Thursday, November 19, 2009

Chapter 13 Debtors Can Pay Their Attorney Fees Directly from Proceeds of Adversary Proceeding, Instead of Paying Those Proceeds Into the Plan

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

In re McIntyre
U. S. Bankruptcy Court for the District of Oregon,
Case No. 08-34900-tmb13
November 13, 2009

Last week Judge Trish Brown ruled in this unpublished opinion that attorney fees paid by a creditor, in settlement of an adversary proceeding brought by Chapter 13 debtors against the creditor for its violations of the automatic stay, could be paid directly to the attorney instead of to the Chapter 13 trustee. Although such fees are property of the estate, they vest in the debtor unless stated otherwise by a modified plan, including one proposed by the trustee. Absent that here, debtors could pay those fees directly to their attorney.

After the confirmation of their Chapter 13 plan Debtors, through their attorney, M. Caroline Cantrell, filed an adversary proceeding against a bank for post-petition violations of the automatic stay. A few months later this matter was settled. The settlement agreement contained a confidentiality clause, but Judge Brown's opinion reveals that the agreement provided for creditor's payment of damages to debtors as well as their attorney fees incurred in the proceeding.

Ms. Cantrell then filed a "Motion to Pay Fees Direct," with a fee itemization. She argued that because the adversary proceeding dealt with post-petition stay violations, the fees earned need not be paid to the trustee. The trustee, Brian D. Lynch, objected, countering that the fees were property of the estate and should be distributed through the Chapter 13 plan. Very shortly thereafter, Debtors filed an amended plan "which specifically allowed them to keep the settlement proceeds to purchase a car." (The opinion does not state if this plan referred specifically to the attorney fee portion of the settlement.) The trustee did not object to this amended plan.

Judge Brown acknowledged that attorney fees paid by a creditor in such circumstances are property of the estate under § 1306. But such property of the estate vests in the debtors under § 1327(b), which states, in full:
Except as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor.
Although the plan had no language reserving any assets in the estate, the judge referred to a prior reported local opinion which had held that avoided transfers and tax refunds do not revest to the debtor. But any other assets, unless referred to in the plan, do revest to the debtor.

The judge further asserted that the standard plan language requiring debtors to inform the trustee if they receive the right to receive assets worth more than $2,500
does not prevent the revesting provided for in § 1327(b). It merely requires that debtors report the funds to the trustee and request authorization to use them, either from the trustee or the court. The terms of the OCP insure that the trustee has full knowledge of a debtor’s post confirmation finances and allows him to seek modification of a debtor’s plan to account for any post confirmation increases in income should he so desire. However, absent such modification, the funds do not become estate property and the debtors need not pay them over to the trustee.
Since here the trustee did not propose
his own modified plan or [seek] turnover of a portion of those funds in conjunction with confirmation of Debtors' . . . amended plan . . . the funds at issue are not estate property and need not be paid over to the Trustee for distribution under the plan.
The Bottom Line
Presumably the lesson here is that the trustee will be more aggressive in objecting to a modified plan involving attorney fees awarded for post-petition services, and will not just rely on an objection to the fee application.

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

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
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

Friday, November 6, 2009

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

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

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."

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 IF YOU WOULD LIKE TO BE EMAILED A LINK TO SUCH FUTURE REPORTS.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
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

Monday, October 5, 2009

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,

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 IF YOU WOULD LIKE TO BE EMAILED A LINK TO SUCH FUTURE REPORTS.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
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

Thursday, September 17, 2009

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,

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."

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.

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 IF YOU WOULD LIKE TO BE EMAILED A LINK TO SUCH FUTURE REPORTS.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
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

Thursday, September 10, 2009

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,

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."


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 IF YOU WOULD LIKE TO BE EMAILED A LINK TO SUCH FUTURE REPORTS.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
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

Monday, June 22, 2009

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,

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.

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 IF YOU WOULD LIKE TO BE EMAILED A LINK TO SUCH FUTURE REPORTS.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
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