September 29, 2008
9th Circuit Rules that Chapter 13 Debtor does not have an Absolute Right to Dismiss the Case
Rosson v. Fitzgerald (In re Rosson) ---- F. 3d ----, 2008 WL 4330558 (9th Cir. September, 2008)
Issue: Does a chapter 13 debtor have an absolute right to dismiss his case?
Holding: No, the court may refuse to dismiss if there is a showing that the debtor’s conduct is “atypical.”
appeal from District Court, Washington
This chapter 13 advised the court over a period of a year that he was expecting to receive a few hundred thousand dollars from an arbitration and would use that money to fund his plan. When he received the money, about $185,000, the court ordered him to turn it over to the chapter 13 trustee. He did not do that and the court, at a hearing by his attorney to withdraw, gave the debtor one hour to turn the funds over. The debtor then submitted a “Notice of Dismissal” of the case. The court refused to sign the order and instead ordered the case converted to chapter 7. The debtor had turned over $104,000 and spent the rest fixing up his residence (which he ultimately lost in foreclosure). The debtor moved for reconsideration arguing that he had an absolute right to dismiss the chapter 13 per Beatty v. Traub (In re Beatty), 162 B.R. 853 (B.A.P. 9th Cir. 1994), and Croston v. Davis (In re Croston), 313 B.R. 447, 450 (B.A.P. 9th Cir. 2004). He also argued there was inadequate notice and that there was no bad faith. That motion was denied. The district court affirmed the order.
The Court of Appeals also affirmed. “11 U.S.C. § 1307(b)-(c). These two provisions—i.e., that the court ‘shall’ dismiss a case on request of the Chapter 13 debtor, but that the court also ‘may’ convert a Chapter 13 case to Chapter 7 ‘for cause’—can conflict.” Although the 9th Circuit BAP has previously ruled in Beatty and Croston that dismissal is mandatory when requested, the 9th Circuit here said “After Marrama, however, the ‘absolute right’ position is no longer viable.” The Supreme Court said in Marrama “that the right to convert to Chapter 13 was impliedly limited by the bankruptcy court’s power to take any action necessary to prevent bad-faith conduct or abuse of the bankruptcy process.” “Although the [Supreme] Court declined to decide ‘with precision what conduct qualifies as ‘bad faith’, the Court ‘emphasize[d] that the debtor’s conduct must, in fact, be atypical.’” “Therefore, in light of Marrama, we hold that the debtor’s right of voluntary dismissal under § 1307(b) is not absolute, but is qualified by the authority of a bankruptcy court to deny dismissal on grounds of bad-faith conduct or ‘to prevent an abuse of process.’” [citing 11 U.S.C. § 105(a).]
As to whether or not the debtor’s conduct was “bad faith,” the Court said, “his use of the money was still in defiance of the bankruptcy court’s specific order to deposit the money with the Chapter 13 Trustee. Moreover, Rosson never—not even in his motion for reconsideration—provided the bankruptcy court with an explanation of what happened to the missing funds.” “[T]he bankruptcy court did not clearly err in finding that Rosson’s failure to deliver to the Trustee $185,000 in estate assets (or, when given the chance, to explain the status of the money) amounted to atypical, bad faith debtor conduct.”
As to notice and an opportunity to be heard, the 9th Circuit agreed that the debtor “never received a meaningful hearing of his arguments against conversion.” “The difficulty for Rosson, however, is that, even when given an opportunity, he has never actually provided a satisfactory explanation of why the funds were not delivered. Rosson’s motion for reconsideration provided no argument of the facts and offered no excuse for his failure to produce the $185,000 as ordered by the court. He did not make any of the kinds of arguments alluded to above. Instead, Rosson rested on the (now) manifestly inadequate legal claim that he had an ‘absolute’ right to voluntarily dismiss his case.” Therefore the debtor “was not prejudiced” by the procedural failure.
September 05, 2008
9th Circuit 2007 Annual Report
This report, just issued, is really nice, judges, cases and goings-on in the district, packed with information - 71 pages. You can access it here.
August 27, 2008
9th Circuit BAP Rules on "Dual Status" of Purchase Money Loans to Purchase Autos When Previous Auto is "Underwater"
Americredit Financial Services, Inc. v. Penrod (In re Penrod), ---- B.R. ---, 2008 WL 3854465 (9th Cir. BAP July, 2008)
Issue: When an auto lender rolls old debt into the purchase of a new auto, is the debt “purchase money,” all or in part?
Holding: In part. The BAP adopts the “Dual Status Rule.”
Judge Thomas Carlson, San Francisco
Markell, Klein, Jury
Opinion by Markell
This chapter 13 debtor borrowed $31,600 from Americredit to buy a “910 auto,” a Taurus, which she purchased for $25,600. The difference was the negative equity she owed on the car she traded in for the Taurus. When she filed chapter 13 she owed about $25,000. The plan valued the Taurus at $15,000 making the remaining balance unsecured. The plan “reduced” the interest rate on the secured debt to 9%. Americredit did not object to the interest rate but objected to the treatment saying the entire amount owed was protected by the hanging paragraph. The Bankruptcy Court found that the negative equity was not protected by the hanging paragraph but the balance, “some $18,540,” was secured. The court then confirmed the plan on that basis.
The BAP affirmed. Markell starts his very lengthy opinion (48 pages) with the sarcastic comment, “The ‘hanging paragraph’ is found somewhere around § 1325(a).” He says, “Much ink has been spilled over the proper characterization and treatment of negative equity in secured claims subject to the hanging paragraph.” “A leading car lender, General Motors Acceptance Corporation, has stated in defending a similar claim that between 26% and 38% of all its new car financing involves ‘negative equity.’” “[G]iving negative equity PMSI status effectively enriches car lenders at the expense of the debtor’s unsecured creditors.” “[T]he financed negative equity is nothing more than a refinancing of the preexisting debt owed on the trade-in.” He says that some courts use the “Transformation Rule” where the purchase money debt becomes non-purchase money when it includes a refi of other debt. He discusses the “Dual Status Rule” where the loan is part purchase money and part not. The BAP adopts the Dual Status Rule which Markell says recognizes “the substance of the transaction.”
August 25, 2008
9th Circuit Court of Appeals Annoyed That It Was Not Advised of Settlement
Lowrey v. Channel Communications, Inc. (In re Cellular 101, Inc) ---- F. 3d ----, 2008 WL ------------- (9th Cir. August 2008)
Issue: Must a party inform the court of appeals of a settlement which might make the appeal moot [and might not]?
Holding: Yes, otherwise the right to argue the terms of the settlement later are waived.
appeal from the BAP
This chapter 11 debtor sued Channel Communications and AT&T prepetition claiming that those companies interfered with the debtor’s right to buy Channel if it were to be sold. After the debtor filed chapter 11, Channel and AT&T filed a chapter 11 plan which permitted the sale of Channel to AT&T to go forward resulting in a payment to the debtor of some $2 million. Channel and AT&T then requested $400,000 in attorneys fees for their substantial contribution to the reorganization. The debtor objected but the court allowed about half of the request. The debtor appealed. The debtor, Channel and AT&T then settled everything but the debtor determined to go forward with the appeal and no one informed the court of appeals of the settlement. The court of appeals affirmed the ruling and Channel then sought payment of the allowed fees. The debtor then objected saying that the settlement included the fees which therefore had already been paid. The bankruptcy court granted the request for payment saying that either the release did not apply to the payment or the appeal was moot and the debtor should have so informed the court of appeals. The debtor appealed that order. The BAP affirmed saying that the debtor should have advised the court of appeals and therefore waived the argument.
The 9th Circuit affirmed. “The Supreme Court has held that all counsel have a duty ‘to bring to the federal tribunal’s attention, without delay, facts that may raise a question of mootness.’” “Regardless of [the debtor’s] motives, we cannot permit the court to be subject to such manipulation. We conclude that by failing to raise the release issue in the prior appeal, [the debtor] waived its right to assert the defense in subsequent proceedings. Settlement and release is an affirmative defense and is generally waived if not asserted in the answer to a complaint.” “[The debtor] argued that ‘even if it had raised the release issue during the prior appeal, we would have been required to remand the matter for factual findings, implying that its failure to inform the court of the settlement agreement was harmless and should be without consequence.” “[R]egardless of the likelihood that remand for factfinding might have been necessary, the decision whether and when to remand the matter was one for the court to make, not [the debtor]. [The debtor] usurped the decision as to how the case should be organized when it proceeded with the arguments it had already presented on appeal and elected not to advise the court of an event which it believed disposed of the claim. The bankruptcy court was correct in its assessment that, having taken its shot, [the debtor] does not get another opportunity to reach into its quiver for another arrow.” The court commented that a complete settlement would divest the court of appeals of jurisdiction. The debtor argued that Channel was asserting [while the matter was pending at the court of appeals] that the claim for fees was not released in the settlement anyway. The court of appeals could not therefore resolve that issue because it was not before it.
August 09, 2008
Arizona Judge Declares California Exemption Scheme Unconstitutional
In re Regevig, 389 B.R. 736 (Bkrtcy, Ariz, Haines J, June, 2008)
Issue: May an Arizona debtor claim California exemptions, otherwise appropriate under Section 522(b)(3)(A)?
Holding: Not under California CCP 703.140(b).
Judge Randall Haines
The debtor, an Arizona resident when the chapter 7 was filed, was required to use California exemptions because she had moved recently from California to AZ. She claimed exemptions under the California “Wildcard,” i.e., CCP 703.140(b)(5). The trustee objected saying the exemptions under 703.140(b) were unconstitutional because they apply only to bankruptcy cases and thus violate the Supremacy Clause. Judge Haines agreed. He acknowledged that what the debtors exempted would have been exempted under Section 522 if California had not opted out but that no showing of prejudice was required.
The opinion gives a little historical background and says that California instituted the “two sets of exemptions” system in 1984 to prevent stacking of exemptions by husbands and wives. Since that is no longer allowed anyway, the two systems serve no purpose today. In any event, California cannot pass a law whose only function is to prevent the bankruptcy trustee from doing his job. This is especially so since the California wildcard is twice the federal wildcard. He cites In re Kanter, 505 F.2d 228, 230 (9th Cir. 1974) which he says invalidates “under the Supremacy Clause, a California law attempting to preclude trustees and other assignees by operation of law from reaching a debtor’s cause of action, but not exempting it from the reach of other judgment creditors.”
Although there is little analysis in the opinion of the Supremacy Clause, Haines says,
"Here, Congress has pervasively defined the exemptions that a state may permit a debtor to claim only in a bankruptcy case, even if they are not generally exempt from creditors outside of bankruptcy. Those are the exemptions defined by Bankruptcy Code § 522(d). And Congress further specified exactly how a state may make those bankruptcy-specific exemptions available – by not opting out pursuant to Code § 522(b)(2). Where Congress has already defined both the substantive law and the procedure, in a pervasive federal scheme that generally pre-empts State legislation, Congress has occupied the field. There simply is no room for states to adopt their own bankruptcy-specific exemptions by a procedure other than that provided by the Code, i.e., not opting out of the Bankruptcy Code’s exemptions.”
I think he has a point although don't tell anyone - I'll be hounded out of the debtor's bankruptcy bar. 703.140(b) is called the "Federal Exemptions" in California. It says something like, "if a person files bankruptcy, the person may use the exemptions in this list instead of any other exemtpions." The list is very similar to Section 522(d). One exception is that the wildcard is double 522(d). But clearly there is no wildcard under California law unless the person files bankruptcy.
June 10, 2008
Further Thoughts on Kagenveama
I received a call asking me why Ms. Kagenveama's net income from Schedules I and J of $1,500 was so much different than the B22C means test of minus $4. My first thought was that the means test net income is always less when the debtor owns a home and has car payments because the debtor gets the IRS allowance amounts and the secured debt also. But I looked up the debtor's forms to see if that was the case here.
The debtor's I and J showed $2,572 of monthly expenses. If you take away the mortgage payments which include property taxes and insurance and take away the car expense and insurance, the total monthly expenses are about $1,030. The IRS National Standard and the Local Standard - non-mortgage alone allowed the debtor $1,805 so that is almost $800. The IRS auto allowances on the B22C totaled $614 plus the $186 car payment for a total of $900 but the Schedule J totaled only $444 (Schedule J did not have the $186 car payment, apparently an oversight). In addition, the means test allowed deduction of the amount needed to cure the mortgage of $141 per month and a hypothetical payment to the chapter 13 trustee of $84.
Most interesting to me is that the debtor deducted $100 on the means test as cell phone, pager etc "necessary for health and welfare." If the trustee had objected to $10 of this amount, the means test would not have been a negative amount and a five year plan would have been required (although not necessarily at $1,000 per month).
So the answer to the question, why were the amounts different, is primarily that the debtor's monthly personal expenses were less that the means test allowances. Short and sweet - what a concept!
June 06, 2008
9th Circuit Sets Chapter 13 Plans on Their Head - In re Kagenveama
Maney v. Kagenveama (In re Kagenveama), ---- F. 3d ----, 2008 WL 2278681 (9th Cir. June 2008)
Issue: Where an above-median chapter 13 debtor has negative “disposable income” per the means test but $1,500 per month per schedules I and J, is the debtor required to propose a five year plan and must the plan payment be based on actual income and expenses or may it be based on the means test calculations?
Holding: A five-year plan under these facts is not required nor must the plan payment be based on actual ability to pay.
appeal (direct) from the Bankruptcy Court Arizona
Judge Siler for the majority,
Judge Carlos Bea, concurring and dissenting
The debtor, an above-median debtor, proposed a chapter 13 plan offering to pay $1,000 per month for 36 months. Her net “I and J income,” i.e., real net income, was $1,524 per month. Her “means test” net income was minus $4. The proposed plan would “yield” some $9,000 to the unsecured creditors. The trustee objected to the 36 month proposed length. The bankruptcy court confirmed the plan.
The 9th Circuit affirmed. The code says that “the plan [must pay] all of the debtor’s ‘projected disposable income’ received during the ‘applicable commitment period.’” Section 1325(b)(1). “Disposable income” is defined in Section 1325(b)(2) but “projected disposable income” is not. “There can be no reason for § 1325(b)(2) to exist other than to define the term ‘disposable income’ as used in § 1325(b)(1)(B). ‘If ‘disposable income’ is not linked to ‘projected disposable income’ then it is just a floating definition with no apparent purpose.” “The plain meaning of the word ‘projected,’ in and of itself, does not provide a basis for including other data in the calculation because ‘projected’ is simply a modifier of the defined term ‘disposable income.’”
Also according to the panel, “projected disposable income” has always been linked to "disposable income." “To get from the statutorily defined ‘disposable income’ to ‘projected disposable income,’ ‘one simply takes the calculation . . . and does the math.” In re Alexander, 344 B.R. at 749. Further, this does not lead to an absurd result. The fact that it reaches a different result than pre-BAPCPA practice doesn’t matter. “We ‘will not override the definition and process for calculating disposable income under § 1325(b)(2)-(3) as being absurd simply because it leads to results that are not aligned with the old law.” In re Alexander, 344 B.R. at 747. “Furthermore, we will not de-couple ‘disposable income’ from the ‘projected disposable income’ calculation simply to arrive at a more favorable result for unsecured creditors, especially when the plain text and precedent dictate the linkage of the two terms.” “While the new law may produce less favorable results for unsecured creditors when applied to above-median income Chapter 13 debtors, it is far from absurd to hold that debtors with no ‘disposable income’ have no ‘projected disposable income.’”
As to applicable commitment period, the “applicable commitment period” requirement is inapplicable to a plan submitted voluntarily by a debtor with no “projected disposable income.” “Thus, only ‘projected disposable income’ is subject to the ‘applicable commitment period’ requirement. Id.” “Any money other than ‘projected disposable income’ that the debtor proposes to pay does not have to be paid out over the ‘applicable commitment period.’” “When there is no ‘projected disposable income,’ there is no ‘applicable commitment period.’”
The opinion adds, “We stress that nothing in our opinion prevents the debtor, the trustee, or the holder of an allowed unsecured claim to request modification of the plan after confirmation pursuant to § 1329.”
The dissent argues that the debtor should be required to propose a five-year plan but otherwise he agreed with the majority. “The applicable commitment period allows unsecured creditors who are otherwise not receiving payment from a debtor five years to monitor the debtor’s finances and, in the event the debtor’s disposable income increases during that time, file for plan modification under § 1329."
May 01, 2008
9th Circuit BAP Rules on "Applicable Commitment Period" When Debtor is Self-Employed
Drummond v. Weigand (In re Weigand), --- B.R. --- (9th Cir. BAP Apr, 2008)
Issue: Is the “applicable commitment period” determined by a self-employed person’s gross income, i.e., gross receipts, or net income, i.e., net business income?
Holding: Gross income
Judge Ralph Kirscher, Montana
Jury, Pappas, Dunn
Opinion by Jury
The debtor is self-employed. His gross income makes him an “above-median” debtor. When business expenses are deducted, he is below-median. He proposed a three year chapter 13 plan and the trustee objected to the length. The bankruptcy court confirmed the plan over the objection.
The BAP reversed. The code defines CMI as all income whether or not it is taxable. CMI determines the applicable commitment period, i.e., the length of the plan. As to disposable income, i.e., the amount of the plan payment, the code “provides that business deductions are taken from the debtor’s current monthly income to arrive at disposable income under § 1325(b)(2)[(B)].” “We start with the plain meaning rule and examine the statutory language in §§ 101(10A) and 1325(b)(2). If the statutory language is clear, we must apply it by its terms unless to do so would lead to absurd results.” CMI includes all income and “If business expenses are deducted from gross receipts to determine a chapter 13 debtor’s current monthly income, then there would be no need for § 1325(b)(2)(B), which provides for the same deductions. We conclude that § 1325(b)(2) plainly and unambiguously requires a debtor to deduct business expenses from current monthly income [when computing disposable income only].”
Note: The B22C form instructs the debtor to deduct business expenses from current monthly income or "above the line." The BAP said that is wrong and the form will have to be changed.
February 14, 2008
9th Circuit BAP Rules on Ipso Facto Clauses
Dumont v. Ford Motor Credit (In re Dumont), --- B.R. --- (9th Cir. BAP Jan, 2008)
Issue: Can an purchase money secured creditor enforce an ipso facto default clause post-bankruptcy when the debtor has not reaffirmed, redeemed or surrendered the collateral?
Judge James Meyers, San Diego
Baum, Montali, Dunn
Opinion by Redfield Baum, Arizona
This post-BAPCPA chapter 7 debtor valued her car in her schedules at $5,800. She owed FMC $8,300. In her Statement of Intention, she checked the box, “Debtor will retain collateral and continue to make monthly payments.” FMC sent her a reaffirmation agreement which she did not sign. After the bankruptcy case was closed, Ford repossessed the car. The debtor was post-petition current. The debtor reopened the case and asked for contempt which the bankruptcy court denied. The debtor argued the debt is covered by Section 521(a)(2) and that she performed her stated intention.
The BAP affirmed. It said the “ride-through” provisions allowed by In re Parker, 139 F.3d 668 (9th Cir. 1998) have been overruled by BAPCPA. Parker held that the code only required the filing of the form and doing one of the three choices on the form “if applicable,” i.e., if the debtor chose one of the three options. That language is still in the code but now there is Section 362(h) which gives Ford relief if the debtor does not chose and perform one of the three options i.e., surrender, reaffirm or redeem.
The BAP said the debtor also did not comply with Section 521(a)(6) (added by BAPCPA) which requires the debtor to “not retain possession” of personal property secured by a purchase money lien unless the debtor reaffirms or redeems. If he does not, the creditor is given relief and permitted to take any act “permitted by applicable nonbankruptcy law.” The BAP said that new Section 521(d) “allows ipso facto default clauses to be enforced.”
January 19, 2008
9th Circuit BAP Case on Vehicle Deduction in Chapter 13
Ransom v. MBNA America Bank (In re Ransom), ---- B.R. ---- (9th Cir. BAP December, 2007)
Issue: Can an above-median chapter 13 debtor deduct “vehicle ownership expenses” for a vehicle owned free and clear when calculating his disposable income?
Dunn, Baum, Montali
Opinion by Dunn
This over-median chapter 13 debtor had net I and J income of $504 per month. His “B22C” or means test net income was $210 per month. The B22C included a deduction of $471 for vehicle ownership expense even though the vehicle was paid off. The debtor proposed a plan of $500 per month for 60 months which paid about 25% to unsecured creditors. MBNA objected and the court denied confirmation. The BAP granted leave to appeal the interlocutory order.
The BAP affirmed. The opinion includes a nice summary of all of the cases on both sides of this issue. The code says, “[t]he debtor’s monthly expenses shall be the debtor’s applicable monthly expense amounts specified under . . . the Local Standards.” “Applicable” modifies the meaning of “monthly expense amounts.” If we granted the debtor [a deduction for something he does not pay], we would be reading ‘applicable’ right out of the Bankruptcy Code.”
The debtor argued that a paid-off vehicle is going to require more maintenance and repairs and those expenses are not in the IRS tables otherwise. The BAP rejected that. The BAP commented in a footnote, “Even the court in Wilson, which ultimately allowed the debtor the vehicle ownership expense deduction, admitted:
'The irony is palpable that Congress’[s] efforts to eliminate perceived abuses in the bankruptcy system by forcing debtors into Chapter 13 also diminishes payments to unsecured creditors by mandating the use of fictitious amounts of income and expenses.'”
January 09, 2008
9th Cir BAP Rules on Chapter 13 "Early Discharge" Issue
Fridley v. Forsythe (In re Fridley), ---- B.R. ---- (9th Cir. BAP December, 2007)
Issue: Can a debtor, at a given point into the chapter 13 plan, simply pay all of the forthcoming payments under the plan at once and receive a discharge immediately?
Holding: Not without seeking a modification of the plan through a noticed motion and establishing good faith.
Judge Paul Snyder, Washington
Klein, Montali, Jury
Opinion by Klein
These are under-median chapter 13 debtors. “The plan confirmed in June 2006 provided for payments of $125 per month and, in paragraph 3.E.2, that the debtors would pay their projected disposable income of $0 for no less than the applicable commitment period of thirty-six months.” The debtors’ income increased 45% that year but they did not report that to the trustee. “In May 2007, during plan month fourteen, the debtors paid the trustee $2,900. This prepayment brought the total paid to slightly more than the $4,500 required by the 36-month plan.” “The debtors filed a motion for entry of discharge pursuant to § 1328(a),” which the trustee opposed. The Bankruptcy Court denied the motion saying that the payments required under the plan were not “complete” and that a Sunahara type modification was required. Furthermore, the “proposed early payoff” was not in good faith because of the increased income.
The BAP affirmed. “The narrow statutory question is whether the phrases ‘completion by the debtor of all payments under the plan’ and ‘completion of payments under [the] plan’ in §§ 1328(a) and 1329(a) include an implied temporal requirement that the chapter 13 plan remain in effect for the ‘applicable commitment period,’ as specified in the plan.” Klein wrote, “The interplay of §§ 1328(a) and 1329(a) invites a race whenever a debtor’s income increases during the performance of a plan. The debtor tries to reach § 1328(a) payment completion before a trustee or creditor forces a § 1329(a)(1) increase in plan payments by way of motion made between plan confirmation and completion of payments.” Rule 3015(g) requires a noticed motion before a modification can be entered. A modification requires “good faith.” “[G]ood faith is to be assessed through the matrix of whether the plan proponent ‘acted equitably’ taking into account ‘all militating factors’ in a manner that equates with the ‘totality’ of circumstances.” BAPCPA did not change any of this. “After BAPCPA, the § 1325(b)(1) ‘applicable commitment period’ continues to operate as a temporal requirement.” “Thus, part of the statutory bargain inherent in chapter 13 is that the debtors must, for the prescribed life of the plan, run the gauntlet of exposure to trustee or creditor requests to increase payments.” “A debtor desiring to prepay a chapter 13 plan and obtain an early discharge without paying allowed unsecured claims in full must follow the § 1329 modification procedure prescribed by Rule 3015(g).” “Since the debtors’ plan [here] would not pay all allowed unsecured claims in full and since they committed themselves to thirty-six months, their prepayment does not ‘complete’ their plan for purposes of §§ 1328(a) or 1329.”
December 02, 2007
9th Circuit BAP rules on the "Community Property Discharge"
Rooz v. Kimmel (In re Kimmel) ---- B.R. ---- (9th Cir. BAP November, 2007)
Issue: Can a creditor seize a person’s interest in his spouse’s wages in California after the spouse has filed a bankruptcy petition and received a discharge?
Judge Dennis Montali
Dunn, Markell, Klein
Opinion by Dunn
Creditor Rooz sued the debtor and his wife in 1991. In 1993 wife filed chapter 7 and received a discharge. In 1995, creditor obtained a state court judgment against the husband. Immediately thereafter, husband and wife entered into an agreement making wife’s post-agreement wages her separate property. In 2005, with creditor still trying to collect the judgment against husband, husband filed his own chapter 7. Creditor filed a non-dischargeability complaint against debtor-husband. The Bankruptcy Court found that the debt was discharged. Creditor then tried to seize the husband’s interest in wife’s paycheck (note: this does not seem possible but that is what the opinion says). Creditor also attacked the post-nuptial agreement as a fraudulent conveyance in state court. Wife reopened her case and removed the new state court case to the Bankruptcy Court. The Bankruptcy Court dismissed the case saying that the “community property discharge” prevented creditor from proceeding against the wages even if the post-nuptial agreement could be avoided as a fraudulent conveyance.
The BAP affirmed. Section 524(a)(3) states:
A discharge in a case under this title – . . .
(3) operates as an injunction against [any] act, to collect or recover from, or offset against, [community] property of the debtor . . . acquired after the commencement of the case, on account of any allowable community claim, except a [non-dischargeable] community claim . . .
A “community claim” is defined in 101(7) as a claim:
that arose before the commencement of the case concerning the debtor for which [community] property . . . is liable, whether or not there is any such property at the time of the commencement of the case.
At the time of wife’s bankruptcy, the claim of creditor was a “community claim” because “it was enforceable against the property of the Kimmel community.” It was a debt for which community property could have been seized by the creditor. Under California Family Code Section 910(a), community property is liable for the debts of either spouse, even those existing at the time of the marriage (see Cal. Family Code Section 902). Therefore whether the wages are separate property per the post-nuptial agreement or are community property of a spouse acquired after the bankruptcy, the property cannot be seized to collect a community debt which existed at the time of the wife’s bankruptcy. The fact that husband and wife attempted a fraudulent conveyance (if it were found to be that) does not change the result because the code is clear.
The rationalization of this of course is that community property is property of the estate and is subject to sale by the trustee in the bankruptcy case of either spouse. If all existing community property is therefore applied to the debt, the discharge would lose some meaning if the creditor could continue to seize community property after the discharge, albeit, the non-filed spouse’s interest only.
The Bankruptcy Judge also ruled that the fraudulent conveyance action could not proceed because of the statute of limitations, i.e., the transfer was ten years earlier.
Note also that the case discusses the requirement that if the debtor believes that the claim against the non-filing spouse is non-dischargeable, a non-dischargeability complaint must be filed in the case of the filing spouse or the creditor cannot seize post-bankruptcy community property even to collect a non-dischargeable debt.
Final note, the BAP points out that if there is a subsequent divorce, the community property discharge will no longer protect property of a non-filing spouse.
December 01, 2007
Japanese Bankruptcy Court Authorizes Sale of Hotel in Hawaii
Iida v. Kitahara (In re Iida) ---- B.R. ---- (9th Cir. BAP September, 2007)
Issue: Can a trustee appointed by a Japanese court pursuant to a Japanese bankruptcy proceeding order the sale of real property in the US without getting permission from a US bankruptcy court first?
Judge Robert Faris, Hawaii
Dunn, Klein, Smith
Opinion by Dunn
This is a chapter 15 case. Iida is a debtor in a bankruptcy case in Japan. Kitahara is the trustee. Iida has no creditors in the US. The Japan bankruptcy case was apparently similar to a chapter 7 in the US. Iida owned several Hawaiian corporations which owned significant properties in Hawaii. The trustee took control of the Hawaiian corporations, via Hawaiian state law corporate procedures, and obtained an order of the Japanese court permitting sale of some of the real properties located in Hawaii. Iida then sued the trustee in Hawaii for declaratory relief arguing that he was still in control of the Hawaiian corps because the Japanese trustee did not obtain consent of US courts before taking the actions he took. After that, the trustee sought an order of the Japanese court making it clear that he had the power to do what he was doing, apparently to use as a defense to the declaratory relief complaint. The Japanese court granted the order.
The trustee then filed a chapter 15 petition in Bankruptcy Court in Hawaii. The BAP opinion called this a “petition for recognition.” The debtor opposed the petition saying that the trustee should have done that before taking the actions he already took. The Bankruptcy Court granted the petition and the trustee removed the state court dec relief action to the Bankruptcy Court and then filed a motion to dismiss it. The Bankruptcy Court dismissed the adversary proceeding saying that the trustee was authorized to do what he did and that he did it properly under Japanese, US and Hawaiian law.
The BAP affirmed saying “nothing in either the Bankruptcy Code or Hawaii state law requires the [Japanese trustee] to obtain a further order from a court within the United States recognizing his authority as trustee before exercising ownership rights.” “[W]hen activity by a foreign representative in the United States is not a subject of controversy, the courts historically have had no occasion to become involved, it being a basic premise of American constitutional law that courts decide only cases and controversies. Measures taken by a foreign representative in the United States that do not require invoking the machinery of the courts and that all counterparties accept as legitimate do not present a controversy and are presumptively valid. If, however, the foreign representative’s authority or capacity is challenged, then there is a controversy that would be appropriate for judicial application of principles of comity.” “Chapter 15 is fundamentally procedural in nature and does not constitute a change in the basic approach of United States law, which, as we have explained, has long been one of honoring principles of comity.” “Nothing in the statute requires prior judicial permission for acts that do not implicate matters of comity or cooperation by courts.”
November 18, 2007
9th Circuit BAP Rules on Chapter 13 Plan Payments
Pak v. eCast Settlement Corporation (In re Pak) ---- B.R. ---- (9th Cir. BAP November, 2007)
Issue: Must the court confirm a chapter 13 plan when the plan proposes to pay the B22 disposable income for the applicable commitment period even though the debtor is actually able to pay considerably more?
Judge Leslie Tchaikovsky
Dunn, Carroll, P, Klein
Opinion by Dunn (Klein concurring)
The debtor’s income for the six months prior to filing was zero for four months, because he was unemployed, and $8,600 per month for the two months prepetition because he found a good job. His current monthly income (“CMI”) was therefore about one-third of his actual monthly income on the petition date. The debtor filed a chapter 7 petition on October 30, 2005, i.e., post-BAPCPA, and the UST filed a 707(b) motion which was granted. He then converted to chapter 13. His I and J net income was $990 per month. He proposed a $300 plan for 36 months which was apparently his CMI less his monthly expenses. The bankruptcy court denied confirmation of the plan and dismissed the case.
The BAP affirmed. The “statutory battleground” is Section 1325(b)(1)(B) which provides that the plan must “as of the effective date of the plan,” pay in “all of the debtor’s projected disposable income to be received in the applicable commitment period.” Disposable income is defined in Section 1325(b)(2) as the debtor’s “current monthly income . . . less amounts reasonably necessary for the debtor’s maintenance and support . . .” Current monthly income is defined in Section 101(10A) as the actual income received by the debtor during the six calendar months prepetition. The debtor argued, of course, that the starting point is the defined CMI and not the actual income set forth on Schedule I.
The BAP pointed out at the outset that BAPCPA did not change the language in 1325(b)(1)(B) that the plan must pay the debtor’s “projected disposable income.” It “changed the determination of ‘disposable income’” in 1325(b)(2) by adding definitional terms. BAPCPA also did not change 1322(a)(1) that the plan pay in “future earnings or other future income.” The BAP said use of the word “projected” to modify “disposable income” “does not fit neatly into the mindless ‘multiplier’ as the ‘plain meaning’ decisions would suggest.” This is because projected disposable income is not defined and the term “projected” is “essentially forward looking.” Its use is consistent with the requirement that the projected disposable income be applied “as of the effective date of the plan” which logically is the date of confirmation of the plan. Congress intended BAPCPA to force debtors to “make a good-faith effort to repay as much as they can afford.”
This analysis helps those whose income in the previous six months has decreased. Using the last six months may make it impossible to get a plan confirmed if the income has gone down. “It makes no sense to interpret ‘projected disposable income,’ governing debtor’s future payments under their chapter 13 plans, as cast in stone by their pre-bankruptcy history, without any opportunity for the trustee, creditors or the debtor to offer rebutting evidence as to changed income circumstances before the effective date of the plan.”
The BAP finally pointed out that if projected disposable income definition is cast in stone, “plan modifications would be prohibited” because there would never be “changed circumstances.”
In Klein’s concurrence, he agrees with the majority but said he prefers to affirm “on a different theory.” “The basic premises of Section 1306(a) and 1322(a)(1) [is] that chapter 13 plans are funded by future income that really exists and [the means test argument here] runs counter to the only thing that appears to be unambiguous about the 2005 consumer amendments to the Bankruptcy Code: the policy that more debtors should be diverted from chapter 7 liquidation to chapter 13 repayment plans.” The “rigid analysis offends the policy.” He agreed that a fixed projected disposable income would essentially prevent modifications to plans. He also points out that he does not think this debtor proposed the plan in good faith since he can clearly pay more. “It is credible to argue that the debtor’s plan is an intentionally passive-aggressive, ‘gotcha’ response to the straightjacket that was nominally imposed by the 2005 amendments. While to some it smacks of delicious irony, there is a point of degree at which a debtor’s proposed chapter 13 plan that can move into the realm of overreaching that it is lacking in ‘good faith.’”
November 12, 2007
9th Circuit Rules on Award of Fees for Appealing an Award of Fees
North Sports, Inc. v. Knupfer (In re Wind n’ Wave), --- F.3d --- (9th Cir. November, 2007)
Issue: When the petitioning creditors of an involuntary petition successfully appeal the denial of their attorneys fees, should they also be awarded attorneys fees for the appeals? In other words, when the bankruptcy code provides for fees, may fees be awarded for litigating the fee award?
Appeal from BAP
Judge Cynthia Holcomb Hall
This case began with an involuntary petition. Ultimately an order for relief was entered and a trustee was appointed. The petitioning creditors then sought fees under Section 503(b)(4) of the Bankruptcy Code. The bankruptcy court denied the request. The BAP reversed. The BAP however did not award fees for bringing the appeal to the BAP. The petitioning creditors appealed to the 9th Circuit seeking the fees for the BAP appeal and for this 9th Circuit appeal.
The 9th Circuit reversed and remanded to the BAP. Section 503(b)(4) “is silent regarding expenses incurred by a creditor in appealing or defending a lower court’s award or denial of fees. However, we do not find, as respondents urge us to, that statutory silence forecloses a fee award here. Along with other circuits, we have granted compensation for litigation over a fee award under fee shifting statutes even when those statutes did not expressly allow for it.” The court said, “where a creditor receives attorney’s fees under Section 503(b)(4), the time and expenses devoted to securing the attorney’s fee award are also compensable if the Smith test is met.” The Smith test has two parts, “1) the services for which compensation is sought satisfy the requirements of 330(a), and 2) the case ‘exemplifies a ‘set of circumstances’ where the time and expense incurred by the litigation is ‘necessary.’ ” “’[T]he underlying purpose of [both Sections 330(a) and 503(b)(4)] would be subverted if the fee award could be diluted through the appeal process.’” The 9th Circuit said that the fees incurred in appealing were “necessary” because the bankruptcy court did not apply the proper rule in the first place forcing the appellate process to go forward. There is no question that the fees requested were reasonable.
October 19, 2007
Appreciation of Property During the Chapter 7 Dilemma
There is a lot a lip service given to the fact that exemptions are determined as of the petition date. But if the property, exempt at filing, appreciates in value during the administration of the estate, who gets the benefit of the appreciation? In the Ninth Circuit the answer is clearly - the estate. The Chappell case confirms that. The argument is that the property is not exempt as of the date of filing, x amount of value in the property is exempt. Since exempt property is still property of the estate, the only thing the debtor has the right to is the amount of the exemption in the property - at some point in time depending on the trustee's activity during the administration of the estate.
But this analysis goes against the history of bankruptcy in my opinion. In the earliest days, the 1700s, states had insolvency laws that permitted a person to be discharged from jail in return for a surrender of his property. There was some property he did not have to surrender - whatever the state decided was the minimum the debtor needed to have a meaningful existence. In the Bankruptcy Act of 1800, the debtor was permitted to keep "necessary wearing apparel and necessary bed and bedding." That was the sum total of allowed exemptions. The whole idea has always been that in exchange for all your property that creditors have the right to seize anyway, you get a fresh start - the discharge.
Tara Twomey pointed out to me that it makes sense if there is property which has equity for the estate, as of the petition date. The trustee can decide to sell it now or later. But if there is no equity as of the filing date, the property should immediately revert to the debtor once the opportunity to object to the exemption has run.
Klein v. Chappell (In re Chappell), ---- B.R. ----, 2007 WL 2200594, (9th Cir. BAP July, 2007)
Issue: Is “postpetition appreciation of exempt property . . . treated the same under the federal exemption scheme as under a state’s exemption scheme?”
Holding: Yes, the appreciation belongs to the estate.
Judge Thomas Glover
Riblet, Klein, Montali
Opinion by Riblet
The debtors filed chapter 7 and claimed their residence in Washington exempt under the federal exemption, Section 522. The trustee did not object. The debtor did not seek abandonment. Two years later the bank filed a Motion for Relief. The trustee opposed the motion arguing that the property had appreciated $200,000 leaving $140,000 for the estate if sold. The trustee asked the bankruptcy court to rule that the appreciation belonged to the estate. The court denied the motion ruling, according to the BAP, that “the residence was withdrawn from administration pursuant to § 522(l) at the expiration of the time to object to exemptions and there was no remaining interest in the residence for the trustee to administer.” Note: Washington has not “opted out” of the federal exemption scheme.
The BAP reversed saying, “In view of the United States Supreme Court’s accordance of equivalence of treatment to federal and state exemptions, we disagree with the debtors’ contention that by claiming a federal residence exemption they were entitled to an ‘aggregate’ interest in the entirety of their residence.” This is especially so here where the debtors exempted a specific amount on Schedule C.
As to the lengthy delay by the trustee, the BAP said, “The debtors here are in large part the ‘victims’ of their own inaction. Their chapter 7 petition was filed on June 30, 2004. The record reveals they took no action to extricate their property from the estate until two years later when the secured creditor sought relief from the automatic stay and the trustee expressed his intent to sell.”
Note: This case has a nice summary of the law that the estate gets the post-filing appreciation of the property of the estate. It also analyzes the effect of stating a specific amount of dollar exemption on Schedule C. The debtor is limited to that amount.
October 03, 2007
9th Circuit BAP Rules on the "Hanging Paragraph"
This seems to me to be a pretty accurate analysis on the effect on the secured claim when the debtor returns a "910" vehicle.
Wells Fargo v. Rodriguez (In re Rodriguez) ---- B.R. ---- (9th Cir. BAP August, 2007)
Issue: When the debtor surrenders a “910” vehicle as part of a chapter 13 plan, does that end the secured creditor’s right to a deficiency?
Judge Paul Snyder (Seattle)
Montali, Dunn, Jaroslovsky
Opinion by Montali
The chapter 13 debtor filed a plan offering to pay unsecured creditors in full. It provided that a “910” vehicle would be returned to WFB in full satisfaction of any claim of WFB. WFB filed a proof of claim seeking a deficiency and an objection to the plan. The parties did not dispute that the “hanging paragraph” applied to this case. The bankruptcy court ruled for the debtor and confirmed the plan.
The BAP reversed. Section 1325(a)(5) provides that 506 (a) doesn’t apply to 910 claims. As to treatment of 910 claims, the debtor can make a deal with the creditor, pay the claim in full, or, return the vehicle. As to returning the vehicle, Congress presumably provided that 506 would not apply because 506(a)(2) limits the deficiency to the total claim less “replacement value.” Thus when the vehicle is returned, the deficiency is the total claim less the actual resale price, or presumably a higher amount.
The opinion quotes Travelers, “’we generally presume that claims enforceable under applicable state law will be allowed in bankruptcy unless they are expressly disallowed” under section 502’. Wells Fargo’s deficiency claim, if any, will come from state law after it disposes of the Aztec.” If there is to be no deficiency, that must come from Section 502(b). The opinion says that once the vehicle is surrendered, 506 doesn’t apply and never did. The estate has no further interest in the vehicle. “The real question is whether Congress intended that, in return for protection from cramdown, 910 creditors who recover surrendered 910 vehicles have lost their right to a deficiency claim.” “Congress may have intended that when a 910 vehicle is not surrendered the secured creditor gets an unfairly large share of the pot but when the 910 vehicle is surrendered it gets none of the pot, thereby resulting in rough fairness between divergent creditor interests. If this was the intent of Congress, it was not expressed clearly enough for us to ignore the effect of section 502.”
Note: In accord In re Wilson, 2007 WL 2405284 (10th Cir.BAP-Kan.). Opposite result in In re Vanduyn, 2007 WL 2484089 (Bkrtcy.M.D.Fla., Judge Paskay).