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

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


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

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."

This is an amazing opinion. It is one of the most colorful opinions I've read in months (see some of that "color" quoted below). In overturning the District Court appellate decision and following its own 9th Circuit precedents, it strongly rejected constitutional arguments to the contrary by the 4th, 6th & 7th Circuits as well as statutory arguments to the contrary by the 2nd and 10th Circuits. (This 2007 10th Circuit opinion was an en banc decision--one decided by the full court of judges in the Circuit--which overturned one of its own 1999 opinions, this now overturned earlier 10th Circuit opinion having been previously used by the 9th Circuit in support of ITS own 1999 opinion, which in contrast Judge Kozinski here reaffirmed as good law!) This Espinosa opinion also explicitly overruled a trio of recent 9th Circuit BAP opinions, as well as some published bankruptcy court opinions within the Circuit.

Special Plan Language

The Chapter 13 plan in this case contained some critical and exceptionally specific language:

One section of the plan is titled "Educational Loan(s)" and lists all of [the student loan creditor's] loans, for a total of $13,250. The plan specifies that this amount should be paid in full, followed by a paragraph stating as follow:

The amounts claimed by [the student loan creditors] for capitalized interest, penalties, and fees shall not be paid for the reasons that the same are penalties and not provided for in the loan agreement between the Debtor and the lender.

The subsequent paragraph provides as follows:

Any amounts or claims for student loans unpaid by this Plan shall be discharged.

Statutory Argument

§ 1328(a)(2) of the Code lists some of the debts which are excluded from a Chapter 13 discharge, including "debts . . . of the kind specified in paragraph . . . (8) . . . of section 523(a) . . . ." § 523(a)(8) contains the familiar language about excepting debts from discharge for " an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit . . . ", unless excepting such a debt from discharge "would impose an undue hardship on the debtor and the debtor's dependents . . . ." So if the Chapter 13 discharge does not discharge a student loan unless that loan imposes an undue hardship on the debtor, and there is no determination of that undue hardship in an adversary proceeding, how can this student loan be deemed discharged merely by creditor not objecting to the plan?

Indeed the student loan creditor's statutory argument was that the bankruptcy court should set aside the discharge order entered at the end of the Chapter 13 case because the debtor did not file such an adversary proceeding to determine undue hardship. Judge Kozinski's quick response was to cite 9th Circuit precedent: "Great Lakes Higher Educ. Corp. v. Pardee (In re Pardee), 193 F.3d 1083, 1086 (9th Cir. 1999), which is on all fours with our case, forecloses this argument." "In essence, Pardee held that a discharge is a final judgment and cannot be set aside or ignored because a party suddenly claims, years later, that the trial court committed an error."

Espinosa rejects the recent arguments of the 2nd and 10th Circuits which found conflict between § 1327(a), the Chapter 13 plan confirmation "finality provision," and the Code sections and Rules calling for an adversary proceeding to discharge student loans. "We see no such conflict; both provisions can operate fully, within their proper spheres." If a debtor proposes a plan which includes a discharge or partial discharge of a student loan and does not file an adversary proceeding to establish undue hardship, the creditor can object to the plan.

But there are many reasons a student loan creditor might not object to such a Chapter 13 plan. The creditor might, for example, believe that the debtor would be able to make a convincing showing of undue hardship, and thus see no point in wasting the debtor’s money, and its own, litigating the issue. Or, the creditor may decide that a Chapter 13 plan presents its best chance of collecting most of the debt, rather than spending years trying to squeeze blood out of a turnip. Or, the creditor may hope that the debtor will make some payments on the plan but ultimately fail to complete it, in which case the creditor will have collected a portion of the debt and still be free to collect the rest later. [Footnote pointing out that statistically about 2/3rds of Chapter 13 cases fail.] Or, the creditor may overlook the notice or fail to understand its legal implications. Regardless, when the creditor is served with notice of the proposed plan, it has a full and fair opportunity to insist on the special procedures available to student loan creditors by objecting to the plan on the ground that there has been no undue hardship finding. Rights may, of course, be waived or forfeited, if not raised in a timely fashion. This doesn’t mean that these rights are ignored, or that a judgment that is entered after a party fails to assert them conflicts with the statutory scheme or is somehow invalid.

The opinion then makes clear that a bankruptcy discharge order is a final judgment, which "cannot be ignored or set aside just because it was the result of an error." After the discharge order is entered and not appealed from, it, like any judgment, can be reconsidered only under the very limited circumstances (such as mistake, excusable neglect, fraud) permitted under Rule 60(b) of the Federal Rules of Civil Procedure.

This Espinosa opinion rejected the 2nd and 10th Circuits' res judicata argument, that the order confirming a plan should not be given preclusive effect and the student loan discharged with the discharge order because undue hardship was not adjudicated on the merits at the time of confirmation. Judge Kozinski retorted that

the creditor in our case (as in those other cases) did get proper notice of the proposed Chapter 13 plan, and so knew perfectly well that if the plan were approved and satisfied, the debtor would be granted a discharge of the student debt listed in the plan. Had the creditor wanted to insist on an adversary, it could have objected to the Chapter 13 plan on the ground that there was no judicial finding of undue hardship. . . . . But [the creditor] didn’t object to the plan and didn’t appeal the order confirming the plan, as it well could have. Instead, it accepted the payments made by the debtor during the plan’s life and then acted as if the whole thing never happened.

It makes a mockery of the English language and common sense to say that Funds wasn’t given notice, or was somehow ambushed or taken advantage of. The only thing the creditor was not told is that it could insist on an adversary proceeding and a judicial determination of undue hardship. But that’s less a matter of notice and more of a tutorial as to what rights the creditor has under the Bankruptcy Code—a long-form Miranda warning for bankers. If that were the standard for adequate notice, every notification under the Bankruptcy Code would have to be accompanied by Collier’s Treatise, lest the creditor overlook some rights it might have under the Code.
. . . .
After all, we aren’t talking here about destitute widows and orphans, or people who don’t speak English or can’t afford a lawyer. The creditors in such cases are huge enterprises whose business it is to administer the very kinds of debts here in question. If this kind of notice to sophisticated parties who have ample resources to protect their rights is inadequate for purposes of res judicata, then the concept of notice has no meaning and res judicata is a fairy tale. [Citations omitted.]

Constitutional Argument

The student loan creditor argued that it was denied due process as to the discharge order because it was not served with a summons and complaint for determination of undue hardship as is required by Rule 7004 of the Federal Rules of Bankruptcy Procedure. The 9th Circuit acknowledged that within the last few years three different Circuits have been persuaded by that argument, but found

the due process argument even less persuasive than the statutory argument, despite the eagerness of some of our sister circuits and other courts to adopt it. What appears to be going on is that courts are re-casting what may be a simple statutory violation as a denial of due process so that they can set aside judgments with which they’re unhappy. This approach is not consistent with the theory of objective judging, which calls for us to apply the law fairly to the facts and let the chips fall where they may.

The Judge Kozinski continued to focus on the order confirming plan as a final judgment, and looked at what would be constitutionally inadequate notice to a student loan creditor, one in violation of due process. He cited the familiar U. S. Supreme Court opinion of Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950) for the standard of constitutionally adequate notice: “notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objection.”

The Court noted that the student loan creditor here had received actual notice, been "warned [in the notice] of the consequences of failing to object--which is more than due process requires," had filed a proof of claim, and had failed to object to the treatment laid out clearly in the plan.

We cannot say that [the student loan creditor] was taken by surprise or was denied due process. Quite the contrary: ]the creditor] appears to have been a willing participant, perfectly happy to receive the benefits of the Chapter 13 plan, but unwilling to suffer the consequences of its failure to file an objection.

The Ninth Circuit rejected the argument of its "sister circuits" that where the Code and Rules require a greater degree of notice through an adversary procedure, "due process entitles a party to receive such notice before an order binding the party will be afforded preclusive effect," quoting the 4th Circuit opinion. To the contrary Judge Kozinski said

we find it both wrong and dangerous to hold that the standard for what amounts to constitutionally adequate notice can be changed by legislation. The constitutional standard, as we understand it, requires that a party affected by the litigation obtain sufficient notice so that it is able to take steps to defend its interests. Congress can, of course, give rights to additional notice, but we find it difficult to see how this can affect the floor provided by due process—either to increase or diminish it.

Beside, the Court said that Congress did not try to change the constitutional standard here: it "made it quite clear that a creditor need only get ordinary notice of a Chapter 13 plan to be bound by its terms. That Congress provided heightened notice requirements for an adversary proceeding, which didn’t take place here, is of no consequence."

Not Need En Banc Review

The coup de grace of Judge Kozinski's opinion was his repeated assertions that his three-judge panel did NOT need to call for an en banc rehearing in spite of conflicts with so many other Circuits, as well as with a number of decisions in the 9th Circuit BAP and 9th Circuit bankruptcy courts. Why?: He simply did not find those other cases persuasive.

[W]e have taken a close look at the contrary holdings of our sister circuits in order to determine whether we have strayed off course, in which case we would call for rehearing en banc to correct our caselaw. But we don’t find the reasoning of the two other circuits persuasive. Seeing no reason to change course, we continue to follow [9th Circuit precedent] Pardee.
. . . .
We do not find this [due process] reasoning [by the 4th, 6th & 7th Circuits] persuasive and thus have no occasion to call for rehearing en banc to consider overruling [9th Circuit precedent] In re Gregory.

I can't help but muse whether he had other reason for not asking for en banc review: Did he perhaps harbor some fear that the en banc 9th Circuit would not stand by him, or he did not want to tempt such challenge to his "authority" as chief judge among his brother and sister judges? Note that his opinion barely cites any authority outside the Ninth Circuit, other than a 58-year old Supreme Court decision. And he is pushing a rationale based in large part on a 10th Circuit case that was repudiated last year by an en banc decision of the 10th Circuit. Principled and gutsy, or stubborn and erroneous, in any event it's an entertaining opinion.

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 Attorney

Three New Unpublished Judge Alley Opinions: Dismissal of Malicious Prosecution, Trustee Appointment in Ch. 11, BAPCPA Tr. Fees Applied Retroactively

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

These three unpublished opinions by Judge Frank Alley are all dated September 15, 2008, although they hit the court's website a few days after that. The case names are linked to the opinions on the court website for quick access to the full opinions.

Miller v. McDougal Bros. Investments
Adv. Pro. No. 08-6110-fra

In this rather factually detailed adversary proceeding (for a 6-page letter opinion at least), Judge Alley granted defendants’ motion to dismiss the complaint with prejudice and without a hearing. Plaintiff was a Chapter 7 debtor. Defendants were a) a lessor/seller of real property to debtor, b) a subsequent purchaser of that property at a foreclosure sale, c) an attorney for that purchaser who represented that purchaser in a suit to eject the debtor from the property, and d) the attorney who defended the purchaser's attorney in a bar complaint by debtor against that purchaser's attorney, and also represented the purchaser in a lawsuit by debtor against the purchaser. The judge held as follows:

1) The debtor-plaintiff failed to state a claim for malicious prosecution or fraud and misrepresentation against the two attorneys for informing the Chapter 7 trustee of plaintiff's possible interest in the real property at the time of filing, although by that time he had been legally ejected from the property. Plaintiff had failed to list this possible interest in the property in his bankruptcy schedules, it was not deemed abandoned to the plaintiff in his role as a debtor and so continued to remain property of the estate subject to the trustee's administration and also subject to the automatic stay. The attorneys violated no duty to plaintiff in informing the Chapter 7 trustee about this possible property interest; indeed it indirectly led to the US Trustee moving to reopening the Chapter 7 case and the trustee realizing some funds for the estate from which to pay creditors. In addition, the attorneys acted within the scope of their attorney-client relationship so they were "within their qualified privilege against liability in tort for actions taken on behalf of a client."

2) Judge Alley held that the bankruptcy court had no jurisdiction to review a state court order dismissing plaintiff's complaint against the purchaser at the foreclosure sale, because "it would constitute an invalid collateral attack on that court's final order." Plaintiff's state court case had been dismissed because he did not have standing, the real estate at issue being still vested in the bankruptcy estate.

3) Similarly, the judge held that the bankruptcy court had no jurisdiction to review the Oregon Court of Appeal's dismissal of plaintiff's appeal of the ejectment judgment, that plaintiff should have address his concerns about that proceeding with that court. And the attorney for the purchaser at foreclosure did not violate any bankruptcy order when he filed a motion to dismiss that appeal on behalf of the purchaser.


In re South Star Oil Co.
Case No. 08-61072-fra11

On motion of the US Trustee and several creditors to dismiss or convert this chapter 11 case to chapter 7, or to appoint a trustee, Judge Alley determined that a trustee should be appointed pursuant to § 1104 of the Code.

1) Under § 503(b)(9) administrative expenses include "the value of any goods received by the debtor within 20 days before the date of commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor's business." Administrative expenses must be paid in full on the effective date of the plan, unless the holder of the claim agrees to the contrary, pursuant to § 1129(a)(9)(A). The debtor-in-possession (DIP) is the operator of ten gasoline service stations. During the 20-day pre-petition period, about $1.3 million in product was supplied by one gasoline supplier, leaving an administrative expense of between $512,000 and $1.3 million depending on some accounting issues involving a large payment made during that same period. Given the supplier's unwillingness to be delay payment in full, and the DIP's lack of cash or any marketable equity in its assets, the judge determined it unlikely that the DIP could propose and confirm a plan. Thus there was cause to convert or dismiss the case because this constituted "the absence of a reasonable likelihood of rehabilitation" under § 1112(a)(4).

2) Judge Alley concluded as follow, applying § 1104(a), and particularly (although not stating so) § 1104(a)(3) added by BAPCPA and explicitly allowing the appointment of a trustee whenever grounds exist for conversion or dismissal, if it "is in the best interests of creditors and the estate" :

Where cause for dismissal is established, the Court may, in the alternative, appoint a trustee or an examiner if it appears to be in the best interest of the creditors to do so. At first blush, a dismissal of the case appears to be the most likely remedy. However, dismissal would severely prejudice [the supplier's administrative] claim, since it would not have administrative priority in any subsequently filed case. Conversion to Chapter 7, while it would provide for a speedy liquidation of the debtor’s assets, and payment of most of the secured debt, would not allow the estate to avail itself of any value these properties have while they support ongoing businesses. It follows that the best resolution to a difficult situation is the appointment of a trustee under Code § 1104.

In re Owens
Case No. 05-70329-fra7

1) The court's primary ruling was to retroactively apply one of BAPCPA's changes to a Chapter 7 case filed a few days BEFORE BAPCPA's effective date, on the justification that "[w]hen a statutory amendment acts to clarify an existing provision rather than to make substantive changes to it, the amendment is normally applied retroactively." The provision added by BAPCPA was a new §330(a)(7) of the Code, stating:

In determining the amount of reasonable compensation to be awarded to a trustee, the court shall treat such compensation as a commission, based on § 326.

§ 326 in turn lays out the maximums that Chapter 7 (and Chapter 11) trustees may be compensated, the familiar "not to exceed 25 percent on the first $5,000 or less, 10 percent on any amount in excess of $5,000 but not in excess of $50,000 . . . ." Judge Alley interpreted the new §330(a)(7)'s requirement that trustee compensation be treated "as a commission" as doing "no more than to clarify Congress' understanding of §326."

2) Beyond applying BAPCPA's §330(a)(7) retroactively, Judge Alley's interpreted how this addition interplays with §326. His interpretation indicates a significant change in the method for trustee fee calculation, at least in certain cases. Judge Alley stated that before BAPCPA a trustee's commission was "determined by multiplying the amount of time spent by the trustee by a reasonable hourly rate; thus, the limits set out in §326 are a ceiling, and no more." But now "[r]eading §§ 326 and 330 together, the statutory scheme provides that a trustee is presumed to be entitled to compensation in the amount specified in §326," although that "presumptive commission . . . must be adjusted to the extent necessary to ensure that the commission actually paid is reasonable." The commission is "subject to reduction if the maximum amount is substantially disproportionate to the value of the trustee's services to the estate" or "if errors or omissions on the part of the trustee result in a material loss to the estate or unsecured creditors."

3) The error by the trustee in this case was to sell debtor's real property with a net loss to the estate after paying liens against the property and the realtor's and trustee's commissions, because the trustee had not realized that one of the secured creditors was entitled to a $8,000 prepayment penalty. Judge Alley noted that the trustee's fee could be reduced to whatever the fee would have been had the real estate been abandoned, but here " the result would be draconian." Instead the judge reduced the trustee's fee by $2,430, the amount "necessary to restore to unsecured creditors the amount lost as a result of the sale."

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 Attorney

Portland Housing Prices Continue to Decline

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

So much of what is going on in this country's economy appears tied to the value of real estate, as in how much those "Troubled Assets" addressed by the $700 billion Congressional bailout bill are really worth. And perhaps no other index is tied so closely to the pace of personal bankruptcy filings than that of home values. So to get some good ideas where the Portland area's bankruptcy filings are heading and how quickly, here's a quick but enlightening look at Portland's home values.

Yesterday Standard & Poor's released its S&P/Case-Shiller Home Price Indices reflecting data through July 2008. This tells us the monthly changes in the values of existing single family homes in twenty urban areas, including Portland. By analyzing these Indices we can also see the rate at which home values are increasing or decreasing, and can compare these rates to the average among these urban areas. The local numbers reveal important trends, especially when compared with this national urban average. (In the rest of this Bulletin I will use "national" to mean "twenty urban areas average".)

The Peaks in Home Values and Subsequent Trends
In the national data, home values peaked in July 2006; in Portland the peak occurred exactly 1 year later in July 2007. The national values declined only incrementally for a full year, going down only 3.8% in that time. But then in the year since then to July 2008, the values have come down much more steeply, by 16.3%.

In Portland, from July 2006 to July 2007, while the national values were going down 3.8%, Portland's were still going UP by 3.8%, coincidentally. And from July 2007 to July 2008, while the national values were going down by 16.3%, Portland's went down by only 6.6%.

Query: Are Portland's value decreases going to accelerate to match the 20-urban area averages because we are in a similar trend line just a year later?

The Very Recent Trends
Is the pace of the decline starting to slow nationally? What's the recent pace of the decline in Portland?

Looking at the data showing the declines during these in 3-month blocks:
Nov '07-Jan '08 / Feb-Apr '08 / May-July '08
National: Declining home values in each of those blocks of:
6.4% / 5.9% / 2.2%
Portland: Declining home values in each of those blocks of:
3.4% / 2.2% / 0.4%

So the pace of the decline nationally has slowed, especially in the last three months, but it has as well in Portland and even more so, seemingly coming close to bottoming out here. Indeed in the last 6 month, 2 of the months showed slight increases in house values in Portland, whereas the national monthly values have been decreasing every single month since the July 2006 peak.

Comparisons to Prior Economic Downturns
The last time there was a significant national decrease in home values was in 1990-92, when, in contrast to the present 16.3% year-to-year decrease, the largest decrease in values was only 6.3%. During the dot-com/post-9-11 downturn of 2001-2002, national home values did not decline but merely slowed their growth from about a 13% increase year-to-year to a brief low of about 7%, but then quite quickly recovered and reached a peak of about 20% in 2005, before starting the consistent monthly declines to the present.

In Portland the 1990-92 downturn was much milder. During the years 1990 through 1992 Portland did not have ANY year-to-year reductions in value, while the national values were down a significant 6.3%. On a year-to-year basis the Portland value INCREASES were more than 5% annually, while nationally home values were significantly decreasing. However during the 2001-2002 period, the home values in Portland increased at a rate lower rate than the national rate, about 7.2% during 2001 and about 5.0% during 2002, going a little lower in the rate of value increases and staying at that lower growth rate for close to two years while the national rate rebounded quickly.

Conclusions
The major national economic disturbances of the past 3 or 4 weeks and how they will play out in the next few weeks and months will have a major impact on the availability of mortgage credit and on consumer confidence, thus affecting national and local home buying activity and home values. But aside from that huge ambiguity, based on the data summarized above, the national home value decrease has slowed but apparently not yet reached bottom. However, Portland's rate of decrease has slowed much more, in the last few months almost flattening out, seemly coming very close to hitting bottom. While Portland's home values had continued to increase from July 2006 to July 2007 for a full year after the national values had peaked and started to decline, in turn the decline in Portland since then has not come close to the steepness of the national decline. So Portland's last three-four month plateauing of its home values may signal that, as in 1990-92, the downturn here will be much shorter and milder than nationwide. If so then we may have indeed hit bottom and be beginning a slow increase in values. However, given the tsunamis roiling the national financial markets, predictions based on past history appears even less reliable than usual. If there is a radical reduction in credit availability, or, as expected, last month's slight improvement in consumer confidence is seriously shaken by the events of the past few weeks, Portland's home values could very well shift back to a downward trend.

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 Attorney

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

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

Barboza v. New Form, Inc.

9th Circuit Case No. 06-56319

Sept. 23, 2008

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. That's two out of its eight published opinions on bankruptcy law during these two months, a lot of focus on interpreting one phrase.

Last week's Litigation Report in this website highlighted the 1st of these two opinions, Lockerby.v. Sierra, on what it takes for an intentional breach of contract to be a nondischargeable "willful and malicious injury."

Now in Barboza, the 9th Circuit reversed both the bankruptcy court and the BAP, primarily by finding that neither court applied the 9th Circuit's law on § 523(a)(6)'s "willful and malicious injury" language accurately. The procedural contexts were the bankruptcy court allowing the plaintiff creditor to prevail on a motion for summary judgment, and then the BAP ruling that the summary judgment was appropriate. This Bulletin summarizes the substantive law of this opinion, while this week's Litigation Report summarizes its procedural lessons.

The Context

In Barboza, before filing Chapter 7 bankruptcy the debtors were found liable for willful copyright infringement in federal District Court. The final judgment was for nearly $900,000. The "Bankruptcy Court concluded that there was uncontroverted evidence that Appellants [debtor-defendants] knew of Appellee’s copyright, and in combination with the jury finding of willful infringement, that the infringement constituted a willful injury within the meaning of § 523(a)(6)." The BAP affirmed.

The Law of "Willful & Malicious Injury" in the 9th Circuit

The 9th Circuit cited a number of 9th Circuit opinions making clear that "[w]e analyze the willful and malicious prongs of the dischargeability test separately."

On the willfulness side, the Court relied on the U.S. Supreme Court opinion of Kawaauhau v. Geiger, 523 U.S. 57(1998) that "if a finding of 'willful' copyright infringement is based merely on reckless behavior, the resulting statutory award would not fit within the § 523(a)(6) exemption." Willful injuries are limited to "deliberate and intentional" injuries. Since the meaning of "willful" under federal copyright infringement law is broader than the § 523(a)(6) meaning, including reckless disregard and insufficient supervision, the 9th Circuit reversed the lower courts' granting of summary judgment for the creditor and remanded to the bankruptcy court.

As to the malicious prong, the 9th Circuit held that the bankruptcy erred in failing to address this directly. And then the BAP erred when, "perhaps in an attempt to remedy the Bankruptcy Court's lack of discussion and findings concerning the 'malicious' prong, found that malice could be implied from willfulness." Since the BAP's implication of maliciousness "rested entirely on its conclusion that the Appellants' [debtors'] actions were willful," while the 9th Circuit had determined their actions were not necessarily willful, the Court remanded to the bankruptcy court on this prong as well.

The Barboza Bottom Line

To determine the nondischargeability of a debt for "willful and malicious injury . . . to another entity or to another entity or to the property of another entity" under § 523(a)(6), the bankruptcy court must make separate findings as to the willful and the malicious requirements. Willfulness includes only intentional injuries not reckless ones. The maliciousness cannot be implied from willfulness.

Consistency With the Most Recent "Willful & Malicious" Oregon Opinion

In January of this year Judge Perris wrote a published opinion on the specific § 523(a)(6) issue addressed at the beginning of this Bulletin, intentional breach of contract causing "willful and malicious injury." Home Instead Senior Care of Oregon v. Treon (Click on opinion name to link to the opinion at the bankruptcy court's website.) In it, after resolving the concept of "tortious conduct" specific to the breach of contract context, she "anticipated" both the 9th Circuit's Lockerby and Barboza opinions by emphasizing the importance of and then engaging in separate analyses of the willful and malicious prongs. See my summary of her opinion by clicking on its title: Debtor's Breach of Prior-Employer’s Non-Compete Agreement IS Dischargeable Under Sect. 523(a)(6)

(Also see this website's Practical Summaries of Oregon Bankruptcy Opinions for my summaries of all of 2008's opinions--scroll down to the lowest item on the far right column of the home page.)

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

Bankruptcy Mortgage Modification Cut Out of Bailout Bill: So What's In this Weekend's Emergency Economic Stabilization Act of 2008 for Homeowners?

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

[LATE-BREAKING NEWS: AS OF EARLY THIS AFTERNOON, 9/29/08, THE HOUSE OF REPRESENTATIVES VOTED DOWN THE EMERGENCY ECONOMIC STABILIZATION ACT OF 2008, CONTRARY TO EXPECTATIONS.]

As of Friday the mortgage modification amendment to the Bankruptcy Code was taken off the table by Democrats during the intense negotiations In the Capitol over the bailout bill, as announced in a closed-door meeting to Democrat legislators by Barney Frank, Chairman of the House Financial Services Committee. Despite this bankruptcy provision being one of the main provisions of Barney Frank's and Senate Banking Committee Chairman Christopher Dodd's responses to Treasury Secretary Henry Paulson's original proposal, it apparently became a "poison pill" sacrificed in order to reach compromise during the weekend. As stated by Rep. Joseph Crowley, a New York Democrat and member of the House Democratic leadership, "There is the belief we would not be able to pass a bill with the provision," There was enormous pressure to announce a final compromise among congressional and Treasury negotiators by the time the Asian stock markets began business Monday morning.

So without the mortgage modification amendment, what does the Emergency Economic Stabilization Act of 2008 (as of its form available Sunday evening, Sept. 28) contain of help to struggling homeowners? Putting aside the general benefits of avoiding the total seizing up of the credit markets, there is little if any tangible help for homeowners.

The Emergency Act establishes the Troubled Assets Relief Program (TARP) authorizing the Secretary of the Treasury "to purchase . . . troubled assets from any financial institution" through a new Office of Financial Stability, overseen by a Financial Stability Oversight Board.

Section 109 of the Act, entitled "Foreclosure Mitigation Efforts," requires the Treasury Secretary to

implement a plan that seeks to maximize assistance for homeowners and use the authority of the Secretary to encourage the servicers of the underlying mortgages, considering net present value to the taxpayer, to take advantage of the HOPE for Homeowners Program under section 257 of the National Housing Act or other available programs to minimize foreclosures. In addition, the Secretary may use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures.

Section 110 of the Act, entitled "Assistance to Homeowners," requires federal entities that hold mortgages and mortgage-backed securities, including the Federal Housing Finance Agency (the conservator for Fannie Mae & Freddie Mac), the FDIC, and the Federal Reserve, to

implement a plan that seeks to maximize assistance for homeowners and use its authority to encourage the servicers of the underlying mortgages, and considering net present value to the taxpayer, to take advantage of the HOPE for Homeowners Program under section 257 of the National Housing Act or other available programs to minimize foreclosures.

Modifications to residential mortgage loans under this plan "may include--(A) reduction in interest rates; (B) reduction in loan principal; and (C) other similar modifications."

Section 124 of the Act, entitled "Hope for Homeowners Amendments," strengthens the Hope for Homeowners program to increase eligibility and improve the tools available to prevent foreclosures.

Section 125 of the Act, entitled "Congressional Oversight Panel," establishes this Panel, with the duty, among others, to report to Congress every 30 days on the effectiveness of the foreclosure mitigation efforts under the Act.

Section 303 of the Act, entitled "Extension of Exclusion of Income From Discharge of Qualified Principal Residence Indebtedness," extends the current provision tax forgiveness for the cancellation of mortgage debt. The expiration of that act is extended from January 1, 2010 to January 1, 2013. This does not apply to insolvent homeowners or those in bankruptcy for whom the cancellation of mortgage debt is not deemed taxable income for other reasons. But this section of the Act will take away for three additional years an important disincentive for solvent homeowners to negotiate with their mortgage creditors for reductions in their loan balances .

Bottom Line: As summarized by Adam Levitin, a law professor at Georgetown Law School, in the blog Credit Slips:

The plan directs the Treasury Department to engage in reasonable modifications for residential mortgage loans it controls and to encourage servicers to do so for loans it doesn't control. . . . Treasury is unlikely to end up controlling many distressed residential mortgage loans directly. And Treasury has been encouraging servicers to do loan modifications since last fall, but with very limited success. There is no reason to think that the bailout suddenly changes anything. In short, Congress enacted some show provisions about consumer relief, but nothing of substance.

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

Is BAPCPA Meeting the Goals of its Proponents?

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



From Anecdotes to Hard Evidence
Those who work in the bankruptcy world day in and day out have infinite anecdotal experience on the effects of BAPCPA on their clients, whether creditors or debtors. Especially for those who represent only creditors or only debtors, their one-sided experience may mostly just reinforce their preconceived opinions about the Act. Especially for them, but for everybody in this bankruptcy world, it is good to get out of their trenches, now nearly two years after BAPCPA's effective date, and look at a purportedly neutral analysis of the law's effects.

The Study
This summer Michael Simkovic, a recent Fellow in Law and Economics at Harvard Law School's John M. Olin Center for Law, Economics, and Business, published a study entitled "The Effect of 2005 Bankruptcy Reforms on Credit Card Industry Profits and Prices." It purported to be a non-partisan, objective study on whether one of the primary stated goals of BAPCPA was being met: the increased availability of credit to consumers as a result of a BAPCPA-induced reduction in bad-debt losses to creditors.

BAPCPA's Goals
This legislative goal was the consistent theme of BAPCPA's proponents, from experts testifying in favor of the legislation before Congress to President Bush, as exemplified in his most substantive sentence promoting the the law in his statement at the bill signing photo op: "This new law will help make credit more affordable, because when bankruptcy is less common, credit can be extended to more people at better rates."

BAPCPA's Methods for Limiting Discharge of Debts
1) Broadened categories of nondischargeable debts.
2) Used means test to dismiss Chapter 7's or turn them into Ch. 13's.
3) Increased costs of filing--filing fees, attorney fees, debt counseling and debtor education.
4) Lengthened time between bankruptcy filings.

Reductions in Losses to Credit Card Creditors
1) Credit card creditors' losses from bad debt went down from 4.64% in 2005, to 3.48% in 2006, to 3.95% in 2007.
2) Although these differences may seem relatively small, these loss reductions translate to as much as $8.6 billion for 2006 and $5.8 billion for 2007.

Credit Card Fees
1) From 4/05 to 12/07--before and after BAPCPA--over-limit fees increased by 17%, and late fees increased by 5%, both continuing prior trends.
2) Annual fees continued to fall, as the most visible of all credit card fees.
3) Late charges and over-limit fees effect a significant portion of credit card accounts, 35% and 13%, respectively, in 2005.
4) The length of grace periods fell by 1.5% from 2005 to 2007.

Interest
1) From 4/05 to 12/07, the average annual percentage rate on credit cards increased by 8%, going from 17.7% to 19.1%.
2) During the same period the "risk-free rate," the interest charged on 5-year Treasury bills, decreased by 12%, going from 3.9% to 3.5%.
3) During this period, the spread between these two sets of rates increased by 14%, from 13.8% to 15.7%.

Credit Card Creditors' Profits
After a small reduction in annual pre-tax profits from about $32 billion in 2004 to about $30 billion in 2005, these creditors' profits increased in 2006 and 2007 to about $38 billion and $40 billion, respectively.

Conclusion
Even though the credit card creditors realized billions of dollars in savings from reduced losses during 2006 and 2007, the cost of credit went up instead of down, contrary to the prior arguments of BAPCPA's proponents. The credit card companies benefited in higher profits and did not make credit more available through lower costs.

How Did This Occur?
Why didn't competition force credit card creditors to use its reduced-loss savings to lower its costs to compete for customers?
1) Industry consolidation: from 1995 to 2005, the top 10 credit card issuers went from having 56% of the market to 87%. In 2007 the percentage went up to nearly 94%. (And based on this week's financial news, that consolidation is increasing by the day.)
2) "Switching costs"--the economic cost of transferring from one creditor to another--are high for the highest profit, financially distressed customers, those who accrue more late-charges and over-limit fees; these debtors' current credit card creditors have substantial more information on their customers and so can determine whether and when they will default on their debts much better than their competitors, making their customers a relatively captive market.
3) The relatively complex and non-transparent multi-tiered pricing structure of credit cards makes comparison shopping very difficult, with large percentages of consumers making economically detrimental decisions based on teaser-interest rates and low annual fees accompanied by many potential hidden costs.

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

There's An Absolute Right for a Debtor to Dismiss a Chapter 13 Case, Right? NO, the 9th Circuit Said on 9/24/08

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

Rosson v. Fitzgerald (In re Rosson), 9th Circuit Case No. 06-35724
Published 9/24/08

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. This Ninth Circuit Rosson opinion is very important because: 1) this specific question is one of first impression in this Circuit, 2) there is a conflict among other Circuits, 3) this opinion expressly overturned a long-standing Ninth Circuit BAP opinion, 4) the Court let stand the conversion in spite of the bankruptcy court's failure to provide the debtor the required notice and hearing on the matter, and 5) the Opinion provides a vague standard for determining when debtor's have a right to dismiss, but its very vagueness demands that it be understood in order to counsel clients on this issue.

The Usual Procedural Context

The way these conflicts--between the Chapter 13 debtor's right to dismiss and the court's power to convert to Chapter 7--tend to arise is that the court decides at some point to convert the case but the debtor then files a motion to dismiss before the conversion order is entered. In Rosson, the debtor had failed to pay to the trustee about $185,000 in proceeds from an arbitration. After about six weeks had passed since debtor had received these funds and been ordered to turn it over, at a hearing on, of all things, debtor's attorney's motion to withdraw as his attorney, the judge gave the debtor one hour to deliver the money or the case would be converted. The debtor instead filed a motion to dismiss the case, which the judge denied and he converted the case instead.

Overturned the 1994 Beatty BAP Opinion

The debtor in Rosson based his argument for the absolute right to dismiss on the well-known 9th Circuit BAP opinion, Beatty v. Traub (In re Beatty), 162 B.R. 853 (B.A.P. 9th Cir. 1994), which had clearly held that "[t]he better reasoned view is that a court must dismiss the case upon the debtor's request for dismissal under section 1307(b) if that request is made prior to the [formal] order converting the case to Chapter 7."

The Ninth Circuit's justification for overturning Beatty is a 2007 U.S. Supreme Court opinion, Marrama v. Citizens Bank of Massachusetts, 127 S.Ct. 1105, although that opinion 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."

But the Ninth Circuit in Rosson glossed over (in a brief footnote) the differences in language between § 1307(b) at issue in Rosson, and § 706(a) at issue in Marrama, especially § 1307(b)'s use of the mandatory "shall" (as in "[u]pon request of the debtor . . . the court shall dismiss a case under [Chapter 13]") and § 706(a)'s use of the permissive "may." The Rosson Court simply said that "[h]ere, the different formulations are not dispositive," without saying why not. This Court ironically hinges its rationale that these two different provisions are analogous on a 9th Circuit BAP opinion, Croston v. Davis (In re Croston), 313 B.R. 447, 450 (B.A.P. 9th Cir. 2004), which came after Beatty and which had EXTENDED the Beatty absolute right to dismiss a Chapter 13 under § 1307(b) to an absolute right to convert to Chapter 13 under § 706(a). In Rosson the Ninth Circuit reasoned that since Marrama had directly overturned Croston, and Croston had relied on Beatty, Marrama had logically invalidated Beatty as well. It held that "although Marrama did not address the exact issue decided in Beatty, it is clear that, after Marrama, Beatty . . . is no longer good law, insofar as it held that a Chapter 13 debtor has an absolute right to dismiss under § 1307(b)."

Denial of Notice and a Meaningful Hearing

The debtor in Rosson argued that §1307(c) requires "notice and a hearing" before "the court may convert a case" to Chapter 7. A hearing on a motion to convert was in fact already scheduled on the bankruptcy court's calendar for a few weeks later when the hearing on the debtor's attorney motion to withdraw occurred. At that hearing the judge learned about debtor's lack of compliance with his prior order to give the trustee the arbitration proceeds, he said he would convert the case if the debtor failed to turn over those proceeds within one hour. The debtor argued that he had no notice that the conversion issue would be heard at the hearing on his attorney's withdrawal, and no opportunity to present arguments or evidence on the issue.

The phrase "after notice and hearing" is defined in §102(1) of the Code, with the required notice and hearing needing only to be "as is appropriate in the peculiar circumstances."

In this Rosson case, as to the lack of effective notice that conversion would be raised at the earlier hearing, "the bankruptcy court was within its discretion to enter, with minimal or no notice, what it perceived as an emergency ruling to prevent dissipation of assets."

As to the lack of any meaningful opportunity to present legal arguments or evidence on the conversion, the Ninth Circuit acknowledged that the bankruptcy court should have scheduled a prompt hearing, to comply with §102(1) and §1307(c). But this was a "harmless error," with " no prejudice arising from the defective process" because at the subsequent hearing to reconsider debtor "offered nothing to counter the court's finding of bad faith."

The Vague Standard

So if the debtor's right to dismiss a Chapter 13 case is not absolute, what kind of "bad-faith conduct or abuse of the bankruptcy process" prevents dismissal? The debtor in Rosson argued unsuccessfully that his behavior was not the sort of "bad-faith conduct or abuse of the bankruptcy process" as in Marrama, which "involved a debtor who consciously lied to the court, attempted to remove assets from the court’s jurisdiction, and took efforts to conceal what he had done.” The Rosson Court quoted Marrama in laying out the unsatisfying standard: "the [Supreme] Court held that bankruptcy judges had the power to differentiate between 'the vast majority' 'of honest but unfortunate debtors who do possess an absolute right to convert their cases from Chapter 7 to Chapter 13' (and by analogy, an absolute right to dismiss their Chapter 13's) and 'the atypical litigant who has demonstrated that he is not entitled to the relief available to the typical debtor' ." So, THE BOTTOM LINE: Just ask your client if she is typical or atypical, and then you'll be able to advise her whether she still has an absolute right to dismiss her Chapter 13 case!

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 Good Are 9th Circuit BAP Opinions in Cases Arising Outside Oregon?

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 to anyone. 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 or should be read as being legal advice to anyone.

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

A while ago I asked an attorney I knew to be a conscientious bankruptcy practitioner a question I thought for sure he could answer: Are 9th Cir BAP opinions from federal districts outside Oregon binding in Oregon bankruptcy courts? His amusing answer: yes, if the Oregon judge who is hearing your local bankruptcy case currently serves on or has served on the Bankruptcy Appellate Panel, no, if she is or has not! After we both laughed he said that his joke was in fact at least partly based on his experience. The joke was also his way of delaying admitting that he really did not know the precedential value of non-Oregon 9th Circuit BAP opinions.

This seems like a rather important question for any Oregon bankruptcy attorney. Given the huge size of the 9th Circuit--57 million people, 9 states, 13 federal districts plus two territories--a huge proportion of the 9th Circuit's BAP opinions arise from cases outside of Oregon. For example, of the 15 opinions filed by the 9th Circuit BAP so far this year, none arose from Oregon. (10 of the 15 were from California, not surprising since California contains virtually 2/3rs of the population of the entire 9th Circuit!) Are all these non-Oregon cases binding on Oregon bankruptcy courts?

Here are some answers:

1) A Judge Alley opinion published in 2000:

Congress established the appellate panels in order to promote uniformity of decision within the circuits. It follows that BAP precedent should be followed by Bankruptcy Courts in the absence of any contrary authority from the District Court. In re Proudfoot, 144 B.R. 876, 878 (9th Cir. BAP (Or.) 1992).

Harry Ritchie’s Jewelers, Inc. v. Chlebowski (In re Chlebowski), 246 B.R. 639, 645 (Bankr. D.Or. 2000).

2) A Judge Dunn opinion published in 2001, following the opinion above and repeating its holding:

. . . Congress provided for the appointment of bankruptcy appellate panels in order to promote greater uniformity of bankruptcy decision making within the circuits. Accordingly, bankruptcy appellate panel decisions should be followed by the bankruptcy courts so long as there is no contrary local district court authority,

In re Platt, 270 B.R. 773, 775 (Bankr. D.Or. 2001).

3) The most extensive recent local bankruptcy court opinion's discussion on the subject that I could find is another Judge Alley opinion, this one, from March 2007. It is surprisingly unpublished, perhaps because the judge explicitly said he would have ruled oppositely on the merits but for a BAP opinion that he felt bound to follow. After citing the above two opinions, Judge Alley stated:

The Doctrine of stare decisis advances two important principles: the uniformity of case law throughout a jurisdiction, and the resulting predictability of results required in order to ensure fairness of the judicial process to litigants. As a matter of fundamental fairness to parties before it, a trial court must strive to apply the law as it is held by courts which may review its decisions. Otherwise, parties will often be forced to the trouble and expense of an appeal to achieve a lawful result whenever the trial court disagrees with the higher court’s view of the law. Rules of comity and stare decisis are essentially corollaries of this basic rule.

In this case, there is appellate authority from the BAP that is directly on point. There is no decision from any Oregon District Court judge addressing the issues before the Court at present. . . . . It is one thing to say that District Court authority somehow

outweighs the BAP’s where the two conflict; it is quite another to say that, where the District Court has been silent, the Bankruptcy Courts are free to disregard the opinions of the BAP. Such a rule would seriously undermine the BAP’s role in promoting uniformity in the law in this Circuit.

I hold that where the Bankruptcy Appellate Panel has issued an opinion applicable to the facts before the Bankruptcy Court, and there is no District Court opinion applicable to those facts, the Bankruptcy Appellate Panel’s opinion is binding.

In re Vue, Case No. 05-66116-fra13, 3/16/2007. (Click on the link to this opinion to see Judge Alley's dicta about potential conflicts between District Court and BAP opinions, in footnote 3 at the very end of his "Discussion and Analysis".)

BOTTOM LINE: All three opinions tell us that, unless our own U.S. District Court in its appellate role has spoken differently (and it's not clear what happens with that conflict) Oregon bankruptcy courts ARE bound by all those originating-away-from-Oregon BAP opinions, yes even all those ones from California!

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 to anyone. 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 or should be read as being legal advice to anyone.

© 2008 Bankruptcy Litigation Support for Attorneys

ALERT: California's § 703.140 Exemptions Are Unconstitutional Violation of Supremacy Clause, According to Non-Binding Arizona B'cy Court 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 to anyone. 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 or should be read as being legal advice to anyone.

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

At least one of the Eugene Chapter 7 trustees has asserted that he will begin challenging debtors' uses of one of the two sets of California property exemptions, the one in California Code of Civil Procedure § 703.140(b). His legal basis for this is a published opinion of the Arizona Bankruptcy Court, In re Regevic, 389 B.R. 736, dated June 24, 2008, which invalidated that bankruptcy-only set of exemptions as contrary to the Supremacy Clause. Since this opinion is not binding in Oregon, it is unclear how many trustees will try asserting this position, but at the very least practitioners should be aware of this possibility and perhaps consider using the alternative set of exemptions, in California Code of Civil Procedure § 704.010ff.

This Arizona opinion and the fact that a trustee is asserting it comes to us courtesy of Eugene Attorney, Kim Covington, of Shlesinger & deVilleneuve Attorneys PC, who first posted an alert about this on the Debtor-Creditor Section's Discussion list serve on 9/10/08. She says, "With BAPCPA's change to the 730-day rule for determining the which state's exemptions to apply, this Arizona bankruptcy court opinion about California exemptions is very pertinent in Oregon, given how often our clients relocate to and from California."

The 730-day rule of § 522(b)(3)(A), requires the use of the California exemptions if a debtor was not domiciled in Oregon during all of the 730 days before filing and was domiciled in California during the 180-day period immediately before that 730 days (or more during those 180 days than any other state).

Covington further notes , "According to the bankruptcy judge in Regevig, there is a complicated history of how California came up with its double exemption scheme, which includes the legislature reacting once before to the nullification of a prior statute because of the federal Supremacy Clause. The Arizona judge quotes a prior opinion calling the current scheme a 'comedy of errors.' Practically speaking, there are major differences between these two California exemption regimens, with neither one necessarily more favorable to all debtors. For example, the bankruptcy-only exemptions in § 703.140(b) have a significant wild card exemption which the Section 704 set of exemptions do not, but the latter is much more generous in many of the specific exemption categories."

Covington's bottom line: "With your California exemption clients, consider just using the § 704.010ff exemptions if they adequately cover the assets, thereby avoiding the risk of trustee challenge under Regevig. And if the client needs the big wild card exemption or anything else in § 703.140(b), first check around to see whether your local trustees are raising the issue."

Based on the most recent information in other authoritatively sounding websites, there will not be an appeal of the Arizona bankruptcy judge's decision in Regevig: the debtors Matthew and Angelia Regevic, after first filing a notice of appeal, have now settled with their Chapter 7 trustee. But this Regevic opinion is hardly the last word.

Because this is by no means a one-sided debate. Notwithstanding the peculiarities of California's scheme, double exemption schemes are not rare among the states, where one set of exemptions are available only to those filing bankruptcy. And perhaps the most recent bankruptcy court to address this same issue has ruled just last month in the opposite direction of Regevig, that West Virginia's bankruptcy-only exemptions do NOT violate the federal Supremacy Clause. In re Morrell, Case No. 08-519 (Bankr. N.D.W.V Aug. 14, 2008). This Court's analysis is much more detailed than Regevig's, citing numerous opinions and even a law review article on each sides of the issue. Because of its thoroughness, Morrell is required reading for anyone wanting to dig further into this arena.

Some California trustees are gearing up to challenge the § 703.140(b) exemptions in the wake of Regevig, with debtors' attorneys there poised to fight back, so it seems inevitable that eventually there will be another, this time binding, appellate opinion addressing this. In the meantime, any debtors' attorney who is inclined to push back against any of our Oregon trustees challenging California's § 703.140(b) bankruptcy-only exemptions, either informally or in litigation, there is plenty of grist for that mill.

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 to anyone. 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 or should be read as being legal advice to anyone.

© 2008 Bankruptcy Litigation Support for Attorneys