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).

Bankruptcy Case Law Updates from the National Consumer Bankruptcy Rights Center

• Eleventh Circuit Gearing Up to Revisit Chapter 7 Lien Strip

  Posted by NCBRC - August 5th, 2013
  Will the Eleventh Circuit continue to buck the trend by allowing lien strips in chapter 7? That is the question that will likely be answered in the case of In re Sinkfield, No. 13-12141. On July 30, the circuit court summarily affirmed the lower courts’ finding that, pursuant to In re McNeal, No. 11-11352 (11th Cir. May 11, 2013), chapter 7 debtors may strip wholly unsecured liens under section 506(d). You will recall that the Court in Dewsnup v. Timm, 502 U.S. 410 (1992), found that under the historical principle that a lien survives bankruptcy unaffected, and a reading of sections 506(a) and (d) under which “allowed secured claim” is given different meanings, debtors may not strip-down a partially secured lien in chapter 7. In addressing a case in which the debtor sought to strip a wholly unsecured lien, however, the court in McNeal found that Dewsnup was inapplicable and that its earlier precedent, Folendore v. United States Small Bus. Admin., 862 F.2d 1537 (11th Cir. 1989), permitting such strip-offs under section 506(d), was still good law. On August 2, the McNeal court agreed to publish its previously unpublished opinion to that effect. In granting summary affirmance of the lower court in Sinkfield, the circuit court specifically stated that its purpose was to allow the parties to seek en banc review.

  On the same topic, the Seventh Circuit recently found that, under Dewsnup, neither section 506(a) standing alone, nor in conjunction with section 506(d), permits lien stripping of a wholly unsecured lien in chapter 7. Palomar v. First American Bank (In re Palomar), No. 12-3492 (7th Cir. July 11, 2013). See also Ryan v. Homecomings Fin. Network , 253 F.3d 778 (4th Cir. 2001); Talbert v. City Mortg. Serv., 344 F.3d 555 (6th Cir. 2003); Wachovia Mortg. v. Smoot, 478 B.R. 555 (E.D.N.Y. 2012) (section 506 may not be used to strip off wholly unsecured lien in chapter 7).
  
  

• Dismissal under Section 109(g)(2)

  Posted by NCBRC - July 31, 2013

  Rivera v. Matos (In re Rivera), No. 12-87 (B.A.P. 1st Cir. June 26, 2013), involved application of section 109(g)(2) which provides that no individual may be a debtor under this title “who has been a debtor in a case pending under this title at any time in the preceding 180 days if—(2) the debtor requested and obtained the voluntary dismissal of the case following the filing of a request for relief from the automatic stay provided by section 362 of this title.” The facts were not good for the debtor. He filed his first chapter 13 bankruptcy on the eve of foreclosure but when he failed to respond to the mortgagee’s motion for relief from stay, the court lifted the stay thereby permitting the creditor to pursue his state foreclosure rights. One week before the scheduled foreclosure, Debtor moved to dismiss his bankruptcy for the express purpose of re-filing in order to prevent the foreclosure. The day before the scheduled foreclosure, the court granted the motion to dismiss. The debtor filed a new chapter 13 bankruptcy petition hours later. The creditor moved to dismiss the petition on the basis of section 109(g)(2)’s proscription against serial filings and on the basis of alleged bad faith. The court granted the motion solely pursuant to section 109(g)(2).

  The BAP agreed that the case was properly dismissed under section 109(g)(2) and that it was unnecessary to make a determination as to bad faith. In so holding, the court discussed the subtleties of section 109(g)(2) noting that courts are divided on its application. In In re Durham, 461 B.R. 139, 142 (Bankr. D. Mass. 2011), the court delineated three approaches to section 109: the mandatory approach, under which the court must dismiss a case that meets the criteria set forth in section 109(g)(2),see, e.g., In re Andersson, 209 B.R. 76, 78 (6th Cir. BAP 1997); the discretionary approach, under which the court may take into consideration the debtor’s motives and whether the creditor has demonstrated bad behavior, see, e.g., Leafty v. Aussie Sonoran Capital, 479 B.R. 545 (B.A.P. 9th Cir. 2012) (section 109(g)(2) dismissal discretionary);

  In re Richter, 2010 WL 4272915, at *3 (Bankr. N.D. Iowa 2010); and the causal approach, under which the case will be dismissed only where there is a connection between the filing of the motion for relief from stay and the debtor’s voluntary dismissal. See In re Payton, 481 B.R. 460 (Bankr. N.D. Ill. 2012) (finding that the most reasonable interpretation of “following” in section 109(g)(2) is “as a result of”). InPayton, the court reasoned that the causal approach harmonizes with congressional intent to prevent debtors from filing serial bankruptcies and dismissing in order to avoid the consequences of court-ordered relief from stay. See In re Riekena, 456 B.R. 365, 368 (Bankr.C.D.Ill.2011) (“It is widely acknowledged that Congress enacted section 109(g)(2) for the purpose of curbing abusive repetitive filings by debtors attempting to nullify a stay relief order entered in a prior case by obtaining a new automatic stay upon refiling.”); In re Beal, 347 B.R. 87 (E.D. Wisc. 2006) (finding that dismissal pursuant to section 109(g)(2) is inappropriate where the motion for relief from stay was denied).

  While some courts in the First Circuit have adopted the causal approach, see, e.g. Durham, 461 B.R. 139; In re Lopez Ramos, 212 B.R. 29, 30 (Bankr. D.P.R. 1997), theRivera court found that it did not have to make a choice as the case would be subject to dismissal based on any of the three approaches. Because the debtor explicitly informed the court that he sought dismissal of the earlier case as a result of the court’s granting of the motion for relief from stay and the pending foreclosure he admitted the causal connection. Moreover, there was no suggestion of bad faith on the part of the creditor and further delay of the foreclosure resulting from the second bankruptcy petition would prejudice the creditor.

  The court was also not faced with the question of whether the automatic stay is in effect until such time as it is determined whether the debtor is ineligible, or whether section 362(b)(21)(A), which provides that the automatic stay does not come into play when the debtor is ineligible under section 109(g), is self-executing. See Anjos v. Bank of America, No. 12-11553 (Bankr. D. Mass. Nov. 5, 2012) (interpreting section 109(g)(1) and finding that the automatic stay is in effect until such time as debtor’s ineligibility is determined). See also Durham, 461 B.R. at 141 (“Thus until the court rules on eligibility, the filing of a petition by an individual possibly ineligible under § 109(g) effectively commences a bankruptcy case.”).

• No Lien Strip Permitted in Chapter 7 under Section 506

  Posted by NCBRC - July 29, 2013

  In In re Palomar the chapter 7 debtors filed an adversary proceeding seeking to strip off a wholly unsecured junior lien on their residence. The bank had not filed a claim in the bankruptcy. The court found that the debtors could not strip the lien and the district court affirmed. The Seventh Circuit found that neither section 506(a) standing alone, nor in conjunction with section 506(d), permits such lien stripping. Palomar v. First American Bank (In re Palomar), No. 12-3492 (7th Cir. July 11, 2013).

  The Seventh Circuit began with the finding that, under the reasoning set forth inDewsnup v. Timm, 502 U.S. 410 (1992), 506(d) does not permit strip-off of a lien that is allowed even though that lien may be valueless under section 506(a). Because, inPalomar, the bank had not filed a claim, there was no issue as to whether the claim was “allowed” for purposes of application of section 506(d), therefore, the lien could not be stripped pursuant to that section. See also Ryan v. Homecomings Financial Network, 253 F.3d 778, 781-82 (4th Cir. 2001) (chapter 7 debtor may not strip-off wholly unsecured lien pursuant to section 506(d)); Talbert v. City Mortg. Serv., 344 F.3d 555 (6th Cir. 2003) (same); Laskin v. First Nat’l Bank of Keystone, 222 B.R. 872 (B.A.P. 9th Cir. 1998) (same). But see In re McNeal, 477 Fed. Appx. 562 (11th Cir. 2012) (under Eleventh Circuit precedent chapter 7 debtor may strip wholly unsecured lien pursuant to section 506(d)).

  The court turned to whether section 506(a) would serve the purpose sought by the debtors and  found that it would did not. “The point of section 506(a) is not to wipe out liens but to recognize that if a creditor is owed more than the current value of his lien, he can by filing a claim in bankruptcy (rather than bypassing bankruptcy and foreclosing his lien) obtain, if he’s lucky, some of the debt owed him that he could not obtain by foreclosure because his lien is worth less than the debt.” Citing In re Tarnow, 749 F.3d 464, 465-66 (7th Cir. 1984).

  Though, as was found by the Palomar court, the trend is toward interpreting Dewsnupas prohibiting strip-offs of wholly unsecured liens in chapter 7, the Eleventh Circuit rejected that finding in its unpublished opinion in In re McNeal, 477 Fed. Appx. 562 (11th Cir. 2012). There, the court found that Dewsnup should be confined to its factual borders which dealt only with a partially secured lien. When the issue involves a wholly unsecured lien, albeit one that is allowed under section 502, Dewsnup does not control. Rather, the court in McNeal relied on Folendore v. United States Small Bus. Admin., 862 F.2d 1537 (11th Cir. 1989), which held that the plain meaning of sections 506(a) and (d) rendered a wholly unsecured lien in chapter 7 void.

• Trustee Steps into Shoes of Lienholder upon Avoidance of Lien

  Posted by NCBRC - July 26th, 2013
  NCBRC filed an amicus brief on behalf of the NACBA membership in the case of In re Traverse, 13-9002 (1st Cir. July 10, 2013). In that case, when the chapter 7 debtor entered into bankruptcy, she sought to exempt her home from the estate and continue making her mortgage payments. It was undisputed that the debtor was not in default on her mortgages. The trustee, however, successfully avoided one of the liens as unperfected and sought to sell the debtor’s residence for the benefit of creditors. The lower courts found that, having avoided the lien, the trustee stood in the shoes of the debtor and had the power to sell the property.

  In its amicus brief before the First Circuit, NACBA argues that application of Bankruptcy Code sections 704, 541(a), 551, and 544, demonstrates that upon avoidance and preservation of a lien the trustee stands in the shoes of the former lienholder, not the debtor. Therefore, the trustee did not gain the power to sell the property except to the extent that the lienholder would have had that power. See In re Trout, 609 F.3d 1106, 1110 (10th Cir. 2010) (“under § 551 the trustee steps into the shoes of the former lienholder, with the same rights in the collateralized property that the original lienholder enjoyed.”).  Because the debtor was current on her payments, under state law, there was no default to trigger the right to foreclose.

  Thanks to Ray DiGuiseppe for authoring NACBA’s brief.

  
  

  NACBA Files Amicus on Applicable Commitment Period

  Posted by NCBRC - July 24, 2013

  NCBRC filed an amicus brief on behalf of the NACBA membership in the case of In re Pliler, No. 13-1445 (4th Cir. June 20, 2013). NACBA’s brief argues that the Bankruptcy Court erred when it held that section 1325(b)(4)(B) created a minimum plan length of sixty months for above-median debtors, and that the disposable income formula set forth by Congress and reflected on Form 22C could be abandoned if it was inconsistent with income and expenses as reflected on Schedules I and J.

  With respect to the applicable commitment period, the lower court in Pliler erroneously adopted the “temporal approach” which treats that period as a mandatory temporal obligation that the debtor must serve in the plan. In its brief NACBA argues that the correct interpretation of the applicable commitment period supports a “monetary approach,” under which “projected disposable income” is calculated by multiplying the number of months in the debtor’s “applicable commitment period” by the debtor’s “disposable income” to produce the minimum dollar amount that must be paid to unsecured creditors. Once that amount is paid, the debtor has fulfilled his or her obligations and may be discharged without regard to whether the debtor completed the plan prior to the 5 year period. This approach has advantages for all concerned. Creditors get their money sooner, thereby lessening the risk of the debtor’s failure to complete the plan, the bankruptcy moves more quickly through the system thereby relieving judicial costs, and the debtor can benefit sooner from the fresh start he or she has earned.

  Furthermore, from a statutory construction standpoint, if section 1325(b)(4) establishes a freestanding plan length even in the absence of objection from the trustee or unsecured creditor, section 1325(b)(1) would be rendered superfluous, as that section only refers to the applicable commitment period upon such objection. This is an untenable result of the “temporal approach” applied by the lower court.

  NACBA’s position is supported by Hamilton v. Lanning,506 U.S. __, 130 S.Ct. 2464, 177 L.Ed.2d 23 (2010), in which the Court found that once income and expenses are adjusted by “known or virtually certain changes,” the resulting amount should be multiplied by 36 or 60 months to arrive at the “projected disposable income.” This is in harmony with pre-BAPCPA treatment of the issue which Lanning endorsed.

  The brief argues that the contrary decisions out of the Sixth and Eleventh Circuits, Baud v. Carroll, 634 F.3d 327 (6th Cir. 2011); Whaley v. Tennyson, 611 F.3d 873 (11th Cir. 2010), were wrongly decided.

  Finally, the brief argues that the bankruptcy court erred in finding that it could jettison the results of the means test in favor of calculating an amount the debtor is able to pay based on schedules I and J, thereby rendering the means test—one of the most significant BAPCPA amendments—superfluous.

  Thanks to Norma Hammes for authoring NACBA’s brief.

  Eighth Circuit Rejects State Common-Law Exemptions

  Posted by NCBRC - July 22, 2013

  The Eighth Circuit found that the Missouri opt-out statute does not permit exemptions that are based upon state common law. In re Abdul-Rahim, 12-3448 (8th Cir. July 12, 2013). In that case, the debtors sought to exempt their unliquidated personal injury claim from their bankruptcy estate. The bankruptcy court rejected the exemption because it originated under state common law rather than by statutory enactment. Missouri’s opt-out statute, section 513.427, provides that Missouri debtors “shall be permitted to exempt from property of the [bankruptcy] estate any property that is exempt from attachment and execution under the law of the state of Missouri.” In finding that the state exemptions referred to in that section did not include common law exemptions, the court relied on, and in fact felt compelled to follow, In re Benn, 491 F.3d 811 (8th Cir. 2007), which held that, under Missouri law, the tax refunds that the debtor sought to exempt were property of the bankruptcy estate and were not exemptible.

  NACBA filed an amicus brief in this case arguing that the Benn decision merely determined that anticipated tax refunds were property of the bankruptcy estate and that Missouri’s opt-out statute did not create exemptions that did not otherwise exist under other state law. In finding that the opt-out statute did not create exemptions, the court in Benn stated: “The statute simply provides that where another Missouri statutespecifies that certain property is exempt from attachment and execution, then a debtor may exempt that property from the bankruptcy estate.” 491 F.3d at 814. Despite the fact that Benn did not deal with a common law exemption, the court inAbdul-Rahim found that Benn’s reference to a Missouri statute, defined a rule that exemptions under Missouri common law could not be used in bankruptcy.

  This decision flies in the face of well-established precedent that state law as determined by state legislature and courts, defines property rights in bankruptcy. As pointed out by NACBA in this case, Missouri courts have consistently held that unliquidated  personal injury claims are exempt property for purposes of 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 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).”

  Nonetheless, the Abdul-Rahim court felt that the language of Benn was controlling and 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.”

• Two New Cases Support Majority in Ch.20 Lien Stripping

  Posted by NCBRC - July 17th, 2013
  While the issue of lien stripping in no discharge chapter 13′s continues to work its way through the appellate courts, two bankruptcy courts have recently weighed in and sided with the majority, which permits lien stripping even when a discharge is unavailable.  The courts in In re Wapshare, 492 B.R. 211 (S.D. N.Y. 2013) and In re Dolinak, 2013 WL 3294277 (Bankr. D.N.H. June 28, 2013), both concluded that the lack of a discharge did no preclude lien avoidance of undersecured junior mortgages, but rather that permanent lien avoidance is conditioned upon completion of payments under the debtor’s confirmed plan.  Finding that the junior mortgagees did not have “allowed secured claims” both courts also rejected the argument that 1325(a)(5)(B) required debtors to pay in full the debt on the junior mortgage or obtain a discharge.
  
  

• Court Finds Ride-Through Not Available with respect to Real Property

  Posted by NCBRC - July 12, 2013

  In In re Jeanfreau, No. 13-50015 (Bankr. S.D. Miss. June 12, 2013), the mortgagee moved to compel compliance with section 521(a)(2), and to delay discharge of the debtor’s chapter 7 bankruptcy due to the debtor’s failure to reaffirm the mortgage on her home. Ms. Jeanfreau was current on her payments under the mortgage and had equity in the home. On her section 521(a)(2) “statement of intention,” she indicated that she intended to retain the property but did not elect to either “redeem” or “reaffirm” the debt. Instead she checked “other” and noted that she intended to maintain regular payments on the mortgage outside of bankruptcy without reaffirming.

  In finding that ride-through was not available to the debtor, the court relied on precedent set by the 1996 decision in Johnson v. Sun Finance Co. (In re Johnson),89 F.3d 249 (5th Cir.), which, in turn, agreed with Taylor v. AGE Federal Credit Union (In re Taylor), 3 F.3d 1512 (11th Cir. 1993). Both Johnson and Taylor involved debts secured by personal property. The Johnson court recognized that circuits were split on the issue of the availability of ride-through as a fourth option outside of those provided by section 521 (surrender, redeem or reaffirm). Accord In re Covel, 474 B.R. 702 (Bankr. W.D. Ark. 2012) (listing pre-BAPCPA circuit cases representing both sides of the issue). Many of those pre-BAPCPA decisions rested on interpretation of the phrase “if applicable” in section 521. See, e.g., McClellan Fed. Credit Union v. Parker (In re Parker), 139 F.3d 668 (9th Cir. 1998); Home Owners Funding Corp. of Am. v. Belanger (In Re Belanger), 962 F.2d 345, 347-49 (4th Cir.1992).  TheJohnson court, however, concluded that the mandatory language, “the debtor shall file with the clerk a statement of his intention,” in the pre-BAPCPA section 521 precluded the fourth, unwritten, option.

  The Jeanfreau court then turned to the impact of the BAPCPA amendments on theJohnson decision. Walking through some of the relevant new provisions, the court noted that section 521(a)(6) specifically provides that a debtor may not retain possession of personal property unless the debtor has selected one of the three options in section 521(a)(2)(A), and the hanging paragraph to section 521(a)(2)(B) provides that nothing in (A) or (B) alters the debtor’s rights except as provided for in section 362(h) which, in turn, provides that the automatic stay is terminated with respect to personal property in the event that the debtor fails to file a timely statement of intention as required by section 521. Based on these changes to the Code, courts have generally found that ride through is no longer available where a debt is secured by personal property. See, e.g., DaimlerChrysler Fin. Serv. Amer. v. Jones (In re Jones), 591 F.3d 308 (4th Cir. 2010); Dumont v. Ford Motor Credit Co. (In re Dumont), 581 F.3d 1107 (9th Cir. 2009); In re Harris, 421 B.R. 597 (Bankr. S.D. Ga. 2010) (BAPCPA clearly eliminated ride through for personal property); In re Linderman, 435 B.R. 715, 716-17 (Bankr. M.D. Fla. 2009).

  Despite the fact that the property at issue in Jeanfreau was real property rather than personal property, the court found that because the BAPCPA amendments did not change the mandatory language relied on in Johnson, they did not abrogate that court’s holding and did not eliminate the precedential mandate established by that case. See also In re Harris, 421 B.R. 597 (Bankr. S.D. Ga. 2010) (finding that BAPCPA clearly eliminated ride through for personal property and did not change the reasoning in Taylor which demands that ride through is also unavailable where real property is involved).

  Though, as found by the Jeanfreau court, the language of Johnson and Taylor may be broad enough to encompass real property, the fact that Congress specifically circumscribed only personal property, arguably supports a finding that ride-through is available where real property is concerned. In re Covel, 474 B.R. 702, 708 (Bankr. W.D. Ark. 2012) (“By not making corresponding changes concerning real property, Congress appears to tacitly recognize a ride through option for real property.”). See also In re Lopez, 440 B.R. 447, 448 (Bankr. E.D. Va. 2010) (denying debtor’s motion to approve reaffirmation agreement because it was not in debtor’s best interest and “Congress changed, but did not entirely eliminate, the ride-through provisions that existed before the 2005 amendments in the Bankruptcy Abuse Prevention and Consumer Protection Act. In re Donald, 343 B.R. 524 (Bankr.E.D.N.C.2006). It did not eliminate the ride-through for debts secured by real property. In re Waller, 394 B.R. 111 (Bankr.D.S.C.2008); In re Wilson, 372 B.R. 816 (Bankr.D.S.C.2007); In re Bennet, 2006 WL 1540842 (Bankr.M.D.N.C.2006).”); In re Caraballo, 386 B.R. 398, 402 (Bankr. D. Conn.2008).

  Ms. Jeanfreau filed a notice of appeal in this case on June 20. Where the bankruptcy court felt bound by precedent, it will be interesting to follow this case on appeal.

• Dewsnup Rears its Ugly Head in Seventh Circuit Chapter 13 Case

  Posted by NCBRC - July 9, 2013

  In Ryan v. U.S.A., No. 12-3398 (7th Cir. July 8, 2013), the IRS had a tax lien on debtor’s property as security for delinquent taxes of more than $136,000.00. At the time debtor filed his chapter 13 petition the value of his estate property totaled approximately $1,600.00. He moved the court to value the IRS’s lien under section 506(a), to treat the secured portion of the lien in the bankruptcy, and to strip the unsecured portion under section 506(d). The bankruptcy court agreed with the IRS that section 506(d) does not authorize a court to strip a wholly unsecured lien.

  The Seventh Circuit granted the debtor’s petition for direct appeal and affirmed.

  Section 506(a) provides that “’[a]n allowed claim . . is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property.” Section 506(d) provides that “[t]o the extent that lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.” Like many debtors, Ryan interpreted these provisions as creating a two-step process under which a lien is valued under section 506(a) and the unsecured portion stripped under section 506(d). Also, like many debtors, Ryan found himself pressed up against the brick wall put up by the Supreme Court in the case of Dewsnup v. Timms, 502 U.S. 410 (1992), where, in a cringe-worthy opinion, the Court found “that §§ 506(a) and 506(d) did not have to be read together, and that the term ‘allowed secured claim’ in § 506(d) was not defined by reference to § 506(a).” Ryan, at * 3.

  In Dewsnup the Court interpreted section 506(d)’s “allowed secured claim” as a claim which is first allowed, and second, secured within the meaning of state law rather than by the valuation performed under section 506(a). Dewsnup went on to find that section 506(d) does not permit a lien to be stripped down to its secured value in chapter 7. Courts have extended this finding to preclude strip-offs of wholly unsecured liens in chapter 7.  See Wachovia Mortgage v. Smoot, 478 B.R. 555 (E.D. N.Y. 2012) (joining majority of courts in finding that Dewsnup precludes strip off of wholly unsecured lien).

  Ryan attempted to distinguish Dewsnup as involving a chapter 7 bankruptcy while his case is in chapter 13. The court found, however, that section 103(a), which provides that chapter 5 applies equally to chapters 7 and 13 precluded that distinction and that section 506(d) cannot be interpreted differently in chapter 13 than it is in chapter 7 merely in an effort to maximize the underlying benefits of chapter 13 bankruptcy where there is no statutory language to support such an interpretation.

  This decision mirrors the recent conclusion by the Tenth Circuit in In re Woolsey, 696 F.3d 1266, 1273 (2012), in which that court rejected the debtor’s attempt to strip a lien under the authority of section 506(d) finding that the mechanism for stripping must be found elsewhere in the Code, such as in section 1322(b). See also Brinson v. U.S.A., 485 B.R. 890 (Bankr. N.D. Ill. 2013) (chapter 13 debtor cannot strip unsecured lien based solely upon section 506(d)); Cusato v. Springleaf Financial, 485 B.R. 824 (Bankr. E.D. Pa. 2013) (506(d) does not provide necessary mechanism for strip-off of wholly unsecured lien in chapter 13). But see National Capital Management v. Gammage-Lewis, No. 12-2286 (4th Cir. June 6, 2013) (finding that Rule 7001(2) provides the mechanism for stripping off a disallowed claim under section 506(d)).
  The Ryan court concluded that “We agree with Woolsey, and join it in holding that the Court’s interpretation of § 506(d) in Dewsnup applies in Chapter 13 cases as well.”

  Court Erroneously Applies Lanning to Find Presumption of Abuse in Chapter 7

  Posted by NCBRC - July 4, 2013

  The district court for the Eastern District of North Carolina was asked to revisit its previous decision that a chapter 7 debtor may take secured payment deductions on property he intends to surrender. Krawczyk v. Lynch (In re Krawczyk), No. 12-643 (E.D. N.C. June 17, 2013). The bankruptcy court had concluded that intervening Supreme Court and Fourth Circuit decisions rendered that finding incorrect. In re Krawczyk, No. 11-0956-8-JRL, 2012 WL 3069437 * 5 (Bankr. E.D. N.C. July 27, 2012) (relying on Hamilton v. Lanning, 130 S. Ct. 2464 (2010); Ransom v. FIA Card Services, 131 S.Ct. 716, 178 L.Ed.2d 603 (2011); In re Quigley, 673 F.3d 269 (4th Cir. 2012)). The district court agreed that the debtor could not take the deductions and that, therefore, the petition was presumptively abusive under section 707(b)(2)(A).

  The court began with a look at section 707(b)(2)(A) which provides that a chapter 7 petition is presumptively abusive when calculation of the means test reveals current monthly income in excess of a statutory minimum. Under the means test, calculation of current monthly income permits a deduction for ‘[t]he debtor’s average monthly payments on account of secured debts,’ which ‘shall be calculated as . . . the total of all amounts scheduled as contractually due to secured creditors in each month of the 60 months following the date of the filing of the petition. . . . divided by 60.’ 11 U.S.C. § 707(b)(2)(A)(iii).” In this case, when the debtor calculated his income with the deduction for his secured debts his petition did not trigger the presumptive abuse provision.

  Nonetheless, the court agreed with the trustee’s position, finding that under Lanning,Ransom and Quigley, the debtor’s intent to surrender collateral altered the means test calculation of current monthly income. It rejected the debtor’s argument distinguishing those cases on the basis that they concern chapter 13, finding that, because the means test is the basis for the calculation whether the bankruptcy is chapter 7 or chapter 13, the reasoning is identical in either situation.

  In so holding,the court performed various contortions beginning with a strained reading of the section quoted above that allows certain deductions in the monthly income calculation. The court first examined the word “scheduled” finding that it is amenable to two plausible interpretations: 1) specified to be paid under the terms of the security agreement, or 2) scheduled as expenses in the debtor’s bankruptcy schedules. If the proper meaning is the latter, the court reasoned, a debtor who has not made payments on the loan and does not intend to in the future, will not schedule the expense on the bankruptcy Schedule J and may not take the deduction. The court next found ambiguity in the phrase “on account of secured debts.” The court found this phrase susceptible to meaning: 1) on account of debts created with a security interest but subject to change – the “snapshot” view, or 2) on account of debts which will continue to be secured during the bankruptcy – the “forward-looking” view.

  Having found ambiguity, the court went on to resolve the issue by reference to In re Quigley, 673 F.3d 269 (4th Cir. 2012), where the circuit court applied a forward-looking approach to decide that a chapter 13 debtor could not calculate projected disposable income with a deduction for secured payments on property he intended to surrender. The Quigley opinion was supported by Hamilton v. Lanning, 130 S. Ct. 2464 (2010) (projected disposable income calculation may take into account changes that are virtually certain to occur), and Ransom v. FIA Card Services, N.A., 131 S.Ct. 716 (2011) (debtor may not take expense deduction for payments on surrendered vehicle).

  It was in the interpretation of the lessons of Lanning, Ransom and Quigley, all three of which dealt with chapter 13 plans, that the district court went off course. The means test is an objective first step in the bankruptcy process based on the state of debtor’s financial affairs as of the petition date. See In re Rivers, 466 B.R. 558 (Bankr. M.D. Fla. 2012) (citing Ransom). “[A] plain, ordinary reading of the subsection supports the bankruptcy court’s finding that it applies to payments that the debtor is under contract to make.” Lynch v. Haenke (In re Lynch), 395 B.R. 346, 349 (E.D. N.C. 2008). A finding based on the means test that the petition is not presumptively abusive under section 707(b)(2) does not preclude a finding of bad faith, however. Section 707(b)(3) permits a court to inquire into the good faith of the petitioner based on the totality of the circumstances, “including debtor’s income and expenses after the filing of the petition.” Id. at 560. Therefore, it is neither necessary nor appropriate to manipulate the outcome of the means test to account for the intended surrender of collateral.

  This reasoning finds support in the very cases the court in Krawczyk relied on for the opposite proposition. Unlike the court here, the Lanning Court did not recalculate “current monthly income” as determined by the means test. Rather, the Lanning Court decided that “projected disposable income” would not be based on that calculation alone when changes to current monthly income were known or virtually certain to occur. The Lanning Court did not have to perform the same sleight of hand with respect to the language of section 707(b)(2)(A)(iii) because that Court did not require recalculation of current monthly income for its ultimate decision. Specifically, Lanninganswered the question of whether the “projected disposable income” calculation—a calculation that does not come into play in chapter 7—always had to be based on the current monthly income in the means test, or whether it could take into account changes to the means test calculation that were “virtually certain” to occur. Notably, the Lanning Court did not find that anticipated changes to income altered the means test calculation of current monthly income.

  The issue is also not answered by Ransom where the Court examined a different provision of the means test relating to deduction of vehicle ownership costs for a car that was fully paid off. Calculation of that deduction is explicitly dependent upon IRS Standards which define the deduction in such a way that it covers only expenses related to a car loan or lease. Since the debtor had neither, the ownership deduction was deemed inapplicable within the meaning of the means test. The Court noted that the means test provided for a separate deduction based on operating expenses which was not dependent on the existence of debt.

  The means test is a “snapshot” of the debtor’s financial situation at the time of filing. Therefore, a debtor’s intent to surrender does not come into play at that juncture. This finding is harmonious with the recent Supreme Court decisions in Lanning andRansom, and obviates the need for strained reading of section 707, without precluding a later finding of abuse if the totality of circumstances warrants such a finding.

  
  

Case law updates from NACBA

Creditor Must Return Repossessed Vehicle upon Bankruptcy Filing

The Second Circuit upheld sanctions against vehicle loan creditor, SEFCU, for refusing to return debtor’s repossessed vehicle without a court order and adequate protection.Weber v. SEFCU, No. 12-1632 (May 8, 2013). SEFCU had lawfully repossessed the debtor’s pick-up truck pursuant to the loan agreement but when the debtor filed for bankruptcy SEFCU refused to return the car. The bankruptcy court determined that SEFCU’s actions did not violate the automatic stay. The district court reversed. Weber v. SEFCU, 477 B.R. 308 (N.D.N.Y. 2012).

On appeal, the Second Circuit walked through the relevant statutory provisions beginning with section 541(a)(1) which provides that upon the filing of the petition, the bankruptcy estate consists of “all [debtor’s] legal or equitable interests in property.” Under New York law, a debtor retains an equitable interest in repossessed property due to his right to redeem, and “under United States v. Whiting Pools, Inc., 462 U.S. 198 (1983), the filing of Weber’s bankruptcy petition transformed the equitable interest into a possessory interest held by Weber’s estate.” Section 542’s mandatory turnover obligation, in conjunction with section 1306(b)’s provision that the debtor retains possession of chapter 13 estate property, required SEFCU to return the vehicle to the debtor without further action.

The court rejected SEFCU’s argument that it did not “exercise control” over the vehicle in violation of section 362. In so holding, the court found that Manufacturers & Traders Trust Co. v. Alberto (In re Alberto), 271 B.R. 223 (N.D. N.Y. 2001), which held that the repossessed property did not become part of the estate until such affirmative step was taken, was erroneously decided. Additionally, SEFCU’s reliance on Alberto did not make its actions any less “willful” within the meaning of section 362. Willfulness requires only knowledge of the bankruptcy and intentional actions that amount to an unlawful exercise of control.

NCBRC filed an amicus brief on behalf of NACBA.

Inherited IRA Exemption Issue Unsettled by Seventh Circuit

In a departure from the majority of courts, the Seventh Circuit found that debtors cannot exempt inherited IRAs. In re Clark, No. 12-1241 & 12-1255 (April 23, 2013). Section 522(b)(3)(C) permits debtors to exempt“[r]etirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.” In Clark, the debtor’s mother had an IRA which, upon her death, was transferred to the debtor into one of the tax exempt accounts specified by the Code. As the Fifth Circuit, the BAPs for the Eighth and Ninth Circuits, and many lower courts have found, such accounts may be exempted in bankruptcy. See, e.g., Chilton v. Moser, 674 F.3d 486 (5th Cir. 2012); Mullen v. Hamlin, 465 B.R 863 (B.A.P. 9th Cir. 2012); Doeling v. Nessa, 426 B.R. 312 (B.A.P. 8th Cir. 2010).

The Seventh Circuit, however, found otherwise. The court’s decision turned on its interpretation of “retirement funds” which it found were no longer “retirement” once they transferred to the debtor’s account. In so holding, the court noted that the debtor did not contribute the funds in contemplation of retirement and that inherited IRAs receive different treatment under the Tax Code. The court expressed its distaste for the outcome that would have resulted from permitting the exemption, saying: “To treat this account as exempt under § 522(b)(3)(C) would be to shelter from creditors a pot of money that can be freely used for current consumption.”

NCBRC filed an amicus brief in this case on behalf of the NACBA membership arguing that the plain language of the Code sets forth only two requirements for the exemption to apply: 1) that the funds in the account represent retirement funds when contributed, and 2) that upon the death of the owner the funds be transferred to a tax exempt account specified in the exemption statute. The majority of appellate courts have agreed with this analysis.

On May 6, 2013, the debtor filed a petition for rehearing en banc.

Fourth Circuit Permits Chapter 20 Lien Strip

The Fourth Circuit is the first circuit court to find that a debtor may strip a wholly unsecured lien in chapter 13 where no discharge is available. In re Davis, No. 12-1184 (May 10, 2013).

Applying the standards applicable in any chapter 13 bankruptcy, both the bankruptcy and district courts held that strip-off was appropriate. The Fourth Circuit agreed finding that the unavailability of discharge does not alter the analysis used when considering whether the debtor is entitled to a lien strip and that, where a lien is deemed valueless under section 506, it may be stripped through the mechanism provided by section 1322(b). Section 1325(a)(5), which provides that a lien survives until it is either paid in full or the debtor is discharged, does not alter this analysis because that section applies only to allowed secured claims, and wholly unsecured liens are not “secured.” The court found that the strip-off becomes permanent upon completion of the plan.

One judge dissented on the grounds that the definition of “allowed secured claim” in section 1325(a)(5), applies to liens that are valueless under section 506(a), and, further, that allowing strip-off in chapter 20 treats the secured creditor less favorably than unsecured creditors. However, as noted by the majority, the difference in treatment between secured and unsecured creditors is a function of the different treatment of in rem and in personam claims in bankruptcy and is, therefore, incidental to the question of lien stripping in chapter 20.

This issue is currently under consideration in the Ninth, Litton Loan v. Blendheim, No. 13-35354, and Eleventh Circuits, Wells Fargo v. Scantling, No. 13-10558, where the lower courts each found that the lien strip was not contingent on the availability of discharge. While NACBA did not participate in this case, NACBA has been involved in this issue at the lower court levels raising the same arguments that were relied on by the Fourth Circuit.See, e.g., In re Fair, No. 10-1128 (E.D. Wisc. April 19, 2011).

Ninth Circuit Denies Petition for Rehearing en Banc

The Ninth Circuit has denied the trustee’s request for en banc rehearing in In re Welsh, No. 12-60009 (9th Cir.). On March 25, 2013, the court affirmed the district court’s finding that social security income may not be considered in PDI nor may a court assess the necessity of items securing debts for which payments have been deducted from PDI. The trustee sought a rehearing on April 8, and the court denied the petition on May 13, 2013. With respect to the decision on the merits of the appeal NCBRC filed an amicus brief on behalf of NACBA.

Argued

In re Schieffer, No. 12-1974 (C.D. Cal.)

Issue: Whether court erred in dismissing chapter 13 case after it granted Wells Fargo's motion for loan modification but the trustee never sought plan modification and debtor defaulted on modified mortgage but was compliant with unmodified plan terms.

Argument date: April 15, 2013

NCBRC assisted with the debtor’s brief.

To make a request for assistance from the amicus committee contact Lisa Sharon at amicus.admin@nacba.org.

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)