THE TOOLBOX 2.1
BASICS FOR CHAPTER 13 STAFF ATTORNEYS
I.
THE LEGAL HIERARCHY.
A.
The Code, Rules, Local Rules, Administrative Orders, And….
Chapter 13 practice has more variance – from court to court – than any other
Chapter in the Code. Plans are done differently, as pot or percentage. Conduit payments of
secured claims are required, encouraged, tolerated, or actively discouraged, depending on
your court or district, sometimes for both mortgages and vehicles, sometimes for only one of
the two. Pre-confirmation adequate protection payments are required to go through the
trustee, or are required to be paid directly by the debtors. The Means Test may be
controlling, a starting point, or pointedly ignored. What controls – the proof of claim or the
Chapter 13 Plan?
Some of these Chapter 13 differences are inherent. The cost of a fixer-upper starter
home in many parts of California – even today – would get you an extravagant McMansion
in Toledo, Ohio. The BAPCPA Amendments have left something to be desired in terms of
clarity, and the bankruptcy courts are coming to different conclusions about what the law
requires.
But, the differences in Chapter 13 practice goes beyond differences in standards of
living and ambiguities in the Code. There is also a long standing “way things have always
been done”. Many bankruptcy judges have issued administrative orders that perpetuate the
way they like to have things done. Form Plans serve the same purpose. And local rules
have been adopted to solidify even further choices that the courts and the Chapter 13
Trustees have made about how they want things done.
There are advantages and disadvantages to this “system”. But, what is a somewhat
hidden “hot issue” is the discussion that is going on – nationally – among judges, about
whether bankruptcy local rules and administrative orders have gone too far. There hasn’t
been any really explosion of case law in this area – yet. However, to the extent local
practices are supported by local rules and administrative orders, anything that could restrict
the use of these control devices should be of more than passing interest.
Bankruptcy law has the same type of hierarchy that other areas of the law have:
The Constitution, jurisdictional and venue statutes and the United States Bankruptcy
Code, the Federal Rules of Bankruptcy Procedure. Below these more common place
sources of authority, we also have Official Forms, Local Rules, administrative orders, and
“local custom”. The status and conflicts between some of these sources of authority are
discussed below.
B.
The Bankruptcy Code Trumps The Bankruptcy Rules.
28 U.S.C. §2075, which implements the Bankruptcy Rules, provides that "such
rules shall not abridge, enlarge or modify any substantive right." In re Dumain, 492 B.R.
140, 148 (Bankr. S.D.N.Y. 2013); In re Brunson, 486 B.R. 759, 772 (Bankr. N.D. Tex.
2013). Thus, the Bankruptcy Rules may not contravene substantive rights contained in
the Bankruptcy Code. In re Padilla, 379 B.R. 643, 657 (Bankr. S.D. Tex. 2007).
As a result, any conflict between the Bankruptcy Code and the Bankruptcy Rules
must be settled in favor of the Code. See, In re Smart World Techs, LLC, 423 F.3d 166,
181 (2nd Cir. 2005); In re Chavis, 47 F.3d 818, 822 (6th Cir. 1995); In re Pac. Atl.
Trading Co., 33 F.3d 1064, 1066 (9th Cir. 1994); In re Perkins, 381 B.R. 530, 535
(Bankr. S.D. Ill. 2007).
Put another way, "[F]orsaking the plain meaning of a provision of the Bankruptcy
Code solely because that meaning conflicts with a bankruptcy rule would run afoul of 28
U.S.C. §2075.". In re Caldor Group, 303 F.3d 161, 170 (2d Cir. 2002); Zedan v. Habash,
529 F.3d 398 (7th Cir. 2007).
E.
Official Forms v. The Code.
In Schwab v. Reilly, 560 U.S. 770, ___ n.5, 130 S.C. 2652, 2660 n.5, 177 L.Ed.2d
234, 245 n.5 (2010), the Supreme Court noted: “The forms, rules, treatise excerpts, and
policy considerations on which the dissent relies . . . must be read in light of the
Bankruptcy Code provisions that govern this case, and must yield to those provisions in
the event of conflict.”
The 9th Circuit Bankruptcy Appellate decision In re Wiegand, 386 B.R. 238 (9th
Cir. BAP 2008) illustrates that the Bankruptcy Code controls over the Official Forms.
The Form B22C ‘Means Test’ allows debtors with business income to deduct their
business expenses before the determination of whether they are above-the-median or
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below-the-median debtors for purpose of determining (among other things) the applicable
commitment period. The Wiegand court stated: “The question is easily answered when
Form 22C is directly at odds with §1325(b)(2)(B), the substantive Code provision that
governs the deduction of business expenses. As aptly noted by another court in
addressing this same question, when an Official Bankruptcy Form conflicts with the
Code, the Code always wins. In re Arnold, 376 B.R. 652, 653 (Bankr. M.D. Tenn.
2007).” In re Wiegand, 386 B.R. at 241. See also, In re Harkins, 491 B.R. 518, 522-523
(Bankr. S.D. Ohio 2013); In re Sharp, 394 B.R. 207 (Bankr. C.D. Ill. 2008); In re
Bembenek, 2008 Bankr. LEXIS 3003, 2008 WL 2704289 (Bankr. E.D. Wis., July 2,
2008).
D.
The Legal Limitations On The Scope Of Local Rules.
‘Local Bankruptcy Rules’ are specifically permitted under Federal Rule of
Bankruptcy Procedure 9029(a):
Rule 9029(a) Local Bankruptcy Rules
(1) Each district court acting by a majority of its district judges may make
and amend rules governing practice and procedure in all cases and
proceedings within the district court's bankruptcy jurisdiction which are
consistent with - but not duplicative of - Acts of Congress and these rules
and which do not prohibit or limit the use of the Official Forms. Rule 83
F.R.Civ.P. governs the procedure for making local rules. A district court
may authorize the bankruptcy judges of the district, subject to any
limitation or condition it may prescribe and the requirements of 83
F.R.Civ.P., to make and amend rules of practice and procedure which are
consistent with - but not duplicative of - Acts of Congress and these rules
and which do not prohibit or limit the use of the Official Forms. Local
rules shall conform to any uniform numbering system prescribed by the
Judicial Conference of the United States.
Thus, there are limitations on what Local Rules can do. Some recent cases have
clarified the standards for invalidating Local Rules:
The rules associated with local bankruptcy rules are clear. As part of the
Bankruptcy Code Congress delegated to the Supreme Court the power to
make and enforce general bankruptcy rules. 28 U.S.C. §2075. Pursuant to
this authority, the Supreme Court promulgated Federal Rule of Bankruptcy
Procedure 9029 ("Rule 9029"), which grants district courts the power to
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adopt their own local rules. Brown v. Smith (In re Poole), 222 F.3d 618, 621
(9th Cir. 2000). Under Rule 9029, however, this power is strictly limited. 10
Collier on Bankruptcy ¶9029.01[1], at 9029-2 (rev. 15th ed. 2006.) Rule
9029 states a local bankruptcy rule must: (1) be consistent with the Acts of
Congress and Federal Rules of Bankruptcy Procedure; (2) not be duplicative
of the Acts of Congress or Federal Rules of Bankruptcy Procedure; and (3)
not limit the use of Official Bankruptcy Forms. Steinacher v. Rojas (In re
Steinacher), 283 B.R. 768, 772-73 (9th Cir. BAP 2002). If any of these
limits are not observed, the local bankruptcy rule must be held invalid.
In re Healthcentral.com, 504 F.3d 775, 784 (9th Cir. 2007)(holding Local Rule 9015-2(b) to
be invalid as it establishes a procedure for withdrawing the district court's jurisdictional
reference inconsistent with the Acts of Congress and Federal Rules of Bankruptcy
Procedure.”). See also, Anwar v. Johnson, 770 F.3d 1183, 1189 (9th Cir. 2013)(“ a local rule
of bankruptcy procedure cannot be applied in a manner that conflicts with the federal
rules.”).
In re Suggs, 377 B.R. 198, 205-206 (8th Cir. BAP 2007) quotes an earlier 8th Circuit
Bankruptcy Appellate Panel decision, In re McGowan, 226 B.R. 13, 16 (B.A.P. 8th Cir.
1998):
As a general rule of law, any local rule of bankruptcy procedure that
conflicts with a federal rule of bankruptcy procedure is invalid and of no
effect. In re Falk, 96 B.R. 901, 903 (Bankr. D. Minn. 1989) (en banc). A
local rule "may only be upheld if (a) it is consistent with the Bankruptcy
Code in that it does not 'abridge, enlarge, or modify any substantive right,' as
required by 28 U.S.C. §2075 and (b) it is 'a matter of procedure not
inconsistent with' the Bankruptcy Rules as required by Bankruptcy Rule
9029." Id. at 904. If a local rule fails either prong of the two-pronged test, it
is invalid. Id. "Consistent is defined as 'coexisting and showing no
noteworthy opposing, conflicting, inharmonious, or contradictory qualities or
trends' or 'jointly assertable so as to be true or not contradictory.'" Id. at 905
(quoting Webster's [T]hird New International Dictionary 484 (1976)).
McGowan, 226 B.R. at 19.
The Suggs decision struck down a Local Rule (4070-1.D) that created procedures for
ex-parte self help if the debtor failed to provide proof of insurance, and insurance lapsed on
a debtor’s vehicle, and required pre-payment of three months worth of insurance for debtors
to get their car back. The BAP held that his local rule enlarged creditors' rights beyond the
scope permitted by §362 and Federal Rule 4001(a), and was therefore invalid.
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Similarly, Northern District of Illinois Local Rule 7054-1(C), which permitted the
recovery of litigation costs not allowed by 28 U.S.C. §1920 (a federal statute applicable to
more than just bankruptcy cases), was held to be unenforceable. See, In re Griffin Trading
Co., 424 B.R. 431 (Bankr. N.D. Ill. 2010).
In contrast, a local rule requiring the use of a form plan has been upheld. See, In re
Walat, 89 B.R. 11 (E.D. Va. 1988); In re Maupin, 384 B.R. 421, 426 (Bankr. W.D. Va.
2007)(“A Bankruptcy Court's requirement that debtors use a form chapter 13 plan is a
valid exercise of the Court's authority to regulate local practice and procedure because
such a policy does not affect the substance rights of a chapter 13 debtor and is not
inconsistent with the Bankruptcy Code or Bankruptcy Rules.”).
A local rule stating that the “trustee may require the debtor to make plan payments in
a specified form, such as certified funds” has been upheld. See, In re Reyes, 482 B.R. 603,
606 (Bankr. D. Ariz. 2012)(Chapter 13 trustee only accepted certified funds, automatic
wage withdrawals, or electronic transfers for Chapter 13 plan payments).
1. District Court Rules Are Not Bankruptcy Court Rules.
There have been occasions where counsel who practice primarily in the District
Court, attempt to make use of District Court rules in Bankruptcy Court. This attempt to
graft on an additional set of local rules has not been successful:
While it is true that the bankruptcy judges in the District constitute
a unit of the District Court pursuant to 28 U.S.C. §151, the Local General
Rules of the District Court are not identical to and are separate from the
Local Bankruptcy Rules, promulgated under Federal Rule of Bankruptcy
Procedure 9029.
In re Kaliana, 207 B.R. 597, 603 (Bankr.N.D.Ill. 1997). See also, In re Flanagan, 999
F.2d 753, 758 n.7 (3rd Cir. 1993)(“The Local [District Court] Rules, adopted pursuant to
Federal Rule of Civil Procedure 83, do not apply to proceedings in bankruptcy.”); In re
Dairy Consulting, Inc., 386 B.R. 135 (Bankr. W.D. Pa. 2008)("[Th]e Local District Court
Rules -- and, in particular, Local District Court Rule 56.1 -- do not apply either generally
in this Court or, in particular, to the instant adversary proceeding.")
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These District Court procedural rules only apply in the Bankruptcy Court if local
bankruptcy rules adopt or incorporate, either in part or in full, the local district court
rules. In re Zuniga, 332 B.R. 760, 774 (Bankr.S.D.Tex. 2005).
E.
Administrative Orders.
One step below Local Rules are what are often referred to as Administrative Orders,
permitted by Federal Rule of Bankruptcy Procedure 9029(b):
(b) Procedures Where There is No Controlling Law. A judge
may regulate practice in any manner consistent with federal law, these
rules, Official Forms, and local rules of the district. No sanction or other
disadvantage may be imposed for noncompliance with any requirement
not in federal law, federal rules, Official Forms, or the local rules of the
district unless the alleged violator has been furnished in the particular case
with actual notice of the requirement.
These Rule 9029(b) orders cannot conflict with the Bankruptcy Code, Rules,
Official Forms, and Local Rules, and no sanctions can be imposed “unless the alleged
violator has been furnished in the particular case with actual notice of the requirement.”
Unlike Local Rules, which are technically adopted at the District Court level, and
which may predate the appointment of the bankruptcy judges who interpret and enforce
them, Administrative Orders are typically signed by the very judges who will determine, in
the first instance, whether they are valid. This fact serves to make legal arguments as to the
validity of these Administrative Orders, in most instances, at least a two step process – you
have to figure on appealing to at least the District Court level.
Some cases dealing with Administrative Orders are: In re Dorner, 343 F.3d 910,
913 (7th Cir. 2003)("No local rule or standing order can supersede the Federal Rules of
Bankruptcy Procedure. . . . A local rule that countermands a national rule is not consistent
with it. Orders with the effect of rules likewise must satisfy the consistency
requirement."); Ford Motor Credit Co. v. Randall Johnson (In re Standing Order), 272
B.R. 917 (W.D. La. 2001)(standing order that modified existing substantive rights of
creditors, by preventing the settlement of a 523 claim while a 727 action was pending,
was invalid). CFCU Cmty. Credit Union v. Jones (In re Jones), 2007 U.S. Dist. LEXIS
65598 (N.D.N.Y. September 4, 2007)(upholding, at the District Court level, an
administrative order requiring that adequate protection payments go through the Chapter 13
Trustee), vacated and remanded as moot, CFCU Cmty. Credit Union v. Jones (In re Jones),
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2008 U.S. App. 24235 (2nd Cir. Nov. 25, 2008); Armstrong v. Lasalle Bank Nat'l Ass'n,
394 B.R. 794, 799-800 (Bankr. W.D. Pa. 2008)(quoting Jones), and In re Binion, 2006
Bankr. LEXIS 2372, (Bankr. N.D. Ohio September 15, 2006)(upholding administrative
order, General Order 05-6, requiring the use of Form B240 for reaffirmation agreements,
even though creditor’s form better complied with the statutory requirements.) Judge Lundin
also briefly discusses Rule 9029(b) in In re Murray, 199 B.R. 165, 172 (Bankr. M.D. Tenn.
1996).
A judge’s approval of a model form order, to be presented by the Chapter 13 Trustee
when submitting a proposed confirmation order, has been upheld as “consistent with Rule
9029(b). See, In re Reyes, 482 B.R. 603, 607 (Bankr. D. Ariz. 2012).
F.
For Us – The Chapter 13 Trustee Manual.
If you have not looked it over, the Handbook for Chapter 13 Standing Trustees
provides guidance to your Office on a number of important issues. For Staff Attorneys,
the following Chapters are important: Chapter 3 – Duties of a Standing Trustee; Chapter
4 – Initial Review of Chapter 13 Cases; Chapter 5 – Section 341 Meeting; Chapter 6 –
Administration of a Case; Chapter 7 – Motions to Dismiss or Convert; and Chapter 8 –
Chapter 13 Debtors Engaged in Business.
Some of the procedures stated in the Handbook are found nowhere else, and can
sometimes be very specific.
Court do, when they wish to, look at the Handbook for Chapter 13 Trustees. See,
In re Acevedo, 497 B.R. 112 (Bankr. D.N.M. 2013)(Trustee Handbook required return of
funds to the debtor in unconfirmed cases, less only allowed Section 503(b) fees); In re
Seger, 444 B.R. 492, 494-495 (Bankr. D. Mass. 2011)(noting that the “Debtors Engaged
in Business” section undercut the Chapter 13 trustee’s argument that business debtor
funds should be required to be held in U.S. Trustee approved depository banks); In re
Wilson, 274 B.R. 4 (Bankr. D.D.C. 2001)(quoting and discussing Handbook requirement
that Chapter 13 distributions should be made “as soon as practicable”, but finding the
legislative history of §1326(a)(2) more persuasive, making Chapter 13 trustee liable for
misdisbursements); In re Myers, 147 B.R. 221, 235 (Bankr. D. Or. 1992)(Trustee
Handbook cited as contradicting statement of the U.S. Trustee that Chapter 13 Trustees
determine compensation of employees).
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G.
“The Way Things Have Always Been Done Here.”
More than any other area of bankruptcy practice, Chapter 13 is based on a culture
– “the way things have always been done here”. One of the most common examples is:
do you pay based on the Plan or the Claim? For many Chapter 13 Trustees, this
important determination is based on just: “that’s the way we’ve always done it”.
For many Chapter 13 Trustees, there are no good alternatives to simply
continuing to practices that have been utilized for decades. You can try to get the issues
before you judge(s), but it the practice is really firmly entrenched in the local bankruptcy
culture, who is going to provide the opposition?
The important thing to remember is how flimsy this basis really is. Obviously,
these kinds of practices can become obsolete based upon a change in the Code or the
Rules, or court decision, or with a new judge who thinks things should work differently.
“The way things have always been done” is a foundation of sand, not concrete.
So always be prepared for some shifting under your feet.
II.
BANKRUPTCY LAW AND RULES.
A.
JURISDICTION AND VENUE.
1.
Bankruptcy In the Constitution.
The United States Constitution, Article 1, Section 8, Clause 4, addresses the
power of Congress to enact bankruptcy laws:
Section 8. The Congress shall have power * * * *
To establish a uniform rule of naturalization, and uniform laws on the
subject of bankruptcies throughout the United States;
The "uniform Laws" language serves as a substantive limit on statutory
acts, but is not meant to act as a "straightjacket that forbids" distinguishing among
different classes of debtors. Ry. Labor Execs. Ass'n v. Gibbons, 455 U.S. 457,
469, 102 S. Ct. 1169, 71 L. Ed. 2d 335 (1982).
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2.
Jurisdiction – Technically, It Is In The District Courts.
Under 28 U.S.C. Section 1334, original jurisdiction in all bankruptcy cases is with
the District Court:
§1334. Bankruptcy cases and proceedings
(a) Except as provided in subsection (b) of this section, the district courts shall
have original and exclusive jurisdiction of all cases under title 11.
(b) Notwithstanding any Act of Congress that confers exclusive jurisdiction on a
court or courts other than the district courts, the district courts shall have
original but not exclusive jurisdiction of all civil proceedings arising under
title 11, or arising in or related to cases under title 11.
(c)
(1) Nothing in this section prevents a district court in the interest of
justice, or in the interest of comity with State courts or respect for State
law, from abstaining from hearing a particular proceeding arising under
title 11 or arising in or related to a case under title 11.
(2) Upon timely motion of a party in a proceeding based upon a State law
claim or State law cause of action, related to a case under title 11 but not
arising under title 11 or arising in a case under title 11, with respect to
which an action could not have been commenced in a court of the United
States absent jurisdiction under this section, the district court shall abstain
from hearing such proceeding if an action is commenced, and can be
timely adjudicated, in a State forum of appropriate jurisdiction.
(d)
Any decision to abstain or not to abstain made under this subsection (other
than a decision not to abstain in a proceeding described in subsection
(c)(2)) is not reviewable by appeal or otherwise by the court of appeals
under section 158(d), 1291, or 1292 of this title or by the Supreme Court
of the United States under section 1254 of this title. This subsection shall
not be construed to limit the applicability of the stay provided for by
section 362 of title 11, United States Code, as such section applies to an
action affecting the property of the estate in bankruptcy.
(e)
The district court in which a case under title 11 is commenced or is
pending shall have exclusive jurisdiction of all of the property, wherever
located, of the debtor as of the commencement of such case, and of
property of the estate.
Congress passed this provision because of Constitutional issues addressed in the
Marathon Pipeline case (Bankruptcy Judges being Article I judges, not Article III judges,
like the judges in the district courts) and placed original jurisdiction in bankruptcy cases
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with the United States District Court. See, Northern Pipeline Construction Co. v.
Marathon Pipeline Co., 458 U.S. 50, 102 S.Ct. 2858 (1982).
Bankruptcy Judges’ power to act is derivative of the district court in each district.
Bankruptcy courts are sometimes referred to as “units of the district court”. See, 28
U.S.C. §151. Bankruptcy cases are not usually handled by district judges, but rather are
referred automatically to the bankruptcy judges. The power to refer cases is given by 28
U.S.C. Section 157(a), which states:
§157. Procedures
(a) Each district court may provide that any or all cases under title 11 and any or all
proceedings arising under title 11 or arising in or related to a case under title 11
shall be referred to the bankruptcy judges for the district.
In the almost every bankruptcy court, there is some type of administrative order,
or general order issued by the United States District Court (somewhere around July of
1984), automatically referring all bankruptcy cases from the District Courts to the
Bankruptcy Courts. This order is usually called “the General Order of Reference”.
While the practice of referring all bankruptcy cases to the bankruptcy courts is
automatic and long standing, district courts do retain the power to withdraw the reference
at any time, either as to an entire bankruptcy case or to particular proceedings within a
case, even though that power is very rarely used.
3.
Core Proceedings.
Bankruptcy judges can hear and make final determination in cases that are “core
proceedings”. This category of cases – core bankruptcy matters – are set forth in 28
U.S.C. Section 157(b):
(b)
(1) Bankruptcy judges may hear and determine all cases under title 11 and all
core proceedings arising under title 11, or arising in a case under title 11,
referred under subsection (a) of this section, and may enter appropriate
orders and judgments, subject to review under section 158 of this title.
(2) Core proceedings include, but are not limited to—
(A) matters concerning the administration of the estate;
(B) allowance or disallowance of claims against the estate or exemptions
from property of the estate, and estimation of claims or interests for the
purposes of confirming a plan under chapter 11, 12, or 13 of title but not
the liquidation or estimation of contingent or unliquidated personal injury
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tort or wrongful death claims against the estate for purposes of
distribution in a case under title 11;
(C) counterclaims by the estate against persons filing claims against the
estate;
(D) orders in respect to obtaining credit;
(E) orders to turn over property of the estate;
(F) proceedings to determine, avoid, or recover preferences;
(G) motions to terminate, annul, or modify the automatic stay;
(H) proceedings to determine, avoid, or recover fraudulent conveyances;
(I) determinations as to the dischargeability of particular debts;
(J) objections to discharges;
(K) determinations of the validity, extent, or priority of liens;
(L) confirmations of plans;
(M) orders approving the use or lease of property, including the use of
cash collateral;
(N) orders approving the sale of property other than property resulting
from claims brought by the estate against persons who have not filed
claims against the estate; and
(O) other proceedings affecting the liquidation of the assets of the estate
or the adjustment of the debtor-creditor or the equity security holder
relationship, except personal injury tort or wrongful death claims.
Like most judges, bankruptcy court judges can (in the first instance) determine
their own jurisdiction. See, 28 U.S.C. Section 157(b)(3) – (5):
(3) The bankruptcy judge shall determine, on the judge’s own motion or on
timely motion of a party, whether a proceeding is a core proceeding under this
subsection or is a proceeding that is otherwise related to a case under title 11. A
determination that a proceeding is not a core proceeding shall not be made
solely on the basis that its resolution may be affected by State law.
(4) Non-core proceedings under section 157(b)(2)(B) of title 28, United States
Code, shall not be subject to the mandatory abstention provisions of section
1334(c)(2).
(5) The district court shall order that personal injury tort and wrongful death
claims shall be tried in the district court in which the bankruptcy case is
pending, or in the district court in the district in which the claim arose, as
determined by the district court in which the bankruptcy case is pending.
In addition to “core proceedings”, bankruptcy judges can hear, and submit
proposed findings of fact and conclusions of law, to the United States District Court
in “non-core related proceedings”:
(c)(1) A bankruptcy judge may hear a proceeding that is not a core proceeding but
that is otherwise related to a case under title 11. In such proceeding, the
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bankruptcy judge shall submit proposed findings of fact and conclusions of law to
the district court, and any final order or judgment shall be entered by the district
judge after considering the bankruptcy judge’s proposed findings and conclusions
and after reviewing de novo those matters to which any party has timely and
specifically objected.
(2) Notwithstanding the provisions of paragraph (1) of this subsection, the district
court, with the consent of all the parties to the proceeding, may refer a proceeding
related to a case under title 11 to a bankruptcy judge to hear and determine and to
enter appropriate orders and judgments, subject to review under section 158 of
this title.
Where a proceeding will impact interstate commerce, the district court can
“withdraw the reference”:
(d) The district court may withdraw, in whole or in part, any case or proceeding
referred under this section, on its own motion or on timely motion of any party, for
cause shown. The district court shall, on timely motion of a party, so withdraw a
proceeding if the court determines that resolution of the proceeding requires
consideration of both title 11 and other laws of the United States regulating
organizations or activities affecting interstate commerce.
a.
But “core” does not equate with jurisdiction after Stern.
The Supreme Court’s decision in Stern v. Marshall, 131 S. Ct. 2594, 180 L. Ed.
2d 475 (2011) held that a bankruptcy court lacked constitutional authority to enter final
judgment on a debtor's state-law counterclaim against a creditor, even though Congress
had granted the bankruptcy court statutory authority to do so.
After Stern, the question of bankruptcy court jurisdiction became much more
difficult, and the answers fragmented in the decisions of the various circuit courts.
4.
Venue For Bankruptcy Cases.
Venue determines where a case may be properly filed. Venue for bankruptcy
cases is governed by 28 U.S.C. Section 1408, which states:
1408. Venue of cases under title 11
Except as provided in section 1410 of this title, a case under title 11 may
be commenced in the district court for the district—
(1) in which the domicile, residence, principal place of business in the United
States, or principal assets in the United States, of the person or entity that is
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the subject of such case have been located for the one hundred and eighty
days immediately preceding such commencement, or for a longer portion of
such one-hundred-and-eighty-day period than the domicile, residence, or
principal place of business, in the United States, or principal assets in the
United States, of such person were located in any other district; or
(2) in which there is pending a case under title 11 concerning such person’s
affiliate, general partner, or partnership.
The test for venue of a bankruptcy case for an individual debtor has not been
changed by BAPCPA – the same “greater part of the previous 180 days” test applies to
cases today. Some confusion has arisen because the test for what exemptions a debtor
may take under the complex provisions of 11 U.S.C. Section 522(b)(3)(A) - looking back
first 730 days, and then if the debtor has moved during that period, looking back an
additional 180 days. That is NOT the rule for determining where a case can be filed, it is
ONLY a rule for determining what state’s exemptions the debtor is eligible to take in
their bankruptcy case.
For venue purposes, close doesn’t count. Thompson v. Greenwood, 507 F.3d 416
(6th Cir. 2007).
When an adversary complaint is filed, the Plaintiff is required to plead both
jurisdiction and venue in the Complaint. The venue rules for an adversary cases related to a
filed bankruptcy “main case” are found in 28 U.S.C. Section 1409:
§1409. Venue of proceedings arising under title 11 or arising in or related to cases
under title 11
(a) Except as otherwise provided in subsections (b) and (d), a proceeding arising
under title 11 or arising in or related to a case under title 11 may be commenced in
the district court in which such case is pending.
(b) Except as provided in subsection (d) of this section, a trustee in a case under title
11 may commence a proceeding arising in or related to such case to recover a
money judgment of or property worth less than $1,000 or a consumer debt of less
than $5,000 only in the district court for the district in which the defendant resides.
(c) Except as provided in subsection (b) of this section, a trustee in a case under title
11 may commence a proceeding arising in or related to such case as statutory
successor to the debtor or creditors under section 541 or 544(b) of title 11 in the
district court for the district where the State or Federal court sits in which, under
applicable nonbankruptcy venue provisions, the debtor or creditors, as the case may
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be, may have commenced an action on which such proceeding is based if the case
under title 11 had not been commenced.
(d) A trustee may commence a proceeding arising under title 11 or arising in or
related to a case under title 11 based on a claim arising after the commencement of
such case from the operation of the business of the debtor only in the district court
for the district where a State or Federal court sits in which, under applicable
nonbankruptcy venue provisions, an action on such claim may have been brought.
(e) A proceeding arising under title 11 or arising in or related to a case under title
11, based on a claim arising after the commencement of such case from the
operation of the business of the debtor, may be commenced against the
representative of the estate in such case in the district court for the district where the
State or Federal court sits in which the party commencing such proceeding may,
under applicable nonbankruptcy venue provisions, have brought an action on such
claim, or in the district court in which such case is pending.
B.
AN OVERVIEW OF THE BANKRUPTCY CODE
1.
Overview Of Various Chapter Proceedings.
The Bankruptcy Code (Title 11 of the United States Code) is divided into
"Chapters", all of which are odd numbers from One (1) to Fifteen (15), plus the only even
numbered Chapter: Chapter 12.
The applicability of the various Chapters is governed first by 11 U.S.C. §103.
Generally speaking, Chapters 1, 3, and 5 of the Bankruptcy Code apply to the entire
Bankruptcy Code. So, for example, the definitions found in §101 are applicable to cases
filed under Chapters 7, 9, 11, 12 or 13. On the other hand, the provisions of Chapters 7,
9, 11, 12, and 13 are generally only applicable to cases filed under those particular
Chapters.
Bankruptcy cases are filed under one of the following Chapters:
Chapter 7 - Court appointed trustee sells assets and debtor is discharged.
Chapter 9 - Municipal Reorganization (extremely rare).
Chapter 11 - Reorganization under Court supervision.
Chapter 12 - Family Farmer reorganization.
Chapter 13 - Individual with regular income arranges to repay some, or all, of
his or her debts.
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Chapter 15 - Ancillary and other cross-border cases – you don’t actually “file a
case” under this Chapter.
2.
Eligibility to File Under Specific Chapters Other Than 13.
Section 109 also sets forth requirements for filing under certain Chapters:
Chapter 7 - A "person" may file a Chapter 7 only if they are not a railroad,
insurance company, bank, savings and loan, or credit union.
See, Section 109(b).
However, under §727(a)(8) & (9), if an individual has received a discharge of debts,
under the listed circumstances, that individual will not receive a discharge in any Chapter
7 that is filed within the next eight years, which the majority rule measures “filing-tofiling”. As a practical matter, this eliminates any incentive to file a Chapter 7 during this
8 year period.
Chapter 11 - Only a "person" who is eligible under Chapter 7 may file a Chapter
11, except stockbrokers and commodity brokers may not file for reorganization. See,
Section 109(d). On the other hand, railroads are permitted to file Chapter 11 under a
special section. Although it is usually businesses that file Chapter 11s, the United States
Supreme Court has held that individuals not engaged in business are also permitted to file
under Chapter 11. See, Toibb v. Radloff, 501 U.S. 157, 111 S.Ct. 2197, 15 L.Ed.2d 145
(1991). Where individual debtors are not eligible for Chapter 13 relief because of a “debt
limit” problem, they may seek similar relief (at much greater cost, tougher procedural
hurdles, and lots more paperwork) through a Chapter 11 reorganization.
Chapter 12 - Chapter 12 applies only to family farmers, or family fisherman,
with regular income. See, §109(f). As amended April 1, 2007, the definition of "family
farmer" in §101(18) requires that at least 50% of the debtor's income must come from a
farming operation, at least 50% of the farmer's debt must have arisen from the farming
operation, and aggregate debts may not exceed $3,544,525. The definition of a “family
fisherman” in §101(19A) requires that at least 50% of the debtor's income must come
from commercial fishing, and at least 80% of the fisherman's debt must have arisen from
the commercial fishing operations, and aggregate debts may not exceed $1,642,500.
3.
Specific eligibility rules for Chapter 13.
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a.
General Eligibility Requirements For Bankruptcy.
Under §109(a), only a "person" that "resides or has a domicile, a place of
business, or property in the United States, or a municipality, may be a debtor". “Person”
is defined very broadly in §101(41) to include both individuals and business entities –
but with some limited exceptions, does not include a governmental unit. Note that there
is no requirement in this definition that the "person" be a citizen of the United States.
b.
Debtor Must Be An “Individual”.
The first part of §109(e)’s eligibility requirements for Chapter 13 states that the
debtor must be an “individual”. See, Section 109(e). The Bankruptcy Code defines the
term “person” as an “individual, partnership, and corporation”. See, 11 U.S.C. §101(41).
Inherent in this definition is the idea that an “individual” is a flesh and blood human
being, and not a business entity. Accordingly, only real human beings are eligible to file
a bankruptcy under Chapter 13. And, because “individual” is a subset of “persons”
(which include business entities), the general requirements for eligibility to file
bankruptcy – residence, domicile, a place of business, ownership of property, etc., apply
to Chapter 13 debtors.
Courts considering this issue have held that the word “individual” refers only to
natural persons, and not business entities of any kind. Accordingly, entities that are not
flesh and blood human beings are not eligible to be debtors under Chapter 13 of the
Bankruptcy Code. See, In re Jac Family Foundation, 356 B.R. 554 (Bankr. N.D. Ga.
2006)(family foundation not an individual, so not eligible for Chapter 13 relief); In re
Estate of Marilyn E. Roberts, 2005 Bankr. LEXIS 2280 (Bankr. D. Md. August 16,
2005)(decedent’s estate was not eligible to be a Chapter 13 debtor); In re West Point Ltd.
Partnership, 270 B.R. 481 (Bankr. E.D. Mo. 2001)(partnership not eligible to be a
Chapter 13 debtor); In re W.F.C. Real Estate Trust #1, 236 B.R. 90 (Bankr. S.D. Fla.
1999)(real estate trust did not qualify as an individual with regular income, and therefore
was not eligible to be a Chapter 13 debtor); Forestry Products, Inc. v. Hope, 34 B.R. 753
(M.D. Ga. 1983)(affirming that corporation not eligible to be a Chapter 13 debtor).
c.
The Debtor(s) Must Have “Regular Income”.
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Section 101(30) defines “regular income” as “income sufficiently stable and
regular . . . to make payments under a plan.” Courts have recognized that Congress
intended a liberal interpretation of "regular income." See, In re Ellenburg, 89 B.R. 258,
260 (Bankr. N.D. Ga. 1988); In re Cohen, 13 B.R. 350, 356 (Bankr. E.D. N.Y. 1981).
The test for regular income is not the type or source of income, but rather its regularity
and stability. In re Varian, 91 B.R. 653, 654 (Bankr. D. Conn. 1988); In re Campbell, 38
B.R. 193, 195 (Bankr. E.D. N.Y. 1984).
Debtors who do not have sufficient income to pay ordinary living expenses have
been held to lack the regular income to be eligible to file a Chapter 13. See, In re Smith,
234 B.R. 852, 854 (Bankr. M.D. Ga. 1999)(regular income has to be sufficient to fund the
debtor’s living expenses and plan payments. Chapter 13 filed for unemployed debtor
receiving public assistance, that was inadequate to pay living expenses alone, resulted in
sanctions against debtor’s counsel.); In re Kollar, 357 B.R. 657, 661-662 (Bankr. M.D.
Fla. 2006); In re Lindsey, 183 B.R. 624, 627 (Bankr. D. Idaho 1995)(debtors who have
no disposable income with which to make payments under a Chapter 13 plan are not
eligible for relief under Chapter 13 regardless of whether they can otherwise fund a plan
through the sale of property.)
However, Judge Proctor has issued several decisions holding that bankruptcy
courts can be flexible in WHEN the “regular income” test is to be applied – it is not
necessarily the date of the petition. The courts can consider circumstances prospectively,
such as using the time of confirmation. See, In re Goodrich, 257 B.R. 101, 103-104
(Bankr. M.D. Fla. 2000); In re Baird, 228 B.R. 324, 328 (Bankr. M.D. Fla. 1999); contra,
In re Smith, 234 B.R. 852, 854 (Bankr. M.D. Ga. 1999)(debtor needs to have regular
income on the date of the filing of the petition).
It has been held that an unemployed spouse may rely on a codebtor's income to
fund a plan. See, In re Sigfrid, 161 B.R. 220, 222 (Bankr. D. Minn. 1993); In re
McLeroy, 106 B.R. 147, 148-49 (Bankr. W.D. Tenn. 1989)(noting that language of
§109(e) clearly allows such). Where the issue is actually litigated, most courts are wary
of confirming Chapter 13 plans based on monies from “live-ins” and relatives. Compare,
In re Loomis, 487 B.R. 296 (Bankr. N.D. Okla. 2013)(case dismissed where the only
income was from live-in fiancé who was under no legal obligation to support the debtor
17
and who had not made a commitment to continue support); In re Jordan, 226 B.R. 117,
119-20 (Bankr. D. Mont. 1998)(rejecting debtor's assertion live-in boyfriend's income
could be counted as part of her "stable and regular" income; no evidence presented
showing boyfriend promised to continue to supply money or had ability to do so); In re
Fischel, 103 B.R. 44, 48-49 (Bankr. N.D.N.Y. 1989)(same); In re Hanlin, 211 B.R. 147
(Bankr. W.D.N.Y. 1997)(Unemployed student relying on parental allowance to pay
living expenses was not eligible for relief as a Chapter 13 debtor because an allowance
was not "income" for the purpose of establishing eligibility); with, In re Murphy, 226
B.R. 601 (Bankr. M.D. Tenn. 1998)(debtor who received regular income from an
individual with whom she lived was eligible to Chapter 13 bankruptcy).
Most courts have held that income for 109(e) purposes is determined without
regard to the exemptions that may be available to the debtor. See, In re Hammonds, 729
F.2d 1391, 1393 (11th Cir. 1984)(legislative history and case law amply support the
proposition that "individuals on welfare, social security, fixed pension income, or who
live on investment incomes" may qualify for Chapter 13.); In re Bassett, 413 B.R. 778,
786 (Bankr. Mont. 2009)(’Regular income’ under 11 U.S.C. §109(e) may include
welfare, pension, social security, and exempt property. In re Hagel, 184 B.R. 793, 797
(9th Cir. BAP 1995).)
A loan, on the other hand, is not income. In re Stones, 157 B.R. 669 (Bankr. S.D.
Cal. 1993)(debtor could not be required to borrow to meet disposable income test
because, in part, borrowing is not income, citing, James v. United States, 366 U.S. 213,
219, 6 L. Ed. 2d 246, 81 S. Ct. 1052 (1961)); In re Kelly, 217 B.R. 273 (Bankr. D. Neb.
1997)(funding Ch. 13 Plan with student loans was bad faith.)
“Regular income” has been held to include commissioned sales and other
“irregular” forms of regular income. See, In re Widdicombe, 269 B.R. 803, 808 (Bankr.
W.D. Ark. 2001)(real estate sales income was ‘regular’ for purposes of 109(e)); In re
Cole, 3 B.R. 346, 348-49 (Bankr. S.D. W. Va. 1980)(holding that income from odd jobs
such as carpentry and "junkin'" was regular income); In re Monaco, 36 B.R. 882 (Bankr.
M.D. Fla. 1983)(self-employed construction business). But, the income cannot be too
irregular. See, In re Hickman, 104 B.R. 374 (Bankr.D.Colo. 1989)(seasonal sprinkler
installer with long history of unemployment did not have regular income.)
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Whether income from farming is “regular” appears to be a fact specific inquiry.
In re Fiegi, 61 B.R. 994 (Bankr.D.Or. 1986)(farming income sufficiently regular); In re
Hines, 7 B.R. 415 (Bankr.D.S.D. 1980)(same).
However, some decisions have held that the income cannot be wholly speculative,
like starting a new business.
In re Gestring, 91 B.R. 870 (Bankr. E.D. Mo.
1988)(debtor’s intent to start a new business - with no previous experience – was not
sufficient); Mills v. Gellert, 55 B.R. 970 (Bankr. D.N.H. 1985)(court dubious of
eligibility of debtor where plan proposes new business venture of developing real estate).
d.
The “180 Day Rule”
Section 109(g) prohibits a debtor from filing if they have been a debtor in a
bankruptcy case in the previous 180 days and: 1) the case was dismissed "for cause"; or
2) the debtor voluntarily dismissed the bankruptcy case after a motion for relief from stay
was filed. This will be discussed in more detail below. Section 109(g) is intended to
prevent serial filings, and provides a window for creditors to complete liquidation of their
security before the debtor can refile a bankruptcy case.
e.
The Chapter 13 Debt Limits.
Section 109(e) sets forth additional specific eligibility requirements for relief
under Chapter 13, including a limitation on the amount of non-contingent, liquidated
secured and unsecured debt that a debtor (or joint debtors) can have at the time of the
filing of the petition. These amounts are indexed to inflation [11 U.S.C. §104(b)(1)], and
were most recently raised on April 1, 2007. Keith M. Lundin, Chapter 13 Bankruptcy,
§11.1 at 11-1 (3rd Ed. 2004).
Thus, 11 U.S.C. §109(e) currently provides, in pertinent part:
(e) Only an individual with regular income that owes, on the date of the
filing of the petition, noncontingent, liquidated, unsecured debts of less
than $360,475 and noncontingent, liquidated, secured debts of less than
$1,081,400, or an individual with regular income and such individual’s
spouse, except a stockbroker or a commodity broker, that owe, on the date
of the filing of the petition, non-contingent, liquidated, unsecured debts
that aggregate less than $360,475 and noncontingent, liquidated, secured
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debts of less than $1,081,400 may be a debtor under chapter 13 of this
title.
Chapter 13 jurisdictional issues arise most often with the unsecured debt limits.
In Matter of Pearson, 773 F.2d 751, 756 (6th Cir. 1985), the Sixth Circuit Court of
Appeals stated: “. . . a court should rely primarily upon the debtor's schedules checking only
to see if the schedules were made in good faith on the theory that section 109(e) considers
debts as they exist at the time of filing, not after a hearing. We adhere to this construction as
more harmonious with congressional intent and with the statutory scheme. First, section
109(e) provides that the eligibility computation is based on the date of filing the petition; it
states nothing about computing eligibility after a hearing on the merits of the claims.” See
also, In re Holland, 293 B.R. 425, 428-429 (Bankr. N.D. Ohio 2002).
The Ninth Circuit adopted the Pearson test, and stated it to be: “We now simply and
explicitly state the rule for determining Chapter 13 eligibility under §109(e) to be that
eligibility should normally be determined by the debtor’s originally filed schedules,
checking only to see if the schedules were made in good faith.” In re Scovis, 249 F.3d 975,
982 (9th Cir. 2001).
While the debtors are, to a large extent, bound by what they have filed with the
court, Chapter 13 Trustee’s can also look at the reality of the debts, not just what the debtors
claim in their schedules. See, DeJounghe v. Mender, 334 B.R. 760, 768 (1st Cir. B.A.P.
2005)("when it appears the debtor did not exercise reasonable diligence or good faith in
completing and filing the schedules, the bankruptcy court may look to other evidence,
including post-petition events, to determine eligibility."); In re Rios, 476 B.R. 685, 688-689
(Bankr. D. Mass. 2012).
i.
Contingent Debts.
If a debt is truly contingent, it is not counted toward the debt limits of Section
109(e).
However, just asserting that a debt is “contingent” may not defeat a Chapter 13
Trustee’s motion to dismiss based on the jurisdictional dollar limits. "For purposes of
§109(e), a contingent debt may be defined as "one for which the debtor will be called upon
to pay only upon the occurrence or happening or an extrinsic event which will trigger the
liability of the debtor to the alleged creditor." In re Martz, 293 B.R. 409, 411 (Bankr. N.D.
20
Ohio 2002), citing, In re Fostvedt, 823 F.2d 305, 206 (9th Cir. 1987); see also, In re Mazzeo,
131 F.3d 295, 302-305 (2nd Cir. 1997). A debt is not rendered contingent merely because it
is a jointly owed debt. In re Martz, 293 B.R. 409, 411 (Bankr. N.D. Ohio 2002).
In addition, without regard to the nature of the underlying cause of action, if a debt
has been reduced to a pre-petition judgment against the debtor, that debt is noncontingent
and is counted toward the debt limit. See, In re Hammers, 988 F.2d 32 (5th Cir. 1993)(tax
court judgment fixes claim); In re Miloszar, 238 B.R. 266 (D.N.J. 1999)(default judgment is
a noncontingent debt); In re Monroe, 282 B.R. 219, 223 (Bankr. D. Ariz. 2002); In re Snell,
227 B.R. 127 (Bankr. S.D. Ohio 1998); In re Mannor, 175 B.R. 639 ( Bankr. E.D. Pa. Mich.
1994)(pre-petition judgment against debtor precluded argument that debt was owed by a
corporation and should be excluded).
ii.
Liquidated Debts.
The term “liquidated” is not defined in the Bankruptcy Code. Basically, it means
that the amount of the debt is known, or is easily determined by reference to an agreement or
by a simple calculation. See, In re Glance, 487 F.3d 317, 321 (6th Cir. 2007)(debts whose
"amount is readily ascertainable”); In re Mazzeo, 131 F.3d 295, 300-3005 (2nd Cir. 1997);
United States v. Verdunn, 89 F.3d 799, 802-803 (11th Cir. 1996); In re Knight, 55 F.3d
231, 235 (7th Cir. 1995)(if the amount of the claim is ascertained or can be readily
calculated, it is liquidated – whether contested or not).
Filing an amended proof of claim does not necessarily result in a change of status
from a liquidated debt to an unliquidated debt. See, In re Newman, 259 B.R. 914, 919
(Bankr. M.D. Fla. 2001); In re Sullivan, 245 B.R. 416 (N.D. Fla. 1999); In re Knize, 210
B.R. 773, 778 (Bankr. N.D. Ill. 1997).
The “liquidated” criteria applies to both secured and unsecured debts. See, United
States v. Verdunn, 89 F.3d 799, 801 n.8 (11th Cir. 1996)(citing Collier: “The dollar limits
on both categories of debts, unsecured and secured, apply only to debts that are
noncontingent and liquidated at the crucial petition filing time."); In re Arcella-Coffman,
318 B.R. 463, 476-77 (Bankr. N.D. Ind. 2004).
A judgment entered for an amount certain – even if entered by default, or on
appeal – renders the debt liquidated for bankruptcy purposes. See, In re Slack, 187 F.3d
1070 (9th Cir. 1999)(stipulated damages, but disputed liability); In re Miloszar, 238 B.R.
21
266 (D.N.J. 1999)(default judgment); In re Wienco, 275 B.R. 772, 778-779 (Bankr. W.D.
Va. 2002)(liquidated based on pre-bankruptcy provisional decree that could be modified);
In re Reader, 274 B.R. 893, 897-99 (Bankr. D. Colo. 2002)(Special Master’s report on
amount inappropriately transferred to debtor). However, a default judgment that does not
specify an amount may be unliquidated where the amount of the claim is subject to a
future exercise of discretion by a trier of fact. See, In re Adams, 373 B.R 116, 122 (10th
Cir. BAP 2007); In re Cunningham, 490 B.R. 152, 156-157 (Bankr. D. Mass. 2013).
iii.
A Word About “Disputed”.
There are three check boxes on Schedules D, E, and F. Disputed, contingent and
unliquidated. The last two make a difference in terms of debtor eligibility, but listing a
debt as “disputed” does not – “disputed” debts are not mentioned in Section 109(e), and
are included in the eligibility calculation. See, In re Thalmann, 469 B.R. 677, 682
(Bankr. S.D. Tex. 2012)(“disputed claims are generally included in the debt limit
calculation under Section 109(e) of the Bankruptcy Code, particularly where the debt has
been liquidated.”); In re Slack, 187 F.3d 1070, 1074-75 (9th Cir. 1999); In re Adams, 373
B.R. 116, 120 (9th Cir. BAP 2007)(citing cases); In re Huelbig, 313 B.R. 540, 543 n.6
(D.R.I. 2004); In re Fuson, 404 B.R. 872, 874 n.3 (Bankr. S.D. Ohio 2008); In re Tabor,
232 B.R. 85, 89-90 (Bankr. N.D. Ohio 1999); In re Teague, 101 B.R. 57 (Bankr. W.D.
Ark. 1989); In re Lamar, 111 B.R. 327 (D. Nev. 1990); In re Pulliam, 90 B.R. 241, 244
(Bankr. N.D. Tex. 1988); In re Crescenzi, 69 B.R. 64 (S.D.N.Y. 1986);
If there is truly a dispute about liability on a debt, counsel may elect to put $0, or
$1, or “unknown” for the amount, effectively taking the amount out of the 109(e)
calculation – I’m not saying it is right, I’m saying it is done.
If the debtor believes that a debt was discharged in a previous bankruptcy, it may
be necessary to litigate that issue in an adversary complaint. See, In re Walls, 496 B.R.
818 (Bankr. N.D. Miss. 2013)(Debtor’s claim that $776,000 unsecured, non-priority
claim filed by IRS was discharged in prior Chapter 7 had to be resolved in an adversary
proceeding.)
iv.
Secured As To Who?
A security interest in the assets of another entity (other than the debtor) does not
make the debt secured as to the debtor. See, In re Fuson, 404 B.R. 872, 876 (Bankr. S.D.
22
Ohio 2008); In re Lower, 311 B.R. 888 (Bankr. D. Colo. 2004); In re Brown, 250 B.R.
382, 386 (Bankr. D. Idaho 2000); In re Lane, 215 B.R. 810 (Bankr. E.D. Va. 1997); In re
Maxfield, 159 B.R. 587 (Bankr. D. Idaho 1993); but see, In re White, 148 B.R. 283, 286
(Bankr. N.D. Ohio 1992)(holding that a debt secured by collateral owned by a non-debtor
third party could still be classified as “secured” by the debtor for §109(e) purposes).
Under bankruptcy case law, guaranteed corporate debt that is in default must be
included as unsecured debt in calculating the guarantor’s eligibility for Chapter 13. See, In
re Enriquez, 315 B.R. 112, 122 (N.D. Cal. 2004)(liability arising from personal guaranty
of corporate debt included in eligibility computation under §109(e)); In re Brown, 250
B.R. 382, 386 (Bankr. D. Idaho 2000)("the Court concludes that the debts owed to [a
bank] under Debtors' guarantees of the corporate debt are properly characterized
unsecured debt in Debtors' individual Chapter 13 case for purposes of determining their
eligibility for relief under §109(e)."); In re Tabor, 232 B.R. 85, 90 (Bankr. N.D. Ohio
1999); In re Robertson, 105 B.R. 504, 508 (Bankr. D. Minn. 1989); In re Pulliam, 90 B.R.
241 (Bktcy. N.D. Tex. 1988)(corporate debt guaranteed at the date of filing is noncontingent
and must be included in the calculation of the monetary limitations); In re Williams, 51 B.R.
249 (Bktcy. S.D. Ind. 1984); DeKalb Bank v. Flaherty, 10 B.R. 118 (N.D. Ill. 1981); In re
Wilson, 9 B.R. 723 (Bktcy. E.D.N.Y. 1981).
v.
Priority Claims Count As Unsecured Claims.
“Unsecured claims for taxes, claims by employees of a debtor engaged in business,
and administrative expenses are examples of priority claims that would be counted as
unsecured debts. Priority tax claims typically are not contingent for purposes of §109(e)
because, with respect to prepetition years, all of the acts and events necessary to trigger the
debtor’s liability have occurred. Most reported decisions also find that prepetition tax debts
are liquidated for eligibility purposes in the amount claimed by the IRS.” Keith M. Lundin,
1 Chapter 13 Bankruptcy, 3rd Ed. At 17-5 to 17-6; In re Potenza, 76 B.R. 17 (D.Nev.
1987); In re Michaelsen, 74 B.R. 245, 247 (Bankr. D. Nev. 1987); In re Tashman, 13
B.R. 549, 550 (Bankr. D. Vt. 1981).
Note that if a debtor has debts greater than those allowed under Chapter 13,
Chapter 11 is available.
vi.
Joint Debtors/Separate Limits?
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In a joint Chapter 13 case, the question arises as to whether the debt limits apply
to both debtors together, or to each separately. The issue isn’t whether the limits are
doubled – they are not. The question is whether the individual debts of each debtor only
count toward the individual limits of each joint debtor. Or, to put it differently, whether
the debt limits are applied as if each debtor filed separate Chapter 13 cases.
As with so many bankruptcy issues, the answer is that the courts are split on this
issue. Courts that follow the Werts decision look at the eligibility of each debtor, based
on the debts each debtor is legally responsible for. See, In re Werts, 410 B.R. 677
(Bankr. D. Kan. 2009); In re Hannon, 455 B.R. 814, 815-16 (Bankr. S.D. Fla. 2011); In
re Scholz, 2011 Bankr. LEXIS 2971, 2011 WL 9517442, at *2 (Bankr. M.D. Fla. Apr.
11, 2011); In re Bosco, 2010 Bankr. LEXIS 3972, 2010 WL 4668595, at *1 (Bankr.
E.D.N.C. Nov. 9, 2010). In contrast, the court in Miller would look at the aggregate
debts, even if each spouse were only liable for part of the debts. See, In re Miller, 493
B.R. 55 (Bankr. N.D. Ill. 2013).
To illustrate the different, look at a Chapter 13 filed with three debts: Husband
has credit card debt of $300,000 that he incurred prior to the marriage, and Wife has a
personal guarantee of $300,000 on a business loan, and Husband and Wife owe $80,000
on a Victoria’s Secret account. Under Werts, the couple could file a joint Chapter 13 and
be under the debt limit. Under Miller, they could not file a joint Chapter 13 because they
would be over the unsecured debt limit. Under both the Werts and Miller decisions,
Husband and Wife could each file an individual Chapter 13 case and would each be
under the debt limit in their individual cases.
C.
STRUCTURE OF THE BANKRUPTCY CODE AND RULES.
1.
The Bankruptcy Code
As previously discussed above, the Bankruptcy Code (Title 11 of the United
States Code) is divided into "Chapters", all of which are odd numbers from One (1) to
Fifteen (15), plus the only even numbered Chapter: Chapter 12.
The applicability of the various Chapters is governed first by 11 U.S.C. §103.
Generally speaking, Chapters 1, 3, and 5 of the Bankruptcy Code apply to the entire
Bankruptcy Code. So, for example, the definitions found in §101 are applicable to cases
24
filed under Chapters 7, 9, 11, 12 or 13. On the other hand, the provisions of Chapters 7,
9, 11, 12, and 13 are generally only applicable to cases filed under those particular
Chapters, unless specific provisions – like those found in Section 707 – make these
provisions applicable to cases filed under other Chapters.
New Chapter 15 is unique – it is intended to incorporate the Model Law on CrossBorder Insolvency, and generally only applies where there is a foreign bankruptcy
proceeding, and incorporates a limited number of sections, listed in §103(a).
2.
The Federal Rules Of Bankruptcy Procedure
The United States Supreme Court is authorized by statute [28 U.S.C. §2075] to
adopt rules to supplement the Bankruptcy Code:
The Supreme Court shall have the power to prescribe by general rules,
the forms of process, writs, pleadings, and motions, and the practice and
procedure in cases under title 11.
Such rules shall not abridge, enlarge, or modify any substantive
right.
The Supreme Court shall transmit to Congress not later than May 1
of the year in which a rule prescribed under this section is to become
effective a copy of the proposed rule. The rule shall take effect no earlier
than December 1 of the year in which it is transmitted to Congress unless
otherwise provided by law.
See, 28 U.S.C. §2075.
The Federal Rules of Bankruptcy Procedure "have the force of law and must be
followed." 1 Collier on Bankruptcy, P 1.04 (Matthew Bender 5th ed. rev. 2000).
Although Collier cites no authority for this proposition, it certainly can be deduced from
the fact that no rule is effective until it is first submitted to Congress. See, 28 U.S.C.
§2075. The only limits on the breadth of a bankruptcy rule is that it must relate to
"practice and procedure in cases under Title 11" and that it must "not abridge, enlarge or
modify any substantive right." §2075; Tenn. Student Assistance Corp. v. Hood, 541 U.S.
440 , 454, 124 S. Ct. 1905, 1914, 158 L. Ed. 2d 764, 779 (2004).
The rules themselves provide a statement as to their use: “The Bankruptcy Rules
and Forms govern procedure in cases under title 11 of the United States Code. * * *
25
These rules shall be construed to secure the just, speedy, and inexpensive determination
of every case and proceeding.” F.R.Bankr.P. 1001.
The “1000 Rules” - F.R.Bankr.P. 1001 to 1020 - deal with commencement of the
case, and proceedings relating to the Petition and the Order for Relief.
Rules 2001 to 2020 govern officers and administration, notices, meetings,
examinations, elections, attorneys and accountants. 2004 examinations are governed by –
surprise! - Rule 2004.
The 3000 Rules (F.R.Bankr.P. 3001 to 3022) deal with claims and distribution to
creditors and equity security holders, as well as Plans.
In 4001 to 4008, the rules regarding the debtor’s duties and benefits are stated.
Federal Rules of Bankruptcy Procedure 5001 to 5011 are the rules for courts and
clerks.
The 6000 Rules (Rules 6001 to 6010) are for collection and liquidation of the
estate.
The 7000 Rules (Rules 7001 to 7087) are for adversary proceedings. Most of
these rules simply incorporate the corresponding Federal Rules of Civil Procedure,
making them applicable to bankruptcy adversary proceedings.
Rules 8001 to 8020 are the rules for appeals to the district court and the
bankruptcy appellate panel. Most crucially, Rule 8002 provides a very short time period
for appealing a bankruptcy court order – 14 days.
The last set of rules are 9001 to 9036. These rules deal with general provisions.
Rule 9014 incorporates a substantial number of the Federal Rules of Civil Procedure and
make them applicable in “contested matters”.
3.
Local Rules And Interim Local Rules.
Almost all bankruptcy districts have at least some local bankruptcy rules. The
local rules as to form have somewhat limited effect. They cannot be enforced against
those who do not know about them in a way that will cause a party to lose rights. Federal
Rule of Bankruptcy Procedure 9029(a)(2) states: “A local rule imposing a requirement of
form shall not be enforced in a manner that causes a party to lose rights because of a
nonwillful failure to comply with the requirement.”. Administrative Orders have similar
restrictions on enforcement. See, Bankruptcy Rule 9029(b).
26
In addition, because amending the Federal Rules of Bankruptcy Procedure is
approximately a three-year process, the Bankruptcy Courts needed new rules that could
be quickly implemented, dealing with the new requirements imposed by BAPCPA.
Accordingly, Interim Local Rules were adopted by District Courts. However, those
interim local rules have now all been superseded by amendments to the Federal Rules of
Bankruptcy Procedure.
4.
The Official Forms And Local Forms.
The Official Forms – at least theoretically - conform to the requirements of
BAPCPA. There are the Official Forms, and there are also official procedural forms.
Copies of those forms (most of which should be on any decent debtor’s bankruptcy filing
program) are found here:
http://www.uscourts.gov/rules/new_and_revised_official_forms_101405.htm
Most jurisdictions also have local forms. Use of those local forms – such as form
Chapter 13 Plans, or forms used in connection with motions for relief from stay – is often
strictly enforced. But, perhaps should not be.... See, Rule 9029(a)(2).
D.
ADVERSARY PROCEEDINGS vs. CONTESTED MATTERS.
Generally, there are two basic ways that issues are litigated in the Bankruptcy
Court: adversary proceedings and contested matters.
1.
Adversary Proceedings.
Federal Rule of Bankruptcy Procedure 7001 lists ten types of relief that must be
sought through an adversary proceeding. For Chapter 13 Trustee’s counsel, the most
common of these are: actions to recover money or property, including preferences,
fraudulent conveyances, and recovery of misdisbursements, and actions to avoid a lien
under Section 544.
Litigating an issue by adversary proceeding is substantially the same as bringing a
civil suit in state or federal court. An adversary complaint is initiated by the filing of a
complaint, styled with plaintiff(s) and defendant(s). Initiating an adversary complaint
requires the service of a summons on the defendants. The defendant(s) must file an
answer or other responsive pleading (such as a motion to dismiss), and then discovery
27
and motion practice continue much like they do in state or federal court. In fact, the
Bankruptcy Rules governing adversary proceedings (found in the Federal Rules of
Bankruptcy Procedure 7001 et seq.) adopt most of the Federal Rules of Civil Procedure.
The issue brought before the Bankruptcy Court though an adversary proceeding
will ultimately be resolved, as with other litigation, by motion practice, trial, or perhaps,
settlement. Usually, however, adversary proceedings are resolved (even if trial is
necessary), more quickly than other kinds of civil litigation. Bankruptcy Courts are
aware of the fact that lengthy litigation is rarely in a debtor’s best interest.
2.
Contested Matters.
“Contested matters” are any other type of dispute (not requiring an adversary
proceeding) that must be resolved in the bankruptcy case. A contested matter is
commenced by a party filing a motion or objection requesting relief from the Bankruptcy
Court. No response to the motion or objection is required, but if another party opposes
the relief requested, a contested matter has begun. Contested matters include litigation of
such issues as objections to claims, motions for relief from stay, objections to Chapter 13
Plan confirmation, motions to sell property, and the like.
The filing of a plan does not initiate a contested matter. Plan confirmation
becomes a contested matter only when an objection is filed. See, In re Rosa, 495 B.R.
522, 525 (Bankr. D. Hawai’i 2013).
Rule 9014 of the Bankruptcy Rules governs contested matters, and provides that
many of the same rules applicable in adversary proceedings also apply in contested
matters. But not all of them.
Since contested matters do not require the formal filing and service of a
complaint, contested matters are often resolved more quickly than adversary proceedings.
E.
DISCOVERY IN BANKRUPTCY PROCEEDINGS.
1.
Discovery Under The Federal Rules.
As noted above, most of the Federal Civil Rules are made applicable to adversary
proceedings and, with one exception, all of the discovery rules of the Federal Rules of
Civil Procedure apply in both adversary proceedings and contested matters. Bankruptcy
Rules 7026 through 7037 simply adopt Federal Rules 26 through 37, and so those Federal
28
Rules apply in adversary proceedings. Pursuant to Bankruptcy Rule 9014, all of the
Federal Rules of Civil Procedure (pertaining to depositions before action or pending
appeal) apply in contested matters, except Rule 27. It should be noted, however, that the
Bankruptcy Court has the discretion to direct that some or all of these rules do not apply
in any particular matter.
2.
Discovery Under Rule 2004.
The Bankruptcy Rules do provide for some additional discovery mechanisms that
are generally not available in other kinds of civil litigation. Rule 2004 of the Bankruptcy
Rules provides extremely wide authority to conduct discovery, limited only by the
requirement that the discovery must be related “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, or to the debtor’s right to a discharge.”
F.R.Bankr.P. 2004.
In fact, a “Rule 2004 exam” is broad enough to allow discovery that is really
nothing more than a fishing expedition. See, In re Enron Corp., 281 B.R. 836, 840
(Bankr. S.D.N.Y. 2002); Matter of M4 Enterprises, Inc., 190 B.R. 471, 474 (Bankr. N.D.
Ga. 1995).
However, there are limits to Rule 2004 examinations. Courts have denied motions
for Rule 2004 examinations when: 1) the purpose is to abuse and harass, In re Mittco,
Inc., 44 B.R. 35, 36 (Bankr. E.D. Wis. 1984) (noting Rule 2004 exams cannot be used to
harass, but finding no harassment in the facts before the court); 2) the examination seeks
to elicit information unrelated to debtor's financial affairs or the administration of the
debtor's estate, In re Enron Corp., 281 B.R. at 840, Matter of Wilcher, 56 B.R. at 433-34;
3) the party seeks to examine an individual with no knowledge of the debtor's affairs, In
re GHR Energy Corp., 35 B.R. 534, 537 (Bankr. D. Mass. 1983).
Of course, the privilege against self incrimination applies to the debtor’s
testimony during a 2004 examination. See, In re Welsh, 2013 Bankr. LEXIS 4716
(Bankr. E.D.N.C. Nov. 7, 2013)(Fifth Amendment privilege upheld based on the
possibility of prosecution under the virtually unused “fornication and adultery” statute).
However, in keeping with Supreme Court authority, the privilege against self
incrimination does not extend to the contents of voluntarily created documents. Id.
29
There is a also a general limitation on the use of 2004 examinations when an
adversary is pending, which is discussed below.
A 2004 examination is available to “any party in interest,” which includes the
trustee, the United States Trustee, the debtor, creditors, entities related to the debtor and
entities with obligations owing to the debtor. While authority to conduct a Rule 2004
exam must be obtained from the Court, there is no requirement in the rule that the witness
be given advance notice of the Motion, and the Order directing the examination is often
signed by a Deputy Clerk pursuant to a grant of authority in an Administrative Order.
In a Rule 2004 examination, a witness has no general right to representation by
counsel, and the right to object to immaterial or improper questions is limited. See, In re
Bennett Funding Group, Inc., 203 B.R. 24 (Bankr. N.D.N.Y. 1996); In re Dinubilo, 177
B.R. 932, 940 (E.D.Cal. 1993); In re French, 145 B.R. 991, 992 (Bankr. D.S.D. 1992).
The issue of whether 2004 examinations are public and open to the press is
subject to a split of authority. Compare, In re Thow, 392 B.R. 860 (Bankr. W.D. Wash.
2007) and In re Symington, 209 B.R. 678 (Bankr. D. Md. 1997). And see, Seattle Times
Co. v. Rhinehart, 467 U.S. 20, 33, 104 S. Ct. 2199, 81 L. Ed. 2d 17 (1984)(there is no
common law or First Amendment right to inspect discovery materials). Courts have
denied access to Rule 2004 documents and transcripts for this reason, when shown good
cause by the opponents of access. In re Apex Oil Co., 101 B.R. 92, 102-103 (Bankr. E.D.
Mo. 1989); In re Ionosphere Clubs, Inc., 156 B.R. 414, 431-433 (S.D.N.Y. 1993).
While arguments have been made to the contrary [See, In re McLaren, 3 F.3d 958,
965 n.5 (6th Cir. 1993)], transcripts of 2004 examinations have been held admissible as
direct evidence. See, In re Jost, 136 F.3d 1455, 1459 (11th Cir. 1998). There appears to
be less question that the 2004 examination transcript can be used for purposes of rebuttal
or impeachment.
There is another important limitation on the use of a Rule 2004 examination.
Under the majority rule, once an adversary proceeding or a contested matter is
commenced, Rule 2004 is no longer available to the parties as a discovery tool, at least
for issues directly related to the adversary case. See, In re 2435 Plainfield Avenue, Inc.,
223 B.R. 440, 445-446 (Bankr. D.N.J. 1998); In re Symington, 209 B.R. 678, 683-84
(Bankr. D. Md. 1997); In re Szadkowski, 198 B.R. 140, 141 (Bankr. D. Md. 1996); In re
30
Bennett Funding Group, Inc., 203 B.R. 24, 28 (Bankr. N.D.N.Y. 1996); In re Sutera, 141
B.R. 539, 541 (Bankr. D. Conn. 1992); but see, Matter of Sun Med. Management, Inc.,
104 B.R. 522, 524-25 (Bankr. M.D. Ga. 1989) (permitting a Rule 2004 exam to go
forward, even though an adversary proceeding was pending).
Generally, once an adversary proceeding or contested matter is commenced, the
federal rules that govern discovery will apply. Since the rules of formal discovery have
certain procedural protections, it has been held that it would be improper to allow a party
to attempt to gain an advantage by using Rule 2004 to circumvent the procedural
protections of Rule 7026, at least as to the subject matter of the adversary litigation.
3.
Privilege Issues In Federal Court.
Federal Rule of Evidence 501 states that the federal common law of privileges
applies when federal law determines the substantive rights of the parties. See also,
United States v. Zollin, 491 U.S. 554, 562, 109 S.Ct. 2619, 105 L.Ed.2d 469 (1989).
On the other hand, the state privilege law controls if the underlying claim or
defense is governed by state law. See, Fed. R. Evid. 501; Star Editorial v. United States
District Court, 7 F.3d 856, 859 (9th Cir. 1993).
Federal privilege law will control even if the evidence sought is relevant to both
the federal and state claims. Bulow v. Bulow, 811 F.2d 136, 140 (2nd Cir. 1987).
“It is only where a discrete bankruptcy adversary proceeding involves litigants
squaring off solely under state law claims will Rule 501 require reference to state
privileged law.” In re North Plaza, LLC, 395 B.R. 113, 122 (S.D. Cal. 2008).
F.
PREFERENCE ACTIONS.
Chapter 13 trustees are given extensive powers to avoid certain pre-petition
transactions. Preference actions, which are based upon section 547 of the Bankruptcy
Code, are one such power that generally has no state-law counterpart for non-insiders.
1.
Reasons For The Preference Statute.
Under the bankruptcy laws, preferences are avoidable for two basic reasons: (1) to
discourage pre-bankruptcy dismemberment of troubled debtors; and (2) to facilitate
equitable distribution among creditors. See, Union Bank v. Walls, 502 U.S. 151, 160-161,
112 S.Ct. 527, 533, 116 L.Ed.2d 514, 524 (1991), quoting, H.R. Rep. No. 95-595, at 177-
31
178, U.S. Code Cong. & Aidmen.News 1978, pp. 6137, 6138. Other courts have cited an
additional policy reason, discouraging secret liens on the debtor's property that are not
perfected until just before the debtor files bankruptcy. See, In re Arnett, 731 F.2d 358, 363
(6th Cir. 1984); In re Gulino, 779 F.2d 546, 549 (9th Cir. 1986). More colorfully, the
Seventh Circuit has stated: "the purpose of the preference statute is to prevent the debtor
during his slide toward bankruptcy from trying to stave off the evil day by giving
preferential treatment to his most importunate creditors." Matter of Tolona Pizza Products
Corp., 3 F.2d 1029, 1032 (7th Cir. 1993).
In essence, the usual preference action requires the creditor who was either repaid
a loan or was paid for goods or services during the preference period, to return the funds,
so that funds can be distributed pro rata among all of the debtor’s creditors.
2.
The Elements Of A Preferential Transfer.
In order for there to be a preference claim, the creditor must have actually
provided the debtor with money, goods or services. The preferential transfer can be the
payment of money, a transfer of property, or the transfer of a security interest in property.
To creditors who are paid, of course, the requirement that they turnover payments made
prior to bankruptcy, in return for a claim that may be paid pennies on the dollar, is a bitter
pill. Don’t expect to make any friends.
The preference statute provides very specific requirements that must be met, as
well as several defenses that can be asserted. The preference statute is essentially a
mechanical test – there is no requirement that the debtor have actually intended to prefer
the creditor. The debtor's or creditor's motive is irrelevant in determining whether there has
been a preference. See e.g., In re Interior Wood Products Co., 986 F.2d 228, 232 (8th Cir.
1993); In re Perma Pacific Properties, 983 F.2d 964, 968 (10th Cir. 1992); Matter of T.B.
Westex Foods, Inc., 950 F.2d 1187, (5th Cir. 1992)("it is the effect of the transaction, rather
than the debtor's or creditor's intent that is controlling"); In re Sevitski, 151 B.R. 590, 596
(Bankr. N.D. Okla. 1993); In re Service Bolt & Nut Co., Inc., 98 B.R. 759, 761 (Bankr. N.D.
Ohio)(Baxter, J.); In re Repro-Technics, Inc.), 8 B.R. 225, 226 (Bankr. D. Me. 1981). But
see, First Fed. v. Barrow, 878 F.2d 912, 914, 918 (6th Cir. 1989)(court stresses debtor's
improper motive in making preferential transfers).
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Section 547(b) of the Bankruptcy Code contains the elements of a complaint to
avoid a preferential transfer of property. They are: (i) a transfer of an interest of the
debtor in property, (ii) to or for the benefit of a creditor, (iii) for or on account of an
antecedent debt owed by the debtor before such transfer was made, (iv) made while the
debtor was insolvent, (v) on or within ninety (90) days before the petition date (or within
one year if the transferee is an “insider” as defined in §101(31) of the Bankruptcy Code),
(vi) the effect of which is to enable the recipient of the transfer to receive more than it
would have received under the distributive provisions of Chapter 7 of the Bankruptcy
Code if such transfer had not been made.
Thus, the prima facie elements of a preference claim are fairly straightforward.
The most commonly litigated elements of preference claims are whether a transfer was an
interest of the debtor in property, and whether the debtor was insolvent at the time of the
transfer.
There are many reported decisions involving cases where the debtor’s defense is
that what was transferred was property that the debtor had in interest in because of the
“earmarking doctrine”. A typical example of the earmarking doctrine is a transaction in
which a loan is made to the debtor for the sole purpose of paying off another creditor,
thus placing the new lender in the shoes of the old creditor. See, In re Bohlen
Enterprises, Inc., 859 F.2d 561 (8th Cir. 1988). The test for determining whether the
earmarking doctrine applies consists of three elements: (1) there is an agreement between
the new lender and the debtor that the funds will be used to pay a specified debt; (2) the
terms of the transaction are actually performed; and (3) the transaction, viewed as a
whole, does not result in any diminution of the estate.
The insolvency requirement is also sometimes litigated. Pursuant to the statute,
the debtor is rebuttably presumed to have been insolvent during the ninety-day period
prior to the filing of bankruptcy. See, §547(f). Once that presumption is rebutted, the
burden of proof on that issue shifts to the trustee to prove insolvency – on of the
necessary elements of a preference. It is important to note that “insolvency” under the
Bankruptcy Code is defined in §101(32) of the Bankruptcy Code, and is not a “balance
sheet” or insolvency under a GAAP approach test. Instead, the Bankruptcy Code
definition focuses on whether the “fair value” of the debtor’s assets exceed the debtor’s
33
liabilities. Thus, litigation involving this issue often depends almost entirely upon
appraisal testimony.
3. The Affirmative Defenses To A Preference Action.
Unlike the elements of the preference claim, the statutory defenses to a preference
are often litigated. There are eight affirmative defenses, which are usually described as
follows: (i) contemporaneous exchange for new value, (ii) ordinary course of business,
(iii) enabling loans, (iv) subsequent new value, (v) floating liens, (vi) statutory liens, (vii)
payments for a domestic support obligation, and (viii) in a consumer case, aggregate
payments to any one creditor of less than $600.00, and in non-consumer cases, less than
$5,475 (increased from $5,000 as of April 1, 2007). These affirmative defenses are
designed to allow a creditor to retain otherwise avoidable payments or transfers of
property.
For cases involving business debtors, the most commonly asserted affirmative
defenses are “contemporaneous exchange for new value”, “ordinary course of business”
and “subsequent new value”.
The classic “contemporaneous exchange” defense [§547(c)(1)] is regularly seen
in business transactions where the payment terms are C.O.D., i.e,. a payment made upon
delivery of goods. To be successful, the creditor must establish that both parties intended
that the payment be a contemporaneous exchanged for new value and that the exchange
was in fact substantially contemporaneous.
The “ordinary course of business defense” [§547(c)(2)] protects payments
received by a creditor pursuant to pre-arranged terms negotiated between the creditor and
the debtor. See, In re Roblin Industries, Inc., 78 F.3d 30 (2nd Cir. 1996). The statute
requires that in order to succeed with this defense, a creditor must show: (i) the debt was
incurred in the ordinary course of business of both the debtor and the creditor; (ii) the
payment was made in the ordinary course of business of between the debtor and the
creditor or the transfer was made according to ordinary business terms. (The BAPCPA
amendments changed this standard, substituting the “or” for an “and”.)
The “subsequent new value defense” [§547(c)(4)] provides some protection to an
unsuspecting creditor who receives payments and continues to ship goods to a customer
on the brink of bankruptcy. The Code provides that a transfer may not be avoided “to the
34
extent that, after such transfer, such creditor gave new value to or for the benefit of the
debtor...”. This is not a simple “net result” calculation. Instead, this preference defense
requires that each subsequent advance of new value must be matched and set off against a
prior preferential payment. In other words, an otherwise preferential payment is reduced
by the amount of good delivered (or other credit extended) by the creditor after receipt of
the otherwise preferential payment.
In consumer cases, preferential transfers are often made to family members. Keep
in mind that to the extent the transfer is made to an “insider”, as defined in §101(31) of
the Code, there is an enhanced preference look-back period. Under Section 547(b)(4)(B),
a transfer made to an insider within one year of filing can be avoided as a preferential
transfer.
The term “insider” is defined to specifically include “relatives”, and the term
“relative” is also defined term, in §101(45). Keep in mind that the statutory definition of
“insider” uses the term “includes”, and then gives examples. Thus, the list of what
relationship with the debtor is considered sufficient to be an “insider” has been held to be
a non-exclusive, and people with other kinds of close relationships with the debtor can be
“insiders”. Where the debtor is an individual, a transfer to a “relative” is a transfer to an
“insider”.
Also keep in mind that to the extent the transfer was a bona fide payment of a
debt for a domestic support obligation, §547(c)(7) provides that such a payment is not a
voidable preference. Further, if the payment you wish to avoid was made to the IRS for
taxes, it is also not going to be recoverable as a preference. See, Begier v. IRS, 496 U.S.
53, 58, 110 S. Ct. 2258, 110 L. Ed. 2d 46 (1990); In re Valley Food Serv., LLC, 389 B.R.
685 (Bankr. W.D. Mo. 2008)(interpreting application of Begier to state taxes). Finally,
under §547(h), transfers made pursuant to a repayment plan created by an approved
nonprofit budget and credit counseling agency may not be recovered as a preferential
transfer.
4.
Time Limit For Filing A Preference Action.
In addition to the defenses set forth in §547, creditors should be mindful of
§546(a) of the Bankruptcy Code, which contains the statute of limitations for preference
actions. Pursuant to §546(a), a preference action may not be commenced after the earlier
35
of (1) the later of two years from the entry of an Order for Relief or one year after the
appointment or election of the first trustee in the case, or (2) the time the case is closed or
dismissed.
G.
FRAUDULENT TRANSFER ISSUES.
1.
Section 548 And The Uniform Fraudulent Transfer Act.
Section 548 of the Bankruptcy Code gives trustees the right to assert fraudulent
conveyance claims in connection with prepetition transfers. This provision is similar to
the fraudulent conveyance provisions of the Uniform Fraudulent Transfer Act, which has
been adopted, in some form, in most states. The UFTA creates parallel causes of action
for transfers that are either actually or constructively fraudulent, usually with a longer
“look-back period” than the two years provided by the Bankruptcy Code.
2.
Claims For Actual Fraud Under The Code.
Under section 548(a)(1)(A), a transfer of an interest of the debtor in property or
an obligation incurred by the debtor that was made or incurred within two years of the
commencement of the bankruptcy case is fraudulent and avoidable if the debtor made the
transfer or incurred the obligation with actual intent to hinder, delay or defraud creditors.
This is a claim for “actual fraud”.
3.
Constructively Fraudulent Conveyances Under The Code.
The more commonly used provision of Section 548 does not require any proof of
“bad intent”. Under §548(a)(1)(B), a transfer that was made or incurred within the two
year prior to the filing of the petition is avoidable if the debtor received less than a
reasonably equivalent value in return for the transfer and one of the following: (1) was
insolvent on the date of the transfer or rendered insolvent thereby; (2) was engaged in a
business or transaction for which his remaining property was an unreasonably small
capital; or (3) intended to incur debts that would be beyond the debtor’s ability to pay as
they matured.
This is the so-called “constructive fraud” provision, because it does not require
proof that the debtor intended to hinder, delay or defraud creditors. Simply making a
transfer for less than reasonably equivalent value, while the debtor was insolvent, makes
the transfer avoidable by the trustee.
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4.
Avoiding Fraudulent Transfers Under State Law.
In addition to the specific provisions contained in §548(a), §544(b) gives the
trustee the right to avoid any transfer avoidable by an actual unsecured creditor under
applicable state law, including state fraudulent conveyance statutes. Under the Uniform
Fraudulent Transfer Act, enacted by most states, the trustee can avoid fraudulent and
constructively fraudulent transfers that occurred up to four years before the bankruptcy
was filed.
Given the inclusion of the state statutes in the trustee’s avoidance arsenal, it is
important to pay attention to the applicable statutes of limitation, the look-back periods
and the confusion they could create. Under the Uniform Fraudulent Transfer Act, the
statute of limitations is four years from the date of the transfer. Under §548 of the
Bankruptcy Code, the look-back period is two years, although under §546 the deadline
for filing the avoidance action in a Chapter 13 will be two years after the petition was
filed. Also keep in mind that the provisions of §108 and §546 will also extend the state
law statute of limitations, if the cause of action was still viable at the time the bankruptcy
case was filed.
To summarize – under either state law, or under Sections 547 (preference) or 548
(fraudulent transfer), the Chapter 13 will have two years after the filing of the case to file
an adversary complaint seeking avoidance of the transfer.
H.
THE TRUSTEE’S STRONG-ARM POWERS.
Lenders' loan documents do not have to be perfect to be enforceable in
bankruptcy -- but they do have to be perfected. Outside of bankruptcy, lenders have an
advantage in that most perfection, priority, and documentation disputes arise with
debtors, not competing creditors. Except in unusual situations, a creditor's claim remains
"secured", as against the debtor, even when the security interest is unperfected, when
there are no other competing creditors involved. See generally, In re Baek, 240 B.R. 633
(Bankr. M.D. Fla. 1999).
However, in bankruptcy the situation changes because there is almost always a
competing creditor involved -- if not an actual one, the Bankruptcy Code creates a
hypothetical one: the bankruptcy trustee.
37
While Section 544(a) is most often invoked by Chapter 7 trustees, these powers
are not exclusive to Chapter 7 trustees. Section 103(a) of the Code makes Section 544(a)
applicable in a a Chapter 13 case. As such, a Chapter 13 trustee may appear and invoke
the strong arm powers under §544(a) to avoid a creditor’s interest just as a Chapter 7
trustee would, despite the fact that a Chapter 13 trustee’s interest in the case may differ
from those of a Chapter 7 trustee’s interest. See, In re Perrow, 498 B.R. 560, 568-569
(Bankr. W.D. Va. 2013).
Under §544(a)(1), the trustee has the power to avoid any transfer or obligation of
the debtor which is avoidable by a hypothetical creditor on a simple contract with a
judicial lien on the property of the debtor unsatisfied as of the date of the commencement
of the case. 5 Collier on Bankruptcy, 544.02 at 544-4 (15th ed. rev. 2000).
The trustee also has the rights and powers, under Section 544(a)(2) of the
Bankruptcy Code, of a hypothetical creditor, with a writ of execution returned unsatisfied
at the date of the commencement of the case. 5 Collier on Bankruptcy, 544.02 at 544-4
(15th ed. rev. 2000).
Finally, under §544(a)(3), the trustee may avoid any lien or transfer avoidable by a
hypothetical bona fide purchaser of the debtors' real property as of the date of the
commencement of the case. 5 Collier on Bankruptcy, ¶544.02 at 544-4 (15th ed. rev. 2000).
These powers may be exercised by the trustee whether or not a creditor or purchaser
of the kind described in any of the three subparagraphs of Section 544(a) actually exist, and
without regard to the actual knowledge of the trustee or any creditor or purchaser. 5 Collier
on Bankruptcy, ¶544.02 at 544-4 to 544-5 (15th ed. rev. 2000).
When these "strong arm" powers are combined with the preference and fraudulent
conveyance powers, the trustee has a formidable arsenal with which to attack defective
loan documents, UCC-1s, mortgages, security agreements, etc. Generally, if the lien or
mortgage was not properly perfected under state law, the security interest will be
avoidable by the bankruptcy trustee.
One problem that appears to arise with some frequency is when the Chapter 13
Plan has provisions contrary to the relief sought by the Chapter 13 Trustee – courts have
held that confirmation of a Chapter 13 Plan is res judicata as to all issues that were, or
38
could have been decided during the confirmation process. See, Reid v. Wells Fargo, 480
B.R. 436 (Bankr. D. Mass. 2012).
I.
DISCHARGE AND DISCHARGEABILITY.
A Chapter 13 debtor’s right to obtain a discharge is generally governed by §1328
of the Bankruptcy Code.
Section 523 sets forth the bases (currently nineteen subsections) upon which a
specific debt may be excluded from a debtor’s discharge.
While Chapter 13 Trustees may oppose a debtor’s discharge, individual creditors
– not the trustee – are almost always the party contesting the dischargeability of a
particular debt.
Section 1328 provides that a Chapter 13 debtor will usually receive a discharge
upon the completion of the Chapter 13 Plan, or the debtor may file a motion for a
hardship discharge under §1328(b). There are exceptions to the general rule that a
discharge is entered upon completion of the Plan payments, including some new
provisions added by the BAPCA, such as: 1) there is no right to a discharge if the debtor
received a discharge in a Chapter 7 filed within the previous four years, or a Chapter 13
(where the debtor received a discharge) filed within the previous 2 years [§1328(f)]; 2)
failure to complete a debtor education course [§1328(g)]; or, 3) the debtor may have
committed certain security laws violations [§1328(h)].
Bankruptcy Rule 4004(a) was amended in 2010 to add: “In a chapter 13 case, a
motion objecting to the debtor's discharge under §1328(f) shall be filed no later than 60
days after the first date set for the meeting of creditors under §341(a).” Note that this rule
specifically references the filing of a “motion”. Trustees that relied on automatic closing
without a discharge in cases filed within the §1328(f) limits should reevaluate the need to
file a motion within the time frame set forth in amended Rule 4004(a).
III.
TIME LIMITS FOR CHAPTER 13 AND CHAPTER 7 DEBTORS
RECEIVING A DISCHARGE.
A.
Section 1328(f) – Eligibility For A Discharge In A Chapter 13 Filed
After A Previous Chapter 7 or 13.
39
BAPCAP implemented new “look back periods” – time that must pass before a
debtor is eligible to receive a discharge if the debtor had filed a prior Chapter 13 or
Chapter 7 case and received a discharge. Section 1328(f) states:
(f) Notwithstanding subsections (a) and (b), the court shall not grant a discharge
of all debts provided for in the plan or disallowed under section 502, if the debtor has
received a discharge—
(1) in a case filed under chapter 7, 11, or 12 of this title during the 4-year
period preceding the date of the order for relief under this chapter,
or
(2) in a case filed under chapter 13 of this title during the 2-year period
preceding the date of such order.
1.
Section 1328(f) Does Not Prevent The Filing Of A Chapter 13.
Section 1328(f) does not prevent the FILING of a Chapter 13 bankruptcy (or
other relief provided by Chapter 13), but it does prevent the entry of a DISCHARGE.
See e.g., In re Bateman, 515 F.3d 272 (4th Cir. 2008); In re Pollard, Case No. 1017396PM, 2011 Bankr. LEXIS 595, n.2 (Bankr. D. Md. Feb. 9, 2011); In re Sours, 350
B.R. 261, 267 n.3 (Bankr. E.D. Va. 2006); In re Lewis, 339 B.R. 814 (Bankr. S.D. Ga.
2006); 8 Collier on Bankruptcy, ¶1328.06[1] at 1328-36 (15th Ed. Rev. 2008); Hon.
William Houston Brown, Taking Exception to Debtor’s Discharge: The 2005 Bankruptcy
Amendments Make It Easier, 79 Am. Bankr. L. J. 419, 448-49 (Spring, 2005).
Thus, in a typical “Chapter 20” case, where the only debt is a mortgage arrearage,
Chapter 13 will remain an effective solution to the problem of catching up the mortgage a bankruptcy discharge isn’t needed. Cure under Code Section 1322(b)(3) and (5) is
typically the primary goal, provided the debtors have not incurred additional unsecured
debts between the filing of the Chapter 7 and the filing of the Chapter 13.
However, where there are unsecured debts, the absence of eligibility for a Chapter
13 discharge creates problems regarding unsecured creditors’ entitlement to interest and
late charges after the Chapter 13 case is completed. Those additional charges are
discharged at the conclusion of a typical Chapter 13, and therefore do not have to be
otherwise dealt with. Under the new restrictions on the granting of a Chapter 13
discharge, it is possible that the holder of (for example) a credit card debt could come
40
back on the debtor after the Chapter 13 is completed and demand their contractual
interest and late charges, even if the Plan proposed to pay unsecured creditors “100%”.
It remains to be seen how many creditors would actually take such a position after
a Chapter 13 Plan is completed.
i.
No Lien Stripping In A 13 Without A Discharge?
The issue of whether or not debtors who are not eligible for a Chapter 13
discharge may strip a junior mortgage has been a hot issue. While there are many
decisions on this issue, the first circuit court decision that directly addressed this issue
was Branigan v. Davis (In re Davis), 716 F.3d 331 (4th Cir. 2013), a 2-1 decision that
allowed lien stripping without a discharge. Contra, Lindskog v. M&I Bank, 480 B.R. 916
(E.D. Wis. 2012); Victorio v. Billingslea, 470 B.R. 545 (S.D. Cal. 2012).
2.
Majority View: The Two And Four Year Waiting Periods Are
Measured Filing To Filing.
Near unanimous case law holds that the two year (discharged Chapter 13 to
Chapter 13) and four year (discharged Chapter 7 to Chapter 13) waiting periods are
measured “filing-to-filing”. In other words, where a Chapter 13 debtor has received a
discharge in a case filed more than two years ago, s/he is eligible for a discharge in a
subsequent Chapter 13 case. See, In re Gagne, 394 B.R. 219 (1st Cir. BAP 2008). Of
course, that means that the two-year waiting period of §1328(f)(2) almost never applies,
since Chapter 13 requires a minimum three year commitment period in cases where
unsecured creditors receive less than 100%.
Since the enactment of the BAPCPA, the Chapter 7 to Chapter 13 waiting period
of §1328(f)(1) has been held to be properly measured “filing-to-filing” by an
overwhelming majority of courts, including the Sixth Circuit Court of Appeals. See, In
re Sanders, 551 F.3d 397 (6th Cir. 2008); In re Bateman, 515 F.3d 272, 272 (4th Cir.
2008); In re Gomez, Case No. 6:09-bk-13656-ABB, 2010 Bankr. LEXIS 4501 (Bankr.
M.D. Fla. Dec. 7, 2010); In re Trujillo, Case No. 6:10-bk-02615-ABB,2010 Bankr.
LEXIS 3834 (Bankr. M.D. Fla. Nov. 10, 2010); In re Colbourne, Case No. 6:10-bk00983, 22 Fla. L. Weekly Fed. B 620, 2010 Bankr. LEXIS 3813 (Bankr. M.D. Fla. Nov.
8, 2010); In re Hieter, 414 B.R. 665, 667-668 (Bankr. D. Idaho 2009); In re McGhee, 342
41
B.R. 256 (Bankr. W.D. Ky. 2006); In re West, 352 B.R. 482 (Bankr E.D. Ark. 2006); In
re Grydzuk, 353 B.R. 564, 568 (Bankr. N.D. Ind. 2006); In re Knighton, 355 B.R. 922,
926 (Bankr. M.D. Ga. 2006)(“The Court now turns to the Bank's alternative argumentthat the look back period starts running on the date of discharge in the prior case rather
than the date of filing in the prior case. Nothing in the language of §1328(f)(1) supports
such an interpretation. The statute bars discharge in the pending case if the debtor
received a prior discharge in a case "filed under chapter 7 … during the 4-year period
preceding the date of the order for relief" in the pending case. Because the order for relief
arises on the date of filing, a plain reading of §1328(f)(1) indicates that the lookback
period runs from the filing date of the prior case to the filing date of the current case.”);
In re Grice, 373 B.R. 886 (Bankr. E.D. Wis. 2007)(in unconverted cases, the measure is
filing-to-filing, where the prior case was a Chapter 7 or a Chapter 13).
Other cases, while not explicitly stating a rule about how the “look back” period
should be measured, simply use the filing-to-filing dates in determining whether or not
the required time that has passed. See e.g., In re Ybarra, 359 B.R. 702, 703 & 709
(Bankr. S.D. Ill. 2007)(court used February 3, 2003, the date of the filing of the prior case
to measure the applicable look back period).
i.
When A Case Converts, Which Look back Period
Applies?
Several published opinions address the question of which chapters’ look
back period will apply when the prior case was converted from a Chapter 13 to a Chapter
7. Typically, the debtor wants the look back period to be based on the chapter the case
was filed under – Chapter 13. Creditors would prefer that the look back period be based
on the chapter in which the debtor received a discharge – Chapter 7.
To date, most bankruptcy courts have held that the relevant “look back” period is
determined by the chapter under which the discharge in the prior case was received
(Chapter 7), and not by the chapter under which the petition was originally filed (Chapter
13): See, Leavitt v. Finney (In re Finney), 486 B.R. 177 (9th Cir. BAP 2013); In re
Johnson, 488 B.R. 46 (Bankr. D. Mass. 2013); In re Capers, 347 B.R. 169, 171 (Bankr.
D.S.C. 2006); In re Sours, 350 B.R. 261, 262-263 (Bankr. E.D. Va. 2006)(Section
1328(f) cannot be read in a vacuum; it must be read in conjunction with §348(a), which
42
"mandates that a case which has been converted [from Chapter 13 to Chapter 7] … is
deemed to be 'filed under' Chapter 7 on the date on which the Chapter 13 was filed.); In
re Grydzuk, 353 B.R. 564, 568 (Bankr. N.D. Ind. 2006); In re Knighton, 355 B.R. 922,
924-925 (Bankr. M.D. Ga. 2006); In re Ybarra, 359 B.R. 702, 706-709 (Bankr. S.D. Ill.
2007); In re Grice, 373 B.R. 886, 889 (Bankr. E.D. Wis. 2007)(“This court joins with
Capers, Sours, Grydzuk, Knighton, and Ybarra and holds that the 4-year waiting period
contained in §1328(f)(1) applies to the case at bar.”); In re Dalton, 63 Collier Bankr. Cas.
2d (MB) 543, 2010 Bankr. LEXIS 51 (Bankr. M.D.N.C. Jan. 7, 2010)(rejecting
Hamilton).
There is one case that goes the other way in a situation where a Chapter 13 was
converted to a Chapter 7. In re Hamilton, 383 B.R. 469 (Bankr. W.D. Ark. 2008) held
that where the debtor filed a Chapter 13 petition, and then converted to a Chapter 7, the
shorter two year Chapter 13 look back period applied. The bankruptcy court relied on its
interpretation of §348 in holding that the look back was based on the Chapter the case
was originally filed under, and conversion of the case from a Chapter 13 to a Chapter 7
did not change the look back period under §1328(f)(1).
ii.
Enforcing §1328(f) – What Do You File?
Federal Rule of Bankruptcy Procedure 4004(a) states that an action for denial of
discharge based on Section 1328(f) is commenced by the filing of a motion within 60
days of the date first set for the first meeting of creditors. This provision was added to
Rule 4004(a) in 2010.
B.
§727(a)(9): Six Years Must Pass From Sub-70% Chapter 13 (Or
Chapter 12) To Discharge In Chapter 7.
“§727(a)(9) constrains successive discharges under Chapters 13 and 7”. Young v.
United States, 535 U.S. 43, 51; 122 S. Ct. 1036, 1041; 152 L. Ed. 2d 79, 88 (2002).
Section 727(a)(9) sets forth the six-year bar rule for a Chapter 7 discharge. The rule
precludes the discharge of a debtor if he obtained a Chapter 13 discharge (or Chapter 12
discharge) within the preceding six years, unless the latter involved payment of 100% of
the allowed unsecured claims or both payment of 70% of such claims and a finding that
43
the plan "was proposed by the debtor in good faith, and was the debtor's best effort." See,
In re Lewis, 392 B.R. 308 (E.D Mich. 2008).
At least one bankruptcy court has rejected, as improper, a Chapter 13 Plan that
included a provision in the confirmation order that establishes Debtors' eligibility under
11 U.S.C. §727(a)(9) to receive a discharge in a subsequent Chapter 7 proceeding. See,
In re Layton, 2008 Bankr. LEXIS 3363 (Bankr. D. N.M. December 10, 2008).
A debtor is “granted a discharge” in a prior Chapter 13, for §727(a)(9) purposes,
even if all of the debtor’s debts are not discharged, and under Parr, even if NO debt was
discharged. See, In re Parr, 222 B.R. 337 (Bankr. D. Minn. 1998)(debtor had only
student loans).
One recent case has looked at what the “best efforts” requirement means. The
court held that a 76.5% Chapter 13 Plan was NOT the debtors ‘best effort’ because the
debtor could have proposed a plan longer than 36 months (although not legally required
to do so) and paid more to creditors. See, In re Ward, Case No. 10-68727, 2010 Bankr.
LEXIS 4028 (Bankr. E.D. Mich. Nov. 29, 2010);
From a strategic standpoint, if a case is not a 70% Plan, debtors’ counsel should
be taking a hard look at whether or not the debtors want to receive a Chapter 13 discharge
if they have accrued substantial post-filing debts. The debtors may be better off
dismissing, waiving the discharge, or converting to a Chapter 7 if substantial debts have
accumulated during the pendency of the Chapter 13 case.
1.
§727(a)(9) And Filing-To-Filing Under §1328(f)
The In re Bateman, 515 F.3d 272, 279-280 (4th Cir. 2008) decision (which
included an appeal of the Graves case) made an interesting argument regarding the
measuring of the two different discharge bars under §1328(f) using the filing-to-filing
rule:
“As the Graveses' case illustrates, however, the "discharge date to
filing date" interpretation urged by the Chapter 13 Trustee would reach an
absurd result that runs counter to Congress's often-expressed preference
for Chapter 13 bankruptcy. The Graveses filed for Chapter 13 bankruptcy
on January 4, 1999, and received a Chapter 13 discharge on June 16,
2004. Under the Chapter 13 Trustee's interpretation, the Graveses would
not be able to receive a discharge in a new Chapter 13 bankruptcy, which
44
would pay all creditor claims in full, until June 16, 2006. But because the
Graveses' previous Chapter 13 plan paid at least 70 percent of the allowed
unsecured claims, was proposed in good faith, and represented their best
efforts, the Graveses would be eligible for a Chapter 7 discharge on the
very day they received their previous Chapter 13 discharge. See 11
U.S.C.A. §727(a)(9) (West 2004 & Supp. 2006) (providing for a six-year
waiting period for a Chapter 7 discharge after a debtor has been granted
discharge in a Chapter 13 case, unless payments under the plan totaled
100% of allowed claims or 70% of such claims and the plan was proposed
by the debtor in good faith and with the debtor's best efforts). This would
produce the strange result that the Graveses would not be able to receive a
Chapter 13 discharge, which would pay the creditor claims in full, but
would be permitted to file a Chapter 7 bankruptcy and thereby avoid
payment of a larger portion of their outstanding debts. The Chapter 13
Trustee's interpretation thus would encourage debtors that had intended to
pay back all of their debts to instead opt for a Chapter 7 discharge merely
because a Chapter 13 discharge would not be available to them at the
height of their financial difficulties.
i. The Fly In The Ointment - What Is A 70% Chapter 13
Plan For §727(a)(9) Purposes?
The Seventy percent level in Chapter 13 Plans are important because if that
threshold is met, a debtor is not prohibited from receiving a discharge in a subsequent
Chapter 7 filed within Six years of the Chapter 13 petition date. See, Section 727(a)(9).
Also, in many areas, local practices truncate certain Chapter 13 requirements where the
Plan calls for unsecured creditors to be paid at least 70%.
Up until recently, we all knew what a “70% Plan” was. Although it was not a
heavily litigated issue, it was commonly accepted that a “70% Plan” was a Plan that paid
at least 70% to unsecured creditors.
That assumption has been called into question by In re Griffin, 352 B.R. 475 (8th
Cir. BAP 2006), one of the best “the emperor has no clothes” decisions in recent
memory.
Initially, the decision acknowledges that there is substantial case law on Section
727(a)(9) that assumes the restriction refers to the payment of 70% of unsecured claims:
The bankruptcy court's interpretation of the statute is consistent
with every reported opinion which has commented upon or mentioned the
45
statute. See, e.g., In re Hiatt, 312 B.R. 150, 152 n.2 (Bankr. S.D. Ohio
2004); In re McMeekan, No. 9682757, 1997 WL 33475211 at *4 (Bankr.
C.D. Ill. Jan. 30, 1997); In re Messenger, 178 B.R. 145, 149 (Bankr. N.D.
Ohio 1995); In re Karayan, 82 B.R. 541 (Bankr. C.D. Cal. 1988); In re
Pierce, 82 B.R. 874 (Bankr. S.D. Ohio 1987); In re Greer, 60 B.R. 547
(Bankr. C.D. Cal. 1986); In re Raines, 33 B.R. 379, 381 (M.D. Tenn.
1983); In re Price, 20 B.R. 253 (Bankr. W.D. Ky. 1981); Triplett v. Arndt
(In re Aalto), 8 B.R. 157 (Bankr. M.D. Fla. 1981); In re McClaflin, 13
B.R. 530 (Bankr. N.D. Ill. 1981); In re Poff, 7 B.R. 15 (Bankr. S.D. Ohio
1980). However, none of these courts was actually interpreting the section
in a Chapter 7 case in which this issue had arisen.
In re Griffin, 352 B.R. at 477; see also, In re Brown, 399 B.R. 162, 166 n.4 (Bankr. W.D.
Va. 2009)(“unless the debtor's plan paid one-hundred percent of unsecured claims or
seventy-percent using the debtor's "best efforts." §727(a)(9).”)
The 8th Circuit BAP Panel looked at the statutory language, noting that that
§727(a)(9) provides, in relevant part:
The court shall grant the debtor a discharge, unless –
the debtor has been granted a discharge under section 1228 or 1328 of
this title . . . in a case commenced within six years before the date of
the filing of the petition, unless payments under the plan in such case
totaled at least –
(A) 100 percent of the allowed unsecured claims in such
case; or
(B) (i) 70 percent of such claims; and
(ii) the plan was proposed by the debtor in good faith,
and was the debtor's best effort.
The Panel focused on the “payments under the plan” language, which is not the
same as “payments to unsecured creditors under the plan.” And, the same term,
“payments under the plan”, is used in Section 1325(b)(1)(B), and it does not mean just
payments to unsecured creditors. Further, in Section 1328(b), the hardship discharge
section, when Congress wanted to refer to the payment of unsecured claims, it did so
differently than in Section 727(a)(9).
The Panel then looked at the legislative history of Section 727(a)(9) and found
nothing to support the assertion that Congress intended the statute to mean the payment to
unsecured creditors of 70% of their claims in order to be eligible for a discharge.
46
So, what does Section 727(a)(9) mean?
The language of §727(a)(9) is clear and plain. If a debtor in a
Chapter 13 case pays to the trustee for distribution under the plan an
amount equal to 70% of the allowed unsecured claims, and the court
finds that the plan was proposed by the debtor in good faith and was the
debtor's best effort, or if such debtor pays to the trustee for distribution
under the plan an amount which totals at least 100% of the allowed
unsecured claims, the debtor, when filing a Chapter 7 case within six
years of the petition date of the Chapter 13 case, will not be denied a
discharge.
In re Griffin, 352 B.R. at 479-480.
If Griffin is right, “70% to unsecured creditors” will rarely be a “magic number”
triggering a Chapter 13 debtors right to immediately file a Chapter 7 and receive a
discharge. Under Griffin, the percentage going to unsecured creditors could be much
lower, and it would still qualify as a “70% Plan” because the trustee distributed an
amount equal to 70% of the unsecured claims to ALL creditors – including secureds. For
example, Chapter 13 Offices that do conduit mortgage payments, “payments to the
trustee for distribution under the plan” will often equal more than 70% of unsecured
claims, sometimes even in “zero percent” Plans. Mortgage arrearages, motor vehicle
payments, and the payment of priority tax claims may similarly influence whether or not
the debtor, in their prior Chapter 13, reached the “70%” level.
To date, no subsequent court has addressed the Griffin interpretation of what
“70%” means in §727(a)(9).
C.
§727(a)(8) - The Eight Year Chapter 7 To Chapter 7 Bar.
Pursuant to Section 727(a))of the Bankruptcy Code, the Court shall grant the
Debtor a discharge unless:--(8) the debtor has been granted a discharge under this section, or section
1141 of this title, or under section 14, 371, or 476 of the Bankruptcy Act [former
11 U.S.C. §§32, 771, 876], in a case commenced within 8 years before the date of
the filing of the petition.
47
Thus, §727(a)(8) bars discharge in a debtor's second Chapter 7 case filed in an
eight year period if the debtor received a discharge in the first case. This time period was
extended from six years to eight years by the 2005 Amendments to the Bankruptcy Code.
1.
The Eight Years Are Filing To Filing.
The measurement of the time for §727(a)(8) purposes is from the commencement
of the previous Chapter 7 case – in other words, filing-to-filing. See, In re Bateman, 515
F.3d 272, 282-283 (4th Cir. 2008)(dicta); In re Asay, In re Burrell, 148 B.R. 820, 822
(Bankr. E.D. Va. 1992); In re Canganelli, 132 B.R. 369, 378 (Bankr. N.D.Ind. 1991).
2.
§727(a)(8) Is Not A Bar To Filing A Second Chapter 7.
Like Section 1328(f)’s bar to a Chapter 13 discharge, most courts hold that
§727(a)(8) does not prevent the filing of a second Chapter 7 within the 8 year period. As
In re Bateman, 515 F.3d 272, 282-283 (4th Cir. 2008) states:
“Collier on Bankruptcy instructs that §727(a)(8), the Chapter 7
provision that is analogous to §1328(f), "does not preclude a debtor
[who received a discharge in a prior case] from again becoming a
debtor within eight years of commencement of the prior case, although
no discharge may be granted in the second proceeding." 6 Collier P
727.11[1][a]; see also In re McKittrick, 349 B.R. 569, 574 (Bankr.
W.D. Wis. 2006) ("The amended version of §727(a)(8) does not even
act to deny access to the bankruptcy system, as debtors remain free to
file; they simply may not receive a discharge.").
See also, In re Thorton, 2012 Bankr. LEXIS 3202 (Bankr. S.D. Ga. July 12, 2012)(joint
debtor who was not eligible for a discharge would not be dismissed.
However, unlike Chapter 13, where the absence of a discharge doesn’t necessarily
destroy the utility of the filing, there is usually little or no benefit to an individual filing a
Chapter 7 without the possibility of getting a discharge. See, In re Bateman, 515 F.3d
272, 283 n.17 (4th Cir. 2008)(“Like the district court, we believe that §§727(a)(8),
727(a)(9) and 1328(f) do function as limitations on serial filing in practice, even though
they do not expressly prohibit the filing of any bankruptcy petition. In re Khan, 2006 U.S.
Dist. LEXIS 90421 at *8” (D. Md. Dec. 14, 2006)(“ Furthermore, even the Supreme
Court's characterization of section 727(a)(8) and (a)(9) as types of provisions
48
"prohibiting" serial filings is not inconsistent with the conclusion that section 1328(f)
speaks only to the power to grant a bankruptcy discharge. All three statutory provisions
prohibit bankruptcy discharge orders under certain circumstances of serial filing, and thus
operate to decrease the incentives to engage in those types of serial filing. In this manner,
these provisions function as limitations on serial filing in practice, even though they do
not directly prohibit the filing of any bankruptcy petition.”).
If a debtor is not eligible for a Chapter 7 discharge, there is always the option of
converting the case to a proceeding under Chapter 13.
3.
Conversion From Chapter 13 To Chapter 7 Does Not
Change The Date Of Filing – So Debtors Should Dismiss And
Refile, NOT Convert.
There are significant malpractice risks associated with using a Chapter 13 case to
get past the eight-year bar to a Chapter 7 discharge, and then converting to a Chapter 7
because the majority of case law supports the concept that conversion does not change
the filing date of the case. Where the second case filed after a Chapter 7 discharge is
filed as a Chapter 13, and then converted to a Chapter 7, the date of the original filing is
used to determine if the debtor is eligible for a discharge. See, In re Asay, 364 B.R. 423,
424 n.1 (Bankr. D.N.M. 2007); United States Trustee v. Skinner (In re Skinner), Case No.
09-50189-NPO, 2010 Bankr. LEXIS 2790 (Bankr. S.D. Miss. Sept. 1, 2010)(citing, In re
Sadler, 935 F.2d 918, 920 (7th Cir. 1991) and Resendez v. Lindquist, 691 F.2d 397, 399
(8th Cir. 1982)).
Similarly, In re Hiatt, 312 B.R. 150 (Bankr. S.D. Ohio 2004), a case under the old
six-year bar to a second Chapter 7 discharge, states:
In calculating the six year time period from the commencement
of the prior case (August 1, 1997) to the commencement of this
present case (August 16, 2002), it is clear that less than six years have
elapsed. The fact that the conversion to chapter 7 in this present case
occurred more than six years after the commencement of the prior
chapter 7 case is not legally relevant to the calculation of the six year
period under 11 U.S.C. §727(a)(8). The date of a subsequent
conversion to a different chapter of the Bankruptcy Code does not
change the date a case was commenced. See 11 U.S.C. §§301 and
348(a). It is not correct to calculate the applicable six year period from
the date of a conversion of a case from one chapter to a different
49
chapter of the Bankruptcy Code -- whether the conversion occurred in
the prior case or the current case -- in determining the six year period
under 11 U.S.C. §727(a)(8). The applicable six year period is
determined from the commencement of the prior case to the
commencement of this present case.
The authorities agree the applicable Code sections [11 U.S.C.
§§301, 348(a) and 727(a)(8)] compel this conclusion. Riske v. Lyons
(In re Lyons), 162 B.R. 242 (Bankr. E.D. Mo. 1993); In re Burrell, 148
B.R. 820 (Bankr. E.D. Va. 1992); Canganelli v. Lake Cty. Dep't of
Public Welfare (In re Canganelli), 132 B.R. 369 (Bankr. N.D. Ind.
1991); Mulford v. Marshall (In re Marshall), 74 B.R. 185 (Bankr.
N.D.N.Y. 1987); In re Czikalia, 2000 Bankr. LEXIS 2063, 2000 WL
33716969 (Bankr. D. Idaho Jan. 18, 2000); See also Norton
Bankruptcy Law and Practice, Second Edition, Section 74:18 (1994,
updated by March 2004 supplement).
Similarly, in counting from a prior case where a Chapter 13 was converted to a
Chapter 7, courts have measured the bar from the date of the original filing, not the date
of conversion.
The unpublished case In re Czikalia, 2000 Bankr. LEXIS 2063 (D. Idaho, January
18, 2000) reviewed this issue on a creditor’s motion to dismiss:
The Court finds no case law supporting Creditor's
interpretation of Section 727(a)(8). Indeed, several decisions and
Collier on Bankruptcy advance the opposite:
The six years begins to run as of the date the first
case is "commenced," i.e. the date the petition is filed, and
ends as of the date that the subsequent proceeding is begun
by the filing of the petition."
6 Collier on Bankruptcy P 727.11[2] (15th Ed. Revised 1999).
Accord Resendez v. Lindquist, 691 F.2d 397, 399 (8th Cir. 1982);
Riske v. Lyons (In re Lyons), 162 B.R. 242, 243-44 (Bankr. E.D. Mo.
1993); In re Burrell, 148 B.R. 820, 822 (Bankr. E.D. Va. 1992).
Creditor's argument that the six-year time period runs from the date of
conversion of the prior bankruptcy to the filing of the petition in this
bankruptcy case therefore lacks merit. Under Section 727(a)(8),
because more than six years had expired between the filing date of
Debtors' prior bankruptcy case and the filing date of the second
petition, Section 727(a)(8) will not prevent Debtors from obtaining a
discharge in this Chapter 7 case.”
50
The majority view is that Chapter 13 debtors have an absolute right to
dismiss, but there is a substantial minority view that disagrees. See, In re Polly,
392 B.R. 236 (Bankr. N.D. Tex. 2008)(citing cases and discussing Marrama).
4.
Does The Time In A Chapter 13 Toll The Eight Years?
The holding in Tidewater Fin. Co. v. Williams, 498 F.3d 249 (4th Cir. 2007) was
that the time bar to receiving a discharge in a second Chapter 7 case - found in §727(a)(8)
- was not equitably tolled during the debtor's intervening Chapter 13 proceedings because
§727(a)(8) was not a statute of limitations. Note that Tidewater was a majority decision –
there was a dissent that argued for the tolling of the §727(a)(8) bar to a Chapter 7
discharge. See also, In re Maas, 416 B.R. 767 (Bankr. D. Kan. 2009)(prior Chapter 13
did not toll 910 days for bifurcating motor vehicle claim).
5.
I Screwed Up The Eight Year Bar –What Do I Do?
If a second Chapter 7 case is filed within the eight-year period, is there anything
debtor’s counsel can do – besides call their carrier? (Or convert to a Chapter 13....) The
answer is yes. Dismissal of the Chapter 7 case can be sought under §707(a). [I’ll leave
out a discussion of the sneakier stuff like not filing the most recent tax return and moving
to dismiss your own case under §521(e)(2)(B), or pay advices, with a motion to dismissal
under §521(i)(1). After all, this is supposed to be a Chapter 13 outline.]
The Haney decision discusses the hurdles to dismissal under 707(a): “Pursuant to
section 707(a) of the Bankruptcy Code, in a chapter 7 case a court has discretion to
dismiss a chapter 7 case only after notice and a hearing and "only for cause." Unlike the
chapter 13 context, the debtor has no absolute right to dismissal. In re Wilde, 160 B.R.
625, 626 (Bankr. W.D. Mo. 1993). In order to obtain a dismissal of a chapter 7 case, the
debtor must make the showing of cause, Mann v. American Federated Life Insurance
Company, 215 B.R. 822 (S.D. Miss. 1997), and the Court should deny the motion if there
is any showing of prejudice to creditors, In re Leach, 130 B.R. 855 (B.A.P. 9th Cir.
1991).” In re Haney, 241 B.R. 430, 432 (Bankr. E.D. Ark. 1999); see also, In re
Cochener, 382 B.R. 311 (S.D. Tex. 2007) rev’d on other grounds, 297 Fed. Appx. 382
(5th Cir. 2008)(citing cases).
51
While there are not many published cases where a Chapter 7 was dismissed
because early filing resulted in a discharge bar date problem, and the majority of cases go
the other way [e.g., In re Kimball, 19 B.R. 300 (Bankr. D. Me. 1982)], anecdotally it
appears that this method is often used, if creditors do not object. Cf., In re McDaniel, 363
B.R. 239 (M.D. Fla. 2007)(Dismissal of Chapter 7 allowed for purposes of refiling
because of mistake on the date for dischargeability of taxes). The Chapter 7 trustee’s
agreement to dismissal is also an important factor. See e.g., In re Hopper, 404 B.R. 202
(Bankr. N.D. Ill. 2009).
6.
Filing A Chapter 13 During The §727(a)(8) Bar – Are There
Any Consequences For The Chapter 13 Case?
The decision in In re Paley, 390 B.R. 53, 59-60 (Bankr. N.D.N.Y. 2008) reflects a
tension that always exists between Chapter 7 and Chapter 13 cases – when is a Chapter
13 too much like a Chapter 7 to be allowed? In the Paley case, the bankruptcy court held:
“A plan whose duration is tied only to payment of attorney's fees simply is an abuse of
the provisions, purpose, and spirit of the Bankruptcy Code.
These cases, basically
Chapter 7 cases hidden within Chapter 13 petitions, blur the distinction between the
chapters into a meaningless haze.
To allow them to go forward would, in effect,
judicially invalidate §727(a)(8)'s requirement of an eight year hiatus between Chapter 7
discharges and replace it with either the four year break required by §1328(f)(1), or the
two year gap mandated by §1328(f)(2).
The court need not decide what would
hypothetically satisfy good faith under §1325(a)(3), only that these plans do not.” See
also, In re Lavilla, 425 B.R. 572 (Bankr. E.D. Cal. 2010)(low dividend and ineligibility
for Chapter 7 did not per se prohibit confirmation of Chapter 13 Plan, but debtor
produced no evidence why another discharge was needed, so plan confirmation was
denied); In re Montry, 393 B.R. 695 (Bankr. W.D. Mo. 2008)(Chapter 13 Trustee’s
objection to confirmation of Chapter 13 plan that would only pay debtors’ attorney fees
was sustained; plan was not filed in good faith); but see, In re Molina, 420 B.R. 825
(Bankr. D.N.M. 2009)(ineligibility for Chapter 7 discharge in “attorney fee only” case
weighed against confirmation, but court declined to add to the statutory requirements for
confirmation).
52
Tougher “good faith” standards for cases where the debtors are not eligible for a
Chapter 7 discharge is an ongoing issue that the courts are thinking about.
E.
Does Section 707(b) Apply When A Chapter 13 Is Converted To A
Chapter 7?
There is a split of authority as to whether a bankruptcy court may dismiss a
bankruptcy case as an abuse under Section 707(b), even if it was not originally filed
under Chapter 7. See, In re Reece, 498 B.R. 72 (Bankr. W.D. Va. 2013)(§707(b)
applies); In re Davis, 489 B.R. 478 (Bankr. S.D. Ga. 2013)(same); contra, In re Layton,
480 B.R. 392 (Bankr. M.D. Fla. 2012)(§707(b) does not apply).
F.
Dismissal Under Section 707(b) – In Truth? No Consequences.
The court in In re Garrett, 2008 Bankr. LEXIS 1673, 2008 WL 2206559 (Bankr.
E.D. Va. May 23, 2008) stated: “Normally, when a debtor has been a debtor in a previous
bankruptcy case that was dismissed within one year of the filing of the new case, the
automatic stay of §362(a) terminates as to the debtor on the thirtieth day following the
new filing. See 11 U.S.C.A. §362(c)(3) (Cum. Ann. Supp. 2008). For the stay to continue
within that thirty days, the debtor must seek and the court must complete a hearing on the
debtor's motion. See 11 U.S.C.A. §362(c)(3) (Cum. Ann. Supp. 2008). But the scope of
§362(c)(3) is limited to cases "other than . . . [those] . . . refiled under a chapter other than
chapter 7 after dismissal under section 707(b)." As the Debtor's Previous Case was
dismissed pursuant to § 707(b), and the Debtor's present case was filed under chapter 13,
§362(c)(3) does not apply and the automatic stay does not terminate on the thirtieth day
after filing.”
G.
What Is The Rule On Extending The Stay In A Second Case File
Within One Year Of A Non-§707(b) Dismissal?
Section 362(c)(3) is not a model of clarity. In re Charles, 332 B.R. 538 (Bankr.
S.D. Tex. 2005)(the language is “at best, particularly difficult to parse and, at worst,
virtually incoherent”). The statute was intended to prevent abusive serial filings by
individual debtors. In re Taylor, 334 B.R. 660 (Bankr. D. Minn. 2005).
53
The statute provides that the case is presumed abusive, causing the automatic stay
to terminate thirty days after filing if: (a) the case at hand is a single or joint filing by or
against a debtor under Chapter 7, 11, or 13; (b) the debtor is an individual; (c) the same
debtor had one other single or joint case pending within the preceding year; (d) the prior
case was dismissed; and (e) the later case is not a Chapter 11 or 13 case that has been
refilled after a dismissal under §707(b). See, Lisa A. Napoli, The Not-So-Automatic Stay:
Legislative Changes to the Automatic Stay in a Case Filed by or Against an Individual
Debtor, 79 Am. Bankr. L.J. 749 (2005).
For purposes of the statute, you measure whether or not a case was “pending” in
the last year using the dismissal date, not the ‘closing date’ of the prior case. See, In re
Moore, 337 B.R. 79, 81 (Bankr. E.D.N.C. 2005); In re Williams, 363 B.R. 786, 789
(Bankr. E.D. Va. 2006).
The statute also does not apply when a case is completed and closed, rather than
dismissed. Thus, a prior Chapter 7 case that was discharged and closed would not be a
case that was “dismissed” under the statute. See, In re Williams, 390 B.R. 780 (Bankr.
S.D.N.Y. 2008); In re Forletta, 397 B.R. 242 (Bankr. E.D.N.Y. 2008).
As discussed in Section E above, the previous dismissal of a case under Section
707(b) does not give rise to any presumption of abuse when the case is refiled as a
Chapter 13. See, In re Garrett, 2008 Bankr. LEXIS 1673, 2008 WL 2206559 (Bankr.
E.D. Va. May 23, 2008).
1.
Section 362(c)(3): The Stay Terminates As To What?
According to the majority view, the termination of the automatic stay 30 days
after filing, in a case filed within one year of the dismissal of an earlier case (other than
pursuant to Section 707(b)), does not terminate the stay as to property of the estate. See,
e.g., Holcomb v. Hardeman (In re Holcomb), 380 B.R. 813 (10th Cir. BAP 2008)(the
unambiguous language of §362(c)(3)(A) terminated the stay only with respect to the
debtors and the debtors' property and did not terminate as to property of the estate);
Jumpp v. Chase Home Finance, LLC (In re Jumpp), 356 B.R. 789 (1st Cir. BAP 2006);
In re Pope, 351 B.R. 14 (Bankr. D.R.I. 2006); In re Williford, 2013 Bankr. LEXIS 2871
(Bankr. N.D. Tex. July 17, 2013); In re Scott-Hood, 473 B.R. 133, 136 (Bankr. W.D.
Tex. 2012); In re Murray, 350 B.R. 408 (Bankr. S.D. Ohio 2006); In re Brandon, 349
54
B.R. 130 (Bankr. M.D.N.C. 2006); Bankers Trust Co. of Cal. v. Gillcrese (In re
Gillcrese), 346 B.R. 373 (Bankr. W.D. Pa. 2006); In re Williams, 346 B.R. 361 (Bankr.
E.D. Pa. 2006); In re Harris, 342 B.R. 274 (Bankr. N.D. Ohio 2006); In re Jones, 339
B.R. 360 (Bankr. E.D.N.C. 2006); In re Moon, 339 B.R. 668 (Bankr. N.D. Ohio 2006); In
re Johnson, 335 B.R. 805 (Bankr. W.D. Tenn. 2006). Contra, Reswick v. Reswick (In re
Reswick), 446 B.R. 362 (9th Cir. BAP 2011); St. Anne’s Credit Union v. Ackell, 490
B.R. 141 (D. Mass. 2013); In re Furlong, 426 B.R. 303, 307 (Bankr. C.D. Ill. 2010); In re
Daniel, 404 B.R. 318, 325 (Bankr. N.D. Ill. 2009); In re Curry, 362 B.R. 394, 400-02
(Bankr. N.D.Ill. 2007); In re Jupiter, 344 B.R. 754, 759 (Bankr. D.S.C. 2006).
2.
Section 362(c)(4)(A)(i): There Is No Stay.
In contrast to §362(c)(3), courts have viewed §362(c)(4)(A)(i) as unambiguous –
where two prior cases were dismissed within one year, no stay arises upon the filing of
the third petition within that same one year period. See, Pierce v. CitiMortgage, Inc.,
2012 U.S.Dist. LEXIS 170713 (N.D. Cal. Nov. 30, 2012); In re Nelson, 391 B.R. 437
(9th Cir. BAP 2008); In re Ferguson, 376 B.R. 109, 118 (Bankr. E.D. Pa. 2007); In re
Schroeder, 356 B.R. 812, 812-13 (Bankr. M.D. Fla. 2006); In re Ortiz, 355 B.R. 587, 590
(Bankr. S.D. Tex. 2006); In re McBride, 354 B.R. 95, 100 (Bankr. D.S.C. 2006).
3.
What About The Co-Debtor Stay?
The termination of the automatic stay under Section 362(c)(3) does not appear to
have any effect on the co-debtor stay. See, In re Lemma, 393 B.R. 299, 303-305 (Bankr.
E.D.N.Y. 2008).
The court in In re King, 362 B.R. 226, 231-234 (Bankr. D. Md. 2007) held that
the co-debtor stay applies even when the stay does not go into effect because of
§362(c)(4)(A)(i) because of a third filing within one year.
4.
Stay Goes Into Effect Even If No Credit Counseling.
The Second Circuit Court of Appeals has held that the automatic stay goes into
effect even if a debtor is ineligible because of the debtor’s failure to obtain pre-petition
credit counseling. See, In re Zarnel, 619 F.3d 156 (2nd Cir. 2010). The Zarnel holding is
the majority view. See, In re Grason, 486 B.R. 448 (Bankr. C.D. Ill. 2013); In re John,
479 B.R. 643, 648 (Bankr. M.D. Pa. 2012); In re Gossett, 369 B.R. 361, 372 (Bankr N.D.
Ill. 2007). Contra, In re Salazar, 339 B.R. 622 (Bankr. S.D. Tex. 2006).
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IV.
THE ROLE OF THE CHAPTER 13 TRUSTEE
[By Phil Lamos, Chief Legal Counsel, Craig Shopneck, Chapter 13 Trustee,
Cleveland, Ohio]
The Chapter 13 Trustee plays many roles in the reorganization of a debtor’s
finances. Some of these roles are mandated by statute; some of these roles are thrust
upon the Trustee by the practical nature of the reorganization process. Some of these
roles are obvious and at the forefront of the Trustee’s operation; some are subtle, behindthe-scenes roles.
The Trustee’s obligations under the Bankruptcy Code are listed in Section 1302
(which references Section 704). Some of these obligations are the same as the
obligations of a Chapter 7 Trustee, such as investigating the financial affairs of the debtor
and examining and objecting to proofs of claim. Some of these obligations are unique to
the Chapter 13 Trustee, such as appearing and being heard at any hearing that concerns
plan confirmation, modification of a plan after confirmation, or the value of property
subject to a lien, advising and assisting the debtor in performance under the plan, and
ensuring that the debtor commences timely payments.
The Trustee’s duty to investigate the financial affairs of the debtor and the
Trustee’s obligation to appear and be heard at the confirmation hearing go hand in hand.
Combined, these statutorily-mandated duties place an obligation on the Trustee to make
sure the debtor’s plan deals appropriately with the creditors, with particular attention to
the unsecured creditors.
Only by thoroughly investigating the financial affairs of the debtor can the
Trustee be sure that the debtor is paying all of his or her projected disposable income to
the unsecured creditors for the applicable commitment period (as required by Section
1325(b)(1)(B) of the Bankruptcy Code), that the unsecured creditors are receiving as
much as they would receive in a Chapter 7 proceeding (as required by Section
1325(a)(4)), and that the debtor’s proposed plan can be completed within a 60 month
period (as required by Section 1322(d)).
The Trustee must be well versed in such areas as reading pay advices, valuing
real, personal, and intangible property, and interpreting tax returns.
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Almost all jurisdictions allow the Chapter 13 Trustee to conduct the meeting of
creditors required by Section 341 of the Bankruptcy Code, which gives the Trustee an
opportunity to interview the debtor as part of his or her financial investigation.
In addition to the “fact finding” component of the Trustee’s obligation to
investigate the debtor’s finances, the Trustee must also know and interpret the “legal”
component of the financial investigation. The Trustee must know and interpret various
state and non-bankruptcy statutes, such as those governing exemptions, domestic support
obligations, garnishments, and retirement accounts. The Trustee must also be aware of
the case law defining such terms of art as “disposable income,” “projected disposable
income,” “good faith,” and “adequate protection.” When the case law in an area is
unsettled or unresolved, the Trustee must take the lead in litigating the issue before the
court.
Most Trustees file an objection to confirmation or similar document so that the
results of their financial investigation and their position on the confirmability of the
debtor’s case can become part of the record. Like any other litigant, the Trustee must
appear and prosecute his objection to confirmation if he or she believes the unsecured
creditors are receiving an amount to which they may be entitled either by statute or by the
various case holdings.
In addition to his role as the representative of the unsecured creditors, Sections
1302 and 1326 of the Bankruptcy Code require the Trustee to administer the debtor’s
case as well. For the most part, this entails collecting debtor payments and making
distributions to creditors.
The Trustee has an obligation to make sure that the debtor starts making payments
under the plan. In order to fulfill this obligation, the Trustee may take such actions as
obtaining an order requiring a debtor’s employer to withhold funds from the debtor’s pay
and to send the money to the Trustee and/or moving to dismiss cases in which the debtor
has failed to start making payments on a timely basis. With adequate protections
payments mandated by the bankruptcy Code under certain circumstances, and with more
and more jurisdictions moving to the “conduit” system where ongoing mortgage
payments are made through the Trustee, the Trustee will be making more and more
57
distributions before confirmation; a proper review of all claims filed is now more
important than ever.
In order to insure that the Trustee makes proper payments to creditors, the Trustee
has an obligation to object to claims. In some circumstances (such as when a debtor
believes that he or she does not owe a debt, or that the amount of a claim is excessive) the
debtor is in the best position to object to a claim; when a claim is untimely or is
duplicative of another claim, however, the Trustee may have sufficient information to
object to the claim himself or herself.
A good cash management system is a must for any Trustee. The Trustee must
account for all funds received and distributed during the course of the case, and must
make a final report of the administration of the case. Thorough and accurate records will
make the preparation of the final report very easy.
The Trustee is also required to make certain notifications if a debtor is obligated
to pay any form of domestic support.
In addition to the roles found in the Bankruptcy Code, a good Trustee has other
unwritten roles. The Trustee should educate the bar, spearhead initiatives to make the
bankruptcy process easier and/or more efficient, make information regarding a debtor’s
case more accessible (without sacrificing security and privacy concerns), and generally
serve as the face of the Chapter 13 process in a given jurisdiction. These unwritten roles
will make the bankruptcy process easier and less intimidating for debtors while ensuring
maximum return for the creditors.
V.
THE BASICS OF LIEN STRIPPING IN BANKRUPTCY.
This portion of the outline will briefly discuss the circumstances under which four
kinds of liens can be stripped – 1) Wholly unsecured mortgages on real estate; 2) judgment
liens; 3) non-purchase money, non-possessory liens on consumer goods; and 4) federal tax
liens.
A.
Secured Claims In Bankruptcy
The Supreme Court has categorized the different types of liens in bankruptcy as
follows: “there are two types of secured claims: (1) voluntary (or consensual) secured
claims, each created by agreement between the debtor and the creditor and called a "security
58
interest" by the Code, 11 U. S. C. § 101(45), and (2) involuntary secured claims, such as a
judicial or statutory lien, see 11 U. S. C. §§ 101 (32) and (47). . . “. United States v. Ron
Pair Enterprises, Inc., 489 U.S. 235, 240, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290, 297
(1989).
Other courts have viewed liens in bankruptcy as being of three types: “As we noted
in Graffen v. City of Philadelphia, the Bankruptcy Code recognizes three types of liens:
judicial, statutory, and consensual. 984 F.2d 91, 96 (3d Cir. 1992) (citing H.R. Rep. No.
95-595, 95th Cong., 312 (1977), reprinted in 1978 U.S.C.C.A.N. 6269).” In re Schick, 418
F.3d 321, 323 (3rd Cir. 2005).
B.
Stripping Wholly Unsecured Mortgages.
1.
In Chapter 7.
The U.S. Supreme Court held, in Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773,
116 L.Ed.2d 903 (1992), that a Chapter 7 debtor could not “strip down” a creditors’ lien
on the debtor’s real property to equal the property’s fair market value, and declare the
remainder unsecured.
In Chapter 7 cases, most courts have not distinguished between mortgages that
attach to some equity, and mortgages that are wholly unsecured because all of the equity
is subject to senior liens. The rule in Chapter 7 has generally been the same – you can’t
strip the mortgage. See, In re Talbert, 344 F.3d 555, 556 (6th Cir. 2003)(“a Chapter 7
debtor may not use §506 to "strip off" an allowed junior lien where the senior lien
exceeds the fair market value of the real property in question.”).
Recently, however, there was a case that allowed the stripping of a wholly
unsecured second mortgage in Chapter 7. See, In re Lavelle, Case No.: 09-72389-478,
2009 Bankr. LEXIS 3795, (Bankr. E.D.N.Y. Nov. 25, 2009)(as amended). This approach
has been rejected by the bankruptcy courts that have considered the Lavelle decision: In
re Hoffman, 433 B.R. 437 (Bankr. M.D. Fla. 2010)(citing cases rejecting the Lavelle
holding); In re Cook, 432 B.R. 519 (Bankr. D. N.J. 2010); In re Immel, 436 B.R. 538
(Bankr. N.D. Ill. 2010); In re Caliguri, 431 B.R. 324 (Bankr. E.D.N.Y. 2010); In re
Pomilio, 425 B.R. 11 (Bankr. E.D.N.Y. 2010).
59
On a different theory – that Dewsnup did not explicitly overrule pre-w 11th Circuit
authority – has held that wholly unsecured junior mortgages can be stripped in Chapter 7
cases. See, McNeal v. GMAC Mortg., LLC (In re McNeal), 477 Fed.Appx. 562, 2012
U.S. App. LEXIS 9589 (11th Cir. May 11, 2012).
2. In Chapter 13.
The United States Supreme Court has held that mortgages on a debtor’s primary
residence cannot be modified in a Chapter 13, even if they are undersecured. Nobelman
v. American Savings Bank, 508 U.S. 324, 124 L. Ed. 2d 228, 113 S. Ct. 2106 (1993).
The question, after Nobelman, was whether the holding, interpreting § 1322(b)(2) as
prohibiting the cramdown of under-secured liens, should be extended to protect junior
liens that are wholly unsecured by any corresponding value in the collateral residence.
The majority of courts – and all of the Courts of Appeals that have directly
addressed the issue – have held that wholly unsecured mortgages (or deeds of trust) can
be stripped off in Chapter 13, and treated as unsecured claims. See, In re Tanner, 217
F.3d 1357 (11th Cir.2000); In re Dickerson, 222 F.3d 924 (11th Cir. 2000)(following
Tanner, somewhat reluctantly); In re Bartee, 212 F.3d 277 (5th Cir. 2000); In re
McDonald, 205 F.3d 606 (3d Cir. 2000); In re Pond, 252 F.3d 122 (2nd Cir.2001); In re
Lane, 280 F.3d 663 (6th Cir. 2002); In re Zimmer, 313 F.3d 1220 (9th Cir. 2003). Other
appellate decisions allowing totally unsecured mortgages to be stripped include: In re
Mann, 249 B.R. 831, 835-37 (1st Cir. BAP 2000)(cited with approval in dicta in by In re
LaFata, 483 F.3d 13 (1st Cir. 2007)); Johnson v. Asset Management Group, LLC, 226
B.R. 364 (D. Md. 1998).
The Sixth Circuit is one of the appellate courts that have held that a wholly
unsecured second or third mortgage can be stripped off in a Chapter 13 under
§1322(b)(2), and paid as an unsecured creditor. See, In re Lane, 280 F.3d 663 (6th Cir.
2002). Mechanically, it appears that a wholly unsecured second or third mortgage can be
stripped off without an adversary proceeding in some jurisdictions. For example, the
bankruptcy court in In re Hill, 304 B.R. 800 (Bankr. S.D. Ohio 2003) held that the Plan
provision – clearly stating that the wholly unsecured mortgage would be stripped together with a subsequent motion, was sufficient under the Bankruptcy Code to strip
these unsecured mortgages. However, the Hill court specifically declined to address the
60
issue of whether a Plan provision by itself was sufficient for purposes of due process,
since that issue had not been raised by the parties. Other courts have held a motion to be
sufficient for mortgage stripping where the treatment of the junior mortgage had been
specifically provided for in the Chapter 13 Plan. See, In re Pereira, 394 B.R. 501, 505
(Bankr. S.D. Cal. 2008); In re Sadala, 294 B.R. 180 (Bankr. M.D. Fla. 2003); In re
Fisher, 289 B.R. 544 (Bankr. W.D.N.Y. 2003), In re Robert, 313 B.R. 545 (Bankr.
N.D.N.Y. 2004), In re Bennett, 312 B.R. 843 (Bankr. W.D. Ky. 2004).
In contrast, some courts require the filing of an adversary proceeding to strip a
mortgage. See, In re Ginther, 2010 Bankr. LEXIS 1076 (Bankr. N.D. Ill. April 22, 2010);
In re Forrest, 410 B.R. 816, 819 (Bankr. N.D. Ill. 2009); In re Chukes, 305 B.R. 744
(Bankr. D.D.C. 2004). Some courts requiring the filing of an adversary have held that the
adversary proceeding requirement can be waived if the creditor does not object. See,
Ginther, supra; In re Pence, 905 F.2d 1107 (7th Cir. 1990); and cf., United Student Aid
Funds, Inc. v. Espinosa, 559 U.S. 260, 130 S.Ct.1367, 176 L. Ed. 2d 158 (2010).
Filing an adversary proceeding is the “safe” way to proceed – no court has held
(or would hold) that a mortgage was not avoided because too much procedural protection
was afforded to the mortgage holder. If, at some point, courts hold that an adversary
proceeding is required to strip a wholly unsecured mortgage, the effectiveness of
mortgages that were stripped by motion could be called into question. Particularly those
mortgages that were still in limbo – stripped by motion but where the Chapter 13
discharge has not been granted.
Debtors’ counsel have attempted to implement “instant” removal of junior
mortgages using Section 506(d). The appellate courts have not been kind to this theory,
and have denied mortgage stripping under Section 506(d). See, In re Woolsey, 696 F.3d
1266 (10th Cir. 2012); see also, In re Ryan, 725 F.3d 623 (7th Cir. 2013)(attempting to
void a federal tax lien).
Note that if the mortgage creditor is a federally insured banking institution, service
of the Chapter 13 Plan, and the subsequent motion to avoid the second mortgage, should be
made as provided by Federal Rule of Bankruptcy Procedure 7004(h). That means sending
the Plan, and the Motion to avoid the junior mortgage, to the bank President or CEO, by
certified mail, return receipt requested (i.e., “green card service”). See e.g., In re Carstens,
61
66 Collier Bankr. Cas. 2d (MB) 11, 2011 Bankr. LEXIS 3048 (Bankr. D. Neb. Aug. 9,
2011)(“Service on the defendant was properly made pursuant to Federal Rule of Bankruptcy
Procedure 7004(h) by mailing the summons and a copy of the complaint to the registered
agent and to an officer of the entity via certified mail.”).
Assuming that the Chapter 13 debtor has done everything correctly – 1) clearly
stating in the Chapter 13 Plan that the wholly unsecured junior mortgage is being stripped;
2) filing a subsequent motion (or filing an adversary complaint) to strip the mortgage; and 3)
properly serving both the Plan and the Motion – when is the mortgage actually “stripped”?
The answer is, under Section 1325(a)(5)(B)(i)(I)(bb), at the time the discharge is granted.
See e.g., In re Sanitate, 415 B.R. 98 (E.D. Pa. 2009)(Full amount of mortgages
encumbered residence upon dismissal of Chapter 13 case. When homeowner’s previous
Chapter 13 was dismissed, plan became void, and no final judgment then existed for
purposes of res judicata or issue preclusion to support homeowner’s attempt to limit
mortgagee’s claim to the amount of scheduled claim under plan.)
C.
Stripping/Bifurcating Judgment Liens That Impair Exemptions
Under §522(f)(1)(A).
Judicial liens that are for Domestic Support Obligations cannot be stripped.
§522(f)(1)(A).
The power to strip judicial liens is available in both Chapter 7 and Chapter 13. In
re Holland, 151 F.3d 547 (6th Cir. 1998)(appeal of Chapter 7 debtor).
Section 522(f) of the Bankruptcy Code states:
Notwithstanding any waiver of exemptions, the debtor may avoid the fixing of a lien
on an interest in property to the extent that such lien impairs an exemption to which
the debtor would have been entitled under subsection (b) of this section if such lien
is –
(1) a judicial lien; or other than a judicial lien that secures a debt of a kind that is
specified in section 523(a)(5);
Under Bankruptcy Rule 7001, an action to determine the validity, priority, or
extent of a lien or other interest in property must be brought as an adversary
proceeding. However, there is one exception - lien avoidance under §522(f), which is
62
controlled by Bankruptcy Rule 4003(d): "A proceeding by the debtor to avoid a lien
or other transfer of property exempt under §522(f) of the Code shall be by motion in
accordance with Rule 9014." Bankruptcy Rule 9014 governs "contested matters" –
NOT adversary proceedings. Accordingly, the courts have held that lien avoidance
under Section 522(f) can be accomplished by motion.
The United States Supreme Court’s decision in Owen v. Owen, 500 U.S. 305, 111 S.
Ct. 1833, 114 L. Ed. 2d 350 (1991) cites the following formula for §522(f) lien avoidance
with approval:
1.
Determine the value of the property on which a judicial lien is sought to be avoided.
2.
Deduct the amount of all liens not to be avoided from (1).
3.
Deduct the Debtors' allowable exemptions from (2).
4.
Avoidance of all judicial liens results unless (3) is a positive figure.
5.
If (3) does result in a positive figure, do not allow avoidance of liens, in
order of priority, to that extent only. (emphasis in Brantz). [In re Brantz, 106
B.R. 62, 68 (Bankr. E.D. Pa. 1989).]
Even though they promised you that there would be no math if took the
lawyering gig, there can be math associated with a Section 522(f) lien strip. See e.g., In
re Pagnini, 433 B.R. 455 (1st Cir. BAP 2010)(BAP decision goes through §522(f) lien
strip math for jointly owned residence, where judgment lien was against the debtor only
(not her co-owner daughter)).
Debtors’ attorneys should bear in mind that the Bankruptcy Code defines a
"judicial lien" as a lien obtained by judgment, levy, sequestration, or other legal or
equitable process or proceeding. 11 U.S.C. §101(32). Mortgages, which are
"consensual liens", and liens arising by operation of law, which are "statutory liens", are
not avoidable under §522(f). Neither are purchase money security interests, nor
instances where the creditor retains possession of the secured property.
D.
Stripping Nonpurchase Money, Nonpossessory Liens On Household
Goods Under §522(f)(1)(B).
There is another tool for debtors’ counsel to consider for non-purchase money
security interests in personal property. Section 522(f)(1)(B) has a provision for
63
removing nonpossessory, nonpurchase-money security interests from "household
furnishings, household goods, appliances, books, animals, crops, musical instruments,
or jewelry that are held primarily for the personal, family or household use of the
debtor or a dependent of the debtor". Many courts hold that §522(f)(4)(A) defines
and limits “household goods” to the listed items – note that the list provides
numerical limitations as well: i.e., “1 television”. See e.g., In re Yawn, 63 Collier
Bankr. Cas. 2d (MB) 1247, 2010 Bankr. LEXIS 486 (Bankr. S.D. Ga. Feb. 5, 2010).
Liens can also be avoided on debtor’s “tools of the trade”, and professional
prescribed health aids for the debtor or a dependant.
One of the hot issues is attempting to strip liens on a vehicle based on it being
a “tool of the trade”. See, In re Garcia, 451 B.R. 909 (C.D. Cal. 2013)(reversing
holding that vehicle lien could not be stripped as a ‘tool of the trade’ as a matter of
law).
Keep in mind, lien avoidance under this provision will not be possible if the
creditor has a purchase money security interest (money was loaned to actually
purchase the item), or if the property is actually held by the creditor (like a pawn shop
situation).
The stripping of the security interest in these kinds of goods (household goods,
tools of the trade, or professionally prescribed health aids) can be accomplished by
motion.
E.
Stripping/Bifurcating Federal Income Tax Liens
1.
In The Reorganization Chapters – 11, 12 and 13.
Federal tax liens arise solely by force of federal tax law, so they are classified as
statutory liens. In re Mills, 37 B.R. 832, 834-35 (Bankr. E.D. Tenn. 1984); see also, In re
Walter, 45 F.3d 1023, 1027 (6th Cir. 1995)(“A federal tax lien under Internal Revenue
Code § 6321 is a statutory lien subject to avoidance.”).
Generally, it appears that federal tax liens can be bifurcated into secured and
unsecured debts in the reorganization Chapters – 11, 12 and 13. See, In re IRS of the
Dep't of the Treasury of the United States v. Johnson, 415 B.R. 159; 2009 (W.D. Pa.
2009)(Bankruptcy court did not err in stripping the federal tax lien of the IRS from the
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debtor's real property, in which there was no equity, in accordance with the confirmed
Chapter 11 amended plan of reorganization, under which he remained obligated to make
payments to the IRS, and as authorized by 11 U.S.C.S. §§ 506(a) and 1123(b)(5). Relies
on Chapter 13 cases to reach its decisions.); Internal Revenue Serv. v. Campbell, 180
B.R. 686, 687 (M.D. Fla. 1995)(holding that a federal tax lien must be voided as to the
unsecured portion of the IRS' bifurcated claim once the secured portion was paid in full
under the Chapter 13 plan, even if the unsecured portion remained unpaid; otherwise,
allowing the IRS to retain the lien would mean the IRS "receiving more than Congress
intended it to receive").
Where a federal tax lien attaches to both real estate and personal property, the tax
lien on real estate cannot be bifurcated separately because a federal tax lien is “one lien”.
See, In re Hoekstra, 255 B.R. 285 (E.D. Va. 2000). I.R.C. §6321 makes clear that the
value of a federal lien for taxes is the sum of all the property that is subject to the lien.
Section 6321 does not state that there shall be "liens" upon a debtor's real and personal
property; it states that there shall be "a lien," or a single lien. A federal tax lien under
§6321 is a single lien. A federal tax lien arises and attached to all the taxpayer's property
and rights to property, real and personal. Therefore, even if one or more properties
subject to the tax lien is without value, if any of the property retains value, bankruptcy
debtors cannot bifurcate the undersecured claim into secured and unsecured claims. In re
Hoekstra, 255 B.R. 285 (E.D. Va. 2000).
Keep in mind that exemptions are no good against federal tax liens. Deppisch v.
United States, 277 B.R. 806, 809 (Bankr. S.D. Ohio 1998); In re Raihl, 152 B.R. 615 (9th
Cir. BAP 1993)(noting § 522(c)(2)(B) provides that property exempted under §522 is
subject to a tax lien.); In re Quillard, 150 B.R. 291, 295 (Bankr. D. R.I. 1993)(stating
§522 (c)(2)(B) limits Debtor's avoiding powers with respect to IRS tax liens.).
Even the IRS statute “exempting” certain items from levy, does not limit the
extent of the federal tax lien. This principle even extends to retirement accounts.
"[I]nalienability of the pension interests does not destroy their character as property or
immunize the interest from the attachment of a federal tax lien." In re Raihl, 152 B.R.
615, 618 (9th Cir. 1993) citing Leuschner v. First Western Bank and Trust Co., 261 F.2d
705, 708 (9th Cir. 1958). Further, interests in ERISA qualified plans are "property or
65
rights to property" under 26 U.S.C. §6321. In re Perkins, 134 B.R. 408, 410-11 (Bankr.
E.D.Cal.1991); accord, Shanbaum v. U.S., 32 F.3d 180, 183 (5th Cir. 1994); see also, In
re Leedy, 230 B.R. 678 (E.D. Va. 1999).
26 U.S.C.S. §6334 exempts several forms of personalty from levy by the IRS.
However, the IRS's inability to levy on exempt property does not destroy the lien, or
make the IRS's claim unsecured. See, United States v. White, 340 B.R. 761 (E.D.N.C.
2006). In affirming the decision of the District Court, the Fourth Circuit held that
“surrender” of property that the IRS was not permitted to levy on – without actually
physically turning over the property to the IRS - did not comply with the requirement of
Section 1325(a)(5)(C). See, IRS v. White, 487 F.3d 199 (4th Cir. 2007).
The IRS's lien attaches also to interest or profits earned post-petition on those
funds, but not to any funds paid into the account from the debtor's post-petition earnings.
See, In re Connor, 27 F.3d 365, 366 (9th Cir. 1994) ("Although the reach of [a Federal
tax lien] is very broad, it does not apply to property acquired after bankruptcy."); Pansier
v. United States, 225 B.R. 657 (E.D. Wis. 1998)("while tax liens securing dischargeable
debts do not attach to property acquired post-petition, bankruptcy does not change their
effectiveness regarding property interests a debtor held pre-petition."); Compare, In re
Deppisch, 227 B.R. 806 (Bankr. S.D. Ohio 1998)(Plaintiff was not able to set aside IRS
seizure of his IRA account notwithstanding claim of exemption and discharge in
bankruptcy case because liens survived discharge and IRS had a valid pre-petition lien on
IRA, despite any exempt status.)
Like the decision in Woolsey, holding that Section 506(d) does not function to
allow the immediate stripping of consensual mortgages, the decision in In re Ryan, 725
F.3d 623 (7th Cir. 2013). The bifurcation of federal tax liens has to be accomplished
under Section 506(a), and the liens are not actually removed until the discharge is
granted.
2.
Chapter 7 – Can’t Use Section 506 For Lien Avoidance, Period.
Lien stripping in chapter 7 cases is inconsistent with the purpose and policy of
§506, which was "to facilitate valuation and disposition of property in the reorganization
chapters of the Code." In re Laskin, 222 B.R. 872, 876 (9th Cir. BAP 1998).
66
Furthermore, the majority of courts addressing this issue have applied Dewsnup to
both consensual and nonconsensual liens in chapter 7 bankruptcy cases. See, e.g., Boring
v. Promistar Bank, 312 B.R. 789, 797 (W.D. Pa. 2004)(citing Laskin and holding §506(d)
may not be used in chapter 7 to strip off an allowed judicial lien); Crossroads of Hillsville
v. Payne, 179 B.R. 486, 491 (W.D. Va. 1995)(holding that Dewsnup's prohibition against
lien stripping barred a chapter 7 debtor from avoiding a wholly unsecured judgment lien
under §506(d)); In re Warner, 146 B.R. 253, 256 (N.D. Cal. 1992)(reversing a bankruptcy
court's decision permitting a chapter 7 debtor to strip down an undersecured federal tax
lien under §506(d)); In re Swiatek, 231 B.R. 26, 29 (Bankr. D. Del. 1999)(holding that
Dewsnup applied to prohibit the avoidance of nonconsensual liens, and observing that
"the in rem aspect of a judgment is equally as viable in the context of a nonconsensual
lien as in that of a consensual one"); In re Esler, 165 B.R. 583, 584 (Bankr. D. Md.
1994)(observing that Dewsnup "is equally applicable to consensual and non-consensual
liens"); In re Doviak, 161 B.R. 379, 381 (Bankr. E.D. Tex. 1993)(rejecting debtors'
argument that Dewsnup applies only to consensual liens, and denying debtors' motion to
strip down an undersecured federal tax lien); In re Rombach, 159 B.R. 311, 314 (Bankr.
C.D. Cal. 1993)(concluding that Dewsnup prohibits debtors "from stripping down the
undersecured portion of a non-consensual lien").
The prohibition against using Section 506 in Chapter 7 proceedings can also
prevent stripping of judgment liens where they cannot be stripped under Section 522(f) –
in other words, if there is no impairment of the debtor’s exemption. See, In re
Concannon, 338 B.R. 90 (9th Cir. BAP 2006)(Debtors attempt to distinguish Laskin by
arguing that Dewsnup and its progeny apply only to consensual liens. Debtors reason
that Imperial's wholly unsecured judgment lien may be stripped off simply because it is
nonconsensual. This is a distinction without a difference.)
The McNeal decision is to the contrary, based on pre-Dewsnup, and may have
some application to a federal tax lien stripping analysis. See, McNeal v. GMAC Mortg.,
LLC (In re McNeal), 477 Fed.Appx. 562, 2012 U.S. App. LEXIS 9589 (11th Cir. May 11,
2012).
ADDITIONAL LIEN STRIP CASES:
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In re Smith, 438 B.R. 69 (Bankr. M.D. Pa. 2010). Chapter 13 debtors do not get a Means
Test deduction for junior mortgage debt that is to be stripped off. See also, In re
Kramer, 495 B.R. 121 (Bankr. D. Mass. 2013); In re Blaies, 436 B.R. 35 (E.D.
Mich. 2010).
In re Wesseldine, 434 B.R. 31 (Bankr. N.D.N.Y. 2010). Attorney could not get additional
fees, over and above their flat fee, for filing an adversary complaint to strip junior
mortgages when it could be accomplished by motion.
In re Loban, 426 B.R. 805 (Bankr. D. Minn. 2010). Lack of objection by junior residential
mortgagee to improper strip off of its lien in Chapter 13 Plan did not allow
confirmation - citing Espinosa.
In re Robert, 313 B.R. 545 (Bankr. N.D.N.Y. 2004). Liens can be “stripped off” by motion
practice.
In re Bennett, 312 B.R. 843 (Bankr. W.D. Ky. 2004). Adversary proceeding not required
for Chapter 13 debtors to "strip off" lien.
In re Monas, 309 B.R. 302 (Bankr. N.D. Ohio 2004). Prior default judgment had preclusive
effect on unsecured nature of first mortgagor's claim where second mortgagor had
obtained a default judgment in state court foreclosure sale prior to bankruptcy.
In re Jones, 305 B.R. 276 (Bankr. S.D. Ohio 2004). Avoidable but unavoided liens cannot
be included in exemption impairment calculation. For §522(f), you take the
unavoidable liens and the debtor's exemption, to determine if the judgment lien
impairs the exemption and can be avoided.
In re Hill, 304 B.R. 800 (Bankr. S.D. Ohio 2004). Chapter 13 debtors could avoid wholly
unsecured junior mortgage without adversary proceeding.
In re Sbriglio, 306 B.R. 445 (Bankr. D. Conn. 2004). Debtors could not avoid lien on
property not included in bankruptcy estate.
In re Sutton, 302 B.R. 568 (Bankr. N.D. Ohio 2003). Judgment lien could not be avoided
where it came ahead of IRS tax lien, where notice of tax lien was not filed by IRS
until after judgment lien, and there was sufficient equity for judgment lien, in that
position, not to impair the debtor's exemption.
In re Samala, 295 B.R. 380 (Bankr. D.N.M. 2003). Chapter 13 debtors could "strip off"
wholy unsecured junior mortgage liens.
In re Bennett, 312 B.R. 843 (Bankr. W.D. Ky. 2004). Adversary proceeding is not required
for Chapter 13 Debtors to “strip-off” lien.
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In re Day, 292 B.R. 109 (Bankr. N.D. Tex. 2003). Lien release must await completion of
debtor's payments under Chapter 13 plan where creditor objected to requirement
that lien be released upon payment of secured portion of claim.
Richard L. Ngo, The Proper Valuation Date of Residential Property for a §506(a) Lien
Strip, 29-AUG AMBKRIJ 14 (July/August 2010).
VI.
CONDUCTING AN EFFECTIVE 341 MEETING.
A.
Areas To Think About For 341 Meetings
(*By Dean Wyman, Esq., Trial Attorney, Office of the U.S. Trustee,
Cleveland. These comments were provided by Mr. Wyman at my request,
and Section VI includes many comments that are solely the opinion of
John Gustafson. Nothing in this section should be taken as official policy
statements of, or direction from, the Office of the United States Trustee.*)
The 341 meeting presents many issues that should be considered:
Petition
1.
The trustee who begins the examination by asking whether all the information in
the petition is correct? The difficulty is that the information in the petition may be
correct but that the information in the schedules and statement of financial affairs may be
completely false.
Papers
2.
The trustee who does not identify which document he is asking about. Such as “Is
all of the information in your bankruptcy papers correct.” In any subsequent action, such
as a 727 action, there is absolutely no record of which documents the trustee or debtor
was talking about. Did the trustee referred to the publicly filed documents, the
documents in his file, or the original documents signed by the debtor? And what is a
bankruptcy paper?
Lawyer As Examiner
3.
The trustee who lets debtor’s counsel, in fact, conduct the meeting. This occurs
when the debtor does not respond to questions and debtor’s counsel, instead, begins to
answer all questions. This is a signal that something is not correct with the bankruptcy
case. The best solution may be to ask the debtor if everything his or her lawyer just said
was true.
Silent Spouse
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4.
The joint debtors where the spouse answers questions for both of the debtors.
Allied with this is the debtor who barely speaks. Unless the trustee is paying attention,
the testimony is so faint that you cannot determine what was said. It is all a mumble.
Indianapolis 500
5.
The trustee who races through the questions and therefore doesn’t hear the
answers to his or her questions. When questions are asked so quickly, the answers
become meaningless. Remember, criminal actions require intent. If the trustee is asking
the questions very quickly, it is difficult to say that the debtor lied even if he or she did.
Money From Dear Uncle
6.
The trustee who does not pinpoint the questions about inheritances. The question
may be “do you have a right to an inheritance?” But that question may ignore some
timing issues. This is a more common issue that any of us would think. The question
really should be: “When you filed your bankruptcy case did you have a right to an
inheritance?” Or. “after you filed your case up until today, did you become entitled to an
inheritance?”
You Are On Candid Camera!
7.
The talkative trustee. Some trustees start the recording devices before the
meeting of creditors. I recall a few years ago, I listed to a recording. Before the debtor
appeared the trustee was talking to debtors counsel. This conversation is now recorded.
It is a conversation that trustee, if he knew, would not want recorded.
Fees
8.
The question about fees. Trustees usually ask about fees. The question is posed
to the debtor but then counsel answers the question.
Second Disclaimer: These are my (Dean Wyman’s) personal comments and observations
and are not to be cited, copied, or distributed. There are not a statement of policy or
otherwise of the United States Trustee, the U.S. Department of Justice or any other
person or entity.
(The following are my [John Gustafson’s] comments, and only my comments.)
1.
The Oath.
This is the oath that I was taught as a law clerk, many, many years ago:
"Raise your right hand."
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"Do you swear, or affirm, that the testimony you are about to give in this proceeding shall
be the truth, the whole truth, and nothing but the truth, as you shall answer to the laws of
perjury."
There are two advantages to this form of oath 1. By giving the option to "swear, or affirm" you give people the option to affirm. Some
people, usually for religious reasons, will not "swear". When that objection is raised, I
usually just ask them to listen carefully, and repeat the oath, with some emphasis on "or
affirm". If they don't get it, I suggest that they can respond to the oath by saying: "I so
affirm".
2. Oaths that use traditional language like "so help me God" will be a problem for some
religious, and non-religious people. Everyone is subject to the laws of perjury, and that is
not a controversial concept.
The purpose of the oath is to put the oath-giver in a solemn frame of mind in giving
testimony. The oath should be given to each debtor individually. Debtors should not be
sworn in as a group before the Section 341 Meeting. See, Handbook for Standing
Chapter 13 Trustees, Chapter 5, page 5-2 (1998).
2.
The Way You Phrase Questions Can Be Important.
In asking your standard questions of debtors, let me point out a couple of areas to be
careful with.
1. When you have a stay at home spouse, never say "You don't work?" Stay at home
Moms, husbands who are caring for disabled wives, etc. are not going to react well to the
assertion that they don't work just because they don't get paid for what they do. Safer
ways to ask the question are: "Do you work outside the home?" Or, more accurate but
more time consuming, "do you have any source of income?" followed by "what are
they?" if the answer is "yes". Of course, you should already have a pretty good idea what
the answers to these questions are going to be based on Schedule I, if they are accurate.
2. An eligibility requirements for a joint Chapter 13 case is that the debtors are
married. This is sometimes an awkward question to ask - "are you married?" leaves are
out an important component - that they are married to each other. (Debtors will often
make nervous jokes in response to this question if it is asked that way. You can ask "are
you married to each other?" - but again, that is going to sound odd to the debtors, and it
leaves out part of the legal requirement: that the debtors were married at the time of
filing. There is also a problem regarding what is a "marriage" - some states recognize
common law marriage, and both spouses may have a different idea as to whether they are
"common law" married. We have adopted this form of the question: "Were you legally
married to each other at the time of filing?" Not perfect, but it works pretty well for me.
3.
My Opening 341 Meeting Questions.
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After the oath is administered, I go through the following questions at the beginning
of every 341 Meeting "Please state your name and address for the record." [This is checked against the address
listed on the Notice – that is the mailing address used by the Court and our Office.]
I slide the Notice that contains the with the debtor(s) social security number(s) across the
table stating that: “I am showing you a copy of the 341 Notice. Highlighted [usually with
an orange highlighter] on that document are/is social security numbers. Please do not
state the number out loud, but please testify if that is your correct social security
number.”
I have a paper copy of the Petition, Schedules and Statement of Financial Affairs for each
case (obviously this would be a problem for a paperless office). I hold up this document
and state: "I'm showing you a copy of the Petition, Schedules, and Statement of Financial
Affairs that started your Chapter 13 proceeding. Do you recognize these documents?"
Hopefully, they answer “yes”.... If they don't recognize the documents, we try to find out
why - sometimes it is because the attorney didn't spend much time meeting with the
client(s). The important thing is: the documents – the Petition, Schedules, and Statement
of Financial Affairs - have been specifically identified. It isn’t just the ‘Petition’.
"Did you provide your attorney with the information used to prepare these documents?"
"Did you review these documents before you signed them?"
"And when you signed them, were they true and correct to the best of your knowledge?"
"Did you list all your debts?" (Often, debtors will want to add "to the best of my
knowledge - and I am OK with that.)
"Did you list all of your assets?"
"Are there any changes that need to be made to these documents today to make them
accurate today, because of changed circumstances, a mistake, or any other reason?"
[Note that this question requires a "no", not a "yes". So, debtors can't say "I was just
mindlessly answering yes to all the questions."]
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When the debtors are answering your questions, be sure to immediately jump in and ask
for a "yes" or a "no" if the debtors are answering "uh-huh", "yeah" or are just nodding
their heads. "This proceeding is being recorded and I need yes or no answers. The tape
can't pick up you nodding your head." Sometimes, you need to remind the debtor more
than once.
We then move to the identification of original "wet signatures" or the debtors. Debtors'
attorneys are required to bring to the 341 Meeting the original documents that the debtors
signed. I ask for those documents and use them to ask the following questions:
"I'm showing you the Petition page, is that your signature?" [Or, "are those your
signatures?"]
"And you signed it on [date - "February 22nd, 2010?"
"Turning to the declaration at the end of the Schedules, are those your signatures?"
"And you signed the declaration on February 22nd as well?"
"Finally, at the end of the Statement of Financial Affairs, is that your signature?"
I don't ask for debtors to identify their signatures on other documents. I don't ask about
the signature on the Means Test because, frankly, I don't expect the debtors to understand
it.
[*** In pro se cases, you will probably not have access to the original signatures (unless
they made extras) because the original paper copies are on filed with the Court. So, I
modify the above-questions by asking if the pro se debtor signed the document they filed
with the Bankruptcy Court Clerk. ***]
When a case has been converted from Chapter 7 to Chapter 13, in many – if not most –
cases it will be because the Office of the United States Trustee filed a Section 707(b)
Motion to Dismiss. While you are preparing for the First Meeting of Creditors: READ
THE 707(b) MOTION. See what was alleged. Ask questions about whether what the
UST alleged is true. You never want to miss an issue that you should have picked up
on based on what the U.S. Trustee has previously filed in the case.
4.
Don’t Forget To Go Back And Get Answers!
Q. “What did you do with the $20,000 in proceeds from the life insurance policy.”
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A. “I went shopping.”
Q. “What did you buy?”
A. “Stuff.”
You have to get back to this type of response and ask: “What stuff?” Do not allow
yourself to be blown off!
5.
Family Size, Dependants, And Who Lives In The House.
Family size issue – the reality can be different from what is listed on the Schedules!
Maintain your sense of curiosity!
Q. “Are you married?”
A. “No.”
Q. “Do you have any dependants?”
A. “No.”
If you stopped there, you might not be getting a true picture of the debtor’s situation.
Q. “How many people live in your house?”
A. “Six”.
Q. “But none of them are dependants?”
A. “No. My boy is 31, he and his girlfriend and her 3 kids moved back in with me.”
Q. “Is your son or his wife employed?”
A. “Yes, Marty has a job.”
Q. “Is he paying you anything for rent, utilities, and groceries?”
A. “No.”
6.
When The Debtor Responds By Pleading The 5th Amendment.
Filing bankruptcy does not waive a debtor’s privilege against self-incrimination.
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“The Fifth Amendment provides in part that: "no person . . . shall be compelled in
any criminal case to be a witness against himself." Hoffman v. United States, 341 U.S.
479, 485, 71 S. Ct. 814, 95 L. Ed. 1118 (1951). A court must afford this privilege against
self-incrimination a liberal construction in favor of the right it was intended to secure. Id.
The Fifth Amendment applies in civil and administrative cases as well as criminal cases.
Kastigar v. United States, 406 U.S. 441, 444, 92 S. Ct. 1653, 32 L. Ed. 2d 212 (1972); In
re DG Acquisition Corp., 151 F.3d 75, 79 (9th Cir. 1998). And, in particular, the Fifth
Amendment privilege may be asserted in a bankruptcy proceeding. McCarthy v.
Arndstein, 266 U.S. 34, 41, 45 S. Ct. 16, 69 L. Ed. 158 (1924); In re Boughton, 243 B.R.
830, 835-836 (Bankr. M.D. Fla. 2000); In re Mudd, 95 B.R. 426, 429 (Bankr. N.D. Tex.
1989). Indeed, the Fifth Amendment privilege may be correctly asserted any time a party
is asked to give testimony that is incriminating or could lead to incriminating evidence.
Hoffman, 341 U.S. at 486; DG Acquisition, 151 F.3d at 79.” In re Yates, 2008 Bankr.
LEXIS 4406 (Bankr. S.D. Cal. June 17, 2008); see also, In re Marble, 2008 Bankr.
LEXIS 1487 (Bankr. N.D. Tex. May 9, 2008)(discussing waiver of the Fifth Amendment
privilege in the context of a 2004 examination).
There are cases that hold that even when the possibility of prosecution is very
remote, the privilege can still be invoked. See, In re Welsh, 2013 Bankr. LEXIS 4716
(Bankr. E.D.N.C. Nov. 7, 2013)(Fifth Amendment privilege could be asserted where
testimony could have been used to prosecute debtor under the virtually unused N.C.
“fornication and adultery” statute.)
The Fifth Amendment privilege belongs to the debtor – not the attorney.
Ask whatever questions you think it is important to ask – even if you know the
debtor is going to plead the Fifth. There are many decisions that hold that a court may
draw a negative inference from the debtor’s invocation of the Fifth Amendment. See,
Baxter v. Palmigiano, 425 U.S. 308, 318, 96 S. Ct. 1551, 47 L. Ed. 2d 810 (1976); In re
Marrama, 445 F.3d 518, 522 (1st Cir. 2006); In re Carp, 340 F.3d 15, 23 (1st Cir. 2003);
In re Norwood, 2013 Bankr. LEXIS 3232 at *35 (Bankr. D. Colo. Aug. 8, 2013).
Make
your record without regard to the debtor’s assertion of the Fifth Amendment privilege.
Do NOT conclude the §341 Meeting – either adjourn it or continue it.
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Whenever a debtor pleads the Fifth Amendment privilege, you need to inform the
Office of the U.S. Trustee of that fact. “The United States Trustee will, if appropriate,
advise the United States Attorney who may take appropriate action to seek a grant of
immunity.” Handbook for Chapter 13 Standing Trustees, Chapter 5, page 5-3
(12/1/1998)
If the claim of privilege is not well founded, the standing trustee should seek an
order from the court compelling testimony or granting such other relief as may be
appropriate, such as dismissal of the case or denial of discharge.
7.
When The Debtor Refuses To Answer Based On AttorneyClient Privilege.
The privilege belongs to the debtor, not the attorney. The debtor should be required to
claim it. See e.g., In re Henderson, 360 B.R. 477, 486-487 (Bankr. D.S.C. 2006); In re
Wilkerson, 393 B.R. 734, 744 (Bankr. D. Colo. 2008).
Remember, there are limits to the attorney-client privilege. WHEN the client met
with his attorney is NOT privileged.
If the debtor is asserting an “advice of counsel” defense – there are problems with
claiming attorney-client privilege. IT has been held that the attorney-client privilege
cannot be used as both a sword and a shield. See, In re Residential Capital, LLC, 491
B.R. 63, 69 (Bankr. S.D.N.Y. 2013);
Note that it has been held that attorney form letters to clients – information letters
that change only the addressee and are prepared independent of the specific attorneyclient relationship – are not privileged. In re Wilkerson, 393 B.R. 734, 741-742 (Bankr.
D. Colo. 2008)("The [attorney-client] privilege may only be raised by the client”).
8.
When Debtor’s Counsel Instructs The Client Not To Answer
The 341 Meeting is a legally authorized fishing expedition. “A §341 meeting is
conducted in much the same way one conducts a fishing expedition -- throwing out baited
lines numerous times in the hope of reeling in something of substance. No formal rules of
evidence are employed.” In re Ward, 92 B.R. 644, 646 (Bankr. W.D. Pa. 1988); see also,
In re Russell, 392 B.R. 315, 358-59 (Bankr. E.D. Tenn. 2008)(The meeting of creditors
76
“is a fishing expedition allowed, even encouraged, by the statutes and the rules so long as
the subject of the questioning relates to the bankruptcy case.”).
Similarly, in a 2004 examination the scope is broader than that of a deposition
under Rule 26 of the Federal Rules of Evidence. See, In re Morrison, 443 B.R. 378, 380
n.2 (Bankr. M.D.N.C. 2011).
If counsel can’t articulate why he or she is instructing the debtor not to answer,
explore the area where the debtor is being non-responsive – establishing a clear record –
then bring it before your judge.
Saying something isn’t relevant, probative, “beyond legitimate inquiry”,
or none of the trustee’s business just isn’t going to fly with the bankruptcy court. See, In
re Morrison, 443 B.R. 378, 380 n.2 (Bankr. M.D.N.C. 2011)(“Under the broad scope of
inquiry applicable to the examination of a debtor at the first meeting of creditors, the
Debtor's objection to the relevance of the question and the subsequent refusal to answer
were improper.”).
9.
Dealing With Specific Issues.
A.
401(k) Loans.
My questions on 401(k) loans almost always start with “When did you take out
the 401(k) loan?” The reason is, most retirement loans are for a five year period. If you
know when the loan was taken out, you pretty much know when it is paid off. But, by
asking when it as taken out, the debtor(s) are less likely to “forget” or not be sure – which
tends to happen when you ask them “when is your 401(k) loan paid off?” They know
what’s coming when you ask that question, and they clam up.
My second 401(k) question is “how much did you borrow?” Third, is: “What did
you use the money for?” And last, I ask when the loan will be paid off. The next step is
to see if the debtor(s) will enter into a stipulation to step up the Plan payments when the
401(k) loan payment ends. See, In re Seafort, 669 F.3d 662, 671 (6th Cir. 2012).
B.
Inheritances, Lottery Winnings, Personal Injury Suits.
So called “windfalls” are a difficult area in Chapter 13. If you look at the Code
sections, and how they interact, difficult questions arise as to whether or not post-petition
inheritances, lottery winnings, and personal injury actions based on post-petition injuries,
are disposable income or even property of the estate. Fortunately, much of the case law
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gets to the result Chapter 13 Trustees generally want – 1) there is a duty to disclose; 2) a
post-petition windfall is part of the estate, even after Confirmation re-vests (in most
instances) property with the debtor; 3) most courts hold that the debtor(s) have an
obligation to disclose the windfall to the Chapter 13 Trustee; and 4) the existence of a
windfall can be grounds for modification under Section 1329. Carroll v. Logan, 735 F.3d
147 (4th Cir. 2013)(inheritance received outside the 180 period); In re Ormiston, 501 B.R.
303 (Bankr. E.D.N.C. 2013)(modification warranted based on inheritances regardless of
when received during the life of the case); Kimberlin v. Dollar Gen. Corp., 520
Fed.Appx. 312 (6th Cir. 2013)(unpublished).
Of course, there is no uniformity among the courts on many of the sub-issues.
The issue of whether a windfall is ‘income’ is a difficult one, particularly with the
backward looking Means Test. For many courts, the “best interest of
creditors/liquidation test” is figured as of the date of filing. What all courts appear to
agree on is – if a Chapter 7 trustee could get the windfall, the inheritance is included in
the best interest/liquidation test.
I don’t ask about inheritances in every case. Note that any present interest in an
inheritance, life insurance policy, or trust is required to be disclosed on Schedule B, Q.
20. See also, In re Waldron, 536 F.3d 1239 (11th Cir. 2008); In re Easley, 205 B.R. 334,
335-336 (Bankr. M.D. Fla. 1996). If there is any possibility of an inheritance, I will also
inform the debtor(s) that they have a duty to inform the Chapter 13 trustee should be
become entitled to an inheritance. In most jurisdictions, this is already a requirement. See,
In re Kimberlin, Of course, this is a delicate area, because the tip-off about a possible
inheritance is usually information about expenses for a sick parent, or a continuance of a 341
meeting because of a death in the family.
The right to bring a personal injury action is also required to be disclosed on
Schedule B, Q. 21 (could be clearer) and any pending lawsuit should be listed on the
Statement of Financial Affairs, Q. 4. A the 341 meeting: “Do you have a right to sue
anyone for any reason?” is broad enough, but I usually add: “such as for a traffic accident or
other personal injury?” If there is a lawsuit pending, we get the attorney’s information and
provide notice of the Chapter 13.
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The areas that courts have looked at in rejecting increased payments based upon
changed circumstances: 1) does the confirmed Chapter 13 Plan have a provision for the
disbursement of after-acquired property to the class of unsecured creditors? [See, In re
Love, 2013 Bankr. LEXIS 3911 (Bankr. W.D. La. Aug. 30, 2013)]; Is there sufficient
certainty that the changed circumstance will continue? [See, In re Eckert, 485 B.R. 77
(Bankr. M.D. Pa. 2013)]; Where the parties stipulate that the property received post-petition
is not property of the estate. [See, In re Preebles, 500 B.R. 270 (Bankr. S.D. Ga. 2013)].
While the Chapter 13 trustees and debtors who are PI plaintiffs are going to have
different interest on many issues, recent case law makes it clear that their interests are the
same on one issue: Disclosure. The requirement of disclosure of post-petition causes of
action in Chapter 13 has become critical in light of the harsh results in cases like Kimberlin
v. Dollar Gen. Corp. (In re Kimberlin), 520 Fed.Appx. 312 (6th Cir. 2013)(unpublished).
The parties won’t be able to have an argument about whether the proceeds of a PI case
should come into the estate if the right to sue has been lost because of the debtor’s failure
to disclose the cause of action. The risks associated with the scope of judicial estoppel in
Chapter 13 have expended, and it is better to argue about the debtor’s exemptions, and
how to split the proceeds of a PI action, rather than losing the possibility of any recovery
based upon a motion to dismiss for failure to amend to list the cause of action in the
Chapter 13 schedules.
10.
It Doesn’t Hurt To Offer A Bit Of Encouragement At The End.
The debtors are facing a daunting task in making payments to your Office for 36
to 60 months. As I have heard Chapter 13 Trustee Frank Pease say: It doesn’t hurt to tell
the debtors: “You can do this.” Or, “Don’t sell yourself short.”
VII. OH NO! NOT A SECTION ON ETHICS! BLEH!
Q.
Precisely who, or what, is my Client?
A.
The Trusteeship. How do you know? If your Chapter 13 Trustee retires, quits, is
removed, or dies, you still have a job.
Q.
What about the Trustee?
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A.
The individual embodies the Trusteeship that is the client. Unless the
person who is the Chapter 13 Trustee is, for whatever reason, no longer the
trustee, that’s your client. The Trustee, while serving, is essentially equivalent to
the trusteeship. If your Trustee retires, quits, is removed, or dies you may find
yourself with a different person as the same client – the Office of the U.S. Trustee
may run a trusteeship after the Chapter 13 trustee, or another Chapter 13 trustee
may be appointed to operate the trusteeship until a new Chapter 13 Trustee is
appointed.
It is important to keep in mind that you have a client because it reminds you that
you are not just an employee, like the rest of the staff at your office. You are an attorney,
and the Trusteeship is your client. That means that you have ethical duties that far
exceed anything imposed on the non-staff attorneys you work with.
There are two differences that are of the paramount importance to keep in mind:
1.
The Attorney-Client Privilege. Your discussions with the Chapter 13 Trustee
that relate to the Trusteeship are privileged communications. As you work with your
Trustee, you will probably develop a personal relationship that may involve a certain
amount of give and take. And that’s a good thing. But, you will always want to err on
the side of treating anything told to you by the Trustee about anything related to the
Office, any case or debtor, any judge or attorney, as being a privileged communication.
That means that you cannot discuss it with anyone. Period. Because, regardless of what
the employee manual says, and beyond what is required of all good employees, you are
an attorney. Thus, the client (the Trustee) would have to affirmatively consent to the
disclosure, and the ethical rules of your state prohibit you from disclosing that privileged
information without such consent.
Rule 1.6 Confidentiality Of Information
(a) A lawyer shall not reveal information relating to the
representation of a client unless the client gives informed consent,
the disclosure is impliedly authorized in order to carry out the
representation or the disclosure is permitted by paragraph (b).
Paragraph (b) relates to various types of wrong-doing.
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2.
The Duty of Loyalty. There is no “I’m just an employee” exception to an
attorney’s duty to the client. There is also no exception based on the fact that you see a
whole lot of schlocky attorneys who don’t live up to their ethical obligations, abandoning
their clients at various stages of their Chapter 13 cases – it doesn’t matter. As an
attorney, you have a duty to carry out the client’s objectives, to be competent in whatever
is necessary to carry out the client’s objectives, and to be diligent.
Whether your trustee is an attorney, or a non-attorney, your trustee ultimately
makes the decisions for the trusteeship.
Rule 1.2 Scope Of Representation And Allocation Of Authority
Between Client And Lawyer
(a) Subject to paragraphs (c) and (d), a lawyer shall abide by a client's
decisions concerning the objectives of representation and, as required
by Rule 1.4, shall consult with the client as to the means by which they are
to be pursued. A lawyer may take such action on behalf of the client as is
impliedly authorized to carry out the representation. A lawyer shall abide
by a client's decision whether to settle a matter.
The duty of diligence is found in Rule 1.3:
Rule 1.3 Diligence
A lawyer shall act with reasonable diligence and promptness in
representing a client.
The duty of competence is found in Rule 1.1:
Rule 1.1 Competence
A lawyer shall provide competent representation to a client. Competent
representation requires the legal knowledge, skill, thoroughness and
preparation reasonably necessary for the representation.
Where do some of the problems arise with these duties in a typical Chapter 13
Office situation?
A new Staff Attorney may be either more technologically savvy than the Chapter
13 Trustee, or less. That may involve learning skills that are necessary to be competent
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in that specific Office environment – in Rule 1.1, “skill” does not appear to be limited to
“legal skill”.
If you are a “techie”, you may see all kinds of technological shortcuts that could
be used to, in your view, increase efficiency. But, if your Chapter 13 Trustee doesn’t
want to change the way paper is used in the Office, you need to get competent with that
old Xerox and fax machines, and learn to scan paper documents into PDF format.
Welcome to the 1990s!
On the other hand, if your Chapter 13 Trustee wants to move the Office into a
more paperless operation, you have to become competent in the computer skills that will
allow you to provide competent representation in that Office environment.
Problems sometimes arise in Offices where a new Chapter 13 Trustee comes in
and does things differently that the past Chapter 13 Trustee did them. This can be a
particular problem when you were also a candidate who interviewed for the position, and
you didn’t get it. It doesn’t matter – you have to either be able to get your mind right,
and be completely loyal to your client – or at the very least be able to act exactly as you
would if you were completely loyal to your client or, ethically, you have to leave.
That may seem harsh, but think of what other attorney are required, by their
professional duties, to do: If you represent a murderer, you can’t stand up in court and
say: “Your Honor, my client wants to plead not guilty. But, I mean, damn. He’s a
murderer, so I’m not going to follow his instructions.” Or, think of the attorney who is
caught in a battle over disclosure of attorney-client communications and is waiting in jail
for the court of appeals to consider an appeal of the lower court’s contempt order.
Bankruptcy lawyers are not lawyers of a lesser god. Nor are Staff Attorneys somehow
exempt from the rules of professional conduct because they are hard to follow, or because
your feelings are hurt, or leaving would be an economic hardship. You are a
professional, and the rules are the rules.
Another common problem can arise from relationships that develop over time
with the other employees. Those employees are managed, and at times disciplined, under
the direction of your client. And, the employees who are disciplined, or denied some
benefit that they wanted, may be very unhappy with your client. But, no matter how
much you may like that person, and no matter how much you may personally agree that
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whatever is happening is not right – you need to stay out of the Office politics of
whatever your client is trying to accomplish (either directly, or through your Office
Manager.) You simply can’t undermine your client – in any way – without violating your
professional obligations.
Sometimes, things involving Office staff can be a little fuzzier. On a personal
note, when I came to the Office as Staff Attorney, I had been a private solo practitioner.
In working as a one man law office, I could juggle my time however I wanted, as long as
I got my work done. When I got to my new job – I was the first Staff Attorney the Office
had - I kept acting like I was still in solo practice, without fully considering how my
getting some things done at the last minute affected the rest of the Office. One of the
staff members who worked with me finally asked me if I could start getting my 341
preparations done farther in advance, because that would make her feasibility calculations
easier. That opened my eyes to the fact that I had a very different position as Staff
Attorney than I had as a solo practitioner, and that I needed to work to fit into the existing
system, not just get my particular part of the job done in time for court.
I have also heard of situations where the Staff Attorney’s unique position in the
Office has created problems. Being on salary makes you different, having to be out of
the Office for court at random times makes you different, and not being subject to some
of the Office rules makes you different – and some staff may be jealous of the privileges
or flexibility you may have. Say you have casual Fridays in the Office, but you have
court on Friday, so the Trustee says you can wear jeans on Tuesdays. And some of the
staff get their nose bent out of joint because of your “special treatment”. Do you have an
ethical obligation to not wear jeans on Tuesdays – even if your Trustee gives you
permission – because you are making his or her job more difficult, because employee
morale is suffering? I am NOT saying wearing jeans on Tuesday is an ethical violation –
but it does illustrate the kind of ethical issues that are in play when you are a Staff
Attorney.
None of the above means that you need to be a “Yes Man” (or “Yes Woman”).
There are two aspects to your communications with the Chapter 13 Trustee. There is the
duty to communicate, and then there is the separate duty to advise:
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Rule 2.1 Advisor
In representing a client, a lawyer shall exercise independent professional
judgment and render candid advice. In rendering advice, a lawyer may
refer not only to law but to other considerations such as moral, economic,
social and political factors, that may be relevant to the client's situation.
As an advisor, you have a duty to give your Chapter 13 Trustee “candid advice”,
based on almost any relevant factor under the sun. That means you should be telling the
Chapter 13 Trustee what you think should be done, if you think you know a better way to
do something, or that there are dangers in pursuing a course that the Trustee has decided
to follow. Comma, HOWEVER, this duty to provide candid advice does not trump Rule
1.2 that the client makes the decisions. In other words, you should offer candid advice,
not nag. When the decision has been made – even if it is directly contrary to your best
advice – you have to try to implement that decision with diligence and competence, and
without a hint that you weren’t in complete agreement with the approach.
In terms of communication with the Chapter 13 Trustee, the ethical rules
specifically provide:
Rule 1.4 Communication
(a) A lawyer shall:
(1) promptly inform the client of any decision or circumstance with
respect to which the client's informed consent, as defined in Rule
1.0(e), is required by these Rules;
(2) reasonably consult with the client about the means by which
the client's objectives are to be accomplished;
(3) keep the client reasonably informed about the status of the
matter;
(4) promptly comply with reasonable requests for information; and
(5) consult with the client about any relevant limitation on the
lawyer's conduct when the lawyer knows that the client expects
assistance not permitted by the Rules of Professional Conduct or
other law.
(b) A lawyer shall explain a matter to the extent reasonably necessary to
permit the client to make informed decisions regarding the representation.
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The obligation to communicate, and keep the Chapter 13 Trustee informed,
carries its own difficulties. If you make a mistake, or get buried in court, or yelled at by
the judge, or miss a hearing – you have to tell your client, even if you aren’t asked.
Note that there are special obligations for Staff Attorneys who represent nonattorney Chapter 13 Trustees. Staff Attorneys have an ethical obligation to explain legal
matters sufficiently to allow the non-attorney Chapter 13 Trustee to make informed
decisions about the approach the Office will take to important legal matters. If you are
working as a Staff Attorney for a non-attorney Trustee, one of the things you will have to
be diligent about, and work to be competent at, is explaining legal issues so that your
Chapter 13 Trustee can participate in decision making on important legal issues to the
extent the Trustee wishes to do so.
A. What Should A Chapter 13 Staff Attorney Aspire To Be?
To me – and this is a subjective question – the model for a good Staff Attorney is
an old school corporate lawyer, who gave trusted advice to the President of the company
about how to stay out of trouble. Getting to be a trusted advisor – someone who your
Trustee is going to go to with all sorts of issues, both legal and operational - is a process.
You don’t walk out of law school with a lot of insight to offer a 20 year Chapter 13
Trustee – whether that Trustee is a lawyer or not, they’ll still know more Chapter 13
bankruptcy law than you. On the other hand, if you are a long time Staff Attorney (why
are you in my basics class????) and your Trustee is coming into the position from a nonbankruptcy field, you may be an important advisor and resource for that Trustee. In fact,
your ethical obligation may be to work to help your Chapter 13 Trustee become less
dependant on your knowledge and advice.
Being a Chapter 13 Staff Attorney also allows you to do a lot of good in the
community – in whatever activities are permitted by your Trustee. You can help raise the
profile of your Office by speak at legal training sessions and seminars, participating in
bar association committees and functions, and representing the Chapter 13 Trustee with
competence and professionalism at Section 341 Meetings and in court.
B. It Ain’t All A Bed Of Roses – You May Have To Be The Bad Cop.
It is not an uncommon thing for Chapter 13 Trustees to want you to be the picky
one, the stickler, the one who says “no”, the hammer, the bad guy. And the Trustee will
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play the role of “good cop” – sometimes overruling you in the hardline positions that the
Trustee told you to take. I’d be sympathetic, but I was brought in as Staff Attorney to be
meaner than my Trustee. Subsequently, when I was appointed Chapter 13 Trustee, I
hired my Staff Attorney with the understanding that she would be meaner than me. This
is partly because Chapter 13 practice has moved from being a genteel, almost nonadversarial practice, conducted by a small group of longtime practitioners, to a practice
with an important litigation component – you can see that change in the number of
reported Chapter 13 bankruptcy decisions that come out in the Bankruptcy Reporter. The
other reason for this kind of good Trustee/bad Staff Attorney set up is that just makes life
easier for your client.
Don’t like it? Try private practice for a while – with **gasp!** bankrupt clients
to deal with.
Your Chapter 13 Trustee may use you as a tool to deliver a message to the bar –
“I’m sick of the failure to promptly turn over tax refunds, we need to send a message.
File 128 motions to dismiss on these cases for failure to get those returns filed by April
15th.” Or, the same type of message may be sent with motions to disgorge attorneys fees
based on some other recurring issue where the bar isn’t doing what is required. Or, you
may be told to require every attorney who fails to list a term life insurance policy on
Schedule B to file an Amended Schedule B listing the policy.
Sometimes, your work in furthering the objectives of representation may not just
be examining debtors, drafting objections, and making arguments in court – it may
involve delivering a message to the debtors’ bar, or to national creditors, that certain
practices will no longer be tolerated.
A well rounded person is more than what they do as their job. You are not an
attorney, you a person who can do many things, including acting as a lawyer. A person is
not a role, they are a capacity to play any number of roles. As a Staff Attorney, you are
going to have to play many roles – bad cop, sympathetic provider of tissues when a
debtor is overwhelmed by emotion at a First Meeting, Glade sprayer after a particularly
hygiene impaired §341 Meeting, peacemaker or order restorer when exchanges between
opposing parties get too heated, Wonder Woman with all the answers for the practicing
bar when they’ve forgotten a basic point of law and are sure you’ll know it, and a
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sounding board for all of the ideas and problems your Chapter 13 Trustee wants to run by
you.
Advice that was given to me, that has served me well – When entering any new
environment, figure out what kind of a person is needed in that situation, and then be that
person.
And sometimes, you also have to realize what your Trustee does not need. In my
Office, I don’t need my Staff Attorney to do legal research. If I asked my Staff Attorney
to research something for me, she’d probably suggest I lie down while she checks to see
if someone can drive me home. I’ve done legal research my entire professional life – and
when my Staff Attorney needs a couple cases for a motion or brief, I almost always do
the research for her. Even though legal research is a “core” part of the job for most Staff
Attorneys, for us it is just more efficient for me to hop on Lexis, and she knows I enjoy
doing it.
C.
Professionalism With The Debtor And Creditor Bars.
In most Chapter 13 Offices, you are going to see a lot of the same faces, over and
over again. And while you may strive to be ethical with a capital E, a paragon of
professionalism, and as evenhanded as Solomon himself – you are going to dealing, day
after day, with some pretty crappy lawyers. That’s just a fact of life for most Staff
Attorneys.
You can’t lose your temper, you can’t act punitively without consulting your
Trustee, and you can’t start snapping off lines like: “Why don’t we just skip the
Stipulation for you to amend your Schedules and go straight to the show cause, shall
we?” Decisions on how to deal with problem attorneys have to be made with the Trustee,
and the approach is probably going to be incremental, at least at first.
There is danger on the other side of the coin – attorneys who are competent,
mostly do things right, and are personable, may start to get treated differently from other
attorneys who don’t demonstrate those qualities. Think of how it looks to a debtor if the
attorney representing the debtor ahead of her is “Hey Alice, how are Bob and the kids?”
and her attorney is “Are you ready to proceed Mr. Smith?” The Trusteeship should strive
to maintain the appearance of evenhandedness, with no prejudice or favor shown to
anyone. Staff Attorneys are on the front lines in those efforts.
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From another perspective – if you look at the Chapter 13 Office as a business,
who are the clients of that business? The answer – to the extent there is true customer
analog – is debtors’ counsel. They are the ones who decide whether their clients are
going to use our services. Many Chapter 13 trustees look at their trusteeship – not totally,
but in part - from a “customer service” perspective.
D.
The Morality Of Treating Everyone The Same.
All debtors who come before the Chapter 13 Trustee for the first time should be
treated equally. We shouldn’t play favorites. We shouldn’t play favorites based on who
the debtor’s attorney is, we shouldn’t play favorites because the debtors seemed nice, and
we shouldn’t play favorites because we personally identify with the situation the debtor is
in.
One way to deal with the tendency to treat debtors differently is to have an
established set of guidelines and procedures that a generally applied to all cases.
Remember, all your Office’s actions are part of a public record – available on PACER.
You never want to have something happen like an attorney putting together an argument
– supported by docket entries - that your Office is treating his clients more harshly, under
the same facts, than the clients of other attorneys.
The Chapter 13 Trustee’s reputation for fairness is something that needs to be
zealously guarded. That doesn’t require you to be a pushover – you just have to be
equally mean (or equally nice) to all.
E.
The Morality Of Making Exceptions Based On The Equities Of The
Case.
While everyone should be treated equally, not all situations that debtors are facing
are the same. The equities of some cases are vastly different than others. While some
debtors want to fight to have unsecured creditors pay for their bass boat, other debtors are
trying to live on a $200 a month food budget so that they can stretch their social security
checks to fit their Plan payments.
When the different treatment is based upon the equities of the case, you can – and
should – treat debtors proposed Chapter 13 Plans differently based on their
circumstances.
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For example, where $40 a month is all a low income debtor can pay, I don’t make
the argument that the minimum Chapter 13 Plan payment should be $50 a month. Where
a high income creditor is trying to – in my view – game the system, and is not really
attempting to repay creditors, I make the argument that a $40 a month payment isn’t
permitted. (Citing Section 330(c)’s minimum monthly payment to the Chapter 13 trustee
of $5 per month. With a maximum 10% Chapter 13 trustee fee, that would require $50 a
month. There is very little case law on this issue.)
F.
To Care, Or Not To Care. That Is (Often) The Question.
One of the more important things that new Staff Attorneys need to figure out is:
What are creditor issues, and what are issues the Chapter 13 Trustee should get involved
in litigating? Does it depend on what your Judge and your Trustee thinks? (Of course it
does.)
G.
Balancing Advising/Assisting Debtors And Not Giving Legal Advice.
Section 1302(b)(4) states:
(b) The trustee shall –
(4) advise, other than on legal matters, and assist the debtor in
performance under the plan;
The debtors – usually – have their own attorney. You are prohibited from giving
them legal advice, but the Code says the trustee is to advise and assist the debtor. How
do you do that?
One explanation that I thought was pretty good was: the trusteeship can be viewed
as operating as an accounting office, and a law office. The ‘accounting firm’ is helpful
and can talk to the debtors. The ‘law office’ can’t.
Sometimes you can illuminate a legal issue for debtor’s counsel by just talking
about it – as a hypothetical, or as a question that incorporates some legal information.
For example: “I see Schedule D shows the second mortgage is underwater, and the first
and second mortgage are the same company, and the first mortgage proof of claim shows
that the value of the property is less than the amount of the first mortgage – have you
decided whether you want to strip the second mortgage under [your appellate court
decision allowing wholly unsecured mortgages to be stripped here]?” You didn’t give
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legal advice, you just asked a question about an issue the lawyer may not have thought of.
It is can be a subtle, but important, distinction.
VIII. IN CHAPER 13, PIONEER IS DEAD OF DYSENTERY.
The Bankruptcy Code is silent as to the deadline for filing nongovernmental
proofs of claim, although it assumes that there will be a deadline. See, §501(b) and (c);
§502(b)(9). Section 502(b)(9) was amended in 1994 to address the tardy claims issue.
See, In re Daniels, 466 B.R. 214, 217 (Bankr. S.D.N.Y. 2011). The deadlines for filing
proofs of claim in a Chapter 13 case are found in the Federal Rules of Civil Procedure.
Unsecured creditor "must file a proof of claim or interest in accordance with this
rule for the claim or interest to be allowed." See, Bankruptcy Rule 3002(a).
Bankruptcy Rule 3002(c) states that in a Chapter 13 case, a proof of claim: "shall
be filed within 90 days after the first date set for the meeting of the creditors." It should
be noted that while Rule 3002(c) applies to Chapter 7, Chapter 12 and Chapter 13 cases,
NOT Chapter 11s. See, In re Jackson, 482 B.R. 659, 663-664 (Bankr. S.D. Fla. 2012); In
re Aboody, 223 B.R. 36, 37-39 (1st Cir. BAP 1998); In re Bourgoin, 306 B.R. 442, 444
(Bankr. D. Conn. 2004); In re Moore, 2012 Bankr. LEXIS 1538 *10-*11 (Bankr.
N.D.N.Y. April 10, 2012). This is important because the “excusable neglect” standard
endorsed by the U.S. Supreme Court in Pioneer for late filed claims in Chapter 11 cases
cannot help a creditor with a late filed claim in a Chapter 13. See, Federal Rules of
Bankruptcy Procedure 9006(b)(3)(extensions of time allowed only to the extent allowed
in the Rule itself); 3003(c)(1) & (3)(Chapter 11 deadline for filing proofs of claim is
fixed by the bankruptcy court and is not limited by Rule); In re Zich, 291 B.R. 883, 885
(Bankr. M.D. Ga. 2003); In re Nyeste, 273 B.R. 148, 149 (Bankr. S.D. Ohio 2001); In re
Aboody, 223 B.R. 36, 38-39 (1st Cir. BAP 1998).
The language of Bankruptcy Rule 3002(c) is unambiguous and courts must apply
the "ordinary, contemporary, common meaning" of this language, See, Pioneer Inv.
Services v. Brunswick Associates, 123 L. Ed. 2d 74, 113 S. Ct. 1489, 1495 (1993), unless
there is an irreconcilable conflict with the enabling legislation or the Constitution. Thus,
in Chapter 13 cases, there is no “excusable neglect” exception to the bar date for filing
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proofs of claim. In re Jackson, 482 B.R. 659, 663-664 (Bankr. S.D. Fla. 2012); In re
Stone, 473 B.R. 465, 467-468 (Bankr. M.D. Fla. 2012)(four claims filed one day late).
As the bankruptcy court in In re Nwonwu, 362 B.R. 705, 708 (Bankr. E.D. Va.
2007) stated:
[S]ome bankruptcy courts have applied various equitable theories
to permit the late filing of claims in chapter 13 cases by creditors who did
not receive proper notice. See, e.g., In re Anderson, 159 B.R. 830, 835
(Bankr. N.D. Ill. 1993); In re Vaughn, 151 B.R. 87 (Bankr. W.D. Tex.
1993); In re Smith, 217 B.R. 567 (Bankr. E.D. Ark. 1998). However, the
weight of authority, particularly at the court of appeals level, is to the
contrary. E.g. Matter of Greenig, 152 F.3d 631, 634-35 (7th Cir. 1998)
(acknowledging harshness of result, but holding that failure to file claim
within time period specified by rules is "absolute bar" unless one of the
specific exceptions in Rule 3002(c) applies and stating that bankruptcy
court "cannot use its equitable power to circumvent the law"); In re
Gardenhire, 209 F.3d 1145 (9th Cir. 2000). Accordingly, the court
concludes that it is without power to extend the time for [Creditor] to file a
proof of claim.
See also, 9 Collier on Bankruptcy, P 3002.03[1]; (15th ed. rev. 2006); Cf., In re Granzow,
210 B.R. 989 (E.D. Mich. 1997).
Similarly, the court in In re Brooks, 370 B.R. 194, 196-197 (Bankr. C.D. Ill.
2007)(disallowing, as late filed, a deficiency claim for a motor home, sold post-petition)
stated:
“Disallowance of a claim is mandated where, subject to certain exceptions not
applicable here, proof of such claim is not timely filed. 11 U.S.C. §502(b)(9). By
Rule, only unsecured claims must be filed to be allowed. F.R.B.P. 3002(a). Most
courts hold, however, that a secured creditor in a Chapter 13 case must have a
claim on file in order to receive payments from the trustee. See In re Mehl, 2005
Bankr. LEXIS 2092, 2005 WL 2806676 (Bankr.C.D.Ill. 2005). However, the
claim filing deadline imposed by Rule applies only to unsecured claims, not
secured claims. Id.; In re Kreisler, 331 B.R. 364, 384-85 (Bankr.N.D.Ill. 2005).
That deadline, set forth in Rule 3002(c), is 90 days after the first date set for the
first meeting of creditors, unless one of six enumerated exceptions applies.
F.R.B.P. 3002 (c). The exceptions pertain to claims of governmental units,
infants and incompetent persons, recipients of avoided transfers, parties to
executory contracts or unexpired leases, foreign creditors, and claims in Chapter 7
cases that began as no asset cases. None of the exceptions apply here.
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The Rule concerning enlargement of time is inapplicable. Generally, a court has
the authority and discretion to extend time limits for any act that "is required or
allowed to be done at or within a specified period by these rules." F.R.B.P.
9006(b)(1). That general authority and discretion is eliminated, however, with
respect to the time limits set forth in certain Rules, including Rule 3002(c), which
may be extended only "to the extent and under the conditions stated in those
rules." F.R.B.P. 9006(b)(3). Moreover, Rule 3002(c)(1), setting the claim date
for claims of governmental units at 180 days after the order for relief, provides
that the court may extend that deadline, for cause, upon motion filed within the
180 days. The Rule contains no similar provision for extending the claim
deadline applicable to non-governmental unsecured creditors. Application of the
principle of statutory construction expressio unius est exclusio alterius suggests
that an extension of the 90-day deadline for non-governmental unsecured claims
is not permitted, even upon motion filed within the 90-day period.
Indeed, the bar date for proofs of claim implemented by Section 502 and Rule
3002(c) is characterized as a strict statute of limitations. In re Reliance Equities,
Inc., 966 F.2d 1338, 1345 (10th Cir. 1992); In re Bourgoin, 306 B.R. 442, 444
(Bankr.D.Conn. 2004); In re Windom, 284 B.R. 644, 646 (Bankr.E.D.Tenn.
2002). Even the forgiving concept of excusable neglect, set forth in Rule
9006(b)(1), is eliminated as a basis for extending the claim date in Chapter 7, 12
and 13 cases. Pioneer Inv. Services Co. v. Brunswick Associates Ltd. Partnership,
507 U.S. 380, 389-90, 113 S.Ct. 1489, 1495, 123 L.Ed.2d 74 (1993). Likewise,
the doctrine of equitable tolling has been rejected as a basis to extend the claim
bar date. In re Gardenhire, 209 F.3d 1145 (9th Cir. 2000).”
An earlier decision, In re Gullatt, 169 B.R. 385 (M.D. Tenn. 1994), reversing a
decision by Judge Lundin, held:
“The answer to this argument is that the meaning of "allowed claim" is somewhat
different under Chapter 7 and Chapter 13. Section 726(a)(3) creates an exception
to the rule that late filed claims are disallowed. The §726(a)(3) exception for late
filed claims to surplus property does not apply in the Chapter 13 context because
the concept of "surplus property" does not apply to Chapter 13 plans.
Section 1325 is concerned with Chapter 13 distribution plans, and the phrase
"allowed unsecured claim" refers to a claim allowed under Chapter 13. The phrase
"such claim" likewise refers to claims that are allowed under Chapter 13. Section
1325 requires a court first to examine whether a given claim is allowed under
Chapter 13, and then to compare what the creditor will receive on that claim
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under the distribution plan with what the creditor would receive on that claim
under a Chapter 7 distribution. Late filed claims are not allowed under Chapter
13, so they need not be compared with late filed claims under Chapter 7.
Further, §1325 only makes sense if one assumes that tardy claims that are allowed
under §726(a)(3) are not allowed under §1325 and Chapter 13. Section 1325 asks
courts to compare what a creditor will receive under the proposed reorganization
plan with what the creditor would receive under Chapter 7. When examining
timely filed claims this is easily done -- the Court looks at what a creditor is going
to receive under the plan and compares it to what the creditor would have
received if the debtor's present assets were disbursed under Chapter 7. Judge
Lundin's interpretation would, however, require courts to compare what late filers
would receive under a proposed distribution plan with what they would receive
under Chapter 7.
* * * * * *
“[I]n Chapter 13 cases Rule 3002 requires courts to disallow late filed claims.”
While holding that an unlisted debt is nondischargeable under Section 523(a)(3),
In re Brooks, 414 B.R. 65, 72 (Bankr. E.D. Pa. 2009) also stated:
“There is thus no question that the Claim was late. See Claim No. 10. The
question then becomes, can the Court extend the bar date for cause, given the
undisputed testimony that the claimant had no notice of the Debtor's bankruptcy?
The answer is no. Here, case and statutory law are in agreement that a bankruptcy
court may not extend the bar date in a chapter 13 case. Bankruptcy Rule
9006(b)(3) provides that the court "may enlarge the time for taking action [under
Rule 3002(c)] only to the extent and under the conditions stated in those rules."
Pursuant to Rule 9006, a court may only extend the bar date in a Chapter 13 case
as prescribed by the specific parameters of Rule 3002(c). None of these
parameters allows a court to extend the bar date for circumstances such as these.
As one court succinctly put it "[c]ourts that have addressed the interaction of
§502(b)(9), Rule 9006(b)(3), and Rule 3002(c) . . . have consistently concluded
that the three provisions reflect Congress' intent to create an absolute bar date for
filing claims in Chapter 13 cases." In re Jensen, 333 B.R. 906, 909 (Bankr. M.D.
Fl. 2005) (citing In re McNeely, 309 B.R. 711 (Bankr. M.D. Pa. 2004)). See also
In re Gardenhire, 209 F.3d 1145, 1151 (9th Cir. 2000) (holding that equitable
tolling did not apply to proofs of claim under §502(b)(9) and noting that most
lower courts have generally adopted a "fairly strict readings of Bankruptcy Code
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and Rules 3002(c)(1) and 9006(b)(3)") (citations omitted); In re Brooks, 370 B.R.
194, 197 (C.D. Ill. 2007) ("the bar date for proofs of claim implemented by
Section 502 and Rule 3002(c) is characterized as a strict statute of limitations . . .
Even the forgiving concept of excusable neglect, set forth in Rule 9006(b)(1), is
eliminated as a basis for extending the claim date in Chapter . . .13 cases.")
(citations omitted).
Further, Law & Zaslow's contention that the bar date in this case does not apply to
it because the Firm did not receive notice of the bankruptcy or the bar date is
incorrect. See Reply to Debtor's Objection to Proof of Claim, pg.1. Courts have
held not only that "Rule 3002(c) is strictly construed as a statute of limitations,"
but further that "there is no provision . . . for extending the bar date simply
because the creditor had no notice of the case." In re Nwonwu, 362 B.R. 705,
707-8 (E.D. Va. 2007). See also In re Watson, 2007 Bankr. LEXIS 3839, 2007
WL 3231529 (Bankr. E.D. Va. Oct. 30, 2007); In re Harding, 2006 Bankr. LEXIS
4627, 2006 WL 5738080 (Bankr. D. Md. Jan. 31, 2006). In sum, the bar date in a
Chapter 13 case is a strict and nonnegotiable deadline, whether or not a creditor
received notice. The Debtor's objection to the Proof of Claim of Law & Zaslow
as untimely will therefore be granted.”
Even when the debtor is adding a claim and requesting that the claims bar date be
extended, some courts have held that the bar date stands. See, In re Plummer, 378 B.R.
569 (Bankr. C.D. Ill. 2007). However, other courts take a more practical approach when
no purpose would be served by disallowing the claim. See, In re Blakely, 440 B.R. 443
(Bankr. E.D. Va. 2010). Another approach that one court took was extending the
deadline for the debtor to file a proof of claim for the creditor so that the claim could be
paid though the Chapter 13 Plan. See, In re Sprague, 2013 Bankr. LEXIS 5336 (Bankr.
D. Idaho December 18, 2013)(debtors’ failure to list claim was based on “excusable
neglect”).
Rule 3002(c) has been held to apply to secured creditors. See, In re Dumain, 492
B.R. 140 (Bankr. S.D.N.Y. 2013). However, where a secured claim has been filed, the
amendment of that claim to reflect a deficiency presents different issues than the failure
of a creditor to file a timely claim. See, In re Haran, 2013 B.R. LEXIS 3632 (Bankr. D.
Colo. August 14, 2013). Courts have also held that specific Chapter 13 Plan provisions,
providing additional time to file a deficiency claim, can extend the claims bar date. See,
In re Shiver, 484 B.R. 468 (Bankr. N.D. Fla. 2012)(Chapter 13 Plan stated that the bank
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would have 90 days after the plan was confirmed to file a claim regarding any deficiency
that remained after debtor's property was sold.)
Note that Rule 3002(c) sets a deadline for FILING – it has been held not to be met
by merely MAILING the proof of claim before the deadline. See, In re Taun, 2013 U.S.
Dist. LEXIS 152425 at *9-*10 (D.N.J. October 21, 2013).
Remember that claims are not disallowed without an objection – and the Chapter
13 Trustee has a choice as to whether or not to file an objection to a late filed claim.
Compare, In re Cassani, 62 Collier Bankr. Cas. 2d (MB) 1961, 2009 Bankr. LEXIS 3716
(Bankr. E.D. Va. 2009); In re Day, 62 Collier Bankr. Cas. 2d (MB) 1651, 2009 Bankr.
LEXIS 3144 (Bankr. E.D. Va. 2009).
IX.
OBJECTING TO ATTORNEY FEES.
By Fiona Whelan, Esq.
Staff Attorney for Lydia Meyer, Chapter 13 Trustee
Rockford, Illinois
At some point, during the confirmation process, you will have to deal with the
issue of the debtor’s counsel’s attorney fees. Fees are not awarded to the debtor’s
attorney until the case is confirmed. Note that fees must be disclosed even if paid prepetition, and the court has authority to review fees and order disgorgement of fees (see
below). Districts which have a model plan in place will dictate the order of distribution
of the debtor’s monthly payment. Unless this is altered in paragraph G for “special
intentions”, the attorney will be paid whatever is left over after those in the plan listed
before him in the order of distribution are paid. Attorneys may alter the amount they get
paid by setting forth a specific amount in paragraph G or alter when they are getting paid
by altering their place in distribution. For example, in the first scenario, an attorney may
seek to be paid a set monthly amount of $75. In the second scenario, an attorney may
seek to be paid ahead of the secured claims so in essence the attorney gets paid first
before the secured creditors other than the mortgage. Regardless whether there is a
model plan or not, there are general guidelines contained in the Code that control attorney
fees. Although there may be occasion to ask for attorney fees as part of a sanction (i.e.
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for violating Rule 9011), or for other reasons, this outline will focus strictly on the fee
application and disclosure made by the attorney.
A.
Attorney Fees, Where Can They Be Found?
Attorney fees are governed by sections 329 and 330 of the Bankruptcy Code and
Rules 2016 and 2017 of the Federal Rules of Bankruptcy Procedure. In a nutshell,
Section 329 requires the filing of the disclosure statement and Rule 2016 requires that it
be done within 14 days after the order for relief is filed, or any other time the court may
direct. Section 330 allows the court to compensate an attorney for reasonable fees and
Rule 2017 allows any party in interest to file a motion or objection to a fee application, or
the court to determine sua sponte whether any payment of money by the debtor before or
after filing for relief is excessive. Section 503 allows a party to request payment of
administrative expenses which covers compensation for an attorney under 503(b)(2).
Section 504 prohibits the attorney from sharing or agreeing to share any compensation or
reimbursement with another person, unless that person is a member, partner or regular
associate in a professional association, corporation, or partnership.
B. What Is A Disclosure Statement?
A disclosure statement is a form that reaffirms the language in section 329, and
sets forth the amount of money an attorney agrees to accept and/or the amount of money
received by the attorney prior to filing the order for relief. (See attached Form A). An
attorney representing a debtor in a chapter 13 case must file a disclosure statement setting
forth any payments received within a year before the filing of the petition for relief, and
any money received during the pendency of the petition for services directly related to
the chapter 13 bankruptcy or for services rendered or to be rendered in connection with
the bankruptcy. Filing the disclosure statement is mandatory, not permissive, and it is
completely irrelevant whether the attorney is owed any fees by the debtors. In re
Hackney, 347 B.R. 432 (Bankr. M.D. Fl. 2006).
To determine whether a service performed by the attorney was “in connection
with” the bankruptcy, the controlling question is the state of mind of the debtor. In
making the transfer was the debtor influenced by the possibility of filing bankruptcy or of
the imminence of the bankruptcy proceeding? In re Newton 292 B.R. 563 (Bkrcty E.D.
Tex. 2003).
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11 U.S.C. 329 “Debtor’s transactions with attorneys”
(a) Any attorney representing a debtor in a case under this title, or in
connection with such a case, whether or not such attorney applies for
compensation under this title, shall file with the court a statement of the
compensation paid or agreed to be paid, if such payment or agreement was made
after one year before the date of the filing of the petition, for services rendered or
to be rendered in contemplation of or in connection with the case by such
attorney, and the source of such compensation.
(b) If the compensation exceeds the reasonable value of any such services,
the court may cancel any such agreement or any such payment, to the extent
excessive to(1) the estate, if the property transferred –
(A) would have been property of the estate; or
(B) was to be paid by or on behalf of the debtor
under chapter 11, 12, or 13 of this title; or
(2) the entity that made such payment.
C.
When Does The Disclosure Statement Need To Be Filed?
Rule 2016 mandates that an attorney file and transmit to the United States trustee
within 14 days after the order for relief, or at another time as the court may direct, the
statement required by section 329 of the Code, including whether the attorney has agreed
to share any compensation with another attorney.
D.
Once it is filed, is that all that is required?
No. The disclosure is an ongoing obligation and the attorney must file and
transmit to the United States trustee a supplemental statement within 14 days after any
payment or agreement not previously disclosed is received or reached. Additionally, in
order to be awarded fees by the court, the attorney must file a notice of his fees along
with the actual application and proposed order. The “Attorney’s Application for
Compensation for Representing Chapter 13 Debtors(s)” affirms that the attorney’s fees
are reasonable under section 330(a)(4)(B). (See Attached Form B). In order to determine
who must receive a copy of the notice for the attorney fees, the “Notice of Chapter 13
Bankruptcy Case, Meeting of Creditors, & Deadlines” (hereinafter the “341 notice”)
needs to be examined. Approximately three quarters of the way down the form, it states
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whether there has been a disclosure of compensation. If there has been, then only the
debtor and the trustee need to receive notice of the attorney fees. If there was no
disclosure of compensation in the 341 notice, then the attorney must send out notices of
his fees to all the creditors, the debtors, and the trustee. (For examples see Form C and D
attached.)
E.
What Happens When The Disclosure Statement Discloses
Unreasonable Fees?
Section 330 sets forth some guidelines the court should consider in attempting to
determine whether the requested fees are reasonable. Section 330 allows the court to
award reasonable compensation for actual, necessary services and reimburse the attorney
for actual, necessary expenses.
1.
What does “reasonable” mean?
What is considered to be ‘reasonable’ is governed by section 330 of the
Bankruptcy Code which lists a number of factors Congress deemed relevant to assess the
value of professional services.
Section 11 U.S.C.330(a)(3) states:
(3) In determining the amount of reasonable compensation to be awarded to an
examiner, trustee under chapter 11, or professional person, the court shall
consider the nature, the extent, and the value of such services, taking into account
all relevant factors, including-(A) the time spent on such services;
(B) the rates charged for such services;
(C) whether the services were necessary to the administration of,
or beneficial at the time at which the service was rendered toward
the completion of, a case under this title;
(D) whether the services were performed within a reasonable
amount of time commensurate with the complexity, importance,
and nature of the problem, issue, or task addressed;
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(E) with respect to a professional person, whether the person is
board certified or otherwise has demonstrated skill and experience
in the bankruptcy field; and
(F) whether the compensation is reasonable based on the
customary compensation charged by comparably skilled
practitioners in cases other than cases under this title.
(4)(A) Except as provided in subparagraph (b), the court shall not allow
compensation for(i) unnecessary duplication of services; or
(ii) services that were not(I) reasonably likely to benefit the debtor’s estate; or
(II) necessary to the administration of the case.
(B) In a chapter 12 or chapter 13 case in which the debtor is an
individual, the court may allow reasonable compensation to the
debtor’s attorney for representing the interests of the debtor in
connection with the bankruptcy case based on a consideration of
the benefit and necessity of such services to the debtor and the
other factors set forth in this section.
2.
Who can object to the reasonableness of the fees?
Under Fed. R. Bankr. P. Rule 2017, pursuant to a request by any party in interest
or on the Court’s own initiative, after notice and a hearing, the Court may review debtor’s
attorney fees paid either prepetition or postpetition to determine whether they are
excessive.
3.
Who has the burden of establishing the reasonableness or
lack thereof?
Once a question has been raised about the reasonableness of an attorney’s fees
under §329, it is the attorney himself who bears the burden of establishing that the fee is
reasonable. In re Geraci, 138 F.3d 314 (7th Cir. 1997), citing Collier on Bankruptcy para
329.04 (15th ed. 1996); see also, In re Andreas, 373 B.R. 864 (Bankr. N.D. Ill. 2007).
Once it is established the fees are excessive or unreasonable, then the extent to which the
compensation should be denied rests within the sound discretion of the court.
"The reasonableness of an attorney's compensation under §329 is assessed with
regards to the particular circumstances of each case. Services charged by a debtor's
attorney which are of poor quality and/or which do not comply with an attorney' ethical
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duties are not reasonable and provide grounds for the disgorgement of fees for purposes
of § 329(b). In re Whitman, 51 B.R. 502, 506 (Bankr. D. Mass. 1985). The same is true
where debtor's counsel does not abide the Bankruptcy Code and Rules and orders of the
court. In re Federal Roofing Co., Inc., 205 B.R. 638, 644 (Bankr. N.D. Ala. 1996)." In re
Smith, 436 B.R. 476, 483 (Bankr. N.D. Ohio 2010):
4.
Does it matter if you are in a district that has a flat rate fee
or not?
No. Many jurisdictions have adopted the flat fee arrangement or otherwise
known as the “no look” policy for fees. Generally this is an amount that has been
predetermined and agreed upon that an attorney can charge a debtor without the necessity
of itemizing the attorney’s time. The flat fee arrangement is not required and an attorney
is free to opt out and enter into other types of fee arrangements. However if another type
of fee arrangement is entered, then pursuant to Rule 2016(a) the attorney must itemize all
his time and services, and the attorney is still subject to the requirements of
reasonableness as set forth in §330.
F.
How Can The Disclosure Statement Be Violated?
Let me count the ways….
Failure to file a disclosure statement; filing only a partial disclosure; filing a
disclosure late; filing a fraudulent disclosure; these are all different ways the
requirements of Section 329 and Rule 2016 can be violated.
1. Can it be fixed?
No. Disclosures must be accurate, complete, and timely. As stated in In re
Jackson, . 401 B.R. 333, 402 (Bankr. N.D. Ill. 2009) “[a]n attorney must ‘lay bare all
[his] dealings with the debtor concerning compensation. The disclosures he makes must
be ‘precise and complete’. ‘Coy or incomplete disclosures’ that force the court ‘to ferret
out pertinent information’ will not do, even if they are merely the result of negligence or
inadvertence. Very simply, ‘anything less than full measure of disclosure’ is
unacceptable. There have been instances when the attorney has attempted to correct the
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situation, but the courts have resoundingly held it can’t be fixed. See In re Whaley, 282
B.R. 38 (Bankr. M.D. Fla. 2002) in which the attorney offered to formally disclose
payments that were previously undisclosed; also see In re Hackney, 347 B.R. 432 (Bankr.
M.D. Fla. 2006) where the attorney attempted to justify the receipt of funds as a set off
for the fees he was owed. In Whaley, the court stated the failure to disclose fees cannot
be cured. The court went on to say that if everyone waited until they were caught to
correct the situation, “the entire concept of mandatory disclosure would be a farce.
Professionals could breach the disclosure rules with impunity because no consequences
would follow for noncompliance.” Whaley, supra, 282 B.R. at 42.
The number of chapter 13 cases filed is tremendous, and as a consequence,
it is essential that attorneys comply with the rules willingly and in a timely
manner. The failure to comply, or to comply in a timely manner threatens the
integrity of the bankruptcy process. The court in Whaley stated that “voluntary
compliance with the disclosure obligation is essential to maintain the efficacy of
our bankruptcy system. Whaley, supra. Compliance is particularly necessary to
the administration and disposition of Chapter 7 and Chapter 13 cases involving a
voluminous number of relatively small individual cases.” Id., see also In re
Andreas, 373 B.R. 864 (Bankr. N.D. Ill. 2007).
2.
Why does it matter so much?
Debtors are in precarious positions. Congress recognized that a debtor would be
tempted to “deal too liberally with his property in employing counsel to protect him in
view of financial reverses and probably failure.” In re Jackson, supra. In light of this, the
legislative history of §329 reflected Congress’ intent to protect against inside
arrangements between attorney and professionals to the detriment of the debtor and the
creditors. The mandatory fee disclosure was a way to prevent over-reaching by the
debtor’s attorneys and it gave creditors the chance to object if the fees were not
reasonable. Congress stated “payments to a debtor’s attorney provide serious potential
for evasion of creditor protection provisions of the bankruptcy laws, and serious potential
for overreaching by the debtor’s attorney, and should be subject to careful scrutiny.” In
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re Hackney, 347 B.R. 432 (Bankr. M.D. Fla. 2006) citing H.R. Rep. No. 95-595 at 329
(1977), as reprinted in 1978 U.S.C.C.A.N. 5787, 6285.
G.
What Are The Consequences?
It is commonly held that the sanction against the attorney should be
“commensurate with the egregiousness of the conduct.” In re Hackney, 347 B.R. 432
(Bkrcty M.D. Fla. 2006). A majority of the courts held that an attorney who violates the
disclosure requirement should suffer “strict and quick consequences including the
imposition of sanctions or disgorgement of all fees paid in the case.” Id., In re Whaley,
supra 282 B.R. at 42. There are a range of consequences the violating attorney may face,
including a partial or total denial of compensation as well as a partial or total
disgorgement of fees already paid. It is within the court’s discretion as to how much if
any of the compensation should be denied. An interesting case on point is that the
confirmation of a chapter 13 plan does not foreclose reevaluation of appropriate attorney
fees at any time. See, In re Josey, 195 B.R. 511 (Bankr. N.D. Ga. 1996) The Josey court
ordered disgorgement of attorney fees paid to a debtor’s counsel four years after
confirmation of the debtor’s chapter 13 plan. It seems how far the court will sanction an
attorney is very fact specific. The range of orders include merely disgorging $500 of
compensation that was not disclosed and allowing the attorney to keep the $2000 he was
paid and did disclose (Whaley, 282 B.R. 43, to disgorging the complete amount of fees
received for two cases in the amount of $17,180.37 (In re Jackson, 401 B.R. 333, 402
(Bankr. N.D. Ill. 2009), to ordering that the attorney shall withdraw as counsel from each
of the 155 cases in which he was counsel, and that in each of such 155 confirmed cases
the orders were modified to reflect that attorney fees were disallowed and that the
attorney must disgorge to the trustee all fees previously received for the 155 cases and for
cases subsequently filed cases within 10 days of the order. ( In re Davila, 210 B.R. 727
(Bankr. S.D. Tex 1996).
H.
What Do You Look For And What Do You Do?
The first thing to look for is whether the disclosure statement has been filed at all.
These are usually filed by the attorneys at the time the petition is filed, however, if it
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isn’t, mark your calendar to follow up in two weeks. In the meantime, it may behoove
you to write a letter to counsel to inform him of his oversight. This helps build your case
and you have proof that you notified the attorney early in the case of the error.
Once the disclosure is filed, does it accurately represent what the debtor has
agreed to pay the attorney? (This can be a good §341 question!) Was there a prior case
filed? Did the attorney represent the debtor in that case? Was the attorney paid then? If
so, when was he paid and how much? All this should be included on the disclosure
statement. During these bad economic times, mortgages many times are being modified
or stripped. Did the attorney handle that transaction? Was he compensated for it? And if
so, again, when and how much? Any such compensation should be listed with amounts
to accurately reflect the attorney’s compensation.
Is the case a flat fee case? If so, are the appropriate boxes checked in the
Application for Fees and the Order? Both should reflect they are for cases ‘through case
closing.’ If an itemization is filed, look at each entry. Does each entry show an efficient
use of the attorney’s time? How much is work is being done by a paralegal, and how
much are they being charged out an hour? Do you see time being billed at increments of
.10 hours? Does there seem to be a ‘cookie cutter’ approach to billing for different
entries? (The court in In re Kowalski, 402 B.R. 843 (Bankr. N.D. Ill 2009) stated it was
inappropriate to bill at a minimum increment of .25 in bankruptcy cases, and inefficient
use of counsel’s time did not warrant full compensation.)
If you discover there has been a violation of the disclosure requirements, it will be
necessary to file a motion to either disallow and/or disgorge fees. If this occurs, it is
helpful to know your judge. In one situation you may have a judge that would cut an
attorney’s fee in half due to the lack of entries at .10 increments, inflated billings,
repetitive services, and the like, but in and in the same fact pattern, before a different
judge, the latter may enter the fee order without any penalty or reduction. Knowing your
judge will save both you and opposing counsel needless headaches and the court’s time.
In addition to the technical violations, the disclosure statement may show a
completely unacceptable amount for attorney fees. Once again you will need to file a
motion and notice opposing counsel of a hearing date and time. In order to try to
preserve a working relationship with the debtor’s attorney, you will want to be as fact
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specific as possible in the allegations set forth in the motion. Use a “flat” style, avoid
inflammatory adjectives, and do not overstate your case.
It is helpful to remember, that, once the question of reasonableness has been
raised, the debtor’s attorney must bear the burden of showing how the fees are
reasonable. Once you have presented your factual allegations, and counsel has had an
opportunity to rebut your allegations, the decision rests with the court.
Since you may have the same attorney at a 341 meeting the next day, next week,
or next month, in these situations it is best to present your facts, make your argument and
rest your case. You most likely have struck a nerve with the debtor’s attorney, and your
motion will most likely not be favorably received. You have discharged your duty,
however, to bring the matter before the judge, and regardless of the outcome, counsel will
most likely adjust his practice accordingly.
(Attached are some sample motions.)
[Fiona’s forms for this section are in the Appendix]
X.
BANKRUPTCY APPEALS – TIME LINES.
Tracy L. Schweitzer, Esq.
Staff Counsel to Henry E. Hildebrand, III
Chapter 13 Standing Trustee, Middle District of Tennessee
A.
Appeal To The BAP (appeal as of right, with no delaying motions*)
1.
Entry of the Order
2.
Within 14 days of the entry of the Order, appellant must file a Notice of Appeal
with the bankruptcy clerk. Fed. R. Bankr. P. 8002(a). (The bankruptcy clerk
serves notice of the filing of a notice of appeal on the other parties. Fed. R. Bankr.
P. 8004.).
3.
Within 14 days after filing the Notice of Appeal, appellant must file a
designation of the record and statement of the issues with the bankruptcy clerk
and serve on the Appellee. Fed. R. Bankr. P. 8006. If the record includes a
transcript, a request for the transcript must be filed “immediately after filing the
designation.” Fed. R. Bank. P. 8006.
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4.
Docketing of the Appeal: On receipt of the complete record from the bankruptcy
court, the BAP clerk enters the appeal on the docket and gives notice to parties.
Fed. R. Bankr. P. 8007(b).
5.
Within 14 days after entry of the appeal on the docket pursuant to Rule 8007, the
Appellant Brief must be filed and served. Fed. R. Bankr. P. 8009(a)(1).
6.
Within 14 days after service of the appellant brief, Appellee Brief must be filed
and served. Fed. R. Bankr. P. 8009(a)(2).
7.
Within 14 days after service of the appellee brief, appellant may file and serve a
Reply Brief. Fed. R. Bankr. P. 8009(a)(3).
* Procedures differ for appeal by leave; certain motions listed in Fed. R. Bankr. P.
8002(b) delay the time for appeal.
B.
Appeal To The District Court (appeal as of right, with no delaying
motions*)
1.
Entry of the Order
2.
Within 14 days of the entry of the Order, appellant must file a Notice of Appeal,
Fed. R. Bankr. P. 8002(a), and a separate Written Statement of Election with the
bankruptcy clerk, 11 U.S.C. §158(c)(1); Fed. R. Bankr. P. 8001(e)(1). (The
bankruptcy clerk serves notice of the filing of a notice of appeal on the other
parties. Fed. R. Bankr. P. 8004.).
3.
Within 14 days after filing the Notice of Appeal, appellant must file a
designation of the record and statement of the issues with the bankruptcy clerk
and serve on the Appellee. Fed. R. Bankr. P. 8006. If the record includes a
transcript, a request for the transcript must be filed “immediately after filing the
designation.” Fed. R. Bank. P. 8006.
4.
Docketing of the Appeal: On receipt of the complete record from the bankruptcy
court, the district court clerk enters the appeal on the docket and gives notice to
parties. Fed. R. Bankr. P. 8007(b).
5.
Within 14 days of the docketing of the appeal, the Appellant Brief must be filed
and served. Fed. R. Bankr. P. 8009(a)(1).
6.
Within 14 days after service of the appellant brief, Appellee Brief must be filed
and served. Fed. R. Bankr. P. 8009(a)(2).
7.
Within 14 days after service of the appellee brief, appellant may file and serve a
Reply Brief. Fed. R. Bankr. P. 8009(a)(3).
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* Procedures differ for appeal by leave; certain motions listed in Fed. R. Bankr. P.
8002(b) delay the time for appeal.
C.
Appeal From The BAP/District Court To The Circuit Court
Rule 6 of the Rules of Appellate Procedure specifies the rules that apply in bankruptcy
appeals from district court and bankruptcy appellate panel decisions. Rule 6(b) lists
rules that do not apply in bankruptcy appeals and clarifies that, in rules that do apply,
“district court” means “appellate panel” in appeals from the BAP.
1.
Within 30 days after the judgment or order appealed from is entered, must file
Notice of Appeal. Fed. R. App. P. 4(a); see also Fed. R. App. P. 3(c) (stating
requirements for the contents of notice of appeal).
2.
Within 14 days after filing the notice of appeal, appellant must file with the
BAP/district court clerk and serve on opposing counsel a statement of the issues
to be presented on appeal and a designation of the record on appeal. Fed. R.
App. P. 6(b)(2)(B). Actual practice may differ: In the 6th Circuit, the
designation of record is apparently not needed in appeals from the BAP and the
statement of issues is filed with the Court of Appeals (not the BAP) pursuant to a
letter sent upon entry of the notice of appeal.
3.
Filing of the Record. When the record is complete, the BAP clerk numbers the
record and sends to Circuit Clerk. Upon receiving the record, the Circuit Clerk
must file the record and notify parties of the filing date. Fed. R. App. P.
6(b)(2)(D).
Note: The briefing schedule may be set by the court in accordance with Fed. R. App. P.
26 and 31. (In the Sixth Circuit, the court will always set the briefing schedule. 6 Cir. R.
31.)
4.
Within 40 days after the record is filed, the Appellant Brief must be filed and
served. Fed. R. App. P. 31(a)(1).) (Note: In the 6th Circuit, an appendix is
generally not required. 6 Cir. R. 30(a).)
5.
Within 30 days after the appellant’s brief is served, the Appellee Brief must be
filed and served. Fed. R. App. P. 31(a)(1).
6.
Within 14 days after the appellee’s brief is served, the Appellant Reply Brief
may be filed and served (but it must be at least 7 days before oral argument). Fed.
R. App. P. 31(a)(1).
D.
Direct Appeal To The Circuit Court (with no delaying motions*)
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A direct appeal to the Circuit Court involves setting up both a normal appeal and a direct
appeal. See Fed. R. Bankr. P. 8002(a). At least at the beginning, therefore, the direct
appeal involves two tracks: (1) the steps required to set up a normal appeal, either to the
BAP or the district court, and (2) the steps required to obtain permission for a direct
appeal.
1.
Entry of the Order.
2.
Within 14 days of the entry of the order, appellant must file a Notice of Appeal
with the bankruptcy clerk. Fed. R. Bankr. P. 8001(f)(1) and 8002(a). (The bankruptcy
clerk serves notice of the filing of a notice of appeal on the other parties. Fed. R. Bankr.
P. 8004.). If the appellant wishes to elect to have the appeal heard by the district court (in
the event the direct appeal is denied), the appellant must file a separate Written
Statement of Election with the bankruptcy clerk at the time of filing the appeal. 11
U.S.C. §158(c)(1); Fed. R. Bankr. P. 8001(e)(1).
3.
Within 14 days after filing the Notice of Appeal, appellant must file a
designation of the record and statement of the issues with the bankruptcy clerk and
serve on the Appellee. Fed. R. Bankr. P. 8006. If the record includes a transcript, a
request for the transcript must be filed “immediately after filing the designation.” Fed.
R. Bank. P. 8006.
4.
Not later than 60 days of the entry of the order, a Request for Certification must
be made to the bankruptcy court, district court, or BAP court, 28 U.S.C. 158(d)(2)(E).
(To determine the court in which to file the request, see Fed. R. Bankr. P. 8001(f)(2).)
See Rule 8001(f)(3)(C) for what the request must include. The clerk must serve notice
on the parties (Fed. R. Bankr. P. 8001(f)(3)(B)).
Or, the statute and the rules suggest that an alternative approach is for all the
appellants and appellees acting jointly to make a certification, using the appropriate
Official Form (Form 24 - Certification to court of appeals by all parties). 28 U.S.C.
158(d)(2)(A); Fed. R. Bankr. P. 8001(f)(2)(B). The deadline for such certification is
unclear; read literally, the 60-day deadline only applies to a request for certification, not a
certification made by all the appellants and appellees acting jointly.1
5.
Certification Entered on docket of bankruptcy court.
1
The statutory basis for this alternative approach is the language of 28 U.S.C. § 158(d)(2)(A),
which states that the appropriate court of appeals shall have jurisdiction if the relevant lower court, “acting
on its own motion or on the request of a party to the judgment, order, or decree described in such first
sentence, or all the appellants and appellees (if any) acting jointly, certify that” specified circumstances
exist. 28 U.S.C. § 158(d)(2)(A) (emphasis added). This provision appears to allow either the court or all of
the appellants and appellees to make the required certification. The Rules, similarly, differentiate between
certification by the court (on request or at the court’s own initiative) and certification by all parties.
Compare Fed. R. Bankr. P. 8001(f)(2)(A) with Fed. R. Bankr. P. 8001(f)(2)(B).
Because 28 U.S.C. § 158(d)(2)(A) is not perfectly clear, it may be advisable to simply request
certification. Under 28 U.S.C. § 158(d)(2)(B), the court must make the certification if it receives a request
made by a majority of the appellants and a majority of the appellees (if any).
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6.
No later than 30 days2 after the certification becomes effective, a Petition
Requesting Permission to Appeal in accordance with Rule 5 of the Federal Rules of
Appellate Procedure must be filed with the circuit court clerk. Fed. R. Bankr. P.
8001(f)(5). Rule 5 of the Rules of Appellate Procedure states what the petition must
include. Fed. R. App. P. 5(b)(1).
7.
Entry of Order Granting Permission to Appeal.
Section 1233(b)(6) of BAPCPA (Pub. L. 109-8) provides that the Federal Rules of
Appellate Procedure apply in direct appeals “to the extent relevant and as if such
appeals were taken from final judgments, orders, or decrees of the district courts or
bankruptcy appellate panels.” Note that Rule 6 of Rules of Appellate Procedure governs
non-direct bankruptcy appeals (appeals from district court or bankruptcy appellate panel
decisions).
8.
Within 14 days after the entry of the order granting permission, the appellant
must pay fees (and post a cost bond, if required). Fed. R. App. P. 5(d)(1). A notice of
appeal is not required. The date of the entry of the order granting permission to appeal
serves as the date of the notice of appeal for calculating timelines. Fed. R. App. P.
5(d)(3).
9.
Once the lower court clerk notifies the circuit court clerk that all fees have been
paid, the record must be forwarded and filed in accordance with Rules 11 and 12(c) of
the Rules of Appellate Procedure. Fed. R. App. P. 5(d)(3). The circuit court clerk must
notify all parties upon receiving the record. Fed. R. App. P. 12(c).
Note: The briefing schedule may be set by the court in accordance with Fed. R. App. P.
26 and 31. (In the Sixth Circuit, the court will always set the briefing schedule. 6 Cir. R.
31.)
10.
Within 40 days after the record is filed, Appellant Brief must be served and filed.
Fed. R. App. P. 31(a)(1).
11.
Within 30 days after the appellant’s brief is served, Appellee Brief must be
served and filed. Fed. R. App. P. 31(a)(1).
12.
Within 14 days after service of appellee’s brief (but at least 7 days before
argument), appellant may file a Reply Brief. Fed. R. App. P. 31(a)(1).
* Certain motions listed in Fed. R. Bankr. P. 8002(b) delay the time for appeal.
2
The 30-day deadline for filing the petition for permission to appeal in the Rules of Bankruptcy
Procedure appears to supersede a 10-day deadline in temporary procedural rules under BAPCPA. See Pub.
L. 109-8, § 1233(b)(4)(A).
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XI.
IF YOU THINK YOU MAY BE APPEALING, OR APPEALED....
A.
1.
Appeals Intended To Establish Or Change The Law.
If you want to tackle an issue on appeal, pick your case carefully. You want facts
that are either neutral, or will make the court favorably disposed to sustaining your
position. In other words, don’t pick on widows and orphans. Bad facts make bad law.
2.
In selecting a case to appeal, make sure that the issue you want to address is a
necessary part of the proceeding, and that the issues are limited – preferably to the one
issue you want the bankruptcy court, or the appellate court, to address. If you can
stipulate the facts and ask the bankruptcy court to address a single legal issue, that’s
generally the ideal way to set up an appeal where you want to litigate what the law
‘should be’.
3.
Make sure you get in every factual item that the court of appeals will need to
decide the issue. You can do that by stipulated facts, or by entering evidence into the
record. You do NOT accomplish this by just talking about facts in your brief.
4.
If things are said while the court is not recording, you won’t be able to make
whatever happened part of the record on appeal. If something needs to be repeated, on
the record, get it repeated.
5.
In deciding whether to appeal, be sure that the court has not cited two or more
reasons for its decisions. If there are two bases for a decision, and one of them is right,
and you think the other one is wrong, the appellate court is going to affirm based upon
the correct reason for the decision and not address what you think is the incorrect reason.
6.
Be sure to designate the full record and order a transcript. If the court of appeals
can’t review what happened in court, they are much less likely to overturn a bankruptcy
court’s decision.
7.
Review whether the bankruptcy court decision will be a final appealable order. If
not, you either have to wait for an event that will make the decision a final appealable
order, or seek leave to appeal. For example, for a debtor, denial of Confirmation of a
Chapter 13 Plan is generally not a final appealable order. For the issues raised in the
denial of Confirmation to become final, the case must either be dismissed, or the Plan
Confirmed as Amended – then the issue in the original denial of Confirmation would be
final and appealable.
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8.
Bankruptcy Courts are not unaware of these considerations and rules. So, for
example, some judges will protect their desired results in decisions where one basis for
the decision is clear-cut, and the stuff that drives your trustee nuts is an second reason for
the decision – in other words, dicta. Of course, that may not prevent your judge from
pointing to the decision and saying s/he has already decided the issue.... Judges also
consciously write their decisions for the court of appeals.
B.
Appealing Based On An Individual Decision Being “Unfair”.
Sometimes, appeals are taken, not for strategic reasons, but because the individual
result is somehow unfair. Unless the facts are really compelling, it is usually better to
save your appeals for situations where the concerns are about the state of the law or local
practices, and not the fairness of the individual decision. Individual fairness is more the
responsibility of debtor’s counsel, and using trusteeship resources is harder to justify.
But there are always exceptions.
C.
1.
Defending An Appeal.
Failing to defend – or at least participate in – an appeal of an order you sought
from your judge may get you the fish eye the next time you’re in court.
2.
Do you want to file your own cross-appeal, on the same or different issues?
XII. MOTION PRACTICE.
Holly Davala, Esq. and Phil Lamos, Esq.
Staff Attorneys for Chapter 13 Trustee, Craig Shopneck, Cleveland, Ohio
I.
Motion Practice
A. Motions filed by Trustee
1. Motion to Modify Plan
a. File before the case is complete
b. File if plan completing in less than 36 months and use good faith
as reason to increase dividend to unsecured creditors
2. Motion to Dismiss Case for Lack of Feasibility
a. File because the case will complete in over 60 months
3. Motion to Dismiss Case for Failure to Fund
a. File if debtor is over two months delinquent
4. Objection to Proof of Claim
a. File if unsecured claim filed after claims bar date
b. Verify service is on correct party and address
B. Notice Time
1. For Pleadings 1-3 under Motion Practice, 21 days.
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2. For Pleading 4 under Motion Practice, 30 days.
C. Cite statute or case law that gives the Trustee legal authority to seek relief
requested
II.
Objections Trustee files to Motions filed by Debtors
A. Motion to Modify Plan post confirmation
1. Does the motion comply with section 1329 (Sections 1322(a), 1322(b),
1323(c), and 1325(a) apply to post-confirmation motions to modify)
B. Motion to Voluntarily Dismiss Case
1. Verify not converted case
2. Verify no language requiring to be dismissed without prejudice when
Section 109(g)(2) applies
C. Motion to Convert Case to Chapter 7
1. Verify debtor does not have a previous discharge under chapter 7 that was
filed in the past 8 years from filing of the present case (Section 727(a)(8))
D. Motion to Incur Debt/Buy/Sell/Refinance
1. Did the motion include documents from the escrow agent that clearly
spells out the terms of the deal?
2. Did you get a HUD 1 statement in time to review it before closing?
3. Is this a good deal for the debtor?
4. How can the debtor afford this new obligation?
5. If selling or refinance real estate what claims will the Trustee stop paying?
6. Is the debtor selling real estate for more than what was scheduled?
7. Who did the real estate vest with at the time of confirmation?
8. If proceeds from sale are to come to the Trustee does the order state that
so the escrow agent properly disburses funds?
9. Will the debtor still be paying 36 months of payments into the case?
E. Motion for Hardship Discharge
1. Verify the court entered an order fixing the time required under
Bankruptcy Rule 4007(d) for §523(a)(6) dischargeability complaints.
2. Verify Section 1328(b) requirements have all been met (this list is all
inclusive, must meet all three requirements)
F. Cite case law or statute that properly supports the Trustee’s objection
III.
Adversary Practice
A. Reasons Trustee files Adversary
1. Preference
2. Fraudulent Transfer
3. Turnover of Funds
B. When Appropriate to File
1. Preference and Fraudulent Transfer actions have 2 years from the time the
debtor sought bankruptcy relief unless the case is dismissed or closed
before that (Section 546(a)(1))
2. Easier to have unsecured creditors paid in full within 2 years from the time
the debtor sought bankruptcy relief rather than file adversary proceeding;
or
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3. Have the party who would be the defendant in the adversary proceeding
sign stipulation waiving statute of limitations defense.
C. Forms
1. Look to your judge’s and court’s local rules to verify complying with their
specific requirements
IV.
Checklist for Filing Pleadings
A. Verify service date, agent, and addresses are correct, or if a federally insured
depository institution that Rule 7004(h) has been complied with.
B. Verify all exhibits are attached and refer to correct exhibit (remember if
evidentiary hearing do not file exhibits)
C. No matter how simple the pleading is verify the issue, applicable law (whether
statute or case) and applicable facts are clearly articulated for the intended
reader (the JUDGE)
D. Verify the case number and party names are correct
E. Verify all unpublished decisions are attached to the pleading.
XIII. DISMISSAL PURSUANT TO SECTION 11 U.S.C. §109(g).
By Fiona Whelan, Esq.
Staff Attorney for Lydia Meyer, Chapter 13 Trustee
Rockford, Illinois
Generally section 109 defines who is eligible to be a debtor. According to the
Senate Report, subparagraph (g) was included to “provide the court with greater authority
to control abusive multiple filings.” A person who has previously filed a petition and
within the previous six months and has had the petition dismissed for failure to abide by a
court order, will be denied eligibility to be a debtor. Additionally, if a person files a
petition, who has previously voluntarily dismissed a petition within the previous six
months, after a creditor has moved for relief of the stay, will be denied eligibility to be a
debtor.
Pursuant to 11 U.S.C. Section 109(g):
(g) Notwithstanding any other provision of this section, no individual or family
farmer may be a debtor under this title who has been a debtor in a case pending
under this title at any time in the preceding 180 days if(1) the case was dismissed by the court for willful failure of the
debtor to abide by orders of the court, or to appear before the court
in proper prosecution of the case; or
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(2) the debtor requested and obtained the voluntary dismissal of the
case following the filing of a request for relief from the automatic
stay provided by section 362 of this title.
Note that the eligibility requirement under 109(g) is much broader than the
eligibility requirement under 109(e). The former section states that ‘notwithstanding any
other provision of this section, no individual or family farmer may be a debtor under this
title…” whereas the latter section defines only the eligibility of a “debtor under chapter
13 of this title.” Therefore it is entirely possible that a debtor may not qualify as a debtor
under 109(e) however may qualify as a debtor under another chapter whereas if a debtor
does not qualify as a debtor under 109(g), they can not be a debtor under any other
chapter. Chapter 13 Bankruptcy, 3rd Edition, K. Lundin (2000 & Supp. 2004).
The Code is silent as to when to file a motion pursuant to section 109(g). This
question has been raised several times and the majority of courts have concluded
willfulness may be found at the time, either at the time of the dismissal of the first case or
in the subsequent case when the court is called upon to determine whether the prior case
renders the debtor ineligible. In re Pike, 258 B.R. 876, 882 (Bankr. S.D. Ohio 2001). The
U.S. Court of Appeals in Montgomery v. Ryan (In re Montgomery) has stated the finding
of willfulness is not necessary in the order dismissing a bankruptcy case because §109(g)
isn’t an issue until the motion to dismiss is raised in the later filing. 37 F.3d 413 (8th Cir.
1994).
A.
Language Of §109(g)(1): What Does ‘Willful” Mean?
This section is broadly worded and ‘willful’ is a term of art. In this section it does
not mean a general willfulness to do something. Specifically it must be a willful failure
to abide by a court order or appear before the court in a proper prosecution of the case.
Willful is not defined by the Code but case law has defined it as something
deliberate or intentional rather than accidental or beyond one’s control. In re King, 126
B.R. 777 (Bankr. N.D. Ill. 1991), see also In re Xu, 386 B.R. 451 (Bankr. S.D.N.Y.
2008). This interpretation seems consistent with case law interpretation of the term
“willful” in other places in the code, for example, 11 U.S.C. §(a)(6).
In order to determine whether the debtor has been guilty of willful conduct to
invoke the bar under this section, there must be an evidentiary hearing. Willfulness is a
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question of fact. In re Walker 171 B.R. 197, 203 (Bankr. E.D. Pa. 1994) set forth ways in
which willfulness may be proven:
a) an admission of intentional conduct by the debtor;
b) a conclusion that denials of intentional conduct by the debtor lack credibility;
c) drawing adverse inferences from all circumstances surrounding the filing.
As you can see, although the requirement of good faith is not stated in the
language of §109(g)(1), it is “inherent in the purposes of bankruptcy itself.” In re Pike,
258 B.R. 876 (Bankr. S.D. Ohio 2001), quoting McLaughlin v. Jones (In re Jones), 114
B.R. 917, 926 (Bankr. N.D. Ohio 1990).
B.
What Does “Failure To Abide By Court Orders” Or “Failure
To Properly Prosecute A Case” Mean?
Willfulness, as stated above, must apply to these two areas. Again, the act must be
more than an isolated failure to perform an act. Instances that, by themselves, do not
warrant a finding of willfulness are:
-failure to appear for a creditors’ meeting; a meeting of creditors is not an
appearance before the court. In re Arena 81 B.R. 851 (Bankr. E.D. Pa. 1988);
-failure to follow local rules; local rules are not court orders. In re Hollis, 150
B.R. 145 (D. Md. 1993);
-failure to make regular monthly plan payments. In re Pike, 258 B.R. 876
(S.D. Ohio 2001).
In order to demonstrate willfulness for §109(g)(1) purposes, it is better to focus on
a pattern of actions or misconduct by the debtor. For instance repeatedly failing to attend
meeting of creditors or produce documents can constitute a pattern of inattentiveness
raising to the level of willful conduct. In re Robinson, 198 B.R. 1017 (Bankr N.D. Ga
1996).
Likewise multiple filings and multiple dismissals are another indication of
willfulness. .” In re Pike, 258 B.R. 876 (Bankr. S.D. Ohio 2001).
The majority of courts have held that §109(g) is not a limitation on the ability of
the bankruptcy court to impose a greater sanction, if appropriate. See, In re Casse, 198
114
F.3d 327, 339-40 (2d Cir. 1999); In re Tomlin, 105 F.3d 933 (4th Cir. 1997); In re
Cusano, 431 B.R. 726, 737 (6th Cir. BAP 2010); Contra, In re Frieouf, 938 F.2d 1099,
1104-05 (10th Cir. 1991).
C.
Voluntary Dismissal After The Request For
Relief From Stay, §109(g)(2)
The debtor himself must request dismissal of this case under this section. A third
party moving for dismissal of the debtor does not invoke the bar. Timing is also
important. If a voluntary motion to dismiss is filed by the debtor the same day as the
Motion for Relief of Stay, it has been ruled that since it was impossible to tell which
motion was filed first, the bar will not be imposed. In re Rosenthal, 117 B.R. 710 (Bankr
M.D. Fla. 1990). Similarly, a debtor was not barred when the debtor filed his motion to
dismiss two weeks before the creditor filed a motion for relief and the dismissal order
was entered after the relief of the stay. In re Ransom, 60 B.R. 19 (Bankr. E.D. Pa. 1986).
It is essential that the debtor “requested and obtained” dismissal following the filing of a
request for relief of the stay. It should be noted that filing for relief of a codebtor stay
does not invoke the bar to refilling either.
In some jurisdictions, the court will not impose the bar if either the Motion for
Relief was resolved in favor of the debtor, or if the dismissal and request for relief are
separated by long periods of time. In these jurisdictions it appears the courts require
more of a ‘casual relationship” between the motion for relief and the debtor’s dismissal of
the prior case which has led to some unique situations. The majority of the courts have
however adopted an approach that looks more at the plain reading of the statute. The
consequences of this approach result in invoking the 180 day bar regardless of which
creditor filed a motion for relief and regardless of the outcome of the motion for relief.
Chapter 13 Bankruptcy, 3rd Edition, K. Lundin, section 23-5, (2000 & Supp. 2004).
D.
How Should I File My Motion?
A motion should be filed setting forth a time and date of an evidentiary hearing
(unless your bankruptcy sets its own docket). Somewhere in the heading of the motion it
should be clearly marked that the trustee will be seeking a 180 day bar. In the case In re
115
Badalyan, 236 B.R. 633 (B.A.P. 6th Cir. 1999) when a debtor did not appear on the
trustee’s motion to dismiss, the court for the appellate panel for the 6th circuit ruled the
record was deficient in showing the debtor had notice the trustee was considering a 180
day bar, therefore refusing to enter the order of willfulness and bar the debtor.
In jurisdictions where the party bringing the motion has the burden, the body of
the motion should include a history of the previously filed cases. The history should
include dates of when the petitions were filed, the dates they were dismissed, whether any
money was paid to the trustee, whether the debtor paid their filing fees, whether a plan,
schedules, or other pertinent documents were filed, and whether they appeared for their
creditors’ meeting, if not, how many times was the meeting reset, and whether there were
any motions for relief filed. If creditor motions were filed, were the cases voluntarily
dismissed by the debtor or by the trustee. All these factors in combination with each
other will help the court to determine whether there is sufficient evidence to shift the
burden to the debtor, who must show that none of the allegations were willful, or at least
that there were circumstances beyond his control.
XIV. MOTIONS TO DISMISS BECAUSE DEBTOR IS OVER
THE §109(e) DEBT LIMIT
By Diana Daugherty, Esq., Staff Attorney
for Standing Chapter 13 Trustee John V. LaBarge, Jr., St. Louis, Mo.
A.
Overview.
Section 109(e) states that for a person to be eligible to be a debtor under Chapter
13 of the Bankruptcy Code, that persons' debts cannot exceed certain dollar limits. There
are two dollar limits: one for secured debt and one for unsecured debt. Debt that is
unliquidated or contingent does not count toward these limits. By statute, the debt limits
increase every three years so it is important to make sure you are using the most recent
numbers when reviewing a debtor's eligibility for Chapter 13. Currently, the limits are
$1,081,400 secured debt and $360,475 unsecured debt, but they are scheduled to adjust in
Spring 2013.
B.
The Limits Apply To An Individual And That Individual’s Spouse.
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1. In a joint case, the dollar limits are not doubled, but there is case law finding
that each spouse is entitled to the debt limit with joint debt counting fully toward each
spouse's total. In Re Werts, 410 B.R.677, 688 (Bankr. D. Kan. 2009); In re Bosco, 2010
Bankr. LEXIS 3972 (Bankr. E.D.N.C. Nov. 9, 2010) For example, if the spouses have
$300,000 in joint unsecured debt and the husband has another $100,000 unsecured debt
only in his name, the husband is over the debt limits, but the wife is not.
2. This section could be read to include the debt of a non-filing spouse, but this
interpretation is not practical because there is no duty to disclose the debt of a non-filing
spouse and no place to do so in the bankruptcy schedules.
C.
At What Point Do You Measure The Amount Of Debt And What
Information Do You Use To Measure The Amount Of Debt?
1. Section 109(e) specifically states that you look at debt owed "on the date of the
filing of the petition." Therefore, a debtor's intention to surrender collateral to satisfy
debt, a creditor's intention to forgive debt, or any other event that would affect the
amount or classification of debt owed is not considered in determining 109(e) eligibility
if that event has not occurred as of the date the debtor filed the bankruptcy petition.
2. The debtor's schedules are the tool used to determine the amount of debt for
eligibility purposes, although these amounts can be challenged if it appears they were not
listed in good faith. In Re Pearson, 773 F.2d 751, 756 (6th Cir. 1985); In Re Scovis, 249
F.3rd 975, 982 (9th Cir. 2001).
D. What Is A Non-Contingent Debt?
1. Contingent. A debt is contingent if it does not become an obligation until the
occurrence of a future event, but is noncontingent when all of the events giving rise to
liability for the debt occurred prior to the debtor's filing for bankruptcy. See, e.g., In re
Mazzeo, 131 F.3rd 295, 302-305 (2nd Cir. 1997); In re Knight, 55 F.3d 231, 236 (7th Cir.
1995); In re Nicholes, 184 B.R. 82, 88 (9th Cir. B.A.P. 1995); In re Fostvedt, 823 F.2d
305, 206 (9th Cir. 1987); Brockenbrough v. Commissioner, 61 B.R. 685, 686-687 (W.D.
Va. 1986); In re Martz, 293 B.R. 490 (Bankr.N.D. Ohio 2002); In re All Media
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Properties, Inc., 5 B.R. 126, 133 (Bankr. S.D. Tex. 1980), aff'd, 646 F.2d 193 (5th Cir.
1981).
2. Guaranteed debt. If the debtor has guaranteed the debt of another person or
entity, the written guarantee may contain language stating that the debtor cannot be called
upon to make payment until such time as that other person or entity defaults on the loan.
If the default has not occurred at the time the bankruptcy petition is filed, the debt is
contingent. If a default has occurred as of the date of filing, all the events necessary to
make the debtor liable on a debt have occurred , and the debt is not contingent. This also
applies to corporate debt which the debtor has guaranteed. In re Tabor, 232 B.R. 85, 90
(Bankr. N.D. Ohio 1999); In re Robertson, 105 B.R. 504, 508 (Bankr. D. Minn. 1989); In
re Pulliam, 90 B.R. 241 (Bktcy. N.D. Tex. 1988)(corporate debt guaranteed at the date of
filing is noncontingent and must be included in the calculation of the monetary
limitations); In re Williams, 51 B.R. 249 (Bktcy. S.D. Ind. 1984); DeKalb Bank v.
Flaherty, 10 B.R. 118 (N.D. Ill. 1981); In re Wilson, 9 B.R. 723 (Bktcy. E.D.N.Y. 1981).
3. Joint debt. The mere fact that a debt is jointly owed does not make it
contingent. In Re Martz, 293 B.R. 409, 411 (Bankr. N.D.Ohio 2002).
4. Effect of a judgment. If a debt has been reduced to a pre-petition judgment
against the debtor, that debt is not contingent. In re Hammers, 988 F.2d 32 (5th Cir.
1993)(tax court judgment fixes claim); In re Miloszar, 238 B.R. 266 (D.N.J.
1999)(default judgment is a noncontingent debt); In re Monroe, 282 B.R. 219, 223
(Bankr. D. Ariz. 2002); In re Snell, 227 B.R. 127 (Bankr. S.D. Ohio 1998); In re Mannor,
175 B.R. 639 ( Bankr. E.D. Pa. Mich. 1994)(pre-petition judgment against debtor
precluded argument that debt was owed by a corporation and should be excluded).
5. Disputed debt. The fact that a debt is disputed does not make it contingent.
See e.g., In re Nowakowsk, 404 B.R. 789, 792 (Bankr. M.D. Pa. 2009). For example, if
the debtor signed a contract to pay a workman a certain dollar amount to pave his
driveway and the workman completed the job, the fact that the debtor believed the
workmanship to be inferior, refused to pay, and was litigating the contract would not
render this particular obligation contingent. All events necessary to trigger the debtor's
obligation to pay under the contract have occurred.
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E.
What Is A Liquidated Debt?
Liquidated in the context of 109(e) is fairly broad. A liquidated debt is a debt the
amount of which has been determined or can readily be determined. For example, if the
debtor has defaulted on a contract and the contract contains a liquidated damages
provision, but is the subject of current litigation, the debtor's obligation under the contract
can be considered liquidated because the amount of the debt can be determined by
applying the formula set forth in the contract. If the debtor is a defendant in a personal
injury case, and that case is still pending, the debt is probably unliquidated because it is
up to the judge or jury to determine the amount of liability.
For a discussion or personal guarantees: See, In re Glaubitz, 436 B.R. 99 (Bankr.
E.D. Wis. 2010).
Cases on this issue can be fact-specific and conflicting, therefore if you anticipate
litigating this issue in a particular case it would be useful to research cases whose fact
patterns are close to those in your case.
F. How Do You Calculate Secured And Unsecured Debt?
1.
The answer to this question varies from jurisdiction to jurisdiction,
primarily depending on whether your circuit believes that debt listed on Schedule D:
a. All counts as secured debt. In re Pearson, 773 F.2d 751 (6th Cir. 1985).
b. Is split into secured and unsecured components. In Re Day, 747 F.2d
405 (7th Cir. 1984); In re Scovis, 249 F.3rd 975 (9th Cir. 2001); In re
Balbus, 933 F.2d 246 (4th Cir. 1991); In re Miller, 907 F.2d 80 (8th Cir.
1990).
2.
Simple calculation for jurisdictions in which you split Schedule D claims
into secured and unsecured portion.
a. The secured debt total is the total amount of secured debt listed
in the first column of Schedule D minus the total of the second
column, which is the unsecured portion of the listed secured debts.
b. Unsecured debt is the total of the second column of schedule D,
Schedule E and Schedule F.
c. The above totals are reduced by the amount of any debt
identified in the schedules as contingent or unliquidated.
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d. If either the secured or unsecured debt totals exceed the
applicable limit, the debtor is not eligible to be a Chapter 13
debtor.
3.
Reality. If filed schedules on their face show that the debtor is above the
109(e) debt limits, the debtor's attorney has probably failed to consider this issue when
filing the case. That means the attorney has probably not marked any of the debt as
contingent or unliquidated, even though it may qualify as such. The attorney may have
overstated debt "just to be on the safe side." For example, the attorney may have listed as
unsecured the entire amount of a debt that was secured by real estate which was
foreclosed prior to filing, because the debtor did not know the amount of the deficiency
after sale. If the debtor owns a business that operates as a corporation, the attorney may
have listed corporate debt for which the debtor has no personal liability. Debt may be
listed in Schedule D as secured, but the collateral for the debt is owned by a third party
such that the debt is not secured for purposes of the bankruptcy case. In short, if you add
up schedules D, E and F and find that the debtor is over one or both limits, you might
want to look for potential errors. Depending on the culture of your district, you might be
able to save time by contacting the debtor's attorney for an amendment or clarification
and thus avoid the need to file a motion to dismiss the case.
G.
What Do You Do If The Debtor Is Over The Debt Limits?
1. If the practice in your court is for the trustee to motion to dismiss a case that is
over the debt limits, and the schedules as filed show that the debtor is over the debt
limits, you can base your motion on the schedules. The debtor has filed the schedules on
the record under penalty of perjury, so you can safely cite them as your evidence. It is
then up to the debtor to rebut your motion. The debtor would then file a written response
or amend the schedules or both.
2. If the schedules as filed do not show that the debtor is over the debt limits, but
you believe there is an error or omission in the schedules that, if corrected, would cause
the debtor to be over the debt limits, your motion should allege sufficient facts to rebut
the challenged information on the schedules.
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3. A basic motion to dismiss the case because the debtor is over the 109(e) debt
limits is attached.
NOTE: Judge Lundin's treatise on Chapter 13 Bankruptcy contains an excellent
section on this topic.
XV.
THE LIGHTNING ROUND!
A Totally Random Concepts, Terms, Laws And Doctrines!
Till Rate, or “Tilling the Interest Rate” – The Supreme Court, in Till v. SCS Credit
Corp., 541 U.S. 465; 124 S. Ct. 1951; 158 L. Ed. 2d 787 (2004) held (a 4-4-1 – just take
my word for it) that interest rates (other than loans secured solely by the debtor’s primary
residence) can be reduced to the prime rate, plus a risk factor of up to 3%. In most of the
country, if the debtor seeks to reduce the interest rate on a non-910 vehicle to prime plus
3%, the debtor should be able to force that reduction, even over a creditor’s objection.
Lis Pendens – A pending suit, and also the doctrine that the court controls the property in
issue during the pending action. A “notice of lis pendens” is a notice filed on public
record for the purpose of putting all persons on notice that title to certain property is in
litigation, and that the court has jurisdiction over the property in issue in the litigation. A
notice of lis pendens provide notice to purchasers or those seeking to encumber the
property, that there may be a prior interest based on the litigation.
Ore Tenus – Orally. If the judge asks you if you want to make your objection “ore
tenus” she’s asking if you want to make the objection orally.
Drop Dead Clause – a provision in an settlement agreement allowing some action upon
the occurrence of a default. For Chapter 13 Trustee purposes, a “drop dead” usually the
dismissal of the Chapter 13 case upon the filing of an affidavit that Plan payments have
not been made on a timely basis. The “drop dead” is a technique for giving the debtor(s)
one more chance, but saves the trustee the trouble of filing and noticing out a new motion
to dismiss if the debtor(s) don’t perform.
Chapter 20 – A Chapter 7 case followed by a Chapter 13. Usually, there is little or no
unsecured debt. Although the debtor is not eligible for a Chapter 13 discharge, that is
usually not what the debtor is seeking – in most cases the debtor is trying to cure a home
mortgage arrearage and reinstitute the mortgage as current. Most courts allow debtors to
“cure” a mortgage arrearage even when they are not eligible for a Chapter 13 discharge.
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“A Title 18 Problem” – Title 18 contains the criminal law statutes that specifically apply
to bankruptcy cases. It is a “code” way of saying that there may be a criminal law
violation that should be reported to the proper authorities – U.S. Trustee, U.S. Attorney,
and/or the FBI.
Step Up Plan – a Chapter 13 Plan where the payments increase, usually because a debt is
paid off (a 401(k) loan, a car, current child support ends, etc.) or the debtor is expecting
an increase in income (from finishing education, a probationary period, etc.).
Seasonal Plan – a Chapter 13 Plan where the payments fluctuate because debtor’s
business has good parts of the year and bad parts of the year for income. For example,
jobs that are weather dependent, like landscaping, roofing, or construction might have
lower payments during the Winter, and higher payments the rest of the year. Or, if
someone is a tax preparer, payments would be higher from January to April of each year.
Motion to Modify v. Amended Plan – a Chapter 13 Plan can be changed through the
filing of an Amended Plan at any time prior to confirmation. After confirmation, debtor’s
counsel should file a Motion to Modify the confirmed Plan, not an Amended Plan. Note
that the notice period for an Amended Plan is 28 days. Rule 2002(b)(2). But a Motion to
Modify is 21 days. Rule 2002(a)(5).
Rooker-Feldman Doctrine. The Rooker-Feldman doctrine precludes lower federal
courts "from exercising appellate jurisdiction over final state-court judgments" because
such appellate jurisdiction rests solely with the United States Supreme Court. See, Lance
v. Dennis, 546 U.S. 459, 463, 126 S. Ct. 1198, 163 L. Ed. 2d 1059 (2006); Rooker v.
Fidelity Trust Co., 263 U.S. 413, 44 S. Ct. 149, 68 L. Ed. 362 (1923); D.C. Court of
Appeals v. Feldman, 460 U.S. 462, 103 S. Ct. 1303, 75 L. Ed. 2d 206 (1983). The
doctrine applies even if the losing state court party claims that the state judgment itself
violates the loser's federal rights. Johnson v. De Grandy, 512 U.S. 997, 1005-06 (1994);
Lawrence v. Welch, 531 F.3d 364, 368 (6th Cir. 2008)
The Rooker-Feldman doctrine is jurisdictional in nature; if a case is dismissed
because the Rooker-Feldman doctrine applies, it means the court has no subject matter
jurisdiction to hear the case. In re Middlesex Power Equip. & Marine, Inc., 292 F.3d 61,
66 n.1 (1st Cir. 2002); Hill v. Town of Conway, 193 F.3d 33, 41 (1st Cir. 1999); Long v.
Shorebank Dev. Corp., 182 F.3d 548, 554-55 (7th Cir. 1999); Goetzman v. Agribank,
FCB (In re Goetzman), 91 F.3d 1173, 1177 (8th Cir. 1996); Dubinka v. Judges of the
Superior Court, 23 F.3d 218, 221 (9th Cir. 1994).
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If the state-court decision was wrong "that did not make the judgment void, but
merely left it open to reversal or modification in an appropriate and timely appellate
proceeding”. Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 287
(2005)(quoting Rooker, 263 U.S. at 415-16).
This doctrine applies equally to federal bankruptcy courts. See, In re Knapper,
407 F.3d 573, 582 (3d Cir. 2005). The fact that a judgment was entered on a party's
default does not alter the applicability of the Rooker-Feldman doctrine. Fielder v. Credit
Acceptance Corp., 188 F.3d 1031, 1035 (8th Cir. 1999).
The Rooker-Feldman doctrine is implicated when, "in order to grant the federal
plaintiff the relief sought, the federal court must determine that the state court judgment
was erroneously entered or must take action that would render that judgment ineffectual."
FOCUS v. Allegheny County Court of Common Pleas, 75 F.3d 834, 840 (3d Cir. 1996).
Accordingly, a claim is barred by Rooker-Feldman under two circumstances: (1)
"if the federal claim was actually litigated in state court prior to the filing of the federal
action" or (2) "if the federal claim is inextricably intertwined with the state adjudication,
meaning that federal relief can only be predicated upon a conviction that the state court
was wrong." In re Knapper, 407 F.3d 573, 580 (3rd Cir. 2005).
A federal claim is "inextricably intertwined" with an issue adjudicated by a state
court when (1) the federal court must determine that the state court judgment was
erroneously entered in order to grant the requested relief, or (2) the federal court must
take an action that would negate the state court's judgment. In re Knapper, 407 F.3d 573,
581 (3rd Cir. 2005).
The Rooker-Feldman doctrine provides no protection in areas where Congress has
explicitly endowed federal courts with jurisdiction. See, Verizon Md., Inc. v. Pub. Serv.
Comm'n of Md., 535 U. S. 635, 644 n.3, 122 S. Ct. 1753, 152 L. Ed. 2d 871 (2002)
(noting that "the Rooker-Feldman doctrine merely recognizes" Congress's choice of
where to vest original jurisdiction and appellate jurisdiction regarding various matters);
Gruntz v. County of Los Angeles (In re Gruntz), 202 F.3d 1074, 1078-79 (9th Cir. 2000)
(en banc)("the Rooker-Feldman doctrine is not implicated by collateral challenges to the
automatic stay in bankruptcy.").
A “Skeleton Filing” – also known as a “coversheet filing”. A bankruptcy filing with a
petition and a list of creditors and not much else. Counsel has 14 days to file the rest of
the Schedules, Statement of Financial Affairs, Means Test, Plan, etc. See, §§301, 302,
521.
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Negative Equity – Where the debtor owes more money than the collateral securing the
loan is worth.
910 Cars – Vehicles that were purchased within 910 day prior to the filing of the Chapter
13. Vehicles that were purchased that close to the filing of bankruptcy can’t be
bifurcated – the Plan cannot pay just the secured value of the vehicle, with the balance of
the debt being treated as unsecured. Instead, the entire loan has be treated as a secured
claim. (The interest rate can still be “Till-ed”.)
Pot Plans/Base Plans/Percentage plans - Chapter 13 Plans can be set up based upon a
set amount of money coming into the Plan, and that money just goes to whomever it
goes, based on filed claims, priorities and claims objections. This is called a “Pot Plan”
– the money just goes into a pot. This kind of Plan has the advantage of flexibility – all
you need to know is what money is coming in, and that the payments will be sufficient to
cover secured and priority claims being paid through the Plan.
A “Base Plan” sets minimum amount that will go to unsecured creditors – say
five thousand dollars. The percentage may vary, based upon filed claims, but unsecured
creditors know how much money will be allocated to their claims. However, some base
plans are also used to pay attorney fees, and in trusteeships that follow that practice, postpetition attorney fees can make a $5,000 base plan a plan that actually pays 0% to general
unsecured creditors.
In contrast, the Plan can propose a set percentage to unsecured creditors – a
“Percentage Plan”. This percentage can be fixed, or proposed as a minimum
percentage, with the percentage being subject to recalculation (by Local Rule, form Plan
provision, or Stipulation). Percentage Plans where the Confirmation Hearing is not held
until after the claims bar date are less likely to be reviewed for an increase in the
percentage, unless income tax refunds are coming into the Plan. The advantage of this
kind of “Percentage Plan” is the quality of notice that unsecured creditors receive. “$500
a month for 36 months” tells an unsecured creditor nothing that they care about, and even
if a “$5,000 base” is actually going to unsecured creditors, each creditor won’t know how
much of that is going to them. In contrast, “unsecured creditors will receive 48% of their
filed and allowed claims” tells them what they want to know.
Arrearage: The amount by which one is past due on a secured debt obligation. For
example, if your mortgage payment is $2,000 per month and you are three months
behind, you are $6,000 in arrears.
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Deficiency: The amount that still remains due and owing after collateral is liquidated and
the proceeds applied to the debt.
Exempt Property vs. Property That Does Not Come Into The Estate – When property
is listed as “exempt” on Schedule C, that starts a process whereby property is removed
from the bankruptcy estate. Under Rule 4003(b), if no objection to the exemption is filed
within 30 days after the first meeting of creditors is concluded, the property comes out of
the estate. Taylor v. Freeland & Kronz, 503 U.S. 638, 644, 112 S. Ct. 1644, 118 L. Ed.
2d 280 (1992). In contrast, some types of property never become part of the estate –
under applicable non-bankruptcy law, a 401(k) or a valid spendthrift trust never become
property of the bankruptcy estate in the first place. See, Patterson v. Shumate, 504 U.S.
753, 119 L. Ed. 2d 519, 112 S. Ct. 2242 (1992).
Countryman Test – Professor Vern Countryman’s test for determining whether a
contract is executory or not. The “test” is basically: Are there still obligations owed by
the parties on both sides of the contract? If yes, it is an executory contract. The most
common examples of executory contracts are leases – for cars, trucks, copiers, real estate,
etc. - and cell phone contracts. Executory contracts should be assumed or rejected in the
Chapter 13 Plan – if they aren’t explicitly assumed, the Bankruptcy Code now provides
they are rejected at the time the Plan is confirmed. See, §365(d)(4)(A)(ii).
Fiduciary: one who is entrusted with duties on behalf of another. The law requires the
highest level of good faith, loyalty and diligence of a fiduciary, higher than the common
duty of care that we all owe one another. The debtor in possession in a Chapter 11 is a
fiduciary for the creditors, owing loyalty to the creditors and not the shareholders of the
debtor. Bankruptcy trustees are fiduciaries. See e.g., In re Stevens, 130 F.3d 1027, 1031
(11th Cir. 1997); In re Murphy, 474 F.3d 143, 153 (4th Cir. 2007); In re Stevens, 187
B.R. 48, 51 (Banrk. S.D. Ga. 1995).
Perfection: When a secured creditor has taken the required steps to perfect his lien, the
lien is senior to any liens that arise after perfection. Perfection is essentially the legally
recognized method of providing notice of a security interest to the world. A mortgage is
perfected by recording it with the county recorder; a lien in personal property is perfected
by filing a financing statement with the secretary of state. An unperfected lien is valid
between the debtor and the secured creditor, but may be behind liens created later in time,
but perfected earlier than the lien in question. An unperfected lien can be avoided by the
trustee using the “strong-arm powers” of Section 544.
Substantive Consolidation: Putting the assets and liabilities of two or more related
debtors into a single pool to pay creditors. (Courts are reluctant to allow substantive
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consolidation since the action must not only justify the benefit that one set of creditors
receives, but also the harm that other creditors suffer as a result.)
Joint Petition: One bankruptcy petition filed by a husband and wife together. No one,
other than a husband and wife, can legally file a joint bankruptcy petition.
Net Income: this is basically "take-home" pay. The amount you receive after necessary
tax withholding deductions have been taken, union dues, insurance, etc. If you are selfemployed, this is the amount left after paying your ordinary business expenses.
Party In Interest: A party who has standing to be heard by the court in a matter to be
decided in the bankruptcy case. The debtor, the U.S. trustee or bankruptcy administrator,
the case trustee and creditors are parties in interest for most matters.
Undersecured Claim: A debt secured by property that is worth less than the full amount
of the debt. Also sometimes referred to as a “partially secured claim”.
Unsecured Claim: A claim or debt for which a creditor holds no special assurance of
payment, such as a mortgage or lien; a debt for which credit was extended based solely
upon the creditor's assessment of the debtor's future ability to pay.
Fully Secured Claim: A claim where the collateral serving as security is worth as much
as, or more than, the amount of the debt.
Oversecured Claim: A claim where the collateral serving as security is worth more than,
the amount of the debt. Whether a claim is “oversecured” often comes up in the context
of whether a secured creditor is entitled to adequate protection, or interest.
Domestic Support Obligation: Debts for alimony, maintenance or support owed to
child, spouse or governmental entity that paid for the support of the child or spouse. A
new term introduced by the bankruptcy amendments of '05. "DSO". Remember, DSO
claims are not just current or past due alimony and child support – the Bankruptcy Code
definition also includes a debt that accrues “after the order for relief in a case under this
title . . . .” See, 11 U.S.C. §101(14A).
Indemnify: to guarantee against any loss which another might suffer. In bankruptcy, it is
used to describe the undertaking of one spouse in a divorce to assume certain debts of the
marriage and to see that the other spouse is not forced to pay. Also called a "hold
hamrless" clause.
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Hypothecate: To pledge (property) as security or collateral for a debt without transfer of
title or possession.
Allonge – A piece of paper attached to a promissory note that is used for endorsements
too numerous or lengthy to be contained in the original note.
Expressio Unius Est Exclusio Alterius - The maxim “expressio unius est exclusio
alterius” is a canon of statutory construction which holds that to include one thing in a
statute implies the exclusion of the other. See, Matter of Cash Currency Exchange, Inc.,
762 F.2d 542, 552 (7th Cir. 1985); In re Vaughan, 311 B.R. 573 (10th Cir. BAP 2004).
Dismissal “Without Prejudice” – dismissal of an action “without prejudice” means
without any loss of rights, including the right to refile the action that is being dismissed.
This term is sometimes used in dismissing a Chapter 13 case, meaning that the case is not
being dismissed based on willful failure to obey orders of the court with a 180 day bar to
refiling under Section 109(e). Under the federal rules of civil procedure (Rule 41(a))
where the plaintiff voluntarily moves to dismiss the case, or all parties stipulate to
dismissal, dismissal is presumed to be without prejudice unless the notice of dismissal
states otherwise. Except that a notice of dismissal operates as an adjudication on the
merits when filed by a plaintiff who has once dismissed an action based on the same
claim in any court in the United States, state or federal. The same rule applies where a
case is dismissed based upon a court order. See, Rule 41(a)(2).
Dismissal “With Prejudice” – If an action is dismissed with prejudice, it is an
adjudication on the merits – meaning that the action cannot be refiled. Where an action,
such as an adversary complaint, is dismissed “with prejudice” dismissal is as conclusive
of the rights of the parties as if the action had been prosecuted to final adjudication
adverse to the plaintiff. Where dismissal is involuntary, such as where the plaintiff fails
to prosecute, or to comply with the federal rules, or any order of the court, defendant may
move for dismissal, and unless the court specifies that the dismissal is without prejudice –
other than a dismissal for lack of jurisdiction, improper venue, or failure to join a party,
the dismissal is with prejudice and operates as an adjudication on the merits. See,
Federal Rule of Civil Procedure 41(b).
No Look Fee – a presumptively reasonable fee that does not require the usual time
documentation for approval of the fee. For debtors’ counsel, this amount will be allowed
without proof of the time actually spent on the case, the reasonableness of the time spent,
and the benefit to the debtor and/or estate of the services.
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“No Look” Budget Items – some trustees have set certain expense levels as
presumptively reasonable. For example, $350 for a single below median debtor for food,
toiletries and pet food. At present, not nearly as common as “no look fees”.
Jurat Clause – Generally, a jurat is a certification at the end of a sworn statement. The
term comes up on bankruptcy case most often in reference to the signature line at the end
of an income tax return. Above the signature line is language to the effect that: “Under
penalty of perjury, I declare that I have examined this return and accompanying schedules
and statements, and to the best of my knowledge and belief, they are true, correct, and
complete.”
When tax payers add their tax protest language to the jurat clause, it can make the return
ineffective, and the tax debt, therefore, nondischargeable. The tax code includes §§6061
and 6065 which courts have interpreted to require execution of an unqualified jurat
clause, the taxpayer's assurance that the figures supplied are true to the best of his or her
knowledge, and numbers sufficient to compute a tax. See, Borgeson v. United States,
757 F.2d 1071, 55 A.F.T.R.2d (P-H) 1120 (10th Cir. 1985); United States v. Stillhammer,
706 F.2d 1072, 52 A.F.T.R.2d (P-H) 5116 (10th Cir. 1983); United States v. Porth, 426
F.2d 519, 25 A.F.T.R.2d (P-H) 961 (10th Cir. 1970); Ted Kimball v. United States, 925
F.2d 356, 67 A.F.T.R.2d (P-H) 570 (9th Cir. 1991); United States v. Moore, 627 F.2d
830, 47 A.F.T.R.2d (P-H) 515 (7th Cir. 1980); Schmitt v. United States, 140 B.R. 571
(Bankr. W.D. Okla. 1992).
Servicemembers’ Civil Relief Act, f.k.a. “Soldiers’ and Sailors’ Relief Act” – The
Servicemembers’ Civil Relief Act (the “SCRA”) became law in 2003, amending and
strengthening the old Solders’ and Sailors’ Relief Act. The statute is found at 50 U.S.C.
app. §§501, et seq.
The SCRA applies to all members of the United States military on active duty,
and to U.S. citizens serving in the military of United States allies in the prosecution of a
war or military action. The provisions of the SCRA generally end when a servicemember
is discharged from active duty or within 90 days of discharge, or when the
servicemember dies. Portions of the SCRA also apply to reservists and inductees who
have received orders but not yet reported to active duty or induction into the military
service.
The language of the SCRA states that it is generally applicable in any action or
proceeding commenced in any court. 50 U.S.C. app. §§512, 521, 522 and 524.
Therefore, absent contravening language with respect to bankruptcy proceedings, the
SCRA applies to all actions or proceedings before a bankruptcy court. See, In re
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Cockerham, 336 B.R. 592, 594 (Bankr. S.D. Ga. 2005); In re Lewis, 257 B.R. 431, 435
(Bankr. D. Md. 2001); In re Montano, 192 B.R. 843, 844 (Bankr.D. Md. 1996).
The applicability of the SCRA in bankruptcy proceedings is also evident in the
Federal Rules of Civil Procedure and the Federal Rules of Bankruptcy Procedure. For
example, the advisory committee note to Federal Rule for default judgments, Fed. R. Civ.
P. 55(b), states that it is directly affected by the SCRA. (2) Under Fed. R. Bankr. P. 7055
and 9014 of the Federal Rules of Bankruptcy Procedure, Fed. R. Civ. P. 55 is applicable
in bankruptcy adversary proceedings and contested matters. Thus, the default judgment
protections of the SCRA clearly apply in bankruptcy cases.
The protections of the SCRA are also extended to co-debtors, if the
Servicemember is protected. See, In re Cockerham, 336 B.R. 592 (Bankr. S.D. Ga.
2005).
There are three primary areas covered by SCRA that are most often relevant in
bankruptcy: 1) protection against the entry of default judgments; 2) stay of proceedings
where the servicemember has notice of the proceedings; and 3) stay or vacation of
execution of judgments, attachments, and garnishments. 50 U.S.C. app. §§521, 522 and
524.
A.
Protection Against Default Judgments.
Section 521 of the SCRA establishes certain procedures that must be followed in
all civil proceedings in order to protect servicemember defendants against the entry of
default judgments. These procedures are:
If a defendant is in default for failure to appear in the action filed
by the plaintiff, the plaintiff must file an affidavit (a.k.a. a “military
affidavit”) with the court before a default judgment may be entered. The
affidavit must state whether the defendant is in the military, or that the
plaintiff was unable to determine whether the defendant is in the military.
If, based on the filed affidavits, the court cannot determine whether the
defendant is in the military, it may condition entry of judgment against the
defendant upon the plaintiff's filing of a bond. The bond would indemnify
the defendant against any loss or damage incurred because of the
judgment if the judgment is later set aside in whole or in part.
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The court may not order entry of judgment against the defendant if
the defendant is in the military until after the court appoints an attorney to
represent the defendant. Bankruptcy Procedural Forms B260, B261A, and
B261B, and their accompanying instructions, provide additional guidance
concerning the applicability of the SCRA to default judgments and related
procedural requirements.
B.
Stay of Proceedings Where A Servicemember Has Notice
Outside the default context, and at any time before final judgment in a civil
action, a person covered by the SCRA who has received notice of a proceeding may ask
the court to stay the proceeding. 50 U.S.C. app. §522. The court may also order a stay
on its own motion. Id.
The court will grant the servicemember's stay application and will stay the
proceeding for at least 90 days if the application includes: (1) a letter or other
communication setting forth facts demonstrating that the individual's current military
duty requirements materially affect the servicemember's ability to appear along with a
date when the servicemember will be able to appear; and (2) a letter or other
communication from the servicemember's commanding officer stating that the
servicemember's current military duty prevents his or her appearance and that military
leave is not authorized for the servicemember at the time of the letter. The court has
discretion to grant additional stays upon further application.
C.
Stay or Vacation of Execution of Judgments, Etc.
In addition to the bankruptcy court's ability to regulate default judgments and stay
proceedings, the court may on its own motion and must upon application: (1) stay the
execution of any judgment or order entered against a servicemember; and (2) vacate or
stay any attachment or garnishment of the servicemember's property or assets, whether
before or after judgment if it finds that the servicemember's ability to comply with the
judgment or garnishment is materially affected by military service. 50 U.S.C. app. §524.
The stay of execution may be ordered for any part of the servicemember's military service
plus 90 days after discharge from the service. The court may also order the
servicemember to make installment payments during any stay ordered.
A military legal assistance office locator for each branch of the armed forces is
available at: http://legalassistance.law.af.mil/content/locator.php
The method most often used for determining that a party does not qualify for the
protections of the SCRA is to do a search at the Department of Defense Manpower Data
130
Center ("DMDC") website by using the debtor's first and last name and social security
number. Use of this data base may help counsel from being sanctioned, even if the
information in the “military affidavit” turns out not to be correct. See, In re Templehoff,
339 B.R. 49 (Bankr. S.D.N.Y. 2005).
All Writs Act – The All Writs Act is an older, general federal court version of a law that
is along the same lines as Section 105(a) of the Bankruptcy Code. The All Writs Act is
found at 28 U.S.C. Section 1651, and states: "The Supreme Court and all courts
established by Act of Congress may issue all writs necessary or appropriate in aid of their
respective jurisdictions and agreeable to the usages and principles of law."
The All Writs Act "invests a court with a power that is essentially equitable and,
as such, not generally available to provide alternatives to other, adequate remedies at
law. See, Clinton v. Goldsmith, 526 U.S. 529, 537, 119 S.Ct. 1538, 1543, 143 L.Ed.2d
720 (1999). The All Writs Act empowers federal courts to issue injunctions and other
orders to protect or effectuate their judgments. Wesche v. Folsom, 6 F.3d 1465, 1470
(11th Cir. 1993). In permitting the federal courts to protect "their respective
jurisdictions," the All Writs Act enables them "to safeguard not only ongoing
proceedings, but potential future proceedings, as well as already-issued orders and
judgments. Klay v. United Healthgroup, Inc., 376 F.3d 1092, 1099 (11th Cir. 2004).
The All Writs Act is not an independent source of subject matter jurisdiction – it
applies only to cases "in aid of" a court's independent source of jurisdiction. See,
Syngenta Crop Protection, Inc. v. Henson, 537 U.S. 28, 33, 123 S. Ct. 366, 154 L. Ed. 2d
368 (2002); Arkansas Blue Cross & Blue Shield v. Little Rock Cardiology Clinic, P.A.,
551 F.3d 812, 821 (8th Cir. 2009).
What is The All Writs Act generally used for in bankruptcy? It is cited as
authority for banning vexatious litigants from filing suit.
The authority of a district court to restrict the activity of abusive litigants is well
recognized. Abdul-Akbar v. Watson, 901 F.2d 329, 332-33 (3d Cir. 1990); Tripati v.
Beaman, 878 F.2d 351, 352 (10th Cir. 1989); Procup v. Strickland, 792 F.2d 1069, 1073
(11th Cir. 1986)(en banc); In re Martin-Trigona, 737 F.2d 1254, 1262 (2d Cir. 1984); In
re Oliver, 682 F.2d 443, 445 (3d Cir. 1982); In re Green, 215 U.S. App. D.C. 393, 669
F.2d 779, 785 (D.C. Cir. 1981)(the right of access to the courts is neither absolute nor
unconditional). A continuous pattern of groundless and vexatious litigation can, at some
point, support an order against further filings of complaints without the permission of the
court. In re Oliver, 682 F.2d 443, 446 (3d Cir. 1982).
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It has been widely held that the courts, including bankruptcy courts, have the
power to enjoin a party from filing pleadings when and to the extent necessary to protect
themselves and other parties from the chaos and burdens of vexatious, duplicative,
frivolous litigation. See, e.g., In re Reilly, 112 B.R. 1014, 1017 (B.A.P. 9th Cir.
1990)(citing cases); In re GTI Capital Holdings, LLC, 420 B.R. 1, 16-17 (Bankr. D. Ariz.
2009)(barring further litigation not approved by the bankruptcy court).
The bankruptcy court's power to regulate vexatious litigation arises pursuant to its
inherent powers under §105(a) of the Bankruptcy Code, and the All Writs Act, 28 U.S.C.
§1651(a). Section 105(a) permits the bankruptcy court to "issue any order, process, or
judgment that is necessary or appropriate to carry out the provisions of the Bankruptcy
Code." 11 U.S.C. §105(a). The All Writs Act grants federal courts, including the
bankruptcy courts, the authority to limit access to the courts by vexatious and repetitive
litigants. See, 28 U.S.C. §1651(a); see also, In re International Power Securities Corp.,
170 F.2d 399, 402 (3d Cir. 1948)(bankruptcy courts have authority to enter relief under
the All Writs Act); In re Kovalchick, 371 B.R. 54, 60-61 (Bankr. M.D. Pa. 2006)
(exercising authority under the All Writs Act to issue an injunction restricting the filing
of meritless pleadings).
Bankruptcy courts have discretion to issue injunctions or restrictions on further
filings if: (1) the litigant receives notice and a chance to be heard before the court enters
the order; (2) there is an adequate record of the cases or abusive activities undertaken by
the litigant; (3) the court makes a substantive finding that the claims brought were
frivolous or were brought with the intent to harass the parties; and (4) the scope of the
injunction is narrowly prescribed to fit the abuse that the court seeks to prevent. See, De
Long v. Hennessey, 912 F.2d 1144, 1147-48 (9th Cir. 1990).
There Is A Co-Debtor Stay/There Is NOT A Co-Debtor Discharge – Section 1301
provides for a stay of actions against co-debtor to collect consumer debts. However,
when the case is over, the co-debtor remains liable for the full balance of the debt. The
protections of the Chapter 13 discharge do not extend to the co-debtor. See, §524(e); In
re Leonard, 307 B.R. 611, 614 (Bankr. E.D. Tenn. 2004).
Badges Of Fraud – these are common law factors that courts look at to determine
whether an action was done with fraudulent intent. In other words, the badges of fraud
are used to determine if a transfer was done with an actual intent to defraud. It is very
rare for a person to say: “yes, I am doing this with fraudulent intent”. Instead, courts
must determine whether fraudulent intent can be inferred from the surrounding
circumstances.
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“The modern law of fraudulent transfers had its origin in the Statute of 13
Elizabeth, which invalidated "covinous and fraudulent" transfers designed "to delay,
hinder or defraud creditors and others." 13 Eliz., ch. 5 (1570). English courts [*541]
soon developed the doctrine of "badges of fraud": proof by a creditor of certain objective
facts (for example, a transfer to a close relative, a secret transfer, a transfer of title
without transfer of possession, or grossly inadequate consideration) would raise a
rebuttable presumption of actual fraudulent intent.” See, BFP v. Resolution Trust Corp.,
511 U.S. 531, 540-541, 114 S.Ct. 1757, 1764, 128 L.Ed.2d 556, 567 (1994).
A typical list of the badges of fraud under state law – as stated in the Uniform
Fraudulent Transfer Act - are:
(1) whether the transfer was to an insider, (2) whether the debtor retained
possession or control of the property, (3) whether the transfer was
concealed, (4) whether the debtor had been sued or threatened with suit,
(5) whether the transfer was of substantially all of the debtor's assets, (6)
whether the debtor absconded, (7) whether the debtor removed or
concealed assets, (8) whether the value received was reasonably
equivalent to the value of the asset transferred, (9) whether the debtor was
or became insolvent after the transfer, (10) whether the transfer was made
shortly before or after a substantial debt was incurred, and (11) whether
the debtor transferred the essential assets of a business to a lienholder who
transferred the assets to an insider of the debtor.
Ohio Rev. Code §1336.04(B).
Bankruptcy courts can rely on these “badges of fraud” to find an intent to defraud.
See, In re Retz, 606 F.3d 1189,1200 (9th Cir. 2012); In re Soza, 542 F.3d 1060, 1067 (5th
Cir. 2008).
XVI. HOW DO YOU KNOW WHEN YOU MAY HAVE TROUBLE AT YOUR
DOORSTEP?
While every debtor should be treated fairly, regardless of their situation or beliefs,
there are some red flags that may alert you to potential problems on the horizon.
“Problems” can range from your trustee (or judge, or both) being sued, a grievance with
the bar association, to security problems at the 341 meeting.
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Here are some things – a very incomplete list - that I have seen that would ping
my “trouble” radar:
1.
Tax Protesters. If you see a lot of tax debt, and the debtor puts in some note
about the IRS being illegal, or the 16th Amendment being void – you’ve got a tax
protester. For a more complete picture of the “theories” underlying the tax protest
movement, here is a pretty good link: http://evans-legal.com/dan/tpfaq.html
Many other off-the-beaten-path groups are also tax protesters.
2.
Debtors Who Allege The Money Is No Good. If you see something about debts
being disputed because they were only given federal reserve notes, or if the debtor claims
debts were paid because they sent in a certified promissory money note to the bank – that
the debtor printed up on his computer - you may have someone who doesn’t believe that
U.S. currency is legal tender. A case involving debtors raising these types of issues is: In
re Walton, 77 B.R. 716 (Bankr. N.D. Ohio 1987).
3.
Land Patents. There is an idea out there, born in the farm protest movements,
that a “federal land patent” is a special kind of land ownership that is superior to fee
simple ownership, and which cannot be defeated by a mortgage. From the recitation of
facts in an unpublished appellate decision:
On the morning of June 29, 2000, Sheriff Wallace and his deputies
prepared to carry out the eviction. Wallace believed special precautions
were needed in light of a letter Watson had sent to the sheriff before the
real estate was sold at auction. Under the heading "Buyer Beware 'Notice'
to All," she declared her belief that the sale was unlawful because she held
a "federal Land Patent," see Hilgeford v. Peoples Bank, 776 F.2d 176, 179
(7th Cir. 1985) (per curiam), and indicated her intent "to defend my
property including using Deadly Force." The eviction was therefore
initiated with some force, which included placing Watson in handcuffs
until the building was deemed secured.
4.
“Preamble Citizens”. These are citizens who had full “preamble” rights at the
time the Constitution was ratified. In other words, free white men. This term can be a
sign that other group affiliations – including a group with members who like to wear
hoods, even in the Summer – may be involved.
5.
Militia members. There are areas where militias – private “armies”, usually
associated with non-mainstream political views – are pretty common.
6.
Anyone Who Has Sued A Judge. Or placed fake judgment liens on the judge’s
house....
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7.
People Who Own Lots Of High Value Guns. Gun ownership is very common –
but debtors with lots of high value guns can be a red flag. Emphasize that you are not a
liquidating trustee, and therefore won’t be coming to take the guns away – in other
words, it is only a HYPOTHETICAL liquidation standard for confirmation.....
8.
Harley Owners. Not because they are likely to be part of a “motorcycle gang” –
but because they want to keep their Harley more than they want oxygen. The idea that
the $300 a month Harley payment may not be something the unsecured creditors should
be indirectly paying for may elicit a very strong reaction.
9.
Debtors Involved In A Domestic Debt Dispute. Nobody knows where your
financial bodies are buried better than your ex-spouse. Sometimes there are issues with
existing restraining orders that make the 341 meeting even more unpleasant than it has to
be. If there is a “hot” domestic dispute going on involving the debtor(s), you may want
to have extra security precautions in place.
10.
The Debtor Is An Attorney. Sadly, members of the profession have a
deservedly bad reputation for honesty in bankruptcy settings. And they can aggressively
pursue issues of questionable (at best) merit.
11.
Debtor Has Filed To Stop Big Time Litigation. For something like fraud or
embezzlement. Creditors are often HOT in these kinds of cases.
12.
The Debtor Attempts To Run Your 341 Meeting. When someone starts telling
you what you can and can’t ask, refuses to answer questions because they aren’t really
“relevant”, or tries to bully you at the first meeting.
13.
Diabetic Debtors. The stress of the 341 can cause diabetic debtors to experience
a hypoglycemia (low blood sugar) reaction during the First Meeting. Usually, people
with diabetes will recognize the symptoms, but may think they can make it through the
examination before taking action to raise blood sugar levels. We keep a roll of lifesavers
handy for such occasions. Juice works as well.
14.
Members of the “Sovereign Movement”. This is becoming an increasingly
popular fringe political movement, with beliefs that people in the U.S. are kings and
queens who do not have to follow laws. They have a wide range of beliefs that can
include the legitimacy of armed resistance to authority, a belief that what we call the
Constitution is a fake inserted by Lincoln, that a separate government has been
established in the United States that is different from the one generally recognized, that
they can take over abandoned real estate and thereby have a first and best claim to
ownership, etc. Self-described members of this “group” have been involved in armed
confrontations with law enforcement recently. Lots of their beliefs are fluid, and are
disseminated through YouTube and social media.
As one bankruptcy court put it: “The Court has seen many of her arguments
before. They are regularly peddled on the less reliable corners of the Internet by tax
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protesters, "sovereign citizens," and other conspiracy theorists. Anthony has joined the
ranks of the unwary, unwise, and often desperate victims to be persuaded that taxes are
voluntary, money isn't "money," and you don't really have to pay your bills. The truth:
they aren't, it is, and you do.” In re Anthony, 481 B.R. 602, 609 (Bankr. D. Neb. 2012);
see also, United States v. Beeman, 2011 U.S. Dist. LEXIS 70892, 2011 WL 2601959 at
*9-12 (W.D. Pa. June 30, 2011)(discussing courts' rejection of "redemptionist" or
"sovereign citizen" theories).
15.
“Moorish Movement” Arguments. These arguments usually deal with a court’s
jurisdiction over the person, or the applicability of U.S. laws. Specifically, they claim
that a 1787 treaty between the United States and Morocco grants them immunity from
U.S. law. [Note that there is a Moorish Science Temple of America that officially
disavows the legal arguments and abusive legal tactics of the vexatious litigators who
claim affiliation.]
In Wheeler v. Fannie Mae, 2013 U.S. Dist. LEXIS 71890 at *14-*15 (E.D. Mich.
April 29, 2013), the court stated:
Further, as I concluded in my previous Report, Plaintiff's claim that this
Court does not enjoy jurisdiction over this action because she is a "private
Moorish American" is without merit. "We equate the citizenship of a
natural person with his domicile." Certain Interested Underwriters at
Lloyd's, London, England v. Layne, 26 F.3d 39, 41 (6th Cir. 1994)(citing
Von Dunser v. Aronoff, 915 F.2d 1071, 1072 (6th Cir.1990)); see also
U.S. Bank Nat. Ass'n v. Bey, 2011 U.S. Dist. LEXIS 32086, 2011 WL
1215738, *3 (D.Conn. March 28, 2011)(citing Linardos v. Fortuna, 157
F.3d 945, 948 (2d Cir.1998))(claim of Moorish citizenship by plaintiff
domiciled in Connecticut was citizen of that state for purposes of diversity
jurisdiction).
See also, Moorish Sci. Temple of Am. 4th & 5th Generation v. Superior Court of New
Jersey, 2012 U.S. Dist. LEXIS 6997 (D.N.J. Jan. 12, 2012),
XVII. PROTECTING THE TRUSTEE.
A.
The Barton Doctrine.
The “Barton Doctrine” comes from a U.S. Supreme Court decision, Barton v.
Barbour, 104 U.S. 126, 26 L. Ed. 672 (1881). In that decision, the Supreme Court held
that a receiver for a railroad could not be sued without leave of the appointing court. The
requirement that a party obtain leave from the appointing court before suing a receiver in
another venue "is long-standing." In re Castillo, 297 F.3d 940, 945 (9th Cir. 2002). As
the Supreme Court explained in a later decision: "When a court exercising jurisdiction in
136
equity appoints a receiver of all the property of a corporation, the court assumes the
administration of the estate. The possession of the receiver is the possession of the court .
. . ." Porter v. Sabin, 149 U.S. 473, 479, 13 S. Ct. 1008, 37 L. Ed. 815 (1893). "It is for
that court," therefore, "to decide whether it will determine for itself all claims of or
against the receiver, or will allow them to be litigated elsewhere." Id.; see also, Barton,
104 U.S. at 136.
Judge Learned Hand authored a decision specifically applying the Barton
Doctrine to bankruptcy trustees: “[A]n action against a trustee in bankruptcy for
transactions of his own, must be brought in bankruptcy court, unless it gives leave to
liquidate elsewhere; it concerns the distribution of the assets as much as a claim against
the bankrupt, and is justiciable only as that is.” Vass v. Conron Bros. Co., 59 F.2d 969,
971 (2nd Cir. 1932).
The modern case law on the Barton Doctrine has included all trustees, not just
those who are holding property of a corporation, or any property: Under the Barton
doctrine, "leave of the [bankruptcy] forum must be obtained by any party wishing to
institute an action in a [state] forum against a trustee, for acts done in the trustee's official
capacity and within the trustee's authority as an officer of the court." In re DeLorean
Motor Co., 991 F.2d 1236, 1240 (6th Cir. 1993) (quoted in In re Lowenbraun, 453 F.3d
314, 321 (6th Cir. 2006)); In re Crown Vantage, Inc., 421 F.3d 963, 970 (9th Cir. 2005);
Muratore v. Darr, 375 F.3d 140, 146 (1st Cir. 2004); In re Lehal Realty Assocs., 101 F.3d
272 (2d Cir. 1996); Byrd v. Hoffman, 417 B.R. 320, 326 (D. Md. 2008).
Claims based on acts that are related to the official duties of the trustee are barred
by the Barton doctrine even if the debtor alleges such acts were taken with improper
motives. Satterfield v. Malloy, 700 F.3d 1231, 1236 (10th Cir. 2012); see also, McDaniel
v. Blust, 668 F.3d 153, 157-158 (4th Cir. 2012); Muratore v. Darr, 375 F.3d 140, 146-147
(1st Cir. 2004).
The policy behind the Barton Doctrine has been described in various ways. Most
simply, the Barton Doctrine allows bankruptcy courts to retain greater control over
administration of the estate. In re Lowenbraun, 453 F.3d, 314, 321 (6th Cir. 2006).
A more detailed explanation is found in Carter v. Rogers:
137
If [the trustee] is burdened with having to defend against suits by litigants
disappointed by his actions on the court's behalf, his work for the court will be
impeded. . . . Without the requirement [of leave], trusteeship will become a
more irksome duty, and so it will be harder for courts to find competent
people to appoint as trustees. Trustees will have to pay higher malpractice
premiums, and this will make the administration of the bankruptcy laws more
expensive. . . . Furthermore, requiring that leave to sue be sought enables
bankruptcy judges to monitor the work of the trustees more effectively.
Carter v. Rogers, 220 F.3d 1249, 1252-53 (11th Cir. 2000)(alteration in original) (quoting,
In re Linton, 136 F.3d 544, 545 (7th Cir. 1998)).
A corollary purpose of the Barton doctrine is "to prevent a party from obtaining
'some advantage over the other claimants upon the assets' in the trustee's hands."
Muratore v. Darr, 375 F.3d 140, 147 (1st Cir. 2004); In re Ridley Owens, Inc., 391 B.R.
867, 871 (Bankr. N.D. Fla. 2008). If dissatisfied parties in bankruptcy proceedings can
freely sue the trustee in another court for discretionary decisions made while
administering the estate, "that court would have the practical power to turn bankruptcy
losers into bankruptcy winners and vice versa." In re Linton, 136 F.3d 544, 546 (7th Cir.
1998); In re VistaCare Group, LLC, 678 F.3d 218, 228 (3rd Cir. 2012). "The requirement
of uniform application of bankruptcy law dictates that all legal proceedings that affect the
administration of the bankruptcy estate be brought either in bankruptcy court or with
leave of the bankruptcy court." In re Crown Vantage, 421 F.3d 963, 971 (9th Cir. 2005);
In re VistaCare Group, LLC, 678 F.3d 218, 228 (3rd Cir. 2012). Thus, the Barton
doctrine prevents creditors from bringing lawsuits against the trustee in more favorable
forums to overturn or compensate themselves for losses incurred in the bankruptcy
proceeding.
The argument that Chapter 13 Trustees are not appointed by the bankruptcy court,
and are therefore not protected by the Barton Doctrine, has been rejected. Mickler v.
Davis, 2005 U.S. Dist. LEXIS 32969 (M.D. Fla. 2005); In re Weitzman, 381 B.R. 874,
879 (Bankr. N.D. Ill. 2008)(citing Mickler) see also, In re James, 490 B.R. 795, 797-798
(Bankr. N.D. Ill. 2013)(applying Barton Doctrine to Chapter 13 trustee).
There were concerns in the Third Circuit based on the holding in In re Lambert,
438 B.R. 523, 525-526 (Bankr. M.D. Pa. 2010)(the bankruptcy courts no longer appoint
trustees, therefore the Barton doctrine no longer applies, without discussing why 28
138
U.S.C. §959(a) continues to exist, granting a narrow exception to – in this court’s view –
a non-existent rule.) That position is no longer viable after the Third Circuit Court of
Appeals decision in In re VistaCare Group, LLC, 678 F.3d 218, 232 (3rd Cir. 2012)(“In
sum, we hold that the Barton doctrine remains valid, and therefore, subject to the
exception in § 959(a), a party must first obtain leave of the bankruptcy court before it
brings an action in another forum against a bankruptcy trustee for acts done in the
trustee's official capacity.”); In re Lunan, 489 B.R. 711, 725 (Bankr. E.D. Tenn.
2012)(citing VistaCare in specifically rejecting the Lambert argument).
Similarly, arguments that the Barton Doctrine only applies to actions in state
courts, and does not require approval for actions in federal courts, has been rejected. See,
Carter v. Rogers, 220 F.3d 1249, 1252 (11th Cir. 2000); In re Kashani, 190 B.R. 875, 885
(9th Cir. 1995).
The Barton doctrine has been held to apply to a suit filed after the Chapter 13 case
is concluded. See, In re Linton, 136 F.3d 544, 545 (7th Cir. 1998); In re Lambert, 438
B.R. 523, 525-526 (Bankr. M.D. Pa. 2010).
What the Barton Doctrine means is, your trustee cannot be sued anywhere but in the
bankruptcy court unless the Plaintiff has prior permission from the bankruptcy court to
commence the action. Obviously, this applies only in civil proceedings. This rule applies
equally whether the trustee is sued in state court, or in federal court. See, Carter v.
Rodgers, 220 F.3d 1249, 1253 (11th Cir. 2000) (applying Barton doctrine to suit against a
bankruptcy trustee and holding "when leave is required, it is required before pursuing
remedies in either state or other federal courts."); Ariel Preferred Retail Group v.
CWCapital Asset Mgmt., 883 F.Supp.2d 797, 816 (E.D. Mo. 2012); Kashani v. Fulton,
190 B.R. 875, 884-885 (B.A.P. 9th Cir. 1995); Blixseth v. Brown, 470 B.R. 562, 566-567
(D. Mont. 2012)(citing cases).
1.
The Barton Doctrine Is Jurisdictional.
Where a plaintiff neglects to obtain leave from the appointing court, a suit filed
against the trustee in another court must be dismissed for lack of subject matter
jurisdiction. Barton, 104 U.S. at 131; Carter v. Rodgers, 220 F.3d 1249, 1253 (11th Cir.
2000); In re Harris, 590 F.3d 730, 741 (9th Cir. 2009); Satterfield v. Malloy, 700 F.3d
139
1231, 1234 (10th Cir. 2012)(“we note that the Barton doctrine is jurisdictional in nature.”,
holding that dismissal should be under 12(b)(1) rather than 12(b)(6)); Barksdale-Bey v.
Creasy, 2011 U.S. Dist. LEXIS 37088 (D. Md. April 4, 2011)(dismissing for lack of
subject matter jurisdiction).
2.
The Barton Doctrine Also Protects A Chapter 13 Trustee’s
Staff Attorney.
The Barton Doctrine has been held to apply not only to a bankruptcy trustee but
also to those individuals who are the “functional equivalent of a trustee.” In re DeLorean
Motor Co., 991 F.2d , 1236, 1241 (6th Cir. 1993); Carter v. Rodgers, 220 F.3d 1249, 1252
n.4 (11th Cir. 2000).
Cases have specifically held that the Barton Doctrine applies to trustee’s counsel,
as well as to trustees themselves. See, Lawrence v. Goldberg, 573 F.3d 1265, 1269 (11th
Cir. 2009); In re McKenzie, 716 F.3d 404, 411-412 (6th Cir. 2013)(as a matter of law,
counsel for the trustee is the function equivalent of a trustee); In re Lowenbraun, 453
F.3d 314, 321 (6th Cir. 2006); In re DeLorean Motor Co., 991 F.2d 1236, 1240-41 (6th
Cir. 1993)("It is well settled that leave of the appointing forum must be obtained by any
party wishing to institute an action in a nonappointing forum against a trustee, for acts
done in the trustee's official capacity and within the trustee's authority as an officer of the
court. . . . counsel for trustee, court appointed officers who represent the estate, are the
functional equivalent of a trustee."); McDaniel v. Blust, 668 F.3d 153, 156-158 (4th cir.
2012)(Barton Doctrine applies to trustees’ attorneys, “we know of no reason why the
trustee must have directed counsel to take the specific actions that are the subject of the
suit.”); Benton v. Cory, 2010 U.S. Dist. LEXIS 134042 (D. Nev. 2010); Washington v.
United States, 2006 U.S. Dist. LEXIS 61985 (M.D. Fla. August 30, 2006); Mammola v.
Dwyer, 497 B.R. 1, 2-3 (Bankr. D. Mass. 2013); In re Martin, 287 B.R. 423, 434 (Bankr.
E.D. Ark. 2003("The Barton Doctrine also applies to counsel representing a bankruptcy
trustee."); In re Krikava, 217 B.R. 275, 278-279 (Bankr. D. Neb. 1998); In re Nathurst,
207 B.R. 755, 758 (Bankr. M.D. Fla. 1997); see also, Carter v. Rodgers, 220 F.3d 1249,
1252 n.4 (11th Cir. 2000).
140
3.
The Statutory Exception To The Barton Doctrine:
28 U.S.C. §959(a).
There is a statutory exception to the Barton doctrine. The exception was enacted by
Congress to address a concern expressed in a dissent to Barton filed by Justice Miller. See,
Diners Club, Inc. v. Bumb, 421 F.2d 396, 398-99 (9th Cir. 1970)(explaining that because the
original §959 was enacted shortly after Barton, and given the content of Justice Miller's
dissent, it is clear that the purpose of §959 was to enact the dissent into law). Justice Miller
wrote that he agreed with the majority to the extent that its rule was limited to receivers
"appointed to wind up a defunct corporation." Barton, 104 U.S. at 138. But where the rule
was extended to a suit that would not "interfere with the actual possession of property which
the receiver holds," such a rule requiring permission from the appointing court before an
action could be brought against a receiver in a different court was "unsupported by authority
and unsound in principle." Id. at 141.
The exception, currently codified at 28 U.S.C. §959(a), reads: “Trustees, receivers or
managers of any property, including debtors in possession, may be sued, without leave of
the court appointing them, with respect to any of their acts or transactions in carrying on
business connected with such property."
This narrow statutory exception to the Barton doctrine applies only to actions
taken while "carrying on business." The Eleventh Circuit has explained that §959(a) was
intended to "permit actions redressing torts committed in furtherance of the debtor's
business, such as the common situation of a negligence claim in a slip and fall case where
a bankruptcy trustee, for example, conducted a retail store." Carter v. Rodgers, 220 F.3d
1249, 1254 (11th Cir. 2000); Satterfield v. Malloy, 700 F.3d 1231, 1237 (10th Cir. 2012).
Section 959 does not apply where a trustee acting in his official capacity conducts
no business connected with the property other than to perform administrative tasks
necessarily incident to the consolidation, preservation, and liquidation of assets in the
debtor's estate. See, e.g., Vass v. Conron Bros. Co., 59 F.2d 969, 791 (2d Cir. 1932); In re
DeLorean Motor Co., 991 F.2d at 1240-41; In re Herrera, 472 B.R. 839, 851 (Bankr.
D.N.M. 2012)(trustee administering a simple Chapter 7 not operating a business); In re
Davis, 312 B.R. 681, 687 (Bankr. D. Nev. 2004); Matter of Campbell, 13 B.R. 974
(Bankr. D. Idaho 1981); Maguire v. Puente, 120 Misc. 2d 871, 466 N.Y.S.2d 934 (N.Y.
141
Sup. Ct. 1983).
“[M]erely holding and collecting the assets intact, collecting and liquidating the
assets of the debtor, and taking steps for the care and preservation of the property, do not
constitute ‘carrying on business.’ Carter v. Rodgers, 220 F.3d 1249, 1254 (11th Cir. 2000);
Satterfield v. Malloy, 700 F.3d 1231, 1237 (10th Cir. 2012). Likewise, actions taken in the
mere continuous administration of property under order of the court do not constitute an
‘act’ or ‘transaction’ in carrying on business connected with the estate.” Muratore v. Darr,
375 F.3d 140, 144 (1st Cir. 2004)(internal citations omitted).
Because Chapter 13 Trustee do not “carry on the debtor’s business”, this
exception should have little, if any, application to Chapter 13 Trustees.
4.
A Case Law Exception To The Barton Doctrine.
Some courts have found additional exceptions to the Barton Doctrine.
The
Bankruptcy Court in Katz v. Kucej (In re Beibel), 2009 Bankr. LEXIS 1544 (Bankr. D.
Conn. May 19, 2009) stated:
Thus, the trustee is not protected by the Barton Doctrine in cases
where the trustee should have obtained a court order and did not. See
Leonard v. Vrooman, 383 F.2d 556, 560 (9th Cir. 1967), cert. denied, 390
U.S. 925, 88 S. Ct. 856, 19 L. Ed. 2d 985 (1968) (holding that "a trustee
wrongfully possessing property which is not an asset of the estate may be
sued for damages arising out of his illegal occupation in a state court without
leave of his appointing court"). But see Muratore v. Darr, 375 F.3d 140, 147
(1st Cir. 2004) (declining to recognize "some generalized tort exception to
the Barton doctrine"). Moreover, the trustee is not protected by the Barton
Doctrine if the trustee obtains a court order but acts beyond its scope. See
Teton Millwork Sales v. Schlossberg, 311 Fed. Appx. 145, 2009 WL 323141
(10th Cir. 2009)(finding that receiver who was authorized by court order to
seize the defendant's property held in the name of Teton Millwork Sales, an
entity in which the defendant held a 25% interest, could be sued without
leave of his appointing court when he seized 100% of the assets of Teton
Millwork Sales). Cf. Lurie v. Blackwell, 211 F.3d 1274, [published in fulltext format at 2000 U.S. App. LEXIS 3360] 2000 WL 237966 (9th Cir. Feb.
18, 2000)(unpublished table decision). Facts sufficient to support the
allegation that the trustee exceeded the scope of the apparent authorizing
order must be pled by the plaintiff at the outset or the Barton Doctrine will
bar the suit in the nonappointing court. Lowenbraun v. Canary (In re
Lowenbraun), 453 F.3d 314 (6th Cir. 2006).
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[It is] presume[d that] acts were a part of the trustee's duties
unless Plaintiff initially alleges at the outset facts demonstrating
otherwise. This presumption strikes us as persuasive. Congress
intended for the Bankruptcy Code to be comprehensive and for
the federal courts to have exclusive jurisdiction over bankruptcy
matters. A presumption in favor of the trustee . . . that [he was]
acting within the scope of . . . [his] duties prevents a plaintiff . . .
from making unsupported allegations in an attempt to defeat
Congress's goal of providing exclusive federal jurisdiction over
bankruptcy matters.
Id. at 322 (second alteration in original; emphasis added; citations omitted).
In determining whether the act complained of was done within the trustee's
"official capacity" and within the trustee's "authority as an officer of the court," courts
look to the nature of the function being performed by the trustee or trustee's counsel at
the time the trustee committed the allegedly improper act. See, Heavrin v. Schilling (In
re Triple S Rests., Inc.), 519 F.3d 575, 578 (6th Cir. 2008); McDaniel v. Blust, 668 F.3d
153, 157 (4th Cir. 2012). Moreover, the Sixth Circuit has held that a presumption applies
under the Barton doctrine that acts "were a part of the trustee's duties unless Plaintiff
initially alleges at the outset facts demonstrating otherwise." In re Lowenbraun, 453 F.3d
314, 322 (6th Cir. 2006).
B.
How To Use The Barton Doctrine To Defend Your Trustee.
If your trustee is sued in a non-bankruptcy forum, the question becomes – how to
use the Barton Doctrine most effectively? Obviously, you can immediately challenge
subject matter jurisdiction on a motion to dismiss. However, there is always a danger
that the non-bankruptcy court is not going to understand, or want to learn about, the
Barton Doctrine.
You could seek to remove the case against your trustee to the bankruptcy court.
However, a recent case suggests that once the action is before the appointing court – i.e.,
the bankruptcy court – you can’t obtain dismissal of the case based on the Barton
Doctrine. See, In re Harris, 590 F.3d 730 741-742 (9th Cir. 2009)(“The Barton doctrine
is not a tool to punish the unwary by denying any forum to hear a claim when leave of the
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bankruptcy court is not sought. When Harris's case was removed to the appointing
bankruptcy court, all problems under the Barton doctrine vanished.”); see also, In re
Mailman Steam Carpet Cleaning Corp., 196 F.3d 1, 5 (1st Cir. 1999); In re Reich, 54
B.R. 995, 997-98 (Bankr. E.D. Mich. 1985)(holding that prior approval by the
bankruptcy court is not a prerequisite for filing a creditor action against the trustee in that
court).
In contrast, courts have held that failure to seek leave of court before instituting a
suit against the trustee in a nonappointing court cannot be rectified after commencement
of that suit because there was lack of subject matter jurisdiction in the nonappointing
court at the time suit was brought. See, In re Kids Creek Partners, L.P., 248 B.R. 554,
558-59 (Bankr. N.D. Ill. 2000), aff'd, 2000 U.S. Dist. LEXIS 17718, 2000 WL 1761020
(N.D. Ill. Nov. 30, 2000).
The decision in In re Crown Vantage, Inc., 421 F.3d 963, 970 (9th Cir. 2005)
suggests a different approach: filing for an injunction against continuation of the state
court proceeding under Section 105(a). At the bankruptcy court level, the court granted
an injunction against the state court action. However, the district court vacated the
injunction, finding that the trustee failed to show irreparable harm. Id., at 969-70. The
Ninth Circuit reversed, stating that "[t]he only requirement for the issuance of an
injunction under §105 is that the remedy conform to the objectives of the Bankruptcy
Code." Id. at 975. As the appellate court explained, it makes no sense to require a
showing of irreparable harm in the context of Barton's bright-line prohibition of
unauthorized litigation against court-appointed receivers. Once such an action had been
filed, "[t]he only appropriate remedy . . . is to order cessation of the improper action." Id.,
at 976. In other words, irreparable harm need not be shown because the movant was
certain to succeed on its claim of a Barton violation.
"If the movant has a 100%
probability of success on the merits," the injunction should issue "without regard to the
balance of the hardships." Sammartano v. First Judicial Dist. Court, 303 F.3d 959, 965
(9th Cir. 2002).
The advantage of the §105 injunction is two-fold: 1) it gets the matter decided by
the bankruptcy court; and 2) it leaves the plaintiff’s suit stranded in a court where it
cannot proceed.
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1. Another Next Level Of Response – Damages.
In addition to injunctive relief, a trustee (or staff attorney) sued in violation of
the Barton Doctrine may be etitled to damages.
As explained in Allard v. Weitzman (In re DeLorean Motor Co.),
991 F.2d 1236 (6th Cir. 1993), two forms of relief are available when a
lawsuit has been brought in contravention of the Barton Doctrine. The
court ruled that both injunctive relief and the recovery of damages were
available where there has been a violation of the Barton Doctrine. In the
DeLorean case, the bankruptcy trustee and his attorneys were sued in state
court by an individual who had been sued by the trustee. The state court
suit was brought without obtaining leave of the bankruptcy court. The
trustee then brought a proceeding in the bankruptcy court alleging a
violation of the Barton Doctrine seeking to enjoin the prosecution of the
state court action and to recover the damages incurred as a result of having
to defend against the state court action. The court upheld both of these
claims. The court held that the trustee's assertion that the unauthorized
suit against the trustee and his attorneys would unduly hinder the
administration of the bankruptcy estate stated a valid claim for injunctive
relief. In the claim for damages in Count I of his complaint, the trustee in
DeLorean sought to recover his "actual damages, including costs and
attorneys' fees and administrative expenses, if any, by way of
indemnification, incurred as a result of the filing of the Weitzman Action."
Id. at 1241. In upholding the damages claim, the court stated:
The Trustee is entitled to the damages that he requested in
Count I of his complaint. Furthermore, the Trustee must be
given the opportunity to prove the amount of the damages
incurred as a result of having to defend against the
Weitzman Action including the necessity of the filing of
the Trustee's complaint with the Bankruptcy Court in
Detroit.
Id. at 1242. In accord Unencumbered Assets Trust v. Hampton-Stein (In
re National Century Financial Enterprises, Inc., 426 B.R. 282 (Bankr. S.D.
Ohio 2010); Steffen v. Berman (In re Steffen), 406 B.R. 148 (Bankr. M.D.
Fla. 2009); Katz v. Kucej (In re Beibel), No. 08-3115, 2009 Bankr. LEXIS
1544, 2009 WL 1451637 (Bankr. May 19, 2009); In re Byrd, No. 0435620, 2007 Bankr. LEXIS 1764, 2007 WL 1485441 (Bankr. May 18,
2007). Thus, where, as in this proceeding, a party has filed a suit in
violation of the Barton Doctrine, such party is liable for the damages
resulting from such violation, and the recoverable damages include the
attorneys' fees and expenses incurred in opposing the unauthorized suit as
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well as the attorneys' fees and expenses incurred in bringing the
proceeding to recover the damages resulting from the violation.
In re EBW Laser, Inc., 2012 Bankr. LEXIS 3767 at *19-*21 (Bankr. M.D.N.C.
August 14, 2012).
There is also case law holding that sanctions may be appropriate under 28
U.S.C. Section 1927. See, Kirschner v. Blixseth, 2012 U.S. Dist. LEXIS 183275
(C.D. Cal. Nov. 1, 2012)(sanction for filing counterclaim against trustee in his
personal capacity without obtaining leave of the appointing court).
C.
When The Plaintiff Actually Seeks Leave Of The Bankruptcy
Court To Sue.
If a plaintiff does proceed properly, and seeks leave of the bankruptcy court to sue
your trustee, the claimant must be able to plead the elements of a prima facie case against
the trustee. See, Anderson v. United States, 520 F.2d 1027, 1029 (5th Cir. 1975); In re
Weisser Eyecare, Inc., 245 B.R. 844 (Bankr. N.D. Ill. 2000); In re Berry Publishing
Services, Inc., 231 B.R. 676 (Bankr. N.D. Ill. 1999); In re Kashani, 190 B.R. 875 (9th
Cir. BAP 1995). In Kashani, the Bankruptcy Appellate Panel held that even if a plaintiff
successfully states a prima facie case, the Court may nevertheless exercise its discretion
and refuse to grant the movant permission to sue in another forum if the Court finds that
it is in a better position to adjudicate the claim based on a "balancing of the interests of
all parties involved." Kashani, 190 B.R. at 886, citing In re Adolf Gobel, Inc., 89 F.2d
171, 172 (2d Cir. 1937).
Courts may consider the following factors, any of which may serve as a basis for
denial of a motion for leave to sue in another court:
1. whether the acts or transactions relate to the carrying on of the business
connected with the property of the bankruptcy estate;
2. whether the claims pertain to actions of the trustee while administering
the estate;
3. whether the claims involve the individual acting within the scope of his
or her authority under the statute or orders of the bankruptcy court, so that
the trusteee is entitled to quasi-judicial or derived judicial immunity;
146
4. whether the movants or proposed plaintiffs are seeking to surcharge the
trustee, that is, seeking a judgment against the trustee personally; and
5. whether the claims involve the trustee's breaching her fiduciary duty
either through negligent or willful misconduct.
Kashani, 190 B.R. at 886-87; see also, Beck v. Fort James Corp. (In re Crown Vantage),
421 F.3d 963, 976 (9th Cir. 2005); Grant, Konvalinka & Harrison, PC v. Banks (In re
McKenzie), 716 F.3d 404, 422-423 (6th Cir. 2013).
D.
Quasi-Judicial Immunity.
The Barton Doctrine is usually a procedural hurdle – albeit based on subject matter
jurisdiction. In contrast, quasi-judicial immunity is substantive. Moreover, a defendant who
is entitled to absolute or qualified immunity enjoys immunity from suit, rather than a mere
defense to liability. Mitchell v. Forsyth, 472 U.S. 511, 526, 86 L. Ed. 2d 411, 105 S. Ct.
2806 (1985).
Judges historically have been granted absolute immunity from suits for their
judicial acts. Forrester v. White, 484 U.S. 219, 225-28, 108 S. Ct. 538, 98 L. Ed. 2d 555
(1988). An offshoot of judicial immunity is the doctrine of quasi-judicial immunity
which extends immunity to nonjudicial officers for "all claims relating to the exercise of
judicial functions." In re Castillo, 297 F.3d 940, 947 (9th Cir. 2002)(applying quasijudicial immunity to Chapter 13 Trustee and Staff Attorney.); see also, Cleavinger v.
Saxner, 474 U.S. 193, 200, 106 S. Ct. 496, 500, 88 L. Ed. 2d 507, 513 (1985)(immunity is
extended in appropriate circumstances to non-jurists "who perform functions closely
associated with the judicial process.").
This area of the law is full of imprecision. “[T]he case law regarding trustee liability
is extremely confusing and often contradictory, with the result that it is difficult from the
caselaw alone to formulate guidelines specifying when a trustee is immune from personal
liability and when he is not.” Kirk v. Hendon (In re Heinsohn), 231 B.R. 48, 64-65 (Bankr.
E.D. Tenn. 1999), aff'd 247 B.R. 237 (E.D. Tenn. 2000). Fiduciary concepts and immunity
concepts are mixed up by the courts, and the usual analysis of fiduciary’s duties – that there
is a duty of care and the duty of loyalty – are not properly distinguished in the case law.
Add to that the fact that courts use different terms – for example, immunity, judicial
147
immunity, quasi-judicial immunity and derived quasi-judicial immunity - to mean basically
the same thing.
This confusion all started with some rather loose language in the U.S. Supreme
Court case Mosser v. Darrow, 341 U.S. 267, 274, 95 L. Ed. 927, 71 S. Ct. 680 (1951).
There is also a difficulty inherent in coming up with one liability standard for Chapter 13,
Chapter 7, and Chapter 11 Trustees, and DIPs as well, all of whom face different challenges.
For a complete discussion of why the logic of the case law is so hard to understand, see: E.
Allan Tiller, Personal Liability of Trustees and Receivers in Bankruptcy, 53 Am. Bankr. L.J.
75 (1979); Daniel B. Bogart, Liability of Directors of Chapter 11 Debtors in Possession:
“Don’t Look Back, Something May Be Gaining on You”, 68 Am. Bankr. L.J. 155 (1994);
Ralph C. McCullough, Trustee Liability: Is There Enough Protection in These “Arms of the
Court”?, 103 Comm. L.J. 123 (1998); Daniel B. Bogart, Finding the Still Small Voice: The
Liability of Trustees and the Work of the National Bankruptcy Review Commission, 102
Dickinson L. Rev. 703 (Summer, 1998); David W. Allard, Personal Liability of Trustees
and Debtors in Possession: Review of the Varying Standards of Care in the United States,
106 Com. L.J. 415 (Winter, 2001).
If you are faced with a situation where your Chapter 13 Trustee may, or does, face a
lawsuit, you may find an analysis of the law as some of the Law Review articles say it
“should be” to be helpful, or you may find some binding precedent that says your client is
entitled to immunity to be more helpful. My goal is to give you enough information so you
understand at least the outlines of this difficult area of the law.
1.
The Two-Part Test For Quasi-Judicial Immunity
In The Case Law.
In Antoine v. Byers & Anderson, Inc., 508 U.S. 429, 113 S.Ct. 2167, 124 L.Ed.2d
391 (1993), the United States Supreme Court set forth a two-part test for determining
whether a non-judicial officer is entitled to quasi-judicial immunity. The first inquiry
requires the court to thoroughly examine the immunity historically accorded to the
relevant official at common law and the public interest behind that immunity. Antoine v.
Byers & Anderson, Inc., 508 U.S. at 432, 113 S.Ct. at 2170, 124 L.Ed.2d at 397; In re
Cedar Funding, Inc., 419 B.R. 807, 822 (9th Cir. BAP 2009).
Generally, when a
bankruptcy trustee is asserting quasi-judicial immunity as a defense, this is done through
148
reference to case law that has examined this issue and held that the defense applies to
trustees .
The second inquiry, under Antoine v. Byers & Anderson, is whether immunity
covers the trustee’s functions that are in issue. This is done on a case-by-case basis. "The
Trustee is immune for actions that are functionally comparable to those of judges, i.e.,
those functions that involve discretionary judgment." In re Castillo, 297 F.3d 940, 947
(9th Cir. 2002).
Similarly, quasi-judicial immunity has been recognized for "those
persons performing tasks so integral or intertwined with the judicial process that these
persons are considered an arm of the judicial officer who is immune." Grant, Konvalinka
& Harrison, PC v. Banks (In re McKenzie), 716 F.3d 404, 412 (6th Cir. 2013).
When judicial immunity is extended to officials other than judges, it is because
their judgments are "functionally comparable" to those of judges -- that is, because they,
too, "exercise a discretionary judgment" as a part of their function. Antoine v. Byers &
Anderson, Inc., 508 U.S. at 436, 113 S.Ct. at 2171, 124 L.Ed.2d at 399, citing, Imbler v.
Pachtman, 424 U.S. at 423, n.20. Phrased another way, the court must consider whether
a judge, if performing the particular act at issue, would be entitled to absolute immunity.
Antoine v. Byers & Anderson, Inc., 508 U.S. at 435, 113 S.Ct. at 2171, 124 L.Ed.2d at
399.
2.
The Two Levels of Immunity – Absolute and Qualified.
Some courts hold that there are two levels of immunity applicable to trustees.
There is “absolute immunity” and “qualified judicial immunity”. See, In re Heinsohn,
231 B.R. 48, 64-65 (Bankr. E.D. Tenn. 1999), aff’d, 247 B.R. 237 (E.D. Tenn. 2000).
[As a general proposition, there is some inconsistency in the language used in immunity
cases, and including the words “judicial”, or “quasi-judicial” to these terms appears to be
a difference in form, not substance.]
When a Chapter 13 Trustee is functioning in a judicial (or quasi-judicial)
capacity, some courts hold that this is sufficient for “absolute immunity” to apply, at least
against third parties.
The United States Supreme Court has adopted a "functional"
approach in determining whether an official is entitled to absolute immunity where a
court looks to "the nature of the function performed, not the identity of the actor who
performed it." Forrester v. White, 484 U.S. 219, 229, 108 S. Ct. 538, 545, 98 L. Ed. 2d
149
555 (1988); In re Heinsohn, 247 B.R. 237, 244-245 (E.D. Tenn. 2000); In re Continental
Coin Corp., 380 B.R. 1, 9 (Bankr. C.D. Cal. 2007).
In contrast, where a trustee is relying on his or her status as a trustee, not on the
specific function that is being performed, some courts denominate this “qualified
immunity” (sometimes called “good faith immunity”), not absolute immunity. However,
a trustee is generally protected by immunity, even if it is “qualified”, when the trustee is
acting within the scope of his or her authority. In re Pacific Lumber Co., 584 F.3d 229,
253 (5th Cir. 2009)(creditors’ committee members); In re Solar Financial Services, Inc.,
255 B.R. 801, 803 (Bankr. S.D. Fla. 2000); Smallwood v. United States, 358 F. Supp. 398,
404 (E.D. Mo. 1973), aff'd, 486 F.2d 1407 (8th Cir. 1973).
Where the trustee is acting within the scope of his or her authority, quasi-judicial
immunity protects a trustee from claims of third parties that result from business
judgments, or mistakes in judgment where discretion is allowed. See, Picard v. Chais (In
re Bernard L. Madoff Inv. Secs. LLC), 440 B.R. 282, 290 (Bankr. S.D.N.Y. 2010); In re
Smith, 426 B.R. 435, 441 (Bankr. E.D.N.Y. 2010); In re Feely, 393 B.R. 43, 49-50
(Bankr. D. Mass. 2010)(fraudulent transfer defendants, who had not alleged they were
creditors, lacked standing to assert breach of fiduciary duty claims against trustee); In re
Ngan Gung Rest., 254 B.R. 566, 570-571 (S.D.N.Y. Bankr. 2000); In re Center
Teleproductions, Inc., 112 B.R. 567, 577-578 (S.D.N.Y. Bankr. 1990).
3.
The Trustee Is Protected By Immunity When Acting Pursuant
To Court Orders.
It is well settled that a trustee who acts pursuant to court orders, after full
disclosure to the court, is cloaked in the mantle of derived judicial immunity. See, e.g.,
Mosser v. Darrow, 341 U.S. 267, 274, 71 S. Ct. 680, 683, 95 L. Ed. 927 (1951); In re
Mailman Steam Carpet Cleaning Corp., 196 F.3d 1, 8 (1st Cir. 1999); Yadkin Valley
Bank & Trust Co. v. McGee, 819 F.2d 74, 76 (4th Cir. 1987); Lonneker Farms, Inc. v.
Klobucher, 804 F.2d 1096, 1097 (9th Cir. 1986); Boullion v. McClanahan, 639 F.2d 213,
214 (5th Cir. 1968).
This derived judicial immunity is not limited to actions for damages, but also
extends to requests for injunctive relief. Mullis v. U.S. Bankr. Ct., 828 F.2d 1385, 1394
150
(9th Cir. 1987). "[A]bsolute immunity bars a suit at the outset and frees the defendant
official of any obligation to justify his actions." Gray v. Bell, 712 F.2d 490, 495-96 (D.C.
Cir. 1983).
A trustee is entitled to quasi-judicial immunity for carrying out the orders of the
bankruptcy court, as long as there has been full and frank disclosure to creditors and the
court. See, In re Mailman Steam Carpet Cleaning Corp., 196 F.3d 1, 8 (1st Cir. 1999);
Henry v. Farmer City State Bank, 808 F.2d 1228, 1238 (7th Cir. 1986)(officials performing
"ministerial acts" under the supervision of judges entitled to quasi-judicial immunity);
Bennett v. Williams, 892 F.2d 822, 823 (9th Cir. 1989)("Bankruptcy trustees are entitled to
broad immunity from suit when acting within the scope of their authority and pursuant to
court order."); Yadkin Valley Bank & Trust Co. v. McGee, 819 F.2d 74, 76 (4th Cir.
1987)(bankruptcy trustee immune if acts "under the direct orders of the court"); Boullion v.
McClanahan, 639 F.2d 213 (5th Cir. 1981)(recognizing derived judicial immunity for
bankruptcy trustees who act under the supervision of and subject to the orders of the
bankruptcy court).
Some courts (particularly in the 9th Circuit) have held that the following elements are
required: “For derived quasi-judicial immunity to apply, the defendants must satisfy four
elements: (1) their acts were within the scope of their authority; (2) the debtor had notice of
their proposed acts; (3) they candidly disclosed their proposed acts to the bankruptcy court;
and (4) the bankruptcy court approved their acts.” Harris v. Whittman, (In re Harris), 590
F.3d 730, 742 (9th Cir. 2010), citing Bennett v. Williams, 892 F.2d 822, 823 (9th Cir. 1989).
The fact that the orders of the bankruptcy court must have been entered after full
disclosure is an important requirement. Where a trustee has not been forthright with the
court, trustees have not been treated kindly in the case law. See, In re Rollins, 175 B.R. 69
(Bankr. E.D. Cal. 1994)(holding that trustee was not immune from personal liability in a suit
by a creditor where the trustee did not reveal – in seeking abandonment of an interest in an
inheritance – that the debtor had already absconded with the money); In re Center
Teleproductions, Inc., 112 B.R. 567, 578 (Bankr. S.D.N.Y. 1990)(“Where the trustee
negligently fails to discover his agent’s negligence, negligently obtains a court order, or
negligently or willfully carries out a court order he knew or should have known he
wrongfully procured, however, personal liability will attach.”).
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The Bankruptcy Appellate Panel in In re Cedar Funding, Inc., 419 B.R. 807 (9th
Cir. BAP 2009) analyzed the immunity issue as follows:
In Antoine v. Byers & Anderson, Inc., 508 U.S. 429, 113 S. Ct.
2167, 124 L. Ed. 2d 391 (1993), the United States Supreme Court set forth a
two-part test for determining whether a non-judicial officer is entitled to
quasi-judicial immunity. The first inquiry requires the court to inquire
thoroughly into the immunity historically accorded the relevant official at
common law and the public interest behind it. Id. at 432. The Ninth Circuit
in Castillo has already conducted this inquiry, concluding that bankruptcy
trustees and their predecessor counterparts historically have been afforded
absolute quasi-judicial immunity because they perform some functions
which are judicial in nature. Id. at 950; Mullis v. United States Bankr. Court,
828 F.2d 1385, 1390 (9th Cir. 1987), cert. denied, 486 U.S. 1040, 108 S. Ct.
2031, 100 L. Ed. 2d 616 (1988)(citing Lonneker Farms, Inc. v. Klobucher,
804 F.2d 1096, 1097 (9th Cir. 1986)). Based on Castillo, the trustee may
assert a quasi-judicial immunity defense.
The second inquiry requires us to examine whether immunity
covers the trustee's functions at issue. We decide questions regarding a
trustee's immunity under this inquiry on a case-by-case basis because not
all "of the [t]rustee's many functions are covered by absolute quasi-judicial
immunity." Castillo, 297 F.3d at 953. The rule is that a trustee may be
"immune for actions that are functionally comparable to those of judges,
i.e., those functions that involve discretionary judgment." Id. at 947, citing
Antoine, 508 U.S. at 436.
In determining whether a particular function is judicial in nature,
we are cautious not to construe the immunity doctrine too narrowly by
focusing on the underlying act. Rather, we identify the "ultimate act" in
determining whether a particular function is judicial in nature. Id. at 952,
citing Ashelman v. Pope, 793 F.2d 1072, 1075-78 (9th Cir. 1986).
A court-appointed bankruptcy trustee enjoys the same immunity as does the judge
who appointed him unless "he acts in the clear absence of all jurisdiction." Mullis v. U.S.
Bankruptcy Court, 828 F.2d 1385, 1390 (9th Cir. 1987); Berry v. Kalyna, 7 Fed. Appx.
624, 626 (9th Cir. March 22, 2001)(accordingly: “Standing Chapter 13 trustees Brown
and McDonald and their employees Maney and Goernitz are entitled to quasi-judicial
immunity from Berry's claims against them.”).
However, a bankruptcy trustee may be sued in his individual capacity for acts
which exceed the scope of his authority, or are ultra vires. United States v. Sapp, 641
152
F.2d 182, 194 (4th Cir. 1981); Grant v. Florida Power Corporation (In re American
Fabricators, Inc.), 186 B.R. 526 (Bankr. M.D. Fla. 1995) (trustee loses his immunity if he
acts in the "clear absence of all jurisdiction."); Schechter v. State of Illinois, Dept. of
Revenue (In re Markos Gurnee Partnership), 182 B.R. 211 (Bankr. N.D. Ill. 1995)
(personal immunity of trustees extends only to matters within the scope of their duties).
To use an obvious example, a Chapter 13 Trustee would not be immune from suit for
negligently hitting another driver on his or her commute to the office.
Remember, the burden of pleading immunity rests with the defendant. Gomez
v. Toledo, 446 U.S. 635, 640, 64 L. Ed. 2d 572, 100 S. Ct. 1920 (1980). Be sure to make
immunity one of your affirmative defenses – I’d put it first. (Of course, you can also
assert immunity as grounds to dismiss a complaint, prior to the filing of an answer.)
4.
The Immunity Of The Staff Attorney – Greater
Than The Trustee?
The doctrine of judicial immunity also applies to court approved attorneys for the
trustee. Harris v. Wittman (In re Harris), 590 F.3d 730 742 (9th Cir. 2009); Lonneker
Farms, Inc. v. Klobucher, 804 F.2d 1096, 1097 (9th Cir. 1986); Smallwood v. United
States, 358 F. Supp. 398, 404 (E.D. Mo. 1973), aff'd mem., 486 F.2d 1407 (8th Cir.
1973); Benton v. Cory, 2010 U.S. Dist. LEXIS 134042 (D. Nev. 2010); In re Continental
Coin Corp., 380 B.R. 1, 16 (Bankr. C.D. Cal. 2007). “The trustee's attorney in this case
does not owe a statutory or fiduciary duty to the creditors of the estate. The attorney's
duties are to the trustee. The claims for breach of statutory and fiduciary duties against
the attorney cannot proceed. The malpractice claim against the attorney also cannot
proceed, as creditor lacks standing.” [aff’d, Zamora v. Virtue (In re Cont'l Coin Corp.),
2009 U.S. Dist. LEXIS 74392 (C.D. Cal., Aug. 21, 2009).]
One of the main vulnerabilities of a Chapter 13 Trustee to suit comes from his or
her status as a fiduciary – certain duties are owed to debtors and to creditors. In contrast,
the case law makes it clear that the attorney for the Chapter 13 Trustee owes fiduciary
duties to the staff attorney’s client – the Chapter 13 Trustee – NOT to debtors and
creditors. Thus, in some respects, it appears that Chapter 13 Staff Attorneys have greater
protection from suit than the Trustee they represent. This is contrary to the perception of
many Chapter 13 Trustees.
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5.
How To ACQUIRE Absolute Immunity For Actions Taken
By The Trustee.
Wouldn’t it be great if there was some way to ensure that the actions being taken
by the Chapter 13 Trustee or the Staff Attorney were virtually guaranteed absolute
immunity? There is. It is called obtaining an Order of the Bankruptcy Court after full
disclosure.
So, if you want to do something that you aren’t sure of, you present all the
relevant facts to the Bankruptcy Court and ask for a court order to do what you want to
do. The Bankruptcy Court may not order you to do what you want to be ordered to do –
and if you come in with too many “comfort orders” you are going to annoy your Judges but, used “judiciously”, this technique can protect your Trustee, and you, in situations
where you recognize that you are going into a dicey situation.
As discussed below, the protection from a court order, obtained after full
disclosure, should apply even where the lawsuit is filed by a beneficiary who is owed
fiduciary duties.
E.
Where There Be Dragons: Areas Where The Trustee May
Lack Legal Protections.
1.
The Chapter 13 Trustee is a Fiduciary
Because the Chapter 13 Trustee is a fiduciary, he or she owes fiduciary duties - to
both the debtor and creditors. Courts have held that breach of those fiduciary duties can
give rise to actions for damages that are not shielded by quasi-judicial immunity. Of
course, this kind of action for breach of a fiduciary duty requires that the party asserting
the claim must be OWED a fiduciary duty – third parties do not come under this
exception. See generally, In re Heinsohn, 231 B.R. 48, 65 (Bankr. E.D. Tenn. 1999).
Chapter 13 Trustees’ fiduciary obligations are composed of two duties: 1) the
duty of care; and 2) the duty of loyalty.
a.
Breach of Fiduciary Duties.
Most of the case law on quasi-judicial immunity fails to distinguish between suits
by third parties, and suits by beneficiaries of the trust. Clearly, creditors in a Chapter 13
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– particularly unsecured creditors - are the beneficiaries of the trust, and are persons to
whom fiduciary duties are owed. See, Commodity Futures Trading Commission v.
Weintraub, 471 U.S. 343, 355, 85 L. Ed. 2d 372, 105 S. Ct. 1986 (1985); In re Gorski,
766 F.2d 723, 725-726 (2nd Cir. 1985). To a more limited extent, debtors may also be
owed fiduciary duties by Chapter 13 Trustees. See, e.g., In re Nash, 765 F.2d 1410 (9th
Cir. 1985)(trustee liable for monies received after dismissal and not returned to debtor).
Where fiduciary duties were owed to the people who are suing, courts are much
less likely to support a judicial immunity defense. See, Grant, Konvalinka & Harrison,
PC v. Banks (In re McKenzie), 716 F.3d 404, 413 (6th Cir. 2013)("It is generally
accepted, albeit under varying rationales, that quasi-judicial immunity does not extend to
claims against a trustee by beneficiaries of the estate for breach of fiduciary duty."); In re
Mailman Steam Carpet Cleaning Corp., 196 F.3d 1, 7 n.4 (1st Cir. 1999)(A bankruptcy
trustee may be held personally liable for negligent breach of fiduciary duty); In re
Ferrante, 51 F.3d 1473, 1478 (9th Cir. 1995)(Trustees may be held personally liable for
breach of fiduciary duties, the embezzlement of fund from the estate is a clear violation
of the duty of loyalty to creditors.); In re Heinsohn, 231 B.R. 48, 65 (Bankr. E.D. Tenn.
1999); Illinois Dep’t of Revenue v. Schechter (In re Markos Gurnee Partnership), 195
B.R. 380, 384 (N.D. Ill. 1996)(Wedoff, J.)(“it is well settled that a trustee cannot be held
personally liable unless he acted outside the scope of his authority as trustee, i.e., acted
ultra vires, or breached a fiduciary duty that he owed as the trustee to some claimant.”).
Let’s use some concrete examples. Take a classic “misdisbursement” situation.
If $10,000 is sent to the wrong creditor, and the trustee is unable to get that money back.
The trustee is going to have a difficult time defending that kind of suit. Fiduciary duties
were owed, they were breached, and the beneficiaries – who should have received those
monies - were damaged.
Using another example: $10,000 is embezzled from a Chapter 13 case by an
employee of the trustee.
In these two situations, while it is possible that a court might find that immunity
applies if a creditor, or creditors, sued – what if the plaintiff were the United States
Trustee? Or, worse yet, the information had come before the bankruptcy judge and she
decided to hold a hearing on surcharging the trustee? Under those circumstances, what
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are the chances of quasi-judicial immunity being a complete defense? Much, much
lower.
There are two areas where a defense may exist – 1) acting pursuant to a court
order; and 2) the degree of culpability required for a the trustee to be liable for a breach
of fiduciary duty: a) negligence, or b) willful and deliberate conduct.
As to the first point, it has been held that acting pursuant to a specific court order
protects a trustee from suit from breach of fiduciary duty. See, Lonneker Farms, Inc. v.
Klobucher, 804 F.2d 1096 (9th Cir. 1986); Boullion v. McClanahan, 639 F.2d 213 (5th
Cir. 1981); In re Heinsohn, 231 B.R. 48, 65 (Bankr. E.D. Tenn. 1999).
The second point, regarding the standard of misconduct required, is subject to a
split of authority:
The courts are divided over whether the trustee must negligently or
willfully breach a fiduciary duty to interested parties in order for liability
to attach. See McCullough, 103 COM. L.J. at 129-32. While the Sixth
Circuit Court of Appeals along with the Fourth, Seventh and Tenth circuits
hold that trustees can only be held personally liable for injuries arising
from willful and deliberate conduct, three circuits, the Second, Ninth and
Eleventh, subject trustees to personal liability for negligent breaches of
fiduciary duties. Id. (citing Ford Motor Credit Co. v. Weaver, 680 F.2d
451 (6th Cir. 1982); Yadkin Valley Bank & Trust Co. v. McGee, 819 F.2d
74 (4th Cir. 1987); In re Chicago Pac. Corp., 773 F.2d 909 (7th Cir.
1985)(dicta); Sherr v. Winkler, 552 F.2d 1367 (10th Cir. 1977); In re
Gorski, 766 F.2d 723 (2d Cir. 1985); Hall v. Perry (In re Cochise College
Park., Inc.), 703 F.2d 1339 (9th Cir. 1983) and Red Carpet Corp. of
Panama City Beach v. Miller, 708 F.2d 1576 (11th Cir. 1983)).
In re Heinsohn, 231 B.R. 48, 65 n.10 (Bankr. E.D. Tenn. 1999); In re McKenzie, 716
F.3d 404, 413 (6th Cir. 2013)(citing Heinsohn).
You also need to think about how these two kinds of factual situations might
come up, prior to any litigation – the U.S. Trustee might make a demand on the Chapter
13 Trustee, or the Chapter 13 Trustee’s bond – to put the $10,000 back into the estate.
What if the trustee refuses? Now, the possibility not only exists of a lawsuit, but also of
the commencement of proceedings to remove your Standing Chapter 13 Trustee. And,
while there are now more due process rights for Chapter 13 Trustees (see, 28 U.S.C.
Section 586(d)(2)), “quasi-judicial immunity” is not going to prevent the Office of the
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U.S. Trustee from attempting to remove a trustee.
Assuming that action is taken on the trustee’s bond, [see, In re Kinross
Manufaction Corp., 174 B.R. 702 (Bankr. W.D. Mich. 1994)] based upon a breach of the
duty of care, that does not take your trustee “off the hook”. A bond is NOT insurance.
Insurance pays a claim, and this may raise your rates – should you elect to continue to
carry the insurance – but the insured is otherwise not liable for claims paid by an
insurance company. In contrast, a bond is simply a device to ensure payment – the
bonding company pays on the bond, then turns around and sues the trustee for
reimbursement on the bond. In the suit by the bonding company against the Chapter 13
Trustee for reimbursement, there isn’t going to be any immunity defense.
b.
Acting “Ultra Vires”.
In the immunity cases, the term “ultra vires” means a trustee acting outside of the
trustee’s authority. One of the biggest problem areas where this can occur is in situations
where the trustee reaches a settlement.
If you haven’t read them, the cases going up the ladder involving former Chapter
13 Trustee Jo-Ann Goldman can be instructive. See, In re Morgan, 353 B.R. 599 (Bankr.
E.D. Ark. 2006); In re Morgan, 375 B.R. 838 (B.A.P. 8th Cir. 2007); In re Morgan, 573
F.3d 615 (8th Cir. 2009), and In re Dedmon, 366 B.R. 1 (Bankr. E.D. Ark. 2007), rev’d,
In re Morgan, 375 B.R. 838 (B.A.P. 8th Cir. 2007). Read them in date order, and you’ll
see a case where a bankruptcy court removed a Chapter 13 Trustee because the court
believed that the trustee acted outside her authority in making an agreement. Obviously,
you don’t want something like that happening to your client.
The settlement process is an area where Chapter 13 Trustees need to exercise
some care. When you are negotiating with other parties, you can agree how you are
going to present a disputed matter to the court – for approval, rejection, or further
instructions - but you can’t actually enter into settlements without court approval.
The problem arises, for many trusteeships, because you know exactly what your
court is going to do when you enter into an agreement to resolve a matter, subject to court
approval. There may not be a chance in the world that the court won’t approve your
agreement – you’ve done hundreds exactly the same. But, until the Judge signs the
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order/stipulation, the matter isn’t settled. Just as, until the Judge signs the Confirmation
Order, the case isn’t confirmed.
Getting approval of a settlement is relatively easy.
Federal Rule of Civil
Procedure 9019(a) provides that a bankruptcy court can approve a settlement or
compromise after notice and hearing.
A bankruptcy settlement is not required to
constitute the best result obtainable. Rather, the court need only canvass the issue to
determine that the settlement does not fall below the lowest point in the range of
reasonableness. In re Healthco Int'l, 136 F.3d 45, 51 (1st Cir. 1998); In re W.T. Grant
Co., 699 F.2d 599, 608 (2d Cir. 1983); Tri-State Fin., LLC v. Lovald, 525 F.3d 649, 654
(8th Cir. 2008); In re Martin, 490 F.3d 1272, 1275-76 (11th Cir. 2007).
A Trustee does not settle matters, confirm cases, approve fees, or dismiss cases.
Courts do those things.
A Trustee only files a motion, an objection, or makes a
recommendation, asking that the court take action. Obviously, a Staff Attorney – who’s
powers are derived from authority given by the Trustee – can do no more than the
Trustee.
Note that in almost every case where a trustee is sued, the allegation is made that
the actions are ultra vires – either to overcome a Barton Doctrine problem or trustee
immunity. In most cases, that allegation is quickly disposed of by the courts. One
exception: “A trustee can be personally liable for seizing or failing to turn over property
in possession of the estate but owned by someone else, which is considered an ultra vires
act.” See, e.g., Leonard v. Vrooman, 383 F.2d 556 (9th Cir. 1967), cert. denied, 390 U.S.
925, 88 S. Ct. 856, 19 L. Ed. 2d 985 (1968). The Sixth Circuit has stated (perhaps
incorrectly) that “thus far, courts have only applied the ultra vires exception to the actual
wrongful seizure of property by a trustee or receiver.” In re McKenzie, 716 F.3d 404,
415 (6th Cir. 2013)(holding that litigation attempting to seize property that was not an
asset of the estate is not ultra vires). So, don’t panic just because there is an allegation
that the trustee acted ultra vires – as we all know, Chapter 13 trustees do not generally
take possession of property, so the most common ultra vires problem should not be a
problem for your client.
c.
Bad Records And Misdisbursements.
A trustee is accountable for all the property he receives and may be liable for
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improper distribution of funds. See, 11 U.S.C. §1302; see also, Nash v. Kester (In re
Nash), 765 F.2d 1410, 1415 (9th Cir. 1985); 1 Lundin Chapter 13 Bankruptcy §58.3; 8
Collier on Bankruptcy ¶ 1302.03[1][b][i], [ii] (Lawrence P. King ed., 15th ed. rev. 2001)
(stating that, under Fed. R. Bankr. P. 2015, the chapter 13 trustee must keep a record of
all receipts and the disposition of money and property received; further stating that he is
liable for improper distributions).
The Trustee is required to keep proper records or exercise normal due diligence
and skill when receiving the assets of the debtor the trustee is charged with assisting. See,
11 U.S.C. §1302(b)(4); cf. In re Colvin, 125 B.R. 182, 183 (Bankr. E.D. Mich. 1991)
(finding that trustee's appropriation of funds from employer and disbursement to
unsecured creditors without notice to the debtor was egregious and impermissible).
Trustees have been held personally liable for the audits required to untangle inaccurate
and misleading records. See, e.g., Nash, 765 F.2d at 1415; In re Johnson, 518 F.2d 246
(10th Cir.), cert. denied, 423 U.S. 993 (1975).
If the misdisbursement is pursuant to a valid court order (entered after adequate
disclosure), the immunity defense may still be available to a trustee, and under those
circumstances it probably should be asserted in response to any litigation.
In re
Heinsohn, 231 B.R. 48, 65 (Bankr. E.D. Tenn. 1999).
d.
Monies That Are Embezzled Or Co-Mingled.
One case discussing immunity in the context of embezzlement by an employee of
the trustee is Matter of Johnson, 518 F.2d 246 (10th Cir. 1975), decided under the
Bankruptcy Act. The law regarding trustee immunity has changed so much in recent years,
it is hard to evaluate how persuasive this case would be, but it found that the trustee was
personally liable for the employee embezzlement because the trustee’s failure to discover
the embezzlement was negligence.
Where monies were embezzled from the trusteeship, the issues are most often
trustee removal, if the trustee was the embezzler, lawsuits against banks if forged checks
are involved, and suits involving the bonding companies. See generally, United States v.
Van den Bosch, No. 85-5349, unpublished, 798 F.2d 1417 (table)(6th Cir.July 15,
1986)(Chapter 13 Trustee removed for comingling funds, and falsifying records.); American
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Surety Co. v. First Nat'l Bank, 141 F.2d 411 (4th Cir. 1944); Traina v. Nationsbank of Tex.,
CIVIL ACTION NO: 00-1160, unpublished, 2001 U.S. Dist. LEXIS 14612, (E.D. La.
September 7, 2001); In re Foodsource, Inc., 130 B.R. 549 (N.D. Cal. 1991).
e.
When The IRS Issues A Levy – An Unwritten Exception
To Immunity?
United States appellate courts have been more likely to rule in favor of the
Internal Revenue Service, despite decisions supporting derived judicial immunity for
bankruptcy trustees. See, David W. Allard, Personal Liability of Trustees and Debtors in
Possession: Review of the Varying Standards of Care in the United States, 106 Com L.J.
415, 437 (Winter, 2001). The law review article points to several decisions where the
IRS was able to hold a bankruptcy trustee personally liable.
In United States v. Hemmen, 51 F.3d 883 (9th Cir. 1995) the court held that the
trustee, who was in receipt of an IRS notice of levy at the time when the case had assets
which were not liquidated, was personally liable for failure to honor the levy. A similar
result was reached in United States v. Ruff, 179 B.R. 967 (M.D. Fla. 1995), aff’d, United
States v. Ruff, 99 F.3d 1559 (11th Cir. 1996)(trustee held personally liable for failing to
honor IRS levy for taxes owed by broker employeed by estate).
2.
Removal Actions By The U.S. Trustee.
See, 28 U.S.C. Section 586(d)(2). To date, there does not appear to be case law
interpreting this statutory protection that provides trustees with due process rights in
actions to remove them from their position. For a look at how trustee removal was
handled prior to the due process subsection being added: See, Joelson v. United States, 86
F.3d 1413 (6th Cir. 1996); Balser v. DOJ, 327 F.3d 903 (9th Cir. 2003); Brooks v. United
States, 127 F.3d 1192 (9th Cir. 1997).
3.
Removal Actions By The Court.
See generally, In re Morgan, 353 B.R. 599 (Bankr. E.D. Ark. 2006); In re
Morgan, 375 B.R. 838 (B.A.P. 8th Cir. 2007); In re Morgan, 573 F.3d 615 (8th Cir.
2009), and In re Dedmon, 366 B.R. 1 (Bankr. E.D. Ark. 2007), rev’d, In re Morgan, 375
B.R. 838 (B.A.P. 8th Cir. 2007).
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4.
The Imposition of Costs In a Lawsuit.
Wood v. Green, 2010 U.S. Dist. LEXIS 40178 (N.D. Fla. 2010): “Ebert claims
that she is individually immune from any costs in this case because she acted only as the
Chapter 7 trustee of the bankruptcy estate. As a general rule, bankruptcy trustees "are not
individually liable unless they act outside their authority." Yadkin Valley Bank & Trust
Co. v. McGee, 819 F.2d 74, 76 (4th Cir. 1987). No allegation was raised in this case that
Ebert acted outside of her authority, and the court's judgment did not reflect any liability
against Ebert individually. A bankruptcy trustee takes the title and rights in the property
a debtor possessed at the time the debtor seeks bankruptcy protection. In re Raborn, 470
F.3d 1319, 1323 (11th Cir. 2006). Consequently, costs are taxable against Ebert only in
her capacity as the trustee of the bankruptcy estate; she has no individual liability for the
costs.”
5.
Prospective grants of judicial immunity for a bankruptcy
trustee are disfavored.
The court in In re Blumenberg, 263 B.R. 704, 711 (Bankr. E.D.N.Y. 2001) stated:
Next, this Court declines to enter an order granting blanket "derived
judicial immunity" to a trustee from any acts or omissions in his or her
administration of any chapter 7 case. There are circumstances in which it
may be held that bankruptcy trustees "derive qualified judicial immunity
for acts taken within their authority as an officer of the court", but this is
an affirmative defense to a complaint that has been actually filed. See, In
re Solar Financial Services, Inc., 255 B.R. 801, 803 (Bankr.S.D.Fla. 2000)
(citing In re Clearwater Bay Marine Service, 236 B.R. 285
(Bankr.M.D.Fla. 1999)). In Solar Financial Services, the bankruptcy
court found that a trustee's obtaining permission from the court to
abandon records was in itself sufficient to qualify the trustee for
judicial immunity, without any need to obtain an explicit grant of
immunity prior to abandonment. The lack of necessity for an
"antecedent" grant of judicial immunity is even more compelling in this
case, when no adverse claims have been raised against the trustee in any
papers filed with this Court. Not a single case cited by the trustee has ever
granted immunity in advance. If somebody sues the trustee in any other
forum for acts or omissions, then the trustee can file a motion for an
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expedited hearing on the trustee's motion to reopen a closed case, remove
that action to this Court, and then move to dismiss that action.
So, the proper way to obtain immunity is to get a court order for the potentially
controversial action you are about to undertake – NOT seek an order explicitly granting
immunity for taking that action. Immunity comes along with the court order. But, courts
are not going to explicitly grant immunity in advance.
F.
Sovereign Immunity.
To the extent that the Trustee is being sued in his official capacity, and not
personally, the defense of sovereign immunity should be pled.
See, Mullarkey v.
Greenberg, 2009 U.S. Dist. LEXIS 103113 (D.N.J. Nov. 4, 2009); United States v.
Sherwood, 312 U.S. 584, 586, 85 L. Ed. 1058, 61 S. Ct. 767 (1941); Jaffee v. United States,
592 F.2d 712, 717-718 (3d Cir.), cert. denied, 441 U.S. 961, 60 L. Ed. 2d 1066, 99 S. Ct.
2406 (1979). [These cases may not be “right” in terms of the defense of a Chapter 13
Trustee – based upon the waiver of sovereign immunity found in Section 106. But,
sovereign immunity probably should still be pled as an affirmative defense on behalf of your
client.]
G.
The Noerr-Pennington Doctrine – Protects Against Anti-Trust Claims.
Under the Noerr-Pennington doctrine, private entities are immune from liability
under the antitrust laws for attempts to influence the passage or enforcement of laws, even if
the laws they advocate for would have anticompetitive effects.
This doctrine actually came up in a bankruptcy case: “Because Berry's anti-trust
allegations concern alleged "abuses of the bankruptcy court process," these claims are
barred by the Noerr-Pennington doctrine, which "protects advocacy before all branches
of government." Kottle v. Northwest Kidney Centers, 146 F.3d 1056, 1060 (9th Cir.
1998); see also, United Mine Workers v. Pennington, 381 U.S. 657, 669-70, 14 L. Ed. 2d
626, 85 S. Ct. 1585 (1965); Eastern RR Presidents Conference v. Noerr Motor Freight,
Inc., 365 U.S. 127, 137, 5 L. Ed. 2d 464, 81 S. Ct. 523 (1961).
H.
The Litigation Privilege.
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The Supreme Court has recognized a traditional common-law immunity for
witnesses, judges and attorneys with respect to their conduct in judicial proceedings.
Briscoe v. LaHue, 460 U.S. 325, 334-35, 103 S. Ct. 1108, 75 L. Ed. 2d 96 (1983).
Recognizing the common-law litigation privilege, Briscoe expressed that "private
attorneys were treated no differently than judges, government lawyers, and witnesses."
Briscoe v. LaHue, 460 U.S. 325, 334-35, 103 S. Ct. 1108, 75 L. Ed. 2d 96 (1983). "All
persons - governmental or otherwise - who were integral parts of the judicial process" were
accorded absolute immunity from civil liability because of the need 'to assure that judges,
advocates, and witnesses can perform their respective functions without harassment or
intimidation.' Id. at 335 (quoting Butz v. Economou, 438 U.S. 478, 512, 98 S. Ct. 2894, 57
L. Ed. 2d 895 (1978)).
Some courts have held that there is a federal litigation privilege. Other courts have
recognized and applied the state law litigation privilege to proceedings in federal court. See,
In re Lowenbraun, 453 F.3d 314, 322-323 (6th Cir. 2006); In re Cedar Funding, Inc., 419
B.R. 807 (9th Cir. BAP 2009); In re Bryan, 308 B.R. 583, 588 (Bankr. N.D. Ga. 2004);
Waterloov Gutter Protection Systems Co. v. Absolute Gutter Protection, LLC, 64
F.Supp.2d 398 (D.N.J. 1999)(non-bankruptcy case).
The litigation privilege is a "long-standing common law rule that communications
uttered or published in the courts of judicial proceedings are absolutely privileged." Circus
Circus Hotels v. Witherspoon, 99 Nev. 56, 657 P.2d 101, 104 (Nev. 1983). The policy
behind the rule is to grant attorneys and other participants in judicial proceedings "the
utmost freedom in their effort to obtain justice …." Id.; In re Davis, 312 B.R. 681, 690
(Bankr. D. Nev. 2004); see also, Rodriguez v. Panayiotou, 314 F.3d 979, 988 (9th Cir. 2002)
(privilege applies to any communication with some logical relation to a judicial or quasijudicial proceeding made by a litigant or other participant in the proceeding). The privilege
is a bar to a defamation claim even if it is alleged that the defamatory statements were made
with knowledge of their falsity and with personal animosity toward the other party. Id.
The scope of the absolute privilege is quite broad. In re Davis, 312 B.R. 681, 690
(Bankr. D. Nev. 2004). To be protected, the defamatory communication need not be
relevant to the proposed or pending litigation; it need only be related in some way to the
subject of the controversy. The privilege applies to communications outside of court and
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those made before litigation has commenced as well as those made during actual judicial
proceedings.
I.
Additional Defense Of Attorney For The Trustee From
Any Creditor Suit.
Richardson lacks standing to sue (1) Womble Carlyle as counsel to
the Trustee, . . . . First, Richardson cannot bring suit against Womble
Carlyle in its official capacity as Trustee's counsel, because only the Trustee
has the authority to do so. See In re Cont'l Coin Corp., 380 B.R. 1, 16
(Bankr. C.D. Cal. 2007), aff'd, No. CV 08-0093(PA), 2009 U.S. Dist. LEXIS
74392, 2009 WL 2589635 (C.D. Cal. Aug. 21, 2009)(holding that the
"trustee's attorney in this case does not owe a statutory or fiduciary duty to
the creditors of the estate. The attorney's duties are to the trustee.") (quoting
Wolf v. Kupetz (In re Wolf & Vine, Inc.), 118 B.R. 761, 771 (Bankr. CD.
Cal. 1990)(noting that while a trustee owes a fiduciary duty to creditors, the
attorneys for the trustee do not)).
Richardson v. Monaco (In re Summit Metals, Inc.), 477 B.R. 484, 501-502 (Bankr. D.
Del. 2012); see also, In re Smith, 400 B.R. 370, 376 (Bankr. E.D.N.Y. 2009)(there was a
lack of privity between Trustee's counsel and the Movants, and as such the proposed
complaint was fatally defective as a matter of law).
XVIII.
INCOME.
Regardless of whether your judge(s) use the Means Test – for above median
debtors only, or also for those with below median income; applying the Means Test either
strictly or with equitable and changed circumstances modifications; or if you court relies,
instead, on Schedules I and J for all debtors -- everyone has the same issues: What is
income? And, how do I check the gross income that is reported to make sure it is
accurate?
A.
What Is Income?
The definition includes income “from all sources that the debtor receives”,
“without regard to whether such income is taxable income”, unless the income is
excluded by statute.
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Income from Social Security is excluded by statute: 11 U.S.C. §101(10A). The
exact language of the provision defining “current monthly income” states that it excludes:
“excludes benefits received under the Social Security Act”.
1.
Social Security Income – Was A Hot Issue:
The exclusion of Social Security from income was not without some controversy.
However, the majority of courts now permit social security income to be excluded from
consideration for purposes of determining the minimum Chapter 13 payments. Ranta v.
Gorman, 721 F.3d 241 (4th Cir. 2013); In re Welsh, 711 F.3d 1120, 1127 n.28, 1130-31
(9th Cir. 2013); In re Ragos, 700 F.3d 220, 223 (5th Cir. 2012); In re Cranmer, 697 F.3d
1314, 1317-18 (10th Cir. 2012); Baud, 634 F.3d 327, 345 (6th Cir. 2011).
However, there are a few courts that either require Social Security income to be
used in determination of disposable income, or allow the non-use of Social Security
income to provide the basis for denial of confirmation of the Chapter 13 Plan on good
faith grounds.
However, other courts that have considered whether “good faith” can be used
based solely on the failure to use social security income to pay unsecured creditors have
rejected that theory. See e.g., Ranta v. Gorman, 721 F.3d 241, 253 n.15 (4th Cir.
2013)(citing cases); Fink v. Thompson (In re Thompson), 439 B.R. 140 (8th Cir. BAP
2010)(To be confirmed, a Chapter 13 plan had to be proposed in good faith. Plain
language of the Bankruptcy Code precluded the Chapter 13 Trustee from objecting to
debtors' plan based on an alleged lack of good faith based solely only on the fact debtors
did not devote all of their Social Security income to their creditors.)
An interesting issue arises when a motion to modify under Section 1329 is filed.
At least one court has held that on a motion to modify, social security income can be
considered. See, In re Hall, 442 B.R. 754 (Bankr. D. Idaho 2010)(Debtor wife's SSDI
benefits could be considered with respect to a modification of a Chapter 13 confirmed
plan because disposable income requirements for confirmation under §1325(b) did not
apply to a proposed modified plan because § 1325(b) was not expressly listed in
§1329(b)(1).
Another problem is when the funds contributed to the household, either for
expenses are rent, have social security income as their source. See, In re Olguin, 429
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B.R. 346 (Bankr. D. Colo. 2010)(When Social Security recipients gave funds derived
from their benefits to third parties, funds ceased to be in nature of "benefits."
Grandparents' regular contribution to debtors' household expenses was not "a benefit
received under the Social Security Act," §101(10A)(B), and had to be included in the
calculation of debtors' income.) In contrast, most cases hold that Social Security received
by a non-filing spouse is not included as income. See, In re Scott, 488 B.R. 246 (Bankr.
M.D. Ga. 2013); In re Miller, 445 B.R. 504 (Bankr. D. S.C. 2011); In re Wilson, 397 B.R.
299 (Bankr. M.D. N.C. 2008); In re Bartelini, 434 B.R. 285 (Bankr. N.D. N.Y. 2010).
Finally, there is a decision on whether the exclusion of social security income
extends so far as to become a subsidy. Where a debtor has wage income, pension income
and social security income, and the social security income is therefore taxable, the taxes
attributable to the social security income are objectionable as an expense deduction –
they should be paid from the excluded social security income. In re Devilliers, 358 B.R.
849 (Bankr. E.D. La. 2007).
2.
Unemployment Benefits - Income, or Excluded?
The courts are currently divided on whether or not unemployment benefits are
excluded under the “Social Security” umbrella, but the tide appears to have turned in
favor of including unemployment benefits as income. Two early cases said that
unemployment benefits were excluded as benefits paid under the Social Security Act:
See, In re Munger, 370 B.R. 21 (Bankr.D.Mass. 2007); In re Sorrell, 359 B.R. 167
(Bankr.S.D.Ohio 2007). The more recent cases hold that unemployment benefits count
as income. See, In re Washington, 438 B.R. 348 (M.D. Ala. 2010); In re Gentry, 463
B.R. 526 (Bankr. D. Colo. 2001); In re Kucharz, 418 B.R. 635 (Bankr. C.D. Ill. 2009); In
re Baden, 396 B.R. 617 (Bankr.M.D.Pa. 2008); In re Overby, Bankr. L. Rep. (CCH)
P81,868, 2010 Bankr. LEXIS 8183 (Bankr. W.D. Mo. Sept. 24, 2010); In re Winkles,
2010 Bankr. LEXIS 2151, 2010 WL 2680895 (Bankr. S.D. Ill. July 6, 2010); In re Nance,
64 Collier Bankr. Cas. 2d (MB) 230, 2010 Bankr. LEXIS 1736, 2010 WL 2079653
(Bankr. S.D. Ind. May 21, 2010); In re Rose, 2010 Bankr. LEXIS 1851, 2010 WL
2600591 (Bankr. N.D. Ga. May 12, 2010).
3.
Other Income Specifically Excluded Under 101(10A):
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Also excluded by statute are “payments to victims of war crimes or crimes against
humanity on account of their status as victims of such crimes, and payments to victims of
international terrorism (as defined in section 2331 of title 18) or domestic terrorism (as
defined in section 2331 of title 18) on account of their status as victims of such
terrorism.” – but for most of us, those almost never come up. Clearly, however, those
items are not income for Means Test purposes - and probably not for any Chapter 13
determination of income.
4.
What About Other Income That Does Not Become Property
Of The Estate?
There is a question whether income that is specifically excluded from becoming
property of the estate by other federal law, would be income for Chapter 13 purposes.
See, In re Moose, 67 Collier Bankr. Cas. 2d (MB) 654, 2012 Bankr. LEXIS 1175
(Bankr. M.D.N.C. March 20, 2012)(Civil Service Retirement System was income). One
case that addresses the the “exemption” and “exclusion from property of the estate” issue
in terms of how income is treated is Meyer v. UST (In re Scholz), 699 F.3d 1167 (9th Cir.
2012)(Benefits received under Railroad Retirement Act of 1974 (RRA), 45 U.S.C.S. §
231 et seq., were not excluded from the operation of the Bankruptcy Code. Accordingly,
debtor's RRA Benefits were included in calculation of current monthly income.).
5.
What About Monies Withdrawn From A 401(k) Or An IRA?
The majority of courts appear to hold that pre-retirement withdrawals from a
401(k) or IRA are not considered income for bankruptcy purposes. See, In re Cram, 414
B.R. 674 (Bankr. D. Idaho 2009)(401(k) distribution did not meet criteria of current
monthly income under §101(10A)); In re Zahn, 391 B.R. 840 (8th Cir. BAP 2008)(IRA
distribution to non-filing spouse not income); In re Mendelson, 412 B.R. 75 (Bankr.
E.D.N.Y. 2009)(one-time early withdrawal from a retirement account was not included in
income). But see, In re DeThample, 390 B.R. 716 (Bankr. D. Kan. 2008)(401(k) was
required to be included in calculating CMI).
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Some cases also discuss whether the “one time” withdrawals are “income”
because the money that is withdrawn was the debtor’s money, albeit in a protected
account.
The bottom line is: these withdrawals are not going to continue in the future.
Thus, under the “forward looking approach” of Lanning, they can be backed out in
determining the minimum monthly payment. However, if these withdrawals are
considered income, they may put a debtor over the median income level, and require a 60
month commitment period.
6.
Life Insurance Proceeds are Income:
Proceeds from life insurance were held part of disposable income. In re Florida,
268 B.R. 875 (Bankr. M.D. Fla. 2001); contra, In re Richardson, 283 B.R. 783 (Bankr. D.
Kan. 2002).
7.
Food Stamps and Government Aid are Income:
Yes, the majority view is that they are income. See, In re Justice, 404 B.R. 506
(Bankr. W.D. Ark. 2009)(government assistance to non-debtor daughter and her infant
son was income); Bibb County Dept. of Family & Children Services v. Hope (In re
Hammonds), 729 F.2d 1391, 1395 (11th Cir. 1984); In re Rigales, 290 B.R. 401 (D. N.M.
2003)(food stamps).
8.
Veterans Benefits are Income:
See, In re Hedge, 394 463 (Bankr. S.D.N.Y. 2008); In re Waters, 384 B.R. 432,
437-38 (Bankr. N.D. W.Va. 2008); In re Redmond, CASE NO. 07-80634-G3-13, 2008
Bankr. LEXIS 1495, (Bankr. S.D. Tex. April 14, 2008)
9.
Disability Payments (from sources other than Social Security)
are Income.
Blausey v. U.S. Trustee, 552 F.3d 1124 (9th Cir. 2009).
10.
Loans are Not Income:
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Loans are generally not income. See, In re Brown, 332 B.R. 562, 568 (Bankr.
N.D. Ill. 2005) ("the refinance proceeds are accompanied by a new loan to the debtor,
which significantly offsets the apparent increase to the debtor's balance sheet").
11.
Income Taxes.
See the discussion below in the section “Exemptions v. Income”.
12.
Pension monies received by a retiree are income.
In re Briggs, 440 B.R. 490 (Bankr. N.D. Ohio 2010). See also, In re
Taylor, 212 F.3d 395 (8th Cir. 2000); In re Rogers, 168 B.R. 806, 808 (Bankr.M.D.Ga.
1993)
B.
How Do You Know The Income Stated By The Debtor(s) Is Correct?
In looking at the debtor's filings, you get income information in several places.
1. Schedule I reflects a gross income figure.
2. The Means Test states a gross income figure based on a six months "look
back".
3. The Statement of Financial Affairs asks for a history of the debtor's earnings,
year to date, and for the previous two years in its first two questions.
4. The federal income tax return provides additional information, including gross
taxable income, for the previous tax year.
5. Pay advices give a more recent history of the debtor's earnings.
Whether your court looks to Schedule I and J, or the Means Test, it is important to
start with the correct gross income figure because if you put garbage in, you get garbage
out. Sometimes the gross income figure is misstated – either by mistake, or intentional
fudging. How do you check to make sure that the gross income figure is correct?
If you suspect that gross income is incorrectly stated, you can do cross-checks
using all of the sources listed above.
For many debtors, the most useful document to look at are the pay advices.
Typically, the pay advice will provide a year-to-date figure for the debtor’s gross
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earnings. If W-2 wage earners are fudging on their income, the pay advices can be used
to show it.
To check whether the debtor’s actual gross income is stated correctly, one method
is to turn the year-to-date gross income figure into a daily figure - what the debtor earns
per day. This is done by noting what the ‘end date’ is on the most recent pay advice.
Calculate how many days the ‘end date’ represents – say, for this example, it is the 184th
day of the year. Then divide the year-to-date gross income – say, $31,055 - by the
number of days (184) over which that income was earned. Using the numbers above, the
debtor’s ‘per diem’ earnings would be $168.77. Multiply that by 365, and you get a
projection of yearly earnings – here, that would be $61,601. Divide the yearly number by
12, and get an average monthly gross income figure – here, it would be $5,133.
The gross income figure calculated from the pay advice can by compared with the
numbers given on the Means Test (Line 1) and Schedule I, Lines 1 and 2. If the gross
income numbers you calculate are significantly different from what the Schedule I and
the Means Test indicate to be gross income, you have to find out why.
Was the year-to-date earnings not reflective of some changes in income that were
present in the Sixth months prior to filing? Or, did debtor’s counsel fail to count the
correct number of paychecks? – 26 if the debtor was paid weekly, 13 if the debtor was
paid bi-weekly, and 12 if the debtor was paid semi-monthly. Or, did debtor’s counsel
look at gross taxable income, instead of gross income? Gross taxable income typically
does not include monies deducted for retirement – if that mistake was made, and the
retirement deducted again on either the Schedules or the Means Test, that is improper
double counting of the deduction of contributions to the debtor’s retirement account.
. Or, is debtors’ counsel going to make the tired argument that overtime wasn’t
listed on Schedule I because “it’s not guaranteed”. Or, “it fluctuates”. Schedule I,
Question 2 requires a debtor to list their ESTIMATED overtime. Not their guaranteed
overtime.
The most recent federal tax return is also worth looking at for determining if
income is properly stated. For self-employed debtors, there are no pay advices. The tax
return can be the most reliable document you are likely to get regarding their income.
Plus, you can learn a lot from the attached schedules. But, on the other side of the coin,
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debtors often under-report tip income, side jobs, and income from their businesses. You
just have to do the best you can with the self employed, tipped employees, and business
owners.
If the gross income number on the tax return is significantly greater than the gross
income claimed on Schedule I/Means Test, that naturally leads to questions about how
the debtor’s income has changed over time. If questions 1 and 2 on the Statement of
Financial Affairs are answered accurately, they can also help give a picture of the
changes in debtor’s income over time.
For many jurisdictions, a properly prepared Schedule I may reflect a
different income number than the Means Test. If income has decreased in the past six
month, the Schedule I gross income number would be less than the gross income number
on the Means Test. Conversely, if the debtor has had rising income, the Schedule I
would be higher than the gross income on the Means Test.
Remember, Question No. 17 on Schedule I asks: “Describe any increase or
decrease in income reasonably anticipated to occur within the year following the filing of
this document.” If that question is left blank, I use that when debtors start talking about
what might happen to reduce their income in the future.
XIX. EXEMPTIONS VS. INCOME – A CAGED DEATH MATCH.
Prior to the passage of BAPCPA, there was a significant minority of courts that –
to some extent – allowed exemptions to reduce or eliminate disposable income, relying
on the language of Section 522(c). See, In re Berger, 61 F.3d 624 (8th Cir. 1995)(holding
in a Chapter 12 case that disposable income did not include exempt life insurance
proceeds); In re Ferretti, 203 B.R. 796, 800 (Bankr. S.D. Fla. 1996)("The clear language
of [§522(c)] protects exempt property, regardless of form, from prepetition debts . . . .
This express limitation cannot be ignored for purposes of defining disposable income
under §1325(b)."); In re Koch, 187 B.R. 664, 667-69 (D.S.D. 1995)(holding that income
exempt under state law could not be included in a Chapter 13 disposable income
calculation, and noting that different panels of the Eighth Circuit may have different
points of view on the issue), rev'd sub nom. Stuart v. Koch (In re Koch), 109 F.3d 1285,
1289 (8th Cir. 1997); In re Tomasso, 98 B.R. 513, 515 (Bankr. S.D. Cal. 1989)(stating
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that only the nonexemptable portion of a personal injury settlement would constitute
disposable income).
However, even pre-BAPCPA, the majority of courts, relying on §1325(b)(1)(B),
held that income was income, whether the source of that income was exempt or not. See,
Stuart v. Koch (In re Koch), 109 F.3d 1285, 1289 (8th Cir. 1997)("Chapter 13 contains
no language suggesting that exempt post-petition revenues are not Chapter 13 'income,'
and §1325(b)(2) expressly defines 'disposable income' to mean income not needed for
debtor's support. . . . . In a Chapter 13 proceeding . . . [the] debtor repays unsecured
creditors primarily with post-petition 'disposable income . . . . Debtor's fresh start is not
endangered by a requirement that income received during the life of the plan from
otherwise exempt sources be included in the calculation of disposable income.");
Freeman v. Schulman (In re Freeman), 86 F.3d 478, 481 (6th Cir. 1996)("[I]ncome that
would be otherwise exempt under Tennessee law can still be 'disposable income' for
purposes of Chapter 13."); In re Hagel, 184 B.R 793 (B.A.P. 9th Cir. 1995)(holding that
exempt social security disability benefits are included under a §1325(b) analysis); In re
Minor, 177 B.R. 576, 579 (E.D. Tenn. 1995)(holding that workers' compensation benefits
are included as disposable income even though exempt under state law); In re Tolliver,
257 B.R. 98, 100 (Bankr. M.D. Fla. 2000)("[B]ecause the fresh start in Chapter 13 is
protected by a debtor's ability to retain non-disposable income rather than exempt assets,
the importance of exemptions is diminished . . . ."); In re Claude, 206 B.R. 374, (Bankr.
W.D. Pa. 1997) ("§1325(b) does not qualify income with reference to its exempt
status."); In re Jackson, 173 B.R. 168, 170-71 (Bankr. ED. Mo. 1994) (same); Watters v.
McRoberts, 167 B.R. 146, 147 (S.D. Ill. 1994) (same); In re Schnabel, 153 B.R. 809,
817-18 (Bankr. N.D. Ill. 1993)("[To allow a debtor] to use his exempt income to attain
Chapter 13's broad discharge, without the corollary requirement to use it to pay creditors
as much as he is able, would contravene the express purpose of the statute - namely, that
the debtor make payments under a plan.").
Today, after the passage of BAPCPA, it appears that most courts regard the
questions about the relationship between exemptions and income as having been
answered by Congress. The language of Section 1325(b)(2) was changed to now
reference “current monthly income”, which is, in turn, defined by 11 U.S.C. §101(10A).
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By excluding specific items, including social security income, in 11 U.S.C.
§101(10A)(B), more recent decisions have held that other sources of income – which
were not excluded by that section, must be counted as income to the debtor.
Under this statutory language, the only exclusions from income are assets that are:
(1) not "income" to the debtor; (2) not paid by an "entity" (which is defined in §101 (15)
as a person, estate, trust, governmental unit or the United States trustee); (3) not received
on a regular basis; (4) not received for the household expenses of the debtor or the
debtor's dependents; (5) Social Security Act payments; (6) payments to victims of war
crimes or crimes against humanity on account of their status as victims of such crimes,
and (7) payments to victims of international terrorism or domestic terrorism on account
of their status as victims of such terrorism. See, In re Waters, 384, B.R. 432, 437 (Bankr.
N.D. Va. 2008).
In other words, after BAPCPA, if it is not excluded from income by Section
101(10A)(B), it is included as income. See, In re Forbish, 414 B.R. 400, 403 (Bankr.
N.D. Ill. 2009)( tax refund attributable to earned income tax credit is income); In re
Royal, 397 B.R. 88, 101-102 (Bankr. N.D. Ill. 2008)(tax refund attributable to earned
income tax credit is income); In re Hedge, 394 B.R. 463, 466 (Bankr. S.D. Ind. 2008); In
re Waters, 384, B.R. 432, 437 (Bankr. N.D. Va. 2008)(veterans’ disability payments are
income).
B.
Tax Refunds As Income – Does An Exemption Matter?
1.
Tax Refund Basics.
In Chapter 7 bankruptcy filings, tax refunds are entitled to exemption, any monies
after the exemption is claimed, is turned over to the estate. The Chapter 7 process
usually only concerns the tax refund for the year in which the bankruptcy is filed.
In a Chapter 13 case, the tax refunds in question concerns all tax refunds received
by debtor during the life of the Plan. The question ultimately boils down to is how much
of the tax refunds is the debtor obligated to turn over to the trustee during the life of plan,
when the plan does not provide for a 100% payout to unsecured creditors.
2.
Does A Tax Refund Constitute Disposable Income?
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In a Chapter 13, the disposable income of a debtor is required to be turned over to
pay unsecured creditors with the provision in the bankruptcy code, 11 U.S.C.
§1325(b)(1)(B), stating :
“If the trustee or the holder of an allowed unsecured claim objects to the
confirmation of the plan, then the court may not approve the plan unless, as of the
effective date of the plan-(B) the plan provides that all of the debtor's projected disposable income to be
received in the applicable commitment period beginning on the date that the first
payment is due under the plan will be applied to make payments to unsecured
creditors under the plan.”
The code clearly states that “projected disposable income” is to be included in
payments in the repayment plan. The question is whether income tax refunds received by
debtor (refunds obtained due to the withholding of income of the debtor) are to be
included in the projected disposable income.
“Most courts have determined that tax refunds should be included in the
§1325(b)(1) “projected disposable income” calculation. In re: Kruse, 406 B.R. 833, 837
(Bankr. N.D. Iowa 2009); In re Cleaver, 426 B.R. 390, 394-395 (Bankr. D. N.M. 2010).
Even tax “refunds” attributable to earned income tax credits have been held to be income
for Chapter 13 purposes. See, In re Forbish, 414 B.R. 400, 403 (Bankr. N.D. Ill. 2009)(
tax refund attributable to earned income tax credit is income); In re Royal, 397 B.R. 88,
101-102 (Bankr. N.D. Ill. 2008)(tax refund attributable to earned income tax credit is
income).
The next issue pertains to whether debtors must contribute income tax refunds
when the debtor’s payment plan does not provide a 100% dividend to unsecured
creditors. The court in In re Michuad, interprets the code sections of 11 U.S.C.
§1325(b)(1), 11 USC §1325(b)(2), and 11 USC §101(10A), as requiring “debtors to
submit their projected disposable income to fund their chapter 13 plan if the debtor does
not propose a plan that will pay his or her unsecured creditors a 100% dividend.” In re
Michuad, 399 B.R. 365, 370 (Bankr. D.N.H. 2008). Another Bankruptcy Judge in that
district has subsequently applied that rule in cases where the debtor’s plan does not pay
100% to the creditors. See, In re: Watson, 417 B.R. 165, 167-168 (Bankr. D.N.H. 2009).
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Since the majority of the courts have held that debtor’s tax refunds must be
committed to the Chapter 13 Plan, the next issue that must be addressed is whether the
debtor must commit all of the tax refunds to the trustee. It is important to note, as the
court does in In re: Koch, that “incomes received from exempt sources during the life of a
Chapter 13 plan are “income”, the disposable portion of which must be paid”. In re:
Koch, 109 F. 3d 1285, 1289 (1997, 8th Cir.). The court in that decision left an opening
for income that is used by the debtor for valid support expenses and therefore would be
an expense deducted from the projected disposable income calculation.
Additionally, the court in In re Michuad said that:
“it is appropriate to allow debtors to retain some amount of a tax refund in order
to provide the debtors with some cushion against unanticipated expenses that arise
in the course of everyday life and to provide some flexibility to debtors as they
attempt to create a budget for the duration of a three-to-five year plan”
In re Michuad, 399 B.R. 365, 372 (Bankr. D.N.H. 2008).
The court also in the case laid out a framework under which a debtor may retain
tax refunds, saying at the outset that all determinations will depend “upon the facts of a
specific case and must be reviewed on case-by-case at the time of confirmation” Id.
In other words, if the “cushion” is already built into the Debtor’s budget and/or
Plan, the full amount of the tax refund must come in.
The Court in In re Wistey sets out one criteria under which a debtor may retain a
tax refund:
“(1) whether the expenses are necessary and the amounts reasonable; (2) whether
the expenses fall within the expense categories in Schedule J; (3) whether the
particular expense was foreseeable within the category; and (4) whether there is
sufficient money within the category to pay the expense”
In re: Kruse, 406 B.R. 833, 837 (Bankr. N.D. Iowa 2009) quoting, In re: Wistey, No. 0800555M, 2008 Bankr. LEXIS 2051, slip op. at 2at *3-4 (Bankr. N.D. Iowa June 25,
2008).
Where the Chapter 13 Plan has been confirmed, the debtors must file a motion to
modify to change the requirement that they turn over tax refunds. In re Michuad, 399
B.R. at 373.
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Even if the Trustee does not raise the issue of turnover of debtor’s tax refunds at
the time of confirmation of debtor’s plans, the trustee can seek the turnover of tax refunds
post confirmation by filing a motion to modify. In re: Watson, 417 B.R. 165, 169-170
(Bankr. D.N.H. 2009).
Another issue that has been addressed is the debtor’s attempt to hide the tax
refund. One instance where this instance may arise is in situations where it unclear
whether the debtors have to pay only those tax refunds they receive during the life of the
plan or whether they must turnover any tax refunds that maybe owed for a specific tax
year. For example, if the debtor’s payment plan ends in March, 2015 and is entitled to a
subsequent chapter 13 discharge, does the debtor have to turn over the tax refund for tax
year 2014, even though the debtor has not actually received the tax refund?
The Court in In re: Midkiff held that “the debtor’s right to a federal income tax
refund arises at the end of the tax year and not on the day of the filing of the tax return”.
In re: Midkiff, 271 B.R. 383, 386 (B.A.P. 10th Cir. 2002). The court in its conclusion
stated that if the debtor were required to pay income tax refunds received during the
commitment period, then the debtors could simply delay filing a tax return (and thus
receive the tax refund) until after the end of the commitment period. Id. at 388. The
Court ruled that since the debtor had a right to the tax refund during the commitment
period, it was included in the disposable income earned by the debtor, and therefore must
be turned over to the trustee for distribution to the unsecured creditors. Id. at 388. The
court’s decision was subsequently affirmed on appeal. Returning to the example given
above, a debtor would have to turn over the tax refund he or she is entitled to for tax year
2014, even if they did not received it by the end of the commitment period in 2015.
XX.
A FEW WORDS ABOUT EXPENSE ISSUES.
Expenses are not treated with even the pseudo-uniformity of income. Even the
Means Test changes the allowance for expenses by state. So, this is more of a local issue.
That being said, there are a few areas that should be discussed.
A.
The Below Median Debtors – Look To The Deep Magic.
For those debtors who fall below the median income, there is no statutory
guidance as to how expenses are derived for "disposable income." However, courts have
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interpreted this exclusion in the drafting to mean that the old practices apply, i.e. courts
should primarily use Schedule J in computing the statutory requirements. See, White v.
Waage, 440 B.R. 563, 566 (M.D. Fla. 2010); In re Neclerio, 393 B.R. 784, 787-788
(Bankr. S.D. Fla. 2008); In re Rush, 387 B.R. 26, 30 (Bankr. W.D. Mo. 2008); In re
Fuller, 346 B.R. 472, 483 (Bankr. S.D. Ill. 2006); In re Schanuth, 342 B.R. 601, 604
(Bankr. W.D. Mo. 2006).
So, whatever your court was doing on expenses, pre-BAPCPA, is probably still
good law in your local court.
B.
Calculating the expense of a 401(k) Loan Repayment:
The majority of courts now appear to require the monies used to pay off a 401(k)
loan each month to come into the Plan after the loan is paid, or allow the deduction only
for the amount necessary to pay off the 401(k) loan pro-rated over 60 months. See,
Section 1322(f); In re Nowlin, 576 F.3d 258 (5th Cir. 2009); In re Lasowski, 575 F.3d 815
(8th Cir. 2009); In re Cleaver, 426 B.R. 390, 395 (Bankr. D. N.M. 2010)(deduct 401(k)
loan payment, then increase payment by a like amount when 401(k) loan is paid off); In
re Davis, 425 B.R. 317, 321 (Bankr. S.D. Tex. 2010)(pro-rating the 401(k) loan
repayment); In re Anstett, 383 B.R. 380 (Bankr. D.S.C. 2008); In re Novak, 379 B.R. 908
(Bankr. D. Neb. 2007). This holding is not, however, unanimous.
The Sixth Circuit BAP has considered the issue of whether a Chapter 13 debtor can use
the additional disposable income available after a 401(k) is paid off to begin funding
401(k) contributions, thereby keeping the money from unsecured creditors. The Seafort
court answered that question with a 2-1 “no”. Burden v. Seafort (In re Seafort), 437 B.R.
204 (6th Cir. B.A.P. 2010), see also, In re Noll, 2010 Bankr. LEXIS 4868 (Bankr. E.D.
Wis. December 21, 2010)(following Seafort).
. However, this case is on appeal to the circuit court, and is far from a settled
issue.
C.
Cases Not Allowing A Tuition Expense For An Adult Child
Attending College:
See, In re Baker, 400 B.R. 594, 598 (Bankr. N.D. Ohio 2009); In re Walker, 383
B.R. 830, 838 (Bankr. N.D. Ga. 2008); In re Hicks, 370 B.R. 919, 923 n.7 (ED. Mo.
2007); U.S. Trustee v. Harrelson, 323 B.R. 176, 179 (Bankr W.D. Va. 2005); In re Staub,
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256 B.R. 567, 571 (Bankr. M.D. Pa. 2000); In re Studdard, 159 B.R. 852, 856 (Bankr.
E.D. Ark. 1993). This quote may be helpful in litigating college tuition issues:
“Bankruptcy is not intended to create involuntary student loans whereby creditors, in
essence, finance the education of the debtors' children.” In re McCormick, 354 B.R. 246,
253-54 (Bankr. C.D. Ill. 2006).
D.
Life Insurance – Term vs. Whole Life.
There seems to be general agreement that some amount of life insurance is an
appropriate expense for many Chapter 13 debtors: "People must have at least small amounts
of life insurance or other financial savings for burials and other final expenses.” In re
McLaney, 314 B.R. 228, 235 (Banrk. M.D. Ala. 2004); In re Ivory, 269 B.R. 890, 899
(Bankr. N.D. Ala. 2001). See also, In re Bottelberghe, 253 B.R. 256, 263-64 (Bankr. D.
Minn. 2000)(life insurance payment of $136 a month not “remotely questionable” as an
expense for a family of six); In re Rothman, 206 B.R. 99, 108 (Bankr. E.D. Pa. 1997)($100
per month for life insurance was not excessive for a debtor with a wife and four young
children).
However, whole life insurance is viewed differently by most courts because it has
an investment component: In re Williamson, 296 B.R. 760, 765-66 (Banrk. N.D. Ill.
2003)(non-debtor spouse’s whole life policy was an investment vehicle, as the policy builds
cash value. Therefore, the whole life insurance policy was not reasonably necessary, and
the amount for those premiums should be included in the debtor’s disposable income); In re
Presley, 201 B.R. 570, 575 (Bankr. N.D. Fla. 1996)(disability and life insurance expenses
allowed because they were “not an investment asset”).
From In re Smith, 207 B.R. 888, 889 (9th Cir. BAP 1996):
In reaching its legal conclusion, the bankruptcy court likened life
insurance premiums to retirement contributions. The court reasoned:
Like retirement plans and savings accounts, life insurance policies
are a means by which the debtor contributes his present income to the
future income of the policy beneficiary. If the policy has a cash value, the
policy may be used for the debtors' retirement. Thus, absent a showing
that the life insurance is required by law, the life insurance premium is not
a necessary expense. 187 B.R. at 679.
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This blanket rule is in error because it does not take into account
different types of life insurance and different circumstances of individual
debtors. Some types of life insurance are indeed mainly estate planning
devices which ought to be treated as retirement contributions. However,
other types of life insurance are intended to legitimately protect the
debtor's dependents from destitution if the debtor were to die. Like other
budget items, HN4whether a life insurance premium is a necessary
expense is a matter which must be determined on a case-by-case basis. See
Matter of Killough, 900 F.2d 61, 65 n.9 (5th Cir.1990); In re Gillead, 171
B.R. 886, 890 (Bankr.E.D.Cal.1994).
The bankruptcy court in this case made no finding that the debtors'
life insurance policies had retirement benefits at all. Assuming some
residual benefits, the focus of its inquiry must nonetheless be whether the
policies are reasonably necessary for the support of the debtors'
dependents. In cases where the debtors have very young or handicapped
dependents, the absence of a budget for life insurance may call a Chapter
13 plan into question. See, e.g. In re Crompton, 73 B.R. 800, 809 (Bankr.
E.D. Pa. 1987). This is a matter for the exercise of sound discretion by the
court; a per se rule is error.
See also, In re Lipford, 397 B.R. 320, 335-336 (Bankr. M.D.N.C. 2008)(deduction not
permitted on the Means Test); In re DeRosear, 265 B.R. 196, 211 (Bankr. S.D. Iowa
2001)(“The Debtors have failed to convince the Court it should not rule in the U.S.
Trustee's favor as it has done in so many past bench rulings and in two prior published
decisions. See Woodward, 265 B.R. 179, 194 (Bankr. S.D. Iowa 2000) ; Matter of
McReynolds, 253 B.R. 54, 63 (Bankr. S.D. Iowa 2000). That is, the Court agrees that
whole life insurance policies amount to savings vehicles and expenditures for such
policies typically should be disallowed.”)
XXI. THE TOP THIRTEEN SUPREME COURT DECISIONS (PLUS FIVE
NEW ONES!) THAT EVERY CHAPTER 13 PRACTITIONER SHOULD
KNOW BY NAME.
Ransom v. FIA Card Servs., N.A., ___ U.S. ___, 131 S. Ct. 716, 721-22, 178 L. Ed. 2d
603 (2011). "For a debtor whose income is above the median for his State, the means test
identifies which expenses qualify as 'amounts reasonably necessary to be expended.' The
test supplants the pre-BAPCPA practice of calculating debtors' reasonable expenses on a
case-by-case basis, which led to varying and often inconsistent determinations." The
Ransom case holds that there is no Means Test deduction for vehicles that are owned free
and clear of liens.
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The case also contains the statement: "Congress enacted the Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005 (BAPCPA or Act) to correct perceived abuses of the
bankruptcy system." Milavetz, Gallop & Milavetz, P. A. v. United States, 559 U.S. ___,
___, 130 S. Ct. 1324, 176 L. Ed. 2d 79, 84 (2010)). In particular, Congress adopted the
means test -- "[t]he heart of [BAPCPA's] consumer bankruptcy reforms," H. R. Rep. No.
109-31, pt. 1, p. 2 (2005) (hereinafter H. R. Rep.), and the home of the statutory language at
issue here -- to help ensure that debtors who can pay creditors do pay them. See, e.g., ibid.
(under BAPCPA, "debtors [will] repay creditors the maximum they can afford").
Milavetz, Gallop & Milavetz, P.A. v. U.S., ___ U.S. ___, 130 S.Ct. 1324, 176 L.Ed.2d
79 (2010). Attorneys who provide bankruptcy assistance are debt relief agencies within
the meaning of BAPCPA. However, the court read the restrictions on attorneys giving
advice to clients about incurring debt narrowly, thereby avoiding the Constitutional
issues. Disclosure requirements in advertising – i.e., the “debt relief agency” language –
were reasonably related to the state’s interest in preventing deception of consumers, and
the disclosure requirement did not prevent debt relief agencies from conveying any
additional information.
United Student Aid Funds, Inc. v. Espinosa, ___ U.S. ___, 130 S.Ct. 1367, 176
L.Ed.2d 158 (2010). Order confirming plan discharging student loan debt without
“undue hardship” finding, or adversary proceeding, was not void. Supports the binding
effect of confirmation of Chapter 13 Plans, and the need for creditors to not sleep on their
rights in seeking relief under 60(b). There is also language in the majority opinion about
the obligation of bankruptcy judges to review Chapter 13 Plan language and not confirm
Plans that do not comply with the Code.
Hamilton v. Lanning, ___ U.S. ___, 130 S.Ct. 2464, 177 L.Ed.2d 23 (2010). "Forward
looking" approach could be used in calculating "projected disposable income" under
§1325(b)(1)(B) as courts had discretion to account for known or virtually certain changes
in a debtor's income. Use of Chapter 13 debtor's current income, not an inflated figure
due to a prior one-time employer buyout, was affirmed.
Schwab v. Reilly, __ U.S. ___, 130 S.Ct. 2652, 177 L.Ed.2d 234 (2010). Where a
Chapter 7 debtor claimed exemptions in business equipment that equaled the maximum
allowed under 11 U.S.C.S. § 522(d) and also equaled the debtor's estimated market value
for the equipment, the trustee was not required to object under § 522(l) in order to
preserve the estate's right to retain any value beyond the claimed amount.
Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314, 70 S. Ct. 652, 657,
94 L. Ed. 865 (1950). Everything we do in bankruptcy is premised on due process based
upon “notice and the opportunity for a hearing”. Mullane is the case to know by name on
the constitutional requirements for notice: "An elementary and fundamental requirement
of due process in any proceeding which is to be accorded finality is notice reasonably
calculated, under all the circumstances, to apprise interested parties of the pendency of
the action and afford them an opportunity to present their objections."
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Butner v. United States, 440 U.S. 48, 55, 99 S. Ct. 914, 918 59 L. Ed. 2d 136, 141-142
(1979). “Property interests are created and defined by state law. Unless some federal
interest requires a different result, there is no reason why such interests should be
analyzed differently simply because an interested party is involved in a bankruptcy
proceeding.”
Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 73 L. Ed. 2d
598, 102 S. Ct. 2858 (1982). In addition to the important statutory changes made in
response to Marathon, this decision set the boundaries of Bankruptcy Court authority.
Without the consent of the parties, Bankruptcy Courts can issue final judgments only on
“core proceedings”. For non-core related proceedings, a Bankruptcy Judge can only
issue proposed findings of fact and conclusions of law, which are submitted to the
District Court, which reviews them de novo.
United States v. Whiting Pools, Inc., 462 U.S. 198, 203, 103 S. Ct. 2309, 76 L. Ed. 2d
515 (1983). Stands for the proposition that the IRS is no better than any other creditor
and has to follow the bankruptcy laws like everyone else. One of the IRS’s arguments
was that it was exempt from the Bankruptcy Code's provision that related to other
secured creditors. It also says stuff about property of the estate….
BFP v. Resolution Trust Corp., 511 U.S. 531; 114 S. Ct. 1757; 128 L. Ed. 2d 556
(1994). A non-collusive and regularly conducted nonjudicial foreclosure sale could not
be challenged as a fraudulent conveyance because the consideration received in such a
sale established reasonably equivalent value as a matter of law. This case set the old
Madrid rule in stone.
Nobleman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d
228 (1993). The protection of Section 1322(b)(2) prevents the use of 11 U.S.C. §506(a)
to "strip down" the lien of a mortgage to the value of the mortgaged real estate when the
creditor's claim is secured only by a lien on the debtor's principal residence. The holding
in Nobleman is what courts must distinguish in allowing the stripping of wholly
unsecured second and third mortgages in Chapter 13 cases – and until that issue gets to
the U.S. Supreme Court, there is still some uncertainty around allowing mortgage strips.
Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365, 367, 127 S. Ct. 1105, 166
L. Ed. 2d 956 (2007). There is no ‘absolute right’ to convert a Chapter 7 case to a
Chapter 13. Where there is fraud, §706(d) provides adequate authority for the denial of
conversion, where there has been fraud. Further, nothing in the text of either §706 or
§1307(c) (or the legislative history of either provision) limited the authority of a court to
take appropriate action in response to fraudulent conduct by the atypical litigant who had
demonstrated that the litigant was not entitled to the relief available to the typical debtor.
The broad authority granted to bankruptcy judges in §105(a) was adequate to authorize
an immediate denial of a §706(a) motion to convert. The impact of this decision on the
debtor’s ‘absolute right to dismiss’ a Chapter 13 case is still a hot issue before the courts.
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Till v. SCS Credit Corp., 541 U.S. 465; 124 S. Ct. 1951; 158 L. Ed. 2d 787 (2004). The
controversy over the 4-4-1 split seems to have died down, and reductions in interest rates
to “prime plus a risk factor” of 1% to 3% are being applied to all kinds of high interest
rate loans (other than mortgages on the debtor’s primary residence), reducing the amount
of interest that Chapter 13 debtors have to pay. The majority of courts allow the “Till-ing
of interest” on 910 vehicle loans, and “Till-ing up” very low interest rate motor vehicle
loans.
United Savings Association of Texas v. Timbers of Inwood Forest Associates, 484
U.S. 365, 370-371, 98 L. Ed. 2d 740, 108 S. Ct. 626 (1988). When a motion for relief
from stay is filed, once the movant shows that the debtor has no equity in the property,
the burden shifts to the debtor to establish that the property is "necessary to an effective
reorganization" and that there is "a reasonable possibility of a successful reorganization
within a reasonable time." And, Timbers also held that when secured collateral is
declining in value, the secured creditor is entitled to cash payments or additional security
in the amount of the decline.
Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 166 S.Ct. 286, 133 L.Ed.2d 258
(1995). The Supreme Court held that bank accounts may be frozen, by the bank, to preserve
their right to set off debts owed to them against the debtor's accounts. However, if the
accounts are frozen, the creditor has move quickly to seek relief from stay to effectuate a
setoff.
Grogan v. Garner, 498 U.S. 279, 111 S. Ct. 654, 112 L. Ed. 2d 755 (1991), the Supreme
Court stated: "Because the preponderance-of-the-evidence standard results in a roughly
equal allocation of the risk of error between litigants, we presume that this standard is
applicable in civil actions between private litigants unless 'particularly important
individual interests or rights are at stake.'"
Dewsnup v. Timm, 502 U.S. 410; 112 S. Ct. 773; 116 L. Ed. 2d 903 (1992). A debtor's
suit to "strip down" creditors' lien on the debtor's real property to equal the property's fair
market value and declare the remainder void was dismissed because the creditors' claim
had been "allowed" and was "secured."
United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 103 L. Ed. 2d 290, 109 S.
Ct. 1026 (1989). The law specifically allowed postpetition interest on a nonconsensual
oversecured lien as well as on a consensual claim in light of the clear language of 11
U.S.C.S. §506(b). Congress intended that all oversecured claims be treated the same way
for purposes of postpetition interest.
Johnson v. Homestate Bank, 501 U.S. 78, 111 S.Ct.2150, 115 L.Ed.2d 66 (1991). Held
that the Code permits “Chapter 20” cases – a Chapter 13 following hard on the heels of a
Chapter 7. Further, Johnson held that a creditor with an obligation secured by a lien on a
debtor’s property that the debtor has no personal liability, due to a prior bankruptcy
discharge, still has a claim against the subsequent Chapter 13 estate and that claim can be
dealt with in the Chapter 13 case.
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XXII. CRIMINAL REFERALS.
A Chapter 13 Trustee’s duties are listed in Section 1302. Many of the duties are
not fully recited, but instead are referenced by making applicable to Chapter 13 Trustees
the Code sections (for Chapter 7 Trustees) found in Section 704. See, Section
1302(b)(1). One of the listed duties incorporated from Chapter 7 is Section 704(a)(4):
“investigate the financial affairs of the debtor”.
So, there is a clear duty to investigate – but what is the Chapter 13 Trustee
supposed to do with the information when possible criminal wrongdoing is found?
The answer isn’t found in the Bankruptcy Code itself, it is found in the criminal
section of the United States Code. 18 U.S.C. Section 3057(a) states:
§3057. Bankruptcy investigations
(a) Any judge, receiver, or trustee having reasonable grounds for believing
that any violation under chapter 9 of this title [18 USCS §§151 et seq.] or
other laws of the United States relating to insolvent debtors, receiverships
or reorganization plans has been committed, or that an investigation
should be had in connection therewith, shall report to the appropriate
United States attorney all the facts and circumstances of the case, the
names of the witnesses and the offense or offenses believed to have been
committed. Where one of such officers has made such report, the others
need not do so.
The word “shall” is, presumably, mandatory. However, the usual practice is not
to follow the strict letter of the statute. Instead, criminal referrals are usually made to the
Office of the United States Trustee, who in turn takes it to the U.S. Attorney, sometimes
directly, sometimes after further investigation. Essentially, the Office of the U.S. Trustee
tries to get enough information together so that they can effectively sell the idea to the
U.S. Attorney of spending U.S. Attorney resources to prosecute the case.
Remember, the referral should be made whenever there is “reasonable grounds for
believing” the has been a violation of criminal law. It is not “beyond a reasonable
doubt”, it is just having reasonable ground for believing that a violation has occurred.
Obviously, a criminal referral is something that should never be made before you
have a full discussion of the issues with your Trustee. A discussion of criminal referrals,
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and bankruptcy crimes, are found in the Handbook for Standing Chapter 13 Trustees,
Chapter 3, Section D.
The Handbook states that, at a minimum, a criminal referral should include:
1. the bankruptcy case name, file number, and chapter;
2. a chronological summary including dates and specific facts related to the who,
what, where, when and how of the suspected crime;
3. a brief narrative of what occurred in relation to each allegation referring to
copies of relevant documents;
4. an estimate of the amount of loss involved;
5. specification of the statutory provision applicable to the matter;
6. names, addresses, phone numbers, titles and descriptions of all persons
involved;
7. copy of all written documents relevant to the allegations; and
8. a statement of other relevant referrals made to law enforcement agencies.
Once a matter is referred, the trustee’s obligation is ended. The trustee may never
hear about the referral again – in fact, that is the norm. This kind of information flows
only one way – from the civil to the criminal side.
No further investigation into the criminal matter should be undertaken by the
Chapter 13 Trustee. Problems arise, and criminal cases have been dismissed, where a
criminal defendant can prove that civil discovery was being used to gather information
for a criminal prosecution.
After a criminal referral, the Chapter 13 Trustee should treat the case the
trusteeship would treat a similar case with no criminal referral. If you would normally
move to dismiss the case, based on the facts – even if those are the facts that led to the
criminal referral - then move to dismiss it.
XXIII. POST-PETITION CAUSES OF ACTION ARE PROPERTY OF THE
ESTATE AND MUST BE REPORTED TO THE TRUSTEE – IN RE
WALDRON.
The 11th Circuit Court of Appeals considered the issue of whether or not a postpetition cause of action is part of the bankruptcy estate in a Chapter 13 case. The decision,
184
In re Waldron, 536 F.3d 1239 (11th Cir. 2008), held that claims acquired after the
commencement of the bankruptcy case but before the case was dismissed were property of
the estate under the plain language of §1306(a). New assets that the debtors acquired
unexpectedly after confirmation by definition did not exist at confirmation and could not be
returned to the debtor under §1327(b). Accordingly, the underinsured motorist claims of the
debtor from a post-petition accident were property of the Chapter 13 bankruptcy estate.
The appellate court further held that the bankruptcy court properly required the
debtors to amend their schedules to disclose the claims under Rule 1009. See also, Mullican
v. Moser, 417 B.R. 408 (E.D. Tex. 2009). Payments under the Chapter 13 Plan were based
on the debtors' disposable income when the plan was confirmed under 11 U.S.C.S.
§1325(b). Although the debtors did not have a duty to disclose every acquisition of
property or an interest in property after plan confirmation, the decision seems to suggest that
the major ones, like this, were required to be disclosed to the Chapter 13 Trustee. Finally,
the Chapter 13 Trustee had the right to request the debtors to modify their plan pursuant to
§1329 and Federal Rule of Bankruptcy Procedure 1009.
XXIV. BANKRUPTCY AND DEATH.
A.
Can The Dead File For Bankruptcy?
Bankruptcy courts have consistently held that the dead, and decedent's estates,
cannot be debtors under the Bankruptcy Code. This holding is based upon 1) history; 2)
legislative history; and 3) statutory construction. There is no direct authority allowing, or
prohibiting, a decedent or a decedent's estate commencing a case under any chapter of the
Bankruptcy Code.
Under the Bankruptcy Act, decedent estates could not file for bankruptcy. See, In
re Estate of Hiller, 240 F.Supp. 504 (N.D. Cal. 1965); In re Fackelman, 248 F. 565, 568
(S.D. Cal. 1918). If a change was intended - particularly a change that would have
changed the holding in Markham v. Allen, 326 U.S. 490, 66 S. Ct. 296, 90 L. Ed. 256
(1946): that federal courts must "not interfere with the probate proceedings" - presumably
the change would have been made with clear and explicit language.
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The Bankruptcy Code's legislative history also makes it clear that there was no
intention to change the prohibition against the dead, or decedents' estates, being permitted
to file bankruptcy.
The (relatively) plain language of the Bankruptcy Code also strongly supports the
prohibition against the deceased filing for bankruptcy. However, to reach that
conclusion, several provisions of the Code must be compared.
Under §109(b), only a "person" may be a Chapter 7 debtor. This is consistent
with the definition of "debtor", which is a "person or municipality concerning which a
case under this title has been commenced." Section 101 defines the term "person" as
including an "individual, partnership, and corporation, but does not include [a]
governmental unit." See, §101(41). Thus, just looking at the definition of "person", there
is no indication whether or not "person" includes a decedent or decedent's estate.
However, the definition of the term "entity" indicates that a decedent's estate does
not fall within the definition of "person". The Bankruptcy Code defines "entity" as
including a: "person, estate, trust governmental unit, and United States trustee." See,
§101(15). If "estate" were included within the definition of "person", there would be no
reason to list "estate" separately, after "person", in the definition of "entity". Therefore,
an estate is an "entity" but not a "person". And, not being a "person", an estate cannot
file for bankruptcy under Chapter 7.
Based on this statutory language, bankruptcy courts have held that a probate
estate is not a "person" and therefore may not file a Chapter 7 bankruptcy case. See, In re
Goerg, 844 F.2d 1562, 1565-1566 (11 Cir. 1988); In re Estate of Whiteside by Whiteside,
64 B.R. 99 (Bankr. E.D. Cal. 1986); In re Jarrett, 19 B.R. 413 (Bankr. M.D.N.C. 1982);
In re Estate of Joseph Brown, 16 B.R. 128 (Bankr. D.C. 1981); Gregory M McCoskey,
Death and Debtors: What Every Probate Lawyer Should Know About Bankruptcy, 34
Real Prop. & Tr. J. 669 (Winter, 2000); David B. Young, The Intersection of Bankruptcy
and Probate, 49 S. Tex. L. Rev. 351, 364-365 (Winter, 2007).
Of course, because a dead individual cannot file for Chapter 7, they cannot file
under Chapter 11. See, In re Estate of Patterson, 64 B.R. 807 (Bankr. W.D. Tex.
1986). Pursuant to Section 109(d), to qualify to be a Chapter 11 debtor, one must first be
"a person that may be a debtor under Chapter 7. . . ." Because an estate is not a "person"
186
eligible for Chapter 7 relief, a decedent's estate is disqualified from filing a Chapter 11
case.
Similarly, Chapter 13 is not available because the debtor must be an individual -which is a subset of "person", which does not include "estate". Plus, in most situations, a
dead person or a decedent's estate is not going to have "regular income". David B.
Young, The Intersection of Bankruptcy and Probate, 49 S. Tex. L. Rev. 351, 365-366
(Winter, 2007). The same reasoning prevents the filing of a Chapter 12 by a decedent. In
re Estate of Earl L. Grassman, 91 B.R. 928 (Bankr. D. Or. 1988).
B.
What Happens When The Debtor Dies After Bankruptcy Is Filed?
Even though a decedent's estate cannot be a debtor in bankruptcy, the death of a
debtor does not require the bankruptcy case to be dismissed. If the bankruptcy case
continues, the bankruptcy and a probate proceeding can go forward parallel to one
another. In re Lucio, 251 B.R. 705, 709 (Bankr. W.D. Tex. 2000); In re Bauer, 343 B.R.
234, 236-237 (Bankr. W.D. Mo. 2006)("If a bankruptcy case is pending when a person
dies, the only assets that go into the probate estate are the property claimed as exempt in
the debtor's bankruptcy case and, with certain exceptions (such as life insurance benefits),
any property acquired by the debtor after the commencement of the case.")
If a debtor in a Chapter 13 case dies before completing the plan, Collier On
Bankruptcy states that there three options available to the bankruptcy court:
In a chapter 12 or 13 case, the confirmation and successful
completion of a chapter 12 or 13 plan are almost always dependent upon the
debtor's future earnings. Thus, normally the debtor's death will often lead to
dismissal of the case because the debtor will likely have no future
income. Alternatively, the court may enter a hardship discharge under
section 1328(b), which would preserve the benefits of discharge for the
debtor's estate. . . . However, if a debtor has proposed a confirmable plan and
that plan is still feasible after the death of the debtor, the court may allow the
case to continue for the benefit of the debtor's estate.
9 Collier On Bankruptcy, ¶1016.04 (Lawrence P. King, 15th rev.ed.); In re Sales,
CASE NO. 03-60861, 2006 Bankr. LEXIS 2373 (Bankr. N.D. Ohio September
15, 2006).
187
Fed. R. Bankr. P. 1016 is consistent with the Bankruptcy Code as it follows the
general presumption that the death of the debtor shall not abate the bankruptcy proceeding,
but provides for the dismissal of a Chapter 13 case at the discretion of the bankruptcy court.
The Federal Rules of Bankruptcy Procedure, Rule 1016, outlines the effect of the
death of a debtor:
Death or incompetency of the debtor shall not abate a liquidation case
under Chapter 7 of the Code. In such event the estate shall be
administered and the case concluded in the same manner, so far as
possible, as though the death or incompetency had not occurred. If a
reorganization, family farmer's debt adjustment, or individual debt
adjustment case is pending under Chapter 11, Chapter 12, or Chapter 13,
the case may be dismissed; or if further administration is possible and in
the best interest of the parties, the case may proceed and be concluded in
the same manner, so far as possible, as though the death or incompetence
had not occurred.
Rule 1016 makes it clear that the death of a Chapter 7 debtor should not affect the
administration of a Chapter 7 bankruptcy case. In re Peterson, 897 F.2d 935, 938 (8th
Cir. 1990)(recognizing that whenever possible the "death of the debtor should not
influence the administration or resolution of a bankruptcy proceeding."); In re Gridley,
131 B.R. 447, 450 (Bankr. D.S.D. 1991); In re Tikijian, 76 B.R. 304, 305 (Bankr.
S.D.N.Y. 1987).
Thus, a Chapter 7 can continue notwithstanding the death of a debtor. In re
Lucio, 251 B.R. 705 (Bankr. W.D. Tex. 2000). If the first meeting of creditors has not
been held at the time of the debtor's death, the personal representative of debtor's probate
estate could appear on behalf of the debtor at creditors' meetings. Id. The subsequent
commencement of a probate proceeding does not affect the bankruptcy case because only
the debtor's property that is exempt from bankruptcy administration and property that the
debtor acquired post-petitition will be available for probate. In re Doyle, 209 B.R. 897
(Bankr. N.D. Ill. 1997).
Nothing prevents a decedent's estate from receiving a discharge enforceable by
the probate estate. In re Lucio, 251 B.R. 705 (Bankr. W.D. Tex. 2000). The case law, as
well as Collier and the legislative history to the Code, all support the conclusion that even
188
a dead debtor can get a discharge. See, In re Cummins, 266 B.R. 852 (Bankr. N.D. Iowa
2001); In re Doyle, 209 B.R. 897, 906-07 (Bankr. S.D.Ill. 1997); see also, H.R. REP. No.
595, 95th Cong, 1st Sess 367-68 (1978); see generally, 1 R. Ginsberg & R. Martin,
Ginsberg & Martin on Bankruptcy, §5.03[B] at 5-26 (4th ed. 1995); 9 L. King, Collier on
Bankruptcy, P 1016.04 (15th ed. rev. 2006).
This does not mean that a Chapter 7 bankruptcy case must continue. The
deceased Chapter 7 debtor's case is still subject to dismissal under §707. In re Marra, 179
B.R. 782, 785 (M.D. Pa. 1995); In re Cleland, 150 B.R. 63 (Bankr. D. Kan. 1992).
Notably, Rule 1016 does not automatically dismiss a Chapter 11 or Chapter 13
case upon the death of a debtor. Courts typically look at the extent to which the Chapter
11 or Chapter 13 had been substantially consummated. If a Chapter 11 or 13 case is not
close to completion, it will typically be dismissed. But there are exceptions. The court
in In re Perkins, 381 B.R. 530 (Bankr. S.D. Ill. 2007) exercised its discretion and declined to
dismiss a Chapter 13 case where the debtor died prior to the completion of plan payments
because the trustee failed to present any case-specific facts showing that further
administration of the case would not be in the best interest of the parties.
If the debtor cannot complete Plan payments, a hardship discharge may be another
possibility. See generally, 9 COLLIER ON BANKRUPTCY ¶ 1016.04 (Alan N. Resnick
& Henry J. Sommer eds, 16th ed.); Keith M. Lundin & William H, Brown, CHAPTER
13 BANKRUPTCY, 4TH EDITION, § 269.1, at ¶ 2, Sec. Rev. June 9,
2004, www.Ch13online.com; see also, In re Graham, 63 B.R. 95, 96 (Bankr. E.D. Pa.
1986); In re Redwine, 2011 Bankr. LEXIS 946 (Bankr. N.D. Ga. March 8, 2011) In re
Bevelot, 2007 Bankr. LEXIS 3970, 2007 WL 4192926, at *2 (Bankr. S.D. 111. Nov.
21,2007); In re Sales, 2006 Bankr. LEXIS 2373, 2006 WL 2668465, at *2 (Bankr. N.D.
Ohio Sept. 15, 2006).
Where a case is pending under Chapter 11 or Chapter 13 when the debtor dies,
conversion will not be possible. In order to convert, a debtor must be eligible to file
under the new chapter. Because a probate estate may not file a bankruptcy case under
any chapter, conversion is also prohibited. See, In re Spiser, 232 B.R. 669, 673 (Bankr.
N.D. Tex. 1999) In re Jarrett, 19 B.R. 413 (Bankr. M.D.N.C. 1982).
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In one recent Texas case, the debtor-husband died before the First Meeting of
Creditors. The debtor-wife was appointed as executor or her husband’s estate, and the
bankruptcy court permitted her to appear and testify at the §341 Meeting for both herself
and her deceased husband. See, In re Seitz, 430 B.R. 761 (Bankr. N.D. Tex. 2010).
XXV. CONTROLLING AUTHORITY AND CHANGING YOUR JUDGE’S
MIND.
[Attorney Joe Prochaska contributed to the following sections of the outline]
A.
Stare Decisis - Generally.
Stare decisis is a judge-created rule "to abide by, or adhere to, decided cases.”
Black's Law Dictionary 1406 (6th ed. 1990). It means that “inferior” courts are bound to
follow the decisions of higher courts. See, Flowers v. United States, 764 F.2d 759, 761
(11th Cir. 1985). The stare decisis doctrine stems from the common law maxim, "Stare
decisis et non quieta movere," which is defined as "Let stand what is decided, and do not
disturb what is settled." In re Globe Illumination, 149 B.R. 614, 617 (Bankr. C.D. Cal.
1993). For a discussion of the history of the concept of stare decisis, see: In re
Livingston, 379 B.R. 711, 722-724 (Bankr. W.D. Mich. 2007).
Stare decisis "promotes the evenhanded, predictable, and consistent development
of legal principles; fosters reliance on judicial decisions; and contributes to the actual and
perceived integrity of the judicial process." Payne v. Tennessee, 501 U.S. 808, 111 S. Ct.
2597, 115 L. Ed. 2d 720 (1991).
Stare decisis maintains a hierarchical dimension which is believed to be crucial to
the efficient operation of the judicial system. There is no dispute that inferior federal
courts, including circuit courts of appeal, district courts and bankruptcy courts, are
absolutely bound by the decisions of the United States Supreme Court on issues of law.
Jaffree v. Board of School Commissioners, 459 U.S. 1314, 74 L. Ed. 2d 924, 103 S. Ct.
842 (1983).
When no intervening Supreme Court decision has been issued, the decisions of
the court of appeals for a particular circuit are binding on all lower courts within that
circuit. Zuniga v. United Can Co., 812 F.2d 443, 450 (9th Cir. 1987); see also, Johnson v.
DeSoto County Bd. of Com'rs, 72 F.3d 1556, 1559 n.2 (11th Cir. 1996); Litman v.
190
Massachusetts Mutual Life Ins. Co., 825 F.2d 1506, 1508 (11th Cir. 1987); Spannaus v.
United States Dep't of Justice, 824 F.2d 52, 55 (D.C. Cir. 1987). This is so even if a split
of opinion exists between the controlling circuit and another circuit court of appeals and
the inferior court believes that the controlling circuit court is in error. Zuniga, at 450;
Hasbrouck v. Texaco, Inc., 663 F.2d 930, 933 (9th Cir. 1981), cert. denied, 459 U.S. 828,
74 L. Ed. 2d 65, 103 S. Ct. 63 (1982).
Bankruptcy courts are also generally bound by an en banc decision of the judges
of the local district court, because the district court would be bound by the en banc
decision. See, In re Gaylor, 123 B.R. 236, 242 (Bankr. E.D. Mich. 1991); and see
generally, Bartels, United States District Courts En Banc -- Resolving the Ambiguities,
73 Judicature 40, 42 (1989).
District judges are not bound by bankruptcy appellate panels, in part because of a
Constitutional issue – how can a panel of non-Article III judges bind an Article III judge?
See, Bank of Maui v. Estate Analysis Inc., 904 F.2d 470, 472 (9th Cir. 1990)(“it must be
conceded that BAP decisions cannot bind the district courts themselves. As article III
courts, the district courts must always be free to decline to follow BAP decisions and to
formulate their own rules within their jurisdiction.”).
For bankruptcy courts, the difficult stare decisis issues arise from decisions of
individual district court judges and the bankruptcy appellate panels. The legislative
history to the direct appeal provision of BAPCPA recognized this issue. The House
Report that accompanied the BAPCPA emphasized that "decisions rendered by a district
court as well as a bankruptcy appellate panel are generally not binding and lack stare
decisis value." See H.R. Rep. No. 109-31, at 148 (2005); see also H.R. Rep. No. 107-3,
Prt. 1, at 112 (2001) (same); Weber v. United States Trustee, 484 F.3d 154, 158 (2nd Cir.
2007).
A.
Are Bankruptcy Judges Bound by District Court Decisions In Multi
Judge Districts?
The issue of whether bankruptcy courts are bound by decisions of district court
judges within the same district has not been definitively resolved. See, Singerman, Paul
S., Of Precedents and Bankruptcy Court Independence," Am. Bankr. Inst. J. 1 (July/Aug.
191
2003); Muniz, Michael H., Anarchy or Anglo-American Jurisprudence? The Doctrinal
Effect of Stare Decisis upon Bankruptcy Courts in the Face of District Court Precedents,
76 Fla. B.M. 34 (Dec. 2002); Levine, David A., Precedent and the Assertion of
Bankruptcy Court Autonomy; Efficient or Arrogant, 12 Bank. Dev. J. 185 (1995);
Maddock III, John H., Stemming the Tide of Bankruptcy Court Independence: Arguing
the Case for District Court Precedent, 2 Am. Bankr. Inst. L. Rev. 507 (Winter, 1994);
Bussell, Daniel J., Power, Authority and Precedent in Interpreting the Bankruptcy Code,
41 U.C.L.A. L. Rev. 1063 (April 1994).
1.
Majority Rule – No, Bankruptcy Courts Are Not Bound By The
Decision Of A Single District Judge.
The majority of bankruptcy courts – in what is often referred to as the “modern
trend” - have held that where the bankruptcy court sits in a multi-judge district, it is not
bound by principles of stare decisis by the decision of a district judge in that district. See,
In re Davis, 352 B.R. 758, 764 (Bankr. D.S.C. 2006); In re Romano, 350 B.R. 276, 281
(Bankr. E.D. La. 2005). In re Baker, 264 B.R. 759, 762 (Bankr. M.D. Fla. 2001); In re
Stafford Pool & Fitness Center, 252 B.R. 627, 631 (Bankr. D.N.J. 2000); In re Jamesway
Corporation, 235 B.R. 329, 337 n.1 (Bankr. S.D.N.Y. 1999); In re Fairchild Aircraft
Corp., 220 B.R. 909, 917 (Bankr. W.D. Tex. 1998); In re Jones, 219 B.R. 1013, 1016
(Bankr. N.D. Ill. 1998); In re Shattuc Cable Corp., 138 B.R. 557, 565 (Bankr. N.D. Ill.
1992); In re Rosemary, 134 B.R. 940, n.6 (Bankr. W.D. Okla. 1991); In re Argo
Communications, 134 B.R. 776, 786 n.9 (Bankr. S.D. N.Y. 1991); In re Goode, 131 B.R.
835, 840 n.2 (Bankr. N.D. Ill. 1991); In re Morningstar Enterprises, 128 B.R. 102, 106
(Bankr. E.D. Pa. 1991); In re Rheuban, 128 B.R. 551, 554-55 (Bankr. C.D. Cal. 1991); In
re Gaylord, 123 B.R. 236, 241- 243 (Bankr. E.D. Mich. 1991); In re Windsor
Communications Group, 67 B.R. 692, 699 (Bankr. E.D. Pa. 1986).
District court decisions are not binding on other district judges within a district.
In re Abernathy, 150 B.R. 688, 693 n.7 (Bankr. N.D. Ill. 1993). Most bankruptcy courts
look to the provision of 28 U.S.C. §151, which provides: "the bankruptcy judges in
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regular service shall constitute a unit of the district court to be known as the bankruptcy
court for that district." 28 U.S.C. § 151. These courts reason that bankruptcy courts, as a
unit of the district court, are not inferior courts and just as there is no "law of the district"
mandated for district judges to follow, bankruptcy judges are likewise not bound by
decisions of a single district court judge. See, Paul Steven Singerman and Paul A. Avron,
Of Precedents and Bankruptcy Court Independence: Is a Bankruptcy Court Bound by a
Decision of a Single District Court Judge in a Multi-judge District?, 22 Am. Bankr. Inst.
J. 1 (2003); In re Ford, 415 B.R. 51, 60 (N.D.N.Y. 2009); In re Eiland, 170 B.R. 370, 378
(Bankr. N.D. Ill. 1994); and c.f., Threadgill v. Armstrong World Indus. Inc., 928 F.2d
1366, 1371 (3rd Cir. 1991)(“there is no such thing as ‘the law of the district’”).
Some appellate court decisions can also be read as supporting the non-binding
effect of individual district court decisions. For example, “the responsibility for
maintaining the law's uniformity is a responsibility of appellate rather than trial judges
and because the Supreme Court does not assume the burden of resolving conflicts
between district judges whether in the same or different circuits.” See, Colby v. J.C.
Penney Co., Inc., 811 F.2d 1119, 1124 (7th Cir. 1987).
There are other sub-issues. Many district court districts are broken into divisions
– is a bankruptcy court in a different division (meaning that the district judge writing the
‘binding’ opinion ever hear an appeal from that bankruptcy court) still in the direct line of
superior courts that stare decisis (arguably) requires? See, In re Hubbard, 23 B.R. 671,
673 (Bankr. S.D. Ohio 1982).
Another argument against the binding effect is found in Romano: “because there
are sixteen district court judges in this district, a rule imposing stare decisis effect of a
district court decision effectively makes final the first district court to rule on an issue,
even though other judges in the district may disagree with the decision. Such a rule
effectively makes the random assignment of appeals determinative for stare decisis
purposes, and leaves no room for differing opinions of other judges in the district.” In re
Romano, 350 B.R. 276, 281 (Bankr. E.D. La. 2005).
Finally, there is discussion as to how meaningful the whole concept of district
court binding authority really is:
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Bankruptcy court decisions are reviewed by different district judges. As a
result, the issue of whether the bankruptcy court is bound to follow
decisions of the district court within its district cannot arise in any
meaningful context. The issue arises only on an appeal from the
bankruptcy court. The substantive issue is placed before this district judge
who is not bound by other district court decisions.
In re KAR Devel. Assocs., L.P., 180 B.R. 629, 640 (D. Kan. 1995).
2.
Minority Rule – Yes, Stare Decisis Applies To Decisions By A
Single District Judge.
Any court whose decisions (even if unanimous) are subject to reversal by a single
judge of another court is "inferior" to the reversing court for stare decisis purposes. See,
In re Rand Energy Co., 259 B.R. 274, 276 (Bankr. N.D. Tex. 2001); In re Phipps, 217
B.R. 427, 430 (Bankr. W.D.N.Y. 1998); In re Thorsell, 229 B.R. 593 (Bankr. W.D.N.Y.
1999); In re Whitehorn, 99 B.R. 734 (Bankr. N.D. Tex. 1989); In re Johnson-Allen, 67
B.R. 968 (Bankr. E.D. Pa. 1986); In re Maisson, 57 B.R. 227, 229 (Bankr. E.D. Mich.
1985); In re Moisson, 51 B.R. 227 (Bankr. E.D. Mich. 1985); In re Investment Sales
Diversified, Inc., 49 B.R. 837, 846 (Bankr. D.Minn. 1985); In re St. Louis Freight Lines,
45 B.R. 546, 551 (Bankr. E.D. Mich. 1984); Eaton Land & Cattle v. Rocky Mtn.
Investments, 28 B.R. 890, 892 (Bankr. D. Colo. 1983); In re V-M Corp., 23 B.R. 952,
954-55 (Bankr. W.D. Mich. 1982); In re Bill Ridgway, Inc., 4 B.R. 351, 353 (Bankr.
D.N.J. 1980).
“This writer…is firmly of the view that each bankruptcy judge in a district served
by more than one U.S. District Court Judge is bound by stare decisis to obey the decision
of any one of those District Court Judges in alike case until a different U.S. District Court
Judge of the same district disagrees with his or her peer's earlier decision, in which event
each Bankruptcy Judge is free to go either way.” In re Bruno, 356 B.R. 89, 91 (Bankr.
W.D.N.Y. 2006). See also, In re Shunnarah, 273 B.R. 671, 672 (M.D. Fla.
2001)("because a bankruptcy court is an Article I court, and appeals from such court are
taken to the Article III courts, which have reversal power over the bankruptcy courts" the
bankruptcy court are inferior courts for stare decisis purposes.)
a.
What If It Is More Than One Decision?
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Although generally agreeing that bankruptcy courts are not bound by district court
decisions, Judge Cyganowski felt compelled to follow two district court decisions. See,
In re McBrearty, Id. at 518 (Bankr. E.D.N.Y. )
3.
Decisions by District Judges in other jurisdictions are not
binding.
The Ninth Circuit has specifically held that district court decisions do not bind
bankruptcy courts in other districts.
“[B]ankruptcy court decisions cannot be appealed to district courts
in other districts. Therefore, it makes little sense for such district court
decisions to have precedential authority over out-of-district bankruptcy
courts. We have also held that "[t]he doctrine of stare decisis does not
compel one district court judge to follow the decision of another."
Starbuck v. City and County of San Francisco, 556 F.2d 450, 457 n.13
(9th Cir. 1977). Were we to hold that bankruptcy courts are bound by all
district court decisions within the circuit, rather than only the decision of
the district judge to whom their ruling has been appealed, bankruptcy
courts would be subject to a potentially non-uniform body of law. We
therefore hold that the bankruptcy court in this case (located in the Central
District of California) was not bound by the Nelson holding (a decision by
a district judge in the Northern District of California).”
In re Silverman, 616 F.3d 1001, 1005 (9th Cir. 2010). [It may be significant to the
discussion below, regarding the binding effect of BAP decisions, that this decision comes
from the 9th Circuit.]
4.
Problems with unpublished opinions.
There is a huge practical problem with a mandatory requirement that bankruptcy
judges follow district court decisions as binding precedent – what do you do about
unpublished opinions? See, In re Gaylord, 123 B.R. 236, 242 n. 8 (Bankr. N.D. Ill.
1992); In re Romano, 350 B.R. 276, 280 n.15 (Bankr. E.D. La. 2005)(the “bankruptcy
court must canvas the other judges in the district to determine if they have reached a
contrary conclusion on the issue, resulting in an unwieldy system.”); But compare, In re
Shunnarah 273 B.R. 671, 672 (M.D. Fla. 2001)(but limited to published decisions). Most
appellate courts have circuit court rules that their unpublished decisions are not binding.
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Contra, Anastasoff v. United States, 223 F.3d 898 (8th Cir. 2000)(unpublished decisions
are binding precedent). But, for most district courts, there are no similar rules in place.
And what do you do with a summary affirmance of a bankruptcy court decision –
usually unpublished, and maybe not saying much more than “affirmed for the reasons set
forth in the bankruptcy court’s opinion” - does that bankruptcy court decision then
become binding on all of the bankruptcy courts in the district?
5.
If Not “Bound” – How ‘Persuasive’ Is The Authority?
Decisions of district judges within a district are "entitled to substantial deference."
In re Stafford Pool & Fitness Center, 252 B.R. 627, 631 (Bankr. D.N.J. 2000); ); In re
Jones, 219 B.R. 1013, 1016 (Bankr. N.D. Ill. 1998)("entitled to substantial deference"
and are considered persuasive authority); In re Shattuc Cable Corp., 138 B.R. 557, 567
(Bankr. N.D. Ill. 1992). The reasoning of the district judge is entitled to “respect”. See,
In re Davis, 352 B.R. 758, 764 (Bankr. D.S.C. 2006).
But not all courts see much need for any special deference. See, In re Fairchild
Aircraft Corp., 220 B.R. 909, 917 (Bankr. W.D. Tex. 1998)(“A district court's ruling on a
bankruptcy appeal enjoys little more precedential weight than does the original
bankruptcy decision itself.”) citing, Paul M. Baisier & David G. Epstein, Resolving Still
Unresolved Issues of Bankruptcy Law: A Fence or An Ambulance, 69 AM. Bankr. L.J.
525, 528-29 & nn.17- 19 (1995).
B.
Are Bankruptcy Judges Bound by BAP Decisions?
This issue is, if anything, even more unsettled than the question of the binding
efffect of district court decisions. Compare, Erwin Chemerinsky, Decision-Makers: In
Defense of Courts, 71 Am. Bankr. L.J. 109, 128 (Spring 1997), and Thalia L. Downing
Carroll, Why Practicality Should Trump Technicality: A Brief Argument For The
Precidential Value Of Bankruptcy Appellate Panel Decisions, 33 Creighton L. Rev. 565
(April, 2000); with, Barbara B. Crabb, In Defense of Direct Appeals: A Further Reply to
Professor Chemerinsky, 71 Am. Bankr. L.J. 137, 140 (Spring 1997); Kathleen P. March
& Roberto V. Obregon, Are BAP Decisions Binding on Any Court?, 18 Cal. Bankr. J.
189(1990).
196
1.
Majority Rule Outside Of The 9th Circuit – No.
It appears that a majority of courts outside the 9th Circuit hold that bankruptcy
appellate panel decisions are not binding on bankruptcy courts. In re Cormier, 382 B.R.
377, 408-409 (Bankr. W.D. Mich. 2008); In re Livingston, 379 B.R. 711, 726 (Bankr.
W.D. Mich. 2007); In re Carrozzella & Richardson, 255 B.R. 267, 272-73 (Bankr. D.
Conn. 2000); In re Williams, 257 B.R. 297, 301 n.5 (Bankr. W.D. Mo. 2001); In re
Virden, 279 B.R. 401, 409 n. 12 (Bankr. Mass. 2002); In re Standard Brands Paint Co.,
154 B.R. 563 (Bankr. C.D. Cal. 1993); See also, March and Obregon, Are BAP Decisions
Binding on Any Court,? 18 Cal. Bankr. J. 189 (1990).
There are a number of reasons given for not regarding bankruptcy appellate panel
decisions as binding under the doctrine of stare decisis. One reason is that the bankruptcy
appellate panel is not a direct avenue of appeal – either party can choose to avoid the
BAP and force an appeal to go to the district court. See, In re Cormier, 382 B.R. 377,
409 (Bankr. W.D. Mich. 2008):
Neither district courts sitting as appellate courts nor bankruptcy appellate
panels in their present incarnation provide a satisfactory means of appeal from
bankruptcy court rulings. The two have the same major drawback: the
appellate decisions they reach do not bind each other or any court except the
court from which the appeal is taken. To the extent their decisions have no
precedential effect (as distinct from the persuasive effect a well-reasoned
opinion may have), the courts or panels serve only the most basic functions of
appellate review, that of correcting particular errors in specific cases and
providing some supervision over the bankruptcy courts. They do not foster
predictability: so long as litigants can choose their forum for appeal, they can
shop for the one they think will be most favorable to their position. They do
not build a coherent body of law because their decisions issue from too many
sources to produce coherency. As a result, bankruptcy practitioners have little
guidance in advising their clients. Many of the most basic issues in
bankruptcy law have no definitive resolution.
The District Court in Oregon has held that "because a bankruptcy court is not
bound by decisions from other districts, it should not be bound by BAP decisions
originating in another district." In re Selden, 121 B.R. 59,62 (D.Or. 1990)(Panner, J.).
(Note that Sunahara arose in the Northern District of California.) Selden relies on Judge
Hess's opinion in In re Junes, 76 B.R. 795, 797 (Bankr. D.Or 1987), [**10] aff'd on other
197
grounds, 99 B.R. 978 (9th Cir. BAP 1989). Junes reasoned that: The BAP is an
intermediate appellate court, sitting between the trial court and the Court of Appeals.
District Court judges, acting as courts of appeal from Bankruptcy Courts, sit in the same
position relative to the trial court and the Circuit Court of Appeals. Since a ruling of one
District Court is not binding on another District Court within the circuit, it follows that
the BAP, acting on a case from a particular district, cannot bind Bankruptcy Courts in
other districts. See also In re Crook, 62 B.R. 937, 941 (Bankr. D.Or. 1986), rev'd79 B.R.
475 (9th Cir. BAP 1987)(Reversed on the merits.) While there is some logic to the
argument, it overlooks entirely Congress' purpose in establishing the BAPs to advance
uniformity in the law. It has been held that the opinion of a single District Court judge is
not binding in subsequent cases in any event. See e.g. In re Barakat, 173 B.R. 672
(Bankr. C.D.Cal. 1994); In re Gaylor, 123 B.R. 236 (Bankr.E.D.Mich. 1991).
2.
Minority Rule Everywhere But The 9th Circuit – Yes, BAP
Decisions Are Binding. But the 9th Circuit view may be
changing.
The majority of decisions in the Ninth Circuit have held that bankruptcy appellate
panels decisions are binding on bankruptcy courts. See, In re Windmill Farms, Inc., 70
B.R. 618 (9th Cir. BAP 1987); In re Proudfoot, 144 B.R. 876 (9th Cir. BAP 1992); In re
Tong Seng Vue, 364 B.R. 767 (Bankr. D. Or. 2007); In re Platt, 270 B.R. 773, 775
(Bankr. D.Or. 2001); In re Chlebowski, 246 B.R. 639, 645 (Bankr. D.Or. 2000); In re
Globe Illumination Co., 149 B.R. 614 (Bankr. C.D. Cal. 1993); In re Hunter, 380 B.R.
753 (Bankr. S.D. Ohio 2008).
However, recently, the Ninth Circuit Court of Appeals stated: “State Fund
has structured its argument on a false premise; we have never held that all
bankruptcy courts in the circuit are bound by the BAP. See, e.g., Bank of Maui v.
Estate Analysis, Inc., 904 F.2d 470, 472 (9th Cir. 1990)” See, In re Silverman,
616 F.3d 1001, 1005 (9th Cir. 2010).
The rationale for the holding that bankruptcy appellate panel decisions are
binding is that Congress's purpose in establishing the BAP was to provide a uniform and
consistent body of bankruptcy law throughout the circuit.
198
3.
Special Rule For Bankruptcy Judges Serving On The BAP?
Find out if your bankruptcy judge is serving or has served on the BAP, before
citing or criticizing the BAP decision. “Know your audience.”
4.
If Not “Bound” – How Persuasive Is The Authority?
Even for bankruptcy courts that do not find bankruptcy appellate panel decisions
binding, BAP decisions are nevertheless persuasive authority. See, In re Silverman, 616
F.3d 1001, 1005 n.1 (9th Cir. 2010)(“Nevertheless, we treat the BAP's decisions as
persuasive authority given its special expertise in bankruptcy issues and to promote
uniformity of bankruptcy law throughout the Ninth Circuit.”); In re Cormier, 382 B.R.
377, 411 (Bankr. W.D. Mich. 2008)(holding BAP opinions are to be given the same
deference accorded district court appellate opinions, treated as extremely persuasive, and
generally followed, but that a bankruptcy court is free to disagree with the BAP or the
district courts if it has a "deeply considered and well-reasoned analysis"); In re Virden,
279 B.R. 401, 409 n.12 (Bankr. D.Mass. 2002); In re Carrozzella & Richardson, 255 B.R.
267, 273 (Bankr. D.Conn. 2000)("[T]his Court will regard BAP opinions as highly
persuasive though not binding, precedent."); In re Cox, 393 B.R. 681, 687 (Bankr. W.D.
Mo. 2008).
5.
What If The BAP Appeal Arises Out Of Another State Or
District?
Two Oregon courts, one district court and one bankruptcy court, have
distinguished bankruptcy appellate panel decisions that arise out of another district. Just
as a district court is not bound by the decisions of district judges from another district,
they are not bound by bankruptcy appellate panel decisions originating from another
district. See, In re Selden, 121 B.R. 59,62 (D.Or. 1990); In re Junes, 76 B.R. 795, 797
(Bankr. D.Or 1987); contra, In re Tong Seng Vue, 364 B.R. 767, 771-772 (Bankr. D. Or.
2007).
C.
Stare Decises – Bankruptcy Courts Are Bound By Decisions Of Their
Courts Of Appeals And The United States Supreme Court.
199
1.
Best Case Scenario - Effect Of A Binding On Point Decision.
The binding precedent rule, that lower courts must follow the holdings of their
court of appeals and the Supreme Court, affords a lower court no discretion where a
higher court has already decided the issue before it. Johnson v. DeSoto County Bd. of
Com'rs, 72 F.3d 1556, 1559 n.2 (11th Cir. 1996).
a.
Laying down your trump card with some tact.
If clear circuit court authority (or U.S. Supreme Court authority) overrules a
decision by your bankruptcy court judge, you should win by simply pointing out the
ruling. Tactfully - particularly if there has been a long history of disagreement with the
court on the issue.
2.
When The Decision Is On A Related Issue.
Related issues come in many flavors: similar language in different chapters in the
Code, and differences in phraseology. Compare Chapter 11 to Chapter 13, for example.
Do a word search in the Code for the string of key words in any statute at issue, to see if
the string of words is interpreted differently, in a different part of the Code. Go outside of
the Code, to other federal or state statutes, using the same word string search.
3.
What Is Dicta, And What Do You Do With It?
“Dicta”, “dictum”, or the longer “obiter dictum” are statements in an opinion or
order that are not neither constitutes the holding of a case, nor arises from a part of the
opinion that is necessary to the holding of the case to decide the case. See, Black v.
United States, 373 F.3d 1140, 1144 (11th Cir. 2004); see also, Cetacean Cmty. v. Bush,
386 F.3d 1169, 1173 (9th Cir. 2004); King v Erickson, 89 F.3d 1575, 1582 (Fed Cir
1996); Kyle v. Office of Workers' Compensation Programs, 819 F.2d 139, 143 (6th Cir.
1987).
Another common definition of dictum is 'a statement in a judicial opinion that
could have been deleted without seriously impairing the analytical foundations of the
holding . . . .'" Sarnoff v. American Home Prods. Corp., 798 F.2d 1075, 1084 (7th Cir.
1986).
200
Statements that are dictum have not been tested by the adversarial process which
enlightens the determination of issues, and are therefore less reliable that ratio decidendi.
In re Youmans, 117 B.R. 113, 121 (Bankr. D.N.J. 1990).
The line is not always easy to draw, however, for "where a panel confronts an
issue germane to the eventual resolution of the case, and resolves it after reasoned
consideration in a published opinion, that ruling becomes the law of the circuit,
regardless of whether doing so is necessary in some strict logical sense." United States v.
Johnson, 256 F.3d 895, 914 (9th Cir. 2001) (en banc). Statements that explain the court's
rationale are part of its holding. U.S. v. Bloom, 149 F.3d 649, 653 (7th Cir. 1998); In re
Swanson, 289 B.R. 372 ,374-375 (Bankr. C.D. Ill. 2003).
Dicta is not binding, regardless of its source. See, Export Group v. Reef
Industries, Inc., 54 F.3d 1466 (9th Cir. 1995). Thus, lower courts are not bound to follow
a higher court's dictum. U.S. v. Crawley, 837 F.2d 291 (7th Cir. 1988).
However, even dicta from the Supreme Court must be heeded by lower courts, at
least where the Court's opinion is "considered" and clearly expressed. See, e.g., Hrometz
v. Local 550, Int'l Ass'n of Bridge Constr. & Ornamental Ironworkers, 227 F.3d 597, 602
(6th Cir. 2000)("Although the interpretation given [to a statute by the Supreme Court] . . .
is technically dicta, its import is clear and therefore binding upon this court. See United
States v. Oakar, 324 U.S. App. D.C. 104, 111 F.3d 146, 153 (D.C. Cir. 1997)('Carefully
considered language of the Supreme Court, even if technically dictum, generally must be
treated as authoritative.' (citation and internal quotation marks omitted))."); [In re]
McDonald, 205 F.3d at 612 ("'Being peripheral, [dictum] may not have received the full
and careful consideration of the court that uttered it.' . . . We should not idly ignore
considered statements the Supreme Court makes in dicta." (quoting [In re] Sarnoff, 798
F.2d [1075,] at 1084 (7th Cir. 1986))). Even Supreme Court justices have found dicta
persuasive: “[I]f dictum it was, it was dictum well considered, and it stated the view of
five Members of this Court”. Boumediene v. Bush, 553 U.S. 723, 799, 128 S. Ct. 2229,
2278, 171 L. Ed. 2d 41, 98 (2008)(Souter, concurring).
a.
If it’s for ya.
201
If dicta from the Supreme Court or your court of appeals are helpful, trot out the
case law that says that if it appears to be a considered statement, it should be “heeded”.
You may also want to argue – if there is a basis for it - that the statement is part of
the overall explanation of the decision, and therefore is not really dicta. The arguments
regarding dicta resemble, in form, arguments about whether a case is “on point” or
distinguishable.
b.
If it’s agin’ ya.
Argue that dicta is not binding, and the bankruptcy court is free to disregard it.
Talk about the unreliability of judicial statements that have not passed through an
adversarial contest where opposing views were brought to the higher court’s attention.
4.
Do Different Rules Apply Based On The “Law Of The Case”
Doctrine?
"The law of the case doctrine generally discourages courts from reconsidering
determinations that the court made in an earlier stage of the proceedings." United States
v. Graham, 327 F.3d 460, 464 (6th Cir. 2003).
Under the law of the case doctrine, "the findings of fact and conclusions of law by
an appellate court are generally binding in all subsequent proceedings in the same case in
the trial court or on a later appeal." This That & the Other Gift & Tobacco, Inc. v. Cobb
County, 439 F.3d 1275, 1283 (11th Cir. 2006); Mason v. Texaco, Inc., 948 F.2d 1546,
1553 (10th Cir. 1991).
In addition, the law of the case doctrine applies to lower court rulings that have
not been challenged on appeal. United States v. Escobar-Urrego, 110 F.3d 1556, 1560
(11th Cir. 1997). Therefore, "a legal decision made at one stage of the litigation,
unchallenged in a subsequent appeal when the opportunity existed, becomes the law of
the case for future stages of the same litigation, and the parties are deemed to have
waived the right to challenge that decision at a later time." Escobar-Urrego, 110 F.3d at
1560.
To avoid the application of the law of the case, the parties must demonstrate that
the case fits within one of the three recognized narrow exceptions: (1) a subsequent trial
202
produces substantially different evidence; (2) controlling authority has since made a
contrary decision of law applicable to that issue; or, (3) the prior decision was clearly
erroneous and would work manifest injustice. United States v. Stinson, 97 F.3d 466, 469
(11th Cir. 1996); Hanover Ins. Co. v. Am. Eng'g Co., 105 F.3d 306, 312 (6th Cir. 1997);
White v. Murtha, 377 F.2d 428, 431-432 (5th Cir. 1967).
The law of the case doctrine "operates to create efficiency, finality, and obedience
within the judicial system." Allapattah Servs., Inc. v. EXXON Corp., 372 F. Supp. 2d
1344, 1363 (S.D. Fla. 2005) (quoting Litman v. Mass. Mut. Life Ins. Co., 825 F.2d 1506,
1511 (11th Cir. 1987)).
The law of the case doctrine encompasses issues previously "decided by
necessary implication as well as those decided explicitly." Dickinson v. Auto Center Mfg.
Co., 733 F.2d 1092, 1098 (5th Cir. 1983); This That & the Other Gift & Tobacco, Inc.,
439 F.3d 1275, 1283 (11th Cir. 2006)("[T]he law-of-the-case doctrine bars relitigation of
issues that were decided either explicitly or by necessary implication.")
The law of the case can apply to bar reconsideration of both a bankruptcy court's
factual findings and legal conclusions. It does not apply to interlocutory – as opposed to
final - rulings.
Accordingly, under the law of the case doctrine, seeking to have a bankruptcy
court reconsider a decision that was not appealed, in the same case, presents substantial
additional difficulties. It is probably better to wait for the issue to arise in another case
before attempting to have the bankruptcy court reconsider its holding.
XXVI. JUDICIAL SANCTIONS – WHAT ARE THE RULES?
Generally, bankruptcy courts can use three different powers to sanction a litigant:
1) Federal Bankruptcy Rule 9011; 2) 11 U.S.C. 105; and 3) the court’s inherent powers.
A.
Rule 9011 Sanctions.
Beyond doing a reasonable inquiry into the facts, Rule 9011 requires a signer
must inquire into the law. A filing need not ultimately prevail to be warranted by
existing law. The relevant inquiry is whether the pleader presented an objectively
reasonable argument in support of its view of what the law is or should be. See, Davis v.
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Carl, 906 F.2d 533 (11th Cir. 1990); Dura Systems, Inc. v. Rothbury Invs., Ltd., 886 F.2d
551, 558 (3d Cir. 1989)(while tenuous arguments are not sanctionable; "patently
unmeritorious or frivolous" arguments demand sanctioning); Smith Int'l, Inc. v. Texas
Commerce Bank, 844 F.2d 1193, 1199 (5th Cir. 1988)(reasonable argument required).
A filing is unwarranted by existing law if it is contrary to settled precedent. See
e.g., Szabo Food Serv., Inc. v. Canteen Corp., 823 F.2d 1073, 1080 (7th Cir. 1987);
Norris v. Grosvenor Mktg. Ltd., 803 F.2d 1281, 1288 (2d Cir. 1986); Westmoreland v.
CBS, Inc., 248 U.S. App. D.C. 255, 770 F.2d 1168, 1176 (D.C. Cir. 1985); Eastway
Const. Corp. v. City of New York, 762 F.2d 243, 254 (2d Cir. 1985) (Sanctions are
merited when "it is patently clear that a claim has absolutely no chance of success under
the existing precedents, and where no reasonable argument can be advanced to extend,
modify or reverse the law as it stands."); Thornton v. Wahl, 787 F.2d 1151, 1154 (7th
Cir.), cert. denied, 479 U.S. 851, 93 L. Ed. 2d 116, 107 S. Ct. 181 (1986).
1.
Judicial Use Of Rule 9011(c)(1)(B).
Under Rule 9011(c), if the court determines that an attorney has filed a frivolous
paper or has filed a paper for an improper purpose as set forth under Rule 9011(b)(1) or
(b)(2), the bankruptcy court may impose an appropriate sanction. The sanction "is
limited to what is sufficient to deter repetition of such conduct." Rule 9011(c)(2). The
sanction may consist of "directives of a nonmonetary nature." Id.
Bankruptcy Rule 9011 requires a court to direct the attorneys and parties to show
cause why sanctions should not be imposed prior to their imposition. In re Cummings,
381 B.R. 810, 839 (S.D. Fla. 2007).
2.
Non-Frivolous Argument For Extension, Modification, Or
Reversal Of Existing Law.
A signer is not just confined to existing law. Indeed, Rule 9011
was never intended to "chill an attorney's enthusiasm or creativity in
pursuing factual or legal theories." Gaiardo v. Ethyl Corp., 835 F.2d 479,
483 (3d Cir. 1987)(quoting the Advisory Committee Note to Rule 11 of
the Federal Rules of Civil Procedure); Local 938 v. B.R. Starnes Co., 827
F.2d 1454, 1458 (11th Cir. 1987)("Rule 11 is intended to deter frivolous
suits, not to deter novel legal arguments or cases of first impression"). On
the other hand, a signer will be sanctioned when it files a paper lacking a
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good faith reasonable argument for the extension, modification, or reversal
of existing law. Eastway Constr. Corp. v. City of New York, 762 F.2d
243, 254 (2d Cir. 1985), modified, 821 F.2d 121 (2d Cir. 1987), cert.
denied, 484 U.S. 918 (1987); Spiller v. Ella Smithers Geriatric Center, 919
F.2d 339, 346 (5th Cir. 1990) (conclusory statements contrary to current
jurisprudence that are made without any support whatsoever do not
represent a good faith effort to modify existing law).
In re KTMA Acquisition Corp., 153 B.R. 238, 250-251 (Bankr. D. Minn. 1993).
To give one example – in In re Griffin, 352 B.R. 475 (8th Cir. BAP 2006), the
appellant had no cases that supported the appeal – every decision had gone the other way
- and the language of the statute had not changed. The only argument was that previous
courts had misread the statute – and the appellant won on that basis.
B.
Other Authority For Judicial Sanctions?
1.
Section 105(a).
Section 105(a) provides that a "court may issue any order, process, or judgment
that is necessary or appropriate to carry out the provisions of this title." and may take any
action "necessary or appropriate to enforce or implement court orders or rules, or to
prevent an abuse of process." 11 U.S.C. § 105(a). Thus, a court may impose sanctions if
a party violates a court order or rule. See, e.g., In re Evergreen Sec., Ltd., 570 F.3d 1257.
1273 (11th Cir. 2009); Jove Eng'g, Inc. v. I.R.S., 92 F.3d 1539, 1542 (11th Cir. 1996)
(awarding sanctions under Section 105(a) for a violation of an automatic stay provision).
2.
The Court’s Inherent Power To Sanction.
The bankruptcy court’s inherent powers to sanction are governed not by rule or
statute but by the control necessarily vested in courts to manage their own affairs so as to
achieve the orderly and expeditious disposition of cases. Hale v. United States Trustee,
509 F.3d 1139, 1148 (9th Cir. 2007).
To impose sanctions under the court's inherent power, the court must find bad
faith. In re Evergreen Sec., Ltd., 570 F.3d 1257. 1273 (11th Cir. 2009). "A finding of bad
faith is warranted where an attorney knowingly or recklessly raises a frivolous argument,
or argues a meritorious claim for the purpose of harassing an opponent. A party also
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demonstrates bad faith by delaying or disrupting the litigation or hampering enforcement
of a court order." In re Walker, 532 F.3d at 1309. In addition, "bankruptcy courts have
the inherent power to sanction vexatious conduct presented before the court." In re
Rainbow Magazine, Inc., 77 F.3d 278, 284 (9th Cir. 1996).
"If particularly egregious, the pursuit of a claim without reasonable inquiry into
the underlying facts can be the basis for a finding of bad faith." Barnes v. Dalton, 158
F.3d 1212, 1214 (11th Cir. 1998); In the Matter of Med. One, Inc., 68 B.R. 150, 152
(Bankr. M.D. Fla. 1986) (finding that failure to make a reasonable inquiry into whether a
filing alleged valid claims was sanctionable).
Further, continually advancing "groundless and patently frivolous
litigation" is "tantamount to bad faith." In re Evergreen Sec., Ltd., 570 F.3d 1257.
1274 (11th Cir. 2009).
The short version: Taking one good faith shot at reversing a decision – probably
no problem.
Continuing to ignore a court decisions – you are asking for sanctions.
C.
What Even Reasonable, Open-Minded Judges Are Concerned About.
1.
Court decisions cannot be ignored.
The system only works if judicial decisions mean something. They have to be
enforceable. The bankruptcy courts have, historically, faced challenges from various
quarters about the effectiveness of their orders. In seeking to get a bankruptcy judge to
revisit an earlier decision, make it clear that you understand that the decision is – until
overturned – binding on you and your client.
2.
Courts do not have time to examine and re-decide issues every
time a party does not like the effect of a past decision.
Courts are deciders. That is their job. Your job as an advocate is to urge your
client’s position. When you are telling a judge that she has made a poor decision in the
past, you are telling that judge that she failed in the single most important job she has:
making decisions. So that you do not yourself fail in your job as an advocate, you must
be prepared to argue why this time is different.
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Bankruptcy judges have limited resources, and it is extremely inefficient for a
judge to have to revisit issues that have been resolved by a final, non-appealable order –
and not appealed. You do not want to be on the receiving end of this kind of statement
from a court:
“[T]his Court's opinions are not intended as mere first drafts,
subject to revision and reconsideration at a litigant's pleasure. Motions
such as this reflect a fundamental misunderstanding of the limited
appropriateness of motions for reconsideration. [Movant] has given no
good reason to alter the Opinion's holdings.”
Quaker Alloy Casting Co. v. Gulfco Industries, Inc., 123 F.R.D. 282, 288 (N.D. Ill.
1988).
Make sure you have that good reason for your motion—and make sure that the
judge knows what that reason is, early.
XXVII.
A.
HOW RECONSIDERATION OPPORTUNITIES CAN
COME UP.
The Judge invites reconsideration of a prior decision.
Judges can realize that they decided an issue incorrectly. This was particularly
likely in the early post-BAPCPA world. The statute was unclear, and judges were forced
to make choices involving poorly drafted, unclear, and sometimes contradictory
language.
Over time, a consensus may have emerged that is contrary to the then ‘majority
view’. The judge may want to re-align with the clear weight of authority, as it now
stands.
Sometimes, judges also start to see internal contradictions in their decisions, and
may want to pull an earlier decision into a more considered, and coherent, legal view of
what the Code requires.
Finally, judges do get feedback from their cases, and from other judges about how
different legal approaches are working in the real world. The fact that a decision has
thrown a monkey wrench into the Chapter 13 process will not escape the court’s notice
for long. Especially if you mention it as a reason when cases fail and have to be
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dismissed by the judge. If there is room, under the courts view of the law, to try another
approach, the judge may want to take a mulligan and start fresh.
B.
You decide you want the Judge to reconsider a decision.
1.
The past decision is causing problems that make it worth the
attempt.
Some decisions create problems of such a magnitude that they are worth tackling
a second time. Usually, those kinds of rulings are the ones you go into full bore the
second time around – with the intention of appealing if you don’t change the judge’s
mind.
2.
The law has changed – subtly or more overtly.
It could be a change in the case law, or a change in the statute, or a change in the
interplay between the two.
Further, the interpretation of some statutes may depend in part upon prevailing
customs and practices. For example, the Uniform Commercial Code explicitly states that
it is to “be liberally construed” and that its underlying practices and policies are “to
permit the continued expansion of commercial practices through custom, usage, and
agreement of the parties.” UCC §1-102(1) and (2). Thus, should your argument include
any interpretation of negotiable instruments, secured transactions, or the sale of goods,
you have a ready-made argument that a previous decision should be reconsidered: the law
hasn’t changed, but commerce has (or, more subtly, that the prevailing commercial
practices were not properly developed or presented in the previous case).
3.
There was a flaw in the original decision – usually because an
important legal argument that was not raised.
If the issue was originally presented by another attorney, you should make sure
that you look deep into the file of the case where the issue was originally litigated. You
should also order the recording(s) if there were any hearing on the issue. You don’t want
to represent that a legal argument wasn’t made that was, in fact, made by counsel,
considered by the court, and rejected.
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a.
Does it make a difference if it was you that failed to
raise the argument the first time around?
It certainly helps if you can point to another attorney’s work, and show that he or
she failed to raise the best arguments – the ones you are going to make to the court –
when the issue was originally presented to the court.
On the other hand, if it was, for example, a BAPCPA issue, the best reasons for a
contrary result may not have become part of the case law when the issue was originally
argued. Tell the judge you wish you had been smarter, and able to come up with the best
arguments on your own, instead of having to read them in other courts’ published
decisions.
C.
Someone on the other side forces the issue - and you have to decide: to
defend the earlier decision, or support change.
D.
Something more subtle - opportunities to distinguish, or limit a
decision that may have been overbroad. Or wrong.
E.
What the heck is a Motion For Reconsideration?
Although "motions to reconsider" find no direct authorization in the Rules, Courts
have frequently noted the case law support for properly conceived motions of that kind.
See, e.g., National Union Fire Ins. Co. of Pittsburgh v. Continental Illinois Corp., 116
F.R.D. 252, 253 (N.D. Ill. 1987)); Quaker Alloy Casting Co. v. Gulfco Industries, Inc.,
123 F.R.D. 282, 288 (N.D. Ill. 1988). Motions to reconsider are, in all likelihood, more
properly couched as motions under either Rule 9023 (incorporating Rule 59 of FRCP) or
Rule 9024 (incorporating Rule 60 of FRCP).
Many courts want more than a generally captioned “Motion for Reconsideration”
– they want counsel to point to a specific subsection of Federal Rule of Civil Procedure
59 or 60 that provides for the requested relief.
In contrast, where counsel is seeking to get a judge to revisit an issue previously
decided in another case, there is no Motion for Reconsideration. You simply bring an
action that puts the issue you want to the court to re-address in play - by filing a motion,
or raising an objection.
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XXVIII.
A.
METHODS FOR ARGUING FOR RECONSIDERATION OF AN
ISSUE.
Is there an argument that controlling authority has shifted?
a.
Some legal issues are foundationally related. If a foundational
underpinning of a holding is taken out by an appellate court,
that can jump start a motion for reconsideration.
i.
Decisions can be overturned “sub silentio”: Look for
cases where the outcome would have been impossible, absent an implicit
overturning of the precedent you seek to challenge.
b.
Is there controlling case law that suggest the original decision
was wrongly decided? Not a specific overruling, but something
that suggests the Court of Appeals would not follow the
original reasoning underlying the decision up for
reconsideration?
B.
A change in the majority/minority status of the issue since the
decision.
After the passage of BAPCPA, a number of bankruptcy courts issued decisions
that held vehicles could be surrendered in full satisfaction, and that negative equity,
warranty costs, insurance, and the like, were not protected from cram-down by the
hanging paragraph. At certain points, those were arguably “majority view” positions.
More than four years into the process of interpreting the 2005 amendments, the
trend at the circuit court level is clear – debtors cannot surrender in full satisfaction over
the objections of a creditor, and pretty much the entire debt secured by a 910 vehicle is
protected from cram-down. And those case law changes might – even in circuits where
the court of appeals has not yet spoken – cause a bankruptcy court to reconsider an earlier
ruling.
C.
New legal arguments that had not been raised in the prior decision.
1.
Review the briefs for the original decision. Determine if there
is a basis for requesting a change because you have new
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arguments to Court had not previously had an opportunity to
considered.
In the age of PACER, there is no excuse for not pulling the briefs from the
previous case, and reading exactly which arguments were made to the judge. In the age of
IPods and MP3 players, there is no excuse for not obtaining the CD recording of the oral
argument before the judge in the previous case, to see what exactly was argued before
that judge and (more importantly) what questions the judge had before deciding the case.
If the case was argued before a Court of Appeals, you may find the oral argument
available for download on the internet for free. Not only will you have the advantage of
peering into the judges’ thoughts on the previous cases, just think of how you can drop
this into the conversation at the next bar function: “when I was listening to Judge Posner
question Gerry Spence about the interplay between habeas corpus and corpus juris
secundus on my last fifteen mile run….”
You can anticipate arguments and questions, in a way that you might not
otherwise.
a.
Was the original decision a result of bad lawyering?
The lawyer who got there first may not have thought out the issue completely,
may not have presented it well, or may have ticked off the judge. If you are going to use
this approach, you must be prepared to let the judge know how your presentation and
argument will differ from the previous case, focusing on differing facts, different cases,
and your different rationale.
b.
Were there bad facts present that made bad law?
Changing the facts may, of course, change the result. Be prepared to demonstrate
how the facts differ, and why those differences compel a different result. Bankruptcy
courts are courts of equity, but they are also constrained to operate within a code of law.
2.
Citations to courts that have accepted the new legal argument.
a.
Briefs for reconsideration – should be citation heavy.
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XXIX. THE ETHICS AND TECHNIQUES OF PREPARING AN APPEAL.
A.
Requirement that you cite contrary authority.
You must cite any contrary authority to the Court, if it is controlling. See, e.g.,
Rule 3.3 of the Tennessee Rules of Professional Conduct: “a lawyer shall not
knowingly…fail to disclose to the [court] legal authority known to the client to be
directly adverse to the position of the client and not disclosed by opposing counsel.”
It would be a foolish lawyer indeed who did not disclose contrary authority in her
opening brief on the issue. On the very off chance that you might succeed in duping
opposing counsel and the judge, this is what you risk:
1) Losing the opportunity to present the contrary authority in the best
light possible to your case; remember the adage that you always want
to bring your own bad news;
2) Handing the other side the ability to trash you, your research skills,
and your argument in its responsive pleadings;
3) Losing the respect of the judge for you, your legal abilities, your
ethics, your argument, and your client.
When there is contrary authority, be open and notorious about it. Once you have
addressed that decision openly and forthrightly, you will have taken away much of its
power to discredit you and your argument.
B.
Duty of candor to the court.
Lawyers, as officers of the court, have a duty of candor to the tribunal. Federated
Mut. Ins. Co. V. McKimmon Motors, LLC, 329 F.3d 805, 808-09 (11th Cir. 2003).
Rule 11 "reinforces counsel's duty of candor to the Court by subjecting litigants to
potential sanctions for making representations to the court for an improper purpose."
Footman v. Wang Tat Cheung, 341 F. Supp. 2d 1218, 1225 (M.D. Fla. 2004).
C.
Preparing To Taking An Appealable Issue Up The Ladder.
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1. Changing The Judge’s Mind Is The Goal At The Hearing –
But It May Not Work.
2.
Setting Up The Appeal
a.
Making the record - make the record as if you
are willing to take the decision up the ladder on
appeal, even if you haven't made that decision.
If you intend to present the issue on appeal, let the judge know, subtly. Statements
such as “I need to make my record” or “Judge, I am making this argument to preserve the
issue” will tell the judge that you are likely to appeal. Present the case as if you are going
to appeal. This means being somewhat more formal in your presentation, and absolutely
observant of the rules of evidence and procedure.
Note that preparing your case for the appeal may prompt the bankruptcy court to
take a second look at the issue, either to make sure that the decision was correct, or to
make findings of fact (which can only be overturned if clearly erroneous) which make her
decision bullet-proof on appeal.
b.
Get in every bit of evidence you need to force the
court of appeals to directly address the issue you
want a decided. Even better, establish the facts
by stipulation.
If opposing counsel knows that they are going to win – based on the court’s prior
decision(s), you may be able to get facts in by stipulation more easily than in a case
where the law is unclear. Take advantage of that to build a record that will put the issue
squarely before the appellate court with as little wiggle room as possible.
If you have communicated squarely to the judge that you are making your record
for appeal, she will likely be more accommodating to you and your arguments—knowing
that each of her evidentiary rulings and comments on the issues are going to be reviewed
by another judge. Judges are embarrassed to have a case remanded for further
proceedings on a mistake under the Rules of Evidence.
213
Follow good trial practice, by preparing your trial notebook, with a page listing
every piece of evidence and testimony that you want to have in the record, with a check
mark beside it once it has been admitted. Do not be afraid, prior to the close of your
proof, to ask that all of the documents that you referenced be admitted into evidence; the
worst that can happen is that the judge rebukes you slightly for duplicating a prior
admission. But you will have made sure that each piece of evidence came in.
3.
Make every argument you want to raise in the court of appeals
at the trial court level – even if your Bankruptcy Judge is sure
to reject that argument. If an argument is not made at the trial
court level, it is waived on appeal. Be sure that no important
argument is waived.
It is a generally accepted principal that an issue not presented to the trial court is
waived; Rothman v. Hospital Service of Southern California, 510 F.2d 956, 960 (9th Cir.
1975). Think long and hard about your issues; if it will not materially harm your chances
with the bankruptcy judge, raise every single argument you can think of at trial.
It is only by the discretion of the appellate court that an issue not raised below
may be presented to the court. See, e.g., In re: Pizza of Hawaii, Inc., 761 F.3d 1374, 1377
(9th Cir. 1985). Application of the rule is discretionary. Singleton v. Wulff, 428 U.S. 106,
121, 49 L. Ed. 2d 826, 96 S. Ct. 2868 (1976). This court may dispense with the waiver
rule when "the question is a purely legal one that is both central to the case and important
to the public." In re: Sells, 719 F.2d 985, 990 (9th Cir. 1983). "It is well settled in this
circuit that where the new issue is purely a legal one, the injection of which would not
have caused the parties to develop new or different facts, we may resolve it on appeal."
United States v. Dann, 706 F.2d 919, 925 n.5 (9th Cir. 1983), cert. granted, 467 U.S.
1214, 104 S. Ct. 2693, 81 L. Ed. 2d 362 (1984).
If you are confronted with a waiver argument, be prepared to argue that this same
legal issue will surely be raised in the next matter on appeal, and that for purposes of
judicial economy the appellate court should consider it now.
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4.
Potential problem - where the court cites two bases for
decision, and only one is wrong.
Lower courts will often cite two or more independent bases for a decision. If one
of the grounds is a “winner” on appeal, the likely trajectory of the case is that the decision
will be affirmed on the non-controversial basis, and the issue you want to overturn will
not be addressed.
At the same time, in the bankruptcy judge’s mind, ALL of his or her holdings are
now binding. It is difficult to get a bankruptcy judge to recognize that something they
held is non-binding dicta. So, you have the worst of both worlds – no relief from appeal,
and a decision that is binding on all parties coming before that bankruptcy judge.
The best you can do is wait for another case that presents the same issue – without
the facts necessary for the alternate holding – and try again. The second time with the
ability to get a decision that can force the appellate courts to consider your issue on
appeal.
5.
What do you do when an opportunity presents itself
unexpectedly?
a.
Temporize. Seek a continuance to plan, prepare and
present.
If you are suddenly presented with an issue, consider asking the judge for a
recess, to talk to the other lawyer. He may be willing to agree to a re-setting, if he is as
blind-sided as you are. Ask anyway; you will at least be able to tell the judge that you
need some time, even though the other lawyer doesn’t.
b.
The down and dirty basics to keep in mind if you are
thrown into the fire and think you might want to pursue
an appeal.
Try and keep the decision to the single issue you want to address. Make all the
arguments you can remember. Put into evidence (or stipulate to, on the record) as much
of the facts as you can get in.
Ask to file a supplemental brief. That will give you time to go over the case law,
and make written arguments that you want the appellate court to consider.
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C.
Do You Change Your Approach If You Know You Are Not Going To
Appeal?
1.
How?
XXX. DIFFICULTIES IN LITIGATING CHANGES THAT ARE NOT BASED
ON COURT DECISIONS.
A.
Local Practice.
Each court is convinced, to a near certainty, that its particular local practices are
in complete conformance with the Code, the Bankruptcy Rules, and the Federal Rules of
Civil Procedure. If you are going to challenge local practice or a local rule, start with
research into other areas near you. It cannot hurt to cite favorable practices being used in
front of another judge, if your judge knows, respects, and cites that other judge
(conversely, also know the judges who disagree with your judge on issues; cite to them
sparingly).
1.
How do you set up an issue where you can argue a local
practice is wrong?
If it is a local rule you want to have changed, remember that typically the local
rules are approved by the District Court judges, and therefore your judge may rightfully
feel that he is bound to abide by the local rules, no matter the situation. If that is the case,
state so directly: tell the judge that you disagree with the local rule, that you realize that
he may feel bound by that rule, but that you would like an opportunity to make your case
and your record, on the off chance that the bankruptcy judge would agree to disagree with
the local rule, and to preserve your record for the appeal to the district court, which may
have greater leeway to set aside or alter the local bankruptcy rule.
If it is a local practice, be prepared to explain why the practice is wrong:
1) Legally, provide grounds in the Code, the Rules, and the case law;
2) Show by admissible evidence how it unfairly and improperly affects your
client in this case;
3) Cite to as many other jurisdictions as you can that use a different practice.
a.
What if you have been relying on practice you want to
change?
216
“Issue conflict” is not as much of a problem for lawyers who stay on one side of
the creditor/debtor/trustee fence. But if one of your clients has been relying on that local
practice, and intends to continue to rely on that practice, be mindful of the ethical issues
involved.
As an example, suppose Client A wants you to argue for a change in the local
practice on interest rates, say, from “contract rate” to “prime rate,” because Client A has
been lending at 0% interest. This would be a direct conflict of interest to your Client B,
who is lending a 18%, because the change in local practice would be directly adverse to
Client B’s interests, in cases in which you represent Client B. This requires contacting
both clients, explaining the conflict, the impact on both clients, and obtaining written
consent from both clients. Difficult to do, if you plan on retaining both clients.
b.
Is there another method that might work better than
litigation?
i.
A change in the Local Rules. This often requires
working with the local bankruptcy committee over weeks or months, without
compensation, followed by more work with the bankruptcy judges and district court
judges, again perhaps without compensation.
ii.
A new administrative order. Admin orders only
take the agreement of the bankruptcy judges to amend. Be prepared to show what your
new form would look like; to demonstrate that your new order would correct an ongoing
wrong; and to present evidence to judge why the change would work not only in your
case, but also in other cases. This may require not just an expert to testify about the
impact in your case, but also to study the impact in a sampling of other cases as well. If
you are setting the administrative order up for an appeal, be sure that your evidence and
record on appeal will support the change you are requesting. District courts typically give
bankruptcy courts great discretion over the administrative conduct of their cases.
iii.
A change in the Form Plan.
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XXXI. HOW DO YOU TRY TO GET A JUDGE TO CHANGE THEIR MIND
WITHOUT HONKING OFF THE JUDGE?
►
Reputation before the court matters – if you are a lawyer who asks the
court to reconsider everything, has a reputation as a sore loser, and are not
respected for your competence, you are going to get a far different
reception to a motion to reconsider than an attorney with a good, serious
reputation, who always addresses and treats the court respectfully. It is not
enough to just sign papers that say “respectfully submitted,” you must
have treated the court with respect previously
►
Let the Judge know that there are scholarly or equitable reasons – i.e.,
really good legal and factual reasons - for presentation of the argument to
the judge a second time. Then make those arguments with courtesy and
respect.
►
Getting a judge to reconsider his or her decision presents a bit of a public
relations problem – you need to draw the judge’s attention to your issue
without impliedly calling the judge a dolt. One way to do that is to tell the
judge that you are asking the court to “see the issue differently.” Do not
tell the judge he or she screwed up.
►
In structuring your argument before the judge, understand that the other
side is going to say something to the judge like: “we agree with you, we
are on the same side of the case now”. You need to anticipate that
statement in your presentation. Present the other side’s argument fairly
and squarely – more so than usual. Don’t dumb down what the judge
said!
►
If you are re-raising an issue for purposes taking it up on appeal, let the
judge know. It may be enough to say: “The other case was not appealed,
it stopped with you.” Or go further, and let the bankruptcy court know
that you are going to take a second bite at the apple – that you think the
case should come out differently, are going to ask the appellate courts to
take a fresh look at it. “These are the arguments we are going to present to
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the BAP – we want you to know that so you can make any additional
arguments that were not included in the original decision”.
►
Some other good arguments for why a bankruptcy judge should change
position on an issue are: the court misunderstood the parties, the decision
was outside the issue presented by the parties, the problem was not of
reasoning but of apprehension – the previous case was not presented well
and the decision is the product of poorly presented facts and bad
arguments of past counsel. “They prevented the court from doing justice.”
►
“When this was presented to you previously, you were only presented with
weak, insufficient arguments. Please let me present mine – I think they
are better.” Be careful of insulting the prior lawyers here, and of
insinuating that the judge was not bright enough to consider this point
himself. Self-deprecation and humor are very important here.
XXXII.
PROOFS OF CLAIM IN CHAPTER 13 BANKRUPTCIES
A. The Proof of Claim Form.
1. Federal Rule Of Bankruptcy Procedure 3001(a) Requires Proofs Of
Claim To Conform To The Official Form.
Federal Rule of Bankruptcy Procedure 3001 requires that a proof of claim
conform substantially to the Official Bankruptcy Form (i.e., Form B10), be executed by
the creditor or an authorized agent of the creditor, and, when a proof of claim is based
upon a writing, the original or a duplicate of the writing shall be filed with the proof of
claim. See Bankruptcy Rule 3001(a), (b) and (c). In re Gulley, 400 B.R. 529, 541 n.13
(Bankr. N.D. Tex. 2009); In re Rogers, 391 B.R. 317, 322 (Bankr. M.D. La. 2008); 9
Collier on Bankruptcy, ¶3001.01 at 3001-4 (15th Ed. Rev. 2007).
In addition, Federal Rule of Bankruptcy Procedure 9009 states that: "[t]he Official
Forms prescribed by the Judicial Conference of the United States shall be observed and
used with alterations as may be appropriate." In re J.S. II, L.L.C., 397 B.R. 383, 386 n.1
(Bankr. N.D. Ill. 2008).
Official Bankruptcy Form B10 reiterates these concepts by directing the filer to
"attach copies of supporting documents such as promissory notes, purchase orders,
invoices,itemized statements of running accounts, contracts, court judgments, mortgages,
security agreements, and evidence of perfection of lien. DO NOT SEND ORIGINAL
DOCUMENTS. If the documents are not available, explain. If the documents are
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voluminous, attach a summary." In re Prevo, 394 B.R. 847, 850 n.4 (Bankr. S.D. Tex.
2008).
Official Form B10 is for filing pre-Petition claims. Form B10 states on its face:
"This form should not be used to make a claim for an administrative expense arising after
the commencement of the case. A request for payment of an administrative expense may
be filed pursuant to 11 U.S.C. § 503." In re Plastech Engineered Products, 394 B.R. 147,
161 n.4 (Bankr. E.D. Mich. 2008).
2.
Form B10, December 1, 2007 Revisions:
The proof of claim form was amended in the following ways:
The creditor now has a space in which to provide a separate payment address if
different from the creditor's address for receiving notices in the case.
The check boxes for indicating that the creditor's address provided on the proof of
claim is a new address, and that the creditor never received any notices from the court in
the case have been deleted.
A new checkbox is to be used when a debtor or trustee files a proof of claim for a
creditor.
Information about obtaining acknowledgment from the court of the filing of the
proof of claim is revised and moved to a new section on the reverse side called
'Information'.
A definition of the word "redacted" (referred to in paragraph 7) has been added in
conformity with Rule 9037.
3.
Form B10, December 1, 2008 Revisions:
From the Committee Notes:
The form is amended at box seven on page one, and instructions two and
seven on page two, to instruct the claimant that the information contained in or
attached to a claim based on the delivery of health care goods or services should
be limited so as to avoid embarrassment or the unnecessary disclosure of
confidential information. The claimant is informed that additional disclosure may
be required if the trustee or another party in interest objects to the claim.
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Page two of the form is also amended to revise slightly the definitions of
“creditor” and “claim” to conform more closely to the definitions of those terms
in the Code.
4. Issues Arising From A Separate Notice And Payment Address
On Proof Of Claim Form.
The instructions for a change of address on the current Form B10 state: “Fill in
the name of the person or entity who should receive notices issued during the bankruptcy
case. A separate space is provided for the payment address if it differs from the notice
address. The creditor has a continuing obligation to keep the court informed of its current
address. See Federal Rule of Civil Procedure (FRBP) 2002(g).”
The above instruction uses “address” in the singular, but there are now two
addresses on the Proof of Claim Form. Some Bankruptcy Clerk’s Offices do not interpret
this as applying to the address for payment, and do not allow the electronic filing of
notices of changes in the address for payment. The clerk’s view is that they are in the
“notice” business, not the payment business. Thus, if the claim payment address is
different from the address for sending notice, a change in the payment address is not
something that should be filed with the court.
In contrast, many Chapter 13 Trustees think that requiring the filing of changes in
the address where payments are to be sent is an important safeguard. Requiring address
changes to be filed with the Court is a protection against fraud because: a) you have to be
an EFC user to file with the bankruptcy court and they have information on the filer - in
contrast to a letter in the mail telling a Chapter 13 Trustee to pay to another address; b) if
redirecting payments is part of some type of fraud, a creditor can investigate using the
electronic docket to discover the reason they are not receiving payment, and any fraud
will be caught more quickly; c) if the creditor did an entry of appearance, they would get
electronic notification of the change of address notice via e-mail; d) other people,
specifically the debtor/debtor's counsel, may need the current payment address for the
mortgage company. A Chapter 13 Trustee having new payment addresses in non-public
records does not provide the same benefits.
XXXIII.
A.
STATUTES AND BANKRUPTCY RULES GOVERNING
PROOFS OF CLAIM.
Section 501 – Filing A Proof of Claim Or Interest.
Section 501 provides the framework for one of bankruptcy’s main functions: the
presentation of claims for payment. “The primary purpose of 11 U.S.C. § 501 "is to
ensure that all those involved in the proceeding will be made aware of the claims against
the debtor's estate and will have an opportunity to contest those claims." In re In re PCH
Assocs., 949 F.2d 585, 605 (2d Cir. 1991).” In re Chateaugay Corp., 94 F.3d 772, 777
(2nd Cir. 1996).
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The filing of a proof of claim is permissive. “[T]he filing of a proof of claim is
not required by the Bankruptcy Code; however, a creditor's failure to timely file a proof
of claim may affect its rights under the plan - namely, its ability to participate in the
distribution of funds according to the plan.” In re Jurado, 318 B.R. 251, 256 (Bankr. D.
Puerto Rico 2004).
The filing of a proof of claim is a prerequisite to allowance of a claim under
Section 502.
In a case converted from Chapter 13 to Chapter 7, if a proof of claim was filed in
the Chapter 13, no new proof of claim is required in the Chapter 7. See, Federal Rule of
Bankruptcy Procedure 1019(3).
The rule is the same when a case is converted from Chapter 7 to Chapter 13, if a
proof of claim was filed in the Chapter 7, no new proof of claim is required when the
case is converted to Chapter 13. See, In re Jasinski, 406 B.R. 653 (Bankr. W.D. Pa.
2009).
A claim has to be allowed to be paid in a Chapter 13 bankruptcy case.
§1325(a)(4); §1322(b)(6); §1325(a)(5)(B)(ii); In re Smith, 123 B.R. 863, 866 n.3 (Bankr.
C.D. Cal. 1991).
The failure to file a proof of claim does not (in and of itself) discharge the lien of
a secured creditor, or discharge an otherwise non-dischargeable debt.
B.
The Mechanics Of Filing A Proof Of Claim.
For larger creditors, in almost all areas of the country, proofs of claim must be
filed electronically using ECF. For most districts, attorney can only file proofs of claim
electronically. Further, the rule in most jurisdictions is that once a creditor files more
than 25 proofs of claim during a 1 year period, that creditor has to become an ECF filer
and file all its proofs of claims electronically. And, if one office of a larger creditor hits
the 25 claim limit, the national creditor must file electronically from all its offices.
Creditors who rarely file claims can still file paper proofs of claim, provided they
are signed by a company representative and not an attorney.
The procedures for filing proofs of claim is set forth in Federal Rule of
Bankruptcy Procedure 3001. 9 Collier on Bankruptcy ¶3001.01 at 3001-4 (15th Ed. Rev.
2007).
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Filing of proofs of claim is with the clerk in the district where the case under the
Code is pending. See, Federal Rules of Bankruptcy Procedure 5005(a); 3002(b).
“A proof of claim shall conform substantially to the appropriate Official Form.”
Federal Rule of Bankruptcy Procedure 3001(a). However: “The clerk shall not refuse to
accept for filing any petition or other paper presented for the purpose of filing solely
because it is not presented in proper form as required by these rules or any local rules or
practices.” See, Federal Rules of Bankruptcy Procedure 5005(a). 9 Collier on
Bankrutpcy ¶5005.02 at 5005-3 (15th Ed. Rev. 2008).
C.
The Evidence Required To Be Attached To A Proof Of Claim.
1.
Claims based on a writing:
“When a claim, or an interest in property of the debtor securing a claim, is based
on a writing, the original or a duplicate shall be filed with the proof of claim.” Federal
Rule of Bankruptcy Procedure 3001(c).
“If the writing has been lost or destroyed, a statement of the circumstances of the
loss or destruction shall be filed with the claim.” Federal Rule of Bankruptcy Procedure
3001(c).
a.
Proposed Amendment 3001(c) – Effective December,
2011.
Amend Form 10 (B10) – Consumer open credit – will require the most recent
account statement to be required to be included.
The new rules for proofs of claim will be:
Rule 3001. Proof of Claim
(c) SUPPORTING INFORMATION.
(1)
Claim Based on a Writing. When a claim, or an interest in
property of the debtor securing the claim, is based on a writing, the
original or a duplicate shall be filed with the proof of claim. If the
writing has been lost or destroyed, a statement of the circumstances of
the loss or destruction shall be filed with the claim. When a claim is
based on an open-end or revolving consumer credit agreement, the
last account statement sent to the debtor prior to the filing of the
petition shall also be filed with the proof of claim.
(2)
Additional Requirements in an Individual Debtor Case;
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Sanctions for Failure to Comply. In a case in which the debtor is an
individual:
(A)
If, in addition to its principal amount, a claim includes
interest, fees, expenses, or other charges incurred
before the petition was filed, an itemized statement of
the interest, fees, expenses, or charges shall be filed with
the proof of claim.
(B)
If a security interest is claimed in property of the
debtor, the proof of claim shall include a statement of
the amount necessary to cure any default as of the date
of the petition.
(C)
If a security interest is claimed in property that is the
debtor’s principal residence and an escrow account has
been established in connection with the claim, the proof
of claim shall be accompanied by an escrow account
statement prepared as of the date the petition was filed
and in a form consistent with applicable nonbankruptcy
law.
(D)
If the holder of a claim fails to provide any information
required by this subdivision (c), the holder shall be
precluded from presenting the omitted information, in
any form, as evidence in any hearing or submission in
any contested matter or adversary proceeding in the
case, unless the court determines that the failure was
substantially justified or is harmless. In addition to or
in lieu of this sanction, the court may, after notice and
hearing, award other appropriate relief, including
reasonable expenses and attorney’s fees caused by the
failure.
COMMITTEE NOTE
Subdivision (c). Subdivision (c) is amended to prescribe with greater specificity
the supporting information required to accompany certain proofs of claim and, in cases in
which the debtor is an individual, the consequences of failing to provide the required
information.
Existing subdivision (c) is redesignated as (c)(1). It is amended to require that a
proof of claim based on an open-end or revolving consumer credit agreement (such as an
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agreement underlying the issuance of a credit card) be accompanied by the last account
statement sent to the debtor prior to the filing of the bankruptcy petition. This
requirement applies whether the statement was sent by the entity filing the proof of claim
or by a prior holder of the claim.
Subdivision (c)(2) is added to require additional information to accompany proofs
of claim filed in cases in which the debtor is an individual. When the holder of a claim
seeks to recover – in addition to the principal amount of a debt – interest, fees, expenses,
or other charges, the proof of claim must be accompanied by a statement itemizing these
additional amounts with sufficient specificity to make clear the basis for the claimed
amount.
If a claim is secured by property of the debtor and the debtor defaulted on the
claim prior to the filing of the petition, the proof of claim must be accompanied by a
statement of the amount required to cure the prepetition default. If the claim is secured
by the debtor’s principal residence and an escrow account has been established in
connection with the claim, the proof of claim must also be accompanied by an escrow
account statement showing the account balance, and any amount owed, as of the date the
petition was filed. The statement shall be prepared in a form consistent with the
requirements of nonbankruptcy law. See, e.g., 12 U.S.C. § 2601 et seq. (Real Estate
Settlement Procedure Act).
Paragraph (D) of subdivision (c)(2) sets forth the sanctions that apply to, or that
may be imposed by the court against, a creditor in an individual debtor case that fails to
provide information required by subdivision (c).
Rule 3002.1. Notice Relating to Claims Secured by Security Interest in the
Debtor’s Principal Residence
(a)
NOTICE OF PAYMENT CHANGES. In a chapter 13 case, if a claim
secured by a security interest in the debtor’s principal residence is
provided for under the debtor’s plan pursuant to § 1322(b)(5) of the
Code, the holder of the claim shall file and serve on the debtor,
debtor’s counsel, and the trustee notice of any change in the payment
amount, including any change that results from an interest rate or
escrow account adjustment, no later than 30 days before a payment at
a new amount is due.
(b)
FORM AND CONTENT. A notice filed and served pursuant to
subdivision (a) of this rule shall: (1) conform substantially to the form
of notice under applicable nonbankruptcy law and the underlying
agreement that would be given if the debtor were not a debtor in
bankruptcy, (2) be filed as a supplement to the holder’s proof of
claim, and (3) not be subject to Rule 3001(f).
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(c)
NOTICE OF FEES, EXPENSES, AND CHARGES. In a chapter 13
case, if a claim secured by a security interest in the debtor’s principal
residence is provided for under the debtor’s plan pursuant to §
1322(b)(5) of the Code, the holder of the claim shall file and serve on
the debtor, debtor’s counsel, and the trustee a notice that itemizes all
fees, expenses, or charges incurred in connection with the claim after
the bankruptcy case was filed, and that the holder asserts are
recoverable against the debtor or against the debtor’s principal
residence. The notice shall be filed as a supplement to the holder’s
proof of claim and served no later than 180 days after the date when
the fees, expenses, or charges are incurred. The notice shall not be
subject to Rule 3001(f). On motion of the debtor or trustee filed no
later than one year after service of the notice, the court shall, after
notice and hearing, determine whether payment of the fees, expenses,
or charges is required by the underlying agreement and applicable
nonbankruptcy law to cure a default or maintain payments in
accordance with § 1322(b)(5) of the Code.
(d)
NOTICE OF FINAL CURE PAYMENT. No later than 30 days after
making final payment of any cure amount on a claim secured by a
security interest in the debtor’s principal residence, the trustee in a
chapter 13 case shall file and serve upon the holder of the claim, the
debtor, and debtor’s counsel a notice stating that the amount required
to cure the default has been paid in full. If the debtor contends that
final cure payment has been made and the trustee does not timely file
and serve the notice required by this subdivision, the debtor may file
and serve upon the holder of the claim and the trustee a notice stating
that the amount required to cure the default has been paid in full.
(e)
RESPONSE TO NOTICE OF FINAL CURE PAYMENT. No later
than 21 days after service of the notice under subdivision (d) of this
rule, the holder of a claim secured by a security interest in the
debtor’s principal residence shall file and serve on the debtor,
debtor’s counsel, and the trustee a statement indicating (1) whether it
agrees that the debtor has paid in full the amount required to cure the
default, and (2) whether, consistent with § 1322(b)(5) of the Code, the
debtor is otherwise current on all payments. If applicable, the
statement shall itemize any required cure or postpetition amounts
that the holder contends remain unpaid as of the date of the
statement. The statement shall be filed as a supplement to the
holder’s proof of claim and shall not be subject to Rule 3001(f).
(f)
MOTION AND HEARING. On motion of the debtor or trustee filed
no later than 21 days after service of the statement under subdivision
(e) of this rule, the court shall, after notice and hearing, determine
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whether the debtor has cured the default and paid all required
postpetition amounts in full.
(g)
FAILURE TO NOTIFY. If the holder of a claim secured by a
security interest in the debtor’s principal residence fails to provide
any information required by subdivision (a), (c), or (e) of this rule, the
holder shall be precluded from presenting the omitted information, in
any form, as evidence in any hearing or submission in any contested
matter or adversary proceeding in the case, unless the court
determines that the failure was substantially justified or is harmless.
In addition to or in lieu of this sanction, the court may, after notice
and hearing, award other appropriate relief, including reasonable
expenses and attorney’s fees caused by the failure.
COMMITTEE NOTE
This rule is new. It is added to aid in the implementation of § 1322(b)(5), which
permits a chapter 13 debtor to cure a default and maintain payments of a home mortgage
over the course of the debtor’s plan.
In order to be able to fulfill the obligations of § 1322(b)(5), a debtor and the
trustee must be informed of the exact amount needed to cure any prepetition arrearage,
see Rule 3001(c)(2), and the amount of the postpetition payment obligations. If the latter
amount changes over time, due to the adjustment of the interest rate, escrow account
adjustments, or the assessment of fees, expenses, or other charges, notice of any change
in payment amount needs to be conveyed to the debtor and trustee. Timely notice of
these changes will permit the debtor or trustee to challenge the validity of any such
charges, if necessary, and to adjust postpetition mortgage payments to cover any properly
claimed adjustment. Compliance with the notice provision of the rule should also
eliminate any concern on the part of the holder of the claim that informing a debtor of a
change in postpetition payment obligations might violate the automatic stay.
Subdivision (a). Subdivision (a) requires the holder of a claim secured by the
debtor’s principal residence to notify the debtor, debtor’s counsel, and the trustee of any
postpetition change in the mortgage payment amount. Notice must be provided at least
30 days before the new payment amount is due.
Subdivision (b). Subdivision (b) provides the method of giving the notice of a
payment change. The holder of the claim must give notice of the change in substantially
the same form that would be used according to the underlying agreement and
nonbankruptcy law if the debtor were not a debtor in bankruptcy. In addition to serving
the debtor, debtor’s counsel, and the trustee, as required by subdivision (a), the holder of
the claim must also file the notice of payment change on the claims register in the case as
a supplement to its proof of claim. Rule 3001(f) does not apply to this notice, and
therefore it will not constitute prima facie evidence of the validity and amount of the
payment change.
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Subdivision (c). Subdivision (c) requires an itemized notice to be given, within
180 days of incurrence, of any postpetition fees, expenses, or charges that the holder of
the claim asserts are recoverable in connection with a claim secured by the debtor’s
principal residence. This amount might include, for example, inspection fees, late
charges, or attorney’s fees. Filing and service requirements for this notice are the same
as for the notice required under subdivision (a).
Within a year after service of a notice under subdivision (c), the debtor or trustee
may move for a court determination of whether the fees, expenses, or charges set forth in
the notice are required by the underlying agreement or applicable nonbankruptcy law to
cure a default or maintain payments.
Subdivision (d). Subdivision (d) requires the trustee to issue notice within 30
days after making the last payment to cure a prepetition default on a claim secured by the
debtor’s principal residence. If the trustee fails to file this notice within the required
time, this subdivision also permits a debtor who contends that the prepetition default has
been cured to file and serve the notice.
Subdivision (e). Subdivision (e) governs the response of the holder of the claim
to the trustee’s or debtor’s notice under subdivision (d). Within 21 days after service of
notice of the final cure payment, the holder of the claim must file and serve a statement
indicating whether the prepetition default has been fully cured and also whether the
debtor is current on all payments in accordance with § 1322(b)(5) of the Code. If the
holder of the claim contends that final cure payment has not been made or that the debtor
is not current on other payments required by § 1322(b)(5), the response must itemize all
missed amounts the holder contends are still due.
Subdivision (f). Subdivision (f) provides the procedure for the judicial resolution
of any disputes that may arise about payment of a claim secured by the debtor’s principal
residence. The trustee or debtor may move no later than 21 days after the service of the
statement under subdivision (e) for a determination by the court of whether the
prepetition default has been cured and whether all postpetition obligations have been
fully paid.
Subdivision (g). Subdivision (g) specifies sanctions that may be imposed if the
holder of a claim secured by the debtor’s principal residence fails to provide any of the
information required by subdivisions (a), (c), or (e).
If, after the chapter 13 debtor has completed payments under the plan and the case
has been closed, the holder of a claim secured by the debtor’s principal residence seeks to
recover amounts that should have been but were not disclosed under this rule, the debtor
may move to have the case reopened in order to seek sanctions against the holder of the
claim under subdivision (g).
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b.
Secured claims – evidence of perfection:
“If a security interest in property of the debtor is claimed, the proof of claim shall
be accompanied by evidence that the security interest has been perfected.” Federal Rule
of Bankruptcy Procedure 3001(d).
c.
Transferred claims:
Where a claim has been transferred (other than for security) prior to the filing of
the proof of claim, proofs of claim for transferred claims can “only be filed by the
transferee or an indentured trustee”. Federal Rule of Bankruptcy Procedure 3001(e)(1).
If the transfer of the claim is after a proof of claim is filed, “evidence of the
transfer shall be filed by the transferee.” This triggers the bankruptcy clerk’s obligation
to notify the transferor, by mail, of the transfer. The transferor has 20 days from the
mailing of the notice to timely object to the reported transfer. Federal Rule of
Bankruptcy Procedure 3001(e)(2).
Claims transferred as security are rare in Chapter 13 cases, and are outside the
scope of this outline. See, Federal Rule of Bankruptcy Procedure 3001(e)(3), (4) and (5).
The Wingerter case, and subsequent appeal, deal with assigned claims. See, In re
Wingerter, 376 B.R. 221 (Bankr. N.D. Ohio 2007). B-Line filed a proof of claim,
purportedly as assignee from Covenant Management (“Covenant”) and/or GTE. The
proof of claim did not identify the date the debt was incurred, indicate that interest or
other charges were included, or include supporting documentation, beyond a one-page
form with one of the debtor’s partial social security number, an address, and an amount
due. The debtors objected to the claim, asserting that they owed no debt to GTE, the
originating creditor. It became evident that no documentation existed in support of BLine’s claim, and that B-Line had relied on representations made from the assignor. The
court issued an order to show cause, directing B-Line to explain its claim-filing
procedures. B-Line stated that it periodically purchased accounts owned by Covenant on
which Covenant received bankruptcy notices, and that claims were assigned as many as
three times before Covenant bought it, and there were no documents relating to the
debtors, the alleged debt, or GTE. The court found that B-Line’s filing of the proof of
claim was a violation of Fed. R. Bankr. P. 9011 because it failed to conduct a reasonable
inquiry into the claim, concluding that at a minimum an assignee should review a
debtor’s schedules to determine whether the assigned claim is reflected. The Bankruptcy
Appellate Panel dismissed B-line’s appeal, In re Wingerter, 394 B.R. 859 (B.A.P. 6th Cir.
2008), appeal docketed, No. 08-4455 (6th Cir. Nov. 6, 2008), as moot and because B-Line
sought an impermissible advisory opinion. The court found that no live controversy
remained in the case because the bankruptcy court declined to enter sanctions related to
B-Line’s violation of Fed. R. Bankr. P. 9011. The court also determined that B-Line’s
appeal of the bankruptcy court’s general views on proper practice in filing proofs of
claim amounted to a request for an impermissible advisory opinion from the court.
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III.
WHAT CREDITORS NEED TO ATTACH TO THEIR PROOFS OF
CLAIM.
The documentary items to be included with a proof of claim are listed on Form
B10. Under Bankr. Rule 3001, a creditor filing a proof of claim must attach a copy of the
underlying contract to establish prima facie evidence of the validity of the contract. In re
G.I. Industries, Inc., 204 F.3d 1276, 1280 (9th Cir. 2000).
A.
Claims Secured By A Mortgage Or Deed Of Trust.
The bankruptcy court decision In re Barnes, 21 Fla. L. Weekly Fed. B 326, 2008
Bankr. Lexis 1932 (Bankr. N.D. Fla. 2008) stated:
“Though the cases cited by the Debtor deal with the requirement of
documentation in the context of claims arising from credit card debt, there are
some general principles that can be gleaned from them. For example, if a
creditor's claim is based on a writing, the original or a duplicate 'should be filed
with the proof of claim, unless it has been lost or destroyed, in which case an
explanation should be provided. In re Burkett, 329 B.R. 820, 826 (Bankr. S.D.
Ohio 2005); Fed. R. Bankr. P. 3001(c). The exclusive statutory bases for
disallowing a claim are found in § 502(b) and do not include a lack of
documentation. Heath v. Am. Express Travel Relates Svcs. (In re Heath), 331
B.R. 424, 431-32, 435 (9th Cir. BAP 2005); B-Line, LLC v. Kirkland (In re
Kirkland), 379 B.R. 341, 345 (10th Cir. BAP 2007); In re Burkett, 329 B.R. 820,
828 (Bankr. S.D. Ohio 2005) (explaining that a lack of documentation is not listed
as a ground for disallowing a claim under § 502). Several courts have concluded
that documentation provided in connection with a proof of claim is sufficient for
claims allowance purposes if it establishes the validity, ownership, and amount of
the claim. Burkett at 828-29; see also In re Sandifer, 318 B.R. 609, 611 (Bankr.
M.D. Fla. 2004) (stating that debtors are entitled to adequate documentation, but
that "creditors should not be burdened with providing unnecessary
documentation"). If a debtor successfully pierces the Rule 3001(f) presumption
of prima facie validity, the burden shifts to the creditor to prove the claim by a
preponderance of the evidence. Burkett, 329 B.R. at 829-30.
In this case, I find that the note and mortgage attached to the proof of
claim provide sufficient documentation of the claim. The note and mortgage give
rise to the claim. The Official Form merely requires the claimant to set forth an
itemization of the elements of the claim; it does not require the claimant to
document each and every element. Since information as to reasonableness can be
obtained through discovery, it does not necessarily have to be provided in the
proof of claim. Furthermore, as was explained in In re Palmer, 386 B.R. 875
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(Bankr. N.D. Fla. 2008), filing a proof of claim does not require legal expertise.
To require the level of documentation the Debtor is requesting could require the
involvement of an attorney and would unnecessarily increase costs. Such
additional documentation may not overwhelm the Court, but it would vastly
increase the cost to all debtors.”
B.
Claims Secured By Title Vehicles.
It appears that a copy of the note, security agreement and the title should be attached to a
proof of claim, along with an account statement.
In re Drake, 363 B.R. 1, 4 (Bankr. D.C. 2006) states:
Moreover, the proof of claim attached a security agreement whereby the debtor
granted HSBC a security interest. Although that security agreement did not
include a signature of the creditor, the District of Columbia's version of the
Uniform Commercial Code only required the debtor's signature on the security
agreement for there to be an enforceable security interest. See U.C. Code §9203(b)(3)(A); Falconbridge U.S., Inc. v. Bank One Illinois (In re Vic Supply Co.,
Inc.), 227 F.3d 928 (7th Cir. 2000) (lack of creditor's signature on security
agreement was not fatal even though security agreement specifically provided that
it was effective only when "accepted" by the creditor "as provided below,"
meaning signed in the blank space for signature). So there can be no doubt that
HSBC had a security interest in the vehicle.
The trustee's objection regarding failure to attach evidence of the lien may be that
no evidence of perfection of the security interest has been appended to the proof
of claim as required by Rule 3001(d) and by the Official Form. 1/ However, that
alone is not a basis for disallowing the claim, and the trustee did not affirmatively
contend in her objection that the claim is unperfected. A creditor's failure to fully
comply with the documentary requirements of Rule 3001(d) does not provide a
basis for disallowing a claim. Dove-Nation v. eCast Settlement Corp. (In re DoveNation), 318 B.R. 147, 152 (B.A.P. 8th Cir. 2004); In re Shank, 315 B.R. 799,
812 (Bankr. N.D. Ga. 2004) (concluding that "an objection to a proof of claim
based solely on the lack of attached documents provides no basis for disallowance
of a claim, even if the claimant declines to respond to the objection.").
Footnote:
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C.
1/ Once the District of Columbia issues a certificate of title to a motor
vehicle, a security interest can be perfected in that vehicle only by its
being noted on the certificate of title, but beforehand, the rule of first in
time, first in right prevails. See McCarthy v. BMW Bank of N. Am. (In re
Dorton), 327 B.R. 14 (Bankr. D.D.C. 2005), aff'd, 346 B.R. 271 (D.D.C.
2006), appeal pending (D.C. Cir.). Accordingly, HSBC ought to have
appended to its proof of claim a copy of the certificate of title (assuming
one was issued, which is likely).
Other Secured Creditors.
Judgment lien creditors filing secured claims should attach a copy of the judgment
to their proof of claim. While the court in In re Trail End Lodge, Inc., 51 B.R. 209 (D.
Vt. 1985) held that a claim based on a judgment was adequate even without the judgment
being attached, when the debtor had a copy of the judgment, it should be noted that the
case was a Chapter 11 proceeding where the debtor was the DIP. In a Chapter 7 or 13
case, the DEBTOR having been served with the judgment would not mean that the
TRUSTEE had a copy of the judgment.
D.
Priority Claims.
1.
The IRS.
In re Shaver, 247 B.R. 436, 438-439 (Bankr. E.D. Tenn. 1999) stated:
The majority of courts to consider this issue in the context of claims by the
IRS have concluded that because tax claims are based on statutory obligations
rather than obligations created by a writing, Fed. R. Bankr. P. 3001(c) does not
apply to proofs of claims filed by taxing authorities. See U.S. v. Braunstein (In re
Pan), 209 B.R. 152, 156 (D. Mass. 1997)(citing Jenny Lynn Mining Co., district
court held that because proof of claim was based on a statutory tax penalty, the
government had no obligation under the rules to provide additional documentation
in support of its proof of claim); Vines v. I.R.S. (In re Vines), 200 B.R. 940, 949
(M.D. Fla. 1996)(IRS was not required to attach any documentation to its proof of
claim because the claim and lien were based on federal statutes, not a writing,
citing Jenny Lynn Mining Co.); In re Alvstad, 223 B.R. 733, 745 (Bankr. D.N.D.
1998)("claim [of IRS] does not fall within the compass of the documentation
requirement of Rule 3001(c), as its basis lies in statute."); Bozich v. I.R.S. (In re
Bozich), 212 B.R. 354, 360 (Bankr. D. Ariz. 1997)("Courts across the country
[**8] have held that tax claims are based on statute, not on a writing, and that,
therefore, such claims do not need to be supported by the documentation required
by Rule 3001(c)."); In re Shabazz, 206 B.R. 116, 124 (Bankr. E.D. Va.
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1996)(court rejected argument that IRS was required to attach a certificate of
assessment to proof of claim, noting that Rule 3001(c) only applies where claim is
based on a writing); Fuller v. U.S. (In re Fuller), 204 B.R. 894, 898 (Bankr. W.D.
Pa. 1997)(court observed that although in the case before it the IRS had provided
detailed supporting documentation, other courts had concluded that such
documentation was unnecessary); In re Catron, 198 B.R. 905, 907 (Bankr.
M.D.N.C. 1996)(court concluded that IRS's proof of claim complied with Rule
3001 because IRS claim was based on statute rather than writing, no security
interest arising out of an agreement was claimed, and IRS had attached to its
proof of claim an itemization of the amounts and types of taxes due); In re
Hollars, 198 B.R. 270, 272 (Bankr. S.D. Ohio 1996)(The supporting
documentation requirement of Rule 3001(c) is not applicable because "the claim
of the IRS is not founded upon a writing, but rather is based upon the United
States Constitution and federal legislation which grants the federal government
the power to lay and collect taxes on income."); In re White, 168 B.R. 825, 834
(Bankr. D. Conn. 1994)(even though statutory lien asserted, it was not necessary
for IRS to attach relevant sections of the Internal Revenue Code or any other
documentation to its proof of claim, citing Jenny Lynn Mining Co.).
2.
Domestic Support Obligations.
In re Watson, 402 B.R. 294 (Bankr. N.D. Ind. 2009) states:
The Trustee has objected to that portion of claim # 3-1 which asserts that
the debtor William Watson is indebted to the claimant LaVonne Hill in the
amount of $ 4,713.45 for "Pre-petition Attorney Fees -- Statutory Recovery of
Enforcement of Custody Support Order" as a claim entitled to priority under 11
U.S.C. § 507(a)(1)(A) or (a)(1)(B). There is nothing in the proof of claim itself
which in any manner establishes an indebtedness of the debtor to anyone for the
amount of the asserted claim for attorney's fees. There is no additional admissible
evidence in the record which establishes Watson's indebtedness to either Hill or
Rappaport. Exhibit "A" attached to the claimant's legal memorandum is not
admissible into evidence and was never sought to be made a part of the
evidentiary record before the court for determination of this contested matter.
Documents attached to legal briefs, or documents which are merely filed on the
court's docket record, do not constitute evidence concerning a matter before the
court unless those documents are specifically made a part of an evidentiary record
applicable to a particular proceeding. This is true regardless of the independent
admissibility of those documents as established by the submission by which those
documents were sought to be placed before the court. Apart from failure to make
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a record by appropriate means, documents which lack a foundation for
admissibility add nothing to the mix.
The Trustee's objection sufficiently calls into question the prima facie basis for
allowance of the amount of $ 4,713.45 asserted by the claim as a claim entitled to
priority under 11 U.S.C. § 507(a)(1)(A)/ 11 U.S.C. § 507(a)(1)(B). Because
Lavonne Hill has failed to create an evidentiary record which sustains her burden
of proof as to this portion of the claim, the Trustee's objection must be sustained.
E.
Unsecured – Credit Card, Bulk Purchased Claims, Etc.
The issue of what needs to be attached to a proof of claim by a bulk purchaser of
unsecured claims, the consequences of not attaching adequate documentation is an
evolving area of the law. The following cases provide some perspective on current
issues:
In re Tran, 369 B.R. 312 (S.D. Tex. 2007). Creditor [eCast] attached to its proof
of claim a general assignment agreement between the creditor and three banks that had
issued credit cards. The assignment agreements did not specifically identify debtor or her
credit card accounts. The claim was disallowed by the bankruptcy court because the
creditor failed to meet the Fed. R. Bankr. P. 3002 requirement that requires attachment of
the underlying documentation when the claim is based upon a writing. Accordingly, the
proofs of claim did not have prima facie validity under Fed. R. Bankr. P. 3001(f). The
creditor also failed to satisfy its evidentiary burden of proving the validity and amounts of
each claim, as required by Texas law. Because the claim did not enjoy prima facie
validity, debtor's Objection was properly allowed under §502(a) because the creditor
failed to meet its burden of producing authenticated credit card agreements or monthly
statements to prove breach of the underlying contract under Texas law. Because the
claims were unenforceable under Texas law, the bankruptcy court properly sustained
debtor’s Objection under §502(b)(1).
In re Sampson, 392 B.R. 724 (Bankr. N.D. Ohio 2008). A blanket assignment
from the original creditor was sufficient that creditor was the holder of the claim where
the debtors acknowledged the legitimacy of three obligations owed to the creditor, and
the successor attached to its proofs of claim copies of account statements that the creditor
had sent to the debtors. In re Cleveland, 396 B.R. 83, 97 (Bankr. N.D. Okla. 2008)
follows Sampson on the assignment issue.
In re Cleveland., 396 B.R. 83 (Bankr. N.D. Okla. 2008). Where evidence of an
assignment is necessary to substantiate a claim for purposes of Federal Rule of
Bankruptcy Procedure 3001, such evidence does not have to be exacting. In other words,
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the documentation for the assignment does not have to specify a bankruptcy debtor's
particular account number. Instead, evidence of a blanket assignment may suffice.
In re Rogers, 391 B.R. 317, 322 (Bankr. E.D. Pa. 2008). Failure to attach
supporting documentation to a proof of claim when the bankruptcy rules require it is not
grounds for disallowing the claim. Claims may be disallowed solely on grounds set forth
in 11 U.S.C. §502(b). See e.g. In re Kirkland, 379 B.R. 341, 354 (B.A.P. 10th Cir. 2007);
In re Dove-Nation, 318 B.R. 147, 152 (B.A.P. 8th Cir. 2004); In re Kincaid, 388 B.R.
610, 614 (Bankr. E.D. Pa. 2008); and In re Burkett, 329 B.R. 820, 828 n.2 (Bankr. S.D.
Ohio 2005) (collecting cases). A proof of claim lacking necessary facts or supporting
documents simply is not entitled to a presumption of prima facie validity. Kincaid, 388
B.R. 610, 614, citing In re Heath, 331 B.R. 424, 433 (B.A.P. 9th Cir. 2005); DoveNation, 318 B.R. at 152; In re Moreno, 341 B.R. 813, 817 (Bankr. S.D. Fla. 2006); In re
Shank, 315 B.R. 799, 810 (Bankr. N.D. Ga. 2004) (quoting In re Stoecker, 5 F.3d 1022,
1028 (7th Cir. 1993)).
Consequently, at most B-Real loses the presumption that its proofs of claim are valid
prima facie and takes on the burden of proving that the claims are valid. If it fails to do
so, the claims may be disallowed.”
In re Kincaid, 388 B.R. 610 (Bankr. E.D. Pa. 2008). The bankruptcy court held
that while the proofs of claim themselves provided no support for the alleged assignments
and/or provided insufficient linkage to the original credit card claims and, thus, were not
entitled to the presumption of validity under Fed. R. Bankr. P. 3001(f), the debtor's
schedules were consistent with the amount set forth in the proofs of claim because each
scheduled claim was identical to the penny to the amount contained in the proofs of claim
and the creditors' proofs of claim identified the last four digits of account numbers
identified by the debtor that matched the last four digits of account numbers associated
with the original credit card claims. Accordingly, the court bankruptcy allowed the
claims as filed because no claims were filed by the scheduled credit card merchant
creditors and the debtor would receive a discharge of the scheduled creditors. [Query: Is
the lesson here – if you don’t have documentation, simply repeat what the debtor listed as
your claim? How many times will this technique have to be used fraudulently by nonclaim holders before the courts stop using the similarity of the listed debt and the proof of
claim as evidence of the validity of the debt and that the proper holder is the claimant?]
In re Chalakee, 385 B.R. 771 (Bankr. N.D. Okla, 2008). Creditors' failure to
attach supporting documentation to their proofs of claim did not require disallowance of
claim, where there was only the debtors' bare assertion that amounts of claims were
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disputed – there was no good-faith substantive objection that the debts were not owed, or
that amounts in the proofs of claim were erroneous.
In re Kendall, 380 B.R. 37 (Bankr. N.D. Okla. 2007). Chapter 13 debtors'
objection to a claim was sustained and the claim was disallowed because the claimant [BReal LLC] had not provided sufficient evidence to establish the actual amount of the
obligation that was due or that the claim had actually been assigned from the original
creditor to the claimant.
In footnote 3 [page 44] the Kendall court stated:
“The Court concurs with those courts that have held that merely failing to attach
written documentation to a proof of claim does not require outright disallowance
of the claim; non-compliance with Rule 3001(c) and Form 10 instructions simply
deprive the claimant of the presumption that its claim is valid in the amount
stated. See, e.g., In re Stoecker, 5 F.3d 1022, 1028 (7th Cir. 1993); B-Line, LLC
v. Kirkland (In re Kirkland), 379 B.R. 341 (B.A.P. 10th Cir. 2007) (Section
502(b) does not authorize disallowance of a claim for failing to comply with the
documentation requirements of Bankruptcy Rule 3001); In re Taylor, 363 B.R.
303, 307 (Bankr. M.D. Fla. 2007); In re Burkett, 329 B.R. 820, 828 n.2 (Bankr.
S.D. Ohio 2005) ("A majority of courts hold that a failure to attach documents
purportedly required by Fed. R. Bankr. P 3001 and Official Form 10 is not, by
itself, a basis for disallowance of claim.")(collecting cases).
However, in the face of a valid substantive objection, if the claim is based on a
writing that is not attached to the proof of claim, and the presumption of validity
does not arise, the claimant is held to the same standard of proof as if the claimant
were establishing its claim in a non-bankruptcy forum. See Raleigh v. Illinois
Dep't. of Revenue, 530 U.S. 15, 19-20, 120 S. Ct. 1951, 147 L. Ed. 2d 13 (2000);
First City Beaumont v. Durkay (In re Ford), 967 F.2d 1047, 1050 n.6 (5th Cir.
1992); Kirkland, at 348 ("In the face of a proper objection, the creditor will have
to establish its claim at hearing, bearing whatever burden of proof exists in
proving such a claim in a non-bankruptcy arena"); In re Leverett, 378 B.R. 793,
799 (Bankr. E.D. Tex. 2007).” [Case citations updated.]
In re Armstrong, 347 B.R. 581 (Bankr. N.D. Tex. 2006). The bankruptcy court
identifies two specific scenarios under which a transferee of a credit card debt may both
establish prima facie validity and overcome a "lack of documentation" objection by the
debtor: (1) the creditor produces documentation of a 'blanket assignment' to itself of
several accounts from a creditor listed as a creditor on the debtor's schedules, coupled
with copies of the underling account documents with the debtor; and (2) the creditor
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produces documentation of a 'blanket assignment' to itself of several accounts from a
creditor not listed on the debtor's schedules, but additional documents submitted with the
assignment provided a basis to link the entity assigning the claim with an entity listed on
the debtor's schedules.
In re Wingerter, 376 B.R. 221 (Bankr. N.D. Ohio 2007). B-Line filed a proof of
claim, purportedly as assignee from Covenant Management (“Covenant”) and/or
GTE. The proof of claim did not identify the date the debt was incurred, indicate that
interest or other charges were included, or include supporting documentation, beyond a
one-page form with one of the debtor’s partial social security number, an address, and an
amount due. The debtors objected to the claim, asserting that they owed no debt to GTE,
the originating creditor. It became evident that no documentation existed in support of BLine’s claim, and that B-Line had relied on representations made from the assignor. The
court issued an order to show cause, directing B-Line to explain its claim-filing
procedures. B-Line stated that it periodically purchased accounts owned by Covenant on
which Covenant received bankruptcy notices, and that claims were assigned as many as
three times before Covenant bought it, and there were no documents relating to the
debtors, the alleged debt, or GTE. The court found that B-Line’s filing of the proof of
claim was a violation of Fed. R. Bankr. P. 9011 because it failed to conduct a reasonable
inquiry into the claim, concluding that at a minimum an assignee should review a
debtor’s schedules to determine whether the assigned claim is reflected. The Bankruptcy
Appellate Panel dismissed B-line’s appeal, In re Wingerter, 394 B.R. 859 (B.A.P. 6th Cir.
2008), appeal docketed, No. 08-4455 (6th Cir. Nov. 6, 2008), as moot and because B-Line
sought an impermissible advisory opinion. The court found that no live controversy
remained in the case because the bankruptcy court declined to enter sanctions related to
B-Line’s violation of Fed. R. Bankr. P. 9011. The court also determined that B-Line’s
appeal of the bankruptcy court’s general views on proper practice in filing proofs of
claim amounted to a request for an impermissible advisory opinion from the court.
Judge Small – Andrews. Summary OK. No sanctions. Request to Rules Committee to
fix. Reason for last account statement provision being added.
F.
Privacy Rights - Full Social Security Number(s) Should NOT Be Used.
Certain personal information of debtor are protected by privacy laws that apply in
bankruptcy proceedings. These laws include the Gramm-Leach-Bliley Financial
Modernization Act, the E-Government Act, and Bankruptcy Rule 9037 and 11 U.S.C.
Section 107.
These laws give debtors (and Chapter 13 Trustees) the tools to remove improper
disclosures of personal information from a debtor’s public bankruptcy records. Items that
237
are improper to disclose include a debtor’s social security numbers, a child's name, full
account numbers, birthdays, and similar information. If these types of items appear in
documents that are publicly viewable, the court can require the information (or
document) to be redacted or blocked.
To date, the case law does not appear to allow additional remedies against
creditors who wrongfully disclose a debtor's private information. In re Killian, 2009
Bankr. LEXIS 2030 (Bankr. D.S.C. July 23, 2009); In re Lentz, 405 B.R. 893 (Bankr.
N.D. Ohio 2009); In re Gjestvang, 405 B.R. 316 (Bankr. E.D. Ark. 2009); In re French,
401 B.R. 295 (Bankr. E.D. Tenn. 2009).
Newton v. ACC of Enter, Inc. (In re Newton), Adv. No. 08-1106-DHW, 2009 WL
277437, 2009 Bankr. LEXIS 210 (Bankr. M.D. Ala. Jan. 29, 2009). Debtors’ filed suit
aftere creditor filed proofs of claim containing the debtors’ full social security
numbers. The court concluded that a private right of action for damages does not exist
under 11 U.S.C. § 105 unless a private right of action is expressly or impliedly created in
other bankruptcy law provisions. The court also found that a private right of action did
not exist in the applicable local rule cited by the debtors or in 11 U.S.C. § 107(c), and
Congress did not intend to create an implied right of action in section 107. The court also
decided that the debtors could not recover damages for an invasion of their privacy under
state law because they had not made the requisite showing that the creditor disseminated
their social security numbers to the public at large.
French v. American General Financial Services, Inc. (In re French), 401 B.R. 295
(Bankr. E.D. Tenn. 2009). Creditors filed proofs of claim that revealed the debtor’s
social security number and birth date. The debtor filed an emergency motion to restrict
access to the proof of claim, which was granted that same day. The debtor then initiated
an adversary proceeding against the creditor alleging various privacy violations under:
(1) the Gramm Leach Bliley Act (the “GLBA”), (2) the E-Government Act of 2002 (the
“EGA”), and (3) 11 U.S.C. § 107 and Fed. R Bankr. P. 9037 for intentionally revealing
the debtor’s private information to the public. The complaint also alleged
intentional/negligent infliction of emotional distress and sought compensatory and
punitive damages as well as the disallowance of the proof of claim. In ruling on the
creditor’s motion to dismiss, the bankruptcy court held that there was no private right of
action under 11 U.S.C. § 107 or Fed. R. Bankr. P. 9037, and the debtor had failed to
plead facts challenging the legal sufficiency of the creditor’s claim and failed to support a
claim for intentional/negligent infliction of emotional distress . The court also found that
neither the GLBA nor the EGA provided a private cause of action. However, the court
did find that to the extent the complaint sought a finding of contempt for violations of
Fed. R. Bankr. P. 9037, 11 U.S.C. § 105(a) did provide authority to enforce the
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rules. Therefore, the court refused to dismiss one count of the complaint to the extent it
sought an order of contempt for failure to comply with Fed. R. Bankr. P. 9037.
Cordier v. Plains Commerce Bank (In re Cordier), Adv. No. 08-2037, 2009 WL
890604 (Bankr. D. Conn. March 27, 2009). The debtors commenced an adversary
proceeding based on the bank’s proof of claim which included their full social security
numbers. The complaint alleged: (1) objection to the bank’s proof of claim; (2) violation
of Gramm-Leach-Bliley Act; (3); violation of Conn. Gen. Stat. § 42-470 (prohibiting the
public display of an individual’s social security number); (4) violation of Fed. R. Bankr.
P. 9037; and (5) invasion of privacy. The court dismissed the complaint holding that: (1)
the debtors failed to allege a substantive basis for disallowance of the claim and failed to
challenge the amount or validity of the claim; (2) there was no private right of action
under the GLBA, Conn. Gen. Stat. § 42-470, or Fed. R. Bankr. P. 9037; and (3) the
debtors failed to establish the “publicity” requirement necessary to establish a claim for
invasion of privacy. The court also rejected the debtor’s argument that 11 U.S.C. §
105(a) and the court’s inherent authority authorized relief for a violation of Fed. R.
Bankr. P. 9037. While the court recognized its ability to sanction under 11 U.S.C. §
105(a) it found that such sanctions are reserved for egregious conduct.
G.
Medical Bills – And What Creditors Should NOT To Attach To A
Proof Of Claim.
The Office of the United States Trustee has identified medical creditors who file
proofs of claim and attach documents that disclose personal medical
information. Official Form 10 (Proof of Claim), instruction 2, provides that a health care
related creditor should limit disclosure to avoid embarrassment or the disclosure of
confidential health care information. Neither the proof of claim or any documents
submitted with the proof of claim should contain any descriptions of treatments, names of
drugs, test performed, diagnosis information, or the like.
H.
Other Unsecured Creditors.
1.
Non-Record Holders Of A Claim Can Ask To Be Treated As
The Record Holder.
“For purposes of Rules 3017, 3018 and 3021 and for receiving notices, an entity
who is not the record holder of a security may file a statement setting forth facts which
entitle that entity to be treated as the record holder. An objection to the statement may be
filed by any party in interest.” Federal Rule of Bankruptcy Procedure 3003(d).
I.
Failure To Attach Adequate Documentation – Grounds For
Disallowance?
239
Courts disagree on whether an objection based solely on failing to attach
supporting documents, constitutes a ground for disallowance of the claim. Some courts
addressing this issue have held that § 502(b) provides the exclusive basis for
disallowance of claims (the "Exclusive View"). See, In re Kirkland, 379 B.R. 341 (10th
Cir. BAP 2007); In re Cluff, 313 B. R. 323 (Bankr. D. Utah 2004), aff'd, Cluff v. eCast
Settlement, No. 2:04-CV-978, 2006 U.S. Dist. LEXIS 71904, 2006 WL 2820005 (D.
Utah Sept. 29, 2006); In re Dove-Nation, 318 B. R. 147 (8th Cir. BAP 2004); In re Heath,
331 B. R. 424 (9th Cir. BAP 2005); In re Mazzoni, 318 B. R. 576 (Bankr. D. Kan. 2004);
In re Burkett, 329 B. R. 820 (Bankr. S. D. Ohio 2005); In re Shank, 315 B. R. 799
(Bankr. N. D. Ga. 2004); In re Relford, 323 B. R. 669 (Bankr. S. D. Ind. 2004), reh'g
granted, as amended; In re Kemmer, 315 B. R. 706 (Bankr. E. D. Tenn. 2004); In re
Moreno, 341 B. R. 813 (Bankr. S. D. Fla. 2006); In re Shaffner, 320 B. R. 870 (Bankr.
W. D. Mich. 2005); In re Guidry, 321 B. R. 712 (Bankr. N. D. Ill. 2005).
Other courts find the failure to attach documents to be a valid ground for a claim
objection (the "Nonexclusive View"). Once an objection is lodged, according to the
Nonexclusive View, if the creditor fails to remedy the defect or to otherwise prove its
claim at hearing, then the claim should be disallowed. See, In re Taylor, 363 B. R. 303
(Bankr. M. D. Fla. 2007); In re Blue, No. 03 C 6979, 2004 U.S. Dist. LEXIS 14771, 2004
WL 1745786 (N. D. Ill. July 30, 2004); In re Stoecker, 5 F.3d 1022 (7th Cir. 1993); In re
Tran, 369 B. R. 312 (S. D. Tex. 2007); In re Armstrong, 320 B. R. 97 (Bankr. N. D. Tex.
2005); In re Henry, 311 B. R. 813 (Bankr. W. D. Wash. 2004); In re Jorczak, 314 B. R.
474 (Bankr. D. Conn. 2004).
XXXIV. THE EFFECT OF A PROPERLY EXCUTED AND FILED PROOF OF
CLAIM.
“A proof of claim executed and filed in accordance with these rules shall
constitute prima facie evidence of the validity and amount of the claim.” Federal
Bankruptcy Rule 3001(f).
A proof of claim is deemed allowed unless it is objected to. See, 11 U.S.C. §
502(a), In re Los Gatos Lodge, Inc., 278 F.3d 890, 894 (9th Cir. 2002); In re Maxwell
Commun. Corp. plc, 93 F.3d 1036, 1046 (2nd Cir. 1996).
A properly executed and filed proof of claim constitutes "prima facie evidence of
the validity and amount of the claim." Bankruptcy Rule 3001(f). When an objection is
filed, the objecting party bears the initial burden of producing sufficient evidence to rebut
the presumption of validity given to the claim. In re Nelson, 206 B.R. 869, 878 (Bankr.
N.D. Ohio 1997). The burden then shifts to the claimant to prove the validity and amount
of the claim by a preponderance of the evidence. Id. While the burden of going forward
shifts during the claims objection process, the ultimate burden of persuasion is always on
the claimant to prove the claimed entitlement. In re Holm, 931 F.2d 620, 623 (9th
Cir.1991).
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XXXV.STANDING TO OBJECT TO A PROOF OF CLAIM.
A.
The Chapter 13 trustee.
Chapter 13 Trustees clearly have standing to object to claims because one of the
specified duties of a trustee under 11 U.S.C. §704(5) is to, "if a purpose would be served,
examine proofs of claims and object to the allowance of any claim that is improper."
Section 704(5) is made applicable to Chapter 13 Trustees by 11 U.S.C. §1302(b)(1)((b)
The trustee shall – (1)perform the duties specified in section . . . 704(5)….) In re Sims,
278 B.R. 457, 482 (Bankr. E.D. Tenn. 2002).
In re Overbaugh, Docket No. 08-2355-bk (2nd Cir. March 11, 2009) states:
“Chapter 13 trustee, who is charged with assuring that claims are properly disbursed, see
11 U.S.C. §1302(b)(3), has standing to object to a motion by debtors to reclassify a claim
from secured to unsecured.”
“In reaching this result, we join two other circuits that have concluded, when
considering similar challenges to the authority of a Chapter 13 trustee, that “the primary
purpose of the Chapter 13 trustee is not just to serve the interests of unsecured creditors,
but rather, to serve the interests of all creditors.” In re Andrews, 49 F.3d 1404, 1407 (9th
Cir. 1995)(citing In re Maddox, 15 F.3d 1347, 1355 (5th Cir. 1994).(“[T]he [C]hapter 13
trustee serves the interests of all creditors…..”).
The Overbaugh court also stated: “In addition, we agree with the commonsensical
observation of the bankruptcy judge that Rule 3007 of the Federal Rules of Bankruptcy
Procedure supports this conclusion; it would make little sense to require parties to notify
a trustee that they objected to a claim if the trustee did not have standing to oppose or
support that objection.”
B.
Chapter 13 debtors.
Courts have generally held that Chapter 13 debtors have standing to object to
proofs of claim filed in their cases. See, Cable v. Ivy Tech State College, 200 F.3d 467,
472-474 (7th Cir. 1999); In re Herrera v. JPMorgan Chase Bank N.A., 369 B.R. 395, 399
n.1 (E.D. Wisc. 2007); In re Rogers, 391 B.R. 317, 321 (Bankr. M.D. La. 2008); In re
Sims, 278 B.R. 457, 482-484 (Bankr. E.D. Tenn. 2002); In re Dooley, 41 B.R. 31, 33
(Bankr. N.D. Ga. 1984); In re Roberts, 20 B.R. , 917 But see, Holmes v. Silver Wings
Aviation, Inc., 881 F.2d 939 (10th Cir. 1989)(No standing in base Plan cases where only
distribution is affected.).
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Courts have held that Chapter 13 debtors lack standing to object to a proof of
claim based on the post-filing assignment of the claim. In re Lynn, 285 B.R. 858, 861862 (Bankr. S.D.N.Y. 2002). But, the validity of the assignment of the debt prior to the
filing of the Chapter 13 case is part of the sufficiency of the evidence supporting a proof
of claim. See, In re Cleveland, 396 B.R. 83, 95 n.47 (Bankr. N.D. Okla. 2008).
C.
Creditors.
Adair v. Sherman, 230 F.3d 890, 894 n.3 (7th Cir. 2000) stated:
“Parties in interest include not only the debtor, but anyone who has
a legally protected interest that could be affected by a bankruptcy
proceeding. See In re FBN Food Servs., Inc., 82 F.3d 1387, 1391 (7th Cir.
1996). Therefore, if one creditor files a potentially fraudulent proof of
claim, other creditors have standing to object to the proof of claim.”
Also Cf., Orius Corp. v. Qwest Corp., 373 B.R. 555, 574-576 (Bankr. N.D. Ill.
2007)(Chapter 11); In re Morrison, 69 Bankr. 586, 588-89 (Bankr. E.D. Pa. 1987) (a
creditor in a Chapter 7 case has standing to object to another creditor's claim).
D.
Other “parties in interest”.
Adair v. Sherman, 230 F.3d 890, 894 n.3 (7th Cir. 2000) states that under §502(a),
a party in interest can object to a claim, and this includes: "not only the debtor, but
anyone who has a legally protected interest that could be affected by a bankruptcy
proceeding".
E.
Creditor’s Standing To File A Proof Of Claim.
In re Hwang, 393 B.R. 701 (Bankr. C.D. Cal. 2008). In the context of a relief
from stay motion, the court analyzed the proper party in interest to bring such motions
(the analysis should be similar for POCs). After discussing how notes and
mortgages/deeds of trust work generally, the court concluded that the “mortgage follows
the note” and only the holder of the note can enforce the mortgage. Id. at 709. The court
held that although the mortgage servicer has the right to take steps to enforce the
mortgage on behalf of its agent, including moving for relief from stay, and is a party in
interest for such motions, it is not the real party in interest under Fed. R. Civ. P.
17(a)(3). Therefore, a motion for relief from stay must be brought in the name of the
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note holder. The court continued the hearing to allow the note holder to join the motion,
be substituted in as movant, or ratify the motion filed by the loan servicer.
In re Conde-Dedonato, 391 B.R. 247 (Bankr. E.D.N.Y. 2008). The court
addressed both the assignment of a note and mortgage, and the mortgage servicer’s
standing to file the proof of claim. The court determined that, under New York law, a
note and mortgage can be transferred by delivery and does not have to be evidenced by a
written assignment. The court found that the assignment from the original mortgage
company to Deutsche Bank was valid. The court concluded that the servicer,
Homecomings Financial, LLC (“Homecomings”), had the authority to collect on behalf
of Deutsche Bank and standing to file the proof of claim.
F. Creditors Can Freely Amend Proofs Of Claim – Unless There Has
Been An Objection?
In re Gilbreath, 395 B.R. 356, 366 (Bankr. S.D. Tex. 2008) states:
Generally, a creditor may freely amend its proofs of claim before they
are successfully objected to by the debtor. See, e.g., First Nat'l Bank of
Mobile v. Everhart (In re Commonwealth Corp.), 617 F.2d 415, 422 n. 12 (5th
Cir. 1980) (noting that "amendment of claims in bankruptcy is liberally
allowed" within statutory limits). However, once the debtor objects to a proof
of claim, it becomes a "contested matter" under Bankruptcy Rule 9014. See In
re Cloud, 214 F.3d 1350, 2000 WL 634637, at *2 (5th Cir. 2000)
(unpublished); see also Fed. R. Bankr. P. 3007, advisory committee's note
("The contested matter initiated by an objection to a claim is governed by rule
9014 . . . ."); Fed. R. Bankr. P. 9014, advisory committee's note ("[T]he filing
of an objection to a proof of claim . . . creates a dispute which is a contested
matter . . . ."). Further, Bankruptcy Rule 9014 makes applicable certain
procedural rules contained in Part VII of the Bankruptcy Rules, and allows the
court to "at any stage in a particular matter direct that one or more of the other
rules in Part VII shall apply." Fed. R. Bankr. P. 9014(c). Bankruptcy Rule
7015 makes Federal Rule of Civil Procedure 15 (Rule 15), governing
amendments, applicable in adversary proceedings. Taken together,
Bankruptcy Rules 9014 and 7015 make Rule 15 applicable in contested
matters at the Court's election.
Further, most bankruptcy courts have recognized that “[t]he trend of
the cases appear to apply Rule 7015 to contested matters." In re MK Lombard
Group I, Ltd., 301 B.R. 812, 816 (Bankr. E.D. Pa. 2003); see also, e.g., In re
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Stavriotis, 977 F.2d 1202, 1204 (7th Cir. 1992) (noting that Bankruptcy Rule
9014 permits extension of Rule 7015 to contested matters); In re Best
Refrigerated Express, Inc., 192 B.R. 503, 506 (Bankr. D. Neb. 1996)
(applying Rule 7015 through Rule 9014 to allow amendment to a filed proof
of claim to relate back); Enjet, Inc. v. Maritime Challenge Corp. (In re Enjet,
Inc.), 220 B.R. 312, 314 (E.D. La. 1998) (noting that "numerous courts have
applied Rule 7015 and Rule 15(c) explicitly or by analogy in non-adversary
[bankruptcy] proceedings"); In re Brown, 159 B.R. 710, 714 (Bankr. D.N.J.
1993) (noting that Rule 15's "standards for allowing amendments to pleadings
in adversary proceedings . . . also apply to amendments to a proof of claim");
In re Blue Diamond Coal Co., 147 B.R. 720, 725 (Bankr. E.D. Tenn. 1992)
(extending Rule 9014 to apply Rule 7015 to contested matters); In re Enron
Corp., 298 B.R. 513, 521-22 (Bankr. S.D.N.Y. 2003) (invoking Rule 9014 to
apply Rule 7015); 10 Collier on Bankruptcy P 7015.02 n.1 (Matthew Bender
15th ed. Rev.).
Rule 15 requires claimants to obtain "the opposing party's written
consent or the court's leave" to amend their claim after being served with a
response (here, a written objection). Fed. R. Civ. P. 15(a)(2). It is therefore
within this Court's power and discretion to refuse to allow [the creditor’s]
amendments to proofs of claim 22 through 28, which were filed without leave
or consent after the Debtors lodged their claim objections.
…
Even if Bankruptcy Rule 7015 is reserved solely for adversarial
proceedings, a number of courts have determined that proof of claim
amendments are subject to the court's equitable powers under 11 U.S.C. §
105(a). See United States v. Johnston, 267 B.R. 717, 721 (N.D. Tex. 2001) ….
Some courts have found a secured creditor’s specific reservation of the right
to file an amended proof of claim to be worthy of consideration in determining
whether the amendment is an attempt to file a new claim under the guise of an
amendment. See, In re Winters, 380 B.R. 855 (Bankr. M.D. Fla. 2007).
G.
Informal Proofs Of Claim.
In some cases, where the creditor has not timely filed a formal proof of claim,
courts have permitted other papers of record to be deemed an informal proof of claim.
"Not every document filed in the bankruptcy court will constitute an informal proof of
claim, however; the document must apprise the court of the existence, nature and amount
of the claim (if ascertainable) and make clear the claimant's intention to hold the debtor
244
liable for the claim." Charter Co. v. Dioxin Claimants (In re Charter Co.), 876 F.2d 861,
863 (11th Cir. 1989).
To constitute an “informal proof of claim”, most courts require that the
document(s) meet the following five requirements:
1. the proof of claim must be in writing;
2. the writing must contain a demand by the creditor on the debtor's estate;
3. the writing must express an intent to hold the debtor liable for the debt;
4. the proof of claim must be filed with the Bankruptcy Court; and
5. based on the facts of the case, it would be equitable to allow the amendment.
See also, In re M.J. Waterman & Assocs., Inc., 227 F.3d 604,607 (6th Cir. 2000); In re
Nikoloutsos, 199 F.3d 233, 236 (5th Cir. 2000); Hefta v. Official Committee of
Unsecured Creditors, 405 F.3d 127, 131-132 (3rd Cir. 2005)(There are two necessary
additions to the informal proof of claim requirements: “that informal proofs of claim
must be in writing and that they must be filed with the bankruptcy court. 5 Those two
new factors are justified, however, by specific rules of bankruptcy procedure. First, Rule
3001(a) defines a proof of claim as "a written statement setting forth a creditor's claim."
Fed. R. Bankr. P. 3001(a). Second, Rule 5005(a)(1) provides, with certain specified
exceptions, that proofs of claim are to be filed with the clerk of the bankruptcy court.”)
Motions for relief from stay are not generally considered “informal proofs of
claim” because they make no claim on the estate for payment. See e.g., In re Anchor
Resources Corp., 139 B.R. 954 (D. Colo. 1992). A creditor’s objection to the debtor’s
Chapter 13 Plan has been held to be an informal proof of claim that could be amended
after the claims bar date had passed. See, In re Harper, 138 B.R. 229 (Bankr. N.D. Ind.
1991).
The trustee does not have to review and consider objecting to every document that
might be considered an “informal proof of claim”. A creditor may not rely on an
informal proof of claim to participate in any distribution, but must instead file an
amendment to the informal proof of claim that complies with the requirements of Rule
3001(a). 9 Collier on Bankruptcy ¶3002.05[4] at 3001-17 (15th Ed. Rev. 2007).
H.
Case Law Interpreting Proofs Of Claim – Writing Controls Over
Preprinted Language.
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In re Padget, 119 B.R. 793, 798 (Bankr. D. Colo. 1990) states:
“Century Bank's only filed proof of claim contained pre-printed portions
requesting unsecured status to the extent of any deficiency and hand-typed
additions indicating the existence of extensive and substantial collateral. In
interpreting proofs of claim filed on printed forms, typed and hand-written
additions entered by the creditor take precedence over the printed language.
"Effect is to be given to words inserted in the body of an existing form, even if to
do so requires a rejection of uncancelled provisions of the original draft."
N.L.R.B. v. Boyer Brothers, Inc., 448 F.2d 555 (3rd Cir. 1971). On its face,
Century Bank's proof of claim was a secured claim and Trustee properly read it as
such. All inferences reasonably drawn from the proof of claim in this case
compel a conclusion that the Creditor filed a secured claim against the Debtor.”
XXXVI. LATE FILED CLAIMS.
A.
Non-Governmental Proofs of Claim.
See, Section VII, CHAPER 13, PIONEER IS DEAD OF DYSENTERY at page 85,
supra.
B.
The Deadline For Governmental Unit Filing Proofs Of Claim.
Proofs of claim by government entities must be filed within 180 days of the
commencement of the case. Federal Rule of Bankruptcy Procedure 3002(c)(1).
Section 101(27) defines the term “governmental unit”:
(27) "governmental unit" means United States; State;
Commonwealth; District; Territory; municipality; foreign state;
department, agency, or instrumentality of the United States (but not a
United States trustee while serving as a trustee in a case under this title), a
State, a Commonwealth, a District, a Territory, a municipality, or a foreign
state; or other foreign or domestic government.
The legislative history to the definition of “governmental unit” is found in the
1977 House Report:
Paragraph [27] defines "governmental unit" in the broadest sense.
The definition encompasses the United States, a State, Commonwealth,
District, Territory, Municipality or foreign state, and a department, agency
or instrumentality of any of those entities. "Department, agency, or
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instrumentality" does not include entities that owe their existence to State
action such as the granting of a charter or a licence but that have no other
connection with a State or local government or the Federal Government.
The relationship must be an active one in which the department, agency,
or instrumentality is actually carrying out some governmental function.
H.Rep. No. 95-595, 95th Cong., 1st Session 311 (1977).
There is case law holding that Federal Credit Unions are “governmental units”,
entitled to file under the extended claims bar date of Bankruptcy Rule 3002(c)(1). See, In
re Trusko, 212 B.R. 819 (Bankr. D. Md. 1997).
XXXVII. THE RIGHT TO FILE A PROOF OF CLAIM WHEN THE CREDITOR
DOES NOT.
The 2005 Amendments to Rule 3004 changed the timing of the right to file a
claim on behalf of a creditor to conform with Section 501(c) of the Bankruptcy Code.
Prior to the 2005 Amendments, Rule 3004 provided that a debtor or trustee could file a
proof of claim on behalf of a creditor the day after the first meeting of creditors. Under
the new Rule, the debtor and trustee must wait until the creditor’s opportunity to file a
claim has expired. The comments on the Amendments to 3004 recognize that the
creditor’s right to file an amendment that would supersede the debtor’s claim filed on
their behalf is an open question for the courts.
A.
Co-Debtor.
If the creditor has not filed a timely proof of claim in a Chapter 13 case, a codebtor may file a proof of claim on behalf of the creditor. Federal Rule of Bankruptcy
Procedure 3005(a). In a Chapter 13, the claim has to be filed within 30 days after the
expiration of the time for filing claims prescribed by Rule 3002(c). See, Rule 3005(a).
No distribution shall be made on the claim except on satisfactory proof that the original
debt will be diminished by the amount of the distribution. See, Rule 3005(a).
B.
Debtor.
If the creditor has not filed a timely proof of claim, a Chapter 13 debtor may file a
proof of claim on behalf of the creditor. Federal Rule of Bankruptcy Procedure 3004. In
a Chapter 13, the claim has to be filed within 30 days after the expiration of the time for
filing claims prescribed by Rule 3002(c). See, Rule 3004. When a proof of claim is filed
by a debtor on behalf of a creditor: “The clerk shall forthwith mail notice of the filing to
the creditor, the debtor and the trustee.” Rule 3004.
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Debtors can file proofs of claim not just on behalf of general unsecured creditors,
but also on behalf of government agencies that fail to file a proof claim. See, In re
Tonner, 291 B.R. 216 (Bankr. S.D. Ga. 2002)(debtor’s window to file proof of claim was
from expiration of 180 day bar date for government entities, until 210 days after the order
for relief.).
If the claim is filed too late for the creditor to fully participate in any distribution
without prejudice to creditors who filed timely claims, the claim may not be allowed.
See, In re Jurando, 318 B.R. 251 (Bankr. D. Puerto Rico 2004).
Creditors have also run into problems where they have failed to indicate on the
proof of claim that they are filing an amendment to a debtor-filed claim, and are not
simply filing a late claim. See, In re Hill, 286 B.R. 612 (Bankr. E.D. Pa. 2002)(creditor’s
claim that did not state that it was an amendment did not superseded debtor’s claim filed
on creditor’s behalf.). And compare, In re Kelley, 259 B.R. 580, 585-586 (Bankr. E.D.
Tex. 2001) with, In re Kolstad, 928 F.2d 171, 175 (5th Cir. 1991), reh'g en banc denied,
936 F.2d 571 (5th Cir. 1991), cert. denied, 502 U.S. 958, 112 S. Ct. 419, 116 L. Ed. 2d
439 (1991).
In contrast to the strict prohibition against enlargement of time for creditors to file
proofs of claim, a debtor’s right to file a protective claim may be enlarged under Federal
Rule of Bankruptcy Procedure 9006(b). See, In re Townsville, 268 B.R. 95, 107 (Bankr.
E.d. Pa. 2001); In re Moore, 247 B.R. 677, 689 n.10 (Bankr. W.D. Mich. 2000).
C.
Chapter 13 Trustee.
If the creditor has not filed a timely proof of claim, a Chapter 13 Trustee may file
a proof of claim on behalf of the creditor. In a Chapter 13, the claim has to be filed
within 30 days after the expiration of the time for filing claims prescribed by Rule
3002(c). See, Rule 3004. When a proof of claim is filed by a trustee on behalf of a
creditor: “The clerk shall forthwith mail notice of the filing to the creditor, the debtor and
the trustee. Rule 3004.
It appears that instances of Chapter 13 Trustees filing claims on behalf of
creditors are rare. One reason for not filing a claim is that the Chapter 13 Trustee does
not usually have sufficient knowledge and documentation to file a claim.
XXXVIII. POST-PETITION CLAIMS.
See, 11 U.S.C. Sections 501(d); 502(e)(2), (f), (g), (h), (i).
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In re Jones, 381 B.R. 555, 558-559 (Bankr. M.D. Fla. 2007) states:
In In re Laymon, 360 B.R. 902 (Bankr. E.D.Ark. 2007), for example, a
postpetition creditor filed a declaratory action seeking a determination that its
claim could not be involuntarily included in the debtor's amended plan. Although
the obligation in that case involved a postpetition consumer debt under subsection
(2) of §1305(a), the Court's ruling applies equally to postpetition tax liabilities
under subsection (1) of §1305(a). In Laymon, the Court stated:
Therefore, only the holder of a §1305 claim may file a proof of claim for a
post-petition debt. In re Benson, 116 B.R. 606, 607 (Bankr. S.D. Ohio
1990). The debtor may not involuntarily "provide for" a debt that is not the
subject of a properly filed and allowed post-petition proof of claim.
Bankruptcy courts have held that, by definition, a debtor is not a holder of
claim. In re Sims, 288 B.R. 264, 268 (Bankr. M.D. Ala. 2003); Benson,
116 B.R. at 607. Further, "a debtor may not file proof of a § 1305 claim on
behalf of the holder of such a claim." Benson, 116 B.R. at 608(quoting In
re Pritchett, 55 B.R. 557, 559 (Bankr. W.D.Va. 1985)). Section
1305(a)(2) of the code does not require that post-petition creditors file a
claim, and the debtor cannot force the creditor's participation through
postconfirmation modifications.
In re Laymon, 360 B.R. 902, at 904 (Emphasis supplied). Since the
claimant in Laymon had not filed a Proof of Claim under §1305, the Court found
that the claim could not be "provided for" in the debtor's plan. Id. 360 B.R. 902,
at 904.
In reaching its decision, the Court in Laymon cited In re Woods, 316 B.R.
522, 524-25 (Bankr. N.D. Ill. 2004) for the proposition that "courts have
uniformly interpreted §1305 to give these postpetition creditors the option of
having their claims pass through the bankruptcy without discharge simply by not
filing the proof of claim that the section authorizes." The liability at issue in
Woods was a postpetition tax claim under subsection (1) of §1305(a).
For other decisions interpreting § 1305(a), see In re Holmes, 312 B.R.
876, 878 (Bankr. W.D. Tenn. 2004)(The tax debt at issue was "a postpetition
liability for which the IRS may, but is not required to, file a claim pursuant to §
1305(a)); In re Parffrey, 264 B.R. 409, 413 (Bankr. S.D. Tex. 2001)("There is no
249
requirement that the holder file proof of a postpetition claim under section
1305."); and In re Wilkoff, 2001 Bankr. LEXIS 124, 2001 WL 91624, at 7 (E.D.
Pa.)(The option to file proof of a postpetition claim "belongs exclusively to the
holder of such a claim; the debtor may not force the holder to file proof of claim
and may not file a proof of claim on the holder's behalf.")
Pursuant to § 1305(a) and the decisions discussed above, therefore, the
Court finds that the IRS cannot be compelled to include any postpetition tax
liability in its Proof of Claim. The Debtors' Objection to the IRS's Claim Number
2 should be overruled to the extent that they seek an Order including the
postpetition tax liability in the Claim, without the consent of the IRS.
In a pre-BAPCPA case, In re Woods, 316 B.R. 522 (Banrk. N.D. Ill. 2004), the
court granted the debtor’s motion to compel payment of a post-Petition tax claim.
XXXIX. SPECIAL PROOF OF CLAIM ISSUES.
A.
Standing To File A Proof Of Claim For A Debt Secured By
A Mortgage Or Deed Of Trust.
Where a claim is filed by a party claiming to be a creditor, the proof of claim must
be signed by the creditor making the claim or an agent of the creditor. See, Federal Rule
of Bankruptcy Procedure 3001(b). The party signing the proof of claim on behalf of a
creditor must be authorized in order to have the legal capacity to execute the proof of
claim. See, 9 Collier on Bankruptcy ¶3001.06 at 3001-19 (15th Ed. Rev. 2007).
The evidence of the authority of the agent to sign the proof of claim does not have
to be included with the proof of claim. However, if the claim is challenged, the party
executing the proof of claim will have to be able show that they had the authority to sign
and file the proof of claim on behalf of the creditor.
For mortgage creditors, the question arises as to whether or not a servicer has
standing to file a proof of claim:
The Code defines a creditor as "an entity that has a claim against the debtor
that arose at the time of or before the order for relief concerning the
debtor." 11 U.S.C. § 101(10)(A). A claim is a "right to payment" or a "right
to an equitable remedy for breach of performance if such breach gives rise to a
right to payment." 11 U.S.C. §§ 101(5)(A) and (B). Bankruptcy Code §
502(a) provides that "a claim or interest, proof of which is filed under section
501 of this title, is deemed allowed, unless a party in interest . . . objects.
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A servicer of a mortgage is clearly a creditor and has standing to file
a proof of claim against a debtor pursuant to its duties as a servicer. See
e.g., In re Viencek, 273 B.R. 354, 359 (N.D.N.Y. 2002); see also Greer v.
O'Dell, 305 F.3d 1297, 1302 (11th Cir. 2002) (holding that loan servicer
was a party in interest in proceedings involving loans that it services);
Bankers Trust (Delaware) v. 236 Beltway Inv., 865 F. Supp. 1186, 1191
(E.D. Va. 1994) (holding that both the lender and servicer had standing to
sue on mortgagor's default even though the servicer was not the holder of
the mortgage); In re Tainan, 48 B.R. 250, 252 (Bankr. E.D. Pa. 1985)
(determining that mortgage servicer was a party in interest for purposes of
a relief from stay proceeding).
In re Conde-Dedonato, 391 B.R. 247, 250 (Bankr. E.D.N.Y. 2008).
B.
Filing Proofs Of Claim For Claims Barred By The Statute Of
Limitations – What Do The Courts Say?
1.
Bulk Purchasers Of Unsecured Debt
McGregor v. B-Real, LLC (In re McGregor), Adv. No. 08-1005, slip op., 2008
WL 5225743 (Bankr. N.D. Miss. December 12, 2008). Debtors initiated an adversary
proceeding against B-Real, LLC (B-Real), a bulk debt purchaser, alleging that B-Real’s
filing of a proof of claim on a debt barred by the applicable limitations period violated
Fed. R. Bankr. R. 3001 and the automatic stay. The Court held that there was no
provision in 11 U.S.C. § 362 prohibiting the filing a proof of claim, even where that
claim may potentially be barred by limitations, but rather that limitations was an
affirmative defense. The Court also agreed with the majority of reported decisions
concluding that the Bankruptcy Code provides no cause of action with respect to the
filing a proof of claim that is statutorily barred by a limitations period. Instead, the
proper response is to object to the claim. Thus, the Court found that the debtors sustained
no actual or punitive damages and also refused to issue a show cause order.
In re Andrews, 394 B.R. 384 (Bankr. E.D.N.C. 2008). Sanctions were not
warranted against bulk buyers of charged-off debts who filed stale and undocumented
proofs of claim because the bulk buyer creditors reasonably relied on case law that
required bankruptcy debtor to assert statute of limitations and provided only for loss of
presumption of validity for lack of documentation.
In re Simpson, Adv. No. 08-00137, 2008 Bankr. LEXIS 2457 (Bankr. N.D. Ala.
August 29, 2008). The adversary proceeding based on the assertion that the creditors
filed a false proof of claim was dismissed because even though the court had dismissed
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the claim as barred by the statute of limitations, the timeliness of the claim did not
extinguish the debt. Rather, the claims allowance process of 11 U.S.C.S. §§ 502(b)(1)
and 558 contemplated that time-barred claims could be filed and expressly preserved the
statute of limitations as a defense and a ground for disallowance of the claim. The 11
U.S.C.S. § 105(a) contempt claim was dismissed for similar reasons. The FDCPA claim
was subject to dismissal because the claim appeared to be based on the filing of a proof
of claim. The debtor's remedy in dealing with an objectionable claim was set forth in the
claims allowance process. Thus, the debtor could not prevail on that claim.
C.
Proofs Of Claim For Mortgage Escrow Shortages – Creditors Should
Zero Out The Escrow, Add 1/6th To The Amount Needed For The
Year, And File A Proof Of Claim For The Balance As An Arrearage
Claim.
The treatment of escrow shortages is a difficult issue for both debtors and
creditors. The problem typically arises because the debtors missed mortgage payments are
also missed payments toward their escrow accounts. The mortgage companies are forced to
pay the property taxes and insurance on the property, which can leave the escrow account at
zero, with monies owed to the mortgage lender for the amounts paid out for taxes and
insurance. Where the problem arises is that property taxes and insurance costs have
continued to accrue, and are about to come due in a some kind of lump sum, leaving the
escrow account (which is supposed to run ahead) further behind that the amount the
mortgage holder has actually expended.
What can the mortgage company to do? Can they determine the post-petition
escrow payment by including all amounts paid toward expenses that were to be covered by
escrow – and thereby recover their entire escrow shortage over the course of a single year?
(If the debtor(s) can actually afford to pay the higher escrow payments.)
Or, can the mortgage company use escrow debts that are due but unpaid at the time
of filing in calculating future monthly escrow payments that the debtor will be required to
pay post-petition, with the balance of the amounts owed for monies actually expended to
cover past escrow shortfalls (for taxes and insurance) being filed as part of the mortgage
company’s arrearage claim?
Or, are the mortgage companies required to zero out their escrow accounts at the
time of filing, then recalculate the escrow amount from a zero balance as of the date of the
filing of the petition, add the permitted reserve of approximately two months of escrow
payments allowed by RESPA, and only include the monies needed to pay the next year’s
taxes and insurance in the post-petition escrow payments? With all unpaid escrow
payments included as part of the arrearage in the proof of claim?
The mortgage companies would like to put as much of their escrow shortage in the
calculation of the post-petition escrow payment because then the escrow deficiency would
be paid in 12 months. If the escrow shortages are part of the arrearage claim, the mortgage
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lender’s claim is stretched out over the life of the Chapter 13 Plan (or some shorter
reasonable repayment period.)
Resetting the mortgage escrow balance to “zero” – rather than trying to recover
the escrow shortage using a 12 month escrow increase – appears to be the emerging view
on how mortgage companies should file their proofs of claim for “negative escrow”
claims. See, In re Rodriguez, 629 F.3d 136 (3rd Cir. 2010); Campbell v. Countrywide
Home Loans, Inc., 545 F.3d 348 (5th Cir. 2008).
D.
The Chapter 13 Is Dismissed Prior To The Bar Date, Reinstated After
The Bar Date, And Your Claim Is ‘Late Filed’ – What Happens?
In re Gulley, 400 B.R. 529 (Bankr. N.D. Tex. 2009). Debtors objected to proofs
of claim that did not attach supporting documents in accordance with Fed. R Bankr. P.
3001. The court concluded: (1) because the creditor amended the proofs of claims to
provide supporting documents and affidavits after the objections were filed, it had
provided sufficient documentation to constitute prima facie evidence of its claims; and
(2) because the debtor provided no evidence to refute the accuracy of the amended proof
of claim, the objection was overruled. The court also addressed whether a chapter 13
claims bar date should be recalculated if the case has been dismissed and later reinstated
(as result of the dismissal order being vacated) and the claims bar date fell within the time
that the case was dismissed. The court concluded that the proper recalculation of the bar
date would have allowed for the full ninety days contemplated by Fed. R. Bankr. P.
3002(c). The court deemed the date on which the creditor filed its proof of claim as the
recalculated deadline because it was “reasonably close, if not the same” date that the
court would have selected as the recalculated deadline. Id. at 539.
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