Self-Employed Ch. 13 Debtor Can't Deduct Business Expenses to Determine Whether Debtor Has Above/Below Median Income, and Thus a 3 or 5-Year Plan

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


Drummond v. Wiegand (In re Wiegand)
9th Circuit BAP No. MT-07-1431 JuPaD, 2008 WL 1733148 (9th Cir. B.A.P. 2008)
April 3, 2008

A 9th Circuit Bankruptcy Appellate Panel (which included Judge Randy Dunn) has ruled that a self-employed Chapter 13 debtor may not subtract business expenses from gross business income in arriving at "current monthly income," even though Form 22C clearly provides for this subtraction. So individual debtors must use their gross monthly business income to calculate whether they are above or below median income, which in turn determines whether their plan's applicable commitment period is 3 years or 5 years.

The BAP's Analysis

In this post-BAPCPA statutory construction case, the BAP used a combination of "the plain meaning rule" and "a holistic approach" to resolve the new law's lack of clarity in its definition of "current monthly income" in § 101(10A)," whether for a self-employed debtor this term includes all monthly gross business receipts or rather only net business income after deducting business expenses.

The Court put much weight on the "plain and unambiguous" § 1325(b)(2), which defines "disposable income" to be "current monthly income" minus, "if the debtor is engaged in business, the payment of expenditures necessary for the continuation, preservation, and operation of such business." If the Code clearly defines "disposable income" to be "current monthly income" minus business expenses in § 1325(b)(2), then "current monthly income" itself must include all business income before deducting business expenses. Otherwise, "[I]f business expenses are deducted from gross receipts to determine a chapter 13 debtor’s current monthly income, then there would be no need for § 1325(b)(2)(B), which provides for the same deductions."

In addition, "current monthly income" is defined in § 101(10A), as the “average monthly income from all sources that the debtor receives . . . without regard to whether such income is taxable income.” After acknowledging that the Code does not define "income," the BAP "conclude[d] that the plain language of the statute demonstrates that the bankruptcy court’s reliance on the Tax Code and Form 1040 to determine the meaning of income under § 101(10A) was misplaced. The phrase “without regard to whether such income is taxable income” in § 101(10A) reflects a clear congressional intent that Tax Code concepts for determining taxable income are inapplicable to a determination of current monthly income."

Practical Consequences on the Use of Flawed Official Form 22B

But what about Official Form 22B, promulgated by the U.S. Judicial Conference last November and effective January 1, 2008 (just 4 months prior to this Wiegand opinion)? In its Section I "Report of Income" used to determine the "applicable commitment period" of 3 or 5 years in Part II, the form explicitly has debtors with "Income from the operation of a business, profession, or farm" subtract their "Ordinary and necessary business expenses" from their "Gross receipts"in order to arrive at their "Business income." Here the BAP holds that "[t]his mandate compels us to conclude that Form 22C ought to be changed to comply with the statute."

But Form 22C was not on the list of Official Forms that were approved at the U.S. Judicial Conference last month to be effective this December. What to do in the many months or even years in the meantime? The BAP made the following suggestion in its final footnote:

Until Form 22C is changed, one possible solution is for below-median debtors to subtract the business deductions allowed under § 1325(b)(2)(B) on Schedule J from their current income. Above-median debtors should fill out the remainder of Form 22C and utilize the Internal Revenue service standards under §§ 1325(b)(3) and 707(b)(2)(A)(ii)(I) for “Other Necessary Expenses,” as specified in the Internal Revenue Service Financial Analysis Handbook. Arnold, 376 B.R. at 654-55. We leave open the possibility that bankruptcy courts may take other approaches to redress the inconsistency of Form 22C with Code §§ 101(10A) and 1325(b)(2)(B).

Interestingly, the successful appellant in this case, the Chapter 13 Trustee in Montana, Robert Drummond, has subsequently provided his own subsequent analysis of the case, and on this Form 22C matter states:

The judicial conference will have to reconsider Form 22C and determine the appropriate portion of the form which should allow the deduction of business expenses. Business expenses should not be deducted under Part I of the form when computing current monthly income - and the judicial conference should revisit the form for the purpose of revising and correcting the place for the deduction of business expenses.

Impact of 9th Circuit's In re Kagenveama

This Wiegand opinion was decided two months before before the 9th Circuit's In re Kagenveama, in my view the most important 9th Circuit bankruptcy opinion of the year. Kagenveama 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. (Please see my Bulletin of 9/3/08 on Kagenveama.) It is beyond the scope of this Bulletin to definitively analyze the impact of Kagenveama on Wiegand, but here are some thoughts.

There appear to be some aspects of Wiegand that are not perfectly consistent with Kagenveama--for example the BAP's reference in a footnote that "[w]e have found the applicable commitment period to be a temporal requirement.". But in my judgment Kagenveama did not effectively overturn Wiegand. There is no direct reference to Wiegand in Kagenveama, because oral arguments in the latter occurred many months before Wiegand was published. And Weigand did not rely on the only 9th Circuit BAP opinion which Kagenveama expressly overturned, In re Pak, 378 B.R. 257, 267 (9th Cir. BAP 2007).

But the cases do overlap, slightly but with potentially huge consequences for a certain population of debtors. Wiegand deals with how a Chapter 13 business owners calculate their "current monthly income" in order to arrive at their "applicable commitment period," whereas Kagenveama interprets "applicable commitment period" in the limited context of above-median income debtors who show negative "monthly disposable income" after deducting expense at the end of Form 22C. Wiegand will push more Chapter 13 business owners above median income in Part I of Form 22C, which paradoxically will qualify them for the huge potential benefits of Kagenveama, IF their expenses in Part IV (apparently including some business expenses per the BAP's suggestion above) exceed their income.

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

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

© 2008 Bankruptcy Litigation Support for Attorneys

What Post-Bankruptcy Credit Solicitations Reveal About the Creditor Industry's Public Policy Arguments

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.

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


A recent law review article, Bankrupt Profits: The Credit Industry’s Business Model for Postbankruptcy Lending, "examines what the credit industry’s behavior toward recently bankrupt families reveals about its internal profit models and the likely causes of consumer bankruptcy." This article looks at the contentious issue of what causes debtors to file bankruptcy by analyzing "original empirical data from the first-ever detailed longitudinal study of bankrupt families," the Consumer Bankruptcy Project. The phase of the study pertinent to this article involved a dozen interdisciplinary researchers and more than a thousand Chapter 7 and Chapter 13 debtors from five federal judicial districts. Here are the most important aspects of this lengthy but fascinating article.

Background

In arguments promoting BAPCPA, the credit industry, members of Congress, and President Bush focused on a perceived abundance of people who irresponsibly overborrow and then lack the moral conviction to repay their debts. Thus, according to this line of argument, these people abuse the credit system to the detriment of creditors and other responsible borrowers. Therefore the intent of many of the new law's provisions was to make bankruptcy relief more restricted, more expensive and more burdensome for potential filers, thereby reducing its availability. Accordingly through this legislation, intentionally and unintentionally irresponsible consumers were being encouraged to make better moral and sensible financial decisions.

But a competing argument

posits that most families fail to pay their debts because of an external financial shock—not because they lack moral fiber or borrowed with no intention of repaying. This view focuses on macroeconomic and social trends, rather than individual consumers’ decisions, to understand the rise in bankruptcy filings. Advocates of the adverse-events model note that America offers families a relatively weak, and declining, social safety net to help them cope with adverse financial events. The expansion of consumer credit in recent decades has left families more highly leveraged and less able to weather financial shocks.

The 1st of these two arguments focuses on debtors' behaviors and decisions in attempting to reduce bankruptcy filings; the 2nd argument leads to questions about reforming "creditors' lending practices and the scope of social programs" to reduce filings. The lengthy legislative process that eventually led to BAPCPA fixated on the former, with very little attention given to creditors' business practices and its consequences on bankruptcy filings. All the effort was on changing consumers' behavior and virtually none on how bankruptcy or other laws could influence creditors' behavior.

Study Findings

The key finding is that contrary to the credit industry's public arguments that consumers who file bankruptcies are irresponsible and immoral, many subsets of the industry repeatedly solicit debtors to borrow after their bankruptcies. If creditors would believe their own public arguments, they would avoid soliciting to these consumers after they file bankruptcy, but the evidence is far to the contrary.

During the one year after bankruptcy, 96.1% of the debtors reported receiving credit solicitations. On average they received more than 14 solicitations per month.

Post-bankruptcy debtors are specifically targeted, with nearly a third of debtors reporting receiving solicitations from the same creditors who were creditors in their bankruptcies, and nearly 90% reporting receiving solicitations which specifically referred to their bankruptcy filing.

Note the following from the Federal Reserve's Report on Soliciting and Extending Credit (2006):

Lender ratings of potential borrowers have become increasingly sophisticated and automated over the past decade. Lenders have extensive information on borrowers available from credit reporting agencies and from proprietary databases. This information is combined with new quantitative modeling techniques—which help lenders rank prospective borrowers on the basis of historical information about borrowers with similar quantifiable characteristics—to guide the determination of which prospective borrowers in each portfolio will be extended credit and the pricing of that credit.

Former bankruptcy debtors, especially those who filed Chapter 7, are high-profit customers because they often continue to have financial difficulties after their bankruptcies and therefore generate a higher proportion of late and other types of fees, and to use higher interest cash advances.

Contrary to expectations that post-bankruptcy creditors would want collateral to protect themselves against conniving and foolish debtors, unsecured credit is more available than secured credit.

The Bottom Line

Many sectors of the credit industry aggressively and purposely solicit to post-bankruptcy consumers. This behavior reveals that these creditors believe the "adverse-events" argument--that most consumers who file bankruptcy are honest and responsible. Therefore to reduce bankruptcy filings, more attention needs to be paid to reforming creditors' lending practices.

Very interestingly and not coincidentally, in the few months since this law review article was written the worsening economy has indeed focused public attention particularly on the practices of sub-prime mortgage creditors and the dizzyingly elaborate system built up in the financial world to support those practices It is now painfully obvious that instead of scapegoating consumers filing bankruptcy, infinitely more public, regulatory, and legislative attention should have been paid to the creditor side of the table.


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

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

© 2008 Bankruptcy Litigation Support for Attorneys

Judgment Lien On Homestead Avoidable Even As to Spouse's Unrecorded Equitable Interest, According to New Judge Dunn Published Opinion

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.

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


In re Lindquist
Oregon Bankruptcy Case No. 03-35895-rld7
October 5, 2008


In this first published opinion from the Oregon Bankruptcy Court since April, Judge Dunn held that under Oregon law the homestead exemption extends to equitable interests in residential property, enabling both spouses to claim a homestead exemption, the one who held legal title and the other who held an equitable interest, thus allowing them, in their motion to avoid a creditor's lien on their residence, to use the joint $30,000 mobile home exemption instead of the $23,000 one for an individual debtor.

Essential Facts
On the date of their joint Chapter 7 petition, wife was the sole title owner of record of the residence, a manufactured home with land, although she and her husband had lived there together for 15 years. Husband had been the sole record owner for about 12 years, but less than three months before filing the Chapter 7 case he transferred title to wife in order to try to refinance the property. (The Judge makes no issue of the short time between that transfer and the case filing.) Husband made all payments on the residence, both for the initial purchase and monthly for the mortgage., since she had no income. When he signed title over to his wife he understood that he was retaining an equitable interest in the residence.

The Judge's Analysis
Homestead exemptions are to be liberally construed, and Oregon case law has supported extensions of the homestead exemption beyond simple fee ownership, although without ever addressing this particular question. Here the residence is the actual abode of both spouses. The husband made all payments on the property. "Recognizing [husband’s] homestead exemption claim for lien avoidance purposes is consistent with the objective of O.R.S. § 18.428(1) [the and is not inconsistent with its terms." So the debtors were entitled to the $30,000 exemption of joint owners instead of the $23,000 one of a single owner.

Judge Dunn distinguished an Oregon bankruptcy court's opinion disallowing a spouse's unrecorded interest in a homestead (In re Mitchell, 9 B.R. 577 (Bankr. D. Or. 1981)) since that case turned on the Chapter 7 trustee's bona fide purchaser status under § 544(a)(3) of the Bankruptcy Code and O.R.S. § 93.640(1) to defeat the unrecorded equitable interest. But the judgment lien holder here is "neither an actual purchaser of the Property in good faith and for value protected by O.R.S. § 93.640(1) [the bona fide purchaser statute], nor a trustee entitled to hypothetical bona fide purchaser status under § 544(a)(3)."

Other Helpful Details

• Timing: This motion to avoid judgment lien was filed more than four years after the debtors had received their discharge and their Chapter 7 case had been closed. To determine the value of the residence and the amount of the senior liens and the judgment lien, the Court looked back to the date of filing the Chapter 7 case.
• State law: § 522(f)(1) of the Bankruptcy Code provides for the avoidance of a judgment lien that impairs an exemption provided for under § 522(b), and since Oregon opted out of the federal exemptions the applicable homestead exemptions are those provided for under state statute. The limits of Oregon's manufactured home exemption thus involves analysis of Oregon case law.
• The accounting: $175,000 residence value less $141,000 in senior, unavoidable liens, left a balance of $4,000 after the $30,000 homestead exemption. This means that of the nearly $11,000 judgment as of the date of the Chapter 7 case, all but $4,000 would be avoided. Interest at the Oregon judgment rate would accrue from the Chapter 7 filing date, May 27, 2003, substantially increasing the balance.

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

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

© 2008 Bankruptcy Litigation Support for Attorneys

Ratio of Ch. 13's Is Declining in U.S. After Big Post-BAPCPA Increase, Oregon's Ch. 13 Ratio is Holding Steady

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


As reported in a prior Bulletin on this website entitled Oregon's Slice of the Bankruptcy Pie, although Oregon's recent per capita Chapter 7 filing rate is virtually the same as the national rate, Oregon's per capita Chapter 13 filing rate is much LESS than the national rate. For example, for the 12-month period through the 2nd quarter of this year, in Oregon the Chapter 7 filing rate was 2.03 filings per 1,000 residents, almost the same as the 2.00 national rate, whereas Oregon's Chapter 13 filing rate for that period was .74 filings per 1,000 residents, only about 2/3rds the 1.12 national rate. The complicated question why Oregon's Chapter 13 filing rate is lower than the national one is beyond the scope of this Bulletin, which will instead compare the trends in the ratio of Chapter 13's to Chapter 7's nationally to the trends in Oregon. These two trends are quite different. Examining both of them may tell us more where Oregon is heading than looking just at Oregon's.


Nationally, using nonbusiness cases as tracked by the Administrative Office of the US Courts, after a significant increase in the ratio of Chapter 13's to Chapter 7's immediately after BAPCPA, that ratio has been declining. The first quarter of 2006, the first full quarter after BAPCPA, the ratio of the number of Chapter 13's filed to the number of Chapter 7's was 78%. After falling to 65% by the 1st quarter of 2007 and holding close to that ratio through 2007, it has fallen to 55% in the 1st quarter of 2008 and then down to only 48% by the 2nd quarter.

If this national trend continues, the ratio may well return to its pre-BAPCPA numbers. From 1998 through 2004, using the 2nd quarter of each year for the sake of comparison, the ration held very steady, no lower than 36% and no higher than 42%.
In contrast, the Oregon rate of Chapter 13's, both before and after BAPCPA, has been significantly lower. During the same 1998 through 2004 period, this rate also held relatively (although not quite as) steady in Oregon, with a low of 12% to a high of 20% Chapter 13 filings to Chapter 7 ones, generally between a third to a half of the national ratios.

In Oregon after BAPCPA, in contrast to the national declining trend, there has not been a clear direction in this Chapter 13 ratio. There has been a definite post-BAPCPA increase in the ratio, from the 12% to 20% pre-BAPCPA range to a 27% to 40% range. But after starting the 1st quarter at 28% the ratio bounced around with generally an upward trend until peaking at 40% during the 4th quarter of 2007, with 2008 seeming to trend back downward, with 37% and 32% during the 1st and 2nd quarters of this year respectively.

Bottom Line
So what do these trends or non-trends mean? Nationally, debtors and their attorneys were induced under BAPCPA to turn to Chapter 13's in large numbers at the outset. I speculate that three main factors are bringing the ratio back closer to earlier averages: 1) the system's--primarily debtors' attorneys but also judges, trustees, US trustees--greater familiarity with the new law; 2) the judicial developments interpreting BAPCPA, in some cases whittling away at some of its more onerous provisions; and 3) the worsening economy both qualifying more debtors for Chapter 7 and giving them less means and inclination to use the advantages of Chapter 13 (especially in light of the continued inability to modify mortgages). Whether the Chapter 13 ratio continues to go down will turn on future direction of the economy, and particularly on what tools homeowners will be given to re-negotiate their mortgages, inside or outside of bankruptcy.

As for Oregon, although it started from a much lower pre-BAPCPA Chapter 13 ratio, that ratio nearly doubled after BAPCPA (as did the national averages) and is still at a higher rate than the first three quarters immediately after BAPCPA. But the trend in that ratio seems to be heading downward during 2008, which would be consistent with the reality that Oregon's economy, as measured by home values especially but also other indices, stayed healthier generally about a year longer than the national average.
There are huge regional variations in the application of bankruptcy laws. Case in point: in most of the South, Chapter 13's actually OUTNUMBER Chapter 7's. Contrast that to Oregon's current 1/3rd as many 13's as 7's. There are so many factors at play in any federal district--legal, economic, even the tendencies of a few particular individuals--the five judges and the three Chapter 13 trustees, for instance--that making principled statements about the reasons that a Chapter 13 ratio is high or low is difficult. Predicting what direction that ratio is going to go is that much harder.

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

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

© 2008 Bankruptcy Litigation Support for Attorneys

9th Circuit BAP: Debt is Dischargeable Under § 523(a)(2)(A) Although Debtor's Knowing and Intentional Misrepresentation Was Reasonably Relied Upon

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



Ghomeshi v. Sabban (In re Sabban)
BAP No. CC-07-1269-MoPaD
February 20, 2008

In this split 2-1 BAP opinion (with Judge Randy Dunn, in his BAP capacity, siding with but not writing the majority opinion), the Court affirmed the bankruptcy court in holding that a $123,000 debt was dischargeable under § 523(a)(2)(A) notwithstanding that the transaction involved a misrepresentation by the debtor, which debtor knew to be false, and upon which the creditor has reasonably relied. The BAP relied on a 1998 U.S. Supreme Court opinion interpreting § 523(a)(2), Cohen v. De La Cruz, 523 U.S. 213 (1998). The BAP held that because the debt was based on an underlying state court judgment which clearly awarded the damages to the creditor for violation of a specific statute, and that statutory violation did not arise out of debtor's fraud or misrepresentation, this debt was dischargeable.

The Facts, and The State Court Judgment
Debtor was an unlicensed contractor who contracted with creditor to remodel creditor's home. In a state court action the trial court found that debtor represented to creditor that he was licensed, when he "knew it to be a false representation," and creditor relied on that representation and was induced into entering into the remodeling contract by it. Creditor paid $123,000 to debtor, who in turn paid out more than that to subcontractors. The state court awarded judgment against debtor exclusively for his violation of two state statutes.

The first provided that a person induced to contract with a building contractor "in reliance on false or fraudulent representation or false statements knowingly made" can be awarded a $500 penalty plus attorney fees, plus "any damages sustained by him by reason of such statements or representations made by the contractor." The court awarded creditor this $500 penalty plus $71,000 in attorney fees, but expressly found that the $123,000 paid by the creditor were NOT damages "sustained by him by reason of such statements or representations."

The second statute which the debtor was found to have violated allows a person contracting with an unlicensed contractor "to recover all compensation paid" to the contractor. This disgorgement statute is not limited to damages based on fraud.

On cross motions for summary judgment, the bankruptcy court held that the $123,000 "disgorgement" award was dischargeable but the $500 penalty and $71,000 in attorney fees were not. The creditor appealed; the debtor did not cross appeal as to the penalty or attorney fees, indeed did not even file a responsive brief in creditor's appeal.

Section 523(a)(2)(A)
This subsection exempts from discharge debts "to the extent obtained, by ... false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's . . . financial condition." Under 9th Circuit precedent, the elements a creditor must show are the misrepresentation, debtor's knowledge of its falsity, debtor's intent to deceive, the creditor's justifiable reliance on the misrepresentation, and damage to the creditor "proximately caused" by his reliance on the misrepresentation.

The BAP's Analysis and Holding
The Court focused on the last of these elements, whether the $123,000 awarded by the state court were damages "proximately caused" by creditor's reliance on debtor's misrepresentation about being a licensed contractor; or in the language of the Supreme Court's opinion in Cohen v. De La Cruz, whether that award was money "obtained by" that misrepresentation. Applying a strict construction to exceptions to discharge, the BAP construed Cohen to state that damages "assessed on account of the fraud" are not dischargeable, but distinguished the case here in that the state court had specifically held that the $123,000 in damages were not based on debtor's misrepresentation about being licensed. Instead the judgment for the $123,000 was based on the disgorgement statute which "is neutral as to fraudulent intent and was enacted to deter unlicensed contractors from offering their services for pay."

Thus the BAP held:

Because the $123,000 disgorgement of compensation under [the state statute] did not arise or flow from Debtor’s fraudulent conduct, the bankruptcy court correctly held that section 523(a)(2)(A) did not apply to that debt.

Dissent
The dissenting judge believed that the Supreme Court's holding in Cohen mandated that the $123,000 award was nondischargeable. It objected to the majority opinion's strict construction of the discharge exception, stating that instead the Court "should decline to employ a general rule of construction in favor of the specific interpretation given the same statute [§ 523(a)(2)(A)] at issue in this appeal by Cohen." "Cohen admonishes that all financial liability stemming from a fraudulent act, whether it be compensatory, punitive or statutory, is excepted from discharge." "Here, the facts show that but for the debtor’s fraud, Creditor would have never hired nor paid him. Plainly, the debtor’s responsibility to disgorge payments to Creditor is directly traceable to his deception." The dissent did not specifically discuss whether or not the two statutes that the state court judgment had been based on provided for damages arising from debtor's misrepresentation.

Bottom Line
A state court judgment award, to the extent it is based on a statute which provides the creditor compensation not arising from debtor’s fraudulent conduct, is dischargeable under section 523(a)(2)(A), even though debtor may otherwise have knowingly and intentionally engaged in a fraudulent misrepresentation reasonably relied upon by creditor.

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

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

© 2008 Bankruptcy Litigation Support for Attorneys

What Must I Know about the NEW Nat'l Guard & Reservists Debt Relief Act of 2008? (Passed by Congress, & Presented to the President on Oct. 9, 2008)

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.

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

The National Guard and Reservists Debt Relief Act of 2008 passed the U.S. Senate by Unanimous Consent on September 30, 2008, and the House passed it with a roll call vote on October 3. The bill was presented on October 9 to the President to sign into law. Here is the Act as passed by Congress. I was not able to find any statements whether or not the President intends to sign it, but given the overwhelming Congressional support and the politically sensitive population assisted, I presume he will . The law primarily changes one subsection of the Bankruptcy Code, so it is easy to become familiar with it before its effective date.

The Population of Debtors Affected
The Act exempts a very specific population of debtors from the Section 707(b)(2)(A) means test, not allowing the dismissal or conversion of a case on that grounds of not meeting that test.

The debtors affected include those members of the National Guard and the Armed Forces Reserves who, after September 11, 2001:

1) at the time of filing their bankruptcy case either are in the midst of a period of at least 90 days of active duty, or had been in such a period of active duty during the last 540 days (about 18 months) before filing the case; or
2) at the time of filing their bankruptcy case are performing "a homeland defense activity" lasting at least 90 days, or had been in such a period during the last 540 days before filing the case.

GAO Study
Within two years after the effective date of the Act, the General Accountability Office must present to Congress "a study of the use and the effects of the provisions of law amended." The Congressional Research Service's summarizes the bounds of this study:

Directs the Comptroller General [the head of the GAO] to study and report to Congress on whether and to what degree members of reserve components of the Armed Forces and the National Guard: (1) avail themselves of the benefits of this Act; (2) are debtors in federal bankruptcy cases substantially related to service that qualifies such members for such benefits of this Act; and (3) are debtors in federal bankruptcy cases materially related to such service.

Requires such study to include the effects that the use by such members of this Act has upon: (1) the bankruptcy system; (2) creditors; and (3) the debt-incurrence practices of such members.

Effective Date of the Act
The Act will be effective 60 days after its date of enactment.

Temporary Nature of the Act
The Act will only be in effect for three years, for cases filed during the three-year period starting on the effective date of the Act.

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

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

© 2008 Bankruptcy Litigation Support for Attorneys

Judge Brown: Future Debts Are Not Cross-Collateralized, at least not with these Contracts, & Antecedent Debts Aren't Either Unless Specified

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.

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



In re Matrix Development Corporation
Oregon Bankruptcy Court Case No. 08-32798
October 9, 2008
UNPUBLISHED

This unpublished letter opinion of last Thursday by Judge Trish Brown addresses the question whether the Chapter 11 corporate debtor's debts to a creditor bank were cross-collateralized. The debtor had entered into multiple promissory notes and trust deeds at different times with the bank, although each contained the same pertinent language, which included cross-collateralization clauses. Each trust deed also had language specifying the obligations secured by that trust deed. This letter opinion is an exercise in contractual interpretation, and to a large extent the judge's decisions turn on the contractual language particular to the case; indeed excerpts from the loan agreements and trust deeds took nearly two pages of the seven page letter.

But Judge Brown did make two rulings of more general application.

First as to the cross-collateralization of future obligations entered into after the trust deeds were recorded: Since a specific provision of a contract controls over an inconsistent general provision, where a series of trust deeds provided that all past, present, and future obligation of debtor were secured by each trust deed, but one clause stated to the contrary that a future obligation was secured by a trust deed only if the obligation specifically stated it was secured by that particular trust deed, since none of the subsequent obligations met that requirement they were not secured by any of the pre-existing trust deeds.

And second as to the cross-collateralization of prior, antecedent obligations: Although there was no specific provision to contradict the general provision granting that each trust deed secured pre-existing obligations, under Oregon law these obligations were still not secured by the trust deeds because of a Judge Radcliffe opinion, In re Wollin, 249 B.R. 555 (Bankr. D. Or. 2000), on such "dragnet" clauses, which stated that antecedent debt must be specified in the subsequent security instrument in order for the debt to be secured by it. The bank tried to distinguish this Wollin opinion as one involving a consumer loan in contrast to the commercial context at issue, but Judge Brown disagreed, stating that Judge Radcliffe's rational "is equally applicable in the commercial context." She also noted that all the loan agreements and trust deeds here were entered into after Wollin so

[a]s of the time the documents were executed, that under Oregon law antecedent debt would only be secured by an after acquired security interest if the documents evidencing the security interest specifically identified that antecedent debt. Despite that fact, the Bank chose not to identify any specific antecedent debt in any of the deeds of trust it obtained from the Debtor. Accordingly, none of the antecedent debt is secured by any of the deeds of trust.

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

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

© 2008 Bankruptcy Litigation Support for Attorneys

The Ninth Circuit Court of Appeals Bankruptcy Opinions of the Last 90 Days

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

Here are the last 90 days of bankruptcy opinions from the 9th Circuit, in reverse chronological order. Plus Maney v. Kagenveama since it was the "Most Important 9th Circuit Bankruptcy Opinion of the Summer." Click on the name of the opinion to link directly to the 9th Circuit Court of Appeals website's original opinion, click on the "Title" to link to my prior published summary of the opinion from the Bulletin or Litigation Report sections of this website, if available. The "Key sentence" comes from my summary, with adjustments as appropriate, if available.

October 2, 2008
Espinosa v. United Student Aid Funds, Inc.
9th Circuit Case No. 06-16421
NOTE: Opinion written by Chief Judge of the 9th Circuit, Alex Kozinski

Key sentence from my Bulletin: "Can a Chapter 13 debtor discharge a student loan by including it in the plan but without filing an adversary proceeding to determine debtor's undue hardship, if the student loan creditor fails to object to the plan? In this opinion filed by the 9th Circuit yesterday, its Chief Judge Kozinski emphatically answered: 'yes.' "

Title: Major New Student Loan Opinion: 9th Circuit Allows Chapter 13 Discharge of Student Loans WITHOUT Adversary Proceeding by Mere Inclusion in Plan


September 24, 2008
Rosson v. Fitzgerald (In re Rosson)
9th Circuit Case No. 06-35724

Key sentence from my Bulletin: "This brand-new Ninth Circuit opinion addresses the conflict between a Chapter 13 debtor's right to dismiss his case "at any time" and the bankruptcy court's power to convert the case to a Chapter 7 case "for cause" if it "is in the best interests of creditors and the estate," between § 1307(b) and § 1307(c) of the Bankruptcy Code."
Title: There's An Absolute Right for a Debtor to Dismiss a Chapter 13 Case, Right? NO, the 9th Circuit Said on 9/24/08

September 23, 2008

Barboza v. New Form, Inc.

9th Circuit Case No. 06-56319

Key sentence from my Bulletin: Last week the 9th Circuit issued its 2nd opinion in as many months interpreting the "willful and malicious injury" language in § 523(a)(6) of the Bankruptcy Code; it reversed both the bankruptcy court and the BAP, finding that neither court applied the 9th Circuit's law on § 523(a)(6) accurately."

Title: The 9th Circuit's Second § 523(a)(6) "Willful & Malicious Injury" Opinion in Two Months


September 4, 2008
Burkart v. Coleman (In re Tippett)
9th Circuit Case No 6.15411

Key sentence from my Bulletin: 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. . . . In last Thursday's opinion the 9th Circuit said . . . a BFP prevails against a trustee.

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


August 22, 2008
Educational Credit Management Corp. v. Coleman
9th Circuit, Case # 06-16477

Key sentence in my Bulletin: The 9th Circuit Court of Appeals ruled that a Chapter 13 debtor could get a judicial determination whether her student loans constituted an “undue hardship” and were thus dischargeable without waiting until close to or after the discharge at the end of the case. BUT CAUTION: This opinion was vacated by the Court because of an appellate procedural error, as explained in my Bulletin, likely to be corrected and returned to the 9th Circuit for final determination.

Title: 9th Circuit Holds that Ch. 13 "Undue Hardship" Student Loan Determinations Need NOT Wait Until End-of-Case Discharge


August 22, 2008
McDonald v. Checks-N-Advance, Inc. (In re Ferrell)
9th Circuit, Case No. 06-17243

Key sentence in my Bulletin: In this per curiam decision published on August 22, 2008, the Ninth Circuit Court of Appeals held that certain specific violations of the federal Truth in Lending Act (TILA) do not result in the award of actual damages, statutory damages, or attorney fees and costs for the consumer, or specifically in this case for the Chapter 13 trustee acting on behalf of the consumer.

Title: 9th Circuit 8/22/08 Opinion: Ch. 13 Trustee NOT Entitled to Actual or Statutory Damages, Atty. Fees or Costs Under Portions of Truth in Lending Act


Auguts 21, 2008
Lowery v. Channel Communications, Inc. (In re Cellular 101, Inc.)
9th Circuit Case No. 06-55779

Quoted from the opinion: "The question posed by this case is whether a party’s failure to timely inform the court of appeals of a settlement that it believes disposes of a pending appeal precludes the party from asserting the affirmative defense of settlement and release in a later proceeding." The 9th Circuit answered "Yes;"
(No Bulletin or Litigation Report on this opinion.)

August 7, 2008
Lockerby v. Sierra (In re Sierra)
9th Circuit Case No. 06-15928

Key Sentence from my Litigation Report: "This is a quick study in what it takes for a breach of contract claim to be nondischargeable under the "willful and malicious injury" provision of § 523(a)(6), to determine what if anything this 9th Circuit Lockerby opinion added to the law on this issue in Oregon that wasn't already in Judge Perris' Home Instead Oregon bankruptcy court opinion, other than the weight of greater authority."
Title: When Is Intentional Breach of Contract Nondischargeable Under § 523(a)(6)?: 9th Circuit Proclaims Legal Standard for "Willful & Malicious Injury"

Amended August 7, 2008; originally filed July 3, 2008
GECC v. Future Media Productions Inc.
9th Circuit Case # 07-55694

Quoted from the opinion: "General Electric Capital Corporation (“GECC”), an oversecured creditor, appeals the bankruptcy court’s order denying it default interest and attorneys’ fees . . [on the grounds that the] bankruptcy court improperly applied a per se rule against default interest to the facts of this case. [W]e reverse and remand to the bankruptcy court with instructions to apply the rule adopted by the majority of federal courts and to then determine if an award of attorneys’ fees is proper."

(No Bulletin or Litigation Report on this opinion.)


June 23 , 2008
Maney v. Kagenveama
527 F.3d 990 (2008); LW 2278681

Key sentence in my Bulletin: 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?
Title: The Most Important 9th Circ. B'cy Opinion of the Summer: Above-Median Income Ch. 13 Debtors Can Have 0%, Shorter-than 5-Year Plans

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

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

© 2008 Bankruptcy Litigation Support for Attorneys

Ch. 13 Debtors with Fully Secured Vehicle Claim May Later Surrender Vehicle & Modify Plan to Treat Deficiency Balance as a General Unsecured Claim

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


In re Berendt
Oregon Bankruptcy Case No. 07-35054-elp13
September 22, 2008

The Holding
In an unpublished letter opinion Judge Perris held that if a Chapter 13 plan had treated a claim as fully secured, then "following post-confirmation surrender of [the] collateral, a Chapter 13 debtor may modify a plan to terminate payments on the secured claim and treat any deficiency as unsecured."

Interestingly, in so ruling she rejected the rationale of an 6th Circuit Court of Appeals opinion, In re Nolan, 232 F.3d 528 (6th Cir. 2000), apparently the only circuit court to have ruled on this issue, instead finding "particularly persuasive" an Indiana bankruptcy judge's opinion, Bank One, NA v. Leuellen, 322 B.R. 648 (S.D. Ind. 2005) This Bulletin summarizes her analysis, and gives the perspectives of the attorneys. Miles Monson of Anderson & Monson, P.C. represents the creditor, Clackamas Community Federal Credit Union; Matthew Casper of Oliveros & O'Brien, P.C. represents the debtors, Timothy & Kara Berendt.

Essential Facts
The Berendts filed a Chapter 13 case and the plan was confirmed with the Clackamas Community Federal Credit Union as a fully secured creditor being paid outside the plan. Because Kara Berendt was unable to find employment, the debtors surrendered the vehicle to the creditor, which was unable to sell it without a deficiency balance. The Berendts proposed a modified plan which treated the credit union as a general unsecured creditor. The credit union objected.

Judge Perris' Analysis
The judge started by acknowledging that the "cases are deeply split over whether § 1329 allows modification of a confirmed chapter 13 plan to account for the surrender and sale of collateral that leaves a deficiency, when the plan had treated the claim as fully secured." She cites Nolan as the primary opinion not allowing such modification and the above Leuellen opinion as her primary support to the contrary. She notes that treatises have also split on the issue, with Norton Bankruptcy Law and Practice against permitting this kind of modification while Collier on Bankruptcy and Chapter 13 Bankruptcy by Judge Keith Lundin allowing it.

Without discussing or refuting the Nolan opinion's arguments she merely said she disagreed with it, and found Leuellen "particularly persuasive" but did not explicitly say what was persuasive about it. She explained her lack of detailed analysis with this: "In light of the extensive opinions that have been written on this subject, I will give only a brief explanation of why I reach that conclusion."

Her "brief explanation" is a statutory one:

1) § 1329(a)(1) allows modified plans to "increase or reduce the amount of payments on claims of a particular class provided for by the plan." So debtors are allowed to modify payments to a formerly secured claim down to $0.

2) The Code and Rules permit objections to claims at any time, and also permits, at any time, valuations of collateral to determine the extent to which a claim is secured.

3) § 1325(a)(5)(C) clearly permits surrender of collateral as one way to treat a secured claim in a plan, and this is incorporated by 1329(b)(1) into plan modifications.

4) Lastly she states that "§ 1323(c) "also specifically applies to post-confirmation modifications", and "contemplates that a secured creditor's rights can be changed under a modification." (This argument is an odd one and perhaps inaccurate: section 1323 is entitled "Modification of plan before confirmation" and, contrary to what she said, nothing in it seems to specifically apply to POST-confirmation modifications instead of PRE-modification ones. Titles may not be part of the actual statutory language, but I see nothing in the actual language that shows that the subsection "specifically applies" to post-confirmation modifications. )

Her holding is:

For these reasons, I conclude that there is no impediment to modification of a confirmed chapter 13 plan to reflect the surrender of collateral and its sale for less than the amount of the debt. This includes treating the claim as partially secured up to the value of the collateral and partially unsecured for the deficiency. I agree with the courts that hold that the creditor’s interests are protected at initial confirmation by the requirement of adequate protection and at modification by the bankruptcy court’s discretion to deny confirmation if the debtors have acted in other than good faith with regard to the collateral.

Judge Perris concluded by giving the creditor five days to ask for an evidentiary hearing in case it believed there were unresolved issues of fact that undercut her analysis of the legal issue.

The credit union subsequently decided not to ask for an evidentiary hearing, and an order has now been entered overruling its objection.

The Creditor's Attorney's Perspective
Miles Monson informed me yesterday that the credit union has decided not to appeal. On the merits, he believes that the Fifth Circuit Nolan opinion lays out the argument well, how it is fundamentally a question of who should carry the risk: should the debtor or the creditor carry the risks of the collateral's depreciation and diminution or total loss in value after the confirmed plan determines the collateral's value? He believes that Nolan makes a very good case why the debtors should bear these risks, and so should not be able to change the secured claim through a surrender and post-confirmation modification. Mr. Monson believes the statutory ambiguity means that the issue is heading for in a split in the Circuits and will eventually need to be decided by the Supreme Court, but acknowledges that would be many years away.

The Debtors' Attorney's Perspective
Matt Casper was not surprised that the credit union decided not to appeal given the small amount at issue and the fact that it has already spent $1,440 on repairing the vehicle while selling it for only $1,500. And he said he was not surprised that Judge Perris did not follow Nolan in spite of it being the only Circuit opinion on the issue, because there are a number of lower court opinions within the 9th Circuit criticizing Nolan, although Judge Perris did not refer in her letter opinion to them. As for the risk-carrying argument, he says, "The creditor is in no worse position now than before the filing of the petition, had the vehicle been surrendered then. Creditors always carry the risk that borrowers will at any time have to surrender the collateral and file a bankruptcy on the deficiency balance." He doesn't see why that should be different just because the borrower is in a Chapter 13 case and paying the creditor directly, outside the plan.

Mr. Casper noted that the trustee has also objected to the modified plan, apparently not wanting to pay the credit union's deficiency balance as an unsecured claim, thereby diluting distributions to the pool of allowed unsecured claims. The hearing on this objection is scheduled for October 15. If the result is interesting, I will report on it in a future Bulletin.

The Bottom Line
Even with an unpublished letter opinion, Judge Perris is certainly signaling her opinion on this issue. She presumably made a point of putting it on the bankruptcy court website so that practitioners would read it. The immediate question is whether the other four Oregon judges agree with her holding since they are not legally bound by it. I am guessing that as the senior judge she may be signaling to the others the direction that she believes this issue should go in the Oregon District, but on the other hand they may well be communicating about this more directly. Is this an issue appropriate for the next Circle of Love (Consumer Bankruptcy Committee of Debtor-Creditor Section) meeting? If anyone has more information about the other judges' treatment of this issue, please contact me and I'll include it an update.

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

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

© 2008 Bankruptcy Litigation Support for Attorneys