Today's Practice-Critical Bankruptcy Bulletins: November 2009

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, Andy@BLSforAttorneys.com

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Last week Judge Trish Brown ruled in this unpublished opinion that attorney fees paid by a creditor, in settlement of an adversary proceeding brought by Chapter 13 debtors against the creditor for its violations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.

Facts
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.

Rationale
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 Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO SUCH FUTURE REPORTS.

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

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

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, Andy@BLSforAttorneys.com

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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