Oregon's Bankruptcy Filing Rates Rising Even Faster Than the Rapidly Accelerating National Rate: Oregon vs. U.S. vs. Northern District of Texas

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

Even though the national bankruptcy filing rates are climbing very steeply, Oregon's are climbing even more so. Thus, while the number of total bankruptcy filings in the 4th quarter of federal fiscal year 2008 (which ended Sept. 30, 2008) increased nationally by 19.0% from the prior quarter--a huge increase on a quarter-to-quarter basis--in Oregon the increase in total bankruptcy fillings was 37.8%, virtually twice the national increase. Similarly, comparing that same 4th quarter of this year to the 4th quarter of fiscal year 2007, the national increase between those two quarters was 33.5% whereas Oregon's was a 46.7% increase.

The increase in the filing numbers in Oregon is noteworthy enough when compared to the national rates, but are even more so when compared to rates in one particular other federal district. The national rate in effect averages the filing rate changes all over the country, with the areas of the country with the greatest bankruptcy filing increases diluted by those areas with lesser increases. So comparing Oregon with another federal district presents some even more striking differences. The Northern District of Texas, based in Dallas, is an area that has a diverse economy which has not been struck nearly as hard as many other parts of the country by the housing boom and bust. I chose this federal district somewhat arbitrarily for this comparison, in large part because this federal district is the source of this website's most recent Bulletin on a Circuit Court case outside the Ninth Circuit, and through that I have been in touch with some attorneys there. Also, this district has a similar amount of total bankruptcy filings as Oregon, and tends to have the most filings of the twelve federal districts of the Fifth Circuit, which includes Mississippi, Louisiana and Texas. (See "Last Week's New Circuit Court Opinions on BAPCPA: Fifth Circuit Says 'Gag Rule' Against Advising Debtors to 'Incur More Debt' IS Constitutional").

Comparing 3rd & 4th Quarter Fiscal 2008
During the 4th quarter of the 2008 fiscal year, Oregon had a total of 3,532 bankruptcy filings: 2,634 Chapter 7's, 888 Chapter 13's, and 10 Chapter 11's (no Chapter 12's). Along with the 37.8% increase in total cases filed from the prior quarter, this represents a 40.9% quarterly increase in Chapter 7's, a 28.9% increase in Chapter 13's, and a 66.7% increase in Chapter 11's. Chapter 7's are increasing more than Chapter 13's, mirroring the national trend during this same period: while total filings nationally went up 19.0%, Chapter 7's went up 23.1% and 13's went up 10.8%. Nationally, Chapter 11's were up 34.7%. Note that the Oregon quarter-to-quarter increases are about twice or even more then these national increases.

In significant contrast, in this same 3rd to 4th quarter period, in the Northern District of Texas total bankruptcy filings were actually slightly DOWN, from 3,789 to 3,781. Chapter 13's were down from 2,099 to 1,980, Chapter 11's were down from 57 to 47, even Chapter 12's went from 2 to 0. Only Chapter 7's went up, but only by 7.5% from 1,631 to 1,754. This mirrors the trend noted above both in Oregon and nationally towards a higher ratio of Chapter 7's to 13's.

Comparing 4th Quarter Fiscal 2007 with 4th Quarter Fiscal 2008
In Oregon, compared to the same quarter a year earlier--4th quarter of 2008 to the 4th quarter of 2007, along with the 46.7% increase in total bankruptcy filings noted earlier, this represents a huge 51.4% increase in Chapter 7's, a 33.9% increase in Chapter 13's, and a 100% increase in Chapter 11's.

Comparing these increases with the national ones shows Oregon increased at a faster rate year-to-year in each Chapter, but not nearly as much more as in the above quarter-to-quarter increases: nationally in this one-year period Chapter 7 filings were up a very significant 47.8%, Chapter 13 were up 10.7%, and Chapter 11 up a huge 71.3%. Even more than nationally, the year-to-year increase in filings occurred primarily in the last two quarters, again indicating a greatly accelerating trend.

And again in stark contrast, in this same period from the 4th quarter of fiscal 2007 to the 4th quarter of fiscal 2008, in the Northern District of Texas total bankruptcy filings were slightly DOWN, from 3,877 to 3,781. Chapter 13's were down from 2,269 to 1,980, Chapter 11's were virtually the same going slightly up from 46 to 47, and even Chapter 12's went from 1 to 0. Only Chapter 7's went up, but only by 12.4% over the course of the year, from 1,561 to 1,754. Contrast that with Chapter 7 increases in the same period nationally of 47.8% and in Oregon of 51.4%

Ratio of Chapter 7's to 13's
Although in all three jurisdictions there is a clear trend towards a larger proportion of Chapter 7's, both from the 4th quarter of fiscal 2007 to the 4th quarter 2008, and also from the 3rd quarter to the 4th quarter 2008, there are wide differences in the proportions between these two Chapters. In the most recent quarter, the District of Oregon had a nearly three-to-one ratio of Chapter 7's to 13's (2.96 ratio), while the Northern District of Texas had MORE CHAPTER 13's than 7's (0.89 ratio). The national ratio was in between, close to a two-to-one ratio of 7's to 13's (2.07 ratio).

Per Capita Bankruptcy Filings
One of the most revelatory ways of comparing bankruptcy filings over time and over different regions is to count the number of bankruptcies per capita, the number of flings per 1,000 residents. For the 12-month period ending on September 30, 2008, the nation had 3.38 bankruptcy filings per 1,000, compared to 3.15 per 1,000 in the prior quarter. That is a 7.3 percent increase in the number of bankruptcy filings, a significant increase in the number of bankruptcies.

Oregon had a little lower than that national average, 3.06 filings per 1,000 residents, compared to 2.78 filings per 1,000 in the prior year, but that brought it a little closer to the national average. It ranks 25th of the 50 states in filings per capita.

Texas (separate information on the Northern District is not readily available) in great contrast had almost half the per capita filing rate: 1.80 filings per 1,000 residents, ranking 46th of all the states.

Reflecting the information in the above section on the ratio of Chapter 7's to 13's, the national per capita filings of Chapter 7's has gone up from the one-year period ending the 3rd quarter of fiscal 2008 to the one-year period ending on the 4th quarter of this same year, from 2.00 filings per 1,000 to 2.21, and in that same period the per capita filings of Chapter 13's has barely budged from 1.12 filings per 1,000 to 1.15. In the latest quarter, the per capita Chapter 7 rate in Oregon is 2.26, in contrast to only .84 in Texas, and the per capita Chapter 13 rates are .80 and .93, respectively, putting Oregon a little about the national average and Texas way below in per capita Chapter 7 filings, and both states somewhat below the per capita Chapter 13 filings.

The data providing the basis for the calculations in this Bulletin are from the
Administrative Office of the U.S. Courts.

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 written or intended 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 legal advice to anyone.

© 2008 Bankruptcy Litigation Support for Attorneys

Bankruptcy Filing Data Released for Fiscal Year 2008 by Administrative Office of the U.S. Courts: Key Details and Comparisons

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

Earlier this month the Administrative Office of the U.S. Courts released the bankruptcy filing statistics for the nation and for each federal district, up through the end of the 2008 federal fiscal year (through September 30, 2008). Today's Bulletin focuses on the national statistics, including information through November 2008 from a more up-to-date source (AACER--Automated Access to Court Electronic Records). (Tomorrow's Bulletin highlights data for the federal district of Oregon, for illustrative purposes comparing it to the Northern District of Texas.)

Fiscal Year 2008 Compared to 2007
Total bankruptcy case filings were up by more than 30% for the fiscal year--from 801,269 for the fiscal year to 1,042,993 for 2008. Chapter 7 filings increased much more than Chapter 13's: by 40% in contrast to only 14%. Chapter 11's increased even more, by 49%.

Quarter-to-Quarter Filing Increases, from Prior Quarter & from a Year Ago
On a quarterly basis, the filings increased significantly from 2008 fiscal year 3rd quarter to 4th quarter in every Chapter. Total filings increased quarter-to-quarter by 19.0%, a huge increase over a just a single quarter, including a 23.1% increase in Chapter 7's, a 10.8% increase in Chapter 13's, a 34.7% increases in Chapter 11's, as well as a 9.9% increase in Chapter 12's.

From the fiscal 4th quarter 2007 to the 4th quarter fiscal year 2008, total filings went up 33.5%, so more than half of the quarterly year-to-year increase occurred during the most recent two quarters (from April through September 2008), indicating an accelerating trend. In this year-to-year comparison under each Chapter, Chapter 7 filings were up a tremendous 47.8%, Chapter 13 up 10.7%, Chapter 11 up a staggering 71.3% and Chapter 12 up 25.4%. In each one of these except Chapter 12's, about half or more of the year-to-year increase occurred in the last two quarters, again indicating an accelerating trend.

Compared to Pre-BAPCPA
However, these fiscal year numbers are still substantially lower than pre-BAPCPA levels, at only 64% of the fiscal year 2004 total filings and 59% of the 2005 total. More telling, on a quarterly basis, with 292,291 filings in the fourth quarter of fiscal year 2008, the most of any quarter since BAPCPA, and with increases in EVERY quarter since BAPCPA, this quarterly filing amount is still LOWER than ANY quarter going back to the 2nd quarter of 1996. That's 39 consecutive pre-BAPCPA quarters which had more bankruptcy filings than the the 4th quarter of 2008.

More Precise Monthly Comparisons
On a monthly basis, from the Administrative Office national statistics August 2008 total bankruptcy filings were actually 2% less than July 2008, but September was 2% more than August, so almost identical to July; thus during these summer months the national filing numbers were quite stable. However July 2008 was 39% higher than July of 2007, August was 22% higher than August of 2007, and September was 42% higher than September of 2007. More recently, from the AACER statistics and based on the more accurate filings-per-business-day by Professor Robert Lawless of the University of Illinois College of Law, September 2008 filings were up 1.9% from August 2008, October up 7.9% from September, and November up 2.6%. Using these same filings-per-business-day calculations, October 2008 was 33.7% higher than October 2007, and November 2008 was 36.9% higher than November 2007.

***Please return here tomorrow for a look at the Oregon side of this national picture, including some surprising differences.***

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.

© 2008 Bankruptcy Litigation Support for Attorneys

Last Week's New Circuit Court Opinions on BAPCPA: Fifth Circuit Says "Gag Rule" Against Advising Debtors to "Incur More Debt" IS Constitutional

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


Hersh v. U.S (In re Hersh)
Fifth Circuit Court of Appeals No. 07-10226
December 18, 2008

In Ross-Tousey v. Neary (In re Ross-Tousey)
Seventh Circuit Court of Appeals Case No. 07-2503 (02008 WL 5234070)

December 17, 2008

These two Circuit Court of Appeals opinions of last week continue the long march of BAPCPA issues through the appellate courts. The Bankruptcy Bulletin of this last Tuesday dealt with the above Ross-Tousey opinion, in which the Seventh Circuit addressed an issue never previously addressed by a Circuit Court: whether a debtor who has no monthly vehicle loan or lease expense can claim a vehicle ownership deduction when applying the means test. In the other opinion, the one addressed in this Bulletin, the Fifth Circuit weighed in on an issue that had been addressed in the Eighth Circuit in Milavetz, Gallop & Milavetz v. United States: the constitutionality of BAPCPA's sections 526(a)(4) and 527(b), part of the "debt relief agency" provisions which prohibit an attorney from advising his or her client "to incur more debt in contemplation of" filing for bankruptcy. But whereas the Eighth Circuit had declared § 526(a)(4) to be unconstitutional, the Fifth Circuit held that it was constituional through the doctrine of constitutional avoidance. (This issue is currently also before the Ninth Circuit, on the appeal of Olsen v. Mukasey, 350 B. R. 906 (D. Or. 2006), an Oregon U. S. District Court opinion covering much of the same ground.)

See this website's previous Bankruptcy Bulletin on the Eighth Circuit Milavetz opinion, entitled "526(a)(4) Is Unconstitutional, Says 8th Circuit: Attorneys ARE "Debt Relief Agencies" But MAY Advise Clients to Incur Additional Debt," which also refers to the Oregon Olsen case.

In a Nutshell
In its relatively long (38 pages) unanimous opinion, the Fifth Circuit panel held first that bankruptcy attorneys qualify as ‘debt relief agencies’ under 11 U.S.C. § 101(12A) of the Bankruptcy Code. The Court then affirmed the district court’s holding that § 527(b), which compels that certain information regarding bankruptcy proceedings be conveyed by the “debt relief agency” to “assisted persons,” does not violate the First Amendment. But most importantly the Court reversed the district court’s holding that § 526(a)(4), which prohibits an attorney from advising his or her client to incur debt in contemplation of filing for bankruptcy, is unconstitutional on its face. In doing so and disagreeing with the Eighth Circuit's Milavetz majority decision, the Fifth Circuit explicitly agreed with its dissent.

Facts, Statutes, and Proceedings Below
Hersh, an experienced Texas debtors' bankruptcy attorney, filed suit in federal district court (NOT bankruptcy court) shortly after BAPCPA's effective date for declaratory and injunctive relief to stop the government from enforcing §§ 526(a)(4) and 527(b), arguing that they "violate the First Amendment right to free speech." She also argued that she was not a "debt relief agency" under BAPCPA's § 101(12A).

§§ 526(a)(4) and 527(b) govern the conduct of "debt relief agencies." § 526(a)(4) prohibits debt relief agencies from advising assisted persons to incur debt “in contemplation of” bankruptcy or to incur debt to pay attorney or bankruptcy petition preparer fees. § 527(b) requires debt relief agencies to disclose specific basic information about bankruptcy to persons being counseled.

The U.S. district court granted Hersh summary judgment on her § 526(a)(4) claim, giving her declaratory judgment that the subsection violates the First Amendment, and permanently enjoined all agents of the U.S. from enforcing it. The court dismissed the § 527(b) claim deciding that it advanced a compelling governmental interest without unduly burdening the attorney-client relationship. Both parties appealed.

The Fifth Circuit Panel's Rationale

On Attorneys as "Debt Relief Agencies"
The Fifth Circuit panel agreed with the only Circuit Court to have ruled on this issue, the Seventh Circuit in the Milavetz opinion cited above, that attorneys are included in the § 101(12A) definition of "debt relief agency" by a plain reading of the statutory language and that of the constituent terms. Particularly, since " 'debt relief agency' is broadly defined as 'any person who provides any bankruptcy assistance to an assisted person' " under § 101(12A), and '[b]ankruptcy assistance' is defined to include 'providing legal representation with respect to a case or proceeding under' the Bankruptcy Code," therefore "a debt relief agency includes any person who provides legal representation in a bankruptcy proceeding to an assisted person. As only attorneys can provide legal representation, they are necessarily included in the definition of 'debt relief agency.' ” So the Court held specifically that an attorney providing "bankruptcy assistance" "in return for the payment of money or other valuable consideration" to an "assisted person" is a "debt relief agency" under BAPCPA. Note this does not include attorneys counseling creditors or others, only "debtors contemplating their own bankruptcy."

On Constitutionality of § 526(a)(4) as to First Amendment
The Court squarely addressed the only Circuit Court opinion to have addressed this issue, that of the Seventh Circuit in Milavetz just three months earlier, which had concluded that this subsection was overly broad and unconstitutional as applied to attorneys because it precluded attorneys from providing clients with prudent bankruptcy planning that did not violate bankruptcy law. The Fifth Circuit panel instead analyzed in detail the standard which should apply in determining this statute's constitutionality, and held that under the doctrine of constitutional avoidance it could construe § 526(a)(4) to avoid constitutional problems. The Court agreed that

[i]f If interpreted literally and broadly, section 526(a)(4) would raise serious constitutional problems because, as Hersh suggests, it would restrict some speech that is protected by the First Amendment.
. . . .
To avoid potential constitutional questions regarding section 526(a)(4)’s restrictions on speech, this court construes the statute to prevent only a debt relief agency’s advice to a debtor to incur debt in contemplation of bankruptcy when doing so would be an abuse of the bankruptcy system.

The Court justified the application of the doctrine of constitutional avoidance as to this statute by 1) equating (strangely, in my mind) the phrase in the subsection "in contemplation of " bankruptcy necessarily with an intent to abuse the system, 2) indicating that the statutory remedies for violations of the subsection speaks only to advice given for abusive behavior, 3) showing how this reading of the statute reflected the legislative history, and 4) the subsection's "placement . . . among three provisions meant to curb abuse of the bankruptcy system."

So the Court held

that under the doctrine of constitutional avoidance, the language of section 526(a)(4) can and should be interpreted only to prohibit attorneys from advising clients to incur debt in contemplation of bankruptcy when doing so would be an abuse or improper manipulation of the bankruptcy system. Thus, section 526(a)(4) has no application to good faith advice to engage in conduct that is consistent with a debtor’s interest and does not abuse or improperly manipulate the bankruptcy system.

The Court made a major distinction between whether to analyze § 526(a)(4) as "facially unconstitutional" or rather only invalid "as applied," and it addressed only the former because Hersh did not challenge the latter. In a footnote the Court speculated that it was "questionable" whether she would have standing to do so because she brought the suit before she had been harmed by enforcement of the statute, before it was applied against her. To determine that a statute is "facially unconstitutional," "[t]he party challenging the statute must demonstrate 'a realistic danger that the statute itself will significantly compromise recognized First Amendment protections of parties not before the [c]ourt’ before a statute will be struck down as facially overbroad." Under this tough standard, the Court held that since it construed the statute as not including attorneys giving counsel to incur debt appropriately, "there is no significant imbalance between any protected speech the statute restricts and the speech that the statute legitimately restricts."

On Constitutionality of § 527(b) as to First Amendment
The Fifth Circuit panel agreed with the district court that this notice section does not violate the First Amendment because it “advances a sufficiently compelling government interest and does not unduly burden either the attorney-client relationship or the ability of a client to seek bankruptcy.” Although agreeing that the First Amendment "protects compelled speech as well as compelled silence" and so "protects an attorney's right not to provide her client with certain factual information, the Court cited a number of "compelled speech" cases in the U.S. Supreme Court in which the compelled speech of professionals was deemed appropriate. Here the Court concluded that "the government's interest sought to be furthered by section 527(b) was 'substantially compelling' for First Amendment purposes."

Conclusion
The Fifth Circuit affirmed the trial court, the U. S. District Court for the Northern District of Texas, that attorneys are "debt relief agencies" if they get paid for providing "bankruptcy assistance" to "assisted persons," and thus attorneys are forbidden from advising such persons to incur debt which violates bankruptcy laws but are NOT forbidden from advising persons to incur debt which does not violate the laws. The Fifth Circuit panel also affirmed the trial court's decision that § 527(b) does not violate the First Amendment. But it reversed the trial court in holding that § 526(a)(4) is facially constitutional, and so it dissolved the injunction by the trial court against enforcement of this section by the agents of the government, presumably primarily by the U.S. Trustee.

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

Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2008 Bankruptcy Litigation Support for Attorneys

Last Week's New Circuit Court of Appeals Opinions on BAPCPA: Vehicle Expense Under Means Test; Constitutionality of No Advising to "Incur More Debt"

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

In Ross-Tousey v. Neary (In re Ross-Tousey)
Seventh Circuit Court of Appeals Case No. 07-2503 (02008 WL 5234070)

December 17, 2008

Hersh v. U.S (In re Hersh)
Fifth Circuit Court of Appeals No. 07-10226
December 18, 2008

These two Circuit Court opinions of last week continue the long march of BAPCPA issues through the appellate courts. In the first of these, the Seventh Circuit is the first Circuit Court to decide an issue that had evenly split the four BAP's which had addressed it, one of which was the 9th Circuit's BAP: whether a debtor who has no monthly vehicle loan or lease expense can claim a vehicle ownership deduction when applying the means test. In the other opinion, the Fifth Circuit weighed in on and came to a different conclusion on an issue that has been addressed in the Eighth Circuit and is currently before the Ninth Circuit (in a case which arose out of the Oregon Bankruptcy Court): the constitutionality of BAPCPA's sections 526(a)(4) and 527(b), part of the "debt relief agency" provisions which prohibit an attorney from advising his or her client "to incur more debt in contemplation of" filing for bankruptcy.

The Seventh Circuit Ross-Tousey opinion is the subject of this Bulletin, this Friday's Bulletin will be about the Fifth Circuit Hersh opinion.

Vehicle Ownership Expense Under Means Test When No Debt or Lease Payment

The Seventh Circuit, based out of Chicago, faced the issue "whether an above-median-income debtor who has no monthly vehicle loan or lease payment can claim a vehicle ownership expense deduction when calculating his disposable income." The Court said "yes" in reversing the district court.

Debtors filed a Chapter 7 case, and since their CMI, "current monthly income," exceeded the applicable median income level, they were subjected to the means test to determine whether or not they were required to convert to a Chapter 13 case. The pertinent statute is the Bankruptcy Code's § 707(b)(2)(A)(ii)(I) which permits debtors to deduct:

the debtor’s applicable monthly expense amounts specified under the [IRS’s] 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 . . . . Notwithstanding any other provision of this clause, the monthly expenses of the debtor shall not include any payments for debts.

Pursuant to this the debtors claimed the IRS Local Standards for vehicle operating/public transportation allowance of $358 and the vehicle ownership allowance of $803 (for two vehicles), which resulted that the means test showed them having no disposable income, thus permitting these debtors to proceed with their Chapter 7 case. In response to a motion by the U.S. Trustee to dismiss for abuse under § 707(b)(2), on grounds that the debtors were not permitted to take the $803 vehicle ownership allowance resulting in a presumption of abuse under the means test, the bankruptcy court for the Eastern District of Wisconsin denied the motion to dismiss and permitted this vehicle ownership allowance event though the debtors had no loan or lease payments on their two vehicles. The district court reversed, holding that the debtors could not claim this allowance since they had no monthly payments on the vehicles.

In the Seventh Circuit's statutory interpretation it looked to the plain language of the statute defining "monthly expenses" quoted above, at the legislative history, and at the underlying policies of the means test.

It acknowledged the 2-2 split among the four BAP's that have addressed this issue, those in the Sixth and Tenth Circuits having concluded that the car ownership allowance is permitted when debtors do not have loan or lease payments, and those in the Eighth and Ninth Circuits to the contrary. (The Ninth Circuit BAP opinion is In re Ransom, 380 B.R. 799; Judge Randall Dunn of the Oregon Bankruptcy Court wrote the opinion for the unanimous panel, affirming the bankruptcy court in Nevada.) All four of those BAP opinions have been decided within the last year.

The Seventh Circuit chose the "plain language" instead of the "Internal Revenue Manual" approach, holding that "the Local Standard vehicle ownership deduction 'applies' to the debtor by virtue of his geographic region and number of cars, regardless of whether that deduction is an actual expenses."

The Court found "no indication that Congress intended the [Internal Revenue Manual" methodology to be used in conducting the means test." Indeed the exclusion from the final version of the statute of a phrase which would have required the use of this methodology--"as determined under the Internal Revenue Service financial analysis"--"indicates Congress's intent that courts not be bound by the financial analysis contained in the IRM and supports the conclusion that courts should look only to the numeric amounts set forth in the Local Standards."

Finally the Court cited the "practical reasons" that the Internal Revenue Manual gives IRS officers substantial discretion contrary to Congress's intent to establish "a uniform, bright-line test that eliminates judicial discretion," and the "common sense that there are costs associated with vehicle ownership apart from loan or lease payments," including "depreciation, insurance, licensing, fees and taxes" as well as the greater likelihood of the need to replace a car for which payments are no longer being made.

Bottom Line
In the Seventh Circuit, the expenses provided for in the IRS's National and Local Standards, such as housing expenses, should be used as allowances and not as caps on expenses. And although the U.S. Trustee can still file motions for dismissal under § 707(b)(3) for bad faith or based on the totality of the circumstances, there is no presumption of abuse by the debtor and the burden of proof will be on U.S. Trustee.

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

Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2008 Bankruptcy Litigation Support for Attorneys

Can a Creditor Challenging Ch. 7 Dischargeability "Go Behind" a State Court Settlement Agreement to the Underlying Fraudulent Allegations?

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

Archer v. Warner
538 U.S. 314 (2003)

An unpublished memorandum of the Ninth Circuit BAP of a few months ago, Weilert v. Parker (In re Weilert), looked at "the dischargeability of a debt in bankruptcy where the debtor may have committed fraud but the alleged fraud claim has been settled before the debtor’s bankruptcy filing." In this memorandum the BAP relied heavily on the 2003 U.S. Supreme Court decision of Archer v. Warner. So instead of discussing a recent but non-binding BAP decision, this Bulletin presents this important (and of course binding!) Supreme Court decision.

The Supreme Court's Statement of the Issue and its Holding
Can the language of § 523(a)(2)(A) of the Bankruptcy Code excluding a debt from discharge "to the extent" it is "for money . . . obtained by . . . false pretenses, a false representation, or actual fraud" also exclude from discharge "a debt embodied in a settlement agreement that settled a creditor's earlier claim 'for money . . . obtained by . . . fraud'?" In other words, can the bankruptcy court look behind a settlement agreement to allegations that the settled debt was based on fraud, if that settlement agreement was honestly entered into by both parties and made no reference to any fraud claim? Or does the settlement act as a kind of "novation" which replaces the original fraud-induced debt with a new non-fraud-induced, and therefore dischargeable, debt?

The Court concluded that the "settlement agreement and releases may have worked a kind of novation, but that fact does not bar the [creditors] from showing that the settlement debt arose out of 'false pretenses, a false representation, or actual fraud,' and consequently is nondischargeable." Thus, although the settlement documents--here a settlement agreement and promissory note--fully resolved the state law claims leaving only the debt agreed to in those documents, the Court held that the bankruptcy court could look beyond the record of the state court proceeding and those settlement documents in order to decide whether the debt at issue was a debt for money obtained by fraud. This holding reversed the decisions of the bankruptcy court, the district court, and the Fourth Circuit Court of Appeals.

The Facts and Decisions Below
Court outlined the facts as follows:

(1) A sues B seeking money that (A says) B obtained through fraud; (2) the parties settle the lawsuit and release related claims; (3) the settlement agreement does not resolve the issue of fraud, but provides that B will pay A a fixed sum; (4) B does not pay the fixed sum; (5) B enters bankruptcy; and (6) A claims that B’s obligation to pay the fixed settlement sum is nondischargeable because, like the original debt, it is for “money . . . obtained by . . . fraud.

To add a touch of helpful detail, A, the Archers, purchased a business from B, the Warners, and then just a few months later sued the Warners for, among other claims, fraud related to the sale. The parties settled the lawsuit with an agreement that the Warners would pay the Archers $300,000, and would receive a release as "to any and all claims . . . arising out of this litigation, except as to amounts set forth in [the] Settlement Agreement.” The Warners paid the Archers $200,000 and gave them a promissory note for the remaining $100,000. The parties signed releases “discharg[ing]” each other “from any and every right, claim, or demand” that the others “now have or might otherwise hereafter have against” them, “excepting only obligations under” the promissory note and related instruments. The Archers then dismissed the lawsuit with prejudice.

A few months later the Warners defaulted on their first payment on the promissory note and filed a Chapter 7 bankruptcy case. The Archers filed an adversary proceeding to declare the $100,000 nondischargeable under § 523(a)(2)(A). The bankruptcy court found the debt dischargeable, the District Court affirmed, and the Court of Appeals, in a 2-1 split decision, also affirmed.

The Precedent: Brown v. Felsen
The difference in this 7-2 decision between the majority and the dissent was that the majority found the Court's 1979 opinion, Brown v. Felsen, 442 U.S. 127, applicable here in spite of factual differences, while the dissent distinguished the Brown case because of those factual differences. Brown also involved a debt allegedly obtained through fraud, a suit by the creditor in state court to collect that debt, a subsequent bankruptcy filing by the debtor, and the creditor seeking a declaration of nondischargeability. But in Brown that debt had not been resolved by settlement but rather "the state court entered a consent decree embodying a stipulation" that the debtor would pay creditor a certain amount. As in the present case, the documents that resolved the state court lawsuit did not make any mention that the underlying allegations were based on fraud.

The Court interpreted Brown to have held that

[c]laim preclusion did not prevent the Bankruptcy Court from looking beyond the record of the state-court proceeding and the documents that terminated that proceeding (the stipulation and consent judgment) in order to decide whether the debt at issue (namely, the debt embodied in the consent decree and stipulation) was a debt for money obtained by fraud.
. . . .
The reduction of Brown’s state-court fraud claim to a stipulation (embodied in a consent decree) worked the same kind of novation as the “novation” at issue here.
. . . .
The dischargeability provision applies to all debts that “aris[e] out of” fraud. [Citations excluded.] A debt embodied in the settlement of a fraud case “arises” no less “out of” the underlying fraud than a debt embodied in a stipulation and consent decree.

Most importantly the Court reasoned that "what has not been established here, as in Brown, is that the parties meant to resolve the issue of fraud or, more narrowly, to resolve that issue for purposes of a later claim of nondischargeability in bankruptcy." The Court's majority opinion relied on its understanding that the settlement did not resolve these issues, in spite of language in the releases "discharg[ing] the [subsequent debtors] "from any and every right, claim, or demand" that the [subsequent creditors] "now have or might otherwise hereafter have against" them, other than the settlement obligation).

Critical Issues NOT Decided
A careful reading of the decision here reveals this important limitation: although in Brown the Court had specifically held, as described by the Court here in the quotation above, that claim preclusion did not stop the bankruptcy court from looking to the facts beyond the state court stipulation and judgment, in contrast here the Court was able to sidestep both claim and issue preclusion issues and remand them to the Circuit Court. The claim preclusion argument by the debtor was "that the settlement agreement and releases . . . included a promise that [the creditor] would not make the present claim of nondischargeability for fraud." The issue preclusion issue was that because the creditor "dismissed the original fraud action with prejudice, [state] law treats the fraud issue as having been litigated and determined in [debtor's] favor, thereby barring the [creditors] from making their present claim . . . ." The Court said "that the Court of Appeals did not determine the merits of either argument, both of which are, in any event, outside the scope of the question presented and insufficiently addressed below." It remanded for the Circuit Court "to determine whether such questions were properly raised or preserved, and, if so, to decide them." It left unresolved not only "whether the parties intended their agreement and dismissal to have issue-preclusive, as well as claim-preclusive, effect," but also "to what extent such preclusion applies to enforcement of a debt specifically excepted from the releases." Thus the Court's holding was more limited than may appear without close analysis.

The Bottom Line
Although this Court held that settlement agreements do not necessarily preclude creditors from getting bankruptcy courts to look behind them to debtors' alleged fraudulent conduct, that alleged conduct may well be able to be precluded with sufficiently specific language in settlement agreements together with state law which supports the preclusive effect of such specific language. To turn the Court's language around, if "the parties [made clear in their settlement documents that they] meant to resolve the issue of fraud or, more narrowly, to resolve that issue for purposes of a later claim of nondischargeability in bankruptcy," the creditor would seem not to be able to raise the fraud issue after all.

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

Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2008 Bankruptcy Litigation Support for Attorneys

The Rising Chorus for Using Bailout Funds for Mortgage Relief

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

This month has seen a wave of criticism about the Treasury Department's use of the first $350 billion authorized by the Emergency Economic Stabilization Act, the "bailout" enacted on October 3, 2008. This has included a GAO (Government Accountability Office) report on December 2 entitled "Troubled Asset Relief Program: Additional Actions Needed to Better Ensure Integrity, Accountability, and Transparency." Much of the criticism has focused on the seeming lack of attention to the residential foreclosure problem that some see as the heart of our economic troubles.

On December 4, Federal Reserve Chairman Ben Bernanke urged using more governmental funds in new ways to prevent home foreclosures, saying "“More needs to be done,” . . . . “Policy initiatives to reduce the number of preventable foreclosures should be high on the agenda.”

On December 8, House Financial Services Committee chairman Barney Frank (D-Mass) threatened to withhold further bailout funds unless there was some direct relief provided in it for foreclosure relief: "They're not going to get the [funds] unless they get very serious about the foreclosure modifications and showing us how we're going to get some lending out of the banks" . . . . "At this point I don't see that happening."

On December 10, the Congressional Oversight Panel established by the Emergency Economic Stabilization Act released its first report listing a series of key questions which will guide its oversight work. One of the top questions in this 38-page report: "Is [Treasury's] Strategy Helping to Reduce Foreclosures?" The subsidiary questions within this broader one:

What steps has Treasury taken to reduce foreclosures? Have those steps been effective? Why has Treasury not generally required financial institutions to engage in specific mortgage foreclosure mitigation plans as a condition of receiving taxpayer funds? Why has Treasury required Citigroup to enact the FDIC mortgage modification program, but not required any other bank receiving TARP funds to do so? Is there a need for additional industry reporting on delinquency data, foreclosures, and loss mitigation efforts in a standard format, with appropriate analysis? Should Treasury be considering other models and more innovative uses of its new authority under the Act to avoid unnecessary foreclosures?

The Oversight Panel's report spells out in detail its concerns about each of these questions.

On the day of this report's release the Panel's outspoken chair, Harvard professor Elizabeth Warren, made clear her perspective in an interview on the public radio business program Marketplace:

There has to be an overall notion that we're going to deal with the genuine economic problems in the United States right now. So, for example, we're having a problem -- a real, visible problem -- in the housing market right now. And we've got, potentially, $700 billion commitment of American dollars out there for which, right now, it's not being used. There's not even a hint that it's going to be used to address any part of that problem. That tells me there's not a coherent strategy here. You know, if the American family fails, then there won't be any banks to save.

Earlier this week House Speaker Pelosi joined these other voices for using the bailout funds for mortgage relief. She asserted that the Administration has "totally ignored" provisions of the Emergency Economic Stabilization Act to help reduce mortgage foreclosures, saying: "Absolutely nothing has been done to respect that part of the legislation." She said that legislation is under consideration that would condition the release of more bailout funds on more direct efforts in this area.

Lastly, at a news conference earlier this month, President-Elect Obama responded to a question about the use of the bailout funds by referring to the foreclosure issue without prompting:

One last component of that that I think has to be emphasized, and I've said this before, we've got to start helping homeowners in a serious way prevent foreclosures. The deteriorating assets in the financial markets are rooted in the deterioration of people being able to pay their mortgages and stay in their homes. And if we help Main Street, ultimately we're going to help Wall Street. So that's an area that I'm particularly interested in.

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

Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2008 Bankruptcy Litigation Support for Attorneys

Are Pre-Petition Income Tax Refunds Which Debtors Had Irrevocably Elected to Apply to Future Tax Liabilities Nevertheless Still Estate Assets?

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

Nichols v. Birdsell
Ninth Circuit Case No. 05-15554
May 9, 2007

Issue of First Impression for Ninth Circuit
Are pre-petition income tax refunds which debtors had irrevocably elected on their tax returns to apply to the next year's taxes assets of their bankruptcy estate? Or as the Court put it, does "debtors’ pre-bankruptcy application of their right to tax refunds to post-bankruptcy tax obligations constitutes an asset that must be turned over to the bankruptcy trustee pursuant to the Bankruptcy Code, 11 U.S.C. § 542?"

Facts and Procedural Status
Debtors overpaid state and federal personal income taxes for 2001, and instead of requesting tax refunds they elected to apply these overpayments to future tax liabilities. Within days of making that election early in 2002, debtors filed a bankruptcy (presumably under Chapter 7 although the opinion does not say so explicitly). A year later, after disregarding the trustee's demand to pay the amount of these overpayments to the estate, the debtors sought to apply the overpayments to their 2002 state and federal tax liabilities. The trustee filed an adversary proceeding for recover of the overpayments, "arguing that the Debtors’ interest in the tax overpayments was property of the bankruptcy estate pursuant to 11 U.S.C. § 541 that must be turned over to the Trustee under section 542." The bankruptcy court agreed, granting summary judgment for trustee, and the district court affirmed.

Debtors' Argument
The debtors pointed to §§ 6402(b) and 6513(d) the Internal Revenue Code which provides, as the Court worded it, for an "irrevocable election applying an overpayment of taxes to the subsequent year’s tax obligation." Thus with their election, they argue, the character of the overpayments changed into estimated payments for the 2002 tax liabilities, leaving nothing in their estate at the time of their bankruptcy filing. After their irrevocable election debtors had no ability to get the funds back from the IRS (presumably also from the state), and so that also "prevents the bankruptcy estate from asserting any right to the funds."

The Code Sections
§ 541, entitled "Property of the estate," describes "property" as “all legal or equitable interests of the debtor in property as of the commencement of the case.”

§ 542, entitled "Turnover of property to the estate," states in pertinent part:

an entity . . . in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.

The Rationale
As an issue of first impression in the Ninth Circuit (and perhaps in many other Circuits as well since the Court did not cite any other Circuit's opinions), this opinion relied very heavily on its own 2000 opinion In re Feiler, 218 F.3d 948, in the context of net operating loss carrybacks and carry forwards. In that case the debtors elected not to exercise their option to carry back their net operating losses and create a current tax refund (of $280,000!) but rather elected to carry these losses forward to reduce tax liabilities in future tax years. The IRS there refused to refund these funds to the bankruptcy trustee on the grounds that the debtors' election was irrevocable, the trustee sued the IRS, the bankruptcy court granted summary judgment in favor of the trustee, and the Ninth Circuit upheld that judgment. The Court here acknowledged that Feiler differs from the instant case not only that it involves different tax elections, but also that it dealt with the trustee's powers to avoid debtor's tax election as a fraudulent transfer under § 548 instead of whether the prepayment of taxes from prior tax years constitutes estate property under § 542. Yet the Court focused on its broad definition of "property" in Feiler, having held there that “[b]ecause the right to receive a tax refund constitutes an interest in property, . . . the election to waive the carryback and relinquish the right to a refund necessarily implicates a property interest.” And it recalled that Feiler had relied on a 1966 U.S. Supreme Court case, Segal v. Rochell, 382 U.S. 375, for the point that "the term property has been construed most generously and an interest is not outside its reach because it is novel or contingent or because enjoyment must be postponed.”

The Holding
From this the Court held that the debtors' inability to get the overpayments back from the IRS because of their irrevocable election does not prevent those overpayments from being assets of the bankruptcy estate. Estate assets include all debtors' interests "even in circumstances in which the interest cannot be liquidated and transferred by the debtor."

In light of the expansive definition of property contained in the Bankruptcy Code and our broad interpretation of “property” under Feiler, we hold that this credit toward future taxes constituted estate property at the time the Debtors filed for bankruptcy.

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

Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2008 Bankruptcy Litigation Support for Attorneys