Thursday, June 26, 2014

9th Circuit - Impositions of Sanctions by Bankruptcy Court - Affirmed - Failure to Transfer Real Property Located in Mexico (Published - 2014)

Contempt sanctions were issued by the bankruptcy court against a defendant for failing to a Mexican Villa to the Plaintiff.  Although the case just came down and I have not adequately reviewed, of interesting point is the reiteration that the Bankruptcy Court can issue contempt proceedings provide that notice is given and a statement of the burden.  Also, the Court examined the ability of the Debtor to actually comply with the order in light of Mexican Law.  Once again, the parties need to always examine who has the burden....

Once an alleged contemnor’s noncompliance with a court order is established, the burden shifts to the alleged contemnor to “produce[] sufficient evidence of [its] inability
comply to raise a question of fact.” United States v. Rylander, 656 F.2d 1313, 1318 (9th Cir. 1981), rev'd on other grounds, 460 U.S. 752 (1983). If the alleged contemnor does
not raise a question of fact through affidavits, and does not seek the opportunity to present its defense through live testimony, a court does not violate that party’s due process rights by holding it in contempt solely based on affidavits. 
See Thomas, Head, 95 F.3d at 1458

Attorney Fees Incurred by the Debtor in a Divorce Proceeding (simply a debt owed to the attorney) Discharged Because Former Counsel Could Not Meet its Burden (1st Circuit 2014)

Debtor, pre-petition, retained an attorney to proceed in a contentious divorce proceeding.  Counsel was paid an initial $25,000.00 retainer but billed over $60,000.00.  Due to the debt and other circumstances, the client filed bankruptcy.  Former Counsel sued the Client seeking a determination that the debt was not discharged based upon 523(A)(2)(a).  (i.e. the debt was incurred under false pretenses...perhaps a promise to pay)  Former Counsel lost at a bench trial, appealed the case to the BAP, lost and then filed an appeal the 1st Circuit.  The 1st Circuit affirmed.  The Court determined that the Counsel did not prove its case with a preponderance of the evidence.  It seemed like the Debtor was a bad apple and lacked candor but the Court stated:

The attorney argues pejoratively that the debtor

was shown to be a liar and that the debtor's "dishonest and

untrustworthy" testimony undermines the bankruptcy court's

factfinding. This argument is wide of the mark. The bankruptcy

court did not rest its decision on any illusions about the debtor's

veracity. To the contrary, the bankruptcy court found much of her

testimony to be self-serving and not deserving of credence. See

deBenedictis, 2013 WL 1342479, at *2.

Taking this lack of veracity into account, however, it

proceeded to find that the attorney's proof was not preponderant.

See id. at *7-8. We are not aware of any rule that mandates a

finding of nondischargeability against a party simply because her

testimony lacks candor. Although we do not countenance untruthful

testimony, a finding of nondischargeability requires more than a

showing that the debtor exhibited a serious character flaw. The

attorney, who had the burden of proof, made no such additional

showing here

IN RE KAREN A. BRADY-ZELL 1st Circuit 2014

Wednesday, June 25, 2014

A Nice Review of the FDCPA and 12(b)(6) Motions to Dismiss - Nevada 2014

Plaintiff filed a complaint alleging that the Defendant filed suit based upon a time-barred debt.  The Defendant filed a motion to dismiss alleging in part that the statute of limitations had not expired, that they were not a collection agency rather they were the owner of the debt and that the Plaintiff failed to dispute the debt within 30 days of the first communication.  The Court on a 12(b)(6) motion must determine if the factual allegations contained in the complaint together with all reasonable inferences state a plausible claim for relief. 

The Defendant's arguments may have had some validity but this was not a motion for summary judgment.  As a result, the majority of the causes of actions by the Plaintiff were sustained and only 1 cause of action was dismissed. 

The following is a brief statement by the Court on 12(b)(6) motions and an overview of the Act:

On a 12(b)(6) motion, the court must determine "whether the complaint's factual allegations, together with all reasonable inferences, state a plausible claim for relief." Cafasso, U.S. ex rel. v. Gen. Dynamics C4 Sys., 637 F.3d 1047, 1054 (9th Cir. 2011) (citing Ashcroft v. Iqbal, 556 U.S. 662, 678-79 (2009)). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 556 U.S. at 678 (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556 (2007)).
When  [4] determining the sufficiency of a claim, "[w]e accept factual allegations in the complaint as true and construe the pleadings in the light most favorable to the non-moving party[; however, this tenet does not apply to] . . . legal conclusions . . . cast in the form of factual allegations." Fayer v. Vaughn, 649 F.3d 1061, 1064 (9th Cir. 2011) (citation and internal quotation marks omitted). "Therefore, conclusory allegations of law and unwarranted inferences are insufficient to defeat a motion to dismiss." Id. (citation and internal quotation marks omitted); see also Iqbal, 556 U.S. at 678 ("A pleading that offers 'labels and conclusions' or 'a formulaic recitation of the elements of a cause of action will not do.'" (quoting Twombly, 550 U.S. at 555)).

The FDCPA creates civil liability for "any debt collector who fails to comply with any provision [of the Act] . . . with respect to any person . . . ." 15 U.S.C. § 1692k(a). The Act defines a debt collector as "any person . . . in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect . . . debts owed or due or asserted to be owed or due another." 15 U.S.C. § 1692a(6). This definition "'would include those who collect for others in the regular course of business.'" Romine v. Diversified Collection Servs., Inc., 155 F.3d 1142, 1146 (9th Cir. 1998)  [6] (quoting S. Rep. No. 95-382 (1977)). The FDCPA does not, however, apply to a "creditor," who is "any person who offers or extends credit creating a debt or to whom a debt is owed." 15 U.S.C. § 1692a(4). Notably, assignees of debt may be considered creditors only if the "'debt was not in default at the time it was assigned.'" Nool v. HomeQ Servicing, 653 F. Supp. 2d 1047, 1053 (E.D. Cal. 2009) (quoting Perry v. Stewart Title Co., 756 F.2d 1197, 1208 (5th Cir. 1985)). Thus, a person who collects a defaulted debt assigned or transferred "solely for the purpose of facilitating collection of such debt for another" is a debt collector, not a creditor. See 15 U.S.C. § 1692a(4).

Todorov v. Easy Loans Corp., 2014 U.S. Dist. LEXIS 84484
United States District Court for the District of Nevada
June 19, 2014, Decided; June 19, 2014, Filed
Case No. 2:13-cv-01264-MMD-GWF

Tuesday, June 24, 2014

At First Blush a Harsh Result in Failing to Advise the Court that the Debtor Passed Within 1 Month of Confirmation of a Chapter 13 - But Likely the Correct Result

A Colorado Bankruptcy Court was faced with a motion to reconsider a dismissal motion after a Chapter 13 plan was completed by payments made by the personal representative of the Debtor.  The Debtor had passed within the first month after confirmation, but no one told the Bankruptcy Court.  After the plan was completed, the Personal Representative filed a motion to waive the requirements of the financial management course.  The Court denied the motion and dismissed the case.  The Personal Representative then filed a motion to reconsider.

In the motion to reconsider, the Court analyzed the difference of Rule 1016 in a Chapter 13 case vs. a Chapter 7 case.  Rule 1016 provides in part that upon the death of a debtor the case can be dismissed or if it is in the best interest of the parties, the case may continue.  The Court focused upon the creditors as the parties vs. the personal representative who would have inherited the remaining assets of the deceased debtor.  If the case was dismissed, then the creditors would get paid more but on the other hand if the case was not dismissed then the representative would get the assets.

The Court appeared to be upset about the failure of the parties to inform the court of the death and chose to wait 3 years to then advise the Court.  The Court indicated that it would have been in a better position to analyze the situation if it was advised immediately. 

Based upon the Court's reading of the law, the Court denied the motion to reconsider.

A quick comment - this was a motion to reconsider and the Court did not seem to focus on why it should reconsider its prior order but rather analyzed the entire situation. 

In re Keith Fogel Ssn Xx 6566, 2014 Bankr. LEXIS 2734 Folder icon(Copy citation)
United States Bankruptcy Court for the District of Colorado
June 20, 2014, Decided
Case No. 10-38010 ABC Chapter 13

Monday, June 23, 2014

Supreme Court - Executive Benefits Case - Analyzed by a Ohio District Court (2014) - Granting a Motion to Withdraw the Reference

An Ohio District Court stayed a motion to withdraw the reference pending the decision by the Supreme Court in the Executive Benefits case.  The Ohio case had similar facts as to Executive Benefit in which the Trustee filed an adversary complaint to avoid a fraudulent transfer against a third party who was not a creditor....but....the third party made demand for a jury trial. 

The Ohio District Court determined that the case was a "Stern" claim and the bankruptcy court could submit proposed findings of act and conclusions of law.  The Court found that the Bankruptcy Court had jurisdiction to handle the pre-trial supervision of the case but granted the motion to withdraw the reference for permissive withdrawal under 157(d) ("for cause shown").  Although cause is not defined the court should look at  a variety of factors (1) core/non core; (2) legal/equitable claims; (3) efficient use of judicial resources and (4) effect of the ruling on uniformity in administering bankruptcy law. 

In this case, the Court noted that in any instance the Bankruptcy Court's decision would have to be reviewed de novo by the District Court; that the Defendant has exercised her right to a jury trial and that the defendant did not consent to the jurisdiction of the bankruptcy court.  Accordingly, the Court granted the motion for permissive withdrawal of the reference.

Query:  Will District Court's be forced to handle more bankruptcy related cases?

Emerson v. Order & Alan J. Treinish

United States District Court for the Northern District of Ohio, Eastern Division

June 20, 2014, Decided

CASE NO. 1:13-mc-52

A Court may decline to utilize issue preclusion based upon a prior Judgment (Bankruptcy Court - Montana - 2014)

A refresher on collateral estoppel in the 9th Circuit as it applies to dischargeability proceedings especially under 523(a)(6). The Court has discretion to decline to give issue preclusion effect to prior judgments in deference of countervailing considerations of fairness (In re Lopez, 367 B.R. 99, 108 (9th Cir. 2007)).  The Court declined to utilize such preclusion because the Plaintiff must prove willful and malicious injury.  The 9th Circuit has stated that Courts must separately analyze both the willful and malicious prongs.  As the underlying judgment did not analyze such prongs, the Court determined that a factual dispute has arisen in the adversary case and denied the motion for summary judgment.

In re Etzel

United States Bankruptcy Court for the District of Montana

June 19, 2014, Decided

Case No. 13-61353-11 Adv No. 14-00001

Taking Testimony Prior to Following Suit - FRCP 27 - This is a Rule that is not Typically Utilized - (ED of Michigan - 2014)

Rule 27 permit a party to obtain discovery through the taking of depositions and production of documents to preserve testimony and evidence for the anticipated suit....

Here is the general law:

To satisfy the court that the testimony is needed to protect against a failure or delay of justice, the great weight of authority requires the petitioner to show that there is a risk of loss of the desired testimony. Penn. Mut. Life Ins. Co. v. United States, 68 F.3d 1371, 1374-75, 314 U.S. App. D.C. 320 (D.C.Cir.1995) (indicating that Rule 27 requires a showing that there is "an immediate need to perpetuate testimony" and that "petitioner must establish danger that testimony may be lost") (citations omitted); Ash v. Cort, 512 F.2d 909, 911 (3d Cir.1975) (indicating that Rule 27 only applies "in that special category of cases

where it is necessary to prevent  [*7] testimony from being lost"); In re Hopson Marine Transportation, Inc., 168 F.R.D. 560, 1996 WL 547467 (E.D.La. 1996) ("The rule was intended to apply to situations in which testimony might be lost to a prospective litigant unless taken immediately, without having to wait for a lawsuit or other legal proceeding to commence."); In re Application of Checkosky, 142 F.R.D. 4, 6-8 (D.D.C.1992) (indicating that the "purpose of Rule 27 is simply to preserve evidence that otherwise would be in danger of being lost" and that "most courts have held that a petitioner must make a particularized showing that the testimony needs to be taken in advance of the contemplated action"). The common situation in which a Rule 27 deposition is appropriate is where there is a risk that a witness will be unavailable at the time of trial, either because of age or infirmity. Penn. Mut., 68 F.3d at 1374; In re Petition of Banks, No. 93-C-6914, 1993 U.S. Dist. LEXIS 17109, 1993 WL 502379 (N.D.Ill. Dec. 6, 1993) ("Most petitions to perpetuate testimony have been granted when a witness is aged or gravely injured an in danger [of] dying.").1996 U.S. Dist. LEXIS 15784, [WL] at *2.

PegaSync Techs., Inc. v. Patros

United States District Court for the Eastern District of Michigan, Southern Division

June 18, 2014, Decided; June 18, 2014, Filed

Case No. 14-MC-50440

Sunday, June 22, 2014

Failing to Obtain a Stay and the Creditor Subsequently forecloses, the appeal must be dismissed as moot and a discussion of equitable mootness

An Alabama District Court did an excellent job in describing mootness in connection with a foreclosure sale.  The Court analyzed mootness due to a foreclosure and equitable mootness.  Although the Court cited to 11th Circuit cases, the Court by analogy cited to 11 USC 363(m) and stated that the 11th Circuit in analyzing the mootness doctrine is not limited to transactions covered under that subsection.   In focusing on equitable mootness, the Court noted that it is most commonly applied in Chapter 11 cases but courts have applied it in Chapter 7 cases where the trustee has already disbursed funds to creditors (citing the 5th and 4th Circuit).  

Davis v. Shepard

United States District Court for the Northern District of Alabama, Northeastern Division

June 18, 2014, Decided

Case No. 5:11-mc-3483-KOB

Appellate Standing of Bankruptcy Matters is More Restrictive

In a recent Chapter 7 District Court Decision out of New Jersey, the Appellant who was the managing member of a LLC was  deemed not to have standing to appeal a motion to remove the Appellee as Trustee.  In a somewhat convoluted case, the Debtor filed a Chapter 13 case and at the time of the filing owned at least a 51% interest in real property.  The remaining interest was owned by a LLC.  The Debtor filed an adversary case against the LLC to seek complete title to the Real Property.  Upon conversion to a Chapter 7, the Chapter 7 trustee was added as the real property in interest and a new managing member was appointed for the LLC.  The managing member, in his individual capacity, filed a motion to remove the Trustee which was denied.  The managing member appealed that decision.  The Court noted that the managing member was not a creditor of the Estate nor had a proprietary interest in the real property.  The Court found that in bankruptcy appeals, court have adopted the person aggrieved doctrine which marginal parties involved in proceeding, who, even though they may be expose to some potential hard incident to the bankruptcy court's orders are not directly affected by that order, lack standing to appeal.  In this case, the managing members only interest was that of a defendant in the adversary proceeding.  Accordingly, the Court dismissed the appeal on lack of standing. 

Forman v. Youngman

United States District Court for the District of New Jersey

June 17, 2014, Decided; June 18, 2014, Filed
Civ. No. 13-5877

Friday, June 20, 2014

Whether Gross Negligence by an Attorney is Cause Not to Convert a Chapter 11 to a Chapter 7? (Recent Oral Argument - 9th)

The 9th Circuit recently heard oral argument on a case involving alleged gross negligence on the part of a Chapter 11 attorney who failed to file a budget and the Debtor utilized approximately $16,000 in cash collateral without an order.  The case was converted to a Chapter 7 based upon the Debtor's failure to comply with a variety of court orders and the unauthorized use of the cash.  The Debtor blamed his counsel and retained new counsel.  Despite the retention of new counsel, the case was converted to a Chapter 7. 

On reconsideration by the Bankruptcy Court, the court also found as a legal matter that inadequate legal advice is no defense to a § 1112(b) dismissal or conversion. As the court noted, mistaken legal advice generally does not relieve a client of the consequences of acts or omissions. See Link v. Wabash R. Co., 370 U.S. 626, 634, 82 S. Ct. 1386, 8 L. Ed. 2d 734 (1962) (dismissal of adversary proceeding for failure to appear at scheduled status conference); Cannon-Stokes v. Potter, 453 F.3d 446, 449 (7th Cir. 2006) (failure to schedule employment cause of action in bankruptcy schedules resulting  [14] in judicial estoppel barring claims); In re DePugh, 409 B.R. 84, 107 n.13 (Bankr. S.D. Tex. 2009) (failure to attach assignments to Proofs of Claim). Accordingly, any failure by counsel to raise the cash collateral issue would not excuse the debtor or mitigate the existing cause for converting the case.

During oral argument the 9th Circuit seemed to agree that the inadequate legal advice is no defense.  I presume that the Court will affirm the District Court but if the gravity of the attorney's actions were so severe, I am hopeful that the Court will provide an analysis on what the Bankruptcy Court should do when it faces such a situation.  My take is that Debtors are also responsible for their actions (i.e. utilizing cash without an order) and their agents' actions or inactions are imputed on them.  The end result could be a malpractice action.

Oral Argument - 9th Circuit - in re: Augustine Pena, III, et al v. Trudi Manfredo

District Court citation:
Pena v. Manfredo, 2013 U.S. Dist. LEXIS 127655
United States District Court for the Eastern District of California
September 5, 2013, Decided; September 6, 2013, Filed
Case No. 12-cv-01233-AWI

BK Court lacks Jurisdiction to Approve a Professionals Fees in a Dismissed Chapter 11 Case - Illinois BK Court

After a Chapter 11 case was dismissed and closed, a professional filed his second and final application for compensation.  The Court determined that because there is no longer a bankruptcy estate, there is no longer an estate from which compensation can be paid.  With the estate's disappearance, the court's duty to oversee its administration has disappeared.  The determination of reasonableness of the compensation would be pointless and a purely academic exercise.  As the federal court has no authority to "give opinions...upon abstract propositions" The Court found that the motions were moot and were denied based upon lack of jurisdiction.

In re Sweports, Ltd.

United States Bankruptcy Court for the Northern District of Illinois, Eastern Division

June 18, 2014, Decided

Chapter 11, No. 12 B 14254

Chapter 7 Trustee has standing to respond to Claim Objections - New Mexico BK Court

The Court sua sponte raised the issue as to whether a Trustee has standing to respond to a claim objection.  The Court determined that neither the Code nor the Rules give explicit standing to a trustee to step in and defend a claim upon the claimant's default.  However, the Court noted that two cases indirectly addressed the issue and appeared to permit the trustee to proceed.  The Court in its case determined that the Trustee as a direct pecuniary interest in the outcome of the claim objection combined with the Congressional intent that case trustees are to be directly involved in claims administration.  Accordingly, the Court found that the Trustee had standing.

In re Quintero

United States Bankruptcy Court for the District of New Mexico

June 19, 2014, Decided

No. 7-12-10591 TA

Thursday, June 19, 2014

11th Circuit allows lien stripping in a Chapter 20 (In re Scantling - 2014)

The Debtor previously filed for relief under Chapter 7 and received her discharge in 2010.  In January 2011, the Debtor filed a Chapter 13 case and sought to determine the secured/unsecured status of the second and third mortgages held by Wells Fargo.  Based upon Wells Fargo's valuation the second and third mortgages were wholly unsecured.   The 11th Circuit agreed with the majority view that in a Chapter 13 case could strip off a wholly unsecured mortgage on the debtor's principal residence through use of Sections 506 and 1322(b)(2). Section 1325(a)(5) did not come into play and a debtor's ineligibility for a discharge is irrelevant for strip off purposes in a Chapter 20 case.

The case has a very good discussion on the majority and minority views.  The link to the case follows.

Wells Fargo v. Scantling

What is Income under 101(10A) for purposes of a Chapter 13 Case - ND Georgia Case

Congress has defined current monthly income as the average monthly income but the Georgia Court was faced with trying to define "income".  The Court determined that Congress intended that "income" was meant to mean "gross receipts" for purposes of calculating the current monthly income of a sole proprietor under 101(10a) and determining the applicable commitment period under 1325(b)(4).

In re Kuwik

United States Bankruptcy Court for the Northern District of Georgia

May 23, 2014, Decided

Case No. 13-77137-JRS Chapter 13

HOA Liens in a Chapter 13 - 2004 New Jersey Case

A New Jersey District court examined the issue of an HOA "lien" on real property.  In the plan, the Debtor sought to surrender the real property back to the HOA.  The HOA objected and the Court held that an objection timely filed an properly prosecuted prevents confirmation of a plan under 1325(a)(5)(A).

Of interesting note is the analysis of HOA liens contained in the opinion which follows:

Homeowners' associations are created in New Jersey through a declaration of covenants, conditions, and restrictions contained in deeds and association bylaws. See Highland Lakes Country Club & Community Association v. Franzino, 186 N.J. 99, 110 (2006), citing E. Richard Kennedy & Mark D. Imbriani, The Rights of Tenants in Condominium and Homeowner Association Communities, 174 N.J. Law. 18, 18 (1996). Homeowners' associations may record these governing documents under N.J.S.A. 46:26A-2,8 as those documents affect title to real estate. See Highland Lakes, supra, 186 N.J. at 111. Once recorded, the recordation serves as notice to subsequent judgment creditors and purchasers. See N.J.S.A. 46:26A-12.9 These recorded covenants create a lien on the property. See Highland Lakes, supra, 186 N.J. at 111, citingLeisuretowne Ass'n, Inc. v.

There are three types of special rights encumbering or chargeable to property: common law liens, equitable liens, and statutory liens. Id., citingJ.T Evans Co. v. Fanelli, 59 N.J. Super 19, 22 (Law Div. 1959). Homeowners' association liens are classified as equitable liens because they are created by the covenants contained in members' deeds. Id., citingFirst Fed. Say. & Loan Ass'n v. Bailey, 316 S.C. 350 (S.C.Ct. App. 1994). "For an equitable lien to arise there must be a debt owing from one person to another, specific property to which the debt might attach, and an intent, expressed or implied, that the property will serve as a security for the payment of the debt." Id. at 111-112, quotingFirst Fed. Sav. & Loan v. Bailey.

In re Specht

United States Bankruptcy Court for the District of New Jersey

June 16, 2014, Decided

Chapter 13, Case No. 10-26741 (CMG)

Monday, June 16, 2014

The Impact of the Supreme Court Case of Law v. Siegle on exemptions - BK Court sua sponte sets aside its order

A California BK Court sua sponte vacated its prior orders denying the claimed homestead exemption claim as a bad faith attempt to frustrate a pending sale.  The Court examined the application of the U.S. Supreme Court case which examined the protection of exemptions. 

The relevant portions of the CA BK Court case follows:

Impact of Law v. Siegel. However, the reach of § 105(a) has seemingly been curtailed after the Supreme Court's decision in Law v. Siegel. This court must therefore decide whether the power to disallow amended exemptions based on bad faith and prejudice, utilizing § 105(a), survives after Law.
In Law, the Supreme Court addressed the scope and application of § 105(a) to remedy an egregious case of bad-faith conduct by the debtor in litigation of an adversary proceeding. See 134 S. Ct. at 1194-95. The Court acknowledged that, in addition to the statutory power under § 105(a) to carry out the provisions of the Code, the bankruptcy court "may  [16] also possess 'inherent power . . . to sanction abusive litigation practices.'" Id. at 1194 (quoting Marrama v. Citizens Bank of Mass., 549 U.S. 365, 375-76 (2007)). The Court then admonished, "But in exercising those statutory and inherent powers, a bankruptcy court may not contravene specific statutory provisions . . . . Section 105(a) confers authority to 'carry' out the provisions of the Code, but it is quite impossible to do that by taking action that the Code prohibits." Id.
In the proceeding below, the Ninth Circuit had followed the precedent established in Latman v. Burdette (In re Latman), 366 F.3d 774 (9th Cir. 2004), a decision now abrogated by Law. See Law v. Siegel, 435 F. App'x 697, 698 (9th Cir. 2011). The Ninth Circuit applied § 105(a) to bestow upon the bankruptcy court the general equitable power to surcharge the debtor's $75,000 homestead exemption to partially compensate the bankruptcy estate for over $500,000 in administrative expenses resulting from the debtor's bad-faith conduct. See id. In effect, this amounted to a disallowance of the debtor's homestead exemption.
The Supreme Court, however, rejected all of the arguments for such a remedy, finding that surcharging  [17] an exemption contravened specific provisions in the Bankruptcy Code and that there was also no statutory basis in the Code for allowing the surcharge on equitable grounds. See 134 S. Ct. at 1195-96. The Court noted that the surcharge conflicted with two subsections of § 522: § 522(b), which allows a debtor to exempt property in the first place, and § 522(k), which expressly limits the use of exempt property to pay for administrative expenses. See id. at 1195. The Court noted that § 522, with its "carefully calibrated exceptions and limitations," did "not give courts discretion to grant or withhold exemptions based on whatever considerations they deem appropriate," such as the debtor's bad-faith conduct. Id. at 1196. Further, outside of § 522, the Court concluded the Code did not admit "a general, equitable power in bankruptcy courts to deny exemptions based on a debtor's bad-faith conduct." Id. at 1197. Although the holding in Law might initially appear to be quite narrow—applicable only to the equitable surcharge of an exemption—the reasoning behind the Law decision compels the bankruptcy courts to reexamine the traditional theories and assumptions upon which they have previously  [18] utilized the equitable powers of § 105(a). That call is particularly pertinent here where the ultimate issue, as in Law, relates to the debtor's homestead exemption.
Turning to this case, the court concludes that the same rationale in Law, that prohibited the equitable surcharge of exemptions, must also be applied to the disallowance of amended exemptions based on the equitable powers of § 105(a). Relying solely on the Bankruptcy Code, a court can no longer disallow an amended exemption on the grounds that the debtor acted in bad faith or that creditors would be prejudiced because there is no "valid statutory basis for doing so."8 Id. at 1196.

In re Gutierrez, 2014 Bankr. LEXIS 2637

United States Bankruptcy Court for the Eastern District of California, Fresno Division
June 12, 2014, Decided; June 12, 2014, Filed
Case No. 12-60444-B-7, DC No. DRJ-2, DC No. TOG-6, DC No. DRJ-3

Determination of Debt other than a debt listed in §§ 523(a)(2), (a)(4) or (a)(6), may be filed at any time (U.S. v. Wanland - 2014).

An attorney convicted in part of tax evasion filed bankruptcy.  The IRS timely filed a proof of claim for over 1.5 million dollars.  The Debtor received his discharge and after receiving his discharge the IRS filed a complaint seeking a determination that the underlying tax debt was not discharged under 11 USC 523(a)(1)(C).  The Debtor filed a motion to dismiss asserting in part that the complaint was not timely filed.  The Court denied the motion to dismiss and stated:

In his motion to dismiss, defendant contends that this action is barred by the doctrines of collateral estoppel and res judicata. Defendant essentially reasons that his June 8, 2011 bankruptcy discharge included the tax liabilities at issue in this action, and that the United States is therefore collaterally estopped from raising the issue of whether or not the taxes were dischargeable in this action. That argument lacks merit, because a discharge under 11 U.S.C. § 727 "does not discharge an individual debtor from any debt—for a tax...with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax...." 11 U.S.C. § 523(a)(1)(C). Furthermore, although the Ninth Circuit has apparently not squarely addressed the issue, other courts have persuasively held, based on an analysis of the applicable statutes and bankruptcy rules, that the United States is not required to obtain a ruling on the non-dischargeability of a tax debt pursuant to section 523(a)(1)(C) in the underlying bankruptcy case to prevent its discharge:
Debts listed in §§ 523(a)(2), (a)(4) and (a)(6) are automatically discharged in bankruptcy unless a creditor  [12] objects to their dischargeability by filing an adversary proceeding. Fed. R. Bankr. P. 4007 (advisory committee notes). A creditor who wishes to object to the dischargeability of a debt under §§ 523(a)(2), (a)(4) or (a)(6) must file a complaint within sixty (60) days of the first scheduled meeting of creditors. Fed. R. Bankr. P. 4007(c)...Those debts excluded from discharge not listed in §§ 523(a)(2), (a)(4) or (a)(6), including certain tax debts, are automatically excepted from discharge...As a result, a complaint to determine the dischargeability of a debt, other than a debt listed in §§ 523(a)(2), (a)(4) or (a)(6), may be filed at any time. Fed. R. Bankr. P. 4007(b).
In re Walls, 496 B.R. 818, 825-26 (N.D. Miss. 2013) (citation omitted); see also In re Range, 48 Fed. App'x 103, at *5 & n.2 (5th Cir. 2002) (unpublished).

See, United States v. Wanland, 2014 U.S. Dist. LEXIS 78479, 11-12 (E.D. Cal. June 6, 2014)

Sunday, June 15, 2014

A Good Discussion on Objecting to Proof of Claims - 2014 case

The Trustee objected to FIA's proof of claim asserting in part that there were not sufficient documents to "prove up" its claim.  The Court initially set forth the burden of proof:
The burden is on the objecting party to produce evidence to refute at least one of the allegations that is essential to the claim's legal sufficiency.  If the objecting party meets his evidentiary burden, the burden shifts to the creditor, who retains the ultimate burden of persuasion as to the validity and amount of the claim.

In  this case, the Trustee argued that FIA's claims should be disallowed because they do not contain all of the information outlined in Rule 3001(c)(3)(A).  The Trustee contended that he could not determine the validity of the claim without the information. 

The Court determined that non-compliance with Rule 3001(c)(3)(A) is not one of the listed exceptions to have a claim disallowed under Section 502(b). 

The failure to provide documentation does not mean that the debtors do not owe the money.  Section 502(b) in part states that there must be proof that such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured (a variety of other reasons are set forth).

Accordingly, the Court denied the objection.

Khatibi v. Civil Action Fia Card Servs., N.A., 2014 U.S. Dist. LEXIS 79873

Thursday, June 12, 2014

NEW 9th Circuit MERS decision.... 6-12-14

The panel held that the plaintiffs had waived their arguments regarding the MDL Court’s orders determining which claims the JPML had remanded to transferor courts, and which it had transferred to the MDL Court.

The panel held that the MDL Court did not convert the defendants’ motion to dismiss into a motion for summary judgment.

The panel reversed the district court’s dismissal of Count I, seeking relief based on violations of Arizona’s false documents statute when the defendants allegedly filed false notices of trustee sale, notices of substitution of trustee, and assignments of deed of trust. The plaintiffs alleged that these
documents were notarized in blank and “robosigned” with forged signatures.

The panel affirmed the dismissal of Count II, alleging that the defendants had committed, or would commit, the tort of wrongful foreclosure, in violation of Arizona, California, and Nevada law, because the MERS System impermissibly “splits” ownership of the note from ownership of the deed of trust, thereby making the promissory note unsecured and unenforceable in any foreclosure proceeding. The panel held that these claims failed because none of the plaintiffs alleged
lack of default, tender to cure the default, or an excuse from tendering.

The panel affirmed the dismissal of Count III, alleging that nonjudicial foreclosures conducted under Nev. Rev. Stat. § 107.080 were improper.

MERS Decision 06/12/14 (case # 11- 7615.pdf)

U.S. Supreme Court (6-12-14) - Funds held in inherited IRAs are not Exempt because they are not “retirement funds”

 In a unanimous decision, the United States Supreme Court held that funds held in an inherited IRAs are not retirement funds within the meaning of Section 522(b)(3)(C). 

The ordinary meaning of "retirement funds" is properly understood to be sums of money set aside for the day an individual stops working. Three legal characteristics of inherited IRAs provide objective evidence that they do not contain such funds. First, the holder of an inherited IRA may never invest additional money in the account. 26 U. S. C. §219(d)(4). Second, holders of inherited IRAs are required to withdraw money from the accounts, no matter how far they are from retirement. §§408(a)(6), 401(a)(9)(B). Finally, the holder of an inherited IRA may withdraw the entire balance of the account at anytime—and use it for any purpose—without penalty. Pp. 4–6.

(b) This reading is consistent with the purpose of the Bankruptcy Code’s exemption provisions, which effectuate a careful balance between the creditor’s interest in recovering assets and the debtor’s interest in protecting essential needs. Allowing debtors to protect funds in traditional and Roth IRAs ensures that debtors will be able to meet their basic needs during their retirement years. By contrast, nothing about an inherited IRA’s legal characteristics prevent or dis
courage an individual from using the entire balance immediately after bankruptcy for purposes of current consumption. The "retirement funds" exemption should not be read in a manner that would convert the bankruptcy objective of protecting debtors’ basic needs into a"free pass," Schwab v. Reilly, 560 U. S. 770, 791. Pp. 6–7.

(c) Petitioners’ counterarguments do not overcome the statute’s text and purpose. Their claim that funds in an inherited IRA are retirement funds because, at some point, they were set aside for retirement, conflicts with ordinary usage and would render the term "retirement funds," as used in §522(b)(3)(C), superfluous. Congress could have achieved the exact same result without specifying the funds as "retirement funds." And the absence of the phrase "debtor’s interest," which appears in many other §522 exemptions, does not indicate that §522(b)(3)(C) covers funds intended for someone else’s retirement. Where used, that phrase works to limit the value of the asset that the debtor may exempt from her estate, not to distinguish between a debtor’s assets and the assets of another. Also unpersuasive is petitioners’ argument that §522(b)(3)(C)’s sentence structure— i.e., a broad category, here, "retirement funds," followed by limitinglanguage, here, "to the extent that"—prevents the broad category from performing any independent limiting work. This is not the only way in which the phrase "to the extent that" may be read, and this argument reintroduces the problem that makes the term "retirement funds" superfluous. Finally, the possibility that an account holder can leave an inherited IRA intact until retirement and take only the required minimum distributions does not mean that an inherited IRA bears the legal characteristics of retirement funds. Pp. 8–11.


Monday, June 9, 2014

Avoiding Consent - a Brief Commentary on the U.S. Supreme Court Follow Up Decision to Stern v. Marshall - Executive Benefits Insurance (2014)

Why decide when you can avoid or why avoid when there is nothing to decide? In a unanimous decision, the United States Supreme Court held that a non-core proceeding requires the District Court to hold a de novo review of the Bankruptcy Court’s findings of fact and conclusions of law.  In particular, the Court found that the Appellant was given a de novo review because it appealed the granting of a motion for summary judgment.  See generally, Bagdadi v. Nazar, 84 F.3d 1194, 1197 (9th Cir. 1994).   Accordingly, the Ninth Circuit’s decision was affirmed. 


In light of the narrow holding, a number of scholars will likely analyze the decision based upon what was not determined.  First, the Court avoided the issue of whether the fraudulent transfer action was a core proceeding.  Why did they avoid it?  The Court avoided the issue because no one appealed such determination.  The Court stated, “[t]he Court of Appeals held, and we assume without deciding, that the fraudulent conveyance claims in this case are Stern claims.”  Second, the Court avoided the issue of consent.  Why did they avoid it?  The Court stated in a footnote that “this case does not require us to address whether EBIA in fact consented to the Bankruptcy Court’s adjudication of a Stern claim and whether Article III permits a bankruptcy court, with the consent of the parties, to enter final judgment on a Stern claim. We reserve that question for another day.”  Despite such evasive maneuvering, the Court did emphasize “[i]f the claim satisfies the criteria of §157(c)(1), the bankruptcy court simply treats the claims as non-core:  The bankruptcy court should hear the proceeding and submit proposed findings of fact and conclusions of law to the district court for de novo review and entry of judgment.” 


The bigger question still remains, can a party consent to entry of a final judgment on a non-core proceeding?  Perhaps the Court in footnote 8 gave us a hint in discussing Appellant’s argument that “nothing in the statute’s text or his­torical context” that makes it “evident” that Congress would prefer to suspend Stern claims in limbo.”  The Court stated, “[t]o the contrary, we noted in Stern that removal of claims from core bankruptcy jurisdiction does not “meaningfully chang[e] the division of labor in the current statute.” 564 U. S., at ___ (slip op., at 37).  Accept­ing EBIA’s contention that district courts are required to hear all Stern claims in the first instance, see Brief for Petitioner 46–48, would dramatically alter the division of responsibility set by Congress.”  If the Court does not believe that Congress wanted to dramatically alter the division of responsibility, then one could argue that it is not a large leap to believe that a party could consent to entry of a final judgment. 


However, why would a party consent?  A party gets a “free” bite at the apple if they do not consent (i.e. a free appeal).  The Bankruptcy Court would then be required to “submit proposed findings of fact and conclusions of law to the District Court to be reviewed de novo.”  The only “problem” with such determination is that after the District Court reviews the matter de novo, the remaining appeal you have is to the Court of Appeals.


So why did the Supreme Court take this appeal?  My initial reaction is that the Court took this appeal based upon what it perceived as an open issue on consent but after fully analyzing the case there was nothing for the Court to truly decide.  If one demands a de novo review and received it, then there is nothing to decide and the matter is moot.  The Court clearly avoided giving us an insight to consent, maybe the Court couldn’t get a majority or they determined that holding would be dicta?  Only the Court and its law clerks know the answer, but for now, as Justice Thomas stated, the answer to the question of consent awaits for another day. 

NEW - Published - United States Supreme Court Case - Revisiting the Stern/Marshall Decision


(A quick restatement of the holding - cut and paste)

Under the Bankruptcy Amendments and Federal Judgeship Act
of 1984, federal district courts have original jurisdiction in bankruptcy cases and may refer to bankruptcy judges two statutory categories of proceedings: "core" proceedings and "non-core" proceedings. See generally 28 U. S. C. §157. In core proceedings, a bankruptcy judge "may hear and determine . . . and enter appropriate orders and judgments," subject to the district court’s traditional appellate review. §157(b)(1). In non-core proceedings—those that are "not . . . core" but are "otherwise related to a case under title 11," §157(c)(1)—final judgment must be entered by the district court after
de novo review of the bankruptcy judge’s proposed findings of fact and conclusions of law, ibid., except that the bankruptcy judge may enter final judgment if the parties consent,§157(c)(2).

In Stern, the Court confronted an underlying conflict between the1984 Act and the requirements of Article III. The Court held that Article III prohibits Congress from vesting a bankruptcy court with the authority to finally adjudicate the "core" claim of tortious interference. The Court did not, however, address how courts should proceed when they encounter a Stern claim. Pp. 4–8.

  1. Stern claims may proceed as non-core within the meaning of §157(c). Lower courts have described Stern claims as creating a statutory "gap," since bankruptcy judges are not explicitly authorized to propose findings of fact and conclusions of law in a core proceeding. However, this so-called gap is closed by the Act’s severabilityprovision, which instructs that where a "provision of the Act or [its]application . . . is held invalid, the remainder of th[e] Act . . . is notaffected thereby." 98 Stat. 344. As applicable here, when a court identifies a Stern claim, it has "held invalid" the "application" of §157(b), and the "remainder" not affected includes §157(c), whichgoverns non-core proceedings. Accordingly, where a claim otherwisesatisfies §157(c)(1), the bankruptcy court should simply treat the Stern claim as non-core. This conclusion accords with the Court’s general approach to severability, which is to give effect to the validportion of a statute so long as it "remains ‘fully operative as a law,’ " Free Enterprise Fund v. Public Company Accounting Oversight Bd., 561 U. S. 477, 509, and so long as the statutory text and context donot suggest that Congress would have preferred no statute at all, ibid. Pp. 8–10.

Stern claims may proceed as non-core within the meaning of §157(c). Lower courts have described Stern claims as creating a statutory "gap," since bankruptcy judges are not explicitly authorized to propose findings of fact and conclusions of law in a core proceeding. However, this so-called gap is closed by the Act’s severabilityprovision, which instructs that where a "provision of the Act or [its]application . . . is held invalid, the remainder of th[e] Act . . . is notaffected thereby." 98 Stat. 344. As applicable here, when a court identifies a Stern claim, it has "held invalid" the "application" of §157(b), and the "remainder" not affected includes §157(c), whichgoverns non-core proceedings. Accordingly, where a claim otherwisesatisfies §157(c)(1), the bankruptcy court should simply treat the Stern claim as non-core. This conclusion accords with the Court’s general approach to severability, which is to give effect to the validportion of a statute so long as it "remains ‘fully operative as a law,’ " Free Enterprise Fund v. Public Company Accounting Oversight Bd., 561 U. S. 477, 509, and so long as the statutory text and context donot suggest that Congress would have preferred no statute at all, ibid. Pp. 8–10.

3. Section 157(c)(1)’s procedures apply to the fraudulent conveyance claims here. This Court assumes without deciding that these claims are Stern claims, which Article III does not permit to betreated as "core" claims under §157(b). But because the claims assert that property of the bankruptcy estate was improperly removed, theyare self-evidently "related to a case under title 11." Accordingly, they

fit comfortably within the category of claims governed by §157(c)(1).The Bankruptcy Court would have been permitted to follow that provision’s procedures, i.e., to submit proposed findings of fact andconclusions of law to the District Court for de novo review. Pp. 11–
4. Here, the District Court’s de novo review of the Bankruptcy Court’s order and entry of its own valid final judgment cured anypotential error in the Bankruptcy Court’s entry of judgment. EBIA contends that it was constitutionally entitled to review by an Article III court regardless of whether the parties consented to bankruptcy court adjudication. In the alternative, EBIA asserts that even if such consent were constitutionally permissible, it did not in fact consent.Neither contention need be addressed here, because EBIA received the same review from the District Court that it would have received had the Bankruptcy Court treated the claims as non-core proceedingsunder §157(c)(1). Pp. 12–13.