BankruptcyProf Blog

Circuit Court of Appeals Cases from Last Week

5th Circuit Court of Appeals, July 14, 2008
Kane v. Nat'l Union Fire Ins. Co., --- F.3d --- 2008 WL ----- (5th Cir. 2008)(trustee is real party in interest in pending non-bankruptcy action and has not abandoned the asset)

6th Circuit Court of Appeals, July 17, 2008
Phar-Mor, Inc. v. McKesson Corp., --- F.3d --- 2008 WL ----- (5th Cir. 2008)(administrative-expense priority on reclamation claim exists even though goods sold)

10th Circuit Court of Appeals, July 15, 2008
In re Tri-Valley Distrib., Inc., --- F.3d --- 2008 WL ----- (5th Cir. 2008)(appeals dismissed for lack of jurisdiction)

10th Circuit Court of Appeals, July 15, 2008
In re US Med., Inc., --- F.3d --- 2008 WL ----- (5th Cir. 2008)(defendant-creditor is not a "non-statutory insider" of debtor for preference purposes)

Thanks to Findlaw.com

Circuit Court of Appeals Cases from Last Week

5th Circuit Court of Appeals, July 08, 2008
In re Hilal, --- F.3d ---, 2008 WL 2655796 (5th Cir. 2008)(appeal not moot even though chapter 11 plan substantially consummated)

5th Circuit Court of Appeals, July 10, 2008
In Re Enron Corp. Sec., Derivative & ERISA Litig., --- F.3d ---, 2008 WL 2689248 (5th Cir. 2008)(claims against Enron 3rd parties dismissed - note: the caption in this case is 7 pages)

10th Circuit Court of Appeals, July 07, 2008
In re Jones, --- F.3d ---, 2008 WL 2640116 (10th Cir. 2008)(confirmation of chapter 13 plan reversed based on objections of "910" secured creditor; postpetition interest on claim required)

11th Circuit Court of Appeals, July 07, 2008
In re Walker, --- F.3d ---, 2008 WL 2637649 (11th Cir. 2008)(award of sanctions under 9011 and inherent authority of the court affirmed)

Thanks again to Findlaw.com. 

Circuit Court of Appeals Cases for Last Week

3rd Circuit Court of Appeals, June 24, 2008
In re Mansaray-Ruffin, --- F. 3d ---, 2008 WL 2498048 (3rd Cir. 2008)(Chapter 13 plan did not invalidate lien, adversary proceeding required)

4th Circuit Court of Appeals, June 25, 2008
Tidewater Fin. Co. v. Kenney, --- F. 3d ---, 2008 WL 2514194 (4th Cir. 2008)(surrender of vehicle creates deficiency which must be provided for in chapter 13 plan) 

6th Circuit Court of Appeals, June 26, 2008
Chase Manhattan Mortgage Corp. v. Shapiro,  --- F. 3d --- (3rd Cir. 2008)(denial of preference action reversed)

9th Circuit Court of Appeals, June 24, 2008
Espinosa v. United Student Aid Funds, Inc., --- F. 3d ---, 2008 WL 2498108 (3rd Cir. 2008)(treatment of student loan in chapter 13 case)

9th Circuit Court of Appeals, June 25, 2008
Cent. Valley AG Enters. v. US, --- F. 3d ---, 2008 WL 2513055 (3rd Cir. 2008)(District Court has jurisdiction over tax treatment issues)

Circuit Court Bankruptcy Cases for Last Week

2nd Circuit Court of Appeals, June 19, 2008
In Re Prudential Lines Inc., --- F.3d --- (2nd Cir., 2008)(bankruptcy court order re use of insurance indemnities to pay claims is reversed)

10th Circuit Court of Appeals, June 17, 2008
Crossingham Trust v. Baines, --- F.3d --- (10th Cir., 2008)(appeal dismissed for lack of final order)

U.S. Supreme Court, June 18, 2008
Florida Dep't of Revenue v. Piccadilly Cafeterias, Inc., ---- U.S. ---, 2008 WL 2404077 (2008)(bankruptcy court order that stamp tax cannot be assessed on sale of property of the estate is reversed)

Thanks to Findlaw.com. 

Circuit Court of Appeals Cases for Last Week

3rd Circuit Court of Appeals, June 10, 2008
Windt v. Qwest Communications Int., Inc., --- F.3d ---, 2008 WL 2345151 (3d Cir, 2008)(trustee's complaint dismissed for forum non conveniens)

8th Circuit Court of Appeals, June 10, 2008
US v. Mitchell, --- F.3d ---, 2008 WL 2345033 (8th Cir, 2008)(conviction of debtor for making a false statement in bankruptcy case, double jeopardy rejected)

Circuit Court of Appeal Bankruptcy Cases for Last Week

4th Circuit Court of Appeals, June 03, 2008
In re Meredith, --- F.3d ---. 2008 WL 2251861 (4th Cir. 2008)(defendant not "the entity for whose benefit such transfer was made" and therefore no avoidable fraudulent transfer)

5th Circuit Court of Appeals, June 03, 2008
In the Matter of Maples, --- F.3d ---. 2008 WL 2249953 (5th Cir. 2008)(court affirms judgment but comments on condition of brief, record on appeal, jurisdiction and other shortcomings of appellant)

6th Circuit Court of Appeals, June 02, 2008
Schultz v. U.S., --- F.3d ---. 2008 WL 2229495 (6th Cir. 2008)(dismissal of constitutional attack on BAPCPA affirmed) 

9th Circuit Court of Appeals, June 04, 2008
In re Imperial Credit Indus., Inc., --- F.3d ---. 2008 WL 2264588 (9th Cir. 2008)(rulings against bank holding company re performance guaranty and claim priority affirmed in part and reversed in part)

9th Circuit Court of Appeals, June 05, 2008
In re Kagenveama, --- F.3d ---. 2008 WL 2278681 (9th Cir. 2008)(chpater 13 plan by above-median debtor does not have to be five years when the means test calculation shows negative "disposable income")

6th Circuit Rules on Ford's Right to Administrative Claim for Post-Confirmation Default by Chapter 13 Debtor

Ford Motor Credit Company v. Parmenter (In re Parmenter)  --- F.3d --- (6th Cir.,  May, 2008)

Issue:   When the chapter 13 plan provides that the debtor will assume a vehicle lease and pay it outside the plan, does the lessor have the right to an administrative claim when the debtor fails to make the payments?               

Holding:    No. 

Appeal from District Court
Counsel for Ford is Ricardo Kilpatrick

In their chapter 13 plan, the debtors “agreed to assume the Ford lease and to pay the remaining lease payments directly to Ford.”  There were no objections and the plan was confirmed.  Post-confirmation, the debtors defaulted on the lease, Ford obtained relief from stay, repossessed the vehicle and sold it.  Ford then “filed a motion for administrative expenses of $5,919.28, which included the deficiency balance on the lease and attorney fees.”  The bankruptcy court denied the motion and the District Court affirmed. 

The 6th Circuit Court of Appeals also affirmed in a per curiam opinion with a dissent.   The opinion says that the confirmed plan was res judicata as to these issues, Section 1327(a).  Ford was a class three creditor in the plan and now wants to “jump to class one.”  “The plan says nothing about permitting the estate to make lease payments to Ford.  Yet Ford’s motion, if granted, would allow the company to impose an obligation on the estate where none existed and indeed would give that claim the highest priority permitted.  Well before the [debtors] defaulted, Ford had made its own bed outside the plan and now must lie in it: If the car company wishes to obtain any additional relief against the [debtors], it must do so outside the plan.”  The opinion does not even suggest what this relief “outside the plan” means.  Modification of the plan does not apply, according to the court, because the allowance of an administrative claim would be “the creation of a new obligation on the estate.”  “If Ford wanted the security of receiving payments directly from the Trustee, it should have objected to the proposed plan.”

The opinion distinguishes chapter 11 cases where this administrative expense clearly would be allowed and chapter 13 cases.  “Whereas a Chapter 11 debtor-in-possession acts on behalf of the estate when it assumes a lease and thus creates a legal obligation on the estate, a Chapter 13 debtor who assumes and
pays for a lease outside of the plan does not.”  It does not explain how it reached that conclusion. 

The dissent begins with “First, I see no convincing reason for treating creditors dealing with a Chapter 13 debtor differently from creditors dealing with a Chapter 11 debtor-in-possession.  The Code offers no basis for treating the two scenarios differently.”  “[S]econd, . . . I see no basis for drawing a line between Chapter 13 creditors who receive lease payments directly from the debtor and those who receive them indirectly through a trustee.”  As to res judicata, the dissent disagrees.  The plan did not deal with and therefore resolve any issues about the right to administrative claims for post-confirmation defaults.

Circuit Court of Appeals Bankruptcy Cases from Last Week

2nd Circuit Court of Appeals, May 29, 2008
In re Bd. of Dir. of Telecom Argentina, --- F.3d ----, 2008 WL 2220682 (2nd Cir, 2008)(Bankruptcy Court's recognition of ancillary foreign insolvency proceeding affirmed)

5th Circuit Court of Appeals, May 29, 2008
Coury v. Moss, --- F.3d ----, 2008 WL 2206645 (5th Cir, 2008)(Court affirms that sale of stock did not violate right of first refusal)

6th Circuit Court of Appeals, May 28, 2008
In re United Producers, Inc., --- F.3d ----, 2008 WL 2186465 (6th Cir. 2008)(appeal of confirmation of chapter 11 plan [in Sept 05] dismissed as moot)

6th Circuit Court of Appeals, May 30, 2008
In re Parmenter, --- F.3d ----, 2008 WL 2219839 (6th Cir. 2008)(Chapter 13 plan binds Ford Motor Credit who cannot thereafter seek an administrative claim)

8th Circuit Court of Appeals, May 29, 2008
In re Patch, --- F.3d ----, 2008 WL 2205270 (6th Cir. 2008)(Bankruptcy Court's ruling that debt is non-dischargeable as willful and malicious is reversed)

1st Circuit Rules on Exempting a Litigation Asset

Barroso-Herrans v. Lugo-Mender (In re Barroso-Herrans) 524 F.3d 341 (1st Cir., May, 2008)

Issue: When the chapter 7 debtor lists, as an asset, a lawsuit and values it at $4,000 and claims the $4,000 exempt, is the entire asset exempt or only $4,000?

Holding: Only $4,000 is exempt.

Appeal from District Court

At the time of the petition, the debtor had a lawsuit pending for damages.  The damages included accounts receivable owed to the debtor which was separately listed as an asset with a value of about
$170,000. The debtor valued the lawsuit on his schedule B at $4,000 and claimed the $4,000 exempt. Later, the trustee settled the case for about $100,000, which included resolution of the accounts
receivable.  The debtor claimed all of the funds arguing that he had claimed the asset, the suit, to be exempt in its entirety and that the trustee had not objected to the exemption. The bankruptcy court
held that only $4,000 was exempt. The District Court affirmed.

The 1st Circuit also affirmed. "The threshold question of what has been claimed calls for interpreting the schedules filed by the debtors.  To start, we ask how a reasonable trustee would have understood the filings under the circumstances." "[T]he $4,000 sum appears to be an implausible full valuation for law suits seeking to collect a vastly greater amount-over $4 million-from a government authority for unpaid invoices." "Had [the debtor] listed the value of the suits as `unknown'-as the debtor did in Taylor-or used a nominal sum like $1 as a placeholder, he would have a much stronger argument. `Use of terms like `100% [of the property's value],' `unknown,' `to be determined,' `tba' and `$1.00' are red
flags to trustees and creditors,' 1 Collier on Bankruptcy P. 8.06(1) (c)(ii) (15th ed. rev.2007), and therefore put them on notice that if they do not object, the whole value of the asset-whatever it might
later turn out to be-will be exempt."  "It is enough to resolve this case that the trustee's reading of the exemptions as limited to a $4,000 share of the proceeds from each law suit is objectively reasonable."

Note: I don't think listing the value as "unknown" and then exempting it does you much good in the 9th Circuit.

8th Circuit Rules that Debtor may Appeal Confirmation of her own Plan

Zahn v. Fink (In re Zahn)  ---- F. 3d ----, 2008 WL 2130508 (8th Cir.,  May, 2008)

Issue:   May the chapter 13 debtor appeal confirmation of her own chapter 13 plan?  May a debtor appeal a refusal to confirm a chapter 13 plan?             

Holding:      Yes, when she has been forced by the court to file a plan to which she objects.  No, denial of confirmation is not a final order. 

The debtor filed a 36 month chapter 13 plan.  The trustee objected saying that the plan must be 60 months because she must include her husband’s IRA distributions in her CMI.  The court agreed.  The debtor appealed and the BAP dismissed the appeal as interlocutory.   The debtor amended the plan increasing it to 60 months and filed an objection to the plan.  The court confirmed the plan and the BAP dismissed the appeal saying the debtor has no standing. 

The 8th Cir reversed on the standing issue.  “The BAP correctly recognized, ‘[i]n order to have standing to appeal the decision of the bankruptcy court, an appellant must be a person aggrieved.’”  “The BAP then concluded ‘[Zahn] is not an aggrieved party.’”  “The BAP reasoned, ’[w]hen the court confirmed her plan, [Zahn] got all the relief for which she asked.’”  “That a party may appeal from a judgment in his favor when there has been some error prejudicial to him, or he has not received all he is entitled to, has quite generally been held by the courts, and there is no sound reason otherwise.”   “The extended length of Zahn’s plan—a consequence of the inclusion of her non-filing husband’s IRA distributions—is material and prejudicial to Zahn.  Zahn is thereby an aggrieved party.”  The 8th Circuit also confirmed that denial of a chapter 13 plan is not an appealable order. 

6th Circuit BAP Rules that Anti-Modification of Loan on Residence is Unchanged by the Addition to the Code of a Definition of "Principle Residence"

Davis v. Green Tree Servicing, LLC (In re Davis)  ---- B.R. ----, 2008 WL 1733396 (6th Cir. BAP,  April, 2008)

Issue:   Does the addition of a definition of “principle residence” in the Bankruptcy Code, Section 101(13A), change the analysis when the debtor attempts to modify a debt secured by the debtor’s principle residence in his chapter 13 plan?             

Holding:      No, a modification of a secured debt is only prohibited if the collateral is both real property and the debtor’s principle residence, irrespective of the new definition of principle residence.   

Judge Marilyn Shea-Stonum

This chapter 13 debtor had a loan secured by both real property and a mobile home.  The plan proposed to bifurcate the secured debt paying only the secured portion in full.  The bankruptcy court refused to confirm the plan based on the anti-modification provision in § 1322(b)(2) which states that “a debtor’s plan may ‘modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence.’”  There was no finding by the court that the mobile home was real property.  The creditor argued that the addition to the code of a definition of “principle residence” in Section 101(13A) negated the need for the court to find that the debtor’s residence was real property, i.e., the court need only find that the lien is secured by the debtor’s residence.  The Bankruptcy Court agreed and refused to confirm the plan. 

The 6th Circuit BAP reversed.  The plan language of 1322(b)(2) requires the court to find that the collateral is both, 1) real property and 2) the debtor’s principle residence, before the anti-modification applies.   Here there was no finding whether or not the mobile home was real property and therefore the matter is remanded. 

Circuit Court of Appeals Bankruptcy Cases Last Week

U.S. 3rd Circuit Court of Appeals, May 19, 2008
In re Krebs, --- F. 3d ---, 2008 WL 2079956 (3rd Cir 2008)
intervening Supreme Court decision implicitly overrules prior precedent, and thus the debtor's right to receive payments from her IRA may be exempt under section 522(d)(10)(E).

U.S. 6th Circuit Court of Appeals, May 19, 2008
Giant Eagle, Inc. v. Phar-Mor, Inc., --- F. 3d ---, 2008 WL 2078787 (6th Cir 2008)
calculation of damages for rejection of lease of personal property

U.S. 8th Circuit Court of Appeals, May 22, 2008
In re Zahn, --- F. 3d ---, 2008 WL 2130508 (8th Cir 2008)
Standing of debtor who objects to her own Chapter 13 plan

U.S. 10th Circuit Court of Appeals, May 19, 2008
In re Ballard, --- F. 3d ---, 2008 WL 2080852 (10th Cir 2008)
dealing with surrender of 910 vehicles in chapter 13 plan, secured creditor's right to a deficiency

1st Circuit BAP Rules on Avoidance of Unrecorded Mortgage

I'm not sure why the 1st Circuit BAP published this as it seems pretty clear cut. 

Riley v. Sullivan (In re Sullivan)  ---- B.R. ----, 2008 WL ------------ (1st Cir. BAP,  May, 2008)

Issue:   May the chapter 7 trustee avoid an unrecorded lien, preserve the lien for the benefit of the estate and at the same time, subordinate the homestead exemption to the rights of the estate even though the time to object to the exemption has expired?             

Holding:      Yes

Judge Votolato

The debtor purchased a home in 2000 and refinanced it with Ameriquest in 2004.  Ameriquest failed to record the mortgage.  The chapter 7 trustee filed a complaint to avoid the lien, preserve the lien for the benefit of the estate and subordinate the homestead exemption to the “estate’s interest in the property.”  The trustee then settled with Ameriquest with Ameriquest conceding it was unsecured.  The trustee then moved for summary judgment which the debtor opposed arguing that the “pleadings amounted to an untimely attempt to object to the homestead exemption.”    He also argued that the estate could not preserve the lien because the settlement made the claim unsecured. 

The court granted summary judgment to the trustee.  The court said that the debtor was trying to undo the settlement to which he had not objected.  It also said “that the Trustee was not objecting to the Debtor’s homestead claim, but was merely seeking to enforce the same rights against the Debtor that the mortgagee had, including the priority provisions of the Massachusetts homestead exemption statute with respect to a lien that predates the homestead declaration.”

The BAP affirmed.  Section 544(a)(3) gives the trustee the rights of a bona fide purchaser “and allows the trustee to invalidate unperfected security interests.”  “under § 551 of the Bankruptcy Code, ‘[a]ny transfer avoided. . . under section 544 . . . is preserved for the benefit of the estate.’”  Under Massachusetts law, the unrecorded lien is enforceable against the debtor.  Also under Massachusetts law, a homestead declaration recorded after a mortgage attaches to property is subordinate to the mortgage.  “As the Trustee correctly noted during oral argument, if the Debtor’s homestead exemption were given priority over the estate’s interest in the property, general creditors would receive nothing.  This would be an illogical result, considering that outside of bankruptcy, as between the mortgagee and mortgagor, American’s unrecorded mortgage would have been satisfied before the Debtor could have received any funds.”

Circuit Court of Appeals Bankruptcy Cases Last Week

7th Circuit Court of Appeals, May 15, 2008
In re: Resource Tech. Corp., ---- F.3d ------, 2008 WL ------------ (7th Cir, 2008), bankruptcy court denial of a motion to compel chapter 7 trustee to assume and assign contract affirmed. 

8th Circuit Court of Appeals, May 13, 2008
Tri-State Fin., LLC v. Lovald, ---- F.3d ------, 2008 WL ------------ (8th Cir, 2008), denial of motion seeking recusal of judge, and granting motion to approve settlement affirmed.

8th Circuit Court of Appeals, May 14, 2008
In re: M & S Grading, Inc.,, ---- F.3d ------, 2008 WL ------------ (8th Cir, 2008), order denying a motion to show cause was not a final appealable order and the order was not a "collateral order." 

$670,000 in Sanctions Awarded Against New York and Florida Law Firms for Filing Improper Recusal Motion

In re Evergreen Security, Ltd, --- B.R. ----, 2008 WL 434644 (Bkrtcy.M.D.Fla. Jan 08)

In a 60 page opinion, Bankruptcy Judge Arthur B. Briskman granted $670,000 in sanctions against a New York law firm and a Florida law firm and various attorneys.  The New York attorney was barred from appearing before Judge Briskman for five years. 

In the sanctions motion, debtor's counsel requested "fees of $631,266.00 and costs of $40,251.69 [against two law firms and various lawyers] in defending the Recusal Motion, addressing the mandamus matters, and prosecuting the Sanctions Motions."  The basis for the recusal motion was that Judge Briskman was "being investigated" by the 11th Circuit Judicial Counsel.  There was apparently a complaint against the judge in an unrelated case but no evidence of any investigation.   

The firms, according to Judge Briskman, filed Affidavits [in their defense] which "asserted the Recusal Motion was filed in good faith, but did not set forth any facts supporting such assertion. The Affidavits did not articulate what specific events or facts led to the filing of the Recusal Motion, who was responsible for its drafting and filing, or what due diligence the Respondents conducted prior to filing the pleading. They primarily expressed [counsel's] profound regret over the results of the filing.  The Affidavits did not establish the Respondents' actions in connection with the Recusal Motion were made in good faith."

"The Respondents, displeased with adverse rulings and desiring to delay pending matters, particularly the Involuntary Cases, drafted the Recusal Motion making scandalous allegations against the undersigned and [opposing counsel].  The pleading is a conglomeration of gossip, intentional misrepresentations, and untruths.  It had no evidentiary or legal support at the time it was filed, or at any time.  Not a single claim has factual basis or legal merit."

"The Respondents conducted no reasonably thorough and objective investigation of the facts regarding the 'complaint' and 'investigation' allegations."

Reaffirmation Agreement Must be Approved Before Entry of the Discharge

Its scary what you don't know. 

In re Engles,  ---- B.R.  ----, 2008 WL 555009  (Bkrtcy M.D. Okla, Feb. 2008)

Issue:   Can the bankruptcy court “temporarily” vacate the discharge on the debtor’s motion for the purpose of permitting entry of an order approving a reaffirmation agreement?            

Holding:      No.      

Judge Terrence Michael

The debtors executed a reaffirmation of a debt on a vehicle.  They sent it to the lender, Regions Bank.  “For reasons unknown to the parties, the Agreement was apparently delayed in reaching its destination and was never filed with the Court.”  The discharge was entered and the car repo’ed.  The debtors then moved the court, under FRCP60(b), to vacate the discharge for the purpose of entering an order of reaffirmation.  The car had equity and the debtors, at all times, were current with the monthly payments.  The court denied the motion. 

“Because of the serious consequences associated with reaffirmation-that the debtor will remain liable for an otherwise dischargeable debt-strict compliance with the terms of § 524 is mandatory.  Based on the plain language of § 524(c)(1), which mandates that an agreement must be made before the granting of the discharge in order to be enforceable, the execution of a reaffirmation agreement after the granting of the discharge renders that agreement unenforceable as a matter of law.”

As to vacating the discharge, the court said that under Section 727(d) and (e), only “the trustee, a creditor, or the United States trustee” has the ability to revoke a debtor's discharge.  As to the equitable power of the court to vacate the discharge, “[A] bankruptcy court's supplementary equitable powers under [section 105] may not be exercised in a manner that is inconsistent with the other, more specific provisions of the Code.”

New Student Loan Case in the 4th Circuit

Educational Credit Management Corp. v. Mosko (In re Mosko),  515 F.3d 319  (4th Cir. Feb. 2008)

Issue:   Did these debtors establish that they made a good faith effort to repay their student loans?           

Holding:      No.      

Appeal from the District Court

The debtors “lived in Mocksville, North Carolina, with their four-year-old son.  Robert’s and Brenda’s student loans as of July 15, 2005, equaled $63,417.06 and $57,156.41, respectively.”  They sought an order that the student loans were discharged as a hardship.  Both have bachelors degrees and Brenda has a master’s degree.  The three years before the bankruptcy they made jointly, $75,000, $78,000 and $64,000.  Robert’s employment is somewhat erratic because of medical problems.  The bankruptcy court granted the discharge and the District Court affirmed. 

The 4th Circuit Court of Appeals reversed finding that the debtors did not meet the third Brunner test, i.e., “a good faith effort to repay their loans.”  “The Moskos have not demonstrated a good-faith effort to obtain employment and maximize income.  Brenda does not work during the summer months because she wishes to spend time with her son and care for her mother.”  “The record does not show that [Robert’s] medical condition precludes him from all part-time employment, self employment, or other work from home.”  “In addition, the budget the Moskos presented to the bankruptcy court does not minimize their expenses.  Each month, the Moskos spend $75 for internet, $80 for cell phones, $60 for satellite television, $68 for a YMCA membership, and an undisclosed amount for cigarettes.”  “Furthermore, the Moskos’ actual expenditures do not demonstrate an effort to minimize expenses.  Between December 2, 2004 and March 1, 2005, the Moskos spent over $1,600 at Circuit City, Best Buy, Amazon.com, and Radio Shack; over $3,000 at Sam’s Club, Wal-mart, and Kmart; and over $800 on computer software related purchases. We conclude that their expenditures do not indicate a good faith effort to minimize expenses.  Furthermore, the Moskos’ failure to minimize expenses during a period when Robert was unemployed indicates that their own negligence contributed to their current financial situation.”  “Additionally, the payments the Moskos made on their student loans are insufficient to demonstrate good faith because they failed to make payments on their student loans during a time period when their income substantially exceeded their necessary expenses.”  “Finally, the Moskos failed to adequately pursue loan consolidation options.”  “Based on the Moskos’ adjusted gross income of $64,130 in 2004, their monthly payments under the income-contingent William D. Ford Direct Loan Consolidation Program would be approximately $319 per month.”

World Health Alternatives, Inc. - Delaware Court Confirms Fiduciary Duties of Corporate Officers

Miller v. McDonald (In re World Health Alternatives, Inc.)  ---- B.R. ----, 2008 WL 1002035 (Bkrtcy D.Del. April 2008)

Issue:   Do corporate officers owe a fiduciary duty to a corporation?  Do they breach this duty by “failing to implement an adequate monitoring system and/or the failure to utilize such system to safeguard against corporate wrongdoing”?            

Holding:      Yes - Yes

Judge Walsh

The trustee sued numerous former executives of this debtor including Brian Licastro, in house counsel and vice-president of operations, for breach of fiduciary duties, aiding and abetting breaches, corporate waste, and numerous other causes of action.  This is the ruling on Licastro’s Motion to Dismiss under FRCP 12(b)(6).  The Motion was denied in part and granted in part.   

When World Heath became a public corporation in early 2003, apparently through the promoting efforts of one Richard E. McDonald, it had $245,000 in assets and negative equity of some $90,000.  It had sustained a $400,000 loss in the previous quarter.  During the next year, it raised some $40 million to buy eight different businesses in the health care staffing industry.  The accounting systems were bad however and made worse by the misrepresentations of McDonald.  The SEC were reports were fraudulent (according to the trustee and accepted as true for 12(b)(6) purposes), and huge amounts of liabilities went unreported.  “The Trustee claims that these reports were false and misleading because World Health lacked adequate internal controls and was, therefore, unable to ascertain its true financial condition.”  The company filed chapter 11 in 2006 and that was converted to chapter 7 the same year. 

“The basis for the Trustee's claim is that Licastro breached his duty of care by failing to implement an adequate monitoring system and/or the failure to utilize such system to safeguard against corporate wrongdoing.”   Judge Walsh concluded, “[T]he Trustee appropriately asserts that Licastro as the in-house general counsel and the only lawyer in top management of World Health during the relevant period, had a duty to know or should have known of these corporate wrong doings and reported such breaches of fiduciary duties by the management.”  Licastro argued that these are proper obligations of directors but he was only an officer.  The court confirmed that duty of officers saying “It is correct that Delaware law does not impose fiduciary duty on ‘employees’ generally, but it is incorrect that it does not impose failure of oversight (fiduciary duty) as to officers.  Of course, Licastro was not just an ‘employee’; he was an officer in two respects, vice president of operations and general counsel.”

10th Circuit BAP Rules on Requirement that Debtor File Paycheck Stubs for Past 60 Days

Miller v. Cameron (In re Miller)  ---- B.R. ----, 2008 WL 754809 (10th Cir. Mar. 2008)
Issue:   Is a debtor's pay stub containing year-to-date income totals “other evidence of payment” sufficient to meet the filing requirements of payment advices for the previous 60 days?         

Holding:      Yes   

Section 521(a)(1)(B)(iv) requires an individual debtor to file “copies of all payment advices or other evidence of payment received within 60 days before the date of the filing of the petition, by the debtor from any employer of the debtor.”  The debtor failed to file one stub (of four pay periods in the previous 60 days).  Instead he “filed a chart which calculated the data on the missing third pay stub, extrapolated from the year-to-date payment information contained on Debtor's fourth pay stub.”  The bankruptcy court raised the issue sua sponte.  The chapter 13 trustee sided with the debtor.  The bankruptcy court “concluded that Debtor's bankruptcy case had been automatically dismissed pursuant to § 521(i)(1), effective on the forty-sixth day following Debtor's petition date.”  “The court found the year-to-date information summarized by Debtor's counsel did not amount to ‘other evidence’ under the statute because Debtor's employer had not provided that evidence.”  The court said the key word in the statute is “received” and that the chart was not something “received” from the employer. 

The BAP reversed.  “We believe this interpretation unnecessarily reads additional requirements into the statute.  Under the bankruptcy court's interpretation, a debtor would not only need to provide a separate piece of documentary evidence for each pay period during the sixty days prepetition, he would also have to ensure that each piece of evidence was created by his employer.”  “[T]he bankruptcy court's interpretation makes the ‘other evidence of payment’ option effectively non-existent.  This stretches the statutory language too far.”  “[Y]ear-to-date payment information may be credible ‘other evidence of payment received,’ even though the evidence is not technically in the form of separate payment advices for each relevant pay period.”  “In reaching this conclusion, it is important to emphasize that we are not holding that year-to-date income information per se satisfies the filing requirements of § 521(a)(1)(B)(iv).  Whether year-to-date figures or some ‘other evidence of payment’ presented by a debtor satisfies the statute will depend on the particular facts and circumstances of any given case.”

5th Circuit Confirms that Till is Still Alive and Applies to "910 Claims"

Drive Financial Services v. Jordon (In re Jordon), --- F.3d --- (5th Cir. Mar 2008)

Issue:  Where creditor holds a "910 Claim," and the debtor chooses to retain the vehicle, may the chapter 13 plan reduce the contract interest rate to a current "reasonable" rate?

Holding:  Yes, Till was not changed by BAPCPA.

Appeal from Bankruptcy Court, Texas.

Opinion by Garwood
The debtor proposed a chapter 13 plan which provided that the 910 secured creditor would be paid in full with 6% interest.  The contract rate was 17.95%.  The bankruptcy court modified the rate to 7.5% based on Till, i.e., the prime rate plus an additional amount for the risk, and confirmed the plan.  The 5th Circuit allowed a direct appeal.

The 5th Circuit affirmed.  It rejected the creditor's argument that since Till was a bifucation case, it does not apply post-BAPCPA to a 910 claim which cannot be bifurcated.  The creditor also argued that Till should not apply because the Till opinion was a plurality opinion.  The 5th Circuit disagreed and said that 1) the majority of the Till court agreed that the contract rate is not the presumptive rate in any event and 2) even if Till does not apply, the creditor still has only the right to the "value of its claim" under Section 1325(a)(5) and the bankruptcy court's amount was reasonable.

6th Circuit Resolves Hanging Paragraph Issue - Not!

Americredit Financial Services v. Long (In re Long)  ---- F.3d ----, 2008 WL 564798 (6th Cir. Mar. 2008)

Issue:   When the debtor surrenders a vehicle under Section 1325(a)(5)(C), is the surrender in full satisfaction of the debt or does the secured creditor continue to have a right to a deficiency?         

Holding:      The secured creditor continues to have the right to a deficiency.   

Merritt wrote the “majority opinion,”  Cox a concurring opinion and Clay a dissenting opinion. 

The chapter 13 debtor proposed the surrender of a “910 vehicle” in full satisfaction of the debt owed to Americredit.  The bankruptcy court affirmed the plan. 

Citing In re Wright, 492 F.3d 829, 830 (7th Cir. 2007), the opinion said, “we agree with the Seventh Circuit that the bankruptcy courts should not simply allow the debtor to surrender the car and then wipe out the deficiency, as the bankruptcy court in the instant case ruled.”  The opinion went on to say however that the reasoning in Wright that state law provided the secured creditor’s rights was faulty.  “A uniform national rule should be adopted and substituted for the widely varying procedural and substantive foreclosure, repossession and deficiency judgment rules provided by the 50 states.”  The opinion says that “a claim cannot be an ‘allowed secured claim’ for purposes of § 1325(a)(5) without first coming through the §506 gateway.  Consequently, we decline to read the hanging paragraph to use state law or some unknown, federal law to create an allowed secured claim.”  “Because section 506 was applicable to the surrender of collateral before the 2005 amendments, and makes the situation incoherent if no longer applicable, we believe the best solution is to regard section 506 as continuing to apply to surrender cases.”  “Because we are unable to find any legislative history that suggests that Congress intended to eliminate all deficiency claims upon surrender of the collateral and because we conclude that a literal interpretation of the statute would create an unintended and illogical result, we decline to adopt a literal interpretation of the statute.”

The opinion concluded, “We hold that claims subject to the hanging paragraph where the debtor elects to surrender the collateral pursuant to § 1325(a)(5)(C) will be governed and adjudicated the same as they were before the 2005 amendments.”

The concurring opinion by District Judge Cox says, “Under its clear terms, for purposes of § 1325(a)(5), § 506 does not apply to claims falling within the definition set forth in the hanging paragraph, otherwise referred to as 910 claims.”  “§506 is not the source for a deficiency claim when collateral is surrendered.  Section 506 is not applicable to surrender of collateral because once the collateral is surrendered, the estate no longer has an interest in the property.”  Therefore Butner applies and the secured creditor has the rights given to it under state law. 

The one paragraph dissent concludes with, “The lead opinion would require us not simply to construe an ambiguity in the statute, but actually to rewrite the statute.  I would be reluctant to do so because Congress has had two years since the enactment of the statute to correct any problems that it sees with the statute and has not seen fit to do so.  I would affirm based upon the well reasoned opinion of the bankruptcy court.”

Comment:  This is just what we need - circuit courts deciding "uniform national rules."  This 1 - 1 - 1 opinion may be reviewed en banc especially since the concurring judge is a District Court Judge and not a Cirucit Court of Appeals Judge.   JH

1st Circuit BAP Affirms Lien Avoidance on Postpetition Home Refi

Miranda v. Doral Financial Corp.  (In re Marrero)  ---- B.R.  ----, 2008 WL 612790  (1st Cir BAP Jan. 2008)

Issue:   When a secured creditor obtains relief from stay to foreclose but no order abandoning the property and then agrees to a refinance of the debtor’s residence, is the new mortgage an unauthorized postpetition transfer?         

Holding:      Yes, and since the bank gave up its prepetition lien, it is now unsecured.    

The debtor filed chapter 13 and shortly thereafter converted it to chapter 7.  After the bank received relief from stay in the chapter 7, the debtor and the bank agreed to a refi of the two mortgages on the debtor’s residence.  The trustee was not served with the Motion for Relief.  There apparently was never any equity in the property beyond the homestead exemption.  Neither the trustee nor other creditors were given notice of the refi.   The facts do not say if a new trust deed was recorded, only that a new mortgage was “delivered” and that that was a postpetition transfer of property of the estate.  The trustee filed a complaint seeking declaratory relief that the residence was free and clear of liens and that the bank was now unsecured.  The bank defended on the basis that the residence was no longer property of the estate at the time of the refi and that if the new mortgage is to be avoided the prior mortgages should be reinstated.  The court granted the trustee’s motion for summary judgment declaring the debt to be unsecured and permitting the sale of the residence.

The BAP affirmed.  On appeal, the bank conceded that the new mortgage was a postpetition transfer but argued that the court abused its discretion in avoiding the lien.  The bank argued “the phrase ‘the trustee may avoid a transfer of property of the estate’ in the first sentence § 549(a) requires the bankruptcy court to review a trustee’s exercise of the power under a benefit to the estate test as a condition of avoidance.”  But the BAP said it is the trustee who “may” avoid the transfer.  “[A] bankruptcy court may not apply its general equitable powers to disregard or  contravene the Code’s unambiguous provisions; or, as [the bank] would have it in this case, to save a defendant creditor from its own improvident actions.”  Furthermore, the avoidance was clearly a benefit to the estate.  The bank also argued that the effect of the ruling was to give the trustee a double satisfaction which is improper under Section 550(d) and therefore the old lien should reattach if the new lien is avoided.  The BAP rejected that since Section 550(d) clearly doesn’t apply.      

8th Circuit Rules on the Hanging Paragraph

Capital One Auto Finance v. Osborn (In re Osborn)  ---- F.3d ----, 2008 WL 304750  (8th Cir. Feb. 2008)

Issue:   When the debtor surrenders a vehicle under Section 1325(a)(5)(C), is the surrender in full satisfaction of the debt or does the secured creditor continue to have a right to a deficiency?         

Holding:      The secured creditor continues to have the right to a deficiency.   

Appeal from the 8th Circuit BAP

The chapter 13 debtors proposed the surrender of a vehicle in full satisfaction of the debt owed to Capital One.  The plan proposed to pay 100% of unsecured claims.  Capital One objected.  The bankruptcy court ruled for the debtor saying that the hanging paragraph made Section 506 inapplicable.  It adopted the argument that since the secured claim cannot be bifurcated, it is therefore an “allowed secured claim” in full, and surrender satisfies the allowed secured claim.  The BAP affirmed. 

The 8th Circuit reversed.  “A Chapter 13 debtor has three options to deal with allowed secured claims of creditors: (1) obtain the creditor’s acceptance of the plan, (2) retain the collateral but make full payment of the creditor’s allowed secured claim, or (3) surrender the collateral to the creditor.”  Section 1325(a)(5).  “BAPCPA eliminated the cram down option for cars purchased less than 910 days before the Chapter 13 bankruptcy, by adding the hanging paragraph at the end of § 1325(a)(9).”  “By the plain language of the hanging paragraph, § 506 does not apply to a 910- claim.  Therefore, as with the retention option, the claim is considered secured because it is secured according to state law (citing Butner).”  “Unlike the retention option in § 1325(a)(5)(B), the surrender option in § 1325(a)(5)(C) does not speak to satisfaction of a claim.”  “The hanging paragraph has no effect on state-law rights.”

Note:  the 9th Circuit reached the same result in Rodriguez. 

4th Circuit Rules on Chapter 13 Discharge Issue

Branigan v. Bateman (In re Bateman)  ---- F.3d ----, 2008 WL 283001  (4th Cir. Feb. 2008)

Issue:   1)  Does the two-year rule in Section 1328(f) run from the date of filing the previous case or the date of entry of the discharge in the previous case?   2)  May a debtor file a chapter 13 case even though the debtor does not qualify for a discharge in the case because of a prior discharge?   

Holding:      1)  The time in Section 1328(f) runs from filing date to filing date.  2)  Yes

Appeal from Bankruptcy Court

The chapter 13 trustee moved to dismiss two pre-BAPCPA chapter 13 cases on the grounds that the debtors did not qualify for chapter 13 because they had received a discharge in previous cases and therefore did not qualify for a new discharge.  The bankruptcy court denied the motion in both cases.  Under Section 1328(f), a chapter 13 debtor cannot receive a discharge if he has received a discharge in a chapter 7 or 11 “during the 4-year period preceding the date of the order for relief under this chapter,” or if he has received a discharge in a chapter 13 “during the 2-year period preceding the date of such order.” 

As to the first debtor, Bateman, he received a discharge in a chapter 7 several months before filing a new chapter 13.  He proposed a 100% plan which was confirmed.  He agreed that he did not qualify for a discharge.   As to the second debtor, Graves, he had filed a chapter 13 in 1999 and received a discharge five years later in 2004.  Within two years after that, he filed a new chapter 13 to stop a pending foreclosure sale.  The trustee argued that Graves received a discharge within two years after the previous discharge which was within two years “preceding the date of such order,” i.e., the discharge order.  The bankruptcy court ruled that Graves was entitled to a discharge and confirmed his plan as well. 

The Court of Appeals permitted a direct appeal of both cases and affirmed the bankruptcy court in both cases.  They ruled that, as to Graves, the plain language of the statute, two years “preceding the date of the order” refers to the order for relief as stated in the previous subsection of Section 1328(f).  The court says this makes sense because it promotes chapter 13s and Graves could have received a chapter 7 discharge had he filed a chapter 7 instead of the second chapter 13.  As to Bateman, Section 1328(f) is not an eligibility provision.         

1st Circuit Rules on Limitation of Homestead Exemption Following a "Criminal act."

Larson v. Howell (In re Larson),  --- F.3d ----, 2008 WL 186506 (1st Cir. Jan. 2008 (Mass.))

Issue:   Should the homestead exemption be limited under Section 522(q)(1)(B)(iv) when the debtor was found guilty of a criminal act even though her “criminal” conduct was simple negligence?       

Holding:   Yes, “any criminal act” is sufficient to require a limitation of the exemption.       

The debtor, age 69 at the time, was involved in an auto accident where she hit a motorcycle and the passenger on the bike was killed.  “[The debtor] said she did not see the oncoming motorcycle, but admitted she caused the accident.  The [criminal court] judge found facts sufficient to find Larson guilty of negligent vehicular homicide.”  The survivors sued the debtor in a civil action which was settled for $1 million.  The debtor then filed chapter 7 and claimed a $500,000 homestead exemption under Massachusetts law.  The creditor and the trustee objected under Section 522(q)(1)(B)(iv) “which caps homestead exemptions claimed under state or local law at $125,000 if ‘the debtor owes a debt arising from ... any criminal act, intentional tort, or willful or reckless misconduct that caused serious physical injury or death to another individual in the preceding 5 years.’”  The debtor argued that the accident was mere negligence and that the statute required an intentional injury.  The bankruptcy court ruled against her and limited the exemption.  The District Court affirmed. 

The Court of Appeals affirmed also.  “Under state law, she effectively pled guilty to the crime.”  The plain language of the code says that the exemption is limited if the debtor owes a debt arising from “any criminal act.”  The language about intentional torts, willful or reckless conduct are preceded by “or,” meaning that “any criminal act” is sufficient.   

10th Cir BAP Rules on "Projected Disposable Income"

In re Lanning,  --- B.R. ---, 2007 WL 4348055  (10th Cir. BAP December, 2007 (Kansas))

Issue:   Can an over-median debtor confirm a chapter 13 plan paying less than the B22C net income by showing “special circumstance”?                

Holding:   Yes

Judge Thurman
The debtor is an over-median chapter 13 debtor whose B22C shows a net of $1,114 because of two one-time payments by her employer in the last six months.  Her “I and J” net income is $149.  The bankruptcy court confirmed the chapter 13 plan of $149 (for 60 months apparently).   

The BAP affirmed.  “[W]e agree with the courts that have found ‘disposable income’ to be only the starting point in determining ‘projected disposable income’ under section 1325(b)(1)(B).  Where it is shown that Form B22C disposable income fails accurately to predict a debtor’s actual ability to fund a plan, that figure may be subject to modification.”  The BAP looked for “guidance” in Section 707(b)(2)(B)(i) which “allows debtors to rebut that presumption [of abuse] ‘by demonstrating special circumstances . . . that justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative.”  “Therefore, parties contending that a debtor’s Form B22C disposable income figure does not accurately project the debtor’s future ability to fund a plan must present documentation similar to that required by section 707(b)(2)(B)(ii) in support of their claim.  However, we emphasize that deviation from the Form B22C determination of disposable income will be the exception rather than the rule.”

Find the case here. 

By the way, the debtor did not participate in the appeal (why should she?).  The court asked the UST to file an amicus brief which it did supporting the debtor and the position.  I guess they don't hate debtors after all. (lol) 

Avoidance Actions for the Benefit of Whom?

Two recent cases have discussed the concept of "recovery for the benefit of the estate" and have permitted avoidance actions to proceed even though nothing will be paid to unsecured creditors irrespective of the result.  Both results are probably right given the specific facts of the case.

In Calpine Corp.v. Rosetta Resources, Inc. (In re Calpine), --- B.R. ---, 2007 WL 3119786 (Bkrtcy.S.D.N.Y. Oct. 27, 2007) Judge Burton Lifland, considering a FRBP 12(b)(6) motion, ruled that the debtor may proceed in its attempt to avoid its own prepetition transfer of assets to certain insiders even though unsecured creditors were going to be paid in full with interest irrespective of the result.  He agreed that unsecured creditors must receive some benefit from the recovery but that does not necessarily mean in the form of payment.  Here, some creditors were receiving stock under the Plan of Reorganization and therefore to the extent that the recovery benefited the debtor, it benefited the unsecured creditors.  In any event, he agreed that the debtor would have to show benefit at trial to prevail. 

In Gonzales v. Conagra Grocery Products (In re Furr's Supermarkets, Inc.) 373 B.R. 691 (10th Cir.BAP (N.M.) Aug. 2007) the BAP affirmed a recovery against the recipient of a preference even though the funds would go only to a secured creditor which had a lien on avoidance actions and to administrative expenses.  The BAP said that payment of administrative expenses incurred before and after the conversion of the case from chapter 11 to chapter 7 was a "benefit to the estate."  The trustee anticipated significant recovery after payment of the secured creditor which funds would then go to administrative expenses and that was sufficient.   

8th Circuit BAP rules on "Committment Period"

This is a victory for "above-median" debtors. The same issue is pending before the Ninth Circuit. 

In re Frederickson,  --- B.R. ---, (8th Cir. BAP September, 2007)
Issue:   Must an above median chapter 13 debtor propose a five year plan when the B22C net is a negative number?                

Holding:   No

Judge Mahoney  (Judge Federman dissenting)
The debtor filed chapter 13.  He is an over the median debtor whose B22C shows a negative $95 per month.  The opinion doesn’t set forth his I and J numbers.  He proposed a plan with a monthly payment of $600 for 48 months.  This plan pays 75% of his unsecured creditors.  The trustee objected saying the plan had to be 60 months.  The trustee argued that since the B22C amount was negative, the debtor had to use the I and J net for five years.  The bankruptcy court disagreed and confirmed the plan. 

The BAP affirmed.  1325(b)(4) says “for purposes of this subsection” and therefore since the B22C net is a negative amount, 1325(b) doesn’t apply including the requirement of the applicable commitment period.   “[T]he Court finds that ‘projected’ merely explains the treatment of ‘disposable income.’”  Looking to the dictionary definition of “projected,” they concluded, “Thus, under § 1325(b)(1)(B), a debtor's disposable income is calculated, according to the statutory definition, and then projected or extrapolated over the plan's term of years.”   Looking to chapter 11, they said, “§ 1129(a)(15)(B) certainly suggests that 'disposable income' in § 1325(b)(2) and 'projected disposable income' in § 1325(b)(1)(B) were regarded by Congress as the same concept."

The BAP concluded, “Contrary to the position taken by the Trustee, we find that the definition of ‘applicable commitment period’ in § 1325(b)(4) as five years for an above- median debtor does not refer to a minimum plan duration.  It refers, instead, to the time during which the debtor must pay projected disposable income to the Trustee for payment to unsecured creditors.  Another statutory provision, § 1322(d), discusses the length of the plan related to above-median income debtors. Section 1322(d) would be superfluous if § 1325(b)(4) set the length of the plan.”

The BAP majority added, “If the disposable income is negative, there is no applicable commitment period and a debtor is not required to propose a plan that calculates payments to unsecured creditors in the same manner as plan payments to all creditors were calculated pre-BAPCPA.”
      
The dissent compared the amendments to pre BAPCPA law and said “BAPCPA was intended by Congress to require that higher income debtors either pay 100% of unsecured claims, or make payments for a period of 5 years.  While there is scant legislative history for most of the BAPCPA provisions, the House Report on § 1325(b) makes clear that the applicable commitment period is a durational requirement for the Chapter 13 plan, and not just, as the majority holds, a multiplier.”   
 

 
 

No 707(a) Dismissal even with $400,000 in Annual Income

In re Perlin, ----F.3rd ---, (3rd Cir. August, 2007)

Issue:   1)  Can a bankruptcy court consider the debtors’ significant income when deciding whether or not to dismiss a chapter 7 under Section 707(a)?  2)  Is the debtors’ income here of about $400,000 per year sufficient to find bad faith and dismiss the case?               

Holding:   1) Yes, 2) No. 

Direct appeal from Bankruptcy Court      

Judge Cowen

The debtors filed chapter 7.   “Dr. Steven J. Perlin is a licensed radiologist.  In recent years, working only part-time, he has earned an annual income of approximately $370,000.  At all relevant times, Dr. Perlin’s wife, Cristine A. Perlin, owned and operated Centre Medical Imaging, LLC (“CMI”), the medical imaging company where Dr. Perlin practiced.  Together, the Perlins expended a considerable amount of money on certain luxury items, such as two Lexus automobiles and private school tuition totaling $5,000 per month.  In addition, they have saved more than $430,000 for their retirement.”   The debtors leased a piece of medical equipment with $1.2 million in total lease payments.  It was a big mistake.   The lessor filed suit to collect and the debtors filed chapter 7.  The lessor then filed a motion to dismiss the chapter 7 under Section 707(a) “alleging (1) the Perlins had submitted allegedly misleading schedules to the court; (2) they had timed the filing of their bankruptcy petition around Hitachi’s exercise of its legal rights against them; (3) they had artificially inflated their expenses in order to insulate their substantial income; (4) they enjoyed a substantial annual income and a lavish lifestyle, which included two luxury automobiles, private school tuition, and substantial retirement savings; and (5) they failed to make a good faith effort to repay Hitachi as an alternative to seeking discharge.”  The bankruptcy court heard evidence and found good faith saying there was no “manipulation.”  “With regard to the Perlins’s substantial income and expenses, the Bankruptcy Court opined that based upon the legislative history to section 707(a) and our comments in Tamecki, a debtor’s ability to repay is not, in and of itself, sufficient to support a bad faith finding.”  The bankruptcy judge also ruled that income was no longer a factor in a 707(a) analysis because of the “theory of negative implication,” i.e., since 707(b) has an income/means test and there is none in 707(a), Congress did not intend income/means to be a factor in 707(a).

The 3rd Circuit affirmed saying that the judge was wrong about the existence of the income/means test in 707(a) but, in any event, the judge was right in finding no bad faith.  For negative implication to apply, the code sections must be “part of a package or commonly associated group or series.”  Congress has always treated 707(a) and (b) differently.  707(b) is directed at consumer debtors, 707(a) is not.  The two sections do not go “hand-in-hand.” 

But is income part of the bad faith test?  The House and Senate Reports in enacting 707(a) stated, “The section does not contemplate, however, that the ability of the debtor to repay his debts in whole or in part constitutes adequate cause for dismissal,” i.e., there is no mandatory chapter 13.  But that does not prohibit the court from looking at income.  “[D]ismissal should be ‘confined carefully’ and utilized only in ‘egregious cases that entail concealed or misrepresented assets and/or sources of income, lavish lifestyles, and intention to avoid a large single debt based upon conduct akin to fraud, misconduct or gross negligence.’”  Here, “[t]here is no evidence that the Perlins schemed to conceal or misrepresent income, inflated their expenses to hide income, filed misleading statements or schedules in an effort to defraud their creditors, unduly interfered with the judicial process, or engaged in any other misconduct.  On the contrary, the Bankruptcy Court found that the Perlins were ‘straightforward in their schedules’ and ‘forthcoming with the Court and their creditors.’”  It appears that the court was also impressed that the debtor’s tried to work it out with the lessor before filing.