BankruptcyProf Blog

Circuit Court of Appeals Cases from Last Week

Third Circuit, 06/29/2010
In re Goody's Family Clothing Inc.
"Stub rent" is administrative expense here, section 365(d)(3) does not supplant section 503(b). 

Sixth Circuit, 07/02/2010
In re Johnson
perfection of lender's security interest in truck did not occur until March 7, 2005, when the security interest was actually noted on the certificate of title. 

Eighth Circuit, 06/28/2010
US v. Mitchell
fraud sentence is affirmed where, in a complicated proceeding such as this, the district court must reasonably approximate the value of the assets that the defendant fraudulently sought to preserve.

Tenth Circuit, 06/29/2010
In re Graves
section 542 does not empower a trustee to demand turnover from a debtor in this case, where debtors' interest in a 2006 tax refund was irrevocably applied pre-petition to 2007 taxes

Thanks to Findlaw.com 

Student Loan Default Rates

Finally some real statistics.  My son is borrowing $49,000 just for the first year at UCLA law (of which I am guaranteeing about 2/3).     

Some Thoughts on Schwab and Exemptions

I commented last week that the problem that the Supreme Court tried to resolve in Schwab v. Reilly needed to be fixed by the powers to be.  Spoken like the true debtor lawyer I am.  The Supremes clearly got it right in Schwab.  Most exemption statutes provide that the debtor may exempt "an interest" in a vehicle or jewelry or cooking utensils "up to" a certain amount.  So when the debtor exempts on Schedule C, $3,000 of her $100,000 Ferrari which she also values at $3,000, there is nothing to object to exemption-wise.  The car is clearly still property of the estate until it is abandoned and subject to being administered.  And the claimed exemption of $3,000 is unassailable once the objection period runs. 

Problem one to be fixed is that the debtor often does not know what the property is worth, especially if it is an interest in litigation or receivables of unknown collectibility, equipment or royalties for which there is no ready market, a fractional interest in a closely held company. 

Problem two is that the trustee often does nothing until a buyer happens to come along (not the case in Schwab by the way).  This could be 6 or 12 months after the case is filed.  The debtor should not be in limbo like that.

I had a case several years ago where the trustee decided to sell a home 2 or 3 years after the petition date.  There was other property of the estate and therefore the trustee did not file a "no-asset report" and the case did not close.  Property values were rising and the home had increased in value a few hundred thousand dollars.  The debtor lost the home.  It was still property of the estate.  I know that the attorney who filed the case committed malpractice by not seeking an order abandoning the property.  The problem for the client is that during the delay, he put a new roof on the home, paid off a second mortgage, painted, new carpets etc etc all of which now belonged to the estate. 

The 30 day time limit in Rule 4003 was designed to get this stuff resolved in a reasonable time.  As Justice Ginsburg says in her dissent, the trustee is supposed to make a determination of value of every asset in order to decide what to sell and what to abandon.  The 30 day time limit is a reasonable time.  And if its not, the trustee can ask for more time.   

One last add, Justice Thomas's comment that the debtor can simply indicate that the claimed exemption is 100% of the property is a little strange.  The problem with that is that the debtor will be claiming an exemption that is not allowed (usually) under the exemption statute.  It will force the trustee to object but I would be a little concerned about sanctions personally. 

Problems with Chapter 13 Plans Post-Lanning

From the smartest lawyer I know, Peter Lively:

After Lanning, the same problems remain using PDI in 1325(b)(1).

PDI under 1325(b)(2) used in Chapter 11 and for below-median-income Chapter 13 debtor follows the preBAPCPA concept of calculating a plan payment; defining Disposable Income as reducing income by household/living expenses only.  1325(b)(2) does not reduce CMI by administrative, secured arrears and priority unsecured claims (other typical plan payment recipients).  This "Disposable Income" is a measure of what plan payment a debtor can afford.

PDI under the Chapter 7 Means Test and under 1325(b)(3) with reference to 707(b)(2) defines Disposable Income as reducing CMI by household/living expenses (albeit standardized) and also by secured arrears and priority unsecured claims. This "Disposable Income" is a measure of what [general] unsecured creditors should receive.

Unfortunately, defining Disposable Income in two entirely different ways and requiring its use in one 1325(b)(1)(B) formula doesn't work.

BAPCPA changed 1325(b)(1)(B) by inserting "to unsecured creditors" between "will be applied to make payment" and "under the plan" with the obvious intention that [general] unsecured creditors receive the PDI; Disposable Income being calculated under 1325(b)(3) and 707(b)(2).

BAPCPA neglected to change the definition of Disposable Income calculated under 1325(b)(2) to include reductions of CMI by administrative expenses, secured arrears and priority unsecured claims. The absurd result of using this PDI in 1325(b)(1)(B) being that below-median-income debtors must pay all that they can afford to [general] unsecured creditors before any PDI can be used for other plan purposes.

Alternatively, ignoring the addition of "to unsecured creditors" between "will be applied to make payment" and "under the plan" and interpreting PDI as a measure of what a debtor can afford to pay makes 1325(b)(3) superflous.

Lanning's instructions to adjust PDI by foreseeable changes in income and expenses does not resolve the problem that the statute defines Disposable Income in two incompatible ways for use in the same test.

Kagenveama (and the dissent in Lanning) got it right when focusing on 1325(b)(1)(B) using 1325(b)(3) as a calculation of what [general] unsecured creditors should get, if anything. Kagenveama is still applicable post Lanning, if 1325(b)(1)(B) PDI goes to only [general] unsecured creditors.

The courts using PDI under 1325(b)(1)(B) with Disposable Income being calculated under 1325(b)(2) as a measure of what total monthly amount debtor can afford to pay also got it right.  However, when applying this approach and using Disposable Income calculated under 1325(b)(3), these courts must ignore that BAPCPA's added the phrase "to unsecured creditors" to 1325(b)(1)(B) and must also adjust Disposable Income from a calculation of what [general] unsecured creditors should receive, to become a measure of ability to pay; this usually means ignoring Form B22C's Disposable Income and using Schedule I - J in its place.

Peter M. Lively, JD/MBA
A-Bankruptcy-Attorney.com

Bankruptcy Filings for Second Quarter 2010 pass 400,000

	Total	7	11	12	13
6/30/2010	413,600	302,300	3,311	193	107,824
3/31/2010	379,800	274,700	3,723	162	101,200
12/31/2009	366,000	258,100	3,615	145	104,200
9/30/2009	381,500	270,200	3,525	158	107,600
6/30/2009	375,100	270,700	4,338	131	99,900
3/31/2009	330,500	233,500	3,649	102	93,200
Total 2009	1,453,100	1,307,200	18,850	698	506,100
12/31/2008	301,300	202,100	3,175	90	95,900
9/30/2008	292,300	195,200	2,712	89	94,300
6/30/2008	276,500	187,400	1,888	85	87,100
3/31/2008	245,700	158,500	2,012	81	85,100
Total 2008	1,115,800	743,200	9,787	345	362,400
12/31/2007	226,400	137,600	1,793	77	86,900
9/30/2007	218,900	132,000	1,583	71	85,200
6/30/2007	210,400	131,500	1,574	112	77,200
3/31/2007	193,600	117,700	1,406	104	74,400
Total 2007	849,300	518,800	6,356	364	323,700
Statistics from 3/31/09 back come from US Courts.gov;
from 6/30/09 forward from Bankruptcy Data Project

Filings for June, 2010

Total filings for June 2010 is 133,850.  For the Central District of California, 12,190.

	2007	2008	2009	%	2010	%
Jan	55200	70,300	89,000	27%	102,600	15%
Feb	58800	79,500	102,000	28%	117,800	15%
March		90,400	131,000	45%	159,200	22%
April		93,200	128,700	38%	146,200	14%
May		89,700	120,400	34%	133,500	11%
June		89,900	124,800	39%	133,850	7%
July		96,400	130,500	35%
Aug		94,300	120,000	27%
Sept		96,200	125,500	30%
Oct		108,900	130,200	20%
Nov		91,400	115,500	26%
Dec		95,900	117,000	22%
		1,096,100	1,434,600	31%
	Central District of California
		2008	2009	%	2010	%
	Jan	3,694	6,004	63%	9,013	50%
	Feb	3,787	6,971	84%	9,659	39%
	March	4,381	8,529	95%	12,840	51%
	April	5,023	8,512	69%	12,114	42%
	May	5,177	8,967	73%	11,906	33%
	June	5,351	9,595	79%	12,190	27%
	July	5,983	9,894	65%
	Aug	6,195	9,748	57%

Schwab v. Reilly, Another Bankruptcy Problem Congress Should Fix

Schwab v. Reilly, --- U.S. ---, 2010 WL ------- (2010)

Issue:  Is a chapter 7 trustee required to object to the valuation of property claimed exempt by a debtor on schedule C within the 30 day time limit proscribed under FRBP 4003?
 
Holding:  No.    
 
Justice Clarence Thomas for a 6-3 court,
Ginsburg dissented with Roberts and Breyer joining

This chapter 7 debtor’s Schedule B “included an itemized list of cooking and other kitchen equipment that she described as ‘business equipment,’ and to which she assigned an estimated market value of $10,718.”  On her Schedule C, she claimed the property exempt as “tools of the trade” in the amount of $1,850 and also exempt under the wildcard in the amount of $8,868 for a total of $10,718.  The trustee obtained an appraisal which valued the property at $17,200 but did not object to the exemption.  He moved the court for permission to sell the property offering to give the debtor $10,718 out of the sale proceeds.  The debtor objected arguing that, by the time of the hearing on the sale motion, it was too late to sell the property since the trustee had not objected to the exemption.  “She argued that by equating on Schedule C the total value of the exemptions she claimed in the equipment with the equipment’s estimated market value, she had put [the trustee] and her creditors on notice that she intended to exempt the equipment’s full value, even if that amount turned out to be more than the dollar amount she declared, and more than the Code allowed.”  She indicated that she would prefer her case be dismissed rather than have the equipment sold.  The bankruptcy court agreed with the debtor and denied the motion to sell the property.  The district court and the court of appeals both affirmed.  The court of appeals ruled that by using the same amount to value the property and claim the exemption, she “indicated” an intent to claim all of the property as exempt.  “Such an identical listing put [the trustee] on notice that [the debtor] intended to exempt the property fully.”  This triggered the trustee’s duty to object within the statutory period.   

The Supreme Court reversed.

 

The starting point for our analysis is the proper interpretation of [the debtor’s] Schedule C.  If we read the Schedule [the debtor’s] way, she claimed exemptions in her business equipment that could exceed statutory limits, and thus claimed exemptions to which [the trustee] should have objected if he wished to enforce those limits for the benefit of the estate.  If we read Schedule C [the trustee’s] way, [the debtor] claimed valid exemptions to which [the trustee] had no duty to object.

The debtor is entitled under section 522(b) to exempt property listed in section 522(d).  Section 522(l) states, “[u]nless a party in interest objects, the property claimed as exempt on [Schedule C] is exempt.”  But under 522(l) the debtor may only claim exemptions under section 522(b) and therefore the trustee has a duty to object only if the exemptions claimed are improper under 522(b).  Since the debtor had the right to claim $10,718 exempt, there was no requirement that the trustee object.  Most exemptions “define the ‘property’ a debtor may ‘clai[m] as exempt’ as the debtor’s ‘interest’—up to a specified dollar amount—in the assets described in the category, not as the assets themselves.” 
“[T]he Code’s definition of the ‘property claimed as exempt’ in this case is clear.  As noted above, §§522(d)(5) and (6) define the ‘property claimed as exempt’ as an ‘interest’ in [the debtor’s] business equipment, not as the equipment per se.  Sections 522(d)(5) and (6) further and plainly state that claims to exempt such interests are statutorily permissible, and thus unobjectionable, if the value of the claimed interest is below a particular dollar amount.”

The decision also discusses the relationship between this case and the earlier Supreme Court case of Taylor.   In Taylor, the debtor listed the value of the exemption as “unknown.”   This made the claimed exemption objectionable on its face because the statutory exemption was limited to a certain amount.  When the trustee did not object, his right to object was lost.  There is also a discussion about the practical effect of the ruling, that is, the delay and uncertainty to the debtor caused by the failure of the trustee to timely object.  The decision states that if it is important to the debtor to claim the asset itself exempt, the debtor may list the “exempt value as ‘full fair market value (FMV)’ or ‘100% of FMV.’"

In her dissent, Justice Ginsburg focuses on the language of section 522(l) and FRBP 4003(b) which says that unless a party in interest objects, the property claimed by the debtor as exempt is exempt.  She says that the debtor “made her position plain,” she listed each item of property and a specific value for each and claimed each exempt.  “Because an asset’s market value is key to determining the character of the interest the debtor is asserting in that asset, Rule 4003(b) is properly read to require objections to valuation within 30 days, just as the Rule requires timely objections to the debtor’s description of the property, the asserted legal basis for the exemption, and the claimed value of the exemption.”  She argues that the trustee is required, as part of his duties, to determine the value of every asset in a case anyway and if he needs more time, he can ask for more time or simply continue the meeting of creditors so that the 30 time limit will be delayed.