June 27, 2009
9th Circuit Rules that Assets in "Single Owner" Corporate Pension Not Exempt under California Law
Cunning v. Rucker (In re Rucker), ---- F. 3d ----, 2009 WL ---------(9th Cir. June, 2009)
Issue: Did the bankruptcy court err when it found that the debtor’s contributions to a corporate pension plan were primarily made to shelter assets and avoid paying debts and therefore not exempt?
Holding: No. The test is one of clear error and the bankruptcy court did not commit clear error. The court should look to the totality of the circumstances when determining the debtor’s intent in making transfers to a corporate pension plan at least when seeking to exempt the assets under California.
Appeal from the district court
The debtor transferred assets of about $1 million to a corporate pension plan over a period of a few years. At the time of the transfers, he had a judgment against him for about $6 million. The corporations were “wholly owned” by the debtor and he was the only employee of each. He did not make any withdrawals from the plans during these years however he “overfunded” the plans to about 20% of the total assets per IRS regs. The contributions equaled or exceeded his compensation by the entities for those years. Rucker filed chapter 7 and claimed the assets exempt under CCP 704.115(b), “which exempts ‘all amounts held, controlled, or in process of distribution by a private retirement plan.’ [The judgment creditor] objected to the exemption, claiming that the Plans were not exempt because they were not designed or used primarily for retirement purposes.” The bankruptcy court conducted a trial and “determined that the Plans were not exempt because Rucker designed and used the Plans primarily to shield his assets from Cunning. Instrumental in the bankruptcy court’s reasoning were the facts that Rucker overfunded the Plans, that Rucker took at least one constructive rent payment, and that Rucker did not accurately disclose his contributions as required by IRS regulations.” The district court reversed.
The 9th Circuit reversed the district court and reinstated the ruling of the bankruptcy court that the funds were not exempt. It said that 9th Circuit “precedent establishes that ‘whether a plan is designed and used for retirement purposes is a question of fact that we review for clear error.’” “In deciding whether a plan is designed and used primarily for retirement purposes, ‘[a]ll factors are relevant; but no one is dispositive.’ Many factors previously considered by us and by California courts concern the extent of a debtor’s withdrawals or loans from the plan. Courts have also considered a debtor’s subjective intent in deciding whether the plans have a retirement purpose.”
“We conclude that the bankruptcy court did not commit clear error in determining that Rucker used his Plans primarily to hide assets from Cunning, and not primarily for retirement. Once we articulate the totality of circumstances standard, and recognize that a bankruptcy court decision on the fact-intensive issue of a retirement plan’s primary purpose is reviewed only for clear error, we conclude that the bankruptcy court’s initial decision on that issue must be here reaffirmed and the district court’s contrary conclusion reversed.”
June 26, 2009
Interim Final Rule for Mortgage Loans Modifications
Board of Governors of the Federal Reserve System
For Immediate Release
June 26, 2009
Agencies Issue Interim Final Rule for Mortgage Loans Modified Under the Making Home Affordable Program
The federal bank and thrift regulatory agencies today invited public comment on an interim final rule that provides that mortgage loans modified under the U.S. Department of the Treasury's Making Home Affordable Program (MHAP) will retain the risk weight applicable before modification.
On March 4, 2009, the Treasury announced guidelines under the MHAP to promote sustainable loan modifications for homeowners at risk of losing their homes to foreclosure. The interim final rule would provide a common interagency capital treatment for mortgage loans modified under MHAP. For example, mortgage loans risk weighted at 50 percent prior to modification would continue to be risk weighted at 50 percent after modification provided they continue to meet other applicable criteria.
The interim final rule, by the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Office of Thrift Supervision, will take effect upon publication in the Federal Register, which is expected shortly. Public comments must be submitted within 30 days after publication in the Federal Register.
June 25, 2009
Loan Modification Fair this Saturday
Neighborhood Legal Services of Los Angeles County is assisting New Economics for Women with homeowner Loan Modification Fair in the San Fernando Valley this Saturday June 27, 2009. It will be at Panorama City High School from 10 am to 2pm. We need pro bono attorneys to meet briefly with the homeowners and then negotiate on their behalf with the bank officials. We expect 60 bank officials to be on hand to do the modifications.
Directing Attorney of Pro Bono Project/Law Clerk Recruitment
Neighborhood Legal Services of LA County
1104 E. Chevy Chase Dr.
Glendale, CA 91205
June 24, 2009
Harvard Note on Hersh v. United States - DRA Constitutional Law Issue
Thanks to a reader. The article BANKRUPTCY LAW — FIFTH CIRCUIT APPLIES DOCTRINE OF CONSTITUTIONAL AVOIDANCE TO UPHOLD ATTORNEY SPEECH RESTRICTIONS IN BANKRUPTCY CODE. — Hersh v. United States ex rel. Mukasey, 553 F.3d 743 (5th Cir. 2008) can be accessed here.
"Where [the doctrine of constitutional avoidance] once applied only in cases of ambiguity, it is now occasionally misapplied in cases where there is no serious doubt as to the statute’s meaning. In these latter cases, judges simply rewrite unconstitutional legislation to make it constitutional. Enter Section 526(a)(4) of the Bankruptcy Code." Pretty good stuff.
"The Fifth Circuit stands alone in its interpretation of Section 526(a)(4); every other court to consider the issue has held the provision unconstitutional. The Hersh court’s evasion of such a result using
constitutional avoidance was inappropriate."
"The proper course of action is simply to strike Section 526(a)(4) from the Bankruptcy Code. The provision’s meaning is clear and is clearly unconstitutional."
June 23, 2009
UST Report on Criminal Referrals in FY 2008
You can access the report here. The UST made 1.471 criminal referrals during the year of which criminal charges were filed in 21 cases.
June 22, 2009
Circuit Court of Appeals Cases from Last Week
3rd Circuit Court of Appeals, June 17, 2009
In re Harvard Indus., Inc., --- F.3d ---, 2009 WL ------ (3rd Cir 2009)(distributor's inability to resell a defective product does not qualify as "damage to or loss of the use of property" under I.R.C. section 172(f)(4)(A); but Debtor's pension plan payments qualified as specified liability losses)
3rd Circuit Court of Appeals, June 19, 2009
Binder & Binder, P.C. v. Handel, --- F.3d ---, 2009 WL ------ (3rd Cir 2009)(Debtor's debt to Plaintiff law firm discharged where the government had not waived its sovereign immunity for attorney's fee claims in social security disputes, and thus Defendant Social Security Administration was not liable for the fees incurred by Debtor)
7th Circuit Court of Appeals, June 17, 2009
In re Jafari, --- F.3d ---, 2009 WL ------ (7th Cir 2009)(gambling debt is an allowed claim where: 1) Wisconsin courts, applying their forum's choice-of-law analysis, would apply Nevada law to govern the claims; and 2) the claims were enforceable under Nevada law)
9th Circuit Court of Appeals, June 18, 2009
Wirum v. Warren (in re Warren), --- F.3d ---, 2009 WL ------ (9th Cir 2009)(Bankruptcy Court can waive section 521(i)(1)'s requirement that a debtor file a list of creditors within 45 days of filing a bankruptcy petition even though the deadline had passed and per section 521(i)(1) the case was automatically dismissed)
11th Circuit Court of Appeals, June 17, 2009
In re Kim, --- F.3d ---, 2009 WL ------ (11th Cir 2009)(Trustee may not avoid lien where the affidavit submitted by the closing attorney attested to the execution of the security deed at issue)
11th Circuit Court of Appeals, June 18, 2009
Bank of Am., N.A. v. Mukamai, --- F.3d ---, 2009 WL ------ (11th Cir 2009)(payments made from the Debtor's other credit card accounts for debt consolidation purposes are avoidable preferences since they are a "transfer[s] of an interest of the debtor in property" under section 547(b))
Thanks to Findlaw.com.
9th Circuit Rules that Ch 7 Case Automatically Dismissed under Section 521(i)(a) is not Automatically Dismissed if the Bankruptcy Court Waives the Duty to File Schedules Even After the Automatic Dismissal
Wirum v. Warren (In re Warren), ---- F. 3d ----, 2009 WL 1694188 (9th Cir. June, 2009)
Issue: May the bankruptcy court waive the duty of the debtor to file schedules thus preventing the chapter 7 case from being automatically dismissed under 521(i)(1) even though the 45 days set forth in 521(i)(1) has elapsed and the case presumably therefore has been “automatically dismissed”?
Appeal from the district court.
Judge T.G. Nelson
The debtor filed chapter 7 as a response to the state of California attempting to collect past due child support. The debtor apparently filed only the emergency forms and not the remainder. The court warned the debtor and set a hearing to consider dismissal and sanctions. Immediately before the hearing, the chapter 7 trustee advised the court there may be assets to administer and asked the court not to dismiss the case and the court agreed. Later, the debtor filed a motion to dismiss arguing that the 45 days to file the remainder of the schedules under Section 521(i)(1) had run and therefore the court was required to dismiss. Section 521(i)(1) says that if the debtor does not file the required schedules within 45 days, the case “’shall be automatically dismissed effective on the’ forty-sixth day.” The trustee argued that the schedules required to be filed under 521(a)(1) were subject to the proviso “unless otherwise ordered by the court.” The bankruptcy court denied the motion to dismiss, ordered that the remainder of the schedules need not be filed, and the debtor appealed. The district court reversed saying that the dismissal was mandatory.
The 9th Circuit Court of Appeals reversed the district court and upheld the refusal to dismiss the case. The Court noted that there is no deadline in 521(a)(1) to “order otherwise.” It said that the language of 521(i)(1) is ambiguous with respect to whether, under 521(a)(1), the court may “order otherwise” after the 45 days has elapsed. “Given the ambiguity in the statutory language, we must ‘evaluate the alternative readings in light of the purpose of the statute.’” The Court pointed out that the “order otherwise” language predated BAPCPA. Congress did not limit the power of the court to “order otherwise” when it provided in BAPCPA that the case would be automatically dismissed. Plus “Congress’s core purpose in enacting BAPCPA was to prevent abusive bankruptcy filings.” The court acknowledged that its ruling was in the minority but said that its reading of the code was necessary to prevent debtors from “manipulating the system.”
June 21, 2009
Travelers Indemnity v. Bailey Brief
Travelers Indemnity Co v. Bailey, 557 U.S. ---, 2009 WL 1685625 (2009)
Issue: Did an injunction entered by the bankruptcy court restrain the filing of the suits here? Did the bankruptcy court have subject matter jurisdiction to enter the injunction and if not, can the injunction be collaterally attacked?
Holding: Yes and the injunction may not be collaterally attacked here.
Justice David Souter for 7-2 court,
Stevens dissented with Ginsburg joining
The 1986 plan of reorganization of Johns-Manville Corporation (“Manville”) enjoined “certain lawsuits” against Travelers, the debtor’s insurer. Manville had been sued by many people for asbestos related injuries leading up to the bankruptcy filing. Its insurance companies agreed to pay millions of dollars into a trust to pay injuries but required a full release as part of the payment. The injunction in the plan (the “1986 Order”) provided that
“upon the insurers’ payment of the settlement funds to the Trust, ‘all Persons are permanently restrained and enjoined from commencing and/or continuing any suit, arbitration or other proceeding of any type or nature for Policy Claims against any or all members of the Settling Insurer Group.’ The Insurance Settlement Order goes on to provide that the insurers are ‘released from any and all Policy Claims,’ which are to be channeled to the Trust. The order defines ‘Policy Claims’ as ‘any and all claims, demands, allegations, duties, liabilities and obligations (whether or not presently known) which have been, or could have been, or might be, asserted by any Person against . . . any or all members of the Settling Insurer Group based upon, arising out of or relating to any or all of the Policies.’”
The plan and injunction was affirmed by the District Court and the 2nd Circuit Court of Appeals.
Ten years later, various plaintiffs sued Travelers seeking “to recover from Travelers, not indirectly for Manville’s wrongdoing, but for Travelers’ own alleged violations of state law.” The gravamen of the new claims was that Travelers violated state law by its “influence” over “Manville’s purported failure to disclose” what it knew about the evils of asbestos. Travelers went back to the bankruptcy court for further orders seeking to stop this new litigation. Travelers argued that what it knew about asbestos it learned from Manville and therefore the new actions arose out of or were related to the policies. Travelers then reached a new settlement with the plaintiffs, and the bankruptcy court, as part of the new settlement, entered new orders “clarifying” the 1986 Orders. “Finding that the ‘claims against Travelers based on such actions or omissions necessarily ‘arise out of’ and [are] ‘related to’ the insurance policies, which compelled Travelers to defend Manville against asbestos-related claims, the Bankruptcy Court held that the Direct Actions ‘are—and always have been—permanently barred’ by the 1986 Orders.”
The District Court affirmed but the Court of Appeals reversed. The parties appealing argued that the new orders expanded the 1986 Orders and went beyond the jurisdiction of the bankruptcy court. “The Court of Appeals held that the Bankruptcy Court mistook its jurisdiction when it enjoined ‘claims brought against a third-party non-debtor solely on the basis of that third-party’s financial contribution to a debtor’s estate,’ because ‘a bankruptcy court only has jurisdiction to enjoin third-party non-debtor claims that directly affect the res of the bankruptcy estate.’”
The Supreme Court reversed the 2nd Circuit. “The question is whether the [1986 Orders] bars state-law actions against Travelers based on allegations either of its own wrongdoing while acting as Manville’s insurer or of its misuse of information obtained from Manville as its insurer.” “Travelers candidly admits that [the new claims] seek damages from Travelers that are unrelated to the policy proceeds.” But the Court rejected the argument that the new actions were not described or covered by the 1986 Order. “[T]his simply is not what the 1986 Orders say.” The Court ruled that the 1986 Orders became final a long time ago and therefore even the bankruptcy court’s subject matter jurisdiction could not be collaterally attached. The appeals of the 1986 Orders argued or at least could have argued (or could have been raised by the court sua sponte) that the bankruptcy court had no jurisdiction and those arguments were rejected. “The willingness of the Court of Appeals [here] to entertain this sort of collateral attack cannot be squared with res judicata and the practical necessity served by that rule. ‘It is just as important that there should be a place to end as that there should be a place to begin litigation,’ Stoll v. Gottlieb, 305 U. S. 165, 172 (1938), and the need for finality forbids a court called upon to enforce a final order to ‘tunnel back . . . for the purpose of reassessing prior jurisdiction de novo.’” “Almost a quarter-century after the 1986 Orders were entered, the time to prune them is over.”
The dissent of Stevens focused on the terms of the 1986 Order and concluded that the language did not cover the new actions and that if it did, it exceeded the bankruptcy court’s jurisdiction. The interpretation that it covered the new actions was not appealed and could therefore be collaterally attacked. “In my view, the judgment of the Court of Appeals was correct. The 1986 Insurance Settlement Order did not bar independent actions, and the Bankruptcy Court lacked any basis for enjoining those actions in 2004. The independent actions have no effect on the bankruptcy estate, and ‘bankruptcy courts have no jurisdiction over proceedings that have no effect on the debtor.’”
My book, Bankruptcy Jurisprudence from the Supreme Court, with briefs of 121 Supreme Court cases since 1819 may be purchased on Amazon.com.