Recent Bankruptcy Cases from Around the Circuits Posted by NACBA.

Cases in Review

June, 2013

“Cases in Review” highlights recent cases that may be of particular interest to consumer bankruptcy practitioners. It is brought to you by Consumer Bankruptcy Abstracts & Research (www.cbar.pro) and

the National Consumer Bankruptcy Rights Center (www.ncbrc.org).

Chapter 13—Confirmation of plan—Treatment of unsecured claims—Unfair

discrimination—Consumer codebtor claim:
Effectively adopting the bankruptcy court’s position that consumer codebtor claims for debts incurred for the debtor’s benefit are excluded from unfair discrimination analysis under Code § 1322(b)(1), the Bankruptcy Appellate Panel embraced a three-part test that requires an examination of (1) whether the claim truly is a codebtor consumer claim; (2) whether the codebtor undertook the underlying liability for the debtor's benefit or vice-versa; and (3) whether the plan satisfies the other requirements for plan confirmation, particularly the good faith requirement under § 1325(a)(3). Here, the bankruptcy court properly determined that the Chapter 13 debtors’ classification scheme was proposed in good faith and satisfied plan confirmation requirements, where the debtors’ plan paid an unsecured consumer codebtor claim of $25,462, which was incurred for the debtor husband’s benefit and guaranteed by the debtor wife’s mother, in full, while paying other unsecured creditors an estimated dividend of 4.51%. In re Martinez Rivera, --- B.R. ----, 2013 WL 1406209 (B.A.P. 1st Cir. April 5, 2013).

Chapter 13—Stripping unsecured lien—Necessity of discharge:
In the first Court of Appeals decision on the issue, the Fourth Circuit Court of Appeals, in a 2-1 panel decision, held that a Chapter 13 debtor ineligible for a discharge may strip a whollyunsecured lien. A completely valueless lien is classified as an unsecured claim under Code § 506(a), the court said, and Code § 1322 expressly permits modification of the rights of unsecured creditors. BAPCPA did not amend sections 506 or 1322(b), so the analysis permitting lien-stripping in “Chapter 20” cases is no different than that in any other Chapter 13 case. A requirement that a claim secured by a worthless lien be considered an “allowed secured claim” for the purpose of Code § 1325(a)(5) would be inconsistent with Nobelman v. American Sav. Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed. 2d 228 (1993), which valued a claim under section 506 before analyzing whether section 1322 barred its modification. While the court did not take lightly the Chapter 13 trustee's assertion that permitting lien-stripping in Chapter 20 cases created an end run around the bar to such relief in Chapter 7 cases enacted in Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992), the trustee's premise ignored the equally reasonable view that Congress intended to leave intact the normal Chapter 13 lien stripping regime where a debtor could otherwise satisfy the requirements for filing a Chapter 20 case. In re Davis, --- F.3d ----, 2013 WL 1926407 (4th Cir. May 10, 2013).

Dischargeability of debt—For defalcation by fiduciary under Code § 523(a)(4)—Scienter requirement: Observing that “[t]he lower courts have long disagreed about whether ‘defalcation’ includes a scienter requirement and, if so, what kind of scienter it requires,” the Supreme Court, in a unanimous decision by Justice Breyer, held that “defalcation,” for the purpose of the discharge exception found at Code § 523(a)(4), includes a culpable state of mind requirement involving knowledge of, or gross recklessness in respect to, the improper nature of the relevant fiduciary behavior. Noting that, in Neal v. Clark, 95 U.S. 704, 24 L.Ed. 586 (1878), the Court had construed “fraud” as meaning “positive fraud, or fraud in fact, involving moral turpitude or intentional wrong, … and not implied fraud, or fraud in law, which may exist without the imputation of bad faith or immorality,” the Court concluded that the statutory term “defalcation” should be treated similarly. Bullock v. BankChampaign, N.A., 2013 WL 1942393 (U.S. May 13, 2013).

Dischargeability of debt—Student loan debt: In an important win for debtors, the

Seventh Circuit Court of Appeals rejected the district court’s conclusion that the

debtor’s failure to apply for the William D. Ford Income–Based Repayment Plan

showed a lack of good faith under the Brunner test. Code § 523(a)(8) requires proof of

“undue hardship,” the court said, and it was important not to allow judicial glosses to  supersede the statute itself. Here, the evidence showed that the debtor could not pay

the debt now or in the foreseeable future. She was living with her 75-year-old mother

in a rural community where few jobs were available; mother and daughter between

them had only a few hundred dollars (from governmental programs) every month.

She was too poor to move in search of better employment prospects elsewhere, and

her car, which was more than a decade old, needed repairs. She lacked Internet access,

which coupled with the lack of transportation hampered a search for work. The

debtor was 53 years old and had not held a job since 1986, when she left the work

force to raise a family. She did not earn more than $12,000 a year in her working

career (between 1978 and 1986). Krieger v. Educational Credit Management Corp., --- F.3d ----, 2013 WL 1442305 (7th Cir. April 10, 2013).

Dischargeability of debt—Student loan debt: Reversing the bankruptcy court, the BAP held that the 64-year-old unemployed Chapter 7 debtor satisfied the good faith prong of the Brunner test, and that discharge of the debtor’s $95,000 student loan debt on the ground of undue hardship was warranted, although the debtor had made no voluntary payments on the loans and she had not applied for the Income-Based Repayment Plan, where the debtor’s only income was Social Security of $774 per month, which was less than her expenses; the debtor suffered from several chronic medical conditions, including a thyroid condition, diabetes, macular degeneration, cataracts, high cholesterol, and depression; the debtor made good faith efforts to obtain employment, maximize income, and minimize expenses; and the debtor did not come to bankruptcy court seeking discharge until many years after the loans were in repayment status. An important concurring opinion argues that the Brunner test “is too narrow, no longer reflects reality, and should be revised by the Ninth Circuit when it has the opportunity to do so. Put simply, in this era, bankruptcy courts should be free to consider the totality of a debtor's circumstances in deciding whether a discharge of student loan debt for undue hardship is warranted.” In re Roth, --- B.R. ----, 2013 WL 1623839 (B.A.P. 9th Cir. April 16, 2013).

Proof of claim—Secured claim—Existence of security interest: Two courts disagreed over whether the language in Best Buy’s credit application and cardholder agreement, both of which grant Best Buy a security interest in “the goods purchased” with the customer’s Best Buy credit card, is sufficient under UCC § 9-108 to create an enforceable security interest in goods purchased with the card. Compare In re Cunningham, --- B.R. ----, 2013 WL 1429683 (Bankr. D. Kan. April 8, 2013) (security interest does not exist) with In re Murphy, 2013 WL 1856337 (Bankr. D. Kan. May 2, 2013) (security interest does exist).

Property of the estate—Exemptions—Objection to exemption—Timeliness: Under Bankruptcy Rule 2003(e), as amended effective December 1, 2011, the only method for adjourning a meeting of creditors is by announcing the continued date and time at the meeting to be continued, coupled with the prompt filing of that announcement on the case docket. Here, the meeting of creditors was held on November 6, 2012; no adjournment to a specific date and time was announced at the meeting; and nothing in that regard was filed in the case docket. Therefore, the meeting “concluded” on November 6, 2012; the deadline for filing an objection to the debtor's exemptions was December 6, 2012; and the Chapter 7 trustee's objection

filed on December 28, 2012 was untimely. In re Vierstra, --- B.R. ----, 2013 WL 1401494 (Bankr. D. Mass. April 8, 2013).

Property of the estate—Exemptions—Of retirement account under Code §

522(b)(3)(C): Breaking a long winning streak for debtors on this issue, the Seventh  Circuit Court of Appeals held that a non-spousal inherited individual retirement account does not represent “retirement funds” in the hands of the debtor who inherited the IRA and therefore is not exempt under Code § 522(b)(3)(C) and § 522 (d)(12), both of which exempt “retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under sections 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.” Under 26 U.S.C. §402(c)(11)(A), a non-spousal inherited IRA (i.e., an IRA inherited from a person other than the debtor’s spouse) must begin distributing its assets within a year of the original owner's death. Payout must be completed in as little as five years (though the

time can be longer for some accounts). In other words, an inherited IRA is a timelimited tax-deferral vehicle, but not a place to hold wealth for use after the new owner's retirement. Finding this an “easy” decision, the court disagreed with In re Chilton, 674 F.3d 486 (5th Cir. 2012) and In re Nessa, 426 B.R. 312 (B.A.P. 8th Cir.2010). Acknowledging that this decision created a circuit conflict, the court said that it “circulated the opinion before release to all judges in active service. None of the judges requested a hearing en banc.” In re Clark, --- F.3d ----, 2013 WL 1729600 (7th Cir. April 23, 2013).

Property of the estate—Exemptions—Under state law: Two more courts upheld the Kansas bankruptcy-specific exemption of the right to receive a federal and state earned income tax credit. In these cases, the Chapter 7 trustee, rather than attacking the constitutionality of the state statute, contended that, under Code § 544(a)(2), the trustee, “as lien creditor and as successor to certain creditors and purchasers,” could gain access to an earned income tax credit in the debtor’s hands because an individual outside bankruptcy is not allowed to exempt the credit. The court replied, however, that while under § 544(a)(2) the trustee may stand in the shoes of a creditor to claim that creditor's hypothetical priority in property of the estate, exempt property is not property of the estate, so § 544(a)(2) is simply inapplicable. In re Murray, 2013 WL 1795676 (Bankr. D. Kan. April 29, 2013); In re Beach, 2013 WL 1795598 (Bankr. D. Kan. April 29, 2013).

Violation of stay—Failure to return repossessed vehicle: The Second Circuit Court of Appeals held that a secured motor vehicle creditor's refusal to return a vehicle, lawfully repossessed prepetition, to the debtor promptly upon learning of the debtor’s Chapter 13 bankruptcy filing constitutes an unlawful exercise of control over the property of the debtor’s bankruptcy estate in violation of the automatic stay. Under New York law, the debtor retained at least an equitable interest in the vehicle notwithstanding its repossession, and U.S. v. Whiting Pools, Inc., 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983) teaches that, upon the debtor’s filing of his bankruptcy petition, the debtor’s equitable interest under state law gave the bankruptcy estate a possessory right in the secured property, as property that the trustee could use under  Code § 363. Under Code § 542, that right took precedence over the creditor’s state law right of possession of the collateral. In re Weber, --- F.3d ----, 2013 WL 1891371.

(2nd Cir. May 8, 2013)