Can a Creditor Challenging Ch. 7 Dischargeability "Go Behind" a State Court Settlement Agreement to the Underlying Fraudulent Allegations?

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

Archer v. Warner
538 U.S. 314 (2003)

An unpublished memorandum of the Ninth Circuit BAP of a few months ago, Weilert v. Parker (In re Weilert), looked at "the dischargeability of a debt in bankruptcy where the debtor may have committed fraud but the alleged fraud claim has been settled before the debtor’s bankruptcy filing." In this memorandum the BAP relied heavily on the 2003 U.S. Supreme Court decision of Archer v. Warner. So instead of discussing a recent but non-binding BAP decision, this Bulletin presents this important (and of course binding!) Supreme Court decision.

The Supreme Court's Statement of the Issue and its Holding
Can the language of § 523(a)(2)(A) of the Bankruptcy Code excluding a debt from discharge "to the extent" it is "for money . . . obtained by . . . false pretenses, a false representation, or actual fraud" also exclude from discharge "a debt embodied in a settlement agreement that settled a creditor's earlier claim 'for money . . . obtained by . . . fraud'?" In other words, can the bankruptcy court look behind a settlement agreement to allegations that the settled debt was based on fraud, if that settlement agreement was honestly entered into by both parties and made no reference to any fraud claim? Or does the settlement act as a kind of "novation" which replaces the original fraud-induced debt with a new non-fraud-induced, and therefore dischargeable, debt?

The Court concluded that the "settlement agreement and releases may have worked a kind of novation, but that fact does not bar the [creditors] from showing that the settlement debt arose out of 'false pretenses, a false representation, or actual fraud,' and consequently is nondischargeable." Thus, although the settlement documents--here a settlement agreement and promissory note--fully resolved the state law claims leaving only the debt agreed to in those documents, the Court held that the bankruptcy court could look beyond the record of the state court proceeding and those settlement documents in order to decide whether the debt at issue was a debt for money obtained by fraud. This holding reversed the decisions of the bankruptcy court, the district court, and the Fourth Circuit Court of Appeals.

The Facts and Decisions Below
Court outlined the facts as follows:

(1) A sues B seeking money that (A says) B obtained through fraud; (2) the parties settle the lawsuit and release related claims; (3) the settlement agreement does not resolve the issue of fraud, but provides that B will pay A a fixed sum; (4) B does not pay the fixed sum; (5) B enters bankruptcy; and (6) A claims that B’s obligation to pay the fixed settlement sum is nondischargeable because, like the original debt, it is for “money . . . obtained by . . . fraud.

To add a touch of helpful detail, A, the Archers, purchased a business from B, the Warners, and then just a few months later sued the Warners for, among other claims, fraud related to the sale. The parties settled the lawsuit with an agreement that the Warners would pay the Archers $300,000, and would receive a release as "to any and all claims . . . arising out of this litigation, except as to amounts set forth in [the] Settlement Agreement.” The Warners paid the Archers $200,000 and gave them a promissory note for the remaining $100,000. The parties signed releases “discharg[ing]” each other “from any and every right, claim, or demand” that the others “now have or might otherwise hereafter have against” them, “excepting only obligations under” the promissory note and related instruments. The Archers then dismissed the lawsuit with prejudice.

A few months later the Warners defaulted on their first payment on the promissory note and filed a Chapter 7 bankruptcy case. The Archers filed an adversary proceeding to declare the $100,000 nondischargeable under § 523(a)(2)(A). The bankruptcy court found the debt dischargeable, the District Court affirmed, and the Court of Appeals, in a 2-1 split decision, also affirmed.

The Precedent: Brown v. Felsen
The difference in this 7-2 decision between the majority and the dissent was that the majority found the Court's 1979 opinion, Brown v. Felsen, 442 U.S. 127, applicable here in spite of factual differences, while the dissent distinguished the Brown case because of those factual differences. Brown also involved a debt allegedly obtained through fraud, a suit by the creditor in state court to collect that debt, a subsequent bankruptcy filing by the debtor, and the creditor seeking a declaration of nondischargeability. But in Brown that debt had not been resolved by settlement but rather "the state court entered a consent decree embodying a stipulation" that the debtor would pay creditor a certain amount. As in the present case, the documents that resolved the state court lawsuit did not make any mention that the underlying allegations were based on fraud.

The Court interpreted Brown to have held that

[c]laim preclusion did not prevent the Bankruptcy Court from looking beyond the record of the state-court proceeding and the documents that terminated that proceeding (the stipulation and consent judgment) in order to decide whether the debt at issue (namely, the debt embodied in the consent decree and stipulation) was a debt for money obtained by fraud.
. . . .
The reduction of Brown’s state-court fraud claim to a stipulation (embodied in a consent decree) worked the same kind of novation as the “novation” at issue here.
. . . .
The dischargeability provision applies to all debts that “aris[e] out of” fraud. [Citations excluded.] A debt embodied in the settlement of a fraud case “arises” no less “out of” the underlying fraud than a debt embodied in a stipulation and consent decree.

Most importantly the Court reasoned that "what has not been established here, as in Brown, is that the parties meant to resolve the issue of fraud or, more narrowly, to resolve that issue for purposes of a later claim of nondischargeability in bankruptcy." The Court's majority opinion relied on its understanding that the settlement did not resolve these issues, in spite of language in the releases "discharg[ing] the [subsequent debtors] "from any and every right, claim, or demand" that the [subsequent creditors] "now have or might otherwise hereafter have against" them, other than the settlement obligation).

Critical Issues NOT Decided
A careful reading of the decision here reveals this important limitation: although in Brown the Court had specifically held, as described by the Court here in the quotation above, that claim preclusion did not stop the bankruptcy court from looking to the facts beyond the state court stipulation and judgment, in contrast here the Court was able to sidestep both claim and issue preclusion issues and remand them to the Circuit Court. The claim preclusion argument by the debtor was "that the settlement agreement and releases . . . included a promise that [the creditor] would not make the present claim of nondischargeability for fraud." The issue preclusion issue was that because the creditor "dismissed the original fraud action with prejudice, [state] law treats the fraud issue as having been litigated and determined in [debtor's] favor, thereby barring the [creditors] from making their present claim . . . ." The Court said "that the Court of Appeals did not determine the merits of either argument, both of which are, in any event, outside the scope of the question presented and insufficiently addressed below." It remanded for the Circuit Court "to determine whether such questions were properly raised or preserved, and, if so, to decide them." It left unresolved not only "whether the parties intended their agreement and dismissal to have issue-preclusive, as well as claim-preclusive, effect," but also "to what extent such preclusion applies to enforcement of a debt specifically excepted from the releases." Thus the Court's holding was more limited than may appear without close analysis.

The Bottom Line
Although this Court held that settlement agreements do not necessarily preclude creditors from getting bankruptcy courts to look behind them to debtors' alleged fraudulent conduct, that alleged conduct may well be able to be precluded with sufficiently specific language in settlement agreements together with state law which supports the preclusive effect of such specific language. To turn the Court's language around, if "the parties [made clear in their settlement documents that they] meant to resolve the issue of fraud or, more narrowly, to resolve that issue for purposes of a later claim of nondischargeability in bankruptcy," the creditor would seem not to be able to raise the fraud issue after all.

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 Rising Chorus for Using Bailout Funds for Mortgage Relief

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

This month has seen a wave of criticism about the Treasury Department's use of the first $350 billion authorized by the Emergency Economic Stabilization Act, the "bailout" enacted on October 3, 2008. This has included a GAO (Government Accountability Office) report on December 2 entitled "Troubled Asset Relief Program: Additional Actions Needed to Better Ensure Integrity, Accountability, and Transparency." Much of the criticism has focused on the seeming lack of attention to the residential foreclosure problem that some see as the heart of our economic troubles.

On December 4, Federal Reserve Chairman Ben Bernanke urged using more governmental funds in new ways to prevent home foreclosures, saying "“More needs to be done,” . . . . “Policy initiatives to reduce the number of preventable foreclosures should be high on the agenda.”

On December 8, House Financial Services Committee chairman Barney Frank (D-Mass) threatened to withhold further bailout funds unless there was some direct relief provided in it for foreclosure relief: "They're not going to get the [funds] unless they get very serious about the foreclosure modifications and showing us how we're going to get some lending out of the banks" . . . . "At this point I don't see that happening."

On December 10, the Congressional Oversight Panel established by the Emergency Economic Stabilization Act released its first report listing a series of key questions which will guide its oversight work. One of the top questions in this 38-page report: "Is [Treasury's] Strategy Helping to Reduce Foreclosures?" The subsidiary questions within this broader one:

What steps has Treasury taken to reduce foreclosures? Have those steps been effective? Why has Treasury not generally required financial institutions to engage in specific mortgage foreclosure mitigation plans as a condition of receiving taxpayer funds? Why has Treasury required Citigroup to enact the FDIC mortgage modification program, but not required any other bank receiving TARP funds to do so? Is there a need for additional industry reporting on delinquency data, foreclosures, and loss mitigation efforts in a standard format, with appropriate analysis? Should Treasury be considering other models and more innovative uses of its new authority under the Act to avoid unnecessary foreclosures?

The Oversight Panel's report spells out in detail its concerns about each of these questions.

On the day of this report's release the Panel's outspoken chair, Harvard professor Elizabeth Warren, made clear her perspective in an interview on the public radio business program Marketplace:

There has to be an overall notion that we're going to deal with the genuine economic problems in the United States right now. So, for example, we're having a problem -- a real, visible problem -- in the housing market right now. And we've got, potentially, $700 billion commitment of American dollars out there for which, right now, it's not being used. There's not even a hint that it's going to be used to address any part of that problem. That tells me there's not a coherent strategy here. You know, if the American family fails, then there won't be any banks to save.

Earlier this week House Speaker Pelosi joined these other voices for using the bailout funds for mortgage relief. She asserted that the Administration has "totally ignored" provisions of the Emergency Economic Stabilization Act to help reduce mortgage foreclosures, saying: "Absolutely nothing has been done to respect that part of the legislation." She said that legislation is under consideration that would condition the release of more bailout funds on more direct efforts in this area.

Lastly, at a news conference earlier this month, President-Elect Obama responded to a question about the use of the bailout funds by referring to the foreclosure issue without prompting:

One last component of that that I think has to be emphasized, and I've said this before, we've got to start helping homeowners in a serious way prevent foreclosures. The deteriorating assets in the financial markets are rooted in the deterioration of people being able to pay their mortgages and stay in their homes. And if we help Main Street, ultimately we're going to help Wall Street. So that's an area that I'm particularly interested in.

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

Are Pre-Petition Income Tax Refunds Which Debtors Had Irrevocably Elected to Apply to Future Tax Liabilities Nevertheless Still Estate Assets?

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

Nichols v. Birdsell
Ninth Circuit Case No. 05-15554
May 9, 2007

Issue of First Impression for Ninth Circuit
Are pre-petition income tax refunds which debtors had irrevocably elected on their tax returns to apply to the next year's taxes assets of their bankruptcy estate? Or as the Court put it, does "debtors’ pre-bankruptcy application of their right to tax refunds to post-bankruptcy tax obligations constitutes an asset that must be turned over to the bankruptcy trustee pursuant to the Bankruptcy Code, 11 U.S.C. § 542?"

Facts and Procedural Status
Debtors overpaid state and federal personal income taxes for 2001, and instead of requesting tax refunds they elected to apply these overpayments to future tax liabilities. Within days of making that election early in 2002, debtors filed a bankruptcy (presumably under Chapter 7 although the opinion does not say so explicitly). A year later, after disregarding the trustee's demand to pay the amount of these overpayments to the estate, the debtors sought to apply the overpayments to their 2002 state and federal tax liabilities. The trustee filed an adversary proceeding for recover of the overpayments, "arguing that the Debtors’ interest in the tax overpayments was property of the bankruptcy estate pursuant to 11 U.S.C. § 541 that must be turned over to the Trustee under section 542." The bankruptcy court agreed, granting summary judgment for trustee, and the district court affirmed.

Debtors' Argument
The debtors pointed to §§ 6402(b) and 6513(d) the Internal Revenue Code which provides, as the Court worded it, for an "irrevocable election applying an overpayment of taxes to the subsequent year’s tax obligation." Thus with their election, they argue, the character of the overpayments changed into estimated payments for the 2002 tax liabilities, leaving nothing in their estate at the time of their bankruptcy filing. After their irrevocable election debtors had no ability to get the funds back from the IRS (presumably also from the state), and so that also "prevents the bankruptcy estate from asserting any right to the funds."

The Code Sections
§ 541, entitled "Property of the estate," describes "property" as “all legal or equitable interests of the debtor in property as of the commencement of the case.”

§ 542, entitled "Turnover of property to the estate," states in pertinent part:

an entity . . . in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.

The Rationale
As an issue of first impression in the Ninth Circuit (and perhaps in many other Circuits as well since the Court did not cite any other Circuit's opinions), this opinion relied very heavily on its own 2000 opinion In re Feiler, 218 F.3d 948, in the context of net operating loss carrybacks and carry forwards. In that case the debtors elected not to exercise their option to carry back their net operating losses and create a current tax refund (of $280,000!) but rather elected to carry these losses forward to reduce tax liabilities in future tax years. The IRS there refused to refund these funds to the bankruptcy trustee on the grounds that the debtors' election was irrevocable, the trustee sued the IRS, the bankruptcy court granted summary judgment in favor of the trustee, and the Ninth Circuit upheld that judgment. The Court here acknowledged that Feiler differs from the instant case not only that it involves different tax elections, but also that it dealt with the trustee's powers to avoid debtor's tax election as a fraudulent transfer under § 548 instead of whether the prepayment of taxes from prior tax years constitutes estate property under § 542. Yet the Court focused on its broad definition of "property" in Feiler, having held there that “[b]ecause the right to receive a tax refund constitutes an interest in property, . . . the election to waive the carryback and relinquish the right to a refund necessarily implicates a property interest.” And it recalled that Feiler had relied on a 1966 U.S. Supreme Court case, Segal v. Rochell, 382 U.S. 375, for the point that "the term property has been construed most generously and an interest is not outside its reach because it is novel or contingent or because enjoyment must be postponed.”

The Holding
From this the Court held that the debtors' inability to get the overpayments back from the IRS because of their irrevocable election does not prevent those overpayments from being assets of the bankruptcy estate. Estate assets include all debtors' interests "even in circumstances in which the interest cannot be liquidated and transferred by the debtor."

In light of the expansive definition of property contained in the Bankruptcy Code and our broad interpretation of “property” under Feiler, we hold that this credit toward future taxes constituted estate property at the time the Debtors filed for bankruptcy.

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

Elizabeth Warren: From Bankruptcy CLE Speaker to the National Limelight as Chair of the Congressional Oversight Panel for Economic Stabilization

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

For years bankruptcy practitioners have known Elizabeth Warren, a professor at Harvard Law School, as a regular speaker at bankruptcy CLE's all over the country. But last month she stepped into an infinitely more visible role by accepting a position on the 5-member Congressional Oversight Panel for Economic Stabilization ("COP"), and then at its first meeting a few days later being elected the Panel's chair. She has in the weeks since then become the very public face of this new assertively public body.

COP's Establishment
COP was mandated by the Emergency Economic Stabilization Act, the $700 billion "bailout," enacted on October 3, 2008. The five members of the panel are each appointed, respectively, by the House speaker, the House Republican leader, the Senate Democratic leader, the Senate Republican leader, and one jointly by the House speaker and the Senate majority leader. This gave Democrats a 3-2 majority in choosing members.

A recent press release lays out COP's mandate and its work thus far:

Section 125 of EESA created the Congressional Oversight Panel to “review the current state of financial markets and the regulatory system” and gave the Panel power to hold hearings, review official data, and write reports that review the TARP program and provide recommendations for regulatory reform. In November, Congressional Leaders began appointing Panel members, and the Panel’s first meeting was held on November 26, 2008. In the two weeks since the first meeting, Panel members met with representatives of the Treasury Department, the Federal Reserve Bank, and the GAO.

The First Report
Although its first members were only appointed in mid-November (John Sununu, the Republican former Senator from New Hampshire, was just appointed on December 17), it has already issued a 38-page report: Questions About the $700 Billion Emergency Economic Stabilization Funds.

As Elizabeth Warren stated in the accompanying press release on December 10:

We are here to get answers to the questions Americans have a right to ask: who got the money, what have they done with it, and how has it helped this country? . . . . This first report not only lays out the questions that will drive the Panel’s work, but demonstrates our determination to bring a broad spectrum of independent input and expertise to ensure that public actions are built on firm foundations that will help stabilize markets and strengthen our economy for America’s families.

The Report includes in its introductory remarks a helpful summary of the use of the "bailout" funds so far:

Treasury has used its authority under the Act to provide 87 banks with $165 billion in exchange for preferred stock and warrants. Treasury further used its authority to provide AIG with $40 billion in exchange for preferred stock and warrants, and to provide Citigroup with an further $20 billion in preferred stock and warrants. As part of a program to guarantee approximately $306 billion in Citigroup's troubled assets, Treasury receives [sic] $4 billion of Citigroup preferred stock and warrants. Together these disbursements constitute approximately $1,900 per American family, or almost 3% of the typical family's pre-tax income.

The ten questions discussed in detail in the report are:
1. What is Treasury’s strategy?
2. Is the Strategy Working to Stabilize Markets?
3. Is the Strategy Helping to Reduce Foreclosures?
4. What Have Financial Institutions Done with the Taxpayers’ Money Received So Far?
5. Is the Public Receiving a Fair Deal?
6. What is Treasury Doing to Help the American Family?
7. Is Treasury Imposing Reforms on Financial Institutions that are taking Taxpayer Money?
8. How is Treasury Deciding Which Institutions Receive the Money?
9. What is the Scope of Treasury’s Statutory Authority?
10. Is Treasury Looking Ahead?

The Panel approved the first report with a 3-1 vote on December 9, with the Republican Congressman Jeb Hensarling of Texas dissenting. (John Sununu had not yet been appointed to the Panel.)

Future Oversight Activities
According to its first Report, "COP will hold a series of field hearings to shine light on the causes of the financial crisis, the administration of TARP, and the anxieties and challenges of ordinary Americans." The first of these is to be held on December 16 in Las Vegas, one of the cities hardest hit by residential foreclosures.

In January 2009 "COP will release two public reports," on January 10 one "that examines the administration of the TARP program, including the impact on the economy to date," and on January 20, one "providing recommendations for reforms to the financial regulatory structure." Its establishment statute requires the Panel to issue reports to Congress during every 30 days of its existence, which is currently scheduled to be until

COP just started a public website to provide resources about its efforts, and to give opportunity for citizens to provide input.

Warren's Press Offensive
Warren has in the last week been appearing on national radio shows publicizing this report and COP's work, including National Public Radio's Fresh Air and American Public Media's Marketplace. She concluded her remarks in the December 10 Marketplace interview as follows, clearly presenting her own concerns and the seriousness of the problem:

There has to be an overall notion that we're going to deal with the genuine economic problems in the United States right now. So, for example, we're having a problem -- a real, visible problem -- in the housing market right now. And we've got, potentially, $700 billion commitment of American dollars out there for which, right now, it's not being used. There's not even a hint that it's going to be used to address any part of that problem. That tells me there's not a coherent strategy here. You know, if the American family fails, then there won't be any banks to save. This isn't about saving banks individually. Ultimately, this is about saving our economy, saving our country. But most of all, saving our people.

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

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

© 2008 Bankruptcy Litigation Support for Attorneys

The Ninth Circuit BAP Gap in Published Opinions; Its Last Three Unpublished but Citeable Memoranda

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

The Ninth Circuit Bankruptcy Appellate Panel has not published an opinion since early August, more than four months ago. (For a summary of that most recent opinion see my Litigation Report entitled The "Law of the Case" Doctrine Applied in the Most Recent 9th Circuit BAP Opinion, Written by Judge Dunn.) This is surprising because in 2008 before August and throughout 2007 the largest gap in published opinions was only about six weeks. In fact, throughout 2005 and 2006 not a single month passed without at least one published opinion. Furthermore, during the calendar years 2005, 2006 & 2007, the BAP published no less than 32 published opinions. So far this year--half-way through December--it has published only 15. A phone call to the BAP Clerk's Office in Pasadena, California asking about this yielded a slightly defensive retort to the effect that "well, we are generating many unpublished memoranda opinions," without any admission of an uncharacteristic gap in published opinions. There seems to be more to this story, and if there is anything newsworthy about it I will report it in a future Bulletin. In the meantime, here are short summaries of the three most recent BAP unpublished but still potentially very valuable memoranda, all from November 2008, two of which had Oregon's Judge Randall Dunn on the three judge panel.

Citeability of the BAP's Unpublished Memoranda

The following cautionary note introduces these memoranda on the Court's website: "All memoranda are unpublished. Memoranda issued before January 1, 2007 may not be cited to or by the courts of this circuit except under the limited circumstances specified in Ninth Circuit BAP Rule 8013-1(c). In accordance with Federal Rule of Appellate Procedure 32.1, memoranda issued on or after January 1, 2007 may be cited without restriction."

Federal Rules of Appellate Procedure Rule 32.1 is titled "Citing Judicial Dispositions" and states in full:

(a) Citation Permitted. A court may not prohibit or restrict the citation of federal judicial opinions, orders, judgments, or other written dispositions that have been:
(i) designated as “unpublished,” “not for publication,” “non-precedential,” “not precedent,” or the like; and
(ii) issued on or after January 1, 2007.

Each of the BAP's unpublished memoranda included here have the following as their first footnote:
"This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. See 9th Cir. BAP Rule 8013-1."

In turn, the most pertinent part of 9th Cir. BAP Rule 8013-1 is subsection (c) stating: "Unpublished memoranda and orders have no precedential value and may not be cited except when relevant under the doctrines of law of the case, res judicata, or collateral estoppel." (The rest of the Rule has aspects of interest not directly relevant here, such as the criteria for determining whether a BAP's decision becomes a published opinion or instead an unpublished memorandum, and the procedure to request that a memorandum be turned into an opinion--see the entire Rule 8013-1 at the end of this Bulletin.)

So, under Rule 32.1 of the Federal Rules of Appellate Procedure all unpublished but written dispositions of any federal court since the beginning of 2007 may be cited, but under the 9th Cir. BAP Rule 8013-1(c) citation seems not to be permitted except in the very limited contexts of "the doctrines of law of the case, res judicata, or collateral estoppel."

However the indicated footnote then says that particular case "may be cited for whatever persuasive value it may have," seemingly contradicting the restriction of the BAP Rule. Perhaps the answer is in 9th Cir. Rule 36-3 (a) and (b):

Citation of Unpublished Dispositions or Orders
(a) Not Precedent: Unpublished dispositions and orders of this Court are not precedent, except when relevant under the doctrine of law of the case or rules of claim preclusion or issue preclusion.
(b) Citation of Unpublished Dispositions and Orders Issued on or after January 1, 2007: Unpublished dispositions and orders of this court issued on or after January 1, 2007 may be cited to the courts of this circuit in accordance with Fed. R. App. P. 32.1.

The bottom line: Citation is permitted to unpublished memoranda for persuasive value--9th Cir. Rule 36-3 (b) trumps any seeming contradiction arising out of 9th Cir. BAP Rule 8013-1(c). The best proof: see footnote 6 in the BAP's own unpublished memorandum in Olympic Coast Investment v. Crum (In re Wright) below, in which the BAP itself cites a Ninth Circuit "unpublished non-precedential decision" "for its persuasive value." Even though the BAP's use of that Ninth Circuit decision was technically governed by 9th Cir. Rule 36-3 (b) instead of 9th Cir. BAP Rule 8013-1(c), I believe the BAP would endorse the use of its own unpublished memoranda in the same fashion.

The Three November 2008 Memoranda

Jared v. Keahey (In re Keahey)
BAP No. WW-08-1151-PaJuKa
November 3, 2008

Issue: Did the bankruptcy court err in "finding that a creditor’s attorney committed the tort of outrage and violated his fiduciary duties as a deed of trust trustee in connection with his repeated, abusive attempts to collect a debt secured by the debtor’s home"?
Holding: "The bankruptcy court did not err in finding that [creditor] committed the [Washington state] tort of outrage," in that 1) the conduct at issue was "extreme and outrageous," "the infliction was intentional or reckless," and the recipient "suffered extreme emotional distress" as a result of the conduct.

Olympic Coast Investment v. Crum (In re Wright)
BAP No. MT-08-1164-MoDH
November 3, 2008

Issue: Does a Chapter 7 trustee's distribution to creditors render as moot the appeal by a creditor which did not receive any payment through that distribution? Specifically, if that 7 trustee proposed and received a court order, over an undersecured creditor's objection, to make a final distribution paying nothing to that undersecured creditor because it had filed a proof of claim failing to specify the amount of the unsecured portion, and never filed an amended proof of claim so specifying, would the creditor's appeal of the distribution order be moot if it did not seek to stay the distribution order pending the appeal and the distribution to creditors occurred while the appeal was pending?
Holding: The BAP held that it lacks jurisdiction over appeals that are moot, and this case was "equitably moot" in that the appellant failed "to pursue their available remedies to obtain a stay of the objectionable orders of the Bankruptcy Court" and so allowed "such a comprehensive change of circumstances to occur as to render it inequitable ... to consider the merits of the appeal." The court also stated that, had it not dismissed the appeal as equitably moot, it would rule on the merits that "a trustee does not have to make distributions to an undersecured creditor who did not amend its claim to assert or estimate the unsecured portion."

Kosmala v. Cook (In re Cook)
BAP No. CC-08-1091-HMoD
November 3, 2008

Issue: Was a debtor's interest in a trust property of his Chapter 7 estate? Particularly, did debtor acquire an interest in trust property under § 541(a)(5)(A) as a "bequest, devise or inheritance" acquired within 180 days of the Chapter 7 filing, since most of the trust assets were transferred to the trust by his mother's will, or instead is debtor's interest in the trust property excluded from property of the Chapter 7 estate because his interest merely vested at the time of the mother's death. § 541(a)(5) includes in the bankruptcy estate “any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date-- (A) by bequest, devise, or inheritance."

Holding: Looking to state law to define debtor's interest in the trust, on the facts here under California law the trust was not a testamentary trust but rather an inter vivos one, and the devise of the assets to the trust through the will did not make the trust testamentary. "[T]the Properties were devised through a pour over provision to the Trust, not to the Debtor. The Debtor was a
contingent beneficiary of the Trust at the date of his bankruptcy filing and had no direct interest in the Properties." The BAP affirmed the decision of the bankruptcy court.

____________________________________________________________________________________________________

Rule 8013-1
DISPOSITION OF APPEAL
(a) OPINION or MEMORANDUM. The Panel may determine that a written disposition of a matter before the Panel will be designated an OPINION if it:
(1) Establishes, alters, modifies or clarifies a rule of law;
(2) Calls attention to a rule of law which appears to have been generally overlooked;
(3) Criticizes existing law; or
(4) Involves a legal or factual issue of unique interest or substantial public importance.
A written disposition of a case not designated for publication will be captioned a MEMORANDUM.
(b) PUBLICATION. Publication of a final disposition means the BAP Clerk will release a copy to recognized channels for dissemination. Only opinions, and orders designated for publication by the Panel, will be published.
(c) CITATION. Unpublished memoranda and orders have no precedential value and may not be cited except when relevant under the doctrines of law of the case, res judicata, or collateral estoppel.
(d) REQUEST FOR PUBLICATION. Any party may request, by letter, that the Panel publish a memorandum. The request must be received no later than 30 days after the filing of the memorandum and must state concisely the reasons for publication.

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

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

© 2008 Bankruptcy Litigation Support for Attorneys

Judge Kozinski-led Ninth Circuit Panel Denies Petition for En Banc Rehearing: Espinosa, Major Student Loan Opinion Still Stands

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


Espinosa v. United Student Aid Funds, Inc.
9th Circuit No. 06-16421
Originally filed October 2, 2008, Amended December 10, 2008
Order Amending Opinion, and Amended Opinion



The Original Opinion
The day after the Ninth Circuit originally released this opinion, I wrote the following entitled Bulletin:

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

That Bulletin started as follows:

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 [en banc]10th Circuits.

The Amended Opinion
Now just released yesterday is this Order Amending Opinion, and Amended Opinion which is unusual in two respects.

1) The Amendments
First, there are an unusual number of amendments to the original opinion. Characteristically, there are one or two corrections or insertions when an opinion is amended. Here, there are seven, covering two full pages. I am speculating, but given that the author is the idiosyncratic Chief Judge Kozinski, and the opinion goes against the grain of other Circuit opinions, including an en banc one, the good judge decided to try to tweak his arguments to try to present the best case for when the argument eventually lands in the Supreme Court.

2) Denial of Petition for Rehearing En Banc
Second, the Order Amending Opinion concludes as follows:

The petition for rehearing en banc is denied. See Fed R. App. P. 35. No further petitions may be filed and all pending motions are denied.

Fed R. App. P. 35 states in pertinent part as follows:

Rule 35. En Banc Determination

(a) When Hearing or Rehearing En Banc May Be Ordered.

A majority of the circuit judges who are in regular active service and who are not disqualified may order that an appeal or other proceeding be heard or reheard by the court of appeals en banc. An en banc hearing or rehearing is not favored and ordinarily will not be ordered unless:

(1) en banc consideration is necessary to secure or maintain uniformity of the court’s decisions; or

(2) the proceeding involves a question of exceptional importance.

(b) Petition for Hearing or Rehearing En Banc.

A party may petition for a hearing or rehearing en banc.

(1) The petition must begin with a statement that either:

(A) the panel decision conflicts with a decision of the United States Supreme Court or of the court to which the petition is addressed (with citation to the conflicting case or cases) and consideration by the full court is therefore necessary to secure and maintain uniformity of the court’s decisions; or

(B) the proceeding involves one or more questions of exceptional importance, each of which must be concisely stated; for example, a petition may assert that a proceeding presents a question of exceptional importance if it involves an issue on which the panel decision conflicts with the authoritative decisions of other United States Courts of Appeals that have addressed the issue.

Note that the Rule in the last sentence above in effect defines "questions of exceptional importance" in such a way that it seems highly applicable to this panel opinion. As stated in my quote from my Bulletin on the original opinion, this Espinosa "panel decision" clearly "conflicts with authoritative decisions of other United States Courts of Appeals that have addressed the issue." Yet Judge Kozinski denies the petition for rehearing en banc summarily, without any explanation whatsoever why this is not "a question of exceptional importance," how it does not conflict with other Courts of Appeals "authoritative decisions" when it so plainly does so.

I finished the earlier Bulletin on the original opinion with a section entitled "Not Need En Banc Review," which stated:

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.

ConcIusion
I finished my earlier Bulletin with:

[Judge Kozinski] 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.

Now in Judge Kozinski's (and his fellow 3-judge panel mates') summary denial of the petition for rehearing en banc and his sprucing up of the opinion with his amendments, he is showing that the Chief Judge is boss and is presenting his best case for knowing better than the other Circuits.


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

Caution: A Bankruptcy Crimes "Sweep" May Be Coming to a Neighborhood Near You

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

As bankruptcy filings increase and individual debtors' attorney offices get more stressed, it may be tempting to let office procedures get lax and to allow corners to be cut in the name of efficient service. As the seriousness of the difficult economy takes hold and some people feel victimized by circumstances beyond their control, there appears to be at least anecdotal indications that more debtors are resorting to cheating the system that they feel has cheated them. So let the following be a cautionary tale.

In one federal district, the Southern District of West Virginia, based in Charleston, the U.S. Trustee's office and the U.S. Attorney combined forces to investigate and charge four different individual debtors with diverse bankruptcy crimes. The details of the charges should both remind debtors' counsel of the kinds of details to pay special attention to and be a short lesson in the most common bankruptcy crime statutes.

Bankruptcy Crime Statutes 18 U.S.C. §§ 152 and 157
§ 152 is entitled "Concealment of assets; false oaths and claims; bribery." It lists nine types of sanctioned behavior, but these four cases involve only the first three types, the concealment of assets, making false oath and a false declaration:

A person who

(1) knowingly and fraudulently conceals from a custodian, trustee, marshal, or other officer of the court charged with the control or custody of property, or, in connection with a case under title 11, from creditors or the United States Trustee, any property belonging to the estate of a debtor;

(2) knowingly and fraudulently makes a false oath or account in or in relation to any case under title 11;

(3) knowingly and fraudulently makes a false declaration, certificate, verification, or statement under penalty of perjury as permitted under section 1746 of title 28, in or in relation to any case under title 11;

. . .

shall be fined under this title, imprisoned not more than 5 years, or both.

The remaining six kinds of sanctioned behavior are noteworthy because many involve potential crimes by parties other than debtors. A summary of these include:

(4) a creditor or alleged creditor filing a false proof of claim;

(5) a transferee wrongfully receiving property from a debtor after the filing of a bankruptcy case;

6) receiving a bribe--"any money or property, remuneration, compensation, reward, advantage, or promise thereof"--or order to take or avoid any action in a bankruptcy case;

(7) pre-petition transfers or concealment of debtor assets by the debtor or by others, including the debtor's agents and officers;

(8) pre-petition and post-petition concealment, falsification, or destruction of records about a debtor's property or financial affairs by the debtor or by others; and

(9) post-petition withholding of records about a debtor's property or financial affairs by the debtor or by others.

§ 157 is entitled "Bankruptcy fraud," and states in its entirety:

A person who, having devised or intending to devise a scheme or artifice to defraud and for the purpose of executing or concealing such a scheme or artifice or attempting to do so -

(1) files a petition under title 11, including a fraudulent involuntary bankruptcy petition under section 303 of such title;

(2) files a document in a proceeding under title 11, including a fraudulent involuntary bankruptcy petition under section 303 of such title; or

(3) makes a false or fraudulent representation, claim, or promise concerning or in relation to a proceeding under title 11, including a fraudulent involuntary bankruptcy petition under section 303 of such title, at any time before or after the filing of the petition, or in relation to a proceeding falsely asserted to be pending under such title,
shall be fined under this title, imprisoned not more than 5 years, or both.

The Four Accused Debtors
Victoria Caudill, 51, was accused of transferring $60,000, that she had received in a workers' compensation settlement from the Florida Department of Labor and Employment Security, into another person's bank account and then failing to disclose this asset in her bankruptcy case. She was indicted by the federal grand jury for concealing assets (18 U.S.C. 152(1)), making a false declaration (18 U.S.C. 152(3)) and devising a bankruptcy fraud scheme (157(3)).

Clinton Smith, 62, was accused of falsely declaring in his 2004 bankruptcy case that his wife still owed a 50-acre parcel of land the couple had bought back in 1977 but had in fact been sold the previous year for about $207,000, his half-share of which was being paid to him in payments of $2,000 per month. He failed to disclose this income. He was indicted by the federal grand jury for concealing assets (18 U.S.C. 152(1)), making a false declaration (18 U.S.C. 152(3)) and devising a bankruptcy fraud scheme (157(3)).

Jennifer Longwell, 38, was accused of falsely disclosing that she had sold a parcel of real property for $20,000 when in fact she had sold it for $69,000; she falsely disclosed that she continued own another parcel when in fact she had sold it the day before. She also gave false testimony at the meeting of creditors about those transactions. She was indicted by the federal grand jury with two counts of making a false oath (18 U.S.C. 152(2)) and one count of concealing assets (18 U.S.C. 152(1)).

Tracy Helms, 42, was accused of concealing guns and jewelry in her bankruptcy case. She was not indicted by grand jury but rather the U.S. Attorney's office filed an "information" against her for concealing these assets (18 U.S.C. 152(1)).

Potential Criminal Penalties
As indicated in the quoted statutes above, both 18 U.S.C. § 152 and § 157 provide for a fine and/or up to 5 years of imprisonment. However local newspaper accounts state that that the three indicted individuals face up to 15 years in prison, and one story last month in the Charleston, West Virgina News & Sentinel said that Ms. Longwell faced 15 years in prison, three years probation and up to $750,000 in fines.

The U.S. Attorney's Warning
The local U.S. Attorney Charles T. Miller said that these cases should "serve as a warning to those who would abuse the [bankruptcy] system." The U.S. Trustee's Office refers suspicious circumstances to his office, the FBI then investigates, and then his office decides whether to prosecute. His parting words: "It's pretty straightforward in bankruptcy: You list what you have, you list what you owe, and you get a clean slate. It's when you hold [assets] back that [you] get into trouble."

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