cases was reversed by the Fourth Circuit in Cleary. So, Judge Gargotta set about rebutting the six arguments on which the Fourth Circuit primarily relied. He saw Cleary as “frustrat[ing] the entire Chapter 11 statutory scheme.”

Dismissing the lender’s nondischargeability complaint, Judge Gargotta said that he “disagrees” with Cleary “and joins [his] sister bankruptcy courts in holding that corporate Subchapter V debtors should not be subject to § 523 dischargeability actions.”

For debtor’s counsel facing the same issue, Judge Gargotta has written the brief for you.

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Masingale v. Muding (In re Masingale),    BR    (9th Cir. BAP 11/2/22), appeal 22-1016

Masingale v. Muding (In re Masingale),    BR    (9th Cir. BAP 11/2/22), appeal 22-1016; for publication 9th Cir BAP decision is important, because BAP rules that by claiming exemption of ‘100% of FMV' of asset (usually homestead exemption, but could be something like stock) debtors keep postpetition appreciation in exempt assets.

Note that for debtors in California, using California exemptions, this result is the result required by the amended California exemption law, which takes effect for bankruptcy cases filed after 1/21/23.

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Tico Construction Co. v. Van Meter (In re Powell)

Tico Construction Co. v. Van Meter (In re Powell),    BR    (B.A.P. 9th Cir. Oct. 21, 2022), appeal number 22-1014.9th Cir BAP says debtor has absolute right to dismiss a ch13 case, even if debtor was not eligible to file ch13. I can see some possibilities this ruling could be abused by a debtor who wants the automatic stay, but does not want to be stuck in bankruptcy, so files a Chapter 13 case, knowing debtor is NOT eligible for chapter 13, then later dismisses the Chapter 13 case, after having the bankruptcy automatic stay protecting the debtor for as long as possible.

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Consumer Financial Protection Bureau v. Cashcall, Inc.; WS Funding, LLC; Delbert Services Corporation; J. Paul Reddam,   F4th    (9th Circuit Court of appeals 2022):

CahCall, Inc. made high interest, predatory, loans to consumers. CashCall, Inc., tried to avoid state usury laws by making loans through an LLC created by an Indian tribe. The loans had a built-in choice of law provision favoring tribal law. CashCall immediately bought all such loans and provided the funding. In litigation initiated by the Consumer Financial Protection Bureau (CFPB), the Central District Court of California (the District Court) tossed out the choice of law provision and found CashCall liable for an “unfair, deceptive, or abusive act” based on the state law violations but restricted its award of damages. In a recently published opinion, Consumer Financial Protection Bureau v. CashCall, Inc., 2022 WL 1614930 (9th Cir. May 23, 2022), the Ninth Circuit (the Court) affirmed the rejection of the choice of law provision and the subsequent liability of CashCall for violation of consumer protection laws, then reversed the limitation on available damages, ruling that CashCall had acted recklessly, which allowed for tier-two damages, and also that both legal and equitable restitution were viable recovery avenues. It remanded for consideration of these additional damages.

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Kurtin v. Ehrenberg (In re Elieff), 637 B.R. 612 (B.A.P. 9th Cir. Mar. 21, 2022)

Kurtin v. Ehrenberg (In re Elieff), 637 B.R. 612 (B.A.P. 9th Cir. Mar. 21, 2022): The 9th Circuit Bankruptcy Appellate Panel (BAP) ruled that when a claim is subordinated, pursuant to 11 USC §510(b), that any liens and encumbrances securing the claim that is subordinated, are subordinated as well. This is a significant decision, because it means subordination of a claim pursuant to Section 510(b) would also subordinate liens and other encumbrances.

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In re Klein,    BR    (US Bankruptcy Court D. Colo. Aug. 23, 2022) bky case No.17-19106: holds Debtor Retains Appreciation in Nonexempt Property Sold During Chapter 13

Judge Rosania answered a question left open by the Tenth Circuit in Barrera.

Answering a question left open by the Tenth Circuit in Rodriguez v. Barrera (In re Barrera), 22 F.4th 1217 (10th Cir. Jan. 19, 2022), Bankruptcy Judge Joseph G. Rosania, Jr., of Denver decided that a chapter 13 debtor retains appreciation in the value of nonexempt property that the debtor owned on the filing date but sold in the course of the chapter 13 case.

In Barrera, the Tenth Circuit held that nonexempt appreciation in the value of a home sold after confirmation of a chapter 13 plan belongs to the debtor, not to creditors, if the case converts to chapter 7 after the sale. The appeals court specifically declined to opine on the result if the debtors were to remain in chapter 13 after the sale. To read ABI’s report on Barrera, click here.

A couple confirmed a chapter 13 plan, after disputes with the chapter 13 trustee concerning the value of a limited liability corporation in which the husband owned a 13% interest. The LLC was the owner of a small office building in which the husband maintained his office.

To confirm the plan, the debtors obtained a valuation of the husband’s interest in the LLC from a chapter 7 panel trustee. The panel trustee opined that the interest was worth $15,000. The couple confirmed their five-year plan based on the $15,000 valuation.

Three years into the plan, the other owners of the LLC decided to sell the office building. The sale resulted in net proceeds to the husband-debtor of about $75,000. The chapter 13 trustee filed a motion aiming to compel the debtors to turn over the sale proceeds and to modify the plan.

The debtors objected and won. Judge Rosania allowed the debtors to retain the sale proceeds in his August 23 opinion.

The case called for Judge Rosania to find the answer in what he called the “apparent contradiction” between Sections 1325(a)(4) and 1306.

In addition to property in Section 541, Section 1306 says that property of the estate in chapter 13 includes property of the type in Section 541 “that the debtor acquires” after filing but before the case is closed.

Section 1325(a)(4) requires the plan to provide value to creditors, as of the effective date of the plan, that is “not less” than what would be paid “if the estate of the debtor were liquidated in Chapter 7 . . . on such date.”

In addition, Section 1327(b) provides that “the confirmation of a plan vests all of the property of the estate in the debtor,” unless the plan or the confirmation order provides otherwise.

Judge Rosania framed the question as whether the proceeds from the sale of prepetition property “should be contributed to the chapter 13 plan.” Under the “estate termination theory” espoused by other bankruptcy judges in Colorado, he said that “property vested with the debtors upon confirmation was no longer property of the estate.”

Other courts, Judge Rosania said, adopted the “estate replenishment theory” where the estate “refills” with property acquired after confirmation without regard to whether the property is necessary to perform the plan. The replenishment theory, he said, requires “continued revaluation of estate property throughout the term of the plan.”

To resolve the contradiction in the statute that the Tenth Circuit recognized in Barrera, Judge Rosania “determined [that] the revesting requirement under 11 U.S.C. § 1327(b) is more specific than the general language of 11 U.S.C. § 1306(a)(1)” and that “the estate termination theory gives meaning to both statutes.”

To rule in favor of the debtor, Judge Rosania observed that the sale proceeds were generated from the sale of a business entity and were not earnings under Section 1306(a)(2).

Of greater significance, perhaps, he said that the value of the interest in the LLC “was appropriately disclosed and reconciled in the best-interest-of-creditors test” and “revested with the Debtors upon confirmation.”

Judge Rosania held that the “estate termination theory . . . allows the Debtors to retain proceeds from the post-confirmation sale of prepetition property under the facts and circumstances of this case.”

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Smart Capital Investments I LLC v. Hawkeye Entertainment LLC (In re Hawkeye Entertainment LLC),    F.4th    (9th Cir. Sept. 23, 2022) appeal no. 21-56264:

A Cured Breach Still Invokes Section 365(b)(1)’s Landlord Protections, Ninth Circuit Court of appeals rules

Adequate assurance of future performance may not be required if the debtor has already cured the breach of lease, the Ninth Circuit says.

If there has ever been a breach of a lease of real property — even if it was cured or was not material — the landlord is still entitled to “adequate protection” or one of the other assurances laid out in Section 365(b)(1), according to the Ninth Circuit.

However, “adequate assurance” may not be required if the breach has been cured or if the debtor has agreed to comply with the lease by having assumed the lease, Circuit Judge Danielle J. Forrest said.

The Monetary and Nonmonetary Breaches of Lease

The debtor leased several floors of an office building in a large city. In her September 23 opinion, Judge Forrest said the lease was below-market.

The landlord and the tenant were not on good terms. Before the tenant’s bankruptcy, the landlord asked the tenant to sign an estoppel certificate to assist in refinancing. The tenant refused and instead said there were problems with the premises and that the tenant had claims against the landlord.

After the squabble about the estoppel certificate, and also before bankruptcy, the landlord notified the tenant about several alleged, non-monetary breaches of the lease. When the landlord threatened to terminate the lease, the tenant filed a chapter 11 petition.

In bankruptcy, the tenant paid a month’s rent into an escrow account, claiming a right to a Covid rent moratorium under local law. The bankruptcy court concluded that the moratorium did not apply. The tenant-debtor paid the rent late and subsequently paid a late fee charged by the landlord.

Soon after filing, the tenant moved to assume the lease. After a year’s discovery, the bankruptcy judge held a trial and allowed the tenant to assume the lease. Judge Forrest quoted the bankruptcy judge as finding that many of the alleged breaches “appeared manufactured, and minor, and made-up, sometimes.”

The landlord nonetheless sought “adequate protection” under Section 365(b)(1) because there had been a breach of lease. The bankruptcy judge decided that the landlord was not entitled to “adequate protection” because the breaches were cured or were not material and would not result in forfeiture of the lease under California law.

The district court affirmed. The landlord appealed to the circuit and won a pyrrhic victory. Although the landlord was entitled to the protections of Section 365(b)(1), the error was harmless because any monetary breach had been cured, and the debtor’s promise to abide by the lease covered everything else.

The Verb Tense in Section 365(b)(1) Is Pivotal

Judge Forrest paraphrased Section 365(b)(1) as saying that a debtor may assume an unexpired lease if (1) it cures or provides adequate assurance of curing a default, (2) provides compensation for actual pecuniary loss, and (3) provides “adequate assurance of future performance.”

However, the prelude in Section 365(b)(1) requires the three protections “[i]f there has been a default.” When there has been no default, “section 365(b)(1)’s requirements — cure, compensation and adequate assurance of future performance — are not triggered,” Judge Forrest said.

The tenant-debtor contended that no protection under Section 365(b)(1) was required because the bankruptcy court had found “no ongoing default at the time of assumption and . . . that any default that had occurred was immaterial under California law.”

Judge Forrest nixed the contention by reference to the “plain terms of the statute” and the use of the “present-perfect tense,” i.e., if “there has been a default.” Citing the Collier treatise, she said that the “assertion that section 365(b)(1) can provide no relief for a landlord where a default already has been cured is simply incorrect both as a matter of interpretation and common sense.”

Judge Forrest held that the absence of an “active default . . . did not render section 365(b)(1)’s curative requirements inapplicable.”

Next, Judge Forrest dealt with the idea that the lack of a material default would render the section inapplicable. She found “no basis for this interpretation” and held that “the bankruptcy court erred in narrowly interpreting ‘default’ to refer only to defaults that are sufficiently material to warrant forfeiture of the lease under California law.”

Judge Forrest concluded the opinion by addressing “whether the bankruptcy court’s failure to analyze section 365(b)(1)’s curative requirements was reversible error” under F.R.C.P. 61, made applicable by Bankruptcy Rule 9005.

The only issue was the landlord’s claimed right to “adequate protection of future performance” under Section 365(b)(1)(C), because any existing breaches had been cured or had been found by the bankruptcy judge to be “only minor deviations from the contract terms.”

“Thus,” Judge Forrest said, “any adequate assurance responsive to the alleged defaults would be little more than simple promises not to deviate from the contract terms again.” She went on to say that the landlord “has not explained how any additional assurance of future performance would have substantively impacted its right to full performance of the lease terms.”

Judge Forrest held that any error by the bankruptcy court was “harmless.” Alluding to the below-market nature of the lease, she said that the landlord “made the deal” and “is not entitled to use section 365(b)(1) as a means to get out of a bad deal so that it can make a better one.”

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SB 1099

Description: On August 30th, California Senate Bill 1099 was delivered to Governor Newsom's desk for signature. NACBA is very proud to be the official sponsor of SB 1099. Join NACBA's California working group as they walk you through the significant improvements to CA's bankruptcy exemption laws & how you can apply them for your clients.

WHY YOU SHOULD ATTEND: NACBA's California working group assisted Senator Bob Wieckowski, the bill's author, in getting these significant improvements to California's bankruptcy laws.

Highlights of SB 1099 that will be discussed include:

"Ride through" option restored for vehicles (no more repos for failure to reaffirm). Homes protected from trustees selling them due to post-petition appreciation where had been fully protected by the homestead exemption on the petition date. Such appreciation will also be exempt. Spouses living separate or apart from a non-filing spouse will no longer require a waiver from the non-filing spouse to utilize our alternate set of exemptions (which are usually more favorable for non-homeowners). Increases the motor vehicle exemption to $7,500 for both sets of exemptions. Creates new exemption fully exempting vehicles converted for use by a disabled debtor, spouse or dependent. Creates new exemption for up to an aggregate amount up to $7,500 for accrued or unused vacation pay, sick leave, family leave or wages. Creates new exemption for payments from settlement agreements arising from debtor's employment (e.g. workplace harassment). Creates new exemption for alimony, maintenance and support which was not previously included in the set of exemptions which includes the homestead exemption.

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Jurist Noted for Bankruptcy Expertise Will Weigh J&J Talc Appeal:

Johnson & Johnson’s use of bankruptcy to shift mass talc lawsuits against the company to chapter 11 will meet its most serious test yet before a federal appeals judge whose influential bankruptcy rulings shape one of the nation’s top corporate restructuring hubs, WSJ Pro Bankruptcy reported. Judge Thomas Ambro sits on the three-judge panel that will hear arguments Monday in a Philadelphia courtroom over an emerging corporate restructuring strategy where companies facing mass personal-injury litigation use a Texas law to create a new subsidiary with minimal business operations and make it responsible for tort liabilities before filing for bankruptcy. The chapter 11 filings by Johnson & Johnson subsidiary LTL Management LLC and others have carried more than a quarter-million personal-injury claims nationwide into bankruptcy court in recent years, stopping further trials on those claims in the civil justice system. J&J’s case has divided bankruptcy specialists and the appeal’s outcome could determine whether the consumer-health giant’s legal strategy could potentially be used more widely by other businesses facing expansive, and costly, personal-injury litigation. Judge Ambro spent more than 20 years practicing bankruptcy law in Wilmington, Del., before assuming his judgeship on the Third U.S. Circuit Court of Appeals in 2000. His background as a bankruptcy practitioner is a rarity among judges in the federal appeals courts, making him an authoritative voice on thorny legal problems arising from complex chapter 11 cases. [as reported by American Bankruptcy Institute on 9/19/22] This tactic that Johnson & Johnson is trying to use, is known in bankruptcy slang as the “Texas Two-Step”, as it was first used in bankruptcy cases filed in bankruptcy courts located in Texas. The view of attorney Kathleen March Esq of The Bankruptcy Law Firm, PC is that this tactic should be held illegal, because it prevents creditors from reaching money of the parent corporation, that the creditors could reach, but for use of the “Texas Two-Step”.

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Mortgage Rates Hit 6.02%, Highest Since the 2008 Financial Crisis

Mortgage rates topped 6% this week [9/15/22] , a jolt to home buyers who last year were paying less than half that. The average rate on a 30-year fixed mortgage climbed to 6.02% this week, up from 5.89% last week and 2.86% a year ago, according to a survey of lenders released by mortgage giant Freddie Mac. The last time rates were this high was in the heart of the financial crisis in 2008, when the U.S. was deep in recession. [reported by Wall street Journal on 9/15/22]

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The federal Consumer Financial Protection Bureau (“CFPB”) Adds New Debt Collection Rule FAQs

Posted on the August 1, 2022

Last week, the CFPB published additional frequently asked questions on Regulation F, its debt collection rule. The new FAQs address third-party communications, electronic communications, and unusual or inconvenient time and place provisions.

Prohibitions on Third-Party Communications. The FAQs address the following questions:

  • What is the Debt Collection Rule’s general prohibition on third-party communications?
  • Are there exceptions to the general prohibition against third-party communications?
  • Does the general prohibition on third-party communications apply to electronic communications from a debt collector about a debt?

Electronic Communications. The FAQs address the following questions:

  • Does the Debt Collection Rule require debt collectors to communicate electronically with consumers?
  • Under the Debt Collection Rule, can a person limit debt collector communications?
  • What is the Debt Collection Rule’s opt-out notice requirement for electronic communications?
  • What are considered reasonable and simple methods for opting out of electronic communications under the Debt Collection Rule?
  • Is a debt collector required to honor a consumer’s request to opt out of electronic communications if the request does not conform to the debt collector’s opt-out instructions?

Unusual or Inconvenient Times or Places. The FAQs address the following questions:

  • Does the debt collection rule limit where or when a debt collector can communicate or attempt to communicate with a consumer about a debt?
  • What does the Debt Collection Rule define as an inconvenient or unusual time?
  • What does the Debt Collection Rule define as an inconvenient or unusual place?
  • Does an automatically generated electronic communication (such as a payment reminder) that is sent at a time the debt collector knows or should know is unusual or inconvenient to the consumer, violate the prohibition on communicating at an inconvenient time?
  • What are the exceptions to the prohibition on communicating at an unusual or inconvenient time or place?
  • Does an automatically generated electronic communication (such as a payment confirmation) sent at a time the debt collector knows or should know is inconvenient to the consumer, which is sent in response to a consumer action (such as a payment), meet the limited exception for responding to consumer-initiated contact?
  • If a consumer tells a debt collector that Fridays are inconvenient, but later contacts a debt collector on a Friday, can the debt collector respond on the following Friday under the limited exception for responding to consumer-initiated contact at a time or place the consumer previously designated as inconvenient?

[As posted by the Credit & Collection e-Newsletter of 08/01/22]

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Commentary: The Aging Student Debtors of America∗

Americans aged 62 and older are the fastest-growing demographic of student borrowers, according to a commentary in the New Yorker. Of the 45 million Americans who hold student debt, one in five are more than 50 years old. Between 2004 and 2018, student loan balances for borrowers over 50 increased by 512 percent. Perhaps because policymakers have considered student debt as the burden of upwardly mobile young people, inaction has seemed a reasonable response, as if time itself will solve the problem. But in an era of declining wages and rising debt, Americans are not aging out of their student loans; they are aging into them, according to the commentary. Credit supposes that which we cannot afford today will be able to be paid back by tomorrow’s wealthier self — a self who is wealthier because of riches leveraged by these debts. Perhaps no form of credit better embodies the myth of a future, richer self than student loans. However, the surge of aging debtors calls into question the premise of education for human capital. Eroding union density, declining wages and skyrocketing tuition have all made college less a path to high-paying jobs than an escape hatch from the worst-paying ones. Those who have taken on debt are increasingly unable to pay it off; many haven’t even received diplomas. Older student debtors are not exceptional cases within the mounting student-debt crisis; their experiences are, in fact, indicative of its hallmark features, according to the commentary. Mounting interest, looming balances, faulty relief methods and declining wages all are forcing borrowers to carry loans for longer and longer, pushing student debt across generations. Older debtors shuffle their income between credit card bills, house payments and car loans; student debts, often the furthest from their day-to-day lives, get paid off last — or don’t get paid at all. For aging borrowers on declining incomes, the crisis is acute: Student debtors over age 65 default at the highest rates. In 2015, more than a third of borrowers in their age group defaulted on their educational loans. Read more.

The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.

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In re Castleman

In re Castleman, (US District Court W.D. Wash. July 1, 2022), appeal to District Court from Bankruptcy Court, DC case no. 21-00829: US District Court Affirms that when a Chapter 13 Debtor’s bankruptcy case is converted from Chapter 13 to Chapter 7, that appreciation in the value of debtor’s residence/real property from when the Chapter 13 case was filed, onward, belongs to the Chapter 7 bankruptcy estate, not to the debtor; whereas if the debtor had remained in Chapter 13, the appreciation in the value of the residence/real property, during the Chapter 13 case, belongs to the Chapter 13 bankruptcy estate, which the debtor (not a Trustee) controls. Result: Conversion from Ch13 to Ch7 can result in debtor’s real property being sold by Chapter 7 Trustee, whereas if debtor had remained in Chapter 13, that would not have happened.


On an issue where the courts are split, the US district Court, in In re Castleman holds that the debtors lose the post-petition appreciation in the value of estate property when a chapter 13 case converts to chapter 7.

Who gets the appreciation in a home when a chapter 13 case converts to chapter 7 after confirmation? Does the debtor keep the appreciation, or does it belong to the chapter 7 trustee? It’s one of the hottest topics in chapter 13 these days. The courts are split.

Having confirmed a plan, the debtors were in chapter 13 for about 18 months before converting to chapter 7. In chapter 13, they had scheduled their home as being worth $500,000 at filing. With a $500,000 valuation, there was no equity in the property on the filing date in view of a $375,000 mortgage and the debtor’s claimed homestead exemption of $125,000.

After conversion, the chapter 7 trustee alleged that the property was worth $700,000 and filed a motion for authority to sell the home. The debtors argued that the valuation at conversion didn’t matter because appreciation during chapter 13 was theirs.

Bankruptcy Judge Marc Barreca of Seattle Washington disagreed with the debtors and held that post-petition, pre-conversion appreciation belonged to the chapter 7 estate. In re Castleman, 631 B.R. 914 (Bankr. W.D. Wash. June 4, 2021).

The debtors appealed, but District Judge John H. Chun affirmed in a seven-page opinion on July 1.

Judge Chun looked primarily at Sections 541(a)(1) and (a)(6). The former defines the estate broadly to include all legal and equitable interests in property as of the filing date. Subsection (a)(6) brings proceeds, rents and profits into the estate, except earnings by an individual for services performed after filing.

Judge Chun also examined Section 348(f)(1)(A). When a chapter 13 case converts to a case under another chapter, it provides that “property of the estate in the converted case shall consist of property of the estate, as of the date of filing of the petition, that remains in the possession of or is under the control of the debtor on the date of conversion.”

However, Judge Chun said that Section 348(f)(1)(A) does not address whether the increase in equity of a pre-petition asset qualifies as a separate, after-acquired property interest — as with after-acquired wages — or whether it is inseparable from the asset itself. Put another way, § 348(f)(1)(A) does not indicate whether “property of the estate, as of the date of filing of the petition,” refers to property as it existed at the time of filing, with all its attributes, including equity interests.

For not addressing the question directly, the debtor contended that the statute was ambiguous. Judge Chun still found the answer within the four corners of the statute in view of the Ninth Circuit’s decision in Wilson v. Rigby, 909 F.3d 306 (9th Cir. 2018). Over a vigorous dissent, the Ninth Circuit, in Wilson v. Rigby, held that Sections 541(a)(1) and (a)(6), read together, lead to the conclusion that post-petition appreciation in the value of a home belongs to the chapter 7 trustee. See detailed discussion of Wilson v. Rigby, below.

However, Wilson was not entirely on point because the 2018 precedent dealt with a case in chapter 7 from the outset, not one converted from chapter 13.

Judge Chun worked from the proposition that a chapter 7 debtor keeps property acquired after filing. Therefore, he said, the question is whether appreciation is “a separate, after-acquired property interest” belonging to the debtor.

By having held in Wilson “that appreciation inures to the estate under 541(a)(6),” Judge Chun inferred that the Ninth Circuit “has necessarily found that increased equity in a pre-petition asset cannot be a separate, after-acquired property interest.”

“This logic,” Judge Chun said, “applies with equal force in a conversion case.”

Although Section 348(f)(1)(A) might seem ambiguous initially, Judge Chun concluded that “it is unambiguous when considered in the context of the Code as a whole and under the Ninth Circuit’s holding in Wilson.”

Judge Chun upheld Bankruptcy Judge Barreca and allowed the trustee to sell the home and retain appreciation for the estate, after covering the debtors’ homestead exemption. He permitted the debtors to file a motion for payment of an administrative expense for mortgage payments the debtors made after filing.

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Stark v. Pryor (In re Stark), 20-4766 (E.D.N.Y. June 28, 2022): US District Court Judge Bars a “Short Sale”, Unless the bankruptcy debtor’s Homestead Exemption is paid in full

Reversing, a Long Island district judge credits value to a homeowner’s ability to delay foreclosure, taking a position contrary to a recent decision from a Ninth Circuit B.A.P.

On an issue where the lower courts are split, a district judge on Long Island, N.Y., reversed the bankruptcy court by holding that a debtor is entitled to a homestead exemption in sale proceeds when the mortgage lender offers to buy the home and voluntarily takes a haircut designed to create an estate for unsecured creditors and the trustee’s commission.

The debtor’s mortgage was long in default. After judgment of foreclosure, the debtor filed a chapter 7 petition and scheduled the property as being worth about $2.2 million. She listed the mortgage debt as some $2.5 million. The lender filed a secured proof of claim for $2.9 million.

Conceding she had no equity in the property, the debtor claimed a New York homestead exemption of $170,825 but stated that she intended to surrender the property. The trustee abandoned the home and filed a report of no distribution. The debtor received a discharge.

Two weeks later, the trustee withdrew his report and filed a motion for permission to sell the home to the mortgage lender, which promised to pay the estate’s administrative expenses. To create grounds for selling over-encumbered property, the lender offered to give the trustee an undetermined amount of money to permit some distribution to unsecured creditors.

The trustee told the bankruptcy court that he could not value the property and quantify the amount of the give-up because the debtor was denying access to the property, perhaps based on the idea that the trustee had abandoned the home.

The debtor objected to the sale motion, arguing that she was entitled to payment of her homestead exemption from the sale. The bankruptcy court denied the objection, ruling that carve-outs were sometimes permitted and that the exemption did not apply. In re Stark, 20-70948, 2020 BL 368946, 2020 Bankr. Lexis 2520, 2020 WL 5778400 (Bankr. E.D.N.Y. Sept. 25, 2020). For ABI’s report on the bankruptcy court’s opinion, click here.

District Judge Eric Komitee of Central Islip, N.Y., reversed in an opinion on June 28. Presaging the result of his reversal, Judge Komitee said that the trustee “may . . . no longer to seek to sell the property through the bankruptcy process because he may decide that the secured creditors would not benefit.”

Appellate Jurisdiction

Appellate jurisdiction was an issue because the decision by the bankruptcy court did not resolve the entire controversy. The bankruptcy court had only denied the exemption but had not ruled on the proposed sale, for which no price had been given.

Judge Komitee cited the Second Circuit for holding that an order granting or denying an exemption is final. He said that every other circuit to reach the question has had the same conclusion.

Judge Komitee found appellate jurisdiction under 28 U.S.C. § 158(a)(1) to review a final order denying the claim of exemption.

The Merits Regarding the Homestead Exemption

On the merits, Judge Komitee said there were two issues. Whether carve-outs are ever permissible was the first. He said that “courts generally have found such arrangements permissible, though disfavored.”

Judge Komitee did not reach the issue because the debtor did not object to the sale as long as she recovered her homestead exemption from the proceeds.

Even if carve-outs are permissible, the second question asked whether the debtor would be entitled to her homestead exemption “before any creditors are paid.” Judge Komitee’s opinion explained that the debtor “would be entitled to her homestead exemption in a carve-out deal, because the value of the carve-out is ultimately derived from equity in the Property as defined by New York law.”

Judge Komitee quoted the New York law as providing a homestead exemption “in value above liens and encumbrances.” The statute, he said, “speaks to equity in the residence,” and the debtor had no equity on the filing date. But that wasn’t the end of the analysis.

Judge Komitee inquired as to “whether the give-up that the Trustee negotiates is extracted from ‘value’ in the ‘property’ that is covered by the New York homestead exemption.” If it does not come from the land and buildings, he said, then “where does it come from?”

The bankruptcy court had reasoned that the give-up derived from the trustee’s power to sell. Judge Komitee cited bankruptcy courts coming down both ways on the issue.

Judge Komitee said that the buyer was not giving value for the trustee’s sale power. Rather, the buyer was paying for the trustee’s ability to deliver ownership of the property more quickly and at a lower cost than through foreclosure.

Alluding to the time-value of money and the cost of foreclosure, Judge Komitee said: [T]he correct answer, in my view, is that in exchange for the carve-out, the Trustee is delivering the sale of the Property outside a foreclosure proceeding. Said differently, the Trustee is trading away, in exchange for the carve-out, [the debtor’s] right to remain in the Property for an extended period without making mortgage payments; her right to exclude others during that period; and the like.

Describing the value in that manner, Judge Komitee said “it is clear that the value resides in the homeowner’s ‘property’ rights in the house, and is thus protected by the homestead exemption.” He elaborated:

When the Trustee trades away those rights via the section 363 sale process, he is trading away the same “property” referred to in the New York homestead exemption.

Having decided that the trustee was selling value in the homestead belonging to the debtor, Judge Komitee next addressed the trustee’s argument that no homestead exemption existed on the filing date because there was no equity on the filing date.

Judge Komitee rebutted the trustee’s argument by citing to authority for the proposition that the value of exempt property is not frozen on the filing date. If a home’s values rises after filing, the debtor is entitled to the appreciation as part of the homestead exemption.

“By their very nature,” Judge Komitee said, “carve-out arrangements do the same thing; the secured creditor’s agreement to accept less money upon a sale creates equity in the home where none existed before.”

Judge Komitee reversed and remanded.


Judge Komitee’s opinion likely means there can be no short sales unless the price covers the entire homestead exemption or whatever smaller amount a debtor might permit. If the exemption is not fully covered, thus creating no estate for unsecured creditors, a bankruptcy court would presumably deny a sale motion on the principle that chapter 7 courts do not liquidate over-encumbered property.

We invite readers to compare the decision by Judge Komitee to the June 17 nonprecedential opinion by the Ninth Circuit Bankruptcy Appellate Panel in Babaee v. Marshack (In re Babaee), 21-1230, 2022 BL 211184 (B.A.P. 9th Cir. June 17, 2022). To read ABI’s report, click here.

In Babaee, the BAP held that the debtor had neither constitutional nor prudential standing to appeal an order selling an over-encumbered home. Notably, the BAP accorded no value to the debtor’s ability to prolong foreclosure or the possibility that the debtor could extract consideration from the lender in return for title.

Judge Komitee recognized the realities of litigation and foreclosure. Sometimes, theoretical rights like foreclosure are encumbered by the real world. The judge’s grounding in reality may have resulted from his service as the Chief of the Business and Securities Fraud Section in the office of the U.S. Attorney for the Eastern District of New York.

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MOAC Mall Holdings LLC v. Transform Holdco LLC (In re Sears Holdings Corp.) 20-1846 (US Supreme Court), and Bartenwerfer v. Buckley, 21-908 (US Supreme Court)

The US Supreme Court now has two bankruptcy cases on the calendar for argument in the term to begin in October, 2022. These are MOAC Mall Holdings LLC v. Transform Holdco LLC (In re Sears Holdings Corp.) 20-1846 (US Supreme Court), and Bartenwerfer v. Buckley, 21-908 (US Supreme Court).

On 6/27/22, the US Supreme Court granted a petition for certiorari, ithe MOAC case, to decide whether the failure to obtain the stay of a sale approval order erects a jurisdictional bar to appeal under Section 363(m).

The courts of appeals are split 6-2. Led by the Second Circuit, the minority hold that Section 363(m) is jurisdictional and bars an appeal from any order that is “integral” to a sale order. The Fifth Circuit sides with the Second.

The majority – composed of the Third, Sixth, Seventh, Ninth and Tenth Circuits – hold that Section 363(m) only sets limits on the relief that a court may grant on appeal from a sale order and is not jurisdictional.

With the grant of certiorari, the Supreme Court will review MOAC Mall Holdings LLC v. Transform Holdco LLC (In re Sears Holdings Corp.), 20-1846, 2021 BL 481940, 2021 US App Lexis 37358, 2021 WL 5986997 (2d Cir. Dec. 17, 2021).

The Sears Lease Sale

The facts and procedural history were complicated but boil down to this:

The landlord was the owner of the giant Mall of America. It was objecting to the assignment of a lease by Sears, a chapter 11 debtor. The landlord lost in bankruptcy court.

Initially, the district court reversed, holding that a provision in a lease cannot supplant the requirement in Section 365(b)(3)(A) mandating that the financial condition of an assignee of a lease must be “similar to the financial condition . . . of the debtor . . . as of the time the debtor became the lessee under the lease . . . .” MOAC Mall Holdings LLC v. Transform Holdco LLC (In re Sears Holdings Corp.), 613 B.R. 51 (S.D.N.Y. May 11, 2020). (“MOAC I”).

Almost immediately, the purchaser of the lease filed a motion for rehearing. Although having taken a contrary position consistently, the purchaser argued for the first time on rehearing that the appeal should be dismissed under Section 363(m) because the landlord did not obtain a stay pending appeal. Previously, the purchaser had consistently contended that the transaction was not a sale.

The case (and the outcome in the Supreme Court) turned on Section 363(m), which says that reversal or modification “of an authorization under subsection (b) or (c) of this section of a sale or lease of property does not affect the validity of a sale or lease [to a purchaser in good faith] . . . unless such authorization and such sale or lease were stayed pending appeal.”

On rehearing in MOAC II, MOAC Mall Holdings LLC v. Transform Holdco LLC (In re Sears Holdings Corp.), 616 B.R. 615 (S.D.N.Y. 2020), the district judge said that the buyer now “seeks to benefit from a complete reversal of that representation.” MOAC II, 616 B.R. at 626. Citing In re WestPoint Stevens Inc., 600 F.3d 231, 248 (2d Cir. 2010), and In re Gucci, 105 F.3d 837, 838–840 (2d Cir. 1997), the district judge said that the Second Circuit had twice held that Section 363(m) is “a jurisdiction-depriving statute.” Id. at 624.

In MOAC II, the district judge granted rehearing, concluded that she lacked appellate jurisdiction, vacated her earlier opinion, and dismissed the appeal.

The Effect of ‘Jurisdictional’

The Second Circuit affirmed in a nonprecedential, summary order on December 17.

The circuit panel said that Section 363(m) applied. Following its own precedent, the Second Circuit held that Section 363(m) is jurisdictional and that the section “also limits appellate review of any transaction that is integral to a sale authorized under § 363(b).”

Applying Section 363(m) was outcome determinative. If the appeal had only dealt with the appellate court’s power, the buyer’s failure to raise Section 363(m) earlier would have been waived, and the Second Circuit could have ruled in favor of the landlord on the merits.

Because the Second Circuit held that Section 363(m) was jurisdictional, the buyer was entitled to raise the jurisdiction issue for the first time on appeal.

The circuit panel held that a review of the merits was “foreclosed by our binding precedent in In re WestPoint Stevens Inc., under which § 363(m) deprived the District Court of appellate jurisdiction.” Earlier last year in another nonprecedential opinion citing WestPoint Stevens, a Second Circuit panel held that Section 363(m) is jurisdictional because it “creates a rule of statutory mootness.” Pursuit Holdings (NY) LLC v. Piazza (In re Pursuit Holdings (NY) LLC), 845 Fed. App’x 60, 62 (2d Cir. 2021).

The Second Circuit affirmed the judgment of the district court dismissing the appeal for lack of jurisdiction. Dismissal of the appeal reinstated the bankruptcy court’s decision in favor of the buyer and effectively overturned the district court’s first decision to reverse the bankruptcy court in the landlord’s favor.

The landlord prevailed on the Second Circuit to stay issuance of the mandate and filed a petition for certiorari in March. The respondent opposed in May. The justices of the Supreme Court held a conference on June 23 to consider the petition and granted certiorari in an order on June 27.

The Question Presented

The landlord is urging the Supreme Court to reverse the Second Circuit, based in large part on Arbaugh v. Y & H Corp., 546 U.S. 500, 515 (2006), where the high court held that a statute is jurisdictional only if Congress has “clearly state[d]” that it is jurisdictional. Earlier, the Supreme Court held that federal courts have a “virtually unflagging obligation” to exercise jurisdiction. Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 817 (1976).

In the petition for certiorari, the landlord colloquially stated that the question on appeal was “whether Section 363(m) of the Bankruptcy Code deprives the appellate courts of jurisdiction or instead merely limits the remedies available on appeal from a sale order [that] has arisen in at least seventy appeals at the district and circuit court levels in the past five years.” Naturally, the petitioner said that the jurisdictional label “is not merely semantic, but carries immense practical consequences [because] [j]urisdictional issues are not subject to waiver or forfeiture.”

The petitioner explained that the jurisdictional label prevents an appellate court from even considering “whether there are remedies available on appeal that do not affect the validity of the sale.”

Assuming there are no inordinate delays in the filing of merits briefs, the case could be argued in the Supreme Court before the year’s end, with a decision by March or April.

Both sides will be well represented by counsel who have argued multiple times in the Supreme Court on complex bankruptcy questions. The petitioner-landlord’s counsel is Douglas Hallward-Driemeier from the Washington, D.C., office of Ropes & Gray LLP. The buyer-respondent’s counsel is G. Eric Brunstad, Jr., from the Hartford, Conn., office of Dechert LLP.

Previously, the Court granted certiorari in Bartenwerfer v. Buckley, 21-908 (Sup. Ct.), to resolve a split of circuits and decide whether a debtor is saddled with a nondischargeable debt for a false representation or actual fraud under Section 523(a)(2)(A) based entirely on the fraud of a partner or agent.

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President Biden Signed Into Law the Bill Raising the Debt Limit for Subchapter V of Chapter 11 and Chapter 13

On 6/21/22, President Biden signed into law the bill raising the debt limit for Subchapter V of Chapter 11 back to 7.5 million dollars, permanently, and raising the debt limit for ch13 to $2.75 million (total 2.75 million secured and unsecured debt, together). This is a beneficial and necessary change, including because the 2.75 million debt limit for Subchapter V of Chapter 11 was too low, and the debt limit for Chapter 13 (the individual wage earner repayment plan chapter of bankruptcy) was also too low, including because of high inflation.

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Bartenwerfer v. Buckley, 2022 U.S. LEXIS 2331 (May 2, 2022)

Bartenwerfer v. Buckley, 2022 U.S. LEXIS 2331 (May 2, 2022): On May 2, 2022, the US Supreme Court granted a petition for certiorari, to hear a nondischargeability case. Certiorari was presumably granted, by the US Supreme Court, so that the US Supreme Court can resolve the split between the Ninth Circuit and the Eight Circuit as to whether fraudulent intent may be imputed to a debtor for the purpose of section 523(a)(2)(A) based on a partnership relationship, but without proof that the debtor knew or should have known of the fraud or false representation.

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In Older Americans, Rising Debt May Adversely Affect Health

The New York Times Newspaper reported on 6/5/22, updated 6/6/22, that research shows that debt has risen among older people, and those who owe are more likely to have multiple diagnosed illnesses.

Denise Revel had a history of developing blood clots, so in 2011, when her leg grew painfully swollen and hot to the touch, she knew what to do. She headed for the emergency room.

She recovered from the clot but could not pay the medical bill. Working as a fitness instructor, she had no health insurance. “I’ve always been financially challenged,” said Ms. Revel, 62, who lives with her daughter in Stockbridge, Ga. “I was a single parent raising two children.”

Four years later, when she was working as a part-time cargo agent for Delta Air Lines, a workplace accident severely injured her leg, leading to extended hospitalization and rehab. Workers’ compensation picked up most, but not all, of the medical costs. In addition to her still-unpaid E.R. bill from years before, she acquired thousands in additional medical debt.

With some older people finding themselves unable to dig out from debt, such dilemmas threaten any notion of a comfortable retirement and have generated alarm among economists and other researchers.

“It’s like a dark cloud over your head,” Ms. Revel said. “You get people calling you, being demanding; some can be very rude. You don’t even want to answer your phone.” She worried constantly about her debts, including monthly installments on her 2014 Toyota Camry, and about being unable to access medical care if she needed it.

Now, researchers at the Urban Institute, by analyzing broad national data over nearly 20 years, have reported that indebted older adults fare measurably worse on a range of health measures: fair or poor self-rated health, depression, inability to work, impaired ability to handle everyday activities like bathing and dressing.

Those in debt were also more likely to ever have had two or more doctor-diagnosed illnesses like hypertension, diabetes, cancer, heart and lung disease, heart attacks and strokes.

“There seems a clear causal link between certain types of debts, especially at higher amounts, and negative health outcomes, both physical and mental,” said Stipica Mudrazija, a senior research associate at the institute.

“Debt is not a bad thing in and of itself,” he said. “If it’s used cautiously, it can build up wealth over time.”

Older adults typically carry less debt than younger ones because people tend to shed debt as they approach and enter retirement. But in recent decades, each cohort of seniors has been more indebted than the previous one.

“There’s a group of older people in financial distress,” said Annamaria Lusardi, an economist at the George Washington University. “They’re highly leveraged; they’re carrying high-cost debt. They’re being contacted by debt collectors. They’re not going to enjoy their golden years.”

Dr. Mudrazija and his co-author, Barbara Butrica, a senior fellow at the institute, used data from the national Health and Retirement Study and calculated that in 1998, about 43 percent of Americans over age 55 had debt, a median of $40,145. By 2016, about 57 percent had debt and more of it: a median $62,784, adjusted for inflation.

The proportion whose debt represented 30 percent of their total assets had risen to almost 45 percent, and the proportion whose debt-to-asset ratio had reached a worrisome 80 percent nearly doubled, to 15 percent.

Although seniors with any debt were more likely to encounter health problems, the kind of debt mattered, according to the study, which was published by the Boston College Center for Retirement Research.

Secured debt, like mortgages and other home loans, is backed by an asset: the dwelling. Such debt rose among older borrowers as real estate prices soared and interest rates remained low. “It’s increasingly less the norm for people to pay off their mortgages before they retire, the traditional model,” Dr. Mudrazija said.

But secured debt appeared less detrimental to health than unsecured debt like credit card balances, student loans and overdue medical payments, which usually charge higher interest rates. About 24 percent of older adults’ debt was unsecured in 1998; by 2016, the proportion had climbed to 35 percent.

Dr. Mudrazija and Dr. Butrica found, for example, that limitations in a person’s ability to perform activities of daily living was only slightly higher for people carrying secured debt than those without debt; the difference did not reach statistical significance. But those with unsecured debt were 28 percent more likely to need help with such activities.

Moreover, as the level of unsecured debt rose, their risks climbed steeply. If what they owed amounted to 30 percent of their assets, they were 65 percent more likely to have trouble with daily activities compared with those with no debt and almost twice as likely if they owed 80 percent of their assets. Other health problems showed similar associations with unsecured debt.

Why would unsecured debt have such impact? The mechanism through which debt affects health remains unclear, Dr. Mudrazija said. He added that the relationship can also work in the other direction: People with poorer health might need to borrow more, especially as increases in health care costs have outpaced inflation.

But “secured debt is a planned debt,” he said. “I decide I’m going to buy a house. It’s an investment, and often a well thought-out decision.”

“Unsecured debt often comes as a surprise,” he added. “You lose a job and have to live off a credit card. You get sick and face a huge hospital bill. The shock and stress might translate to deteriorating health.”

In a 2020 study, also using Health and Retirement Study data, Dr. Lusardi and her co-authors found that even in a relatively high-income group of 51- to 61-year-olds, whose average household income was $103,000, almost one-quarter reported being contacted by bill collectors. “I was frankly shocked,” Dr. Lusardi said. “People close to retirement should be at the peak of their wealth accumulation.”

The pressures are stronger still on older people with less income and education, and on women and nonwhite people.

In a study using credit bureau data, Dr. Mudrazija and Dr. Butrica documented the disparity. “In ZIP codes where people are better off, older people carry mortgages, but they pay them off,” Dr. Mudrazija said. “Where people are poorer, they seem to carry debt indefinitely.” They are also more vulnerable to predatory payday lending.

What could help seniors avoid these credit traps, apart from higher incomes and more comprehensive health insurance? (In 2020, one-fifth of Medicare beneficiaries over 65 paid $2,000 or more out of pocket, beyond the premiums themselves, according to a study by The Commonwealth Fund.)

Dr. Lusardi advocates financial literacy training in workplaces, where employers are more apt to emphasize retirement savings than debt management. Some borrowers don’t grasp fundamentals such as the way interest compounds, she said.

“We have made it very easy to borrow,” she said. “We also need to help people make good decisions.”

But regulating credit, providing clearer consumer information and reining in predatory lending practices could also reduce high levels of unsecured debt, Dr. Mudrazija said.

Last fall, Ms. Revel got a call out of the blue. The nonprofit RIP Medical Debt, which uses donated dollars to buy bundled medical debt, had acquired her long-outstanding emergency room debt of $2,728.50 and erased it. “I was so grateful,” she said.

Unable to work, relying on disability payments, Ms. Revel is now insured by Medicare and Medicaid, shielding her from most future medical debt. She is down to the last three months of car payments and “I’m counting the days.”

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$5.8 Billion in Loans Will Be Forgiven for Corinthian Colleges Students

In its largest student loan forgiveness action ever, the Education Department said on Wednesday, 6/1/22, that it will wipe out $5.8 billion owed by 560,000 borrowers who attended Corinthian Colleges, one of the nation’s biggest for-profit college chains before Corinthian College collapsed in 2015, the New York Times reported.

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In re Royal Street Bistro, LLC,     F. 4th    ., 2022 WL 499938 (5th Cir.Court of Appeals 2/16/22).

In a published order denying a petition for writ of mandamus to compel a district court to grant a stay pending appeal of a bankruptcy sale order, the Fifth Circuit Court of Appeals ruled that a chapter 11 trustee could sell real property free and clear of leasehold interests which were junior to the rights of a mortgagee which could have foreclosed out those interests in a state court proceeding, but for the bankruptcy. In doing so, the Court rejected alternative arguments relied upon by the bankruptcy court and the district court.

Debtor Royal Street Bistro filed a Chapter 11 bankruptcy case to, among other things, resolve a dispute with its mortgagee AMAG and prevent a foreclosure on Bourbon Street property (the “Property”.). The appointed chapter 11 Trustee sought to settle the AMAG claim and to sell the Property free and clear of interests under Bankruptcy Code § 363(f)(1). Two lessees of the property, who were insiders of the debtor company, objected to the sale free and clear of their interests, asserting their rights to remain in possession were protected by Code § 365(h)(1)(A)(ii). The Bankruptcy Court rejected that argument for several reasons, the first of which was based on a textual analysis of the two pertinent statutory subsections. The District Court affirmed, using similar reasoning. When the lessees appealed that order to the Court, they sought a stay of the sale pending appeal from the District Court. The denial of that stay resulted in the writ of mandamus to the Court, which was denied in this ruling.

The Debtor filed a voluntary Chapter 11 petition on November 1, 2021, identifying itself as a small business debtor and electing to proceed under Subchapter V. The reported opinion addresses two motions: first, the motion of the Debtor seeking to extend the time to file its Subchapter V plan of reorganization (the “Extension Motion”) by 90 days. The second is the motion of Security Benefit for a determination that the automatic stay does not apply to litigation it wanted to file or in the alternative, for relief from the automatic stay to pursue such litigation. This report addresses only the Extension Motion that the Court granted.

The Court did not need to look past the first reason the lower courts had given to overrule the lessees’ objections. It looked at the wording of § 365(f), which provides the means to sell free and clear: “The trustee may sell property…free and clear of any interest in such property of an entity other than the estate, only if – (1) applicable nonbankruptcy law permits sale of such property free and clear of such interest.” It found that since under the applicable nonbankruptcy (state) law, with no bankruptcy case pending, AMAG would have been entitled to foreclose and wipe out the junior interests of the lessees, the statute allowed the Trustee to sell free and clear of those interests. The objectors had no valid defense.

The Court then turned to the argument raised under § 365(h)(1)(a)(ii), which can preserve a tenant’s right to remain in possession through its lease term if the debtor is the lessor and rejects the lease under § 365. However, this protection is also limited by the words in the subsection which apply when the lease is rejected: “(ii)…. the lessee may retain its rights under such lease…for the balance of the term…to the extent that such rights are enforceable under applicable nonbankruptcy law.” Again, the Court reasoned that since AMAG could foreclose out those junior interests (and the leases did not contain nondisturbance clauses that would have protected the lessees upon such foreclosure), their rights to remain in possession were not enforceable under applicable nonbankruptcy law. For these two straightforward reasons, the order for sale would stand and no stay pending appeal should issue.

The Court was not quite done, however. Both lower courts had also relied on a Seventh Circuit decision, Precision Indus., Inc. v. Qualitech Steel SBQ, LLC, 327 F. 3d 537 (7th Cir. 2003), a reliance the Court found was misplaced. The Court found that Qualitech had posed an “excessively broad proposition that sale free and clear under Section 363 override[s], and essentially render[s] nugatory, the critical lessee protections against a debtor-lessor under Section 365(h).” It noted that Qualitech, which had been followed by the Ninth Circuit in In re Spanish Peaks Holdings II, LLC, 872 F. 3d 892, 899-900 (9th Cir. 2017),had been widely criticized for “the potential of profoundly impact[ing] the bankruptcy world.” The Court specifically did not endorse the Qualitech approach in the Fifth Circuit, particularly because this case could be simply resolved by its textual analysis.

If adopted by the Ninth Circuit, this case would overrule the 9th Circuit BAP’s Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC),391 B.R. 25 (9th Cir. BAP 2008), a much-criticized case which held that a trustee could not rely on §363(f)(5) to sell free and clear of junior interests, a practice which had been widely adopted in that circuit. Using § 363(f)(1) would solve that problem. Second, it stifles the impact of Qualitech, particularly if applied to facts similar to these. Both impacts should be welcomed by trustees and debtors in possession. Expect to see the arguments made in this case asserted frequently for sales free and clear of junior interests in the future.

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Spark Factor Design Inc. v. Hjelmeset (In re Open Medicine Institute Inc.)

Spark Factor Design Inc. v. Hjelmeset (In re Open Medicine Institute Inc.),    BR    (B.A.P. 9th Cir. May 26, 2022), appeal no. 21-1233: Ninth Circuit BAP decision holds that a bankruptcy court does NOT always have to evaluate a settlement/proposed compromise as an 11 USC 363 sale, and NOT to require overbidding opportunity.

If there are mutual claims, the Ninth Circuit BAP gives the court discretion not to evaluate a settlement as a sale.

When considering approval of a compromise and settlement that includes a sale of estate property, the bankruptcy court sometimes has discretion not to evaluate the transaction as a sale under Section 363 and likewise has discretion not to allow overbids, according to the Ninth Circuit Bankruptcy Appellate Panel.

Concurring, Bankruptcy Judge Gary Spraker believes that a Section 363 analysis is required, but he concurred because he saw the bankruptcy court as having properly evaluated the settlement as a sale.

The facts were complex. Basically, the former part owner and former chief executive of a company was in his own chapter 11 case. The company was in chapter 7 with a trustee. The company and the former owner had highly disputed litigation claims against one another.

The trustee for the company and the former owner, the chapter 11 debtor, negotiated a settlement. For $200,000, an entity controlled by the former owner would buy the chapter 7 trustee’s claims against the majority owners of the chapter 7 debtor company. Were the litigation successful, the buyer would turn over 55% of the recovery to the chapter 7 trustee.

The settlement called for the chapter 7 trustee to release the estate’s claims against the former owner, but the former owner would subordinate his claims to all claims of the company’s non-insider creditors.

The majority owners of the chapter 7 debtor objected to the settlement and made a competing offer to buy the claims against themselves.

In both the chapter 7 case and the chapter 11 case, the bankruptcy court approved the settlement without permitting an overbid by the majority owners. The majority owners appealed to the BAP.

The BAP’s Majority Opinion

Writing on May 26 for himself and Bankruptcy Judge Julia W. Brand, Bankruptcy Judge Robert J. Faris based his decision largely on the BAP’s previous opinion in Goodwin v. Mickey Thompson Ent. Grp. (In re Mickey Thompson Ent. Grp.), 292 B.R. 415 (B.A.P. 9th Cir. 2003). He described Mickey Thompson as holding that, “in some circumstances, a settlement agreement transferring estate assets must be evaluated both as a compromise under Rule 9019 and a sale under § 363.” Id. at 421.

In a later case, Judge Faris said that the Ninth Circuit “agreed with” Mickey Thompson and held that the bankruptcy court “has the discretion to apply Section 363 procedures to a sale of claims pursuant to a settlement approved under Rule 9109.” Adeli v. Barclay (In re Berkeley Delaware Court, LLC), 834 F.3d 1036, 1040 (9th Cir. 2016).

Crucially, Judge Faris observed that the BAP in Mickey Thompson “applied the § 363 sale analysis to a settlement of litigation claims because the claims ran in only one direction.”

“Unlike in Mickie Thompson,” Judge Faris said that the case on appeal had claims by the trustee against the former owner and claims by the former owner against the estate represented by the trustee. “Because this settlement resolved mutual claims,” he held that “it was not a one-way sale requiring scrutiny under § 363.”

“In other words,” Judge Faris said, “Mickey Thompson’s requirement that the bankruptcy court examine a compromise as a sale or conduct an auction is inapplicable to this case.”

With regard to issues related to the majority owners’ competing bid, Judge Faris described how the bankruptcy court considered and rejected it, finding that it was inferior to the proposed settlement. “This fulfilled the purpose of the Mickey Thompson rule,” he said.

Having held that the bankruptcy court properly exercised discretion to approve the settlement without applying Section 363 and without permitting an overbid, Judge Faris proceeded to evaluate the bankruptcy court’s decision to approve the settlement under Rule 9019. Among other things, he said that the court was not bound “to defer to the wishes of objecting creditors simply because they held the majority of the claims in the two bankruptcy cases.”

In deciding whether the settlement was in the creditors’ best interests, he concluded that the decision not to permit overbids was not error, because the bankruptcy court had compared the two proposals. “It does not make sense,” Judge Faris said, “to require an auction where bids cannot be readily compared.”

Finding no error in approval of the settlement, Judge Faris affirmed.

The Concurrence

Judge Spraker agreed with the Rule 9019 analysis and with the result. However, he believed that the court was required to analyze the settlement as a sale under Section 363.

Even in cases with mutual claims, Judge Spraker believes that the court is obliged to analyze a settlement as a sale under Section 363.

Judge Spraker reached the same result because he concluded that the bankruptcy court had properly considered the settlement as a sale and had properly exercised discretion in not allowing overbids.

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Bartenwerfer v. Buckley

Bartenwerfer v. Buckley, 21-908 (US Supreme Court 5/4/22.): The United States Supreme Court on 5/4/22 granted a Petition for Certiorari, to hear and rule, in Bartenwerfer v. Buckley, on whether or not a Principal’s liability, for the fraud committed by the principal’s agent, makes the debt from that fraud NONdischargeable as to the Principal, if the Principal files bankruptcy. One assumes that principals often? Always? Claim they were not aware that their Agent was committing a fraud.

The US Circuit Courts are split on whether an innocent debtor’s liability is automatically nondischargeable when an agent or partner committed fraud.

The Supreme Court granted certiorari this week to resolve a split of circuits and decide whether a debtor is saddled with a nondischargeable debt for a false representation or actual fraud under Section 523(a)(2)(A) based entirely on the fraud of a partner or agent. In other words, does the imputation of liability for fraud also result automatically in nondischargeability, or must the debtor have some degree of scienter?

The decision in Bartenwerfer v. Buckley, 21-908 (Sup. Ct.), likely to be argued this fall, will say whether the debtor must have known or should have known about the agent’s fraud before the debt is considered nondischargeable.

The circuits are split as follows: (1) The Second, Fourth, Seventh and Eighth Circuits hold that the debtor must have some degree of scienter before an imputed liability for fraud becomes nondischargeable, while (2) the Fifth, Sixth, Ninth and Eleventh Circuits hold that a debt is nondischargeable as to an entirely innocent debtor based on the fraud of a partner or agent.

The ‘Innocent’ Wife

A couple owned a home. They moved out to renovate and then sell the home. The husband oversaw the renovations. The wife had little to do with the renovations. After renovation, they sold the home.

The buyers sued in state court, alleging fraud in the disclosure statement for failure to disclose known defects in the home. A jury found the couple liable, resulting in a judgment against them for about $540,000, plus interest.

The couple filed a chapter 7 petition, and the bankruptcy court ruled that the debt was nondischargeable as to the husband.

Bankruptcy Judge Hannah L. Blumenstiel discharged the debt as to the wife, finding that she neither knew nor should have known that the disclosures were fraudulent. See Buckley v. Bartenwerfer (In re Bartenwerfer), 596 B.R. 675 (Bankr. N.D. Cal. 2019). The Ninth Circuit Bankruptcy Appellate Panel affirmed in a nonprecedential opinion. See Bartenwerfer v. Buckley (In re Bartenwerfer), 16-1277, 2017 BL 461730, 2017 Bankr. Lexis 4396, 2017 WL 6553392 (B.A.P. 9th Cir. Dec. 22, 2017).

The Ninth Circuit reversed in a nonprecedential opinion and directed the bankruptcy judge to enter judgment in favor of the creditor, declaring the debt to be nondischargeable. Raising the circuit split, the debtor-wife filed a petition for certiorari in December. The Supreme Court granted the petition on May 2.

The Supreme Court’s order granting review did not describe the issue on appeal. The debtor’s petition stated the question presented as follows:

May an individual be subject to liability for the fraud of another that is barred from discharge in bankruptcy under 11 U.S.C. § 523(a)(2)(A), by imputation, without any act, omission, intent or knowledge of her own?

The (Outdated?) Supreme Court Precedent

The root of the circuit split is found in what the debtor calls a misinterpretation of an 1885 decision by the Supreme Court under the Bankruptcy Act of 1867, Strang v. Bradner, 114 U.S. 555 (1885). There, the Court was primarily concerned with whether a partner in a law firm was entitled to a discharge. The Court said the debt was not discharged, because the partner had himself committed fraud.

According to the debtor, the Court in 1885 “simply assumed — without authority or analysis — that the liability [of other partners] was nondischargeable.”

The debtor went on to say,
[T]he Court did not actually consider the particular issue, perhaps because it was not raised on appeal, the parties having elected to focus their arguments on the underlying liability for fraud, which occupies most of the opinion.

In other words, the debtor is arguing that the Court’s pronouncement in 1885 about per se nondischargeability of one partner for another’s fraud is dicta.

The Circuits’ Opposing Camps

The circuits these days that find no per se liability are led by the Eighth Circuit in Walker v. Citizens State Bank (In re Walker), 726 F.2d 452 (8th Cir. 1984). The St. Louis-based appeals court held that actual participation in the fraud is not required for the debt to be nondischargeable. However, the circuit said that the debt is nondischargeable if “the principal either knew or should have known of the agent’s fraud.” Id. at 454.

On the other side of the fence, Deodati v. M.M. Winkler & Assocs. (In re M.M. Winkler & Assocs.), 239 F.3d. 746 (5th Cir. 2001), is the leading authority for a principal’s strict liability. Writing for the Fifth Circuit, Circuit Judge Edith H. Jones held “that § 523(a)(2)(A) prevents an innocent debtor from discharging liability for the fraud of his partners, regardless of whether he receives a monetary benefit.” Id. at 751.


Absent lengthy extensions, the briefs should be filed by summer, allowing for argument in the fall. As the debtor said in her certiorari petition, did the Ninth Circuit commit error when it “impose[d] nondischargeability upon an innocent debtor for the fraud of another without any act, omission, intent or knowledge of the debtor’s own”?

It’s a classic question that asks whether scienter is an implicit requirement before a debt is excepted from discharge under Section 523(a)(2)(A).

The face of the statute itself may or may not answer the question. The subsection renders a debt nondischargeable if it was obtained by “false pretenses, a false representation, or actual fraud.”

The subsection does not say whether the debtor must have made the false representation or committed the fraud. Still, the statute could be read to mean that any liability for fraud or misrepresentation is nondischargeable, regardless of who committed the fraud.

The drafters of the Code did not explicitly overrule Strang, of which they surely were aware. Being vague on the issue now in the Supreme Court, did they mean for the courts to decide whether the debtor must be guilty of fraud?

We will have the answer about one year from now.

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9th and 4th Circuit Both Hold: Old Bankruptcies Aren’t Grounds for Removal to Federal Court

This month, two circuits found no ‘related to’ bankruptcy jurisdiction for climate-change lawsuits against energy companies, and therefore held those climate change suits could NOT properly be removed to Bankruptcy Court.

On 4/19/22 the Ninth Circuit Court of Appeals held, in County of San Mateo v. Chevron Corp.,    F.4th    (9th Cir. April 19, 2022), appeal No. 18-15499, that a climate change suit was not properly removed from nonbky court to bankruptcy court.

That was the second time in 12 days, a circuit court has held that a chapter 11 plan confirmed by an energy company doesn’t permit multinational oil companies to remove a climate-change lawsuit to federal court, because the confirmed chapter 11 plan did not bear a “close nexus” to a climate-change lawsuit and thereby justify removal from state court to federal district court.

On 4/7/22, in Mayor and City Council of Baltimore v. BP P.L.C.,    F4th   , (4th Cir. April 7, 2022), appeal 19-1644 the Ninth Circuit ruled on April 19 that.

The facts and the procedural posture in the Fourth and Ninth Circuits were similar. In 2017, six California cities and counties sued dozens of oil and gas companies in California state court, asserting only state-law claims. The plaintiffs alleged that the energy companies wrongfully promoted fossil fuels and concealed their known hazards. The plaintiffs are seeking damages for the costs to be thrust on municipalities as a result of climate warming and rising sea levels.

The energy companies removed the suit to federal court, asserting there was federal jurisdiction on six grounds, including federal question, federal enclave, federal officer removal and bankruptcy jurisdiction. The district court rejected all assertions of federal subject matter jurisdiction. The district court stayed its remand order pending appeal to the Ninth Circuit.

In 2020, the Ninth Circuit affirmed the district court’s ruling regarding federal officer removal. The appeals court dismissed the remainder of the appeal for lack of appellate jurisdiction.

Meanwhile, the energy companies had appealed Baltimore to the Supreme Court, where the high court reversed and held that 28 U.S.C. § 1447(d) permitted appellate review of all of the defendants’ asserted grounds for removal. In the California case, the Supreme Court reversed and remanded for consideration in light of Baltimore.

So, the question of remand was back in the Ninth Circuit’s lap to consider whether remand was proper despite all of the defendants’ theories about federal jurisdiction.

In her April 19 opinion, Circuit Judge Sandra S. Ikuta affirmed the district court’s remand. Because our readers are (mostly) bankruptcy nerds, we will only discuss her opinion regarding the bankruptcy removal statute, 28 U.S.C. § 1452(a). It allows a party to remove any claim or cause of action in a civil action other than . . . a civil action brought by a governmental unit’s police or regulatory power, to the district court where such civil action is pending, if such district court has jurisdiction of such claim or cause of action under section 1334 of this title.

In turn, Section 1334(b) confers federal jurisdiction over civil proceedings arising under title 11 or arising in or related to a case under title 11.

The energy companies based removal on the chapter 11 plan of Texaco Inc., which was confirmed in 1988, and the plan confirmed in 2017 by Peabody Energy Corp., a coal company.

In deciding whether a lawsuit is “related to” a bankruptcy, Judge Ikuta said that the Ninth Circuit has “differentiated between bankruptcy cases that are pending before a plan has been confirmed and bankruptcy cases where the plan has been confirmed and the debtor discharged from bankruptcy.”

Consequently, Judge Ikuta said, “the same term ‘related to’ has a more limited meaning after a plan has been confirmed.” When a lawsuit arises after confirmation, she said, there is “related to” bankruptcy jurisdiction “only if there is ‘a close nexus to the bankruptcy plan or proceeding.’” In turn, Judge Ikuta said there is a close nexus if the new case involves the interpretation, implementation, consummation, execution or administration of the confirmed plan.

The energy companies argued there was a close nexus to the Peabody bankruptcy because the confirmed plan would have discharged the California municipalities’ claims. In fact, by the time the district had ruled on the remand motion, the Peabody bankruptcy court had directed the plaintiffs to dismiss the suit against Peabody.

Where “the district court’s review of a plan involves merely the application of the plan’s plain or undisputed language, and does not require any resolution of disputes over the meaning of the plan’s terms,” Judge Ikuta said that “the review does not ‘depend upon resolution of a substantial question of bankruptcy law.’”

Judge Ikuta said that the energy defendants did not contend that the district court would be interpreting “disputed language” in the Peabody plan. “Accordingly,” she said, “the complaints before the district court were not ‘related to’ Peabody Energy’s bankruptcy case for purposes of § 1334(b), and the district court did not have removal jurisdiction over the complaints under § 1452 on that basis.”

The energy’s company reliance on the Texaco bankruptcy met the same fate. The energy companies did not argue that the district court would be interpreting “disputed language” in the Texaco plan, Judge Ikuta said.

“Moreover,” Judge Ikuta said, Texaco’s relationship to the California lawsuit was “attenuated” because Texaco was not named as a defendant. The district court, she said, would not “look at” the Texaco plan unless Texaco was held to be “a proper defendant” and the court decided that the municipalities’ claims arose before Texaco’s confirmation in 1988.

Seeing no “close nexus” to the Texaco plan, Judge Ikuta saw no bankruptcy removal jurisdiction under Section 1452.

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Bechkart v. Newrez LLC,    F.4th    (US 4th Circuit Court of Appeals, 4/15/22 decision) appeal 21-1838

Bechkart v. Newrez LLC,    F.4th    (US 4th Circuit Court of Appeals, 4/15/22 decision) appeal 21-1838: Decision holds that reliance on advice of counsel is not a complete defense (but is relevant to defense of creditor), when a bankruptcy debtor moves to have creditor held in civil contempt, for allegedly violating the debtor’s bankruptcy discharge, and that. Taggart US Supreme Court case applies to all contempt motions citations in bankruptcy court.

However, the Richmond, Va.-based appeals court held that advice of counsel is not a complete defense to civil contempt in bankruptcy court.

A couple filed a chapter 11 petition after falling $23,000 behind on their mortgage. The bankruptcy court confirmed the plan without modifying the plan to specify how future mortgage payments would be applied to principal, interest and arrears.

The plan and confirmation order were vague in other respects. The papers (1) did not state how much the debtors would owe on confirmation; (2) did not say how the $23,000 in arrears would be paid, if at all; (3) set the first day for payment but did not say how much the payment would be; and (4) said that the original loan terms would remain in effect, except as modified.

The servicer did not appeal confirmation.

The debtors made monthly payments. For five years after confirmation, the lender treated the loan as being in default. After the debtors objected and claimed that their mortgage should be treated as current, the servicer conferred with counsel a dozen times. Counsel told the servicer that the loan was correctly listed as being in default.

The servicer eventually listed the property for foreclosure. After further complaints from the debtors, the servicer withdrew the foreclosure and treated the loan as being current.

The debtors then brought proceedings in bankruptcy court to impose civil contempt sanctions. Ultimately, the bankruptcy court imposed monetary sanctions of almost $115,000, including lost wages, attorneys’ fees and “loss of fresh start.”

The servicer appealed and won a reversal in district court last July. See Newrez LLC v. Beckhart, 20-192, 2021 BL 294572, 2021 US Dist Lexis 146230, 2021 WL 3361707 (E.D.N.C. July 2, 2021).

The district court evaluated the servicer’s contempt liability by the standard in Taggart v. Lorenzen, 139 S. Ct. 1795 (2019), where the Supreme Court held that there can be no sanctions for civil contempt of a discharge injunction if there was an “objectively reasonable basis for concluding that the creditor’s conduct might be lawful under the discharge order.” Id. at 1801.

The district judge went on to say that he was “not convinced . . . that the discharge order . . . in Taggart is different from the confirmation order at issue here.” Applying Taggart, the district judge decided that the servicer had acted in good faith and “adopted a reading that seemed consistent with the contractual terms of the loan and was objectively reasonable.”

The district judge reversed and remanded for further proceedings because “the bankruptcy court’s contempt order falls far short of the standard required for a finding of civil contempt.” The district court also noted that the servicer had acted several times on advice of counsel.

The debtors appealed to the circuit.

Taggart Applies

The debtors argued in the circuit that Taggart only applies to alleged discharge violations. Circuit Judge Toby J. Heytens rejected this contention in his April 15 opinion. He said that “Taggart applies broadly and cannot be confined to Chapter 7 bankruptcy in the way the [debtors] seek.”

Judge Heytens said, Nothing about the Supreme Court’s analysis in Taggart suggests it is limited to violations of Chapter 7 discharge orders — which liquidate a debtor’s assets and then discharge the debt — or that the Court’s decision turned on considerations unique to the Chapter 7 context.

Judge Heytens held “that the standard articulated by the Supreme Court in Taggart governs civil contempt under Chapter 11 of the Bankruptcy Code as well.” Although chapter 11 may differ from chapter 7, he said that “a bankruptcy court’s authority to enforce its own orders — regardless of which chapter of the Bankruptcy Code those orders were issued under — derives from the same statutes and the same general principles the Supreme Court relied on in Taggart.” But Judge Heytens was not prepared to affirm. He found fault with one important aspect of the district court’s opinion: He said that “the district court erred in appearing to grant controlling weight to the fact that [the servicer] had requested and received legal advice from outside counsel.”

Judge Heytens cited the Fourth Circuit for holding before Taggart that advice of counsel is not a defense in civil contempt. Consequently, he held that “the district court erred when concluding that [the servicer’s] reliance on the advice of outside counsel was seemingly dispositive as a defense to civil contempt.”

Although advice of counsel is not a complete defense, Judge Heytens added in a footnote that it “may still be considered in appropriate circumstances as a relevant factor under the Taggart standard.” More particularly, he said that “a party’s reliance on guidance from outside counsel may be instructive, at least in part, when determining whether that party’s belief that she was complying with the order was objectively unreasonable.”

Having found error in the decisions by both the bankruptcy and district courts, Judge Heytens reversed and remanded to the bankruptcy court “as the court of first instance and the tribunal closest to the facts.” He gave instructions to “reconsider the contempt motion under the correct legal standard, including any additional factfinding that may be necessary.”

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Biden Aims to Expand Access to Student-Loan Debt Forgiveness for Millions of People

The Biden administration said it plans to make it easier for lower-income student-loan borrowers to get debt forgiveness through an existing program that has enrolled millions of people, but provided few with relief, the Wall Street Journal reported. The move, announced by the Education Department on Tuesday, is part of a politically sensitive debate on the forgiveness of student-loan debt and attempts to more broadly overhaul how the student-loan repayment system works. President Biden earlier this month extended to Aug. 31 a pandemic-related pause on payments of federal student loans and faces pressure from progressive members of his own party to forgive debt on a larger scale. The changes would apply to an income-based program for repaying student loans, allowing around 3.6 million people — nearly 10% of all student-loan borrowers — to receive at least three years of credit toward eventual debt forgiveness. The program, referred to as income-driven repayment plans, permits borrowers to pay a certain percentage of their income on loans for 20 to 25 years and have the rest of their balances forgiven. Loan servicers play a key role in how borrowers navigate their repayment options. Borrowers and members of both parties in Congress have criticized the program as broken. A 2021 study of government data found that just 32 borrowers out of eight million enrolled in the program successfully had their debt forgiven after decades of payments. The program has existed since 1992. “Today, the Department of Education will begin to remedy years of administrative failures that effectively denied the promise of loan forgiveness to certain borrowers,” Education Secretary Miguel Cardona said in a statement. [as reported by Wall Street Journal on 4/2022]

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DC Solar owner Jeff Carpoff was sentenced to 30 years in federal prison in connection with defrauding investors

American Bankruptcy Institute (“ABI”) reports that In the fall of 2021, DC Solar owner Jeff Carpoff was sentenced to 30 years in federal prison in connection with defrauding investors (and taxpayers) out of over $2B through a Ponzi scheme involving favorable tax credits that incentivize investments in sustainable energy. The fraud, described by the Department of Justice as "the largest criminal fraud scheme in the history of the Eastern District of California" was uncovered shortly after a Christmas 2018 government raid on DC Solar's headquarters which caused the company to file a Chapter 11 bankruptcy case, in Bankruptcy Court, Eastern District of California, in early in 2019. The Bankruptcy Law Firm, PC reports: Moral of this story: If something sounds too good to be true, it very likely is too good to be true.

Censo LLC v. Newrez LLC (In re Censo LLC),    BR    21-1125 (B.A.P. 9th Cir. April 5, 2022): BAP Describes When a Nonbankruptcy Court’s Order or Judgment, entered AFTER bankruptcy is filed, Does, or Does Not, Violate the bankruptcy automatic Stay

If a proposed Order or proposed Judgment has been submitted to a non-bankruptcy court, but the non-bankruptcy court (such as California Superior Court, or a US District Court), has not yet signed and entered that Order or Judgment, by the date that the party the order or judgment will be against, when entered, files bankruptcy, is the non-bankruptcy court entering the Order or Judgment, after the party the Order or Judgment will be against, when entered, a violation of the bankruptcy automatic stay (11 USC §362(a)).

And is the entered Order or Judgment, entered AFTER the bankruptcy is filed, void as being entered in violation of the bankruptcy automatic stay?

“Maybe yes, maybe no.” That’s the answer from the Ninth Circuit Bankruptcy Appellate Panel in an opinion on April 5, 2022. Whether there is a stay violation depends on whether the creditor was on the offensive, or the defensive.

The owner of a condominium unit was behind in the payment of assessments by the homeowners’ association. The unit was subject to a mortgage. The purchaser of the unit at the HOA’s foreclosure sale was the entity to become the chapter 11 debtor later.

After foreclosure, the foreclosed homeowner sued the purchaser in federal district court, along with the HOA, the mortgagee and everyone else in sight. The homeowner sought a declaration that the foreclosure was invalid in view of alleged defects in the mortgage. The purchaser filed an answer, counterclaims and crossclaims, contending that the HOA’s foreclosure had extinguished the mortgage.

The mortgagee filed a motion for summary judgment, seeking a declaration that the purchaser bought the unit at foreclosure subject to the mortgage. The motion was sub judice in district court when the purchaser filed a chapter 11 petition.

After bankruptcy, the district court ruled on the summary judgment motion and held that the now-bankrupt purchaser bought the unit subject to the mortgage.

Back in bankruptcy court, the debtor-purchaser sued the mortgagee, contending that the mortgage was invalid because it did not contain a correct description of the property, among other defects.

The mortgagee filed a motion to dismiss. Bankruptcy Judge Michael K. Nakagawa granted the motion based on issue preclusion, previously known as collateral estoppel. The debtor appealed.

For the BAP, Bankruptcy Judge William J. Lafferty affirmed, first laying out the elements of claim preclusion.

Claim preclusion cuts off claims that were raised or could have been raised in the prior proceeding if (1) there is an identity of claims; (2) there was a final judgment on the merits; and (3) there was identity or privity between the parties.

On appeal in the BAP, the debtor only argued there was no final order on the merits because the order of the district court was in continuation of an action against the debtor and thus invalid as a violation of the automatic stay.

Judge Lafferty analyzed each of the subsections in Section 362(a), beginning with subsection (a)(1). He said that it “applies only to actions against the debtor.” [Emphasis in original.]

Judge Lafferty summarized the distinction between defensive and offensive claims by a creditor, saying, The cases holding that a creditor’s defense of claims brought by a debtor do not violate the automatic stay typically involve facially defensive actions such as moving for summary judgment of dismissal of a complaint filed by a debtor. On the other hand, the commencement or continuation of a creditor’s counterclaim for affirmative relief will generally be construed as a stay violation. [Citation omitted.]

Judge Lafferty therefore analyzed whether the action was against the debtor at its inception. He said that the debtor began the fight by aiming to invalidate the mortgage. “Under any common sense interpretation,” the mortgagee’s counterclaims and summary judgment motion were defenses to the debtor’s claims, he said.

In other words, “all [the mortgagee] was doing was defending its lien against [the debtor’s] attack,” Judge Lafferty said. Therefore, the order by the district court did not violate Section 362(a)(1), even though it disposed of the mortgagee’s counterclaims against the debtor.

Next, Judge Lafferty looked at Section 362(a)(3), which precludes taking possession of property of the estate. In that respect, he cited the Supreme Court for the proposition that “[a]cts that simply maintain the status quo do not violate the automatic stay.” City of Chicago v. Fulton, 141 S. Ct. 585, 590 (2021). To read ABI’s report on Fulton, click here.

Judge Lafferty noted that the mortgage existed on the filing date and that the order of the district court “simply affirmed the validity of the existing lien. It did not affect [the debtor’s] possession or control of the Property.” Not changing the status quo, the order did not violate Section 362(a)(3).

With regard to Sections 362(a)(4) and (a)(5), Judge Lafferty alluded to the teaching of Fulton that “not every post-petition act or omission that could conceivably affect property of the debtor or the estate is a stay violation.”

Judge Lafferty found no violation of Sections 362(a)(4) and (a)(5) because the order did not create, perfect or enforce a lien. Indeed, he said that the mortgagee had filed a motion in the bankruptcy case for a modification of the stay to permit enforcement of the lien after the district court had upheld the validity of the mortgage.

The BAP upheld the bankruptcy court’s dismissal of the debtor’s complaint, because the district court’s order did not violate the automatic stay and supplied the elements of claim preclusion.


Judge Lafferty’s opinion should not be understood to mean that a plaintiff can sit tight if a matter is sub judice when the defendant files a bankruptcy petition.

A pair of recent decisions suggest that a creditor is obliged to inform the nonbankruptcy court about the defendant’s bankruptcy filing and attempt to stop the proceeding, if, for instance, the creditor’s pending motion seeks an attachment or transfer of property.

See Stuart v. City of Scottsdale (In re Stuart), 632 B.R. 531 (B.A.P. 9th Cir. Nov. 10, 2021); and Margavitch v. Southlake Holdings LLC (In re Margavitch), 20-00014, 2021 BL 383922, 2021 Bankr Lexis 2784, 2021 WL 4597760 (Bankr. M.D. Pa. Oct. 6, 2021).

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Manookian v. Burton (In re Cummings Manookian PLLC),     BR    (Bankruptcy Court, M.D. Tenn. March 7, 2022), bankruptcy case no. 21-00797.

Bankruptcy Court rules that ‘Reasonable Possibility’ of a Surplus gives a Chapter 7 bankruptcy Debtor Standing in Chapter 7 case, to object to something the Chapter 7 bankruptcy trustee wants the Bankruptcy Court to approve

Due process considerations mean it’s not harmless error if a debtor was denied standing improperly.

Everyone knows that chapter 7 debtors seldom have standing to object to a trustee’s initiatives in bankruptcy court because they can’t show that the outcome will affect the debtor. But how strong a showing must the debtor make about the likelihood of a surplus to establish standing to object?

That’s the subject of a March 7 opinion by Chief District Judge Waverly D. Crenshaw, Jr. of Nashville, Tenn.

The chapter 7 debtor was a law firm. The largest claim against the firm was a sanction of some $750,000 that had been entered in state court. While the bankruptcy was pending, the state appellate court set aside the sanction, finding that the trial judge had animus against the firm. The appellate court remanded the case for further proceedings before a different trial judge.

The chapter 7 trustee filed a motion to approve a settlement where the litigants seeking sanctions would have a claim for $250,000. The trustee justified the settlement by saying it would reduce the estate’s exposure and cut off the cost of ongoing litigation.

Here’s where it gets interesting. As special counsel to negotiate the settlement, the trustee had retained the lawyer who had been appointed in state court as the firm’s receiver on application of the litigants seeking sanctions.

A partner in the debtor firm objected to the settlement, contending that the trustee’s special counsel had a conflict of interest. The partner also alleged that the litigants seeking sanctions had offered to walk away with nothing after the sanction was set aside on appeal.

The bankruptcy court ruled that the partner did not have standing and approved the settlement. According to Judge Crenshaw, the bankruptcy court required the partner to produce concrete, tangible evidence showing a high likelihood of a surplus.

The partner appealed.

The trustee argued on appeal that another creditor had objected to the settlement. Although the partner was denied standing, the trustee contended that the bankruptcy court had considered the partner’s objection.

In the Sixth Circuit, Judge Crenshaw said, a party must be adversely affected pecuniarily to have standing. If the estate has a surplus for the debtor after distributions to creditors, the debtor will have standing.

How strong must the evidence be about a surplus?

According to Judge Crenshaw, there must be a reasonable possibility of a surplus, not a metaphysical possibility.

Although the bankruptcy court may have imposed too high a standard, the trustee argued that the error was harmless because the bankruptcy court had considered the partner’s objections, albeit through the objection of another creditor.

“Nevertheless,” Judge Crenshaw said, the denial of standing “may have affected [the partner’s] due process rights.”

Reversing the denial of standing and approval of the settlement, Judge Crenshaw said that the partner’s “due process deserves consideration applying the correct legal standard.” He remanded for the bankruptcy court to apply the “reasonable possibility standard” because the bankruptcy judge was “intimately familiar with the facts of this case.”

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Guevarra v. Whatley (In re Guevarra),     BR     (B.A.P. 9th Cir. March 25, 2022) BAP appeal Number 21-1141:

Guevarra v. Whatley (In re Guevarra),     BR     (B.A.P. 9th Cir. March 25, 2022) BAP appeal Number 21-1141: Ninth Circuit BAP (Bankruptcy Appellate Panel) holds Debtor Can’t Be Punished for Shifting Legal Theories, to amend exemptions claimed by debtor in debtor’s bankruptcy case, after Bankruptcy Judge rules debtor’s originally claimed exemptions

With regard to exemptions, a debtor can’t be punished for dramatically shifting legal theories regarding exemptions claimed, in response to an unfavorable decision by the bankruptcy court. That’s the teaching of a March 25 opinion for the Ninth Circuit Bankruptcy Appellate Panel by Bankruptcy Judge Gary A. Spraker.

The opinion also shows that state exemption law might provide equitable grounds for denying an objection claim, despite the Supreme Court’s ruling in Law v. Siegel, 571 U.S. 415 (2014), that equity cannot override a debtor’s exemption granted by a federal statute.

The opinion also seems to be an implicit warning that a trustee cannot claim surprise when the trustee was aware of the facts but hoped that the debtor was not smart enough to advance a winning legal theory.

The Home and the Resulting Trust

The chapter 7 debtor disclosed in his schedules that he had joint title to a home with a value of some $217,000. He also stated in the schedules that the value of his interest in the home was zero dollars and that it was encumbered by a mortgage.

In the schedules, the debtor said he had “co-signed” for his nephew and that he had “no interest in the property.” The debtor claimed no exemption in the property.

At the 341 meeting and in subsequent communications with the trustee, the debtor said that he took title with his nephew as joint tenants and co-signed the mortgage so his nephew could qualify for the loan. The debtor said that he had never lived in the home, only his nephew, and that the nephew had always paid the mortgage and operating expenses.

Unfortunately for the debtor, his counsel never explained the legal theory supporting the assertion that the debtor had no interest in the home until after the bankruptcy court had ruled against him and declared that the debtor’s half of the home was estate property.

Judge Spraker’s opinion suggests that the debtor had a perhaps winning argument under California law that the home was impressed with a resulting trust. In California, a transferee who does not pay the purchase price is presumed to hold the property in a resulting trust for the party who paid the consideration. If there is a resulting trust, the trust res is not estate property.

The Procedural Posture

The chapter 7 trustee filed a motion to sell the debtor’s half interest in the property. The debtor objected, saying he had no interest in the home. The bankruptcy court overruled the objection and approved the sale for $32,000, subject to existing liens. The agreement with the purchaser provided that if a court were to rule that the debtor had no interest in the property, the trustee would refund the purchase price.

The debtor did not appeal the sale-approval order.

Three months later, the debtor amended his schedules to claim a wildcard exemption in the $32,000. Judge Spraker said that the debtor amended his exemptions pro se because his lawyer had been suspended from practice. Later, the debtor’s new lawyer explained that the debtor had claimed no interest in the home based on California’s recognition of resulting trusts.

The bankruptcy court denied the wildcard exemption claim, saying that it was made for an improper purpose and not in good faith under California law.

In a previous opinion, the BAP reversed, holding that the wildcard exemption does not require an intent to use the exempt property for any particular purpose. The BAP remanded to consider the trustee’s equitable estoppel argument. In re Guevarra, 20-1165, 2021 WL 1179619 (B.A.P. 9th Cir. March 29, 2021).

On remand, the debtor laid out the resulting trust theory to justify the claim that the debtor had no interest in the property. The trustee invoked equitable estoppel to contend that the debtor should not be rewarded for lengthy inaction while the trustee was incurring expenses in administering the property. The trustee did not deny the underlying facts, Judge Spraker said.

After remand, the bankruptcy court denied the wildcard exemption, invoking equitable estoppel.

Reversed Again

The debtor appealed. If Law v. Siegel applied, the bankruptcy court could not have denied the exemption on equitable grounds, but the exemption claim was based on California law because the state has opted out of federal exemptions.

In California, exemptions are liberally construed in favor of the debtor, and debtors have a general right to amend their exemptions at any time before the case is closed. In California, though, equitable estoppel can be invoked if there was a misrepresentation made to someone who was not aware of the facts, among other factors for the court to consider.

Although there is not much law on the topic, the Ninth Circuit had said in a nonprecedential opinion that equitable estoppel can counter an exemption claim.

Applying the paucity of California law to the facts, Judge Spraker said it was “largely irrelevant” when the debtor first presented his “nuanced” resulting trust theory to the bankruptcy court. Equitable estoppel, he said, “focuses on representation(s) to the party allegedly prejudiced. [Citation omitted.] Here, the relevant party is the trustee, and the record is clear that [the debtor] early on informed the trustee, through his counsel, of the facts and law supporting the resulting trust argument.”

The significant facts, Judge Spraker said, “were disclosed early and often to the trustee.” Indeed, he said that the trustee’s attorney’s time records showed research on resulting trusts.

Judge Spraker did not say whether the resulting trust theory would have prevailed had it been raised when the trustee was selling the property or on the appeal, had there been one. Rather, he said that “no finder of fact reasonably could have found that [the debtor] misled the trustee as to his ownership in the Property.”

Judge Spraker continued:

As a result of the court’s decision [finding that the debtor owned half of the home], [the debtor’s] circumstances changed, and that change in circumstances provided him with a basis to claim an exemption he previously did not believe he had . . . . The record simply does not support any inference that [the debtor] held a present intent to exempt a property interest that he believed was limited to bare legal title when he filed his original schedules and exemptions. To deprive the debtor of his wildcard exemption, Judge Spraker said, would amount “to nothing more than penalizing the debtor for raising an unsuccessful legal argument.” He fleshed out the idea, saying:

Courts must be careful not to penalize debtors for exercising the statutory right to amend their exemptions or to read too much into a debtor’s failure to exempt an asset. Without more, such an omission does not constitute a misrepresentation or concealment for purposes of equitable estoppel. Similarly, standing alone, the failure to exempt an asset does not impermissibly induce a trustee to administer an asset as he or she knows that debtors may amend their exemptions as a matter of right.

The BAP reversed the order sustaining the trustee’s objection to the wildcard exemption because “the record does not support the bankruptcy court’s findings that [the debtor] knowingly concealed his interest in the Property while the trustee was ignorant of that interest.”

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Democrats Press Biden to Extend Freeze on Student Loan Payments

American Bankruptcy Institute on 03/25/22 reports:

Democrats in Congress are pressing the Biden administration to extend the suspension of student loan payments before it’s set to expire May 1 as they seek to avoid cutting off a pandemic-induced benefit in the middle of an election year, The Hill reported. The federal student loan payments suspension has already been extended five times throughout the COVID-19 pandemic since it began under former President Trump in March 2020. That means millions of people who owe student loans to the federal government haven’t been required to make payments on their debt in two years, all while interest rates on those loans have been set to zero. But President Biden has yet to say whether he’ll renew it again, after last extending it in December amid surging cases of COVID-19. The freeze on federal student loan payments has had more staying power than other popular federal aid programs designed to help people stay afloat during the pandemic. By contrast, the ban on evictions, enhanced unemployment benefits and expanded child tax credit have all lapsed over the past year. And the longer that millions of people have adapted to budgets that don’t include monthly student loan payments, the harder it will be for Democrats to reinstate them. Dozens of Democrats are calling for an extension that lasts at least through the end of this year. “Millions of borrowers have benefited from the pause in payments,” a group of more than 40 House Democrats ranging from progressives to lawmakers in competitive districts wrote in a letter to Biden this week. “Although progress has been made, we believe it is vital to ensure that we continue to work to alleviate the continued impact the pandemic is having on families across the country.”

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American Bankruptcy Institute reports that a Bill has been introduced in the US Senate on 3/14/22, called "Bankruptcy Threshold Adjustment and Technical Corrections Act"

Introduced by Senator Charles Grassley (R-Iowa). The Bill, S. 3823, if it was passed by Senate, and by House, and if signed into law by President Biden, would permanently set the debt limit at $7.5 million for small businesses electing to file for bankruptcy under subchapter V of chapter 11. Consistent with the recommendations of ABI’s Commission on Consumer Bankruptcy, the bill also would raise the debt limit for individual chapter 13 filings to $2.75 million and remove the distinction between secured and unsecured debt for that calculation.

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Lan Tu Trinh v. citizens Business Banking 141 S.Ct. 1412, 2012 WL 666601 (2021)

Lan Tu Trinh v. citizens Business Banking 141 S.Ct. 1412, 2012 WL 666601 (2021): US Supreme Court Won't Review Court-Appointed Receivers' Immunity

The U.S. Supreme Court will not second-guess whether court-appointed receivers are shielded from liability for their actions thanks to "quasi-judicial immunity," leaving in place a recent Third Circuit ruling that granted a receiver those protections.

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Guzman v. Springfield Hospital Inc.,    F.4th   , 2022 WL 790689 (US Court of Appeals for the Second Circuit, March 16, 2022)

Guzman v. Springfield Hospital Inc.,    F.4th   , 2022 WL 790689 (US Court of Appeals for the Second Circuit, March 16, 2022): Second Circuit Court of Appeals is First Appeals Court to Hold that Small Business Administration was allowed to bar bankruptcy Debtors from Receiving PPP Loans

On an issue where the lower courts are divided, the Second Circuit became the first court of appeals to rule that a “loan” under the Paycheck Protection Program, “as a matter of law, . . . is a loan guaranty program and not an ‘other similar grant,’ and thus is not covered by [the antidiscrimination provision in] Section 525(a)” of the Bankruptcy Code.

In other words, the Small Business Administration properly barred companies in chapter 11 from receiving PPP “loans,” according to a March 16 opinion by Circuit Judge Joseph F. Bianco.

The Paycheck Protection Program, or PPP, was part of the $2.2 trillion Coronavirus Aid, Relief and Economic Security Act (CARES Act), which became law in March 2020. Although denominated as a loan, it will be forgiven if the proceeds are spent on eligible expenses like payroll and rent.

A hospital in Vermont was in chapter 11 and applied for a PPP loan. The Small Business Administration denied the loan solely because the debtor answered “yes” to a question on the loan application asking whether the borrower was in bankruptcy.

The debtor sued the SBA in bankruptcy court, where the judge decided that a PPP “loan” was a “grant” protected by the antidiscrimination provision in Section 525(a). The bankruptcy court granted summary judgment in favor of the debtor and entered a permanent injunction requiring the SBA to make the loan. Springfield Hospital Inc. v. Carranza (In re Springfield Hospital Inc.), 618 B.R. 70 (Bankr. D. Vt. June 22, 2020). The bankruptcy court authorized a direct appeal, which the Second Circuit accepted.

In his 53-page opinion, Judge Bianco said that 18 courts to date have ruled that the PPP is not protected by Section 525(a), while six courts have decided that the section requires the SBA to grant loans to businesses in chapter 11.

Principally, Judge Bianco found the answer in the plain language of Section 525(a), which provides:

[A] governmental unit may not deny . . . a license, permit, charter, franchise, or other similar grant to . . . a person that is or has been a debtor under this title . . . .

A PPP loan was not a license, permit, charter or franchise. Judge Bianco therefore focused on whether it was a “grant,” a word not defined in the statute.

Two Second Circuit decisions were controlling: In re Goldrich, 771 F.2d 28 (2d Cir. 1985), and Stoltz v. Brattleboro Hous. Auth. (In re Stoltz), 315 F.3d 80, 90 (2d Cir. 2002). In Goldrich, the circuit held that Section 525, as it was then written, did not cover a guaranteed student-loan program.

Almost a decade after Goldrich, Judge Bianco said that “Congress amended Section 525 to include a subsection prohibiting discrimination against debtor-borrowers by any ‘governmental unit that operates a student grant or loan program.’ 11 U.S.C. § 525(c).”

In Stoltz, the Second Circuit held that a lease for a public housing unit was a “grant” protected by Section 525(a).

Taken together, Judge Bianco said that the two opinions mean that a “grant” is something that is “‘unobtainable from the private sector’ [and] ‘essential to a debtor’s fresh start.’ Stoltz v. Brattleboro Hous. Auth. (In re Stoltz), 315 F.3d 80, 90 (2d Cir. 2002).”

Judge Bianco said that Goldrich, which precluded loans from coverage in Section 525(a), remained good law after Stoltz. He said that the amendment to Section 525 “narrowly abrogated Goldrich’s specific holding as to student loans but had not abrogated its broader holding that Section 525(a) did not cover loans in general.” [Emphasis in original.]

“[W]e reaffirm here,” Judge Bianco said, “that the plain text of Section 525(a) does not cover loan programs.”

PPP ‘Loans’ Aren’t Grants

Even if loans are not protected by Section 525(a), the debtor contended that PPP loans are actually grants.

Judge Bianco disagreed. He said that the CARES Act refers to PPP loans as “loans” 75 times. Furthermore, he said, the forgiveness of PPP loans is “neither automatic nor guaranteed.”

Judge Bianco again referred to the dual standards in Goldrich/Stoltz. Unlike the refusal to grant a license that would put a company out of business, he said that the refusal of the SBA to grant a loan does not exclude a debtor “from receiving capital from other sources,” nor is an SBA loan “essential to a debtor’s fresh start.”

Subsequent Legislation

Although Judge Bianco found the answer in the plain language of the statute, he said that “the additional PPP legislation enacted after the Cares Act provides further support for our interpretation of Section 525(a).”

In the Consolidated Appropriations Act of 2021, he said, Congress amended Section 525 to expressly bar discrimination based on bankruptcy status in the provisioning of certain Cares Act benefits — such as foreclosure moratoriums, 15 U.S.C. § 9056, forbearance of certain residential mortgages, id. § 9057, and eviction moratoriums, id. § 9058 — but notably did not include PPP loans in this amendment. [Emphasis in original.]

Judge Bianco drew a “clear negative inference from this amendment . . . that other provisions of the Cares Act are not covered by Section 525(a).” [Emphasis in original.]

Judge Bianco vacated the permanent injunction and remanded with instructions that the SBA was entitled to summary judgment in its favor. However, he did not rule on whether the SBA was “immune from injunctive relief” under Section 634(b)(1) of the Small Business Act.

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Sheen v. Wells Fargo Bank, NA, 2022 DJDAR 2345 (California Supreme Court 3/7/22)

Sheen v. Wells Fargo Bank, NA, 2022 DJDAR 2345 (California Supreme Court 3/7/22): In this landmark decision of the California Supreme Court—the highest court in the California State court system, in a decision that is amazingly BAD for property owners, the California Supreme Court held that lenders/loan servicers do NOT owe borrowers a duty of care in the loan modification process. Borrowers seeking loan modifications always had trouble dealing with lenders/loan servicers who were supposed to be processing the loan modification applications submitted to the lenders/loan servicers by the borrowers. Now it will be functionally impossible to get lenders/loan servicers to process loan modification applications, because they will have no liability if they fail to process the loan modifications.

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In re Egan Avenatti LLP

In re Egan Avenatti LLP,    BR    (Bankr. C.D. Cal. March 3, 2022) bankruptcy case #19-13560: A Bankruptcy Judge in Central District of California Bankruptcy Court issues decision that a party which wants to subpoena a bankruptcy trustee must—pursuant to the “Barton Doctrine” move for and get permission of the Bankruptcy Court to subpoena the Trustee, before subpoenaing the Trustee.


Someone seeking to issue a subpoena to a trustee is the proper party to seek leave under the Barton doctrine, Judge Clarkson says. However, the Bankruptcy Judge’s decision acknowledges that a 2006 9th Circuit BAP decision In re Media Group, Inc., 2006 WL 6810963 (B.A.P. 9th Cir. 2006), where the BAP “declined to extend the application of the Barton Doctrine to a subpoena issued on a trustee’s lawyer.” It will take a 9th Circuit Decision or a US Supreme Court decision, to have a binding ruling on this subpoena issue.

Someone issuing a subpoena to a bankruptcy trustee in a criminal case or a lawsuit outside of bankruptcy court must first ask the bankruptcy court for permission to issue the subpoena in view of the Barton doctrine, for reasons explained by Bankruptcy Judge Scott C. Clarkson of Santa Ana, Calif.

Without prior bankruptcy court approval, expenses incurred by a trustee to comply with a subpoena issued outside of bankruptcy court would be an unauthorized use of estate property not in the ordinary course of business under Section 363(b), Judge Clarkson said in his March 3 opinion. The opinion suggests that a third party intending to issue a subpoena to a bankruptcy trustee for a case outside of bankruptcy court should offer to reimburse the estate for the expense of complying with the subpoena.

The Criminal Subpoena

The case involved Michael Avenatti, whose law firm is in chapter 7 liquidation in Judge Clarkson’s court. Individually, Mr. Avenatti is a defendant in a criminal case in California, with a trial scheduled to begin on May 10. He is now appealing a criminal judgment entered against him in February in New York.

Mr. Avenatti went to trial in a separate criminal case in New York beginning on January 24. The jury found him guilty of wire fraud and aggravated identity theft in a verdict on February 4.

In the criminal case that went to trial in January, both the prosecution and the defense had issued subpoenas on the California trustee demanding that the trustee appear personally and produce four terabytes of data held by the trustee.

On January 24, when the trial was beginning in New York, the California trustee filed an emergency motion asking Judge Clarkson to authorize expenses to be incurred in complying with the two subpoenas. The motion did not challenge the validity of the subpoenas, although the trustee’s motion did mention the Barton doctrine.

The doctrine arose from Barton v. Barbour, 104 U.S. 126 (1881), where the Supreme Court held that receivers cannot be sued without permission from the appointing court. After adoption of the Bankruptcy Act of 1898, the doctrine was extended to cover bankruptcy trustees. Barton was subsequently broadened by many circuits to protect court-appointed officials and fiduciaries, such as trustees’ and debtors’ counsel, real estate brokers, accountants, and counsel for creditors’ committees.

Barton Doctrine Applied

Although the trustee was not asking for a declaration that the subpoenas were invalid under Barton, Judge Clarkson said that “the Court must address issues that pertain to the Motion’s essence; namely, those principles that make up the Barton Doctrine.”

Judge Clarkson said that Barton was based on the notion that the bankruptcy court has exclusive jurisdiction of the estate. As the Ninth Circuit held in 2005, a party must first obtain leave from the bankruptcy court before “it initiates an action in another forum against a bankruptcy trustee or other officer appointed by the bankruptcy court for acts done in the officer’s official capacity.”

In re Crown Vantage, Inc., 421 F.3d 963, 970 (9th Cir. 2005).

Judge Clarkson relied heavily on In re Circuit City Stores, Inc., 557 B.R. 443 (Bankr. E.D. Va. 2016), where the bankruptcy court applied Barton to subpoenas served on trustees or other officers or their agents “owing their positions to bankruptcy court orders.”

On the other side of the fence, Judge Clarkson cited In re Media Group, Inc., 2006 WL 6810963 (B.A.P. 9th Cir. 2006), where he said that the BAP “declined to extend the application of the Barton Doctrine to a subpoena issued on a trustee’s lawyer.”

Judge Clarkson described the BAP as believing that Barton only applies to lawsuits against trustees, not subpoenas.

As an opinion from the BAP, even in his own circuit, Judge Clarkson said that Media Group was “not binding precedent.” He also said that the BAP “did not correctly apply the rule of law developed either in the Supreme Court’s 1881 decision in Barton or the Ninth Circuit’s 2005 Crown Vantage decision.” In his opinion, the BAP “engaged in a too narrow, textual analysis of the Supreme Court’s decision in Barton.”

Judge Clarkson quoted Crown Vantage for applying Barton to “all legal proceedings.” Under “any common-sense interpretation,” commanding a trustee to appear 3,000 miles away “involves a legal proceeding,” he said.

Although the Ninth Circuit has not addressed the question, Judge Clarkson said that he was “persuaded that the application of the Barton Doctrine respecting subpoenas, as so thoughtfully discussed in the more recent (2016) Circuit City case, is appropriate.”

Without permission from the bankruptcy court, Judge Clarkson said that the trustee could not comply with the subpoena because the trustee would have been using estate property outside of the ordinary course of business in violation of Section 363(b).

By asking him for permission to comply with the subpoena, Judge Clarkson said that the trustee was seeking permission to use estate property “without first allowing this Court to engage in a Barton analysis . . . . This was improper.”

“The proponent[s] of the subpoenas are the proper parties to seek permission to submit these subpoenas,” Judge Clarkson said. “In the absence of this Court’s prior approval, the subpoenas commanding the Trustee to use Estate resources usurp the power and authority of this Court.” Judge Clarkson denied the trustee’s motion with prejudice, saying that Barton “considerations should be raised in the first instance by the issuers of the proposed subpoenas.”

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Harrington v. Mayer (In re Mayer), 20-56340 (9th Cir. Ct of Appeals, issued March 8, 2022), and Harrington v. Mayer (In re Mayer), 20-56340 (9th Cir. Ct. of Appeals, issued March 8, 2022).

Denial of Stay Modification Without Prejudice Can Be Final, Ninth Circuit Says

In a 3/8/22 decision, the Ninth Circuit Court of Appeals answered a question left open by the Supreme Court in Ritzen.

Reaching an issue the Supreme Court left undecided in Ritzen, the Ninth Circuit held that denial of a stay-relief motion without prejudice can still be a final, appealable order.

The appeals court looked beyond the “without prejudice” label placed on the order by the bankruptcy court to decide whether denial of the motion meant that the creditor would not have stay relief for the purpose sought by the creditor.

Reversing the district court, which had believed that the order was not appealable, the panel majority reached the merits and upheld the bankruptcy court’s denial of stay relief.

Stay-Relief Motion Denied

The debtor and a creditor had been embroiled in litigation in Massachusetts state court for seven years, trading claims and counterclaims about breach of fiduciary duty and fraudulent misrepresentation. One week before a jury trial was to begin in Massachusetts, the debtor-defendant filed a chapter 7 petition in California.

The creditor filed a $2 million claim in bankruptcy court, a complaint in bankruptcy court to bar discharge of the debt and a companion motion to modify the automatic stay. The creditor reasoned in the lift-stay motion that the Massachusetts court was familiar with the case and could resolve all questions about the validity of the claim and facts indicating whether the claim was dischargeable.

Originally inclined to modify the stay, the bankruptcy court ultimately denied the motion without prejudice.

The district court denied the creditor’s motion for leave to appeal an interlocutory order. The creditor appealed to the circuit.

The Ninth Circuit panel handed down two decisions on March 8. One decision unanimously reversed the district court by holding that lift-stay denial was a final, appealable order. In the second opinion, all three judges found reason to rule on the merits. Over a dissent, two judges in the second opinion upheld denial of the lift-stay motion.

Lift-Stay Denial Was Appealable

In his precedential opinion on finality, Circuit Judge A. Wallace Tashima began by citing Ritzen Group, Inc. v. Jackson Masonry, LLC, 140 S. Ct. 582 (2020), where the Supreme Court held that an order denying a stay-relief motion is final and appealable when it “conclusively resolve[s] the movant’s entitlement to the requested relief.” Id. at 591. Citing Bullard v. Blue Hills Bank, 575 U.S. 496, 501 (2015), the Supreme Court went on to say that “[o]rders in bankruptcy cases qualify as ‘final’ when they definitively dispose of discrete disputes within the overarching bankruptcy case.” Id. 586.

In Ritzen, Judge Tashima said that the Supreme Court “did ‘not decide whether finality would attach to an order denying stay relief if the bankruptcy court enters it “without prejudice” because further developments might change the stay calculus.’” Id. at 592, n.4. To read ABI’s report on Ritzen, click here.

Confronting the question left undecided in Ritzen, Judge Tashima said, “We address the finality of an order denying stay relief without prejudice.”

In the case on appeal, Judge Tashima said that “the record makes clear that the [bankruptcy] court ‘unreservedly denied relief’” even though “the bankruptcy court stated that the denial was without prejudice.”

Judge Tashima gave several reasons for his conclusion about finality. Principally, the bankruptcy judge made it clear that the issues in the creditor’s proof of claim and adversary proceeding would be tried in bankruptcy court, not before a jury in state court. The bankruptcy court said it would hold trial in short order and gave no indication of an inclination to revisit stay relief.

In saying that stay denial was without prejudice, Judge Tashima said that the bankruptcy court meant that it was “willing to consider stay relief if sought for a different purpose, but not for the purpose of resolving [the creditor’s] state claims against [the debtor].”

The Merits of Stay Relief

In a separate but nonprecedential opinion, the panel dealt with the merits: Did the bankruptcy court abuse its discretion in denying stay relief? On the merits, the panel was divided. Oddly enough, Judge Tashima would have reversed and modified the stay.

The affirmance on the merits was an unsigned memorandum principally by the other two judges on the panel, Circuit Judges Milan D. Smith, Jr. and Paul J. Watford.

Generally, the two judges said, the appeals court would remand to the district court after reversing on appealability. In the case before them, they said that the record presented the issues, and the circuit court was in as good a position as the district court to address the merits.

The two judges saw no abuse of discretion and upheld denial of the stay-relief motion. Among other things, they said that the bankruptcy court “properly considered the interests of judicial economy.”

The Dissent

Judge Tashima agreed that the panel should reach the merits of stay relief. However, he “respectfully” dissented. He identified several reasons why the stay should have been modified.

State law issues predominated, he said. There would have been no basis for federal jurisdiction on many of the issues had there been no bankruptcy, and the creditor had a right to a jury trial.

Judge Tashima believed that denial of stay modification was an abuse of discretion.

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In re LTL Management LLC,     BR   , 21-30589 (Bankr. D.N.J. Feb. 25, 2022)

In re LTL Management LLC,     BR   , 21-30589 (Bankr. D.N.J. Feb. 25, 2022): Johnson & Johnson Subsidiary Survives a Motion to Dismiss—for being a bad faith bankruptcy filing-- the bankruptcy filed by the subsidiary that J& J created, put all the talc claim cancer lawsuits into, and then had subsidiary (LTL Management LLC) filed bankruptcy. J&J created the LTL Management LLC subsidiary, put the talc tort claim suits into the subsidiary, have the subsidiary file bankruptcy and the parent company does NOT file bankruptcy, has come to be referred to as the “Texas 2 Step”, because this procedure was first used in a bankruptcy filed in a bankruptcy court located in Texas. Though the Bankruptcy Court denied the Motion to dismiss, it is the opinion of attorney March of The Bankruptcy Law Firm, PC, that the “Texas 2 Step” is a bad faith violation of bankruptcy law, that the Motion to dismiss for bad faith should have been granted, and that it is only a matter of time until appeal courts hold that the “Texas 2 Step” procedure is a bad faith violation of bankruptcy law.

Not what the Bankruptcy Judge who denied the motion to dismiss the subsidiary bankruptcy for bad faith thought, however, as that Judge (Bankruptcy Judge Michael B. Kaplan of Trenton, New Jersey) found no fault with the “Texas 2 Step” procedure. In fact, Judge Kaplan said chapter 11 is the best alternative in the state and federal legal systems for dealing with mass torts. He found no fault with J&J’s use of the so-called Texas Two-Step to avoid putting the entire enterprise in chapter 11. That is where attorney March of The Bankruptcy Law Firm, PC disagrees. Time will tell how appellate courts rule on this issue.

Judge Kaplan ruled the “Texas Two-Step” procedure was allowable, despite the fact that Judge Kaplan admitted that bankruptcy courts have witnessed serious abuses and inefficiencies, striking at the heart of the integrity of our bankruptcy courts. For instance, the approval of overly broad nonconsensual third-party releases, and the propriety/necessity for twenty-four hour accelerated bankruptcy cases have drawn deserved scrutiny. Likewise, the selection of case venue, as in the matter at hand, has warranted critical attention and debate.

Refusing to dismiss the case after a five-day trial, Judge Kaplan said that the chapter 11 filing “is unquestionably a proper purpose under the Bankruptcy Code.” Still, he had “no expectation that this decision will be the final word on the matters.”

How the Texas Two Step works:

Just before the chapter 11 filing, Johnson & Johnson created two new subsidiaries. LTL was created to be the debtor, and the other took over J&J’s operating businesses.

The debtor was first created as a limited liability company in Texas and converted to a North Carolina limited liability company. On October 14, two days later, the debtor filed a chapter 11 petition in Charlotte.

The debtor was given no business operations of its own but assumed liability for all talc-related claims. The debtor was given some non-operating assets and insurance receivables, plus $6 million in cash. The debtor was also the beneficiary of a so-called funding agreement where the other J&J businesses agreed to supply the funds necessary for emerging from chapter 11, up to about $60 billion, representing the value of the businesses at the time of the restructuring.

In an opinion on November 16, Bankruptcy Judge J. Craig Whitley transferred venue to New Jersey, where the case was assigned to Judge Kaplan. The official committee representing talc claimants filed a motion to dismiss the chapter 11 case under Section 1112(b), contending that the filing was in bad faith. The U.S. Trustee supported either dismissal or appointment of a chapter 11 trustee.

J&J’s Financial Distress:

Judge Kaplan laid out J&J’s financial problems resulting from the 38,000 talc-related lawsuits that have been filed so far, not to mention tens of thousands more that would be filed in the future as cancers manifest themselves.

Judge Kaplan mentioned one case where the jury awarded an individual claimant $4.69 billion that was affirmed on appeal but reduced to $2.25 billion. Based on awards stemming so far from litigation, he roughly calculated liability as exceeding $15 billion, “not including the tens of thousands of ovarian cancer claims and all future cancer claims.”

In sum, Judge Kaplan said that the tort system outside of bankruptcy would result in judgments in favor of a few claimants exhausting all of the value in J&J, leaving nothing for the vast majority of claimants.

The debtor itself said that the corporate restructuring before bankruptcy and the chapter 11 filing together were designed to “globally resolve talc-related claims through a chapter 11 reorganization without subjecting the entire [J&J business] to a bankruptcy proceeding.”

Applying the Facts to the Law:

Arguing for dismissal, talc claimants noted that the debtor had no creditors (aside from talc claimants), no lenders, no customers and no suppliers. They said the bankruptcy had no business purpose but was designed to shed tort liability without subjecting the J&J business to the rigors and inconveniences of chapter 11.

The talc claimants, according to Judge Kaplan, argued that the bankruptcy strategy was “intended to force talc claimants to face delay and to secure a ‘bankruptcy discount’; in Movants’ words, ‘an obvious legal maneuver to impose an unfavorable settlement dynamic on talc victims.’”

To decide whether the bankruptcy strategy justified dismissal for cause under Section 1112(b), Judge Kaplan said that the good faith inquiry examines “the totality of the circumstances.” The general focus, he said, is whether the petition serves a valid bankruptcy purpose or was filed “merely to obtain a tactical litigation advantage.”

Valid Reorganization Purpose:

Judge Kaplan found a valid reorganization purpose because bankruptcy is the only method to “ensure that all present and future tort claimants will share distributions through the court-administered claims assessment process.”

In the Third Circuit, Judge Kaplan said, there must be “some” degree of financial distress to underpin a valid business purpose. In that respect, he said, No public or private company can sustain operations and remain viable in the long term with juries poised to render nine and ten figure judgments, and with such litigation anticipated to last decades going forward.

Judge Kaplan said that J&J “need not have waited until its viable business operations were threatened past the breaking point.”

In reaching his conclusion on valid business purpose, Judge Kaplan examined what he called “a far more difficult issue”: whether there was “a more beneficial and equitable path toward resolving Debtor’s ongoing talc-related liabilities.” In that regard, he said he “simply cannot accept the premise that continued litigation in state and federal courts serves best the interest of [the tort lawyers’] constituency.”

Class actions, Judge Kaplan said, are usually not suitable for mass tort cases. Likewise, multidistrict litigation would produce a few bellwether trials, “at best.” Thereafter, 40,000 tort cases would be sent to district courts for trials throughout the country, where the same issues would be relitigated over and over.

By contrast, Judge Kaplan said that chapter 11 invokes Section 524(g) to “ensure[] that present claimants do not exhaust the debtor’s assets before future claimants have even manifested injuries.” The tort system, on the other hand, “produces an uneven, slow-paced race to the courthouse, with winners and losers.” It was “folly,” he said, to say that “the tort system offers the only fair and just pathway of redress.”

Unfair Tactical Advantage:

With regard to the claim that J&J invoked bankruptcy to obtain an unfair tactical advantage, Judge Kaplan found “no improprieties or failures to comply with the Texas statute’s requirements.” He added, “the interests of present and future talc litigation creditors have not been prejudiced.” He found “nothing inherently unlawful or improper with application of the Texas divisional merger scheme.”

Judge Kaplan was “not prepared to rule that use of the statute as undertaken in this case, standing alone, evidences bad faith.”

With regard to other aspects of good faith, Judge Kaplan said that the funding agreement “will be available upon confirmation of a plan — whether or not the plan is acceptable to [the debtor or J&J], and whether or not the plan offers payors protections under § 524(g).”

Had there been no reorganization to exclude the operating business from chapter 11, Judge Kaplan said, [S]uch filings would pose massive disruptions to operations, supply chains, vendor and employee relationships, ongoing scientific research, and banking and retail relationships — just to name a few impacted areas. The administrative and professional fees and costs associated with such filings would likely dwarf the hundreds of millions of dollars paid in mega cases previously filed — and for what end?

It was not, Judge Kaplan said, “a case of too big to fail . . . rather, this is a case of too much value to be wasted, which value could be better used to achieve some semblance of justice for existing and future talc victims.”

“The potential loss in market value, the disruptions to operations, and the excessive administrative costs associated with independent chapter 11 filings,” Judge Kaplan said, “justify the business decision to employ the divisional merger statute as a means of entering the bankruptcy system.” Bankruptcy, he said, “may indeed accelerate payment to cancer victims and their families.”

In sum, it would be fair to say that Judge Kaplan found that bankruptcy confers benefits on the bulk of existing and future claimants and was not designed to gain an unfair litigation advantage.

The Ruling:

Judge Kaplan denied the motion to dismiss and said that the record did not support the appointment of a chapter 11 trustee. He nonetheless agreed “that there is a need for independent scrutiny of possible claims while the case progresses through the appointment of a Future Talc Claims Representative, mediation and towards the plan formulation process.”

Judge Kaplan said he would take up questions about a future claimants’ committee and mediation at the omnibus hearing on March 8.

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ABI Analysis: The $1.7 Billion Student Loan Deal that Was Too Good to Be

ABI Analysis: The $1.7 Billion Student Loan Deal that Was Too Good to Be True, because hundreds of thousands of borrowers still have to pay back the predatory, high interest rate, educational loans:

Even though prosecutors said Navient had made predatory loans to hundreds of thousands of borrowers it knew couldn’t afford them, the $1.7 billion settlement the lender made last month with 39 states covered only about 66,000 who were in default. Those who managed to make the payments on their deceptive, high-interest debt — mostly to attend for-profit schools that left them with worthless degrees — would just have to keep paying, the New York Times reported. The settlement resolved nearly a decade of state investigations into the role Navient, the lender and loan-servicer that has long been a linchpin of the educational lending market, played in a bleak cycle of vulnerable students, dubious for-profit schools and taxpayer money. State prosecutors said that Navient, which did business as Sallie Mae until 2014, was willing to give private loans to borrowers it knew couldn’t pay them back because they were a money-losing lure for a far more profitable product: federal student loans. Starting in the early 2000s, Navient and the schools it worked with used the private loans to fill gaps for students who relied on government-backed loans from Navient to pay the bulk of their tuition. Even if the private loans weren’t repaid, the federally guaranteed loans were bulletproof revenue for Navient — and the more borrowers it attracted, the more money it made. One internal Navient email cited in court documents described the private loans as a “baited hook” to reel in more government-backed loans. [reported on 021722]

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Senate Judiciary Subcommittee Hearing, held in February 2022, Takes Aim at "Texas Two-Step" Strategy to Shift Liabilities in Bankruptcy

American Bankruptcy Institute Reports that US Senate Judiciary Subcommittee Hearing, held in February 2022, Takes Aim at "Texas Two-Step" Strategy to Shift Liabilities in Bankruptcy: The Senate Judiciary Subcommittee on Federal Courts, Oversight, Agency Action and Federal Rights held a hearing last week titled, "Abusing Chapter 11: Corporate Efforts to Side-Step Accountability Through Bankruptcy." The “abuse” being discussed in corporations, setting up a new corporation, putting product liability claims into the new corporation, and then having the new corporation file bankruptcy, to try to use bankruptcy to stay product liability litigation (like the J& J talc cancer litigation) and to pay pennies on the dollar to the victims of the product liability suits, who are the plaintiffs suing for product liability. Witnesses testifying at the hearing included Hon. Judith K. Fitzgerald of Tucker Arensberg, P.C. (Pittsburgh), Prof. David Skeel of the University of Pennsylvania Law School, Kimberly Ann Naranjo of Sandy, Utah, Paul H. Zumbro of Cravath, Swaine & Moore LLP (New York) and Kevin C. Maclay of Caplin & Drysdale (Washington, D.C.).

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2/11/22 Article reports Landlords finding ways to evict tenants, after the landlord receives government rental aid:

A day before she was due to be evicted in November 2021 from her Atlanta home, Shanelle King heard that she had been awarded about $15,000 in rental assistance. She could breathe again.

But then the 43-year-old hairdresser got a letter last month from her landlord saying the company was canceling her lease in March —- seven months early — without any explanation.

“I’m really pissed about it. I thought I would be comfortable again back in my home,” said King, whose work dried up during the pandemic and who now worries about finding another apartment she can afford. “Here I am back up against the wall with no where to stay. I don’t know what I am going to do.”

Although the $46.5 billion Emergency Rental Assistance Program has paid out tens of billions of dollars to help avert an eviction crisis, some tenants, like King, who received help are finding themselves threatened with eviction again — sometimes days after getting federal help. Many are finding it nearly impossible to find another affordable place to live.

“It is a Band-Aid. It was never envisioned as anything more than a Band-Aid,” Erin Willoughby, director of the Clayton Housing Legal Resource Center Atlanta, said of the program.

“It’s not solving the underlying problem, which is a lack of affordable housing. People are on the hook for rents they cannot afford to pay,” she said. “Simply finding something cheaper is not an option because there is not anything cheaper. People have to be housed somewhere.”

The National Housing Law Project, in a survey last fall of nearly 120 legal aid attorneys and civil rights advocates, found that 86% of respondents reported cases in which landlords either refused to take assistance or accepted the money and still moved to evict tenants. The survey also found a significant increase in cases of landlords lying in court to evict tenants and illegally locking them out.

“A number of issues could be described as issues related to landlord fraud ... and a set of problems I would describe as loopholes within the ... program that made it less effective to accomplish the goal,” said Natalie N. Maxwell, a senior attorney with the group.

National Apartment Association President and CEO Bob Pinnegar said the survey was not based on facts, adding that its members are doing everything they can to keep tenants in their homes, including lobbying to get rental assistance out faster.

“Skewed surveys aren’t reflective of the entire situation. By and large the rental housing industry has gone to great lengths to support residents, including when it comes to rental assistance and adherence to laws and regulations,” Pinnegar said in a statement.

Legal aid attorneys interviewed across the country confirmed they are seeing a steady increase in cases where tenants were approved for rental help and still faced eviction.

These include the mother of a newborn and two other children in Florida who received rental assistance but was ordered evicted after the landlord refused to take the money. Another Florida landlord lied in court that she hadn’t received the money in a bid to push through an eviction.

There have also been cases in Georgia and Texas where landlords who received assistance moved to end leases early, increased rents to unaffordable levels or found other reasons than nonpayment to evict someone, lawyers said.

“As it is right now, it doesn’t seem to be working as intended,” said Tori Tavormina, an eviction prevention specialist with Texas Housers. “It feels much more like it’s a program that is alleviating the pressure of the eviction crisis but not solving the underlying problems.”

District Court Judge Shera Grant, who handles housing cases in Birmingham, Alabama, said she and her fellow judges have seen an uptick in cases of landlords getting assistance and returning to court a few weeks later after a tenant has fallen behind on rent to seek an eviction. So far they have prevented them — though she expects a spike in these kinds of cases going forward.

“It’s incumbent on the judges to make sure we are paying close attention to our eviction cases and making sure that the landlord is not having their cake and eating it too,” she said. “By the same token, we are not forcing landlords to take the money. There are some unfortunate circumstances where the tenant has to be evicted.”

In the case of King, she believes her landlord was retaliating for earlier complaints about mold and water leaks in her three-bedroom house. The company King was dealing with, NDI Maxim, which manages property for owners, said it “was not at liberty to share details of tenants’ status nor their payment records.”

Other cases are complicated by the length of the pandemic and conflicting accounts of landlord and tenant. And they often leave both parties feeling shortchanged.

Despite his landlord getting more than $20,000 in rental assistance, Prince Beatty is facing imminent eviction from his three-bedroom house in East Point, Georgia.

After the money was approved, Beatty signed an agreement in court late last year to pay several thousand dollars more that he owed as a condition to remain housed. He went back to the county for additional assistance to cover the balance but says he was denied. Unable to find warehouse work during the pandemic, the 47-year-old Navy veteran still can’t pay rent and is now $12,000 behind, in part due to his rent increasing from $1,250-a-month to $2,000.

Beatty, who was told he would be evicted this month, said he wakes most mornings in a panic, wondering if this will be the day when marshals “come and disrespect my stuff and throw it in the street.”

His landlord, Monique Jones, said she tried to work with Beatty. But she said he violated the lease by subletting rooms to several other people and that the amount of rental assistance has not covered losses from months of unpaid rent that started before the pandemic.

“It was helpful but it did not address the underlying issue which is his nonpayment of rent,” she said of the rental assistance. “That still remains and that is rightfully why I am proceeding. If I have a tenant who will pay rent and abides by the lease, I would not attempt to evict.”

Limits with rental assistance often come down to some states and localities failing to follow Treasury Department guidance calling for policies requiring landlords delay evictions after getting money. Although the program prevents landlords from evicting during the period covered by rental assistance, the Treasury Department can only encourage states to adopt policies that ban evictions up to three months afterward.

The National Low Income Housing Coalition found only 29 states and localities in 2021 had adopted policies that prohibit landlords who participate in the rental assistance program from evicting tenants for a period ranging from 30 days to 12 months. Six states — Arizona, Kentucky, Louisiana, New York, North Carolina and West Virginia — passed regulations while several cities or counties in Texas and Maryland did.

Gene Sperling, who is charged with overseeing implementation of President Joe Biden’s $1.9 trillion coronavirus rescue package, said there was no data to suggest landlords evicting tenants after getting assistance is a “pervasive issue” but that it was “completely unacceptable.”

While it’s “not against the letter of the act, it’s against the spirit of it,” he said.

The Coalition also said the program’s issues illustrate a larger problem.

“We are in the middle of a severe affordable housing crisis with gaping holes in our social safety net,” CEO Diane Yentel said. “We have a systemic power imbalance that favors landlords at the expense of low-income tenants. Emergency rental assistance and eviction moratoriums were a temporary patch to those holes.”

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Provisions in the CARES Act

On March 28, 2022, certain provisions in the CARES Act expire. Importantly for insolvency practitioners, the amount of eligible debt permissible for a debtor to file under Subchapter V of Chapter 11-the simpler, faster, less expensive, better for debtors kind of chapter 11 bankruptcy case--decreases from $7,500,000, back to the original amount of $2,725,625. It is uncertain whether Congress will extend this provision before it expires. If Congress does not pass legislation extending the $7,500,000 amount, or President Biden does not sign such legislation passed by Congress into law, before March 28, 2022, then the maximum allowable debt amount, for filing a subchapter V bankruptcy, reduces to $2,725,625.

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California Adopts New Debt Collection Regulations (as reported in 2/11/22 Credit & Collection E-Newsletter)

New regulations from the California Department of Financial Protection and Innovation (Department) affecting licensure of debt collectors became effective as of January 1, 2022. The regulations provide the process and requirements to apply for a license as a debt collector, including application through the NMLS, and specify the acts that constitute grounds for license denial. The California Debt Collection Licensing Act (the Act) prohibits any person from engaging in the business of consumer debt collection without a license from the Department and authorizes the Department to adopt rules to administer the Act. Among other provisions, the recently effective rules require applicants to apply through the NMLS and includes rules for affiliates applying under a single license; establishes the process for challenging information entered into the NMLS; identifies factors the Department may consider in denying a license; establishes the process for submitting and maintaining the required surety bond; and sets forth the process for surrendering a license.

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In Guevarra v. Whatley (In re Guevarra)

In Guevarra v. Whatley (In re Guevarra),     BR   , 2021 WL 1179619 (BAP 9th Cir. Mar. 29, 2021), the Ninth Circuit Bankruptcy Appellate Panel (the “BAP”) vacated the bankruptcy court’s decision. Bankruptcy Court had sustained the chapter 7 Trustee’s Objection to debtor having used the CA CCP 703.140(b)(5) “wild card” exemption to exempt proceeds from selling a house, up to the approximately $30,000 limit of the “wild card” exemption. The bankruptcy court’s ruling was based on the grounds that debtor had not acted good faith when debtor claimed the wild card exemption. However, the BAP remanded to the bankruptcy court, so that bankruptcy court could examine whether the Trustee’s objection to the debtor claiming the wild card exemption could be sustained based on principles of equitable estoppel. Seems unlikely Trustee would win on remand: The BAP stated that although recent case law has clarified that bankruptcy courts retain the power to deny a state exemption if state law provides an equitable basis for doing so, there was no basis here because the nature of the wildcard exemption is such that there is no requirement that a debtor have a good faith intent to use the property for any specific purpose. This is not a published decision, so it can be cited only as “persuasive” if whoever cites it thinks the BAP’s reasoning is persuasive.

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Patterson v. Mahwah Bergen Retail Group Inc.

Patterson v. Mahwah Bergen Retail Group Inc.,   BR   , (E.D. Va. Jan. 13, 2022; appeal from bankruptcy court to district court number 21-167): It is becoming more common for confirmation of Chapter 11 plans, which grant non-debtors releases, are reversed on appeal. In Patterson, a District Judge, Virginia, on appeal from bankruptcy court to district court, emphatically rejects confirmation of a chapter 11 Plan which grants broad releases to non-debtor Third Parties.

In a scorching opinion, US District Judge David Novak of Richmond, Va., set aside confirmation of a chapter 11 plan that contained “extremely broad third-party (non-debtor) releases” and said that the releases in the appeal before him “represent the worst of this all-too-common practice, as they have no bounds.” He described the releases as barring the claims “of at least hundreds of thousands of potential plaintiffs not involved in the bankruptcy . . . , shielding an incalculable number of individuals associated with the Debtors . . . for an unspecified time period stretching back to time immemorial . . . .” [Emphasis in original.]

Judge Novak said that the bankruptcy court “exceeded the constitutional limits of its authority . . . , ignored the mandates of the Fourth Circuit . . . , and offended the most fundamental precepts of due process.”

Referring to what he called the “ubiquity of third-party releases” approved by a bankruptcy judge in Richmond who “regularly approves third-party releases,” Judge Novak said that “[t]his recurrent practice contributes to major companies like [the debtor] using the permissive venue provisions of the Bankruptcy Code to file for bankruptcy here.”

Citing the U.S. Trustee, Judge Novak said that “the Richmond Division (just the division, not the entire Eastern District of Virginia) joins the District of Delaware, the Southern District of New York, and the Houston Division of the Southern District of Texas as the venue choice for 91% of the ‘mega’ bankruptcy cases.”

On the penultimate page of his 88-page opinion reversing and remanding, Judge Novak directed the chief bankruptcy judge to reassign the chapter 11 case to another bankruptcy judge outside of the Richmond division. If there is another appeal after remand, Judge Novak said that the new appeal would be assigned to him. The District Court decision holds that third-party, non-debtor releases must be approved by district judge under Stern and must comply with the strictures of Federal Rule 23.

The Purdue Pharma LLP chapter 11 plan has also recently been reversed on appeal from Bankruptcy Court to District Court, for granting non-consensual releases to non-debtors. On December 16, District Judge Colleen McMahon in New York vacated confirmation of the Purdue Pharma LLP chapter 11 plan, holding that the court had no statutory power to impose non-consensual releases of creditors’ direct claims against non-debtor third parties. In re Purdue Pharma LP, 21-07532, 2021 BL 482465, 2021 WL 5979108 (S.D.N.Y. Dec. 16, 2021). To read ABI’s report, click here.

The January 13 opinion by Judge Novak goes beyond Judge McMahon’s more narrow preservation of creditors’ direct claims against non-debtors. Readers may draw some of the following conclusions from Judge Novak’s opinion.

  • Third-party releases are virtually impermissible when the releasing parties are receiving no consideration under the chapter 11 plan and the creditors do not manifest actual consent, under high standards for what constitutes actual consent.
  • Just providing creditors with an ability to opt out does not make the release consensual as a matter of fact and law.
  • The limited power of a bankruptcy judge under Article I of the Constitution requires that third-party releases be approved by district judges, and confirmation orders with third-party releases should be reports and recommendations.
  • The procedure for approval of third-party releases in a chapter 11 plan must comply with Federal Rule 23, which deals with class actions. Among other things, creditors who are losing the right to sue must be involved in negotiations on the plan and must be adequately represented.
  • Like the Eighth Circuit, which limited the doctrine of equitable mootness almost to the vanishing point, equitable mootness will not protect third-party releases from appellate review.
  • A creditor who opts out has no standing to appeal.

Judge Novak’s opinion is required reading for anyone involved in chapter 11 practice. He gathers together authorities that are either hostile to or limit third-party releases.

However, Judge Novak does not proscribe third-party releases altogether. Indeed, he could not in view of Behrmann v. Natl. Heritage Found. Inc., 663 F.3d 704 (4th Cir. 2011), where the Fourth Circuit adopted the Sixth Circuit’s approach to approval of third-party releases and rejected the idea that Section 524(e) bars them outright.

The Circuit Split on Third-Party Releases

Judge Novak cited the Fifth, Ninth and Tenth Circuits for prohibiting third-party releases under Section 524(e). He cited other circuits, like the Second and Third, that permit releases in rare cases.

In Behrmann, supra, the Fourth Circuit followed the test laid down by the Sixth Circuit for third-party releases. He ruled that the failure to opt out did not amount to the level of consent required by Behrmann.

Judge Novak said that the bankruptcy court “failed to conduct any Behrmann analysis.” He said that the released parties gave no substantial contribution as required by Berhmann. In addition, the releases were not essential to the reorganization and were not “overwhelmingly” approved by the affected class.

“Because the Plan extinguishes these claims entirely without giving any value in return, this weights strongly against granting the Releases,” Judge Novak said.

Beyond Behrmann, Judge Novak said that “no court” would have found the instant settlement “fair, reasonable and adequate under Rule 23.” No one represented the interests of those who were giving releases, and the releases did not result from negotiations with those on whom releases were imposed. Instead, he said, the negotiations only occurred between those who would benefit from the releases. Furthermore, he found that the releases given by the debtor to shareholders “lacked any value and [were] purely fictional.”

Judge Novak went on to hold that the third-party releases failed three of the four elements required to afford due process under Rule 23. “Accordingly,” he said, allowing releases only based on the failure to opt out “does not comport with due process.” He voided the third-party releases and held them unenforceable.

Appeal NOT Equitably Moot

The debtors in the Patterson case appeal, argued for dismissal of the appeal as equitably moot, but Judge Novak found four reasons why the appeal was not equitably moot. “First and foremost,” he said, the confirmation order was no longer a final order, and equitable mootness does not apply when the confirmation order has been converted to a report and recommendation. Second, equitable mootness does not apply when the government, via the U.S. Trustee, is representing absent individuals. “Not only did the parties craft a release that would extinguish the rights of countless individuals, they did so in a way that would insulate the release from judicial review,” Judge Novak said. He refused to “apply the doctrine of equitable mootness against the Trustee when the Trustee seeks to protect the rights of absent individuals. Third, the “seriousness” of the bankruptcy court’s “errors counsels against a finding of equitable mootness.” Fourth, effective relief was available. Judge Novak said he could sever the releases without altering any creditor’s recovery “or affect[ing] the bankruptcy estate in any way.”

Applying the factors to the appeal at hand, Judge Novak observed that equitable mootness “is all too often invoked to avoid judicial review, as Debtors seek to do here,” citing the recent Eighth Circuit opinion that limited equitable mootness dramatically. FishDish LLP v. VeroBlue Farms USA Inc. (In re VeroBlue Farms USA Inc.), 6 F.4th 880 (8th Cir. Aug. 5, 2021). Judge Novak’s order vacated the confirmation order, voided the third-party releases, severed the third-party releases from the plan, and voided the exculpation clause. Judge Novak remanded the case to another bankruptcy judge with instructions to redraft the exculpation clause and “then to proceed with confirmation of the Plan without the voided Third-Party Releases.”

Comment of attorney March of The Bankruptcy Law Firm, PC: The Bankruptcy Code does NOT allow non-debtors to be granted releases in a debtor’s Chapter 11 plan. This practice has always been illegal, and it is reassuring to see that more Judges are reversing confirmation of Chapter 11 plans, on appeal, which grant releases to non-debtor parties.

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Fraudulent Transfer and Turnover Claims

In Pereira v. Urthbox, Inc., et al. (In re Try the World, Inc.),     BR   , 2021 WL 3502607 (Bankr. S.D.N.Y. 8/9/21), the U.S. Bankruptcy Court for the Southern District of New York held that fraudulent transfer and turnover claims are “core” non-arbitrable claims and denied a motion to compel arbitration as to those claims.

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California’s Debt Collection Licensing Act Creates Uncertainty:

California’s new Debt Collection Licensing Act, Cal. Fin. Code § 100000 et seq., took effect on January 1, 2022. However, the legislature’s inartful and inconsistent draftsmanship has resulted in a great deal of uncertainty over who exactly must be licensed.

Section 100001(a) provides that “no person shall engage in the business of debt collection in this state without first obtaining a license . . .”. Section 100005 authorizes the Commissioner of Financial Protection & Innovation to take specified enforcement actions if in her opinion ” a person who is required to be licensed under this division is engaged in business as a debt collector without a license . . .”. Note that these two statutes use different terms – “debt collection” and “debt collector”. Both are defined in the DCLA but the definitions are not consistent. Section 10000(2)(i) defines “debt collection” as “any act or practice in connection with the collection of consumer debt” while Section 100002(j) defines “debt collector” as “any person who, in the ordinary course of business, regularly, on the person’s own behalf or on behalf of others, engages in debt collection”. Thus, the definition of “debt collector” requires more than simply “debt collection”.

The determining the scope of the DCLA is further complicated by the use of nested definitions. The definition of “debt collection” refers to collection of “consumer debt” which is defined in Section 100002(f) as “money, property, or their equivalent, due or owing, or alleged to be due or owing, from a natural person by reason of a consumer credit transaction”. It also includes mortgage debt and “charged-off consumer debt” as defined in Section 1788.50 of the Civil Code. Section 100002(e) term “consumer credit transaction” as “a transaction between a natural person and another person in which property, services, or money is acquired on credit by that natural person from the other person primarily for personal, family, or household purposes”.

Recognizing that many businesses are confused about the scope of the DCLA, the DFPI recently added the following notice to its website:

Furthermore, the DFPI will not bring an enforcement action for unlicensed activity under Financial Code section 100001 if there is a bona fide legal opinion request, or similar request submitted in good faith via, prior to and pending as of December 31, 2021, regarding whether a prospective applicant is “in the business of debt collection.”

Unfortunately, anyone reading this notice for the first time after 12.31.21 will not be able to make a request before 12/31/21. [Reported in 1/6/22 Credit & Collection e-newsletter]

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Key Provisions in the Federal CARES Act

A key provisions in the federal CARES Act expires on March 28, 2022. Specifically, the maximum amount of debt a debtor can owe, and still be eligible to file bankruptcy in Subchapter V of Chapter 11, will decrease from $7.5 million, back to the original maximum debt amount of $2,725,625.

It is uncertain whether Congress will extend this provision before it expires.

The opportunity for a person or entity to file Subchapter V Chapter 11 (the simpler, faster, cheaper, more favorable for debtors kind of Chapter 11 bankruptcy case), where the debtor owes up to 7.5 million dollars of debt, will end on March 28, 2022, unless Congress extends the 7.5 million amount, which is uncertain.

Persons and entities owing more than $2,725,625 of debt, but not over $7.5 million dollars of debt, which wish to file Subchapter V bankruptcy, should do so before March 28, 2022.

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In re Lockhart-Johnson

In re Lockhart-Johnson, 2021 WL 3186115 (9th Cir. BAP 2021): In this case, the United States Bankruptcy Appellate Panel of the Ninth Circuit decides a previously unresolved issue, holding that to assert a nondischargeability claim against the non-filing spouse of a bankruptcy debtor, a plaintiff must affirmatively obtain a nondischargeability determination by commencing an adversary action against that person within 60 days of the meeting of creditors.

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Sienega v. State of California Franchise Tax Board (In re Sienega)

Sienega v. State of California Franchise Tax Board (In re Sienega),    F.4th    (9th Circuit Court of Appeals 12/6/21): In Sienega, the Ninth Circuit Court of Appeals NARROWLY defines what is the equivalent of a tax return for dischargeability purposes, pursuant to 11 USC 523(a)(1)(B) of the Bankruptcy Code. Bad news for debtors who do not file tax returns on time, as failing to file a tax return on time prevents a debtor from seeking to discharge that tax debt in bankruptcy.

Interpreting the hanging paragraph in Section 523(a), the Ninth Circuit sticks to the Beard test in deciding whether something is close enough to a tax return to justify discharging a tax debt. Affirming the Bankruptcy Appellate Panel, the Ninth Circuit narrowly defined a tax return, leaving debtors with nondischargeable tax debts if they didn’t file something that looks like traditional tax returns within the prescribed time.

The 2005 amendments to Section 523 included a so-called hanging paragraph that gave some flexibility to what constitutes a tax return. However, the Ninth Circuit sticks to the venerable Beard test and won’t allow debtors to provide taxing authorities with a dollop of information and expect a discharge of delinquent taxes.

The opinion by the Ninth Circuit on December 6 does not deal with the longstanding circuit split over the dischargeability of taxes when returns are filed even one day late. See, e.g., Mass. Dept. of Revenue v. Shek (In re Shek), 947 F.3d 770 (11th Cir. Jan. 23, 2020), and click here for ABI’s discussion.

The Nonfiled State Tax Returns

The debtor failed to file California state tax returns for four years in the 1990s. In 2007, the Internal Revenue Service made upward adjustments to the debtor’s federal tax liability for those four years.

In 2009, the debtor’s counsel sent a fax to the California state taxing authority that included a form from the IRS showing the adjustments to the federal tax and the debtor’s taxable income. In the fax, the debtor’s counsel said that the debtor conceded the adjustments.

In response, the state taxing authority sent the debtor a notice of proposed assessments for those four years. The notice stated that the state had no records of having received the debtor’s state income tax returns.

The debtor filed a chapter 13 petition in 2014 that was converted to chapter 7.

The state filed an adversary proceeding to declare that the taxes were not dischargeable under Section 523(a)(1)(B) because the debtor had not filed state tax returns for the years in question. On summary judgment, the bankruptcy court ruled that the taxes were nondischargeable. The BAP affirmed. The debtor appealed to the circuit but lost for a third time in an opinion by Circuit Judge Sidney R. Thomas.

The Statutes

Section 523(a)(1)(B) bars the discharge of a tax debt for which the debtor did not file a “return.” The 2005 amendments added a hanging paragraph at the end of Section 523(a) that says that “a ‘return’ means a return that satisfies the requirements of applicable nonbankruptcy law . . . [and] includes a return prepared [by the IRS] pursuant to section 6020(a) [of the IRS Code] . . . or similar State or local law.”

Section 6020(a) of the IRS Code pertains to taxpayers who do not file tax returns but disclose “all information” necessary for the preparation of a return. The IRS may then prepare a return that becomes the taxpayer’s return on “being signed by such person.”

The debtor argued that his fax was “similar” to the type of a return specified in Section 6020(a) and a parallel California statute. The provision in the state tax code says:

If any item . . . on a federal tax return . . . is changed or corrected [by the IRS], . . . that taxpayer shall report each change . . . and shall concede the accuracy of the determination or state wherein it is erroneous.

It’s Not Similar

Affirming the lower courts, Judge Thomas put it succinctly: The California statute “is not ‘similar’ to [Section] 6020(a).” He identified the difference.

The California tax law does not permit the state taxing authority to prepare a return. “[U]nder the plain words of the relevant statutes, the return exception contained in § 523(a)’s hanging paragraph does not apply,” Judge Thomas said.

The debtor also argued that his fax was the “functional equivalent” of a tax return because his counsel provided all the information required to calculate state tax liability.

Judge Thomas evaluated the argument under the so-called Beard test emanating from the federal Tax Court. Beard v. Commissioner of IRS, 82 T.C. 766 (1984), aff’d, 793 F.2d 139 (6th Cir. 1986).

The Ninth Circuit, he said, had adopted the Beard test. It requires something that (1) purports to be a return; (2) is executed under oath; (3) contains enough information to compute the tax; and (4) is an “honest and reasonable” attempt to comply with tax law.

The fax failed every element of the Beard test. The debtor, Judge Thomas said, did not file a return that complied with state law, and the fax did not purport to be a return. It was not submitted under oath. Indeed, the debtor did not sign the document. It was sent by the debtor’s lawyer and did not include enough information “to allow complete computation of state tax.”

According to Judge Thomas, the fax only communicated information about a federal tax proceeding and was not an “honest and reasonable attempt” to comply with tax law.

Judge Thomas affirmed the BAP because the fax “did not constitute state tax returns under § 523(a)’s hanging paragraph.”

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In re Purdue Pharma

In In re Purdue Pharma,     F.Supp.4th    (US District Court, Southern District of New York 12/16/21 decision, in appeal LC 21-07532 from Bankruptcy court to District Court, the US District Court Judge overturned the Order confirming debtor Purdue Pharma’s Chapter 11 Plan, because of the releases plan gave nondebtors (Sackler family). the US District Court ruled that the Bankruptcy court had no statutory power to impose non-consensual releases--by creditors which had NOT voted to accept the plan-- of creditors’ direct claims against non-debtors for opioid damages. Sacklers paying 4.35 billion dollars into plan did NOT fix that fatal problem.

Moral of this story: If you want a discharge, file your own bankruptcy case, where you are the bankruptcy debtor, and seek a discharge in your own bankruptcy case of claims against you. If you receive a discharge in your own bankruptcy case, that will have the same effect as RELEASES would have, that Sacklers try to get in Purdue Pharma’s bankruptcy case.

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US Solicitor General Urges US Supreme Court to Review Constitutionality of the 2018 Increase in U.S. Trustee Fees

On 12/08/21, the U.S. Solicitor General urged the Supreme Court to grant certiorari, resolve a circuit split and decide whether the increase in fees payable to the U.S. Trustee system in 2018 violated the uniformity aspect of the Bankruptcy Clause of the Constitution because it was not immediately applicable in the two states that have bankruptcy administrators rather than U.S. Trustees.

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In re Moore

As discussed in In re Moore, a recent Bankruptcy Court decision, cases and bankruptcy treatises are split on the question of whether or not a debtor who proposes a Chapter 13 plan which provides to pay 100% of what debtor owes to general unsecured creditors, is NOT entitled to have the Bankruptcy Judge confirm (aka approve) the Chapter 13 Plan, so it goes into effect, binding debtor and creditors, unless the Plan provides to pay general unsecured creditors interest, on their general unsecured claims, over the life of the Chapter 13 Plan,where the Debot is not devoting all the debtor’s “disposable monthly income” to fund the Plan.

Taking sides with Collier but disagreeing with two other treatises, Bankruptcy Judge John E. Waites of Columbia, S.C., ruled, in his In re Moore decision, that a chapter 13 debtor is not required to pay interest on unsecured claims when the plan pays creditors in full, even if the debtor commits less than all disposable income to the plan.

Faced with a final judgment for almost $50,000, the debtor filed a chapter 13 petition on the eve of a contempt hearing in state court. The debtor filed a five-year plan to pay unsecured creditors in full, but without interest.

The debtor’s income was above median, but his monthly plan payments were about $1,500 less than his projected disposable income.

The judgment creditor objected to confirmation, contending that the plan was not filed in good faith and that Section 1325(b) requires interest when the debtor is not committing all disposable income to creditor payments.

Judge Waites overruled the objections in his November 23 opinion.

Good Faith

Filing on the eve of a hearing in state court was not dispositive on the question of good faith. Judge Waites said that “[m]any debtors file bankruptcy cases for the purpose of staying actions in state court.” Furthermore, the debtor was not using bankruptcy to avoid payment of an admitted debt.

The plan to pay all creditors in full was “strong indication of good faith,” Judge Waites said.

Judge Waites therefore held that the plan was filed in good faith.

Committing All Disposable Income Not Required

The judgment creditor argued that the failure to commit all disposable income to the plan did not comply with Section 1325(b)(1).

When a creditor or the trustee objects to confirmation, the section does not permit confirmation unless:

(A) the value of the property to be distributed under the plan . . . is not less than the amount of such claim; or (B) the plan provides that all of the debtor’s projected disposable income . . . will be applied to make payments to unsecured creditors under the plan.

For Judge Waites, the question was an issue of first impression in his district.

Judge Waites said that a majority of cases around the country permit confirmation if the debtor is paying less than all disposable income, as long as creditors are paid in full. He cited more than a dozen decisions to that effect.

Subsection 1325(a)(1)(A) is written in the disjunctive and is controlling, Judge Waites said. The debtor is not required to satisfy both subsections (A) and (B).

Judge Waites held that that debtor “does not have to commit all of his projected disposable income to plan payments for the duration of the plan” because he “has proposed to pay unsecured creditors in full over 60 months, satisfying the requirements of § 1325(b)(1)(A).”

Interest Isn’t Required

The judgment creditor argued that under Section 1325(b)(1)(A), the debtor could not confirm the plan without paying interest. On that score, Judge Waites said that the courts “vary.”

Judge Waites cited four opinions not requiring interest when the debtor is paying claims in full but is not devoting all disposable income to the plan. Among those cases is In re Gillen, 568 B.R. 74 (Bankr. C.D. Ill. 2017). To read ABI’s report on Gillen, click here.

On the other hand, Judge Waites cited six cases, along with the Lundin and Norton treatises, that require interest.

In short, Judges Waites agreed with Gillen and concluded that “value” as used in the subsection does not mean “present value.” He noted that the Collier treatise and three other cases concur with Gillen.

If Congress had intended to require interest, Judge Waites said that it would have “drafted § 1325(b)(1) to match the other subsections of § 1325 with present value requirements.” He said that placement of “the phrase ‘as of the effective date of the plan’ prior to the word ‘value’ should be regarded as a purposeful policy decision by Congress requiring a different interpretation than the phrase’s meaning in § 1325(a)(4) and (a)(5)(B)(ii).”

Judge Waites overruled the objection and confirmed the plan six days later.

Comment of attorney KPMarch of The Bankruptcy Law Firm, PC: Usually general unsecured creditors are THRILLED where a debtor’s Chapter 13 Plan proposes to pay their claims 100%, and do NOT object. The objecting party in In re Moore was a Judgment creditor, and Judgment creditors can be aggressive, as this Judgment creditor was.

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Hawker v. Eastport Holdings LLC (In re GYPC Inc.),     BR    (Bankr. W.D. Ohio, Nov. 22, 2021, bankruptcy case 19-3054)

Bankruptcy Judge Decision holding that the US Supreme Court Taggart case means there is no strict liability for violating a corporate debtor’s automatic stay. Instead, the debtor must present persuasive authority before a creditor can be held in contempt for violating the automatic stay protecting a corporate debtor.

Bankruptcy Court found that the creditor took an “ill-advised” action in violation of the automatic stay in a corporate debtor’s chapter 11 case but refused to hold the creditor in contempt, applying Taggart v. Lorenzen, 139 S. Ct. 1795 (2019), the Supreme Court held that there can be no sanctions for civil contempt of the discharge injunction if there was an “objectively reasonable basis for concluding that the creditor’s conduct might be lawful under the discharge order.” Id. at 1801.

Judge Humphrey ruled he was obliged to apply Taggart in deciding whether the creditor could be held in contempt. In the absence of persuasive authority, the creditor was off the hook for contempt given the “fair ground of doubt” about the creditor’s stay violation. Judge Humphrey nonetheless found a remedy that was still available. Whether the remedy has any value is debatable.

So it is today in bankruptcy after Taggart. Creditors face no contempt sanctions if they can argue with a straight face that their actions didn’t violate the automatic stay. Whether they knew it or not, the justices of the Supreme Court have taken away some of the efficacy of the automatic stay under Section 362(a), now that lower courts are ruling that Taggart applies to all contempt sanctions in bankruptcy, not just violations of the discharge injunction.

Stay Violation Buried in Complex Facts

The facts were maddeningly complex but amounted to this: A company sold its assets to a buyer in return for cash and some preferred stock in the buyer. The purchase agreement called for adjustments of the purchase price after closing based on cash flow and the level of working capital.

If the working capital and cash flow proved too low, the seller would lose some or all of the preferred stock.

Four months after the seller’s chapter 11 filing, the buyer sent a notice to the seller claiming there was a working capital deficiency and demanding payment of the deficiency. Evidently, the preferred stock would be the largest asset in the seller’s bankruptcy. However, the letter was more than a year late under the asset purchase agreement.

According to Judge Humphrey, the buyer did not know that the seller was in bankruptcy when the first letter went out. In response to the letter, counsel for the debtor told the buyer about the bankruptcy and the automatic stay.

A few months later, the seller sent a second letter to the debtor, this time claiming a cash flow deficiency and declaring that the seller lost the preferred stock as a consequence. Now aware of the bankruptcy, the letter said that the buyer was not demanding payment.

Also after bankruptcy, the buyer sued the seller’s principals in state court. The debtor was not named as a defendant. If it went to judgment, Judge Humphrey said that the outcome as a practical matter would determine whether the debtor had indeed lost the preferred stock, even though the debtor was not a party in the suit.

By now, the case had converted to chapter 7. The trustee sued the buyer in bankruptcy court, claiming violations of the automatic stay and seeking contempt sanctions.

Assuming there were violations of the automatic stay, Judge Humphrey was first tasked with deciding whether Taggart limits the ability of corporate debtors to win sanctions for contempt.

Taggart Applies to Corporate Debtors

Before Taggart, Judge Humphrey said that lower courts in the Sixth Circuit applied a standard akin to strict liability where a creditor could be held in contempt even if the creditor subjectively believed that the action was not a stay violation. He said that the Sixth Circuit itself had approved the strict liability standard “at least implicitly.”

Judge Humphrey acknowledged that Taggart did not address the contempt standard for corporate debtors and noted “that different policy imperatives exist in addressing a violation of the automatic stay rather than a discharge violation.”

Congress has not given corporate debtors a private right of action similar to the relief afforded to individual debtors in Section 362(k), Judge Humphrey said. In other words, corporate debtors cannot assert a strict liability standard “because it is inconsistent with the conclusion in Taggart that damages for contempt under § 105, and the private right of action supporting damages under § 362(k)[,] have different standards.”

Although he cited courts’ rulings to the contrary, Judge Humphrey applied “the Taggart standard in determining whether any stay violations committed by [the buyer] entitle [the debtor] to damages under a civil contempt theory.”

Clear Authority Required for Contempt after Taggart

Next, Judge Humphrey applied Taggart to the three asserted stay violations, beginning with the first letter demanding payment to cure the working capital deficiency.

The first letter violated the stay by demanding payment. Given the debtor’s ignorance of the bankruptcy, Judge Humphrey held that contempt was not available and no damages could be awarded.

The second letter was no stay violation, but for a different reason. The letter did not demand payment, but notified the debtor about the loss of preferred stock in view of the cash flow deficiency.

The second letter was no stay violation, Judge Humphrey said, because it was a “classic recoupment” to which the automatic stay does not apply. The buyer was offsetting mutual debts and credits arising from the same transaction.

The state court suit against the two principals did violate Section 362(a)(3), even though the debtor was not a defendant. Why? Because, as Judge Humphrey said, “the ultimate resolution of [the state court suit would decide] whether the potentially most significant estate asset, the [preferred stock], is of any value.”

Judge Humphrey explained that the suit in state court at least had the potential for interfering with the debtor’s contractual rights in the preferred stock. The buyer should have sought a modification of the automatic stay, he said.

Even so, Judge Humphrey held that the state court suit was not contemptuous under Taggart. There was no “persuasive authority,” and the legal issues were “less clear.” Consequently, there was a “fair ground of doubt” and no basis for a contempt finding under Taggart. Although the buyer’s actions were “ill-advised,” the buyer had “an objectively reasonable basis” for believing the suit in state court was not a stay violation, Judge Humphrey said.

While contempt was off the table, Judge Humphrey cited the Sixth Circuit for the proposition that an action in violation of the stay is “invalid and voidable.” He therefore held that the buyer’s actions “in violation of the stay are invalid and void.”

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Stuart v. City of Scottsdale (In re Stuart),     BR    (B.A.P. 9th Cir. Nov. 10, 2021, appeal No. 21-1063): Creditor which obtained an attachment before the debtor filed bankruptcy, has NO Duty to Release that Attachment, when debtor files bankruptcy, holds 9th Circuit BAP, relying on the US Supreme Court Fulton case.

The BAP decision may have a hint that failure to stop proceedings after bankruptcy can be an automatic stay violation, even after Fulton.

Concluding that the Supreme Court’s Fulton decision overruled prior Ninth Circuit authority, the Ninth Circuit Bankruptcy Appellate Panel held that a creditor no longer violates any provision of the automatic stay in Section 362(a) by maintaining the status quo and declining to vacate a prepetition attachment.

While the decision under Section 362(a)(3) is no surprise given that Fulton addressed the same subsection, the November 10 BAP opinion is noteworthy for finding no stay violations under any other subsection in Section 362(a).

The Prepetition Attachment

A municipality in Arizona obtained a $30,000 judgment against an individual and served a writ of garnishment on a bank that held about $9,000 belonging to the judgment debtor in three accounts.

The judgment debtor moved in state court to quash the garnishment, contending that the accounts were community property. The state court allowed the city to take discovery, but the debtor filed a chapter 13 petition before the city took further action in state court.

Once in bankruptcy, the debtor’s counsel sent messages to both the city and bank demanding the release of the attachment. The city’s attorney responded by filing a motion to stay the litigation in state court.

The debtor moved the state court to vacate the garnishment. The city’s attorney responded by saying that the city would abide by whatever decision was made under the Bankruptcy Code and did not oppose releasing the funds.

More specifically, the city told the debtor that Section 362(a) only required staying the proceedings, not dismissing the garnishment.

The state court vacated the garnishment, and the bank released the funds. The debtor then filed a motion in bankruptcy court seeking $30,000 in damages for a willful violation of the stay under Section 362(k).

The Pre-Fulton Finding of a Stay Violation

At the ensuing hearing held before the Supreme Court handed down Fulton, the bankruptcy court cited Ninth Circuit authority from 2017, faulted the city for not vacating the garnishment, and entered an order finding a stay violation. The bankruptcy court told the debtor to proceed with a hearing to fix damages.

After Fulton came down, the city filed a motion for rehearing under Bankruptcy Rule 9024 and Federal Rule 60(b). The bankruptcy court granted rehearing.

The Ruling After Fulton

Ruling under Fulton, the bankruptcy court said that its prior ruling was wrong and that the automatic stay does not require a creditor to take affirmative action under any of the subsections in Section 362(a).

The debtor appealed to the BAP, but Bankruptcy Judge Robert J. Faris affirmed for the BAP in an opinion on November 10.

First, Judge Faris dealt with the question of whether the city properly moved for rehearing under Bankruptcy Rule 9024. He said that the finding of a stay violation was not a final order in the absence of a decision fixing damages.

Because there was no final order, Judge Faris said that Rule 9024 did not apply and that the “bankruptcy court was free to review and change its own interlocutory order whether or not Rule 9024 permitted it to do so.”

Judge Faris therefore reviewed the reconsideration order de novo.

Fulton Means No Stay Violation

Citing City of Chicago v. Fulton, 141 S. Ct. 585, 208 L. Ed. 2d 384 (Sup. Ct. Jan. 14, 2021), Judge Faris saw no error when the city “failed to move to quash the writ of garnishment or cause [the bank] to unfreeze the bank accounts.” To read ABI’s report on Fulton, click here.

Before Fulton, Judge Faris cited the Ninth Circuit for having held that the knowing retention of estate property violates Section 362(a)(3). Fulton, he said, overruled those decisions.

Judge Faris quoted Fulton for saying that Section 362(a)(3) contains no affirmative turnover obligation and that mere retention of estate property does not violate the stay. He affirmed the bankruptcy court’s ruling on subsection (a)(3) by saying that the city “had no affirmative duty to ensure the return of estate property to [the debtor].”

Judge Faris cited Margavitch v. Southlake Holdings LLC (In re Margavitch), 20-00014, 021 BL 383922, 2021 Bankr. Lexis 2784, 2021 WL 4597760 (Bankr. M.D. Pa. Oct. 6, 2021), as being directly on point. In Margavitch, he described Bankruptcy Judge Mark J. Conway of Wilkes-Barre, Pa., as finding “no affirmative obligation to release the funds and [said that the creditor] need only maintain the status quo.” To read ABI’s report on Margavitch, click here.

Having found no violation of Section 362(a)(3), Judge Faris saw no violation of any other subsection in Section 362(a).

By promptly taking steps to stay the litigation in state court, Judge Faris said there was no violation of subsection (a)(1), which bars the continuation of a suit against a debtor. Because the city had done nothing to enforce the judgment or the writ, he saw no violation of subsection (a)(2).

Likewise, there was no act to recover a claim against the debtor and no violation of subsection (a)(6), because the city only maintained the status quo.

A Possible Qualification

Judge Faris concluded his opinion by saying there was no stay violation because the city “did nothing to change the status quo” and “immediately asked the state court to stay the case.”

Is there significance in Judge Faris’s use of the word “immediately”?

Assume that the motion was sub judice in state court to convey estate property to a creditor. Would the creditor violate the automatic stay if the creditor does not ask the state court to withhold a decision conveying property to the creditor?

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Jackson v. Le Centre On Fourth LLC (In re Le Centre On Fourth LLC),    F4th    (11th Cir. Nov. 15, 2021), appeal No. 20-12785

11th Circuit Court of Appeals expands Espinosa case reasoning, to say that a debtor’s failure to give notice--as required by FRBP Rule 2002(c)(3)--to creditors, that the bankruptcy debtor’s proposed plan would give releases to non-debtor third parties, not just to the bankruptcy debtor, is NOT fatal, so long as the proposed Plan was served on all creditors, and the Plan stated that the Plan, if confirmed, would give release to non-debtor third parties, not just to debtor. The 11th Circuit decision said Circuit was analogizing to the reasoning of the Espinosa case.

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In re Summit Financial Inc.

In re Summit Financial Inc.,     BR    (Bankr. C.D. Cal. Nov. 5, 2021, bankruptcy case number 21-12276): Bankruptcy Court (Bankruptcy Judge Scott Clarkson) held it is improper for debtor’s attorney to put a “Disclaimer” on Debtor’s bankruptcy Schedules and Statement of Financial Affairs, because the “Disclaimer” contravened the debtor’s statutory obligation to update its schedules and statement of affairs.

Judge Clarkson ruled that a debtor and debtor’s attorney cannot disclaim responsibilities that the bankruptcy debtor (and the bankruptcy debtor’s attorney) owe pursuant to the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure (here the debtor’s statutory obligation to update its schedules and statement of affairs.)

The attorney had copied and used, a disclaimer used in a Subchapter V case, which had been used in several of the country’s largest “mega” cases.

Judge Clarkson laid down guidelines for a lawyer who copies pleadings written by another lawyer in a different case. The debtor in Judge Clarkson’s court was a collection of seven nail salons dealing with unpaid rent. The case “is not General Motors,” remarked Judge Clarkson in his decision. The debtor had prefaced the 34-page schedules and statement of affairs with 11 pages of disclaimers and explanations. Judge Clarkson held that a debtor cannot put a disclaimer on the debtor’s schedules and statement of financial affairs which says that:

  • The debtor has no duty to ensure that the schedules and statement of affairs are accurate;
  • The debtor has no duty to update or correct the schedules and statement of affairs; and
  • Even if the debtor makes changes in the schedules or statement of affairs, the debtor has no duty to tell any creditor that changes were made, even creditors affected by the changes.

Judge Clarkson said he was “quite concerned” about the disclaimers. He cited Ninth Circuit authority for the proposition that the disclaimer contradicted the “universal understandings that bankruptcy schedules and statements of financial affairs require continuous monitoring and updating when necessary, and that the Federal Rules of Bankruptcy Procedure require notice of all amendments to affected parties in interest.” Judge Clarkson entered an order directing the debtor to show cause why it should not be removed as debtor in possession or why the case should not be dismissed. The impending hearing prompted the debtor’s counsel to remove the offending disclaimers.

In explanation, the debtor’s counsel said that the disclaimers were “somewhat boilerplate” and had been taken from four of the country’s recent and largest chapter 11 cases. The deletion of the disclaimers allowed Judge Clarkson to vacate the hearing to remove the DIP or dismiss. However, he said that “this matter will be revisited at the time of professional compensation review.” Subchapter V, he said, “was meant to reduce the costs of Chapter 11 to small businesses, not bilk the small businesses and their creditors with mega case billing opportunities.”

Not finished, Judge Clarkson went on to discuss whether cutting and pasting legal documents from pleadings by other lawyers in other cases amounts to plagiarism or has ethical implications. Citing an article by two law professors about ethics and plagiarism, Judge Clarkson laid down guidelines for lawyers to follow when copying someone else’s work. “[F]or goodness sake,” he said, “make sure that your own facts match up with the facts present from the original source,” and “make sure that the law is correct and hasn’t changed since the original text was written.”

Comment of attorney Kathleen P. March of The Bankruptcy Law Firm, PC: Lesson this decision teaches is do NOT use disclaimers, and do NOT mindlessly copy disclaimers (or other material) used in other cases, before analyzing to make sure what you are copying is correct.

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Bankruptcy Venue Reform Act

The American Bankruptcy Institute 11/10/21 e-newsletter reports that:

A Bipartisan Coalition of Attorneys General Support the US Congress passing, and President Biden signing into law, the Bankruptcy Venue Reform Act The National Association of Attorneys General (NAAG) sent a letter yesterday to Congress signed by 43 attorneys general in support of the Bankruptcy Venue Reform Act of 2021. Venue reform has long been needed, to require corporations, LLCs and partnerships to file bankruptcy in the State which is the principal place of business of the corporation, LLC or partnership, instead of having the option of filing bankruptcy in the State where the entity is incorporated.

A high percent of corporations nationwide are incorporated in Delaware, and therefore, under present bankruptcy venue law, can file bankruptcy in Delaware, even when the only contact the corporation has with Delaware is that the corporation is incorporated in Delaware, and the corporation’s principal place of business is in a state other than Delaware.

The present bankruptcy venue law allows many corporations to “venue shop”, to file bankruptcy in Delaware (a state where the Bankruptcy Court is known to be VERY debtor favoring), instead of being required to file bankruptcy in the Bankruptcy Court of the State in which the corporation has the corporation’s principal place of business.

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Wigley v. Lariat Cos. (In re Wigley),    F.4th   , 20-3132 (8th Cir. Ct. of Appeals, 10/18/21)

Wigley v. Lariat Cos. (In re Wigley),    F.4th   , 20-3132 (8th Cir. Ct. of Appeals, 10/18/21): The cap on a so-called landlord claim under Section 502(a)(6) does not prevent the court from barring discharge of the claim under Section 523(a)(2)(A), even if the reduced claim was paid in an individual’s chapter 11 plan, according to this10/18/21 decision of the Eighth Circuit Court of Appeals.

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In re Stevens,    F.4th   (9th Cir. 2021)

In re Stevens,    F.4th   (9th Cir. 2021) issued on 10/19/21, is important, because it holds that where a bankruptcy debtor lists a lawsuit (in which debtor is the plaintiff) in debtor’s Statement of Financial Affiars, but does NOT list the lawsuit in the debtor’s Asset Schedule (Schedule A/B), that the lawsuit is NOT abandoned back to the debtor, when the Bankruptcy Court closes debtor’s bankruptcy case. Note that assets that are accurately listed, in the bankruptcy debtor’s schedule A/B (asset schedule) are abandoned back to the debtor, per 11 USC 521(a), when the Bankruptcy Court closes the debtor’s bankruptcy case, if the asset has not been “administered” (example: sold by bankruptcy trustee in Ch 7, sold to pay creditors by debtor’s ch11 or 13 plan) during the bankruptcy case.

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Mass Evictions Didn’t Result After U.S. Ban Ended, Despite Fears

When the federal moratorium on evictions ended in August, many feared that hundreds of thousands of tenants would soon be out on the streets. More than six weeks later, that hasn’t happened, the Wall Street Journal reported. Instead, a more modest uptick in evictions reflects how renter protections at the city and state levels still remain in parts of the country, housing attorneys and advocates said. Landlords, meanwhile, say the risk of an eviction epidemic was always overstated and that most building owners have been willing to work with cash-strapped tenants. Both groups also think that federal rental assistance, slow to get off the ground earlier this year, is now helping prevent many new eviction filings. Eviction filings in court — which are how landlords begin the process of removing tenants from their homes — were up 8.7% in September from August, according to the Eviction Lab, a research initiative at Princeton University that tracks filings in more than 30 cities. But the rate is still low on a historic basis, and, at 36,796 filings, it is roughly half the average September rate pre-pandemic. While subdued eviction rates offer only an early and incomplete look at the issue, “what is out so far is certainly better than anyone’s previous best case scenario for the month after the moratorium,” said Gene Sperling, a senior adviser to President Biden. Eviction rates could still accelerate. Courts are now hearing a backlog of cases filed earlier in the pandemic. Rental assistance is still moving too slowly and is inadequate in some places, said David Dworkin, a former U.S. Treasury official and president and chief executive of the National Housing Conference, a Washington affordable housing-advocacy group. “We’ve got a long way to go,” Mr. Dworkin said. [as reported by 10/14/21 American Bankruptcy Institute (“ABI”) e-newsletter]

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Margavitch v. Southlake Holdings LLC (In re Margavitch)

Margavitch v. Southlake Holdings LLC (In re Margavitch),    BR   , case no. 20-00014 (Bankr. M.D. Pa. Oct. 6, 2021): Bky ct decision holding that, in light of the US Supreme Court Fulton decision, a creditor does not violate any of the 11 USC 362(a)(1)-(8) bankruptcy automatic stays, by refusing to release-- after the debtor filed bankruptcy and demanded (several time) that the creditor release the judicial lien the creditor had obtained on debtor’s bank account, which lien the creditor had obtained before the debtor filed bankruptcy. ABI in its 10/14/21 e-mail reports on the Margavich decision as follows:

Refusing to Release an Attachment After Filing Is No Stay Violation Following Fulton: Pennsylvania’s Judge Conway hints that failure to stop proceedings after bankruptcy can be an automatic stay violation, even after Fulton.

After Fulton, a creditor’s refusal to lift the attachment of a bank account is no violation of the automatic stay under any subsection Section 362(a), according to Bankruptcy Judge Mark J. Conway of Wilkes-Barre, Pa.

The October 6 opinion by Judge Conway hints that a creditor must stop legal proceedings after bankruptcy that would impair the debtor’s interest in property, Fulton notwithstanding.

The Pre-Filing Attachment

Before bankruptcy, the creditor obtained a $33,300 judgment against the soon-to-be debtor. Also before bankruptcy, the creditor obtained a writ of execution and served it on a credit union holding an account belonging to the debtor that contained about $1,100.

Service of the writ froze the account and gave the creditor a judicial lien. After service of the writ, the debtor filed a chapter 13 petition. The creditor did not undertake further proceedings in state court after bankruptcy that would have been required to transfer the funds in the account from the credit union to the creditor.

On several occasions after filing, counsel for the debtor contacted the lender and demanded the lifting of the attachment. The lender declined.

A few months after filing, the debtor commenced an adversary proceeding against the lender, alleging a willful violation of the automatic stay under Section 362(k), thereby opening the door to actual and punitive damages and attorneys’ fees. The complaint also sought turnover.

The debtor and the creditor filed cross-motions for summary judgment. Before the hearing, the debtor confirmed a plan promising to pay the creditor in full, and the lender released the funds in the account to the debtor.

Judge Conway was therefore only required to rule about a stay violation and contempt.

Nothing Offended in Section 362(a)

Naturally, Fulton was front and center. SeeCity of Chicago v. Fulton, 141 S. Ct. 585, 208 L. Ed. 2d 384 (Sup. Ct. Jan. 14, 2021). The Supreme Court held “that mere retention of property does not violate the [automatic stay in] § 362(a)(3).” Id. 141 S. Ct. at 589. Section 362(a)(3), the Court said, only “prohibits affirmative acts that would disturb the status quo of estate property.” Id. at 590.

In Fulton, the City of Chicago was itself holding the debtor’s car at the time of the chapter 11 filing. Admitting that the lender had taken no action after bankruptcy, the debtor contended that Fulton did not apply because the credit union was in possession of the funds, not the judgment creditor.

Judge Conway first analyzed the facts under Section 362(a)(3), the same subsection at issue in Fulton. That section prohibits “any action” to obtain possession or exercise control over estate property.

In the case at hand, Judge Conway said that the creditor’s actions were “perhaps more appropriately characterized as inactions.” He paraphrased Fulton as holding that “the mere retention of estate property” is no stay violation.

Applying Fulton, Judge Conway held that the creditor’s refusal to withdraw the prepetition attachment “does not violate Section 362(a)(3).” Rather, the creditor only maintained the status quo. Further, withdrawing the attachment could have deprived the creditor of its judicial lien on the account.

Judge Conway found no violation of the other subsections in Section 362(a).

Subsections (a)(4) through (a)(6) likewise bar “any action” to create or enforce a lien or to recover on a prepetition claim. Given that the creditor had a lien before the filing date, Judge Conway said that the creditor “had to have done something post-petition” to violate subsections (a)(4) or (a)(5). Likewise, he held that the “mere retention of a valid pre-petition” attachment does not violate (a)(4) through (a)(6).

Next, Judge Conway examined Section 362(a)(1). The debtor claimed there was an (a)(1) violation because the subsection does not begin with “any act.” Rather the subsection bars the “commencement or continuation” of a proceeding to collect on a claim.

Judge Conway approvingly cited In re Iskric, 496 B.R. 355 (Bankr. M.D. Pa. 2013), where the court found a stay violation because the creditor allowed the continuation of state court proceedings resulting in the debtor’s incarceration.

Judge Conway read Iskric as “an example of a factual scenario where if a creditor has put a process into effect that, without intervention, causes a change in the status quo as to property of the estate or the debtor, then a creditor must act to avoid that change.”

Cases like Iskric did not apply, in Judge Conway’s opinion, because the creditor “did nothing to further or ‘continue’ the garnishment process.”

Similarly, the creditor did not violate Section 362(a)(2), prohibiting enforcement of a judgment. Judge Conway held that the failure to withdraw the attachment “cannot be construed as, or equated with, taking an affirmative action to enforce a judgment.”

In short, Judge Conway granted summary judgment in favor of the creditor by dismissing the complaint.

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Debt Collection Licensing Act

The New California Debt Collection Licensing Act (“DCLA”) may require some lawyers to get licensed as debt collectors:

California had been one of 16 states that did not require licensing of debt collectors. That changed last year with the enactment of the Debt Collection Licensing Act (“DCLA”). 2020 Cal. Stats. ch. 163 (SB 908). The DCLA will go into effect at the beginning of next year and provides for the licensing and regulation of debt collectors. As defined by the DCLA, a debt collector is “any person who, in the ordinary course of business, regularly, on behalf of that person or others, engages in debt collection.” Fin. Code § 100002(j). “Debt collection” is defined as “any act or practice in connection with the collection of consumer debt”. The term “debt collector” includes any person who composes and sells, or offers to compose and sell, forms, letters and other collection media used or intended to be used for debt collection. The term “debt collector” includes “debt buyer” as defined in Section 1788.50 of the Civil Code. The DCLA exempts a several classes of persons, including depository institutions (e.g., FDIC-insured banks, credit unions, DFPI-licensed finance lenders and brokers, DFPI-licensed mortgage lenders and servicers, Department of Real Estate licensed agents, persons subject to the Karnette Rental-Purchase Act, a trustee for a nonjudicial foreclosure, and debt collections regulated under the Student Loan Servicing Act). Fin. Code § 100001(b)(1), (2). The DCLA, however, does not expressly exempt licensed attorneys. In August, the DFPI issued an invitation for comments regarding possible additional rulemaking, including the scope of the DCLA. Today is the deadline for responding to the invitation. [as reported in 100621 Credit & Collection e-newsletter]

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Argonaut Ins. Co. v. Falcon V LLC

Argonaut Ins. Co. v. Falcon V LLC, 20-00702 (US District Court, M.D. La. Sept. 30, 2021) holds Surety Bonds Aren’t Executory Contracts, Can’t Be Assumed, and Can’t “Ride Through” bankruptcy, unaffected. The US District Court affirmed a Bankruptcy Court decision, to hold that an irrevocable surety bond isn’t executory because it gives the bonding company no further obligations to the debtor. The US Court of Appeals for the Fifth Circuit has adopted the definition of executory contracts proposed by Prof. Vern Countryman of Harvard Law School. The professor called a contract executory if it is “a contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing performance of the other.” Executory Contracts in Bankruptcy: Part I, 57 Minn. L. Rev. 439, 460 (1973). Because the surety bond was not an executory contract, per 11 USC 365, the bankruptcy debtor could not “assume” that contract. Moreover, because the surety bonds are “irrevocable.”, “the Reorganized Debtors failure to perform does not create a material breach that excuses [the bond company’s] performance, as required by the second prong of the Countryman test.” Seems unfair to the bonding company. Even worse for the bonding company, the District Court decision ruled that surety bonds cannot pass unaffected through bankruptcy because the ride-through doctrine applies only to executory contracts that were neither assumed nor rejected.

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In re Innerline Engineering, Inc.

In re Innerline Engineering, Inc., 6:21-bk-11349-WJ (Bankr. C.D. Cal. Mar. 31, 2021) Bankruptcy Court DENIED motion of bankruptcy debtor Innerline Engineering, Inc., which moved Bankruptcy Court to extend the debtor’s time to file debtor’s bankruptcy schedules, in the emergency SubV (Chapter 11 bankruptcy, 11 USC 1181 to 11 USC 1195 is the “SubchapterV part of Chapter 11):

The United States Bankruptcy Court for the Central District of California (Judge Wayne Johnson) denied the motion of Chapter 11 debtor and debtor-in-possession Innerline Engineering, Inc., that moved to extend the time for Innerline Engineering to file its case initiation documents (schedules, etc), notwithstanding that the motion was filed timely and submitted on the court’s approved local bankruptcy form. In re Innerline Engineering, Inc., 6:21-bk-11349-WJ (Bankr. C.D. Cal. Mar. 31, 2021). The court issued a lengthy order regarding the debtor’s motion, enforcing the existing deadline to submit the remaining schedules, statements, and other required forms, and finding that the debtor failed to describe any emergency or urgent development that prompted the filing. The court, however, “encourag[ed] the Debtor to immediately re-file when ready to do so.” Entry of this order resulted in the dismissal of the case on the same date.


The Bankruptcy Court issued an order analyzing what occurs at the moment a bankruptcy case is filed and how the duties of the debtor and creditors which stem therefrom are balanced under the Bankruptcy Code. The court ultimately denied the motion for 1) lack of good cause—the motion did not explain why the debtor voluntarily selected the petition date when it was either unable or unwilling to timely file all required schedules and documents; 2) lack of service of the motion on all creditors; and 3) other factors, including the debtor’s failure to file a prepetition payroll motion.

The court emphasized that, because the automatic stay provided in section 362 of the Bankruptcy Code affords a generous benefit to debtors in bankruptcy, there are responsibilities on the part of debtors that come with this “comprehensive, immediate, self-executing, and worldwide injunction” that “in most instances . . . immediately stops nearly all collection activities by creditors.” Or., pg. 2.

One such responsibility is the need to provide information:

When a borrower files a bankruptcy case and demands that a lender immediately stop a foreclosure sale or cease efforts to repossess collateral, diligent creditors will want to promptly verify that the borrower has (1) listed the collateral as an asset in that specific bankruptcy case and (2) listed the creditor on Schedule D in that case. When debtors fail to file their case initiation documents, however, verification is not possible.

Similarly, some debtors file bankruptcy cases to immediately stop wage garnishment or an eviction or a bank levy or other asset seizures. Creditors who are subject to the automatic stay under these circumstances will understandably want to know if the debtor listed the creditor on Schedules D, E or F … However, when debtors fail to file case initiation documents timely, this process is stymied.

Or., pg. 3.

Another responsibility is to provide this information timely. The court lists several important deadlines imposed on creditors, such as the 30-day deadline to object to exemptions after the meeting of creditors ends (FRBP 4003(b)(1)); the 60-day deadlines to object to the discharge of a debtor (FRBP 4004(a)) and the dischargeability of a debt (FRBP 4007(c)) ; and the 60-day deadline for a creditor to pursue a reaffirmation agreement (FRBP 4008(a)).

Creditors inevitably need to review a debtor’s schedules and statements to be able to evaluate their position on these matters (and others), and “a few weeks is not much time for a creditor to receive notice of the filing of a bankruptcy case in the mail, hire an attorney, and investigate the case.” The court noted that, “[t]his short time period is significantly reduced when debtors fail to file schedules and other case initiation documents with the petition and then, again, do not do so during the subsequent and fourteen-day period.” Or., pg. 4.

The court highlighted the refusal of higher courts to excuse untimeliness by creditors—even by just a few minutes—under virtually every conceivable set of facts and concluded that, “Courts need to avoid taking steps or other actions that would give debtors better treatment when missing deadlines than creditors or trustees.” Or., pg. 6.

With regard to lack of service of the motion on all creditors, that court identified the issue as two-fold: the debtor clearly did not serve the motion as required by the relevant local bankruptcy rule; however, the court’s analysis equally focused on the “almost always” ex parte nature of such motions brought by debtors.

The court concentrated on the typical procedure surrounding such motions to extend the deadline to file schedules and other case initiation documents, which typically results in creditors not having any “meaningful opportunity to respond” and concluded that the “process seems designed to prevent creditors from weighing in on the request.” Or., pg. 7. While the United States Bankruptcy Court for the Central District of California has a local rule which allows this type of motion to be determined without a hearing after notice is provided (LBR 9013-1(p)), in its order, the court did not reference this rule or if the motion would have been granted had notice been provided.

The court further found a lack of sufficient cause to grant the motion. The Court queried:

[T]he Motion references “several judgment creditor collection actions” and “cash flow interruptions” but it does not indicate whether these occurred gradually over time or suddenly.

. . .

The Motion also does not explain why the Debtor needs to be in bankruptcy at this time. The Motion does not identify any urgent problem. The Motion does not explain why the case should not be dismissed and then re-filed in another week or two or some later date whenever the Debtor has finished preparing the necessary documents. The Motion does not articulate any harm or problem that would arise if the Court simply enforced the fourteen-day deadline, dismissed the case and then the Debtor refiled another case whenever the Debtor finished preparing all necessary documents. Therefore, good cause for an extension has not been demonstrated.

Or., pg. 8.

The court similarly questioned why the debtor never filed a motion to pay prepetition payroll postpetition.

The court concluded with acknowledging that

[C]omments in the Motion tend to suggest that counsel has tried to press the Debtor to proceed with greater speed. Counsel who is diligently trying to prosecute a chapter 11 case cannot be faulted if the Debtor does not fully grasp the need for quick work and providing information quickly.

Or. pg., 10.

Nonetheless, the court found that “[d]enial of the Motion will assist counsel in helping the Debtor focus in the next case.”


The court here emphasizes the importance for debtors to file complete schedules with their petition or within fourteen days thereafter “to avoid prejudice to other parties,” but does not mention how FRBP 1007(c) must be weighed in this analysis. The Bankruptcy Rules specifically allow for an extension of time, and it therefore seems reasonable for debtors to expect that continuances will be granted if cause exists.

The Small Business Reorganization Act of 2019 (the “SBRA”) enacted subchapter V of chapter 11 to streamline the process by which small business debtors reorganize and rehabilitate their financial affairs.” H.R. REP. NO. 116-171, at 1 (2019). A sponsor of the SBRA legislation stated that the new law will allow small business debtors “to file bankruptcy in a timely, cost-effective manner, and hopefully allows them to remain in business,” which “not only benefits the owners, but employees, suppliers, customers, and others who rely on that business.” H.R. REP. NO. 116-171, at 4. It seems here that a short extension of the deadline to file the remaining schedules and statements would have allowed the debtor’s management to conclude their efforts to complete these documents—only additional 7 days were requested—and then refocus on the debtor’s business operations with an aim to reorganize. Likely dismissal and refiling resulted in additional costs for the debtor, such as paying another Chapter 11 filing fee of $1,738, and certainly took time away from the debtor’s business operations.

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One-Third Of American Families Weren't Prepared For Financial Emergencies, Even Before The Pandemic:

There's a reason we're supposed to load our savings accounts with cash for a rainy day. You never know when a catastrophic financial event might occur. And without money in the bank, you could wind up in a dire situation that sends you into debt or even bankruptcy. Now, when we think about financial catastrophes, it's easy to point to the coronavirus outbreak as a recent example. The pandemic has been a major health crisis that many are still grappling with. But it also upended a lot of people's finances. And unfortunately, a large number of Americans weren't prepared to deal with an event that instantly caused a massive wave of unemployment. In January of 2020, about 27% of U.S. families couldn't come up with $2,000 for an unplanned expense within a month, according to the Stanford Center on Longevity and the Global Financial Literacy Excellence Center. And 33% of Americans were struggling to make ends meet before the pandemic began. It's likely that many of these people suffered financially over the past 18 months. If you don't have enough money in savings for emergencies, you could be in a scary position the next time a major financial crisis hits. If that's the case, it pays to work on boosting your cash reserves. [as reported in Credit & Collection 9/22/21 e-newsletter]

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In re Lockhart-Johnson

In re Lockhart-Johnson, 2021 WL 3186115 (B.A.P. 9th Cir. 2021). Deciding a previously unresolved issue, the Ninth Circuit Bankruptcy Appellate Panel held that, to assert a nondischargeability claim against the non-filing spouse of a debtor, a plaintiff must affirmatively obtain a nondischargeability determination by commencing an adversary proceeding against the non-debtor spouse within 60 days after the meeting of creditors.

The BAP acknowledged that neither the Federal Rules of Bankruptcy Procedure nor other courts had previously addressed how a creditor can assert its community claim when nondischargeable acts were committed by the non-filing spouse, or “expressly provide[d] the procedure for asserting hypothetical nondischargeability or objections to discharge under § 524.”

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Nichols v. Marana Stockyard & Livestock Market Inc. et al (In re Nichols)

Nichols v. Marana Stockyard & Livestock Market Inc. et al (In re Nichols),    F.4th   , 2021 WL 3891571 (9th Circ. 9/1/2021). Unanimous decision by 9th Circuit Court of Appeals holds that a Chapter 13 debtor has an absolute right to dismiss that debtor’s Chapter 13 case, even if the Chapter 13 debtor had engaged in bad faith or abuse of the bankruptcy process. Nicols decision rules that the Law v. Siegel US Supreme Court case effectively overrules refusing to let Chapter 13 debtors dismiss their Chapter 13 cases because the debtor had done bad thing. Nichols holds that a debtor who wishes to dismiss the debtor’s Chapter 13 case can do so, regardless whether the debtor had done bad things, such as engaging in bad faith or abuse of the bankruptcy process. In In re Nichols the debtors were indicted on criminal charges that they had participated in a scheme to defraud Marana Stockyard & Livestock Market Inc. the debtors stopped participating in their Chapter 13 case, for fear that disclosures they might need to make in their Chapter 13 case would hurt them in their criminal case. Therefore, debtors sought to dismiss their Chapter 13 case.

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Best v Ocwen Loan Servicing, LLC

BEST v. OCWEN LOAN SERVICING, LLC, 2021 WL 2024716 (Cal Court of Appeal, May 21, 2021), appeal E074386, certified for partial publication: Finding that prior authority to the contrary had been overruled by subsequent United States Supreme Court and state court decisions, a California Court of Appeal recently held that California’s Rosenthal Act (similar to but broader than the federal Fair Debt Collection Practices Act (FDCPA)) can apply to a nonjudicial foreclosure. Best v Ocwen Loan Servicing, LLC,.

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Update on Trying to Discharge Student Loan Debt

American Bankruptcy Institute 9/10/21 Update on Trying to Discharge Student Loan Debt: In July 2021, the Second Circuit issued an opinion favoring the dischargeability of certain private student loans in what appears to be a growing circuit trend. This trend correlates with the call for student loan reform, which has been at the forefront of the news in recent months.

In Homaidan v. Sallie Mae Inc., the Second Circuit affirmed the bankruptcy court’s denial of lender Navient’s motion to dismiss on the basis that 11 U.S.C. § 523(a)(8)(A)(ii) does not except private student loans from discharge. [1] Debtor Homaidan filed for chapter 7 after graduating from Emerson College, listing private student loans from Navient as liabilities. [2] These loans had been disbursed from Navient directly to Homaidan, not to or through Emerson’s financial aid office. [3] After the closure of Homaidan’s bankruptcy case, Navient hired a collection firm to “pester” Homaidan. [4] Believing, therefore, that he still had a legal obligation to pay the loans, Homaidan paid them in full. [5] However, Homaidan later moved to reopen his bankruptcy case and initiated a putative adversary proceeding seeking determination that the loans had been discharged. [6] Homaidan alleged that Navient “has employed a scheme of issuing dischargeable loans to unsophisticated student borrowers and then demanding repayment even after those loans are discharged in bankruptcy.” [7] Navient moved to dismiss, arguing that the loans were excepted from discharge pursuant to § 523(a)(8)(A)(ii). [8] In its thorough analysis of the statutory language and construction of § 523(a)(8), the Second Circuit concluded that the term “educational benefit” found in § 523(a)(8)(A)(ii) is “best read to refer to conditional grant payments similar to scholarships and stipends.” [9] The Second Circuit thus joined the Fifth [10] and Tenth [11] Circuits, which also disagreed with the argument that § 523(a)(8) provides a blanket discharge for all private student loans. [12]

As of July 10, 2021, the national private student loan balance was approximately $137 billion. [13] This balance makes up approximately 8.4% of the total national student loan debt, which is approximately $1.73 trillion. [14] Although it is unclear exactly what impact Homaidan and its ilk will have on the national private student loan debt, the courts continue to widen the opening in the door to dischargeability — certainly a welcome development for hopeful debtors who previously stared down the formidable Brunner test [15] as potentially their only avenue for relief.

This developing litigation-driven trend is, at the moment, coinciding with a call for Congress to amend the Bankruptcy Code to eliminate the undue hardship standard altogether. Recently, a bipartisan bill targeted at federal student loans was introduced to this effect. [16] Said bill proposes to make these loans eligible for discharge 10 years after the date they become due. [17] It also proposes to require “Institutes of Higher Education” “who receive a certain amount of federally-backed student loans” “to repay a portion of discharged federal student loans to the taxpayer” and potentially refund the government for a portion of said loans received by an institution if the default rate is high and repayment rate is low consistently for that institution. [18] The goal is to incentivize “Institutes of Higher Education” to provide value to borrowers and penalize those institutions that fail to do so. [19] Although the discharge provision in this bill does not extend to private student loans, these incentives may benefit all borrowers and decrease the default and overall debt numbers across the board. But with favorable circuit level decisions, such as Homaidan, stacking up, private student loan borrowers seemingly need not despair.

The movement in recent months toward easing overall student loan debt does not begin or end with that bill or those circuit decisions. In July, the Department of Education exercised its muscle to cancel student loans from three for-profit colleges that had engaged in predatory lending, [20] the result of a rollback from the previous administration’s stance, [21] resulting in relief for more than 1,800 borrowers from approximately $55.6 million of student loan debt. [22] In August, the Department of Education also rolled back the previous administration’s bar on the states’ ability to monitor and litigate against federal student loan servicers that fail to provide quality service to borrowers — which can result in increased repayment costs. [23] Additionally, in August, the Young Lawyers Division of the American Bar Association drove a vote to adopt a resolution to urge Congress to broadly reform repayment and forgiveness programs and consolidation and refinancing opportunities, with a special focus on law school loan debt. [24] These actions and efforts, coupled with courts’ favorable interpretations of the Code, may profoundly ease the student loan burden before the bubble bursts.

[1] 3 F.4th 595, 604–05 (2d Cir. 2021). 11 U.S.C. § 523(a)(8)(A)(ii) specifically excepts from discharge “an obligation to repay funds received as an educational benefit, scholarship, or stipend.”
[2] Id. at 599.
[3] Id.
[4] Id.
[5] Id.
[6] Id.
[7] Id.
[8] Id.
[9] Id. at 605.
[10] See Crocker v. Navient Sols. LLC (In re Crocker), 941 F.3d 206 (5th Cir. 2019).
[11] See McDaniel v. Navient Sols. LLC (In re McDaniel), 973 F.3d 1083 (10th Cir. 2020).
[12] Bill Rochelle, “All Private Student Loans Are Not Excepted from Discharge, Second Circuit Holds,” American Bankruptcy Institute: Rochelle’s Daily Wire (July 20, 2021), available at
[13] Melanie Hanson, Student Loan Debt Statistics,, available at (last updated July 10, 2021).
[14] Id.
[15] See Brunner v. N.Y. State Higher Educ. Servs. Corp., 831 F.2d 395, 396 (2d Cir. 1987); see also Tingling v. Educ. Credit Mgmt. Corp. (In re Tingling), 990 F.3d 304, 308–09 (2d Cir. 2021) (reaffirming undue hardship standard for student loan discharge articulated in Brunner).
[16] The FRESH Start Through Bankruptcy Act of 2021, S. 2598, 117th Cong. (2021); see also FRESH Start Through Bankruptcy Act of 2021 One Pager, available at
[17] Id.
[18] Id.
[19] Id.
[20] Wesley Whistle, “Biden Education Department Approves Student Loan Cancellation for More than 1,800 Defrauded Borrowers,” Forbes (Jul. 9, 2021, 9:00 AM), available at
[21] See Wesley Whistle, “Senate Votes to Overturn Betsy DeVos Decision to Withhold Debt Relief from Defrauded Students,” Forbes (Mar. 11, 2020, 12:39 PM), available at
[22] Whistle, supra n. 20.
[23] Stacy Cowley, “The Education Department Ends Its Effort to Stop States from Suing Federal Student Loan Servicers,” The New York Times: Daily Business Briefing (Aug. 9, 2021), available at
[24] Karen Sloan, “ABA Will Press Congress to Ease Student Loan Discharge in Bankruptcy,” Reuters: Legal News (Aug. 10, 2021, 2:23 PM), available at also American Bar Association Young Lawyers Division Resolution 106C, available at

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American Bankruptcy Institute Reports that 44 Percent of U.S. Small Businesses Have Less than 3 Months' Worth of Cash

[ABI e-newsletter of 9/9/21]

More than 18 months into the pandemic, bakery owner Letha Pugh is so low on cash that she's afraid to spend it on anything other than paying her employees. She's hardly alone: 44% of U.S. small businesses have less than three months of cash reserves, leaving them vulnerable to another shutdown due to COVID-19 or other financial emergencies, according to a Goldman Sachs survey of more than 1,100 small businesses, reported. An even greater share — 51% — of Black-owned small businesses have less than three months' cash on hand, according to the same survey. While federal loan programs were crucial in keeping many small businesses afloat until COVID-19 restrictions were eased, some owners are concerned by the level of debt they've taken on. According to Goldman, 41% of small business owners and 55% of Black-owned businesses say the new debt could undermine their financial stability. Only 31% of small businesses say they could access funding if they needed additional capital. Even fewer Black-owned businesses — just 20% — report confidence in their ability to raise money.

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Federal Jobless Aid, a Lifeline to Millions, Reaches an End on 9/4/21

Unemployment benefits have helped stave off financial ruin for millions of laid-off workers over the last year and a half. After this week, that lifeline will snap: An estimated 7.5 million people will lose their benefits when federally funded emergency unemployment programs end, the New York Times reported. Millions more will see their checks cut by $300 a week. The cutoff is the latest and arguably the largest of the benefit “cliffs” that jobless workers have faced during the pandemic. Last summer, the government ended a $600 weekly supplement that workers received early in the crisis, but other programs remained in place. In December, benefits briefly lapsed for millions of workers, but Congress quickly restored them. This time, no similar rescue appears likely. President Biden has encouraged states with high unemployment rates to use existing federal funds to extend benefits, but few appear likely to do so. And administration officials have said repeatedly that they will not seek a congressional extension of the benefits. The politics of this cliff are different in part because it affects primarily Democratic-leaning states. Roughly half of states, nearly all of them with Republican governors, have already ended some or all of the federal benefits on the grounds that they were discouraging people from returning to work. So far, there is little evidence they were right: States that cut off benefits have experienced job growth this summer that was little different from that in states that retained the programs. In the states that kept the benefits, the cutoff will mean the loss of billions of dollars a week in aid when the pandemic is resurgent and the economic recovery is showing signs of fragility. And for workers and their families, it will mean losing their only source of income as other pandemic programs, such as the federal eviction moratorium, are ending. Even under the most optimistic forecasts, it will take months for everyone losing aid to find a job, with potentially long-term consequences for both workers and the economy. [as reported by ABI 9/2/21 e-newsletter]

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Date for Debt Collection Final Rules

Consumer Financial Protection Bureau (“CFPB”), which is a US Government Agency, Confirms November 30, 2021 is Effective Date for Debt Collection Final Rules which include that debt collectors cannot threaten to sue consumers, or sue consumers, on time-barred debt. This is a BIG Change, because debt collectors have been suing consumers on time-barred debts for decades.

The CFPB recently announced that its two final debt collection rules implementing the Fair Debt Collection Practices Act (FDCPA) will take effect as planned on November 30. 2021. The first rule, issued in October 2020, involves debt collection communications and clarifies restrictions on harassment and abuse, false or misleading representations, and unfair practices by debt collectors engaged in collecting a consumer debt. The second rule, issued in December 2020, focuses on disclosures debt collectors must provide to consumers at the onset of collection communications. Notably, debt collectors must take specific steps to disclose to consumers the existence of a debt before reporting information about that debt to a credit reporting agency and may not sue, or threaten to sue, consumers on time-barred debt.

By leaving the door open to reconsider the debt collection rules at a later date, the CFPB is likely signaling to debt collection firms, and the creditors who utilize them, that the agency will be keeping a watchful eye as hundreds of thousands of borrowers exit mortgage forbearance this fall. Anyone who may be impacted by the CFPB’s debt collection rules ought to thoroughly review their processes to ensure that they are in compliance with the final rule, and be moving forward with implementation efforts.

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The Family Farmer or Family Fisherman Chapter of the Bankruptcy Code

Chapter 12—the Family Farmer or Family Fisherman Chapter of the Bankruptcy Code (11 USC 1201 to 1232)--was added to the Bankruptcy Code in 1986 in response to the farm crisis of the 1980s. Chapter 12 became a permanent part of the Code in 2005. For many reasons, farmers have continued to struggle in the intervening years, causing this chapter to be more relevant than ever. In 2016, farm real estate debt surpassed the 1981 peak. In 2019, commodity prices were 50 percent lower than their peak in 2012, and the weather in 2019 — including massive Midwest floods — prevented American farmers from planting 19.6 million acres of crops, more than double any other year since the U.S. Department of Agriculture began keeping track in 2007. Droughts in California, and much of the Southwest US, for the past several years and continuing to worsen to present, have caused additional losses by farmers and ranchers in those areas.

For chapter 11 and 13 practitioners, chapter 12 will look familiar. Chapter 12 cases are typically administered by a trustee. Many districts have a standing chapter 12 trustee, but others are assigned on a case-by-case basis. Like chapter 13 but unlike chapter 11, chapter 12 cases proceed under the supervision of a trustee and the court until completion of the plan. Chapter 12 cases also have a debt limit of $10 million. After successful plan completion, the debtor receives a discharge. There is no disclosure statement or voting on the plan by creditors. Also unlike chapter 11, there is no absolute priority rule in chapter 12.

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Bankruptcy Code 11 USC 523(a)(3)(A)

There is a split in case law, on how courts read Bankruptcy Code 11 USC 523(a)(3)(A) (which is about nondischargeability of late filed claims, where creditor did not have knowledge or notice of existence of bankruptcy case in time to file a proof of claim before the deadline set by the Bankruptcy Court for filing proofs of claim), should be read in conjunction with 11 USC 726(a)(2)(C) (which is about paying late filed claims under some circumstances). A Bankruptcy Court decision from Florida, Creative Enterprises HK Ltd. v. Simmons (In re Simmons),    BR   20-0081 (Bankr. M.D. Fla. Aug. 24, 2021). discusses this split in the case law

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US Supreme Court Blocks CDC Eviction Moratorium

US Supreme Court Blocks CDC Eviction Moratorium, in decision issued 08/26/21 in Alabama Association of Realtors v. Department of Health and Human Services,     US     (08/26/21): Just one day after the US Ninth Circuit Court of Appeals refused to enjoin the residential eviction moratorium of the City of Los Angeles, the U.S. Supreme Court reinstated a lower court order blocking the Centers for Disease Control and Prevention's (“CDC”) latest eviction moratorium on Thursday evening, granting a request from a group of landlords and Realtor associations claiming the CDC had overstepped its authority.

The CDC has repeatedly renewed the eviction moratorium for millions of tenants affected by the pandemic, in large part to allow them to remain in their rented apartments/houses, even though they were far behind (far in default) in paying rent owed to their landlords. The most recent nationwide residential eviction moratorium that President Biden had the CDC issue was until Oct. 3, 2021. Very little of the billions of payments to landlords, that Congress had approved, had actually been paid to landlords, to make up for the rents the tenants were NOT paying the landlords.

In the 8/26/21 opinion, 6 of the 9 US Supreme Court Justices ruled that the eviction ban exceeded the CDC’s authority to combat communicable diseases, forcing landlords to bear the pandemic’s costs, stating: “The moratorium has put…millions of landlords across the country, at risk of irreparable harm by depriving them of rent payments with no guarantee of eventual recovery,” the court said. “Many landlords have modest means. And preventing them from evicting tenants who breach their leases intrudes on one of the most fundamental elements of property ownership—the right to exclude.”

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Residential Eviction Moratorium

On 8/25/21, the Ninth Circuit Court of Appeals issued its Opinion in the case: APARTMENT ASSOCIATION OF LOS ANGELES COUNTY, INC., DBA Apartment Association of Greater Los Angeles, Plaintiff-Appellant v. CITY OF LOS ANGELES; ERIC GARCETTI, in his official capacity as Mayor of Los Angeles; CITY COUNCIL OF THE CITY OF LOS ANGELES, in its official capacity; et al, Defendants-Appellees.

The OPINION ruled against the landlords, refusing to enjoin the City of Los Angeles, residential eviction moratorium. The Opinion held the City of Los Angeles’ Residential Eviction Moratorium did NOT violate the Contract clause of the US Constitution. Even though the moratorium was a substantial deprivation of landlords’ contractual rights, the moratorium did not violate the Contract clause of the US Constitution, because the moratorium was appropriate to try to prevent people from being homeless during the COVID pandemic. Note that the ONLY thing challenged in the appeal was that the residential eviction moratorium violated the Contract clause of the US Constitution. Additional challenges, such as challenging that the residential eviction moratorium violated landlords due process rights, or was a taking of property without compensation, were NOT made in this appeal. Other suits nationwide, challenging other eviction moratoriums, federal, state, county, city, have made these additional arguments. But not this appeal.

Click here for more information

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Four Presidents of the United States Filed for Bankruptcy

Did You Know? Four Presidents of the United States filed for Bankruptcy: Thomas Jefferson, Abraham Lincoln, Ulysses S. Grant and William McKinley [as reported by Credit & Collection e-newsletter of 8/23/21].

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Lockwood v. Wells Fargo NA

Lockwood v. Wells Fargo NA,    F.3d     (US 5th Cir. Court of Appeals, decision issued 8/16/21), case 20-42324

It isn’t duress when a lender threatens to take action that the loan agreement allows, the circuit court says. In the Fifth Circuit and perhaps elsewhere, claiming duress won’t let someone escape from a personal guarantee, even if it’s $58 million.

As Circuit Judge Gregg J. Costa said in an August 16 opinion:

[U]sing leverage is what negotiation is all about. And difficult economic circumstances do not alone give rise to duress. If they did, then many loans would be voidable. [Citation omitted.]

An individual owned several companies with $90 million in secured bank debt. With the businesses burning cash, the companies and the lenders revised the loan agreements to reduce the banks’ exposure to $72 million. To ensure that the owner had “skin in the game,” as Judge Costa put it, the lenders asked for the owner’s personal guarantee, and he agreed. At the lenders’ insistence, the owner also agreed to hire a chief restructuring officer.

As the companies’ finances continued to deteriorate, the lenders insisted that the CRO have full authority to run the businesses, or they would accelerate the debt.

To avoid acceleration, the owner let the CRO take over and signed a forbearance agreement where he acknowledged that the debts were valid, binding and enforceable. He also agreed there were no valid defenses and waived all setoffs, claims and counterclaims.

When the first forbearance agreement was about to lapse, the owner agreed to a second forbearance where he made the waivers a second time.

After the second forbearance, the lenders accelerated, touching off litigation where the owner made claims against the lenders. Ultimately, the banks came out on top when the district court awarded them judgment against the owner for more than $58 million based on the personal guarantee.

On summary judgment, the district court dismissed the owner’s claims based on the waivers. The owner appealed to the circuit.

Judge Costa explained how the owner needed to prove that the guarantee and the two forbearances were voidable. Even if the guarantee was void, he said that the first forbearance could still ratify the guarantee.

So, Judge Costa addressed the owner’s ability to void the first forbearance as having been fraudulently induced.

Judge Costa found a “glaring” defect in the argument. The alleged fraud was the lenders’ insistence on giving control to the CRO. However, the owner knew about the demand before he signed the first forbearance and thus ratified the guarantee under Texas law.

The owner’s fraudulent inducement defense therefore failed.

Next, the owner claimed he was compelled to sign the guaranty and the forbearances on account of economic duress.

If duress were a defense, Judge Costa said, “many loans would be voidable.” Moreover, he said that opportunities to “stave off financial disaster . . . would be few and far between if a borrower could later void the modification because of the economic pressure that prompted it in the first place.”

Under Texas law, duress has three tests. The debtor failed the first one, Judge Costa said. Duress requires proving that “the lenders threatened to take any unauthorized action.”

Judge Costa said that the lenders had the right to demand a CRO with authority to run the business. He added:

Nor are we aware of anything that bars a lender from seeking a change in management as a condition of a loan modification.

In the absence of any “bad acts,” Judge Costa upheld the district court and ruled that the “duress defense fails.”

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$5.8 Billion in Automatic Federal Student Loan Forgiveness

American Bankruptcy Institute article reports that the Biden administration on 8/19/21 announced it would line up more than 323,000 borrowers with a total and permanent disability (TPD) for $5.8 billion in automatic federal student loan forgiveness.

The Education Department announced that it would no longer make those classified as totally and permanently disabled by the Social Security Administration (SSA) apply for their federal student loans to be discharged. Instead, borrowers with TPDs will be able to receive automatic forgiveness thanks to a new rule allowing student loan servicers to match customer data with the SSA.

“Today's action removes a major barrier that prevented far too many borrowers with disabilities from receiving the total and permanent disability discharges they are entitled to under the law," Secretary of Education Miguel Cardona said in a statement.

Federal law allows student borrowers with TPDs to seek forgiveness of their federal student loans on the grounds that they would not be able to make enough to pay them off. Those with TPDs may receive Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI), meaning the SSA would likely have the necessary information to determine if they qualify for student loan forgiveness.

The Education Department previously arranged a similar automatic loan forgiveness regime with the Department of Veteran Affairs, but the new Thursday rule will allow non-veterans with TPDs to avoid the application process.

“We've heard loud and clear from borrowers with disabilities and advocates about the need for this change and we are excited to follow through on it. This change reduces red tape with the aim of making processes as simple as possible for borrowers who need support."

Cardona said the change will go into effect next month during the upcoming quarterly data match with the SSA.

The department is also indefinitely suspending the process of sending automatic income information requests to those who receive TPD loan discharges. If a borrower with a TPD fails to respond to that request, the Education Department may order them to repay their loans.

The department will also propose scrapping the three-year income review following the grant of TPD loan discharge.

Cardona’s announcement is the latest step by the Biden administration toward wiping out student debt for the most vulnerable borrowers, including those defrauded by for-profit colleges and borrowers who qualified for public service loan forgiveness but did not receive it.

But Biden is also facing intense pressure from liberal lawmakers and activists to forgive up to $50,000 in federal student loans per borrower regardless of income level or economic status.

Supporters of broad-based student loan forgiveness insist Biden has the power and obligation to wipe out much of the $1.6 trillion in federally held debt owed by roughly 43 million borrowers.

While progressives pushed ambitious student loan forgiveness before the pandemic as a means to narrow the racial wealth gap and inequality, they say the cause is even more urgent after the economic crisis.

Biden has explicitly ruled out forgiving up to $50,000 per borrower, but suggested he was open to a unilateral loan forgiveness order with a smaller total and income restrictions. The president is also waiting on a review of his legal authority from the Justice Department, the White House has said.

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Law Violates the Due Process Rights of Landlords

On 8/12/21, in Chrysafis v. Marks, 594 US     (2021), the US Supreme Court granted an Injunction, to block a New York state Anti-Eviction Law from being enforced against Landlords, because Law Violates the Due Process Rights of Landlords to be paid rent by tenants of the landlords. The decision granted the injunction blocking enforcement of a New York anti-eviction law, because the US Supreme Court found that a key provision allowing tenants to attest to their pandemic-related hardship in order to prevent eviction violates landlords' due process. Copy of dUS Supreme Court’s Order granting injunction is attached as pdf.

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American Bankruptcy Institute 8/12/21 e-newsletter reports that: With Tenants Who Won’t Pay or Leave, Small Landlords Face Struggles of Their Own

Advocates for renters celebrated last week when the Biden administration effectively extended a Centers for Disease Control and Prevention ban on most evictions. But for some small landlords — struggling to pay mortgages and taxes — it was the last straw, the Washington Post reported. The CDC’s ban legally protects only renters who have suffered financially because of the pandemic, who are at risk of homelessness and who meet other criteria. But landlords say some tenants are abusing the eviction ban to live rent-free. Others cannot be evicted for any reason because of state and local rules enacted in response to the pandemic. In general, it’s a great time to be a real estate owner, as residential property values have risen dramatically in many parts of the country. But as with many of the emergency policies passed in response to the pandemic, the evictions ban has had disparate effects on large and small companies. Many corporate apartment chains catering to white-collar workers are raising rents and booking enormous profits; an index of publicly traded apartment chain stocks is up 43 percent through Friday. Meanwhile, some mom-and-pop landlords are giving up and deciding to sell, though at what scale is difficult to determine.

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Nondebtor Release Prohibition Act of 2021

On July 28, 2021, democrats introduced bicameral legislation in the US Congress, titled the Nondebtor Release Prohibition Act of 2021, in an effort to ensure bad actors in bankruptcy cases—including Purdue Pharma, Boy Scouts of America, USA Gymnastics, and others—are held accountable. The legislation proposes to amend the Bankruptcy Code by adding a section that would essentially prohibit courts from approving the discharge, release, termination, or modification of claims or causes of action belonging to third parties that are not property of the estate. The bill also proposes to prohibit courts from permanently enjoining the commencement or continuation of such claims or causes of action. If the legislation passes, it will become effective from the date of enactment and impact pending and future bankruptcies. [as reported by the American Bankruptcy Institute on 8/5/21]

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Biden Administration Issues New Eviction Moratorium

The previous federal moratorium on residential evictions (of tenants not paying their rent to the tenants’ landlords ended on July 31, 2021. But on Aug. 3, 2021 7:14 pm ET, President Biden announced a new federal moratorium on residential evictions to last through October 3, 2021. President Biden did this even though he admitted that this additional 60 day moratorium would likely be held to be unconstitutional by the US Supreme Court, when the US Supreme Court ruled on the constitutionality/unconstitutionality of this additional 60 days extension of moratorium on residential evictions. The new moratorium applies to over 80% of counties in the US, including it applies to Los Angeles County, Orange County, Ventura County, San Bernardino County, and most other counties in Southern California, and in much of Central and Northern California.

After saying he did NOT have power to order a further moratorium, President Biden bowed to pressure from far left leaning Democrats, to order an additional 60 days of the moratorium tenant protections that ended on 7/31/21. He did this despite White House officials saying they lacked the legal authority to do so.

It is a VERY bad precedent for a US President—who is supposed to be upholding the laws of the US—to order something that he admits is very likely unconstitutional.

The Centers for Disease Control and Prevention’s ban targets areas that have experienced “substantial or high” levels of Covid-19 transmission and is expected to cover more than 80% of U.S. counties.

The action aims to buy states and localities more time to distribute about $47billion in rental assistance designed to help tenants harmed by the pandemic who have fallen behind on their rent. As of June 30, just $3 billion of that money had reached tenants and landlords.

“I asked the CDC to go back and consider other options,” President Biden said Tuesday afternoon, prior to the CDC announcement. Whether the new approach passes constitutional muster, he added, “I don’t know.” But, he said, a likely legal fight would provide more time to get the congressional money distributed.

The CDC said its new order will last through Oct. 3, “but is subject to further extension, modification, or rescission based on public health circumstances.”8/4/2021 Biden Administration Issues New Eviction Moratorium - WSJ 2/4

The White House had said for days that lawmakers would need to pass legislation to extend the moratorium after a recent Supreme Court decision signaled the CDC couldn’t lawfully extend its moratorium again absent congressional authorization.

But the White House waited until last Thursday to ask Congress to try to pass an extension. The CDC had previously extended the moratorium three times before it expired on Saturday.

The moratorium, which stems from an August 2020 executive order by then-President Donald Trump, has protected millions of tenants from eviction but created financial hardships for landlords. Some states, including New York and California—home to about 20% of the U.S. population—have their own eviction moratoriums.

Tuesday’s decision marks a sharp turnabout for the White House. Administration officials said Monday that Mr. Biden on Sunday had asked the CDC to come up with a new, 30-day eviction moratorium focused on areas with high Covid-19 rates, rather than the months long options previously proposed. But the White House said the CDC said it hadn’t found the legal authority for that action, and signal edit was loath to take an action that could lead to the Supreme Court striking down its public-health powers.

Republicans said that Mr. Biden was acting irresponsibly by proceeding with an action that he knew had legal problems. “Biden even admits it’s unconstitutional! Lawless,” said Sen. Tom Cotton(R., Ark.), on Twitter.

Tuesday’s move came after far left leaning democrats intensified their pressure on the Biden administration to reconsider and issue a new eviction moratorium. First-term Rep. Cori Bush (D., Mo.) staged a days long protest outside the Capitol that included sleeping overnight on the stairs to highlight the plight of evicted Americans. Tuesday afternoon, in the shadow of the Capitol dome, Ms. Bush huddled with a handful of lawmakers around her chief of staff’s cellphone as a White House aide briefed them about the coming announcement.8/4/2021. Obviously Representative Bush does NOT care about the landlords that are not being paid rent by tenants, due to the repeated moratoriums, but still owe mortgages, real estate taxes, maintenance expenses on the rented properties.

Ms. Bush smiled when she walked toward Senate Majority Leader Chuck Schumer (D., N.Y.), who congratulated her: “You are great! You did this! One person did this!” Mr. Schumer said.

Later, when Ms. Bush answered reporters’ questions along with other law makers outside the Capitol, a teardrop rolled down her cheek.

“This is why this happened. Being unapologetic. Being unafraid,” Ms. Bush told the crowd.

With the sit-in on the Capitol steps stretching into a fourth day, civil-rights leader Jesse Jackson and Democratic lawmakers had joined Ms. Bush to train their focus on the executive branch. The Biden administration had said that the Supreme Court would likely reject any extended eviction ban and that officials should focus on distributing $46.5 billion in rental assistance, most of which remains unused.

Local governments have struggled to distribute the money. Many renters are being disqualified for failing to correctly complete their applications, local officials say. Some landlords have turned down the payments, saying the aid carries too many conditions, such as preventing the eviction of problematic tenants or compelling them to turn over sensitive financial information.

Many landlords and most tenants were unaware aid was available, according to an Urban Institute study from June. Though money began flowing early this year, most state and local governments had to start their programs from scratch, with many not getting off the ground until late May or early June, according to the Treasury Department.

Progressives, unmoved by the administration’s legal arguments, had said that the White House needed a way to reinstate a federal ban on evictions, especially because of the rapid spread of the Delta variant of the coronavirus—even if that threw the matter back to the high court.

About 4.7 million Americans report that it is “very likely or somewhat likely” that they will face an eviction or foreclosure in the next two months, according to Census Bureau data.

With other Democrats including Rep. Alexandria Ocasio Cortez (D., N.Y.) sleeping on the Capitol steps overnight in an act of protest, House Speaker Nancy Pelosi (D., Calif.), who had taken some criticism for not holding a vote on the matter, shifted responsibility to the White House.

“House Democrats stand ready to work with the administration as they search for ways to extend the moratorium and as they urge states and localities to spend the$46.5 billion that Congress allocated,” she said.

House Democratic leaders have been unable to pass an eviction ban because of Republican opposition and divisions within their own caucus, where some members worry about the extended hardship for small landlords who remain unpaid. While Democratic lawmakers are fighting over whether to try to pass legislation, activists are saying that reinstating the ban is the first step.

Bob Pinnegar, the president and chief executive of the National Apartment Association, a landlord trade group, criticized the moratorium. He said it “forces housing providers to deliver a costly service without compensation and saddles renters with insurmountable debt.” His group last week sued the federal government seeking $26 billion in monetary damages due to the ban.

In a June Supreme Court decision, Justice Brett Kavanaugh cast the deciding vote to leave the moratorium in place through July 31, but indicated he would be a fifth vote to block any further extension unless Congress authorized the moratorium beyond July.

“What needs to be understood is that we are in a Delta scourge,” said Rep. Sheila Jackson Lee (D., Texas), adding that the June Supreme Court decision “was issued in a time of calmness. This now is occurring in a time of immediate crisis.”

The CDC defines transmission risk based on new cases reported in the past seven days per 100,000 people and the percentage of positive tests within the last seven days. A county is considered at high transmission risk with 100 or more cases in the past seven days per 100,000 people or positive cumulative test rates at or above 10%.

Appeared in the August 4, 2021, print edition as 'Biden Orders New Evictions Moratorium.'

Copyright © 2021 Dow Jones & Company, Inc. All Rights Reserved This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers visit

8/4/2021 Biden Administration Issues New Eviction Moratorium - WSJ 4/4

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Recommend Improvements to the Consumer Bankruptcy System

The ABI Commission on Consumer Bankruptcy was created in December 2016 to research and recommend improvements to the consumer bankruptcy system that can be implemented within its existing structure. The Commission’s Final Report contains recommendations for amendments to the Bankruptcy Code, and to the Federal Rules of Bankruptcy Procedure, designed to make the consumer bankruptcy system more accessible and efficient for both financially struggling Americans and the professionals who serve them. After soliciting public feedback, Commission members identified nearly 50 discrete issues for study and divided these issues among three advisory committees composed of 52 bankruptcy professionals.

The Comissions’ NUMBER ONE RECOMMENDATION for what amendment was most needed, to present Bankruptcy Law is to amend Bankruptcy Law regarding how student loan debt is treated in Bankruptcy. Here is that recommendation of the Commission:

Recommendation Student Loans Student loan debt significantly depresses U.S. economic activity, and current bankruptcy law ineffectively addresses it. The Commission recognizes that recent graduates should generally be required to repay government-made or guaranteed student loans, but it recommends statutory amendments to discharge student loans that are • made by nongovernmental entities; • incurred by a person other than the person receiving the education; • being paid through a five-year chapter 13 plan; or • first payable more than seven years before a chapter 7 bankruptcy is filed. In addition, the Commission recommends administrative procedures and interpretations of current law to facilitate reasonable relief from student loan indebtedness. [as reported by American Bankruptcy Institute e-newsletter on 8/1/21]

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New Form Motion

8/1/21 The Bankruptcy Court, CD CA, has just created a new, easy to use, form motion, for consumer debtors to use to seek an order compelling a creditor which has seized an item of debtor’s property, before debtor files bankruptcy, to immediately return that item of property to debtor, after debtor files bankruptcy. Most often, the seized item is debtor’s car/truck/other vehicle, which the secured lender on the vehicle repossessed prepetition, usually because debtor defaulted in making make monthly vehicle payments the debtor owed the secured lender, to repay the secured car loan. The Central District Consumer Bankruptcy Attorneys Association (CDCBAA) reports on the new form motion as follows:

A few months ago, the US Supreme Court ruled in Chicago v Fulton, 141 S.Ct 585 (2021) that a creditor's keeping of a prepetition seized car doesn't violate section 362(a)(3)'s "exercise control" provision. Under the leadership of Judge Bason, the Local Rules Committee acted upon Justice Sotomayor's suggestion for expedited turnover procedures. A small group was formed, with a balance of debtor's and creditor's counsel, to work on new local forms. From cdcbaa, Nicholas Gebelt was part of this working group (thanks, Nick!).

The result of the group's efforts is a new motion and order to help recover and turnover debtor's property after a case is filed. This would typically be a car that was seized prepetition. As our clients will need their cars to get to work to earn income to fund a Chapter 13 plan, there is a sense of urgency which hopefully can be resolved informally with a call to creditor counsel and this motion (F 4001-1.SEIZED.PROPERTY.MOTION), settled by stip, and the related order. This is intended to be a speedy alternative to a month's-long adversary proceeding suggested in Fulton.

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What Is an “Executory Contract” Pursuant to 11 USC §365

ABI (American Bankruptcy Institute) Article on What is an “Executory Contract” pursuant to 11 USC §365 : The bankruptcy community needs a better definition of what’s an executory contract, and Prof. Jay Westbrook has it.

A decision--In re Financial Oversight and Management Board for Puerto Rico, 17- 3283 (D. P.R. June 29, 2021)--by the district court in restructuring Puerto Rico’s debt demonstrates the gyrations a court must sometimes undertake to conclude that a contract is capable of assumption under the “Countryman” definition of an executory contract.

Rather than decide whether a contract is executory under the dueling “Countryman” and “functional” definitions of executoriness, this writer instead recommends adoption of the “Modern Contract Analysis” proposed by Prof. Jay L. Westbrook and Kelsi S. White in “The Demystification of Contracts in Bankruptcy,” 91 Am. Bankr. L.J. 481 (Summer 2017). Prof. Westbrook occupies the Benno C. Schmidt Chair of Business Law at the University of Texas School of Law.

The Class Action Insurance Settlements

When auto owners in Puerto Rico register their vehicles, they pay auto insurance premiums to the commonwealth government. If an owner has private insurance, the owner is entitled to a refund of the premium paid to the government.

Two class actions were filed seeking refunds for auto owners who had private insurance but paid for duplicate insurance between 1998 and 2010. One suit was in a commonwealth court, and the other was in federal district court in Puerto Rico.

The suits were settled at least in principle before Puerto Rico and its instrumentalities initiated their debt adjustments in district court in Puerto Rico in 2017 under the Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA (48 U.S.C. §§ 2161 et. seq.). PROMESA incorporates large parts of the Bankruptcy Code, including Section 365 and law on assuming executory contracts.

Acting as the representative of the commonwealth in the debt-adjustment cases, the Financial Oversight and Management Board for Puerto Rico filed a motion to assume the settlements as executory contracts under Section 365. The official creditors’ committee objected, contending that the settlements were not executory, and if they were, that assumption did not satisfy the business judgment standard.

District Judge Laura Taylor Swain overruled the objections in an opinion on June 29. She concluded that the settlements were executory and that the Oversight Board exercised sound business judgment in deciding to assume the settlements as executory contracts. Judge Swain ordinarily sits in the Southern District of New York but was tapped by the Chief Justice to preside over the PROMESA proceedings.

The Two Definitions of ‘Executory’

Under Section 365(a), a trustee may assume or reject a contract if it is “executory.” The term is not defined in the Bankruptcy Code.

Judge Swain laid out two competing definitions of executory contracts:

(1) The so-called Countryman definition, where Prof. Vern Countryman of Harvard Law School proposed that a contract is executory if it is “a contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing performance of the other.” Executory Contracts in Bankruptcy: Part I, 57 Minn. L. Rev. 439, 460 (1973); and

(2) The so-called functional approach, which, as explained by Judge Swain, works backward from the purposes to be accomplished by rejection. The contract is no longer executory if the purposes have been accomplished already.

Judge Swain said that “some courts” have moved away from the Countryman definition to the functional approach, believing that courts should not be bound by a static definition not appearing in the language of the statute.

Judge Swain first applied the Countryman test and found one narrow (if not contorted) basis for concluding that the contract remained executory because the plaintiffs had remaining obligations that would amount to breach if not performed.

Without much in the way of explanation, Judge Swain also decided that the contract was executory under the functional approach.

Having decided that the contract was available for assumption, Judge Swain asked whether the Oversight Board had properly exercised its business judgment.

Settlement would resolve a lawsuit kicking around for 20 years and end the commonwealth’s expenditures on counsel fees. The settlement would also avoid paying interest on the monies withheld from auto owners for so long.

Judge Swain authorized assumption of the settlements.

The Westbrook Approach

Prof. Westbrook told ABI that the result reached by Judge Swain was correct, but he went on to say that “the so-called ‘functional’ cases are a dead end, with the name taken from my first executoriness article but ignoring its analysis.”

In that regard, we have written several times in recent months about the sometimes baffling analysis and results that courts reach in applying the Countryman analysis or avoiding it. To read ABI discussions of recent cases on the Countryman definition, click here, here, here, and here.

To provide a more solid foundation for analysis, this writer recommends that courts embrace Prof. Westbrook’s Modern Contract Analysis.

Prof. Westbrook told ABI that he provides a “simple analysis and relates it to all the major lines of modern cases to show how it can light the way out of the labyrinth.”

The approach in the professor’s 2017 article “ensures that pre-bankruptcy bargains and entitlements will be changed in Chapter 11 only insofar as bankruptcy policies, like equality of treatment and rehabilitation of debtors, require alteration. Properly understood, the very process of acceptance or rejection is simply the trustee’s exercise of the opportunity every contract party has to perform or breach with whatever consequences non-bankruptcy law proscribes.” Westbrook, supra, 91 Am. Bankr. L.J. at 535. [ABI e-newsletter of 7/23/21]

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As Forbearance Protections End, Nonbank Mortgage Lenders Face High-Volume Processing Tests, Ginnie Mae Risks

Tech-savvy millennials fled to the suburbs during the coronavirus pandemic, fueling a hot housing market that enabled nonbank and fintech mortgage companies to grab a big piece of the growing market share, churning out loans at a faster pace than more traditional bank lenders, according to a Morning Consult report. That booming market has so far shielded a vulnerability. Homeowners had multiple options to buoy their finances, from refinancing opportunities to extra unemployment insurance and stimulus checks. As those programs come to a close this year, most homeowners that took advantage of coronavirus-era policies to delay their loans have now exited forbearance, staving off a widespread, 2008-style foreclosure crisis that many feared at the start of the pandemic. But for a portion of borrowers — largely Black, Hispanic and first-time homeowners — the end of housing programs could pose significant difficulties. The issue has to do with nonbank servicers that have never dealt with the number of loan modification requests and foreclosures that policymakers expect, and who aren’t required, like banks, to hold capital in reserve to offset the costs. These servicers, which handle the day-to-day managing of a mortgage, including foreclosures, have aggressively taken market share since the Great Recession and the regulation of bank mortgage lending that followed. Mortgage-servicers and other industry-watchers were on alert for these issues early in the pandemic, even unsuccessfully lobbying the Federal Reserve for a liquidity facility for nonbank mortgage-servicers. And though a widespread liquidity crisis reminiscent of the 2008 crisis now appears unlikely, experts are worried about logistical challenges with everything from high-touch transactions like loan modifications or foreclosures to a lack of infrastructure to service loans in foreclosure.​​ [as reported in American Bankruptcy Institute 7/15/21 enewsletter]

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Moratorium on Residential Evictions

On 6/29/21 the US Supreme Court refused to overturn the CDC’s (federal Center for Disease Control) nationwide moratorium on residential evictions, which continues to be in effect until the end of July 2021. The petitioners were a coalition of landlords and realtors. The vote against the landlords and realtors was 5-4, with Chief Justice John Roberts Jr. and Justice Brett Kavanaugh joining the liberal members of the court to form a majority. The CDC had said that this is the last moratorium on residential evictions that the CDC will order. But that CDC representation is likely NOT enforceable.

In their emergency appeal to the Supreme Court, the moratorium’s challengers said landlords have been losing $13 billion a month in unpaid rent and won’t ever recover all of that money. They said the ban on evictions is less justifiable now that the U.S. is easing Covid-19 protocols in light of declining case numbers and the growing vaccinations of Americans.

Local governments across the U.S. have struggled to quickly distribute approximately $47 billion of rental assistance authorized by Congress, with some complaining that their staffs are being deluged by a flood of aid requests. Numerous renters are being disqualified for failing to correctly complete their applications, local officials say.

When the moratorium was extended last week, administration officials said that rental-assistance funds were increasingly flowing to landlords. However, officials declined to provide an estimate for how much of the $47 billion was distributed.

The delays have added pressure on landlords who have gone months without back rent while continuing to be on the hook for taxes, insurance and maintenance costs tied to their properties even when their tenants aren’t paying.

About 4.2 million Americans report that it is “very likely or somewhat likely” that they will face an eviction or foreclosure in the next two months, according to Census Bureau data.

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In TransUnion LLC v. Ramirez,   US   (June 2021), the US Supreme Court Substantially Restricts Ability To Sue In Federal Court For violations by credit reporting agencies and creditors of various federal statutes protecting consumers, regarding credit reporting (Fair Credit Reporting Act), debt collection (Fair Debt Collection Protection Act), and creditors phoning consumers (Telephone Consumer Protection Act).

On June 25, 2021, the Supreme Court of the United States held that a plaintiff must suffer a concrete injury resulting from a defendant’s statutory violation to have Article III standing to pursue damages from that defendant in federal court. The Court also held that plaintiffs in a class action must prove that every class member has standing for each claim asserted and for each form of relief sought.

Justice Kavanaugh wrote the majority opinion, which was joined by Chief Justice Roberts as well as Justices Alito, Gorsuch, and Barrett. Justice Thomas, often considered the Court’s most conservative member, wrote a dissent joined by Justices Breyer, Sotomayor, and Kagan. Justice Kagan also wrote a separate dissent that was joined by Justices Breyer and Sotomayor.

The road to this momentous US Supreme Court TransUnion LLC v. Ramirez decision began at a car dealership where the plaintiff sought to finance the purchase of a vehicle. When running a credit check, the dealership received a TransUnion credit report indicating that the plaintiff’s name matched a name on a list of “specially designated nationals” maintained by the United States Department of Treasury’s Office of Foreign Assets Control. The OFAC list contains the names of terrorists, drug traffickers, and other serious criminals deemed to be a threat to national security. After seeing his credit report, the dealership refused to sell a car to the plaintiff.

The following day, the plaintiff called TransUnion to request a copy of his credit file pursuant to 15 U.S.C. § 1681g(a)(1). TransUnion fulfilled the request and included a copy of the CFPB’s summary of rights as required by 15 U.S.C. § 1681g(c)(2). The documents sent to the plaintiff omitted the OFAC alert, so the following day TransUnion sent the plaintiff a second letter explaining that his name potentially matched a name on the OFAC list. However, the second letter did not include the CFPB’s summary of rights.

The plaintiff subsequently filed suit against TransUnion, asserting three claims under the Fair Credit Reporting Act (FCRA): (1) that in utilizing the OFAC list, TransUnion failed to follow reasonable procedures to ensure the accuracy of information in violation of 15 U.S.C. § 1681e(b); (2) that by omitting the OFAC information from the credit file TransUnion initially mailed to plaintiff in response to his request, TransUnion failed to provide plaintiff with all information in his credit file in violation of § 1681g(a)(1); and (3) that by failing to include another copy of the summary of rights in the second mailing to plaintiff, TransUnion violated § 1681(c)(2). The plaintiff also asserted those three claims on behalf of a class of all people in the United States to whom TransUnion mailed a follow-up OFAC notice without a summary of rights — i.e., those who received a mailing like the second mailing received by the plaintiff. There were 8,185 people in the class, but only 1,853 of them had their credit reports sent to creditors during the relevant time period.

The plaintiff prevailed on all three claims at trial and the jury awarded over $60 million ($984.22 in statutory damages and $6,353.08 in punitive damages for each member of the class). On appeal, the Ninth Circuit agreed that all members of the class had Article III standing, but the circuit court reduced the punitive damages award to just under $4,000 per class member, which brought the overall award to roughly $40 million. The Supreme Court granted certiorari.

SCOTUS Decision

The Supreme Court’s decision focused on whether each member of the class suffered a “concrete” injury and further developed its analysis of concreteness provided five years earlier in Spokeo, Inc. v. Robins, 578 U.S. 330 (2016). In particular, the Court elaborated on the limits of Congress’s power to create statutory injuries that can form the basis of a lawsuit in federal court. After all, as the Court held in Spokeo, “Article III requires a concrete injury even in the context of a statutory violation.” And this means that “[o]nly those plaintiffs who have been concretely harmed by a defendant’s statutory violation may sue that private defendant over that violation in federal court.”

In further describing those Congressional limits, the Court cited recent FDCPA decisions from the Seventh and Eleventh Circuits. The Court agreed with the Eleventh Circuit (Trichell v. Midland Credit Mgmt., Inc., 964 F.3d 990, 999, n. 2 (11th Cir. 2020)) that Congress’s “say so” does not make an injury concrete. The Court also quoted the Seventh Circuit decision written by then-Judge (now Justice) Barrett in Casillas v. Madison Avenue Assocs., Inc., 926 F. 3d 329, 332 (7th 2019) to explain that “‘Article III grants federal courts the power to redress harms that defendants cause plaintiffs, not a freewheeling power to hold defendants accountable for legal infractions.’”

In determining whether the class members had standing, the Court examined whether the alleged injury bore a “close relationship to a harm traditionally recognized as providing a basis for a lawsuit in American courts,” here the harm to one’s reputation resulting from defamation.

Starting with the 1,853 class members whose credit reports were disseminated to creditors, the Court noted that American law has long recognized that a person is injured when a defamatory statement is published to a third party. Therefore, class members whose credit reports were published to third parties were injured because those reports flagged them as potential terrorists.

Although the credit reports merely alerted users to a potential match on the OFAC list and did not falsely assert that any class member was a terrorist, the Court held that the harm associated with being described as a potential terrorist bears a sufficiently close relationship to being called a terrorist. Therefore, the Court affirmed the finding of standing on the § 1681e(b) claim for the plaintiff and the 1,853 members of the class whose credit reports were disseminated by TransUnion.

The Court then turned to the 6,332 class members whose credit reports were not disseminated and questioned whether they suffered a concrete injury from the mere existence of an inaccurate credit file that was never published to a third party. The Court determined that publication is necessary for a concrete injury, comparing an unpublished credit report with a defamatory letter that is hidden in a desk drawer instead of mailed.

The Court also rejected the plaintiff’s argument that all class members had standing because they were subjected to a material risk of future harm based on the potential later release of their credit reports. The Court’s prior decision in Spokeo noted that a risk of future harm can sometimes satisfy the concreteness requirement, so long as the risk is sufficiently imminent and substantial.

In Ramirez, the Court took the opportunity to explain that a plaintiff exposed to a risk of future harm may sometimes have standing to pursue injunctive relief to prevent that harm from occurring, but a mere exposure to risk is insufficient to confer standing to seek retrospective damages. Because their credit reports were never published, the Court reversed the finding of standing for the other 6,332 class members on the § 1681e(b) claim.

The Court then addressed whether the class members had standing to pursue what it called the “disclosure claim” (based on the omission of OFAC information from the credit file sent to class members pursuant to § 1681g(a)) and the “summary-of-rights claim” (based on the failure to send another summary of rights with the follow-up mailing that contained the OFAC information). The plaintiff argued that all class members suffered a concrete injury because they were deprived of their right to receive information in the format required by the FCRA, but the Court rejected this argument because there was no evidence that any class member suffered a harm that bore a close relationship with a harm traditionally recognized as providing a basis for a lawsuit in American courts. Indeed, there was no evidence that anyone other than the plaintiff himself even opened the two mailings, much less that anyone acted or failed to act based on the information contained in those mailings.

Although Congress can elevate to legally cognizable the harm associated with the denial of information subject to public disclosure, the Court again cited Casillas and Trichell in pointing out that the FCRA, like the Fair Debt Collection Practices Act, is not a public-disclosure law. The Court then turned to Trichell once more in noting the failure to identify any “downstream consequences” resulting from the defective disclosures: “An ‘asserted informational injury that causes no adverse effects cannot satisfy Article III.’” Therefore, the Court held that none of the class members had standing to pursue damages for the “disclosure claim” or the “summary-of-rights claim.”

Impact on Consumer Litigation

In the wake of Spokeo, the federal circuit and district courts were divided on whether a statutory violation, on its own, was sufficient to confer standing. For example, the Sixth Circuit in Macy v. GC Services Ltd. Partnership, 897 F.3d 747 (6th Cir. 2018), held that an alleged violation of a disclosure provision of the FDCPA was itself enough to confer standing, a holding that was expressly rejected by the Seventh Circuit in Casillas. The Supreme Court’s ruling in Ramirez appears to resolve this split and essentially makes Casillas and Trichell the law of the land. Going forward, plaintiffs who merely allege a technical violation of a consumer-protection statute, with no associated concrete injury, lack standing to pursue that claim in federal court. Also, even if the plaintiff can prove that he suffered a concrete injury as the result of a statutory violation, he will be unable to recover on behalf of a class unless he can also prove that every class member suffered a concrete injury as well. In other words, gone are the days in which a plaintiff could pursue class recovery based solely on the fact that every member of the class received the same allegedly defective letter.

In his dissent, Justice Thomas notes that the Ramirez decision gives defendants like TransUnion more than they bargained for because consumers are often able to pursue violations of federal statutes in state court and defendants will be unable to remove those cases to federal court when the plaintiff lacks Article III standing. For cases now pending in federal court that are subject to dismissal due to lack of standing, defendants should evaluate whether those cases can be filed again in state court. Some states have savings statutes that extend the time to file if the limitations period expired while the case was pending in federal court. Other states lack savings statutes or have savings statutes that apply only in limited situations. Also, because many cases will undoubtedly be filed in state court going forward, defendants should familiarize themselves with the standing doctrines applied in various state courts.

Potential Impact on Hunstein

For readers who have been following the Hunstein case in the Eleventh Circuit, the plaintiff in Ramirez also argued that TransUnion “published” the credit reports internally to its own employees and externally to letter vendors who mailed those reports to the class members in response to their requests. The Court disposed of this argument with a footnote explaining that the argument was forfeited because it was asserted for the first time on appeal. However, the Court also called the argument “unavailing” because American courts have not traditionally recognized intra-company disclosures or disclosures to print vendors as actionable publications supporting a defamation claim. The appellee in Hunstein has already filed a Rule 28(j) letter citing Ramirez as supplemental authority. [as reported in Credit & Collection 6/29/21 e-newsletter]

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CDC Extends Eviction Moratorium a Month, Says It’s Last Time

The Biden administration on Thursday extended the nationwide ban on evictions for a month to help millions of tenants unable to make rent payments during the coronavirus pandemic but said this is expected to be the last time it does so, the Associated Press reported. Dr. Rochelle Walensky, director of the Centers for Disease Control and Prevention, extended the eviction moratorium from June 30 until July 31. The CDC said that “this is intended to be the final extension of the moratorium.” A Biden administration official said the last month would be used for an “all hands on deck” multi-agency campaign to prevent a massive wave of evictions. One of the reasons the moratorium was put in place was to try to prevent further spread of COVID-19 by people put out on the streets and in shelters. As of the end of March, 6.4 million American households were behind on their rent, according to the Department of Housing and Urban Development. Nearly 1 million said eviction was very likely in two months, and 1.83 million said it was somewhat likely in the same period. The extension announcement Thursday was accompanied by a flurry of eviction-related administration activity, including by the Treasury Department and the Justice Department. New Treasury guidance was issued, encouraging states and local governments to streamline distribution of the nearly $47 billion in available emergency rental assistance funding. And Associate Attorney General Vanita Gupta released an open letter to state courts around the country encouraging them to pursue a number of alternatives that would protect both tenants and landlords. [As reported by American Bankruptcy Institute e-newletter of 6/24/21]

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EXCLUSIVE U.S. Watchdog to Adopt Mortgage Moratorium Rule with Some Exclusions - Sources

WASHINGTON, June 22 (Reuters) – The federal Consumer Protection Financial Bureau (“CFPB”), which is the U.S. consumer watchdog, will, in coming weeks, adopt a rule requiring mortgage servicers to give struggling homeowners until next year (2022), to resume repayments, but is expected to carve out some groups of borrowers following industry pushback, four people with knowledge of the matter told Reuters.

The Consumer Financial Protection Bureau (CFPB) in April proposed, among other measures, a new review process that would generally prohibit mortgage servicers from starting a foreclosure until after Dec. 31, 2021. The rule will throw a lifeline to hundreds of thousands of homeowners due to exit COVID-19 mortgage holiday or "forbearance" programs in coming months.

Mortgage servicers receive payments from borrowers and pass them on to investors, tax authorities and insurers.

The CFPB plans to finalize the rule and make it effective before the end of August, but has agreed to carve out certain groups of borrowers after the industry said the proposal was too broad and beyond the CFPB's legal remit, three of sources said.

A CFPB spokesperson said the agency is working on finalizing the proposal but did not comment on what exclusions had been agreed to.

"We remain committed to working with both servicers and homeowners to prevent avoidable foreclosures to the maximum extent possible," the spokesperson added.

The borrowers expected to be carved-out, which has not previously been reported, include those in the process of negotiating an arrangement with their servicer to avoid foreclosure but who have not yet applied to be put into forbearance, the same three people said.

It is also expected to exclude borrowers who may have abandoned their homes without trying to notify their servicers and those who do not respond to multiple inquiries from servicers about whether they wish to remain in their homes.

The CFPB agreed to the exemptions to limit the compliance burden for some servicers and give them more flexibility to help customers, the four sources said. They said the rule will also not apply to small servicers with limited market share that are less able to absorb the compliance costs.

The sources, some of whom spoke on the condition of anonymity, include a regulatory official and industry lawyers and executives involved in the discussions.

"The Bureau's rules achieve two aims: mandating some additional help for struggling borrowers who have a plan to stay in their homes, while also creating clear exemptions to help servicers maintain the steady supply of homes the market demands," said Michael Bright, CEO of the Structured Finance Association, which represents the mortgage securitization industry and was among the groups that pushed for the exemptions.

Background: The Pandemic FORECLOSURE CRISIS: To help Americans weather pandemic lockdowns, Congress last year gave struggling homeowners the right to pause mortgage repayments and imposed a moratorium on foreclosures. As of June 14, an estimated 2 million homeowners were in forbearance, according to the Mortgage Bankers Association. Around 900,000 of those forbearance plans are due to expire later this year, industry data provider Black Knight estimates.

CFPB staff are worried existing regulatory tools will not provide sufficient help for homeowners who have suffered a permanent disruption of income as a result of the pandemic.

They hope the new rule would prevent a wave of foreclosures by raising the burden of "reasonable effort" a servicer makes to help struggling borrowers, one of the sources said.

At the same time, "the agency wants to make sure struggling consumers know that they can't just put their head in the sand until December 31" and should reach out to their servicer for help, said the regulatory official.

"And to servicers: we're watching you, but we want to achieve the best outcomes for business and borrowers."[as reported in the Credit & collection e-newsletter of 6/21/21]

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In re Dockins,    BR    (Bankr. W.D.N.C. June 4, 2021)

In re Dockins,    BR    (Bankr. W.D.N.C. June 4, 2021), bky case no. 20-10119, holds that, unlike IRAs, Debtors keep inherited 401(k)s because inherited 401(k)s are NOT property of the Debtor’s bankruptcy estate:

In the decision, Bankruptcy Judge Hodges explains exemptions never come into play with inherited 401(k)s because inherited 401(k)s aren’t estate property in the first place,. In Clark v. Rameker, 573 U.S. 122 (2014), the Supreme Court held that individual retirement accounts inherited before bankruptcy are not exempt and belong to creditors. It follows, does it not, that a debtor cannot keep a 401(k) inherited before bankruptcy?

Answer: Wrong. Unlike an IRA, an inherited 401(k) does not become estate property, for reasons explained by Bankruptcy Judge George R. Hodges of Asheville, N.C.

The Inherited IRA

Not long before filing a chapter 7 petition, the debtor inherited a 401(k) from someone who was neither her spouse nor a relative. The debtor told the trustee about the inherited 401(k) but did not list it among her assets, nor did she claim an exemption. Rather, the debtor took the position that the 401(k) was not estate property, thus making exemptions and scheduling irrelevant.

Disagreeing, the trustee filed a turnover motion, relying largely on Clark, where the Supreme Court held that an inherited IRA is not exempt under Section 522(b)(3)(C) because it doesn’t fit the description of “retirement funds.”

In his June 4 opinion, Judge Hodges concluded that an inherited 401(k), unlike an inherited IRA, never becomes estate property. He wasn’t required to decide whether an inherited 401(k) is an exempt asset, the focus of Clark.

Clark Distinguished

Judge Hodges distinguished Clark. There, the question was whether an inherited IRA fell under Section 522(b)(3)(C), which exempts “retirement funds” if they are exempt from taxation under specified provisions of the Internal Revenue Code.

Clark focused on the characteristics of inherited IRAs that make them something other than “retirement funds.” Unlike retirement funds, the holder of an IRA cannot make additional investments, must continually make withdrawals, and may withdraw everything without incurring a penalty.

Judge Hodges observed that inherited 401(k)s have “the same legal characteristics,” but the result was not the same.

Unlike IRAs, the trusts holding 401(k)s must have anti-alienation provisions as required by both the IRS Code and ERISA.

The anti-alienation provisions in 401(k) trusts invoke Section 541(c)(2), which provides that “a restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title.” Property in a trust that complies with Section 541(c)(2) does not become estate property.

Judge Hodges held that the outcome was not controlled by Clark, but by Section 541(c)(2) and Patterson v. Shumate, 504 U.S. 753 (1992). In Patterson, the Supreme Court held that “applicable nonbankruptcy law” includes ERISA-qualified plans. Id. at 759.

IRAs, Judge Hodges said, “are not qualified plans under ERISA.” By way of contrast, “a 401(k) plan is a qualified plan under ERISA and qualifies for tax benefits and protection that an IRA does not.”

To qualify under ERISA, the trust for a 401(k) must provide that it “may not be assigned or alienated.” For tax benefits, the IRS Code also requires that assets in a 401(k) may not be assigned or alienated.

Judge Hodges therefore concluded that “401(k) plans contain enforceable transfer restrictions for purposes of § 541(c)(2)’s exclusion of property from the bankruptcy estate.”

Furthermore, Judge Hodges mentioned how the “Supreme Court in Patterson even acknowledge[d] that ERISA-qualified plans receive greater protection than IRAs in bankruptcy,” because IRAs are not included in ERISA’s anti-alienation provision.

Judge Hodges noted that Section 541(c)(2) does not mention “retirement funds” like Section 522(b)(3)(C), the focus of Clark. Thus, he said, “the legal characteristics of inherited IRAs relevant to the Supreme Court’s analysis in Clark are not relevant to the analysis of 401(k)’s.”

In the case before Judge Hodges, the funds had not been withdrawn from the 401(k) before bankruptcy, meaning that they were protected by the trust’s anti-alienation provisions. He therefore held that the funds in the 401(k) “are not property of the estate” under Section 541(c)(2) and belong to the debtor. The lack of an exemption didn’t matter because exemptions only apply to estate property.

Opinion Link


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Case Details

Case Citation

In re Dockins, 20-10119 (Bankr. W.D.N.C. June 4, 2021)

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Child Tax Credit

The California Attorney General Rob Bonta warned today that it is illegal for California creditors, debt collectors, and financial institutions to take Child Tax Credit payments from California families. According to the Attorney General, eligible families will receive $300 a month for young children and $250 per month for families with children between the ages of 6 and 17. The IRS will provide the credit as a monthly payment. “The pandemic has been tough on families across California,” said Bonta. “The Child Tax Credit payments should be a bright spot for our families, putting money in their pockets as the country begins our recovery. No parent should go to bed worried that these payments will be seized by some debt collector.” The new tax credit is part of President Biden’s American Rescue Plan, which is to provide $1.9 trillion in economic aid. [as reported in Credit & Collection 061020 e-newsletter]

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Biden Administration Urges Supreme Court to Pass on Student-Loan Bankruptcy Case

Justice Department says Texas woman’s appeal is premature because Department of Education is reviewing whether to relax rules governing student debt in bankruptcy proceedings

  • The Biden administration wants the Supreme Court to pass on an appeal seeking to ease the way for more borrowers to erase their student-loan debt in bankruptcy, saying the Department of Education is already examining the issue.

The reasoning was laid out in a court filing Friday by the Justice Department, representing the latest front in efforts from the White House, Congressional Democrats and the U.S. court system to address student-loan debt. An estimated 43 million Americans have federal student loans, the total amount of which has nearly doubled over the past decade to about $1.7 trillion.

Student loans are difficult to discharge through a bankruptcy filing. To qualify for a bankruptcy discharge, borrowers must prove they face an “undue hardship” from their student debts, such a stringent standard that few even try.

The Supreme Court is considering whether to hear an appeal from a Texas woman seeking to loosen those standards after she filed for bankruptcy at age 60 with about $345,000 in student-loan debt—about half of which represents fees and interest. Thelma McCoy’s lawyers are asking to apply a more forgiving test, used by bankruptcy judges in some states, that would make it easier for those in extreme financial hardship to discharge student loans in bankruptcy.

Acting Solicitor General Elizabeth Prelogar said in Friday’s filing that the appeal is premature because the Department of Education is evaluating whether to relax the government’s stance on when borrowers should be able to discharge student loans. That review was started in 2018 by the Trump administration.

The Education Department “may revise its regulations and related policies in the future,” the Justice Department filing said.

The Justice Department also said the woman’s case wouldn’t be appropriate for considering a nationwide standard for student-debt discharge because of procedural problems in her appeal unrelated to her student-loan issues.

Kory DeClark, a lawyer representing Ms. McCoy, said Monday that he and his client were disappointed in the government’s decision to oppose a Supreme Court review of her case in light of the longstanding split between federal appeals courts on what bankruptcy test to apply when determining if a borrower can discharge their loans.

“The approach followed by most courts of appeals lacks grounding in the statutory text and makes it all but impossible for even the most deserving debtors to qualify for discharge,” Mr. DeClark said.

The problem is both pressing and of national importance and there is no indication of whether or when the Education Department might revise its policies, Mr. DeClark said.

While bankruptcy rules prohibit all but the most-dire cases from erasing student debt, some judges in recent years have been re-evaluating whether certain borrowers deserve relief.

Ms. McCoy, who has raised four children, filed for chapter 7 protection in 2016. She took on debt when she returned to school in her early 40s, earning a bachelor’s degree from Louisiana State University and a master’s degree in social work from the University of Houston. She incurred most of her debt to complete her Ph.D. in social work from the University of Texas, according to court papers.

As she finished her degree, Ms. McCoy suffered several physical and financial hardships and was unable to find steady employment despite applying for nearly 200 jobs in and out of her field of study.

In December 2007, Ms. McCoy and her son were severely injured after her car was struck head-on by a drunk driver. Her son required multiple emergency surgeries and was placed in a medically induced coma while she needed to use a wheelchair for more than two years. Ms. McCoy also suffered from PTSD and anxiety as a result of the crash, according to court papers.

Ms. McCoy filed a lawsuit against the Department of Education in 2016 to discharge her student-loan debt but was unsuccessful. A bankruptcy judge ruled in 2017 that Ms. McCoy didn’t meet the requirements of the stringent test applied in Texas courts, determining she didn’t meet the high bar because it was possible she might find better employment in the future, according to court documents.

The appeal has been closely followed by consumer-rights advocates and bankruptcy academics who have urged the Supreme Court to take her case and issue a national rule friendlier to troubled borrowers. In Texas, “debtors have little to no chance of receiving a discharge of their student loan debt,” the National Consumer Bankruptcy Rights Center said in a court filing.

Congressional Democrats introduced legislation earlier this year that would overhaul the nation’s consumer-bankruptcy laws and could open the door for debtors to cancel student loan debt. President Biden, meanwhile, has considered forgiving some student-loan debt through executive action.

The White House at the start of the year also extended a moratorium on federal student-loan payments as part of Covid-19-related financial relief efforts. [as reported in 5/10/21 Wall Street Journal]

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CFPB Sends Notification Letters To Landlords Regarding COVID-19 Evictions

On May 3, 2021, the Consumer Financial Protection Bureau (CFPB) and Federal Trade Commission (FTC) sent notification letters reminding the nation’s largest apartment landlords of federal protections in place to keep tenants in their homes and stop the spread of COVID-19. The Notification Letter points to the Centers for Disease Control and Prevention (CDC) eviction moratorium for non-payment of rent (CDC Moratorium), which the CDC extended through June 30, 2021, as well as recent guidance from the CFPB and FTC in support of the CDC Moratorium. The Notification Letter also provides an overview of the CFPB’s final rule, effective May 3, 2021, addressing debt collector conduct associated with the CDC Moratorium. The CFPB and FTC explain that, under the Fair Debt Collection Practices Act (FDCPA), debt collectors seeking to evict certain tenants for non-payment of rent must provide such tenants with “clear and conspicuous notice” that the tenant may be eligible for temporary protection from eviction under the CDC Moratorium. The final rule provides that notice must be given on the same day as the eviction notice, or on the date that the eviction action is filed if no eviction notice is required by law. Sample language that will satisfy the FDCPA final rule is attached to the Notification Letter. The Notification Letter further emphasizes that, under the final rule, debt collectors must not falsely represent or imply to a consumer that the consumer is ineligible for temporary protection from eviction under the CDC Moratorium. [as reported in Credit & Collection 5/13/21 e-newletter

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Analysis: Is the U.S. Student Loan Program Facing a $500 Billion Hole? One Banker Thinks So

In 2018, Betsy DeVos, then U.S. education secretary, called JPMorgan Chase & Co. Chief Executive Jamie Dimon for help. Repayments on federal student loans had come in persistently below projections. Did Dimon know someone who could sort through the finances to determine just how much trouble borrowers were in? Months later, Jeff Courtney, a former JPMorgan executive, arrived in Washington. And that’s when the trouble started, according to an analysis in the Wall Street Journal. According to a report he later produced, over three decades Congress, various administrations and federal watchdogs had systematically made the student loan program look profitable when in fact defaults were becoming more likely. The result, he found, was a growing gap between what the books said and what the loans were actually worth, requiring cash infusions from the Treasury to the Education Department long after budgets had been approved and fiscal years had ended, and potentially hundreds of billions in losses. The federal budget assumes the government will recover 96 cents of every dollar borrowers default on. In reality, the government is likely to recover just 51% to 63% of defaulted amounts, according to Courtney’s forecast in a 144-page report of his findings, which was reviewed by the Wall Street Journal. Courtney’s calculation was one of several supporting the disclosure in a Journal article last fall that taxpayers could ultimately be on the hook for roughly a third of the $1.6 trillion federal student loan portfolio. This could amount to more than $500 billion, exceeding what taxpayers lost on the savings-and-loan crisis 30 years ago, according to the analysis. [as reported in Credit and Collection 042921 e-newsletter]

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U.S. Supreme Court Overturns $1.3 Billion Award Against Kansas Payday Loan Operator

A unanimous Supreme Court on Thursday cut back the Federal Trade Commission’s authority to recover ill-gotten gains, overturning a nearly $1.3 billion award against a professional race car driver who was convicted of cheating consumers through his payday loan businesses. The high court’s ruling takes away what the FTC has called “one of its most important and effective enforcement tools,” used in recouping billions of dollars over the past decade. Justice Stephen Breyer wrote in his opinion for the court that the provision of federal law that the FTC has relied on does not authorize the commission to seek or a federal court to order restitution or disgorgement of profits. But Breyer noted that other parts of the Federal Trade Commission Act could be used to obtain restitution for consumers who have been cheated. “If the Commission believes that authority too cumbersome or otherwise inadequate, it is, of course, free to ask Congress to grant it further remedial authority. Indeed, the Commission has recently asked Congress for that very authority.” The FTC accused Scott Tucker of Leawood, Kansas, of using his payday loan companies to deceive consumers across the United States and illegally charge them undisclosed and inflated fees. Tucker is a former American Le Mans Series champion who, according to prosecutors, used proceeds from the lending business to finance a professional auto racing team. [reported in Credit & Collection e-newsletter of 4/23/21]

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Older Americans Dealing with Rising Debt, Falling Income Amid Pandemic

According to the Employee Benefit Research Institute, the share of households headed by someone 55 or older with debt — from credit cards, mortgages, medical bills and student loans — increased to 68.4 percent in 2019, from 53.8 percent in 1992. Bankruptcy rates among older adults are also rising. The COVID-19 pandemic may be adding to their woes, the New York Times reported. A survey at the end of 2020 by Clever, an online service that connects home buyers and sellers with real estate agents, found that on average, retirees had doubled their non-mortgage debt in 2020 — to $19,200. Francesca Ortegren, the data science and research product manager for Clever, said that business cutbacks had forced many older adults to retire earlier than planned. Others left work for health reasons or to care for family members, she said. “They had expected to have more time to save money,” Dr. Ortegren said. “They are putting their expenses on their credit cards and are carrying balances month to month.” Also driving this rising debt load are soaring medical costs, the steep decline in pensions, growing housing expenses and low interest rates on savings. To make ends meet, many older adults are known to skip meals and cut pills to stretch prescriptions, according to a survey by the National Council on Aging. [reported by American Bankruptcy Institute 4/22/21 e-newsletter]

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The $50 Billion Race to Save America’s Renters from Eviction (While Violating Rights of America’s Landlords)

The Biden administration again extended a federal moratorium on evictions last week, but conflicting court rulings on whether the ban is legal, plus the difficulty of rolling out nearly $50 billion in federal aid, mean the country’s reckoning with its eviction crisis may come sooner than expected, the Washington Post reported. The year-old federal moratorium — which has now been extended through June 30 — has probably kept hundreds of thousands or millions of people from being evicted from their apartments and homes. More than 10 million Americans are behind on rent, according to Moody’s, easily topping the 7 million who lost their homes to foreclosure in the 2008 housing bust. Despite the unprecedented federal effort to protect tenants, landlords have been chipping away at the moratorium in court. Six lawsuits have made their way before federal judges — with three ruling in support of the ban and three calling it illegal. The opposition started when landlords in Texas sued in the fall, arguing that the Centers for Disease Control and Prevention had overstepped its bounds in implementing the ban. Apartment owners argued in their complaint that they built and maintained apartment buildings “with the reasonable expectation that they would be legally permitted to realize the benefit of their bargain by collecting monthly rent from their tenants.” District Judge J. Campbell Barker agreed. “Although the COVID-19 pandemic persists, so does the Constitution,” he wrote. The National Association of Home Builders joined Ohio landlords in another suit. The judge in that case, J. Philip Calabrese, also ruled against the ban, writing March 10 that “the CDC’s orders exceeded the statutory authority Congress gave the agency.” Treasury Department officials have been armed with nearly $50 billion in emergency aid for renters who have fallen behind and are racing to distribute it through hundreds of state, local and tribal housing agencies, some of which have not created programs yet. The idea is to get the money to renters before courts nationwide begin processing evictions again. “We are running the Emergency Rental Assistance Program every day like we’re going to lose the moratorium tomorrow,” said a Treasury Department official, who spoke on the condition of anonymity to discuss the program before any formal announcements. The moratorium was not overly controversial at first, and it has received bipartisan support from lawmakers. It was formed when President Donald Trump and Congress directed the CDC to create a form tenants can use to declare that they cannot pay rent because of the pandemic and that they have been unable to secure other housing. Filing the form generally halts eviction proceedings. [Reported by 4/9/21 American Bankruptcy Institute e-newsletter]

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CFPB Proposes Delaying Implementation of Debt-Collection Rules

The Consumer Financial Protection Bureau yesterday proposed postponing the implementation of two new Fair Debt Collection Practices Act rules governing borrower communication, which currently have a Nov. 30 start date, the American Banker reported. One rule delineates what constitutes harassment, false representation and unfair practices by debt collectors. The other clarifies the disclosures collectors must provide to consumers regarding communication with credit-reporting agencies and prohibits collectors from threatening to sue borrowers with time-barred debt. The delay would mean that third-party mortgage-servicing entities and others governed by the FDCPA will not be able to use the new safe harbors for compliance until Jan. 29, 2022. The proposal has a 30-day comment period. [as reported by 4/8/21 Credit & Collection e-newsletter]

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Consumer Protection Financial Bureau (“CFPB”) Proposes To Stop Foreclosures Through The End Of 2021

Saying that the pandemic has caused a “shocking increase in housing uncertainty,” the CFPB proposed Monday, 4/6/21, to stop mortgage servicers from foreclosing on most home loans until after the end of 2021. The plan outlined by the agency is an attempt to give borrowers time to find ways to make payments once pandemic relief ends. “We are going to use everything in our toolbox to prevent avoidable foreclosures,” Acting CFPB Director Dave Uejio told reporters in a telephone conference call. “This rule is one of the sharpest tools in our toolbox.” He said the agency wants “to ensure that servicers and borrowers have time to work together.” Last week, the agency said it expects mortgage servicers to assist millions of homeowners as pandemic protections end and will closely monitor efforts to help borrowers remain in their homes. That follows the agency’s announcement that it was rescinding guidance issued last year that gave financial services companies flexibility in following agency rule as they faced the coronavirus crisis. The CFPB will accept comment on the proposed mortgage rule until May 10 and some form of the rule is expected to become effective on Aug. 31. The rule only applies to institutions with more than 5,000 mortgages. “The CFPB’s proposal seeks to ensure that both servicers and borrowers have the tools and time they need to work together to prevent avoidable foreclosures, recognizing that the expected surge of borrowers exiting forbearance in the fall will put mortgage servicers under strain,” the agency said, in outlining the rule. [As reported in Credit & Collection e-newsletter of 04/06/21]

Comment of The Bankruptcy Law Firm, PC, by KPMarch, Esq. of Bankruptcy Law Firm, PC: If CFPB succeeded in getting President Biden/Congress to order this forbearance, through end of 2021 (or later), there would be huge arrearages building up, for each month of forbearance, which would be due once forbearance ended. Then people would have to file Ch13, to try to pay those arrearages over 60 months. Problem is that Chapter 13 won’t be feasible for a lot of people, because in a chapter 13 plan, the person would have to pay that person’s pay regular monthly DOT payment each month, plus pay 1/60th of a large arrearage payment, each month. Lots of people will not be able to do that. For those that can do that, The Bankruptcy Law Firm, PC, can be hired to represent individual debtors in their Chapter 13 cases.

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Sandford Landress v. Cambridge Land Co. II LLC (In re Cambridge Land Co. II LLC), 20-1110 (B.A.P. 9th Cir. April 2, 2021)

BAP Says Undisclosed Assets Revest in the Debtor After Dismissal of Bankruptcy case, but Not After Closing of bankruptcy case. If bankruptcy case is closed as fully administered, only scheduled assets are abandoned back to debtor, per 11 USC 350:

If a case is dismissed, all assets revest in the debtor and nothing remains in the bankruptcy estate, not even undisclosed assets.

Unscheduled, undisclosed property is treated altogether differently when a case was dismissed compared to what happens if the case was closed, as the Ninth Circuit Bankruptcy Appellate Panel explained in an April 2 opinion.

If the case was administered and closed, undisclosed or unscheduled property remains in the estate, perhaps indefinitely. On the other hand, if the case was dismissed, all property reverts to the debtor, including undisclosed property.

The debtor’s standing is also different after dismissal. Because all property revested in the debtor, the debtor can pursue undisclosed property after dismissal. If the case was administered and closed, the debtor would not have standing to collect undisclosed property.

The Undisclosed Malpractice Claim

Two individuals owned a corporate debtor that owned apartment buildings. The owners conferred with bankruptcy lawyers about the efficacy of filing a chapter 11 petition for the corporation. The lawyers advised against a filing in chapter 11 and recommended filing a chapter 7 petition instead.

The owners consulted another bankruptcy lawyer, who put the debtor corporation into chapter 11, but not before the lender had installed a receiver in state court. The owners did not put themselves into bankruptcy.

In the chapter 11 case, the debtor did not schedule malpractice claims as an asset.

The bankruptcy court approved a sale of the corporation’s property, but the estate was administratively insolvent. The debtor corporation filed a motion to dismiss the chapter 11 case under Section 1112(b)(1). When no one objected, the bankruptcy court granted the dismissal motion.

Using the district’s standard form, the order dismissed the case and closed it, “but only for administrative purposes.”

The Malpractice Suit

After dismissal, the owners and the debtor corporation sued the lawyers they first consulted, claiming malpractice for not recommending a chapter 11 filing before the receiver was installed.

In state court, both sides agreed that the malpractice claim was a prepetition asset. They disagreed about whether the claim was owned by the bankruptcy estate or the debtor corporation.

Not sure who owned the claim, the judge in state court asked the parties to reopen the bankruptcy, schedule the malpractice claim, and have the bankruptcy court decide who owned the claim.

The debtor corporation filed a motion asking Bankruptcy Judge Peter C. McKittrick of Portland, Ore., to reopen the chapter 11 case. He reopened the case, but “for administrative purposes only, including but not limited to filing amended schedules.” He said it was impossible to reopen the dismissed chapter 11 case under Section 350(b) because it has not been closed under Section 350(a).

The case reopened, and the debtor amended the schedules to list the malpractice claim as an asset.

The Appeal Dismissed in the BAP

The malpractice defendants appealed the order to the BAP that reopened the chapter 11 case.

Writing for the BAP, Bankruptcy Judge Julia W. Brand dismissed the appeal because the malpractice defendants lacked standing.

Judge Brand noted that the malpractice defendants were not creditors of the debtor corporation. Reopening the chapter 11 case, she said, did not diminish their property, impose any burdens on them, or detrimentally affect their rights. Reopening the case would require the firm to defend the suit in state court but did not preclude them from asserting any defenses.

Consequently, the law firm was not a “person aggrieved” and therefore had no standing to appeal.

The Discussion of Dismissal vs. Closing under Section 350

The significance of the opinion lies in the BAP’s discussion of the distinction between closing a case after dismissal and closing a case under Section 350(a) after the case has been “fully administered.”

If the case has been “fully administered,” Section 350(a) requires the court to close the case.

Judge Brand pointed out that the chapter 11 case had been administratively closed after dismissal. It was not a statutory closing mandated by Section 350(a) after the case has been fully administered.

Judge Brand noted that no one had moved to vacate dismissal. She said that administrative reopening did not vacate the dismissal, reinstate the case, create a bankruptcy estate to administer, or trigger the automatic stay.

Had the case been administered and closed under Section 350(a), all scheduled property would have been “abandoned to the debtor” under Section 554(c). If there had been an administration and closure, Bankruptcy Judge Christopher M. Klein said in a concurring opinion that “unscheduled property is neither abandoned nor administered and remains property of the estate, essentially forever,” citing Section 554(c) & (d).

However, the case had not been administered and closed. It had been dismissed, making Sections 350 and 554 inapplicable. On the other hand, Section 349 was applicable.

After dismissal, Section 349(b)(3) “revests the property of the estate in the entity in which such property was vested immediately before the commencement of the case under this title.”

In the case of dismissal, Judge Brand characterized the section as saying that “all of the estate property revested in them at that time under § 349(b)(3), ‘regardless of whether the property was scheduled,’” citing Menk v. LaPaglia (In re Menk), 241 B.R. 896, 912 (B.A.P. 9th Cir. 1999). [Emphasis in original.]

Consequently, Judge Brand said, the malpractice claim “is now owned by” the debtor corporation. “In short, the [debtor corporation is] the proper plaintiff,” she said.

Judge Klein’s Concurrence

Judge Klein wrote a concurring opinion to “foster informed communication with state courts” about the distinction between closing and dismissing a case and the consequences for property of the estate.

As guidance for state courts when there has been an administered and closed case followed by the debtor’s prosecution of an unscheduled asset, Judge Klein said that judicial estoppel is not the issue. Rather, the debtor lacks standing to prosecute a claim that belongs to the estate. The trustee is the real party in interest, and the debtor lacks standing.

When a dismissed case is administratively reopened, Judge Klein said that “an unscheduled cause of action could not be property of the estate,” because nothing was left in the estate. He went on to say that “amending the schedules would have no legal effect.” He surmised that the bankruptcy judge allowed the debtor to amend the schedules “apparently as an accommodation to the state court’s requirement that schedules be amended so there would be no doubt about the state court’s authority.”

Judge Klein ended his concurrence with a hint about what might happen next in state court. He said that the BAP expressed no view “regarding what, if anything, the Oregon state court should do in consequence of the omission from the schedules of the prepetition cause of action.”

In other words, Judge Klein was hinting that judicial estoppel might bar the owners and the debtor corporation from prosecuting claims they had not scheduled in the bankruptcy case.

Other Observations

What happens next in state court?

Judicial estoppel could be a problem for the owners and the debtor, but better-reasoned opinions are saying that judicial estoppel does not preclude a trustee from liquidating an unscheduled asset.

Let’s assume, however, that the suit proceeds in state court and judicial estoppel doesn’t knock out the owners and the debtor. Also assume that the plaintiffs obtain a judgment against the malpractice defendants.

The malpractice claim had not been abandoned in chapter 11, so ownership did not vest permanently in the debtor.

The U.S. Trustee or a creditor could have the bankruptcy court revoke dismissal, convert to chapter 7 or appoint a chapter 11 trustee, and take the judgment into the estate. Or, the U.S. Trustee or a creditor could revoke dismissal sooner and take over prosecution of the suit if the state court was on the verge of dismissing based on judicial estoppel.

From the BAP’s opinion, it is unclear whether further proceedings in bankruptcy court would serve any purpose because the debtor said that no remaining unsecured creditors existed.

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A US District Court Rules that the Consumer Financial Protection Bureau (“CFPB”) Lacked Authority To Bring Suit While Its Structure Was Unconstitutional

On March 26, the U.S. District Court for the District of Delaware dismissed a 2017 lawsuit filed by the CFPB against a collection of Delaware statutory trusts and their debt collector, ruling that the Bureau lacked enforcement authority to bring the action when its structure was unconstitutional. As previously covered by InfoBytes, the Bureau alleged the defendants filed lawsuits against consumers for private student loan debt that they could not prove was owed or that was outside the applicable statute of limitations, which allowed them to obtain over $21.7 million in judgments against consumers and collect an estimated $3.5 million in payments in cases where they lacked the intent or ability to prove the claims, if contested. In 2020, the court denied a motion to approve the Bureau’s proposed consent judgment, allowing the case to proceed. The defendants filed a motion to dismiss, arguing that the Bureau lacked subject-matter jurisdiction because the defendants should not have been under the regulatory purview of the agency, and that former Director Kathy Kraninger’s ratification of the enforcement action, which followed the Supreme Court holding in Seila Law LLC v. CFPB that that the director’s for-cause removal provision was unconstitutional but was severable from the statute establishing the Bureau (covered by a Buckley Special Alert), came after the three-year statute of limitations had expired. While the Bureau acknowledged that the ratification came more than three years after the discovery of the alleged violations, it argued that the statute of limitations should be ignored because the initial complaint had been timely filed and that the limitations period had been equitably tolled. The court rejected the subject-matter jurisdiction argument because it held that the term “covered persons” as used in the Consumer Financial Protection Act, 12 U.S.C. § 5481(6), is not a jurisdictional requirement. However, the court then determined that the Bureau’s claims were barred by the statute of limitations. [As reported by Credit & Collection 4/1/21 e-newsletter]

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On 3/29/21, President Biden extended the National Eviction Moratorium through June 2021.

On 3/29/21, President Biden extended the National Eviction Moratorium through June 2021. However, United States Courts are split on whether it is legal for the government to prohibit landlords from evicting tenants who fail to pay the landlords rent that the tenants owe the landlords, without the government paying that rent to the landlords. The legal argument is that the right of landlords to collect rent, per leases, is a property right, which cannot be taken away from landlords by the government, without the government paying the landlords for taking away the landlords’ right to evict nonpaying tenants, as allowed by state law governing evictions. In short, the argument is that the government taking away the landlords’ right to collect rent, without the government paying the landlords the rent, is deprivation of property without due process, which is prohibited by the US Constitution, as well as prohibited by the Constitutions of California and other states.

Millions have fallen behind on their rent, and courts have disagreed on whether the relief is legal.

Millions have been unable to pay some or all of their rent since March 2020.

The Biden administration announced a three-month extension to a national eviction moratorium, to end of June 2021, a move designed to help millions of tenants who have fallen behind on their rent even as courts have disagreed on whether the relief is legal.

The Centers for Disease Control and Prevention extended the eviction moratorium through June 30. It had been set to expire Wednesday.

The moratorium, which originated from an executive order signed by then-President Donald Trump in September, protects tenants who have missed monthly rent payments from being thrown out of their homes if they declare financial hardship.

“The Covid-19 pandemic has presented a historic threat to the nation’s public health,” the White House said in a press release Monday. “Keeping people in their homes and out of crowded or congregate settings—like homeless shelters—by preventing evictions is a key step in helping to stop the spread of Covid-19.”

A series of conflicting court rulings have called into question the legality of the moratorium. At least three federal judges—in Tennessee, Ohio and Texas—have ruled the moratorium is unlawful. The Justice Department is appealing those cases. Other judges have rejected challenges to the moratorium. In a December ruling in Louisiana, a federal judge said the CDC had clear legal authority to “take those measures that it deems reasonably necessary to prevent the spread of disease, so long as it determines that the measures taken by any state or local government are insufficient.” That decision followed a similar ruling from Georgia in October.

Other cases are in progress, including one in which Realtors associations and several housing providers are challenging the moratorium in a Washington, D.C., federal court. Monday’s extension comes as the administration seeks to distribute some $46.6 billion in rental assistance authorized by Congress. The aid is being administered by state and local governments, many of which are still setting up their assistance programs.

Millions of renters have been unable to pay some or even all of their rent since March 2020, when the pandemic struck. An analysis by the Urban Institute, a Washington think tank, found that the amount of unpaid rent could exceed $52 billion. It estimated that the average household that has fallen behind on rent owed $5,586. [As reported in 3/30/21 Wall Street Journal]

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Gaske v. Satellite Restaurants Inc. Crabcake Factory USA (In re Satellite Restaurants Inc. Crabcake Factory USA),    BR    (Bankr. D. Md. March 19, 2021), bky case no. 21-00012 holds that Corporate Debtors in Subchapter V May Discharge 11 USC 523(a).

Only individuals in subchapter V of chapter 11 are barred from discharging debts found to be nondischargeable under Section 523(a).

The first court to grapple with the new issue, Bankruptcy Judge Maria Ellena Chavez-Ruark of Greenbelt, Md., decided that corporate debtors in subchapter V of chapter 11 may discharge debts that would not be discharged under Section 523(a).

In other words, according to Judge Ruark, only individual debtors in subchapter V are unable to discharge debts that are found to be excepted from discharge under Section 523(a).

Before bankruptcy, more than a dozen former employees filed a wages and hours suit in district court against a restaurant under state law and the federal Fair Labor Standards Act. The suit was automatically stayed when the restaurant corporation filed a petition in October under subchapter V of chapter 11.

The employees sued the debtor in bankruptcy court, claiming that the wages and hours claims were nondischargeable under Section 532(a)(2)(A) and (a)(6), as debts obtained by false representations, false pretenses or actual fraud, or resulting from a willful and malicious injury.

The debtor proposed a cramdown plan. If the plan had been consensual, Section 1191(a) meant that the debtor’s discharge would have arisen under Section 1141(d). Because the plan called for cramdown, the discharge would be governed by Section 1192.

The two governing statutes therefore were Sections 1192 and 523.

Section 1192 gives the debtor “a discharge of all debts provided in section 1141(d)(1)(A) of this title, and all other debts allowed under section 503 of this title and provided for in the plan, except any debt . . . of the kind specified in section 523(a) of this title.”

With an amendment made alongside the adoption of subchapter V, Section 523(a) provides that a “discharge under section . . . 1192 . . . does not discharge an individual debtor from any debt” defined in 19 paragraphs that followed.

The debtor filed a motion to dismiss, contending that the exceptions to discharge apply only to an individual debtor in subchapter V. That is to say, the debtor took the position that corporate debtors in subchapter V receive the same broad discharge as larger corporate debtors in traditional chapter 11 cases.

The right of a corporate debtor to discharge nondischargeable debts in subchapter V would have been clearer were the debtor confirming a consensual plan. Sections 1141(d)(1) and (d)(3) together say that corporate debtors receive discharges of nondischargeable debts while individual debtors do not.

The employees latched onto the differences between Sections 1141 and 1192 to argue that any debt excepted from discharge in Section 523(a) is not discharged in subchapter V, regardless of whether the debtor is an individual or a corporation.

The Judge Ruark granted the debtor’s motion to dismiss in an opinion on March 19. It was her first published opinion since ascending to the bench four months ago.

Judge Ruark found herself bound by the plain language of the statutes. Section 523(a), she said, “is clear and unambiguous that it applies only to individual debtors.” In light of the reference to Section 1192 in Section 523(a), she said that “the only reasonable meaning is that Congress intended to continue to limit application of the Section 523(a) exceptions in a Subchapter V case to individuals.”

Judge Ruark held that “the plain language of Section 523(a) is unequivocal and confirms that the exceptions to a debtor’s discharge, including a discharge under Section 1192, apply only to an individual.”

Judge Ruark conceded that two chapter 12 cases make Section 523(a) exceptions to discharge applicable to corporate farm debtors, but she cited two courts that had refused to extend those two cases to chapter 11.

The Collier and Norton treatises both say that Section 523(a) exceptions to discharge apply to corporate debtors in subchapter V. Judge Ruark declined to follow the treatises, finding them “unpersuasive because they fail to examine the plain language of the statute and instead state unsupported conclusions.”

On the other hand, Judge Ruark cited Bankruptcy Judge Paul W. Bonapfel, who said in his treatise that Section 523(a) applies only to individuals in subchapter V.

Judge Ruark found no cause to rely on legislative history, because the statute was clear. However, she found “[n]othing in the legislative history for Section 1192 [to] support[] the conclusion that Congress intended to expand the application of Section 523(a) to a non-individual.” Had Congress intended to make “a dramatic change in existing Chapter 11 law,” she said that the “House Report most certainly would have addressed it.”

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Educational Credit Management Corp. v. Goodvin,    BR    (US District Court Kansas 3/17/21) appeal from bankruptcy court to US District Court #20-1247

Many Bankruptcy Judges (here a bankruptcy judge in Kansas, affirmed on appeal by US District Court in Kansas) looked for and found way to discharge student loan debt, even though the wording of 11 USC 523(a)(8) only allows discharging student loan debt that is federal or federally insured (which is almost all student loan debt) if it would be an UNDUE hardship on the borrower (or the borrower’s dependents) if the borrower was required to repay the student loan debt, over the borrower’s whole working life.

Decision turned on 2 things:
(1) Inability to Cover Accruing Interest Was Pivotal on Discharging Student Loans, and

(2) Eligibility for an income-based repayment program is relevant only on the third Brunner test regarding good faith.

A district court decision upholding Chief Bankruptcy Judge Dale L. Somers has two important holdings regarding the dischargeability of student loans: (1) Disposable income insufficient even to pay accruing interest can prove “undue hardship” under Section 523(a)(8); and (2) the availability of an income-based repayment program will not automatically preclude the discharge of student loans.

Judge Somers, of Topeka, Kan., held a trial and discharged a consolidated loan representing almost $50,000 of the debtor’s $77,000 in student loans. The lender appealed and lost in a March 17 decision by District Judge John W. Lungstrum of Kansas City, Kan.

The single debtor was 57 years old with no dependents. The interest on his $77,000 in student loans was $503 a month.

The debtor was a union apprentice earning about $2,500 a month. After expenses, Judge Somers found the debtor to have $209 a month in disposable income available to pay student loans. On becoming a journeyman in three years, his income would rise 66%. Even after the debtor’s income increases, the lender conceded that the debtor’s disposable income still would not cover accruing interest.

On appeal, the lender did not challenge the findings about the debtor’s income. The lender only questioned two findings regarding the debtor’s expenses. The debtor listed $550 a month for groceries and dining out. The lender argued that $550 a month was too high to represent a “minimal standard of living.”

Finding support in the record for $550 a month, Judge Lungstrum “defer[red] to the bankruptcy court’s finding on that issue.”

The lender also questioned the debtor’s $125 a month for personal care expenses. Judge Lungstrum said he was “not left with a firm and definite conviction that a mistake has been made in this regard.”

Having upheld Judge Somers’ fact findings on income and expenses, Judge Lungstrum turned to the “undue hardship” standard in the Tenth Circuit. In ECMC v. Polleys, 356 F.3d 1302 (10th Cir. 2004), the Denver-based appeals court adopted its version of the Brunner test. See Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395, 396 (2d Cir. 1987).

Significantly, the Tenth Circuit did not understand Brunner “to rule out consideration of all of the facts and circumstances” nor to require a “certainty of hopelessness.” Polleys, id. at 1309-10. Judge Lungstrum detailed how Polleys put softer corners around all three elements of the Brunner test.

Considering only the debtor’s current circumstances, Judge Lungstrum said that the debtor “easily” satisfied the Brunner test because he could not pay all accruing interest on the student loans while maintaining a minimal standard of living. Even after a pay increase, the debtor still could not completely cover accruing interest, thus showing that his circumstances are “likely to persist.”

The lender contended that the debtor did not meet the Brunner test because he had not sought an income-based repayment program.

The response by Judge Lungstrum may be the most significant part of his opinion. The Tenth Circuit “indicated,” he said, that the repayment program is not dispositive and should be considered only under the third Brunner test, good faith. If it were considered in the first test, maintenance of a minimal standard of living, the availability of a repayment program would always be dispositive and would always bar discharge.

Judge Lungstrum therefore considered the availability of a repayment program along with other “relevant circumstances under Brunner’s third prong.”

The lender contended that failure to apply for reduced payments under a repayment program barred a finding of good faith. Judge Lungstrum countered by saying that not signing up for the program “was reasonable and should not be given controlling weight.” It was “significant,” he said, that the debtor could not cover interest on the student loans, even after his expected increase in income.

On the question of good faith, Judge Lungstrum observed that the debtor had “consistently” made payments for 30 years, when he was employed and able.

“Finally,” Judge Lungstrum said, having the debt hanging over him under a repayment program “may affect the availability of housing or credit.” He also weighed the “emotional and psychological toll on the debtor” if the debt were not discharged.

Judge Lungstrum therefore decided that the debtor had satisfied the third Brunner prong and was entitled to discharge at least some of the student loans.

The lender did not challenge the bankruptcy court’s ability to discharge a portion of the loans. The lender, however, argued that the lower court should have prorated the discharged debt among all of the loans.

Judge Lungstrum disagreed. He said that the Tenth Circuit had “effectively sanctioned” partial discharge given the bankruptcy court’s “equitable power” under Section 105(a).

In terms of selecting the loans to discharge, the bankruptcy court picked the oldest loans with the highest interest rates. Those loans, Judge Lungstrum said, “drive[] the conclusion of undue hardship in this case.” He therefore held that Judge Somers had not abused his discretion because discharging the oldest loans with the highest interest rates had a “rational basis.”

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In re Ritter,    BR    , 2021 WL 864092 (Bankr. C.D. CA 3/5/21)

In re Ritter,    BR    , 2021 WL 864092 (Bankr. C.D. CA 3/5/21). Analyzing the application of the new Chapter 13 discharge provision passed by Congress on December 27, 2020 as part of the coronavirus emergency response legislation, section 1328(i), a bankruptcy court in the Central District of California ruled, in In re Ritter, that in order to receive a “Covid-19 Discharge”, debtors must still comply with all the other provisions of section 1328 (a)–(h). Meeting only the requirements of section 1328(i) will not result in a discharge.

FACTS Debtors James and Debra Ritter filed a chapter 13 petition on July 21, 2019. An order confirming the plan was entered on October 18, 2019. Through a step-up of payments under the plan, over the 60 month applicable commitment period the debtors would pay about $97,000 plus tax refunds, which would result in an approximate 63% payment to their unsecured creditors. The plan provided for the curing of defaults and maintenance of payments on residential mortgages owed to two secured creditors. In June 2020, the second priority mortgagee entered into a temporary forbearance with the debtors due to Covid-19 under the CARES Act. In September 2020 the Chapter 13 Trustee filed a stipulation which suspended plan payments for three months due to Covid-19. Then in January 2021, the court entered an order approving a loan modification between the debtor and the first priority mortgagee.

Believing they complied with the necessary provisions of newly enacted section 1328(i), the debtors filed a motion for discharge. At that time, there were 45 payments remaining in the plan term. The newly-enacted section reads as follows:

(1)IN GENERAL – Section 1328 of title 11, United States Code, is amended by adding at the end the following:

(i)Subject to subsection (d)...the court may grant a discharge of debts dischargeable under subsection (a) to a debtor who has not completed payments to the trustee or a creditor holding a security interest in the principal resident of the debtor if –

(1) the debtor defaults on not more than 3 monthly payments due on a residential mortgage under section 1322 (b)(5) on or after March 13, 2020, to the trustee or creditor caused by a material financial hardship due, directly or indirectly, by the coronavirus disease 2019 (Covid-19) pandemic; or

(2)(A) the plan provides for the curing of a default and maintenance of payments on a residential mortgage under section 1322(b)95); and

(B) the debtor has entered into a forbearance agreement or loan modification agreement with the holder ore servicer…of the mortgage described in sub-paragraph (A).

Debtors argued that because their plan provided for the curing and maintenance of their residential mortgages and they had entered into a forbearance agreement with one secured lender and a loan modification with the other secured lender in accordance with the disjunctive section 1328(i)(2), they satisfied all the requirements of section 1328(i) without doing more and were entitled to a discharge without completing the plan. The Chapter 13 trustee opposed the motion, asserting that debtors still had to comply with all the other conditions for the right to a discharge in provisions (a)–(h) of section 1328. The purpose of the Covid-19 amendment was to allow a discharge under subsection (a) if the only failed requirement was being current on the cure and maintenance payments on the residential mortgages.

After careful analysis, the court agreed with the trustee’s position and denied the motion for discharge.

REASONING The Bankruptcy Court recognized it was writing on a fresh slate; no interpretation of the new statute had been handed down by any court. Therefore, to ascertain Congress’s intent it must follow the customary rules of statutory construction by looking first to the plain language of the statute. If the language is clear, the job is done. If the language is ambiguous, then the court considers extrinsic evidence, including legislative history, public policy and the entire statutory scheme of which the statute is a part. If after doing all that, the meaning remains unclear, the court applies reason, practicality, and common sense to the statute.

Here, the statutory scheme and common sense were the most important factors. The court noted that subsection (i) used the word may grant a discharge, whereas the legislature had used the mandatory shall when speaking of granting a discharge under (a) and not granting a discharge under (c) and (g) if certain circumstances occurred. This distinction in terms was critical, because if Congress wanted the court to only look at compliance with the subsection (i) terms, it would have said shall. The use of may implied Congress expected other factors, such as those found in (a) – (h) to come into play.

In a lengthy analysis, the court also considered the absurdities which would occur if debtors could obtain a discharge by merely show a plan with cures and maintenance provisions and forbearance or modification. First, it would be easier to get a discharge than to do a modification under the Covid-19 modification provisions. Second, if they got a Covid-19 discharge and subsection (c) did not apply, they would be entitled to discharge debt which they could not discharge after full performance of the plan. They could also receive a discharge without doing the financial management course under subsection (g). If Congress had intended such a substantial change, it would have said so more explicitly.

Therefore, the debtors must either complete their plan as confirmed or seek a modification. They did not get to walk away with an easily-achieved discharge.

COMMENT Of all the factors the court had to consider doing its statutory analysis, the application of common sense was the most important here. Yes, the statutory scheme was important, because the use of shall in some places but the use of may in subsection (i) certainly implied that more was needed for a discharge than just a cure and maintain plan and a forbearance or modification. But most persuasive was common sense. Congress did not intend to give debtors who had lost even minimal amounts of income due to Covid-19 to get a free pass out of chapter 13, with all their debt—including that which would otherwise be nondischargeable—discharged almost 4 years earlier than could have been possible after full payments under the plan. That would defy common sense.

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The Us Consumer Financial Protection Bureau (“CFPB”) Is “Encouraging” Banks and Debt Collectors Not To Take, From Consumers, Toward Paying Debts That Consumers Owe...

The US Consumer Financial Protection Bureau (“CFPB”) is “encouraging” banks and debt collectors NOT to take, from consumers, toward paying debts that consumers owe, the $1,400 stimulus payments that the federal government is sending out to consumers, under the newest covid relief law. See below article. However, there is nothing in that newest covid relief law that prevents/prohibits banks and debt collectors from taking those $1,400 payments from consumers. Therefore, the CFBP “encouragement” is unlikely to be effective in keeping banks and debt collectors from taking those $1,400 payments from consumers.

March 17, 2021WASHINGTON, D.C. – Consumer Financial Protection Bureau (CFPB) Acting Director Dave Uejio issued the following statement regarding consumers’ access to Economic Impact Payment (EIP) funds distributed through the American Rescue Plan:

“The Consumer Financial Protection Bureau is squarely focused on addressing the impact of the COVID-19 pandemic on economically vulnerable consumers and is looking carefully at the stimulus payments that millions are now receiving through the American Rescue Plan. The Bureau is concerned that some of those desperately needed funds will not reach consumers, and will instead be intercepted by financial institutions or debt collectors to cover overdraft fees, past-due debts, or other liabilities.

“In recent days, many financial industry trade associations in dialogue with the CFPB have said they want to work with consumers struggling in the pandemic. Many of these organizations have told us they have begun or soon will take proactive measures to help ensure that consumers can access the full value of their stimulus payments. If payments are seized, many financial institutions have pledged to promptly restore the funds to the people who should receive them. We appreciate these efforts, which recognize the extraordinary nature of this crisis and the extraordinary financial challenges facing so many families across the country.

“I applaud the actions of our state partners, who have taken rapid action and concrete measures to protect stimulus funds. We will remain in touch with them to better understand the effectiveness of these actions. I’ll also stay in touch with the Bureau’s consumer stakeholders who provide valuable ‘voice of the consumer’ insight on problems with accessing their stimulus payments. The Bureau will continue to closely monitor consumer complaint data and other information that will help us to better understand how these issues are affecting consumers.

“The Bureau will stay closely engaged on this issue as the COVID relief payment rollout continues.”

Consumer Resources

Consumers should monitor their bank and credit union accounts or use the IRS’s Get My Payment tool to confirm EIP funds have been deposited into their accounts. In addition, a new CFPB consumer advisory offers advice on steps consumers can take if they believe their bank or credit union has withheld their stimulus payment to cover an overdrawn account balance. Consumers should also be aware of scams and not give personal or banking information to unsolicited callers claiming to help with relief payments.

If consumers have a problem with their financial products or services, they can reach out directly to the company. Companies can usually answer questions unique to their situations and more specific to the products and services they offer. The CFPB can help consumers connect with companies about complaints. Consumers can submit complaints to the CFPB online or by calling (855) 411-2372.

The Bureau’s COVID-19 Prioritized Assessments Special Edition of Supervisory Highlights addressed, among other things, observations related to deposit accounts and stimulus payments.

The Consumer Financial Protection Bureau is a US government agency that claims to help consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives.

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Tingling v. Educational Credit Management Corp.     F.3d     (In re Tingling), 20-757 (2d Cir. March 11, 2021)

Second Circuit Reaffirms the Strictures of Brunner case re. under what circumstances can student loan debts be discharged in a bankruptcy case

Second Circuit insinuates that “undue hardship” and the Brunner test are synonymous.

In 1987 when it handed down Brunner v. N.Y. State Higher Educ. Servs. Corp. (In re Brunner), 831 F.2d 395 (2d Cir. 1987), the Second Circuit claims to have anticipated legislative intent 10 years later when Congress adopted the current iteration of Section 523(a)(8), the statute that makes student loans nondischargeable except when the debtor suffers “undue hardship.”

The debtor owed about $60,000 in student loans. The bankruptcy court ruled that the debt was nondischargeable because the pro se debtor had not shown undue hardship. The district court affirmed, and the debtor appealed to the Second Circuit, this time represented by counsel.

The Second Circuit affirmed on March 11 in an opinion by Circuit Judge José A. Cabranes.

Judge Cabranes characterized the debtor as arguing that “the Brunner test has, over time, become too high a burden for debtors to satisfy.” [Note: If that be a fair characterization of the argument, the relief the debtor sought could only be obtained if the Second Circuit were sitting en banc.]

Judge Cabranes disagreed. He said that the “Brunner test reflects the Section 523(a)(8) statutory scheme exhibiting ‘clear congressional intent . . . to make the discharge of student loans more difficult than that of other nonexcepted debt . . . .’” Id. at 396.

Judge Cabranes laid out the three fact findings that a debtor must establish by a preponderance of the evidence: (1) The debtor cannot maintain a “minimal” standard of living; (2) additional circumstances exist to show that the debtor’s financial condition is “likely to persist for a significant portion of the repayment period,” and (3) the debtor made a good faith attempt to repay the loan.

The debtor failed all three tests, Judge Cabranes said.

On the first test, Judge Cabranes said that the debtor’s income was above the federal poverty level. Her expenses, he said, “allow her to make loan repayments while maintaining a minimal standard of living. Further, [the debtor] failed to undertake steps to improve her overall financial condition and reduce her discretionary expenses.”

According to Judge Cabranes, the debtor was “fairly young” at age 52, in good health, with no dependents and two graduate degrees. Therefore, she failed the second test because she “is able to maintain her current level of income.”

The debtor failed the third test because she had not attempted to consolidate her loans or qualify for income-based repayment programs. Moreover, Judge Cabranes said, the debtor had received $4,000 tax refunds for four years but used none of the money to repay student loans.

Judge Cabranes affirmed the judgment of the bankruptcy court because the debtor had failed to prove her satisfaction of the Brunner tests.


Brunner is an elaborate test compared to the straightforward “undue hardship” standard adopted by Congress 10 years later in Section 523(a)(8). Had Congress intended to adopt Brunner, this writer assumes that the drafters would have included language in the statute alluding to the elements of the test laid down by the Second Circuit and adopted elsewhere.

Judge Cabranes insinuated that someone above the poverty level cannot show “undue hardship.” Is poverty the bright-line test defining “undue hardship?”

Section 523(a)(8) could be understood to mean that former students are obliged to incur “due hardship” in the course of repaying student loans. What hardship should former students be obligated to endure?

Did Congress mean to say that a former student must pay student loans to the point that the debtor’s disposable income after paying student loans results in a standard of living at the poverty level?

On top of the Brunner test’s departure from the statutory language, there is a long-standing circuit split that warrants Supreme Court review. There are three standards among the circuits, and they are irreconcilable with one another.

Standing alone, the Eighth Circuit developed the so-called totality-of-the-circumstances test, where the court must consider (1) the debtor’s future financial condition, (2) the debtor’s and dependents’ reasonable and necessary living expenses, and (3) “other relevant facts and circumstances surrounding each particular bankruptcy case.” Long v. Educ. Credit Mgmt. Corp. (In re Long), 322 F.3d 549, 554 (8th Cir. 2003). Rejecting Brunner, the Eighth Circuit said it preferred a “less restrictive approach.” Id.

Brunner is followed in the Second, Third, Fourth, Fifth, Sixth, Seventh, Ninth and Eleventh Circuits.

Although professing to follow Brunner, the Fifth Circuit tightened its already higher standard in 2019 by ruling that a debtor may not discharge a student loan unless “repayment would impose intolerable difficulties on the debtor.” Thomas v. Department of Education (In re Thomas), 931 F.3d 449 (5th Cir. July 30, 2019).

Earlier in In re Gerhardt, 348 F.3d 89, 92 (5th Cir. 2003), the Fifth Circuit held that discharging student loans requires the debtor to “show that circumstances out of her control have resulted in a ‘total incapacity’ to repay the debt now and in the future.” Gerhardt, 348 F.3d at 92.

What is “undue hardship?” Is Brunner the test? The Supreme Court should intervene if Congress does not ameliorate a statute that can impose life-long penury on some former students.

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Edwards Family Partnership LP v. Johnson (In re Community Home Financial Services Inc.)

Edwards Family Partnership LP v. Johnson (In re Community Home Financial Services Inc.),     F.3d     (5th Circuit Court of Appeal, 3/5/21) appeal no. 20-60718: This is an additional Circuit holding that Trustees have standing to appeal, even if the Trustee has no pecuniary interest in the ruling being appealed. Cites 9th Circuit, 1st Circuit and 6th Circuit decisions that recognize “the inadequacy of a pecuniary-interest test for trustee standing.” Also cites a Fourth Circuit decision that says a trustee never has a pecuniary interest. Decision says that the Fifth Circuit had “implicitly recognized” the same principle.

Decision observes that a “trustee’s standing comes from the trustee’s duties to administer the bankruptcy estate, not from any pecuniary interest in the bankruptcy.” Therefore, 5th Circuit held appeal was not moot (due to the 2 law firms that had appealed, and which did have a pecuniary interest in the appeal—their fees—having settled and dropped out of the appeal. Decision holds trustee had standing because “the payment of fees to [the two firms] directly affects the administration of the bankruptcy estate” and the trustee’s responsibility for “ensuring that only proper payments are made from the bankruptcy estate.”

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Kaiser et al v. Cascade Capital, LLC et al.

Kaiser et al v. Cascade Capital, LLC et al. ,     F3rd.   , 2021 DJDAR 2171 (9th Circuit Court of Appeals, 3/11/21. This case holds that threatening to sue, or suing, a person or entity which owes a debt which is time barred t, constitutes a violation of the federal Fair Debt Collection Practices Act (“FDCPA”).

This is a BIG change in the law: For decades, debt collectors have sued on time barred debts, and have claimed that a debt being time barred is an affirmative defense, which the person owing the debt must plead in the person’s answer, and prove, and therefore, that suing on a time barred debt is NOT a FDCPA violation. This new decision changes that.

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Consumer Financial Protection Bureau (“CFPB”) Report: Housing insecurity and the COVID-19 pandemic (3/6/21)

In 2020, those who have fallen behind at least three months on their mortgage increased 250 percent to over 2 million households, and is now at a level not seen since the height of the Great Recession in 2010. Collectively, these households are estimated to owe almost $90 billion in deferred principal, interest, taxes and insurance payments.1 At the same time, we are facing a rental crisis, with over 8 million rental households behind in their rent. While there are significant differences from the last crisis, particularly a more stable mortgage market and substantial homeowner equity, there are a significant number of households at risk of losing their housing just as the U.S. economy is poised to emerge from the pandemic—a disproportionate number of them from communities of color. This report summarizes some of the relevant data and research on the impact of the pandemic on the rental and mortgage market, and particularly its impact on low income and minority households.


A first take away from this is that more than 900,000 people have been in forbearance during the last year, with 28% of those remaining current on payments, 26% getting a payment deferral or partial claim and 16% making a lump sum catch-up payments. That leaves 30% that have no solution to their delinquency or of 270,000 households which the report describes as having “limited options to avoid foreclosure initiation when the moratoria end.”

Unmentioned, is that Chapter 13 is among those options, particularly in North Carolina, where most districts have active mortgage modification programs that provide improved outcomes for homeowners that are delinquent on mortgages. The CFPB could affirmatively work with bankruptcy court across the country to expand these programs.

The omission of bankruptcy as an option (and to be fair this report does not specifically list options) is repeated in the discussion of delinquent rent and for protections related to mobile homes, this includes mobile home cram-down in Chapter 13, see, for example, In re St. Fleur, and incorporation of Eviction Diversion programs with bankruptcy.

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GLM DWF Inc. v. Windstream Holdings Inc. (In re Windstream Holdings Inc.)

GLM DWF Inc. v. Windstream Holdings Inc. (In re Windstream Holdings Inc.),    F.3d   appeal 20-1275 (2d Cir. Feb. 18, 2021): 2nd circuit court of appeals equitable mootness decision described by ABI as making it impossible to review critical vendor orders, after a ch 11 plan is confirmed.

An appeal from a critical vendor order was dismissed as equitably moot.

By invoking equitable mootness, the Second Circuit has made a critical vendor order virtually unreviewable after confirmation of a chapter 11 plan.

In chapter 11, the debtor prevailed on the bankruptcy court to approve a so-called critical vendor motion, allowing full payment before confirmation of prepetition claims owing to unsecured creditors whose cooperation was seen as critical to a successful reorganization.

A creditor appealed the critical vendor order but did not seek a stay pending appeal. The district court affirmed on the merits, prompting a second appeal to the circuit. Click here to read ABI’s report on the district court affirmance.

While the appeal was pending in the circuit, the debtor confirmed its chapter 11 plan.

The creditor assigned two errors: (1) The bankruptcy court improperly delegated its judicial authority to the debtor to decide who should be paid, and (2) the bankruptcy court improperly withheld the identities of the creditors being paid.

In a nonprecedential, per curiam opinion on February 18, the Second Circuit dismissed the appeal as equitably moot.

The appeals court laid out Second Circuit authority and the five factors to consider in dismissing bankruptcy appeals under the judge-made principle of equitable mootness. See Frito-Lay, Inc. v. LTV Steel Co. (In re Chateaugay Corp.), 10 F.3d 944, 949–50 (2d Cir. 1993). Once a debtor’s plan has been substantially consummated, the Second Circuit presumes that an appeal is equitably moot.

The appeals court rejected the creditor’s argument that equitable mootness did not apply because the creditor was not appealing confirmation. “Our precedent is clear,” the Second Circuit said, “that equitable mootness can be applied ‘in a range of contexts,’ including appeals involving all manner of bankruptcy court orders.”

The appeals court said that the creditor’s argument “makes little sense” because it “overlooks the important interest of finality that attaches once a reorganization plan is approved and consummated.” The circuit decided to apply equitable mootness “even though [the appellant] has not expressly asked us to reject the bankruptcy court’s approval of [the debtor’s] plan of reorganization.”

Turning to the merits of equitable mootness, the appeals court decided that the creditor had “clearly failed” to satisfy the five Chateaugay factors, most prominently by failing to seek a stay or even an expedited appeal.

In terms of disruption, the circuit court said that the relief sought on appeal “could cause tens of millions of dollars in previously satisfied claims to spring back to life, thereby potentially requiring the bankruptcy court to reopen the plan of reorganization.” Moreover, the court said, “it would likely be highly disruptive for the creditors that received these funds to return them more than a year later.”

The circuit court dismissed the appeal as equitably moot.

In a footnote, the appeals court declined to rule on disclosure of the identities of the creditors whose claims were paid. The appellant had “no cognizable interest” in finding out who was paid “if it lacks the ability to parlay them into a possible financial recovery.”


On the first appeal, District Judge Cathy Seibel wrote a formidable opinion upholding the critical vendor order on the merits. It’s unfortunate that the Second Circuit sidestepped an issue of significance that arises in almost every major chapter 11 case in the Southern District of New York.

In terms of applying equitable mootness to the case on appeal, the Second Circuit may have misapprehended the effect of reversal.

Arguably, requiring critical vendors to disgorge payments would not upset the plan. Critical vendors would be disgorging whatever they received before confirmation that was in excess of their recoveries under the plan. The excess recovered by the debtor could mean greater dividends to other creditors. If there be any doubt about upsetting the plan, the circuit court could remand the question to the bankruptcy court rather than ruling on its own.

This writer submits that disclosing the identities of recipients of preconfirmation payments would not be meaningless relief. Without disclosure, how is the creditor body to know whether improper favoritism motivated the debtor’s selection of critical vendors?

Admittedly, something seems wrong about compelling disgorgement from critical vendors who were not parties to the appeal. Still, major initiatives that occur in most large chapter 11 cases should be subject to review in the circuit as activities that escape review but are likely to recur.

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In re Jesslyn Anderson,    F3d    (9th Circuit Court of Appeals 3/1/21), appeal number 20-60014

Can be thought of as standing for the proposition that a Chapter 7 bankruptcy is a “snapshot” of the debtor’s situation on the day the debtor files the debtor’s chapter 7 bankruptcy case, and that things that happen AFTER the debtor files the debtor’s Chapter 7 bankruptcy case do not matter.


A chapter 7 debtor retains her Washington state homestead exemption even if she moves out of the house after the filing of the bankruptcy case and does not re-occupy or file a declaration of abandonment within six months after vacating the house. Chapter 7 involves a "snapshot" of the debtor's assets, liabilities, and rights to exemption, on the filing date. The debtor's subsequent actions generally do not affect that snapshot or the debtor's rights. Per curiam, the Ninth Circuit panel affirmed, adopted and republished the March 23, 2020, decision of the BAP in case number WW-19-1224-LBG.

Procedural context:

The chapter 7 trustee objected to the debtor's homestead exemption because the debtor moved out of her house after filing bankruptcy. The bankruptcy court denied the trustee's objection. The trustee appealed to the Bankruptcy Appellate Panel, which affirmed the bankruptcy court.

The trustee appealed again.


Jesslyn Renee Anderson filed a chapter 7 petition in December 2017. In her schedules, Anderson declared that she owned a 15% interest in a house that she co-owned with her parents. She scheduled the value of her interest at $90,000 and declared a homestead exemption of $125,000 on her interest under RCW §§ 6.13.010, 6.13.020, and 6.13.030. After she filed her bankruptcy case, Anderson got married and moved out of the house to live with her spouse. The chapter 7 trustee objected to the exemption, arguing that Anderson did not intend to live in the house when she filed her bankruptcy petition and that, under Washington law, she had abandoned the her interest in the house post-petition by failing to reside there for six months or to file a declaration of homestead.

Question: this case was about a homestead exemption claimed under Washington state law. Would this case have come out the same way if the homestead exemption had been claimed by a California Chapter 7 debtor, on a house in California, where the homestead exemption was claimed under California state law (CA CC 704.703)? Different states have differently worded homestead exemption laws.

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Archer-Daniels Midland Co. v. Country Visions Cooperative

Below is a District Court decision, important because it refused to uphold sale of real property through confirmed ch11 plan, in violation of secured creditor's recorded ROFR, where insufficient notice of bky given to secured creditor by debtor’s atty

Archer-Daniels Midland Co. v. Country Visions Cooperative, ( District Court E.D. Wis. Feb. 19, 2021), appeal 17-0313 from US Bankruptcy Court decision to US District Court

US Supreme Court Espinosa Decision Doesn’t Forgive All Procedural Defects in Confirmation, District Judge Ludwig Says.

To sell free and clear, someone with an interest in the property must receive the notice required for service of a summons and complaint. Actual notice doesn’t suffice.

The Supreme Court’s Espinosa decision does not stand “for the broad proposition that some informal notice always satisfies due process,” according to District Judge Brett H. Ludwig of Milwaukee. [Emphasis in original.]

In his February 19 opinion, Judge Ludwig held that informal notice of a pending bankruptcy did not enable a purchaser to buy property from the debtor free and clear of the creditor’s right of first refusal.

Judge Ludwig was a bankruptcy judge in Milwaukee from 2017 to 2020, when he was elevated to the district court bench. He was one of the judges appointed by former President Trump who upheld the results of voting in his state. Two days before the meeting of the Electoral College, Judge Ludwig dismissed a lawsuit asking for the Wisconsin legislature, not the voters, to determine the winner of the state’s electoral votes.

The Defective Notice

The creditor had a right of first refusal, or ROFR, to purchase real property owned by the chapter 11 debtor. The creditor had properly filed the ROFR with the land records. The ROFR would have shown up on a title report, Judge Ludwig said.

The debtor filed a plan calling for the sale of the property free and clear of all liens, claims and interests. The creditor did not receive written notice of the bankruptcy, the plan, the disclosure statement, the confirmation hearing or the motion to sell free and clear.

According to Judge Ludwig, the creditor received “informal” notice of the sale motion after approval of the disclosure statement. The creditor’s counsel both called and wrote to the debtor’s lawyers but received no response. One week before the sale and confirmation hearing, counsel for the debtor had a telephone call with the creditor’s counsel and relayed information about the sale and hearing date.

The creditor did not appear at the sale and confirmation hearing. The bankruptcy judge, not having been apprised of the ROFR, approved the plan and the sale.

About four years later, the purchaser arranged a sale of the property and filed a motion in the bankruptcy court seeking a declaration that the ROFR was ineffective in view of the plan confirmation and the sale free and clear.

Now-retired Bankruptcy Judge Susan V. Kelley, who had presided over confirmation, denied the motion to enforce the confirmation order. In what Judge Ludwig called a “thorough decision,” she ruled that the informal, last-minute notice was insufficient to overcome due process violations.

Judge Ludwig affirmed.

No Protection from Espinosa

The purchaser argued that actual notice of the bankruptcy overcame due process shortcomings. The argument, according to Judge Ludwig, “reflects a fundamental misunderstanding of both the importance of bankruptcy procedure and due process.”

On a sale free and clear, Section 363(f) and Bankruptcy Rules 6004(c) and 9014(b) require serving anyone with an interest in the property in the same “manner provided for service of a summons and complaint.”

“None of these rules was complied with here,” Judge Ludwig said. Instead, the parties “utterly disregarded the procedural protections necessary to strip [the creditor] of its interest in the . . . Property.” The “procedural lapses” here were “immense,” he said. “The absence of this higher notice was not a trifling error.”

The lack of notice resulted in giving the bankruptcy court no personal jurisdiction over the creditor, Judge Ludwig said.

The purchaser did not succeed in fobbing the procedural shortcomings off on the debtor. The purchaser was “heavily interested” in confirmation and “had a responsibility to ensure compliance with the Bankruptcy Code and Rules if it wanted to be sure it was taking clean title.” Similarly, Espinosa gave the purchaser no protection. See United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260 (2010).

Citing Espinosa, the creditor argued that “that these procedural failings can be wiped clean because [the creditor] received ‘actual notice’ of the potential sale.” Judge Ludwig disagreed.

Espinosa, he said, was not “an attempt to bind a party that was not brought within the bankruptcy court’s jurisdiction,” nor did it stand “for the broad proposition that some informal notice always satisfies due process.” [Emphasis in original.]

In Espinosa, the creditor had received the required notice of the confirmation hearing and the plan where student loans would be discharged. In addition, the creditor had filed a proof of claim, Judge Ludwig said.

Espinosa was different “in several material respects,” Judge Ludwig said. The creditor in the appeal before him “was not subject to the bankruptcy court’s jurisdiction,” meaning that the “resulting order [was] not binding against it.”

Furthermore, the “number and level of procedural violations inflicted” on the creditor “dwarfs the procedural deficiency in Espinosa,” Judge Ludwig said.

Significantly, Judge Ludwig said that “Espinosa . . . did not hold . . . that actual notice is sufficient to satisfy due process in all contexts” and was not a “blank check to disregard procedure, especially procedure enacted for the protection of third parties’ property rights.”

The Buyer Was Not a ‘Good Faith Purchaser’

Judge Ludwig also upheld Judge Kelley’s findings that the purchaser was not a good faith purchaser. He said that the purchaser had received the title report and thus had “constructive notice” of the ROFR.

In addition, the purchaser “knew or should have known” that the holder of the ROFR was not on the service list, Judge Ludwig said. He therefore ruled that Judge Kelley “had correctly determined that [the purchaser] could not invoke the good faith purchaser defense.”

Judge Ludwig upheld the bankruptcy court’s order denying the motion to enforce the confirmation order.

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Radiance Capital Receivables Nineteen LLC v. Crow (In re Crow)

Radiance Capital Receivables Nineteen LLC v. Crow (In re Crow),    F.3rd    (10th Cir. Feb. 12, 2021). Appeal case number 19-8082: 10th Circuit Court of Appeals, in a 2 to 1 decision, holds that an Order holding an asset to be exempt is a final order (as to which Notice of Appeal must be filed within 14 days after Order is entered, or right to appeal is lost), even though the Order does NOT state what dollar amount of the asset in question is held to be exempt.

Tenth Circuit majority believes that the grant or denial of an exemption is sufficient to make the order final, even if the bankruptcy court hasn’t ruled on the extent or amount of the exemption.

A panel of Tenth Circuit judges disagreed about the extent of flexibility in deciding whether a bankruptcy court order is final and therefore appealable.

Two judges believe that simply finding an asset to be exempt makes the order appealable. The third judge believes that an order is not final and not appealable until the bankruptcy judge rules on the extent or amount of the exempt asset. Before bankruptcy, a husband and wife established a brokerage account in Wyoming in their names as tenants by the entireties.

Several years later, a creditor obtained a $2.8 million judgment against the husband. He responded by filing a chapter 7 petition. The husband claimed that some $2 million in the entireties account was exempt under Wyoming law. The wife did not resort to bankruptcy.

Wyoming is among the minority of states allowing a married couple to hold personal property by the entireties. Over objections by the chapter 7 trustee and the judgment creditor, the bankruptcy judge ruled that the account was validly held by the couple as tenants by the entireties and was therefore exempt. However, the bankruptcy judge decided that there must be an adversary proceeding to decide the extent or amount of the exemption.

The Bankruptcy Appellate Panel affirmed the order finding the account to be exempt, and the creditor appealed to the Tenth Circuit. Evidently, the husband died while the appeal was pending in the Court of Appeals.

In his opinion on February 12, Circuit Judge Timothy M. Tymkovich upheld the finding that the brokerage account was validly held by the couple as tenants by the entireties under Wyoming law.

The couple had filed a motion to dismiss, contending that the order of the bankruptcy court was not final.

Judge Tymkovich denied the motion. He relied on Tenth Circuit authority holding that an order granting or denying an exemption is final and appealable. In re Brayshaw, 912 F.2d 1255, 1256 (10th Cir. 1990).

Because the bankruptcy court had ruled that the husband was entitled to a tenancy by the entireties exemption, Judge Tymkovich held that the order was “immediately appealable,” even though the bankruptcy court had not decided the amount of the exemption.

Circuit Judge Mary Beck Briscoe concurred in the result. She agreed on the merits and agreed that the order was final, but only as a consequence of the husband’s death while the appeal was pending.

Judge Briscoe did not believe that the finding of an exemption was final at the time it was made, because the bankruptcy court had not ruled on the extent or amount of the exemption. She said that “this case initially fell under our general rule that the BAP’s decision is interlocutory when it affirms an interlocutory order by the bankruptcy court.”

The husband’s death changed the circumstances. While the appeal was pending, the bankruptcy judge granted summary judgment, saying that the deceased husband’s bankrupt estate held no interest in the entireties account once the husband died.

In Judge Briscoe’s view, the ruling that the estate had no interest in the account gave the circuit court appellate jurisdiction over a final order.

Although the “finality rules are indeed ‘different in bankruptcy,’ . . . they are not so flexible as to permit review while the parties’ dispute is simultaneously litigated in an adversary proceeding,” Judge Briscoe said. The creditor’s “appeal of the exemption issue only ripened when the adversary proceeding concluded as to that issue.”

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Manikan v. Peters & Freedman, L.L.P,    F.3d   , 2020 WL 6938318 (9th Cir. 11/25/20)

Manikan v. Peters & Freedman, L.L.P,    F.3d   , 2020 WL 6938318 (9th Cir. 11/25/20): Ninth Circuit Court of Appeals ruled on the interplay between two federal statutes, the Bankruptcy Code (Code) and the Fair Debt Collection Practices Act (FDCPA). The Ninth Circuit ruled that its prior precedent establishing contempt as the exclusive remedy for discharge injunction violations did not preclude a discharged debtor from seeking a remedy under the FDCPA against debt collectors who attempted to collect a discharged debt which had been paid in full.

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Consol Energy Inc. v. Murray Energy Holdings Co. (In re Murray Energy Holdings Co.),    BR    (B.A.P. 6th Cir. Feb. 1, 2021), BAP case number 20-8017:

6th Circuit BAP Adheres to ‘Person Aggrieved’ standard for who has standing to appeal, despite dicta from the Sixth Circuit Court of Appeal. May develop into a “Circuit Split” with 6th Circuit on one side, and with Ninth and Third Circuits on the other side.

The Supreme Court and the Sixth Circuit both questioned the continuing validity of doctrines of prudential standing, such as ‘person aggrieved.’

The Sixth Circuit Bankruptcy Appellate Panel enforced the “person aggrieved” rule for appellate standing, even though more recent Supreme Court authority could be read to mean that “prudential standing” doctrines are headed for extinction.

The debtor was a coal producer aiming to sell its assets. The only buyer refused to purchase the assets without insulation from successor liability that it otherwise would have to make contributions for retirees’ health benefits under the 1992 Coal Act.

To satisfy the buyer’s demands, the debtor, the retirees’ committee and the union fund created under the Coal Act entered into a settlement insulating the buyer from liability for retiree benefits.

The former owner of the debtor’s coal business objected, contending that the settlement would increase its liability for retiree benefits. The bankruptcy court overruled the objection and approved the settlement. The court also confirmed the chapter 11 plan, which provided that the buyer would not assume any obligation to pay retiree benefits.

The prior owner appealed the settlement order but did not appeal confirmation.

In an opinion on February 1 for the Sixth Circuit Bankruptcy Appellate Panel, Bankruptcy Judge Tracey N. Wise dismissed the appeal for lack of appellate standing under the “person aggrieved” standard.

In some detail, Judge Wise explained how “person aggrieved” is “quite restrictive” and narrower than Article III standing, or constitutional standing. The “person aggrieved” standard is a principle known as prudential standing, meaning it is based on judge-made law, not on statute.

The “person aggrieved” standard requires the appellant to have a direct, pecuniary interest in the bankruptcy court’s order.

Judge Wise cited 2009 authority from the Sixth Circuit adhering to the “person aggrieved” standard and said it is designed to prevent parties from bringing appeals when they are only “indirectly affected” by a bankruptcy court’s order.

In a footnote, Judge Wise cited a recent opinion where the Sixth Circuit mused, in dicta, on the question of whether prudential standing survived the Supreme Court’s decision in Lexmark International Inc. v. Static Control Components Inc., 572 U.S. 118 (2014). SeeCarl F. Schier PLC v. Nathan (In re Capital Contracting Co.), 924 F.3d 890 (6th Cir. 2019). To read ABI’s report on Capital Contracting, click here.

In Capital Contracting, the Sixth Circuit surmised that the Supreme Court “jettisoned the label ‘prudential standing.’” Id. at 893. If the plaintiff shows injury, the appeals court went so far as to say in dicta that there is constitutional standing, and “courts lack discretion to decline to hear the claim.” Id. at 896.

Judge Wise did not ask whether Lexmark had impliedly overruled Sixth Circuit authority espousing the “aggrieved person” doctrine of prudential standing.

“[A]lthough the law in this area may be in flux,” Judge Wise said that “the Sixth Circuit has not eliminated the ‘person aggrieved’ doctrine and the Panel will continue to apply it.”

Applying the law to the facts, Judge Wise concluded that the settlement did not impose liability on the prior owner to pay retiree benefits, an issue to be decided by another court in another proceeding. Even if the settlement removed a defense that the prior owner could raise, “that defense is unrelated to an interest that the Bankruptcy Code seeks to protect,” she said.

The BAP dismissed the appeal for lack of appellate standing.


Should the Sixth Circuit adopt the BAP’s analysis, there is a split with the Ninth Circuit and possibly also with the Third Circuit. SeeMotor Vehicle Cas. Co. v. Thorpe Insulation Co. (In re Thorpe Insulation Co.), 677 F.3d 869 (9th Cir. 2012); and In re Combustion Eng’g, Inc., 391 F.3d 190 (3d Cir. 2004), as amended (Feb. 23, 2005).

The “person aggrieved” standard may be headed for the dustbin should the Supreme Court tackle the split.

Can a court create “prudential” principles to deny an appeal when there is no such limitation in the statute? May courts circumscribe their own appellate jurisdiction as decreed by statute?

The issue often arises when a party, such as a shareholder, has standing to litigate in bankruptcy court as a party in interest. However, the same shareholder will often be found to lack appellate standing to appeal the very issue litigated in bankruptcy court, because the outcome would not enhance the shareholder’s recovery in bankruptcy. In other words, the Bankruptcy Code confers standing on parties who may have no appellate standing on the same issue.

The prudential standard makes sense in obviating appeals that will have no practical, economic effect on the appellant. But should a court hear an appeal where reversal would affect the appellee but not the appellant? So long as there is constitutional standing, should courts hear appeals that only seek to vindicate legal principles?

The notions of “aggrieved person” and equitable mootness are related. Created by courts, both doctrines enable an appellate court to dismiss an appeal for lack of prudential standing when the appellant would have constitutional standing.

If the Supreme Court eventually abolishes either doctrine, the other is likely to fall eventually, and for the same reason. After reviewing the appeal on the merits, the court could then invoke equitable powers to fashion relief that would be fair to creditors who were not parties in the appeal.

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Unemployment Benefits During the Pandemic

American Bankruptcy Institute on 1/28/21 reports that: Almost 70 million Americans, or about 40% of the labor force, have filed for unemployment benefits during the pandemic. The number of Americans filing for state unemployment benefits edged lower but remained elevated last week, as the labor market struggles to recover from a surge in COVID-19 infections nationwide amid new restrictions to help curb the spread of the virus, reported. Figures released today by the Labor Department showed that 847,000 Americans filed first-time jobless claims in the week ended Jan. 23, slightly lower than the 875,000 forecast by Refinitiv economists. The number is nearly four times the pre-crisis level but is well below the peak of almost 7 million that was reached when stay-at-home orders were first issued in March. The number of people who are continuing to receive unemployment benefits fell to 4.77 million, a decline of about 203,000 from the previous week. The report shows that roughly 18.28 million Americans were receiving some kind of jobless benefit through Jan. 9, an increase of 2.29 million from the previous week [1/28/21 American Bankruptcy Institute e-newsletter]

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Biden Administration Will Provide Debt-Relief Measures

American Bankruptcy Institute (ABI) reports that the Biden administration will provide debt-relief measures for more than 12,000 financially distressed farmers, Bloomberg News reported. The U.S. Department of Agriculture will temporarily suspend past-due debt collections and foreclosures for farmers borrowing under two major loan programs administered by the Farm Service Agency, administration officials said. The measure is designed to help farmers hit by the coronavirus pandemic and economy’s slump with about 10% of borrowers qualifying. “USDA and the Biden Administration are committed to bringing relief and support to farmers, ranchers and producers of all backgrounds and financial status, including by ensuring producers have access to temporary debt relief,” Robert Bonnie, the department’s deputy chief of staff, said in a statement. The government is evaluating ways to improve and address borrowing to keep farmers “earning living expenses, providing for emergency needs and maintaining cash flow,” Bonnie said. The USDA will temporarily suspend non-judicial foreclosures and wage garnishments and halt referring foreclosures to the Justice Department. The department will also seek to stop foreclosures and evictions already in progress. The administration plans to keep the debt-relief measures in place until the COVID-19 emergency ends, the officials said. (ABI enewsletter of 1/28/21)

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Deutsche Bank Nat'l Tr. Co. as Tr. for Holders of BCAP LLC Tr. 2007-AA1 . v. Madeira Canyon Homeowners Ass’n

Deutsche Bank Nat'l Tr. Co. as Tr. for Holders of BCAP LLC Tr. 2007-AA1 . v. Madeira Canyon Homeowners Ass’n, 819 F. App'x 565, 566 (9th Cir. 2020): United States Court of Appeals for the Ninth Circuit reiterated the precept that creditors lack standing to challenge violations of the automatic stay in the Ninth Circuit.

FACTS: Plaintiff, Deutsche Bank National Trust Co. (“Deutsche Bank”), sued Defendant, Madeira Canyon Homeowners Association (“Madeira”), in the United States District Court for the District of Nevada, in order to set aside a foreclosure sale, contending that the sale violated the automatic stay in an underlying bankruptcy case. On summary judgment the District Court ruled in favor of Madeira finding that pursuant to the holding in Pecan Groves, Deutsche Bank, a creditor, did not have standing to challenge a stay violation. In re Pecan Groves of Arizona, 951 F.2d 242, 246 (9th Cir. 1991). The Ninth Circuit Court of Appeals reviewed and affirmed the district court’s judgment.

REASONING: The question raised in the instant case is whether creditors have standing to challenge violations of the automatic stay. The Ninth Circuit, along with the “majority of jurisdictions that have considered standing under the automatic stay provision, have concluded that Section 362 is intended solely to benefit the debtor’s estate.” Magnoni v. Globe Inv. And Loan Co., 867 F.2d at 559 (9th Cir. 1989). “A creditor has no independent standing to appeal an adverse decision regarding a violation of the automatic stay.” See Pecan Groves, 951 F.2d at 246. “If the trustee does not seek to enforce the protections of the automatic stay, no other party may challenge acts purportedly in violation of the automatic stay.” Washington Mut. Sav. Bank v. James (In re Brooks), 79 B.R. 479, 481 (B.A.P. 9th Cir. 1987), aff'd, 871 F.2d 89 (9th Cir. 1989).

Here, although Madeira violated the stay, Deutsche Bank was a creditor of the estate, and therefore lacked standing to attack the violation of the automatic stay. Deutsche Bank’s attempt to narrow the holding in Pecan Groves to a Nevada HOA litigation issue, does not work here. Prior to 2015, under Nevada law, an HOA with a statutory lien against a property for unpaid assessments had priority over a first deed of trust (aka the “superpriority” lien). Madeira’s superpriority lien status therefore extinguished Deutsche Bank’s first deed of trust in the foreclosure Madeira held while the underlying bankruptcy case was pending. Many opinions by the Ninth Circuit and Nevada Supreme Court have attempted to chip away at the effects of an HOA foreclosure on behalf of mortgage lenders in this ongoing conflict, but using a violation of the automatic stay has been fruitless.

COMMENTARY: There is over 30 years of precedent and the question seems quite settled. Trustees and debtors are tasked with challenging Section 362 automatic stay violations, not creditors.

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.In re Claar Cellars LLC,    BR    (Bankr. E.D. Wash. Jan. 14, 2021), case No. 20-00044

Bky Ct Washington decision refused to confirm a debtor’s proposed chapter 11 plan that promised to pay creditors 100% in 5 years, but lacked specifics to prove that was going to happen. In addition, debtor’s proposed plan had the problem of providing for “de facto” third party release, has discussion of Blixeth 9th Cir decision limited circumstances where a plan can release a non-debtor third party, without consent of creditors.

Detail as reported by ABI (American Bankruptcy Institute):

Debtor’s ch11 plan Promising Payment in Full to Everyone Doesn’t Warrant Confirmation by Itself, and there was a competing creditor proposed ch 11 plan:

Chapter 11 can’t modify a nondebtor’s guarantee of a debtor’s obligations, absent consent from the lender.

Simply saying the debtor will pay creditors in full is not enough. To warrant confirmation, a chapter 11 plan must explain how the debtor will start from Point A and arrive at Point B, according to Chief Bankruptcy Judge Whitman L. Holt of Spokane, Wash.

The debtor was a vineyard owner and wine producer in Washington State’s Columbia Valley. The debtor’s finances were decimated by a glut of grapes and the Covid pandemic. The debtor filed a chapter 11 petition when the secured lender was on the cusp of having a receiver appointed in state court.

The debtor and the lender filed competing plans. The debtor’s plan promised to pay all creditors in full over five years, with interest. The debtor would re-amortize the lender’s mortgage with payments over the first four years and a balloon payment in the fifth year.

Unsecured creditors were to receive equal payments each year.

The plan said the debtor would make payments from operations, refinancing, or sale.

The lender objected to the plan. In his January 14 opinion, Judge Holt decided that the debtor’s plan was not worthy of confirmation. The plan had some fatal defects. We will discuss several.

Among the confirmation requirements, Section 1123(a)(5) requires that the plan “provide adequate means for the plan’s implementation.”

“The plan does state that creditors will receive payments via funds from operations, asset sales, or future refinancing,” Judge Holt said. However, he went on to say that “the plan omits details explaining when and which option will be selected and the process for executing the chosen option.”

If the debtor’s projections were proven incorrect, Judge Holt said that “the plan contains no trigger requiring the reorganized debtor to shift course, no firm milestones for commencing or completing a sale or refinancing, and no range of sale or refinancing terms to which the reorganized debtor is bound.”

Judge Holt characterized the plan as “a five-year runway and near boundless latitude to adopt and execute a strategy to fully repay creditors from illiquid assets.” For creditors, he called the plan a “hope certificate.”

Judge Holt held that the plan did not comply with Section 1123(a)(5) given its lack of “detail and . . . firm processes that could constitute adequate means for the plan’s implementation.”

For the same reasons, Judge Holt found a failure to comply with Section 1123(a)(3), which requires that a plan “specify the treatment” of impaired classes of claims. He said that the plan “promised an outcome but left [the lender] in the dark about how the reorganized debtor will achieve that outcome.”

Ruling that the plan failed to comply with Section 1123(a)(3), Judge Holt said that the plan had a “high degree of uncertainty for [the lender] — the flipside of the substantial flexibility reserved for the debtors.”

The debtor’s owners had given their personal guarantees to the secured lender. The plan extended the guarantees of the debtor’s obligations as modified by the plan. The lender objected.

Ruling again for the lender, Judge Holt declined to give a broad reading to Blixseth v. Credit Suisse, 961 F.3d 1074, 1083 (9th Cir. 2020).

The Ninth Circuit had been understood as having a categorical ban on nondebtor, third-party releases. Narrowing three earlier opinions in Blixseth, the Ninth Circuit explicitly aligned itself with the Third Circuit by permitting nonconsensual, third-party releases in chapter 11 plans that exculpate participants in the reorganization from claims based on actions taken during the case. To read ABI’s report on Blixseth, click here.

In Blixseth, Judge Holt said that the Ninth Circuit “reiterated” how “section 524(e) precludes a co-obligor of a bankrupt debtor from piggybacking on rights the debtor enjoys under the Bankruptcy Code, including the right to discharge or restructure indebtedness.”

Judge Holt said that the plan transgressed Section 524(e) because it was a “de facto restructuring of nondebtors’ liability to [the lender and] thus runs afoul of section 524(e) and prevents confirmation absent [the lender’s] consent.”

Judge Holt denied confirmation of the debtor’s plan and devoted the remainder of his opinion to explaining why he was confirming the lender’s liquidating plan.

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Supreme Court Holds that Merely Holding Property Isn’t a Stay Violation

On 1/14/21, in City of Chicago v. Fulton   S.Ct    case 19-357 (US Sup. Ct. 2021), the US Supreme Court ruled NO STAY VIOLATION by a creditor continuing to hold onto debtor’s property, after debtor files bankruptcy, which the creditor got possession of lawfully, before the debtor filed bankruptcy. Here is the ABI discussion of the case:

Justices rule that affirmative action is required before withholding property amounts to controlling estate property and results in an automatic stay violation.

Reversing the Seventh Circuit and resolving a split among the circuits, the Supreme Court ruled unanimously today “that mere retention of property does not violate the [automatic stay in] § 362(a)(3).”

Writing for the 8/0 Court in a seven-page opinion, Justice Samuel A. Alito, Jr. said that Section 362(a)(3) “prohibits affirmative acts that would disturb the status quo of estate property.” He left the door open for a debtor to obtain somewhat similar relief under the turnover provisions of Section 542, although not so quickly.

In a concurring opinion, Justice Sonia Sotomayor wrote separately to explain how a debtor may obtain the same or similar relief under other provisions of the Bankruptcy Code.

Justice Amy Coney Barrett, who had not been appointed when argument was held on October 13, did not take part in the consideration and decision of the case.

The Chicago Parking Ticket Cases

Four cases went to the Seventh Circuit together. The chapter 13 debtors owed between $4,000 and $20,000 in unpaid parking fines. Before bankruptcy, the city had impounded their cars. Absent bankruptcy, the city will not release impounded cars unless fines are paid.

After filing their chapter 13 petitions, the debtors demanded the return of their autos. The city refused to release the cars unless the fines and other charges were paid in full.

The debtors mounted contempt proceedings in which four different bankruptcy judges held that the city was violating the automatic stay by refusing to return the autos. After being held in contempt, the city returned the cars but appealed.

The Seventh Circuit upheld the bankruptcy courts, holding “that the City violated the automatic stay . . . by retaining possession . . . after [the debtors] declared bankruptcy.” The city, the appeals court said, “was not passively abiding by the bankruptcy rules but actively resisting Section 542(a) to exercise control over the debtors’ vehicles.” In re Fulton, 926 F.3d 916 (7th Cir. June 19, 2019). To read ABI’s report on the Fulton decision in the circuit court, click here.

The Circuit Split

The Second, Seventh, Eighth, Ninth and Eleventh Circuits impose an affirmative duty on creditors to turn over repossessed property after a bankruptcy filing.

The Third, Tenth and District of Columbia Circuits held that the retention of property only maintains the status quo. For those circuits, a stay violation requires an affirmative action. Simply holding property is not an affirmative act, in their view.

The City of Chicago filed a certiorari petition in September 2019. To resolve the circuit split, the Supreme Court granted certiorari in December 2019. Argument was originally scheduled to be held in April 2020 but was postponed until October as a result of the coronavirus pandemic.

The Statute Demanded the Result

Justice Alito laid out the pertinent statutes. Primarily, Section 362(a)(3) stays “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.” In the lower courts, the debtors relied on that section, but not exclusively.

With some exceptions, Section 542(a) provides that “an entity . . . in possession . . . of property that the trustee may use, sell, or lease under section 363 of this title . . . , shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.”

Justice Alito said that the case turned on the “prohibition [in Section 362(a)(3)] against exercising control over estate property.” He said the language “suggests that merely retaining possession of estate property does not violate the automatic stay.”

To Justice Alito, “the most natural reading” of the words “stay,” “act” and “exercise control” mean that Section 362(a)(3) “prohibits affirmative acts that would disturb the status quo of estate property as of the time when the bankruptcy petition was filed.” He found a “suggestion” in the “combination” of the words “that §362(a)(3) halts any affirmative act that would alter the status quo as of the time of the filing of a bankruptcy petition.”

Justice Alito said that words in Section 362(a)(3) by themselves did not “definitively rule out” the result reached in the Seventh Circuit. “Any ambiguity” in that section, he said, “is resolved decidedly in” Chicago’s favor by Section 542.

In view of Section 542, Justice Alito said that reading Section 362(a)(3) to proscribe “mere retention of property” would create two problems.

First, a broad reading of Section 362(a)(3) would “largely” render Section 542 “superfluous.” Second, it would make the two sections contradictory. Where Section 542 has exceptions, Section 362(a)(3) has none.

Justice Alito observed that the prohibition against “control” over estate property was added to Section 362 in the 1984 amendments. “But transforming the stay in §362 into an affirmative turnover obligation would have constituted an important change,” he said.

It “would have been odd for Congress to accomplish that change by simply adding the phrase ‘exercise control,’ a phrase that does not naturally comprehend the mere retention of property and that does not admit of the exceptions set out in §542,” Justice Alito said.

Justice Alito interpreted the 1984 amendment to mean that it “simply extended the stay to acts that would change the status quo with respect to intangible property and acts that would change the status quo with respect to tangible property without ‘obtain[ing]’ such property.”

Justice Alito ended his decision by noting what the opinion did not decide. The ruling did not “settle the meaning of other subsections of §362(a)” and did “not decide how the turnover obligation in §542 operates.”

“We hold only that mere retention of estate property after the filing of a bankruptcy petition does not violate §362(a)(3) of the Bankruptcy Code.” Justice Alito vacated the Seventh Circuit’s judgment and remanded for further proceedings.

Justice Sotomayor’s Concurrence

Justice Sotomayor said she wrote “separately to emphasize that the Court has not decided whether and when §362(a)’s other provisions may require a creditor to return a debtor’s property.” She said that the “the City’s conduct may very well violate one or both of these other provisions,” referring to subsections 362(a)(4) and (6).

In her six-page concurrence, Justice Sotomayor noted that the Court had not “addressed how bankruptcy courts should go about enforcing creditors’ separate obligation to ‘deliver’ estate property to the trustee or debtor under §542(a).”

Although Chicago’s conduct may have satisfied “the letter of the Code,” she said that the city’s policy “hardly comports with its spirit.” She went on to explain why returning a car quickly is important so a debtor can commute to work and make earnings to pay creditors under a chapter 13 plan.

“The trouble” with Section 542, Justice Sotomayor said, is that “turnover proceedings can be quite slow” because they entail commencing an adversary proceeding. She ended her concurrence by saying that either the Advisory Committee on Rules or Congress should consider amendments “that ensure prompt resolution of debtors’ requests for turnover under §542(a), especially where debtors’ vehicles are concerned.”


Prof. Ralph Brubaker agreed with the opinion of the Court. He told ABI that the “Court emphatically confirms the fundamental principle that the text of the automatic stay provision must be interpreted consistent with its most basic and limited purpose of simply maintaining the petition-date status quo. As Judge McKay put it in his Cowen opinion for the Tenth Circuit, ‘Stay means stay, not go.’ That guiding principle should also prove determinative in resolving the potential applicability of § 362(a)(4) and (a)(6), which the Court expressly refused to address.”

Prof. Brubaker is the Carl L. Vacketta Professor of Law at the University of Illinois College of Law.

Rudy J. Cerone agreed. He told ABI that Justice Alito reached “the correct result under the history and structure of sections 362(a) and 542.” He noted that the ABI Consumer Commission recommended speeding up turnover proceedings. Mr. Cerone is a partner with McGlinchey Stafford PLLC in New Orleans.

Significantly, the Court did not rule on whether debtors could achieve the same result under subsections (4) and (6) of Section 362(a), which prohibit an act to enforce a lien on property and an act to recover a claim.

In one of the cases before the Supreme Court, the bankruptcy court had relied on those other subjections in ruling for the debtor. The Supreme Court did not address subsections (4) and (6) because the Seventh Circuit did not reach those issues.

Consequently, debtors might resurrect a victory either through speedy procedures under Section 542 or a favorable interpretation of subsections (4) and (6). Reliance on the other subsections may not prevail given how Justice Alito would not permit Section 362 to perform all of the work of Section 542.

It is noteworthy how Justice Alito was skeptical that Congress would make major changes in a statute by using only a few words. At the same time, the Supreme Court has been reluctant in recent years to give importance to legislative history. Since legislative history might not succeed in altering the Supreme Court’s view of the law, Congress evidently needs to attach bells and whistles to an amendment meant to change the law.

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Famous People Who Have Filed Bankruptcy

Credit & collection newsletter of 1/13/21 reports on famous people who have filed bankruptcy. Here is one report:

Movie director Francis Ford Coppola filed for his second bankruptcy case in 1992, with assets listed at $52 million and liabilities at $98 million, according to the New York Times. He blamed the majority of his debt on the failure of the movie “One From The Heart,” which cost $27 million to film but earned only $4 million.

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America Bankruptcy Institute (“ABI”) summarizes New Bankruptcy Relief Provisions, that are contained in the 2021 Federal Appropriations Act

The new Consolidated Appropriations Act of 2021 (the “Act”), which was signed into law on Dec. 27, 2020 (H.R. 133), includes within its 5,593 pages a number of new bankruptcy relief provisions for businesses as part of what the legislation calls the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act. Additional bankruptcy relief provisions are found in a miscellaneous section of the Act. A summary of the relief provisions (including PPP loans becoming available to certain debtors, treatment of commercial real estate leases and preference amendments).

Here is a summary of the relief provisions that will affect businesses, predominantly small businesses, follows. PPP Loans Now Available to Certain Debtors Under regulations adopted by the SBA in response to the CARES Act, businesses in bankruptcy were disqualified from receiving PPP loans. The SBA regulations spawned an avalanche of litigation that challenged them on grounds that they were unlawfully discriminatory under 11 U.S.C. §525(a),1 or were arbitrary and capricious or exceeded the SBA’s rulemaking authority.2 In somewhat of a quizzical intermediate approach, the new law provides that only debtors that are proceeding under subchapter V of chapter 11, the Small Business Reorganization Act of 2019 (SBRA), as well as chapter 12 and chapter 13 debtors, may apply to the bankruptcy court 1 See, e.g., In re Springfield Hospital Inc., 618 B.R. 70, 80-93 (Bankr. D. Vt. June 22, 2020), appeal pending Nos. 20- 3902, 20-3903 (2d Cir.). 2 See, e.g., In re Gateway Radiology Consultants P.C., 2020 WL 7579338 (11th Cir. Dec. 22, 2020) (reversing bankruptcy court’s ruling striking down the regulations as exceeding SBA authority and as arbitrary and capricious). 2 for a PPP loan.3 This new provision is yet another advantage to seeking relief under subchapter V, but does nothing to resolve the pending litigation over the SBA’s prohibition against extending PPP loans to chapter 11 debtors that are not proceeding under subchapter V. Under the new provision, which amends § 364 of the Bankruptcy Code, a qualifying debtor may apply for and obtain authority to receive a PPP loan, which, if not forgiven, will be treated as a “superpriority” administrative expense in the chapter 11 proceeding, which means it will come ahead of all administrative expenses in the case. If such an application is made, the bankruptcy court is required to hear it within seven days of the filing and service of the application. In addition, the debtor’s plan of reorganization may provide that the PPP loan, if not forgiven, may be paid back under the terms on which it was originally made, which are favorable. Leases of Commercial Real Estate Section 365(d)(3) of the Bankruptcy Code requires that chapter 11 debtors continue to pay rent and comply with all other obligations under a lease of commercial real estate from and after the bankruptcy filing date, but vests authority in the bankruptcy court to extend the time of performance under such a lease for up to 60 days. In yet another plum given to subchapter V debtors, that section has been amended to allow the bankruptcy court to extend the time for performance under these types of leases for a subchapter V debtor for an additional 60 days, but only “if the debtor is experiencing or has experienced a material financial hardship due, directly or indirectly,” to the COVID-19 pandemic. 3 The provisions of SBRA are summarized at, with the caveat that the debt limitations to qualify for SBRA were expanded by the CARES Act to $7.5 million. 3 The period of time within which a chapter 11 debtor has to either assume or reject a lease of commercial real estate has also been changed. With the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), a chapter 11 debtor became limited to a period of 120 days, or 210 days with the court’s permission, to decide whether to assume or reject nonresidential real property leases. Prior to BAPCPA, the initial period of time to make that decision was 60 days, but it could be extended by the bankruptcy court for cause without any outside time limitation. Under the Act, the period of time to decide whether to assume or reject a lease of commercial real estate has been expanded to 210 days, subject to an additional 90 days with the bankruptcy court’s permission. There is a sunset provision for the foregoing amendments that is two years after the date of enactment of the Act. Preference Amendments The Act appears to recognize that many landlords and suppliers have entered into forbearance or deferral agreements with businesses in financial trouble due to the pandemic, and laudably provides preference protection for payments that are made pursuant to these types of agreements. Generally, a payment to a creditor that is made within 90 days of a bankruptcy filing on account of a pre-existing debt can be recovered, or clawed back to the bankruptcy estate, as a preferential transfer (subject to certain defenses). For landlords of a commercial tenant, any “covered payment of rental arrearages” will be protected from avoidance as a preference if (1) the payment is made pursuant to an agreement or arrangement to defer or postpone the payment of rent or other charges under the lease, (2) the 4 agreement or arrangement was made or entered into on or before March 13, 2020, and (3) the amount deferred or postponed does not (a) exceed the rent and other charges that were owed under the lease prior to March 13, 2020, and (b) include fees, penalties or interest in an amount that is greater than what would be owed under the lease, or include any fees, penalties or interest that would be greater than what would be charged if the debtor had paid all amounts due under the lease timely and in full before March 13, 2020. For suppliers of goods and services, the protection given is similar to that provided for landlords. Specifically, any “covered payment of supplier arrearages” will be protected from avoidance as a preference if (1) the payment is made pursuant to an agreement or arrangement to defer or postpone the payment of amounts due under a contract for goods or services, (2) the agreement or arrangement is made on or before March 13, 2020, (3) the amount deferred or postponed does not (a) exceed the amount that was due under the contract prior to March 13, 2020, and (b) include fees, penalties or interest in an amount that is greater than what would be owed under the contract, or include any fees, penalties or interest that would be greater than what would be charged if the debtor had paid all amounts due under the contract timely and in full before March 13, 2020. There is a sunset provision for the foregoing amendments that is two years after the date of enactment of the Act. Conclusion The ability of a subchapter V debtor to obtain a PPP loan while in bankruptcy is certainly a welcome addition to the bankruptcy landscape, but left in the lurch are larger companies that do not seem less deserving of the same relief. Subchapter V debtors that are materially affected 5 by the pandemic will also benefit from an additional form of rent relief based on the new authority given to bankruptcy courts to extend the debtor’s time for paying rent and other charges under a lease of commercial real estate for an additional 60 days, on top of the 60-day deferral period that already existed in the law. And all chapter 11 debtors will now be given at least 210 days to decide whether to assume or reject such leases, subject to an additional 90 days with the court’s permission. The new provisions protecting landlords and suppliers from having to disgorge payments that might otherwise be considered preferences if they are made pursuant to a deferral or forbearance agreement reflect a sensible recognition that such arrangements were designed to provide financial assistance to a struggling business and are deserving of protection.

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Rodriguez v. Mukamal,    BR    (US District Court, SD Fla Oct. 1, 2020), case number 20-50583

DECEMBER 30, 2020

US District Court affirmed US Bankruptcy Court decision, to hold that the bankruptcy debtors (who voluntarily converted their chapter 13 bankruptcy case to chapter 7) could not claim a homestead exemption in a home they did not own on the date they filed their Chapter 13 bankruptcy case, even though they did own the home (which they inherited) on the date they converted their Chapter 13 case to Chapter 7.


US District Court, SD Florida, held Chapter 13 debtors lost an exemption they claimed in a home they inherited, when they converted their Chapter 13 case to Chapter 7, because they didn’t follow the rules.

A chapter 13 debtor is stuck with the homestead declaration made on filing, even if the case is later converted to chapter 7, according to District Judge Robert N. Scola, Jr. of Miami, who upheld Bankruptcy Judge A. Jay Cristol. The holding is based on the facts of the case and may not be as broad as it seems.

A couple filed a chapter 13 petition, scheduling the home where they lived as their homestead. Less than 180 days after filing, the wife’s mother died, bequeathing her an apartment. However, the debtors continued living in their home for about two years, until it was foreclosed. They then moved into the bequeathed apartment.

Almost six years after filing, the couple converted the chapter 13 case to chapter 7 and amended their schedules to claim the bequeathed apartment as their homestead. Judge Cristol denied the exemption and was upheld on October 1 by Judge Scola.

For Judge Scola, the appeal entailed a straightforward interpretation of statutes.

First, of course, the bequeathed apartment was deemed property of the chapter 13 estate as of the original chapter 13 filing date by virtue of Section 541(a)(5)(A), because the bequest occurred within 180 days of filing. Next, the bequeathed apartment became property of the chapter 7 estate under Section 348(f)(1)(A).

Although the bequeathed apartment would now qualify for a Florida homestead exemption, “this does not mean that it qualifies as an exemption they can assert in the instant bankruptcy proceeding,” Judge Scola said.

Why? Because “the availability of exemptions is determined as of the commencement of a case,” Judge Scola said.

And why is that true? Because, Section 522(b)(3)(A) provides that exempt property is “property that is exempt under Federal law . . . or State or local law . . . on the date of the filing of the petition . . . .”

On the chapter 13 filing date, the couple could not have claimed an exemption in the bequeathed apartment because they did not own it at the time. Furthermore, Florida requires “actual occupancy” for a homestead exemption.

Because the couple could not have claimed an exemption in the bequeathed apartment on the chapter 13 filing date, Judge Scola affirmed Judge Cristol and held they were not entitled to an exemption in the apartment in chapter 7.


The opinion should not be read to mean that anyone who files in chapter 13 is prohibited from buying a new home. Typically, states allow selling a homestead and preserving the exemption in proceeds so long as the seller buys a new homestead within a prescribed amount of time.

If the facts were different, the debtors might have been able to exempt the bequeathed apartment. They could have argued that the foreclosure of their original home was a sale entitling them to claim a homestead exemption elsewhere.

Unfortunately, they did not amend their schedules to disclose the bequest. Instead, they waited five years to disclose the bequest when they claimed an exemption on conversion to chapter 7.

Had they abandoned the original home on receiving the bequest, they might have succeeded in claiming an exemption in the bequeathed apartment had they moved into the deceased mother’s unit.

They tried to have the best of both worlds by keeping the original home and enjoying the value of the bequest without disclosure. There were no equities to underlay an exemption in the bequeathed apartment.

Bankruptcy has gobs of technicalities. Without advice from counsel, debtors are likely to slip up, with bad results.

Conclusion: these debtors would have been better off dismissing their Chapter 13 case, instead of converting it to Chapter 7.

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On 12/17/20, the American Bankruptcy Institute (“ABI”) reports that US Congress and White House Race to Finish $900 Billion Covid-19 Aid Package:

US House and Senate, and the White House face a rapidly approaching deadline to wrap up negotiations on another coronavirus relief bill, racing today to complete the details of the roughly $900 billion package and pass it through Congress before the end of the week, the Wall Street Journal reported. Top Republicans and Democrats are closing in on a relief package that would send another direct check to many Americans, enhance unemployment benefits, provide aid to small businesses and fund the distribution of the Covid-19 vaccine, among other measures. Because they are planning to approve a relief bill alongside a broad government spending package, they are sprinting to finish the relief bill before current government funding expires at 12:01 a.m. Saturday. Forms of unemployment assistance and other relief measures will expire in the coming weeks without congressional action. As of yesterday, lawmakers were still discussing the duration of a $300 weekly boost to unemployment benefits and whether to include $90 billion in emergency aid for the Federal Emergency Management Agency. But negotiations on a long-discussed relief package eased this week when Republicans and Democrats dropped the two most contentious issues from the proposed package: aid for state and local governments, and enhanced liability protections for businesses, schools and health care providers

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More Than Half of Emergency Small-Business Funds Went to Larger Businesses, New Data Shows

More than half of the money from the Treasury Department’s coronavirus emergency fund for small businesses went to just 5 percent of the recipients, according to data on more than 5 million loans that was released by the government yesterday evening in response to a Freedom of Information Act request and lawsuit, the Washington Post, on 12/2/20, reported.

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American Bankruptcy Institute on 11/25/20 published the following UPDATE ON PROPOSED EXTENSION OF THE PPP LOAN PROGRAM:

With a change in administration likely within the next two months, and Congress scrambling to agree on another rescue package for millions of Americans facing yet more pandemic related economic hardship as many of the government subsidies and stimulus plans are set to expire the end of December, Senators Rubio and Collins have revamped S. 4321 initially introduced on July 27, 2020 (“Initial Proposed PPP III Legislation”),1 which would (finally) make the Payroll Protection Program loans (“PPP Loans”) available to debtors in bankruptcy. The PPP expired in early August 2020, and S. 4321 became bogged down in neverending partisan politics, and, ultimately, put on the back burner by the Götterdämmerung that was the presidential election. The Initial Proposed PPP III Legislation still had issues, but was, at least, a step in the right direction. [See Salerno, “Proposed Extension of the PPP Loan Program: A Nice First Step…”, ABI Journal (September 2020) (the “Nice Step Article”).] On October 1, 2020, Senators Rubio and Collins apparently reintroduced a different version of the Initial Proposed PPP III Legislation, S. 4773 (the “Amended PPP III Legislation”).2 One of the first lessons all lawyers learn (some the hard way) is that the devil is always in the details, and you gotta read the fine print! In nearly 40 years as a bankruptcy practitioner, one would think it’s a lesson I had mastered. And one would be wrong. 1 S. 4321, titled “A Bill to Establish the Paycheck Protection Program Second Draw Loan and Amend the 7(a) Loan Guaranty Program For Recovery Sector Business Concerns, and For Other Purposes” introduced July 27, 2020. 2 S. 4773, titled “A Bill To Establish the Paycheck Protection Program Second Draw Loan, and For Other Purposes”, introduced October 1, 2020 When looking at the Amended PPP III Legislation and discussing it with my colleagues who have been following this process,3 the Amended PPP III Legislation contains the following language: “(a) IN GENERAL.—Section 364 of title 11, United States Code, is amended by adding at the end the following: ‘‘(g)(1) The court, after notice and a hearing, may authorize a debtor in possession or a trustee that is authorized to operate the business of the debtor under section 1183, 1184, 1203, 1204, or 1304 of this title to obtain a loan under paragraph (36) or (37) of section 7(a) of the Small Business Act (15 U.S.C. 636(a)), and such loan shall be treated as a debt to the extent the loan is not forgiven under section 1106 of the CARES Act (15 U.S.C. 9005) or subparagraph (II) of such paragraph (37), as applicable, with priority equal to a claim of the kind specified in subsection (c)(1) of this section.” Amended Proposed PPP Legislation at p. 53 (emphasis added). What this language does, of course, is make the PPP loans available to Subchapter V, Chapter 12 and Chapter 13 debtors — but excludes by omission all other Chapter 11 debtors (who are authorized to act under Bankruptcy Code §§ 1106 and 1107). Certainly, this must be a typographical error!4 Dealing with all those Bankruptcy Code section numbers, certainly some erstwhile senate aide simply missed a section or two (hey, we’ve all been there!). Returning to S. 4321 to see if this limiting language was added after the Initial Proposed PPP III Legislation, it was discovered (to my surprise and chagrin) that the same limitation is contained in Section 116 of S. 4321. Accordingly, a critical issue regarding the Initial Proposed PPP III Legislation that I analyzed in the Nice Step Article was completely missed! Mea culpa! Hence, to add to the list of serious issues already existing regarding the proposed PPP extension legislative efforts, this exclusion certainly should go to the very top of the list. Even assuming, arguendo, that the stated rationale of the Small Business Administration (“SBA”) for excluding debtors in the original (and now expired) PPP provisions of the CARES Act has some basis in fact (i.e. as defended in the now infamous April 24, 2020 administrative rule that categorically denied debtors in bankruptcy from accessing the PPP Loans on the basis that debtors “present an unacceptably high risk of an unauthorized use of funds or nonrepayment of unforgiven loans”), how does the latest Amended Proposed PPP Legislation make any sense whatsoever? How does Congress justify allowing some debtors to access the PPP Loans (i.e. Subchapter V, Chapter 12 and Chapter 13 debtors), while denying the same loans to a business or individual who happen to have more than $7.5 million of debt (thereby putting them outside the debt limits of Subchapter V)? 3 Thanks to Andrew Helman and Tiffany Payne Geyer in particular. 4 While the reader may be inclined to scoff at the author’s naiveté, and in my own defense, I also still believe in unicorns (although rare, I am convinced they still exist in the wild). As the loans max out at a certain level, and assuming all other criteria are met (need for funds, appropriate use of the funds, etc.), why is a debtor with $7.5 million in debt somehow qualify, yet one with $7,500,001 does not? Perhaps the SBA believes that all debtors are deadbeats, but debtors owing more than $7.5 million in debt are riskier deadbeats. The result of this latest Congressional gambit should it be enacted is stunningly obvious and foreseeable—more litigation related to discriminatory treatment!

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US v. Allahyari,    F.3d.   , 2020 DAR p12125 (9th Cir. 2020)

US v. Allahyari,    F.3d.   , 2020 DAR p12125 (9th Cir. 2020): US 9th Circuit Court of Appeals reversed US District Court. 9th Circuit held US District Court erred in holding that defendant’s 2005 deed of trust was not entitled to priority over later-recorded federal tax liens. That should have been obvious to US District Court, since the general rule is that earlier recorded lien has priority over later recorded lien.

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In re Leucadia Group, LLC, Ninth Circuit Bankruptcy Appellate Panel Case No. SC-20-1066-GFB (9th Circuit, Nov 04,2020) Not Published

Affirmed Bankruptcy Court decision


Full Faith and Credit Act requires bankruptcy courts to give the same preclusive effect to a state court judgment. Under Georgia law, a voluntary dismissal with prejudice operates as an adjudication upon merits. Under Georgia law, claim preclusion includes: (1) an identity of the cause of action; (2) an identity of the parties or their privies; and (3) a previous adjudication on the merits by a court of competent jurisdiction. Considering Georgia statutes and case law, the Panel agreed with the Trustee's argument that the Claimant (CHPL) was precluded. Therefore, the Claim was disallowed.

Procedural context:

Chapter 7 Trustee commenced an adversary against Claimant, CHPL, seeking to disallow the Claim as barred by claim preclusion. CHPL filed a cross motion for summary judgment. The bankruptcy court entered a tentative ruling stating its intention to grant the Trustee's motion for summary judgment denying the Claim. At the hearing the bankruptcy court focused on whether Debtor was a "party" in the Georgia Action and whether the state court had personal jurisdiction for purposes of claim preclusion. The bankruptcy court determined that service of the Georgia Action on Miller (who was the Debtor's registered agent at the time, under Georgia law was sufficient to confer personal jurisdiction over the Debtor to make it a party to the Georgia Action. Therefore, under Georgia law claim preclusion applied and the Trustee's motion for summary judgment seeking to disallow CHPL's Claim was granted. CHPL timely appealed.


The Debtor is a California LLC that was originally formed by Robert Miller (Miller) and Sean Frisbee (Frisbee) in 2013, each holding a 50% ownership. Miller initiated discussions with Daryl Moody (Moody) about opportunities to invest in the Debtor. Debtor entered into an agreement with one of Moody's companies Mast Nine, Inc. (Mast Nine) that gave Mast Nine the option to make a convertible loan up to $1,575,000 to be secured by Debtor's assets (Loan Agreement). Mast Nine assigned its interest in the Loan Agreement to UAS, which was also controlled by Moody. UAS loaned Debtor a total of $650,000. In 2015 Miller informed Moody and Frisbee the Debtor was not going to financially be able to continue operating. Shortly thereafter, Frisbee appointed Moody as a direct, and, collectively they removed Miller as president of the Debtor. On the same day as the removal, UAS and Frisbee commenced a lawsuit naming the Debtor and Miller in Georgia for breach of contract and injunctive relief (Georgia Action). UAS and Frisbee filed an amended lawsuit naming only Miller and removing the Debtor. The amended lawsuit was served on Miller. Even though Miller was purportedly removed as president of the Debtor, he was still listed as the service agent for the Debtor. Frisbee dismissed all of his claims in the Georgia Action without prejudice; and, was removed as a plaintiff. Miller sought to disqualify UAS's counsel; and, in response UAS filed an unopposed motion to dismiss the Georgia Action as to the Debtor with prejudice. The court entered the order dismissing the Debtor with prejudice. During the time the Georgia Action was pending, UAS commenced an involuntary Chapter 11 as to the Debtor. The bankruptcy court entered an order for relief and converted the case to Chapter 7. UAS filed a Proof of Claim in the amount of $716,010.61 based upon the Loan Agreement. UAS asserted that $696,010.61 of its Claim was secured and unsecured in the amount of $20,000. UAS later partially assigned its Claim to CHPL. The Trustee's position was that the Claim was barred by claim preclusion in that the Debtor's liability under the Loan Agreement was at issue in the Georgia Action; and, dismissal with prejudice operated as an adjudication. CHPL's position was that claim preclusion does not apply because Debtor was not served the lawsuit and Debtor never appeared in the Georgia Action; at the time of dismissal, by amending the Georgia Action and removing the Debtor, UAS manifested the intent to continue performance under the Loan Agreement; and, if the Claim is barred - then the bankruptcy court should dismiss the involuntary bankruptcy case. The bankruptcy court did not opine on CHPL's 3rd argument, stating it needed to be sought in the administrative case.

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Wells Fargo Bank N.A. v. Mahogany Meadows Ave. Trust,     F3d     (9th Circuit Ct of Appeals; Nov. 5, 2020).

Ninth Circuit Court of Appeals Allows HOA lien to extinguishes senior DOT lender’s lien on condo, But only because senior DOT lender (Wells Fargo) Failed to Object.

Ninth Circuit Court of Appeals decision allows a tiny HOA lien for unpaid HOA assessments, to wipe out a big mortgage if the bank wasn’t vigilant at the time of foreclosure.

For the second time in a week, we report a decision where the Ninth Circuit had no sympathy for a lender who was asleep at the switch and woke up to find its mortgage wiped out.

This time, the San Francisco-based appeals court upheld the constitutionality of a Nevada statute giving superpriority status to the lien of a homeowners’ association for unpaid assessments. Last week, we saw the Ninth Circuit rule that a subordinate mortgage lender did not have appellate standing to challenge the bankruptcy court’s annulment of the automatic stay in favor of an HOA, even when it meant that an HOA’s small lien wiped out a $1.4 million mortgage. To read ABI’s report on Bank of New York Mellon v. 2298 Driftwood Tide Trust (In re Barrett), 19-60043, 2020 BL 416716 (9th Cir. Oct. 28, 2020), click here.

The Superpriority HOA Lien

Nevada adopted a statute in 1991 giving superpriority status to a portion of an HOA’s lien for unpaid assessments. The statute makes the HOA’s lien superior to all other liens, including deeds of trust.

A couple purchased a home in 2008. Three years later they became delinquent on the mortgage. The HOA recorded a lien for the delinquent assessments, foreclosed the lien, and sold the property at public auction in 2013 for about $5,300.

The mortgage lender brought a quiet-title action in 2017, claiming that the property was worth some $200,000. The lender contended that the state statute violated both the Takings Clause and the Due Process Clause of the U.S. Constitution. The district court dismissed the suit for failure to state a claim.

The appeals court upheld dismissal in a November 5 opinion by Circuit Judge Eric D. Miller, who was confirmed by the Senate in 2019 without consent from either of the senators in Washington, his home state. His was the first confirmation without a so-called blue slip from his home state senators. After law school, Judge Miller clerked on the D.C. Circuit and for Justice Clarence Thomas.

No Constitutional Infirmities

Judge Miller first examined the Takings Clause claim.

Made applicable to the states by the Fourteenth Amendment, the Takings Clause of the Fifth Amendment provides that no “private property [shall] be taken for public use, without just compensation.”

Because the clause only deals with government conduct, the lender contended that the state statute violated the Takings Clause, not the foreclosure.

The lender’s argument failed, because its lien attached to the property long after the statute was enacted. Therefore, Judge Miller said, the lender “cannot establish that it suffered an uncompensated taking.”

With regard to the lender’s Due Process argument, the Ninth Circuit had previously held that the same statute was not facially unconstitutional. Bank of America, N.A. v. Arlington West Twilight Homeowners Association, 920 F.3d 520 (9th Cir. 2019). The lender therefore argued that the statute was unconstitutional as applied.

Although conceding that it had received actual notice as prescribed by the statute, the lender contended that the notice was inadequate because it did not state that the HOA was foreclosing a prior lien, nor did it state the amount of the prior lien or say that the bank’s lien was in jeopardy.

Judge Miller upheld dismissal of the Due Process claim because Arlington West held that the statutorily prescribed notice was constitutionally sufficient.


Do we see a pattern here?

The cases this week and last week involved mortgage lenders who didn’t want to take back property during the housing crisis, because doing so would have obliged them to pay taxes, HOA fees, and insurance. Ten years later, housing prices skyrocketed, and the mortgages would have been valuable if they had been protected 10 years ago.

In both cases, the Ninth Circuit allowed buyers at foreclosure to pocket profits they made by taking risks years ago.

More significantly, Judge Miller’s opinion cites Supreme Court and appeals court authorities on the Taking Clause regarding the permissibility of statutes that impair the rights of secured parties. If the new administration proposes legislation modifying the Bankruptcy Code that erodes rights of secured creditors, the amendments might have prospective effect only — that is, they would apply only to liens created after the effective date.

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In re Pearl Resources LLC,    BR    (Bankr. S.D. Tex. Sept. 30, 2020), bankruptcy case no. 20-31585

Texas Mineral Liens May Be Modified in a Subchapter V Cramdown Plan

A cramdown plan can reduce the collateral coverage for secured creditors.

A debtor can confirm a cramdown plan under subchapter V of chapter 11, even though the objecting secured creditors will receive replacement collateral worth less than the collateral originally securing the claims, according to Bankruptcy Judge Eduardo V. Rodriguez. However, the substitute collateral was still worth six times more than the secured claims.

Sitting in Houston, Judge Rodriguez explained why the absolute priority rule does not apply in subchapter V cases. He also found nothing sacrosanct about Texas mineral liens and said they may be modified over the secured creditors’ objections.

By containing all of the requisite findings and statutory references, the 53-page decision by Judge Rodriguez can be used as a template for anyone writing an opinion or order confirming a plan being crammed down on secured creditors under subchapter V.

The Collateral-Switching Plan

Designed for chapter 11 reorganizations to be more streamlined and less costly for small businesses, subchapter V of chapter 11 became effective on February 19. The debt limit for subchapter V was raised to $7.5 million on March 25.

The debtors’ primary assets were leases on about 2,500 acres in Pecos County, Texas, where they drill and produce oil and gas. The debtors filed their petitions under subchapter V on March 3.

The debtors filed plans promising to pay secured and unsecured creditors in full. Several classes of unsecured creditors voted in favor of the plan, but three classes of secured creditors voted against the plan.

The objecting secured creditors had claims totaling about $1.2 million for supplying goods and services. Their claims were secured by Texas mineral liens on all of the leaseholds where they worked. The property subject to the liens was worth about $35 million.

The undisputed testimony showed that the debtors’ assets were worth in excess of $50 million. To provide flexibility so the debtors could develop their assets, the plan took away the secured creditors’ liens on all of the leaseholds and gave them replacement liens on property with a value of $7.4 million. In addition, the secured claims were to remain recourse obligations of the debtors, who would be required to sell assets if the secured claims were not paid within two years.

In his September 30 opinion, Judge Rodriguez marched through the labyrinth of statutory requisites for confirmation of a cramdown plan, showing how subchapter V differs from chapters 11, 12 and 13. He explained, among other things, how the absolute priority rule does not apply in subchapter V, thus allowing the equity holders to retain ownership without making a new value contribution. He explained how Congress gave other protections to creditors in a subchapter V cramdown plan in lieu of the absolute priority rule.

Collateral Switching and the Fair and Equitable Rule

The confirmation objections by the secured creditors focused primarily on losing collateral. They argued that stripping away collateral meant the debtors could not satisfy the “fair and equitable” requirement under Section 1129(b)(2)(A)(iii), as modified and made applicable in subchapter V by Section 1191.

For secured creditors, the “fair and equitable” requirement is satisfied if the plan assures “the realization by such holder of the indubitable equivalent of such claims.” See Sections 1191(c)(1) and 1129(b)(2)(A).

The statute contains an “important distinction,” Judge Rodriguez said, because indubitable equivalent is “tied to” the claim, not to the property securing the claim. He said that the creditors incorrectly focused on their prepetition collateral, not their claims.

With $1.2 million in claims and $35 million in prepetition collateral, the creditors had a coverage ratio of 29 to 1. They argued that the plan must maintain the ratio. Judge Rodriguez said the argument was “without merit” because the plan satisfied the indubitable requirement under Section 1129(b)(2)(A)(iii).

Judge Rodriguez cited the Fifth Circuit for permitting the exchange of collateral to satisfy Section 1129(b)(2)(A)(iii). Although there must be “a high degree of certainty,” the satisfaction of the requirement is subject to the bankruptcy court’s discretion.

Although the plan provides collateral coverage of only 6 to 1, and not 29 to 1, Judge Rodriguez said the plan “provides virtual certainty that the Allowed Claims will be paid in full,” given more than $6 million in excess collateral.

Texas Mineral Liens

The creditors countered by arguing that Texas mineral liens are “sacrosanct” and cannot be modified. For that proposition, Judge Rodriguez said the creditors “offer no authority whatsoever.” Rather, he said, “[n]either the Bankruptcy Code [n]or case law provide statutory mineral liens [with] extra protection.”

Judge Rodriguez said that Section 1123(a)(5)(E) allows a plan to modify “any lien,” including IRS liens. He therefore held that “statutory mineral liens may be modified over objection under Section 1123(a)(5)(E), as long as Section 1129(b)(2)(A) is satisfied.”

In sum, Judge Rodriguez said the plan “more than satisfies the stringent indubitable equivalent standard” by (1) providing a 6 to 1 value-to-debt ratio, (2) continuing the recourse nature of the obligation, and (3) requiring the debtors to sell assets if the debt is not paid within two years.

Judge Rodriguez confirmed the plan.

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United States v. Hutchinson, 615 B.R. 596 (E.D. Cal. 2020).

Bankruptcy Court denied motion of the IRS to compel abandonment of the Chapter 7 debtors’ house to IRS, because the property was not of inconsequential value to the bankruptcy estate, or burdensome to the bankruptcy estate, which is the standard the IRS motion had to show to compel abandonment of the property from the Chapter 7 bankruptcy estate, to the IRS. The Chapter 7 Trustee has a statutory right to avoid the penalty portion of a tax lien, if avoiding the penalty portion of the tax lien amount benefits the bankruptcy estate, by providing a distribution to unsecured creditors from the avoided and preserved portion of the lien.

Facts Relevant to Motion: Leonard and Sonya Hutchinson filed a chapter 7 bankruptcy case. The debtors’ primary residence (the “Property”) is the subject of the dispute. The Property’s market value was estimated at $190,000. The Property was encumbered by a first deed of trust in the amount of approximately $84,000 and five tax liens totaling $412,067.47 which include taxes, interest on taxes, and penalties. The penalty portion of these tax liens totaled $162,690.85.

The Trustee asserted the estate’s interest in avoiding the penalty portion of the tax liens and sought to preserve them for the benefit of the bankruptcy estate pursuant to Sections 724(a) and 522(i), respectively. The government brought a motion to compel abandonment of the Property, arguing that the Property was of little or no value to the estate because no funds would remain to distribute to unsecured creditors if the Property were to be sold. The Trustee opposed the motion, and the bankruptcy judge denied the motion, finding that the Property was not inconsequential to the bankruptcy estate.

The court’s ruling to deny the motion to abandon was premised on the Trustee’s position that the penalty portions of each lien are avoided by operation of the Bankruptcy Code and are set aside for the benefit of unsecured creditors ‘lien-by-lien’ and do not simply pay out the non-avoided portion of the lien next-in-line. Instead, the non-avoidable portion would be treated as secured and the remainder as unsecured subject to “different and potentially disadvantageous treatment by the Trustee.” Because some money would be set aside to disburse to unsecured creditors, the Property was of value to the estate and should not be abandoned. The government appealed.

Reasoning of the Bankruptcy Court:

The Trustee’s duty is to maximize the assets of the estate to allow maximum recovery for creditors and to abandon interest in property of the estate that is burdensome or of inconsequential value. Trustees have power to avoid certain liens, including avoidance of liens to the extent they are a penalty. Penalty portions of avoided liens are preserved for the benefit of the bankruptcy estate for distribution to the unsecured creditors.

A critical point in the court’s analysis under Section 551 was that Congress intended to increase the assets of the bankruptcy estate and prevent junior lienors from improving in position at the expense of the estate when a senior lien is avoided. Without Section 551, the lien next-in-line would receive a windfall by improving the amount of their secured claim, all while the estate incurred the administrative expense to litigate the avoidance of a lien. Because the Trustee “steps into the shoes” of the avoided lienholder and enjoys the same rights as that lienholder enjoyed over competing interests, the lien’s priority remains intact. The amount the Trustee avoided would be set aside for disbursement to unsecured creditors.

The government argued that the total of its five liens including taxes and interest on taxes are priority as a whole before looking at the penalty portions as a whole, meaning the avoided penalty portions would receive distributions only if funds remained following satisfaction of the senior deed of trust and the tax and interest portions of all five secured liens. Under the government’s theory, the Property is of no value to the estate because reducing the property to money will not satisfy these liens.

The Trustee argued that the distribution order of the liens is based on each lien’s seniority according to its recordation dates. The first tax lien’s avoidable penalty portion is preserved for the benefit of the estate and deducted from any sale proceeds while the tax and interest portions of the lien receive a distribution. The process repeats for each additional tax lien until all sale property funds are exhausted. Under this theory, the Property is of value to the estate because its sale will result in some distribution to unsecured creditors.

Penalties accrued by the delinquent taxpayer are meant to punish them. Innocent creditors would be otherwise punished for debtor’s wrongdoings if penalty portions of a tax lien were not avoided and preserved for the benefit of creditors. Instead, the avoided and preserved penalty portions will go to creditors, the estate will be enriched, and the government still receives a distribution for the principal portion of its liens, with interest, in the order and priority of each respective lien.

The government asserts that lien avoidance as outlined above diverts property by paying general unsecured creditors before satisfying actual tax losses. However, the law disfavors penalties, and to the extent these penalties are not compensation for actual pecuniary loss the avoided portions would be a windfall to junior lienholders if not preserved for the benefit of the bankruptcy estate.


The decision could be viewed as being the most equitable to the most parties in interest: the Trustee’s avoidance of the tax penalties protects the unsecured creditors, by allowing creditors to receive a distribution and the estate is enriched while the government still obtains the principal portion of its liens, with interest, in the order and priority of each respective lien; and the debtors get their discharge. It appears to be a win-win for all, however, an appeal was filed on July 9, 2020, so motion awaits decision of the appellate court.

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In re Gilbert,    BR    (Bankr. E.D. La. Oct. 6, 2020) , case 16-12120

Bankruptcy Judge rules that ‘13’ Plans Already in Default on March 27 May Be Extended Under the CARES Act

Judge Grabill finds nothing in Section 1329(d) to preclude extending the duration of a plan if payments were already in default when the CARES Act was enacted on March 27.

Enacted on March 27, the CARES Act amended Section 1329 by allowing chapter 13 debtors to extend their plans for up to seven years if they have experienced “material and financial hardship” as a consequence of the pandemic.

But if the debtors were already behind in their plan payments on March 27, may they amend their plans under the CARES Act?

In her October 6 opinion, Bankruptcy Judge Meredith S. Grabill of New Orleans said the answer is “yes.” She held that “the CARES Act allows modification of a confirmed plan if a debtor is experiencing or has experienced a material financial hardship due to the coronavirus pandemic, regardless of whether the debtor was current in his or her payments prior to the pandemic or whether the material financial hardship is solely caused by the pandemic.”

The CARES Act Adds Section 1129(d)

Section 1113(b)(1)(C) of the CARES Act, Pub. L. No. 116-136, amended Section 1329 of the Bankruptcy Code by adding subsection (d). “[F]or a plan confirmed prior to the date of enactment of this subsection,” it allows someone experiencing “a material financial hardship due, directly or indirectly to the . . . pandemic,” to modify a chapter 13 plan to provide for payments up to a period of no more “than 7 years after the time that the first payment under the original confirmed plan was due.”

In several cases before Judge Grabill, the debtors were in default on their chapter 13 plan payments before March 27. They filed motions to amend their plans under Section 1329(d).

The chapter 13 trustee objected, because they were in default before March 27.

Judge Grabill said that Section 1329(d) contains two requirements: (1) The debtors must have confirmed a plan before March 27; and (2) the debtors must be experiencing financial hardship directly or indirectly due to the pandemic.

She said the trustee wanted to add a third requirement: The debtors “must have been current on their plan payments prior to March 27.”

‘13’ Is Already Difficult

Before answering the question directly, Judge Grabill observed that two-thirds of chapter 13 debtors default on their plans and never receive discharges. She quoted Chief Bankruptcy Judge David R. Jones of Houston for saying that debtors succeed in chapter 13 only if they have steady or increasing income and encounter no significant, unanticipated financial setbacks.

Judge Grabill also observed that the Fifth Circuit does not require chapter 13 debtors to show hardship or substantial change to modify a confirmed plan under Section 1329(a). In re Meza, 467 F.3d 874 (5th Cir. 2006).

Focusing on Section 1329(d), Judge Grabill asked “whether the statutory language of the Cares Act requires debtors to have been current in their plan payments as of March 27, 2020, as a prerequisite to obtaining a plan modification under this subsection.”

Judge Grabill said that Section 1329(d) is “unambiguous” and requires debtors to show “a material financial hardship,” unlike Section 1329(a). Otherwise, “nothing in the text of the Cares Act forecloses the relief available under Section 1329(d) to those Debtors simply because they were behind in plan payments prior to March 27, 2020.”

Judge Grabill overruled the trustee’s objections and said she would approve the debtors’ plan amendments unless the trustee files objections to other aspects of the plans.

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Issue: Is Inaction of Creditor an Automatic Stay Violation?

On October 13, 2020, the US Supreme Court heard oral argument on City of Chicago v. Fulton, 19-357 (Sup. Ct. 2020), to resolve the Circuit split on whether a creditor who legally took possession of property of the debtor, prepetition, violates the bankruptcy automatic stay if the creditor does not return the property to the debtor, as soon as the debtor files bankruptcy.

Supreme Court to resolve a circuit split by deciding whether a change in the status quo must occur before the automatic stay is violated.

The Supreme Court heard oral argument this morning in City of Chicago v. Fulton, 19-357 (Sup. Ct.), to resolve a circuit split and decide whether the automatic stay requires a creditor to turn over repossessed property immediately after the debtor files a chapter 13 petition.

Based on questions by the justices, the outcome may turn on whether a creditor who merely maintains the status quo by retaining repossessed property has exercised control over estate property in violation of Section 362(a)(3). The subsection prohibits “any act . . . to exercise control over property of the estate.”

The Second, Seventh, Eighth, Ninth and Eleventh Circuits impose an affirmative duty on creditors to turn over repossessed property after a filing.

The Third, Tenth and District of Columbia Circuits have held that the retention of property only maintains the status quo. For those three circuits, a stay violation requires an affirmative action. Simply holding property is not an affirmative act, in their view.

In Fulton, the Supreme Court is reviewing a decision from the Seventh Circuit. Upheld in the Court of Appeals, the bankruptcy judges in Chicago have been requiring the City of Chicago to turn over cars automatically that had been impounded for unpaid parking fines. To read ABI’s discussion of the Seventh Circuit decision, click here.

Eugene Wedoff argued on behalf of the debtor in the Supreme Court. Mr. Wedoff is a former bankruptcy judge in Chicago and a recent past president of ABI. Craig Goldblatt of Wilmer Cutler Pickering Hale & Dorr LLP in Washington, D.C., argued for the City of Chicago. Assistant to the Solicitor General Colleen E. Roh Sinzdak argued for the U.S. government on Chicago’s side.

The Chicago Parking Ticket Cases

Four cases went to the Seventh Circuit together. The chapter 13 debtors owed between $4,000 and $20,000 in unpaid parking fines. Before bankruptcy, the city had impounded their cars. Absent bankruptcy, the city will not release impounded cars unless the fines are paid.

After filing their chapter 13 petitions, the debtors demanded the return of their autos. The city refused to release the cars unless the fines and other charges were paid in full.

The debtors mounted contempt proceedings in which four different bankruptcy judges held that the city was violating the automatic stay by refusing to return the autos. After being held in contempt, the city returned the cars but appealed.

The Seventh Circuit upheld the bankruptcy courts, saying the outcome was ordained by the circuit’s controlling precedent in Thompson v. General Motors Acceptance Corp., 566 F.3d 699 (7th Cir. 2009). The appeals court said it had already rejected the city’s contention that “passively holding the asset did not satisfy the Code’s definition of exercising control.” The circuit court noted that Congress amended Section 362 in 1984 by adding subsection (a)(3) and making the automatic stay “more inclusive by including conduct of ‘creditors who seized an asset pre-petition,’” citing U.S. v. Whiting Pools Inc., 264 U.S. 198, 203-204) (1983).

Applying Thompson, the Seventh Circuit held “that the City violated the automatic stay . . . by retaining possession . . . after [the debtors] declared bankruptcy.” The city, the appeals court said, “was not passively abiding by the bankruptcy rules but actively resisting Section 542(a) to exercise control over the debtors’ vehicles.” In re Fulton, 926 F.3d 916 (7th Cir. June 19, 2019). To read ABI’s report on Fulton, click here.

The Supreme Court granted certiorari in December. The case was originally scheduled for argument in April but was postponed in view of the pandemic.

Oral Argument

Holding oral arguments virtually has changed the format. Rather than a free-for-all, where justices ask questions whenever they wish, the format now only allows each justice to ask questions for a few minutes each in order of seniority. The time limits on each justice sometimes do not allow them to pursue issues thoroughly.

For the city, Mr. Goldblatt immediately defined the automatic stay as freezing the status quo as of the filing date. In response to a question by Chief Justice John G. Roberts, Jr., he said that exercising “control” only pertains to acts that change the status quo.

The Chief Justice responded by asking whether the city’s refusal to return a car on request turned inaction into action. In the same vein, Justice Brett M. Kavanaugh said that “ordinary language” suggests that holding property is exercising control.

Justice Sonia Sotomayor and others focused on the practical aspects of the Court’s eventual ruling. She and others noted that requiring the debtor to initiate an adversary proceeding would significantly delay and add expense to the debtor’s ability to regain possession of an auto. When his time to speak arrived, Mr. Wedoff said that delay could prevent a debtor from working and subsequently collapse a chapter 13 case, injuring creditors who wouldn’t receive payments.

Justice Sotomayor mentioned cases finding an automatic stay violation if a college refuses to turn over a transcript unless tuition is paid. She suggested that ruling for Chicago would overrule those cases. Similarly, Justice Elena Kagan said that holding onto property unless fines are paid sounds like a prohibited stay violation.

Raising a different but related question, Justice Neil M. Gorsuch inquired as to why holding a car wasn’t a violation of Section 362(a)(6) as an act to collect a prepetition debt.

Mr. Wedoff had an equally rocky reception when his time came to speak. The Chief Justice asked why the procedure was not governed by Section 542 and whether the creditor would lose its rights under Section 542 if required to turn over property immediately under Section 362. Like the Chief Justice, Justice Stephen G. Breyer expressed concern that a creditor might lose rights by turning over a car immediately.

Among the justices, questions from Justice Thomas most clearly indicated how he might come out. He said he had a “problem” in seeing how holding onto a car was an exercise of control.

Justice Samuel A. Alito might also be in the city’s camp. Simply adding the notion of “control” in the 1984 amendments seemed to him like an “oblique” way to make a major change in the scope of the automatic stay.

As one of the first cases argued in the new term that began this month, the Court may issue a decision sometime after the new year.

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Houch v. Substitute Trustee Services Inc. (In re Houck),     BR    (Bankr. W.D.N.C. Oct. 6, 2020) case #15-5028

Unrepentant Lender Slammed with $260,000 in Damages for an ‘Egregious’ Stay Violation

Lender soon recognized that home foreclosure violated the stay but continued denying liability through seven years of litigation.

For an egregious violation of the automatic stay that “severely injured” the debtor, Chief Bankruptcy Judge Laura T. Beyer of Charlotte, N.C., imposed $260,000 in sanctions, given that the lender’s “behavior displayed a high degree of reprehensibility.”

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In re Kimball Hill Inc.,     BR    (Bankr. ED Illinois 9/30/20) case #08-10095

Creditor seeking to avoid being held in contempt for violating bankruptcy debtor’s discharge, could not avoid being held in contempt by arguing that creditor’s objective basis for thinking creditor was not violating discharge was that creditor hoped to overturn existing precedent. Holds that ‘Fair Ground of Doubt’ required by US Supreme Court Taggart case is NOT shown by Creditor was hoping to to Overturn Precedent

The contemnor shoulders the burden of showing ‘uncertainty’ under the Taggart standard for contempt, Judge Barnes says.

Bankruptcy Judge Timothy A. Barnes of Chicago wrote an opinion elucidating the burdens of proof and standards for establishing liability for contempt following the Supreme Court’s decision in Taggart v. Lorenzen, 139 S. Ct. 1795, 1799 (June 3, 2019).

Judge Barnes ruled that taking a “gamble” by hoping to “overturn precedent and create new law” is not objectively reasonable and cannot shield someone from more than $9.5 million in damages for contempt.

Creditor Violates a Plan Injunction

In the case before Judge Barnes, the debtor had confirmed a liquidating chapter 11 plan. The creditor later found in contempt was a bonding company that had issued bonds in favor of municipalities to secure the completion of residential projects being built by the debtor. The bonding company filed a claim and voted in favor of the plan prescribing distributions from the liquidation of assets. The plan and the confirmation order contained injunctions prohibiting those who voted for the plan from pursuing claims.

After confirmation, the bonding company sued several buyers who had purchased the debtor’s assets free and clear of claims under Section 363(f). A purchaser filed a motion in bankruptcy court asking Judge Barnes to hold the bonding company in contempt of the plan and the confirmation order.

The First Two Opinions

In his first decision, Judge Barnes found the bonding company in contempt. In a second opinion, he imposed a sanction of more than $9.5 million in actual damages. He did not impose punitive damages. The bulk of the sanction was $7.7 million for lost property value. While the appeal was pending from the two orders, the Supreme Court handed down Taggart, holding that a court “may impose civil contempt sanctions [for violating the discharge injunction] when there is no objectively reasonable basis for concluding that the creditor’s conduct might be lawful under the discharge order.” To read ABI’s report, click here.

On appeal, the district court ruled that Judge Barnes had subject matter jurisdiction and properly denied a motion to abstain. The district court also decided that Judge Barnes properly interpreted the plan as barring the bonding company’s claims against purchasers.

However, the district court remanded for Judge Barnes to decide whether a finding of contempt was proper under Taggart. Although he had questions about whether Taggart even applied because Taggart was a discharge case, Judge Barnes interpreted the district court’s mandate as directing him to decide whether the bonding company could be found in contempt under the Taggart standard.

The Record Satisfied Taggart

On remand, Judge Barnes found no reason to hold another evidentiary hearing because the record was already sufficient to decide whether the Taggart standard had been satisfied.

With regard to the burdens of proof, Judge Barnes decided that the debtor carried the burden of showing the right to relief, while the bonding company had the burden of demonstrating “uncertainty” under Taggart.

With regard to liability, Judge Barnes said that the bonding company had “repeatedly and knowingly violated the terms” of the injunction in the plan. He also said that the bonding company “pursued claims that it knew were released on theories where it knew the law was settled against it.” The bonding company’s actions, he said, “unequivocally violate the injunction in the Plan and thus the court’s Confirmation Order.”

Judge Barnes said the burden shifted to the bonding company to show “uncertainty” because its “persistent and contumacious” actions had been shown by “clear and convincing evidence.”

Judge Barnes said that courts “focused on different factors” in deciding whether “a fair ground of doubt” exists under Taggart. In the case at hand, he said there was “no question” that the bonding company knew about the injunction.

With regard to uncertainty, Judge Barnes said that the bonding company had “provided no holding from case law or statute to support the theories that [the bonding company] advances in the State Court Lawsuits — that a surety may pursue a purchaser of assets through a sale under section 363(f) of the Bankruptcy Code despite the surety having settled and released its claims in the bankruptcy itself.”

In other words, the bonding company “knew the case law did not support its actions when it took them,” Judge Barnes concluded.

The opinion by Judge Barnes could be read to stand for the principle that challenging authority cannot be grounds for showing uncertainty. He said that the bonding company’s “pursuits in multiple forums and lack of supporting case law demonstrate what this court has already found — that [the bonding company’s] pursuit of [the purchaser] was a gamble by [the bonding company] to overturn precedent and create new law that would allow it double recovery, against both bankruptcy estates and subsequent purchasers of bankruptcy property.”

Judge Barnes therefore found satisfaction of the Taggart standard because there was “no doubt, let alone a fair ground of doubt, that [the bonding company’s] actions were unlawful under the orders entered in the case.”

Although the district court had not directed him to revisit the quantum of damages, Judge Barnes said that satisfying Taggart “effects no change to the damages awarded” to the purchaser.

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SE Property Holdings LLC v. Gaddy (In re Gaddy)

SE Property Holdings LLC v. Gaddy (In re Gaddy),    F.3d    (11th Cir. Sept. 29, 2020) appeal #19-11699: 11th Circuit Court of Appeals holds that for a debt to be held nondischargeable per 11 USC 523(a)(2)(A), the debtor’s fraud must have occurred before the debt arises. Therefore, fraudulent transfers that the debtor made, after the debtor incurred the debt (debt was that debtor personally guaranteed a 12 million dollar loan), did NOT make the debt nondischargeable per 11 USC 523(a)(2)(A).

However, that did not leave the creditor with no remedy, in this case, because the creditor could have timely brought an adversary proceeding against debtor, to seek to deny the debtor any discharge, pursuant to 11 USC 727(a)(2), for debtor having made fraudulent transfers of debtor’s assets, to try to keep the creditor owed the 12 million dollar debt, personally guaranteed by debtor, from seeking to collect that debt from debtor’s assets, because debtor had fraudulently transferred debtor’s assets to debtor’s wife and daughter within 1 year before debtor filed debtor’s chapter 7 bankruptcy case. Creditor didn’t do that, creditor only brought a “nondischargeability” adversary proceeding, to seek to hold only the debt owed creditor to be not discharged, and did not bring a “denial of discharge” adversary proceeding. But that was creditor’s choice (and as it turned out) error. The 11th Circuit decision discusses the US Supreme Court decision, Husky International Electronics Inc. v. Ritz, 136 S. Ct. 1581 (2016), where the Supreme Court held that a debt can be nondischargeable under Section 523(a)(2)(A) if it was obtained by “actual fraud” in the absence of a misrepresentation to the creditor.

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Jalbert v. Gryaznova (In re Bicom NY LLC),     BR    (Bankr. S.D.N.Y. Sept. 21, 2020), bky case #19-1311

Fraudulent Transfer Law Doesn’t Victimize Innocent Parties, Bankruptcy Judge Wiles Says

“Bare legal ownership” of a bank account isn’t enough to turn the account holder into the initial transferee of a fraudulent transfer made into the account, according to the interpretation of Second Circuit law by Bankruptcy Judge Michael E. Wiles of Manhattan.

In substance, Judge Wiles said that Section 550(a)(1) is not a “gotcha” statute. “Strict liability,” he said, “is appropriate as a way of addressing wrongs, not as a way of victimizing innocent parties.”

The defendant, a Russian citizen, said she needed a bank account in the U.S. as a stepping stone to a green card. Claiming she was unable to open an account because she had no Social Security number, she opened a joint account with a friend, who later became the debtor. She deposited $10,000 into the joint account.

The erstwhile friend was busy defrauding one of his bank lenders. To abscond with $1 million, he transferred the money into the joint account and immediately sent it elsewhere.

In his September 21 opinion, Judge Wiles said that the woman never used any of the $1 million and didn’t know about the transfer until she was sued for receipt of a fraudulent transfer by her friend’s chapter 7 trustee. In other words, Judge Wiles said that the money was “long gone” before the woman ever knew about the transfer.

The trustee contended that the woman was the initial transferee of the fraudulent transfer under Section 550(a)(1) and thus had absolute liability as the account holder, relying on the Second Circuit’s landmark decision in In re Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey, 130 F.3d 52 (2d Cir. 1997).

Judge Wiles rejected the argument and granted summary judgment to the defendant, dismissing the lawsuit. He said that the trustee’s argument “pushes legal fictions to extremes that make no sense and that are inconsistent with the teachings of the Finley Kumble decision.

In Finley Kumble, an insurance broker received payments from the debtor and paid everything out within 14 days to an insurance company to purchase policies that were worthless, according to the trustee. The trustee sued the broker as the initial transferee of constructively fraudulent transfers.

The trustee contended that Finley Kumble stands for the principle that dominion and control over a bank account creates absolute liability for the account holder as the initial recipient of a fraudulent transfer.

Judge Wiles disagreed. The broker in Finley Kumble was “functionally just a conduit,” Judge Wiles said. Dominion and control are the “minimum” requirements for treating someone as a transferee, but Finley Kumble “did not hold that they were always sufficient by themselves.” “Emphatically,” he said, every recipient of funds is not automatically an initial transferee.

According to Judge Wiles, the trustee incorrectly relied on cases where the defendants “knowingly act as transferees for the purpose of hiding the funds from creditors.”In the “real world,” Judge Wiles said, the defendant “had no such control at all” because no “real world transfer of funds [to the defendant] was intended, and none was accomplished.” The debtor, he said, had simply “used the joint account solely to facilitate the transfer.”

Comment of The Bankruptcy Law Firm, PC: The above case is about a bank account, and is not by a bankruptcy judge located in the Ninth Circuit. However, there are cases in the Ninth Circuit, including by the 9th Circuit BAP, where a person who later files bankruptcy only holds “bare legal title” to real property, for some other person, who is the “beneficial owner” of the property, and the person who hold bare legal title to the real property, transfers the title to the real property, to the person who is the actual beneficial owner of the real property, before the person with “bare legal title” files bankruptcy, the real property is NOT recoverable by the bankruptcy trustee.

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Nearly 11 Million Households Missed Mortgage Or Rent Payments At Pandemic's Outset

Nearly 11 million households fell behind on their mortgage or rent payments during the first three months of the COVID-19 pandemic, according to a new study by the Mortgage Bankers Association’s Research Institute for Housing America (RIHA). Meanwhile, 30 million people missed at least one student loan payment. The report contains data from an internet panel survey specially tailored to study the impact of the pandemic on rent, mortgage and student loan payment patterns. It found that the sudden onset of the pandemic led to abrupt job losses and reductions in hours worked. “However, federal government stimulus programs and employees being called back to work both appear to have helped most individuals make their housing payments,” the MBA said. Still, the report found that 5.14 million homeowners (8%) missed or deferred at least one mortgage payment, while 5.88 million renters (11%) reported a missed, delayed or reduced payment. “RIHA’s study shows that households were largely successful in navigating a difficult economic landscape and continued to make their housing payments during the first three months of the outbreak,” said Gary V. Engelhardt, professor of economics at Syracuse University’s Maxwell School of Citizenship and Public Affairs. “In contrast, nearly half of student debt borrowers missed at least one payment. Data from other sources reveal that this trend has continued through August 2020. [as reported in Credit and Collection e-newsletter of 9/21/20]

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In re Goodrich Quality Theaters Inc.

In re Goodrich Quality Theaters Inc.,    BR    (Bankr. W.D. Mich. Sept. 16, 2020), case number 20-00759: Michigan Bankruptcy Judge Prefers Dismissal of Chapter 11 case, to conversion of Chapter 11 case to Chapter 7, if Conversion to Chapter 7 will NOT Benefit General Unsecured Creditors, even though Office of US Trustee wanted case converted to Chapter 7, instead of Chapter 11 case being dismissed.

The debtor, a corporation, used the chapter 11 case to sell its assets. The debtor and secured creditors judged the chapter 11 case a success, even though unsecured creditors got ZERO, from the assets of the chapter 11 bankruptcy debtor being sold. The general unsecured creditors got zero, because a secured creditor had a lien on all proceeds of sale. Comment of The Bankruptcy Law Firm, PC, by KPMarch, Esq.: Unclear how dismissing the Chapter 11 case would help general unsecured creditors, if all assets the debtor had, had a creditor’s lien on them. However, conversion to Chapter 7 wouldn’t help the general unsecured creditors, for the same reason. ABI reviews this case as follows: These days, “success” in a chapter 11 case is measured differently. A generation ago, a successful chapter 11 reorganization entailed restructuring the debt, perhaps over three years. Sales were few and far between. Today, success more often than not means selling the assets quickly.

In a chapter 11 case before Bankruptcy Judge Scott W. Dales of Grand Rapids, Mich., all the parties aside from the U.S. Trustee judged the case a success. The assets were all sold, and the debtor was evidently left with $2.9 million in cash plus receivables.

However, the secured lender held what Judge Dales called an “unassailable” lien on cash and receivables but was owed $17 million. All agreed that the cash belonged to the lender as “cash collateral.”

Judge Dales said there was “no prospect for reorganization now” and “absolutely no prospect for payment to any unsecured creditors” in view of cash collateral orders and financing for the chapter 11 effort.

The debtor, the official creditors’ committee and the lender filed a motion to dismiss the chapter 11 case. The U.S. Trustee opposed and filed a motion for conversion to chapter 7, contending that a trustee would be capable of making the final distributions.

According to Judge Dales, the U.S. Trustee argued that dismissal would set a “bad precedent by allowing interested parties to use the bankruptcy sale process under Section 363 to skirt court-supervised distributions that would occur under a confirmed plan, or in the case of conversion, Section 727.”

The debtor submitted that dismissal would make the Western District of Michigan an “attractive venue” for chapter 11 cases.

Judge Dales said he had “no legitimate interest . . . in promoting our district as a haven for chapter 11 cases.” Instead, he addressed the U.S. Trustee’s conversion motion by evaluating “the interests of this estate and the creditors of this estate.” [Emphasis in original.] Judge Dales said there was “no serious suggestion” that the parties intended to ignore bankruptcy priorities by turning the case into a “structured dismissal” of the type outlawed by the Supreme Court in Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017).

Judge Dales found “no persuasive reason” to override the wishes of the official committee and the largest unsecured creditor. Conversion to chapter 7, he said, “would increase administrative expenses and engender confusion among the creditor body, without promising any meaningful recovery for unsecured creditors.”

Judge Dales denied the conversion motion and scheduled a hearing on the motion to dismiss.

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In re Cumbess

In re Cumbess,     F.3d     2020 WL 2897260 (11th Cir. 2020),. In this 6/3/20 published decision, the US Court of Appeals for the Eleventh Circuit holds that if a trustee does not assume a personal property lease before confirmation of a Chapter 13 plan, the leased property is no longer property of the estate and cannot be assumed by the debtor in the confirmed plan on behalf of the estate. No such decision by the Ninth Circuit Court of Appeals, so far. Only time will tell whether Circuit Courts, other than the Eleventh Circuit, will take this same position.

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U.S. Corporate Bankruptcy Filings at 10-Year High as COVID-19 Pandemic Inflicts Economic Pain

U.S. corporate bankruptcies are on their way to hitting a decade-long high, underlining the economic pain inflicted by the COVID-19 pandemic and efforts to limit the disease’s spread, reported. Total bankruptcies announced by U.S. companies so far this year stand at 470, the most for any comparable year-to-date period since 2010, according to S&P Global Market Intelligence. S&P’s analysis took into account both public and private companies with public debt. Most of the bankruptcies were concentrated in retail, energy and manufacturing, with larger defaults such as J.C. Penney and Chesapeake Energy occurring exclusively in these industries. Analysts say many of these businesses were already facing significant headwinds before the coronavirus struck. Much of the resilience among companies with access to public capital markets is down to the Federal Reserve swiftly deploying its emergency lending facilities. The U.S. central bank’s support helped to prop up bond issuance, allowing companies to raise cash to get through the coronavirus crisis. But companies more reliant on bank lending and other forms of credit have been left in the cold as financial institutions retrenched to protect their balance sheet, according to an August report from the Bank of International Settlement. [as reported in American Bankruptcy Institute 9/10/20 e-newsletter]

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Bankruptcy and Social Security Income

In In re Welsh, 711 F. 3d 1120, 35 (9th Cir. 2013) the Ninth Circuit Court held: “We conclude that Congress’s adoption of the BAPCPA forecloses a court’s consideration of a debtor’s Social Security income or a debtor’s payments to secured creditors as part of the inquiry into good faith under 11 U.S.C. § 1325(a).” So in the Ninth Circuit social security income, and debtor’s monthly payments owed to secured creditors (on Notes secured by Deeds of Trust, secured vehicle loans, etc) cannot be counted in a Chapter 13 case, to determine whether or not the debtor’s proposed Chapter 13 case is proposed in “good faith” as required by 11 USC 1325(a). Lucky California Bankruptcy Courts are in the Ninth Circuit, because some cases from other parts of the US rule contrary to Welsh.

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Serious Mortgage Delinquencies Soar To a 10-Year High, reports Credit & Collection e-newsletter on 8/24/20

Good News and Bad News - The Black Knight Mortgage Monitor for July has a bit of good news and bad. The Good News: Mortgage delinquencies continued to improve in July, falling 9% from June, with more than 340K fewer past due mortgages than the month prior. Early-stage delinquencies (30 days past due) have fallen below their pre-pandemic norms. This is a good sign that – at least for the time being – the inflow of new COVID-19-related delinquencies has subsided. Though foreclosure starts ticked up slightly for the month, COVID-19 foreclosure moratoriums are keeping both foreclosure starts and completions at record lows. Driven by record-low mortgage interest rates, prepayment activity edged slightly higher in July, hitting its highest point since early 2004. The Bad News - Some 376K homeowners became 90 or more days past due in July. Serious delinquencies were up 20% from June and are now the highest they’ve been since early 2010. In total, serious delinquencies are now 1.8M over pre-pandemic levels.

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Analysis: Small Firms Die Quietly, Leaving Thousands of Failures Uncounted

American Bankruptcy Institute on 8/12/20 reports that big companies are going bankrupt at a record pace, but that’s only part of the carnage. By some accounts, small businesses are disappearing by the thousands amid the COVID-19 pandemic, and the drag on the economy from these failures could be huge, Bloomberg News reported. “Probably all you need to do is call the utilities and tell them to turn them off and close your door,” said William Dunkelberg, who runs a monthly survey as chief economist for the National Federation of Independent Business. Nevertheless, closures “are going to be well above normal because we’re in a disastrous economic situation,” Dunkelberg said. Yelp Inc., the online reviewer, has data showing more than 80,000 permanently shuttered from March 1 to July 25. About 60,000 were local businesses, or firms with fewer than five locations. About 800 small businesses did indeed file for chapter 11 bankruptcy from mid-February to July 31, according to the American Bankruptcy Institute, and the trade group expects the 2020 total could be up 36 percent from last year. Firms with fewer than 500 employees account for about 44 percent of U.S. economic activity, according to a U.S. Small Business Administration report, and they employ almost half of all American workers. Chapter 11 bankruptcy gives a business protection from its creditors while the owners work out a turnaround plan. For smaller companies, though, the extra time might not make any difference. “Bankruptcy cannot create more revenue,” said Robert Keach, a restructuring partner at New England-based Bernstein Shur and former president at the American Bankruptcy Institute. Some owners fear bankruptcy could scar their credit reports and hurt their future chances to rebuild. Bankrupt businesses have a nearly 24 percentage point higher likelihood of being denied a loan, according to the SBA, and a filing can show up on a credit report for 10 years. [as reported in ABI 8/12/20 e-newsletter]
Wednesday, August 12, 2020

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CARES Act Amendment

In two decisions on 7/30/20, by two different bankruptcy judges in two different states, the bankruptcy judges’ decisions agree that the CARES Act Amendment, which allows chapter 13 plans to be extended to last for seven years (instead of the statutory 5 year maximum Chapter 13 plan length stated in 11 USC ……) is applicable only to plans confirmed before March 27, 2020. 3/27/20 is the date the CARES Act went into effect. A Chapter 13 plan confirmed after 3/27/20 can only be maximum length 5 years (60 months), NOT 7 years. No answer yet as how Courts in the 9th Circuit will decide this issue. Also possible that further legislation will be passed to allow Chapter 13 plans confirmed after 3/27/20 to be 7 years maximum length, instead of 5 years maximum length.

The 2 Bky Ct opinions are:

  • In re Drews, 19-52728 (Bankr. E.D. Mich. July 30, 2020)
  • In re Bridges, 19-31012 (Bankr. S.D. Ill. July 30, 2020)

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Struggling Retailers Use Bankruptcy to Break Leases by the Thousands

Struggling Retailers Use Bankruptcy to Break Leases by the Thousands, reports the American Bankruptcy Institute, on 8/620:

With the pandemic intensifying the plight of U.S. retailers, companies ranging from J. Crew Group Inc. to the owner of Ann Taylor are using chapter 11 bankruptcy filings to quickly get out of costly, long-term leases and shutter thousands of stores, Bloomberg News reported. By seeking court protection, firms like Neiman Marcus Group Inc. and the parent company of Men’s Wearhouse avoid the headache of protracted negotiations with individual landlords. But the moves threaten to upend huge swaths of the real estate market and the half-trillion-dollar market for commercial mortgage-backed securities. “This is now black-letter law — a debtor can cram down a landlord,” said Melanie Cyganowski, a former bankruptcy judge who’s now a partner at law firm Otterbourg PC. “If this becomes a tsunami of retailers rejecting their leases, it’s going to trigger another part of the sea change — the mortgages held by the landlords.” As bankrupt firms like JCPenney Co. and Brooks Brothers Group Inc. look to jettison leases, landlords are already feeling the consequences. CBL & Associates Properties Inc., owner of more than 100 shopping centers in the U.S., is preparing its own bankruptcy filing after rent collections cratered. And 16 percent of retail property loans bundled into CMBSs were delinquent in July, according to research firm Trepp. At least 25 major retailers have filed for bankruptcy this year, according to data compiled by Bloomberg. The most recent additions include Tailored Brands Inc., owner of Men’s Wearhouse and Jos. A. Bank, which is seeking to close about a third of its more than 1,200 stores, and Lord & Taylor parent company Le Tote, which said it could shut down all of the department store’s remaining locations.

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Hull v. Rockwell (In re Rockwell)

Hull v. Rockwell (In re Rockwell),    F.3d    (1st Cir. July 30, 2020, appeal #19-2074) sets up a Circuit Split among US Circuit Courts, which may eventually get decided by the US Supreme Court, about whether a bankruptcy debtor must reinvest homestead exemption funds in a new residence, within 6 months after the bankruptcy debtor receives the homestead exemption amount, or LOSE the exemption.

In re Rockwell US First Circuit Ct of Appeals 7/30/20 case is contrary to US Ninth Cir Ct of Appeals case, In re Jacobson, 676 F.3d 1193 (9th Cir. 2012), also contrary to 5th Cir. Frost decision re exemptions.

Note: The Bankruptcy Law Firm, PC’s opinion is that this First Circuit Rockwell decision is wrong, because the $47,500 exemption claimed by the bankruptcy debtor, in Rockwell, on debtor’s residence in Maine, was claimed exempt by the bankruptcy debtor per Maine state law, and Maine state law said exemption was lost if money not reinvested in a new residence within 6 months after sale of residence (same thing CA state law re exemptions, CCP 704.960)

Asset Exempt in Chapter 13 Retains the Exemption After Conversion, First Circuit Says:Circuit split is eroding on the loss of a homestead exemption for failing to reinvest proceeds from a sale after filing.

On an issue where the circuits are divided, the First Circuit upheld the two lower courts by ruling that a homestead exemption, valid on the chapter 13 filing date, is not lost if the debtor sells the home but does not reinvest the proceeds within six months as required by state law.

The July 30 opinion from the Boston-based appeals courts is the latest evidence of an eroding circuit split. As it now stands, only the Ninth Circuit has authority starkly at odds with the decision by the First Circuit. The Fifth Circuit is backing off from In re Frost, 744 F.3d 384 (5th Cir. 2014), where the appeals court ruled that the exemption is lost if a home is sold after a chapter 13 filing and the proceeds are not reinvested.

As noted by the First Circuit, the contrary Ninth and Fifth Circuit opinions were both written before the Supreme Court made important pronouncements about the inviolability of exemptions and a debtor’s property in Harris v. Viegelahn, 135 S. Ct. 1829 (2015), and Law v. Siegel, 571 U.S. 415 (2014).

The Facts

The debtor confirmed a chapter 13 plan under which he would retain his home and pay the mortgage directly. The home was in Maine, a state with a $47,500 homestead exemption. Maine opted out of federal exemptions.

One year after confirmation, the debtor decided to sell the home. The bankruptcy court approved the sale, which generated proceeds of almost $52,000 after paying the mortgage and closing costs. In accord with the bankruptcy court’s order, the debtor retained $47,500, his homestead exemption. More than $4,000 went to the trustee for distribution to creditors.

Five months after closing, the debtor converted the case to chapter 7 and received his general discharge. When a homeowner sells a home, Maine law requires reinvesting the proceeds in another homestead within six months to maintain the exemption.

When the debtor did not purchase another home within six months, the chapter 7 trustee objected to the allowance of the debtor’s homestead exemption in the proceeds. Chief Bankruptcy Judge Peter G. Cary of Portland, Maine, overruled the objection. The district court affirmed last year, prompting the trustee to appeal again.

The Code Governs

Circuit Judge O. Rogeriee Thompson began her analysis by citing the Supreme Court decisions from 1924 and 1943 establishing the so-called snapshot rule, where the debtor’s financial condition is frozen on the filing date. The rule means that an “asset will retain whatever status . . . it had when the debtor filed for bankruptcy,” she said. Judge Thompson said, in substance, that an asset exempt on the filing date will retain its exemption unless there is a statutory exception permitting loss of the exemption.

Judge Thompson then inquired as to whether an exemption could be lost if a chapter 13 case was converted to chapter 7. Naturally, she cited Section 348(a) for the proposition that conversion from one chapter to another does not change the original filing date. In other words, “the estate does not begin anew” on conversion, she said.

“So, without a doubt,” Judge Thompson said, “we examine [the debtor’s] claim of a homestead exemption on the date he filed for his chapter 13 bankruptcy.”

Because there are no statutory exceptions regarding the homestead exemption, Judge Thompson upheld the lower courts. But what about Maine law, where the exemption is lost in six months absent purchasing another homestead?

Judge Thompson said that “Maine’s six-month period for protecting the value of that homestead would not apply. From our perspective, that is what the Code requires.”

Contrary Circuit Authority

The trustee wanted the First Circuit to follow contrary authority: Frost from the Fifth Circuit, and In re Jacobson, 676 F.3d 1193 (9th Cir. 2012), from the Ninth Circuit. Judge Thompson said “these cases are unpersuasive,” in part because neither “addresses the Code’s valued ‘fresh start’ principles articulated in Harris.”

Judge Thompson noted how Frost and Jacobson were written before the Supreme Court decided Harris and Law. The high court authorities tell lower courts that a debtor’s property or exemptions cannot be invaded absent statutory authority.

In this writer’s view, Frost has been all but abandoned by the Fifth Circuit. The New Orleans-based court has rejected Frost in cases where the facts were different. This writer is also of the opinion that a three-judge panel in the Fifth Circuit could rule contrary to Frost because it was impliedly overruled by Harris and Law.

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A New Challenge for Debtors Who Received PPP Loans Under the federal CARES Act

A New Challenge for Debtors Who Received PPP Loans Under the federal CARES Act: if the borrow is in bankruptcy, the borrower may not be able to get the borrower’s PPP loan forgiven, because the borrower filing bankruptcy may be claimed by lender to constitute an act of default, under the PPP loan terms:

The CARES Act and corresponding paycheck protection program (PPP) provisions continue to provide fertile ground for discourse concerning policy implications and legislative intent amid an unprecedented pandemic, according to an analysis by David M. Barlow of the U.S. Bankruptcy Court for the District of Arizona in Phoenix. In the early months of implementing the CARES Act’s PPP provisions, the bankruptcy world was particularly fraught with such debate. Courts across the country grappled with the SBA’s authority to enforce rules prohibiting access to the $659 billion of relief afforded to small businesses solely based on their status as debtors in bankruptcy. Although that phase of litigation appears to have concluded, debtors who received PPP loans and are now seeking loan forgiveness may need to clear a new hurdle. Specifically, lenders of the PPP loans may refuse to process a borrower’s application for loan forgiveness because the applicant’s filing of bankruptcy constituted a default under the terms contained in the PPP loans. Despite going to a lot of places and engaging in what has affectionately been referred to by one commentator as the “SBA Tango,” debtors may end up somewhere they have already been: in front of a bankruptcy court seeking the relief necessary to have their PPP loan forgiven. [as reported in 073020 American Bankruptcy Institute e-newsletter]

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California and additional States Sue US Governement over New Payday Lending Rule

California and additional States Sue US Governement over New Payday Lending Rule (adopted by US Government on 6/2/20) that Makes Payday Lenders NOT subject to “cap” on the (extremely high) interest rates the Payday Lenders can charge consumers on unsecured loans, so Long as the Payday Lender “partners” with a Bank:

Trying to stop the cycle of unsophisticated borrowers getting trapped in a recurring cycle of debt, multiple states have imposed regulations on payday lenders in recent years – regulations that will no longer apply to some lenders under a new Trump administration rule. California, Illinois and New York sued the Office of the Comptroller of Currency, a bureau of the U.S. Treasury Department, Wednesday over a new rule that makes it easier for lenders to skirt state laws that cap interest rates for payday loans. The rule finalized on June 2 makes lenders who partner with federally regulated banks exempt from state interest rate caps on loans. “The OCC creates loopholes that allow predatory lenders to bypass our laws,” California Attorney General Xavier Becerra said in a statement Wednesday. “Particularly during this period of economic crisis, the Trump administration should fight to stop these bad actors, not enable them.” The states are challenging the new rule on several grounds. They claim OCC lacks the power to enact the rule, that the rule violates procedures created by Congress after the last financial crisis, that it ignores the potential for regulatory evasion of state laws and that OCC fails to provide evidence supporting its change in policy.

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The United States Senate has unanimously passed legislation protecting stimulus checks from being garnished by creditors.

Credit & Collection e-newsletter of 7/28/20 reports:The United States Senate has unanimously passed legislation protecting stimulus checks from being garnished by creditors.

The bipartisan bill, co-sponsored by senate finance committee chairman Sen. Chuck Grassley (R-IA) and Sen. Sherrod Brown (D-OH), will ensure that coronavirus relief payments go directly to the aid of Americans.

“This is a common sense measure that will ensure the $1,200 Economic Impact Payments Congress provided to help individuals meet essential needs during these trying times don’t instead end up in the pockets of creditors and debt collectors,” Grassley said in a statement, according to Newsweek.

“The bill we passed today will further the original intent under the CARES Act of ensuring that the Economic Impact Payments go to help individuals struggling to make ends meet as a result of government enforced lockdowns and economic fallout of the current pandemic.”

Passed in March, the CARES Act dispersed checks of up to $1,200 for each qualifying adult, and an additional $500 per qualifying dependent child.

While the CARES Act ensured that the checks could not be reduced due to unpaid taxes or debts owed to the government, it did not protect the stimulus payments from private debt collectors.

The newly passed Senate legislation protecting stimulus payments can’t move directly to the House because it is a tax bill. But senators are urging the House to pass an identical version of the bill.

“The House must immediately take up this bill and ensure that the money allocated to working families by Congress goes to pay for food, medicine, and other necessities, not to debt collectors,” said Senator Brown, according to the outlet.

If the House passes their own version, it can be sent back to the Senate and eventually make its way to President Trump’s desk.

If it becomes law, the bill includes wording that states it “shall take effect on the date of the enactment of this Act,” indicating it could be applied retroactively. It is unclear how it would affect any payments that were previously deduced by creditors, reported Forbes.

Congress is currently working out details of another coronavirus relief package.

The Democrat-controlled House previously unveiled the HEROES Act, a $3 trillion relief package that passed in May. The package has not advanced in the Republican-controlled Senate. [Note: Republican version of bill is “Heals Act” for $1 trillion, with many provisions different from the Democratic $3 Trillion bill]

On Thursday, Treasury Secretary Steven Mnuchin said that Senate Republicans and the White House have reached a “fundamental agreement” on the next round of COVID-19 relief legislation, but that certain portions of the bill are still up in the air, reported CBS News.

Senate Majority Leader Mitch McConnell said that the bill would be unveiled early next week.

Both Republicans and Democrats have indicated they are looking into issuing a second round of stimulus payments.

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In re Specialty Shops Holding Corp.

In re Specialty Shops Holding Corp.,   F.4th    (US District Court, District of Nebraska July 24, 2020; case number 18-405): 11 USC 546( c ) allows a creditor, which has sold goods to a debtor, shortly before the debtor files bankruptcy, to reclaim the creditor’s goods from the debtor, where the debtor has failed to pay for the goods. Specialty Shops hold that a creditor doesn’t get the goods back, it only gets a only has a general unsecured claim, if a secured lender already has a lien on the goods sought to be reclaimed, at the time the debtor files bankruptcy.

2005 Amendments to Section 546(c) Limited the Remedies of Reclamation Creditors

After the 2005 amendments to Section 546(c), a reclamation claimant no longer has an administrative claim or lien if a lender’s security interest eats up all the value in the reclaimed goods, according to a district judge who affirmed a ruling by Bankruptcy Judge Thomas L. Saladino of Omaha, Neb.

A creditor with a valid reclamation claim for $36 million offered arguments amounting to a plea for the court to use equitable powers to devise a remedy not provided by statute. District Judge Robert F. Rossiter, Jr. of Omaha held in substance that a reclamation creditor has nothing more than an unsecured claim if the secured lender is undersecured.

Reclaimed Goods Gobbled Up by the Lender

Before a retailer’s bankruptcy, a pharmaceutical supplier made a reclamation demand that was valid under state law. The debtor filed a chapter 11 petition before the supplier could reclaim the goods.

In bankruptcy, the supplier filed a proof of claim, including a reclamation claim for more than $36 million on account of goods delivered within 45 days of bankruptcy and a general unsecured claim for another $32 million. The lender had a secured claim for over $400 million. The lender’s collateral included the goods provided by the supplier.

Alongside approval of post-petition financing from the lender, the debtor and the supplier stipulated that the supplier would retain its reclamation rights, subject to the superior rights of the lender.

After the debtor’s inventory was sold, the supplier filed a motion to compel payment of the $36 million reclamation claim as an expense of administration. In the ensuing litigation, the supplier could not establish that the collateral was worth more than the debt owing to the lender. The failure of proof was significant, because the supplier bore the burden of proof in establishing equity in the reclaimed goods.

For the reclaimed goods, Bankruptcy Judge Saladino ruled that the supplier had no administrative claim or lien, only an unsecured claim. The supplier appealed but fared no better in Judge Rossiter’s July 24 opinion.

The Amendments to Section 546(c)

Before the 2005 amendments, Judge Rossiter explained that Section 546(c) permitted the bankruptcy court to deny reclamation only by granting the supplier a secured or administrative claim. The amendments changed the “deal” for reclamation creditors Section 546(c) was modified to expand the reclamation period from 10 to 45 days before bankruptcy. The amendment made it clear that a reclamation creditor’s rights were subject to the prior rights of a security interest in the goods. In addition, the language disappeared about a lien or administrative claim in favor of the reclamation creditor.

The supplier argued to Judge Rossiter that bankruptcy courts “historically” awarded administrative claims when the goods were no longer available for reclamation. Judge Rossiter said that Judge Saladino properly rejected the argument based on the 2005 amendments.

Judge Rossiter said that the plain language in the 2005 amendments “makes clear it requires” no administrative claim. He quoted Judge Saladino, who said that the 2005 amendments “‘radically alter[ed] how reclamation claims are treated in bankruptcy’ and do not maintain the alternative remedy of an administrative claim for reclaiming sellers.” The supplier, Judge Saladino said, only had an administrative claim for goods delivered within 20 days of bankruptcy under Section 503(b)(9).

Judge Rossiter rejected several other arguments by the supplier. One way or another, the supplier wanted the court to create a remedy not contained in Section 546(c). Some failed, the judge said, because the supplier “has shown no traceable excess proceeds exist for [the supplier’s] interests to attach to.”

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American Bankrutpcy Institute E-newsletter of 7/23/20 Reports that Democratic Senators Push Bill Allowing Student Loans to Be Dischargedd in Bankruptcy, Under Certain Circumstances:

Democratic Senators introduced a bill today (7/23/20) that would allow people to cancel student loan debt in bankruptcy if they can show income loss tied to economic fallout from the coronavirus pandemic, the Wall Street Journal reported. The measure from Sens. Sheldon Whitehouse (D-R.I.) and Sherrod Brown (D-Ohio) would allow student loan cancellations for people who either racked up large medical bills in the past three years or lost wages because of the coronavirus fallout. Republicans have expressed concerns that widespread student loan cancellations will cause the cost of higher education to rise, and earlier attempts to ease student loan restrictions for bankrupt borrowers have failed. Rising costs could make that education less accessible, according to those who oppose easing standards for forgiving student loan debt. A 1970s federal law requires people who take out student loans to prove an undue hardship in repaying their loans before canceling them. Over time, bankruptcy judges who have decided case by case have set a high bar. Only several thousand student-loan borrowers have tried to cancel their loans in recent years, despite more than $1.5 trillion worth of student-loan debt outstanding as of March, according to the Federal Reserve Bank of New York. Several earlier bills to ease student-loan restrictions for bankrupt borrowers have failed without support from Republicans. The bill from Sens. Whitehouse and Brown expands protections for people who file for bankruptcy, stating that people who lost income during the pandemic or because of a health care crisis should have easier access to a fresh financial start. It also has relief for homeowners who have equity in their property. The bill, called the Medical Bankruptcy Fairness Act, also has the backing of Sens. Elizabeth Warren (D-Mass.), Dick Durbin (D-Ill.) and Tammy Baldwin (D-Wis.).

Note: There have been several bills introduced into the US Congress, over the past decade, to make it easier to discharge student loan debt in bankruptcy. NONE of those bills has become law. NONE of those bills even came close to becoming law.

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Bankruptcy Press reports a 26% increase in Chapter 11 bankruptcy filings so far in 2020, over 2019:

A 26% increase in Chapter 11 filings so far in 2020 as compared to last year can largely be blamed on the effects of COVID-19, and restructuring professionals say the spike is mirroring trends seen at the beginning of the 2008 financial crisis.

Legal services firm Epiq Global released a report this week with data on the number of bankruptcy filings so far this year, revealing commercial restructuring cases are up 26% over 2019 as of the end of June, while the number of bankruptcy cases of all kinds was actually down by a similar margin over last year.

The jump in business restructurings reverses a continuous, but slight, downward trend in those types of bankruptcies over the last few years.

Chris Kruse, vice president of Epiq's Automated Access to Court Electronic Records, or AACER, program, said the trend echoes what happened during the crisis of 2008, where corporate insolvency cases spiked in the weeks after the onset of the downturn, which was then followed by a surge in personal bankruptcies.

"The data doesn't lie. It's growing," Kruse told Law360. "We saw this in the last cycle starting in '08 and '09. The Chapter 11 commercial cases preceded the personal bankruptcies by some period."

Epiq's AACER service performs a daily "scraping" of electronic bankruptcy court records in all 94 district court jurisdictions, Kruse said, and prepares reports for clients that include large institutional lenders interested in assessing credit risk and other factors.

And since the onset of the coronavirus pandemic and related financial woes, a growing number of clients have been requesting reports on a weekly basis instead of the more routine monthly basis.

"They're looking for signals from the market," Kruse said.

Epiq's report shows there have been 3,604 new business Chapter 11 cases through June, an increase of 26% over the same six-month period in 2019, and that June alone saw 609 new cases for a jump of 43% over the same month last year.

The number of total bankruptcies has declined by a similar margin — dropping 23% over the same period last year.

The crisis 12 years ago showed similar trends, where financial institutions began failing at the end of the first quarter, kicking off a surge of commercial cases to be followed by a wave of personal bankruptcies.

David Prager, the managing director of the disputes consulting practice of Duff & Phelps, said the rise in commercial bankruptcies so far in 2020 will likely continue as the fallout from COVID-19 spreads throughout the economy, closely tracking the pattern seen in 2008.

"What we did see in the financial crisis is that there was a very long time from when Bear Stearns starts to fail in March 2008 until the peak of the financial crisis, probably a year or more," Prager told Law360. "We saw these points in time when the government would come in and support things, and markets would come back so people calmed down."

Yet as that government support wavered as the crisis continued into 2009, Prager said, the number of bankruptcies jumped.

"I think we may see a series of events like that going forward. For the rest of the calendar year, with the government aid and elections, there will still be some support and liquidity — and eventually that is going to dry up," Prager said. "When that dries up, then I think we'll see the real wave coming at us."

According to reports from the U.S. federal court system, 2008 saw 9,272 business Chapter 11 cases filed, a number that rose to 13,683 in 2009, or 47%. The reports also show that by the end of 2008, there had been 714,389 nonbusiness Chapter 7 cases filed, and that number jumped by 41% by the end of 2009 to more than 1 million new cases.

Laura Davis Jones, a name partner with Pachulski Stang Ziehl & Jones LLP, said both the 2008 crisis and the current COVID-19 crisis are similar in that they both arose unexpectedly, but the situation the economy is facing now is different because revenues have evaporated almost overnight for many industries.

The coronavirus' impact is also being felt on a much wider scale geographically than the financial crisis of 2008 and 2009, Jones said, reaching every continent and virtually every industry that depends on public operations.

"This is very international in scope," Jones told Law360. "There is not a country that is not affected by this."

Deirdre O'Connor, Epiq's managing director for corporate restructuring, affirmed that the current situation differs from 2008 in that the effects of COVID-19 are far broader than what was felt in the last cycle.

While the initial wave of commercial Chapter 11 cases has been largely concentrated in the retail, energy and transportation sectors, its impact will be felt widely, she said.

"This wave is very broad. It affects everyone," O'Connor said. "The last financial crisis started in the mortgage sector and became distinctly between lending institutions. … This one affects all of us from top to bottom."

Jones elaborated that 2008 saw lenders impacted first, which then spread into the housing sector and trickled down to the building trades and related industries as demand for homes dropped.

Predicting which companies or industries will be the next to feel the pain of the crisis is nearly impossible, O'Connor said, but certain indicators point to trouble for some in particular.

The Chapter 11 cases filed so far this year that cite the coronavirus involve companies that were already in a precarious financial state, including limited liquidity. As COVID-19 restrictions forced many businesses to close their doors for several weeks, that liquidity was eaten up in the face of evaporating revenue.

O'Connor said the pain in retail, energy and transportation will likely continue and, if the pattern of previous cycles holds, will be followed by a wave of personal bankruptcies.

Corporate Chapter 11 filings being up by 26% contrasts with the overall 23% decline in all types of cases, but individual cases will probably surge due to the historic jump in unemployment, Kruse said.

Liquidity injections via stimulus packages approved by federal and state governments and forbearance deals from lenders have staved off the surge for now, but if these programs begin tapering off in the coming months, people out of work will have no income as months of bills come due.

Prager said the hope is that people are able to go back to work before they fall too far behind on their personal financial obligations, but after about two months of mounting expenses — especially with mortgages or rent — it becomes harder to bounce back financially.

"I'm not encouraged by the way things are heading, and it seems we may have more bad days coming before we get to the good days," he said.

Jones said the government aid currently available has provided a parachute for individuals that was not available back in 2008, so the number of personal bankruptcies might not reach the same levels as they did back then.

But the aid available to corporations this time around was not provided quickly enough or in the right manner to stave off insolvency for the hundreds of companies that have filed for Chapter 11 in recent months, she said.

Personal filings may be mitigated by the number of employers that are able to bring workers back on board as business restrictions are eased, Jones said, and the stimulus payments and extra uninsurance compensation available to many laid-off workers could be enough to bridge the gap until that happens.

"In 2008-2009, there was no parachute, so people had no choice but to hold on as long as they could and then file," she said.

September will be a major turning point for many corporations and individuals, Jones explained, as the reopening status in many areas will dictate whether normal or close to normal business operations can resume.

The spike in Chapter 11 cases has also been augmented by increased access to the bankruptcy system for small businesses through the Subchapter V program, which reduces the cost of filing and administering Chapter 11 proceedings, O'Connor said.

The program went into effect in February, so there is no year-over-year comparison available, but the 506 cases that have taken advantage of Subchapter V so far this year indicate it is a popular option for companies that may have previously been forced to shut down without reorganizing.

The report said 133 of the 506 Subchapter V cases in 2020 were filed in June, trending upward over the short life of the program. That trend will probably be mirrored by large corporate cases over the next few quarters as the economic world adjusts to the "new normal" post-pandemic, O'Connor said.

"We are expecting increased bankruptcy filings on the large corporate scale to come down the pike in the next few quarters," she said.

--Editing by Philip Shea and Alanna Weissman.

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Merriman v. Fattorini (In re Merriman)

Merriman v. Fattorini (In re Merriman),     BR     (B.A.P. 9th Cir. July 13, 2020, appeal 19-1245): 9th Circuit BAP holds that the US Supreme Court’s Acevedo opinion, which is viewed as barring federal courts, in most circumstances, from entering orders nunc pro tunc, does NOT bar a Bankruptcy Court from granting an order annulling the bankruptcy automatic stay retroactively (even though doing so is a nunc pro tunc order).

In Merriman, the Ninth Circuit Bankruptcy Appellate Panel held that this year’s Acevedo decision from the Supreme Court does not bar bankruptcy courts from annulling the automatic stay. Except in unusual circumstances, Acevedo effectively bars federal courts from entering orders nunc pro tunc.

To uphold the bankruptcy court, the BAP was obliged to disagree with In re Telles, 20-70325, 2020 WL 2121254 (Bankr. E.D.N.Y. Apr. 30, 2020) (Telles is a “not for publication” bankruptcy court decision). In Telles, a bankruptcy court on Long Island, N.Y., appeared to hold that Acevedo does not permit annulling the automatic stay, or modifying the stay nunc pro tunc, if a foreclosure sale was conducted in violation of the automatic stay.

Filing a Lawsuit Violated the Automatic Stay

The appeal in the BAP didn’t involve a foreclosure sale like Telles. Rather, a creditor filed a wrongful death suit against the debtor, not knowing the debtor had filed a chapter 13 petition eight months earlier.

On being told about the bankruptcy, the creditor filed a motion within a few days to annul the automatic stay.

Over the debtor’s objection, Bankruptcy Judge Vincent P. Zurzolo found cause to annul the automatic stay. He allowed the creditor to liquidate its claim in state court and obtain findings that might have preclusive effect in later dischargeability litigation in bankruptcy court. However, Judge Zurzolo did not permit the creditor to enforce a judgment without further order of the bankruptcy court.

The debtor appealed and lost, in a July 17 opinion for the BAP by Bankruptcy Judge William Lafferty.

Judge Lafferty agreed there was cause to modify the automatic stay. The creditor did not have notice of the bankruptcy. The judge said there was no prejudice to the debtor aside from the fact that he had no insurance to defend the wrongful death suit. The debtor would have had the same problem were the suit in bankruptcy court. There were other defendants in the wrongful death suit, so modifying the stay would promote judicial economy.

What Does Acevedo Mean for Bankruptcy?

While the appeal was pending, the Supreme Court handed down Acevedo. Roman Catholic Archdiocese of San Juan, Puerto Rico v. Acevedo Feliciano, 140 S. Ct. 696 (2020). In a per curiam opinion, the high court strictly limited the ability of federal courts to enter orders nunc pro tunc.

Quoting one of its prior decisions, the Supreme Court said that a nunc pro tunc order must “‘reflect[] the reality’” of what has occurred. A nunc pro tunc order, the Court said, “presupposes” that a court has made a decree that was not entered on account of “inadvertence.” Id. at 700-701.

In other words, the high court will allow nunc pro tunc orders only if the court had made a ruling but failed to enter an order at the time. To read ABI’s report on Acevedo, click here.

Acevedo therefore raised a cloud over the ability of bankruptcy courts to annul the automatic stay or modify the stay nunc pro tunc. Judge Lafferty interpreted Telles as “prohibiting a grant of retroactive or nunc pro tunc relief from stay.”

Judge Lafferty disagreed with Telles. “We do not believe that the ruling in Acevedo prohibits a bankruptcy court’s exercise of the power to grant retroactive relief from stay,” he said.

Judge Lafferty noted the statutory underpinning of the case on appeal compared to Acevedo. In the Supreme Court case, the federal removal statute expressly divested a state court of jurisdiction after the suit was removed.

In the case on appeal, Congress “expressly” gave power to modify the stay retroactively, Judge Lafferty said. In that regard, Section 362(d) confers power to grant relief from the stay, “such as by terminating, annulling, modifying, or conditioning such stay.”

“[T]he conclusion that Acevedo prohibits the annulment of the stay based on jurisdiction and property of the estate concerns reads too much into the Supreme Court’s opinion,” Judge Lafferty said. Although he did not say so, the Supreme Court might not have the capacity to take away the ability to annul the stay, a power granted by Congress, unless there was a constitutional infirmity or lack of subject matter jurisdiction.

Judge Lafferty upheld the ruling of the bankruptcy court, saying that the “statutory language, and longstanding and sound experience, make clear that the effective use of these remedies must occasionally include the option of granting retroactive relief.” [as reported by ABI]

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U.S. Weekly Jobless Claims Fall; But a Record 32.9 Million People are receiving Unemployment

Benefits, reports American Bankruptcy Institute’s 7/9/20 e-newsletter: New applications for U.S. jobless benefits fell last week, but a record 32.9 million Americans were collecting unemployment checks in the third week of June, Reuters reported. Economists cautioned against reading too much into the drop in weekly jobless claims reported by the Labor Department on Thursday, noting that the period included the July 4 Independence Day. Claims data are volatile around holidays. Large parts of the country, including densely populated states like Florida, Texas and California, are dealing with record spikes of new COVID-19 cases, which have forced a scaling back or pausing of reopenings and sent some workers home again. Initial claims for state unemployment benefits dropped 99,000 to a seasonally adjusted 1.314 million for the week ended July 4. That was the 14th straight weekly decline. The number of people receiving benefits after an initial week of aid dipped 698,000 to 18.062 million in the week ending June 27. These so-called continued claims, which are reported with a one-week lag, topped out at a record 24.912 million in early May. There were 32.9 million people receiving unemployment checks under all programs in the third week of June, up 1.411 million from the middle of the month.

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In re Cherry,    F.3d     (7th Cir. July 6, 2020, appeal number 19-1534)

US Court of Appeals for the Seventh Circuit Requires the Bankruptcy Court to Make Specific Findings for why the Bankruptcy Court is confirming a Chapter 13 plan that contains a plan provision that is expressly allowed by 11 USC 1322(b)—the Bankruptcy Code Section that lists what provisions a Chapter 13 plan may contain. This is a poorly reasoned decision, which, happily, is not what the US Court of Appeals for our Circuit, the 9th Circuit, or the 9th Circuit BAP, or bankruptcy courts in the 9th Circuit, require. There is nothing in 11 USC 1322(b) that would require a Bankruptcy Court to make findings that putting a provision in a Chapter 13 plan, that 11 USC 1322(b) expressly allows to be put in a Chapter 13 plan, is allowed to be put in a Chapter 13 plan. Hopefully the Ninth Circuit will not follow this Seventh Circuit decision.

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Hackler v. Arianna Holdings Company,     F.3d     (3rd Cir. 9/12/19)

Re: Avoiding Tax Sales in Bankruptcy: Not All Foreclosures Are Equal

When asked whether a foreclosure sale can be avoided in bankruptcy, the first answer that comes to many practitioners’ minds is “no” because of the Supreme Court’s opinion in BFP v. Resolution Trust Corp.[1] The correct answer, though, is a much more nuanced “it depends.” The Third Circuit’s Sept. 12, 2019, precedential opinion in Hackler v. Arianna Holdings Company LLC[2] is an excellent reminder why.

The facts in Hackler are relatively straightforward. The Hacklers failed to pay taxes on a parcel they owned in New Jersey, which resulted in a tax lien. The township in which the property was located subsequently conducted a public auction of the tax lien. The lien sold at auction and was assigned to Arianna Holding Company LLC. The Hacklers failed to redeem the tax lien, which resulted in a foreclosure judgment vesting title to the property in Arianna.

Two months later, the Hacklers simultaneously filed a voluntarily petition for relief under chapter 13 and an adversary proceeding to avoid the transfer of the property as preferential and/or fraudulent. On summary judgment, the Hacklers argued that the foreclosure occurred within the preference period and permitted Arianna to receive more than it otherwise would have in a chapter 7 had the transfer not taken place. Arianna, in its counter-motion for summary judgment, asserted that the tax foreclosure sale was properly conducted under state law and, as a result, was immune from avoidance under the Supreme Court’s opinion in BFP.

The bankruptcy court ultimately entered summary judgment in favor of the Hacklers on the preference cause of action without rendering a decision on the fraudulent transfer cause of action. The district court affirmed, which brought the case to the Third Circuit. On appeal, the panel was faced with a question of first impression: whether a New Jersey tax foreclosure could be avoided as a preferential transfer.[3]

BFP v. Resolution Trust Corp.: Foreclosure Sales Conducted in Accordance with State Law Cannot Be Avoided as Fraudulent Transfers

Arianna’s primary argument rested upon the Supreme Court’s opinion in BFP. In that case, the Supreme Court was faced with the question of whether a debtor receives “reasonably equivalent value” for purposes of § 548 of the Bankruptcy Code when its property is sold to satisfy a mortgage in a foreclosure sale. The Supreme Court ruled that a debtor does receive reasonably equivalent value, even if the foreclosure sale value is significantly less than the fair market value, so long as the sale is noncollusive and is conducted in accordance with state law.

In the time since BFP, some courts have applied BFP broadly, while others have made an effort to limit its effects.[4] For example, courts have drawn distinctions between mortgage foreclosures, which typically involve a public sale, and strict foreclosures, such as property tax foreclosures, which might not have.[5] Few courts, however, have addressed the treatment of tax foreclosures as preferences under § 547 of the Bankruptcy Code.

New Jersey Tax Foreclosures vs. Mortgage Foreclosures

The various courts in Hackler v. Arianna Holdings Company LLC identified two critical differences between Hackler and the Supreme Court’s decision in BFP. First, the Hackler courts noted that BFP involved fraudulent transfers and not preferential transfers. Unlike § 548, § 547 contains no requirement that a party receive reasonably equivalent value. Thus, the primary rationale and policy considerations of BFP are not necessarily implicated. Second, tax foreclosures in New Jersey are much different than mortgage foreclosures. When foreclosing a mortgage, an arms’ length sale process results in parties bidding for the property, after which it is sold to the highest bidder. In a New Jersey tax foreclosure, however, parties bid only for the government’s lien rights, the value of which may have no correlation to the actual value of the property.

Indeed, even if conducted in accordance with state law, a tax foreclosure can result in the purchaser paying significantly less for a tax certificate than the fair market value of the property. The result of such a sale is that the purchaser of a tax certificate could gain title to the property upon the owner’s failure to redeem without having gone through a noncollusive public auction process and without having realized the property’s full value.

Because of these differences, the Third Circuit was not willing to apply BFP to protect a tax foreclosure from preference liability, even if conducted in accordance with state law.

In re Veltre: A Properly Conducted Foreclosure Sale Isn’t a Preference?

At first blush, the result in Hackler may seem at odds with other Third Circuit case law. In In re Veltre,[6] the Third Circuit found that under Pennsylvania law, a properly conducted judicial foreclosure can never constitute a preference. Pennsylvania law presumes that the price received at a duly advertised public sale is the highest and best obtainable. Citing to BFP, the Third Circuit indicated that such state law would be determinative of value in the bankruptcy preference context. Thus, as a matter of law, the creditor could not have received more than it would have in a liquidation under chapter 7.

Veltre is distinguishable, however, for one of the same reasons that the Third Circuit found BFP to be distinguishable: Mortgage foreclosures and tax foreclosures are not the same. A New Jersey tax foreclosure isn’t a “duly advertised public sale” of the property, it is only a sale of the tax lien rights.[7]

Further, not all states hold that a public foreclosure sale obtains the highest best price for a property as a matter of law. See, e.g., Olentangy Local Sch. Bd. of Edn. v. Delaware Cty. Bd. of Revision, 141 Ohio St. 3d 243 (2014) (holding that pursuant to Ohio statute, sale price at auction is not presumptive evidence of value of property for tax purposes).


Whether a foreclosure sale was conducted in accordance with state law is just one piece of the puzzle in determining whether the sale might be avoidable in bankruptcy. Practitioners must be ready to scrutinize the type of foreclosure, whether a noncollusive public auction occurred and what presumptions state law creates as to the value obtained upon the sale. While cases like Hackler provide some clarity, the many factors at play when tax foreclosures meet bankruptcy will continue to cause confusion. And without further guidance from the courts, avoidance litigation over tax liens will be unavoidable. [Hackler is reported on in American Bankruptcy Institute e-news letter of 7/7/20, article by attorney Cannizzaro, Columbus Ohio.

Ice Miller LLP; Columbus, Ohio

Footnotes follow here:

[1] BFP v. Resolution Trust Corp., 511 U.S. 531 (1994).

[2] Hackler v. Arianna Holdings Company LLC (In re Hackler & Stelzle-Hackler), 938 F.3d 473 (3d Cir. 2019).

[3] The district court and Third Circuit were also faced with the question of whether the Tax Injunction Act, 28 U.S.C. § 1341, barred an action to avoid the tax foreclosure. Both courts answered that question in the negative.

[4] In re Hackler, 571 B.R. 662, 667 n. 2 (Bankr. D.N.J. 2017) (comparing In re Tracht Gut LLC, 836 F.3d 1146 (9th Cir. 2016) (California tax sales have same procedural safeguards as BFP mortgage foreclosure sale); In re Grandote Country Club Co., 252 F.3d 1146, 1152 (10th Cir. 2001) (decisive factor in determining “reasonably equivalent value” in context of tax sale transfer is state procedures for tax sales, in particular statutes requiring public sales under a competitive bidding procedure); In re T.F. Stone Co., 72 F.3d 466, 472 (5th Cir. 1995) (tax sale for $325 on property valued at more than $65,000 was conducted in conformity with Oklahoma law and was for “present fair equivalent value”); In re 2345 Plainfield Ave. Inc., 72 F. Supp. 2d 482 (D.N.J. 1999), aff’d, 213 F.3d 629 (3d Cir. 2000) (when New Jersey Tax Sale Law has been complied with, the price received at the tax sale is reasonably equivalent value); In re Crespo, 557 B.R. 353 (Bankr. E.D. Pa. 2016), aff’d, 569 B.R. 624 (E.D. Pa. 2017) (same under Pennsylvania law); In re Jacobson, 523 B.R. 13 (Bankr. D. Conn. 2014) (same under Connecticut law); In re Fisher, 355 B.R. 20 (Bankr. W.D. Mich. 2006) (no distinction between BFP analysis in foreclosure sale or forced tax sale); In re Washington, 232 B.R. 340 (Bankr. E.D. Va. 1999) (tax sale conducted under Virginia law conclusively presumed to constitute reasonably equivalent value); In re Samaniego, 224 B.R. 154 (Bankr. E.D. Wash. 1998) (same under Washington law); In re Turner, 225 B.R. 595 (Bankr. D.S.C. 1997) (adopting and applying BFP holding to tax sales); In re Russell-Polk, 200 B.R. 218 (Bankr. E.D. Mo. 1996) (tax sale conducted under Missouri law satisfies requirement that transfer be in exchange for reasonably equivalent value); In re Golden, 190 B.R. 52 (Bankr. W.D. Pa. 1995) (same under Pennsylvania law); In re Hollar, 184 B.R. 243 (Bankr. M.D.N.C. 1995) (same in the context of IRS tax sales); In re Lord, 179 B.R. 429 (Bankr. E.D. Pa. 1995) (same under Pennsylvania law); In re Comis, 181 B.R. 145 (Bankr. N.D.N.Y. 1994) (same under New York law); In re McGrath, 170 B.R. 78 (Bankr. D.N.J. 1994) (same under New Jersey law); with In re Smith, 811 F.3d 228 (7th Cir. 2016) (Illinois tax sale procedures do not involve competitive bidding, and bid amount bears no relationship to value of real estate; therefore, procedures cannot establish that sale is for reasonably equivalent value); In re GGI Properties LLC, 568 B.R. 231 (Bankr. D.N.J. 2017) (pre-petition tax foreclosure sale conducted in accordance with New Jersey law did not establish “reasonably equivalent value” for debtor's property so as to prevent avoidance of tax sale as constructively fraudulent transfer, nor did it establish property's value and what taxing authority, as secured creditor, would have received in hypothetical chapter 7 liquidation, so as to prevent debtor from avoiding sale as preference); In re Berley Associates Ltd., 492 B.R. 433 (Bankr. D.N.J. 2013) (distinguishing between procedures for mortgage and tax foreclosures in New Jersey; absence of competitive bidding a bar to finding reasonably equivalent value); In re Varquez, 502 B.R. 186 (Bankr. D.N.J. 2013) (applying Berley); City of Milwaukee v. Gillespie, 487 B.R. 916, 920 (E.D. Wis. 2013) (BFP should not apply to nonsale foreclosure proceedings without a public sale offering); In re Murphy, 331 B.R. 107, 120 (Bankr. S.D.N.Y. 2005) (New York procedure for tax forfeiture does not provide for public sale with competitive bidding).

[5] Brent Devere, “Mortgage Foreclosure Sales: Life after BFP v. Resolution Trust Corp.,” ABI Journal (March 2013) (discussing Williams v. City of Milwaukee (In re Williams), 473 B.R. 307 (Bankr. E.D. Wis. 2012), a property tax foreclosure case).

[6] In re Veltre, 732 F. App’x 171, 172 (3d Cir. 2018), cert. denied sub nom. Veltre v. Fifth Third Bank, 139 S. Ct. 1296 (2019).

[7] Though the Third Circuit in Hackler did not discuss its opinion in Veltre, the underlying bankruptcy court decision did discuss and distinguish its case from that before the bankruptcy court in Veltre. See In re Hackler, 571 B.R. 662, 668 (Bankr. D.N.J. 2017) (citing In re Veltre, No. CV 17-239, 2017 WL 3481077, at ∗1 (W.D. Pa. Aug. 14, 2017)).

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Rockstar Inc. v. Schultz

In Rockstar Inc. v. Schultz,    F.3d    (9th Cir. June 25, 2020 (not for publication), appeal from BAP to 9th Circuit Court of Appeals #19-60031) and Schultz v. Keyword Rockstar Inc. (In re Schultz) (also not for publication),     BR    (B.A.P. 9th Cir. June 4, 2019, appeal to BAP #18-1269), the 9thCircuit Court of Appeals and the 9th Circuit BAP Draw Opposite Conclusions from the Same Testimony. The BAP reversed the Bankruptcy Court trial decision, the 9th Circuit Court of Appeals reversed the BAP. For the 9th Circuit Court of Appeals, scant evidence is enough to uphold the trial court’s findings of fact.

The Ninth Circuit Bankruptcy Appellate Panel habitually writes lengthy opinions with copious analysis of the facts and the law, just in case the appeal goes to the Ninth Circuit and is not well argued or briefed in the circuit court.

Without refuting any of the BAP’s logic, the Ninth Circuit reversed the BAP and rigorously enforced the principle that a trial court’s findings of fact will not be set aside absent clear error.

A Close Case

The case might have gone either way in bankruptcy court. The debtor owned a company that he put in chapter 7. The owner put himself in chapter 7 at roughly the same time.

The controversy revolved around the company’s customer list and lead list. In the company’s schedules, the owner calculated the customer list as worth some $350, or 10 cents per customer, and the lead list as worth about $430, or two cents per lead.

In the owner’s separate case, several creditors objected to the debtor’s discharge under Section 727(a)(4)(A), alleging that he made a false oath in scheduling the lists as worth only $780. Among other evidence, the creditors played a video where the debtor was making a sales pitch to potential customers. In the video, he said his own lists were worth $1 million.

The debtor had psychiatric problems: He had been diagnosed with bipolar disorder and post-traumatic stress disorder. He was taking several medications that, in the words of the BAP, resulted in “bouts of strange behavior including paranoia, forgetfulness, and deep depression.”

At trial in bankruptcy court, the debtor testified that the lists would only have a higher value in his hands, because he had personal relationships with customers and potential customers.

The bankruptcy court decided that the debtor’s testimony about the value of the lists was not credible and that he had grossly undervalued the lists. The bankruptcy court therefore denied the debtor a discharge for making a false oath in the company’s schedules.

The BAP’s Reversal

The BAP reversed in a 30-page, nonprecedential, per curiam opinion.

With regard to the bankruptcy court’s valuation finding, the BAP recited the usual standard that an appellate court may not reverse without having “a definite and firm conviction that a mistake has been committed.”

The BAP noted that the trustee had abandoned the lists, but for reasons other than value.

Examining the trial testimony on both sides, the BAP said there was “no competent or plausible evidence that [the company’s] customer list was worth more in the hands of the chapter 7 trustee than the value scheduled by [the debtor] on [the company’s] schedules.” The panel said it was “left with a definite and firm conviction that a mistake has been committed.”

The BAP decided that the debtor was entitled to a discharge because the bankruptcy court’s conclusion that the debtor had knowingly and fraudulently undervalued the lists was “clearly erroneous.”

The Circuit Reverses the BAP

The Ninth Circuit reversed the BAP in a five-page, nonprecedentential, per curiam opinion on June 25. The panel was composed of Circuit Judges Ronnie B. Rawlinson and N.R. Smith and District Judge Edward R. Korman, sitting by designation from the Eastern District of New York.

The circuit court did not pause to find shortcomings in the BAP’s analysis of the trial record. Instead, the circuit panel said it reviews bankruptcy court decisions “‘without according any deference to the BAP,’” citing Salazar v. McDonald (In re Salazar), 430 F.3d 992, 994 (9th Cir. 2005).

Taking its own look at the bankruptcy court’s findings, the circuit panel said that the trial court’s valuation “finds support in the record and is not illogical or implausible.”

The circuit panel said it was required to give “great deference” to the bankruptcy court’s conclusion that the debtor’s testimony was not credible.

With regard to fraudulent intent, the circuit panel said it was “unable to say” that the bankruptcy court’s finding “was illogical, implausible, or without support in the record.”

What Does This Mean?

Both opinions were nonprecedential. Both focused on the trial record and the bankruptcy court’s conclusions. Both the BAP and the circuit court were trying to make rulings that seemed right to them. The BAP may have been influenced by the debtor’s psychiatric problems, while the circuit court was seemingly bent on discouraging appellate courts from reversing findings of fact.

There is a practice point to be made. Pegging estate assets with a low value is perilous. Importuning a trustee to abandon an asset based on a low scheduled value is a dangerous undertaking. Counsel should carefully scrutinize a debtor’s valuations with an eye toward fending off an objection to discharge.

The bankruptcy court noted that the debtor had not listed the value as “unknown.” Would the bankruptcy court have granted a discharge had the debtor said “unknown?” Or, would listing the value as “unknown” invite the court to believe the debtor was being deceptive?

Both decisions are “not for publication”, which means the 9th Circuit decision cannot be cited as being binding. And BAP decisions are never binding. But per 9th Circuit rules, both decisions can be cited as being “persuasive”.

The opinions are linked below:

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Analysis: Retail, Energy Set Grim Bankruptcy Milestones

More U.S. retail companies sought bankruptcy protection in the first half of 2020 than in any other comparable period. Energy filings piled up at the fastest pace since oil prices plunged in 2016, data compiled by Bloomberg show. There have been 75 filings among all companies with liabilities of at least $50 million in the last three months, matching the same period of 2009, the second-worst quarter ever. Signaling more trouble ahead, the universe of issuers with bonds trading at distressed levels expanded for the first time since April. Three retailers filed last week, including Grupo Famsa SAB de CV, CEC Entertainment Inc. and GNC Holdings Inc. That made 16 bankruptcies for the year-to-date, the most ever for the first six months of a year, according to Bloomberg data going back to 2003. The sector remains under pressure from lockdowns that are crushing demand. The energy sector is the second-biggest contributor to this year’s bankruptcy surge, with June’s seven oil and gas filings matching the April 2016 peak. Chesapeake Energy Corp.’s insolvency highlights risk lurking in the shale sector, which remains under pressure from weak global demand. [as reported in American Bankruptcy Institute e-newsletter of 7/1/20]

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Seila Law LLC V. Consumer Financial Protection Bureau

The US Supreme Court, on 6/29/20, issues decision that to be constitutional, the President of the United States must be able to fire the Director of the Consumer Financial Protection Bureau (“CFPB”), and that therefore, the CFPB’s present structure is unconstitutional, because under the CFPBs present structure, the President cannot fire the CFPB director. The US Supreme Court rejected the argument that the dodd-Frank Act prohibited the President from firing the CFPB’s director. Overall, this decision is a win for the CFPB, because the decision upholds the rest of the CFPB.

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Lariat Companies, Inc. v. Wigley (In re Wigley), 951 F.3d 967 (8th Cir. 3/9/20)

The Eighth Circuit Court of Appeals reversed the Eighth Circuit Bankruptcy Appellate Panel. The 8th Circuit held that husband’s discharge of a Minnesota state court Judgment for fraudulent transfer, against husband and wife, did not extinguish the wife’s joint and several liability for a fraudulent transfer judgment against the husband and wife. Though husband had discharged husband’s liability on the state court judgment, creditor Lariat still held a claim against wife (Mrs. Wigley) based on Bankruptcy Code 11 USC §524(e), which provides that “discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt.”. The Eighth Circuit held that, while Mr. Wigley’s discharge extinguished Mr. Wrigley’s personal liability under the fraudulent transfer judgment, Mrs. Wigley remained liable for that debt. Note that Mr. and Mrs. Wrigley were Minnesota residents, the fraudulent transfer state court Judgment was a Minnesota state court Judgment, and the Wigleys’ “his and her” chapter 11 cases were filed in Bankruptcy Court, District of Minnesota. Minnesota is not a community property state. If Mr. and Mrs. Wrigley had been California residents, and the Judgment had been a California state court Judgment, the outcome may have been different because of the community discharge in 11 USC §524(a)(3).

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US Home-Mortgage Delinquencies Surge To The Highest Level In 9 Years

The number of US home mortgage delinquencies has surged to the highest level in nine years as the coronavirus pandemic continues to hit family finances. Total borrowers more than 30 days late surged to 4.3 million in May after a record jump to 3.4 million in April, according to a Monday report from Black Knight. In addition, more than 8% of all US mortgages were either past due or in foreclosure, the report showed. The report also included homeowners that missed payments even though they had forbearance agreements in place, which allow six months of deferral without penalty. Many borrowers who qualified for forbearance plans initially made payments, although the percentage has declined since the start of the pandemic — 15% of homeowners in forbearance plans made payments as of June 15, down from 28% in May and 46% in April. Even though the jump in delinquencies was less than the record spike in April, there’s still much uncertainty going forward due to the coronavirus pandemic. While all US states are moving forward with reopening efforts, a spike in new COVID-19 cases in some areas has led to fears that the pandemic could further decimate the economy. The government stimulus that’s kept some families afloat amid the pandemic is also set to expire soon — at the end of July, the additional $600 per week that unemployed Americans have been collecting will end. More than 20 million Americans filed continuing claims for unemployment insurance in the week ending June 6, Labor Department figures show. [as reported in 6/23/20 Credit & Collection e-newsletter]

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Blixseth v. Credit Suisse,    F3d   16-35304 (9th Cir. June 11, 2020): Ninth Circuit 6/11/20 Decision in Blixseth v. Credit Suisse, Now Permits Nonconsensual, Third-Party Releases in Chapter 11 Plans, which is a BIG change in Ninth Circuit law

Aligning with the Third Circuit, the Ninth Circuit says that lower courts were reading its prior decisions too broadly. The Ninth Circuit had been generally understood as categorically banning nonconsensual, third-party releases in chapter 11 plans. Narrowing, if not repudiating, three earlier opinions in a published decision on June 11, the Ninth Circuit explicitly aligned itself with the Third Circuit by permitting nonconsensual, third-party releases in chapter 11 plans that exculpate participants in the reorganization from claims based on actions taken during the case.

In her opinion for the appeals court, Ninth Circuit Judge Marsha S. Berzon quoted the Third Circuit for observing that “similar limited exculpatory clauses focused on acts committed as part of the bankruptcy proceedings are ‘apparently a commonplace provision in Chapter 11 plans,’” citing PWS Holding Corp., 228 F.3d 224, 245 (3d Cir. 2000).

The Circuit Split

The Fifth, Ninth and Tenth Circuits were commonly understood as prohibiting nonconsensual, third-party releases in chapter 11 plans, while the Second, Third, Fourth, Sixth and Eleventh Circuits permit exculpations in “rare” or “unusual” cases.

Bank of N.Y. Trust Co. v. Official Unsecured Creditors’ Comm. (In re Pacific Lumber Co.), 584 F.3d 229, 251 (5th Cir. 2009), represents the Fifth Circuit’s prohibition of third-party releases in chapter 11 plans. On the other side of the fence, the Second Circuit has said that releases of the type are proper, but only when “a particular release is essential and integral to the reorganization itself.” In re Metromedia Fiber Network, Inc., 416 F.3d 136, 141-43 (2d Cir. 2005).

There was good reason for believing the ban on third-party releases was categorical in the Ninth Circuit. In In re Lowenschuss, 67 F.3d 1394, 1401-1402 (9th Cir. 1995), the Ninth Circuit held, “without exception, that Section 524(e) precludes bankruptcy courts from discharging the liabilities of nondebtors,” unless the case falls within Section 524(g) pertaining to asbestos claims.

For example, a district judge in Washington State criticized several lower court opinions in the Ninth Circuit that, in his view, violated the hard-and-fast rule laid down by Lowenschuss. The judge refused to recognize any loopholes in the Ninth Circuit’s categorical ban on nondebtor, third-party releases in In re Fraser’s Boiler Service Inc., 18-05637, 2019 BL 80048, 2019 U.S. Dist. Lexis 37840, 2019 WL 1099713 (W.D. Wash. March 8, 2019). To read ABI’s report on Fraser’s, click here.

Tim Blixseth Changes the Law (but Still Loses)

And then came Timothy Blixseth and the seemingly unending litigation in the wake of the chapter 11 reorganization and sale of his Yellowstone Mountain Club LLC. Ultimately, the club was sold to a third party over Blixseth’s objection as part of a chapter 11 plan.

The plan contained a release in favor of specified nondebtor third parties, including the club’s primary bank lender. The provision read as follows:

None of [the exculpated parties, including the bank], shall have or incur any liability to any Person for any act or omission in connection with, relating to or arising out of the Chapter 11 Cases, the formulation, negotiation, implementation, confirmation or consummation of this Plan, the Disclosure Statement, or any contract, instrument, release or other agreement or document entered into during the Chapter 11 Cases or otherwise created in connection with this Plan . . . .

The release did not forgive “willful misconduct or gross negligence.”

Challenging the releases, Blixseth was originally appealing confirmation of the plan as to third parties, as well as to the bank. Because the other third parties settled, Blixseth went forward with his appeal only as to the bank.

Having previously ruled that the appeal was not equitably moot because the court might be able to fashion some form of relief, Judge Berzon tackled the propriety of third-party releases.

The Circuit Narrows Its Precedents

Quoting the bankruptcy court, Judge Berzon said that the releases were “‘narrow both in scope and time’” and were limited to acts and omissions “‘in connection with, relating to or arising out of the Chapter 11 cases.’” She also cited the bankruptcy court’s finding that the releases only covered those who were “‘closely involved’” in formulating the plan.

Judge Berzon noted the bankruptcy court’s finding that the exculpation was “not ‘a broad sweeping provision that seeks to discharge or release nondebtors from any and all claims that belong to others.’”

Recognizing the “long-running circuit split,” Judge Berzon cited the governing statute, Section 524(e), which provides that “discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt.” She held that the section “does not bar a narrow exculpation clause of the kind here at issue — that is, one focused on actions of various participants in the Plan approval process and relating only to that process.”

Focusing on the language of Section 524(e) rather than the court’s previous perception of a larger policy, Judge Berzon quoted the Collier treatise for saying that “‘discharge in no way affects the liability of any other entity . . . for the discharged debt.’” [Emphasis in original.]

After noting the narrow prohibition in Section 524(e), Judge Berzon dealt with Blixseth’s reliance on three Ninth Circuit opinions with seemingly broad rejections of third-party releases. She said those cases “all involved sweeping nondebtor releases from creditors’ claims on the debts discharged in the bankruptcy, not releases of participants in the plan development and approval process for actions taken during those processes.”

Having distinguished prior Ninth Circuit authority, Judge Berzon said that Section 105(a) gave the bankruptcy court “authority to approve an exculpation clause intended to trim subsequent litigation over acts taken during the bankruptcy proceedings and so render the Plan viable.”

Recognizing that the Fifth Circuit in Pacific Lumber “reached a conclusion opposite ours,” Judge Berzon ruled that Section 524(e) did not bar the exculpation, because it “covers only liabilities arising from the bankruptcy proceedings and not the discharged debt.” [this analysis is as reported in ABI’s e-newsletter of 6/17/20]

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Small Businesses Tackle New PPP Puzzle: Forgiveness

Small businesses that received government-backed loans to ease the pain of the coronavirus pandemic are beginning to turn to a process some say is as complex as getting the money: figuring out whether they have to pay it back, the Wall Street Journal reported. Some small-business owners have spent dozens of hours wading through the 11-page forgiveness application for Paycheck Protection Program loans. Others are trying to determine how or whether legislation President Trump signed earlier this month changes the math. Some lenders say that the government is putting them in a difficult spot by making them responsible for determining forgiveness, and they fear being saddled with unprofitable loans. The Treasury Department and the Small Business Administration have issued 18 “interim final rules” and 48 pieces of guidance in the form of “frequently asked questions” for the program. The government has approved $512 billion in loans to nearly 4.6 million businesses since the program’s April rollout. The new law lengthens from eight weeks to 24 the time that borrowers have to use PPP funds and qualify for forgiveness. It also lets them spend 40 percent of the loan on rent and certain other expenses, up from 25 percent. The changes came in response to requests for more flexibility from small businesses that remain closed, were slow to reopen or spend more on rent and other overhead. Read more.(Subscription required.)

In related news, Senate Democrats are calling for the Small Business Administration and Treasury Department to simplify the application process for small businesses seeking loan forgiveness under a federal coronavirus aid program, the Wall Street Journal reported. In a letter dated on Friday to SBA Administrator Jovita Carranza and Treasury Secretary Steven Mnuchin, 47 Democratic and independent senators urge the agencies to take several steps to streamline the forgiveness application for the Paycheck Protection Program. “Since the release of the forgiveness form and instructions a few weeks ago, we have heard significant concerns from small businesses and lenders alike about the complexity of the process, especially for the smallest businesses,” the letter said. The Senators’ recommendations include a simpler application for low-dollar loans that would require minimal documentation and resources, including “how to” videos and a help line, for borrowers who need assistance completing the forgiveness form.

Additionally, federal authorities administering business payroll loans as part of U.S. coronavirus relief efforts on Friday eased rules prohibiting lending to business owners with criminal records, allowing some with no convictions in the past year to access funds, Reuters reported. The U.S. Treasury Department and the Small Business Administration said the look-back period for non-financial felony convictions has been reduced to one year from five years. The prohibition threshold for business owners with felonies involving fraud, bribery, embezzlement and similar offenses remains five years, they said. The change goes further than what U.S. Treasury Secretary Steven Mnuchin had suggested on Wednesday. He said the period for considering felony records would be reduced to three years. The Paycheck Protection Program, part of a historic fiscal package worth nearly $3 trillion passed by Congress and signed by President Donald Trump to deal with the economic fallout from the coronavirus pandemic, offers businesses loans that can be partially forgiven if used for employee wages. The Treasury Department and the SBA said the decision was made in the interest of criminal justice reform. [as reported in 6/15/20 American Bankruptcy Institute e-newsletter]

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Millions Of Americans Skipping Payments As Tidal Wave Of Defaults, Evictions Looms

reports 6/4/20 Credit & Collection e-newsletter

Americans are skipping payments on mortgages, auto loans and other bills. Normally, that could mean massive foreclosures, evictions, cars repossessions and people’s credit getting destroyed. But much of that’s been put on pause. Help from Congress and leniency from lenders have kept impending financial disaster at bay for millions of people. But that may not last for long. The problem is, these efforts aim to create a financial bridge to the future for people who’ve lost their income in the pandemic — but the bridge is only half built. For one thing, the help still isn’t reaching many people who need it. “My wife has filed, certified every week for her unemployment for 10 weeks now, and they have done nothing,” says Jonathan Baird of Bruceton, Tenn. “We’ve struggled.” Baird is a disabled veteran who gets a small disability pension. But after the pandemic hit, his wife lost her job as a home health aide. That was most of their income. And like many other contract workers, she’s run into long delays trying to collect unemployment. Meanwhile, Baird says his mortgage company told him he didn’t qualify for a federal program to postpone payments. Many homeowners have been given wrong or misleading information from lenders about that. And it appears that’s what happened in Baird’s case. Baird also called Ford to try to get a break on the payments for his pickup truck. “When I contacted them, they told me that there was nothing they could do,” he says. “Just basically make your payment or suffer the late fees.”

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Bird v. Hart,     BR    (US District Ct, District of Utah May 19, 2020) case number in District Court 19-54

Bird v. Hart,     BR    (US District Ct, District of Utah May 19, 2020) case number in District Court 19-54: US District Court, hearing bankruptcy appeal, affirms bankruptcy court decision that asset is automatically abandoned back to the chapter 7 bankruptcy debtor, from the bankruptcy debtor’s chapter 7 “bankruptcy estate”, by the bankruptcy case being closed, IF debtor listed that asset anywhere in the debtor’s bankruptcy documents.

This is a more “debtor friendly” decision than the more narrow rule, which is that an asset is automatically abandoned back to the chapter 7 bankruptcy debtor, from the bankruptcy debtor’s chapter 7 “bankruptcy estate”, by the bankruptcy case being closed, ONLY IF debtor listed that asset in the debtor’s asset schedule (Schedule A/B) and that referring to the asset somewhere else, such as in debtor’s Statement of Financial Affairs, is NOT sufficient.

Following is how ABI’s [American Bankruptcy Institute’s Rochelle’s] e-newsletter of 6/1/20 reported on this case: Sufficiently listing an asset anywhere in the schedules and SOFA will result in abandonment if the asset was not administered by the trustee, Utah district judge holds.

Adopting the broader, “plain language” interpretation of Section 554(c), District Judge Jill N. Parrish of Salt Lake City affirmed a decision by Bankruptcy Judge Joel T. Marker and held that an asset is abandoned if it is not administered by the trustee and was sufficiently disclosed somewhere in the debtor’s schedules.

The husband and wife debtors filed a chapter 7 petition in 2011 and received their discharges. In their schedule of assets under Section 521(a)(1)(B)(i), they listed a 49% ownership of a limited liability company that we shall refer to as the operating company.

The trustee closed the case without administering the assets of the operating company. Under Section 554(c), the operating company was theoretically abandoned to the debtors when the trustee closed the case.

Receiving an anonymous tip four years later about the possible failure to disclose assets, the trustee reopened the case. In the ensuing investigation, the trustee learned that the debtors did not own the operating company directly. Rather, the couple owned a limited liability company we shall refer to as the holding company.

The holding company, not the debtors, owned the 49% interest in the operating company. Significantly, the debtors did not schedule the holding company among their assets under Section 521(a)(1)(B)(i). However, the debtors had mentioned the holding company several times elsewhere in their schedules, as we shall discuss later.

The trustee filed a motion where, in substance, he sought a declaration that the holding company and its ownership of the operating company were not automatically abandoned because the debtors had not listed the holding company in their schedule of assets under Section 521(a)(1)(B)(i).

Bankruptcy Judge Marker denied the trustee’s motion, concluding that the holding company had been sufficiently disclosed to result in abandonment automatically.

The trustee appealed, but District Judge Parrish affirmed in an opinion on May 19, saying that Judge Marker’s “interpretation of the statute was correct.”

The result turned on a split among the lower courts on Section 554(c). The majority hold that an asset is automatically abandoned only if it is listed in the schedule of assets under Section 521(a)(1)(B)(i). Those courts believe that an asset is not automatically abandoned if it is listed elsewhere in the schedules and statement of affairs.

Judge Parrish adopted the broader, “plain language” interpretation of Section 554(c) embraced by the minority. However, she said that the trend in recent years among bankruptcy courts and appellate panels “has been toward adopting this plain language reading of the statute.”

Section 554(c) says that an asset is “abandoned to the debtor” if it was not administered before the closing of the case and if it was “scheduled under section 521(a)(1) of” the Bankruptcy Code.

The majority of courts add a gloss to the section by requiring that the asset must have been listed on the schedule of assets under 521(a)(1)(B)(i). Disclosing the asset elsewhere in the schedules will not result in automatic abandonment, they hold.

Like Bankruptcy Judge Marker, District Judge Parrish took the plain-meaning approach and interpreted the section more broadly to allow abandonment if the asset was disclosed anywhere under Section 521(a)(1). Had Congress intended the more narrow reading, she said, Congress would have drafted the statute to “specify that the scheduling must occur under 521(a)(1)(B)(i).”

In terms of policy, the broader approach is the better reading. If the asset were required to appear only on the schedule of assets, Judge Parrish said that the wrong placement or a “typographical error” would deprive the debtor of abandonment.

Having settled on statutory interpretation, Judge Parrish turned to the question of whether the holding company was sufficiently disclosed so that the trustee could “fulfill his duty to investigate the assets of the estate.” On that issue, she said the debtors had disclosed the holding company “repeatedly, across multiple documents filed under Section 521(a)(1).”

Judge Parrish said the debtors had disclosed the holding company (1) in question 18 on the statement of financial affairs as a business owned within five years; (2) by giving their home address as the address for the holding company; (3) by filing a six-month profit-and-loss statement for the holding company under Section 521(a)(1)(B)(iv); (4) by disclosing their 49% ownership interest in the operating company when the holding company was the actual owner; and (5) by listing the holding company as a source of income on the means test.

Had the trustee “made any effort to investigate” the operating company, Judge Parrish said, he would have discovered the debtors’ ownership of the holding company. In sum, she said the debtors’ “disclosure of [the operating company] on their personal property schedule was the functional disclosure of their interest in” the holding company.

Judge Parrish upheld the ruling by Judge Marker because the debtors’ “various Section 521(a)(1) filings provided [the trustee] with enough information to identify and investigate” the holding company.

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Big Bankruptcies Sweep the U.S. in Fastest Pace Since May 2009

In the first few weeks of the pandemic, it was just a trickle: Companies like Alaskan airline Ravn Air pushed into bankruptcy as travel came to a halt and markets collapsed. But the financial distress wrought by the shutdowns only deepened, producing what is now a wave of insolvencies washing through America’s corporations. In May alone, some 27 companies reporting at least $50 million in liabilities sought court protection from creditors — the highest number since the Great Recession. They range from well-known U.S. mainstays such as J.C. Penney Co. and J. Crew Group Inc. to air carriers Latam Airlines Group SA and Avianca Holdings, their business decimated as travelers stayed put. In May 2009, 29 major companies filed for bankruptcy, according to data compiled by Bloomberg. And year-to-date, there have been 98 bankruptcies filed by companies with at least $50 million in liabilities — also the highest since 2009, when 142 companies filed in the first four months. Few people believe bankruptcies have by any means hit a peak. “I think we’re going to continue to see filings of at least the level we’re seeing for a while,” said Melanie Cyganowski, a former bankruptcy judge now with the Otterbourg law firm. The wave of insolvencies is seemingly at odds with U.S. credit markets, which are busier than ever: Investment-grade corporations were able to cushion their balance sheets by borrowing nearly $1 trillion in the first five months of the year, the fastest pace on record. No such luck for weaker companies. Their revenues have evaporated, straining their ability to keep up with debt payments and all but forcing them to seek refuge in bankruptcy court. [as reported in American Bankruptcy Institute 5/28/20 e-newsletter]

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ISL Loan Trust v. Millennium Lab Holdings II, 19-1152 (Sup. Ct.)

ISL Loan Trust v. Millennium Lab Holdings II, 19-1152 (Sup. Ct.): US Supreme Court Denied Petition for Certiorari, in an appeal in a Chapter 11 bankruptcy case, which asked US Supreme Court to decide issues of Equitable Mootness and Third-Party Releases. Denied on 5/26/20.

The US Supreme Court said it denied the petition for certioraria because the case from the Third Circuit was not a good vehicle for granting certiorari on either issue, even though there is a circuit split on nonconsensual, third-party releases.

The US Supreme Court declined to the case, even though the decision on appeal from the US Circuit Court for the Third Circuit raised two fundamental questions regarding chapter 11 reorganizations: (1) May a chapter 11 plan include third-party, nonconsensual releases, and (2) may appellate courts dismiss appeals from confirmation orders under the doctrine of equitable mootness?

Although there is a circuit split on third-party releases, the courts of appeals to consider the issue have all allowed dismissals of appeals from consummated chapter 11 plans under the doctrine of equitable mootness.

The petition for certiorari was filed by lenders who dissented from the chapter 11 plan of Millennium Lab Holdings II LLC. The Third Circuit had upheld the constitutional power of a bankruptcy court to grant nonconsensual, third-party releases, given the “exceptional facts” of the case. Opt-Out Lenders v. Millennium Lab Holdings II LLC (In re Millennium Lab Holdings II LLC), 945 F.3d 126 (3d Cir. Dec. 19, 2019).

The facts were indeed exceptional. The plan conferred nonconsensual releases on shareholder defendants in return for their $325 million contribution. Narrowing the availability of third-party releases in his December 19 opinion, Circuit Judge Kent A. Jordan said, “we are not broadly sanctioning the permissibility of nonconsensual third-party releases in bankruptcy reorganization plans.”

To read ABI’s report on the Third Circuit decision, click here.

Because the facts were “exceptional” and the holding was ostensibly narrow regarding releases, the case was not an ideal vehicle for certiorari. And because there is no circuit split on equitable mootness, the case was not a good candidate for Supreme Court review on that score, either.

The dissenting lenders filed their certiorari petition in March. In April, the debtor and other respondents waived their rights to file a response to the certiorari petition. The Court scheduled the petition for review by the justices at a conference on May 21. The Court denied the petition along with dozens of others on May 26.

Observations of ABI (American Bankruptcy Institute) re US Supreme Court’s Denial of Petition for Certiorari

Because the Court did not ask the debtor to file a response to the petition, the justices evidently had little interest in reviewing the Third Circuit’s decision on either issue.

In the last decade, the Supreme Court has been more inclined to grant review in cases involving consumer bankruptcy. Arguably, the high court has been reluctant to review chapter 11 issues for several reasons.

First and perhaps foremost, corporate reorganization is a system that “works” and doesn’t cost the federal government a dime. In fact, filing fees and Pacer charges cover all of the expenses of the bankruptcy courts and much of the cost in operating the entire federal judicial system.

Chapter 11 the U.S. is seen as being the most efficient corporate reorganization scheme anywhere in the world. The justices may fear that tinkering with the system might make it less successful.

The justices have little experience with bankruptcy because they take so few cases involving title 11. For example, Justice Stephen Breyer, who is perhaps the justice most fluent with bankruptcy, will inevitable comment in oral argument something like, “I don’t know much about bankruptcy, but . . . .”

Most of the major reorganizations come from courts in a few jurisdictions where the bankruptcy judges are highly sophisticated when it comes to chapter 11. The district and circuit courts in those regions therefore have far greater experience with title 11. If a case does not raise constitutional questions or issues of similar import, the justices may be content to leave the work to the lower courts.

In some respects, the split on third-party releases should be a prime target for Supreme Court review. The circuit split is deep and persistent, with appellate decisions restricting releases more often observed in theory than in practice. The better vehicle for Supreme Court review would be a circuit decision denying confirmation and categorially barring third-party releases.

But the Supreme Court itself has raised procedural barriers to appeals from denials of confirmation. In light of Bullard v. Blue Hills Bank, 575 U.S. 496 (2015), and Ritzen Group Inc. v. Jackson Masonry LLC, 140 S. Ct. 582, 205 L. Ed. 2d 419 (Sup. Ct. Jan. 14, 2020), the district and circuit courts would both be required to grant interlocutory appeals to reach the release question.

In other words, when it comes to a high court ruling on third-party releases and equitable mootness, don’t hold your breath. [as reported by ABI e-newsletter, Rochelle’s Daily Wire on 5/27/20]

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US Senate Bill Would Ban Garnishment Of Relief Funds By Debt Collectors

A bipartisan group of senators have introduced legislation to prevent debt collectors from garnishing coronavirus relief payments from consumers. Sens. Sherrod Brown, D-Ohio, Ron Wyden, D-Ore., Chuck Grassley, R-Iowa, and Tim Scott, R-S.C., have sponsored legislation that would bar private debt collectors from garnishing the “recovery rebates” that were provided to consumers through the Coronavirus Aid, Relief, and Economic Security Act. “Congress came together to pass the CARES Act, which provided money to help working families pay for food, medicine, and other basic necessities — it’s not for debt collectors,” Brown, the top Demcorat on the Senate Banking Committee, said in a press release. “Our bill will protect these funds and ensure working families receive the help they need.” Grassley added that Congress intended for the rebates to help Americans weather the pandemic. “We established these recovery rebates to help individuals and families through the tough times of this pandemic,” said Sen. Chuck Grassley, R-Iowa, who chairs the Senate Finance Committee. “We established these recovery rebates to help individuals and families through the tough times of this pandemic,” said Grassley, who chairs the Senate Finance Committee. “We did not establish them just so debt collectors could swoop in and undermine that purpose.” [as reported in 5/26/20 Credit & Collection e-newsletter]

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In re Thu Thi Dao,    BR    (Bankr. E.D. Cal. May 11, 2020, docket number 20-20742)

In re Thu Thi Dao,    BR    (Bankr. E.D. Cal. May 11, 2020, docket number 20-20742): Bankruptcy Judge Christopher Klein Takes Sides on a Circuit Spilt Coming to the US Supreme Court, regarding whether automatic stay that expires per 11 USC 362( c )(3)(A)—stay expires 30 days into second case ongoing for debtor within a 1 year period--expires only as to debtor’s property, or also expires as to property of the debtor’s “bankruptcy estate” American Bankruptcy Institute says Judge Klein’s opinion reads like an amicus brief urging the Supreme Court to grant ‘cert’ and resolve a circuit split by taking sides with the majority on Section 362(c)(3)(A).

This summer, the US Supreme Court will consider granting certiorari to resolve a circuit split under Section 362(c)(3)(A).

The question is this: If a petition by an individual under chapters 7, 11 or 13 has been dismissed within one year, does the stay terminate automatically 30 days after a new filing only as to property of the debtor or as to property of both the debtor and the estate? See Rose v. Select Portfolio Servicing Inc., 19-1035 (Sup. Ct.).

In the case before the US Supreme Court, the Fifth Circuit took sides with the majority by holding that the stay only terminates automatically as to property of the debtor, but the stay remains in place as to property of the estate. Rose v. Select Portfolio Servicing Inc., 945 F.3d 226 (5th Cir. Dec. 10, 2019) (cert. pending). To read ABI’s report on Rose, click here.

Bankruptcy Judge Christopher M. Klein of Sacramento, Calif., wrote an opinion on May 11 agreeing with the result in the Fifth Circuit. His opinion reads like an amicus brief urging the Court to grant certiorari and uphold the Fifth Circuit.

Judge Klein’s decision is the best analysis so far of the mistakes made by the minority, who see a total termination of the automatic stay 30 days after a repeat filing. He expertly explains why the result in the Fifth Circuit properly follows the plain meaning of Section 362(c)(3)(A) and comports with the principles and procedures underlying bankruptcy administration.

Although he sits in the Ninth Circuit, Judge Klein disagreed with a decision by the Ninth Circuit Bankruptcy Appellate Panel that held that the automatic stay terminates in 30 days as to both estate property and property of the debtor. See Reswick v. Reswick (In re Reswick), 446 B.R. 362 (B.A.P. 9th Cir. 2011).

The Facts in Judge Klein’s Case

The facts confronting Judge Klein underscore the pernicious results that would flow from ending the stay automatically as to both the debtor’s and the estate’s property. The pro se debtor’s first chapter 7 petition had been dismissed on January 31, 2020, for failure to file schedules. He filed again under chapter 7 on February 10, this time with schedules.

Having reason to believe that the debtor was concealing property, the chapter 7 trustee was worried that the automatic stay would terminate entirely within 30 days, allowing a few creditors to glom assets that rightly belong to all creditors.

So, the trustee filed a motion asking Judge Klein to rule, among other things, that the stay would not terminate as to estate property, whether it was disclosed or not. Judge Klein wrote a 29-page opinion explaining why Section 362(c)(3)(A) only terminates the stay as to the debtor’s property, if there is any.

Clumsy Drafting of Section 362(c)(3)

Section 362(c)(3)(A) is one of the most curiously drafted provisions in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, or BAPCPA. It uses the phrase “with respect to” three times.

If an individual’s case under chapters 7, 11 or 13 has been dismissed within one year, the subsection provides that the automatic stay in Section 362(a) terminates 30 days after the most recent filing “with respect to any action taken with respect to a debt or property securing such debt . . . with respect to the debtor . . . .” [Emphasis added.]

The Circuit Split and the ‘Cert’ Petition

In December 2018, the First Circuit adopted the position taken by the minority of lower courts by ruling that Section 362(c)(3)(A) terminates the automatic stay entirely, including property of the estate. Smith v. State of Maine Bureau of Revenue Services (In re Smith), 910 F.3d 576 (1st Cir. Dec. 12, 2018).

The circuit split arose when the Fifth Circuit took the contrary view in Rose by holding that the stay only ends automatically as to the debtor’s property. Represented by an attorney who clerked for Justice Anthony M. Kennedy, the loser in the Fifth Circuit filed a certiorari petition in February, highlighting the circuit split and the recurring importance of the issue.

The response to the certiorari petition is due June 4, meaning that the Supreme Court might not act on the petition before the end of the term. If there is no answer this term, the Court might pass on the petition at the so-called long conference in late September and issue a grant or denial of certiorari in early October. Because the government is the largest creditor in many bankruptcies, the Court might ask for the views of the U.S. Solicitor General, thus delaying action on the certiorari petition until early 2021.

Judge Klein’s Opinion

For anyone litigating an issue under Section 362(c)(3)(A), Judge Klein’s opinion is “must” reading. He says that the majority, more than 50 cases, follow the Fifth Circuit, while the First Circuit is in the minority, allied with over 20 lower court decisions.

Judge Klein defined the question as whether the reference in Section 362(c)(3)(A) to termination “with respect to the debtor” should be “construed implicitly to extend to the ‘estate’ . . . even though neither ‘estate’ nor ‘property of the estate’ appears in Section 362(c)(3).” In succinct, technical terms, Judge Klein held that “Section 362(c)(3) does not modify or affect Section 362(c)(1).”

According to Judge Klein, the majority sees no ambiguity in Section 362(c)(3) and follows the plain meaning of the statute. He describes the minority as finding the statute ambiguous, allowing them to infer an extension beyond the language of the statute “consistent with the Congressional purpose of thwarting bad-faith manipulations of bankruptcy.”

Judge Klein said that the minority’s “tunnel vision manifests itself by way of disregard of how Section 362(c)(3) applies in chapter 7.”

Judge Klein devotes the bulk of his opinion to explaining how the minority’s rule would have the practical effect of precluding a chapter 7 trustee from protecting estate property from the clutches of one or a few creditors. For instance, the stay would terminate before the Section 341 meeting and possibly before the debtor even files schedules. In other words, the stay would terminate before the trustee could find out if there was estate property to protect.

Likewise, the stay would terminate as to estate property that the debtor did not disclose. Absent Section 362(c)(3), the stay would remain as to undisclosed property, even after discharge.

Furthermore, the trustee would face an insurmountable burden in obtaining an extension of the stay because Section 362(c)(3)(B) requires a showing that the new case was “filed in good faith as to the creditors to be stayed.”

Among other things, Judge Klein points out how there is no good faith requirement imposed on a chapter 7 filing. And even if the debtor did not file in good faith, the debtor’s bad intentions should not bar a trustee from recovering property for the benefit of all creditors.

Judge Klein dissects the history surrounding the adoption of Section 362(c)(3) as part of BAPCPA. He points out that Section 362(h), also adopted in BAPCPA, refers to property of the estate and property of the debtor, thus showing that the omission of property of the estate in Section 362(c)(3) was no mistake.

In other words, the minority’s interpretation makes some sense when a debtor files repeatedly in chapter 13 but has pernicious results if the later filing is in chapter 7. Judge Klein argues that the result should be the same regardless of whether the filings were in chapter 13 or chapter 7.

Judge Klein said that the minority opinions “neither mention nor attempt to explain the asymmetry between Section 362(h) and Section 362(c)(3).” He went on to say that “none of the minority cases involve a chapter 7 trustee concerned about preserving stay protection for property of the estate.”

Judge Klein said it would have been “extraordinary for Congress to have eviscerated this fundamental protection for property of the estate without so much as an explanatory comment” in the legislative history. Later, he added that “Congress would not have intended such dramatic consequences without unambiguous explanation.”

Judge Klein’s opinion is chock full of other quotable quotes. For instance, he says that the minority’s “benign check on shifty chapter 13 debtors turns malignant” when the stay evaporates as to estate property that a chapter 7 trustee could otherwise liquidate for the benefit of all creditors. He speaks of the “absurdity of extending Section 362(c)(3) to property of the estate” and the minority’s “zero analysis of how the chapter 7 trustee fits in.”

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Pillars v. General Motors LLC (In re Motors Liquidation Co.), 18-1954 (US Court of Appeals for the Second Circuit, May 6, 2020)

A mistake by a lawyer isn’t “deliberate” and therefore can’t be a judicial admission.

Joining three other circuits, the Second Circuit held that a lawyer’s mistake in a pleading doesn’t amount to a judicial admission making the client liable when the client would have been free from liability had the lawyer quoted the correct document.

The opinion is a hornbook explication of what is or is not a judicial admission. Among other things, a judicial admission must be “deliberate.” Evidently, a lawyer’s mistake is not “deliberate,” thus extricating the lawyer from the specter of malpractice.

The appeal arose in the wake of the reorganization of General Motors Corp. The plaintiff’s deceased wife had an accident several years before GM’s bankruptcy in 2009. The accident was the result of a faulty ignition switch. The wife was severely injured, but she did not die from her injuries until three years after the GM bankruptcy.

In state court, the plaintiff brought a wrongful death suit against “New GM,” the successor entity that had purchased “Old GM’s” assets in a bankruptcy sale. “New GM” removed the suit to federal court and filed an answer to the complaint.

Here was the mistake by New GM’s counsel: In the body of both the notice of removal and answer, “New GM” quoted from a prior version of the asset purchase agreement that was not approved by the bankruptcy court. The quoted language would have made New GM liable, not the creditors’ trust created to deal with accidents occurring before the sale.

As exhibits to both the notice of removal and answer, New GM attached copies of the asset purchase agreement that the bankruptcy court actually approved. In the court-approved version, New GM was to have no liability for accidents that occurred before the closing date of the sale.

The plaintiff resorted to GM’s bankruptcy court for a ruling on whether the suit was barred. The bankruptcy judge ruled that the reference to the prior draft of the sale agreement was a judicial admission binding New GM. Although saying that the quotation from the prior version was “plainly” a mistake, the bankruptcy judge ruled that the suit was not barred by the sale order.

Had New GM quoted from the final version of the sale agreement, the bankruptcy judge observed that he would have followed a prior decision of his where he ended a lawsuit against New GM.

The district court reversed, concluding that the documents were not judicial admission.

In a per curiam opinion on May 6, the Second Circuit upheld the district court’s reversal.

First citing Second Circuit precedent, the appeals court said that a judicial admission must be a statement “of fact — a legal conclusion does not suffice.”

Analyzing the facts, the appeals court observed that the misquotation in both the answer and notice of removal “bore sufficient indicia of formality and conclusiveness to constitute such an admission.” On the other hand, the circuit went on to say that its conclusion would be “informed” by two facts: (1) New GM had attached the correct agreement to the pleadings; and (2) the bankruptcy court recognized that the quoted language was “plainly” a mistake.

The appeals court then proceeded to join three other circuits by holding that a judicial admission must also be “deliberate, clear, and unambiguous.” For “a statement to constitute a judicial admission it must not only be a formal statement of fact but must also be intentional, clear, and unambiguous,” the circuit court said.

The appeals court declined to decide whether the misquotation was a statement of fact rather than a legal conclusion, which cannot be the basis for a judicial admission. The court nonetheless said it had “serious misgivings” about whether the quotation was a statement of fact.

The circuit said it was not appropriate to elevate a statement of fact to the status of a judicial admission “where that statement could not be true.”

The court therefore held that the erroneous quotation from a non-operative agreement “did not constitute a judicial admission” because it “was not an intentional, clear, and unambiguous statement of fact.”

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Potential Wave of U.S. Bankruptcies Draws Nearer as Corporate Distress Spreads

For many troubled companies, like luxury retailer Neiman Marcus Group Inc., which filed today, the lockdown to blunt the COVID-19 coronavirus super-charged the effects of pre-existing problems like debt overloads and the inability to please fickle consumers. For others, the debt they rack up while the pandemic rages may prove insurmountable once the health threat is over, Bloomberg News reported. “Everyone’s distressed watch list has become so big that it doesn’t even make sense to call it a watch list — it’s everyone,” said Derek Pitts, head of debt advisory and restructuring at PJ Solomon, which tracks the financial well-being of hundreds of companies. Here’s a sampling: The amount of debt classified as distressed in the U.S. surged 161 percent in just the last two months to more than half a trillion dollars. In April, corporate borrowers defaulted on $35.7 billion of bonds and loans, the fifth-largest monthly volume on record, according to JPMorgan Chase & Co. So far in 2020, the pace of corporate bankruptcy filings in the U.S. has already surpassed every year since 2009, the aftermath of the global financial crisis, Bloomberg data show. Even the bankruptcy process has been complicated by the virus, with social distancing making it impossible for companies to conduct asset sales that may keep them in operation and save jobs. “Many companies aren’t paying rent or vendors either right now, so they’re just accumulating liabilities to deal with later,” said Perry Mandarino, head of restructuring and co-head of investment banking at B. Riley FBR Inc. “There’s a large universe of companies that have been massively affected by COVID-19, and it’s unclear whether the slope of recovery will be fast enough for them to avoid bankruptcy,” said Mo Meghji, founder and CEO of restructuring adviser M-III Partners. “The debt they are taking on now will put that much more pressure on their finances going forward.” [as reported by American Bankruptcy Institute’s e-newsletter of 5/7/20]

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Housing Market Faces Its Next Crisis as May Rent and Mortgages Come Due

While aggressive federal and state intervention and temporary corporate measures have prevented a surge in evictions and foreclosures, the housing and rental market has fallen into a severe crisis that threatens the ability of millions of Americans to stay in their homes even if the coronavirus pandemic eases in the coming months, the Washington Post reported. [as reported in 5/4/20 American Bankruptcy Institute e-newsletter]

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Bankruptcy Code’s Small Business Reorganization Act Debt Limit is Increased to $7,500,000 for One Year, by the CARES Act that is part of US Legislation to Combat the Covid 19 Pandemic

In February 2020, the Small Business Reorganization Act of 2019 (“SBRA”), also known as Subchapter V of Chapter 11 of the Bankruptcy Code, went into effect. The SBRA includes a number of provisions that make Chapter 11 reorganization quicker, cheaper and more effective for businesses with total debts under $2,725,625. The recently enacted CARES Act, designed to aid businesses suffering the effects of the coronavirus, increases the debt limit to $7,500,000 for one year, which will enable a far greater number of companies to take advantage of the SBRA

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State Bank of Southern Utah v. Beal (In re Beal), 19-2043 (Bankr. D. Utah March 31, 2020)

Warning that attorneys must file bankruptcy adversary proceedings before the deadline for doing so runs, lack of expertise using Court e-filing system (CM/ECF) is not an excuse for missing deadline:

State Bank of Southern Utah v. Beal (In re Beal), 19-2043 (Bankr. D. Utah March 31, 2020)

Bankruptcy Judge R. Kimball Mosier of Salt Lake City dismissed an adversary proceeding complaint that was 16 minutes late because the plaintiff’s lawyer waited to file until the last minute and then encountered problems in navigating the Court e-filing system.

The plaintiff’s lawyer made his appearance in a consumer’s chapter 7 case. He attended the first meeting of creditors and took an examination of the debtor under Bankruptcy Rule 2004. The EBT was completed nine hours before the deadline for filing complaints objecting to discharge and dischargeability.

The lawyer returned to his office to brush up a complaint he had been drafting. Intending to file the complaint by the deadline, he logged into the PACER system 20 minutes before midnight.

The story recounted in detail by Judge Mosier in his March 31 opinion reads like a lawyer’s nightmare. Having only once before filed a complaint through PACER, the lawyer soon encountered problems. PACER was rejecting his attempts to file for reasons he could not understand.

By trial and error, the lawyer finally succeeded in filing the complaint at 12:16 a.m., 16 minutes after the deadline. The lawyer filed a motion for an extension of time to file the complaint.

In his 28-page opinion, Judge Mosier demonstrated a masterful understanding of PACER and its intricacies. Interpreting the rules and case law, he refused to extend the filing deadline and dismissed the complaint.

Ordinarily in federal practice, excusable neglect is grounds for extending a missed deadline. See Bankruptcy Rule 9006(b)(1). However, excusable neglect does not apply to complaints regarding discharge and dischargeability. See Bankruptcy Rule 9006(b)(3).

To enlarge time regarding discharge and dischargeability, Rules 4004(b) and 4007(c) only permit extensions on motions filed before the deadline, with exceptions not applicable to the case at hand.

The lawyer was therefore not entitled to extend the deadline under any of the foregoing rules.

So, the lawyer argued that the clerk’s office was “inaccessible,” thus giving him more time to file under Rule 9006(a)(3) and the companion local rule.

Nope, said Judge Mosier. The PACER system was functioning properly at the time, he found as a fact. The local rule only gives slack to “a technical failure by the court.” The rules, he said, are not forgiving of “user error, such as a lack of familiarity with [PACER] that causes a filer to make missteps in the filing process or simply to progress through it more slowly than anticipated.”

As a last resort, the lawyer called on Section 105(a), the bankruptcy version of the All Writs Act.

Judge Mosier rejected the argument, saying that an enlargement of time under Section 105(a) would “represent a patent end-run around the prohibition against excusable neglect in this context.”

In his apologia pro judicium sua, Judge Mosier dismissed the late-filed complaint, saying that the Court’s CM/ECF “system may be confusing in some respects, but that is why courts around the country offer training. The Court will not accept counsel’s unfamiliarity with [the Court’s efiling system] as an excuse to vitiate the strictly-construed deadlines of Rules 4004(a) and 4007(c).”

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Increase In Applications for Unemployment Benefits

Wall Street Journal, on 3/26/20, reports that a record 3.28 million workers applied for unemployment benefits last week as the new coronavirus hit the economy, ending a decade long job expansion.

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Five Big Banks Suspend Mortgage Payments

Five of the nation’s largest banks have agreed to temporarily suspend residential mortgage payments for people affected by the coronavirus, California Gov. Gavin Newsom said Wednesday. The announcement came as Newsom provided yet another grim statistic about the economic devastation from the virus: 1 million Californians have filed for unemployment benefits since March 13 as businesses shut down or dramatically scaled back because of a statewide “stay-at-home” order to prevent the spread of the virus. Meanwhile, Newsom said California is rapidly expanding its supply of equipment for health care workers and hospital beds in anticipation of the expected surge in patients that will come as more people are infected. Testing for the virus is accelerating quickly as the state adds locations for the public to get checked. “We are leaning in to meet this moment,” Newsom said. Wells Fargo, US Bank, Citi and JP Morgan Chase will defer mortgage payments for three months. State chartered banks and credit unions will offer similar deferrals. The banks also pledged not to initiate foreclosure sales or evictions for the next 60 days. And they promised not to report late payments to credit reporting agencies. [as reported in Credit & Collection e-newsletter of 3/26/20]

Comment on this by The Bankruptcy Law Firm, PC: Banks “deferring” mortgage payments for 3 months does NOT mean those 3 months of payments are forgiven or no longer owed. It just means that the borrower has to pay those 3 months of payments later, in addition to the borrower will have to pay the monthly payments that come due, after the 3 months “deferral” period. Which means the borrower will likely have to pay double payments, down the road, after the 3 months “deferral” period ends. “Deferral” of monthly mortgage payments can be a trap for the unwary borrower, rather than an aid to the borrower. Borrowers who cannot afford to pay their monthly mortgage payments for 3 months “deferral” period, likely cannot afford to pay double monthly payments, for the successive months.

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67 Million Americans May Have Trouble Paying Credit Card Bills

Even before the spread of corona virus (aka COVID-19) brought the U.S. economy to a near standstill, Americans were taking on increasing amounts of debt. Now, around 67 million Americans said they will have trouble paying their credit card bills due to the outbreak and its aftermath, according to a new Coronavirus Money Survey by personal finance site WalletHub. “Their struggles could easily ripple through the economy if left unaddressed, especially considering the more than $1 trillion in credit card debt currently owed by U.S. consumers,” said Odysseas Papadimitriou, CEO of WalletHub. According to data from the Federal Reserve, the U.S. has surpassed $1 trillion in credit card debt — the highest level since the Great Recession. However, credit cards are one of the most expensive ways to borrow money. Considering U.S. households with revolving credit card debt owe nearly $7,000, on average, and credit card interest rates are near record highs — at more than 17% — they are also coughing up roughly $1,100 a year in interest payments, according to NerdWallet’s 2019 household debt study.

[as reported in Credit & Collection e-newsletter of 3/19/20]

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Mortgage Lenders Fannie Mae, and Freddie Mac To Suspend Foreclosures Through April

Mortgage lenders Fannie Mae and Freddie Mac will suspend foreclosures and evictions for at least 60 days as federal and business leaders respond to the growing COVID-19 crisis that will cost people their jobs and likely tip the economy into a recession. In a statement Wednesday, the Federal Housing Finance Agency said the suspension by the mortgage giants applies to homeowners with a single-family mortgage, backed by either company. “This foreclosure and eviction suspension allows homeowners with an Enterprise-backed mortgage to stay in their homes during this national emergency,” said FHFA Director Mark Calabria in a statement. The agency announced earlier this month Fannie Mae and Freddie Mac would offer payment forbearance – the option to suspend mortgage payments – because of hardship related to the pandemic. Earlier Wednesday, President Donald Trump announced the Department of Housing and Urban Development would suspend foreclosures and evictions through the end of April 2020. [as reported in Credit & Collection e-newsletter of 3/19/20] Comment by The Bankruptcy Law Firm, PC: “Forbearance” means borrower/homeowner does not have to pay the monthly mortgage payments as they come due, for the period of time the “forbearance” is in effect. It does NOT mean those monthly mortgage payments are forgiven, by the mortgage lender, so the borrower/homeowner never has to pay those mortgage payments. Instead, the unpaid monthly mortgage payments add up, increasing the total amount owed. When the forbearance ends, the borrower/homeowner may discover the borrower/homeowner is so far behind that the borrower/homeowner cannot catch up, with the result that the borrower/homeowner may have to file Chapter 13 bankruptcy (if eligible and feasible) to try to pay off the arrearage over a maximum 60 months Chapter 13 bankruptcy plan, or if paying off the arrearage in Chapter 13 is not feasible (or if borrower/homeowner is not eligible for Chapter 13), the borrower/homeowner can end up losing the house to foreclosure by the mortgage lender, at a later date.

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Hospitals Are Seizing Patients' Homes And Wages For Overdue Bills

Credit and Collection e-newsletter of 1/6/20 reports that the American Hospital Association, the biggest hospital trade group, says it promotes “best practices” among medical systems to treat patients more effectively and improve community health. But the powerful association has stayed largely silent about hospitals suing thousands of patients for overdue bills, seizing homes or wages and even forcing families into bankruptcy. Atlantic Health System, whose CEO is the AHA’s chairman, Brian Gragnolati, has sued patients for unpaid bills thousands of times this year, court records show, including a family struggling to pay bills for three children with cystic fibrosis. AHA, which represents nearly 5,000, mostly nonprofit hospitals and medical systems, has issued few guidelines on such aggressive practices or the limited financial assistance policies that often trigger them. In a year when multiple health systems have come under fire for suing patients, from giants UVA Health System and VCU Health to community hospitals in Oklahoma, it has made no concrete move to develop an industry standard.

Atlantic Health System, whose CEO is the AHA’s chairman, Brian Gragnolati, has sued patients for unpaid bills thousands of times this year, court records show, including a family struggling to pay bills for three children with cystic fibrosis.

“There could be a broader message coming out of hospital leadership” about harsh collections, said Erin Fuse Brown, a law professor at Georgia State University who studies hospital billing. “It seems unconscionable if they are claiming to serve the community and then saddling patients with these financial obligations that are ruinous.”

Nonprofit hospitals are required to provide “community benefit,” including charity care in return for billions of dollars in government subsidies they get through tax exemptions. But the rules are lax and vague, experts say, especially for bill forgiveness and collections.

The Affordable Care Act requires nonprofit hospitals to have a financial assistance policy for needy patients but offers no guidance about its terms.

“There is no requirement” for minimum hospital charity under federal law, said Ge Bai a health policy professor at Johns Hopkins. “You design your own policy. And you can make it extremely hard to qualify.”

Practices vary sharply, a review of hospital policies and data from IRS filings show. Some hospitals write off the entire bill for a patient from a family of four making up to $77,000 a year. Others give free care only if that family makes less than $26,000.

The law does not substantially limit harsh collections, either. IRS regulations require only that nonprofit hospitals make “reasonable efforts” to determine if patients qualify for financial assistance before suing them, garnishing their wages and putting liens on their homes.

Gaping differences in both collections and financial assistance show up in the policies of health systems represented on AHA’s board of trustees.

This year, AHA board chairman Gragnolati’s Atlantic Health System, in northern New Jersey, sued patients for unpaid bills more than 8,000 times, court records show.

Atlantic Health sued Robert and Tricia Mechan of Maywood, N.J., to recover $7,982 in unpaid bills for treatment of their son Jonathan at the system’s Morristown Medical Center.

Three of the Mechans’ four children have cystic fibrosis, a chronic lung disease, including Jonathan, 18. Tricia Mechan works two jobs — full time as a manager at Gary’s Wine & Marketplace and part time at Lowe’s — to try to pay doctor and hospital bills that pile up even with insurance.

“I have bill collectors call me all the time,” Tricia Mechan said. “You’re asking me for more, and all I’m doing is trying to get the best care for my children. I didn’t ask to have sick children.”

She closed a savings account and borrowed money to settle Jonathan’s bill for $6,000. Another son with cystic fibrosis, Matthew, owes Atlantic Health $4,200 and is paying it off at $25 a month, she said.

Marna Borgstrom, CEO of Yale New Haven Health, also sits on AHA’s board. Yale almost never sues families like the Mechans.

“I have not signed off on a legal action since 2015” against a patient, Patrick McCabe, the system’s senior vice president of finance, said in an interview. “People are coming to us when they are at their most vulnerable, and we truly believe we need to work with them and not create any additional stress that can be avoided.”

Yale has treated Nicholas Ruschmeyer, 30, a Vermont ski mountain manager, for recurring cancer. He has been careful to maintain insurance, but a few years ago the hospital performed a $12,000 genetic test that wasn’t covered.

“Yale completely absorbed the cost,” said his mother, Sherrie Ruschmeyer. Yale is “wonderful to work with, not at all aggressive,” she said.

Atlantic Health bars families from receiving financial assistance if they have more than $15,000 in savings or other assets. Yale never asks about savings. Even families who own homes without a mortgage qualify if their income is low enough.

Atlantic Health’s policies including seizing patient wages and bank accounts through court orders to recoup overdue bills. Yale says it does not do this.

In some ways, Atlantic Health’s policies are more generous than those of other systems.

It forgives bills exceeding 30% of a family’s income in many cases, the kind of “catastrophic” assistance some hospitals lack. It also bills many uninsured patients only slightly more than Medicare rates. That’s far less than rates charged by other hospitals in the same situation that are substantially higher than the cost of treatment.

“Atlantic Health System’s billing policy complies with all state and federal guidelines,” said spokesman Luke Margolis. “While we are willing to assist patients no matter their financial situation, those who can pay should do so.”

After a reporter inquired about its practices, Atlantic Health said it “is actively engaged in refining our policies to reflect our patients’ realities.”

AHA also is considering changing its position on billing in the wake of recent reports on aggressive and ruinous hospital practices.

Previously AHA said billing offices should “assist patients who cannot pay,” without giving specifics, and treat them with “dignity and respect.” Queried this month, association CEO Rick Pollack said, “We are reevaluating the guidelines [for collections and financial assistance] to ensure they best serve the needs of patients.”

Kaiser Health News found that the University of Virginia Health System sued patients 36,000 times over six years, taking tax refunds, wages and property and billing the uninsured at rates far higher than the cost of care. Richmond-based VCU Health’s physicians group sued patients 56,000 times over seven years, KHN also found.

In Memphis, Methodist Le Bonheur Healthcare sued patients for unpaid bills more than 8,000 times over five years, ProPublica reported. In South Carolina, hospitals have been taking millions in tax refunds from patients and their families, an examination by The Post and Courier showed.

In response, VCU pledged to stop suing all patients. UVA promised to “drastically” reduce lawsuits, increase financial assistance and consider further steps. Methodist erased debt for 6,500 patients and said it would overhaul its collections rules.

Yale’s less aggressive policies also came in response to journalism — a 2003 Wall Street Journal report on how the system hounded one family. Yale still sends overdue bills to collections, McCabe said. But it balks at the last, drastic step of asking a court to approve seizing income and assets.

For patients with unpaid bills, he said, “if you’re willing to play a game of chicken, you will win.”

Hospitals say they see more and more patients who can’t pay, even with insurance, as medical costs rise, family incomes plateau and out-of-pocket health expenses increase. In particular, they blame widespread high-deductible coverage, which requires patients to pay thousands before the insurance takes over.

“More consumers pay far more with fewer benefits,” Pollack said.

Some states go beyond federal rules for charity care and collections. In California, patients with an income of less than $90,000 for a family of four must be eligible for free or discounted care. New Jersey requires Atlantic Health and other systems to give free care to patients from families of four with income less than $51,000.

The National Consumer Law Center, a nonprofit advocacy group, suggests all states adopt that standard for large medical facilities. Its model medical debt law also would require substantial discounts for families of four with income below $103,000 and relief for patients with even higher incomes facing catastrophic bills.

The AHA should consider similar changes in its own guidelines, NCLC attorney Jenifer Bosco said.

“I would be interested in seeing them taking a more active role in creating some standard for hospitals about what’s too much,” she said. “What’s going too far? Given that this is a helping profession, what would be some appropriate industry standards?”

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Supreme Court Rules that ‘Unreservedly’ Denying a Lift-Stay Motion Is Appealable

Building on Bullard, the US Supreme Court on 011420 ruled unanimously that a lift-stay motion is a “procedural unit” that’s appealable if the bankruptcy court “conclusively” denies the motion.

Note: Where a bankruptcy court order is “final”, the party complaining about the order must file a Notice of Appeal within 14 days after the order is entered by the Bankruptcy Court, and loses the right to appeal a final order if the party complaining about the order FAILS to file a Notice of appeal within 14 days after the order is entered in the Bankruptcy Court docket.

The Supreme Court ruled unanimously today in Ritzen v. Jackson Machinery that an order denying a motion to modify the automatic stay is a final, appealable order “when the bankruptcy court unreservedly grants or denies relief.”

In her unanimous opinion for the Court, Justice Ruth Bader Ginsburg said that a lift-stay motion is a “procedural unit” separate from the remainder of the bankruptcy case, even though the decision to retain the stay may be “potentially pertinent to other disputes.”

The decision in Ritzen may contain a trap for creditors: A bankruptcy court could deny a creditor the right to appeal, perhaps for an extended time, by denying a lift-stay motion without prejudice or offering to reexamine the result in light of subsequent events.

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Rising Credit Card Defaults Are Reported by 1/1/2020 Credit & Collection E-Newsletter

Rising credit card defaults are reported by 1/1/2020 Credit & Collection e-newsletter: Consumer credit card losses, or charge-offs, among the Top 100 U.S. banks, are continuing to rise to levels for a third-quarter not seen since early 2013. Meanwhile, delinquency, the precursor of charge-offs, is also hovering at seven-year highs. The trends are concerning to card issuers as it adds more evidence the U.S. economy is headed into a downturn in 2020, or already unraveling. Third-quarter card charge-offs among the Top 4 U.S. bank credit card declined sharply from the prior quarter, a historical pattern, but up slightly from one-year ago, remaining the highest for a third-quarter in seven years. Credit card charge-offs among the nation’s Top 4 credit card issuers decreased 36 bps (basis points) sequentially in the third-quarter (3Q/19), and up 3 bps year-on-year (YOY). Additionally, loan loss reserves for credit card or consumer banking among the Top 4 increased 9.9% YOY. Chase boosted credit card loan loss reserves by 10.9% or $549 million from one-year ago, and Citibank loan loss reserves rose by 12.1%. Capital One and Bank of America likewise boosted loan loss reserve for the third-quarter, according to analysis by RAM Research.

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In re Palladino, 942 F.3d 55 (1st Cir. Court of Appeals 2019)

In re Palladino, 942 F.3d 55 (1st Cir. Court of Appeals 2019): Bankruptcy Trustee recovered—as constituting fraudulent transfers--the tuition payments that parents made to college, to pay college tuition for parent’s daughter. Whether paying the college tuition for daughter was a fraudulent transfer had to be analyzed from the point of view of the creditors of parents. Creditors of the parents did not receive any benefit from parents paying the daughter’s college tuition.

Note: These were not sympathetic debtors, they had been found liable for running a Ponzi scheme. The First Circuit reversed a bankruptcy court order, that had granted summary judgment in favor of the college, which was sued to recover the tuition payments the college had received. First Circuit found that insolvent parents paying tuition payments to college constituted a constructive fraudulent transfer.

That payment of the tuition ultimately provided reasonably equivalent value to the Palladinos by helping to make their daughter self-sufficient. The bankruptcy court certified its decision for direct appeal to the First Circuit (the appeal was only as to the constructive fraudulent transfer claims). The First Circuit reversed and remanded the bankruptcy court’s decision. Argument that parents paying tuition to make daughter self-sufficient, failed.

In reversing the bankruptcy court’s decision, the First Circuit viewed reasonably equivalent value from the perspective of creditors and not from the perspective of the recipient (the college) or the person who benefitted from the transfer (the Palladinos’ daughter). The First Circuit stated at the outset that “[b]ecause fraudulent transfer law’s purpose is to preserve the debtor’s estate for the benefit of unsecured creditors, courts evaluate transfers from the creditors’ perspective.” The decision makes clear that the result was not a close call, stating that, “[t]o us, the answer is straightforward. The tuition payments here depleted the estate and furnished nothing of direct value to the creditors who are the central concern of the code provisions.”

Reviewing the categories of transactions providing value in 11 U.S.C. § 548(d)(2), the First Circuit determined that “none are present here, nor are parents under any legal obligation to pay for college tuition for their adult children.” In a footnote, the court stated that “Sacred Heart invokes a “societal expectation” that parents will pay college tuition for their adult children, but, and again, this does nothing for the creditors.”

Citing to the Supreme Court’s opinion in TVA v. Hill, 437 U.S. 153, 194 (1978), the First Circuit stated that the fraudulent transfer statutes in the Bankruptcy Code were enacted by Congress and that, “[a]bsent constitutional challenge, when confronted with a clear statutory command like the one in the bankruptcy code, that is the end of the matter.”

Note: In Ponzi scheme cases, the debtor’s actual intent to hinder, delay or defraud creditors is established as a matter of law. See, e.g., In re AFI Holding, 525 F.3d 700, 704 (citing In re Agricultural Research and Technology Group, Inc., 916 F.2d 528, 535 (9th Cir. 1990) as to the impact on fraudulent intent of “the mere existence of a Ponzi scheme”). See also, Donell v. Kowell, 533 F.3d 762, 770 (9th Cir. 2008). The debtor operating as a Ponzi scheme also establishes the insolvency tests for constructive fraudulent transfer claims. See, e.g., Donell v. Kowell, 533 F.3d 762, 770–771 (9th Cir. 2008) and In re Maui Indus. Loan & Finance Co., 463 B.R. 499, 503 (Bankr. D. Hawaii 2011). A bankruptcy trustee’s prima facie case for actual intent fraudulent transfers is therefore proven if it has been established that the debtor operated as a Ponzi scheme.

The issue in this appeal was limited to whether a transfer for an adult child’s school tuition provides reasonably equivalent value to the debtor (“reasonably equivalent value” is part of the prima facie case for constructive fraudulent transfers in 11 U.S.C. § 548(a)(1)(B) whereas taking the transfer for “value to the debtor” and taking the transfer in good faith are affirmative defenses to actual and constructive fraudulent transfer claims in 11 U.S.C. § 548(c)). It is unclear in the opinion why the appeal was only taken in relation to the constructive fraudulent transfer claims.

The opinion focused on whether value is reasonably equivalent from the perspective of creditors. That is the same approach taken in California’s Uniform Voidable Transactions Act in California and related case law. See, e.g., in relation to fraudulent transfer claims in under the Uniform Voidable Transactions Act in California, California Civil Code § 3439.03 in the Legislative Committee Comments—Assembly, Note 2; see also In re Bay Plastics, Inc., 187 B.R. 315, 329 (Bankr. C.D. Cal. 1995) and In re Maddalena, 176 B.R. 551, 555 (Bankr. C.D. Cal. 1995). See also, In re Jeffrey Bigelow Design Group, Inc., 956 F.2d 479, 484 (4th Cir. 1992) (“Hence, the proper focus is on the net effect of the transfers on the debtor's estate, the funds available to the unsecured creditors.”). Other courts have taken different approaches as to whether tuition payments provide reasonably equivalent value. See, e.g., In re Michel, 572 B.R. 463, 475-478 (Bankr. E.D.N.Y. 2017) (that case dealt with tuition for minor children, which differs from the situation in the present case regarding college tuition payments).

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United States Dep’t of Agriculture v. Hopper (In re Colusa Reg’l Med. Ctr.)

In United States Dep’t of Agriculture v. Hopper (In re Colusa Reg’l Med. Ctr.), 604 B.R. 839 (9th Cir. BAP 2019), the U.S. Bankruptcy Appellate Panel of the Ninth Circuit vacated a bankruptcy court's order surcharging a secured creditor for a substantial portion of the Trustee’s attorneys’ fees, and the entire statutory fee, of a chapter 7 trustee. The basis for the decision was that the bankruptcy court failed to correctly apply either the objective test for surcharge adopted by the Ninth Circuit (that the funds were expended directly, specifically and primarily for the benefit of the secured creditor) or the subjective test for surcharge (that the secured creditor consented to the expenditure).

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Mass. Dept. of Revenue v. Shek (In re Shek),     F3d     (11th Cir. Jan. 23, 2020), appeal case number 18-14992, widens the Circuit Split over whether Income Taxes can ever be discharged in bankruptcy, where the tax return for those taxes was filed even one day late:

Widening an existing split of circuits, the Eleventh Circuit rejected the one-day-late rule adopted by three circuits and held that a tax debt can be discharged even if the return was filed late.

The Atlanta-based circuit aligned itself with the Third, Fourth, Sixth, Seventh, Eighth and Eleventh Circuits, which employ the four-part Beard test, named for a 1984 Tax Court decision. Beard v. Commissioner of IRS, 82 T.C. 766 (1984), aff’d, 793 F.2d 139 (6th Cir. 1986). Following Beard, it’s possible — but not automatic — to discharge the debt on a late-filed tax return.

The First, Fifth and Tenth Circuits hold that a tax debt never can be discharged as a consequence of the hanging paragraph in Section 523(a) if the underlying tax return was filed even one day late.

The Ninth Circuit Court of Appeals (which is the federal Circuit Court for California and some other western states) has NOT ruled on this issue, one way or the other. The Second Circuit Court of Appeals (which is the federal Circuit Court for New York and some states near New York) has not ruled on this issue either.

Likely that the US Supreme Court will eventually hear and decide this issue, because of this multi-circuit Circuit split, though in the past the US Supreme Court has refused to grant petitions for certiorari to decide this issue.

The First, Fifth and Tenth Circuits hold that a tax debt never can be discharged as a consequence of the hanging paragraph in Section 523(a) if the underlying tax return was filed even one day late.

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. The high court denied certiorari. Mallo v. IRS, 135 S. Ct. 2889, 192 L. Ed. 2d 924 (2015). In February 2017, 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. Smith v. IRS, 137 S. Ct. 1066, 197 L. Ed. 2d 176 (2017).

Participating in oral argument in the Eleventh Circuit on behalf of the debtor, Prof. Pottow resurrected the argument and won this time around. If the Massachusetts taxing authority files a petition for certiorari, it will be difficult for the Supreme Court to dodge the question once again.

The January 23 opinion for the Eleventh Circuit by Circuit Judge R. Lanier Anderson, III picks apart the logic employed by the three circuits that refuse to discharge tax debts under all circumstances if the return was even a day late. The statutory analysis employed by Judge Anderson and advocated by Prof. Pottow raises questions of statutory interpretation that are the Supreme Court’s bread and butter.

In a footnote, Judge Anderson said that Prof. Pottow’s “briefing and oral argument were very helpful in untangling this corner of bankruptcy law.”

Simple Facts

The case is a good vehicle for Supreme Court review because it entails none of the difficult issues that sometimes arise under the Beard test. Indeed, the state taxing authority stipulated that the debtor satisfied all four parts of the Beard test. Instead, the state argued that the debt was nondischargeable because the debtor was late in filing his return.

The debtor had filed his 2008 state tax return in late 2009, seven months late. He filed a chapter 7 petition six years later and received a general discharge in January 2016. Then, the state resumed collection activities.

The debtor reopened his bankruptcy case, and the parties filed cross motions for summary judgment on the dischargeability of the tax debt. Bankruptcy Judge Karen S. Jennemann of Orlando, Fla., ruled in favor of the debtor, discharging the debt. She was upheld in district court, prompting the taxing authority to appeal a second time.

The Confusing Statute

Two provisions of the Bankruptcy Code come into play. Section 523(a)(1) bars discharge if no “return” was filed or if the return was filed less than two years before bankruptcy.

Until Congress added the so-called hanging paragraph in Section 523(a) in 2005, the Bankruptcy Code had not defined “return.” Added in 2005, the unnumbered subsection in Section 523(a) defines a “return” as a “return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements).” The term includes “a return prepared pursuant to Section 6020(a)” of the IRS Code but excludes “a return made pursuant to Section 6020(b)” of the IRS Code.

Section 6020(a) governs “substitutes for returns,” where the IRS drafts a return with the taxpayer’s cooperation. Significantly, Judge Anderson quoted the IRS in another case as having said that Section 6020(a) is “almost never used.”

Section 6020(b) allows the IRS to file a return without the taxpayer’s cooperation. In other words, the hanging paragraph bars discharge if the taxing authority has filed a return without the debtor’s cooperation, but permits discharge if the IRS files a return with the debtor’s cooperation.

In substance, the question for Judge Anderson was this: Did the debtor satisfy “the applicable filing requirements”?

Judge Anderson’s Statutory Analysis

The First, Fifth and Tenth Circuits believe that the plain language of the hanging paragraph means that a late tax return does not qualify for discharge. Judge Anderson conceded that the argument “has some force to it.” However, he did not agree that “the phrase ‘applicable filing requirements’ unambiguously includes filing deadlines.” [Emphasis in original.]

To the contrary, he said the “best reading” of “applicable filing requirements” must include the statutory context. He said the court must also devise an interpretation that gives meaning to every word in the statute.

Judge Anderson distinguished between “applicable filing requirements” and “other” filing requirements. He decided that “applicable” means “something different from ‘all.’”

Examining the “statutory context,” Judge Anderson concluded that “applicable” relates to “whether the document at issue can reasonably be deemed a ‘return.’”

Significantly, Judge Anderson noted that Section 523(a)(1) predated the adoption of the hanging paragraph and was not altered by Congress in 2005. “By negative implication,” he said, a tax debt can be discharged if the return was filed more than two years before bankruptcy.

The one-day-late approach, Judge Anderson said, “would render Section 523(a)(1)(B)(ii) a near nullity.” That section “explicitly permits the discharge of at least some late-filed returns,” he said.

Judge Anderson rejected the taxing authority’s approach to statutory interpretation because it “would render the dischargeability limitation in Section 523(a)(1)(B)(ii) insignificant” and would apply only to a “subset of already ‘minute’ set of tax returns.” [Emphasis in original.]

Adopting the analysis of the three circuits, Judge Anderson said, “would run counter” to the Supreme Court’s refusal to construe statutes in a manner that would make them “‘entirely superfluous in all but the most unusual circumstances,’” quoting Roberts v. Sea-Land Services Inc., 566 U.S. 93 (2012).

Judge Anderson said it was “deeply implausible” that Congress intended for “Section 523(a)(1)(B)(ii) to apply only in such a handful of cases despite no such limitation appearing in that provision itself.” He did not believe that Congress would curtail dischargeability “so starkly without a clearer indication that it was indeed intending to do so.”

Judge Anderson explained in detail why he was not persuaded by the opinions from the First, Fifth and Tenth Circuits. He upheld the discharge of the debtor’s tax liability because he determined that the late return satisfied the requirements for a “return” under both the Beard test and Massachusetts tax law.

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In re Golan,    BR    (Bankr. E.D.N.Y. Dec. 19, 2019), E.D.N.Y case #19-75598

In re Golan,    BR    (Bankr. E.D.N.Y. Dec. 19, 2019), E.D.N.Y case #19-75598: Bankruptcy Court decision holds that it did not violate the bankruptcy automatic stay for the state court to hold a contempt hearing, in a divorce suit, after the debtor filed bankruptcy, because the bankruptcy debtor failed to pay a $20,000 sanction to wife’s attorney, in divorce suit, which the state court had ordered the bankruptcy debtor to pay to wife’s divorce attorney. There was no stay violation for the state court to hold the contempt hearing, because the contempt hearing was criminal contempt, and 11 USC 362(b)(1) stay exception excepts criminal matters from being stayed by the bankruptcy automatic stay. The outcome of the criminal contempt hearing was that the state court ordered the bankruptcy debtor put in jail, until the bankruptcy debtor paid the $20,000 to the wife’s divorce attorney. The Bankruptcy Court held that putting the debtor in jail as punishment for criminal contempt would not have been a stay violation, due to the same 11 USC 362(b)(1) stay exception for criminal matters. However, the Bankruptcy Court held that putting debtor in jail, to try to coerce debtor into paying $20,000 to the wife’s divorce attorney, did violate the bankruptcy automatic stay, because that was a prepetition debt, and it was unclear whether the state court order was seeking to have that debt paid from bankruptcy estate funds, or from postpetition earnings of debtor. Because divorce “domestic support payments” are automatically nondischargeable, pursuant to 11 USC 523(a)(5), it would not have been a stay violation to seek to collect the $20,000 form debtor’s postpetition earnings.

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McCoy v. Mississippi State Tax Comm'n

McCoy v. Mississippi State Tax Comm'n, 666 F.3d 924 (5th Cir. 2012) held that if a tax return of a debtor was filed even ONE day late, the taxes reported in that return cannot be discharged. Case is referred to as the "McCoy rule," or the "McCoy test”. In a nutshell, this 5th Circuit rule provides that if the debtor's tax return was filed late, even by one day, it is invalid and the tax cannot be dischargeable. The rule has been adopted in the 1st, 5th, and 10th circuits, but rejected in the 11th Circuit. Expect that eventually the US Supreme Court will decide the issue, by granting a petition for certiorari in a case involving a (very slightly) filed late tax return.

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In re Emerge Energy Services LP,    BR    (Bky Ct D. Del 12/5/19) case #19-11563 December 10, 2019: Failure to Opt Out Won’t Justify Imposing Third-Party Releases, Delaware Bky Judge Says

Saying she is in the minority in her district, a new Delaware judge ruled that allowing creditors to opt out won’t permit a plan to impose nonconsensual, third-party releases.

Disagreeing with some of her colleagues in Delaware, a newly appointed bankruptcy judge refused to approve third-party releases binding creditors and equity holders who receive no distribution in a chapter 11 plan but had been given the option of opting out from the releases.

In her December 5 opinion, Bankruptcy Judge Karen B. Owens could not conclude that the failure to opt out represented consent to granting the releases, under the circumstances of the case. Judge Owens was appointed to the bankruptcy bench in Delaware in June.

The debtor mined and produced sand used for hydraulic fracturing in the oil and gas industry. The case was a typical prepackaged chapter 11 reorganization.

The plan called for refinancing the pre-bankruptcy revolving credit and secured loans incurred by the debtor in possession. In return for their debt, secured noteholders were to receive all of the equity in the reorganized debtor.

The plan presumed that the reorganized business was worth less than the approximately $320 million owed to secured creditors. Therefore, unsecured creditors and equity holders were out of the money and entitled to no distribution.

As an incentive for unsecured creditors to vote in favor of the reorganization, the plan contained a so-called deathtrap. If the unsecured creditor class were to vote in favor of the plan by the requisite majorities, they would receive 5% of the new equity and warrants for 10% more. Existing equity holders would be given warrants for 5% of the new equity if the unsecured creditor class were to approve the plan.

The plan contained broad third-party releases barring everyone – creditors and equity holders included – from bringing claims against non-debtor participants in the reorganization, such as the secured noteholders and revolving credit lenders.

In the ballots they were given, unsecured creditors had the option of opting out from the releases. Equity holders were given a form for them to sign and return if they did wish to grant releases.

The unsecured creditor class voted against the plan, meaning neither they nor equity holders would receive any distribution. The unsecured creditors’ committee, the U.S. Trustee, and the Securities and Exchange Commission objected to confirmation of the plan on a variety of grounds.

Judge Owens devoted most of her decision to placing a value on the debtor’s business and assets. Analyzing valuation opinions given by experts for the debtor and the unsecured creditors’ committee, Judge Owens concluded that unsecured creditors were entitled to no distribution. She also concluded that the plan satisfied the best interests and fair and equitable tests.

Having failed to win the war on valuation, the unsecured committee argued that the deathtrap meant the plan was not filed in good faith.

Although the deathtrap “may have seemed unsavory,” Judge Owens said it “was intended to encourage consensus.” Given the circumstances, she ruled that the deathtrap was neither “impermissible [nor] indicative of a lack of good faith.” Thus, she concluded that the plan was proposed in good faith.

With regard to the third-party releases, the debtor did not fare so well.

The debtor argued that the releases were consensual because creditors and equity holders were given the opportunity of opting out. Judge Owens disagreed, holding that “consent cannot be inferred by the failure of a creditor or equity holder to return a ballot or Opt-Out Form.”

Judge Owens could not say “with certainty” that a creditor or equity holder who failed to opt out “did so intentionally to give the third-party release.”

To evaluate the significance of failing to opt out, Judge Owens employed what she called “basic contract principles.” She concluded that failing to opt out did not “manifest [an] intent to provide a release.” She believed that “[c]arelesness, inattentiveness, or mistake are three reasonable alternative explanations.”

Judge Owens conceded that the conclusion put her in “a minority amongst the judges in this District.” She cited bankruptcy judges in New York and Bankruptcy Judge Mary F. Walrath in Delaware who take the same position as she.

Nonetheless, Judge Owens did not proscribe third-party releases altogether. First, she said that “silence or inaction” may be indicative of consent if “special circumstances are present.” She did not give examples of special circumstances.

Second, nonconsensual releases, she said, can be permissible in the Third Circuit under Gillman v. Continental Airlines (In re Continental Airlines), 203 F.3d 203, 212-14 (3d Cir. 2000), when there is an appropriate bankruptcy justification.

The debtor had not proffered a bankruptcy justification, so Judge Owens declined to confirm the plan, while suggesting that the debtor may confirm the plan by omitting the third-party releases.

[As reported in ABI e-newsletter]

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FTC v. Federal Check Processing, Inc.,    F.3d    (2nd Cir. 2019):

The US Court of Appeals for the Second Circuit held that Individual Owners Of Debt Collector Companies Personally Liable For Companies’ FDCPA And FTCA Violations

The Second Circuit recently held that it was proper to find two individual co-owners and co-directors of several corporate debt collector entities personally liable for $10,852,396 after such entities violated the Federal Trade Commission Act (FTCA) and the Federal Fair Debt Collection Practices Act (FDCPA). In FTC v. Federal Check Processing, Inc., the FTC brought suit against thirteen corporate debt collector entities and the two co-owners and co-directors of such entities, alleging that the defendants’ combined debt collection practices violated the FDCPA and FTCA. The corporate defendants’ business consisted primarily of collecting payday loan debts, which they bought from consumer-debt creditors and compiled into debt portfolios. On summary judgement, the U.S. District Court for the Western District of New York found that the corporate defendants directed nearly all of their approximately twenty‐five employee‐debt collectors to routinely contact debtors by telephone and falsely identify themselves as ʺprocessors,ʺ ʺofficers,ʺ or ʺinvestigatorsʺ from a ʺfraud unitʺ or ʺfraud division,ʺ then accuse debtors of check fraud or a related crime and threaten them with criminal prosecution if they did not pay their debts. Moreover, on certain occasions, the collectors called friends, family members, employers, or co‐workers of debtors, informing them that the debtors owed a debt, had committed a crime in failing to pay it, and faced possible legal repercussions. If debtors or other interested parties sought further information about the debt, the collectors typically refused to provide such information. [As reported in Credit & Collection e-newsletter on 2/4/19]

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U.S. Bank NA v. Saccameno,     F.3d     (7th Cir. Nov. 27, 2019) (case number 19-1569)

American Bankruptcy Institute (ABI) reports on this case as follows:

Seventh Circuit Limits Punitive Damages to Total Compensatory Damages of $582,000

Despite atrocious mortgage servicing, the circuit court cut a jury’s $3 million award of punitive damages to $582,000.

As a matter of constitutional law, the Seventh Circuit reduced punitive damages from $3 million to $582,000 when the jury had awarded the debtor $582,000 in compensatory damages as a consequence of the mortgage servicer’s “reprehensible conduct” and its “obstinate refusal” to correct its mistakes.

The story told by Circuit Judge Amy J. St. Eve in her November 27 opinion would be amusing if it did not depict horrors inflicted on a debtor about to lose her home even though she was current on the mortgage.

The debtor had filed a chapter 13 petition and dutifully cured arrears on her $135,000 home mortgage over the life of her 42-month plan. The servicer did not even object after receiving notice under Bankruptcy Rule 3002.1 stating that the debtor had cured the arrears.

The nightmare for the debtor began when the servicer received the discharge but erroneously marked the file to say that the case had been dismissed. The mistake was compounded because the servicer failed to credit two of her monthly payments.

You know what happens next. The servicer deluges the debtor with threatening letters, demands thousands of dollars not owing, and incurs expenses (which it charges to the debtor) incurred in initiating foreclosure. Along the way, the debtor and her lawyers on multiple occasions sent hundreds of pages of documents to the servicer showing that the mortgage was current.

The servicer’s incompetence was shown by statements that varied from month to month by thousands of dollars. One inaccurate statement even showed that the debtor was $2,800 ahead in mortgage payments.

The lender halted foreclosure proceedings when the debtor filed suit in federal district court. The debtor asserted claims for breach of contract and for violating the Fair Debt Collection Practices Act, the Real Estate Settlement Procedures Act, and the Illinois Consumer Fraud and Deceptive Business Practices Act. The Illinois statute was the only claim under which the debtor was entitled to punitive damages.

After trial, the jury awarded the debtor $500,000 in compensatory damages for her breach-of-contract claims and claims under the FDCPA and the RESPA. On the Illinois CFDBPA claims, the jury gave her $82,000 in compensatory damages and $3 million in punitive damages. The jury may have been persuaded to impose large punitive damages because the servicer was already operating under a consent decree for shoddy servicing.

The damage award totaled $3,582,000. The district court affirmed, but the servicer appealed the punitive damages award to the Seventh Circuit.

Judge St. Eve said that “jury was well within its rights to punish” the servicer, but “the award is excessive.”

Anyone on either side of a case involving an egregious violation of the discharge injunction or the automatic stay should read the opinion in full text. Judge St. Eve meticulously analyzes constitutional principles governing the award of punitive damages. Most prominently, she parses leading cases that propound flexible formulas to divine the limits on punitive damages.

For the case at hand, Judge St. Eve decided that $582,000 was the “maximum permissible punitive damages award.” She concluded that a 1:1 ratio between the total compensatory and punitive damages was “consistent with Supreme Court guidance.” Likewise, 7:1 was a similarly permissible ratio between $582,000 and the $82,000 award under the Illinois statute.

Judge St. Eve said that $582,000 punished the servicer for its “atrocious recordkeeping” without “equating its indifference to intentional malice.”

The servicer sought a new trial, given the disallowance of the jury’s punitive damage award. Judge St. Eve said that the servicer was not entitled to a new trial, because the constitutional limit on punitive damages is a question of law not within the purview of a jury. Therefore, she said, the “court is empowered to decide the maximum permissible amount without offering a new trial.

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DeGiacomo v. Sacred Heart Univ. Inc. (In re Palladino),    F.3d    (1st Cir. Nov. 12, 2019), case number 17-1334

US Court of Appeals for the First Circuit held, on 11/12/19, that where parents pay the college tuition of an adult child (child over 18 years old) to the college, that the parent paying that payment is a gift transfer, and that college can be sued for receiving a fraudulent transfer, if the parent files bankruptcy, after making the tuition payment, to get the tuition payment back from the college. ABI article on 11/15/19 describes this case as follows:

The First Circuit starkly held – without any ifs, ands, or buts – that college tuition paid by an insolvent parent for an adult child is a constructive fraudulent transfer.

The lower courts are divided on the issue, but the First Circuit is the first court of appeals to decide the question.

The debtor was a fraudster sentenced to 10 years in prison for perpetrating a Ponzi scheme and was slapped with a $9.7 million judgment by the Securities and Exchange Commission for securities law violations. As usual, the college was an innocent bystander.

Insolvent at the time, the fraudster-parent had paid almost $65,000 in college tuition for an adult child over two years. The last payment was some two months before the father copped a guilty plea. Two months after the plea, he filed a chapter 7 petition.

The chapter 7 trustee sued the college on theories of actual and constructive fraudulent transfer. On cross motions for summary judgment, the college contended that the debtor-father received equivalent value because an educated child will not be an economic burden on the parents.

The bankruptcy court ruled in favor of the college, finding that the debtor received reasonably equivalent value. The bankruptcy court certified a direct appeal to the circuit.

In an eight-page opinion on November 12, Chief Circuit Judge Jeffrey R. Howard reversed, ruling de novo on a question of law that the payments were constructively fraudulent transfers under Section 548(a)(1)(B).

Judge Howard explained that courts “evaluate transfers from the creditors’ perspective…, measuring value at the time of transfer.” He conceded that lower courts are divided on the issue, “although the recent cases have mostly ruled for trustees.”

Judge Howard said the answer is “straightforward,” because the tuition payments “depleted the estate and furnished nothing of direct value to the creditors who are the central concern of the code provisions at issue.”

Judge Howard said that none of the exceptions in Section 548(d)(2)(A) were applicable, nor did the debtor have any legal obligation in Massachusetts to pay “college” tuition for an adult child. He was not swayed even if payments were for “worthy causes,” such as caring for “elderly parents or needful siblings.”

Judge Howard reversed and remanded the case to the bankruptcy court, saying that the Bankruptcy Code “is the end of the matter” when there is “a clear statutory command.”

What the Opinion Does Not Consider

Evidently, the parties conceded that the college was the initial recipient of the fraudulent transfer, thus preventing the college from claiming to be a subsequent transferee who could raise a good faith defense under Section 550(b).

Aware of the threat of being sued, colleges and universities are getting smart. We have reported cases where colleges set up accounts for each student. The parents make payments to the students’ accounts, not to the colleges. If the child is the initial recipient, the college is in a better position to claim the good faith defense. Click here and here for ABI reports on district court and bankruptcy court decisions where colleges crafted partial protection for themselves.

Until Congress or state legislatures confer immunity, colleges and universities may be able to adopt concepts of structured finance to provide near total protection from fraudulent transfer suits. In the process, however, schools and colleges will be making adult children liable to bankruptcy trustees.

Curiously, we have not come across any reported cases where a trustee has sued a child for being the recipient of a fraudulent transfer resulting from a tuition payment. Perhaps trustees see no reason for suing penurious college-age children. Anyway, a student or recent graduate would likely be eligible to discharge a fraudulent transfer debt in chapter 7.

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U.S. Secretary of Education Betsy DeVos Fined $100,000 for Violating an Order ordering the Department of Education to STOP Trying to Collect Student Loans made to Students to attend Corinthian Colleges, a for profit college that closed and filed bankruptcy

U.S. Secretary of Education Betsy DeVos was hit with a $100,000 fine for violating a judge’s order to stop debt collection efforts against former students at bankrupt Corinthian Colleges Inc., Bloomberg News reported. Despite the order, the department went as far as seizing the students’ tax refunds and wages. U.S. Magistrate Judge Sallie Kim in San Francisco issued the fine Thursday, after finding DeVos in contempt of court. Kim ordered the $100,000 to go to a fund held by the students’ lawyers to help the more than 16,000 borrowers who she said suffered damages from the violation. Both sides must submit a plan for administering the fund by Nov. 15. The judge’s rebuke comes hours after DeVos’s point person on overhauling the student loan system abruptly resigned and publicly called for mass debt forgiveness.

Despite the order, the department went as far as seizing the students’ tax refunds and wages. U.S. Magistrate Judge Sallie Kim in San Francisco issued the fine Thursday, after finding DeVos in contempt of court. Kim ordered the $100,000 to go to a fund held by the students’ lawyers to help the more than 16,000 borrowers who she said suffered damages from the violation. Both sides must submit a plan for administering the fund by Nov. 15.

The judge’s rebuke comes hours after DeVos’s point person on overhauling the student loan system abruptly resigned and publicly called for mass debt forgiveness.

“There is no question that defendants violated the” court order, Kim wrote in her ruling. She said the violation hurt individual borrowers. The language the judge used in her written order Thursday was more reserved than what she said in court earlier this month. At an Oct. 7 hearing, Kim said she was “astounded” by the agency’s conduct, saying it was “gross negligence,” at best, and “an intentional flouting” of her order, at worst. The Education Department didn’t immediately respond to a request for comment. “The contempt finding and sanctions here are appropriate and well-deserved,” said Eileen Connor, a lawyer for the students. “The department and its leaders need to do better by students.” Corinthian, once among the largest for-profit college chains in the country, faced a flood of government investigations and lawsuits alleging systemic fraud before filing for bankruptcy protection from creditors in 2015. In the aftermath, the federal government declared that as many as 335,000 former students could erase their loans by checking a box and signing their names on a simple form, under penalty of perjury. Doing so, the former students were told, would void their debt and prompt a refund on past payments.

[as reported by American Bankruptcy Institute e-newsletter on 10/25/19]

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Big Electric Company Chapter 11 Bankruptcy

Big Electric Company Chapter 11 bankruptcy case in the news: In the Pacific Gas & Electric Co. (“PG&E”) Chapter 11 bankruptcy, the Bankruptcy Court recently ended the “exclusivity period”, in which only debtor PG&E could file a proposed Chapter 11 plan of reorganization. Now the noteholders and wildfire victims have filed a joint alternative proposed Chapter 11 plan, which will compete for confirmation, with PG&E’s proposed Chapter 11 plan. The proposed Chapter 11 plan filed by the noteholders and wild fire victims, would, if confirmed (means approved) by the Bankruptcy Court, give the noteholders control of the company and would provide for paying victims an additional $6 billion in potential compensation.

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2 Bankruptcy Court Opinions are opposite to each other, on Bankruptcy Court Allowing a Late Claim if the Creditor Was Not Listed and did not find out there was a bankruptcy until after the deadline for filing proofs of claim had passed:

Bankruptcy Judge Elizabeth Brown of Denver differs with Bankruptcy Judge Michelle Harner of Baltimore on the interpretation of Bankruptcy Rule 3002(c)(6), about whether a Bankruptcy Court can allow a Proof of Claim filed AFTER the deadline (“bar date”) for filing Proofs of Claim has passed, in a bankruptcy case, if the creditor filing the Proof of Claim, after the deadline (“bar date”) did not receive notice of the existence of the bankruptcy case, and did not find out there was a bankruptcy case, until after the deadline (“bar date”) for filing a Proof of Claim had passed.

Yesterday we reported a decision where Bankruptcy Judge Michelle M. Harner of Baltimore ruled that newly modified Bankruptcy Rule 3002(c)(6) did not give her discretion to allow a creditor to file a late claim when the creditor did not know there was a bankruptcy and the creditor had been omitted from the creditor matrix.

Today, we have an opinion by Bankruptcy Judge Elizabeth W. Brown of Denver (In re Vanderpol,    BR   19-10072 (Bankr. D. Colo. Aug. 28, 2019).who reached the opposite result and found discretion to allow the filing of a late claim under the same rule.

The Facts in Judge Brown’s Case

The facts in the case before Judge Brown were functionally the same as those confronting Judge Harner. The chapter 13 debtor filed his creditor matrix on time but inadvertently omitted his credit card lender, who therefore did not have notice of the filing.

The creditor learned about the bankruptcy about one month after the bar date and filed a motion under Bankruptcy Rule 3002(c)(6) for authority to file a late claim. The debtor supported the motion to allow the late filing of the claim.

Noting that courts have come down both ways, Judge Brown found discretion to allow the late filing of the claim. Like Judge Harner, she observed that the rule was amended, effective December 1, 2017. The recent amendment has given courts little time to sort out the issues.

Rule 3002(c)(6) was the governing rule. It allows the filing of a late claim “if the court finds that: (A) the . . . debtor failed to timely file the list of creditors . . . required by Rule 1007(a); or (B) the notice was insufficient under the circumstances to give the creditor a reasonable time to file a proof of claim, and the notice was mailed to the creditor at a foreign address.”

Like Judge Harner, Judge Brown said in her August 28 opinion that the “express terms” of the rule only permit the filing of a late claim “when the debtor fails to file the Creditor Matrix on a timely basis.” Because the debtor filed the creditor list, the rule on its face would seem to deprive the court of discretion to allow a late claim.

Also like Judge Harner, Judge Brown noted the difference in language between subsections (c)(6)(A) and (B). Where clause (A) requires insufficient note and the late filing of the creditor list, clause (B) only requires insufficient notice.

The two judges agreed that the inclusion of the condition regarding the creditor list in clause (A) and its omission in clause (B) implies that the drafters intended to permit no discretion to allow a late claim if the debtor had filed the creditor list on time.

However, that’s where Judge Brown parted company with Judge Harner.

Judge Brown said that a strict reading of (c)(6)(A) will rarely, if ever, come into play because a case will be automatically dismissed in 45 days after filing under Section 521(i)(1) if the debtor has not filed a list of creditors. If the case has been dismissed, there will be no need for creditors to file claims and thus no need for permission to file a late claim.

Judge Brown said she “interpreted [the rule] more broadly to apply whenever a full and complete Creditor Matrix is not timely filed, such as when a creditor is omitted from the list or is listed incorrectly in such a way that the creditor does not receive notice.” (Emphasis in original.) She went on to say that both the creditor and the debtor can benefit by a more flexible reading of the rule.

Where the benefit to the creditor is obvious, a debtor can benefit because, for example, estate assets can be paid on account of priority or nondischargeable debts.

Allowing the creditor to file a claim beyond the bar date, Judge Brown said she “believes that the intent of Congress is best effectuated by reading this rule to apply whenever the debtor fails to timely file a full and complete Creditor Matrix.”

N.B. Judge Harner could not have known about Judge Brown’s opinion because it was not reported on Lexis until later in October after Judge Harner had filed her opinion.

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California Legislature Declares That Mortgage Debt Is Regulated Under State's Debt Collection Law:

For many years it was unclear whether mortgage debt was covered under the California Rosenthal Fair Debt Collection Practices Act (the “Rosenthal Act”), which is California’s corollary to the federal Fair Debt Collection Practices Act (“FDCPA”). That issue was resolved on October 7, 2019, when California Governor Gavin Newsom signed into law legislation that expressly includes “mortgage debt” within the Rosenthal Act’s definition of “consumer credit.” Senate Bill 187 (“SB 187”), which is effective January 1, 2020, amends the Rosenthal Act to expressly apply to debt collection activities involving residential mortgage loans. SB 187 also amends the Rosenthal Act so that it now includes attorneys in the definition of “debt collector.” Until the amended Rosenthal Act goes into effect, attorneys are excluded from that definition. Debt collection activities in California generally are subject to the Rosenthal Act if those activities are performed by a debt collector in connection with “consumer debt” or “consumer credit.” Those terms are defined under the statute to mean “money, property or their equivalent, due or owing or alleged to be due or owing from a natural person by reason of a consumer credit transaction.”¹ SB 187 retains this definition, but adds “mortgage debt” to the definition of “consumer debt.” SB 187 states that adding “mortgage debt” to the definition of “consumer debt” is not a change in law, but is instead declaratory of existing law. It is not clear from the legislative history to SB 187 how the current legislature determined the intent of the legislature that enacted the Rosenthal Act. In fact, prior to enactment of SB 187, there were conflicting federal district court rulings on this issue. [As reported in Credit & Collection e-newsletter on 10/18/19]

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New California Law

A 10/10/19 article in Credit & Collection e-newsletter reports: A new California law signed by Gov. Gavin Newsom prohibits collection agencies from wiping out bank accounts to pay medical debts.

“People who are living paycheck to paycheck need the protection that this bill will provide to give them more financial security,” said Sen. Bob Wieckowski, who authored the legislation. “We do not want people living on the streets because debt collectors, who don’t have the greatest track record for accuracy, claim someone owes an old debt.”

Mr. Wieckowski says the legislation doesn’t erase debt, but “gives people the ability to pay rent, medical expenses and other daily costs while they pay down or contest the debt.”

Agencies will be required to leave $1,724 in a consumer’s bank account. Mr. Wieckowski said this amount is the lowest possible for a family of four to live in urban California, as determined by the state’s social services department.

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Ronnoco Coffee v. Westfeldt Brothers Inc.,     F.4th    (8th Cir. Sept. 19, 2019), case No. 18-1498

US Court of Appeals for the 8th Circuit Finds No Successor Liability for Buyer which Buys Debtor’s Assets from Bank, at a foreclosure sale held by the Bank, and then Buyer Continues the Business that debtor used to run, using debtor’s employees, and some of debtor’s executives:

Bottom Line: Buyer Continuing debtor’s business after buying the assets from the lender at a foreclosure sale doesn’t bring successor liability to Buyer.

Through a properly structured purchase of a debtor’s assets at a private foreclosure sale, a purchaser has no successor liability to a debtor’s unpaid creditors, the Eighth Circuit held.

The buyer and the debtor were both in the business of roasting coffee. The buyer declined to purchase the assets directly from the debtor because due diligence revealed that the debtor had substantial liabilities.

Later, the debtor’s secured bank lender declined to roll over a maturing $5 million debt. According to the September 19 opinion by Circuit Judge James B. Loken, the bank “demanded repayment in full, foreclosed when [the debtor] failed to pay, and sold its collateral [to the buyer] at a private foreclosure sale” for about $2 million. The agreement between the bank and the buyer specifically said that the buyer would not be liable for any debts owing by the debtor.

Judge Loken said the price was “commercially reasonable.” The foreclosure and sale left the bank still owed more than $3 million. The foreclosure rendered the debtor unable to pay an unsecured claim of some $2.7 million owing to the debtor’s supplier of green coffee.

The coffee supplier sued the buyer in federal district court based on claims of successor liability, among other theories. The district court granted summary judgment in favor of the buyer, dismissing the successor liability claim and everything else.

Judge Loken upheld the district court top to bottom. Regarding successor liability, he found “no prior case imposing successor liability” and said that “prevailing law [is] to the contrary.”

Judge Loken began with the “well-settled general rule” adopted “virtually” everywhere that the sale of all assets does not make the buyer liable for debts of the seller. There are exceptions for cases involving a de facto merger, fraud, or a “mere continuation” of the seller’s business.

To decide whether one business is a continuation of another, Judge Loken said, “the test is whether there is a continuation of the corporate entity of the transferor — not whether there is a continuation of the [seller’s] business operation.”

There was no continuation, Judge Loken said, because the sale was an arm’s-length transaction with no continuity of ownership or management after the sale. Even though the buyer kept the employees and retained the seller’s top executives for a few months, “this is common after such acquisitions and is not evidence of ‘mere continuation’ of the company,” Judge Loken said.

With regard to the fraud exception, Judge Loken noted how the buyer had purchased the assets from the bank, not from the debtor. “There is nothing inherently wrongful or fraudulent,” he said, “in purchasing assets at a foreclosure sale, free of encumbrances, rather than directly purchasing the assets.”

Judge Loken latched onto an additional reason for upholding dismissal: The unpaid supplier suffered no prejudice because the bank was not paid in full, leaving nothing for unsecured creditors.

Judge Loken upheld dismissal of the successor liability claim because the unpaid supplier “presented insufficient evidence of mere continuation or fraud.”

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Bankruptcy Amendments

Three narrow in scope bankruptcy amendments have been passed by both the US House of Representatives, and the US Senate, and are awaiting President Trump signing these 3 amendments into law. Bankruptcy press reports that President Trump is expected to sign these 3 bills into law, as the 3 bills had little to no opposition, in Congress:

  1. H.R. 2938: Excludes VA and Department of Defense disability payments from the monthly income calculation used for bankruptcy means testing.
  2. H.R. 2336: "H.R. 2336, the "Family Farmer Relief Act of 2019," would increase the current debt limit used to determine whether a family farmer is eligible for relief under chapter 12 of the Bankruptcy Code from $4,411,400 to $10,000,000."
  3. H.R. 3311: "The principal features of H.R. 3311 consist of the following: (1) requiring the appointment of an individual to serve as the trustee in a chapter 11 case filed by a small business debtor, who would perform many of the same duties required of a chapter 12 trustee; (2) requiring such private trustee to monitor the debtor's progress toward confirmation of a reorganization plan; and (3) authorizing the court to confirm a plan over the objection of the debtor's creditors, providing such plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.

The bill also includes two provisions, not limited to small business chapter 11 cases, pertaining to preferential transfers. In sum, it specifies an additional criterion that a trustee must consider before commencing an action to recover a preferential transfer (i.e., a transfer of property by the debtor made before the filing of the bankruptcy case preferential to a creditor and to the detriment of creditors). The first provision would require the trustee to determine whether to exercise such authority based on reasonable due diligence in the circumstances of the case and take into account a party's known or reasonably knowable affirmative defenses.

The second provision concerns the venue where such preferential transfer actions may be commenced. Current law requires this type of action to be commenced in the district where the defendant resides if the amount sought to be recovered by the action is less than $13,650.19 H.R. 3311 would increase this monetary limit to $25,000."

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Garvin v. Cook Investments NW, SPNWY, LLC, 922 F.3d 1031 (9th Cir. 2019)

The U.S. Trustee argued that a chapter 11 plan was “proposed by …means forbidden by law” because one of five debtors’ income was from lease of its real property to a marijuana grower. Debtors and property were located in Washington state in which marijuana is legal. Leasing property to a marijuana grower is illegal under federal law.

Click here for more information

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East West Bank vs. Altadena Lincoln Crossing, LLC

East West Bank vs. Altadena Lincoln Crossing, LLC, 2019 Westlaw 1057044 (US District Court, CD CA 2019): A district court in California has held that a state statute invalidating contractual penalty provisions was inapplicable to a default interest rate clause contained in loan documents.

Facts: A lender and a commercial borrower entered into two related real estate construction loan agreements, both of which contained clauses increasing the base interest rate by 5% in the event of default. The agreements also contained late fee provisions, which were intended to compensate the lender for any additional administrative costs arising from late payments.

After the developer filed a Chapter 11 petition, the lender sought to recover interest at the default rate set out in the parties' governing documents. The debtor objected, claiming that the default rate of interest was an unenforceable penalty under California Civil Code §1671(b). The bankruptcy court ruled in favor of the debtor, but the district court reversed.

Rationale: Citing Thompson v. Gorner, 104 Cal. 168 (1894), the court held that default interest provisions are simply not treated as penalties under §1671(b).

As a fallback, the court reasoned that even if §1671 were applicable, the default rate in this case would have been enforceable as liquidated damages. Citing numerous California appellate cases, the court acknowledged that a liquidated damages provision must represent the result of a "reasonable endeavor" by the parties to estimate the probable losses resulting from a breach.

The bankruptcy court had held that there was no evidence that the lender and the borrower had negotiated the default rate; therefore, they had not engaged in a "reasonable endeavor" to set the default rate. However, the district court held that the bankruptcy court's focus on contractual negotiations was too narrow:

This "reasonable endeavor" requirement is imprecisely phrased and, contrary to the Bankruptcy Court's discussion, should not be read to require that the provision be the subject of actual negotiation by the parties prior to contract formation. Specifically, the Bankruptcy Court improperly concluded that there was no such "reasonable endeavor" because "there was no endeavor at all by either of the parties at the time they entered into the loans . . . to estimate any losses that might be suffered by [the lender] in the event of a default . . . ." There is no requirement that the parties negotiate a liquidated damages provision for it to be enforceable; instead, the "reasonable endeavor" requirement means only that a liquidated damages provision must be reasonable in light of the potential harm that could result from a breach, as that harm could be anticipated at the time of contract formation.

The court went on to hold that the borrower's defaults had devalued the overall loan package, from the standpoint of the lender:

The loan is a liability to [the borrower], but it is an asset to [the lender], and an uncured default affects the value of that asset. Below, the Bankruptcy Court rejected [the lender's] argument that the diminution of the value of [the lender's] asset is not the type of harm or damage that can be used to measure anticipated harm or damages under §1671(b); instead, the Bankruptcy Court held that damages must be realized – must be "out-of-pocket damages" – in order to be considered in determining the reasonableness of a liquidated damages provision . . . .
The Bankruptcy Court cited no authority for this proposition, and the Court rejects it.

The district court relied on the lender's expert, who testified that the defaults had diminished the value of the loan package:

[T]he diminution in value of the loan as an asset held by [the lender] was within the range of actual damages that the parties could have anticipated would flow from a breach. Expert evidence of record establishes that an increased interest rate is a common method of recouping this type of loss, and that the increase in the interest rate upon default in this case is not likely to overcompensate [the lender]. As such, it not an unenforceable penalty.

Comment: Does the ancient Thompson line of cases still stand for the proposition that a default interest provision, no matter how Draconian, can never be attacked as a penalty under §1671? It has been a long time (over a hundred years) since the California Supreme Court has squarely addressed this issue; the courts have become much less tolerant of harsh liquidated damages provisions in the last century.

Thus, if this case were proceeding in the state courts, I would predict reversal. However, since this is now in the federal court system, I am not sure that the Ninth Circuit will have the courage to hold that Thompson is no longer good law.

In any event, I think that lenders would be wise to support default interest rate provisions with carefully-worded factual recitals, right in the body of the agreement, demonstrating as a factual matter why the provision is needed and why it is the parties' best approximation of the anticipated losses. Could the borrower later repudiate those factual recitals? Maybe not. See Cal. Evid. Code § 622: "The facts recited in a written instrument are conclusively presumed to be true as between the parties thereto . . . ." (For a discussion of a case in which that drafting technique was successful, see 2015-30 Comm. Fin. News. NL 60, Liquidated Damages Claim for Default Interest Is Enforceable Because Promissory Notes Recite Difficulty of Ascertaining Lender's Actual Damages.)

Given the bankruptcy courts' perennial antipathy to default interest rates, I am surprised that the finance industry still uses bland and generic "one-size-fits-all" default interest provisions, without including anticipatory verbiage to forestall the borrower's inevitable liquidated damages attack.

For discussion of the bankruptcy court's decision in this case, see 2018-30 Comm. Fin. News. NL 59, Default Interest Rate is Unenforceable Penalty Because Loan Agreements Did Not Contain Estimate of Probable Costs to Lender Resulting from Borrower's Default.

For discussions of other cases dealing with related issues, see:

  • 2016-45 Comm. Fin. News. NL 89, When Plan of Reorganization Cures Debtor's Default, Creditor is Entitled to Interest at Default Rate Specified by Promissory Note.
  • 2006 Comm. Fin. News. 20, Postdefault Interest Rate of 36% Is Approved Because Congress Did Not Impose "Reasonableness" Requirement.
  • 2005 Comm. Fin. News. 22, Oversecured Lender's Claim for Default Interest Is Actually a "Charge" That Must Be Reasonable and Cannot Be Awarded in Addition to Late Fees.
  • 2004 Comm. Fin. News. 19, Contract Rate Governs Cramdown Interest, Unless Creditor Produces Evidence to Show That Default Rate Reflects Actual Damages.

[as reported in e-newsletter of Insolvency Section of CA State Bar]

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US Consumer Debt Surges To Record Highs

America has a shocking new “savings and loan” crisis. Consumer debt is surging to record highs, fueled by rising mortgage debt, student loans and a binge on credit card use. And more Americans are flat-out broke, with no emergency savings. “Consumer debt is an ongoing personal financial crisis for many Americans,” said John Madison, CPA and personal financial counselor at Dayspring Financial Ministry. “The ease of obtaining ever-increasing levels of available credit traps many consumers into the illusion that they can buy whatever they want — regardless of their ability to repay the debt they take on.” Despite borrowing beyond their means, many Americans are in a more upbeat economic mood lately. That positivity is propelling borrowing and spending to new highs, driven by the long-running US economic expansion, a soaring Dow Jones industrial average, low unemployment and rising average hourly pay. But some analysts worry about the implications for today’s wild spending spree when the next recession inevitably hits. “The lack of financial wiggle room will cause further stress for indebted households leading up to, and during, the next recession,” said Greg McBride, chief financial analyst at “When the economy slows, income drops, and layoffs rise, those living paycheck-to-paycheck will feel the squeeze soonest, and will show the quickest surge in delinquencies.” [as reported in 7/15/19 Credit & Collection e-newsletter]

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Seventh Circuit Solidifies a Circuit Split on the Automatic Stay

Disagreeing with the Tenth and D.C. Circuits and siding with four other circuits, the Seventh Circuit rules that passively holding estate property violates the automatic stay.

Solidifying a split of circuits, the Seventh Circuit ruled that the City of Chicago must comply with the automatic stay by returning impounded cars immediately after being notified of a chapter 13 filing.

The decision lays the foundation for the Supreme Court to grant certiorari and decide whether violation of the automatic stay requires an affirmative action or whether inaction amounts to control over estate property and thus violates the stay.

The Second, Seventh, Eighth, Ninth and Eleventh Circuits hold that a secured creditor or owner must turn over repossessed property immediately or face a contempt citation. The Tenth and the District of Columbia Circuits have ruled that passively holding an asset of the estate in the face of a demand for turnover does not violate the automatic stay in Section 362(a)(3), which prohibits “any act . . . to exercise control over property of the estate.”

The same issue was argued on May 23 in the Third Circuit, where the lower courts were siding with the minority. See Denby-Peterson v. NU2U Auto World, 18-3562 (3d Cir.). For ABI’s report on Denby, click here.

The Impounded Cars in Chicago

Four cases went to the circuit together. The facts were functionally identical.

The chapter 13 debtors owed between $4,000 and $20,000 on unpaid parking fines. Before bankruptcy, the city had impounded their cars. Absent bankruptcy, the city will not release impounded cars unless the fines are paid. If the cars are not redeemed by their owners, most of them are scrapped.

In 2016, Chicago passed an ordinance giving the city a possessory lien on impounded cars.

After filing their chapter 13 petitions, the debtors demanded the return of their autos. The city refused to release the cars unless the fines and other charges were paid in full.

The debtors mounted contempt proceedings in which four different bankruptcy judges held that the city was violating the automatic stay by refusing to return the autos. After being held in contempt, the city returned the cars but appealed.

In all four cases, the owners confirmed chapter 13 plans treating the city as holding unsecured claims. The city did not object to confirmation or appeal.

In the four cases, the city never sought adequate protection for its alleged security interests under Section 363(e).

Thompson Controls

Circuit Judge Joel M. Flaum was not writing on a clean slate in his June 19 opinion, given the circuit’s controlling precedent in Thompson v. General Motors Acceptance Corp., 566 F.3d 699 (7th Cir. 2009). Thompson, he said, presented “a very similar factual situation.”

Although Thompson came down only 10 years ago, Judge Flaum nonetheless wrote a comprehensive, 27-page opinion, perhaps sensing that the case will go to the Supreme Court on certiorari.

In Thompson, Judge Flaum said, “we held that a creditor must comply with the automatic stay and return a debtor’s vehicle upon her filing of a bankruptcy petition. We decline the City’s request to overrule Thompson.” He also agreed with the bankruptcy courts “that none of the exceptions to the stay apply.”

Quoting extensively from Thompson, Judge Flaum said that the Seventh Circuit had already “rejected” the city’s contention that “passively holding the asset did not satisfy the Code’s definition of exercising control.” He noted that Congress amended Section 362 in 1984 by adding subsection (a)(3) and making the automatic stay “more inclusive by including conduct of ‘creditors who seized an asset pre-petition,’” citing U.S. v. Whiting Pools Inc., 264 U.S. 198, 203-204) (1983).

Again citing Whiting Pools, Judge Flaum said that Section 362(a)(3) “becomes effective immediately upon the filing of the petition and is not dependent on the debtor first bringing a turnover action.” He added, the “creditor . . . has the burden of requesting protection of its interest in the asset under Section 363(e).”

Judge Flaum found support for his conclusion in Section 542(a). Again quoting Thompson, he said the section “‘indicates that turnover of a seized asset is compulsory.’” Thompson, supra, at 704.

“Applying Thompson,” Judge Flaum held “that the City violated the automatic stay . . . by retaining possession . . . after [the debtors] declared bankruptcy.” The city, he said, “was not passively abiding by the bankruptcy rules but actively resisting Section 542(a) to exercise control over the debtors’ vehicles.”

Telling Chicago how to proceed in the future, Judge Flaum said the city must turn over the car and may seek adequate protection on an expedited basis. The burden of seeking adequate protection, he said, “is not a reason to permit the City to ignore the automatic stay and hold captive property of the estate, in contravention of the Bankruptcy Code.”

In sum, Judge Flaum declined the city’s invitation to overrule Thompson. He said, “Our reasoning in Thompson continues to reflect the majority position and we believe it is the appropriate reading of the bankruptcy statutes.”

Exceptions to the Automatic Stay

Judge Flaum devoted the last third of his opinion to explaining why Chicago was not eligible for any of the exceptions to the automatic stay.

Section 362(b)(3), allowing acts to perfect or continue perfection of liens, does “not permit creditors to retain possession of debtors’ property,” Judge Flaum said. Rather, it allows creditors to file notices to continue or perfect a lien when bankruptcy has intervened. The city, he said, could perfect its possessory lien by a filing with the Secretary of State.

Judge Flaum cited Illinois decisions holding that giving up possession involuntarily does not destroy a possessory lien. The notion that turning over cars would abrogate the possessory lien was one of Chicago’s primary arguments on appeal.

Judge Flaum held that Section 362(b)(4), excepting police or regulatory powers from the automatic stay, did not apply. On balance, he said, the municipal machinery to impound cars “is an exercise of revenue collection more so than police power.”

Is Certiorari Next?

In the term that ends this month, the Supreme Court denied a petition for certiorari raising the same question. See Davis v. Tyson Prepared Foods Inc., 18-941 (Sup. Ct.) (cert. denied May 20, 2019).

Davis, from the Tenth Circuit, was a challenge to the Tenth Circuit’s holding in WD Equipment v. Cowen (In re Cowen), 849 F.3d 943 (10th Cir. Feb. 27, 2017). In Cowen, the Tenth Circuit ruled that passively holding an asset of the estate in the face of a demand for turnover does not violate the automatic stay in Section 362(a)(3) as an act to “exercise control over property of the estate.” To read ABI’s discussion of the denial of certiorari, click here.

In this writer’s opinion, the Chicago parking ticket cases are a better vehicle for certiorari because they raise the issue more cleanly. Davis was a step or two removed from the question of whether overt action is required to violate the automatic stay.

Given the recent change in administration in Chicago, it is not certain that the city will pursue certiorari.

Note: This case discussion is from ABI’s e-newsletter of 6/20/19

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Klein v. Good (In re Good

Klein v. Good (In re Good),     BR   , 2018 Bankr. LEXIS 3609 (9th Cir. BAP 2018) ( BAP No. WW-18-1125-KuTaB) , (9th Cir. BAP 2018), which is a case about a homestead exemption claimed by bankruptcy debtors, that a Chapter 7 trustee objected to, unsuccessfully:

Summary: The United States Bankruptcy Appellate Panel for the Ninth Circuit held that in a case converted from chapter 13 to chapter 7, the relevant date for determining a debtor’s homestead exemption was fixed on the date of the chapter 13 filing. The BAP affirmed the bankruptcy court’s ruling denying the chapter 7 trustee’s objection to the Debtors’ homestead exemption as untimely, and found no abuse of discretion in its ruling that equitable estoppel was not applicable.

Facts: The Debtors filed a chapter 13 case in October 2016. They claimed a schedule C homestead exemption of $125,000 in their residence (“Property”) and no party objected. Their chapter 13 Plan was confirmed February 17, 2017. The Debtors subsequently moved to convert their case to a chapter 7, and the bankruptcy court granted their motion on June 15, 2017. On the same day the clerk of the court issued an order to file post-conversion schedules (“Order”) which required the Debtors to file amended statements, schedules and documents, or execute a declaration under penalty of perjury that there had been no change therein. However, the Order did not include a deadline for compliance with that requirement.

Appellant (“Trustee”) was appointed Chapter 7 Trustee of the Debtors’ estate. The Debtors filed amended schedules in early July 2017, but did not include an amended schedule C or a declaration of no change.

The Trustee concluded a meeting of creditors on July 12, 2017. The Debtors testified at the creditor meeting that they had not lived in the Property since April 2017; the Trustee responded that the Debtors were not entitled a to a homestead exemption. Debtors’ counsel then stated that if the Property was sold, the Debtors could not exempt any of the proceeds. Debtor, Mr. Good, replied “it is what it is”. The Debtors then informed the Trustee they were surrendering the Property and would not be claiming a homestead exemption. They also promised to file an amended schedule C.

The Trustee marketed and sought approval for the sale of the Property. Through new counsel, the Debtors filed an objection to the sale alleging, among other things, that they were entitled to a homestead exemption as indicated on the schedule C filed in the chapter 13 case. The Trustee responded with an objection to the Debtors’ homestead exemption and moved for sanctions. The Trustee argued that the Debtors’ claim to a homestead exemption after the sale was contrary to their testimony under oath, and that doctrines of equitable and judicial estoppel were applicable. The bankruptcy court approved the sale, subject to further order regarding the objection to the homestead exemption. At a subsequent hearing, the bankruptcy court overruled the Trustee’s objection to the Debtors’ homestead exemption, finding that the Trustee’s objection was untimely and that, whether or not Debtors filed an amended Schedule C, the relevant date for determining the Debtors’ eligibility for the homestead exemption was fixed on the date of the chapter 13 filing pursuant to the federal “snap shot” rule (providing that Debtors did not lose their right to an otherwise valid exemption post-petition if they no longer qualified for an exemption after conversion). The bankruptcy court also decided that neither judicial nor equitable estoppel applied. The Trustee filed a timely appeal, and the BAP affirmed.

Reasoning: The BAP applied a de novo standard of review to the Debtors’ right to claim an exemption (a question of law), and an abuse of discretion standard to the ruling finding no equitable estoppel, holding that: (a) the bankruptcy court did not err in finding the Trustee’s objection to the Debtors’ homestead exemption was untimely; and (b) the bankruptcy court did not abuse its discretion in finding that equitable estoppel was not applicable.

As noted by the BAP, FRBP 4003(b)(1) provides that a party may file an objection to exemptions “within 30 days after the meeting of creditors… is concluded or within 30 days after any amendment to the list or supplemental schedules is filed, whichever is later.” The Court found that, because the Debtors’ case was converted less than one year after entry of the first order confirming their chapter 13 plan, pursuant to FRBP 1019(2)(B) a new time period to object to the claim of exemptions commenced after the conversion.

The Trustee did not file his objection to the Debtors’ exemption until January 29, 2018—well past the 30 days after the creditor meeting was concluded on July 12, 2017. The Trustee nevertheless contended his objection was timely, asserting that the new thirty day time period did not commence since the Debtors failed to obey the Order with regard to amended filings.

The BAP disagreed. The Court found that nothing in the Order or FRBP 1007-1(b) set a deadline for the Debtors to file amended schedules or declaration of no change, therefore nothing kept the Debtors from complying with the Order as long as the case remained open. The BAP also held that, in the absence of an amendment, the Debtors’ original schedule C filed in the chapter 13 case was deemed filed in the converted case under FRBP 1007(c). Consequently, pursuant to FRBP 4003(b), a new time period began running upon conversion of the case, and the Trustee was required to object to the homestead exemption within 30 days of concluding the creditor meeting. The Trustee failed to do so, and the BAP found the objection to be untimely.

The BAP further upheld the bankruptcy court’s ruling that the Debtors were not equitably estopped from asserting the homestead exemption. At the outset, the BAP held that even though the bankruptcy court erroneously applied federal law rather than the elements of equitable estoppel under Washington state law, the elements were substantially the same, therefore the error was harmless.

The BAP went on to consider whether the bankruptcy court had abused its discretion in finding that equitable estoppel did not apply, noting that such an order may be reversed only if the BAP has a “definite and firm conviction that the court committed a clear error of judgment in the conclusion it reached.” The BAP held that the bankruptcy court did not abuse its discretion, referencing the record that the bankruptcy court had found the Debtors’ statements at the creditor meeting “equivocal at most;” that Debtors’ counsel’s statements regarding surrender did not clearly express an intent to amend Schedule C to delete the homestead exemption; that the Trustee had never forced the issue and should have performed further investigation and inquiry; that the bankruptcy court was not convinced that testimony and statements at the creditors meeting were “sufficiently definite to reasonably and foreseeably induce” the Trustee’s reliance; and that the Trustee’s reliance on those statements was unreasonable. Based thereon, the BAP held that the bankruptcy court’s holding was “plausible and supported by inferences drawn from the record.”

The BAP stated that it was “sympathetic” to the Trustee’s position, but that it had discerned no abuse of discretion. The ruling in the Debtors’ favor was affirmed.

Author's Commentary: The BAP’s order was not published. Therefore, while it may be cited for any persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential value. See 9th Cir. BAP Rule 8024-1. The case may be best read as a word to the wise about relying on informal statements, but also as a subtle rebuke for wasting the Trustee’s time with idle promises; although the bankruptcy court had denied the Trustee’s motion for sanctions without prejudice (and thus the BAP expressed “no opinion” as to whether such a motion should be granted or denied), the BAP’s comment seemed to be an invitation to the bankruptcy court to consider compensating the Trustee for his trouble “should he renew his request.”

The above case discussion is as posted online by the Insolvency Law Committee of the California State Bar on 6/21/19

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Risky Borrowing Is Making a Comeback, but Banks Are on the Sidelines, Reports American Bankruptcy Institute 6/13/19 E-Newsletter

A decade after reckless home lending nearly destroyed the financial system, the business of making risky loans is back, the New York Times reported on Tuesday. This time, the money is bypassing the traditional, and heavily regulated, banking system and flowing through a growing network of businesses that have stepped in to provide loans to parts of the economy that banks abandoned after 2008. With almost $15 trillion in assets, the shadow-banking sector in the U.S. is roughly the same size as the entire banking system of Britain, the world’s fifth-largest economy. In certain areas — including mortgages, auto lending and some business loans — shadow banks have eclipsed traditional banks, which have spent much of the last decade pulling back on lending in the face of stricter regulatory standards aimed at keeping them out of trouble. But new problems arise when the industry depends on lenders that compete aggressively, operate with less of a cushion against losses and have fewer regulations to keep them from taking on too much risk. Recently, a chorus of industry officials and policymakers — including Federal Reserve Chair Jerome H. Powell — have started to signal that they’re watching the growth of riskier lending by these nonbanks. “We decided to regulate the banks, hoping for a more stable financial system, which doesn’t take as many risks,” said Amit Seru, a professor of finance at the Stanford Graduate School of Business. “Where the banks retreated, shadow banks stepped in.” Lately, that lending is coming from companies like Quicken Loans, loanDepot and Caliber Home Loans. Between 2009 and 2018, the share of mortgage loans made by these businesses and others like them soared from 9 percent to more than 52 percent, according to Inside Mortgage Finance. While they don’t have a nationwide regulator that ensures safety and soundness like banks do, non-banks say that they are monitored by a range of government entities, from the Consumer Financial Protection Bureau to state regulators.

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In Ritzen Group Inc. v. Jackson Masonry LLC

In Ritzen Group Inc. v. Jackson Masonry LLC, the US Supreme Court, on 5/20/19, granted the Petition for Certioraris, to decide the question of what Is or Is not a 'Final, Appealable Order', in a bankruptcy case.

In Davis v. Tyson Prepared Foods Inc, the US Supreme Court, also on 5/20/19, denied the petition for certiorari in that case, thereby declining to review and decide whether a creditor or other non-debtor passively holding property of the estate violates the automatic stay under § 362(a).

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Commentary: Legislation Aims to Tackle the Student Loan Crisis in Bankruptcy Court

The American Bankruptcy Institute e-newsletter of 5/16/19 reports that Legislation introduced last week, in the US Congress, seeks to allow student loans to be discharged in bankruptcy without the difficulty of proving the "undue hardship" standard, according to a Washington Post commentary. The legislation has drawn bipartisan support with two Republican co-sponsors in the House, including Rep. John Katko (R-N.Y.), who introduced a similar bill in the last session of Congress. It would, as sponsor House Judiciary Chair Jerrold Nadler (D-N.Y.) put it in a statement, “ensure student loan debt is treated like almost every other form of consumer debt." In the Senate, Sen. Elizabeth Warren (D-Mass.), along with fellow presidential candidates Sens. Bernie Sanders (I-Vt.), Kamala Harris (D-Calif.) and Amy Klobuchar (D-Minn.), are all co-sponsoring companion legislation. Americans owe a collective $1.5 trillion in student loan debt, an amount that’s increased from $90 billion over the past two decades, according to the commentary. In 2018, more than two-thirds of college graduates graduated with student loans. The average amount borrowed (from all sources) by a 2018 graduate is just under $30,000. The burden is impacting people from early adulthood to those in retirement: Some senior citizens are using their Social Security checks to pay back student loan bills, according to the commentary. Restoring bankruptcy could protect borrowers in another way, too, by potentially acting as a check on the careless treatment of debtors by student loan servicers, according to the commentary. In 2017, the Consumer Financial Protection Bureau sued Navient, claiming that the student loan giant repeatedly did not tell borrowers experiencing financial difficulties about income-based repayment options and instead pushed them into forbearance, a strategy that resulted in further interest charges and increased the amount borrowers owed.

The issue of student loan debt and bankruptcy is the first problem addressed in the Final Report of the ABI Commission on Consumer Bankruptcy.

Comment by attorney Kathleen P. March, Esq: Over the past 10 years, there have been various bills introduced in the US Congress, to make it easier to discharge student loan debt in bankruptcy. None of those bills have come close to passing. Some of those earlier bills have had “bi-partisan support”. It’s wait and see if this new bill makes any progress toward becoming law.

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Benjamin v. U.S. (In re Benjamin),     F.3d     (5th Cir. May 10, 2019), case18-20185

This case is described as being part of a growing split among federal Circuit Courts, on whether bankruptcy courts have jurisdicition to hear disputes over social security disputes, and over Medicare disputes:

American Bankruptcy Institute [5/14/19 e-newsletter] reports that, in In re Benjamin, the Fifth Circuit Court of Appeals rejects the ‘recodification canon’ to divest bankruptcy courts of jurisdiction over Social Security suits.

Deepening an existing split of circuits, the Fifth Circuit held that the recodification canon does not divest the bankruptcy court of subject matter jurisdiction to hear Social Security claims.

In the May 10 opinion by Circuit Judge Edith Brown Clement, the Fifth Circuit joined the Ninth Circuit. On the other side of the fence, the Third, Seventh, Eighth and Eleventh Circuits held there is no bankruptcy or diversity jurisdiction over Social Security claims.

The issue is important because the same jurisdictional question looms over Medicare and Medicaid claims. As a result of the Eleventh Circuit’s opinion in Florida Agency for Health Care Administration v. Bayou Shores SNF LLC (In re Bayou Shores SNF LLC), 828 F.3d 1297 (11th Cir. July 11, 2016), the bankruptcy court, for example, lacks jurisdiction to force the government to continue funding a hospital or nursing facility that files a chapter 11 petition. To read ABI’s report on Bayou Shores, click here.

The Fifth Circuit Case

A debtor allegedly received an overpayment of Social Security benefits. According to the debtor, the Social Security Administration, or SSA, was improperly withholding a portion of his Social Security benefits to recover the overpayment.

Before bankruptcy, the debtor appealed to an administrative law judge from the agency’s denial of a refund. The appeal was pending when the debtor filed a chapter 7 petition.

In bankruptcy court, the debtor sued the SSA to recover the benefits. The bankruptcy court granted the SSA’s motion to dismiss and was upheld in district court on jurisdictional grounds.

The debtor appealed to the Fifth Circuit and won a reversal reinstating the suit in bankruptcy court. The debtor was represented in the circuit by Prof. John A. E. Pottow, the John Philip Dawson Collegiate Professor of Law at the University of Michigan Law School.

The Recodification

Section 405(h) of Title 42 provides that no one may sue the government “under section 1331 or 1346 of Title 28 to recover on any claim arising under” the Social Security, Medicare or Medicaid laws until there is an exhaustion of remedies in the agency. Because jurisdiction in the bankruptcy court was based on Section 1334 — not Sections 1331 or 1346 — the plain language of the statute would seem to allow the suit in bankruptcy court. But it’s not so simple.

From 1939 to 1984, bankruptcy courts lacked jurisdiction over SSA claims because Section 405(h), as adopted in 1939, deprived federal courts of jurisdiction “under section 26 of the Judicial Code.” At the time, Section 26 contained virtually all of the grants of jurisdiction to federal courts, including bankruptcy and diversity jurisdiction.

In 1948, Congress recodified Section 26, establishing jurisdictional grants in Section 1331 for federal questions, Section 1332 for diversity, Section 1346 for suits against the government, and Section 1334 for bankruptcy. However, Congress did not get around to correcting Section 405(h) until 1984. In the intervening years, Section 405(h) continued referring to “section 26 of the Judicial Code” and was interpreted to mean there was no bankruptcy or diversity jurisdiction over Social Security, Medicare and Medicaid disputes.

Congress eventually recodified Section 405(h) in a technical corrections bill in 1984, resulting in the statute as it now reads, depriving federal courts of jurisdiction over Social Security, Medicare and Medicaid disputes under Sections 1331 and 1346. Pointedly, the recodification did not list Section 1334, the grant of bankruptcy jurisdiction, or 1332, for diversity jurisdiction.

The legislative history said that the bill was intended only to correct “technical errors.” The bill itself contained a provision saying that none of the amendments “shall be construed as changing or affecting any right, liability, status, or interpretation which existed (under the provisions of law involved) before” the amendments’ effective date.

The Doctrine of Recodification Error

In the late nineteenth century, the Supreme Court pronounced the doctrine of recodification error, proclaiming that a recodification does not effect a substantive change without a clear expression of congressional intent.

The Third, Seventh, Eighth and Eleventh Circuits held that the omission of Sections 1332 and 1334 from Section 405(h) was a mistake in recodification and continued to hold that there was no bankruptcy or diversity jurisdiction.

A circuit split arose in 1991 when the Ninth Circuit handed down In re Town & Country Home Nursing Services Inc., 963 F.2d 1146 (9th Cir. 1991), and held that Section 405(h) did not prohibit the exercise of bankruptcy jurisdiction.

The Fifth Circuit Heeds Justice Scalia

Writing for the Fifth Circuit, Judge Clement didn’t buy the notion that there is “a hidden jurisdictional bar” resulting from a mistake in recodification. She said the doctrine only applies “in the absence of a clear indication from Congress that it intended to change the law’s substance.” She said that the clear indication of congressional intent is contained in the “actual words” of the statute.

Judge Clement cited Reading Law: The Interpretation of Legal Texts, a book by the late Justice Antonin Scalia. He said that the “new text is the law . . . even when the legislative history . . . expresses the intent to make no change.”

Judge Clement interpreted Section 405(h) “to mean what it says. And it says nothing about Section 1334.” Given the language of the statute, she said that the recodification canon cannot “trump the clear text.”

The debtor did not win outright, however. A different sentence in Section 405(h) provides, “No findings of fact or decision of the Commissioner of Social Security shall be reviewed by any person, tribunal, or governmental agency except as” provided in Section 405(g). She went on to say that the channeling into Section 405(g) “applies only where the would-be plaintiff is challenging (1) a disability determination by the Commissioner (2) for which the statute requires a hearing.”

Judge Clement remanded for the bankruptcy court to determine whether there is jurisdiction. In the Medicare and Medicaid context, it is similarly unclear whether bankruptcy courts will have jurisdiction to complete adjudication of a dispute.

Prof. Pottow’s Observations

Prof. Pottow told ABI, “This is an area of flux.

“Earlier decisions were more confident brushing away the text. We now live in a different world of statutory interpretative methodology, so the [Eleventh Circuit’s Bayou Shores opinion] had to do much heavier lifting to combat the text, resorting gamely to something called the recodification canon.

“The Fifth Circuit has just taken the wind out of those sails, holding that properly applied, the recodification canon cannot bear such weight, and the text is the text.”

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American Bankruptcy Institute e-newsletter of 5/9/19 reports RISK from over-leveraged debt, from over-borrowing by corporations

For fund managers, it’s easy to be picky when money is tight, but not so simple when they’re rolling in cash, according to a Bloomberg commentary on Tuesday. Leveraged-loan investors are suddenly willing to push back on the pervasive weakening of covenants, the safeguards in offering documents that are meant to protect creditors. In January, Moody’s Investors Service determined that covenant quality in leveraged loans was the worst on record in the third quarter of 2018. It hasn’t gotten much better since. On Monday, the Federal Reserve echoed that sentiment, further amplifying its warnings about risky corporate debt in a twice-a-year financial stability report. “Credit standards for new leveraged loans appear to have deteriorated further over the past six months,” the Fed said, with its board voting unanimously to approve the document. “The historically high level of business debt and the recent concentration of debt growth among the riskiest firms could pose a risk to those firms and, potentially, their creditors.” It might be too little, too late for investors to get tough on leveraged-loan issuers, according to the commentary. Already, UBS Group AG estimates that loan owners may end up recouping about 40 cents on the dollar in a downturn, potentially less than half what they’d historically expect to get. Moody’s has estimated recovery rates of 61 percent on first-lien loans and 14 percent on second-lien obligations in a recession, down from long-term historical averages of 77 percent and 43 percent, respectively.

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Soaring Bankruptcies in the Farm Belt Force Banks to Boost Defenses

Banks that serve U.S. farmers are increasingly restructuring existing loans and boosting the collateral needed for new ones as the numbers of late and missed payments have risen, Bloomberg News reported. While regional banks are healthy, they’re clearly boosting their defenses against the risks they face. In March, a report by First Midwest Bank in Chicago showed past-due agricultural loans up 287 percent in 2018 over the previous year. Meanwhile, cases handled by the Iowa Mediation Service involving farmers unable to make payments rose 20 percent. While regional banks are healthy, they’re clearly boosting their defenses against the risks they face. In March, a report by First Midwest Bank in Chicago showed past-due agricultural loans up 287 percent in 2018 over the previous year. Meanwhile, cases handled by the Iowa Mediation Service involving farmers unable to make payments rose 20 percent. Farmer bankruptcies in six Midwest states rose 30 percent to 103 in 2018, according to the Federal Reserve Bank of Minneapolis. To hold back the tide, Farmers National Bank in Prophetstown, Illinois is restructuring more and more loans to keep growers solvent while trimming the bank’s own risk. Conditions that prompted lenders to ask for more collateral rose 2.5 percent in the fourth-quarter of 2018 from a year earlier, according to a survey by the Federal Reserve Bank of Kansas City, which covers parts of seven states. Meanwhile, as of January 1, average interest rates on farm operating loans had edged up to 6.07 percent, its highest level since the second quarter of 2010, according to February report by the Federal Reserve Bank of Chicago.

As bankruptcy rates among American farmers near record highs, U.S. Senators Chuck Grassley (R-Iowa), Amy Klobuchar (D-Minn.) and Tina Smith (D-Minn.) reintroduced the "Family Farmer Relief Act of 2019" on March 27 to raise the chapter 12 operating debt cap to $10 million, allowing more family farmers to seek relief under the program. [as reported in American Bankruptcy Institute e-newsletter of 5/6/19]

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Wells Fargo Bank NA v. Weidenbenner (In re Weidenbenner),    BR    (Bankruptcy Court S.D.N.Y. April 25, 2019) case number 15-244 Freezing a Chapter 7 Debtor’s Bank Account Doesn’t Violate the Automatic Stay

SDNY opinion seems to mean that a bank may freeze a debtor’s entire bank account at filing, without violating the automatic stay.

Persuaded by a Ninth Circuit opinion, a district judge in New York held that a bank does not violate the automatic stay by imposing a temporary freeze on the account of an individual who files a chapter 7 petition.

The bank had an internal policy of allowing chapter 7 debtors to continue drawing funds from their accounts if the accounts held an aggregate of less than $5,000 on the date of filing. On the other hand, the bank would temporarily freeze the accounts if they held more than $5,000 in total.

In the case at bar, the debtors had more than $5,000 in their accounts on the filing date, so the bank froze everything. On the same day, the bank notified both the chapter 7 trustee and the debtor’s counsel about the temporary freeze and sought instructions from the trustee about the disposition of the account.

One week after filing, the bank dishonored a $75 check the debtors had drawn on the account and imposed a $25 fee.

Ten days after filing, the trustee instructed the bank to release all funds in the account to the debtors, presumably because the funds were exempt assets. The bank immediately complied.

Later, the debtor sued the bank for violating the automatic stay under Section 362(a). Eventually, the bankruptcy court ruled that the bank had violated the stay by exercising control over estate property. The court awarded the debtors $25 in damages and attorneys’ fees of almost $15,000.

The bank appealed and won a reversal in an April 25 opinion by District Judge Kenneth M. Karas of White Plains, N.Y.

Judge Karas explained that two provisions of the Bankruptcy Code are “in tension.” Section 542(b) requires an entity owing a “debt” that is property of the estate to pay the “debt” to “or for the benefit of” the trustee. On the other hand, he said, Section 362(b)(3) prohibits an exercise of control over estate property.

Judge Karas noted how Bankruptcy Rule 4003(b) imposes a 30-day deadline after the first meeting of creditors for objecting to the debtor’s claimed exemptions. Once the deadline passes without objection, exempt property reverts to the debtor, is no longer an asset of the estate and is not protected by the automatic stay.

In Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 19 (1995), the Supreme Court held that a bank did not violate the automatic stay by placing an administrative freeze on a debtor’s bank account, to the extent the bank had a right of setoff. Judge Karas said that subsequent courts “applied [Stumpf’s] reasoning to temporary holds placed on bank accounts even where the bank had no setoff rights.”

Judge Karas said he was persuaded by the Ninth Circuit’s “reasoning” in In re Mwangi, 764 F.3d 1168 (9th Cir. 2014), where the bank had placed an administrative freeze on the debtors’ bank account after they filed a chapter 7 petition. The debtors had sued, alleging a violation of the automatic stay.

The Ninth Circuit found no stay violation before the deadline for objecting to exemption claims, because the debtors had no right to possession of the funds and thus suffered no injury. After the exemption deadline, the appeals court likewise found no stay violation because the account was no longer estate property and thus was not protected by the automatic stay.

Judge Karas cited Section 362(k), which allows the recovery of damages by an individual who is “injured by any willful violation” of the stay. He agreed with “the overwhelming majority of courts” holding that a debtor has not been injured — and thus has no right to recover damages — before the exemption deadline when the debtor has no right to possess the property.

There was no stay violation on a second ground, according to Judge Karas. Because the bank immediately sought instructions from the trustee after imposing the temporary freeze, he said that the bank had not exercised control over the property and therefore did not violate the stay.

Observation: The opinion seems to mean that the bank would not violate the stay by freezing accounts with less than $5,000. By allowing debtors to draw against accounts with less than $5,000, the bank is exposing itself to potential liability if a debtor withdraws funds for an improper purpose. Evidently to maintain good relations with customers, the bank’s policy gives debtors more rights than those to which they are entitled by strict application of the Bankruptcy Code, as interpreted by Judge Karas. [as reported by ABI e newsletter on 050219.

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Credit and Collection E-newsletter of 4/29/19 Reports:

Red flags are flying in the credit-card industry after a key gauge of bad debt jumped to the highest level in almost seven years. The charge-off rate—the percentage of loans companies have decided they’ll never collect—rose to 3.82 percent in the first three months of 2019, the highest since the second quarter of 2012, according to data compiled by Bloomberg Intelligence. And loans 30 days past due, a harbinger of future write-offs, increased at all seven of the largest U.S. card issuers. At Discover Financial Services, which reported results on Thursday, the charge-off rate increased to 3.5 percent from 3.23 percent in the prior quarter. “Certainly, this has been one of the longest recoveries, so, in general, we have been contracting credit policy at the margin and tightening,” Discover CEO Roger Hochschild said in an interview. Hochschild said his company has been closing inactive accounts and slowing down the number and size of credit-line increases for both new and existing customers. There’s been a “degradation” in credit quality for certain customers, according to Richard Fairbank, chief executive officer at Capital One Financial Corp., the country’s third-largest card issuer. Fairbank said some customers with negative credit events during the financial crisis are now seeing those problems disappear from their credit-bureau reports.

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American Bankruptcy Institute reports that Malls are Under Pressure as More Stores Close

Strong retail numbers last year from department stores Macy’s Inc. and Nordstrom Inc. raised hopes that the beleaguered mall industry would finally rebound. But recent developments this year are pointing to more trouble ahead, the Wall Street Journal reported. A number of struggling retailers are closing stores and being more selective about where to open ones, dimming prospects for many mall owners and investors. U.S. retailers have already closed 5,994 stores so far this year, compared with 5,864 closures for all of last year, according to Coresight Research. The net store closings, or the number of closings minus openings this year, stands at 3,353. Payless ShoeSource Inc., Gymboree Group Inc. and Charlotte Russe Holding Inc. are among the retailers to announce plans to close stores after earlier attempts at restructuring failed. An unexpected rebound in brick-and-mortar stores last year suggested that malls might enjoy a bit of a comeback, too. Consumer spending was strong, and shopping centers benefited from the expansion of beauty chains like Sephora and Ulta. Macy’s and Nordstrom made new investments in their stores to create a more appealing experience for shoppers. But retail sales have slipped more recently, falling 0.2 percent in February from a month earlier after gaining 0.7 percent in January. Retail sales fell 1.2 percent in December. The mortgage for Destiny USA, one of the largest malls in the country, was recently moved to a special servicer that deals with defaults or renegotiations of loan terms. The servicer said that it expects the mall owner, Pyramid Management Group, to default when the mortgage is due in June. [Reported in ABI e-newsletter of 4/18/19]

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Bankrupt Student Loan Borrowers Could Finally Get a Break

American Bankruptcy Institute 4/15/19 e-newsletter reports that it is possible that Bankrupt Student Loan Borrowers Could Finally Get a Break, if congress were to accept the recommendations of the recent Commission on Consumer Bankruptcy report, and make amendments to the Bankruptcy Code, to make it easier to seek to discharge student loan debt in bankruptcy.

Getting out from under crushing student loan debt might become a little easier if new proposed changes in bankruptcy rules take hold, reported. The proposed changes are part of a wide-ranging report by prominent members of the bankruptcy community, including former judges, academics and lawyers from both the debtor and creditor sides. The recommendations from the American Bankruptcy Institute’s Commission on Consumer Bankruptcy are aimed in part at addressing issues that have made it more challenging for debtors to file bankruptcy. The 274-page report, released Thursday, touched on issues including attorney costs, rainy day funds for debtors with unexpected expenses and the disproportionate number of African-American consumers in a certain type of bankruptcy proceeding. “Debt hanging over the debtor forever has a cost,” Elizabeth Perris, a retired bankruptcy judge who co-chaired the commission report, said Thursday. “It’s a cost in terms of lack of purchase of houses, cars, having children and we just recognize that at a certain point for those people who want to avail themselves of bankruptcy, they ought to be able to get the fresh start and move on with their lives.”

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Jung v. Internal Revenue Serv. (In re Jung) (Bankr. W.D. Wis., 2019)

Jung v. Internal Revenue Serv. (In re Jung) (Bankr. W.D. Wis., 2019) holds Bankruptcy court has jurisdiction to adjudicate both dischargeability as well as liability of prepetition taxes owed to IRS:

After filing chapter 7 the debtors filed an adversary action in bankruptcy court requesting a ruling of discharge for income taxes and penalties.

"The IRS moved to dismiss this adversary on the ground of lack of subject-matter jurisdiction under Federal Rules of Civil Procedure 12(b)(1) and 12(h)(3). The IRS asserts the adversary should be dismissed because the decision will not affect creditors given that the case is a no asset chapter 7. The IRS argues that even if the Court has jurisdiction, the Court should abstain from exercising it "in the interests of judicial economy and because a more appropriate forum exists to adjudicate this matter."

"Jung responds the Court has jurisdiction because (1) the determination of tax liability arises under Section 505(a) of the Code, and (2) a dischargeability determination is a core proceeding."

After a fair amount of discussion about 11 U.S.C. ¶ 505 and 523, and 28 U.S.C. § 1334, and 28 U.S.C. § 157(b)(2)(i), addressing what is a "core proceeding" and the basis for jurisdiction, the court held:

"The IRS assessed tax and penalties against Jung. He filed bankruptcy and asks the Court to determine whether the tax and penalties are dischargeable. Determination of the amount of tax or penalties and the decision on dischargeability are intertwined. In the end, determinations about whether a debt is dischargeable are substantive rights provided by 11 U.S.C. § 523.

"In sum, this Court has jurisdiction. Dischargeability is a core proceeding. It is a substantive right that does not exist outside bankruptcy. Having assessed tax and penalties, the IRS acknowledges there is a debt. If necessary, this Court can determine the amount of tax or penalties as part of the decision on dischargeability."

Having retained jurisdiction, the court's next step would be adjudicating the case.

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Sens. Grassley and Klobuchar Introduce Bipartisan Legislation to Help Family Farms Reorganize

U.S. Senators Chuck Grassley (R-Iowa), Amy Klobuchar (D-Minn.) and Tina Smith (D-Minn.) reintroduced bipartisan legislation to help family farms reorganize after falling on hard times, according to a press release from Sen. Smith’s office. The legislation is also cosponsored by Senators Ron Johnson (R-Wis.), Patrick Leahy (D-Vt.), Thom Tillis (R-N.C.), Doug Jones (D-Ala.) and Joni Ernst (R-Iowa). As bankruptcy rates among American farmers near record highs, the Family Farmer Relief Act of 2019 would raise the chapter 12 operating debt cap to $10 million, allowing more family farmers to seek relief under the program. Several years of low commodity prices, stringent farm lending regulations and recent retaliatory tariffs have taken a toll on America’s agriculture producers. Farm bankruptcy rates in many farming regions across the country are at their highest point in a decade. In some places in 2018, farm bankruptcies doubled from the previous year. Debts held by farmers are nearing historic levels set in the 1980s, further financially extending farm operations. Sens. Klobuchar, Smith and Grassley first introduced this legislation in December. [as reported in ABI e-newsletter of 3/28/19]

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Car Loan Delinquencies Surge To Highest Point Since 2010

Car Loan Delinquencies Surge To Highest Point Since 2010, reports Credit & Collection e-newsletter of 2/27/19

Borrowers are behind in their auto loan payments in numbers not seen since delinquencies peaked at the end of 2010, according to the Federal Reserve Bank of New York. More than 7 million Americans were 90 or more days behind on their car loans at the end of last year, 1 million more than eight years ago, according to a report from the bank. That’s a potential sign of trouble for the auto industry and perhaps the broader economy. The New York Fed reported that auto loan delinquency rates slowly have been worsening, even though borrowers with prime credit make up an increasing percentage of the loans. The 90-day delinquency rate at the end of 2018 was 2.4 percent, up from a low of 1.5 percent in 2012, the bank reported. Also, delinquencies by people under 30 are rising sharply, the report said. But economists and auto industry analysts say they aren’t sounding an alarm yet. The number is higher largely because there are far more auto loans out there as sales grew since the financial crisis, peaking at 17.5 million in 2016. The $584 billion borrowed to buy new autos last year was the highest in the 19-year history of loan and lease origination data, according to the report. Other signs still point to a strong economy and auto sales that will continue to hover just under 17 million per year for the near term. “I think it’s a little too soon to say that the sky is falling, but it’s time to look up and double check to make sure nothing is about to hit you on the head,” said Charlie Chesbrough, senior economist for Cox Automotive.

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Federal Trade Commission vs. AMG Capital Management, LLC

Federal Trade Commission vs. AMG Capital Management, LLC,     F.3d    , 2018 Westlaw 6273036 (9th Cir.): The Ninth Circuit Court of Appeals holds that a trial court correctly ordered equitable restitution of $1.27 billion due to a payday lender's deceptive practices. Comment: seems unlikely that 1.27 billion can be collected from a payday lender, regardless of the amount stated in the judgment against the payday lender.

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Williams vs. American Honda Finance Corp.

Williams vs. American Honda Finance Corp., 907 F.3d 83 (1st Cir. 2018): The federal court of appeals for the First Circuit recently decided a case regarding whether, when a car borrower defaults on paying, and the car lender repossesses and sells the car at auction, is the “deficiency” that the car borrow owes calculated as amount owed minus fair market value of car, or as amount owed minus auction price car sold for at a wholesale auction. NOT a 9th Circuit case, NOT on CA law, but still could have effect in how 9th Circuit would rule on this issue, under CA law.

The First Circuit has held that under Massachusetts law, the post-sale notice given by a lender to a defaulting car buyer must state that the borrower’s deficiency liability is based on the difference between the balance due and the vehicle’s fair market value, rather than the auction price.

Facts: After a consumer defaulted on her car loan, the lender repossessed her car and sold it at auction. It then sent her the following notice: “The money received from the sale (after paying our costs) will reduce the amount you owe. If the auction proceeds are less than what you owe, you will still owe us the difference.”

She brought a putative class action in state court against the lender, claiming that this notice violated both Article 9 of the UCC and the Massachusetts consumer protection statute. She argued that the notice erroneously told her that her deficiency liability would be calculated using the auction price, rather than its fair market value.

That suit was removed to federal court, and summary judgment was entered in favor of the lender. The Court of Appeals certified the question to the Massachusetts Supreme Judicial Court, which ruled that the deficiency must be measured by the fair market value of the vehicle, rather than the auction price. However, the Massachusetts court distinguished between "fair market retail value" and "fair market value."

Reasoning: The First Circuit reversed the grant of summary judgment in favor of the lender, holding that the issue had been decided in favor of the consumer by the Massachusetts court. The lender argued that the auction price was, in fact, the fair market value of the car, but the court disagreed.

Comment: This ruling will make it much harder for vehicle lenders to collect from defaulting consumers, for two reasons: the use of a higher hypothetical value ("fair market" value vs. wholesale auction price) will artificially reduce the amount of the borrower’s deficiency, and the “fair market” value is inherently murky and harder to prove than the auction price. The burden of proof, of course, is on the creditor seeking the deficiency.

Speaking cynically (but honestly), the good news is that there is little chance of recovering anything from a defaulting car buyer in any case; thus, a decision that makes it more difficult to collect might not have a significant real-world effect on the finance industry.

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In re Maust Transport, Inc., 2018 Westlaw 4488712 (Bankr. W.D. Wash.).

A bankruptcy court in Washington has held that when a creditor assisted a bankruptcy trustee's prosecution of a fraudulent transfer claim against a bank, the creditor was entitled to seek an award of administrative expenses for its "substantial contributions" to the Chapter 7 estate.

FACTS: Following the filing of an involuntary Chapter 7 petition, one of the petitioning creditors suspected that the debtor's secured lender had received a fraudulent transfer. The Chapter 7 trustee had no funds to pursue the case and could not locate contingent fee counsel to handle the matter. The petitioning creditor then assembled some evidence and obtained a firm willing to handle the prosecution on a contingency basis.

Ultimately, that firm settled the fraudulent transfer claim against the bank, resulting in a substantial influx of cash to an otherwise-administratively insolvent estate. The settlement also extinguished the bank's $3 million deficiency claim.

The petitioning creditor eventually sought to recover its fees and costs incurred in assisting the trustee's pursuit of the fraudulent transfer settlement, claiming that it had made a "substantial contribution" under 11 U.S.C.A. §503(b)(3)(D). That provision permits the court to award administrative expenses incurred by "a creditor . . . in making a substantial contribution in a case under chapter 9 or 11 of this title."

While acknowledging the creditor's assistance, the trustee objected to the creditor's application for administrative expenses, arguing that the statute permitted an award to a creditor who had made "a substantial contribution in a case under chapter 9 or 11 of this title." Since the debtor's bankruptcy was an involuntary Chapter 7 case, the language of the statute was not broad enough.

REASONING: The court disagreed, first noting that the introductory paragraph of §503(b) included the word "including," which is an expansive term, rather than a limitation on the court's powers. The court acknowledged noted that there was no controlling Ninth Circuit authority on the precise issue at bar and that the cases throughout the country were in conflict.

The court held that the language of the statute did not prohibit an award of expenses:

[T]here is nothing in the Code specifically excluding such administrative claims in a Chapter 7. The use of the term "including" indicates an intent that the categories listed in the statute not be exhaustive and that the terms be flexible and adaptable to the unique circumstances of each case. In addition, the legislative history of this section indicates that Congress’s intent in enacting subsection (b)(3)(D) was to resolve a problem that was occurring in Chapters 9 and 11, not to exclude the allowance of such fees in the rare Chapter 7 case to which it would be applicable. Further, Congress could have specifically stated that such claims are never allowed in Chapter 7, 12 or 13, but it did not.

The court then invoked public policy in support of its reading of the statute:

The purpose of § 503(b)(3)(D) is to encourage creditors in whatever chapter a bankruptcy case is filed to “substantially contribute” to the estate by pursuing funds that will be available for distribution to claimants. If the particular facts of a case warrant reimbursement, the court should have the ability to fashion a remedy that will foster rather than hinder such actions for the benefit of the estate. While it is true, that in cases where there is a trustee, the allowance of such claims will be rare and such allowed substantial contribution claims should be limited to avoid overlap and duplication of efforts with those of the trustee, there are cases where for any number of reasons a creditor may still provide a "substantial contribution."

The court finally held that the creditor’s efforts merited an award, although not in the full amount claimed by the creditor:

[The creditor's] actions significantly benefitted the Chapter 7 estate. [The creditor] expended significant resources in obtaining documents, locating and interviewing counsel, and convincing such counsel to pursue the claims on a contingency basis. The fraudulent transfer action resulted in a compromise with [the bank] and other defendants and recovery for the estate in the amount of $200,000. After payment of fees and costs, the net recovery to the estate was $130,830.57. Although these are not the only funds recovered, they do constitute the bulk of funds received, and it is undisputed that such funds would not have been available for distribution to creditors but for [the creditor's] actions.

[as reported in 1/18/19 CA state bar insolvency committee e-newsletter, analysis by professor schechter]

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The US Government Consumer Financial Protection Bureau May Scrap Underwriting Requirements For Payday Loans

The Consumer Financial Protection Bureau (CFPB) may scrap some underwriting requirements for payday loans, which would make it easier for payday lenders to provide the loans and easier for some borrowers to procure them. The underwriting requirements in question are part of the CFPB’s payday lending rule, which the bureau spent five years working on and which the last director and the current one, Mick Mulvaney and Kathy Kraninger respectively, seek to backtrack. This part of the rule requires payday lenders to underwrite loans for borrowers who obtain more than six payday loans in a year. Lenders must verify the borrower’s income and examine the borrower’s other debts and spending. In other words, they must evaluate a borrower’s “ability to repay.” The purpose of this provision is to prevent borrowers from falling into a long-term debt trap, as payday loans usually come with interest rates upward of 300 percent. If payday lenders believe a frequent borrower is unable to pay back the loans, they can refuse to provide more of them. Rebecca Borné, senior policy counsel with the Center for Responsible Lending (an anti-payday lending advocacy group), told InsideSources she doesn’t see how nixing this provision will be good for consumers. [as reported in Credit & Collection e-newsletter of 01/17/19]

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Obduskey v. McCarthy & Holthus LLP, U.S. Supreme Court case No. 17-1307: Meaning of the Term 'Debt Collector' in Foreclosure Protections Case Debated in Supreme Court Oral Argument

On 1/7/19, the US Supreme Court heard oral argument in Obduskey v. McCarthy & Holthus LLP, U.S. Supreme Court case No. 17-1307. A decision is expected to be issued by the US Supreme Court by June 2019. According to, depending what the US Supreme Court rules, the case may resolve a legal question that could have broad ramifications on hundreds of thousands of Americans who are foreclosed on without a judicial process each year. A key issue in the matter is who or what can be considered a "debt collector." The case centers on Dennis Obduskey, a Colorado man who defaulted on his $329,940 home loan in the aftermath of the 2007 financial crisis. The question in the case is whether Obduskey is entitled to legal protections for debtors provided by Congress in 1977, or whether the foreclosure is exempt because it is Obduskey's home, and not money, that is at stake. Obduskey obtained his home loan from a company called the Magnus Financial Corporation in 2007, before it was ultimately transferred to Wells Fargo. Like many other Americans, he defaulted on the loan in 2009. The bank then attempted to foreclose on Obduskey for six years, to no avail. Finally, in 2015, Wells Fargo retained a law firm — McCarthy & Holthus — to handle the foreclosure proceedings. But, as of the latest briefs in the case, Obduskey's home has yet to be sold. The question of whether a law firm seeking to foreclose on a property is a debt collector is one that could affect millions of Americans. In 2016, about 200,000 homes were lost to foreclosure in states that permit lenders to foreclose on a property without going to court. Business groups have argued that these so-called non-judicial foreclosures are more efficient and fair to borrowers. Progressives say borrowers are entitled to more protections.

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9th Circuit Upholds Record $1.27 Billion Judgement Against Payday Lender

FEDERAL TRADE COMMISSION, Plaintiff-Appellee, v. AMG CAPITAL MANAGEMENT, LLC; BLACK CREEK CAPITAL CORPORATION; BROADMOOR CAPITAL PARTNERS, LLC; LEVEL 5 MOTORSPORTS, LLC; SCOTT A. TUCKER; PARK 269 LLC; KIM C. TUCKER, Defendants-Appellants, Ninth Circuit Court of appeals decision on December 3, 2018, case number No. 16-17197

The Ninth Circuit recently upheld a $1.27 billion award against a former professional racecar driver’s loan companies, finding that the companies had violated Section 5 of the FTC Act by deceiving consumers and illegally charging them undisclosed and inflated fees. The $1.27 billion judgement represents the largest litigated judgement ever obtained by the FTC.

The case stems from a complaint filed in 2012 by the FTC, which alleged that a number of payday loan companies controlled by the defendant falsely claimed they would charge borrowers the loan amount plus a one-time finance fee while defendants actually made multiple withdrawals from consumers’ bank accounts and assessed a new finance fee each time, without properly disclosing the true costs of the loan. In particular, the FTC alleged that the loan notes the defendant’s businesses displayed on their payday lending websites did not clearly disclose that the loans would automatically renew unless consumers performed a series of affirmative steps to deny renewal and thus pay only the amount disclosed as the "total of payments" in the TILA box of the loan note.

In upholding the district court’s summary judgement and award against the defendants, the Ninth Circuit panel found that the loan notes offered by the defendant’s companies were "likely to deceive a consumer acting reasonably under the circumstances” and therefore violated the FTC Act’s prohibition against “unfair or deceptive acts or practices in or affecting commerce."

The Ninth Circuit panel rejected the defendants’ arguments that the loan contracts were not deceptive because they included, in fine print, a description of the loan terms and renewal practices that were "technically correct." Instead, the panel found that the fine print provided only an “oblique” and “misleading” description of the loan terms that failed to cure the misleading "net impression" created by the amount disclosed in the TILA box. According to the Ninth Circuit panel, the loan note did not accurately disclose that the loans would be automatically renewed without further action. Further, the Ninth Circuit panel stated that, for example, renewals led to additional finance charges that could amount to as much as $585 in additional payments on a $300 loan.

In addition to summary judgement and the $1.27 billion judgement, the ruling upheld the ban permanently enjoining the defendant and his companies from engaging in consumer lending.

Reported in Credit and Collection e-newsletter

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In re OGA Charters, LLC, 2018 Westlaw 4057525 (5th Cir.)

In re OGA Charters, LLC, 2018 Westlaw 4057525 (5th Cir.): The Fifth Circuit Court of Appeals recently held that when a bankruptcy estate is subject to mass tort claims, the estate has an equitable interest in the insurance proceeds, thus precluding extrajudicial settlements by the tort victims.

FACTS: A thinly-capitalized bus charter company owned an insurance policy providing $5 million in liability coverage. One of the company's two buses suffered an accident, killing nine passengers and injuring 40 others. The passengers filed claims against the bus company. Some of the passengers quickly entered into settlements with the insurance carrier, which would have exhausted the liability coverage.

The victims without settlements filed an involuntary bankruptcy petition against the bus company and initiated an adversary proceeding against the insurance company, seeking to enjoin the payments to the settling passengers. The bus company's bankruptcy trustee claimed that the proceeds of the insurance policy were property of the bankruptcy estate under 11 U.S.C.A. §541(a).

The bankruptcy court entered summary judgment in favor of the trustee, and the settling claimants appealed directly to the Fifth Circuit.

REASONING: The appellate court affirmed. Acknowledging some inconsistencies in the circuit's own prior decisions, the court articulated its holding:

We now make official what our cases have long contemplated: In the "limited circumstances," as here, where a siege of tort claimants threaten the debtor’s estate over and above the policy limits, we classify the proceeds as property of the estate. Here, over $400 million in related claims threaten the debtor’s estate over and above the $5 million policy limit, giving rise to an equitable interest of the debtor in having the proceeds applied to satisfy as much of those claims as possible.

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New California Debt Collection Laws Take Effect Jan. 1, 2019:

Three new CA state laws take effect on 1/1/2019, and these laws all favor debtors, and disfavor debt collectors. The three bills are A.B. 1526, which amends sections 1788.14 and 337 of the California civil code adding requirements for time-barred debts; A.B. 38, which clarifies the definition of a "student loan servicer"; and A.B. 1974, which provides parameters for collecting debts owed to public schools, ACA International’s Compliance Analyst Laura Dadd reports. Just like several other states, the amendments to sections 1788.14 and 337 of the California civil code will require debt collectors to provide consumers with a notice that they cannot be sued for a debt that is time-barred. The new law provides two possible options to use depending on whether the seven-year period for credit reporting debts has run out. The notices are as follows. For debts that may still be credit reported under the FCRA: “The law limits how long you can be sued on a debt. Because of the age of your debt, we will not sue you for it. If you do not pay the debt, [insert name of debt collector] may [continue to] report it to the credit reporting agencies as unpaid for as long as the law permits this reporting.” [reported in credit and collection e-newsletter of 12/20/18]

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Geltzer v. Oberlin College (In re Sterman), 18-01015 (Bankr. S.D.N.Y. Dec. 4, 2018): Bankruptcy Judge in SDNY holds

Tuition Payments for Adult Children Squarely Held to Be Constructively Fraudulent, where parents were INSOLVENT at the time the parents paid the tuition for the parent's child who was NOT a minor at time the parents paid the "child's" tuition. However, case also holds parents paying tuition for a MINOR child is NOT a fraudulent transfer, even if the parents were INSOLVENT at the time the parents paid the tuition for the minor child:

On an issue dividing the lower courts, Bankruptcy Judge Martin Glenn of New York squarely held that educational expenses paid for a child over the age of majority are constructively fraudulent transfers, assuming the debtor-parent was insolvent.

Conversely, Judge Glenn found no fraudulent transfer in his December 4 opinion when parents paid educational expenses for a minor child, because parents receive reasonably equivalent value by satisfying their obligations to educate their children.

Judge Glenn said the case presented "culturally and socially charged issues." Citing a "developing body of case law," he listed decisions holding that tuition payments for adult children are or are not constructively fraudulent transfers.

Judge Glenn said he was "constrained" by the Bankruptcy Code and New York's fraudulent transfer law to determine whether the bankrupt parents received "reasonably equivalent value" or "fair consideration" for educational expenses they paid.

Stipulated facts presented the issues starkly. Within six years before their joint bankruptcies, the parents paid tuition and related expenses for their two children. Some payments came before the children were 21, and others were after. The trustee sued the children, the college they attended and student loan lenders.

In New York, majority occurs at age 21, not 18. State law requires parents to pay for their minor children's housing, food, education, and health care, Judge Glenn said.

The parents contended they received sufficient value because educating their children helped to ensure that the kids would be financially independent. Indeed, Judge Glenn cited studies showing that an education decreases the odds that a child will live with his or her parents.

Nonetheless, Judge Glenn said that "the economic 'benefit' identified by the [parent-debtors] does not constitute 'value' under [New York law] or the Bankruptcy Code." He therefore held that expenses paid for the children after majority were constructively fraudulent, assuming the trustee could later prove that the parents were insolvent at the time of the transfers.

The trustee contended that expenses paid before majority were also constructively fraudulent because the children attended an expensive private college.

Judge Glenn framed the question as whether "the parents receive reasonably equivalent value when they do pay for" a minor child's more expensive education.

Judge Glenn followed a decision by Chief Bankruptcy Judge Carla E. Craig of the Eastern District of New York, who said that paying tuition satisfies the parents' "'legal obligation to educate their children. . . . It is irrelevant to this determination whether the Debtors could have spent less.'" In re Akanmu, 502 B.R. 124, 132 (Bankr. E.D.N.Y. 2013).

Absent "egregious conduct," Judge Glenn granted summary judgment and dismissed claims based on expenses paid before majority.

Given the procedural posture of the case, Judge Glenn did not reach the question of whether the children, the college or the student loan lenders were the initial or subsequent transferees. Likely as not, only the initial transferee would be liable, because subsequent transferees would be entitled to the good faith defense under Section 550(b)(2).

Question: The age of majority varies among the states. In CALIFORNIA, the age of majority is 18 years old (NOT 21 years old, as in New York).

Unanswered questions, per ABI, which reported on above case, include: With regard to constructively fraudulent transfers under Section 548(a)(1)(B), should federal courts borrow the age of majority in the forum, and if so, on what theory? Or, should the age of majority depend on the residence of the defendant or the residence of the debtor? Or, is there separate federal law for the age of majority in cases under Section 548(a)(1)(B)?

There is sure to be more case law on this issue, as time passes.

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Judge Tells Government Debt Collectors They Can't Collect From A Broke 58-Year-Old Woman

In 1991, Vicky Jo Metz borrowed $16,613 to pay for tuition; now she's 59, and has paid back 90% of that money - and she still owes $67,277. Metz is broke and has filed for bankruptcy. But thanks to a law signed by Bill Clinton, it's almost impossible to discharge your student debt through bankruptcy. That's why the US government sent their most notorious knuckle-breaking debt-collectors, the Educational Credit Management Corporation to argue against Metz's debt being forgiven. ECMC had a counteroffer: Metz could pay $203 per month for 25 years - until she was 84 years old - and then, the remaining debt (which would have ballooned to $152,277.88, 900% of her principal) would be forgiven. The judge pointed out that Metz would be a formerly bankrupt person living on Social Security by then, and would be liable for taxes on the $152,277.88 in "debt forgiveness" that ECMC was generously extending to her. The proposal was completely ordinary: ECMC makes this kind of deal for Americans all the time. What was out of the ordinary was Judge Robert E. Nugent's response: he told them to pound sand. Instead, he ordered Metz to pay back the $1,000 or so she still owes on her principal and then have done with it.

As Richard Fossey writes, this highly unusual ruling is a breath of fresh air in the world of predatory government student debt-collection.

Vicky Jo Metz's case is important for two reasons. First, Judge Nugent rejected ECMC's argument, which it has made hundreds of times, that a distressed student-loan debtor should be forced into an income-based repayment plan as an alternative to bankruptcy relief. As Judge Nugent pointed out, an IBRP makes no sense at all when the debtor is older and the accumulated debt is already many times larger than the original amount borrowed.

Indeed ECMC's argument is either insane or sociopathic. Why put a 59-year old woman in a 25-year repayment plan with payments so low that the debt grows with each passing month?

Second, the Metz case is important because it is the second ruling by a Kansas bankruptcy judge that has canceled accrued interest on student-loan debt. In Murray v. ECMC, decided in 2016, Alan and Catherine Murray, a married couple in their late forties, filed for bankruptcy in an effort to discharge $311,000 in student loans a