BankruptcyProf Blog

Trustee's Reply Brief in Lanning

Jan Hamilton has filed his Reply Brief in Hamilton v. Lanning.  You can access it here. 

FDCPA Program Tomorrow at Southwestern Law School

Don't forget the program tomorrow - Southwestern Law School.

Here is a request for cert being considered by the Supreme Court:

Title: Javitch, Block & Rathbone, LLP v. Hartman
Docket: 09-606
Issue: (1) Whether various provisions of the Fair Debt Collection Practices Act are unconstitutional as applied to literally true but potentially misleading representations in pleadings under the First Amendment, Fifth Amendment, and the Commerce Clause; and (2) whether evidence that a debt collector acted in good faith and reasonably under the circumstances qualifies for the FDCPA’s “bona fide error” defense.

For the briefs go to scotusblog.com. 

Great Comments from Alex Kozinski

I remember seeing a poster some time ago that said:  "the only reason I hang around here is to see what happens next."  I feel like the best part of continuing to practice law is to see what Judge Kozinski says next.  Take a look at USA v. Lemus.

Kozinski writes in a dissent to an order denying a hearing in banc :   

The panel goes to considerable lengths to approve a fishing expedition by four police officers inside Lemus’s home after he was arrested just outside it. The opinion misapplies Supreme Court precedent, conflicts with our own case law and is contrary to the great weight of authority in the other circuits. It is also the only case I know of, in any jurisdiction covered by the Fourth Amendment, where invasion of the home has been approved based on no showing whatsoever. Nada. Gar nichts. Rien du tout. Bupkes.

Did I mention that this was an entry into somebody’s home, the place where the protections of the Fourth Amendment are supposedly at their zenith?

Thanks to my friend Scott Clarkson for this. 

Top Five Bankruptcy Article Downloads

1    Assessing the Probability of Bankruptcy
Stephen A. Hillegeist , Elizabeth K. Keating , Donald P. Cram and Kyle G. Lundstedt
INSEAD , Harvard University - John F. Kennedy School of Government , Independent Author and VaRisk, Inc.
Date Posted: May 3, 2002
Last Revised: November 17, 2003
Working Paper Series
2010 downloads

2    Misbehavior and Mistake in Bankruptcy Mortgage Claims
U of Iowa Legal Studies Research Paper No. 07-29, Texas Law Review, Vol. 87, 2008
Katherine M. Porter
University of Iowa - College of Law
Date Posted: November 7, 2007
Last Revised: August 14, 2009
Accepted Paper Series
1787 downloads

3    Have Financial Statements Become Less Informative? Evidence from the Ability of Financial Ratios to Predict Bankruptcy
William H. Beaver , Maureen F. McNichols and Jung-Wu Rhie
Stanford University , Stanford University and Stanford University - Graduate School of Business
Date Posted: February 2, 2005
Last Revised: May 22, 2008
Working Paper Series
1717 downloads

4    Bankruptcy Prediction With Industry Effects
Sudheer Chava and Robert A. Jarrow
Texas A&M University and Cornell University - Samuel Curtis Johnson Graduate School of Management
Date Posted: October 20, 2001
Last Revised: July 21, 2009
Working Paper Series
1607 downloads

5    Do Bankruptcy Codes Matter? A Study of Defaults in France, Germany and the UK
EFA 2005 Moscow Meetings Paper, ECGI - Finance Working Paper No. 89/2005, WFA 2005 Portland Meetings Paper, AFA 2005 Philadelphia Meetings Paper
Sergei A. Davydenko and Julian R. Franks
University of Toronto - Finance Area and London Business School
Date Posted: January 5, 2005
Last Revised: September 28, 2006
Working Paper Series
1564 downloads

The articles can be retrived for free here.  
 

Combined and Streamlined Disclosure Statement and Chapter 11 Plan

The judges in the San Fernando Valley have prepared and posted a greatly streamlined Disclosure Statement and Plan of Reorganization for use in small individual chapter 11 cases.  You can acess it here in Word format.  It is on the court website in WP format also.  Look under Judge Geraldine Mund. 

Comments on Lanning

I have submitted my article on Lanning to the ABA Preview magazine. It will be published I believe at the end of this month.  I knew I was in trouble when I sent a draft copy to one of the local chapter 13 trustees and her comment was that it was perfect.  My buddy, fellow debtor bankruptcy attorney, and resident bankruptcy genius, Peter Lively, had other thoughts.  Peter was the attorney for the debtor in the companion case argued with Kagenveama.  Here are his comments on my article and on Lanning:

    Jon, I think this article is a great opportunity to show how the Supreme Court hasn't been given the whole picutre.  The Ch13 T has already won the battle by limiting the issue presented only to the computation of a plan payment during a predetermined plan duration.  This is essentially an 1329 modification issue.  It's unfortunate that the Supreme Court isn't being presented with the more difficult question presented to the 9th Circuit.
 
    I.  The Real Issue:
 
    The issue is "how did the law change from requiring a 36 month plan with the court's discretion over a budget." 
 
    My argument is that the best interpretation of BAPCPA is that it essentially left unchanged the debtor's 36 month plan duration requirement coupled with the court's discretion over household expenses and ADDED a mechanical test ONLY to determine a fair amount general unsecured creditors of above-median-income creditors should receive.  Remember 1325(b)(4) [ACP determination] only exists to modify 1325(b)(1)(B) derivation of the amount to be received by the unsecured creditors [general since priority is deducted above the line in the formula; this is straight statory language and a departure from NACBA's political position].  Therefore, what we have now is a base requirement of 36 months and an objective fairness test for general unsecured creditors of above-median-income debtors to receive at least 60 x PDI (an objective test) before a judge can confirm a plan.

 
    The Ch13 T already won the battle in Lanning because he has the court missing the point entirely by presuming a 5 year duration for above-median-income debtors.  The rest is a no-brainer, go with I-J since we have 1329 anyway.
 
    If you don't interpret it this way, you get a debtor $1 above median stuck with 2 more years of duration than the debtor $1 below median.   
   
    II.   Public Policy:
 
    Remember my brief from Garcia:
 
   In addition to the argument presented above in favor of interpreting the new Code provisions as not mandating a five year plan for above-median-income debtors, such an interpretation promotes fairness in the bankruptcy system generally and promotes good public policy. The consequences of interpretation of ACP as durational would be to discourage debtors generally from earning more income for fear of becoming above-median-income debtors who would be punished for their better earnings and desire to pay creditors with two additional years of court administration before they can obtain a "Fresh Start."

    It is better public policy to provide people with an incentive to earn more income when faced with changed circumstances that result in financial difficulty and to allow debtors electing Chapter 13 over Chapter 7 to voluntarily pay some of their debts, than it is to provide people with a disincentive to earn more money under those circumstances where doing so may result in the denial of a "Fresh Start" for five years. An above-median-income debtor should not be faced with servitude for 60 months and payment of all future actual disposable income during that duration without any hope of pre-payment through subsequent diligent efforts (second or third jobs), family contributions or hoped for windfalls. 

    A plan duration requirement, independent of an opportunity to pre-pay, will obviously deter all debtors from electing Chapter 13 to voluntarily pay their debts. Contrary to the well-funded political forces arguably influencing the BAPCPA and a media blitz focusing on fraudulent debtors, it has been established historically that most debtors are not fraudulent, but suffer from a variety of life’s unanticipated and unplanned for hardships.1 Sound public policy favors a system that encourages debtors to voluntarily pay some of their debt and a reasonable expectation of fairness to above-median-income debtors who elect to do so relative to their below-median-income brothers.

    Administration of Chapter 13 cases will be significantly less burdensome on all parties where a specific dollar amount is calculated under subsection 1325(b)(1)(B) to be paid over any feasible plan length up to five years. Chapter 13 cases are likely to be more successfully completed where debtors have the certainty and the incentive to pay the specific amount derived up-front as opposed to the punishment of a virtual debtor’s prison and disincentive to get ahead. 
 
Footnote:   "The honest desire of debtors to pay debts rather than go through liquidation and wholly defeat the claims of creditors was verified by the Report of the Bankruptcy Commission 40 years later [following Judge Thomas D. Thacher’s exhaustive study of the administration of bankruptcy throughout the United States in the late 1920s and early 1930s]. The Commission noted that the overwhelming majority of debtors were not crooks or dishonest, but victims of circumstances. Report on Bankruptcy Laws, H.R. Doc. No. 137, 93rd Cong. 1st. Sess. Part I, 45-46 (1973)." Norton Bankruptcy Law and Practice 2ND, Volume 5, Chapter 113, 113-4, 5.
 
    III.  Other Points
 
    Its not a MEANS TEST in Chapter 13.  That characterization also presupposes that duraiton is fixed at 5 years and ignores the statute requirement of calculating a fair total payment to Class 5.   
 
A couple more points:
 
For a decreasing average income debtor, NACBA's brief is the right approach since this debtor didn't belong in Ch13.  Alternatively, Jim listserve point should be highlighted.  101(10A) allows the court to determine CMI using a different period if the debtor doesn't file the form B22 with the petition.  Both are planning issues requiring some knowlege of the law (CMI calculation).
 
For increasing average income debtors, their plans are subject to 1329 modification and contribution of all disposable income during the duration they propose.  I just don't believe that there is a requirement of a 5 year plan duraiton except by election.  This pulls in the constitutional arguments and those cases are all about slavery and bondage, etc.  

Well, It's My Blog - Bragging About my Sons

My oldest son, Joshua P. Hayes is a CPA, tax partner at Eide Bailly's office in Phoenix.  This is an interview of him last week.  http://www.azfamily.com/news/consumer/Top-six-ways-to-avoid-an-audit-84521327.html

My youngest son, Cassidy Hunter Hayes, just got accepted to UCLA Law School, University of Irvine Law School, and Loyola Law School.  Congratulations - UCLA here he comes - I assume. 

Circuit Court of Appeals Cases from Last Week

7th Circuit Court of Appeals, February 19, 2010
Miller v. LaSalle Bank Nat'l Ass'n, --- F.3d ---, 2010 WL --------- (7th Cir 2010)(technical error in recorded mortgage not sufficient to avoid lien under Indiana law)

8th Circuit Court of Appeals, February 16, 2010
American Prairie Constr. Co. v. Hoich, --- F.3d ---, 2010 WL --------- (8th Cir 2010)(request to recuse judge denied, order approving settlement agreement reversed where the parties did not come to a meeting of the minds with respect to an essential term)

9th Circuit Court of Appeals, February 16, 2010
US v. Edwards, --- F.3d ---, 2010 WL --------- (9th Cir 2010)(Defendant's sentence and restitution order for bankruptcy fraud affirmed where: 1) collateral estoppel did not preclude the restitution order because, although compensation to defendant's victims was the general issue in a bankruptcy settlement, the issue was not identical to the issue in the criminal proceedings; and 2) the sentence was not substantively unreasonable because the district court did not abuse its discretion when it considered defendant's history and circumstances)

Thanks to Findlaw.com

Program Honoring Judge Maureen Tighe

San Fernando Valley Bar Association
Invites You to Attend Our Annual Judges’ Night Dinner

2010 SFVBA Judge of the Year
Honorable Maureen A. Tighe
United States Bankruptcy Court

Special Recognition to Judges
Shari K. Silver and Wendy L. Kohn

Thursday, February 25, 2010
Warner Center Marriott
21850 Oxnard Street, Woodland Hills

5:30 PM Reception
6:30 PM Dinner and Program
Gold Sponsor
Alternative Resolution Centers

$75 Ticket(s)
$750 Table(s) of ten*
* Please allow two seats for judicial officers.
Self-Parking $6 per car

To register go to Linda Temkin
Director of Education and Events
San Fernando Valley Bar Association
E-mail: events@sfvba.org

Inn of the Court Dinner

The Southern California Bankruptcy Inn of Court

Our fourth meeting will begin on Tuesday, March 9, 2010
With check-in and reception beginning at 6:30 p.m.
Dinner and pupillage presentation at 7:00 p.m.

Café Pinot
700 West 5th Street
Los Angeles, CA 90071-2026
Pupillage team 3 is scheduled to present this evening

Circuit Court of Appeals Cases from Last Week

5th Circuit Court of Appeals, February 10, 2010
In re TransTexas Gas Corp., --- F.3d ---, 2010 WL ---------------- (5th Cir. 2010) (severance payment to former CEO are fraudulent transfers, and the CEO's repayment of the amounts received did not constitute an insurable "Loss" under the insurance policy.)

11th Circuit Court of Appeals, February 08, 2010
Robinson v. Tyson Foods, Inc., --- F.3d ---, 2010 WL ---------------- (11th Cir. 2010)(In an employment discrimination action brought by debtor during the Chapter 13, summary judgment for defendant on the ground of judicial estoppel is affirmed where debtor failed to disclose her employment discrimination suit to the bankruptcy court, and thus took inconsistent positions under oath with the intent of misleading the court)

Solicitor General Amicus Brief in Lanning

Amicus Brief supporting the debtor and the "forward looking" test.  All the briefs can be found on the Scotus Wiki page for this case which I edit. 

January Filings

There were 102,600 total bankruptcy filings in January 2010.  This compares to 117,000 in December, 115,500 in November, and 130,200 in October, 2009.  The rest of the year is: 125,500 September; 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.  That is 12% less than December but 15% higher than January a year ago.    

Circuit Court of Appeals Cases from Last Week

6th Circuit Court of Appeals, January 25, 2010
B-Line, LLC v. Wingerter, --- F.3d ---, 2010 WL ---------- (6th Cir. 2010)(bankruptcy court reversed in holding that plaintiff's purchase of a creditor's claim against the debtors was not valid and bankruptcy court abused its discretion in determining that plaintiff's actions violated Rule 9011(b))

ABA Preview of the Supreme Court Magazine

This is a great publication I just discovered.  I am going to write the preview of the Lanning case, oral arguments coming in March. 

The current highlights: www.supremecourtpreview.org (on the right hand column)

The archives: http://www.abanet.org/publiced/preview/highlights.shtml

(Click on the link for “Complete PREVIEW Article” to get the url for the Preview for a specific case.)

Illinois Judge Rules Unemployment is not a Benefit Under Social Security and Therefore is part of CMI

Brief by my associate, Roksana Moradi 

In re Kucharz, 418 B.R. 635 (Bkrtcy C.D. Ill, Oct 2009)

Issue:  Is unemployment compensation a “benefit received under the Social Security Act” and thus excluded from a Chapter 13 debtor's current monthly income?

Holding: No.   

The Debtor, Jonathan Kucharz, received unemployment compensation totaling $1,230.00 during the six-month period preceding his bankruptcy filing.  He disclosed the unem-ployment compensation but claimed “it as a benefit under the Social Security Act that, as such, does not need to be included in the calculation of his current monthly income.” The Chapter 13 Trustee disagreed and objected.

Current monthly income (CMI) is defined in Section 101(10A) as follows:

(B) includes any amount paid by any entity other than the debtor (or in a joint case the debtor and the debtor's spouse), on a regular basis for the household expenses of the debtor or the debtor's dependents (and in a joint case the debtor's spouse if not otherwise a dependent), but excludes benefits received under the Social Security Act, payments to victims of war crimes or crimes against humanity on account of their status as victims of such crimes . . .

The Social Security Act of 1935 (hereinafter “SSA”) “incentivized the states to adopt conforming laws to pay unemployment insurance benefits to their involuntarily unem-ployed citizens.”  Congress “rejected the alternative of a uniform national unemployment insurance system, preferring instead to preserve the autonomy of the states to adopt their own systems.”  The incentive for the states to act was a financial one, provided through the Federal Unemployment Tax Act (FUTA), 26 U.S.C. §§ 3301-3311.   FUTA imposes an excise tax on wages paid by employers.  An employer, however, is allowed a credit of up to 90% of the federal tax for contributions the employer pays to a state fund established under a federally approved state unemployment compensation law.  In order to protect the employer contributions against loss, the states are required to invest the funds with the U.S. Treasury. Id. The states' funds are deposited and held in an ‘Unemployment Trust Fund.’ 42 U.S.C. § 1104.”

The court said the legislative history is “inconclusive” and that “the combination of the historical link to the SSA and the element of federal-state collaboration on behalf of un-employment compensation gives rise to the ambiguity.”  The court determined that the “inquiry is more specific than whether there is merely an historical link between the SSA and unemployment compensation.  Unemployment payments are excluded only if they are properly characterized as benefits received under the Social Security Act.  It is not sufficient that the benefits are merely ‘related to’ or ‘envisioned by’ or ‘induced by’ the SSA. More is required. They must have been received under the SSA.”

The Court found the preposition under to be both “the cause of and the key to unlock the mystery. In the context of its usage in Section 101(10A), ‘under’ means ‘required by’ or ‘in accordance with’…Neither the SSA nor FUTA requires the states to enact an unemployment insurance program.  As determined by the Supreme Court, inducement is not coercion, and the unemployment insurance programs that were adopted in all 50 states are truly state, not federal, programs.  Unemployment benefits are paid as required by state law, not by the SSA. Thus, a purely textual analysis favors the conclusion that unemployment benefits are not received under the SSA.”

The Court did not stop there, “because the language of the provision is ambiguous, it is appropriate to also consider a contextual analysis…Chapter 13 plan payments are based, in part, on the income that a debtor is expected to receive during the term of the plan. The CMI calculation uses a 6-month lookback period as an indicator of future income, in-cluding earnings from employment.  So the CMI formula serves a predictive function… Unemployment compensation is a temporary, partial substitute for wages lost due to the involuntary unemployment of one who intends to return to the workforce. The theory behind CMI is premised upon the assumption that their recent earnings history is a valid predictor of how much debtors are likely to earn in the future.  Since unemployment benefits replace lost wages, including those benefits in the CMI calculation is consistent with the predictive purpose of the provision.  Excluding those benefits would be inconsistent with the statute's policy and purpose.  The fallacy of using $0 during periods of temporary unemployment as a predictor of future earnings once the debtor is reemployed seems obvious.”   Thus the Court concluded that a “contextual analysis weighs in favor of including unemployment benefits in a debtor's CMI.”

The Court ruled that unemployment compensation, received in the six months before bankruptcy, must included in CMI.   

Great New Article from Ronald Mann and Katie Porter

Saving Up for Bankruptcy, Georgetown Law Journal, Jan. 10, 2010

This is a great article, especially since it agrees with what I have been saying forever.  Most consumers who file chapter 7 are driven to it by credit card collectors.  Chapter 13s of course are driven by foreclosure sales.

This Article looks beneath the raw bankruptcy numbers and examines the mystery of why so few of the consumers for whom bankruptcy would be economically valuable actually choose to file. What prompts the few who seek bankruptcy relief at any given moment to separate themselves from the mass who do not?

From the abstract:

Abstract:  
This paper probes the puzzle of why only a few of those for whom bankruptcy would be economically valuable ever choose to file. We use empirical evidence about the patterns of bankruptcy filings to understand what drives the point in time at which the filings occur, and to generate policy recommendations about how the bankruptcy and debt-collection system sorts those that need relief from those that do not.

The paper combines three kinds of data. First, quantitative data collected from judicial filing records that show the weekly, monthly, and annual patterns of bankruptcy filings. Second, 40 interviews with industry professionals (consumer and creditor attorneys, trustees, and judges) from five states (Georgia, Iowa, Massachusetts, Nevada, and Texas). The interviews probe why people file when they do and what distinguishes those that choose to file from those that hold off. Third, survey data from the 2007 Consumer Bankruptcy Project, the first nationally representative sample of bankrupt households. The survey data explores the struggles families endure before they choose to file.

The data support two empirical findings. The first is about the role of aggressive collection in motivating bankruptcy filings. Generally, apart from foreclosure-related filings, the emergency bankruptcy filing is largely a myth. Creditor collection activity does not force people into an immediate bankruptcy. On the contrary, it wears them down slowly but ineluctably, like water dripping on a stone. Second, the primary factor that affects the date on which people actually file is their ability to save up the money to pay their attorneys and filing fees. Thus, among other things, we see an annual peak shortly after families receive their tax refunds, and a semi-monthly peak related to the receipt of paychecks.

Finally, we build two important policy recommendations on those findings. First, we argue that the existing collection process is flawed by a prisoner’s dilemma that leads to excessive and wasteful “dunning” by creditors. Because each creditor has an incentive to be first in line to collect, and because the creditors can dun their debtors at little or no cost to themselves, creditors as a group naturally engage in dunning activities that debtors find intolerable – a level of activities from which a rational single creditor would refrain. We recommend a variety of solutions to strengthen the FDCPA. Some are at the level of detail (extending it to in-house collection, increasing the statutory damages, and the like). But the most important is a “do-not-call” rule modeled on the do-not-call list for telemarketers. Specifically, we recommend a low-transaction-cost mechanism (activated by telephone call or Internet site) that would automatically and immediately stop all creditor collection activity.

Second, corollary to our argument that excessive collection causes inappropriate filings, we also believe that the excessive filing costs deter socially valuable filings. To respond to that problem, building on earlier work, we argue that low-income low-asset filers should have access to a simplified administrative process that provides prompt relief without the costs and delay of judicial process.