BLS Litigation

Can't Include 401(k) Loan Payment Under Chapter 7 Means Test: Does Not Qualify either as "Secured Debt" Payment or as "Other Necessary Expense"

2009-06-01T06:00:00.000-07:00

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

Egebjerg v. Anderson (In re Egebjerg)
Ninth Circuit Court of Appeals Case No. 08-55301
May 29, 2009

The Issue
In a case of first impression for the Ninth Circuit Court of Appeals, under BAPCPA's "means test" does a Chapter 7 "debtor's repayment of a 401(k) loan constitute a 'monthly payment on account of secured debts' or an '[o]ther [n]ecessary [e]xpense' that can be deducted from a debtor's monthly income for purposes of calculating the debtor's disposable monthly income under § 707(b)(2)"?

Under the facts of this case, if the 401(k) loan payments DO fit within either of these statutory terms, then the debtor's filing would not be presumptively abusive, and the Chapter 7 case would not be dismissed. Otherwise, the debtor would be left with sufficient monthly disposable income to make his filing presumptively abusive.

The Critical Facts
Two years before filing his Chapter 7, debtor took out a loan against his 401(k) plan to pay creditors, in an effort to avoid bankruptcy. The monthly payment was about $700; the loan was scheduled to be paid off 21 months after the date of filing. The debtor sought to include this payment as a necessary expense, the U.S. Trustee objected. Without this expense, debtor's filing was presumptively abusive under the means test.

Bankruptcy Court Ruling Below
The bankruptcy court held that the 401(k) loan was a "secured debt," and so appropriately deducted from disposable income, resulting in no presumption of abuse. However, since after the loan would be paid off there would be income available to pay a significant amount to unsecured creditors in a Chapter 13 case, the court determined that under the "totality of the circumstances" it would be an abuse to permit the case to stay in Chapter 7. Upon debtor's failure to convert to Chapter 13, the case was dismissed. Debtor appealed directly to the Ninth Circuit (see below about this appeal procedure).

The Ninth Circuit's Rulings and Rationale
1) "Secured Debts"
The debtor's monthly payments on a 401(k) loan are not permitted "monthly payments on account of secured debts" under § 707(b)(2)(A)(iii) because that type of loan is not a "debt" under the Bankruptcy Code, in that the 401(k) plan administrator has no "claim" for repayment against the debtor. Such a loan is merely an offset against future 401(k) benefits of the debtor.

2) "Other Necessary Expense"
The 401(k) loan payments do not fall within "the categories specified as Other Necessary Expenses issued by the Internal Revenue Service" under § 707(b)(2)(A)(ii) because these payments "are the functional equivalent of voluntary contributions to a retirement plan," which are expressly excluded under the IRS guidelines.

3) "Special Circumstances"
401(k) payments do not constitute "special circumstances" which would rebut the resulting presumption of abuse because such payments are "neither extraordinary nor rare."

Since the 401(k) loan payments are not payments on "secured debts" and are not "other necessary expenses," they may not be deducted from disposable income, resulting here in the presumption of abuse. And since these 401(k) payments do not qualify as a "special circumstance" rebutting that presumption, the Court affirmed the bankruptcy court's dismissal of the Chapter 7 case.

Note: Direct Appeal from Bankruptcy Court to Court of Appeals
28 U.S.C. § 158(d)(2), added by BAPCPA, provides for a direct appeal from the bankruptcy court to the circuit court. There are a variety of circumstances now permitting such direct appeals, but here debtor filed a notice of appeal, persuaded the bankruptcy court to certify that its decision involved a question of law for which where was no controlling precedent in the Ninth Circuit, and the motions panel of the Circuit granted the motion for direct appeal.

The Bottom Line
A 401(k) monthly loan payment cannot be included as an expense under the means test. And such a loan does not constitute an abuse presumption-defeating special circumstance if the loan was incurred for a commonplace reason such as "general financial problems." In dicta the Court kept open the possibility that if such a loan were incurred for some extraordinary reason, the payments could possibly qualify as an extraordinary circumstances overcoming the abuse presumption.

New Litigation Reports 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 this Litigation Report and the entire contents of this website are NOT intended 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 legal advice to anyone.

Ch. 13 "Undue Hardship" Student Loan Discharge Proceeding Need Not Wait Until End of Case; Ch. 13 Is Valid Way to Pay These Debtors' Attorney Fees

2009-05-26T06:00:00.000-07:00

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

Educational Credit Management Corp. v. Coleman (In re Coleman)
Ninth Circuit Court of Appeals Case No. 06-16477
March 25, 2009 (originally published August 1, 2008, vacated August 22, 2008 for lack of jurisdiction, opinion refiled after district court below certified the matter for interlocutory review)

The Issue
"We consider whether “undue hardship” determinations—whereby bankruptcy courts decide whether student loans qualify for discharge—are ripe in a Chapter 13 case substantially in advance of plan completion." This is an issue of first impression for this Circuit Court.

The Ninth Circuit's Rulings
Yes, in the right circumstances, a Chapter 13 debtor can file an adversary proceeding for an undue hardship discharge determination early in the case.

This adversary proceeding to determine hardship discharge was constitutionally ripe even though filed long before the anticipated discharge because 1) the discharge dispute constituted a “substantial controversy,” 2) the dispute was “definite and concrete” because it was about a specific debt, and 3) it was “of sufficient immediacy and reality” since it relied on only “a single factual contingency,” the completion of plan payments.

The "hardship discharge" was also prudentially ripe: applying the 1967 Supreme Court Abbott Labs opinion to this bankruptcy context, 1) the facts needed to determine if there was “undue hardship" were sufficiently developed in this case for the court to make this determination ("fitness of the issues") and 2) delaying the hardship determination would cause a series of hardships to the debtor, including having to go through the length of a Chapter 13 case without knowing whether a major creditor would be discharged in the case ("hardship of the parties").

In holding that the matter was ripe for adjudication although the debtor’s Chapter 13 case was less than a year past confirmation of debtor’s five-year plan, the Court went against two other Circuits, the Fifth and the Eighth, and joined one, the Fourth. Interestingly, it buttressed its position by citing an earlier Ninth Circuit Bankruptcy Appellate Panel opinion, In re Taylor, 334 B.R. 747 (1998), which had been overturned on other grounds.

The Critical Facts
Coleman owed more than $100,000 in student loans and had been trying to pay on them since 1999. She filed a Chapter 13 case in 2004. She had worked as a substitute teacher and an art teacher, but was laid off in 2005. A little less than a year after plan confirmation Coleman asked for an "undue hardship" determination under 11 U.S.C.§ 523(a)(8) so that her student loans would be included in the discharge at the end of her case. The creditor, Educational Credit, filed a motion to dismiss for lack of subject matter jurisdiction on ripeness grounds, and the bankruptcy court denied the motion. The U.S. District Court affirmed, and Educational Credit appealed.

The Ninth Circuit's Rationale
The 3-judge panel distinguished between “constitutional ripeness” and “prudential ripeness," citing both Supreme Court and Ninth Circuit precedents.

Constitutional Ripeness
Constitutional ripeness is a jurisdictional prerequisite--a matter must be ripe for adjudication before it can be heard. Constitutional ripeness existed here because:
1) a “substantial controversy” arose from debtor’s attempt to discharge the debt and the student loan creditor’s objection to the discharge;
2) this controversy was “definite and concrete, not hypothetical or abstract,” because it was about a specific debt: and
3) was “of sufficient immediacy and reality” and not “impermissibly speculative” since it relied on only “a single factual contingency,” her completion of plan payments, instead of a “series of contingencies.”

Prudential Ripeness
Even after the jurisdictional hurdle of constitutional ripeness is overcome, the Supreme Court has long held that “[p]roblems of prematurity and abstractness may well present ‘insuperable obstacles’ to the exercise of the Court’s jurisdiction, even though that jurisdiction is technically present" (citing Supreme Court decisions in 1947 and 1972). .

The Ninth Circuit panel at this point made the critical decision that a 1977 Supreme Court two-part test for determining the prudential component of ripeness in the administrative context was also applicable to this bankruptcy context. Under Abbott Labs. v. Gardner, 387 U.S. 136, 149
(1967), prudential ripeness turns on 1) “the fitness of the issues for judicial decision” and “2) the hardship of the parties of withholding judicial consideration.”

1) Fitness of the issues:
A case is not "fit" if facts need to be further developed before the court can make a decision in the case.

Here, the Court of Appeals determined that the undue hardship issue requires a bankruptcy court to look usually far into the future to weigh the debtor’s ability to repay the debt during the lengthy term of the loan, so that delaying that determination a relatively short time to the Chapter 13 discharge date “is unlikely to provide much, if any, additional benefit to the bankruptcy court’s resolution of the issue.”

As for whether there has been enough time to determine whether the debtor has made a sufficient good faith efforts to repay the debt, that depends on the facts of each case—here the Court determined that debtor’s attempts to repay from 1999 until her Chapter 13 filing in 2004 was a sufficient time for the bankruptcy court to make this evaluation. The Court strongly implied that a debtor who files her Chapter 13 case soon after becoming liable on her student loans would not have a ripe controversy. But here the facts were sufficiently well developed for the bankruptcy court to determine the undue hardship issue.

Importantly, the Court disagreed with the Eighth Circuit by holding that the hardship determination does NOT need to be made in reference to the debtor's circumstances at the time of discharge; there is no such timing requirement in § 523(a)(8).

2) Hardship of the parties:
On the “hardship of the parties” prong of the prudential ripeness test, the Court held that "[h]ardship to the debtor from postponing a decision in this situation supports a finding of ripeness."

Looking exclusively to the potential hardship to the debtor (without even a passing reference to any potential hardship to the student loan creditor), the Court was very understanding of a debtor's practical circumstances. It stated that subjecting a debtor to committing all her disposable income for five years is “a considerable burden to bear without any guarantee that the debt will be ultimately discharged.”

Fascinatingly, the Court argued, some might say speculatively, that because the undue hardship exception is narrow and difficult for debtors to establish, they need an attorney to do so, and if they could not afford to pay up-front for that attorney in a Chapter 7 case they should be able to finance that representation through the mechanism for paying debtors' attorneys through Chapter 13. Because I believe the exact wording of the Court on this is so interesting, here is the entire pertinent excerpt, with all citations and footnotes deleted:

Theoretically, Coleman could convert her case to a Chapter 7 bankruptcy, assuming that she meets the requirements for filing under that Chapter, and receive a discharge under 11 U.S.C. § 727(a). However, it appears the reason Coleman filed under Chapter 13 rather than Chapter 7 was that she was unable to afford an up-front payment for the undue hardship litigation. In Chapter 7, debtors’ attorneys may not be paid from the estate, so unless the attorney is paid up-front, she is unlikely to be paid. In a Chapter 13, however, the attorney is often paid as part of the plan.

Because Coleman apparently cannot finance the undue hardship litigation up-front, she would have to proceed with the undue hardship litigation pro se, if at all.

A fundamental purpose driving the bankruptcy system is to “relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes.” Debtors who are primarily burdened by student debt will not emerge from bankruptcy with a “fresh start” if those student loan debts are not dischargeable—and if they are forced to pursue the undue hardship matter pro se, the likelihood of a successful undue hardship hearing is probably substantially reduced given the complexity of the inquiry. Because the undue hardship standard is extremely difficult to meet, a debtor who would meet the undue hardship standard and yet is unable to obtain an undue hardship determination because it is not yet ripe may be forced to rely on public benefits—or may turn to credit as a means of meeting their basic needs. In a case where a debtor faces genuine undue hardship from student loan debt, the debtor’s best shot at a fresh start may be to litigate the matter in a Chapter 13 case. [Emphasis added.]

The Bottom Line
This opinion gives debtors’ attorneys clear authority in Chapter 13 cases, in the appropriate circumstances, to file “undue hardship” adversary proceedings early in the case. This authority is particularly important in this Circuit to the extent that the 1998 In re Taylor BAP opinion has been uncertain authority, having been overturned on other grounds.

But the opinion also provides ammunition for attorneys of student loan creditors to argue lack of ripeness when the facts on hardship have not. been sufficiently developed, such as when a debtor brings the nondischargeability proceeding when her capacity for future income is unresolved or she does not have a sufficiently long history of attempted loan payments.

Finally, this opinion invites debtors’ attorneys confronted with a new client who has a strong “undue hardship” case, but no up-front attorney fees for litigating it, to think seriously about filing a Chapter 13 case instead of Chapter 7, when otherwise legally and ethically appropriate to do so.

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

New Litigation Reports 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.

PLEASE NOTE that this Litigation Report 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.

State Court Litigation Against Debtor Allowed through Order Granting Relief from Stay Can't Be Expanded Beyond Strictly-Construed Terms of the Order

2009-05-18T06:00:00.000-07:00

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

Griffin v. Wardrobe (In re Wardrobe)
Ninth Circuit Court of Appeals Case No. 07-16635
March 16, 2009

This opinion addressed an issue of first impression in the Ninth Circuit: "the narrow question whether a limited relief from stay order can be expanded by a creditor to obtain a non-dischargeable judgment when the motion for the limited relief requested only permission to litigate the factual question of the damages caused by a breach of contract."

From the way the Court couched the issue here, it signaled its decision: No. Creditor, a homeowner, received an order granting it relief from stay to litigate the amount of damages on a state court breach of contract claim against the debtor, a construction contractor, for the stated purpose of proceeding against the bonding companies of the debtor, a construction contractor. Even though this order granting relief was arguably open-ended, it nevertheless did not permit the creditor to amend the state court complaint to add allegations of intentional fraud and get a default judgment against debtor on that new nondischargeable claim, because the motion for relief from stay had not contemplated such an amendment.

The bankruptcy court had decided to the contrary, so there is more to this story.

Additional Critical Facts
A homeowner sued her building contractor and his bonding companies for breach of contract on a home repair. Shortly before trial, the contractor filed bankruptcy, a Chapter 13, which turned into a Chapter 7. Homeowner filed a motion for relief from stay which "expressly stated that “[t]he stay relief will only allow her to go to state court and proceed against [the bonding companies]." Relief was granted with the order explicitly stating that "Creditor may not proceed to enforce that judgment against the Debtor, or property of the estate without further order of this court." The order did not address whether additional claims could be raised against the debtor and brought to judgment.

Importantly, homeowner then filed an motion in the bankruptcy court to extend the bar date to objecting to dischargeability of the debt until “thirty days after there has been a notice of entry of judgment" in the state court case. The motion pointedly stated that “[homeowner] believes her debt is non-dischargeable under 11 U.S.C. § 523(a)(2), (4) and (6).” The motion was unopposed and granted.

Debtor received his discharge, his attorney withdrew from the state court case, the homeowner settled with the bonding companies and then proceeded against debtor in the state court case. She amended the complaint to add allegations of intentional fraud, got a default judgment against the debtor for more than $250,000, including $50,000 of punitive damages, and filed an adversary proceeding in the bankruptcy case to establish the nondischargeabilty of that judgment debt under § 523(a)(2)(A), the "false representation, or actual fraud" provision.

The Courts Below
The bankruptcy court "determined that the state court judgment was entitled to preclusive effect and 'that the elements necessary to establish a cause of action under . . . Section 523(1)(2)(A) have been established in this matter.' " All but the punitive damages portion of the state court judgment was determined to be nondischargeable.

The BAP reversed. In an unpublished opinion it held that in allowing homeowner to amend her complaint to include the claim for fraudulent misrepresentation, “the state court impermissibly modified the stay as to [debtor],” resulting in a violation of the stay and leaving its findings “void and without preclusive effect.” So the BAP remanded to the bankruptcy court to try the § 523(a)(2)(A) claim. Homeowner appealed. (Note: Judge Randall Dunn was on this panel, but no author is indicated on the unpublished "Memorandum.")

Ninth Circuit's Rationale and Holdings

1) Under Ninth Circuit case law, federal courts are required to give full faith and credit to state judicial proceedings, however, “[b]ecause . . . judicial proceedings in violation of the stay are void ab initio, the bankruptcy court is not obligated to extend full faith and credit to such judgments.”

2) Also under Ninth Circuit precedent, "the continuation of the [stayed] proceeding can derive legitimacy only from the bankruptcy court order," the terms of which must therefore be strictly construed.

3) The purpose of the automatic stay--preserving assets both for the debtor and other creditors--is promoted by "[l]imiting the relief available to a creditor to that which was currently alleged in a pending complaint or specifically requested in the motion for relief forces creditors to disclose the causes of action they intend to pursue and ensures that the bankruptcy court is fully apprised of the nature of the lawsuit so that the court can determine whether cause exists to grant relief from the stay."

4) Adopting the rationale of an unpublished Ninth Circuit opinion, the Court held: "an order granting limited relief from an automatic stay to allow a creditor to proceed to judgment in a pending state court action is effective only as to those claims actually pending in the state court at the time the order modifying the stay issues, or that were expressly brought to the attention of the bankruptcy court during the relief from stay proceedings."

New Litigation Reports 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 this Litigation Report 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.

Bankruptcy Court Has Inherent Power to Suspend Attorney, Separate from Its Civil Contempt Authority Under § 105(a); the Extent of Due Process Required

2009-05-11T06:00:00.000-07:00

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

Price v. Lehtinen (In re Lehtinen)
Ninth Circuit Court of Appeals, Case No. 05-15421
April 28, 2009

The Ninth Circuit panel addressed the source for and limitations on a bankruptcy court's inherent authority to suspend an attorney from practicing before it.

The Issues
1) Does a bankruptcy court have the inherent power to suspend an attorney from practicing before it, independent of its general civil contempt power under § 105(a)? If so, upon what is this power based? 2) What standards of due process must be accorded the attorney in the bankruptcy court's exercise of that power? 3) What is the role of local bankruptcy rules in this arena, and were those rules appropriately applied here?

The Holdings: the Shorthand Version
1) Yes, a bankruptcy court has the inherent power to sanction attorneys practicing before it, and this power includes the power to suspend since a suspension is not punitive in nature but rather maintains the integrity of the court and of the attorney profession.

2)) In the bankruptcy court's exercise of its inherent power, an attorney is entitled to procedural due process including notice and an opportunity to be heard, but not the procedures of criminal due process. Sanctions under this power require a finding of "bad faith" and "willful misconduct," but explicit findings are not necessary as long as the record supports a finding of bad faith.

3) With the pertinent local federal district court rule stating that a judge "may do any or all of the following," the bankruptcy court had no obligation to refer the matter to the court's Standing Committee on Professional Conduct, just one of the enumerated discretionary options.

The Facts
The summary of facts is longer here than usual for the benefit of attorneys who might be particularly interested in the specific conduct of this suspended attorney.

Attorney Price represented Lehtinen in a Chapter 13 case, one intended to allow for the sale of her house to pay her creditors in full. Price did not attend the § 341 meeting of creditors but sent a contract attorney instead, without informing his client. Price also failed to appear at the confirmation hearing, having instead agreed to appear elsewhere at a hearing for another client, and without requesting that either hearing be continued. Price did not inform Lehtinen about the confirmation hearing, although she received written notice of it and upon calling the trustee's office was informed that she needed to attend. She did attend and the plan paying all creditors 100% was confirmed.

Price referred Lehtinen to a friend to get a loan to repair the house to be able to sell it. The friend agreed to make the loan only if Lehtinen retained Price, who was also a real estate broker, as the realtor for the sale of the house. Price also directly pressured his client to hire him as her realtor, soliciting her five distinct times for that purpose. Nevertheless, she did not make the loan through this friend, and eventually sold the house without hiring the attorney as her realtor.

Price assumed that the case was dismissed because he understood Lehtinen had not been current on her plan payments. So on the day after the confirmation hearing he sent her a letter telling her that the case had been dismissed, that he could refile the case for her or help her sell her house, and that the mortgage holder could now proceed with foreclosure.

A few days after the confirmation hearing the bankruptcy court issued an order to show cause why it should not require Price to disgorge some of his fees for his failure to appear at the two hearings. After a hearing the court ordered Price to disgorge $300 of the $1,500 paid to him.

Lehtinen then sent a letter to the bankruptcy court about Price referring her to his friend for a loan and pressuring her to hire him as realtor. She attached his letter to her about the supposed dismissal. The court issued a second order to show cause why Price should not be "suspended or disbarred from practice in this court," citing its "inherent sanction power" and listing his alleged misconduct but not the particular rules of professional conduct or state statute at issue. After the hearing on this order to show cause, the court ordered Price to disgorge the rest of his fees and suspended him from practice in the bankruptcy court for the Northern District of California for three months. Price appealed.

The BAP Opinion
The Bankruptcy Appellate Panel determined that the bankruptcy court had the authority to sanction Price, and that it had "afforded him due process," but the BAP remanded to the bankruptcy court to discipline him with consideration of the American Bar Association Standards. Price appealed to the Ninth Circuit and stayed the suspension.

The Holdings Expanded, Rationale
1) Based on Supreme Court precedent as to federal courts in general, and Ninth Circuit precedent as to bankruptcy courts in particular, a bankruptcy court has the inherent power--independent of any express statutory basis-- to sanction attorneys practicing before it. This inherent power must be exercised with restraint because of its potential breadth and relatively low procedural safeguards, so the sanctions under this power may only be in the nature of civil contempt, NOT criminal contempt. On the question of first impression in the Ninth Circuit whether a bankruptcy court has the inherent power to suspend an attorney from practicing in its court, given that such a sanction may appear to be punitive akin to criminal contempt and not compensatory akin to civil contempt, the Ninth Circuit here held that the bankruptcy does have that power since a suspension is not punitive in that it maintains the integrity of the court and of the attorney profession.

2) An attorney is entitled to procedural due process including notice and an opportunity to be heard in the bankruptcy court's exercise of it inherent power, but it is not a criminal proceeding so criminal due process does not apply. Necessary notice includes advance notice of the alleged misconduct and notice of the basis for the court's sanctioning authority. The bankruptcy court's reference in its second order to show cause to its inherent sanctioning authority was adequate even though the final suspension order made reference to related bar rules of professional conduct and state statutes to which the order to show cause had made no mention. Sanctions under the bankruptcy court's inherent powers require a finding of "bad faith" and "willful misconduct," but explicit findings are not necessary as long as the record supports a finding of bad faith.

3) Because there is no overall federal procedure for attorney discipline in the federal court system, each federal district is permitted to create its own rules. Here the rules stated that a judge "may do any or all of the following," with five enumerated options, one of them being a referral to "the Court's Standing Committee on Professional Conduct," another being "other appropriate sanctions." Price's objection that the bankruptcy court did not refer the matter to the Standing Committee was not persuasive since the items on the list are discretionary not mandatory, even though an earlier BAP opinion had recommended that attorney discipline matters be referred to that committee. The open-ended "other appropriate sanctions" was sufficient to allow for suspension under the court's inherent authority.

Bottom Line
This Ninth Circuit Panel opinion, in a number of instances, seems to at least bend the prior rules in order to uphold this bankruptcy court's authority to sanction this attorney with a three month suspension. Although it made no mention of the appropriateness of the length of the suspension, the opinion leaves a strong impression that the Court believed that this attorney's conduct merited this degree of sanction, and the Ninth Circuit was not going to let legal niceties hinder the bankruptcy court from levying this sanction.

For Oregon Attorneys:
In the District of Oregon unlike in this Lehtinen opinion, attorney discipline is addressed in the Local Bankruptcy Rules (LBR) instead of the District's Local Rules of Civil Practice. But as in Lehtinen, the rules do not refer directly to attorney suspension, while here too providing an open-ended option, in this case subjecting an attorney to "[a]ny other appropriate sanction or remedy." Based on Lehtinen, this is no limit on a bankruptcy court's inherent authority to suspend an attorney from practicing before it. Note that the Oregon LBR's do make a direct reference to attorney suspension, but only in reaction to a suspension in another court.

Here are the pertinent subsections to Oregon LBR 9011-3:

Rule 9011-3. Sanctions, Remedies, & Suspension/Disbarment.

(a) General Sanctions and Remedies. A party or attorney who without just cause fails to comply with any provision of an LBR, FRCP, FRBP, LR, statute, or order; fails timely to notify the court of withdrawal, lack of opposition, settlement or proposed continuance of any matter; presents to the court unnecessary contested matters or adversary proceedings, motions, or unwarranted opposition; fails to appear or prepare for presentation to the court; or otherwise multiplies the proceedings in a case to increase costs unreasonably or vexatiously, may be subject to one or more of the following remedies:
(1) Entry of an order or judgment of default on a specific issue or the entire matter.
(2) Payment of any expense, including filing fees, attorney fees, or reporter fees incurred by any party or the court because of the violation.
(3) Entry of an order of dismissal for lack of prosecution.
(4) Any other appropriate sanction or remedy.

(c) Suspension/Disbarment. An attorney suspended or barred from the practice of law before any court may be served with an order to show cause why the attorney should not similarly be suspended or barred from practice before this court until the attorney is reinstated as an active member in good standing of that other court.

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

PLEASE NOTE that this Litigation Report 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.

May an Assignee of a Debt Base Its "False Financial Statement" Nondischargeability Claim on the Assignor's Reliance on that Statement?

2009-05-04T06:00:00.000-07:00

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

Boyajian v. New Falls Corp. (In re Boyajian)
Ninth Circuit Court of Appeals, Case Nos. 07-55713 & 07-55716
May 1, 2009

The Issue
May a § 523(a)(2)(B) nondischargeability proceeding be brought against debtors not just by the creditor which reasonably relied on debtors' alleged false financial statement, but also by this original creditor's successor-in-interest, which had not itself relied on those financial statements? The opinion turns on the meaning and weight to be given to the word "is" in the nondischargeability subsection § 523(a)(2)(B)(iii) and the fact that this verb is in the present tense.

The Courts Below
The bankruptcy court had entered summary judgment for the debtors, holding that the reliance on the false financial statement had to be by the assignee bringing the nondischargeability proceeding, not just the original creditor. The Bankruptcy Appellate Panel, which included Judge Randall Dunn, reversed, saying that an assignee stands in the shoes of the assignor and can base its nondischargeability case on the assignor's reliance on the false financial statements. The Ninth Circuit panel's opinion introduced the BAP opinion as a "careful" one, so one can guess which way its opinion went.

The Statute
Section 523(a)(2)(B) provides that a debt will not be discharged if it was obtained by:

use of a statement in writing—

i) that is materially false;

ii) respecting the debtor’s or an insider’s financial condition;

iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and

iv) that the debtor caused to be made or published with intent to deceive . . . .

(Emphasis added.) The plain meaning of the emphasized subsection, particularly the present tense of "is," seems to require that "there be reliance by the creditor who holds the claim at the time of the bankruptcy, even if there had been reliance in the past by the creditor who originally extended credit." The Ninth Circuit disagreed.

The Ninth Circuit's Statutory Interpretation and Holding

Read as a whole, this language does not provide that a debt is non-dischargeable only if the assignee creditor reasonably relied on the materially false statement.
. . . .
The most natural reading of the word “is” in subsection (iii) is simply that the debt is nondischargeable if, at the time the money is obtained by the debtor, he or she used a materially false written statement that was intended to deceive.
. . . .
Therefore, t]he bankruptcy court erred in holding as a matter of law that [the original creditor's assignee] could not pursue an action for non-dischargeability under § 523(a)(2)(B) because it was not the original creditor whom the [debtors] allegedly deceived in the course of incurring their debt.

The Court's Remaining Rationale

1) Congressional intent: Without clear language to the contrary, "Congress intended that the general law of assignment remain applicable," allowing the holder of a general assignment to stand in the shoes of the assignor for purposes of nondischargeability actions.

2) Adverse court opinions: The Ninth Circuit rejected the reasoning and result of the local bankruptcy court case relied upon by the debtors, General Electric Capital Corp. v. Bui (In re Bui), 188 B.R. 274 (Bankr. N.D. Cal. 1995), as well as that of two out-of-circuit bankruptcy courts.

3) Sister Circuit court opinion: The Ninth Circuit embraced the result in a Seventh Circuit opinion which did not directly interpret § 523(a)(2)(B)(iii) but relied on general assignment principles to give the assignee the right to raise a § 523(a)(2)(B) nondischargeability claim: FDIC v. Meyer (In re Meyer),120 F.3d 66 (7th Cir. 1997).

4) Public policy: "[I]f assignment of such a debt were to obviate a future non-dischargeability action in all cases where the assignee did not itself rely on misleading financial statements, the functioning of modern debt markets would be unnecessarily disrupted." Plus it would be perverse to permit "dishonest debtors to receive a discharge through the fortuity that their creditor chose to assign the debt."

The Bottom Line
The assignee of a debt need not have relied on the debtor's false financial statement but may base its nondischargeability claim on the original creditor's reliance on that financial statement.

New Litigation Reports 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 this Litigation Report 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.

Bankruptcy Ct. Has No Jurisdiction Over Fair Credit Reporting Act Violations Since No "Close Nexus" to Debtor's B'cy Case; Judge Trish Brown Affirmed

2009-02-23T06:00:00.000-08:00

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

Kasim v. Equifax (In re Kasim), Adversary Proceeding No. 07-03144
U.S. District Court, District of Oregon, Appellate Nos. CV 08-627-HA and CV 08-628-HA
October 29, 2008

Summary

Debtor filed a Chapter 7 case in early 2004 and received a discharge. In 2007 he filed this adversary proceeding against two credit reporting agencies and a creditor for violating the federal Fair Credit Reporting Act ("FCRA") by continuing to report a debt that had been apparently discharged in the bankruptcy case. Judge Trish Brown dismissed for lack of subject matter jurisdiction over the CRA claims. U.S. District Court Judge Ancer Haggerty affirmed.

Bankruptcy Court and District Court Jurisdictions
Debtor argued that the jurisdictional provision, 28 U.S.C. § 1331, gave the bankruptcy court jurisdiction over the FCRA claims. This section states in full: "The district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States." The debtor tried to show that the broad grant of § 1331 granted this jurisdiction "because the Bankruptcy Court's jurisdiction is coextensive with the District Court's jurisdiction." The District Court Judge disagreed, citing the more limited jurisdiction specifically conferred upon bankruptcy courts under 28 U.S.C. § 157.

Non-Core Proceedings
28 U.S.C. § 157(a) gives bankruptcy courts jurisdiction over "any or all proceedings . . . arising in or related to a case under title 11. Those proceedings "related to" a bankruptcy case are labeled "non-core proceedings," which are those in which the proceeding may not be against the debtor or the debtor's property, but the outcome could nevertheless "alter the debtor's rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate." [Citations excluded.]

"Close Nexus" Test
The District Court decision turned on the interpretation of the "close nexus" test as laid out in In re Pegasus Gold Corp., 394 F.3d 1189 (9th Cir. 2005). The Ninth Circuit there determined that the bankruptcy court did have subject matter jurisdiction over a non-core matter, stating that

the test is whether: the outcome of the proceeding could conceivably have any effect on the estate being administered in bankruptcy. Thus, the proceeding need not necessarily be against the debtor or against the debtor's property. An action is related to bankruptcy if the outcome could alter the debtor's rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate.
. . . .
The court ultimately concluded that matters affecting 'the interpretation, implementation, consummation, execution, or administration of the confirmed plan [in the context of a Chapter 11 case] will typically have the requisite close nexus.' [Quoting directly from Pegasus Gold, more extensively than was quoted in Judge Haggerty's opinion.]

Application of "Close Nexus" Test
Debtor contended that there was a "close nexus" between his Chapter 7 discharge and his allegations about the defendants' misreporting of his discharged debts on his credit reports.

But Judge Haggerty disagreed, determining that the "applicable 'close nexus' analysis examines the progress of the bankruptcy proceeding itself and not the parties involved in the litigation." "There is . . . no impact upon the estate itself." So he concluded: "That test is not met under these circumstances."

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

PLEASE NOTE that this Litigation Report 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.

In Involuntary Chapter 11 Case, Unsuccessfully Petitioned & Dismissed, How are the Debtor's Attorney Fees Apportioned Among the Petitioning Parties?

2009-02-16T06:00:00.000-08:00

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

Sofris v. Maple-Whitworth (In re Maple-Whitworth, Inc.)
Ninth Circuit Court of Appeals Case No. 07-56537
February 10, 2009

Two groups disputed the ownership and control of an apartment building in Beverly Hills, California owned by Maple-Whitworth, Inc. Certain parties related of one group filed an involuntary Chapter 11 case against this corporation. After the bankruptcy court denied this involuntary petition and dismissed the case, Maple-Whitworth sought to recover $42,257 in attorneys' fees and costs against only one of the parties who had filed the petition, Sofris. He challenged the award on a waiver theory: that Maple-Whitworth had waived its right to attorney fees and costs through a release executed on its behalf. The bankruptcy court did not address this waiver argument, deferring to a pending state court proceeding to determine control over Maple-Whitworth and thus the validity of the waiver. Instead the bankruptcy court apportioned the fees and costs among a number of the petitioners, under a common law theory of joint and several liability. Sofris appealed (apparently not happy about paying even just a portion of the fees).

Discretionary Relief under § 303(i)

§ 303(i) is the statutory basis for attorney fees in unsuccessfully petitioned bankruptcies:

If the court dismisses a petition under this section other than on consent of all petitioners and the debtor, and if the debtor does not waive the right to judgment under this subsection, the court may grant judgment—

1) against the petitioners and in favor of the debtor for—

A) costs; or

B) a reasonable attorney’s fee . . ..

The heart of the Ninth Circuit Panel's opinion on this issue is that the:

bankruptcy court erred by interpreting the unambiguously discretionary language of the statute as requiring that all petitioners be joined and served with the motion because all were jointly and severally liable as a class. . . .. [This] interpretation of § 303(i) as incorporating the common law doctrine of joint and several liability . . . is contrary to the individualized exercise of discretion unambiguously authorized by the statute, and ignores the consideration of the totality of the circumstances in imposing liability required by our precedent. . . .. In exercising its discretion whether to award fees and costs, the bankruptcy court may consider factors such as relative culpability among the petitioners, the motives or objectives of individual petitioners in joining in the involuntary petition, the reasonableness of the respective conduct of the debtors and petitioners, and other individualized factors. . . .. Tort concepts and class theories of liability are irrelevant to these discretionary and flexible considerations.

The Panel held that even though the bankruptcy court had applied the wrong standard, it did not abuse its discretion in awarding fees and costs against Sofris, and so affirmed this portion of the bankruptcy court's ruling.

The Waiver Defense

The Ninth Circuit Panel noted that § 303(i) allows a prevailing debtor to waive rights to attorney fees and costs, so "[i]t was an abuse of discretion not to resolve the contested waiver issue before awarding fees and costs. . . .. [T]he bankruptcy court has a non-delegable statutory obligation to make findings on this contested issue because it directly affects Maple-Whitworth’s right to § 303(i)(1) relief."

The Court remanded the case to the bankruptcy court to make findings on this waiver defense.

(NOTE: The Ninth Circuit's original opinion of February 20, 2009 referred to the underlying case as an involuntary Chapter 7 one, but corrected this to an involuntary Chapter 11 in its supplemental opinion of March 11, 2009.)

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

PLEASE NOTE that this Litigation Report 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.

Ninth Circuit Not Pursuaded by National Ass'n of Ch. 13 Trustees: Affirms Chapter 13 Debtor's Plan Paying Monthly Mortgage Payments Outside of Plan

2009-01-05T06:00:00.000-08:00

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

Cohen v. Lopez (In re Lopez)
Ninth Circuit Case No. 07-56337
December 24, 2008

On Christmas Eve the Ninth Circuit issued an opinion, in an appeal for which oral arguments had been heard less than two weeks earlier, by simply "adopt[ing] as [their] own the well-reasoned published opinion of the Bankruptcy Appellate Panel." This Bulletin reviews this BAP opinion which is now serves as the Ninth Circuit's opinion.

This relatively lengthy opinion--33 pages--addressed the issue referred to in the title of this Bulletin: may a Chapter 13 debtor's Plan provide for the debtor to make regular monthly payments directly to the mortgage creditor(s) while paying pre-peitition arrearage payments to the same mortgage creditor(s) inside the Plan? The simple answer is: yes.

The BAP took 33 pages to say "yes," in part to defeat the Chapter 13 trustee's argument "that, despite longstanding practice in this and other circuits and the comments of the leading treatise on Chapter 13, pre-BAPCPA Ninth Circuit precedent does not permit debtors to make direct payments in these circumstances." The Court also refuted the trustee's arguments that BAPCPA's amendments do not permit such direct payments. Perhaps one other reason the opinion was relatively long is to fully address the amicus brief of the National Association of Chapter 13 Trustees filed on behalf of the trustee's position.

The In re Fulkrod Precedent

The BAP carefully analyzed the precedent in question, a pre-BAPCPA Chapter 12 case, Fulkrod v. Barmettler (In re Fulkrod), 126 B.R. 584 (9th Cir. BAP 1991), aff’d sub. nom. Fulkrod v. Savage (In re Fulkrod), 973 F.2d 801 (9th Cir. 1992). In that case "a Chapter 12 debtor filed a plan providing for direct payment to three creditors with 'impaired' claims," the bankruptcy court required that these payments be made through the plan, and the BAP and the Ninth Circuit both affirmed. Somewhat surprisingly, "Fulkrod assumed that the issue was controlled by the trustee fee statute, 28 U.S.C. § 586," which provides that Chapter 12 trustees are to be paid a fee "not to exceed ten percent of the payments made under the plan." The BAP opinion affirming the bankruptcy court interpreted this phrase "payments made under the plan"

to mean those payments which result from the operation of Chapter 12 bankruptcy law. Those payments should be made by the trustee, and the trustee’s fee should be assessed against the funds received from the debtor for that purpose.

But then the BAP in Fulkrod provided some confounding dicta:

[a] contrary provision in a plan or an order confirming a plan is permissible because the [C]ode contemplates flexibility in the payment of claims, and would allow direct payment of an impaired claim without trustee compensation in appropriate circumstances.

The Ninth Circuit in its own Fulkrod opinion addressed this dicta with its own dicta:

[a]lthough the BAP hinted that Chapter 12 might permit a debtor to make direct payments to impaired creditors without trustee compensation in certain limited circumstances, that statement is neither necessary to its decision nor supported by statute.

It is this sentence, and presumably especially the last phrase, upon which the Chapter 13 trustee in the present Lopez case sought to base his argument. And the BAP in our case stated that "[a]lthough dicta, Fulkrod . . . nonetheless deserves consideration in any determination as to what debts may be paid outside of a Chapter 13 plan."

But after its detailed analysis, the BAP decided that Fulkrod was "not binding or determinative." The Court distinguished Fulkrod in the following ways: 1) although 28 U.S.C. § 586 also applies to cases under Chapter 13, however the "under the plan" clause quoted above and analyzed by Fulkrod applies specifically only to cases under Chapter 12, although the same words are in the clause which applies to Chapter 13; 2) the "under the plan" phrase "is not particularly illuminative . . . the language indicates that trustees should receive a fee for all amounts they receive 'under plans,' but it does not purport to define what types of payments should be received 'under plans,' which is the issue in the present case;" and 3) "[t]here are significant differences between Chapter 12 and Chapter 13 that make the distinctions regarding their treatment under 28 U.S.C. § 586 appropriate," such as Chapter 12 being much more permissive "regarding the scope of allowed modifications of secured debt, particularly regarding modifications of claims secured by residences."

The Court then focused on Fulkrod's reference to not permitting "impaired claims" to be paid directly to creditors. It determined that mortgage arrearages are impaired whereas mortgage payments which become due post-petition are not, since "impairment occurs when the plan purports to pay an obligation as originally scheduled notwithstanding a creditor's nonbankruptcy rights other than the right to accelerate the debt’s maturity date."

§ 1322(a)(1)

The BAP then analyzed § 1322(a)(1) of the Bankruptcy Code, which states that the Chapter 13 plan "shall -- (1) provide for the submission of all or such portion of future earnings or other future income of the debtor to the supervision and control of the trustee as is necessary for the execution of the plan". Contrary to the trustee's argument that this language requires all creditor payments to be paid through the trustee, the Court held that the subsection does not say "what exactly must be paid through the plan."

BAPCPA Amendments

The BAP next responded to the trustee's arguments arising from the BAPCPA amendments to § 1326 (a), which required plan payments to begin within 30 days after filing of a Chapter 13 case (not from the plan's filing date) and provided "for specific types of debts that can be paid by the debtor outside of the plan." The Court relied on § 1326 (c), which pre-dates BAPCPA and states: “Except as otherwise provided in the plan or in the order confirming the plan, the trustee shall make payments to creditors under the plan.” The Court held that these two subsections read together lead "to the conclusion that Congress intended that some debts other than those specifically enumerated in Section 1326(a)(1) could also be paid by the debtor outside of the plan, so long as either the plan itself or the order confirming the plan allows it."

Rejection of NACCTT's Arguments

Finally, the BAP addressed public policy issues raised by an amicus brief filed by the National Association of Chapter Thirteen Trustees (NACTT). As to the argument "that the various statutory duties of the Chapter 13 Trustee manifest a presumption that the trustee will be the principal disbursing agent," to Court retorted: "While the panel sympathizes with the NACTT’s concerns, it nevertheless does not view the [indicated] statutory responsibilities as creating any inherent presumption that all payments must be made by the trustee." As to the "potential revenue effects" for the trustee, after noting that thirty-two of the thirty-five trustees within the Ninth Circuit received the maximum compensation of $170,524 in 2006, the Court concluded: "Considering that many jurisdictions have allowed debtors to make maintenance payments outside of the plan for the past 20 years, and this has not lead to the insolvency of the standing Chapter 13 trustee program, the addition of fees for ongoing maintenance payments is not required for the financial health of the program."

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

PLEASE NOTE that this Litigation Report 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.

Which Court Has Jurisdiction to Determine a Bankruptcy Debtor's Inverse Condemnation Claim Against the U.S.? Ninth Circuit Reverses District Court

2008-12-29T06:00:00.000-08:00

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

McGuire v. U.S.
Ninth Circuit Court of Appeals Case No. 06-15812
December 24, 2008

The Facts and the Case Below

The Chapter 11 debtor, a farmer named McGuire, filed an inverse condemnation action against the United States for $2 million in compensation for the Bureau of Indian Affairs ("BIA") dismantling a bridge over a canal, which prevented him from having access to a large portion of a parcel of land he had leased earlier from an Indian tribe with the approval of the BIA. (Inverse condemnation is "the taking of property by a government agency which so greatly damages the use of a parcel of real property that it is the equivalent of condemnation of the entire property.")

The bankruptcy court held, in denying the government's motion to dismiss the case on sovereign immunity grounds, that 1) the Tucker Act, 28 U.S.C. § 1491, waived governmental immunity; 2) the bankruptcy court "should maintain jurisdiction of the action in the interests of judicial economy and not unduly burdening McGuire," and 3) the proceeding was not a "core proceeding" and so it needed to report its findings and recommendations to the district court for action. Accordingly, the district court reviewed the bankruptcy court's findings and recommendations and denied the government's motion to dismiss and remanded to the bankruptcy court for trial.

After trial the bankruptcy court "found that the United States had committed a regulatory taking of McGuire’s leasehold interest and recommended an award of $1,132,059.60 in damages." The district court agreed that there had been a taking, but "that McGuire's claim was not ripe for review because the government never denied an application for a permit to construct a new bridge." McGuire appealed.

Ripeness
The Ninth Circuit panel overturned the district court saying: "we hold that McGuire’s takings claim is ripe because he sufficiently complied with the permitting system as practiced by the BIA." Although the pertinent BIA regulations prescribed a permitting procedure which McGuire had not completely followed, he had followed the "prevailing practice," as had been established at trial, and "tried a variety of additional strategies to maintain access to the Leased Property." "In short, McGuire did everything reasonably within his power to prevent removal of the bridge and, when those efforts proved ineffective, to build a new one."

Sovereign Immunity and Bankruptcy/District Court Jurisdiction: The Tucker and Little Tucker Acts
The United States must have expressly waived its sovereign immunity in order for an action to be maintained against it. The "two principal federal statutes authorizing suit against the United States [are] the Tucker Act and the Little Tucker Act."

These two acts waive sovereign immunity, as specified within each. The Tucker Act states:

The United States Court of Federal Claims shall have jurisdiction to render judgment upon any claim against the United States founded either upon the Constitution, or any Act of Congress or any regulation of an executive department, or upon any express or implied contract with the United States, or for liquidated or unliquidated damages in cases not sounding in tort.

The Little Tucker Act is for smaller claims against the U.S. and allows for concurrent district court jurisdiction over

[a]ny . . . civil action or claim against the United States, not exceeding $ 10,000 in amount, founded either upon the Constitution, or any Act of Congress, or any regulation of an executive department, or upon any express or implied contract with the United States, or for liquidated or unliquidated damages in cases not sounding in tort.

The Court concluded:

Read together, these statutes provide for jurisdiction solely in the Court of Federal Claims for Tucker Act claims seeking more than $10,000 in damages, and concurrent district court jurisdiction over claims seeking $10,000 or less.
. . . .
McGuire’s takings claim falls within the scope of the Tucker Act. A takings claim is the type of claim founded on the Constitution for which the Tucker Act grants jurisdiction in the Court of Federal Claims.
. . . .
McGuire claimed $2,000,000 in damages, well in excess of the $10,000 jurisdictional amount. Thus McGuire could have brought his takings claim in the Court of Federal Claims.

But the Ninth Circuit panel also noted that the "statutory basis for federal district court jurisdiction in this case is founded not on the Tucker Act, but on the Bankruptcy" statutes. 28 U.S.C. § 1334(b) provides that

. . . notwithstanding any Act of Congress that confers exclusive jurisdiction on a court or courts other than the district courts, the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.

But while this provision gives the district court jurisdiction, "there is no corresponding statute that provides a waiver of sovereign immunity." As a result, the Tucker Act's provision for the Court of Federal Claims makes it "the proper court to entertain the merits of McGuire's takings claims."

If Sovereign Immunity Prevented Jurisdiction, Why Resolve Ripeness Issue?
In a footnote the Ninth Circuit Panel explained this question as follows:

Although we conclude in Section II that sovereign immunity barred the district and bankruptcy courts from hearing the merits of the claim, we reach the question of ripeness because we consider it a predicate to transferring the case to the Court of Federal Claims.
. . . .
[J]udicial economy and courtesy to transferee courts dictates that we resolve threshold issues first before invoking the transfer statute.

Continued Bankruptcy/District Court Role in spite of Lack of Jurisdiction over Takings Claim
Even though the Ninth Circuit held that the Court of Federal Claims must resolve the merits of McGuire's takings claim, this claim is an asset in his Chapter 11 case over which the bankruptcy court retains jurisdiction.

Dismissal or Transfer?
Given the uncontested district court jurisdiction over the bankruptcy, coupled with authority from the Federal Circuit Court of Appeals [through the opinion Quality Tooling v. United States, 47 F.3d 1569 (Fed. Cir. 1995)] indicating that the district court had jurisdiction over the Tucker Act claim, we conclude it would be in the interest of justice to transfer the action to the Court of Federal Claims, rather than dismissing it.

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

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

9th Circuit Justifies Payment of Creditors' Atty. Fees Under Sect. 503(b)(4), Based on Case Law on Payment of Debtors' Atty. Fees Under Sect. 303(a)

2008-12-15T06:00:00.000-08:00

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

North Sports v. Knupfer (In re Wind N' Wave)
Ninth Circuit Case No. 05-56254
November 1, 2007

Although the context of this case is limited, the implications are broader and worthy of attention. At issue in the opinion is the allowance of attorney fees for creditors in the context of filing an involuntary Chapter 7 case, and specifically the allowance of such fees if incurred in successfully appealing to the BAP the bankruptcy court's denial of attorney fees. Involuntary Chapter 7 cases are rare, with most federal districts having only a handful or two of them each year. However, the Ninth Circuit's holding here, involving the statutory construction of § 503(b)(4), an issue of first impression, applies not only to attorney fees for creditors bringing an involuntary Chapter 7 or 11 case under § 503(b)(3)(A), but also, for example, to fees for "a creditor that recovers, after the court's approval, for the benefit of the estate any property transferred or concealed by the debtor" under § 503(b)(3)(B), and for fees of a creditor "in making a substantial contribution in a case under chapter 9 or 11" under § 503(b)(3)(D). Also, § 503(b)(4) applies not only to attorney fees but as well to "reasonable compensation for professional services rendered by . . . an accountant" in the same contexts.

The Statutes
"Section 503(b)(3)(A), in combination with 503(b)(4), grants creditors costs incurred in connection with filing an involuntary bankruptcy petition," and in same other contexts indicated above. Section 503(b)(4) reads in relevant part:

(b) After notice and a hearing, there shall be allowed administrative expenses, . . . including

4) reasonable compensation for professional services rendered by an attorney or an accountant of an entity whose expense is allowable under [503(b)(3)], based on the time, the nature, the extent, and the value of such services, and the cost of comparable services other than in a case under this title, and reimbursement for actual, necessary expenses incurred by such attorney or accountant.

To distinguish a 1991 Ninth Circuit case denying attorney fees for unsuccessful litigation about attorney fees which the Court had "refused to adopt a per se rule," here it added in the condition indicated in the Holding section below, that the case “exemplifies a ‘set of circumstances’ where litigation was ‘necessary.’ ”

Although this is a pre-BAPCPA case, the above quoted provision has not changed, except for some greater specificity in the bracketed section, which does not affect this holding.

The Holding
The Ninth Circuit panel held that

creditors who receive compensation under 503(b)(4) [such as for bringing an involuntary petition] should also be compensated for costs incurred in litigating a fee award, so long as the services meet the Section 503(b)(4) requirements [e.g., "reasonable compensation . . . based on the time, the nature, the extent, and the value of such services"] and the case “exemplifies a ‘set of circumstances’ where litigation was ‘necessary’. ”

In applying this standard to the facts of this case, the Court indicated that there was no dispute that the creditors were entitled to attorney fees for filing the involuntary case--an allowable expense enumerated in § 503(b)(3), nor any dispute that the amount of fees for the appellate work at issue was reasonable. So the remaining question was whether the litigation was necessary, not a frivolous appeal "merely to acquire litigation fees." The Court said "yes":

[T]he fact that the Petitioning Creditors were erroneously denied their fee award in the bankruptcy court—notwithstanding Ninth Circuit precedent urging otherwise—suggests that the litigation expenses incurred on appeal were unavoidable, as appeal to the BAP was the only avenue through which the creditors could receive their due compensation.

The Ninth Circuit's Rationale
Briefly, the Court reasoned that § 503(b)(4) regarding certain limited categories of creditors' attorney fees is similar in pertinent ways to § 330(a) regarding debtors' attorney fees, and so used Ninth Circuit and other case law on § 330(a) and analogized these to its statutory interpretation of § 503(b)(4). The Court focused on preventing attorney fee "dilution":

[It would be] both inconsistent with the policy of the Bankruptcy Reform Act and “fundamentally inequitable” to demand that counsel prepare and present extensive fee applications and yet simultaneously “deny[ ] compensation for the efforts necessary to comply with those requirements.” [Citation deleted.] . . . [L]itigation over a fee award should also be compensable, otherwise fee awards would be diluted: “If an attorney is required to expend time litigating his fee claim, yet may not be compensated for that time, the attorney’s effective rate for all the hours expended on the case will be correspondingly decreased.”

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

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

Oregon Insurance Licensee Convicted of Bankruptcy Crime and Loses "Resident Insurance Producer" License

2008-12-08T06:00:00.000-08:00

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

Last spring a Roseburg, Oregon woman, Brenda Gay Hartman, now known as Brenda Gay Burum, lost her Oregon license as a "resident insurance producer" because she was convicted in 2006 of a bankruptcy crime. Here is the rest of the story.

The Initial Chapter 7 Case
While living in Klamath Falls Hartman filed a voluntary Chapter 7 petition in June of 2000, the trustee filed a no-asset report that August, and about $72,000 of her debts were discharged in October and the case was closed.

The Case Reopened, and Criminal Conviction
But then in 2002, on motion of the U.S. Trustee's office, the case was reopened, two adversary proceedings were initiated by the Chapter 7 trustee against transferees of assets transferred by the debtor, and a turnover order was entered against Hartman. She was charged in federal court in Eugene, Oregon with committing the crime of bankruptcy fraud under 18 U.S.C. §157, and in June 2006 she pled guilty. She had intentionally omitted from her bankruptcy documents information on assets that she owned or controlled, as well as assets that she transferred, she understated her income, falsely stated expenses, and failed to disclose a debt and payments on that debt. She falsely testified under oath at the regular Meeting of Creditors in 2002 that her petition and schedules were accurate, and then after her case was reopened in 2002 she again made false statements under oath and produced false documents about a vehicle transfer.

Oregon Insurance License Statutes and Rules
Under Oregon law a licensed insurance producer must provide the Director of the state's Department of Consumer and Business Services (DCBS) with notice of any criminal prosecution against him or her and with copies of the criminal complaint and other relevant documents, all within 30 days of the criminal pretrail hearing. ORS 744.089(2). Hartman failed to provide this notice and the documents voluntarily, and more than a year later when contacted by the DCBS, she failed to provide all of the required documents.

ORS 731.428(4) requires the DCBS Director to "revoke, suspend, or refuse to renew" the insurance license of a person convicted "of a felony involving dishonesty or a breach of trust." OAR 836-071-0321(1) defines a felony involving dishonesty as “includ[ing] but not limited to any offense constituting or involving theft, burglary, perjury, bribery, forgery, counterfeiting, a false or misleading oral or written statement, deception, fraud, a scheme or artifice to deceive or defraud, a material misrepresentation or the failure to disclose material facts, or any felony the commission of which is determined by the Director to have involved some element of deceit, misrepresentation, untruthfulness or falsification.”

The Administrative Proceeding
When the DCBS gave notice to Hartman of a proposed action about her license last December (2007), she requested an administrative hearing. A hearing was scheduled and Hartman was given notice. One business day before the scheduled hearing the DCBS received a faxed letter from Hartman withdrawing her request for a hearing, so one was not held. Instead the administrative order was promulgated on the basis of the case record for the purpose of making a prima facie determination. Based on the evidence in the record, the Director found "that the record of this proceeding to date . . . proves a prima facie case." Hartman's insurance license was revoked as of the date of the order.

Additional Administrative Options?
ORS 731.428(4) provides the option, as quoted above, to suspend a license, not only to revoke it. But I could not find reference, in either the ORS or the OAR about this suspension option, such as the appropriate lengths or terms of suspensions.

In addition, although the Final Order of the DCBS Director does not make any reference to this, ORS 731.428(4) continues with the sentence: "The person may apply to the director for a written consent as provided in subsection (1) of this section." This subsection in turn refers to applying "for a written consent to engage or participate in the business of insurance." So there is an procedure for getting an exception to the prohibition against these kinds of felony convictions. The procedures for this "written consent" are laid out in detail, including a list of criteria for the Director to use in making these determinations, in OAR 836-071-0323 through 836-071-0346. Query: could Hartman have retained her license had she worked hard to meet the indicated criteria? Note that she did not get her license until 2003, and the criminal conviction in 2006 pertained to her actions back in 2000 and 2002.

Postscript
Google "Brenda Hartman" and, surprise, you'll find a bit of internet leftover, like the space detritus littering low-Earth orbit, her presumably former business website, which ironically states "I'm licensed in the state of: Oregon." Goes to show, don't believe everything you read on the internet. And to kick a dead horse, isn't her failure to terminate this website a continued misrepresentation to the public?

(Please see my last Litigation Report, dated 12/1/08, about a Ninth Circuit opinion from last year, U. S. v. Milwitt, in which the court overturned a criminal conviction based on the same bankruptcy crime statute, 18 U.S.C. §157. Click on its title: 9th Circuit Overturns B'cy Criminal Conviction of Defendant Pretending to Be Attorney, Who Filed Ch. 13 Cases Without the Knowledge of His "Clients".)

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

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

9th Circuit Overturns B'cy Criminal Conviction of Defendant Pretending to Be Attorney, Who Filed Ch. 13 Cases Without the Knowledge of His "Clients"

2008-12-01T06:00:00.000-08:00

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

U. S. v. Milwitt
9th Circuit Case No. 05-10344
February 5, 2007

Although bankruptcy attorneys, representing either debtors or creditors, do not often deal directly with bankruptcy crimes, and would generally refer such a case to a criminal defense attorney or to the U.S. attorney, respectively, it is nevertheless extremely important to "know it when you see it."

This Ninth Circuit opinion from last year sheds some light on but one of a number of potential bankruptcy crime statutes, 18 U.S.C. § 157. "As opposed to the historic bankruptcy crimes . . which concerns acts committed in the bankruptcy context, the focus of § 157 is a fraudulent scheme outside the bankruptcy which uses the bankruptcy as a means of executing or concealing the artifice." In this case the egregious "truth is stranger than fiction" facts of the crime alone make looking further worthwhile, heightened by the curiosity of finding out why this 9th Circuit panel overturned the defendant's two-year prison conviction, notwithstanding the earnest efforts of the dissenting judge.

The Amazing Facts

In early 1997 the defendant Milwitt put an ad in the "Landlord Tenant Law" heading under the "Attorneys" section of a phone book yellow pages, with the business name "AP Assistance," suggesting that the company provided both legal services through attorneys and pro bono help with "tenants' rights." Milwitt was not admitted to practice law, and never even attended law school. He represented himself as an attorney to tenants having problems with their landlords, and collected fees from them with their understanding that he would represent them in the unlawful detainer actions against them by their landlords. He instructed them not to pay their landlords and at least in some cases had them pay him instead. He filed pro se papers on their behalf in the unlawful retainer actions but, contrary to the tenants' beliefs, did not appear at court on their behalf, and judgments were entered against all the tenants. Then

Milwitt filed bankruptcy petitions on behalf of several of the tenants, without their authorization or knowledge. These bankruptcy petitions listed the relevant landlords as well as fabricated creditors. While the tenants did not know about or authorize the filing of these petitions, Milwitt did tell them that for various reasons they did not have to pay judgments entered against them or move out after receiving eviction notices. The petitions were filed under Chapter 13 of the United States Bankruptcy Code, and the petitions indicated that the debtors would be filing a plan for repayment of the debts.

After being convicted of the unauthorized practice of law in state court and being released from state custody he was immediately indicted by the U.S. Attorney on six counts of bankruptcy fraud in violation of 18 U.S.C. § 157, and was convicted in a jury trial on five counts. He appealed. Through the defendant's apparently very able representation by the former prominent (and very recently dissolved!) San Francisco firm of Heller Ehrman, but mostly because of the prosecution's unfamiliarity with bankruptcy crimes, the Ninth Circuit overturned his conviction. About the only thing the majority and dissenting opinions could agree upon was that the prosecution could have done a much better job with both framing the indictments and presenting the evidence at trial.

The Short Answer Why

The conviction was overturned because the Ninth Circuit here determined that "[i]n enacting § 157, Congress made it quite clear that the new crime was a specific intent crime," meaning that it "requires the prosecution to prove that the defendant intended to defraud an identifiable individual." The simple and decisive problem, in the eyes of the majority, was that all the evidence put forward by the prosecution at trial showed how the tenants were victims of Milwitt's fraudulent scheme of fake Chapter 13 petitions, whereas the indictment charged him with fraudulently obstructing the creditors' legal rights. Without any "proof that there was a scheme to defraud the landlords, much less that the bankruptcy petitions had been filed as a means of executing or concealing the scheme," "the evidence presented was insufficient to sustain the verdict, [and so] we reverse the conviction."

This was a case of first impression for the Ninth Circuit but it arrived at this conclusion about the need for "specific intent" by analogizing to its and the U.S. Supreme Court's prior holdings on the wire and mail fraud crimes, upon which § 157 was modeled according to this opinion.

The Disconnect Between the Criminal Statute, the Indictment and the Evidence at Trial

The version of 18 U.S.C. § 157 applicable to this case (subsequently changed by BAPCPA in ways not pertinent) is:

A person who, having devised or intending to devise a scheme or artifice to defraud and for the purpose of executing or concealing such a scheme or artifice or attempting to do so—
(1) files a petition under title 11;
(2) files a document in a proceeding under title 11; or
(3) makes a false or fraudulent representation, claim, or promise concerning or in relation to a proceeding under title 11, at any time before or after the filing of the petition, or in relation to a proceeding falsely asserted to be pending under such title,
shall be fined under this title, imprisoned not more than 5 years, or both.

The pertinent language of the indictment is as follows:

By filing the sham petitions, the defendant . . . fraudulently obstructed the creditors’ legal right to collect back rents, and repossess the properties.

In contrast, according to the majority "[n]o evidence was presented concerning any scheme to defraud creditors, only debtors. There was no proof that Milwitt received or sought any money or other consideration from the landlords, only that he defrauded the tenants."

The Dissent

The dissenting judge focused on the highly deferential standard of appellate review of a jury verdict, that the Court "must defer to a jury's guilty verdict if, 'after viewing the evidence in the light most favorable to the prosecution, any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt.' ” He accused the majority arriving at its "specific intent" holding unnecessarily since it was not raised by either party, and then he interpreted the same 9th Circuit and U.S. Supreme Court case law as NOT requiring "that the government prove intent to defraud a specific victim or class of victims." He concluded that with the evidence presented, "a reasonable jury could have found that Milwitt possessed an intent to defraud the landlords."

The majority also appears to believe that Milwitt could not simultaneously possess the intent to defraud the tenants and the landlords. . . . [T]he evidence reveals that Milwitt possessed no shortage of fraudulent intent. . . . .The case went to the jury under proper instructions requiring proof beyond a reasonable doubt that Milwitt defrauded the landlords. Because a reasonable jury could have concluded that Milwitt’s fraudulent intent was not solely directed toward the tenants, but also toward the landlords, Milwitt's conviction must be affirmed.

A Critical Consideration

As I stated at the outset, this opinion fixates on 18 U.S.C. § 157, which is a relatively new bankruptcy crime, enacted in 1994 as the "centerpiece" of a new bankruptcy crime statute. In contrast, ever since "[t]he bankruptcy act passed by Congress in 1841 was the first in world history allowing individuals to obtain voluntary discharge of their debts," "Congress has always provided for the imposition of criminal penalties for those who abuse the bankruptcy system. . . . . With some modifications, these core bankruptcy criminal provisions have remained intact to this date, with the essential components codified into 18 U.S.C. § 152." I will address this more common and generally more easily proven bankruptcy criminal provision of § 152 in a future Litigation Report, but mention it here to make clear that this Milwitt opinion provides just a small window into this bankruptcy crimes arena.

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

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

Oversecured Creditor Entitled to Contractual Default Interest Rate: Ninth Circuit Narrows Its Prior Per Se Rule Against Default Rate

2008-11-24T06:00:00.000-08:00

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

GECC v. Future Media Productions Inc.
9th Circuit Case # 07-55694

Second Amendment October 24, 2008; Amended August 7, 2008; originally filed July 3, 2008
(On direct appeal from the bankruptcy court under BAPCPA's new subsection 28 U.S.C. § 158(d)(2), providing for discretionary appellate jurisdiction over non-final orders of the bankruptcy court upon proper certification of that court or of all parties.)

The Ninth Circuit considered here whether an oversecured creditor, GECC, was entitled to its pre-default or rather its higher default rate of interest under § 506(b), which provides that such creditor “shall be allowed . . . interest . . . provided for under the agreement or State statute under which such claim arose.” The difference between the two rates of interest was only 2%, but since the debt at issue was nearly $6 million, about $165,000 of interest differential was at issue.

The Court's decision turned on whether or not this case was distinguishable from Ninth Circuit precedent as established in In re Entz-White Lumber and Supply, Inc., 850 F.2d 1338 (9th Cir. 1988), and whether that precedent and this case were affected by last year's U.S. Supreme Court opinion in Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 127 S. Ct. 1199 (2007).

The Ninth Circuit distinguished this case from Entz-White, by restricting that precedent to "the rule that an oversecured creditor was not entitled to interest at the default rate when its claim was paid in full pursuant to the terms of a Chapter 11 plan." This is the so-called per se rule against using a default interest rate. Here to the contrary, GECC's claim was NOT paid off through the Chapter 11 plan but rather "as a result of a series of asset sales outside of a Chapter 11 plan." Therefore the Court held that the per se rule against use of the default interest rate was not applicable here, and remanded to the bankruptcy court "to decide whether the default rate should apply under the rule adopted by the majority of federal courts . . . : The bankruptcy court should apply a presumption of allowability for the contracted for default rate, 'provided that the rate is not unenforceable under applicable nonbankruptcy law'."

The Ninth Circuit also held that this "majority rule" is consistent with the Travelers Supreme Court opinion (which specifically addressed creditors' attorney fees), but Entz-White is not overturned by Travelers either. Let me explain.

The Essential Facts
Future Media owed a substantial commercial loan to GECC, secured by a first priority security interest on substantially all of Future Media's assets. The loan's terms included a default interest rate: a 2% increase in the rate if Future Media defaulted on loan payments. Future did default, which triggered the interest rate increase. Future Media then filed a liquidating Chapter 11 case, having "executed an agency agreement to sell its assets in an auction." It immediately arranged to enter into a "cash collateral" agreement with GECC--allowing it to use cash, which was collateral on the GECC debt, for winding down its business and preparing for the auction. The cash collateral agreement was delayed by objections from unsecured creditors, including an objection about GECC's right to impose the higher default interest rate (thereby reducing what was available to unsecured creditors from the liquidating auction). An amended cash collateral agreement was entered into allowing the default interest rate issue to be decided separately. On a subsequent motion raising that issue, the bankruptcy court decided that GECC was only entitled to the lower pre-default interest rate pursuant to the Entz-White opinion, and GECC appealed.

The Ninth Circuit's Rationale
In Travelers the Supreme Court said that “[c]reditors’ entitlements in bankruptcy arise in the first instance from the underlying substantive law creating the debtor’s obligation, subject to any qualifying or contrary provisions of the Bankruptcy Code.” The Ninth Circuit said that the facts in Entz-White fit within such a "qualifying or contrary provision" of the Code, but the present case did not. In Entz-White the specific issue was whether a creditor's claim was considered "impaired" for purposes of voting on a Chapter 11 plan, which it is not if the debtor "cures" any pre- or post-petition defaults. And since the Code permits "cures" under § 1124(2)(A) to negate all consequences of default including the imposition of a default interest rate, the debtor was permitted to avoid this higher rate "to cure a default to render it unimpaired for voting on a Chapter 11 plan." In the present case in contast, "GECC's oversecured claim was paid through a sale of assets governed by § 363, outside the context of a Chapter 11 plan" and so "the facts of Entz-White are distinguishable, and thus our per se rule from that case is inapplicable." "Because the Bankruptcy Code does not provide a 'qualifying or contrary provision' to the underlying substantive law here [as now required by Travelers], the bankruptcy court's extension of Entz-White to the loan agreement's default rate was error." Instead The Ninth Circuit remanded to the bankruptcy court to apply the federal majority rule as quoted above.

Applicability to Chapter 13?
This Future Media case and Entz-White are both Chapter 11 cases, referring to sections of the Code which are unique to Chapter 11. But are their holdings also applicable to Chapter 13 cases? Are Chapter 13 oversecured creditors, whose claims are after all also covered by § 506(b), entitled to their default interest rate, and do the same rules specified above govern this question? To quote a controversial remark by a former Presidential candidate now President-elect, that question is "above my pay grade" at least for purposes of this Bulletin. My suspicion is that fully secured creditors paid through a Chapter 13 plan, such as a vehicle loan paid in full through the plan, are not entitled to a default interest rate but a creditor not being paid through the Plan, such as a current home mortgage, is entitled to default interest. But I could very well be wrong. I would appreciate comments from any readers who know.

Note that although Travelers was also a Chapter 11 case, the Supreme Court's overturning of the 9th Circuit's Fobian rule on creditor's attorney fees does apply to Chapter 13 since it involves interpretation of §502(b) of the Code, applicable to all Chapters. Please see my earlier Bulletin on Travelers entitled: Reminder about U.S. Supreme Ct's Reversal of 9th Circuit's Fobian Rule on Creditors' Atty Fees: Fees Recoverable Even on Issues Peculiar to B'cy Law

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

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

Retroactive Effect of U.S. Supreme Court Opinion Decided During Pendency of Unrelated Bankruptcy Case on Appeal

2008-11-17T06:00:00.000-08:00

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

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

This Ninth Circuit opinion addressed both substantive issues about nondischargeability "for willful and malicious injury by the debtor" under § 523(a)(6) of the Bankruptcy Code, and various procedural issues including 1) the retroactive effect of a Supreme Court opinion decided during the pendency of a case, and 2) amending a complaint to add a § 727 discharge objection to the § 523 dischargeabililty claim. The substantive nondischargeability matters are addressed in this website's Bulletin article of 11/13/08 entitled After 18 Years of Litigation Ninth Circuit Holds $2.8 Million Medical Malpractice Judgment "Not Non-Dischargeable" Under Section 523(a)(6). The two procedural issues are dealt with here in this Litigation Report.

1) Retroactive Effect of US Supreme Court Opinion on Pending Unrelated Cases
This case had a torturous procedural history spanning 18 years and including three different journeys up the chain of appellate courts, to the Hawaii Supreme Court once and to the Ninth Circuit twice. It is no wonder that the applicable case law changed in the interim.

Without detailing all the twists and turns of this history, here are the salient events for our purpose: a) After plaintiff won a large judgment in Hawaii state court against debtor in 1992, debtor both appealed that judgment and filed a Chapter 7 bankruptcy. b) In Plaintiff's adversary proceeding against the debtor for the nondischargeability of her claim based on her state court judgment, she won a summary judgment in her favor in 1996; she prevailed because of 9th Circuit case law of the time that "willful and malicious injury" under § 523(a)(6) meant that plaintiff did not have to show that "debtor acted with intent to injure" but only that he "committed a wrongful act . . . , done intentionally, necessarily produc[ing] harm and . . . without just cause or excuse, . . . even absent proof of a specific intent to injure." c) The following year the state trial court judgment found its way to the Hawaii Supreme Court, which affirmed the gross negligent portion of the judgment but reversed the fraud portion. d) Debtor filed a motion in bankruptcy court to set aside the nondischargeability summary judgment in light of this Hawaii Supreme Court decision. The bankruptcy court denied the motion, and debtor appealed to the U.S. District Court and then to the Ninth Circuit. e) But before this Court ruled on that motion, in 1998 the U.S. Supreme Court held in Kawaauhau v. Geiger, 523 U.S. 57 that “debts arising from recklessly or negligently inflicted injuries do not fall within the compass of § 523(a)(6).” f) As a consequence this Court overturned the bankruptcy court and U.S. District Court decisions, setting aside the summary judgment against debtor which had been based on pre-Geiger law. g) Debtor then prevailed in bankruptcy court in a summary judgment establishing the dischargeability of plaintiff's debt against him, the U.S. District Court affirmed, and plaintiff appealed to this Court, which is the matter now before it.

As to whether the Geiger decision should be applied to this case, generally speaking "a federal court must applly a new and supervening rule of federal law when applicable to the issues in the case." Accordingly the Ninth Circuit had applied Geiger retroactively in a number of cases. But this present case is distinguishable in that plaintiff "had already obtained a final judgment in 1996, which became non-appealable as of January 19, 1997—more than a year before Geiger was decided. [Plaintiff] maintains that the law as of that date ought to apply to this case, even after the former judgment was vacated following [debtor's] successful Rule 60(b) motion" to set it aside.

But instead the Ninth Circuit decided to the contrary, applying its own rationale that "[w]hen a judgment has been set aside pursuant to Rule 60(b), the case stands as if that judgment had never occurred in the first place. The case remains open on direct review, and the court must apply the law as it stands, including any intervening precedents," such as Geiger.

Note that the Court did not cite any case law in support for this analysis, only a reference in a footnote to Am. Jur. 2nd Judgments about the setting aside of a judgment placing "the parties in the position they occupied before entry of the judgment," without any reference to the applicability of an intervening change in the case law.

2) Amending a Complaint to Add a § 727 Claim to a § 523 One
Referring (much more briefly!) to the procedural history above, plaintiff's original adversary proceeding complaint in 1992 contained not just a § 523(a)(6) nondischargeability claim but also § 727(a)(4) and (7) objections to discharge. After winning summary judgment in her favor on the § 523(a)(6) claim, she dismissed the § 727 claims. But then after that judgment was eventually set aside on remand from this Court in 2000, and the bankruptcy court granted debtor a discharge in February 2000, in May 2001 plaintiff moved to amend her complaint to add back her § 727 claim.

In determining whether to give plaintiff leave of court to amend the complaint, the Court referred to "[f]our factors . . commonly used to determine the propriety of a motion for leave to amend. These are: bad faith, undue delay, prejudice to the opposing party, and futility of amendment." But the appellate standard for reviewing how these rather vague factors were weighed by the bankruptcy court is whether the bankruptcy court abused its discretion, that is, whether the Ninth Circuit has "a definite and firm conviction that the district court committed a clear error of judgment in the conclusion it reached."

Noting that plaintiff had waited "more than fifteen months" between the discharge granted in 2000 and her motion to amend complaint, the Court held that the bankruptcy court had not abused its discretion in not permitting this amendment. It reasoned: "If the ordinary action of § 727(a) is extreme, it must surely be still more extreme to order, retroactively, a revocation of the discharge. Given the value of finality in bankruptcy, as well as the difficulty of unscrambling an egg by effectively revoking discharge . . . , we hold that the bankruptcy court did not err in denying [plaintiff] leave to amend her complaint."

Comment
Chapter 7 trustees commonly file motions to revoke the discharge when debtors fail to pay their oblgations to the estate, and no one complains then about "the difficulty of unscrambling an egg." And given that about eight years had passed between the filing of the Chapter 7 case in 1992 and the granting of the discharge in 2000, and given that the discharge of this debt continued to be under appeal for another seven years, the fifteen months that the Ninth Circuit considered to be excessive delay does not seem to be so in this context. At the very least, the Court does not explain its position well, although given the low "abuse of discretion" standard perhaps it does not need to beyond what it did.

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

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

What are the Standards for Motions for Reconsideration?: Judge Dunn's Suggestions in Schacher v. Dolph

2008-11-03T06:00:00.000-08:00

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

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

The Oregon Bankruptcy Court's website entry under this adversary proceeding in fact contains two separate Memorandum Opinions by Judge Randall Dunn, the first consisting of his decisions resolving issues from the adversary proceeding trial, and the second his denial of plaintiff's motion for reconsideration of the first. Inexplicably, these two opinions were uploaded to the Court's website just last week although they were filed last June and July. This Litigation Report addresses the Memorandum Opinion on the motion for reconsideration.

(This website's Bankruptcy Bulletin dated November 4, 2008 will review the first Memorandum Opinion.)

Background
The litigation is part of a lengthy inheritance fight among stepbrothers and stepsisters: plaintiff Jim Schacher is a stepson of decedent Patricia Schacher, while defendant Donald Dolph, the Chapter 13 debtor, is a son. Plaintiff seeks to impose a constructive trust on assets of defendant, particularly his residence, because of transfers made by the decedent to defendant allegedly in violation of a 1988 Agreement to Execute Wills between the decedent and her husband, plaintiff's father. After trial in the adversary proceeding, Judge Dunn imposed a constructive trust on defendant's residence, but in the amount of only about $1,850 instead of the $90,000 amount plaintiff wanted. Before judgment was entered, plaintiff filed a motion for reconsideration on the amount of the constructive trust.

The Standard for Motions for Reconsideration
Federal Rule of Bankrutpcy Procedure 9023 incorporates Rule 59 F.R.Civ.P. into cases under the Bankruptcy Code, making motions for reconsideration "analogous to a motion for a new trial or to alter or amend the judgment pursuant to FRCP 59." Rule 59(a)(2) specifies the grounds for granting a new trial, where the trial was without a jury: "for any of the reasons for which rehearings have heretofore been granted in suits of equity in the courts of the United States . . . ." Judge Dunn referred to three reasons cited by the Ninth Circuit under Rule 59(a)(2): "(1) manifest error of law; (2) manifest error of fact; and (3) newly discovered evidence.”

Application of the Standard for Motion for Reconsideration

1) "Newly discovered evidence": The judge dispensed with this potential reason for reconsideration by stating that he had "closed the evidentiary record" immediately after the trial, had reminded plaintiff's counsel of this at the scheduling hearing on this motion, but plaintiff made no request under FRCP 59 to reopen the evidentiary record. So there is no "newly discovered evidence" here. (Had additional evidence been offered, the judge would have "need[ed] to evaluate whether any additional evidence offered is 'new' evidence that was not available at the time of Trial.")

2) "Manifest error of law," "manifest error of fact":
First, plaintiff contends that the calculations for determining the constructive trust amount should take into account "the cost to the Probate Estate inherent in the delay in recovering the funds wrongfully received by Mr. Dolph."
To the contrary, Judge Dunn held that a constructive trust does not "affect rights in the res until it is imposed," and therefore property appreciation or other impacts on the property prior to a court imposition of the constructive trust on the property do not benefit the plaintiff.

Second, plaintiff argues that the calculation should not include a credit for defendant's "legitimate share of the Probate Estate, either because that share cannot be determined at this time or, alternatively, because Mr. Dolph has waived that share through his confirmed chapter 13 plan."

As to the defendant's plan's purported waiver of his claim against plaintiff, the judge ruled that this was specifically a waiver "by Mr. Dolph of the right to receive any additional distribution he otherwise might be entitled to receive from the Probate Estate," and the plan provision did NOT "preclude Mr. Dolph from asserting, as an offset for purposes of calculating the amount by which he was unjustly enriched."

As to plaintiff's objection to crediting defendant's legitimate share of the estate, "[i]n order to calculate the amount Mr. Dolph was unjustly enriched, I am required to subtract the amount Mr. Dolph was entitled to receive from the Probate Estate from the amount he actually received."

Since the only evidence presented at trial of Mr. Dolph's legitimate share was plaintiff's proof of claim, the judge used this for his calculations over plaintiff's objections. Plaintiff argued that the appropriate offset amount would not be known until the other potential wrongdoers--Mr. Dolph's two sisters--had paid their obligations back to the estate. Judge Dunn rejected this, saying that if he accepted that argument, the various siblings would be dead before the matter was resolved! Since the plaintiff failed to provide evidence of the diminished value of the probate estate, he cannot now argue that as a consequence the constructive trust was larger than the evidence indicated.

With a lack of "newly discovered evidence" or of any "manifest error of law or fact," the judge denied plaintiff's motion for reconsideration.

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

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

The Last Ten Litigation Reports On Bankruptcy Litigation and Procedure from Recent Ninth Circuit and BAP Opinions

2008-10-27T06:00:00.000-07:00

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

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

This website has published ten weekly Litigation Reports. They are all summaries of recent 9th Circuit and Bankruptcy Appellate Panel (BAP) opinions on important issues about bankruptcy litigation and procedure. Together they comprise an essential recent package of law that every bankruptcy attorney practicing in Oregon or anywhere in the Ninth Circuit should know. To help get to that knowledge quickly and easily, here is a list of these ten Litigation Reports with a short descriptive excerpt from each, with convenient links BOTH to the Reports (click on the Report title) as well as directly to the full opinions themselves (click on the case name). The opinions are in reverse chronological order of court publication, with the most recent one on top, the 9th Circuit ones separate from the BAP ones.

Ninth Circuit Opinions

October 10, 2008
American Sports Radio Network v. Krause (In re Krause)
Litigation Report Title: 9th Circuit Certifies Question of Law to State Supreme Court on Capacity of Administratively Dissolved Corporation to Prosecute Adversary Proceeding Excerpt: "This is not an opinion, merely a lengthy order certifying a question to the Nevada Supreme Court. And yet the 9th Circuit takes 13 pages to do this. The Court's discussion is valuable from a bankruptcy litigation perspective both for its substantive issue--the capacity of an administratively dissolved corporation to file an adversary proceeding against a debtor, and the appellate procedural one--when is it appropriate for a bankruptcy appellate court to seek formal assistance from a state supreme court in interpreting that state's laws. Oh, and by the way: 'several million dollars' are at stake in this Chapter 7 nondischargeability adversary proceeding."

September 23, 2008
Barboza v. New Form, Inc.
Litigation Report Title: Ninth Circuit Reverses Both B'cy Court's & BAP's Summary Judgment on "Willful & Malicious Injury" Under § 523(a)(6) Excerpt: "Last week the 9th Circuit issued its second opinion in as many months interpreting the 'willful and malicious injury' language in § 523(a)(6) of the Bankruptcy Code. The Litigation Report in this website for the week of September 21 - 28 highlighted the 1st of these two opinions, Lockerby.v. Sierra, on the necessary elements for an intentional breach of contract to be a nondischargeable 'willful and malicious injury.' Now in Barboza, the 9th Circuit comes back to this same 'willful and malicious injury' language, although not in the narrow breach of contract context. Here the Court reversed both the bankruptcy court and the BAP, primarily by finding that neither court applied the 9th Circuit's law on § 523(a)(6)'s "willful and malicious injury" language accurately."

September 4, 2008
Burkart v. Coleman (In re Tippett)
Litigation Report Title: The Rights of a Bona Fide Purchaser Buying Estate Assets Without Knowledge of Debtor's B'cy: Are State BFP Statutes Preempted by the Bankruptcy Code?
Excerpt: "A recent Bankruptcy Bulletin on this website (entitled "New 9th Circuit Opinion Adjusts the Line Between Void & Voidable Transfers in Violation of the Automatic Stay: Bona Fide Purchaser Defeats Trustee," dated 9/8/08) summarized this Burkart opinion and but reserved discussion about the federal preemption argument there for this Litigation Report."

August 22, 2008
McDonald v. Checks-N-Advance, Inc. (In re Ferrell)
Litigation Report Title:
Excerpt:"In this per curiam decision . . . , the Ninth Circuit Court of Appeals held that certain specific violations of the federal Truth in Lending Act (TILA) do not result in the award of actual damages, statutory damages, or attorney fees and costs for the consumer, or specifically in this case for the Chapter 13 trustee acting on behalf of the consumer. The court affirmed the ruling of the Bankruptcy Appellate Panel, which had affirmed the judgment of the bankruptcy court. This was a case of first impression for the Ninth Circuit as to the issue of statutory damages, and precisely as to whether the specific TILA violations.here fell within any of TILA's exceptions to statutory damages."

August 7, 2008
Lockerby v. Sierra (In re Sierra)
Litigation Report Title: When Is Intentional Breach of Contract Nondischargeable Under § 523(a)(6)?: 9th Circuit Proclaims Legal Standard for "Willful & Malicious Injury"
Excerpt: "This is a quick study in two published opinions about what it takes for a breach of contract claim to be nondischargeable under the "willful and malicious injury" provision of § 523(a)(6). One is the Lockerby opinion referenced above; the other is the January 2008 bankruptcy court opinion of Judge Perris' Home Instead Senior Care of Oregon v. Treon (In re Treon). Both of these rely heavily on a 2001 9th Circuit opinion, Petralia v. Jercich (In re Jercich), 238 F.3d 1202. The primary point of this quick study is to determine what if anything the recent Lockerby opinion added to the law on this issue in Oregon that wasn't already in Judge Perris' Home Instead opinion, other than the weight of greater authority."

August 1, 2008
Educational Credit Management Corp. v. Coleman
Litigation Report Title: NOTE: THIS OPINION WAS VACATED: 9th Circuit Holds that Ch. 13 "Undue Hardship" Student Loan Determinations Need NOT Wait Until End-of-Case Discharge
Excerpt: "ON AUGUST 22, 2008 THE 9TH CIRCUIT COURT OF APPEALS VACATED THIS AUGUST 1, 2008 OPINION BECAUSE IT APPARENTLY DETERMINED IN THE INTERIM THAT IT DID NOT HAVE JURISDICTION TO CONSIDER THE APPEAL FROM THE DISTRICT COURT, SINCE THE BANKRUPTCTY COURT'S ORDER BEING APPEALED FROM WAS AN INTERLOCUTORY ORDER. LINK HERE TO SEE THE CIRCUIT COURT'S VACATING ORDER. THE CASE WAS REMANDED TO THE DISTRICT COURT TO DETERMINE WHETHER IT WOULD CERTIFY THE CASE FOR APPEAL. IF THAT COURT DOES SO, AND THE 9TH CIRCUIT THEN DETERMINES IT DOES INDEED HAVE JURISDICTION, THIS NOW-VACATED OPINION MAY BE RE-PUBLISHED. IN THE MEANTIME IT IS NOT GOOD LAW. AT BEST IT IS SOME INDICATION OF HOW THE 9TH CIRCUIT MAY RULE ON THIS ISSUE IN THE FUTURE, IN THIS CASE OR OTHERWISE.
On August 1, 2008 the 9th Circuit Court of Appeals ruled that a Chapter 13 debtor could get a judicial determination whether her student loans constituted an “undue hardship” and were thus dischargeable without waiting until close to or after the discharge at the end of the case. Going against two other Circuits, the Fifth and the Eighth, and joining one other Circuit, the Fourth, the 9th Circuit held that the matter was ripe for adjudication, although the debtor’s Chapter 13 case was less than a year past confirmation of debtor’s five-year plan."

May 6, 2008
Johnson v. Nielson (In re Slatkin)
Litigation Report Title: Transferees Must Pay Chapter 7 Trustee "Millions of Dollars" under § 548(a) with Debtor's Plea Agreement As Sole Evidence of His Fraudulent Intent
Excerpt: "The Circuit Court addressed three issues of interest in this Litigation Report: A) can a debtor's fraudulent intent be based on the sole evidence of his guilty plea and plea agreement in a criminal case, authorizing the trustee's avoidance of transfers arising from such intent; B) can a bankruptcy court deny a transferee's motion for a continuance to conduct further discovery before having the opportunity to depose the debtor-transferor, or to review a transcript of the debtor-transferor's prior testimony; and C) does the bankruptcy court have the authority to grant an award of prejudgment interest if the transferee-defendants have demanded a jury trial?"

April 16, 2008
Barclay v. Mackenzie (In re AFI Holding, Inc.) Litigation Report Title: 9th Circuit on Fraudulent Transfers: "Actual Intent to Hinder, Delay, or Defraud," "Reasonably Equivalent Value," & the "Good Faith Exception"
Excerpt: "In this opinion the 9th Circuit analyzed fraudulent transfers under § 548 of the Code (and its analogous provision in state law) in the form of payments paid out to "investors" in a Ponzi scheme. (A Ponzi scheme involves "paying investors purported interest payments with funds
raised from other investors, rather than from the profits of the . . . business".) The Court focused on the § 548(c) exception to fraudulent transfers for transferees who take "for value and in good faith," and particularly on the "reasonably equivalent value" that transferee received in his role as a limited partner of the debtor."

BAP Opinions (of the 9th Circuit)

August 4. 2008
FDIC v. Kipperman (In re Commercial Money Center, Inc)
Litigation Report Title: The "Law of the Case" Doctrine Applied in the Most Recent 9th Circuit BAP Opinion, Written by Judge Dunn
Excerpt: "This most recent of the 9th Circuit BAP opinions was written by Judge Randall Dunn in his capacity as a BAP judge. The facts and procedural background are so involved that they take the first nearly 18 pages of his opinion, in part because this is the second appeal in the adversary proceeding. But the focus of this Litigation Report is on just one particular aspect: the doctrine of "the law of the case." As stated in this opinion, '[u]nder the law of the case doctrine, a court is barred from reconsidering an issue that already has been decided in the same court or in a higher court on the same case. [Citation omitted.] For the law of case doctrine to apply, the issue must have been decided, either expressly or by necessary implication.' "

April 22, 2008
White v. Brown
Litigation Report Title: Chapter 13 Debtor Must Account for $145,000 in Unreinvested Homestead Proceeds After Converting from Chapter 7 Case Excerpt: "This 9th Circuit BAP opinion addresses this question: what is the effect of an asset turnover order against a Chapter 7 debtor when he responds by converting his case into a Chapter 13? The BAP's discussion of this leads to a better understanding of two concepts that can get tricky especially when combined: asset turnover orders and conversions from Chapter 7 to 13."

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

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

9th Circuit on Fraudulent Transfers: "Actual Intent to Hinder, Delay, or Defraud," "Reasonably Equivalent Value," & the "Good Faith Exception"

2008-10-20T06:00:00.000-07:00

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

Barclay v. Mackenzie (In re AFI Holding, Inc.)
9th Circuit Case No. 06-55033
April 16, 2008

In this opinion the 9th Circuit analyzed fraudulent transfers under § 548 of the Code (and its analogous provision in state law) in the form of payments paid out to "investors" in a Ponzi scheme. (A Ponzi scheme involves "paying investors purported interest payments with funds
raised from other investors, rather than from the profits of the . . . business".) The Court focused on the § 548(c) exception to fraudulent transfers for transferees who take "for value and in good faith," and particularly on the "reasonably equivalent value" that transferee received in his role as a limited partner of the debtor.

The Court's Holdings
1) On the transferee's argument that he was entitled to the "profits" not just the funds "invested", the Court held that no genuine issues of material fact existed as to whether the debtor, a corporation that had been operated by a person who was convicted of federal securities fraud for operating a Ponzi scheme, made the transfers at issue with the "actual intent to hinder, delay, or defraud" a creditor, because: a) " 'the mere existence of a Ponzi scheme' is sufficient to establish actual intent under § 548(a)(1) or a state’s equivalent to that section"; and b) debtor's principal's criminal plea agreement showed his fraudulent intent existed before defendant transferee "invested" in the debtor and before the transfers at issue, when debtor paid him back his "investment" along with the "profits."

2) On trustee's argument that the good faith exception to a fraudulent transfer claim under § 548(c) and its state law equivalent is barred as a matter of law, the Court held that the good faith exception is NOT barred because the transferee received in exchange for the transfers "reasonably equivalent value" in the form of "a proportionately reduced restitution claim" against the debtor. related to his role as a purported limited partner to the debtor.

Statutory Language
The Court pointed out that on one hand § 548 of the Code did not apply because the transfers at issue occurred well beyond its 1-year statute of limitations (extended to 2 years under BAPCPA), but "[w]here state statutes are similar to the Bankruptcy Code, cases analyzing the Bankruptcy Code provisions are persuasive. It then based virtually its entire analysis on 9th Circuit case law primarily interpreting § 548 of the Code.

§ 548(a)(1) and (c) state, as pertinent here:

The trustee may avoid any transfer . . . of an interest of the debtor in property . . . that was made . . within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily-- (A) made such transfer . . . with actual intent to hinder, delay, or defraud any entity to which the debtor was . . . indebted; or (B) received less than a reasonably equivalent value in exchange for such transfer ... .

c) . . . a transferee . . . of such a transfer . . . that takes for value and in good faith . . . may retain any interest transferred . . . to the extent that such transferee . . . gave value to the debtor in exchange for such transfer ... .

Note that the Oregon and California's fraudulent transfer statutes pertinent to this decision are substantively identical, both based on the Uniform Fraudulent Transfer Act. So this opinion applies to Oregon no less than it does to California. Compare 11 U.S.C. § 548(a)(1) with Cal. Civ. Code § 3439.04(a) and ORS 95.230 (allowing a transfer to be avoided when the debtor acted with “actual intent to hinder, delay, or defraud” an entity or creditor, or where indicia of constructive fraud are present); and compare 11 U.S.C. § 548(c) with Cal. Civ. Code §3439.08(a) and ORS §95.270 (the safe harbor good faith exception to transferees who took in good faith and for value).

Actual Intent to Defraud
The transferee argued that there remained a genuine issue of fact on the debtor's actual intent to defraud any entity or creditors, and that therefore he should be entitled to go to trial on the transfer to him of "profits" not just the original "investment." The 9th Circuit disagreed, citing its own case law that fraudulent intent can be found from circumstantial evidence and that " 'the mere existence of a Ponzi scheme' is sufficient to establish actual intent under § 548(a)(1) or a state's equivalent to that section." The opinion pointed out that from the debtor's principal's admissions in his plea agreement, the Ponzi scheme was in effect at the time the transferee "invested" and continued to be throughout the time he received the payment, and that was sufficient to find actual fraudulent intent. So there was no genuine issue of material fact on this and so trustee prevailed as to the "profits," since the "reasonably equivalent value" exception about to be discussed only applied to the "investment" portion.

Existence of Reasonably Equivalent Value
The Court spent most of its analysis on this issue, primarily explaining two of its own precedents interpreting "reasonably equivalent value" in the Ponzi context and their application to the present case. In its own words:

in Agretech [Hayes v. Palm Seedlings Partners-A (In re Agric. Research and Tech. Group, Inc.), 916 F.2d 528 (9th Cir. 1990)], . . . we held that a distribution on account of a partnership interest relative to an investor’s capital contribution was not “reasonably equivalent value” as defined by the Bankruptcy Code and Hawaii’s analog. . . . [I]n United Energy [Wyle v. C.H. Rider & Family (In re United Energy Corp.), 944 F.2d 589 (9th Cir. 1991)], . . . we held that a transfer in exchange for a proportionally reduced restitution claim was “reasonably equivalent value” as defined by the Bankruptcy Code and California’s analog. . . . . The question before us today is whether the transfer from [the debtor to the transferee] was a distribution under Agretech, or a transfer in exchange for a proportionally reduced restitution claim under United Energy.

The Court rejected the trustee's arguments that Agretech should control. 1) The fact "that Agretech dealt with affirmative defenses to actually fraudulent transfers [under § 548(a)(1)(A), as in the case here], whereas United Energy dealt with the prima facie case for constructively fraudulent transfers [§ 548(a)(1)(B)], was "a distinction without a difference." 2) "Although limited partnership interests are present in Agretech and in this case, [the transferee] was defrauded by [debtor's principal], creating rights different that the rights held by the limited partners in Agretech."

Instead the Court held that United Energy controls. Quoting the District Court opinion which it affirmed on this issue, the tranferee "exchanged his partnership interest for a proportionately reduced restitution claim." The 9th Circuit acknowledged that this exchange of payments for restitution claim did not occur expressly, but that, as in United Energy "we delve beyond the 'form' to the 'substance' of the transaction." Because debtor's business was a Ponzi scheme by the time transferee invested in it, the transferee"acquired a restitution claim at the time he bought into [the] ... Ponzi scheme, just as the investors in United Energy acquired a restitution claim at the time they bought [the debtor's fraudulently produced equipment]. It is this restitution claim, in toto, that [the transferee] exchanged when [debtor] returned [transferee's] principal 'investment' amount."

Ninth Circuit's Bottom Line
So the Court remanded to the bankruptcy court to determine if transferee took the transfers in good faith. If so, he will be entitled to retain the amount he initially "invested" in with debtor, because that would be covered by his restitution claim, now fully paid off with the debtor's transfers. But the "profits" would be beyond any restitution claim and so must be paid to the trustee.

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

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

9th Circuit Certifies Question of Law to State Supreme Court on Capacity of Administratively Dissolved Corporation to Prosecute Adversary Proceeding

2008-10-13T06:00:00.000-07:00

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

American Sports Radio Network v. Krause (In re Krause)
9th Circuit Case No. 07-55131
October 10, 2008

This opinion has no holding, indeed it is merely a lengthy order certifying a question to the Nevada Supreme Court. And yet the 9th Circuit takes 13 pages to do this. Indeed the Court's discussion IS valuable from a bankruptcy litigation perspective both for its substantive issue--the capacity of an administratively dissolved corporation to file an adversary proceeding against a debtor, and the appellate procedural one--when is it appropriate for a bankruptcy appellate court to seek formal assistance from a state supreme court in interpreting that state's laws.

Oh, and by the way: "several million dollars" are at stake in this Chapter 7 nondischargeability adversary proceeding.

Dissolved Corporation's Capacity to Sue

The Court's discussion about the corporate capacity to sue is worthwhile not for the answers it provides--because it provides none, but rather for how it formulates the question. This ends up being more interesting and challenging than would first appear.

The threshold consideration is that corporate capacity to sue is determined "by the law under which it was organized," FRCP 17(b), FRBP 7017, so we look to the law of the state where the corporation is incorporated.

Then stating the question is simple: does a corporation, which was administratively dissolved by the state for failing to pay its annual fees and in that status files a timely adversary proceeding in bankruptcy court, and then has its corporate charter reinstated by the state within weeks after filing the adversary proceeding, have capacity to continue that adversary proceeding?

This question gets more interesting. If the administrative dissolution of a corporation results in a forfeiture of its "right to transact business," does this necessarily include the right to sue when transacting business is not defined in the state statute nor interpreted in its case law? The bankruptcy court and district court on appeal had determined that by a plain reading of the statute the right to sue is included in the right to transact business, but to the contrary the 9th Circuit decided that transacting business did not NECESSARILY include the right to sue.

What if the corporation did not have capacity to sue at the time it filed the adversary proceeding, which was just a day before the bar date, but the state statute provides that reinstating the corporate charter after dissolution "reinstates the corporation's right to transact business as if such right had at all times remained in full force and effect?" In contrast the bankruptcy court had dismissed the adversary proceeding WITH PREJUDICE, and the district court affirmed. The 9th Circuit held that the statute was ambiguous, had no state court precedent, and so determined that it needed to certify the question to the state supreme court.

And if the corporation did not have capacity to sue at the time it filed the adversary proceeding, did its directors have that capacity, since by state law they have some right to hold the dissolved corporation's assets in trust, including such assets as the claim against the debtor? And if so, should the bankruptcy court give the directors the opportunity to be substituted for the corporation as the plaintiff? The 9th Circuit did not address whether the bankruptcy court or district court looked at this question, but the Court decided that with no statute or case law directly on point, it again needed to certify the question to the state supreme court, as follows:

Under Nevada law, may a domestic corporation whose charter has been revoked under Nevada Revised Statutes section 78.175(2) prosecute a lawsuit either (a) in its own corporate name or (b) through its directors? If not, is the defendant entitled to have such a lawsuit dismissed with prejudice, or must the plaintiff corporation first be given a reasonable opportunity to reinstate its charter? Cf. Executive Mgmt. Ltd. v. Ticor Title Ins. Co., 38 P.3d 872 (Nev. 2002).

The Appellate Procedure of Certifying Questions to a State Supreme Court

Without asserting that this is the procedure in all states, the 9th Circuit stated in the Order the two elements required under Nevada's Rules of Appellate Procedure for a federal or other state's highest court to certify a question to the Nevada Supreme Court: 1) that "the answer to this question will be determinative of the matter pending before this court, and [2) that] there is no clearly controlling precedent in the decisions of the Nevada Supreme
Court."

Compare this to the pertinent Oregon statute, ORS 28.200, which contains the same two elements:

Supreme Court authorized to answer questions of law certified by other courts. The Supreme Court may answer questions of law certified to it by the Supreme Court of the United States, a Court of Appeals of the United States, a United States District Court, a panel of the Bankruptcy Appellate Panel Service or the highest appellate court or the intermediate appellate court of any other state, when requested by the certifying court if there are involved in any proceedings before it questions of law of this state which may be determinative of the cause then pending in the certifying court and as to which it appears to the certifying court there is no controlling precedent in the decisions of the Supreme Court and the intermediate appellate courts of this state.

The short title of the act containing this ORS section is the Uniform Certification of Questions of Law Act.

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

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

Chapter 13 Debtor Must Account for $145,000 in Unreinvested Homestead Proceeds After Converting from Chapter 7 Case

2008-10-06T06:00:00.000-07:00

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

White v. Brown
9th Circuit BAP
Published opinion No. AZ-07-1385-KPaJu
April 22, 2008

This 9th Circuit BAP opinion addresses this question: what is the effect of an asset turnover order against a Chapter 7 debtor when he responds by converting his case into a Chapter 13? The BAP's discussion of this leads to a better understanding of two concepts that can get tricky especially when combined: asset turnover orders and conversions from Chapter 7 to 13.

Adding the necessary details to the initial question: if a Chapter 7 debtor exempts from the estate the proceeds of the pre-petition sale of his homestead--about $145,000, then fails to reinvest these proceeds in another homestead within the time permitted by state law for preserving the exemption (18 months here), but instead debtor spends these funds on bad investments and living expenses, and then, after the Chapter 7 trustee reopens his case and gets a turnover order as to those homestead sale proceeds, debtor converts that case to a Chapter 13 case, will that $145,000 be considered a non-exempt asset for purposes of the best-interests test? I propose that the intuitive answer is, "No." The rationale: if debtor innocently albeit foolishly invested and lost most of the homestead sale proceeds and lived off the rest of it, then converted his case to Chapter 13, the debtor should no longer have to account for the now nonexistent assets.

According to this 9th Circuit BAP opinion, my intuitive sense would be wrong but I would not be alone--this conclusion was shared by the very strong dissenting opinion. But here's how the majority opinion analyzed this.

It started by admitting that the "bankruptcy status of the Arizona 18-month temporary homestead sale proceed exemption is a festering sore." (Note that Oregon, California and numerous other states, have such "temporary sale proceed" exemptions.)

The BAP then dealt with a necessary and contentious threshold issue: is this appeal made moot by the conversion to Chapter 13? The argument for mootness is that upon conversion to Chapter 13, the Chapter 7 trustee who got the conversion order no longer exists in the case, and indeed through § 1306(b) the debtor takes possession of all assets of the estate. An order for the debtor to turn over to himself the no-longer-existent sale proceeds, or in affect to collect on a judgment against himself in that amount, seems to make no sense.

But the BAP analyzed the turnover order as a determination, effectively a judgment, that the Chapter 7 trustee has a right to the $145,000 in non-exempt assets, one which did not come into effect and so could not be pursued until the 18-month reinvestment period had passed. So at the time of the conversion, the property of the estate included a right to recover $145,000 from the debtor. But the Chapter 13 trustee, as a successor to the original trustee, is not able to enforce the turnover "judgment" against debtor because this trustee does not have the right to possession of estate assets, debtor does. However, the Chapter 13 trustee DOES have the right to object to confirmation of a plan that does not require payments enough to cover the value of nonexempt assets. This gives the trustee standing in this dispute, and "enables de facto enforcement of the . . . turnover order by opposing confirmation of any plan that does not distribute property of the estate to creditors in the manner and sums . . . required by the Bankruptcy Code."

But once the Chapter 13 Trustee has standing, the debtor can still argue that 1) there is no legal restriction on his "use of homestead sale proceeds during the period of temporary exemption," and 2) so "he is not required to account for the postpetition loss of net homestead sale proceeds." And finally, that 3) the trustee failed to timely object to his claim of objection so is now unable to request turnover of the proceeds.

The BAP began its response to these arguments with bankruptcy law, basing it largely around a 9th Circuit opinion England v. Golden (In re Golden), 789 F.2d 698, 700 (9th Cir. 1986) applying the analogous California 6-month homestead sale proceeds exemption. Golden held that

upon the expiration of [that] sale proceeds exemption, proceeds that have not been reinvested in a new homestead "revert to the trustee." Rejecting argument that there should be credit for expenditures, the Ninth Circuit also held that the amount that reverts is the sum claimed as exempt at the time of filing.

But Golden, and its BAP progeny, did not address the permissible uses of sale proceeds during the exemption period, which is largely an issue of state law: state law creates the property exemption and so in this opinion the BAP looked to state law to determine the nature of that exemption.

Without here getting into the intricacies of Arizona's proceeds-of-homestead exemption law (which again may or may not be sufficiently analogous to Oregon statute and case law), the Court then tried to figure out how the Arizona Supreme Court would respond to debtor's three arguments listed above.

First, the BAP held that use of the sale proceeds is restricted during the period of temporary exemption because a "contingent, reversionary interest" attached to the homestead proceeds upon the filing of the Chapter 7 case, and remains for the full duration of the estate.

Second, the debtor must account for the post-petition loss of the homestead proceeds because of his lack of intent to reinvest the proceeds for an exempt purpose, "as evidenced, inter alia, by trading activities in risky investments 'so contrary to' the claim of exemption as to constitute abandonment of the exemption."

And third, the Chapter 7 trustee's lack of objection to the debtor's exemption did not effect the trustee's right to request turnover. Until the temporary exemption period expired, the trustee had nothing to which to object. So trustee did not lose the right to turnover for objecting to the exemption only after learning about the spending of the proceeds.

BOTTOM LINE: This is a contentious issue, or really a set of them. Not only is there a vigorous dissent in this BAP opinion (for which I do not have space here to give due credit), prior BAP cases interpreting Golden have had dicta and concurring opinions raising concerns. The holding here, that a Chapter 7 debtor must account in his converted Chapter 13 case for temporarily exempt homestead proceeds spent contrary to the exemption's purpose, may well apply in Oregon, but requires a careful comparison of the Arizona and Oregon statutes, and of the states' case law.

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

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

Ninth Circuit Reverses Both B'cy Court's & BAP's Summary Judgment on "Willful & Malicious Injury" Under § 523(a)(6)

2008-09-29T06:00:00.000-07:00

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

Barboza v. New Form, Inc.

9th Circuit Case No. 06-56319

Sept. 23, 2008

Last week the 9th Circuit issued its second opinion in as many months interpreting the "willful and malicious injury" language in § 523(a)(6) of the Bankruptcy Code. The Litigation Report in this website for the week of September 21 - 28 highlighted the 1st of these two opinions, Lockerby.v. Sierra, on the necessary elements for an intentional breach of contract to be a nondischargeable "willful and malicious injury."

Now in Barboza, the 9th Circuit comes back to this same "willful and malicious injury" language, although not in the narrow breach of contract context. Here the Court reversed both the bankruptcy court and the BAP, primarily by finding that neither court applied the 9th Circuit's law on § 523(a)(6)'s "willful and malicious injury" language accurately. Procedurally, the bankruptcy court had granted the plaintiff creditor a motion for summary judgment, and the BAP agreed that summary judgment was appropriate. This Litigation Report summarizes the procedural aspects of this opinion; please see this website's Bulletin of 9/30/08 for a summary of the substantive law.

The issue was the appropriateness of granting a motion for summary judgment in favor of the creditor, that is , whether the pleadings and the evidence before the bankruptcy court "show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c). The complication here is that a judgment for willful copyright infringement had been entered against the debtors in federal District Court (for nearly $800,000) before they filed their bankruptcy case, and the bankruptcy judge decided that the trial court's findings would be binding in the adversary proceeding on nondischargeability. Those findings were sufficient to address some but not all of the elements of a § 523(a)(6) "willful and malicious injury." Each of the three courts--the bankruptcy court, BAP, and 9th Circuit--analyzed this interplay between the prior civil judgment against the debtors and the requirements under § 523(a)(6) differently.

The Bankruptcy Court

The pertinent jury instruction in the District Court trial was as follows:

To prove willful infringement, the Plaintiff must prove by a preponderance of the evidence that the Defendants knew that they were infringing the Plaintiff’s copyrights or that they acted with reckless disregard as to whether they were doing so. If you conclude that the Defendants reasonably and in good faith believed that they were not infringing the Plaintiff’s copyrights, then you may not find that they willfully infringed those copyrights.

The bankruptcy judge recognized that the "willful" in copyright infringement is broader than the "willful" in § 523(a)(6), that, as the above jury instruction shows, the former includes acting "with reckless disregard," not just acting deliberately and intentionally. So in response to the creditor's motion for summary judgment, the judge set the issue of subjective intent for trial. But the creditor persisted, filing a partial motion for summary judgment specifically on the issue of intent, although without any new evidence. In opposition the debtors filed affidavits stating that someone other than debtors had ordered the duplication of the copyrighted movies at issue, and had received and diverted the movies. But the court held that the evidence showing that debtors knew about the copyright, and that, together with the jury's finding of willful infringement, constituted a willful injury , and so it decided after all to grant summary judgment to creditor.

The BAP

The BAP affirmed as to the "willful" prong on the basis that the bankruptcy court appropriately determined that debtors "had the requisite subjective intent to injure another's property interest."

The BAP recognized that the bankruptcy court had failed to make a separate inquiry about the "malicious" prong of "willful and malicious." but its solution: the "BAP implied 'maliciousness' from the Bankruptcy Court’s finding of willfulness. The BAP reasoned that 'an award of statutory damages based on willful copyright infringement is a debt for an injury to the owner’s property interest.' Accordingly, the BAP reasoned that '[t]he only remaining proof required was that Debtors were aware of Appellee’s copyright at the time they infringed it.' ” So the BAP held that debtors' knowledge of the creditor's copyright interest at the time of infringement established the "substantial certainty" of the resulting injury.

The Ninth Circuit
Question of Material Fact about Willfulness

The Court held that the creditor did not meet its burden of showing the absence of a genuine issue of material fact about whether debtors' acted willfully. Based on the evidence before it on the two motions for summary judgment, the bankruptcy court " had no way to determine whether the jury found the willful infringement based on a reckless disregard or a knowing violation of [creditor's] copyright." Citing the U.S. Supreme Court opinion Kawaauhau v. Geiger, 523 U.S. 57 (1998), willful injuries under § 523(a)(6) are specifically limited to "deliberate or intentional" injuries.

The 9th Circuit instead found a genuine issue of material fact in evidence that someone else other than the debtors had ordered the pirated movies and therefore summary judgment on the willfulness element was in error.

Lack of Finding About Maliciousness

As to the bankruptcy court and its adoption of the trial court's findings, the 9th Circuit stated: "Because the District Court ... did not address the “malicious” prong of § 523(a)(6), and the jury made no findings in this regard, we cannot discover any separate findings of uncontroverted fact of maliciousness by the Bankruptcy Court." The 9th Circuit held that this lack of a separate finding on maliciousness was reversible error.

The BAP's reversible error was in implying maliciousness from willfulness. Although acknowledging
that

there may be some overlap between the test for “willfulness” and the test for “malice,” [citation omitted] the overlap does not mean that the Bankruptcy Court can ignore entirely the malice inquiry. We require a separate analysis for each of the “willful” and “malicious” prongs. [Citations omitted.] The BAP’s conclusion that the Appellants’ actions were malicious under § 523(a)(6) rested entirely on its conclusion that the Appellants’ actions were willful under § 523(a)(6).

The Bottom Line
1) If a bankruptcy court adopts the findings of a trial court in an adversary proceeding on nondischargeability of a "willful and malicious injury" claim under § 523(a)(6), the bankruptcy court must take care that the elements of the trial court's findings match the elements required for nondischargeability. Particularly, summary judgment for creditor is not appropriate if the definition of willfulness is broader in the trial court findings than under § 523(a)(6), such as when that definition included injuries from recklessness, leaving a genuine issue of material fact about whether the underlying judgment was based on conduct which is not adequate to determine nondischargeablity. Under that circumstance, the adversary proceeding must go to trial to establish if the conduct was intentional and deliberate, not just reckless.

2) A bankruptcy court must make separate findings as to the "willful" and "malicious" prongs under § 523(a)(6). One can not be inferred from the other.

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

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

When Is Intentional Breach of Contract Nondischargeable Under § 523(a)(6)?: 9th Circuit Proclaims Legal Standard for "Willful & Malicious Injury"

2008-09-22T06:00:00.000-07:00

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

Lockerby v. Sierra (In re Sierra)
9th Circuit Case No. 6-15928
August 7, 2008

This is a quick study in two published opinions about what it takes for a breach of contract claim to be nondischargeable under the "willful and malicious injury" provision of § 523(a)(6). One is the Lockerby opinion referenced above; the other is the January 2008 bankruptcy court opinion of Judge Perris' Home Instead Senior Care of Oregon v. Treon (In re Treon). Both of these rely heavily on a 2001 9th Circuit opinion, Petralia v. Jercich (In re Jercich), 238 F.3d 1202. The primary point of this quick study is to determine what if anything the recent Lockerby opinion added to the law on this issue in Oregon that wasn't already in Judge Perris' Home Instead opinion, other than the weight of greater authority. (Please see my earlier summary of this Home Instead opinion in the Oregon Bankruptcy Opinions section of my website.)
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These opinions are made a bit more personal in that Judge Perris was one of the three judges on the Bankruptcy Appellate Panel that had been overturned back in 2001 by the 9th Circuit in Jercich, which opinion she then used as her main precedent earlier this year in Home Instead.

9th Circuit in Lockerby

In the recent Lockerby opinion the 9th Circuit held that "an intentional breach of contract cannot give rise to nondischargeability under § 523(a)(6) unless it is accompanied by conduct that constitutes a tort under state law." It overruled both the underlying bankruptcy court and the district court in determining that the claim against debtor was dischargeable. The debtor was an attorney, the creditor a former client. The claim, a rather odd one, was based on a settlement agreement entered into to settle a malpractice claim by the client against the attorney, through which the client was to receive 50% of attorney's proceeds on four of his pending personal injury claims; the attorney breached that contract when he determined for himself that the client did not have a valid malpractice claim against him.

The Court relied heavily on the 2001 9th Circuit Jercich opinion referred to above, saying: "The Jercich court undertook a two-part inquiry to determine whether the breach of contract rendered the debt excepted from discharge, first examining whether the debtor’s conduct was 'tortious,' and then asking whether the debtor’s conduct was both 'willful' and 'malicious.' "

Interestingly, after referring to this "two-part inquiry," it's entire remaining analysis seemed to be on the first part. "Something more than a knowing breach of contract is required before conduct comes within the ambit of § 523(a)(6) and Jecich defined that 'something more' as tortious conduct."

The issue then becomes what is tortious conduct for this purpose? Conduct is not tortious, according to Lockerby, again using Jercich as precedent, "simply because injury is is intended or 'substantially likely to occur,' but rather is only tortious if it constitutes a tort under state law." Otherwise, reasoned the Court, the core principle of debtors' "fresh start" would be seriously challenged, because a large portion of debts arise from debtors' intentional breaches that are substantially likely to harm the creditor. Since the debtor's breach of the settlement agreement was not tortious according to Arizona law, the creditor's claim arising from it was dischargeable under § 523(a)(6).

Judge Perris in Home Instead

Judge Perris' bankruptcy court opinion issued in January 2008, Home Instead Senior Care of Oregon v. Treon, involved a debtor's breach of a Non-Compete Agreement with her former employer.

The judge based her entire analysis of the facts under the Jercich standard:

Under Jercich, the first question in determining whether a breach of contract is excepted from discharge under § 523(a)(6) is whether debtor’s conduct was tortious. [Citation deleted.] The second question is whether the debtor’s conduct resulted in willful and malicious injury to the Home Instead. Both requirements must be met before a debt arising from conduct that also constitutes breach of a contract will be nondischargeable under § 523(a)(6).

On the first question, the judge held that debtor’s breach of this Agreement was not tortious because the evidence did not establish 3 of the 6 necessary elements under Oregon law for the tort of intentional interference with an economic relationship: 1) a valid business relationship for debtor to interfere with, 2) her intentional interference with that relationship, and 3) a causal effect between this interference and the damage to the economic relationship.

Judge Perris also analyzed the second question of willful and malicious injury even though her "findings [on the tortious conduct question] are sufficient to support a decision in favor of debtor" "because [her] conclusions provide an alternative basis for [her] determination that debtor should prevail." She found that debtor's conduct was neither willful nor malicious, and so the creditor's claim was dischargeable for not meeting those criteria as well.

She went through this second question presumably because as the trial judge, she wanted to make a full record not just for the benefit of the parties, but also in case there was an appeal there would be an alternate basis to find in favor of debtor.

In contrast, at first glance it is not clear why the 9th Circuit in Lockerby presented Jercich's two-part inquiry but then did not apply the second part. Was it trying to change Jercich's holding without expressly saying so or did it not have to get into the second part because as the appellate court the first was sufficient. The Court answers this question itself: "Having determined that state specific tortious conduct is required under § 523(a)(6), we can only affirm the district court if [debtor] engaged in conduct that would constitute a tort under Arizona law." The Court found that the conduct did not, and so it could hold that a "breach of contract is not 'willful and malicious' under § 523(a)(6), allowing it to overrule the lower courts without needing to get to the second part.

Thus beyond clarifying Jercich and indirectly affirming Judge Perris' analysis in Home Instead, and of course adding the substantial weight of the 9th Circuit to this area of nondischargeability, Lockerby did not add substantially to what was already Oregon law through Home Instead.

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

The Rights of a Bona Fide Purchaser Buying Estate Assets Without Knowledge of Debtor's B'cy: Are State BFP Statutes Preempted by the Bankruptcy Code?

2008-09-15T06:00:00.000-07:00

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

Burkart v. Coleman (In re Tippett)
9th Circuit Case No. 6-15411
Sept. 4, 2008

A recent Bankruptcy Bulletin on this website (entitled "New 9th Circuit Opinion Adjusts the Line Between Void & Voidable Transfers in Violation of the Automatic Stay: Bona Fide Purchaser Defeats Trustee," dated 9/8/08) summarized this Burkart opinion and but reserved discussion about the federal preemption argument there for this Litigation Report.

The key rationale of the 9th Circuit panel was that the automatic stay of § 362 which generally makes post-petition transfers "void, not voidable" does not apply to transfers BY DEBTORS. Those transfers are instead addressed by § 549(a), which gives the trustee power to "avoid a transfer of property of the estate . . . that occurs after commencement of the case, and . . . that is not authorized under [the Code] or by the court." § 549(c) exempts bona fide purchasers (BFP's) from this trustee avoidance power. Because the postpetition sale by debtors of their residence without trustee or court approval, and without the buyer's knowledge of the bankruptcy, was not covered by the automatic stay, the sale was valid and so the BFP prevailed over the trustee.

In the midst of this analysis the Court also had to ask whether the state BFP statute was preempted by federal bankruptcy law to the extent that this statute conflicted with the bankruptcy court's authority over bankruptcy estate assets. Since the relevance of this opinion to Oregon is affected by the similarity of the Oregon BFP statute to the California BFP statute at issue in the opinion, let's compare them:

* Cal. Civ. Code § 1214: "Every conveyance of real property . . . is void as against any subsequent purchaser or mortgagee of the same property, or any part thereof, in good faith and for a valuable consideration, whose conveyance is first duly recorded . . . ."

* ORS 93.640: "Every conveyance . . . affecting the title of real property within this state which is not recorded as provided by law is void as against any subsequent purchaser in good faith and for a valuable consideration of the same real property, or any portion thereof, whose conveyance . . . thereof is first filed for record . . . ."

They appear to be substantially the same, each with virtually the same elements. So it seems that the 9th Circuit's federal preemption holding as to California's statute would apply equally to Oregon's.

The Court did not cite any other opinions that addressed preemption of state BFP statutes. It referred to two kinds of preemption: "field" and "direct-conflict". The direct-conflict type "arises, if at all, from the operation of the automatic stay. Accordingly, the direct-conflict inquiry collapses into the statutory analysis of the automatic stay provision" which I addressed in my 9/08/08 Bulletin and briefly summarized above. The Court's preemption discussion focused on the "field" type.

The "field" occupied by the Bankruptcy Code at issue here is "the field of title transfers initiated by Chapter 7 debtors." The issue was whether "the scheme of federal regulation is so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it."

In its analysis the Court looked at the purpose of bankruptcy law and whether the BFP statue is consistent with that purpose. Beyond the general purposes of Chapter 7 in giving debtors a fresh start and fairly dividing debtors' assets, the more focused purposes of the automatic stay: "it provides debtors with protection from hungry creditors" and "assures creditors that the debtor's other creditors are not racing to various courthouses to pursue independent remedies to drain the debtor's assets." The Court discussed only the last of these purposes as the only one applicable to the situation, and decided that the BFP "statute is wholly consistent with this congressional goal."

First, because the proceeds of sale become property of the estate and valid prepetition liens on the property get paid as appropriate, "neither the total value of the assets available to the creditors through the estate nor the equity of the distribution among creditors is markedly affected." (Not that this neglects the reality that the debtors here pocketed the sale proceeds of $76,583, well beyond their homestead exemption, and depending on the extent to which those funds have been dissipated, practically speaking the assets readily available to the creditors may well have been "markedly affected.")

Second, with § 549(a) providing trustees power to avoid unauthorized transfers, but not as to BFP's, this "suggests that Congress is sufficiently comfortable with the protection of bona fide purchasers within the bankruptcy scheme that an implied preemption is not in order."

And last, a trustee who was concerned about a potential transfer by a debtor or simply whenever she wished to protect potential equity for creditors, "can simply protect the estate and its creditors" by recording the bankruptcy or a notice of it at the recorder's office.

Since the BFP statute was not meaningfully inconsistent with the federal purposes of the automatic stay, the 9th Circuit held that the California BFP statute is not federally preempted, and thus the Oregon BFP statute is not either.

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

The "Law of the Case" Doctrine Applied in the Most Recent 9th Circuit BAP Opinion, Written by Judge Dunn

2008-09-08T06:00:00.000-07:00

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

FDIC v. Kipperman (In re Commercial Money Center, Inc)'
BAP Case No. SC-07-1298-DCMo
August 4. 2008

This most recent of the 9th Circuit BAP opinions was written by Judge Randall Dunn in his capacity as a BAP judge. The facts and procedural background are so involved that they take the first nearly 18 pages of his opinion, in part because this is the second appeal in the adversary proceeding. But the focus of this Litigation Report is on just one particular aspect: the doctrine of "the law of the case."

As stated in this opinion, "[u]nder the law of the case doctrine, a court is barred from reconsidering an issue that already has been decided in the same court or in a higher court on the same case. [Citation omitted.] For the law of case doctrine to apply, the issue must have been decided, either expressly or by necessary implication."

The overall legal issue to be decided on appeal involved the perfection of security interests: did a creditor, NetBank, perfect its security interest in equipment lease payments owed to debtor, Commercial Money Center, and its security interest in surety bonds procured by debtor to guarantee these lease payments, so as to withstand trustee's avoidance powers under §§ 544 and 547(b)? These secured assets were worth about $47 million. The bankruptcy court had ruled that NetBank had failed to perfect its security interest in these two sets of assets, thus allowing the trustee to avoid these security interests.

Just one of the sub-issues was whether the "law of the case" doctrine barred NetBank from arguing that some of the surety bonds were "instruments" rather than "supporting documents" under Nevada's Article 9 of the UCC. If they were instruments then this creditor could argue that it had perfected its security interest by possession before the 90-day preference period, and so the trustee could not avoid that security interest .

The bankruptcy court had held (after the BAP had remanded back to it after the first appeal) that the law of the case doctrine barred this argument because 1) NetBank had argued earlier, before the first appeal, that the surety bonds were supporting obligations, 2) the trustee also asserted the same, and 3) therefore "the bankruptcy court believed it implicitly determined that the surety bonds were supporting obligations by finding that NetBank did not perfect its security interest in the lease payments and that the trustee was entitled to summary judgment avoiding NetBank's security interest in all of the transferred assets, including the surety bonds."

But the BAP held to the contrary, that the law of the case doctrine did not apply here. The bankruptcy court "neither expressly nor implicitly decided whether the surety bonds were instruments or supporting obligations . . . [; it] simply assumed that the surety bonds were supporting obligations because both NetBank and the trustee argued that the surety bonds were supporting obligations and determined that NetBank did not have a perfected security interest in the lease payments." Therefore, the BAP concluded that NetBank could raise the issue that the security interests in some of the surety bonds were instruments and not supporting documents, and therefore were perfected.

However, after all that, the BAP analyzed the convoluted facts of the case, applied the UCC's definitions to these two types of assets, and held that as a matter of law the surety bonds were indeed supporting documents and not instruments, therefore NetBank's security interests in them were not perfected, and thus were avoidable by the trustee. Earlier in the opinion the BAP had also held that NetBank had not perfected its security interest in the lease payments either, and so those security interests were avoidable by the trustee as well. Since the bankruptcy court on remand had come to the same conclusions, the BAP affirmed its summary judgment in favor of the trustee.

BOTTOM LINE: For the law of the case doctrine to bar a court from considering an issue, that issue must have already been decided, either expressly or by necessary implication, in the same court or in a higher court on the same case. It is not enough, as here, for both adversaries and the court to have earlier ASSUMED that a particular issue was resolved a particular way without such a decision having been either expressly made necessarily made by implication. The challenge of logic is distinguishing between an issue having been merely assumed instead of having been "decided by necessary implication."

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

Transferees Must Pay Chapter 7 Trustee "Millions of Dollars" under § 548(a) with Debtor's Plea Agreement As Sole Evidence of His Fraudulent Intent

2008-09-02T06:00:00.000-07:00

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

Johnson v. Nielson (In re Slatkin)
Ninth Circuit Case No. 06-56334
May 6, 2008
Affirmed District Court's affirmation of the Bankruptcy Court's granting of summary judgment to Chapter 7 trustee.

In this opinion the Ninth Circuit Court of Appeals ruled that the appellants must pay back to the trustee "millions of dollars" they had received from debtor as "profits" from their investments in debtor's Ponzi scheme, even though appellants had no knowledge of debtor's fraudulent intent and even though some of these funds may have been based on legitimate investments.

The Circuit Court addressed three issues of interest in this Litigation Report: A) can a debtor's fraudulent intent be based on the sole evidence of his guilty plea and plea agreement in a criminal case, authorizing the trustee's avoidance of transfers arising from such intent; B) can a bankruptcy court deny a transferee's motion for a continuance to conduct further discovery before having the opportunity to depose the debtor-transferor, or to review a transcript of the debtor-transferor's prior testimony; and C) does the bankruptcy court have the authority to grant an award of prejudgment interest if the transferee-defendants have demanded a jury trial?

A) The primary issue was this evidentiary one: could the bankruptcy court grant summary judgment on the issue of debtor's actual intent to "hinder, delay, or defraud" his creditors with the sole evidence consisting of debtor's guilty plea and the plea agreement, thus enabling the trustee to avoid and recover transfers from debtor to transferees under § 548(a) of the Bankruptcy Code and a similar California state statute?

The Circuit Court held:

1) The plea agreement was hearsay, but admissible under the exception in Federal Rule of Evidence 807 because:

The plea agreement was offered as evidence of the material fact of debtor's operation of a Ponzi scheme and his actual fraudulent in doing so;
The plea agreement and its admissions were not only more probative than any other evidence that could be procured through reasonable efforts, they were unusual direct proof of fraudulent intent, where usually circumstantial evidence must suffice;
Admission of the plea agreement into evidence to establish fraudulent intent furthered the purposes of the evidentiary rules and served the interests of justice;
The plea agreement had "equivalent circumstantial guarantees of trustworthiness" in that it was made under oath, with the advice of counsel and after debtor was advised of his constitutional rights, it subjected debtor to severe criminal penalties (a 14-year prison sentence), and was accepted by the criminal court only after the court determined that the plea was voluntary.

2) The plea agreement "preclusively establishe[d debtor's] intent to defraud in relation to transfers to [the defendants]," as follows:

Debtor's actual intent to defraud was established by his admissions in the plea agreement, in which he admitted operating a massive Ponzi scheme used to defraud 800 investors of over $593 million, since prior 9th Circuit opinions had established that the mere existence of a Ponzi scheme was sufficient to establish actual intent under § 548(a);
Debtor's plea agreement provided a sufficient factual basis to support the bankruptcy court's finding that the transfers to the defendants were fraudulent, because once the existence of a Ponzi scheme is established payments received as "profits" by investors (amounts beyond the initial "investment") are deemed fraudulent transfers as a matter of law;
Debtor's tax return did not raise a genuine issue of material fact in that his reporting of income to the IRS and delineating of capital gains attributable to various investors including the defendants because the tax return was not inconsistent with his operation of the Ponzi scheme.

B) On the matter of the bankruptcy court's denial of a motion for a continuance to conduct further discovery, given the incredible amount of money at stake it is certainly understandable that, before the court's granting of summary judgment on the issue of debtor's intent, defendants wanted to depose the debtor as to his intent regarding the specific transfers at issue. Defendants also wanted to review a transcript of debtor's testimony in a prior proceeding with the trustee (not involving defendants). The Circuit Court followed an earlier 9th Circuit opinion, Bank of America v. PENGWIN, 175 F.3d 1109 (9th Cir.1999), in stating that the defendants had to show that allowing additional discovery would have precluded summary judgment on the issue of debtor's fraudulent intent. Apparently at some point after the summary judgment ruling, defendants did have the opportunity to depose the debtor and to review the transcript of the prior proceeding, but according to the Circuit Court did not identify anything from that deposition or that transcript that contradicted the bankruptcy court's finding of fraudulent intent. So the Court determined that the bankruptcy court did not abuse its discretion in denying time for further discovery before granting summary judgment on the issue of intent.

C) Given the huge amount of the judgment awarded to the trustee, the bankruptcy court's granting of prejudgment interest on this judgment involved much more money than usual. (The Circuit Court's opinion did not provide any specific amounts as to either the transfers or the prejudgment interest, perhaps as a subtle way of indicating that the dollar amounts do not change the legal principles?) The Court looked at the appropriateness of prejudgment interest under California and federal law.

A California statute provided for interest to be awarded in fraud cases "in the discretion of the jury," so defendants argued that only a jury and not the bankruptcy court had the authority to award prejudgment interest. The Court reviewed the state case law and instead held that "when a court has granted judgment as a matter of law on all substantive issues, the court has authority to award prejudgment interest under [that statute]."

As to federal law on prejudgment interest, the Court rejected the defendant's argument that under federal law if they demanded a jury trial they were entitled to have a jury decide this interest issue, and the Court instead held that a bankruptcy court has the authority to award prejudgment, with no discussion other than to briefly distinguish a US Supreme Court case, Osterneck v. Ernst & Whinney, 489 U.S. 169 (1989)

(Note that the Court also determined through a detailed analysis (taking nearly 8 pages of the 24-page opinion on this issue) that the debtor was not a "stockbroker" under the Bankruptcy Code, critical here because under § 546(e) settlement or margin payments by a stockbroker are not avoidable. That analysis is beyond the scope of this Report so please see the opinion itself for that.)

BOTTOM LINE:

1) A debtor's criminal plea agreement can be admitted as evidence under an exception to hearsay if it meets certain conditions, especially if it has "equivalent circumstantial guarantees of trustworthiness."

2) A plea agreement can establish a debtor's intent to defraud for purposes of § 548(a) as to transfers by debtor of "profits" to "investors" if the plea agreement contains admissions of a Ponzi scheme, since as a matter of law the mere admitted existence of such a scheme establishes actual intent.

3) Payments made in a Ponzi scheme to "investors" of any sums beyond the amounts invested are deemed fraudulent transfers as a matter of law.

4) A bankruptcy court does not abuse its discretion if the party, who was, prior to the court's decision on a motion for summary judgment on a person's intent, denied a motion for continuance to conduct further discovery about that intent, cannot subsequently show that the requested additional discovery would have contradicted the court's finding of intent.

5) Bankruptcy courts have authority to award prejudgment interest in a fraudulent transfer case, in spite of transferees' demand for and lack of a jury trial, under both California statute and federal law.

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

9th Circuit 8/22/08 Opinion: Ch. 13 Trustee NOT Entitled to Actual or Statutory Damages, Atty. Fees or Costs Under Portions of Truth in Lending Act

2008-08-25T06:00:00.000-07:00

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

McDonald v. Checks-N-Advance, Inc. (In re Ferrell)

Ninth Circuit Case No. 06-17243

In this per curiam decision published on August 22, 2008, the Ninth Circuit Court of Appeals held that certain specific violations of the federal Truth in Lending Act (TILA) do not result in the award of actual damages, statutory damages, or attorney fees and costs for the consumer, or specifically in this case for the Chapter 13 trustee acting on behalf of the consumer. The court affirmed the ruling of the Bankruptcy Appellate Panel, which had affirmed the judgment of the bankruptcy court. This was a case of first impression for the Ninth Circuit as to the issue of statutory damages, and precisely as to whether the specific TILA violations.here fell within any of TILA's exceptions to statutory damages.

Although almost the entire opinion was devoted to the Truth in Lending issues, the Court also ruled against awarding attorney fees and costs to plaintiff under Nevada's consumer fraud act apparently because of a pleading error by the plaintiff. More about this shortly.

The plaintiff (again, the Chapter 13 trustee acting on behalf of the debtor) claimed that the defendant, a payday loan creditor, failed to provide TILA-required disclosures before the transaction (15 U.S.C Section 1638(b)(1)) , and failed to conspicuously disclose the finance charge and annual percentage rate (15 U.S.C. Section 1632(a)). (All statutory references hereafter are to Title 15.) Defendant did not timely respond to the complaint, and the bankruptcy court entered a default judgment against defendant and granted plaintiff-trustee's objection to this creditor's proof of claim. The primary issue on appeal was whether the particular TILA violations pled by trustee are of the type entitling it to statutory damages.

(Note: although at least in Oregon payday lenders have greatly restricted their business activity since new state laws went into effect a couple years ago, these TILA issues remain pertinent to any closed-end consumer loans.)

The court held that that these two violations were not of the type resulting in statutory damages because they fit within the scope of the exceptions to such damages in Section 1640(a). The detailed statutory construction the court used to arrive at this conclusion is beyond the scope of this summary, other than to note that in doing so it rejected the contrary analysis of a Michigan U.S. District Court and followed the 6th and 7th Circuit opinions upon which the Bankruptcy Appellate Panel decision on appeal had also relied.

Based on TILA's statutory scheme, once the trustee could not show any liability entitling her to statutory damages under Section 1640(a)(2), she was also not entitled to attorney fees and costs under Section 1640(a)(3).

As for actual damages, the court followed its own holding in Smith v. Gold Country Lenders (In re Smith), 289 F.3d 1155 (9th Cir. 2000) that to be awarded actual damages under TILA, a borrower has to show "detrimental reliance," that he could have gotten a better interest rate elsewhere or would have not gotten the loan at all. The trustee could not establish these facts as to the debtor, so she was not entitled to any actual damages.

The trustee's pleading error I referred to above resulted in her being unable to separately recover attorney fees and costs under a Nevada consumer fraud statute. Had she not made this error, it appears she would have been so entitled. In her adversary proceeding complaint the trustee asked for attorney fees and costs under a particular Nevada statute. After defendant did not appear to defend the complaint and the bankruptcy court found that defendant had violated the Truth in Lending Act, the trustee asserted the right to attorney fees and costs under a different Nevada statute, one that made violations of the Truth in Lending Act a "deceptive trade practice" under Nevada law . Because the judgment ended up being entered by default against defendant, under Fed. R. Bankr.P 7054(a), following Fed. R. Civ. P. 54, the trustee had "to plead with specificity the statute under which she now claims to be entitled to costs and fees." The standard "for such other relief as the court deems appropriate" prayer was too general to help here. Failure to plead with specificity meant that defendant was not put on notice as to the basis for an award of attorney fees and costs, and so the trustee was not entitled to attorney fees and costs under the Nevada statute.

BOTTOM LINE: 1) The specific TILA violations referred to here will not result in awards for statutory damages, or attorney fees and costs. 2) To be awarded actual damages the consumer must meet the "detrimental reliance" standard. 3) Consumer must plead the accurate statutory basis for the requested damages or else better not plan on being awarded those damages, especially if the lender does not answer and a default judgment is entered.

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

9th Circuit Holds that Ch. 13 "Undue Hardship" Student Loan Determinations Need NOT Wait Until End-of-Case Discharge

2008-08-18T08:00:00.000-07:00

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

Educational Credit Management Corp. v. Coleman, (9th Cir 2008)
Case # 06-16477
Published 8/1/08

***ON AUGUST 22, 2008 THE 9TH CIRCUIT COURT OF APPEALS VACATED THIS AUGUST 1, 2008 OPINION BECAUSE IT APPARENTLY DETERMINED IN THE INTERIM THAT IT DID NOT HAVE JURISDICTION TO CONSIDER THE APPEAL FROM THE DISTRICT COURT, SINCE THE BANKRUPTCTY COURT'S ORDER BEING APPEALED FROM WAS AN INTERLOCUTORY ORDER. LINK HERE TO SEE THE CIRCUIT COURT'S VACATING ORDER. THE CASE WAS REMANDED TO THE DISTRICT COURT TO DETERMINE WHETHER IT WOULD CERTIFY THE CASE FOR APPEAL. IF THAT COURT DOES SO, AND THE 9TH CIRCUIT THEN DETERMINES IT DOES INDEED HAVE JURISDICTION, THIS NOW-VACATED OPINION MAY BE RE-PUBLISHED. IN THE MEANTIME IT IS NOT GOOD LAW. AT BEST IT IS SOME INDICATION OF HOW THE 9TH CIRCUIT MAY RULE ON THIS ISSUE IN THE FUTURE, IN THIS CASE OR OTHERWISE.***

On August 1, 2008 the 9th Circuit Court of Appeals ruled that a Chapter 13 debtor could get a judicial determination whether her student loans constituted an “undue hardship” and were thus dischargeable without waiting until close to or after the discharge at the end of the case. Going against two other Circuits, the Fifth and the Eighth, and joining one other Circuit, the Fourth, the 9th Circuit held that the matter was ripe for adjudication, although the debtor’s Chapter 13 case was less than a year past confirmation of debtor’s five-year plan. Interestingly, it buttressed its position by citing an earlier 9th Circuit Bankruptcy Appellate Panel opinion, In re Taylor, 334 B.R. 747, 751-52 (1998), which had been overturned on other grounds.

The panel applied U.S. Supreme Court standards for “constitutional ripeness” and “prudential ripeness”.

Constitutional ripeness existed here because 1) a “substantial controversy” arose from debtor’s attempt to discharge the debt and the student loan creditor’s objection to the discharge, 2) this controversy was “definite and concrete, not hypothetical or abstract” because it was about a specific debt, and 3) was “of sufficient immediacy and reality” and not “impermissibly speculative” since it relied on only “ a single factual contingency,” her completion of plan payments, instead of a “series of contingencies.”

Prudential ripeness turns on “the fitness of the issues for judicial decision” and “the hardship of the parties of withholding judicial consideration.”

On the “fitness” issue the Court of Appeals determined that the undue hardship issue requires a bankruptcy court to look usually far into the future to weigh the debtor’s ability to repay the debt during the lengthy term of the loan, and that delaying a relatively short time “is unlikely to provide much, if any, additional benefit to the bankruptcy court’s resolution of the issue.” And as for whether there has been enough time to determine whether the debtor has made a sufficient good faith efforts to repay the debt, that depends on the timing of each case—here the Court determined that debtor’s attempts to repay from 1999 until her Chapter 13 filing in 2004 was a sufficient time for the bankruptcy court to make this evaluation. (The Court strongly implied that a debtor who files her Chapter 13 case soon after becoming liable on her student loans would not have a ripe controversy.) Importantly, the Court disagreed with the Eighth Circuit in holding that the “hardship” determination does NOT need to be made IN REFERENCE TO THE TIME OF DISCHARGE; there is no such timing requirement in § 523(a)(8).

On the “hardship of the parties” prong of the prudential ripeness test, the Court became very pragmatic and frank, at least as to the hardship to the debtor. It stated that subjecting a debtor to committing all her disposable income for five years is “a considerable burden to bear without any guarantee that the debt will be ultimately discharged.” Fascinatingly, the Court acknowledged that the primary reason the debtor was still in her Chapter 13 case, instead of converting to Chapter 7 when her income was reduced, was because she could not pay the up-front attorney fees in a Chapter 7 case to fight the “undue hardship” battle whereas in a Chapter 13 case these fees could be spread out over time. The Court concluded by relying on the “fresh start” purpose of bankruptcy in candidly stating: “In a case where a debtor faces genuine undue hardship from student loan debt, the debtor’s best shot at a fresh start may be to litigate the matter in a Chapter 13 case.”

BOTTOM LINE: To the extent that the 1998 In re Taylor BAP opinion has been uncertain authority, having been overturned albeit on other grounds, and given that there has been apparently NO OTHER Circuit ruling on this, this brand new 9th Circuit opinion gives Chapter 13 debtors’ attorneys, in the appropriate circumstances, strong ammunition to file “undue hardship” adversary proceedings earlier rather than later. And this case also provides some guidance for student loan creditors to argue lack of ripeness in the appropriate cases. Finally, this opinion virtually invites debtors’ attorneys confronted with a new client who had a good “undue hardship” case but no way to pay up-front attorney fees to litigate it, to think seriously about filing a Chapter 13 case instead of Chapter 7, when it is legally and ethically fitting to do so.

THIS OPINION WAS VACATED BY THE 9TH CIRCUIT ON 8/22/08--SEE NOTE AT THE TOP OF THIS REPORT

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