Case Law News from NACBA and their important work through Amicus Briefs in Consumer Bankruptcy Cases

Amicus Project Update

November, 2013

Inherited IRA's to be decided:

Cert. Granted

The Supreme Court has granted certiorari in the case of Clark v. Rameker (In re Clark), No. 13-299. In that case, the Seventh Circuit created a split in the circuits when it held that a debtor may not exempt her inherited IRA in bankruptcy. In re Clark, No. 12-1241 & 12-1255 (April 23, 2013). The Fifth Circuit had reached the opposite conclusion in Chilton v. Moser, 674 F.3d 486 (5th Cir. 2012). NCBRC will file an amicus brief on behalf of the NACBA membership in this important case.

Fees upon frivolous appeal sought:

Debtor Moves for Fees on Frivolous Appeal. The debtor in In re Murray, No. 13-34 (B.A.P. 10th Cir.), has moved for fees and costs against the trustee for filing a frivolous appeal. The case involves the question of the constitutionality of Kansas’s bankruptcy specific exemption—an issue upon which the trustee has consistently lost in the bankruptcy court, In re Westby, 473 B.R. 392 (Bankr. D. Kan. 2012), the district court, In re Lea, 2013 W.L. 4431267 (D. Kan. 2013), and the BAP, In re Westby, 486 B.R. 509 (B.A.P. 10th Cir. 2013).Although the trustee filed an appeal of the Westby case to the Tenth Circuit, she later dismissed it, Williamson v. Westby (In re Westby), Case No. 13-3044 (10th Cir. 3/29/13), and, instead, sought another bite at the apple in the BAP with Murray. The trustee’s likelihood of success at the circuit level was further diminished when the Sixth Circuit upheld the constitutionality of state bankruptcy specific exemptions in In Re Schafer, 689 F.3d 601 (6th Cir. 2012), cert. den. sub nom. Richardson v. Schafer, 133 S. Ct. 1244 (2013). In the meantime, as a result of the trustee’s decision to pick away at individual cases in the lower courts rather than seek decisive resolution in the Circuit Court, some debtors have been forced, for financial reasons, to settle the issue at the outset thereby losing the benefit of the exemption. NCBRC was involved in Schafer and has been involved in a number of the cases coming out of the Kansas court on this issue, filing amicus briefs and assisting with debtor’s briefs.

Carving out an equity exception to the debtor's fully encumbered homestead:

Fourth Circuit Allows Trustee/IRS Carve-Out Agreement In an unpublished, per curiam, opinion the Fourth Circuit found that the trustee could sell the debtors’ fully encumbered homestead despite the fact that the debtors were entitled to an exemption for the property. In re Reeves, No. 12-2127 (Nov. 20, 2013). The debtors’ residence was fully encumbered by a first mortgage lien and a tax lien. Under North Carolina law, the debtors claimed an exemption in their homestead in the amount of $60,000.00. The trustee objected to the exemption on the basis that the debtors had no equity in the property. After the bankruptcy court overruled the objection, the trustee moved to sell the property explaining that the IRS had agreed to “carve out” a portion of its share of the proceeds to benefit the bankruptcy estate. The debtors objected to the sale arguing that allowance of the exemption effectively removed the property from the estate. The bankruptcy court disagreed finding that the exemption was as to the debtors’ “interest” in the property rather than in the property itself. The district court affirmed. On appeal, the Fourth Circuit relied on Schwab v. Reilly, 130 S. Ct. 2652, 2661-63 (2010) for the distinction between an “asset” and the “interest” in that asset, finding that the exemption applied only to the latter and did not result in removal of the entire asset from the bankruptcy estate. The court went on to reject the debtors’ argument, which was more fully elucidated in NACBA’s amicus brief, that where an asset is fully encumbered the trustee must abandon it and a side agreement with a creditor to circumvent that rule is not a legitimate exercise of the trustee’s power. In a short discussion notable for its lack of in-depth analysis, the court found simply that the agreement between the IRS and the trustee “assigned equity” to the asset for the benefit of the estate. As an unpublished opinion this decision is not precedential.

Extent of Lien Avoidance Posers:

Argued: In re Traverse, No. 13-9002 (1st Cir.) Issue: Whether upon avoidance of a lien the trustee gains the debtor’s power to sell the property for which the debtor has claimed a homestead exemption, or whether the trustee’s powers are limited to what the lienholder could have done. Argument date: October 10, 2013. NCBRC filed an amicus brief on behalf of the NACBA membership.

Surcharging Homestead Exemption:

Set for Argument:

Law v. Seigel, No. 12-5196 (U.S.S.Ct.) Issue: Whether the debtor’s homestead exemption may be surcharged as a result of the debtor’s failure to comply with discovery. Argument date: January 13, 2014. NCBRC filed an amicus brief on behalf of the NACBA membership.

Federal District Court and Bankruptcy

Surprisingly, you may encounter many bankruptcy issues at the Federal District Court Level.

First, when a litigant determines to take an appeal from an order of the Bankruptcy Court, they have the option to appeal to the Federal District Court or the Bankruptcy Appellate Panel for the First Circuit. 

If you take your appeal to the District Court, the case will be assigned to one District Court Judge to hear and determine the appeal.  If you choose to appeal to the Bankruptcy Appellate Panel, your appeal will be determined by a panel of three bankruptcy judges from the First Circuit, and the judge who decided your case may not participate in that particular panel.

Strategically, there are many reasons why one would choose the Bankruptcy Appellate Panel over the District Court, or vice versa,  to hear and determine an appeal.

Secondly, where challenges to the debtor's discharge of debt are normally adjudicated by the Bankruptcy Court (under the standing order of reference), the District Court may hear them as well in certain circumstances.  For example, the Internal Revenue in foreclosing a federal tax lien on real property would file its complaint at the District Court, and may in that ligation challenge the debtor's discharge under 11 U.S.C. Section 523(a)(1)(C) for alleged, willful tax evasion.  That particular piece of litigation for a bankruptcy debtor is a "double whammy" i.e. the IRS is foreclosing a federal tax lien to take the home, and then is alleging that the taxes that would otherwise have been discharged are not discharged by the discharge order entered in the bankruptcy case.

Bankruptcy Appeals

SUMMARY:

The path of a bankruptcy appeal is as follows:

(1) Bankruptcy Court renders a final decision; 

(2) Appeal from the Bankruptcy Court decision is filed before either the Federal District Court or Bankruptcy Appellate Panel ("BAP")(appellant, meaning the person filing the appeal, can elect to have either the BAP or Federal District Court hear the appeal);

(3) Then, appeal from either the BAP or Federal District Court decision is filed before the Circuit Court of Appeals in your geographic area; and

(4) Finally, appeal from the decision of the Circuit Court of Appeals is filed with the Supreme Court of the United States.

MORE DETAIL:

Step One: Obtain a decision from the Bankruptcy. 

Step Two:  If you are considering appealing a final decision from the Bankruptcy Courts,  it can be a time consuming and expensive process. From the Bankruptcy Court, you would appeal to the Federal District Court in your District or the Bankruptcy Appellate Panel ("BAP").   The appellant, meaning the one appealing the Bankruptcy Court's decision, has the choice of electing to file his/her appeal before either the Federal District Court or the BAP.  If your bankruptcy appeal is heard before the Federal District Court, it will be decided by one Federal District Court judge.  If your bankruptcy appeal is heard by the BAP, it will be decided by a panel of three Bankruptcy Judges.  The Bankruptcy Judge who originally made the decision that triggered the appellate route cannot be one of the three judges on the BAP hearing your appeal.  From my experience, this first level of appeal is usually as far as most bankruptcy appeals are taken.

Step Three:  From there, the next level of appeal would be filed with the Court of Appeals for your Circuit.  There are a total of thirteen (13) Federal Circuit Courts of Appeal. The Country is divided into twelve (12) regional areas for appeals from cases in the federal system (the first 11 Circuit Courts of Appeal cover multiple districts, the 12th or D.C. Circuit Court of appeals covers only cases in the Washington, D.C. area). The 13th or Federal Circuit Court of Appeals is a little different.  The Federal Circuit Court was created in 1982 by merging the United States Court of Customs and Patent Appeals with the appellate division of the United States Court of Claims, and it has nationwide jurisdiction to hear appeals within those few subject matter areas.  Below is a map of the areas the Circuit Courts of Appeal covers. 

For example, the Court of Appeals for the First Circuit, where I practice, covers the geographic areas of Massachusetts, Rhode Island, Maine, New Hampshire and Puerto Rico.

Click here: Court Locator

Step Four:  Appeals from Circuit Court of Appeals are filed with the Supreme Court of the United States.  Generally, the First Circuit is the last stop for most appeals.  The Supreme Court of the United States ruled on only four major bankruptcy decisions in 2010 (Please see my blog dated January 6, 2011 summarizing those Supreme Court cases) so it is unlikely that the Supreme Court would choose to hear your bankruptcy appeal. But, you never know.

Educating:  Each week, as part of a national educational project with the Bankruptcy Section of the Federal Bar Association, each Circuit has a "Circuit Summary Writer" who summarizes the cases in his or her Circuit and then these case summaries are circulated to the members.  I am the Summary Writer for the First Circuit.

Below are the cases I posted this week:

Aja v. Fitzgerald, 2011 Bankr. Lexis 138 (BAP 1^st Cir. 1/19/11)(Before Judges Votolato, Lamoutte and Tester, Opinion by Bankruptcy Judge Votolato).

Appeal dismissed as moot.  Appellant filed a Chapter 11 case, which the US Trustee successfully moved to convert to Chapter 7 (on grounds the debtor did not have liability insurance on her property), which conversion hearing the debtor did not appear claiming no notice.  The debtor requested reconsideration, which the Bankruptcy Court denied.  The debtor unsuccessfully appealed:  Although debtor appealed the denial of reconsideration, it did not appeal the conversion order nor seek a stay pending appeal; and, at the time the appeal was heard the Chapter 7 case had been substantially completed.  Substantively, the record did not support the debtor’s position, with the BAP admonishing the pro se debtor to avoid sanctions by not continuing meritless litigation.  Companion case of  Aja v. Emigrant Bank, 2011 Bankr. Lexis 131 (BAP 1^st Cir. 1/19/11)(Before Judges Votolato, Lamoutte and Tester, Opinion by Bankruptcy Judge Votolato)(Court also dismissed debtor’s challenge to stay relief orders, as only the Chapter 7 trustee, and not the debtor, had standing to take any appeal).

Frati v. Gennaco, 2011 U.S. Dist. Lexis 6563 (D. Mass. 1/25/11)(Patti B. Saris, District Judge).

District Court affirmed Bankruptcy Court’s dismissal of plaintiff’s non-dischargeability complaint against the debtor as untimely under Fed. R. Bankr. P 4004(a). Case converted from Chapter 11 to 7; notices in the Chapter 7 case set forth the date to file non-dischargeability complaints which notice plaintiff’s counsel did receive.  The Chapter 7 Trustee had continued for a second time the 341(a) meeting, awaiting documents from the debtor.  At that meeting, the Trustee advised creditors he would be filing a motion to extent the discharge deadline, and the creditors in question relied on that.  However, the Trustee moved pursuant to 4004(b) to cover the Trustee and did not reference 4004(a) to cover other creditors.   Where a motion is unambiguous, it applies only to the moving party.  Although the Supreme Court has held that Rule 4004(a) is not jurisdictional, it is strictly construed (but the Circuits are split as to whether the Rule allows equitable exceptions).

Massillion v. Riley, 2011 Bankr. Lexis 83 (BAP 1^st  Cir. 1/11/11)(Before Judges Votolato, Lamoutte and Tester, Opinion by Bankruptcy Judge Lamoutte).

BAP reversed and remanded to be consistent with the legal position that (1)The corpus of a valid testamentary spendthrift trust is excluded as property of the bankruptcy estate, (2) The distributions from the trust to the debtor received by the debtor in the first 180 days of the bankruptcy case are property of the estate per 11 U.S.C. §541(a)(5)(A); and, (3) Distributions received after 180 days from date of petition filing are not property of the estate. 

Banco Popular v. Torres (In re Torres), 2011 Bankr. Lexis 130 (BAP 1^st Cir. 1/19/11)[not for publication](Before Judges Kornreich, Hillman and Bailey, Opinion by Bankruptcy Judge Bailey).

BAP vacated and remanded Bankruptcy Court’s finding that a portion of the secured creditor’s claim be disallowed, as it was based on grounds not articulated in the debtor’s objection such that the creditor had no opportunity to be heard on the basis for disallowance.  The argument centered upon the debtor’s objection to paying the lender’s costs and fees to file a POC on a mortgage that was current pre and post-petition.

In re Seger, Chapter 13 Debtors Case 10-42776-MSH, (Bankr. D. Mass. 1/24/11)(Melvin S. Hoffman Bankruptcy Judge)[unreported].

Court denied Chapter 13 Trustee’s motion to dismiss debtor’s case for “non-compliance”.  Debtors maintained funds from their business, a dance school, in an FDIC insured account, which was not on the Trustee’s approved list of financial institutions.  Court found there is no obligation for the debtor to maintain their operating accounts exclusively in US Trustee approved depositories.  Here, the debtor wanted a bank closer to home with banking fees lower than the Trustee approved institution.  11 U.S.C. §345 does not apply to Chapter 13 debtors, even though applicable to Chapter 7 trustees and Chapter 11 trustees or DIP’s.

                   
PATRICIA S. GARDNER, ESQ.
THE GARDNER LAW FIRM

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