November 15, 2009

Circuit Court of Appeals Cases from Last Week

3rd Circuit Court of Appeals, November 12, 2009
In re Madera, --- F.3d ---, 2009 WL ----------- (3rd Cir. 2009)(summary judgment for creditor is affirmed where 1) the Rooker-Feldman precluded the bankruptcy court's jurisdiction over debtors' rescission claim because that claim was inextricably intertwined with a Court of Common Pleas' foreclosure judgment; 2) summary judgment for creditor on the Truth in Lending Act damages claim appropriate; and 3) debtor's motion to amend was untimely)

5th Circuit Court of Appeals, November 12, 2009
In re Bradley, --- F.3d ---, 2009 WL ----------- (5th Cir. 2009)(contempt of court and monetary sanctions affirmed where: 1) civil contempt power extends to defiance of a bankruptcy court injunction whose terms are known, but which has not yet been formalized as required by procedural rules; and 2) the lack of agreement between the opposing parties briefing the motion for injunction did not render the resulting ruling unclear)

6th Circuit Court of Appeals, November 13, 2009
In re Nowak, --- F.3d ---, 2009 WL ----------- (6th Cir. 2009)(informal proof of claim not allowed where 1) plaintiff had ample notice of the likelihood that it would lose its status as a secured creditor, necessitating the filing of a proof of claim; 2) plaintiff's unexplained delay weighed against allowing plaintiff's informal proof of claim; and 3) the large dilution in the distribution to other creditors in this case was an appropriate consideration weighing against allowing plaintiff's claim)

Thanks to Findlaw.com  

November 15, 2009 in Other Circuit Briefs | Permalink | Comments (0) | TrackBack

November 10, 2009

Court of Appeals Cases from Last Week

1st Circuit Court of Appeals, November 06, 2009
In re Smith, --- F.3d ----, 2009 WL ---------- (1st Cir. 2009)(late alimony payment penalty was not a domestic support obligation, and as such, the ex-wife's claim was a general unsecured claim not entitled to priority status and consequently dischargeable) 

2nd Circuit Court of Appeals, November 05, 2009
Ogle v. Fidelity & Deposit Co. of Md., --- F.3d ----, 2009 WL ---------- (2nd Cir. 2009)(liquidating trust must pay post-petition attorneys' fees on a claim that stemmed from a pre-petition indemnity agreement where such claims are categorically allowable)

9th Circuit Court of Appeals, November 05, 2009
In re Bender, --- F.3d ----, 2009 WL ---------- (9th Cir. 2009)(appeal dismissed as BAP's order re action seeking avoidance of a transfer was not final)

10th Circuit Court of Appeals, November 03, 2009
In re Paige, --- F.3d ----, 2009 WL ---------- (10th Cir. 2009)(dismissal of the appeal as moot is reversed where: 1) the competing chapter 11 plan could theoretically be confirmed without requiring disgorgement of payments made to third-party creditors; and 2) reversal of the existing plan would not require the undoing of complex transactions)

Thanks to Findlaw.com

November 10, 2009 in Other Circuit Briefs | Permalink | Comments (0) | TrackBack

November 07, 2009

Circuit Court of Appeals Cases from Last Week

(well - a week late)

5th Circuit Court of Appeals, October 30, 2009
In the Matter of: Proeducation Int'l. Inc., --- F.3d ---, 2009 WL ------------- (5th Cir. 2009)(counsel for creditor should not have been disqualified where: 1) the bankruptcy court should have considered counsel's evidence of his lack of involvement with the debtor while at his prior law firm in making its decision; and 2) counsel presented sufficient evidence to demonstrate that he did not operate under a conflict of interest when he undertook the representation of creditor).

10th Circuit Court of Appeals, October 28, 2009
In re Riebesell, --- F.3d ---, 2009 WL ------------- (5th Cir. 2009)(debt of attorney debtor to his former client not discharged where: 1) the parties had an attorney-client relationship during the relevant period under Colorado law; 2) the loans to debtor attorney were not "standard commercial transactions" exempt from the requirements of Colo. R. Prof'l Conduct 1.8(a); and 3) the bankruptcy court's finding that defendant had the requisite intent to deceive plaintiff was not clearly erroneous)

November 7, 2009 in Other Circuit Briefs | Permalink | Comments (0) | TrackBack

October 21, 2009

Circuit Court of Appeals Cases from Last Week

1st Circuit Court of Appeals, October 08, 2009
In re Simply Media, Inc., --- F.3d ---, 2009 WL ------------- (1st Cir 2009)(appeal dismissed and OSC set re sanctions against attorney for frivolous appeal) 

1st Circuit Court of Appeals, October 15, 2009
In re Reale, --- F.3d ---, 2009 WL ------------- (1st Cir 2009)(preference judgment for trustee affirmed where 1) debtor exercised sufficient control over the funds at issue to demonstrate that they were an interest of the debtor in property; and 2) successor judge had no obligation to recall witnesses or to order a new trial)

Thanks to Findlaw.com

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October 09, 2009

Judge Rules that Spouses' Debts are Considered Separately for Eligibility for Chapter 13

Brief by my law clerk Roksana Moradi

In re Werts, --- B.R. ----, 2009 WL 2563468 (Bkrtcy.D.Kan.)

Issue:  Do the debt limitations for filing chapter 13 apply to a husband and wife separately even though they file a joint case?  Is the unsecured portion of secured debt treated as unsecured for eligibility purposes?  Was the conversion here from chapter 7 to chapter 13 in bad faith and therefore subject to dismissal?

Holding:  The debt limitations apply to the spouses separately.  The unsecured portion of secured debt is treated as unsecured for eligibility purposes.  Here there was no sufficient bad faith to justify dismissal of the chapter 13.

Judge Janice Miller Karlin,

Mr. and Mrs. Werts, had unsecured debts of $161,977.71 and $100,913.37, respectively.  They filed chapter 7 on June 16, 2008.  The debtors were also jointly liable on a second mortgage on their residence.  Further, the debt secured by that second mortgage exceeded the value of the house by $134,760.  Their schedules had numerous deficiencies which they corrected with various amendments (and blamed most on their attorney).  Plus Mr. Werts received a cash settlement from a business deal of $75,000 on October 31, 2008.  The debtors used the “$75,000 to pay some routine bills, make several advanced payments on their first and second mortgages ($21,535 and $7,124, respectively), make car payments ($5,995), buy new furniture for their house ($5,500), make deck repairs ($750), paint their house ($3,650), pay off an unsecured consolidation loan that was guaranteed by a friend and former employer of Mr. Werts ($12,235), pay attorney fees ($3,000) and take a ski vacation in Colorado ($4,117).”
 
In January of 2009, the UST filed an adversary proceeding objecting to Debtors' discharge pursuant to § 727(a)(2) and (4).  The UST also filed a Motion for Dismissal for Abuse under § 707(b)(3).  Three months later, with new counsel, the debtors “filed the motion to convert to Chapter 13. . . [that is] the subject of this order. 

The first issue for the court was whether the debtors qualified for chapter 13.  The Court stated that “this issue is governed, in part, by the answer to the following question: whether the $134,760 undersecured portion of Debtors' second mortgage should be considered unsecured debt for purposes of the § 109(e) debt limitation when another section of the Code, § 1322(b)(2), specifically requires that same debt to be treated as secured for plan confirmation purposes.  This second mortgage note is secured only by a security interest in Debtors' principal residence.”  The Court concluded “that the undersecured portion of a secured debt should be treated as an unsecured debt for § 109(e) debt limitation calculations.”

The Debtors argued in the alternative that “the §506 analysis should not be applied when the debt in question will be treated as fully secured by operation of law, specifically §1322(b)(2), which requires that a claim secured only by a security interest in the debtors' principal residence cannot be bifurcated and crammed down.”  The Court disagreed ruling that the application of §1322(b)(2) does not create an exception to the general rule and declined “to graft additional content onto § 109(e) that Congress did not choose to include, to wit, that the section does not apply to those debts that are truly undersecured, but that will be treated as fully secured for confirmation purposes.”

The debtors next argument was that because each of them, individually, had “unsecured debt less than $336,900, because not all of their unsecured debt is joint debt, they should be allowed to proceed as debtors in a Chapter 13 case. The UST objected saying §109(e) requires both spouse's debts to be considered together when determining whether they fall under the unsecured debt limit.” The parties did not provide ANY case law addressing this issue, and the Court was also unable to locate any cases directly on point.   The UST’s argument focused “ on the portion of the statute that reads ‘an individual with regular income and such individual's spouse ... that owe ... unsecured debts that aggregate less than $336,900’ to support its claim that all debts of both spouses must be combined for purposes of § 109(e).”  The Court found “that a more reasonable reading of the statute, and one that furthers the goal of encouraging Chapter 13 filings, is that the provision dealing with ‘an individual with regular income and such individual's spouse’ is intended to apply in those cases where the spouse could not otherwise be a Chapter 13 debtor, because he or she is not ‘an individual with regular income.’  If each spouse has regular income, and each spouse separately qualifies under the debt limits of §109(e), then each spouse should be entitled to file his or her own Chapter 13 case-even if the debts of both spouses together would exceed the debt limits.”  The Court further stated that “if a husband and wife can each file separate Chapter 13 proceedings, where their own individual debt is within the § 109(e) limits, the Court can think of no reason why a husband and wife could not file a joint petition, as authorized by § 302(b).” 

As to good faith, the Court ruled the “key inquiry” for courts attempting to ascertain a debtor's good faith ‘is whether the debtor is seeking to abuse the bankruptcy process.’ ”  The overwhelming majority of Courts have held that the party moving to dismiss or convert a case under § 1307(c) bears the burden of showing that the case was not filed in good faith.” The Court held that, “although a debtor bears the burden of proving that a plan was filed in good faith under § 1325(a), the burden of showing that a case was filed in bad faith so as to require conversion or dismissal under § 1307(c) falls on the party seeking such conversion or dismissal.”
 
The UST alleged that the deficiencies in the schedules were evidence of bad faith.  The court said it was “troubled by the actions of each Debtor and [their prior attorney] regarding the errors and omissions on the schedules, the Court does not find that those actions rise to the level of bad faith that would render Debtors ineligible for Chapter 13 relief.  Critical to this finding is the testimony of the Chapter 7 Trustee, who testified that once her initial concerns about the schedules were discussed with counsel, Debtors were at all times cooperative in providing follow-up documentation about all bank accounts and other identified issues, they answered all of her questions in a timely fashion, and, most importantly, that she never felt Debtors were being deceptive or uncooperative in their responses to her.”

The Court also found “that Debtors' actions in disposing of the $75,000 payment from the EB buyout in the 7-8 months prior to the filing of the case do not rise to the level of bad faith. Typically, engaging in pre-bankruptcy planning by converting non-exempt assets into exempt assets, without more, does not constitute bad faith.  However, the UST contends that bad faith does exist here because Debtors accumulated a fairly significant amount of unsecured debt in connection with the EB business, itself, and should have used the $75,000 payment to repay some of that debt, rather than using it to pay down their mortgage or for a family vacation.  In response, Debtors testified that they did in fact intend to use the EB payment to repay some of their business debt. However, [their previous attorney] specifically advised them to use the money in a fashion that would best benefit their future financial fresh start, rather than that of their creditors or the bankruptcy estate.  “Debtors stated that they simply followed the pre-bankruptcy planning advice offered by their attorney, and were not acting in bad faith.”

In conclusion the Court held that “Debtors' actions prior to filing this case did not rise to a level of bad faith that would prevent conversion, the Court finds that the case would not be subject to dismissal or conversion under 1307(c).”

October 9, 2009 in Other Circuit Briefs | Permalink | Comments (1) | TrackBack

October 06, 2009

Circuit Court of Appeals Cases from Last Week

2nd Circuit Court of Appeals, October 01, 2009
Orange Cty. Water Dist. v. Unocal Corp., --- F.3d ---, 2009 WL ------------ (2nd Cir. 2009)(petition for a writ of mandamus rejected because any challenge to the district court's subject matter jurisdiction was best addressed on direct appeal, rather than by a writ of mandamus)

5th Circuit Court of Appeals, September 29, 2009
In the Matter of: Pac. Lumber Co., --- F.3d ---, 2009 WL ------------ (5th Cir. 2009)(confirmed Chapter 11 reorganization plan affirmed in part where: 1) certain noteholders did not preserve their challenge to the plan's treatment of their secured claims; and 2) the plan did not create a substantive consolidation. Order reversed in part where: 1) the equitable mootness doctrine did not bar review of issues raised on appeal concerning the treatment of noteholders' secured claims, it did not bar re-evaluation of whether their administrative priority claim was correctly calculated, and it did not bar review of the plan's release clauses insulating multiple parties from liability; and 2) the bankruptcy court may have made a mathematical error and deprived noteholders of a post-petition administrative priority claim)

6th Circuit Court of Appeals, October 02, 2009
Tam Travel, Inc. v. Delta Airlines, Inc., --- F.3d ---, 2009 WL ------------ (6th Cir. 2009)(plaintiff-travel agencies' lawsuit under the Sherman Antitrust Act alleging a conspiracy to eliminate the practice of paying base commissions by various airlines, district court's dismissal of the amended complaint is affirmed, as the plaintiffs' claims against United Airlines were discharged in bankruptcy and the claims against the remaining defendants failed to allege sufficient facts to plausibly suggest a prior illegal agreement)

9th Circuit Court of Appeals, October 01, 2009
Sternberg v. Johnston, --- F.3d ---, 2009 WL ------------ (9th Cir. 2009)(no viloation of the automatic stay where plaintiff violated his duty to ensure that his actions did not prolong a violation of the stay that resulted from a state court motion seeking relief against defendant that plaintiff filed prior to the bankruptcy. However, the damages limited to only those attorney's fees related to enforcing the automatic stay and remedying the stay violation, not the fees incurred in prosecuting the bankruptcy adversary proceeding in which he pursued his claim for those damages)

9th Circuit Court of Appeals, October 02, 2009
In re Greene, --- F.3d ---, 2009 WL ------------ (9th Cir. 2009)(perfection of a homestead exemption does not constitute acquisition of a property interest for purposes of 11 U.S.C. section 522(p)(1), and thus the debtor's homestead was not subject to the $125,000 cap contained in section 522(p))

10th Circuit Court of Appeals, September 30, 2009
In re Corey, --- F.3d ---, 2009 WL ------------ (10th Cir. 2009)(debtor barred from defending non-dischargeability actkion by issue preclusion because the issue of his fraud was actually litigated in the prior case)

Thanks to Findlaw.com. 

October 6, 2009 in Other Circuit Briefs | Permalink | Comments (0) | TrackBack

September 19, 2009

Circuit Court of Appeals Cases from Last Week

2nd Circuit Court of Appeals, September 18, 2009
In re Ames Dept. Stores, Inc., --- F.3d ---, 2009 WL ----------- (2nd Cir. 2009)(Bankruptcy Code order disallowing request for payment of administrative expenses until debtor's predecessor in interest returned a preferential transfer is vacated where section 502(d) does not bar allowance of administrative expenses within the scope of section 503(b))

7th Circuit Court of Appeals, September 17, 2009
US v. Arthur, --- F.3d ---, 2009 WL ----------- (7th Cir. 2009)(bankruptcy fraud and related crimes affirmed where: 1) wife's conviction is supported by sufficient evidence; 2) defendant's constitutional claims that the marital agreements were fraudulent was well-founded; 3) defendant lacks standing to raise a Sixth Amendment ineffective assistance of counsel claim on behalf of his wife; and 4) district court did not err in using defendant's prior state court judgment to increase his base offense level)

7th Circuit Court of Appeals, September 17, 2009
Hoosier Energy Rural Elec. Coop., Inc. v. John Hancock Life Ins. Co., --- F.3d ---, 2009 WL ----------- (7th Cir. 2009)(In a dispute involving a leveraged lease of a power station, district court's grant of temporary injunction is affirmed since co-op's claim was sufficient for the limited purpose of the temporary injunction)

8th Circuit Court of Appeals, September 16, 2009
Knudsen v. IRS, --- F.3d ---, 2009 WL ----------- (8th Cir. 2009)(ch 12 reorganization plan affirmed where: 1) a Chapter 12 debtor may treat postpetition income taxes imposed on the debtor's income earned during the pendency of the case as administrative expenses; 2) debtors' sale of their slaughter hogs in 2004 constituted the sale of a "farm asset used in the debtor's farming operation" under section 1222(a)(2)(A); and 3) the "marginal method" was the correct method to determine the allocation of taxes between priority and non-priority claims under section 1222(a)(2)(A))

Thanks to Findlaw.com

September 19, 2009 in Other Circuit Briefs | Permalink | Comments (0) | TrackBack

September 12, 2009

Circuit Court of Appeals Cases from Last Week (a good day for Ford)

5th Circuit Court of Appeals, September 09, 2009
Ford Motor Credit Co. v. Dale, --- F.3d ---, 2009 WL ----------- (5th Cir. 2009)(Ford has purchase-money security interest in those portions of a claim attributable to the payoff of negative equity in a trade-in vehicle, gap insurance, and an extended warranty)

8th Circuit Court of Appeals, September 08, 2009
Ford Motor Credit Co. v. Mierkowski, --- F.3d ---, 2009 WL ----------- (8th Cir. 2009)(2-1 ruling that under Missouri law, the amount financed to pay off the negative equity in the trade-in is part of the price of the new car, thus it is a purchase-money obligation)

8th Circuit Court of Appeals, September 09, 2009
In re Callicott, --- F.3d ---, 2009 WL ----------- (8th Cir. 2009)(creditor has a purchase-money security interest in its entire claim, including the negative equity financing resulting from debtor's trade-in vehicle - this was the same panel as the Mierkowski case above)

Thanks to Findlaw.com. 

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September 06, 2009

Delaware Bankruptcy Judge Rules 2004 Exam Proper Even Though Four Adversary Actions are Pending

Brief by UWLA Law Student, Sara Hussain:

In re Washington Mutual, Inc., 408 B.R. 45 (Bkrtcy D. Delaware, June, 2009)

ISSUE:  Does the existence of four pending adversary proceedings or other litigation between the parties require denial of a requested 2004 examination?
 
HOLDING:  No.

Judge Mary Walrath

The chapter 11 debtor filed a motion for a 2004 exam directing the examination of JPMorgan Chase Bank (“JPM”). “For the reasons set forth below, the Court will grant the Debtors' Motion.”  Prior to the filing of a chapter 11 petition, Washington Mutual, Inc. (“WMI”) was a savings and loan holding company, which owned Washington Mutual Bank (“WMB”). “Deteriorating confidence in WMB fueled a bank run beginning September 15, with $16.7 billion in deposits withdrawn over a ten-day period.”  On September 25, 2008, FDIC took over WMB.  It was the largest bank failure in the nation's history.  Immediately after its appointment as receiver, the FDIC sold substantially all the assets of WMB to JPM.  On September 26, the Debtors filed chapter 11 petitions.
 
The Debtors filed proofs of claim with the FDIC in its capacity as receiver of WMB which the FDIC denied.  On March 20, 2009, the Debtors filed suit in the United States District Court against the FDIC (the “DC Action”) with the following five counts: (1) seeking review of the FDIC's denial of the Debtors' proofs of claim; (2) wrongful dissipation of WMB's assets; (3) taking of the Debtors' property without just compensation; (4) conversion of the Debtors' property; and (5) seeking a declaration that the FDIC's disallowance of the Debtors' claims is void.  JPM moved to intervene in the DC Action; the Debtors have opposed JPM's motion to intervene.

JPM filed an adversary proceeding against the Debtors seeking declaratory judgments regarding the ownership of various assets which JPM asserts it acquired in good faith and for value from the FDIC (the “JPM Adversary Action”).  The Debtors then filed an adversary proceeding against JPM seeking turnover of approximately $4 billion in cash held in demand deposit accounts in the name of the Debtors at WMB at the time WMB was seized and sold to JPM.  JPM filed a motion to dismiss the Turnover Action; the Debtors filed a motion for summary judgment.
 
A fourth action was filed, in state court in Texas by a group of insurance companies which held common stock of WMI against JPM (the “Texas Action”).  On March 25, 2009, the FDIC and JPM removed the Texas Action to the United States District Court for the Southern District of Texas.

 
 
ANALYSIS:
 
Rule 2004(a) of the Federal Rules of Bankruptcy Procedure states that “on motion of any party in interest, the court may order the examination of any entity.” The scope of a Rule 2004 examination is “unfettered and broad.”   “The examination ... may relate only to the acts, conduct, or property or to the liabilities and financial condition of the debtor, or to any matter which may affect the administration of the debtor's estate.  Additionally, in a case under chapter 11 ... the examination may also relate to the operation of any business and the desirability of its continuance, the source of any money or property acquired or to be acquired by the debtor for purposes of consummating a plan and the consideration given or offered therefor, and any other matter relevant to the case or to the formulation of a plan.”

“At issue in this case is the potential limitation on the use of the Rule 2004 examination device caused by the shadow of pending adversary proceedings or litigation in other forums.  The ‘pending proceeding’ rule states ‘that once an adversary proceeding or contested matter has been commenced, discovery is made pursuant to Federal Rules of Bankruptcy Procedure 7026 et seq., rather than by a Rule 2004 examination.’” In addition, courts have also recognized that Rule 2004 examinations may be inappropriate “where the party requesting the Rule 2004 examination could benefit their pending litigation outside of the bankruptcy court against the proposed Rule 2004 examinee.”
 
In this case, JPM argues that the 2004 examination is improper because it seeks to elicit information directly related to issues and parties already named in the JPM Adversary Action as well as the DC Action.  However, the Court held that nothing in the document production request seeks any information related to the Turnover Action.  “The requested Rule 2004 examination does seek extensive discovery related to the Texas Action and because the Debtor is not a party to the Texas Action, the requested 2004 examination is proper, even though it seeks information related to the Texas Action.”
 
JPM then argues that the Debtors' requested 2004 examination seeks documents related to the JPM Adversary Action.  The JPM Adversary Action primarily seeks a series of declaratory judgments that JPM owns a number of disputed assets it asserts that it purchased when it acquired the assets of WMB from the FDIC.  The Debtors' Motion seeks production of documents and related depositions relating to potential business tort claims, potential fraudulent transfer claims, potential turnover claims against JPM, and potential preferential transfer claims against JPM.
 
“The Court concludes that the Debtors' Motion does not seek the discovery of evidence ‘related’ to the JPM Adversary Action.  With respect to the potential business tort claims, the Debtors seek to investigate conduct which occurred before the OTS closed WMB.  In contrast, the JPM Adversary Action seeks to have the Court determine the ownership of certain disputed assets from the sale of WMB's assets to JPM, which occurred after the OTS closed WMB. Accordingly, the Court finds that the Debtors' Motion does not seek to discover evidence related to the JPM Adversary Action.”
 
JPM also argues that the Debtors' requested 2004 examination seeks documents related to the DC Action.  However, JPM is not a party to the DC Action.  “The possibility that JPM may intervene in the DC Action is not a sufficient reason to deny the Debtors' Motion at this time.  The “pending proceeding” rule is predicated on there actually being a pending action involving the two parties.”

“[T]here is no justification to prevent the Rule 2004 examination of JPM simply because the Debtors may obtain evidence which could be used in a pending proceeding in which JPM is not yet a party.  One of the primary purposes of a Rule 2004 examination is as a pre-litigation device.  Consequently, the Court should not permit a party to avoid examination by simply filing a motion to intervene in a pending proceeding against a third party.  Since JPM is not a party to the DC Action, the concern that the Debtors are attempting to circumvent the Federal Rules of Civil Procedure is not present.  The ‘relatedness’ of the DC Action to the Debtors' requested 2004 examination is not relevant.”

With respect to the DC Action, the “Debtors seek to discover evidence regarding JPM's alleged malfeasance prior to the seizure and sale of WMB.  JPM argues that discovery of this evidence is related to the Debtors alleged causes of action against the FDIC for dissipation of WMB's assets and the taking of Debtors' property without just compensation.  However, these causes of action are premised on the FDIC's failure to maximize the value of the receivership's assets in the sale of WMB to JPM. Specifically, the Debtors assert the FDIC would have received a higher value through the liquidation of WMB than the sale to JPM.  The requested 2004 examination does not seek to discover evidence related to the hypothetical liquidation analysis implicated in the dissipation and takings causes of action asserted in the DC Action.” 

September 6, 2009 in Other Circuit Briefs | Permalink | Comments (2) | TrackBack

Circuit Court of Appeals Cases from Last Week

3rd Circuit Court of Appeals, September 01, 2009
In re Jersey Tractor Trailer Training, Inc., --- F.3d ---, 2009 WL ------- (3rd Cir. 2009)(creditor did not waive its security interest in debtor's accounts receivable. District court's holding that a competing creditor did not act in good faith, and therefore cannot be a holder in due course or a purchaser of instruments, is vacated and remanded)

September 6, 2009 in Other Circuit Briefs | Permalink | Comments (1) | TrackBack

September 05, 2009

8th Cir BAP Rules Social Security Proceeds Not Property of the Estate

Brief by my law clerk Roksana Moradi

Carpenter v. Ries (In re Carpenter), 408 B.R. 244 (8th Cir.BAP (Minn.))
 
Issue:  1.  Is a prepetition lump sum payment for retroactive social security benefits property of the estate?  2.  Can the debtor exempt those funds pursuant to §522(d)(10)(A).  
 
Holding:  1.  No, the funds are not property of the estate pursuant to Social Security Act Section 407.  2.  No, but it doesn’t matter because the funds are not property of the estate. 
 
The Debtor is disabled and receives social security disability benefits, the first of which was a lump sum payment of $17,165 for retroactive benefits which he received in the fall of 2007 (when his disability status was determined).  He deposited the funds into the bank and maintained them in a segregated fashion, then “[s]hortly before filing for bankruptcy protection he converted the proceeds into a cashier's check.”
 
On April 3, 2008, he filed Chapter 7 and claimed the social security proceeds exempt under §522(d)(10)(A).  In response to the Trustee's objection to the exemption Carpenter contended “that social security benefits, including funds previously paid, are excluded from a debtor's bankruptcy estate altogether, and thus cannot be reached by the Trustee..”  Carpenter further argued “that the funds were excluded from the estate by virtue of 11 U.S.C. § 541(c)(2).”  The Bankruptcy Court ruled “that section does not apply to already-paid retroactive social security benefits because such benefits are not a trust.”
 
Minnesota has not opted out of the 522(d) exemptions and therefore the debtor may choose the federal exemptions.   “As relevant here, §522(d)(10)(A) of the Bankruptcy Code allows a debtor …to claim as exempt ‘the debtor's right to receive ... a social security benefit....’ As the Bankruptcy Court concluded, the cashier's check held by Carpenter does not constitute the ‘right to receive’ a social security benefit, but instead represents funds which were previously paid as such a benefit.” Therefore §522(d)(10)(A) did not apply.
 
The BAP said, “ordinarily, that would be the end of the matter, and Carpenter would be required to turn over the funds to the Trustee for distribution to creditors.  However, §522(d)(10)(A) notwithstanding, the treatment of social security payments is governed by a separate federal statute, namely §407 of the Social Security Act, which bears on the question of whether a social security recipient such as Carpenter is required to give up already-paid benefits for the benefit of his creditors in bankruptcy.”


 
Section 407 of the Social Security Act provides, in relevant part:
 (a) The right of any person to any future payment under this subchapter shall not be transferable or assignable, at law or in equity, and none of the moneys paid or payable or rights existing under this subchapter shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.
 
(b) No other provision of law, enacted before, on, or after April 20, 1983, may be construed to limit, supersede, or otherwise modify the provisions of this section except to the extent that it does so by express reference to this section.
 
Does this exclude social security proceeds from the recipient's bankruptcy estate altogether?  In the bankruptcy context, at the commencement of a case, §544 of the Bankruptcy Code “authorizes a trustee to, in effect, capture property of the estate by exercising, as relevant here, all powers of a judgment creditor which obtains an execution that is returned unsatisfied.”  Nothing in that section, §541, or §522, or any other provision of the Bankruptcy Code, makes express reference to §407 of the Social Security Act, or in any way trumps its provisions.  The BAP held that since no provision in the Bankruptcy Code makes express reference to §407, and, without such express reference, that statute renders social security benefits, paid or payable, free from the operation of any bankruptcy law, a bankruptcy trustee has no authority to administer, as property of the bankruptcy estate, moneys paid to a debtor as social security benefits. “In other words, such proceeds are not property of the bankruptcy estate.”
 
The BAP concluded that, “although [the debtor] cannot claim the retroactive social security benefits exempt under § 522(d)(10), such benefits are excluded from the bankruptcy estate pursuant to 42 U.S.C. § 407, and may be retained by him.  The judgment of the bankruptcy court is, therefore, REVERSED.”

September 5, 2009 in Other Circuit Briefs | Permalink | Comments (0) | TrackBack

August 22, 2009

Circuit Court of Appeals Cases from Last Week

5th Circuit Court of Appeals, August 18, 2009
St. Paul Fire & Marine Ins. Co. v. Labuzan, --- F.3d ---, 2009 WL -------- (5th Cir. 2009)(these particular creditors had standing to claim damages based on violations of the automatic-stay provision, section 362(k))

9th Circuit Court of Appeals, August 21, 2009
Joye v. Franchise Tax Bd., --- F.3d ---, 2009 WL -------- (9th Cir. 2009)(only state taxes incurred post-petition may be treated as postpetition claims under 11 U.S.C. section 1305(a))(Note: 2-1 opinion)

Thanks to Findlaw.com 

August 22, 2009 in Other Circuit Briefs | Permalink | Comments (0) | TrackBack

August 18, 2009

Circuit Court of Appeals Cases from Last Week

9th Circuit Court of Appeals, August 14, 2009
Ransom v. MBNA Am. Bank, --- F.3d ---, 2009 WL ------------- (above-median income chapter 13 debtor may not deduct from his projected disposable income a vehicle "ownership cost" for a vehicle he owns free and clear)

Supreme Court of California, August 10, 2009
Imperial Merchant Services, Inc. v. Hunt, ---- Cal ----, 2009 WL ------------- (2009)(In a bankruptcy action decided on request of the Court of Appeals for the Ninth Circuit, the Supreme Court of California concludes that the statutory damages prescribed in Civil Code sec. 1719 are exclusive in the sense that a debt collector who recovers a service charge on a dishonored check pursuant to Civil Code sec. 1719 may not also recover prejudgment interest on damages under Civil Code sec. 3287)

Thanks again to Findlaw.com. 

August 18, 2009 in Other Circuit Briefs | Permalink | Comments (0) | TrackBack

August 16, 2009

Bankruptcy Court Rules that Non-Payment of Tuition is not a Non-Dischargeable Student Loan

In re Moore, 407 B.R. 855  (Bkrtcy E.D. VA, June 2009)

Issue:   Did an on-line law school violate the discharge injunction when it refused, postpetition, to award the debtor his degree and certify his status to employers?  Is the unpaid tuition a non-dischargeable student loan?         

Holding:     Yes, the refusal violates 524.  It is not a non-dischargeable student loan.   

This chapter 7 debtor owed about $5,800 to Novus Law School.  After the petition was filed, Novus “sent the debtor an email on June 10, 2008, informing him that if the debt owed to it was ‘liquidated through bankruptcy,’ he ‘will not be eligible to receive [his] degree’ nor would Novus ‘validate, certify, and/or verify [his] graduate status to employers.’”  The debtor filed a motion for contempt for violating the discharge injunction.  The debtor “testified that he has completed all of his course work, including the final project, but has not yet received his degree or final transcript.”  “The issues here are whether Novus's refusal to issue a degree or transcript because the debtor has not paid the tuition where the debt was discharged in bankruptcy is a violation of the discharge injunction, and if so, whether the debtor is entitled to an award of damages.”

The bankruptcy court found the school in contempt.  It ruled that the damages would be “$10,000.00, to be paid within 30 days, unless within that time it has issued the debtor a degree and a transcript reflecting completion of the degree requirements and has filed with the clerk evidence of its compliance.”

The court first ruled that the debt was not a non-dischargeable student loan.  “In the present case, the debt owed by the debtor to Novus can be characterized as an unpaid tuition debt.  Such a debt is not an ‘educational benefit overpayment,’ which is an overpayment from a program like the GI Bill, where students receive payments even though they are not attending school.  Nor does the debt fall into the ‘obligation to repay funds received’ category, because there is no evidence indicating that the debtor received any funds from Novus.”  The “unilateral [decision] not to pay tuition when it came due’ did not constitute a loan and that the unpaid tuition debt owed was therefore not excepted from discharge under § 523(a)(8).”  “Of significance to the court was the fact that the debt owed to the school did not involve an advance of cash or exchange of money, nor did the debtor make any arrangements to borrow money from the school or sign a promissory note .”

As to the discharge injunction, the court held that the school violates the stay when it “withhold[s] a debtor's transcript . . . for no other purpose than to compel the payment of a pre-petition debt.”

August 16, 2009 in Other Circuit Briefs | Permalink | Comments (1) | TrackBack

August 09, 2009

New Case on Household Size

In re Bostwick,  406 B.R. 867 (Bkrtcy, Minn 2009)

Issue:   May the debtor claim a “household of two” when she lives in a single family residence with an unrelated individual as roommates and nothing more?  Must she include the roommate’ share of the rent and utilities in her current monthly income?         

Holding:      Yes, it is a household of two.   Yes as to the utilities but no as to the rent.     

Judge Robert J. Kressel:
The chapter 13 debtor lives in a house with a guy but they have separate leases, separate bedrooms, and do not share food, toiletries etc.  They share the common areas of the home.  They split the utilities but nothing else.  The home has a third bedroom which is vacant waiting for the owner to find a third lessee.  The debtor claimed a household of two which made her a below-median debtor.  She did not include any of his income in her CMI.  She proposed a 36 month plan.  The trustee objected saying it was a household of one putting her above-median and therefore must be a 60 month plan.  The trustee also said the CMI must include the roommate’s share of the rent and utilities.

The bankruptcy judge overruled the objections.  He said the roommate’s share of the utilities must be included in CMI because they shared the cost but the rent was not shared because they had separate leases.  With the utilities, the debtor was still below-median. 

As to the household size, Judge Kressel wrote: 

I have previously addressed the meaning of “household” in the context of § 1325(b)(4) and concluded that because [the code] defines the ‘median family income’ as ‘the median family income both calculated and reported by the Bureau of the Census,’ ” it is only fair to use the Census Bureau's definition of household: “all of the people, related and unrelated, who occupy a housing unit.” (citing U.S. Census Bureau, Current Population Survey (2004), available at http:// www. census. gov/ population/ www/ cps/ cpsdef. html).  Generally, a single-family home shared by unrelated persons is a single housing unit whose occupants comprise a single household, and the residence shared by Bostwick and Weis is no exception.  The relationship among residents is not a consideration in the Census Bureau's definition, and nothing in the Bankruptcy Code compels unique treatment for households comprised of unrelated members.

The Census Bureau considers whether “A house, an apartment or other group of rooms, or a single room, ... is occupied or intended for occupancy as separate living quarters; that is, when the occupants do not live and eat with any other persons in the structure and there is direct access from the outside or through a common hall”  The criteria of separateness and direct access are not met here.

Although Bostwick and Weis each are entitled to private use of some parts of the house-each has a separate bedroom, storage area and parking stall-it remains a single-family home, with a shared bathroom, kitchen, living room, yard, and laundry.  The trustee argues that the separate leases and separate bedrooms have transformed the single-family home into a rooming house, but Bostwick lives with Weis as two ordinary roommates might, despite their separate leases.  Because of the layout of the house, it is not possible for Bostwick to enter her bedroom without passing by their living room or kitchen.  There is no direct access from the outside.  There are times that they are both in the kitchen or living room.  They do not eat together, but they share a refrigerator, a microwave oven and a stove. Bostwick must cross Weis's basement storage space to get to the laundry machines.  None of this rises to the level of “separateness” that the Census Bureau's definition of housing unit requires. In fact, the Census Bureau's definition specifically includes “unrelated people sharing a housing unit such as partners or roomers” Id. (“A household includes ... all the unrelated people, if any, such as lodgers, foster children, wards, or employees who share the housing unit. A person living alone in a housing unit, or a group of unrelated people sharing a housing unit such as partners or roomers, is also counted as a household.”).

Although the Census Bureau excepts “group quarters” from its definition of “household,” the exception is limited to unusual housing situations unlike the common roommate situation presented in this case.  According to the Census Bureau, group quarters are “noninstitutional living arrangements for groups not living in conventional housing units or groups living in housing units containing ten or more unrelated people or nine or more people unrelated to the person in charge.” Id. Bostwick and Weis, despite their separate leases, are a single household for the purposes of 11 U.S.C. § 1325(b)(4), and Bostwick is entitled to claim a household of two.

August 9, 2009 in Other Circuit Briefs | Permalink | Comments (0) | TrackBack

August 08, 2009

Circuit Court of Appeals Cases from Last Week

1st Circuit Court of Appeals, August 05, 2009
In re Rudler, --- F.3d ---, 2009 WL 2385469 (1st Cir. 2009)(means test allows debtors to deduct payments due on a secured debt notwithstanding the debtor's intention to surrender the collateral)

2nd Circuit Court of Appeals, August 05, 2009
In re Chrysler LLC, --- F.3d ---, 2009 WL --------- (2nd Cir. 2009)(1.bankruptcy court did not abuse its discretion in approving the sale as the sale did not constitute an impermissible sub rosa plan and prevented further, unnecessary losses; 2) the court properly held that although the plaintiffs did not consent to the sale order's release of all liens on Chrysler's assets, consent was validly provided by the collateral trustee, who had authority to act on behalf of all first-lien credit holders; 3) the plaintiffs lack standing to raise the issue of whether the Secretary of the Treasury exceeded his statutory authority by using TARP money to finance the sale of Chrysler’s assets as they cannot demonstrate that they have suffered an injury in fact; and 4) arguments advanced by present and future tort claimants against the portion of the sale order extinguishing all existing and future claims against New! Chrysler are rejected)

7th Circuit Court of Appeals, August 03, 2009
Smith v. Duffey, --- F.3d ---, 2009 WL --------- (7th Cir. 2009)(defendants had no duty to tell plaintiff that defendants' employer was about to declare bankruptcy, and none of the their actions were actionable as fraud)

10th Circuit Court of Appeals, August 03, 2009
Ford v. Ford Motor Credit Corp., --- F.3d ---, 2009 WL ------------- (10th Cir. 2009)(bifurcation of "negative equity" owed by debtors on a car loan was impermissible under the "hanging paragraph" of 11 U.S.C. section 1325(a))

10th Circuit Court of Appeals, August 05, 2009
Johnson v. Smith, --- F.3d ---, 2009 WL ---------- (10th Cir. 2009)(sanctions against defendant is affirmed; dismissal of Chapter 13 case did not divest the Bankruptcy Court of jurisdiction over automatic stay violation adversary proceeding)

Thanks to Findlaw.com. 

August 8, 2009 in Other Circuit Briefs | Permalink | Comments (0) | TrackBack

August 07, 2009

1st Circuit Rules that Debtor may Deduct Mortgage Payments on the Means Test, Even if He Intends to Return the Property

In re Rudler  --- F.3d ---, 2009 WL 2385469 (1st Cir. Aug, 2009)

Issue:   Is a debtor permitted to deduct on the means test, mortgage payments he does not intend to make?         

Holding:     Yes. 

The chapter 7 debtor’s mortgage payments were about $4,000 per month.  Including them on the means test, his net disposable income was minus $2,376.  His statement of intentions said that he was giving up the home.  Without the secured payments, his means test net was plus $1,430.  In a footnote, the 1st Cir said, the debtor “actually deducted both the housing allowance and his mortgage debt, which is clearly impermissible.  Accordingly, his disposable income amount needs to be revised regardless of the treatment of his mortgage debt.”  The UST filed a motion to dismiss.   The bankruptcy court denied the motion and the 1st Cir. BAP affirmed.  “The BAP held that the means test calculation is meant to be ‘a 'snapshot' of the debtor's situation as of the petition date,’ rather than a "'forward-looking'" consideration of "only those payments that will actually be made.’" 

The 1st Cir affirmed also.  “In arguing her view of section 707(b)(2)(A)(iii)(I), the Trustee relies heavily on Congress's purpose in enacting the BAPCPA, i.e., to ensure that individuals who are able to repay a portion of their debts do so.  However, we must defer our consideration of Congressional intent because our examination of the statute must begin ‘where all such inquiries must begin: with the language of the statute itself.’"  “We thus look first to the specific language at issue, which defines deductible secured debt as amounts that are ‘scheduled as contractually due to secured creditors in each of the 60 months following the date of the petition.’  Unless that language is ambiguous, we consider Congress's intent only to be certain that the statute's plain meaning does not lead to ‘absurd’ results.”  The code says the debtor can deduct payments “scheduled as contractually due.”  That is looked at as of the petition date.  “The word ‘scheduled,’ *** implies *** that such payments, although ‘scheduled,’ may in fact not be made; otherwise, the request would more logically have been for information about all payments that will be made to creditors during the targeted sixty-month period, or all payments the debtor expects or intends to make during that time frame.”  The trustee argued that under this interpretation the word “scheduled” is surplusage.  It could have said simply “contractually due.”  The trustee also argued that “scheduled” means listed on Schedule D rather than some sort of calendar schedule.  “The Trustee [also] argues that Congress, in using the word "following," [the date of the petition] contemplated a projection of future expenses – i.e., expenses that will exist ‘following’ the bankruptcy proceedings – rather than a snapshot of current expenses.  Again, however, that interpretation is not supported by the words themselves, which are forward-looking only in the sense that the required current calculation is for debts that are scheduled into the future.”  “The Trustee also invokes a third phrase from section 707(b)(2)(A) in support of her position, arguing that the requirement that payments be made ‘on account of secured debts’ excludes debts that will remain after the property serving as collateral for them has been surrendered. She reasons that, after title has transferred following surrender, the debtor's obligation either will be eliminated entirely or changed into an unsecured debt – meaning that any future payments will not be ‘on account of secured debts.’"

“The Trustee argues that allowing debtors to deduct only payments they will actually make, rather than all payments scheduled at the time of the bankruptcy filing, better serves the purpose behind the means test because it more accurately reflects the debtor's resources following the bankruptcy proceedings.  This argument has force – but it misses the point.  There are a number of ways Congress could have effectuated its goal of increased debtor responsibility, and calculating projected income based on actual anticipated expenses is unquestionably one of them.  However, based on the plain language of the statute, that is not the approach Congress enacted into law, and we cannot rewrite the statute simply because we think a different method of assessing abuse would be more effective.”

The concurring opinion said that “scheduled” is ambiguous but he is convinced that Congress intended a mechanical test.  For one reason, because 707(b)(3) allows the “totality of the circumstances” to be used as a “backstop to catch those whose petitions are not presumptively abusive under the means test but for whom a closer look at their actual financial situation shows that they have the means to repay their creditors under chapter 13 and that they have tried to avoid that repayment.”

August 7, 2009 in Other Circuit Briefs | Permalink | Comments (0) | TrackBack

August 01, 2009

Circuit Court of Appeals Cases from Last Week

2nd Circuit Court of Appeals, July 31, 2009
Jasco Tools, Inc. v. Dana Corp., --- F.3d ---, 2009 WL --------- (2nd Cir. 2009)(summary judgment reversed re alleged conspiracy to misappropriate its trade secrets)

3rd Circuit Court of Appeals, July 31, 2009
Brown v. JEVIC, --- F.3d ---, 2009 WL --------- (3rd Cir. 2009)(removal of class action is proper)

9th Circuit Court of Appeals, July 27, 2009
Boucher v. Shaw, --- F.3d ---, 2009 WL --------- (9th Cir. 2009)(individual managers may constitute "employers" under the Fair Labor Standards Act, and their duty to pay wages to Plaintiffs did not expire with the conversion of the Castaways hotel's Chapter 11 bankruptcy proceeding into a Chapter 7 liquidation)

August 1, 2009 in Other Circuit Briefs | Permalink | Comments (0) | TrackBack

July 25, 2009

Circuit Court of Appeals Cases from Last Week

7th Circuit Court of Appeals, July 20, 2009
In re Gallo, --- F.3d ---, 2009 WL ---------------- (7th Cir. 2009)(no slander of title for filing lis pendens and turnover proper where debtor's former wife failed to establish that the bankruptcy court had any obligation to ensure her ability to pay the judgment before granting the turnover motion)

7th Circuit Court of Appeals, July 20, 2009
In re Turner, --- F.3d ---, 2009 WL ---------------- (7th Cir. 2009)(chapter 13 debtor's phantom mortgage not deductible from debtor's disposable income)

U.S. 9th Circuit Court of Appeals, July 20, 2009
Hoffman v. Lloyd, --- F.3d ---, 2009 WL ---------------- (9th Cir. 2009)(rescission of sale of debtor's foreclosed home proper where the buyer failed to notify the debtor of his rights under California's Home Equity Sales Contract Act, and the parties' settlement agreement did not affect this obligation)

Thanks to Findlaw.com. 

July 25, 2009 in Other Circuit Briefs | Permalink | Comments (0) | TrackBack

July 19, 2009

Circuit Court of Appeals Cases from Last Week

5th Circuit Court of Appeals, July 14, 2009
Tech. Lending Ptnrs. LLC v. San Patricio Cty. Cmty. Action Agency, --- F.3d ---, 2009 WL ---------- (5th Cir. 2009)(equitable mootness does not apply where the relief requested would not affect the success of the plan or the rights of parties not before the court)

6th Circuit Court of Appeals, July 15, 2009
Quilling v. Trade Ptnrs., Inc., --- F.3d ---, 2009 WL ---------- (6th Cir. 2009)(order distributing the proceeds of life insurance policies owned by a receivership estate on a pro rata basis is affirmed over objection of plaintiff seeking priority)

6th Circuit Court of Appeals, July 17, 2009
Mitan v. Duval, --- F.3d ---, 2009 WL ---------- (6th Cir. 2009)(order converting case from Chapter 11 to Chapter 7 nunc pro tunc under Section 105 affirmed)

7th Circuit Court of Appeals, July 17, 2009
In re MarchFIRST, Inc. , --- F.3d ---, 2009 WL ---------- (7th Cir. 2009)(claim filed untimely where: 1) claim faxed but the bankruptcy notice was sufficiently clear that submission by mail or by hand were the only permissible methods of transmittal; and 2) creditor did not offer convincing justification or explanation for its untimely filing)

10th Circuit Court of Appeals, July 14, 2009
Caplan v. B-Line, LLC, --- F.3d ---, 2009 WL ---------- (10th Cir. 2009)(creditor failed to provide documentation in support of its proof of claim in chapter 13, and thus it was properly disallowed)

July 19, 2009 in Other Circuit Briefs | Permalink | Comments (0) | TrackBack