Monday, May 25, 2009

Why President Obama Let the Bankruptcy Cramdown Legislation Die of Neglect

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

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

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

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

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

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

Two possible theories.

1) Genuine Ambivalence

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

Barack Obama had consistently supported the concept of bankruptcy mortgage cramdown. He promoted it explicitly during his Presidential campaign, devoting an entire (albeit short) speech to bankruptcy reform, a rather unusual elevation of bankruptcy law to the national stage. His campaign website listed "Reform of Bankruptcy Laws," including mortgage cramdown, as one of his 10 key bullet-points on the Economy (see my Bulletin of August 28, 2008). His support did not end with the election. A month after his inauguration, after he and his staff had had a few months since Election Day to consider the appropriate role of mortgage cramdown in addressing the foreclosure crisis, the President included the following paragraph in a major speech on his plan to address the foreclosure crisis:
My administration will continue to support reforming our bankruptcy rules so that we allow judges to reduce home mortgages on primary residences to their fair market value – as long as borrowers pay their debts under a court-ordered plan. That's the rule for investors who own two, three, and four homes. It should be the rule for ordinary homeowners too, as an alternative to foreclosure.
That sounds like genuine support. Two weeks later the House passed its cramdown bill.

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

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

The following week, the Senate voted down the measure.

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

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

2) Utilitarian Political Calculation

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

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

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

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

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

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

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

"Bankruptcy reform, important as it was, was sort of esoteric. If you went into O'Halloran's Pub, the fellas aren't saying to you, 'What's going on with bankruptcy reform?' But they might say, 'What are you doing about my credit cards?' The average person feels the second much more than the first . . . ."
And third, although there are plenty of credit card abusers, somehow in the general public's eye credit card borrowers were helpless victims while homeowners being foreclosed on were much less so. The picture of millions of innocent homeowners who had been merely counted on what had largely been consistently occurring for two generations--increases in home values--was indelibly sullied with and overwhelmed by images of greedy house-flipping speculators and refinance-addicted spendthrifts. Perversely, and in no small part because of the persistent efforts of the mortgage lobby spanning at least two legislative cycles, a substantial portion of taxpayers transferred their outrage about having to shoulder the costs of the financial industry's collapse into an indignant moral superiority: "I've been responsible in buying a house within my means and paying on my mortgage so why should I pay for someone else's irresponsibility and failure to understand their mortgage terms?"

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


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

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

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

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

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

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, May 18, 2009

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

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

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

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

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

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

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

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

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

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

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

Nevertheless Judge Markell concurs in Judge Dunn's holding on the mandatory use of the ABA Standards, perhaps mollified by this footnote in the Court's opinion:
For the reasons stated by Judge Markell in his concurrence, we all have serious questions as to the appropriateness of requiring explicit consideration of the ABA standards in determining the reasonableness of the suspension sanction imposed by the bankruptcy court. However, as further discussed herein, this Panel stated its reasons for requiring consideration of the ABA standards in Crayton and Lehtinen, and this Panel is bound by its prior decisions.
Perhaps to the relief of both judges, just three months later the Ninth Circuit Lehtinen opinion disregarded the ABA Standards, by its silence dispensing with the need for a bankruptcy court to make "explicit consideration of the ABA standards."

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

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

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

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

New Bulletins on this website will provide summaries of other opinions within the Ninth Circuit shortly after they are published. PLEASE EMAIL ME at 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

Wednesday, May 13, 2009

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

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

In re Goss

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

April 29, 2009

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

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

The Facts

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

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

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

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

The Issues

The judge isolated these issues:

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

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

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

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

The Holdings

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

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

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

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

New Bulletins on this website will provide summaries of other opinions within the Ninth Circuit shortly after they are published. PLEASE EMAIL ME at 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, May 8, 2009

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

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

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

On Wednesday, May 6, the Ninth Court filed its second opinion of the week on a § 507(a) claim priorities issue. On Monday one panel of the Court had addressed whether a debt of an employer for a workers' compensation reimbursement was an "excise tax" and thus a priority claim under § 507(a) a)(8)(E) of the Bankruptcy Code. (Here is my Bulletin on that opinion.) And now two days later the question is whether certain a debtor-employer's debts constitute "claims for contributions to an employee benefit plan" under § 507(a)(5).
Preliminary Note: This is not a well-written opinion. It does not state clearly either the specific issues the panel was addressing or its holdings on those issues. One has to try to read between the lines. Although the judge liked using million dollar words like "pellucid" and "hyaline," referring to how clear he believed the law to be, this opinion was one of the least clear ones that I have read in months. I have done my best to try to get at the intended meaning, but feel free to comment if you think I was led astray and you come away with a different understanding. This opinion makes more sense by reading the underlying bankruptcy court opinion at In re Consol. Freightways, Corp. of Del., 363 B.R. 110 (Bankr. C.D. Cal. 2007), but that should not be necessary.
The Court addressed:
1) whether the portion of the claim related to benefits paid to retirees falls within "claims for contributions to an employee benefit plan" under § 507(a) a)(5);
2) whether claims related to such retirees who did not render services within the statutory 180-day look-back period are nevertheless entitled to a priority claim;
3) whether such retiree-related claims are to be counted in determining the number of employees for purposes of calculating the priority claim; and
4) whether the priority recovery cap under this subsection is to be treated as an aggregate cap or one limited per individual employee.

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

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

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

The Courts Below

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

The Statutes
Since § 507(a) a)(5) addressing "contributions to an employee benefit plan" interrelates with § 507(a) a)(4) addressing "wages, salaries, or commissions," here are the pertinent portions of both:
(a) The following expenses and claims have priority in the following order: . . .

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

(5) Fifth, allowed unsecured claims for contributions to an employee benefit plan
(A) arising from services rendered within 180 days before the date of the petition or the date of the cessation of the debtor’s business, whichever occurs first; but only
(B) for each such plan, to the extent of —
(i) the number of employees covered by each such plan multiplied by $ 4,650;
less (ii) the aggregate amount paid to such employees under paragraph (4) of this
subsection, plus the aggregate amount paid by the estate on behalf of such
employees to any other employee benefit plan.
(Note that these subsections were not substantively changed by BAPCPA except that the dollar amounts were greatly increased and the look-back period in § 507(a) a)(4) was doubled from 90 to 180 days, and the subsections were renumbered because of a new subsection § 507(a) a)(1)).

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

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

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

Calculation of the Claim:
On the issue of the total amount of the claim and the meaning of the term "aggragate amount," the Ninth Circuit again quoted the Supreme Court in Howard Delivery:
Congress tightened the linkage of (a)(4) and (a)(5) by imposing a combined cap on the two priorities, currently set at $10,000 per employee [$4,650 in our case here]. Because (a)(4) has a higher priority status, all claims for wages are paid first, up to the $10,000 limit; claims under (a)(5) for contributions to employee benefit plans can be recovered next up to the remainder of the $10,000 ceiling. No other subsections of § 507 are joined together by a common cap in this way.
The panel concluded:
A plain reading of § 507(a)(5) demonstrates that it provides an aggregate limit on recovery under that provision; not an individualized recovery per employee. . . . . The result is, therefore, that an individual employee’s claim under § 507(a)(5) will not be limited by the amount that the employee may have recovered under § 507(a)(4). No doubt the overall fund will be limited by the (a)(4) recovery, but individual claims to benefits will not be.

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

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
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