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October 6, 2007

What Do We Do with Travelers?

In Travelers Casualty & Surety Co v. Pacific Gas & Electric, --- U.S. ---, 127 S. Ct. 1199 (2007), the Supreme Court overruled the long established rule, certainly in the 9th Circuit, that unsecured creditors cannot get attorneys fees pursuant to a contractual right to fees when the fees are incurred in litigating bankruptcy issues.

There is an excellent new article on Travelers in Jennifer M. Taylor and Christopher J. Mertens, Travelers and the Implications on the Allowability of Unsecured Creditors Claims for Post-Petition Attorneys' Fees Against the Bankruptcy Estate, 81 Am. Bankr. L.J. Vol. 2, 2007. 

The article points out that attorneys' fees issues arise in two different situations.  First, when the claim is asserted against the estate as was the case in Travelers, and second, when the award is requested against a litigant other than the estate.  The article contains an excellent analysis of allowance of attorneys fees issues pre-Fobian. 

I'm not sure that Travelers did that much other than re-institute the debate over allowance of fees.  Surprisingly PG&E, the appellant, conceded that Fobian was wrongly decided even though the validity of that case was specifically cited by the Supreme Court as the reason for the grant of cert.  So the unanimous ruling is not surprising.  Alito did confirm the general rule that non-bankruptcy law should prevail in bankruptcy proceedings unless the bankruptcy code says otherwise.  The code doesn't limit under non-bankruptcy law unless that result is required by Section 506(b) which Travelers specifically avoided as it was not argued in the lower courts.      

It seems to me that post-petition fees cannot be awarded against the estate based on Section 502 which states that a claim is fixed as of the petition date.  Also it seems clear that Section 506(b) which describes oversecured creditors are entitled to fees presumably excludes everyone else.  But why cannot a credit card company seek fees in a 523(a) dischargeability action or GMAC in a relief from stay action if the matter is covered by the language of the contract?  I understand that typically the contract clause says something like, if we start fighting over this contract, the winner gets fees.  A non-dischargeability action is not "fighting over the contract," I'll grant you that.  But what if the clause says, "fighting about the discharge in a bankruptcy case," or, "trying to get relief from stay in bankruptcy court." 

Take a look at three recent cases which discuss Travelers. 

In re QMECT, INC., --- B.R. ----, 2007 WL 1463846, (Bkrtcy, N.D. CAL, Tchaikovsky, May, 2007)
Issue:   May the bankruptcy court “allow” attorneys fees for postpetition bankruptcy litigation to be added to the creditor’s prepetition claim?             

Holding:   Yes.   

Busch v. Hancock (In re Busch), 369 B.R. 614,  (10th Cir. BAP, June, 2007(Utah))
Issue:   Did the bankruptcy court err when it awarded attorneys fees to a litigant in bankruptcy court based on a state law permitting attorneys fees in any action to enforce alimony?         

Holding:   No, to the extent the litigation was in bankruptcy court.

In re Electric Machinery Enterprises, Inc.,  --- B.R. ----, 2007 WL 2031445, (Bkrtcy.M.D.Fla. 2007)
Issue:   Can an unsecured creditor be allowed attorneys fees for post-petition bankruptcy litigation?            

Holding:   No.    

October 6, 2007 in Current Affairs | Permalink | Comments (0) | TrackBack

October 4, 2007

Great Insight on Credit Card Lending to "Bankrupts"

Professor Katie Porter has a great article on the practices of the credit card industry in lending to persons after they have filed bankruptcy.  Bankrupt Profits: The Credit Industry’s Business Model For Postbankruptcy Lending, Katherine Porter, College of Law, University of Iowa.  Using significant empirical data, she establishes that the credit card industry tells Congress that debtors are low-lifes who run up their credit card on frivolities intending to file bankruptcy to avoid repayment.  In reality, the industry views debtors as "new meat," a new source of profit. 

She says,

"This Article’s key finding is that creditors repeatedly solicit debtors to borrow after bankruptcy. Families receive dozens of offers for new credit in each month immediately after their bankruptcy discharge.  Some offers specifically target these families based on their recent financial problems, using bankruptcy as an advertising lure."

Her findings are based on a "core sample" of "1,250 consumer bankruptcy cases, consisting of 780 Chapter 7 bankruptcies and 470 Chapter 13 bankruptcies."  She analyzed the cases at the outset and did telephone interviews one and three years later. 

"Credit solicitation of recent bankruptcy debtors is rampant.  Nearly all debtors stated that they had received offers for credit in the first months following their bankruptcy.  One year postbankruptcy, these families reported that creditors sent them an average of more than fourteen credit offers per month."

Her findings are that 25% of the debtors had obtained new credit within one year of the filing.

"Two paradoxes emerge.  Debtors report more difficulty in obtaining secured loans than unsecured loans.  Also, debtors who chose Chapter 13 (repayment) bankruptcy instead of Chapter 7 (liquidation) bankruptcy have fewer opportunities to borrow.  Rather than identifying them to creditors as a 'responsible' borrower, repaying a portion of their past debts actually hinders a family’s access to future credit.  On the whole, the credit industry treats former Chapter 7 bankruptcy debtors as valuable customers, seeking to profit by loading these families with new debt immediately after bankruptcy."

"Chapter 13 families are significantly less likely to receive credit offers than Chapter 7 families.  The reported rate for Chapter 13 families is significantly lower than the fraction of Chapter 7 debtors (96.1 percent) who receive credit offers after filing bankruptcy.  At least in the short-term, Chapter 13 seems to be a modest deterrent to the credit industry’s efforts to turn bankrupt families into customers."

She concludes, "lenders’ intense solicitation of postbankruptcy families is consistent with an understanding of the consumer bankruptcy system as a refuge for decent, honest families reacting to adverse events such as job loss or illness."

October 4, 2007 in Article Reviews | Permalink | Comments (0) | TrackBack

October 3, 2007

9th Circuit BAP Rules on the "Hanging Paragraph"

This seems to me to be a pretty accurate analysis on the effect on the secured claim when the debtor returns a "910" vehicle. 

Wells Fargo v. Rodriguez (In re Rodriguez)  ---- B.R. ----  (9th Cir. BAP  August, 2007)
Issue:  When the debtor surrenders a “910” vehicle as part of a chapter 13 plan, does that end the secured creditor’s right to a deficiency?       

Holding:  No.

Judge Paul Snyder (Seattle)
Montali, Dunn, Jaroslovsky
Opinion by Montali

The chapter 13 debtor filed a plan offering to pay unsecured creditors in full.  It provided that a “910” vehicle would be returned to WFB in full satisfaction of any claim of WFB.  WFB filed a proof of claim seeking a deficiency and an objection to the plan.  The parties did not dispute that the “hanging paragraph” applied to this case.  The bankruptcy court ruled for the debtor and confirmed the plan.

The BAP reversed.  Section 1325(a)(5) provides that 506 (a) doesn’t apply to 910 claims.  As to treatment of 910 claims, the debtor can make a deal with the creditor, pay the claim in full, or, return the vehicle.  As to returning the vehicle, Congress presumably provided that 506 would not apply because 506(a)(2) limits the deficiency to the total claim less “replacement value.”  Thus when the vehicle is returned, the deficiency is the total claim less the actual resale price, or presumably a higher amount.

The opinion quotes Travelers, “’we generally presume that claims enforceable under applicable state law will be allowed in bankruptcy unless they are expressly disallowed” under section 502’.  Wells Fargo’s deficiency claim, if any, will come from state law after it disposes of the Aztec.”  If there is to be no deficiency, that must come from Section 502(b).  The opinion says that once the vehicle is surrendered, 506 doesn’t apply and never did.  The estate has no further interest in the vehicle.  “The real question is whether Congress intended that, in return for protection from cramdown, 910 creditors who recover surrendered 910 vehicles have lost their right to a deficiency claim.”  “Congress may have intended that when a 910 vehicle is not surrendered the secured creditor gets an unfairly large share of the pot but when the 910 vehicle is surrendered it gets none of the pot, thereby resulting in rough fairness between divergent creditor interests.  If this was the intent of Congress, it was not expressed clearly enough for us to ignore the effect of section 502.”

Note:  In accord  In re Wilson, 2007 WL 2405284 (10th Cir.BAP-Kan.).  Opposite result in In re Vanduyn, 2007 WL 2484089 (Bkrtcy.M.D.Fla., Judge Paskay).


October 3, 2007 in 9th Circuit Briefs | Permalink | Comments (0) | TrackBack

October 2, 2007

8th Circuit BAP rules on "Committment Period"

This is a victory for "above-median" debtors. The same issue is pending before the Ninth Circuit. 

In re Frederickson,  --- B.R. ---, (8th Cir. BAP September, 2007)
Issue:   Must an above median chapter 13 debtor propose a five year plan when the B22C net is a negative number?                

Holding:   No

Judge Mahoney  (Judge Federman dissenting)
The debtor filed chapter 13.  He is an over the median debtor whose B22C shows a negative $95 per month.  The opinion doesn’t set forth his I and J numbers.  He proposed a plan with a monthly payment of $600 for 48 months.  This plan pays 75% of his unsecured creditors.  The trustee objected saying the plan had to be 60 months.  The trustee argued that since the B22C amount was negative, the debtor had to use the I and J net for five years.  The bankruptcy court disagreed and confirmed the plan. 

The BAP affirmed.  1325(b)(4) says “for purposes of this subsection” and therefore since the B22C net is a negative amount, 1325(b) doesn’t apply including the requirement of the applicable commitment period.   “[T]he Court finds that ‘projected’ merely explains the treatment of ‘disposable income.’”  Looking to the dictionary definition of “projected,” they concluded, “Thus, under § 1325(b)(1)(B), a debtor's disposable income is calculated, according to the statutory definition, and then projected or extrapolated over the plan's term of years.”   Looking to chapter 11, they said, “§ 1129(a)(15)(B) certainly suggests that 'disposable income' in § 1325(b)(2) and 'projected disposable income' in § 1325(b)(1)(B) were regarded by Congress as the same concept."

The BAP concluded, “Contrary to the position taken by the Trustee, we find that the definition of ‘applicable commitment period’ in § 1325(b)(4) as five years for an above- median debtor does not refer to a minimum plan duration.  It refers, instead, to the time during which the debtor must pay projected disposable income to the Trustee for payment to unsecured creditors.  Another statutory provision, § 1322(d), discusses the length of the plan related to above-median income debtors. Section 1322(d) would be superfluous if § 1325(b)(4) set the length of the plan.”

The BAP majority added, “If the disposable income is negative, there is no applicable commitment period and a debtor is not required to propose a plan that calculates payments to unsecured creditors in the same manner as plan payments to all creditors were calculated pre-BAPCPA.”
The dissent compared the amendments to pre BAPCPA law and said “BAPCPA was intended by Congress to require that higher income debtors either pay 100% of unsecured claims, or make payments for a period of 5 years.  While there is scant legislative history for most of the BAPCPA provisions, the House Report on § 1325(b) makes clear that the applicable commitment period is a durational requirement for the Chapter 13 plan, and not just, as the majority holds, a multiplier.”   


October 2, 2007 in Other Circuit Briefs | Permalink | Comments (0) | TrackBack

October 1, 2007

Judicial Appointment and Reappointments - 9th Circuit

From the website of the Circuit Court of Appeals. Several judges have been formally reappointed for new 14 year terms. Chief Judge Mary M. Schroeder of the United States Court of Appeals for the Ninth Circuit has announced the reappointments of five bankruptcy judges and the appointment of one new bankruptcy judge for federal bankruptcy courts in Arizona, California, Washington.

Eastern District of California Chief Bankruptcy Judge Michael S. McManus has been reappointed to a second 14-year term on the U.S. Bankruptcy Court for the Eastern District of California. His reappointment is effective January 11, 2008. Judge McManus, 54, came onto the bankruptcy bench in 1994 and was elevated to chief bankruptcy judge in 2000. He has chambers in Sacramento. Judge McManus received his B.A. in criminology and psychology in 1975 from the University of California at Berkeley, graduating Phi Beta Kappa. He received his J.D. in 1978 from the University of California at Los Angeles School of Law, graduating Order of the Coif. The U.S. Bankruptcy Court for the Eastern District of California is authorized seven judges and received 9,323 bankruptcy filings in 2006.

District of Arizona Bankruptcy Judges James M. Marlar and Charles G. Case have been reappointed to second 14-year terms on the U.S. Bankruptcy Court for the District of Arizona. Judge Marlar, 62, who maintains chambers in Tucson, came onto the bankruptcy bench in 1993. His reappointment is effective December 29, 2007. Judge Case, 59, who has chambers in Phoenix, came onto the bankruptcy bench in 1994. His reappointment is effective January 5, 2008. In addition to his work in Arizona, Judge Marlar sat on the Ninth Circuit Bankruptcy Appellate Panel (BAP) from 1999 to 2006. Prior to becoming a bankruptcy judge, Judge Marlar practiced with private law firms for 20 years. Judge Marlar received his undergraduate degree in 1967 from Stanford University and his J.D. in 1970 from the University of Arizona Law School.

Judge Case received his B.A. in 1969 from Harvard University and his J.D. in 1975 from the Arizona State University College of Law, graduating magna cum laude. He served in the Peace Corps as a teacher for three years before beginning his legal career. The U.S. Bankruptcy Court for the District of Arizona is authorized seven judges and handled 7,793 bankruptcy filings in 2006.

Western District of Washington Chief Bankruptcy Judge Karen A. Overstreet has been reappointed to a second 14-year term on the U.S. Bankruptcy Court for the Western District of Washington.  Appointed in 1994, Judge Overstreet, 52, was the first woman to serve on the federal bankruptcy bench in either of Washington's two judicial districts. Elevated to chief bankruptcy judge in 2005, she has chambers in Seattle. Judge Overstreet received her B.A. in 1977 from the University of Washington, graduating cum laude. She received her J.D. from the University of Oregon School of Law in 1982, graduating Order of the Coif. Judge Overstreet currently serves on the Judicial Conference of the United States' Committee on the Administration of the Bankruptcy System, and as chair of the Western District of Washington Local Rules Committee. The U.S. Bankruptcy Court for the Western District of Washington is authorized five judges and received 8,448 bankruptcy filings in 2006.

Central District of California Bankruptcy Judge Thomas B. Donovan has been reappointed to a second 14-year term on the U.S. Bankruptcy Court for the Central District of California. Judge Donovan, 71, came onto the bankruptcy bench in 1994 and has chambers in Los Angeles. Judge Donovan received his B.A. in 1957 from the University of California at Berkeley, and his J.D. in 1962 from the UC Berkeley Boalt Hall School of Law, where he was associate editor of the California Law Review. Judge Donovan served as a first lieutenant in the U.S. Army Security Agency, 1957-1959. The U.S. Bankruptcy Court for the Central District of California, one of the nation's largest bankruptcy courts, is authorized 24 judges and received 17,802 bankruptcy filings in 2006.

Southern District of California San Diego attorney Laura Taylor has been appointed to serve as a judge of the U.S. Bankruptcy Court for the Southern District of California. The appointment is contingent upon approval of background clearances. She will succeed Bankruptcy Judge John J. Hargrove, who is scheduled to retire January 4, 2008. Ms. Taylor, 49, is an administrative partner in the banking and finance practice group in the San Diego office of the law firm of Sheppard, Mullin, Richter & Hampton LLP. She manages 32 lawyers, legal assistants and support personnel and also serves on the firm's recruiting and diversity committee. Ms. Taylor received her B.A. in English and political science in 1979, graduating Phi Beta Kappa from the University of North Carolina at Chapel Hill. She received her J.D. in 1983 from Duke University, where she served on the school's moot court board. The U.S. Bankruptcy Court for the Southern District of California is authorized four judges and handled 4,338 bankruptcy filings in 2006.

October 1, 2007 in Judicial Announcements | Permalink | Comments (0) | TrackBack

September 30, 2007

No 707(a) Dismissal even with $400,000 in Annual Income

In re Perlin, ----F.3rd ---, (3rd Cir. August, 2007)

Issue:   1)  Can a bankruptcy court consider the debtors’ significant income when deciding whether or not to dismiss a chapter 7 under Section 707(a)?  2)  Is the debtors’ income here of about $400,000 per year sufficient to find bad faith and dismiss the case?               

Holding:   1) Yes, 2) No. 

Direct appeal from Bankruptcy Court      

Judge Cowen

The debtors filed chapter 7.   “Dr. Steven J. Perlin is a licensed radiologist.  In recent years, working only part-time, he has earned an annual income of approximately $370,000.  At all relevant times, Dr. Perlin’s wife, Cristine A. Perlin, owned and operated Centre Medical Imaging, LLC (“CMI”), the medical imaging company where Dr. Perlin practiced.  Together, the Perlins expended a considerable amount of money on certain luxury items, such as two Lexus automobiles and private school tuition totaling $5,000 per month.  In addition, they have saved more than $430,000 for their retirement.”   The debtors leased a piece of medical equipment with $1.2 million in total lease payments.  It was a big mistake.   The lessor filed suit to collect and the debtors filed chapter 7.  The lessor then filed a motion to dismiss the chapter 7 under Section 707(a) “alleging (1) the Perlins had submitted allegedly misleading schedules to the court; (2) they had timed the filing of their bankruptcy petition around Hitachi’s exercise of its legal rights against them; (3) they had artificially inflated their expenses in order to insulate their substantial income; (4) they enjoyed a substantial annual income and a lavish lifestyle, which included two luxury automobiles, private school tuition, and substantial retirement savings; and (5) they failed to make a good faith effort to repay Hitachi as an alternative to seeking discharge.”  The bankruptcy court heard evidence and found good faith saying there was no “manipulation.”  “With regard to the Perlins’s substantial income and expenses, the Bankruptcy Court opined that based upon the legislative history to section 707(a) and our comments in Tamecki, a debtor’s ability to repay is not, in and of itself, sufficient to support a bad faith finding.”  The bankruptcy judge also ruled that income was no longer a factor in a 707(a) analysis because of the “theory of negative implication,” i.e., since 707(b) has an income/means test and there is none in 707(a), Congress did not intend income/means to be a factor in 707(a).

The 3rd Circuit affirmed saying that the judge was wrong about the existence of the income/means test in 707(a) but, in any event, the judge was right in finding no bad faith.  For negative implication to apply, the code sections must be “part of a package or commonly associated group or series.”  Congress has always treated 707(a) and (b) differently.  707(b) is directed at consumer debtors, 707(a) is not.  The two sections do not go “hand-in-hand.” 

But is income part of the bad faith test?  The House and Senate Reports in enacting 707(a) stated, “The section does not contemplate, however, that the ability of the debtor to repay his debts in whole or in part constitutes adequate cause for dismissal,” i.e., there is no mandatory chapter 13.  But that does not prohibit the court from looking at income.  “[D]ismissal should be ‘confined carefully’ and utilized only in ‘egregious cases that entail concealed or misrepresented assets and/or sources of income, lavish lifestyles, and intention to avoid a large single debt based upon conduct akin to fraud, misconduct or gross negligence.’”  Here, “[t]here is no evidence that the Perlins schemed to conceal or misrepresent income, inflated their expenses to hide income, filed misleading statements or schedules in an effort to defraud their creditors, unduly interfered with the judicial process, or engaged in any other misconduct.  On the contrary, the Bankruptcy Court found that the Perlins were ‘straightforward in their schedules’ and ‘forthcoming with the Court and their creditors.’”  It appears that the court was also impressed that the debtor’s tried to work it out with the lessor before filing. 

September 30, 2007 in Other Circuit Briefs | Permalink | Comments (0) | TrackBack