BankruptcyProf Blog

Bankruptcy Jurisprudence from the Supreme Court - Bailey v. Glover

Bailey v. Glover, 88 U.S. 342 (1874)

Issue:  When the trustee is required to bring an action to avoid a fraudulent conveyance within two years of the bankruptcy filing, does the active concealment of the transfer by the debtor and the transferees toll the running of the two year statute of limitations to bring the action?       

Holding:  Yes, the two years runs from the time the conduct is discovered by the trustee assuming that the trustee used due diligence.      
 
Justice Samuel F. Miller

The debtor transferred all of his assets to family members for little or no consideration and subsequently filed bankruptcy.  His schedules listed only one creditor.  The trustee did not discover the transfer and thus did not file the complaint until some three years after his appointment.  The code at the time required the trustee to bring such an action “within two years from the time of the cause of action accrued for or against such [trustee].”  The transferees demurred and the demurrer was sustained. 

The Supreme Court reversed.  The opinion states that statutes of limitation should be strictly construed.  “It is obviously one of the purposes of the Bankrupt law, that there should be a speedy disposition of the bankrupt's assets.  This is only second in importance to securing equality of distribution.”  But this rule should not apply when fraudulent conduct has prevented the trustee from learning about the potential action. 

“[The requirement of a speedy bankruptcy case] is a wise policy, and if those who administer the law could be induced to act upon its spirit, would do much to make the statute more acceptable than it is.  But instead of this the inferior courts are filled with suits by or against [trustees], each of whom as soon as appointed retains an attorney, if property enough comes to his hands to pay one, and then instead of speedy sales, reasonable compromises, and efforts to adjust differences, the estate is wasted in profitless litigation, and the fees of the officers who execute the law.”

“In suits in equity where relief is sought on the ground of fraud, the authorities are without conflict in support of the doctrine that where the ignorance of the fraud has been produced by affirmative acts of the guilty party in concealing the facts from the other, the statute will not bar relief provided suit is brought within proper time after the discovery of the fraud.”

“[W]e hold that when there has been no negligence or laches on the part of a plaintiff in coming to the knowledge of the fraud which is the foundation of the suit, and when the fraud has been concealed, or is of such character as to conceal itself, the statute does not begin to run until the fraud is discovered by, or becomes known to, the party suing, or those in privity with him.”

The court struggled a little with the issue of whether or not this equitable rule should apply in actions at law.  But it said “the case before us is a suit in equity.”  Furthermore, the statute said that no “action in law or in equity” may be brought after two years and therefore the “statute must be held to apply equally by its own force to courts of equity and to courts of law.”

Note:  Justice Samuel Miller, a doctor before he studied law, was appointed to the Supreme Court by Abraham Lincoln in 1862. 

33rd Annual Meeting of the Supreme Court Historical Society

The Supreme Court Historical Society will hold its 33rd Annual meeting and Dinner on June 2, 2008 at the Supreme Court Building.  The meeting includes a tour of the building and later a lecture by Justice Alito.  There is a reception at 7:00 p.m. and a black tie dinner at 8:00 p.m. in The Great Hall.

For information, go to the society website at www.supremecourthistory.org.      

Comment on Weigand re Commitment Period for Self-Employed Person

Jon: 

I read Weigand, and understand Judge Jury’s analysis.  Strict statutory construction controls. 

While I understand Judge Jury’s analysis, I felt completely let down by the BAP's conclusion that it was acceptable to treat sole proprietors differently from wage earners.  I found lacking the statement that “It may be that Congress simply did not want those persons generating significant revenues through a business to have access to three-year chapter 13 plans.”  Is this justification for discrimination under the law?

Raymond H. Aver, Esquire
ray@averlaw.com

Interview with Justice Scalia on his new Book

Here is the transcript of a very entertaining recent interview of Justice Scalia by Brian Lamb of C-SPAN discussing his new book, Making Your Case.   Now if I could find where to get one of those bobbleheads. 

Is It "Above-Median" or "Over-Median"? "Below-Median" or "Under-Median"?

I find myself switching back and forth when I make comments about some of the new BAPCPA provisions.  So I did a google search-analysis-study with " at each end and here are my official findings"

"Above-Median" - 476,000 hits; "Over-Median" -13,200 hits; 

"Below-Median" - 475,000 hits; "Under-Median" - 4,450 hits

The code uses "greater than the median" without hyphens by the way. 

April 2008 Filings

April 2008 saw 93,096 petitions filed in the United States.  This up from 90,288 in March, 2008 and up from 67,787 in April of 2007.  The total for the first four months of 08 is 333,051 compared to 254,799 for the four months in 2007 or a 31% increase.  According to Bob Lawless on Credit Slips, the April filings are actually sightly down from March because there was one more "filing day" in April. 

Looking at just the past three months, Feb - April, the total of 272,772 is still lower than any quarter since March, 1996. 

Update on Marrama: Post-Supreme Court Goings-On

I took a gander at the docket on Robert Marrama today wondering what had happened since the Supreme Court ruled last year that he did not have an absolute right to convert his case to chapter 13. 

On October 23, 2007 the chapter 7 trustee filed his final report advising the court that he collected some $269,000, gave $150,000 of that to a secured creditor, $9,000 to an auctioneer, and after some other expenses, there was $107,000 left.  Those funds of course will go entirely to the trustee, his counsel and his accountant who, in fact, had to take a haircut on their fees to the tune of about half. 

The debtor's discharge is unclear.  There is an order entered on November 13, 2007 granting the discharge.  But there is also an Order entered on April 28, 2004 granting Citizens Bank's MSJ in its adversary proceeding seeking denial of the discharge.  The trustee also filed a 727 complaint but later dismissed it when the Citizen's order became final. 

New Study on Justice Scalia Statutory Interpretation

I found a great new article on Justice Scalia, thanks to Professor David Hricik's Statutory Construction Blog.  Written by Professor Miranda McGowen at the University of San Diego, it is entitled, "Do as I Do, not as I say: An Empirical Investigation of Justice Scalia's Ordinary Meaning Method of Statutory Interpretation."  Studying Scalia's dissents for the past twenty years she concludes,

"This study shows that Justice Scalia consults an eclectic set of extrinsic materials when he is construing statutes.  He in fact uses essentially the same broad set of materials that other justices use—except for legislative history.

"This also study found that Justice Scalia’s methodology is eclectic, too.  In a quarter of the issues in this sample, Justice Scalia abandoned textualism in favor of overtly common law methods.  When interpreting regular statutes, his presumption in favor of ordinary meaning did little work for him; in a majority of cases Justice Scalia construes words in statutes in light of their specialized, legal meanings or the meaning they have accrued in case law or in common law, not their ordinary meaning.

"Whatever Justice Scalia says about his interpretive theory, he is as purposivist of a judge as they come.  The data show that he interprets statutes in light of purpose as frequently as the rest of the Court.  Purpose rather than text sometimes drives his interpretation; if statutory purpose requires it, he will sometimes adopt second-best textual interpretations.

"The purposes he attributes to statutes do not come from his theory of interpretation, for he claims that purpose analysis is generally improper, unless the text indicates the statute’s purpose.  Nor do they come from the legislative materials, for he considers them too unreliable and too easily manipulated to provide judges with the proper amount of constraint.

"Sometimes Justice Scalia does infer statutory purpose from the text, and sometimes from agency regulations.  But frequently, his sense of a statute’s purpose comes from earlier Court decisions and lower court decisions.  Indeed, this is so often the case that his statutory interpretation practice bears an uncanny resemblance to the kind of common law interpretation of statutes he has decried in his theoretical writings."

$670,000 in Sanctions Awarded Against New York and Florida Law Firms for Filing Improper Recusal Motion

In re Evergreen Security, Ltd, --- B.R. ----, 2008 WL 434644 (Bkrtcy.M.D.Fla. Jan 08)

In a 60 page opinion, Bankruptcy Judge Arthur B. Briskman granted $670,000 in sanctions against a New York law firm and a Florida law firm and various attorneys.  The New York attorney was barred from appearing before Judge Briskman for five years. 

In the sanctions motion, debtor's counsel requested "fees of $631,266.00 and costs of $40,251.69 [against two law firms and various lawyers] in defending the Recusal Motion, addressing the mandamus matters, and prosecuting the Sanctions Motions."  The basis for the recusal motion was that Judge Briskman was "being investigated" by the 11th Circuit Judicial Counsel.  There was apparently a complaint against the judge in an unrelated case but no evidence of any investigation.   

The firms, according to Judge Briskman, filed Affidavits [in their defense] which "asserted the Recusal Motion was filed in good faith, but did not set forth any facts supporting such assertion. The Affidavits did not articulate what specific events or facts led to the filing of the Recusal Motion, who was responsible for its drafting and filing, or what due diligence the Respondents conducted prior to filing the pleading. They primarily expressed [counsel's] profound regret over the results of the filing.  The Affidavits did not establish the Respondents' actions in connection with the Recusal Motion were made in good faith."

"The Respondents, displeased with adverse rulings and desiring to delay pending matters, particularly the Involuntary Cases, drafted the Recusal Motion making scandalous allegations against the undersigned and [opposing counsel].  The pleading is a conglomeration of gossip, intentional misrepresentations, and untruths.  It had no evidentiary or legal support at the time it was filed, or at any time.  Not a single claim has factual basis or legal merit."

"The Respondents conducted no reasonably thorough and objective investigation of the facts regarding the 'complaint' and 'investigation' allegations."

Reaffirmation Agreement Must be Approved Before Entry of the Discharge

Its scary what you don't know. 

In re Engles,  ---- B.R.  ----, 2008 WL 555009  (Bkrtcy M.D. Okla, Feb. 2008)

Issue:   Can the bankruptcy court “temporarily” vacate the discharge on the debtor’s motion for the purpose of permitting entry of an order approving a reaffirmation agreement?            

Holding:      No.      

Judge Terrence Michael

The debtors executed a reaffirmation of a debt on a vehicle.  They sent it to the lender, Regions Bank.  “For reasons unknown to the parties, the Agreement was apparently delayed in reaching its destination and was never filed with the Court.”  The discharge was entered and the car repo’ed.  The debtors then moved the court, under FRCP60(b), to vacate the discharge for the purpose of entering an order of reaffirmation.  The car had equity and the debtors, at all times, were current with the monthly payments.  The court denied the motion. 

“Because of the serious consequences associated with reaffirmation-that the debtor will remain liable for an otherwise dischargeable debt-strict compliance with the terms of § 524 is mandatory.  Based on the plain language of § 524(c)(1), which mandates that an agreement must be made before the granting of the discharge in order to be enforceable, the execution of a reaffirmation agreement after the granting of the discharge renders that agreement unenforceable as a matter of law.”

As to vacating the discharge, the court said that under Section 727(d) and (e), only “the trustee, a creditor, or the United States trustee” has the ability to revoke a debtor's discharge.  As to the equitable power of the court to vacate the discharge, “[A] bankruptcy court's supplementary equitable powers under [section 105] may not be exercised in a manner that is inconsistent with the other, more specific provisions of the Code.”

9th Circuit BAP Rules on "Applicable Commitment Period" When Debtor is Self-Employed

Drummond v. Weigand (In re Weigand),  --- B.R. ---  (9th Cir. BAP Apr, 2008)

Issue:   Is the “applicable commitment period” determined by a self-employed person’s gross income, i.e., gross receipts, or net income, i.e., net business income?         

Holding:      Gross income      

Judge Ralph Kirscher, Montana
Jury, Pappas, Dunn
Opinion by Jury

The debtor is self-employed.  His gross income makes him an “above-median” debtor.  When business expenses are deducted, he is below-median.  He proposed a three year chapter 13 plan and the trustee objected to the length.  The bankruptcy court confirmed the plan over the objection. 

The BAP reversed.  The code defines CMI as all income whether or not it is taxable.  CMI determines the applicable commitment period, i.e., the length of the plan.  As to disposable income, i.e., the amount of the plan payment, the code “provides that business deductions are taken from the debtor’s current monthly income to arrive at disposable income under § 1325(b)(2)[(B)].”  “We start with the plain meaning rule and examine the statutory language in §§ 101(10A) and 1325(b)(2).  If the statutory language is clear, we must apply it by its terms unless to do so would lead to absurd results.”  CMI includes all income and “If business expenses are deducted from gross receipts to determine a chapter 13 debtor’s current monthly income, then there would be no need for § 1325(b)(2)(B), which provides for the same deductions.  We conclude that § 1325(b)(2) plainly and unambiguously requires a debtor to deduct business expenses from current monthly income [when computing disposable income only].” 

Note:  The B22C form instructs the debtor to deduct business expenses from current monthly income or "above the line."  The BAP said that is wrong and the form will have to be changed. 

New Student Loan Case in the 4th Circuit

Educational Credit Management Corp. v. Mosko (In re Mosko),  515 F.3d 319  (4th Cir. Feb. 2008)

Issue:   Did these debtors establish that they made a good faith effort to repay their student loans?           

Holding:      No.      

Appeal from the District Court

The debtors “lived in Mocksville, North Carolina, with their four-year-old son.  Robert’s and Brenda’s student loans as of July 15, 2005, equaled $63,417.06 and $57,156.41, respectively.”  They sought an order that the student loans were discharged as a hardship.  Both have bachelors degrees and Brenda has a master’s degree.  The three years before the bankruptcy they made jointly, $75,000, $78,000 and $64,000.  Robert’s employment is somewhat erratic because of medical problems.  The bankruptcy court granted the discharge and the District Court affirmed. 

The 4th Circuit Court of Appeals reversed finding that the debtors did not meet the third Brunner test, i.e., “a good faith effort to repay their loans.”  “The Moskos have not demonstrated a good-faith effort to obtain employment and maximize income.  Brenda does not work during the summer months because she wishes to spend time with her son and care for her mother.”  “The record does not show that [Robert’s] medical condition precludes him from all part-time employment, self employment, or other work from home.”  “In addition, the budget the Moskos presented to the bankruptcy court does not minimize their expenses.  Each month, the Moskos spend $75 for internet, $80 for cell phones, $60 for satellite television, $68 for a YMCA membership, and an undisclosed amount for cigarettes.”  “Furthermore, the Moskos’ actual expenditures do not demonstrate an effort to minimize expenses.  Between December 2, 2004 and March 1, 2005, the Moskos spent over $1,600 at Circuit City, Best Buy, Amazon.com, and Radio Shack; over $3,000 at Sam’s Club, Wal-mart, and Kmart; and over $800 on computer software related purchases. We conclude that their expenditures do not indicate a good faith effort to minimize expenses.  Furthermore, the Moskos’ failure to minimize expenses during a period when Robert was unemployed indicates that their own negligence contributed to their current financial situation.”  “Additionally, the payments the Moskos made on their student loans are insufficient to demonstrate good faith because they failed to make payments on their student loans during a time period when their income substantially exceeded their necessary expenses.”  “Finally, the Moskos failed to adequately pursue loan consolidation options.”  “Based on the Moskos’ adjusted gross income of $64,130 in 2004, their monthly payments under the income-contingent William D. Ford Direct Loan Consolidation Program would be approximately $319 per month.”

California Bankruptcy Forum 20th Annual Conference

The 20th Annual California Bankruptcy Conference can be found here.

May 16-18, 2008 • Hyatt Grand Champions, Indian Wells

New IRS Form for Mortgage Forgiveness Income

Here is the IRS Announcement and their new form for reporting income under the Mortgage Forgiveness Debt Relief Act of 2007.  Surprisingly, the IRS will permit the new law to apply to refinance debts even though, by its terms, the Act applies to the discharge of "qualified principal residence indebtedness" which means "acquisition indebtedness."   

Consumer Bankruptcy Program with US Trustee

Central District Consumer Bankruptcy Attorneys Association

Date:    April 26, 2008

Time:     9:00 A.M.        Board of Director’s Meeting
            10:00 A.M.        General Membership Meeting
            11:00 A.M.        Program

Place:  University of West Los Angeles School of Law
           9920 S. La Cienega Blvd., Suite 404,
           Inglewood, CA 90301-4423

“Hot topics with the U.S. Trustee: Means Test and Beyond"

Speakers from the UST:
Jill Sturtevant, Esq., Kenneth Lau, Esq.,Phil Green, Esq.

Moderator:
David Tilem, Esq.

Other Upcoming Events:

  June 19, 2008              BAP Dinner: "Volume II: Effective advocacy before the
                                       BAP: BAP Panel Judges Dennis Montali, Randall Dunn
                                       and Bruce Markell together with BAP Clerk of Court,
                                       Harold Marenus"