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.

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.

Social Security Income is not included in Chapter 13 Plan (great news from NACBA)

  The National Consumer Bankruptcy Rights Center (NCBRC), NACBA’s 501(c)(3) offshoot, scored an important win in the Ninth Circuit yesterday.  In, In re Welsh, 2013 U.S. App. LEXIS 5880 (9th Cir. 2013), that court of appeals joined the Fifth and Tenth Circuits in holding that it was not bad faith for a debtor to decline to devote social security income to paying unsecured creditors in a chapter 13 plan.  The court rejected the trustee’s argument that this allowed the debtor to have money left over that could be used to pay creditors, stating that:

Congress chose to remove from the bankruptcy court's discretion the determination of what is or is not "reasonably necessary.” It substituted a calculation that allows debtors to deduct payments on secured debts in determining disposable income. That policy choice may seem unpalatable either to some judges or to unsecured creditors. Nevertheless, that is the explicit choice that Congress has made. We are not at liberty to overrule that choice.

In fact, the court followed the Eighth Circuit in holding that the issue of how much creditors are paid should not even be a part of the good faith analysis, now that Congress has adopted the disposable income test.

            Equally as important, the court rejected the trustee’s argument that the debtors should not be permitted to continue to pay for “luxury” secured debts (on two ATVs and an Airstream trailer) “at the expense” of their unsecured creditors. Again, the court found that the statutory language is clear:

The calculation of "disposable income" under the BAPCPA requires debtors to subtract their payments to secured creditors from their current monthly income. In enacting the BAPCPA, Congress did not see fit to limit or qualify the kinds of secured payments that are subtracted from current monthly income to reach a disposable income figure. Given the very detailed means test that Congress adopted, we cannot conclude that this omission was the result of oversight. Moreover, even if it were, we would not be justified in imposing such a limitation under "the guise of interpreting 'good faith.’”

click here for the full text of the Welsh Opinion 

from the web site of the 9th Cirucit Court of Appeals:

Click here: http://cdn.ca9.uscourts.gov/datastore/opinions/2013/03/25/12-60009%20web%20revised.pdf

The brief for NCBRC was written by Geoff Walsh of the National Consumer Law Center.

Henry Sommer, NACBA President Emeritus; Chair, Amicus Committee.

Social Security Income is not included when calculating projected disposable income on a bankruptcy petition & plan.

NH Caselaw: Social Security income may properly be excluded from determining your projected disposable income when filing a bankruptcy petition and plan. See  In re Teixeira, 2006 BNH 049, p.4 footnote 4 (Bankr. D.N.H. 2006)(Vaughn)(social security and child support payments not included in projected disposable income).  See also 11 U.S.C. Section 101(10A).  Thus, I would disclose the existence of social security income on SOFA (statement of financial affairs) but would not necessarily include it in the disposable income calculations if not needed to fund a plan. click here to read the case: Click here: http://www.nhb.uscourts.gov/Opinions/Judge_Vaughn/2006BNH049-Teixeira.pdf As reported by NACBA: Social Security Income Not Included in Projected Disposable Income Tenth Circuit found that social security income is not included in the calculation of projected disposable income and that its exclusion cannot support a finding of bad faith. Anderson v. Cranmer (In re Cranmer), No. 12-4002 (10th Cir. Oct. 24, 2012). The trustee argued that while social security income is not included in disposable income under section 101(10A)(B) it should be included in the calculation of “projected disposable income” under section 1325(b). The court disagreed, reasoning that “[t]he mere placement of the adjective ‘projected’ in front of the words ‘disposable income’ does not imbue the term ‘disposable income’ with different substantive components.” The court noted that the exclusion of social security benefits from the grasp of creditors in bankruptcy is supported by similar protections included in the Social Security Act. The court also dispensed with the trustee’s attempt to align this case with Hamilton v. Lanning, 130 S.Ct. 2464 (2010), stating that there was no change in the debtor’s income by reason of the exclusion of social security benefits. In fact, the court found thatLanning reconfirms the rule that disposable income is the starting point for calculating projected disposable income. Finally, the court stated the rule that “[w]hen a Chapter 13 debtor calculates his repayment plan payments exactly as the Bankruptcy Code and Social Security Act allow him to, and thereby excludes SSI, that exclusion cannot constitute a lack of good faith.” NACBA submitted an amicus brief by Geoff Walsh and the opinion of the court largely tracks NACBA’s arguments. This issue is pending in the Fourth, Fifth and Ninth Circuits as well. See In re Ranta, No. 12-2017 (4th Cir.); Beaulieu v. Ragos (In re Ragos), No. 11-31046 (5th Cir.); Drummond v. Welsh (In re Welsh), No. 12-60009 (9th Cir.). NACBA filed amicus briefs in those cases. click here to read the case: Click here: http://www.ca10.uscourts.gov/opinions/12/12-4002.pdf