April 2013 Case Law updates from NACBA related to Bankruptcy.

Amicus Brief Filed in Eighth Circuit Exemption Case

On April 3, 2013, the Eighth Circuit Court of Appeals granted NACBA’s motion for leave to file an amicus brief in In re Abdul-Rahim, No. 12-3448. The brief addresses the issue of whether the debtors may exempt an unliquidated personal injury claim in their bankruptcy case. NACBA argued that the question is one of state law and that under Missouri law courts have repeatedly held that such a claim is exempt in bankruptcy. Allowing debtors to exempt personal injury claims is consistent with policies underlying both bankruptcy and tort law and the fact that the exemption at issue was based in common law is irrelevant. Nothing in section 522(b)(3) or the history of the 1978 Bankruptcy Code suggests that only “statutory” exemption are permitted in states that have opted-out of the federal exemption scheme. The Eighth Circuit’s dictum in In re Benn, 491 F.3d 811 (8th Cir. 2007), which suggests all state exemptions must be statutory, is not consistent with the law of Missouri or the plain language of section 522(b)(3).

The case was argued on April 10, and according to one NACBA member in attendance, the argument went well. Judge Beam sprung a very recent Supreme Court case on the parties, Kirtsaeng v. John Wiley & Sons, No.11-697 (S.Ct. March 19, 2013), rev’g and rem’g John Wiley & Sons v. Kirtsaeng, 654 F.3d 210 (2d Cir. 2011), from which he quoted the following language: “A relevant canon of statutory interpretation favors a nongeographical reading. “[W]hen a statute covers an issue previously governed by the common law,” we must presume that “Congress intended to retain the substance of the common law.” Samantar v. Yousuf, 560 U. S. ___, ___, n. 13 (2010) (slip op., at 14, n. 13). See also Isbrandtsen Co. v. Johnson, 343 U. S. 779, 783 (1952) (“Statutes which invade the common law . . . are to be read with a presumption favoring the retention of long established and familiar principles, except when a statutory purpose to the contrary is evident”).” Kirtsaeng at *17.

Post-Confirmation Funds Returned to Debtor after Conversion to Chapter 7

In a case that illustrates the power of NCBRC briefs to create good law around the country by getting involved in select cases on appeal, the bankruptcy court for the Western District of Texas ordered turnover of funds that t he trustee had distributed to creditors post-conversion. Relying in large part on the Third Circuit case of In re Michael, 699 F.3d 305 (2012), in which NACBA participated as amicus, the district court affirmed. Veigelahn v. Harris (In re Harris), No. 12-540 (W.D. Tex. March 22, 2013).

Key to the decision was section 348(f) which provides that when a case is converted in good faith from chapter 13 to chapter 7 the property of the estate is determined as of the original petition date.  Because the funds at issue had been garnished from debtor’s wages post-confirmation, they were not part of the debtor’s estate at the original filing of the chapter 13 petition and, therefore, under section 348 would not be part of the chapter 7 estate upon conversion.  

Quoting Michael, the court found that the duties of the trustee delineated in section 1326 did not vest any rights in the creditors:

When the debtor transfers funds to the Chapter 13 trustee . . . under a confirmed plan . . . the funds become part of the estate, and the debtor retains a vested interest in them. Though creditors have a right to those payments based on the confirmed plan, the debtor does not lose his vested interest until the trustee affirmatively transfers the funds to creditors. Also, § 1326(a)(2) and (c) only address the obligation of  the trustee to distribute payments in accordance with a confirmed plan; they do not vest creditors with any property rights.

Michael, 699 F.3d at 313.

Argued:

In re Ranta, No. 12-2017 (4th Cir.)

Issue: Whether social security income may be considered in PDI.

Argument date: March 20, 2013

NCBRC filed an amicus brief on behalf of NACBA.

In re Abdul-Rahim, No. (1st Cir.)

Issue: Whether an unliquidated personal injury claim may be exempted in bankruptcy.

Argument date: April 10, 2013

NCBRC filed an amicus brief on behalf of NACBA.

Petition for rehearing en banc

In re Welsh, No. 12-60009 (9th Cir.)

Issue: Whether social security income may be considered in PDI and whether court may look at necessity of items securing debts for which payments have been deducted from PDI.

Result: The Ninth Circuit affirmed the decision of the BAP on March 25, 2013, in favor of the debtor. The trustee petitioned for rehearing on April 8.