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THIS WEEK'S OPINIONS
Mon. March 22
2010
U.S. SUPREME COURT HEARS ORAL ARGUMENT TODAY:
SHOULD CALCULATION OF PROJECTED DISPOSABLE
INCOME IN CHAPTER 13 BE RESTRICTED TO FORMULAIC
CALCULATION OF PAST INCOME, OR TAKE INTO
CONSIDERATION ACTUAL PROJECTED
INCOME?
DOWNLOAD, Hamilton,
Chapter 13 Trustee, v. Lanning, No. 08-998;
court below, 545
F.3d 1269 (10th Cir. 2008)
Debtors filed chapter
13.
In previous 6 months the
debtor received a substantial windfall from her
employer's "buyout," that, if averaged into the
6-month period, substantially raised her monthly
gross income.
Debtor's plan assumed a
below-the-median income in the post-filing
period and proposed a 36-month plan.
Chapter 13 trustee
objected, arguing that the court should
calculate "projected disposable income" based
strictly on the historic 6-month average prior
to filing, i.e., the "mechanical"
approach.
The 10th Circuit
acknowledged that cases were divided on whether
the "projected disposable income" should be
restricted to the codified 6-month formula, or
look at more realistic income projections.
The 10th Circuit held in
favor of the more realistic projections based on
actual expected post-petition income, i.e., the
"forward-looking" approach.
Thus, the "buyout," a
pre-petition lump sum windfall, should not be
added into the projected disposable
income.
The 10th Circuit agreed
with the bankruptcy court's reasoning that " ...
the mechanical approach ' leads to absurd
results that are at odds with both congressional
purpose and common sense.'"
[Ed. note:
whichever method is adopted is a two-edged sword
for the debtor whose prepetition income varies
substantially from post-petition income. The
Supreme Court will hopefuylly settle the
argument with reasoning based on actual
knowledge of Bankruptcy law, which would be
novel for the court.]
Mon. March 8
2010
U.S.
SUPREME COURT - HELD: ENACTMENTS OF BAPCPA ARE
NOT UNCONSTITUTIONAL AS THEY PERTAIN TO
BANKRUPTCY ATTORNEYS
DOWNLOAD:
Milavetz
et al. v. United States 559 U.S. ____ (March 8
2010)
Appellants challenged the
constitutionality of the provisions of BAPCPA
that impose additional duties and restrictions
on bankruptcy attorneys, including the
prohibition to advise the client to incur
additional debt.
The Supreme Court, in a
typically impractical ruling, said:
" ... we reject
Milavetz's suggestion that §526(a)(4)
broadly prohibits debt relief agencies from
discussing covered subjects instead of merely
proscribing affirmative advice to undertake a
particular action. Section 526(a)(4) by its
terms prevents debt relief agencies only from
"advis[ing]" assisted persons "to incur"
more debt.
"Covered professionals
remain free to "tal[k] fully and
candidly about the incurrence of debt in
contemplation of filing a bankruptcy case."
Brief for Milavetz 73. Section 526(a)(4)
requires professionals only to avoid instructing
or encouraging assisted persons to take on more
debt in that circumstance."
Fri. March 5
2010
HELD:
PAYOFF $ AMOUNT OF TRADED-IN VEHICLE AS PART OF
NEW VEHICLE FINANCING IS INCLUDED IN PMSI AND
CANNOT BE STRIPPED IF A 910 PMSI
DOWNLOAD:
In
re Howard case No. 08-B-32998 (7th Cir. Mar. 1
2010)
In this Chapter 13 case
the debtors had purchased a vehicle within 910
days
As part of the
financing the debtors traded in their old
vehicle
The loan was a
purchase-money-security interest.
The loan amount
included the amount the finance company paid for
the "negative equity"
Negative equity in this
context means the balance owed on the traded-in
vehicle that exceeded the value of that
vehicle
Hence, part of the new
loan included the amount the new finance company
paid to clear the lien on the turned-in vehicle
(i.e., the portion of the balance still owed
that exeeded the current value of the traded-in
vehicle.
Since the new vehicle
was purchased within 910 days of filing the
bankruptcy, the PMSI could not be stripped down
per the "hanging paragraph" following 11 U.S.C.
§ 1325(a)(9).
Debtor's argued that
the portion of the loan that went to pay off the
traded-in car was not used to purchase the new
car, and thus was not a PMSI; therefore that
portion of the loan could be stripped
down.
The District Court
cited six other circuit court rulings holding
that the negative equity was a part of the loan
used to purchase the new vehicle and hence could
not be stripped down.
The court followed the
general rule that the definition of a PMSI is
typically based on state law and reference to
the Uniform Commercial Code.
The relevant portion of
the UCC includes such incidental expenses as
payoff of negative equity if it is required in
order to finance the deal.
The court ruled that
the negative equity portion of the loan as PMSI
and therefore could not be
stripped.
HELD: CHAPTER 13 PLAN MAY STRIP WHOLLY UNSECURED
LIEN FROM RESIDENCE NOTWITHSTANDING DEBTOR IS
NOT ELIGIBLE FOR DISCHARGE
DOWNLOAD:
In
re Hart Case No. 09-CV-1017 JLS (Bkrtcy.S.D. Cal
March 1 2010)
The chapter 13 debtors
filed a motion to fix the value of two junior
liens on their residence.
They asserted that
since the value of the residence was less than
the senior lien (the mortgage), the other two
liens were wholly unsecured and therefore were
not allowed secured claims under §
506.
Accordingly, they
argued, the anti-stripping provision of §
1322(b)(2) did not apply, because that section
only applies to allowed secured claims, and a
wholly unsecured claim is not an allowed secured
claim.
The court held in favor
of the debtors and allowed the liens to be
stripped off.
The second issue in
this case arose out of the debtors having filed
a chapter 7, and receiving a discharge, within 4
years of filing the chapter 13 and were thus
ineligible for a discharge under §
1328(f).
The argument was that
if no discharge is granted, the lien pops back
into existence.
The court acknowledged
that § 349(b)(1)(C) provides that liens are
revived if the case is dismissed.
But the court held that
there is no provision in the Code that requires
a discharge in order to validate the lien
stripoff.
Accordingly, the court
allowed the strip off effective at time of
confirmation of the plan and would remain
stripped off at the end of the plan,
notwithstanding there would be no discharge.
Fri.
Feb. 14 2010
COURT
DESCRIBES SIMPLE WAY TO CALCULATE PROPER TAX
DEDUCTION FOR MEANS TEST
DOWNLOAD:
In
re Okorowski Feb. 8 2010 (Bkrtcy.N.D. Ohio
2010)
Chapter
7 case
Trustee
moved for dismissal based on presumption of
abuse.
The
issue boiled down to whether the debtor's
deduction, for purposes of calculating the means
test and disposable income, for tax deductions
was proper.
Many
courts have noted that simply deducting what was
actually deducted from the paycheck is not
accurate and is too susceptible to manipulation
by the debtor, such as claiming too many
exemptions.
The
weight of authority is that the debtor must at
least estimate what the proper deduction should
be.
This
court suggested two ways to estimate what the
actual amount should be:
1)
Subtract one-twelfth of the previous years' tax
refunds from the monthly taxes withheld;
or
2)
Permit the debtor to list the amount withheld,
even if that sum would result in a refund, as
long as some or all of the refund is dedicated
to the plan.
In this
case using either method resulted in a
presumption of abuse.
The
court gave the debtor 28 days to convert or
dismiss.
HELD: TRUSTEE MAY AVOID UNPERFECTED MORTGAGE AND
RETAIN THE EQUITY IN THE DEBTOR'S RESIDENCE FOR
THE ESTATE
DOWNLOAD:
In
re Neal Feb. 8 2010 (Bkrtcy.E.D. Mich.
2010)
Debtor's
had arranged a $20,000 line of credit against
their residence, which had a value of
$25,000.
The
finance company neglected to record the
lien.
Trustee
moved under "strong-arm" provisions for order
avoiding the lien under 11 U.S.C. § 544(a)
and for an order evicting the debtors.
Debtor's
argued that once the unperfected lien was
avoided, the $25,000 of equity in the home was
protected to them under their homestead
exemption of $30,000.
The
court ruled in favor of the trustee, holding
that under § 551 the avoidance is " ...
preserved for the benefit of the
estate."
The
courted cited another case for the proposition
that "The debtors are only entitled to an
exemption to the extent there is equity in the
property" and another case saying "The value
that can be exempted is the unencumbered
portion. "
SEE OUR
NEWEST BOOK RELEASE: ALLMAND'S
HANDLING & AVOIDING
LIENS.
ATTORNEY
DODGES BULLET - IS NOT SANCTIONED FOR
ELECTRONICALLY FILING UNSIGNED
PETITION
DOWNLOAD:
In
re Rose February 9 2010 (Bkrtcy.S.D. Ohio
2010)
When
the trustee asked debtors at meeting of
creditors if they had signed the petition, the
debtors unexpectedly answered they had not.
It
turns out the debtor's had "reviewed" the
papers, but not signed originals.
The
weight of authority is that it is a serious
ethical error for an attorney to electronically
file a petition without first getting a real
signature on hard-copy originals.
In this
case the court accepted the attorney's
representation that it was an innocent
oversight, and that he had thought his staff had
obtained the signatures.
The
court cited Rule 9011(a) that "An unsigned paper
shall be stricken unless the omission of the
signature is corrected promptly after being
called to the attention of the attorney or
party."
The
court opined that this language anticipated an
innocent failure to sign before filing might
occur and did not require dismissal if promptly
remedied.
Friday
Feb. 4 2010
COURT GRANTS MOTION TO COMPEL ABANDONMENT OF
PROPERTY
In
re Newcomb, Case No. 08-43143 (Bkrtcy.D. Mass.
Jan. 26 2010)
Chapter
7 case
Debtors
claimed a homestead on their
residence.
Debtor
moved to avoid two judicial liens impairing the
exemption
The
property was valued at $275,000
Debtor's
homestead exemption was claimed for
$68,377
The
court found the judicial liens impaired the
exemption
The
court granted the motion to avoid the judicial
liens
The
trustee opposed the motion to abandon the
estate's interest
The
court observed that there was insufficient
equity to be of value to the estate and granted
the motion to abandon.
The
court cited 11 U.S.C. § 522(i) in ruling
that the debtor could avoid the lien and exempt
it for the benefit of the debtor.
This
Code section provides an exception to the
general rule under § 551 that avoided
transfers are preserved for the benefit of the
estate.
COURT LETS CASE AGAINST CHASE FOR FRAUD ON THE
COURT TO PROCEED
In
re Woodruff Case no. 02-81159 (Bkrtcy.M.D.Ark
Jan. 27 2010)
Chapter
13
Debtors
were in default on their mortgage
A plan
was approved permitting debtors to
- Continue
making the monthly mortgage payment directly,
and
- Make
delinquency payments through the
plan
Chase
moved for relief from stay to
foreclose
In
support, Chase filed a motion, an affidavit, and
a record of payments
All
three were inconsistent with each
other
Debtors
alleged Chase's affidavits were boilerplate and
Chase knew they were false
Debtors
sued for damages and injunctive
relief
Chase
moved for dismissal, which court
denied
Court
observed: "The gravamen of the complaint is that
Chase has made an institutional practice of
filing false affidavits."
The
court denied Chase's motion to
dismiss:
"The
damage alleged in this case is far more
widespread than damage to an individual debtor.
The damage is to the system itself. If improper
procedures are followed by parties or their
counsel, they must be unearthed
..."
_________________
HOTWIRE
FOR WEEK ENDING
JANUARY
29 2010. HOTWIRE # 2010-2
SO.
DIST. CALIFORNIA RULES UNSECURED PORTION OF
MORTGAGE IS NOT COUNTED FOR 109(e) DEBT
LIMIT
In
re Munoz Bkrtcy. S.D. Cal. January 12
2010
Debtor's
filed chapter 13.
Trustee
moved to dismiss on ground that unsecured debt
exceeded the unsecured debt limit per 11 U.S.C.
§ 109(e) ($336,900) for eligibility to be
in chapter 13.
Debtor's
have a mortgage and a second deed of trust on
their residence
Value
of house is set at $412,000.
The
mortgage is $707,382, of which $295,385 is
unsecured
The
second is $161,382, all of which is
unsecured.
If
the unsecured portion of the mortgage is
counted, the total unsecured debt breaks the
109(e) limit.
The
court ruled you don't count the unsecured
portion of the mortgage.
The
court held that, since § 1322(b)(2)
prohibits bifurcating the mortgage into a
secured and unsecured portion, it should not be
deemed bifurcated for other purposes, such as
eligibility for chapter 13.
The
court cited § 506(a)(1) to the effect that
"value shall be determined in light of the
purpose of the valuation ..."
The
court held that the ruling in In re Nobleman was
consistent with its ruling in this
case.
"The
undersecured portion of a lien that cannot be
modified in chapter 13 should not be included in
the amount of unsecured debts for purposes of
determining eligibility under 11 U.S.C. §
109(e), but as part of the secured
debt."
The
court distinguished those cases ruling that a
wholly unsecured or undersecured judicial lien
on the debtor's primary residence should be
bifurcated, with the unsecured portion included
under 109(e), because such a claim could be
stripped off or stripped down to the extent that
it impairs the homestead exemption (11 U.S.C.
§ 522(f)(1)(A), § 506(a)), while a
voluntary lien is prohibited from bifurcation by
1322(b)(2).
HOTWIRE
FOR WEEK OF JANUARY
15 2010 # 1
8TH
CIRCUIT AFFIRMS TRUSTEE'S AVOIDANCE OF
UNRECORDED MORTGAGE
Wells
Fargo Home Mortgage, Inc. v. Dwight R.J.
Lindquist, Chapter 7 Trustee, 8th Cir. January
11 2010
Chapter
7 case
Debtor
granted Wells Fargo a mortgage on May 16,
2005.
Debtor
filed bankruptcy Oct. 14 2005
(pre-BAPCPA)
Mortgage
holder had not recorded the mortgage prior to
chapter 7 filing
Debtor
erroneously listed mortgage as
secured
Trustee
filed adversary action under 11 U.S.C. §
547 pleading debt was unsecured and transfer of
mortgage was preferential
Bankruptcy
court held for trustee and ordered Wells Fargo
to pay the estate $190,808 (the value of the
mortgage).
Wells
Fargo Appealed, arguing that the transfer
actually happened more than 90 days prior to the
petition date and therefore was not
preferential.
The
mortgage lien was eventually recorded on March
20 2006. The court deemed the transfer to have
been made (i.e., perfected) at that
date.
The
version of 11 U.S.C. § 547(e)(2)(C) in
effect pre-BAPCPA provided that a transfer (in
this case the mortgage lien) not recorded at the
time the petition is filed, or within 10 days
after, is deemed filed immediately prior to the
petition filing date (BAPCPA merely extended the
10 days to 30 days, not applicable here).
Accordingly,
trustee argued transfer should be avoided as a
preference under 11 U.S.C. §
547(b), §
544(a) and § 550(a).
The
Court of Appeal agreed, holding that the
transfer at issue was the debtor's granting of a
mortgage to Wells Fargo, and Wells Fargo's
failure to record it prior to the petition
filing date brought it under § 547(e)(2)(C)
providing that a postpetition transfer would be
deemed a transfer made within 90 days prior to
the petition date, and therefore a preferential
transfer.
4TH
CIRCUIT AFFIRMS REJECTION OF
RIDE-THROUGH
In
re Jones 4th Cir. Jan 11 2010
The
chapter 7 debtor did not elect any of the
options available for a purchase-money security
interest in his car, to wit, redemption,
reaffirmation, or surrender.
The
holder of the PMSI (Daimler/Chrysler) repossesed
the car.
The
co-owner of the car appealed from the court's
order permitting the repo.
The
co-owner argued that he was entitled to keep
possession of the vehicle if he remained current
on the payments (i.e., a "ride-through"). But
the debtor's argument was based on pre-BAPCPA
case law in the district.
Daimler/Chrysler
argued that BAPCPA extinguished the ride-through
as a debtor's option, and that in the event the
debtor fails to elect one of the options
prescribed at 11 U.S.C. § 521(a)(6), the
automatic stay is lifted as to the property, and
the property is no longer property of the
estate.
The
court agreed, ruling that the creditor was
entitled to act within its rights under state
law.
The
court then dealt with the applicability of state
law.
The
contract included an "ipso facto" clause
providing that the debtor's filing bankruptcy
was a default of the contract.
The
court acknowledged that as a general rule
ipso facto clauses are not enforceable in
bankruptcy, but that the Code provided an
exception to that rule in the event of a
debtor's failure to elect one of the permitted
options for a PMSI.
In
other words, the creditor was free to act within
its rights under state law.
The
debtor then argued that under West Virginia law,
in the event the consumer defaulted on a PMSI
contract the creditor was required to give the
consumer notice of his/her right to cure the
default and continue with possession of the
vehicle, and that in this case the creditor had
failed to do so.
But the
Appellate court held that the procedural
obligation on a creditor to provide the notice
was predicated on the ability of the consumer to
cure the default, and that in this case the ipso
facto clause was triggered by an event that
could not be cured, to wit, the debtor's filing
of the bankruptcy.
Accordingly,
the creditor was not required to send the
notice, and the repossession was
valid.
©
KING BANKRUPTCY PRACTICE
2010
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