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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.

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.

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.”

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.

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.

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.

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]

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.

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.

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]

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.

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.

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

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)

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.

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.

Did You Know? Four Presidents of the United States filed for Bankruptcy:

Thomas Jefferson, Abraham Lincoln, Ulysses S. Grant and William McKinley

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]

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.

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.

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.”

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.

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.

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]

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.

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.

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)).

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:

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]

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.

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).

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]

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]

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]

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.”

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.

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]

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]

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]

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.”

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.”

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]

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]

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

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).”

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.

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.

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]

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.

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?”

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.

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).

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).

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.

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.

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.

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]

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]

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.

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.

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]

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.

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.

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]

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.

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.”

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."

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.

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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]

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]

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

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

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.

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).

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.

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.”

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.

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]

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.

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.

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]

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.”

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.

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]

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.

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.

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.

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]

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]

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.

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

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.

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]

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.

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 and accumulated interest.

The Murrays took out a total of $77,000 in student loans back in the 1990s, and they made monthly payments totally 70 percent of what they borrowed.

But, much like Vicky Jo Metz, the Murrays saw their student-loan debt grow larger and larger over the years until their debt totaled $311,000-four times what they borrowed.

Fortunately for the Murrays, Judge Dale Somers, a Kansas bankruptcy judge, granted them a partial discharge of their massive debt. Judge Somers ruled that the Murrays had managed their student loans in good faith, but they would never be able to pay back the $311,000 they owed. Very sensibly, he reduced their debt to $77,000, which is the amount they borrowed, and canceled all the accumulated interest.

As reported in Credit & Collection e-newsletter of December 2018

Elite of Los Angeles, Inc. v. Hamilton (In re Hamilton)

Elite of Los Angeles, Inc. v. Hamilton (In re Hamilton), 2018 WL 3637905 (9th Cir. BAP July 31, 2018), the Ninth Circuit Bankruptcy Appellate Panel reversed an Order of the Bankruptcy Court for the Southern District of California, where the Bankruptcy Court's Order had confirmed the chapter11 plan of the debtor, who was an individual. The BAP ruled that the debtor had not satisfied the standards of 11 USC 1129, that had to be met, in order for the individual debtor's Chapter 11 plan to be confirmable. A major defect in the plan was that plan enjoined creditors that held debts against debtor, that were NOT dischargeable, from taking collection efforts to collect those nondischargeable debts from debtor, despite the plan being confirmed, and the chapter 11 plan did not provide any meaningful distribution to the non-dischargeable debts, so the creditors holding non-dischargeable claims were likely worse off as a result of the plan being confirmed, than those creditors would have been, if the plan had not been confirmed. From the decision, it appears that, if the plan had provided for paying the nondischargeable debts 100% over the life of the plan, the injunction might have been sustained.

In re McCormick, 894 F.3d 953 (8th Cir. 2018)

In re McCormick, 894 F.3d 953 (8th Cir. 2018): The US Court of Appeals for the Eighth Circuit holds that attorney's fees owed to an oversecured lender arose under the parties' agreements, even though the borrowers' obligations resulted in nonconsensual judgment liens that did not include an award of fees. This decision, if adopted in other Circuits, such as the US Court of Appeals for the Ninth Circuit (our Circuit for bankruptcy courts and US district Courts in California) increases the ability of oversecured creditors, to add attorneys fees to those creditors claims in bankruptcy cases. An oversecured creditor is a creditor which has a lien on collateral (real or personal property) of the bankruptcy debtor, and for which the value of that collateral, that the creditor could get by executing

FACTS: A secured lender entered into a series of agreements with a group of borrowers; all of the agreements contained provisions stating that the lender would be entitled to collect its attorney's fees in the event of default.

After a default, the parties entered into a workout agreement, under which the lender agreed to forbear. The borrowers executed confessions of judgment totaling more than $3 million, to be filed if they defaulted on their workout obligations. When they did so, the lender filed the confessions of judgment, resulting in judgment liens.

The borrowers soon filed a Chapter 11 petition. After a complex (but irrelevant) procedural history, the lender sought and obtained an award of attorney's fees under 11 U.S.C.A. §506(b), on the ground that it was oversecured and that the governing agreements contained fee clauses.

REASONING: On appeal, the borrowers argued that the agreement for fees was superseded by the entry of the judgments and that the lender was oversecured by operation of its nonconsensual judgment liens, rather than by virtue of the parties' contractual agreements. The court rejected that argument:

We disagree with any notion that the judgment liens are somehow not part of [the lender's] secured claim. The judgment liens came about because of the Workout Agreement wherein [the lender] agreed to forebear on various other (secured) loan defaults in return for the [borrowers'] executing confessions of judgments and providing additional collateral to [the lender]. [The lender] filed the confessions of judgments in North Dakota state court, resulting in the judgment liens. Attorney fee provisions were not allowed to be included in these judgment liens by operation of a North Dakota state statute . . . , but these judgment liens did not simply come out of left field. They were always part of the secured claim between [the parties] and came into being because [the lender] attempted to work with the debtors to collect on its secured debt, presumably to avoid what now seems was inevitable-bankruptcy proceedings.

Held: Late-Filed State Tax Return as Invalid

HELD: LATE-FILED STATE TAX RETURN AS INVALID; and because late-filed tax return was invalid, the taxes were not dischargeable, by debtor, in debtor's bankruptcy case

Kline v. Internal Revenue Service and Arkansas Department of Finance & Administration, 581 B.R. 597 (Bankr. W.D. Ark., 2018)

In this case what has become known as the "McCoy rule" rearsits head again, and, like McCoy, it involves state income taxes, in particular taxes assessed by the Arkansas Department of Finance and Administration. The debtor filed his state tax returns years after they were due. The State challenged the dischargeability of the liabilities because the applicable State statute required that the returns "shall" be filed by a certain date. But " ... in fact all of the returns at issue were filed ... more than four and a half years after the 2008 return was due and fourteen and a half years after the 1998 tax was due." The State averred its argument based on 11 U.S.C. § 523(a)(19).

That section reads:

"For purposes of this subsection, the term "return" means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements). Such term includes a return prepared pursuant to section 6020(a) of the Internal Revenue Code of 1986, or similar State or local law, or a written stipulation to a judgment or a final order entered by a nonbankruptcy tribunal, but does not include a return made pursuant to section 6020(b) of the Internal Revenue Code of 1986, or a similar State or local law." inf.added

The court commented:

"This Court agrees that the language defining "return" that was added under BAPCPA is clear and unambiguous and that the phrase "including applicable filing requirements" is not superfluous to the definition. To determine what the applicable filing requirements are, the Court must turn to Arkansas law.

In Arkansas, an income tax return "shall be filed as follows: (a) If covering the preceding calendar year, on or before April 15." Ark. Code Ann. § 26-51-806(a)(2)(A). By including a requirement that a tax return "shall be filed" by a certain date, the state is indicating that timeliness is a condition to filing."

ed. note:

This case is in the 8th Circuit, which has not adopted the McCoy rule. This case, like a growing handful of courts outside the 1st., 5th., and 10th. circuits, have independently adopted the McCoy "late filed returns are invalid" rule. If a case involves late-filed returns, it is not enough to assume that because your district is not in one of the 3 McCoy rule circuits, you need not give it a second thought. You may want to check out your local judge's inclination, if any, for or against people who have filed their tax returns late.

McNair vs. Maxwell & Morgan PC, 893 F.3d 680 (9th Cir. 2018)

McNair vs. Maxwell & Morgan PC, 893 F.3d 680 (9th Cir. 2018): 9th Circuit Court of Appeals holds that an attorney who does a judicial foreclosure on a piece of real property owned by an individual homeowner, is a "debt collector", who is subject to the Fair Debt Collection Practices Act ("FDCPA") and that a Court can order that attorney to pay damages, to the consumer homeowner, per the FDCPA, if the attorney did not comply with what the FDCPA requires. An attorney doing a judicial foreclosure would almost certainly NOT have done the things the FDCPA requires doing.

More specifically McNair decision holds that SUMMARY:

The Ninth Circuit has held that attorneys seeking a judicial foreclosure against a homeowner may be held liable under the FDCPA as "debt collectors" because the applicable state statute permitted deficiency liability, even though the attorneys did not seek a deficiency judgment against the homeowner. [McNair vs. Maxwell & Morgan PC, 893 F.3d 680 (9th Cir. 2018).]

FACTS: A homeowner defaulted on her HOA dues. A law firm, acting on behalf of the HOA, eventually obtained a writ of special execution for foreclosure on the home. The foreclosure sale completely satisfied the debt owed by the homeowner to the HOA. The homeowner later sued the firm under the Fair Debt Collection Practices Act ("FDCPA"), claiming that the firm had violated the FDCPA by misrepresenting the amount of the debt that she owed and by seeking attorney's fees to which the firm was not entitled. The district court granted summary judgment against the homeowner on the ground that the firm was not engaged in "debt collection" for purposes of the statute and that the filing of the writ did not violate the statute because the state court approved the attorney's fees claimed in the writ.

REASONING: The Ninth Circuit first held that the FDCPA did apply to the firm's collection efforts. The firm argued that under Ho vs. ReconTrust Co., NA, 858 F.3d 568 (9th Cir.), cert. denied, 138 S. Ct. 504 (2017), the firm could not be held liable because it was merely pursuing foreclosure, rather than seeking to collect a debt. But the court reasoned that Ho involved a nonjudicial foreclosure, which (under California law) precluded deficiency liability. By contrast, in the present case, the relevant Arizona statute theoretically permitted the recovery of a deficiency following the judicial foreclosure. Therefore, Ho was distinguishable, and the firm's conduct fell within the scope of the FDCPA.

The court then went on to hold that even though the state court eventually approved the attorney's fees claimed by firm acting on behalf of the HOA, the application filed by the firm falsely implied that its fees had already been approved. That false statement provided an independent ground for FDCPA liability.

Supreme Court Approves Amendments to Bankruptcy Rules

Supreme Court Approves Amendments to Bankruptcy Rules; Those Amendments will go into effect on 12/1/18, unless (very unlikely to happen) the US Congress disapproves those Amendments.

The U.S. Supreme Court earlier this year approved amendments to the Federal Rules of Bankruptcy Procedure that are expected to become effective on December 1, 2018. Many of the amendments are technical and are intended to conform the Bankruptcy Rules to recently amended rules of appellate and civil procedure. Bankruptcy Rules affected by the amendments include Rules 3002.1, 5005, 7004, 7062, 8002, 8006, 8007, 8010, 8011, 8013, 8015, 8016, 8017, 8021, 8022, 9025, and new Rule 8018.1 and Part VIII Appendix.

Rule 3002.1. Bankruptcy Rule 3002.1 requires creditors with claims secured by a debtor's personal residence to provide notice of all post-petition payment changes, fees, expenses, and charges incurred. The proposed amendments to the rule would create flexibility regarding notice of payment changes for home equity loans, include a procedure for objecting to payment changes, and expand the category of parties who can seek a determination of fees, expenses, and charges that are owed at the end of a bankruptcy case.

Rules 5005 and 8011. Rules 5005(a)(2) and 8011 authorize individual courts to mandate electronic filing or to make it optional. Most courts require attorneys to file electronically, subject to reasonable exceptions. The proposed amendments would make electronic filing mandatory in all districts for all parties represented by an attorney. Paper filing would be allowed for good cause, and individual courts by local rule could permit paper filings for other reasons.

The proposal would permit pro se debtors to file electronically only if authorized by individual court order or local rule. Individual courts that mandates electronic filing for all pro se debtors must provide reasonable exceptions.

Rule 7004. The technical amendment to Rule 7004 would update a cross-reference to Federal Rule of Civil Procedure 4.

Rules 7062, 8007, 8010, 8021, and 9025. These rules address the entry, enforcement, and appeal of judgments entered in adversary proceedings. Rule 7062 incorporates the whole of Federal Rule of Civil Procedure 62, which provides an automatic stay for the enforcement of judgments entered by a district court. The current stay is 14 days, but a proposed amendment to Civil Rule 62 would increase the stay to 30 days to coincide with the 28-day deadline for filing post-judgment motions in district court. The proposed amendment to Bankruptcy Rule 7062 would still incorporate Civil Rule 62 but would retain the 14-day duration for the automatic stay of judgments since the deadline for post-judgment motions in bankruptcy cases is only 14 days.

The proposed amendments to Rules 8007, 8010, 8021, and 9025 would allow a party to stay the enforcement of a judgment in an adversary proceeding by posting a "bond or other security." This is not a substantive amendment; it is intended only to "broaden and modernize" the terms "supersedeas bond" and "surety" that are used currently in the rules.

Rule 8002; Official Form 417A and New Director's Form 4170. Rule 8002 addresses the timeliness of appeals. Rule 8002(a) provides that a notice of appeal must be filed within 14 days after the entry of a judgment. The proposed amendment to Rule 8002(a) would add a new subparagraph (5) that defines the term "entry of judgment" for purposes of calculating the time for filing the notice of appeal.

Rule 8002(b) lists the types of post-judgment motions that toll the deadline for filing appeals. The proposed amendment to Rule 8002(b) would require the filing of post-judgment motions within the times specified by the rules under which the motions are authorized. A similar amendment concerning the timeliness of tolling motions was made to Federal Rule of Appellate Procedure 4(a)(4) in 2016.

Rule 8002(c) establishes filing and service requirements for inmate appeals. Under the proposed amendments to Rule 8002(c), an inmate's notice of appeal is timely if deposited in the institution's mail system on or before the last day for filing. The notice must include a declaration or notarized statement by the inmate stating the mailing date of the notice and attesting to the prepayment of first-class postage. A new Director's Form, Form 4170 (Declaration of Inmate Filing), sets out a suggested form for the declaration. An amendment to Official Form 417A would direct inmate filers to the Director's Form.

Rule 8006. Rule 8006(c) establishes the manner by which litigants can file a joint certification for direct appellate review. The amendment would add a new subsection that would allow the bankruptcy court to file a supplemental statement about the merits of the parties' joint certification. The new subsection is intended to be the counterpart to existing subsection (e)(2), which authorizes the parties to file a similar statement when the court certifies direct review on its own motion.

Rules 8013, 8015, 8016, 8022, and New Part VIII Appendix; Official Form 417C. Rules 8013 (motions), 8015 (briefs), 8016 (cross-appeals), and 8022 (rehearing) establish length limits for motions, briefs, and other pleadings filed in bankruptcy appeals. The proposed amendments convert current page limits to word-count limits for documents prepared using a computer. Similar length limits were made to Federal Rules of Appellate Procedure in 2016. A new appendix to Part VIII of the Bankruptcy Rules lists all of the length limits in one chart. A conforming amendment is made to the certificate of compliance in Official Form 417C.

Rule 8017. Rule 8017 addresses the filing of amicus curiae briefs. The proposed amendments would permit a district court or bankruptcy appellate panel to prohibit or strike an amicus brief if the filing would result in the disqualification of a judge. The amendments address the scenario in which an amicus brief is filed before a judge or appellate panel is assigned to a case and amicus curiae could not predict whether the filing of its brief would result in a recusal. A similar amendment has been proposed for Federal Rule of Appellate Procedure 29.

Rule 8018.1. New Rule 8018.1 is the latest installment of rule amendments intended to address the impact of the Supreme Court's decision in Stern v. Marshall, 564 U.S. 462 (2011) on bankruptcy court jurisdiction to enter final judgments. The proposed rule would authorize a district court to treat a bankruptcy court's judgment as proposed findings of fact and conclusions of law if the lower court did not have the constitutional authority to enter a final judgment.

Official Forms 411A and 411B. The use of Official Forms is mandatory. The Bankruptcy Rules do not require the use of Director's Forms; their use is optional unless local court rule or general order mandates their use. At its September meeting, the Judicial Conference approved reissuing the bankruptcy general and special power of attorney forms, currently Director's Forms 4011A and 4011B, as Official Forms 411A and 411B to conform to Bankruptcy Rule 9010(c), which requires execution of a power of attorney on an Official Form. Bankruptcy cases commenced after December 1, 2018, must use the new forms. Cases pending on December 1 must use the new forms "insofar as just and practicable."

Effective date. The Judicial Conference approved the rule amendments last fall at its annual meeting. The Supreme Court adopted the proposed amendments and transmitted them to Congress in April 2018. If Congress takes no action, the amendments will become effective on December 1, 2018.

Cresta Technology Corporation

What date controls when a check is delivered before the debtor files bankruptcy, but is not cashed (honored) until after the debtor files bankruptcy: In In re Cresta Technology Corporation, 583 B.R. 224 (9th Cir. BAP 2018) the Bankruptcy Appellate Panel of the Ninth Circuit found, among other things, that a bankruptcy court did not err in finding that a check delivered pre-petition, but honored postpetition, constituted an unauthorized postpetition transfer recoverable by a chapter 7 trustee pursuant to 11 § USC 549.

On March 16, 2016, appellant Matthew Lewis ("Appellant"), in his role as Chief Financial Officer ("CFO") of debtor Cresta Technology Corp. ("Debtor"), issued a check from Debtor's bank account to Debtor's bankruptcy attorney ("Counsel"), as payment for representing Debtor in its bankruptcy case. Counsel refused the check in favor of a cashier's check. The next day, Appellant delivered Counsel a cashier's check drawn on Appellant's personal bank account for Debtor's legal fees, with the agreement that Debtor would reimburse Appellant. On March 18, 2016, Debtor, through Appellant as its CFO, issued a check for $10,000 ("Check") to Appellant from Debtor's bank account. Later that same day, Debtor filed its chapter 7 bankruptcy petition, signed by Appellant. The Check cleared Debtor's bank account on March 22, 2016, four days after the petition date.

Debtor's chapter 7 trustee ("Trustee") subsequently filed a complaint against Appellant seeking to avoid the $10,000 payment as a postpetition transfer under 11 U.S.C. §549(a) and to recover the funds for the benefit of the estate under 11 U.S.C. §550(a)(1). Relying on Barnhill v. Johnson, 503 U.S. 393 (1992), the Trustee moved for summary judgment arguing that a "transfer" by an ordinary check occurs when the check clears the originating bank account and not when it is delivered to the intended beneficiary. Thus, the Trustee argued, the Check constituted an authorized postpetition transfer.

The bankruptcy court granted the Trustee's motion, determining that the "transfer" to Appellant occurred on March 22, 2016 - the date the Check was honored by Debtor's bank, four days after the petition date. Therefore, and because the Check was "transferred" postpetition without authorization, the Bankruptcy Court for the Northern District of California held that the Check was an avoidable postpetition transfer under 11 U.S.C. §549(a). Noting that the issue was one "of first impression before any appellate court in the Ninth Circuit since Barnhill," the Bankruptcy Appellate Panel of the Ninth Circuit affirmed the bankruptcy court's entry of summary judgment in favor of the Trustee. Cresta, at 226.

Appellant argued that the bankruptcy court committed reversible error by applying 11 U.S.C. §549 instead of 11 U.S.C. §547, since the Check was delivered prepetition. Appellant further argued that the bankruptcy court should have applied the affirmative defenses available for a preferential transfer under section 547(c). The BAP rejected Appellant's arguments, reasoning that while the transaction between Debtor and Appellant straddled the petition date, the most critical date to consider was when the check was honored by the Debtor's bank, which occurred postpetition. Thus, the BAP found, neither 11 U.S.C. §547(b) nor the affirmative defenses available under 11 U.S.C. §547(c) applied. Relying on Barnhill, the BAP held that the "date of honor" rather than the "date of delivery" is when a "transfer" occurs in connection with an ordinary check.

Thus, the BAP concluded that the bankruptcy court did not err when it granted summary judgment in favor of the Trustee, finding that the Check was an unauthorized postpetition transfer and that Trustee was entitled to judgment as a matter of law.

Courts Split on Denying a Chapter 13 Discharge for Failure to Make Direct Payments

Bankruptcy Judges are Split on Whether or Not a Chapter 13 debtor should be denied a Chapter 13 discharge for debtor failing to pay mortgage/DOT payments that are to be paid direct to the secured lender, even though debtor has paid all the payments that were required to be paid through the debtor's confirmed Chapter 13 plan. Issue is whether the "direct pay" payments are payments owed "under the chapter 13 plan" or not.

Two bankruptcy judge decisions from Illinois illustrate the split among bankruptcy judges on whether or not a chapter 13 debtor who fails to make all direct payments on a home mortgage is eligible for a discharge.

Adopting the minority approach, Bankruptcy Judge Thomas L. Perkins of Peoria, Ill., ruled in March that failure to make direct payments on a nondischargeable mortgage is not grounds for denying a chapter 13 discharge. To read ABI's discussion of Judge Perkins' opinion, In re Gibson, 582 B.R. 15 (Bankr. C.D. Ill. March 5, 2018), click here.

Chief Bankruptcy Judge Laura K. Grandy of East St. Louis, Ill., confronted a similar case where the confirmed chapter 13 plan called for the debtors to make direct payments to the home mortgage lender going forward. Payments through the trustee cured arrears.

At the end of the plan, the trustee filed a notice saying that the arrears had been cured and that the debtors had made all payments required to be made to the trustee. The debtors filed a motion for entry of discharge, stating they had made all payments required by the plan.

Fifteen days before the deadline for objecting to discharge, the mortgage lender filed a response to the trustee's notice stating that the mortgage was in arrears by almost $71,000. The lender did not object to the entry of discharge, perhaps because the mortgage debt would not be discharged in any event under Sections 1322(b)(5) and 1328(a)(1).

Neither the chapter 13 trustee nor any creditor objected, so Judge Grandy entered the debtor's discharge under Section 1328(a).

One month after the entry of discharge, the chapter 13 trustee filed a complaint to revoke discharge under Section 1328(e), alleging that the debtors had obtained their discharges by fraud. The debtors' counsel argued that the motion for a discharge was accurate because direct payments allegedly were not "under the plan."

Judge Grandy said in her August 28 opinion that she "respectfully" disagrees with Judge Perkins because she believes that direct payments to a mortgagee are "payments under the plan," as required by Section 1328(a). Direct payments are "under the plan," she said, because they "must be addressed in that plan."

However, Judge Grandy did not revoke the debtors' discharges. Because the lender's response told the chapter 13 trustee in advance of discharge that the debtors had not made all payments, she allowed the discharge to stand under Section 1328(e) because the trustee knew about the alleged fraud before discharge.

Given the trustee's tardy objection to discharge, Judge Grandy said it was unnecessary to decide "whether or not the debtors' statement that they completed all plan payments was fraudulent."

She ended her opinion with an admonition, saying it was "entirely possible that such statements may rise to the level of fraud." Therefore, she said, debtors "are advised to carefully consider the accuracy and truthfulness of statements made in their motions for discharge."

Opinion Link

Judge Name: Laura K. Grandy

Case Citation: Simon v. Finley (In re Finley), 18-4011 (Bankr. S.D. Ill. Aug. 28, 2018)

Case Name: In re Finley

Lehman Brothers Holdings Inc. v. 1st Advantage Mortgage LLC

Lehman Brothers Holdings Inc. v. 1st Advantage Mortgage LLC,    BR    (Bankr. SD NY 8/13/18) case #16-01019: Bankruptcy Court 8/15/18 decision rules Bankruptcy Court Still Has Jurisdiction Seven Years After Confirmation of Chapter 11 plan: Almost 10 years after Lehman Brothers began the biggest Chapter liquidation bankruptcy in history, Bankruptcy Judge Shelley C. Chapman ruled that the bankruptcy court still has jurisdiction to host new lawsuits against third parties. She also held that New York is the proper venue for suing defendants from all around the country, even though Lehman's chapter 11 plan was confirmed almost seven years ago. Comment: bankruptcy should NOT go on forever, this seems like a poorly reasoned decision.

In re BMT-NW Acquisition, LLC, 582 B.R. 846 (Bankr. D. Del.2018)

A bankruptcy court in Delaware has held that a trustee's constructive fraudulent transfer claims stemming from a failed leveraged buyout were not subject to the newly heightened pleading standards articulated by the Supreme Court. [In re BMT-NW Acquisition, LLC, 582 B.R. 846 (Bankr. D. Del.2018).] Cites to and distinguishes the US supreme court cases, Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007), and Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009), which hold that fraud must be pleaded with particularly, in a Complaint that alleges fraud. In In re BMT-NW Acquisition case, the defendants argued that a bare-bones recitation of the statutory grounds for avoidance could not satisfy the newly-heightened pleading standards which had shifted from "simple notice pleading" to "a more heightened form of pleading." Per Twombly-Iqbal. The Bankruptcy Court in Delaware disagreed, allowed bare bones pleading of fraudulent transfer against the defendant.

Pacific Western Bank v. Fagerdala USA-Lompoc Inc. (In re Fagerdala USA-Lompoc Inc.),     F.3d     (9th Cir. June 4, 2018), 9th Circ case number 16-35430

Buying Just Enough Unsecured Claims to Defeat Confirmation Is Ok, Ninth Circuit Says: To warrant the Bankruptcy Court 'designating,' the purchased claims as being purchased in bad faith, and therefore NOT entitled to vote for or against the debtor's proposed Chapter 11 plan, a claim purchaser must have an 'ulterior motive' beyond self-interest.

Buying barely enough unsecured claims to defeat confirmation of a plan is not reason in itself for barring a secured creditor from voting the purchased claims against confirmation of a chapter 11 plan, according to the Ninth Circuit.

In Figter Ltd. v. Teachers Ins. & Annuity Association of America (In re Figter), 118 F.3d 635, 639 (9th Cir. 1997), the Ninth Circuit ruled that a secured creditor was entitled to vote unsecured claims against confirmation of a chapter 11 plan when the lender had purchased all the claims in the class. In his June 4 opinion, Ninth Circuit Judge N. Randy Smith expanded Figter by ruling emphatically that a secured creditor is not in bad faith by purchasing just enough claims to defeat confirmation, thereby adversely affecting other creditors.

Owed about $4 million, the secured creditor spent $13,000 on advice of counsel to purchase just over half in number of the chapter 11 debtor's unsecured claims. The purchased claims represented only 10% of the unsecured class in amount.

The lender's counsel testified that the client made no attempt at purchasing all unsecured claims. The client's motivation, the lawyer said, was to acquire a blocking position and do what was best for the lender.

Although the debtor had the required two-thirds vote in amount in the unsecured class to confirm the plan, the debtor was facing defeat because a majority in number of unsecured creditors were not voting in favor of the plan as required by Section 1126(c). The plan would pay unsecured creditors in full in a few months.

The debtor moved to "designate" the unsecured claims purchased by the lender under Section 1126(e), which provides that the court "may designate any entity whose acceptance or rejection of such plan was not in good faith…." In substance, "designate" means to disallow voting.

The bankruptcy court designated the claims and later confirmed an amended version of the plan. Judge Smith said that the bankruptcy court based designation on just two facts: (1) the lender did not offer to purchase all unsecured claims, and (2) voting the purchased claims against the plan would give the lender an "unfair advantage" and would be "highly prejudicial" to other creditors.

The district court affirmed, but the Ninth Circuit reversed.

Judge Smith said that the Bankruptcy Code does not define "good faith" as used in Section 1126(e). Figter, he said, defined "bad faith" as an attempt to "secure some untoward advantage over other creditors for some ulterior purpose." Judge Smith quoted Figter as holding that designation applies to creditors who were "'not attempting to protect their own proper interests, but who were, instead, attempting to obtain some benefit to which they were not entitled.'"

According to Figter, "bad faith explicitly does not include 'enlightened self-interest, even if it appears selfish to those who do not benefit from it,'" Judge Smith said. Therefore, purchasing claims to obtain a blocking provision and to protect a creditor's own claim "does not demonstrate bad faith or an ulterior motive," Figter held.

Purchasing all unsecured claims was only one factor prompting the Figter court to find good faith, Judge Smith said. He cited Second Circuit authority for the proposition that purchasing claims to block a plan is not bad faith in itself.

Judge Smith faulted the bankruptcy court for not analyzing the lender's motivation and failing to identify an "ulterior motive." Citing Figter, he said that self-interest and ulterior motive are not identical. Ulterior motive is attempting to obtain a benefit to which the creditor is not entitled, Judge Smith said, again citing Figter.

Examples of bad faith, according to Judge Smith, include purchasing a claim to block a lawsuit against the purchaser or buying claims to destroy a competitor's business. "There must be some evidence beyond negative impact on other creditors," Judge Smith said.

In sum, the bankruptcy court erred by making no findings about the lender's motivation and by considering the effect on other creditors without evidence of bad faith. [as reported in ABI e-newsletter of 6/6/18]

Lamar, Archer & Cofrin, LLP v. Appling, 16-1215 (Sup. Ct. June 4, 2018)

Lamar, Archer & Cofrin, LLP v. Appling, 16-1215 (Sup. Ct. June 4, 2018): US Supreme Court rules, on 6/4/18, that a bankruptcy debtor's False Statement About One Asset Isn't Grounds for holding a debt nondischargeable. This US Supreme Court decision resolves a circuit split on Section 523(a)(2)(B) and the meaning of "financial condition."

The Supreme Court resolved a split of circuits today by holding that a false statement about one asset must be in writing to provide grounds for rendering a debt nondischargeable under Section 523(a)(2).

The 15-page opinion by Justice Sonia Sotomayor focused primarily on the plain language of the statute and the meaning of the word "respecting." The opinion was unanimous, except that Justices Clarence Thomas, Samuel A. Alito Jr. and Neil M. Gorsuch did not join in a section of the decision where Justice Sotomayor buttressed her conclusion by relying on legislative history surrounding the adoption of the Bankruptcy Code in 1978.

The case pitted courts' aversion to those who lie against the statutory language and its history. In a sense, the result is akin to Law v. Siegel, 134 S. Ct. 1188 (2014), where the Supreme Court ruled that the bankruptcy court does not have a "roving commission" to do equity. In Law, the high court barred the imposition of sanctions by invading property made exempt by statute, even though the debtor persistently committed fraud.

A ruling the other way would have led to anomalous results. If a smaller lie about one asset could result in nondischargeability, a bigger lie about a debtor's entire net worth would provide no grounds for nondischargeability unless it were in writing.

While courts may not be favorably inclined toward debtors who lie orally to obtain credit, Congress made a decision in Section 523(a)(2)(B) that a materially false statement "respecting the debtor's . . . financing condition" must be in writing to provide grounds for nondischargeability of the related debt.

The Case Below

A client told his lawyers that he was to receive a large tax refund enabling him to pay his legal bills. The lawyers continued working, based on the oral representation.

Although the refund was smaller than represented, the client spent it on his business, falsely telling his lawyers that he had not received the refund. The lawyers continued working. Years later, they obtained a judgment they could not collect after the client filed bankruptcy.

Affirmed in district court, the bankruptcy judge held that the claim for legal fees was not discharged. The Eleventh Circuit reversed in a Feb. 15, 2017, opinion by Circuit Judge William Pryor, Appling v. Lamar, Archer & Cofrin LLP (In re Appling), 848 F.3d 953 (11th Cir. Feb. 15, 2017). To read ABI's discussion of the Eleventh Circuit opinion, click here.

The creditor filed a petition for certiorari, which the Supreme Court granted on the recommendation of the U.S. Solicitor General, who later submitted an amicusbrief supporting the debtor, arguing that the Eleventh Circuit was correct, and contending that an oral misstatement about one asset is a statement about "financial condition" that must be in writing before the debt can be declared nondischargeable.

The circuits were split. The Fifth and Tenth Circuit held that a false statement about one asset can result in nondischargeability, while the Eleventh Circuit had joined the Fourth in holding that a statement about any asset must be in writing to provide grounds for nondischargeability.

The justices heard oral argument on April 17.

Another 'Plain Language' Opinion

The creditor-petitioner argued that a statement about a debtor's overall financial condition is the only type of statement "respecting" financial condition that can result in nondischargeability under Section 523(a)(2)(B).

According to the creditor, a lie about one asset is not about "financial condition." Rather, the law firm contended that a lie about one asset falls within the ambit of Section 523(a)(2)(A) and leads to a nondischargeable debt because it is a "false representation." Under (a)(2)(A), there is no requirement that a "false representation" be in writing before the debt can be nondischargeable.

As is her style, Justice Sotomayor was quick to the point. In the second paragraph of her opinion, she said that the "statutory language makes plain that a statement about a single asset can be a 'statement respecting the debtor's financial condition.'" If the statement was not made in writing, she said, "the associated debt may be discharged, even if the statement was false."

Justice Sotomayor said that the Bankruptcy Code does not define three critical terms: "statement," "financial condition," and "respecting." Only "respecting" was in dispute, she said.

Looking to several dictionaries, Justice Sotomayor said that "respecting" means "in view of: considering; with regard or relation to: regarding, concerning." At least in the context of the instant case, she said that "related to" does not have a "materially different meaning" than "about," "concerning," "with reference to," or "as regards." The words all have circular definitions, she said.

In the realm of statutory construction and drafting, Justice Sotomayor said that "respecting" "generally has a broadening effect" and "covers not only its subject but also matters relating to that subject." She rejected the notion that (a)(2)(B) only refers to overall financial condition, because that interpretation would read "'respecting' out of the statute."

Broadening her opinion further, she said that a statement is "respecting" financial condition "if it has a direct relation to or impact on the debtor's overall financial condition."

A narrower interpretation, according to Justice Sotomayor, "would yield incoherent results." For example, she said that a false statement, such as, "I am above water," could not result in nondischargeability unless it were in writing, while saying, "I have $200,000 in equity in my house" could lead to nondischargeability. "This, too, is inexplicably bizarre," she said.

Justice Sotomayor traced the language in the Bankruptcy Code to a phrase first adopted by Congress in 1926, which the circuits consistently interpreted to include even one of a debtor's assets. Having used the same word in the Bankruptcy Reform Act of 1978, she said that Congress "intended for it to retain its established meaning."

Justices Thomas, Alito and Gorsuch did not join in the last section of Justice Sotomayor's opinion, where she grounded the result in legislative history underpinning Section 523(a)(2)(B). She quoted from a 1995 Supreme Court decision citing the legislative history as saying that Congress drafted Section (a)(2) in a manner intended to prevent abuse by creditors who might otherwise trap debtors into making statements that could result in denial of discharge.

Ninth and Fourth Circuits Issue Important Rulings on Sanctions and Exemptions

Ninth Circuit opinion is prime for Supreme Court review regarding the extent of a bankruptcy court's contempt powers.

The Ninth Circuit refused to rehear an appeal, setting up an opportunity for the Supreme Court to decide whether bankruptcy judges have constitutional power to impose sanctions as robust as Article III judges.

Meanwhile, the Fourth Circuit aligned itself with the Fifth by holding that events after a chapter 7 filing cannot undermine a homestead exemption.

In the Ninth Circuit case, a debtor defied a turnover order by refusing to cough up $1.4 million belonging to the estate. The bankruptcy judge imposed civil contempt sanctions of $1.4 million and $1,000 a day until the debtor complied.

The district court upheld the sanctions except for $1,000 a day, ruling that sanctions could not exceed the amount to be turned over.

In July 2017, the Ninth Circuit reversed and reinstated all of the sanctions imposed by the bankruptcy court. On May 8, the Ninth Circuit denied motions for rehearing and rehearing en banc, setting up the possibility of a petition for certiorari testing either constitutional limits on the severity of sanctions or the constitutional power of bankruptcy courts to impose sanctions far surpassing the amount in controversy.

In a significant case involving the homestead exemption for chapter 7 debtors, the Fourth Circuit gave the highest compliment to District Judge James K. Bredar of Baltimore by affirming his decision for the reasons stated in his opinion from August 2017.

A husband owned a home with his wife as tenants by the entireties. The wife did not file. After filing, the wife died, prompting the chapter 7 trustee to argue that the home was no longer entireties property exempted under Section 522(b)(3)(B).

The bankruptcy court overruled the trustee's objection and was upheld by Judge Bredar.

Following Fourth Circuit authority, Birney v. Smith (In re Birney), 200 F.3d 225 (4th Cir. 1999), Judge Bredar said that the entireties exemption did lapse on the wife's death, but, as Birney said, that "does not end the inquiry."

There still must be a provision in the Bankruptcy Code bringing the property into the estate.

Unlike chapters 11, 12 and 13, there is no provision in chapter 7 bringing after-acquired property into the estate. Therefore, Judge Bredar held that the home was not brought into the estate.

By upholding Judge Bredar, the Fourth Circuit has firmly aligned itself with the Fifth Circuit, which held in Hawk v. Engelhart (In re Hawk), 871 F.3d 287 (5th Cir. Sept. 5, 2017), that exempt property on the filing date does not lose its exempt status even if it is converted to nonexempt property after the filing of a chapter 7 petition.

The Fifth Circuit expanded Hawk six months later by holding that a chapter 7 debtor did not lose the exemption in his home even though he sold the property after filing and did not reinvest the proceeds in another home within the six-month window allowed by Texas law. Lowe v. DeBerry (In re DeBerry), 884 F.3d 526 (5th Cir. March 7, 2018).

We submit that the Fourth Circuit's ruling and the opinions in Hawk and DeBerry are little more than a reaffirmation of the so-called snapshot test. Those opinions were necessitated by creative arguments designed to undermine the snapshot rule.

Judge Name:
James K. Bredar

Case Citation:
The rulings by the Ninth and Fourth Circuits are Gharib v. Casey (In re Kenny G. Enterprises LLC), 16-55007 (9th Cir. May 8, 2018), and Bellinger v. Buckley, 17-2138 (4th Cir. May 9, 2018)

[as reported in American Bankruptcy Institute e-newsletter]

Lorenzen v. Taggart (In re Taggart),    F.3d     (9th Cir. April 23, 2018) appeal #16-35402

Violation of Discharge Is Now Difficult to Prove in the Ninth Circuit

An unreasonable but good faith, subjective belief that there is no injunction bars a finding of contempt in the Ninth Circuit.

A creditor's subjective, good faith belief that its action does not violate the discharge injunction precludes finding the creditor in contempt, even if the discharge injunction did apply and the creditor's belief was "unreasonable," the Ninth Circuit ruled in an April 23 opinion.

The opinion appears to mean that a creditor can act in good faith even if the creditor's belief is unreasonable. In other words, litigation in the Ninth Circuit over contempt of the discharge injunction will focus on the creditor's subjective good faith, without regard to whether the creditor's belief was right or wrong, reasonable or unreasonable.

The facts were horribly complex. With apologies for oversimplification, we summarize the facts as follows:

Before bankruptcy, the debtor transferred his interest in a closely held corporation. After the debtor received his chapter 7 discharge, two other shareholders sued the debtor in state court for transferring his interest without honoring their contractual right of first refusal. They also sued the transferee of the stock.

After the debtor raised his discharge as a defense in state court, the parties agreed he would not be liable for a monetary judgment. The state court eventually ruled in favor of the creditors and unwound the transfer.

The creditors then sought attorneys' fees as the prevailing parties, invoking a fee-shifting provision in the shareholders' agreement. The state court ruled that the debtor "returned to the fray" and thereby made himself liable for post-discharge attorneys' fees.

Meanwhile, the debtor reopened his bankruptcy case, seeking to hold the creditors in contempt for violating the discharge injunction. The bankruptcy judge sided with the debtor and imposed sanctions. The Bankruptcy Appellate Panel reversed the finding of contempt, ruling that the creditors' good faith belief that their actions did not violate the injunction absolved them of contempt.

Meanwhile, the state appellate court and a federal district court in related litigation both ruled that the debtor's participation in the litigation did not constitute returning to the fray, thus taking away the grounds for imposing attorneys' fees and lending credence to the notion that the creditors did technically violate the injunction.

In sum, judges disagreed over whether the discharge injunction applied to the litigation to recover attorneys' fees.

The debtor appealed the BAP's opinion to the Ninth Circuit, where Circuit Judge Carlos T. Bea upheld the BAP and found no contempt. In the process, he expanded the defenses available to someone charged with contempt of a discharge injunction.

To impose sanctions, existing Ninth Circuit precedent requires the debtor to show that the creditor knew the discharge injunction was applicable and prove that the creditor intended the actions that violated the injunction.

In the case at hand, knowledge of the applicability of the injunction was the only issue.

Based on In re Zilog Inc., 450 F.3d 996 (9th Cir. 2006), Judge Bea said that knowledge of the injunction cannot be proven by merely showing that the creditor was aware of the bankruptcy. Citing a footnote in Zilog, he went on to hold that "the creditor's good faith belief that the discharge injunction does not apply to the creditor's claim precludes a finding of contempt, even if the creditor's belief is unreasonable."

Judge Bea acknowledged that his interpretation of Zilog is "somewhat at tension" with two other Ninth Circuit precedents. Although Judge Bea said that Zilog was binding, it is arguable that the footnote in Zilog was dicta and therefore was not binding. Regardless of whether Zilog was binding or not, Judge Bea's opinion is now law in the Ninth Circuit, although it is unclear whether it was necessary for him to rule that an unreasonable belief is not actionable.

Based on his reading of Zilog, Judge Bea concluded, like the BAP, that the creditor had a good faith belief that the discharge injunction was inapplicable on the theory that the debtor had "returned to the fray." The creditor's belief in that regard was strengthened because the state trial court agreed.

Recall, however, that the state appellate court and the district court took the opposite view by concluding that the debtor had not "returned to the fray" but had been compelled to litigate. In other words, judges disagreed about the applicability of the injunction.

Although the creditors' belief in the inapplicability of the injunction ultimately was proven wrong, Judge Bea said that "their good faith belief, even if unreasonable, insulated them from a finding of contempt."

Judge Bea's opinion applies a subjective test with respect to belief in the inapplicability of the injunction. Moreover, there is no contempt even if the creditor's subjective belief is unreasonable. Consequently, it seems that reliance on counsel's advice would always absolve a client from contempt liability in the Ninth Circuit.

Judge Bea's opinion also seems to stand for the proposition that there is no contempt if reasonable minds could differ on the applicability of the injunction. Since it's often debatable whether the discharge injunction applies, contempt henceforth may be difficult to prove in the Ninth Circuit.

Because an unreasonable belief is not grounds for a finding of contempt, an argument evidently must be at least frivolous before there is contempt.

We submit that the appeals court could have reached the same result on more narrow grounds by finding good faith since the trial judge in state court supported the creditors' belief by ruling that the injunction did not apply.

By ruling more narrowly, the appeals court could have avoided pronouncing a rule that gives creditors license to disregard discharge injunctions by making pretextual arguments.

It is not clear from the opinion whether the same contempt standard applies to violation of the automatic stay. If it does, the automatic stay will have lost its teeth in the Ninth Circuit.

In re McGinness,    BR    (Bankruptcy Court ED Tenn 3/2/18), case 17-14746:

Yet another decision in the many court decisions that show there is still no still No Uniform Test for when a debtor can Bifurcate debtor's secured vehicle loan into secured and unsecured pieces, in Chapter 13, versus having to Pay the Total Amount owed as Secured, in debtor's Chapter 13 plan, even where the fair market value of the vehicle is far less than the total amount owed: Courts are groping to define 'personal use' (versus non personal use) because Congress didn't define that term in the Bankruptcy Code.

One of these days, the courts will develop a uniform, coherent definition of "personal use" for deciding when a chapter 13 debtor can cram down the secured claim on a recently purchased car to the current value of the vehicle. For the time being, courts are using variants of the "totality of the circumstances" to reach differing results in similar situations.

To stem the tide against debtors who would cram down secured auto loans to the value of the car, Congress added the so-called hanging paragraph to Section 1325(a) in 2005 to proscribe the bifurcation of a purchase money secured claim on a vehicle acquired within 910 days of bankruptcy "for the personal use of the debtor." Congress did not define "personal use."

In a chapter 13 case before Bankruptcy Judge Shelley D. Rucker of Chattanooga, Tenn., the debtor had purchased a car about one year before filing. The security agreement she signed recited how the "primary use" was "personal."

The debtor was a health care worker whose job required her to pick up her employer's clients and take them to events and medical appointments. She was obligated to have a car and was reimbursed by her employer for the number of miles driven.

The auto lender filed a secured claim for about $28,000 and objected to confirmation of the plan, which provided for reducing the secured claim to $15,000 and paying interest at 4%.

Judge Rucker overruled the objection and confirmed the plan in her March 2 opinion.

Judge Rucker said there is universal acceptance that the debtor's intended use at the time of purchase is the "operative intent." She said it is also "widely accepted" that the debtor's "actual use" after purchase "can be persuasive evidence of the debtor's intent at the time of purchase."

There are three iterations of the "totality of the circumstances" test used by most courts in deciding whether a car was for the debtor's personal use, Judge Rucker said. On one end of the spectrum, courts inquire as to whether the car enabled the debtor to make a "substantial contribution" to gross income.

A second approach "flips the analysis around" and inquires whether personal use was "significant and material," regardless of whether there was also some business use.

The third test, adopted by Judge Rucker, explores whether the car enables the debtor "to perform the functions of a business or a trade" after the debtor "arrives at work." She said the third test evaluates "whether the vehicle is predominantly used to perform functions of a business or trade rather than personal ones."

Applying the test to the facts at hand, Judge Rucker said the recitation of personal use in the printed form purchase agreement was "ambiguous and inconclusive."

Concluding that the hanging paragraph did not apply, Judge Rucker was persuaded by evidence showing that the debtor was required to have a car for her job and that she was reimbursed.

The facts, Judge Rucker said, show that "the vehicle was predominantly used to perform the functions of the debtor's job," thus allowing the debtor to bifurcate the claim and reduce the secured claim to the value of the car.

Phillips v. Gilman (In re Gilman),    F.3d    (9th Cir. April 13, 2018), case 16-55436:

Order granting or Denying a Homestead Exemption Remains a Final Order in the Ninth Circuit. US Supreme Court case Bullard v. Blue Hills Bank, 135 S. Ct. 1686, 191 L. Ed. 2d 621, 83 U.S.L.W. 4288 (2015) did not undermine the automatic appealability of orders granting or denying homestead exemptions.

Is an order granting or denying a homestead exemption a final, appealable order? The Ninth Circuit concluded that Bullard did not undermine the circuit's existing precedent and ruled that an order upholding a homestead exemption is appealable automatically.

In Bullard, the Supreme Court held that an order denying confirmation of a chapter 13 plan was not a final, appealable order. The high court held that an order is final only if it "alters the status quo and fixes the rights and obligations of the parties." Id. at 1692.

In the case before the Ninth Circuit, the bankruptcy court had upheld the debtor's claimed homestead exemption under California law. The district court affirmed.

In an opinion on April 13, Circuit Judge Daly Hawkins said that the Ninth and other circuits have held that orders granting or denying exemptions are final and thus automatically appealable. He concluded that Bullard was not "so fundamentally inconsistent with our existing case law as to require a different result." He also said that the circuit's existing authority was not "clearly irreconcilable" with Bullard.

Pre-Bullard, the Ninth Circuit held that bankruptcy court orders are appealable as of right if they resolve or seriously affect substantive rights and finally determine a discrete issue. The circuit's previous standard, Judge Hawkins said, "is 'generally consistent with Bullard.'"

Judge Hawkins' decision is therefore significant because it signals there will be no general reexamination of appealability in the Ninth Circuit.

After resolving the circuit's jurisdiction, Judge Hawkins reversed the bankruptcy court for not having determined whether the debtor intended to continue residing in the property, one of the elements of a California homestead exemption.

In re Cresta Technology Corp.     BR   , (B.A.P. 9th Cir. April 6, 2018), BAP case number 17-1186

9th circuit BAP rules that a post-petition transfer occurs when an ordinary check is honored, not when it is delivered, in light of US Supreme Court case Barnhill

An unauthorized post-petition transfer occurs when an ordinary check is honored by the bank, not when the check is delivered, the Ninth Circuit Bankruptcy Appellate Panel said in the course of overruling its own precedent in view of later Supreme Court authority.

In Barnhill v. Johnson, 503 U.S. 393 (1992), the Supreme Court ruled that the date of honor of an ordinary check is the date of transfer with regard to preferences under Section 547. In the April 6 opinion by Bankruptcy Judge Julia W. Brand, the three-judge BAP ruled that the high court's "rationale … applies with equal force to postpetition transfers under Section 549."

The case involved a lawyer who was either a loyal corporate employee or a chump, or both. A company was on the cusp of filing a chapter 7 petition. The company's bankruptcy lawyer refused to accept a $10,000 ordinary check for his retainer. The company's in-house lawyer therefore gave the bankruptcy lawyer a $10,000 cashier's check drawn on his personal account.

The next day, the company attempted to reimburse inside counsel by giving him an ordinary $10,000 check drawn on a company account. The company filed its chapter 7 petition the same day. The check to inside counsel was not honored until four days after the company's bankruptcy.

The chapter 7 trustee sued in-house counsel for a $10,000 unauthorized post-petition transfer under Section 549. The bankruptcy court granted summary judgment to the trustee. The lawyer appealed but lost in the BAP.

The lawyer argued that the transaction should be analyzed as a preference under Section 547, so he could raise the defense of a contemporaneous exchange under Section 547(c). Were it applicable, the defense might have worked because the Ninth Circuit continues to hold, Judge Brand said, that the date of delivery pertains to the contemporaneous exchange defense.

However, Judge Brand said that the transaction and any defenses must be analyzed under Section 549, applicable to postpetition transfers. The Sixth Circuit and "several courts," she said, have invoked Barnhill and held that the date of honor controls under Section 549 when a check was delivered before filing but honored afterwards. The judge said she could find no authority to the contrary.

In ruling that the date of honor governs, Judge Brand said that the Ninth Circuit BAP's own authority had been "effectively overruled" by Barnhill. In 1987, the BAP had held that the date of honor was the date of transfer under Section 549. Tarver v. Trois Etoiles Inc. (In re Trois Etoiles Inc.), 78 B.R. 237, 239 (B.A.P. 9th Cir. 1987).

In re Charles Frederick Biehl, Ch. 7 Case No. 6:13-bk-26277-MH (Bankr. C.D. Cal. Jan. 16, 2018)

In re Charles Frederick Biehl, Ch. 7 Case No. 6:13-bk-26277-MH (Bankr. C.D. Cal. Jan. 16, 2018), the United States Bankruptcy Court for the Central District of California rejected a trustee's request to revoke abandonment of real property when the trustee received an offer to purchase the property more than one year after the abandonment became effective. Moral of this case: Once property is abandoned out of the "bankruptcy estate", back to the debtor, a bankruptcy Trustee cannot "un-abandon" the property, to get the property back into the bankruptcy estate.

In re Bianchi,    BR    (Bankr. D. Id. March 20, 2018, case #12-221):

Bankruptcy Judge Papas, D. Idaho rules:

'Snarky' or Factually Incorrect Emails Are Not Grounds for Rule 9011 Sanctions

Neither oral statements nor emails are sanctionable under Rule 9011, Judge Pappas says.

"Snarky and unprofessional" emails written by a debtor's counsel to a chapter 13 trustee are not grounds for sanctions under Rule 9011 because they were not contained in pleadings presented to the court, according to Bankruptcy Judge Jim D. Pappas of Boise, Idaho.

The March 20 opinion by Judge Pappas is a story about a lawyer behaving badly. Although the facts suggest that the debtor's lawyer was acting unprofessionally, the facts had "little impact" on the opinion, the judge said.

Evidently, there was "considerable friction existing" between the debtor's counsel and the chapter 13 trustee. Emails sent by the lawyer to the trustee were "at best, a poor attempt at humor, and at worst, snarky and unprofessional." In addition, an email by the lawyer incorrectly said that the debtor had confirmed a 100% plan.

Judge Pappas said that the debtor's lawyer also made "an unnecessary complaint to the Assistant U.S. Trustee, even speculating" that the trustee "may have done something inappropriate with" estate funds.

Asking Judge Pappas to sanction the debtor's counsel, the trustee filed a motion under Rule 9011 seeking recovery of her attorneys' fees incurred "as a result of false statements and accusations made" by the lawyer.

Judge Pappas denied the sanctions motion on two grounds. First, the trustee failed to comply with the safe harbor provision in Rule 9011 requiring the trustee to give the debtor's counsel 21 days to correct the allegedly sanctionable conduct.

Even were there compliance with procedural requirements, Judge Pappas said there was "no authority to sanction counsel" because she was targeting "emails sent between [the trustee] and [debtor's counsel] as the basis for the alleged Rule 9011 violation."

Judge Pappas said that "a fair reading of the text" of Rule 9011 "shows that it was not intended to police lawyer email communications." A violation of the rule, he said, "must be based upon 'a petition, pleading, written motion or other paper' [that was] 'present[ed] to the court.'"

As a second ground for denying the motion, the judge said that email messages "were not 'presented to the Court' and indeed the Court would have been unaware of them save for their inclusion in the Trustee's motion."

Judge Pappas went on to cite authority for the proposition that "offensive oral statements" or misstatements made in the courtroom during oral argument are not sanctionable under Rule 11.

"If oral statements made to the Court are not sanctionable under Rule 9011, then certainly sharp barbs exchanged privately via email between lawyers fall outside of the reach of the Rule," Judge Pappas held.

Although he declined to impose sanctions, Judge Pappas reminded counsel of local rules requiring lawyers to "act professionally and civilly in their dealings with one another."

In re Gibson,    BR   12-81186 (Bankr. C.D. Ill. March 5, 2018)

A developing issue, in Chapter 13 cases with confirmed Chapter 13 plan, is whether or not the Chapter 13 debtor is still eligible to receive a Chapter 13 discharge, despite the fact that the Chapter 13 debtor fails to make payments direct to creditor(s) (usually secured creditors) that are required to be made, direct to the creditor(s) by the Confirmed plan.

Courts are Split on whether or not a Debtor should be denied a Chapter 13 discharge, where the debtor fails to make direct payments to creditors that the confirmed Chapter 13 plan requires the debtor to make. In In re Gibson, an Illinois bankruptcy judge interprets Rule 3002.1 as being 'debtor-friendly,' not as creating new grounds for denial of a chapter 13 discharge, and held that a debtor failing to make direct payments on a nondischargeable mortgage is not grounds for denying a chapter 13 discharge, according to Bankruptcy Judge Thomas L. Perkins of Peoria, Ill. This is an issue that will eventually get ruled on by Circuit Courts, and if the Circuit Courts split, is likely to be ruled on by the US Supreme Court.

Gibson is contrary to several recent decisions ruling the OPPOSITE. It is a minority position. But Gibson opinion contains a compendium of cogent arguments favoring chapter 13 debtors who have made all payments to the trustee and were not defrauding unsecured creditors.

Here is discussion of facts in In re Gibson: The debtors confirmed a five-year plan calling for payments of $350 a month. The plan provided for the debtors to make direct payments on the first and second mortgages on their home. Although the first mortgage was current at filing, there was more than $9,000 in arrears on the second mortgage to be cured under the plan with payments from the trustee.

Near the end of the plan payments, the trustee filed and served two notices under Bankruptcy Rule 3002.1(f) pertaining to the mortgages. The notices stated that the debtors had made all payments required to be made to the trustee, that the pre-petition arrears on the second mortgage had been paid, and that the debtors were to make direct payments on both mortgages.

The lender on the second mortgage responded under Rule 3002.1(g) by saying that the arrears had been cured but that the debtors were about $19,000 in default on second mortgage payments due after filing.

The trustee then moved to dismiss the chapter 13 case without granting a discharge.

The Bankruptcy Judge held a trial and concluded that the debtors misunderstood the plan. According to the judge, the debtors believed they were not required to make payments on the second mortgage. They testified that they understood their lawyer as telling them that they were only required to pay the first mortgage.

Judge denied the trustee's motion to dismiss and granted the discharge, noting, however, that the debt on the second mortgage was not dischargeable.

In his 17 years on the bench, the judge said, he had "never dismissed a chapter 13 case without discharge, where the required payments to the trustee were completed, for the reason that the debtor failed to make all of the direct mortgage payments."

Judge Perkins said that "this recently identified theory of dismissal" for failure to make direct payments resulted from the 2011 amendment adding Rule 3002.1 and requiring a mortgage lender to disclose whether the debtor was current. The new rule, he said, "was not intended to serve as the impetus for dismissal without discharge." Rather, the new rule was designed for a "debtor-friendly purpose," namely, giving the debtor a forum for resolving disputes when the parties disagree on whether a mortgage is current.

Until "very recently," Judge Perkins said, "countless chapter 13 debtors received a discharge despite an uncured default in payments to a creditor made direct by the debtor."

The governing statute, Section 1328(a), requires the court to enter a discharge "after completion of all payments under the plan." Does "payments under the plan" only refer to payments made by the trustee, or does the term include payments that debtors undertake to make directly to mortgagees?

Judge Perkins said that the statute is ambiguous because it is susceptible to different interpretations. He noted that the statute refers to "payments under the plan," not "payments provided for by the plan."

Since a plan cannot have payments beyond five years, Judge Perkins theorized that direct payments on long-term debt that continue for more than five years are not made "under the plan" and thus are not grounds for denial of discharge.

He also noted that the 2005 amendments to Section 1328(a) require the debtor to certify that he or she has made all domestic support payments. The statute, Judge Perkins said, "never has required the debtor to certify that he has paid all other direct payments."

The case at bar did not involve debtors who defrauded unsecured creditors.

The debtors, Judge Perkins said, only harmed the mortgage lender, "which, for reasons not explained at trial, never took action . . . to enforce its rights." Unsecured creditors, on the other hand, "received all that they were entitled to under the terms of the plan."

Denying discharge, Judge Perkins said, is "not an appropriate remedy" when the "debtor's conduct was truly innocent and unsecured creditors were not harmed."

Click here to read ABI's discussion of a case from the Eastern District of New York where Bankruptcy Judge Alan S. Trust of Central Islip, N.Y., developed other theories for debtors to retain their discharges even though they had missed direct payments.

Merit Mgmt. Group, LP v. FTI Consulting, Inc.,     U.S.    ,     S. Ct.    

Merit Mgmt. Group, LP v. FTI Consulting, Inc.,     U.S.    ,     S. Ct.    , 2018 WL 1054879 (No. 16-784 February 27, 2018), the United States Supreme Court held in an unanimous opinion that the safe harbor provision of Bankruptcy Code (the "Code") section 546(e) does not prohibit the avoidance of a transfer which passes through one or more financial institutions (acting merely as "conduits") prior to being received by the intended recipient (where the transfer is made "through" a financial institution rather than "to" a financial institution).

Heller Ehrman LLP v. Davis Wright Tremaine LLP (California Supreme Court, decision issued 3/5/18)   Cal.4th    ; case S236208

California Supreme Court Kills the Jewel Doctrine on a Certified Question

the so called "JewelDoctrine" has now been formally rejected in New York and California. Washington, D.C. is next. The handwriting was on the wall, but now it's official in California, and probably everywhere else: Profits earned on unfinished hourly business after a law firm dissolves are not property of the "old" firm and can be retained by the new firm that completes the work. This question got answered in the Heller Ehrman bankruptcy case.

Answering a certified question from the Ninth Circuit, the California Supreme Court held on March 5 that "a dissolved law firm's property interest in hourly fee matters is limited to the right to be paid for the work it performs before dissolution." A "narrow" exception allows the old firm to collect for work performed before dissolution and to be paid for preserving and transferring hourly fee matters to new counsel of the client's choice.

The state's high court did not rest its conclusion on a tortured analysis of the Revised Uniform Partnership Law or impressive-sounding legal mumbo jumbo. Instead, the state Supreme Court relied on logical conclusions based on common experience and longstanding principles. For instance, the court said that the dissolved firm cannot claim "a legitimate interest in the hourly matters on which it is not working - and on which it cannot work."
[Emphasis in original.]

The result emanated principally from two value judgments: The law should not intrude "without justification on clients' choice of counsel" nor limit "lawyers' mobility postdissolution."

The Heller Ehrman Liquidation

A firm that once had 700 lawyers, Heller Ehrman LLP was liquidated in chapter 11. The confirmed plan created a trust that sued 16 firms for income that lawyers from the liquidated firm earned at their new firms in completing hourly matters originated at Heller Ehrman. All but four firms settled. The bankruptcy court granted summary judgment in favor of the trustee and against the four firms.

The bankruptcy court based its decision on Jewel v. Boxer, a 1984 decision by an intermediate California appellate court, which said that profits earned on unfinished business belong to the "old" firm. The Jewel court allowed the new firm to recover only its overhead and rejected arguments based on clients' rights to select attorneys of their choice. Jewel had been followed in one other California appellate decision, but the issue had not previously reached the state's highest court.

Jewel was attractive for trustees in law firm bankruptcies because asserting the principle brought in settlements generating assets that otherwise would be few and far between.

After the Heller Ehrman bankruptcy court ruled in favor of the trustee, District Judge Charles R. Breyer of San Francisco withdrew the reference.

Reviewing the bankruptcy court's rulings de novo, he granted summary judgment for the law firms. The trustee appealed.

After hearing oral argument in June 2016, the Ninth Circuit issued an order the next month certifying the question to the California Supreme Court. The Ninth Circuit pointed out that California's highest court has never directly addressed the Jewel issue. The appeals court also alluded to Jewel litigation in New York.

On a certified question from the Second Circuit, the New York Court of Appeals held in July 2014 that Jewel is not the law in New York. The New York court ruled that there is no property interest in hourly unfinished business because it is "too contingent in nature and speculative to create a present or future property interest." The New York decision stemmed from the bankruptcies of Coudert Brothers LP and Thelen LLP.

In addition to citing the New York decision, the Ninth Circuit pointed out that California revised its partnership law in 1996, 12 years after Jewel.

Judge Breyer was not the only district judge to undermine Jewel. Granting an interlocutory appeal, District Judge James J. Donato of San Francisco reversed the bankruptcy court and held in favor of lawyers who went to new firms. He ruled that they could retain what they bill at their new firms.

Judge Donato issued his decision in the liquidation of Howrey LLP. On appeal, the Ninth Circuit certified the question to the District of Columbia Court of Appeals in February because the case turns on D.C. law, not California law.

The California Court's Analysis

The certified question was argued in the state's high court in December 2017. The March 5 opinion by Justice Mariano-Florentino Cuéllar went to the heart of the issue immediately. He said that a dissolved law firm has "no property interest in legal matters handled on an hourly basis, and therefore, no property interest in the profits generated by its former partners' work on hourly fee matters pending at the time of the firm's dissolution."

There is no property interest, he said, because the old firm "has no more than an expectation" that "may be dashed at any time by a client's choice to remove its business." He explained that the "mere possibility of unearned, prospective fees . . . cannot constitute a property interest."

Rather than tease the result from the Revised Uniform Partnership Act, or RUPA, Justice Cuéllar based the decision on a "sensible interpretation" of state law and "practical implications" to conclude that "the dissolved firm's property interest here is quite narrow."

Policy implications were paramount. The outcome should "protect the client's choice of counsel" and comport "with our policy of encouraging labor mobility while minimizing firm instability." He said that neither previous cases nor "specific statutory provisions . . . resolve the question before us."

In the law firm context, a property interest is grounded on a "sufficiently strong expectation." That expectation "requires a legitimate, objectively reasonable assurance rather than a mere unilaterally-held presumption."

The old firm, Justice Cuéllar said, claims an "interest in the hourly matters on which it is not working - and on which it cannot work" and "seeks remuneration for work that someone else must undertake." [Emphasis in original.] Given that neither clients nor lawyers would share that view, he said that the old firm's "expectation is best understood as essentially unilateral." He went on to add that the old firm's "hopes were speculative, given the client's right to terminate counsel at any time, with or without cause. As such, they do not amount to a property interest."

Again focusing on policy considerations, Judge Cuéllar recognized that former partners in a dissolved firm "may face limited mobility in bringing unfinished business to replacement firms." Similarly, recognizing a property interest in unfinished business "would also risk impinging on the client's right to discharge an attorney at will." He therefore affirmed the principle "that client matters belong to the clients, not the law firms."

Judge Cuéllar said that the principle in Jewel was unnecessary to prevent lawyers from jumping ship prematurely because the California Supreme Court had upheld the enforceability of a law partnership's noncompetition agreement. Rather than basing the conclusion on RUPA, Judge Cuéllar said that "[n]othing else in RUPA cuts against our holding." Judge Cuéllar pointedly declined to say whether overruling Jewel with regard to hourly matters would also apply to contingencies. [as reported in American Bankruptcy Institute e-newsletter of 03/07/18]

U.S. Bank NA v. The Village at Lakeridge LLC, 15-1509 (US Supreme court, decided March 5, 2018)

U.S. Bank NA v. The Village at Lakeridge LLC, 15-1509 (US Supreme court, decided March 5, 2018)-bankruptcy decision, held that insider status was reviewed for clear error on appeal, because mainly a factual issue.

Rather than clarifying standard of review on appeal, this US Supreme Court decision muddies the water regarding standard of review when a fact/law mixed question is reviewed on appeal. Because usually, fact/law mixed questions are reviewed de novo. But here there was a fact law mixed question reviewed for clear error, which is the standard of review for fact decisions below, NOT the standard of review for legal issues, or for mixed fact / law issue, which is the de novo standard of review.

Split Among Us Circuit Courts Involving Licensees of a Trademarks

Split among US Circuit Courts of 4th, 7th, 1st Circuit, and maybe 3rd Circuit, as to whether or not the licensee of a trademark has a right to keep using the trademark, when the licensor of the trademark files bankruptcy, and rejects the trademark license contract, pursuant to 11 USC 365. Compare: Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F2d 1043 (4th Cir. 1985) (debtor's rejection of trademark licenses stops non-debtor licensee from continuing to use trademark); In re Sunbeam Products, Inv. v. Chicago American Manufacturing, LLC, 686 F.3d 372 (7th Cir. 2012) (rejection does NOT stop trademark licensee from continuing to use trademark), In re Exide Technologies, 607 F.3d 957, 964 (3d Cir. 2010) (see concurrence of Third Circuit Judge Thomas L. Ambro), and now In re Tempnology, LLC (Mission Product Holdings, Inc. v. Tempnology, LLC, 879 F.3d 389 (1st Cir. 1/12/18) (rejection STOPS non-debtor licensee from continuing to use trademark).

This Circuit split arises do to the failure of 11 USC §365(n) to refer to trademarks. When a debtor uses 11 USC §365 to reject a patent license, 11 USC §365(n) protects the non-debtor license of the patent, allowing the non-debtor licensee of the patent to continue using the patent, despite the debtor having rejected the patent license. However, 11 USC 365(n) does NOT say that trademark licenses are similarly protected.

For splits among US Circuit Courts, the next step is that some party files a petition for certiorari, in the US Supreme Court, and the US Supreme Court grants certiorari, and rules, to resolve the split among US Circuit Court.

Arellano vs. Clark County Collection Service, LLC,    F3d   , 2017 Westlaw 5505117 (9th Cir.2017)

The Ninth Circuit has held that a debt collector cannot effectively destroy a consumer's FDCPA claim by acquiring it at an execution sale following a default judgment, because the FDCPA impliedly preempts that strategy.

A collection agency obtained a default judgment in state court against a consumer for roughly $800. She filed a separate suit in federal court against the collection agency, claiming that its practices had violated the Fair Debt Collection Practices Act ("FDCPA").

The collection agency then requested the state court to issue a writ of execution against the consumer in the hope of executing on her FDCPA cause of action, since that claim was one of her assets subject to execution. The state court issued the requested writ of execution; the sheriff sold her FDCPA claim in an auction. The successful bidder was the collection agency, which bought her claims for $250.

The collection agency then moved in federal district court to dismiss her lawsuit, on the ground that she no longer owned the claim. The district court dismissed her suit.

The Ninth Circuit reversed, holding that the FDCPA preempted the collection agency's acquisition of the consumer's claim under the FDCPA.

The collection agency argued, however, that the FDCPA did not specifically address this issue. But the court held that the goals and policies of the FDCPA would be thwarted if the collection agency could acquire the consumer's claim and thereby destroy it:

In addition to evading liability and preventing the consumer (aka debtor on debt) from pursuing her potential federal claims, the collection agency has literally used the execution mechanism to collect the debt from [the consumer], and argues that she "has received the benefit of [the $250] reduction in her judgment." But a debt collector cannot be allowed to use state law strategically to execute on a debtor's FDCPA claims against it under the guise of legitimate debt collection. Though the FDCPA does preserve debt collectors' rights to collect what they are owed, the Act does not "authorize the bringing of legal actions by debt collectors." See 15 U.S.C. §1692i(b). Debt collectors cannot evade the restrictions of the Act by forcing a debtor's claims to be auctioned, acquiring the claims, and dismissing them. To allow otherwise would thwart enforcement of the FDCPA and undermine its purpose.

In re Addison,    BR    (Bankruptcy. Court E.D.N.Y., 2018)

Held, individual chapter 7 debtor is entitled to deduct payments for two motor vehicles; IRM is helpful but not controlling.

In a complicated opinion the court addressed the binding and non-binding use of the Internal Revenue Manual guidelines for allowable expenses, and other resources to determine how much the debtor may deduct for motor vehicles.

"Pending before the Court is the United States Trustee's motion to dismiss the chapter 7 bankruptcy case of Barry Addison, solely as a presumed abuse case pursuant to 11 U.S.C. § 707(b)(2). The UST asserts that Debtor, an above-median income, single-person-household debtor, improperly claimed certain deductions on his chapter 7 means test, and that after adjusting for the improper deductions, Debtor's case is presumptively abusive and should be dismissed. The deductions at issue are for operating two vehicles, an older vehicle, and an overstated tax liability. Debtor asserts all of the deductions on his means test are proper and that the presumption of abuse does not arise.

"Thus, in conformity with Ransom, in a presumed abuse case, a court may consult the IRS Handbook for guidance where the National or Local Standards either directs the court to do so, or where the standards are vague or unclear as to the amount to be claimed, or where the debtor must substantiate special circumstances, or where the expense at issue is one for which the Code provides that a debtor may only take a deduction which is "reasonable."

"Here, for purposes of § 707(b)(2)(A)(ii)(I), as Debtor actually incurs an operation expense for two or more vehicles, in accordance with the Code, Rules, Form 122A-2, and the Local Standards, Debtor is entitled under lines 11 and 12 to a vehicle operation deduction for two vehicles in the total amount of $616.00.

Note that Bankruptcy cases are not binding on any other judge, not even on other bankruptcy judges. Bankruptcy judge decisions are only "persuasive". However, the above reasoning seems sound.

Momentive Performance Materials Inc. v. BOKF, NA (In the Matter of: MPM Silicones, L.L.C.)

Momentive Performance Materials Inc. v. BOKF, NA (In the Matter of: MPM Silicones, L.L.C.), - F.3d --, 2017 WL 4700314, No. 15-1682, (2d Cir. Oct. 20, 2017): US Court of Appeals for the Second Circuit recently issued its long-awaited opinion stemming from the confirmed Chapter 11 plan of Momentive Performance Materials Inc.

The court reversed the lower courts' controversial holding that senior secured lenders receiving replacement secured notes under the debtors' plan were only entitled to interest at the "formula" rate - determined by using the risk-free rate plus a plan-specific risk adjustment. Instead, the Second Circuit remanded the case to the bankruptcy court with instructions to determine whether an efficient market rate exists, and if so, to apply that "market" rate to the replacement notes, and to use the "formula" rate only in the event there is no efficient "market" rate. The Second Circuit's ruling is an important victory for secured lenders, who now will not have to risk being saddled with new debt instruments bearing below-market interest rates in a "cramdown" Chapter 11 plan scenario.

Click here for more information

Mission Product Holdings Inc. v. Tempnology LLC (In re Tempnology LLC)

Mission Product Holdings Inc. v. Tempnology LLC (In re Tempnology LLC),    F3d   , (1st Cir. Jan. 12, 2018)(Circuit case #16-9016 ): The 1/12/2018 decision of the US Court of Appeals for the First Circuit, in In re Tempnology, deepens the split between federal Circuits regarding whether or not a bankruptcy debtor "rejecting" a trademark license, per 11 USC 365, prevents the licensee (creditor) from continuing to use the trademark license, per 11 UDC 365(n): Pointedly disagreeing with the Seventh Circuit, the First Circuit deepened an existing split by adopting the Fourth Circuit's conclusion in Lubrizol and holding that rejection of a trademark license agreement precludes the licensee from continuing to use the license.

The 2/1 opinion from the First Circuit on Jan. 12 reversed the Bankruptcy Appellate Panel, which, to the contrary, had followed Circuit Judge Frank Easterbrook's decision in Sunbeam Products Inc. v. Chicago American Manufacturing LLC, 686 F.3d 372 (7th Cir. 2012). In Sunbeam, the Seventh Circuit rejected the Fourth Circuit's rationale in Lubrizol Enterprises Inc. v. Richmond Metal Finishers Inc., 756 F.2d 1043 (4th Cir. 1985).

DZ Bank AG Deutsche Zentral-Genossenschaft Bank v. Meyer, 869 F.3d 839 (9th Cir. 2017) ("DZ Bank")

In DZ Bank AG Deutsche Zentral-Genossenschaft Bank v. Meyer, 869 F.3d 839 (9th Cir. 2017) ("DZ Bank"), the Ninth Circuit Court of Appeals held that a nondischargeable debt resulting from a fraudulent transfer included the full amount that a bank-creditor would have recovered if the creditor had been able to execute against the debtor's ownership interests in a closely-held corporation. The Ninth Circuit disagreed with the bankruptcy court and the district court in limiting the nondischargeable debt to the original amount of the collateralized debt ($123,200), versus the full market value of the assets at the time of the fraudulent transfer ($385,000).

In re Marino (Ocwen Loan Servicing v. Marino),    BR   , 2017 WL 6553691 (appeals Nos. 16-1229, 16-1238) (B.A.P. 9th Cir. Dec. 22, 2017).

In re Marino (Ocwen Loan Servicing v. Marino),    BR   , 2017 WL 6553691 (appeals Nos. 16-1229, 16-1238) (B.A.P. 9th Cir. Dec. 22, 2017).

BAP upheld Bankruptcy Court ordering Ocwen, the servicer for mortgage company, to pay $119,000 in monetary sanctions to bankruptcy debtors, Christopher and Valerie Marino, for Ocwen's violation of debtors' bankruptcy discharge, by Ocwen's continuous confusing contact with the discharged debtors by the mortgage servicer was appropriately sanctioned at $1,000 per violation notwithstanding the servicer's formulaic and contradictory disclaimers in some of the correspondence. Debtors, Christopher and Valerie Marino, surrendered their real property in their chapter 7 bankruptcy. After they received their discharge in June, 2013, the court granted the mortgagee relief from the automatic stay and closed the case. From June, 2013, through April, 2015, Ocwen, as servicer for the mortgagee, sent nineteen letters stating the amount owed on the debt as the "amount you must pay," and providing payment due dates. Some of the letters contained the disclaimer that, "if you have received a discharge in bankruptcy, this notification is for informational purposes only and is not intended to collect a pre-petition or discharged debt." Ocwen also made approximately one hundred calls to the Marinos seeking payment on the discharged debt.

Eleventh Circuit Joins Ninth in Allowing Appellate Counsel Fees for a Stay Violation

12/5/17 decision by Eleventh Circuit US Court of Appeals agreed with Ninth Circuit 2015 decision, in In re Schwartz-Tallard, 803 F.3d 1095 (9th Cir. 2015) (en banc), in which the Ninth Circuit US Court of Appeals held that a debtor is entitled to recovery of attorneys' fees incurred in upholding a judgment for violation of the automatic stay, siding with the Ninth Circuit's decision.

The Dec. 5 opinion for the Eleventh Circuit by District Judge Leigh Martin May, sitting by designation, held that the debtor could recover counsel fees for pursuing a monetary award and appellate counsel fees resulting from the stay violation, plus fees incurred in litigation precipitated by the stay violation.

In re Barcelos,    BR   , 2017 WL 464927(Bankr. E.D. Cal. 10/12/2017)

In re Barcelos,    BR   , 2017 WL 464927(Bankr. E.D. Cal. 10/12/2017): IRS violated bankruptcy automatic stay by taking debtor's tax refund, during debtor's Chapter 12 bankruptcy case; but Bky Court did not order IRS to reimburse debtor's attorneys fees expended to get the seized tax refund back from the IRS, because debtor did not "exhaust" administrative remedies at IRS:

Chapter 12 debtor filed an adversary proceeding against the IRS, pursuant to Section 362(k), for wrongfully seizing income tax refunds in the amount of $21,000. The IRS admitted the stay violation, and promptly returned the refunds. Debtor pursued the adversary to recover attorney's fees. The IRS objected that debtor had failed to exhaust administrative remedies prior to commencing the adversary proceeding. On cross motions for summary the bankruptcy court ruled in favor of the IRS.

IRS has unconditionally consented to 362(k) lawsuits for compensatory damages, other than attorney's fees and costs. However, prior to commencing a lawsuit against the IRS for attorney's fees and costs, debtor must first exhaust administrative remedies: the debtor must file an administrative claim with the chief, local insolvency unit, for the judicial district in which the case was filed, and then wait the earlier of six months or until an IRS decision has been made on the claim. Here, the debtor filed the adversary prior to making the administrative claim, and he failed to serve the claim on the proper IRS officer.

Tower Credit Inc. v. Schott (In re Jackson), 850 F.3d 816 (5th Cir. March 13, 2017)

Tower Credit Inc. v. Schott (In re Jackson), 850 F.3d 816 (5th Cir. March 13, 2017): US Supreme Court Won't Decide a Circuit Split on Garnished Wages as Preferences

The Supreme Court will not resolve a circuit split by deciding whether wages garnished within 90 days of bankruptcy are recoverable preferences.

This morning, the high court denied a certiorari petition in Tower Credit Inc. v. Schott, 17-444 (Sup. Ct.), where the Fifth Circuit differed with three older circuit court decisions by holding in March that a wage garnishment resulted in a preference because the transfer was deemed to occur within the preference period when the wages were earned.

The New Orleans-based court reasoned that the transfer to the garnishor came inside the preference window because a worker does not have an interest in wages until she or he has performed services. Tower Credit Inc. v. Schott (In re Jackson), 850 F.3d 816 (5th Cir. March 13, 2017).

US Supreme Court Might Grant 'Petition for Certiorari' to Hear and Resolve a Split between US Circuit Courts on Dischargeability

The US Supreme Court will decide whether a false oral statement about one asset is grounds for denial of discharge of a debt, IF the justices take the advice of the U.S. Solicitor General and grant certiorari to the Eleventh Circuit in Lamar Archer & Cofrin LLP v. Appling, 16-1215 (Sup. Ct.).

The courts of appeals are evenly split, with the Eleventh and Fourth Circuits holding that a false oral statement about one asset is a statement of "financial condition" that must be in writing to result in denial of discharge of a debt under Section 523(a)(2). The Fifth and Tenth Circuits ruled to the contrary and held that misrepresenting one asset can result in nondischargeability of the debt owing to the creditor to whom the misrepresentation was made. [reported on 11/16/17]

Anti-Suit Injunction Protecting Non-Settling Defendant

US Circuit Court for the Eleventh Circuit holds that Bankruptcy Court has jurisdiction and statutory power to grant an Anti-Suit Injunction Protecting Non-Settling Defendant.

The bankruptcy court has both the jurisdiction and statutory power to impose an anti-suit injunction protecting a non-settling defendant from claims by third-party nondebtors, even if the injunction was not part of the parties' settlement, according to the Eleventh Circuit. Evidently, however, the question was not raised concerning the bankruptcy court's constitutional power to enter a final order imposing an injunction having the effect of a third-party release.

The maddeningly complex procedural history resulted from several lawsuits fought in multiple courts over 10 years. The litigation ended up in bankruptcy court, years after the families of six deceased patients won $1 billion in default judgments against nursing homes based on wrongful death claims.

Ivey v. First Citizens Bank & Trust Co.

Ivey v. First Citizens Bank & Trust Co. (In re Whitley), 848 F.3d 205 (4th Cir. 2017), the US Court of Appeals for the Fourth Circuit held that a deposit into one's own bank account is not a "transfer" within the meaning of Section 101(54) and therefore provides no basis for a fraudulent transfer with actual intent to hinder or delay creditors under Section 548(a)(1)(A).

Not binding on Judges in Ninth Circuit, because not a US Court of Appeals for the Ninth Circuit decision; but may be followed by bankruptcy judges, and appellate judges within the Ninth Circuit (includes California), if those judges find the decision to have reasoning that is "persuasive".

Brace v. Speier (In re Brace), 566 B.R. 13 (9th Cir. BAP 2017)

Brace v. Speier (In re Brace), 566 B.R. 13 (9th Cir. BAP 2017): Ninth Circuit Bankruptcy Appellate Panel ("BAP") holds that California's community property presumption prevails over the record title presumption in bankruptcy cases. BAP affirmed a ruling by the bankruptcy court holding that, where the avoidance of transfers of interests in real properties restored title to a married couple as joint tenants, California's community property presumption (California Family Code § 760) (the "Community Property Presumption") prevailed over California's record title presumption (California Evidence Code § 662) (the "Record Title Presumption"). As a result, both the debtor's and the non-debtor spouse's interests in the recovered real properties were assets of the bankruptcy estate despite the couple's arguments that either transmutation was not required with respect to a transfer from a third party, or that the taking of title as "joint tenants" was a sufficient transmutation of their interests in the real properties from community to separate property.

Spiller McProud v. Siller (In re CWS Enterprises Inc.)

Spiller McProud v. Siller (In re CWS Enterprises Inc.),    F.3d    14-17045 (9th Cir. Sept. 14, 2017)

Ninth Circuit ringingly endorses allowance of prepetition contingent fee arrangements; holds 11 USC 502(b)(4) Fee Cap on prepetition attorneys fees, when client that owes attorneys fees to attorney thereafter files bankruptcy, seldom applies to contingent fee attorneys fees, earned by attorney prepetition. Commentators say the decision tackles a particularly cerebral question at the intersection of the Full Faith and Credit Act and Section 502(b)(4), the section of the Bankruptcy Code that puts a "reasonable value" cap on a prepetition claim for services by a debtor's attorneys.

Without saying so explicitly, the Sept. 14 opinion by Circuit Judge Andrew J. Kleinfeld seems to stand for the proposition that a prepetition judgment or arbitration awarding contingency fees to a debtor's counsel is not likely to be reduced under Section 502(b)(4) absent evidence that the fees were inflated by collusion. Arguably, the holding is equally applicable if the attorney does not have a judgment for contingency fees, only a claim based on a prepetition retention agreement.

BREAKING: 9th Circ. Says FCRA Claims Meet Standing Bar In Spokeo Row

The Ninth Circuit ruled on 8/15/17 that a man who accuses Spokeo of violating the Fair Credit Reporting Act by allegedly reporting inaccurate information about him had claimed a sufficiently concrete injury to meet the Article III standing bar established by the U.S. Supreme Court in the dispute last year.

US Supreme Court Rules That Purchaser Of Defaulted Debt Is Not "Debt Collector" Under FDCPA

The US Supreme Court ruled, 6/12/17, in Henson v. Santander Consumer USA Inc., No. 16-349, 2017 BL 198032 (U.S. June 12, 2017), that the purchaser of a defaulted debt is not a "debt collector" subject to the FDCPA. The FDCPA applies to "debt collectors," a term defined in 15 U.S.C. § 1692a(6) as anyone who "regularly collects or attempts to collect . . . debts owed or due . . . another." The term includes "any creditor who, in the process of collecting his own debts, uses any name other than his own which would indicate that a third person is collecting or attempting to collect such debts." The FDCPA defines the term "creditor" to mean: any person who offers or extends credit creating a debt or to whom a debt is owed, but such term does not include any person to the extent that he receives an assignment or transfer of a debt in default solely for the purpose of facilitating collection of such debt for another. The statutory definition of "debt collector" excludes a person attempting to collect a debt that was originated by such person, a debt that was not in default at the time it was acquired, or a debt obtained by a secured party in a commercial credit transaction involving the creditor.

In re Fravala,    BR   (BkyCt, MD Fla Aug 10, 2017)

In re Fravala,    BR   (BkyCt, MD Fla Aug 10, 2017): Bankruptcy Judge Awarded No Damages to Debtor for Willful Stay Violation Since Debtor Failed to Mitigate Damages

I. Nondischargeability of Debt under Sect. 1328(a) and 532(a)(3)

Even though the Debtor did not understand the effect of the guaranty, the Defendant was a known creditor on the petition date by virtue of his signature on the agreement. The Debtor's liability under the guaranty was a contingent claim on the date that he filed his Chapter 13 petition. A contingent claim as of the petition date is a prepetition claim for the purposes of filing the schedule of a debtor's liabilities under Section 521 of the Bankruptcy Code.

The Debtor did not list the Defendant as a creditor on his bankruptcy schedules.

Section 1328(a) of the Bankruptcy Code provides that a Chapter 13 discharge generally discharges a debtor from all unsecured debts provided for by the plan, but does not discharge the debtor from any debt of the kind specified in Section 523(a)(3) of the Code.

A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt-neither listed nor scheduled under section 521(a)(1) of this title, with the name, if known to the debtor, of the creditor to whom such debt is owed, in time to permit-if such debt is not of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim, unless such creditor had notice or actual knowledge of the case in time for such timely filing; 11 USC 523(a)(3) is only concerned with the ability of a creditor to file a proof of claim in order to take part in the distribution of assets from the bankruptcy estate.

In this case, the Defendant did not have knowledge of the case until 3 years after the claims bar date had passed. Therefore, the Defendant did not have the opportunity to participate in any payment from the Chapter 13 estate.

Also, even if it had filed a claim in August of 2014, it would not have received any distribution under the confirmed plan.

Untimely claims are not allowed in Chapter 13 cases, and creditors who file untimely claims are not permitted to share in distributions under a confirmed Chapter 13 plan, even if they did not have notice of the bankruptcy case until after the claims bar date had passed. Instead, the Bankruptcy Code gives such creditors who were not given notice of the bankruptcy filing other remedies, such as provided for in Section 523(a)(3).

The Defendant's claim was not discharged under 1328(a) and 523(a)(3) since the debt was not listed on the Debtor's schedules in time for it to file a timely proof of claim, and the Defendant did not have notice or actual knowledge of the bankruptcy case in time to file a timely claim.

II. Violation of the Automatic Stay and Discharge Injunction

The Defendant sued the Debtor for breach of contract. A Motion for Final Judgment was set for hearing. The day before the hearing, the Debtor filed a Suggestion of Bankruptcy and served the Defendant's attorney.

More than one year after the Suggestion was filed, the Defendant filed a Motion for Summary Judgment against the Debtor in the state court case. The Debtor contends that the filing of the the Motion for Summary Judgment was a willful violation of the automatic stay by the Defendant since it was an attempt to collect a prepetition debt from the Debtor after the Defendant had actual knowledge of the bankruptcy filing.

The filing of a bankruptcy petition operates as an automatic stay of any act to recover or collect a prepetition claim against the Debtor. Any violation of the stay is prohibited by Section 362, and a "willful" violation occurs if the creditor (1) knew the stay was invoked and (2) intended the actions that violated the stay.

In this case, the Defendant violated the automatic stay when it filed its Motion for Summary Judgment in state court. The Motion constituted an attempt to collect a prepetition of the Debtor. The Debtor's liability on the guaranty was not in default on the date of the filing, and the debt was a contingent liability on that date. Generally, contingent claims as of the petition date are subject to the automatic stay.

Second, the Defendant filed the Motion for Summary Judgment while the Chapter 13 case was pending, and after the Defendant had actual knowledge of the bankruptcy case.

Finally, the nondischargeable character of the debt has no effect on the application of the automatic stay. If a creditor wishes to pursue a nondischargeable debt during the bankruptcy court, its recourse is to file a motion for relief from stay in the Bankruptcy Court.

For these reasons, the Court found that the Defendant willfully violated the automatic stay.

III. Failure to Mitigate Damages for Stay Violation

Section 362(k) of the Bankruptcy Code provides a remedy for Debtors harmed by willful violations of the automatic stay. It allows a Debtor to recover actual damages, including costs, attorney's fees, and punitive damages. The purpose is to hold creditors liable for injuries caused by a willful violation of the stay.

However, a Debtor has a duty to mitigate damages that may occur as the result of a willful stay violation under 362(k).

In this case, the Debtor did not mitigate damages and is therefore not entitled to monetary damages. First, the Debtor did not inform the Defendant of his Chapter 13 case for almost 3 years while the Defendant tried to enforce its claim. The Debtor had several chances in court to inform the Defendant of the Chapter 13 case, but chose not to. In addition, even after the Debtor filed its Suggestion of Bankruptcy, he chose to exacerbate the situation by defending himself in the state court action.

Gharib v. Casey (In re Kenny G. Enterprises LLC),    F.3d     (9th Cir. July 28, 2017) (9th circuit appeal case number 16-55007)

Gharib v. Casey (In re Kenny G. Enterprises LLC),    F.3d     (9th Cir. July 28, 2017) (9th circuit appeal case number 16-55007):

Ninth Circuit Upholds Tough Civil Sanctions for Contempt of Turnover Order that Ordered Person to turn over $1,420,000 to Chapter 7 Trustee, as belonging to Chapter 7 bankruptcy estate.

(Two years in "body detention" (aka incarceration) and $1,000 in daily fines are ok as civil contempt sanctions).

For failure to comply with a turnover order, the bankruptcy court can properly order the person who fails to comply put in body detention (aka incarcerated), until the person complies with the turnover order. In addition, the bankruptcy court can impose $1,000 a day in civil contempt sanctions, according to a nonprecedential opinion from the Ninth Circuit.

After extensive discovery, briefing, and trial, Bankruptcy Judge Theodore C. Albert of Santa Ana, Calif., decided that an individual had refused, after demand, to turn over some $1,420,000 belonging to a chapter 7 estate. As sanctions for contempt, Judge Albert imposed civil contempt sanctions of $1,420,000 and $1,000 a day until he complied. The judge also ordered the man incarcerated until he complied.

On appeal, the district judge upheld the sanctions except for the $1,000 a day. In the opinion of the district judge, the sanction could not exceed the amount to be turned over.

In its July 28 per curiam opinion, the Ninth Circuit reinstated all of Judge Albert's sanctions.

Because the findings of fact were not clearly erroneous, the circuit court held that the $1,420,000 sanction was within the bankruptcy court's civil contempt powers under Section 105(a).

The appeals court reasoned that the amount of the citation was not "cabined" by the withheld funds, because the contempt power under Section 105(a) allows entry of "any order" to "carry out the provisions of this title."

"As long as the sanctions are coercive in nature and not punitive, Section 105(a) articulates no specific monetary limit on the scope of contempt sanctions available to the court," the Ninth Circuit held.

Noting that the contemnor had been in jail for 26 months, the circuit court noted that the $1,000 in daily sanctions "at some point" will have ceased to be coercive and would become punitive, requiring release from jail under "due process considerations."

Weil v. Elliott (In re Elliott),    F.3d    , No. 16-55359 (9th Cir. June 14, 2017)

Weil v. Elliott (In re Elliott),    F.3d    , No. 16-55359 (9th Cir. June 14, 2017): Holds the one-year deadline for seeking revocation of a debtor's discharge order is not jurisdictional and may therefore be waived.

When Edward Elliott filed his chapter 7 bankruptcy petition he failed to mention one important asset: his home. He received a discharge under section 727(a). Fifteen months later, when the trustee discovered the fraudulent nondisclosure, she filed an adversary complaint seeking an order vacating the discharge under section 727(d)(1). Section 727(e)(1) permits a trustee to seek revocation of discharge within one year of the discharge order. Mr. Elliott did not raise the issue of untimeliness in his response to the adversary complaint. The bankruptcy court revoked his discharge. The Bankruptcy Appellate Panel, however, found the one-year filing deadline to be jurisdictional and reversed. Elliott v. Weil (In re Elliott), 529 B.R. 747, 755 (B.A.P. 9th Cir. 2015). On remand, the bankruptcy court dismissed the adversary complaint for lack of jurisdiction. The trustee was permitted direct appeal to the Ninth Circuit.

In re Salamon,     F.3d    , 2017 Westlaw 1404194 (9th Cir. 2017)

SUMMARY: In re Salamon,     F.3d    , 2017 Westlaw 1404194 (9th Cir. 2017: The Ninth Circuit holds that when a vendor's nonrecourse junior purchase money lien is extinguished by a senior creditor's postpetition nonjudicial foreclosure sale, the "foreclosed-out" vendor could not assert a deficiency claim under Bankruptcy Code 11 USC §1111(b), even though the lien was in existence on the day the bankruptcy petition was filed. A creditor making the so-called "1111(b)" election is very rare in Chapter 11 bankruptcy cases, the only chapter where "1111(b)) elections are allowed. Now it will be even more rare.

The insolvency section of the California state bar, by Professor Dan Schector, has written a detailed analysis of the Salamon decision, as follows:

FACTS: A vendor of real property held a note secured by a junior purchase money trust deed on a parcel of commercial real estate. Following the vendor's bankruptcy, his Chapter 7 trustee succeeded to the bankrupt vendor's rights under the purchase money note and the junior deed of trust.

Later, the purchasers (the debtors under the note and deed of trust) filed their own Chapter 11 petition. The vendor's trustee filed a secured proof of claim in the purchasers' bankruptcy case.

The bank holding the senior lien on the apartment building was later granted relief from the automatic stay to conduct a nonjudicial foreclosure sale.

Under California law, the foreclosure sale automatically extinguished the vendor's junior purchase money deed of trust. The vendor's trustee filed an amended proof of claim in the purchasers' bankruptcy case, seeking the unpaid balance.

When the purchasers objected to that claim, the vendor's trustee argued that under 11 U.S.C.A. §1111(b)(1), he had the right to elect to be treated as an unsecured creditor because he held the purchasers' nonrecourse note.

(Although the opinion does not explain why the vendor's claim was nonrecourse, the vendor was barred from obtaining a deficiency judgment against the purchasers under Calif. Code of Civil Procedure §580b(a)(2).)

The bankruptcy court ruled in favor of the purchasers, the Ninth Circuit BAP affirmed, and so did the Ninth Circuit.

REASONING: On appeal, the vendor's trustee argued that as of the date of the purchasers' bankruptcy petition, he qualified under §1111(b)(1) because he held a nonrecourse claim against the purchasers, secured by a lien on the real property, even though that lien was later extinguished by the senior lender's foreclosure. He reasoned that §1111(b) expressly incorporates §502(b), which requires that the nature of his claim had to be determined "as of the date of the filing of the petition."

The court rejected that reasoning, distinguishing between the amount of the claim and its secured status: "Under §502, what must be determined as of the date of the filing of the petition is the amount of the claim." Placing primary reliance on In re Tampa Bay Associates, Ltd., 864 F.2d 47 (5th Cir. 1989), the court held in favor of the purchasers:

[W]e hold that §1111(b)'s requirement that a creditor hold a "claim secured by a lien on the property of the estate" means that if a creditor's claim, for any reason, ceases to be secured by a lien on property of the estate, the creditor can no longer transform a non-recourse claim into a recourse claim.

AUTHOR'S COMMENT: Although there is little chance that the trustee will seek certiorari (perhaps because the amount in controversy may not justify the expense), I think that the court reached the wrong result and misconstrued §502(b). Other than Tampa Bay (which I criticize below), there is no authority holding that any date other than the petition date would control the determination of the claim.

When Congress wants to depart from the petition date in the evaluation of a secured claim, it does so explicitly, as it did in § 506(a)(1), which controls the treatment of oversecured creditors: "Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor's interest."

There is no such exception to §502 in §1111(b).

Second, even without reference to §502, §1111(b) itself defines the circumstances under which the statute does not apply, and there are only two exceptions to the general rule:

(b)(1)(A) A claim secured by a lien on property of the estate shall be allowed or disallowed under section 502 of this title the same as if the holder of such claim had recourse against the debtor on account of such claim, whether or not such holder has such recourse, unless-
(i) the class of which such claim is a part elects, by at least two-thirds in amount and more than half in number of allowed claims of such class, application of paragraph (2) of this subsection; or
(ii) such holder does not have such recourse and such property is sold under section 363 of this title or is to be sold under the plan.

Focusing particularly on §1111(b)(1)(A)(ii), note that Congress specifically carved out two types of post-petition sales for special treatment: either a sale under § 363, or a sale under the plan. When it drafted that provision, Congress was obviously aware of post-petition foreclosure sales, yet foreclosure sales were excluded from that exception. See, e.g., Silvers v. Sony Pictures Entertainment, Inc., 402 F.3d 881, 887 (9th Cir. 2005): "[W]hen a statute designates certain persons, things, or manners of operation, all omissions should be understood as exclusions." The Salamon court did not discuss the significance of the structure of §1111(b)(1)(A)(ii).

Finally, I believe that the court's reliance on Tampa Bay, supra, may have been misplaced, for a couple of reasons. First, that case is factually distinguishable: it involved a creditor who itself had conducted a post-petition foreclosure and had later invoked §1111. That is very different from the present case, in which a junior creditor's lien was extinguished by a senior creditor's post-petition foreclosure. The destruction of the creditor's lien in Tampa Bay resulted from a self-inflicted post-petition wound. The vendor's lien in the present case was destroyed by someone else's post-petition behavior.

More significantly, the reasoning in Tampa Bay is suspect. The court there held that post-petition foreclosure sales are implicitly encompassed within the"§363" exception to § 1111(b) because foreclosure sales are "similar" to sales under § 363. The linchpin of the Tampa Bay policy-based analogy is that in both foreclosure sales and § 363 sales, "the creditor in each instance is allowed the opportunity to preserve the benefit of its bargain with the debtor by purchasing its collateral at a sale, with a credit offset allowed for any bid up to the full amount of the debt."

That may be true of a creditor who conducts a foreclosure, as in Tampa Bay, but it is not true of a junior creditor bidding at a senior lender's foreclosure sale. Under California law, a sold-out junior lien holder cannot submit a credit bid at a senior creditor's foreclosure sale. See, e.g., Nomellini Const. Co. v. Modesto Sav. & Loan Ass'n, 275 Cal. App. 2d 114, 116, 79 Cal. Rptr. 717, 719 (3d Dist. 1969): "[W]here the sale is held pursuant to a power of sale in a trust deed ..., and the bid is made by a junior lienholder who proposes to use the claimed balance of the junior paper as a part of the bid, the bid should be rejected by the trustee."

It is also worth noting that the Tampa Bay court cited §502 and yet failed to focus on the language in § 502(b) requiring the court to "determine the amount of such claim of the date of the filing of the petition ..." For all of these reasons, Tampa Bay was a badly-flawed opinion and does not merit the Ninth Circuit's reliance on it.

The Salamon court's decision to rely on post-petition events for purposes of §1111(b) is at odds with other Ninth Circuit authority holding that the petition date is generally controlling in a bankruptcy case. For example, see In re LCO Enterprises, 12 F.3d 938, 941 (9th Cir. 1993), a preference action:

[T]he amount and priority of an unsecured creditor's claim is fixed on the date of the filing of the petition. Similarly, on the date of the filing, a secured creditor's claim is fixed in amount, the value of the security as of that date can be ascertained and the claim will be either fully or partially secured.

Ironically, the LCO court then went on to carve out an ad hoc exception to the "petition date" rule where a lease had been assumed by the estate post-petition; but in In re Tenderloin Health, 849 F.3d 1231 (9th Cir. 2017), the Ninth Circuit recently limited LCO to its facts and reaffirmed the primacy of the "petition date" rule in the context of preferences.

My point is not that LCO and Tenderloin are controlling but that the petition date should usually be viewed as a watershed moment, unless there is a clear statutory mandate to depart from that rule. (For a more thorough discussion of Tenderloin, see 2017-11 Comm. Fin. News. NL 22, Debt Repayment Was Preferential Because Under "Hypothetical Liquidation" Rule, Other Funds Deposited by Debtor Could Have Been Avoided as Hypothetically Preferential.)

From a policy standpoint, haven't sold-out junior vendors suffered enough, without also depriving them of the ability to invoke §1111(b)? In the context of a commercial development, what is the reason for such harsh treatment? The purchaser of the property, the bankrupt debtor, gets to enjoy a "heads I win, tails you lose" bargain, at least in a state (like California) that forbids most commercial vendors from obtaining recourse from the purchaser. If the property is a success, the purchaser enjoys the upside. If the property is a failure, the vendor loses its junior lien and now loses all hope of recourse, even after the debtor files a bankruptcy petition.

Given the overall dearth of authority on point, this issue apparently does not arise very frequently, so we may have to wait a long time before the Supreme Court untangles this statutory problem. For a discussion of the Bankruptcy Appellate Panel's opinion in this case, see 2015-16 Comm. Fin. News. NL 33, Vendor Holding Nonrecourse Purchase Money Paper Cannot Assert Deficiency Claim Under § 1111(b) After Junior Lien is Extinguished by Senior Creditor's Post-Petition Nonjudicial Foreclosure Sale.

In re World Imports Ltd.,    F.3d     case number 16-1357 (3d Cir. July 10, 2017)

In re World Imports Ltd.,    F.3d     case number 16-1357 (3d Cir. July 10, 2017):

Third Circuit Court of Appeals holds that "receipt" under 11 USC 503(b)(9) Occurs when debtor obtains Physical Possession of goods, which may be later than "delivery" of goods. Increases the chance the creditor who supplied the goods to the debtor can have an administrative claim, per Section 503(b)(9).

Section 503(b)(9) gives a seller has an administrative expense claim under Section 503(b)(9), if the goods were "received" by the debtor within "20 days before the date of commencement" of debtor's bankruptcy case.

Questions arise when the dates of "delivery" and "receipt" are not the same.

By holding that receipt occurs on the sometimes later date of physical possession, the Third Circuit's decision is beneficial for sellers because delivery can occur before physical receipt, thus giving a supplier a better shot at having a valid reclamation or administrative claim for goods received before bankruptcy.

Two Chinese furniture manufacturers sold goods to a U.S. buyer. The goods were loaded on a cargo vessel and shipped free on board, or FOB. Although the goods were loaded more than 20 days before the buyer's chapter 11 filing, the buyer received physical possession within the 20-day period.

Upheld in district court, the bankruptcy court ruled that because the goods were shipped FOB, they were received when the risk of loss or damage passed to the debtor at the port in China. The sellers appealed and won, in a July 10 opinion by Circuit Judge.

Although "received" is not defined in the Bankruptcy Code, Judge said that Black's Law Dictionary and the Oxford English Dictionary both define the word as requiring physical possession. The legal and dictionary definitions agree with Section 2-103(1)(c) of the Uniform Commercial Code, which "defines 'receipt' of goods as 'taking physical possession of them.'"

For purposes of Section 546(c) and the right of reclamation, the Third Circuit had previously defined "receipt" in In re Marin Oil Inc., 740 F.2d 220, 224-25 (3d Cir. 1984), to mean "taking physical possession." Marin "explicitly stated that delivery and receipt of goods can occur at different times," Judge Hardiman said.

"Receipt" means the same thing in Sections 546(c) and 503(b)(9), Judge Hardiman said. Therefore, "regardless of FOB status, under the UCC and chapter 11, receipt does not occur until after the seller's ability to stop delivery ends - namely, upon the buyer's physical possession." Consequently, the sellers were entitled to administrative expense claims because the debtor received the goods within 20 days of filing.

Judge Hardiman qualified the holding by saying that receipt occurs on physical possession by the buyer "or his agent." However, he said the shipper was not the buyer's agent.

In re Kipnis, 555 BR 877 (Bankr. S.D. Fla. 2016)

In re Kipnis, 555 BR 877 (Bankr. S.D. Fla. 2016). A bankruptcy court in Florida has held that a bankruptcy trustee had the power to use the Internal Revenue Service's 10 year statute of limitations in pursuing fraudulent transfer litigation on behalf of the bankruptcy estate, instead of the shorter statute of limitations (usually 4 years if recorded transfer, or 7 years if not recorded transfer).

Kipnis is contrary to an earlier bankruptcy case, In re Vaughan, 498 B.R. 297, at 304 (Bankruptcy Court D. New Mexico 2013), which cites to Marshall v. Intermountain Elec. Co., Inc., 614 F.2d 260, 263 n.3, 7 O.S.H. Cas. (BNA) 2149, 1980 O.S.H. Dec. (CCH) P 24202 (10th Cir. 1980) ("An action which, although brought in the name of the United States, involves no public rights or interests may be subject to a state statute of limitations.") and S.E.C. v. Calvo, 378 F.3d 1211, 1218, Fed. Sec. L. Rep. (CCH) P 92879 (11th Cir. 2004) ("Where ... the government's action vindicates a private interest, the [state statute of limitations] defense is typically available.")).

Discussion of Kipnis: An individual owed back taxes to the Internal Revenue Service. In an attempt to avoid paying those assessments, he allegedly engaged in fraudulent transfers of his assets. Roughly 10 years after those transfers, he filed a bankruptcy petition. His trustee then asserted fraudulent transfer claims against his transferees under 11 U.S.C.A. §544(b). They moved to dismiss on the ground that the claims were time barred, since the alleged transfers have occurred more than seven years prior to the filing of the bankruptcy petition.

The bankruptcy court denied the motion to dismiss on the ground that the trustee was empowered to step into the shoes of the IRS. Under federal law, the IRS enjoyed a 10 year window for the avoidance of transfers made by taxpayers. The court recognized that there was little authority on point and that there was a split among the lower federal courts on this issue.

The court acknowledged that this ruling could have a very substantial impact:

The IRS is a creditor in a significant percentage of bankruptcy cases. The paucity of decisions on the issue may simply be because bankruptcy trustees have not generally realized that this longer reach-back weapon is in their arsenal. If so, widespread use of § 544(b) to avoid state statutes of limitations may occur and this would be a major change in existing practice.

AUTHOR'S COMMENT: The court is absolutely right that this opinion, if widely followed, could be a game-changer. Further, I predict affirmance, since the plain language of § 544(b) means exactly what it says:

[T]he trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim...

Here, since the IRS (one of the unsecured creditors) had the power to challenge the transfers, the trustee succeeded to those powers, for the benefit of all of the creditors. This is the ancient rule of "void against one, void against all," as articulated in Moore v. Bay, 284 U.S. 4, 5, 52 S.Ct. 3, 76 L.Ed. 133 (1931).

It will be very interesting to see if this obscure bankruptcy court opinion results in a huge upheaval in the world of fraudulent transfer litigation, as the court has predicted.

SBA v. Bensal (9th Cir. 2017) 853 F.3d 994: California Probate Code §283

SBA v. Bensal (9th Cir. 2017) 853 F.3d 994: California Probate Code §283 states that a disclaimer of an inheritance is not a fraudulent transfer: "A disclaimer is not a voidable transfer by the beneficiary under the Uniform Voidable Transactions Act…" Therefore, California state law allows a person to disclaim an inheritance, without the disclaimer of inheritance constituting a fraudulent transfer. Individuals quite often do disclaim inheritances, shortly before filing bankruptcy, so the inheritance will not become part of the individual's "bankruptcy estate", when the individual thereafter files bankruptcy. Purpose of the disclaimer of inheritance is to prevent the Chapter 7 bankruptcy trustee/creditors from being able to reach the inheritance to pay debtor's bills owed to creditors. However, in SBA v. Bensal (9th Cir. 2017) 853 F.3d 994, the 9th Circuit held that a judgment debtor who owed a small business administration loan (SBA loan) committed a fraudulent transfer by disclaiming an inheritance the debtor was about to receive, to prevent the SBA from being able to satisfy the judgment that debtor owed the SBA, from the inheritance. Bensal cites California Probate Code 283, but refuses to follow it on theory of federal preemption. Bensal is very dangerous for a person who disclaims an inheritance, shortly before filing bankruptcy, because if a debtor disclaimed an inheritance less than 1 year before filing bankruptcy, and the disclaimer of inheritance was held to constitute a fraudulent transfer, per Bensal, the debtor would risk being denied a discharge, per 11 USC 727(a)(2). 11 USC 727(a)(2) states that a debtor making a transfer with intent to hinder, delay or defraud a creditor, within 1 year before filing bankruptcy, is grounds to deny the debtor a discharge, per 11 USC 727(a)(2). Additionally, the disclaimed inheritance, if a fraudulent transfer, could presumably be recovered by trustee, to become property of individual debtor's bankruptcy estate.

Oskoui vs. J.P. Morgan Chase Bank, N.A,    F3d    , 2017 WL 957206 (9th Cir. 2017)

Oskoui vs. J.P. Morgan Chase Bank, N.A,    F3d    , 2017 WL 957206 (9th Cir. 2017): Ninth Circuit holds that when a lender encouraged a borrower to make thousands of dollars in payments in pursuit of an unavailable mortgage modification program, the lender engaged in deceptive practices in violation of the California Unfair Competition Law.

FACTS: A homeowner asked her lender for a home mortgage modification pursuant to the federal "HAMP" standards. Her lender allegedly misled her into making interim payments, even though the lender knew that she was not eligible for modification. In total, she made almost $34,000 in fruitless payments, in pursuit of modification.

She brought suit against the lender under California's Unfair Competition Law, on the ground that the lender's behavior had been unconscionable. The district court granted the lender's motion for summary judgment, on the ground that the borrower had failed to provide the lender with appropriate documentation.

REASONING: The Ninth Circuit reversed, holding that her allegations demonstrated an unconscionable course of conduct on the part of the lender:

The published HAMP Guidelines disqualified [the borrower] from HAMP relief. In an age of computerized records, [her lender] no doubt had this disqualifying information at its fingertips and could have made this simple determination within a matter of minutes. But instead of determining eligibility before asking for money-a logical protocol called for by HAMP ... - [the lender] asked [the borrower] for more payments... And even when [the lender] told [the borrower] the next day that she did not qualify for HAMP, it did not inform her of her precarious situation concerning unexplained "other alternatives," preferring instead to accept payments for seven additional months.

The 9th Circuit concluded that the lender had either intentionally or negligently deceived the borrower, saying:

"We can discern no acceptable utility in [the lender's] alluring "other alternatives" strategy or tactics. Whether [the lender's] Kafkaesque conduct was intentional or the result of corporate ineptitude … the result is the same: The facts in this record would amply support a verdict on this claim in [the borrower's] favor on the ground that she was the victim of an unconscionable process. [The lender] knew that she was a 68 year old nurse in serious economic and personal distress, yet it strung her along for two years, kept moving the finish line, accepted her money, and then brushed her aside. During this process, [the borrower] made numerous frustrating attempts in person and by other means to seek guidance from [the lender], only to be turned away."

COMMENT: This opinion should provide a strong incentive to lenders to either fish or cut bait when borrowers apply for mortgage modifications: instead of stringing the borrower along for many months while "evaluating" the application, the lender should quickly determine whether or not the borrower can qualify for a modification. Those of us who are active in this area of the law are quite familiar with anecdotal horror stories told by borrowers who have been led down the garden path by lenders holding out false hopes of modifications while draining the borrowers of additional cash.

Admittedly, there are many instances in which the borrower's application is incomplete, due to missing documentation; in those situations, the lender will be justified in demanding interim payments while those documents are in the process of completion. But the lender should be prepared to back up its assertion that the long pendency of the modification process is objectively justifiable, rather than the result of bureaucratic inertia or incompetence.

[this case analysis is from The State Bar of California - Business Law Section e-newsletter of 6/19/17]

Strickland v. U.S. Trustee (In re Wojcik), 560 B.R. 763 (9th Cir. BAP 2016)

In Strickland v. U.S. Trustee (In re Wojcik), 560 B.R. 763 (9th Cir. BAP 2016), the U.S. Bankruptcy Appellate Panel for the Ninth Circuit (the "BAP") affirmed the lower court's ruling that a paralegal's use of the word "legal" in her business name and advertisements violated the strict liability provisions of 11 U.S.C. section 110(f). In doing so, the BAP upheld an order requiring the disgorgement of fees plus the payment of penalties.

The BAP ruled that Strickland's use of the business name "Low Cost Paralegal Services," and her use of the word "paralegal" and "legal" throughout her website violated section 110(f). It further ruled that section 110's penalty of $2,000 in damages was mandatory, though the bankruptcy court's additional order for the disgorgement of Strickland's $150 fee and the imposition of a $500 fine were discretionary under the statute. Nevertheless, the BAP further ruled that the bankruptcy court did not abuse its discretion in ordering those additional penalties.

BAP decision is notable for holding that section 110(f) is a strict liability statute that requires the imposition of a fine even if a debtor suffers no harm. There is no indication in the decision that the Debtor had complained about the services she received from the BPP or the amount she was charged. The BAP's ruling promotes the legislative purpose of section 110 - that is, the protection of debtors from a BPP who lacks legal training and ethical regulations. Consequently, a BPP must understand and strictly comply with the requirements of section 110 to avoid the imposition of mandatory damages and potential disgorgement of fees and fines that may substantially exceed any compensation that a BPP may receive for his or her services.

Henson v. Santander Consumer USA, Inc.,     S.Ct.   , 2017 WL 2507342

Henson v. Santander Consumer USA, Inc.,     S.Ct.   , 2017 WL 2507342: US Supreme Court Did NOT Widen Debt-Collection Abuse Law In Santander Case, decided 6/12/17

The U.S. Supreme Court on Monday declined to expand a federal law targeting alleged harassment and threats in debt-collection tactics, saying oversight of distressed debt buyers that then become collection entities isn't within the court's purview. The court unanimously upheld a lower court's dismissal of a proposed consumer class-action suit against auto-lender Santander Consumer USA Holdings Inc. over allegations it violated the Fair Debt Collection Practices Act. The case hinged in large part on the definition of "creditor" and "debt collector" and whether a company that buys debt should be treated as a creditor, not subject to the collections law. The law applies only to companies that collect debts on behalf of others-an $11.4 billion industry-and doesn't apply to businesses like Santander who buy the distressed debt from other companies after it defaults, the Supreme Court ruled. The plaintiffs argued that unscrupulous debt collectors could evade the law by buying the debt. The ruling was the first written by the court's newest justice, Donald Trump-appointee Neil Gorsuch, who said any change to the distinction would require a genesis in congress. Four Maryland residents who had defaulted on car loans filed a proposed class action in 2012 in federal court, accusing Santander of violations of the debt-collection law including misrepresenting debt loads and bypassing debtors' lawyers. Their debts had been sold to Santander, which then tried to collect on them.

Boston-based Santander Holdings is the majority owner of Dallas-based Santander Consumer USA, which specializes in car loans. Both entities a subsidiary of Spanish lender Banco Santander.

Shovlin v. Klass (In re Klass),    F.3d    (3d Cir. June 1, 2017). Case number 15-3341

Shovlin v. Klass (In re Klass),    F.3d    (3d Cir. June 1, 2017). Case number 15-3341: holds that under proper circumstances a Chapter 13 debtor can complete plan payments MORE than 60 months after the plan was filed, and receive a Chapter 13 discharge, even though 60 months is the maximum length for a Chapter 13 plan. Second Circuit also has a case with a similar holding. Neither 9th Circuit Court of Appeal, nor any other Circuits besides the 3rd and 2nd circuits, have ruled on the issue.

The Third Circuit's June 1 opinion by Circuit Judge Cheryl Ann Krause lays down flexible rules governing the bankruptcy court's discretion in allowing a final payment after 60 months.

In In re Klass, the debtors confirmed a chapter 13 plan calling for monthly payments of about $3,000, totaling almost $175,000 over five years. After paying about $50 more than the plan required, the trustee notified the debtors in the 61st month that their payments were about $1,100 short because the trustee's fees were higher than anticipated.

Judge Krause said that the underpayment was not the debtors' fault because the trustee did not make the calculation and bring the shortfall to the debtors' attention until after the end of the plan term.

The trustee filed a motion to dismiss but said she would withdraw the motion if the debtors made up the shortfall. Within 16 days of being notified, but after 60 months, the debtors paid the shortfall.

The trustee withdrew her motion to dismiss, but by that time a creditor had joined the motion to dismiss. The bankruptcy judge denied the motion to dismiss, granted a discharge, and was upheld in district court, prompting the creditor's appeal to the Third Circuit.

The creditor argued that the plain language of the statute required dismissal. The creditor pointed to Section 1322(d) which provides that the court "may not" approve a plan with payments extending beyond five years and to Section 1329(c) which prohibits plan modifications that extend payments beyond five years.

Judge Krause said the creditor was relying on the wrong sections. The relevant provisions, she said, were Sections 1307 and 1328 which govern dismissal and completion discharge. Section 1307 says a court "may" - not "must" - dismiss a case, and Section 1328 requires the court to issue a discharge when all plan payments have been completed, "without an express requirement that such payments were made within five years."

Only the Seventh Circuit has touched the issue, in Germeraad v. Powers, 826 F.3d 692 (7th Cir. June 23, 2016), according to Judge Krause. She said the Chicago court's discussion of the issue was dicta and that the circuit assumed, without deciding, that a bankruptcy court has discretion to allow a final payment beyond five years.

Judge Krause concluded that the unambiguous language of Sections 1307 and1328 invest the bankruptcy court with discretion. She bolstered her conclusion by reference to legislative history where Congress said that the Bankruptcy Reform Act's chapter 13 was intended to remedy similar provisions in the Bankruptcy Act that were "overly stringent and formalized."

Judge Krause said that chapter 13 was intended to cap plans at five years, where payments might have continued up to 10 years under prior law. The cap, she said, was a "shield" for debtors, not a "sword" for creditors.

To deny discharge, Judge Krause said, "would also produce an absurd result" when the debtors had acted in good faith by making the final payment promptly and had substantially complied with the plan. She said it "would hardly make sense to deny them the benefit of chapter 13 bankruptcy by dismissing the entire proceeding."

Judge Krause then turned to the question of standards to govern the bankruptcy court's exercise of discretion in permitting a payment beyond five years. Building on case law from lower and from the circuit's case law on setting aside default judgments, she laid down a "nonexclusive list" of five factors to guide the court's exercise of discretion: (1) whether the debtor substantially complied with the plan, (2) the feasibility and time required to complete payments, (3) whether any creditors would be prejudiced, (4) whether the "debtor's conduct is excusable or culpable," and (5) the "availability and relative equities of other remedies."

Judge Krause had "no trouble concluding" that the bankruptcy court properly exercised discretion in denying the dismissal motion and granting a discharge. She said that conversion to chapter 7 or a "hardship discharge would be nonsensical in this situation."

First Southern National Bank v. Sunnyslope Housing LP (In re Sunnyslope Housing LP),    F3d    (9th Cir. EN BANC May 26, 2017) (case #12-17241)

First Southern National Bank v. Sunnyslope Housing LP (In re Sunnyslope Housing LP),    F3d    (9th Cir. EN BANC May 26, 2017) (case #12-17241)

In an En banc decision, 8 to 3, the US Court of Appeals for the Ninth Circuit, on 5/26/17 reversed a 9th Circuit decision from 2016 on cramdown valuation, for "cramming down" a Chapter 11 plan on a secured creditor which rejected the Chapter 11 debtor's proposed Chapter 11 plan. EN BANC, the Ninth Circuit held that Cramdown Value Is Not the Higher of Foreclosure or Replacement Value, it is replacement value.

Specifically, the en banc 9th Circuit decision held that a secured creditor in a "cramdown" of a Chapter 11 plan on that secured creditor, after creditor voted to reject (or did not vote to accept) the Chapter 11 plan, is only entitled to the replacement value of the collateral, not the price that would be realized after foreclosure in those rare cases where foreclosure value is higher than replacement value.

The majority in the three-judge panel opinion from April 2016 believed that valuation, governed by Section 506(a), is not measured by the income an owner could generate by operating the property as affordable housing. In the 2/1 decision a year ago, the majority believed that the bankruptcy court could not shortchange a secured creditor if foreclosure would generate a higher value by freeing the property from the strictures of affordable housing.

The enc banc decision decided that Associates Commercial Corp. v. Rash, 520 U.S. 953 (1997) requires using the "replacement value standard" rather than the value from a foreclosure sale that will not take place.

In re Cowen,    F.3d   , 2017 Westlaw 745596 (10th Cir. 2017)

In re Cowen,    F.3d   , 2017 Westlaw 745596 (10th Cir. 2017): The US Court of Appeals for the Tenth Circuit held in Cowen that when two creditors "passively retained" the debtor's property, that they did not violate the automatic stay by "passively retaining" debtor's property (which they had possession of at the time debtor filed bankruptcy), because the creditors did NOT engage in any affirmative acts to "control" the debtor's property. However, the creditors' post-petition forgery and perjury did violate the stay.

Note that (as stated in Cowen) the Second, Seventh, Eighth, and Ninth Circuits (California is in the Ninth Circuit) have all ruled that passive retention of an asset can constitute a violation of the statute, but the Tenth Circuit disagreed. The court construed the language of the statute in light of the 1984 amendments:

This issue is now a "Circuit Split" (Different US Courts of Appeals for Different Circuits have taken opposite positions), which at some point is likely to get decided by the US Supreme Court, by some party in interest, in some case, bringing a petition for certiorari, and the US Supreme Court granting same, to decide the issue.

FACTS: The owner of a commercial truck brought it in for repair; he could not afford to pay cash and instead executed a note secured by the truck. At around the same time, the owner defaulted on another note secured by a second truck; that note was held by the repairman's father-in-law. The second truck was repossessed under hostile circumstances. During the next few days, title to the first truck was supposedly transferred to the repairman, and the second truck was allegedly sold for cash to an unknown Mexican national in an undocumented transaction.

Ten days after the repossession, the owner of the trucks filed a Chapter 13 petition. He demanded the immediate return of the trucks. The bankruptcy court soon issued a turnover order and an order to show cause why the retention of the trucks was not a willful violation of the automatic stay. The repairman and his father-in-law failed to turn over the trucks.

The debtor brought an adversary proceeding seeking damages for violations of the automatic stay. The creditors argued that the debtor's rights in the trucks had terminated prior to the filing of the petition, as shown by the documents concerning the title transfer and the sale. After finding that that the creditors had forged those documents and had committed perjury, the court awarded compensatory and punitive damages. The district court affirmed the liability phase of the case, and the creditors appealed to the Tenth Circuit.

REASONING: On appeal, the creditors argued that 11 U.S.C.A. §362(a)(3) does not cover the act of passively holding onto an asset of the debtor, as distinguished from taking an affirmative act against that asset. The court candidly noted that the Second, Seventh, Eighth, and Ninth Circuits had all ruled that passive retention of an asset can constitute a violation of the statute, but the Tenth Circuit disagreed. The court construed the language of the statute in light of the 1984 amendments: As noted supra, the Second, Seventh, Eighth, and Ninth Circuits have all ruled that passive retention of an asset can constitute a violation of the 11 USC 362(a)(3) bankruptcy automatic stay, which prohibits "any act to obtain possession of property" or "any act to exercise control over property." "Act", in turn, commonly means to "take action" or "do something." ... This section, then, stays entities from doing something to obtain possession of or to exercise control over the estate's property. Per Cowen, it does not cover "the act of passively holding onto an asset," …, nor does it impose an affirmative obligation to turnover property to the estate.

The court then reasoned that if Congress had wanted to cover passive activity, as being a stay violation, it would have done so in the wording of 362(a)(3):

However, (not surprisingly) if the creditors had committed affirmative misconduct of forging title papers and lying, that conduct could be sanctioned. Per § 362(a)(3) and under § 105(a), which "grants bankruptcy courts the power to sanction conduct abusive of the judicial process." … The bankruptcy court here "found the Defendants' attitudes while testifying to be contemptuous of the bankruptcy process, the Debtor, and the Court." … It also found that Defendants "manufactured the paperwork ... after the bankruptcy filing." … And it noted that Defendants "likely forged documents and gave perjured testimony," and "coached their witnesses on what to testify to during [ ] breaks." …This was all done in an "attempt to convince the Court that [the debtor's] rights in the Trucks had been terminated prebankruptcy." (Id.) These would qualify as post-petition acts to exercise control over the debtor's property in violation of the automatic stay.

Midland Funding LLC v. Johnson

US Supreme Court on 5/15/17 issued a decision in Midland Funding LLC v. Johnson holding that Debtor Collectors That Pursue Stale Debt In Bankruptcy cases, by filing a proof of claim on a debt that is beyond the state law statute of limitations, do NOT violate the FDCPA (Fair Debt Collection Practices Act) federal consumer protection statute. US Supreme Court decision reversed an US Circuit Court, Eleventh Circuit, decision that had held that it DID violated the FDCPA for creditors to file proofs of claim in a bankruptcy case, that were past the non-bankruptcy law statute of limitations.

Click here for more information

Giacchi v. U.S. (In re Giacchi),    F.3d    (3d Cir. 5/5/17)

Giacchi v. U.S. (In re Giacchi),    F.3d    (3d Cir. 5/5/17): US Court of Appeals for the Third Circuit, in 5/5/17 decision, Joins Majority of Circuits in the Split Over Whether Tax Can Ever be Discharged, that is owed on Late-Filed Tax Returns

The split widens on the one-day-late rule, where the First, Fifth and Tenth Circuits hold that a tax debt never can be discharged under Section 523(a)(1)(B)(i) if the underlying tax return was filed even one day late.

The Fourth, Sixth, Seventh, Eighth and Eleventh Circuits, on the other hand, employ the four-part test resulting from a 1984 Tax Court decision known as Beard. Addressing the question, the Third Circuit joined the majority in a May 5 opinion by adopting the Beard test.

Deepening the controversy over late-filed tax returns, the Third Circuit weighed in on a subordinate split by differing with the Eighth Circuit and considering the timing of the late-filed return as relevant to the question of dischargeability.

Circuit split widens on an issue the Supreme Court has been ducking.

The split widens on the one-day-late rule, where the First, Fifth and Tenth Circuits hold that a tax debt never can be discharged under Section 523(a)(1)(B)(i) if the underlying tax return was filed even one day late.

The Fourth, Sixth, Seventh, Eighth and Eleventh Circuits, on the other hand, employ the four-part test resulting from a 1984 Tax Court decision known as Beard. Addressing the question, the Third Circuit joined the majority in a May 5 opinion by adopting the Beard test.

Deepening the controversy over late-filed tax returns, the Third Circuit weighed in on a subordinate split by differing with the Eighth Circuit and considering the timing of the late-filed return as relevant to the question of dischargeability.

The Supreme Court has been ducking the split. Columbia University Law Professor Ronald J. Mann attempted to take a one-day-late case to the Supreme Court in 2015 in In re Mallo. The high court denied certiorari. In February, the justices denied certiorari in Smith v. IRS, where the petitioner's counsel raising the same issue was Prof. John A.E. Pottow from the University of Michigan Law School.

The Third Circuit Giacchi decision is a case where the debtor did not file three years' worth of tax returns until after the Internal Revenue Service made assessments. The bankruptcy court held that the tax debt was not dischargeable and was upheld in district court.

On appeal to the Third Circuit, the debtor argued that his late-filed returns nonetheless qualified as "returns," making the tax debt dischargeable under Section 523(a)(1)(B)(i). That section excepts a debt from discharge "for a tax... with respect to which a return... was not filed..." Added to Section 523(a) along with the amendments in 2005, the so-called hanging paragraph defines "return" to mean "a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements)."

The opinion by Third Circuit Judge Jane R. Roth declined to employ the one-day-late rule followed by three circuits and instead adopted the Beard test used by five others. She tersely alluded to the fact that the IRS does not endorse the one-day-late rule.

Among the four parts to the Beard test, only the fourth element was at issue: whether the debtor's late-filed return "represent[ed] an honest and reasonable effort to comply with the tax law."

Citing other circuits, Judge Roth said that a return filed after an IRS assessment will "rarely, if ever, qualify as an honest or reasonable attempt to satisfy the tax law."

The debtor relied on the Eighth Circuit's Colsen decision focusing "on the content of the form, not the circumstances of its filing." Judge Roth declined to follow the sister circuit but instead agreed "with the weight of authority that the timing of the filing of a tax form is relevant" in deciding whether the late-filed return was an "honest and reasonable attempt to comply with tax law."

Judge Roth therefore ruled that tax debts were not dischargeable under the Beard test because they did not qualify as "returns."

[as reported in ABI enewsletter "Rochelle Daily Wire" of 5/9/17]

Porter v. Nabors Drilling USA LP,    F.3d    (9th Cir. April 20, 2017), 9th Circuit case number 15-16985

Porter v. Nabors Drilling USA LP,    F.3d    (9th Cir. April 20, 2017), 9th Circuit case number 15-16985: Ninth Circuit Court of Appeals holds that Police Power Exception to bankruptcy automatic stay, 11 USC 362(b)(4), does NOT Apply to Suits by Private Attorneys General. Suits by private attorney generals (aka nongovernment individuals/entities suing as "private attorney generals"), against the bankruptcy debtor, are stayed by the bankruptcy automatic stay, and cannot proceed unless plaintiff moves for and receives relief from stay to proceed with the suit. Porter was a "private attorney general" suit seeking to enforce state labor laws.

A suit brought by an individual acting as a private attorney general is not a governmental police or regulatory action excepted from the automatic stay, according to an April 20 decision from the Ninth Circuit.

A worker complained to the California Labor & Workforce Development Agency, contending that his employer violated state labor law. When the state regulators did not act, the employee filed suit in state court under California's Private Attorney General Act, which allows individuals to sue seeking penalties for violating state labor law. If successful, the employee would recover 25% of the civil penalties and attorneys' fees, with the remainder earmarked for the state labor department.

The employer removed the case to federal court, where the district judge compelled arbitration and dismissed the suit. The employee appealed to the Ninth Circuit. While the appeal was pending, the employer filed a chapter 11 petition and filed a so-called suggestion of bankruptcy in the appeals court.

The employee responded with a motion arguing that the exception to the automatic stay in Section 362(b)(4) permitted the appeal to proceed. That section provides an exception to the automatic stay for a "governmental unit's… police and regulatory power."

In his opinion ruling that the automatic stay applied to the appeal, Circuit Judge Richard R. Clifton said that similar labor-law suits have been held to be a type of a qui tam action. He cited courts "consistently" holding that the exception for police and regulatory actions does not apply to qui tam suits, at least when the government has not intervened.

The employee's argument, according to Judge Clifton, reads the phrase "by a governmental unit" out of Section 362(b)(4). He therefore held that the automatic stay applied to privately prosecuted suits under state labor law.

Since the state had not intervened, he noted that the employee retained complete control over the suit, including the right to settle.

Circuit Split on Whether or Not Bankruptcy Courts Are "Courts of the United States"

Circuit split on whether or not bankruptcy courts are "courts of the United States". If they are, Bankruptcy Courts can use 28 USC 1927 (as well as 11 USC 105) to order misbehaving debtors, creditors, and their attorneys to pay monetary sanctions. If Bankruptcy Courts are NOT "courts of the United States", they cannot use 28 USC 1927, but can still use 11 USC 105. This Circuit split is reported in a 2016 not for publication 6th Circuit case, In re Royal Manor Management (6th Cir. 6/15/16), 652 Fed. App. 330, as follows:

There is a split of authority regarding whether a bankruptcy court is a "court of the United States" within the meaning of28 U.S.C. § 1927; the Ninth and Tenth Circuits answering in the negative and the Second, Third, and Seventh Circuits answering in the positive. Compare Miller v. Cardinale (In re Deville), 280 B.R. 483, 494 (B.A.P. 9th Cir. 2002), judgment aff'd, 361 F.3d 539 (9th Cir. 2004) ("the Ninth Circuit does not regard a bankruptcy court as a 'court of the United States' "); Jones v. Bank of Santa Fe (In re Courtesy Inns, Ltd., Inc.), 40 F.3d 1084, 1086 (10th Cir. 1994) ("bankruptcy courts are not within the contemplation of, with In re Schaefer Salt Recovery, Inc., 542 F.3d 90, 105 (3d Cir. 2008) (bankruptcy court has authority to impose sanctions under § 1927 because it is a unit of the district court, which is a "court of the United States"), Adair v. Sherman, 230 F.3d 890, 895 n.8 (7th Cir. 2000) (bankruptcy courts have authority to sanction attorneys under § 1927); Baker v. Latham Sparrowbush Assoc. (In re Matter of Cohoes Indus. Terminal, Inc.), 931 F.2d 222, 230 (2d Cir. 1991) (bankruptcy courts have authority to impose § 1927 sanctions). No published decision of this court addresses this question, but in Maloof v. Level Propane Gasses, Inc., 316 Fed.Appx. 373, 376 (6th Cir. 2008) (per curiam), this court affirmed a bankruptcy court's sanctions order under § 1927, observing that federal courts, including bankruptcy courts, have inherent and statutory authority to impose sanctions (citing Rathbun v. Warren City Schs. (In re Ruben), 825 F.2d 977, 982-84 (6th Cir. 1987)). And more recently, in Followell v. Mills, 317 Fed.Appx. 501, 513-14 (6th Cir. 2009), this court vacated the bankruptcy court's denial of sanctions under § 1927 and remanded for reconsideration of the appropriateness of sanctions without questioning the bankruptcy court's authority under the statute. ∗342 We find Followell and Maloof persuasive and follow them here.

Does Using a 'Mere Conduit' Invoke the 11 USC §546(e)?

US Supreme Court to Decide Whether Using a 'Mere Conduit' Invokes the 11 USC §546(e), so called 'Safe Harbor', provision of the Bankruptcy Code:

On 5/1/17, the US Supreme Court granted certiorari, to resolve a split of circuits and decide whether the "safe harbor" for securities transactions applies under Section 546(e), of the Bankruptcy Code, when a financial institution acts only as a "mere conduit" with no beneficial interest in the stock being sold in a leveraged buyout.

The Court will review the Seventh Circuit's decision in FTI Consulting Inc. v. Merit Management Group LP, 830 F.3d 690 (7thCir. July 28, 2016), where "mere conduit" is the only issue.

The justices are yet to act on the certiorari petition in Deutsche Bank Trust Co. Americas v. Robert R. McCormick Foundation, 16-317 (Sup. Ct.), which raises the "mere conduit" question along with several others under Section 546(e).

Fees to Recover Sanctions Are Permitted under 28 U.S.C. § 1927

Whether a court can award "fees on fees" is a hot topic, exemplified by the US Supreme Court's decision in Baker Botts LLP v. Asarco LLC , 135 S. Ct 2158 (2015) which holds that retained counsel cannot obtain compensation for successfully defending a fee application. In the appellate context, the Ninth Circuit laid down rules explaining when an injured party can recover fees incurred in obtaining a sanction against an adversary for a frivolous appeal.

Essentially, the expense of obtaining a monetary sanction can be recovered if the basis for the award is a fee-shifting statute. If the basis for the award is a rule that allows sanctions, "fees on fees" are not recoverable, according to a published-but-unsigned opinion by the Ninth Circuit on April 18.

US Supreme Court to Hear Oral Argument on 4/18/17 in Henson v. Santander Consumer USA, Inc.

The U.S. Supreme Court today will hear oral argument in a case that looks at whether a company that regularly attempts to collect debts it purchased after the debts had fallen into default is a "debt collector" subject to the Fair Debt Collection Practices Act.

U.S. Bank NA v. The Village at Lakeridge LLC

U.S. Bank NA v. The Village at Lakeridge LLC: US Supreme Court on 3/2717 Granted Petition for Certiorari on U.S. Bank NA v. The Village at Lakeridge LLC, to decide the issue of Appellate Standards for Non-Statutory Insider Status. However, does not appear that granting certiorari on U.S. Bank NA v. The Village at Lakeridge LLC will result in the US Supreme Court reviewing the more important question of INSIDER treatment.

Czyzewski v. Jevic Holding Corp.,    US    2017 WL 1066259

Czyzewski v. Jevic Holding Corp.,    US    2017 WL 1066259 (3/22/2017): US Supreme Court Strikes Down "Structured Dismissals" of Bankruptcy cases, if the terms of the "Structured Dismissal" of the bankruptcy case violate the priority scheme of the Bankruptcy Code: The United State Supreme Court in Czyzewski v. Jevic Holding Corp. held that "[a] distribution scheme ordered in connection with the dismissal of a Chapter 11 case cannot, without the consent of the affected parties, deviate from the basic priority rules that apply under the primary mechanisms the Code establishes for final distribution of estate value in business bankruptcies." Importantly, the Court, with Justice Breyer writing the majority opinion, emphasized that "a bankruptcy court does not have such a power." The "structured dismissals" of bankruptcy cases that the US Supreme Court decision prohibits were a threat to the Code's priority scheme is the allowance of "structured dismissals," which include a settlement as part of the dismissal of a chapter 11 case that would distribute estate assets in a manner that contravenes the Code's priority rules. Such priority-altering distributions could not be approved pursuant to a confirmed chapter 11 plan absent the consent of the class that is adversely affected, because of the absolute priority rule (§§ 1129(a)(8) and 1129(b)), nor would they be possible if the chapter 11 case were converted to a chapter 7 liquidation, because of the Code's strict distributional priority rules (§ 726). If such structured dismissals were permitted, a debtor and collaborating creditors effectively could do an end-run around the absolute priority rule by exiting chapter 11 via a "dismissal," before the confirmation cramdown rules are formally applied, but with final, binding distributions made as part of the "structured" dismissal in derogation of absolute priority.

Opt-Out Lenders v. Millennium Lab Holdings II LLC (In re Millennium Lab Holdings II LLC),    F.Supp.3d     (US District Court, District of Delaware 3/17/17):

Opt-Out Lenders v. Millennium Lab Holdings II LLC (In re Millennium Lab Holdings II LLC),    F.Supp.3d     (US District Court, District of Delaware 3/17/17): US District Court for District of Delaware held

Bankruptcy courts can't issue final orders approving non-consensual third-party releases of non-bankruptcy claims, even as part of a Chapter 11 plan confirmation order.

Without making a definitive ruling, a district judge in Delaware said that the US Supreme Court Stern v. Marshall case and its progeny preclude a bankruptcy court from entering a final order granting non-consensual third-party releases of non-bankruptcy claims, even as part of a chapter 11 confirmation order.

In his March 17 opinion, District Judge Leonard P. Stark implied that a bankruptcy court must submit proposed findings and conclusions to the district court, which would have the power to enter a final order approving third-party releases contained in a chapter 11 plan.

Judge Stark's opinion seems to mean that a creditor objecting to confirmation of a plan with third-party releases will have an automatic stay pending appeal while the district court conducts de novo review of the bankruptcy court's proposed findings and conclusions regarding non-consensual releases.

Judge Stark's opinion has another important consequence: The district court will review findings on third-party releases de novo and not use the clear-error standard, thus giving a district court theoretically wider latitude to reject releases.

Ruling on appeal from a confirmation order, Judge Stark remanded the case for the bankruptcy court in the first instance to rule on whether it has constitutional authority to enter a final order imposing third-party releases. If the bankruptcy court decides it does not have final adjudicatory authority, Judge Stark instructed the bankruptcy court to submit proposed findings and conclusions.

The Millennium Plan

The appeal arose from the reorganization of Millennium Lab Holdings II LLC, a provider of laboratory-based diagnostic testing services.

While being investigated by Medicare and Medicaid for fraudulent billing, the company obtained a $1.825 billion senior secured credit facility and used $1.3 billion of the proceeds to pay a special dividend to shareholders.

Thirteen months after the loan, the company agreed to settle with Medicare and Medicaid by paying $250 million. Unable to restructure its debt out of court, Millennium initiated a prepackaged chapter 11 reorganization six months later, in part to carry out the settlement.

The plan provided that the shareholders would contribute $325 million in return for releases of any claims that could be made by the lenders. The plan did not contain an opt-out provision allowing lenders to exempt themselves from the third-party releases given the shareholders.

The shareholders' $325 million contribution would be used to pay the government settlement. Some of the lenders would get $50 million in return for supporting the plan, while the remainder would be used for the reorganized company's working capital.

Before confirmation, lenders holding more than $100 million of the debt filed suit in district court in Delaware against the shareholders and company executives who would receive third-party releases under the plan.

The suit alleged fraud and RICO violations arising from misrepresentations inducing the lenders to enter into the credit agreement. The suit in district court was stayed pending appeal from plan confirmation.

The bankruptcy court confirmed the plan and approved the third-party releases. The dissenting lenders appealed, but the bankruptcy court denied a stay pending appeal. The lenders did not seek a stay from higher courts.

Having consummated the plan, Millennium filed a motion to dismiss the appeal on the ground of equitable mootness. The parties also briefed the merits of the appeal, in which the dissenting lenders alleged that no court in Delaware had ever approved such a broad third-party, non-debtor injunction.

Judge Stark's Opinion

In connection with the contested confirmation hearing, Judge Stark said the bankruptcy court ruled that it had "related to" jurisdiction to impose third-party releases. He said the bankruptcy judge also ruled that third-party releases were appropriate under Third Circuit authority.

Significantly, Judge Stark reviewed the proceedings in the lower court and concluded that the bankruptcy court had not decided whether it had power under Stern to enter a final order granting the releases.

Judge Stark conceded that the company made a "persuasive" argument that the appeal should be dismissed as equitably moot. Nonetheless, he sided with the dissenting lenders by saying he could not consider equitable mootness "without first determining whether a constitutional defect in the bankruptcy court's decision deprived that court of the power to issue that decision."

Turing to the jurisdictional and constitutional issues, Judge Stark agreed that the bankruptcy court had "related to" jurisdiction to issue non-consensual releases. However, he said it was not clear that the bankruptcy court "ever had the opportunity to hear and rule on the adjudicatory authority issue."

On the Stern question, Judge Stark said that the lenders' common law fraud and RICO claims involved public rights that were "not closely intertwined with a federal regulatory program." Consequently, he said, the dissenting lenders "appear entitled to Article III adjudication of these claims."

Judge Stark said he was "further persuaded" by the lenders' "argument that the Plan's release, which permanently extinguished [the lenders'] claims, is tantamount to resolution of those claims on the merits against" the lenders.

He rejected the company's contention that the releases in the plan "did not run afoul of Stern because it was not a final adjudication of the claims."

Next, Judge Stark said that a de novo review by him would not "resolve the constitutional concerns set forth in Stern."

Despite what he called the "seeming merits" of the dissenting lenders' arguments, Judge Stark said he "will not rule on an issue that the bankruptcy court itself may not have ruled upon."

He therefore remanded the case for the bankruptcy court to consider whether it had "constitutional adjudicatory authority" to approve non-consensual releases of the dissenting lenders' "direct-bankruptcy common law and RICO claims." If the bankruptcy court decides it does not have final adjudicatory authority, Judge Stark said the lower court should submit proposed findings and conclusions. Alternatively, Judge Stark said, the bankruptcy court could strike the releases from the confirmation order.

Judge Stark denied the equitable mootness motion without prejudice.

Assuming she feels compelled to issue proposed findings and conclusions, the bankruptcy judge on remand will presumably reach the same factual conclusions and again approve the releases, thus setting up the company to argue once again that the appeal is equitably moot. It is not clear that Judge Stark, the next time around, would dismiss the appeal as equitably moot if he were to differ with the bankruptcy court about the propriety of the releases, because he said that the bankruptcy judge on remand could strike the releases.

Confirmation Becomes Two-Step Process

Assuming Judge Stark is correct and plan releases are not core issues, plans like Millennium's will require two-step confirmation, first in the bankruptcy court, followed by de novo review in district court of non-consensual releases. Consequently, a plan could not be consummated until after district court review of proposed findings and conclusions about the releases. Presumably, the district court would review the merits of the appeal at the same time.

Given the lack of finality with regard to releases, a dissenter in effect gets an automatic stay of the confirmation order pending appeal to the district court.

[as reported in 3/21/17 ABI (American Bankruptcy Institute) e-newsletter "Rochelle's Daily Wire"]

Conflicting Outcomes, Between 2014 9th Circuit BAP Markosian v. Wu (In re Markosian), 506 B.R. 273 (9th Cir. BAP 2014), and 2 Bankruptcy Court Decisions from Other Circuits

Conflicting outcomes, between 2014 9th Circuit BAP Markosian v. Wu (In re Markosian), 506 B.R. 273 (9th Cir. BAP 2014), and 2 bankruptcy court decisions from other Circuits, which are In re Lincoln, BR    , bky case number 16-12650 (Bankr. E.D. La. Feb. 8, 2017) and the 2015 Rogers v. Freeman (In re Freeman), 527 B.R. 527 (Bankr. N.D. Ga. 2015).

The issue in all 3 cases is the same, and is this: When an individual's chapter 11 case converts to chapter 7, does property acquired post-petition revert to the debtor or does it belong to the chapter 7 estate?

There is no explicit answer to that question, in the Bankruptcy Code, when conversion is from chapter 11 to chapter 7.

But for cases where conversion is from chapter 13 to chapter 7, Congress added Section 348(f)(1)(A) to provide that property in the converted case includes property of the estate at the time of the original filing that has remained in the debtor's control at the time of conversion. In other words, on conversion from chapter 13 to chapter 7, the debtor keeps after-acquired property and wages. Further buttressing the rights of the debtor, the Supreme Court decided Harris v. Viegelahn in 2015 by holding that undisbursed wages in possession of the chapter 13 trustee go to the debtor on conversion to chapter 7.

11 USC 1115 points in the other direction. Amended in 2005, that section says that money earned by an individual while in chapter 11 is part of the bankrupt estate, not separate property the individual can keep.

In Markosian v. Wu (In re Markosian), 506 B.R. 273 (9th Cir. BAP 2014) the Ninth Circuit BAP came down in favor of the debtor in 2014. The BAP saw no reason to treat bankruptcy debtors differently if their cases were converted from chapter 11 than if they were converted from chapter 13. The BAP also cited Section 541(a)(6), which provides that money earned after filing in chapter 7 belongs to the bankrupt.

In the case decided by Judge Manger on Feb. 8, the debtor had about $6,000, which he had acquired after filing his chapter 11 petition but before conversion to chapter 7.

The 2 bankruptcy decisions, Lincoln and Freeman, supra, disagreed with the BAP Markosian decision, and ordered the property acquired by the debtor after the Chapter 11 bankruptcy case was filed, and before the Chapter 11 case was converted to Chapter 7, which was still in debtor's possession, must be turned over to the Chapter 7 trustee, by debtor, when the case was converted from 11 to 7. Judge Manger (Lincoln case) was persuaded by the principle of statutory construction that Congress is presumed to act intentionally when it includes particular language in a statute but omits another. She therefore concluded that the money goes to the chapter 7 estate, by negative inference from Section 348(f)(1)(A).

This issue could someday go to the US Supreme Court, if this issue gets appealed up to US Circuit Courts, and the Circuit Courts of 2 or more Circuits disagree.

Greif & Co. v. Shapiro (In re Western Funding Inc.), 550 B.R. 841 (9th Cir.BAP 2016) ("Greif")

Greif & Co. v. Shapiro (In re Western Funding Inc.), 550 B.R. 841 (9th Cir.BAP 2016) ("Greif"): The U.S. Bankruptcy Appellate Panel for the Ninth Circuit (the "9th Circuit BAP") held that the standards for approving a settlement agreement under Fed. R. Bankr. P. 9019(a) did not apply per se to a post-confirmation settlement agreement between a creditor and the liquidating trustee (the "Liquidating Trustee"), as liquidating trustees do not constitute "trustees" for purposes of the Bankruptcy Code and Bankruptcy Rules.

Wolf Metals Inc. v. Rand Pac. Sales, Inc., 4 Cal. App. 5th 698

Wolf Metals Inc. v. Rand Pac. Sales, Inc., 4 Cal. App. 5th 698 (2016), a published California Court of Appeals decision, the California Court of Appeal held that a judgment creditor could not amend a default judgment to add an additional individual judgment debtor under an "alter ego" theory, because doing so would violate that person's due process rights, although adding a successor corporation to the judgment was permissible. Judgment creditors often want to add a nondebtor individual to a state court default judgment, because the corporation the judgment is against files bankruptcy, or is otherwise "uncollectible".

FACTS: Wolf Metals filed a complaint against Rand Pacific Sales, Inc. ("RPS") for open book account, account stated and breach of contract after RPS did not pay for solid sheet metal that Wolf Metals sold to RPS.

RPS answered the complaint, but then filed for bankruptcy under chapter 7. The state action was stayed. Wolf Metals asserted an unsecured claim in the bankruptcy proceedings. The case was fully administered and RPS, as a corporate debtor, did not receive any discharge.

After the bankruptcy case was closed, the trial court authorized Wolf Metals to resume the state court litigation. RPS's counsel repeatedly failed to appear at hearings. Ultimately the trial court struck RPS's answer and entered a default judgment against RPS. Wolf Metals conducted a debtor's examination of RPS's president, Donald Koh, and RPS's secretary and treasurer, Koh's wife. Following motions to compel responses, sanctions and another debtor's examination, Wolf Metals filed a motion under California Code of Civil Procedure section 187 to amend the default judgment to name Koh and South Gate Steel, Inc. ("SGS"), another company that Koh operated, as additional judgment debtors under alter ego and successor corporation theories. Concluding that Koh was RPS's alter ego and that SGS was RPS's successor corporation, the court amended the default judgment naming Koh and SGS as additional judgment debtors.

On appeal, the California Court of Appeal reversed the amended judgment as to Koh, and affirmed as to SGS.

REASONING: Under the California Supreme Court's precedent in Motores De Mexicali, S.A. v. Superior Court, 51 Cal. 2d 172 (1958) ("Motores"), adding Koh as an additional judgment debtor under an alter ego theory violated Koh's due process rights because the initial judgment against Wolf Metals was obtained by default.

California Code of Civil Procedure section 187 authorizes a trial court to amend a judgment to add additional judgment debtors. In some circumstances, it may be proper to add an additional judgment debtor under an alter ego theory. For example, when an individual abuses the corporate form to perpetrate a fraud, courts will ignore the corporate entity and adjudge the wrongful acts to be those of the persons controlling the corporation.

However, courts are sensitive to the application of the alter ego theory in connection with default judgments because it raises due process concerns. "[T]o amend a judgment to add a defendant, thereby imposing liability on the new defendant without trial, requires both (1) that the new party be the alter ego of the old party and (2) that the new party ... controlled the litigation, thereby having had the opportunity to litigate, in order to satisfy due process concerns. The due process considerations are in addition to, not in lieu of, the threshold alter ego issues." Triplett v. Farmers Ins. Exchange, 24 Cal. App. 4th 1415, 1421 (1994) (emphasis in original).

The court noted that it was bound by the rule first established over fifty years ago in Motores. There, the plaintiff obtained a default judgment against a corporation and sought to add as alter egos the three individuals who formed the corporation. In rejecting the request, the Motores court cited Fourteenth Amendment due process concerns, particularly because the individuals had no duty to participate in that action since no claims had been made against them personally. Likewise, in NEC Electronics, Inc. v. Hurt, 208 Cal. App. 3d 772 (1989) ("NEC"), the court relied on Motores to reverse the lower court's decision adding the defendant's CEO as an additional judgment debtor. The NEC court explained that there was no defense for the defendant's CEO to control because the corporate defendant did not appear to defend at trial.

This case is the same as Motores. Both the individuals behind the corporate defendants here and in Motores dominated their respective companies. However, in both cases, the corporate defendants offered no evidence-based defenses and the judgments against the corporate entities were entered by default. The cases upon which Wolf Metals relied were distinguishable, because they did not follow defaults. In those cases, the defendants presented evidence-based defenses before the court amended the judgment to add additional alter ego defendants. Thus, those cases involved defenses that the proposed alter ego judgment debtor potentially could control. In contrast, despite having filed its answer, which was later stricken, RPS did not present any evidence-based defense before default judgment was entered against it, and Koh was not proposed as an alter ego defendant before default judgment was entered. Thus, bound by Motores, the court reversed the lower court's decision as it applied to Koh.

Contrast the reversal of the trial court's alter ego decision with the portion of the decision affirming that the amended judgment could include SGS as a successor corporation. Due process is not contravened by amending the judgment to include a corporation that is the debtor defendant's "mere continuation." See McClellan v. Northridge Park Townhome Owners Ass'n, 89 Cal. App. 4th 746 (2001). The evidence presented to the trial court established that SGS was a mere continuation of RPS, because they shared the same officers, business location, employees, agent for service of process and equipment, the companies' funds and assets were commingled, and SGS did not pay adequate consideration for RPS's assets.

COMMENT from 2/6/17 enewsletter

Wolf Metals highlights the due process problem of adding an additional individual debtor to a default judgment under an alter ego theory. The lesson is that plaintiffs should consider whether an alter ego theory applies before moving forward to obtain a default judgment, and make sure to add the relevant individuals as additional named defendants before moving forward with a prove-up. Adding those individuals in advance may enable the plaintiff to obtain default judgments against them or may at least prompt the individuals to appear and respond (of course, where - as here - the defendants are not forthcoming with information about various relationships, it may be difficult for a plaintiff to determine in advance whether it should name additional defendants). Conversely, debtor-defendants should consider the advantages of defaulting when only a corporate defendant is named in the pleadings. As Wolf Metals demonstrates, waiting until after the default judgment is obtained against the entity forecloses the plaintiff's opportunity to obtain an amended judgment against an individual on an alter ego theory.

[as reported in State Bar of California, Business Law Section, Insolvency Law Committee e-newsletter of 2/6/17]

U.S. Bank N.A. v. The Village at Lakeridge, LLC

U.S. Bank N.A. v. The Village at Lakeridge, LLC (In re The Village at Lakeridge, LLC), 814 F.3d 993 (9th Cir. 2016): Held that purchasing a claim from an insider of the bankruptcy debtor does NOT necessarily result in the person/entity purchasing the claim becoming an insider. United States Court of Appeals for the Ninth Circuit held that a vote on a plan of reorganization submitted by a non-insider claimant was not to be disregarded under Bankruptcy Code section 1129(a)(10) merely because the claimant purchased the claim from an insider.

FACTS: The debtor owned a commercial real estate development in Reno, Nevada. There was only one secured claim in the debtor's case, amounting to about $10 million. There was also only one unsecured claim, listed on the debtor's schedules at $2,761,000. The holder of the unsecured claim at the outset of the case was the debtor's sole member, MBP Equity Partners 1, LLC ("MBP").

The debtor filed a plan and disclosure statement that addressed the two claims in the case. Before the hearing on the adequacy of the disclosure statement, MBP sold the unsecured claim to Dr. Robert Rabkin for $5,000. After the disclosure statement was approved, Rabkin voted in favor of the debtor's plan.

During a deposition conducted by the secured lender in connection with the plan confirmation proceedings, Rabkin testified that: (i) he had a business and a close personal relationship with Kathie Bartlett, a member of the board of MBP; (ii) he saw Bartlett regularly; (iii) he purchased the unsecured claim for $5,000 as a business investment; and (iv) other than the foregoing, he had no interest in the case or relationship to the debtor.

The secured lender then filed a motion to designate the unsecured claim purchased by Rabkin and disallow such claim for the purposes of voting on the debtor's plan.

The bankruptcy court found that the assignment of the unsecured claim was not in bad faith, and declined to designate Rabkin's unsecured claim on that basis. The bankruptcy court also found that Rabkin was not a non-statutory insider due to his relationship with Bartlett. However, the bankruptcy court did designate Rabkin's claim and disallowed Rabkin's vote on the plan because the bankruptcy court determined that Rabkin had become a statutory insider by purchasing the claim from MBP. The designation ruling prevented the debtor from obtaining an impaired consenting class of creditors as required by Section 1129(a)(10) of the Bankruptcy Code, thus blocking confirmation of the debtor's plan.

The debtor and Rabkin appealed the bankruptcy court's order. The secured lender cross-appealed the portions of the bankruptcy court's order finding that Rabkin was not a non-statutory insider and finding that Rabkin's vote should not be designated under Bankruptcy Code section 1126(e).

The Ninth Circuit Bankruptcy Appellate Panel reversed the bankruptcy court's ruling that Rabkin was a statutory insider merely by virtue of having purchased his claim from a statutory insider, and permitted Rabkin to vote on the plan. The secured lender appealed to the Ninth Circuit.

REASONING: This case concerns Bankruptcy Code section 1129(a)(10), which provides that if a class of claims is impaired, at least one class of impaired claims must accept the plan, "determined without including any acceptance of the plan by any insider." The term "insider" is defined in Bankruptcy Code section 101(31), which provides a non-exclusive list of parties that are deemed insiders. Parties deemed to be insiders by virtue of being on the non-exclusive list are referred to as "statutory insiders," and parties not on that list who nonetheless have a close enough relationship with the debtor to warrant special treatment are referred to as "non-statutory insiders." In this case, the parties did not dispute that MBP, as the sole member of the debtor, was a statutory insider.

The Ninth Circuit reversed the bankruptcy court's determination that Rabkin was a statutory insider such that his acceptance of the debtor's plan should be excluded under Bankruptcy Code section 1129(a)(10). The Ninth Circuit held that the bankruptcy court applied an erroneous standard when it concluded that Rabkin became a statutory insider merely because he acquired the unsecured claim from a statutory insider.

The Ninth Circuit explained that insider status is a property of a claimant, not of the claim, and thus does not flow to the assignee as a matter of assignment law when a claim is assigned. The Ninth Circuit acknowledged that this result conflicted with a prior unpublished Ninth Circuit ruling which had held that insider status does transfer with a claim under general assignment law, In re Greer W. Inv. Ltd. P'ship, No. 94-15670, 1996 WL 134293 (9th Cir. Mar. 25, 1996), but distinguished that decision by observing that it was unpublished and not binding.

The Ninth Circuit further explained that "insider status is a question of fact that must be determined after the claim transfer occurs." Lakeridge, 814 F.3d at 1000. This factual analysis is done on a "case-by-case basis," after considering various factors. Id. The Ninth Circuit held that the factual inquiry could not be bypassed by a per se rule such as that created by the bankruptcy court, which would bar even a third party that acquired the claim at arm's length from voting on a plan. The Ninth Circuit further noted that courts have held that when an insider acquires a claim from a non-insider, the claim loses its non-insider status because of the insider character of the purchaser. See In re Applegate Prop., Ltd., 133 B.R. 827 (Bankr. W.D. Tex. 1991); In re Holly Knoll P'ship, 167 B.R. 381 (Bankr. E.D. Pa. 1994). Thus, to hold that the claim keeps its insider status when transferred away from a statutory insider, but loses its non-insider status when transferred to a statutory insider, would create a procedural inconsistency in the Code.

The Ninth Circuit affirmed the finding that Rabkin was not a non-statutory insider. In doing so, the Ninth Circuit clarified the standard for becoming a non-statutory insider as a two-part, conjunctive test: "A creditor is not a non-statutory insider unless: (1) the closeness of its relationship with the debtor is comparable to that of the enumerated insider classifications of § 101(31), and (2) the relevant transaction is negotiated at less than arm's length." Lakeridge, 814 F.3d at 1001. The Ninth Circuit explained that while the secured creditor had demonstrated a close relationship between Rabkin and Bartlett, it had not shown a close relationship between Rabkin and Lakeridge, in part because Bartlett did not control either Lakeridge or its member, MBP.

COMMENT: The Lakeridge case both clarifies the law on the determination of insider status - which is relevant not just to the plan confirmation process, but also to preference actions - and also touches on the increasing area of claims trading. The ruling avoids what could have been a trap for the unwary claims trader, who, if the bankruptcy court ruling had stood, would have had to undertake due diligence as to the insider status of the assignor before purchasing a claim. Arguably, the case also gives debtors greater freedom in the plan confirmation effort by suggesting that a debtor's insiders may increase the debtor's chances of obtaining an impaired consenting class by transferring their claims to third parties. This prospect was raised by the secured creditor as a "slippery slope" type of argument, but the Ninth Circuit found that this effect would be mitigated by various protections in the plan confirmation process, including the requirements that the plan comply with the Bankruptcy Code, that the plan be proposed in good faith, that the plan disclose the identity of all insiders, that at least one class of impaired claims has accepted the plan, and that the plan is fair and equitable with respect to each class that did not accept it. In practice, a greater protection against that slippery slope may be the bankruptcy court's own discretion in undertaking the insider analysis, which is highly specific to the facts of each case and, as a factual determination, may be difficult to overturn on appeal.

[This review is from California State Bar Insolvency Committee e-newsletter of 020317]

In re Rexford Properties, LLC,    BR   , 2016 Westlaw 5416443 (Bankr. C.D.Cal.2016)

In re Rexford Properties, LLC,    BR   , 2016 Westlaw 5416443 (Bankr. C.D.Cal.2016): A bankruptcy court in California has held that the separate classification of a group of trade creditors in a Chapter 11 plan had to be based on a "legitimate business or economic justification," but the debtor did not have to show that the special treatment of that group was "critical, essential, or necessary" to the reorganization. [.]

FACTS: A Chapter 11 debtor negotiated a reorganization plan, under which certain of its unsecured creditors (primarily trade creditors) would be separately classified. The members of that class would be paid in full, provided that they promised to continue providing goods and services to the reorganized debtor on terms and conditions that were no less favorable than before the reorganization. Prior to seeking formal plan confirmation, the debtor brought a motion under Federal Rule of Bankruptcy Procedure 3013, seeking an advanced determination that its classification scheme was appropriate.

One of the debtor's largest unsecured creditors, which was not part of that special class, objected to the motion on the ground that preferential treatment for the class members was not "critical, essential, or necessary" to the reorganization. The debtor argued that as long as the separate classification and the separate treatment were supported by a "legitimate business or economic justification," the classification scheme was permissible.

REASONING: The court ruled in favor of the debtor but noted that there was no controlling Ninth Circuit authority that was exactly on point. Citing In re Johnston, 21 F.3d 323 (9th Cir. 1994), and In re Barakat, 99 F.3d 1520 (9th Cir. 1996), the court observed that "[s]ubstantially similar claims may be classified separately if there is a 'legitimate business or economic justification' for doing so:

The Court concludes that when a plan proposes separate classification of trade vendor claims in order to provide preferential treatment to those claims, a "legitimate business or economic justification" is established when (i) the vendors provide genuine operational or financial benefits to the debtor and (ii) the preferential treatment of vendor claims is reasonably calculated to induce the continued support of those vendors.

The court noted that the higher standard proposed by the objecting party went beyond the language of Barakat, supra:

A legal standard permitting separate classification of substantially similar claims only where the claims are "critical," "essential," or "necessary" would go far beyond the requirement of a legitimate business or economic justification. Use of these terms would suggest that separate classification is justified only when it is proven that a debtor's reorganization will not succeed without it . . . . The requirement of a "legitimate business or economic justification" does not impose such a high bar. If the Ninth Circuit had intended to do so, it certainly would not have held that a legitimate justification would suffice to permit the separate classification of substantially similar claims . . . . Instead, it would have held that such classification is permitted only when necessary to achieve the debtor's reorganization.

The court also observed that the stricter "necessity" standard would pose evidentiary and procedural problems:

[A] necessity standard would not be practicable. There is no question that when a debtor seeks to provide preferential treatment to a group of otherwise similar claims, it is necessary to separately classify those claims . . . . But how does a debtor show that the preferential treatment (i.e., the premise for the separate classification) is truly necessary (i.e., "inescapable," "unavoidable," "compulsory," "absolutely needed" and "required")? To meet such a standard-logically speaking- the debtor would need to demonstrate (1) the vendor provides necessary goods and services that are not available from alternative vendors, or that are not otherwise available on terms and conditions that will permit the business to reorganize and (2) the vendor will stop providing those goods and services or favorable terms after confirmation of a plan that does not include the preferential treatment of its claim.

The first proposition is readily capable of proof, but the second proposition is problematic. First, bankruptcy courts do not have a crystal ball. They do not predict what will or will not happen in the future. At best, they make reasoned judgments about the likelihood of future events based on existing circumstances and historical facts . . . . Second, as a matter of proof, it is inherently difficult to establish what a vendor will or will not do in the future. A vendor might be willing to testify that its continued support of the debtor depends on the proposed preferential treatment, but the self-serving nature of the testimony is not likely to yield a satisfying result. Any vendor asked whether preferential treatment of its prepetition claim is a prerequisite to its future support of the debtor is likely to say "yes." And even if this were not the case, the debtor would face a substantial (perhaps insurmountable) burden in soliciting and presenting the testimony of potentially dozens or hundreds of vendors to demonstrate that the proposed treatment, in each instance, is necessary (i.e., "inescapable," "unavoidable," "compulsory," "absolutely needed" and "required") to obtain the continued support of those vendors.

The court went on to hold, however, that although the class of trade creditors, taken as a whole, qualified under the "legitimate business or economic justification" test, a few of the claimants included by the debtor in the class of trade creditors had to be excluded because the debtor had not presented sufficient evidence to show justification as to those particular creditors.

After determining that the separate classification of the trade creditors was justifiable, the court then ruled that those creditors would qualify as "impaired" for purposes of the cramdown provisions in the Bankruptcy Code, which require that at least one "impaired class" consent to the plan. The court noted that under In re L & J Anaheim Assocs., 995 F.2d 940 (9th Cir. 1993), any alteration of a creditor's rights constitutes "impairment," even if the value of the rights is enhanced:

The proposed Trade Class described in the present motion is clearly "impaired" within the meaning of section 1124. Under the proposed treatment of the Trade Class claims, the holders of trade claims will be provided payment equal to 100% of the allowed amount of their claims, but as a condition to such treatment they will be required to agree to continue providing goods and services to [the debtor] on terms and conditions no less favorable than currently provided. The imposition of this condition is an alteration of the rights of the holders of the claims in the Trade Class, even if the treatment overall results in full payment.

COMMENT OF ATTORNEY MARCH: Don't count on higher courts agreeing with this decision. It guts the Bankruptcy Code's classification scheme if creditors of same priority can be separately classified

For discussions of recent opinions involving related issues, see 2014-08 Comm. Fin. News. NL 17, New Value Chapter 11 Plan Requires Genuine Market Test, Lender's Deficiency Claim Cannot Be Gerrymandered Where Guarantor is Insolvent, and Artificial Impairment Cannot Be Abusive; and 2012 Comm. Fin. News. 19, When Secured Lender Holds Non-Debtor Guarantees, Lender's Unsecured Deficiency Claim May Be Separately Classified, Thus Enabling Debtor to Confirm Cramdown Plan Using a Separate Class of Impaired Consenting Unsecured Creditors.

[this case discussion, but NOT attorney March's above comment, is from the California State Bar Insolvency Law Committee e-newsletter of 1/30/17}

Ho vs. ReconTrust Co., NA, 2016 Westlaw 6091564 (9th Cir. 2016)

SUMMARY: Ho vs. ReconTrust Co., NA, 2016 Westlaw 6091564 (9th Cir. 2016): Ninth Circuit Court of Appeals held that a foreclosure trustee's notice of default sent to a borrower was not an attempt to collect a debt for purposes of the FDCPA.

FACTS: A consumer defaulted on her home loan. Acting on behalf of the lender, the trustee sent her a notice of default ("NOD"), in anticipation of foreclosure. The notice stated that she owed approximately $20,000 and that she "may have the legal right to bring [her] account in good standing by paying all of [her] past due payments." The NOD also stated that the home "may be sold without any court action." The trustee then recorded a notice of sale.

Borrower sued lender under the Fair Debt Collection Practices Act ("FDCPA"), stating that the NOD had misrepresented the amount of the debt. The district court granted the trustee's motion to dismiss, and the Ninth Circuit affirmed.

REASONING: In a 2 to 1 opinion written by Judge Kozinski, the court reasoned that the trustee was simply seeking to proceed with the foreclosure in compliance with California law and was not attempting to collect a debt:

[The trustee] would only be liable if it attempted to collect money from [the borrower]. And this it did not do, directly or otherwise. The object of a nonjudicial foreclosure is to retake and resell the security, not to collect money from the borrower. California law does not allow for a deficiency judgment following non-judicial foreclosure. This means that the foreclosure extinguishes the entire debt even if it results in a recovery of less than the amount of the debt . . . . Thus, actions taken to facilitate a non-judicial foreclosure, such as sending the notice of default and notice of sale, are not attempts to collect "debt" as that term is defined by the FDCPA.

The prospect of having property repossessed may, of course, be an inducement to pay off a debt. But that inducement exists by virtue of the lien, regardless of whether foreclosure proceedings actually commence. The fear of having your car impounded may induce you to pay off a stack of accumulated parking tickets, but that doesn't make the guy with the tow truck a debt collector.

The court acknowledged that its result was contrary to those of two other circuit court decisions, Glazer v. Chase Home Fin. LLC, 704 F.3d 453 (6th Cir. 2013), and Wilson v. Draper & Goldberg, P.L.L.C., 443 F.3d 373 (4th Cir. 2006). The court was particularly critical of the Glazer opinion:

The Sixth Circuit's decision in Glazer rests entirely on the premise that"the ultimate purpose of foreclosure is the payment of money . . . ." But the FDCPA defines debt as an "obligation of a consumer to pay money . . . ."Following a trustee's sale, the trustee collects money from the home's purchaser, not from the original borrower. Because the money collected from a trustee's sale is not money owed by a consumer, it isn't "debt" as defined by the FDCPA.

The court carefully limited the scope of its opinion:

We do not hold that the FDCPA intended to exclude all entities whose principal purpose is to enforce security interests. If entities that enforce security interests engage in activities that constitute debt collection, they are debt collectors. We hold only that the enforcement of security interests is not always debt collection.

Later, the court invoked the underlying policy of the FDCPA to explain why the NOD was not a request for payment:

The notices at issue in our case didn't request payment from [the borrower]. They merely informed [her] that the foreclosure process had begun, explained the foreclosure timeline, apprised her of her rights and stated that she could contact [the lender] . . . if she wished to make a payment. These notices were designed to protect the debtor. They are entirely different from the harassing communications that the FDCPA was meant to stamp out.

There was a strong and lengthy dissent by Judge Korman, arguing that the weight of authority supported the application of the FDCPA to the foreclosure trustee.

COMMENT: Less than two weeks before the decision in Ho was issued, the Fourth Circuit reaffirmed its holding in Wilson, supra, in McCray vs. Federal Home Loan Mortgage Corp., 2016 Westlaw 5864509 (4th Cir.). (For a discussion of McCray, see 2016 Commercial Finance Newsletter - - , Lender and Law Firm Seeking Foreclosure Are "Debt Collectors" Under FDCPA.) There is now an irreconcilable circuit split that requires Supreme Court review. I predict that certiorari will be granted in both of these cases and that the Supreme Court will agree with the Fourth Circuit.

I think that the Court will reason that one purpose of the NOD is to collect the debt. The mailing of an NOD tells the borrower that she has to pay up or else. Yes, it is true that the NOD does not expressly say "you must pay." But it does say "if you do not pay, bad things will happen," which is essentially the same thing. To use an ancient maxim in a new context, an NOD is as good as a wink.

I am certainly not saying that every NOD constitutes a violation of the FDCPA; the statute is violated only when a creditor engages in specific types of misconduct. But a creditor who violates the statute should not be able to hide behind the fact that the misbehavior was coupled with an effort to foreclose.

The counterargument, as articulated by Judge Kozinski, is that it would interfere with the foreclosure process, a creature of state law, to expose lenders to federal liability under the FDCPA. That is true, but I think that argument is overbroad. Many commercial transactions are governed by state law, often with a federal overlay, so that the creditor must comply with both sets of laws. That is the nature of federalism. See, e.g., Arizona v. United States, ---U.S. ----, 132 S.Ct. 2492, 2500, 183 L.Ed.2d 351 (2012): "Federalism, central to the constitutional design, adopts the principle that both the National and State Governments have elements of sovereignty the other is bound to respect."

Whether or not the Supreme Court overturns the Ninth Circuit on this issue, I am compelled to add that Judge Kozinski's writing is always a pleasure to read. His prose is so clear and so refreshingly informal that his meaning shines through. Very few other judges are such powerful writers; Judges Posner and Easterbrook of the Seventh Circuit are in the same elite class. [as reported California State Bar Business Law Section Insolvency e-newsletter of 1/25/17]

Retailers' Free Speech Challenge to Surcharge/discount Distinction for Describing Price Differences for Credit Card and Cash Sales

Retailers' Free Speech Challenge to Surcharge/discount Distinction for Describing Price Differences for Credit Card and Cash Sales (US Supreme Court docket certarari granted on 10-20-16, and US Supreme Court heard argument of case on 1/11/17 :U.S. Supreme Court on 1/11/17 struggled over how to decide a challenge to a state law barring retailers from charging more to buy with credit instead of cash, debating whether it merely regulates prices or violates merchants' constitutional rights. The eight justices heard an hour of arguments in an appeal brought by merchants to a lower court's ruling upholding the New York law, which is similar to statutes in nine other states. Merchants contend these laws infringe on their free speech rights guaranteed by the U.S. Constitution by dictating how they describe their pricing to customers. Retailers are forced to pay fees to credit card companies every time a customer buys with a card. The law bars retailers from imposing a surcharge on customers who make purchases with a credit card. It also makes it impossible for merchants to call fees paid to credit card companies a surcharge that is added to the price of a product. The law does not stop retailers from offering a discount for cash purchases. The justices debated whether the law even regulates speech or whether it is a traditional form of price regulation that is not subject to a free speech challenge. Several justices including Stephen Breyer indicated they did not think the law affects free speech, suggesting they may vote to uphold it. Breyer said the law simply requires retailers to post a price that includes the credit card surcharge. [as reported in Credit & Collection News e-newsletter of 1/12/17]

Midland Funding, LLC v. Johnson, St. Ct., No. 16-348

In Midland Funding, LLC v. Johnson, St. Ct., No. 16-348, appeal docketed Sept. 16, 2016: US Supreme Court in 2017 will hear and decide a bankruptcy case involving a debt collection agency and a consumer bankruptcy debtor.

Issue is whether the Consumer Financial Protection Act prohibits a debt collection agency/creditor from filing a proof of claim, in a bankruptcy case, that is barred by the statute of limitations. More than two years into a litigation effort challenging the credit and collection industry's practice of filing time-barred proofs of claim in consumer bankruptcy cases, all eyes are on the U.S. Supreme Court, which recently received a flood of "friend of the court" briefs arguing both sides of the debate - including amicus briefs from ACA International and the Consumer Financial Protection Bureau. In Midland Funding, LLC v. Johnson, St. Ct., No. 16-348, appeal docketed Sept. 16, 2016, a consumer is accusing a debt collector of engaging in deceptive, misleading, unfair, or unconscionable conduct in violation of the Fair Debt Collection Practices Act by knowingly filing an accurate bankruptcy proof of claim on a debt that is barred by the applicable statute of limitations. The district court judge in the Southern District of Alabama who considered the issue in Johnson granted the debt collector's motion to dismiss, finding the FDCPA and the Bankruptcy Code in "irreconcilable conflict" because the Code allows all creditors to file a proof of claim on any debt, even if that debt is barred by the statute of limitations, whereas the FDCPA prohibits a "debt collector" from "us[ing] any false, deceptive, or misleading representation or means in connection with the collection of any debt," including attempting to collect a debt that is not "expressly authorized by the agreement creating the debt or permitted by law" (i.e., a debt barred by the statute of limitations.) The district court found that the later-enacted Bankruptcy Code effectively repealed the conflicting provision under the FDCPA and precluded consumers from challenging the practice of filing time-barred proofs of claim as a violation of the FDCPA in a bankruptcy proceeding. [reported in 010517 Credit & Collection e-newsletter].

Beware of Online Bankruptcy Solicitations

BEWARE OF SUPPOSED "NATIONAL" LAW FIRM (PRINCE LAW FIRM, LLC) WHICH ADVERTISED ON INTERNET, SOLICITING FOR BANKRUPTCY CASES, BUT WHICH WAS NOT A NATIONAL LAW FIRM, AND WHICH WAS FARMING THE CASES OUT TO LAW FIRMS IN VARIOUS STATES, SOMETIMES WITH BAD RESULTS: In re Aimee Dawn Futreal and Judge A. Robbins, US Trustee for Region Four, Movant v. Brent Barbour and Barry Proctor and Prince Law Firm, LLC, Respondents; and In re Micah Jerimey Repass and Holly Leigh Repass, Debtors, and Judgy A. Robbins, US Trustee for Region Four, Movant v. Brent Barbour and Barry Proctor and Prince Law, LLC and Prince Law Firm, LLC, Respondents (US Bankruptcy Court, WD VA, 2016 WL 2609644, issued 5/2016) : Decision found that Prince Law Firm, LLC, was misrepresenting, in claiming to be a "national" law firm, and that its "agreements" for hiring counsel to handle cases was not proper, and ordered various sanctions.

In re Kimball,    BR    (Bankr. W.D. Okla. 12/13/16)

In re Kimball,    BR    (Bankr. W.D. Okla. 12/13/16): bankruptcy court decision explains the (complex) case law rules for determining which state's statute of limitations law applies where a creditor's claim in a bankruptcy case is based on a state court judgment/order. There is a split among federal Circuit courts on this issue.

ABI (American Bankruptcy Institute) described the case as follows: Spotting an issue that both parties missed, Bankruptcy Judge Janice D. Loyd of Oklahoma City avoided the circuit split on choice of law rules for cases with exclusive jurisdiction in federal courts. Her Dec. 13 opinion reads like a handbook for deciding which state's statute of limitations applies.

A former husband filed bankruptcy in Oklahoma. His former wife filed a priority claim for $27,000 in unpaid child support under a Utah divorce decree. The former husband-debtor objected to the claim, contending the allowable amount of the claim was only some $3,000 after applying Utah's statute of limitations for child support.

The wife agreed that the Utah statute applied but argued that the husband had waived the statute by making voluntary payments after the limitations period expired.

Judge Loyd did not adopt the parties' agreed choice of law. Instead, she said that neither party raised the "unsettled and potentially determinate choice of law issue."

Under the Supreme Court's Guaranty Trust and Klaxon decisions from the 1940s, federal courts sitting in diversity employ the forum state's choice of law rules to determine controlling substantive law; however, the Supreme Court has never extended the rule to cases under bankruptcy jurisdiction.

In federal question cases, four circuits use choice of law rules of the forum state. Three other circuits, including the Tenth, employ federal common law and the Restatement (Second) of Conflicts of Laws. Under the Restatement, Judge Loyd said that Utah law would apply because it had the most "significant relationship to the parties and the occurrence."

Judge Loyd decided, though, that federal common law did not apply in view of the federal Full Faith and Credit Child Support Orders Act of 1994, which includes choice of law rules for child support matters. In an action to enforce child support arrears, Section 1738(h) of FFCCOA provides for the application of the statute of limitations of the forum state or the state that issued the order, "whichever statute provides the longer period of limitation."

Both Utah and Oklahoma had adopted the Uniform Interstate Family Support Act, which similarly invokes the longer statute of limitations.

Oklahoma "clearly provides for the longer statute of limitations in child support actions," Judge Loyd said, because there is none in the Sooner state. In Oklahoma, child support is owed until it is paid in full, the judge said.

Since the statute will never expire, Judge Loyd directed the parties to recalculate the allowable claim.

Comment by KP March, Esq. of the Bankruptcy Law Firm, PC: Choice of law issues are often very tricky to figure out.

CFPB v. Chance Edward Gordon, 819 F.3d 1179 (9th Cir. 4/14/2016):

CFPB v. Chance Edward Gordon, 819 F.3d 1179 (9th Cir. 4/14/2016): Defendant Gordan on 11/17/16 filed his Petition for Certiorari, requesting the US Supreme Court to grant review by the US Supreme Court of the 9th Circuit's decision against defendant Gordon. The 9th Circuit decision affirmed Gordon's liability for Gordon having committed deceptive practices in connection with offering/providing/charging for mortgage modification services. The petition addresses the ratification of government action alleged to be ultra vires at the time the action was taken, as well as a subject-matter jurisdiction question regarding whether federal courts' Article III jurisdiction exists when the federal official heading the agency and bringing the case does not have the proper authority at the time the case is litigated. In his petition for a writ of certiorari, the defendant contends primarily that because CFPB Director Richard Cordray was not validly appointed as an Officer of the United States before his July 2013 confirmation by the Senate, Director Cordray's post-confirmation ratification of the Bureau's actions during the previous 18 months was invalid. The defendant argues that Director Cordray was not properly appointed under the President's recess appointment power, and, thus, Director Cordray was a "private citizen" who had no authority to initiate any pre-confirmation enforcement actions (including the federal court action against the defendant). The defendant then argues that Director Cordray's post-confirmation ratification - a four-sentence Federal Register notice - of all previous Bureau actions violated Article II of the Constitution. It will likely take the US Supreme Court several months to grant or deny Gordon's Petition for Certiorari, to say whether the US Supreme Court will, or will not, review the 9th Circuit's decision.

Blixseth v. Brown (In re Yellowstone Mountain Club, LLC),    F.3d    , 2016 WL6936595 (9th Cir. 11/28/2016):

Blixseth v. Brown (In re Yellowstone Mountain Club, LLC),    F.3d    , 2016 WL6936595 (9th Cir. 11/28/2016): In Blixseth, the Ninth Circuit Extends Barton doctrine, to Protect Creditors' Committee Members

In Blixseth, the Ninth Circuit Court of Appeals became the first US appeals court to hold that the Supreme Court's Barton doctrine, barring suits against receivers and trustees without permission from the appointing court, also protects creditors' committee members from claims based on actions taken within the scope of authority.

The appeal involved Timothy Blixseth, former owner of the bankrupt Yellowstone Mountain Club LLC, who used some proceeds from a loan to the club to pay personal debts. The same lawyer who advised Blixseth about the loan was also his divorce lawyer before the club's bankruptcy.

In re Archdiocese of Milwaukee (Official Committee of Unsecured Creditors v. Archdiocese of St. Paul and Minneapolis),     BR   , 2016 WL7115977 (US DC ED Wisconsin 2016):

In re Archdiocese of Milwaukee (Official Committee of Unsecured Creditors v. Archdiocese of St. Paul and Minneapolis),     BR   , 2016 WL7115977 (US DC ED Wisconsin 2016): US District Court affirmed, on appeal, the bankruptcy court's denial of substantive consolidation. The Bankruptcy Court decision is 483 BR 693, 2012 WL 6093494 (Bky Ct. ED Wisconsin 2012). The Bankruptcy Judge had denied motion of creditors committee to substantively consolidate non-bankrupt catholic schools and parishes into the bankruptcy case of the Catholic Archdiocese in which those non-bankrupt catholic schools and parishes were nocated. On appeal, the US District Court, ED Wis 2016, agreed that non-bankrupt parishes and schools cannot be drawn involuntarily into the bankruptcy of a Catholic archdiocese, via a Motion to substantively consolidate the nonbankruptcy parishes and schools into the bankruptcy case of the bankrupt archdiocese those parishes and schools are located in.

The case stands for the proposition that a motion for substantive consolidation is equivalent to an involuntary bankruptcy petition that cannot be filed against non-bankrupt schools, churches and charitable organizations as a consequence of Section 303(a) of the Bankruptcy Code, which prohibits filing an involuntary bankruptcy petition against a charitable entity (aka "eliomosinary institution").

The creditors' committee for the Archdiocese of St. Paul and Minneapolis attempted to increase the pool of assets for sexual abuse claimants by filing a motion for substantive consolidation with about 200 non-bankrupt parishes, schools and other non-bankrupt Catholic entities under control of the archbishop. Without even reaching the First Amendment or the Religious Freedom Restoration Act, Bankruptcy Judge Kressel dismissed the consolidation motion in July, noting that the Eighth Circuit has not decided whether Section 105(a) allows substantive consolidation of debtors with non-debtors. He was upheld on Dec. 6 by District Judge Ann D. Montgomery.

Judge Montgomery began from the proposition that equitable relief under Section 105, such as substantive consolidation, "is limited to actions which are consistent with the Bankruptcy Code." Dismissing the substantive consolidation motion was proper, she said, because "substantive consolidation is effectively involuntary bankruptcy" that is impermissible under Section 303(a), which bars involuntary bankruptcy proceedings against eleemosynary institutions.

Judge Montgomery upheld Judge Kressel's alternative ruling that the motion did not make a case for substantive consolidation, largely because the finances of the archdiocese and the other Catholic institutions were "distinct and not tangled or intertwined."

In re Kipnis,    BF   , 2016 Westlaw 4543772 (Bankruptcy Court. S.D. Fla. 2016).:

A bankruptcy court in Florida has held that a trustee had the power to borrow the Internal Revenue Service's 10 year statute of limitations in pursuing fraudulent transfer litigation on behalf of the estate.

FACTS: An individual owed back taxes to the Internal Revenue Service. In an attempt to avoid paying those assessments, he allegedly engaged in fraudulent transfers of his assets. Roughly 10 years after those transfers, he filed a bankruptcy petition. His trustee then asserted fraudulent transfer claims against his transferees under 11 U.S.C.A. §544(b). They moved to dismiss on the ground that the claims were time barred, since the alleged transfers have occurred more than seven years prior to the filing of the bankruptcy petition.

REASONING: The bankruptcy court denied the motion to dismiss on the ground that the trustee was empowered to step into the shoes of the IRS. Under federal law, the IRS enjoyed a 10 year window for the avoidance of transfers made by taxpayers. The court recognized that there was little authority on point and that there was a split among the lower federal courts on this issue.

The court acknowledged that this ruling could have a very substantial impact:

The IRS is a creditor in a significant percentage of bankruptcy cases. The paucity of decisions on the issue may simply be because bankruptcy trustees have not generally realized that this longer reach-back weapon is in their arsenal. If so, widespread use of § 544(b) to avoid state statutes of limitations may occur and this would be a major change in existing practice.

COMMENT: The court is absolutely right that this opinion, if widely followed, could be a game-changer. Further, I predict affirmance, since the plain language of §544(b) means exactly what it says:

[T]he trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim....

NOTE: Under California state law, transfers can only be avoided as fraudulent transfers if made within 4 years before the bankruptcy case is filed, and under rare circumstances up to 7 years, but NEVER 10 years back (except for self settled trusts set up by debtor, with debtor as beneficiary), so this would be a huge change in California.

[review of this case is from the California State Bar, Business Law Section, Insolvency Law Committee, but NOTE is added by attorney March]

National Association of Consumer Bankruptcy Attorneys files Amicus Brief, arguing against the 11th Circuit US Court of Appeals Judicial Estoppel Doctrine

NCBRC has filed an amicus brief in the Eleventh Circuit on behalf of the NACBA membership to address the issue of that circuit's approach to judicial estoppel. Slater v. U.S. Steel, No. 12-15568 (filed October 24, 2016).

Twenty one months after filing an employment discrimination suit in federal district court against her former employer, U.S. Steel, Sandra Slater filed for bankruptcy. (The original case was filed under chapter 7 and later converted to chapter 13). She failed to list the pending federal case in her bankruptcy schedules. U.S. Steel then moved the district court to bar the discrimination suit based on the doctrine of judicial estoppel. The district court granted the motion and Ms. Slater appealed.

The Eleventh Circuit affirmed with a concurring opinion by Judge Tjoflat in which he agreed that the holding was compelled by the Eleventh Circuit decisions in Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282 (11th Cir. 2002), and Barger v. City of Cartersville, 348 F.3d 1289 (11th Cir. 2003), but argued that those cases were wrongly decided. He maintained that application of Eleventh Circuit judicial estoppel precedent led to the resulted that: "U.S. Steel is granted a windfall, Slater's creditors are deprived of an asset, and the Bankruptcy Court is stripped of its discretion." Slater v. U.S. Steel Corp., 820 F.3d 1193, 1235 (11th Cir. 2016).

The court then vacated that decision and granted Ms. Slater's motion for reconsideration en banc.

In its brief, NACBA argues that, as interpreted by Burnes and Barger and their progeny, the doctrine of judicial estoppel has strayed from its original purpose of protecting the integrity of the judicial process and become an inappropriate remedy for debtor error or misconduct.

In re Intervention Energy Holdings, LLC, 553 B.R. 258 (Bankr. D. Del. 2016):

U.S. Bankruptcy Court for the District of Delaware ruled that a provision in a debtor's operating agreement that permitted its lender to block a bankruptcy filing by voting the lender's single Common Unit against a filing was unenforceable as a matter of federal bankruptcy policy. What restrictions on filing bankruptcy are/are not against bankruptcy public policy is the subject of many cases, with differing outcomes. An outright prohibition on a company filing bankruptcy IS unenforceable as being against federal bankruptcy policy.

In Castaic Partners II, LLC v. Daca-Castaic, LLC

In Castaic Partners II, LLC v. Daca-Castaic, LLC (In re Castaic Partners II, LLC), 823 F.3d 966 (9th Cir. 2016), the United States Court of Appeals for the Ninth Circuit dismissed the debtors' appeal of stay relief orders as constitutionally moot after the consensual dismissal of the debtors' underlying bankruptcy cases.

In re Quantum Foods, LLC, 554 B.R. 729 (Bankr. D. Del. 2016)

In re Quantum Foods, LLC, 554 B.R. 729 (Bankr. D. Del. 2016): The United States Bankruptcy Court for the District of Delaware held that a defendant could set off potential preference liability against its allowed administrative expense claim.

Heller Ehrman LLP, Liquidating Debtor v. Davis Wright Tremaine LLP

Heller Ehrman LLP, Liquidating Debtor v. Davis Wright Tremaine LLP (In re Heller Ehrman LLP), 830 F.3d 964 (9th Cir. July 27, 2016): The U.S. Court of Appeals for the Ninth Circuit certified to the California Supreme Court the question of whether a dissolved law firm has a property interest in hourly fee engagements in progress at the time of its dissolution such that the firm is entitled to compensation from law firms that later complete the work after employing an attorney of the dissolved firm post-dissolution to complete the engagement. The issue underlies the viability of the doctrine of Jewel v. Boxer, 156 Cal. App. 3d 171 (1984).

DeNoce v. Neff (In re Neff), 824 F.3d 1181 (9th Cir. 2016):

The U.S. Court of Appeals for the Ninth Circuit held that the ONE year period of 11 U.S.C. § 727(a)(2) is not subject to equitable tolling. 11 USC 727(a)92) states that a bankruptcy debtor may be denied a discharge, in a Chapter 7 bankruptcy case, if the debtor transferred property, within ONE year before the date the debtor filed bankruptcy, with an actual intent to hinder, delay or defraud creditors, by making that transfer.

Rivera v. Orange Cnty. Prob. Dep't (In re Rivera), 832 F.3d 1103 (9th Cir.

Aug. 10, 2016), the U.S. Court of Appeals for the Ninth Circuit held that fees owing to a governmental unit incurred for the criminal detention of a minor child were dischargeable in the chapter 7 bankruptcy of a parent.

This was not a domestic support obligation (domestic support obligations are always nondischargeable, per 11 USC 523(a)(5)).

In re Ritz,   F.3d    , 2016 Westlaw 4253552 (5th Cir. 2016)

In re Ritz,   F.3d    , 2016 Westlaw 4253552 (5th Cir. 2016): The US Fifth Circuit Court of Appeals held that when a corporations controlling shareholder "loots" (takes without right) money or assets of the corporation, that the controlling shareholder does that, that looting qualifies as an "actually fraudulent" transfer, which can be recovered from the insider, possibly by "piercing the corporate veil". In Ritz, a supplier sold merchandise to a corporation. The corporation's controlling shareholder siphoned off its assets for his own benefit. Following the shareholder's bankruptcy filing, the supplier sought to pierce the corporate veil in order to hold the shareholder (now the bankruptcy debtor) personally liable for the company's debt. After a tortuous procedural history (which included a trip to the United States Supreme Court), the Fifth Circuit essentially ruled in favor of the creditor. The Fifth Circuit held that under Texas law, if the creditor could establish that the transfer of the company's assets was a fraudulent transfer undertaken with actual fraudulent intent, that fact would be sufficient to justify veil-piercing, even in the absence of a direct misrepresentation made to the credito, stating:

[E]stablishing that a transfer is fraudulent under the actual fraud prong of [the Uniform Fraudulent Transfer Act] is sufficient to satisfy the actual fraud requirement of veil-piercing because a transfer that is made "with the actual intent to hinder, delay, or defraud any creditor" ... necessarily "involves 'dishonesty of purpose or intent to deceive.'

The court then remanded the case for further findings. Almost all states have adopted some version of the Uniform Fraudulent Transfer Act, or its successor, the Uniform Voidable Transactions Act. So though this case involved the Texas version of that statute, the case may be applicable to fraudulent transfers under CA state law, or most other states law, instead of just applying under Texas state fraudulent transfer law. If this rule is widely adopted, it will mean that fraudulent transfer defendants can be held liable not only for the value of the assets transferred but for all debts of the looted company, a potentially much greater exposure. In turn, that threat will empower bankruptcy trustees to force defendants to enter into larger and quicker settlements.

Midland Funding, LLC v. Hill

Midland Funding, LLC v. Hill: On 10/11/16, the US Supreme Court has granted a petition for certiorari, to hear creditor Midland Fundings' appeal to US Supreme Court, from 11th Circuit Court of Appeals, of Hill v Midland Funding, LLC, 823 F.3d 1334 (11th Cir 2016). By deciding Midland Funding, LLC v Hill, the US Supreme Court is expected to resolve the split in cases of various Circuits, as to whether or not it violates the Fair Debt Collection Practices Act (FDCPA), for a creditor to file a Proof of Claim in a bankruptcy case, to try to collect a claim which is barred from being collected by the applicable statute of limitations (time limit for suing), under applicable state law. The 11th Circuit Court Of Appeals decision holds that the Bankruptcy Code provision allowing creditors to file proofs of claim for debts that appeared on their face to be time-barred did not preclude liability under FDCPA for debt collectors who filed proofs of claim for debts that they knew were time-barred.

Adinolfi v. Meyer (In re Adinolfi),    BR    (9th Cir. BAP 2016)

Adinolfi v. Meyer (In re Adinolfi),    BR    (9th Cir. BAP 2016): In a two judge with one judge dissenting decision, the Ninth Circuit's Bankruptcy Appellate Panel wrote an opinion that could be interpreted to mean that benefits received under most programs governed by the Social Security Act are not "disposable income" that must be devoted to payment of creditors' claims in a chapter 13 plan.

In Adinolfi, Chapter 13 debtor was receiving $1,400 a month to care for a child adopted from foster care.

Both the majority and the dissent based their opinions on the language of Sections 1325(b)(1) and 101(10A)(B). The latter provision defines "current monthly income" to exclude "benefits received under the Social Security Act."

The majority's opinion has the effect of allowing a parent to devote adoption benefits for the upbringing of a former foster child and not toward payment of creditors' claims. In terms of policy, the majority's opinion is in line with the Seventh Circuit's decision from April in In re Brooks holding that child support payments ordinarily are excluded from the calculation of disposable income.

For having adopted a child from foster care, the debtor received $1,400 a month in adoption assistance payments under the federal Adoption Assistance and Child Welfare Act of 1980. Half of the funding came from the federal government, 37.5% from the state, and 12.5% from the county. The payments were made by the county social services agency, not by the federal government.

The woman's chapter 13 plan excluded the adoption assistance payments from the calculation of her "disposable income." The bankruptcy judge sustained the chapter 13 trustee's objection to the plan, ruling that it was improper to exclude adoption benefits in calculating current monthly income.

Writing for the majority, Bankruptcy Judge Robert J. Faris of Honolulu said that no court had previously decided whether the Social Security exclusion covers adoption payments. In his Jan. 19 opinion, he said that most, but not all, courts have held that unemployment compensation is not excluded.

Judge Faris' opinion lays out various categories of programs governed by the Social Security Act with varying percentages of funding from the federal government.

The majority interpreted "benefits received under the Social Security Act" as meaning "benefits received subject to the authority of, and in accordance with, 42 U.S.C. §§ 301-1397mm." Although adoption benefits are paid by the county government, they are nonetheless "subject to the federal program requirements and standards of 42 U.S.C. §§ 670-679(c) and federal oversight," according to the majority opinion.

Because adoption benefits are "received under the Social Security Act," the majority reversed the bankruptcy court and held that they are excluded from the calculation of current monthly income.

Judge Faris admitted that the 2005 amendments "generally made bankruptcy more difficult and expensive for many debtors, but it does not follow that courts must interpret every one of BAPCPA's provisions in that manner," he said.

Bankruptcy Judge Meredith A. Jury of Riverside, Calif., dissented.

In re City of Detroit, Michigan,     F.3d    , 2016 WL 5682704 (6th Circ.10/3/16)

In re City of Detroit, Michigan,     F.3d    , 2016 WL 5682704 (6th Circ.10/3/16): The Sixth Circuit refused to reverse cuts to pensions of Detroit municipal retires. The retires pension benefits were cut as part of Detroit City chapter 9 bankruptcy plan. The retirees appealed to the 6th Circuit Court of Appeals. The Sixth Circuit based its ruling on the fact that too many significant or irreversible actions taken under the Chapter 9 plan, would have to be unraveled, for the cut pension benefits to be restored.

There was a dissent 2-1. The split decision of the 6th Circuit concurred with a finding in the US District Court of the Eastern District of Michigan, that the claims of the pensioners were foreclosed under equitable mootness (the retirees did not get a stay pending appeal, of the confirmed Chapter 9 plan being performed). Equitable mootness is more like waiver or forfeiture than getting a ruling on the merits of whether it was improper to cut the pension benefits. Note: the 9th Circuit Court of Appeal, which is the US Circuit Court for California and several additional states, is much more resistant to finding appeals to be "equitably moot", than was the 6th Circuit Court of Appeal, in this Detroit decision. Equitable mootness will very likely be taken up by, and decided by the US Supreme Court, in future.

Hernandez v. Williams Zinman & Parham,     F3d     (9th Cir. 7/20/16) (appeal no. 14-15672)

Hernandez v. Williams Zinman & Parham,     F3d     (9th Cir. 7/20/16) (appeal no. 14-15672): The U.S. Court of Appeals for the Ninth Circuit, in a case of first impression and the first published circuit court opinion to address the issue, recently held that each and every debt collector - not just the first one to communicate with a debtor - must send the debt validation notice required by the federal Fair Debt Collection Practices Act.

A copy of the opinion in is available at: Link to Opinion.

A consumer financed the purchase of her automobile, but stopped making payments on the loan. A debt collection company sent her a letter trying to collect the debt, to which the debtor did not respond. The debt collector hired a law firm to collect the debt, which sent the debtor another collection letter.

The debtor filed a putative class action alleging that the law firm violated 15 U.S.C. § 1692g(a) of the FDCPA by not informing the debtor that if she disputed the debt, she had to do so in writing.

As you may recall, section § 1692g(a) requires a "debt collector" to notify a debtor either in the "initial communication" with a consumer incident to collecting a debt or within five days thereafter, of the amount of the debt, the name of the creditor, that the consumer can dispute the debt in writing within 30 days after receiving the initial notice, that if the consumer does so, the debt collector will obtain verification of the debt and mail a copy to the debtor, and that if the debtor requests it in writing within the 30-day period, the debtor collector will provide the name and address of the original creditor, if the debt has been sold.

The parties filed cross-motions for summary judgment. The law firm argued that it was not required to comply with § 1692g(a) because its letter was not the "initial communication" with the debtor. The district court agreed and granted summary judgment in its favor. The debtor appealed.

On appeal, the debtor argued that § 1692g(a) requires that each and every debt collector that communicates with a consumer send the "validation notice." The Consumer Financial Protection Bureau, the agency charged with rulemaking authority under the FDCPA, and the Federal Trade Commission, which has concurrent authority to enforce the FDCPA, filed an amicus curiae brief agreeing with the debtor's interpretation.

The Ninth Circuit began its analysis with the statutory text, explaining that under well-recognized rules of interpretation, "[i]f the operative text is ambiguous when read alongside related statutory provisions, we 'must turn to the broader structure of the Act,' ... and to its 'object and policy to ascertain the intent of Congress.'" If "'the plain language of the statute, its structure and purpose' clearly reveals" Congress's intent, the court's inquiry stops there. However, "if the plain meaning of the statutory text remains unclear after consulting internal indicia of congressional intent, [the court] may then turn to extrinsic indicators, such as legislative history, to help resolve the ambiguity."

The Court found that the text of § 1692g(a) is ambiguous because "Congress did not define the term 'initial communication' or the word 'initial.'" It noted, however, that "Congress did define 'communication' to mean 'the conveying of information regarding a debt directly or indirectly to any person through any medium... [and] [t]his definition ... is broad enough to sweep into its ambit both" the initial letter from the debt collector and the second one from the law firm.

After parsing the statutory language and still finding the text ambiguous, the Ninth Circuit turned "to the broader structure of the FDCPA to determine which initial communication triggers the validation notice requirement - the first ever sent or the first sent by any debt collector, whether first or subsequent."

The Court concluded that interpreting the text of § 1692g(a) "in the context of the FDCPA as a whole makes clear that the validation notice requirement applies to each debt collector that tries to collect a given debt," reasoning that its "interpretation is the only one that is consistent with the rest of the statutory text and that avoids creating substantial loopholes around both § 1692g(a)'s validation notice requirement and § 1692g(b)'s debt verification - loopholes that otherwise would undermine the very protections the statute provides."

Having found Congress intended to require that "each debt collector send a validation notice with its initial communication is clear from the statutory text," the Ninth Circuit reasoned that it was not necessary to consult "external sources to interpret § 1692g(a)," but even if any ambiguity remained, "the external indicia of Congress's intent eliminate it."

In particular, the Ninth Circuit stressed that the "Senate Report's description of the validation notice suggests that Congress intended it to apply to each debt collector's first communication." The Court also highlighted the FDCPA remedial nature and that "the legislative history also shows that Congress's sole goal in enacting § 1692g(a) was consumer protection. ... Nothing in this legislative history suggests that Congress thought consumers needed less protection from successive debt collectors or less information as their debts passed from hand to hand."

After applying "the tools of statutory construction," the Ninth Circuit held "that the FDCPA unambiguously requires any debt collector - first or subsequent - to send a § 1692g(a) validation notice within five days of its first communication with a consumer in connection with the collection of any debt."

Accordingly, the Ninth Circuit held that the trial court committed error by determining that because the law firm was not the first debt collector to communicate with the debtor, it did not have to send the validation notice, and the case was reversed and remanded. [as reported in Credit & Collection e-newsletter of 10/316]

Bourne Valley Court Trust vs. Wells Fargo Bank, N.A.,     F.3d    , 2016 Westlaw 425498 (9th Cir. 2016)

Bourne Valley Court Trust vs. Wells Fargo Bank, N.A.,     F.3d    , 2016 Westlaw 425498 (9th Cir. 2016): The Ninth Circuit has held that a Nevada statute that extinguished mortgage liens following HOA foreclosure sales was unconstitutional and violated the lenders' due process rights because the statutory notice provisions were inadequate.

Green Tree Servicing LLC v. Giusto, 2016 Westlaw 3383959 (N.D.Cal. 2016):

A US District Court in California held that a debtor could not receive an award of attorney's fees expended by debtor's attorney, to defeat the relief from stay motion brought by the DOT loan lender on debtor's house, because the motion was not an "action on a contract" under California law.

DJM Associates LLC v. Capasso,     F.Supp.3d     (DC ED NY 2016) case number 97-7285 (E.D.N.Y. Sept. 22, 2016)

US District Court held that Successor to Bankrupt Company was liable for Pre-Bankruptcy Environmental Claims

Although the facts existed and a statute had been adopted before bankruptcy giving rise to a claim that would be discharged, the claim was not discharged because the Supreme Court did not hand down a decision until years after bankruptcy recognizing a private right of action.

The Sept. 22 decision by Chief District Judge Dora L. Irizarry in Brooklyn, N.Y., means that a confirmed chapter 11 plan is no shield to environmental contribution claims not recognized by statute or case law until after bankruptcy. This principle might also apply to bar discharge of other types of successor liability claims created by legislation or recognized by the courts for the first time after bankruptcy. [as reported by ABI 9/27/16 e-newsletter]

Kirkland v. Rund (In re EPD Investment Co.), 821 F.3d 1146 (9th Cir. 2016):

The United States Court of Appeals for the Ninth Circuit affirmed the district court's decision affirming the bankruptcy court's denial of a motion to compel arbitration in a chapter 7 trustee's adversary proceeding seeking avoidance of fraudulent transfers and disallowance and subordination of claims.

Mortgage Servicer Saddled with $375,000 in Sanctions for Violating Rule 3002.1

In In re Gravel,     BR    (Bankr. D. Vt. Sept. 12, 2016, case no. 11-10112), the first reported decision of its kind under Bankruptcy Rule 3002.1, Bankruptcy Judge Colleen A. Brown, who is Vermont's chief bankruptcy judge, imposed $375,000 in sanctions on a mortgage servicer for billing debtors for fees without first filing the required notices under Rule 3002.1(c), which are required to be filed in a Chapter 13 bankruptcy case, by the secured DOT lender, stating any changes in mortgage payment, during the Chapter 13 bankruptcy case. Judge Brown directed that the sanctions be paid to Vermont's largest pro bono provider of legal services in bankruptcy cases. [as reported in 9/16/16 ABI Rochelle e-newsletter.

Regularly Conducted Tax Sales Cannot Be Fraudulent Transfer, Ninth Circuit Holds

In Tracht Gut LLC v. Los Angeles Country Treasurer & Tax Collector (In re Tracht Gut LLC),    F.3d    case no. 14-60007 (9th Cir. Sept. 8, 2016), the Ninth Circuit joined the Fifth and Tenth by holding that a tax sale conducted in accordance with state law cannot be set aside as a fraudulent transfer for less than reasonably equivalent value.

A company owned real property but did not pay real estate taxes for years. The company filed a chapter 11 petition a month after the county sold the property in a tax sale. The newly minted debtor in possession immediately sued the county and the buyer to set aside the tax sale as a fraudulent transfer under the Bankruptcy Code and California law.

The bankruptcy court dismissed the complaint and was upheld by the Bankruptcy Appellate Panel. Circuit Judge Richard R. Clifton agreed with the BAP that the debtor could not state a claim for relief since there was no allegation that procedures followed in the tax sale failed to comply with state law.

In 1994, the Supreme Court held in BFP v. Resolution Trust Corp. that a regularly conducted foreclosure sale cannot result in a fraudulent transfer.

Judge Clifton said that the "rationale and policy considerations" underlying BFP are "just as relevant in the California tax sale context."

Even though the price realized at the sale might be low, Judge Clifton upheld the lower courts and extended the holding in BFP to cover tax sales conducted in accordance with state law.

The complaint initially did not allege the amount of the inadequacy of the price. The debtor argued that the bankruptcy judge should have given leave to amend the complaint rather than dismiss the suit outright.

In his Sept. 8 opinion, Judge Clifton found no error in refusing to allow an amendment because the price was irrelevant since the complaint did not allege any procedural defect in the sale.

Judge Clifton distinguished several bankruptcy court decisions not extending BFP to tax sales because those cases entailed procedural deficiencies. [as reported by ABI Rochelle enewsletter of 9/14/16]

In re Diaz, 547 B.R. 329 (9th Cir. BAP 3/11/2016)

In In re Diaz, 547 B.R. 329 (9th Cir. BAP 3/11/2016), the U.S. Bankruptcy Appellate Panel for the Ninth Circuit (the "BAP") vacated the Bankruptcy Court's order sustaining the chapter 7 trustee's objection to the debtor's homestead exemption under Cal. Civ. Pro. Code §740.730(a) and remanded the case for further proceedings. Under California law, the relevant factors for determining if a debtor resides in a property are the physical fact of occupancy and the debtor's intent to live there. In ruling on the debtor's claimed homestead exemption, the bankruptcy court considered that the debtor had not resided in the property on the petition date and considered the debtor's inability to live in the property but failed to consider the debtor's intent to reside in the property. In that regard, the BAP held that the bankruptcy court had incorrectly interpreted California law.

Following is an analysis of the Diaz case that ran in the 8/22/16 California State Bar Insolvency Committee e-newsletter, written by a San Francisco attorney on that Committee, Stephen Finestone:


Prior to 2011, the debtor married Rebecca Wilson Diaz ("Rebecca"). The couple had one child. Before filing bankruptcy in 2013, debtor suffered through several personal setbacks. In 2011, he suffered two major brain aneurysms. The aneurysms required multiple surgeries and after the surgeries, he was in a coma for several weeks. As a result of his aneurysms, debtor suffered from stroke like symptoms rendering him unable to walk or talk. After months in a medical facility, debtor was released to the care of his mother, who lived on the same block where debtor owned a home, while relatives resided in debtor's home (the "Property"). Debtor and Rebecca divorced in 2011, though it is not clear from the opinion whether the divorce was before or after his health challenges.

Debtor continued with his recovery under the care of his mother but was unable to work and was receiving Social Security Disability benefits when he filed a chapter 7 bankruptcy in November 2013 (the "Petition Date"). At the time of filing, debtor was still under his mother's care at her home and his relatives lived in the Property.

Debtor initially claimed the wildcard exemptions, but after the chapter 7 trustee sought turnover of the Property, debtor amended his Schedule C to assert a homestead exemption of $175,000 under California Code of Civil Procedure section 704.730(a)(3). The trustee objected to the homestead exemption on the basis that debtor did not reside in the Property on the Petition Date and his absence was not temporary as debtor's health made it unlikely that he would resume living in the Property.

The trustee's objection was supported by a declaration from Rebecca (the largest creditor in the case), which stated, among other things, that 3 ½ years after his aneurysms, debtor still could not take care of himself; he requires constant care from his mother or brother; the Property was occupied by debtor's brother and sister-in-law; debtor has only spent a few nights at the Property since his release from medical care, and only then with the care of his mother or brother; the bulk of debtor's personal effects were at his mother's house; when debtor's son visits him, he does so at debtor's mother's house; and, all correspondence between Rebecca and debtor was sent to the mother's house and all interactions between them took place there.

Debtor responded to the trustee's objection by noting: he had made great strides in his recovery (attaching letters from his doctors to that effect); he used the Property address for voting registration, his driver's license and his mail; the mortgage and utilities for the Property were in his name; he still had his personal belongings at the Property and a separate bedroom there; and he was taking independent living classes.

The trustee filed a reply brief and the matter went to hearing before the bankruptcy court. The judge sustained the trustee's objection, noting that although the situation was a sad one, there was a large amount at stake with the exemption, the debtor had not lived at the Property for 3 ½ years as of the Petition Date, and it appeared the relatives were the ones who benefited from debtor's conduct in asserting the exemption.

In response to matters raised by debtor's counsel, the judge further clarified her remarks by noting that she was suspicious as to the facts and circumstances of the filing, whether debtor was capable of making the decision to file, and again focused on the benefit to the relatives occupying the Property and the size of the exemption. Debtor then timely appealed.


The BAP determined that physical occupancy of the property on the Petition Date was not central to the residency requirement for a homestead exemption under California law. The bankruptcy court did not consider debtor's intent respecting residency. Thus, the bankruptcy court had applied an incorrect legal standard. The BAP also held that the burden of proof was to be determined with reference to state law, which was relevant given that the BAP remanded the case for further hearing.

The BAP began by noting that the 1983 amendment to California's homestead provision changed the language of the statute from "actually resided" to "resided" in the homesteaded dwelling, making clear that a temporary absence from the home did not preclude assertion of the homestead. The BAP then cited California law for the proposition that the relevant factors for determining whether a debtor "resides" in a property are the "physical fact of the occupancy of the property and the debtor's intention to live there."

California law further provides that the lack of physical occupancy does not preclude establishing residency if the debtor intends to return to live there. The BAP referenced various California cases on that issue, including one holding that a three year absence from the homestead did not preclude claiming an exemption. On the other hand, the BAP also noted that simple occupancy without intent was insufficient to support a homestead exemption.

Turning back to the bankruptcy court's decision, the BAP noted that the bankruptcy court interpreted California law as requiring physical occupancy on the Petition Date. The BAP also commented on the bankruptcy court's focus on the amount of the exemption and the fact that debtor's relatives would benefit from allowance of the exemption. The BAP indicated that the bankruptcy court's considerations were misplaced, as its focus should be on debtor's intent, and there was no evidence that the court had considered the intent. Since evidence of debtor's intent was not "sufficiently developed", the BAP held that the record below should be reopened to permit additional evidence and guided the lower court by directing that the debtor's inability to live unassisted, the amount of the exemption at issue or the fact that family members may benefit from having the exemption allowed were not relevant factors.

The BAP next turned to the question of the burden of proof under Bankruptcy Rule 4003(c), which provides in pertinent part "the objecting party has the burden of proving that the exemptions are not properly claimed." The burden of proof in exemption disputes has received much discussion since the Supreme Court ruling in Raleigh v. Illinois Dep't of Revenue, 530 U.S. 15 (2000) ("Raleigh"). Raleigh, which involved the burden of proof on an objection to claim, held that the burden of proof regarding claims is an essential element of the underlying substantive claim and is, therefore, a substantive rather procedural matter. As a substantive matter, the burden of proof would be determined by reference to state law rather than federal bankruptcy law as the Bankruptcy Rules Enabling Act (28 U.S.C. section 2075) prohibits rules that alter substantive rights.

With respect to California law, CCP section 703.850(b) places the burden of proof on the party claiming the exemption. (See also CCP section 704.780 - specific to homestead exemptions). The BAP cited to various bankruptcy court level decisions on the issue, all of which determined that Raleigh requires the use of the California burden of proof in exemption litigation. See e.g. In re Tallerico, 532 B.R. 774, 788 (Bankr. E.D. Cal 2015) (decided by Judge Klein); In re Pashenee, 531 B.R. 834, 837 (Bankr. E.D. Cal 2015) (decided by Judge Jaime).

The BAP joined with the lower court decisions, in particular noting the Tallerico decision, and concluded that when a state court exemption statute allocates the burden of proof to a debtor, Bankruptcy Rule 4003(c) does not change the allocation (finding that the Ninth Circuit's decision in Carter v. Anderson (In re Carter), 182 F.3d 1027, 1029 (9thCir. 1999), had been effectively overruled or rendered inapplicable by Raleigh).


The two important rulings in the case involve the California homestead exemption and the burden of proof relating to exemption disputes. An objecting creditor or trustee must demonstrate that a debtor did not intend to occupy the property in question in order to prevail on exemption litigation. Where the debtor happened to be living at the filing date is of limited importance depending on the facts of a given case.

With respect to the burden of proof issue, one ought to review the extensive discussion by Judge Klein in In re Tallerico, which reviews the history of Bankruptcy Rule 4003 and concludes that Rule 4003(c) is invalid to the extent it shifts the burden contrary to state law (in cases where a state has opted out of the federal exemptions). Some courts have suggested that Raleigh may be distinguishable on the basis that it involved a claim objection rather than an objection to an exemption. See e.g. In re Greenfield, 289 B.R. 146 (Bankr. S.D. Cal. 2003) (Judge Bowie), but Judge Klein's discussion in Tallerico argues that there is no "principled difference" between objections to section 502 claims and objections to section 522 claims of exemption. This author could not find any circuit court level decisions on the issue of the burden of proof in exemption litigation. Obviously, which party bears the burden of proof is an important consideration in a close case.

In re Boates,    BR    (BAB case no. AZ-15-1279-KuJaJu) (9th Cir. B.A.P. July 8, 2016)


In re Boates,    BR    (BAB case no. AZ-15-1279-KuJaJu) (9th Cir. B.A.P. July 8, 2016). Published.

9th circuit BAP holds that a chapter 7 debtor's rights arising from a prepetition payment to a lawyer are estate property, even if the engagement agreement isn't executory. Comment: this opinion does not seem consistent with the Bankruptcy Code.

Caldwell v. DeWoskin,     F.3d   , case number 15-1962 (8th Cir. Aug. 5, 2016) and Flanders v. Lawrence (In re Flanders)

Caldwell v. DeWoskin,     F.3d   , case number 15-1962 (8th Cir. Aug. 5, 2016) and Flanders v. Lawrence (In re Flanders),    F.3d    , case number 15-1327 (10th Cir. Aug. 5, 2016): These 2 Circuit Court decisions, one by the 8th Circuit Court of Appeals, and one by the 10th Circuit Court of Appeals, both discuss and apply the Rooker-Feldman US Supreme Court doctrine. The US Supreme Court Rooker-Feldman doctrine, named after the US Supreme Court Rooker case, and the US Supreme Court Feldman case, holds that lower federal courts (includes US bankruptcy Courts, US District Courts, BAPs, US Circuit Courts)-in fact that any US Court except for the US Supreme Court-lacks subject matter jurisdiction to hear an appeal of a state court judgment, made by a state court that had jurisdiction to issue the state court judgment.

In Caldwell (the Eighth Circuit case), a man filed bankruptcy in the midst of a matrimonial dispute. Because he refused to pay spousal maintenance after bankruptcy, the wife's lawyer dragged him into state court. The state court jailed him for contempt until he paid overdue maintenance, ruling in the process that the automatic stay did not bar proceedings to compel payment of support. After his chapter 13 case was dismissed, the former husband sued his former wife and her lawyer in bankruptcy court for violating the automatic stay. The bankruptcy court dismissed the suit, believing there was no subject matter jurisdiction as a consequence of Rooker-Feldman. The Eighth Circuit Court of Appeals reversed, explaining that Rooker-Feldman applies when someone seeks relief from a state court judgment. The doctrine does not apply to an action seeking "relief from the allegedly illegal act or omission of an adverse party."Because the husband was not seeking to overturn the state court decision, Rooker-Feldman did not apply. Eighth Circuit, in Caldwell, did not say whether rules of issue or claim preclusion would still result in dismissal or summary judgment after remand.

In Flanders, the Tenth Circuit, however, explored the relationship in depth between Rooker-Feldman and claim preclusion in a non-precedential opinion, and explained why res judicata or issue preclusion would still result in dismissal even if Rooker-Feldman did not apply.

Cases from Different Circuits Conflict

Cases from different Circuits conflict, as to whether or not a creditor violates the federal Fair Debt Collection Practices Act ("FDCPA"), by filing a Proof of Claim, in a debtor's bankruptcy case, that the creditor knows is "time barred" (past the statute of limitations for time period in which creditor must sue, if creditor wants to seek to collect the debt from the debtor who owes the debt. The US Supreme Court will likely eventually rule on this issue:

Here are some of the cases in conflict:

The Eighth Circuit Court of Appeals held that a debt collector's filing an "accurate and complete" proof of claim for a time-barred debt does not constitute a practice forbidden under the Fair Debt Collection Practices Act.

See Nelson v. Midland Credit Management, Inc., --- F.3d ----, 2015 WL
5093437 (8th Cir., July 11, 2016) (text of opinion). The court concluded that such a proof of claim "is not false, deceptive, misleading, unfair, or unconscionable under the FDCPA."

To date only the Eleventh Circuit Court of Appeals has allowed a claim under the FDCPA for a debt collector's filing a proof of claim for a time-barred debt. See Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014) (by filing a proof of claim for a time-barred debt, the debt collector engaged in conduct that was "deceptive," "misleading," "unconscionable," or "unfair" under the FDCPA) (text of opinion) and Johnson v. Midland Funding, LLC, --- F.3d ----, 2016 WL 2996372 (11th Cir., May 24, 2016) (the Bankruptcy Code does not preempt the FDCPA in the context of a Chapter 13 bankruptcy case in which a debt collector files a proof of claim for a debt the collector knows to be time-barred).

Conversely, decisions in two other circuits disallow such a claim under the FDCPA. In Simmons v. Roundup Funding, LLC, 622 F.3d 93 (2nd Cir., Oct. 5, 2010) (text of opinion), which involved a debt collector's filing an allegedly inflated proof of claim, the Second Circuit Court of Appeals held that a creditor's filing an invalid proof of claim in a bankruptcy case does not constitute the sort of abusive debt collection practice proscribed by the Fair Debt Collection Practices Act.

Previously, in Walls v. Wells Fargo Bank, N.A., 276 F.3d 502 (9th Cir.
2002), which involved a claim under the FDCPA for a debt collector's attempting to collect a debt previously discharged in bankruptcy, the Ninth Circuit Court of Appeals held that a debtor's sole remedy is under the Bankruptcy Code for creditor misconduct for which the Code provides a remedy; this decision has been interpreted as generally disallowing a claim under the FDCPA for creditor conduct during or related to a bankruptcy case.
See also Rhodes v. Diamond, 433 Fed. Appx. 78 (3rd Cir., April 28, 2011) (text of opinion), an unreported case that is similar to Simmons, above.

This issue is currently before five Courts of Appeals. See Martel v. LVNV Funding, LLC, Case No. 16-1653 (1st Cir., filed May 25, 2016); Torres v. Cavalry SPV I, Case No. 15-2132 (3rd Cir., filed May 13, 2015); Dubois v. Atlas Acquisitions LLC, Case No. 15-1945 (4th Cir., filed August 21, 2015); In re Broadrick, Case No. 16-5042 (6th Cir., filed Jan. 14, 2016); and Owens v. LVNV Funding, LLC, Case No. 15-2044 (7th Cir., filed May 13, 2015). Oral argument has been held in the Dubois (4th Circuit) and Owens (7th Circuit) cases (on May 10 and June 1, respectively); briefing is ongoing in the others.

Southwest Airlines Co. v. Tidewater Finance Co. (In re Cole),     BR    15-70960 (N.D. Ga. June 24, 2016)

Southwest Airlines Co. v. Tidewater Finance Co. (In re Cole),     BR    15-70960 (N.D. Ga. June 24, 2016) is yet another bankruptcy case which rules on the issue of whether the Rooker-Feldman doctrine prohibits a bankruptcy court (or any other federal court except the US Supreme Court) from changing a ruling made by a state court, or whether the federal court can change/overrule the state court's ruling on an automatic stay. With cases going both ways on this issue, this will likely eventually be a "Circuit split" (conflicting decisions by various US Circuit Courts). Circuit splits usually eventually get ruled on by the US Supreme Court.

Here is a discussion of Southwest Airlines by ABI (American Bankruptcy Institute):

Bankruptcy Judge James R. Sacca of Atlanta came down on the side of the Third and Ninth Circuits by holding that bankruptcy courts can review decisions of state courts on the automatic stay. He disagreed with the Sixth Circuit Bankruptcy Appellate Panel and bankruptcy courts in New York and Florida.

Judge Sacca's case was more difficult because a non-bankrupt third party sought to revisit the state court's decision. Moreover, the debtor's liability evidently would not have been affected whichever way the courts ruled.

Judge Sacca began his analysis on June 24 by remarking that the stay "is one of the most fundamental protections" in the Bankruptcy Code. Significantly, he said, bankruptcy courts have exclusive jurisdiction to grant relief from the stay. In addition, state court suits in violation of the stay are void ab initio.

Thus, he concluded that he was not bound by the state court's ruling on the stay, although he conceded that state courts have concurrent jurisdiction to rule on the applicability of the stay.

On the merits of the alleged stay violation, Judge Sacca held that the stay did not apply because the suit in state court affected only the separate liability of a garnishee for failing to set aside the debtor's wages before bankruptcy.

Smith v. I.R.S. (In re Smith)

Smith v. I.R.S. (In re Smith),    F.3d    (9th Cir. July 13, 2016) Circuit case number 14-15857:
Ninth Circuit holds that taxes owed, pursuant to a tax return that the debtor files late - after the due date for the return - may still, under some circumstances be dischargeable in the debtor’s bankruptcy case, using a 4 part test known as the "Beard" test. The part of the Beard test that is most often contested by the tax agency is whether the debtor, in filing a late tax return, made an honest and reasonable attempt to satisfy the requirements of the tax law.

This adds the 9th Circuit to the 4th, 6th, 7th 8th and 11th Circuits, which have similar rulings.

The Ninth Circuit’s opinion is a vindication for the Ninth Circuit Appellate Panel’s December 2015 decision in U.S. v. Martin (In re Martin). There, the B.A.P. rejected the one-day-late rule by holding that the hanging paragraph did not alter two Ninth Circuit cases that adopted a version of the Beard test, which defines the term "return" in the context of determining nondischargeability of tax debts.

In Martin, the B.A.P. reversed and remanded for the bankruptcy judge to apply the Ninth Circuit’s modified Beard test, which inquires into whether the document purports to be a return that was signed under penalty of perjury, contained sufficient information to allow calculation of the tax, and was an "honest and reasonable" attempt to satisfy the requirements of tax law.

There is a "Circuit-Split" between those Circuits, and the 1st, 5th and 10th Circuits, each of which has held that if a tax return is filed even one day late, that the tax owed for that tax year is NOT dischargeable, ever.

It is extremely likely that at some point, the US Supreme Court will decide this issue, to resolve this "Circuit-Split".

The US Supreme Court Granted Certiorari in Czyzewski v. Jevic Holding Corp.

On 6/28/16, the US Supreme Court granted certiorari in Czyzewski v. Jevic Holding Corp., a 2015 Third Circuit Court of Appeals decision, to decide whether bankruptcy courts are allowed to dismiss chapter 11 cases when property is distributed in a settlement that violates the priorities contained in Section 507 of the Bankruptcy Code. Although Jevic deals with structured dismissals, the high court’s decision might also have the effect of allowing or barring so-called gift plans where a secured creditor or buyer makes a payment, supposedly from its own property, that enables a distribution in a chapter 11 plan not in accord with priorities.

Granting certiorari was not surprising because there has been a long-standing split of circuits. In Jevic, the Third Circuit approved a structured dismissal in May 2015 following the Second Circuit, which had ratified structured dismissals in its 2007 Iridium decision. Conversely, the Fifth Circuit barred structured dismissals in 1984 when it decided Aweco and held that the “fair and equitable” test must apply to settlements. Before acting on the certiorari petition, the Supreme Court sought comment from the Solicitor General. In May, the federal government’s counsel in the Supreme Court recommended granting review and reversing the Third Circuit. Expected timing of a US Supreme Court decision: first quarter of 2017

Structured dismissals occur when the sale of a company’s assets in chapter 11 will not generate enough cash to pay priority claims in full and permit confirmation of a plan. In the unsuccessful reorganization of Jevic Holding Corp., the official unsecured creditors’ committee had sued the secured lender and negotiated a settlement calling for the lender to set aside some money for distribution to unsecured creditors following dismissal. The distribution scheme did not follow priorities in Section 507 because wage priority claimants received nothing from the lender through a trust set aside exclusively for lower-ranked general unsecured creditors.

Over the wage claimant’s objection, the bankruptcy court’s approval of the settlement was upheld in the district court and the Third Circuit. The appeals court’s opinion was important because the Third Circuit makes law for Delaware, where many of the country’s largest chapter 11s are filed.

The Third Circuit’s opinion was 2-1, with the dissenter saying that while structured dismissals are permissible, Jevic was not a proper case.

Recommending that the Supreme Court review and reverse the Third Circuit, the Solicitor General said that “bankruptcy is not a free-for-all in which parties or bankruptcy courts may dispose of claims and distribute assets as they see fit.” He argued that “nothing in the Code authorizes a court to approve a disposition that is essentially a substitute for a plan but does not comply with the priority scheme set forth in Section 507.”

There are powerful arguments in support of the Third Circuit’s opinion. To begin with, there is nothing in the Bankruptcy Code explicitly saying that priorities govern settlements under Bankruptcy Rule 9019. Proponents of structured dismissals also rely on the notion that the distribution is the lender’s own property, not property of the estate, thus making priorities inapplicable.

The position of the Solicitor General came as no surprise because the government lost a similar case called In re LCI Holding Co., in which the Third Circuit sanctioned so-called gift plans that distribute estate property counter to bankruptcy priorities. The LCI and Jevic cases were argued the same day in January 2015, but before different panels of the Third Circuit. Although it was the primary objector in LCI, the government did not pursue a certiorari petition.

Grossman v. Wehrle (In re Royal Manor Management Inc.,    F3d   , 15-3146 (6th Cir. June 15, 2016)

Grossman v. Wehrle (In re Royal Manor Management Inc.,    F3d   , 15-3146 (6th Cir. June 15, 2016), In Grossman Sixth Circuit Joins the Split Among US Circuit Courts, on Whether Bankruptcy Courts Are ‘Courts of the U.S.’The Sixth Circuit Grossman decision joined the Second, Third and Seventh Circuits in holding that a bankruptcy court is a “court of the United States.The Ninth and Tenth, US Circuit Courts of Appeals, have held that bankruptcy courts are not courts of the U.S.

To decide another case where the outcome would either elevate or deprecate the status of bankruptcy courts, the Supreme Court should grant certiorari. Since he would remain liable even after winning in the Supreme Court, the lawyer who lost in the Sixth Circuit may not pursue a final appeal. The issue arose in the Sixth Circuit following the bankruptcy court’s imposition of $207,000 in sanctions against an attorney. Upheld in district court, the bankruptcy judge imposed sanctions under both 28 U.S.C. Section 1927 and the court’s inherent powers under Section 105 of the Bankruptcy Code. Section 1927 enables “any court of the United States” to impose sanctions on an attorney who “unreasonably and vexatiously” multiplies the proceedings. On appeal to the Tenth Circuit, the sanctioned attorney contended that the bankruptcy court is not a “court of the United States” and thus cannot sanction under Section 1927.

Noting the split among the circuits, Circuit Judge Helene N. White said in the opinion on June 15 that her circuit has not addressed the question in a reported opinion. In two unreported decisions, the Tenth Circuit said that bankruptcy courts are courts of the U.S.

Without elaboration, Judge White found those decisions “persuasive” and sided with the Second, Third and Seventh Circuits.

A contrary ruling on “court of the U.S.” would not have affected the outcome because Judge White also held that sanctions were proper under Section 105. She held that the lawyer’s conduct justified all the sanctions imposed by the bankruptcy court, because the lawyer’s baseless litigation and appeals delayed the trustee in making distributions to unsecured creditors and diminished the estate.

It is unknown whether the sanctioned attorney might file a certiorari petition, asking the US Supreme Court to grant certiorari, to hear and decide the split among US Circuit Courts of Appeals, on this issue.

In re Sunnyslope Housing Ltd. Partnership,    F3d   , 2016 Westlaw 1392318 (9th Cir. 2016)

In re Sunnyslope Housing Ltd. Partnership,    F3d   , 2016 Westlaw 1392318 (9th Cir. 2016), the Ninth Circuit Court of Appeals held that since affordable housing covenants encumbering a development were subordinated to the senior lender’s lien, the borrower’s valuation of the lender’s collateral in a bankruptcy case had to account for the potential extinguishment of those junior covenants in the event of foreclosure. One could quarrel with the Ninth Circuit’s reasoning which led to this result, because it could be argued that the affordable housing covenants “ran with the land”, and therefore would NOT be extinguished by a foreclosure, that they would still be on the land and would bind whoever was the buyer of the property in the foreclosure sale. However, unless there is a petition for certiorari to the US Supreme Court, and the US Supreme Court grants certiorari, the Ninth Circuit Sunnyslope decision is the controlling law in the Ninth Circuit, whether rightly or wrongly reasoned.

Clark's Crystal Springs Ranch LLC v. Gugino (In re Clark), --- B.R. --- (9th Cir. BAP March 2016)

Issue: Was substantive consolidation of the debtor, his LLC and trust into a single chapter 7 appropriate under the facts here?

Holding: Yes. creditors dealt with the entities as a single economic unit and did not rely on their separate identity in extending credit [and] the affairs of the debtor are so entangled that consolidation will benefit all creditors.

Judge Terry Myers, Idaho

Jury, Kirscher, Faris

Opinion by Jury

The chapter 12 debtor operated a family farm which was purportedly owned and managed by an LLC which was, in turn, purportedly owned by a trust. The case was converted to chapter 7 because there was "a showing that the debtor has committed fraud in connection with the case.” The trustee filed a complaint seeking substantive consolidation of the individual, the LLC and the trust. The bankruptcy court held a two day trial and granted the motion nunc pro tunc.

The BAP affirmed. The rule comes from a case called In re Bonham. "[W]hether creditors dealt with the entities as a single economic unit and did not rely on their separate identity in extending credit or whether the affairs of the debtor are so entangled that consolidation will benefit all creditors." Both factors were pretty obviously present here. The sloppiness was everywhere. The trust had provisions which contradicted other provisions, the debtor called himself the manager of the LLC and took a draw even though the docs said the trust was the manager. The bankruptcy schedules even listed assets which the debtor argued later were actually owned by the LLC. The debtor on the petition was “Jay P. Clark, DBA Crystal Springs Ranch.” This case has a nice summary of substantive consolidation.

The debtor argued on appeal that the court was required to use state law and since the trust had a spendthrift clause, that was binding on the court here. He also argued that alter ego with respect to an LLC under Idaho law must be followed. But the BAP said, "the law of substantive consolidation is federal bankruptcy law and is not dependent upon state law concepts."

The BAP wrote: "Substantive consolidation is an uncodified, equitable doctrine allowing the bankruptcy court, for purposes of the bankruptcy, to 'combine the assets and liabilities of separate and distinct - but related - legal entities into a single pool and treat them as though they belong to a single entity.' The doctrine 'enables a bankruptcy court to disregard separate corporate entities, to pierce their corporate veils in the usual metaphor, in order to reach assets for the satisfaction of debts of a related corporation.' The essential purpose behind the doctrine is one of fairness to all creditors, but it is a doctrine to be used sparingly."

California Senate Bill S380

California Senate Bill S380 seeks to increase the homestead exemption amounts to $100,000 for a single person; $150,000 for a family or head of household; and $300,000 for those over 65. Under existing law, the homestead exemption is $75,000 for a single person; $100,000 for a family; and $175,000 for a person over age 65, or who is over age 55 with very low income, or who is permanently disabled. The sponsors of S380 expect the California Senate to vote on the bill in the next few weeks. It is unknown at present whether this bill will become law or not. In previous years, similar bills have been defeated.

Sponsoring of the California Bankruptcy Forum Annual Continuing Legal Education Conference

The Bankruptcy Law Firm, PC was a sponsor of the California Bankruptcy Forum annual continuing legal education Conference, for lawyers and other bankruptcy professionals, held on May 22-22, 20016 in Indian Wells, California

Husky International Electronics, Inc. v. Ritz,     S.Ct.   , 2016 WL 2842452 (May 16, 2016) (case no. 15-145):

The United States Supreme Court, in Husky International Electronics, Inc. v. Ritz, on 5/16/16, reversed a 5th circuit Court of appeals case, In re Ritz, 787 F.3d 312 (5th Cir., May 22, 2015) and resolved a split among Circuit Courts nationwide, by the US Supreme Court ruling that the term "actual fraud" in Bankruptcy Code 11 USC § 523(a)(2)(A) encompasses forms of fraud, like fraudulent conveyance schemes, that can be effected without a false representation.

In Husky, the US Supreme Court ruled that anything that counts as "fraud" and is done with wrongful intent is "actual fraud," although "the term is difficult to define more precisely." However, there was "no need to adopt a definition for all times and all circumstances here because, from the beginning of English bankruptcy practice, courts and legislatures have used the term 'fraud' to describe a debtor's transfer of assets that, like [the debtor's] scheme, impairs a creditor's ability to collect the debt."

The US Supreme Court’s 7-1 decision, with only Justice Thomas dissenting, is consistent with In re Lawson, 791 F.3d 214 (1st Cir., July 1, 2015); McClellan v. Cantrell, 217 F.3d

890 (7th Cir. 2000); In re Vitanovich, 259 B.R. 873 (6th Cir. B.A.P. 2001) and In re Vickery, 488 B.R. 680 (10th Cir. B.A.P., March 13, 2013), all of which held that "actual fraud" under § 523(a)(2)(A) does not require a misrepresentation.

Whatley v. Stijakovich-Santilli (In re Stijakovich-Santilli), 542 B.R. 245 (9th Cir. BAP 2015)

The U.S. Bankruptcy Appellate Panel of the Ninth Circuit ("BAP") construed Rule 4003(b)(2) of the Federal Rules of Bankruptcy Procedure ("FRBP"), which extends the period for a trustee to object to exemptions where the exemption was fraudulently asserted, and held that a debtor fraudulently asserts an exemption when the debtor knowingly misrepresents a material fact that supports the claim of exemption and the trustee justifiably relies on a misrepresentation. A trustee can justifiably rely on that misrepresentation even if the trustee could have uncovered the fraud had the trustee carefully investigated. In determining whether a debtor fraudulently asserted an exemption, the court must look to the circumstances that existed when the exemption claim was made and, in doing so, can consider later statements made by the debtor regarding those circumstances.

Shalaby v. Mansdorf (In re Nakhuda) (B.A.P. 9th Cir. 2016)

Debtor's attorney sanctioned by Bankruptcy Court, sua sponte (sua sponte means on the Court's own motion, instead by a party bringing a Motion for sanctions) for multiple errors, including that debtor attorney did not have debtor client's original signature on the bankruptcy petition, schedules, other required bankruptcy documents, which is required if the debtor's attorney efiles the bankruptcy case with "/s/" signatures for debtor, instead of with ink signed signature. In addition, bankruptcy court sanctioned debtor attorney for: "(1) making arguments not warranted by existing law or non-frivolous arguments for its extension, modification or reversal; (2) failing to ensure that allegations and factual contentions had evidentiary support; (3) his inability or unwillingness to obtain the most basic knowledge of bankruptcy law or engage in the legal analysis necessary to competently represent debtor; (4) harming the estate by forcing Trustee to use limited estate assets to respond to the frivolous arguments and positions;..." Sanctions included bankruptcy court suspended attorney's ability to file electronically or appear in court in the Northern District of California, ordered debtor attorney to disgorge attorneys fees paid to him by client, and required attorney to take an ECF course. The 9th Circuit BAP affirmed some of the sanctions, but did not affirm others of the sanctions that the Bankruptcy Court had imposed, due to a difference in the standards of proof depending on the motion being made by another party, and a motion initiated sua sponte by the court, stating: "When assessing sanctions sua sponte under Rule 9011(c)(1)(B) and under the law of this Circuit, the bankruptcy court is required to issue an order to show cause to provide notice and an opportunity to be heard and to apply a higher standard "akin to contempt" than in the case of party-initiated sanctions. The reason behind the heightened standard is because, unlike party-initiated motions, court-initiated sanctions under Rule 9011(c)(1)(B) do not involve the 21-day safe harbor provision for the offending party to correct or withdraw the challenged submission. "Accordingly, at bottom, the "akin to contempt" standard seems to require conduct that is particularly egregious and similar to conduct that would be sanctionable under the standards for contempt."

Scheer v. State Bar of California (In re Scheer),    F.3d    , case no.14-56662 (9th Cir. April 14, 2016)

The Ninth Circuit wrote an opinion on April 14 indirectly saying that the Supreme Court should overrule Kelly v. Robinson, where the high court held in 1986 that criminal restitution imposed as a condition for probation is nondischargeable under Section 523(a)(7).

Writing for the appeals court, Circuit Judge John B. Owens said that Kelly "untether[ed] statutory interpretation from the statutory language." That approach, he said, "has gone the way of NutraSweet and other relics of the 1980s and led to considerable confusion." He then went on to cite circuit court decisions from around the country that distinguish Kelly to the vanishing point.

Section 523(a)(7) bars the discharge of "a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit" that is not compensation for "actual pecuniary loss."

Although restitution in Kelly was payable to the victim of the crime and therefore seemingly outside of the boundaries of Section 523(a)(7), the Supreme Court nonetheless held that the debt was nondischargeable based on a "deep conviction" that bankruptcy courts should not invalidate state criminal proceedings. The case before the Ninth Circuit involved a lawyer who violated state law by charging a client in advance for a mortgage modification. The client fired the lawyer and got an arbitration award requiring repayment of the entire fee. When the lawyer did not pay, the state bar suspended the lawyer's license to practice until she repaid the fee. Filing a chapter 7 petition, the lawyer sued the state bar in bankruptcy court under Section 525(a) for revoking a license "solely because" she had not paid a dischargeable debt. The bankruptcy court and the district court both held that the debt was nondischargeable.

On appeal, Judge Owens ruled that the fee was a dischargeable debt and reversed the lower courts. He relied in significant part on the Ninth Circuit's 2010 decision in Findley, which held that the costs associated with state bar disciplinary proceedings are nondischargeable.

In the case on appeal, Judge Owens said, there were no costs payable to the state that were assessed for disciplinary proceedings, only a debt for receiving a fee improperly from a client. Furthermore, the debt was "compensation for actual loss," not a fine or penalty.

If the debt were not dischargeable, Judge Owens said that fee disputes with other licensed professionals like doctors, dentists or barbers would lead to nondischargeable debts. [ analysis is from ABI 4/18/16 e-newsletter]

Revision of Certain Dollar Amounts in the Bankruptcy Code

(Effective April 1, 2016) - Source: 81 Fed. Reg. 8748-01, 2016 WL 684261 (Feb. 22, 2016)

Affected sections of Title 28 U.S.C. and the Bankruptcy Code Dollar amount to be adjusted New (adjusted) dollar amount1
28 U.S.C.:    
Section 1409(b)—a trustee may commence a proceeding arising in or related to a case to recover    
(1)—money judgment of or property worth less than $1,250 $1,300
(2)—a consumer debt less than $18,675 $19,250
(3)—a non consumer debt against a non insider less than $12,475 $12,850
11 U.S.C.:    
Section 101(3)—definition of assisted person $186,825 $192,450
Section 101(18)—definition of family farmer $4,031,575 (each time it appears) $4,153,150 (each time it appears)
Section 101(19A)—definition of family fisherman $1,868,200 (each time it appears) $1,924,550 (each time it appears)
Section 101(51D)—definition of small business debtor $2,490,925 (each time it appears) $2,566,050 (each time it appears)
Section 109(e)—debt limits for individual filing bankruptcy under chapter 13 $383,175 (each time it appears)
$1,149,525 (each time it appears)
$394,725 (each time it appears)
$1,184,200 (each time it appears)
Section 303(b)—minimum aggregate claims needed for the commencement of an involuntary chapter 7 or 11 petition    
(1)—in paragraph (1) $15,325 $15,775
(2)—in paragraph (2) $15,325 $15,775
Section 507(a)—priority expenses and claims:    
(1)—in paragraph (4) $12,475 $12,850
(2)—in paragraph (5)(B)(i) $12,475 $12,850
(3)—in paragraph (6)(B) $6,150 $6,325
(4)—in paragraph (7) $2,775 $2,850
Section 522(d)—value of property exemptions allowed to the debtor    
(1)—in paragraph (1) $22,975 $23,675
(2)—in paragraph (2) $3,675 $3,775
(3)—in paragraph (3) $575
(4)—in paragraph (4) $1,550 $1,600
(5)—in paragraph (5) $1,225
(6)—in paragraph (6) $2,300 $2,375
(7)—in paragraph (8) $12,250 $12,625
(8)—in paragraph (11)(D) $22,975 $23,675
Section 522(f)(3)—exception to lien avoidance under certain state laws $6,225 $6,425
Section 522(f)(4)—items excluded from definition of household goods for lien avoidance purposes $650 (each time it appears) $675 (each time it appears)
Section 522(n)—maximum aggregate value of assets in individual retirement accounts exempted $1,245,475 $1,283,025
Section 522(p)—qualified homestead exemption $155,675 $160,375
Section 522(q)—state homestead exemption $155,675 $160,375
Section 523(a)(2)(C)—exceptions to discharge    
(1)—in paragraph (i)(I)—consumer debts for luxury goods or services incurred < 90 days before filing owed to a single creditor in the aggregate $650 $675
(2)—in paragraph (i)(II)—cash advances incurred < 70 days before filing in the aggregate $925 $950
Section 541(b)—property of the estate exclusions:    
(1)—in paragraph (5)(C)—education IRA funds in the aggregate $6,225 $6,425
(2)—in paragraph (6)(C)—pre-purchased tuition credits in the aggregate $6,225 $6,425
Section 547(c)(9)—preferences, trustee may not avoid a transfer if, in a case filed by a debtor whose debts are not primarily consumer debts, the aggregate value of property is less than $6,225 $6,425
Section 707(b)—dismissal of a chapter 7 case or conversion to chapter 11 or 13 (means test):    
(1)—in paragraph (2)(A)(i)(I) $7,475 $7,700
(2)—in paragraph (2)(A)(i)(II) $12,475 $12,850
(3)—in paragraph (2)(A)(ii)(IV) $1,875 $1,925
(4)—in paragraph (2)(B)(iv)(I) $7,475 $7,700
(5)—in paragraph (2)(B)(iv)(II) $12,475 $12,850
(6)—in paragraph (5)(B) $1,250 $1,300
(7)—in paragraph (6)(C) $675 $700
(8)—in paragraph (7)(A)(iii) $675 $700
Section 1322(d)—contents of chapter 13 plan, monthly income $675 (each time it appears) $700 (each time it appears)
Section 1325(b)—chapter 13 confirmation of plan, disposable income $675 (each time it appears) $700 (each time it appears)

1Section 1326(b)(3)—payments to former chapter 7 trustee stays at $25, no change

Double Bogey, L.P. v. Enea, 794 F.3d 1047 (9th Cir. 2015) ("Double Bogey")


In Double Bogey, L.P. v. Enea, 794 F.3d 1047 (9th Cir. 2015) ("Double Bogey"), the U.S. Court of Appeals for the Ninth Circuit held in a published opinion that the debtors, who were the sole officers and shareholders of a corporation, could not have their debts determined non-dischargeable under 11 U.S.C. Section 523(a)(4) solely on the basis that the debtors were found to be the alter ego of the corporation under applicable California law. The Ninth Circuit determined that California's alter ego doctrine acts as a procedural mechanism rather than providing for "trust-like" obligations that would create a fiduciary relationship.

Issues raised in Double Bogey as to whether California common law doctrines can impose a fiduciary relationship under 11 U.S.C. Section 523(a)(4) are of continuing importance. During January 2016, the Ninth Circuit, in an unpublished decision in Yin v. Tatung Co. (In re Houng), 2016 WL 145841 (9th Cir. 2016), interpreted Double Bogey and determined that the "trust fund doctrine," a California common law doctrine, creates a fiduciary relationship within the meaning of Section 523(a)(4).


Paul and Sylvester Enea created and owned Appian Construction, Inc. (the "Corporation"). The Eneas were also the Corporation's only officers. The Corporation managed two real estate development projects - 1221 Monticello L.L.P., as a general partner, and Monterrosa, L.L.C. as the managing member. Double Bogey, L.P. (the "Investor") invested $4 million in Monticello as its limited partner, and $1 million in Monterrosa as a non-managing member.

The Investor did not recover its investment, and after the Corporation failed to provide an accounting, the Investor filed a state court action against the Corporation and the Eneas. The Eneas ("Debtors") and the Corporation each filed bankruptcy under Chapter 7 approximately one year later.

The Investor initiated an adversary action against Debtors, alleging: (1) The Corporation was the Investor's fiduciary; (2) The Corporation was liable for the Investor's lost principal and profits; (3) such liabilities were created by the Corporation's defalcation; (4) liabilities created by a fiduciary's defalcation are non-dischargeable under Section 523(a)(4); and (5) the Debtors were liable for such non-dischargeable debt by way of their own defalcation or as alter egos of the Corporation.

The bankruptcy court found that the Corporation was a fiduciary of the Investor and that Debtors were alter egos of the Corporation. However, the bankruptcy court entered judgment in favor of Debtors – finding that a determination that the Debtors were the alter egos of the Corporation was insufficient to hold that Debtors were fiduciaries of the Investor. The district court affirmed the bankruptcy court, as did the Ninth Circuit.


The Ninth Circuit began its analysis noting that it has adopted a narrow definition of fiduciary – in that the fiduciary relationship must be one arising from an express or technical trust imposed before, and without reference to, the wrongdoing that caused the debt. See In re Cantrell, 329 F.3d 1119, 1125 (9th Cir. 2003). The Ninth Circuit stated that it may consult state law when interpreting whether one is a fiduciary under Section 523(a)(4), but such a relationship will only be found when the non-bankruptcy law clearly and expressly imposes trust-like obligations.

The Ninth Circuit further stated that common-law doctrines, such as California's alter ego doctrine, rarely impose trust-like obligations to create a fiduciary relationship under Section 523(a)(4) - and that constructive, resulting, or implied trusts never satisfy this element. As stated in the opinion, "California's alter ego doctrine does not explicitly create a trust relationship, either by raising existing legal duties or otherwise. Nor does it come into operation prior to wrongdoing - rather it merely operates to hold an individual liable for his corporation's already-existing debt. Instead of creating, enforcing, or expounding on substantive duties, California's alter ego doctrine merely acts as a procedural mechanism by which an individual can be held jointly liable for the wrongdoing of his or her corporate alter ego." Double Bogey at 1051-1052. The Ninth Circuit determined that since California's alter ego doctrine results in adding judgment debtors post-liability, and does not impose trust-like obligations prior to the liability, it does not create a fiduciary relationship under Section 523(a)(4).

Subsequent Ninth Circuit Case:

In Houng v. Tatung Co. (In re Houng), 2016 WL 145841 (9th Cir. 2016), the Ninth Circuit, in an unpublished decision, considered a non-dischargeability claim under 11 U.S.C. § 523(a)(4), and whether a fiduciary duty arising from the "trust fund doctrine" (the California doctrine holds that assets of a corporation become a trust fund for the benefit of creditors upon insolvency - see Berg & Berg Enter., LLC v. Boyle, 100 Cal.Rptr.3d 875, 893 (Cal. App. 2009)) creates a fiduciary relationship within the meaning of Section 523(a)(4). The Ninth Circuit determined in Houng that the trust fund doctrine did qualify as such a fiduciary relationship, notwithstanding dicta in Double Bogey that common law doctrines "rarely impose the trust-like obligations sufficient to create a fiduciary relationship" subject to nondischargeability in Section 523(a)(4). Houng at 2. The Ninth Circuit stated that Double Bogey simply states that cases "have long held-that for a fiduciary relationship to satisfy § 523(a)(4), it must exhibit characteristics of a traditional trust relationship and must arise prior to the wrongdoing at issue." Houng at 2.


Given the Ninth Circuit's narrow definition of a fiduciary under Section 523(a)(4), the court's reasoning and ultimate ruling is not surprising. However, the court's ruling was narrowly limited to a determination of whether California's alter ego doctrine alone can create a fiduciary relationship under the Bankruptcy Code - leaving open the possibility of using a finding of alter ego to support other grounds for nondischargeability - such as embezzlement or larceny under Section 523(a)(4), or willful and malicious injury to property under Section 523(a)(6). In addition, the Ninth Circuit's decision in the Houng case following on Double Bogey makes it likely that there will be more cases exploring whether other California common law doctrines qualify to create a fiduciary relationship within the meaning of Section 523(a)(4).

[this case analysis is reprinted from the State Bar of California Insolvency Committee e-newsletter, written by their authors]

In re Village Green I, GP,    F.3d   , 2016 Westlaw 325163 (6th Cir. 2016).

The Sixth Circuit has held that a cramdown plan of reorganization was not propounded in good faith due to the artificial impairment of small claims held by two creditors who were closely connected to the Chapter 11 debtor, especially since the debtor had sufficient funds on hand to pay those creditors in full immediately.

This is a circuit split issue: 9th Circuit and 6th Circuit are split on the issue of "artificial impairment." See, e.g., In re L & J Anaheim Associates, 995 F.2d 940 (9th Cir. 1993), holding that the definition of "impairment" under § 1124 did not necessarily mean "harmed." The Ninth Circuit reasoned that under § 1124(1), an unimpaired claim is one that is "unaltered." Therefore, any alteration, no matter how trivial, is sufficient to constitute impairment. The Village Green court conceded the issue of impairment but focused instead on the "bad faith" prong of the analysis. Perhaps the Supreme Court will ultimately resolve this question.

Facts and reasoning in Village Green: A partnership owned an apartment complex that was substantially "underwater" on its mortgage. It filed a Chapter 11 petition and eventually sought confirmation of a "cramdown" plan. Under 11 U.S.C.A. §1129(a)(10), a plan may be confirmed over the objections of most of the creditors ("crammed down") if there is at least one impaired consenting class of creditors. Under the proposed plan, the debtor's accountant and attorney were owed $2,400 but would not be immediately "cashed out" for 60 days, even though the debtor had sufficient cash to do so. By contrast, the plan proposed to pay its secured creditor over a 10 year span of time.

The debtor contended that those two creditors (its attorney and its accountant) constituted an "impaired consenting class," thus satisfying the cramdown requirements. After considerable litigation, the bankruptcy court eventually lifted the automatic stay and dismissed the bankruptcy case on the ground that it had not been filed in good faith. The district court affirmed, and so did the circuit court.

The court first agreed that the minor delay in payment to the debtor's accountant and attorney meant that they were technically "impaired" for purposes of §1124(1). However, the court went on to hold that the plan had been propounded in bad faith, in violation of §1129(a)(3), since the debtor had ample funds to pay the "impaired creditors" immediately: "[T]hat the minor claimants ([the debtor's] former lawyer and accountant) are closely allied with [the debtor] only compounds the appearance that impairment of their claims had more to do with circumventing the purposes of § 1129(a)(10) than with rationing dollars."

Ninth Circuit Rules That Debtor's Insider Can Sell Claims to Friendly Third Parties and Garner Critical Acceptance Votes on Its Plan

U.S. Bank N.A. v. The Village at Lakeridge, LLC (In re The Village at Lakeridge, LLC),    F3d   , 2016 WL 494592 (9th Cir. Feb. 8, 2016). Earlier this month, the Ninth Circuit ruled that an insider can sell its claim to a friendly third party, whose vote fulfills Bankruptcy Code section 1129(a)(10)'s requirement of an impaired consenting class, unless the third party has a close relationship with the debtor and negotiated the claim purchase at less than arm's length.

In re Murray

In re Murray, 543 B.R. 484 (Bankr. S.D. N.Y. 2016), issued an opinion dismissing an involuntary bankruptcy case brought by a single creditor.

In Murray, this creditor, the Wilk Auslander LLP law firm, was the assignee of a judgment obtained from its client (after the client did not pay its fees). The law firm sought to enforce upon its the judgment. To that end, the firm, as Murray's sole creditor, filed an involuntary chapter 7 bankruptcy proceeding. Shortly after, Murray, filed a motion to dismiss the case under section 707(a), alleging the firm brought the petition in bad faith. Murray also requested sanctions.

Murray had no income, and his sole material asset was an interest in a tenancy by the entirety with his wife in the apartment in which they resided. Under New York law, the creditor's sole remedy was to execute on Murray's interest in the apartment, but not the entire interest held by Murray and his non-debtor spouse. But the bankruptcy code, under Section 363, allows a forced sale of the entire apartment, providing Murray's non-debtor spouse only with the right of first refusal to match the sale offer.

The court began by noting that the facts of the case represent a "common" and abused practice: the filing of a bankruptcy petition in a two-party dispute. Though most commonly, the court stated, the abuser is the debtor and not the creditor. The question the court addressed was whether a single creditor could bring an involuntary bankruptcy case, admittedly as a judgment enforcement tool. The petitioning creditor law firm, the court noted, brought the case to as a means to exploit Section 363, in an attempt to monetize the spousal interest in the property jointly held with Murray.

The court reviewed several factors used to determine whether bankruptcy petitions constitute bad-faith filings: whether the dispute involved two-parties, whether the dispute could be resolved in a non-bankruptcy forum, and whether filing the petition was a mere litigation tacit.

Relying on these factors, the court found that the involuntary filing was indeed inappropriate. The goal of the bankruptcy system, it noted, is to achieve societal goals as a collective remedy, and to achieve distributions for all creditors. But in this case, the filing arose from a two-party dispute, and the petitioning creditor used the bankruptcy system "solely as a judgment enforcement mechanism" to achieve a result unavailable under non-bankruptcy law, and where no other creditors existed that needed protection. The court found this to be a misuse of the bankruptcy code.

Considering that 11 USC 303(a)(2) states a single creditor can file an involuntary bankruptcy petition, if there are fewer than 12 total creditors, the fact a single creditor filed the involuntary petition against Murray was allowed by Section 303(a)(2).

While the court did not award sanctions to Murray, creditors should consider the risks of using involuntary petitions as a litigation strategy aimed at obtaining remedies under the bankruptcy code not otherwise available under state law. On the other hand, the whole point of filing an involuntary bankruptcy case (or a voluntary bankruptcy case) is to obtain remedies not available under non-bankruptcy law.

In re Tapang

In re Tapang, 540 B.R. 701 (Bankr. N.D. Cal. 2015): the U.S. Bankruptcy Court for the Northern District of California determined that a 5% interest rate on the secured creditor's claim met the standards set forth in Till v. SCS Credit Corporation, 541 U.S. 465 (2004) ("Till") for confirmation of the debtor's chapter 11 plan, by "cramdown" on the secured creditor who voted to reject the Chapter 11 plan.


The Tapang case concerned the limited question of the rate of interest required for the debtor to cram down her proposed plan of reorganization on a dissenting secured creditor, 523 Burlingame LLC ("Creditor"). The case is a bit unusual in that it was originally assigned to the Honorable Arthur Weissbrodt, who determined (1) the value of the property in question, (2) that Till applied, and (3) that Creditor had the burden of proof on the appropriate risk factors to be applied under the Till formula. When Judge Weissbrodt announced his retirement, the case was reassigned to the Honorable Charles Novack, though the interest rate issue was reserved to Judge Weissbrodt. Judge Weissbrodt presided over a trial and took the matter under submission; however, the issue was later reassigned to Judge Novack, who reviewed the record and testimony and issued the court's decision.

Creditor held a first deed of trust on the debtor's real property, which was a commercial property used as an elder living facility. As of the bankruptcy filing, Creditor held a claim of $1,829,167.33. The court determined the property's value to be $1,148,785, and there was a prepetition real property tax claim of $100,060.32 senior to Creditor's claim. The debtor proposed to pay the secured portion of Creditor's claim over 25 years with an annual interest rate of 5%. Creditor opposed confirmation, asserting that 5% interest did not provide for an adequate risk premium. Creditor did not, however, propose an alternate rate.

During the chapter 11 case, the debtor timely made adequate protection payments to Creditor and was current on postpetition real property taxes. In addition, the debtor (who owned a number of properties) had amassed cash of $200,000 in her checking account.

The debtor's expert, whose qualification as an expert was unsuccessfully challenged by Creditor via a motion in limine, opined that a risk premium of 1.75% over and above the prime rate of 3.25% was appropriate. He based his opinion on the following factors: the treatment of similarly situated creditors in the debtor's reorganization plan (all had agreed to a rate of 5% or less), the timeliness of the debtor's postpetition monthly payments to Creditor and to the County for real property taxes, and the debtor's cash on account.

Upon cross-examination by Creditor's counsel, the expert acknowledged that additional factors were relevant to the analysis. The factors included: the age and nature of the property; any necessary repairs and maintenance; the duration of the plan; the debtor's prepetition defaults; and the loan-to-value ratio. The expert did not consider the debtor's age a factor in his analysis.

Creditor did not offer any expert testimony. It did designate an expert witness on the interest rate issue, but at the hearing Creditor advised the court that its expert had left the industry. Creditor did not identify any other expert, instead relying on its cross-examination of the debtor's expert.


In accepting the debtor's proposed 5% interest rate on the objecting Creditor's claim, the court noted that under Till a creditor bears the burden of proof as to any risk factors that justify an upward adjustment of the interest rate. It appears that Judge Novack agreed with Judge Weissbrodt's prior ruling that Till applied in the chapter 11 context, citing, among other cases, In re Dunlop Oil Co., Inc., BAP No. AZ-14-1172-JuKiD, 2014 WL 6883069, at ∗19 (B.A.P. 9th Cir. Dec. 5, 2014).

The court noted that Creditor's trial brief argued that the debtor's proposed 5% interest rate failed to consider eight relevant concerns: (1) the initial contract rate of 7.213%; (2) the age and condition of the property, which Creditor alleged required several hundred thousand dollars of deferred maintenance; (3) accrued property taxes which were to be paid off in three years; (4) the debtor had no funds for capital improvements or deferred maintenance; (5) the property was co-owned by a debtor-controlled entity which presented another bankruptcy risk; (6) the debtor was elderly (she was 64), (7) the debtor's business was not subject to the court's jurisdiction; and (8) the debtor's income was historically inadequate to make debt service payments.

The court further noted, however, that Creditor either failed to introduce any evidence to support these arguments or failed to establish them as relevant risk factors. Moreover, Creditor did not introduce any evidence to justify a greater risk premium adjustment or identify any specific rate it believed would be more appropriate than the debtor's 5% interest rate. While Creditor solicited testimony from the debtor's expert that certain hypothetical factors might be relevant to consider in setting an appropriate interest rate, Creditor presented no evidence to establish that any of the hypothetical factors were actually present.

The court also made clear that the debtor's age could not be considered as a potential negative factor as to do so would violate the Equal Credit Opportunity Act. The court also noted that it did not believe Till required a 3% cap on the risk premium. Finally, the court noted that the amount Creditor paid for the note when it purchased it from the initial lender ($500,000) was irrelevant to the court's analysis.


There are numerous practice points of interest in this case. First, since a secured creditor has the burden to establish the appropriate risk factors, it must put on evidence of those risk factors. While this is possible without its own expert, a creditor is well advised to retain its own expert (and perhaps a back-up expert) in such a situation. While there were potential weaknesses in the debtor's expert opinion, those weaknesses went effectively unchallenged in this case.

Second, without a controlling decision from the Ninth Circuit on the applicability of

  • Till
  • to a chapter 11 case, and given the ambiguity in Till's plurality opinion, the bankruptcy courts are free to accept or reject Till as an analytical framework. See, e.g., In re MPM Silcones LLC, 531 B.R. 321, 332-334 & n.9 (S.D.N.Y. 2015); In re Texas Grand Prairie Hotel Realty LLC, 710 F.3d 324, 731-734 (5th Cir. 2013). Within the Ninth Circuit, prior to Till, courts applied a formula/market rate approach to determine an appropriate rate of interest to satisfy Bankruptcy Code section 1129(b). This line of reasoning is represented by cases such as Pacific First Bank v. Boulders on the River, Inc. (In re Boulders on the River, Inc.), 164 B.R. 99, 105 (B.A.P. 9th Cir. 1994), In re Fowler, 903 F.2d 694, 697 (9th Cir. 1990), and In re El Camino Real, 818 F.2d 1503, 1508 (9th Cir. 1987). Accordingly, parties ought to determine whether their judge will apply Till or whether they wish to stipulate that Till applies as part of the confirmation process.

    Third, even if Till applies, it appears that courts do not feel necessarily limited to the 1%-3% risk premium adjustment discussed therein.

    [this case analysis appeared in the California State Bar Insolvency Committee e-newsletter of 02/16/16]

    Zachary v. California Bank & Trust

    Zachary v. California Bank & Trust,    F.3d    , 2016 WL 360519 (9th Cir. Jan. 28, 2016), the U.S. Court of Appeals for the Ninth Circuit ( "9th Circuit") held that the absolute priority rule, codified in section 1129(b)(2)(B)(ii) of the Bankruptcy Code, continues to apply to individual chapter 11 cases following the enactment, in 2005, of the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA 2005"). In so holding, the Ninth Circuit overruled the decision of the U.S. Bankruptcy Appellate Panel for the Ninth Circuit (the "BAP") in In re Friedman, 466 B.R. 471 (9th Cir. BAP 2012) ("Friedman"), and adopted the "narrow view" of the individual debtor exception to the absolute priority rule. The narrow view, which Zachary adopts as the rule in the 9th Circuit, is that, for individuals filing Chapter 11 bankruptcy, the individual debtor's Chapter 11 plan cannot be confirmed (approved by the Bankruptcy Court so it goes into effect, binding debtor and creditors) unless debtor puts into the Chapter 11 plan the value of all assets that the debtor had, at the time the debtor filed bankruptcy (all "prepetition" assets), except for those assets that the debtor claimed exempt (only individual debtors can claim exemptions). That has always been the rule for non-individual debtors' Chapter 11 cases - corporations, LLCs, etc. - except corporations and LLCs and other non-individual debtors cannot claim exemptions.

    The result of the absolute priority rule applying in individual Chapter 11 cases is that the value of all non-exempt prepetition assets of the individual debtor must be paid into the Chapter 11 plan to help fund the plan, so debtor has to give up all those assets, usually achieved by selling those assets, in the bankruptcy case.

    The only exception to this requirement is if the debtor "buys back" debtor's prepetition assets, by making a "new value" contribution in money or money's worth (debtor's promise of performing future labor does not constitute a "new value" contribution).

    Per Zachary, an individual debtor does get to keep assets that the debtor acquires after debtor files bankruptcy (ie "postpetition").

    However, in an individual Chapter 11 case, per 11 USC 1115, the individual debtor's earnings, earned by work the debtor does during the bankruptcy case belongs to the debtor's "bankruptcy estate". If any unsecured creditor objects to the individual debtor's proposed Chapter 11 plan, the individual debtor must pay debtor's "projected monthly disposable income" into debtor's Chapter 11 plan, every month of the plan (minimum Ch 11 plan length for an individual is 5 years), to help fund the plan, per 11 USC 1129(a)(15), or the plan cannot be confirmed.

    Coker v. JP Morgan Chase Bank, N.A.,    Cal.   

    Coker v. JP Morgan Chase Bank, N.A.,    Cal.   , 2015 Westlaw ----- (Supreme Court of the State of California, 2015.): The California Supreme Court held that a lender holding a residential purchase money obligation cannot obtain a deficiency from a borrower, even though the property was sold at a short sale and even though the borrower waived her antideficiency protection. Secured lender could not collect the deficiency owed after short sale of residence, from borrower.

    FACTS: The owner of a residence encumbered by a purchase money deed of trust arranged for a "short sale," under which the proceeds of the sale would be less than the outstanding balance owed to the purchase money lender. The lender agreed to the sale, but only if the borrower would agree to be liable for any deficiency. She agreed to those terms.

    After she went ahead with the sale, the lender sought recovery. The borrower then filed a complaint for declaratory relief to establish that the lender was barred by California Code of Civil Procedure §580b from obtaining a deficiency judgment against her. The trial court dismissed her complaint, but the appellate court reversed, on the ground that the statute prohibited a deficiency after any sale, whether by foreclosure or otherwise.

    REASONING: The Supreme Court unanimously affirmed, holding that the California cases interpreting §580b had all adopted a broad reading of the statute in order to protect homeowners from deficiency liability on purchase money obligations, whether or not a foreclosure sale had been held. The lender argued that the pre-2012 version of the statute, which applied to the facts in this case, meant that its protections did not attach unless a foreclosure sale had taken place.

    The court recognized that the pre-2012 version of the statute was not perfectly clear, noting that "[i]n 2012, the Legislature reformatted section 580b to expressly parse the text" to provide that a lender cannot collect a deficiency from a residential borrower under a purchase money obligation. But the court looked to its earlier decisions to guide its construction of the former statute.

    The lender argued that the borrower had waived the protection of the statute, but the court held that contractual waivers of §580b are unenforceable. As a fallback, the lender argued that the recent enactment of §580e demonstrated that the prior law did not protect homeowners after short sales. (That new statute expressly protects residential borrowers in that situation.) The court reasoned that its construction of §580b was unaffected by the new statute because "the Legislature did not limit or otherwise alter section 580b when it enacted section 580e." The court declined to discuss whether non-residential borrowers would be protected by its reading of §580b, even after the enactment of §580e.

    Finally, the court held that although the borrower's consent to the short sale constituted a de facto waiver of her right under §726(a) (the "one-action rule") to compel the lender to foreclose prior to seeking recovery from her, that did not constitute a valid waiver of her protections under §580b:

    [T]he fact that [the borrower] waived her right to insist that [the lender] proceed via foreclosure does not mean that the short sale agreement destroyed the purchase money nature of the loan or that [the lender] became entitled to collect more than the value of its security. Once [the lender] realized and exhausted the full value of its security, section 580b prevented [it] from seeking to obtain [her] other assets. When a borrower waives her rights under section 726 by agreeing to a short sale, section 580b remains a barrier to any deficiency judgment after the lender collects the full value of its security from the sale.

    AUTHOR'S COMMENT: This result is not a surprise. Even though newly-enacted §580e and newly-amended §580b were inapplicable to this case, the Legislature provided very strong policy guidance to the court: homeowners are to be protected from deficiency liability on purchase money loans. (Full disclosure: the court mentioned the "reformatted" post-2012 §580b. I was a member of a team of drafters sponsored by the Insolvency Law Committee of the Business Section of the California State Bar that proposed those amendments in order to clarify the earlier version of the statute.) Given the enactment of §580e and the "reformatting" of §580b, I do not think that this opinion will have a major impact in future litigation over the application of §580b, since new §580b and §580e now occupy the field.

    The lender raised questions about the policy implications of a broad reading of §580b: Does the statute really protect against overvaluation of residential property, or does it cause borrowers to pay more than the market value, since they know they are insulated from liability? Does the statute really prevent the aggravation of an economic downturn by protecting homeowners from liability, or does it encourage strategic default? The court declined to reach either of those issues, stating that the earlier California cases have "implicitly rejected" both of those arguments. I believe that both of those arguments have merit but that the Legislature will never change the rule protecting homeowners from liability, for obvious political reasons.

    For a discussion of the appellate opinion in this case, see 2013-32 Comm. Fin. News. NL 65, Despite Borrower's Agreement to Remain Liable, Borrower is Protected From Purchase Money Deficiency Liability After Short Sale.

    [Note: this case analysis was written by Professor Dan Schechter of Loyola Law School, Los Angeles]

    New Proof of Claim and Mortgage Attachment, effective December 1, 2015

    New Proof of Claim and Mortgage Attachment, effective December 1, 2015: The national bankruptcy forms were revised as of December 1, 2015. One of the major changes in the national forms is a revision to the form (Form 410) that creditors use to file Proofs of Claims in bankruptcy cases. Effective 12/1/15, the Proof of Claim form (Form 410) and the Mortgage Proof of Claim Attachment form (Form 410A), were revised to require that DOT lenders/ mortgage lenders must now provide a loan payment history from the first date of default as part of the mortgage attachment form, which must include information about payments received and how they were applied, when fees and charges were incurred, when fees and charges were paid from what source, when escrow amounts were disbursed, and whether funds were held in an unapplied or suspense account. Requiring secured DOT/mortgage creditors to supply this information can be a big help to bankruptcy debtors' attorneys, in the debtors' attorneys analyzing whether the creditor's secured Proof of Claim is accurate, or whether the servicer may have misapplied payments or made other servicing errors before the bankruptcy was filed.

    Eden Place LLc v. Perl (In re Perl)

    Eden Place LLc v. Perl (In re Perl) F.3d (9th Cir. 1/8/16) (9th Cir. Appeal number14-70039): Creditor did NOT violate bankruptcy stay when creditor had law enforcement officers evict debtor, post-petition, from real property debtor was occupying, which had previously belonged to debtor, but which debtor no longer owned, at time debtor filed bankruptcy. Held mere fact that bankruptcy debtor had possession of a real property did NOT mean that new owner violated stay by having debtor evicted. The new owner of the real property had purchased debtor's real property at a nonjudicial foreclosure sale held pre-petition (before debtor filed bankruptcy). Also prepetition, the new owner sued to evict debtor from the property, in California state court, and, prepetition, obtained an eviction order from California state court, giving new owner right to evict debtor from the property. Debtor then filed Chapter 13 bankruptcy. New owner had law enforcement officers evict debtor, after debtor filed bankruptcy, and without seeking relief from stay in the bankruptcy case. Debtor claimed the eviction violated the bankruptcy automatic stay, because debtor's possession of the property was an interest protected by the automatic stay. Debtor lost in the Ninth Circuit, which held mere possession, without right to possess (there was no right to possess, due to new owner having obtained an eviction order in state court, BEFORE debtor filed bankruptcy), was NOT an interest protected by the bankruptcy automatic stay. Therefore, new owner did not have to seek or obtain relief from stay, to be able to have law enforcement officers evict debtor, post-petition, using the eviction order obtained prepetition. Case also presented issue of whether there was an appealable order.

    Kostecki v. Sutton (In re Sutton)

    Kostecki v. Sutton (In re Sutton)BR (9th Cir. BAP 12/3/15) (not for publication) (BAP case number EC014-1204-JuFD) held that a case-terminating sanction may not be imposed absent bad faith or consideration of a more moderate penalty, such as a continuance.

    In re Free

    In re Free, ... BR... (9th Cir. BAP 12/17/15) BAP case number WW-14-1395-JuKiF: Good decision for debtors. Debtors filed a chapter 7 and received their discharge. The discharge released them from personal liability on two wholly-unsecured junior liens that encumbered their real property. Before the chapter 7 was closed, Debtors file a chapter 13 intending to strip off the two junior liens in the in the chapter 13 plan. Trustee moved to dismiss, arguing they were ineligible for chapter 13 because their debt exceed the 109(e) limits. The bankruptcy court agreed. On appeal the BAP reversed, holding in personam liability on undersecured debt that is discharged in a chapter 7 is not counted toward the unsecured debt limit in a subsequent chapter 13 case.

    Inst. of Imaginal Studies v. Christoff (In re Christoff) (B.A.P. 9th Cir., 2015)

    Inst. of Imaginal Studies v. Christoff (In re Christoff) (B.A.P. 9th Cir., 2015): Held that debtor who was contractually obligated to pay a student loan, but did not actually receive funds, could discharge that contract obligation. May be case of first impression. Facts: Meridian is a for-profit California corporation which operates a private university licensed under California's Private Post Secondary Education Act of 2009, Cal. Educ. Code § 94800, et seq. If a graduate of Meridian fulfills other post-graduate requirements, the graduate may obtain a license from California to practice as an independent, unsupervised psychologist.

    Debtor applied for admission to Meridian in 2002. Meridian agreed to admit Debtor and offered her $6,000 in financial aid to pay a portion of the tuition for that school year. Under this arrangement, Debtor did not receive any actual funds from Meridian, but instead she received a tuition credit. Debtor signed an enrollment agreement acknowledging Meridian's offer to "finance" $6,000 of the tuition, and she signed a promissory note in favor of Meridian evidencing her obligation. The promissory note provided that the debt for the tuition credit was to be paid by Debtor in installments of $350 per month after Debtor completed her course work or withdrew from Meridian. Interest accrued on the unpaid balance of the note at nine percent per annum, compounded monthly.

    The bankruptcy court held the obligation discharged. On appeal, the 9th Cir. BAP held that under § 523(a)(8)(A)(ii), a student loan debt was excepted from discharge only for loans in which funds were actually received by the debtor.

    Section 523(a)(8)(A)(ii) plainly provides that a bankruptcy discharge will not impact "an obligation to repay funds received as an educational benefit, scholarship, or stipend." It is undisputed that the agreements between Meridian and Debtor constitute an "obligation to repay" "educational benefits" provided by Meridian to Debtor. However, § 523(a)(8)(A)(ii) requires more.

    To except a debt from discharge under this subsection, the creditor must demonstrate that the debtor is obliged to repay a debt for "funds received" for the educational benefits. The phrase "funds received" has been interpreted by the BAP, in an opinion which was as adopted by the Ninth Circuit as its own, to require "that a debtor receive actual funds in order to obtain a nondischargeable benefit." In re Hawkins, 317 B.R. at 112 (emphasis added); accord In re Oliver, 499 B.R. 617, 625 (Bankr. S.D. Ind. 2013) (holding under § 523(a)(8)(A)(ii), "[i]n order to be obligated to repay funds received, [the] [d]ebtor had to have received funds in the first place.")

    Tetzlaff v. Educ. Credit Mgmt. Corp. (7th Cir., 2015) HELD: Evidence of debtor's paydown of one student loan is not evidence of good faith in regard to another loan for which no payments were made.

    Seventh Circuit Court of Appeals held that the bankruptcy court was not required to consider Tetzlaff's payments to Florida Coastal as evidence of a good faith effort to repay Educational Credit, as his Florida Coastal debt was not included in the discharge action. Furthermore, as the bankruptcy court noted, it seems that Tetzlaff repaid his debt to Florida Coastal largely because he needed the school's cooperation in releasing his diploma and transcript. Thus, Tetzlaff was motivated by certain incentives to pay down his Florida Coastal debt that do not apply to the repayment of his debt held by Educational Credit.

    Therefore, Seventh Circuit Court of Appeals declined to hold that the bankruptcy court erred when it refused to consider the repayment of debt not included in the loan discharge proceeding before it in making a determination of good faith under the Brunner test. Further, we affirm the bankruptcy court's conclusion that Tetzlaff has not made a good faith effort to pay down his student loan debt.

    HELD: Hardship found were debtors' status affected by current economic realities

    Court says " ... Brunner framework is an unfortunate relic."

    Johnson v. Sallie Mae (Bankr. Kan. 2015)

    In this case the court found hardship where the debtors were in good health and had college degrees (wife was actually 1 course away from a degree in biology), but had been unable to get employment with sustainable income, the expenses listed by the debtors were unrealistically low, their cars together were 40 years old, the debtors had made good faith efforts to pay the loans, had they had three minor children, and there was a recession.

    Saying it would be " ... wrong to leave debtors in virtual lifetime servitude," the court found hardship, and said –

    "The Court takes judicial notice of the Great Recession and the lumbering recovery of the United States' economy and slow growth since 2008. Debtors' projected expenses make no provision for the unexpected yet inevitable occurrences, in particular those associated with raising three young children. While such unexpected events impose additional hardship on any debtor, the resulting hardship on these Debtors would be undue because they would be incapable of affording essential expenses and deprived of the ability to maintain a minimal lifestyle if forced to repay the Loan."

    "...a substantial percentage of Americans may not be able to buy homes and automobiles, start businesses, invest in capital ventures, educate their children, or save for a secure and dignified retirement because they are overly burdened with debt incurred in completing their postsecondary educations."

    ∗Robert C. Cloud and Richard Fossey, Facing the Student-Debt Crisis: Restoring the Integrity of the Federal Student Loan Program, 40 J.C. & U.L. 467, 495 (2014), citing to Jayne O'Donnell, Consumer Protection Chief Talks About Student Loans, USA Today, Aug. 15, 2013

    McFarland v. Gen. Electric Capital Corp. (In re: Int'l Mfg. Grp., Inc.)

    McFarland v. Gen. Electric Capital Corp. (In re: Int'l Mfg. Grp., Inc.), 538 B.R. 22 (Bankr. E.D. Cal. 2015), the Bankruptcy Court for the Eastern District of California denied defendant General Electric Capital Corporation's (GECC's) FRCP Rule 9 [FRBP Rule 7009] Motion to Dismiss Bankruptcy Trustee's Adversary Proceeding Complaint against GEEC, for failure to plead fraud with the specificity required by Rule 9. Trustee's Complaint alleged that GECC had received 2 million dollars (4 transfers of $500,000 each made by Olivehurst Glove Manufacturers, LLC, an entity which had been substantively consolidated into the IMG bankruptcy case) from the bankruptcy debtor, International Manufacturing Group, Inc. (IMG), and that those 4 transfers were in furtherance of the bankruptcy debtor's Ponzi scheme. considered the sufficiency of a complaint alleging fraudulent transfers in the Ponzi scheme context. Defendant General Electric Capital Corporation (GECC) moved to dismiss the complaint of the plaintiff and trustee, Beverly McFarland.) Per Rules 9(b) and 12(b)(1), all allegations pleaded in the Complaint must be accepted as true. The court denied GECC's Motion to Dismiss Trustee's Complaint.

    First, the Bankruptcy Court ruled that the Complaint's allegations were sufficient to establish the transfers were made with actual intent to defraud creditors, as required in cases alleging actual fraudulent transfers. Specifically, the complaint alleged that each of the transfers were made in furtherance of IMG's Ponzi scheme, when it alleged that the principal of IMG, caused the transfers to appease GECC, in order to prolong the duration of the scheme by: (1) avoiding any adverse final judgment or findings of fact in litigation, (2) preventing knowledge of IMG's various fraudulent schemes, and (3) otherwise enabling IMG to remain in operation and for the fraud to continue. The court found these allegations sufficient to state a claim of actual fraudulent intent.

    Second, the Bankruptcy Court ruled that even though the Complaint on its face properly alleged actual intent, (rendering the Ponzi Scheme presumption unnecessary), it found that in any case, that the Ponzi scheme presumption also applied. The Ponzi Scheme presumption, when it applies, permits a presumption of actual intent to defraud in all transactions in furtherance of a Ponzi scheme. The court found the trustee adequately alleged sufficient connections between the Ponzi scheme and the payments to GECC, triggering the presumption.

    Comment: Courts are not friendly to alleged Ponzi schemes, and are unlikely to throw a Complaint alleging Ponzi scheme out on a pleading sufficiency technicality.

    Ezra v. Seror (In re Ezra)

    Ezra v. Seror (In re Ezra), 537 B.R. 924 (B.A.P. 9th Cir. 2015): The Ninth Circuit Bankruptcy Appellate Panel ruled that res judicata barred an appellant, who had raised one state law limitations argument at trial in defense of a trustee's fraudulent conveyance action, from raising a related but different limitations defense for the first time on appeal. Appellant could not raise the second limitations defense, for the first time on appeal, because an appellate court will not consider such an argument first raised on appeal, except under circumstances not present in the case. The court also decided that the fact that the new theory was generically related to a theory that the defendant did raise below did not rescue it from the no-review rule.

    In re Penrod, F.3d , 2015 Westlaw 5730425 (9th Cir. 2015):

    In re Penrod, F.3d , 2015 Westlaw 5730425 (9th Cir. 2015): The Ninth Circuit has held that a Chapter 13 debtor was entitled to recover $245,000 in fees from a secured lender because she defeated a $7,000 portion of the lender's claim. [.]

    FACTS: A consumer borrowed $32,000 to buy a car worth $25,000. The difference ($7000) was used to pay off the "negative equity" in her old vehicle. Less than two years later, she filed a Chapter 13 petition. The lender asserted a secured claim for $26,000, the amount she still owed on the loan. The debtor proposed a Chapter 13 plan that bifurcated the lender's claim into a secured claim for the value of the car and an unsecured claim for the "negative equity."

    The lender argued that its entire claim should be treated as a "purchase-money security interest" and should therefore be viewed as a secured claim. Construing the infamous "hanging paragraph" of 11 U.S.C.A. § 1325(a), the bankruptcy court ruled that the lender's claim was "purchase-money" only to the extent of the value of the car ($19,000) and was unsecured for the balance ($7,000) because the "negative equity" could not be included in the purchase-money characterization. Eventually, that ruling was affirmed by the BAP and then by the Ninth Circuit.

    Having prevailed on that issue, the debtor then sought to recover $245,000 in attorney's fees from the lender, citing California Civil Code §1717, which transmutes unilateral fee clauses into reciprocal fee clauses for actions based on a contract. The clause contained in the lender's documentation stated: "You will pay our reasonable costs to collect what you owe, including attorney fees, court costs, collection agency fees, and fees paid for other reasonable collection efforts." But the bankruptcy court held that she could not collect her fees because she had not prevailed on the contract per se, since her success against the lender had turned on a question of federal bankruptcy law, rather than on an interpretation of the contract or on state law. The district court affirmed.

    REASONING: The Ninth Circuit reversed, holding that her victory was indeed "on the contract" for purposes of § 1717 because the lender was seeking to enforce the contract against her:

    [The lender] sought to enforce the provisions of its contract with [the debtor] when it objected to confirmation of her proposed Chapter 13 plan. The plan treated [the lender's] claim as only partially secured, but [the lender] insisted that it was entitled to have its claim treated as fully secured. The only possible source of that asserted right was the contract—in particular, the provision in which [the debtor] granted a security interest in her [new car] to secure "payment of all you owe on this contract." (Had the contract not granted [the lender] a security interest in the car, [the lender] could not have asserted a secured claim for any amount . . . .) The security interest conveyed by the contract covered not just the funds [the debtor] borrowed to pay for the [new car], but also the funds she borrowed to refinance the negative equity in [her old car]. The sole issue in the hanging-paragraph litigation was whether this provision of the contract should be enforced according to its terms, or whether its enforceability was limited by bankruptcy law to exclude the negative-equity portion of the loan . . . . By prevailing in that litigation, [the debtor] obtained a ruling that precluded [the lender] from fully enforcing the terms of the contract.

    Citing Travelers Casualty & Surety Co. v. Pacific Gas & Electric Co., 549 U.S. 443, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007), the court noted that contractual fee clauses can be enforced in bankruptcy, even where the issues litigated are questions of federal law, rather than state law or factual issues. Further, under §1717, fees can be awarded even if the outcome depends on purely legal issues:

    Nothing in the text of § 1717 limits its application to actions in which the court is required to resolve disputed factual issues relating to the contract. A party who obtains (or defeats) enforcement of a contract on purely legal grounds, as by prevailing on a motion to dismiss with prejudice or by showing that a defendant's contract-based defenses are barred by federal statute or federal common law, still prevails in an action "on a contract."

    The court concluded its analysis by noting that the lender could have recovered its fees if it had prevailed, thus justifying a reciprocal recovery by the prevailing debtor:

    The contract included—no doubt for [the lender's]—an attorney's fees provision quite broad in scope. The provision was not limited, for example, to actions to determine whether the terms of the contract had been breached. It instead stated that, in the event of default, [the debtor] would be obligated to pay the reasonable attorney's fees [the lender] incurred in attempting "to collect what you owe." That provision encompasses [the lender's] efforts . . . to establish that it held a fully secured rather than a partially secured claim. AmeriCredit wanted to prevail on that issue to ensure that it would collect 100% of what it was owed on the loan. [The lender] had no reason to litigate that issue other than as part of an attempt to collect from [the debtor] what she owed. Whether [the lender] actually would have sought attorney's fees had it prevailed (something it denies) is immaterial. What matters is whether it could have sought fees under the contract, and here it could indeed have done so.

    COMMENT: Note that the Supreme Court's Travelers decision, cited by the circuit court, was nominally a victory for creditors. (For a discussion of that case, see 2007 Comm. Fin. News. 23, Unsecured Creditor May Claim Contractual Attorney's Fees Even Though Litigation Involves Purely Bankruptcy-Related Issues.) But many commentators (including myself) noted that Travelers was really a disguised defeat for creditors. This is from my 2007 discussion of that case:

    In California, and in other states with reciprocal fee statutes such as Civil Code §1717, the decision in this case may result in an ironic result when the creditor is not the prevailing party in the bankruptcy litigation. Since the creditor would have been entitled to a fee award under the contractual fee provision, the debtor (as the prevailing party) should be able to invoke the reciprocal fee statute to obtain recovery from the creditor. The irony, of course, is that although the creditor's unsecured fee claim against the debtor would have been worth very little in most cases, the debtor's fee claim against the creditor will often be fully recoverable. In other words, if I am reading this opinion correctly, the real benefit of this opinion will flow to debtors, not to creditors.

    As predicted, we now have the result in Penrod: the lender that unsuccessfully litigated a $7,000 claim is hit with a §1717 fee award of $245,000. As predicted, the rule in Travelers is not a two-edged sword. It is a sword with one sharp edge and one dull edge. If the creditor prevails, the fee clause is almost useless, since the debtor cannot pay the fees. If the debtor prevails, the creditor has to pay in real dollars.

    I have long urged that it does not make sense for creditors to include broad contractual attorney's fee clauses that encompass fees incurred during bankruptcy proceedings. The only possible exception is in a commercial lending context when the lender is absolutely certain that it will be unassailably perfected and amply oversecured, if and when the borrower files a bankruptcy petition. And in the wake of the 2008 "mortgage meltdown," can anyone ever be certain of oversecured status?

    For discussions of related issues, see 2015-30 Comm. Fin. News. NL 61, Debtor Receives Award of Attorney's Fees After Defeating Lender's Motion for Relief from Stay, Even Though Debtor is Not a Signatory to Loan Documents Containing Fee Clause, and 2015-15 Comm. Fin. News. NL 30, Secured Creditor's Successful Defense Against Avoidance Claims Constitutes "Enforcement" of Loan Agreements Under Attorneys' Fee Clause.

    For a discussion of an earlier opinion in the Penrod saga, see 2008 Comm. Fin. News. 85, "Negative Equity" Does Not Destroy Purchase Money Status of Automobile Loan Under "Dual Status" Rule, but "Negative Equity" Cannot Enlarge Secured Claim of Purchase-Money Lender.

    Foregoing analysis is as reported in 10/20/15 e-newsletter of California State Bar Business Law Section Insolvency Law Committee.

    HSBC Bank v. Blendheim (In re Blendheim)

    HSBC Bank v. Blendheim (In re Blendheim), F.3d , 2015 WL 5730015 (9th Cir. Oct. 1, 2015). 9th Circuit Court of Appeals joins Fourth Circuit, and Eleventh Circuit, in holding that a Chapter 13 debtor can strip from secured, to unsecured, a completely underwater junior DOT loan, owed on debtor's primary residence, in a "Chapter 20" bankruptcy case. "Chapter 20" is bankruptcy slang for a debtor first filing a Chapter 7 bankruptcy case, and receiving a discharge of unsecured debt in that Chapter 7 bankruptcy case, and then soon thereafter filing a Chapter 13 bankruptcy case (7 + 13 + 20), in which debtor is NOT eligible to receive a discharge (because the debtor has too recently had a discharge in Chapter 7) and then using the Chapter 13 case and plan to "lienstrip" the wholly underwater junior DOT loan from secured to unsecured. The US Supreme Court has not yet ruled on whether doing that is allowed.

    Coyle v. United States (In re Coyle)

    Coyle v. United States (In re Coyle), 524 B.R. 863 (Bankr. S.D.Fla., 2015) addresses issues regarding whether a tax can be dischargeable, per 11 USC 523(a)(1), when the debtor's tax return for that tax is filed later than when it was due, but is filed more than 2 years before debtor files bankruptcy.

    In Coyle, the taxpayer filed his tax returns later than they were due, and filed the tax returns after the IRS had already assessed the taxes. In Coyle, the bankruptcy for the Southern District of Florida avoided following the so called McCoy rule (McCoy rule prevents late filed returns from being dischargeable), and instead, based its decision instead on the 4-prong Beard test. Citing Pendergast v. Mass. Dep't of Revenue 510 B.R. 1 (B.A.P. 1st Cir., 2014) the court wrote:

    "The Pendergast court agreed with McCoy that the changes in BAPCPA replaced the Beard test but held that:

    " if a tax return is never filed, then it is clear that the tax obligation is nondischargeable. If a return is filed late, dischargeability depends on the taxpayer's cooperation with the taxing authorities. In Massachusetts, if the debtor engages in self-assessment by filing a late return before the taxing authority assesses a deficiency (analogous to 26 U.S.C. § 6020(a)), then the tax liability may be dischargeable if the return was filed more than two years before the filing of the petition. If the Massachusetts tax authority assesses a deficiency before the debtor's self ... the debtor's tax liability will not be dischargeable.

    "Although this Court is relying on the Beard test, the reasoning in Pendergast is instructive. The IRS Assessment occurred on May 11, 2009, without the Debtor's cooperation and input. After the IRS Assessment, the IRS began its collection efforts. The Debtor then, in response to the IRS's actions, filed her Form 1040 for tax year 2006 in February 19, 2010, roughly two years after a return was due.

    The Debtor's filing of a Form 1040, according to counsel for the IRS ... was never considered a "tax return" by the IRS, but was rather taken as an administrative request to reconsider the IRS Assessment, which the IRS accepted and used to modify the Debtor's tax liability. In sum, because the Debtor filed her Form 1040 for 2006 after the IRS Assessment, it was not an honest and good faith effort to comply with the tax laws. Therefore, the tax owed on the late filed return, was not dischargeable in debtor's bankruptcy, even though debtor filed the late return more than 2 years before debtor filed bankruptcy.

    Fed Interest Rate Countdown Begins Amid Deluge Of Data

    Thursday, 9/17/15, is D-Day for the Federal Reserve to come to a decision on whether to increase interest rates. And the nation's central bank, which keeps insisting its decision is dependent on incoming economic data, will have to sort through an onslaught of data points before it goes public with its decision Sept. 17 at 2 p.m. ET. The Fed is weighing its first rate hike since 2006. The Janet Yellen-led Fed has emphasized that its decision-making is data-dependent. Well, recent U.S. data on jobs, the pace of economic growth, the health of the economy's services sector and sales of durable goods (refrigerators, etc.) all point to the Fed raising short-term rates, currently pegged at 0% to 0.25%, when they break from their two-day policy meeting Thursday. There's a catch, though. If the Fed views the recent financial market turbulence, sparked by a slowdown in China's economy, as a sign of market instability, that could override the strong data and keep the Fed on hold. But this week the Fed gets more fresh data before its closely watched meeting. Tuesday, the Fed will get readings on August retail sales and industrial production, as well as July business inventories and manufacturing in the New York region. Wednesday is critical, too, as the August report on inflation at the consumer level is set for release. Inflation, currently below the Fed's 2% mandate, is key to the Fed's decision-making. [Reported in 9/15/15 Credit & Collection e-newsletter]

    In re Gatewood, a new case, by 8th Circuit BAP, and 11st Circuit Crawford case, disagree

    In re Gatewood, a new case, by 8th Circuit BAP, and 11st Circuit Crawford case, disagree:

    In Gatewood, a Bankruptcy Appellate Panel for the Eighth Circuit has held that a proof of claim filed by a creditor on an out-of-statute debt is not a violation of the Federal Fair Debt Collection Practices Act.

    The debtors had urged the court to follow the Eleventh Circuit's holding in Crawford v. LVNV Funding, LLC, 738 F.3d 1254 (11th Cir. 2014), which said debt-collector creditors who file a time-barred proof of claim in a Chapter 13 bankruptcy case engage in deceptive, misleading, unconscionable, or unfair conduct under the FDCPA. The Crawford court focused on the harm to the debtors and the bankruptcy estate caused by such a filing, in that the onus would be on either the trustee or the debtor to object to the claim, and if they did not, the claim would automatically be allowed and paid, at least in part, to the detriment of other creditors. This potential outcome was deemed unfair, unconscionable, deceptive, and misleading under the "least-sophisticated consumer" standard used by the Eleventh Circuit in FDCPA cases.

    Crawford has been criticized by a number of bankruptcy courts in different circuits, finding that filing a proof of claim on a stale (beyond the statute of limitations) debt does NOT violate FDCPA. Here the Eighth Circuit BAP followed the trend:

    "Filing in a bankruptcy case an accurate proof of claim containing all the required information, including the timing of the debt, standing alone, is not a prohibited debt collection practice" concluded the panel.

    COMMENTARY: Supreme Court Denies Law Firm Payment for Defending Right to be Paid

    On 6/16/15, the US Supreme Court issued its decision in Baker Botts, LLP v. ASARCO, LLC. The US Supreme Court had granted certiorari to decide the issue of: "whether Sect. 330(a)(1) permits a bankruptcy court to award attorneys' fees for work performed in defending a fee application." By a vote of 6-3, with US Supreme Court Justice Thomas writing for the majority, the US Supreme Court held that Bankruptcy Code section 11 USC 330(a) does not give bankruptcy courts the discretion to award fee-defense fees under any circumstances. The Court reasoned that the plain text of the statute, which only permits "reasonable compensation for actual, necessary services rendered by" a professional retained by the estate, does not suffice in the context of fee-defense awards to override the "American Rule" that each party bears its own attorneys' fees. While fees may be awarded for work done in preparing a fee application (per the express language of 11 USC 330(a)(6), the Court found no comparable basis for authorizing compensation for fees incurred in defending an application. Although Baker Botts superintended a challenging reorganization and then successfully defended its fees against all challenges, it took a $5 million hit. According to Prof. Tabb, the law firm should have been allowed to recover compensation for that defense. Not allowing that compensation is unfair to estate professionals, according to Prof. Tabb, and weakens the incentives for the best and brightest professionals to work in the bankruptcy arena. Because the US Supreme Court's decision is based on the "plain language" (ie wording) of Bankruptcy Code section 11 USC 330(a), the decision would likely not apply to attorneys fees sought pursuant to fee shifting statutes, because it has long been the rule that when a prevailing plaintiff's attorney is entitled to be paid attorneys fees, pursuant to a federal fee shifting statute, that the attorney is entitled both to be paid for preparing the attorney's fee application, and for defending the attorney's fee application, if any party in interest objects to that fee application.

    Debt Collection Report Captures Horror Stories

    A new report by the Center for Responsible Lending has revealed what many consumers have known for years. Debt collectors often cross the line with abusive behaviors. From coercive language to outright lies about debt to forged documents, federal and state regulator investigations into debt buyers and debt collectors revealed a pattern of abuses prevalent within the industry. Recent investigations have forced debt collectors to pay tens of millions of dollars in fines for multiple instances of illegal activity. The report comes as several state legislatures are considering legislation to put in place new rules-of-the-road for debt collectors to protect consumers. "People should not be sued and they should not have their wages garnished for debts they do not owe or for stale debts," said Lisa Stifler, a policy counsel at the Center for Responsible Lending and one of the authors of the analysis. "Unfortunately, our analysis shows that consumers are often unfairly hurt by debt collectors making improper use of the court system to collect questionable debts. The burden of proof should be on debt collectors to document that a consumer owes a debt upfront before they initiate a lawsuit." Debt buyers and collectors purchase debt from consumer creditors and then attempt to collect. Unscrupulous collectors often engage in illegal and predatory behavior to pressure or force consumers to pay up. The abusive debt collector's business model often relies on pursuing quick court judgments against consumers. In many cases, consumers do not appear and the resulting default judgments result in wage garnishment. Consumers with similar names, John Smith, for example, have been sued and seen their wages garnished because of incorrect, inadequate or deliberately mistaken documentation.

    Reported in 6/4/15 Credit & Collection e-newsletter

    The Supreme Court issued a unanimous opinion in HARRIS v. VIEGELAHN

    The Supreme Court issued a unanimous opinion, on 5/18/15, in HARRIS v. VIEGELAHN, in favor of the debtor and holding that debtor is entitled to return of any post-petition wages not already disbursed by the chapter 13 trustee, when debtor converts debtor's ch 13 case to ch 7, and the ch 13 trustee is holding plan payments paid to trustee by debtor to fund plan, which Trustee has not yet distributed to the creditors.

    US Supreme Court rules on 6/1/15 that Chapter 7 debtors CANNOT "lienstrip" a junior lien, even if that junior lien is completely "under water", meaning there is not even $1 of equity available to pay the junior lien, after the senior lien(s) are paid in full.

    The U.S. Supreme Court on June 1, 2015, unanimously held in Bank of America, N.A. v. Caulkett that a chapter 7 debtor cannot "strip off" even a totally underwater mortgage under § 506(d), reversing the Eleventh Circuit. In so holding, the Court not only reaffirmed but extended its controversial decision in Dewsnup v. Timm, 502 U.S. 410 (1992), in which the Court had held that a chapter 7 debtor cannot "strip down" a partially underwater mortgage under § 506(d). Many observers had thought -- especially after oral argument in Caulkett -- that the Court might take this opportunity to overturn its much-criticized Dewsnup decision, or at the very least confine it to partially underwater mortgages. Instead, much as Mark Twain once quipped that "the reports of his death were greatly exaggerated," the reports of Dewsnup's demise proved premature. Writing for the Court, Justice Thomas concluded that "Dewsnup's construction of "secured claim" resolves the question presented here." The Court's decision in Caulkett now indicates that mortgage liens are sacrosanct in chapter 7, irrespective of whether they are partially or totally underwater. Whether they will be so in chapter 13 remains to be seen, but mortgagees have a plausible argument to extend Caulkett there as well.

    New Life Adult Medical Day Care Center v. Failla & Banks, LLC, et al. (In re New Life Adult Medical Day Care Center, Inc.,

    New Life Adult Medical Day Care Center v. Failla & Banks, LLC, et al. (In re New Life Adult Medical Day Care Center, Inc.,    BR   , 2014 WL 6851258 (Bankruptcy Court, D. NJ 2014): Held that a fraudulent transfer, made by the debtor, could NOT be avoided and recovered from the recipient of the fraudulent transfer, because recovering the fraudulent transfer would not benefit the bankruptcy estate, and 11 USC 550(a), the Bankruptcy Code section governing recovering fraudulent transfers, only allows recovering a fraudulent transfer where recovering the fraudulent transfer would "benefit the bankruptcy estate" of the debtor. In Medical Day Care Center, recovering the fraudulent transfer would NOT benefit the "bankruptcyestate" of the debtor, because the debtor's chapter 11 joint liquidating plan provided for full payment of all creditor claims. The court noted that because all creditors had been paid in full, and because there would be no reorganized entity, the only entity that stood to benefit from the avoidance of the fraudulent transfer was the equity holder of the debtor. The court noted that recovery that solely benefits the equity owner does not constitute a "benefit for the estate" under § 550(a). Even applying the "broadest application of the ‘benefit of the estate' requirement [of section 550(a)], there is no conceivable benefit to the state, either directly or indirectly," id. at 6, when the debtor's plan will already pay 100% of creditor claims.

    Supreme Court Backs Power of Bankruptcy Judges in Wellness Decision

    On 5/26/15, the U.S. Supreme Court ruled, in Wellness International Network Ltd v. Sharif, that bankruptcy judges have the power to make final judgments in certain disputes if everyone involved consents to the arrangement, the Wall Street Journal reported today. In a 6-3 ruling, the Court reversed a Seventh Circuit finding that the bankruptcy court didn't have the constitutional authority to decide whether certain property belonged to the bankruptcy estate because the dispute also involved state law issues. Justice Sonia Sotomayor, writing for the court, said that bankruptcy courts can be the final arbiter of disputes so long as those involved consent to the arrangement. "Adjudication based on litigant consent has been a consistent feature of the federal court system since its inception," she said in the 19-page ruling. "Reaffirming that unremarkable fact, we are confident, poses no great threat to anyone's birthrights, constitutional or otherwise." It was the third time in the last four years that the Court has faced the question of the power of the bankruptcy court. Four justices joined Justice Sotomayor's opinion in full, with Justice Samuel Alito joining in part. Justices John Roberts, Antonin Scalia and Clarence Thomas dissented.

    Ninth Circuit Court of Appeals Made a Ruling in Favor of Debt Collection Industry

    On May 12, 2015, the Ninth Circuit Court of Appeals ruled 3-0 in favor of the credit and collection industry in the case of Kubler Corporation, dba Alternative Recovery Management v. Diaz, 14-55235 (9th Cir., May 12, 2015). The issue on appeal was the district court's decision that California law does not permit a creditor without a contractual interest provision to claim and collect interest prior to a court awarding prejudgment interest. The Ninth Circuit held that California law can entitle a creditor to interest even without a prior judgment. Consequently, the court found that the collection agency did not violate the Fair Debt Collection Practices Act when it sent a collection letter to the consumer seeking to recover the principal amount of the debt, plus prejudgment interest calculated at the statutory rate of 10 percent. The court reasoned that the collection agency would have been entitled to prejudgment under California state law because said law allows recovery of prejudgment interest on a debt that is certain or capable of being made certain, even if a judgment has not yet been obtained. The court ruled that"...just because prejudgment interest can be awarded if a plaintiff prevails in court does not mean the plaintiff was not entitled to prejudgment interest even before."

    Supreme Court Holds that Denial of Confirmation of a Plan is Not an Appealable Final Order

    On 5/4/15, the U.S. Supreme Court unanimously decided, in case Bullard v. Blue Hills Bank, Case No. 14-116, that a bankruptcy court's order denying confirmation of a debtor's proposed chapter 13 plan is not a final order that the debtor can immediately appeal under 28 U.S.C. Sect. 158(a)(1) and (d)(1). The Court resolved a split among the Courts of Appeals, adopting the majority view. Interestingly, the Court rejected the argument of the Solicitor General, who had joined the debtor in arguing that denial of plan confirmation should be treated as an appealable final order, just as confirmation of a plan is indisputably a final order. While the case involved a chapter 13 plan, the Court's reasoning should be equally applicable to denial of a chapter 11 plan. Furthermore, Bullard will be compelling authority to deny immediate appeal of other important rulings during a case denying requested relief, most notably perhaps requests for extensions of time, which the Court singled out as being non-final and therefore not appealable without leave of court.

    Posted on 5/4/15 on the American Bankruptcy Institute e-website, written by Prof. Charles J. Tabb of University of Illinois College of Law

    Will a Debtor with the Right to Appeal an Order Denying Confirmation of a Bankruptcy Plan be Less Likely to Negotiate with Creditors? Justices Examine in Bullard

    The Supreme Court on April 1 heard oral argument in Bullard v. Blue Hills Bank, the second of two bankruptcy cases that the Court heard that day (an analysis of Harris v. Viegelahn appeared in Tuesday's edition of the ABI Bankruptcy Brief). In Bullard, the Court took up the question of whether an order denying confirmation of a chapter 13 plan with leave to file an amended plan is a final order appealable as of right. While several Justices were skeptical of the dire consequences cited by respondent Blue Hills Bank, they also recognized that a debtor with the right to appeal an order denying confirmation of his plan might have less incentive to negotiate an acceptable compromise with his creditors.

    This report appeared in the 4/9/15 e-newsletter of ABI (American Bankruptcy Institute), written by by Prof. Anne Lawton ABI Resident Scholar

    Who Gets Funds Held By Ch. 13 Trustee When Case Converts to Chapter 7? Supreme Court Looks to Policy, Equity and the Code During Oral Argument

    On Wednesday, April 1, 2015, the U.S. Supreme Court heard oral argument in two bankruptcy cases: Harris v. Viegelahn and Bullard v. Blue Hills Bank. The issue for the Court in Harris is whether funds already paid to, but not yet disbursed by, the chapter 13 trustee should revert to the debtor or be distributed to creditors when the debtor converts his case to chapter 7 after confirmation of his chapter 13 plan. Many of the questions that the Justices asked at oral argument focused not on the nuances of statutory language, but rather on the usefulness of trust law principles in analyzing proposed distribution rules, the wisdom of creating a rule of distribution based on little more than happenstance, and the desire to adopt a rule consistent with Congress's intent to provide debtors with incentives to file for relief under chapter 13.

    The above, written by Prof. Anne Lawton, ABI Resident Scholar, appeared in ABI (American Bankruptcy Institute) e-newsletter of 4/7/15. ABI reports that it will also publish an analysis of the the oral argument in Bullard, the companion case to Harris, in 4/9/15 ABI e-newsletter.

    Supreme Court, Advocates Struggle with Dewsnup at Oral Argument on Lien Stripping

    On Tuesday, March 24, 2015, the Supreme Court heard oral argument in the consolidated cases of Bank of America, N.A. v. Caulkett and Bank of America, N.A. v. Toledo-Cardona. The Supreme Court granted certiorari in Caulkett and Toledo-Cardona to decide whether a chapter 7 debtor may "strip off" a junior mortgage lien, pursuant to Sect. 506(d), when the debt owed to the senior lienholder exceeds the current value of the collateral. In its 1992 decision in Dewsnup v. Timm, the Supreme Court held that Sect. 506(d) did not permit the chapter 7 debtors to "strip down" a lien to the current value of the collateral. Finding the Code's text ambiguous, the Dewsnup Court explained that Congress did not intend to depart from the pre-Code rule that liens pass through bankruptcy unaffected. Because the creditors' claim in Dewsnup was allowed and secured by a lien, even though the claim amount exceeded the collateral's value, the Court concluded that the chapter 7 debtors could not "void" the lien, pursuant to Sect. 506(d). The issue in Caulkett and Toledo-Cardona is whether Dewsnup's holding in the context of a partially underwater mortgage applies to cases with totally underwater second mortgages.

    This case discussion is from 4/1/15 ABA e-newsletter, written by an ABI resident Scholar, Prof. Anne Lawton.

    US Supreme Court has heard argument in, and has "under submission" (awaiting Court ruling) on Court's THIRD case on jurisdiction of Bankruptcy Courts since 2011:

    Since 2011, the Supreme Court has decided two cases relating to the constitutional authority of Bankruptcy Courts to enter final judgments in proceedings that are outside the resolution of the debtor-creditor relationship and that seek to augment the bankruptcy estate. Stern v. Marshall, 131 S. Ct. 2594 (2011) and Executive Benefits v. Arkison, 134 S. Ct. 2165 (2014). In January 2015, the Supreme Court heard arguments in its third bankruptcy jurisdiction case in four years. Wellness International v. Sharif, No. 13-935, places at issue both the constitutional authority of the bankruptcy court to enter final judgment that a chapter 7 debtor is the alter ego of a trust for which the debtor is the trustee but not a beneficiary, as well as the necessity and character of consent to enter such a final judgment.

    The pivotal issue in Sharif is whether a state law alter ego claim against the chapter 7 debtor is a Stern claim. Depending on the Court's disposition of this issue, it may not reach the issue of consent.

    Petitioner Wellness International has a long history of chasing Debtor Sharif, including obtaining default judgment against him as a plaintiff in Texas, which led to discovery in aid of collection efforts. Sharif allegedly evaded answering discovery and ultimately filed a chapter 7 petition. Debtor failed to list assets that he contends are assets of a trust his mother created and for which Debtor serves as trustee and his sister is the beneficiary. He testified about these assets, answered discovery relating to these assets but did not escape Wellness's complaint objecting to his discharge. Wellness included as Count V in its complaint a claim for determination that the trust is the alter ego of the Debtor and that trust assets are property of the estate pursuant to §541.

    The parties do not dispute that a debtor's legal title over trust assets does not render those assets property of the estate. 11 U.S.C. §541(d).

    From this starting point, the parties' views diverge. Unsurprisingly, the manner in which the parties frame the dispute is markedly different. Wellness presents its position in terms of the jurisdiction of the Bankruptcy Court to decide what is property of the estate. It asserts that the Bankruptcy Court indisputably has exclusive jurisdiction over property of the estate, which only arises when the Debtor filed his bankruptcy petition. Thus, a dispute with the Debtor over what is and what is not property of the estate "stems from bankruptcy," coining a phrase from Stern, and could only arise post-petition because the estate is created solely by the filing of a petition. §541(a). Thus, according to Wellness, the resolution of the alter ego theory derives entirely from §541. That state law is determinative does not transform the Bankruptcy Code action into a state law action, Wellness argues, if for no other reason than long-standing bankruptcy jurisprudence holds that the debtor's interest in property in bankruptcy is defined by state law.

    In contrast, Debtor characterizes Count V solely as a common law alter ego claim that seeks to extinguish property interests of third parties (the trust and the sister) and to augment Debtor's estate by those trust assets, much like a fraudulent conveyance action. Because Debtor held bare legal title to the assets in trust, they never become part of the estate, Debtor argues, and because Wellnesse's effort to augment the Debtor's estate does not derive from or depend on bankruptcy law, Stern holds that the Constitution reserved these claims in the federal system to Article III courts rather than tribunals controlled by Congress or by the Executive. Leaning heavily on the reasoning of Stern upholding the separation of power between the branches of government, the Debtor argues that Count V is a Stern claim because, although it appears to arise under the rubric of §541, it nonetheless is a common law claim that seeks to augment the estate with assets owned by a third party. As such, the Bankruptcy Court did not have jurisdiction to enter final judgment.

    The Seventh Circuit held in favor of the Debtor on this first issue. Its resolution in the Supreme Court may turn on whether the Court accepts Wellness's characterization of Count V as a core matter stemming from §541 or the Debtor's characterization that Count V is at most non-core as a purely state law claim that seeks to augment the estate with property in which third parties have an interest.

    The second issue, which Wellness contends only arises if the Supreme Court concludes that Count V is a Stern claim, is whether the Bankruptcy Court could properly exercise the judicial power of the United States by the litigants' consent and, if so, whether implied consent is sufficient to satisfy Article III. Wellness argues that the Debtor admitted that the entire adversary proceeding was core and that the Debtor never raised the Stern claim until well into briefing at the Seventh Circuit. Wellness also argues that Article III protects primarily "personal" rights as opposed to "structural" rights and that personal rights are subject to waiver. Wellness contends that Article III is not structurally at issue because the Bankruptcy Court was operating within the judicial branch and exercising jurisdiction over Stern claims upon referral and with the litigants' consent.

    Not so, proclaims the Debtor, who argues that the structural Article III issue may not be cured by consent, which may only be given expressly. F.R.B.P. 7012(b). The nature of the Article III violation is by definition structural, according to the Debtor, because of the separation of powers and the right of an individual to an independent judiciary in certain cases, not judges subject to legislative and executive manipulation. Accordingly, the violation of Article III could not be waived and was not waived.

    The Court heard argument in January and is expected to render a decision before the end of the term.

    This article was written by C. Lee and appeared in American Bankruptcy Institute Consumer Bankruptcy Committee e-newsletter in March 2015

    Supreme Court Hears Oral Argument in Mortgage Lien-Stripping Cases

    The Supreme Court heard oral argument today in the cases of Bank of America v. Caulkett and Bank of America v. Toledo-Cardona, and its decision later this year could have big implications for the U.S. housing market, the Financial Times reported today. The cases present the Supreme Court with the issue of whether, under Sect. 506(d) of the Bankruptcy Code (which provides that "[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void"), a chapter 7 debtor may "strip off" a junior mortgage lien in its entirety when the outstanding debt owed to a senior lienholder exceeds the current value of the collateral. The debate in the Supreme Court today centered on the 1992 case of Dewsnup in which the court ruled that a borrower could not reduce a primary mortgage to the value of the property. Bank of America argued that the same logic should apply whether a loan is a primary mortgage or a junior debt. While it was unclear from the judges' questions today how they would rule, several of the nine members, including Justice Antonin Scalia, who dissented in the original Dewsnup decision, hinted that the Court might need to limit or reconsider the Dewsnup ruling itself. At one point, Justice Elena Kagan interrupted Stephanos Bibas, the lawyer representing the people who owned the homes, to say: "My sort of reaction to this case is that these distinctions that you are drawing between partially underwater and fully underwater are not terribly persuasive. But the only thing that may be less persuasive is Dewsnup itself."

    In re Hoilien

    In re Hoilien,    BR   , 2015 WL 509564 (Bankr.D. Hawaii February 3, 2015): Bankruptcy Court held that creditor that proceeded with foreclosure of debtor's real property did not violate the bankruptcy automatic stay by doing so, because there was no stay, because the bankruptcy case in issue was the individual debtor's third bankruptcy case ongoing in 2014 (ie ongoing within a single year), and debtor had no obtained an order from the bankruptcy court, imposing a stay in the third case. Debtor hadn't even moved bankruptcy court to impose stay, in the third bankruptcy case. Per 11 USC 362(c)(4) of the Bankruptcy Code, where an individual debtor has 3 bankruptcy cases within a 1 year period, there is no bankruptcy automatic stay as to proceeding against debtor, in the third bankruptcy case of the 3, unless debtor moves to have a stay imposed, and the bankruptcy court grants debtor's motion. Such motions are difficult to get granted. Some cases say that for third case, no stay as to debtor, but there still is a stay as to property of the bankruptcy estate. Hoilien found no stay at all.

    In re Motors Liquidation Co.

    In re Motors Liquidation Co.,     F3d    , 2015 Westlaw 252318 (2d Cir. 2015): The Second Circuit has held that a lender and its counsel had inadvertently authorized the filing of an erroneous termination statement, thus invalidating the lender's $1.5 billion security interest. This case is an additional "secured lenders better not make mistakes" case, which is truly terrifying for secured lenders.

    Facts: A secured lender intended to file a termination statement (a "UCC-3") in order to release its lien securing a $300 million synthetic lease. Unfortunately, the termination statement also erroneously included language releasing a lien securing an unrelated $1.5 billion term loan, which was directly contrary to the intent of both the lender and the borrower. The Second Circuit's vivid recitation of the facts described how this disaster occurred:

    A ... partner [in the borrower's law firm] assigned the work to an associate and instructed him to prepare a closing checklist and drafts of the documents required to pay off the Synthetic Lease and to terminate the lenders' security interests in [the borrower's] General Motors' property relating to the Synthetic Lease. One of the steps required to unwind the Synthetic Lease was to create a list of security interests held by [the borrower's] lenders that would need to be terminated. To prepare the list, the ... associate [in the borrower's law firm] asked a paralegal who was unfamiliar with the transaction or the purpose of the request to perform a search for UCC–1 financing statements that had been recorded against [the borrower] ... The paralegal's search identified three UCC–1s ... Neither the paralegal nor the associate realized that only the first two of the UCC–1s were related to the Synthetic Lease. The third [financing statement] related instead to the Term Loan.
    When [the borrower's counsel] prepared a Closing Checklist of the actions required to unwind the Synthetic Lease, it identified the Main Term Loan UCC–1 for termination alongside the security interests that actually did need to be terminated. And when [the borrower's counsel] prepared draft UCC–3 statements to terminate the three security interests identified in the Closing Checklist, it prepared a UCC–3 statement to terminate the Main Term Loan UCC–1 as well as those related to the Synthetic Lease.
    No one at [the borrower], [the borrower's law firm], [the lender], or [the lender'] counsel ... noticed the error, even though copies of the Closing Checklist and draft UCC–3 termination statements were sent to individuals at each organization for review ... All three UCC–3s were filed with the Delaware Secretary of State, including the UCC–3 that erroneously identified for termination the Main Term Loan UCC–1, which was entirely unrelated to the Synthetic Lease.

    The borrower (General Motors) later filed a bankruptcy petition. Its unsecured creditors' committee filed an adversary proceeding, seeking a determination that the lender's $1.5 billion term loan was completely unsecured, as a result of the erroneous termination statement. The bankruptcy court granted summary judgment in favor of the lender. The Second Circuit Court of Appeals certified a question to the Delaware Supreme Court, asking if the subjective intent of the secured creditor was relevant. In Official Committee of Unsecured Creditors of Motors Liquidation Co. v. JPMorgan Chase Bank, N.A., - A.3d -, 2014 Westlaw 5305937 (Del.), the Delaware Supreme Court held that if a secured party authorizes the filing of a UCC–3 termination statement, then that filing is effective to terminate all UCC-1 financing statements covered by the termination statement, regardless of whether the secured party subjectively intends to do so or understands the effect of that filing.

    In the wake of that opinion, the Second Circuit held that there was just one remaining question: "Did [the lender] authorize the filing of the UCC–3 termination statement that mistakenly identified for termination the Main Term Loan UCC–1?"

    Reasoning: The lender argued strenuously that it never instructed anyone to file the UCC–3 in question, and the termination statement was therefore unauthorized and ineffective. The lender claimed that it authorized the borrower only to terminate security interests related to the synthetic lease; that it instructed its law firm and the borrower's law firm to take actions to accomplish that objective, and no other; and that therefore the borrower's law firm exceeded the scope of its authority when it filed the UCC–3 purporting to terminate the main term loan UCC–1.

    The court disagreed, holding that the lender and its counsel never expressed any concerns about the transaction, even though they had supposedly reviewed it thoroughly:

    After [the borrower's counsel] prepared the Closing Checklist and draft UCC–3 termination statements, copies were sent for review to a Managing Director at [the lender] who supervised the Synthetic Lease payoff and who had signed the Term Loan documents on [the lender's] behalf. [The borrower's law firm] also sent copies of the Closing Checklist and draft UCC–3 termination statements to [the lender's] counsel . . . to ensure that the parties to the transaction agreed as to the documents required to complete the Synthetic Lease payoff transaction. Neither directly nor through its counsel did [the lender] express any concerns about the draft UCC–3 termination statements or about the Closing Checklist. [An attorney in the lender's law firm] responded simply as follows: "Nice job on the documents ..."
    After preparing the closing documents and circulating them for review, [the borrower's law firm] drafted an Escrow Agreement that instructed the parties' escrow agent how to proceed with the closing. Among other things, the Escrow Agreement specified that the parties would deliver to the escrow agent the set of three UCC–3 termination statements (individually identified by UCC–1 financing statement file number) that would be filed to terminate the security interests that [the borrower's] Synthetic Lease lenders held in its properties. The Escrow Agreement provided that once [the borrower] repaid the amount due on the Synthetic Lease, the escrow agent would forward copies of the UCC–3 termination statements to [the borrower's] counsel for filing. When [the borrower's law firm] e-mailed a draft of the Escrow Agreement to [the lender's] counsel for review, the same ... attorney [acting on behalf of the lender] responded that "it was fine" and signed the agreement.
    From these facts it is clear that although [the lender] never intended to terminate the Main Term Loan UCC–1, it authorized the filing of a UCC–3 termination statement that had that effect.

    Comment of Loyola Law School Professor Dan Schecter, who wrote this analysis, published in California State Bar Insolvency Committee e-newsletter of 2/11/15: This is the correct result from a legal standpoint, but it is so easy to imagine one's self in the position of the attorneys who failed to catch this error. As we now know, there were quite a few people who could have fixed the problem, but everyone's eyes glazed over when confronted with the long checklist of documents to review. There were so many people involved in the process that no one took "ownership" of the end result. This may be a corollary of the well-documented "bystander effect," a psychological phenomenon in which the greater the number of people present, the less likely any individual is to take responsibility for a problem.

    There are two other hidden messages in this tragic fact pattern: first, counsel for a lender should not blindly trust the borrower's counsel to protect the lender's interests. Second, when junior staff has been given the task of preparing the first draft of a key document, a senior lawyer with intimate knowledge of the client's business affairs must carefully review the document before the document is put into final form.

    Finally, I [Professor Schecter] will take the liberty of repeating something I wrote in my discussion of the Delaware Supreme Court's earlier ruling:

    This opinion should be required reading for all first year law students, who are often astonished that law professors require them to read long cases, documents, and statutes in excruciating detail. Someone fell asleep at the switch in this case, and did not re-read the termination statement. Roughly $1.5 billion went up in smoke, possibly exposing a major law firm to a ruinous malpractice verdict. (I hope not.) I often tell my students that one key difference between laypeople and lawyers is that we lawyers develop the ability to read, understand, and think carefully about the fine print, hour after hour, day after day, year after year. If that sounds like hard work, that's because it is.

    For a discussion of the Delaware Supreme Court's opinion, see 2014-44 Comm. Fin. News. NL 89, Lien Securing $1.5 Billion Debt is Invalid Because of Overbroad Termination Statement, Even Though Lender Did Not Intend to Release That Lien.

    For discussions of other cases dealing with related issues, see:

    • 2011 Comm. Fin. News. 44, Escrow Agent's Mistaken Filing of Overbroad Amendment to Financing Statement Is Not Binding on Secured Party, When Agent Exceeds Scope of Authority.
    • 2012 Comm. Fin. News. 67, Filing of "Correction Statement" Is Insufficient to Revive Security Interest Following Erroneous Filing of Termination Statement; Belated Filing of New Financing Statement Is Avoided As Preferential.

    In re Duckworth

    In re Duckworth,     F3d    , 2014 Westlaw 7686549 (7th Cir. 2014): The Seventh Circuit has held that a lender's security interest in crops and equipment was void because the security agreement referred to a promissory note dated "December 13," instead of "December 15," the correct date of execution; further, incorporation by reference did not cure the defect because the definitions contained in the document were circular. Case is a warning to secured creditors to make sure that security agreements and other transactional documents are accurate.

    In re Virgin Offshore U.S.A., Inc.

    In re Virgin Offshore U.S.A., Inc., 2015 Bankr. LEXIS 233 (Bankr. E.D. La. January 26, 2015): The Bankruptcy Court for the Eastern District of Louisiana held that a Chapter 11 trustee's compensation is subject to the lodestar factors listed in 11 USC 330(a)(3) of Bankruptcy Code. when determining reasonable compensation, and that Section 330(a)(7) does not create a presumption that the statutory maximum provided for in Section 326 is reasonable compensation. Shows Courts are beginning to re-think blindly allowing Trustee's fees in the statutory maximum amount allowed by 11 USC 326. Even though this decision involved a Chapter 11 trustee, all trustees should be careful to keep detailed time sheets in case a court wants to review them in determining reasonable compensation.


    A Chapter 11 trustee ("Trustee") submitted a third and final fee application for consideration by the Bankruptcy Court. The Trustee requested compensation calculated under Section 326 as a percentage of the funds distributed in the case to administrative, secured, and unsecured creditors. The court did not allow the full amount of the commission calculated under Section 326, but rather allowed fees in a reduced amount, taking into consideration the lodestar factors set forth in Section 330(a)(3), as well as other "relevant factors." The court considered other relevant factors such as: (1) the Trustee received an additional three percent of the fees awarded to the Trustee's counsel because the Trustee was a member of the law firm that represented him; and (2) the court had to force the case to conclusion despite counsel for the Trustee initially advising that the case would be concluded in a matter of months.

    The court held that the factors listed in Section 330(a)(3) must be considered in determining reasonable compensation to a Chapter 11 trustee. The court examined the Trustee's billing statements, finding all of the time entries were reasonable. The court allowed compensation for all time billed but only at the lowest billing rate reflected on the Trustee's billing statements of $375 per hour. The amount allowed was less than the amount calculated under Section 326.


    Section 330(a)(7) provides that a trustee's compensation shall be treated as a commission under Section 326. Section 326 states that in a Chapter 7 or 11 case, the court may allow reasonable compensation to a trustee under Section 330 not to exceed certain amounts based on a percentage of the assets distributed in the case. For a Chapter 11 trustee, Section 330(a)(3) sets forth certain factors the court must review in determining reasonable compensation.

    The court held that the more specific Section 330(a)(3) controls, rather than the more general Section 326 and as such, the factors set forth in Section 330(a)(3) must be examined in determining a Chapter 11 trustee's compensation. Further, the court held that, contrary to the Trustee's position, Section 330(a)(7) does not create a presumption that a trustee should receive the maximum compensation allowed under Section 326. If it did, then Section 330(a)(3) would be unnecessary. Rather, Section 330(a)(7) merely "incorporates the limitations of section 326 on any determination made under section 330(a)(3)."

    This review is from the California State Bar Insolvency Committee e-newsletter of 2/23/15

    Elliott v. Weil (In re Elliott)

    In Elliott v. Weil (In re Elliott),     B.R.    , 2014 WL 6972472 (9th Cir. BAP 2014), the U.S. Bankruptcy Appellate Panel of the Ninth Circuit ("BAP") held that Law v. Siegel,     U.S.    , 134 S.Ct. 1188 (2014), abrogated Ninth Circuit authority under which a debtor's exemption could be denied, or under which a debtor could be denied the right to amend his or her exemptions, on the basis of bad faith or prejudice to creditors.


    In an effort to conceal his Los Angeles home from judgment lien creditors, Edward Elliott ("Elliott") transferred his residential real property to a business entity formed by the son of a former associate. The property was later transferred to another corporation formed and controlled by Elliott. Then, in December 2011, Elliott filed a chapter 7 petition. He failed to schedule any interest in the property or the corporation and he omitted certain judgment lien creditors. According to his schedules and testimony at his 341(a) meeting of creditors, he lived in Granada Hills and owned no real property. Relying on the schedules and Elliott's testimony, the trustee filed a "no asset" report, Elliott was granted a discharge, and the case was closed.

    A few weeks later, Elliott's corporation quitclaimed the residence back to Elliott for no consideration. Elliott advised his judgment lien creditors that he acquired the property postpetition, and demanded that their judicial liens be removed. After an investigation, the judgment lien creditors successfully moved to reopen Elliott's bankruptcy case.

    In June 2013, the trustee filed a complaint for turnover of the property and revocation of Elliott's discharge. In April 2014, the bankruptcy court granted summary judgment, revoked the discharge, vested title to the property in the trustee, and ordered that the property be turned over to the trustee. Elliott did not appeal the judgment.

    While the adversary was pending, and almost one year after the case was reopened, Elliott amended his schedules to disclose an interest in the property and claim a $175,000 homestead exemption therein. The trustee objected to the claimed exemption due to Elliott's bad faith concealment of the asset. The trustee also argued that Elliott could not claim a homestead exemption because he did not hold title to the property on the petition date. The bankruptcy court sustained the trustee's objection on the basis that the debtor belatedly claimed the exemption in bad faith, but did not address the trustee's alternative argument. Elliott appealed. Less than one month after the appeal was filed, the U.S. Supreme Court issued its decision in Law v. Siegel.


    The BAP first concluded that Law v. Siegel abrogated Ninth Circuit authority under which exemptions could be denied if a debtor acted in bad faith or creditors had been prejudiced. See Martinson v. Michael (In re Michael), 163 F.3d 526 (9th Cir. 1998); Arnold v. Gill (In re Arnold), 252 B.R. 778 (9th Cir. BAP 2000). Although the bankruptcy court's ruling was supported by then-existing Ninth Circuit law, under Law v. Siegel, unless statutory power exists to do so, a bankruptcy court may not deny a debtor's exemption claim – or bar a debtor from amending his or her exemptions - on the basis of bad faith or prejudice to creditors.

    Second, the BAP addressed the trustee's argument that Elliott could not claim a homestead exemption because he did not own the property on the petition date. The BAP held that for purposes of CCP § 704.730, continuous residency, not continuous ownership, controls the analysis. That exemption applies to any interest in the property so long as the debtor satisfies the continuous residency requirement set forth in CCP § 704.710(c). Because the bankruptcy court's inquiry was confined to Elliott's bad faith, the BAP remanded for the bankruptcy court to determine whether Elliott was, in fact, entitled to a homestead exemption under CCP § 704.730.

    Third, the BAP identified an alternative statutory basis for denying Elliott's homestead exemption on remand. Section 522(g) provides that a debtor may claim an exemption in previously-transferred property that a trustee recovers under sections 510(c)(2), 542, 543, 550, 551 or 553 if "such transfer was not a voluntary transfer of such property by the debtor" and "the debtor did not conceal such property." Since the trustee prevailed in her turnover action under section 542, Elliott's right to claim an exemption is limited by section 522(g), and the BAP suggested that the limitation be considered on remand.


    Some bankruptcy courts interpret Law v. Siegel narrowly, limiting its holding to cases in which trustees seek to surcharge exemptions after the objection period has expired. These courts continue to follow Michael and Arnold, sustaining timely filed objections when debtors conceal assets and then amend their schedules to claim exemptions after trustees discover and incur expenses administering those assets. The trustee in Elliott conceded the point in her brief, so the BAP's decision was rendered without the benefit of a party advocating a contrary position. Before bankruptcy courts, this likely remains an open issue.

    This analysis appeared in 2/20/15 California State Bar Insolvency Section e-newsletter, written by attorney John Tedford, Esq.

    In re Genmar Holdings, Inc., 2015 Westlaw 350721 (8th Cir. 2015): Preference decision (11 USC 547 of Bankruptcy Code governs preferences). The Eighth Circuit Court of Appeals held that even though there was a very short lag between the date that the debtor incurred an obligation to pay and the actual date of payment, a preference recipient was unable to invoke the "substantially contemporaneous" defense because the parties did not intend that the payment would actually be contemporaneous.

    Tamm v. U.S. Trustee (In re Hokulani Square, Inc.)

    Tamm v. U.S. Trustee (In re Hokulani Square, Inc.),     F.3d    , 2015 WL 305540 (9th Cir. 2015): On 1/26/15, the U.S. Court of Appeals for the Ninth Circuit issued its decision in Tamm v. U.S. Trustee (In re Hokulani Square, Inc.),. On appeal from the U.S. Bankruptcy Appellate Panel of the Ninth Circuit, the Ninth Circuit affirmed the BAP's reversal of the bankruptcy court's compensation award to a chapter 7 trustee that included fees calculated on a secured creditor's credit bid on real property of the bankruptcy estate. The Ninth Circuit held that Bankruptcy Code section 326(a) allows reasonable compensation for "moneys" disbursed by the trustee, which does not include property disbursed to a secured creditor on a credit bid. This is a significant decision because secured creditors often "credit bid" (ie, bid the amount the bankruptcy debtor owes the creditor, secured by the property the debtor's property that the bankruptcy trustee is selling), to purchase the property, from the "bankruptcy estate" of the debtor.

    The Ninth Circuit framed the issue on appeal as whether or not the trustee's compensation, per 11 USC 326(a), may reflect the value of a credit bid. The court stated that section 326(a) authorizes the bankruptcy court to award a trustee fees "up to a cap that is calculated as a percentage of ‘all moneys disbursed or turned over in the case by the trustee to parties in interest.'" (Emphasis added by the court). Applying the ordinary meaning to "moneys disbursed or turned over," the Ninth Circuit concluded that "moneys" means a medium of exchange, "disbursed" means to pay out, and "turned over" means to deliver or surrender. Thus, the statute seems to say that the trustee can only collect fees for those transactions where interested parties are paid "in some form of generally accepted medium of exchange."

    In a credit bid transaction, only the property is "disbursed or turned over" to the secured creditor. "However broadly we define ‘moneys,' the term can't be expansive enough to encompass real estate, which is about as far from a ‘medium of exchange' as one can get." The statute, as written, specifically uses the narrow term "moneys." Congress could have used the broader terms "property" or "assets" but chose not to do so.

    The court stressed that both the legislative history of section 326(a) and the decisions of other circuit courts that have analyzed the issue confirm the Ninth Circuit's interpretation. A House Judiciary Committee report explicitly states that section 326(a) does not include cases where the trustee turns over the property to the secured creditor or abandons the property permitting the secured creditor to foreclose. H.R. Rep. No. 95-595, at 327 (1977). Both the Fifth Circuit and Third Circuit held that section 326(a) does not allow the trustee to collect compensation based upon the value of property turned over to a secured creditor on a credit bid. See In re England, 153 F.3d 232, 235 (5th Cir. 1998); In re Lan Assocs. XI, L.P., 192 F.3d 109, 117-118 (3d Cir. 1999).

    The trustee argued that pre-Bankruptcy Code cases demonstrated that section 326(a) should be interpreted to include compensation even where no money changes hands. The Ninth Circuit rejected that argument. Historical practice cannot overcome clear language in the Bankruptcy Code. Moreover, the historical practice showed conflicting evidence, with courts coming out on both sides of the issue with regards to a trustee being compensated for credit bids. No prior Ninth Circuit case had addressed the credit bid question. Finally, the Ninth Circuit disagreed with the trustee's argument that not counting credit bids resulted in the "absurd" result that the trustee could be compensated for a third party cash bid at auction, but not for a credit bid that exceed the cash bid by a dollar. Congress could have intended to motivate trustees to seek out third party buyers. The court will disregard the text of a statute only where it is impossible that Congress intended the result and where the alleged absurdity is so clear as to be obvious. That is not the situation here, where the text is rational.

    Every circuit court that has decided this issue, to date, has refused to pay trustee fee on the "credit bid" amount. As the Ninth Circuit pointed out, this could motivate trustees to seek third party buyers, which would benefit bankruptcy estates.

    In re Sui     BR    , 2014 WL 5840246

    In re Sui     BR    , 2014 WL 5840246 (9th Cir. BAP 11/10/14), BAP case number 11-20448-CB: In Sui, Chapter 7 debtor Yan Sui ("Debtor") and non-debtor Pei-yu Yang ("Ms. Yang"), both acting pro se, appealed jointly from a bankruptcy court order barring each of them from filing "initiating documents" in the Debtor's bankruptcy case without advance review by the bankruptcy court and a determination that such documents were meritorious. The order also required the Debtor and Ms. Yang to obtain leave from the bankruptcy court before filing suit in any forum against the Chapter 7 trustee, Richard A. Marshack (the "Trustee"), or his professionals.

    The U.S. Bankruptcy Appellate Panel for the Ninth Circuit ("BAP") upheld the general validity of the bankruptcy court's "pre-filing" relief, but vacated the original order and remanded it to the bankruptcy court for an amendment consistent with Ninth Circuit authority.

    The BAP Sui decision is "not for publication", which means anyone citing that decision must state the decision is a "not for publication" decision. Not for publication decisions can have persuasive force, but are not precedent.

    Supreme Court Doubleheader

    The National Association of Consumer Bankruptcy Attorneys ("NACBA") reports, in its 2/3/15, e-newsletter to members, that NACBA has filed amicus briefs, in two bankruptcy cases on which the US Supreme Court has granted petitions of certiorari, as follows:

    NACBA filed amicus briefs on Monday in two Supreme Court cases: Harris v. Veigelahn, 14-400, and Bullard v. Blue Hills Bank, 14-116.

    Harris asks whether funds paid into a confirmed chapter 13 plan that are still in the trustee's possession when the bankruptcy is converted to chapter 7 should be refunded to the debtor or paid to creditors. At the time of conversion, the trustee was holding funds originally designated for the debtor's mortgagee, but more than $4,300 in funds were not disbursed because the mortgagee obtain relief from stay and foreclosed on the debtor's home. Neither the trustee nor the debtor sought to modify the plan. Instead, the debtor converted the case to Chapter 7. Several days after debtor filed his notice of conversion, the trustee distributed the funds she had on hand to unsecured creditors. Harris moved to compel a refund of the money. The bankruptcy court granted the motion, and the district court affirmed. The Fifth Circuit reversed and found that the monies were properly distributed to creditors. Harris, No. 13-50374 (July 7, 2014) (disagreeing with In re Michael, 699 F.3d 305 (3rd Cir. 2012).

    NACBA's brief in Harris argues that the Code's plain text as well as the policies that animate the Code require that undisbursed funds be returned to the debtor. NACBA thanks Martin Totaro, Lucas Walker and their team at MoloLamken, LLP for their work on the brief.

    Bullard asks whether denial of confirmation is a final appealable order. In Bullard, confirmation of the plan depended solely on the resolution of a disputed legal issue that has divided the bankruptcy courts. The bankruptcy court denied confirmation of debtor's proposed plan, and after granting leave to appeal, the bankruptcy appellate panel affirmed. The First Circuit held that because the debtor could theoretically, though not realistically, submit a new plan, the decision of the bankruptcy appellate panel was not final. By contrast, if the bankruptcy appellate panel had ruled in the debtor's favor and reversed the bankruptcy court, then its order would indisputably be final, and the First Circuit could conclusively determine the issue and resolve the split among the lower courts.

    NACBA's brief in Bullard argues that giving creditors, but not debtors, the ability to appeal decisions relating to plan confirmation is unjustified, that the alternatives proposed by the court-dismissal or refile and object to debtor's own plan-are problematic, and that allowing such appeals are unlikely to overburden the courts. NACBA thanks Scott Nelson and Allison Zieve at Public Citizen for their work on the brief.

    America's Servicing Company v. Schwartz-Tallard

    The Ninth Circuit Court of Appeals has granted a rehearing en banc in America's Servicing Company v. Schwartz-Tallard, 765 F.3d 1096 (9th cir. 2014). The question presented in Schwartz-Tallard is whether debtor's counsel may obtain a fee award for defending creditor's appeal in stay violation cases. The Ninth Circuit's original opinion turned on the application of a wrongly decided Ninth Circuit opinion of Sternberg v. Johnston, 595 F.3d 937 (9th Cir. 2010). In Sternberg, the Court held that debtor's counsel could be awarded fees for ending a stay violation, but not for pursuing actual damages that resulted from the violation. The Sternberg decision has been emphatically rejected by every decision outside the Ninth Circuit. Its analysis has been described as "unpersuasive," "odd," and "simply wrong."

    The National Association of Consumer Bankruptcy Attorneys (NACBA) has filed an amicus brief in Schwartz-Tallard asking the court to reconsider its Sternberg opinion. We argue that the decision conflicts with the language and logic of section 362(k), misreads the American rule, departs from multiple principles of statutory construction, and creates an unworkable system that frustrates Congress's objectives.

    The rehearing en banc is set for argument in June, 2015.

    Supreme Court to Hear Oral Argument, on 1/14/15, in Wellness International LTD. v. Sharif

    The US Supreme Court will hear oral arguments, on 1/14/15, in the case of Wellness International Ltd. v. Sharif, in which the US Supreme Court granted certiorari. The Wellness case is the most recent opportunity for the Court to address the jurisdiction of the bankruptcy court. Certiorari was granted on July 1, 2014, from a Seventh Circuit decision. The court will hear argument on the following issues:

    (1) Whether the presence of a subsidiary state property law issue in an 11 U.S.C. § 541 action brought against a debtor to determine whether property in the debtor's possession is property of the bankruptcy estate means that such action does not "stem[] from the bankruptcy itself" and therefore, that a bankruptcy court does not have the constitutional authority to enter a final order deciding that action; and
    (2) whether Article III permits the exercise of the judicial powers of the U.S. by the bankruptcy courts on the basis of litigant consent, and if so, whether implied consent based on a litigant's conduct is sufficient to satisfy Article III.

    In re The Mortgage Store, Inc.,     F.3d    , 2014 Westlaw 6844630 (9th Cir. 2014). In a fraudulent transfer appeal, in a Chapter 7 bankruptcy case adversary proceeding, the Ninth Circuit Court of Appeals has held that an "initial transferee" of a fraudulent transfer made by an insolvent corporation was strictly liable under the "pure dominion" rule, even though the debtor corporation's insider was the party who exercised indirect control over the funds and even though the recipient of the money was unaware of its source.

    Following is detail of the case, which appeared in the California State Bar's Insolvency Committee e-bulletin of 1/13/15:

    Facts: The owner of a shopping center entered into a $3 million sales agreement with an individual purchaser, under which the purchaser would provide the owner with $300,000 in "earnest money" and would execute a promissory note for the balance, secured by a mortgage in favor of the vendor. The "earnest money" was to be funneled through an attorney, acting on behalf of both the vendor and purchaser. Unbeknownst to the vendor, the purchaser himself did not provide the "earnest money." Instead, the money came from a separate corporation controlled by the purchaser; the corporation was experiencing financial trouble at the time.

    Less than two years later, that corporation filed a Chapter 7 petition. Its trustee brought a fraudulent transfer action against the vendor, claiming that the corporation received no value in exchange for the payment and that the vendor was the "initial transferee" of the earnest money payment. Under 11 U.S.C.A. §550(a)(1), an "initial transferee" is strictly liable for the receipt of a fraudulent transfer and cannot interpose a "good faith" defense under §550(b). The trustee moved for summary judgment. The bankruptcy court ruled in favor of the trustee, as did the District Court.

    Reasoning: The Ninth Circuit affirmed. The vendor argued that the individual purchaser himself should be the viewed as the "initial transferee," citing In re Presidential Corp., 180 B.R. 233 (9th Cir. BAP 1995), for the proposition that a party should be deemed the initial transferee when another party receives and distributes funds on the first party's behalf. The court disapproved of the holding in Presidential because it relied on the flexible "dominion and control" test; the court held that In re Incomnet, 463 F.3d 1064 (9th Cir. 2006) had articulated a new test, the "pure dominion" test: "[T]he touchstones in this circuit for initial transferee status are legal title and the ability of the transferee to freely appropriate the transferred funds."

    The vendor argued that since the purchaser had the ability to direct his corporation to pay money on his behalf, he was the person with dominion over that money and therefore he was the initial transferee, rather than the vendor. But the court disagreed, holding that the purchaser never had legal title to the funds in question. Furthermore, he had lost control over that money at the time the money was paid from the attorney (acting as an escrow agent) to the vendor: "Because the conditions precedent for the contract's consummation had been satisfied by the time [the insolvent corporation] transferred the funds to [the attorney], [the purchaser] had no right to control their distribution."

    The vendor then protested that imposing strict liability on a completely innocent party was a very harsh result. The court responded with a long explanation of the policies justifying the imposition of liability on an initial transferee:

    In virtually every case involving a bankrupt entity, a third party will be injured because the debtor's obligations to creditors, by definition, outstrip its assets. In the case of a debtor's fraudulent conveyance, injury must fall on either the transferee of the conveyance or the debtor's creditors . . . . The aim of §550 . . . must be to allocate risk such that the parties tending to have the lowest monitoring costs must bear the costs of a debtor's failings...
    Unlike subsequent transferees, who "usually do not know where the assets came from and would be ineffectual monitors if they did," initial transferees tend to have relationships and influence with the debtor . . . . By placing the risk on initial transferees rather than creditors, Congress ensured that creditors "need not monitor debtors so closely," the idea being that "savings in monitoring costs make businesses more productive."

    The court then explained that the vendor in this case was not helpless to protect itself against the risk of fraudulent transfer liability:

    Although [the vendor] asserts it did not have direct contact with the debtor [corporation] until well after the transfer, [the vendor] was represented by counsel in the transaction and entered a contract that allowed [the purchaser] to satisfy his obligations under the contract through a third party. In so doing, [the vendor] accepted the risk that [the purchaser] obligation would be satisfied through an avoidable conveyance.

    Professor Schector's Comment: It is telling that the court's policy defense of the strict "initial transferee" rule goes on for so many paragraphs; to quote Shakespeare, "The lady doth protest too much, methinks." (Hamlet, Act III, Scene II.) The court implicitly recognizes that this is a very harsh rule and that there is really no practical way for the vendor (or any other payee) to protect itself.

    At one point, the court quotes Scholes v. Lehmann, 56 F.3d 750, 761 (7th Cir.1995), for the dubious proposition that "conveyance recipients could hold cash reserves or obtain liability insurance to hedge against the possibility of a fraudulent conveyance." But since the payee rarely knows that he or she is a "conveyance recipient" of a fraudulent transfer, this must mean that every payee of every check must always obtain some sort of insurance to hedge against the possibility of unforeseen fraudulent transfer liability. That is patently unworkable: the occasional catastrophic loss is apparently just a risk of doing business.

    I am disappointed that the court did not discuss the ambiguous role of the attorney in this case. Recall that he acted as an escrow agent, apparently on behalf of both parties. One could argue that his receipt of the money from the insolvent corporation was on behalf of the purchaser, the corporate insider who set up the whole deal. Therefore, since the attorney was the agent of the purchaser, the purchaser would be viewed as the initial transferee. Alternatively, the attorney could be characterized as nothing more than a conduit acting on behalf of the insolvent corporation, thus transmuting the vendor into the initial transferee.

    In hindsight, I suppose that the vendor could have insisted that the funds in question come directly from the purchaser's personal bank account, so as to eliminate the possibility that the purchaser was obtaining the funds from an unknown insolvent corporation; in that case, the purchaser would have been the initial transferee, and the vendor would have qualified as a "subsequent transferee." The vendor would have had to be simultaneously paranoid and prescient to insist on such an arrangement. Worse yet, one can easily envision that a bankruptcy court could seize on this awkward arrangement as evidence that the vendor, as a subsequent transferee, must have been on notice of the tainted source of the money, thus fatally impeaching its putative "good faith transferee" defense.

    Note that as a result of the rejection of Presidential, the trustee in analogous cases has now gained another strictly liable defendant: if the corporate officer who directs the transaction but never receives the money is not a "transferee," he must the "entity for whose benefit" the transfer was made, under §550(a)(1). The trustee may obtain a judgment against both the controlling officer and against the hapless initial transferee.

    For a detailed discussion of Incomnet, see 2006 Comm. Fin. News. 71, Preference Recipient Has "Dominion" over Funds, Even If Recipient Is under Statutory Duty to Transmit the Funds to a Third Party.

    US Supreme Court has Recently Granted Petitions for Certiorari on Two Cases

    The US Supreme Court has recently granted petitions for certiorari on two cases--Bank of America v. Calukett and Bank of America v. Toledo-Cardona--involving mortgage lien-stripping in bankruptcy. The fact that the US Supreme Court granted certiorari, regarding these two cases, means that the US Supreme Court will review, and could either affirm or reverse, the two US Courts of Appeal decisions. If the US Supreme Court were to reverse present law, which is that lienstripping is NOT allowed in Chapter 7, and is only allowed (under specific, limited, circumstances in Chapter 11, 12 and 13), that would be a HUGE change in Bankruptcy Law. The US Supreme Court will hear and decide these 2 cases sometime in 2015.

    On 12/14/14, the US Supreme Court Granted Petitions for Certiorari (ie has agreed to review) in Two Different Bankruptcy Cases, Agreeing to Review Two Different Bankruptcy Issues

    There is no right to appeal a bankruptcy issue from a US Court of Appeals, to the US Supreme Court. Instead, a party requests the US Supreme Court to review a bankruptcy decision (and most other kinds of decisions) of a US Court of Appeals, by filing a Petition for Certiorari with the US Supreme Court. Thousands of Petitions for Certiorari are filed each year, with the US Supreme Court, in various subject matters of cases. The US Supreme Court only grants certiorari (agrees to review the US Court of Appeals decision) in a tiny percent of those petitions for certiorari, granting certiorari in approximately 80 to 90 cases per year. As a result, conflicting decisions, by various US Courts of Appeal, can exist for years, before the US Supreme Court grants certiorari.

    On 12/14/15, the US Supreme Court granted petitions for certiorari in two different bankruptcy appeals, thereby agreeing to review the US Court of Appeals decisions, on two different bankruptcy issues.

    First, the U.S. Supreme Court on 12/15/14, granted certiorari (ie, agreed to review), the question of whether those who fail to win confirmation of their bankruptcy-exit plans, whether consumers or businesses, can appeal the loss, immediately, or whether orders denying confirmation of a proposed Chapter 11, 12 or 13 plan are interlocutory orders, which cannot be appealed until the end of the case. The appeal where the US Supreme Court granted certiorari was a chapter 13 bankruptcy case, of an individual homeowner Louis Bullard, who failed to win court approval of his proposed Chapter 13debt-repayment plan, then lost again when he asked an appeals court to review the decision. Denial of confirmation isn't a final order, it is an interlocutory order, the First Circuit Court of Appeals ruled, so it can't be appealed immediately. Bullard's lawyers asked the high court to weigh in on the question, to clear up the split of opinion among the nation's appeals courts, and to reverse rulings that they say feed an "inefficient and wasteful" process.

    Second, in a different Chapter 13 case, converted from Chapter 13 to Chapter 7, the US Supreme Court, on 12/15/14, granted certiorari, to review what should happen to the pool of money that accumulates from a Chapter 13 debtor making monthly Chapter 13 plan payments, where, instead of continuing in Chapter 13, the debtor converts the debtor's Chapter 13 case to Chapter 7. In Chapter 13, the debtor makes the monthly plan payment, called for by debtor's proposed Chapter 13 plan, starting 30 days after the debtor's Chapter 13 bankruptcy case is filed, and monthly, each month thereafter. However, before the Chapter 13 plan is confirmed, the Chapter 13 trustee does not distribute the monthly plan payments to the creditors. Instead, the Chapter 13 Trustee holds all those monthly plan payments, until if and when the Bankruptcy Court confirms (approves, so it goes into effect) debtor's proposed Chapter 13 plan. The question is, who is entitled to receive the accumulated plan payments, where the debtor's case is converted from Chapter 13 to Chapter 7, before/without a Chapter 13 plan being confirmed? Is the Chapter 13 Trustee required to return all undistributed plan payments to the debtor? Or are the creditors entitled to be paid those accumulated plan payments, as specified in the (not confirmed) proposed Chapter 13 plan? Or is the Chapter 13 Trustee required to turn that accumulated plan payments over to the Chapter 7 Trustee. In the US Court of Appeals for the Ninth Circuit, at present, the paid to Chapter 13 Trustee, but not yet distributed, Chapter 13 plan payments are returned to debtor, by the Chapter 13 Trustee, if debtor's Chapter 13 plan is not confirmed, and debtor's Chapter 13 case is converted to Chapter 7.

    Two certiorari grants are reported in the 12/15/14 ABI (American Bankruptcy Institute) e-newsletter

    US Supreme Court has granted certiorari, to hear appeal on Baker Botts LLP v. ASARCO LLC

    On Oct. 2, 2014, the U.S. Supreme Court granted certiorari in Baker Botts LLP v. ASARCO LLC, No. 14-103. Baker Botts, which represented debtor-in-possession ASARCO LLC in one of the largest and most complex chapter 11 bankruptcy cases ever, obtained a fee award from the bankruptcy court of $113 million for fees and costs, $4.1 million as an enhancement, and $5 million for defending its fee application. On appeal, the Fifth Circuit Court of Appeals reversed the $5 million award for defense of the fee application. Citing In re Pro-Snax Distributors Inc., 157 F.3d 414 (5th Cir. 1998), and Bankruptcy Code § 330(a)(3), (4) and (6), the Fifth Circuit held that compensation for defending fee applications was not allowable where the services provided were not likely to benefit the debtor's estate or necessary to the administration of the estate. The ruling deviates from prior Ninth Circuit rulings. Would a ruling barring professionals from being compensated for successfully defending against challenges to their fees give too much leverage to the fee examiners and other parties willing to use the adversary process?

    Bankruptcy Judge's Ruling in City of Stockton Chapter 9 (Municipality) bankruptcy case, which allowed Stockton to reduce its pension debt owed to present and retired City Employees, Is Not a Free Pass for Cities to Cut Pensions, say Experts

    Bankruptcy Judge's Ruling in City of Stockton Chapter 9 (Municipality) bankruptcy case, which allowed Stockton to reduce its pension debt owed to present and retired City Employees, Is Not a Free Pass for Cities to Cut Pensions, say Experts Although Judge Christopher M. Klein ruled on Wednesday in the Stockton, Calif., chapter 9 case that the city could use bankruptcy to wipe away its pension debt, experts do not view the bankruptcy judge's oral statement as a free pass for other California cities struggling with rising pension costs, the New York Times reported on Friday. "He did give us a tool," said Richard L. Barnett, mayor of Villa Park, Calif., and a bankruptcy lawyer. "But it's not a tool the city will be using in the immediate future." Other analysts said that they doubted there would be a stampede to the courts. CalPERS observed that what Judge Klein said was a signal, but not necessarily a precedent. "It's not binding on any other bankruptcy court," said Michael A. Sweet, a partner at the law firm of Fox Rothschild who represents California municipalities in chapter 9. Judge Klein made his remarks orally from the bench on Wednesday, adding that he reserved the right to issue a written opinion later. He adjourned the trial on Stockton's bankruptcy exit plan until Oct. 30. CalPERS said that it disagreed with what the judge had said, but without a written opinion, it has nothing to take on appeal to a higher court.

    Reported in ABI (American Bankruptcy Institute) e-newsletter of 10/7/14


    IN ASARCO CASE, SUPREME COURT WILL DECIDE WHETHER FEES AND COSTS INCURRED DEFENDING FEE APPLICATIONS ARE COMPENSABLE US Supreme Court has granted certiorari, to review the 5th Circuit Court of Appeals decision in Baker Botts L.L.P., et al. v. Asarco, LLC. The US Supreme Court will review and decide whether the 5th Circuit Court of Appeals was correct, or in error, in ruling that 11 USC §330(a) of the Bankruptcy Code does not authorize compensation for the fees and costs that counsel incur while defending their fee applications in bankruptcy court. The Supreme Court's decision should provide much-needed guidance on whether §330(a) of the Bankruptcy Code ever authorizes compensation for the costs borne by counsel and other professionals for defending their fee applications in bankruptcy court, and if so, under what circumstances.

    US Supreme Court has Granted Certiorari, regarding Wellness Int'l Network, Limited v. Sharif, 727 F.3d 751 (7th Cir. 2013), cert. granted, 134 S.Ct. 2901 (2014)

    US Supreme Court has Granted Certiorari, regarding Wellness Int'l Network, Limited v. Sharif, 727 F.3d 751 (7th Cir. 2013), cert. granted, 134 S.Ct. 2901 (2014), meaning that US Supreme Court, in its fall 2014 term, will hear and decide the issue raised by the 7th Circuit Court of Appeals decision, which is:

    Whether the presence of a subsidiary state property law issue in a 11 U.S.C. § 541 action brought against a debtor to determine whether property in the debtor's possession is property of the bankruptcy estate means that such action does not "stem[] from the bankruptcy itself" and therefore, that a bankruptcy court does not have the constitutional authority to enter a final order deciding that action; and (2) whether Article III permits the exercise of the judicial power of the United States by the bankruptcy courts on the basis of litigant consent, and if so, whether implied consent based on a litigant's conduct is sufficient to satisfy Article III.

    Rivera v. Orange County Probation Dep't (In re Rivera), Case No. CC-13-1476-PaKiLa,     BR     (9th Cir. BAP June 4, 2014)

    Rivera v. Orange County Probation Dep't (In re Rivera), Case No. CC-13-1476-PaKiLa,     BR     (9th Cir. BAP June 4, 2014): Ninth Circuit Bankruptcy Appellate Panel held that amounts due to a county for food, clothing, and medical care for an incarcerated minor are nondischargeable "domestic support obligations" of the parents pursuant to 11 U.S.C. § 523(a)(5).

    Facts and Procedural History:

    The debtor's minor son was incarcerated in Orange County from 2008 through 2010, for a total of 593 days. California law requires parents of an incarcerated minor to pay "costs of support" of the minor, which are limited to food, food preparation, clothing, personal supplies, and medical expenses, not to exceed $30 per day. Cal. Welf. & Inst. Code § 903(a).

    Orange County calculated the total cost of incarceration to be $420 per day, but charged the debtor only $23.90 per day for the allowed support items in accordance with the statute. Orange County also charged the debtor an additional $2,199 for the cost of legal representation pursuant to section of 901.1(a) of the California Welfare & Institutions Code.

    The debtor paid Orange County $9,508.60 in May 2010. On July 20, 2011, the Juvenile Court entered judgment against the debtor and her husband for the balance of $9,905.40, which included the unpaid costs of support and the legal expenses.

    The debtor filed a voluntary petition for relief under Chapter 7 on September 12, 2011. The debtor listed Orange County as a priority, unsecured creditor, but the case was a no-asset case. Following the entry of the discharge, Orange County resumed collection efforts.

    The debtor filed a motion to issue an Order Show Cause for why Orange County should not be held in contempt for violation of the discharge injunction. The bankruptcy court initially sided with the debtor over the meaning of sections 101(14A) (defining the term "domestic support obligation") and 523(a)(5) of the Bankruptcy Code, but ultimately ruled in favor of Orange County. The debtor appealed.

    The Ninth Circuit Bankruptcy Appellate Panel's Ruling and Reasoning:

    The Ninth Circuit Bankruptcy Appellate Panel affirmed the bankruptcy court's ruling. In so doing, the Panel compared the pre-Bankruptcy Abuse and Consumer Protection Act ("BAPCPA") language in section 101(14A) and the new post-BAPCPA language. The Panel noted that pre-BAPCPA, the statute only encompassed debts owed to a "spouse, former, spouse, or child of the debtor . . ." but now the statute contained new categories of possible creditors such as the child's "parent, legal guardian, or responsible relative, or (ii) a governmental unit." Hence, governmental entities could assert nondischargeable claims.

    The debtor argued the debt was not a "domestic support obligation" because it was not in the nature of "alimony, maintenance, or support." The Panel rejected this argument determining that the narrow category of expenses recoverable under the California statute (i.e., food, food preparation, clothing, and medical expenses) were quintessentially support expenses.

    The Panel declined to rule on the dischargeability of the legal expenses as the debtor failed to challenge them, but stated in dicta that the fees would be discharged.


    One could certainly argue that the addition of "governmental unit" to the list of potential "domestic support obligation" beneficiaries under section 101(14A) was intended to encompass family support reimbursement obligations formerly listed within section 523(a)(18), rather than a significant expansion of the support exception, as determined in this case.

    Former section 523(a)(18) specifically allowed "governmental units" to pursue support enforcement claims where the state paid public assistance to the debtor's dependents. This exception is now within the language of 523(a)(5) and 101(14A), rather than a separate section. Further, the definition at section 101(14A)(B) includes a qualifier in describing a domestic support obligation: "alimony, maintenance or support (including assistance provided by a governmental unit)." (Emphasis added).

    However, the statutory language supports the outcome here. California's statute governing the obligation to reimburse the State for costs narrowly limits the category of expenses for which the State can seek reimbursement, and they are, as the Panel emphasized, "quintessentially" support expenses.

    This analysis is from the California State Bar Business Law Section's Insolvency Law Committee e-newsletter of 9/25/14

    Wortley V. Chrispus Venture Capital LLC (In re Global Energies LLC),     F.3d    , 2014 WL 3974577 (11TH CIR. 8/15/2014)

    The Eleventh Circuit Court of Appeals held that the bankruptcy court abused its discretion and applied the incorrect legal standard in denying Joseph G. Wortley's ("Wortley") FRCP Rule 60(b)(2) [incorporated into bankruptcy practice by FRBP Rule 9024] motion to set aside an order denying Wortley's motion to dismiss, with prejudice, an involuntary chapter 11 case that business partners of Wortley had filed, against Global Energies, LLC (the entity that Wortley, and Wortley's partners were partners in), as respondent. The Eleventh Circuit decision remanded the case, with instruction to the bankruptcy court to grant Wortley's Rule 60(b)(2) motion, and instructed the bankruptcy court to vacate the bankruptcy court's order that had approved the sale of Global Energies, LLC's assets to Chrispus Venture Capital, LLC The Eleventh Circuit also directed the bankruptcy court to conduct hearings to impose sanctions against Wortley's former business partners, Chrispus, and Chrispus' bankruptcy counsel for withholding email communications essential to Wortley's ability to provide evidentiary support for dismissing the involuntary bankruptcy case as a bad faith filing and his business partners' false deposition testimony with respect to their plan and intentions for filing the involuntary petition.

    Secondary Debt Collectors Must Give Notice, Judge Says

    The fair Debt Collection Practices Act requires subsequent debt collectors to notify consumers in writing, even if the prior holder or debt collector had already given notice, a federal judge has ruled. Deciding an issue that has divided courts, Southern District Judge William Pauley III said secondary collectors still must send a validation notice to avoid confusion by consumers over who holds the debt and whether they have the right to contest it. In Tocco v. Real Time Resolutions, 14-cv-810, Pauley said the requirement of a validation notice in 15 U.S.C. &1692g "applies to initial communications from each successive debt collector." Under &1692g, once a debt collector has initially contacted the consumer, it must send, within five days, a notice stating the amount of the debt, the name of the creditor and a statement that the debt will be assumed valid if the consumer does not dispute it within 30 days of receiving it. If any portion of the debt is disputed, the collector has to send verification of the debt to the consumer as well as a statement that, at the consumer's written request, the collector will send the name and address of the original creditor if it is different from the current creditor.

    Schultze v. Chandler

    Schultze v. Chandler,    F.3d    , 2014 WL 3537030 (9th Cir. July 18, 2014, amended August 1, 2014): In a published decision, the Ninth Circuit Court of Appeals held that a post-petition malpractice claim originally filed in state court against an attorney for an unsecured creditors' committee is a core proceeding. Agreeing with other circuits, the Ninth Circuit found that the malpractice lawsuit, which was removed to a bankruptcy court from state court, fell within the definition of a core proceeding because: (1) the attorney's employment and compensation was approved by the bankruptcy court; (2) his duties as committee counsel pertained solely to the administration of the bankruptcy estate; and (3) the claim asserted against him was based purely on acts that occurred in the administration of the estate.


    Plaintiffs were individual investors in Colusa Mushroom, Inc. ("Debtor"), a mushroom enterprise that filed a voluntary chapter 11 petition in the United States Bankruptcy Court for the Northern District of California. The Bankruptcy Court appointed an unsecured creditors' committee ("Committee"), consisting of Plaintiffs, other individuals, and a business entity. The Committee obtained an order from the Bankruptcy Court authorizing it to employ David Chandler ("Committee Counsel") as its attorney.

    The Debtor's confirmed plan of reorganization provided for the sale of its business and assets to a third party, Premier Mushroom, LP ("Buyer"). All unsecured creditors, including Plaintiffs, were to share pro-rata in the sale proceeds. Pursuant to the terms of the sale, Buyer paid a down payment and executed a promissory note for the payment of the remainder of the sale price ("Note"). Buyer was to make three annual payments and a final balloon payment.

    Security for the Note was to be provided in the form of a deed of trust on real property and a secured interest on personal property, junior to three other liens. The Debtor and Buyer, not Committee Counsel, conducted the closing of the sale. Following the closing of the sale, the Bankruptcy Court entered a final decree and administratively closed the bankruptcy case.

    Buyer defaulted on the balloon payment. Plaintiffs then learned that Debtor's counsel failed to file the financing statements necessary to perfect the estate's junior security interest in the personal property. Because the security interest was not perfected, Buyer was able to further encumber the purchased assets and the net recovery from post-default assets was significantly less than it would have been had the security interest been properly perfected.

    Plaintiffs commenced a malpractice action in state court against Committee Counsel, contending that he was negligent in failing to ensure that Debtor's attorney properly perfected the security interest. Although the Committee had been dissolved, Committee Counsel removed the malpractice lawsuit to the Bankruptcy Court. Plaintiffs attempt to remand the case was denied. The Bankruptcy Court then granted Committee Counsel's motion to dismiss on the grounds that he owed no duty to Plaintiffs individually because he represented the Committee as a whole, and not its individual members. Plaintiffs appealed the Bankruptcy Court's dismissal to the district court, which affirmed. Plaintiffs then appealed to the Ninth Circuit.


    As set forth below, the Ninth Circuit found that the district court properly concluded that the Bankruptcy Court possessed jurisdiction over the malpractice action because it was a core proceeding.

    A bankruptcy court has jurisdiction over "all civil proceedings arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. § 1334(b). Claims that arise under or in title 11 are deemed to be core proceedings, while claims that are related to title 11 are noncore proceedings. Maitland v. Mitchell (In re Harris Pine Mills), 44 F.3d 1431, 1435 (9th Cir. 1995).

    The Ninth Circuit explained that core proceedings arising in title 11 can be matters "that are not based on any right expressly created by title 11, but nevertheless, would have no existence outside of the bankruptcy." In contrast, where the post-petition proceeding involves rights unconnected to the bankruptcy, the Ninth Circuit stated that the proceeding is noncore.

    Noting that all circuit courts are in agreement, the Ninth Circuit stated that "where a post-petition claim was brought against a court-appointed professional, we have held the suit to be a core proceeding." The rationale is that a court must be able to police the fiduciaries in restructuring the debtor-creditor relationship, whether it be a trustee, debtor-in-possession, or other court-appointed professional. In this case, Committee Counsel's employment and compensation were approved by the Bankruptcy Court, his duties pertained solely to the administration of the bankruptcy estate, and the claim asserted against him pertained to acts that occurred in the administration of the estate. Accordingly, the lawsuit fell within the definition of a core proceeding.

    In reaching this conclusion, the Ninth Circuit rejected a number of arguments advanced by Plaintiffs. First, citing 28 U.S.C. § 157(b)(3), the Ninth Circuit explained that it did not matter that Plaintiffs' claim was predicated on state law. Second, the Court also rejected the notion that Plaintiffs' claim did not invoke any right created by federal bankruptcy law because "arising in" jurisdictional analysis looks at whether the matter has no existence outside of the bankruptcy. In this case, the basis for the claim occurred within the administration of the estate, and any alleged duties arose from obligations created under bankruptcy law.

    The Ninth Circuit also affirmed the district court's grant of the motion to dismiss because Committee Counsel did not owe an individual duty of care to Plaintiffs. Rather, he represented the Committee only, and that is to whom his fiduciary duties ran. Moreover, in his capacity as Committee Counsel, he was not charged with the duty of recording the financing statement. That duty fell to Debtor's attorney.


    The Supreme Court's recent decisions in Executive Benefits Insurance Agency v. Arikson (In re Bellingham Ins. Agency, Inc.), 134 S. Ct. 2165 (2014) and Stern v. Marshall, 131 S. Ct. 2594 (2011), illustrate that the distinction between core and noncore proceedings can provide for vexing ramifications affecting jurisdiction and the ability of a bankruptcy court to enter a final judgment. This decision provides some practical clarity by holding that a post-petition state law claim against professionals is a core proceeding. Further rulings such as this will help harmonize these recent Supreme Court rulings and the sometimes blurred-lines between core and noncore proceedings that can create jurisdictional instability.

    This analysis is from CA State Bar Business Law Section's Insolvency Law Committee e-newsletter of 8/18/14

    DeNoce v. Neff (In re Neff)

    DeNoce v. Neff (In re Neff), 505 B.R. 255 (9th Cir. BAP 2014): In a published decision the U.S. Bankruptcy Appellate Panel of the Ninth Circuit ("BAP") affirmed a bankruptcy court's order granting a debtor partial summary judgment against a denial of discharge complaint that alleged debtor should be denied a discharge because debtor had, within 1 year before debtor filed bankruptcy, made a fraudulent transfer of some of debtor's property, and had made that transfer with an actual intent to hinder, delay, or defraud creditors. the BAP held that the one-year "lookback period" of Bankruptcy Code 11 USCn 727(a)(2)(A) is not a "statute of limitations", which would be subject to equitable tolling; but instead is a "statute of repose", and as such, was NOT subject to equitable tolling. In addition, the BAP held that the doctrine of continuing concealment is not applicable where the debtor conceals a transfer of property but does not attempt to conceal debtor's interest in the property.


    On March 4, 2010, Appellee Ronald Neff (the "Debtor") filed his first chapter 13 petition. Shortly thereafter, on April 7, 2010 the Debtor recorded a quitclaim deed (the "Transfer") transferring certain real property (the "Subject Property") from himself to a revocable trust (the "Trust"). Two days later, the Debtor's bankruptcy case was dismissed. The Debtor filed his second chapter 13 petition on June 18, 2010 and reported on his Schedule B that the Subject Property was owned by the Trust but did not disclose the Transfer in his Statement of Financial Affairs. The second bankruptcy case was dismissed on November 14, 2011.

    On October 24, 2011, the Debtor filed a third bankruptcy case, this time under chapter 7. Appellant Douglas DeNoce ("Appellant") filed a complaint to deny the Debtor's discharge under 11 U.S.C. § 727(a)(2) (the "Complaint") alleging the Transfer was fraudulent and done with the intent to avoid paying creditors. The Debtor answered, denying Appellant's allegations and asserting, among other things, that the Complaint was barred by the applicable statute of limitations.

    The Debtor moved for partial summary judgment under section 727(a)(2)(A) on the grounds that the Transfer was made more than one year prior to the filing of the chapter 7 petition. Appellant argued that the statute of limitations should be equitably tolled during the chapter 13 cases. The bankruptcy court granted partial summary judgment in favor of the Debtor holding that the one-year "lookback period" of section 727(a)(2)(A) is not subject to equitable tolling because it is a "statute of repose" and not a "statute of limitations." Appellant moved for reconsideration, and the bankruptcy court denied the reconsideration motion. The bankruptcy court reasoned that the one-year period in section 727(a)(2)(A) was similar to the period in section 727(a)(8) rather than the statute of limitations periods found in section 523(a)(1)(A) and section 507(a)(8)(A). Appellant timely appealed to the BAP.

    BAP's Holding and Analysis

    In dealing with this matter of first impression, the BAP analyzed the decisions in Womble v. Pher Partners, 299 B.R. 810 (N.D. Tex. 2003), aff'd on other grounds, 108 F. App'x 993 (5th Cir. 2004) and Tidewater Fin. Co. v. Williams, 498 F.3d 249 (4th Cir. 2007). In Womble, the district court held that the one year period in section 727(a)(2)(A) is a statute of limitations that can be equitably tolled. In so holding, the Womble court relied on Young v. United States, 535 U.S. 43 (2002) for its reasoning that the one year lookback period in section 727(a)(2)(A) was similar to the three year statute of limitations set forth in section 507(a)(8)(A) because both statutes reference "the date of the filing of the petition" and therefore "dictate[d] similar treatment." In re Womble, 299 B.R. at 812.

    The BAP disagreed with Womble because sections 523 and 727 serve two entirely different purposes. The purpose of section 523 is to except certain specified debts of a debtor from discharge but the purpose of section 727 is to deny the discharge of all debts based upon a debtor's wrongful conduct without trying to protect an individual creditor's claim from being discharged due to inaction. In short, creditors are not the intended beneficiaries of section 727.

    In Tidewater, the issue was whether the lookback period in section 727(a)(8) was a statute of limitations subject to equitable tolling. The Tidewater court disagreed with Womble and questioned the applicability of Young in cases under section 727. The Tidewater court found that section 727(a)(8) does not contain the two required characteristics for a limitations period: (1) it does not prescribe a period of time within which a plaintiff must pursue a claim, and (2) the time period does not commence when a claimant has a complete and present claim for relief. Tidewater, 498 F.3d at 256. The BAP found the reasoning in Tidewater persuasive and concluded that section 727(a)(8) and section 727(a)(2) share two important similarities – (1) neither expressly provides for tolling and (2) neither contains the two required characteristics for a limitations period. Accordingly, the BAP affirmed the bankruptcy court finding that section 727(a)(2)(A) is a statute of repose not subject to equitable tolling.

    The BAP also rejected the Appellant's argument that the doctrine of "continuing concealment" was applicable because "concealment" focuses on the debtor's intent to conceal any interest in transferred property, not whether the debtor intended to conceal the transfer. Hughes v. Lawson, 122 F.3d 1237, 1240 (9th Cir. 1997). Although the Debtor did not initially disclose the Transfer, no "concealment" of his interest in the Subject Property occurred within the meaning of the doctrine because the Debtor did nothing to change the title of his interest in the Subject Property in the year before he filed his Chapter 13 petition.


    The opinion provides an excellent analysis of the different purposes of Sections 523 and 727. It also provides a useful discussion regarding the distinction between a statute of limitations and a statute of repose, a difference which can sometimes be obscure. The BAP's examination of the two required characteristics for a limitations period provides a helpful roadmap for practitioners.

    This analysis is from the CA State Bar Insolvency Law Committee e-newsletter of 8/14/14

    FDIC v. Siegel (In re Indymac Bancorp, Inc.),     F.3d     (9th Cir. 4/21/14)

    FDIC v. Siegel (In re Indymac Bancorp, Inc.),     F.3d     (9th Cir. 4/21/14): The U.S. Court of Appeals for the Ninth Circuit ("Ninth Circuit") recently affirmed the decision of a district court finding that a $55 million tax refund paid to a bank holding company on account of losses suffered by a defunct subsidiary constituted an asset of the holding company's bankruptcy estate. Though this decision gives some insight into the Ninth Circuit's thinking on this issue, the decision is NOT binding authority, because it is an "unpublished" decision. Unpublished decisions can be cited in briefs, but must be identified as being a "not for publication" decision, if they are cited in briefs, to alert everyone that the decision is a "not for publication" decision.

    Daniel Bock Jr. v Pressler & Pressler

    Daniel Bock Jr. v Pressler & Pressler, Civ. No. 11-7593 (KM)(MCA), 2014 WL 2937929, (D.N.J. June 30, 2014), in which a US District Court held that a Law Firm violated the federal Fair Debt Collection Practices Act ("FDCPA") when a lawyer of that Law Firm signed the Complaint, which Law Firm then filed in Court, to commence a lawsuit against the consumer who owed the debt to plaintiff company, seeking to collect the debt from consumer, only spent a few seconds reviewing and signing the Complaint, before that Complaint was filed in Court. Four second review did not comply with FDCPA requirement that there must be "substantial attorney review" of a lawsuit Complaint, before it is filed, to comply with FDCPA's "meaningful involvement" rule, which requires that an attorney must meaningfully review the claim, before the law firm files collection lawsuit against the consumer.

    Following is the analysis of this case that appeared in Credit and Collection News e-newsletter of 08/07/14: The U.S. District Court for the District of New Jersey recently ruled in Daniel Bock Jr. v Pressler & Pressler, Civ. No. 11-7593 (KM)(MCA), 2014 WL 2937929, (D.N.J. June 30, 2014) that New Jersey's largest debt collection law firm violated the Fair Debt Collection Practices Act when it signed, filed and served a state court complaint against a consumer in a civil suit without "substantial attorney review."

    The court held that a consumer is unfairly misled and deceived under the FDCPA when an attorney who signs a complaint, thereby impliedly representing that he has meaningfully reviewed the claim, is not involved and familiar with the case against the consumer.

    In Bock, a consumer filed suit against a debt collection law firm for violations under the FDCPA, alleging that the law firm made a false or misleading representation by filing a debt collection complaint against him without having an attorney perform any meaningful prior review.

    The facts presented to the district court revealed that the law firm's collection process was administered by "dedicated employees," "who are not attorneys," using specialized software that electronically transmitted information relating to collection claims.

    The law firm's attorney who signed the pleading in Bock testified at a deposition that, on average, he reviewed between 300 and 400 complaints per day, and some days as many as 1,000.

    Likely most troubling to the district court was the fact that the law firm's computer records showed that its attorney spent a total of only four seconds reviewing the electronic case file before approving the complaint against the consumer. And no one at the law firm ever reviewed the consumer's credit card account (on which the collection claim was based) or the assignment of debt to the debt buyer the law firm represented.

    Based upon substantially undisputed evidence, the district court decided against the law firm's ruling that it violated the FDCPA and is, therefore, liable for damages to the consumer. In doing so, the court determined that the "meaningful involvement" rule that applies to collection demand letters also applies to the filing of a civil complaint.

    The district court held that a signed complaint is inherently false and misleading, in violation of the FDCPA (15 U.S.C. Section 1692e), where at the time of signing, the attorney signing it has not:

    1. Drafted, or carefully reviewed, the complaint; and
    2. Conducted an inquiry, reasonable under the circumstances, sufficient to form a good faith belief that the claims and legal contentions are supported by fact and warranted by law.

    Considering this criteria, the district court found that law firm violated the FDCPA because its attorney's "rapid look-over the complaint against Bock, one of 673 complaints he reviewed that day, cannot really be considered careful review of the complaint, let alone an exercise of the professional skills of a lawyer." The court explained:

    The process by which Pressler prepares complaints almost entirely involves automation and nonattorney personnel. There is nothing wrong with that; the FDCPA does not mandate drudgery or enshrine outmoded business methods. The state court complaint filed in the state action here, however, was reviewed by an attorney for approximately four seconds. The case law is sparse, and it is possible for reasonable people to disagree as to what constitutes reasonable attorney review. But whatever reasonable attorney review may be, a four-second scan is not it.

    Practical Considerations: Courts are increasingly expanding the scope and application of the FDCPA. The U.S. District Court for the District of New Jersey has expanded the application of the FDCPA to the preparation and court filing of a civil complaint.

    Collection attorneys should be aware that it is not only false and misleading, within the meaning of the FDCPA, for an attorney to send a debt collection letter without having meaningfully reviewed the case, but it is also an FDCPA violation to file a debt collection complaint without meaningful involvement for the same reason. Lesher v. Law Offices of Mitchell N. Kay, P.C., 650 F.3d 993, 1001-1003 (3rd Cir. 2011), cert. denied, 132 S.Ct. 1143 (2012); Daniel Bock Jr. v Pressler & Pressler, Civ. No. 11-7593 (KM)(MCA), 2014 WL 2937929, (D.N.J. June 30, 2014).

    Crawford vs. LVNV Funding, LLC

    Crawford vs. LVNV Funding, LLC, ___F.3d___, 2014 Westlaw 3361226 (11th Cir. 2014): held that a bulk debt buyer violated the federal Fair Debt Collection Practices Act ("FDCPA") by filing a proof of claim in a consumer bankruptcy, based on a time-barred debt. There is a multi-Circuit split on this issue. Crawford is directly contra to a Second Circuit Court of Appeals decision Simmons v. Roundup Funding, LLC, 622 F.3d 93 (2nd Cir. 2010) in which the Second Circuit held that filing a proof of claim (on an unenforceable debt) is not a violation of FDCPA, that FDCPA does not apply in bankruptcy cases.

    Contra to Crawford and Simmons are decisions of the Third Circuit and Seventh Circuit. The Third Circuit Court of Appeal's decision Simon v. FIA Card Services, NA et al, 732 F.3d 259 (3rd Cir. 2013) held that a debt collector's letter to a debtor in bankruptcy can give rise to an FDCPA claim. Accord: Randolph v. IMBS, Inc., 388 F.3d 726 (7th Cir. 2004), holding Bankruptcy Code did not pre-empt or otherwise preclude using FDCPA in a bankruptcy case.

    The Ninth Circuit Court of appeals is federal appeals court whose decisions are binding on all bankruptcy and other federal judges in California, except where the US Supreme Court has ruled. In Walls v. Wells Fargo Bank N.A., 276 F.3d 502 (9th Circ. 2002), the Ninth Circuit Court of Appeals affirmed dismissal of an FDCPA claim made by a bankruptcy debtor against a bank, which complaint alleged that the bank had violated the FDCPA, by attempting to collect a debt that had been discharged by the discharge that the debtor received in the debtor's bankruptcy case. In Walls, the Ninth Circuit Court of Appeals held that 11 USC 524 of the Bankruptcy Code was the exclusive (only) remedy for violation of the bankruptcy discharge, and therefore, though the debtor could seek damages for violation of debtor's bankruptcy discharge, pursuant to 11 USC 524, the debtor could not additionally seek damages, for violation of the debtor's discharge, pursuant to the FDCPA.

    Whether FDCPA can be used to address (improper) creditor activity in, or in relation to, a bankruptcy case, appears to be ripe for the US Supreme Court to grant certiorari on, and decide, do to the conflicting Circuit level cases.

    Wu v. Markosian (In re Markosia)

    Wu v. Markosian (In re Markosian, 506 BR 273 (9th Cir. BAP 3/12/14). The United States Bankruptcy Appellate Panel of the Ninth Circuit ("BAP") has affirmed a bankruptcy court's ruling that an individual debtor's chapter 11 post-petition earnings, which are property of the debtor's Chapter 11 bankruptcy estate,per 11 USC § 1115, while the debtor is in Chapter 11, revert to debtor, if debtor's Chapter 11 case is later converted from Chapter 11 o Chapter 7. This is not a surprising result, because the same is true when an individual debtor's Chapter 13 case is converted from Chapter 13 to Chapter 7.


    On February 7, 2009, debtors and appellees Ara and Anait Markosian filed a chapter 7 bankruptcy petition. The United States Trustee moved to dismiss their case for abuse based on high income and their ability to pay their creditors. In response, the Markosians converted their case to chapter 11 on February 11, 2010. The Markosians could not, however, confirm a plan due to a decrease in income owing to Mrs. Markosian's loss of her job. Thus, on March 7, 2012, the Markosians reconverted their case to chapter 7. In the following month, Mr. Markosian received a $102,498.421 bonus from his employer for personal services provided during the period that the case was under chapter 11.

    The Markosians turned over the bonus to the Chapter 7 trustee and filed a motion to address whether the bonus was property of their chapter 11 estate, partially exempt property of the chapter 7 bankruptcy estate or property excluded from the chapter 7 estate. The Trustee opposed.

    The bankruptcy court, adopting the reasoning of In re Evans, 464 B.R. 429, 438-41 (Bankr. D. Col. 2011), entered an order granting the Markosians' motion, finding that the bonus constituted earnings from personal services within the meaning of Bankruptcy Code §1115(a)(2), but the bonus ceased to be property of the estate upon conversion to chapter 7. The Trustee timely appealed to the Bankruptcy Appellate Panel ("BAP").


    The issue on appeal was whether an individual debtor's chapter 11 post-petition earnings, which are property of the estate under § 1115, revert to him or her upon a subsequent conversion to chapter 7. The issue was a matter of first impression in the Ninth Circuit.

    In affirming the bankruptcy court's order compelling the Trustee to return the bonus, the BAP initially focused on the distinction between estate and debtors' property delineated by Bankruptcy Code § § 541(a)(6) and (7). The BAP noted that "[u]nder § 541(a)(6), "earnings from services performed by individual debtors after the commencement of the case are the debtor's property which are excluded from property of the estate."

    The BAP observed next that Bankruptcy Code §1115, added by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, makes an individual chapter 11 debtor's post-petition earnings property of the estate. The bankruptcy court found that the bonus received by Mr. Markosian post-conversion was property of the Markosians' chapter 11 estate under § 1115(a)(2). The BAP disagreed, though that finding was not appealed, stating that § 1115 does not apply upon conversion from chapter 11 to chapter 7.

    The BAP focused instead upon Bankruptcy Code § 348, which governs the effect of a conversion. The BAP agreed with the bankruptcy court that § 348(f)(1)(A) excludes a debtor's post-petition earnings from property of a chapter 7 estate upon conversion from chapter 13 but that there is no parallel provision for chapter 11 debtors. As a consequence, the BAP held that it had to look more broadly to § 348(a) – a section that applies to all cases under Title 11. The BAP stated that "[w]here a case is converted from Chapter 11 to Chapter 7, property of the estate is determined by the filing date of the Chapter 11 petition, and not by the conversion date" citing Magallanes v. Williams (In re Magallanes), 96 B.R. 253, 255 (9th Cir. BAP 1988).

    The BAP then simply applied the earnings exception of section 541 to a case that, for analytical purposes, it treated as having been commenced on the date of conversion: "[a]s of the petition date, § 541(a)(6) excludes from the chapter 7 estate earnings from services performed by individual debtors after the commencement of the case. Therefore, by operation of § 348(a), personal service income that came into Debtors' chapter 11 estate is recharacterized as property of the debtor under § 541(a)(6) when the case is converted to chapter 7. Accordingly, upon conversion, the bonus reverted to Debtors." The BAP spends the balance of its opinion explaining away contrary views espoused by other courts that have come to different conclusions.

    The BAP provides sound policy reasons to explain why it elected not to stretch to fill a statutory void that Congress left in amending § 348 in 1994 to add subsection (f)(1)(A): "[i]n the end, there is no reason to treat chapter 11 debtors differently than chapter 13 debtors in this context. As the Evans court pointed out, at the time Congress enacted § 348(f), it ‘clearly conveyed its purpose to avoid penalizing debtors who first attempt a repayment plan . . . [t]here is no policy reason as to ‘why the creditors should not be put back in precisely the same position as they would have been had the debtor never sought to repay his debts . . . .' 464 B.R. at 441."


    The failure by Congress to enact a provision parallel to § 348(f)(1)(A) for chapter 11 debtors so that all debtors' post-petition earnings from property of a chapter 7 estate upon conversion are treated identically can be viewed by debtors/debtor's attorneys as disappointing. Courts often abandon plain language statutory interpretation to try to make sense of BAPCPA, more often than not at the expense of a blameless debtor. Here, the BAP's refusal to attempt "to divine Congressional intent from congressional silence" and create a rule that works differently for Chapter 11 and Chapter 13 debtors in identical circumstances generated an equitable and consistent outcome. Until Congress decides to address the void in section 348, In re Markosian will serve as well-reasoned authority to assist practitioners in dispensing appropriate advice to individual Chapter 11 clients with ongoing income from employment who must convert their cases to Chapter 7.

    This case, with analysis appeared in the American Bankruptcy Institute e-newsletter of 8/5/14.

    Hoskins v. Citigroup

    HOSKINS V. CITIGROUP (IN RE VIOLA; 9TH CIR., July 16, 2014) case 12-60032, not for publication The Ninth Circuit Court of Appeals ruled that a "transferee", as that term is used in Bankruptcy Code section 11 U.S.C. § 550(a)(1), is one who has legal title to the funds and the ability to use them as the recipient sees fit. This is the "dominion test." The Ninth Circuit ruled that allegations of open and exclusive control through fraudulent misappropriation of funds is insufficient to satisfy the dominion test. The case is "not for publication". But still sheds light on Ninth Circuit's thinking on this issue.

    Robinson v. American Home Mortgage Servicing, Inc. (In re Mortgage Electronic Registration Systems, Inc.).,   F/3d   , 2014 WL 2611314 (9th Cir. 6/12/14):

    On June 12, 2014, the 9th Circuit Court of Appeals issued its decision in). This decision is the result of multi-district litigation related to the operation of the MERS System and, with one exception, found in favor of the lenders on state law claims, such as, wrongful foreclosure, predatory lending, etc. The decision provides a good summary of the operation of the MERS System and prior case law on the topic. In this case, the 9th Circuit court of appeals held that:

    1. the District Court did not improperly convert a motion to dismiss for failure to state a claim into a motion for summary judgment;
    2. mortgagors' challenge to MERS was not time-barred;
    3. mortgagors had standing to bring false document claims against MERS;
    4. mortgagors stated a false filing claim against MERS;
    5. mortgagors could not bring wrongful foreclosure claims against MERS;
    6. split between a note and deed of trust did not preclude nonjudicial foreclosure; and
    7. the District Court did not abuse its discretion in denying mortgagors leave to amend their complaint.

    Dismissed in part, affirmed in part, and reversed in part.

    Anil Sachan v. Benjamin Moonkang Huh (In re Benjamin Moonkang Huh)

    Anil Sachan v. Benjamin Moonkang Huh (In re Benjamin Moonkang Huh), 506 B.R. 257 (9th Cir. BAP March 11, 2014)--published en banc Oionion of the United States Bankruptcy Appellate Panel of the Ninth Circuit ("BAP"--held that imputing fraud to a debtor for purposes of exception to discharge under 11 U.S.C. § 523(a)(2), where the evidence does not show that the debtor knew or had reason to know of the agent's fraud, " not consistent with the provisions or objectives of the Bankruptcy Code."


    Pre-petition, the debtor was a licensed real estate broker in California. While initially operating a sole proprietorship under a fictitious business name, the debtor subsequently incorporated his business but retained his broker license in his personal name. Associated with the debtor and his corporation was Jay Kim ("Kim"), who engaged in real estate activity under the debtor's license.

    During that relationship, Anil Sachan ("Sachan") dealt with Kim in Sachan's efforts to purchase a market in Long Beach, California. Kim acted on behalf of the seller. Misrepresentations of fact were made to Sachan affirmatively and by omission regarding the revenues of the market and its physical condition not being in compliance with the City of Long Beach code provisions. Sachan acquired the market and suffered heavy losses, subsequently reselling the market at a loss.

    Sachan commenced litigation against multiple defendants, including Kim and the fictitious business name for the debtor. A jury verdict in Sachan's favor was rendered, and in 2010, the superior court amended the judgment to include the debtor as jointly and severally liable for the judgment in Sachan's favor. The debtor thereafter filed a chapter 7 bankruptcy petition on October 13, 2010.

    Sachan timely filed a complaint to except his judgment against the debtor from discharge under 11 U.S.C. § 523(a)(2)(A). Following a trial, the bankruptcy court rendered judgment in favor of the debtor based on findings of fact that: (i) the debtor never directly communicated with Sachan; (ii) the debtor made no misrepresentations to Sachan; (iii) no misrepresentations were made on the debtor's behalf to Sachan; and (iv) the debtor was not aware of the condition of the market being sold. An appeal to the BAP followed.


    The BAP, reviewing under a de novo standard as to issues of law, framed the question on appeal as whether or not the bankruptcy court (Hon. Barry Russell) erred in declining to impute the fraud of Kim to the debtor for purposes of the discharge exception. More precisely, the question was whether the provisions of 11 U.S.C. § 523(a)(2)(A), excepting a debtor's discharge for debts resulting from "false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition" may be applied to a debtor by imputation based on the fraud of the debtor's agent.

    The BAP, reaching back to Neal vs. Clark, 95 U.S. 704 (1877), and Strang vs. Bradner, 114 U.S. 555 (1885) (both decisions under the Bankruptcy Act of 1867) noted the unwillingness of the Supreme Court to impute fraud as a basis to deny a discharge except in instances where the fraud was committed by a partner of the debtor. Recognizing that the evolving purposes of bankruptcy law have changed over time, the BAP reviewed several approaches to the issue of imputation of fraud taken by various Courts of Appeal outside the Ninth Circuit.

    Under the BAP's analysis, these approaches generally fell along a spectrum ranging from Fifth Circuit's holding in Deodati v. M.M. Winkler § Associates, 239 F.3d 746 (5th Cir. 2001) (adopting an "absolute" approach that innocent partners could not discharge debts generated from their partners' fraud), through the the Sixth Circuit in BancBoston Mortg. Corp. v. Ledford, 970 F.2d 1556 (6th Cir. 1992) cert. denied, 507 U.S. 916 (1993) (holding that innocent partners could be denied a discharge because of partners' fraud where they received the financial benefits of that fraud) to the Eighth Circuit in Walker v. Citizens State Bank, 726 F.2d 452 (8th Cir. 1984) (holding that the agent's fraud can be imputed to the debtor only when there was proof that the principal "knew or should have known of the fraud"). Under the Eighth Circuit's approach, reckless indifference to the acts of the agent could also result in imputation. Finally, the BAP noted a fourth line of circuit authority which it described as "minimalist" – and which, relying on the Supreme Court's 1885 Strang decision, holds that fraud will not be imputed except in a specific partnership context.

    The BAP went on to discuss recent Supreme Court decisions on related issues. In Kawaauhau v. Geiger, 523 U.S. 57 (1998), the Supreme Court, dealing with Section 523(a)(6)'s exception to discharge for "willful and malicious injury by the debtor to another" in the context of a medical malpractice case, held that non-dischargeability required a deliberate or intentional injury. Finally, in Bullock v. BankChampaign, N.A., 133 S.Ct. 1754 (2013), the Supreme Court considered Section 523(a)(4)'s exception to discharge "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." In this latter decision, the Supreme Court appeared to come full circle, reaching back to its 1877 decision in Neal in reiterating that the fiduciary defalcation by the debtor must be based on a showing of, "culpable state of mind". The BAP concluded that Geiger and Bullock cut strongly against the imputation of the fraud of another to the debtor for purposes of Section 523(a)(2)(A) without some further showing of the debtor's own culpability.

    The BAP then reviewed related Ninth Circuit authority, discussing first Impulsora Del Territorio Sur, S.A. v. Cecchini, 780 F.2d 1440 (9th Cir. 1986), a case addressing Section 523(a)(6). Though it concluded this decision had been effectively overruled by Geiger, the BAP noted that Cecchini nonetheless seemed to place the Ninth Circuit in the Six Circuit's "receipt of benefits" camp (under the earlier-reviewed BancBoston Mortg. Corp. decision).

    Turning next to Sherman v. Sec. § Exch. Comm'n, 658 F.3d 1009 (9th Cir. 2011), the BAP stated that the Ninth Circuit's discussion, though perhaps dicta, nonetheless seems to suggest that under Section 523(a)(2)(A) it is the debtor's conduct which must have been fraudulent to gain the exception to the discharge.

    Finally, the BAP finally turned to a review of its prior decisions, including those in Tobin v. Sans Souci Ltd. P'ship, 258 B.R. 199 (9th Cir. BAP 2001) and Tsurukawa v. Nikon Precision, Inc., 258 B.R. 192 (9th Cir. BAP 2001), as well as a subsequent, second Tsurukawa opinion holding that fraud in an action under Section 523(a)(2)(A) could be imputed to a spouse only under partnership/agency principles. The BAP concluded that its prior authority is consistent with the adoption of the Eighth Circuit's "knew or should have known" standard in the earlier-reviewed Walker decision. The BAP then specifically adopted the Walker standard, holding that the imputation to a debtor of an agent's fraud, absent the debtor's knowledge or having reason to know of that fraud, was not consistent with the Bankruptcy Code's provisions or objectives. The BAP affirmed the bankruptcy court's dismissal.


    The BAP's extensively researched and analyzed Opinion in Huh helps clarify the law on whether or not a debt can be held NONdischargeable (not discharged), pursuant to 11 USC 523(a)(2)(A) where the fraud was committed by the debtor's agent. The BAP held that such a debt could be excepted from discharge only when the agent's misconduct was known or should have been reasonably known by the debtor. This, the BAP held, is consistent with the purposes of the Bankruptcy Code: to give debtors a fresh start, and that the exceptions to discharge be strictly construed. This author agrees, and would add that under the Huh standard, evidence such as "receipt of benefits," though not dispositive, nevertheless remains relevant.

    The Substance of this analysis is from the e-newsletter of the Insolvency Committee of the CA State Bar of 6/3/14.

    Frates v. Wells Fargo Bank, N.A. (In re Frates)

    Frates v. Wells Fargo Bank, N.A. (In re Frates), 507 B.R. 298, 2014 WL 982851 (9th Cir. BAP March 13, 2014)--The United States Bankruptcy Appellate Panel for the Ninth Circuit (the "BAP") ruled in a published decision that service under Federal Rule of Bankruptcy Procedure ("FRBP") 7004(h) governs service on an insured depository institution of a motion to avoid a judgment lien against the debtors' real property under Bankruptcy Code section 522(f) ("Code section 522(f)") rather than the service provisions of California Code of Civil Procedure ("CCP") section 684.010, which applies to proceedings affecting judgment. It also ruled that including the recording information for the judgment lien in the motion sufficiently identified the property at issue to satisfy procedural due process.


    The debtors (the "Frates") moved under Code section 522(f) to avoid a judgment lien recorded against their residence by Wells Fargo Bank (the "Bank"). In making the motion, the Frates served the Bank "by certified mail addressed to an officer of the institution," as specified by FRBP 7004(h) for service on an insured depository institution. The Bank did not respond. The Frates moved for entry of default. The bankruptcy court declined to grant the motion, holding that the Frates should have served the Bank under CCP 684.010. CCP 684.010 requires service of papers regarding a judgment lien on the "judgment creditor's attorney of record if the judgment creditor has an attorney of record." The bankruptcy court also held that by not including a legal description of the property in the notice, the Frates failed to sufficiently identify the property to give the Bank notice of the rights at issue. The Frates appealed to the BAP.

    The BAP reversed, holding that service in accordance with FRBP 7004(h) was proper and that CCP 684.010 was inapplicable. The BAP also held that the provision of recording information about the judgment lien gave the Bank sufficient notice of what was at issue.


    In its central analysis, the BAP noted first that FRBP 1001 provides that "the Bankruptcy Rules and Forms govern procedure in cases under title 11 of the United States Code." Next, it observed that a lien avoidance proceeding is a "motion" under FRBP 9014, which applies to a "contested matter" per FRBP 4003(d). In turn, FRBP 9014(b) requires service under FRBP 7004. And, as noted above, FRBP 7004(h) regulates service on an insured depository institution such as the Bank. The BAP then noted that in Hanna v. Plumer, 380 U.S. 460 (1965), the United States Supreme Court had sanctioned service under Federal Rule of Civil Procedure 4(d)(1) (the civil cognate of FRBP 7004) in diversity actions, rather than state procedure, reasoning that to hold that state law governs procedure in federal courts when state law substantive rights are at issue would undermine the Constitution's bestowal of the power to determine procedure in federal courts and Congress' enactments thereunder.

    In connection with its analysis, the BAP also observed that FBRP 7004 goes beyond the minimum notice requirements of Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306 (1950), thus addressing the concern in Jones v. Flowers, 547 U.S. 220 (2006) that Mullane might require more rigorous service in the context of proceedings that might eliminate property rights than in other kinds of proceedings. The BAP disagreed with dicta set forth in a concurring opinion in All Points Cap. Corp. v. Meyer (In re Meyer), 373 B.R. 84, 92 (9th Cir. BAP 2007) that opined that CCP 684.010 does apply to lien avoidance proceedings because of the extra assurance of successful service it may provide.

    Finally, the BAP concluded that identifying the recording information was a sufficient guide to the Bank regarding the rights in play to satisfy the notice requirements of Mullane.


    The opinion is correct--"No Brainer" that federal procedure (here Federal Rules of Bankruptcy Procedure) governs how to serve a Motion that is filed in a bankruptcy case. There is nothing in the federal power over procedure in federal courts in general or the FRBP in particular to indicate a deferral to state law absent an express exception in a federal rule or statute. Moreover, as stated in a separate concurring and dissenting opinion in In re Meyer that criticized the concurrence mentioned above, adopting a conceptual regime that sometimes defers to state procedure when not specified in federal rules or statutes would be a prelude to mass confusion and chaos as courts tried to figure out when state procedure applies and when it does not.

    Report on this decision appeared in the California State Bar Insolvency Committee e-newsletter of 5/15/14

    Law v. Siegel, Chapter 7 Trustee

    Law v. Siegel, Chapter 7 Trustee, __ U.S. __, 134 S.Ct. 1188, 2014 WL 813702 (March 4, 2014): The Supreme Court of the United States held that a bankruptcy court exceeded the limits of its authority by imposing a surcharge on a debtor's homestead exemption to pay for a chapter 7 trustee's litigation fees and costs incurred in avoiding a fraudulent lien against estate property created by the debtor. In a unanimous opinion written by Justice Scalia, the Court held that a bankruptcy court cannot exercise its authority under 11 U.S.C. § 105(a) or its inherent equitable powers in contravention to a specific statutory provision, in this case 11 U.S.C. § 522. No power to surcharge debtor's exemption, even though debtor had done IMPROPER THINGS in debtor's bankruptcy case. This decision does NOT mean that debtor's can get away with doing improper things in their bankruptcy cases, because the US Supreme Court decision says that Bankruptcy Courts have OTHER provisions of the Bankruptcy Code that they can use to punish debtors who do bad things in their bankruptcy cases.

    Factual Background

    Debtor Stephen Law ("Debtor") filed for chapter 7 bankruptcy relief in 2004. On his schedules of assets and liabilities filed with the bankruptcy court, the Debtor listed his personal residence located in Hacienda Heights, California (the "Property"), stated the value of the Property to be $363,348, and claimed a homestead exemption in the Property of $75,000 under section 704.730(a)(1) of California Code of Civil Procedure. The Debtor further listed two creditors holding claims secured by deeds of trust against the Property. The first deed of trust was held by Washington Mutual Bank and secured a note in the amount of $147,156.52. The second deed of trust, securing a note in the amount of $156,929.04, named "Lin's Mortgage & Associates" ("Lin"), as beneficiary, and reflected a debt owed to someone named "Lili Lin" (the "Lin Deed of Trust"). Because the two stated liens against the Property exceeded the nonexempt value of the Property, it appeared that there was no value in the Property that would be available to pay the estate's creditors.

    Alfred H. Siegel, the duly-appointed chapter 7 trustee (the "Trustee"), commenced an adversary proceeding to challenge the validity of the lien purportedly held by Lin. During the course of the litigation, two different individuals appeared claiming to be Lili Lin. The first Lili Lin, of Artesia, California, claimed to be a former acquaintance of the Debtor and described the Debtor's numerous attempts to involve her in sham transactions involving the Property and Lin Deed of Trust. Ms. Lin of Artesia denied ever loaning money to the Debtor and quickly entered into a stipulated judgment with the Trustee in which she disclaimed any interest in the Property. At some point, however, a second Lili Lin, who supposedly lived in China and spoke no English, appeared in the matter and claimed to be the true beneficiary under the Lin Deed of Trust. This second Ms. Lin engaged in extensive and costly litigation with the Trustee, including several appeals, over the avoidance of the Lin Deed of Trust and subsequent sale of the Property.

    After five years of litigation, the bankruptcy court concluded that no person named Lili Lin made a loan to the Debtor and that the alleged loan was a fiction created by the Debtor to preserve the Debtor's equity in the Property beyond his homestead exemption. The bankruptcy court was unpersuaded that Lili Lin of China signed or approved any of the declarations or pleadings filed in her name, finding it more likely that the Debtor himself drafted, signed and filed such papers. The bankruptcy court further found that the Debtor submitted false evidence purporting to show that Lili Lin of China, and not Lili Lin of Artesia, was the beneficiary under the Lin Deed of Trust.

    In the end, the Trustee had incurred over $500,000 in fees and costs in litigating the dispute and overcoming the Debtor's fraudulent misrepresentations. Based on the Debtor's misconduct, the Trustee moved to "surcharge" the entire $75,000 homestead exemption to defray the Trustee's attorney's fees. The bankruptcy court granted the Trustee's motion. The Ninth Circuit Bankruptcy Appellate Panel affirmed the bankruptcy court's decision. Citing Latman v. Burdette, 366 F.3d 774 (9th Cir. 2004), the BAP recognized a bankruptcy court's power to equitably surcharge a debtor's statutory exemption in exceptional circumstances, including where the debtor engages in inequitable or fraudulent conduct. The Ninth Circuit Court of Appeals also affirmed, holding that the surcharge was proper because it was "calculated to compensate the estate for the actual monetary costs imposed by the debtor's misconduct, and was warranted to protect the integrity of the bankruptcy process." The Debtor appealed.

    Holding and Analysis

    The Supreme Court found that the bankruptcy court exceeded the limits of its authority by surcharging the Debtor's homestead exemption and ultimately reversed and remanded the Ninth Circuit's decision.

    The Court's opinion began by recognizing the bankruptcy court's statutory authority under Bankruptcy Code section 105(a) to issue any order, process, or judgment necessary to carry out the provisions of the Bankruptcy Code, along with the bankruptcy court's inherent power to sanction parties engaging in abusive litigation conduct. The Court, however, held that the bankruptcy court may not exercise either its statutory power under section 105(a) or its inherent equitable powers in contravention to any specific statutory provisions. In this case, the Court found that the bankruptcy court's surcharge of the Debtor's homestead exemption contravened Bankruptcy Code section 522, which: (1) allowed the Debtor to claim a California homestead exemption (sub-section 522(b)(3)(A)) and (2) provided that such exemption could not be liable for the payment of any administrative expenses of the estate (section 522(k)).

    The Court was not persuaded by the Trustee's argument that section 522 merely establishes the procedure for a debtor to claim an exemption in property, and does not require the bankruptcy court to allow such exemption regardless of the circumstances. This argument was supported by the United States, which filed an amicus brief asserting that section 522 "neither gives debtors an absolute right to retain exempt property nor limits a court's authority to impose an equitable surcharge on such property." The Court read these arguments as equating a bankruptcy court's right to surcharge an exemption with the bankruptcy court's right to deny or limit the Debtor's homestead exemption under section 522. In this case, the Court held that such arguments fail for two reasons.

    First, the Court held that the Trustee did not timely object to the Debtor's claimed homestead exemption, and, therefore, the exemption became final prior to the imposition of the surcharge. The Court noted that it previously held that a trustee's failure to object timely to a claimed exemption prevents him from later challenging the exemption, citing Taylor v. Freeland & Kronz, 503 U.S. 638, 643-644 (1992).

    Second, the Court reasoned that, even if the bankruptcy court could reconsider the Debtor's ability to claim the exemption, section 522 does not give the bankruptcy court discretion to grant or withhold exemptions based on any factors the bankruptcy court deems appropriate. The statute specifies the criteria that will allow the debtor to claim an exemption, and it is the debtor's discretion whether to elect to take the exemption. If the debtor chooses to do so, the Court reasoned, a bankruptcy court may not refuse to honor such exemption without a valid statutory basis. The Court explained that section 522 sets forth a number of specific exceptions and limitations to exemptions, some of which relate to a debtor's misconduct, and stated that section 522's "meticulous...enumeration of exemptions and exceptions to those exemptions confirms that courts are not authorized to create additional exceptions." While the Court acknowledged that there may be circumstances where state law may be applied to disallow a state-created exemption based on the debtor's misconduct, the Court held that "federal law provides no authority for bankruptcy courts to deny an exemption on a ground not specified in the Code." (emphasis in original).

    The Court concluded by recognizing that its ruling will leave the Trustee with a great financial burden as a result of the Debtor's egregious misconduct, and may also result in inequitable outcomes in future cases as well. Ultimately, however, the Court determined that Congress already balanced the interests of debtors and creditors in section 522, and the courts cannot alter the statute's balance. The Court also reassured the bankruptcy courts that this decision does not strip or otherwise alter the bankruptcy court's authority to impose other authorized means of discipline on a dishonest debtor, such as sanctions, a denial of discharge, and, in cases of fraudulent conduct in a bankruptcy case, criminal prosecution.


    Although the bankruptcy court in this case admirably tried to achieve an equitable result and to lessen the substantial financial burden to be borne by the Trustee as a result of outrageous and egregious conduct on the part of the Debtor, all in the best interests of the creditors, the Supreme Court's decision appropriately requires that any actions taken by the bankruptcy court be consistent with specific provisions of the Bankruptcy Code. To the extent any trustees have relied on Ninth Circuit law allowing for surcharging of a debtor's exemption in certain circumstances, this decision may impact the strategic considerations of litigating contested property disputes because the trustees would not be able to reach any property subject to a debtor's exemption. In this particular case, the fees incurred by the Trustee in fighting over the Debtor's exemption exceeded the value of the Property—so certainly Trustees need to keep this decision in mind when commencing litigation and in evaluating the costs and benefits of extensive litigation.

    Substance of this analysis was published in Insolvency Law Committee of the California State Bar e-newsletter.

    Gray1 CPB, LLC vs. SCC Acquisitions, Inc

    Gray1 CPB, LLC vs. SCC Acquisitions, Inc., ___ CA3d___, 2014 Westlaw 1388697 (California State Court Court of Appeals 2014): A California appellate court has held that once a judgment creditor has accepted a cashier's check from a judgment debtor, the creditor no longer has the right to collect post-judgment attorneys' fees.

    Comment: Take the money!! A judgment creditor should ALWAYS accept full payment of the judgment, if the judgment debtor sends it to judgment creditor. Lucky (and rare) judgment creditor who gets paid judgment, without struggling to collect the judgment. Unless the attorneys fees claim is a very large claim, in comparison to the judgment amount, the creditor holding the judgment is almost certainly better off to accept the cashiers check paying the full amount of the judgment, even though doing so cuts off the right to, thereafter, make a claim for attorneys fees incurred by the judgment creditor, post judgment, trying to collect the judgment. Creditors should remember that a judgment is just a piece of paper with a number on it, and that doing things to seek to collect a judgment (defending judgment on appeal, if there is an appeal, applying for writ of execution, applying for wage garnishment, obtaining and recording an abstract of judgment in the county recorder's office (to create judgment lien on the judgment debtor's property), moving to do execution sale of debtor's real property, after obtaining judgment lien on the real property, are all expensive to do, and may result in driving the debtor to file bankruptcy, where the judgment may be dischargeable, or if secured by a judgment lien, may be undersecured and subject to lienstripping, and even if it is a judgment is for something (e.g., fraud judgment) that would be nondischargeable in bankruptcy, per 11 USC 523(a)(2), (4), or (6), the creditor will have to bring and win a "nondischargeability" adversary proceeding, in the bankruptcy, to keep the judgment from being discharged, which takes more time, and costs more of the creditor's money to do.

    Facts: After many years of bitter litigation, a creditor obtained a large judgment against a debtor. The judgment creditor incurred millions of dollars in attorneys' fees in attempting to enforce that judgment. Unexpectedly, the debtor's counsel tendered a cashier's check for the entire face amount of the judgment plus interest, not including the post-judgment attorneys' fees. The judgment creditor's counsel accepted the check but did not cash it. When the judgment creditor filed a motion for post-judgment costs, the trial court denied the motion, ruling that the judgment had been satisfied by the cashier's check.

    Reasoning: The appellate court affirmed. The creditor claimed that the judgment had not really been satisfied, since the post-judgment fees had not been covered by the cashier's check. The court disagreed, holding that the applicable statutes clearly provided that the acceptance of the cashier's check had satisfied the judgment, which (at that time) did not include an award of fees.

    The creditor complained that this result was prejudicial, since the debtor's surprise tender of the cashier's check had deprived the creditor of its chance to obtain a fee award. The court disagreed:

    The rule we announce today does no disservice to judgment creditors who have incurred postjudgment costs they wish to add to the judgment . . . . [I]f they have not yet filed a motion for postjudgment costs at the time the judgment debtor tenders a cashier's check in full payment of the outstanding judgment, they are free to reject the payment and to file a motion for postjudgment costs.

    The court recognized that the creditor's argument "is not without sympathetic appeal" because the expensive collection was caused by the debtor's "slippery efforts to evade paying the judgment . . . ." But the court held that the creditor could have made interim motions for fees: "[The creditor] could have made a motion or motions for postjudgment costs, including attorney fees, prior to defendants fully satisfying the judgment nearly two years after entry of the judgment."

    The first paragraph of the court's opinion vividly describes the creditor's dilemma:

    You cross continents and spend years trying to collect a judgment for your client. Late one Friday afternoon, the debtor's lawyer walks into your office and hands you a cashier's check for almost $13 million, covering the entire judgment and all accumulated interest. Do you accept the check or say, "no thank you, I need to make a motion for attorney fees first?" Put another way, is a bird in the hand worth two in the bush?

    In the real world, who would ever turn down a check for $13 million? And yet the Enforcement of Judgments Act, as currently written, essentially forces the creditor to do exactly that. As the Court notes, the only other alternative is to file repetitive interim motions for fees during the collection process, which is costly not only to the creditor but also to the judicial system. Worse yet, when the debtor finally tenders the money, there will almost always be additional fees and costs that have not been picked up in one of those interim motions.

    The court reached the correct result under the statutes as they are currently written. But the heart of the problem is that the judgment is deemed to be "fully satisfied" for all purposes as soon as the cashier's check is accepted, thus cutting off the creditor's ability to obtain an additional fee award under that judgment. Perhaps the Legislature could amend the statute to cover the precise problem identified by the court in this case: although the tender of the check would be deemed to satisfy the judgment (thus cutting off the accrual of post-judgment interest), the judgment creditor would still have the right to make a final motion for post-judgment fees and costs.

    Portion of this analysis appeared in the California State Bar Insolvency Committee e-newsletter

    In re SW Boston Hotel Venture, LLC

    In re SW Boston Hotel Venture, LLC, ___ F.3d___, 2014 Westlaw 1399418 (1st Cir. 2014):The First Circuit Court of Appeals held that bankruptcy courts may choose to use a flexible approach when selecting a "measuring date" for the accrual of an over secured creditor's right to postpetition interest, and the value assigned to the property during the creditor's relief from stay motion is not necessarily binding at later stages of the bankruptcy case.

    Facts: A lender held a first priority mortgage on a hotel and related properties. A few months after the borrower's Chapter 11 filing, the lender moved for relief from the automatic stay; the debtor successfully contended that the creditor was oversecured, precluding relief from the stay.

    Less than a year later, the hotel property was sold for a very good price. The oversecured lender filed a motion under 11 U.S.C.A. §506(b), seeking the recovery of postpetition interest accruing during the pendency of the reorganization at the default rate set forth in the loan documents. The bankruptcy court granted the lender's motion but held that postpetition interest began to accrue only as of the date of the sale of the property, rather than from the petition date. The First Circuit BAP reversed on that point, but the First Circuit reversed the BAP.

    Reasoning: The court held that when viewed as a whole, the language of §506 permits a flexible approach to the date for determining whether a creditor is oversecured. The court noted that although §506(b) does not provide a specific measuring date, an exception to the rule contained in §506(a)(2) does specify the date of the filing of the petition as the measuring date: "The fact that Congress mandated particular measuring dates in the exception without mandating a particular measuring date in the general rule suggests that it intended flexibility . . . ."

    The court also noted that using the petition date as the sole measuring date would lead to absurd results:

    [R]ather than yielding the fairest result, a rigid single-valuation approach guarantees an all-or-nothing result that hinges more on fortuity than reality. For example, if the petition date were the required measuring date, a creditor that first became oversecured even one day later would be allowed no post-petition interest, even though it was oversecured throughout almost the entire bankruptcy and even though it could receive substantial post-petition interest under a flexible approach. Conversely, if the confirmation date were the required measuring date, a creditor that first became oversecured just one day earlier would be allowed post-petition interest for the entirety of the bankruptcy proceeding (up to the amount of the equity cushion). We do not believe that Congress intended entitlement to post-petition interest to depend so heavily on chance.

    In a footnote, however, the court held that although the statute permits a flexible approach to valuation, it does not necessarily require flexibility:

    We do not suggest that bankruptcy courts must, or even should, adopt the flexible approach whenever collateral values and/or claim amounts fluctuate. We simply recognize that a bankruptcy court may, in the exercise of its discretion, determine that, on the particular facts before it, equity and fairness would be best served by application of a flexible approach.

    The creditor then argued that since the bankruptcy court had earlier found that the creditor was oversecured at the time it moved for relief from the automatic stay, thus justifying the denial of the creditor's motion, that finding was binding upon the bankruptcy court when considering the creditor's entitlement to postpetition interest. The court disagreed: "[A] valuation made for one purpose at one point in a bankruptcy proceeding has no binding effect on valuations performed for other purposes at other points in the preceding."

    Comment: The court's "contextual" approach to valuation under §506(b) is messy but unavoidable. The court's linguistic argument is appropriate: if Congress had wanted to ossify the valuation date as of the commencement of the case, Congress would have included that precise phrase, just as it did in (e.g.) § 544(a). Also, I think the court's policy argument is very insightful, since a rigid "petition date" standard would deprive the creditor of the opportunity to seek postpetition interest, when the property has appreciated during the bankruptcy proceeding.

    But I am troubled by the court's treatment of the findings made during the creditor's motion for relief from stay. The debtor successfully contended that the secured creditor was oversecured, a common tactic. When the creditor later moved for postpetition interest, shouldn't the debtor's successful defense of the relief from stay motion have given rise to a classic example of judicial estoppel? If the debtor was able to persuade the court at the outset of the case that the creditor was substantially oversecured at that time, how could the court have triggered postpetition interest as of any later date? The appellate court's reasoning on this issue comes down to "that was then, this is now," which is not very satisfying. Debtors are therefore encouraged to play fast and loose with property appraisals, submitting high appraisals at the outset of the case and then low appraisals later.

    For a discussion of the First Circuit BAP's opinion in this case, see 2012 Comm. Fin. News. 85, Date of Accrual of Oversecured Creditor's Right to Postpetition Interest Is Determined under Flexible Approach.

    Substance of this analysis appeared on California State Bar Insolvency Committee e-newsletter

    Goldstein V. Diamond (In Re Diamond), 8TH CIR. 2014

    The Eighth Circuit Court of Appeals recently ruled that a creditor which wants to file a "nondischargeability" complaint against a debtor, brought pursuant to 11 USC §523(a)(3)(B) is not required to move to reopen the underlying bankruptcy case, and get the underlying bankruptcy case re-opened, before filing the 523(a)(3)(B) nondischargeability adversary proceeding. The 8th Circuit reasoned that the bankruptcy court's jurisdiction arises from § 1334 and does not terminate simply because a bankruptcy case is closed.

    A 523(a)(3)(B) adversary proceeding can be brought by a creditor where the creditor was NOT properly scheduled, in the debtor's bankruptcy schedules, and so that the creditor was not notified by the Bankruptcy Court that the debtor had filed bankruptcy, AND if the creditor did not from any other source find out debtor had filed bankruptcy, in time for the creditor to bring a timely nondischargeability adversary proceeding pursuant to 11 USC 523(a)(2) (fraud, misrepresentation by debtor), 523(a)(4) (breach of fiduciary duty, larcency, embezzlement by debtor) or 523(a)(6) (wilful and malicious act by debtor), within the 60 days after date first set for 341a meeting of debtor time-deadline for filing 523(a)(2), (4), (6) "nondischargaebility" adversary proceedings.

    However, California is NOT part of the 8th Circuit. California, Washington, Oregon, Idaho New Mexico, Alaska and Hawaii are all in the area where the federal Circuit Court is the 9th Circuit Court of Appeals.

    Bankruptcy Judges in CD CA California (and in many other bankruptcy courts) require that a creditor who wants to bring an 11 USC 523(a)(3)(B) "nondischargeability" adversary proceeding move to reopen the debtor's bankruptcy case, if that case has been closed, and get the bankruptcy case reopened, before filing the 523(a)(3)(B) adversary proceeding.

    New Bankruptcy Filing Fee Increases to Take Effect June 1

    April 17, 2014

    The Judicial Conference of the United States has approved several bankruptcy related fee increases to take effect starting June 1. Based on the chapter, the cost to file will be:

    Chapter7: $335
    Chapter13: $310
    Chapter9,11and15: $1,717
    Chapter 12: $275

    The fee schedule changes project to raise about $35 million per year for the courts, based on current case loads.

    It's hard to get a Court to Change an Already Entered Order: Tevis v. Burkart, et al. (In re Tevis)

    It's hard to get a Court to Change an Already Entered Order: Tevis v. Burkart, et al. (In re Tevis), Case No. EC-13-1211-KiKuJu (9th Cir. BAP Jan. 30, 2014), the Ninth Circuit Bankruptcy Appellate Panel affirmed an order of the bankruptcy court denying a chapter 13 debtor's motion for relief from a prior order under Fed. R. Civ. P. 60(d)(3), demonstrating the high burden to satisfy the grounds of Rule 60(d)(3) and holding that the bankruptcy court did not abuse its discretion in denying the motion. The decision is "not for publication", meaning it has no precedential value, only persuasive value, if other judges agree with the decision's reasoning. "Not for publication" cases can be cited, but must be cited stating "not for publication" decision, to alert reader to the "not for publication" status.

    Factual Background

    Before filing their chapter 7 bankruptcy case on June 21, 2004, Larry and Nancy Tevis ("Tevises") were entrenched in three legal battles. First, Tevises had initiated state court construction defect litigation regarding a modular home they had purchased with a loan from the State of California Department of Veteran Affairs ("Cal Vet"), secured by Tevises' real property (the "Modular Home Litigation"). After the state court approved a $65,000 settlement that Mr. Tevis agreed to in open court, Tevises later reneged and refused to sign the settlement. The state court granted an order enforcing the settlement order over Tevises' objections, and later dismissed the case. Second, Tevises initiated a malpractice suit against the attorneys who represented them in the Modular Home Litigation, who then filed attorney's liens against the settlement proceeds from the Modular Home Litigation (the "Malpractice Litigation"). Third, Cal Vet initiated an unlawful detainer action against Tevises after they defaulted on their loan.

    The chapter 7 trustee and his counsel, Daniel Egan ("Egan"), negotiated a settlement between the trustee, the Modular Home Litigation defendants, and the Malpractice Litigation defendants (the "Settlement Agreement"). During a hearing to approve the Settlement Agreement, Egan represented to the bankruptcy court that: (i) Cal Vet was not a party to the Settlement Agreement; (ii) the trustee was separately negotiating a settlement with Cal Vet (the "Cal Vet Proposal"); and (iii) the trustee anticipated seeking the court's approval of the Cal Vet Proposal. Over Tevises' objection, the bankruptcy court entered an order approving the Settlement Agreement.

    The bankruptcy court's approval of the Cal Vet Proposal by November 30, 2004 was a condition precedent to the effectiveness of the Settlement Agreement. On November 16, 2004, the trustee filed a motion to approve the Cal Vet Proposal. The court never heard the motion, however, because Tevises moved to convert their case to chapter 13, and the case was converted on December 1, 2004. The Tevises' chapter 13 plan, which assumed the Settlement Agreement as part of the plan, was confirmed on July 18, 2005.

    On March 26, 2013, Tevises filed a motion seeking relief under Fed. R. Civ. P. 60(d)(3) (the ("Civil Rule 60(d) Motion") for fraud on the court with respect to the bankruptcy court's approval of the Settlement Agreement, asserting that the Settlement Agreement was invalid because the court never approved the Cal Vet Proposal. Tevises claimed that Egan's false statement that Cal Vet was not a party to the Settlement Agreement misled the court into approving the Settlement Agreement. The bankruptcy court denied the Civil Rule 60(d) Motion, specifically finding that Tevises had failed to show any fraud on the court because Egan's statements were accurate when made, and further, that it would not have arrived at a different conclusion even if Egan's statements had been false.

    Holding and Analysis

    The Ninth Circuit Bankruptcy Appellate Panel affirmed the bankruptcy court's order, holding that the court did not abuse its discretion in denying the Civil Rule 60(d) Motion.

    Fed. R. Civ. P. 60(d)(3), incorporated by Fed. R. Bankr. P. 9024, permits a court to "set aside a judgment for fraud on the court." To prevail in the Ninth Circuit, the BAP noted that a plaintiff must establish to a clear and convincing standard, egregious conduct aimed to defile or improperly influence the court—perjury alone does not normally constitute fraud on the court. Further, the denial of a motion for relief under Rule 60(d)(3) is reviewed only for abuse of discretion. This standard can only be satisfied if the bankruptcy court applied the wrong legal standard or its findings of fact were illogical, implausible or without support in the record.

    The BAP determined Egan accurately stated that Cal Vet was not a party to the Settlement Agreement and that the Cal Vet Proposal was being negotiated separately. Egan's statements were later confirmed when the chapter 7 trustee filed a motion for approval of the Cal Vet Proposal. The Panel held that the bankruptcy court's finding that Egan's statements were accurate was supported by the record. The Panel further noted that the bankruptcy court was not given the opportunity to consider the Cal Vet Proposal prior to the November 30, 2004 deadline because Tevises' motion to convert was granted a day after the deadline. Finally, the Panel noted that Tevises assumed the Settlement Agreement in their confirmed chapter 13 plan.


    This decision illustrates the high bar set for parties seeking to set aside an order for fraud on the court under Fed. R. Civ. P. 60(d)(3). The bar is not only difficult to meet in the lower court where the standard is "clear and convincing," but the decision to overturn the lower court's ruling is viewed for an abuse of discretion.

    Note: the foregoing analysis appeared on the California State Bar Insolvency Committee e-newsletter of 4/16/14.

    Menjivar v. Wells Fargo Bank, N.A.

    Menjivar v. Wells Fargo Bank, N.A. (9th Cir. BAP January 28, 2014)(Unpublished): The United States Bankruptcy Appellate Panel (the "BAP") upheld a bankruptcy court's dismissal of the debtors' claims against Wells Fargo Bank ("WFB") without leave to amend. The claims sought to invalidate a trust deed against the debtors' residence relating to a refinance transaction. The BAP found that: (1) any amended allegations in regard to the fraudulent transfer claims were preempted as inconsistent with the Home Owners' Loan Act of 1933 ("HOLA"); (2) the actual fraudulent transfer allegations improperly focused on the transferee's intent; and (3) the constructive fraudulent transfer claims could not survive given that the satisfaction of an antecedent debt through a refinance transaction would constitute reasonably equivalent value.

    This decision is marked by BAP as being a "Not for Publication" decision. "Not for Publication" decisions can still be accessed on Westlaw or Lexis, and they can be cited, but when they are cited, the cite must state the decision is "Not for Publication". However, because the decision is marked by the BAP as "not for publication", the decision has no precedential value, though it can have "persuasive" value, if the reader agrees with the case's analysis. It is unclear what the BAP is trying to accomplish, by issuing this decision, on a "hot" topic, yet marking this decision as "not for publication. Mixed message for sure.


    In October 2005, Benjamin and Sarah Menjivar ("Debtors") obtained a loan from WFB's predecessor, World Savings Bank ("World Savings"), to refinance the first and second deeds of trust on their residence. The Debtors refinanced again in January 2007, using most of the loan proceeds to pay off their 2005 home loan.

    In July 2007, World Savings persuaded the Debtors to refinance their residence for a third time. The Debtors alleged that World Savings represented they would receive a home loan with a fixed interest rate. The loan documents the Debtors executed stated otherwise. The Debtors claimed World Savings pressured them to close quickly and that the stress of the refinancing resulted in personal tragedies.

    WFB became the successor by merger to World Savings. As part of an effort to obtain yet another refinance, the Debtors defaulted on their 2007 loan. WFB recorded a notice of default in August 2010 and a notice of trustee's sale in November 2010.

    After filing and dismissing an initial lawsuit against WFB, the Debtors filed a second action against WFB in state court seeking a temporary restraining order ("TRO") to stop a sale of the property. Ultimately, after two earlier filings, the Debtors filed their third bankruptcy case and removed the state court action to the bankruptcy court, commencing the adversary proceeding at issue.

    On July 31, 2012, the Debtors filed their First Amended Complaint ("FAC"). Among the multiple claims for relief, the Debtors alleged: (1) that the 2007 notes and trust deeds were constructive fraudulent transfers under California's Uniform Fraudulent Transfer Act ("UFTA"); (2) that the 2007 notes and trust deeds were actual fraudulent transfers under UFTA; and (3) Word Savings gave them no consideration in exchange for the 2007 notes and trust deeds. The bankruptcy court dismissed all claims, with prejudice.

    Ruling and Reasoning:

    The BAP affirmed the bankruptcy court's ruling. First, the BAP held that the Debtor's UFTA claims were inconsistent with the HOLA. In Silvas v. E∗Trade Mortg. Corp., 514 F.3d 1001 (9th Cir. 2008), the Ninth Circuit held that claims for relief based on the California Business and Professions Code were preempted by HOLA. In holding the California statutes were preempted, the Ninth Circuit in Silvas found that the specific factual allegations contained in the complaint referenced activities and conduct subject to the exclusive regulation of the Office of Thrift Supervision ("OTS"). Applying the reasoning in Silvas, the BAP concluded that the factual allegations supporting the UFTA claims – that World Savings misrepresented the terms of the 2007 loans, overcharged for settlement fees, and ultimately extended credit to the Debtors under terms they considered unfavorable – constituted conduct and activities exclusively regulated by the OTS and, in turn, were preempted by HOLA.

    Second, as to the Debtors' actual fraudulent transfer claims, the BAP held that, whereas UFTA focuses on the transferor's intent, the Debtors focused on the transferee's intent (see Cal. Civ. Code § 3934.04(a)(1)). More specifically, the Debtors alleged World Savings duped them into entering into the refinance; not that the Debtors effectuated the transfers at issue with any fraudulent intent.

    Finally, the BAP held that the Debtors' constructive fraudulent transfer claims were fatally inconsistent with the UFTA, which requires an absence of reasonably equivalent value. The determination of reasonably equivalent value is determined objectively, from the perspective of the transferor's creditors. The BAP found that, from the creditors' perspective, the satisfaction of an antecedent debt through a refinance transaction constituted reasonably equivalent value.


    If it had been marked "for publication", this case would extend the Ninth Circuit's Silvas opinion, which could impact many fraudulent transfer claims in the consumer debtor arena. It is not surprising that the BAP upheld the bankruptcy court's finding that the Debtors' fraudulent transfer allegations were factually inconsistent with the UFTA. This opinion offers an important reminder to practitioners to pay very close attention to ensure that their claims are consistent with the statutes they are relying on, and to ensure that their claims are not preempted by other statutes.

    Note: The substance of the foregoing analysis appeared on the California State Bar Insolvency Section e-newsletter of 4/9/14

    Analysis: Supreme Court Hears Arguments on Whether an Inherited IRA is Exempt

    March 25, 2014
    By Charles J. Tabb
    Mildred Van Voorhis Jones Chair in Law, University of Illinois, and Resident Scholar for the American Bankruptcy Institute

    The United States Supreme Court yesterday heard oral arguments in the case of Clark v. Rameker, on the issue of whether an inherited IRA is exempt. The Seventh Circuit had denied the debtor's exemption, disagreeing with the Fifth Circuit in the Chilton case, as well as the clear majority of lower courts, which had held that an inherited IRA is exempt under section 522(b)(3)(C) or 522(d)(12) (depending on whether the debtor elects the state or federal exemptions). On balance, while it is a close question, the oral arguments appear to indicate that the Court is likely to reverse the Seventh Circuit and hold for the debtor. My sense is that the Justices do not really like the result as a policy matter but think the Code dictates a pro-exemption reading.

    After Heidi Heffron-Clark and her husband Brandon Clark filed chapter 7, Heidi claimed an exemption under section 522(b)(3)(C), for an IRA valued at close to $300,000 that she had inherited from her mother Ruth. The trustee (Rameker) objected. If the trustee wins, the Clarks' creditors get that money. If the debtor wins, she keeps all of the money for herself, and indeed does not even have to wait until she is retirement age to start enjoying the funds. It would just be a $300,000 windfall for her (albeit with some tax implications), free from her creditors. Clearly, this was the point at oral argument that most troubled the Justices if they were to hold for the debtor. Justices Ginsburg, Alito, and the Chief Justice all found it quite odd that Congress would have allowed a debtor who had not herself saved the money for retirement to keep such a huge pile of money for herself, ripe for immediate enjoyment. Why Congress would have wanted a debtor to be able to keep all of an inherited IRA, but none of other inherited funds, puzzled them.

    Yet, the questioning suggested that a majority of the Justices - led most vociferously by Justice Breyer - found the statutory reading to favor the debtor. The relevant statutory exemption language is for "retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under" certain enumerated sections of the Internal Revenue Code, including the ones for IRAs. The inherited funds indisputably satisfied the latter part of the statutory test, as they were exempt from taxation under a listed section. The battle is over whether they are "retirement funds" within the meaning of the exemption. The debtor argued that they are, as they had that status when set aside initially in the account by the debtor's mother, and nothing in the statute limited the exemption to "the debtor's" retirement funds. The trustee countered by arguing that after being inherited, in the hands of the non-spousal debtor, they no longer constituted retirement funds at all. While still tax exempt, the attributes relevant to retirement had changed significantly so as to negate that characterization; for example, the debtor could withdraw the money immediately (before age 59½), and indeed was not even permitted to wait until she was 59½, but had to start withdrawals within a short time. Also, she could neither make new retirement contributions to the fund nor roll it over.

    The Justices, though, seemed persuaded by the plain meaning of the unqualified reference to "retirement funds," especially given the telling omission of any further requirement that they be "the debtor's" retirement funds. This omission was notable, the Justices thought, since all of the other enumerated exemption provisions in section 522(d) do include a specific reference to "the debtor's" interest in the property at issue, be it a car, a tool of the trade, a homestead, or whatever. The Justices also seemed to agree with the debtor that the qualifying language "to the extent" in the exemption favored a broader reading of the "retirement funds" language. Further, the Court worried about the administrative complexity that would result if "retirement funds" was not given a broad meaning. In short, several of the Justices thought that the phrase "retirement funds" was not necessarily and definitionally limited to funds set aside originally by the debtor (or inherited only by a spouse), but could include a retirement fund that was inherited from its creator by someone other than a spouse.

    Economically and demographically, this is a huge issue. Massive amounts of wealth are being passed down to future generations via inherited retirement vehicles as both "the greatest generation" and baby boomers are dying. Whether creditors get to share in that largesse or not is a very significant question; the magnitude is staggering. Forty percent of U.S households have IRAs, totaling over $5 trillion in value. Indisputably, in the hands of the person who set up the IRA, creditors cannot touch the money in bankruptcy. Is that protection lost if the creator of the IRA dies and the funds are inherited by someone other than her spouse? When the Court hands down its decision in Clark v. Rameker, we will know the answer. After the oral arguments, it appears likely that the Court will hold for the debtor and maintain the exemption; in short, the exempt status of "retirement funds" in bankruptcy will not die with the creator of the account.

    Fowler vs. U.S. Bank, N.A., 2014 Westlaw 850527 (District Court S.D. Tex. 2014).

    Facts: Two homeowners facing foreclosure filed an action against their mortgage lender under the Truth in Lending Act ("TILA"), alleging a variety of violations. One of the plaintiffs' theories was that the mortgage had been assigned and that the assignee had failed to inform the borrowers of the assignment. The lender moved to dismiss the complaint, arguing that the borrowers themselves had disputed whether the assignment had actually taken place.

    Reasoning: Although the court dismissed some of the plaintiffs' claims, the court upheld the claim under 15 U.S.C.A. §1641(g), enacted in 2009, which provides that "not later than 30 days after the date on which a mortgage loan is sold or otherwise transferred or assigned to a third party, the creditor that is the new owner or assignee of the debt shall notify the borrower in writing of such transfer . . . ." The court reasoned that the borrowers could plead (in the alternative) either that the assignment had not taken place or that the assignee had failed to provide the proper notification of the assignment. The court further noted that the borrowers had alleged that they had conducted a title search, which failed to reveal any recorded assignment of the mortgage.

    Comment: Although the potential damage award for violation of this new statute is relatively small, the effect of this rule could be significant. It provides a convenient "hook" upon which many distressed homeowners can hang a TILA claim, thus temporarily forestalling foreclosure. As everyone now knows, the documentation surrounding the assignment of mortgages has been slipshod, and violations of §1641(g) are quite common.

    This analysis is from the California State Bar Insolvency Committee e-newsletter of 3/14

    Preview: Scope of Protections for Retirement Funds in Bankruptcy at Issue in Case Before Supreme Court on Monday

    Scheduled for oral argument on Monday, Clark v. Rameker presents the Supreme Court with a case that has a clean and straightforward question of statutory interpretation, with no looming shadow of oppressive media scrutiny, according to a SCOTUSBlog preview of the argument. Among the assets exempt from the estate of a debtor in bankruptcy, Congress has with steadily increasing generosity included a wide variety of retirement funds. The specific question in this case is whether those provisions exempt the $450,000 IRA that petitioner Heidi Clark inherited upon the death of her mother. If the IRA is exempt, she can keep it and use it for support after her bankruptcy; if it is not exempt, the bankruptcy court will take it and use it to pay creditors. The relevant statute is Bankruptcy Code § 522(b)(3)(C), which exempts "retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under [seven listed sections] of the Internal Revenue Code." The parties agree that the inherited IRA is exempt from taxation under one of those sections. The sole issue in dispute is whether the inherited IRA constitutes "retirement funds" for purposes of paragraph (C). Note that for bankruptcy debtors who have resided in California continuously for over two years, as of the date the debtor's bankruptcy case is filed, such debtors (which is the great majority of individuals who file bankruptcy in California), do NOT used the federal (11 USC 522(b)(3)(C) exemptions. Instead California residents for over 2 years who file bankruptcy use the California state exemptions, which are CA CCP 703 and 704 sets of exemptions (debtors get to choose which). For such debtors, though the soon to be decided US Supreme Court case might be helpful by analogy, that case will NOT be controlling. Rather, the language of the California exemption statutes will be controlling.

    Law v. Siegel (In re Law)

    Law v. Siegel (In re Law), No. 12-5196, 571 U.S.    (United States Supreme Court 3/4/14): In a unanimous decision authored by Justice Scalia, the Supreme Court found that a bankruptcy court may not surcharge the homestead exemption as a result of the debtor's misconduct.

    The bankruptcy court found that the debtor created a fictional loan "to preserve his equity in his residence beyond what he was entitled to exempt" by perpetrating "a fraud on his creditors and the court." That court surcharged the debtor's $75,000 homestead exemption to reimburse the trustee's attorney fees. The surcharge was upheld on appeal to the Bankruptcy Appellate Panel, 2009 WL 7751415 (Oct. 22, 2009) (per curiam), and the Ninth Circuit Court of Appeals, In re Law, 435 Fed. Appx. 697 (2011) (per curiam), on the basis that the surcharge reimbursed actual costs incurred by reason of the fraud, and would protect the integrity of the bankruptcy process. The Supreme Court reversed.

    The National Consumer Bankruptcy Rights Center filed an amicus brief in the Supreme Court on behalf of the NACBA membership in which it set out the arguments ultimately relied on by that Court in reversing the decision.

    In re NNN Parkway 400 26, LLC, 2014 Westlaw 309734 (Bankr. C.D. Cal. 2014).

    In re NNN Parkway 400 26, LLC, 2014 Westlaw 309734 (Bankr. C.D. Cal. 2014). A bankruptcy court in California has held that a "new value" Chapter 11 reorganization plan requires a genuine market test of the value of the equity, that the lender's deficiency claim could not be gerrymandered where the guarantor was insolvent, and that the artificial impairment of a consenting class cannot be the result of abusive conduct.

    Facts: A group of Chapter 11 debtors sought confirmation of a plan of reorganization that sought to invoke an exception to the "absolute priority rule" of 11 U.S.C.A. § 1129(b)(2)(B)(ii). That rule requires, in essence, that if the non-consenting unsecured creditors are not paid in full, the equity holders cannot retain anything following the reorganization. Under the plan, the equity holders would retain some interest in the reorganized companies, in exchange for the contribution of some "new value." In addition, the plan separately classified (or "gerrymandered") the multimillion dollar deficiency claim of the secured lender. The plan also identified a very small single-creditor class as an "impaired consenting class," for purposes of plan cramdown. The lender objected to the plan on a variety of grounds, and the court denied confirmation.

    Reasoning: The court first explained that under Bank of America Nat. Trust and Sav. Ass'n v. 203 North LaSalle Street Partnership, 526 U.S. 434, 119 S. Ct. 1411, 143 L. Ed. 2d 607 (1999), the plan proponent must show that the proposed "new value" is quantitatively sufficient:

    LaSalle requires that the quantum of new value be market tested; otherwise the parties and the court cannot know whether the amount of new value proposed in the debtor's plan is the most available. And if more (or better) could be gotten elsewhere, then the equity is effectively keeping a form of property or interest in the debtor despite not paying the dissenting creditors in full, by exercising its exclusive "option" to direct/determine the source of the new value. But LaSalle is frustratingly vague as to what exactly a debtor must do to "market test" the interest ...

    Given that vagueness, the debtors attempted to show that their private marketing efforts had constituted a de facto "market test," since they had tried to reach out to investors to purchase the equity. The court was unimpressed, noting that "[n]o contact log was kept . . . [n]o advertisements of any kind were undertaken . . . whether in commercial real estate investor-oriented magazines or otherwise." The court held that the debtors' marketing program fell far short of the required due diligence:

    This court does not hold that in every case an investment banker must be hired, whose fee is tied to success in finding the most money on the best terms. But engagement of such a person with that goal and motivation would help. The court does not hold that advertisements in targeted local and national newspapers are always required, or that they would even be appropriate in every case. But the court does hold that debtors bear the burden of showing that the new money offered is the most and best reasonably obtainable after some "market testing" in order to cram down over the objections of a non-consenting class of unsecured creditors. This probably requires, at a minimum, demonstration of a systematic effort designed to "market test" the deal.

    Moving to the issue of claims classification, the debtors argued that the lender's deficiency claim could be separately classified because the lender held a guarantee, unlike other unsecured creditors, in conformity with the holding in In re Loop 76, LLC, 465 B.R. 525 (9th Cir. BAP 2012). But the court held that the debtor had failed to show that the guarantor was insolvent, thus casting doubt on the basis for gerrymandering:

    [S]ince this entire question of separate classification is one addressed to separating reality from façade, it follows that the basis for the distinction must be one that is meaningful. . . . [T]his court holds that a guaranty from an insolvent guarantor provides nothing meaningful and so it becomes a distinction without a difference and cannot alone support separate classification.

    Finally, the debtor claimed that it had provided a plausible "impaired consenting class" for purposes of cramdown, since it owed approximately $10,000 to one creditor for the purchase of a truck. The court noted that there was testimony that the truck had been unnecessary, that the debtor had no place to store it, and that its purchase was simply a strategy. The court held that this was a case of impermissible "artificial impairment:"

    This smells to the court like a device to create an impaired consenting class. Moreover, the parties apparently agree that there are and have been at all times since the petition hundreds of thousands on deposit [in funds available to the debtors], so it is entirely unclear why this creditor is impaired at all. A doctrine has emerged that "artificial impairment" is a form of gerrymandering and when abusively used is held to be antithetical to the good faith which must be at the center of any reorganization effort.

    Comment: This opinion is significant because it adds a healthy dose of common sense to the murky jurisprudence surrounding the cramdown process. First, the court required genuine efforts by the debtors to "market test" their new value plan, going so far as to spell out the investor outreach program that a debtor must undertake. As far as I know, no other reported opinion has provided such detailed guidance.

    Second, the court's rejection of gerrymandering in this case adds an important qualification to the rule in Loop 76, supra: it is not enough to show that the lender holds a guarantee. Instead, the debtor must also show that the guarantor is solvent. Otherwise, there is no good reason to separately classify the lender's deficiency claim. I do not know whether this "friendly amendment" to the holding in Loop 76 will survive appeal, but I hope that it will. Otherwise, the holding in Loop 76 will create a huge loophole in the cramdown process: many (and perhaps most) lenders hold guarantees, thus setting the stage for routine gerrymandering.

    Third, the court's "reality-based" rejection of "artificial impairment" is refreshing. The court was able to look at the circumstances surrounding the collusive creation of the "impaired consenting class" and to reject the debtors' transparent gamesmanship. However, I am not sure that the court's ruling on this point would withstand appeal in light of In re L & J Anaheim Associates, 995 F.2d 940 (9th Cir. 1993), which permitted a creditor that propounded a plan of the organization to "impair" itself by accelerating its own recovery. If the blatantly collusive impairment in that case was sufficient, then I don't see why the purchase of the truck in this case would not pass muster.

    Finally (and pedantically), I am delighted to see that the court capitalized the word "Chapter" in "Chapter 11," perhaps following the lead of the Ninth Circuit in In re Bellingham Ins. Agency, Inc., 702 F.3d 553 (9th Cir. 2012). I continue to believe that the bankruptcy bar's ostentatious use of the lower case form is without statutory justification and is nothing more than artificial orthographic impairment.

    For a critical discussion of the Loop 76 opinion, see 2012 Comm. Fin. News. 19, When Secured Lender Holds Non-Debtor Guarantees, Lender's Unsecured Deficiency Claim May Be Separately Classified, Thus Enabling Debtor to Confirm Cramdown Plan Using a Separate Class of Impaired Consenting Unsecured Creditors.

    This analysis is from CA State Bar Insolvency Committee e-newsletter

    Janura et. al. v. Saridakis (In re Saridakis),   BR  

    Janura et. al. v. Saridakis (In re Saridakis),   BR  , 2013 WL 6488276, 9th Cir.BAP (Cal.), 12/10/13): The U.S. Bankruptcy Appellate Panel of the Ninth Circuit ("BAP") held that post-trial discovery of a default judgment, that apparently was entered in a state court action contemporaneously with, or immediately following, a trial in the bankruptcy court was not newly discovered evidence "of such magnitude that production of it earlier would likely have changed the outcome of the case." What to learn from this decision: Whatever evidence you have, present that evidence before the Court rules for the first time, because its very hard to get reconsideration of an already issued decision, based on "newly discovered evidence", or on any other ground.

    Brown v. Ferroni,   BR  , 2014 WL 695090 (District Court, ED PA 2014)

    Brown v. Ferroni,   BR  , 2014 WL 695090 (District Court, ED PA 2014): U.S. District Court, Eastern District of Pennsylvania (Philadelphia), has become an additional court holding that the "absolute priority rule" applies in individual Chapter 11 bankruptcy cases, and that the 2005 BAPCPA amendments to the Bankruptcy Code did NOT eliminate the absolute priority rule from applying in Chapter 11 cases of individuals.

    Courts are split nationwide at all levels (Bankruptcy Court, District Court, BAP, and Court of Appeals), as to whether or not the 2005 BAPCPA Amendments eliminated the absolute priority rule, in Chapter 11 bankruptcy cases of individuals (as opposed to Chapter 11 bankruptcy cases of corporations and partnerships, where everyone agrees the absolute priority rule applies). It seems inevitable that this nationwide split will eventually be ruled on by the US Supreme Court.

    Brown v. Ferroni holds that Congress didn't repeal the so-called absolute priority rule for individuals in chapter 11 when it amended the Bankruptcy Code in 2005, according to a recent ruling by a district judge in Philadelphia, Bloomberg News reported yesterday. The issue has divided federal courts, as three circuit courts of appeal and 17 bankruptcy courts follow the narrow view that absolute priority survives in individuals' chapter 11s. One bankruptcy appellate panel, one district court and seven bankruptcy courts read the amendments broadly and contend that the absolute priority rule no longer applies to individuals in chapter 11, according to U.S. District Judge Timothy J. Savage in Philadelphia. The case turns on language added in 2005 to §1129(b)(2)(B)(ii) of the Bankruptcy Code and §1115.

    The majority take the view that the plain meaning of the two statutes together only allows an individual using cramdown to keep property that was obtained after filing for bankruptcy. In his Brown v. Ferronia decision, US District Judge Savage found the language unambiguous, and even if it weren't, he nonetheless subscribed to the narrow view.

    He said that there is nothing in the statute or legislative history to indicate that Congress intended to abrogate absolute priority for individuals. Because repeal by implication is "disfavored," Judge Savage concluded that absolute priority remains because nothing in the statute shows an intention to repeal the rule that existed before 2005.

    The most recent appeals court decision on the issue came down in May from the circuit court in New Orleans in a case called Lively.

    Hudson v. Martingale Investments, LLC (In re Hudson),    B.R.   , 2014 WL 128965 (9th Cir. BAP January 14, 2014)

    Hudson v. Martingale Investments, LLC (In re Hudson),    B.R.   , 2014 WL 128965 (9th Cir. BAP January 14, 2014): The U.S. Bankruptcy Appellate Panel of the Ninth Circuit ("BAP") reversed the bankruptcy court's ruling to annul the automatic stay. The BAP held that the bankruptcy court abused its discretion by basing the ruling on inadmissible evidence.


    On March 5, 2013 at 10:28 a.m. (the "Petition Date"), John E. Hudson (the "Debtor") filed a chapter 13 bankruptcy petition. Martingale Investments, LLC ("Martingale") alleged that at 10:01 a.m. on the same day, Martingale bought the Debtor's home at a foreclosure sale. The Debtor did not vacate his home and Martingale moved to lift the automatic stay in order to proceed with its unlawful detainer action pending in a state court.

    In its motion, Martingale sought to annul the automatic stay retroactive to the Petition Date by arguing that the foreclosure sale occurred pre-petition. In support of its motion, Martingale submitted two declarations. The first declaration, by Martingale's property manager Olivia Reyes ("Reyes"), stated that she was the custodian of Martingale's books and records with "personal knowledge" of the Debtor's account. To support that Martingale purchased the property at 10:01 a.m., before the bankruptcy filing, Reyes attached a report (the "Sale Report") from the trustee who conducted the sale. The Sale Report was actually an email with essential information about the foreclosure sale, prepared by a third party, Priority Posting & Publishing, Inc. ("Priority"). The Debtor objected to the motion, arguing in part, that because the Sale Report was hearsay and not authenticated, Martingale failed to submit any admissible evidence. In response, Martingale submitted a second declaration. The second declaration was from the trustee's employee, Ric Juarez ("Juarez"), who declared that the foreclosure sale was completed at 10:01 a.m. Juarez's declaration also relied on the email message from Priority.

    The bankruptcy court granted Martingale's motion and found that the evidence was admissible. The bankruptcy court ordered annulment of the automatic stay. The Debtor timely appealed to the BAP, arguing that the Sale Report was inadmissible evidence.


    The BAP reversed the bankruptcy court's ruling because there was no admissible evidence to support the bankruptcy court's ruling. The BAP reviewed various Federal Rules of Evidence ("FRE") to conclude that the Sale Report was inadmissible hearsay.

    The BAP first noted that the Sale Report, which supported the bankruptcy court's ruling, was hearsay pursuant to FRE 801(c). The BAP noted the requirement of FRE 802 that hearsay evidence must be excluded unless an exception applies. Reviewing FRE 803(6), which sets forth the "business record exception," the BAP noted that Reyes and Juarez qualified as custodians and other qualified witnesses. Reyes and Juarez's declarations, however, contained no foundation for admissibility of the Sale Report, which was not Martingale's or the trustee's record, but Priority's record.

    The BAP went on to note that the business record exception can apply to records and documents received from another business. In order for the exception to apply, there must be testimony that (1) the document was kept in the regular course of business and (2) the business regularly relied on the document. Thus, in order for the business record exception to apply to the Sale Report, the BAP reasoned that Martingale should have shown that Martingale or the trustee (1) kept the Sale Report in the regular course of business and (2) regularly relied on the Sale Report.

    Having explained what was required for the Sale Report to be admissible evidence, the BAP concluded that Martingale failed to make such showing in this case. The BAP held that Reyes and Juarez's declarations failed to state that Martingale or the trustee (1) kept the Sale Report in the regular course of business and (2) regularly relied on the Sale Report. Because the declarations failed to provide these two foundational showings, the BAP held that the business records exception did not apply to the Sale Report.

    The BAP concluded that the bankruptcy court's ruling must be reversed because there was no other evidence on the record regarding the timing of the foreclosure sale. Thus, the admission of the Sale Report was prejudicial error requiring reversal of the ruling.

    Bradley vs. Franklin Collection Service, Inc.

    Bradley vs. Franklin Collection Service, Inc.,    F.3d   , 2014 Westlaw 23738 (11th Cir. 2014). The Eleventh Circuit Court of appeals held that an attempt by a collection agency to collect a 33% "collection fee" violates the Federal Debt Collection Practices Act, unless the consumer has agreed in advance to pay "reasonable collection agency fees."

    Facts: Two patients incurred medical expenses. One of the patients signed an agreement stating that he would pay "all costs of collection including ... reasonable collection agency fees." The other patient's agreement stated that he would pay "all costs of collection," but that agreement did not contain any reference to collection agency fees. Both accounts were unpaid; the healthcare provider referred the accounts to a collection agency, which tacked on a fee of roughly 33%.

    After the collection agency contacted each patient, each patient brought suit under the Federal Debt Collection Practices Act ("FDCPA"), claiming that the extra fee had violated the statute. The District Court dismissed both suits.

    Reasoning: The appellate court affirmed the dismissal of one of the claims but reversed as to the other. Noting that this was a question of first impression in the Eleventh Circuit, the court held that in the case of the patient who had not specifically agreed to pay "collection agency fees," the collection agency had no right to impose the fee, since the fee bore no relation to the actual cost of the collection effort. However, the court noted that "a percentage-based fee can be appropriate if the contracting parties agreed to it."

    Comment: Law Professor Dan Schechter, of Loyola Law School, who wrote this analysis, says: This ruling may be significant far beyond the arena of consumer debt collection. First, it provides some drafting guidance: whenever an agreement contains a "costs and fees" clause, it may be advisable to include specific language referring to "reasonable collection agency fees." Second, the court's decision seems to mean that even if those fees exceed the actual costs of collection, those fees can still be collected.

    I am not sure, however, whether that second point would be valid in all jurisdictions. For example, in California, the courts frequently strike down collection costs (such as late fees) that are in excess of the creditor's actual administrative costs, on the theory that those extra charges are really disguised liquidated damages, even if the debtor has agreed in writing to pay those charges.

    For discussions of earlier decisions dealing with the relationship between liquidated damages and the prevailing party's actual costs, see:

    – 2012 Comm. Fin. News. 78, 2012 Liquidated Damages Provision in Commercial Lease Is Unenforceable Because It Bore No Relationship to Actual Damages Suffered by Tenant Due to Landlord's Failure to Complete Redevelopment Project.
    – 2008 Comm. Fin. News. 68, Prepayment Premium in Commercial Promissory Note Is Not Invalid as Liquidated Damages Provision Because It Reflects Lender's Actual Loss Resulting from Prepayment.
    – 2007 Comm. Fin. News. 52, Creditor May Not Collect Late Charge As a Percentage of Final Balloon Payment Because Late Charge Does Not Represent Actual Administrative Costs and Is Therefore Unlawful Penalty.

    This case report appeared in the CA State Bar Insolvency Committee e-newsletter of 2/4/14

    First-Citizens Bank & Trust Co. v. Reikow

    First-Citizens Bank & Trust Co. v. Reikow, 313 P.3d 1208 (Wash.App. 2013) An appellate court in Washington has held that despite a broad waiver of antideficiency protections contained in a guarantee, the guarantor was nevertheless protected by the "fair value" limitation on the lender's right to recover. Though this is a Washington state court decision, not a federal court decision, it is useful because it highlights certain issues relating to liability of persons who GUARANTEE they will pay debts owed by some other person/entity.

    Facts: A lender funded a $6.7 million construction loan to a development company. The equity holders execute personal guarantees, which contained waivers stating that the guarantors waived "any and all rights or defenses arising by reason of (A) any 'one action' or 'anti-deficiency' law or any other law which may prevent Lender from bringing any action, including a claim for deficiency, against Guarantor . . . . "

    The lender eventually foreclosed nonjudicially, submitting a successful credit bid for $5.2 million, and then sought to recover the balance due from the guarantors. When the lender moved for summary judgment, the guarantors produced an Internal Revenue Service form filed by the lender, listing the fair market value of the property as $7.8 million. The trial court, on its own motion, ordered a "fair value" hearing and found that the value of the property exceeded the amount due on the loan. The trial court entered judgment for the guarantors, and the lender appealed.

    Reasoning: On appeal, the lender argued that the guarantors had waived the Washington "fair value" statute, RCW 61.24.100(3), which states that a guarantor's deficiency liability is limited to the difference between the outstanding loan balance and the "fair value" of the collateral. The court held that no waiver "would entitle the bank to a larger deficiency judgment than the statute allows." Further, the court doubted whether the language of the guarantee constituted an adequate waiver: "[T]he broad boilerplate waiver in the guarantees' fine print could hardly defeat the explicit and specific provisions of [the statute], which plainly aimed to protect guarantors from having their obligations enlarged."

    Comment: Law Professor Dan Schechter, of Loyola Law School, who wrote this analysis, says: I am going to go way out on a limb and predict reversal by the Washington Supreme Court. I know of no authority that says that the protection of the antideficiency statutes can never be waived by a sophisticated guarantor; therefore, if there were an adequate waiver in the guarantees, that waiver should be enforceable. Second, I think that there was a proper waiver in this case. The guarantors waived "any and all rights or defenses arising by reason of (A) any 'one action' or 'anti-deficiency' law or any other law which may prevent Lender from bringing any action, including a claim for deficiency, against Guarantor . . . . " The "fair value" statute is unquestionably included within the scope of that sweeping language.

    However, whether this opinion is reversed or not, I predict two more outcomes. First, the Washington lending community will soon seek the enactment of a statute comparable to California Civil Code §2856(c), which specifically authorizes the following "safe harbor" waiver:

    The guarantor waives all rights and defenses that the guarantor may have because the debtor's debt is secured by real property. This means, among other things:
    (1) The creditor may collect from the guarantor without first foreclosing on any real or personal property collateral pledged by the debtor.
    (2) If the creditor forecloses on any real property collateral pledged by the debtor:
    (A) The amount of the debt may be reduced only by the price for which that collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price.
    (B) The creditor may collect from the guarantor even if the creditor, by foreclosing on the real property collateral, has destroyed any right the guarantor may have to collect from the debtor.
    This is an unconditional and irrevocable waiver of any rights and defenses the guarantor may have because the debtor's debt is secured by real property. These rights and defenses include, but are not limited to, any rights or defenses based upon Section 580a, 580b, 580d, or 726 of the Code of Civil Procedure.

    Second, I predict that even if no such legislation is enacted in Washington, lenders will now draft guarantees using language similar to the "safe harbor" wording of the California statute.

    This case report appeared in the CA State Bar Insolvency Committee e-newsletter of 2/4/14

    In re H Granados Communications, Inc.

    In re H Granados Communications, Inc., 2013 Westlaw 6838709 (9th Cir. BAP 2013. Creditor and creditor attorney ordered to pay monetary sanctions for violating bankruptcy automatic stay. The United States Bankruptcy Appellate Panel of the Ninth Circuit ("BAP") recently upheld sanctions of $23,072.09 against a creditor and its counsel in civil contempt under 11 U.S.C. § 105(a) for violation of the bankruptcy automatic stay.


    In September 2011, Rediger Investment Corporation ("Rediger") through its counsel, the Duringer Law Group, PLC ("Duringer Firm" and, jointly, the "Appellants") commenced an unlawful detainer action in state court against H Granados Communications, Inc. ("debtor") and its president, Henry Granados. Four months later, on January 8, 2012, the debtor filed for bankruptcy relief under Chapter 11.

    Debtor listed Rediger on its list of 20 largest creditors and thus Rediger promptly received a Notice of Bankruptcy as well as notices throughout the bankruptcy case. Debtor also filed the Notice of Bankruptcy in the state court action on or about the petition date. Despite these notices, the Duringer Firm continued to prosecute the state court action against debtor during the first three months of 2012: it obtained a default judgment against debtor, filed a declaration of accrued interest, and obtained a writ of execution.

    On November 1, 2012, debtor's counsel, apparently unaware of the state court proceedings beforehand, filed a notice of stay in the state court. One month later, however, the Duringer Firm caused the Los Angeles Sheriff to levy on debtor's DIP bank account which deprived the debtor of the use of $27,941.26. In response, debtor's counsel wrote the Sheriff and the Duringer Firm advising of the pending bankruptcy and demanding the release of the levy. Appellants refused.

    In December 2012, debtor moved for an order to show cause ("OSC") why Appellants should not be found in contempt under Section 105(a) for willfully violating the automatic stay. The bankruptcy court issued and then heard the OSC. It found that both Rediger and the Duringer Firm willfully violated the stay and therefore held them in contempt. After a continued hearing on the sanctions issue, the court awarded compensatory sanctions for costs incurred as a result of the stay violation, which included attorneys' fees.

    On appeal, the BAP upheld the ruling of the bankruptcy court.


    The BAP found that because the Duringer Firm conceded that the Notice of Bankruptcy was filed in the state court action at the commencement of the bankruptcy, it consequently also conceded that the stay was willfully violated. A party willfully violates the automatic stay if (1) it knew of the automatic stay, and (2) the actions that violated the automatic stay were intentional. In re Dyer, 322 F.3d 1178, 1191 (9th Cir. 2003). As to the second prong, the BAP found that the "Duringer Firm, on behalf of its client Rediger, pursued relief in the State Court Action that violated the stay: namely, moving for and then obtaining a default judgment; filing a declaration of accrued interest; obtaining a writ of execution; and causing the Los Angeles Sheriff to levy on the debtor's DIP bank account." The BAP also found that the "Duringer Firm also failed to take affirmative action to undo the effects of stay violative action after receiving the November 2, 2012 notice; it did not vacate, and it did not cancel, the default judgment."

    Appellants challenged the sanctions award on three grounds: (1) under Sternberg v. Johnson, 595 F.3d 937 (9th Cir. 2010), damages for stay violations under Section 105(a) are limited to efforts to enforce the stay or remedy the violation, (2) debtor must show the Appellants' actions interfered with the debtor's reorganization efforts, and (3) the charges awarded were beyond the scope authorized by Ninth Circuit and United States Supreme Court authority and were otherwise unreasonable.

    The BAP flatly rejected each argument. First, the bankruptcy court awarded sanctions under Section 105(a). Sternberg did not address that statute and therefore "does not limit the availability of contempt sanctions, including attorney fees, for violation of the automatic stay, where otherwise appropriate." Sternberg, 595 F.3d at 946. Second, when calculating damages for civil contempt violations under Section 105(a), it is irrelevant whether a creditor's stay violation interferes with a debtor's reorganization efforts. The several cases cited by Appellants in support address damages under the predecessor of Section 362(k) and are therefore inapposite. Third, attorneys' fees and costs incurred in litigating issues which flow from the stay violation are proper under Section 105(a). Moreover, based on the detailed records submitted in support by debtor, and the bankruptcy court's prior approval, the BAP found the debtor's requested fees and costs reasonable and supported by evidence.


    It is hardly surprising that the BAP upheld the bankruptcy court's finding that Appellants willfully violated the automatic stay. Even if Appellants had not conceded the point, the record clearly demonstrates that Appellants knew of the stay and that pressing forward with the unlawful detainer complaint and eventually levying on debtor's DIP account, were intentional acts.

    It is equally unsurprising that the BAP rejected debtor's arguments concerning the validity and reasonableness of debtor's fee requests. The authority cited by Appellants was either inapposite or, worse, contrary to the point they were trying to make. In challenging fees, the Ninth Circuit requires that a party expressly identify the time entries that are objectionable. This opinion offers an important reminder to practitioners to identify and address the relevant underlying statutes. Here, Appellants seem to attack debtor's sanction request with authority analyzing Section 362(k) rather than Section 105(a).

    Finally, this opinion offers another reminder that if you prevail on a contested motion which will likely be appealed, you should consider preparing an order setting forth findings of fact and conclusions of law. The bankruptcy court did not make detailed findings of fact and conclusions of law but the record here provided the BAP with a "full, complete, and clear view of the issues on appeal." That may not always be the case. First Yorkshire Holdings, Inc. v. Pacifica L 22, LLC (In re First Yorkshire Holdings, Inc.), 470 B.R. 864, 871 (9th Cir. BAP 2012). A party can avoid a lot of problems on appeal by putting forth a little effort crafting detailed findings of fact and conclusions of law at the trial court level.

    This case report is from the California State Bar Insolvency Committee e-newsletter of 2/3/14

    Public Comment Period Ending Soon for Proposed Amendments to the Federal Rules of Bankruptcy Procedure

    The Judicial Conference Advisory Committee on Bankruptcy Rules has proposed amendments to the Federal Rules of Bankruptcy Procedure and Official Forms, and requested that the proposals be circulated to the bench, bar, and public for comment. On August 15, 2013, the public comment period opened for the proposed amendments to Bankruptcy Rules 2002, 3002, 3007, 3012, 3015, 4003, 5005, 5009, 7001, 9006, and 9009, and Official Forms 17A, 17B, 17C, 22A-1, 22A-1Supp, 22A-2, 22B, 22C-1, 22C-2, 101, 101A, 101B, 104, 105, 106Sum, 106A/B, 106C, 106D, 106E/F, 106G, 106H, 106Dec, 107, 112, 113, 119, 121, 318, 423, and 427. The public comment period closes on February 15, 2014.

    Blade Energy Pty Ltd. et al. v. Rodriguez (In re Rodriguez)

    Blade Energy Pty Ltd. et al. v. Rodriguez (In re Rodriguez)—9th Cir. BAP 12/19/13. This is an "unpublished" decision. The United States Bankruptcy Appellate Panel of the Ninth Circuit (the "BAP") has affirmed a bankruptcy court's (Bankruptcy Judge Scott Clarkson, Bankruptcy Court, CD CA) dismissal of an adversary proceeding as a discovery sanction for failure to comply with initial discovery rules and the court's procedural rules.


    The plaintiffs and appellants (the "Appellants") in this case brought an action against appellee and debtor Jacqueline Rodriguez (the "Appellee" or "Ms. Rodriguez") seeking a determination that their claims against her were non-dischargeable in bankruptcy pursuant to 11 U.S.C. §§ 523(a)(2)(A), (a)(2)(B), (a)(4), and (a)(6). As required by a local bankruptcy rule ("LBR"), Appellants served with the summons and complaint a copy of the bankruptcy court's "Early Meeting of Counsel and Status Conference Instructions" ("Rule 26 Instructions"). The Rule 26 Instructions require, among other things: (1) compliance with LBR 7026-1, (2) a meet and confer at least 21 days before the status conference, and (3) the filing of a joint status conference statement if an answer has been filed, or the filing of a unilateral status conference statement if an answer has not been filed.

    Instead of filing an answer, Ms. Rodriguez moved to dismiss. The Appellants filed a response to the motion but failed to respond to multiple correspondence and inquiries from Ms. Rodriguez's counsel about setting the Federal Rule of Civil Procedure ("Federal Rule") 26 meeting. A limited telephonic meeting took place 18 days after the deadline for a meeting, and an untimely unilateral report was filed on the same day indicating that the required Federal Rule 26 meeting had finally occurred.

    The bankruptcy court dismissed the action due to the failure to comply with the Rule 26 Instructions, as well the court's civil and local rules in lieu of monetary sanctions that had previously proven ineffective in the case.


    In affirming the lower court's dismissal, the BAP examined Federal Rule 16(a), applicable in adversary proceedings pursuant to Federal Rule of Bankruptcy Procedure 7016, and LBR 7016-1. The BAP found it undisputed that the Appellants had failed to participate in a Federal Rule 26 meeting or timely file either a joint or unilateral status conference statement.

    The BAP then explained that to overturn a dismissal ordered as a discovery sanction, the appellate court must "have a definite and firm conviction that it was clearly outside the acceptable range of sanctions," citing Malone v. U.S. Postal Service, 833 F.2d 128, 130 (9th Cir. 1987). The BAP enunciated the five factors a trial court must weigh before an action is dismissed as a sanction for lack of prosecution: "(1) the public's interest in expeditious resolution of litigation; (2) the court's need to manage its docket; (3) the risk of prejudice to the defendant; (4) the public policy favoring disposition of cases on their merits; and (5) the availability of less drastic sanctions." Citing Malone, 833 F.2d at 130; and Thompson v. Hous. Auth., 782 F.2d 829, 832 (9th Cir.), cert. denied, 479 U.S. 829 (1986).

    In upholding the selection of the sanction of dismissal over monetary sanctions, the BAP strongly supported Judge Clarkson's issuance of a harsher penalty, finding that "[w]hen challenged by the bankruptcy court on his missteps [counsel ] had difficulty understanding, in effect, what all the fuss was about [and adding] [t]his lack of comprehension of the impact of dilatory practice on the operation of a trial court is exactly why a sanction stronger than a monetary sanction was warranted in this case."


    In upholding the dismissal of adversary proceedings for failure to comply with the weighty requirements of Federal Rule 26, the least of which are obligations to meet and confer and file status conference statements on a timely basis, it seems apparent that the BAP was supportive of an effort by Judge Clarkson to change "[t]he practice culture of the bar [appearing before the bankruptcy court that] appears to have relegated monetary sanctions for noncompliance with procedural rules to a cost of doing business."

    Federal Rule 26 contains requirements for early initial disclosures "without awaiting a discovery request" supportive of a party's claims. Absent a stipulation or court order to the contrary (often contained in a standard order setting dates and deadlines in a proceeding) or an objection during the Federal Rule 26(f) conference to the rule's deadlines, litigants can be substantially prejudiced if their counsel is not alert to his or her obligations. Federal Rule 26(a)(3)(B) for example provides that all objections to the admissibility of materials identified under Federal Rule 26(a)(3)(A)(ii) not made within 14 days after disclosures are made are (with the exception of objections under Federal Rules of Evidence 402 and 403) waived unless the court orders otherwise. Practitioners are well advised to ascertain before filing an action the extent to which Federal Rule 26 is in force in any particular court, identify all dates set by local rule or practice, and avoid the untimely and incomplete compliance that bankruptcy courts, given ever dwindling judicial resources, are less and less likely to overlook.

    The dismissal was a punishment bigger than the crime, and should have been viewed by the BAP as an abuse of discretion. Most judges would NOT have dismissed the adversary proceeding.

    Tronox v. Kerr-McGee,  BR  , 2013 WL6596696(Bankr SD NY Dec 12, 2013)

    Tronox v. Kerr-McGee,  BR  , 2013 WL6596696(Bankr SD NY Dec 12, 2013): adversary proceeding fraudulent transfer decision, referred to as being a "Game Changing Ruling on Fraudulent Transfer and Spin-Offs to Shed Legacy Liabilities"

    In a ground-breaking environmental fraudulent transfer case, a New York Bankruptcy court held that Kerr-McGee's transfer of valuable oil and gas assets to a new company and (attempted) spin-off of the legacy liabilities to newly-formed Tronox constituted fraudulent transfer and that the transaction, which left Tronox insolvent, was not made for reasonably equivalent value.

    Damages between $5.1 and $14.1 billion are anticipated, payable to the debtor (Tronox) bankruptcy estate. This ruling has a considerable impact on companies with substantial liabilities that attempt to restructure outside of bankruptcy, and is a blow to attempts to create "bankruptcy remote" entities and put assets into the bankruptcy remote entity, before a bankruptcy is filed, even years before a bankruptcy is filed. The statute of limitations under state law (such as CA state law) for seeking to recover fraudulent transfers, can be as much as 7 years from when the transfer occurred.

    Opinion also discusses the Stern v. Marshall issue of consent to the bankr. court's jurisdiction, holding that the Bankruptcy Court had authority to enter final order because Kerr-McGee filed proofs of claims against the debtors for not honoring terms of the spin-off, including failure defend environmental litigation against Tronox.

    Key issues in Tronox include:

    • What facts and circumstances led the court to conclude that the eventual spin-off of Tronox was both an actual and constructive fraudulent transfer?
    • What reasonably equivalent value arguments put forth by Kerr-McGee were rejected by the court?
    • What statute of limitations issues arose under the state UFTA and Bankruptcy Code fraudulent transfer provisions?
    • How did the court rule on the Stern v. Marshall issue of consent when a creditor files a proof of claim?

    Vazquez v. AAA Blueprint & Digital Reprographics (In re Vazquez)


    Vazquez v. AAA Blueprint & Digital Reprographics (In re Vazquez), 2013 WL 6571693 (9th Cir. BAP December 13, 2013): The Ninth Circuit Bankruptcy Appellate Panel ("BAP") recently upheld summary judgment in favor of a creditor under Bankruptcy Code Section 523(a)(6), excepting from discharge debts for willful and malicious injury, in which the bankruptcy court applied issue preclusion to a California trial court's findings of actual fraudulent transfer.

    Factual Background

    Dennis Adrian Vazquez (the "Debtor") owned a document printing, copying and digital reproduction business known as Alliance Reprographics ("Alliance"). A former employee of AAA Blueprint & Digital Reprographics ("AAA") left AAA and immediately went to work for Alliance, taking with him a confidential customer list that he then used to solicit AAA's customers. AAA sued the employee and Alliance (but not Vazquez) in state court for misappropriation of trade secrets, conversion and several other causes of action. AAA prevailed upon all causes of action except conversion, and the court awarded approximately $280,000 in compensatory and exemplary damages and attorney's fees.

    In post-judgment settlement discussions, Vazquez stated that he would close Alliance and open a new business across the street if AAA would not accept $100,000 in full satisfaction of the judgment. Shortly thereafter, Vazquez wound down most of the operations and transferred virtually all of the business to a new company, named All Blueprint, Inc. ("All Blueprint"). AAA sued All Blueprint, Vazquez and his live-in girlfriend Melissa Huerta in state court for actual and constructive fraudulent transfers. After trial, the court entered its findings in a minute order, as follows:

    Dennis Adrian Vazquez and Melissa Huerta conspired to fraudulently transfer assets from Alliance Reprographics Inc to All Blueprint Inc for the purpose of hindering judgment creditor AAA from collecting its judgment against Alliance.

    The court also found, among other findings, that (1) Huerta and Vazquez formed All Blueprint and transferred the assets "for the sole purpose of hindering [AAA's] efforts to collect its judgment" and (2) "by conducting himself in this manner, 'Vazquez committed the wrongful act of hindering AAA in trying to collect the judgment.'" Vazquez appealed the second judgment.

    Thereafter, Vazquez commenced a chapter 13 bankruptcy case. AAA filed an adversary proceeding to except the second judgment from discharge under Bankruptcy Code Section 523(a)(6). AAA filed a motion for summary judgment, relying upon issue preclusion and the findings in both state court lawsuits. Bankruptcy Judge Catherine E. Bauer granted the motion over the Debtor's opposition, holding that the state court's actual fraudulent transfer findings establish that the debt arose from willful and malicious injury.


    The BAP reviewed de novo the bankruptcy court's grant of summary judgment as well as the non-dischargeability of a particular debt as this is a mixed question of law and fact. The BAP reviewed de novo the determination that issue preclusion was available and, upon making that determination, the panel reviewed the bankruptcy court's decision to apply it under an abuse of discretion standard. Lopez v. Emergency Serv. Restoration, Inc. (In re Lopez), 367 B.R. 99, 103 (9th Cir. 2007).

    Bankruptcy Code Section 523(a)(6) excepts from discharge debts "for willful and malicious injury by the debtor to another entity or to the property of another entity..." California's issue preclusion law requires that:

    1) the issue sought to be precluded . . . must be identical to that decided in the former proceeding; 2) the issue must have been actually litigated in the former proceeding; 3) it must have been necessarily decided in the former proceeding; 4) the decision in the former proceeding must be final and on the merits; and 5) the party against whom preclusion is being sought must be the same as the party to the former proceeding.

    Honkanen v. Hopper (In re Honkanen), 446 B.R. 373, 382 (9th Cir. BAP 2011); Lucido v. Super. Ct., 51 Cal.3d 335, 341 (1990). The court must also determine "whether imposition of issue preclusion in the particular setting would be fair and consistent with sound public policy." Khaligh v. Hadaegh (In re Khaligh), 338 B.R. 817, 824-825 (9th Cir. BAP 2006).

    The Debtor argued that the issues decided in the state court were not identical to the elements of section 523(a)(6), which requires that his conduct be both "willful" and "malicious." The BAP disagreed.

    With respect to willfulness, the BAP held that a debtor's conduct is "willful" under section 523(a)(6) "only if he or she actually intended to cause injury or actually believed that injury was substantially certain to occur." See Ormsby v. First Am. Title Co. of Nev. (In re Ormsby), 591 F.3d 1199, 1206 (9th Cir. 2010). The BAP found that AAA alleged in state court that the Debtor actually intended to hinder its efforts to collect, consistent with the elements of California Civil Code Section 3439.04(a)(1) requiring that the debtor acted "[w]ith actual intent to hinder, delay, or defraud" a creditor. Moreover, the state court determined that the Debtor and Huerta transferred the business "for the sole purpose of hindering" AAA's collection efforts. The BAP agreed with the bankruptcy court's determination that these findings satisfied the willfulness requirement of section 523(a)(6) as they were "tantamount to a finding that Vazquez intended to harm AAA by transferring" the assets.

    Malice is present when the debtor's conduct "involves (1) a wrongful act, (2) done intentionally, (3) which necessarily causes injury, and (4) is done without just cause or excuse." In re Ormsby, 591 F.3d at 1207. "Malice may be inferred based on the nature of the wrongful act." Id. The BAP found malice based upon the state court's finding that the Debtor's conduct was wrongful. As discussed above, the state court found that "by conducting himself in this manner, 'Vazquez committed the wrongful act of hindering AAA in trying to collect the judgment.'" The BAP further found that wrongfulness "is self-evident given the very nature of Vazquez's conduct in transferring Alliance's assets for the purpose of hindering AAA." Finally, the BAP found support for malice in the state court's determination that the Debtor's conduct was intentional, commenting that "[t]he intentional nature of Vazquez's conduct is reflected in the state court's account of Vazquez conspiring and plotting with Huerta to interfere with AAA's collection efforts. That the act of hindering AAA's collection efforts necessarily harmed AAA also is self-evident."

    The Debtor argued that he had a just cause or excuse in that he desired to set up Huerta with her own reprographics business independent from Alliance. However, the state court previously rejected this assertion, and the BAP found that it does not constitute a just cause or excuse in light of the Debtor's specific intent to harm AAA. See In re Sicroff, 401 F.3d 1101, 1107 (9th Cir. 2005) (specific intent to injure negated proffered just cause or excuse); see also Murray v. Bammer (In re Bammer), 131 F.3d 788 (9th Cir. 1997) (debtor's subjective desire to help mother with financial difficulties was not just cause or excuse for knowing participation in fraud against her creditors).

    The Debtor's final argument was that he was not aware that the fraudulent transfer findings could serve as a basis for a section 523(a)(6) judgment. The panel was perplexed by this, noting that the Debtor was represented by counsel and the findings featured prominently in the complaint and summary judgment pleadings. Although the Debtor raised no public policy concerns against applying issue preclusion, the BAP commented that "the bankruptcy court's application of issue preclusion here strikes us as a commonplace and appropriate usage of the doctrine."


    It appears that the panel considers a California state court actual fraudulent transfer judgment to be per se non-dischargeable under section 523(a)(6). It is hard to imagine a judgment under California Civil Code Section 3439.04(a)(1), which requires that a debtor act with "actual intent to hinder, delay, or defraud" a creditor, that does not imply willfulness as construed by the panel. In turn, this necessarily suggests that the debtor "committed the wrongful act of hindering" collection efforts. In fact, the BAP found malice to be "self-evident" by virtue of the Debtor's conduct in transferring assets for the purpose of hindering collection. Accordingly, the BAP's decision appears to allow creditors to extract the elements of willfulness and malice as having been decided in any California state court judgment of actual fraudulent transfer.

    The BAP focused upon whether the state court judgment satisfied the elements of section 523(a)(6) and gave very little attention to the elements of issue preclusion. The author suggests that the Debtor may have consumed his resources in briefing and arguing his appeal from a related order denying his motion for reconsideration, which was subject to several problems, including his failure to include it in his notice of appeal and to order transcripts.

    The BAP's opinion appears to be in line with at least two courts in other circuits. In In re Kovler, 249 B.R. 238 (Bankr. S.D.N.Y. 2000), corrected, 329 B.R. 17 (2005), the court found (after a relatively terse analysis) that a transfer from the chapter 7 debtor to his wife with intent to hinder, delay or default his creditor supported a judgment of non-dischargeability under Section 523(a)(6). Id. at 261-262. Likewise, in In re Shore, 317 B.R. 536 (10th Cir. BAP (Kan.) 2004), the court applied issue preclusion and ruled that a state court's findings of "willful conduct and fraud" in awarding punitive damages awarded in a judgment for actual fraudulent transfer under the UFTA supported both willfulness and malice. Id. at 542-544.

    This analysis is from the California State Bar Insolvency Section e-newsletter of 1/28/14

    In re Energytec, Inc., 2013 Westlaw 6868618 (5th Cir. 2013)

    In re Energytec, Inc., 2013 Westlaw 6868618 (5th Cir. 2013). A sale of pipeline system, which was property of the bankruptcy estate, "free and clear of liens and encumbrances", in a bankruptcy case, per 11 USC 363(f), might NOT get rid of covenants relating to pipeline system

    Facts: In connection with the sale of a pipeline system, the purchaser executed covenants in favor of the vendor. Those covenants required the purchaser to pay a transportation fee based upon the amount of gas flowing through the pipeline and required the purchaser to obtain consent prior to assigning its interest in the pipeline. The agreement stated that the covenants would "run with the land" and would be enforceable by the vendor's assignees and affiliates.

    The vendor's beneficial interest in the covenants was assigned to an affiliate (the "beneficiary"), and the pipeline itself was assigned to a new purchaser (the "burdened party"), which expressly assumed the obligations under the covenants. Eventually, the burdened party (the new owner of the pipeline) filed a Chapter 11 petition. It later sought to sell the pipeline to a third party free and clear of the burden of the covenants, pursuant to 11 U.S.C.A. § 363(f)(5). The bankruptcy court approved the sale, and the district court affirmed, both holding that the covenants in question were not property interests running with the land.

    Reasoning: The Fifth Circuit vacated and remanded, holding that the covenants did run with the land but that there were unresolved issues concerning the effect of the sale on the enforceability of the covenants. After holding that the issue was not moot despite the beneficiary's failure to obtain a stay, the court discussed whether the covenants ran with the land under applicable state law.

    The court first held that there was "vertical privity" between the original covenantor and its successor (the ultimately burdened party), as well as between the original covenantee and its successor (the beneficiary seeking to enforce the covenant); the vertical privity requirement is satisfied where the assignees of both of the original covenanting parties have succeeded to the estates or interests held by those parties.

    The court then noted that Texas law was unclear as to whether "horizontal privity" between the original covenanting parties is necessary; the horizontal privity requirement is satisfied when a separate interest in real property has passed between the original covenanting parties at the time of the execution of the accompanying covenants. The court held that even if horizontal privity is required, it did exist in this case, since a property interest passed between the original covenantor and the original covenantee:

    [T]he transportation fee and other benefits for [the beneficiary] were created at the time of a conveyance of real property. [The original covenantee] . . . conveyed the pipeline and rights-of-way and carved out of that conveyance the rights at issue in [this case] . . . . [The original covenanting parties] were in horizontal privity, and a later assignment by [the vendor to its assignee] satisfies vertical privity.

    The court then discussed whether the covenant in question "touched and concerned" the property; the "touch and concern" requirement imposes an independent subject-matter test to determine whether the covenant really affects the use of the property or is independent of it. The court first acknowledged that the tests of the "touch and concern" requirement were "far from absolute" but that some Texas courts had held that this requirement takes into account the covenant's impact on the property's value:

    If the promisor's legal relations in respect to the land in question are lessened—his legal interest as owner rendered less valuable by the promise—the burden of the covenant touches or concerns that land; if the promisee's legal relations in respect to that land are increased—his legal interest as owner rendered more value by the promise—the benefit of the covenant touches or concerns the land.

    The court then held that these covenants did "touch and concern" the pipeline property:

    The real property at issue here is a gas pipeline system . . . . [The beneficiary's] interest in transportation fees is for the use of real property, i.e., the traveling of natural gas from a starting point along the length of the pipeline to an endpoint. The pipeline is a sub-surface road for natural gas, and a fee for the use of that road was retained by [the original covenantee] and assigned to [the beneficiary]. Another restriction on use is that the pipeline cannot be assigned without [the beneficiary's] consent. These rights impact the owner's interest in the pipeline. Furthermore, as burdens on the property, they also impact the pipeline's value in the eyes of prospective buyers. Indeed, the impact on the sale in bankruptcy has been clear, though the financial impact has not been quantified.

    Having held that the covenants satisfied all of the requirements, the court held that the lower courts had erred in deciding that the covenants did not "run with the land." The court then turned to a discussion of §363(f)(5), which provides:

    The trustee may sell property . . . free and clear of any interest in such property of an entity other than the estate, only if . . . such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.

    The beneficiary of the covenant argued that since the monetary value of its right to future transportation fees was impossible to estimate, monetization of its interest in the transportation fees was impossible. Therefore, no "money satisfaction" was possible, and the statute was inapplicable. The court declined to reach this issue, however, since the lower courts had failed to reach the question of valuation, and it remanded the case on that basis. The court noted a split of authority on that issue and admitted that the Fifth Circuit "has yet to consider what constitutes a qualifying legal or equitable proceeding" for purposes of the statute."

    Comment: Property professors all over the country are rejoicing: the rule in Spencer's case still lives! "Touch and concern," horizontal privity, vertical privity: these are precious nuggets of ancient lore revived by the Fifth Circuit in the 21st Century. Alas, the court may have botched the analysis.

    First, its discussion of the "touch and concern" requirement is hopelessly circular:

    (a) The covenant runs only if it touches and concerns the property.
    (b) It touches and concerns only if it affects the property's value.
    (c) It affects the value only if it runs.
    (d) See (a).

    Second, the court missed the fact that the issue of privity (both horizontal and vertical) may have been dicta. The burdened party in this case (the Chapter 11 debtor) expressly assumed the obligation of the covenant; a contractual assumption is a valid substitute for a failure of privity. And the beneficiary of the covenant was a named third-party beneficiary of the original agreement. Therefore, under ordinary contract doctrine, the beneficiary was entitled to assert the benefit of the agreement, whether vertical privity existed or not.

    It is really too bad that the court did not discuss the "monetization" issue, at least to give guidance to the bankruptcy court upon remand. Merely acknowledging the circuit split is not the same thing as providing guidance. For whatever it's worth, I believe that the claim of the beneficiary will be factually capable of monetization; the bankruptcy court can take testimony on the estimated stream of income and then reduce that stream to a discounted present value. However, that still doesn't answer the second prong of the statute, an issue of law: could the beneficiary of the covenant "be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest?" Him

    Under the facts of this case, the only "legal or equitable proceeding" that I can imagine that would have "compelled" the beneficiary to accept a money satisfaction would have been an eminent domain proceeding. Is that what Congress had in mind: a hypothetical condemnation, deus ex machina? If that is true, isn't every interest in real property subject to compensable extinguishment?

    Certainly, the bankruptcy case itself cannot satisfy the "legal or equitable proceeding" requirement, since that would make the statute completely circular: every time a trustee seeks a sale, the trustee seeks to extinguish claims against the property and to force the holders of those claims to accept money. For the same reason, the theoretical availability of a "cramdown" plan under Chapter 11 should not be sufficient to satisfy the statute, although the court noted that a few bankruptcy courts had so held. I predict that this fascinating case will be back before the Fifth Circuit within 18 months, and some of the unanswered questions will be resolved.

    For a discussion of a recent decision holding that a §363 sale cannot be used to extinguish real covenants encumbering the property, see 2013-50 Comm. Fin. News. NL 102, Bankruptcy Trustee Cannot Use Sale "Free and Clear" to Extinguish Equitable Servitudes Because Holder of Servitude Would Not Have Received Any Money If Senior Lienholder Had Foreclosed.

    This analysis is from the CA State Bar Insolvency Committee e-newsletter of 1/24/14

    In re Tronox, Inc., 2013 Westlaw 6596696 (Bankr. S.D.N.Y 2013).

    In re Tronox, Inc., 2013 Westlaw 6596696 (Bankr. S.D.N.Y 2013). A bankruptcy court decision, but the reasoning as to why there was a fraudulent conveyance could be very important, in future, if additional courts in future agree with this reasoning:

    Facts: An oil, gas, and chemical company was burdened with enormous "legacy liabilities," primarily due to environmental contamination. The company developed a plan to spin off its viable assets, leaving the legacy liabilities with a newly-formed successor entity. The complex asset divestiture proceeded over a period of several years. A few years after the completion of the transaction, the successor entity responsible for the legacy liabilities filed a Chapter 11 petition and then brought suit against the spinoff participants, claiming that the entire series of transactions had constituted fraudulent transfers under Oklahoma law. The estate asked for roughly $15 billion in damages.

    Reasoning: Following a lengthy trial, the court held that the transactions, when collapsed, constituted fraudulent transfers, under both the "actual fraud" and "constructive fraud" prongs of the fraudulent transfer statutes:

    [The former corporate entity] acted to free substantially all its assets—certainly its most valuable assets—from 85 years of environmental and tort liabilities. The obvious consequence of this act was that the legacy creditors would not be able to claim against "substantially all of the [former company's] assets," and with a minimal asset base against which to recover in the future, would accordingly be "hindered or delayed" as the direct consequence of the scheme. This was the clear and intended consequence of the act, substantially certain to result from it . . . . [A] principal goal of the separation of the [petrochemical exploration and production] assets from the chemical business was to cleanse [those] assets of every legacy liability resulting from the 85–year history of the company and to make the cleansed company more attractive as a target of an acquisition.

    The defendants argued that there was nothing in the record to show that the participants specifically intended to leave the "legacy creditors" without recourse. But the court held that the absence of certain evidence in the record was highly significant: "[O]ne of the most compelling facts in the enormous record of this case is the absence of any contemporaneous analysis of [the successor entity's] ability to support the legacy liabilities being imposed on it." The court later reiterated that key point: "[N]either the Board nor management ever reviewed a contemporaneous analysis of the effect of the transactions on the legacy liability creditors, and there is no evidence that one was ever prepared."

    The court later held that the company did not receive "reasonably equivalent value" in exchange for the assets and that it was insolvent as a result of the transfers, thus justifying liability under the "constructive fraud" prong of the statute.

    Turning to the issue of damages, the court held that the gross liability of the defendants was roughly $14.5 billion. However, the defendants claimed the right to an offset under 11 U.S.C.A. §502(h). That statute permits defendants in avoidance-powers claims to assert offsetting claims against the estate under certain circumstances. The court declined to decide whether the defendants in this case were entitled to such an offset and, if so, how much of an offset would be appropriate, seeking further briefing. The court noted, however, that even under the best-case scenario, the defendants would still be liable for more than $5 billion. In discussing the offset, the court pondered the problem of whether the §502(h) claim should be valued at its face amount (as the defendants urged) or whether the dilution of the total pool of creditors' claims due to the inclusion of the offset should be used to discount the effect of the claim. Under the latter scenario the defendants' liability would still exceed $14 billion.

    Finally, the court discussed the defendants' belated assertion of the "settlement payment" defense under §546(e), which some courts have used to insulate transfers made during complex corporate transactions. The court refused to allow the defendants to assert this defense, holding that it had been waived due to the defendants' failure to timely assert it and that the defense would not have applied in any event. In a footnote, the court mentioned that although the §546(e) settlement payment defense would not protect a fraudulent transfer defendant in an "actual fraud" case prosecuted under §548 (the federal fraudulent transfer statute), the statute "inexplicably" protects a defendant prosecuted in an "actual fraud" case under §544(b), which empowers the trustee to avoid transfers under state fraudulent transfer statutes.

    Comment: Here, the participants in the asset spinoff prepared elaborate documentation regarding the fairness of the transaction, in anticipation of fraudulent transfer litigation; yet they did not prepare any analysis of the post-transaction entity's ability to pay the "legacy liabilities." The court seized upon that gap in the record to show that the participants either knew or must have known that the "legacy creditors" would end up with nothing at the end of the day. Given the multi-billion dollar magnitude of this transaction, one can be sure that the participants received top-notch legal advice and that the attorneys specifically recommended that the participants not prepare such an analysis because the result would have been overwhelmingly unfavorable.

    For whatever it's worth, could end up that the court will later adopt the "dilution solution," resulting in a total liability of roughly $14 billion. Prediction is based on dicta contained in footnote 130. The court (in text) noted that the courts should not "reassess equity among the parties based on subsequent events." Then, in footnote 130, the court stated:

    Valuation of a claim on the basis of subsequent information unknown at the time of confirmation of [the debtor's] plan would also appear inconsistent with the argument that Defendants' §502(h) claim should be valued without inclusion of its claim included in the creditor base, or stated differently, that it should have the benefit of the facts known and relied on at the time of confirmation, and not as they developed subsequently.

    The court's observation that the §546(e) "settlement payment" defense might "inexplicably" protect "actual fraud" defendants prosecuted under state law is both acute and disturbing. It is almost certain that Congress never intended such an anomalous result, but the plain language of the statute seemingly denies protection to "actual fraud" defendant prosecuted under federal law but not under state law. Perhaps this statutory glitch could be cured with a minor amendment to the statute. This technical issue would not appear to be one that would divide Congress along partisan lines.

    This analysis appeared in the CA State Bar Insolvency Committee e-newsletter of 1/24/14

    Hazelrigg v. United States Trustee (In re Hazelrigg)


    Hazelrigg v. United States Trustee (In re Hazelrigg), BAP No. WW-13-1230-TaDJu (Nov. 19, 2013). This is a "not for publication" decision of the Bankruptcy Appellate Panel for the Ninth Circuit, in which the BAP affirmed the entry of summary judgment against the debtor in an objection to discharge proceeding based in part on the debtor's invocation of the privilege against self-incrimination under the Fifth Amendment to the United States Constitution.

    Factual Background

    Debtor Thomas R. Hazelrigg, III (cDebtor"), was a well-known financier and businessman in the Seattle area, who, along with another associate and developer, was put into an involuntary chapter 7 in 2011. The order for relief was entered in February 2012. The Debtor then filed Schedules and a Statement of Financial Affairs ("Schedules") that were essentially blank other than the assertion of a blanket Fifth Amendment privilege against self-incrimination.

    The Office of the United States Trustee ("OUST") moved to compel the filing of amended and completed schedules, or, alternatively, to require a specific Fifth Amendment invocation in response to each question and category of information required by the Schedules. The Court granted the OUST's motion, and in response, the Debtor filed amended Schedules that disclosed ownership of a PT cruiser and the pre-petition sale of two vehicles.

    The OUST then issued a subpoena pursuant to a Rule 2004 Order based on the discovery of additional valuable assets identified in a balance sheet that were not disclosed in either set of Schedules. The Debtor did not produce responsive documents, and instead, asserted a blanket Fifth Amendment privilege. In response, the OUST commenced an adversary proceeding objecting to the Debtor's discharge under 11 U.S.C. sections 727(a)(2), (a)(3), (a)(4) and (a)(5) based, in part, on the Debtor's failure to disclose assets and to account for their transfer, disposition, or ownership.

    The OUST moved for summary judgment on the section 727(a)(3) and (a)(5) claims, relying on the subpoena, the Debtor's response, and the balance sheet. The Debtor's response to the motion raised some procedural issues, blamed his failure to produce information and documents on the crash of his bookkeeper's computer, and addressed the disposition of certain assets.

    The Court granted the summary judgment motion on the section 727(a)(5) claim, certified it as final, and denied the Debtor's motion for reconsideration in which he argued he had properly invoked the Fifth Amendment privilege.

    Holding and Analysis

    The BAP reviewed the burden of proof and elements of a section 727(a)(5) claim. The BAP explained that the objector bears the burden of proof to show by a preponderance of the evidence that the debtor's discharge should be denied, even though the grounds for denial of discharge under subsection (a)(5) describe the debtor's failure "to explain satisfactorily . . . any loss of assets or deficiency of assets to meet the debtor's liabilities." The BAP also outlined the elements of this claim as requiring the objector to demonstrate that (1) at a time not too remote from the instant proceeding the debtor owned identifiable assets, (2) the debtor no longer owned the assets on the petition date, and then (3) the Schedules or other pleadings do not adequately explain their disposition.

    The BAP found that, as the bankruptcy court did in this case, a court may make a negative inference that corroborating evidence exists to support a claim when a debtor (in a civil matter only) asserts a Fifth Amendment privilege.

    The BAP held that the OUST met its burden in demonstrating its prima facie case under section 727(a)(5) in reliance on the balance sheet, including its contents and apparent date of its preparation, and the Debtor's subsequent failure to explain the loss of or to schedule those assets. Once that burden was met, the burden then shifted to the Debtor to offer a satisfactory explanation for the disposition of the missing assets. The Debtor did not do so as the bookkeeping problem was not a satisfactory explanation.


    This case demonstrates the elements of, and shifting burdens related to, an objection to discharge. And making the adverse inference does not often arise in bankruptcy court, but, at least according to the BAP, it does have vitality in an objection to discharge proceeding. This case had some difficult facts from the Debtor's perspective, including, as noted by the BAP, that there were "undisputed facts of the extraordinary quantum of luxury items" unaccounted for, and clearly the Debtor was a sophisticated and able businessman who nonetheless was unable to carry his burden to explain the loss of those assets. Since a court has discretion to make the adverse inference in a civil case, some of these facts may have played a part here.

    Commentary of The Bankruptcy Law Firm, PC:

    11 USC §727(a)(6)(B) expressly states that debtor can be denied a discharge if: "(6) the debtor has refused, in the [bankruptcy] case--(B) on the ground of privilege against self-incrimination, to respond to a material question approved by the court or to testify, after the debtor has been granted immunity with respect to the matter converning which such privilege was invoked". The BAP decision appears to be unaware of 11 USC 727(a)(6)(B), and therefore erroneously reasoned.

    Jones v. U.S. Trustee, Eugene

    Jones v. U.S. Trustee, Eugene, ___ F.3d ___, 2013 WL 6224330 (9th Cir. 2013 Dec. 2, 2013): Debtors who omit assets from their bankruptcy schedules, and/or undervalue their assets in their bankruptcy schedules, can be denied any discharge, or have discharge revoked, if discharge has alreadby been granted: The United States Court of Appeals for the Ninth Circuit held that fraud which would have justified the bankruptcy court denying a discharge under 11 U.S.C. §727(a)(4)(A) will support an action to revoke a discharge under 11 U.S.C. §727(d)(1).


    In his initially filed bankruptcy schedules and in his testimony at the meeting of creditors under 11 U.S.C. §341(a), Jerry Jones (debtor) omitted a number of assets and undervalued other assets, largely valuing them at zero. The debtor received his discharge in due course. Within a year of the date the discharge was granted, the United States Trustee discovered the debtor had omitted and undervalued assets in his bankruptcy schedules, and brought an adversary action to revoke the discharge. After two days of hearings, the bankruptcy court ruled that the debtor's omissions and undervaluations violated 11 U.S.C. §727(a)(4) and revoked the discharge. On appeal, the Ninth Circuit affirmed.


    Before the bankruptcy court the debtor argued that his omissions and undervaluations had been inadvertent or on advice of counsel, and that several were corrected through schedule amendments. The bankruptcy court rejected these defenses, found the omissions and undervaluations had been made knowingly and fraudulently, and determined they constituted a violation of 11 U.S.C. §727(a)(4), justifying revocation of the discharge pursuant to 11 U.S.C. §727(d)(1).

    On appeal, the debtor argued that it was error to revoke a discharge under 11 U.S.C. §727(d)(1) based on a violation of 11 U.S.C. §727(a)(4). Quoting Nielsen v. White (In re Nielsen), 383 F.3d 922, 925 (9th Cir. 2004) that to revoke a discharge due to the debtor's fraud it had to be shown that "but for the fraud, the discharge would not have been granted" the debtor argued that some fraud other than his fraudulent schedules had to be proven, and it had to be proven that but for the additional fraud, the discharge would not have been granted. The debtor argued that since he would have received his discharge even without the fraud, that is, he would have received a discharge had he filed accurate schedules, it could not be said he would not have obtained a discharge "but for" his fraud. The debtor further argued, citing Nielsen, 383 F.3d at 925-26, that to revoke the discharge it had to be proven the outcome of the case would have been different had the fraud not occurred. According to the debtor, the alleged fraud did not affect the outcome of his case. The chapter 7 trustee investigated all the assets on the debtor's schedules and was liquidating them for the benefit of creditors. As a result, the debtor believed that creditors would get paid and there was no harm caused by his actions.

    The Ninth Circuit rejected these arguments. The Ninth Circuit cited two Ninth Circuit Bankruptcy Appellate Panel cases, In re Gilliam, 2012 WL 1191854 (9th Cir. BAP 2012, Dkt. no. 11-1248) and In re Wahl, 2009 WL 7751412 (9th Cir. BAP 2009, Dkt. no. 08-1218), and a district court case, In re Guadarrama, 284 B.R. 463 (C.D. Cal. 2002), all holding that pre-discharge fraud which would have justified denial of a discharge had it been discovered prior to the grant of a discharge, will justify revocation of the discharge when it is discovered post-discharge. Jones at *2. As for the requirement in Nielsen that "but-for" the fraud the discharge would not have been granted, the Ninth Circuit stated this is "properly read as establishing the rule that the fraud must be material, i.e., must have been sufficient to cause the discharge to be refused if it were known at the time of discharge." Here, the Ninth Circuit concluded that had the fraud been discovered prior to issuance of the discharge, the debtor could have been denied a discharge, satisfying the suggestion in Nielsen that the fraud must have affected the outcome of the bankruptcy.


    There were two strands to the debtor's argument, neither of which was accepted by the Ninth Circuit. First, by noting that he would have received a discharge had he properly disclosed the assets, the debtor argued that his fraud did not procure the discharge; he would have received the discharge had he properly disclosed and valued the assets. The Ninth Circuit rejected interpreting the "but-for" language of Nielsen as a requirement that the fraud must have directly procured the discharge, instead interpreting it as a materiality requirement, that the fraud must have been sufficient to justify denying a discharge had it been known at the time of the discharge. Jones at ∗2. The Ninth Circuit implicitly adopted the holding of Guadarrama and the other cited cases that the fraud need only have occurred "in the procurement" of the discharge. It is not required to be the direct cause of the debtor obtaining a discharge.

    The second strand of the debtor's argument was that since the debtor was not questioned about the omissions and undervaluations on his schedules. He therefore did not engage in a second fraud to conceal the first to procure a discharge. The Ninth Circuit rejected a requirement there be two frauds, the second consisting of concealing the first. Only the initial fraud need be shown.

    Although not addressed by the Ninth Circuit, the debtor also argued that because 11 U.S.C. §727(d)(3) explicitly makes a violation of 11 U.S.C. §727(a)(6) a ground for revocation of a discharge, it is error to revoke a discharge under 11 U.S.C. §727(d) by reason of a violation of any other subsection of 11 U.S.C. §727(a). The debtor argued that by explicitly making a violation of 11 U.S.C. §727(a)(6) a ground for discharge under 11 U.S.C. §727(d)(1), Congress implicitly rejected making the violation of any other subsection of 11 U.S.C. §727(a) a basis for revocation of the discharge. If any violation of 11 U.S.C. §727(a) justified revocation under 11 U.S.C. §727(d)(1), the debtor argued, there was no need for 11 U.S.C. §727(d)(3), rendering the subsection superfluous. Presumably, however, because 11 U.S.C. §727(d)(1) requires a showing of fraud, only those violations of 11 U.S.C. §727(a) which implicate fraud, e.g., 11 U.S.C. §727(a)(2), would be the basis for an action to revoke a discharge under 11 U.S.C. §727(d)(1). Section §727(a) is not wholly incorporated into 11 U.S.C. §727(d).

    The case establishes that a debtor who has committed pre-discharge fraud is not safe once the discharge is obtained. The debtor remains exposed to possible revocation proceedings under 11 U.S.C. §727(d)(1) for one year from the date of discharge. 11 U.S.C. §727(e)(1).

    Interestingly, the opinion did not address the debtor's materiality argument. The debtor did not dispute that he listed many of his assets as having no value. However, according to the debtor, the bankruptcy court never made a finding as to the specific value of his assets. Because the bankruptcy court did not determine the value of his assets, the bankruptcy court could not find that the debtor's undervaluation was material, i.e. sufficient to cause the discharge to be refused if it were known at the time of the discharge.

    Finally, the opinion did not address the debtor's argument that even if the debtor undervalued his assets, the chapter 7 trustee investigated each asset and determined that he could liquidate them. Because the chapter 7 trustee was liquidating the assets, the debtor's non-disclosure or undervaluation had no impact on the case. Perhaps the Ninth Circuit did not want to lessen the debtor's burden to be truthful regarding the information reported in the schedules.

    Analysis is from the Insolvency Committee of the State Bar of California, reported in e-newsletter of Insolvency Committee.

    Bellingham Oral Argument Recap: Bankruptcy and the Slippery Slope

    The Supreme Court's recent strong record of confining bankruptcy judges within a tight sphere of power seemed a bit shaky on Tuesday, but mainly because the Court spent significant time looking beyond bankruptcy law, according to a SCOTUSBlog analysis of Tuesday's oral argument in Executive Benefits Insurance Agency v. Arkison (In re Bellingham) currently before the Supreme Court. Concerns about the impact that a decision in a chapter 7 case may have on the ranks of federal magistrate judges, and even on arbitrators who keep a lot of private disputes out of courts, were evident during the argument on In re Bellingham. That case was about the power that federal law appears to give to a bankruptcy judge, and it is a test of whether, if that power contradicts the limits of the Constitution's Article III, the power can be exercised anyway because the parties consent to it. It was immediately clear that if insurance firm Executive Benefits wins the case, the chances are good that bankruptcy judges will have less power than Congress wanted them to have, and that the lost power would not be revived just because the parties agreed that it should exist. With Justice Scalia, the Court's strongest proponent of a strict construction of the Constitution, taking the lead, there were fervent comments from the bench suggesting that bankruptcy judges who are not appointed under Article III might well wind up with a diminished role: they would not be able to issue final decisions on many disputes, and might not even be able to propose decisions for adoption by an Article III judge. That impression was consistent with the Court's most recent major decision on bankruptcy court authority, the 2011 decision in Stern v. Marshall. Chief Justice Roberts, the author of the main Stern opinion, bluntly suggested on Tuesday that if Congress cannot act to beef up the roles of bankruptcy judges without violating Article III, why would the Court permit "people taken off the street" to do so just because they were parties to a case and had consented to enlarged bankruptcy court authority?

    In Heritage Pac. Fin., LLC v. Montano (In re Montano)

    In Heritage Pac. Fin., LLC v. Montano (In re Montano), __ B.R. __, 2013 WL 5890681 (9th Cir. BAP Nov. 1, 2013), the U.S. Bankruptcy Appellate Panel of the Ninth Circuit held that California's anti-deficiency statutes barred the successor to a mortgage lender from obtaining a nondischargeability judgment for a purportedly fraudulently induced loan against a borrower who misrepresented his financial condition. Specifically, the successor could not enforce the loan against the borrower despite the borrower's alleged misrepresentations in his loan application because: (1) the loan was for less than $150,000, (2) the loan was secured by residential real property, and (3) the borrower occupied the property as his home. Furthermore, the BAP affirmed an award for attorneys' fees to the borrower because it found that the plaintiff's position was not substantially justified pursuant to 11 U.S.C. § 523(d).


    In November 2006, Jesus Edgar Montano ("Montano") purchased a California home using a first loan of $348,750 and a second loan of $89,990 from WMC Mortgage Corporation ("WMC"). The loan application stated that Montano earned over $8,000 per month, over half of which came from Montano's purported business, Montano Moving Services. The loan application contained three letters from satisfied customers of Montano Moving Services and a letter from a tax preparer that she had performed accounting services for the business for the past three years. Montano, a native of El Salvador, who could not read or write English, later contended that the loan broker fabricated the documents. The application also contained an audit form prepared by an individual who stated that he spoke with the tax preparer, who represented that Montano filed Schedule C (a profit and loss schedule for a sole proprietorship) tax information for the prior three years. Otherwise, the income in the application was not verified. After making only five payments on the loans, Montano defaulted on the loans, and WMC non-judicially foreclosed under the first loan on October 22, 2007. During that time, Montano occupied the property. Heritage Pacific Financial, LLC ("Heritage") purchased the now-unsecured note for the second loan over a year later on January 20, 2009.

    In April 2010, Heritage filed a complaint in the Alameda County Superior Court alleging that Montano misrepresented his income in the loan application. On October 13, 2010, Montano filed a chapter 7 bankruptcy petition. Heritage timely filed a complaint to determine that its $89,990 claim against Montano was excepted from discharge for fraud under 11 U.S.C. § 523(a)(2)(A) and (B). Montano moved to dismiss and cross-claimed against Heritage seeking to recover his attorneys' fees and cost pursuant to section 523(d).

    The bankruptcy court denied Montano's motion to dismiss. However, the bankruptcy court noted the difficulty Heritage would face in establishing that WMC, now a defunct company, reasonably relied upon Montano's purported misrepresentations in the loan application.

    Montano then moved for summary judgment contending, among other things, that California's anti-deficiency statutes (in particular section 726 of the California Code of Civil Procedure) barred Heritage's claim. Montano also requested attorneys' fees. Heritage responded, arguing among other things, that the anti-deficiency statutes do not apply to claims against a borrower for fraud and do not apply to "sold-out" junior lienholders.

    The bankruptcy court disagreed with Heritage and found that the anti-deficiency statutes applied to this case. The bankruptcy court noted that the loan was used to purchase an owner-occupied property and the loan amount fell within the limit in section 726(g) of the California Code of Civil Procedure. Accordingly, the bankruptcy court granted Montano's motion for summary judgment because section 726(g) barred Heritage's claim. However, the bankruptcy court denied Montano's request for attorneys' fees.

    Montano then moved for reconsideration for his attorneys' fees. In considering the motion, the bankruptcy court focused on the reliance element of Heritage's fraud claim and questioned whether Heritage had shown that WMC, the original lender, actually relied on Montano's misrepresentation. Ultimately, the bankruptcy court found that Heritage failed to meet its burden and granted Montano's motion for reconsideration of his attorneys' fees under 11 U.S.C. § 523(d). Heritage timely appealed both judgments on the motions for the summary judgment and reconsideration.


    The BAP affirmed the bankruptcy court's rulings. The BAP held that the bankruptcy court correctly granted Montano's motion for summary judgment because section 726(g) of the California Code of Civil Procedure barred Heritage's claim.

    The BAP analyzed section 726 of the California Code of Civil Procedure. Under this statute, often referred to as the one-action rule, a lender's primary remedy to collect a loan secured by a mortgage or deed of trust is to foreclose. Section 726(f), however, provides an exception to the one-action rule; a creditor may bring an action to recover damages based on a borrower's fraudulent conduct that induced the original lender to make a loan. Section 726(g), provides an exception to this exception, making it clear that the lender may not pursue such fraud claim if (1) the loan was secured by "owner-occupied residential real property," (2) the property was actually occupied by the borrower, and (3) the loan was for $150,000 or less.

    The BAP found that the facts in this case satisfied the exception set forth in section 726(g). Heritage argued that the bankruptcy court should have aggregated the dollar amount of first and second loans in determining the dollar limit of section 726(g), thereby making Montano's loans total $438,740. However, the BAP rejected Heritage's argument because it contradicted the plain meaning of the statute. In reaching this conclusion, the BAP highlighted that the amount and method of calculating the cap in section 726(g) was never amended, even though the California Legislature has amended section 726 four different times.

    Additionally, the BAP affirmed the bankruptcy court's grant of Montano's motion for reconsideration and award of attorneys' fees under 11 U.S.C. § 523(d). The BAP explained that to support a request for attorneys' fees under section 523(d), a debtor initially needs to prove that: (1) the creditor sought to except a debt from discharge under section 523(a); (2) the debt was a consumer debt; and (3) the debt ultimately was discharged. Once these elements are established, the burden of proof shifts to the creditor to prove that its action was substantially justified.

    The BAP found that Montano satisfied the three factors. The bankruptcy court, however, did not initially require Heritage to satisfy its burden of proof. Thus, because the burden of proof shifted to Heritage who was not required to prove its burden, the BAP held that the reconsideration was proper.

    The BAP affirmed the bankruptcy court's ruling that Heritage failed to prove that WMC reasonably relied on Montano's misrepresentation. Though the case had lasted a year since the bankruptcy court first raised the issue at the hearing on Montano's motion to dismiss, Heritage provided no proof of reliance, which was a necessary element of Heritage's claim. Because Heritage failed to prove that its fraudulent claim against Montano was substantially justified, the award for attorneys' fees to Montano was proper.


    The opinion explores overlooked exceptions to California's one-action rule. The opinion is more influential, however, as a cautionary tale for debt purchasers rather than for its exploration of the arcana of the one-action rule. Underlying the BAP's decision is the bankruptcy court's astute foresight early in the case that it would be difficult for the creditor to find the right person in the prior lender's organization, a lender which is now defunct, who could credibly testify that the lender reasonably relied upon the borrower's representations in order to satisfy section 523(a)(2)(B). This evidentiary difficulty is buttressed by poor underwriting. Had the original lender actually required the borrower's filed tax returns, payment advices, receipts, invoices, bank statements, and any other documented sources of income to verify the information in the loan application, the creditor may have had a better chance at showing that it was substantially justified in pursuing the action. The perils of this failure are not inconsequential. The creditor now owes the borrower all of its attorneys' fees and costs in defending against the action, over $70,000, not including the costs of the appeal, nearly the same amount as the loan at issue, which may alter the cost-benefit analysis for pursuing such actions.

    The foregoing analysis is from the California State Bar Business Law Section's INSOLVENCY LAW COMMITTEE's e-newsletter.

    In re BP RE, LP, 735 F.3d 279 (5th Cir. 2013)

    In re BP RE, LP, 735 F.3d 279 (5th Cir. 2013): 5th Circuit rules parties CANNOT consent to jurisdiction in bankruptcy court, where there is no jurisdiciton in bankruptcy court. Chapter 11 Debtor's Consent to Jurisdiction Cannot Cure Bankruptcy Court's Lack of Jurisdiction to Enter Final Judgment. [In re BP RE, LP (5th Cir. 2013).] The Fifth Circuit has held that a Chapter 11 debtor's consent to the jurisdiction of a bankruptcy court cannot cure the court's lack of jurisdiction to enter a final judgment under Article III of the Constitution.

    Facts: A Chapter 11 debtor asserted common-law claims against a non-debtor defendant. Following a bench trial in the bankruptcy court, a final judgment was entered against the debtor. The debtor appealed, and the district court affirmed. The debtor then appealed to the Fifth Circuit, arguing that the bankruptcy court lacked constitutional authority to enter a final judgment.

    Reasoning: On appeal, the prevailing defendant argued that the debtor had consented to the bankruptcy court's jurisdiction. But the circuit court vacated and remanded the case, holding that since the bankruptcy court lacked jurisdiction under Article III of the Constitution, the parties' consent was insufficient to cure that defect. The court noted a split of authority among the circuits on this issue.

    Comment: The conflict is not only among the circuits – it is even within one of the circuits (the Seventh). Compare Peterson v. Somers Dublin Ltd., 729 F.3d 741 (7th Cir. 2013) (holding that consent can cure the jurisdictional problem) with Wellness Intern. Network, Ltd. v. Sharif, 727 F.3d 751 (7th Cir. 2013) (holding to the contrary). The Supreme Court will soon clear this up for us, since certiorari was granted in In re Bellingham Ins. Agency, Inc., 702 F.3d 553 (9th Cir. 2012), cert. granted sub nom. Executive Benefits Ins. Agency v. Arkison, 133 S.Ct. 2880 (2013).

    Even though I believe that this entire jurisdictional charade is a complete waste of time (since the bankruptcy courts will simply issue their "reports," to be rubberstamped by the district courts), I predict that the Supreme Court's opinion in Bellingham will spell the end of "Article III jurisdiction by consent." Note that in Stern v. Marshall, 131 S. Ct. 2594, 180 L. Ed. 2d 475 (2011), the non-bankrupt litigant filed a claim in the bankruptcy, certainly consenting to the adjudication of that claim. Nevertheless, the Supreme Court held that this consent did not extend to a claim asserted by the estate against him.

    For a discussion of Peterson, see 2013-38 Comm. Fin. News. NL 78, Parties' Express Consent Confers Jurisdiction Upon Bankruptcy Court, Despite Contrary Ruling By Another Panel of Same Circuit.

    For a discussion of Wellness, see 2013-33 Comm. Fin. News. NL 69, Debtor's Objection to Bankruptcy Court's Constitutional Authority to Enter Final Judgment Cannot Be Waived.

    For a discussion of Bellingham, see 2012 Comm. Fin. News. 100, Although Bankruptcy Courts Lack Jurisdiction to Hear and Determine Fraudulent Transfer Claims, They May Issue Reports and Recommendations, and Defendant May Waive Objection to Lack of Jurisdiction.

    For a discussion of Stern, see 2011 Comm. Fin. News. 51, Statutory Power of Bankruptcy Courts to Hear and Determine Compulsory State-Law Counterclaims Against Non-Bankrupt Claimants is Unconstitutional.

    This analysis was published by the California State Bar Business Law Section's INSOLVENCY LAW COMMITTEE 12/13

    Alakozai v. Citizens Equity First Credit Union (In re Alakozai)

    Alakozai v. Citizens Equity First Credit Union (In re Alakozai), 499 BR 698 (9th Cir. BAP 10/2/13). The Bankruptcy Appellate Panel of the Ninth Circuit ("BAP") affirmed the bankruptcy court's order in the debtor's sixth bankruptcy case granting a lender relief from stay to continue with its state court unlawful detainer action. The BAP found that the lender's foreclosure on the debtor's real property during the fifth case did not violate the automatic stay and was not void because the lender's relief from stay order in the debtor's fourth bankruptcy case was effective as to the property.


    Mohamed Alakozai (Husband) executed a promissory note secured by a deed of trust on California residential real property owned by the Husband. Debra Alakozai (Wife) held a community property interest in the property. Husband defaulted on the note, a notice of default was recorded and a trustee's sale was scheduled. The property then became the subject of six bankruptcy cases filed between 2008 and 2012; three were filed jointly by Husband and Wife; two were filed by Husband; and one was filed by Wife.

    After Husband filed the fourth bankruptcy case, the lender requested and was granted relief from the automatic stay under 11 U.S.C. § 362(d)(4). The order granting relief provided that it was binding upon the property for 180 days after entry of the order and upon the Husband (the "In Rem Order"). No appeal was filed. Shortly after the fourth case was dismissed, the lender recorded the In Rem Order in the county recorder's office.

    Wife then filed a fifth case and, later the same day, the lender purchased the property at a trustee's sale. The foreclosure sale was held within 180 days after entry of the In Rem Order as required by such order. A month later, the bankruptcy court dismissed the fifth case. Husband and Wife refused to vacate the property and the lender commenced an unlawful detainer action in state court.

    Approximately seven months later, Husband and Wife filed a sixth case. The lender filed a motion for, and was granted, relief from stay to continue to prosecute its state court unlawful detainer action. Wife appealed this relief from stay order.

    Wife's only argument on appeal was that the bankruptcy court in the fourth case (filed by Husband only) did not make the necessary findings of fact to support in rem relief. Wife argued that, as a result, the bankruptcy court in the sixth case erred in granting the lender relief from stay to continue with its unlawful detainer action because the foreclosure sale during the fifth bankruptcy case violated the automatic stay and was void.


    The BAP found that the bankruptcy court did not abuse its discretion when it granted the lender relief from stay to to continue with its unlawful detainer action. Under the BAP's reasoning, the In Rem Order was effective against the property when Wife filed the fifth bankruptcy case. Moreover, the BAP opined, Wife could not challenge the factual findings by collaterally attacking the prior, final and unappealed In Rem Order in Husband's fourth case.

    The BAP discussed the special relief fashioned by Congress when BAPCA added Sections 362(d)(4) and 362(b)(20) to the Bankruptcy Code to protect creditors against serial bankruptcy filings. Section 362(d)(4) provides that "if the court finds that the filing of the petition was part of a scheme to delay, hinder, or defraud creditors that involved . . . multiple bankruptcy filings affecting such real property" and the creditor records such order "in compliance with applicable State laws governing notices of interests or liens in real property" such order "shall be binding in any other case under this title purporting to affect such real property filed not later than 2 years after the date of the entry of such order. . . ." Id. For such two year period, under section 362(b)(20), the automatic stay imposed in a bankruptcy case does not prohibit a creditor from enforcing its lien that is the subject of a 362(d)(4) order entered in a prior case. Alakozai at ∗15.

    In response to Wife's argument that she was not a debtor in Husband's bankruptcy case when the In Rem Order was entered, the Court made clear that an order under Bankruptcy Code section 362(d)(4) "binds any party asserting an interest in the affected property, including every non-debtor, co-owner, and subsequent owner of the property." Alakozai at ∗14.

    Author's Comment

    This case demonstrates precisely why Congress amended the Bankruptcy Code to provide for in rem relief from stay as to real property. Once granted, the relief remains effective for two years after the in rem order is entered, so long as the creditor records the order where real property liens are recorded under state law. This prevents a debtor, co-owner or purchaser of such real property from reimposing the automatic stay in subsequent bankruptcy filings for such two-year period except upon "changed circumstances or for other good cause shown, after notice and a hearing." 11 U.S.C. § 362(b)(20). Here, Husband and Wife were "tactical serial filers" who used bankruptcy as a means to prevent the lender from enforcing its lien.

    Any lender obtaining in rem relief should make sure that it records the order in the real property records in accordance with state law as soon as possible. Otherwise, it may find itself subject to the automatic stay in a subsequent bankruptcy filing by the debtor, co-owner, or subsequent purchaser of the property.

    In re Gasprom, 500 B.R. 598 (9th Cir. BAP 2013)

    In re Gasprom, 500 B.R. 598 (9th Cir. BAP 2013). The Ninth Circuit Bankruptcy Appellate Panel held that a secured creditor violated the automatic stay by foreclosing on collateral abandoned by the Trustee of a corporate chapter 7 debtor before the bankruptcy case was closed.


    In Gasprom, after the corporation's case was converted from chapter 11, the Trustee moved to abandon the debtor's sole asset - an non-operational gas station for which there were troublesome issues concerning permitting, hazardous waste and underground storage compliance, and which was fully encumbered to a secured creditor. The debtor objected to the abandonment and asked for a continuance to avoid any sudden actions by the secured creditor against the property. Relying on In re D'Annies Restaurant, 15 B.R. 828 (Bankr. D.M.N. 1981), the bankruptcy court granted the motion to abandon, noting that the effect of the abandonment would be to vacate the automatic stay. The bankruptcy court entered an order for the abandonment of the property.

    As the debtor feared, the secured creditor conducted the foreclosure sale later that day. Thereafter, the chapter 7 trustee issued a final "no asset" report, and the case was closed about two weeks later.

    The debtor then filed a motion to reopen the bankruptcy case so that it could set aside the foreclosure sale and commence contempt proceedings for violation of the automatic stay. The bankruptcy court reopened the case, but denied the yet unfiled motions. It held that upon entry of the abandonment, the automatic stay no longer enjoined the sale of the gas station, and that the court would annul the automatic stay sua sponte to the extent necessary to validate the foreclosure. The debtor appealed.

    The BAP's Holding And Reasoning

    The BAP reversed, holding that the bankruptcy court erred when in found that the foreclosure did not violate the automatic stay. Although the abandonment made the collateral no longer property of the estate, the automatic stay remained in effect to bar enforcement of liens against "property of the debtor" under section 362(a)(5). The BAP declined to follow the holding of D'Annes which held that after abandonment of estate property, Section 365(a)(5)only protects a debtor from foreclosure of that property if that debtor is an individual. The BAP found that nothing in the statutory language would permit it to read "of an individual" into the statutory language of Section 362(a)(5). The BAP found that references in prior Supreme Court and Ninth Circuit decisions that the effect of abandonment was to revert property to the debtor "nunc pro tunc" "as if no bankruptcy petition had been filed" concerned the effect on title, and not whether the property was subject to the automatic stay.

    The BAP also held that it was an abuse of discretion for the bankruptcy court to annul the automatic stay sua sponte without affording the debtor an opportunity to brief and be heard on the appropriate factors for such an order.

    As a result of Gasprom, even though the property has been abandoned, a secured creditor should always either: (1) file a motion for stay relief; or (2) wait to conduct the foreclosure sale until the case has been closed.


    Opinion does not state any reason why the automatic stay should protect abandoned property of a corporate debtor in the period between abandonment and the closing of the case. For an individual debtor, the reasons are clear; the Code grants the individual debtor the right to avoid certain judicial liens and certain nonpossessory, nonpurchase-money security interests and to redeem some collateral by paying the value of the property when less than the claim. There are no such rights for a corporate debtor. Indeed, one could question: (a) why GASPROM should have standing to object; (b) why the bankruptcy court would have subject matter jurisdiction to address the debtor's claim regarding abandoned property where the debtor has no remaining rights under the Bankruptcy Code; or (c) why any bankruptcy court would deny a motion for stay relief if brought by a secured creditor under these circumstances?

    U.S. Supreme Court to Hear Case on Inherited IRAs in Bankruptcy

    November 27, 2013

    The U.S. Supreme Court will hear a dispute in the bankruptcy of a small-town pizza shop owner, taking on a case that could dictate how inherited individual retirement accounts are treated in bankruptcy, Reuters reported yesterday. The Supreme Court said yesterday that it would hear arguments in Clark v. Rameker in a fight over whether Heidi Heffron-Clark and her husband, Brandon Clark, can keep creditors from going after $300,000 in an IRA inherited from Heffron-Clark's late mother. The Clarks declared bankruptcy in 2010 after the pizza shop they opened in their home town of Soughton, Wis., fell victim to economic hardship, said Michael Murphy, the couple's lawyer. The Clarks owed about $700,000 to their landlord, mortgage lenders, trade creditors and others, Murphy said. That means the roughly $300,000 in the IRA could make a big difference in overall creditor recoveries. William Rameker, the trustee in charge of administering the couple's bankruptcy estate, took the position that the IRA was fair game for creditors, but the Clarks argued that it was exempt under bankruptcy laws, which generally protect retirement funds. After an initial victory for Rameker was reversed by a district court, the matter went before a three-judge panel in the 7th Circuit U.S. Court of Appeals. In an April opinion written by Chief Judge Frank Easterbrook, the panel sided with Rameker, saying creditors could access the inherited IRA. Easterbrook held that while bankruptcy laws exempt retirement funds from creditor claims, IRAs cease to be "retirement funds" when inherited from a deceased owner. Under existing law, distributions under an inherited IRA must begin within a year of the prior owner's death and finish within five years. The ruling clashes with decisions in both the Fifth and Eighth Circuits, where judges have held that IRAs do not cease to be retirement funds when they change hands.

    In re Rowe, 2013 U.S. Dist. LEXIS 11970

    In In re Rowe, 2013 U.S. Dist. LEXIS 11970 (E.D. Va., January 29, 2013), the United States District Court for the Eastern District of Virginia (the "District Court") affirmed the decision of the United States Bankruptcy Court for the Eastern District of Virginia (the "Bankruptcy Court"), wherein the Bankruptcy Court reduced the requested compensation of the chapter 7 trustee significantly below the amount requested, which was calculated in accordance with Bankruptcy Code section 326 (a). the Bankruptcy Court concluded that the trustee had failed to "properly or timely complete his duties as trustee." In re Rowe, 484 B.R. 667 (Bankr. E.D. Va. 2012). On appeal, the trustee argued that he was entitled to the requested compensation under the 2005 amendment to Bankruptcy Code section 330(a)(7) and the Bankruptcy Court had wrongfully refused to grant his request on that basis. The District Court affirmed the Bankruptcy Court holding that the Bankruptcy Court did not abuse its discretion as the Bankruptcy Court had made factual findings sufficient to justify its decision and the findings were not clearly erroneous.

    Cal-Western Business Services, Inc. v. Corning Capital Group

    Cal-Western Business Services, Inc. v. Corning Capital Group, 2013 DJAR 14887 (California Court of Appeal, 2nd Dept 11/6/13) holds that a California corporation that was suspended, for failure to pay its corporation taxes, is disqualified from exercising any right, power or privilege of a corporation, including a suspended corporation may not prosecute or defend a lawsuit, appeal from a judgment, seek a writ, or take any other similar legal action. Because Pacific West was a suspended CA Corp, it lacked power to assign a judgment, that it owned, in its favor, against Corning Capital Group, to Cal -Western Business Services. Because the assignment to Cal-Western Business Services of the judgment was invalid, due to Pacific West being suspended, Cal-Western (the purported assignee of the judgment) could not proceed to try to collect that judgment from Judgment Debtor Corning Capital.

    How this relates to bankruptcy: There is conflicting case law on whether or not a suspended corporation can file bankruptcy. As a practical matter, when a corporation is suspended, there is no one to pass a corporate resolution that the corporation should file bankruptcy, and having such a corporate resolution, directing the corporation to file bankruptcy, is a requirement before a corporate bankruptcy can be filed. Solution: Pay the taxes, get the corporation UN-suspended (ie back in active corporate status), then pass the corporate resolution, then file bankruptcy.

    US Supreme Court to hear and decide 2 appeals in two different bankruptcy cases:

    The United States Supreme Court has granted "certiorari" on two bankruptcy cases, meaning that the United States Supreme Court will hear and decide the the appeals of the following 2 bankruptcy cases, in the Court's 2013-2014 session The two cases are the appeals of (1) Law v. Siegel, which questions whether the court may use its general equitable authority under §105 of the Bankruptcy Code to surcharge a debtor's exempt assets, and (2) Executive Benefits Insurance Agency v. Arkison (In re Bellingham), which will address the bankruptcy court's authority to adjudicate Article III matters. Whenever the US Supreme Court rules on an issue, every federal court in the US, including every Bankruptcy Court in the US, is REQUIRED to do what the US Supreme Court rules. This is referred to as lower federal courts being "bound" by US Supreme Court rulings, whether or not the Circuit Judge, District Judge, Bankruptcy Appellate Panel Judge, or Bankruptcy Judge agrees or disagrees with the US Supreme Court's decision.

    Zadrozny vs. Bank of New York Mellon

    Zadrozny vs. Bank of New York Mellon, 2013 Westlaw – – (9th Cir. 2013): Applying Arizona law, the Ninth Circuit has held that a foreclosing creditor need not produce the original promissory note before pursuing nonjudicial foreclosure. [See immediately below].

    Facts: A married couple executed a note and deed of trust in favor of a lender. The deed of trust authorized the lender to transfer the note and authorized MERS (Mortgage Electronic Registration Systems, Inc.) to act as the nominee on behalf of the lender. MERS ultimately transferred the rights to the note and trust deed to an assignee.

    The assignee eventually sought nonjudicial foreclosure. The borrowers filed suit, claiming that MERS lacked authority to act on behalf of the lender and that the original promissory note had not been produced prior to foreclosure. Following removal of their case to federal court, the district court dismissed their complaint, and the Ninth Circuit affirmed.

    Reasoning: On appeal, the borrowers relied upon in In re Veal, 450 B.R. 897 9th Cir. BAP 2011), for the proposition that the note and the deed of trust cannot be separated; therefore, the party seeking nonjudicial foreclosure under the deed of trust had to establish that it also had rights to the underlying note. But the Ninth Circuit distinguished Veal on the ground that it construed Illinois law, rather than Arizona law. The Arizona Supreme Court had recently held that there is no statutory requirement that a foreclosing creditor produce the original promissory note prior to foreclosure.

    The Ninth Circuit also distinguished Veal on the ground that it was limited to cases involving relief from the automatic stay in bankruptcy and did not necessarily control nonjudicial foreclosure under state law.

    As a fallback, the borrowers argued that following the securitization of the promissory note, the assignee lacked a valid security interest under the Uniform Commercial Code, because it did not obtain actual possession of the note. But again quoting Arizona authority, the court noted that the Arizona foreclosure statutes "do not require compliance with the UCC before a trustee commences a nonjudicial foreclosure."

    Comment: Except in isolated jurisdictions and isolated procedural contexts, the "show me the note" theory is becoming more and more marginalized. In a perfect world, assignees would indeed obtain the original promissory notes prior to commencing foreclosure; but the recent trend in the case law recognizes that this is not a perfect world and that the disastrous mortgage securitization schemes hatched during the early years of this century must be unwound in a quick and orderly way, so that the banking system can recover and so that the "shadow inventory" of pending foreclosures can be cleared out of the real estate market.

    The Ninth Circuit's opinion in this case makes it clear that the holding in Veal does not supersede state law; indeed, the Veal court itself (perhaps in dicta) made a similar observation in footnote 34:

    Ultimately, the minimum requirements for the initiation of foreclosures under applicable nonbankruptcy law will shape the boundaries of real party in interest status . . . with respect to relief from stay matters. As a consequence, the result in a given case may often depend upon the situs of the real property in question. [Id., 450 B.R. at 917, fn. 34.]

    For a discussion of Veal, see 2011 Comm. Fin. News. 52, Purported Assignee of Mortgage Lacks Standing to Obtain Relief from Automatic Stay Because Assignment Transferred Mortgage Without Underlying Note. For discussions of decisions dealing with closely-related issues, see 2012 Comm. Fin. News. 30, Assignee Of Senior Trust Deed Seeking Nonjudicial Foreclosure Need Not Show Possession of the Underlying Promissory Note, Despite Commercial Code Provisions Governing Enforcement Of Negotiable Instruments, and 2011 Comm. Fin. News. 95, Assignee of Mortgage May Not Have Standing to Pursue Foreclosure Unless It Can Establish Assignment of Corresponding Promissory Note.

    This analysis was published by the California State Bar Business Law Section's INSOLVENCY COMMITTEE e-newsletter

    Beware of Breadth of Attorneys Fees Clauses in Contracts:

    Maynard vs. BTI Group, Inc., 2013 Westlaw 2322608 (California Court of Appeals 2013):

    Facts: An individual owned a retail business and retained a broker to help her sell it. Although the business was sold, the purchaser soon filed a bankruptcy petition, leaving a portion of the purchase price unpaid. Supposedly, the broker failed to obtain security from the purchaser, despite the seller's instructions to do so.

    Following the purchaser's default, the seller brought suit against the broker, asserting claims for breach of contract and negligence. She prevailed on her negligence claim but not on her contract claim. The trial court also awarded her attorney's fees. The broker appealed, claiming that it had prevailed over her on the contract claim and that the seller should not have received an award of fees.

    Reasoning: The appellate court affirmed, citing the fee clause in the listing agreement, which provided that the "prevailing party in the event of . . . litigation shall be entitled to costs and reasonable attorney fees . . . ." The court reasoned that this language meant that since the purchaser received a net recovery, she was entitled to fees, even though she had not prevailed on the contract:

    Unlike some attorney fee provisions that restrict the right to recover attorney fees to the party prevailing on a breach of contract claim, in which case the outcome of other claims does not affect the right to recover attorney fees, the agreement in this case entitles the party who prevails in the overall dispute to recover its attorney fees.

    The court noted that a fee provision can be narrowly drafted to focus solely on contractual claims:

    [W]hen the attorney fee provision provides that the party who prevails on the contract claim shall recover its attorney fees, only that party may recover its fees even if the other party obtains greater relief under a noncontractual cause of action.

    However, the fee clause at issue in this case was not expressly restricted to contractual claims:

    If the attorney fee provision does encompass noncontractual claims, the prevailing party entitled to recover fees normally will be the party whose net recovery is greater, in the sense of most accomplishing its litigation objectives, whether or not that party prevailed on a contract cause of action.

    Finally, the court held that "[i]f the attorney fee provision is broad enough to encompass contract and noncontract claims, in awarding fees to the prevailing party it is unnecessary to apportion fees between those claims."

    As a fallback, the broker argued that even if the seller were entitled to recover fees for the tort claim, the broker should have been entitled to recover fees because it prevailed on the contract claim. The court disagreed:

    This contention disregards the terms of the contractual attorney fee provision. That provision does not entitle the party prevailing on a particular cause of action to recover its fees incurred in connection with that cause of action. Rather . . . , the agreement is that the party who prevails in arbitration or litigation of 'any dispute' shall recover its costs and reasonable attorney fees.

    Comment: This case illustrates the hidden risk of fee clauses. I have long argued that fee clauses are dangerous because they can result in paradoxical (and asymmetrical) liability for commercially-sophisticated drafters (such as lenders). The drafting party is rarely able to collect a fee award from the less-sophisticated party, who is often judgment-proof. Thus, the fee clause provides no meaningful protection for the drafting party in the event of victory, while still exposing that party to substantial liability in case of a loss.

    Nevertheless, if the drafter really wants to include a fee clause despite those risks, this case provides some drafting tips. First, the clause should expressly restrict the scope of the clause to contractual claims and should specifically exclude tort claims. Second, the clause may provide that the prevailing party on the contract claim may recover its fees, even if the opposing party prevails on noncontractual claims. At a minimum, the contractual fee award may offset any tort damages recovered by the non-drafting party.

    There is one passage in this opinion that may need clarification. The court stated that "when the attorney fee provision provides that the party who prevails on the contract claim shall recover its attorney fees, only that party may recover its fees even if the other party obtains greater relief under a noncontractual cause of action." Note, however, that if the prevailing party invokes a noncontractual theory (such as fraud) in order to prevail on both the tort and contract claims, the trial court may award fees to that party incurred in connection with all of the claims, if the issues were "inextricably intertwined." See, e.g., PM Group, Inc. v. Stewart, 154 Cal.App.4th 55, 69-70, 64 Cal.Rptr.3d 227, 238 (2007).

    For discussions of earlier cases involving comparable "asymmetrical fee liability" situations, see:

    • 2011 Comm. Fin. News. 103, Broadly Worded Attorney's Fee Clause Contained in Asset Transfer Agreement May Be Asserted Against Nonsignatory, After Nonsignatory Unsuccessfully Seeks to Enforce Agreement against Asset Transferee.
    • 2011 Comm. Fin. News. 92, Guarantor Who Is Not a Signatory to Underlying Agreement Is Nevertheless Entitled to Assert Attorney's Fee Clause in Agreement, Even Though Guaranty Contains No Fee Clause.
    • 2010 Comm. Fin. News. 95, Debtor May Recover Attorney's Fees Incurred During Prosecution of Creditor for Violation of Automatic Stay.
    • 2009 Comm. Fin. News. 76, Assignee of Contract That Does Not Contain Attorney's Fee Clause Cannot Invoke Fee Clause Contained in a Related Contract That Was Not Assigned, Despite Broad Wording of Fee Clause.
    • 2007 Comm. Fin. News. 84, Broadly Worded Attorney's Fee Clause Encompasses Fees Incurred in Connection with Both Contract and Tort Claims.
    • 2005 Comm. Fin. News. 66, Lender Is Liable for Attorney's Fees Incurred by Nonsignatory Account Debtor, Even Though Underlying Agreement between Account Debtor and Borrower Did Not Contain a Fee Clause.
    • 2004 Comm. Fin. News. 61, Narrowly-Drafted Attorney Fee Clause Does Not Encompass Fees Incurred in Contract Defense to Tort Action.

    This analysis was published by the California State Bar Business Law Section's INSOLVENCY LAW STANDING COMMITTEE

    Wellness International n Network, Ltd. v. Sharif, ___ F.3d ___, 2013 Westlaw 4441926 (7th Circuit 2013)


    In Wellness International n Network, Ltd. v. Sharif, ___ F.3d ___, 2013 Westlaw 4441926 (7th Circuit 2013) , disagreeing with the Ninth Circuit, the Seventh Circuit has held that a debtor's objection to a bankruptcy court's constitutional authority to enter a final judgment cannot be waived.

    Facts: After a creditor obtained a judgment against a debtor, the debtor filed a Chapter 7 bankruptcy petition. The creditor then brought an adversary complaint seeking to block his discharge and seeking a declaratory judgment that a trust administered by the debtor was actually his alter ego. As the result of discovery violations, the court entered a default judgment against the debtor.

    Following the publication of the Supreme Court's opinion in Stern vs. Marshall, – U.S. –, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), sharply limiting the authority of bankruptcy judges to enter final judgments, the debtor in the Wellness case appealed to the district court but failed to challenge the bankruptcy judge's authority to enter a final judgment in his opening brief. After the Stern issue was later raised, the district court nevertheless affirmed the bankruptcy court's decision, ruling that the debtor had effectively waived the Stern issue. On appeal to the Seventh Circuit, the debtor successfully argued that the Stern issue was not waivable.

    Reasoning: The court noted that the Ninth Circuit had held that the Stern issue could be waived, in In re Bellingham Ins. Agency, Inc., 702 F.3d 553 (9th Cir. 2012), cert. granted sub nom. Executive Benefits Ins. Agency v. Arkison,133 S.Ct. 2880 (2013). On the other hand, the Sixth Circuit had held that this issue was not waivable, in Waldman v. Stone, 698 F.3d 910 (6th Cir. 2012), cert. denied, 133 S.Ct. 1604, 185 L.Ed.2d 581 (2013).

    After an exhaustive review of Stern, and after a careful discussion of the subtle differences between subject matter jurisdiction and constitutional authority, the court held that Stern, despite its discussions of the doctrine of waiver, had never explicitly authorized the waiver of a constitutional defect: "We discern nothing in Stern that supports the proposition that a party may waive an Article III objection to a bankruptcy judge's entry of final judgment."

    Comment: Commentator is not sure that the court's analysis of the differences between subject matter jurisdiction and constitutional authority are supported by the reasoning in Stern; commentator does not think that Stern articulated that distinction clearly. Nevertheless, commentator predicts affirmance, if certiorari is granted. It is one thing to consent to jurisdiction by filing a claim, as discussed in Stern. It is quite another to have that consent infect that same party's ability to defend against a claim. That distinction was the basis for commentator's prediction that Bellingham will be reversed; see 2012 Comm. Fin. News. 100, Although Bankruptcy Courts Lack Jurisdiction to Hear and Determine Fraudulent Transfer Claims, They May Issue Reports and Recommendations, and Defendant May Waive Objection to Lack of Jurisdiction:

    The discussion in Stern . . . , addressing the issue of consent, dealt with the act of the litigant in affirmatively filing a claim in the bankruptcy court; when he did so, he consented to an adjudication of that claim.
    But the Stern court emphatically did not say that a litigant who has not filed a claim and who is simply a target of a claim filed by the estate can waive the jurisdictional defect. When one considers the facts in Stern, the opposite is evidently true. The non-bankrupt litigant in that case did file a claim in the bankruptcy, consenting to the adjudication of that claim. Nevertheless, the Supreme Court held that this consent did not extend to a claim asserted by the estate against him.

    Looking beyond the fascinating metaphysical questions posed by Stern, this whole issue is a deplorable waste of time and money. Even if (as seems likely) Stern is broadly construed and applied, it will result in nothing more than an elaborate charade. The district courts, facing their own crowded dockets, will almost invariably rubber-stamp the bankruptcy courts' "Reports and Recommendations," properly deferring to the bankruptcy judges' expertise in such matters. For an excellent analysis of the practical consequences of Stern and its progeny, see J. Tanner, Stern v. Marshall: the Earthquake that Hit the Bankruptcy Courts and the Aftershocks that Followed, 45 Loy. L.A. L. Rev. 587 (2012).

    Finally, a truly pedantic note: the Bellingham court capitalized the word "Chapter," as in "Chapter 7." So did the Seventh Circuit in the Wellness decision. So does the heading to Chapter 7 of Title 11 of the United States Code. I know that bankruptcy petitioners generally don't capitalize that word, but I do not understand why that word should be singled out for capital punishment. As far as I can tell, no published treatise or reported case has made a persuasive case for lower case.

    The foregoing analysis is from the Insolvency Law Committee - Business Law Section of the State Bar of California, from the Insolvency Law Committee's 082813 e-newsletter

    The U.S. Bankruptcy Appellate Panel of the Ninth Circuit ("BAP") has held that a recorded abstract of judgment attached to the proceeds from the sale of a debtor's residence even though the abstract was recorded after the debtor's fraudulent transfer of her interest in the residence to her daughter. Daff v. Wallace (In re Cass), BAP No. CC-12-1513-KiPaTa (9th Cir. BAP, Apr. 11, 2013)(unpublished). To read the full decision, click (Cass)

    Facts and Procedural Background

    Creditors sued the Debtor for nuisance and defamation. To prevent the potential seizure of her half million dollar home, the Debtor transferred her residence to her daughter for no consideration and reserved a life estate therein. The Debtor and her daughter then entered into a separate agreement where the daughter promised to reconvey the home ("Residence") back to the Debtor upon the Debtor's request (the "Fraudulent Transfer"). The Fraudulent Transfer gave rise to further litigation, as Creditors then filed a second action alleging that the Debtor fraudulent transferred the Residence to her daughter. Creditors obtained a judgment in the nuisance lawsuit, including an award of punitive damages, from which the Debtor appealed. Judgment Creditors then recorded an abstract of judgment against the Debtor (although the Debtor had already transferred title to her Residence).

    While the fraudulent transfer litigation progressed, the Debtor filed a chapter 7 petition. The chapter 7 trustee ("Trustee") substituted into the fraudulent transfer action, removed it to the bankruptcy court, and subsequently obtained a stipulated judgment avoiding the Fraudulent Transfer of the Residence. The Debtor opposed the stipulated judgment but her death rendered both her objections and appeals moot.

    The Judgment Creditors and the Trustee agreed to sell the Residence. However, the parties disputed whether the Judgment Creditors' lien attached to the sale proceeds. The Trustee argued that the lien was invalid because the Debtor transferred title to her daughter before the Judgment Creditors perfected their lien. The Judgment Creditors took the position that the Fraudulent Transfer was void such that it never occurred. As a result, the Judgment Creditors argued, title and ownership in the Residence remained in the Debtor and their judgment was superior to any interest held by the Trustee. The bankruptcy court ruled in favor of the Judgment Creditors. On appeal, the Trustee argued, among other things, that the stipulated judgment avoiding the Fraudulent Transfer also avoided the Judgment Creditors' lien.

    Holding and Analysis

    The BAP began its analysis by reviewing the California Uniform Fraudulent Transfer Act ("CUFTA"), which law permits defrauded creditors to reach property in the hands of a transferee. The transferee holds only nominal or bare title while the transferor retains a beneficial and equitable interest. A perfected judgment lien therefore attaches to all of a debtor's interests in real property, including equitable interests.

    Both the bankruptcy court and the BAP focused on the daughter's agreement to reconvey the Residence back to the Debtor at the Debtor's request. The daughter's promise to transfer the Residence back meant that the Debtor did not relinquish all of her interests in the Residence; the Debtor retained an equitable interest. Because the Debtor retained an equitable interest, the BAP concluded that the Judgment Creditors' judgment lien attached to that equitable interest. As a result, the Judgment Creditors' lien was valid and attached to the Residence and its sale proceeds.

    In reaching its determination, the BAP rejected the Trustee's argument that the stipulated judgment avoiding the Fraudulent Transfer extinguished the judgment lien. According to the BAP, under California law perfected judgment liens are extinguished only by satisfaction of the underlying judgment or a release. Judgment liens are not extinguished through sections 550 and 551 of the Bankruptcy Code.

    The BAP also affirmed the rulings of the bankruptcy court that issue preclusion and judicial estoppel did not prevent the Judgment Creditors from enjoying the status of perfected secured creditors as to the sale proceeds of the Residence.


    A chapter 7 trustee generally seeks to avoid liens in order to take property that is otherwise another creditor's collateral and allow the funds to be used to pay administrative expenses and unsecured creditors. In this case, the opinion mentions but does not discuss the fact that the Trustee was unable to avoid the lien but nevertheless was permitted to pay administrative expenses from the sale proceeds. The administrative expenses were incurred in significant part fighting with the judgment creditor, so a surcharge theory would not seem to apply; nor does it appear that the judgment creditors agreed to the payment. Thus, the Cass opinion seems to split the baby in the sense that the court held that the sale proceeds were collateral of the wronged judgment creditors, but at the same time apparently available to pay administrative expenses.

    Prepared by the Insolvency Law Committee - Business Law Section of the State Bar of California

    Quasi-judicial Immunity of Bankruptcy Trustees: A bankruptcy court in Eastern District of Tennessee has held that a chapter 7 trustee and his auctioneer enjoy quasi-judicial immunity against allegations of theft, embezzlement, conversion and fraud when selling property pursuant to a court order. Lunan v. Jones (In re Lunan), In re Lunan, 2012 WL 77491912 (Bankr. E.D. Tenn. Mar. 22, 2013) To read the full decision, click here.

    Factual Background and Procedural History

    The chapter 7 trustee ("Trustee") moved to sell the debtor's million dollar home, luxury vehicles and artwork. Insisting that the sale price was too low, the debtor opposed the sale motion. After losing in the bankruptcy court, the debtor appealed to the district court and to the Sixth Circuit. Her appeals were eventually dismissed. In tandem with the debtor's efforts, her non-debtor husband ("Plaintiff") sued the Trustee and the court appointed auctioneer in state court to stop the sale. Plaintiff alleged that the trustee was attempting to sell non-estate property for personal gain and alleged state and federal civil rights violations, conversion, theft, embezzlement and fraud. Among other allegations, Plaintiff asserted that some of the property subject to the Trustee's sale belonged solely to Plaintiff and to his son. Plaintiff also contended that certain of the property at issue was jointly-held by Plaintiff and the debtor.

    The Trustee removed the state court litigation to the bankruptcy court and moved to dismiss Plaintiff's claims because (i) Plaintiff did not obtain court permission as required by the Barton doctrine, and (ii) the Trustee and his auctioneer were protected by quasi-judicial immunity. Plaintiff opposed dismissal, asserting that neither the Barton doctrine nor immunity applied because the Trustee's and auctioneer's actions were outside the scope of their authority.

    Holding and Analysis

    In evaluating the Barton doctrine contentions, the bankruptcy court looked to the Sixth Circuit's definition of the doctrine. The Barton doctrine requires a party to obtain the permission of the bankruptcy court before commencing an action in a state forum against a trustee, for acts committed in the trustee's official capacity and within the trustee's authority as an officer of the court. Barton also applies to those who are the "functional equivalent" of trustees, such as court appointed auctioneers.[1] While the court agreed with Plaintiff's legal position that Barton does not apply to acts outside of a trustee's official duties, Plaintiff's husband failed to provide any evidence that the Trustee and the auctioneer were acting outside of the court's order authorizing them to sell the property. Mere allegations of improper conduct, the court concluded, do not take Plaintiff's claims outside the Barton doctrine. Nonetheless, the court declined to dismiss the case for a violation of the Barton doctrine, since removal of state court litigation to the bankruptcy court cures any Barton violations.

    Turning to the immunity issue, the court held that, similar to the Barton doctrine, trustees and court-appointed auctioneers are entitled to special protections when they are acting within the scope of their official duties and pursuant to court orders. A trustee's conduct is not immune if a trustee acts outside his authority - such as seizing non-estate property. But, according to the court, the property allegedly converted was taken pursuant to court order. As a result, the Trustee's and the auctioneer's acts were protected. Further, their acts were immune even from allegations of bad faith, malice or gross error. The court further determined that the Trustee's and auctioneer's statements and speech were protected by immunity, in addition to their conduct. Granting the Trustee's motion, the bankruptcy court dismissed the litigation.


    The Lunan opinion, issued by a bankruptcy court in the Sixth Circuit, appears consistent with Ninth Circuit precedent.

    In Harris v. Wittman (In re Harris), 590 F.3d 730, 742-44 (9th Cir. 2009), the U.S. Court of Appeals for the Ninth Circuit affirmed the district court's and bankruptcy court's orders granting quasi-judicial immunity to the chapter 7 trustee and "functional equivalents" of the chapter 7 trustee - the trustee's counsel, and an unsecured creditor assigned the right to pursue avoidance litigation - against a debtor's breach of contract claims. Parties who would seek judgment against a bankruptcy trustee for alleged malfeasance arising from acts taken by the trustee in his or her official capacity should note that such suits are unlikely to succeed in the Sixth and Ninth Circuits.

    This case write up was prepared by The Insolvency Law Committee of the Business Law Section of the California State Bar.

    Recent 9th Circuit Court of Appeals Decision re Judicial Estoppel: Usually, where a debtor fails to list (schedule) a claim/cause of action/lawsuit in which debtor is plaintiff, and in which other persons/entities are defendants, the punishment is that the debtor is NOT allowed to pursue that claim, after the bankruptcy case is over (debtor is estopped to pursue claim after bankruptcy, because debtor failed to schedule the existence of the claim, in debtor's bankruptcy schedules.

    However, in Ah Quin v. County of HI, F.3d, 2013 DAR 9634 (9th Cir. 7/25/13), the 9th Circuit Court of Appeals held that the Debtor/plaintiff was not estopped from pursuing discrimination law suit, despite fact debtor had failed to list that suit as an asset, in debtor's bankruptcy schedules. 9th Cir., 2-1 decision, reverses summary judgment for Defendant determining that lower court did not apply correct standard as mistake or inadvertence exception to application of judicial estoppel. Perhaps the most relevant fact, not really discussed in the opinion, is that the debtor/plaintiff reopened her case and the Ch 7 trustee abandoned the claim.

    If the claim had not been abandoned, by the Trustee, back to the debtor, when the bankruptcy case was reopened, the unscheduled claim would have remained part of the bankruptcy estate, after case was over, forever, and therefore debtor would NOT have been able to pursue the unscheduled claim after debtor's case was over.

    Anti-Deficiency Protection, on Purchase Money DOT Residential Loans, Expanded by new CA statute signed into law on 7/11/13 by governor, to Include Short Sale Done with DOT Lender Consent, not Just Non-Judicial Foreclosure Sale by Lender


    On July 11, 2013 Governor Brown signed into law SB 426 which expands the anti-deficiency language in Code of Civil Procedure ("C.C.P.") sections 580b and 580d by expressly prohibiting not only: (i) a deficiency judgment against the borrower in connection with either a "purchase money" deed of trust covered under C.C.P. §580b or following a non-judicial foreclosure of a deed of trust covered under C.C.P. §580d, but now also (ii) any liability for any deficiency in the foregoing situations. However, SB 426 expressly recognizes the right of a lender to collect any such deficiency from any additional collateral held or from any third-party guarantor.

    As discussed herein, the new statute could be viewed as "clarifying" rather than "amending" existing California law so that when it becomes effective, it will apply to deficiency obligations then existing and held by any lender or its assignee.

    A. New Legislation (C.C.P. §§580b and 580d)

    Prior to the enactment of SB 426, C.C.P. § 580b prohibited a deficiency judgment in connection with the following: (1) any sale of real property for failure of the purchaser to complete the contract of sale;(2) under a deed of trust given to the vendor to secure repayment of the purchase price of the encumbered property; (3) under a deed of trust on residential property given to a lender to secure repayment of a loan ("purchase money loan") used in whole or in part to pay for the purchase price of a residence to be occupied, in whole or in part, by the purchaser; or (4) a loan used to refinance a purchase money loan except to the extent that the lender advanced new principal to the borrower which was not used to repay existing principal or interest or loan fees and costs.

    Similarly, prior to the enactment of SB 426, C.C.P. §580d prohibited a deficiency judgment on a note secured by a deed of trust on real property in any case in which the property had been sold under a power of sale (i.e. a non-judicial foreclosure).

    SB 426 clearly provides that not only is a deficiency judgment prohibited, but that no deficiency shall be collected or even owed in such situations. However, such protections apply only to the borrower and to its non-encumbered assets. The statute expressly provides that although a deficiency may not be collected from the borrower, the new provisions do not affect the liability: (i) of any guarantor, pledgor or any other surety might have with respect to the deficiency; or (ii) that might be satisfied in whole, or in part, from other collateral pledged to secure the obligation that is the subject of the deficiency.

    B. C.C.P. §580e

    Although SB 426 does not expressly address C.C.P. §580e, any deficiency subject to C.C.P. §580e will be similarly affected.

    C.C.P. §580e (a)(1) provides that no deficiency may be collected and no deficiency judgment may be requested for a loan secured solely by a residence in any case where the lender agrees to a short sale and receives any agreed portion of the sale proceeds. However, C.C.P. §580e(a)(2) simply prohibits a deficiency judgment, and does not prohibit collection of any deficiency in those situations where the lender has other collateral securing its loan in addition to the residence.

    Although SB 426 does not address C.C.P. §580e(a)(2), its prohibition of the collection of any deficiency will apply to a short sale covered under §580e(a)(2) because C.C.P. §580e(a)(2) expressly provides that the "rights, remedies, and obligations of any holder, beneficiary, trustor, mortgagor, obligor, obligee or guarantor of the note ... shall be treated and determined as if the dwelling had been sold through foreclosure under a power of sale contained in deed of trust ... in the manner contemplated by Section 580d".

    In other words, the lender's right to collect a deficiency under C.C.P. §580e(a)(2) will be treated (i.e. prohibited) just as if the lender had conducted a foreclosure under C.C.P. §580d.

    C. Extent of Application of SB 426

    If a statute is merely declaratory of or clarifies existing law, it will be applicable to all existing covered transactions that exist as of the date that the statute goes into effect. From the present case law, it could be concluded that under existing case law a lender would be precluded not only from obtaining a deficiency judgment under C.C.P. §§580b and 580d, but also would be prohibited from collecting any deficiency owed under the subject obligation.

    First, case law is clear that C.C.P. §§580b and 580d do not prevent a secured creditor from collecting the deficiency from additional collateral. Freedland v. Greco (1995) 45 Cal.2d 462, 466; Hatch v. Security-First Nat. Bank (1942) 19 Cal.2d 254, 260-61; Mortgage Guarantee Co. v. Sampsell (1942) 51 Cal.App.2d 180, 183-86; see also Paradise Land and Cattle Co. v. McWilliams Enterprises, Inc., 959 F.2d 1463 (9th Cir. 1992) (permitting a secured creditor to collect against a third party guarantor or surety).

    Second, a number of California decisions have expressly acknowledged that the purpose of C.C.P. §§580b and 580d was to prevent a borrower from being obligated to repay the unpaid balance of a loan (i.e. the deficiency) following any foreclosure on the real property collateral. The oft-repeated explanation is stated in Cadlerock Joint Venture L.P. v. Lobel (2012) 206 Cal. App.4th 1531:

    The anti-deficiency statutes are to be construed liberally to effectuate the legislative purposes underlying them, including the policies ' "... (2) to prevent an overvaluation of the security, (3) to prevent the aggravation of an economic recession which would result if [debtors] lost their property and were also burdened with personal liability, and (4) to prevent the creditor from making an unreasonably low bid at the foreclosure sale, acquire the asset below its value, and also recover a personal judgment against the debtor." ' " (emphasis added)(internal citations omitted)

    Similarly there is other oft-repeated language from the California Supreme Court in Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226:

    Thus, the anti-deficiency statutes in part "serve to prevent creditors in private sales from buying in at deflated prices and realizing double recoveries by holding debtors for large deficiencies." (Commonwealth Mortgage Assurance Co. v. Superior Court (1989) 211 Cal.App.3d 508, 514 (emphasis added)

    Further, it has regularly been held in cases such as Walters v. Marler (1978) 83 Cal.App.3d 1147 that C.C.P. §580b has the additional public policy of putting the risk of loss from a shortfall in the value of the collateral on the lender. Therefore, it would be illogical to permit recovery of the deficiency from the borrower:

    Section 580b of the Code of Civil Procedure prohibits a foreclosing mortgagee from proceeding personally against a mortgagor to recover a deficiency after the security is exhausted, and places the full risk of inadequate security on the purchase money lender. (internal citations omitted)

    Case law is clear that the anti-deficiency laws under C.C.P. §§580b and 580d are to be interpreted broadly to accomplish the purposes of the statutes. Thus, the conclusion could be drawn that the chief purpose of C.C.P. §580d and one of the chief purposes of C.C.P. §580b is to prevent the borrower from being liable for any deficiency. As a result, it is likely that SB 426 could be held to be declaratory of existing law. A credible argument therefore could be made that immediately upon SB 426 becoming effective, it will apply to all outstanding deficiency obligations, regardless whether the deficiency was created before or after the enactment of SB 426. This conclusion remains to be confirmed by the case law interpreting this new statute.

    D. Applicability to Assignees of Deficiency Obligations

    Finally, it is currently not uncommon for certain lenders which hold notes or loans subject to C.C.P. §§580b and 580d to sell such notes/loans following the foreclosure on the underlying residences to debt collection agencies at a discount. Usually this is done without representation or warranty as to collectability of such assets. It is also not uncommon for the assignees to press the borrowers for payment on the deficiency.

    However, California case law makes it clear that if a loan is subject to C.C.P. §§580b or 580d, the prohibition against deficiency judgments will apply to any third-party assignee of the note/loan. Costanzo v. Ganguly (1993) 12 Cal.App.4th 1085. It would be prudent for lenders and their assignees to take account of this prohibition in their actions.

    These materials were written for, and disseminated by, the Insolvency Law Committee - Business Law Section of the State Bar of California

    Split Among Court Decisions re whether or not the absolute priority rule applies in an individual Chapter 11 case and individual Chapter 11 plan:

    The United States Court of Appeals for the Tenth Circuit (the "10th Circuit") has held that, notwithstanding the BAPCPA's amendments to the Bankruptcy Code, individual chapter 11 debtors must still comply with the absolute priority rule (adopting the so-called "narrow view"). Dill Oil Company, LLC v. Arvin E. Stephens (In re Stephens), 704 F.3d 1279 (10th Cir., Jan. 15, 2013). To view the full decision, click:


    The debtors, Mr. and Mrs. Stephens (the "Stephens"), owned a chain of convenience stores and filed a voluntary individual chapter 11 case because the stores were operating at a loss. The Stephens sought confirmation of a plan of reorganization (the "Plan") that paid approximately 1% to allowed unsecured claims over a five-year period, but allowed for the Stephens to retain possession and control of their convenience stores.

    Dill Oil Company, owned by Mr. and Mrs. Dill (the "Dills"), was the primary supplier of gasoline and gas station products to the Stephens' stores. At the time the chapter 11 case was filed, the Stephens owed the Dills approximately $1.8 million. Repayment of the debt was partially secured by mortgages the Stephens granted to the Dills in various tracts of real estate. However, the mortgages were subject to more senior mortgages.

    In the Stephens' Plan, the Dills' claims were classified as partially secured in the amount of $15,000, with the balance of the debt classified as unsecured. The Dills' unsecured debt amounted to approximately 96% of the allowed unsecured claims class. The Dills objected to confirmation of the Plan and voted to reject it. Given the Dills' vote of their unsecured claims, the only way the Stephens could confirm their Plan was by way of a "cram down," under Bankruptcy Code section 1129(b)(2)(B)(ii).

    The Dills argued that the Plan could not be confirmed via cram down, because it violated the "absolute priority rule" of section 1129(b)(2)(B)(ii) (e.g., that a chapter 11 debtor cannot keep any pre-petition property unless the Plan provides for payment of all creditors in full), which they argued survived the 2005 enactment the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA") (thereby asserting the so-called "narrow view" of the BAPCPA's effect on the absolute priority rule in individual chapter 11 cases).

    The bankruptcy court nevertheless crammed down the Plan over the Dills' objections, adopting the "broad view," which concludes that the plain language of the BAPCPA abrogated the absolute priority rule in individual chapter 11 cases.

    The Dills timely appealed the bankruptcy court's decision to the Bankruptcy Appellate Panel ("BAP"), which, on its own motion, certified the case for direct appeal to the 10th Circuit, on the basis that the case presented a question of public importance for which there was no controlling law. The 10th Circuit accepted the appeal.

    Holding and Reasoning

    The 10th Circuit reversed the bankruptcy court and remanded the case for further proceedings. In doing so, the court adopted the "narrow view," by ruling that post-BAPCPA, the absolute priority rule remains valid and enforceable in individual chapter 11 cases, and therefore the Stephens' Plan could not be confirmed because it violated the absolute priority rule.

    The 10th Circuit's analysis was twofold:

    First, the Court examined the language of the operative statutes giving rise to the debate as to whether the absolute priority rule survived enactment of BAPCPA – namely 11 U.S.C. sections 1115 and 1129(b)(2)(B)(ii) – to determine whether the statutory language was clear and unambiguous. After recognizing the divergent views expressed by other courts adopting the broad or narrow views, the Court determined that the statutes were ambiguous because both views were plausible.

    Second, the Court noted that, because the statutory language and the sparse legislative history are ambiguous, there was no clear evidence that Congress intended through BAPCPA to repeal the absolute priority rule in individual chapter 11 cases. Without a clearly stated intention to repeal the absolute priority rule, the Court adopted the presumption against "implied repeal," stating that, "[R]epeals by implication are not favored and will not be presumed unless the intention of the legislature to repeal is clear and manifest."


    There are now two post-BAPCPA circuit court rulings on the absolute priority rule, both adopting the majority "narrow view" that the absolute priority rule remains valid and enforceable: (i) the 10th Circuit opinion in the Stephens case; and (ii) the 4th Circuit opinion in the case of In re Maharaj, 681 F.3d 558 (4th Cir. 2012) However, neither the 4th Circuit's Maharaj opinion nor the 10th Circuit's Stephens opinion is binding on bankruptcy courts in the 9th Circuit.

    As it presently stands, the 9th Circuit's BAP decision in In re Friedman, 466 B.R. 471 (9th Cir. BAP 2012), where the BAP's majority adopted the minority "broad view," remains good law. Depending on the particular bankruptcy judge, however, the Friedman decision may or may not constitute binding authority in the 9th Circuit. See In re Arnold, 471 B.R. 578 (Bankr. C.D. Cal. 2012) (ruling that the Friedman decision was wrongly decided, and is not binding authority in the 9th Circuit).

    Creditors--DON'T BE LATE

    Creditors--DON'T BE LATE--Creditor Being a Few MINUTES Late in Filing Creditor's Nondischargeability Adversary Proceeding against Debtor, in Debtor's Bankruptcy Case, Resulted in Complaint being Thrown Out, as AFTER DEADLINE. In Anwar v. Johnson, ___ F.3d.___, 2013 DJDAR 8725 (9th Cir. 7/3/2013). Same reasoning would apply to cause Bankruptcy Court to have to throw out a creditor's, trustee's, or US Trustee's Complaint seeking to deny the debtor any discharge, if filed after the deadline that the Bankruptcy Code sets for filing "nondischargeability" or "denial of discharge" complaints.

    There are certain excuses that may excuse untimely filing of Complaint, but none of those excuses applied in Johnson, and The 9th Circuit held that the Federal Rules of Bankruptcy Procedures did NOT afford the Bankruptcy Court the discretion to extend, retroactively (after deadline had passed) the dealine for filing nondischargeability complaints when an attorney's computer difficulties cause him to miss the electronic filing deadline. The 9th Circuit Court of appeals held that the Federal Rules of Bankruptcy Procedure to NOT allow retroactive extension of the deadline.

    Wells Fargo Bank, N.A. v. Texas Grand Prairie Hotel Realty, LLC (In the Matter of Texas Grand Prairie Hotel Realty, LLC), No. 11-11109 (5th Cir. Mar. 1, 2013).

    Fifth Circuit Court of Appeals rules contra to how 9th Circuit Court of Appeals determines "cram down" interest rate to be used in Chapter 11 bankruptcy cases, to "cram down" Chapter 11 plan on objecting secured creditor. "Cram down" means that the Bankruptcy Judge confirms (approves) Chapter 11 plan over objection of secured creditor)The U.S. Court of Appeals for the Fifth Circuit has held that, in chapter 11 cases, the bankruptcy court decides the formula to use to determine the appropriate "cram down" rate under a plan, and the bankruptcy court's decision is reviewed for clear error rather than de novo. In doing so, the Fifth Circuit rejected the universal application of Till v. SCS Credit Corp., 541 U.S. 465 (2004), in chapter 11 cases, which is the way cram down interest rate is calculated in the Ninth Circuit (includes California Bankruptcy Courts).

    Facts and Procedural Background

    The debtors owned a number of hotels on which Wells Fargo Bank (the "Bank") held a lien to secure a loan balance of about $49 million. Unable to pay the loan when it came due, the debtors filed chapter 11 cases. The bankruptcy court valued the property and the Bank's secured claim at $39 million. The debtors proposed a cram down plan under which they proposed to pay the Bank's claim with interest at 5% per annum (1.75% over prime). The parties agreed that Till controlled the interest rate issue. The bankruptcy court confirmed the plan at the debtors' proposed interest rate. The district court affirmed and the Bank appealed.

    Presuming that Till applied in all chapter 11 cases as a matter of law, the Bank contended that a de novo standard of review was required.

    The Firth Circuit's Ruling and Analysis

    The Fifth Circuit disagreed with the Bank. Although Till suggested that the prime-plus methodology applicable in chapter 13 cases also should apply in chapter 11 cases (at least absent an efficient market for the loan at issue), the Court of Appeals concluded that Till is not binding on the issue.

    Moreover, the Fifth Circuit declined to adopt any specific legal standard for determining cram down rates in chapter 11 cases, preferring instead to leave it to the bankruptcy court to adopt a formula appropriate for the particular case. With the appropriate formula left for the bankruptcy court to decide, the court's cram down analysis is reviewed for clear error, not de novo.

    In this instance, the parties stipulated that the Till formula should be used. Applying a clear error standard of review to the bankruptcy court's application of the Till formula, the Fifth Circuit affirmed the bankruptcy court's ruling.

    In re Blixseth, 484 B.R. 360 (9th Cir. BAP Dec. 17, 2012)

    Reversing the Bankruptcy Court, the U.S. Bankruptcy Appellate Panel of the Ninth Circuit Court of Appeals (the "BAP") has ruled that even though the law generally provides that intangible assets have no physical location or are located where their owner resides, for purposes of determining the proper venue of an involuntary chapter 7 petition against a Washington resident whose principal assets were intangibles comprising interests in Nevada entities, those assets were located in Nevada.

    Facts and Procedural Background

    The debtor, a Washington state resident, held his principal assets through a Nevada limited liability company and a Nevada limited partnership (the "Nevada Entities"). The Nevada Entities owned other entities that owned real estate around the country, none of which was located in Nevada. Other than existing in Nevada, the Nevada Entities did no business in Nevada. In addition, the Nevada Entities' offices and books and records were located in Idaho. Nevada law provides that a creditor seeking to execute against an interest in a Nevada entity must proceed in Nevada courts and that a person seeking to dissolve a Nevada entity must likewise proceed in Nevada courts.

    Three non-Nevada state tax agencies filed an involuntary petition against the debtor in Nevada upon learning that he had transferred substantially all his assets to the Nevada Entities. Noticing the debtor's Washington residence address in the involuntary petition, the bankruptcy court raised the issue of whether venue was proper sua sponte, and the debtor later filed a motion to dismiss the petition on the grounds of improper venue.

    Under 28 U.S.C. section 1408, venue of a bankruptcy case is proper where the debtor (1) resides, (2) is domiciled, (3) has his principal place of business or (4) has his principal assets. Clearly the first three locations would not support venue of the involuntary petition in Nevada, leaving the location of the debtor's principal assets as the only venue candidate. According to the bankruptcy court, intangible assets, such as the debtor's interests in the Nevada Entities, generally have no physical location or are located where the owner resides or is domiciled. Thus, the bankruptcy court found that venue in Nevada was improper because the debtor's principal assets, the Nevada Entities, were not located in Nevada and dismissed the involuntary petition. It is not clear why the bankruptcy court did not exercise its discretion under Bankruptcy Rule 1014(a)(2) to transfer the case to a proper venue rather than ordering dismissal. One of the petitioning creditors appealed.

    The BAP's Ruling and Analysis

    The BAP reversed. According to the BAP, the purpose of the venue statute is to identify a jurisdiction that is both convenient for parties in interest and to enhance effective administration of the case. The BAP acknowledged that intangible property generally either has no location or is located (by a fiction) at the owner's residence or domicile. However, it observed that "courts frequently have ascribed a location to intangible assets for various purposes." Blixseth, 484 B.R at 366-67. The BAP noted that there were no cases on the issue for purposes of bankruptcy venue.

    Citing Office Depot, Inc. v. Zuccarini, 596 F.3d 696, 702 (9th Cir. 1010) the BAP ruled that an analysis of the location of intangibles for venue purposes involves a "'context specific'" inquiry. Id. at 367. The court likened a chapter 7 involuntary petition to a collection action by creditors. In light of that fact and the rules regarding execution against an interest in or dissolution of Nevada entities, it reasoned that Nevada would be the "location" of the debtor's interests in the Nevada Entities for purposes of the chapter 7 trustee. Accordingly, it held that Nevada was a proper venue for the involuntary petition.

    One member of the BAP panel dissented, arguing that the majority has engaged in a "case specific" (emphasis added) rather than a "context specific" exercise.


    The dissent's "case specific" vs. "context specific" comment is justified. The Office Depot opinion distinguishes context by the nature of the proceeding, not by the specific facts of a particular case. By focusing on what may serve a case well based on its particulars, the BAP may open a Pandora's box. For example, the court's reliance on the notion that an involuntary chapter 7 petition is like a collection action suggests that the result could be different if the facts were the same except that the debtor filed a voluntary chapter 7. What if Nevada law authorized out-of-state execution but only in-state dissolution? While the opinion may be justified as supporting jurisdiction in the venue most convenient for this debtor's chapter 7 trustee to function, it is less compelling as standard for determination of where the debtor's principal assets are located.

    Samuels vs. Midland Funding, LLC, 2013 Westlaw 466386 (S.D. Ala. 2013)

    A United States District court in Alabama has held that a consumer debtor may bring a suit against a debt collector for malicious prosecution after the debt collector showed up for trial with no witnesses and no evidence.

    Facts: An individual debtor was sued by a debt collector. The debtor appeared at trial, but the debt collector had no evidence to prove the creation of the alleged debt, the date of the default, the amount due, or any other crucial fact. The debt collector also had no witnesses at trial.

    After the trial court entered judgment for the individual debtor, the debtor brought suit under the Fair Debt Collection Practices Act ("FDCPA") and also brought a claim under state law for malicious prosecution. The debt collector moved to dismiss the complaint, but the district court denied the motion.

    Reasoning: The court held that under well-established FDCPA authority, the debt collector's behavior was actionable. In addition, the court noted that the debt collector's alleged modus operandi (i.e., filing suit in order to obtain a settlement, without actually intending to litigate the case on its merits) constituted an "improper manipulation of the legal system to obtain payment," thus supporting the state law claim for malicious prosecution and abuse of process.

    Comment: Judging by the published opinions in this area, the behavior of "bulk purchasers" of consumer debt is a national scandal. Whenever these outfits are challenged by consumer debtors, the outcome is overwhelmingly in favor of the debtor, due to the complete absence of documentation to support the debt collector's claim. Unfortunately, very few consumer debtors are aware of their rights, and they cannot afford representation, which is exactly what the debt collectors are apparently counting on. Unlikely that the tiny percent of consumers who do so will cause the "debt buyer" industry to clean up its practices, unless it gets hit with some huge punitive damage tort awards.

    The U.S. Bankruptcy Appellate Panel of the Ninth Circuit ("BAP") held that a judgment awarding the value of a withdrawing member's interest in an LLC constitutes "damages arising from the purchase or sale of... a security" under 11 U.S.C. § 510(b), and therefore is vulnerable to mandatory subordination. O'Donnell, et. al. v. Tristar Esperanza Properties, LLC (In re Tristar Esperanza Properties, LLC), BAP No. CC-12-1340-KlPaDu (9th Cir. BAP Mar. 8, 2013). To read the opinion, click here: (Tristar)

    US Supreme Court decision, Bullock v. BankChampaign

    Bullock v. BankChampaign (United States Supreme Court, decided 5/13/13), decision on nondischargeability of debt pursuant to 11 USC 523(a)(4), which is nondischargeability of debt based on debt arising from debtor committing "fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny".

    Unanimous United States Supreme Court decision, holding that "defalcation" under 11 USC 523(a)(4) of the Bankruptcy Code requires that the debtor, at time of the debtor's defalcation, had "scienter". "Scienter" element requires knowledge of, or gross recklessness in respect to, the improper nature of the fiduciary behavior.

    Bullock was decided in the context of a proceeding commenced to deny the debtor a discharge for certain state law judgments arising from his appointment as a nonprofessional trustee. Pursuant to Code section 523(a)(4), debts arising from defalcation while acting in a fiduciary capacity are excepted from discharge. Such an exception from discharge has been codified since 1867 and subject to varying interpretations. In coming to its decision, the Supreme Court employed various tenets of statutory construction.

    The term "defalcation" appears in the Code only once, in section 523(a)(4). An analysis of the Bullock opinion would be valuable for members of our Committee, exploring its potential impact on burdens of pleading and proof in bankruptcy and how this opinion fits with established state and federal law.

    New Bankruptcy Court Decision about law firm that filed bankruptcy: Heller Ehrman LLP, Liquidating Debtor v. Jones Day (In re Heller Ehrman, LLP), Bankr. Case No. 08-32514DM, Adv. No. 10-3221DM (Bankr. N.D. Cal. March 11, 2013).


    Judge Dennis Montali, of the Bankruptcy Court for the Northern District of California, recently granted partial summary judgment in favor of the plaintiff debtor, a dissolved law firm, on the basis that the debtor's waiver of rights under Jewell v. Boxer, 156 Cal. App. 3d 171 (1994) constituted an avoidable transfer under 11 U.S.C. section 548 and the California Uniform Fraudulent Transfer Act, entitling the debtor to recover profits from unfinished business.


    In its dissolution plan, Heller included a provision ("the Jewel Waiver") purporting to waive the firm's rights to payment of the profits from unfinished matters which former shareholders were expected to take to their new firms. These payment rights were established by the California Supreme Court in its seminal Jewel v. Boxer decision. The debtor filed adversary proceedings against law firms that hired former Heller shareholders on the theory that the Jewel Waiver constituted actually or constructively fraudulent transfers to the shareholders and their new law firms.

    With regard to the debtor's constructively fraudulent transfer argument, the court found that the shareholders did not provide reasonably equivalent value in exchange for the Jewel Waiver. The defendants had argued that Heller received various indirect benefits. For example, they claimed that the Jewel Waivers encouraged shareholders to move clients to new law firms, which helped ensure that client matters were attended to and that existing accounts receivable were collected. It also assisted associates and staff in finding new jobs, thereby limiting WARN Act liability. However, the defendants did not show that these indirect benefits were given in exchange for the Jewel Waiver, and thus the debtor prevailed on this issue.

    The defendants also asserted the safe harbor defenses of Section 550(b)(1), available to subsequent transferees who take for value, in good faith, and without knowledge of the voidability of the transfers. Some of the defendants took in good faith and without knowledge of the avoidability of the Jewel Waiver. Nevertheless, these defenses are cumulative and, because the defendants could not prove that they took for value, they were not shielded by Section 550(b)(1).

    The court reserved for trial the amount of Heller's damages.

    Author's Commentary:

    This decision discusses extensively In re Brobeck, Phleger & Harrison LLP, 408 B.R. 318 (Bankr. N.D. Cal. 2009), also presided over by Judge Montali, in which the bankruptcy court found that a waiver designed to avoid the consequences of Jewel was a transfer of the debtor's property for which it received less than reasonably equivalent value. To law firms acquiring talent from dissolving former competitors: caveat emptor.

    The U.S. Court of Appeals for the Ninth Circuit has held that: (1) a motor vehicle, including a luxury vehicle, may fall within California's "wildcard" or "grubstake" exemption; and (2) if an exempt vehicle is a "tool of the debtor's trade," the debtor can avoid a non-possessory, non-purchase money lien against it under 11 U.S.C. § 522(f)(1)(B). Orange County's Credit Union v. Angie M. Garcia (In re Garcia) ___ F. 3d ___ (9th Cir. 2013). To read the full opinion, click here (Garcia).

    Factual Background

    In November 2006, real estate agent Angie Garcia ("Debtor") borrowed $22,160 from Orange County's Credit Union ("OCCU"), using her Mercedes Benz automobile as collateral. OCCU properly perfected its non-possessory, non-purchase money lien on the Mercedes.

    When the Debtor later filed for Chapter 7 relief, she listed the car's value at $5,350, with an outstanding balance of $12,715.50 owed to OCCU. The Debtor claimed that the car was exempt from her bankruptcy estate under California Code of Civil Procedure section 703.140(b)(5), known as California's "wildcard" exemption. The bankruptcy court ruled that the Debtor could not exempt her Mercedes under the wildcard exemption, because there are other sections in the California exemption statutes that explicitly deal with vehicles, e.g. Section 703.140(b)(2), which has a significantly lower statutory cap intended specifically for vehicles.

    The Debtor also sought to avoid OCCU's lien on the car pursuant to 11 U.S.C. section 522(f)(1)(B), claiming that as a realtor her Mercedes is a "tool of the trade". The bankruptcy court ruled that the Debtor could not use Section 522(f)'s lien avoidance provisions because motor vehicles are explicitly mentioned in other portions of the statute (e.g., Section 522(d)(2)), and because the legislative history did not support avoiding liens on luxury items.

    The district court reversed and remanded the case to the bankruptcy court, and OCCU appealed.

    The Appellate Court's Holding and Reasoning

    Noting that the issues presented are purely legal, the appellate court affirmed the district court's ruling. It first held that, as a matter of law, the Debtor is permitted to claim a wildcar