Chapter 13 Mortgage Cramdown Bill Passes House of Representatives, Moves to Senate For New Battle About Amendments

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

Yesterday evening (March 5) the House passed H.R. 1106, the Helping Families Save Their Homes Act of 2009, by a largely party-line vote of 234 to 191. Seven Republicans voted for it, 24 Democrats against. None of the Oregon and Washington Representatives broke party ranks. The vote came a week after debate on the bill began on the floor a week before, and after votes on three substantive amendments, two of which passed and one failed, all again mostly decided on party-line votes. The issue now goes to the Senate, as early as next week according to a spokesman for Senate Majority Leader Harry Reid, as reported by Bloomberg.com.

Senate Prospects
The Senate's bill, S. 61, is identical to the House's original bill, H.R. 200, when both were introduced on January 6, 2009, but has not yet seen any committee action. The consensus appears to be that passage in the Senate of a bankruptcy mortgage modification bill will be more difficult than in the House, if for no other reason than the Senate's rule requiring 60 votes to force a vote, effectively meaning that the bill must have the support of every Democratic Senator and also a couple Republicans. The additional time also gives the lobbying power of the mortgage industry opportunity to further limit the amendment's scope and to continue to try to kill it. However, the continuing downward spiral both in foreclosures and in the general economy may well encourage Senate passage. Of the House Republicans who crossed party lines to vote for H.R. 1106, most were from states with the worst foreclosure situations.

Amendments Made on the House Floor
Of the three amendments debated on the House floor yesterday, the one that was the closest vote, 211-218 (with all Republicans and 37 Democrats voting for in favor) did not pass. It sought to provide that if a residence with a mortgage modified through Chapter 13 is sold after "the effective date of the [Chapter 13 plan," at a net profit beyond the modified principal amount, the mortgage holder would recapture ALL of this profit (instead a portion as provided by another amendment).

The significant substantive amendment which did pass by 263-164, with all Democrats and 10 Republican votes, requires courts to use FHA appraisal guidelines in cases of dispute about a residence's fair market value, prevents Chapter 13 modifications for homeowners deemed to be able to pay their mortgage, extends the negotiation period before filing from 15 to 30 days, and requires the debtor to certify that he or she contacted the lender and provided it with income, expense and debt statements.

The other substantive amendment which passed, near unanimously, 423-2, provides that for debtors with their residence in foreclosure, their pre-filing credit counseling requirement can be met not just before filing but up to 30 days thereafter.

The precise language of these amendments is found in House Report 111-21 and 111-23. In an upcoming Bulletin on this website I will provide a more detailed analysis of the entire bill in its final version.

Party Unity
In the final 234-191 vote on the bill, the seven Republicans voting in favor are from Florida, Ohio, Delaware, New York and North Carolina, and the 24 Democrats voting against are from the South and Border States, and the greater Midwest.

Interestingly, the Republicans tended to vote more as a block with the exception of the key 1st amendment and the final vote. The opposition seems to be somewhat more united than the proponents. We shall see if that carries through to the Senate.

A new Bulletin on this website will provide an update of this legislation as soon as there is new information to report, certainly by the end of next week (March 13). PLEASE EMAIL ME at the address below IF YOU WOULD LIKE TO BE EMAILED A LINK TO IT AS SOON AS IT IS UPLOADED.

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

PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Annuity Bought for $10,000 by Debtor a Few Months Before Filing Chapter 7 Case is Not Exempt Either as Life Insurance or a Private Retirement Plan

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



Simpson v. Burkart (In re Simpson)
Ninth Circuit Court of Appeals, Case No. 07-15626
February 23, 2009

The Ninth Circuit panel agreed with both the bankruptcy court and the Bankruptcy Appellate Panel that a single-premium annuity purchased by debtor a few months before filing Chapter 7 was not exempt as either life insurance or private retirement account under California exemption statutes.

Although this opinion turns on statutory interpretation of California statutes, it is of broader interest because it addresses two important general issues:
a) what factors determine whether an annuity with life insurance components qualifies for a life insurance exemption, and
b) the role of debtor's subjective intent in determining whether an annuity qualifies for a retirement exemption.

(The BAP opinion being appealed from, Simpson v. Burkart (In re Simpson), 366 B.R. 64 (9th Cir. B.A.P. 2007) was authored by Judge Randall Dunn writing for the three-judge BAP.)

Essential Facts
The Annuity: Simpson paid $10,000 to buy an annuity "a few months" before filing a Chapter 7 bankruptcy.

• Simpson was the annuity contract owner and annuitant (the person entitled to receive benefits or payments from the annuity); his two sons were the beneficiaries.
• Non-qualified for IRS purposes, meaning that contributions to it are not tax-deductible.
• No loan value, so could not be borrowed against.
• If the annuity was surrendered before 2043 when Simpson was to begin receiving payments from it, he would have to pay a 10% early surrender penalty.
• If Simpson were to die before 2043--when he would be 95 years old, his beneficiaries could either surrender the annuity and receive the principal and interest, or could wait until that date and receive the payments as usual.
• Cute twist: Simpson bought the annuity through his bankruptcy attorney, who sold financial products as an apparent side business.
  

Judge Dunn's BAP Opinion Corrected on Methodology
The Ninth Circuit called "incorrect" the BAP opinion's statement that "[w]hether an annuity contract qualifies as exempt life insurance under California law is a factual determination that we review under the clearly erroneous standard.” Instead, the Ninth Circuit asserted:

we undertake two inquiries. The first is a question of statutory interpretation, that is, whether the claimed statutory exemption includes the asset at issue. . . .. If the statutory exemption categorically includes the questioned asset, then the inquiry is at an end. If the asset is not categorically embraced within the statutory exemption, then the question is whether, as a factual matter, the particular financial instrument qualifies for the exemption. . . . . Statutory interpretation and whether a particular policy qualifies as a life insurance policy are questions of law subject to de novo review. We do, however, review factual findings for clear error.

Life Insurance Exemption
The pertinent exemption statute states: "Unmatured life insurance policies (including endowment and annuity policies), but not the loan value of such policies, are exempt without making a claim."

As to the first inquiry, the Court determined that, notwithstanding the parenthetical reference to "annuity policies," "single-premium annuities are not included categorically within California’s statutory life insurance exemption." It based this on a prior BAP opinion's "careful statutory analysis" which concluded that the purpose of this parenthetical language was "to clarify that life insurance that includes the essential features of an annuity or endowment policy does not lose its exempt character." But that language apparently did not add annuities to this category of exemptions, which "applies only to life insurance."

On the second inquiry, in response to debtor's argument that the annuity "is actually a life insurance policy," the Ninth Circuit held that a "single-premium annuity that provides a guaranteed stream of income and has no contingencies that can divest the debtor or his beneficiaries of their right to payment is an investment, not a life insurance policy."

To make this determination, the Court looked to the following list of non-exclusive factors from the BAP opinion Turner v. Marshack (In re Turner), 186 B.R. 108, 117 (9th Cir. B.A.P. 1995):

(1) whether the annuity is truly contingent;

2) whether the debtor can accelerate the maturity date;

3) whether the debtor can borrow against the policy;

4) who owns the policy;

5) whether payment of the premium is consistent with an investment or payment;

6) whether the seller was licensed to sell life insurance in the debtor’s state;

7) what, if any, is the opinion of testifying experts;

8) what provisions of the application are also part of the policy; and

9) whether a life insurance policy in the debtor’s state must contain a death benefit.

The Ninth Circuit held that the BAP did not err in concluding that, based on the bankruptcy court's findings, the debtor's annuity was not a life insurance policy. The BAP had focused on six of the above factors, determining that the annuity is not life insurance because:

• "the payments under the . . . Annuity are not contingent upon debtor's life" (above factor 1);
• the "Annuity does not allow for the debtor to accelerate the maturity date" (factor 2);
• the "Annuity . . . does not allow the debtor to borrow against it" (factor 3);
• “[i]nstead of creating an immediate estate for the benefit of others, the annuitant [reduced his] immediate estate in favor of future contingent income." (factor 4);
• the "limited death benefits do not change the fundamental purpose of the . . . Annuity — to provide the debtor with fixed, periodic payments for life or a stated period of time, without requiring his death to trigger [the annuity obligor]’s obligation to pay" (factor 5); and
• the annuity obligor was"authorized to sell life insurance . . .[but this is] not dispositive as to whether the annuity contract qualifies as life insurance . . .." (factor 6)

The only "death benefit" of the annuity was that upon debtor's death his beneficiaries would not have to pay the 10% early-surrender penalty and received an accelerated vesting of accrued interest; "those features do not change the 'fundamental purpose' of the . . . Annuity."

"Private Retirement Plan"
The pertinent exemption statute states:
All amounts held, controlled, or in process of distribution by a private retirement plan, for the payment of benefits as an annuity, pension, retirement
allowance, disability payment, or death benefit from a private retirement plan are exempt.
To be a "private retirement plan," the asset must fit into one of the following definitions:
(1) Private retirement plans, including, but not limited to, union retirement plans.
(2) Profit-sharing plans designed and used for retirement purposes.
(3) Self-employed retirement plans and individual retirement annuities or accounts provided for in the Internal Revenue Code of 1986.

Starting again with the first inquiry, the Court asked if under this statute a single-premium annuity would "categorically" fit under the the term, "private retirement plan." It reviewed California case law, which did not directly address whether a single-premium annuity would qualify as a private retirement plan, observing that not a single one of the appellate decisions interpreting the term did so "to include independent retirement investments." From this the Court inferred that such annuities would not "qualify categorically under California law as a private retirement plan."

And on the second inquiry, whether this particular annuity qualifies for the exemption, the debtor argued that it was a private security plan under subsection (1) above "because he subjectively intended to use it as one." But the Court cited an earlier Ninth Circuit opinion, Lieberman v. Hawkins (In re Lieberman), 245 F.3d 1090, (9th Cir. 2001) to determine that "debtor's subjective intent for or use of the asset is irrelevant to this analysis." That same earlier opinion held that "private retirement plans" under subsection (1) applied "only to retirement plans set up by private employers, 'not by individuals acting on their own, outside the employment sphere.' " As such, debtor's annuity here did not qualify as a "private retirement plan"

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

PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Ch. 13 Debtor Living in Tri-Plex Can Claim A Homestead AND Cram Down his Mortgage Holder's Claim As Not "Secured Only by Debtor's Principal Residence"

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

In re Melvin Hight Grimes
Bankruptcy Court for the District of Oregon, Case No. 08-34275-rld13
Unpublished Memorandum Opinion
February 5, 2009

Although unpublished,Judge Dunn's memorandum opinion is worth a look because it provides a handy review of two superficially similar concepts--the "homestead" for exemption purposes and "real property that is the personal residence" for mortgage cramdown purposes--and explores the interplay between the two. The seemingly counterintuitive conclusion that a residence can be a "homestead" while it not a "principal residence" is here made sensible.

The Issues
1) Under § 1322(b)(2) can a Chapter 13 Debtor, Grimes, owner of a triplex who lives in one of the units and rents out the others, modify the rights of Countrywide, its mortgage holder, because the mortgage is secured by more than "only" an interest in his "personal residence"?
2) If so, can Grimes nevertheless claim a homestead exemption in the triplex?

The Answers
Judge Dunn said: If Grimes brought the triplex for investment and income purposes, and the documentation and other evidence so reflects, even if he subsequently moved into one of the units while continuing to rent out the others, the mortgage holder's interest is secured by a security interest in property that is overall income-producing and therefore not "secured only" by an interest in Grimes' "principal residence." And since he lives there, he can claim a homestead, and there is nothing in § 1322(b)(2) or the rest of the Code saying that he cannot.

The Essential Facts
Grimes bought a triplex in 2006 for investment and rental income purposes, while living in a single family residence. The trust deed for the triplex contained an occupancy provision requiring him to "occupy, establish, and use the . . . Property as [his] principal residence . . . unless Lender otherwise agrees in writing." The trust deed contained a "Rider" which deleted this occupancy provision, and added a requirement for rent loss insurance plus an assignment of rents.He could not maintain the payments on his residence, surrendered it to the lender, moved to one of the triplex units, and in 2008 filed this Chapter 13 case.

"Principal Residence"
Section 1322(b)(2) allows a chapter 13 plan to

modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence . . ..

Judge Dunn ruled that the evidence showed that Grimes purchased the triplex for investment and rental income purposes. This evidence included Grimes' unrefuted testimony, and the documentation in the trust deed "Rider" deleting the occupancy provision from the trust deed and adding provisions pertaining to the rental income.

The judge relied greatly on an opinion of Judge Radcliffe, In re McVay, 150 B.R. 254 (Bankr. D. Or. 1993) to refute the creditor's argument that Grimes can't avoid having the triplex be considered his "principal residence" for § 1322(b)(2) purposes because he claimed the triplex for his homestead exemption. The Chapter 13 debtors in McVay owned property that was both their bed and breakfast business and their residence. As Judge Dunn characterized the lender's argument in that case: "If the debtors claimed a homestead exemption in the Property, it should be considered their principal residence, with the result that modification of the Loan would be precluded." To the contrary, Judge Radcliffe held that in the context of mixed use properties, the appropriate focus is "upon the actual use of the property to produce income." Since § 1322(b)(2) restricts modification only when a secured claim is secured ONLY by a security interest in "debtor's principal residence," when the security interest is also in income-producing property, then that secured claim can be modified. "[C]onsistent with In re McVay, [Judge Dunn] conclude[d] that Mr. Grimes is not precluded by § 1322(b)(2) from modifying the treatment of Countrywide’s secured claim in his chapter 13 plan."

Homestead Exemption
As to whether Grimes could claim a homestead exemption in the triplex even if it is not his "principal residence" for cramdown purposes, Judge Dunn held that:

1) The heart of the issue was that the standards are very different for determining a) whether a debtor may claim a residence as a homestead and b) whether or not that real estate is a "principal residence" as to mortgage modification. The former is based on Oregon statutory and case law, requiring, for example, that it be "interpreted liberally." "Nothing in § 1322(b)(2) or in any other provision of the Bankruptcy Code precludes a debtor from claiming a homestead exemption in real property with respect to which secured claims can be modified in a chapter 13 plan."

2) Practically speaking here, Countrywide's secured claim was being crammed down to the value of the triplex, with the result that there is still no equity to which a homestead exemption could attach. And Judge Dunn dismissed any potential future benefit from Grimes from his claimed homestead exemption to be "purely speculative, with no support in the evidentiary record before me."

3) And finally, Countrywide lost procedurally: its failure for having raised its objection to the homestead exemption by 30 days after the § 341(a) meeting resulted in its waiver of it objection pursuant to Federal Rule of Bankruptcy Procedure 4003(b).

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

PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Thursday's Vote by Full House on Chapter 13 Mortgage Cramdown Delayed to Next Week Amid Frenzy of Amendments, Disagreements Among Democrats

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

This is an update of the Chapter 13 mortgage cramdown legislation since my Bulletin of February 19 called Prospects for Bankruptcy Mortgage Modification After Obama's February 18 Speech on the "Homeowner Affordability and Stability Plan".


1) Over last weekend and on Monday (2/23/09) Democratic leaders were giving signals that the legislation, having passed the House Judiciary Committee with amendments on January 27 (see the transcript of this hearing), would come to the full House for debate in the latter half of this week. On Monday, according to the news service Reuters, House Speaker Nancy Pelosi stated that a new bill repackaging the legislation would be introduced later that day (2/23) and could be debated on the House floor on Thursday (2/26).

2) Indeed on Monday H.R. 1106 was introduced. (It is titled the same as its predecessor, H.R. 200: Helping Families Save Their Homes Act of 2009). The new bill packages H.R. 200, basically as it was voted out of the House Judiciary Committee, with a number of important other mortgage-relief provisions, some of which, not coincidentally, are supported by Republicans. (Note that every Democrat on the Committee had voted for H.R. 200, every Republican had voted against it.)


Besides the contents of amended H.R. 200, the new H.R. 1106 also:

• Adds protection from liability for mortgage servicers who implement mortgage loan modifications.
• Permanently increases deposit insurance limits to $250,000 for the FDIC (Federal Deposit Insurance Corporation) and NCUA (National Credit Union Administration), and increases their borrowing authority.
• Amends the Hope for Homeowners Program in various ways to make it more workable, including an incentive to servicers of up to $1,000.
• Authorizes the federal VA, HUD and Agriculture Department to pay the guaranteed portion of any losses incurred by mortgage holders or servicers resulting from Chapter 13 mortgage cramdowns.
• Fixes the Chapter 13 trustee fee at 4% for plan payments made under the new cramdown provisions, with court discretion to waive these fees for debtors with income less than 150% of the official poverty line.

3) As of Wednesday (2/25) this combined bill was slated for 1 hour of General Debate" by the full House on Thursday, February 26. In the meantime dozens of amendments were proposed before the deadline to do so, by both Democrats and Republicans, a number by the latter which would have deleted the mortgage cramdown provisions entirely.

On Thursday this General Debate session (see transcript) occurred from 12:15 p.m. to 1:30 p.m, with vigorous speeches on both sides (including a couple in support by one of the cosponsors, Rep. Earl Blumenauer of Oregon).

Here are representative excerpts from the debate, first from another cosponsor, Rep. Brad Miller, (D.) North Carolina:

[I]it is remarkable after all that has happened in the American economy to still hear the talking points of the banking industry and the securities industry repeated verbatim without criticism, simply parroted. That the banking industry is really all about helping folks, that's what caused the problem; that they were trying too hard to help people; that they loaned, perhaps not wisely but too well.

The reality is, this is not going to affect the availability of credit. We've got plenty to judge that by. There have been rafts of economic studies by real economists in peer review journals that show that when you compare lending practices in one place and another at the same time with different laws, there is very little, if any, difference.

Now, the minority has tried to tap into the American anger at banks by calling this a bailout. The reason that the banking industry is so virulently opposed to this, this is the only proposal to deal with the foreclosure problem that does not give them tax money. We aren't begging them, we aren't bribing them to do the right thing; we will make them do the right thing. They will modify mortgages in the way they should have, voluntarily, involuntarily in bankruptcy court if they don't do it voluntarily.

And by Lamar Smith, (R.) Texas, the Ranking Member of the House Judiciary Committee:

This bankruptcy provision not only will fail to solve the foreclosure crisis, but also will make the crisis deeper, longer and wider. Allowing bankruptcy judges to rewrite mortgages will increase the overall cost of lending. Lenders and investors will hesitate to put up capital in the future if they fear that judges will rewrite the terms of their mortgage contracts. Less available capital and increased risk means that borrowers will pay higher interest rates in the future.

Allowing bankruptcy judges to rewrite mortgages will also encourage borrowers to file for bankruptcy. Under this bill, a borrower will be able to reduce, for example, a $500,000 mortgage to $400,000. When housing prices rise in the future, that borrower has no obligation to pay back the

100,000 amount they crammed down. Thus, the borrower receives a $100,000 windfall. And experts predict that receiving this windfall will provide an incentive for borrowers to file for bankruptcy.

If bankruptcy filings increase as a result of this legislation, which is predicted, it is unlikely that the country's only 368 bankruptcy judges could handle the additional caseload in an effective manner. This will prolong the crisis as borrowers wait for their bankruptcy plan to be court-approved.

The House floor debate ended with "no resolution thereon."

4) Already shortly before the start of this General Debate reports were surfacing that a postponement of a vote would likely occur. Overnight stories after the floor debate from the Associated Press and the Wall Street Journal indicate that the immediate cause of the delay were concerns about the legislation raised by conservative "Blue Dog" Democrats and "centrist" pro-business New Democrat Coalition members in a private meeting earlier this week . The debate is feeding off of the perceived national angst of the "responsible homeowners" who are continuing to be current on their mortgages, that they not be made to pay for the mistakes of those who supposedly made foolish or even greedy choices. Republicans in the floor debate constantly raised the concern of favoring the "irresponsible" at the expense of the "responsible." For example, by Rep. Jim Jordan of Ohio: "94 percent of mortgages are being paid on time. It is wrong to tell those individuals they are now going to have to in some way compensate or not be able to get credit in the future to accommodate those individuals, that 6 percent, who have behaved in an irresponsible fashion."

A meeting is scheduled for next Monday evening (3/2/09) for Democrats with Housing Secretary Shaun Donovan about this bill and its role in the Administration's overall "Homeowner Affordability and Stability Plan." And next Wednesday, March 4, is the Administration's self-imposed deadline to provide additional details about that Plan, and some Democrats want assurances that non-bankruptcy mortgage modification efforts will be effective before approving bankruptcy cramdowns as a tool of last resort.

What This Delay Means
There continues to be strong indication, as of yet, that bankruptcy mortgage cramdown legislation in some form will pass, and do so within the next few weeks. The Wall Street Journal story above states that a vote on the House Floor is not expected until at least next Tuesday. The Associated Press story above reports that the Senate is expected to get back involved in the legislation "within two weeks." But the delay unquestionably favors creditor organizations and others who are putting tremendous effort into narrowing it. The current central question seem to be whether or not the legislation will be significantly restricted, such as being limited only to subprime mortgages. And as with all controversial bills, the pragmatic question is whether there will be enough votes to get past a potential Republican filibuster in the Senate. With the Minnesota Coleman/Franken Senate race still tied up in litigation, and with Sen. Arlen Spector of Pennsylvania being the only Republican Senator thus far publicly supporting the bill, there is certainly a question about whether there will be the necessary 60 votes needed to get to a floor vote in the Senate.


A new Bulletin on this website will provide an update of this legislation as soon as there is new information to report, likely by mid- or certainly late next week. PLEASE EMAIL ME at the address below IF YOU WOULD LIKE TO BE EMAILED A LINK TO IT AS SOON AS IT IS UPLOADED.

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

PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Ninth Circuit Affirms Oregon Bankruptcy Court that "Student Account and Deferment Agreement" Is a Nondischargeable "Loan" Under Section 523(a)(8)

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

McKay v. Ingleson
Ninth Circuit Court of Appeals, Case No. 07-35362
February 23, 2009


Issue
"[W]hether a student’s financial arrangement with the university she attended constituted a nondischargeable educational loan under [§ 523(a)(8) of the] Bankruptcy Code."

Holding
The Ninth Circuit Panel held that the debt was dischargeable by comparing the terms of a written agreement memorializing the debt with the ordinary and dictionary meanings of the term "loan," by determining that in the agreement the "value of the actual benefit received" was sufficiently clear and it "sufficiently articulate[d] definite repayment terms," and finally that a "loan" need not include either an exchange of money or the repayment of "a sum certain."

Facts
McKay filed a Chapter 7 bankruptcy (pre-BAPCPA) listing Vanderbilt University as creditor under a “Graduate and Professional Student Account and Deferment Agreement” (“Agreement”). Neither she nor the University sought a determination of the dischargeability of the obligation under that Agreement. She received a discharge. About two years later, Vanderbilt University retained an attorney, John Ingleson, to collect the balance on the Agreement, resulting in a default judgment in the amount of $38,250.53 against McKay. This represented tuition, housing, dining charges for one term, plus less than $2,500 on a "Flexible Spending Account" of miscellaneous purchases, and late fees and collection costs.

Shortly thereafter McKay reopened her bankruptcy case and filed an adversary proceeding against the University and Ingleson, asking for a determination that the debt to the University had been discharged and alleging violation of the discharge injunction of § 524. Bankruptcy Judge Trish Brown granted summary judgment in favor of the University and Ingleson, and the U.S. District Court Judge Garr King affirmed. McKay appealed (apparently only as to Ingleson.)

The Statute
11 U.S.C. § 523(a)(8), as applicable to this pre-BAPCPA case, made non-dischargeable a “loan . . .made under any program funded in whole or in part by a . . .nonprofit institution.”

(This language is all still in the statute after BAPCPA, but there is additional language which may well have affected this opinion. See the addition of subsection § 523(a)(8)(B) stating in part: "any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code.")

The Agreement
The Ninth Circuit Panel provided only a few snippets of the Agreement:

After reciting that the parties “desire the convenience of deferring payment for . . . educational services,” the Agreement states that the “[s]tudent, as purchaser of the educational services,” would be billed monthly. “Any balances not paid by the end of each calendar month [would] be assessed a late fee of one and one-half (1.5%) percent per month.” The Agreement further states that "[a]ll amounts deferred are due not later than” a specific date close to the end of each semester.

The unpublished U.S. District Court opinion below also noted that the "Agreement provides for recovery of attorney fees and collection costs incurred in collection of unpaid balances due under the Agreement," and made clear that debtor executed this Agreement.

The Rationale
In determining whether the Agreement was a "loan" the Ninth Circuit Panel focused on the following:
1) The "ordinary meaning of such term": Even accepting McKay's argument that "the Agreement is a revolving credit account (specifically, a credit card) rather than a loan," "revolving credit accounts are considered loans in everyday parlance."
2) Dictionary definition of "loan": "[s]omething lent for the borrower's temporary use on condition that it or its equivalent be returned."
3) Money is not necessarily exchanged between lender and borrower, such as in the "creation of debt by a credit to an account with the lender upon which the debtor is entitled to draw immediately."

The Panel then primarily relied on an Eighth Circuit BAP opinion Johnson v. Mo. Baptist Coll. (In re Johnson), 218 B.R. 449, (B.A.P. 8th Cir. 1998). There the debtor attended classes without prepayment of the tuition but rather with a promise to pay for that tuition later. This promise was memorialized by a promissory note. The BAP reasoned that "the College was, in effect, 'advancing' funds or credits to [debtor's] student account," and she "drew upon these advances through immediate class attendance." The BAP determined that the lack of money changing hands was "immaterial."

The Ninth Circuit asserted that the "Johnson court’s analysis is persuasive, and we find no relevant differences between the Agreement here and the arrangement in Johnson."

The debtor raised a number of arguments that the Agreement did not constitute a "loan," none of which the Ninth Circuit found "persuasive":
1) "[T]he loan payment must 'reflect the value of the benefit actually received, rather than some other ill defined measure of damages or penalty'.”: The Court agreed with this principle but ruled that "the cost of tuition, housing, board, and various other items and fees were readily available to her, and the amount she was required to repay was determined by the costs of these items."
2) "[T]o constitute a loan, the Agreement would have had to sufficiently articulate definite repayment terms.": Again, the Court agreed with debtor's principle, but determined that the Agreement's statement that " '[a]ll amounts deferred are due not later than' a specific date close to the end of each semester" was sufficient to meet that principle.
3) "[T]he loan agreement did not indicate a sum certain": The Court responded that while this may be "one of the factors that may be considered in determining whether a loan exists," "[w]e are not convinced that a loan requires a sum certain."

Local Connections
Ninth Circuit opinions come relatively rarely from the Oregon bankruptcy court. This one involved a 2003 Chapter 7 case filed on behalf of the debtor by Gary L Marcy of Snyder & Associates; in 2003 Terrance J. Slominski, Slominski & Associates reopened the case and filed the adversary proceeding on debtor-plaintiff's behalf, as well as filed the appeal to the District Court and then to the Ninth Circuit. Tara Schleicher of Farleigh Wada Witt, was attorney for Vanderbilt University in the adversary proceeding and the appeal to the District Court. David B. Gray of Swensen & Gray was attorney for John Ingleson in the adversary proceeding and both appeals. Oral argument before the Ninth Circuit panel was in Portland on December 10, 2008, with Circuit Judges Diarmuid F. O’Scannlain, Susan P. Graber and Jay S. Bybee, with Judge O'Scannlain writing the opinion for the panel.

Commentary
In my opinion, the Ninth Circuit panel's 7-page opinion is not persuasively written. For example, the opinion relies heavily on the Eighth Circuit's Johnson opinion but provides very little about the terms of the financial agreement there before stating summarily that there were "no relevant differences." What little Judge O'Scannlain's opinion does provide about the agreement in Johnson, for example that it included a promissory note, made is sound more like a "loan" than the terms in the present case. It would appear that this case's lack of any conventional promissory note language clearly stating a debt and a commitment to repay it is a significant difference which merited attention. In addition it was at least bad form in the recitation of the facts to call the financial arrangement at issue a loan when whether or not it should be so characterized is what needed to be determined. District Court Judge Garr King's unpublished opinion of two years ago is just slightly longer but is much better written, cites better authorities, and presents the rationale more convincingly.

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

PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

New Wife Creditor Wins Nondischargeability Battle With Ex-Wife Debtor: A Judgment for Statutory Attorney Fees Alone Fits Within Section 523(a)(6)

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


Suarez v. Barrett (In re Suarez)
Ninth Circuit BAP No. SC-07-1401-MoJuKw
January 16, 2009

Issue
In "a case of apparent first-impression in the Ninth Circuit," may a Chapter 7 debtor "discharge a state court judgment for attorneys fees and costs under § 523(a)(6) of the Bankruptcy Code in which that is the only monetary liability imposed on her for civil contempt in violating a court order."

Holding
No, she may not. Since Suarez's conduct leading to the contempt judgment was "willful and malicious," the debt arising from that conduct constitutes an "injury" under § 523(a)(6). The lack of any underlying compensatory damages in the judgment is not a meaningful distinction; a judgment debt consisting only of statutory attorney fees and costs arising "as a result of" Suarez’s willful and malicious violation of an injunction is nondischargeable.

Good Summary of the Law of § 523(a)(6)
Because debtor-defendant was not represented by counsel on appeal, "in the interest of completeness," the BAP "address[ed] briefly all of the relevant issues presented in a § 523(a)(6) determination such as this." So this opinion is a handy outline of the elements of a § 523(a)(6) claim.

Facts
Barrett won a state court judgment against her husband's ex-wife, Suarez, for contempt of a court injunction, which had been imposed because of an alleged assault by Suarez on Barrett. The judgment required Suarez to serve 5 days in jail and to pay $11,573 in Barrett's attorney fees and costs. Suarez filed a Chapter 7, and Barrett sought a declaration of nondischargeability of her monetary judgment as a willful and malicious injury, under section 523(a)(6). The bankruptcy court determined that the judgment was nondischargeable, and Suarez appealed.

Debtor's Argument
Suarez argued that

since Barrett received no damage award for any injury, and the Fees and Costs Judgment awarded was merely statutory and penal in nature and not compensatory or punitive, it fails to satisfy the elements of a willful and malicious “injury” under section 523(a)(6) and is therefore dischargeable.

A Summary of the Elements of a § 523(a)(6) Claim
§ 523(a)(6) excludes from discharge "any debt . . . for willful and malicious injury by the debtor to another entity or to the property of another entity."

• "The creditor must prove that the debtor’s conduct in causing the injuries was both willful and malicious."
• "Willfulness requires proof that the debtor deliberately or intentionally injured the creditor, and that in doing so, the debtor intended the consequences of his act, not just the act itself."
• "The debtor must act with a subjective motive to inflict injury, or with a belief that injury is substantially certain to result from the conduct."
• "For conduct to be malicious, the creditor must prove that the debtor: (1) committed a wrongful act; (2) done intentionally; (3) which necessarily causes injury; and (4) was done without just cause or excuse."

Nondischargeability of Contempt Sanctions
The BAP here did not read § 523(a)(6) or any other part of § 523(a) to make contempt sanctions per se nondischargeable. Without any controlling Ninth Circuit law, while acknowledging "[t]wo frequently cited bankruptcy court cases holding contempt judgments nondischargeable" "as a matter of law," the Panel relied chiefly on a 2001 Eighth Circuit decision, Siemer v. Nangle (In re Nangle), 274 F.3d 481 which did not go so far. The rule of Nangle is: "when the debtor’s conduct leading to the contempt judgment was 'willful and malicious,' then the debt arising from that willful and malicious conduct suffices as an injury and is nondischargeable under section 523(a)(6)."

Application of Nangle Standard
On the "willful" element, the Panel held "that Suarez's Injunction violations were clearly 'willful' within the meaning of section 523(a)(6) because they were aimed at Barrett and substantially certain to result in injury to Barrett." And Suarez' conduct was “malicious” "because she knowingly and intentionally violated the Injunction, her conduct was wrongful, done without just cause or excuse, and that it caused Barrett “injury” in the form of attorneys fees and costs."

"Injury" Without Compensatory Monetary Award
As stated above in the summary of the elements of a § 523(a)(6) claim, the creditor must show that the intentional, wrongful act necessarily caused injury. Is this element met when a judgment excludes any compensatory damages, includes only statutory attorney fees and costs? The Panel found no Ninth Circuit or any other circuit case law on this narrow question, but analogized to a Ninth Circuit opinion holding that a judgment for sanctions against a debtor for filing a frivolous appeal was not dischargeable regardless that the judgment was only for attorney fees and costs.

The Conclusion
"Although we appreciate the fine line Suarez would have us draw between contempt judgments with and without compensatory awards, it is clear that the Fees and Costs Judgment debt was 'as a result of,' 'with respect to' and 'by reason of' Suarez’s willful and malicious violation of the Injunction. Barrett’s action against Suarez arose solely out of those wrongful acts . . .." Therefore, that judgment debt is not dischargeable under § 523(a)(6).

The Concurring Opinion
The Concurring judge believed that the conclusion of nondischargeability was plainly dictated by the 1998 Supreme Court's opinion, Cohen v. De La Cruz, 523 U.S. 213: "Although there was an underlying monetary judgment in Cohen, that factual circumstance did not impact the Supreme Court’s statutory analysis, nor should the lack of a damages judgment here impact ours" Since the judgment here "unquestionably is 'as a result of', 'with respect to' and 'by reason of' debtor's violation of the injunction and court order," "[t]he plain meaning of § 523(a)(6) as construed by the Cohen court compels our conclusion that the fees and costs are nondischargeable."

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

PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys