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October 9, 2009

Judge Rules that Spouses' Debts are Considered Separately for Eligibility for Chapter 13

Brief by my law clerk Roksana Moradi

In re Werts, --- B.R. ----, 2009 WL 2563468 (Bkrtcy.D.Kan.)

Issue:  Do the debt limitations for filing chapter 13 apply to a husband and wife separately even though they file a joint case?  Is the unsecured portion of secured debt treated as unsecured for eligibility purposes?  Was the conversion here from chapter 7 to chapter 13 in bad faith and therefore subject to dismissal?

Holding:  The debt limitations apply to the spouses separately.  The unsecured portion of secured debt is treated as unsecured for eligibility purposes.  Here there was no sufficient bad faith to justify dismissal of the chapter 13.

Judge Janice Miller Karlin,

Mr. and Mrs. Werts, had unsecured debts of $161,977.71 and $100,913.37, respectively.  They filed chapter 7 on June 16, 2008.  The debtors were also jointly liable on a second mortgage on their residence.  Further, the debt secured by that second mortgage exceeded the value of the house by $134,760.  Their schedules had numerous deficiencies which they corrected with various amendments (and blamed most on their attorney).  Plus Mr. Werts received a cash settlement from a business deal of $75,000 on October 31, 2008.  The debtors used the “$75,000 to pay some routine bills, make several advanced payments on their first and second mortgages ($21,535 and $7,124, respectively), make car payments ($5,995), buy new furniture for their house ($5,500), make deck repairs ($750), paint their house ($3,650), pay off an unsecured consolidation loan that was guaranteed by a friend and former employer of Mr. Werts ($12,235), pay attorney fees ($3,000) and take a ski vacation in Colorado ($4,117).”
In January of 2009, the UST filed an adversary proceeding objecting to Debtors' discharge pursuant to § 727(a)(2) and (4).  The UST also filed a Motion for Dismissal for Abuse under § 707(b)(3).  Three months later, with new counsel, the debtors “filed the motion to convert to Chapter 13. . . [that is] the subject of this order. 

The first issue for the court was whether the debtors qualified for chapter 13.  The Court stated that “this issue is governed, in part, by the answer to the following question: whether the $134,760 undersecured portion of Debtors' second mortgage should be considered unsecured debt for purposes of the § 109(e) debt limitation when another section of the Code, § 1322(b)(2), specifically requires that same debt to be treated as secured for plan confirmation purposes.  This second mortgage note is secured only by a security interest in Debtors' principal residence.”  The Court concluded “that the undersecured portion of a secured debt should be treated as an unsecured debt for § 109(e) debt limitation calculations.”

The Debtors argued in the alternative that “the §506 analysis should not be applied when the debt in question will be treated as fully secured by operation of law, specifically §1322(b)(2), which requires that a claim secured only by a security interest in the debtors' principal residence cannot be bifurcated and crammed down.”  The Court disagreed ruling that the application of §1322(b)(2) does not create an exception to the general rule and declined “to graft additional content onto § 109(e) that Congress did not choose to include, to wit, that the section does not apply to those debts that are truly undersecured, but that will be treated as fully secured for confirmation purposes.”

The debtors next argument was that because each of them, individually, had “unsecured debt less than $336,900, because not all of their unsecured debt is joint debt, they should be allowed to proceed as debtors in a Chapter 13 case. The UST objected saying §109(e) requires both spouse's debts to be considered together when determining whether they fall under the unsecured debt limit.” The parties did not provide ANY case law addressing this issue, and the Court was also unable to locate any cases directly on point.   The UST’s argument focused “ on the portion of the statute that reads ‘an individual with regular income and such individual's spouse ... that owe ... unsecured debts that aggregate less than $336,900’ to support its claim that all debts of both spouses must be combined for purposes of § 109(e).”  The Court found “that a more reasonable reading of the statute, and one that furthers the goal of encouraging Chapter 13 filings, is that the provision dealing with ‘an individual with regular income and such individual's spouse’ is intended to apply in those cases where the spouse could not otherwise be a Chapter 13 debtor, because he or she is not ‘an individual with regular income.’  If each spouse has regular income, and each spouse separately qualifies under the debt limits of §109(e), then each spouse should be entitled to file his or her own Chapter 13 case-even if the debts of both spouses together would exceed the debt limits.”  The Court further stated that “if a husband and wife can each file separate Chapter 13 proceedings, where their own individual debt is within the § 109(e) limits, the Court can think of no reason why a husband and wife could not file a joint petition, as authorized by § 302(b).” 

As to good faith, the Court ruled the “key inquiry” for courts attempting to ascertain a debtor's good faith ‘is whether the debtor is seeking to abuse the bankruptcy process.’ ”  The overwhelming majority of Courts have held that the party moving to dismiss or convert a case under § 1307(c) bears the burden of showing that the case was not filed in good faith.” The Court held that, “although a debtor bears the burden of proving that a plan was filed in good faith under § 1325(a), the burden of showing that a case was filed in bad faith so as to require conversion or dismissal under § 1307(c) falls on the party seeking such conversion or dismissal.”
The UST alleged that the deficiencies in the schedules were evidence of bad faith.  The court said it was “troubled by the actions of each Debtor and [their prior attorney] regarding the errors and omissions on the schedules, the Court does not find that those actions rise to the level of bad faith that would render Debtors ineligible for Chapter 13 relief.  Critical to this finding is the testimony of the Chapter 7 Trustee, who testified that once her initial concerns about the schedules were discussed with counsel, Debtors were at all times cooperative in providing follow-up documentation about all bank accounts and other identified issues, they answered all of her questions in a timely fashion, and, most importantly, that she never felt Debtors were being deceptive or uncooperative in their responses to her.”

The Court also found “that Debtors' actions in disposing of the $75,000 payment from the EB buyout in the 7-8 months prior to the filing of the case do not rise to the level of bad faith. Typically, engaging in pre-bankruptcy planning by converting non-exempt assets into exempt assets, without more, does not constitute bad faith.  However, the UST contends that bad faith does exist here because Debtors accumulated a fairly significant amount of unsecured debt in connection with the EB business, itself, and should have used the $75,000 payment to repay some of that debt, rather than using it to pay down their mortgage or for a family vacation.  In response, Debtors testified that they did in fact intend to use the EB payment to repay some of their business debt. However, [their previous attorney] specifically advised them to use the money in a fashion that would best benefit their future financial fresh start, rather than that of their creditors or the bankruptcy estate.  “Debtors stated that they simply followed the pre-bankruptcy planning advice offered by their attorney, and were not acting in bad faith.”

In conclusion the Court held that “Debtors' actions prior to filing this case did not rise to a level of bad faith that would prevent conversion, the Court finds that the case would not be subject to dismissal or conversion under 1307(c).”

October 9, 2009 in Other Circuit Briefs | Permalink | Comments (1) | TrackBack

Article on Judge Peter Carroll

From the California Bar, Board of Legal Specialization.

October 9, 2009 in Current Affairs | Permalink | Comments (0) | TrackBack

October 7, 2009

cdcbaa Program October 17, 2009



October 17, 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.

Total Hours: 2 hours

This is a two-part program:

"Stripping Liens: Motion vs. Adversary”

The Honorable Judge Vincent P. Zurzolo
Chief Judge, Bankruptcy Court, Central District of California

The Honorable Judge Alan M. Ahart
Bankruptcy Court Judge, Central District of California

"How to Prepare a Perfect Chapter 13 Plan”

Aki Koyama, Esq
Staff Attorney for Chapter 13 Trustee, Kathy A. Dockery

Melissa Besecker, Esq
Staff Attorney for Chapter 13 Trustee, Elizabeth F. Rojas
*CDCBAA certifies that an application is pending for approval for this activity for Bankruptcy Specialization credit by the State Bar of California

October 7, 2009 in Programs | Permalink | Comments (2) | TrackBack

The Big Six Oh

Please ignore the last post:  I had'nt had my coffee yet. 

October 7, 2009 | Permalink | Comments (1) | TrackBack

The Big Six Oh

So now you know.  Today I am finishing my 60th trip around the sun.  I stole that quip from my idol, Carl Sagan, who went to that great physics lab in the sky in 1996 at age 62, way too young.  Turning 30 blew me out; 40 and 50 didn't bother me at all, kids growing up and all.  But 60 is pretty tough.  I'm way too young to be 60. 

Oh to be a child again.
Oaks from acorns grew
One and one make two
I believed it all
Didn't you?

The Poco Seco Singers, 1967

October 7, 2009 in Current Affairs | Permalink | Comments (0) | TrackBack

October 6, 2009

Filings in September 2009 Remain Steady

Total bankruptcy filings for September, 2009 were 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. 

October 6, 2009 in Bankruptcy Statistics | Permalink | Comments (0) | TrackBack

Circuit Court of Appeals Cases from Last Week

2nd Circuit Court of Appeals, October 01, 2009
Orange Cty. Water Dist. v. Unocal Corp., --- F.3d ---, 2009 WL ------------ (2nd Cir. 2009)(petition for a writ of mandamus rejected because any challenge to the district court's subject matter jurisdiction was best addressed on direct appeal, rather than by a writ of mandamus)

5th Circuit Court of Appeals, September 29, 2009
In the Matter of: Pac. Lumber Co., --- F.3d ---, 2009 WL ------------ (5th Cir. 2009)(confirmed Chapter 11 reorganization plan affirmed in part where: 1) certain noteholders did not preserve their challenge to the plan's treatment of their secured claims; and 2) the plan did not create a substantive consolidation. Order reversed in part where: 1) the equitable mootness doctrine did not bar review of issues raised on appeal concerning the treatment of noteholders' secured claims, it did not bar re-evaluation of whether their administrative priority claim was correctly calculated, and it did not bar review of the plan's release clauses insulating multiple parties from liability; and 2) the bankruptcy court may have made a mathematical error and deprived noteholders of a post-petition administrative priority claim)

6th Circuit Court of Appeals, October 02, 2009
Tam Travel, Inc. v. Delta Airlines, Inc., --- F.3d ---, 2009 WL ------------ (6th Cir. 2009)(plaintiff-travel agencies' lawsuit under the Sherman Antitrust Act alleging a conspiracy to eliminate the practice of paying base commissions by various airlines, district court's dismissal of the amended complaint is affirmed, as the plaintiffs' claims against United Airlines were discharged in bankruptcy and the claims against the remaining defendants failed to allege sufficient facts to plausibly suggest a prior illegal agreement)

9th Circuit Court of Appeals, October 01, 2009
Sternberg v. Johnston, --- F.3d ---, 2009 WL ------------ (9th Cir. 2009)(no viloation of the automatic stay where plaintiff violated his duty to ensure that his actions did not prolong a violation of the stay that resulted from a state court motion seeking relief against defendant that plaintiff filed prior to the bankruptcy. However, the damages limited to only those attorney's fees related to enforcing the automatic stay and remedying the stay violation, not the fees incurred in prosecuting the bankruptcy adversary proceeding in which he pursued his claim for those damages)

9th Circuit Court of Appeals, October 02, 2009
In re Greene, --- F.3d ---, 2009 WL ------------ (9th Cir. 2009)(perfection of a homestead exemption does not constitute acquisition of a property interest for purposes of 11 U.S.C. section 522(p)(1), and thus the debtor's homestead was not subject to the $125,000 cap contained in section 522(p))

10th Circuit Court of Appeals, September 30, 2009
In re Corey, --- F.3d ---, 2009 WL ------------ (10th Cir. 2009)(debtor barred from defending non-dischargeability actkion by issue preclusion because the issue of his fraud was actually litigated in the prior case)

Thanks to Findlaw.com. 

October 6, 2009 in Other Circuit Briefs | Permalink | Comments (0) | TrackBack

October 5, 2009

Avoiding Liens in Chapter 7

This is such a good comment that I wanted to post it.  From Brian Rookard:

Professor Scarberry said: "The idea that 506(d) means something different in chapter 7 than in chapter 13 is not, in my view, tenable. The same words, the same code section, made applicable by the code to both chapters, but interpreted differently in different chapters?"

See my "comment" in the original thread.  There is no difference between Chapter 7 and 13, because 506(d) does not serve to strip the lien in Chapter 13 either.  It is 1327(c) which vests the property free and clear of claims *and interests* that does the heavy lifting.  As I said, see In re Claar, 368 B.R. 670 (Bankr. S.D. Ohio, 2007); In re Hill, 304 B.R. 800 (Bankr. S.D. Ohio, 2003); for the Chapter 12 analog see In re Harmon, 101 F.3d 574, 581 (8th Cir., 1996).

Brian's comment from the original thread.

I work in the Sixth Circuit, I'm a consumer bankruptcy attorney, and I'm convinced that it is correct. While Dewsnup seems an odd construction of 506(d) at first, when you go back and look at the legislative history and the reports, the Dewsnup construction was in line with what was intended. 506(d) cannot be used to "strip" liens, and it is not the section that is used in the reorganization chapters to strip liens. For example, in Chapter 13 cases, it is 1327(c) which vests the property in the debtor free and clear of claims and interests. See In re Claar, 368 B.R. 670 (Bankr. S.D. Ohio, 2007); In re Hill, 304 B.R. 800 (Bankr. S.D. Ohio, 2003); for the Chapter 12 analog see In re Harmon, 101 F.3d 574, 581 (8th Cir., 1996). 506(d) goes to the claims allowance process. Is a claim allowed? Is it secured? To the extent that it is not "allowed," then the lien will be void. Thus, in order to avoid a lien under 506(d) one would actually have to object to a claim and get it disallowed. Then it would be void. Courts that hold that 506(d) can be used to just strip liens, and where the claim has been allowed, unfortunately, got it wrong, IMHO. While Dewsnup seems odd, I have to admit that it agrees with what was originally intended by Congress, and is the correct decision.

Brian Rookard

October 5, 2009 in Current Affairs | Permalink | Comments (2) | TrackBack

Avoiding Liens in Chap 7 - Response from Prof. Scarberry

If there is a free link someone could provide to the unpublished Montero order ("In re Montero, No. 6:08-bk-10797-KSJ (M.D. Fla. 5/27/09, Docket Entry 37)" as cited by Dan) that would be much appreciated. (Or I'd be happy to receive a pdf file or something like that as an attachment.)
The unpublished opinion in In re Arrieta, 2009 WL 1789576, Bankr. N.D. Ill., June 22, 2009, notes that
"However, of all the cases which have permitted the 'stripping off' of a second mortgage, only the Howard court has not been abrogated by a later decision."

And in fact Howard did not involve stripping off a mortgage but rather a nonconsensual judgment lien. The court in Howard relied rather heavily on the distinction that the lien in Dewsnup, by contrast, was consensual. The court in Howard thus refused to follow decisions that applied Dewsnup to nonconsensual liens. That was not the court's only basis for distinguishing Dewsnup, but it is not at all clear that the court in Howard would have reached the same result had the lien been consensual.

With regard to the Third Circuit, I wouldn't go so far as to say that the Third Circuit in McDonald (in a case dealing with chapter 13) expressly left the chapter 7 issue open; it did not have the issue before it and thus of course did not address the issue. By the way, if you are having trouble finding McDonald, the cite is 205 F.3d 606, not 605.
The Third Circuit noted that what mattered primarily to it was the discharge of personal liability in a chapter 7 case:
[Begin quote]
Because Dewsnup allowed the creditor in Chapter 7 to maintain a claim against the property for the unsecured balance, the decision prevented a Chapter 7 debtor from benefitting from an increase in the value of the home. But what matters for our purposes is that even under Dewsnup the debtor is still discharged of personal liability, so Dewsnup does not eliminate the incentive to switch from Chapter 13 to 7 in order to escape debt on a home that far exceeds the home's value. A debtor in the McDonalds' position would still view Chapter 7 as a better alternative than Chapter 13.

It is also worth noting that courts are split on whether Dewsnup's rejection of lien-stripping in Chapter 7 applies to a wholly unsecured lien, although of course *615 we express no view on that dispute. Compare In re Yi, 219 B.R. 394 (E.D.Va.1998), and Howard v. National Westminister Bank, 184 B.R. 644 (Bankr.E.D.N.Y.1995), with In re Laskin, 222 B.R. 872 (9th Cir.BAP 1998).

[End of quote]
A comment, really just an aside, that it is "worth noting" that courts are split on an issue, in a case in which the court did not have the issue even remotely before it -- and thus of course "express[ed] no view" -- doesn't seem to tell us much.
The idea that 506(d) means something different in chapter 7 than in chapter 13 is not, in my view, tenable. The same words, the same code section, made applicable by the code to both chapters, but interpreted differently in different chapters?  Even a court that treats the same words in different places in a section to mean different things (which the S. Ct. has been criticized for supposedly doing in Dewsnup) couldn't go along with that.
What I think may be a live issue, however, is whether a *nonrecourse* mortgage can be stripped down or stripped off under section 506(d) in a chapter 7 case, because in a chapter 7 case the deficiency claim may be disallowed (most of us would say of course would be disallowed) even as an unsecured claim should its allowability be at issue. Dewsnup does seem to say that if a provision of the Code disallows a claim, then the lien is void for the disallowed amount. I posed that question a while back and didn't get any response, which is fine; I know list members are busy. But I think it is an important question.
Mark S. Scarberry
Pepperdine Univ. School of Law
(in London for fall semester 2009)

October 5, 2009 in Current Affairs | Permalink | Comments (2) | TrackBack