September 19, 2008
Constitutionality of the California Wildcard - Last Add
I received an email from counsel for the debtors in the Regevig case in Arizona telling me that they have settled with the trustee and will be withdrawing their appeal. We will have to wait to see if any trustees in California decide to take the baton and run.
Circuit Court of Appeals Cases for Last Week
3rd Circuit Court of Appeals, September 09, 2008
In re Schaefer Salt Recovery, Inc., --- F.3d ---, 2008 WL -------- (3rd Cir. 2008)(authority of Bankruptcy Court to issue sanctions under 28 U.S.C. 1927)
5th Circuit Court of Appeals, September 12, 2008
In the Matter of Soza, --- F.3d ---, 2008 WL -------- (5th Cir. 2008)(purchase of annuity one day before bankruptcy represented a payment made in fraud of a creditor)
7th Circuit Court of Appeals, September 12, 2008
In re Willett, --- F.3d ---, 2008 WL -------- (7th Cir. 2008)(in 522(f) motion, court must value residence as of the date that interest becomes part of the bankruptcy estate)
8th Circuit Court of Appeals, September 09, 2008
In re M & S Grading, Inc., --- F.3d ---, 2008 WL -------- (8th Cir. 2008)(pension plan sues to collect unpaid contributions under various theories, 1) unpaid contributions owed to the plans were not employee contributions because the contributions were not withheld from employees' paychecks; 2) thus, the unpaid contributions remained corporate assets and did not become assets of the plan; 3) trustee's failure to assert a claim against the bank was justified; 4) there was no abuse of discretion in not granting an equitable subordination claim; and 5) plans' motion for removal of the bankruptcy trustee was properly denied without a hearing)
10th Circuit Court of Appeals, September 11, 2008
In re Sandoval, --- F.3d ---, 2008 WL -------- (10th Cir. 2008)(debt not non-dischargeable under 523(a)(7) where debtor guaranteed a bail bond to a bondsman in the event a criminal defendant jumps bail)
Thanks again to Findlaw.com
September 18, 2008
More Further Thoughts on the California Wildcard Exemption
More further thoughts about the Regevig case in Arizona. I will admit that at first I thought Judge Haines had a supportable argument for his proposition. He ruled that California cannot tell the trustee to leave things alone which applies only when a federal bankruptcy proceeding is in process. But I really believe after considering it further that he is 100% wrong (or maybe 90%).
1. Suppose the California legislature passed a law which said that there are no state exemptions at all. Suppose also Cal did not "opt out" as the Bankruptcy Code allows it to do. The debtor would be able to claim all sorts of stuff exempt under the Bankruptcy Code. The trustee would be told to leave things alone even though other creditors could seize the same stuff outside of BK.
2. Suppose Cal passed a law which had the state exemptions (CCP 704 et seq) and no Section 703 exemptions (where the wildcard is) and did not opt out – same thing. The trustee would be prevented from taking things that other creditors could take in Cal. And he is prevented because the Bankruptcy Code stops him. Congress thought this up, not Cal.
3. Suppose Cal kept the 704 exemptions and opted out but 703.140(b) was verbatim Section 522(d). Surely that is constitutional because it parrots the Bankruptcy Code passed by the federal government. And again, Cal law provides that the trustee must stay away from stuff other creditors can take but it the same stuff Congress prohibits the trustee from getting.
4. Suppose Cal had no exemptions at all and still opted out. There would be an uproar that Cal cannot tell debtors that they cannot use any exemptions when the federal government has provided for exemptions. The uproar would be that the trustee should be forced to leave alone at least what 522(d) says to leave alone even though everyone else outside of bankruptcy can grab at will.
So the issue cannot be the "scheme" or the fact that the trustee is prevented from doing something that other creditors are not. The issue is whether the amount of the wildcard - being double the federal exemptions in Section 522(d) - "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress," per Perez v. Campbell, 402 U.S. 637 (1971) and lots of older Supreme Court cases.
There is a question as to whether Cal can modify 522(d) at all and it seems that the answer is yes unless the modification stands as an obstacle etc. If the answer is yes, Cal can modify 522(d), the rule is that Cal gets the benefit of the doubt as to the amount of the changes. I smell another 5-4 decision in our future.
Lehman Hearing Transcript
So it was really one of your typical "First Day" hearings on September 16. One of the motions was to give a "comfort order" to JP Morgan Chase, the bank that clears the checks and various securities going from here to there on a daily basis. Technically, when the chapter 11 is filed, whatever cash is in the bank at that moment and whatever securities are owned by the debtor are transferred to the bankruptcy estate. The bank should not be sending those funds to someone else without court permission or someday some sharp chapter 7 trustee will sue the bank to get the money back. Counsel for the bank was explaining the problem to Judge James Peck and stated "And then this morning, Your Honor, there was a smaller advance had to be made for fifty-one billion dollars." Anyway, the transcript of the hearing can be accessed here.
September 17, 2008
More on the Constitutionality of the California Wildcard Exemption
As I reported earlier, August 9, 2008, an Arizona Bankruptcy Judge has ruled that the California Wildcard exemption (CCP 703.140(b)) is unconstitutional. In re Regevig, 389 B.R. 736 (Bkrtcy, Ariz, Haines J, June, 2008) As I understand it, certain trustees in California intend to attack the exemption as well. The Supreme Court in Perez v. Campbell, 402 U.S. 637 (1971) struck down an Arizona statute which it deemed violated the Supremacy clause.
In the 5-4 decision, Justice White wrote:
"Deciding whether a state statute is in conflict with a federal statute, and hence invalid under the Supremacy Clause, is essentially a two-step process of first ascertaining the construction of the two statutes and then determining the constitutional question whether they are in conflict. In the present case, both statutes have been authoritatively construed. In Schecter v. Killingsworth, 93 Ariz. 273, 380 P.2d 136 (1963), the Supreme Court of Arizona held that
"[t]he Financial Responsibility Act has for its principal purpose the protection of the public using the highways from financial hardship which may result from the use of automobiles by financially irresponsible persons."
"With the construction of both statutes clearly established, we proceed immediately to the constitutional question whether a state statute that protects judgment creditors from "financially irresponsible persons" is in conflict with a federal statute that gives discharged debtors a new start "unhampered by the pressure and discouragement of preexisting debt." As early as Gibbons v. Ogden, 9 Wheat. 1 (1824), Chief Justice Marshall stated the governing principle -- that
"acts of the State Legislatures . . . [which] interfere with, or are contrary to the laws of Congress, made in pursuance of the constitution,"
are invalid under the Supremacy Clause. Id. at 22 U. S. 211 (emphasis added). [In the final analysis] our function is to determine whether a challenged state statute "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress." Hines v. Davidowitz, 312 U. S. 52, 312 U. S. 67 (1941). Since Hines, the Court has frequently adhered to this articulation of the meaning of the Supremacy Clause. See, e.g., Nash v. Florida Industrial Comm'n, 389 U. S. 235, 389 U. S. 240 (1967); Sears, Roebuck & Co. v. Stiffel Co., 376 U. S. 225, 376 U. S. 229 (1964); Colorado Anti-Discrimination Comm'n v. Continental Air Lines, Inc., 372 U. S. 714, 372 U. S. 722 (1963) (dictum); Free v. Bland, 369 U. S. 663, 369 U. S. 666 (1962); Hill v. Florida, 325 U. S. 538, 325 U. S. 542-543 (1945); Sola Electric Co. v. Jefferson Electric Co., 317 U. S. 173, 317 U. S. 176 (1942)."
I'm going to prepare an amicus brief for the Central District Consumer Bankruptcy Attorneys Assn supporting the debtor and the constitutionally of the wildcard exemption. I will update this as I get further along in the research.
6th Circuit Rules That Rooker-Feldman Does Not Prevent Bankruptcy Court from Declaring that Post-Discharge Judgment is Void Ab Initio
In re Hamilton, --- F.3d ---, 2008 WL 3905437 (6th Cir, August, 2008)
Issue: Is a post-discharge judgment against the debtor void ab initio or must the bankruptcy court leave the judgment alone based on the Rooker-Feldman doctrine?
Holding: The judgment is void per Section 524(a).
The debtor filed chapter 7 and received his discharge. His ex-wife filed a non-dischargeability action against him but lost. She then sued him in state court for indemnification on a certain debt and the debtor filed an answer in pro per without mentioning the discharge. The debtor lost in state court and appealed. He raised the discharge for the first time on appeal. The state court of appeals said the discharge is an affirmative defense and was waived. The debtor filed suit in bankruptcy court and the ex defended saying that Rooker-Feldman prevented the Bankruptcy Court from interfering with the state court judgment. The Bankruptcy Court ruled against the debtor. The District Court reversed saying Section 524(a) applies and Rooker-Feldman does not.
The Court of Appeals affirmed the reversal. “The Rooker-Feldman doctrine, we hold today, is confined to . . . cases brought by state-court losers complaining of injuries caused by state-court judgments rendered before the district court proceedings commenced and inviting district court review and rejection of those judgments. Rooker-Feldman does not otherwise override or supplant preclusion doctrine or augment the circumscribed doctrines that allow federal courts to stay or dismiss proceedings in deference to state-court actions.” “If a federal plaintiff ‘present[s] some independent claim, albeit one that denies a legal conclusion that a state court has reached in a case to which he was a party ..., then there is jurisdiction and state law determines whether the defendant prevails under principles of preclusion.’ ”
As to Section 524(a), it states the discharge “voids any judgment at any time obtained.” Asserting the discharge as an affirmative defense is “unnecessary.”
September 16, 2008
More Info on Lehman Bros.
The second item on the Bankruptcy Court docket is the Declaration of the Chief Financial Officer of Lehman Bros., Ian T. Lowitt. This pleading gives a brief background on Lehman Bros and why it filed the chapter 11 case. You can access it here. Usually the reason for the filing is some unexpected event like some creditor trying to seize something or call a loan that is about to come due. Lehman Bros. filed due to a lack of liquidity according to Lowitt. You know this is a big case when you read this paragraph:
"The Company’s liquidity crisis prompted an emergency meeting on September 12, 2008, between the Debtor’s management, officials from the New York branch of the Federal Reserve Bank, the heads of major financial institutions, Treasury Secretary Henry Paulson, and SEC Chairman Christopher Cox. Government officials later indicated that emergency federal funding would not be forthcoming to stabilize Lehman Brothers and provide the liquidity needed for its operations."
The pleading did not disclose the amount of Lowitt's bonus for last year.
September 15, 2008
Lehman Bros. Bankruptcy - Can You Say $639 Billion in Assets and $613 Billion in Debts?
This chapter 11 case was filed in the Southern District of New York. You can access the emergency schedules here. It's case No. 08-13555-jmp. Judge James M. Peck. (The picture is Emanuel and Mayer Lehman, circa 1880s)
Debtor's counsel is:
Harvey R. Miller
Weil, Gotshal & Manges, LLP
767 Fifth Avenue
New York, NY 10153
Fax : (212) 310-8007