Connecticut Bar Association v. U. S. : Another U. S. District Court Agrees with Oregon's Olsen v. Gonzales about BAPCPA's Unconstitutionality

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

First a word of context: the first U. S. Circuit Court to rule on the constitutionality of BAPCPA's § 526(a)(4) and § 528(a)(4) and (b)(2)(B) published its opinion just last week: Milavetz, Gallop & Milavetz v. United States, 8th Circuit Case No. 07-2405. These provisions deal with BAPCPA's prohibition against attorneys advising clients to incur additional debt before filing bankruptcy, and the required "We are a debt relief agency ..." advertising disclosures. This 8th Circuit opinion was the subject of my Bankrutpcy Bulletin of 9/09/08. I referred there to Milavetz's potential impact in Oregon, particularly in light of our own U.S. District Court opinion of much earlier, Olsen v. Gonzales, 350 B. R. 906 (D. Or. 2006), which covered many of the same issues. My conclusion in that Bulletin was that the "holdings of and the rationales used in this 8th Circuit opinion give reason to believe that Oregon's Olsen v. Gonzales will continue to stand firm as least as to these issues."

Now just days after Milavetz, we have all the more reason to believe in our Olsen case. On 9/09/08 the U. S. District Court of Connecticut published an opinion that again covers these same BAPCPA provisions and rules largely the same as both Milavetz and Olsen but then goes a half-step further. Connecticut Bar Assn. v U.S., Civil Action No. 3:06-CV-729 (CFD). These two earlier opinions held that the prohibition against attorneys advising clients to incur additional debt was unconstitutional as applied to attorneys while the advertising disclosures were not. The Connecticut District Court agreed to the unconstitutionality of the advising-clients provision but also held that the advertising disclosures ARE ALSO unconstitutional as to "attorneys representing clients other than consumer debtors filing for bankruptcy."

The plaintiffs to whom this applied included a domestic relations attorney who "sometimes discusses bankruptcy with his clients," a law firm which represented only creditors, and an attorney who used to represent both creditors and debtors but had stopped representing debtors after BAPCPA. The District Court in Connecticut relied on the same "reasonably related to the State's interest" rule used by the 8th Circuit in Milavetz days earlier, with both courts basing much of their rationales on the same U.S. Supreme Court case, Zauderer v. Office of Disciplinary Counsel of Supreme Court of Ohio, 471 U.S. 626 (1985). But as applied to these non-bankruptcy attorneys, the Court found that the required disclosure (the familiar: “We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.”) was NOT reasonably related to the state's interest in preventing deceptive advertising. Because the definition of debt relief agency included "attorneys beyond those who actually do help people file for relief under the Bankruptcy Code and extends to attorneys for creditors, landlords and other clients whose legal issues relate to bankruptcy." For these attorneys the Court said that the required statement--"We help people file for bankruptcy relief under the Bankruptcy Code"--"is in fact a false statement--but the advertiser is nevertheless required to adopt it as its own view." The Court rejected the Government's argument that attorneys can just clarify the required language elsewhere in their advertising, saying that practically speaking attempting to do so would be confusing, with contradictory statements in the same advertising.

Maybe the most interesting parts of this Connecticut State Bar opinion are where it directly referenced the ink-is-barely-dry Milavetz 8th Circuit opinion (dated literally only 5 days earlier) and Oregon's Olsen opinion, managing to "respectfully disagree" with both.

This Court rejected the 8th Circuit's argument that non-bankruptcy attorneys "should tailor their advertisement disclosure statements to factually represent the 'bankruptcy assistance' they provide, basing this "tailoring" on the phrase in § 528(a)(4) and (b)(2)(B) which allowed language "substantially similar" to the "We are a debt relief agency..." verbiage. The Connecticut District Court retorted: "For such a disclosure to be accurate with respect to these attorneys, it would necessarily be substantially dis-similar from the statement prescribed by section 528." (Emphasis in original.)

As to Olsen, the Connecticut District "Court respectfully disagrees with the Olsen court to the extent that its decision upholds the requirement of the two-line advertising disclosure in situations in which the statement is indeed false." By this the Court presumably meant to include attorneys who do not help clients actually file bankruptcies but still deal with debt problems, such as attorneys who help with tax collections, disputes with landlords, unlawful debt collection and other consumer protections, but simply do not file bankruptcies.

Looking at the broader picture, all three of these cases agree that 1) attorneys are debt relief agencies, 2) § 526(a)(4)'s prohibition against debt relief agencies advising clients to incur additional debt is unconstitutional as to attorneys, and 3) § 528(a)(4) and (b)(2)(B)'s advertising disclosures are constitutional as to attorneys who do in fact help at least some of their clients file bankruptcies. These consistencies among these opinions far outweigh their modest differences, again reinforcing the likelihood that Olsen v. Gonzales will continue to be the law in Oregon for the foreseeable future.

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

© 2008 Bankruptcy Litigation Support for Attorneys

Oregon Chapter 13 Cases Under Trustees Long, Lynch & Ridgway, By the Numbers

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

In the Bankruptcy Bulletin of September 2, 2008 entitled Intriguing Oregon & National Chapter 13 Trustee Statistics, I presented some data and observations about the money that flows yearly into Chapter 13 cases (more than $5 billion in FY 2007) and where this money goes. The source for that information, the U. S. Trustee's detailed spreadsheet entitled Chapter 13 Standing Trustee FY07 Audited Annual Reports, also has very informative data about the number of filed and completed or terminated Chapter 13 cases, both nationally and per each trustee. This data includes, for example, the number of active cases at the beginning and end of the fiscal year, how many converted into Chapter 7's, were dismissed, were completed normally and through hardship discharges, and even how many cases paid designated percentages to the unsecured creditors. This information provides a closer look at both the national and local Chapter 13 world than the much publicized numbers available from the Administrative Office of the U. S. Courts. It provides a window into what trustees & attorneys in other parts of Oregon & the nation may be doing differently. If you are in that Chapter 13 world, here's some help looking at those important numbers.



OBSERVATIONS AND ANALYSIS

#1: THE NUMBER OF ACTIVE CASES: While nationally the number of active cases at the beginning of this fiscal year compared to its end (9/01/07) decreased by 1.7%, they decreased at a much higher rate for trustees Fred Long and Brian Lynch, by 5.6% and 5.3%, respectively, & increased by 24% for Robert Ridgway.

(NOTE: Because Mr. Ridgway's sample size is so much smaller and his history as a trustee is different than the other two trustees, while I will include his numbers in the rest of these notes, I will usually not refer to them in any analysis, leaving that to those more familiar with the specifics of his pool of cases.)

#2: NEW CASES FILED: The percentage between the number of new cases filed during the year and the number of cases at the start of the year was very similar nationally and for Long & Lynch, 29.3%, 28.4%, & 26.2%, respectively; 60.3% for Ridgway.

#3: REOPENED CASES: For some reason a much larger number of Lynch's reopened cases closed this year although it is not clear how they were closed, e.g. by successful discharge or dismissal. This accounts for a small part of the difference between the national and Long, and especially Lynch, percentages in note #1. It does NOT reflect a higher rate of reopened cases compared to active cases, with both the national and Lynch at 1.1%, with Long & Ridgway at 1.7% and 2.5% respectively.

#4: CONVERSIONS TO CHAPTER 7: The percentage of conversions to Ch. 7 relative to the number of new cases filed for Long are much lower than the national average for conversions pre-confirmation, 1.2% versus 2.9% nationally, and about the same for post-confirmation conversions, 8.5% versus 8.0% nationally. Lynch's pre-confirmation percentage was closer but still under the national average, 2.1%, while his post-confirmation percentage was somewhat lower than the average, at 6.4%. Ridgway's pre- and post-confirmation rate was both at 4.3%.

(NOTE about these calculations: Be aware that these percentages do not precisely track the rate of conversion for cases during their lifetime, rather comparing the total conversions of this fiscal year in relation to the number of cases filed, even though some of these conversions were in cases filed before this fiscal year, and some of the cases filed this fiscal year will undoubtedly be converted after the end of this fiscal year. However, these comparisons within the fiscal year are still informative, as long as it is clear what we are actually comparing. This also applies to my other listed observations. I am aware that with some of these comparisons it might make more sense to change what I've calculated, for example to compare the conversion amounts to the number of cases pending at the start of the the fiscal year instead of to the number of cases filed. Feel free to play with the numbers as makes sense to you, and tell me what you've learned!)

#5: DISMISSED CASES: The percent of cases dismissed pre-confirmation relative to the number of new cases filed are substantially lower than the national average for all 3 Oregon trustees, at 10.5%, 11.8% & 12.9% for Long, Lynch & Ridgway respectively, compared to the national average of 21.3%; for post-confirmation dismissals, again relative to the number of new cases filed, Long is slightly higher than the national average of 30.1%, at 33.1%, compared to Lynch at 23.1% and Ridgway at 11.4%, both much lower than the average. These seem to reflect that in Oregon, undoubtedly through the combined efforts by the bench and bar.

#6: COMPLETED PLANS: Consistent with this, Long & Lynch's percentage of cases closed with completed plans compared to the number of cases filed this fiscal year is substantially higher than the national average of 49.1%, at 80.1% and 78.8%. Ridgway's low percentage at 16.4%, with 19 cases completed compared to 70 filed, presumably reflects the age of his case pool compared to the other two trustees.

#7: HARDSHIP DISCHARGE: Long and Lynch both had a substantially higher number of hardship discharged cases than the national average compared to number of cases filed this year, especially Lynch, with 0.55% and 1.02% respectively, compared to 0.32%. This perhaps reflects Oregon's debtors' attorneys greater familiarity with this procedure, and the trustees' and judges', and perhaps creditors',less resistance to it. Ridgway's percentage was 1.43% but was statistically skewed because he had just one hardship discharge.

#8: CASES LONGER THAN 60 MONTHS: The number of Lynch's cases longer than 60 months as a percentage of the number of cases at the end of the fiscal year (which I assumed is the pertinent point in time) is slightly lower than the national average, 0.67% compared to 0.84% nationally. Long does not have any cases longer than 60 months, presumably reflecting the procedures used in his office and the attitudes of the judges in the Eugene Division. Ridgway also has no 60+ month cases.




THE DATA

________________________________________________________________

	# CASES ACTIVE FY07	NEW CASES FILED	CASES RE- OPENED	CLOSURE OF REOPENED CASES
Long	3,200	910	53	-17
Lynch	4,862	1,275	54	-67
Ridgway	116	70	3	0
National Totals	790, 030	281,337	84,686	-3,922
National Average Per Trustee	4,115	1,465	44	-20

________________________________________________________________

	CONVER- TED PRE- CONF	CONVER- TED POST- CONF	DIS- MISSED PRE- CONF	DIS- MISSED POST- CONF
Long	-11	-77	-96	-301
Lynch	-27	-82	-151	-294
Ridgway	-3	-3	-9	-8
National Totals	-8,140	-22,635	-60,003	-84,767
National Average Per Trustee	42	-118	-313	-441

________________________________________________________________

	CLOSED COM- PLETED PLAN	CLOSED HARD- SHIP DIS- CHARGE	# OF CASES END OF FY07	CASES > 60 MOS.
Long	-736	-5	3,021	0
Lynch	-1,005	-13	4,606	31
Ridgway	-19	-1	144	0
National Totals	-138,065	-901	776,269	6,531
National Average Per Trustee	-719	-5	4,043	34

_______________________________________________________________

Underlying data from Chapter 13 Standing Trustee FY07 Audited Annual Reports,
calculations by: Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

© 2008 Bankruptcy Litigation Support for Attorneys

BAPCPA's § 526(a)(4) Is Unconstitutional, Says 8th Circuit: Attorneys ARE "Debt Relief Agencies" But MAY Advise Clients to Incur Additional Debt

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

Milavetz, Gallop & Milavetz v. United States
U. S. Circuit Court for the Eighth Circuit, Case No. 07-2405
September 4, 2008

For the first time, just last week, a Circuit Court has addressed whether bankruptcy attorneys are "debt relief agencies" under BAPCPA, and, if they are, whether specific controversial prohibitions or requirements of debt relief agencies are unconstitutional as applied to attorneys. Although of course not binding on Oregon attorneys, this case is of local interest because of important clues it may give about the long-term viability of our earlier Oregon U. S. District Court opinion covering much of the same ground, Olsen v. Gonzales, 350 B. R. 906 (D. Or. 2006).

The 8th Circuit addressed 3 questions that have arisen under BAPCPA 1) whether bankruptcy attorneys who provide bankruptcy assistance to assisted persons are debt relief agencies; 2) if so, whether the prohibition of § 526(a)(4) for debt relief agencies to advise clients to incur debt is unconstitutional; and 3) if attorneys are debt relief agencies, whether the now-familiar advertising disclosure requirements of § 528(a)(4) and (b)(2)(B) are unconstitutional as applied to attorneys. The U. S. District Court for the District of Minnesota had resolved these issues by granting summary judgment in favor of the plaintiff bankruptcy law firm, and thereby ordering that the attorneys of the District of Minnesota were not debt relief agencies and that the above challenged provisions were unconstitutional as applied to Minnesota's attorneys.

1) The Circuit Court disagreed with the lower court's application of the doctrine of constitutional avoidance, which dictates that "where an otherwise acceptable construction of a statute would raise serious constitutional problems, the Court will construe the statute to avoid such problems unless such construction is plainly contrary to the intent of Congress." (Quoting from.Edward J. DeBartolo Corp. v. Florida Gulf Coast Bldg. & Constr. Trades Council, 485 U.S. 568, 575 (1988).) The 8th Circuit believed the Congressional intent was clear: that BAPCPA's definition of "debt relief agency" in § 101(12A), and the component definitions of "bankruptcy assistance" and "assisted persons," required the conclusion that Congress intended for attorneys to be included as debt relief agencies. "The statutory language sweeps broadly and clearly covers the legal services provided by attorneys to debtors in bankruptcy unless excluded by another provision." The Court then noted that the five exclusions listed in § 101(12A).did not refer to attorneys, so it ruled that attorneys are debt relief agencies.

2) After briefly addressing the competing First Amendment standards of scrutiny for weighing the prohibition against advising a client to incur more debt in contemplation of bankruptcy, the Circuit Court held that

regardless of whether the government's interest in prohibiting the speech was legitimate (Gentile standard) or compelling (strict scrutiny standard), § 526(a)(4) is unconstitutionally overbroad as applied to attorneys falling within the definition of debt relief agencies because it is not narrowly tailored, nor narrowly and necessarily limited, to restrict only that speech that the government has an interest in restricting. Instead, § 526(a)(4) prohibits attorneys classified as debt relief agencies from advising any assisted person to incur any additional debt in contemplation of bankruptcy; this prohibition would include advice constituting prudent prebankruptcy planning that is not an attempt to circumvent, abuse, or undermine the bankruptcy laws. Section 526(a)(4), as written, prevents attorneys from fulfilling their duty to clients to give them appropriate and beneficial advice not otherwise prohibited by the Bankruptcy Code or other applicable law.

The government argued, and a dissenting opinion discussed at some length, that the restriction on speech is constitutional because it should be interpreted to mean only inappropriately given advice, but the majority dismissed this because "the plain language of the statute does not permit this narrow interpretation."

3) As for the advertising disclosure requirements of §§ 528(a)(4) and (b)(2)(B), these require the use of the following (or a substantially similar) disclosure by any debt relief agency providing bankruptcy or a list of other debtor-related assistance to any assisted person: "We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code." In reviewing the constitutionality of these disclosures. the Eighth Circuit disagreed with the District Court's use of the "intermediate scrutiny" standard and determined that the "rational basis" standard was instead appropriate. The Court relied on the U. S. Supreme Court opinion, Zauderer v. Office of Disciplinary Counsel of the Supreme Court of Ohio, 471 U.S. 626 (1985) in determining that the "disclosure requirements here, like those in Zauderer, are intended to avoid potentially deceptive advertising". That context called for the regulation of speech to be merely reasonably related to preventing consumer deception, so "although less intrusive means may be conceivable" for meeting the governmental goal, these disclosures were reasonably related to that goal and so they passed constitutional muster.


This 8th Circuit opinion referred repeatedly and favorably to the 2006 Oregon U. S. District Court opinion, Olsen v. Gonzales, mentioned at the beginning of this Bulletin, in fact using it as direct or indirect support for each of its three key holdings above. That gives strong indication that this Olsen opinion will represent the law in Oregon on these issues for at least the near future. In addition, the 8th Circuit expressly stated that its was following the majority view that attorneys are debt relief agencies; and it only cited (and presumably only found) opinions supporting the unconstitutionality of § 526(a)(4) and the constitutionality of §§ 528(a)(4) and (b)(2)(B). These seem also to indicate some stability for the same holdings in Olsen. Until the 9th Circuit or its Bankruptcy Appellate Panel rules to the contrary, these particular rooms in the BAPCPA house of ambiguity are relatively settled in Oregon.

THE BOTTOM LINE: In Oregon since 2006, and now in the 8th Circuit, attorneys ARE debt relief agencies, but they are EXCLUDED from the § 526(a)(4) prohibition against giving advice to procure additional debt, since that prohibition is unconstitutional broad in violation of the First Amendment. However the disclosure requirements. However the disclosure requirements of §§ 528(a)(4) and (b)(2)(B) are reasonably related to the governmental purpose of regulating deceptive advertising and so they continue to be applicable to attorneys. The holdings of and the rationales used in this 8th Circuit opinion give reason to believe that Oregon's Olsen v. Gonzales will continue to stand firm as least as to these issues.


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

© 2008 Bankruptcy Litigation Support for Attorneys

New 9th Circuit Opinion Adjusts the Line Between Void & Voidable Transfers in Violation of the Automatic Stay: Bona Fide Purchaser Defeats Trustee

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


Burkart v. Coleman (In re Tippett), 9th Circuit Case No. 6-15411
Sept. 4, 2008

In this Opinion published last week the Ninth Circuit addressed one point of conflict between two very basic principles: the automatic stay and the bona fide purchaser, specifically the automatic stay's voiding of "any act to . . . exercise control over property of the estate" (§ 362(a)(3)), and the rights of a bona fide purchaser of such property of the estate. If, as the 9th Circuit had held in its seminal 1992 opinion, Schwartz v. United States (In re Schwartz), 954 F.2d 569, 571, "violations of the automatic stay [are] void, not voidable," then wouldn't a Chapter 7 debtor's post-petition wrongful sale of property of the estate be void, even to a bona fide purchaser ("BFP"), allowing the Chapter 7 trustee to take that property back into the estate? In last Thursday's opinion the 9th Circuit said no, a BFP prevails against a trustee.

How did the Court come to this result in spite of its 16-year old "void, not voidable" standard? Mostly by closely analyzing its 1992 Schwartz opinion. It's rationale is important to the bankruptcy practitioner beyond the simple "BFP beats trustee" holding because it provides a better understanding of the automatic stay, a concept that is part of every bankruptcy attorney's daily practice.

In this Chapter 7 case the debtors listed their residence for sale, about 18 months after their case was filed, without permission from the trustee or the bankruptcy court and without informing their real estate broker of their bankruptcy. Indeed around this same time the trustee sent them and their attorney a letter requesting their cooperation in his intended sale of the property for the bankruptcy estate, to which they did not respond. A few months later they sold the residence, for $85,000 more than had been stated on their schedules, to a purchaser who did not know about their bankruptcy, and who financed the purchase with two loans secured by trust deeds. The deed transferring ownership and the trust deeds were duly recorded. The debtors received sale proceeds well in excess of their homestead and any other applicable exemptions.

In the adversary proceeding by the trustee against the purchaser and his lenders to regain title of the property, the bankruptcy court ruled in favor of the trustee, while granting the lenders equitable liens to be paid out of the trustee's sale of the property. On appeal the BAP reversed, and the trustee appealed.

The 9th Circuit affirmed the BAP holding, in favor of the BFP. After getting past the trustee's argument that the Bankruptcy Code's automatic stay preempts the state bona fide purchaser statute (to be discussed in an upcoming (9/15/08) Litigation Report on this website), the Court arrived at its ruling in two steps.

1) The trustee argued that upon the filing of a bankruptcy all of debtors' property vested in the bankruptcy estate, and so the debtors no longer had any interest in the real estate and the deed purporting to sell their real estate thus had no legal effect. The Court reasoned that this reflects a misunderstanding of the California bona fide purchaser ("BFP") statute (which is effectively the same as Oregon's--see below). The whole point of BFP statutes is to give effect to transfers in which the record owner's title is defective because of a prior unrecorded transfer, thereby nullifying that unrecorded transfer in favor of the BFP. The unrecorded transfer here is the residence's transfer into the bankruptcy estate resulting from the filing of the bankruptcy case. So, the Court held that this transfer to the estate is nullified in favor of the BFP.

2) The trustee then argued that "the automatic stay triggered by the [debtors'] petition rendered their deed to [the purchaser] a nullity ab initio, which conveyed nothing to [the purchaser] despite his status as a bona fide purchaser." He cited § 362(a)(3) that the petition "operates as a stay, applicable to all entities, of . . . any act to . . . exercise control over property of the estate." Indeed the Court acknowledged the "surface plausibility" of this argument, which was after all largely based on its own "void, not voidable" Schwartz opinion referred to above.

The Court's interpretation of its own Schwartz opinion turned on whether a particular part of that opinion was dicta, as the trustee argued, or not. In Schwartz the 9th Circuit had analyzed what it now called the "important potential conflict" between the automatic stay provision of § 362(a) and the trustee's special avoidance power in § 549(a), which provides that "the trustee may avoid a transfer of property of the estate . . . that occurs after the commencement of the case; and . . . that is not authorized under [the Bankruptcy Code] or by the court." But § 549 creates an exception for BFP's, not permitting the trustee's avoidance of transfers to BFP's. The Court in Schwartz had reasoned that § 549(a) and § 362(a) can be read together such that "§ 549 applies to transfers in which the debtor is a willing participant" whereas "[s]ection 362's automatic stay does not apply to sales or transfers of property initiated by the debtor." So in the present case, the Court, after rejecting trustee's argument that the above discussion in Schwartz was only dicta, instead determined that Schwartz was both binding precedent and well reasoned, and thus held that the automatic stay does not render void the debtors' sale of their residence.

Lastly, I mentioned above that Oregon's BFP statute is effectively the same as California's. This is important in considering the applicability to this opinion to Oregon. Here are the two pertinent statutes for the readers' own comparison:

• Cal. Civ. Code § 1214: "Every conveyance of real property . . . is void as against any subsequent purchaser or mortgagee of the same property, or any part thereof, in good faith and for a valuable consideration, whose conveyance is first duly recorded . . . ."

• ORS 93.640: "Every conveyance . . . affecting the title of real property within this state which is not recorded as provided by law is void as against any subsequent purchaser in good faith and for a valuable consideration of the same real property, or any portion thereof, whose conveyance . . . thereof is first filed for record . . . ."

Query:

• The 9th Circuit twice noted that the "Trustee in bankruptcy had not recorded the [debtors'] Chapter 7 petition in the office of the . . . County Recorder . . . ." Clearly that would have yielded the opposite result, indeed would have avoided the entire issue because there would not have been a BFP without notice of the trustee's interest. But is the Court trying to say that trustee's should be bearing the expense of recording petitions or notices of bankruptcy? Apparently so, in cases where the trustee believes there is equity beyond the homestead exemption.
  

• Why didn't the title company in the sale to the BFP report the debtor's bankruptcy? It's a matter of public record and referred to by title companies generally.,even if the bankruptcy is not recorded in the county real estate records. Could it be that the sale here was not stopped by the title company because the Chapter 7 case had by that time been discharged and closed, the sale being 23 months after the case was filed?

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

© 2008 Bankruptcy Litigation Support for Attorneys

Oregon's Slice of the Bankruptcy Pie

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

Yesterday's Bulletin addressed the most recent quarterly national bankruptcy filing numbers, and how both the number and the rate of increase compare to pre-BAPCPA years. Today, the Oregon story.

The important questions:

• How do the current number of filings in Oregon compare to the number of filings in the quarters and few years shortly before the pre-BAPCPA tidal wave of filings?

• How do the current numbers compare to 10-12 years ago, well before BAPCPA?

• What are the current trends in Oregon filings, and how do they compare to the national trends?

• How does Oregon compare to the rest of the country in per capita Chapter 7 and Chapter 13 filings?

The answers:

• The filings in the 2nd quarter of 2008 are less than half as much as for the same quarter in not only 2005, but also for the four prior years. In the current year's 2nd quarter, 3,162 cases were filed in Oregon under all Chapters, compared to 2,527 cases in the 2nd quarter of 2005, an amount 138% higher. Yes, by that period in 2005 the filing volume was undoubtedly being affected by the ticking BAPCPA time bomb, but that quarter's volume was not all that much different than the previous 4 years: the lowest number of filings among those quarters was in 2001, 6,582, but that amount is still 108% larger than in the current year's 2nd quarter. We are still way below the number of filings during the half-decade before BAPCPA.

• The current quarterly numbers in Oregon are still well below the numbers of even 10-12 years ago. A full dozen years ago, the 2nd quarter of 1996, was the lowest pre-BAPCPA 2nd quarter throughout this whole period, with 4,517 filing, still 43% more than in 2008. The average number of filings during the 2nd quarters of 1995 through 2000 was about 4,850, about 53% more than the current 2nd quarter.

• Although the trend in filings since the 1st quarter of 2006 are generally upwards in Oregon, the progression has not been as steady or as strongly upward as the national trend. In the national numbers every single quarter after the 1st quarter of 2006 was larger than the prior one, with a total of a 137% increase during that period. In Oregon, during that same 10 quarter period, in 3 of the quarters the filings went down from earlier quarters, and the total increase was 101% during that period, much less than nationally.
  

• The Oregon filings are much lower now relative to 10-12 years ago compared to the national numbers. I noted above that 2nd quarter 1996 Oregon filings were 43% higher than in 2008, while the national difference was only 8% higher. The national quarterly numbers have almost caught up with those of a dozen years ago while Oregon's are not nearly as close.

• However Oregon's pace of filings seems to have accelerated relative to the nation as a whole during the last two quarters, perhaps reflecting the delayed arrival of the housing crisis in Oregon. Specifically, the increase in national filings from the 1st quarter to the 2nd quarter of 2008 was 12.5% while the increase in Oregon was 23.3%. This is only one quarter but at raises the question whether Oregon is poised to start catching up.
  

• Perhaps the most important kind of measurement is one that counts the number of bankruptcies per capita, the number of flings per 1,000 residents. For the 12-month period ending on June 30, 2008, the country had 3.15 bankruptcy filings per 1,000, while Oregon had a little lower than that average, 2.78 filings per 1,000. (Interestingly Washington's rate was exactly the same, 2.78; the rates vary widely among the states, from a high of 6.92 filings per 1,000 residents during those 12 months in Tennessee down to 1.08 filings in Alaska.)

• In Oregon the per capita Chapter 7 filings for the 12-month period ending on June 30, 2008 was 2.03 filings per 1,000 residents, virtually the same as the 2.00 national rate, whereas Oregon's Chapter 13 filings for that period were .74 filings per 1,000, well below the 1.12 national rate.
  

Source: The calculations reflected in this Bulletin were based on data provided by the Administrative Office of the U.S. Courts.

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

© 2008 Bankruptcy Litigation Support for Attorneys

The National Bankruptcy Statistics Demystified

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

Every few months we see the headlines about how the bankruptcy filing numbers are up, yet again. Indeed a few days ago an Associated Press story was headlined in the LosAngeles Times with "U.S. Bankruptcy Filings Rise 28.9%". This isolated statistic referred to the increase in filings from the one-year period of July 1, 2006 through June 30, 2007 to the same period one year later, July 1, 2007 through June 30, 2008. But everybody in the bankruptcy world knows that such year-to-year comparisons are suspect because the October 2005 BAPCPA's shock waves were being strongly felt through the second half of 2006 and arguably for much longer. So comparing these one-year periods is not very enlightening.

What WOULD be enlightening would be the answers to the following questions:

1) How do the present filing numbers compare to the filings before BAPCPA?
2) How do the current percentage increases compare to previous periods of increase?


1) The current quarterly numbers for cases commenced are not only low compared to the year or two right before October 2005, but as much as they have increased over the two years the numbers are still well below the quarterly numbers of even a decade ago.

276,510 bankruptcies were filed in the United States during the most recent quarter, April through June 2008. The number of filings has significantly increased every single quarter since the 1st quarter of 2006, immediately after BAPCPA's arrival, from a low of 116,771 filings that quarter. As is well known, during the two or three months before the law's change in mid-October 2005 there were a huge volume of filings, most dramatically impacting the 3rd and 4th quarters of 2005, with 542,002 and 667,431 cases filed respectively.

What is less remembered is that filings were also relatively high for many quarters, and even for years, before that, perhaps spurned on during this extended period by the increasing indications that BAPCPA was finally actually going to be passed after all the "false starts" going back to the mid- and late 1990's. The second quarter of 2005 had 467,333 filings, 69% more than the 2nd quarter of this year--perhaps not surprising because BAPCPA was signed into law in April 2005, with a 6-month delay in its effective date, so the rush was on from that point forward. But the number of filings were also comparatively high for years earlier: the 2nd quarters of 2004, 2003, 2002 and 2001 ALL had filings in excess of 400,000, the lowest being in 2001 at 400,394, still 45% more than this current year's 2nd quarter. (I use the 2nd quarters for comparisons to minimize seasonal variations.)

Even a full dozen years ago, the 2nd quarter of 1996, the lowest pre-BAPCPA 2nd quarter throughout this whole period, had 297,162 filings, which is still 7.5% more than the current 2nd quarter. The average number of filings during the 2nd quarter from 1996 through 2000 was about 341,000, about 24% more than the current year's 2nd quarter filings of 276,510. We are only now beginning to approach the filing numbers of a dozen years ago.

Furthermore, these comparisons are of the absolute numbers of cases filed, without taking into account the interim increase in the nation's population. And the current filing numbers seem all the lower when considering the relatively strong economy during much of the last dozen years, and how strong home values were along with the availability of refinancing credit for people to borrow their way out of debt. It seems very likely that the filing numbers will continue to climb for at least the near term as potential filers become more aware of the continued availability of bankruptcy options and even as the large volume of people who filed in 2004 and 2005, and in the high-volume years earlier, become eligible to seek relief again.

2) The percentage increase in filings from the 1st quarter of 2006 through last quarter IS higher than any other 10-quarter period in the last dozen years, INCLUDING the period just before BAPCPA's arrival. The increase from 1st quarter 2005 until last quarter was 137%; the increase during the 10-quarters approaching and including BAPCPA's effective date was about a 50% increase.

However, considering the unprecedented drop-off in filings during especially the first year or so after BAPCPA, including them does not seem to lead to a useful comparison. So looking instead at the increase in filings from the 2nd quarter 2007 to the 2nd quarter 2008, 210,449 to 276,510, yields a 31% increase, STILL by far larger than any other 2nd quarter to 2nd quarter year-to-year increase in the last dozen years, more than during the dot-com bust, the aftermath of 9-11, or even from 2004 to 2005 in the run-up to BAPCPA. This steep increase seems to indicate a capacity for continued increases in filings, the extent to which depends on the economy. and particularly on the housing and credit markets. And it also depends on the elusive answer to that perennial question: how much did the BAPCPA overhaul truly reduce the ability or inclination for people to file bankruptcy?

Lastly, another set of important questions about the bankruptcy statistics, of even greater practical interest that these national ones, are about the trends and the truth in the numbers behind OREGON bankruptcies. See tomorrow morning's Bulletin for that story.

Source: The calculations reflected in this Bulletin were based on data provided by the Administrative Office of the U.S. Courts.

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

© 2008 Bankruptcy Litigation Support for Attorneys

The Most Important 9th Circuit B'cy Opinion of the Summer: Above-Median Income Ch. 13 Debtors Can Have 0%, Shorter-than 5-Year Plans

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


Maney v. Kagenveama, 527 F.3d 990 (9th Cir. 2008)
June 5, 2008, amended June 23, 2008

The Ninth Circuit has applied a strict reading to BAPCPA's new terms, "projected disposable income" and "applicable commitment period," with the result that an above-median income debtor who had a negative income on Form B22C, and thus no "projected disposable income," had no requirement to pay unsecured creditors and no requirement to pay into the Chapter 13 plan for 5 years, or for any other particular period of time. However, under-median income debtors do not benefit from this ruling. How could all this be?

With this opinion the Ninth Circuit became the first Circuit in the country to strictly interpret "projected disposable income," a term not defined in the Code, to mean "disposable income" projected out over the "applicable commitment period." The consequences of this statutory construction are huge. So we need to walk carefully through the Court's semantics.

The Court's Analysis

"Projected disposable income" is a pre-BAPCPA term, "applicable commitment period" is a BAPCPA term. "Disposable income" is defined in § 1325(b)(2) as "current monthly income . . . less amounts reasonably necessary to be expended--for the maintenance and support of the debtor or a dependent [and appropriate charitable and business expenses] . . . ." And "current monthly income" is a BAPCPA term involving a calculation of income and expenses of the prior 6 months, and, under § 1325(b)(3), requires over-median debtors to determine expenses according to § 707(b)(2), the number-crunching involved in the expense portion of Form B22C. So if, as in this case, the "disposable income," as reflected in Form B22C, is zero dollars or less, projecting that amount over the "applicable commitment period" yields a "projected disposable income" amount also of zero dollars. The Court's critical sentence in this statutory interpretation: ". . . to give meaning to every word of § 1325(b), 'disposable income,' as defined in 1325(b)(2), must be 'projected' in order to derive 'projected disposable income'."

The Court rejected the trustee's arguments for "a forward-looking determination of 'projected disposable income' " (instead of the Court's focus on prepetition income via Form B22C) with two arguments: 1) The view that "projected disposable income" must be based on the debtor's anticipated income during the life of the plan violates the plain language link of "disposable income" (i.e., the Form B22C amount) to "projected disposable income." 2) The view that this calculation under § 1325(b)(2) (again, the Form B22C amount) is merely a starting point for deriving the "projected disposable income," and can be rebutted or supplemented by other evidence of the debtor's past and future finances, has no support in the Code and flies in the face of BAPCPA's formulaic approach instead of the prior flexible one. (The Court here cites but does not discuss the details of a recent 9th Circ. BAP opinion, In re Pak, 378 B.R. 257, 267 (9th Cir. BAP 2007), as part of the "unpersuasive" line of case supporting this second erroneous view.)

The Court pointedly explained that the results from its "plain reading" of § 1325(b) are not absurd simply because unsecured creditors get less in some circumstances, and [i]f the changes imposed by BAPCPA arose from poor policy choices that produced undesirable results, it is up to Congress, not the courts, to amend the statute." Even more pointedly, "Chapter 13 trustees were aware of the change in the law and notified Congress of their concerns before BAPCPA was passed but Congress failed to act", so "we presume that it was aware of the new result, and the decision not to amend the statute was intentional."

The Court then addressed the "applicable commitment period" requirement, holding that although the trustee was correct that this term generally "denotes the time by which a debtor is obligated to pay unsecured creditors," but that "the 'applicable commitment period' requirement is inapplicable to a plan submitted voluntarily by a debtor with no 'projected disposable income'.". Its rationale: upon objection to a plan by trustee or creditor, the debtor must propose a plan in which all "projected disposable income" is submitted to make payments during the "applicable commitment period," but if, as here, there is no "projected disposable income" there is no "applicable commitment period."

So why does all this benefit the above-median income debtor and not the below-median one? Recall that a below-median income debtor completes Form B22C only so far as to show that her income is below the median. It is only above median debtors who must recalculate his expenses on Form B22C pursuant to § 707(b)(2) and thus has an opportunity to have a negative "disposable income."


Appeal?

According to a deputy clerk at the 9th Circuit, no timely petition for rehearing was filed in this case and so as of July 15, 2008, it is final. It may yet be appealed to the Supreme Court but the 9th Circuit has not received notice of this as of the date of this Bulletin.

The Bottom Line

Best articulated by the dissenting opinion: "So long as the debtor can calculate no “disposable income” at the time his creditor plan is confirmed, he can rest easy. The debtor can propose as short a time period as he wants: a day, a week or a month." And "[u]nder the majority's rule, a debtor could mischievously 'game the system' and avoid repaying debt to his unsecured creditors by inflating his pre-plan confirmation expenses and deferring income until after plan confirmation. He could gain confirmation of his plan with a short commitment period and then reduce his actual expenses and accept his deferred income. Unsecured creditors who discover the debtor's improved financial situation would be limited to seek modification of the debtor's plan only within the short commitment period . . . ".

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

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

© 2008 Bankruptcy Litigation Support for Attorneys

Intriguing Oregon & National Chapter 13 Trustee Statistics

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

The US Trustee's office generates a highly detailed spreadsheet entitled Chapter 13 Standing Trustee FY07 Audited Annual Reports, containing about 60 statistical facts on each of the nearly 200 standing Chapter 13 trustees. Here are some definitely interesting, and in some cases perhaps useful, bits of information gleaned from that spreadsheet. (Federal Fiscal Year 2007 (FY07) is the period from Oct. 1, 2006 through Sept. 30, 2007).

First, some highlights:

• Total payments made by Chapter 13 debtors to the trustees: more than $5 billion.
• National average of ongoing mortgage payments paid through the trustee is about $3.8 million per trustee, but almost none for the Oregon trustees because these are virtually all paid outside the plan here; clearly not elsewhere.
• Ongoing domestic support payments are much less than average in Oregon, presumably because of procedures that tend to have these regular payment be made directly to the recipients or their governmental agents.
• Other priority debt disbursements--presumably mostly taxes and support arrearage, were substantially higher in Lynch and Long's offices than the average.
• Disbursements of debtors' attorney fees were more than double the average in Lynch's office, about average in Long's.
• Trustee fees collected by Lynch's office: about $1.8 million; by Long's office: about $1.4 million.

***CAVEAT: I could not locate an explanatory guide for using this Annual Reports spreadsheet, which would especially help with more precise meanings of some of the terminology. If any of my readers are aware of any such guide, or if any reader believes I misconstrued any entry on this spreadsheet, please contact me.***

_______________________________________________

GROSS DEBTOR PAYMENTS

National Total:

$5,310,173,498

National Average per Trustee:

$27,657,154

Brian Lynch's Office:

$32,527,173

Fred Long's Office:

$22,272,497

Robert Ridgway's Office:

$826,605

_______________________________________________

ONGOING MORTGAGE PAYMENTS

National Total:

$727,731,899

National Average per Trustee:

$3,790,270

Brian Lynch's Office:

$27,530

Fred Long's Office:

$0

Robert Ridgway's Office:

$0

______________________________________________

MORTGAGE ARREARAGES DISBURSEMENTS

National Total:

$416,694,300

National Average per Trustee:

$2,170,283

Brian Lynch's Office:

$1,982,058

Fred Long's Office:

$1,315,176

Robert Ridgway's Office:

$55,406

___________________________________________________

ALL OTHER SECURED DEBT

National Total:

$ ?

National Average per Trustee:

$9,373,711

Brian Lynch's Office:

$6,611,810

Fred Long's Office:

$5,279,839

Robert Ridgway's Office:

$112,875

____________________________________________________

ONGOING DOMESTIC SUPPORT PAYMENTS

National Total:

$7,102,629

National Average per Trustee:

$36,993

Brian Lynch's Office:

$10,059

Fred Long's Office:

$0

Robert Ridgway's Office:

$5,751

__________________________________________________________

ALL OTHER PRIORITY DEBT

National Total:

$284,781,007

Average per Trustee:

$1,483,205

Brian Lynch's Office:

$5,274,796

Fred Long's Office:

$3,022,529

Robert Ridgway's Office:

$101,055

____________________________________________________

UNSECURED PAYMENTS

National Total:

$1,345,850,898

National Average per Trustee:

$7,009,640

Brian Lynch's Office:

$11,658,467

Fred Long's Office:

$8,783,899

Robert Ridgway's Office:

$360,967

_______________________________________________

DEBTOR ATTORNEYS' PAYMENTS

National Total:

N/A

National Average per Trustee:

$2,035,753

Brian Lynch's Office:

$4,490,177

Fred Long's Office:

$2,306,708

Robert Ridgway's Office:

$88,425

_______________________________________________

AVERAGE % FEES

National Average per Trustee:

6.4%

Brian Lynch's Office:

5.4%

Fred Long's Office:

6.2%

Robert Ridgway's Office:

10.0%

_______________________________________________

FEES TRANSFERRED

National Totals:

$256,256,713

National Average per Trustee:

$1,224,670

Brian Lynch's Office:

$1,816,115

Fred Long's Office:

$1,373,480

Robert Ridgway's Office:

$81,832

____________________________________________

EMPLOYEE SALARIES

National Totals:

$126,010,122

National Average per Trustee:

N/A

Brian Lynch's Office:

$877,332

Fred Long's Office:

$685,152

Robert Ridgway's Office:

$26,519

_______________________________________________

TOTAL ACTUAL EXPENSES

National Totals:

$239,555,018

National Average per Trustee:

$1,247,682

Brian Lynch's Office:

$1,726,215

Fred Long's Office:

$1,171,865

Robert Ridgway's Office:

$39,650

_______________________________________________

ACTUAL COMPENSATION

National Totals:

$31,847,130

National Average per Trustee:

$165,870

Brian Lynch's Office:

$173,523

Fred Long's Office:

$173,523

Robert Ridgway's Office:

$41,431

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

© 2008 Bankruptcy Litigation Support for Attorneys

Negative Equity in Vehicle Loans under Chapter 13: Harmonizing New 9th Circuit BAP Opinion With Recent Oregon Bankruptcy Court Opinions

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

In re Penrod

9th Circuit BAP (arising out of Northern District of California)

BAP Nos. NC-07-1360-MkKJu & NC-07-1368-MkKJu

July 28, 2008

Consider how many Chapter 13 cases involve vehicle loans, how many of those loans are undersecured, and of these how many are undersecured because they include negative equity from a prior vehicle trade-in. BAPCPA created confusion about how to treat such negative equity in vehicle loans 910 days old or less with its notorious "Hanging Paragraph" of Section 1325(a). . In just the last few months the Oregon bankruptcy bar has been "blessed" with three separate opinions interpreting, to use Judge Randall Dunn's apt language, "the semantic briarpatch generally referred to as the Hanging Paragraph."

All three opinions--one last December by Judge Dunn, In re Johnson, and another in February by Judge Albert Radcliffe, In re Riach (unpublished letter opinion so link not readily available), both of the bankruptcy court for the District of Oregon, and the third just a few weeks old from the 9th Circuit BAP (Northern District of California), In re Penrod--deal with the same issue: "whether a creditor holds a purchase money security interest (“PMSI”) for purposes of the Hanging Paragraph, where a portion of its debt represents financing of negative equity in a vehicle traded in by the debtors at the time the debtors purchased their new car" (quoting Judge Dunn's opinion again). Luckily for practitioners, these three opinions all arrived at virtually the same conclusion, on largely (but not totally) the same rationales, with two differences worth noting, one in rationale and the other in practical effect.

First, the uniform conclusion was 1) that the negative equity which derived from the payoff of the traded-in balance was not part of the PMSI and so was NOT subject to the Hanging Paragraph's protection against cramdown; but 2) that, under the "dual status rule," this mixing of PMSI and non-PMSI status in one vehicle loan did not "transform the entire loan into a non-PMSI one but rather allowed the PMSI portion to be protected under the Hanging Paragraph while the non-PMSI one was not.

Second, as to the differences in rationale, the two Oregon opinions referred very specifically to the Oregon version of the UCC, with Judge Dunn expressly rejecting another bankruptcy court's suggestion that a uniform federal definition of PMSI be developed, instead stating: "I can appreciate the irony in developing federal common law to interpret a state law code term to aid in the interpretation of a federal law code provision. However, I find it inappropriate to do so. I join
with most other courts that have considered the issue and look to state law to determine whether [the vehicle creditor] holds a PMSI." The BAP opinion in contrast makes a point of NOT looking to the California version of the UCC in defining PMSI, instead looking to the current version of the general UCC as "a unifying code governing commercial transactions across and among the states that have adopted it." So the BAP extensively quotes from and refers only to the UCC as promulgated by the National Conference of Commissioners on Uniform State Laws and its Official Comments (except for a passing mention of the California UCC on the limited issue of its interplay with California vehicle financing laws and disclosures). However, this difference in approach still yields the same result, probably because both the Oregon and California UCC's follow the uniform version closely as to the sections pertinent to this analysis.

A practical difference among these three cases was whether they addressed how to allocate debtors' prepetition payments between the PMSI and non-PMSI components of the debt. Without guidance on this, attorneys would be left up in the air about the exact amount that must be paid in a Chapter 13 plan. Judge Dunn chose not to reach that issue in In re Johnson, simply denying confirmation of a Plan that proposed to cram down the entire vehicle debt, with a 28-day order to file a modified plan. Judge Radcliffe, who in In re Riach quoted and followed In re Johnson closely in rationale and result, also denied confirmation with leave to amend, but he stated clearly (making the calculations down to the penny!) how to allocate those prepetition payments. According to debtor's counsel, Karen Oakes of Klamath Falls, Oregon, his opinion resolved this practical question because she briefed the issue and asked for a ruling. His answer: if, as here, there is no contractual provision allocating payments, prorate the combined amount of prepetition payments between the PMSI and non-PMSI components based on the ratio between the amount financed just for the new purchase and the amount used for the trade-in negative equity. Here, the contract did provide that payments on the account would go first to interest and late charges, and then to principal, so the amount to allocate was the amount credited to principal, $2,120. The ratio between the portion financed on the new purchase, $19,471, and the amount used to pay off the trade-in's loan, $3,768, is 83.79% to 16.21%; and multiplying the current balance on the account of $20,709 by the PMSI side of that ratio, 83.79%, equals $17,351, which is the PMSI component of that balance, the amount protected by the Hanging Paragraph. Since the vehicle was worth somewhat less than that, the remaining amount of the balance would be treated as a general unsecured claim. (Had the vehicle been worth more than $17,351 , the plan would have to provide for payment of that amount: "collateral's value is a floor below which the secured claim cannot be decreased".)

As for the BAP Penrod opinion, it did not need to address the payment allocation issue because the creditor surprisingly did not raise the issue on appeal, even though the bankruptcy court had allocated ALL of the prepetition payments to the PMSI side of the debt, thereby reducing the amount protected by the Hanging Paragraph.. But note that according to the Clerk of the BAP, Harold Marenus, about 2 weeks ago the creditor in this case filed a notice of appeal to the 9th Circuit (Appeal # 08-60037). As of this writing there has been no motion filed with either the BAP or the 9th Circuit to stay the BAP's ruling pending appeal. So this BAP opinion appears for the moment to be good law, further buttressing the two Oregon opinions which preceded it. BUT IF this BAP opinion IS overturned by the 9th Circuit, such a decision would also effectively overturn the Oregon opinions. According to Mr. Marenus, the 9th Circuit will likely take about two years to rule on the Penrod appeal.

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

© 2008 Bankruptcy Litigation Support for Attorneys