RECENT DEVELOPMENTS IN CONSUMER BANKRUPTCY CASES

Hon. Frank J. Santoro

United States Bankruptcy Judge Eastern District of Virginia

Norfolk and Newport News Divisions 600 Granby St.

Norfolk, VA 23510

Kelly M. Barnhart

Roussos, Lassiter, Glanzer & Marcus, PLC 580 E. Main St., Ste. 300

Norfolk, VA 23510

§§ 101(12A), 526, 528

Advising Debtor to Incur Additional Debt on Eve of Bankruptcy May Be Appropriate Depending on the Circumstances – Milavetz, Gallop & Milavetz, P.A., et al. v. United States, No. 08-1119 (2010)

A. Facts: The plaintiffs, including Milavetz, Gallop & Milavetz, P.A. (“Milavetz”), filed a suit seeking declaratory relief, arguing that it was not bound by certain debt relief agency provisions, that it could advise clients to incur more debt and did not need make certain disclosures in its advertisements. The District Court concluded that the definition of “debt relief agency” in 11 U.S.C. §101(12A) did not apply to attorneys and that §§526 and 528 were unconstitutional as applied to professionals. The Eighth Circuit Court of Appeals affirmed in part and reversed in part, disagreeing with the District Court’s decision that attorneys did not fit within the definition of debt relief agencies, finding that §528’s disclosure requirements did apply to attorneys and that §526(a)(4) was unconstitutional because it broadly prohibits debt relief agencies from advising clients to incur any additional debt in contemplation of bankruptcy even if the advice would be considered valid bankruptcy planning.

B. Holding: First, attorneys who provide legal assistance to assisted

persons are debt relief agencies under the Bankruptcy Code. Second, §526(a)(4) only prohibits an attorney from advising a debtor to incur more debt because that person is filing for bankruptcy relief. If there is a valid reason to incur more debt, the attorney may advise the debtor to do so on the eve of bankruptcy. According to the Court, the question to consider is why counsel is advising the person to incur additional debt. Finally, §528’s disclosure requirements are considered valid because the rights to advertise are adequately protected because the disclosure requirements are reasonably related to the State’s interest in preventing deception of consumers. Note the not so subtle implications reference the scope of the attorney-client privilege.

§§ 330(a), 503(b)(2), Fed. R. Bankr. P. 2016

Counsel May Not Receive Supplemental Fees, in Addition to No-Look Fee, Unless Charges are for Unanticipated Services – In re Grubb, 2009 Bankr. LEXIS 4083 (Bankr. E.D. Va. 2009)

A. Facts: Counsel for chapter 13 debtors filed a Supplemental Fee Application, seeking approval of attorneys’ fees in the amount of $5,569.00. They had already been awarded the No-Look Fee of $3,000. The Application included only time for work that was part of the no-look fee. Counsel had previously been awarded $700.00 for fees associated with the sale of the debtors’ house.

B. Holding: The Court denied the fee application, after considering applicable law and the evidence presented. First, the Court discussed Standing Order 08-1, which allows counsel representing chapter 13 debtors to claim a “no look” fee for $3,000.00 and expenses of $300.00. This is referred to as a “no look” fee, which covers all services that are

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reasonably expected in order to get a chapter 13 plan confirmed. In addition, this standing order contains a menu of supplemental fees for additional services that debtor’s counsel may provide during the course of the case. With respect to supplemental fee applications, the Court explained that these were not meant to be a way for enlarging the amount of the “no look” fee sought and paid during the course of the case. Instead, supplemental fee applications should be solely for “unusual and unexpected circumstances.” In this case, the Court concluded that the “no look” fee was sufficient for the work actually performed. The court noted three concerns related to the application. First, the duplication of work and “the systemic inefficiency incident to the high number of billing units assigned to the file.” Second, the billing for secretarial and ministerial time as paraprofessional time. Third, the overstatement of time as a result of the firm’s use of “tenth of an hour/upward rounding” practice. The Court concluded that not all of the services performed by the numerous attorneys on the file were necessary and were in fact duplicative. Second, the billing of secretarial and ministerial time as paraprofessional time was unacceptable. Finally, the Court noted its concern that the firm was billing at one-tenth an hour for every discrete activity, regardless of how small and regardless of how much time was actually spent on the task. As a result, the supplemental fee request was denied, given that this was a typical chapter 13 case with no exceptional or unusual circumstances.

§ 330(a) Firm May Only be Reimbursed for Actual, Necessary Expenses, Not Overhead – In re Wyche, 425 B.R. 779 (Bankr. E.D. Va. 2010)

A. Facts: Chapter 13 debtor’s counsel submitted costs applications in two separate cases, seeking reimbursement of costs in excess of the $300.00 allowed under Standing Order 08-1. The trustee objected in both cases, concerned with whether the requests were for actual and necessary expenses.

B. Holding: The Court reduced the amounts of both applications, after considering all of the evidence presented at hearing. In reaching its conclusion, the Court first explained the Court’s duty to examine expense reimbursement requests in order to protect the estates. In order for the expenses to be approved, it must be shown that the expenses were “actually necessary for the proper representation of the particular client from whom reimbursement is sought.” Counsel, as the moving party, bore the burden of establishing this. Here, there were various charges that were duplications, which counsel could not show were necessary and therefore should be passed on to clients and the estate. For example, in-house copying and printing that was solely for the benefit of the various attorneys handling the cases could not be reimbursed. Finally, to the extent an argument may be made that it is traditional to pass on duplication costs to the clients, such argument must fail, since no such showing has been made. The Court held that when reviewing cost reimbursement applications, courts should look at

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each expense to determine whether it is necessary, rather than categorically denying or allowing the reimbursement of expenses.

§ 362(h), § 521(a)(2)(C)

BAPCPA Eliminated Ride Through Option – DaimlerChrysler Financial Services Americas LLC v. Jones (In re Jones), 591 F.3d 308 (4th Cir. 2010)

A. Facts: Mr. and Mrs. Jones bought a vehicle under a sales contract with DaimlerChrsyler that allowed it a security interest in the car to secure payment. The contract also had an “ipso facto” clause, which provided that the purchasers would be considered in default if they filed for bankruptcy relief. Mr. Jones then filed for chapter 7 relief. He filed a statement indicating that he would continue making payments on the car, but did not state whether he intended to redeem the vehicle or reaffirm the debt as required by §§ 362(h) and 521(a)(2). He failed to redeem or enter into a reaffirmation agreement within 45 days of the first 341 meeting of creditors. He made one payment to DaimlerChrysler following the 45 day period. DaimlerChrysler then moved to confirm termination of the automatic say so that it could enforce its interest by repossessing the car based on the ipso facto clause. The Bankruptcy Court held that the stay had been terminated and DaimlerChrsyler repossessed the vehicle and the Joneses filed an adversary proceeding. The Bankruptcy Court enjoined the sale and held that DaimlerChrysler did not have the right to repossess the vehicle, relying on the “ride-through” option. The District Court for the Southern District of West Virginia reversed and held that DaimlerChrsyler had the right to repossess the vehicle, since the ride-through option had been eliminated with the enactment of BAPCPA.

B. Holding: Affirmed. The enactment of BAPCPA eliminated the ride-through option. A debtor is now required, pursuant to §§ 521(a)(2)(C) and 362(h) to indicate whether he is going to redeem the property or reaffirm the debt, in order to keep the property. If the debtor does not indicate his intention the stay terminates and the property is no longer considered part of the estate. While ipso facto clauses are typically unenforceable, the Court noted the exception to this rule is contained in §521(d), which allows enforcement of these clauses if the debtor fails to comply with §§ 521(a)(6) or 362(h). The Court specifically did not address the “back door” ride through. See In re Husain, 364 B.R. 211 (Bankr. E.D. Va. 2007)(holding that the ipso facto clauses in the loan agreements were not enforceable, regardless of whether the reaffirmation agreements were approved or disapproved, because the debtors timely filed a statement of intent to reaffirm and timely performed such intent by executing the reaffirmation agreements and sending the executed reaffirmation agreements to the creditor within the prescribed time limits).

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§ 502(b)(9) Mailbox Rule Does Not Apply With Respect to Filing Proofs of Claim –In

re Edwards, 2010 Bankr. LEXIS 3337 (Bankr. M.D. Ala. 2010)

A. Facts: chapter 13 debtor filed for relief. At the time of filing, he owed a former attorney fees. The debtor attempted to include the creditor in his case, but incorrectly listed his address (omitted one number in the attorney’s P.O. Box number). The attorney did receive actual notice of the case and attempted to send his proof of claim to the chapter 13 trustee by mail, rather than sending it to the clerk, prior to the expiration of the claims bar date. However, the trustee indicated that he never received the attorney’s proof of claim. After the bar date, the attorney filed a copy of his claim with the clerk and the trustee objected.

B. Holding: The trustee’s objection was sustained. In reaching its decision, the Court first concluded that simply because the creditor did not receive official notice did not relieve him of his obligation to timely file a proof of claim since he had actual notice of the filing. Thus, the creditor could not point to any of the exceptions contained in § 502(b)(9) to permit his tardily filed claim. Next, the court considered whether the attempted filing of the claim with the trustee constituted timely filing of the claim. In determining this issue, the Court had to determine whether the mailbox rule applied to proofs of claim. The Court held that it did not apply. First, it noted that if Congress had intended for it to apply, it would have made this clear in the Bankruptcy Code. Second, if the rule was applied, it would lead to uncertainty, making the administration of cases slower and more difficult.

§ 502(j), § 1325

Secured Creditor May Seek Reconsideration of its Claim in the Event of an Unsecured Deficiency Following Surrender – Branch Banking & Trust Co. v. Coffia (In re Coffia), 2010 Bankr. LEXIS 1563 (Bankr. S.D. Ga. 2010)

A. Facts: Chapter 13 debtors proposed to surrender real property in full satisfaction of BB&T's claim without providing it recourse to pursue any deficiency. BB&T filed an objection to the plan. BB&T was concerned that the plan, if confirmed, may preclude it from filing an amended claim in the event that after foreclosure there remained a deficiency balance owed to it. Holding: The Debtors were permitted to surrender the property in full satisfaction of the allowed secured claim of BB&T, which surrender is permitted by § 1325(a)(5)(C). The Court concluded that BB&T was misreading the plan, since nothing in the plan suggested that the surrender meant that BB&T’s entire debt was satisfied. The plan did not limit BB&T’s right to seek recovery of its deficiency claim, and therefore the plan could be confirmed. BB&T has the right to seek reconsideration of its claim as unsecured pursuant to § 502(j) and nothing in the plan or confirmation of the plan precludes BB&T from seeking this relief.

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§ 506(a) and (d)

Junior Lien on Entireties Property May be Avoided in Chapter 13 case filed by Only One Spouse – Strausbough v. Co-op Services Credit Union (In re Strausbough), 426 B.R. 243 (Bankr. E.D. MI 2010) and Tomasi v. Citizens Bank (In re Tomasi), 426 B.R. 243 (Bankr. E.D. MI 2010)

A. Facts: This proceeding involved two different bankruptcy cases. In the first case, the debtor filed for chapter 13 relief. She and her non-filing spouse owned their primary residence as tenants by the entireties. She filed an adversary proceeding against Co-op Services Credit Union to determine the extent of its lien. She alleged that the value of her home was $120,000 but that she owed $131,117.98 on the first mortgage and that her second mortgage totaled $48,262.48. Her husband had previously filed a chapter 7 bankruptcy case and received a discharge. In the second case, the debtor filed for chapter 13. He owned his primary residence as tenants by the entireties with his wife, who did not file for bankruptcy relief. He filed an adversary proceeding against Citizens Bank to determine the extent of its lien. The first was owed to HSBC in the amount of $103,990.24. The second, owed to Citizens Bank, was $45,598.48. He valued the house at $100,000.00. All parties sought summary judgment.

B. Holding: The Court held that the wholly unsecured junior liens on entireties property may be avoided in chapter 13 case filed by only one spouse. The Court rejected the lienholders’ arguments that avoidance allowed nondebtor spouses to benefit without filing for chapter 13 relief, especially if the spouses previously received chapter 7 discharges and could not have avoided the liens in chapter 7. The Court discussed the case relied upon by the Defendants, Hunter v. CitiFinancial, Inc. (In re Hunter), 284 B.R. 805 (Bankr. E.D. Va. 2002), which appeared to be the only case addressing the issue at the time. This involved the application of Pennsylvania law. In Hunter, the Bankruptcy Court for the Eastern District of Virginia concluded that because the property was entireties property, the debtor could not avoid the junior lien. In reaching its decision, the Court found two bases for its decision: (a) the spouse had not sought relief under title 11, and thus the debtor was seeking to provide the spouse with the benefit of having filed for relief without her having any of the burdens of filing; and (b) the non-filing spouse’s interest is in the whole. Even if the lien is voided as to the debtor, it remained as to the wife’s interest and encumbered the entire property. The result, if allowed, would be that avoidance of the junior lien would result in a severance of the entireties estate in violation of state law. The Michigan Court was not persuaded by analysis in Hunter. It concluded that no state law or any provision of the Bankruptcy Code precluded the plaintiffs from avoiding the liens on entireties properties, and thus the plaintiffs’ summary judgments were granted.

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§ 506, 1328(b)

Power to Strip Off Lien Not Dependent Upon Whether Debtor is Entitled to Discharge – In re Gordy, 2009 Bankr. LEXIS 2911 (Bankr. D. Md. 2010)

A. Facts: Debtor and her husband filed for chapter 7 relief and received their discharge in 2007. The discharge included liability on two claims held by First Franklin that were secured by first and second liens on their residence. The discharge did not affect the status of the liens. The debtor then filed for chapter 13 relief and her plan was confirmed. There were no unsecured claims filed in the chapter 13 case. First Franklin filed two claims secured by liens in the approximate amounts of $75,000 and $299,000. Debtor’s counsel filed a claim for attorneys’ fees in the amount of $2,000. After filing the case, the debtor filed a motion to avoid the second lien of First Franklin, as it was wholly unsecured. The motion was unopposed and an order was entered granting the requested relief. The case was then confirmed. The plan was amended six times and at no point was good faith challenged. Eventually, First Franklin and the debtor reached an agreement to modify the existing loan related to the first deed of trust. The trustee challenged the stripping of the second lien on the grounds that the debtor was not entitled to a discharge. The trustee also argued that the lien could not be avoided until the plan was completed.

B. Holding: The Court held that the debtor’s ability to strip off the wholly unsecured lien of First Franklin was not dependent on whether she was entitled to a discharge. In addition, the court could see no reason for requiring plan completion as a condition of lien avoidance.

§ 522, Bankr R. Civ Pro. 4003(b)

Exemptions: Chapter 7 Trustee Not Required to Object to Unclear Exemptions – Schwab v. Reilly, 130 S. Ct. 2652, 177 L.Ed.2d 234 (2010)

A. Facts: Debtor filed for chapter 7 relief after her catering business failed. On Schedule B, the debtor listed certain kitchen/cooking equipment, scheduling these items with a value of $10,718.00. On schedule C, she claimed two different exemptions for these items under §522, totaling $10,718.00. The trustee had an appraisal done of the equipment, which showed a value for the equipment of $17,200.00. The trustee did not object to the debtor’s exemptions. The trustee moved to sell the equipment, with the debtor to receive the claimed exemption amounts following the sale, and the remainder going to the unsecured creditors. The debtor argued that because she claimed, as exempt, the total of the scheduled value of the equipment, she had put the trustee on notice that she intended to exempt the full value, even if it was more than what she listed on the schedules. The debtor also argued that the estate had forfeited its claim to any of the items because the trustee did not object to her exemptions within the required 30 days. The bankruptcy court denied the trustee’s sale motion, as did the District Court, and the Third Circuit Court of Appeals.

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B. Holding: The trustee was not required to object to the exemptions in order to maintain the estate’s right to keep any value of the equipment over the value claimed as exempt by the debtor. The majority gave several examples of language the debtor could have used that would have clearly indicated to the trustee, and other parties, of her intention to claim the entire value as exempt, including: (a) “full fair market value”, or “100% of FMV” in the value claimed exempt portion of the schedules.

§ 522(b) Joint Debtors are not Required to Claim Same Exemptions – In re Connor,

419 B.R. 304 (Bankr. E.D. N.C. 2009)

A. Facts: Husband and wife chapter 13 debtors claimed different exemptions, one under federal law and the other under North Carolina law. The chapter 13 trustee objected, arguing that the debtors were required to claim the same set of exemptions and that failure to do so evidenced bad faith on the part of the debtors. The husband debtor had lived in North Carolina for the 730 days prior to filing. His wife had lived in Florida within the 730 days prior to filing and then moved to North Carolina. She was not eligible to claim Florida exemptions because she had to be a resident of Florida to do so. She was subject to the savings provision of §522(b)(3), which provides that she has the right to claim federal exemptions if she was ineligible for any other exemption. The husband was required to claim North Carolina exemptions, and North Carolina is an opt-out state.

B. Holding: The Court held that, notwithstanding §522(b)(1)’s prohibition against joint debtors’ electing exemptions under different schemes, the debtors in this case were permitted to do so, because they were not electing to do so, but were required to do so. One was required to claim exemptions under North Carolina law and the other spouse was not eligible for either Florida or North Carolina exemptions, and thus required to claim federal exemptions. §522(b)(1) does not apply in this situation, or any situation, where one joint filer is not eligible for state exemptions, since the ban is on election between federal and state exemptions. When choice is eliminated, as a matter of statutory provisions, no election has been made.

§ 522 Claimed Exemptions Must Fail When Not Properly Claimed or Recorded -

In re Strickland, 2010 Bankr. LEXIS 1037 (Bankr. E.D. Va. March 30, 2010)

A. Facts: As of the date of filing for chapter 7 relief, debtors owned real property as tenants by the entirety, in Powhatan, Virginia, which was valued at $150,000. As of the filing date, the debtors had a loan with the Bank of Virginia, which an outstanding balance of approximately $215,000. The loan was secured by a first deed of trust lien on the property. The debtors did not claim any exemption as to the property because it appeared to them that the property was fully encumbered.

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The debtor husband also owned a certificate of deposit with Bank of America. The value of the CD, according to the debtors’ schedules, was approximately $80,000. The CD was pledged as additional collateral for the loan with Bank of Virginia. The debtors each claimed a $2.00 homestead exemption in the CD. The debtors filed for chapter 7 bankruptcy relief and the Bank of Virginia filed for relief from the automatic stay. The Trustee informed counsel for the bank that he would not endorse an order until the Bank first liquidated the CD and applied it to the amount owed to it. The Bank then filed a motion for relief from the stay as to the CD. The consent order on this motion was endorsed by all parties and granted the Bank relief as to the CD. After the order was entered, the Bank liquidated the CD and applied the proceeds to the loan balance. A second consent order was presented to the Court, which it entered, granting relief as to the real property. At the 341 hearing, the trustee never abandoned his interest in the property. The property was sold and the excess funds, approximately $7,500, were provided to the trustee by counsel for the Bank. The debtors then filed an amended homestead deed, increasing the amount of the claimed exemption by the debtor husband in the CD, to approximately $4,600.00, and also increasing the debtor wife’s claimed exemption, as well. The debtors also filed amended Schedules B and C. The debtors were attempting to claim the homestead exemptions in the CD in order to obtain the excess funds from the sale of the real property. The trustee objected to the claimed exemptions.

B. Holding: The Court sustained the trustee’s objection, since the debtors failed to properly exempt an interest in the real property. In order to have claimed a portion of the property as exempt, they would have had to file a homestead deed in the circuit court where the real property was located, Powhatan, which they failed to do. The Court held the debtors were not entitled to claim either the real property or the proceeds received from the sale of the real property as exempt. In addition, as to the CD, they did properly file the homestead deed in the right court, but the claimed exemption was only for $2.00. The Court rejected the debtors’ argument that the proceeds from the sale were somehow should be considered proceeds from the liquidation of the CD. While the debtors believed the property would be sold before the CD was liquidated, there was nothing that required this order of satisfaction and the debtors failed to take the steps necessary for this to occur. The Court held that the proceeds from the sale were proceeds from the property and not from the CD and thus the claimed exemptions had to fail.

§ 541, § 542 Prepaid Taxes Are Not Part of Bankruptcy Estate – Weinman v. Graves (In re Graves), 2010 U.S. App. LEXIS 13249 (10th Cir. June 29, 2010)

A. Facts: Prior to filing for chapter 7 bankruptcy relief, the debtors filed their 2006 tax return, and were entitled to a refund. They made an irrevocable election for the refund to be applied to future tax liability.

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Shortly after filing the tax return, the debtors filed for chapter 7 relief. The trustee moved for turnover of the tax refund under §542(a), arguing that the refund was property of the estate under §541(a)(1). The bankruptcy court denied the motion, and the BAP affirmed. The BAP explained that the prepayment constituted estate property as a contingent reversionary interest and that § 542 did not allow a trustee to demand turnover from a debtor under these facts.

B. Holding: Affirmed. The Tenth Circuit Court of Appeals held that the trustee’s interest in the tax refunds was limited to the same extent as the debtors’ interest, and that such election was irrevocable under § 6513(d). The debtors had no right to any cash from the refund applied as prepayment of their 2007 taxes until after the liability was determined and then only if they were entitled to a further refund. The portion of that additional refund attributable to pre-petition earnings would become property of the estate. Important in the decision was the fact that the debtors were never in possession, custody or control of the contingent reversionary interest in the prepayment. In other words, the trustee succeeds to the same bundle of rights enjoyed by the debtor in the asset in question.

§ 541(c)(2) Loss of Exclusion Status Upon Removal of Funds in Thrift Savings Plan –

In re Johnson, 2009 Bankr. LEXIS 3645 (Bankr. E.D. Va. Nov. 6, 2009)

A. Facts: Prior to filing, debtor husband withdrew funds from his Thrift Savings Plan and placed them in checking and savings accounts. He exempted a portion by filing a homestead deed, and then attempted to argue that the remaining portion not claimed on the homestead deed were excluded because they were originally from the Thrift Savings Plan, and thus insulated from claims of the trustee and creditors.

B. Holding: Funds voluntarily withdrawn from Thrift Savings Plan prior to the bankruptcy filing did not retain their excluded status under §541(c)(2).

§§ 548, 550 Law Firm Considered Initial Transferee – Funds In Escrow At Risk –

Martinez v. Hutton (In re Harwell), 2010 U.S. App. LEXIS 23367 (11th Cir. 2010)

A. Facts: Prior to filing, a creditor, Thomas Hill (“Hill”) obtained a $1.396 million judgment against debtor in Colorado. In the same month, Hill filed papers to have the judgment domesticated in Florida. The debtor retained an attorney, Steven D. Hutton (“Hutton”), to represent him in this matter. At the time the judgment was entered, the debtor had interests in two Florida based businesses. The debtor retained Hutton and his firm to represent him in disputes involving the investors of the two companies. Shortly thereafter, a settlement was reached between Harwell and the investors, which settlement provided that the debtor would receive $100,000 in cash for his interest in one company, and

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$400,000 cash, as well as a promissory note of approximately $45,000 for his interest in the other company. Immediately thereafter, the debtor answered post-judgment interrogatories and did not disclose the settlement or any information regarding the monies he was to receive. Hutton did not represent the debtor related to the interrogatories. The settlement funds were transmitted into Hutton’s trust account, and at the debtor’s direction the funds were paid to the debtor, his wife, his family members and certain creditors. Funds were also provided to the debtor’s bankruptcy counsel (which was not Hutton). Hill served Hutton with a writ of garnishment for any amounts held in the trust account related to the debtor and as a result, Hutton did put a stop payment on a number of checks that had been issued. Hutton and the debtor moved to quash the garnishment; they were successful. The debtor then filed for chapter 11 in the Bankruptcy Court for the District of Colorado. This case was later converted to a chapter 7. The trustee filed a complaint against Hutton (the attorney) seeking relief including the return of the $500,000 from the settlements pursuant to §§ 548(a)(1)(A) and 550(a)(1). Hutton filed a motion to transfer the case to Florida, which was granted. The Bankruptcy Court for the Middle District of Florida later denied Hutton’s motion to dismiss the complaint. Hutton then moved for summary judgment, which was granted. The Bankruptcy Court concluded that while Hutton appeared to the mastermind of the transfers, he was not an “initial transferee” of the money under § 550(a)(1) because he never had dominion and control over the funds kept in his trust account for the debtor. Accordingly, the trustee could not recover the funds from Hutton. In addition, because he was not considered an initial transferee, the trustee could not recover against Hutton under applicable Florida law related to fraudulent transfers. The District Court Affirmed.

B. Holding: The 11th Circuit Court of Appeals reversed and remanded. In reaching its conclusion that Hutton should be considered an initial transferee, it discussed prior cases involving initial transferees. If someone is the first recipient of funds, that person is clearly the initial transferee. However, there is an equitable exception to such a determination, which exception is known as the “mere conduit or control test.” For initial transferees who are merely conduits and have no control over the fraudulently transferred funds, recover from them cannot occur. In applying this test, the courts consider whether the recipient acts without bad faith and is simply an innocent participant to the transfer. Thus, good faith is a requirement under the test. Accordingly, the 11th Circuit remanded the case in order for the bankruptcy court to reconsider whether Hutton acted in good faith and was an initial transferee for purposes of § 550.

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28 U.S.C. § 158(a)(1), 707(b)

Court’s Refusal to Dismiss a Case as Abusive or Filed in Bad Faith is Not a Final Judgment Subject to Appeal – McDow v. Dudley (In re Dudley), 428 B.R. 686 (W.D. Va. 2010)

A. Facts: Chapter 13 debtor converted to chapter 7. When they originally filed for chapter 13 their Form 22C (the “Means Test”), the debtors calculated their monthly disposable income to be negative $1,862.99. Their net monthly income was $9,715.23 and their expenses were $11,578.42, including their mortgage payment. They filed a plan, indicating their intent to surrender the property. The trustee moved to convert or dismiss the case and the debtors filed a motion to convert to chapter 7. The conversion motion was granted. The U.S. Trustee then filed a motion to dismiss pursuant to § 707(b)(1) as an abuse of chapter 7. The U.S. Trustee also alleged that the presumption of abuse arose under § 707(b)(2) because, had the debtors properly calculated their disposable income, Form 22A would reflect they had approximately $2,000 in disposable monthly income to pay creditors over 60 months. The debtors objected, arguing that §707(b) does not apply to cases converted from chapter 13 to 7. The Bankruptcy Court agreed with the debtors and granted their motion for summary judgment. The U.S. Trustee appealed under 28 U.S.C. § 158(a)(1).

B. Holding: The District Court held that the Bankruptcy Court’s determination that §707(b) did not apply in a converted case is interlocutory, and dismissed the appeal. A bankruptcy court’s refusal to dismiss a case as abusive or filed in bad faith is not a final judgment, reasoned the District Court, citing to other cases, including In re Donovan, 532 F.3d 1134, 1137 (11th Cir. 2008). In Donovan, the order under review on appeal denied the motion of an unsecured creditor to dismiss the chapter 7 debtor’s bankruptcy case, as abusive. The Eleventh Circuit held that it did not have jurisdiction to consider the matter since an order denying a motion to dismiss is not a final order.

§ 707(a) Debtors Must Show Cause Why Case Should be Voluntarily Dismissed – In

re Mercer, 2010 Bankr. LEXIS 4693 (Bankr. M.D. Ga. 2010)

A. Facts: Debtors filed for chapter 13 relief in an attempt to save their house from foreclosure. The mortgage holder filed for relief from the automatic stay after not receiving post-petition payments and because the plan did not adequately cure the prepetition arrearage. The motion for relief went uncontested and relief was granted. The debtor wife contacted her counsel to see about saving the house after the motion was granted, and, according to her, he advised them that nothing could be done to save the property unless they converted their case to one under chapter 7. The case was converted and counsel also filed a motion to extend the automatic stay. The debtor husband signed an affidavit that was attached to this motion explaining why the debtors did not oppose the motion for relief from the stay. The motion to extend the stay was

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denied. The debtors then hired a new attorney and filed a motion for voluntary dismissal of their case. In the motion, they indicated that the house had been foreclosed on, that they were in the process of getting a reverse mortgage to redeem the house, and that they were going to pay their unsecured creditors directly. The chapter 7 trustee objected, indicating that there were valuable assets, including ones that had not been listed by the debtors in their schedules.

B. Holding: The Court denied the debtors’ motion to voluntarily dismiss, holding that the debtors did not show cause. First, the debtors did not establish how they were going to pay their unsecured creditors if the case was dismissed. In fact, the evidence showed that the creditors would receive more in the chapter 7 case than pursuant to the debtors’ proposal. Second, the Court found that when considering the facts of the case, including the debtors having omitted assets that were available for administration, there appeared that there would be substantial prejudice to creditors if the case were dismissed. In reaching this conclusion the Court considered the following factors: (1) whether all creditors have consented to dismissal; (2) whether the debtors are acting in good faith; (3) whether dismissal would result in prejudicial delay in payment; (4) whether dismissal would result in a reordering of priorities; (5) whether there is another proceeding through which the payment of claims can be handled; and (6) whether an objection to discharge, an objection to exemptions, or a preference claim is pending. In considering all of these factors, it denied the relief requested.

§ 707(b) Debtors Did Not Have to Reduce Expenses and Convert to Chapter 13,

Case Not Abusive – In re Rudmose, 2010 Bankr. LEXIS 4044 (Bankr. N.D. Ga. 2010)

A. Facts: chapter 7 debtors filed for chapter 7 bankruptcy relief. Debtors had total assets valued at approximately $600,000 and total debts of approximately $670,000. Almost all of their unsecured debt was credit card debt. The debtors proposed to exempt over $140,000 in assets pursuant to Georgia exemption laws, the bulk of which was a retirement fund. According to their schedules, the debtors’ average monthly income was approximately $8,100. The debtor wife had as a deduction from her payroll a contribution of approximately $500 a month to her retirement. Their average monthly expenses were $12,600, thus resulting in a monthly loss of approximately $4,400. The debtors intended to reaffirm their house debt, as well as their car debt. The total debt to be reaffirmed was approximately $380,000. The United States Trustee moved to dismiss the case as an abusive filing, arguing that the debtors should make payments to creditors in a chapter 13 or outside of bankruptcy, if only they would change their way of living. Specifically, the U.S. Trustee objected to: (a) continuing to make retirement deposits; (b) the amount of the monthly mortgage; (c) the amount of the non-mortgage living expenses; (d) life insurance payments; (e) boat payments; and (f) college expenses and car expenses for their children,

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who were over 18. Both sides agreed that even if the debtors were to cut the non-house related expenses, the debtors’ net monthly income would still be a negative. The U.S. Trustee then focused its Motion on the amount of the debtors’ mortgage payment and related house expenses. The U.S. Trustee argued that the debtors should surrender their house.

B. Holding: After considering the totality of the circumstances, the Court concluded that the U.S. Trustee did not carry its burden of proving an abuse on the part of the debtors. The debtors passed the Means Test and there were no allegations of bad faith on the part of the debtors. In addition, there was no evidence presented that the debtors could afford a chapter 13 plan payment and no evidence that the debtors could find alternative living arrangements sufficient to create monthly disposable income. Simply because the debtors have a big house was not sufficient to grant the relief requested. Stated differently, while the UST has successfully argued regarding the amount of discretionary expenditures (i.e., cell phone, clothing, recreation, to a lesser extent food and other utilities) it is more difficult to successfully argue over fixed expenses on secured debt.

§ 707(b) Means Test Deductions and What May be Included– McDow v. Williams

(In re Williams), 424 B.R. 207 (Bankr. W.D. Va. 2010)

A. Facts: The debtors filed for chapter 7 relief. According to their Form 22A (the “Means Test”), their current monthly income was $7,127.24. In determining the current monthly income, they deducted several expenses, including $1,689.42 in monthly payments for taxes, $199.00 in monthly telecommunication charges and $200.00 in monthly payments for the continuing care for an adult child. According to their Means Test they had a negative monthly income. The United States Trustee (the “Trustee”) moved to dismiss the case as abusive under § 707(b)(2) and filed a statement of presumed abuse. The debtors objected.

B. Holding: The Court first noted that the burden of proof rests with the party who claims a case is abusive. If that party produces sufficient evidence in support of its position (evidence that the Means Test has been improperly completed using expenses a debtor is not entitled to claim), then a prima facie case of abuse has been established under § 707(b)(2)(A). The burden of proof then shifts to the debtor to overcome such presumption by showing special circumstances that justify the claimed expenses. Debtors were permitted to include taxes related to their income, but not for personal property. In addition, debtors may take a telecommunications expense, as long as related to work, but not for satellite television and long distance service. Expenses for the care of an adult child, who is not ill or disabled, are not allowed. The filing was deemed abusive.

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§§ 1141(d), 350, Fed. R. Bankr. P. 3022

Chapter 11 Debtor Not Permitted Early Discharge; Case Permitted to Close Early – In re Necaise, 2010 Bankr. LEXIS 2856 (Bankr. S.D. MS 2010)

A. Facts: Individual chapter 11 debtor filed a plan, which was confirmed. The plan called for the payment of all administrative claims as of the effective date of the plan, payment of all priority tax claims in 60 installments, the payment of his secured creditor by the sale of real property and payments to unsecured creditors by distributions of proceeds from sale of real and personal property. Approximately 3 months after confirmation, the debtor filed a motion requesting that he receive an early discharge and entry of a final decree closing his case. The debtor had sold his assets and had made an initial distribution to his unsecured creditors, although he still needed to sell three assets for the benefit of his unsecured creditors, as well as his secured creditor. The debtor sought the relief to cut down on the payment of quarterly US Trustee’s fees and to dispense of the requirement of the debtor to file the operating reports. In the alternative, the debtor asked the court to close his case early, subject to it later being reopened for entry of the discharge order once all plan payments have been made.

B. Holding: The Court allowed the case to be closed early pursuant to §350, especially in light of the fact that the US Trustee did not oppose such relief, but would not permit the debtor to receive an early discharge. In reaching its decision in allowing the case to close early, the Court considered the factors listed in the Advisory Committee Note to Fed. R. Bankr. P. 3022, including: (a) whether the confirmation order is final; (b) whether the debtor has assumed control of the property to be dealt with in the plan; (c) whether distributions have begun; and (d) whether there are any pending motions, pleadings, contested matters or adversary proceedings to be resolved.

§§ 1304, 364 Separate Classification in Chapter 13 Permitted for Credit Card Creditor – In re Caccamise, 2009 Bankr. LEXIS 4174 (Bankr. E.D. Va. Dec. 22, 2009)

A. Facts: Debtors filed for chapter 13 relief. Debtors listed an unsecured creditor, Alliant, with a claim of approximately $5,000, which represented 1/5 of their total unsecured debt. The proposed plan called for a distribution of about 16 cents on the dollar for the all of the unsecured creditors, other than Alliant. With respect to Alliant, the debtors filed a motion to obtain credit from it and the plan proposed paying its claim in full, outside the plan and the wife being permitted to continue to use her credit card (there were two credit cards, one for the husband with a balance of approximately $4,000.00 and one for the wife, with a balance of $700.00).

B. Holding: The Court concluded that the discriminatory classification as to the wife’s Alliant debt was proposed in good faith, but not so for the

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husband’s credit card. For the wife, there is a small balance owed and there is little difference in the amount to be paid to unsecured creditors regardless of whether her debt to Alliant is separately classified. Not so for the husband. Simply having the account open and paid in order to help debtors rebuild their credit score is not a sufficient basis for extending a better treatment to Alliant and not to other creditors. The Court held that the separate classification as to the husband’s Alliant debt unfairly discriminated against the other creditors and that the motion to incur the debt with Alliant, to the extent it required full payment of the prepetition balance owed, could not be granted. Query whether the result would have been different if only one spouse was in bankruptcy and/or the debtors argued that the debt was “long-term” debt which would extend beyond the life of the plan.

§ 1322 Antimodification Provision Limited Where Instrument Specified Debtor

would Occupy Residence for at Least One Year – In re Roemer, 421 B.R. 23 (Bankr. D.D.C. 2009)

A. Facts: Chapter 13 debtor proposed to treat U.S. Bank’s lien on her condo as secured only to the extent of the value. At the time she bought the condo, the deed of trust stated that she would occupy it as her principal residence within 60 days after the execution of the security instrument and would occupy it as her principal residence for at least one year after the date of the occupancy. The debtor eventually listed the property for sale. She received an offer for a short sale, and she rented a new apartment and left the condo. When she commenced the case, the condo was vacant.

B. Holding: The Court held that debtor could modify the debt. At most, the debtor could not modify the loan for one year, but following her moving after the one year required period, U.S. Bank was no longer entitled to the antimodification protection of §1322(b)(2).

§ 1322 In Certain Circumstances, Chapter 13 Plans May Separately Classify

Unsecured Student Loan Debt – In re Boscaccy, In re George, In re Nunnally, 2010 Bankr. LEXIS 3702 (Bankr. N.D. MS 2010)

A. Facts: This case involves three different debtors who each proposed, in their chapter 13 plans, to separately classify unsecured student loan debt from general unsecured debt, and to pay the unsecured student loan debt at a better rate than the unsecured debt. In each case, the trustee objected.

B. Holding: The Court permitted the separate classification in two of the three cases, based upon the facts of those cases. The Court explained that if the separate classification was solely based upon the fact that the student loan debt was nondischargeable, such classification would be deemed unfair and impermissible pursuant to § 1322(b). However, if the basis for the separate classification is in order to allow debtors to

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maintain their student loan payments at the full contract rate, as allowed under § 1322(b)(5), then such classification is not considered unfair discrimination. In two of the cases, the Court permitted the separate classification because of the large amount of student loan debt, the amount of interest that would accrue on the debt if not permitted to make payments and the fact that if the payments were not permitted, the debtor would leave bankruptcy actually in a worse financial situation than when the debtor filed for bankruptcy relief. In reaching its decision, the Court did take into consideration the fact that the debt in question was long term debt.

§ 1325 Negative Equity Does Not Constitute Purchase Money Security Interest – AmeriCredit Financial Services, Inc. v. Penrod (In re Penrod), 611 F.3d 1158 (9th Cir. 2010)

A. Facts: Within the 910 days of filing, debtor bought a vehicle and rolled over approximately $7,000.00 in negative equity owed on her current vehicle used as a trade-in to purchase current vehicle. After filing for chapter 13 relief, the debtor proposed to bifurcate the car lender’s claim into secured and unsecured portions. The car lender objected, arguing that it had a purchase money security interest in the entire balance owed it, including the negative equity. The Bankruptcy Court and the Bankruptcy Appellate Court concluded that the creditor did not have a purchase money security interest in the negative equity owed it. The creditor appealed.

B. Holding: The Ninth Circuit Court of Appeals affirmed the lower courts, holding that negative equity is not considered purchase money security interest. In reaching its decision, the Court’s analysis focused on the definition of “price” in a purchase money security interest. Relying upon Article 9 of the Uniform Commercial Code, it concluded that the “price” of collateral in the definition of purchase money obligation includes those obligations for expenses incurred in connection with acquiring rights in the collateral, sales taxes, duties, finance charges, interest, attorney’s fees and similar costs, but not negative equity. Simply because a trade in and the purchase of a new vehicle occurs at the same time does not mean that there is automatically a purchase money security interest. Instead, there are two transactions. In reaching its decision, the Court indicated its awareness of the other decisions, and that its decision created a circuit court split. In the 4th Circuit, for instance, negative equity is considered part of the purchase money security interest. See In re Price, 562 F.3d 618 (4th Cir. 2009).

§ 1325 Chapter 13 Debtor Does Not Have to Pay Interest to Unsecured Creditors – In re Stewart-Harrell, 2011 Bankr. LEXIS 277 (Bankr. N.D. Ga. 2011)

A. Facts: Debtor’s proposed amended chapter 13 plan called for monthly plan payments of $1,157.00 and a 100% dividend to unsecured creditors. The Debtor was an above-median income debtor and her

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applicable commitment period was 5 years. The plan would actually last about 50 months. The debtor’s net monthly disposable income was actually higher than her proposed plan payment. The trustee filed an objection to the plan, because the debtor was not pledging all of her net disposable income, and therefore the plan would take about 30 months longer to pay her unsecured creditors than if she pledged all of her net disposable income. If the debtor wished to delay the payment to unsecured creditors, then she should have to pay interest to her unsecured creditors, reasoned the trustee.

B. Holding: The Court overruled the trustee’s objection, noting that its decision turned on the interpretation of the phrase, “as of the effective date of the plan” which comes before subsections § 1325(b)(1)(A) and (B). The court noted that this phrase required a present value analysis of the distributions as compared to the face value of the claims. The Court did not agree that the debtor should have to pay interest to unsecured creditors in order to satisfy § 1325(b), although the court noted that it may be required to meet the best interests of creditors test pursuant to § 1325(a)(4). The Court did not rule on whether the plan was proposed in good faith, which issue would be determined at a later hearing, if the trustee was inclined to pursue the matter. Would the result be different if the liquidation analysis demonstrated that unsecured creditors would receive 100% in chapter 7?

§ 1325 Chapter 13 Debtors May Not Make Post-Petition 401(k) Plan

Contributions – Burden v. Seafort (In re Seafort), 437 B.R. 204 (BAP 6th Cir. Sept. 14, 2010)

A. Facts: Chapter 13 debtors proposed a plan whereby after they concluded making loan repayments to their § 401(k) plans, they would begin making contributions to those plans. At the time of the bankruptcy filing, neither debtor was making such contributions. The Bankruptcy Court confirmed the chapter 13 plan, over the objection of the chapter 13 trustee.

B. Holding: The majority of the Bankruptcy Appellate Panel agreed with the trustee that the debtors could not make contributions to their § 401(k) plans before paying off their creditors, since they were not making such contributions at the time the case was filed. While BAPCPA does allow a debtor to continue saving for retirement, the Bankruptcy Appellate Panel found that there was no such protection to allow debtors to begin contributions after they filed for bankruptcy relief. The court also held that after the repayment of the loans occurred, this income is projected disposable income that must be used to pay creditors.

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§§ 1325(b)(1), 707(b)(2)

Debtor May Not Deduct Ownership Costs for Unencumbered Vehicle –Ransom v. MBNA America Bank NA (In re Ransom), ___ U.S. ___, 2011 U.S. LEXIS 608 (2011)

A. Facts: The chapter 13 debtor owned a vehicle free and clear of any liens or encumbrances. On Form 22C (the “Means Test”), he claimed a monthly expense deduction for ownership costs for the vehicle. The Means Test indicated that he was an above-median debtor, and that he had monthly disposable income of $210.00. MBNA objected to confirmation, arguing that he was not pledging all of his projected disposable income, as required by §1325(b)(1)(B), pointing out that he could not deduct the vehicle ownership expense since he was neither purchasing nor leasing a vehicle. The bankruptcy court sustained the objection and the BAP affirmed.

B. Holding: In an 8-1 decision, the Supreme Court ruled that a chapter 13 debtor who does have a vehicle loan or lease payment obligation cannot take the vehicle ownership deduction that is allowed for ownership costs of a vehicle on the Means Test. The majority decision focused on giving the appropriate effect to the purpose to the applicable Code provision. In addition, the majority focused on the language of § 707(b)(2)(A)(ii)(I), specifically, the word “applicable.” The Court noted that whether a debtor, such as Ransom, could claim the vehicle ownership expense turned on whether such an expense was applicable to the debtor. Not answered is whether a debtor, who does have either a loan or lease payment, but the amount is less than the IRS allowance, may take the higher amount as a deduction on the Means Test. The Court did discuss what is expected to happen during the life of the plan when a debtor’s car payments terminate during the life of the plan, which is that creditors could move to modify the chapter 13 plan to increase plan payments. Likewise, if a debtor needed to purchase a vehicle during the life of the plan, he should seek permission and seek to modify his plan to reduce payments to creditors so that he could afford the vehicle. As a result of this decision, there may be an increase by debtors’ counsel in claiming the deduction on the Means Test for costs associated with high mileage or older vehicles, which is not often used currently by debtors.

§ 1325 Confirmed Plan May Discharge Student Loan Debt Without the Need for

Adversary Proceeding But Be Careful About Due Process Considerations – United Student Aid Funds, Inc. v. Espinosa, ___ U.S. ___, 130 S. Ct. 1367, 176 L. Ed. 2d 158 (2010)

A. Facts: Mr. Espinosa filed a chapter 13 plan that called for the discharge of a student loan (government sponsored), even though he failed to initiate an adversary proceeding in accordance with Fed. Rule Bankr. Proc. 7001(6), which requires that a complaint be filed to determine

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whether requiring payment of the student loan debt would be an undue hardship. The plan called for repayment of the principal of the student loan and discharging the interest upon completion of the payments of the principal balance. United Student Aid Funds, Inc (“United”) received notice of the plan, but did not object to the plan or to the debtor’s failure to initiate the adversary proceeding to determine undue hardship. The Bankruptcy Court confirmed the plan without a finding that the payment of the loan would be an undue hardship for the debtor. Eventually, the Department of Education sought to collect the interest and Espinosa asked the bankruptcy court to enforce the confirmation order by ordering the Department of Education and United to cease all collection activities. United opposed the motion, and asked that the confirmation order be set aside as void, arguing that the provision allowing the discharge of the debt was in contravention of the Bankruptcy Code and its due process rights had been violated. The Bankruptcy Court granted the debtor’s motion and the District Court reversed, holding that the student loan creditor has been denied due process. The Ninth Circuit Court of Appeals reversed, concluding that, by confirming the plan without first finding undue hardship in an adversary proceeding, the Bankruptcy Court may have committed a legal error, which United could have appealed, but that such an error could not be a basis for setting aside the confirmation order as void under Federal Rule of Civil Procedure 60(b)(4).

B. Holding: The Bankruptcy Court’s confirmation order is not void as its foundation was not based upon either a jurisdictional error or a violation of due process. The failure to find undue hardship was a legal error given the requirement for an undue hardship determination, the confirmation order is enforceable and binding on United because it had actual notice of the error and failed to object or timely appeal. Accordingly, United forfeited any arguments it had regarding the validity of service. The Court was pointedly critical of the process used by debtor’s counsel, suggesting it was not appropriate.

§ 1325(b)(4) Applicable Commitment Period is a Temporal Requirement, Not a

Multiplier – Whaley v. Tennyson (In re Tennyson), 611 F.3d 873 (11th Cir. 2010)

A. Facts: Debtor filed for chapter 13 bankruptcy relief. According to the debtor’s Form 22C (the “Means Test”), he was an above-median debtor with a negative monthly disposable income. Debtors proposed a 36 month plan, but did not provide for full repayment of his unsecured debt, and the trustee objected to confirmation. The basis for the objection was the failure of the debtor to propose a 60-month plan, given his status as above-median debtor. The debtor responded that the applicable commitment period, as required by the Bankruptcy Code, was nothing more than a multiplier and thus because he had no disposable income, he was not required to be in a chapter 13 for a minimum period of time.

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B. Holding: The Court held that the debtor was required to be in his plan for 60 months unless he paid his unsecured creditors in full, based upon the plain language of the statute. Key to the Court’s decision was the word “shall” which is a word of command. The Court also found that the language of § 1325(b)(4) was clear, unambiguous and did not result in an absurd consequence. The Court also concluded that the Supreme Court’s decision in Hamilton v. Lanning, ___ U.S. ___, 130 S. Ct. 2464, 177 L. Ed. 2d 23, 28 (2010), also supported a temporal interpretation of applicable commitment period. It is important to note that if the debtor was allowed to be in a chapter 13 for less than 60 months, he would be depriving the trustee and his creditors the right to seek an increase in plan payments if his financial situation improved during that period of time.

§ 1325(b)(4) Applicable Commitment Period for an Above Median Debtor is 5 Years if

Not Paying Creditors in Full – Timothy v. Anderson (In re Anderson), 2010 Bankr. LEXIS 4732 (10th Cir. BAP 2010)

A. Facts: chapter 13 debtor proposed a plan that did not contain a minimum plan length, but instead proposed to make payments only for as long as necessary to pay $1,750.00 to non-priority unsecured creditors. The plan also provided for payment of approximately $6,500 in attorney’s fees. The trustee objected to confirmation, based upon the absence of a plan term. The trustee contended that because the debtors were considered above-median debtors, they had to propose a plan of five years, unless the plan provided for full payment to unsecured creditors. The debtors responded by arguing that since they reflected a negative income on Form 22C, they were not required to remain in chapter 13 for five years. The Bankruptcy Court sustained the trustee’s objection. The debtors filed an amended plan that called for payments of $130.00 per month for five years. The plan was confirmed, with the debtors reserving the right to appeal. The debtors appealed, arguing that the court had erred when it held that the debtors were required to pay the $130.00 per month of net income listed on Schedule J since this required them to use social security funds for 60 months and erred when it included the debtor’s social security income in the projected disposable income, and finally when it required the plan to be 60 months.

Holding: The Bankruptcy Appellate Panel for the Tenth Circuit ruled that the applicable commitment period is a temporal requirement, not a multiplier. In addition, the Court concluded that simply because a portion of their income was from social security did not mean that the debtors could dictate how long their plan would be, especially in light of the fact that the debtors voluntarily elected to file for chapter 13 relief. Whether a portion of a debtor’s income is derived from Social Security benefits does not impact the length of a plan. If a debtor is considered an above-median income debtor, the Court held, then that debtor must propose a plan for five years, unless the plan proposes to pay unsecured creditors in full.

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§ 1325 Forward Looking Approach, Not Mechanical Approach to be Used to Determine Projected Disposable Income - In re Lanning, __ U.S. __, 130 S. Ct. 2464, 177 L.Ed.2d 23 (2010)

A. Facts: Kay Lanning (the “Debtor”) filed for chapter 13 bankruptcy relief. In the six months prior to the filing, she had received a one-time buyout from her former employer, which resulted in an inflated gross income for two months of the six month period. According to her Form 22C she had a disposable income of $1,114.00. However, her net disposable income, according to Schedules I & J, was $149.00. She proposed a chapter 13 plan whereby she would pay $144.00/mo for 36 months. The chapter 13 trustee objected to confirmation, arguing that she was required to pay $1114.00/mo. and thus she was not pledging all of her projected disposable income to the repayment of her creditors as required by §1325. The trustee reasoned that her projected disposable income had to be calculated by multiplying the disposable income, as stated on Form 22C, by the number of the months of her plan period. Since the Debtor was an above median debtor, she had to be in a plan for either 60 months or pay her unsecured creditors in full. The Bankruptcy Court held that it could consider the debtor’s actual income and changes. All parties stipulated that the Debtor’s actual income was insufficient to make these plan payments. The U.S. Court of Appeals for the Tenth Circuit held that a court, when determining what a debtor’s projected disposable income is, should begin with the figure as listed on Form 22C, but that it may be rebutted by evidence of a change in the debtor’s circumstances.

B. Holding: In an 8-1 decision, the U.S. Supreme Court affirmed the Tenth Circuit, concluding that, when a court calculates a debtor’s projected disposable income for purposes of §1325(b)(1)(B), it should account for changes in the income or expenses of the debtor that are known or practically certain at the time of plan confirmation. The Court reasoned that the forward looking approach, rather than the mechanical approach, was the better means of calculating a debtor’s projected disposable income.

§§ 1325, 1329 Plan Confirmation Requirements Mandatory – Vetter v. McGinnis (In re McGinnis), 2010 U.S. Dist. LEXIS 32210 (D. Md. Mar. 31, 2010)

A. Facts: Debtor filed for chapter 7 relief and later converted her case to chapter 13. The debtor’s confirmed plan required her to pay $560 per month for 60 months and $4,000 once a year for four years. She failed to make any of the annual $4,000 payments and stopped making monthly payments approximately two years into the plan. The trustee moved to dismiss the case based on her default, and the debtor objected. She also moved to modify her plan so that she would pay $300 per month for 60 months. The trustee objected to the proposed modification for several reasons including the attempt by the debtor to retroactively modify the payment amount under the plan. The bankruptcy court held a hearing and disapproved the proposed modification because it would

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result in a lower payment amount than her creditors would receive in a chapter 7. The Bankruptcy Court granted the trustee’s motion to dismiss. The debtor appealed, arguing that the Bankruptcy Court treated the confirmation criteria in §1325(a) as mandatory rather than discretionary.

B. Holding: The main issue in the appeal was whether the Bankruptcy Court properly refused to confirm the modified plan that failed to satisfy the requirements of §1325(a), a question of law that depends on whether such requirements are mandatory. The Court noted that the Court did not abuse its discretion in dismissing the case because the debtor was behind in her payments and so, even if the requirements were not mandatory, the debtor could not meet her burden. The Court concluded that the requirements of §1325 “are most likely mandatory.” In reaching this decision, the Court emphasized that the majority of the decisions on this issue held that the requirements are mandatory, not discretionary. The District Court affirmed the Bankruptcy Court’s decision.

§§ 1325, 1329 Above-Median Chapter 13 Debtors Could Not Modify Confirmed Chapter

13 Plan to Reduce Applicable Commitment Period – In re Buck, 2010 Bankr. LEXIS 4736 (Bankr. N.D. Ga. 2010)

A. Facts: Chapter 13 debtors filed for bankruptcy relief in 2007. At the time, their current monthly income was above the median income for a household of their size in Georgia. Accordingly, the applicable commitment period for their plan was 60 months. Their Form 22C indicated they had $0.00 disposable income, but they proposed a 60 month plan with monthly payments of $340. This plan was confirmed. At the end of 2009, the debtor husband lost his job and did not obtain new employment. The debtors continued with their plan payments through June 2010, and then they sought permission to modify their plan to shorten the commitment period to 36 months. The trustee objected (although not on the basis of good faith).

B. Holding: The Court concluded that the applicable commitment period, as defined in § 1325, is a temporal requirement and thus the debtors could not reduce the term of their plan, even with their change in circumstances. Debtors who are considered above-median income debtors at confirmation must remain in their plans for 60 months, unless they pay their unsecured creditors in full. (The Court noted that given the circumstances of this case, the debtors could have proposed monthly plan payments of $0.00).

28 U.S.C. § 157(b)(2)(C)

Is Granting of Core Jurisdiction related to Counterclaims Constitutional? – Stern v. Marshall, 600 F.3d 1037 (9th Cir. 2010) cert. granted, September 28, 2010

A. Facts: Vickie Lynn Marshall (better known as Anna Nicole Smith) filed for chapter 11 in 1996, following her husband’s death. Prior to his

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death, her husband attempted to provide for her through an inter vivos trust, however his son either hid or destroyed the document and stripped the husband of his assets prior to his death, at least according to Marshall. In her bankruptcy case, the son filed an adversary proceeding against her seeking a determination of whether his defamation claims against her were nondischargeable. She counterclaimed, alleging the son had tortuously interfered with her expectation of a gift or inheritance. In 1995, a probate court had begun administering the husband’s estate. In 2000, she filed a tortuous interference claim with the probate court after the husband's son argued the bankruptcy court lacked jurisdiction to her counterclaim. The bankruptcy court eventually found for her and she filed the judgment in the probate court and voluntarily nonsuited her claims without prejudice. The son then filed new claims against Marshall, which claims had already been decided by the bankruptcy court. After the bankruptcy court judgment, but before the probate court ruled, the son appealed the bankruptcy decision to the district court. The District Court held that Marshall’s claim was a compulsory counterclaim, but was not a core proceeding. The district court also found that the husband had directed the trust be established for Marshall, but that the son had either hidden or destroyed the trust document. The court awarded a large award in favor of Marshall. The son appealed.

B. Holding: The Ninth Circuit revered the judgment and concluded that the probate exception to federal jurisdiction barred Marshall’s counterclaim. In 2006, the Supreme Court reversed and remanded for further proceedings to consider whether Marshall’s claim was considered a core proceeding under § 157(b)(2)(C). The Ninth Circuit again reversed the decision in favor of Marshall and held that the counterclaim, although compulsory, was not a core proceeding and that the bankruptcy judgment was not final. The Ninth Circuit held that despite the language of § 157(b)(2)(C), the word “counterclaim” could not be read so broadly and instead should be read narrowly to avoid having an Article I Judge issue a final order in a case where an Article III judge was required. The Supreme Court has granted certiorari. The Court will most likely consider: (a) whether the Ninth Circuit’s decision contravenes with the intent of Congress in enacting §157(b)(2)(C); (b) whether Congress may authorize core jurisdiction over a debtor’s compulsory counterclaim to a proof of claim; and (c) whether the Ninth Circuit misapplied applicable case law, including Northern Pipeline v. Marathon and its progeny.

28 U.S.C. §§ 1334, 157(a)

Bankruptcy Court Lacks Jurisdiction to Set Costs and Interests After Estate is Closed – Educational Credit Management Corp. v. Kirkland (In re Kirkland), 600 F.3d 310 (4th Cir. 2010)

A. Facts: Prior to filing for chapter 13 relief, the debtor borrowed money from Sallie Mae to go to college. Various companies guaranteed her loans. In her chapter 13, Sallie Mae filed 5 proofs of claim, three of

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which were allowed, guaranteed by USAF, NJHEAA and ECMC. At the time of filing, none of the loans were in default. The debtor remained in bankruptcy for five years. The plan was designed so that she would pay the three Sallie Mae loans in full, except for interest that accrued during the life of the case. She made all of her payments to the trustee. For some reason, the Chapter 13 Trustee scheduled lower amounts to Sallie Mae than what was approved based on the filed proofs of claim. In addition, the sums scheduled to be paid toward one claim were paid to the two other claims, causing an overpayment on these claims and no payment on one of the claims. Sallie Mae refunded the overpayments to the trustee, and he refunded the money to the debtor and did not require her to make her last five payments. The trustee filed a final report, the court entered the discharge order, and the case was closed. After her case was closed, the debtor received notices that she owed Salle Mae approximately $5,000, which represented the entire principal loan amount as to one of the claims, along with accrued interest. The debtor filed an adversary proceeding against ECMC in the bankruptcy court, to determine whether the debt had been discharged, since she listed it as part of her plan and should have been paid by the trustee. She did agree that any interest that accrued during the life of the case would be nondischargeable and that she was responsible for paying post-petition interest. ECMC argued that the claim had not been paid during the case and the court could not declare the loan had been discharged. Neither party asked the court to make a finding as to post-petition interest or collection costs. The Bankruptcy Court held it had jurisdiction to hear the matter, that the debtor owed the full amount of the loan, awarded ECMC post-petition interest of $184.00 and held that it was not awarding ECMC any collection costs. ECMC then filed a motion to alter or amend, arguing that it should have received more in post-petition interest and that it should get collection costs. The bankruptcy court denied the motion. ECMC appealed. On appeal, ECMC argued that the bankruptcy court and district court lacked jurisdiction to make any determination as to either post-petition interest or collection costs. The district court disagreed and affirmed the bankruptcy court’s decision.

B. Holding: The Fourth Circuit began its decision by finding that the

Bankruptcy Court had subject matter jurisdiction to determine the issue of whether the principal amount of the student loan had been discharged during her case. The Court also found that the Bankruptcy Court lacked subject matter jurisdiction to determine the amount owed as post-petition interest or whether ECMC was entitled to collection costs, since collection costs are addressed under 20 U.S.C. § 1901 and the defaults on the loan occurred post-discharge, neither of which arise under, arise in, or relate to cases under Title 11.

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Bankr. R. Fed. P. 9014, 9024

Order Resolving Objection to Claim Did Not Constitute Order Entered Without a Contest Even if Matter Had Not Been Litigated for Purposes of Rule 9024 – GA Dep’t of Revenue v. Mouzon Enterprises, Inc .(In re Mouzon Enterprises, Inc.), 610 F.3d 1329 (11th Cir. 2010)

A. Facts: Debtor filed for chapter 11 relief. In the case, Georgia Department of Revenue filed a proof of claim establishing a priority tax claim and an unsecured claim. The debtor objected to the filed claim and eventually the parties entered into a consent order related to the amount and classification of the claim owed. The parties settled prior to any litigation. The bankruptcy case was later voluntarily dismissed. After the dismissal, the parties disagreed about issues involving the claim, and the debtor and its officers filed a motion seeking to reopen the case for the purpose of determining the tax liability. The motion was granted and the debtor then filed a motion seeking to vacate the consent order, which had been entered more than one year before. It relied upon Fed. R. Bankr. P 9024 as a basis for the motion, stating that the order was based upon a material mistake of fact. The Georgia Department of Revenue argued that the motion was time-barred by the one year limitation contained in the rule. The Bankruptcy Court concluded the motion was not time barred because the matter was not a contested matter and therefore the one year time limit did not apply. The Bankruptcy Court reached this decision because the matter was not actually litigated. The United States District Court for the Northern District of Georgia affirmed.

B. Holding: Reversed and remanded. The Court of Appeals considered both the legal and plain definition of “contest” and held that the filing of an objection to a proof of claim gave rise to a contested matter. Thus, the order resolving the objection to the proof of claim, regardless of whether entered after a settlement was reached by the parties is not entered without a contest, even if the court did not have to make a determination on the merits of the arguments.

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Miscellaneous Topics Involving Recent Developments in Consumer Cases

I. Mortgage Matters

In the current economic climate, there has been a rise in bankruptcy matters involving mortgage obligations. One issue that has been recently raised, involving FHA loans, is that the mortgage holder is precluded from pursuing foreclosure if the deed of trust or other documents between the borrower and lender provides that foreclosure (or acceleration, in some instances) is not permitted by FHA regulation unless other actions are first pursued.

According to 24 CFR 203.64, borrower and lender must have a face-to –face interview or

there be a reasonable attempt to arrange such a meeting before three full monthly payments due on the mortgage are unpaid. The regulation further provides that if default occurs in a repayment plan arranged other than during the interview, the parties must have a face-to-face meeting, or make a reasonable effort to arrange such meeting within 30 days prior to foreclosure.

Such meetings, however, are not required if the lenders do not have an office or branch office

at least within 200 miles of the residence that is collateral for the FHA mortgage loan. Typically, the larger mortgage lenders, such as Wells Fargo or Bank of America have not been exempted from such requirements because they have many branch offices within 200 miles within the location of the residence in question.

In states where foreclosure must occur through the judicial process this is possibly an

effective way to postpone a foreclosure on a loan guaranteed by FHA. However, in states where non-judicial foreclosures are the rule, the burden is on the borrower to pursue injunctive relief, which may require the borrower to post a bond. Query: if the borrower could not make its mortgage payments how could it afford such a bond?

II. Means Test Issues After Ransom v. MBNA America Bank NA (In re Ransom),

U.S. , 2011 U.S. LEXIS 608 (2011)

Attorneys for consumer debtors should be honing their skills when it comes to calculating Form 22C (the “Means Test”) for their bankruptcy clients, especially after the recent decision of Ransom v. MBNA America Bank NA (In re Ransom), U.S. , 2011 U.S. LEXIS 608 (2011). While most attorneys are familiar with the ends and outs of the Means Test, many have not looked at it closely since BAPCPA was first enacted and may not be familiar with all of the expenses allowed to be taken. This may be due to a reliance on their assistants or their chosen bankruptcy software program, neither of which may be tuned in to the various expenses allowed. For instance, it appears that many attorneys do not take the additional operating expense related to vehicles that are more than 6 years old or which have over 75,000 miles. In addition, many attorneys have stopped taking the expense related to the administrative cost associated with filing a chapter 13, since the bankruptcy software providers have stopped calculating this automatically. In situations involving a married debtor whose spouse is not filing for bankruptcy, the attorney should be well familiar with the non-filing spouse’s expenses in order to claim those as deductions, as well. Finally, make sure to include the deduction for payments related to priority claims.

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It may be good practice to review the various deductions allowed to be taken on the Means Test and to prepare a few of the forms in order to understand how they work from a practical standpoint.

III. Service related to Adversary Proceedings

As noted above, there has been a rise in bankruptcy filings given the current economic climate, and a number of those cases involve disputes related to mortgage obligations. Chapter 13 debtors who wish to strip a lien off of their property, may not do so through a chapter 13 plan, but instead must file an adversary proceeding and follow the applicable Bankruptcy Rules related to such proceeding. See the discussion of Espinosa, above.

Rule 7004 of the Federal Rules of Bankruptcy Procedure spells out exactly how service of

the complaint must occur. Thus, if the debtor is seeking to avoid a lien, it must comply with this rule in serving the complaint on the lienholder. For example, if the lienholder is an insured depository, then the complaint shall be served by certified mail addressed to an officer of the lienholder, unless the lienholder has waived in writing its entitlement to service by certified mail.

In addition, the debtor must make sure to serve all of the appropriate parties, including the

trustee named in the deed of trust, if applicable. Unfortunately, counsel has seemed to overlook including this necessary party to the proceeding, and without such party, the case cannot move forward. IV. Chapter 13 Attorneys’ Fees

In some divisions, bankruptcy courts have attempted to streamline the process regarding compensation to counsel in chapter 13 cases by entering an order regarding the fees or having rules regarding the compensation. For example, at the end of this material is a standing order entered by the bankruptcy judges for the Eastern District of Virginia, which order provides that chapter 13 attorneys may receive compensation of $3,000.00, plus reimbursement of actual and necessary expenses of up to $300.00 without having to file an application.

Likewise, in the Northern District of George there is the General Order No. 6-2006, which addresses conmpensation for attorneys in chapter 13 cases. This order provides the chapter 13 plan filed by a debtor must state the fee to be paid through the plan and the method of payment. If, for instance, the debtor is paying a flat fee, then this must be stated in the plan. If, on the other hand, the debtor will pay counsel on an hourly basis, the plan must make that clear and how such fees will be paid. In addition, the debtor and counsel should agree to a set fee scheduled related to specific tasks, and that agreement should be provided for in the Rule 2016 disclosure statement. Finally, if the debtor and counsel enter into an arrangement whereby there will be additional fees requested in an application, then the plan should address how the fees are to be disbursed and how this will effect distributions to creditors.

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