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"

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.

© 2009 Bankruptcy Litigation Support for Attorneys

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

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.

© 2009 Bankruptcy Litigation Support for Attorneys

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

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.

© 2009 Bankruptcy Litigation Support for Attorneys

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

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.

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.

© 2009 Bankruptcy Litigation Support for Attorneys

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

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.

© 2009 Bankruptcy Litigation Support for Attorneys

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

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.

© 2009 Bankruptcy Litigation Support for Attorneys

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

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.

© 2009 Bankruptcy Litigation Support for Attorneys