BankruptcyProf Blog

30 Years, and by the way, We're Here

It was 30 years ago today (think the Beatles), November 29, 1979 - I was sworn into the California Bar.  So tomorrow I start the next 30 years. 

My son and I went to Ford's Theater today - it was closed to the masses because The Christmas Carol was playing live.  So we walked to the Washington Memorial, then the Lincoln Monument.  I got choked up reading Lincoln's second inaugural, carved into one wall.  It's the shortest inaugural ever made.  The speech is worth a read.  God decided to get rid of slavery, he says, and made both sides pay and if it's not over, so be it - it will proceed (March 1865): 

"Fondly do we hope--fervently do we pray--that this mighty scourge of war may speedily pass away. Yet, if God wills that it continue, until all the wealth piled by the bond-man's two hundred and fifty years of unrequited toil shall be sunk, and until every drop of blood drawn with the lash, shall be paid by another drawn with the sword, as was said three thousand years ago, so still it must be said "the judgments of the Lord, are true and righteous altogether"

"With malice toward none; with charity for all; with firmness in the right, as God gives us to see the right, let us strive on to finish the work we are in; to bind up the nation's wounds; to care for him who shall have borne the battle, and for his widow, and his orphan--to do all which may achieve and cherish a just and lasting peace, among ourselves, and with all nations."

My son and I then went out to the steps and someone was playing a tape of Martin Luther King's I Have Dream speech.  We sat on the steps staring out on the reflecting pool listening to MLK. 

"I say to you today, my friends, so even though we face the difficulties of today and tomorrow, I still have a dream. It is a dream deeply rooted in the American dream.

I have a dream that one day this nation will rise up and live out the true meaning of its creed: "We hold these truths to be self-evident: that all men are created equal."

I have a dream that one day on the red hills of Georgia the sons of former slaves and the sons of former slave owners will be able to sit down together at the table of brotherhood.

I have a dream that one day even the state of Mississippi, a state sweltering with the heat of injustice, sweltering with the heat of oppression, will be transformed into an oasis of freedom and justice.

I have a dream that my four little children will one day live in a nation where they will not be judged by the color of their skin but by the content of their character.

I have a dream today.

I have a dream that one day, down in Alabama, with its vicious racists, with its governor having his lips dripping with the words of interposition and nullification; one day right there in Alabama, little black boys and black girls will be able to join hands with little white boys and white girls as sisters and brothers.

I have a dream today.

I have a dream that one day every valley shall be exalted, every hill and mountain shall be made low, the rough places will be made plain, and the crooked places will be made straight, and the glory of the Lord shall be revealed, and all flesh shall see it together.

This is our hope. This is the faith that I go back to the South with. With this faith we will be able to hew out of the mountain of despair a stone of hope. With this faith we will be able to transform the jangling discords of our nation into a beautiful symphony of brotherhood. With this faith we will be able to work together, to pray together, to struggle together, to go to jail together, to stand up for freedom together, knowing that we will be free one day.

And if America is to be a great nation this must become true. So let freedom ring from the prodigious hilltops of New Hampshire. Let freedom ring from the mighty mountains of New York. Let freedom ring from the heightening Alleghenies of Pennsylvania!

Let freedom ring from the snowcapped Rockies of Colorado!

Let freedom ring from the curvaceous slopes of California!

But not only that; let freedom ring from Stone Mountain of Georgia!

Let freedom ring from Lookout Mountain of Tennessee!

Let freedom ring from every hill and molehill of Mississippi. From every mountainside, let freedom ring.

And when this happens, when we allow freedom to ring, when we let it ring from every village and every hamlet, from every state and every city, we will be able to speed up that day when all of God's children, black men and white men, Jews and Gentiles, Protestants and Catholics, will be able to join hands and sing in the words of the old Negro spiritual, "Free at last! free at last! thank God Almighty, we are free at last!"

It was really a great day.  JH

Happy Thanksgiving and We're Off

My son Desmond and I are leaving for Washington DC in about an hour.  We are going to go to the Supreme Court next Tuesday to hear oral arguments on the two bankruptcy cases, Espinosa and Milavetz.  I got a guest pass for myself but they would only give me one - they said there is a lot of interest in the cases (nah!).  My son will have to wait in line.  We will go over there on Monday to see if we can get in then to listent to whatever is going on.  I'll post about it during the trip.  We're going today because two roundtrip tickets to Washington DC leaving today and coming back next wednesday was $441 - total.  Of course its more if you bring more than your tooth brush.  We''ll find out at the airport.  Happy Thanksgiving.  JH   

Supreme Court Historical Society: National Heritage Lecture on December 8, 2009

Hopefully this will be on C-Span one of these days since I cannot make it.  Four former Solicitor Generals will discuss the role of that office on all of us.  The brochure can be accessed here.

Rules Changes Beginning December 1, 2009

Amendments to the Bankruptcy Rules Take Effect December 1
The following is a summary of the amendments to the Bankruptcy Rules which will take effect December 1, 2009.  The complete text of the new rules, along with official reports, summaries and explanations, are available at:

 http://www.uscourts.gov/rules/newrules6.htm .

A.  Rule 9006:  Changes to the Time Computation Rules
The most pronounced amendment to the bankruptcy rules is in Rule 9006 regarding time computation, i.e. the number of days or hours from a triggering event.  All calendar days are now counted, not just “business days” — excluding the date of the event that triggers the period, but including weekends and holidays.  If, at the end of the time period the deadline day is on a weekend or holiday, then the period is extended to the next day that is not a weekend or holiday, with a proviso for state holidays as discussed below.  These same rules apply for calculation of hourly time periods, except if the hourly time period ends on a weekend or holiday, then the deadline for the hourly time period is automatically extended to the same time on the next day that is not a weekend or holiday.

The amended rules introduce a quirk involving state holidays that must be taken into account.  First, if the deadline set by the rules is on a state holiday that is not a federal holiday, there is an automatic extension of the time period to the next day that is not a weekend or a holiday, but only if the time period being counted is one that goes forward from the event that triggers the deadline.  For example, a rule requiring a filing 14 days after an order of relief would be extended to 15 days if the deadline day is a state, but not federal, holiday.  This change is designed to prevent parties from missing deadlines because they incorrectly believed the courthouse was closed on the state holiday.  However, if the rule requires the parties to count backwards from the triggering event, then the deadline is not extended if the final day is a state, but not federal, holiday.  For example, a rule requiring objections to a proposed sale 7 days before the date of the sale would not be extended to 8 days if the deadline date is a state, but not federal, holiday.  Thus the parties do not lose an extra day because the deadline date is a state holiday.  Practitioners should take extra care counting backwards from deadlines because, if the deadline is extended by a weekend or federal holiday, then the time period to act is effectively shortened by the amended rules.

    The amended rules continue the practice of extending deadlines in cases when the clerk’s office is inaccessible.  The amended rules specifically provide that in cases of electronic filing, if the clerk’s office is inaccessible on the deadline day, then the filing date is midnight of the next day the office is open, presuming that day is not a weekend or holiday.  For non-electronic filing, it is the normal period of closure on the next day.  The committee notes clarify that interruptions in the electronic filing system are specifically considered as causing “inaccessibility” of the clerk’s office within the meaning of the rules.

   The committee notes clarify that there are two exceptions to the new calculation rules.  First, if a court ordered calendar date is specifically set by the order, i.e. “November 1st” rather than “7 days from the date of this order,” then November 1st is the hard date, regardless of the rules.  Second, some statutes still require business days be used in calculation: these rules do not affect deadlines set by statute.  See, e.g., 11 U.S.C. § 527(a)(2) (debt relief agencies must provide a written notice to an assisted person “not later than 3 business days” after providing bankruptcy assistance services) (emphasis added).

   Finally, the amended rules modify all the set periods in the rules in order to account for the fact that weekends are now included in time computation.  The various deadlines are amended in the following manner:
• 5-day periods become 7-day periods
• 10-day periods become 14-day periods
• 15-day periods become 14-day periods
• 20-day periods become 21-day periods
• 25-day periods become 28-day periods

B. Additional Rule Changes
In addition to the time calculation measures, a variety of minor changes will be added to the rules.  These are summarized briefly below.

Rule 4008:  A requirement that a cover sheet be filed along with all reaffirmation agreements.  The cover sheet will be included in the Official Forms.

Rule 7052, 7058, 9021:  In order to clarify judgment requirements, Rule 58 of the Federal Rules of Civil Procedure is explicitly made applicable to adversary proceedings.  This clarifies that the separate document requirements for recording judgments apply to adversary proceedings.  All other recording requirements for judgments and orders are determined by Rule 5003(a), which does not have a separate document requirement.

Rule 7052, 9015, 9023:  These rules are amended to change the deadline for filing certain post-judgment motions to 14 days, rather than the 28 day deadline in the 2009 Amendment to the Federal Rules of Civil Procedure (which are generally incorporated by reference into the Bankruptcy Rules).  This is necessary because the deadline for filing a notice of appeal under Bankruptcy Rule 8002 is 14 days rather than the 30 days allowed under Rule 4(a)(1)(A) of the Federal Rules of Appellate Procedure.

Rule 2016:  The rule is updated to reflect the requirement of 2005 Amendments to the Bankruptcy Code that the declaration of compensation paid to the bankruptcy petition preparer as required by 11 U.S.C. § 110(b)(2) must be filed with the petition, rather than 10 days after the petition.

Rule 9006:  Corrects a cross-referencing error in relation to the time requirements for service of process.

Official Form 9F, 10, and 23:  Minor technical changes in these forms are made to comply better with the official language of the bankruptcy code.

The foregoing materials were prepared by Donald H. Cram, III  and Bernard Kornberg of Severson & Werson, San Francisco, California, Robert G. Harris of Binder & Malter, Santa Clara, California, and Neil W. Bason of Howard Rice Nemerovski Canady Falk & Rabkin, P.C., San Francisco, California.

Judge Throws Entire Gallery in Jail, Supreme Court has to Intervene

This is a pretty funny story which I will use to explain to my clients why you never know for sure what's going to happen in court. 

Briefs in Espinosa Case Before the Supreme Court

You can get all of the briefs including the eight amicus briefs (including Ken Klee's brief) here.   The Schwab v. Reilly briefs are here (only three amicus briefs).   The Milavetz briefs are here.

Circuit Court of Appeals cases from Last Week

7th Circuit Court of Appeals, November 18, 2009
Boyer v. Crown Stock Distrib., Inc., --- F.3d ---, 2009 WL --------- (7th Cir. 2009)(judgment for trustee in fraudulent conveyance action is affirmed in part and reversed in part where: 1) bankruptcy court did not commit clear error in finding that the statutory condition for a fraudulent conveyance was satisfied; and 2) district court's ruling with respect to the dividend is reversed as the trustee is entitled to the dividend because it was an integral part of the leveraged buy-out)

9th Circuit Court of Appeals, November 20, 2009
Severo v. Comm'r of Int'l Rev., --- F.3d ---,  2009 WL ----------- (9th Cir. 2009)(IRS permitted to proceed with collection action relating to petitioners' 1990 tax liability because statute of limitations regarding collection was tolled during the pendency of petitioners' bankruptcy proceedings)

Thanks as always to Findlaw.com 

Financial Lawyers Conference Program with Ken Klee - December 10, 2009

(If it says Ken Klee, It's worth posting and is highly recommended)

Financial Lawyers Conference

FOR MORE INFORMATION: www.financiallawyers.org

"Current Topics in Bankruptcy Litigation: Five Causes of Action, A Theory of Damages, and a Defense"

Thursday, December 10, 2009
Ken and Matt will discuss at least five cutting-edge issues in bankruptcy litigation: equitable subordination, recharacterization, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and deepening insolvency (including deepening insolvency as a measure of damages and the defense of in pari delicto).
Register Online

Speakers: Kenneth N. Klee, Klee, Tuchin, Bogdanoff & Stern LLP
Matthew Heyn, Klee, Tuchin, Bogdanoff & Stern LLP

Location: The Olympic Collection
11301 W. Olympic Boulevard
Los Angeles, California

Time: 6:00pm - 6:45 pm - Registration and Cocktails
6:45pm - 7:30 pm - Dinner
7:30pm - 8:30 pm - Program

Cost: $70.00 FLC Members
$85.00 Nonmembers
$40.00 Lawyers in Gov’t Svc.

9th Circuit BAP Adds to Debate on Above-Median Chapter 13 Plans, How to Compute Projected Disposable Income

American Express Bank v. Smith (In re Smith), ---- B.R. ----, 2009 WL -------- (9th Cir. BAP Oct, 2009)

Issue:   When computing the chapter 13 plan payment, can an above-median chapter 13 debtor deduct payments to secured creditors for property they intend to abandon?   

Holding:   No.   

Trial Judge:  Paul Snyder, Washington
Montali, Jury, Hollowell

Opinion by Montali (Hollowell dissenting)
These are above-median chapter 13 debtors.  Their means test net income was minus $1,789.  That included deduction for payments to secured creditors for “two houses and a vehicle” which they were surrendering.  The plan proposed to pay $889 for six months which would pay 4% to unsecured creditors.  The debtors’ I and J net was apparently (as it is not clear) about $900 to the positive.  The chapter 13 trustee and a creditor objected that the debtors were not paying their “projected disposable income” and the plan was not proposed in good faith.  If the means test did not include the secured payments and did include the housing allowance, the debtors had a positive net of $4,191 per month and could pay unsecured creditors in full in 24 months.  The bankruptcy court overruled the objections.  “The bankruptcy court held that section 1325(b)(3) supersedes -- not supplements -- subsection (b)(2) when debtors have above-median incomes.”

The BAP reversed, 2-1.  It first dealt with Kagenveama.  “The issue before the Ninth Circuit in Kagenveama did not involve either the determination of what are proper expenses (under section 1325(b)(2)) or the measurement of them (under section (b)(3)).” 

It then states:

“Subsections (b)(2) and (b)(3) of section 1325, read together, provide that if an expense is not reasonably necessary for a debtor’s and/or dependants’ maintenance and support, it is not included in the calculation of disposable income.  If the expense is reasonably necessary, and the debtor is an above median income debtor, subsection (b)(3) requires the court to determine the amount in accordance with section 707(b)(2).”
 
“If the expense is reasonably necessary for the debtor’s and/or dependants’ maintenance and support, then section 1325(b)(3) requires the court to determine the amount in accordance with section  707(b)(2).”  “Items that a debtor has surrendered or intends to surrender are not necessary for his or her support or maintenance.  The concepts -- surrender and necessity – are mutually exclusive of one another. Phantom payments for the surrendered item are not reasonably necessary for a debtor’s support and maintenance.”

Dissent of Hollowell.

“Under the guise of a plain meaning statutory analysis, the majority holds that § 1325(b)(2) and (b)(3) must be read sequentially, thereby arriving at a ‘common sense’ result which only permits an above median-income debtor to use the means test to calculate expenses after the debtor demonstrates the expense is reasonably necessary.  While I sympathize with the majority’s desire to achieve a common sense result, I cannot agree with its contorted statutory analysis.” 

“I cannot join my colleagues in an interpretation that upends the statutory inclusion of the means test in chapter 13, reverting back to the pre-BAPCPA judicial discretion as to what expenses of a debtor are reasonably necessary.”

Yarnall v. Martinez (In re Martinez), ---- B.R. ----, 2009 WL -------- (9th Cir. BAP Oct, 2009)

Issue:   When computing the chapter 13 plan payment, can an above-median chapter 13 debtor deduct payments to a secured creditor for a lien which has been “stripped off” pursuant to a Lam Motion?   

Holding:   No.  Note:  The opinion references and is essentially the same as In re Smith decided the same day by the same panel.   

Trial Judges:  Riegel, Markell, Nakagawa, Nevada
Montali, Jury, Hollowell

Opinion by Montali (Hollowell dissenting)
This is an appeal from three separate chapter 13 cases.  The debtors are above-median chapter 13 debtors who filed successful Lam Motions yet still deducted the payment on the avoided second from the calculation of the plan payment.  The bankruptcy judges in Nevada held a joint hearing and approved the plans holding that Kagenveama and Section 1325(b)(3) require a mechanical test and specifically permit deducting payments to secured creditors, even those they do not intend to make.

The BAP reversed.  2-1.  It held that subsections (b)(2) and (b)(3) of section 1325 must be read together.  The expense must first be “necessary” pursuant to (b)(2) and, if necessary, it must be computed pursuant to (b)(3).  “[The debtors] made the decision to strip the liens, not the bankruptcy courts.  Phantom payments cannot be necessary.”  “[I]f an item is not necessary for a debtor’s support or maintenance, a debtor cannot engage in the fiction of pretending to pay for it.” 

The dissent is virtually identical to Judge Hollowell’s dissent in Smith (see above). 

Ninth Circuit Annual Report 2008

This was completed in August, 2009.  I'm a little late in posting it but its kind of a fun read.  There is a little article on page 31 about Dennis Montali and one on Judge Richard Medick who died in 2008 on page 13.   

Circuit Court of Appeals Cases from Last Week

3rd Circuit Court of Appeals, November 12, 2009
In re Madera, --- F.3d ---, 2009 WL ----------- (3rd Cir. 2009)(summary judgment for creditor is affirmed where 1) the Rooker-Feldman precluded the bankruptcy court's jurisdiction over debtors' rescission claim because that claim was inextricably intertwined with a Court of Common Pleas' foreclosure judgment; 2) summary judgment for creditor on the Truth in Lending Act damages claim appropriate; and 3) debtor's motion to amend was untimely)

5th Circuit Court of Appeals, November 12, 2009
In re Bradley, --- F.3d ---, 2009 WL ----------- (5th Cir. 2009)(contempt of court and monetary sanctions affirmed where: 1) civil contempt power extends to defiance of a bankruptcy court injunction whose terms are known, but which has not yet been formalized as required by procedural rules; and 2) the lack of agreement between the opposing parties briefing the motion for injunction did not render the resulting ruling unclear)

6th Circuit Court of Appeals, November 13, 2009
In re Nowak, --- F.3d ---, 2009 WL ----------- (6th Cir. 2009)(informal proof of claim not allowed where 1) plaintiff had ample notice of the likelihood that it would lose its status as a secured creditor, necessitating the filing of a proof of claim; 2) plaintiff's unexplained delay weighed against allowing plaintiff's informal proof of claim; and 3) the large dilution in the distribution to other creditors in this case was an appropriate consideration weighing against allowing plaintiff's claim)

Thanks to Findlaw.com  

Supreme Court Database

I will have to add this website to my sources.

NACBA Amicus Brief in Espinosa

Another great job by Tara Twomey.  You can access it here.  Oral argument is set for December 1, 2009.   

Court of Appeals Cases from Last Week

1st Circuit Court of Appeals, November 06, 2009
In re Smith, --- F.3d ----, 2009 WL ---------- (1st Cir. 2009)(late alimony payment penalty was not a domestic support obligation, and as such, the ex-wife's claim was a general unsecured claim not entitled to priority status and consequently dischargeable) 

2nd Circuit Court of Appeals, November 05, 2009
Ogle v. Fidelity & Deposit Co. of Md., --- F.3d ----, 2009 WL ---------- (2nd Cir. 2009)(liquidating trust must pay post-petition attorneys' fees on a claim that stemmed from a pre-petition indemnity agreement where such claims are categorically allowable)

9th Circuit Court of Appeals, November 05, 2009
In re Bender, --- F.3d ----, 2009 WL ---------- (9th Cir. 2009)(appeal dismissed as BAP's order re action seeking avoidance of a transfer was not final)

10th Circuit Court of Appeals, November 03, 2009
In re Paige, --- F.3d ----, 2009 WL ---------- (10th Cir. 2009)(dismissal of the appeal as moot is reversed where: 1) the competing chapter 11 plan could theoretically be confirmed without requiring disgorgement of payments made to third-party creditors; and 2) reversal of the existing plan would not require the undoing of complex transactions)

Thanks to Findlaw.com

Central District of California Filings Break 10,000 in October, 2009

From Prof. Lawless' data base, the Bankruptcy Data Project:

Filings by chapter in the Central District of California in October, 2009:

CACB

ch 7; 7839

ch 11; 107

ch 13; 2366

total; 10314

 

This compares to 9,089 total in September, 9,740 in August, and 9,886 filings in July, 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. 

Chapter 13s were 2,366 in October, 2,025, in September, 2,180 in August, 2,053 in July, 2,291 in June, 1,988 in May.  Chapter 13 trustees received 473 new petitions each in October.

Total Central District filings in October by the way were more than double the entire state of New York,  10,314 to 5,117 and roughly double the entire state of Texas, 10,314 to 5,274.  So about the same as the Texas and New York combined.   

Prof. Jean Braucher Leads Great Thread on In re Lanning

This is such a great thread from another list serve about In re Lanning, the chapter 13 case now before the Supreme Court which deals with the question, how do you compute the plan payment for an over-median debtor? 

From Karen Cordry,
Well, what can I say -- they decided Marrama on the "we don't believe Congress wanted this crazy result" analysis.  I think deciding all three case (Espinosa, the trustee exemption case (Reilly?) and this one) on the "anti-abuse" approach would take a much smaller stretch than that case. 

And, in going back and looking at Lanning, I had forgotten, but that is one where the Tenth Circuit opinion took the flexible view to PROTECT the debtor (she had gotten one-time income during the 6 months prebankruptcy) and using the strict calculation would have left her being required to pay far more than she was actually making.  So, I shouldn't say the latter view is necessarily "anti-debtor," as much as "pro reality."  On the whole, my guess is that upholding the Tenth Circuit approach will probably benefit more creditors than debtors, just because of the asymmetry arising from the debtor's right to choose when to file, and the fact that the means test quirks tend to go in the direction of allowing more expenses than the debtor actually pays.  But, the legal fact is that it actually works both ways and the debtor is the one trying to uphold the ruling in this instance. 

Karen Cordry, Bankruptcy Counsel
National Association of Attorneys General, Washington, DC  20036

From Prof. Jean Braucher,
The Supreme Court granted cert on this question:

“Whether, in calculating the debtor's "projected disposable income" during the plan period, the bankruptcy court may consider evidence suggesting that the debtor's income or expenses during that period are likely to be different from her income or expenses during the pre-filing period.”  The question is much broader than necessary to decide the Lanning case.

A possible answer starts with the point that the debtor in this case, whose income had an upward blip because of a one-time buyout from her former employer during the six months before filing, could simply have waited to file, that is until CMI lined up with her current income.  There is no indication she needed to rush, for example to stave off foreclosure.  Even if she did need to file immediately, section 101(10A)(A)(ii) provides for the CMI period to be moved forward by the debtor to deal with Lanning-type facts.  Several cases have so held—the debtor also needs to seek approval not to file a schedule of current income.  See notes 66 and 77 in this article of mine for the cites to cases from North Carolina and Illinois:  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1428927 So it is unnecessary to read another mechanism for moving forward the period for measuring CMI into section 1325(b).

Similarly, section 1325(b)(3) incorporates rebuttal on expenses under section 707(b)(2)(B).  Lanning did not involve changed expenses, so this issue need not be reached.  Still, the existence of Code mechanisms for debtors to reduce income or increase expenses for means-testing purposes strongly suggests that Congress did not intend for courts to make up their own other means of doing so.  These provisions were not discussed in the lower court cases, including the circuit court opinion.   The Solicitor General also neglected them in her amicus brief filed in September, even though the brief of the United States does cite section 101(10A(A)(ii) in passing, without considering its implications for the case.

Might the court dismiss the case without a decision once it realizes that the lower courts in this case did not address many twists and turns in the Code in their analysis?  Also, the debtor was unrepresented in the BAP and circuit court, making this a very bad case for a Supreme Court decision.  If the court does decide it, it is because it is looking for a way to complicate (and toughen) means testing with another layer using judicial discretion.   Means testing has turned out to be easier on debtors than prior law.  Lanning is an odd case where, as so far inadequately briefed, it looks like adding discretion helps the debtor.  The reality is that the trustee system is looking to “fix” means testing by making it tougher—its approach would have the debtor go through the hassle of the mechanical test and then also have to prepare to pass a discretionary test administered case-by-case by judges.  If Congress doesn’t like the results under means testing, shouldn’t it fix the statute?  Or better yet, it could repeal means testing and go back to the old case-by-case approach.  But if the court goes where the trustee system wants it to, we’ll end up with two layers of means testing, mechanical, followed by discretionary.  Sigh. 

From Mark Cornell,
I forgot about the Espinosa case. As a Don Quixote of the Debtor's Bar, I am embarrassed by the position taken by the Debtor in Espinosa. That case is going to do more harm than good. A victory by the debtor will be small potatoes compared to the damage a loss will do. I routinely claim exemptions in retirement assets and PI claims as "100%", which while not an issue directly in Espinosa, may get impacted by the ruling. IMNSHO, the debtor will do very poorly before the Supreme Court.

I also agree that the Lanning decision is a double edged sword. I wonder if the Court is going to get that. The better rule is to allow courts the flexibility to address each debtor on their merits, but that is certainly not the intent of Congress in passing the BARF.

We can disagree as to whether or not "the means test quirks tend to go in the direction of allowing more expenses than the debtor actually pays".  While the majority view is that in a chapter 7 case, the debtor can deduct ownership expenses for cars with no loans and secured debt payments for property being surrendered, the inflexible budget items like food, rent and utilities are penurious. Sometimes the Debtor's B22 shows less ability to pay then reality, sometimes it shows more. The one thing everyone should be able to agree with is that the B22 is an abomination in chapter 13 cases.

Mark Cornell
Concord, NH

From Jim Gray,
In analyzing whether these views are anti-debtor or pro-reality, I look at the "reality" of the Means Test in which student loan payments, as just one example, are not counted as a legitimate deduction even though they cannot be discharged in a 7 nor can they be fully paid off with the accruing interest in a 13.

I've had a few clients stopped by the B22 even though the reality of their situation did not match the "one size fits all" test.  They weren't "abusing" anything, but tell that to Sen. Grassley.

This mechanical test had only one purpose that anyone can seriously consider, seeking to make debtors continue paying on credit cards for up to 6 months before they could file a 7.

And the sad thing is, it appears that a number of debtors were so scared that they paid on credit cards instead of house payments, fueling or at least aggravating the foreclosure crisis.

I think it's poetic justice that the big banks who bought and paid for BAPCPA suffered some mighty big unintended consequences and reaped a catastrophe.  Their lobbyists perhaps owe them a refund.

Jim Gray
Atlanta, GA

From Ken Doran,
Judges, and appellate judges particularly, have a pretty good lot in life and I don't generally feel sorry for them, but in one way I do:  they are obliged to try very hard to assume that the legislature acted intelligently and in good faith, and knew what it was doing, and to find the wisdom that is buried in there somewhere.  That is often, to put it mildly, a fool's errand, and rarely more so than with BAPCPA.  I have no expertise in predicting Supreme Court decisions, but it will not surprise me if they kick it around and spit out a result that leaves us little more illuminated than before; the Rash decision about valuing collateral in Chapter 13 comes to mind.

Kenneth J. Doran / Doran Law Offices / Madison, Wis. / W.D.Wis. /

From Dan Press,
The only "abuse" in Lanning is the fact that the debtor had to include this non-existent income because of the silly six-month lookback.  Seems to me that it should have been dealt with by applying "special circumstances" rather than throwing out the mean test that the banks bought and paid for.   The banks wanted it to be applied strictly, with special circumstances as the only safety valve (and that had to be fought for), so they should get what they wanted.  Yes, what they are realizing now is that all of this "abuse" was non-existent, and by putting in the fake numbers, they are lowering what they get in a 13, and allowing people to file 7 who otherwise couldn't.   Sorry.  I have no sympathy for them.

Let's see who sides with whom in Lanning - which is backwards from most cases.  The trustee in Lanning is advocating for the strict Kagenveama approach, while the debtor wants flexibility.  While that is what some may have predicted in 2005, reality is that most debtors are better off with the Kagenveama approach, and this C13 trustee is arguing against the position of most trustees and creditors.  Watch what position the bankers take - I bet they side with the debtor here!

Dan Press
Chung & Press, P.C.

From Karen Cordary,
Yup, mea culpa, I took back the "abuse" statement.  I had forgotten what the facts were in Lanning and it doesn't apply there.  (As opposed to cases such as Nowlin, where a single debtor making $90,000 a year wanted to file a Chapter 13 plan that would pay less than $1,000 to her unsecured creditors based on a strict application of the disposable income test, even though, after she paid off her 401(k) loan in two years, she would have something like an added $1,000 A MONTH that she could pay to them.)  My guess is they may have taken Lanning because it presents a sympathetic fact pattern that would allow them to uphold the flexible approach and show that it is not just pro-creditor or pro-debtor.

Karen Cordry, Bankruptcy Counsel
National Association of Attorneys General

From Hank Hildebrand,
Sorry.  In chapter 13 the "special circumstances" might help you with expenses - it cannot help you with income (read the way 707(b) applies to determine a debtors reasonable expenses).  The way to deal with the decline in income is outlined in a case called In re Shelor, 2008 WL 4344894 (Bkrtcy.M.D.N.C.,2008).

The application of the "means test" into the disposable income test was either a poison pill planted when the bill was working its way through the committee structure or a misguided staffer trying to create a balance between chapter 7 and chapter 13.  I cannot find anyone who admits to being the source of adding 707(b) - a litmus test - to 1325(b) - a determination of what must be paid.

I am afraid that the SCOTUS will be called upon to actually draft a statute because Congress did not do a very good job of it.  I fear the outcome.

Henry E. Hildebrand III
Chapter 13 Trustee
Nashville, TN 37219

From Prof. Braucher,
What about section 101(10A)(a)(ii)?  See In re Dunford 408 B.R. 489, 496-97 (Bankr. N.D. Ill. 2009) and In re Hoff, 402 B.R. 683 (Bankr. E.D.N.C. 2009); In re Crink, 2008 WL 2944652 (Bankr. M.D. N.C. 2008); In re Montgomery, 2008 WL 597180 (Bankr. M.D. N.C. 2008); In re Shelor, 2008 WL 4344894 (Bankr. M.D.N.C. 2008).  All these cases recognize a process for the debtor to move forward the CMI period to deal with reduced income as of filing.

Lanning probably could have just waited to file.  But if there was some need for a rush, she could have used the mechanism discussed in these cases.  So the courts do not need to invent some other end-run to deal with decreased income.

This point was not raised in the 10th Circuit or in the Solicitor General's brief to the Supreme Court arguing in favor in granting cert., but it surely will be in the briefs on the merits in the Supreme Court.

  --Jean Braucher, University of Arizona

From Karen Cordry,
That takes care of the debtor's problem with reduced income -- what takes care of the creditors' problem if the debtor has increased income?  Or will stop having an expense after filing the case (either due to abandonment or the completion of a loan), which is the scenario in some of the other cases?  Is this a situation where only the debtor can adjust the situation to protect his or her interests but cannot be forced to do anything to protect creditors' interests when the facts are reversed?

Karen Cordry, Bankruptcy Counsel

From Prof. Braucher,
Perhaps Congress "thought" that if your plan is feasible using the means test version of income, that's what you have to commit.  This is certainly the most obvious reading of a provision allowing the debtor to move forward the period for measuring income but not providing for anyone else to do so.  And if Congress now wants to get rid of the six-month lookback way of looking at income, it could certainly amend the statute.

The statute also provides for adjusting expenses upward by incorporating 707(b)(2)(B) into 1325(b)(3).

The fact that there are specific ways for the debtor to adjust income down and expenses up suggests that others are not allowed to argue for more disposable income payment than means testing requires--this is supposed to be a bright line rule (for the most part) about what debtors have to pay, but with adjustments permitted for feasibility if income has gone done or special circumstances require higher expenses.

From Prof. Braucher,
I've been asked off list if I really think Congress wrote a statute that was "heads, the debtors win, tails, the creditors lose."

My answer is this:  Hardly.  The debtor has to go through all the hassle of filling out the means testing form.  This and other burdens raise the price of bankruptcy.  But if the debtor proposes a chapter 13 plan based on the means test, just as Congress specified, it seems like Congress was saying that's what the debtor can reasonably afford.  The legislative history says the objective is to have debtors pay the maximum they can afford. Means testing has turned out to be more affordable than the unreal budgets chapter 13 debtors wrote for themselves, leading to a two-third failure rate in chapter 13 prior to 2005 (and we don't know yet whether that has changed).  Anyway, the court may very well ignore the statute, but the most obvious reading is that debtors have ways to deviate from the means test, but no one else does.  About 20 percent of debtors have to pay more in chapter 13 as a result of means testing there; the rest pay less than under prior law.
It might be a good thing to go back to prior law, having courts use their discretion to say what debtors can reasonably afford, but having means testing and then judicial discretion to do something else seems like the worst possible outcome.

From Karen Cordry,
Then I'll just throw my two cents in.  I think it is unlikely in the extreme that Congress intended to have the law they wrote result in 80% of Chapter 13 debtors paying less than they paid before.  I think it is also extremely unlikely that it intended to have people continuing to deduct for 401(k) loans that had been paid off (the 5th Cir. Nowlin case) or for secured debts where the collateral had been surrendered (the 7th Cir. Turner case).  Nor do I think that when they wrote statutes with sections with titles like "restoring the basis for secured credit," that, in fact, they meant to ensure that only debtors had rights and creditors didn't.  And, if they did, I think the American public -- much of which doesn't even like people getting mortgage foreclosure relief even in the middle of this recession -- would oppose such scenarios. 

The statute is very badly written -- and many of the policy choices in it are flawed -- but I think it is unrealistic to make arguments based on the notion that Congress intended to write a law to make it easier for debtors to pay less to their creditors. 

Karen Cordry, Bankruptcy Counsel

From Ken Doran,
Karen Cordry asks, "What takes care of the creditors' problem if the debtor has increased income? Or will stop having an expense after filing the case ?"  I would note that in my 30 years of doing this, attempts by creditors to pursue anything like that have been vanishingly rare, under any of the many variations of the statutes.  I believe that this reflects a considered and correct decision that such micromanaging is simply not worth their while.  I infer that Ms. Cordry believes that trustees should be tasked with doing this for the benefit of creditors, paid by commissions on the debtors' payments (practice currently varies considerably in this regard).  If my assumption is correct, my question is: Would trustees be equally tasked with finding grounds to decrease payments, with a similar absence of obliging debtors to employ their own counsel for that purpose?

Kenneth J. Doran / Doran Law Offices / Madison, Wis. / W.D.Wis. /

From Karen Cordry,
I wasn't suggesting trustees would do it -- this is more in the nature of the objections that get raised to plan confirmation by creditors based on those sort of factors.  In addition, though, I think the amendments did require debtors to update income and expenses annually precisely so creditors could do this if they want to.

Karen Cordry, Bankruptcy Counsel

From Jon Hayes,
Jean,
This is such a great thread!  I am going to file an amicus brief in Lanning for a consumer organization in Los Angeles - cdcbaa - www.bklawyers.org.  That is if I can get some consensus about which way we, as an organization, want it to go.  I was on the amicus brief in Kagenveama although Tara Twomey wrote it and graciously added my name to the brief.

It seems to me that if the court is not going to follow Kagenveama, then they are going to have to rule that the scheme in the code for over-median debtors is to be ignored.  The code makes it very specific how to compute the plan payment.  It is a ridiculous scheme but we either follow it or ignore it would be my argument.  Its better to have some unfortunate people like Lanning not be able to file than to simply ignore what Congress wrote.

Does anyone mind if I post this whole thread on my blog?   www.lawprofessorblogs.com.  My blog is BankruptcyProf on the right hand side.

Jon Hayes

From Diane Kerns,
That is a perplexing comment.  I read Kagenveama the exact opposite.  But I couldn't agree more that we should follow the statute as written.  Trustees, however, have no consensus, as you know.

Dianne Crandell Kerns
Chapter 13 Trustee

Circuit Court of Appeals Cases from Last Week

(well - a week late)

5th Circuit Court of Appeals, October 30, 2009
In the Matter of: Proeducation Int'l. Inc., --- F.3d ---, 2009 WL ------------- (5th Cir. 2009)(counsel for creditor should not have been disqualified where: 1) the bankruptcy court should have considered counsel's evidence of his lack of involvement with the debtor while at his prior law firm in making its decision; and 2) counsel presented sufficient evidence to demonstrate that he did not operate under a conflict of interest when he undertook the representation of creditor).

10th Circuit Court of Appeals, October 28, 2009
In re Riebesell, --- F.3d ---, 2009 WL ------------- (5th Cir. 2009)(debt of attorney debtor to his former client not discharged where: 1) the parties had an attorney-client relationship during the relevant period under Colorado law; 2) the loans to debtor attorney were not "standard commercial transactions" exempt from the requirements of Colo. R. Prof'l Conduct 1.8(a); and 3) the bankruptcy court's finding that defendant had the requisite intent to deceive plaintiff was not clearly erroneous)

Transcript in Schwab v. Reilly

I'm finally getting a chance to read it.  You can access it here.   

Questions to the Trustee's Counsel:

JUSTICE GINSBURG: The question is whether -- the question is whether the trustee had to make an objection, when it seems really as clear as could be that what she was seeking was to keep her equipment, not to get the -- some monetary equivalent for it.

JUSTICE KENNEDY: What -- what -- what you are doing there, you -- you argue that ambiguities are construed against the person that made the form. I think that's a little harsh when the trustee is a repeat player and knows -- and know the rules.

Questions to Debtor's Counsel:

JUSTICE BREYER: How long do these creditors meetings last? How easy are they to postpone? How -how easy is it for the trustee to get the information together during the creditors meeting, et cetera, et cetera; where do I look to find out the answer to that question?

 JUSTICE SOTOMAYOR: Counsel, in -- what's interesting is that all of the circuits or most of the majority have not address -- announced the fixed rule. The rule they said is, it depends on the circumstances. And so it appears to me that most of the courts are saying to us, we don't want a default rule, because we have to see what has happened and see what has happened between the parties to determine in one situation rather than another what the intent was. It's not an irrational rule.  Why shouldn't we be considering that as an alternative? Because once we make an announcement like the one that you're proposing, it is an inducement to undervalue your property for a debtor because -- in the hopes that an overly worked trustee won't have either the time or opportunity or wherewithal to understand that the value is off and that they're going to lose something that the estate is entitled to.

October Filings Up

Total bankruptcy filings for October, 2009 were 130,200, up 3.7% from September, 2009 of 125,500; compared to 120,000 in August; 130,500 in July; 124,800 in June; 120,400 in May; 128,700 in April, 131,000 in March, 102,000 in February and 89,000 in January.

Total filings Jan through October, 2009; 1,211,300
Total filings Jan through October, 2008;   908,700
Total filings Jan through October, 2007;   687,000

I'm not sure this means things continue to get worse.  I am getting a lot of calls from people trying to hold off hoping to get a loan modification and slowly giving up.   

Supreme Court Grants Cert in Lanning

Boy, four bankruptcy cases in one term - so far!  The 10th Circuit opinion is here.  This is about what means "projected disposable income" in chapter 13.  Doesn't sound too tough, eh?  But the code is very specific about how to compute "disposable income" and that is by looking back to income for the past six months and then subtracting amounts from a bunch of charts - that is disposable income.  Do you take that amount and "project" it into the future, i.e., the net amount computed times x months?  Or do you ignore the computations and look to the future for the result?  Lanning says you ignore the computations  Kagenveama in the 9th Circuit says you do it the way the code says even though it gets you to a ridiculous result a lot of the time.  .