I. MARSHALL V. BLAKE, 2018 U.S. APP. LEXIS 7223 (7TH CIR. 2018) - TAX REFUNDS AS DISPOSABLE INCOME

A. Facts1. Debtors pro-rated expected tax refunds over the entire year for purposes of determining

disposable income2. Trustee Objected - Wanted to take tax refunds for creditors3. Debtors also pro-rated expenses they paid with tax refunds4. Bankruptcy court overruled trustee’s objections

B. Circuit ruling1. Bankruptcy court ruling was consistent with forward-looking flexible approach of Supreme

Court’s Lanning decision.2. Rejected trustee argument that plan not in good faith3. Trustee argued court had to hold a hearing on debtor’s expenses.4. Court held bankruptcy court had discretion on holding a hearing on good faith calculation of

expenses5. Court rejected feasibility objection - plan gave debtor more flexibility

C. Analysis1. Most low income workers receive large tax refunds due to earned income tax credit and child

tax credit2. Income should be calculated as including these credits3. These debtors rarely have much disposable income and use credits for large expenses or

annual spending like children’s clothes4. Trustee practices of taking some or all of tax refunds deprives debtors of funds needed for

necessities.

II. IN RE BIRD, 577 B.R. 365 (10TH CIR. BAP 2017) - DENIAL OF TRUSTEE COMPENSATION FOR ATTEMPTED “CARVE-OUT’

A. Facts1. Debtors in two cases filed chapter 7 petitions2. Trustee Jubber objected to homestead exemption claims on grounds of no equity3. Jubber engaged real estate broker to sell homes4. Debtors objected to sale, responded to exemption objection and moved for abandonment5. Jubber moved for approval of stipulations with IRS that it would subordinate $10,000 of its

claim to create carve-out for bankruptcy estate6. Bankruptcy court upheld debtors’ exemptions7. Trustee appealed and at same time presented sales contracts that produced minimal proceeds

above liens, which would be subject to administrative expenses8. Debtors filed objections to sale and motions to vacate discharges and convert to chapter 13,

in order to avoid mounting litigation expenses9. Bankruptcy court granted motions to convert, mooting other issues10. Trustee moved for fees and expenses; debtors objected11. Bankruptcy court denied them

a. The fees and costs sought were for services neither necessary to administration of the cases nor reasonably likely to benefit Debtors' estates.

b. In determining Trustee and Counsel's services were unnecessary, the bankruptcy court found that, here where the Homesteads had no equity value in excess of liens but were subject to valid homestead exemptions, Trustee had "no obligation to seek carve-outs from secured creditors or sell encumbered property subject to such agreements."

c. The bankruptcy court also concluded the services provided were not reasonably likely to benefit Debtors' estates, i.e., result in a meaningful distribution to unsecured creditors.

i. First, the bankruptcy court determined the proposed sales of the Homesteads were not authorized by any subsection of § 363(f). Specifically, the homestead exemptions were not subject to a bona fide dispute under § 363(f)(4), and Debtors could not be compelled to accept a money satisfaction under § 363(f)(5).

ii. Second, the bankruptcy court reasoned that even if the sales were permitted, Debtors—and not unsecured creditors—would be entitled to the proceeds of the Carve-Outs as payment of their homestead exemptions.

iii. In reaching this result, the bankruptcy court disagreed with Trustee's interpretation of §§ 724 and 522(c)(2)(B), that would permit him, pursuant to a carve-out agreement with a tax lien claimant, to "liquidate the [Homesteads] in order to satisfy the tax liens to the detriment of the Debtors' homestead exemptions," and that the Carve-Outs constituted a valid § 506(c) surcharge.

iv. Finally, the bankruptcy court explained that the Bankruptcy Code's fresh start policy objectives did not support approval of the proposed sale of the Homesteads. In other words, Trustee's proposal would impermissibly subordinate the homestead exemptions because the sale proceeds would go to pay large, unnecessary bankruptcy administrative fees, leaving Debtors with nondischargeable tax claims, no home, and no homestead exemption.

B. BAP decision - Fees denied1. The purpose of the independent review is to ensure that the services provided were

necessary, reasonable, and justified. In other words, a bankruptcy court has an obligation to see that bankruptcy estates are administered efficiently and economically for the benefit of creditors.

2. Court scrutiny of professional fee applications is particularly important when, as is the case here, a trustee and/or his firm has been authorized to serve as an attorney or accountant for the estate.

3. On the facts of these cases, abandonment of the Homesteads would have better comported with a Chapter 7 trustee's ultimate duties and responsibilities. The Bankruptcy Code, an abundance of case law, and express language in the Handbook for Chapter 7 Trustees prepared by the Office of the United States Trustee ("Trustee Handbook") all emphatically support the bankruptcy court's decision.

4. It has been long recognized that bankruptcy courts should not administer encumbered property and authorize its sale "unless it is made to appear that there is a fair prospect of the

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property being sold for substantially more than enough to discharge the lien or liens upon it." Instead, the possession and control of fully or over-encumbered property should be released and surrendered.

5. UST Trustee Handbook:6. ” A trustee shall not administer an estate or an asset in an estate where the proceeds of

liquidation will primarily benefit the trustee or the professionals, or unduly delay the resolution of the case. The trustee must be guided by this fundamental principle when acting as trustee. Accordingly, the trustee must consider whether sufficient funds will be generated to make a meaningful distribution to unsecured creditors, including unsecured priority creditors, before administering a case as an asset case.”

7. “In asset cases, when the property is fully encumbered and of nominal value to the estate, the trustee must immediately abandon the asset and contact the secured creditor immediately so that the secured creditor can obtain insurance or otherwise protect its own interest in the property.”

8. Carve out agreements are only permitted if they result in meaningful distributions to creditors. And the definition of meaningful depends on the totality of circumstances.

9. Liquidation should not be for the benefit of the estate's secured creditors. Therefore, a trustee's negotiation of a carve out with a secured creditor as a means of creating the equity necessary to justify the sale of fully encumbered estate property is suspect and presents opportunities for collusion.

10. Here, Trustee and Counsel fees, together with realtor commissions and closing costs, would have totaled at least $57,284.97 in the Bird case ($34,744.97 + $22,540), and $61,513.63 in the Christensens' case ($31,763.63 + $29,750). Unsecured creditors, on the other hand, would have received only $10,000 in each case.

11. Trustee's steps in obtaining the Carve-Outs here in order to sell the Homesteads would shift estate assets away from the IRS to professionals, harming Debtors in the process.

12. On these facts, sale of the homesteads undoubtedly violates the Trustee Handbook's directive that estate property should not be sold "where the proceeds of liquidation will primarily benefit the trustee or the professionals, or unduly delay the resolution of the case.”

13. Court cited 3 guiding principles:

a. First, exemptions are extremely important to the Bankruptcy Code's fresh start policy, and of these exemptions, the homestead exemption is paramount.

b. Second, a Chapter 7 trustee is duty bound to administer the estate solely for the benefit of creditors.

c. And third, the Bankruptcy Code's objective and priorities control and are not subject to being rearranged by the actions of a Chapter 7 trustee. Though not cited, the Supreme Court’s Jevic decision supports this principle.

14. Court rejected appeal of homestead exemption ruling:

a. Utah Supreme Court held that the statutory right to a homestead exemption is predicated on two bases or interests in real property— title and possession, and further that the exemption "protect[s] the physical thing as a whole from lien or sale so long as the exemption continues." It has further opined that courts "cannot whittle down the exemption by undermining and cutting at its roots."

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b. The bankruptcy court's conclusion that the condition stated in § 363(f)(5) is not met because debtors were entitled to their full homestead exemption in cash from any sale is supported by the Utah statutes.

15. Court rejected section 724 argument:

a. Section 724 permits subordination of tax liens to the extent of administrative expenses.

b. But the plain language of § 724 does not separately authorize sale of estate property. Instead, it sets forth a mandatory distribution scheme after an otherwise already authorized sale has been conducted.

c. Section 363 is the only basis for authorizing Trustee to sell estate property

16. Law v. Siegel supports court’s decision:

a. Held that exemptions can be denied only on statutory bases enumerated in the Bankruptcy Code underscores the sacrosanct nature of homestead exemptions.

b. In Siegel, the Supreme Court ruled that because § 522(k) prohibits exempt property from being liable for payment of ordinary administrative expenses, even a debtor's fraud was not grounds to "surcharge" his homestead exemption to defray attorney's fees of the trustee.

17. Overall conclusions:

a. It makes no sense whatsoever to sell the homesteads and incur administrative expenses of $57,284.97 in the Bird case, and $61,513.63 in the Christensens' case, in order to get only $10,000 to unsecured creditors and at the same time deny Debtors their Homesteads.

b. Trustee sought to manufacture equity through the Stipulations and Carve-Outs with the IRS in order to sell the homesteads and generate funds that would primarily benefit Trustee, Counsel, and other bankruptcy professionals, while only minimally benefitting unsecured creditors.

C. Analysis1. One of the best cases to use in fighting carve-outs2. Although some courts have held that no exemption available when there is no equity, debtor

still has interests in property to exempt, such as right to possession. State law may be crucial.

3. $10,000 is only a minimal distribution in most cases.4. Jevic and Law decisions are important support.5. Section 724 should apply only where a sale makes sense otherwise and not to create a sale.6. Court did not address issue of whether chapter 7 trustee entitled to any compensation in

chapter 13 when no chapter 7 trustee made no distributions, except under section 1326(b)(3).

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III. PEAKE V. AYOBAMI (IN RE AYOBAMI), 879 F.3D 152 (5TH CIR. 2018) - NECESSITY OF OBJECTING TO EXEMPTIONS

A. Proceedings below:1. Debtor Ayobami listed exempt property and checked box for 100% of Fair Market Value for

some property2. Trustee argued that “a debtor may never exempt a 100% interest in an asset under §§ 522(d)

(1)-(6) because allowing such an exemption effectively removes the entire asset from the bankruptcy estate. And because the relevant subsections of § 522(d) place a monetary-value cap on the claimed exemptions, trustee argued, the exemption itself must be "limited to the specific amount, not [become] an indefinite [monetary] exemption in-kind to be determined at a later date.”

3. District court allowed Ayobami's amended exemptions that claimed "100% of fair market value, up to any applicable statutory limit" of certain assets, but only after she also listed a claimed amount within the statutory limit in the "Specific laws that allow exemption" column.

4. The parties then jointly requested certification to directly appeal the court's order allowing Ayobami's amended exemptions.

B. Court of Appeals Decision1. If, when considering any other exemptions claimed, the debtor's entire interest in an asset is

less than or equal to any dollar-value limitation imposed by the applicable § 522(d) subsection, then the debtor may exempt her 100% interest in that asset.

2. Footnote: ‘We make special note of the fact that Ayobami assigned her exempt interest a dollar value, disclosed on her Schedule C, within the statutory limits. This opinion does not address or decide a factual situation in which a debtor exempts "100% of fair market value, up to any applicable statutory limit" of an asset and fails to also designate a specific dollar value within the statutory limit.”

3. Court declined to address whether claiming a 100% interest in an asset as exempt allows the debtor to "walk away" with the asset itself and potentially benefit from any post-petition appreciation of it. This seemed to be a big part of parties’ dispute, but was not certified.

C. Analysis1. Case is a result of Supreme Court’s schizophrenic decision in Schwab v. Reilly, 560 U.S.

770, 794 n.21, 130 S. Ct. 2652, 177 L. Ed. 2d 234 (2010) (contemplating a scenario where a debtor "claimed as exempt a 'full' or '100%' interest" in an asset).

2. Schwab’s schedules were arguably ambiguous. She did not make clear she intended to claim 100% of the asset as exempt, rather than just exempting them up to the value she stated.

3. But another footnote in Schwab states that “Challenges to the valuation of what the dissent terms “exemptible assets” are not covered by Rule 4003(b) in the first place,” so no need to object.

4. Real issue - does trustee have to object to valuation, i.e. object if value of interest claimed exceeds exemption limits

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a. Trustee in Schwab had not objected, but still wanted to sell property claimed as exempt, arguing that debtor could not exempt amount above statutory limit

b. If that view prevails, debtor does not know if exemption is allowed until case is closed

c. Also raises issue of trustee waiting for real estate or other property to appreciated. But section 522(a)(3) defines “value” as fair market value on date of petition.

5. Valuation is probably the most common type of exemption issue and it was always assumed that if property worth more than allowed amount trustee had to object.

6. Rules Committee amendment to Schedule C dodged the issue.

a. Gives debtor the option to claim 100% of FMV up to statutory cap, or “alternatively” to claim a specific value.

b. Instructions say if you claim 100% of FMV and value exceeds statutory limit, your exemptions would be limited to statutory amount

c. Form does not state whether the process by which that happens is objection to exemption

d. Form does not seem to prohibit both stating amount and claiming that the full value of the asset is not more than statutory cap

7. Solution adopted by the district court and approved by circuit court is correct approach

a. Debtor should be able to list the value exempted, say that it is the full value of asset, and debtor is claiming that full value as exempt

b. Trustee should have to object if trustee claims value is higher than allowed exemption

IV. IN RE KLAAS, 858 F.3D 820 (3D CIR. 2017).

A. Facts 1. Debtors made timely scheduled plan payments over the five-year period, but trustee had increased his fee without informing the debtors. 2. At the end of five years, trustee moved to dismiss for plan default due to non-payment of $1,123 fee. Debtors cured arrearage within 16 days. Bankruptcy court granted discharge. 3. One of the creditors piggybacked on the motion to dismiss and then appealed the entry of discharge.

B. Circuit Ruling1. Circuit acknowledged Code sections prohibiting confirmation or modification of a plan that

would exceed 60 months, but reasoned that allowing a “cure” of plan payments following the end of 60 months did not violate these provisions because the court is neither confirming nor modifying a plan.

2. Section 1307 is permissive (the court “may” dismiss when cause exists, such as a plan default). It contains no reference to the five-year length restriction.

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3. Section 1328 directs the court to enter discharge upon completion of all plan payments but does not require “timely” payments. Even a late payment would still be made “under” or pursuant to the authority conferred by the plan.

4. The cure payments did not modify the plan but only allowed the debtors to complete the plan commitments.

5. Courts have inherent discretion to allow the debtors to cure plan defaults within a reasonable period of time after the end of the 60-month plan. The factors to consider in exercising discretion include: (a) whether debtor substantially complied with plan; (b) feasibility of making cure payments and time necessary to do so; (c) prejudice to creditors; (d) debtor’s excusable or culpable conduct; (e) relative equities of other options such as conversion or hardship discharge.

C. Analysis1. Section 1329 expressly provides that extending the time for making plan payments is a form

of modification. It expressly prohibits any modification that cause a plan to exceed 60 months. See In re Humes, 579 B.R. 557 (Bankr. D. Colo. 2018).

2. Courts may not exercise their discretion in a way that contravenes or disregards plain language of the Code.

3. The same issue will arise with shorter plans if the debtor fails to complete payments and then cures the default after the end of the term without first modifying the plan. Section 1329(a) states that a plan may only be modified “before the completion of payments” under the existing plan. While the debtor may modify a 36-month plan for the extra months necessary to cure the arrears, he must move to do so before he makes the last payment.

4. There are practical ways to ameliorate the harsh results of adhering to a strict five-year limit. These include the hardship discharge, conversion and a chapter 7 discharge, filing another chapter 13 case is the defaults are substantial, and instituting a “true-up” or audit six months before the end of the plan instead of waiting until the plan is over to discover plan defaults.

V. TITLE MAX V. NORTHINGTON (IN RE NORTHINGTON), 876 F.3D 1302 (11TH CIR. 2017)

A. Facts and proceedings below1. Debtor had automobile title pawn transaction2. Debtor filed chapter 13 plan to cram down secured debt3. Georgia pawn law provided that an item that is not "redeemed" within a statutorily

prescribed grace period "shall be automatically forfeited to the pawnbroker by operation of [law], and any ownership interest of the pledgor ... shall be automatically extinguished in the pledged item”

4. After expiration of redemption period, as extended by section 108(b), Title Max filed motion for stay relief

5. Plan confirmed while stay motion pending6. Stay motion denied because

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a. Plan was bindingb. Plan modified rights of secured creditor

B. Court of appeals decision1. Reversed bankruptcy court2. Property exited the bankruptcy estate automatically when extended redemption period

expired3. Stay motion preserved creditor’s rights and deemed to be objection to plan4. So appeal of stay relief denial deemed appeal of confirmation5. Cited Supreme Court BFP case for upholding state property rights absent specific Code

provision changing them6. Acknowledged other cases holding that stay tolls redemption period, but held that specific

(section 108) prevails over general (section 362).7. So no secured claim existed by time of confirmation8. Dissent

a. Confirmed plan was bindingb. Title Max conceded below that it did not object to the planc. Bankruptcy estate created on petition date and creditors make claims against it

C. Analysis 1. Seems to ignore Espinosa holding that confirmed plan is binding2. Relies on stay motion - if that had not been pending, holding probably different3. Could have implications for other redemption issues in 11th Circuit - e.g., tax sales4. Result would presumably be different if plan confirmed before extended redemption period

ended

VI. SLATER V. UNITED STATES STEEL CORP., 871 F.3D 1174, (11TH CIR. 2017) - JUDICIAL ESTOPPEL

A. Facts1. Prior to filing bankruptcy, debtor was a plaintiff in ongoing litigation against U.S. Steel

claiming race and sex discrimination in the District Court.2. Debtor filed a chapter 7 bankruptcy. The debtor didn’t disclose her ongoing lawsuit in her

bankruptcy schedules nor in her statement of financial affairs.3. U.S. Steel filed a motion for summary judgment based on the doctrine of judicial estoppel. 4. The debtor then amended the schedules and claimed that the omission was inadvertent.

B. District court ruling1. Granted U.S. Steel’s motion for summary judgment.2. Cited prior 11th Circuit caselaw for the proposition “that waiting until after being caught to

rectify the omission is too little, too late.” Slater v. United States Steel Corp., 2012 U.S. Dist. LEXIS 136919, *19, 2012 WL 4478981 (N.D. Ala. 2012) citing Robinson v. Tyson Foods, Inc., 595 F.3d 1269 (11th Cir. 2010); Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282 (11th Cir. 2002)).

3. Rejected debtor’s argument that the Court should consider her statements and explanation that the omissions were unintentional and inferred her intent as a matter of law.

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C. 11TH Circuit Court of Appeals (panel) (Slater v. U.S. Steel Corp., 820 F.3d 1193 (11th Cir. 2016))

Affirmed the District Court citing Robinson and Burns cases.D. 11th Circuit Court of Appeals (en banc) (Slater v. United States Steel Corp., 871 F.3d 1174 (11th Cir. 2017))

1. Remanded the matter back to the panel to determine whether the district court abused its discretion in light of a new standard.

2. Reversed and overruled prior 11th Circuit precedent that permitted a district court to infer intent to misuse the courts without considering the individual plaintiff and the circumstances surrounding the nondisclosure.

3. Rejected a finding of intent to deceive based solely on failure to disclose the asset.4. Established that a finding of intent must be done under a review of the totality of the

circumstances. Elements to consider are:

a. Plaintiff's level of sophistication, b. whether and under what circumstances the plaintiff corrected the disclosures, c. whether the plaintiff told his bankruptcy attorney about the civil claims before filing the

bankruptcy disclosures, d. whether the trustee or creditors were aware of the civil lawsuit or claims before the

plaintiff amended the disclosures, e. whether the plaintiff identified other lawsuits to which he was party, and f. any findings or actions by the bankruptcy court after the omission was discovered.

E. Analysis1. When applying the judicial estoppel doctrine, failure to disclose an asset is not per se intent

to deceive. 2. Amend schedules and statements immediately upon learning of an error.3. Complete a review of pending cases before filing a bankruptcy.

VII. CLARK V. AII ACQUISITION, LLC, NO. 17-1727-CV, 2018 U.S. APP. LEXIS 8135 (2D CIR. MAR. 30, 2018) – JUDICIAL ESTOPPEL

A. Facts1. Debtors were in a pending chapter 13 bankruptcy and close to receiving their discharge2. Husband was diagnosed with cancer caused by asbestos and decided to sue the corporations

responsible.3. Debtors informed their bankruptcy counsel as they were unsure whether this needed to be

disclosed. Debtors’ counsel did not amend the schedules.4. Asbestos lawsuit was filed, defendant filed a motion for summary judgment based upon

judicial estoppel argument.

B. District Court1. Granted motion for summary judgment.2. Adopted a mechanical rule that if (i) that "the party against whom the estoppel is asserted

took an inconsistent position in a prior proceeding" and (ii) that "that position was adopted

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by the first tribunal in some manner, such as by rendering a favorable judgment" then judicial estoppel applied.

C. 11th Circuit Court of Appeals1. Vacated and remanded the case.2. Rejected the mechanical rule 3. Before judicially estopping a litigant court must inquire into whether the particular factual

circumstances of a case tip the balance of equities in favor of doing so.4. Cited Holmberg v. Armbrecht, 327 U.S. 392, 396, 66 S. Ct. 582, 90 L. Ed. 743 (1946)

("Equity eschews mechanical rules.").5. Inquiry into judicial estoppel begins by determining whether the prior inconsistent position in

question gave the party to be estopped an "unfair advantage" over the party seeking estoppel. If the advantage is de minimus, then judicial estoppel should not apply. However, this requirement is usually overlooked if the debtor is in a bankruptcy.

6. Special test for bankruptcy plaintiffs: Does the failure to disclose have a de minimus effect on creditors?

7. In this case the debtors were approaching the end of a 100% repayment plan and therefore it had a de minimus effect on creditors.

D. Analysis1. The court appears to be saying that since judicial estoppel is an equitable remedy it should be

used when it is really equitable to do so. A court must look closer than just whether the claim was omitted.

2. Although it is arguable whether the Bankruptcy Code or Rules require the debtor to amend schedules post-petition (see F.R.Bankr.P. 1007(h)), the best practice is to amend the schedules immediately upon learning of a post-petition asset.

3. Advise your clients in writing before the bankruptcy is filed to notify bankruptcy counsel in the event they receive any asset, claim etc. and the consequences if they do not.

VIII. JANVEY V. ROMERO, 2018 U.S. APP. LEXIS 4108 - ABILITY TO PAY IS NOT BAD FAITH UNDER SECTION 707(A)

A. Facts1. Debtor found liable for $1.275 million in Stanford Ponzi scheme.2. Debtor filed chapter 7 case.3. Debtor had over $5,000,000 in exempt assets (entireties, pensions) and exemptions not

challenged4. Lesser nonexempt assets (car, 2 boats) sold by trustee5. Debtor’s wife disabled - $12,000/mo medical expenses6. Debtor and wife’s income (pension, rental properties, social security, long-term disability)

slightly less than expenses7. SEC-appointed receiver moved to dismiss for bad faith8. Motion denied

a. Debtor lived comfortable, but not exorbitant lifestyleb. Most of his assets were exempt

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B. Circuit court decision1. Agreed bad faith can be cause for dismissal under section 707(a).2. But remedy of dismissal be must be reserved for cases of real misconduct3. Cited In re Zick, 931 F.2d at 1129 (explaining that bad faith exists “only in those egregious

cases that entail concealed or misrepresented assets and/or sources of income, and excessive and continued expenditures, lavish life-style, and intention to avoid a large single debt based on conduct akin to fraud, misconduct, or gross negligence”).

4. Bankruptcy court had looked at 11 factors often considered by courts and found that

a. debtor had real problems - his disabled wife, and unemployment caused by his involvement in Ponzi scheme;

b. and had been cooperative, candid in the bankruptcy case

5. Rejected receiver’s arguments - looked at totality of circumstances

c. Ponzi liability was not only cause for filing -

i. wife’s disability and other debts were factors

ii. even if filing was motivated by one debt, that is not bad faith by itself

d. Prebankruptcy offer of settlement, with bankruptcy as alternative was not bad faith

i. Law encourages settlement negotiation

ii. Bankruptcy is an important backstop that can encourage parties to come to the table

iii. debtor had every right to take advantage of the mechanism by which insolvent individuals can discharge their debts

e. Ability to pay, by itself, not cause for dismissal

i. A debtor’s ability to repay debts does not alone amount to cause for dismissal.

ii. Such a conclusion also follows logically from the Code’s fresh-start philosophy. A penniless start is not a fresh start.

iii. Were absolute depletion of one’s assets a prerequisite for bankruptcy relief, debtors and their families would be left destitute and without the means to become productive members of society. This would increase the strain on our social safety net by increasing the number of people who might potentially qualify for government benefits.

iv. Forcing a debtor to repay his debts using exempt assets before resorting to bankruptcy would also undercut the entire exemption scheme that Congress designed. The

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suggestion that Romero should use his exempt assets to pay the judgment turns this carefully crafted scheme on its head.

C. Analysis1. This was not a consumer case, so section 707(b)(3) not applicable.2. Would analysis have been same under that section?3. Was court more sympathetic to a business person “peer”?4. Many bankruptcy courts might have forced a consumer debtor into chapter 135. Courts also seem looser on expenses in chapter 11 than chapter 136. Case should be cited as precedent in consumer cases - same totality of circumstances test7. Why didn’t creditor file proceeding under section 523(a)(2)?

IX. WD EQUIP., LLC V. COWEN (IN RE COWEN), 849 F.3D 943 (10TH CIR. 2017) - RETURN OF REPOSSESSED VEHICLE NOT REQUIRED BY AUTOMATIC STAY

A. Facts1. Creditor repossessed commercial truck before bankruptcy2. Debtor filed chapter 13 petition and demanded return of truck3. Creditor refused to return truck4. Debtor filed motion to show cause why debtor should not be held contempt for violation of

stay5. Bankruptcy court ordered return of truck, with threat of damages if turnover did not occur6. Creditor did not comply7. Without truck, debtor had no income, so defaulted on plan8. Bankruptcy court dismissed case but retained jurisdiction over stay issue9. Bankruptcy court held creditor in contempt and imposed actual and punitive damages

B. Circuit court decision1. Bankruptcy court had jurisdiction over stay violation and could enter final judgment in core

proceeding even though underlying case had been dismissed.2. Court acknowledged “majority rule” that refusal to return repossessed collateral violates the

stay.

a. Thompson v. Gen. Motors Acceptance Corp., 566 F.3d 699, 703 (7th Cir. 2009); b. Weber v. SEFCU (In re Weber), 719 F.3d 72, 81 (2d Cir. 2013)c. California Emp't Dev. Dep't v. Taxel (In re Del Mission Ltd.), 98 F.3d 1147, 1151 (9th

Cir. 1996)d. Knaus v. Concordia Lumber Co. (In re Knaus), 889 F.2d 773, 775 (8th Cir. 1989)e. Unified People's Fed. Credit Union v. Yates (In re Yates), 332 B.R. 1, 4 (B.A.P. 10th Cir.

2005)

3. Nonetheless, the court found the majority rule not faithful to plain language

a. Section 362(a) prohibits “any act to obtain possession of or. . .to exercise control over property of the estate.”

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b. Creditor had not taken any action.c. To exercise control, creditor would have to do something, like sell the propertyd. Refused to read section 362 in conjunction with section 542.

i. No textual link

ii. Did not decide if section 542 self-executing

iii. Section 362 not needed to enforce section 542; court has equitable powers to do that

iv. Court remanded case because damages could still be awarded

e. Bankruptcy court:

i. found the Defendants' attitudes while testifying to be contemptuous of the bankruptcy process, the Debtor, and the Court."

ii. found that Defendants "manufactured the paperwork . . . after the bankruptcy filing."

iii. noted that Defendants "likely forged documents and gave perjured testimony," and "coached their witnesses on what to testify to during breaks."

iv. This was all done in an "attempt to convince the Court that [Mr. Cowen's] rights in the Trucks had been terminated pre-bankruptcy."

4. These would qualify as post-petition acts to exercise control over the debtor's property in violation of the automatic stay.

C. Analysis1. Court did not say there was no duty to turnover under section 5422. Merely held failure to turn over, by itself, did not violate section 3623. To show stay violation in 10th Circuit there must be an act, e.g., moving the property, or

putting it up for sale.

a. Could saying “I will not return the property” be an act?b. Court seems to hold other statements were actsc. Otherwise, a turnover proceeding must be broughtd. Need to develop formse. Adversary proceeding requiredf. Can file motion for TRO and Preliminary Injunction g. More paperwork and work for the court, but can be routinized

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X. PARTIDA V. UNITED STATES DOJ (IN RE PARTIDA), 862 F.3D 909 (9TH CIR. 2017) - COLLECTION OF FEDERAL CRIMINAL RESTITUTION DOES NOT VIOLATE AUTOMATIC STAY

A. Facts1. Prior to bankruptcy debtor pled guilty to embezzlement2. Debtor was ordered to pay restitution3. Debtor filed chapter 13 case when she owed over $200,000 in restitution4. Government sent notice that it would offset against her income.5. After plan confirmed, debtor moved to hold government in contempt of automatic stay6. Bankruptcy court and BAP ruled against debtor

B. Circuit court decision1. Mandatory Victims Restitution Act (“MVRA”), 18 U.S.C. 3613(a), overrode automatic stay.2. “The United States may enforce a judgment imposing a fine in accordance with the practices

and procedures for the enforcement of a civil judgment under Federal law or State law. Notwithstanding any other Federal law (including section 207 of the Social Security Act), a judgment imposing a fine may be enforced against all property or rights to property of the person fined ...”

3. “Notwithstanding” clause, passed after enactment of automatic stay, controlled.4. Government could collect under Federal Debt Collection Practices Act ("FDCPA"), 15

U.S.C. § 1692 et seq., including by income offset

C. Analysis1. Result consistent with In re Robinson, 764 F.3d 554 (6th Cir. 2014).2. Somewhat like United States v. Colasuonno, 697 F.3d 164 (2d Cir. 2012)(probation

conditioned on payment was excepted under section 362(b)(1) exception for continuation of criminal proceedings)

3. Bankruptcy courts and appellate courts very reluctant to interfere with criminal proceedings.4. Only inroads have been awards of extraneous costs. See Cnty. of Dakota v. Milan (In re

Milan), 556 B.R. 922 (B.A.P. 8th Cir. 2016) (costs of incarceration imposed by correctional agency had purely pecuniary purpose and were therefore dischargeable); Lopez v. First Judicial Dist. (In re Lopez), 531 B.R. 554 (Bankr. E.D. Pa. 2015)(costs and fees not included in criminal sentence were discharged).

XI. HAWK V. ENGELHART (IN RE HAWK), 871 F.3D 287 (5TH CIR. 2017) - POST-PETITION CONVERSION OF EXEMPT ASSETS TO CASH

A. Facts1. Prior to filing bankruptcy, the debtors held money in an exempt IRA.2. Debtors filed a chapter 7 bankruptcy and claimed an exemption under Texas law that the IRA

funds were exempt.3. The Trustee did not object to the exemptions.4. After filing the bankruptcy, the debtors liquidated the money in their IRA and notably did not

roll it over into another qualified retirement account.

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5. Tex. Prop. Code § 42.0021(a) provides that amounts distributed from an exempt retirement account "are not subject to seizure for a creditor's claim for 60 days after the date of distribution if the amounts qualify as a nontaxable rollover contribution."

6. The Trustee demanded return of all funds withdrawn ($133,434.64 in total). The Trustee argued that since the funds were not rolled over into a new qualified retirement account, they lost their exempt status.

7. The debtors refused. 8. The trustee filed a motion to compel turnover.

B. Bankruptcy Court1. Held that the funds must be turned over to the trustee.2. The bankruptcy court concluded that the funds "lost their exempt status" under Texas law

because the Hawks "did not roll them over to another individual retirement account within 60 days."

C. The District Court affirmed the bankruptcy court's decision.D. 5th Circuit Court of Appeals

3. Reversed and remanded.4. Reaffirmed the “snap shot” rule that exemptions and the character of property are determined

as of the date the case is filed citing White v. Stump, 266 U.S. 310, 311, 45 S. Ct. 103 (1924) (the date of filing is the point at which "the status and rights of the bankrupt, the creditors and the trustee . . . are fixed.")

5. The protected status of property under applicable exemptions is determined at the time of filing.

a. If the debtors had cashed out their IRA 10 days before filing, then their exemption would be in effect for 50 days after the bankruptcy was filed. They would in effect have a conditional exemption upon filing.

i. This presumes however that the trustee filed a timely objection to their exemption.

ii. Failure to timely object to an exemption makes the property claimed as exempt permanently exempt. See 11 U.S.C. § 522(l), Federal Rule of Bankruptcy Procedure 4003(b) and Taylor v. Freeland & Kronz, 503 U.S. 638, 639, 643-44, 112 S. Ct. 1644, 118 L. Ed. 2d 280 (1992).

b. Funds withdrawn after filing however were not subject to the 60-day conditional exemption limit. They were unconditionally exempt at filing and subsequent acts converting those funds to non-exempt assets do not change their initial exempt status in a chapter 7 case.

E. Analysis1. The result would likely be different in a chapter 13 bankruptcy in which Section 1306 may

pull the non-exempt assets into the bankruptcy estate.2. Warn clients of the possible effect of liquidating assets after the case is filed.3. Inquire specifically as to withdrawals made before the bankruptcy was filed from exempt

assets.

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XII. LOWE V. DEBERRY (IN RE DEBERRY), NO. 17-50315, 2018 U.S. APP. LEXIS 5772 (5TH CIR. MAR. 7, 2018). POST-PETITION CONVERSION OF EXEMPT ASSETS TO CASH

A. Facts1. Prior to filing bankruptcy, the debtor owned his residence.2. Debtor filed a chapter 7 bankruptcy and claimed a 100% exemption under Texas law on the

value of the residence.3. The Trustee did not object to the exemption.4. After filing the bankruptcy, the debtor sold the residence and did not reinvest the funds into

another residence. 5. TEX. PROP. CODE § 41.001(a) creates a "proceeds rule." It provides that "proceeds of a

sale of a homestead are not subject to seizure for a creditor's claim for six months after the date of sale." The purpose of this statute was to allow the seller 6 months to reinvest the funds in another home.

6. The Trustee demanded return of the funds received from the sale ($364,592.21 in total). The Trustee argued that, since the funds were not reinvested in a new home, they lost their exempt status.

7. The Trustee filed an adversary complaint for turnover against the debtor and third parties who received some of the funds.

8. The debtor filed a motion to dismiss the adversary as the funds were exempt.

B. Bankruptcy Court1. Dismissed the adversary.2. Held that with a sale of exempt assets after filing, the proceeds are exempt.

C. District CourtDisagreed and reversed the Bankruptcy Court.

D. 5th Circuit Court of Appeals3. Reversed and remanded.4. Trustee argued that the Hawk case did not apply because the DeBerry debtor waived his right

to discharge under Section 727.5. Rejected the Trustee’s argument.6. Expanded on its explanation in the Hawk case.7. Under the proceeds rule, if a house is sold prior to filing bankruptcy, the exemption is

conditional until the end of the 6 months after sale. However, if the property is owned at the time of filing, the proceeds rule does not apply as the property was fully and unconditionally exempt at the time of filing.

8. Indicated that the Trustee’s argument would inject uncertainty about whether property is protected until the closing or conversion of a case and would lead to arbitrary results dependent on the aggressiveness of the individual trustee

E. Analysis1. Again, the result would likely be different in a chapter 13 bankruptcy in which Section 1306

may pull the non-exempt assets into the bankruptcy estate.2. Clarifies that exemptions apply regardless of whether the debtor receives a discharge of the

debt.

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3. The opinion should also settle the issue of disposal of exempt assets post filing but pre-discharge in chapter 7 under Texas law. California law has been held to have a different result.

4. It is good practice to warn clients not to sell exempt assets until the case is closed unless the Trustee has approved of the sale and retention of the proceeds.

XIII. ANDERSON V. CREDIT ONE BANK, N.A. (IN RE ANDERSON), NO. 16-2496, 2018 U.S. APP. LEXIS 5703 (2D CIR. MAR. 7, 2018) - ARBITRATION CLAUSES AND DISCHARGE VIOLATIONS

A. Facts1. Prior to filing bankruptcy, debtor had an outstanding debt on a Credit One credit card. Credit

One reported the debt as charged off to the credit reporting agencies. Then Credit One sold the debt to a debt buyer.

2. The credit card agreement contains an arbitration clause that either party may require any controversy be submitted to mandatory, binding arbitration.

3. Debtor filed a chapter 7 bankruptcy, listed the creditor, and subsequently received a discharge.

4. Post-discharge the debtor asked Credit One to remove the charge off notation from his credit report.

5. Credit One refused to remove the language.6. Debtor then reopened his case and filed a class action against Credit One, alleging Credit

One was violating the discharge order. Debtor argued that failure to correct the credit report was coercion to pay the discharged debt.

7. Credit One filed a motion to compel arbitration and stay the bankruptcy proceeding.

B. The Bankruptcy Court denied the motion finding that the matter was a core proceeding and therefore the Bankruptcy Code overrides the Arbitration Acts policy favoring enforcement of arbitration agreements.

C. The District Court affirmed the bankruptcy court.D. 2nd Circuit Court of Appeals

1. Reviewed the steps to determine whether arbitration clauses should be enforced in bankruptcy court:

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a) Does the issue involve a core or non-core proceeding?(1) If the issue is core then

(a) The bankruptcy court is tasked with engaging in a "particularized inquiry into the nature of the claim and the facts of the specific bankruptcy." MBNA America Bank, N.A. v. Hill, 436 F.3d 104, 108 (2d Cir. 2006). (b) If the bankruptcy court determines that arbitration would create a "severe conflict" with the purposes of the Bankruptcy Code, it has discretion to conclude that "Congress intended to override the Arbitration Act's general policy favoring the enforcement of arbitration agreements." Id.

(2) If the proceeding is "non-core," "bankruptcy courts generally must stay" the proceedings "in favor of arbitration." In re Crysen/Montenay Energy Co., 226 F.3d 160, 166 (2d Cir. 2000).

2. In 28 U.S.C. § 157(b)(2), Congress articulated "a nonexclusive list of 16 types of proceedings" that it considers "core" to the power of the bankruptcy court. Wellness Intern. Network, Ltd. V. Sharif, 135 S. Ct. 1932, 1940, 191 L. Ed. 2d 911 (2015).

3. The Federal Arbitration Act creates a presumption favoring arbitration but may be overridden by a contrary congressional directive.

4. "[T]he burden is on the party opposing arbitration . . . to show that Congress intended to preclude a waiver of judicial remedies for the statutory rights at issue." Shearson/American Exp., Inc. v. McMahon, 482 U.S. 220, 227, 107 S. Ct. 2332, 96 L. Ed. 2d 185 (1987).

5. Credit One did not raise the issue of intent and legislative history of the Arbitration Act before the bankruptcy court and it was not considered by the 2nd Circuit Court of Appeals.

6. 2nd Circuit found that arbitration of a claim based on an alleged violation of section 524(a)(2) would seriously jeopardize a particular core bankruptcy proceeding because

a. the discharge injunction is integral to the bankruptcy court's ability to provide debtors with the fresh start that is the very purpose of the Code;

b. the claim regards an ongoing bankruptcy matter that requires continuing court supervision; and

c. the equitable powers of the bankruptcy court to enforce its own injunctions are central to the structure of the Code.

E. Analysis1. Opinion may be subject to collateral attack if the creditor presents evidence of Congressional

intent and legislative history that demonstrates a contrary holding.2. Debtor’s argument may have been stronger if he also sent a request for investigation to the

credit reporting agencies to remove Credit One’s comment. This may have also created an additional claim under the Fair Credit Reporting Act.

3. The rationale for the 2nd Circuit Court’s opinion could be used in a variety of core bankruptcy issues.

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XIV. DINGLEY V. YELLOW LOGISTICS. LLC (IN RE DINGLEY), 852 F.3D 1143 (9TH CIR. 2017) - POLICE AND REGULATORY POWER STAY EXCEPTION

A. Facts1. Towing operator Dingley sued in state court for improper towing 2. Operator failed to show up for deposition3. Plaintiff sought discovery sanctions and they were awarded4. Dingley failed to pay5. Plaintiff obtained order to show cause why Dingley should not be held in contempt6. Dingley filed chapter 7 case7. State court asked for briefs on whether it was stayed8. Plaintiff filed brief9. Dingley filed stay violation proceeding10. Bankruptcy court held that stay was violated by filing brief11. BAP reversed

B. Circuit court decision1. Under 9th Circuit case law police and regulatory exception applies under either of two tests:

a. Pecuniary Purpose Test - Gov’t pecuniary interest vs. public safety and welfareb. Public Policy Test - Whether gov’t purpose is to "effectuate public policy" or to

"adjudicate private rights.”

2. Civil contempt proceeding met both testsa. Intended to effectuate public policy to deter unprofessional conduct in litigation

b. Not intended to obtain money for government

3. Exception also applied to private parties seeking to obtain contempt rulinga. Even if private party seeking to collect monetary sanctions

C. Analysis1. Only other circuit decision is in accord - Alpern v.Lieb 11 F.3d 689 (7th Cir. 1993)(Rule 11 sanctions)

2. Shows surprising breadth of stay exception3. Presumably, courts do not want bankruptcy to be escape from punishment4. Many courts have held that sanctions not dischargeable under section 523(a)(7).

[shouldn’t this be 7 vs. 6???]

XV. PORTER V. NABORS DRILLING USA, LTD. P'SHIP, 854 F.3D 1057 (9TH CIR. 2017) - “PRIVATE ATTORNEY GENERAL” NOT WITHIN POLICE AND REGULATORY POWERS EXCEPTION

A. Facts1. Nabors filed chapter 11 case2. Prior to bankruptcy Porter brought action under California Private Attorney General Act

(PAGA).

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3. District court had dismissed case action based on arbitration clause and appeal had been pending in circuit court.

4. Porter asked circuit court to rule that automatic stay did not apply because case was under police and regulatory powers

B. Circuit court decision1. Under PAGA, "civil penalt[ies] to be assessed and collected by the Labor and Workforce

Development Agency . . . for a violation of th[e Labor] code, may, as an alternative, be recovered through a civil action brought by an aggrieved employee." Cal. Lab. Code § 2699(a).

2. “[A] PAGA action has been identified as a kind of qui tam action, an action in which a private citizen is authorized to sue on behalf of the government” like a qui tam case.

3. But unlike in traditional government enforcement actions, the qui tam relators [regulators?] in these cases were proceeding without the involvement of the governmental unit on whose behalf the action is purportedly brought.

4. So action was not within police and regulatory exception, which applies only to governmental units.

5. Court distinguished Dingley, supra because in the case of judicially imposed sanctions, the governmental unit whose interests are being enforced—that is, the court—itself conducts additional proceedings to advance its own interests and uses its own resources to do so. Ultimately, the "sanction is meted out by a governmental unit, the court," even if the sanction is initially "sought by a private individual or organization.”

C. Analysis1. Despite Dingley, section 362(b)(4) cannot be used to pursue private actions2. This case presented the strongest possible facts, but they were not enough.

XVI. REINBOLD V. THORPE (IN RE THORPE), 881 F.3D 536 (7TH CIR. 2018) - DIVORCE AND PROPERTY OF THE ESTATE

A. Facts1. Debtor filed a bankruptcy after divorce had been filed2. A month later, divorce court awarded former joint tenancy home to nondebtor spouse3. Each spouse had contingent interest in property, depending on outcome of divorce4. Trustee sued nondebtor for half interest and argued, based on state statute that provides that

contingent interests in marital property "shall not encumber that property so as to restrict its transfer, assignment or conveyance”

5. Bankruptcy court ruled against trustee and did not address argument6. District court held that estate’s interest was subject to contingency of award to nondebtor, so

affirmed

B. Circuit court decision1. Home was marital property in which each had a contingent interest once divorce was filed2. State law cited by trustee not applicable because it did not restrict right to transfer property;

property had been transferred when debtor filed bankruptcy case

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3. Court noted that trustees still have remedies to prevent abuse4. Section 544 allows transfers voidable by hypothetical bona fide purchaser without notice of

divorce proceeding5. Section 548 allows avoidance of fraudulent transfers6. Trustee’s reading would violate principle that estate has same ownership rights as debtor had

C. Analysis1. In many states, both spouses acquire contingent, or inchoate, interests in all marital property

upon filing divorce

a. Inchoate interest value unknown until equitable distributionb. Bankruptcy courts often grant stay relief to allow family court determination of that

interest

2. But not all states - In some, a spouse has only a claim, not a property interest, until divorce decree

3. Big difference - Know the cases in your state

a. In first group of states, nondebtor spouse has a property interest, but no right to distributions from estate

b. In second group, nondebtor spouse has a claim, which may be dischargeable in chapter 13, and must file a proof of claim to share in estate

c. Cases listed and discussed in Collier Family Law and the Bankruptcy Code ¶¶ 2.01[5] 2.02[5][a] (available on Lexis)

4. Case also notes there can be issues under section 544 or 548

a. Bona fide purchaser if there is no record notice of divorce proceeding - issue of state law. See In re Fisher, 67 B.R. 666 (Bankr. D. Colo. 1986)

b. Collusive divorce settlement to prejudice debtor’s creditors may be avoidable as fraudulent transfer

XVII. LOVENTHAL V. EDELSON, 844 F.3D 662 (7TH CIR. 2016) - EXEMPTION OF LIVING TRUST

A. Facts1. Debtor filed chapter 13 case2. Former husband objected to exemption of home owned by debtor and current husband3. Debtor claimed tenancy by entireties exemption4. But seven months prior to bankruptcy debtor and husband had conveyed home to husband’s

living trust, which provided that beneficial interest in trust was held by husband and wife as tenants by entirety

5. Exemption objection was apparently denied and former husband appealed 6. Chapter 13 plan was confirmed7. Confirmation order not appealed

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B. Circuit court decision1. Case was not moot based on confirmation order finality

a. Plan could be modifiedb. Case could be converted to chapter 7

2. Illinois statute provided that trust stating “when a trust "specifically state[s] that the interest of the husband and wife to the homestead property are to be held as tenants by the entirety, the estate created shall be deemed to be a tenancy by the entirety."

3. So, based on statute, trust was entireties property even though

a. trust instrument allows the trustee (nondebtor spouse) in his "sole and absolute discretion" to pay his legally enforceable debts from the trust and

b. to amend the trust "in whole or in part," again unilaterallyc. and even to "revoke the trust," also unilaterally; and "upon revocation, the trustee shall

deliver the trust property to me" (i.e., to trustee)

C. Analysis1. Mootness issue somewhat glossed over by court2. Plan is usually res judicata on issues such as this, which raised best interests of creditors test3. Would court have allowed a subsidiary issue like this to upset a chapter 11 plan?4. Creditor should have appealed confirmation (also)5. Many decisions treat living (revocable) trusts as property of debtor for exemption purposes6. Check state statutes on issues like this

XVIII. WIGGAINS V. REED (IN RE WIGGAINS), 848 F.3D 655 (5TH CIR. 2017) - APPLICATION OF HOMESTEAD CAP TO COMMUNITY PROPERTY

A. Facts1. Debtor and wife bought and improved expensive property2. They marketed property 9 months later for $3.4 million3. They partitioned community property into separate property4. Debtor filed chapter 7 case one hour after partition recorded5. Trustee sold property for $3.4 million, netting over $500,000 for estate6. Nondebtor spouse filed action claiming half7. Debtor testified at trial that partition was to protect wife’s half because he did not think

she was liable on his business debts8. Bankruptcy court found partition to be avoidable fraudulent transfer9. Wife claimed share of proceeds under section 363(j)10. Court denied her claim because she did not show that the "Homestead had anything more

than general intrinsic value to her.”11. Direct appeal to circuit granted

B. Circuit court decision1. Finding of intent to hinder and delay creditors not clearly erroneous2. Facts were very suspicious

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3. Cited exemption planning (pig/hog) cases4. Homestead rights did not include right to payment5. “Despite its vigor and breadth, the protection [of the Texas homestead exemption] does not

grant a spouse an economic interest. ‘The homestead interest . . . gives protective legal security rather than vested economic rights.’”

6. Takings Clause argument not valid because homestead had been purchased after enactment of section 522(q)

7. Section 363(j) did not apply because estate owned all of community property and that section applies when there is dower, curtesy, tenancy in common, joint tenancy or tenancy by entirety under 363(g) or (h).

C. Analysis 1. Trustee could have sought return of property transferred to estate under section 550(a), which

would have eliminated community property issue2. Common misconception is that avoidance reinstates previous ownership, but section 550

states results of avoidance3. Issue is important in cases such as payment for child’s expenses, or postpetition transfer from

bank account, or avoidance of lien4. Remedy is not to act as if debtor again has the funds or property5. Remedy is to sue transferee under section 550.

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