BankruptcyProf Blog

Inside Counsel Article on Chrysler and GM 363 Sales

I am quoted in this article by Melissa Maleska (along with Douglas Baird and  Steve Jakubowski - such company!).  You can access the article here.

Masry & Vititoe Files Chapter 11

U.S. Bankruptcy Court
Central District Of California (San Fernando Valley)
Bankruptcy Petition #: 1:09-bk-20447-MT

Assigned to: Maureen Tighe Chapter 11

Date filed:   08/14/2009

Debtor Law Offices of Masry & Vititoe 5705 Corsa Avenue 2nd Floor Westlake Village, CA 91362	represented by	Leslie A Cohen Leslie Cohen Law PC 506 Santa Monica Bl Ste 200 Santa Monica, CA 90401 310-394-5900 Fax : 310-394-9280  leslie@lesliecohenlaw.com
U.S. Trustee United States Trustee (SV) 21051 Warner Center Lane, Suite 115 Woodland Hills, CA 91367	represented by	Katherine Bunker 21051 Warner Center Lane Ste 115 Woodland Hills, CA 91367 818-610-2376 Fax : 818-716-1576  kate.bunker@usdoj.gov

Yo Congress!

In its August decision in In re Ransom, the 9th Circuit has ruled that a debtor may not deduct on the means test, an automobile "ownership" cost, i.e., use the IRS ownership table, for an automobile he owns free and clear.  I love the last paragraph of the opinion:

“The ‘correct’ answer to the question before us, which the courts have been struggling with for years—at the unnecessary cost of thousands of hours of valuable judicial time— depends ultimately not upon our interpretation of the statute, but upon what Congress wants the answer to be.  We would hope, in this regard, that we the judiciary would be relieved of this Sisyphean adventure by legislation clearly answering a straightforward policy question: shall an above-median income debtor in chapter 13 be allowed to shelter from unsecured creditors a standardized vehicle ownership cost for a vehicle owned free and clear, or not?  Because resolution of this issue rests with Congress, we have taken the unusual step of directing the Clerk of the Court to forward a copy of this opinion to the Senate and House Judiciary Committees.” 

9th Circuit Rules that Tax Assessed on a Post Chapter 13 Filed Tax Return for a Prepetition Year is a Prepetition Debt

Joye v. Franchise Tax Board (In re Joye),  ---- F. 3d ----, 2009 WL 2568649 (9th Cir. Aug, 2009)

Issue:   When a tax return for a prepetition year has not been filed prior to chapter 13 petition and plan, is the resulting tax a prepetition or a postpetition debt?
 
Holding:   Prepetition.    
Appeal from the district court

Judge Wallace (Dissent by Judge Graber)
The debtors filed chapter 13 on Mar 7, 2001.  They had not yet filed their 2000 tax return.  They estimated their 2000 state income taxes at $10,000 and provided for that in their plan which was confirmed.  The FTB did not object or file a proof of claim.  The debtors filed their 2000 return on October 15, 2001 showing a tax owed of $28,000.  The debtors later completed their plan and received a discharge.  The FTB then began collection of the remaining 2000 tax.  The debtors filed an adversary proceeding seeking to stop the FTB from trying to collect the tax.  The FTB argued that it was a postpetition tax or that they did not receive adequate notice.  The parties agreed that if it is a postpetition tax, it is not discharged.  The bankruptcy court agreed with the debtors.  The district court ruled that the tax was technically discharged but reversed holding that the FTB did not receive adequate notice. 

The 9th Circuit reversed the district court agreeing that the tax was discharged.  The chapter 13 discharge provides that debts "provided for under the plan" are discharged.  Section 1305 provides that "[a] proof of claim may be filed by any entity that holds a claim against a debtor . . . (1) for taxes that become payable to a governmental unit while the case is pending."  The issue then is whether the taxes "became payable" while the case was pending.  The 9th Circuit went through a nice analysis of the meaning of payable.  Generally in "'customary usage'" [it] means … `[c]apable of being paid' [and] `justly due' and `legally enforceable.' "  But this is bankruptcy.  We have to look to Section 502(i) which "addresses tax claims held by governmental entities.  This section provides that `[a] claim [for certain tax liabilities owed to governmental units] that does not arise until after the commencement of the case . . . shall be determined, and shall be allowed . . . the same as if such claims had arisen before the date of the filing of the petition.'"  Therefore the tax due for 2000 was a claim which "arose" before the filing and is "payable" before the filing, especially since is certainly could have been computed and paid before the filing.  The opinion rejects the notion that "payable" means what the FTB rulings and manuals say (and even the IRS rulings and manuals) as this is bankruptcy law.

  

As to the notice issue, the opinion says "[w]hen the holder of a large, unsecured claim [in bankruptcy] . . . receives any notice from the bankruptcy court that its debtor has initiated bankruptcy proceedings, it is under constructive or inquiry notice that its claim may be affected, and it ignores the proceedings to which the notice refers at its peril." Citing Matter of Gregory, 705 F.2d 1118 (9th Cir. 1983).  The FTB argued that it did not know how much was owed and could not file a proof of claim until the debtor filed the tax return.  The 9th Circuit said that the FTB could have estimated the claim or asked for an extension of time to file the POC.  "We acknowledge that the Board has the unenviable task of maintaining complete and accurate records for the millions of taxpayers in the State of California.  But we are not at liberty to rework the Bankruptcy Code in order to lighten its burden." 

The dissent argued that Section 502(i) is not relevant because it deals with claims "that arise" and 1305 deals with "taxes that become payable."  She also says that the 9th Circuit should follow the 5th Circuit "because of the importance of national uniformity in administering the Bankruptcy Code."  Now, she says, there is a split between the circuits.

Circuit Court of Appeals Cases from Last Week

5th Circuit Court of Appeals, August 18, 2009
St. Paul Fire & Marine Ins. Co. v. Labuzan, --- F.3d ---, 2009 WL -------- (5th Cir. 2009)(these particular creditors had standing to claim damages based on violations of the automatic-stay provision, section 362(k))

9th Circuit Court of Appeals, August 21, 2009
Joye v. Franchise Tax Bd., --- F.3d ---, 2009 WL -------- (9th Cir. 2009)(only state taxes incurred post-petition may be treated as postpetition claims under 11 U.S.C. section 1305(a))(Note: 2-1 opinion)

Thanks to Findlaw.com 

"Medical" Bankruptcy Cases

I try to stay away from soap boxing too much on this blog.  That is part of the instructions from our leader Prof. Paul Caron. 

But I keep reading here and there about how many bankruptcy cases, indeed often in terms of percentages of  total bankruptcies, are filed by persons seeking to escape from medical expenses and/or filings caused by medical problems of the debtor[s].  It's not my experience.   

I have filed about 20 chapter 7s this year, maybe 2 or 3 chapter 13s (too complicated), and about 10 chapters 11s.  I have spoken to probably 10 times that number of potential debtors this year alone.  None of them have any significant medical expenses or had financial problems caused by medical issues.  Not a big enough sample you say?  I have filed or overseen the filing of probably 2,000 consumer bankruptcy cases in the past 20 years and again I don't remember any "medical" cases although I am sure there were a few.  That is still not much of a sample given the big picture but what I see is articles or politicos/blogs or what have you that say that 60% of all cases (or 30%) or some amount of hundreds of thousands of cases per year are caused by the medical problems of the debtors.  I haven't seen it in my practice.  I'm sure there are studies with lots of mathematical terms and figures which prove the percentage but my off-the-cuff guess would be that the total is 2%. 

JH 

"The flag is up."  Jim Healy

cdcbaa Program September 12, 2009 at Southwestern Law School

CENTRAL DISTRICT CONSUMER BANKRUPTCY ATTORNEYS ASSOCIATION

September 12, 2009 at 10:30 a.m.

Southwestern Law School
3050 Wilshire Blvd., Room W329
3rd Floor in the Westmoreland Building
Los Angeles, CA 90010

MCLE Program, Co-Sponsored by Southwestern Law School,

11:00 a.m. – 1:00 p.m. MCLE: 2 hours

“The Chapter 7 Trustees”

We are pleased to announce that at least five Central District Chapter 7 trustees have agreed to attend, and there may be more.  We are asking the membership to send in questions of concern and interest to the Chapter 7 trustee panel so that we may propose questions to our discussion panel in advance of the seminar.

At this time we are not yet disclosing the names of our panelists, as we do not want questions aimed at any particular trustee, but instead general questions that all trustee panelists can address.  We are hoping to have a portion of our program include an “open forum” element where specific questions may be posed to specific trustees in attendance.

If you have any questions, please e-mail them directly to the CDCBAA Chapter 7 Trustee Liaison Committee chair, Jeffrey B. Smith at jsmith@cgsattys.com.  The CDCBAA board will assemble your questions and choose those they deem most appropriate considering our time constraints. 

Public Counsel Program for new Volunteers

“BANKRUPTCY BASICS: INTRODUCTION TO CHAPTER 7 CONSUMER BANKRUPTCY LAW FOR NEW ATTORNEYS”

PANEL 
Honorable Maureen Tighe
James King
Jeff Wishman
Marisa Hawkins 

Date: Thursday, September 24, 2009
Time: 9:00 am-1:00 pm
Location: 255 E. Temple Street 9TH FLOOR, RM. 952

This program is designed to provide training to attorneys interested in providing pro bono assistance to pro se debtors  Introduction to Chapter 7 Bankruptcy Process Important changes under the New Bankruptcy Law Opportunities to get involved in pro bono work!  Refreshments generously provided by Suite Solutions

To register please email your contact information to Maggie Bordeaux at mbordeaux@publiccounsel.org. Registration is limited. Attorneys interested in volunteering will be given first priority. *The program has been approved for 3 hours of MCLE Credit *

Judge Lisa Fenning (Ret.) Joins Arnold & Porter

Announcement:
 
Arnold & Porter LLP is pleased to announce that Lisa Hill Fenning has joined our firm’s bankruptcy and corporate restructuring practice as a partner in Los Angeles. As a former bankruptcy judge  and a very experienced bankruptcy lawyer and litigator at prominent law firms, she brings to the firm an exceptional background and a reputation for outstanding client service.

Lisa will be working with a team of 20 lawyers in Arnold & Porter’s well-regarded national bankruptcy and corporate restructuring group, which is ranked in the No. 1 band in Washington, DC by Chambers USA 2009.

Sincerely,
Michael Bernstein
Chair, Bankruptcy and Corporate Restructuring Practice

© 2009 Arnold & Porter LLP. 

California Bankruptcy Judge Rules that Completely Unsecured Secured Debt is Unsecured for Chapter 13 Eligibility Purposes

In re Smith, --- B.R. ---, 2009 WL ------------ (unpublished to date)(Bankr. C.D. Cal. Aug. 2009, Tighe. J.)

Issue:   Is secured debt which is entirely unsecured because of the value of the collateral, treated as secured or unsecured for chapter 13 eligibility purposes?          

Holding:      Completely unsecured secured debt is unsecured for chapter 13 eligibility purposes. 

This opinion rules on three similar cases.  In each, the debtors filed Lam motions which were granted (one was by stipulation).  If the debt covered by the Lam motion is added to the total unsecured debt, the debtors were well over the chapter 13 limits in Section 109(e).  Lam motions apply usually to junior mortgages which are completed underwater.  A Lam motion which is granted permits a chapter 13 plan to treat the debt as unsecured in the plan and extinguishes the lien at the end of the plan.    

Judge Tighe first dealt with the issue of whether the “undersecured debt is ‘liquidated.’”  The argument is that it is unknown on the filing date whether the Lam motion will be granted.  Judge Tighe responded that usually the Lam motion requires only a simple hearing and that makes the debt liquidated.

Judge Tighe next dealt with Scovis, 249 F.3d 975, 981 (9th Cir. 2001) which required a judgment lien avoided under Section 522(f) to be treated as unsecured for eligibilty purposes.  The debtors argued that Scovis does not apply because the undersecured lien there was a judgment lien, not a consensual lien.  But Tighe said that if the chapter 13 is dismissed, the judgment lien comes back, same as Lam motions. 

The debtors also argued that even after the Lam motion is granted, the debt is secured, at least until the discharge is entered.  Tighe said that 506(a) says the debt is unsecured and 506(d) says that the lien is void “for bankruptcy purposes.” 

Next Tighe dealt with the issue that 1322(b)(2) prevents the debtor from modifying loans when the collateral is the debtor’s residence.  She writes, debtors “wish to extend the limitation placed on modifying a partially secured trust deed to wholly unsecured junior liens on the primary residence.”  She acknowledges that there is a “problem with applying Scovis and Soderlund to debtor’s primary residence indebtedness.”  She concludes, “In order to avoid treating a lien one way for confirmation and another for eligibility, and to treat the partially secured senior trust deeds consistent with Nobleman and Zimmer, any lien which is partially secured on debtor’s primary residence will be treated as a secured debt for §109(e) purposes as well.”

Judge Tighe invited appeals at the end of the ruling and said she would consider stays pending appeal.  She also said she would consider certifying the matter for direct appeal. 

Supreme Court Sets Oral Argument in Schwab v. Reilly - November 3, 2009

The Supreme Court has set oral argument in Schwab v. Reilly (08-538) for November 3, 2009, I think at 11:00 a.m.  This is the case that will decide whether an exemption claimed on Sched C protects the asset or some specific amount of the asset.  When a debtor claims stock for example as having a value of $10,000 and then exempts $10,000, is the stock exempt or just $10,000 of the stock?  In the 9th Circuit it is clearly just the value.  The trustee's failure to object to the exemption does not prevent him from selling the stock a year later; he must give the debtor the exemption amount of course.  In Schwab v. Reilly, the circuit court ruled that saying something is worth x and then exempting x results in a full exemption for the asset, not just the amount.  

I am going to go to Washington to hear oral argument for one of the three cases before the Supreme Court this term.  The other cases deal with the Debt Relief Agency rules and the effect of confirmation of a chapter 13 plan.  I'm leaning towards the confirmation order issue but have to see when argument is set.   

Circuit Court of Appeals Cases from Last Week

9th Circuit Court of Appeals, August 14, 2009
Ransom v. MBNA Am. Bank, --- F.3d ---, 2009 WL ------------- (above-median income chapter 13 debtor may not deduct from his projected disposable income a vehicle "ownership cost" for a vehicle he owns free and clear)

Supreme Court of California, August 10, 2009
Imperial Merchant Services, Inc. v. Hunt, ---- Cal ----, 2009 WL ------------- (2009)(In a bankruptcy action decided on request of the Court of Appeals for the Ninth Circuit, the Supreme Court of California concludes that the statutory damages prescribed in Civil Code sec. 1719 are exclusive in the sense that a debt collector who recovers a service charge on a dishonored check pursuant to Civil Code sec. 1719 may not also recover prejudgment interest on damages under Civil Code sec. 3287)

Thanks again to Findlaw.com. 

Bankruptcy Court Rules that Non-Payment of Tuition is not a Non-Dischargeable Student Loan

In re Moore, 407 B.R. 855  (Bkrtcy E.D. VA, June 2009)

Issue:   Did an on-line law school violate the discharge injunction when it refused, postpetition, to award the debtor his degree and certify his status to employers?  Is the unpaid tuition a non-dischargeable student loan?         

Holding:     Yes, the refusal violates 524.  It is not a non-dischargeable student loan.   

This chapter 7 debtor owed about $5,800 to Novus Law School.  After the petition was filed, Novus “sent the debtor an email on June 10, 2008, informing him that if the debt owed to it was ‘liquidated through bankruptcy,’ he ‘will not be eligible to receive [his] degree’ nor would Novus ‘validate, certify, and/or verify [his] graduate status to employers.’”  The debtor filed a motion for contempt for violating the discharge injunction.  The debtor “testified that he has completed all of his course work, including the final project, but has not yet received his degree or final transcript.”  “The issues here are whether Novus's refusal to issue a degree or transcript because the debtor has not paid the tuition where the debt was discharged in bankruptcy is a violation of the discharge injunction, and if so, whether the debtor is entitled to an award of damages.”

The bankruptcy court found the school in contempt.  It ruled that the damages would be “$10,000.00, to be paid within 30 days, unless within that time it has issued the debtor a degree and a transcript reflecting completion of the degree requirements and has filed with the clerk evidence of its compliance.”

The court first ruled that the debt was not a non-dischargeable student loan.  “In the present case, the debt owed by the debtor to Novus can be characterized as an unpaid tuition debt.  Such a debt is not an ‘educational benefit overpayment,’ which is an overpayment from a program like the GI Bill, where students receive payments even though they are not attending school.  Nor does the debt fall into the ‘obligation to repay funds received’ category, because there is no evidence indicating that the debtor received any funds from Novus.”  The “unilateral [decision] not to pay tuition when it came due’ did not constitute a loan and that the unpaid tuition debt owed was therefore not excepted from discharge under § 523(a)(8).”  “Of significance to the court was the fact that the debt owed to the school did not involve an advance of cash or exchange of money, nor did the debtor make any arrangements to borrow money from the school or sign a promissory note .”

As to the discharge injunction, the court held that the school violates the stay when it “withhold[s] a debtor's transcript . . . for no other purpose than to compel the payment of a pre-petition debt.”

Los Angeles Superior Court Furloughs

Starting September 16 and continuing for at least one year, all Superior and Appellate Courts in the State will be closed on the third Wednesday of the month.  This will be an actual closure.  The Courts, including those in Los Angeles County, will be considered closed on the third Wednesday of the month, there will be no drop box for filing and the day will NOT count as a court day for deadline calculations. 

LACB Kick Off Party at the Jonathan Club Malibu

LOS ANGELES COUNTY BAR ASSOCIATION
COMMERCIAL LAW AND BANKRUPTCY SECTION 

SUNDAY, SEPTEMBER 13, 2009 

To:  LACBA Commercial Law & Bankruptcy Section Executive Committee
LACBA Bankruptcy Committee
LACBA Commercial Law Committee
Debtor Assistance Project Committee
Financial Lawyers Conference Executive Board.

Please plan to attend the LACBA Commercial Law & Bankruptcy Section’s annual party. This year’s soiree, as in years past, will be a wonderful opportunity to enjoy great food, drink and company.

 When:  Sunday, September 13, 2009

Where:  Jonathan Beach Club, 850 Palisades Beach Road, Santa Monica, CA 90403 Please note that the club has a “no cell phone use” policy and that smoking is prohibited. Parking may be available in the adjacent main parking lot. If the main lot is full, the overflow parking lot is immediately north of the club.

Time:  4-7 p.m.
Cost:  $60.00 - Members
$30.00 - Judges, federal employees, employees of nonprofit organizations 

Please make your reservations as early as possible by returning the registration section below, along with a check made payable to Catherine Bauer-CL&B Party (DO NOT MAKE THE CHECKS PAYABLE TO THE BAR ASSOCIATION). Mail your check to: Catherine Bauer, U.S. Attorney’s Office, 300 N. Los Angeles St., Rm 7516, Los Angeles, CA 90012. If you have any questions, please call Catherine at 213-894-3038 or e-mail her at Catherine.Bauer@usdoj.gov

Lenny Dykstra

My fleeting moment of fame:

http://www.cnbc.com/id/15840232?video=1211884386&play=1

http://www.cnbc.com/id/32377251

Delaware Filings in July, 2009

DEB

223

0

193

66

0

5

482

I started wondering about how many cases were filed in Delaware in July, 2009 to give us in the Central District some perspective.  The above table says 223 chapter 7s were filed in July, -0- individual chapter 11s, 193 total chapter 11s, 66 chapter 13s, -0- chapter 9s, and 5 chapter 15s.  Remember Delaware has only one bankruptcy court district.

NYSB

877

8

53

184

1

1

1114

How 'bout Manhatten, Southern District of New York?  There were 877 chapter 7s (compared to 7,761 in the Central District of California); 8 individual chapter 11s, 53 total chapter 11, 184 chapter 13s, 1 chapter 9, and 1 chapter 15.

CACB

7761

33

71

2053

0

0

9886

This is the Central District of California numbers.  Ch 7 - 7,761; individual ch 11 - 33, total ch 11 - 71, 2,053 ch 13, no 9s and no 15s.   

The second highest number of chapter 7s is in Florida, 4,153.  Only three other districts (out of 95) had more than 3,000; Eastern Michigan, Northern Ill, and Eastern California.

Thanks to the Bankruptcy Data Project. 

Central District Filings in July

In July, 2009, the Central District saw 9,886 filings compared to 9,578 in June, 8,965 in May, 8,398 in April, 8,518 in March, 6,967 in February and 5,999 in January.  That is 58,436 for the first seven months compared 33,396 for the same seven months last year or a 75% increase.   

Chapter 13s were 2,053 compared to 2,287 in June, 1,988 in May - 21% of total filings - roughly the same percentage as the last four months.  That is 411 new petitions per trustee for the month.     

There were 71 new chapter 11 petition compared to 110 in June and 66 in May.  Individuals filed 33 of the chapter 11 petitions in July.    

This info can be found at the Bankruptcy Data Project.   

New Case on Household Size

In re Bostwick,  406 B.R. 867 (Bkrtcy, Minn 2009)

Issue:   May the debtor claim a “household of two” when she lives in a single family residence with an unrelated individual as roommates and nothing more?  Must she include the roommate’ share of the rent and utilities in her current monthly income?         

Holding:      Yes, it is a household of two.   Yes as to the utilities but no as to the rent.     

Judge Robert J. Kressel:
The chapter 13 debtor lives in a house with a guy but they have separate leases, separate bedrooms, and do not share food, toiletries etc.  They share the common areas of the home.  They split the utilities but nothing else.  The home has a third bedroom which is vacant waiting for the owner to find a third lessee.  The debtor claimed a household of two which made her a below-median debtor.  She did not include any of his income in her CMI.  She proposed a 36 month plan.  The trustee objected saying it was a household of one putting her above-median and therefore must be a 60 month plan.  The trustee also said the CMI must include the roommate’s share of the rent and utilities.

The bankruptcy judge overruled the objections.  He said the roommate’s share of the utilities must be included in CMI because they shared the cost but the rent was not shared because they had separate leases.  With the utilities, the debtor was still below-median. 

As to the household size, Judge Kressel wrote: 

I have previously addressed the meaning of “household” in the context of § 1325(b)(4) and concluded that because [the code] defines the ‘median family income’ as ‘the median family income both calculated and reported by the Bureau of the Census,’ ” it is only fair to use the Census Bureau's definition of household: “all of the people, related and unrelated, who occupy a housing unit.” (citing U.S. Census Bureau, Current Population Survey (2004), available at http:// www. census. gov/ population/ www/ cps/ cpsdef. html).  Generally, a single-family home shared by unrelated persons is a single housing unit whose occupants comprise a single household, and the residence shared by Bostwick and Weis is no exception.  The relationship among residents is not a consideration in the Census Bureau's definition, and nothing in the Bankruptcy Code compels unique treatment for households comprised of unrelated members.

The Census Bureau considers whether “A house, an apartment or other group of rooms, or a single room, ... is occupied or intended for occupancy as separate living quarters; that is, when the occupants do not live and eat with any other persons in the structure and there is direct access from the outside or through a common hall”  The criteria of separateness and direct access are not met here.

Although Bostwick and Weis each are entitled to private use of some parts of the house-each has a separate bedroom, storage area and parking stall-it remains a single-family home, with a shared bathroom, kitchen, living room, yard, and laundry.  The trustee argues that the separate leases and separate bedrooms have transformed the single-family home into a rooming house, but Bostwick lives with Weis as two ordinary roommates might, despite their separate leases.  Because of the layout of the house, it is not possible for Bostwick to enter her bedroom without passing by their living room or kitchen.  There is no direct access from the outside.  There are times that they are both in the kitchen or living room.  They do not eat together, but they share a refrigerator, a microwave oven and a stove. Bostwick must cross Weis's basement storage space to get to the laundry machines.  None of this rises to the level of “separateness” that the Census Bureau's definition of housing unit requires. In fact, the Census Bureau's definition specifically includes “unrelated people sharing a housing unit such as partners or roomers” Id. (“A household includes ... all the unrelated people, if any, such as lodgers, foster children, wards, or employees who share the housing unit. A person living alone in a housing unit, or a group of unrelated people sharing a housing unit such as partners or roomers, is also counted as a household.”).

Although the Census Bureau excepts “group quarters” from its definition of “household,” the exception is limited to unusual housing situations unlike the common roommate situation presented in this case.  According to the Census Bureau, group quarters are “noninstitutional living arrangements for groups not living in conventional housing units or groups living in housing units containing ten or more unrelated people or nine or more people unrelated to the person in charge.” Id. Bostwick and Weis, despite their separate leases, are a single household for the purposes of 11 U.S.C. § 1325(b)(4), and Bostwick is entitled to claim a household of two.

Sotomayor Sworn in Today