Bankruptcy Cases of Interest in September 2013 from The Consumer Bankruptcy Abstracts & Research, and The National Consumer Bankruptcy Rights Center

Cases in Review September, 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).

Authority of the court—Imposition of sanctions—On creditor’s attorney - 

Court can sanction creditor's attorney by requiring that all dischargee complaints comply with the rules: 

The Fifth Circuit Court of Appeals held that the bankruptcy court did not abuse its discretion in requiring a creditor’s attorney (formerly employed by Weinstein & Riley, P.S.) to (1) comply with Fed. R. Civ. Proc. 9(b) in filing nondischargeability complaints under Code § 523(a)(2)(A) and (2) file a copy of the bankruptcy court’s order in every adversary proceeding commenced by the attorney in the Southern District of Texas over the next year. The bankruptcy court found that the attorney had a practice of filing generic credit card nondischargeability complaints that did not comply with Rule 9(b). The Court of Appeals reasoned that nothing in the bankruptcy court's limited order prevented the attorney from practicing law or inconvenienced the attorney to such an extent that it in effect prevented him from the practice of law. The Court of Appeals therefore agreed with the district court's analysis that the bankruptcy court's order did not rise to the level of a suspension and was not quasicriminal in nature. In re Monteagudo, --- Fed. Appx. ----, 2013 WL 3753609 (5th Cir. July 18, 2013).

Chapter 7—Stripping unsecured lien - 

11th Circuit Allows lien stripping second mortgage in Chapter 7 (pub. decision):

The Eleventh Circuit Court of Appeals released an order in In re McNeal that contains two significant decisions. First, the court granted the debtor’s motion to publish its opinion, currently found at In re McNeal, 477 Fed. Appx. 562 (11th Cir. May 11, 2012), which held that, under existing circuit precedent, a Chapter 7 debtor may strip a wholly-unsecured lien. This will result in a fully-precedential opinion. Second, the court stated that, since the stay had been lifted in the appellee mortgage creditors’ bankruptcy cases (which are part of the Residential Capital bankruptcy), the appeal in the pending case was no longer stayed. This will allow the court to consider the creditors’ petition for rehearing en banc. The court said that no ruling would be made on that petition until at least 30 days after publication of the panel decision in the case. In re McNeal, Case No. 11-11352 (11th Cir. Aug. 2, 2013). 

Chapter 13—Confirmation of plan—Calculation of projected disposable income - 

Deducting Pension payments from PDI is permitted: 

Taking the intermediate position on the issue, the bankruptcy court held  that, in calculating projected disposable income, a Chapter 13 debtor is permitted to deduct voluntary contributions to an ERISA-qualified retirement plan that the debtor is making on the petition date. While the contributions are subject to a good-faith analysis, here the 47-year-old debtor’s commencing a $541.67 monthly contribution less than three months prior to filing her joint bankruptcy petition was not in bad faith, where the court found credible the debtor’s explanation that she was worried that Social Security would not be solvent when she reached retirement age. In re Jensen, --- B.R. ----, 2013 WL 3877818 (Bankr. D. Utah July 26, 2013).

Chapter 13—Confirmation of plan—Good faith -  

Plan can pay 100% to unsecured over 60 months even if Debtor you could it in less months is permitted:

Two more courts held that, where a Chapter 13 plan pays unsecured creditors in full, it is not bad faith under Code § 1325(a)(3) for the plan to do so over the debtor’s full applicable commitment period, even if the creditors could be paid more quickly if the debtor paid his or her full projected disposable income each month. In re Braswell, 2013 WL 3270752 (Bankr. D. Or. June 27, 2013); In re McGehan, --- B.R. ----, 2013 WL 4069524 (Bankr. D. Colo. July 19, 2013).

Dischargeability—Court-ordered restitution - 

Restitution was discharged where paid directly to victim: 

Court-ordered restitution of $919,356 that the Chapter 7 debtors, who pled guilty to embezzlement from a vulnerable adult, were directed to pay did not fall within the discharge exception in Code § 523(a)(7) for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit that was not compensation for actual pecuniary loss. Although the debtors' restitution may have been initially payable to the probation department, the Michigan restitution statute required that it then be paid to the victim or her representative or estate, so that the ultimate destination of the restitution was not a governmental unit. Moreover, the amount of the restitution was the amount of damages suffered by the victim, so that the restitution was compensation for actual pecuniary loss. In re Rayes, --- B.R. ----, 2013 WL 3784159 (Bankr. E.D. Mich. July 16, 2013).

Dischargeability—Student loan debts - 

Hardship proven due to health reasons:

 Debtors established undue hardship under Code § 523(a)(8) in two recent cases, although both involved debtors with serious medical conditions. In In re Myhre, 2013 WL 3872509 (Bankr. W.D. Wis. July 25, 2013), the court discharged the student loan debt of a quadriplegic Chapter 7 debtor who was nonetheless able to work full-time and earn between $29,000 and $35,000 per year.  And in In re O'Donohoe, 2013 WL 2905275 (Bankr. S.D. Tex. June 13, 2013) the court discharged the student loan debt of a Chapter 7 debtor who, despite having earned in excess of $150,000 per year for each of 2007, 2008 and 2009, had not worked since then, due to his multiple medical conditions (cancer, morbid obesity, severe depression, bipolar disorder, adult ADHD, obsessive compulsive disorder, high blood pressure, and sleep apnea) and the mental slowness that was a side effect of the medications required to treat these conditions.

Judicial estoppel -

Re-open Ch. 7 case allowed due to mistake or inadvertence, no presumption of deceit:

 Believing that the terms “mistake” and “inadvertence” should be given their natural meanings in the context of the application of judicial estoppel, the Ninth Circuit Court of Appeals acknowledged that its approach was less stringent than that of several other circuits. Where, as here, the debtor reopened her bankruptcy proceedings, corrected her initial error, and allowed the bankruptcy court to re-process the bankruptcy case with the full and correct information, a presumption of deceit no longer was appropriate. Rather, the debtor should be allowed to establish that the cause of action on which she now sued was omitted from her prior bankruptcy schedules through mistake or inadvertence, rather than intention. Ah Quin v. County of Kauai Dept. of Transp., --- F.3d ----, 2013 WL 3814916 (9th Cir. July 24, 2013). 

Means test—Expenses - Don't list Tobacco: 

Taking a position that was nothing if not dogmatic, the bankruptcy court declared that “in the Eastern Division of the Northern District of Alabama, expenses for tobacco may never be taken as a deduction on Schedule J,” and this “will be a per se rule in this Court until the Eleventh Circuit or Supreme Court rule otherwise.” The court said that it had repeatedly sustained the Chapter 13 trustee's objections to deductions claimed for excessive phone, Internet and cable fees, pest control services, security monitoring, pet expenses, non-mandatory retirement payments, and vehicles for non-debtor family members. It was difficult to imagine, the court continued, that counsel believed tobacco expenses would be approved by the court or would not draw an objection from the trustee. In re Vest, 2013 WL 3781508 (Bankr. N.D. Ala. July 18, 2013).

Proof of claim—Secured claim—Post-petition charges—Effect of Rule 3002.1: 

Prima Facie Validity does not apply to Post-petition Charges or POC Supplements :

The Bankruptcy Code is not clear as to the burden of proof with respect to the court's determination under Bankruptcy Rule 3002.1(h) of whether a debtor has cured a prepetition default and paid all required postpetition amounts. Rule 3002.1 does provide that Rule 3001(f), which otherwise grants a presumption of prima facie validity to a proof of claim, does not apply to supplements to the claim, including postpetition fees, expenses, and charges. The court inferred from the absence of a presumption of prima facie validity that the claimant bore the burden of proof under Bankruptcy Rule 3002.1(h). In re Rodriguez, 2013 WL 3430872 (Bankr. S.D. Tex. July 8, 2013).

Use of appearance attorneys - Not allowed due to lack of accountabililty:

Concluding that the use of appearance attorneys posed such significant problems to the proper and effective administration of consumer debtor cases that their use must be barred, Chief Bankruptcy Judge Jeff Bohm ruled that appearance attorneys would no longer be permitted to appear in cases over which he presided. Explaining that one of the largest problems with appearance attorneys was the potential lack of accountability, the court said that appearance attorneys were rarely listed as an attorney of record or co-counsel in a case, and this could raise questions as to the legitimacy of their representation of debtors and their authority to speak for, or make admissions on behalf of, the debtor. Moreover, appearance attorneys helped promote lazy and poor lawyering, as there was evidence that some practitioners never met with their clients. Ultimately, use of appearance attorneys constituted improper representation for an attorney's client. The client did not hire the appearance attorney and, almost always, the client had little or no say as to whether the attorney they did hire would represent them at any given proceeding. Often, debtors were given no notice that their own attorney would not personally represent them at their meeting of creditors or at any hearing, and this was what happened in the case at hand. The court ruled that both Code § 105(a) and Bankruptcy Rule 9029(b) permitted the court to prohibit the further use of appearance attorneys. In re Bradley, ---B.R. ----, 2013 WL 3753559 (Bankr. S.D. Tex.July 16, 2013).