Prior Judgment is NOT Needed to Exclude Civil Restitution or Damages from Chapter 13 Discharge

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

Waag v. Permann [link to Oregon Bankruptcy Court website]
Ninth Circuit Bankruptcy Appellate Panel Case No. 08-1339
October 14, 2009

In this published opinion the BAP addressed a Chapter 13 discharge issue that is not only one of first impression in the Ninth Circuit, but had been addressed in only two published bankruptcy court opinions. These two prior bankruptcy courts had come to opposite conclusions. This new opinion is valuable for resolving this issue locally, but also in reminding both debtors' and creditors' attorneys about the terms of this less familiar discharge exception introduced by the 2005 BAPCPA amendments.

The Issue
Does 11 USC §1328(a)(4), a subsection entirely added by BAPCPA, require the pre-petition entry of a civil judgment in order to exclude from Chapter 13 discharge an award of civil restitution or damages which resulted from debtor's "willful or malicious injury . . . that caused personal injury . . . or . . . death"?

The BAP Holding
No. The court affirmed Judge Elizabeth Perris' ruling that a pre-petition judgment is not needed to exclude such civil restitution or damages from Chapter 13 discharge.

The Statute and its Context
BAPCPA added the following exception to discharge in §1328(a):

any debt
. . .
(4) for restitution, or damages, awarded in a civil action against the debtor as a result of willful or malicious injury by the debtor that caused personal injury to an individual or the death of an individual.

This statutory addition is noteworthy, as the BAP opinion lays out, for the following reasons:

1) The much more familiar §523(a)(6)--excluding debts "for willful and malicious injury by the debtor to another entity or to the property of another entity"--is not applicable to Chapter 13; although BAPCPA added a series of § 523(a) exceptions to § 1328(a), § 523(a)(6) was NOT one of them.

2) § 523(a)(6) generally "provides a broader exclusion from discharge than section 1328(a)(4).

3) On the other hand, while § 523(a)(6) uses the familiar "willful and malicious" language, §1328(a)(4) instead uses the more expansive "willful or malicious."

4) §1328(a)(4) is restricted "to personal injuries or death and not to injuries to property."

5) It is also restricted only to those restitution and damages "awarded in a civil action against the debtor."

Rationale
The issue turned on the interpretation of the word "awarded," specifically--to the pleasure of grammarians--whether that word should be read as a past tense verb or instead a past participle. That's because if Congress meant to say that the "restitution, or damages" must have been previously awarded (the past tense), then such a debt would only be excluded from a Chapter 13 discharge if there was a prepetition civil judgment so awarding. That is how one bankruptcy court in Illinois, citing Collier on Bankruptcy and another treatise on Chapter 13, read it:

the new section 1328(a)(4) is worded in the past tense . . . . Thus, a pre-petition award of restitution or damages for willful or malicious injury is a prerequisite to a finding of non-dischargeability. . . .
. . . .
[Otherwise, it] is simply a contingent, unliquidated debt that is . . . not subject to exception from discharge.

But the BAP rejected this "plain meaning" and instead "examined the use of the word 'awarded' both grammatically and in the context of the entire subsection." It adopted the rationale of a bankruptcy court in Pennsylvania which

found that 'awarded'--like the 'included' in subsection 1328(a)(3)--was not being used as a past tense verb, but as a past participial phrase as an adjective modifying the nouns 'restitution' and 'damages.' ' A past participle is simply the form of the verb used in the phrase and does not suggest past action.'

After citing a grammar threatise in support, the BAP concluded that "[n]othing in [the] phraseology of section 1328(a)(4) requires, either implicitly or explicitly, entry of a prepetition judgment."

The BAP found further support for this conclusion in looking at the parallel phraseology of the subsection immediately before, §1328(a)(3), added by Congress in 1994, which excluded criminal restitution and fines from Chapter 13 discharge. The court noted the lack of any case in the 16 years since then holding that a prepetition conviction was required for this other exception to Chapter 13 discharge.

Finally, the court analogized §1328(a)(4) to a prior similar version of § 523(a)(9), the exception for debts arising from "a judgment . . . entered . . . wherein liability was . . . a result of the debtor's operation of a motor vehicle while illegally intoxicated." In this context, the BAP cited a 1988 Ninth Circuit opinion holding that "a creditor's drunk driving claim did not have to be reduced to judgment or consent decree before a debtor filed for bankruptcy in order to have a consequent debt declared nondischargeable." The BAP quoted that Ninth Circuit opinion's public policy argument that a contrary argument

would lead to an absurd result: an unjust and unwise race to the courthouse, as race that "would give the debtor a clear advantage since it takes considerably longer to obtain a judgment than it does to file a bankruptcy."

The BAP concluded that the grammatical structure of the new subsection, its context, and "its policy and object," meant "that it did not differentiate between a judgment entered prepetition and one entered postpetition. Beyond that, it "adhere[d] to the Ninth Circuit's guidance . . . to avoid an absurd result: . . . in which a willful or malicious tortfeasor could eliminate an otherwise nondischargeable debt simply by filing a chapter 13 petition prior to entry of judgment." The BAP affirmed Judge Perris' ruling denying debtor's motion to dismiss the adversary proceeding.

New Bulletins on this website will provide summaries of other opinions within the Ninth Circuit shortly after they are published. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO SUCH FUTURE REPORTS.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that the writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Creditor's Attorney Violated Automatic Stay for Not Acting Affirmatively to Stop Unexpected Dom Rel Order, However Debtor's Atty Fees Greatly Limited

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com


Sternberg v. Johnston (In re Johnston)
9th Circuit Court of Appeals Case Nos. 07-16870 & 08-15721
October 1, 2009


The Issues:
1) What constitutes a creditor attorney's "willful violation" of the automatic stay while collecting on a "domestic support obligation," permitting the debtor to recover against the attorney debtor's "actual damages, including costs and attorney fees," under § 362(k)? Specifically, after filing a state court motion pre-petition to collect for support arrears, what must a creditor's attorney do post-petition to comply with the stay?

2) What attorney fees may the debtor recover as "actual damages" in this context? Specifically, can debtor recover "only those attorney fees related to enforcing the automatic stay and remedying the stay violation," or also "the fees incurred in prosecuting the bankruptcy adversary proceeding in which he pursued his claim for those damages"

Its Rulings
1) Upon the issuance of the domestic relations judge's order in violation of the automatic stay, the creditor's attorney had an affirmative duty "[w]ithin a reasonable time after that" "to take corrective action." Since he "did not act to try to fix that problem," "he willfully violated the automatic stay."
2) Debtor may only recover attorney fees "related to enforcing the automatic stay and remedying the stay violation."

The Court affirmed the judgment that creditor's attorney violated the automatic stay and is liable for debtor's actual damages of almost $3,000, plus for emotional distress of an additional $20,000. It remanded to the bankruptcy court to determine the amount of "attorney fees incurred [by debtor] in seeking to enforce the automatic stay and to fix the problem caused by the overbroad state court order," but NOT "in prosecuting the adversary proceeding to determine damages."

Essential Facts
Johnston, an attorney, fell behind on his spousal support payments. Sternberg, attorney for Johnston's ex-wife, filed a motion in state court to hold Johnston in contempt for this non-payment. The motion also asked for a judgment in the amount of the support arrears, and an order that Johnston be jailed, his drivers' license revoked, a lien put on his vehicle and other assets, and his law license suspended. Johnston filed a Chapter 11 case through his bankruptcy attorney three days before the hearing on Sternberg's motion. Johnston represented himself at that hearing, and informed Sternberg and the court of his Chapter 11 filing. The court decided it would address the contempt issue at that hearing, but that it would take up the issue of the appropriate sanctions after the attorneys had researched whether the court had authority to order sanctions in light of the bankruptcy filing. Two months later, to the surprise of both attorneys, the state court judge issued an order not only finding Johnston in contempt and granting judgment in the amount of about $87,500, but ordered him to pay that amount in full in less than three weeks or else be jailed "until the full amount . . . is paid."

Johnston wrote a letter to Sternberg stating that he was in violation of the automatic stay, and asked him to remedy the situation. Johnston also both filed a motion in state court for relief from the order and an appeal with the state court of appeals to stay the order. Sternberg's law firm filed a brief with that court of appeals arguing for the appropriateness of the state court judge's sanction notwithstanding the automatic stay.

Johnston also filed a motion in bankruptcy court to set aside the state court order. That court concluded that the automatic stay had been violated and set aside the order. However, after Johnston filed an adversary proceeding asserting Sternberg's willful violation of the automatic stay, the bankruptcy court ruled after trial that the affirmative duty to stop actions which violate the stay did not extend to collection on support arrears. Johnston appealed to the district court, which reversed, extending Sternberg's affirmative duty to stopping collections on support arrears. On remand, the bankruptcy court awarded Johnston nearly $3,000 for loss of employment income, $20,000 for emotional distress, and nearly $70,000 for Johnston's attorney fees and costs, a total of nearly $93,000. Sternberg appealed to the district court, which affirmed; he then appealed to the Ninth Circuit.

The Rationales
1) Creditor Attorney's Duty
The Court cited a number of Ninth Circuit opinions on the affirmative duty of a creditor and its counsel to comply with the automatic stay, but focused mostly on the applicability of its 2002 opinion Eskanos & Alder, P.C. v. Leetien (Eskanos), 309 F.3d 1210. There a law firm representing a debtor's unsecured creditor was held to have willfully violated the stay when it waited 23 days after learning of a bankruptcy filing to dismiss its client's lawsuit against a debtor.

The Court here reasoned that even though Sternberg was not responsible for the state court's order,

[w]ithin a reasonable time after [learning of the order], however, the law required Sternberg to take corrective action. He did not, and he affirmatively opposed Johnston's effort to obtain relief from the state appellate court.
. . .
. . . Sternberg offered a complete defense of the order. . . . . He did not try to parse the valid from the invalid, but instead defended the order in its entirety, including the command that Johnston pay the arrears or go to jail, and without limiting the source of payment to non-estate property.
. . .
To comply with the "affirmative duty" under the automatic stay, Sternberg needed to do what he could to relieve the violation. He could not simply rely on the normal adversarial process.

As to Sternberg's willfulness, it is enough that he was aware of the automatic stay and that his actions in violation were intentional. It does not help if he had a good faith belief that he was acting legally, or that debtor did not make a specific request to amend the state court order to comply with the stay.

2) Permitted Attorney Fees
Unless established otherwise by statute, the "American Rule" says that litigants pay their own attorney fees. § 362(k)(1) of the Bankruptcy Code says that

an individual injured by any willful violation of a stay . . .shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.

At issue, the Court reasoned, is the interpretation of the ambiguous and statutorily undefined phrase, "actual damages." Using Black's Law Dictionary's definition as it's sole cited source, the Court determined that the permitted attorney fees are those "resulting from the stay violation itself. Once the violation has ended, any fees the debtor incurs after that point in pursuit of a damage award would not be for 'actual damages' under § 362(k)(1)."

Court argued that the "context and goals of the automatic stay support this narrower understanding." The financial goal of the stay is to give the debtor time to put his finances in order, reorganize to maximize satisfying creditors, and prevent creditors from racing to the debtor's assets.

We have never said that the stay should aid the debtor in pursuing his creditors, even those creditors who violate the stay. The stay is a shield, not a sword.

The non-financial goal is to "create a breathing spell" for the debtor.

More litigation is hardly consistent with the concept of a “breathing spell” for the debtor.
. . . .
[Encouraging] litigation attenuated from the actual bankruptcy, [is] something we do not think Congress intended to promote by allowing him to collect “actual damages” for a violation of the automatic stay.

In so holding the Court went against two longstanding Ninth Circuit BAP opinions, one of which explicitly said that "it is well established that the attorneys’ fees and costs incurred in prosecuting an adversary proceeding seeking damages arising from a violation of the automatic stay is recoverable . . . . " The Court even acknowledged in a footnote that the Ninth Circuit Court of Appeals itself had affirmed such attorney fees, no less than three times. But since in none of these appeals was this specific issue "presented for review," the Court here was "free to decide the issue without referring it to the court en banc."

Finally, the Court also went against apparently the only other Circuit Court to squarely address the issue, Young v. Repine (In re Repine), 536 F.3d 512, 522 (5th Cir. 2008). In his short paragraph on this, the Ninth Circuit judge said that "we are hard-pressed to find this decision persuasive" because it merely relied on the "lower courts of [that] Circuit . . and adopt[ed] the same reading of section 362(k) . . . ." The judge did not bother to address the reasoning of the lower courts' published opinions listed in and endorsed by the Fifth Circuit opinion.

Note on Emotional Distress
The $20,000 award for emotional distress was resolved in this opinion by a one-paragraph footnote stating that 1) the automatic stay violation need not necessarily be "egregious" to warrant an emotional distress award, and 2) the circumstances need only to "make it obvious 'that a reasonable person would [have] suffer[ed] significant emotional harm.' "

New Bulletins on this website will provide summaries of other opinions within the Ninth Circuit shortly after they are published. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO SUCH FUTURE REPORTS.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that the writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

BAPCPA Does Away With Chapter 7 Debtor's Option of Retaining Vehicle by Making Monthly Payments Without Reaffirming, Post-Discharge Repo is OK

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

Dumont v. Ford Motor Credit Company (In re Dumont)
9th Circuit Court of Appeals Case No. 08-60002
September 15, 2009

One of the most controversial pre-BAPCPA consumer bankruptcy law issues was whether a debtor could keep possession of her vehicle (or other personal property collateral) as long as she kept current on the regular monthly payments, even without reaffirming the debt. The circuit courts were split five to four, with the Ninth Circuit and four others permitting this "ride-through" option, four others not. The rest of the courts and legal commentators reflected similar disagreement. "Because of confusing and contradictory statutory text, courts have struggled for decades to discern congressional intent on the answer to that simple question."

The post-BAPCPA conundrum, in the eyes of the dissenting opinion here: "When faced with confusing and contradictory amendments to already confusing and contradictory statutory text, what should we do?" The heart of the dispute between the majority and dissenting opinions here was whether through BAPCPA Congress intended to RESOLVE the judiciary's split on this issue or instead to PERPETUATE it. The majority here went with what appears to becoming the prevailing view, that BAPCPA eliminated the "ride-through" option. The amendments to the Bankruptcy Code language at issue, effectively overturned the Ninth Circuit's contrary precedent, McClellan Fed. Credit Union v. Parker (In re Parker), 139 F.3d 668 (9th Cir. 1998).

The Essential Facts

Ford Motor Credit Company repossessed a Chapter 7 debtor's vehicle, without any warning, about three months after discharge, when she was current on her post-petition monthly payments. (The record is unclear whether she had ever defaulted on payments pre-petition.) The balance on the loan exceeded the value of the vehicle. The contract contained an "ipso facto" clause, stating that debtor's filing of a bankruptcy case would be in itself constitute a default of the contract. Her Statement of Intentions had stated that she would "retain the collateral and continue to make regular payments" The creditor sent a proposed reaffirmation agreement and then its attorney sent an email to debtor's attorney requesting reaffirmation, but debtor's attorney "declined the offer." (The terms of the reaffirmation offer were not clear from the record.) After the repossession, Debtor reopened the case and claimed that Ford Motor Credit had violated the discharge injunction. The bankruptcy court for the Southern District of California denied the motion, and the BAP (with Judge Randall Dunn on the panel but not the author of its opinion) affirmed without dissent.

The Majority Opinion
In essence, Judge Diarmuid O`Scannlain held that "BAPCPA wrought several changes in the Code" which now undercut and in some respects contradicted the rationale for Parker, the Ninth Circuit's pre-BAPCPA precedent. In an opinion with 28 footnotes, including some on every single page, he laid out a detailed analysis of the relevant statutory changes.

Statutory Changes with BAPCPA
First, § 521(a)(2)(C) now explicitly says that the debtor's rights about his or her property under the Statement of Intention subsection are not altered, "except as provided by section 362(h)." The new subsection referred to there says that the automatic stay is cut off and the property is no longer property of the estate if debtor does not timely file a Statement of Intention or fails to act timely as indicated in the Statement. (Note: all references here to Bankruptcy Code sections are as they were re-numbered after BAPCPA.)

Second, under the new § 521(a)(6) a debtor

shall . . . not retain possession of personal property as to which a creditor has an allowed claim for the purchase price secured in whole or in part by an interest in such personal property unless the debtor, not later than 45 days after the first meeting of creditors . . .

A) enters into [a reaffirmation] agreement . . .; or

B) redeems such property . . . .

If the debtor fails to act within the 45-day period . . . the stay under section 362(a) is terminated with respect to the personal property of the estate or of the debtor which is affected, such property is no longer property of the estate, and the creditor may take whatever action as to such property as is permitted by applicable nonbankruptcy law . . . .

Third, under the new § 521(d), if a debtor fails to reaffirm or redeem as stated in § 521(a)(6) or to file the Statement of Intent or to act on it timely, then

nothing in this title shall prevent or limit the operation of a provision in the underlying lease or agreement that has the effect of placing the debtor in default under such lease or agreement by reason of the occurrence, pendency, or existence of a proceeding under this title or the insolvency of the debtor. Nothing in this subsection shall be deemed to justify limiting such a provision in any other circumstance.

In re Parker Effectively Overturned by These Amendments
Judge O'Scannlain observed that Parker had relied on the lack of any mandatory act for the debtor in § 521(a) beyond filing the Statement of Intention. But now these new provisions mean that the debtor is now not only required to file a Statement of Intention "but also [to] follow through with his expressed intent." Parker had also relied on the lack of ambiguity in § 521(a)(2)(C) in not altering debtor's rights "with regard to such property under this title." But now the phrase "except as provided in section 362(h)" immediately after makes "this conclusion . . . not only obsolete but actively contradicted."

When the debtor failed to reaffirm timely as required under the new provisions, the automatic stay expired and the vehicle was no longer the property of the estate. But, Judge O'Scannlain continued, that did not in itself authorize Ford Motor Credit to repossess, it "merely lifted one obstacle to its doing so." He acknowledged another obstacle: "§ 365(e)(1)(B) generally renders unenforceable any contractual term which purports to create a default solely based on the commencement of a bankruptcy case." The contract here had such a "ipso facto" clause, but § 365(e)(1)(B) seemed to block its use. However, the judge reasoned that § 521(d) provided a new way around that. As a consequence of the debtor not doing what that provision required--reaffirm or redeem, "nothing in [the Code] prevent[ed] or limit[ed] the operation of [the ipso facto] provision in the underlying [contract]." Thus, "our decision in Parker has been superseded by BAPCPA. Accordingly, Ford did not violate the discharge injunction in repossessing Dumont's vehicle."

Dissent
In contrast, Judge Susan Graber reasoned that BAPCPA's "changes to the [statutory] text indicate an intent to perpetuate the extant circuit split, not resolve it." [Italicized in original.] The heart of the dispute, § 521(a)(2)(A), "remains entirely unchanged." The new § 362(h) addition to the automatic stay statute, on which the majority opinion relies so much, "suggests that, if anything, Congress intended no change to the existing circuit split." (Emphasis in original.] She focuses on the concluding phrase in that new subsection, which requires a debtor to follow of one of three options laid out in the Statement of Intention, "as applicable," She equates that to the "if applicable" phrase in § 521(2)(A) upon which Parker had focused in its rationale that reaffirmation was not mandatory in order to retain a vehicle.

The dissent cited this rule of statutory interpretation: " 'Congress is presumed to be aware of an administrative or judicial interpretation of a statute and to adopt that interpretation when it re-enacts a statute without change.' " In spite of the notoriety of the circuit split, "Congress did not amend § 521(a)(2)(A) or the critical phrase 'if applicable.' " Indeed, it "carried forward the important qualifier 'applicable'." So, "we should continue to read the statute as we did pre-BAPCPA." "Congress decided to do nothing--neither increasing nor decreasing access to ride-through," "thus perpetuating the circuit split."

After appealing to the "overarching guiding principle of statutory interpretation . . . [that] '[t]he principal purpose of the Bankruptcy Code is to grant a fresh start to the honest but unfortunate debtor'," Judge Graber concluded that "we have already answered the question at hand [in] In re Parker. . . . Because the BAPCPA amendments add only confusion, I would not overrule In re Parker.

Limitations on the Holding
The majority opinion acknowledged some courts have allowed post-BAPCPA ride-through, but asserted that "in each of these cases there was 'substantial compliance with § 521(a)(2), § 521(a)(6), and § 362(h)'." In these cases the bankruptcy courts had not approved the reaffirmation agreements even though the debtors had sought for them to do so. Judge O'Scannlain also acknowledged not ruling on this creates uncertainty, but said the issue was not before the court.

NOTE: Both Judge O'Scannlain and Judge Graber are based out of the Portland branch of the Ninth Circuit Court of Appeals in Pioneer Courthouse, and both formerly practiced law in Portland. Judge Graber also had been on the Oregon Court of Appeals and then the Oregon Supreme Court, before starting at the Ninth Circuit in 1998. Judge O'Scannlain has been at the Ninth Circuit since 1986.

New Bulletins on this website will provide summaries of other opinions within the Ninth Circuit shortly after they are published. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO SUCH FUTURE REPORTS.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that the writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Above-Median Income Ch. 13 Debtor Can't Deduct Vehicle "Ownership Cost" on Vehicle Owned Free and Clear: 9th Circuit Affirms Judge Dunn's BAP Opinion

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com


Ransom v. MBNA America Bank (In re Ransom)
Ninth Circuit Court of Appeals, Case No. 08-15066
August 14, 2009

The Issue and Decision

The first two sentences of this opinion state the Issue and decision clearly:

Does an above-median income debtor seeking bankruptcy relief under chapter 13 get to deduct from his projected disposable income (that otherwise would be available to unsecured creditors) a vehicle “ownership cost” for a vehicle he owns free and clear? Based upon our interpretation of the controlling statute, 11 U.S.C. § 707(b)(2)(A)(ii)(I), our answer is “no.”

Old News Packaged into an Intriguing Opinion

This opinion upheld the nearly two-year old published decision of the same name of the Ninth Circuit Bankruptcy Appellate Panel,380 B.R. 799 (BAP 9th Cir. 2007). So most practitioners presumably have already been abiding by this holding, and thus in practical terms this Ninth Circuit opinion is old news. Indeed this has been the law in Oregon even longer, since a published decision by Judge Radcliffe in August, 2006, In re Carlin, 348 B.R. 795.

Nevertheless, this new Ninth Circuit opinion is still tantalizing, particularly in Oregon, because:

1. Not only was Oregon's Judge Randall Dunn the author of the affirmed BAP opinion, the Ninth Circuit took the somewhat unusual step of excerpting and adopting more than two full pages of the "cogent reasoning of our BAP."

2. The Ninth Circuit's decision put it "in the uncomfortable position" of explicitly rejecting the rationale and conclusion of "two of our sister circuits," instead following what it called "roughly half of the courts to address the issue," including one other BAP opinion and Judge Dunn's underlying BAP opinion.

3. In the excerpted portion of his BAP opinion, Judge Dunn relied most heavily on ,and quoted a paragraph from, a Wisconsin district court decision ,which was subsequently overturned by the Seventh Circuit Court of Appeals. This Seventh Circuit opinion was published a full half-year before oral arguments on this Ninth Circuit appeal, and was discussed by the Ninth Circuit in its opinion. The Ninth Circuit not only included this paragraph from the overturned Wisconsin opinion in its excerpt, it even mistakenly attributed it to Judge Dunn's opinion. That put the Ninth Circuit in the position of quoting an overturned lower court opinion in support of the heart of its own rationale, while inadvertently or possibly intentionally making it look as if that quote was written by its BAP.

4. The case was deemed sufficiently important to merit two amicus curiae, one from the Executive Office of the U.S. Trustees, and the other from the National Association of Consumer Bankruptcy Attorneys (NACBA).

5. The courts also apparently agreed that this was an urgent case: the debtor received "leave to appeal the bankruptcy court's interlocutory order to our BAP," which, upon issuing its decision "certified its disposition of the case to this circuit for possible review of the non-final order," and then the Ninth Circuit "authorized this interlocutory appeal to go forward."

6. For those readers easily entertained by appellate judges' subtle humor, the Ninth Circuit rejected the "plain language approach" of the Fifth and Seventh Circuits and instead embraced what it called the "statutory language, plainly read" approach of Judge Dunn's opinion. Perhaps this is less funny than it is unhelpful.

7.The Ninth Circuit concluded with what it characterized as an "unusual step": after complaining about "the unnecessary cost of thousands of hours of valuable judicial time" spent struggling with this question, the court explicitly asked Congress to clarify the conundrum through legislation, and did so by "directing the Clerk of the Court to forward a copy of this opinion to the Senate and House Judiciary Committees."

Statutory Context

This interpretation of one ingredient of BAPCPA's means test is one of first impression in this Circuit. To meet the "disposable income" requirement of a Chapter 13 plan under § 1325(b)2)(A)(i), a debtor must pay into the plan all "current monthly income . . . less amounts reasonably necessary to be expended for the maintenance and support of the debtor . . . ." § 1325(b)(3) requires an above-median income debtor to determine the "amounts reasonably necessary to be expended" under the means test of § 707(b)(2). The sentence at issue is the means test's definition of a debtor's "monthly expenses" at § 707(b)(2)(A)(ii)(I):

a debtor’s monthly expenses shall be the debtor’s applicable monthly expense amounts specified under the National Standards and Local Standards, and the debtor’s actual monthly expenses for the categories specified as Other Necessary Expenses issued by the Internal Revenue Service for the area in which the debtor resides . . . . [Emphasis added.]

The IRS's Local Standards' transportation costs include "operating costs" and "ownership costs." The specific issue of statutory interpretation is whether a debtor may deduct the IRS's Local Standard for "ownership costs" as an "applicable monthly expense" on a vehicle if debtor makes no loan or lease payments on that vehicle.

The "ownership cost" for one vehicle under the Local Standards in this case was $471 per month, so in a 60 month plan this amounted to a difference of $28,260 paid or not paid into the plan.

The Ninth Circuit's Rationale

The two circuits which had already addressed this issue--the Fifth and Seventh--both held that a debtor in this situation IS entitled to include the Local Standard "ownership cost" as an expense. They interpreted the word "applicable" in the phrase "applicable monthly expense amounts specified under the National Standards and Local Standards" to mean that specific "ownership cost" in the IRS' Local Standards which applied to the debtor's geographical region and number of vehicles.

In contrast the Ninth Circuit here in Ransom held that " 'applicable' means that a debtor actually is making a loan or lease payment." The court acknowledged but did NOT adopt the "IRM approach" (from the Internal Revenue Manual in which the Standards are located), That approach reasons that Congress must have intended by its use of the IRS' Standards to have courts look at how the IRS interprets the expense categories. The IRM and other IRS publications do not allow the use of the "ownership cost" expense unless a taxpayer is making loan or lease payments on the vehicle.

Instead of relying on this IRM approach, the court reached the same result but by a different rationale by adopting what it called Judge Dunn's BAP opinion's "statutory language, plainly read" approach. Under this, according to the Ninth Circuit, "[a]n 'ownership cost" is not an 'expense'--either actual or applicable--if it does not exist, period." The core of this BAP opinion's rationale, excerpted in the Ninth Circult opinion, is that:

[a]s set forth in the statute, the adjective “applicable” modifies the meaning of the noun “monthly expense amounts;” it indicates that the deduction of the monthly expense amount specified under the Local Standard for the expense becomes relevant to the debtor (i.e., appropriate or applicable to the debtor) when he or she in fact has such an expense.

The adopted BAP excerpt finished with three points:
1) "[t]he ordinary, common meaning of 'applicable' "--"capable of being applied"--makes no sense if there is no loan or lease payment to which the "ownership cost" could be applied;
2) there are mechanisms for allowing additional operating expenses for older vehicles or for other special circumstances in § 707(b)(3)(B);
3) the result of this interpretation is "consistent with the underlying goals of BAPCPA": "to ensure that debtors repay as much of their debt as reasonably possible."

Conclusion

As Judge Dunn said in footnote in his 2007 BAP opinion, already by that time fifty different courts had ruled on this issue, "many of which set forth variations on the prevailing rationales." This demonstrates yet again the dreadfully unclear drafting of BAPCPA. In its final paragraph in this Ransom opinion, the Ninth Circuit expressed its frustration with this reference to Greek mythology: "We would hope, in this regard, that we the judiciary would be relieved of this Sisyphean adventure by legislation clearly answering [the] straightforward policy question [at issue in this opinion]."

To save you a trip to Wikipedia, Sisyphus was the first king of Corinth who was punished by Zeus--for acting like he was more clever than the gods--by being forced to roll a large boulder up a steep hill only to have it roll all the way down just as he almost got to the top, and then to repeat this forever. Although the Supreme Court may eventually tell us which of the diametrically opposed circuit courts happen to be right on this present issue, an eternity of frustration is ahead of us unless Congress returns to clean up the many confusions of BAPCPA. Until then, keep on rolling.

New Bulletins on this website will provide summaries of other opinions within the Ninth Circuit shortly after they are published. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO SUCH FUTURE REPORTS.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that the writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

B'cy Ct. Can Avoid the 45-Day Automatic Dismissal of Sec. 521(i) with an Order Entered AFTER the 45 Days, to Prevent a Ch. 7 Debtor's Abusive Conduct

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com



Wirum v. Warren (In re Warren)
Ninth Circuit Court of Appeals, Case No. 07-17226
June 18, 2009


The Issue

BAPCPA more than tripled the verbiage of § 521 of the Bankruptcy Code, the section titled "Debtor's duties." One of the many added provisions, § 521(i)(1), states that if a debtor does not file a specified set of documents within 45 days of filing, "the case shall be automatically dismissed effective on the 46th day after the date of the filing of the petition." Under § 521(a)(1), most of the documents in that set are required to be filed "unless the court orders otherwise." Here the Ninth Circuit addressed "whether the bankruptcy court has the discretion to 'order[ ] otherwise' and thereby waive the § 521(a)(1) filing requirement by entering an order after the forty-five day filing deadline in § 521(i)(1) has passed."

The Decision
This is an issue of first impression in the Circuit, with only the First Circuit Court of Appeals having addressed it before. The Ninth Circuit here went against the majority of bankruptcy and district courts, but followed the First Circuit, in ruling that the bankruptcy court DOES have discretion to waive the filing deadline even after that deadline had passed. However, the bankruptcy court appears to have this discretion in only very select circumstances, and likely NOT when debtors' attorneys would want.

The Statute and Automatic Dismissal
§ 521(a)(1) and (i)(1) state in pertinent part:

(a) The debtor shall--
1) file--
A) a list of creditors; and
(B) unless the court orders otherwise--
[(i) through (vi): a list including schedules of assets, liabilities, income and expenses, statement of financial affairs, 60 days of pay stubs]

(i)(1) . . . if an individual debtor in a voluntary case under chapter 7 or 13 fails to file all of the information required under section (a)(1) within 45 days after the date of the filing of the petition, the case shall be automatically dismissed effective on the 46th day after the date of the filing of the petition. [Emphasis added.]

How could the Ninth Circuit, and before it the First Circuit, give the bankruptcy court discretion to address this deadline after the 45-day period in spite of the statute's language expressly mandating dismissal of the case on the 46th day? Indeed, in this case the bankruptcy court did not order waiver of the 45-day deadline until more than six months had passed since the date of filing. How was the case even still active then if the statute clearly seems to provide for automatic dismissal on the 46th day after filing?

The Facts
This is not a case where debtor sought to avoid dismissal, but the opposite: debtor moved to dismiss his Chapter 7 case about five months after its filing, to get out of a case he clearly no longer wanted to be in.

The debtor had filed the bankruptcy case apparently in reaction to a state court order to his bank to freeze his bank accounts and turn over $93,000 to satisfy a child support arrearage. When debtor failed to file all the necessary documents at the time of his original bankruptcy case filing, the bankruptcy court issued the usual 15-day order of potential dismissal, and then scheduled a hearing on his failure to file those documents within the 15 days. Before that hearing the Chapter 7 trustee requested that the case not be dismissed, in order to give her time to determine if there were any assets available for distribution to the creditors. (Although not revealed in the Ninth Circuit opinion, the trustee had learned from debtor's bank that it intended to satisfy the $93,000 obligation from debtor's account, and also that debtor had withdrawn about $90,000 from that bank account.) At the hearing, which occurred 37 days after the date of filing, the court granted this request not to dismiss. Debtor did not appear in spite of an order to do so to face sanctions for failing to file the bankruptcy documents.

Then months later, in response to debtor's subsequent motion to dismiss the case, the bankruptcy court first waived the document filing requirement and then denied debtor's motion to dismiss. Debtor appealed.

Rationale
Throughout its analysis, the Court relies extensively on the First Circuit opinion referred to above, Segarra-Miranda v. Acosta-Rivera (In re Acosta-Rivera), 557 F.3d 8 (1st Cir. 2009), quoting or citing this February 2009 opinion no less than fourteen times.

The Ninth Circuit Court's analysis starts with its assertion that the statutes at issue, § 521(a)(1) and § 521(i)(1), are ambiguous as to "whether subsection (i)(1)'s forty-five day filing deadline limits the power of a court to 'order[ ] otherwise' and waive the (a)(1) filing requirement." This purported statutory ambiguity required the Court to look at the possible interpretations of the statute "in light of the purpose of the statute." The Court determined that Congress' core purpose in enacting BAPCPA was to prevent abusive bankruptcy filings. Abusive filings would be discouraged by allowing the bankruptcy court to "decline to dismiss the debtor's case if it determines the debtor is abusing and manipulating the bankruptcy system."

Accordingly, the Court found that both this Congressional intent and what it called the "authentic value of automatic dismissal" would be served by determining that the bankruptcy courts have the discretion not only 1) to dismiss the case, or 2) not to dismiss based on the statutory exceptions, but also 3) to "determine, in its discretion, that the missing information is not required or that denial of dismissal is necessary to prevent a debtor from abusing and manipulating the bankruptcy system."

The Court recognized that the majority of bankruptcy and district courts had decided to the contrary, that the automatic dismissal provision does NOT give bankruptcy courts discretion, especially after the 45-day deadline had passed, to avoid dismissing the case. But because "such a reading also would allow abusive and manipulative debtors to gain automatic dismissal and thereby encourage bankruptcy abuse," the Court simply "decline[d] to read § 521 in this manner."

The Holding
It held that "where a bankruptcy court reasonably determines that there is no continuing need for the information or waiver of the filing requirement is necessary 'to prevent automatic dismissal from furthering a debtor’s abusive conduct, the court has discretion to take such an action.' " [Quoting in part from Acosta-Rivera.]


Query #1: Does this Ninth Circuit opinion open the door to giving bankruptcy courts the discretion to extend this 45-day deadline on behalf of debtors, and particularly to do so AFTER that 45-day period has passed?
The Court does not address this directly, but its rationale and holding do not apply to debtors' extension requests, so the opinion does not give any support for such requests. The First Circuit in Acosta-Rivera was good enough to state clearly that it did "not decide today whether bankruptcy courts possess unfettered discretion to waive the disclosure requirements ex post." The Ninth Circuit made no such clarification, but its decision was similarly narrowly focused, and thus did not address, favorably or not, even in dicta, the question whether a debtor could avoid the automatic dismissal of § 521 (i)(1).

Query #2: Why did the Ninth Circuit Not Address a Critical Subsection?
In its interpretation of § 521(i)(1), the Ninth Circuit does not address the subsections immediately after, that is § 521(i)(2), (3), and (4). These are the statutory conditions and exceptions to the automatic dismissal of § 521(i)(1) so a careful review of them seems essential. § 521(i)(2) especially appears pertinent, stating that:

any party in interest may request the court to enter an order dismissing the case. If requested, the court shall enter an order of dismissal not later than 5 days after such request.

The debtor is a "party in interest," and so this provision seems to give no discretion to the court in dismissing the case upon debtor's request if the requisite documents are not timely filed.

This issue was certainly raised on appeal by debtor: a detailed statutory analysis of these three subsections was at the very heart of the district court opinion on appeal, Warren v. Wirum, 378 B.R. 640 (N.D. Cal. 2007). And yet this Ninth Circuit opinion overturning that district court opinion oddly made absolutely no mention of these clearly pertinent subsections. Even the First Circuit opinion relied on so heavily in this Ninth Circuit opinion addressed these subsections, explaining that these subsections "operate within their own statutory ambit and do not cabin the bankruptcy court's discretion in other areas." The Ninth Circuit opinion simply states in a conclusory footnote that "none of th[e] § 521(i)(1), (3), (4) exceptions apply in this case," without any reference whatsoever to § 521(i)(2) which seems clearly to apply . In my view, the Court's failure to address this diminishes its opinion's credibility and likely its longevity .

New Bulletins on this website will provide summaries of other opinions within the Ninth Circuit shortly after they are published. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO SUCH FUTURE REPORTS.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that the writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Judge Trish Brown Rules that $10,000 IRS Debt is Priority Debt Because 3-Year Look-Back Period is Tolled under the BAPCPA-Amended §507(a)(8)

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com


In re Steen
Oregon Bankruptcy Court Case No. 08-35047-tmb13
April 13, 2009

§507(a)(8) of the Bankruptcy Code is the provision determining which tax debts are priority and thus must be paid in full in a Chapter 13 case. BAPCPA added an unnumbered paragraph to this subsection. Although this opinion by Judge Trish Brown is unpublished, neither the judge nor either party found any case law interpreting this unnumbered paragraph, so this appears to be a case of first impression and worthy of attention.

In her opinion the judge declined to apply equitable principles of tolling urged by the debtors but rather applied "the plain language" of the unnumbered paragraph, ruling that an IRS tax debt was a priority debt because the three-year look-back period was tolled during the 31 days that a prior Chapter 13 case had been pending, plus the 90 additional days referred to in the paragraph, a total of 121 days of tolling. The case at issue had been filed before the passing of this three years plus 121 days. Had the Chapter 13 case been filed about 75 days later, the debtors would have had about $10,000 less in priority debt to pay in their plan.

The BAPCPA "Unnumbered Paragraph"
That added paragraph in §507(a)(8) stated, as pertinent here:

An otherwise applicable time period specified in this paragraph shall be suspended for . . . any time during which the stay of proceedings was in effect in a prior case under this title . . . plus 90 days.

The "applicable time period . . . suspended," or tolled, here was the one pertaining to income taxes, "for which a return . . . is last due, including extensions, after three-years before the date of the filing of the petition."

The Critical Facts and the Specific Issue
Chapter 13 debtors objected to the IRS' proof of claim, which treated one tax year's liability of about $10,000 as a priority claim. Debtors had filed their Chapter 13 case 46 days plus three years since that liability's tax return had been due after a tax filing extension. But about a year earlier a prior Chapter 13 case had been filed and then dismissed only 31 days later, all well before the three-year look-back period had expired. How should the three-year look-back period and tolling rules be calculated when the prior case occurred entirely within that period?

The case turned in large part on an interpretation of the Supreme Court's holding in its 2002 unanimous opinion in Young v. U.S., 535 U.S. 43, which the legislative history clearly indicated was intended to be codified in this addition to §507(a)(8).


Debtors' Argument
Debtors looked to the Young opinion for authority that the bankruptcy court should look to the traditional equitable tolling principles "to determine the extent, if any, to which the lookback period was tolled by their prior bankruptcy filing." Under these equitable principles, the IRS rights would be protected not expanded by the tolling, with the result that, as argued by debtors' counsel: “if the three year time period had not run when a prior bankruptcy case was filed, then such period would run the later of 90 days after the end of the prior bankruptcy case or the full three year period." That is, tolling occurs only if the three year period expires less than 90 days after the prior case was over.

IRS' Argument
The IRS appeared to interpret Young instead to say that the three-year period was tolled for the length of time the prior case was pending, regardless that this occurred well within the three-year period. Thus, following the statute, the IRS argued that the look-back period is simply extended for the number of days the prior case was pending plus 90 days.

Judge Brown's Rationale
While finding that "there is some appeal to the Debtors’ argument," the judge determined that "it runs afoul of the plain language of the statute." She said that the clause stating that the "applicable time period . . . shall be suspended for . . . any time during which the stay of proceeding was in effect in a prior case under this title" "clearly contemplates that the lookback period shall cease to run during the time that a debtor is in bankruptcy plus 90 days."

As additional justification, the judge referred to another statute in the Code, §108(c), in which Congress laid out expressly a time calculation very similar to the one that Debtors sought to apply here, as indication that "had Congress intended such a result it clearly knew how to word the unnumbered paragraph to accomplish that goal. It did not do so."

The Bottom Line
The Supreme Court's Young opinion stated that "[i]t is hornbook law that limitations periods are 'customarily subject to equitable tolling,' unless tolling would be 'inconsistent with the text of the relevant statute.' " (Citations omitted.) Although Judge Brown did not refer to this in her opinion, she looked to "the text of the relevant statute" to determine, that the principles of equitable tolling were subservient to "the plain language of the statute." The three-year period of §507(a)(8) is tolled for whatever period of time a prior bankruptcy case is pending, plus 90 days, regardless when that prior case occurred in relation to that three-year period.

New Bulletins on this website will provide summaries of other opinions within the Ninth Circuit shortly after they are published. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO SUCH FUTURE REPORTS.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that the writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Why President Obama Let the Bankruptcy Cramdown Legislation Die of Neglect

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

After the bankruptcy cramdown legislation was voted down on the Senate floor at the end of April, one of the reasons cited for its defeat has continued to confound both its supporters and its opponents: why did President Obama not push hard for the legislation that he had consistently supported, just when his help was most needed?

This is no mere academic question. The foreclosure crisis continues to show little sign of abating. The Administration's true attitude towards the legislation is a key factor for those supporters in deciding whether and when they should renew their efforts in Congress.


The Neglect
The White House put virtually no effort into the bankruptcy legislation after the House passed its version in early March.

Contrast what happened on credit card reform, which the President just signed into law on Friday, May 22. He met with credit card lenders at the White House about the legislation in late April right before the House passed its bill. On the morning of that vote, Treasury Secretary Timothy Geithner convened a meeting with the House bill's sponsor and consumer groups, at which he trumpeted the Administration's strong support. The White House publicly got involved in the negotiations, pushing certain provisions, broadcasting again that the Administration was deeply invested in the law's passage. Obama promoted it personally in a prime-time news conference and then again in one of his weekly weekend radio addresses, and then even traveled to Albuquerque, New Mexico for a highly publicized town hall meeting specifically on this issue, putting the full weight of his office behind the bill a few days before the Senate vote. Finally, the President pronounced weeks ago that he wanted to sign a credit card reform bill by the Memorial Day weekend, with the result that the Senate passed its version this last Tuesday, the House passed the compromise version on Wednesday, and, lo and behold, the bill was ready for the Rose Garden signing ceremony just in time for this "deadline."

This White House clearly knows how to go on the offensive. In stark contrast, everybody could tell, especially the Senators on the fence, that there was no offensive push whatsoever on the bankruptcy bill. Not a single word of public support from the President between the time of House passage and the Senate vote. Why not?

Two possible theories.

1) Genuine Ambivalence

Is it sensible that, notwithstanding the Presidential campaign rhetoric and Obama's inclusion of bankruptcy cramdown in his Administration's economic battle plan, he or his economic team actually did not believe in it? Or at least not enough?

Barack Obama had consistently supported the concept of bankruptcy mortgage cramdown. He promoted it explicitly during his Presidential campaign, devoting an entire (albeit short) speech to bankruptcy reform, a rather unusual elevation of bankruptcy law to the national stage. His campaign website listed "Reform of Bankruptcy Laws," including mortgage cramdown, as one of his 10 key bullet-points on the Economy (see my Bulletin of August 28, 2008). His support did not end with the election. A month after his inauguration, after he and his staff had had a few months since Election Day to consider the appropriate role of mortgage cramdown in addressing the foreclosure crisis, the President included the following paragraph in a major speech on his plan to address the foreclosure crisis:

My administration will continue to support reforming our bankruptcy rules so that we allow judges to reduce home mortgages on primary residences to their fair market value – as long as borrowers pay their debts under a court-ordered plan. That's the rule for investors who own two, three, and four homes. It should be the rule for ordinary homeowners too, as an alternative to foreclosure.

That sounds like genuine support. Two weeks later the House passed its cramdown bill.

But at that point, it's as if the lights went out. Only muted or ambiguous public support followed. The most visible comment from the Administration thereafter came from Treasury Secretary Timothy Geithner on April 21 during questioning before the congressional oversight panel overseeing the financial bailout. The panel's otherwise very able chair, Elizabeth Warren, who had championed bankruptcy cramdown, made the most basic litigator's error: she asked the witness, Geithner, a question she did not know how he would answer. Or perhaps more accurately, Geithner just did not follow the lead of her leading question. Obama had said that cramdown was a vital incentive, the "stick," to encourage mortgage holders to enter into mortgage modifications. With that undoubtedly in mind, Warren asked Geithner if the cramdown bill was essential, to which he replied: “We are supportive of carefully designed changes” to bankruptcy law. "It’s a difficult balance to get right, as you know,” he continued, lamely adding, “But the president is supportive of this.”

This response was universally seen as unenthusiastic and ambivalent just when Senate negotiators desperately needed a hearty endorsement. Indeed, it gave any wavering Democratic Senators a clear signal that this legislation was not an Administration priority and that there would not be significant consequences if they strayed from the fold on this one.

The following week, the Senate voted down the measure.

Did the Obama economic brain trust, after a few months of grappling with so many angles of the broader economic picture, believe at least on some level the main talking point of the Mortgage Bankers Association, that the mortgage credit markets are in a such a delicate state that inserting a major unknown such as the cramdown law, with its inevitable immediate significant uptick in Chapter 13 bankruptcy filings, was too risky? Or did the Administration determine at some point that their beefed up non-bankruptcy mortgage modification programs should be first given an opportunity to work without the incentive of a possible Chapter 13 cramdown? More specifically, did these decision-makers fear that cramdown would force the nation's financial institutions at all levels to more quickly acknowledge the true value of their mortgage assets, overstressing the financial system just when it seemed to be starting to regain some traction?

Rahm Emanuel, Obama's chief of staff and de facto legislative strategist, knows, but he's not talking.


2) Utilitarian Political Calculation

At some point, perhaps even before the House vote in favor of the measure, the White House made a decision that the cost of expending political capital on the cramdown legislation was not worth the anticipated benefit. An educated guess was made that Senator Durbin would not be willing to gut the bill by restricting it to subprime or a similarly restricted set of loans, that the mortgage industry would not bend to accept a broadly applicable bill, with the reliably predictable result that the bill would thus fail to garner every one of the essential Democratic Senate votes much less the necessary few Republican ones to get to the filibuster-proof 60 votes. Knowing the power of the financial services lobby, particularly on many of the crucial swing Senators, and knowing the relative discipline of the Republican Senators, the Administration determined that the legislation would almost certainly not pass in the Senate.

The only unknown in that utilitarian calculus was the difference that a full Presidential offensive could make on the outcome. The decision by the White House against mounting this offensive had the following Congressional and public components.

The Congressional Calculus
On the Congressional side, the Administration saw that the issue was starkly partisan, exemplified by the House Judiciary Committee vote just one week after the inauguration, in which the bill carried 21-15 but on strictly party lines. Given the other monumental legislative battles ahead--such as health care and climate change--this particular one was determined to be not worth enough to allow its partisan collateral damage to affect those future battles. Indeed, although there were a few Republican Representatives had voted to help pass the House bill, not a single Republican Senator voted for in favor of the Senate bill. Splitting off some of these disciplined Republican votes would only have been possible with a great deal of bruising arm-twisting.

By way of great contrast, the battle the Administration instead chose to pick against the financial industry, the credit card reform which became law this last week, was much less partisan. The bipartisan votes reflect this: it passed the House 357-70, the Senate 90-5, and then the House again 361-64. These votes were relatively one-sided partly because of the Administration's multi-faceted aggressive push, but more so because credit card reform, at least at this political moment, was much less divisive than bankruptcy cramdown. The Administration needed this infinitely less bloody and less risky victory.

Assessing the Public Mood
On the public side as well, the White House made an assessment of the public mood and concluded that, given the tenor of the moment, it was battling against the tide, and should cut its losses. Had the Administration pushed hard and lost, it would have taken a significant hit to its reputation.

The Administration perceived that, first, the pool of people personally affected by credit card interest rates and fees is many times larger than those personally affected by foreclosures.

Second, a large percentage of the public is frustrated by their credit card lenders and their seemingly unlimited arbitrary power, this frustration greatly accentuated these last few months as these lenders have tried to reduce their losses by much more aggressively using the discretion that their one-sided contracts have given them. As Senator Charles Schumer, one of the cramdown legislation's chief supporters, expressed:

"Bankruptcy reform, important as it was, was sort of esoteric. If you went into O'Halloran's Pub, the fellas aren't saying to you, 'What's going on with bankruptcy reform?' But they might say, 'What are you doing about my credit cards?' The average person feels the second much more than the first . . . ."

And third, although there are plenty of credit card abusers, somehow in the general public's eye credit card borrowers were helpless victims while homeowners being foreclosed on were much less so. The picture of millions of innocent homeowners who had been merely counted on what had largely been consistently occurring for two generations--increases in home values--was indelibly sullied with and overwhelmed by images of greedy house-flipping speculators and refinance-addicted spendthrifts. Perversely, and in no small part because of the persistent efforts of the mortgage lobby spanning at least two legislative cycles, a substantial portion of taxpayers transferred their outrage about having to shoulder the costs of the financial industry's collapse into an indignant moral superiority: "I've been responsible in buying a house within my means and paying on my mortgage so why should I pay for someone else's irresponsibility and failure to understand their mortgage terms?"

The White House realized the limits of its bully pulpit against such visceral attitudes.

Conclusion

The Obama Administration is cautious, rational and realistic. It determined at some point that, in the totality of the present circumstances, bankruptcy mortgage cramdown was not going to make it through the Senate. So, after that point the Administration did not invest hardly any of its political capital on that fight. The result: with almost no money on this race, it did not lose much. Although the Mortgage Bankers Association and its allies crowed about its success, and news reports labeled this as a defeat for the Administration, that part of the story faded quickly. The swiftness of the subsequent passage of the credit card reform bill, with its relatively strong bipartisan support, was in part orchestrated by the White House to mute the loss on the bankruptcy bill, to demonstrate its ability to prevail against at least one sector of the financial services industry.

Would the Administration's full support, akin to its effort with the credit card reform, have made a difference in the outcome? Take it from one of the chief legistlative opponents, Camden Fine, President and CEO of the Independent Community Bankers of America: "This would have been a much different deal if Obama had pressed it." "The fact that Obama effectively sat it out helped us a great deal."

Whether this bankruptcy legislation will return depends on two primary unknowns:
1) the evolution of the economy in the coming year or so, particularly how much the Obama Administration's enhanced loan modification programs reduce the millions of anticipated foreclosures and their tremendous strain on the economy; and
2) the true attitudes among the President's economic team about the benefits and risks of bankruptcy mortgage cramdown, and how those attitudes evolve over the coming months.

This Administration has only been in power for one quarter of a year, has had to deal with a tsunami of economic issues, and understandably has had to pick its battles. By all indications, the home foreclosure scene will still be one crying out for further attention for many months to come. We may well still have the opportunity to see what would happen to bankruptcy cramdown if this Administration gave it its full-throated support.

New Bulletins on this website will provide articles of interest related to any future bankruptcy mortgage cramdown legislation, non-bankruptcy mortgage modifications, foreclosures and similar subjects. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED WITH LINKS TO SUCH FUTURE BULLETINS.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that the writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

New Ninth Circuit Lehtinen Opinion on Bankruptcy Court's Authority to Sanction Attorneys Trumps Part But Not All of Recent Judge Dunn BAP Opinion

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com


In re Brooks-Hamilton
Ninth Circuit Bankruptcy Appellate Panel No. NC-08-1233-DJuMk
January 21, 2009

A couple of weeks ago the Ninth Circuit addressed the bankruptcy court's inherent authority to suspend an attorney from practicing before it, in Price v. Lehtinen (In re Lehtinen). (See last week's Litigation Report on that opinion.) A few months earlier the Ninth Circuit BAP had addressed the very same issue, in a published opinion authored by Judge Randall Dunn, the In re Brooks-Hamilton opinion addressed in this Bulletin. The question is whether this published BAP opinion, or any part of it, is still good law in the Circuit after Lehtinen? This may be of particular importance to attorneys who practice in Judge Dunn's courtroom in Oregon.

A Touch of Background
This case has an extended history, certainly for the attorney fighting for six years, so far unsuccessfully, to avoid a six-month suspension. It involved a prior dance up the appellate staircase, resulting in an earlier BAP published opinion, the Ninth Circuit sending the case back to the bankruptcy court on remand, and now the attorney again appealing to the BAP. After a lessening of the monetary sanction, the appeal is now limited to the bankruptcy court's reimposed six-month suspension sanction.

The Brooks-Hamilton Holding
The BAP, through Judge Dunn, held that bankruptcy courts derive their authority to suspend attorneys from practicing law in that district's bankruptcy courts from three sources: through an "inherent authority" to discipline attorneys before it, through § 105(a) of the Bankruptcy Code, and through Rule 9011 of the Federal Rules of Bankruptcy Procedure. Having established that the court has the authority to suspend, this left the question whether this sanction was appropriate here, particularly whether the bankruptcy court had considered the factors established in a 1996 9th Circuit BAP opinion, Peugeot v. United States Trustee (In re Crayton), 192 B.R. 970 (and followed in the 2005 Ninth Circuit BAP Lehtinen opinion from which last month's Ninth Circuit Lehtinen opinion referred to above was appealed).

In applying the Crayton factors, the BAP determined in Brooks-Hamilton that the disciplinary proceeding was fair in that the attorney received adequate notice and opportunity to be heard, and the evidence supported the bankruptcy court's findings. But the BAP also held that in determining the reasonableness of the sanction, the court abused its discretion in not expressly considering the American Bar Association standards for sanctioning attorneys, and so remanded to the bankruptcy court for further findings on the application of those ABA standards to the case.

The Ninth Circuit Silent in Lehtinen on Brooks-Hamilton
This analysis of Brooks-Hamilton as compared to the Ninth Circuit's Lehtinen leads to some quixotic and ironic observations. The first curiosity is that even though Judge Dunn's BAP opinion of January 21, 2009 and the April 28, 2009 Lehtinen opinion addressed identical issues, the Ninth Circuit opinion made no mention of the Brooks-Hamilton opinion. Given the Brooks-Hamilton case's prior appellate history, it seems like the Ninth Circuit judges and clerks should have had some familiarity with it. And the BAP case could not have been TOO new to fly under their radar--it was published, on an expedited basis, in January of this year while the Ninth Circuit case was not submitted to the Court of Appeals for decision until mid-February (there was no oral argument) and its opinion was filed in late April, 2009, seemingly with plenty of time to notice this BAP opinion published back in January. And although the higher court was under no obligation to name prior BAP cases on point in its opinion, it apparently intended to do so here: it said that "[t]he BAP has "held that the bankruptcy court has the power to disbar or suspend an attorney under its inherent authority power"--the key holding in the Brooks-Hamilton of January 2009--but cited instead to the 1996 Crayton BAP opinion cited above. Are the Ninth Circuit's judges or their law clerks not on top of recent case law? Must be--makes no sense that the opinion's author would purposely avoid referring to the most recent BAP opinion squarely on point.

The Appropriate Role of the ABA Standards in Attorney Sanctioning
A second curiosity is that the Ninth Circuit in Lehtinen managed to avoid addressing the dispositive holding in all three of the BAP opinions in play--Crayton from 1996, this Brooks-Hamilton one, and the BAP Lehtinen opinion below: the mandatory reference by the bankruptcy court to the ABA Standards to determine the reasonableness of the sanction. On this, Judge Dunn stated in Brooks-Hamiliton that "[t]he Panel has adopted ABA standards as the means for determining reasonable sanctions," and he quoted the BAP's Crayton opinion that the “[f]ailure to consider such factors constitutes an abuse of discretion" by the bankruptcy court. This quote was subsequently repeated and relied upon by the BAP judges in their Lehtinen opinion. And yet when that case came before the Ninth Circuit, after making passing mention of the BAP's reference to the ABA Standards in the introduction, its opinion never refers to the ABA Standards again, neither to embrace nor to reject them.

But while the Ninth Circuit in Lehtinen did not expressly reject reliance on the ABA Standards, it surely did so by clear implication. In its conventional recitation of the Standard of [Appellate] Review, the Court quoted its own precedents that "[t]his court independently reviews the bankruptcy court's ruling on appeal from the BAP," and "reviews an award of sanctions for an abuse of discretion." In its independent review, the Court could have affirmed the BAP ruling below that the failure to consider the ABA Standards "constitutes an abuse of discretion." Instead the Court addressed whether the bankruptcy court's procedures met the due process standards of notice and opportunity to be heard, and determined that it had met them. The Court "conclude[d] that because [the attorney] was accorded due process, the bankruptcy court possessed the inherent power to suspend him." The Court never felt a need to ask, as did all three BAP panels, whether the suspension sanction was reasonable in the circumstances. Clearly, the Ninth Circuit ruling is that a bankruptcy court has the power to suspend an attorney as long as she is afforded procedural due process, without any obligation to consult the ABA Standards as to the fairness of the suspension.

The "Tempest in a Teapot" of Brooks-Hamilton
One irony in this is that this now discredited reference to the ABA Standards was the entire focus of a multi-page repartee in Brooks-Hamilton between Judge Dunn's majority opinion and Judge Bruce Markell's very reluctant concurrence. Judge Markell, a former law professor, railed in his concurrence against the appropriateness of the ABA Standards in this context, and then against the Ninth Circuit BAP's "rigid view that we cannot change or alter our prior precedent, even if we think it dead wrong." "[B]lindly applying Lehtinen and Crayton to the facts of this case leads, I believe, to a result that should offend those who care about how courts operate, or who wish courts to operate rationally." He cites as authority for not "blindly applying" precedent sources as diverse as Aristotle, the economist John Maynard Keynes, and the British House of Lords of the 19th Century. The Keynesian quote was a particularly nice flourish: against over reliance on precedents: "When the facts change, I change my mind. What do you do, sir?"

Nevertheless Judge Markell concurs in Judge Dunn's holding on the mandatory use of the ABA Standards, perhaps mollified by this footnote in the Court's opinion:

For the reasons stated by Judge Markell in his concurrence, we all have serious questions as to the appropriateness of requiring explicit consideration of the ABA standards in determining the reasonableness of the suspension sanction imposed by the bankruptcy court. However, as further discussed herein, this Panel stated its reasons for requiring consideration of the ABA standards in Crayton and Lehtinen, and this Panel is bound by its prior decisions.

Perhaps to the relief of both judges, just three months later the Ninth Circuit Lehtinen opinion disregarded the ABA Standards, by its silence dispensing with the need for a bankruptcy court to make "explicit consideration of the ABA standards."

The "Standing Committee" Recommendation
Judge Dunn ended the Brooks-Hamilton opinion with a somewhat odd twist: a nonbinding "strong recommendation" to the bankruptcy court below. After instructing the bankruptcy court to determine the appropriate sanction under the ABA standards, he stated: "Although the Panel’s prior decisions do not require that the bankruptcy court refer the matter to the Standing Committee [on Professional Conduct of the Northern District of California], we strongly urge the bankruptcy court to do so, to spare itself from having to rehash this stale and exhausting matter." (Emphasis in original; citations omitted.) However, lest there be any doubt, the very last words of his opinion was this final footnote: "Despite that strong recommendation, we reiterate that the bankruptcy court has the authority, as discussed supra, to impose a district-wide disbarment or suspension sanction on an attorney for misconduct and/or incompetence in appropriate circumstances."

The Ninth Circuit in Lehtinen would definitely have agreed (had it taken to opportunity to acknowledge Judge Dunn's opinion): in the face of an argument by the sanctioned attorney that the bankruptcy case should have referred the matter to the court's Standing Committee on Professional Conduct pursuant to the bankruptcy court's rules, the Court pointed to the bankruptcy court's unfettered discretion within the same rules to "[i]mpose other appropriate sanctions" as an open-ended authority to suspend. Under this bankruptcy court's rules, whether or not it should refer the matter to the court's Standing Committee was completely discretionary, and thus it was free to impose the suspension instead.

The Bottom Line
Without referring by name to the BAP's Brooks-Hamilton opinion, the Ninth Circuit's Lehtinen opinion discarded 1) any reliance on the ABA's Standards for determining whether an attorney sanction is reasonable, and 2) any emphasis on referring attorney discipline issues to the court's Standing Committee on Professional Conduct. But the Court of Appeals followed all three BAP opinions--Brooks-Hamilton, Clayton, and Lehtinen--in approving, for the first time in this Circuit, the inherent authority of bankruptcy courts to suspend attorneys from all of its district's bankruptcy courts, as long as general procedural due process principles of notice and opportunity are followed. Each bankruptcy court must look to its own, and its district's court rules because each "are free to define the rules to be followed and the grounds for punishment.”

(Oregon attorneys should review, perhaps among others, LBR 9011-3: Sanctions, Remedies, & Suspension/Disbarment.)

New Bulletins on this website will provide summaries of other opinions within the Ninth Circuit shortly after they are published. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO SUCH FUTURE REPORTS.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that the writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Post-Petition Marital Dissolution Judgment, Allowed Through Prior Relief from Stay, Creates Valid Secured Claim in Chapter 13 Case

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

In re Goss

Oregon Bankruptcy Court, Case No. 06-31932-rld13

April 29, 2009

This Memorandum Opinion by Judge Randall Dunn, although unpublished, is worthwhile because 1) it addresses and gives good guidance in two areas which Chapter 13 practitioners deal with constantly--relief from stay and objections to claims, and 2) his Opinion sorts through these issues constructively in the very real world of a tough domestic relations dissolution.

I usually start these opinion summaries by getting right to the point with the legal issues and the court's holding(s), but in this case these do not make much sense without the factual context.

The Facts

About two years after the filing of a marital dissolution case and before it went to trial, the husband, Mr. Goss, filed a Chapter 13 case. Ms. Goss filed a motion for relief from stay to be permitted to continue the dissolution case in state court, and relief was granted "to complete dissolution . . . proceedings . . . on all issues." Mr. Goss' Chapter 13 plan, providing nonpriority unsecured claims to be paid 100% plus 3% interest within 60 months, was subsequently confirmed. Ms. Goss did not appeal the order confirming this plan, and Mr. Goss has not modified the plan since then.

Two years after the Chapter 13 filing, the marital dissolution case went to trial and a property division judgment was entered against Mr. Goss for about $181,000, to be paid by December 31, 2008, barely a month after the judgment was entered. A supplemental judgment of about $32,000 based on half of Ms. Goss' attorney fees was also entered against him, because of his "conduct in this litigation, causing significant delay and increased attorney fees."

Ms. Goss filed two proofs of claim, for $181,000 on the property division, secured by debtor’s real property, and for $32,000 on the attorney fees, as a priority unsecured claim in the nature of a domestic support obligation. Mr. Goss objected to the proofs of claim, wanting to have them both treated as nonpriority unsecured claims.

Ms. Goss also filed a motion for relief from stay to enforce the dissolution judgment. Judge Dunn’s Memorandum Opinion resolves both the relief from stay and claims objection matters.

The Issues

The judge isolated these issues:

1) Should the Property Division Judgment claim be allowed as a claim secured against Mr. Goss’s real property?

2) Should relief from stay be granted to allow Ms. Goss to enforce the Property Division Judgment claim?

3) Should the Attorney Fees Judgment be treated as a claim?

4) Is Mr. Goss’s objection to the Attorney Fees Judgment claim ripe for determination?

The Holdings

1) Under Oregon law, a marital dissolution property claim unresolved on the date of bankruptcy filing is a vested, inchoate claim arising out of the spouses’ co-ownership of marital property, which became, through the bankruptcy court-permitted post-petition dissolution judgment, a judgment lien on Mr. Goss’ real property. Because the judgment “created a new property interest in place of the prepetition co-ownership interest,” the underlying debt is neither a dischargeable pre-petition debt nor a preferential transfer of a security interest in the real property. Furthermore, the post-petition judgment’s creation of the lien did not violate the automatic stay since “[t]his result was authorized by [the prior] order granting relief from the automatic stay.”

2) With debtor current on his support obligations but not having paid anything on the dissolution judgment, which was to have been paid in full shortly after the entry of that judgment, the judge found no “cause” to grant relief from stay to Ms. Goss to execute on her judgment lien. His decision was based largely on “evidence that there is equity in Mr. Goss’s real property adequate to pay the Property Division Judgment, and if some time is allowed for the real estate market to improve, Ms.Goss may continue to receive support payments and Plan payments . . . and, ultimately, receive payment in full of the Property Division Judgment as well.”

3) Under Oregon law, at the time when the dissolution proceeding was filed Ms. Goss had a potential, inchoate and unliquidated claim for attorney fees in that proceeding, and so this was a valid prepetition claim in Mr. Goss’ Chapter 13 case.

4) Whether or not this claim for attorney fees should be treated as a priority one is an issue not ripe for determination because under the current 100%-plus-interest plan the claim must be paid in full either way. Only if the plan is modified to pay a priority domestic support claim differently than a nonpriority unsecured one would the controversy be ripe for judicial resolution.

New Bulletins on this website will provide summaries of other opinions within the Ninth Circuit shortly after they are published. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO SUCH FUTURE REPORTS.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that the writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Are Retirees "Employees" in Determining Priority Claims Under § 507(a)(5)?

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

Consolidated Freightways v. Aetna (In re Consolidated Freightways)
Ninth Circuit Court of Appeals, Case Nos. 07-56720
May 6, 2009


On Wednesday, May 6, the Ninth Court filed its second opinion of the week on a § 507(a) claim priorities issue. On Monday one panel of the Court had addressed whether a debt of an employer for a workers' compensation reimbursement was an "excise tax" and thus a priority claim under § 507(a) a)(8)(E) of the Bankruptcy Code. (Here is my Bulletin on that opinion.) And now two days later the question is whether certain a debtor-employer's debts constitute "claims for contributions to an employee benefit plan" under § 507(a)(5).

Preliminary Note: This is not a well-written opinion. It does not state clearly either the specific issues the panel was addressing or its holdings on those issues. One has to try to read between the lines. Although the judge liked using million dollar words like "pellucid" and "hyaline," referring to how clear he believed the law to be, this opinion was one of the least clear ones that I have read in months. I have done my best to try to get at the intended meaning, but feel free to comment if you think I was led astray and you come away with a different understanding. This opinion makes more sense by reading the underlying bankruptcy court opinion at In re Consol. Freightways, Corp. of Del., 363 B.R. 110 (Bankr. C.D. Cal. 2007), but that should not be necessary.

Issues
The Court addressed:
1) whether the portion of the claim related to benefits paid to retirees falls within "claims for contributions to an employee benefit plan" under § 507(a) a)(5);
2) whether claims related to such retirees who did not render services within the statutory 180-day look-back period are nevertheless entitled to a priority claim;
3) whether such retiree-related claims are to be counted in determining the number of employees for purposes of calculating the priority claim; and
4) whether the priority recovery cap under this subsection is to be treated as an aggregate cap or one limited per individual employee.

Holdings
1) and 2): The portion of the claim based on retirees' benefits count as priority but only so long as the retirees at the time of the filing of the case had rendered some services to the employer-debtor in the statutory 180-day look-back period.
3): The opinion, as far as I could tell, never stated this issue nor discussed it; it merely stated in the first sentence of the "Conclusion": "We disagree with the bankruptcy court’s determination that individuals who did not render services within the 180-day period are to be counted in determining the number of employees . . . under § 507(a)(5)."
4): The $4,650 (at that time) statutory recovery cap for the priority debt is an aggregate amount: the calculation of the total priority claim is not based on an individualized recovery limit of $4,650 per any single employee, but rather that $4,650 is multiplied by the total number of employees in that pool, thus allowing for some individual employees in the pool to be paid substantally more than that, assuming that there were others paid much less and the amount paid being capped at $4,650 times the number of employees.

The Court remanded to the bankruptcy court to apply these holdings.

The Essential Facts
Aetna administered Consolidated Freightways Corporation's (CFC) self-funded medical health plans. It paid medical claims for CFC's employees and retirees, which were reimbursed by CFC. When CFC filed its liquidating Chapter 11 case, it owed Aetna for medical claims as well as for costs of administering the plans. The liquidating trustee objected to priority treatment of claims related to retirees.

The Courts Below
The bankruptcy court determined that Aetna's claim related to the medical claims of retirees qualified as a priority debt The district court affirmed.

The Statutes
Since § 507(a) a)(5) addressing "contributions to an employee benefit plan" interrelates with § 507(a) a)(4) addressing "wages, salaries, or commissions," here are the pertinent portions of both:

(a) The following expenses and claims have priority in the following order: . . .

(4) Fourth, allowed unsecured claims, but only to the extent of $4,650 for each individual or corporation, as the case may be, earned within 90 days before the date of the filing of the petition or the date of the cessation of the debtor’s business, whichever occurs first, for —
(A) wages, salaries, or commissions, including vacation, severance, and sick
leave pay earned by an individual; or
(B) sales commissions . . . .

(5) Fifth, allowed unsecured claims for contributions to an employee benefit plan—
(A) arising from services rendered within 180 days before the date of the petition or the date of the cessation of the debtor’s business, whichever occurs first; but only
(B) for each such plan, to the extent of —
(i) the number of employees covered by each such plan multiplied by $ 4,650;
less (ii) the aggregate amount paid to such employees under paragraph (4) of this
subsection, plus the aggregate amount paid by the estate on behalf of such
employees to any other employee benefit plan.

(Note that these subsections were not substantively changed by BAPCPA except that the dollar amounts were greatly increased and the look-back period in § 507(a) a)(4) was doubled from 90 to 180 days, and the subsections were renumbered because of a new subsection § 507(a) a)(1)).

The Ninth Circuit's Rationale
Retirees are "Employees":
On the issues whether retirees are "employees" under § 507(a)(5) and what is meant by "arising from services rendered," the Court reasoned that "[w]hile at first blush there may be some ambiguity . . . , we think that a consideration of [that subsection] in the context of the statute renders the answer quite clear."

The Court recalled that § 507(a)(5) did not exist at first, when a priority was granted to employees only for wages and such under the predecessor to § 507(a)(4). After the Supreme Court "had determined that unpaid contributions to welfare plans that “provided life insurance, weekly sick benefits, hospital and surgical benefits” or annuities were not accorded priority. . . Congress then remedied that by adopting § 507(a)(5)."

This Ninth Circuit Panel quoted a 2006 Supreme Court opinion asserting that "[t}he current Code’s juxtaposition of the wages and employee benefit plan priorities manifests Congress’ comprehension that fringe benefits generally complement, or 'substitute' for, hourly pay." Howard Delivery Serv., Inc. v. Zurich Am. Ins. Co., 547 U.S. 651, 659 (2006). From this "tight connection" between the two subsections, the Ninth Circuit concluded: "The operative principle is that the priority is for those who rendered services during the 180-day period, whether they were retired or not at the moment of the filing of the bankruptcy petition."

Calculation of the Claim:
On the issue of the total amount of the claim and the meaning of the term "aggragate amount," the Ninth Circuit again quoted the Supreme Court in Howard Delivery:

Congress tightened the linkage of (a)(4) and (a)(5) by imposing a combined cap on the two priorities, currently set at $10,000 per employee [$4,650 in our case here]. Because (a)(4) has a higher priority status, all claims for wages are paid first, up to the $10,000 limit; claims under (a)(5) for contributions to employee benefit plans can be recovered next up to the remainder of the $10,000 ceiling. No other subsections of § 507 are joined together by a common cap in this way.

The panel concluded:

A plain reading of § 507(a)(5) demonstrates that it provides an aggregate limit on recovery under that provision; not an individualized recovery per employee. . . . . The result is, therefore, that an individual employee’s claim under § 507(a)(5) will not be limited by the amount that the employee may have recovered under § 507(a)(4). No doubt the overall fund will be limited by the (a)(4) recovery, but individual claims to benefits will not be.

New Bulletins on this website will provide summaries of other opinions within the Ninth Circuit shortly after they are published. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO SUCH FUTURE REPORTS.


by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that the writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Debtor Corporation's Obligation to State Worker's Compensation Fund is Not "Excise Tax" and So Not a Priority Claim

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com


California Self-Insurers' Security Fund v. Lorber Industries (In re Lorber Industries)
Ninth Circuit Court of Appeals, Case Nos. 07-56227 & 07-56309
May 4, 2009

Issue
Does a business debtor's statutory obligation to reimburse a state workers' compensation fund for benefits the fund paid out on the debtor's behalf constitute an "excise tax," and is therefore a priority debt?

Holding
This obligation to reimburse the worker's compensation fund, under the state statute at issue here, is not a priority debt under § 507(a)(8)(E)(ii) of the Bankruptcy Code primarily because "if a private creditor similarly situated to the government can be hypothesized under the relevant statute, the claim cannot be considered an excise tax."

Facts
Debtor corporation self-insured its workers' compensation obligations, as permitted under California state law and, as required under those circumstances, provided the Self-Insurers' Security Fund a security deposit in the form of a letter of credit in case it defaulted on those obligations. After filing a Chapter 11 case, debtor did default, and the Fund took over payments to injured workers, exhausting the letter of credit and then some. The Fund is statutorily entitled to reimbursement for the amount paid beyond the letter of credit. This claim was treated as a general unsecured instead of priority claim in the debtor's reorganization plan, to which the fund objected

The Statute
Section 507 of the Code states as pertinent here:

(a) The following expenses and claims have priority in the following order:
(8) Eighth, allowed unsecured claims of governmental units, only to the extent that such claims are for —
(E) an excise tax on —
(ii) if a return is not required, a transaction occurring during the three years immediately preceding the date of the filing of the petition.

The Courts Below
The bankruptcy court held that the claim for reimbursement qualified as an excise tax but was not entitled to priority because the "transaction" being taxed was debtor's application for self-insurance 14 years before the bankruptcy case was filed, well beyond the 3-year priority period. The BAP also held that the claim qualified as an excise tax but decided that the "transaction" at issue was the debtor's post-petition default on its workers' compensation obligations; since that did not occur "during the three years immediately preceding the date of the filing of the petition," the claim was not entitled to priority.

The Ninth Circuit's Rationale
The court disagreed with both lower courts by holding that the debt was not an excise tax, and did so by focusing on one relatively new element in making this determination.

Since 1982 the Ninth Circuit had used the following 4-prong test to determine whether a debt was an excise tax:

(a) an involuntary pecuniary burden, regardless of name, laid upon individual or property; (b) imposed by or under the authority of the legislature; (c) for public purposes, including the purposes of defraying expenses of government or undertakings authorized by it; and (d) under the police or taxing power of the state.

(Interestingly, the court adopted this test in a case decades earlier but apparently involving the same employer-debtor: County Sanitation District Number 2 v. Lorber Industries (In re Lorber Industries of California) 675 F.2d 1062 (9th Cir. 1982)).

But in 2004, because of concerns that the "public purposes" prong was too broad and was thereby overly expanding the definition of "excise taxes" to the detriment of general unsecured creditors, the Ninth Circuit added a fifth prong: the debt is not an excise tax if a non-governmental creditor "can be hypothesized under the relevant statute." George v. Uninsured Employers Fund (In re George), 361 F.3d 1157(9th Cir. 2004). This means that if under the statute "a private creditor . . . can assert a claim against the debtor similar to that of the [governmental entity, the] claim did not qualify as an excise tax." The rationale is that granting priority treatment for the government on a claim that was functionally the same as that of other creditors would unfairly favor the government.

Under the California workers' compensation self-insurance statute, beyond the Self-Insurers' Security Fund's reimbursement right:

private creditors . . . may also have similar reimbursement claims against [the debtor corporation.] For example, the entity that extended the letter of credit . . . has a claim against [the debtor] related to its default on its self-insurance obligations. Additionally, [the statute] recognizes that claimants retain a cause of action against the defaulting self-insurer, and provides that the Fund can recover as a subrogee in any action to collect.

So, the Fund’s claim is one that is similar to claims that certain private creditor could raise, and is thus not an excise tax.

Distinguished Its Own Opinions Based on Another State's Statute
The Ninth Circuit panel emphasized that whether a workers' compensation reimbursement is an excise tax and thus a priority debt turns on the details of the statute at issue. It contrasted the California statutory scheme with that of Arizona's, which has "several unique, non-universal characteristics" leading earlier Ninth Circuit opinions to conclude that claims by the Arizona workers' compensation fund are priority excise taxes. Particularly, the Arizona statutes give its fund the exclusive right to pursue uninsured reimbursement claims, and such claims "have the same priority . . . as claims for taxes." See Indus. Comm’n of Ariz. v. Camilli (In re Camilli), 94 F.3d 1330 (9th Cir.1996); DeRoche v. Arizona Industrial Commission (In re DeRoche), 287 F.3d 751 (9th Cir. 2002).

The Bottom Line, and in Oregon . . .
Whether a claim for workers' compensation reimbursement is an excise tax and thus a priority debt under § 507(a)(8)(E)(ii) turns on the state statute upon which the claim is based. Assuming the traditional four prongs of the excise tax test have been met, the matter is determined by whether under the pertinent statute "a private creditor . . . can assert a claim against the debtor similar to that of the [governmental entity]."

Oregon's workers' compensation statutes seem to assert that all employer obligations to its fund are "preferred to all general claims in all bankruptcy proceedings," and that all amounts due to the umbrella agency that overseas the workers compensation functions "shall be considered taxes." ORS 656.562

Query: do these assertions serve to turn such obligations by debtors into "excise taxes" and thus priority claims in bankruptcy court, in light of this Ninth Circuit Lorber Industries opinion, which turns so much on the content of the respective state statutes? Or does the question turn on the application of the five prongs discussed in the opinion regardless of the Oregon statute's assertion? Is Oregon's statute more like California's or instead Arizona's, governed by this new Lorber Industries opinion or rather by the Arizona-based opinions distinguished and approved by the Ninth Circuit panel here?

Please feel free to respond to this question by making a comment below. For your convenience, here is ORS 656.562, quoted from above, in full:

(1) All premiums, fees, assessments, interest charges, penalties or amounts due the Industrial Accident Fund from any employer under this chapter and all judgments recovered by the State Accident Insurance Fund Corporation against any employer under this chapter shall be deemed preferred to all general claims in all bankruptcy proceedings, trustee proceedings, proceedings for the administration of estates and receiverships involving the employer liable therefor or the property of such employer.
(2) All assessments, interest charges, penalties or amounts due the Department of Consumer and Business Services shall be considered taxes due the State of Oregon.

New Bulletins on this website will provide summaries of other opinions within the Ninth Circuit shortly after they are published. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO RECEIVE AN EMAIL WITH A LINK TO SUCH FUTURE REPORTS WHEN THEY BECOME AVAILABLE.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that the writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

May an Assignee of a Debt Base Its "False Financial Statement" Nondischargeability Claim on the Assignor's Reliance on that Statement?

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com



Boyajian v. New Falls Corp. (In re Boyajian)
Ninth Circuit Court of Appeals, Case Nos. 07-55713 & 07-55716
May 1, 2009

The Issue
May a § 523(a)(2)(B) nondischargeability proceeding be brought against debtors not just by the creditor which reasonably relied on debtors' alleged false financial statement, but also by this original creditor's successor-in-interest, which had not itself relied on those financial statements? The opinion turns on the meaning and weight to be given to the word "is" in the nondischargeability subsection § 523(a)(2)(B)(iii) and the fact that this verb is in the present tense.

The Courts Below
The bankruptcy court had entered summary judgment for the debtors, holding that the reliance on the false financial statement had to be by the assignee bringing the nondischargeability proceeding, not just the original creditor. The Bankruptcy Appellate Panel, which included Judge Randall Dunn, reversed, saying that an assignee stands in the shoes of the assignor and can base its nondischargeability case on the assignor's reliance on the false financial statements. The Ninth Circuit panel's opinion introduced the BAP opinion as a "careful" one, so one can guess which way its opinion went.

The Statute
Section 523(a)(2)(B) provides that a debt will not be discharged if it was obtained by:

use of a statement in writing—

i) that is materially false;

ii) respecting the debtor’s or an insider’s financial condition;

iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and

iv) that the debtor caused to be made or published with intent to deceive . . . .

(Emphasis added.) The plain meaning of the emphasized subsection, particularly the present tense of "is," seems to require that "there be reliance by the creditor who holds the claim at the time of the bankruptcy, even if there had been reliance in the past by the creditor who originally extended credit." The Ninth Circuit disagreed.

The Ninth Circuit's Statutory Interpretation and Holding

Read as a whole, this language does not provide that a debt is non-dischargeable only if the assignee creditor reasonably relied on the materially false statement.
. . . .
The most natural reading of the word “is” in subsection (iii) is simply that the debt is nondischargeable if, at the time the money is obtained by the debtor, he or she used a materially false written statement that was intended to deceive.
. . . .
Therefore, t]he bankruptcy court erred in holding as a matter of law that [the original creditor's assignee] could not pursue an action for non-dischargeability under § 523(a)(2)(B) because it was not the original creditor whom the [debtors] allegedly deceived in the course of incurring their debt.

The Court's Remaining Rationale

1) Congressional intent: Without clear language to the contrary, "Congress intended that the general law of assignment remain applicable," allowing the holder of a general assignment to stand in the shoes of the assignor for purposes of nondischargeability actions.

2) Adverse court opinions: The Ninth Circuit rejected the reasoning and result of the local bankruptcy court case relied upon by the debtors, General Electric Capital Corp. v. Bui (In re Bui), 188 B.R. 274 (Bankr. N.D. Cal. 1995), as well as that of two out-of-circuit bankruptcy courts.

3) Sister Circuit court opinion: The Ninth Circuit embraced the result in a Seventh Circuit opinion which did not directly interpret § 523(a)(2)(B)(iii) but relied on general assignment principles to give the assignee the right to raise a § 523(a)(2)(B) nondischargeability claim: FDIC v. Meyer (In re Meyer),120 F.3d 66 (7th Cir. 1997).

4) Public policy: "[I]f assignment of such a debt were to obviate a future non-dischargeability action in all cases where the assignee did not itself rely on misleading financial statements, the functioning of modern debt markets would be unnecessarily disrupted." Plus it would be perverse to permit "dishonest debtors to receive a discharge through the fortuity that their creditor chose to assign the debt."

The Bottom Line
The assignee of a debt need not have relied on the debtor's false financial statement but may base its nondischargeability claim on the original creditor's reliance on that financial statement.



New Bulletins on this website will provide summaries of other opinions within the Ninth Circuit shortly after they are published. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO SUCH FUTURE REPORTS.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that the writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Mortgage Cramdown Prospects After Its Senate Defeat

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

Thursday afternoon's defeat of the bankruptcy mortgage cramdown legislation in the Senate very likely means that it will fall into the background in spite of its passage in the House, at least for a number of months and probably for the rest of this year. The defeat was almost universally expected, especially after the top Senate Democratic leadership stripped it off the broader housing bill with its enticements for the banking industry and made it stand alone in the form of an amendment. But the margin of the loss--45-51, far from the necessary 60 votes, and particularly the fact that a full dozen Democrats voted against it when virtually every Democratic vote was needed, makes it very unlikely that any bankruptcy mortgage cramdown bill could make it into law. This is all the more true in light of the Obama administration's negligible public and legislative support for the provision, indicating that it had decided to pick other battles, and presumably could not be counted on for support in at least the near future.

What's Next
Senator Dick Durbin immediately vowed to try to hang on to a bankruptcy cram down provision in the anticipated conference committee's housing bill, as the House and Senate's bills are reconciled, but the relatively large margin of the loss in the Senate makes this very likely a futile effort. There is a slight possibility of very limited success if the cramdown which came out of the conference was highly restricted, such as applicable only to subprime mortgages--which a number of Senators who voted against it said they would have supported. Sen. Durbin determined early in the negotiation process that such a major narrowing of the cram down benefits would not achieve the desired objectives, but he now has reason to reconsider that, if it is not too late.

In the meantime there will very shortly be, perhaps even by the time this Bulletin is uploaded, a Senate vote on the broader bill, without the bankruptcy provision. It includes two components greatly favored by the financial industry: 1) a huge increase in the FDIC's borrowing authority, which would have the effect of reducing by more than half a proposed special premium that banks would be required to pay the FDIC to help shore it up in the wake of bank failures, saving them $7.7 billion; 2) making permanent the temporary increase in deposits guaranteed by the FDIC., from $100,000 to $250,000. It will have no trouble passing. Then this bill will be reconciled with the already passed House bill which includes the cramdown provision, with the final opportunity mentioned above.

If No Cramdown Comes Out of the Conference Committee
Democrat Tom Carper of Delaware, who voted against the cram down, said "My guess is we're not going to see it again [in the Senate]."

Sen. Durbin was taking the long view after the defeat, clearly trying to be optimistic :

I mean, really, to lose 11 Democrats was disappointing, but, you know, I guess I've gained some ground since the issue last came up. Maybe if the mortgage foreclosures go up dramatically and I call it again next year I can pass it.

Going from 36 votes in favor of bankruptcy cram down a year ago to 45 on Thursday may seem like significant progress, except when considering the large increase in Democrats in the chamber, the change in Administrations, and the phenomenal increase in foreclosures in the meantime. And it is no solace for the hundreds of thousands of homeowners who could have been helped.

Durbin added wryly: "If we fail [at passing cramdown through the conference committee procedure] we’ll wait another year and face a worse crisis and hope that the banks won’t have as much clout.” He concluded: "I'll be back, I'm not going to give up."

The Bottom Line

From a press release from the President of the Center for Responsible Lending, one of the consumer organizations involved in the weeks of negotiations with Sen. Durbin: "The mortgage crisis continues to worsen, and the need for this legislation will only grow. Unfortunately, millions of homeowners and all Americans waiting for economic recovery will pay dearly for this delay."

A new Bulletin on this website will provide an update of this legislation and related foreclosure and mortgage modification issues as soon as there is new information to report. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO IT AS SOON AS IT IS UPLOADED onto this website.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that the writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Bankruptcy Mortgage Cramdown Soundly Defeated in Senate Vote

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

The bankruptcy mortgage cramdown amendment was defeated in the Senate on Thursday afternoon by a margin of 45 - 51 (with three Senators not voting), a wide margin considering the 60 votes needed for cloture. Every Republican voted against it, not a surprise, but so did 12 Democrats, including Senator Arlen Specter who switched parties just days ago. Although the defeat was almost universally expected, the margin of the loss and the number of Democrats in the "nay" column must be disheartening for Senator Durbin. He admitted: "I had hoped for a better vote." Although he vowed to try to insert the bankruptcy provision in an anticipated conference with the House, such a provision having passed in the House in early March, the relatively large margin of the loss in the Senate makes his success there quite unlikely.

The Roll Call

The Democrats who had been on the fence and voted for the amendment include Sen. Evan Bayh of Indiana, Mark Warner and Jim Webb of Virginia, Claire McCaskill of Missouri, and Ted Kaufman of Delaware. Votes against were cast by Democrats Tom Carper of Delaware, Robert Byrd of West Virginia, Max Baucus and Jon Tester of Montana, Mary Landrieu of Louisiana, Ben Nelson of Nebraska, Blanche Lincoln and Mark Pryor of Arkansas, Michael Bennett of Colorado, Tim Johnson of South Dakota, and Byron Dorgan of North Dakota, as well as Arlen Specter.

Key Reasons for the Defeat

From watching the legislative developments closely since the House and Senate bills were introduced during the first week of this session of Congress, I believe the bill was defeated for two fundamental reasons: 1) the opponents largely succeeded in framing the debate on their terms; 2) President Obama and his Administration did not risk virtually any political capital on this fight.

Framing the Debate

The financial industry succeeded in convincing enough Senators that preventing hundreds of thousands of foreclosures was not worth risking having mortgage rates go up for everyone. This argument succeeded in spite of the lack of credible evidence of this purported cause and effect, indeed in the face of substantial indications to the contrary. And it succeeded in spite of changes in the original legislation designed to further mitigate any such purported tendency, such as its restriction to mortgages entered into before enactment and adding a sunset clause.

The argument played into and arguably even fanned the popular feelings of righteous indignation of "responsible" homeowners against supposedly "irresponsible" ones. Regardless of how convincing this was, it gave political cover to some Senators. For example, Democratic Sen. Ben Nelson justified his "nay" vote with: "Do I want to have my rate go up so that somebody else might be able to cram down" their mortgage payment?

The financial industry's message resonated in the media with the general fears about the instability of the economy. This resulted in reputable news organization such as the Associated Press mouthing that message with statements such as: "The forced easing, or 'cram-down,' of a mortgage by a bankruptcy judge would have likely introduced additional uncertainty for investors." Such arguments were found credible in spite of the appropriate current popular and Congressional distrust of this industry.

White House Missing from the Debate

For reasons not yet clear, neither President Obama nor virtually any senior members of his Administration provided strong support in the legislative effort in the Senate, indeed even undercutting that effort when it was most needed. Back in mid-February when Obama proposed his "Homeowner Affordability and Stability Plan with barely a mention of bankruptcy cramdown, I speculated that the legislation was "perhaps soft-pedaled because it is controversial." After the House passed its amended bill in early March, in spite of the clear need for help for the tougher Senate battle the Administration issued no statements of support, and seemed to pay no attention as the negotiations kept faltering. And last week, just when an enthusiastic endorsement could well have provided a needed push for the undecided Senators, Treasury Secretary Timothy Geithner instead guardedly said: "We are supportive of carefully designed changes” to bankruptcy law. . . . .“It’s a difficult balance to get right, as you know.” "But the president is supportive of this.” Hardly a ringing endorsement from the Administration's bully pulpit. Even after the vote, there has been no comment from either the Treasury Department or the White House. At some point it seems that a decision was made that in the grand scheme of things, this legislation, at least at this time, was expendable.

Financial Influence from the Financial Sector

And then there is always the issue of campaign money. According to the Center for Responsive Politics, banking and real estate interests have given about $2 million to Sen. Mary Landrieu's campaigns, about $2.6 million to Sen. Ben Nelson's, $1.3 million to Sen. Blanche Lincoln's, $2.5 million to Sen. Johnson's, and $3.5 to Sen. Max Baucus'. Oh, and more than $4.5 million to the new Democrat Sen. Arlen Specter's campaigns. Perhaps the most revealing comment in this respect after the vote was by the Delaware Sen. Ted Kaufman, a state with a very significant financial industry, who is not running for reelection: "I'm liberated from fundraising." He voted for the amendment.

Please return to this website tomorrow morning for a Bulletin on the prospects for this legislation going forward notwithstanding this Senate vote.

A new Bulletin on this website will provide an update of this legislation as soon as there is new information to report. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO IT AS SOON AS IT IS UPLOADED onto this website.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that the writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Will Senator Arlen Specter's Party Switch Affect the Senate Vote on the Bankruptcy Mortgage Cramdown Legislation?

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com


With a Senate floor vote anticipated today on the bankruptcy cramdown amendment, and seemingly everything riding on whether it has the support to garner the filibuster-proof 60 votes, does Sen. Arlen Specter's defection from the Republican party improve its chances? There's a small possibility that it does . . . but probably not, at least not today.

Arlen Specter's Position
Sen. Specter has long been in the middle of the cramdown debate as the potential deal-maker for a long time, as he is now. So there are many clues about his position.

Way back in October 2007, Sen. Specter and Sen. Dick Durbin, the sponsor and steadfast advocate of the current Senate bill, introduced separate bankruptcy cramdown bills and were in direct talks to try to forge a bi-partisan compromise. Specter's bill gave mortgage lenders the right to reject any to changes to the loan terms, giving some indication of how relatively modest his own ideas were on cramdown, at least at that time. Indeed, he expressly argued against allowing bankruptcy judges to modify mortgages without lender approval, asserting that lenders would not be willing to lend if "we meddle with the principal sums." He clearly indicated that he was at the very least very cautious about the cramdown concept.

So how much has Specter's perspective shifted as the foreclosure situation has tremendously worsened in the year and a half since then? As reported in a previous Bulletin here, "Republican [Sen.] Arlen Specter of Pennsylvania has long been a potential supporter, but apparently of only a narrower version, so Democratic Sen. Evan Bayh of Indiana and he are working on a proposal limiting cramdown only to subprime mortgages." There are no indications that the version to be voted on today will be so limited, and if not this seems to indicate that Specter will not be voting in favor of it.

Specter's Role in the Negotiations
According to a very recent story in BusinessWeek.com:

Early on in Senate negotiations over the bill, Specter was one of a handful of moderate Republicans taking part. Since then, the talks have shrunk to several key Democrats. But a Senate staffer close to the talks says the Republicans—or former Republican, in Specter's case—remain key to actually getting to the 60 votes supporters will need.

This same Senate staffer's comment: ""He's the kind of guy where you never know."

Specter's Change in Party Affecting His Prior Positions
According to the same BusinessWeek.com article: " The measure's supporters hope Specter will have to worry less about the GOP base when considering the topic, but that's not a given. "

According to Specter himself, as he concluded in his statement announcing his party change:

My change in party affiliation does not mean that I will be a party-line voter any more for the Democrats that I have been for the Republicans. . . . I will not be an automatic 60th vote for cloture.
. . . .
Whatever my party affiliation, I will continue to be guided by President Kennedy’s statement that sometimes Party asks too much. When it does, I will continue my independent voting and follow my conscience on what I think is best for Pennsylvania and America.

Although he was speaking here in platitudes, Specter has a well-deserved reputation as an independent thinker. So his change in party affiliation does not seem likely to affect his vote on this bill. Indeed, he may well use this early opportunity to assert his independence from his new party.

Remaining Unknowns
First, even up to the last hours before today's anticipated vote, there is talk of a possible new compromise, one which conceivably could entice Specter's vote. How much that talk is mere posturing is difficult to discern. Indications are that any last-moment breakthrough are a very long shot.

Second, there has been some indication that if today's floor vote is unsuccessful, the measure will still not be dead. With Specter's party switch, there are 57 Democrats in the Senate, and two independents who caucus with them. With the Minnesota election between Al Franken and Norm Coleman still in litigation, the Democrats are now effectively one vote short of the critical 60-vote for cloture. The Minnesota Supreme Court has recently agreed to hear Coleman's election appeal on June 1, meaning that the election there could be decided, according to political observers, as early as mid-June. This extra margin may become critical if the cramdown bill, in whatever amended form, re-emerged after Franken's anticipated arrival.
Finally, and perhaps most importantly, if home foreclosures continue at the present pace, stalling the economic recovery and even further devastating major regions of the country, political pressure will continue to build to address this more assertively.

A new Bulletin on this website will provide an update of this legislation as soon as there is new information to report. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO IT AS SOON AS IT IS UPLOADED onto this website.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that the writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

The Insider's Story on Bankruptcy Cramdown: Senator Durbin's Perspective

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

Negotiations on the Chapter 13 mortgage cramdown bill are reportedly still continuing, so the terms of the compromise bill have not yet been finalized, even as it poised for a Senate floor likely this Thursday. Therefore it is impossible to count votes and attempt to predict the outcome, although virtually all sources are expressing doubt that it will pass. The proponents --primarily Senator Dick Durbin and his aides--continue to say publicly that they still hope to strike a compromise with creditors that will convince a few more key Senators to support the legislation.

Although some negotiation apparently continues, the bill's terms directly related to the mortgage cramdown itself may well by now be firm, since the latest indications are that the focus has now turned to other issues within the broader mortgage legislation. Beyond its terms referred to in my Bulletin of 4/20/09, the bill now requires a homeowner to be two months delinquent. Also, the restriction of the cramdown to loan balances of less than $729,750 (which derives from a FHA conforming loan maximum) continues to be in the bill.

Senator Durbin, the sponsor of the pertinent Senate Bill 61, "The Helping Families Save Their Homes in Bankruptcy Act of 2009," gave a detailed speech yesterday on the Senate floor in support of the cramdown legislation. Although short on details of the bill that will come up for the floor vote, he shed some light on the issue and on the negotiations, from his perspective.

His main themes:

The beneficiaries of the proposed legislation:

When we consider amendments to the bill, the key number to remember is 1.7 million families—1.7 million. That is the number of families we will either give a chance to save their homes or allow them to be thrown out in the street, depending on how the vote turns out.

Refuting the argument that bankruptcy would encourage too many bankruptcies

I don’t want to see more people in bankruptcy. That is not a good outcome. But if the lenders of these mortgages know that at the end of the road, after everything else has gone on, there may be a bankruptcy judge who will sit down and look at that mortgage and say to that flight attendant: You know what. You are offering mortgages at this bank for 4 and 5 percent. You offer this woman 4.5 percent. She can make the payments and keep her home and the court is going to order it.

If they knew that could happen at the end of the day, I think those bankers would be in a position where they would want to sit down before it occurs and try to avoid the foreclosure, avoid the terrible outcome for the family and the neighborhood.

Getting at the heart of the recession:

The Mortgage Bankers Association and their cronies scoffed when we told them we were going to have even more foreclosures, but the number continues to grow. This is the cancer at the heart of this recession. This is what we have to address.

This President has worked overtime with a Recovery and Reinvestment Act, putting money back into the economy, saving jobs, creating jobs. But we have to get to the heart of this housing crisis. We have to stop what has become a steady decline of neighborhoods and real estate values in America. It affects us all.

Durbin's perspective on the financial institutions' perspective:

The banks have said all along we don’t need any change in the law, we will take care of this problem. Look what has happened. As they promised us they would take care of it, they didn’t. More and more homes went into default and face foreclosure because they won’t sit down and make the deal. Why wouldn’t they? If they face $50,000 in losses on these foreclosures, if they have all these new obligations, at the end of the day why wouldn’t they sit down?

I will tell you why. For many of them, they don’t want to concede the fact that they created this crisis. Second, many of them believe that at the end of the day Uncle Sam and the taxpayers of America will ride to the rescue, buying these mortgage securities, taking care of these banks, saving them after the bottom falls out of the real estate market and housing market in America. What an awful outcome, that all these families would have to go through all this suffering, that all these neighborhoods would have all

these problems, so at the end of the day the banks that made the original bad mortgages would be rescued. That must be what they are thinking.

Durbin's anger at the big financial institutions:

The groups that are leading the charge against me on this are familiar names on Capitol Hill: The Mortgage Bankers Association, the people who brought us this wonderful subprime mortgage crisis, they oppose my bill; the Financial Services Roundtable, the biggest names in financial services in this Nation, the ones who have had their hands out for Federal money, oppose this idea of helping people facing foreclosure; and the American Bankers Association. What a disappointment.

. . . .

They say: Don’t worry about it, Senator, we are experts. We are going to handle it. Don’t tell us what we need to do.

. . . .

In effect, they have said we have created these rotten mortgages in the first place. Then we sliced them up into securities and sold them to investors all over the world as though there were no risks involved, although we knew better. They tell us we made billions of profits on the backs of homeowners, and then we took billions more from the taxpayers when the mortgages went bad, but don’t make us solve the crisis.

Supporters of the legislation:

Not everyone has walked away from this responsible solution. The amendment which we will vote on a little later this week has the support of CitiGroup, the Center for Responsible Lending, and many other leading homeowner advocacy groups such as the AARP, the Leadership Council on Civil Rights, the Consumer Federation of America, and dozens of other groups. They have worked with me to craft a responsible, reasonable proposal to give lenders a clear incentive to work hard to keep families in their homes.

Terms of the compromise:

The amendment I am going to offer will make a modest change in the Bankruptcy Code with a lot of conditions. It will not apply across the board. In the past, some of my colleagues have understood the need for action but have been uncomfortable with some of the original language. So let me be clear. This amendment is very different. This amendment limits the assistance in bankruptcy to situations where lenders are so intransigent that they are unwilling to cooperate with the two primary foreclosure prevention efforts already underway, the Obama administration’s Homeowner Assistance and Stability Plan, and the congressionally created HOPE for Homeowners Refinancing Program, which this bill will greatly improve.

A new Bulletin on this website will provide an update of this legislation as soon as there is new information to report. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO IT AS SOON AS IT IS UPLOADED onto this website.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

The Latest Clues on Whether the Senate Will Pass the Bankruptcy Mortgage Cramdown

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

With the Senate poised for a floor vote this week on the mortgage cramdown legislation, here are the very latest clues as to whether or not it will pass there.

The Most Recent Negotiations & Tactics

Early in the Congressional Easter Recess which ended a week ago, Senate Majority Leader Harry Reid made a statement that if the cramdown bill did not have the votes for passage, he would be willing to drop it from other housing-related legislation. One intent of this was to put pressure on the negotiators to come up with a compromise during the recess. No deal was reached and negotiations continued last week after Congress returned. No breakthrough was achieved, and instead the news focused on indications of continued dispute--including dueling announcements midweek by the National Association of Federal Credit Unions that it could not support the legislation on the table and by the larger Credit Union National Association arguing that the negotiations were progressing productively. In a news conference on Thursday, April 23, Senator Reid announced that the bill would be brought to the Senate floor for a vote this week. He did not provide details about the cramdown terms or whether it would be packaged with other housing provisions as the successful House bill had been. Negotiations continued over this last weekend.

Standing on Principle vs. Compromising

From my review of countless articles over the past few weeks, the dynamic at play appears to be that the key proponents of the legislation ardently believe that restricting mortgage cramdown to a relatively limited pool of loans--such as subprime or Alt-A ones--would limit its impact so severely as to have it fail in its purpose. At the same time the most ardent opponents--the Mortgage Bankers Association, American Bankers Association, the Financial Services Roundtable--appear to be against mortgage cramdown in any form, and have virtually every Republican Senator in that camp. There are very few Republican Senators, and a few more conservative Democrats, who are somewhat more open to the bankruptcy cramdown concept, state that they are very nervous about the economic impact of a broad applied cramdown, and are only willing to sign on to a restricted version. The votes appear to be sufficient for passage if a restricted version would be put to the Senate floor, but there is no present indication that will be happening.

The Legislative Packaging

Whether the cramdown bill will be packaged with other provisions the credit industry favors will indicate how aggressively the Senate Democratic leadership is willing to push to have the bill pass, and how likely it would pass.

Back during the Easter recess, a Wall Street Journal editorial referred to a bill that banks are hoping for, a huge temporary increase in the FDIC's borrowing authority from the Treasury, which could mitigate an onerous increase in the FDIC's deposit-insurance fee. The editorial said that "[w]e're told that Senate assistant majority leader Dick Durbin is telling banks that if they want that extra credit-line for the FDIC, they'd best sign on to cramdown. A spokesman for Mr. Durbin denies threatening banks, but we also know he refuses to give the FDIC credit increase a stand-alone vote."

The question now is whether the cramdown measure will be part of the package including the FDIC borrowing authority increase, or whether it will be offered as a stand-alone amendment, thus much more easily voted against. The latter would also give Democrats both political cover as to their constituents and talking points for future battles, by enabling them to blame Republicans more directly for the legislation's failure to pass. As an indication of this, in a news conference on April 23 the Democratic leadership, including Senators Dick Durbin and Harry Reid, attacked the Republicans for their purported inflexibility. Thus, more likely the cramdown provisions will not be combined with creditor-attractive legislation but will be voted on directly in a proposed amendment to a broader housing-related bill.

And If It Does Not Pass?

If the cramdown does not survive the Senate floor vote, Sen. Durbin, who has been pushing similar legislation for years, asserts that he would continue trying to pass some version. Who knows whether that is a face-saving comment or is true, and even if true whether the best time for potential passage would have come and gone. However, considering that home foreclosures will almost certainly continue at a heart-breaking pace for months if not several years to come, the public pressure for direct relief through bankruptcy cramdowns will continue.

NOTE:

There have been no committee hearings whatsoever in the Senate, and no formal action on Senate Bill 61 at all since the day Sen. Durbin introduced it on January 6, 2009 at the very beginning of this legislative session. On that same day it was referred to the Judiciary Committee, where nothing further has occurred. Instead the House took the lead, debated an identical and then amended bill in committee and an amended one on the House floor, and passed that amended version in early March.

A new Bulletin on this website will provide an update of this legislation as soon as there is new information to report. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO IT AS SOON AS IT IS UPLOADED onto this website.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Bankruptcy Cramdown Headed for Senate Vote Next Week, Likely to Defeat?

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

The Associated Press and Reuters are both reporting as of late afternoon today that Senate Majority Leader Harry Reid has announced that the bankruptcy mortgage cramdown bill is heading for a vote on the Senate floor likely either Wednesday or Thursday of this coming week. The Associated Press story is further stating that the bill is "headed for defeat." The AP story does not state specifically the basis for this prediction, except to cite the statements of two Democratic Senators who are saying they intend to vote against the legislation, Jon Tester of Montana and Ben Nelson of Nebraska.

Throughout this week there have been indications of the intense ongoing negotiations coordinated mostly through Senator Dick Durbin's office, in which he sought creditor industry support primarily from some of the largest banks and from credit union organizations. The goal had been to have a deal in place as a way of persuading all or virtually all Democratic Senators to get behind the bill, along with a handful of Republicans, to reach the filibuster-proof 60 votes. There has been no announcement of such a deal.

Instead the consistent story of the week has been the lack of progress in the negotiations, punctuated by a midweek story that received a great deal of publicity, a statement by the National Association of Federal Credit Unions that it could not support the legislation in the form being negotiated. This produced a public retort by the much larger Credit Union National Association, with its president chiding the rival trade group for no longer participating in the negotiations.

Treasury Secretary Timothy Geithner did not help the cause earlier in the week with his less than enthusiastic endorsement of the legislation: "We are supportive of carefully designed changes” to bankruptcy law, Geithner said. “It’s a difficult balance to get right, as you know,” he continued. “But the president is supportive of this.” He was responding to a question from Elizabeth Warren, chairwoman of the congressional oversight panel on the financial bailout, a friendly audience since she has been a long-time supporter of the bankruptcy mortgage cramdown option.

Please return to this website for developments throughout this upcoming week as the anticipated Senate floor vote approaches.

A new Bulletin on this website will provide an update of this legislation as soon as there is new information to report. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO IT AS SOON AS IT IS UPLOADED onto this website.


by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

A Busy Senate Easter Break for the Bankruptcy Mortgage Cramdown Legislation

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

After a few days of quiet early in the Congressional two-week Easter break which ended this last weekend, reliable details are now emerging about the intense negotiations on the bankruptcy mortgage cramdown legislation among Senators and their staff during the break. After the Senate leadership decided in mid-March not to bring a bill to the floor for a vote before the break (see my earlier Bulletin on this), rumors arose that the legislation was in serious trouble. Indeed there is more doubt now that a bill will pass Congress than at any time since the beginning of the session. All indications are that at the least the bill that passed the House of Representatives on March 5 will not pass the Senate without significant changes. However, the vigorous horse-trading of the last week or two which has now come to light--occurring even while Congress was not in session--shows that the legislation is very much alive. But whether any bill will pass in the Senate, and then survive in a conference committee to resolve the almost certain differences from the House bill, is still impossible to predict.

If a bill does emerge into law, some of its most important provisions will be shaped by how Congress resolves the issues which were the subject of the last few days of negotiation, as follows:

1) Potential Restriction to Subprime Mortgages

On April 16, a spokesperson for Senator Richard Durbin, sponsor of the Senate bill and the Senate Majority Whip, said that one of the main points of contention is whether to limit bankruptcy cramdowns to certain kinds of mortgages, at the extreme end only to subprime mortgages. Indications are that such a severe restriction is unacceptable to Sen. Durbin. In contrast, the bill passed by the House has no such restriction, in that it is applicable to any mortgage "secured by a security interest in the debtor’s principal residence that is the subject of a notice that a foreclosure may be commenced with respect to such loan." (See my prior Bulletin on the key terms of the bill passed by the House.)

2) Potential Restriction to Mortgages of Limited Time Periods, Limited in Amount

Bankruptcy mortgage modifications are limited in one compromised version to loans originated before 2009, and with a balance of less than $729,750. The modification provisions would expire in 2014. In contrast the House-passed version would include loans "originated before the effective date" of the law, thus including those entered into so far this year. And importantly there is no explicit maximum loan balance in the House bill, and no sunset clause.

3) Restrictions Related to Non-Bankruptcy Mortgage Modifications

Before its early March passage, the House bill had been delayed by and then amended at the behest of a group of self-styled "moderate" Democratic Representatives. This amendment required bankruptcy judges in certain circumstances to consider whether a non-bankruptcy loan modification consistent with President Obama’s Homeowner Affordability & Stability Plan had been offered to the homeowners before their Chapter 13 case was filed. For more details on this provision, see my earlier Bulletin titled The Terms of the Bankruptcy Mortgage Cramdown Bill Passed by the House of Representatives--The Cramdown Itself. A potential Senate compromise would convert this limited and at least somewhat discretionary standard and turn it into a explicit restriction: if a lender offered a modification through the Obama plan or last year's Hope for Homeowners Act program called the Hope for Homeowners Act, the homeowner would be ineligible to modify their loan through bankruptcy.

Another related potential compromise: if a homeowner ended up paying a quarter of income or less for the mortgage under a non-bankruptcy modification under the Obama plan, he or she would not be eligible for a bankruptcy modification.

4) Limits on Principal Reduction

Mortgage holders have been highly resistant to lowering principal balances, in large part because they do not want to lose any more discretion on how to value such assets. This issue is one that is near the heart of the mortgage crisis. A potential compromise in discussion among Senate negotiators would not allow mortgage principal reductions for certain low-income borrowers who pay less than 31 percent of their income for their mortgage payments. Instead they could only have their interest rates reduced or their loans amortized over a longer time.

5) 50-50% Split of Residential Sale Proceeds

In mortgages where the principal is reduced by a bankruptcy judge and the residence is then sold during the Chapter 13 case for more than the court-determined value, one possible Senate compromise would have the mortgage holder and homeowner evenly split any such profit. This is actually less generous to mortgage holders in some respects than the House bill. The House version's annually graduated schedule pays to the mortgage holder 90% of such potential profit during the 1st year of the Chapter 13 plan, 70% the 2nd year, 50% the 3rd year, 30% the 4th year, and 10% the 5th year.

Current Prospects in the Senate

Max Gleischman, Senator Durbin's spokesperson, said on April 8 that the bill in the form that passed the House bill in March “doesn’t have the votes to pass the Senate.” So the pressing question is what compromises will be struck in the next few days to come up with a bill which the leadership believes will pass. According to an April 16 CongressDaily / NationalJournal.com article, "Democrats hope to move the measure this month with a deal in place."

Congress is scheduled to reconvene on Monday, April 20. Prospects are that the negotiations will only intensify.

Addendum: Potentially Influential Report for the Senate Debate

Mr. Gleischman says that Senator Durbin sought independent analysis of the controversial issues behind his mortgage cramdown proposal from, among other sources, a Credit Suisse/Fixed Income Research report of late January 2009. It is titled "Bankruptcy Law Reform – A new tool for foreclosure avoidance." Given how extensively this respected research organization's earlier study on the projected number of upcoming foreclosures was cited by the press and by many governmental decision makers, I anticipated this new report's similar impact. See my prior Bulletin titled New Report by Influential Credit Suisse Cautiously Supportive of Chapter 13 Mortgage Cramdown Legislation. This study goes to the heart of the issue: the potential effectiveness of Chapter 13 residential mortgage cramdowns and their potential effect on future mortgage credit markets. It is highly worthwhile reading.

A new Bulletin on this website will provide an update of this legislation as soon as there is new information to report. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO IT AS SOON AS IT IS UPLOADED onto this website.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Mortgage Cramdown Legislation Stalled in the Senate, Not Likely Seeing Action Until Late-April, After Easter Break

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

Although there had been some indications that the Senate would quickly take up the Chapter 13 mortgage cramdown legislation after the House of Representatives passed its bill on March 5, because of political distractions and fierce negotiations this will not happen until late April or even later.

Hurry Up and Wait
When the House passed HR 1106, the "Helping Families Save Their Homes Act of 2009" on March 5, the Democratic Senate leadership signaled that it would attempt to bring the matter to a vote within the following week or two. That same day Bloomberg.com reported that the senior communication advisor to Senate Majority Leader Harry Reid, Jim Manley, one of the most powerful Senate staffers, said the Senate could vote on its bill as early as the following week.

But with more than two weeks having passed and the start of the two week Easter recess a little more than a week away--it starts Friday, April 3--it appears highly unlikely that the Senate will take any action on its bill, S. 61, until after this recess. Indeed, according to a recent Associated Press story, the bill did not make it onto Senator Reid's list of priorities to accomplish before the Easter recess.

The Behind-the-Scenes Negotiations
The Senate situation echos what occurred in the House. There the House Judiciary Committee passed H.R. 200 with amendments on January 27, and the full House was scheduled to vote on it on February 26, but was delayed a week while additional amendments were hammered out and the necessary votes rounded up. (See my earlier Bulletin on this delay in the House.)

The wrangling in the Senate continues the House battles on how much to narrow the types of mortgage eligible for Chapter 13 cramdown. The horsetrading is closely tied to the need to attract virtually every one of the 58 Democratic votes (with the potentially 59th Minnesota vote still tied up in litigation) and a few Republican votes to reach the 60 needed to break filibuster. Republican Arlen Spector of Pennsylvania has long been a potential supporter, but apparently only a narrower version, so Democratic Sen. Evan Bayh of Indiana and he are working on a proposal limiting cramdown only to subprime mortgages. There are also discussions among the Democratic leadership and various creditor organizations, such as the Credit Union National Association, to include provisions favorable to them, in an effort to win their support and that of on-the-fence Senators.

The Personal Politics
While Sen. Dick Durbin of Michigan is the sponsor of S. 61, the "Helping Families Save Their Homes in Bankruptcy Act of 2009," Sen. Christopher Dodd of Connecticut has been an influential and vocal supporter. He is the Chair of the Senate Banking, Housing, and Urban Affairs Committee to which the House bill was referred after it passed. He spoke at the press conference along with Sen. Durbin in early January when the "deal" with Citigroup was announced. (See my Bulletin about that.) In his speech on March 12 to the Consumer Federation of America, he emphasized the importance of and his support for the bankruptcy legislation.

But Sen. Dodd has been buffeted by a number of controversies involving personal financial matters--he is under Senate ethics investigation for a couple of Countrywide mortgages he received, and in the last two weeks has been soundly criticized in the AIG executive bonuses brouhaha. AIG's notorious Financial Products division is based in Connecticut, and Sen. Dodd was the largest recipient of AIG executives' political contributions in the US Senate, according to the Center for Responsive Politics. He vacillated about his role in the stimulus bill which allowed those AIG bonuses, first denying involvement and then trying to pin the blame on the Treasury Department, until Secretary Geithner accepted responsibility. Dodd is up for election in 2010, and in spite of being the longest-serving Senator in his state's history, in a state that has recently tended to vote Democratic, is in a close race with his anticipated Republican challenger. It is hard to say what effect his political vulnerabilities will have on the controversial bankruptcy legislation, but these circumstances do not seem conducive to risk-taking.

The Latest on the Prospects
A month of delay, including a two week recess, is a very long time in this economic and political environment, making assessing the legislation's prospects impossible. This delay gives opportunity for Senators to be influenced by all the interest groups, especially those who can most afford to pay for that influence. But it also perhaps gives them the opportunity to see the detrimental impact of home foreclosures upon their voting constituents and neighborhoods.

The House vote earlier this month had to some degree been slowed down by the controversies of the prior few weeks surrounding the huge stimulus bill, and now Congress is digging into controversial budgetary issues with the same potential effect on the Senate side. And for the first time there are serious hints of the possibility that no version of the legislation will pass, or only a highly restrictive one, given the skepticism expressed by a number of "centrist" Democratic Senators, and by Republican Senators who had appeared more amenable earlier. The fate of the legislation will depend on the direction of the economic and political winds of the next several weeks.

A new Bulletin on this website will provide an update of this legislation as soon as there is new information to report. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO IT AS SOON AS IT IS UPLOADED onto this website.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys