BAPCPA Does Away With Chapter 7 Debtor's Option of Retaining Vehicle by Making Monthly Payments Without Reaffirming, Post-Discharge Repo is OK

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

Dumont v. Ford Motor Credit Company (In re Dumont)
9th Circuit Court of Appeals Case No. 08-60002
September 15, 2009

One of the most controversial pre-BAPCPA consumer bankruptcy law issues was whether a debtor could keep possession of her vehicle (or other personal property collateral) as long as she kept current on the regular monthly payments, even without reaffirming the debt. The circuit courts were split five to four, with the Ninth Circuit and four others permitting this "ride-through" option, four others not. The rest of the courts and legal commentators reflected similar disagreement. "Because of confusing and contradictory statutory text, courts have struggled for decades to discern congressional intent on the answer to that simple question."

The post-BAPCPA conundrum, in the eyes of the dissenting opinion here: "When faced with confusing and contradictory amendments to already confusing and contradictory statutory text, what should we do?" The heart of the dispute between the majority and dissenting opinions here was whether through BAPCPA Congress intended to RESOLVE the judiciary's split on this issue or instead to PERPETUATE it. The majority here went with what appears to becoming the prevailing view, that BAPCPA eliminated the "ride-through" option. The amendments to the Bankruptcy Code language at issue, effectively overturned the Ninth Circuit's contrary precedent, McClellan Fed. Credit Union v. Parker (In re Parker), 139 F.3d 668 (9th Cir. 1998).

The Essential Facts

Ford Motor Credit Company repossessed a Chapter 7 debtor's vehicle, without any warning, about three months after discharge, when she was current on her post-petition monthly payments. (The record is unclear whether she had ever defaulted on payments pre-petition.) The balance on the loan exceeded the value of the vehicle. The contract contained an "ipso facto" clause, stating that debtor's filing of a bankruptcy case would be in itself constitute a default of the contract. Her Statement of Intentions had stated that she would "retain the collateral and continue to make regular payments" The creditor sent a proposed reaffirmation agreement and then its attorney sent an email to debtor's attorney requesting reaffirmation, but debtor's attorney "declined the offer." (The terms of the reaffirmation offer were not clear from the record.) After the repossession, Debtor reopened the case and claimed that Ford Motor Credit had violated the discharge injunction. The bankruptcy court for the Southern District of California denied the motion, and the BAP (with Judge Randall Dunn on the panel but not the author of its opinion) affirmed without dissent.

The Majority Opinion
In essence, Judge Diarmuid O`Scannlain held that "BAPCPA wrought several changes in the Code" which now undercut and in some respects contradicted the rationale for Parker, the Ninth Circuit's pre-BAPCPA precedent. In an opinion with 28 footnotes, including some on every single page, he laid out a detailed analysis of the relevant statutory changes.

Statutory Changes with BAPCPA
First, § 521(a)(2)(C) now explicitly says that the debtor's rights about his or her property under the Statement of Intention subsection are not altered, "except as provided by section 362(h)." The new subsection referred to there says that the automatic stay is cut off and the property is no longer property of the estate if debtor does not timely file a Statement of Intention or fails to act timely as indicated in the Statement. (Note: all references here to Bankruptcy Code sections are as they were re-numbered after BAPCPA.)

Second, under the new § 521(a)(6) a debtor

shall . . . not retain possession of personal property as to which a creditor has an allowed claim for the purchase price secured in whole or in part by an interest in such personal property unless the debtor, not later than 45 days after the first meeting of creditors . . .

A) enters into [a reaffirmation] agreement . . .; or

B) redeems such property . . . .

If the debtor fails to act within the 45-day period . . . the stay under section 362(a) is terminated with respect to the personal property of the estate or of the debtor which is affected, such property is no longer property of the estate, and the creditor may take whatever action as to such property as is permitted by applicable nonbankruptcy law . . . .

Third, under the new § 521(d), if a debtor fails to reaffirm or redeem as stated in § 521(a)(6) or to file the Statement of Intent or to act on it timely, then

nothing in this title shall prevent or limit the operation of a provision in the underlying lease or agreement that has the effect of placing the debtor in default under such lease or agreement by reason of the occurrence, pendency, or existence of a proceeding under this title or the insolvency of the debtor. Nothing in this subsection shall be deemed to justify limiting such a provision in any other circumstance.

In re Parker Effectively Overturned by These Amendments
Judge O'Scannlain observed that Parker had relied on the lack of any mandatory act for the debtor in § 521(a) beyond filing the Statement of Intention. But now these new provisions mean that the debtor is now not only required to file a Statement of Intention "but also [to] follow through with his expressed intent." Parker had also relied on the lack of ambiguity in § 521(a)(2)(C) in not altering debtor's rights "with regard to such property under this title." But now the phrase "except as provided in section 362(h)" immediately after makes "this conclusion . . . not only obsolete but actively contradicted."

When the debtor failed to reaffirm timely as required under the new provisions, the automatic stay expired and the vehicle was no longer the property of the estate. But, Judge O'Scannlain continued, that did not in itself authorize Ford Motor Credit to repossess, it "merely lifted one obstacle to its doing so." He acknowledged another obstacle: "§ 365(e)(1)(B) generally renders unenforceable any contractual term which purports to create a default solely based on the commencement of a bankruptcy case." The contract here had such a "ipso facto" clause, but § 365(e)(1)(B) seemed to block its use. However, the judge reasoned that § 521(d) provided a new way around that. As a consequence of the debtor not doing what that provision required--reaffirm or redeem, "nothing in [the Code] prevent[ed] or limit[ed] the operation of [the ipso facto] provision in the underlying [contract]." Thus, "our decision in Parker has been superseded by BAPCPA. Accordingly, Ford did not violate the discharge injunction in repossessing Dumont's vehicle."

Dissent
In contrast, Judge Susan Graber reasoned that BAPCPA's "changes to the [statutory] text indicate an intent to perpetuate the extant circuit split, not resolve it." [Italicized in original.] The heart of the dispute, § 521(a)(2)(A), "remains entirely unchanged." The new § 362(h) addition to the automatic stay statute, on which the majority opinion relies so much, "suggests that, if anything, Congress intended no change to the existing circuit split." (Emphasis in original.] She focuses on the concluding phrase in that new subsection, which requires a debtor to follow of one of three options laid out in the Statement of Intention, "as applicable," She equates that to the "if applicable" phrase in § 521(2)(A) upon which Parker had focused in its rationale that reaffirmation was not mandatory in order to retain a vehicle.

The dissent cited this rule of statutory interpretation: " 'Congress is presumed to be aware of an administrative or judicial interpretation of a statute and to adopt that interpretation when it re-enacts a statute without change.' " In spite of the notoriety of the circuit split, "Congress did not amend § 521(a)(2)(A) or the critical phrase 'if applicable.' " Indeed, it "carried forward the important qualifier 'applicable'." So, "we should continue to read the statute as we did pre-BAPCPA." "Congress decided to do nothing--neither increasing nor decreasing access to ride-through," "thus perpetuating the circuit split."

After appealing to the "overarching guiding principle of statutory interpretation . . . [that] '[t]he principal purpose of the Bankruptcy Code is to grant a fresh start to the honest but unfortunate debtor'," Judge Graber concluded that "we have already answered the question at hand [in] In re Parker. . . . Because the BAPCPA amendments add only confusion, I would not overrule In re Parker.

Limitations on the Holding
The majority opinion acknowledged some courts have allowed post-BAPCPA ride-through, but asserted that "in each of these cases there was 'substantial compliance with § 521(a)(2), § 521(a)(6), and § 362(h)'." In these cases the bankruptcy courts had not approved the reaffirmation agreements even though the debtors had sought for them to do so. Judge O'Scannlain also acknowledged not ruling on this creates uncertainty, but said the issue was not before the court.

NOTE: Both Judge O'Scannlain and Judge Graber are based out of the Portland branch of the Ninth Circuit Court of Appeals in Pioneer Courthouse, and both formerly practiced law in Portland. Judge Graber also had been on the Oregon Court of Appeals and then the Oregon Supreme Court, before starting at the Ninth Circuit in 1998. Judge O'Scannlain has been at the Ninth Circuit since 1986.

New Bulletins on this website will provide summaries of other opinions within the Ninth Circuit shortly after they are published. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO SUCH FUTURE REPORTS.

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

PLEASE NOTE that 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

Above-Median Income Ch. 13 Debtor Can't Deduct Vehicle "Ownership Cost" on Vehicle Owned Free and Clear: 9th Circuit Affirms Judge Dunn's BAP Opinion

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


Ransom v. MBNA America Bank (In re Ransom)
Ninth Circuit Court of Appeals, Case No. 08-15066
August 14, 2009

The Issue and Decision

The first two sentences of this opinion state the Issue and decision clearly:

Does an above-median income debtor seeking bankruptcy relief under chapter 13 get to deduct from his projected disposable income (that otherwise would be available to unsecured creditors) a vehicle “ownership cost” for a vehicle he owns free and clear? Based upon our interpretation of the controlling statute, 11 U.S.C. § 707(b)(2)(A)(ii)(I), our answer is “no.”

Old News Packaged into an Intriguing Opinion

This opinion upheld the nearly two-year old published decision of the same name of the Ninth Circuit Bankruptcy Appellate Panel,380 B.R. 799 (BAP 9th Cir. 2007). So most practitioners presumably have already been abiding by this holding, and thus in practical terms this Ninth Circuit opinion is old news. Indeed this has been the law in Oregon even longer, since a published decision by Judge Radcliffe in August, 2006, In re Carlin, 348 B.R. 795.

Nevertheless, this new Ninth Circuit opinion is still tantalizing, particularly in Oregon, because:

1. Not only was Oregon's Judge Randall Dunn the author of the affirmed BAP opinion, the Ninth Circuit took the somewhat unusual step of excerpting and adopting more than two full pages of the "cogent reasoning of our BAP."

2. The Ninth Circuit's decision put it "in the uncomfortable position" of explicitly rejecting the rationale and conclusion of "two of our sister circuits," instead following what it called "roughly half of the courts to address the issue," including one other BAP opinion and Judge Dunn's underlying BAP opinion.

3. In the excerpted portion of his BAP opinion, Judge Dunn relied most heavily on ,and quoted a paragraph from, a Wisconsin district court decision ,which was subsequently overturned by the Seventh Circuit Court of Appeals. This Seventh Circuit opinion was published a full half-year before oral arguments on this Ninth Circuit appeal, and was discussed by the Ninth Circuit in its opinion. The Ninth Circuit not only included this paragraph from the overturned Wisconsin opinion in its excerpt, it even mistakenly attributed it to Judge Dunn's opinion. That put the Ninth Circuit in the position of quoting an overturned lower court opinion in support of the heart of its own rationale, while inadvertently or possibly intentionally making it look as if that quote was written by its BAP.

4. The case was deemed sufficiently important to merit two amicus curiae, one from the Executive Office of the U.S. Trustees, and the other from the National Association of Consumer Bankruptcy Attorneys (NACBA).

5. The courts also apparently agreed that this was an urgent case: the debtor received "leave to appeal the bankruptcy court's interlocutory order to our BAP," which, upon issuing its decision "certified its disposition of the case to this circuit for possible review of the non-final order," and then the Ninth Circuit "authorized this interlocutory appeal to go forward."

6. For those readers easily entertained by appellate judges' subtle humor, the Ninth Circuit rejected the "plain language approach" of the Fifth and Seventh Circuits and instead embraced what it called the "statutory language, plainly read" approach of Judge Dunn's opinion. Perhaps this is less funny than it is unhelpful.

7.The Ninth Circuit concluded with what it characterized as an "unusual step": after complaining about "the unnecessary cost of thousands of hours of valuable judicial time" spent struggling with this question, the court explicitly asked Congress to clarify the conundrum through legislation, and did so by "directing the Clerk of the Court to forward a copy of this opinion to the Senate and House Judiciary Committees."

Statutory Context

This interpretation of one ingredient of BAPCPA's means test is one of first impression in this Circuit. To meet the "disposable income" requirement of a Chapter 13 plan under § 1325(b)2)(A)(i), a debtor must pay into the plan all "current monthly income . . . less amounts reasonably necessary to be expended for the maintenance and support of the debtor . . . ." § 1325(b)(3) requires an above-median income debtor to determine the "amounts reasonably necessary to be expended" under the means test of § 707(b)(2). The sentence at issue is the means test's definition of a debtor's "monthly expenses" at § 707(b)(2)(A)(ii)(I):

a debtor’s monthly expenses shall be the debtor’s applicable monthly expense amounts specified under the National Standards and Local Standards, and the debtor’s actual monthly expenses for the categories specified as Other Necessary Expenses issued by the Internal Revenue Service for the area in which the debtor resides . . . . [Emphasis added.]

The IRS's Local Standards' transportation costs include "operating costs" and "ownership costs." The specific issue of statutory interpretation is whether a debtor may deduct the IRS's Local Standard for "ownership costs" as an "applicable monthly expense" on a vehicle if debtor makes no loan or lease payments on that vehicle.

The "ownership cost" for one vehicle under the Local Standards in this case was $471 per month, so in a 60 month plan this amounted to a difference of $28,260 paid or not paid into the plan.

The Ninth Circuit's Rationale

The two circuits which had already addressed this issue--the Fifth and Seventh--both held that a debtor in this situation IS entitled to include the Local Standard "ownership cost" as an expense. They interpreted the word "applicable" in the phrase "applicable monthly expense amounts specified under the National Standards and Local Standards" to mean that specific "ownership cost" in the IRS' Local Standards which applied to the debtor's geographical region and number of vehicles.

In contrast the Ninth Circuit here in Ransom held that " 'applicable' means that a debtor actually is making a loan or lease payment." The court acknowledged but did NOT adopt the "IRM approach" (from the Internal Revenue Manual in which the Standards are located), That approach reasons that Congress must have intended by its use of the IRS' Standards to have courts look at how the IRS interprets the expense categories. The IRM and other IRS publications do not allow the use of the "ownership cost" expense unless a taxpayer is making loan or lease payments on the vehicle.

Instead of relying on this IRM approach, the court reached the same result but by a different rationale by adopting what it called Judge Dunn's BAP opinion's "statutory language, plainly read" approach. Under this, according to the Ninth Circuit, "[a]n 'ownership cost" is not an 'expense'--either actual or applicable--if it does not exist, period." The core of this BAP opinion's rationale, excerpted in the Ninth Circult opinion, is that:

[a]s set forth in the statute, the adjective “applicable” modifies the meaning of the noun “monthly expense amounts;” it indicates that the deduction of the monthly expense amount specified under the Local Standard for the expense becomes relevant to the debtor (i.e., appropriate or applicable to the debtor) when he or she in fact has such an expense.

The adopted BAP excerpt finished with three points:
1) "[t]he ordinary, common meaning of 'applicable' "--"capable of being applied"--makes no sense if there is no loan or lease payment to which the "ownership cost" could be applied;
2) there are mechanisms for allowing additional operating expenses for older vehicles or for other special circumstances in § 707(b)(3)(B);
3) the result of this interpretation is "consistent with the underlying goals of BAPCPA": "to ensure that debtors repay as much of their debt as reasonably possible."

Conclusion

As Judge Dunn said in footnote in his 2007 BAP opinion, already by that time fifty different courts had ruled on this issue, "many of which set forth variations on the prevailing rationales." This demonstrates yet again the dreadfully unclear drafting of BAPCPA. In its final paragraph in this Ransom opinion, the Ninth Circuit expressed its frustration with this reference to Greek mythology: "We would hope, in this regard, that we the judiciary would be relieved of this Sisyphean adventure by legislation clearly answering [the] straightforward policy question [at issue in this opinion]."

To save you a trip to Wikipedia, Sisyphus was the first king of Corinth who was punished by Zeus--for acting like he was more clever than the gods--by being forced to roll a large boulder up a steep hill only to have it roll all the way down just as he almost got to the top, and then to repeat this forever. Although the Supreme Court may eventually tell us which of the diametrically opposed circuit courts happen to be right on this present issue, an eternity of frustration is ahead of us unless Congress returns to clean up the many confusions of BAPCPA. Until then, keep on rolling.

New Bulletins on this website will provide summaries of other opinions within the Ninth Circuit shortly after they are published. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO SUCH FUTURE REPORTS.

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

PLEASE NOTE that 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

B'cy Ct. Can Avoid the 45-Day Automatic Dismissal of Sec. 521(i) with an Order Entered AFTER the 45 Days, to Prevent a Ch. 7 Debtor's Abusive Conduct

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



Wirum v. Warren (In re Warren)
Ninth Circuit Court of Appeals, Case No. 07-17226
June 18, 2009


The Issue

BAPCPA more than tripled the verbiage of § 521 of the Bankruptcy Code, the section titled "Debtor's duties." One of the many added provisions, § 521(i)(1), states that if a debtor does not file a specified set of documents within 45 days of filing, "the case shall be automatically dismissed effective on the 46th day after the date of the filing of the petition." Under § 521(a)(1), most of the documents in that set are required to be filed "unless the court orders otherwise." Here the Ninth Circuit addressed "whether the bankruptcy court has the discretion to 'order[ ] otherwise' and thereby waive the § 521(a)(1) filing requirement by entering an order after the forty-five day filing deadline in § 521(i)(1) has passed."

The Decision
This is an issue of first impression in the Circuit, with only the First Circuit Court of Appeals having addressed it before. The Ninth Circuit here went against the majority of bankruptcy and district courts, but followed the First Circuit, in ruling that the bankruptcy court DOES have discretion to waive the filing deadline even after that deadline had passed. However, the bankruptcy court appears to have this discretion in only very select circumstances, and likely NOT when debtors' attorneys would want.

The Statute and Automatic Dismissal
§ 521(a)(1) and (i)(1) state in pertinent part:

(a) The debtor shall--
1) file--
A) a list of creditors; and
(B) unless the court orders otherwise--
[(i) through (vi): a list including schedules of assets, liabilities, income and expenses, statement of financial affairs, 60 days of pay stubs]

(i)(1) . . . if an individual debtor in a voluntary case under chapter 7 or 13 fails to file all of the information required under section (a)(1) within 45 days after the date of the filing of the petition, the case shall be automatically dismissed effective on the 46th day after the date of the filing of the petition. [Emphasis added.]

How could the Ninth Circuit, and before it the First Circuit, give the bankruptcy court discretion to address this deadline after the 45-day period in spite of the statute's language expressly mandating dismissal of the case on the 46th day? Indeed, in this case the bankruptcy court did not order waiver of the 45-day deadline until more than six months had passed since the date of filing. How was the case even still active then if the statute clearly seems to provide for automatic dismissal on the 46th day after filing?

The Facts
This is not a case where debtor sought to avoid dismissal, but the opposite: debtor moved to dismiss his Chapter 7 case about five months after its filing, to get out of a case he clearly no longer wanted to be in.

The debtor had filed the bankruptcy case apparently in reaction to a state court order to his bank to freeze his bank accounts and turn over $93,000 to satisfy a child support arrearage. When debtor failed to file all the necessary documents at the time of his original bankruptcy case filing, the bankruptcy court issued the usual 15-day order of potential dismissal, and then scheduled a hearing on his failure to file those documents within the 15 days. Before that hearing the Chapter 7 trustee requested that the case not be dismissed, in order to give her time to determine if there were any assets available for distribution to the creditors. (Although not revealed in the Ninth Circuit opinion, the trustee had learned from debtor's bank that it intended to satisfy the $93,000 obligation from debtor's account, and also that debtor had withdrawn about $90,000 from that bank account.) At the hearing, which occurred 37 days after the date of filing, the court granted this request not to dismiss. Debtor did not appear in spite of an order to do so to face sanctions for failing to file the bankruptcy documents.

Then months later, in response to debtor's subsequent motion to dismiss the case, the bankruptcy court first waived the document filing requirement and then denied debtor's motion to dismiss. Debtor appealed.

Rationale
Throughout its analysis, the Court relies extensively on the First Circuit opinion referred to above, Segarra-Miranda v. Acosta-Rivera (In re Acosta-Rivera), 557 F.3d 8 (1st Cir. 2009), quoting or citing this February 2009 opinion no less than fourteen times.

The Ninth Circuit Court's analysis starts with its assertion that the statutes at issue, § 521(a)(1) and § 521(i)(1), are ambiguous as to "whether subsection (i)(1)'s forty-five day filing deadline limits the power of a court to 'order[ ] otherwise' and waive the (a)(1) filing requirement." This purported statutory ambiguity required the Court to look at the possible interpretations of the statute "in light of the purpose of the statute." The Court determined that Congress' core purpose in enacting BAPCPA was to prevent abusive bankruptcy filings. Abusive filings would be discouraged by allowing the bankruptcy court to "decline to dismiss the debtor's case if it determines the debtor is abusing and manipulating the bankruptcy system."

Accordingly, the Court found that both this Congressional intent and what it called the "authentic value of automatic dismissal" would be served by determining that the bankruptcy courts have the discretion not only 1) to dismiss the case, or 2) not to dismiss based on the statutory exceptions, but also 3) to "determine, in its discretion, that the missing information is not required or that denial of dismissal is necessary to prevent a debtor from abusing and manipulating the bankruptcy system."

The Court recognized that the majority of bankruptcy and district courts had decided to the contrary, that the automatic dismissal provision does NOT give bankruptcy courts discretion, especially after the 45-day deadline had passed, to avoid dismissing the case. But because "such a reading also would allow abusive and manipulative debtors to gain automatic dismissal and thereby encourage bankruptcy abuse," the Court simply "decline[d] to read § 521 in this manner."

The Holding
It held that "where a bankruptcy court reasonably determines that there is no continuing need for the information or waiver of the filing requirement is necessary 'to prevent automatic dismissal from furthering a debtor’s abusive conduct, the court has discretion to take such an action.' " [Quoting in part from Acosta-Rivera.]


Query #1: Does this Ninth Circuit opinion open the door to giving bankruptcy courts the discretion to extend this 45-day deadline on behalf of debtors, and particularly to do so AFTER that 45-day period has passed?
The Court does not address this directly, but its rationale and holding do not apply to debtors' extension requests, so the opinion does not give any support for such requests. The First Circuit in Acosta-Rivera was good enough to state clearly that it did "not decide today whether bankruptcy courts possess unfettered discretion to waive the disclosure requirements ex post." The Ninth Circuit made no such clarification, but its decision was similarly narrowly focused, and thus did not address, favorably or not, even in dicta, the question whether a debtor could avoid the automatic dismissal of § 521 (i)(1).

Query #2: Why did the Ninth Circuit Not Address a Critical Subsection?
In its interpretation of § 521(i)(1), the Ninth Circuit does not address the subsections immediately after, that is § 521(i)(2), (3), and (4). These are the statutory conditions and exceptions to the automatic dismissal of § 521(i)(1) so a careful review of them seems essential. § 521(i)(2) especially appears pertinent, stating that:

any party in interest may request the court to enter an order dismissing the case. If requested, the court shall enter an order of dismissal not later than 5 days after such request.

The debtor is a "party in interest," and so this provision seems to give no discretion to the court in dismissing the case upon debtor's request if the requisite documents are not timely filed.

This issue was certainly raised on appeal by debtor: a detailed statutory analysis of these three subsections was at the very heart of the district court opinion on appeal, Warren v. Wirum, 378 B.R. 640 (N.D. Cal. 2007). And yet this Ninth Circuit opinion overturning that district court opinion oddly made absolutely no mention of these clearly pertinent subsections. Even the First Circuit opinion relied on so heavily in this Ninth Circuit opinion addressed these subsections, explaining that these subsections "operate within their own statutory ambit and do not cabin the bankruptcy court's discretion in other areas." The Ninth Circuit opinion simply states in a conclusory footnote that "none of th[e] § 521(i)(1), (3), (4) exceptions apply in this case," without any reference whatsoever to § 521(i)(2) which seems clearly to apply . In my view, the Court's failure to address this diminishes its opinion's credibility and likely its longevity .

New Bulletins on this website will provide summaries of other opinions within the Ninth Circuit shortly after they are published. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO SUCH FUTURE REPORTS.

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

PLEASE NOTE that 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

Judge Trish Brown Rules that $10,000 IRS Debt is Priority Debt Because 3-Year Look-Back Period is Tolled under the BAPCPA-Amended §507(a)(8)

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


In re Steen
Oregon Bankruptcy Court Case No. 08-35047-tmb13
April 13, 2009

§507(a)(8) of the Bankruptcy Code is the provision determining which tax debts are priority and thus must be paid in full in a Chapter 13 case. BAPCPA added an unnumbered paragraph to this subsection. Although this opinion by Judge Trish Brown is unpublished, neither the judge nor either party found any case law interpreting this unnumbered paragraph, so this appears to be a case of first impression and worthy of attention.

In her opinion the judge declined to apply equitable principles of tolling urged by the debtors but rather applied "the plain language" of the unnumbered paragraph, ruling that an IRS tax debt was a priority debt because the three-year look-back period was tolled during the 31 days that a prior Chapter 13 case had been pending, plus the 90 additional days referred to in the paragraph, a total of 121 days of tolling. The case at issue had been filed before the passing of this three years plus 121 days. Had the Chapter 13 case been filed about 75 days later, the debtors would have had about $10,000 less in priority debt to pay in their plan.

The BAPCPA "Unnumbered Paragraph"
That added paragraph in §507(a)(8) stated, as pertinent here:

An otherwise applicable time period specified in this paragraph shall be suspended for . . . any time during which the stay of proceedings was in effect in a prior case under this title . . . plus 90 days.

The "applicable time period . . . suspended," or tolled, here was the one pertaining to income taxes, "for which a return . . . is last due, including extensions, after three-years before the date of the filing of the petition."

The Critical Facts and the Specific Issue
Chapter 13 debtors objected to the IRS' proof of claim, which treated one tax year's liability of about $10,000 as a priority claim. Debtors had filed their Chapter 13 case 46 days plus three years since that liability's tax return had been due after a tax filing extension. But about a year earlier a prior Chapter 13 case had been filed and then dismissed only 31 days later, all well before the three-year look-back period had expired. How should the three-year look-back period and tolling rules be calculated when the prior case occurred entirely within that period?

The case turned in large part on an interpretation of the Supreme Court's holding in its 2002 unanimous opinion in Young v. U.S., 535 U.S. 43, which the legislative history clearly indicated was intended to be codified in this addition to §507(a)(8).


Debtors' Argument
Debtors looked to the Young opinion for authority that the bankruptcy court should look to the traditional equitable tolling principles "to determine the extent, if any, to which the lookback period was tolled by their prior bankruptcy filing." Under these equitable principles, the IRS rights would be protected not expanded by the tolling, with the result that, as argued by debtors' counsel: “if the three year time period had not run when a prior bankruptcy case was filed, then such period would run the later of 90 days after the end of the prior bankruptcy case or the full three year period." That is, tolling occurs only if the three year period expires less than 90 days after the prior case was over.

IRS' Argument
The IRS appeared to interpret Young instead to say that the three-year period was tolled for the length of time the prior case was pending, regardless that this occurred well within the three-year period. Thus, following the statute, the IRS argued that the look-back period is simply extended for the number of days the prior case was pending plus 90 days.

Judge Brown's Rationale
While finding that "there is some appeal to the Debtors’ argument," the judge determined that "it runs afoul of the plain language of the statute." She said that the clause stating that the "applicable time period . . . shall be suspended for . . . any time during which the stay of proceeding was in effect in a prior case under this title" "clearly contemplates that the lookback period shall cease to run during the time that a debtor is in bankruptcy plus 90 days."

As additional justification, the judge referred to another statute in the Code, §108(c), in which Congress laid out expressly a time calculation very similar to the one that Debtors sought to apply here, as indication that "had Congress intended such a result it clearly knew how to word the unnumbered paragraph to accomplish that goal. It did not do so."

The Bottom Line
The Supreme Court's Young opinion stated that "[i]t is hornbook law that limitations periods are 'customarily subject to equitable tolling,' unless tolling would be 'inconsistent with the text of the relevant statute.' " (Citations omitted.) Although Judge Brown did not refer to this in her opinion, she looked to "the text of the relevant statute" to determine, that the principles of equitable tolling were subservient to "the plain language of the statute." The three-year period of §507(a)(8) is tolled for whatever period of time a prior bankruptcy case is pending, plus 90 days, regardless when that prior case occurred in relation to that three-year period.

New Bulletins on this website will provide summaries of other opinions within the Ninth Circuit shortly after they are published. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO SUCH FUTURE REPORTS.

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

PLEASE NOTE that 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

Why President Obama Let the Bankruptcy Cramdown Legislation Die of Neglect

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

After the bankruptcy cramdown legislation was voted down on the Senate floor at the end of April, one of the reasons cited for its defeat has continued to confound both its supporters and its opponents: why did President Obama not push hard for the legislation that he had consistently supported, just when his help was most needed?

This is no mere academic question. The foreclosure crisis continues to show little sign of abating. The Administration's true attitude towards the legislation is a key factor for those supporters in deciding whether and when they should renew their efforts in Congress.


The Neglect
The White House put virtually no effort into the bankruptcy legislation after the House passed its version in early March.

Contrast what happened on credit card reform, which the President just signed into law on Friday, May 22. He met with credit card lenders at the White House about the legislation in late April right before the House passed its bill. On the morning of that vote, Treasury Secretary Timothy Geithner convened a meeting with the House bill's sponsor and consumer groups, at which he trumpeted the Administration's strong support. The White House publicly got involved in the negotiations, pushing certain provisions, broadcasting again that the Administration was deeply invested in the law's passage. Obama promoted it personally in a prime-time news conference and then again in one of his weekly weekend radio addresses, and then even traveled to Albuquerque, New Mexico for a highly publicized town hall meeting specifically on this issue, putting the full weight of his office behind the bill a few days before the Senate vote. Finally, the President pronounced weeks ago that he wanted to sign a credit card reform bill by the Memorial Day weekend, with the result that the Senate passed its version this last Tuesday, the House passed the compromise version on Wednesday, and, lo and behold, the bill was ready for the Rose Garden signing ceremony just in time for this "deadline."

This White House clearly knows how to go on the offensive. In stark contrast, everybody could tell, especially the Senators on the fence, that there was no offensive push whatsoever on the bankruptcy bill. Not a single word of public support from the President between the time of House passage and the Senate vote. Why not?

Two possible theories.

1) Genuine Ambivalence

Is it sensible that, notwithstanding the Presidential campaign rhetoric and Obama's inclusion of bankruptcy cramdown in his Administration's economic battle plan, he or his economic team actually did not believe in it? Or at least not enough?

Barack Obama had consistently supported the concept of bankruptcy mortgage cramdown. He promoted it explicitly during his Presidential campaign, devoting an entire (albeit short) speech to bankruptcy reform, a rather unusual elevation of bankruptcy law to the national stage. His campaign website listed "Reform of Bankruptcy Laws," including mortgage cramdown, as one of his 10 key bullet-points on the Economy (see my Bulletin of August 28, 2008). His support did not end with the election. A month after his inauguration, after he and his staff had had a few months since Election Day to consider the appropriate role of mortgage cramdown in addressing the foreclosure crisis, the President included the following paragraph in a major speech on his plan to address the foreclosure crisis:

My administration will continue to support reforming our bankruptcy rules so that we allow judges to reduce home mortgages on primary residences to their fair market value – as long as borrowers pay their debts under a court-ordered plan. That's the rule for investors who own two, three, and four homes. It should be the rule for ordinary homeowners too, as an alternative to foreclosure.

That sounds like genuine support. Two weeks later the House passed its cramdown bill.

But at that point, it's as if the lights went out. Only muted or ambiguous public support followed. The most visible comment from the Administration thereafter came from Treasury Secretary Timothy Geithner on April 21 during questioning before the congressional oversight panel overseeing the financial bailout. The panel's otherwise very able chair, Elizabeth Warren, who had championed bankruptcy cramdown, made the most basic litigator's error: she asked the witness, Geithner, a question she did not know how he would answer. Or perhaps more accurately, Geithner just did not follow the lead of her leading question. Obama had said that cramdown was a vital incentive, the "stick," to encourage mortgage holders to enter into mortgage modifications. With that undoubtedly in mind, Warren asked Geithner if the cramdown bill was essential, to which he replied: “We are supportive of carefully designed changes” to bankruptcy law. "It’s a difficult balance to get right, as you know,” he continued, lamely adding, “But the president is supportive of this.”

This response was universally seen as unenthusiastic and ambivalent just when Senate negotiators desperately needed a hearty endorsement. Indeed, it gave any wavering Democratic Senators a clear signal that this legislation was not an Administration priority and that there would not be significant consequences if they strayed from the fold on this one.

The following week, the Senate voted down the measure.

Did the Obama economic brain trust, after a few months of grappling with so many angles of the broader economic picture, believe at least on some level the main talking point of the Mortgage Bankers Association, that the mortgage credit markets are in a such a delicate state that inserting a major unknown such as the cramdown law, with its inevitable immediate significant uptick in Chapter 13 bankruptcy filings, was too risky? Or did the Administration determine at some point that their beefed up non-bankruptcy mortgage modification programs should be first given an opportunity to work without the incentive of a possible Chapter 13 cramdown? More specifically, did these decision-makers fear that cramdown would force the nation's financial institutions at all levels to more quickly acknowledge the true value of their mortgage assets, overstressing the financial system just when it seemed to be starting to regain some traction?

Rahm Emanuel, Obama's chief of staff and de facto legislative strategist, knows, but he's not talking.


2) Utilitarian Political Calculation

At some point, perhaps even before the House vote in favor of the measure, the White House made a decision that the cost of expending political capital on the cramdown legislation was not worth the anticipated benefit. An educated guess was made that Senator Durbin would not be willing to gut the bill by restricting it to subprime or a similarly restricted set of loans, that the mortgage industry would not bend to accept a broadly applicable bill, with the reliably predictable result that the bill would thus fail to garner every one of the essential Democratic Senate votes much less the necessary few Republican ones to get to the filibuster-proof 60 votes. Knowing the power of the financial services lobby, particularly on many of the crucial swing Senators, and knowing the relative discipline of the Republican Senators, the Administration determined that the legislation would almost certainly not pass in the Senate.

The only unknown in that utilitarian calculus was the difference that a full Presidential offensive could make on the outcome. The decision by the White House against mounting this offensive had the following Congressional and public components.

The Congressional Calculus
On the Congressional side, the Administration saw that the issue was starkly partisan, exemplified by the House Judiciary Committee vote just one week after the inauguration, in which the bill carried 21-15 but on strictly party lines. Given the other monumental legislative battles ahead--such as health care and climate change--this particular one was determined to be not worth enough to allow its partisan collateral damage to affect those future battles. Indeed, although there were a few Republican Representatives had voted to help pass the House bill, not a single Republican Senator voted for in favor of the Senate bill. Splitting off some of these disciplined Republican votes would only have been possible with a great deal of bruising arm-twisting.

By way of great contrast, the battle the Administration instead chose to pick against the financial industry, the credit card reform which became law this last week, was much less partisan. The bipartisan votes reflect this: it passed the House 357-70, the Senate 90-5, and then the House again 361-64. These votes were relatively one-sided partly because of the Administration's multi-faceted aggressive push, but more so because credit card reform, at least at this political moment, was much less divisive than bankruptcy cramdown. The Administration needed this infinitely less bloody and less risky victory.

Assessing the Public Mood
On the public side as well, the White House made an assessment of the public mood and concluded that, given the tenor of the moment, it was battling against the tide, and should cut its losses. Had the Administration pushed hard and lost, it would have taken a significant hit to its reputation.

The Administration perceived that, first, the pool of people personally affected by credit card interest rates and fees is many times larger than those personally affected by foreclosures.

Second, a large percentage of the public is frustrated by their credit card lenders and their seemingly unlimited arbitrary power, this frustration greatly accentuated these last few months as these lenders have tried to reduce their losses by much more aggressively using the discretion that their one-sided contracts have given them. As Senator Charles Schumer, one of the cramdown legislation's chief supporters, expressed:

"Bankruptcy reform, important as it was, was sort of esoteric. If you went into O'Halloran's Pub, the fellas aren't saying to you, 'What's going on with bankruptcy reform?' But they might say, 'What are you doing about my credit cards?' The average person feels the second much more than the first . . . ."

And third, although there are plenty of credit card abusers, somehow in the general public's eye credit card borrowers were helpless victims while homeowners being foreclosed on were much less so. The picture of millions of innocent homeowners who had been merely counted on what had largely been consistently occurring for two generations--increases in home values--was indelibly sullied with and overwhelmed by images of greedy house-flipping speculators and refinance-addicted spendthrifts. Perversely, and in no small part because of the persistent efforts of the mortgage lobby spanning at least two legislative cycles, a substantial portion of taxpayers transferred their outrage about having to shoulder the costs of the financial industry's collapse into an indignant moral superiority: "I've been responsible in buying a house within my means and paying on my mortgage so why should I pay for someone else's irresponsibility and failure to understand their mortgage terms?"

The White House realized the limits of its bully pulpit against such visceral attitudes.

Conclusion

The Obama Administration is cautious, rational and realistic. It determined at some point that, in the totality of the present circumstances, bankruptcy mortgage cramdown was not going to make it through the Senate. So, after that point the Administration did not invest hardly any of its political capital on that fight. The result: with almost no money on this race, it did not lose much. Although the Mortgage Bankers Association and its allies crowed about its success, and news reports labeled this as a defeat for the Administration, that part of the story faded quickly. The swiftness of the subsequent passage of the credit card reform bill, with its relatively strong bipartisan support, was in part orchestrated by the White House to mute the loss on the bankruptcy bill, to demonstrate its ability to prevail against at least one sector of the financial services industry.

Would the Administration's full support, akin to its effort with the credit card reform, have made a difference in the outcome? Take it from one of the chief legistlative opponents, Camden Fine, President and CEO of the Independent Community Bankers of America: "This would have been a much different deal if Obama had pressed it." "The fact that Obama effectively sat it out helped us a great deal."

Whether this bankruptcy legislation will return depends on two primary unknowns:
1) the evolution of the economy in the coming year or so, particularly how much the Obama Administration's enhanced loan modification programs reduce the millions of anticipated foreclosures and their tremendous strain on the economy; and
2) the true attitudes among the President's economic team about the benefits and risks of bankruptcy mortgage cramdown, and how those attitudes evolve over the coming months.

This Administration has only been in power for one quarter of a year, has had to deal with a tsunami of economic issues, and understandably has had to pick its battles. By all indications, the home foreclosure scene will still be one crying out for further attention for many months to come. We may well still have the opportunity to see what would happen to bankruptcy cramdown if this Administration gave it its full-throated support.

New Bulletins on this website will provide articles of interest related to any future bankruptcy mortgage cramdown legislation, non-bankruptcy mortgage modifications, foreclosures and similar subjects. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED WITH LINKS TO SUCH FUTURE BULLETINS.

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

PLEASE NOTE that 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