Thursday, January 6, 2011


The Supreme Court published four key cases in 2010 on the subject of bankruptcy law, which provided very interesting reading.

  1. Bankruptcy Attorney = Debt Relief Agency
Milavetz v. U.S., 130 S. Ct. 1324 (2010).

In this case, the Supreme Court included lawyers in the definition of “debt relief agency” under the Bankruptcy Code.  They found the bankruptcy statutes regulating debt relief agencies applied to attorneys as well, since attorneys provide bankruptcy assistance to clients.  However, attorneys were only barred under 11 U.S.C. §526(a)(4) from advising clients to incur more debt because of bankruptcy, and disclosure requirements of 11 U.S.C. §528 to prevent deception were found to be constitutional.

That is why you see the words (or other words to similar effect) on many legal web sites:  “We are a debt relief agency; we help people file for relief under the United States Bankruptcy Code”  - it is required disclosure after the Milavetz case. 

From the case itself:

PROCEDURAL POSTURE: Petitioner attorneys brought actions against respondent United States seeking a declaration that the attorneys were not subject to the bankruptcy statutes relating to debt relief agencies. Upon the grant of a writ of certiorari, the attorneys and the government cross-appealed the judgment of the U.S. Court of Appeals for the Eighth Circuit which held that the provisions applied to the attorneys but a limitation on advice was unconstitutional.OVERVIEW: The attorneys contended that, in providing legal advice and services to clients, the attorneys were not debt relief agencies and thus were not precluded from advising clients to incur more debt in contemplation of filing for bankruptcy. The attorneys argued that they were also not subject to the disclosure requirements applicable to debt relief agencies which curtailed the attorneys' freedom of speech. The U.S. Supreme Court unanimously held that the attorneys were debt relief agencies. In providing bankruptcy assistance, which was defined as including services commonly provided by attorneys, the attorneys were clearly within the definition of a debt relief agency, even though attorneys were not expressly included in such definition. Further, the attorneys were not precluded under 11 U.S.C.S. § 526(a)(4) from advising clients to incur more debt for valid purposes, and were only precluded from providing such advice when contemplation of bankruptcy was the impelling reason for the advice. Also, the disclosure requirements of 11 U.S.C.S. § 528 were not unconstitutional since the requirements were reasonably related to the government's interest in preventing consumer deception.OUTCOME: The judgment of the appellate court was affirmed in part with regard to the applicability of the debt-relief-agency provisions to the attorneys, the judgment was reversed in part with regard to the constitutionality of the disclosure provisions, and the cases were remanded for further proceedings.

  1. Sleeping on rights = student loan lender’s loss
U.S. Student Aid Funds, Inc. v. Espinosa, 130 S.Ct.  1367 (2010).

While it was legal error for the Bankruptcy Court to confirm a Chapter 13 debtor’s plan that discharged student loan interest without first finding “undue hardship” in an adversary proceeding, the confirmation order was nonetheless enforceable and binding because the creditor, despite not receiving the required service of the confirmation order, had notice of the error but did not object or timely appeal.

From the case itself:

PROCEDURAL POSTURE: The U.S. Court of Appeals for the Ninth Circuit held that confirming respondent Chapter 13 debtor's plan without finding undue hardship to discharge interest on a student loan under 11 U.S.C.S. § 523(a)(8) in an adversary proceeding did not render the order void under Fed. R. Civ. P. 60(b)(4), and that, although petitioner creditor was not served a summons, it had notice of the plan and failed to object. Certiorari was granted.OVERVIEW: Rule 60(b)(4) applied only where a judgment was premised on certain jurisdictional errors or due process violations depriving notice or opportunity to be heard. The Bankruptcy Court's (BC) error was not jurisdictional. The failure to serve a summons violated Fed. R. Bankr. P. 7004(b)(3)'s procedural rights; it was not a violation of a constitutional right to due process. The creditor received actual notice of the filing and contents of the plan, satisfying due process. A failure to find undue hardship under § 523(a)(8) was not a jurisdictional or notice failing that defined void judgments under Rule 60(b)(4). Given the clear and self-executing requirement for an undue hardship determination, the failure to find undue hardship before confirming the plan was a legal error. But the order remained enforceable and binding because the creditor had notice of the error and failed to object or appeal. The creditor's proof of claim for the student loan submitted it to the BC's jurisdiction on that claim. But, an assertion that bankruptcy courts were not obliged to direct a debtor to conform his plan to the requirements of 11 U.S.C.S. §§ 523(a)(8), 1328(a)(2), went too far.OUTCOME: A unanimous court affirmed the judgment of the Court of Appeals for the Ninth Circuit. 1 opinion.

  1. Practical trumps mechanical approach in calculating income to fund Chapter 13 plan.
          Hamilton v. Lanning, 130 S. Ct. 2464 (2010).

“Forward looking” approach could be used in calculating “projected disposable income” (“PDI”) under 11 U.S.C. §1325(b)(1)(B) because Bankruptcy Courts have the discretion to account for known or virtually certain changes in a debtor’s  income.  Use of Chapter 13 debtor’s current income then, not an inflated figure due to a prior one-time employer buyout, was affirmed.

Normally, a Chapter 13 debtor uses his or her disposable income to fund his or her plan; or put more simply, what is left over at the end of the month after paying basic and necessary living expenses should be used to pay off your debts.    To calculate this, the Bankruptcy Court looks at the debtor’s income for the last full six months before the bankruptcy petition is filed, and averages the 6-month’s income to arrive at the debtor’s average monthly income.  If the average monthly income is below the state median (state median income tables can be found on line at  ), then certain deductions are made to arrive at the debtor's disposable income, per 11 U.S.C.  §1325(B)(2)(A)(i).  If the debtor's monthly income is above his/her state median income, then the deductions to arrive at his/her disposable income are more restrictive, See 11. U.S.C. §707(b)(2) and §1325(b)(3)(A).  In this case, the reason the debtor’s income was above the state’s median was due to a one-time occurrence, which the Supreme Court found was permissible to exclude.

From the case itself:

PROCEDURAL POSTURE: A bankruptcy court confirmed a Chapter 13 plan, considering respondent debtor's actual income for "projected disposable income" (PDI) under 11 U.S.C.S. § 1325(b)(1)(B). An appellate panel and the U.S. Court of Appeals for the Tenth Circuit affirmed, holding that evidence of a substantial change in the debtor's circumstances could be used under a forward looking approach. Certiorari was granted on petitioner trustee's petition.OVERVIEW: In ordinary usage, future occurrences were not "projected" with an assumption that the past would necessarily be repeated. A one-time buyout from her former employer in the six months before filing greatly inflated the debtor's gross income for 11 U.S.C.S. § 101(10A)(A)(i)'s look-back period. Before the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, multiplying current monthly income by the number of plan months was the first step in determining PDI, but courts also had discretion to account for known or virtually certain changes in income. Congress did not amend PDI in 2005. If Congress intended for "projected" to carry a specialized--and indeed, unusual--meaning in Chapter 13, it could have said so expressly. The mechanical approach clashed repeatedly with § 1325's terms. 11 U.S.C.S. § 1129(a)(15)(B) referred to "disposable income," but offered no insight into the meaning of "projected." Section 1325's incorporation of 11 U.S.C.S. § 707 did not infer that Congress intended to eliminate, sub silentio, the discretion that courts previously exercised when projecting PDI to account for known or virtually certain changes. The Tenth Circuit was correct.OUTCOME: The Court affirmed the Tenth Circuit's holding that a court calculating "projected disposable income" should begin with the "presumption" that the figure yielded by the mechanical approach was correct, but that the figure could be rebutted by evidence of a substantial change in the debtor's circumstances. 8-1 Decision; 1 Dissent.

  1. Debtor keeps the entire asset = Exempt “100% of FMV” or “full fair market value(FMV)”
          Schwab v. Reilly, 130 S. Ct. 2652 (2010).

Where a Chapter 7 debtor claimed exemptions in business equipment that equaled the maximum allowed under 11 U.S.C. § 522(d) and also equaled the debtor’s estimated market value for the equipment, the Chapter 7 Trustee was not required to object under §522(l) in order to preserve the estate’s right to retain any valued beyond the debtor’s claimed exemption amount. 

Essentially, the debtor’s exemption of business equipment and the debtor’s value of the exempted business equipment was not challenged; rather, the Chapter 7 Trustee simply sold the business equipment and retained for the estate’s creditors the dollar value over and above the dollar amount claimed by the debtor as exempt, relying on the debtor’s value.  If the debtor wished to keep the exempted equipment, the Supreme Court provided some guidance:

Where, as here, it is important to the debtor to exempt the full market value of the asset or the asset itself, our decision will encourage 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." Such a declaration will encourage the trustee to object promptly to the exemption if he wishes to challenge it and preserve for the estate any value in the asset beyond relevant statutory limits. If the trustee fails to object, or if the trustee objects and the objection is overruled, the debtor will be entitled to exclude the full value of the asset. If the trustee objects and the objection is sustained, the debtor will be required either to forfeit the portion of the exemption that exceeds the statutory allowance, or to revise other exemptions or arrangements with her creditors to permit the exemption.”

“Where a debtor intends to exempt nothing more than an interest worth a specified dollar amount in an asset that is not subject to an unlimited or in-kind exemption under the Bankruptcy Code, if an interested party does not object to the claimed interest by the time the Fed. R. Bankr. P. 4003 period expires, title to the asset will remain with the estate pursuant to 11 U.S.C. §541, and the debtor will be guaranteed a payment in the dollar amount of the exemption. If an interested party timely objects, the court will rule on the objection and, if it is improper, allow the debtor to make appropriate adjustments. “

The Bankruptcy Code at 522(d) sets forth exemptions of two types.  Most exemptions place a dollar limit on the value of the property the debtor may reclaim, and such exemptions are distinct from those made per the Code provisions that authorize reclamation of the property in full without any cap on value.
Where the debtor accurately describes an asset subject to an exempt interest and on Bankruptcy Form 6, Schedule C, declares the value of the claimed exemption as a dollar amount within the range the Bankruptcy Code allows, interested parties are entitled to rely upon that value as evidence of the claim’s validity.  As such, an interested party is not required to object to the debtor’s claimed exemption in order to preserve the estate’s right to retain any value in the asset beyond the value of the exempt interest.

From the case itself:
PROCEDURAL POSTURE: Petitioner Chapter 7 trustee moved to auction respondent debtor's business equipment, in which the debtor had claimed exemptions under 11 U.S.C.S. § 522(d)(5) and (6). The bankruptcy court denied the motion. A district court denied the trustee's request for relief, and the United States Court of Appeals for the Third Circuit affirmed. Certiorari was granted.OVERVIEW: The debtor claimed exemptions in business equipment that equaled the maximum amounts allowed under § 522(d)(5) and (6). The total of the claimed exemptions equaled the estimated market value of the equipment that the debtor listed on her schedules. The trustee did not timely object to the exemptions under Fed. R. Bankr. P. 4003(b). After discovering that the equipment might have been worth more than the claimed amount, the trustee sought to recover any excess amount for the estate. The court of appeals held that, by equating the value of her exemptions with the equipment's market value, the debtor indicated her intent to exempt the equipment's full value, so the trustee was required to object under § 522(l). The Supreme Court held that the trustee was not required to object in order to preserve the estate's right to retain any value beyond the debtor's exempt interest. Subsections 522(d)(5) and (6) defined the exempt property as an interest, the value of which could not exceed a certain dollar amount, in an asset. The debtor's claimed exemptions fell within the allowed range, so the trustee was entitled to rely on that value as evidence of the claim's validity.OUTCOME: The court of appeals' judgment was reversed, and the case was remanded. 6-3 Decision; 1 Dissent.

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