Bankruptcy Case News from NACBA and the National Consumer Bankruptcy Rights Center August 2013

The National Consumer Bankruptcy Rights Center has been active in cases around the country – Read about these cases by clicking on the links below:

Kansas EITC Exemption Constitutional
Despite relentless attacks by the bankruptcy trustees Kansas’s bankruptcy-only exemption scheme, under which a debtor in bankruptcy is permitted to exempt his Earned Income Tax Credit, has once again been deemed constitutional. Nazar v. Lea (In re Lea), No. 12-1297 (D. Kans. Aug. 16, 2013), consolidated with Parks v. Hudson (In re Hudson), No. 12-1298. The exemption benefits low income families with dependent children by treating the excess of EITC credit over taxes owed as an overpayment of taxes and refunding the difference. Like all the courts addressing the Kansas statute so far, the district court rejected the trustees' argument that the exemption statute violates the Uniformity and the Supremacy Clauses of the Constitution.

There is no violation of the Uniformity Clause for the simple reason that that Clause restricts the power of Congress and is not applicable to state action. See In re Kulp, 949 F.2d 1106, 1109 n. 9 (10th Cir. 1991). See also Richardson v. Schafer (In re Schafer), 689 F.3d 601 (6th Cir. 2012), cert. denied, No. 12-643 (Feb. 19, 2013). Relying on section 522 of the Bankruptcy Code which expressly permits states to use their own exemptions rather than the federal exemption scheme, the court quickly dispensed with the notion that the exemption statute offends the Supremacy Clause by express or field preemption. Against the backdrop of a presumption of constitutionality, the court went on to reject the trustees’ argument that the exemption statute actually conflicts with several provisions of the federal Bankruptcy Code.

NACBA filed amicus briefs in these cases and other cases attacking the Kansas exemption statute. Notwithstanding consistent losses on these issues, the Kansas trustees have taken two cases raising the identical arguments to the Tenth Circuit BAP. In re Beach, No. 13-37, and In re Murray, No. 13-34.

Amicus Briefs Filed:

Estate Property Upon Conversion to Chapter 7
The NACBA membership has filed an amicus brief in the case of Viegelahn v. Harris (In re Harris), No. 13-50374 (5th Cir. August 20, 2013) seeking affirmance of the lower courts’ opinions. There, the debtor filed a chapter 13 petition, but after a good faith attempt to fulfill his obligations under the plan, he converted to chapter 7. The trustee sought to distribute debtor’s wages collected pursuant to the plan but not yet distributed at the time of conversion.

In its brief, NACBA argues that the trustee seeks to turn back the clock on an issue resolved by Congress in 1994 when it added section 348(f) to the Bankruptcy Code. That section provides that when a case is converted from chapter 13 to chapter 7, the “property of the estate” in the new chapter 7 case consists of the debtor’s property as of the date of the original petition. Only in the case of bad faith conversions is the property of the estate determined as of the date of conversion. In enacting section 348(f), Congress resolved a split in the circuits on this issue and since that time circuit courts have uniformly found that undistributed post-petition property belongs to the debtor upon conversion. See, e.g., In re Michael, 699 F.3d 305 (3d Cir. 2012) In re Stamm, 222 F.3d 216, 217-18 (5th Cir. 2000) In re Young, 66 F.3d 376, 378 (1st Cir. 1995).

The brief argues that the trustee’s “third option” of treating property as neither belonging to the estate, nor belonging to the debtor, but as having “vested” in the creditors upon confirmation of the chapter 13 plan is unsupported by statutory interpretation. Section 348(f) resolves the issue in favor of incentivizing debtors to attempt to repay creditors without the fear of negative repercussions if those good faith efforts fail.

Section 109(e) Debt Limits
NACBA filed an amicus brief in the Third Circuit case of In re Scotto-DiClemente, No. 12-3336. That case involves the question of how underwater mortgages are counted toward the section 109(e) debt limits when the chapter 13 debtor’s personal liability on the mortgages was discharged in a previous chapter 7 bankruptcy.Six months after obtaining his chapter 7 discharge the debtor filed a chapter 13 petition seeking to cure the arrearage on his first mortgage, strip the underwater mortgages, and save his residence from foreclosure. The court granted the trustee’s motion to dismiss, finding that the debtor’s unsecured debts based on the underwater mortgages exceeded section 109(e)’s debt limits. In re Scotto‐DiClemente, 463 B.R. 308, 314 (Bank. N.J. 2012) (decision on debtor’s motion for reconsideration). The district court affirmed.

NACBA’s brief makes the argument that the courts below improperly conflated a “debt” and “claim.” Under the text of the Code and the reasoning in Johnson v. Home State Bank, 501 U.S. 78 (1991), the chapter 7 discharge left the bank with an in rem “claim” against the property securing the liens, while eliminating the debtor’s in personam liability. Therefore, while the “claim” remained, no unsecured “debt” of the debtor existed to be used in the section 109(e) unsecured debt calculation. Additionally, stripping off wholly unsecured liens in chapter 13 does not convert those liens to unsecured debt where the debtor’s personal liability has already been discharged in a previous chapter 7. 
Thanks to Peter Goldberger for authoring NACBA’s brief.

Petition for Rehearing on State Law Exemption of Personal Injury Claim:The debtor filed a petition for rehearing en banc in the case of In re Abdul-Rahim. In that case, the Eighth Circuit held that the Missouri opt-out statute does not permit exemptions that are based upon state common law. In re Abdul-Rahim, No. 12-3448 (8th Cir. July 12, 2013). There, the debtors sought to exempt their unliquidated personal injury claim from their bankruptcy estate. NACBA filed an amicus brief in that case distinguishing the case relied on by the Eighth Circuit and arguing that state law defines property rights in bankruptcy and Missouri courts have consistently held that unliquidated personal injury claims are exempt property for purposes of bankruptcy. In its decision, the Eighth Circuit panel stated that “unless In re Benn is overruled en banc or by the Supreme Court, it remains binding precedent, and is directly applicable to the issues in this case.”

Arguments Scheduled:
In re Reeves, No. 12-2127 (4th Cir.)
Issue: Whether trustee has an obligation to liquidate asset that is security for tax lien to pay administrative fees and interest owed to tax creditor where creditor has not sought relief from stay. Date of argument: September 19, 2013. NACBA filed an amicus brief in this case.

In re Hensen, No. 11-16019 (9th Cir.)
Issue: Whether possession is required for debtor’s obligation to turnover value of non-exempt funds. Date of argument: October 8, 2013. NACBA filed an amicus brief in this case.

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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.