After 18 Years of Litigation Ninth Circuit Holds $2.8 Million Medical Malpractice Judgment "Not Non-Dischargeable" Under Section 523(a)(6)

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


Ditto v. McCurdy (In re McCurdy)
Ninth Circuit Case No. 02-16252
December 14, 2007

This Ninth Circuit opinion addressed both substantive issues about nondischargeability "for willful and malicious injury by the debtor" under § 523(a)(6) of the Bankruptcy Code, and various procedural issues including the retroactive effect of a Supreme Court opinion decided during the pendency of a case. The nondischargeability matters are addressed in this Bulletin, the procedural one in an upcoming weekly Litigation Report.

Ninth Circuit's Holding
In the Ninth Circuit quoted the U.S. Supreme Court in Kawaauhau v. Geiger, 523 U.S. 57 (1998), “debts arising from recklessly or negligently inflicted injuries do not fall within the compass of § 523(a)(6).” Therefore, in this case the debtor, a plastic surgeon, could discharge a malpractice claim against him in the amount of nearly $2.8 million after a state supreme court reversed a portion of the judgment, dismissing the portion based on fraud and affirming the portion based on gross negligence.

Procedural History
This case is noteworthy in the length and number of appeals. Briefly, the plaintiff filed her malpractice case in state court in 1989, won a judgment in 1992, when defendant filed an appeal to Hawaii Intermediate Court of Appeals and also filed his bankruptcy case, resulting in this adversary proceeding being filed by plaintiff in 1993, initially resulting in a summary judgment for plaintiff based on pre-Kawaauhau v. Geiger law. But in 1997 the state court case reached the Hawaii Supreme Court, which overturned a fraud claim and left only the gross negligence one, after which defendant filed an FRCP Rule 60(b) motion in bankruptcy court to set aside the nondischargeability summary judgment in light of the Hawaii Supreme Court decision. The bankruptcy court denied this motion, as did the district court on appeal, but the Ninth Circuit in 2000 remanded to the bankruptcy court with instructions to grant the motion to set aside the summary judgment. At the rehearing in bankruptcy court the defendant then moved for summary judgment, which was granted by the bankruptcy court, the district court affirmed, and the matter was now back at the Ninth Circuit for a final decision, no less than the sixth appellate decision on the matter, eighteen years after the case was originally filed.

The Ninth Circuit's Rationale

"[A]s to the exact mental state required of the debtor in order for a debt to fall into the [§ 523(a)(6)] exception," before Geiger in 1998 some circuits, "including this circuit, interpreted § 523(a)(6) to include unintended injuries, so long as the acts themselves were deliberate, wrongful, and necessarily caused injury." In contrast, the Supreme Court in Geiger "stated definitively that 'debts arising from recklessly or negligently inflicted injuries do not fall within the compass of § 523(a)(6)'." The plaintiff, besides arguing against retroactive application of Geiger (a subject of my upcoming Litigation Report), asserted that her "malpractice judgment rested, in part, on [defendant's] failure to adequately disclose the risks inherent in her surgery," and negated her consent to the surgery, thus making her claim an intentional tort, "an unconsented touching--in other words, a battery."

But the Court here responded that "[t]he failure to obtain informed consent, without evidence of intent to injure, does not give rise to a willful and malicious injury within the meaning of § 523(a)(6)." "The elements of this cause of action--duty, breach, causation, damages--are those of a negligence claim." "In order to qualify for the § 523(a)(6) “willful and malicious” exception to discharge, therefore, the debtor must have acted with either the desire to injure or a belief that injury was substantially certain to occur." Without any such evidence, defendant's debt "is not non-dischargeable under § 523(a)(6)."

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

New Streamlined Home Mortgage Modification Program: Making Sense of Yet Another Federal Effort to Rescue Homeowners

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

On November 11, 2008 the federal government announced another major home mortgage modification program. It is being presented by the Federal Housing Finance Agency (FHFA), which was established by the Housing and Economic Recovery Act of 2008 signed into law on July 30, 2008, the same agency which took control of Fannie Mae and Freddie Mac in September by authority of that Act. This Bulletin focuses on the bankruptcy aspects of this story, plus outlines the program's main components, and concludes with some of the key perceived shortcomings of the new program as highlighted by some of the immediate criticism that greeted it the very day it was presented.

The Bankruptcy Aspects

Most important for bankruptcy practitioners, this program is NOT available to homeowners in bankruptcy. According to the "Questions and Answers on the Streamlined Modification Program" attached to FHFA's news release about it, an eligible homeowner is one who "has not filed bankruptcy." This is in contrast to the Hope for Homeowners program of the federal Department of Housing and Urban Development (HUD), which IS available to debtors in bankruptcy, according to Oregon Chapter 13 trustee Brian Lynch, who is Chair of the Loss Mitigation Subcommittee of the Mortgage Liaison Committee of NACTT (National Assn. of Chapter Thirteen Trustees).

(Please see my two earlier Bulletins, on the Housing and Economic Recovery Act of 2008 entitled
The Impact of the New Major New Federal Housing Law on Your Bankruptcy Practice, and on The Hope for Homeowners Program Launched on Oct. 1, 2008: What Do I Need to Know About It?)

What is the effect of this and various other mortgage modification programs--governmental as well as a recent series of them by major mortgage holders--on the prospects for the oft-proposed Chapter 13 mortgage modification amendment? I have been monitoring the blogosphere of bankruptcy attorneys and law professors and have not recently seen any noteworthy analysis about this. The facts on the ground seem to be moving too fast to allow for time for analysis. But with the Presidential election now decided, everybody is will be trying to discern what steps the Obama administration will take on bankruptcy legislation and other ways of dealing with the mortgage crisis, as the ground continues to move quickly beneath us.

The FHFA's "Streamlined Modification Program"

For a brief outline of the new program, click here for statements on November 11 by FHFA head James Lockhart and by Treasury Interim Assistant Secretary for Financial Stability Neel Kashkari.

Eligibility: Owner-occupied as primary residence, three or more missed payments, "has not filed bankruptcy," with "a Freddie Mac, Fannie Mae or portfolio loan with participating investors. . . . must certify that he or she experienced a hardship or change in financial circumstances, and did not purposely default to obtain a modification."

"Streamlined"?: This program requires less documentation and processing, largely by using a "benchmark ratio of housing payment to monthly gross household income" of 38%. "This is the first time the industry has agreed on an industry standard. . . . Once the affordable payment is determined, there are several steps the servicer can take to create that payment – extending the term, reducing the interest rate, and forbearing interest. In the event that the affordable payment is still beyond the borrower’s means, the borrower’s situation will be reviewed on a case-by-case basis using a cash flow budget."

The Procedure: A "seriously delinquent borrower should contact his or her servicer and provide the requested information – monthly gross household income, association dues and fees, and a hardship statement." "Upon receiving the Modification Agreement from the servicer, the borrower signs it and returns it with the 1st payment at the modified terms along with income verification. Once the borrower makes three payments at the modified terms and the account is current as of day 90 of the modified plan, the modification is complete."

Effective Date: December 15, 2008.

Limitations on and Criticism of the New FHFA Program

Even though FHFA's Director James Lockhart made a point of stating that "we have drawn on the FDIC’s experience and assistance, and have greatly benefited from the FDIC’s input," and indeed the new program is largely based on a similarly streamlined one formulated by FDIC for IndyMac mortgages after its takeover of that lender, nevertheless the FDIC's outspoken chairman Sheila Bair used the occasion to both applaud the step and continue her argument that some of the recently approved bailout funds be used to deal directly with the foreclosure problem.

U.S. Senator Charles Schumer also released a statement on the same day as the new FHFA program was announced complaining that this program will work only where "Fannie and Freddie hold the whole loan, which is true in too few cases" . . . . “When the loan is chopped up into a million pieces . . . any investor can block a modification from happening.” Instead Schumer again argued for loan modification through bankruptcy code amendment as the best solution to get at this otherwise intractable problem. Depending on how the ground continues to move beneath us, the larger majorities of Democrats in both Houses of Congress two months from now may be able to overcome the heretofore strong Republican and banking industry opposition to this bankruptcy component.

FHFA's Lockhart anticipated this concern about this program only dealing with mortgages owned or guaranteed by Fannie Mae and Freddie Mac, and effectively pleaded with other mortgage holders to use this program as a model for their own efforts:

Although these [Fannie and Freddie] mortgages only represent 20% of serious delinquencies, I believe their leadership role combined with the many partners of HOPE NOW should spread this approach throughout the whole mortgage loan servicing business. The performance of private label mortgage backed securities that were sliced and diced and sold to investors is just the opposite of Fannie Mae’s and Freddie Mac’s. Private label securities represent less than 20% of the mortgages but 60% of the serious delinquencies. As the regulator of the housing GSEs that own over a quarter of a trillion dollars of private label securities, I ask the private label MBS servicers and investors to rapidly adopt this program as the industry standard. Not only will this streamlined program assist borrowers, but broad acceptance and effective implementation could stabilize communities and property values.

Query: Does the bankruptcy disqualification apply only to homeowners in pending bankruptcy cases or also to those who have recently completed a Chapter 7 or 13 case? And if a homeowner qualifies for and signs the Modification Agreement, can she file a bankruptcy case after the three months of new payments "completes" the modification? We should have more guidance about such critical details in early December when the implementing regulations are completed.

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 Now-Limited Right to Convert from Chapter 7 to 13, & from Chapter 13 to 7: the U.S. Supreme Court's Marrama and the 9th Circuit's Rosson Opinions

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


Marrama v. Citizens Bank of Massachusetts
127 S.Ct. 1105
Decided February 21, 2007

In a Bulletin on this website in September entitled There's An Absolute Right for a Debtor to Dismiss a Chapter 13 Case, Right? NO, the Ninth Circuit Said on 9/24/08, I summarized the Ninth Circuit opinion Rosson v. Fitzgerald (In re Rosson),---- F. 3d ----, 2008 WL 4330558 (9th Cir 2008), which addressed conversion of a Chapter 13 case to a Chapter 7 one. In that opinion the Ninth Circuit expressly overturned a long-standing Ninth Circuit BAP opinion, based on the authority of the 2007 U.S. Supreme Court Marrama opinion cited above. Marrama dealt with conversion of a Chapter 7 case to Chapter 13, while Rosson dealt with conversion from Chapter 13 to 7. Because of its differences from and broader application than Rosson, and simply because it is one of the relatively rare Supreme Court bankruptcy opinions, Marrama is definitely worth knowing well.


Supreme Court Holding
Marrama involved the right of a debtor to convert a Chapter 7 case to Chapter 13 under § 706(a). The Supreme Court held "that the right to convert to Chapter 13 was impliedly limited by the bankruptcy court’s power to take any action necessary to prevent bad-faith conduct or abuse of the bankruptcy process."

The Facts and Procedural Context
This opinion provides a vague standard for determining when debtors have a right to convert to Chapter 13, but its very vagueness demands that it be well understood in order to be able to counsel clients on this issue. So knowing the facts in this opinion--the specific "bad-faith conduct or abuse of the bankruptcy process" which confronted the Supreme Court here--is critical.

The debtor filed a Chapter 7 case showing that he was the sole beneficiary of a trust that owned a residence with no value as to him personally. He also stated in his documents or at the Meeting of Creditors that he had not transferred any assets in the year before filing, had no tax refunds pending, and no debts owed to him. In fact, the residence "had substantial value, and Marrama had transferred it into the newly created trust for no consideration seven months prior to filing his Chapter 13 petition," with the intent of protecting it from his creditors. And months before the case was filed, he had submitted to the IRS an amended tax return showing a refund, which ended up being more than $8,700. Mr. Marrama was clearly not a forthright debtor.

Yet he sought to convert to Chapter 13 on the basis that he became employed in the meantime, with the primary argument that he had an absolute right to convert under the plain language of §706(a) of the Code. The bankruptcy court disagreed and denied his motion to convert, holding that debtor's concealment of assets constituted bad faith. The BAP affirmed, as did the First Circuit Court of Appeals. And yet in spite of all this unanimity in the lower courts, this was a 5-4 decision at the Supreme Court, with the more "liberal" and "centrist" members of the Court--Stevens, Kennedy, Souter, Ginsburg, and Breyer, siding in favor of the trustee and a creditor against the debtor, while the "conservative" members--Alito, Roberts, Scalia, and Thomas--sided with the debtor.

The Statute
In essence this was a dispute about statutory construction. The pertinent statutes are subsections (a) and (d) of §706, which provide:

(a) The debtor may convert a case under this chapter to a case under chapter 11, 12, or 13 of this title at any time, if the case has not been converted under section 1112, 1208, or 1307 of this title. Any waiver of the right to convert a case under this subsection is unenforceable.
(d) Notwithstanding any other provision of this section, a case may not be converted to a case under another chapter of this title unless the debtor may be a debtor under such chapter.

The Majority's Rationale
Justice Stevens' majority opinion acknowledged that the legislative history of §706 states that "[s]ubsection (a) gives the debtor the one-time absolute right to conversion of a liquidation case to a reorganization or individual repayments plan case." But Stevens' asserts that the direct "reference to an 'absolute right' of conversion is more equivocal that petitioner suggests." His opinion focuses on subsection (d) allowing conversion only if the debtor "may be a debtor" in Chapter 13, and from there argues that conversion to Chapter 13 is not appropriate if the debtor runs afoul of § 1307(c), the provision which governs dismissals and conversions of Chapter 13's "for cause."

§ 1307(c) "includes a nonexclusive list of 10 causes justifying" dismissal or conversion, none of which "mentions prepetition bad-faith conduct."

Bankruptcy courts nevertheless routinely treat dismissal for prepetition bad-faith conduct as implicitly authorized by the words 'for cause.' In practical effect, a ruling that an individual's Chapter 13 case should be dismissed or converted to Chapter 7 because of prepetition bad-faith conduct, including fraudulent acts committed in an earlier Chapter 7 proceeding, is tantamount to a ruling that the individual does not qualify as a debtor under Chapter 13. . . . . The text of §706(d) therefore provides adequate authority for the denial of his motion to convert.

The Court's Dissatisfactory Ambiguity
So what guidance does the majority opinion give to distinguish what Chapter 7 debtors may convert to 13 from those whose "bad-faith" provides "cause" disallow conversion? The answer is intentionally ambiguous: "The class of honest but unfortunate debtors who do possess an absolute right to convert their cases from Chapter 7 to Chapter 13 includes the vast majority of the hundreds of thousands of individuals who file Chapter 7 petitions each year." At that point the Court inserts this footnote: "We have no occasion here to articulate with precision what conduct qualifies as 'bad faith' sufficient to permit a bankruptcy judge to dismiss a Chapter 13 case or to deny conversion from Chapter 7. It suffices to emphasize that the debtor's conduct must, in fact, be atypical." So the Court reiterates "an absolute right to convert . . . to Chapter 13" if the debtor is of the "class of honest but unfortunate debtors," but not if the debtor is "atypical"!

Dissent
This Bulletin cannot focus nearly as much attention on Justice Alito's dissenting opinion, although it was nearly as long as the majority opinion and arguably better reasoned.

Briefly, the dissent read § 706(a) and (d) plainly to state that a Chapter 7 debtor may convert to Chapter 13 as long as she meets the two "--and only two--" stated conditions: that 1) there have been no prior conversions to Chapter 7 and 2) the debtor meets the necessary conditions to "be a debtor under such chapter [13]." "By contrast, the Code pointedly does not give the bankruptcy courts the authority to deny conversion based on a finding of 'bad faith.' There is no justification for disregarding the Code's scheme."

The dissent asserted that "§706(d)'s requirement that a debtor may convert only if 'the debtor may be a debtor under such chapter' " "obviously refers to the chapter-specific requirements of §109" (which is entitled "Who may be a debtor"). For example, to qualify to be a debtor under Chapter 13, §109(e) refers to the familiar jurisdictional "noncontingent, liquidated" secured and unsecured debt limits for "an individual with regular income" to be able to file a Chapter 13 case. The dissent strongly disagreed with the majority's contrary focus on §1307(c) as a basis for restricting conversion to Chapter 13:

§1307(c) plainly does not set out requirements that an individual must meet in order to 'be a debtor' under Chapter 13. Instead, §1307(c) sets out the standard ("cause") that a bankruptcy court must apply in deciding whether, in its discretion, an already filed Chapter 13 case should be dismissed or converted to Chapter 7. Thus, the Court's holding in this case finds no support in the terms of the Bankruptcy Code.

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

Will President-Elect Obama Now Make Chapter 13 Mortgage Modification Part of His First-100-Days Economic Plan?

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

What did Barack Obama say before his election about bankruptcy reform in general and specifically about mortgage modification through bankruptcy, and what is likely to occur now that he is the President-elect?

In my Bankruptcy Bulletin on August 28 of this year titled Prospects for Amendments to BAPCPA Under an Obama-Biden Administration, I referred to references in candidate Obama's website to his proposed reforms to bankruptcy law and to his speech the prior month almost exclusively on bankruptcy reform issues. I said "in Barack Obama's website one of his 10 key bullet-points on the Economy is 'Reform Bankruptcy Laws.' He proposes amending bankruptcy law to allow modifications of mortgages, and to create some kind of streamlined medical bankruptcy."

I concluded that Bulletin with:

Perhaps a more realistic view turns on broader economic and political developments in the next few months. IF Obama-Biden win in November, and especially IF there are some Democratic gains, as is generally expected, in both the House and the Senate, there will be tremendous political pressure on the Democrats to address the foreclosure and other economic problems. The new Housing and Economic Recovery Act's $300 billion voluntary program to refinance troubled mortgages begins being implemented on October 1, 2008, with much speculation about whether it will indeed help 400,000 households as was projected. If this program, and the other components of the Act, are successful, together with all the other forces on the real estate and financial sectors, at significantly improving the foreclosure and general economic situation, there may be less pressure to act. Given that this is just a few months from now, a greatly improved outlook seems doubtful. More likely BANCAP reform of some sort would be part of their "first 100 days" plan.

Obama gave his speech and these bankruptcy reforms were put on his website, and I wrote the above, before the incredible financial events of September and October. Obama-Biden did win the election, the Congressional gains by the Democratic party were even larger than many expected, including Gordon Smith's very close loss to Jeff Merkley in the Senate here in Oregon, and the Help for Homeowners program was implemented more than a month ago. And my conclusion that "a greatly improved outlook seems doubtful" now seems like a vast understatement, making it more likely that something dramatic to deal directly with the foreclosure situation will be part of Obama's economic plan. But with so much else unexpected that has happened, I believe that some initiative bigger than, or perhaps in conjunction with, Chapter 13 mortgage modification will be implemented.

Here is a sampling of what the blogosphere is saying about the current prospects for bankruptcy law reform and specifically Chapter 13 mortgage modifications.

At the outset, the Housing and Economic Recovery Act's Hope for Homeowners voluntary FHA refinancing program has gotten off to a very slow start since October 1 when it went into effect, according to the blog story entitled Government's Mortgage Relief Program Not Popular. It states that in contrast to the initial publicized goal to help as many as 400,000 homeowners in its three-years in existence, "it appears that [Hope for Homeowners] is turning out to be just one more failed attempt to break the foreclosure crisis, as less than 100 people applied for the program last month. The FHA [now] projects that only 13,300 struggling homeowners will actually use the program during the first year."

In mid-October Senator Chris Dodd (D-CT), Chairman of the Senate Banking, Housing, and Urban Affairs Committee, made the following announcement, contained on his Committee's website: DODD . . . OUTLINES CONSUMER-FOCUSED AGENDA TO COMPLETE ECONOMIC RECOVERY. Issues pertinent to foreclosures covered two of the four items in his agenda:

Homeownership Preservation: 9,800 families enter foreclosure each day. We should declare a temporary moratorium on foreclosures so that lenders, servicers and homeowners can come together to try to restructure their loans on terms agreeable to all. Bankruptcy Reform: It is irrational and unjust that a family that owns one home receives less protection under our laws than a family that owns two or more homes. The average American homeowner should be able to seek the protection of bankruptcy court to save his or her home.

And according to a blog story entitled Senate banking chairman: credit card reform on tap:

the Connecticut Democrat [Dodd] said he plans to include credit card reform as well as bankruptcy law reform in a package of consumer protection measures he hopes to schedule during special hearings in November or when Congress returns from winter break in January under a new administration.

Here's a day-after-election blog story: Obama will usher in credit card reform, observers say: Bankruptcy, mortgage reform and credit card industry rules on tap, which includes:

Sam Gerdano, executive director of the American Bankruptcy Institute, a nonpartisan educational research foundation, agreed that pressure is on for quick results and passage of something to help debt-ridden consumers. He said members of the current, lame duck 110th Congress, may attempt to pass consumer-friendly legislation and hope that President Bush will sign it before leaving office.

And finally, here is a day-after-election plea by a Florida attorney for quick mortgage modification amendment to the bankruptcy law: President Elect Obama-Congratulations-Please Amend the Bankruptcy Code.

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

Ninth Circuit Affirms Denial of Discharge under Section 727(a)(3) for Chapter 7 Debtor's Failure to Keep Financial Records

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

Caneva v. Sun Communities (In re Caneva)
Ninth Circuit Court of Appeals Case No. 07-15686
November 5, 2008

This Ninth Circuit opinion filed yesterday addresses the standard for denying discharge under § 727(a)(3) of the Bankruptcy Code, regarding a debtor's failure "to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor's financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case."

Facts & Procedural Context

The individual Chapter 7 debtor Caneva listed on his personal property schedule fifteen business entities in which he held an interest, and stated: "[t]he extent of his interest and the status of several of the entities is unknown. The debtor has made his best effort to list all he knows and if additional information becomes available, additional amendments will be made." At a Rule 2004 Examination by creditor Sun Communities

Caneva admitted that he kept no records for the entities, despite the fact that some of them had business operations and others existed as holding companies for active businesses. Caneva also admitted during the Rule 2004 Examination that he had no documentation regarding the payment of $500,000 to Bowden as a brokerage fee for a $20 million loan that Caneva stated he did not receive, although he indicated that Sun could contact the Federal Bureau of Investigation for details on Bowden’s criminal prosecution and conviction.

Sun Communities filed an adversary proceeding to deny Caneva's discharge under § 727(a)(3), and the bankruptcy court granted this creditor's motion for summary judgment denying discharge. This decision was affirmed by the U.S. District Court, and Caneva appealed.

Holding

Under 11 U.S.C. § 727(a)(3) the creditor has the burden of

establishing a prima facie case (1) that [debtor] had failed to keep or preserve records and (2) that such failure made it impossible to ascertain his financial condition and material business transactions. The prima facie case shifted to [debtor] the burden to avoid summary judgment by showing that a genuine issue of material fact existed with respect to whether his failure was justified under the circumstances of his case.
. . . .
[T]he statute imposes an affirmative duty on the debtor to keep and preserve recorded information that will allow his creditors to ascertain his financial condition and business transactions. A debtor who has admitted to owning businesses for which he kept no recorded information and to transferring a substantial sum of money without retaining any documentation has not kept or preserved information within the meaning of the statute, and must provide a justification for this failure that goes beyond a conclusory statement in an affidavit that he is entitled to discharge.

The Court's Rationale

1) The Failure to Keep Records: The Prima Facie Violation
The Court relied heavily on its own earlier opinion, Lansdowne v. Cox (In re Cox), 41 F.3d 1294 (9th Cir. 1994), in stating the elements of a prima facie case, and then the burden on the debtor to justify the failure to keep records, quoted above. Debtor argued that he had turned over to the creditor and the trustee boxes of his records, and these documents, together with the public criminal record on the conviction of his broker, were sufficient to create a genuine issue of material fact about the adequacy of his records for § 727(a)(3) purposes. The Ninth Circuit disagreed. It adopted the Seventh Circuit's assertion of "an affirmative duty on the debtor to create books and records accurately documenting his business affairs," and the requirement that if a debtor is sophisticated and owns a business with substantial assets "creditors have an expectation of greater and better record keeping." The Ninth Circuit focused on "the crucial point that the total absence of records related to his business entities and to his alleged $500,000 payment to Bowden necessarily makes it impossible for Sun to accurately determine his financial condition and business transactions."

Thus, we hold that when a debtor owns and controls numerous business entities and engages in substantial financial transactions, the complete absence of recorded information related to those entities and transactions establishes a prima facie violation of 11 U.S.C. § 727(a)(3). Likewise, we hold that when a debtor transfers a substantial amount of money to a third party, the failure to keep any documentation evidencing the terms of the transfer or the fact that the payment actually took place establishes a prima facie violation of 11 U.S.C. § 727(a)(3).

2) The Burden on Debtor to Justify His Failure to Keep Records
After the creditor established its prima facie case

Caneva could have avoided summary judgment by presenting evidence sufficient to show that a question of material fact did exist as to whether such failure was justified under the circumstances of his case. Aside from a conclusory statement tracking the language of § 727(a)(3) in his affidavit in opposing summary judgment, however, Caneva made no effort to present evidence tending to show that the business entities for which he admitted no records existed were of the type that would not generate records. Likewise, he has not presented any evidence that might justify his failure to keep records regarding the $500,000 payment to Bowden.

After noting that the standard for justifying a debtor's failure to keep records depends on "whether others in like circumstances would ordinarily keep them," the Court said

the only explanation that Caneva has submitted that purports to justify his failure to keep or preserve such records is the statement in his affidavit that the circumstances of his business dealings justified the absence of any records he did not possess. He did not disclose the so-called circumstances of his business entities.

Since "a conclusory statement in an affidavit that an absence of records is justified is not enough to avoid summary judgment," the Court affirmed the lower courts' denial of debtor's discharge.

The Bottom Line

To avoid successful challenge to their discharge under § 727(a)(3), a debtor must keep and preserve sufficient documents about her business and financial affairs to enable creditors to accurately determine her financial condition and business transactions. And if such business and transactional documents were not kept or preserved, debtor must have an objectively sound justification in order to preserve her discharge.

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 Effect of a Decrease in Credit Availability on the Number of Future Bankruptcy Filings

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

National bankruptcy filings in October 2008 increased significantly, a much greater month-to-month increase than in the previous few months. Using the average daily filing rate (more accurate than raw monthly comparisons), after month-to-month increases in July of 2.4%, in August of 2.4%, and in September of 2.0%, the increase in October was 7.9%. With more than 108,000 total petitions filed, this was the first month since the 2005 amendments with more than 100,000 filings. (Please look at this website a few days from now for a Bulletin on the bankruptcy filing numbers specifically for Oregon.)

Besides these numbers reflecting that economic problems are rapidly moving from Wall Street to Main Street, what is the role of decreases in the availability of consumer credit? Intuitively, a reduction in credit--such as the shut-off of home equity lines of credit and reductions in credit card credit limits--force borrowers into filing bankruptcy because they do not have the cash-flow cushion to get past temporary financial problems or to delay the inevitable for those with more long-term problems. But what if there is a long-term reduction in credit? What effect would that have on bankruptcy filings in the future?

According to The Paradox of Consumer Credit, by Robert M. Lawless, a professor at the University of Illinois College of Law, first, empirical data supports the above inclination that, in the short-run, decreases in credit availability increase bankruptcy filings. But in the long-run, bankruptcy filing rates increase with greater credit availability. Does that mean that potential long-term reductions in credit availability mean long-term reductions in bankruptcy filings?

In his introductory review of the scholarly literature in his article, Professor Lawless starts by noting that "the literature overall tells a story of rising bankruptcy rates going hand-in-hand with rising consumer debt. . . . . Long-term macroeconomic trends might outweigh any effects that changes in the federal bankruptcy law have on filing rates." But his study's

principal finding is that consumer credit has a paradoxical effect on bankruptcy filing rates. Despite previous data and intuition that rising consumer debt walks hand-in-hand with rising bankruptcy filing rates, increases in consumer debt are associated with short-term decreases in bankruptcy filing rates. The effect likely stems from desperate borrowing by financially strapped consumers postponing the day of reckoning. Like many short-term effects, this one also loses in the long run, as mounting consumer debt catches up with consumers and eventually leads to higher long-term filing rates.

Professor Lawless does not directly ask about the effect of long-term reduced credit availability on bankruptcy filings, and thus far I have not been able to find any study facing that question. But if it is true, as many studies have shown, that increased credit availability in the long run leads to increased filing rates, is it not logically sensible to infer that decreased credit availability would eventually lead to decreased filing rates?

I recognize that the extent of the availability of consumer credit in the long-term is highly speculative. But given the financial upheavals of the past few months and the related rapid constrictions in virtually every credit market, from local to international levels, it seems unlikely that in the next few years consumer credit will again became as freely available it had become during the last decade or two. Therefore, IF consumer credit remains tight or becomes even more so, after a few years of increased bankruptcy filings as tighter consumer credit reduces consumers' financial cushions, thereafter as total consumer debt decreases so will the bankruptcy filing rate.

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

Constructive Trusts: Barred by Laches? Prejudgment Interest? How to Determine Amount of Constructive Trust?

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



Schacher v. Dolph (In re Dolph)
Oregon Bankruptcy Court Case No. 04-37320-rld13
Adversary Proceeding No. 07-3326-rld
June 11, 2008 opinion; July 24, 2008 reconsideration denied
Unpublished

The Oregon Bankruptcy Court's website entry under this adversary proceeding in fact contains two separate Memorandum Opinions by Judge Randall Dunn, the first consisting of his decisions resolving issues from the adversary proceeding trial, and the second his denial of plaintiff's motion for reconsideration of the first Memorandum Opinion. This Bulletin focuses on the first of these Memorandum Opinions; the one on the motion for reconsideration was the subject of this website's Litigation Report dated November 3, 2008.

(Inexplicably, these two opinions were uploaded to the Court's website just last week (late October 2008) although they were decided last June and July.)

The litigation is part of a long-running inheritance fight among stepbrothers and stepsisters: plaintiff Jim Schacher is a stepson of decedent Patricia Schacher, while defendant Donald Dolph, the Chapter 13 debtor, is a son. Plaintiff seeks to impose a constructive trust on assets of defendant, particularly his residence, because of transfers made by the decedent to defendant allegedly in violation of a 1988 Agreement to Execute Wills between the decedent and her husband, plaintiff's father. Richard J. Parker of Parker Bush & Lane PC represented plaintiff, Brian E. Wheeler represented defendant.

The Issues and Judge Dunn's Holdings

These are the issues as the judge worded them, and his ruling on each:

"1. Is Mr. Schacher’s pursuit of a constructive trust remedy barred by laches?"
No. Although plaintiff waited to file the adversary proceeding until defendant's Chapter 13 plan payments were almost completed, and after arguably knowing about all the transfers at issue by no later than the plan confirmation, Judge Dunn declined to apply by analogy Oregon's 2-year statute of limitations for fraud. Instead he held that that plaintiff's claim was not barred by laches, for two reasons: 1) "[T]he right of Patricia’s estate to bring a constructive trust claim expressly was reserved in the order . . . confirming Mr. Dolph’s chapter 13 plan," so defendant "cannot have been surprised, and should have been prepared, when Mr. Schacher asserted that right and filed the Adversary Proceeding." 2) The delay in the filing of the adversary proceeding actually "may have saved [the parties] time and money, or at least did not increase their expenses" because plaintiff "might have decided not to pursue the constructive trust claims at all" after waiting to see how the Chapter 13 plan ran its course, and "[i]t is also possible that if such claims had been brought earlier, the court would have abated their pursuit while plan payments were made."

"2. Is Mr. Schacher entitled to prejudgment interest on his claims in behalf of Patricia’s estate?"
No, because Ninth Circuit case law makes clear that '[i]mposition of a constructive trust is an equitable remedy, and such a “trust” is not a property interest until its existence has been determined by a judicial decision." So a constructive trust judgment begins to accrue interest from the date that such judgment in this adversary proceeding is entered.

"3. Has Mr. Schacher met his burden of proof to establish that a constructive trust should be imposed?"
Yes, because Judge Dunn found that under Oregon law plaintiff has established the three elements of a constructive trust: "(1) the existence of a confidential or fiduciary relationship; (2) a violation of a duty imposed by that relationship; and (3) failure to impose the constructive trust would result in unjust enrichment."

The fiduciary relationship between defendant and his mother's estate arose because he was appointed personal representative of her estate back in 1992 shortly after her husband's death, and defendant was aware of transfers made to him and to others thereafter. Defendant violated this fiduciary duty by arranging for distributions of an IRA account from the estate to himself and a sister at a time when the state court dispute about such transfers was pending, plaintiff challenged these distributions in state court and included them in his proof of claim in the Chapter 13 case, and defendant did not object to this proof of claim. And defendant was unjustly enriched in that the trial record showed that he received about $75,100 from the transfers instead of his appropriate share of the estate, about $48,750.

"4. If a constructive trust is imposed, what should the judgment amount be, and on what asset(s) should the constructive trust be imposed?"
From the $75,100 amount just noted above, Judge Dunn subtracted a $10,000 credit for a savings bond recovered by the estate, and another $14,500 or so the estate received through the Chapter 13 plan, leaving a balance of about $50,600. Although the plaintiff wanted the judge to impose a constructive trust in this full amount on defendant's residence, instead he first credited the $48,750 "estimated legitimate share of Patricia's estate, calculated by the proof of claim filed by Mr. Schacher in Mr. Dolph's bankruptcy case," resulting in a constructive trust in the amount of about $1,850.

The Judge's Analysis on the Amount of the Constructive Trust
In this most critical aspect of Judge Dunn's analysis, he rejected Mr. Schacher's argument that the constructive trust should not be reduced by the $48,750 "estimated legitimate share" because that amount was highly speculative. This argument seems to have at least superficial appeal: since the amount debtor would eventually get from the estate was based on a variety of unknowns, including whether the estate succeeded in collecting its substantial claims against Mr. Dolph's two sisters, how can the court reduce the constructive trust imposed on Mr. Dolph's residence by this speculative amount?

Judge Dunn's answer is a practical and equitable one, turning pointedly on an evidentiary issue. The probate had been pending for a full five years with no distributions to the beneficiaries, and the judge suggested to Mr. Schacher that he ought to apply to the probate court for a partial distribution. Taking the debtor's house now after he has complied fully with his Chapter 13 plan would not be equitable. Most importantly, Judge Dunn focused on the only evidence available at trial on Mr. Dolph's estimated share of the estate: Mr. Schacher''s proof of claim leading to the calculation that Mr. Dolph would receive about $48,750 from the estate. Since Mr. Schacher sought the remedy of a constructive trust, he had the burden of showing proof of unjust enrichment. The only unjust enrichment the evidence supported was the difference between the above calculated $50,600 balance, reflecting the assets transfered to Mr. Dolph from his mother's estate, and this $48,750 share in that estate that the plaintiff himself had calculated defendant was to receive, resulting in the $1,850 constructive trust.

Reactions of Attorneys for the Parties
Rich Parker, represented the plaintiff in this adversary proceeding, and Theodore Sims of Sims & Sims is now his primary counsel on the appeal of the judgment. Defendant's Statement of Issues on Appeal states that the judge erred in holding that defendant was entitled to a present offset against the unjust enrichment claim for his eventual, now still highly speculative, share of the probate estate. The Statement of Issues also puts forward that there should be interest or some other consideration given for the time between when defendant was unjustly enriched by the various transfers and the time of the Chapter 13 filing many years later. Lastly, the Statement of Issues points out that the Chapter 13 Order Confirming Plan in this case, entered after objection by the plaintiff and negotiation between the parties, required defendant to pay over to the probate estate the full amount of the equity in his residence.

Brian Wheeler, attorney for debtor-defendant, agrees with the judge that a claim for the equitable remedy of unjust enrichment requires specific evidence of the extent of that enrichment. He points out the very practical problem that the plaintiff, the personal representative of his step-mother's estate, has spent the last five years going through a series of attorneys, accruing substantial attorney fees as well as his own travel costs, greatly dissipating the value of the estate, to all the beneficiaries' detriment. Now this appeal of Judge Dunn's judgment will only waste the estate assets further.

The Last Word
Judge Dunn's words with which he had introduced his analysis, from the biblical book of Proverbs, are appropriate last words here: "He that troubleth his own house shall inherit the wind.” Proverbs, 11:29

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

At the Extreme of BAPCPA's Unintended Consequences: Did Arcane Provisions of BAPCPA Contribute to the Bear Stearns, Lehman Bros. & AIG Collapses?

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

Sounds fanciful: How could BAPCPA possibly have contributed to the financial demise of these financial giants? According to an article last week in the Financial Times of London, knowledgeable bankers and attorneys are now saying that changes in BAPCPA that had been promoted by bankers' trade groups and were designed to protect large financial institutions in the event of a large customer's bankruptcy, instead had extremely detrimental consequences for some of those very institutions.

Certain derivatives and financial transactions were made exempt from the automatic stay by BAPCPA, in order to allow financial institutions to unwind trades and transactions efficiently in the event of a bankruptcy filing by a major customer. Specifically BAPCPA amended Section 362 to exempt from the automatic stay setoffs by a newly defined entity, a "financial participant." I'll spare you the full 130+ word definition at Section 101(22A), but to get an idea of the type and magnitude, this is an entity which has any of a set of agreements (such as securities and commodities contracts, swap, repurchase and master netting agreements) "of a total gross dollar value of not less than $1,000,000,000 [yes, that's $1 BILLION] in notational or actual principal amount outstanding . . . or has gross mark-to-market positions of not less than $100,000,000 (aggregated across counterparties) in one or more such agreements or transactions with the debtor."

Also very importantly the term "repurchase agreement" was greatly expanded at Section 101(47) to include mortgage repurchase agreement, presumably including the now-notorious mortgage-backed securities and collateralized debt obligations.

In the brief and neutral words of a detailed BAPCPA Section-by-Section Analysis written in 2005 by the Collier Editors-in-Chief Alan Resnick and Henry Sommer, on these changes:

Many Code sections are amended, and several new sections are added, to clarify and expand the protection for certain financial contracts, including the right to liquidate, terminate, or accelerate securities contracts, forward contracts, commodities contracts, swap agreements, and repurchase agreements, in the event of a participant's bankruptcy.

So how could mere bankruptcy code changes designed to protect financial institutions, and pushed by knowledgeable organizations like the Securities Industry & Financial Markets Association and the International Swaps & Derivatives Association, lead to the demise of some of the most venerable of these institutions? By newly exempting credit default swaps and mortgage repurchase agreements from the automatic stay, instruments which Bear Sterns and Lehman Brothers used extensively, creditors of these institutions--such as hedge funds and other financial institutions--no longer had the disincentive that the institutions could file bankruptcy and freeze their transactions and their collateral if they were pushed too hard. These creditors, instead of being normally cautious about settling trades and about forcing these institutions to put up more collateral, became aggressive along these very same lines, which greatly accelerated the credit and liquidity squeeze that led to these institutions' demise.

According to this Financial Times article, the Securities Industry & Financial Markets Association and the International Swaps & Derivatives Association deny this connection between the BAPCPA amendments and these financial institutions' troubles.

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

Eighth Circuit Declines to Follow Ninth Circuit's Kagenveama Opinion, Determines that Above-Median Income Ch. 13 Debtor Must Pay Plan for Full 5 Years

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

Coop v. Frederickson (In re Frederickson)
8th Circuit Court of Appeals, Case No. 07-3391
Decided 10/27/08

Although this Bulletin usually does not venture much outside the 9th Circuit for opinions to highlight, this 8th Circuit Frederickson opinion warrants an exception because its holding is so directly opposed to the very important Kagenveama opinion decided by the 9th Circuit this last June, thus setting up an eventual BANCPA-settling showdown at the U.S. Supreme Court.

In an earlier Bulletin in this website on Kagenveama, I called that opinion The Most Important 9th Circuit B'cy Opinion of the Summer. In that opinion the Ninth Circuit 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 length of time.

In contrast, here in Frederickson the 8th Circuit ruled that for an above-median income chapter 13 debtor whose Form B22C disposable income was nevertheless negative, the debtor was required to propose either a full payment plan, or a sixty month plan which paid creditors claims at least in part. In so ruling it overturned both the bankruptcy court and the BAP. Interestingly, the BAP opinion which Frederickson directly overturned (Coop v. Frederickson (In re Frederickson), 375 B.R. 829 (B.A.P. 8th Cir 2007)) is one that the 9th Circuit in Kagenveama had cited favorably.

The 8th Circuit gets to the opposite conclusion than Kagenveama by starting with the opposite first step: asserting that BAPCPA's new terms, "projected disposable income" and "applicable commitment period," cannot be enforced as plain language because the "text leads to a result that is seemingly at odds with the congressional intent of the text." So instead of just enforcing the plain language of the statute, "in determining the true congressional intent of a statute it can be appropriate to consider all available evidence of that intent rather than limiting analysis to the text of the statute." From this consideration of "all available evidence of that intent" the 8th Circuit perceived that congressional intent was "to eliminate what it perceived as widespread abuse of the system by curtailing the bankruptcy courts’ discretion and requiring debtors to pay more to their unsecured creditors."

The Court also asserted that the statute was simply not clear, that there were different "possible interpretations of the text that are supported by authority," as evidenced by the opposing positions of the Chapter 13 debtor and the trustee in this very dispute, and by "the differing outcomes of the bankruptcy courts that have examined this issue to date."

Then after acknowledging that Congress clearly and rigidly defined "disposable income" in § 1325(b)(2) but did not define “projected disposable income” as used in § 1325(b)(1)(B), the Court asserted that if "a distinction [is] drawn between a debtor’s 'disposable income,' which is calculated solely on the basis of historical numbers and regional averages, and a debtor’s 'projected disposable income,' which necessarily contemplates a forward-looking number," then bankruptcy courts will continue to have some discretion over the calculations of each individual debtor’s financial situation, with the result that the debtor’s 'projected disposable income' will end up more closely aligning with reality. "

The Court seems to go so far as to explicitly rewrite the statute: "If we read the word 'projected' out of 11 U.S.C. § 1325(b)(1)(B) and rely solely on the calculation of 'disposable income' on Form 22C, the outcome involves anomalous, and perhaps even absurd, results."

Accordingly, we adopt the view shared by many bankruptcy courts that a debtor’s “disposable income” calculation on Form 22C is a starting point for determining the debtor’s “projected disposable income,” but that the final calculation can take into consideration changes that have occurred in the debtor’s financial circumstances as well as the debtor’s actual income and expenses as reported on Schedules I and J. . . . . Additionally, under this interpretation, the 'applicable commitment period' is logically a temporal requirement that does not lead to anomalous or absurd results. . . . . Thus, we conclude that the bankruptcy court erred by confirming [debtor's] plan because [debtor] actually does have projected disposable income and therefore the plan cannot be confirmed over the trustee’s objection unless it extends for the entire sixty-month applicable commitment period.

The 8th Circuit ended with direct rejection of Kagenveama:

In arriving at our holding, we have given careful consideration to the Ninth Circuit’s recent decision in In re Kagenveama, 541 F.3d 868 (9th Cir. 2008), which found persuasive the Eighth Circuit Bankruptcy Appellate Panel’s decision in this case. With all due respect to the Ninth Circuit’s opinion, we believe that the approach we have taken will more fully accomplish that which Congress intended to achieve through the enactment of BAPCPA.

Stay tuned as to whether the debtor here appeals this case to the Supreme Court. Note that the National Association of Consumer Bankruptcy Attorneys (NACBA) had filed an amicus brief on behalf of the debtor, and therefor may well be willing to give continued assistance to bring this contentious issue to national resolution. Until then, Kagenveama is the law of the Ninth Circuit, with opposite law in the Eighth.


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