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).

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)

Student Loan may not be pursued where lender's Proof of Claim was disallowed by the Bankruptcy Court.

Hann v. Educational Credit Management Corporation (BAP 1st Cir. August 7, 2012)( Before Judges Hillman, Feeney and Hoffman, Opinion by Hoffman).*

This is a First Circuit Bankruptcy Appellate decision handed down on August 7, 2012.  I do not have the case citation yet, but the decision will be published and is available on the BAP web site.
See link below:

Click here: US Bankruptcy Appellate Panel for the First Circuit

The Chapter 13 debtor averred she paid her loan in full, pre-petition. Thus, she objected to the lender's proof of claim filed in the chapter 13 bankruptcy case. The Bankruptcy Court set a hearing for the debtor's objection to the lender's proof of claim, which the lender did not attend. The Bankruptcy Court sustained the debtor's objection to claim and fixed the amount at $zero.

The debtor successfully completed her Chapter 13 plan and received a discharge of debts (an order of discharge).  Thereafter the Chapter 13 case closed, the lender tried to collect the student loan, post-discharge, taking the position that the alleged balance due was not discharged, as student loans are non-dischargeable. Lender argued that while they were not paid under the debtor's Chapter 13 plan, they could still pursue the debt, post-discharge.

Hann reopened her bankruptcy case to sue the lender for attempting to collect a discharged debt, including counts for damages and attorney fees. Lender unsuccessfully argued that the Chapter 13 disallowance of the lender's claim did not extinguish a non-dischargeable debt and thus did not collaterally estop subsequent collection of the debt.

Lender unsuccessfully argued that in addition to disallowance of the claim in the bankruptcy case, that the debtor should have filed an adversary proceeding to determine the debt to be non-dischargeable.  The debtor's position was, why would she file suit on a debt that was zero?

The Bankruptcy Court found for the debtor and also awarded the debtor her legal costs and fees as sanction against the lender for violating the discharge injunction.

Lender appealed.

The BAP held that the claims allowance process in the bankruptcy case was to determine the amount and validity of debt. The BAP disagreed with the lender's position that in context of claims allowance, the bankruptcy court determines only what the estate will pay and cannot bind creditors post-discharge. The bankruptcy court's order disallowing a claim is a final order and to be given preclusive effect.

BAP AFFIRMED the Bankruptcy Court.

* Colleague Richard Gaudreau represented the debtor, and was aided by Mary Stewart, Mark Cornell and Peter Wright in the preparation for oral argument - kudos!

Student Loans and Bankruptcy

Student loan are normally not discharged in bankruptcy. 

There is a "hardship" exception which requires that the debtor (the person who has filed for bankruptcy) file an adversary proceeding (lawsuit) against the student lender to determine if the hardship applies, which is very difficult and in the majority of these type of "hardship" challenges do not succeed.  However, one commentator has estimated that 40% do succeed, so it may be worth consideration.

However, if you do not qualify for the "hardship" exception, and you are struggling with the massive student-loan debt and monthly payments larger than your disposable income, you may wish to consider a chapter 13 bankruptcy plan.  It won't discharge your student debt, but it will give you up to five years breathing space with a fixed monthly payment through the Chapter 13 plan based on what you may be able to afford to pay.