Ch13online Editorials
Keith M. Lundin & William H. Brown


Bankruptcy Rule 9011 Applies to Blind Reliance on Mortgagee’s Electronic Data: The United States Court of Appeals for the Third Circuit has delivered an important message about the management of mortgage claims in bankruptcy cases: blind reliance on inaccurate data supplied by a mortgage lender subjects the lender, its attorney and her law firm to sanctions under Bankruptcy Rule 9011. In re Taylor, No. 10-2154, 2011 WL 3692440 (3d Cir. Aug. 24, 2011) (Fuentes, Smith, Van Antwerpen).


Careful What You Wish For: State Court Judgment Gives Debtor Standing to Avoid Preference: You may remember the decision of the Bankruptcy Appellate Panel for the Sixth Circuit in Dickson v. Countrywide Home Loans (In re Dickson), 427 B.R. 399 (B.A.P. 6th Cir. Apr. 12, 2010) (Fulton, McIvor, Shea-Stonum). The interesting holding by the BAP in Dickson was that a Chapter 13 debtor had “derivative standing” to pursue the preferential perfection of a lien on a manufactured home when the trustee declined to bring the action. On further appeal, the United States Court of Appeals for the Sixth Circuit has affirmed the BAP, but the Circuit found a different and equally interesting logic: the Chapter 13 debtor has direct standing to avoid the preferential perfection of a lien when the creditor took a default judgment during the preference period. Dickson v. Countrywide Home Loans (In re Dickson), No. 10-5580, 2011 WL 3768684 (6th Cir. Aug. 26, 2011) (Norris, Gibbons, Griffin).


POSTPETITION DSOs RUN AMOK IN EIGHTH CIRCUIT: Of course, it’s not uncommon for strange facts to make strange law. But the outcome found by the United States Court of Appeals for the Eighth Circuit in Burnett v. Burnett (In re Burnett), 646 F.3d 575 (8th Cir. July 20, 2011) (Smith, Beam, Benton), may be the product of both strange law and strange facts with respect to the treatment of domestic support obligations (DSOs) in Chapter 13 cases after BAPCPA.


Early Payoff v. Applicable Commitment Period: Bird in Hand or What?: Two recent bankruptcy court decisions reach opposite conclusions with respect to whether a Chapter 13 debtor can payoff a confirmed plan and receive a discharge before completion of the applicable commitment period. As more and more appellate courts conclude that the applicable commitment period in § 1325(b)(4) is “temporal” and that Chapter 13 debtors must stay in their plans for that time without regard to the entitlement of unsecured creditors, there are sure to be more cases like these two.


Regular Income: In the Eye of the Beholder: Courts continue to struggle with the regular income condition for eligibility in §§ 109(e) and 101(30) when the source of the debtor’s income is a spouse or family member. The strange accounting for income and expenses required by the projected disposable income test after amendment by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) has complicated the regular income calculus. Two recent decisions reach opposite regular income conclusions in the context of family members in separate Chapter 13 cases.


Applicable Commitment Period and the Debtor with No Disposable Income: Outside the Sixth and Eleventh Circuits, bankruptcy practitioners, trustees and courts continue to struggle with the question whether a Chapter 13 debtor with current monthly income (CMI) greater than applicable median family income must sit in a Chapter 13 case for five years when there is no projected disposable income available for unsecured creditors. This question was directly addressed by the U.S. Court of Appeals for the Ninth Circuit in Maney v. Kagenveama (In re Kagenveama), 541 F.3d 868 (9th Cir. June 23, 2008) (Pregerson, Siler, Bea). The Ninth Circuit said that applicable commitment period in § 1325(b)(4) is a temporal requirement that determines the time during which a debtor is obligated to pay unsecured creditors; but, when there is no projected disposable income, there is no applicable commitment period.


Supreme Court Adopts Amendments and New Bankruptcy Rules: On April 26, 2011, the Supreme Court transmitted to the Speaker of the House and President of the Senate its adoption of amendments to Bankruptcy Rules 2003, 2019, 3001, 4004, and 6003, as well as new Rules 1004.2 and 3002.1. Assuming no adverse action by Congress, these amendments and new Rules will take effect December 1, 2011. New Rule 3002.1—addressing the management of home mortgages in Chapter 13 cases—is particularly important.


Naked Stay Relief Motion Is Stricken to Avoid § 109(g)(2) Prejudice: Here’s one you may need someday: a procedurally defective motion for stay relief was stricken by the bankruptcy court, rather than just denied, to avoid potential prejudicial effect under § 109(g)(2) in the event of dismissal. In re Cross, 442 B.R. 681 (Bankr. N.D. Ind. Dec. 20, 2010) (Grant). This case is a lesson in why naked stay relief motions are a bad idea and how bankruptcy courts might deal with the systemic problems involved.


Another Reason It Is Important to Object to Claims: Monk v. LSI Title Co. of Oregon, LLC (In re Monk), No. 10-6067-fra, 2011 WL 212831 (Bankr. D. Or. Jan. 21, 2011) (Alley), is an important reminder to debtors and trustees why it may be critical to object to a mortgage creditor’s proof of claim. Litton Loan Servicing filed a proof of claim in Monk that was disallowed on the trustee’s objection when Litton failed to respond to the trustee’s requests for documentation of its security interest. The claim was disallowed under § 502, but not for reasons described in § 506(d)(1), leading the court to conclude that the claim was not an “allowed secured claim,” and that the lien was void under § 506(d). Consequently, when the debtors completed plan payments and received their discharge, Litton had no lien that could survive discharge. Judge Alley’s analysis knitted together several Code definitions and the effects of disallowance.


Judicial Estoppel Applied to Proof of Claim: We frequently see judicial estoppel applied when a Chapter 13 debtor has neglected to disclose a cause of action in the schedules and then attempts to pursue that action after the bankruptcy case is dismissed or closed. See Chapter 13 Bankruptcy, 4th Ed. § 47.7. In a recent case, Oparaji v. Wells Fargo Bank, N.A. (In re Oparaji), No. 10-03231, 2010 WL 5462456 (Bankr. S.D. Tex. Dec. 29, 2010) (Isgur), Judge Marvin Isgur applied judicial estoppel in an unusual setting: to preclude Wells Fargo from seeking arrearages and charges that were inconsistent with the amounts it stated in proofs of claim filed in a prior Chapter 13 case.


Claiming Exemptions Remains Scrambled after Schwab v. Reilly: We are beginning to see opinions addressing what happens when Chapter 13 debtors put “FMV” or “100% FMV” on Schedule C in the two columns calling for “Value of Claimed Exemption” and “Current Value of Property Without Deducting Exemption.” The Supreme Court invited this practice with dicta in Schwab v. Reilly, ___ U.S. ___, 130 S. Ct. 2652, 177 L. Ed. 2d 234 (June 17, 2010)), when Justice Thomas “encourage[d] the debtor to declare the value of her claimed exemption in a manner that makes the scope of the exemption clear, for example, by listing the exempt value as ‘full fair market value (FMV)’ or ‘100% of FMV.’”


Sixth Circuit BAP Holds Michigan Bankruptcy-Specific Exemptions Unconstitutional: Michigan, like eight other states, legislated specific exemptions that are available only to bankruptcy debtors. Perhaps ironically, the Michigan bankruptcy-specific homestead exemption is more favorable than the homestead exemption available to nondebtors. Under Michigan Compiled Laws § 600.5451(n), a debtor in bankruptcy may claim a homestead exemption of up to $34,450, and if the debtor is 65 years old or is disabled, the homestead exemption increased to $51,560. By contrast, individuals not in bankruptcy can only claim a miserly state homestead exemption of $3,500. Mich. Comp. Laws § 600.6023. In two Chapter 7 cases, debtors chose the Michigan enhanced bankruptcy homestead exemption, and the trustees objected, challenging the constitutionality of the bankruptcy-specific exemptions.


Ransom: No Debt, No Transportation Ownership Costs: In her debut opinion, Justice Elena Kagan enthusiastically joins seven other Justices of the Supreme Court willing to Fix the mess that Congress made of consumer bankruptcy in 2005. In Ransom v. FIA Card Services, N.A., No. 09-907, 2011 WL 66438 (Jan. 11, 2011), the Supreme Court holds that a Chapter 13 debtor with current monthly income greater than applicable median family income cannot deduct Local Standards Transportation Ownership Costs with respect to a car owned free of debt or lease. On the way there, the majority opinion comments broadly about many important consumer bankruptcy issues—answering some questions not presented and declining to answer others that were.


Good Faith, Equitable Tolling And Counting The 910 Days In The Hanging Sentence: A bankruptcy court has ruled that the 910-day period in the hanging sentence at the end of § 1325(a) is tolled during a debtor’s prior Chapter 13 case—notwithstanding the absence of bad faith or misconduct by the debtor. In re Hingiss, No. 10-29145-jes, 2010 WL 4941622 (Bankr. E.D. Wis. Dec. 2, 2010) (Shapiro). There are contrary cases but Supreme Court authority seems to support this outcome.


Bankruptcy Technical Corrections Act of 2010: Minor Changes to Chapter 13: On December 23, 2010, the President signed the Bankruptcy Technical Corrections Act of 2010. It took nearly six years to get here and the bill that finally emerged is a bit of a yawn. For the most part, this Technical Corrections Act just corrects misspellings, punctuation and mistaken cross references that abounded in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). There are changes to Chapter 13 in the Technical Corrections Act, but Congress did not address the major nonsenses, leaps of illogic or areas of significant controversy in BAPCPA.


Bankruptcy Rules and Forms Changing December 1, 2010: Several Bankruptcy Rules and Official Forms are amended, effective December 1, 2010, and some of those changes are applicable to Chapter 13 cases. The complete versions of the amended Rules and Forms are available on the website of the U.S. Courts, A summary of the changes affecting consumer cases follows.


Making Sense of Property Taxes in Chapter 13 Cases: Bankruptcy Judge John Cook in Chattanooga, Tennessee, has offered some logic for the management of property taxes in Chapter 13 cases. In re Stokes, No. 06-11296, 2010 WL 3980232 (Bankr. E.D. Tenn. Oct. 8, 2010) (Cook). This is a messed-up area of Chapter 13 practice and Stokes is a useful contribution to the debate.


Lien Stripping and the Debtor Ineligible for Chapter 13 Discharge: In a prior editorial, we examined recent decisions discussing which methods are available for lien stripping of a wholly unsecured junior lien, and which legal theories have been used to get there. (See: The Many Ways To Strip Off Wholly Unsecured Liens.) Now, we look at some recent analyses of whether debtors ineligible for a Chapter 13 discharge can accomplish lien stripping under any method or theory.


Can You Modify a Due on Sale Clause?: In a fresh look at the enforcement of due on sale clauses and the prohibition against modification of home mortgages, the court in In re Mullin, No. 09-39760-H4-13, 2010 WL 2680868 (Bankr. S.D. Tex. July 2, 2010) (Bohm), concluded that the clause was enforceable under Texas law and prevented the Chapter 13 debtor from curing default and making ongoing payments when the mortgage creditor objected to confirmation.


Lanning: Down the Slope and Off the Cliff: Pandora’s box is open. In Hamilton v. Lanning, __ U.S. __, 130 S. Ct. 2464 (June 7, 2010), the Supreme Court unhinged the projected disposable income test from the statutory definition of disposable income in §§ 101(10A), 707(b)(2)(A) and 1325(b), substituting the discretion of bankruptcy judges for the policy choices Congress made in BAPCPA in 2005. If you don’t believe that, take a look at the early returns: In re Collier, No. 09-33187, 2010 WL 2643542 (Bankr. M.D. Ala. June 29, 2010) (Williams); In re Cranmer, No. 10-22994, 2010 WL 2680940 (Bankr. D. Utah June 29, 2010) (Thurman).


The Many Ways To Strip Off Wholly Unsecured Liens: The volume of opinions discussing the stripping off of wholly unsecured junior mortgages on residential property continues to grow, supported by nearly unanimous appellate authority supporting Chapter 13 debtors’ ability to do so. Several recent decisions address the sticky question whether a debtor who is ineligible for Chapter 13 discharge may accomplish lien stripping—the subject of a sequel to this editorial. Before we get there, a review of the procedural differences seen in recent reported opinions will be helpful as background. The fundamental procedural question is: How does a Chapter 13 debtor accomplish lien stripping? Can it be done through the Chapter 13 plan confirmation process, or does it require a separate motion? Or an adversary proceeding? Courts haven’t agreed on a single pathway or on a single legal theory for lien stripping.


Sixth Circuit BAP: You Can’t Reprogram Pension Loan Repayment as Retirement Plan Contribution: A divided panel of the Bankruptcy Appellate Panel for the Sixth Circuit has resolved against the debtor the fascinating question whether a Chapter 13 plan can use the money that is repaying a pension loan to commence contributions to a 401(k) plan when the pension loans are repaid. Burden v. Seafort (In re Seafort), Nos. 09-8062 & 09-8063, 2010 WL 3564709 (B.A.P. 6th Cir. Sept. 14, 2010) (Boswell, McIvor, Shea-Stonum).


Homeowners’ Association Dues Don’t Discharge: For lots of years, the status of homeowners’ association (HOA) dues has been a mess in consumer bankruptcy cases because of conflicting appellate decisions and ambiguous changes in the Bankruptcy Code. Without reviewing the whole story, it is enough to say that one line of cases considered HOA dues to be “covenants running with the land” that were not ordinary debts and could not be discharged in bankruptcy. See, e.g., River Place East Housing Corp. v. Rosenfeld (In re Rosenfeld), 23 F.3d 833 (4th Cir. May 4, 1994) (Hamilton, Chapman, Young). Other courts treated HOA dues as debts arising from prepetition contract that could be discharged in bankruptcy. See In re Rosteck, 899 F.2d 694 (7th Cir. Apr. 13, 1990) (Bauer, Flaum, Manion).


Judicial Estoppel is a Force to be Reckoned with in Chapter 13 Practice: Judicial estoppel is not a concept that is kind to Chapter 13 debtors. We regularly report cases in which judicial estoppel is used against a Chapter 13 debtor to bar a cause of action the debtor failed to schedule during the Chapter 13 case. In Montonati v. Wettstein (In re Wettstein), No. 10-2124, 2010 WL 2772628 (Bankr. E.D. Wis. July 13, 2010) (McGarity), the bankruptcy court uses judicial estoppel in a different way—to bar the debtor from denying the nondischargeability of a debt. There are lessons in Wettstein for debtors and for those who may litigate with debtors.


Don’t Forget: Five Days Became Seven Days for Waiver of Prepetition Briefing: Section 109(h)(3)(A)(ii) was amended effective December 1, 2009, to increase from five days to seven days the time within which a prospective debtor must be unable to obtain briefing services to qualify for the 30-day waiver in § 109(h)(3)(B). The Statutory Time Periods Technical Amendments Act of 2009, Pub. L. No. 111-16, 123 Stat. 1607 (2009), made this change, but not everyone got the word.


FIFTH CIRCUIT VACATES CLASS ACTION CERTIFICATION: Class action certifications have become more common in Chapter 13 cases—especially when debtors contest the validity of actions by mortgage creditors and servicers, such as nondisclosure of postpetition fees and charges. The Fifth Circuit has struck a blow to certification in Wilborn v. Wells Fargo Bank, N.A. (In re Wilborn), No. 09-20415, 2010 WL 2433091 (5th Cir. June 18, 2010) (Reavley, Prado, Owen), vacating a class action certification by the bankruptcy court in Wilborn v. Wells Fargo Bank, N.A. (In re Wilborn), 404 B.R. 841 (Bankr. S.D. Tex. Mar. 24, 2009) (Bohm). The plaintiffs in Wilborn alleged that Wells Fargo, as the mortgage holder or servicer, had charged or collected, unreasonable and unapproved postpetition attorney fees and other costs during Chapter 13 cases, in violation of Bankruptcy Rule 2016 and Code § 506(b). The bankruptcy court certified a class action for its district only, not nationwide. The Fifth Circuit granted Wells Fargo permission to appeal.


EIGHTH CIRCUIT BAP HOLDS THAT INHERITED IRA IS EXEMPT: In a recent editorial, we discussed the holding of In re Chilton, 426 B.R. 612 (Bankr. E.D. Tex. Mar. 5, 2010) (Rhoades), that an IRA inherited by the Chapter 13 debtor from her mother was not exempt under § 522(d)(12) (see Chilton: Inherited IRA Not Exempt Under § 522(d)(12)). The Eighth Circuit BAP has disagreed in a Chapter 7 case, Doeling v. Nessa (In re Nessa), 426 B.R. 312 (B.A.P. 8th Cir. Apr. 9, 2010) (Schermer, Venters, Saladino). In Nessa, the debtor inherited an IRA from her father and then made a “trustee-to-trustee transfer of the IRA to her own account.” The Nessa debtor made no contributions of her own funds to the inherited account and made no withdrawals.


Tennyson: Eleventh Circuit Says Applicable Commitment Period Is Minimum Plan Length: Citing Hamilton v. Lanning, No. 08-998, 2010 WL 2243704 (June 7, 2010), and rejecting Maney v. Kagenveama (In re Kagenveama), 541 F.3d 868 (9th Cir. June 23, 2008) (Pregerson, Siler, Bea), the U.S. Court of Appeals for the Eleventh Circuit has concluded that the applicable commitment period calculation in § 1325(b)(4) is the minimum required length of any Chapter 13 plan that does not pay unsecured claims in full—without regard to whether the debtor has any projected disposable income. Whaley v. Tennyson (In re Tennyson), No. 09-14628, 2010 WL 2793941 (11th Cir. July 16, 2010) (Tjoflat, Wilson, Ebel). Conflating plan length and applicable commitment period, the Eleventh Circuit has sentenced all Chapter 13 debtors to sit purposelessly in their Chapter 13 plans for years even when they have no money with which to pay unsecured creditors. This reading of the statute distorts legislative intent to punish Chapter 13 debtors—perhaps punishing trustees and creditors along the way.


Penrod: Ninth Circuit Says “Negative Equity” Is Not Purchase Money: However lonely it may be, the U.S. Court of Appeals for the Ninth Circuit has bravely declared that the Emperor has no clothes: “Negative equity”—the deficiency on the loan on a car traded in—is not part of the “price” of the new car and is not a purchase money debt for purposes of the hanging sentence at the end of § 1325(a). AmeriCredit Financial Services v. Penrod (In re Penrod), No. 08-60037, 2010 WL 2794409 (9th Cir. July 16, 2010) (Goodwin, Fletcher, Mills). To get there, the Ninth Circuit had much good help from the BAP opinion by Judge Markell and from oral argument for the debtor by Professor Kenneth Klee. Penrod splits the circuits on the negative equity issue.


SUPREME COURT GIVES ADVICE ON HOW TO CLAIM EXEMPTIONS: In its fourth bankruptcy decision this term, the Supreme Court’s 6-3 decision in Schwab v. Reilly, No. 08-538, 2010 WL 2400094 (June 17, 2010) (J. Thomas), delivers important exemption advice for debtors and trustees in all consumer bankruptcy cases.


A TWIST ON WHO GETS FUNDS HELD BY TRUSTEE AT PRECONFIRMATION DISMISSAL: Bankruptcy Code § 1326(a)(2) states that “if a plan is not confirmed, the trustee shall return any [preconfirmation plan] payments not previously paid and not yet due and owing to creditors . . . to the debtor, after deducting any unpaid claim allowed under section 503(b).” This provision, coupled with the revesting of property upon dismissal under § 349(b)(3), has typically led courts to hold that, upon dismissal of a Chapter 13 case before confirmation, the trustee should return any funds on hand, less administrative expenses, to the debtor. The difficulty comes when a diligent creditor grabs those funds, through garnishment or other execution method, before the trustee pays the debtor.


LANNING: ONE BIG ANSWER AND MANY QUESTIONS: An 8 to 1 majority of the United States Supreme Court has endorsed the “forward-looking approach” to determine projected disposable income at confirmation in Chapter 13 cases. Hamilton v. Lanning, No. 08-998, 2010 WL 2243704 (June 7, 2010). Perhaps more important, the Supreme Court has answered the fundamental question of will the Supreme Court fix the mess that is our Bankruptcy Code after BAPCPA, or will it tell us to follow the crooked path set by Congress? Now we know. Eight justices have signed on to be fixers. But as always, the devil is in the detail and there is precious little detail in Lanning.


DERIVATIVE STANDING FOR DEBTOR IN PREFERENCE LITIGATION: A PRACTICAL RESULT: Acknowledging a split of authority, the Bankruptcy Appellate Panel of the Sixth Circuit has held that a Chapter 13 debtor has derivative standing to maintain a preference action when the Chapter 13 trustee declines to pursue avoidance. Countrywide Home Loans v. Dickson (In re Dickson), No. 09-8034, 2010 WL 1427380 (B.A.P. 6th Cir. Apr. 12, 2010) (Fulton, McIvor, Shea-Stonum). Writing for a unanimous panel, Judge Thomas H. Fulton affirmed the avoidance of Countrywide’s perfection of a lien on a manufactured home in a preference action brought by the Chapter 13 debtor.


INHERITED IRA NOT EXEMPT UNDER § 522(d)(12): Sections 522(b)(3)(C) and 522(d)(12), added by BAPCPA, give debtors an exemption in “retirement funds to the extent . . . exempt from taxation” under specified sections of the Internal Revenue Code (IRC). This exemption is available under both state or federal exemption schemes and the referenced IRC provisions include Individual Retirement Accounts (IRAs). Seems like a broad exemption, up to a monetary limit of $1,171,650, as automatically adjusted on April 1, 2010, but not broad enough, according to In re Chilton, No. 08-43414, 2010 WL 817331 (Bankr. E.D. Tex. Mar. 5, 2010). Judge Brenda T. Rhoades held that the exemption in § 522(d)(12) did not reach an inherited IRA. Her rationale would apply to § 522(b)(3)(C) as well, since the same language appears in both subsections. (See also Nessa: Eighth Circuit BAP Holds That Inherited IRA Is Exempt).


DEVELOPING NEW LAW: LIMITATIONS ON THE RECOVERY OF ATTORNEY FEES FOR STAY VIOLATIONS: Recent reported cases reflect a lot of litigation over willful stay violations, and it is common that the debtor’s most significant, perhaps only, damages are attorney fees. A controversial recent decision by the Ninth Circuit in a Chapter 11 case that severely limited the recovery of attorney fees as damages for a willful stay violation, Sternberg v. Johnston, 582 F.3d 1114 (9th Cir. Oct. 22, 2009) (Hawkins, Berzon, Clifton), is finding acceptance in Chapter 13 cases, such as In re Thompson, No. 08-02560, 2010 WL 1063578 (Bankr. N.D. Ill. Mar. 19, 2010) (Schmetterer). What makes Thompson particularly interesting is that it was on remand after the Seventh Circuit held that a car lender willfully violated the stay by not promptly returning a repossessed car. Thompson v. General Motors Acceptance Corp., 566 F.3d 699 (7th Cir. May 27, 2009) (Cudahy, Williams, Tinder). One might expect big damages, but the bankruptcy court was persuaded that the American Rule on attorney fees applied to § 362(k)(1).


BAILEY, ESPINOSA AND CHUBB: THE CYCLE IS COMPLETE: On remand from the Supreme Court, Travelers Indemnity Co. v. Bailey, __ U.S. __, 129 S. Ct. 2195, 174 L. Ed. 2d 99 (June 18, 2009), the United States Court of Appeals for the Second Circuit in Johns-Manville Corp. v. Chubb Indemnity Insurance Co. (In re Johns-Manville Corp.), Nos. 06-2103-bk, 06-2118-bk, 06-2186-bk, 2010 WL 1007832 (2d Cir. Mar. 22, 2010) (Calabresi, Wesley), has put an exclamation point to one of the important take-aways of United Student Aid Funds, Inc. v. Espinosa, No. 08-1134, 2010 WL 1027825 (Mar. 23, 2010): The binding effect of confirmation in any bankruptcy case depends on constitutionally adequate notice to parties affected by the plan.


RANSOM: WHY DID THE SUPREMES TAKE CERT?: The consumer bankruptcy world is abuzz about the Supreme Court’s April 19, 2010, grant of certiorari in Ransom v. MBNA, America Bank, N.A., No. 09-907, 2010 WL 333672 (Apr. 19, 2010).


KIRKLAND: FOURTH CIRCUIT MAKES BAD LAW ON BAD FACTS: On very messy facts, after completion of payments, discharge and closing of Chapter 13 case, the U.S. Court of Appeals for the Fourth Circuit holds that the bankruptcy court lacks subject matter jurisdiction to determine the nondischargeable amount of postpetition interest and collection costs due on a student loan. Educational Credit Management Corp. v. Kirkland (In re Kirkland), No. 009-1379, 2010 WL 851414 (4th Cir. Mar. 12, 2010) (Motz, King, Agee). The terrible facts explain this outcome but the jurisdictional holding is just plain strange.


ESPINOSA—MUCH MORE THAN A STUDENT LOAN OPINION: On March 23, 2010, the Supreme Court issued one of its most significant opinions on Chapter 13 law, United Student Aid Funds, Inc. v. Espinosa, No. 08-1134, 2010 WL 1027825 (Mar. 23, 2010). Affirming the Ninth Circuit’s opinion at 553 F.3d 1193 (9th Cir. Dec. 10, 2008), the unanimous decision authored by Justice Thomas, held that the confirmation order was not void under Federal Rule of Civil Procedure 60(b)(4), notwithstanding that it was legal error to confirm a plan that paid only the principal portion of student loan debt and discharged interest without a finding of undue hardship or the filing of an adversary proceeding. It would be a mistake to read the opinion narrowly as merely a student loan discharge case.


IF YOU CAN’T SEPARATELY CLASSIFY, CONSIDER ENJOINING STUDENT LOAN CREDITOR: In re Harding offers a twist on treatment of student loan debt that can’t be fully paid during the plan’s life. Judge John K. Olson held (as have many other courts) that the student loan could not be separately classified as a long term debt under § 1322(b)(5). To get there, Judge Olson observed that § 1322(b)(5) was directed toward long-term mortgage debt and could trump the § 1322(b)(1) prohibition against unfairly discriminatory classification only on unusual facts. The opinion reviewed the tests for unfairness, and distinguished Judge Olson’s prior opinion, In re Kalfayan, in which separate classification of a student loan was not discriminatory because failure to repay student loan in full would jeopardize a professional license without which unsecured creditors would receive nothing. The facts in Harding just wouldn’t support the fairness of separate classification.


GOOD FAITH AND THE CHAPTER 13 DEBTOR WHO CAN’T PAY UNSECURED CREDITORS: A STUDY IN CONTRASTS: What do you do with a debtor who is not eligible for a Chapter 7 discharge because of a prior Chapter 7 case, but doesn’t have enough money to pay unsecured creditors in a Chapter 13 case? Can you file a “good faith” Chapter 13 plan for this debtor? Does it implicate a lack of good faith that the debtor is eligible for a Chapter 13 discharge but not eligible for a Chapter 7 discharge? Does payment of attorney fees and no payment to unsecured creditors cast a stench about the case? It was nothing but coincidence that almost identical Chapter 13 cases raising exactly these issues were filed by the same debtors’ attorney in the same district within a few weeks of each other before two different bankruptcy judges. The differing outcomes are a testament to the endless difficulty of good-faith analysis in Chapter 13 cases.


PAYING LESS THAN 100% OF DSO CLAIMS ASSIGNED TO THE GOVERNMENT—NOT EASY, MAYBE NOT GOOD: Recent opinions from several courts remind us that § 1322(a)(4) permits a plan to pay less than 100% of an assigned domestic support obligation (DSO) that falls within the § 507(a)(1)(B) priority, but the process is complicated and the results are not necessarily good for the debtor.


DOLLAR AMOUNTS INCREASE APRIL 1, 2010: Every three years, beginning April 1, 1998, pursuant to 11 U.S.C. § 104(b)(1), automatic increases in many of the monetary amounts in the Bankruptcy Code take effect. The increases are based on changes in the Consumer Price Index for Urban Consumers. Of most significance for Chapter 13 practitioners is the increase in the § 109(e) debt limits for eligibility, but other amounts are important in all cases. Some of the Official and Procedural Forms issued by the Administrative Office of the United States Courts will be modified to reflect these changes, but the effective date of the increases does not await form changes. Effective for bankruptcy cases filed on or after April 1, 2010, monetary amounts are adjusted as shown in the following chart . . .


MILAVETZ: SOTOMAYOR’S FIRST CUT ON BAPCPA: Who would have thunk: the third authored opinion by the newest Justice of the Supreme Court is a bankruptcy case! Is there a take-away here? You remember the case—Milavetz, Gallop & Milavetz, P.A. v. United States. A law firm in Minnesota (Milavetz) sought a declaration that it was not a “Debt Relief Agency” (DRA) under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 and thus was not bound by the prohibition in § 526(a)(4) against advising an assisted person “to incur more debt in contemplation of” bankruptcy and was not subject to the “We are a Debt Relief Agency” disclosure and advertisement requirements in § 528(a)(4). The district court found that attorneys were not DRAs and that §§ 526 and 528 were unconstitutional as applied to attorneys. The Eighth Circuit affirmed in part and reversed in part—holding that attorneys were DRAs and DRAs were subject to the disclosure and advertising requirements in § 528; but the Eighth Circuit found § 526(a)(4) unconstitutional because it over-broadly prohibited DRAs from providing prudent prebankruptcy advice with respect to incurring debt. Perhaps not too surprisingly, the Supreme Court affirmed the Eighth Circuit’s conclusions that attorneys can be DRAs and that attorneys must provide the disclosures in advertisements required by § 528. The Supreme Court reversed the Eighth Circuit’s holding with respect to the constitutionality of § 526(a)(4) concluding that a narrow interpretation of “in contemplation of” the filing of a petition required that only advice to incur debt “impelled” by the prospect of filing for bankruptcy was prohibited by § 526(a)(4).


FORM B22C MISLEADS AGAIN: In re Trimarchi, 421 B.R. 914 (Bankr. N.D. Ill. Jan. 25, 2010) (Squires), illustrates how the upside-down construction of Form B22C makes the calculation of current monthly income (CMI) unnecessarily complicated. The outcome of the case looks “right,” but getting there was a struggle for the debtors, the trustee and the court.


WHY KAGENVEAMA TRUMPS SMITH: A bankruptcy court in Montana has explained why the Ninth Circuit Bankruptcy Appellate Panel’s decision in Howe v. Smith (In re Smith), 418 B.R. 359 (B.A.P. 9th Cir. Oct. 5, 2009), is inconsistent with the decision of the Ninth Circuit itself in Maney v. Kagenveama (In re Kagenveama), 541 F.3d 868 (9th Cir. June 23, 2008).


STRANGE OUTCOME: JOINT DEBTORS USE DIFFERENT EXEMPTION SCHEMES: Section 522(b)(1) says that when husband and wife are joint debtors in a jointly administered case, one debtor may not elect exemptions under § 522(b)(2)—the federal bankruptcy exemptions—while the other elects exemptions under § 522(b)(3)—the state-law exemptions. If joint debtors can’t agree on the alternative “to be elected,” they are “deemed to elect paragraph (2), where such election is permitted under the law of the jurisdiction where the case is filed.” Sounds like joint debtors must always use the same exemption scheme, right? Not so, said Judge Leonard in In re Connor.


“NO LOOK” FEES: NEVER BEYOND DISPUTE: Judge Paul Bonapfel has reminded debtors’ attorneys that a “no look” or “flat” fee—agreed upon between the Chapter 13 debtor and attorney—is not insulated from objection by the trustee and won’t survive scrutiny if not reasonable on the facts of each case. In re Dabney, 417 B.R. 826, 827 (Bankr. N.D. Ga. Apr. 7, 2009).


BANKRUPTCY RULES CHANGING DECEMBER 1, 2009: After working through the Rules amendment process with the Advisory Committee on Bankruptcy Rules, after approval by the Judicial Conference of the United States Courts and by the Supreme Court, and after no adverse action by Congress, amendments to the Federal Rules of Bankruptcy Procedure take effect on December 1, 2009. The principal change results from a Time-Computation Project by the Rules Committee, adjusting the manner in which time is computed for purposes of the Federal Bankruptcy, Civil Procedure and Appellate Rules.


SMITH AND MARTINEZ: NINTH CIRCUIT BANKRUPTCY APPELLATE PANEL MAKES A COLOSSAL MESS OF THE PROJECTED DISPOSABLE INCOME TEST: Just when you thought (hoped?) the projected disposable income debate couldn’t get any more convoluted, the Bankruptcy Appellate Panel for the Ninth Circuit has trashed the relatively straight-forward analysis of Maney v. Kagenveama (In re Kagenveama), 541 F.3d 868 (9th Cir. 2008), and replaced it with an unfamiliar new test.


WEAVING A TANGLED WEB: WASHBURN, LASOWSKI AND FREDERICKSON: If you aren’t convinced that disposable income jurisprudence will require congressional intervention, take a look at the trio of recent § 1325(b) cases from the Eighth Circuit.


CIRCUIT SPLIT: ARE TAXES PRE- OR POSTPETITION CLAIMS?: In 1991, the U.S. Court of Appeals for the Fifth Circuit held that self-employment taxes “become payable” when the debtors are required to file their tax returns, not when estimated tax installment payments are due; thus, in a Chapter 13 case filed in November of 1987, unpaid self-employment taxes for 1987 were postpetition claims under § 1305. Both the Tenth Circuit Bankruptcy Appellate Panel and, most recently, the Ninth Circuit disagreed with the Fifth Circuit’s analysis.


ONE SOLUTION TO MANAGEMENT OF MORTGAGE CLAIMS: ADOPT THE PROPOSED NEW RULES: As courts continue to struggle with many issues arising out of mortgage claims disputes, the Bankruptcy Court for the District of Massachusetts found a unique approach — adoption of proposed Federal Bankruptcy Rules 3001(c) and 3002.1. Even though these proposed Rules may never be adopted, or, if they are, may see significant changes before becoming official Bankruptcy Rules, Judge Rosenthal found them so persuasively useful in resolving a dispute over mortgage arrearage and charges that he required the debtor to file an amended plan incorporating the terms of proposed Rules 3001(c) and 3002.1.


RAMSOM: NINTH CIRCUIT TAKES A WRONG TURN IN THE DISPOSABLE INCOME CALCULATION: Two things are remarkable about the Ninth Circuit’s recent decision in Ransom v. MBNA, America Bank, N.A. (In re Ransom): how wrongheaded it is and how honestly the panel admits it has made a policy choice that rests with Congress.


NEGATIVE EQUITY TRENDING INTO AN ABYSS: Despite insightful dissents, the courts of appeals continue to trend in favor of finding that “negative equity” financing is included in a purchase-money security interest for purposes of the protection from bifurcation in the hanging sentence at the end of § 1325(a).


PROJECTED DISPOSABLE INCOME COMES UNGLUED: NOWLIN, TURNER, LANNING AND FREDERICKSON: At this writing, the box score is 4 to 1 with only the Ninth Circuit holding the statutory line on the meaning of projected disposable income after the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Four circuits—the Fifth, Seventh, Eighth and Tenth—have now abandoned the statute and substituted some form of the pre-BAPCPA discretion that Congress thought it had squeezed out of the statute. Once unhinged from the statutory definition of “disposable income,” the courts of appeals have offered a fruit salad of different formula to determine projected disposable income.


IN RE VARNER: NOT ALL RENTERS SUFFER UNDER BAPCPA: In re Varner, No. 08-20806-TLM, 2009 WL 1468707 (Bankr. D. Idaho May 22, 2009) (Myers), is a good case study of the almost complete mismanagement of renters by BAPCPA.


ANOTHER CHAPTER 20 TWIST ON MANAGING LIENS THAT SURVIVE DISCHARGE IN A PRIOR CHAPTER 7 CASE: The Bankruptcy Court for the District of Kansas recently reported an interesting twist on a difficult question: What is a lienholder’s entitlement in a Chapter 13 case when the debtor’s personal liability was discharged in a prior Chapter 7 case and the debtor is not eligible for discharge in the current Chapter 13 case because of § 1328(f)? In re Picht concludes that the lienholder is only entitled to retain its lien to the extent there is value in its collateral. Admittedly in a "Chapter 20" context, this seems to effect the outcome rejected by the Supreme Court in a Chapter 7 case in Dewsnup v. Timm — an attractive potential use of Chapter 13 for some debtors.


REINSTATEMENT AFTER DISMISSAL MAY RESET CLAIMS BAR DATE: In In re Gulley, Bankruptcy Judge Jernigan concluded that although “Rule 9006(b)(3) appears to unambiguously preclude any equitable discretion on the part of a bankruptcy court to extend or toll [Rule 3002(c)] deadlines,” there is authority in the Fifth Circuit to “nullify” the original claims bar date and reset that date upon reinstatement of a dismissed case.


THINKING ABOUT THE MEANING OF “WITH RESPECT TO THE DEBTOR”: In In re Daniel, a case filed under Chapter 13 within one year of the dismissal of a prior Chapter 13 case, Bankruptcy Judge Gene Wedoff gives new meaning to the phrase “with respect to the debtor” in § 362(c)(3).


THEY DID IT AGAIN, AGAIN AND WHY YOU SHOULD CARE: On May 9, 2008, the Internal Revenue Service eliminated the “Health Care” category of Other [Necessary] Expenses. Even if you do a lot of consumer bankruptcy, I bet you didn’t know that. If you don’t do a lot of consumer bankruptcy, I suspect you are scratching your head and wondering what I am talking about and why you should care. You should care and here’s why.


SEVENTH CIRCUIT AGREES WITH SIXTH CIRCUIT BAP: TRANSPORTATION OWNERSHIP EXPENSE IS ALLOWED WITHOUT REGARD TO DEBT: It’s in a Chapter 7 case, but the United States Court of Appeals for the Seventh Circuit has sided with the Bankruptcy Appellate Panel for the Sixth Circuit to conclude that transportation ownership expenses are allowed under § 707(b)(2)(A)(ii)(I) without regard to actual debt on or lease of vehicle.


PROJECTED DISPOSABLE INCOME BOX SCORE – FIXERS: 2, FOLLOWERS: 1: As of Thanksgiving Day 2008, the fixers have moved slightly ahead in the race for circuit decisions with respect to the meaning of projected disposable income in § 1325(b). But if the appellate courts will just read the statute carefully, they will realize that the projected disposable income test does not invite this particular fixing.


PETRO AND THOMAS: SIXTH BAP WANDERS INTO DEEP YOGURT?: With full disclosure that both of these BAP cases came out of the Middle District of Tennessee, Petro v. Hildebrand (In re Petro), and Thomas v. Hildebrand (In re Thomas), signal trouble ahead for consumer bankruptcy practitioners in the Sixth Circuit.


PENROD: MARKELL ON NEGATIVE EQUITY AND THE INFAMOUS HANGING SENTENCE: The contrast between the Eleventh Circuit’s decision in Graupner v. Nuvell Credit Corp. (In re Graupner) and Judge Markell’s opinion for the Bankruptcy Appellate Panel for the Ninth Circuit in Americredit Financial Services v. Penrod (In re Penrod) could not be more stark: The Eleventh Circuit knee-jerked in Graupner, reasoning without careful analysis that Georgia law included negative equity in a purchase money security interest for purposes of the hanging sentence at the end of § 1325(a); Penrod meticulously dissects the language, history and policies underlying the U.C.C. and the hanging sentence to explain why negative equity is not part of a purchase money security interest.


NINTH CIRCUIT GETS IT RIGHT: STUDENT LOAN DISCHARGE THROUGH CONFIRMED PLAN STICKS ABSENT TIMELY OBJECTION: Bucking the trend in convincing fashion, the Ninth Circuit reaffirms in Espinosa v. United Student Aid Funds, Inc. that Great Lakes Higher Education Corp. v. Pardee (In re Pardee) correctly held that student loan creditors are not entitled to relief from the discharge order in a Chapter 13 case when notice of the plan was adequate and the creditor failed to object to confirmation of a plan that discharged student loan debt. In getting there, the Ninth Circuit rejects statutory and constitutional objections to the discharge of student loans through confirmed Chapter 13 plans that have been accepted by several other circuits. A clear circuit split is now framed.


FREDERICKSON: THE SPLIT BEGINS: As quickly as the Ninth Circuit came out of the box with Maney v. Kagenveama (In re Kagenveama), 541 F.3d 868 (9th Cir. 2008) (Pregerson, Siler, Bea), the Eighth Circuit has brushed it aside with hardly a mention in Coop v. Frederickson (In re Frederickson), No. 07-3391, 2008 WL 4693132 (8th Cir. Oct. 27, 2008) (Wollman, Beam, Riley).


TIME-BARRED PROOF OF CLAIM IS NOT NECESSARILY FALSE OR FRAUDULENT, WITH A LITTLE JOURNEY THROUGH THE FAIR DEBT COLLECTIONS PRACTICES ACT AND THE BANKRUPTCY CLAIMS PROCESS: Considering when the filing of a proof of claim may subject the filer to sanctions, In re Varona addresses the specific question whether a claim for a debt that is time-barred is a false or fraudulent claim. If it is, can the bankruptcy court use its sanction authority to deal with the filer?


ELEVENTH CIRCUIT – CAR LENDERS: 2, DEBTORS: 0: In two decisions filed a day apart, the same panel of the Eleventh Circuit handed car lenders victories with respect to two aspects of the hanging sentence at the end of § 1325(a). Nuvell Financial Services Corp. v. Dean (In re Dean) holds that a 910-day PMSI car claim must be treated as fully secured with present value interest under § 1325(a)(5)(B)(ii) when the debtor retains the collateral and makes installment payments through a plan. Graupner v. Nuvell Credit Corp. (In re Graupner) applies Georgia law (sort of) to conclude that financed “negative equity” is included in a purchase money security interest for purposes of the hanging sentence. Neither opinion adds much to the robust debate on these two important issues under BAPCPA, but the Eleventh Circuit firmly takes sides.


BRIEFING ON SAME DAY AS PETITION IS OKAY!: The Bankruptcy Appellate Panel for the Tenth Circuit has concluded in In re Francisco, that a briefing on the same calendar day as the filing of the petition satisfies the eligibility requirement in § 109(h). This appears to be the first appellate decision on the subject, and with a little luck, it will lay to rest a split among the bankruptcy courts.


“CHAPTER 13 IS A SAGA, NOT A SNAPSHOT”: You can count on Bankruptcy Judge Marvin Isgur in the Southern District of Texas to find a twist in BAPCPA that leaves folks scratching their heads. That’s what he did in In re DeSardi with respect to payments before confirmation, and now there is In re Gonzalez addressing the allowance of expenses at confirmation for a debtor with current monthly income (CMI) greater than applicable median family income.


IRS FREEZE THAWS WITHOUT VIOLATING STAY: What first looks like a stay violation doesn’t always turn out to be. Harchar v. United States (In re Harchar) gives an in-depth analysis of why a temporary freeze by the Internal Revenue Service of a debtors’ tax refund is not a per se violation of §§ 362(a)(3) or (6), even when that freeze occurs postpetition.


TIP OF AN ICEBERG? — STRIPPING A WHOLLY UNSECURED MORTGAGE IN A “NO DISCHARGE” CHAPTER 13 CASE: Here is Dewsnup v. Timm in a Chapter 20 package, rejected by the Bankruptcy Court for the Central District of Illinois. But there may be more lurking here than first meets the eye.


TENTH CIRCUIT RETREATS FROM MERSMANN?: A panel of the same United States Court of Appeals that recently gave us Educational Credit Management Corp. v. Mersmann (In re Mersmann) has delivered a confusing and perhaps contrary message with respect to the binding effect of confirmation and acceptance by silence in Wachovia Dealer Services v. Jones (In re Jones).


A MUST READ: THIRD CIRCUIT DEBATES FINALITY OF CONFIRMATION: Too often lately, the circuit courts of appeals have rediscovered the question whether a confirmed Chapter 13 plan is binding on a creditor that had notice but failed to object to a provision that would have been rejected had the creditor timely challenged confirmation. This fundamental issue for Chapter 13 practice just won’t go away notwithstanding the unambiguous language in § 1327 that a confirmed plan binds all creditors. Several courts of appeals have recently refused binding effect to confirmed plans that found “undue hardship” for purposes of the discharge of student loans — sometimes overruling earlier contrary decisions by the same courts. Now the Third Circuit has revisited the effect of confirmation on liens, and the outcome is scary.


EARLY PAYOFF AND MODIFICATION AFTER CONFIRMATION: IS THE DEBTOR TRAPPED?: There is a curious case out of the Bankruptcy Court for the Northern District of Texas styled In re McCarthy about early payoff of Chapter 13 plans, entitlement to discharge, postconfirmation modification in response to early payoff and the impact of BAPCPA on all of the above. These are hot issues in Chapter 13 practice, and McCarthy takes an incendiary approach.


SIXTH CIRCUIT BAP: EVERY CAR OWNER DESERVES A TRANSPORTATION OWNERSHIP DEDUCTION: Bucking the appellate trend, the Bankruptcy Appellate Panel for the Sixth Circuit has convincingly held that the Local Standards deduction for Transportation Ownership is an allowed expense for a Chapter 13 debtor with current monthly income greater than applicable median family income without regard to actual lease or debt payment. Rejecting the contrary conclusions of the Eighth and Ninth Circuit BAPs, Judge Rhodes for the Sixth Circuit BAP collects the competing arguments and forcefully lists the reasons why the ownership expense allowance is available when the debtor has no debt or lease payment.



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