BankruptcyProf Blog

New SCOTUS Wiki Editor

I have been invited by Tom Goldstein's team at SCOTUSBlog.com to be the SCOTUS Wiki Editor for the case of Hamilton, Chapter 13 Trustee v. Lanning.  My mission is set forth by Manager Erin Miller:

You will be responsible for all the entries for the Lanning page that I initially listed: the three articles of roughly 800 words each (the argument preview, oral argument recap, and opinion analysis) and links to news/blog coverage.  It would also be great if you could link to any new amicus briefs that are posted in the case (we will post all the merits briets by the parties as they come in).
 
You and your blog will be listed as the caretakers of the Lanning page.  In addition, we will post the articles that you produce on the blog as well as the Wiki, if you would like.  If that interests you--we generally aim for previews to go up on the blog two days before an argument, and recaps and analysis to go up within two days of the event (the sooner the better).  Our editor Amy Howe reviews everything that goes up on the blog, so we would ask you to submit a draft a few days before (this is mostly a formality).

I consider this a serious honor and am up to the task. 

Prof. Mark Scarberry Article on Loan Mods

An email from Mark:

In case list members might be interested, let me say that I've just posted the following forthcoming article on SSRN:
 
A Critique of Congressional Proposals To Permit Modification of Home Mortgages in Chapter 13.
 
You can read the abstract and download the full text at http://ssrn.com/abstract=1520794. There may yet be a few edits, but it is in essentially final form.
 
The article follows up on my December 2007 congressional testimony, on the debate or conversation on mortgage modification at a January 2009 AALS program, and on the presentation I gave as part of the Pepperdine Law Review symposium on the mortgage crisis in April 2009, with some of you in attendance. The article will be published soon as part of the Pepperdine Law Review symposium edition.
 
As anyone who attended the AALS presentation or the Pepperdine symposium would expect, the article is sharply critical of the conclusions Georgetown Law Prof. Adam Levitin draws from his empirical studies. 
 
Best wishes,
Mark Scarberry
Pepperdine

NY Times Article on Why Loan Mods Fail

The article is here.  Thanks to Prof. Jean Braucher for pointing it out. 

Back on the Job

Well, my son and I got back from Washington on Wednesday night.  I had two hearings on Thursday which took the whole day and phone call after phone call on Friday.  Today and tomorrow I can get some work done.  I have 14 chapter 11s going on right now and will probably file another on Monday.  They are virtually all individuals trying to save real property.  About half are trying to save their homes, half have additional pieces of real property they purchased in the last few years when loans were easy to get.  The properties are always underwater. The debtors have tried extensively to get a "loan mod" prior to coming to me.  The retainers I get are usually small and the paperwork huge.  My most common statement to my exasperated clients is "GM filed the same chapter 11 that you filed."  It is my sense that the judges are getting a little exasperated also with the number of cases filed by people who simply cannot afford the property they have and will not accept that - they are hoping that a delay will somehow help.  In the chapter 11 bankruptcy arena, I rarely see aggressive efforts by the banks - and I am no fan of banks.  Most banks in chapter 11 wait a few to several months before taking action to get relief from stay and finish the foreclosure, even if they are not getting monthly payments.  It may be because they are so busy, or the few firms that do the work in bulk are so busy, or because they too are hoping that a delay will somehow help to get the loan caught up or paid.  The tragedy is that the chapter 13 limits are not increased.  If the secured debt limit was increased to $2 million, my 14 cases would become two or three.  I'll post the Circuit Court of Appeals Cases for the past two weeks today and tomorrow.   Thanks for continue to follow my blog.  JH  

30 Years, and by the way, We're Here

It was 30 years ago today (think the Beatles), November 29, 1979 - I was sworn into the California Bar.  So tomorrow I start the next 30 years. 

My son and I went to Ford's Theater today - it was closed to the masses because The Christmas Carol was playing live.  So we walked to the Washington Memorial, then the Lincoln Monument.  I got choked up reading Lincoln's second inaugural, carved into one wall.  It's the shortest inaugural ever made.  The speech is worth a read.  God decided to get rid of slavery, he says, and made both sides pay and if it's not over, so be it - it will proceed (March 1865): 

"Fondly do we hope--fervently do we pray--that this mighty scourge of war may speedily pass away. Yet, if God wills that it continue, until all the wealth piled by the bond-man's two hundred and fifty years of unrequited toil shall be sunk, and until every drop of blood drawn with the lash, shall be paid by another drawn with the sword, as was said three thousand years ago, so still it must be said "the judgments of the Lord, are true and righteous altogether"

"With malice toward none; with charity for all; with firmness in the right, as God gives us to see the right, let us strive on to finish the work we are in; to bind up the nation's wounds; to care for him who shall have borne the battle, and for his widow, and his orphan--to do all which may achieve and cherish a just and lasting peace, among ourselves, and with all nations."

My son and I then went out to the steps and someone was playing a tape of Martin Luther King's I Have Dream speech.  We sat on the steps staring out on the reflecting pool listening to MLK. 

"I say to you today, my friends, so even though we face the difficulties of today and tomorrow, I still have a dream. It is a dream deeply rooted in the American dream.

I have a dream that one day this nation will rise up and live out the true meaning of its creed: "We hold these truths to be self-evident: that all men are created equal."

I have a dream that one day on the red hills of Georgia the sons of former slaves and the sons of former slave owners will be able to sit down together at the table of brotherhood.

I have a dream that one day even the state of Mississippi, a state sweltering with the heat of injustice, sweltering with the heat of oppression, will be transformed into an oasis of freedom and justice.

I have a dream that my four little children will one day live in a nation where they will not be judged by the color of their skin but by the content of their character.

I have a dream today.

I have a dream that one day, down in Alabama, with its vicious racists, with its governor having his lips dripping with the words of interposition and nullification; one day right there in Alabama, little black boys and black girls will be able to join hands with little white boys and white girls as sisters and brothers.

I have a dream today.

I have a dream that one day every valley shall be exalted, every hill and mountain shall be made low, the rough places will be made plain, and the crooked places will be made straight, and the glory of the Lord shall be revealed, and all flesh shall see it together.

This is our hope. This is the faith that I go back to the South with. With this faith we will be able to hew out of the mountain of despair a stone of hope. With this faith we will be able to transform the jangling discords of our nation into a beautiful symphony of brotherhood. With this faith we will be able to work together, to pray together, to struggle together, to go to jail together, to stand up for freedom together, knowing that we will be free one day.

And if America is to be a great nation this must become true. So let freedom ring from the prodigious hilltops of New Hampshire. Let freedom ring from the mighty mountains of New York. Let freedom ring from the heightening Alleghenies of Pennsylvania!

Let freedom ring from the snowcapped Rockies of Colorado!

Let freedom ring from the curvaceous slopes of California!

But not only that; let freedom ring from Stone Mountain of Georgia!

Let freedom ring from Lookout Mountain of Tennessee!

Let freedom ring from every hill and molehill of Mississippi. From every mountainside, let freedom ring.

And when this happens, when we allow freedom to ring, when we let it ring from every village and every hamlet, from every state and every city, we will be able to speed up that day when all of God's children, black men and white men, Jews and Gentiles, Protestants and Catholics, will be able to join hands and sing in the words of the old Negro spiritual, "Free at last! free at last! thank God Almighty, we are free at last!"

It was really a great day.  JH

Happy Thanksgiving and We're Off

My son Desmond and I are leaving for Washington DC in about an hour.  We are going to go to the Supreme Court next Tuesday to hear oral arguments on the two bankruptcy cases, Espinosa and Milavetz.  I got a guest pass for myself but they would only give me one - they said there is a lot of interest in the cases (nah!).  My son will have to wait in line.  We will go over there on Monday to see if we can get in then to listent to whatever is going on.  I'll post about it during the trip.  We're going today because two roundtrip tickets to Washington DC leaving today and coming back next wednesday was $441 - total.  Of course its more if you bring more than your tooth brush.  We''ll find out at the airport.  Happy Thanksgiving.  JH   

Rules Changes Beginning December 1, 2009

Amendments to the Bankruptcy Rules Take Effect December 1
The following is a summary of the amendments to the Bankruptcy Rules which will take effect December 1, 2009.  The complete text of the new rules, along with official reports, summaries and explanations, are available at:

 http://www.uscourts.gov/rules/newrules6.htm .

A.  Rule 9006:  Changes to the Time Computation Rules
The most pronounced amendment to the bankruptcy rules is in Rule 9006 regarding time computation, i.e. the number of days or hours from a triggering event.  All calendar days are now counted, not just “business days” — excluding the date of the event that triggers the period, but including weekends and holidays.  If, at the end of the time period the deadline day is on a weekend or holiday, then the period is extended to the next day that is not a weekend or holiday, with a proviso for state holidays as discussed below.  These same rules apply for calculation of hourly time periods, except if the hourly time period ends on a weekend or holiday, then the deadline for the hourly time period is automatically extended to the same time on the next day that is not a weekend or holiday.

The amended rules introduce a quirk involving state holidays that must be taken into account.  First, if the deadline set by the rules is on a state holiday that is not a federal holiday, there is an automatic extension of the time period to the next day that is not a weekend or a holiday, but only if the time period being counted is one that goes forward from the event that triggers the deadline.  For example, a rule requiring a filing 14 days after an order of relief would be extended to 15 days if the deadline day is a state, but not federal, holiday.  This change is designed to prevent parties from missing deadlines because they incorrectly believed the courthouse was closed on the state holiday.  However, if the rule requires the parties to count backwards from the triggering event, then the deadline is not extended if the final day is a state, but not federal, holiday.  For example, a rule requiring objections to a proposed sale 7 days before the date of the sale would not be extended to 8 days if the deadline date is a state, but not federal, holiday.  Thus the parties do not lose an extra day because the deadline date is a state holiday.  Practitioners should take extra care counting backwards from deadlines because, if the deadline is extended by a weekend or federal holiday, then the time period to act is effectively shortened by the amended rules.

    The amended rules continue the practice of extending deadlines in cases when the clerk’s office is inaccessible.  The amended rules specifically provide that in cases of electronic filing, if the clerk’s office is inaccessible on the deadline day, then the filing date is midnight of the next day the office is open, presuming that day is not a weekend or holiday.  For non-electronic filing, it is the normal period of closure on the next day.  The committee notes clarify that interruptions in the electronic filing system are specifically considered as causing “inaccessibility” of the clerk’s office within the meaning of the rules.

   The committee notes clarify that there are two exceptions to the new calculation rules.  First, if a court ordered calendar date is specifically set by the order, i.e. “November 1st” rather than “7 days from the date of this order,” then November 1st is the hard date, regardless of the rules.  Second, some statutes still require business days be used in calculation: these rules do not affect deadlines set by statute.  See, e.g., 11 U.S.C. § 527(a)(2) (debt relief agencies must provide a written notice to an assisted person “not later than 3 business days” after providing bankruptcy assistance services) (emphasis added).

   Finally, the amended rules modify all the set periods in the rules in order to account for the fact that weekends are now included in time computation.  The various deadlines are amended in the following manner:
• 5-day periods become 7-day periods
• 10-day periods become 14-day periods
• 15-day periods become 14-day periods
• 20-day periods become 21-day periods
• 25-day periods become 28-day periods

B. Additional Rule Changes
In addition to the time calculation measures, a variety of minor changes will be added to the rules.  These are summarized briefly below.

Rule 4008:  A requirement that a cover sheet be filed along with all reaffirmation agreements.  The cover sheet will be included in the Official Forms.

Rule 7052, 7058, 9021:  In order to clarify judgment requirements, Rule 58 of the Federal Rules of Civil Procedure is explicitly made applicable to adversary proceedings.  This clarifies that the separate document requirements for recording judgments apply to adversary proceedings.  All other recording requirements for judgments and orders are determined by Rule 5003(a), which does not have a separate document requirement.

Rule 7052, 9015, 9023:  These rules are amended to change the deadline for filing certain post-judgment motions to 14 days, rather than the 28 day deadline in the 2009 Amendment to the Federal Rules of Civil Procedure (which are generally incorporated by reference into the Bankruptcy Rules).  This is necessary because the deadline for filing a notice of appeal under Bankruptcy Rule 8002 is 14 days rather than the 30 days allowed under Rule 4(a)(1)(A) of the Federal Rules of Appellate Procedure.

Rule 2016:  The rule is updated to reflect the requirement of 2005 Amendments to the Bankruptcy Code that the declaration of compensation paid to the bankruptcy petition preparer as required by 11 U.S.C. § 110(b)(2) must be filed with the petition, rather than 10 days after the petition.

Rule 9006:  Corrects a cross-referencing error in relation to the time requirements for service of process.

Official Form 9F, 10, and 23:  Minor technical changes in these forms are made to comply better with the official language of the bankruptcy code.

The foregoing materials were prepared by Donald H. Cram, III  and Bernard Kornberg of Severson & Werson, San Francisco, California, Robert G. Harris of Binder & Malter, Santa Clara, California, and Neil W. Bason of Howard Rice Nemerovski Canady Falk & Rabkin, P.C., San Francisco, California.

Ninth Circuit Annual Report 2008

This was completed in August, 2009.  I'm a little late in posting it but its kind of a fun read.  There is a little article on page 31 about Dennis Montali and one on Judge Richard Medick who died in 2008 on page 13.   

Prof. Jean Braucher Leads Great Thread on In re Lanning

This is such a great thread from another list serve about In re Lanning, the chapter 13 case now before the Supreme Court which deals with the question, how do you compute the plan payment for an over-median debtor? 

From Karen Cordry,
Well, what can I say -- they decided Marrama on the "we don't believe Congress wanted this crazy result" analysis.  I think deciding all three case (Espinosa, the trustee exemption case (Reilly?) and this one) on the "anti-abuse" approach would take a much smaller stretch than that case. 

And, in going back and looking at Lanning, I had forgotten, but that is one where the Tenth Circuit opinion took the flexible view to PROTECT the debtor (she had gotten one-time income during the 6 months prebankruptcy) and using the strict calculation would have left her being required to pay far more than she was actually making.  So, I shouldn't say the latter view is necessarily "anti-debtor," as much as "pro reality."  On the whole, my guess is that upholding the Tenth Circuit approach will probably benefit more creditors than debtors, just because of the asymmetry arising from the debtor's right to choose when to file, and the fact that the means test quirks tend to go in the direction of allowing more expenses than the debtor actually pays.  But, the legal fact is that it actually works both ways and the debtor is the one trying to uphold the ruling in this instance. 

Karen Cordry, Bankruptcy Counsel
National Association of Attorneys General, Washington, DC  20036

From Prof. Jean Braucher,
The Supreme Court granted cert on this question:

“Whether, in calculating the debtor's "projected disposable income" during the plan period, the bankruptcy court may consider evidence suggesting that the debtor's income or expenses during that period are likely to be different from her income or expenses during the pre-filing period.”  The question is much broader than necessary to decide the Lanning case.

A possible answer starts with the point that the debtor in this case, whose income had an upward blip because of a one-time buyout from her former employer during the six months before filing, could simply have waited to file, that is until CMI lined up with her current income.  There is no indication she needed to rush, for example to stave off foreclosure.  Even if she did need to file immediately, section 101(10A)(A)(ii) provides for the CMI period to be moved forward by the debtor to deal with Lanning-type facts.  Several cases have so held—the debtor also needs to seek approval not to file a schedule of current income.  See notes 66 and 77 in this article of mine for the cites to cases from North Carolina and Illinois:  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1428927 So it is unnecessary to read another mechanism for moving forward the period for measuring CMI into section 1325(b).

Similarly, section 1325(b)(3) incorporates rebuttal on expenses under section 707(b)(2)(B).  Lanning did not involve changed expenses, so this issue need not be reached.  Still, the existence of Code mechanisms for debtors to reduce income or increase expenses for means-testing purposes strongly suggests that Congress did not intend for courts to make up their own other means of doing so.  These provisions were not discussed in the lower court cases, including the circuit court opinion.   The Solicitor General also neglected them in her amicus brief filed in September, even though the brief of the United States does cite section 101(10A(A)(ii) in passing, without considering its implications for the case.

Might the court dismiss the case without a decision once it realizes that the lower courts in this case did not address many twists and turns in the Code in their analysis?  Also, the debtor was unrepresented in the BAP and circuit court, making this a very bad case for a Supreme Court decision.  If the court does decide it, it is because it is looking for a way to complicate (and toughen) means testing with another layer using judicial discretion.   Means testing has turned out to be easier on debtors than prior law.  Lanning is an odd case where, as so far inadequately briefed, it looks like adding discretion helps the debtor.  The reality is that the trustee system is looking to “fix” means testing by making it tougher—its approach would have the debtor go through the hassle of the mechanical test and then also have to prepare to pass a discretionary test administered case-by-case by judges.  If Congress doesn’t like the results under means testing, shouldn’t it fix the statute?  Or better yet, it could repeal means testing and go back to the old case-by-case approach.  But if the court goes where the trustee system wants it to, we’ll end up with two layers of means testing, mechanical, followed by discretionary.  Sigh. 

From Mark Cornell,
I forgot about the Espinosa case. As a Don Quixote of the Debtor's Bar, I am embarrassed by the position taken by the Debtor in Espinosa. That case is going to do more harm than good. A victory by the debtor will be small potatoes compared to the damage a loss will do. I routinely claim exemptions in retirement assets and PI claims as "100%", which while not an issue directly in Espinosa, may get impacted by the ruling. IMNSHO, the debtor will do very poorly before the Supreme Court.

I also agree that the Lanning decision is a double edged sword. I wonder if the Court is going to get that. The better rule is to allow courts the flexibility to address each debtor on their merits, but that is certainly not the intent of Congress in passing the BARF.

We can disagree as to whether or not "the means test quirks tend to go in the direction of allowing more expenses than the debtor actually pays".  While the majority view is that in a chapter 7 case, the debtor can deduct ownership expenses for cars with no loans and secured debt payments for property being surrendered, the inflexible budget items like food, rent and utilities are penurious. Sometimes the Debtor's B22 shows less ability to pay then reality, sometimes it shows more. The one thing everyone should be able to agree with is that the B22 is an abomination in chapter 13 cases.

Mark Cornell
Concord, NH

From Jim Gray,
In analyzing whether these views are anti-debtor or pro-reality, I look at the "reality" of the Means Test in which student loan payments, as just one example, are not counted as a legitimate deduction even though they cannot be discharged in a 7 nor can they be fully paid off with the accruing interest in a 13.

I've had a few clients stopped by the B22 even though the reality of their situation did not match the "one size fits all" test.  They weren't "abusing" anything, but tell that to Sen. Grassley.

This mechanical test had only one purpose that anyone can seriously consider, seeking to make debtors continue paying on credit cards for up to 6 months before they could file a 7.

And the sad thing is, it appears that a number of debtors were so scared that they paid on credit cards instead of house payments, fueling or at least aggravating the foreclosure crisis.

I think it's poetic justice that the big banks who bought and paid for BAPCPA suffered some mighty big unintended consequences and reaped a catastrophe.  Their lobbyists perhaps owe them a refund.

Jim Gray
Atlanta, GA

From Ken Doran,
Judges, and appellate judges particularly, have a pretty good lot in life and I don't generally feel sorry for them, but in one way I do:  they are obliged to try very hard to assume that the legislature acted intelligently and in good faith, and knew what it was doing, and to find the wisdom that is buried in there somewhere.  That is often, to put it mildly, a fool's errand, and rarely more so than with BAPCPA.  I have no expertise in predicting Supreme Court decisions, but it will not surprise me if they kick it around and spit out a result that leaves us little more illuminated than before; the Rash decision about valuing collateral in Chapter 13 comes to mind.

Kenneth J. Doran / Doran Law Offices / Madison, Wis. / W.D.Wis. /

From Dan Press,
The only "abuse" in Lanning is the fact that the debtor had to include this non-existent income because of the silly six-month lookback.  Seems to me that it should have been dealt with by applying "special circumstances" rather than throwing out the mean test that the banks bought and paid for.   The banks wanted it to be applied strictly, with special circumstances as the only safety valve (and that had to be fought for), so they should get what they wanted.  Yes, what they are realizing now is that all of this "abuse" was non-existent, and by putting in the fake numbers, they are lowering what they get in a 13, and allowing people to file 7 who otherwise couldn't.   Sorry.  I have no sympathy for them.

Let's see who sides with whom in Lanning - which is backwards from most cases.  The trustee in Lanning is advocating for the strict Kagenveama approach, while the debtor wants flexibility.  While that is what some may have predicted in 2005, reality is that most debtors are better off with the Kagenveama approach, and this C13 trustee is arguing against the position of most trustees and creditors.  Watch what position the bankers take - I bet they side with the debtor here!

Dan Press
Chung & Press, P.C.

From Karen Cordary,
Yup, mea culpa, I took back the "abuse" statement.  I had forgotten what the facts were in Lanning and it doesn't apply there.  (As opposed to cases such as Nowlin, where a single debtor making $90,000 a year wanted to file a Chapter 13 plan that would pay less than $1,000 to her unsecured creditors based on a strict application of the disposable income test, even though, after she paid off her 401(k) loan in two years, she would have something like an added $1,000 A MONTH that she could pay to them.)  My guess is they may have taken Lanning because it presents a sympathetic fact pattern that would allow them to uphold the flexible approach and show that it is not just pro-creditor or pro-debtor.

Karen Cordry, Bankruptcy Counsel
National Association of Attorneys General

From Hank Hildebrand,
Sorry.  In chapter 13 the "special circumstances" might help you with expenses - it cannot help you with income (read the way 707(b) applies to determine a debtors reasonable expenses).  The way to deal with the decline in income is outlined in a case called In re Shelor, 2008 WL 4344894 (Bkrtcy.M.D.N.C.,2008).

The application of the "means test" into the disposable income test was either a poison pill planted when the bill was working its way through the committee structure or a misguided staffer trying to create a balance between chapter 7 and chapter 13.  I cannot find anyone who admits to being the source of adding 707(b) - a litmus test - to 1325(b) - a determination of what must be paid.

I am afraid that the SCOTUS will be called upon to actually draft a statute because Congress did not do a very good job of it.  I fear the outcome.

Henry E. Hildebrand III
Chapter 13 Trustee
Nashville, TN 37219

From Prof. Braucher,
What about section 101(10A)(a)(ii)?  See In re Dunford 408 B.R. 489, 496-97 (Bankr. N.D. Ill. 2009) and In re Hoff, 402 B.R. 683 (Bankr. E.D.N.C. 2009); In re Crink, 2008 WL 2944652 (Bankr. M.D. N.C. 2008); In re Montgomery, 2008 WL 597180 (Bankr. M.D. N.C. 2008); In re Shelor, 2008 WL 4344894 (Bankr. M.D.N.C. 2008).  All these cases recognize a process for the debtor to move forward the CMI period to deal with reduced income as of filing.

Lanning probably could have just waited to file.  But if there was some need for a rush, she could have used the mechanism discussed in these cases.  So the courts do not need to invent some other end-run to deal with decreased income.

This point was not raised in the 10th Circuit or in the Solicitor General's brief to the Supreme Court arguing in favor in granting cert., but it surely will be in the briefs on the merits in the Supreme Court.

  --Jean Braucher, University of Arizona

From Karen Cordry,
That takes care of the debtor's problem with reduced income -- what takes care of the creditors' problem if the debtor has increased income?  Or will stop having an expense after filing the case (either due to abandonment or the completion of a loan), which is the scenario in some of the other cases?  Is this a situation where only the debtor can adjust the situation to protect his or her interests but cannot be forced to do anything to protect creditors' interests when the facts are reversed?

Karen Cordry, Bankruptcy Counsel

From Prof. Braucher,
Perhaps Congress "thought" that if your plan is feasible using the means test version of income, that's what you have to commit.  This is certainly the most obvious reading of a provision allowing the debtor to move forward the period for measuring income but not providing for anyone else to do so.  And if Congress now wants to get rid of the six-month lookback way of looking at income, it could certainly amend the statute.

The statute also provides for adjusting expenses upward by incorporating 707(b)(2)(B) into 1325(b)(3).

The fact that there are specific ways for the debtor to adjust income down and expenses up suggests that others are not allowed to argue for more disposable income payment than means testing requires--this is supposed to be a bright line rule (for the most part) about what debtors have to pay, but with adjustments permitted for feasibility if income has gone done or special circumstances require higher expenses.

From Prof. Braucher,
I've been asked off list if I really think Congress wrote a statute that was "heads, the debtors win, tails, the creditors lose."

My answer is this:  Hardly.  The debtor has to go through all the hassle of filling out the means testing form.  This and other burdens raise the price of bankruptcy.  But if the debtor proposes a chapter 13 plan based on the means test, just as Congress specified, it seems like Congress was saying that's what the debtor can reasonably afford.  The legislative history says the objective is to have debtors pay the maximum they can afford. Means testing has turned out to be more affordable than the unreal budgets chapter 13 debtors wrote for themselves, leading to a two-third failure rate in chapter 13 prior to 2005 (and we don't know yet whether that has changed).  Anyway, the court may very well ignore the statute, but the most obvious reading is that debtors have ways to deviate from the means test, but no one else does.  About 20 percent of debtors have to pay more in chapter 13 as a result of means testing there; the rest pay less than under prior law.
It might be a good thing to go back to prior law, having courts use their discretion to say what debtors can reasonably afford, but having means testing and then judicial discretion to do something else seems like the worst possible outcome.

From Karen Cordry,
Then I'll just throw my two cents in.  I think it is unlikely in the extreme that Congress intended to have the law they wrote result in 80% of Chapter 13 debtors paying less than they paid before.  I think it is also extremely unlikely that it intended to have people continuing to deduct for 401(k) loans that had been paid off (the 5th Cir. Nowlin case) or for secured debts where the collateral had been surrendered (the 7th Cir. Turner case).  Nor do I think that when they wrote statutes with sections with titles like "restoring the basis for secured credit," that, in fact, they meant to ensure that only debtors had rights and creditors didn't.  And, if they did, I think the American public -- much of which doesn't even like people getting mortgage foreclosure relief even in the middle of this recession -- would oppose such scenarios. 

The statute is very badly written -- and many of the policy choices in it are flawed -- but I think it is unrealistic to make arguments based on the notion that Congress intended to write a law to make it easier for debtors to pay less to their creditors. 

Karen Cordry, Bankruptcy Counsel

From Ken Doran,
Karen Cordry asks, "What takes care of the creditors' problem if the debtor has increased income? Or will stop having an expense after filing the case ?"  I would note that in my 30 years of doing this, attempts by creditors to pursue anything like that have been vanishingly rare, under any of the many variations of the statutes.  I believe that this reflects a considered and correct decision that such micromanaging is simply not worth their while.  I infer that Ms. Cordry believes that trustees should be tasked with doing this for the benefit of creditors, paid by commissions on the debtors' payments (practice currently varies considerably in this regard).  If my assumption is correct, my question is: Would trustees be equally tasked with finding grounds to decrease payments, with a similar absence of obliging debtors to employ their own counsel for that purpose?

Kenneth J. Doran / Doran Law Offices / Madison, Wis. / W.D.Wis. /

From Karen Cordry,
I wasn't suggesting trustees would do it -- this is more in the nature of the objections that get raised to plan confirmation by creditors based on those sort of factors.  In addition, though, I think the amendments did require debtors to update income and expenses annually precisely so creditors could do this if they want to.

Karen Cordry, Bankruptcy Counsel

From Jon Hayes,
Jean,
This is such a great thread!  I am going to file an amicus brief in Lanning for a consumer organization in Los Angeles - cdcbaa - www.bklawyers.org.  That is if I can get some consensus about which way we, as an organization, want it to go.  I was on the amicus brief in Kagenveama although Tara Twomey wrote it and graciously added my name to the brief.

It seems to me that if the court is not going to follow Kagenveama, then they are going to have to rule that the scheme in the code for over-median debtors is to be ignored.  The code makes it very specific how to compute the plan payment.  It is a ridiculous scheme but we either follow it or ignore it would be my argument.  Its better to have some unfortunate people like Lanning not be able to file than to simply ignore what Congress wrote.

Does anyone mind if I post this whole thread on my blog?   www.lawprofessorblogs.com.  My blog is BankruptcyProf on the right hand side.

Jon Hayes

From Diane Kerns,
That is a perplexing comment.  I read Kagenveama the exact opposite.  But I couldn't agree more that we should follow the statute as written.  Trustees, however, have no consensus, as you know.

Dianne Crandell Kerns
Chapter 13 Trustee

McCourt Divorce Pleadings

Sorry, it's the voyeur in me.  This is the McCourt pleadings filed in Superior Court yesterday.  I got them from the L.A. Times' website.  I do intend to use the pleadings in my Business Organizations class tonight to discuss the mechanics of pitching Jamie out of the various entities and the corporate obligations of each to each other. 

9th Circuit to Hold Oral Arguments at UCLA - October 28, 2009

The announcement can be accessed here.

California Homestead Exemption Increases January 1, 2010

A thanks to Matt Reznik:

Under the "did you know" category...

Just stumbled upon this info:

HOMESTEAD EXEMPTION RAISED

Homestead Exemptions Increased (Assembly Bill 1046) - Effective January 1, 2010: California Homeowner'’s equity protected from creditors is now $75,000 for individuals and $100,000 for married couples and $175,000 for seniors (over 65), disabled or over 55 with limited income.

Writ of Craving Oyer - I'm not Kidding!

From mega bankruptcy attorney Marc S. Stern marc@hutzbah.com.  Note:  This is a real motion.

Introduction
Debtor, by and through counsel, hereby responds to the Objection to Confirmation filed by [...] Bank, Requests that matter be continued until the her primary counsel can return from bar meetings out of state and discovery can be completed, and requests this court issue a Writ of Craving Oyer.

FACTS
1. The debtor operates the property in qustion as a rooming house.
2. The debtor derives revenue from providing room and board to foreign students.
3. The Debtor has done this since before the inception of the loan.
4. The loan being modified herein was obtained using the rental income from the room and board as part of the income considered in granting the loan.
5. This objection was filed on Tuesday of last week. Marc S. Stern, the debtor's primary counsel left on Wednesday morning for Bar Meetings in Los Angeles and Los Vegas and has not had the time necessary to devote to this response. Ms. [Jones] has refused a request for continuance.
6. The debtor is out of state until October 26 and is unavailable to sign a declaration.  The debtor is entitled to adjust the interest rate on the home loan in question because as a rooming-house, the property is not solely the principal residence of the debtor.

MOTION FOR CONTINUANCE
The debtor has not had any chance to complete discovery. The decision to make the loan, the collateral relied upon, and the documents received in support of the loan require that the debtor be given time to complete discovery. See, Motion for Craving Oyer, infra.

This Objection was filed at the very last minute, and a continuance was requested, informally. Ms. A refused, as is her right. However, given the important legal issues and the need for a firm factual underpinning for the court's ultimate ruling in this case, the court must continue the hearing until counsel can be present and discovery completed.

II. The Property is Not Solely the Principal Residence of the Debtor
A. Section 1322(b)(2) Does Not Apply  AR has operated use the property herein as a rooming house and income producing property since before the inception of this loan. (she has occasionally suspended renting rooms due to health problems.] [(2) Ms. [R] out of state until October 26th, is unavailable to sign a declaration in support of this reply. 

 At any given time, the property in question houses several, primarily foreign, students. The students receive room and board, with meals prepared by the debtor. This makes the obligation not secured solely by residental real property. This is a question of first impression in this Circuit, however, it is the clear holding of  the 3rd Circuit in. In re Scarborough 461 F.3d 406, 2006 WL 2466859 (C.A.3 2006 (Pa.)) the court held that
 By using the word "is" in the phrase "real property that is the debtor's principal residence," Congress equated the terms "real property" and "principal residence." Put differently, this use of "is" means that the real property that secures the mortgage must be only the debtor's principal residence in order for the anti-modification provision to apply. We thus agree with the reasoning of the Bankruptcy Court for the District of Connecticut when it noted that § 1322(b)(2) "protects claims secured only by a security interest in real property that is the debtor's principal residence, not real property that includes or contains the debtor's principal residence, and not real property on which the debtor resides." In re Adebanjo, 165 B.R. 98, 104 (Bankr.D.Conn.1994). A claim secured by real property that is, even in part, not the debtor's principal residence does not fall under the terms of § 1322(b)(2). Consequently, "real property which is designed to serve as the principal residence not only for the debtor's family but for other families is not encompassed by the clause." Id.; see also In re Maddaloni, 225 B.R. 277, 280 (D.Conn.1998) ("[T]he use of 'is' without any modifier ( e.g., 'in whole' or 'in part') does not evince an intent by Congress to apply the antimodification provision to real property that includes, but is more than, a debtor's residence."); In re McGregor, 172 B.R. 718, 720 (Bankr.D.Mass.1994) (relying on plain language of § 1322(b)(2) to permit modification of claim secured by "the debtor's residence and property which has 'inherently income producing' power"); In re Legowski, 167 B.R. 711, 714 (Bankr.D.Mass.1994) (same). [emphasis supplied]

It is believed that the deed of trust in this case contains a security interest in rent. It is also clear that the rental income was part of the original collateral package and the existence of rent was used in making the determination to make the loan. As the term is defined, the property includes the debtor's residence but is not the debtor's principal residence.

MOTION FOR CRAVING OYER
The debtor askes the court for a Writ Directing the bank to Crave Oyer, or, more literally, bring the original document to court. A Motion for Craving Oyer is one of the lesser known Common Law writs. The common law was adopted in the State of Washington and in the United States. Craving Oyer predates the formation of the United States of America. Literally, it requires that the document be read in court.

In today's world, it is impossible to tell who owns the document. Were this a law suit in King County, where the property is located, local rules require hat the Original Document be filed in the court. This court should not be less vigilent than its state court counterpart. In fact, since the plan requires modification of the terms of the Note and Deed of Trust, the original should be produced so that the terms of the Order Confirming Plan can be attached to the document as an allange thus providing notice to future holders that there has been a modification.

In the event that the original can not be produced, with appropriate assignments evidencing that Deutsch Bank is indeed the holder of the instrument, its claim must be denied and its objection over ruled.
 

CONCLUSION
This matter is not ripe for a decision. The bank has not demonstrated that it is entitled to any relief. The debtor has requested a continuance and there is still discovery to do. In any event, it is clear that section 1322(b)(2) does not apply to this case because the obligation in question is not secured solely by the debtor's principal residence. This court should continue the matter for 120 days in order to complete discovery or it must overrule the objection.

Response from fellow listmember Dan Press

Well, here in VA we crave oyer all the time. But I would think that because it's purely procedural, it has been superseded by the Rules Enabling Act and the All Writs Act. In Federal Court, if you want the original, just ask for it in discovery.

The reason we crave oyer so much in state court is that there is really no effictive motion for summary judgment (we can only rely on the pleadings and requests for admission), so if the document is not attached to the complaint but is part of the cause of action, craving oyer not only gets the document produced, but it is deemed part of the pleading so that it can be included in a demurrer (the equivalent to a 12(b)(6) motion to dismiss). In Fed. Court (including bk court), you can use the document if they produce it in discovery, so that's not necessary.

Of course, this doesn't relate much to foreclosure litigation in VA (what's that??!!), because our foreclosures are strictly non-judicial.

Dan Press
Chung & Press, P.C.
6718 Whittier Ave. #200
McLean, VA 22101

Judge Alan Jaroslovsky - A Warning to Attorneys Representing Individual Chapter 11 Debtors

Read 'em and weep as they say.  I think Judge Jaroslovsky definitely had too much coffee the morning he wrote this.  Its posted on his website so I guess he means it.   

New Median Income Figures

The median income figures beginning November 1, 2009 can be accessed here.

Article on Judge Peter Carroll

From the California Bar, Board of Legal Specialization.

The Big Six Oh

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

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

The Poco Seco Singers, 1967
   

Avoiding Liens in Chapter 7

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

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

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

Brian's comment from the original thread.

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

Brian Rookard

brianrookard@hotmail.com

Avoiding Liens in Chap 7 - Response from Prof. Scarberry

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

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

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

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

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

Avoiding Liens in Chapter 7?

I believe I have posted this before but this is such great research you might find useful some day.  Its from Dan Press at dpress@CHUNG-PRESS.COM. 

As I have pointed out a few times in recent months, you cannot strip off a lien in a 7 in the the 4th Cir or the 6th Cir.  But the most recent published decision from the EDNY (Howard v. Nat. West, 184 BR 644 (Bk. EDNY 1995)) says you can, and the MDFL (in a recent unreported order, In re Montero, No. 6:08-bk-10797-KSJ (M.D. Fla. 5/27/09, Docket Entry 37) has allowed it.  One of the leading cases to allow such strip-offs was Yi v. Citibank, 219 BR 394 (ED Va. 1998). Unfortunately, in 2001, the 4th Cir. first agreed with Yi in an unpublished case, and then issued a published case later that same year, Ryan v. Homecomings, 253 F.3d 778 (4th Cir 2001), overruling Yi.  The 6th Cir. has agreed with Ryan, in Talbert v. City Mortgage, 344 F.3d 355 (6th Cir. 2003).  The Third Circuit seems to have expressly left the issue open in McDonald v. Master Fin., 205 F.3d 605 (3rd Cir. 2000).  So it seems to me that this ought to be considered still a live issue everywhere but the 4th and 6th circuits. The 9th Cir. BAP has said you can't, In re Laskin, 222 B.R. 872 (9th Cir. BAP 1998), but that's not the Court of Appeals and is not binding precedent.

Just keep in mind that Dewsnup expressly says it is limited to its facts, and its facts were a partially secured 2nd.  As we know from Ch 13 practice, that makes a huge difference.  So it is easily distinguishable.

Thanks to Larry Szabo in Oakland.