BankruptcyProf Blog

Bankruptcy Program at Widener Law

Rethinking Bankruptcy Law in the Aftermath of a Financial Crisis
Lecturer: Melissa B. Jacoby

The John Gedid Lecture Series sponsored by Aspen Publishers
Tuesday, April 6, 2010-4:30 p.m.
Widener University School of Law
Law & Government Institute
Harrisburg Campus

For more information contact: Sandy Graeff at 717-541.3965 or slgraeff@widener.edu.  You can access more information here. 

Nice Article on Elizabeth Warren

You can access the NY Times article here.

Circuit Court of Appeals Cases from Last Week

Supreme Court, March 23, 2010
United Student Aid Funds, Inc. v. Espinosa, --- U.S. ---- (2010)(Order confirming chapter 13 plan cannot be attacked years later even though it contained improper provision discharging student loans - lender had sufficient notice)

2nd Circuit Court of Appeals, March 22, 2010
In re Johns-Manville Corp., --- F.3d ---, 2010 WL ------- (2nd Cir 2010)(objector-insurer not given constitutionally sufficient notice of the bankruptcy court's 1986 orders, so that due process absolved it from following them, whatever their scope)

2nd Circuit Court of Appeals, March 26, 2010
In re WestPoint Stevens, Inc., --- F.3d ---, 2010 WL ------- (2nd Cir 2010)(chapter 11 plan affirmed in part and reversed in part re distribution of securities but court of appeals lacks jurisdiction to review the sale order unless a stay had been entered or there was a challenge to the "good faith" aspect of the sale; and 2) in withdrawing the motion for "a stay of the closing of the sale," the parties' stay stipulation permitted the transfer of assets and the lien release, claim satisfaction, and distribution to occur as a single integrated transaction)

3rd Circuit Court of Appeals, March 22, 2010
In re Philadelphia Newspapers, LLC. , --- F.3d ---, 2010 WL ------- (3rd Cir 2010)(proposed bid procedure is affirmed as section 1129(b)(2)(A) unambiguously permits a debtor to proceed with any plan that provides secured lenders with the "indubitable equivalent" of their secured interest in the asset and contains no statutory right to credit bidding)

6th Circuit Court of Appeals, March 24, 2010
In re Westfall, --- F.3d ---, 2010 WL ------- (6th Cir 2010)(negative equity qualifies for protection from cramdown under the hanging paragraph of 11 U.S.C. section 1325(a) because negative equity financing constitutes a purchase money obligation under the UCC and thus the associated security interest satisfies the UCC's definition of a purchase money security interest)

7th Circuit Court of Appeals, March 25, 2010
Ojeda v. Goldberg, --- F.3d ---, 2010 WL ------- (7th Cir 2010)(bankruptcy court reversed where: 1) it clearly erred in finding that the creditor was unjustified in relying on the debtors' misrepresentations about the asserted continued ownership of McDonald's restaurants and by finding that the creditor did not establish a claim for fraudulently induced forbearance; and 2) the bankruptcy court committed an error of law in finding that only the unpaid interest and attorney's fees were non-dischargeable)

9th Circuit Court of Appeals, March 22, 2010
In re Marshall, --- F.3d ---, 2010 WL ------- (9th Cir 2010)(In an action based on defendant's purported tortious interference with a substantial inter vivos gift that plaintiff's late husband intended to give to her, judgment for plaintiff is reversed where a prior Texas probate court judgment should have been afforded preclusive effect because it was the earliest final judgment on matters relevant to the proceeding)

9th Circuit Court of Appeals, March 22, 2010
In re Taylor, --- F.3d ---, 2010 WL ------- (9th Cir 2010)(bankruptcy court reversed where court's determination of the value of the security interest in vehicle was clearly erroneous, because there was no evidence to support the finding that the value of the security interest equaled the amount of the original loan at the time the bank perfected its security interest)

D.C. Circuit Court of Appeals, March 26, 2010
Burns v. George Basilikas Trust, --- F.3d ---, 2010 WL ------- (D.C. Cir 2010)(Rule 9011(b)(2) sanctions reversed where requesting counseling from an unapproved credit counseling agency could satisfy 11 U.S.C. section 109(h)(3), and thus counsel did not violate that statute)

Thanks to Findlaw.com

Circuit Court of Appeals Cases from Last Week

5th Circuit Court of Appeals, March 18, 2010
In re Condor Ins. Ltd., --- F.3d ----, 2010 WL ------- (5th Cir. 2010)(bankruptcy court has jurisdiction to offer avoidance relief under foreign law in a Chapter 15 bankruptcy proceeding)

11th Circuit Court of Appeals, March 16, 2010
In re Delco Oil, Inc., --- F.3d ----, 2010 WL ------- (11th Cir. 2010)(bankruptcy trustee may avoid post-petition payments by the debtor under 11 U.S.C. sections 549(a) and 363(c)(2) as unauthorized transfers of cash collateral)

Thanks to Findlaw.com 

Supreme Court Affirms Espinosa

The unanimous opinion in United Student Aid Funds, Inc. v. Espinosa can be accessed here.  The outcome is not too surprising.   

Orange County Bankruptcy Forum Peter M. Elliott Award to Penelope Parmes - Meeting on April 6, 2010

Congratulations to:
Penelope Parmes
Rutan & Tucker, LLP

Recipient of the
The Honorable Peter M. Elliott
Memorial Award 2009

for Outstanding Scholarship, Ethics and Service to the Orange County Bankruptcy Community

We will present the award at our April 6, 2010 program on the economic outlook for the rest of the year and next.

For any questions, please contact the OCBF office.
Phone/Fax: 949-681-8676 ~ info@ocbf.org

Hamilton v. Lanning Transcript

The transcript is here.  I will be uploading a summary on Scotus Wiki tomorrow.  JH

Desmond J. Lizotte Oct 30, 1919 - March 16, 2010

My father in law was a great man.  He was the retired General Agent for the Mass Mutual Los Angeles office and a constant supporter of mine.  It was my good fortune to know him and I will miss him. 

9th Circuit Reverses $85 million Judgment in Favor of Vickie Lynn Marshall

The 68 page 9th Circuit opinion is here.  They remanded to the District Court which presumably will remand to the Bankruptcy Court.  But Judge Bufford will probably be gone by the time it gets back as he is retiring in September.  What is a little strange to me is that after 68 pages, the ruling is that Judge Bufford had no jurisdiction simply, "Because the Texas probate court’s judgment was the earliest final judgment entered on matters relevant to this proceeding, the district court erred when it did not afford preclusive effect to the Texas probate court’s determination of relevant legal and factual issues."    

Circuit Court of Appeals Cases from Last Week

U.S. Supreme Court, March 08, 2010
Milavetz, Gallop & Milavetz, P.A. v. US, --- U.S. --- (2010)(attorneys are debt relief agencies.  Restriction on speech in section 526(a)(4) is not unconstitutional since it does restrict discussion, only improper advice)

1st Circuit Court of Appeals, March 10, 2010
In re Am. Bridge Prod., Inc., --- F.3d ---, 2010 WL ------------- (1st Cir. 2010)(In a bankruptcy trustee's action against an appointed receiver for misfeasance statute of limitations did not run because the receiver had not rendered a final accounting or been discharged in either state or federal court)

4th Circuit Court of Appeals, March 12, 2010
In re Kirkland, --- F.3d ---, 2010 WL ------------- (4th Cir. 2010)(bankruptcy court did not have jurisdiction to determine the post-petition interest and collection costs to which the creditor was entitled as the result of a default on a student loan that occurred after the Chapter 13 estate was closed and the debtor discharged)

7th Circuit Court of Appeals, March 08, 2010
In re Ray, --- F.3d ---, 2010 WL ------------- (7th Cir. 2010)(dismissal of two Chapter 11 proceedings was correct, but the decision is vacated, as the law firm lacked standing where there is no evidence that one of the law firm's former attorneys ever informed the bankruptcy court that it was appearing on behalf of the firm and the record is devoid of any mention of the firm by the attorney or any other party)

Thanks to Findlaw.com

Local Judge Opines that an LLC is an Express Trust for Non-Dischargeability Purposes

This is a tentative ruling I copied off the calendar of one of our local judges.  It's a pretty schocking ruling to my way of thinking but she really supports it with lots of 9th Circuit and California law.  I'm going to have to update my Summary of Bankruptcy Law book.  I was going to edit the tentative but it really all needs to be there to understand it. 

The tentative:

The complaint filed by Nature's Wing Fin Design, LLC (NWFD) against debtor under 11 U.S.C. sections 523(a)(2) and (a)(4) alleges nondischargeability of a state court judgment entered on 8/19/05 in the amount of $849,754 (later reduced to $778,000) for breach of fiduciary duty in debtor's fulfillment of his role as a majority shareholder and manager of NWFD. The underlying complaint was filed derivatively by the minority shareholders and the judgment was entered after a three-week trial, and is now final as all avenues on appeal have been exhausted.

Specifically, the judgment was granted on the causes of action for breach of fiduciary duty, constructive trust, permanent injunction, and accounting.  Detailed findings are contained in the statement of decision filed on 8/18/05 ("SOD") and include the following:  debtor made improper distributions to himself before paying back investor funds, allowed an unauthorized investment in NWFD, commingled funds, interfered with a forensic audit, and improperly removed directors.  In addition, the state court found that debtor "was not acting in good faith" (SOD, p.20-21).  However, no punitive damages were awarded due to lack of proof of "sufficient reprehensibility or fraud" (SOD, p.22).

Argument:
Collateral estoppel applies to findings made by the state court for purposes of section 523(a)(4) which show that debtor's acts constituted defalcation while serving in a fiduciary capacity and embezzlement, and the full faith and credit clause bars this court from reviewing the judgment. Debtor's opposition fails to include a statement of genuine issues of material fact.

For purposes of defalcation while acting in a fiduciary capacity, debtor was a fiduciary because in California LLC managers owe the same fiduciary duties as those owed by a partner to a partnership and its partners. In re Lewis, 97 F.3d 1182, 1185-86 (9th Cir. 1996). Defalcation occurs when, as here, debtor cannot account for the res, commingles funds and uses the company's money for personal benefit. Id. at 1186-87.  Section 523(a)(4) requires that (1) the res was rightfully in the possession of the nonowner, (2) the nonowner appropriated the property for a use for which it was not entrusted and (3) circumstances indicate fraud. In re Littleton, 942 F.2d 551, 555 (9th Cir. 1991). These elements are met in this case and, although the findings do not include fraud, the state court found bad faith and fraudulent conduct which amounts to circumstances indicating fraud.

Debtor's opposition:
Summary judgment cannot be granted because there are genuine issues of material fact as to both elements of section 523(a)(4).  First, whether an express preexisting trust was created as required by California law.  Second, the three amounts at issue which constitute the judgment ($520,670.16 for a company loan for defense costs, $105,245 for mandatory distributions and $94,500 for a share transfer transaction) are dischargeable because they were proper, authorized and accounted for, and thus no defalcation occurred.  Moreover, triable issues of material fact exist as to the Sommers transaction because the trial court did not consider all of the evidence.

Applicable Law:
In re Bigelow, 271 B.R. 178, 186-87 (9th Cir. BAP 2001), thoroughly discusses the elements that must be met to establish nondischargeability under section 523(a)(4).  A debt is nondischargeable under § 523(a)(4) where “‘1) an express trust existed, 2) the debt was caused by fraud or defalcation, and 3) the debtor acted as a fiduciary to the creditor at the time the debt was created.’” In re Niles, 106 F.3d 1456, 1459 (9th Cir.1997) (citations omitted). “Defalcation is defined as the ‘misappropriation of trust funds or money held in any fiduciary capacity; [the] failure to properly account for such funds.’... Under section 523(a)(4), defalcation ‘includes the innocent default of a fiduciary who fails to account fully for money received.’ ” In re Lewis, 97 F.3d 1182, 1186 (9th Cir.1996) (citations omitted).

1. Existence of fiduciary relationship
State law is relevant to the inquiry whether a fiduciary relationship exists. In re Pedrazzini, 644 F.2d 756, 758 (9th Cir.1981). Cal. Code of Corp. section 17153 provides that "[t]he fiduciary duties a manager owes to the limited liability company and to its members are those of a partner to a partnership and to the partners of the partner." The word "manager" is defined in Cal. Code of Corp. 17001(w) as somebody identified as such in the articles of organization. Under California law, partners are trustees of the partnership's assets. Ragsdale v. Haller, 780 F.2d 794, 796-97 (9th Cir.1986).

Taking into consideration the California law background as stated above, federal law ultimately determines whether there is a fiduciary relationship within the meaning of § 523(a)(4). In re Hemmeter, 242 F.3d 1186, 1189 (9th Cir.2001). The parties have not presented and the court has been unable to locate a case directly on point. However, the Ninth Circuit has held that "California partners are fiduciaries within the meaning of [section] 523(a)(4)." Haller, 780 F.2d at 796-97. Thus, reading section 17153 in conjunction with Haller compels the conclusion that an LLC manager is a fiduciary for purposes of section 523(a)(4).

On the other hand, an officer of a corporation is not a fiduciary for purposes of section 523(a)(4) because s/he is more akin to an agent. In re Cantrell, 329 F.3d 1119, 1127-28 (9th Cir. 2003). In addition, at least one bankruptcy court has rejected the proposition that a controlling majority shareholder is automatically a fiduciary of the corporate res and subject to liability by the minority under section 524(a)(4). In re Bangerter, 106 B.R. 649, 654 (Bankr. C.D. Cal. 1989).

2. Defalcation
"Defalcation is defined as the 'misappropriation of trust funds or money held in any fiduciary capacity; [the] failure to property account for such funds.'" Lewis, 97 F.3d at 1186, quoting Black's Law Dictionary 417 (6th ed. 1990). This includes innocent, intentional or negligent defaults. Id. (omit cit.). "An individual may be liable for defalcation without having the intent to defraud." Id. at 1187. It is no longer the law that there must be some showing of bad faith or reprehensible conduct. Id. at 1186-87 (overruling In re Martin, 161 B.R. 672 (9th Cir. BAP 1993)). Lewis concerned a dispute between partners where one partner contributed funds, while two others contributed time and labor. The unrefuted evidence showed that the partners running the enterprise failed to provide a complete accounting and commingled funds, and this was enough to grant summary judgment against them. Although the question of defalcation in Lewis was decided under Arizona law, the court noted that Arizona and California law are identical on this point.

Analysis:
The complaint requests relief under sections 523(a)(2) and (a)(4); the motion is made pursuant to (a)(4) only. To the extent that Mr. McCarthy is trying to get this court to relitigate what has already been decided in state court, now that all avenues on appeal have been exhausted, this is impermissible under the Rooker-Feldman doctrine. Thus, this court will not examine evidence that has been or should have been presented in state court. Instead, this court will focus its inquiry on the issue of collateral estoppel and needs to decide the following:
(1) whether the issues are identical as those decided in the former proceeding; (2) whether the issues have been actually litigated; (3) whether the issues have been necessarily decided; (4) whether the decision is final and on the merits; and (5) whether the parties are the same or in privity. In re Harmon, 250 F.3d 1340, 1245 (9th Cir. 2001).

The state court judgment is based on debtor's breaches of fiduciary duty, as is the complaint for nondischargeability; thus, the issues are identical. It is clear that the issues have been actually litigated since the state court conducted a three-week bench trial which resulted in extensive findings of fact and conclusions of law. The judgment is final and the parties are the same. Thus, the only question for this court to decide is whether the elements required under section 523(a)(4) have been necessarily decided, or whether this court must make additional findings for the debt to be deemed nondischargeable.

1. Fiduciary relationship
It is undisputed that the operating agreement discussed and quoted on pp.3-8 of the SOD is the document controlling the relationship between the parties. Under that agreement, debtor was in charge of "generally operating the business" and had "fairly broad managerial powers" (SOD p.3, para.9). The state court also found that at the time the improper acts took place, debtor was the sole manager and 59% owner of NWFD and that under Cal. Code of Corp. section 17153, "LLC managers owe the same fiduciary duties of care and loyalty as are owed by a partner to a partnership and its partners" (SOD p.2, para.2 & p.19, para.2), concluding that debtor was a fiduciary under California law (SOD p.20-21).

California law outlines the fiduciary duties of a partner which constitute an "express" or "technical" trust relationship, and this court is instructed to follow that determination. See Ragsdale, 780 F.2d at 797 ("[i]f state law makes clear that a partner necessarily is a trustee over partnership assets for all purposes, then that partner is a fiduciary within the narrow meaning of 523(a)(4)"). See also In re Stanifer, 236 B.R. 709, 715 (9th Cir. BAP 1999); Collier on Bankruptcy, para. 523.10[1][d], at 523-74 (16th ed. 2009). Trust relationships created by statute fall into this category. Pedrazzini, 644 F.2d at 758 n.2.

As outlined by the state court in its SOD, p.19-20, LLC managers have specific duties under Cal. Corp. Code section 16404 which clearly impose trust-like obligations on the debtor. The debtor was required to perform those obligations under the operating agreement (SOD, p.3-4; 20-21). In essence, the debtor was like the sole manager of a joint venture as described in In re Short, 818 F.2d 693 (9th Cir. 1987)(debtor in charge of joint venture affairs who had duty to act as trustee under agreement and statute held to be fiduciary for purposes of section 523(a)(4)). Therefore, this court finds that the required express trust relationship existed in this case and that debtor was a fiduciary for purposes of section 523(a)(4) at the time the improper acts took place.

2. Defalcation:
The findings made by the state court show that debtor made improper distributions in violation of the operating agreement (SOD 20), improperly obligated the company (SOD 35), lied to the board about the cause for overpayments (SOD 37), used and lied about using company funds for personal expenses (SOD 37-38), commingled funds (SOD 39), interfered with an audit (SOD 41), and acted fraudulently and in bad faith to remove board members (SOD 58). Akin and beyond the facts of Lewis, the underlying judgment contains sufficient findings of improper activity to satisfy the element of defalcation under section 523(a)(4).

3. Debtor's case law:
Mr. McCarthy relies on the Ninth Circuit case of Cantrell. Although Cantrell contains applicable statements of law, its facts are inapposite in that it dealt with a default judgment against a corporate officer, not a judgment on the merits against a controlling shareholder and manager of an LLC. As such, Cantrell's holding is limited to its specific factual scenario and does not apply in this case. Further, Mr. McCarthy relies on the case of In re Niles, 106 F.3d 1456 (9th Cir. 1997). Niles is inapplicable because the holding in relevant part deals with who bears the burden of proof in a section 523(a)(4) proceeding; plaintiff was not asserting collateral estoppel based on findings already made in conjunction with a final state court judgment after trial, but instead was proceeding with trial in the bankruptcy court. Here, the state court has already conducted a trial and made detailed findings, and the bankruptcy court does not have to retry the case if it finds those findings sufficient for purposes of section 523(a)(4).  However, the case is instructive to the extent that the relationship between the parties under state law (defendant was plaintiff's real estate broker and property manager) is expressly controlled by statute and thus was determined to be an express trust.

In addition, Mr. McCarthy relies on In re Abrams, 229 B.R. 784 (9th Cir. BAP 1999), aff'd, 242 F.3d 380 (9th Cir. 2000). Again, this case is distinguishable because it does not deal with the effect of a state court judgment, but instead focuses on the sufficiency of evidence presented during trial in the bankruptcy court in a nondischargeability proceeding under sections 523(a)(2) and whether the bankruptcy court properly decided that second-tier general partners are held to the same fiduciary obligations as first-tier general partners under California common law, and therefore are fiduciaries for purposes of section 523(a)(4). Mr. McCarthy points out that the court in Abrams examined the level of control exercised by the general partners to make its findings on the issue of whether they were fiduciaries; however, this court will not do so when sufficient findings have already been made by the state court judge who in this case relied on statute and not California common law (per Abrams, the court could have relied on either, depending on the existence of a statute on point).

Finally, the California Supreme Court case of Bainbridge v. Stoner, 16 Cal.2d 423 (Cal. 1940)(holding that a corporate director is an agent rather than a fiduciary) does not speak to the situation here which deals with Mr. McCarthy as manager of the LLC who not only had broad managerial powers but also used those powers to his personal benefit, as reflected in the state court's findings. Similarly, the California cases cited in Bainbridge refer to corporate shareholders and members of a limited liability company, but not a LLC manager empowered with broad managerial powers by an operating agreement. Bainbridge also discusses the two required elements for an express trust to exist under California law: (1) an explicit declaration of trust and (2) transfer of res to the trustee. Mr. McCarthy argues that no such transfer ever took place and therefore no express trust was created. Even if the court were to go this way and revisit these facts (which it is not), it must be noted that Bainbridge is a 1940 case which does not implicate a California statue clearly stating that a LLC manager owes the same fiduciary duties as a partner (Cal. Corp. Code section 17153) and another statute listing those duties (Cal. Corp. Code section 16404). The Ninth Circuit has since held that, in conjunction with these California statutes, partners are fiduciaries for purposes of section 523(a)(4). Ragsdale, 780 at 796-97.

Finally, Mr. McCarthy argues that certain admissions were made by NWFD in its third amended complaint which were not considered by the state court judge and which show that certain meetings and the votes taken during those meetings were invalid because Mr. McCarthy was not in attendance. Again, this is something that would have to be considered by the state court on a motion for a new trial or reconsideration. The whole section claiming that no defalcation or embezzlement occurred (p.37-59 of the opposition) discusses alleged error by the state court; again, this is not the proper forum to appeal these issues.

Conclusion:
Since all of the elements of collateral estoppel have been met and it is fair to apply the doctrine in this case to prevent further unnecessary litigation that would not produce a different result in light of the fact that the state court's findings are sufficient to satisfy section 523(a)(4), summary judgment is proper and should be granted.

Trustee Sues Yale for Return of Chair Endowment as a Fraudulent Conveyance

A trustee is New York has sued Yale University seeking a return of $8 million Yale received from BreakingPoint for endowment of a Chair and naming rights to buildings.  The trustee asserts that “No material consideration flowed to BearingPoint, and no benefit to its business or assets was derived from the endowing of chairs or the naming of buildings at Yale,”

The case is In re BearingPoint Inc., 09-10691, U.S. Bankruptcy Court, Southern District of New York.  I'll try to post the complaint and follow this along. 

Great Article on John Paul Stevens by Jeffrey Toobin

John Paul Stevens will be 90 on April 20, 2010.  You can access Jeffrey Toobin's short biography here. 

Further Thoughts on Hamilton v. Lanning

Jan Hamilton

Just to put the whole thing in context, I went to the Marrama oral argument a few years ago.  One of the justices asked whether or not there are trustees in chapter 13 cases – I’m not kidding.  
 
I’m surprised the briefs don’t have more “big picture” arguments.  Congress makes the law, we do what Congress says – let Congress fix the problem if it isn’t working the way they intended and leave it at that.  In fact, if Congress were to meet tomorrow and pass a resolution something like “we intended the mechanical test,” there would be no discussion about whether it reaches an absurd result.  It reaches an absurd result only because it makes no sense in cases like Kagenveama to permit someone to pay less than they can afford.  But it makes no sense because we have this view of how it should work.  Pay as much as you can afford – that it the way it has worked since it was invented.  The briefs, even the amici briefs, jump right into the textual arguments and don’t seem to give the Supreme Court a way out.  That is what they will be asking the parties at oral argument.  
 
People are always surprised when I tell them that Congress can get rid of bankruptcy any time they want, or chapter 7, or the discharge, or require repayment of 50% of debts to get the discharge, or require 10 year plans, or 25% of the debtor’s income.  Bankruptcy is not a constitutional right (see In re Kras).  So Congress defined chapter 13 and defined the computation of the plan payment – “So what’s the problem?” (quoting Mona Lisa Vito in My Cousin Vinny).  Ms. Lanning does not qualify – I feel bad for the lady but she needs to tell her Congressman about her problem, not the Supreme Court.  
 
Requiring a debtor to “project” income by looking back 6 months is silly I think but that’s what Congress did.  And permitting the plan to be modified the next day is silly.  At oral argument in Milavetz, one attorney said the DRA rules are silly – Scalia responded, “where does it say it’s unconstitutional for Congress to make stupid laws.”  (That’s a direct quote)
 
I think that for the court to affirm Lanning they are going to have to ignore the plain language Congress wrote and try to fix the mess it created.  The only possible way they affirm is to say that the mechanical test is the way it works except in weird cases.  Stevens will write that Congress knew how it worked before and since the code (forget legislative history) specifies the mechanical test which doesn’t always fit right, Congress must have intended the old way to continue in the weird cases.
 
Milavetz teaches us that the Court hates to say Congress blew it.  Everyone – all the briefs except Hamilton's - seem to agree that the mechanical test is the way it works except in weird cases.  So it’s a matter of what do we do about the weird cases.  I say let Congress fix it.  The “projected,” the “as of the effective date of the plan,” the “in the future” are problematic but everyone agrees that they are not problematic except in weird cases.   So let Congress fix it.  
 
For whatever its worth, I file about one chapter 13 a year and have not had a chapter 13 plan confirmed in probably twenty years.  It may be easier for me since I am not in the trenches in chapter 13 world.   

My Article on Hamilton v. Lanning on Scotusblog.com

My article on Hamilton v. Lanning has been posted on Scotusblog.com.  You can access it here. 

Peter Carroll to be New Chief Judge in the Central District of California

Peter Carroll sitting in Riverside will move to Los Angeles in September of this year and will become the new Chief Judge on January 1, 2011 replacing Judge Vincent Zurzolo as Chief Judge.  Judge Sam Bufford is retiring in September and will take a position at Penn State University.  Geraldine Mund and Kathleen Thompson are retiring in January, 2011 - they are sure going to be missed.  Judges Alan Ahart and Victoria Kaufman will move from downtown to the San Fernando Valley to fill the vacancies.  As I understand it, Judge Mund will remain on some sort of temporary status and finish up the cases assigned to her.   

Some Thoughts on Milavetz - Disappointing Decision and Opinion

As I have said, the issue of whether attorneys are DRAs was really a no brainer.  Congress makes the laws and bankruptcy assistance is defined in section 101(4A) as "providing legal representation with respect to a case or proceeding..."  A DRA is someone who provides bankruptcy assistance.  The real issue was the part of section 526(a)(4) which says a DRA cannot "advise an assisted person to incur more debt in contemplation of” filing bankruptcy.  As Justice Roberts pointed out at oral argument, there is all kinds of advise relating to incurring debt in contemplation of bankruptcy which might be perfectly appropriate but there is also all kinds which is inappropriate.  So where is that line and if the attorney is worrying about where the line is, doesn't that chill speech between the client and attorney? 

Before I complain about the opinion, I would point out that I long ago stopped worrying about whether I can tell the prospective client that it is okay to rent a different apartment or buy a new car or borrow money from mother to pay the fees "in contemplation of filing bankruptcy."  It is just too clear that that that is appropriate advice.  But I am aware of attorneys who are afraid and wobble giving that kind of advice.

 

So the Supreme Court ruled that the restriction only prohibits bad stuff and there are good reasons for Congress to do that so it's okay.  But Sotomayor really sort of wanders in the opinion trying to tell us what "bad advice is" which is good but then makes broad statement which resurrect the fears.  For example, "we conclude that §526(a)(4) prohibits a debt relief agency only from advising a debtor to incur more debt because the debtor is filing forbankruptcy, rather than for a valid purpose."  I tease my students regularly about words I hate and tell them don't utter those words in my classroom or on the test.  I do that to emphasize that words are important and because they look up from their laptops and blackberrys when I say something funny.  The worst is "bad faith."  The second worst is "valid."  What does that mean?  I can give my client advice as long as it is for a valid purpose? 

Sotomayor writes, "advice to incur more debt because of bankruptcy, as prohibited by §526(a)(4), will generally consist of advice to 'load up' on debt with the expectation of obtaining its discharge—i.e., conduct that is abusive per se."  That's good to hear and helps a lot - it does. "[W]e conclude that §526(a)(4) prohibits a debt relief agency only from advising an assisted person to incur more debt when the impelling reason for the advice is the anticipation of bankruptcy."  "Impelling"?  Some definitions from google, "To urge to action through moral pressure; drive"  "markedly effective as if by emotional pressure" "to urge or drive forward or on by or as if by the exertion of strong moral pressure."  Huh?   

She helps us understand impelling by saying, "Covered professionals remain free to 'tal[k] fully and candidly about the incurrence of debt in contemplation of filing a bankruptcy case.'”  "Section 526(a)(4) requires professionals only to avoid instructing or encouraging assisted persons to take on more debt in that circumstance."  So I can tell them the consequences of various alternatives, just don't impell them to do one or the other - don't instruct or encourage the conduct.  "Under our reading of the statute, of course, the prohibited advice is not defined in terms of abusive prefiling conduct but rather the incurrence of additional debt when the impelling reason is the anticipation of bankruptcy."  "It would make scant sense to prevent attorneys and other debt relief agencies from advising individuals thinking of filing for bankruptcy about options that would be beneficial to both those individuals and their creditors."  "Section 526(a)(4) by its terms prevents debt relief agencies only from 'advis[ing]' assisted persons 'to incur' more debt.  Covered professionals remain free to 'tal[k] fully and candidly about the incurrence of debt in contemplation of filing a bankruptcy case.” 

"Our construction of §526(a)(4) to prevent only advice principally motivated by the prospect of bankruptcy further ensures that professionals cannot unknowingly run afoul of its proscription.  Because the scope of the prohibition is adequately defined, both on its own terms and by reference to the Code’s other provisions, we reject Milavetz’s vagueness claim."  In footnote 5 there is a helpful comment, "Reiterating the significance of such dialogue, we note that §526(a)(4), as narrowly construed, presents no impediment to “ ‘full and frank’ ”
discussions."  But don't give advice "principally motivated by the prospect of bankruptcy"?  What do you think I do all day?

So we have lots of sound bites to show the court in the event the UST or a client comes after us - something I'm not sure has ever happened.  But what about advice designed to help the client pass the means test, i.e., stop paying your taxes which will be a priority debt and deductible on the means test.  Buy a new car which will be deductible on the means test so you can pass.  Is that "valid."  I guess if you say, "Mr. Client, if you buy a new car whether you need it or not, you will pass the means test," that is only "frank discussion" or it is impelling the debtor to incur debt only because the debtor wants to file and cannot otherwise file.  Someone who files when they could not otherwise file would hurt creditors I assume.  That makes it not a valid purpose?

I better get to my office.  Let me know what you think.     

cdcbaa Meet the Clerk Program - location change

MEET THE COURT CLERK'S OFFICE:  THE POWER BEHIND THE POWER

NEW LOCATION
The Olympic Collection Banquet & Conference Center
11301 Olympic Blvd., Suite #204
Los Angeles, CA 90064 (West L.A. – 405 & 10 Freeway)
Tel (310) 575-4585

MCLE Program 11:00 a.m. – 1:00 p.m.

cdcbaa Newsletter

You can access our most recent newsletter here. 

Public Counsel Program - Introduction to Chapter 7

“BANKRUPTCY BASICS: AN INTRODUCTION TO CHAPTER 7 CONSUMER BANKRUPTCY LAW”

PANEL
The Honorable Maureen Tighe   Kenneth G. Lau
United States Bankruptcy Judge      U.S. Trustee Trial Attorney

James King     David A. Tilem
King & Associates    Law Offices of David A. Tilem

Moderator
Magdalena Reyes Bordeaux
Public Counsel

Date:   Thursday, April 8, 2010
Time:   9:00 am-12:00 pm
Location:   255 E. Temple Street
   9TH Floor, Rm. 952

This program is designed to provide training to attorneys who will be providing pro bono assistance to pro se debtors

• Introduction to Chapter 7 Bankruptcy Process
• Avoid common mistakes in filing a Chapter 7 bankruptcy case

To register, please email your contact information and availability to volunteer to Magdalena Reyes Bordeaux at mbordeaux@publiccounsel.org.  This program is approved for 3 hours of MCLE Credit. REGISTRATION IS LIMITED.  A 2 HOUR PRO BONO COMMITEMENT WILL BE REQUIRED TO REGISTER FOR THIS PROGRAM.

This program is co-sponsored by the Central District Consumer Bankruptcy Attorney Association (“CDCBAA”).

*Refreshments generously provided by Suite Solutions*