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.
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.
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.
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
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
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.
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
Remains Scrambled after Schwab
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
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.
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,
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
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
(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
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
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 . . .
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)
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
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
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
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
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.