October 4, 2008
9th Circuit Rules on Effect of Completion of Chapter 13 Plan on Unpaid Student Loans
Espinosa v. United Student Aid Funds (In re Espinosa), ---- F. 3d ----, 2008 WL 4426634 (9th Cir. October 2008)
Issue: When a confirmed chapter 13 plan is completed and the discharge injunction is entered, is the unpaid portion of the student loan discharged when the lender received actual notice of its treatment in the plan and did not object?
Holding: Yes, the discharge injunction may be set aside only pursuant to FRCP60(b) and then based on a lack of sufficient notice.
Judge Alex Kozinski
The debtor’s chapter 13 plan
“provided for repayment of $13,250 in student loans to United Student Aid Funds, Inc. (Funds). Funds was notified and filed a proof of claim in the amount of $17,832.15. The bankruptcy court eventually confirmed the plan, and the Chapter 13 Trustee mailed Funds a notice advising it that ‘[t]he amount of the claim filed differs from the amount listed for payment in the plan. Your claim will be paid as listed in the plan.’ The notice also contained the following warning: If an interested party wishes to dispute the above stated treatment of the claim, it is the responsibility of the party to address the dispute. The claim will be treated as indicated above unless the Trustee receives within 30 days from this mailing, a written request for different treatment. The request should set forth the specific grounds for alternative treatment and should be filed with the Clerk of the Court, with a copy mailed to the Trustee. Funds did not object and Espinosa successfully completed the plan.”
The discharge was then entered. Three years later Funds began collection efforts. The bankruptcy court ruled for the debtor and ordered Funds to cease collection efforts. The District Court reversed. Funds defended arguing that an adversary proceeding was required with a finding that there was a hardship. Kozinski writes, “Great Lakes Higher Educ. Corp. v. Pardee (In re Pardee), 193 F.3d 1083, 1086 (9th Cir. 1999), which is on all fours with our case, forecloses this argument.” “In essence, Pardee held that a discharge is a final judgment and cannot be set aside or ignored because a party suddenly claims, years later, that the trial court committed an error.” “Regardless, when the creditor is served with notice of the proposed plan, it has a full and fair opportunity to insist on the special procedures available to student loan creditors by objecting to the plan on the ground that there has been no undue hardship finding.” “A discharge injunction does not operate by way of res judicata; it is, rather, an equitable remedy precluding the creditor, on pain of contempt, from taking any actions to enforce the discharged debt.” “Had the creditor wanted to insist on an adversary, it could have objected to the Chapter 13 plan on the ground that there was no judicial finding of undue hardship. Had Funds so objected, the bankruptcy court would have been required to disapprove the plan and Espinosa would have been put to the hard choice of commencing an adversary or abandoning Chapter 13. But Funds didn’t object to the plan and didn’t appeal the order confirming the plan, as it well could have. See Lawrence Tractor Co. v. Gregory (In re Gregory), 705 F.2d 1118 (9th Cir. 1983). Instead, it accepted the payments made by the debtor during the plan’s life and then acted as if the whole thing never happened.”
“It makes a mockery of the English language and common sense to say that Funds wasn’t given notice, or was somehow ambushed or taken advantage of.”
The lender must go through FRCP 60(b)(4) or (6) to vacate the judgment. That comes down to whether or not it received sufficient notice. “We reject the idea that a creditor who is in the business of administering student loans has a constitutional right to ignore a properly served notice that clearly specifies that its debt will be discharged on successful completion of the plan.”
October 3, 2008
Circuit Court of Appeals Cases from Last Week
1st Circuit Court of Appeals, September 22, 2008
Richmond v. New Hampshire Supreme Court Comm. of Prof'l Conduct, --- F.3d ---, 2008 WL ------ (1st Cir. 2008)(cost assessments from disbarment proceedings non-dischargeable)
2nd Circuit Court of Appeals, September 24, 2008
In re James and Karen Wornick, --- F.3d ---, 2008 WL ------ (2nd Cir. 2008)(life insurance policies appellants each held for the benefit of the other were exempt)
2nd Circuit Court of Appeals, September 24, 2008
In re Adelphia Communications Corp., --- F.3d ---, 2008 WL ------ (2nd Cir. 2008)(court may withdraw a committee's derivative standing and transfer the management of its claims, even in the absence of that committee's consent, if the court concludes that such a transfer is in the best interests of the bankruptcy estate)
3rd Circuit Court of Appeals, September 22, 2008
In re Exide Tech. v. Pacific Dunlop Holdings, Inc., --- F.3d ---, 2008 WL ------ (3rd Cir. 2008)(extension of automatic stay to debtor's foreign subsidiaries vacated)
8th Circuit Court of Appeals, September 24, 2008
Velde v. Kirsch, --- F.3d ---, 2008 WL ------ (1st Cir. 2008)(trustee loses preference action where check resulted in the release of appellee's bank's security interest in collateral)
9th Circuit Court of Appeals, September 23, 2008
Barboza v. New Form, Inc., --- F.3d ---, 2008 WL ------ (9th Cir. 2008)(summary judgment that damages for willful copyright infringement are dischargeable debt is reversed where: 1) there was a genuine issue of material fact as to whether the willful copyright infringement was a willful injury under Bankruptcy Code; and 2) the maliciousness requirement of Bankruptcy Code section 523(a)(6) was not addressed separately from the willfulness requirement)
9th Circuit Court of Appeals, September 24, 2008
In re Rosson, --- F.3d ---, 2008 WL ------ (9th Cir. 2008)(chapter 7 debtor's right to convert to chapter 13 not absolute)
Thanks to Findlaw.com.
Bankruptcy Filings Increase Slightly in September
September saw 96,049 bankruptcy petitions, up from 93,987 in August and down a little from 96,385 for July, 2008. That is 286,421 for the quarter compared to 272,000 in the second quarter and 242,000 in the first quarter of 2008. The third quarter of 2007 had about 219,000 filings. The last pre-BAPCPA quarter that was lower than the third quarter 2008 was the first quarter 1996 with 266,000 filings. Filings broke 400,000 for the first time in the second quarter of 2001.
October 2, 2008
Experian Consents to Order re Credit Reporting after Bankruptcy Discharge
District Court Judge David Carter has approved a settlement in a class action case by a bankruptcy debtor against various credit reporting entities. You can access the Order here. The agreement sets forth extensive procedures that the reporting agencies will follow to insure that a debtor's credit report is accurate after the bankruptcy discharge is entered.
West Virginia Bankruptcy Judge Rules "bankruptcy only exemptions" are not Unconstitutional
In re Morrell, --- F.3d ---, 2008 WL 3852723 (Bkcy, N.D.W.V., August, 2008, Flatley J.)
Issue: Does the West Virginia statute which permits a bankruptcy only exemption for the homestead violate the Supremacy Clause?
West Virginia has a two-set exemption scheme, one for debtors in bankruptcy and one for non-bankruptcy use. The debtors claimed an $18,000 exemption (on the $56,000 home) under W.V. law which applies only in a bankruptcy case. The trustee wanted to limit them to a $10,000 exemption , the amount allowed under W.V. “non-bankruptcy law.” The court ruled for the debtors. The opinion has a very nice section on the history and purpose of bankruptcy. It discusses the legislative history behind the “opt-out” provision permitting states specifically to design their own exemption scheme. In “opting-out,” a state could still “frustrate the purposes and policies of the bankruptcy code,” but here, “[t]he differences between the two statutes are not so great as to call into question whether West Virginia's bankruptcy exemptions frustrates a federal bankruptcy policy.”
October 1, 2008
Bailout Bill - Third Time's a Charm? U.S. Senate's Turn to Try
Here is the text of the revised again bailout bill - now 451 pages. The first version was 2 1/2 pages, the second version was 110 pages. The Senate is going to vote on this tonight as I understand it. They are going to wait until the Dodgers-Cubs game is over so they can get a little attention.
Countrywide - Motions for Relief from Stay
Yesterday, Countrywide was seeking relief from stay to proceed with a foreclosure before Los Angeles bankruptcy Judge Sam Bufford. I was sitting in the courtroom like a fly on the wall. The Countrywide attorney had an employee on the stand testifying as is the custom of Judge Bufford. Bufford wants evidence of who is in possession of the original promissory note i.e., who is the owner of the note. There was an issue with establishing the knowledge of the person testifying - did he know what he was saying or was he just reading some printout?
What caught my attention was when Judge Bufford asked him how long he spent reviewing each declaration submitted to support a MFR. He responded "10 to 15 minutes." His attorney then asked him how many declarations he signed in the past week. His response (and it was a little flippant), "about 500." Bufford jumped on that asking him how many hours a day he worked and how he could spend 10 to 15 minutes reading 500 declarations in one week. He backpedaled off course on the timing - got it down to 5 minutes each which still meant that if he did not take lunch or go to the bathroom, and did nothing but read and sign declarations, he could do 480 in a week.
What struck me was the 500 per week. That is 26,000 MFR per year. I thought they were trying to work things out with homeowners. I don't know how it ended since Bufford recessed the hearing to get the rest of the matters heard and get us on our way for which I was thankful.
September 29, 2008
9th Circuit Rules that Chapter 13 Debtor does not have an Absolute Right to Dismiss the Case
Rosson v. Fitzgerald (In re Rosson) ---- F. 3d ----, 2008 WL 4330558 (9th Cir. September, 2008)
Issue: Does a chapter 13 debtor have an absolute right to dismiss his case?
Holding: No, the court may refuse to dismiss if there is a showing that the debtor’s conduct is “atypical.”
appeal from District Court, Washington
This chapter 13 advised the court over a period of a year that he was expecting to receive a few hundred thousand dollars from an arbitration and would use that money to fund his plan. When he received the money, about $185,000, the court ordered him to turn it over to the chapter 13 trustee. He did not do that and the court, at a hearing by his attorney to withdraw, gave the debtor one hour to turn the funds over. The debtor then submitted a “Notice of Dismissal” of the case. The court refused to sign the order and instead ordered the case converted to chapter 7. The debtor had turned over $104,000 and spent the rest fixing up his residence (which he ultimately lost in foreclosure). The debtor moved for reconsideration arguing that he had an absolute right to dismiss the chapter 13 per Beatty v. Traub (In re Beatty), 162 B.R. 853 (B.A.P. 9th Cir. 1994), and Croston v. Davis (In re Croston), 313 B.R. 447, 450 (B.A.P. 9th Cir. 2004). He also argued there was inadequate notice and that there was no bad faith. That motion was denied. The district court affirmed the order.
The Court of Appeals also affirmed. “11 U.S.C. § 1307(b)-(c). These two provisions—i.e., that the court ‘shall’ dismiss a case on request of the Chapter 13 debtor, but that the court also ‘may’ convert a Chapter 13 case to Chapter 7 ‘for cause’—can conflict.” Although the 9th Circuit BAP has previously ruled in Beatty and Croston that dismissal is mandatory when requested, the 9th Circuit here said “After Marrama, however, the ‘absolute right’ position is no longer viable.” The Supreme Court said in Marrama “that the right to convert to Chapter 13 was impliedly limited by the bankruptcy court’s power to take any action necessary to prevent bad-faith conduct or abuse of the bankruptcy process.” “Although the [Supreme] Court declined to decide ‘with precision what conduct qualifies as ‘bad faith’, the Court ‘emphasize[d] that the debtor’s conduct must, in fact, be atypical.’” “Therefore, in light of Marrama, we hold that the debtor’s right of voluntary dismissal under § 1307(b) is not absolute, but is qualified by the authority of a bankruptcy court to deny dismissal on grounds of bad-faith conduct or ‘to prevent an abuse of process.’” [citing 11 U.S.C. § 105(a).]
As to whether or not the debtor’s conduct was “bad faith,” the Court said, “his use of the money was still in defiance of the bankruptcy court’s specific order to deposit the money with the Chapter 13 Trustee. Moreover, Rosson never—not even in his motion for reconsideration—provided the bankruptcy court with an explanation of what happened to the missing funds.” “[T]he bankruptcy court did not clearly err in finding that Rosson’s failure to deliver to the Trustee $185,000 in estate assets (or, when given the chance, to explain the status of the money) amounted to atypical, bad faith debtor conduct.”
As to notice and an opportunity to be heard, the 9th Circuit agreed that the debtor “never received a meaningful hearing of his arguments against conversion.” “The difficulty for Rosson, however, is that, even when given an opportunity, he has never actually provided a satisfactory explanation of why the funds were not delivered. Rosson’s motion for reconsideration provided no argument of the facts and offered no excuse for his failure to produce the $185,000 as ordered by the court. He did not make any of the kinds of arguments alluded to above. Instead, Rosson rested on the (now) manifestly inadequate legal claim that he had an ‘absolute’ right to voluntarily dismiss his case.” Therefore the debtor “was not prejudiced” by the procedural failure.
Federal Bailout Bill - Updated
Here is the text of the most recent version of the bailout bill - the Emergency Economic Stabilization Act of 2008, also known as TARP - Troubled Asset Relief Program. It requires the Treasury to create an Office of Financial Stability and establishes a Financial Stability Oversight Board.
I'm not sure what the interest rate is on the federal debt but at 3% lets say, the interest is $27 billion each month, or about a billion dollars a day ($37 million an hour).