THE TOOLBOX 2.1BASICS FOR CHAPTER 13 STAFF ATTORNEYS

I. THE LEGAL HIERARCHY.

A. The Code, Rules, Local Rules, Administrative Orders, And….

Chapter 13 practice has more variance – from court to court – than any other

Chapter in the Code. Plans are done differently, as pot or percentage. Conduit payments of

secured claims are required, encouraged, tolerated, or actively discouraged, depending on

your court or district, sometimes for both mortgages and vehicles, sometimes for only one of

the two. Pre-confirmation adequate protection payments are required to go through the

trustee, or are required to be paid directly by the debtors. The Means Test may be

controlling, a starting point, or pointedly ignored. What controls – the proof of claim or the

Chapter 13 Plan?

Some of these Chapter 13 differences are inherent. The cost of a fixer-upper starter

home in many parts of California – even today – would get you an extravagant McMansion

in Toledo, Ohio. The BAPCPA Amendments have left something to be desired in terms of

clarity, and the bankruptcy courts are coming to different conclusions about what the law

requires.

But, the differences in Chapter 13 practice goes beyond differences in standards of

living and ambiguities in the Code. There is also a long standing “way things have always

been done”. Many bankruptcy judges have issued administrative orders that perpetuate the

way they like to have things done. Form Plans serve the same purpose. And local rules

have been adopted to solidify even further choices that the courts and the Chapter 13

Trustees have made about how they want things done.

There are advantages and disadvantages to this “system”. But, what is a somewhat

hidden “hot issue” is the discussion that is going on – nationally – among judges, about

whether bankruptcy local rules and administrative orders have gone too far. There hasn’t

been any really explosion of case law in this area – yet. However, to the extent local

practices are supported by local rules and administrative orders, anything that could restrict

the use of these control devices should be of more than passing interest.

Bankruptcy law has the same type of hierarchy that other areas of the law have:

The Constitution, jurisdictional and venue statutes and the United States Bankruptcy

Code, the Federal Rules of Bankruptcy Procedure. Below these more common place

sources of authority, we also have Official Forms, Local Rules, administrative orders, and

“local custom”. The status and conflicts between some of these sources of authority are

discussed below.

B. The Bankruptcy Code Trumps The Bankruptcy Rules.

28 U.S.C. §2075, which implements the Bankruptcy Rules, provides that "such

rules shall not abridge, enlarge or modify any substantive right." In re Dumain, 492 B.R.

140, 148 (Bankr. S.D.N.Y. 2013); In re Brunson, 486 B.R. 759, 772 (Bankr. N.D. Tex.

2013). Thus, the Bankruptcy Rules may not contravene substantive rights contained in

the Bankruptcy Code. In re Padilla, 379 B.R. 643, 657 (Bankr. S.D. Tex. 2007).

As a result, any conflict between the Bankruptcy Code and the Bankruptcy Rules

must be settled in favor of the Code. See, In re Smart World Techs, LLC, 423 F.3d 166,

181 (2nd Cir. 2005); In re Chavis, 47 F.3d 818, 822 (6th Cir. 1995); In re Pac. Atl.

Trading Co., 33 F.3d 1064, 1066 (9th Cir. 1994); In re Perkins, 381 B.R. 530, 535

(Bankr. S.D. Ill. 2007).

Put another way, "[F]orsaking the plain meaning of a provision of the Bankruptcy

Code solely because that meaning conflicts with a bankruptcy rule would run afoul of 28

U.S.C. §2075.". In re Caldor Group, 303 F.3d 161, 170 (2d Cir. 2002); Zedan v. Habash,

529 F.3d 398 (7th Cir. 2007).

E. Official Forms v. The Code.

In Schwab v. Reilly, 560 U.S. 770, ___ n.5, 130 S.C. 2652, 2660 n.5, 177 L.Ed.2d

234, 245 n.5 (2010), the Supreme Court noted: “The forms, rules, treatise excerpts, and

policy considerations on which the dissent relies . . . must be read in light of the

Bankruptcy Code provisions that govern this case, and must yield to those provisions in

the event of conflict.”

The 9th Circuit Bankruptcy Appellate decision In re Wiegand, 386 B.R. 238 (9th

Cir. BAP 2008) illustrates that the Bankruptcy Code controls over the Official Forms.

The Form B22C ‘Means Test’ allows debtors with business income to deduct their

business expenses before the determination of whether they are above-the-median or

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below-the-median debtors for purpose of determining (among other things) the applicable

commitment period. The Wiegand court stated: “The question is easily answered when

Form 22C is directly at odds with §1325(b)(2)(B), the substantive Code provision that

governs the deduction of business expenses. As aptly noted by another court in

addressing this same question, when an Official Bankruptcy Form conflicts with the

Code, the Code always wins. In re Arnold, 376 B.R. 652, 653 (Bankr. M.D. Tenn.

2007).” In re Wiegand, 386 B.R. at 241. See also, In re Harkins, 491 B.R. 518, 522-523

(Bankr. S.D. Ohio 2013); In re Sharp, 394 B.R. 207 (Bankr. C.D. Ill. 2008); In re

Bembenek, 2008 Bankr. LEXIS 3003, 2008 WL 2704289 (Bankr. E.D. Wis., July 2,

2008).

D. The Legal Limitations On The Scope Of Local Rules.

‘Local Bankruptcy Rules’ are specifically permitted under Federal Rule of

Bankruptcy Procedure 9029(a):

Rule 9029(a) Local Bankruptcy Rules

(1) Each district court acting by a majority of its district judges may make and amend rules governing practice and procedure in all cases and proceedings within the district court's bankruptcy jurisdiction which are consistent with - but not duplicative of - Acts of Congress and these rules and which do not prohibit or limit the use of the Official Forms. Rule 83 F.R.Civ.P. governs the procedure for making local rules. A district court may authorize the bankruptcy judges of the district, subject to any limitation or condition it may prescribe and the requirements of 83 F.R.Civ.P., to make and amend rules of practice and procedure which are consistent with - but not duplicative of - Acts of Congress and these rules and which do not prohibit or limit the use of the Official Forms. Local rules shall conform to any uniform numbering system prescribed by the Judicial Conference of the United States.

Thus, there are limitations on what Local Rules can do. Some recent cases have

clarified the standards for invalidating Local Rules:

The rules associated with local bankruptcy rules are clear. As part of the Bankruptcy Code Congress delegated to the Supreme Court the power to make and enforce general bankruptcy rules. 28 U.S.C. §2075. Pursuant to this authority, the Supreme Court promulgated Federal Rule of Bankruptcy Procedure 9029 ("Rule 9029"), which grants district courts the power to

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adopt their own local rules. Brown v. Smith (In re Poole), 222 F.3d 618, 621 (9th Cir. 2000). Under Rule 9029, however, this power is strictly limited. 10 Collier on Bankruptcy ¶9029.01[1], at 9029-2 (rev. 15th ed. 2006.) Rule 9029 states a local bankruptcy rule must: (1) be consistent with the Acts of Congress and Federal Rules of Bankruptcy Procedure; (2) not be duplicative of the Acts of Congress or Federal Rules of Bankruptcy Procedure; and (3) not limit the use of Official Bankruptcy Forms. Steinacher v. Rojas (In re Steinacher), 283 B.R. 768, 772-73 (9th Cir. BAP 2002). If any of these limits are not observed, the local bankruptcy rule must be held invalid.

In re Healthcentral.com, 504 F.3d 775, 784 (9th Cir. 2007)(holding Local Rule 9015-2(b) to

be invalid as it establishes a procedure for withdrawing the district court's jurisdictional

reference inconsistent with the Acts of Congress and Federal Rules of Bankruptcy

Procedure.”). See also, Anwar v. Johnson, 770 F.3d 1183, 1189 (9th Cir. 2013)(“ a local

rule of bankruptcy procedure cannot be applied in a manner that conflicts with the federal

rules.”).

In re Suggs, 377 B.R. 198, 205-206 (8th Cir. BAP 2007) quotes an earlier 8th Circuit

Bankruptcy Appellate Panel decision, In re McGowan, 226 B.R. 13, 16 (B.A.P. 8th Cir.

1998):

As a general rule of law, any local rule of bankruptcy procedure that conflicts with a federal rule of bankruptcy procedure is invalid and of no effect. In re Falk, 96 B.R. 901, 903 (Bankr. D. Minn. 1989) (en banc). A local rule "may only be upheld if (a) it is consistent with the Bankruptcy Code in that it does not 'abridge, enlarge, or modify any substantive right,' as required by 28 U.S.C. §2075 and (b) it is 'a matter of procedure not inconsistent with' the Bankruptcy Rules as required by Bankruptcy Rule 9029." Id. at 904. If a local rule fails either prong of the two-pronged test, it is invalid. Id. "Consistent is defined as 'coexisting and showing no noteworthy opposing, conflicting, inharmonious, or contradictory qualities or trends' or 'jointly assertable so as to be true or not contradictory.'" Id. at 905 (quoting Webster's [T]hird New International Dictionary 484 (1976)).

McGowan, 226 B.R. at 19.

The Suggs decision struck down a Local Rule (4070-1.D) that created procedures

for ex-parte self help if the debtor failed to provide proof of insurance, and insurance lapsed

on a debtor’s vehicle, and required pre-payment of three months worth of insurance for

debtors to get their car back. The BAP held that his local rule enlarged creditors' rights

beyond the scope permitted by §362 and Federal Rule 4001(a), and was therefore invalid.

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Similarly, Northern District of Illinois Local Rule 7054-1(C), which permitted the

recovery of litigation costs not allowed by 28 U.S.C. §1920 (a federal statute applicable to

more than just bankruptcy cases), was held to be unenforceable. See, In re Griffin Trading

Co., 424 B.R. 431 (Bankr. N.D. Ill. 2010).

In contrast, a local rule requiring the use of a form plan has been upheld. See, In re

Walat, 89 B.R. 11 (E.D. Va. 1988); In re Maupin, 384 B.R. 421, 426 (Bankr. W.D. Va.

2007)(“A Bankruptcy Court's requirement that debtors use a form chapter 13 plan is a

valid exercise of the Court's authority to regulate local practice and procedure because

such a policy does not affect the substance rights of a chapter 13 debtor and is not

inconsistent with the Bankruptcy Code or Bankruptcy Rules.”).

A local rule stating that the “trustee may require the debtor to make plan payments

in a specified form, such as certified funds” has been upheld. See, In re Reyes, 482 B.R.

603, 606 (Bankr. D. Ariz. 2012)(Chapter 13 trustee only accepted certified funds, automatic

wage withdrawals, or electronic transfers for Chapter 13 plan payments).

1. District Court Rules Are Not Bankruptcy Court Rules.

There have been occasions where counsel who practice primarily in the District

Court, attempt to make use of District Court rules in Bankruptcy Court. This attempt to

graft on an additional set of local rules has not been successful:

While it is true that the bankruptcy judges in the District constitute a unit of the District Court pursuant to 28 U.S.C. §151, the Local General Rules of the District Court are not identical to and are separate from the Local Bankruptcy Rules, promulgated under Federal Rule of Bankruptcy Procedure 9029.

In re Kaliana, 207 B.R. 597, 603 (Bankr.N.D.Ill. 1997). See also, In re Flanagan, 999

F.2d 753, 758 n.7 (3rd Cir. 1993)(“The Local [District Court] Rules, adopted pursuant to

Federal Rule of Civil Procedure 83, do not apply to proceedings in bankruptcy.”); In re

Dairy Consulting, Inc., 386 B.R. 135 (Bankr. W.D. Pa. 2008)("[Th]e Local District Court

Rules -- and, in particular, Local District Court Rule 56.1 -- do not apply either generally

in this Court or, in particular, to the instant adversary proceeding.")

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These District Court procedural rules only apply in the Bankruptcy Court if local

bankruptcy rules adopt or incorporate, either in part or in full, the local district court

rules. In re Zuniga, 332 B.R. 760, 774 (Bankr.S.D.Tex. 2005).

E. Administrative Orders.

One step below Local Rules are what are often referred to as Administrative Orders,

permitted by Federal Rule of Bankruptcy Procedure 9029(b):

(b) Procedures Where There is No Controlling Law. A judge may regulate practice in any manner consistent with federal law, these rules, Official Forms, and local rules of the district. No sanction or other disadvantage may be imposed for noncompliance with any requirement not in federal law, federal rules, Official Forms, or the local rules of the district unless the alleged violator has been furnished in the particular case with actual notice of the requirement.

These Rule 9029(b) orders cannot conflict with the Bankruptcy Code, Rules,

Official Forms, and Local Rules, and no sanctions can be imposed “unless the alleged

violator has been furnished in the particular case with actual notice of the requirement.”

Unlike Local Rules, which are technically adopted at the District Court level, and

which may predate the appointment of the bankruptcy judges who interpret and enforce

them, Administrative Orders are typically signed by the very judges who will determine, in

the first instance, whether they are valid. This fact serves to make legal arguments as to the

validity of these Administrative Orders, in most instances, at least a two step process – you

have to figure on appealing to at least the District Court level.

Some cases dealing with Administrative Orders are: In re Dorner, 343 F.3d 910,

913 (7th Cir. 2003)("No local rule or standing order can supersede the Federal Rules of

Bankruptcy Procedure. . . . A local rule that countermands a national rule is not consistent

with it. Orders with the effect of rules likewise must satisfy the consistency

requirement."); Ford Motor Credit Co. v. Randall Johnson (In re Standing Order), 272

B.R. 917 (W.D. La. 2001)(standing order that modified existing substantive rights of

creditors, by preventing the settlement of a 523 claim while a 727 action was pending,

was invalid). CFCU Cmty. Credit Union v. Jones (In re Jones), 2007 U.S. Dist. LEXIS

65598 (N.D.N.Y. September 4, 2007)(upholding, at the District Court level, an

administrative order requiring that adequate protection payments go through the Chapter 13

Trustee), vacated and remanded as moot, CFCU Cmty. Credit Union v. Jones (In re Jones),

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2008 U.S. App. 24235 (2nd Cir. Nov. 25, 2008); Armstrong v. Lasalle Bank Nat'l Ass'n,

394 B.R. 794, 799-800 (Bankr. W.D. Pa. 2008)(quoting Jones), and In re Binion, 2006

Bankr. LEXIS 2372, (Bankr. N.D. Ohio September 15, 2006)(upholding administrative

order, General Order 05-6, requiring the use of Form B240 for reaffirmation agreements,

even though creditor’s form better complied with the statutory requirements.) Judge Lundin

also briefly discusses Rule 9029(b) in In re Murray, 199 B.R. 165, 172 (Bankr. M.D. Tenn.

1996).

A judge’s approval of a model form order, to be presented by the Chapter 13 Trustee

when submitting a proposed confirmation order, has been upheld as “consistent with Rule

9029(b). See, In re Reyes, 482 B.R. 603, 607 (Bankr. D. Ariz. 2012).

F. For Us – The Chapter 13 Trustee Manual.

If you have not looked it over, the Handbook for Chapter 13 Standing Trustees

provides guidance to your Office on a number of important issues. For Staff Attorneys,

the following Chapters are important: Chapter 3 – Duties of a Standing Trustee; Chapter

4 – Initial Review of Chapter 13 Cases; Chapter 5 – Section 341 Meeting; Chapter 6 –

Administration of a Case; Chapter 7 – Motions to Dismiss or Convert; and Chapter 8 –

Chapter 13 Debtors Engaged in Business.

Some of the procedures stated in the Handbook are found nowhere else, and can

sometimes be very specific.

Court do, when they wish to, look at the Handbook for Chapter 13 Trustees. See,

In re Acevedo, 497 B.R. 112 (Bankr. D.N.M. 2013)(Trustee Handbook required return of

funds to the debtor in unconfirmed cases, less only allowed Section 503(b) fees); In re

Seger, 444 B.R. 492, 494-495 (Bankr. D. Mass. 2011)(noting that the “Debtors Engaged

in Business” section undercut the Chapter 13 trustee’s argument that business debtor

funds should be required to be held in U.S. Trustee approved depository banks); In re

Wilson, 274 B.R. 4 (Bankr. D.D.C. 2001)(quoting and discussing Handbook requirement

that Chapter 13 distributions should be made “as soon as practicable”, but finding the

legislative history of §1326(a)(2) more persuasive, making Chapter 13 trustee liable for

misdisbursements); In re Myers, 147 B.R. 221, 235 (Bankr. D. Or. 1992)(Trustee

Handbook cited as contradicting statement of the U.S. Trustee that Chapter 13 Trustees

determine compensation of employees).

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G. “The Way Things Have Always Been Done Here.”

More than any other area of bankruptcy practice, Chapter 13 is based on a culture

– “the way things have always been done here”. One of the most common examples is:

do you pay based on the Plan or the Claim? For many Chapter 13 Trustees, this

important determination is based on just: “that’s the way we’ve always done it”.

For many Chapter 13 Trustees, there are no good alternatives to simply

continuing to practices that have been utilized for decades. You can try to get the issues

before you judge(s), but it the practice is really firmly entrenched in the local bankruptcy

culture, who is going to provide the opposition?

The important thing to remember is how flimsy this basis really is. Obviously,

these kinds of practices can become obsolete based upon a change in the Code or the

Rules, or court decision, or with a new judge who thinks things should work differently.

“The way things have always been done” is a foundation of sand, not concrete.

So always be prepared for some shifting under your feet.

II. BANKRUPTCY LAW AND RULES.

A. JURISDICTION AND VENUE.

1. Bankruptcy In the Constitution.

The United States Constitution, Article 1, Section 8, Clause 4, addresses the

power of Congress to enact bankruptcy laws:

Section 8. The Congress shall have power * * * *

To establish a uniform rule of naturalization, and uniform laws on the

subject of bankruptcies throughout the United States;

The "uniform Laws" language serves as a substantive limit on statutory

acts, but is not meant to act as a "straightjacket that forbids" distinguishing among

different classes of debtors. Ry. Labor Execs. Ass'n v. Gibbons, 455 U.S. 457,

469, 102 S. Ct. 1169, 71 L. Ed. 2d 335 (1982).

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2. Jurisdiction – Technically, It Is In The District Courts.

Under 28 U.S.C. Section 1334, original jurisdiction in all bankruptcy cases is with

the District Court:

§1334. Bankruptcy cases and proceedings

(a) Except as provided in subsection (b) of this section, the district courts shall have original and exclusive jurisdiction of all cases under title 11.

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

(c) (1) Nothing in this section prevents a district court in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11.

(2) Upon timely motion of a party in a proceeding based upon a State law claim or State law cause of action, related to a case under title 11 but not arising under title 11 or arising in a case under title 11, with respect to which an action could not have been commenced in a court of the United States absent jurisdiction under this section, the district court shall abstain from hearing such proceeding if an action is commenced, and can be timely adjudicated, in a State forum of appropriate jurisdiction.

(d) Any decision to abstain or not to abstain made under this subsection (other than a decision not to abstain in a proceeding described in subsection (c)(2)) is not reviewable by appeal or otherwise by the court of appeals under section 158(d), 1291, or 1292 of this title or by the Supreme Court of the United States under section 1254 of this title. This subsection shall not be construed to limit the applicability of the stay provided for by section 362 of title 11, United States Code, as such section applies to an action affecting the property of the estate in bankruptcy.

(e) The district court in which a case under title 11 is commenced or is pending shall have exclusive jurisdiction of all of the property, wherever located, of the debtor as of the commencement of such case, and of property of the estate.

Congress passed this provision because of Constitutional issues addressed in the

Marathon Pipeline case (Bankruptcy Judges being Article I judges, not Article III judges,

like the judges in the district courts) and placed original jurisdiction in bankruptcy cases

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with the United States District Court. See, Northern Pipeline Construction Co. v.

Marathon Pipeline Co., 458 U.S. 50, 102 S.Ct. 2858 (1982).

Bankruptcy Judges’ power to act is derivative of the district court in each district.

Bankruptcy courts are sometimes referred to as “units of the district court”. See, 28

U.S.C. §151. Bankruptcy cases are not usually handled by district judges, but rather are

referred automatically to the bankruptcy judges. The power to refer cases is given by 28

U.S.C. Section 157(a), which states:

§157. Procedures

(a) Each district court may provide that any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judges for the district.

In the almost every bankruptcy court, there is some type of administrative order,

or general order issued by the United States District Court (somewhere around July of

1984), automatically referring all bankruptcy cases from the District Courts to the

Bankruptcy Courts. This order is usually called “the General Order of Reference”.

While the practice of referring all bankruptcy cases to the bankruptcy courts is

automatic and long standing, district courts do retain the power to withdraw the reference

at any time, either as to an entire bankruptcy case or to particular proceedings within a

case, even though that power is very rarely used.

3. Core Proceedings.

Bankruptcy judges can hear and make final determination in cases that are “core

proceedings”. This category of cases – core bankruptcy matters – are set forth in 28

U.S.C. Section 157(b):

(b) (1) Bankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a) of this section, and may enter appropriate orders and judgments, subject to review under section 158 of this title.

(2) Core proceedings include, but are not limited to— (A) matters concerning the administration of the estate; (B) allowance or disallowance of claims against the estate or exemptions from property of the estate, and estimation of claims or interests for the purposes of confirming a plan under chapter 11, 12, or 13 of title but not the liquidation or estimation of contingent or unliquidated personal injury

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tort or wrongful death claims against the estate for purposes of distribution in a case under title 11; (C) counterclaims by the estate against persons filing claims against the estate; (D) orders in respect to obtaining credit; (E) orders to turn over property of the estate; (F) proceedings to determine, avoid, or recover preferences; (G) motions to terminate, annul, or modify the automatic stay; (H) proceedings to determine, avoid, or recover fraudulent conveyances; (I) determinations as to the dischargeability of particular debts; (J) objections to discharges; (K) determinations of the validity, extent, or priority of liens; (L) confirmations of plans; (M) orders approving the use or lease of property, including the use of cash collateral; (N) orders approving the sale of property other than property resulting from claims brought by the estate against persons who have not filed claims against the estate; and (O) other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship, except personal injury tort or wrongful death claims.

Like most judges, bankruptcy court judges can (in the first instance) determine

their own jurisdiction. See, 28 U.S.C. Section 157(b)(3) – (5):

(3) The bankruptcy judge shall determine, on the judge’s own motion or on timely motion of a party, whether a proceeding is a core proceeding under this subsection or is a proceeding that is otherwise related to a case under title 11. A determination that a proceeding is not a core proceeding shall not be made solely on the basis that its resolution may be affected by State law.

(4) Non-core proceedings under section 157(b)(2)(B) of title 28, United States Code, shall not be subject to the mandatory abstention provisions of section 1334(c)(2).

(5) The district court shall order that personal injury tort and wrongful death claims shall be tried in the district court in which the bankruptcy case is pending, or in the district court in the district in which the claim arose, as determined by the district court in which the bankruptcy case is pending.

In addition to “core proceedings”, bankruptcy judges can hear, and submit

proposed findings of fact and conclusions of law, to the United States District Court

in “non-core related proceedings”:

(c)(1) A bankruptcy judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11. In such proceeding, the

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bankruptcy judge shall submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge’s proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected.

(2) Notwithstanding the provisions of paragraph (1) of this subsection, the district court, with the consent of all the parties to the proceeding, may refer a proceeding related to a case under title 11 to a bankruptcy judge to hear and determine and to enter appropriate orders and judgments, subject to review under section 158 of this title.

Where a proceeding will impact interstate commerce, the district court can

“withdraw the reference”:

(d) The district court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown. The district court shall, on timely motion of a party, so withdraw a proceeding if the court determines that resolution of the proceeding requires consideration of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce.

a. But “core” does not equate with jurisdiction after Stern.

The Supreme Court’s decision in Stern v. Marshall, 131 S. Ct. 2594, 180 L. Ed.

2d 475 (2011) held that a bankruptcy court lacked constitutional authority to enter final

judgment on a debtor's state-law counterclaim against a creditor, even though Congress

had granted the bankruptcy court statutory authority to do so.

After Stern, the question of bankruptcy court jurisdiction became much more

difficult, and the answers fragmented in the decisions of the various circuit courts.

4. Venue For Bankruptcy Cases.

Venue determines where a case may be properly filed. Venue for bankruptcy

cases is governed by 28 U.S.C. Section 1408, which states:

1408. Venue of cases under title 11

Except as provided in section 1410 of this title, a case under title 11 may be commenced in the district court for the district—

(1) in which the domicile, residence, principal place of business in the United States, or principal assets in the United States, of the person or entity that is

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the subject of such case have been located for the one hundred and eighty days immediately preceding such commencement, or for a longer portion of such one-hundred-and-eighty-day period than the domicile, residence, or principal place of business, in the United States, or principal assets in the United States, of such person were located in any other district; or

(2) in which there is pending a case under title 11 concerning such person’s affiliate, general partner, or partnership.

The test for venue of a bankruptcy case for an individual debtor has not been

changed by BAPCPA – the same “greater part of the previous 180 days” test applies to

cases today. Some confusion has arisen because the test for what exemptions a debtor

may take under the complex provisions of 11 U.S.C. Section 522(b)(3)(A) - looking back

first 730 days, and then if the debtor has moved during that period, looking back an

additional 180 days. That is NOT the rule for determining where a case can be filed, it is

ONLY a rule for determining what state’s exemptions the debtor is eligible to take in

their bankruptcy case.

For venue purposes, close doesn’t count. Thompson v. Greenwood, 507 F.3d 416

(6th Cir. 2007).

When an adversary complaint is filed, the Plaintiff is required to plead both jurisdic-

tion and venue in the Complaint. The venue rules for an adversary cases related to a filed

bankruptcy “main case” are found in 28 U.S.C. Section 1409:

§1409. Venue of proceedings arising under title 11 or arising in or related to cases under title 11

(a) Except as otherwise provided in subsections (b) and (d), a proceeding arising under title 11 or arising in or related to a case under title 11 may be commenced in the district court in which such case is pending.

(b) Except as provided in subsection (d) of this section, a trustee in a case under title 11 may commence a proceeding arising in or related to such case to recover a money judgment of or property worth less than $1,000 or a consumer debt of less than $5,000 only in the district court for the district in which the defendant resides.

(c) Except as provided in subsection (b) of this section, a trustee in a case under title 11 may commence a proceeding arising in or related to such case as statutory successor to the debtor or creditors under section 541 or 544(b) of title 11 in the district court for the district where the State or Federal court sits in which, under applicable nonbankruptcy venue provisions, the debtor or creditors, as the case may

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be, may have commenced an action on which such proceeding is based if the case under title 11 had not been commenced.

(d) A trustee may commence a proceeding arising under title 11 or arising in or related to a case under title 11 based on a claim arising after the commencement of such case from the operation of the business of the debtor only in the district court for the district where a State or Federal court sits in which, under applicable nonbankruptcy venue provisions, an action on such claim may have been brought.

(e) A proceeding arising under title 11 or arising in or related to a case under title 11, based on a claim arising after the commencement of such case from the operation of the business of the debtor, may be commenced against the representative of the estate in such case in the district court for the district where the State or Federal court sits in which the party commencing such proceeding may, under applicable nonbankruptcy venue provisions, have brought an action on such claim, or in the district court in which such case is pending.B. AN OVERVIEW OF THE BANKRUPTCY CODE

1. Overview Of Various Chapter Proceedings.

The Bankruptcy Code (Title 11 of the United States Code) is divided into

"Chapters", all of which are odd numbers from One (1) to Fifteen (15), plus the only even

numbered Chapter: Chapter 12.

The applicability of the various Chapters is governed first by 11 U.S.C. §103.

Generally speaking, Chapters 1, 3, and 5 of the Bankruptcy Code apply to the entire

Bankruptcy Code. So, for example, the definitions found in §101 are applicable to cases

filed under Chapters 7, 9, 11, 12 or 13. On the other hand, the provisions of Chapters 7,

9, 11, 12, and 13 are generally only applicable to cases filed under those particular

Chapters.

Bankruptcy cases are filed under one of the following Chapters:

Chapter 7 - Court appointed trustee sells assets and debtor is discharged.

Chapter 9 - Municipal Reorganization (extremely rare).

Chapter 11 - Reorganization under Court supervision.

Chapter 12 - Family Farmer reorganization.

Chapter 13 - Individual with regular income arranges to repay some, or all, of

his or her debts.

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Chapter 15 - Ancillary and other cross-border cases – you don’t actually “file a

case” under this Chapter.

2. Eligibility to File Under Specific Chapters Other Than 13.

Section 109 also sets forth requirements for filing under certain Chapters:

Chapter 7 - A "person" may file a Chapter 7 only if they are not a railroad,

insurance company, bank, savings and loan, or credit union. See, Section 109(b).

However, under §727(a)(8) & (9), if an individual has received a discharge of debts,

under the listed circumstances, that individual will not receive a discharge in any Chapter

7 that is filed within the next eight years, which the majority rule measures “filing-to-

filing”. As a practical matter, this eliminates any incentive to file a Chapter 7 during this

8 year period.

Chapter 11 - Only a "person" who is eligible under Chapter 7 may file a Chapter

11, except stockbrokers and commodity brokers may not file for reorganization. See,

Section 109(d). On the other hand, railroads are permitted to file Chapter 11 under a

special section. Although it is usually businesses that file Chapter 11s, the United States

Supreme Court has held that individuals not engaged in business are also permitted to file

under Chapter 11. See, Toibb v. Radloff, 501 U.S. 157, 111 S.Ct. 2197, 15 L.Ed.2d 145

(1991). Where individual debtors are not eligible for Chapter 13 relief because of a “debt

limit” problem, they may seek similar relief (at much greater cost, tougher procedural

hurdles, and lots more paperwork) through a Chapter 11 reorganization.

Chapter 12 - Chapter 12 applies only to family farmers, or family fisherman,

with regular income. See, §109(f). As amended April 1, 2007, the definition of "family

farmer" in §101(18) requires that at least 50% of the debtor's income must come from a

farming operation, at least 50% of the farmer's debt must have arisen from the farming

operation, and aggregate debts may not exceed $3,544,525. The definition of a “family

fisherman” in §101(19A) requires that at least 50% of the debtor's income must come

from commercial fishing, and at least 80% of the fisherman's debt must have arisen from

the commercial fishing operations, and aggregate debts may not exceed $1,642,500.

3. Specific eligibility rules for Chapter 13.

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a. General Eligibility Requirements For Bankruptcy.

Under §109(a), only a "person" that "resides or has a domicile, a place of

business, or property in the United States, or a municipality, may be a debtor". “Person”

is defined very broadly in §101(41) to include both individuals and business entities –

but with some limited exceptions, does not include a governmental unit. Note that there

is no requirement in this definition that the "person" be a citizen of the United States.

b. Debtor Must Be An “Individual”.

The first part of §109(e)’s eligibility requirements for Chapter 13 states that the

debtor must be an “individual”. See, Section 109(e). The Bankruptcy Code defines the

term “person” as an “individual, partnership, and corporation”. See, 11 U.S.C. §101(41).

Inherent in this definition is the idea that an “individual” is a flesh and blood human

being, and not a business entity. Accordingly, only real human beings are eligible to file

a bankruptcy under Chapter 13. And, because “individual” is a subset of “persons”

(which include business entities), the general requirements for eligibility to file

bankruptcy – residence, domicile, a place of business, ownership of property, etc., apply

to Chapter 13 debtors.

Courts considering this issue have held that the word “individual” refers only to

natural persons, and not business entities of any kind. Accordingly, entities that are not

flesh and blood human beings are not eligible to be debtors under Chapter 13 of the

Bankruptcy Code. See, In re Jac Family Foundation, 356 B.R. 554 (Bankr. N.D. Ga.

2006)(family foundation not an individual, so not eligible for Chapter 13 relief); In re

Estate of Marilyn E. Roberts, 2005 Bankr. LEXIS 2280 (Bankr. D. Md. August 16, 2005)

(decedent’s estate was not eligible to be a Chapter 13 debtor); In re West Point Ltd.

Partnership, 270 B.R. 481 (Bankr. E.D. Mo. 2001)(partnership not eligible to be a

Chapter 13 debtor); In re W.F.C. Real Estate Trust #1, 236 B.R. 90 (Bankr. S.D. Fla.

1999)(real estate trust did not qualify as an individual with regular income, and therefore

was not eligible to be a Chapter 13 debtor); Forestry Products, Inc. v. Hope, 34 B.R. 753

(M.D. Ga. 1983)(affirming that corporation not eligible to be a Chapter 13 debtor).

c. The Debtor(s) Must Have “Regular Income”.

16

Section 101(30) defines “regular income” as “income sufficiently stable and

regular . . . to make payments under a plan.” Courts have recognized that Congress

intended a liberal interpretation of "regular income." See, In re Ellenburg, 89 B.R. 258,

260 (Bankr. N.D. Ga. 1988); In re Cohen, 13 B.R. 350, 356 (Bankr. E.D. N.Y. 1981).

The test for regular income is not the type or source of income, but rather its regularity

and stability. In re Varian, 91 B.R. 653, 654 (Bankr. D. Conn. 1988); In re Campbell, 38

B.R. 193, 195 (Bankr. E.D. N.Y. 1984).

Debtors who do not have sufficient income to pay ordinary living expenses have

been held to lack the regular income to be eligible to file a Chapter 13. See, In re Smith,

234 B.R. 852, 854 (Bankr. M.D. Ga. 1999)(regular income has to be sufficient to fund the

debtor’s living expenses and plan payments. Chapter 13 filed for unemployed debtor

receiving public assistance, that was inadequate to pay living expenses alone, resulted in

sanctions against debtor’s counsel.); In re Kollar, 357 B.R. 657, 661-662 (Bankr. M.D.

Fla. 2006); In re Lindsey, 183 B.R. 624, 627 (Bankr. D. Idaho 1995)(debtors who have

no disposable income with which to make payments under a Chapter 13 plan are not

eligible for relief under Chapter 13 regardless of whether they can otherwise fund a plan

through the sale of property.)

However, Judge Proctor has issued several decisions holding that bankruptcy

courts can be flexible in WHEN the “regular income” test is to be applied – it is not

necessarily the date of the petition. The courts can consider circumstances prospectively,

such as using the time of confirmation. See, In re Goodrich, 257 B.R. 101, 103-104

(Bankr. M.D. Fla. 2000); In re Baird, 228 B.R. 324, 328 (Bankr. M.D. Fla. 1999); contra,

In re Smith, 234 B.R. 852, 854 (Bankr. M.D. Ga. 1999)(debtor needs to have regular

income on the date of the filing of the petition).

It has been held that an unemployed spouse may rely on a codebtor's income to

fund a plan. See, In re Sigfrid, 161 B.R. 220, 222 (Bankr. D. Minn. 1993); In re

McLeroy, 106 B.R. 147, 148-49 (Bankr. W.D. Tenn. 1989)(noting that language of

§109(e) clearly allows such). Where the issue is actually litigated, most courts are wary

of confirming Chapter 13 plans based on monies from “live-ins” and relatives. Compare,

In re Loomis, 487 B.R. 296 (Bankr. N.D. Okla. 2013)(case dismissed where the only

income was from live-in fiancé who was under no legal obligation to support the debtor

17

and who had not made a commitment to continue support); In re Jordan, 226 B.R. 117,

119-20 (Bankr. D. Mont. 1998)(rejecting debtor's assertion live-in boyfriend's income

could be counted as part of her "stable and regular" income; no evidence presented

showing boyfriend promised to continue to supply money or had ability to do so); In re

Fischel, 103 B.R. 44, 48-49 (Bankr. N.D.N.Y. 1989)(same); In re Hanlin, 211 B.R. 147

(Bankr. W.D.N.Y. 1997)(Unemployed student relying on parental allowance to pay

living expenses was not eligible for relief as a Chapter 13 debtor because an allowance

was not "income" for the purpose of establishing eligibility); with, In re Murphy, 226

B.R. 601 (Bankr. M.D. Tenn. 1998)(debtor who received regular income from an

individual with whom she lived was eligible to Chapter 13 bankruptcy).

Most courts have held that income for 109(e) purposes is determined without

regard to the exemptions that may be available to the debtor. See, In re Hammonds, 729

F.2d 1391, 1393 (11th Cir. 1984)(legislative history and case law amply support the

proposition that "individuals on welfare, social security, fixed pension income, or who

live on investment incomes" may qualify for Chapter 13.); In re Bassett, 413 B.R. 778,

786 (Bankr. Mont. 2009)(’Regular income’ under 11 U.S.C. §109(e) may include

welfare, pension, social security, and exempt property. In re Hagel, 184 B.R. 793, 797

(9th Cir. BAP 1995).)

A loan, on the other hand, is not income. In re Stones, 157 B.R. 669 (Bankr. S.D.

Cal. 1993)(debtor could not be required to borrow to meet disposable income test

because, in part, borrowing is not income, citing, James v. United States, 366 U.S. 213,

219, 6 L. Ed. 2d 246, 81 S. Ct. 1052 (1961)); In re Kelly, 217 B.R. 273 (Bankr. D. Neb.

1997)(funding Ch. 13 Plan with student loans was bad faith.)

“Regular income” has been held to include commissioned sales and other

“irregular” forms of regular income. See, In re Widdicombe, 269 B.R. 803, 808 (Bankr.

W.D. Ark. 2001)(real estate sales income was ‘regular’ for purposes of 109(e)); In re

Cole, 3 B.R. 346, 348-49 (Bankr. S.D. W. Va. 1980)(holding that income from odd jobs

such as carpentry and "junkin'" was regular income); In re Monaco, 36 B.R. 882 (Bankr.

M.D. Fla. 1983)(self-employed construction business). But, the income cannot be too

irregular. See, In re Hickman, 104 B.R. 374 (Bankr.D.Colo. 1989)(seasonal sprinkler

installer with long history of unemployment did not have regular income.)

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Whether income from farming is “regular” appears to be a fact specific inquiry.

In re Fiegi, 61 B.R. 994 (Bankr.D.Or. 1986)(farming income sufficiently regular); In re

Hines, 7 B.R. 415 (Bankr.D.S.D. 1980)(same).

However, some decisions have held that the income cannot be wholly speculative,

like starting a new business. In re Gestring, 91 B.R. 870 (Bankr. E.D. Mo. 1988)

(debtor’s intent to start a new business - with no previous experience – was not

sufficient); Mills v. Gellert, 55 B.R. 970 (Bankr. D.N.H. 1985)(court dubious of

eligibility of debtor where plan proposes new business venture of developing real estate).

d. The “180 Day Rule”

Section 109(g) prohibits a debtor from filing if they have been a debtor in a

bankruptcy case in the previous 180 days and: 1) the case was dismissed "for cause"; or

2) the debtor voluntarily dismissed the bankruptcy case after a motion for relief from stay

was filed. This will be discussed in more detail below. Section 109(g) is intended to

prevent serial filings, and provides a window for creditors to complete liquidation of their

security before the debtor can refile a bankruptcy case.

e. The Chapter 13 Debt Limits.

Section 109(e) sets forth additional specific eligibility requirements for relief

under Chapter 13, including a limitation on the amount of non-contingent, liquidated

secured and unsecured debt that a debtor (or joint debtors) can have at the time of the

filing of the petition. These amounts are indexed to inflation [11 U.S.C. §104(b)(1)], and

were most recently raised on April 1, 2007. Keith M. Lundin, Chapter 13 Bankruptcy,

§11.1 at 11-1 (3rd Ed. 2004).

Thus, 11 U.S.C. §109(e) currently provides, in pertinent part:

(e) Only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $360,475 and noncontingent, liquidated, secured debts of less than $1,081,400, or an individual with regular income and such individual’s spouse, except a stockbroker or a commodity broker, that owe, on the date of the filing of the petition, non-contingent, liquidated, unsecured debts that aggregate less than $360,475 and noncontingent, liquidated, secured

19

debts of less than $1,081,400 may be a debtor under chapter 13 of this title.

Chapter 13 jurisdictional issues arise most often with the unsecured debt limits.

In Matter of Pearson, 773 F.2d 751, 756 (6th Cir. 1985), the Sixth Circuit Court of

Appeals stated: “. . . a court should rely primarily upon the debtor's schedules checking only

to see if the schedules were made in good faith on the theory that section 109(e) considers

debts as they exist at the time of filing, not after a hearing. We adhere to this construction as

more harmonious with congressional intent and with the statutory scheme. First, section

109(e) provides that the eligibility computation is based on the date of filing the petition; it

states nothing about computing eligibility after a hearing on the merits of the claims.” See

also, In re Holland, 293 B.R. 425, 428-429 (Bankr. N.D. Ohio 2002).

The Ninth Circuit adopted the Pearson test, and stated it to be: “We now simply and

explicitly state the rule for determining Chapter 13 eligibility under §109(e) to be that

eligibility should normally be determined by the debtor’s originally filed schedules,

checking only to see if the schedules were made in good faith.” In re Scovis, 249 F.3d 975,

982 (9th Cir. 2001).

While the debtors are, to a large extent, bound by what they have filed with the

court, Chapter 13 Trustee’s can also look at the reality of the debts, not just what the debtors

claim in their schedules. See, DeJounghe v. Mender, 334 B.R. 760, 768 (1st Cir. B.A.P.

2005)("when it appears the debtor did not exercise reasonable diligence or good faith in

completing and filing the schedules, the bankruptcy court may look to other evidence,

including post-petition events, to determine eligibility."); In re Rios, 476 B.R. 685, 688-689

(Bankr. D. Mass. 2012).

i. Contingent Debts.

If a debt is truly contingent, it is not counted toward the debt limits of Section

109(e).

However, just asserting that a debt is “contingent” may not defeat a Chapter 13

Trustee’s motion to dismiss based on the jurisdictional dollar limits. "For purposes of

§109(e), a contingent debt may be defined as "one for which the debtor will be called upon

to pay only upon the occurrence or happening or an extrinsic event which will trigger the

liability of the debtor to the alleged creditor." In re Martz, 293 B.R. 409, 411 (Bankr. N.D.

20

Ohio 2002), citing, In re Fostvedt, 823 F.2d 305, 206 (9th Cir. 1987); see also, In re

Mazzeo, 131 F.3d 295, 302-305 (2nd Cir. 1997). A debt is not rendered contingent merely

because it is a jointly owed debt. In re Martz, 293 B.R. 409, 411 (Bankr. N.D. Ohio 2002).

In addition, without regard to the nature of the underlying cause of action, if a debt

has been reduced to a pre-petition judgment against the debtor, that debt is noncontingent

and is counted toward the debt limit. See, In re Hammers , 988 F.2d 32 (5th Cir. 1993)(tax

court judgment fixes claim); In re Miloszar, 238 B.R. 266 (D.N.J. 1999)(default judgment is

a noncontingent debt); In re Monroe, 282 B.R. 219, 223 (Bankr. D. Ariz. 2002); In re Snell,

227 B.R. 127 (Bankr. S.D. Ohio 1998); In re Mannor, 175 B.R. 639 ( Bankr. E.D. Pa. Mich.

1994)(pre-petition judgment against debtor precluded argument that debt was owed by a

corporation and should be excluded).

ii. Liquidated Debts.

The term “liquidated” is not defined in the Bankruptcy Code. Basically, it means

that the amount of the debt is known, or is easily determined by reference to an agreement

or by a simple calculation. See, In re Glance, 487 F.3d 317, 321 (6th Cir. 2007)(debts whose

"amount is readily ascertainable”); In re Mazzeo, 131 F.3d 295, 300-3005 (2nd Cir. 1997);

United States v. Verdunn, 89 F.3d 799, 802-803 (11th Cir. 1996); In re Knight, 55 F.3d

231, 235 (7th Cir. 1995)(if the amount of the claim is ascertained or can be readily

calculated, it is liquidated – whether contested or not).

Filing an amended proof of claim does not necessarily result in a change of status

from a liquidated debt to an unliquidated debt. See, In re Newman, 259 B.R. 914, 919

(Bankr. M.D. Fla. 2001); In re Sullivan, 245 B.R. 416 (N.D. Fla. 1999); In re Knize, 210

B.R. 773, 778 (Bankr. N.D. Ill. 1997).

The “liquidated” criteria applies to both secured and unsecured debts. See, United

States v. Verdunn, 89 F.3d 799, 801 n.8 (11th Cir. 1996)(citing Collier: “The dollar limits on

both categories of debts, unsecured and secured, apply only to debts that are

noncontingent and liquidated at the crucial petition filing time."); In re Arcella-Coffman,

318 B.R. 463, 476-77 (Bankr. N.D. Ind. 2004).

A judgment entered for an amount certain – even if entered by default, or on

appeal – renders the debt liquidated for bankruptcy purposes. See, In re Slack, 187 F.3d

1070 (9th Cir. 1999)(stipulated damages, but disputed liability); In re Miloszar, 238 B.R.

21

266 (D.N.J. 1999)(default judgment); In re Wienco, 275 B.R. 772, 778-779 (Bankr. W.D.

Va. 2002)(liquidated based on pre-bankruptcy provisional decree that could be modified);

In re Reader, 274 B.R. 893, 897-99 (Bankr. D. Colo. 2002)(Special Master’s report on

amount inappropriately transferred to debtor). However, a default judgment that does not

specify an amount may be unliquidated where the amount of the claim is subject to a

future exercise of discretion by a trier of fact. See, In re Adams, 373 B.R 116, 122 (10th

Cir. BAP 2007); In re Cunningham, 490 B.R. 152, 156-157 (Bankr. D. Mass. 2013).

iii. A Word About “Disputed”.

There are three check boxes on Schedules D, E, and F. Disputed, contingent and

unliquidated. The last two make a difference in terms of debtor eligibility, but listing a

debt as “disputed” does not – “disputed” debts are not mentioned in Section 109(e), and

are included in the eligibility calculation. See, In re Thalmann, 469 B.R. 677, 682

(Bankr. S.D. Tex. 2012)(“disputed claims are generally included in the debt limit

calculation under Section 109(e) of the Bankruptcy Code, particularly where the debt has

been liquidated.”); In re Slack, 187 F.3d 1070, 1074-75 (9th Cir. 1999); In re Adams, 373

B.R. 116, 120 (9th Cir. BAP 2007)(citing cases); In re Huelbig, 313 B.R. 540, 543 n.6

(D.R.I. 2004); In re Fuson, 404 B.R. 872, 874 n.3 (Bankr. S.D. Ohio 2008); In re Tabor,

232 B.R. 85, 89-90 (Bankr. N.D. Ohio 1999); In re Teague, 101 B.R. 57 (Bankr. W.D.

Ark. 1989); In re Lamar, 111 B.R. 327 (D. Nev. 1990); In re Pulliam, 90 B.R. 241, 244

(Bankr. N.D. Tex. 1988); In re Crescenzi, 69 B.R. 64 (S.D.N.Y. 1986);

If there is truly a dispute about liability on a debt, counsel may elect to put $0, or

$1, or “unknown” for the amount, effectively taking the amount out of the 109(e)

calculation – I’m not saying it is right, I’m saying it is done.

If the debtor believes that a debt was discharged in a previous bankruptcy, it may

be necessary to litigate that issue in an adversary complaint. See, In re Walls, 496 B.R.

818 (Bankr. N.D. Miss. 2013)(Debtor’s claim that $776,000 unsecured, non-priority

claim filed by IRS was discharged in prior Chapter 7 had to be resolved in an adversary

proceeding.)

iv. Secured As To Who?

A security interest in the assets of another entity (other than the debtor) does not

make the debt secured as to the debtor. See, In re Fuson, 404 B.R. 872, 876 (Bankr. S.D.

22

Ohio 2008); In re Lower, 311 B.R. 888 (Bankr. D. Colo. 2004); In re Brown, 250 B.R.

382, 386 (Bankr. D. Idaho 2000); In re Lane, 215 B.R. 810 (Bankr. E.D. Va. 1997); In re

Maxfield, 159 B.R. 587 (Bankr. D. Idaho 1993); but see, In re White, 148 B.R. 283, 286

(Bankr. N.D. Ohio 1992)(holding that a debt secured by collateral owned by a non-debtor

third party could still be classified as “secured” by the debtor for §109(e) purposes).

Under bankruptcy case law, guaranteed corporate debt that is in default must be

included as unsecured debt in calculating the guarantor’s eligibility for Chapter 13. See, In

re Enriquez, 315 B.R. 112, 122 (N.D. Cal. 2004)(liability arising from personal guaranty

of corporate debt included in eligibility computation under §109(e)); In re Brown, 250

B.R. 382, 386 (Bankr. D. Idaho 2000)("the Court concludes that the debts owed to [a

bank] under Debtors' guarantees of the corporate debt are properly characterized

unsecured debt in Debtors' individual Chapter 13 case for purposes of determining their

eligibility for relief under §109(e)."); In re Tabor, 232 B.R. 85, 90 (Bankr. N.D. Ohio

1999); In re Robertson, 105 B.R. 504, 508 (Bankr. D. Minn. 1989); In re Pulliam, 90 B.R.

241 (Bktcy. N.D. Tex. 1988)(corporate debt guaranteed at the date of filing is noncontingent

and must be included in the calculation of the monetary limitations); In re Williams, 51 B.R.

249 (Bktcy. S.D. Ind. 1984); DeKalb Bank v. Flaherty, 10 B.R. 118 (N.D. Ill. 1981); In re

Wilson, 9 B.R. 723 (Bktcy. E.D.N.Y. 1981).

v. Priority Claims Count As Unsecured Claims.

“Unsecured claims for taxes, claims by employees of a debtor engaged in business,

and administrative expenses are examples of priority claims that would be counted as

unsecured debts. Priority tax claims typically are not contingent for purposes of §109(e)

because, with respect to prepetition years, all of the acts and events necessary to trigger the

debtor’s liability have occurred. Most reported decisions also find that prepetition tax debts

are liquidated for eligibility purposes in the amount claimed by the IRS.” Keith M. Lundin,

1 Chapter 13 Bankruptcy, 3rd Ed. At 17-5 to 17-6; In re Potenza, 76 B.R. 17 (D.Nev.

1987); In re Michaelsen, 74 B.R. 245, 247 (Bankr. D. Nev. 1987); In re Tashman, 13

B.R. 549, 550 (Bankr. D. Vt. 1981).

Note that if a debtor has debts greater than those allowed under Chapter 13,

Chapter 11 is available.

vi. Joint Debtors/Separate Limits?

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In a joint Chapter 13 case, the question arises as to whether the debt limits apply

to both debtors together, or to each separately. The issue isn’t whether the limits are

doubled – they are not. The question is whether the individual debts of each debtor only

count toward the individual limits of each joint debtor. Or, to put it differently, whether

the debt limits are applied as if each debtor filed separate Chapter 13 cases.

As with so many bankruptcy issues, the answer is that the courts are split on this

issue. Courts that follow the Werts decision look at the eligibility of each debtor, based

on the debts each debtor is legally responsible for. See, In re Werts, 410 B.R. 677

(Bankr. D. Kan. 2009); In re Hannon, 455 B.R. 814, 815-16 (Bankr. S.D. Fla. 2011); In

re Scholz, 2011 Bankr. LEXIS 2971, 2011 WL 9517442, at *2 (Bankr. M.D. Fla. Apr.

11, 2011); In re Bosco, 2010 Bankr. LEXIS 3972, 2010 WL 4668595, at *1 (Bankr.

E.D.N.C. Nov. 9, 2010). In contrast, the court in Miller would look at the aggregate

debts, even if each spouse were only liable for part of the debts. See, In re Miller, 493

B.R. 55 (Bankr. N.D. Ill. 2013).

To illustrate the different, look at a Chapter 13 filed with three debts: Husband

has credit card debt of $300,000 that he incurred prior to the marriage, and Wife has a

personal guarantee of $300,000 on a business loan, and Husband and Wife owe $80,000

on a Victoria’s Secret account. Under Werts, the couple could file a joint Chapter 13 and

be under the debt limit. Under Miller, they could not file a joint Chapter 13 because they

would be over the unsecured debt limit. Under both the Werts and Miller decisions,

Husband and Wife could each file an individual Chapter 13 case and would each be

under the debt limit in their individual cases.

C. STRUCTURE OF THE BANKRUPTCY CODE AND RULES.

1. The Bankruptcy Code

As previously discussed above, the Bankruptcy Code (Title 11 of the United

States Code) is divided into "Chapters", all of which are odd numbers from One (1) to

Fifteen (15), plus the only even numbered Chapter: Chapter 12.

The applicability of the various Chapters is governed first by 11 U.S.C. §103.

Generally speaking, Chapters 1, 3, and 5 of the Bankruptcy Code apply to the entire

Bankruptcy Code. So, for example, the definitions found in §101 are applicable to cases

24

filed under Chapters 7, 9, 11, 12 or 13. On the other hand, the provisions of Chapters 7,

9, 11, 12, and 13 are generally only applicable to cases filed under those particular

Chapters, unless specific provisions – like those found in Section 707 – make these

provisions applicable to cases filed under other Chapters.

New Chapter 15 is unique – it is intended to incorporate the Model Law on Cross-

Border Insolvency, and generally only applies where there is a foreign bankruptcy

proceeding, and incorporates a limited number of sections, listed in §103(a).

2. The Federal Rules Of Bankruptcy Procedure

The United States Supreme Court is authorized by statute [28 U.S.C. §2075] to

adopt rules to supplement the Bankruptcy Code:

The Supreme Court shall have the power to prescribe by general rules, the forms of process, writs, pleadings, and motions, and the practice and procedure in cases under title 11.

Such rules shall not abridge, enlarge, or modify any substantive

right.

The Supreme Court shall transmit to Congress not later than May 1 of the year in which a rule prescribed under this section is to become effective a copy of the proposed rule. The rule shall take effect no earlier than December 1 of the year in which it is transmitted to Congress unless otherwise provided by law.

See, 28 U.S.C. §2075.

The Federal Rules of Bankruptcy Procedure "have the force of law and must be

followed." 1 Collier on Bankruptcy, P 1.04 (Matthew Bender 5th ed. rev. 2000).

Although Collier cites no authority for this proposition, it certainly can be deduced from

the fact that no rule is effective until it is first submitted to Congress. See, 28 U.S.C.

§2075. The only limits on the breadth of a bankruptcy rule is that it must relate to

"practice and procedure in cases under Title 11" and that it must "not abridge, enlarge or

modify any substantive right." §2075; Tenn. Student Assistance Corp. v. Hood, 541 U.S.

440 , 454, 124 S. Ct. 1905, 1914, 158 L. Ed. 2d 764, 779 (2004).

The rules themselves provide a statement as to their use: “The Bankruptcy Rules

and Forms govern procedure in cases under title 11 of the United States Code. * * *

25

These rules shall be construed to secure the just, speedy, and inexpensive determination

of every case and proceeding.” F.R.Bankr.P. 1001.

The “1000 Rules” - F.R.Bankr.P. 1001 to 1020 - deal with commencement of the

case, and proceedings relating to the Petition and the Order for Relief.

Rules 2001 to 2020 govern officers and administration, notices, meetings,

examinations, elections, attorneys and accountants. 2004 examinations are governed by –

surprise! - Rule 2004.

The 3000 Rules (F.R.Bankr.P. 3001 to 3022) deal with claims and distribution to

creditors and equity security holders, as well as Plans.

In 4001 to 4008, the rules regarding the debtor’s duties and benefits are stated.

Federal Rules of Bankruptcy Procedure 5001 to 5011 are the rules for courts and

clerks.

The 6000 Rules (Rules 6001 to 6010) are for collection and liquidation of the

estate.

The 7000 Rules (Rules 7001 to 7087) are for adversary proceedings. Most of

these rules simply incorporate the corresponding Federal Rules of Civil Procedure,

making them applicable to bankruptcy adversary proceedings.

Rules 8001 to 8020 are the rules for appeals to the district court and the

bankruptcy appellate panel. Most crucially, Rule 8002 provides a very short time period

for appealing a bankruptcy court order – 14 days.

The last set of rules are 9001 to 9036. These rules deal with general provisions.

Rule 9014 incorporates a substantial number of the Federal Rules of Civil Procedure and

make them applicable in “contested matters”.

3. Local Rules And Interim Local Rules.

Almost all bankruptcy districts have at least some local bankruptcy rules. The lo-

cal rules as to form have somewhat limited effect. They cannot be enforced against those

who do not know about them in a way that will cause a party to lose rights. Federal Rule

of Bankruptcy Procedure 9029(a)(2) states: “A local rule imposing a requirement of form

shall not be enforced in a manner that causes a party to lose rights because of a nonwillful

failure to comply with the requirement.”. Administrative Orders have similar restrictions

on enforcement. See, Bankruptcy Rule 9029(b).

26

In addition, because amending the Federal Rules of Bankruptcy Procedure is ap-

proximately a three-year process, the Bankruptcy Courts needed new rules that could be

quickly implemented, dealing with the new requirements imposed by BAPCPA. Accord-

ingly, Interim Local Rules were adopted by District Courts. However, those interim local

rules have now all been superseded by amendments to the Federal Rules of Bankruptcy

Procedure.

4. The Official Forms And Local Forms.

The Official Forms – at least theoretically - conform to the requirements of

BAPCPA. There are the Official Forms, and there are also official procedural forms.

Copies of those forms (most of which should be on any decent debtor’s bankruptcy filing

program) are found here:

http://www.uscourts.gov/rules/new_and_revised_official_forms_101405.htm

Most jurisdictions also have local forms. Use of those local forms – such as form

Chapter 13 Plans, or forms used in connection with motions for relief from stay – is often

strictly enforced. But, perhaps should not be.... See, Rule 9029(a)(2).

D. ADVERSARY PROCEEDINGS vs. CONTESTED MATTERS.

Generally, there are two basic ways that issues are litigated in the Bankruptcy

Court: adversary proceedings and contested matters.

1. Adversary Proceedings.

Federal Rule of Bankruptcy Procedure 7001 lists ten types of relief that must be

sought through an adversary proceeding. For Chapter 13 Trustee’s counsel, the most

common of these are: actions to recover money or property, including preferences,

fraudulent conveyances, and recovery of misdisbursements, and actions to avoid a lien

under Section 544.

Litigating an issue by adversary proceeding is substantially the same as bringing a

civil suit in state or federal court. An adversary complaint is initiated by the filing of a

complaint, styled with plaintiff(s) and defendant(s). Initiating an adversary complaint

requires the service of a summons on the defendants. The defendant(s) must file an

answer or other responsive pleading (such as a motion to dismiss), and then discovery

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and motion practice continue much like they do in state or federal court. In fact, the

Bankruptcy Rules governing adversary proceedings (found in the Federal Rules of

Bankruptcy Procedure 7001 et seq.) adopt most of the Federal Rules of Civil Procedure.

The issue brought before the Bankruptcy Court though an adversary proceeding

will ultimately be resolved, as with other litigation, by motion practice, trial, or perhaps,

settlement. Usually, however, adversary proceedings are resolved (even if trial is

necessary), more quickly than other kinds of civil litigation. Bankruptcy Courts are

aware of the fact that lengthy litigation is rarely in a debtor’s best interest.

2. Contested Matters.

“Contested matters” are any other type of dispute (not requiring an adversary

proceeding) that must be resolved in the bankruptcy case. A contested matter is

commenced by a party filing a motion or objection requesting relief from the Bankruptcy

Court. No response to the motion or objection is required, but if another party opposes

the relief requested, a contested matter has begun. Contested matters include litigation of

such issues as objections to claims, motions for relief from stay, objections to Chapter 13

Plan confirmation, motions to sell property, and the like.

The filing of a plan does not initiate a contested matter. Plan confirmation

becomes a contested matter only when an objection is filed. See, In re Rosa, 495 B.R.

522, 525 (Bankr. D. Hawai’i 2013).

Rule 9014 of the Bankruptcy Rules governs contested matters, and provides that

many of the same rules applicable in adversary proceedings also apply in contested

matters. But not all of them.

Since contested matters do not require the formal filing and service of a

complaint, contested matters are often resolved more quickly than adversary proceedings.

E. DISCOVERY IN BANKRUPTCY PROCEEDINGS.

1. Discovery Under The Federal Rules.

As noted above, most of the Federal Civil Rules are made applicable to adversary

proceedings and, with one exception, all of the discovery rules of the Federal Rules of

Civil Procedure apply in both adversary proceedings and contested matters. Bankruptcy

Rules 7026 through 7037 simply adopt Federal Rules 26 through 37, and so those Federal

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Rules apply in adversary proceedings. Pursuant to Bankruptcy Rule 9014, all of the

Federal Rules of Civil Procedure (pertaining to depositions before action or pending

appeal) apply in contested matters, except Rule 27. It should be noted, however, that the

Bankruptcy Court has the discretion to direct that some or all of these rules do not apply

in any particular matter.

2. Discovery Under Rule 2004.

The Bankruptcy Rules do provide for some additional discovery mechanisms that

are generally not available in other kinds of civil litigation. Rule 2004 of the Bankruptcy

Rules provides extremely wide authority to conduct discovery, limited only by the

requirement that the discovery must be related “to the acts, conduct, or property or to the

liabilities and financial condition of the debtor, or to any matter which may affect the

administration of the debtor’s estate, or to the debtor’s right to a discharge.”

F.R.Bankr.P. 2004.

In fact, a “Rule 2004 exam” is broad enough to allow discovery that is really

nothing more than a fishing expedition. See, In re Enron Corp., 281 B.R. 836, 840

(Bankr. S.D.N.Y. 2002); Matter of M4 Enterprises, Inc., 190 B.R. 471, 474 (Bankr. N.D.

Ga. 1995).

However, there are limits to Rule 2004 examinations. Courts have denied motions

for Rule 2004 examinations when: 1) the purpose is to abuse and harass, In re Mittco,

Inc., 44 B.R. 35, 36 (Bankr. E.D. Wis. 1984) (noting Rule 2004 exams cannot be used to

harass, but finding no harassment in the facts before the court); 2) the examination seeks

to elicit information unrelated to debtor's financial affairs or the administration of the

debtor's estate, In re Enron Corp., 281 B.R. at 840, Matter of Wilcher, 56 B.R. at 433-34;

3) the party seeks to examine an individual with no knowledge of the debtor's affairs, In

re GHR Energy Corp., 35 B.R. 534, 537 (Bankr. D. Mass. 1983).

Of course, the privilege against self incrimination applies to the debtor’s

testimony during a 2004 examination. See, In re Welsh, 2013 Bankr. LEXIS 4716

(Bankr. E.D.N.C. Nov. 7, 2013)(Fifth Amendment privilege upheld based on the

possibility of prosecution under the virtually unused “fornication and adultery” statute).

However, in keeping with Supreme Court authority, the privilege against self

incrimination does not extend to the contents of voluntarily created documents. Id.

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There is a also a general limitation on the use of 2004 examinations when an

adversary is pending, which is discussed below.

A 2004 examination is available to “any party in interest,” which includes the

trustee, the United States Trustee, the debtor, creditors, entities related to the debtor and

entities with obligations owing to the debtor. While authority to conduct a Rule 2004

exam must be obtained from the Court, there is no requirement in the rule that the witness

be given advance notice of the Motion, and the Order directing the examination is often

signed by a Deputy Clerk pursuant to a grant of authority in an Administrative Order.

In a Rule 2004 examination, a witness has no general right to representation by

counsel, and the right to object to immaterial or improper questions is limited. See, In re

Bennett Funding Group, Inc., 203 B.R. 24 (Bankr. N.D.N.Y. 1996); In re Dinubilo, 177

B.R. 932, 940 (E.D.Cal. 1993); In re French, 145 B.R. 991, 992 (Bankr. D.S.D. 1992).

The issue of whether 2004 examinations are public and open to the press is

subject to a split of authority. Compare, In re Thow, 392 B.R. 860 (Bankr. W.D. Wash.

2007) and In re Symington, 209 B.R. 678 (Bankr. D. Md. 1997). And see, Seattle Times

Co. v. Rhinehart, 467 U.S. 20, 33, 104 S. Ct. 2199, 81 L. Ed. 2d 17 (1984)(there is no

common law or First Amendment right to inspect discovery materials). Courts have

denied access to Rule 2004 documents and transcripts for this reason, when shown good

cause by the opponents of access. In re Apex Oil Co., 101 B.R. 92, 102-103 (Bankr. E.D.

Mo. 1989); In re Ionosphere Clubs, Inc., 156 B.R. 414, 431-433 (S.D.N.Y. 1993).

While arguments have been made to the contrary [See, In re McLaren, 3 F.3d 958,

965 n.5 (6th Cir. 1993)], transcripts of 2004 examinations have been held admissible as

direct evidence. See, In re Jost, 136 F.3d 1455, 1459 (11th Cir. 1998). There appears to

be less question that the 2004 examination transcript can be used for purposes of rebuttal

or impeachment.

There is another important limitation on the use of a Rule 2004 examination.

Under the majority rule, once an adversary proceeding or a contested matter is

commenced, Rule 2004 is no longer available to the parties as a discovery tool, at least

for issues directly related to the adversary case. See, In re 2435 Plainfield Avenue, Inc.,

223 B.R. 440, 445-446 (Bankr. D.N.J. 1998); In re Symington, 209 B.R. 678, 683-84

(Bankr. D. Md. 1997); In re Szadkowski, 198 B.R. 140, 141 (Bankr. D. Md. 1996); In re

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Bennett Funding Group, Inc., 203 B.R. 24, 28 (Bankr. N.D.N.Y. 1996); In re Sutera, 141

B.R. 539, 541 (Bankr. D. Conn. 1992); but see, Matter of Sun Med. Management, Inc.,

104 B.R. 522, 524-25 (Bankr. M.D. Ga. 1989) (permitting a Rule 2004 exam to go

forward, even though an adversary proceeding was pending).

Generally, once an adversary proceeding or contested matter is commenced, the

federal rules that govern discovery will apply. Since the rules of formal discovery have

certain procedural protections, it has been held that it would be improper to allow a party

to attempt to gain an advantage by using Rule 2004 to circumvent the procedural

protections of Rule 7026, at least as to the subject matter of the adversary litigation.

3. Privilege Issues In Federal Court.

Federal Rule of Evidence 501 states that the federal common law of privileges

applies when federal law determines the substantive rights of the parties. See also,

United States v. Zollin, 491 U.S. 554, 562, 109 S.Ct. 2619, 105 L.Ed.2d 469 (1989).

On the other hand, the state privilege law controls if the underlying claim or

defense is governed by state law. See, Fed. R. Evid. 501; Star Editorial v. United States

District Court, 7 F.3d 856, 859 (9th Cir. 1993).

Federal privilege law will control even if the evidence sought is relevant to both

the federal and state claims. Bulow v. Bulow, 811 F.2d 136, 140 (2nd Cir. 1987).

“It is only where a discrete bankruptcy adversary proceeding involves litigants

squaring off solely under state law claims will Rule 501 require reference to state

privileged law.” In re North Plaza, LLC, 395 B.R. 113, 122 (S.D. Cal. 2008).

F. PREFERENCE ACTIONS.

Chapter 13 trustees are given extensive powers to avoid certain pre-petition

transactions. Preference actions, which are based upon section 547 of the Bankruptcy

Code, are one such power that generally has no state-law counterpart for non-insiders.

1. Reasons For The Preference Statute.

Under the bankruptcy laws, preferences are avoidable for two basic reasons: (1) to

discourage pre-bankruptcy dismemberment of troubled debtors; and (2) to facilitate

equitable distribution among creditors. See, Union Bank v. Walls, 502 U.S. 151, 160-161,

112 S.Ct. 527, 533, 116 L.Ed.2d 514, 524 (1991), quoting, H.R. Rep. No. 95-595, at 177-

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178, U.S. Code Cong. & Aidmen.News 1978, pp. 6137, 6138. Other courts have cited an

additional policy reason, discouraging secret liens on the debtor's property that are not

perfected until just before the debtor files bankruptcy. See, In re Arnett, 731 F.2d 358, 363

(6th Cir. 1984); In re Gulino, 779 F.2d 546, 549 (9th Cir. 1986). More colorfully, the

Seventh Circuit has stated: "the purpose of the preference statute is to prevent the debtor

during his slide toward bankruptcy from trying to stave off the evil day by giving

preferential treatment to his most importunate creditors." Matter of Tolona Pizza Products

Corp., 3 F.2d 1029, 1032 (7th Cir. 1993).

In essence, the usual preference action requires the creditor who was either repaid

a loan or was paid for goods or services during the preference period, to return the funds,

so that funds can be distributed pro rata among all of the debtor’s creditors.

2. The Elements Of A Preferential Transfer.

In order for there to be a preference claim, the creditor must have actually

provided the debtor with money, goods or services. The preferential transfer can be the

payment of money, a transfer of property, or the transfer of a security interest in property.

To creditors who are paid, of course, the requirement that they turnover payments made

prior to bankruptcy, in return for a claim that may be paid pennies on the dollar, is a bitter

pill. Don’t expect to make any friends.

The preference statute provides very specific requirements that must be met, as

well as several defenses that can be asserted. The preference statute is essentially a

mechanical test – there is no requirement that the debtor have actually intended to prefer

the creditor. The debtor's or creditor's motive is irrelevant in determining whether there has

been a preference. See e.g., In re Interior Wood Products Co., 986 F.2d 228, 232 (8th Cir.

1993); In re Perma Pacific Properties, 983 F.2d 964, 968 (10th Cir. 1992); Matter of T.B.

Westex Foods, Inc., 950 F.2d 1187, (5th Cir. 1992)("it is the effect of the transaction, rather

than the debtor's or creditor's intent that is controlling"); In re Sevitski, 151 B.R. 590, 596

(Bankr. N.D. Okla. 1993); In re Service Bolt & Nut Co., Inc., 98 B.R. 759, 761 (Bankr.

N.D. Ohio)(Baxter, J.); In re Repro-Technics, Inc.), 8 B.R. 225, 226 (Bankr. D. Me. 1981).

But see, First Fed. v. Barrow, 878 F.2d 912, 914, 918 (6th Cir. 1989)(court stresses debtor's

improper motive in making preferential transfers).

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Section 547(b) of the Bankruptcy Code contains the elements of a complaint to

avoid a preferential transfer of property. They are: (i) a transfer of an interest of the

debtor in property, (ii) to or for the benefit of a creditor, (iii) for or on account of an

antecedent debt owed by the debtor before such transfer was made, (iv) made while the

debtor was insolvent, (v) on or within ninety (90) days before the petition date (or within

one year if the transferee is an “insider” as defined in §101(31) of the Bankruptcy Code),

(vi) the effect of which is to enable the recipient of the transfer to receive more than it

would have received under the distributive provisions of Chapter 7 of the Bankruptcy

Code if such transfer had not been made.

Thus, the prima facie elements of a preference claim are fairly straightforward.

The most commonly litigated elements of preference claims are whether a transfer was an

interest of the debtor in property, and whether the debtor was insolvent at the time of the

transfer.

There are many reported decisions involving cases where the debtor’s defense is

that what was transferred was property that the debtor had in interest in because of the

“earmarking doctrine”. A typical example of the earmarking doctrine is a transaction in

which a loan is made to the debtor for the sole purpose of paying off another creditor,

thus placing the new lender in the shoes of the old creditor. See, In re Bohlen

Enterprises, Inc., 859 F.2d 561 (8th Cir. 1988). The test for determining whether the

earmarking doctrine applies consists of three elements: (1) there is an agreement between

the new lender and the debtor that the funds will be used to pay a specified debt; (2) the

terms of the transaction are actually performed; and (3) the transaction, viewed as a

whole, does not result in any diminution of the estate.

The insolvency requirement is also sometimes litigated. Pursuant to the statute,

the debtor is rebuttably presumed to have been insolvent during the ninety-day period

prior to the filing of bankruptcy. See, §547(f). Once that presumption is rebutted, the

burden of proof on that issue shifts to the trustee to prove insolvency – on of the

necessary elements of a preference. It is important to note that “insolvency” under the

Bankruptcy Code is defined in §101(32) of the Bankruptcy Code, and is not a “balance

sheet” or insolvency under a GAAP approach test. Instead, the Bankruptcy Code

definition focuses on whether the “fair value” of the debtor’s assets exceed the debtor’s

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liabilities. Thus, litigation involving this issue often depends almost entirely upon

appraisal testimony.

3. The Affirmative Defenses To A Preference Action.

Unlike the elements of the preference claim, the statutory defenses to a preference

are often litigated. There are eight affirmative defenses, which are usually described as

follows: (i) contemporaneous exchange for new value, (ii) ordinary course of business,

(iii) enabling loans, (iv) subsequent new value, (v) floating liens, (vi) statutory liens, (vii)

payments for a domestic support obligation, and (viii) in a consumer case, aggregate

payments to any one creditor of less than $600.00, and in non-consumer cases, less than

$5,475 (increased from $5,000 as of April 1, 2007). These affirmative defenses are

designed to allow a creditor to retain otherwise avoidable payments or transfers of

property.

For cases involving business debtors, the most commonly asserted affirmative

defenses are “contemporaneous exchange for new value”, “ordinary course of business”

and “subsequent new value”.

The classic “contemporaneous exchange” defense [§547(c)(1)] is regularly seen

in business transactions where the payment terms are C.O.D., i.e,. a payment made upon

delivery of goods. To be successful, the creditor must establish that both parties intended

that the payment be a contemporaneous exchanged for new value and that the exchange

was in fact substantially contemporaneous.

The “ordinary course of business defense” [§547(c)(2)] protects payments

received by a creditor pursuant to pre-arranged terms negotiated between the creditor and

the debtor. See, In re Roblin Industries, Inc., 78 F.3d 30 (2nd Cir. 1996). The statute

requires that in order to succeed with this defense, a creditor must show: (i) the debt was

incurred in the ordinary course of business of both the debtor and the creditor; (ii) the

payment was made in the ordinary course of business of between the debtor and the

creditor or the transfer was made according to ordinary business terms. (The BAPCPA

amendments changed this standard, substituting the “or” for an “and”.)

The “subsequent new value defense” [§547(c)(4)] provides some protection to an

unsuspecting creditor who receives payments and continues to ship goods to a customer

on the brink of bankruptcy. The Code provides that a transfer may not be avoided “to the

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extent that, after such transfer, such creditor gave new value to or for the benefit of the

debtor...”. This is not a simple “net result” calculation. Instead, this preference defense

requires that each subsequent advance of new value must be matched and set off against a

prior preferential payment. In other words, an otherwise preferential payment is reduced

by the amount of good delivered (or other credit extended) by the creditor after receipt of

the otherwise preferential payment.

In consumer cases, preferential transfers are often made to family members. Keep

in mind that to the extent the transfer is made to an “insider”, as defined in §101(31) of

the Code, there is an enhanced preference look-back period. Under Section 547(b)(4)(B),

a transfer made to an insider within one year of filing can be avoided as a preferential

transfer.

The term “insider” is defined to specifically include “relatives”, and the term

“relative” is also defined term, in §101(45). Keep in mind that the statutory definition of

“insider” uses the term “includes”, and then gives examples. Thus, the list of what

relationship with the debtor is considered sufficient to be an “insider” has been held to be

a non-exclusive, and people with other kinds of close relationships with the debtor can be

“insiders”. Where the debtor is an individual, a transfer to a “relative” is a transfer to an

“insider”.

Also keep in mind that to the extent the transfer was a bona fide payment of a

debt for a domestic support obligation, §547(c)(7) provides that such a payment is not a

voidable preference. Further, if the payment you wish to avoid was made to the IRS for

taxes, it is also not going to be recoverable as a preference. See, Begier v. IRS, 496 U.S.

53, 58, 110 S. Ct. 2258, 110 L. Ed. 2d 46 (1990); In re Valley Food Serv., LLC, 389 B.R.

685 (Bankr. W.D. Mo. 2008)(interpreting application of Begier to state taxes). Finally,

under §547(h), transfers made pursuant to a repayment plan created by an approved

nonprofit budget and credit counseling agency may not be recovered as a preferential

transfer.

4. Time Limit For Filing A Preference Action.

In addition to the defenses set forth in §547, creditors should be mindful of

§546(a) of the Bankruptcy Code, which contains the statute of limitations for preference

actions. Pursuant to §546(a), a preference action may not be commenced after the earlier

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of (1) the later of two years from the entry of an Order for Relief or one year after the

appointment or election of the first trustee in the case, or (2) the time the case is closed or

dismissed.

G. FRAUDULENT TRANSFER ISSUES.

1. Section 548 And The Uniform Fraudulent Transfer Act.

Section 548 of the Bankruptcy Code gives trustees the right to assert fraudulent

conveyance claims in connection with prepetition transfers. This provision is similar to

the fraudulent conveyance provisions of the Uniform Fraudulent Transfer Act, which has

been adopted, in some form, in most states. The UFTA creates parallel causes of action

for transfers that are either actually or constructively fraudulent, usually with a longer

“look-back period” than the two years provided by the Bankruptcy Code.

2. Claims For Actual Fraud Under The Code.

Under section 548(a)(1)(A), a transfer of an interest of the debtor in property or

an obligation incurred by the debtor that was made or incurred within two years of the

commencement of the bankruptcy case is fraudulent and avoidable if the debtor made the

transfer or incurred the obligation with actual intent to hinder, delay or defraud creditors.

This is a claim for “actual fraud”.

3. Constructively Fraudulent Conveyances Under The Code.

The more commonly used provision of Section 548 does not require any proof of

“bad intent”. Under §548(a)(1)(B), a transfer that was made or incurred within the two

year prior to the filing of the petition is avoidable if the debtor received less than a

reasonably equivalent value in return for the transfer and one of the following: (1) was

insolvent on the date of the transfer or rendered insolvent thereby; (2) was engaged in a

business or transaction for which his remaining property was an unreasonably small

capital; or (3) intended to incur debts that would be beyond the debtor’s ability to pay as

they matured.

This is the so-called “constructive fraud” provision, because it does not require

proof that the debtor intended to hinder, delay or defraud creditors. Simply making a

transfer for less than reasonably equivalent value, while the debtor was insolvent, makes

the transfer avoidable by the trustee.

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4. Avoiding Fraudulent Transfers Under State Law.

In addition to the specific provisions contained in §548(a), §544(b) gives the

trustee the right to avoid any transfer avoidable by an actual unsecured creditor under

applicable state law, including state fraudulent conveyance statutes. Under the Uniform

Fraudulent Transfer Act, enacted by most states, the trustee can avoid fraudulent and

constructively fraudulent transfers that occurred up to four years before the bankruptcy

was filed.

Given the inclusion of the state statutes in the trustee’s avoidance arsenal, it is

important to pay attention to the applicable statutes of limitation, the look-back periods

and the confusion they could create. Under the Uniform Fraudulent Transfer Act, the

statute of limitations is four years from the date of the transfer. Under §548 of the

Bankruptcy Code, the look-back period is two years, although under §546 the deadline

for filing the avoidance action in a Chapter 13 will be two years after the petition was

filed. Also keep in mind that the provisions of §108 and §546 will also extend the state

law statute of limitations, if the cause of action was still viable at the time the bankruptcy

case was filed.

To summarize – under either state law, or under Sections 547 (preference) or 548

(fraudulent transfer), the Chapter 13 will have two years after the filing of the case to file

an adversary complaint seeking avoidance of the transfer.

H. THE TRUSTEE’S STRONG-ARM POWERS.

Lenders' loan documents do not have to be perfect to be enforceable in

bankruptcy -- but they do have to be perfected. Outside of bankruptcy, lenders have an

advantage in that most perfection, priority, and documentation disputes arise with

debtors, not competing creditors. Except in unusual situations, a creditor's claim remains

"secured", as against the debtor, even when the security interest is unperfected, when

there are no other competing creditors involved. See generally, In re Baek, 240 B.R. 633

(Bankr. M.D. Fla. 1999).

However, in bankruptcy the situation changes because there is almost always a

competing creditor involved -- if not an actual one, the Bankruptcy Code creates a

hypothetical one: the bankruptcy trustee.

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While Section 544(a) is most often invoked by Chapter 7 trustees, these powers

are not exclusive to Chapter 7 trustees. Section 103(a) of the Code makes Section 544(a)

applicable in a a Chapter 13 case. As such, a Chapter 13 trustee may appear and invoke

the strong arm powers under §544(a) to avoid a creditor’s interest just as a Chapter 7

trustee would, despite the fact that a Chapter 13 trustee’s interest in the case may differ

from those of a Chapter 7 trustee’s interest. See, In re Perrow, 498 B.R. 560, 568-569

(Bankr. W.D. Va. 2013).

Under §544(a)(1), the trustee has the power to avoid any transfer or obligation of

the debtor which is avoidable by a hypothetical creditor on a simple contract with a

judicial lien on the property of the debtor unsatisfied as of the date of the commencement

of the case. 5 Collier on Bankruptcy, 544.02 at 544-4 (15th ed. rev. 2000).

The trustee also has the rights and powers, under Section 544(a)(2) of the

Bankruptcy Code, of a hypothetical creditor, with a writ of execution returned unsatisfied

at the date of the commencement of the case. 5 Collier on Bankruptcy, 544.02 at 544-4

(15th ed. rev. 2000).

Finally, under §544(a)(3), the trustee may avoid any lien or transfer avoidable by a

hypothetical bona fide purchaser of the debtors' real property as of the date of the

commencement of the case. 5 Collier on Bankruptcy, ¶544.02 at 544-4 (15th ed. rev. 2000).

These powers may be exercised by the trustee whether or not a creditor or purchaser

of the kind described in any of the three subparagraphs of Section 544(a) actually exist, and

without regard to the actual knowledge of the trustee or any creditor or purchaser. 5 Collier

on Bankruptcy, ¶544.02 at 544-4 to 544-5 (15th ed. rev. 2000).

When these "strong arm" powers are combined with the preference and fraudulent

conveyance powers, the trustee has a formidable arsenal with which to attack defective

loan documents, UCC-1s, mortgages, security agreements, etc. Generally, if the lien or

mortgage was not properly perfected under state law, the security interest will be

avoidable by the bankruptcy trustee.

One problem that appears to arise with some frequency is when the Chapter 13

Plan has provisions contrary to the relief sought by the Chapter 13 Trustee – courts have

held that confirmation of a Chapter 13 Plan is res judicata as to all issues that were, or

38

could have been decided during the confirmation process. See, Reid v. Wells Fargo, 480

B.R. 436 (Bankr. D. Mass. 2012).

I. DISCHARGE AND DISCHARGEABILITY.

A Chapter 13 debtor’s right to obtain a discharge is generally governed by §1328

of the Bankruptcy Code.

Section 523 sets forth the bases (currently nineteen subsections) upon which a

specific debt may be excluded from a debtor’s discharge.

While Chapter 13 Trustees may oppose a debtor’s discharge, individual creditors

– not the trustee – are almost always the party contesting the dischargeability of a

particular debt.

Section 1328 provides that a Chapter 13 debtor will usually receive a discharge

upon the completion of the Chapter 13 Plan, or the debtor may file a motion for a

hardship discharge under §1328(b). There are exceptions to the general rule that a

discharge is entered upon completion of the Plan payments, including some new

provisions added by the BAPCA, such as: 1) there is no right to a discharge if the debtor

received a discharge in a Chapter 7 filed within the previous four years, or a Chapter 13

(where the debtor received a discharge) filed within the previous 2 years [§1328(f)]; 2)

failure to complete a debtor education course [§1328(g)]; or, 3) the debtor may have

committed certain security laws violations [§1328(h)].

Bankruptcy Rule 4004(a) was amended in 2010 to add: “In a chapter 13 case, a

motion objecting to the debtor's discharge under §1328(f) shall be filed no later than 60

days after the first date set for the meeting of creditors under §341(a).” Note that this rule

specifically references the filing of a “motion”. Trustees that relied on automatic closing

without a discharge in cases filed within the §1328(f) limits should reevaluate the need to

file a motion within the time frame set forth in amended Rule 4004(a).

III. TIME LIMITS FOR CHAPTER 13 AND CHAPTER 7 DEBTORSRECEIVING A DISCHARGE.

A. Section 1328(f) – Eligibility For A Discharge In A Chapter 13 FiledAfter A Previous Chapter 7 or 13.

39

BAPCAP implemented new “look back periods” – time that must pass before a

debtor is eligible to receive a discharge if the debtor had filed a prior Chapter 13 or

Chapter 7 case and received a discharge. Section 1328(f) states:

(f) Notwithstanding subsections (a) and (b), the court shall not grant a discharge

of all debts provided for in the plan or disallowed under section 502, if the debtor has

received a discharge—

(1) in a case filed under chapter 7, 11, or 12 of this title during the 4-year period preceding the date of the order for relief under this chapter, or

(2) in a case filed under chapter 13 of this title during the 2-year period preceding the date of such order.

1. Section 1328(f) Does Not Prevent The Filing Of A Chapter 13.

Section 1328(f) does not prevent the FILING of a Chapter 13 bankruptcy (or

other relief provided by Chapter 13), but it does prevent the entry of a DISCHARGE.

See e.g., In re Bateman, 515 F.3d 272 (4th Cir. 2008); In re Pollard, Case No. 10-

17396PM, 2011 Bankr. LEXIS 595, n.2 (Bankr. D. Md. Feb. 9, 2011); In re Sours, 350

B.R. 261, 267 n.3 (Bankr. E.D. Va. 2006); In re Lewis, 339 B.R. 814 (Bankr. S.D. Ga.

2006); 8 Collier on Bankruptcy, ¶1328.06[1] at 1328-36 (15th Ed. Rev. 2008); Hon.

William Houston Brown, Taking Exception to Debtor’s Discharge: The 2005 Bankruptcy

Amendments Make It Easier, 79 Am. Bankr. L. J. 419, 448-49 (Spring, 2005).

Thus, in a typical “Chapter 20” case, where the only debt is a mortgage arrearage,

Chapter 13 will remain an effective solution to the problem of catching up the mortgage -

a bankruptcy discharge isn’t needed. Cure under Code Section 1322(b)(3) and (5) is

typically the primary goal, provided the debtors have not incurred additional unsecured

debts between the filing of the Chapter 7 and the filing of the Chapter 13.

However, where there are unsecured debts, the absence of eligibility for a Chapter

13 discharge creates problems regarding unsecured creditors’ entitlement to interest and

late charges after the Chapter 13 case is completed. Those additional charges are

discharged at the conclusion of a typical Chapter 13, and therefore do not have to be

otherwise dealt with. Under the new restrictions on the granting of a Chapter 13

discharge, it is possible that the holder of (for example) a credit card debt could come

40

back on the debtor after the Chapter 13 is completed and demand their contractual

interest and late charges, even if the Plan proposed to pay unsecured creditors “100%”.

It remains to be seen how many creditors would actually take such a position after

a Chapter 13 Plan is completed.

i. No Lien Stripping In A 13 Without A Discharge?

The issue of whether or not debtors who are not eligible for a Chapter 13

discharge may strip a junior mortgage has been a hot issue. While there are many

decisions on this issue, the first circuit court decision that directly addressed this issue

was Branigan v. Davis (In re Davis), 716 F.3d 331 (4th Cir. 2013), a 2-1 decision that

allowed lien stripping without a discharge. Contra, Lindskog v. M&I Bank, 480 B.R. 916

(E.D. Wis. 2012); Victorio v. Billingslea, 470 B.R. 545 (S.D. Cal. 2012).

2. Majority View: The Two And Four Year Waiting Periods AreMeasured Filing To Filing.

Near unanimous case law holds that the two year (discharged Chapter 13 to

Chapter 13) and four year (discharged Chapter 7 to Chapter 13) waiting periods are

measured “filing-to-filing”. In other words, where a Chapter 13 debtor has received a

discharge in a case filed more than two years ago, s/he is eligible for a discharge in a

subsequent Chapter 13 case. See, In re Gagne, 394 B.R. 219 (1st Cir. BAP 2008). Of

course, that means that the two-year waiting period of §1328(f)(2) almost never applies,

since Chapter 13 requires a minimum three year commitment period in cases where

unsecured creditors receive less than 100%.

Since the enactment of the BAPCPA, the Chapter 7 to Chapter 13 waiting period

of §1328(f)(1) has been held to be properly measured “filing-to-filing” by an

overwhelming majority of courts, including the Sixth Circuit Court of Appeals. See, In

re Sanders, 551 F.3d 397 (6th Cir. 2008); In re Bateman, 515 F.3d 272, 272 (4th Cir.

2008); In re Gomez , Case No. 6:09-bk-13656-ABB, 2010 Bankr. LEXIS 4501 (Bankr.

M.D. Fla. Dec. 7, 2010); In re Trujillo, Case No. 6:10-bk-02615-ABB,2010 Bankr.

LEXIS 3834 (Bankr. M.D. Fla. Nov. 10, 2010); In re Colbourne, Case No. 6:10-bk-

00983, 22 Fla. L. Weekly Fed. B 620, 2010 Bankr. LEXIS 3813 (Bankr. M.D. Fla. Nov.

8, 2010); In re Hieter, 414 B.R. 665, 667-668 (Bankr. D. Idaho 2009); In re McGhee, 342

41

B.R. 256 (Bankr. W.D. Ky. 2006); In re West, 352 B.R. 482 (Bankr E.D. Ark. 2006); In

re Grydzuk , 353 B.R. 564, 568 (Bankr. N.D. Ind. 2006); In re Knighton, 355 B.R. 922,

926 (Bankr. M.D. Ga. 2006)(“The Court now turns to the Bank's alternative argument-

that the look back period starts running on the date of discharge in the prior case rather

than the date of filing in the prior case. Nothing in the language of §1328(f)(1) supports

such an interpretation. The statute bars discharge in the pending case if the debtor

received a prior discharge in a case "filed under chapter 7 … during the 4-year period

preceding the date of the order for relief" in the pending case. Because the order for relief

arises on the date of filing, a plain reading of §1328(f)(1) indicates that the lookback

period runs from the filing date of the prior case to the filing date of the current case.”);

In re Grice, 373 B.R. 886 (Bankr. E.D. Wis. 2007)(in unconverted cases, the measure is

filing-to-filing, where the prior case was a Chapter 7 or a Chapter 13).

Other cases, while not explicitly stating a rule about how the “look back” period

should be measured, simply use the filing-to-filing dates in determining whether or not

the required time that has passed. See e.g., In re Ybarra, 359 B.R. 702, 703 & 709

(Bankr. S.D. Ill. 2007)(court used February 3, 2003, the date of the filing of the prior case

to measure the applicable look back period).

i. When A Case Converts, Which Look back PeriodApplies?

Several published opinions address the question of which chapters’ look

back period will apply when the prior case was converted from a Chapter 13 to a Chapter

7. Typically, the debtor wants the look back period to be based on the chapter the case

was filed under – Chapter 13. Creditors would prefer that the look back period be based

on the chapter in which the debtor received a discharge – Chapter 7.

To date, most bankruptcy courts have held that the relevant “look back” period is

determined by the chapter under which the discharge in the prior case was received

(Chapter 7), and not by the chapter under which the petition was originally filed (Chapter

13): See, Leavitt v. Finney (In re Finney), 486 B.R. 177 (9th Cir. BAP 2013); In re

Johnson, 488 B.R. 46 (Bankr. D. Mass. 2013); In re Capers, 347 B.R. 169, 171 (Bankr.

D.S.C. 2006); In re Sours, 350 B.R. 261, 262-263 (Bankr. E.D. Va. 2006)(Section

1328(f) cannot be read in a vacuum; it must be read in conjunction with §348(a), which

42

"mandates that a case which has been converted [from Chapter 13 to Chapter 7] … is

deemed to be 'filed under' Chapter 7 on the date on which the Chapter 13 was filed.); In

re Grydzuk, 353 B.R. 564, 568 (Bankr. N.D. Ind. 2006); In re Knighton, 355 B.R. 922,

924-925 (Bankr. M.D. Ga. 2006); In re Ybarra, 359 B.R. 702, 706-709 (Bankr. S.D. Ill.

2007); In re Grice, 373 B.R. 886, 889 (Bankr. E.D. Wis. 2007)(“This court joins with

Capers, Sours, Grydzuk, Knighton, and Ybarra and holds that the 4-year waiting period

contained in §1328(f)(1) applies to the case at bar.”); In re Dalton, 63 Collier Bankr. Cas.

2d (MB) 543, 2010 Bankr. LEXIS 51 (Bankr. M.D.N.C. Jan. 7, 2010)(rejecting

Hamilton).

There is one case that goes the other way in a situation where a Chapter 13 was

converted to a Chapter 7. In re Hamilton, 383 B.R. 469 (Bankr. W.D. Ark. 2008) held

that where the debtor filed a Chapter 13 petition, and then converted to a Chapter 7, the

shorter two year Chapter 13 look back period applied. The bankruptcy court relied on its

interpretation of §348 in holding that the look back was based on the Chapter the case

was originally filed under, and conversion of the case from a Chapter 13 to a Chapter 7

did not change the look back period under §1328(f)(1).

ii. Enforcing §1328(f) – What Do You File?

Federal Rule of Bankruptcy Procedure 4004(a) states that an action for denial of

discharge based on Section 1328(f) is commenced by the filing of a motion within 60

days of the date first set for the first meeting of creditors. This provision was added to

Rule 4004(a) in 2010.

B. §727(a)(9): Six Years Must Pass From Sub-70% Chapter 13 (OrChapter 12) To Discharge In Chapter 7.

“§727(a)(9) constrains successive discharges under Chapters 13 and 7”. Young v.

United States, 535 U.S. 43, 51; 122 S. Ct. 1036, 1041; 152 L. Ed. 2d 79, 88 (2002).

Section 727(a)(9) sets forth the six-year bar rule for a Chapter 7 discharge. The rule

precludes the discharge of a debtor if he obtained a Chapter 13 discharge (or Chapter 12

discharge) within the preceding six years, unless the latter involved payment of 100% of

the allowed unsecured claims or both payment of 70% of such claims and a finding that

43

the plan "was proposed by the debtor in good faith, and was the debtor's best effort." See,

In re Lewis, 392 B.R. 308 (E.D Mich. 2008).

At least one bankruptcy court has rejected, as improper, a Chapter 13 Plan that

included a provision in the confirmation order that establishes Debtors' eligibility under

11 U.S.C. §727(a)(9) to receive a discharge in a subsequent Chapter 7 proceeding. See,

In re Layton, 2008 Bankr. LEXIS 3363 (Bankr. D. N.M. December 10, 2008).

A debtor is “granted a discharge” in a prior Chapter 13, for §727(a)(9) purposes,

even if all of the debtor’s debts are not discharged, and under Parr, even if NO debt was

discharged. See, In re Parr, 222 B.R. 337 (Bankr. D. Minn. 1998)(debtor had only

student loans).

One recent case has looked at what the “best efforts” requirement means. The

court held that a 76.5% Chapter 13 Plan was NOT the debtors ‘best effort’ because the

debtor could have proposed a plan longer than 36 months (although not legally required

to do so) and paid more to creditors. See, In re Ward, Case No. 10-68727, 2010 Bankr.

LEXIS 4028 (Bankr. E.D. Mich. Nov. 29, 2010);

From a strategic standpoint, if a case is not a 70% Plan, debtors’ counsel should

be taking a hard look at whether or not the debtors want to receive a Chapter 13 discharge

if they have accrued substantial post-filing debts. The debtors may be better off

dismissing, waiving the discharge, or converting to a Chapter 7 if substantial debts have

accumulated during the pendency of the Chapter 13 case.

1. §727(a)(9) And Filing-To-Filing Under §1328(f)

The In re Bateman, 515 F.3d 272, 279-280 (4th Cir. 2008) decision (which

included an appeal of the Graves case) made an interesting argument regarding the

measuring of the two different discharge bars under §1328(f) using the filing-to-filing

rule:

“As the Graveses' case illustrates, however, the "discharge date to filing date" interpretation urged by the Chapter 13 Trustee would reach an absurd result that runs counter to Congress's often-expressed preference for Chapter 13 bankruptcy. The Graveses filed for Chapter 13 bankruptcy on January 4, 1999, and received a Chapter 13 discharge on June 16, 2004. Under the Chapter 13 Trustee's interpretation, the Graveses would not be able to receive a discharge in a new Chapter 13 bankruptcy, which

44

would pay all creditor claims in full, until June 16, 2006. But because the Graveses' previous Chapter 13 plan paid at least 70 percent of the allowed unsecured claims, was proposed in good faith, and represented their best efforts, the Graveses would be eligible for a Chapter 7 discharge on the very day they received their previous Chapter 13 discharge. See 11 U.S.C.A. §727(a)(9) (West 2004 & Supp. 2006) (providing for a six-year waiting period for a Chapter 7 discharge after a debtor has been granted discharge in a Chapter 13 case, unless payments under the plan totaled 100% of allowed claims or 70% of such claims and the plan was proposed by the debtor in good faith and with the debtor's best efforts). This would produce the strange result that the Graveses would not be able to receive a Chapter 13 discharge, which would pay the creditor claims in full, but would be permitted to file a Chapter 7 bankruptcy and thereby avoid payment of a larger portion of their outstanding debts. The Chapter 13 Trustee's interpretation thus would encourage debtors that had intended to pay back all of their debts to instead opt for a Chapter 7 discharge merely because a Chapter 13 discharge would not be available to them at the height of their financial difficulties.

i. The Fly In The Ointment - What Is A 70% Chapter 13 Plan For §727(a)(9) Purposes?

The Seventy percent level in Chapter 13 Plans are important because if that

threshold is met, a debtor is not prohibited from receiving a discharge in a subsequent

Chapter 7 filed within Six years of the Chapter 13 petition date. See, Section 727(a)(9).

Also, in many areas, local practices truncate certain Chapter 13 requirements where the

Plan calls for unsecured creditors to be paid at least 70%.

Up until recently, we all knew what a “70% Plan” was. Although it was not a

heavily litigated issue, it was commonly accepted that a “70% Plan” was a Plan that paid

at least 70% to unsecured creditors.

That assumption has been called into question by In re Griffin, 352 B.R. 475 (8th

Cir. BAP 2006), one of the best “the emperor has no clothes” decisions in recent

memory.

Initially, the decision acknowledges that there is substantial case law on Section

727(a)(9) that assumes the restriction refers to the payment of 70% of unsecured claims:

The bankruptcy court's interpretation of the statute is consistent with every reported opinion which has commented upon or mentioned the

45

statute. See, e.g., In re Hiatt, 312 B.R. 150, 152 n.2 (Bankr. S.D. Ohio 2004); In re McMeekan, No. 9682757, 1997 WL 33475211 at *4 (Bankr. C.D. Ill. Jan. 30, 1997); In re Messenger, 178 B.R. 145, 149 (Bankr. N.D. Ohio 1995); In re Karayan, 82 B.R. 541 (Bankr. C.D. Cal. 1988); In re Pierce, 82 B.R. 874 (Bankr. S.D. Ohio 1987); In re Greer, 60 B.R. 547 (Bankr. C.D. Cal. 1986); In re Raines, 33 B.R. 379, 381 (M.D. Tenn. 1983); In re Price, 20 B.R. 253 (Bankr. W.D. Ky. 1981); Triplett v. Arndt (In re Aalto), 8 B.R. 157 (Bankr. M.D. Fla. 1981); In re McClaflin, 13 B.R. 530 (Bankr. N.D. Ill. 1981); In re Poff, 7 B.R. 15 (Bankr. S.D. Ohio 1980). However, none of these courts was actually interpreting the section in a Chapter 7 case in which this issue had arisen.

In re Griffin, 352 B.R. at 477; see also, In re Brown, 399 B.R. 162, 166 n.4 (Bankr. W.D.

Va. 2009)(“unless the debtor's plan paid one-hundred percent of unsecured claims or

seventy-percent using the debtor's "best efforts." §727(a)(9).”)

The 8th Circuit BAP Panel looked at the statutory language, noting that that

§727(a)(9) provides, in relevant part:

The court shall grant the debtor a discharge, unless –

the debtor has been granted a discharge under section 1228 or 1328 of this title . . . in a case commenced within six years before the date of the filing of the petition, unless payments under the plan in such case totaled at least –

(A)100 percent of the allowed unsecured claims in such case; or

(B) (i) 70 percent of such claims; and (ii) the plan was proposed by the debtor in good faith,

and was the debtor's best effort.

The Panel focused on the “payments under the plan” language, which is not the

same as “payments to unsecured creditors under the plan.” And, the same term,

“payments under the plan”, is used in Section 1325(b)(1)(B), and it does not mean just

payments to unsecured creditors. Further, in Section 1328(b), the hardship discharge

section, when Congress wanted to refer to the payment of unsecured claims, it did so

differently than in Section 727(a)(9).

The Panel then looked at the legislative history of Section 727(a)(9) and found

nothing to support the assertion that Congress intended the statute to mean the payment to

unsecured creditors of 70% of their claims in order to be eligible for a discharge.

46

So, what does Section 727(a)(9) mean?

The language of §727(a)(9) is clear and plain. If a debtor in a Chapter 13 case pays to the trustee for distribution under the plan an amount equal to 70% of the allowed unsecured claims, and the court finds that the plan was proposed by the debtor in good faith and was the debtor's best effort, or if such debtor pays to the trustee for distribution under the plan an amount which totals at least 100% of the allowed unsecured claims, the debtor, when filing a Chapter 7 case within six years of the petition date of the Chapter 13 case, will not be denied a discharge.

In re Griffin, 352 B.R. at 479-480.

If Griffin is right, “70% to unsecured creditors” will rarely be a “magic number”

triggering a Chapter 13 debtors right to immediately file a Chapter 7 and receive a

discharge. Under Griffin, the percentage going to unsecured creditors could be much

lower, and it would still qualify as a “70% Plan” because the trustee distributed an

amount equal to 70% of the unsecured claims to ALL creditors – including secureds. For

example, Chapter 13 Offices that do conduit mortgage payments, “payments to the

trustee for distribution under the plan” will often equal more than 70% of unsecured

claims, sometimes even in “zero percent” Plans. Mortgage arrearages, motor vehicle

payments, and the payment of priority tax claims may similarly influence whether or not

the debtor, in their prior Chapter 13, reached the “70%” level.

To date, no subsequent court has addressed the Griffin interpretation of what

“70%” means in §727(a)(9).

C. §727(a)(8) - The Eight Year Chapter 7 To Chapter 7 Bar.

Pursuant to Section 727(a))of the Bankruptcy Code, the Court shall grant the

Debtor a discharge unless:---

(8) the debtor has been granted a discharge under this section, or section

1141 of this title, or under section 14, 371, or 476 of the Bankruptcy Act [former

11 U.S.C. §§32, 771, 876], in a case commenced within 8 years before the date of

the filing of the petition.

47

Thus, §727(a)(8) bars discharge in a debtor's second Chapter 7 case filed in an

eight year period if the debtor received a discharge in the first case. This time period was

extended from six years to eight years by the 2005 Amendments to the Bankruptcy Code.

1. The Eight Years Are Filing To Filing.

The measurement of the time for §727(a)(8) purposes is from the commencement

of the previous Chapter 7 case – in other words, filing-to-filing. See, In re Bateman, 515

F.3d 272, 282-283 (4th Cir. 2008)(dicta); In re Asay, In re Burrell, 148 B.R. 820, 822

(Bankr. E.D. Va. 1992); In re Canganelli, 132 B.R. 369, 378 (Bankr. N.D.Ind. 1991).

2. §727(a)(8) Is Not A Bar To Filing A Second Chapter 7.

Like Section 1328(f)’s bar to a Chapter 13 discharge, most courts hold that

§727(a)(8) does not prevent the filing of a second Chapter 7 within the 8 year period. As

In re Bateman, 515 F.3d 272, 282-283 (4th Cir. 2008) states:

“Collier on Bankruptcy instructs that §727(a)(8), the Chapter 7 provision that is analogous to §1328(f), "does not preclude a debtor [who received a discharge in a prior case] from again becoming a debtor within eight years of commencement of the prior case, although no discharge may be granted in the second proceeding." 6 Collier P 727.11[1][a]; see also In re McKittrick, 349 B.R. 569, 574 (Bankr. W.D. Wis. 2006) ("The amended version of §727(a)(8) does not even act to deny access to the bankruptcy system, as debtors remain free to file; they simply may not receive a discharge.").

See also, In re Thorton, 2012 Bankr. LEXIS 3202 (Bankr. S.D. Ga. July 12, 2012)(joint

debtor who was not eligible for a discharge would not be dismissed.

However, unlike Chapter 13, where the absence of a discharge doesn’t necessarily

destroy the utility of the filing, there is usually little or no benefit to an individual filing a

Chapter 7 without the possibility of getting a discharge. See, In re Bateman, 515 F.3d

272, 283 n.17 (4th Cir. 2008)(“Like the district court, we believe that §§727(a)(8), 727(a)

(9) and 1328(f) do function as limitations on serial filing in practice, even though they do

not expressly prohibit the filing of any bankruptcy petition. In re Khan, 2006 U.S. Dist.

LEXIS 90421 at *8” (D. Md. Dec. 14, 2006)(“ Furthermore, even the Supreme Court's

characterization of section 727(a)(8) and (a)(9) as types of provisions "prohibiting" serial

48

filings is not inconsistent with the conclusion that section 1328(f) speaks only to the

power to grant a bankruptcy discharge. All three statutory provisions prohibit bankruptcy

discharge orders under certain circumstances of serial filing, and thus operate to decrease

the incentives to engage in those types of serial filing. In this manner, these provisions

function as limitations on serial filing in practice, even though they do not directly

prohibit the filing of any bankruptcy petition.”).

If a debtor is not eligible for a Chapter 7 discharge, there is always the option of

converting the case to a proceeding under Chapter 13.

3. Conversion From Chapter 13 To Chapter 7 Does NotChange The Date Of Filing – So Debtors Should Dismiss AndRefile, NOT Convert.

There are significant malpractice risks associated with using a Chapter 13 case to

get past the eight-year bar to a Chapter 7 discharge, and then converting to a Chapter 7

because the majority of case law supports the concept that conversion does not change

the filing date of the case. Where the second case filed after a Chapter 7 discharge is

filed as a Chapter 13, and then converted to a Chapter 7, the date of the original filing is

used to determine if the debtor is eligible for a discharge. See, In re Asay, 364 B.R. 423,

424 n.1 (Bankr. D.N.M. 2007); United States Trustee v. Skinner (In re Skinner), Case No.

09-50189-NPO, 2010 Bankr. LEXIS 2790 (Bankr. S.D. Miss. Sept. 1, 2010)(citing, In re

Sadler, 935 F.2d 918, 920 (7th Cir. 1991) and Resendez v. Lindquist, 691 F.2d 397, 399

(8th Cir. 1982)).

Similarly, In re Hiatt, 312 B.R. 150 (Bankr. S.D. Ohio 2004), a case under the old

six-year bar to a second Chapter 7 discharge, states:

In calculating the six year time period from the commencement of the prior case (August 1, 1997) to the commencement of this present case (August 16, 2002), it is clear that less than six years have elapsed. The fact that the conversion to chapter 7 in this present case occurred more than six years after the commencement of the prior chapter 7 case is not legally relevant to the calculation of the six year period under 11 U.S.C. §727(a)(8). The date of a subsequent conversion to a different chapter of the Bankruptcy Code does not change the date a case was commenced. See 11 U.S.C. §§301 and 348(a). It is not correct to calculate the applicable six year period from the date of a conversion of a case from one chapter to a different

49

chapter of the Bankruptcy Code -- whether the conversion occurred in the prior case or the current case -- in determining the six year period under 11 U.S.C. §727(a)(8). The applicable six year period is determined from the commencement of the prior case to the commencement of this present case.

The authorities agree the applicable Code sections [11 U.S.C. §§301, 348(a) and 727(a)(8)] compel this conclusion. Riske v. Lyons (In re Lyons), 162 B.R. 242 (Bankr. E.D. Mo. 1993); In re Burrell, 148 B.R. 820 (Bankr. E.D. Va. 1992); Canganelli v. Lake Cty. Dep't of Public Welfare (In re Canganelli), 132 B.R. 369 (Bankr. N.D. Ind. 1991); Mulford v. Marshall (In re Marshall), 74 B.R. 185 (Bankr. N.D.N.Y. 1987); In re Czikalia, 2000 Bankr. LEXIS 2063, 2000 WL 33716969 (Bankr. D. Idaho Jan. 18, 2000); See also Norton Bankruptcy Law and Practice, Second Edition, Section 74:18 (1994, updated by March 2004 supplement).

Similarly, in counting from a prior case where a Chapter 13 was converted to a

Chapter 7, courts have measured the bar from the date of the original filing, not the date

of conversion.

The unpublished case In re Czikalia, 2000 Bankr. LEXIS 2063 (D. Idaho, January

18, 2000) reviewed this issue on a creditor’s motion to dismiss:

The Court finds no case law supporting Creditor's interpretation of Section 727(a)(8). Indeed, several decisions and Collier on Bankruptcy advance the opposite:

The six years begins to run as of the date the first case is "commenced," i.e. the date the petition is filed, and ends as of the date that the subsequent proceeding is begun by the filing of the petition."

6 Collier on Bankruptcy P 727.11[2] (15th Ed. Revised 1999). Accord Resendez v. Lindquist, 691 F.2d 397, 399 (8th Cir. 1982); Riske v. Lyons (In re Lyons), 162 B.R. 242, 243-44 (Bankr. E.D. Mo. 1993); In re Burrell, 148 B.R. 820, 822 (Bankr. E.D. Va. 1992). Creditor's argument that the six-year time period runs from the date of conversion of the prior bankruptcy to the filing of the petition in this bankruptcy case therefore lacks merit. Under Section 727(a)(8), because more than six years had expired between the filing date of Debtors' prior bankruptcy case and the filing date of the second petition, Section 727(a)(8) will not prevent Debtors from obtaining a discharge in this Chapter 7 case.”

50

The majority view is that Chapter 13 debtors have an absolute right to

dismiss, but there is a substantial minority view that disagrees. See, In re Polly,

392 B.R. 236 (Bankr. N.D. Tex. 2008)(citing cases and discussing Marrama).

4. Does The Time In A Chapter 13 Toll The Eight Years?

The holding in Tidewater Fin. Co. v. Williams, 498 F.3d 249 (4th Cir. 2007) was

that the time bar to receiving a discharge in a second Chapter 7 case - found in §727(a)(8)

- was not equitably tolled during the debtor's intervening Chapter 13 proceedings because

§727(a)(8) was not a statute of limitations. Note that Tidewater was a majority decision –

there was a dissent that argued for the tolling of the §727(a)(8) bar to a Chapter 7

discharge. See also, In re Maas, 416 B.R. 767 (Bankr. D. Kan. 2009)(prior Chapter 13

did not toll 910 days for bifurcating motor vehicle claim).

5. I Screwed Up The Eight Year Bar –What Do I Do?

If a second Chapter 7 case is filed within the eight-year period, is there anything

debtor’s counsel can do – besides call their carrier? (Or convert to a Chapter 13....) The

answer is yes. Dismissal of the Chapter 7 case can be sought under §707(a). [I’ll leave

out a discussion of the sneakier stuff like not filing the most recent tax return and moving

to dismiss your own case under §521(e)(2)(B), or pay advices, with a motion to dismissal

under §521(i)(1). After all, this is supposed to be a Chapter 13 outline.]

The Haney decision discusses the hurdles to dismissal under 707(a): “Pursuant to

section 707(a) of the Bankruptcy Code, in a chapter 7 case a court has discretion to

dismiss a chapter 7 case only after notice and a hearing and "only for cause." Unlike the

chapter 13 context, the debtor has no absolute right to dismissal. In re Wilde, 160 B.R.

625, 626 (Bankr. W.D. Mo. 1993). In order to obtain a dismissal of a chapter 7 case, the

debtor must make the showing of cause, Mann v. American Federated Life Insurance

Company, 215 B.R. 822 (S.D. Miss. 1997), and the Court should deny the motion if there

is any showing of prejudice to creditors, In re Leach, 130 B.R. 855 (B.A.P. 9th Cir.

1991).” In re Haney, 241 B.R. 430, 432 (Bankr. E.D. Ark. 1999); see also, In re

Cochener, 382 B.R. 311 (S.D. Tex. 2007) rev’d on other grounds, 297 Fed. Appx. 382

(5th Cir. 2008)(citing cases).

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While there are not many published cases where a Chapter 7 was dismissed

because early filing resulted in a discharge bar date problem, and the majority of cases go

the other way [e.g., In re Kimball, 19 B.R. 300 (Bankr. D. Me. 1982)], anecdotally it

appears that this method is often used, if creditors do not object. Cf., In re McDaniel, 363

B.R. 239 (M.D. Fla. 2007)(Dismissal of Chapter 7 allowed for purposes of refiling

because of mistake on the date for dischargeability of taxes). The Chapter 7 trustee’s

agreement to dismissal is also an important factor. See e.g., In re Hopper, 404 B.R. 202

(Bankr. N.D. Ill. 2009).

6. Filing A Chapter 13 During The §727(a)(8) Bar – Are ThereAny Consequences For The Chapter 13 Case?

The decision in In re Paley, 390 B.R. 53, 59-60 (Bankr. N.D.N.Y. 2008) reflects a

tension that always exists between Chapter 7 and Chapter 13 cases – when is a Chapter

13 too much like a Chapter 7 to be allowed? In the Paley case, the bankruptcy court held:

“A plan whose duration is tied only to payment of attorney's fees simply is an abuse of

the provisions, purpose, and spirit of the Bankruptcy Code. These cases, basically

Chapter 7 cases hidden within Chapter 13 petitions, blur the distinction between the

chapters into a meaningless haze. To allow them to go forward would, in effect,

judicially invalidate §727(a)(8)'s requirement of an eight year hiatus between Chapter 7

discharges and replace it with either the four year break required by §1328(f)(1), or the

two year gap mandated by §1328(f)(2). The court need not decide what would

hypothetically satisfy good faith under §1325(a)(3), only that these plans do not.” See

also, In re Lavilla, 425 B.R. 572 (Bankr. E.D. Cal. 2010)(low dividend and ineligibility

for Chapter 7 did not per se prohibit confirmation of Chapter 13 Plan, but debtor

produced no evidence why another discharge was needed, so plan confirmation was

denied); In re Montry, 393 B.R. 695 (Bankr. W.D. Mo. 2008)(Chapter 13 Trustee’s

objection to confirmation of Chapter 13 plan that would only pay debtors’ attorney fees

was sustained; plan was not filed in good faith); but see, In re Molina, 420 B.R. 825

(Bankr. D.N.M. 2009)(ineligibility for Chapter 7 discharge in “attorney fee only” case

weighed against confirmation, but court declined to add to the statutory requirements for

confirmation).

52

Tougher “good faith” standards for cases where the debtors are not eligible for a

Chapter 7 discharge is an ongoing issue that the courts are thinking about.

E. Does Section 707(b) Apply When A Chapter 13 Is Converted To A Chapter 7?

There is a split of authority as to whether a bankruptcy court may dismiss a

bankruptcy case as an abuse under Section 707(b), even if it was not originally filed

under Chapter 7. See, In re Reece, 498 B.R. 72 (Bankr. W.D. Va. 2013)(§707(b)

applies); In re Davis, 489 B.R. 478 (Bankr. S.D. Ga. 2013)(same); contra, In re Layton,

480 B.R. 392 (Bankr. M.D. Fla. 2012)(§707(b) does not apply).

F. Dismissal Under Section 707(b) – In Truth? No Consequences.

The court in In re Garrett, 2008 Bankr. LEXIS 1673, 2008 WL 2206559 (Bankr.

E.D. Va. May 23, 2008) stated: “Normally, when a debtor has been a debtor in a previous

bankruptcy case that was dismissed within one year of the filing of the new case, the

automatic stay of §362(a) terminates as to the debtor on the thirtieth day following the

new filing. See 11 U.S.C.A. §362(c)(3) (Cum. Ann. Supp. 2008). For the stay to continue

within that thirty days, the debtor must seek and the court must complete a hearing on the

debtor's motion. See 11 U.S.C.A. §362(c)(3) (Cum. Ann. Supp. 2008). But the scope of

§362(c)(3) is limited to cases "other than . . . [those] . . . refiled under a chapter other than

chapter 7 after dismissal under section 707(b)." As the Debtor's Previous Case was

dismissed pursuant to § 707(b), and the Debtor's present case was filed under chapter 13,

§362(c)(3) does not apply and the automatic stay does not terminate on the thirtieth day

after filing.”

G. What Is The Rule On Extending The Stay In A Second Case File Within One Year Of A Non-§707(b) Dismissal?

Section 362(c)(3) is not a model of clarity. In re Charles, 332 B.R. 538 (Bankr.

S.D. Tex. 2005)(the language is “at best, particularly difficult to parse and, at worst,

virtually incoherent”). The statute was intended to prevent abusive serial filings by

individual debtors. In re Taylor, 334 B.R. 660 (Bankr. D. Minn. 2005).

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The statute provides that the case is presumed abusive, causing the automatic stay

to terminate thirty days after filing if: (a) the case at hand is a single or joint filing by or

against a debtor under Chapter 7, 11, or 13; (b) the debtor is an individual; (c) the same

debtor had one other single or joint case pending within the preceding year; (d) the prior

case was dismissed; and (e) the later case is not a Chapter 11 or 13 case that has been

refilled after a dismissal under §707(b). See, Lisa A. Napoli, The Not-So-Automatic Stay:

Legislative Changes to the Automatic Stay in a Case Filed by or Against an Individual

Debtor, 79 Am. Bankr. L.J. 749 (2005).

For purposes of the statute, you measure whether or not a case was “pending” in

the last year using the dismissal date, not the ‘closing date’ of the prior case. See, In re

Moore, 337 B.R. 79, 81 (Bankr. E.D.N.C. 2005); In re Williams, 363 B.R. 786, 789

(Bankr. E.D. Va. 2006).

The statute also does not apply when a case is completed and closed, rather than

dismissed. Thus, a prior Chapter 7 case that was discharged and closed would not be a

case that was “dismissed” under the statute. See, In re Williams, 390 B.R. 780 (Bankr.

S.D.N.Y. 2008); In re Forletta, 397 B.R. 242 (Bankr. E.D.N.Y. 2008).

As discussed in Section E above, the previous dismissal of a case under Section

707(b) does not give rise to any presumption of abuse when the case is refiled as a

Chapter 13. See, In re Garrett, 2008 Bankr. LEXIS 1673, 2008 WL 2206559 (Bankr.

E.D. Va. May 23, 2008).

1. Section 362(c)(3): The Stay Terminates As To What?

According to the majority view, the termination of the automatic stay 30 days

after filing, in a case filed within one year of the dismissal of an earlier case (other than

pursuant to Section 707(b)), does not terminate the stay as to property of the estate. See,

e.g., Holcomb v. Hardeman (In re Holcomb), 380 B.R. 813 (10th Cir. BAP 2008)(the

unambiguous language of §362(c)(3)(A) terminated the stay only with respect to the

debtors and the debtors' property and did not terminate as to property of the estate);

Jumpp v. Chase Home Finance, LLC (In re Jumpp), 356 B.R. 789 (1st Cir. BAP 2006);

In re Pope, 351 B.R. 14 (Bankr. D.R.I. 2006); In re Williford, 2013 Bankr. LEXIS 2871

(Bankr. N.D. Tex. July 17, 2013); In re Scott-Hood, 473 B.R. 133, 136 (Bankr. W.D.

Tex. 2012); In re Murray, 350 B.R. 408 (Bankr. S.D. Ohio 2006); In re Brandon, 349

54

B.R. 130 (Bankr. M.D.N.C. 2006); Bankers Trust Co. of Cal. v. Gillcrese (In re

Gillcrese), 346 B.R. 373 (Bankr. W.D. Pa. 2006); In re Williams, 346 B.R. 361 (Bankr.

E.D. Pa. 2006); In re Harris, 342 B.R. 274 (Bankr. N.D. Ohio 2006); In re Jones, 339

B.R. 360 (Bankr. E.D.N.C. 2006); In re Moon, 339 B.R. 668 (Bankr. N.D. Ohio 2006); In

re Johnson, 335 B.R. 805 (Bankr. W.D. Tenn. 2006). Contra, Reswick v. Reswick (In re

Reswick), 446 B.R. 362 (9th Cir. BAP 2011); St. Anne’s Credit Union v. Ackell, 490 B.R.

141 (D. Mass. 2013); In re Furlong, 426 B.R. 303, 307 (Bankr. C.D. Ill. 2010); In re

Daniel, 404 B.R. 318, 325 (Bankr. N.D. Ill. 2009); In re Curry, 362 B.R. 394, 400-02

(Bankr. N.D.Ill. 2007); In re Jupiter, 344 B.R. 754, 759 (Bankr. D.S.C. 2006).

2. Section 362(c)(4)(A)(i): There Is No Stay.

In contrast to §362(c)(3), courts have viewed §362(c)(4)(A)(i) as unambiguous –

where two prior cases were dismissed within one year, no stay arises upon the filing of

the third petition within that same one year period. See, Pierce v. CitiMortgage, Inc.,

2012 U.S.Dist. LEXIS 170713 (N.D. Cal. Nov. 30, 2012); In re Nelson, 391 B.R. 437

(9th Cir. BAP 2008); In re Ferguson, 376 B.R. 109, 118 (Bankr. E.D. Pa. 2007); In re

Schroeder, 356 B.R. 812, 812-13 (Bankr. M.D. Fla. 2006); In re Ortiz, 355 B.R. 587, 590

(Bankr. S.D. Tex. 2006); In re McBride, 354 B.R. 95, 100 (Bankr. D.S.C. 2006).

3. What About The Co-Debtor Stay?

The termination of the automatic stay under Section 362(c)(3) does not appear to

have any effect on the co-debtor stay. See, In re Lemma, 393 B.R. 299, 303-305 (Bankr.

E.D.N.Y. 2008).

The court in In re King, 362 B.R. 226, 231-234 (Bankr. D. Md. 2007) held that

the co-debtor stay applies even when the stay does not go into effect because of §362(c)

(4)(A)(i) because of a third filing within one year.

4. Stay Goes Into Effect Even If No Credit Counseling.

The Second Circuit Court of Appeals has held that the automatic stay goes into

effect even if a debtor is ineligible because of the debtor’s failure to obtain pre-petition

credit counseling. See, In re Zarnel, 619 F.3d 156 (2nd Cir. 2010). The Zarnel holding is

the majority view. See, In re Grason, 486 B.R. 448 (Bankr. C.D. Ill. 2013); In re John,

479 B.R. 643, 648 (Bankr. M.D. Pa. 2012); In re Gossett, 369 B.R. 361, 372 (Bankr N.D.

Ill. 2007). Contra, In re Salazar, 339 B.R. 622 (Bankr. S.D. Tex. 2006).

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IV. THE ROLE OF THE CHAPTER 13 TRUSTEE

[By Phil Lamos, Chief Legal Counsel, Craig Shopneck, Chapter 13 Trustee, Cleveland, Ohio]

The Chapter 13 Trustee plays many roles in the reorganization of a debtor’s

finances. Some of these roles are mandated by statute; some of these roles are thrust

upon the Trustee by the practical nature of the reorganization process. Some of these

roles are obvious and at the forefront of the Trustee’s operation; some are subtle, behind-

the-scenes roles.

The Trustee’s obligations under the Bankruptcy Code are listed in Section 1302

(which references Section 704). Some of these obligations are the same as the

obligations of a Chapter 7 Trustee, such as investigating the financial affairs of the debtor

and examining and objecting to proofs of claim. Some of these obligations are unique to

the Chapter 13 Trustee, such as appearing and being heard at any hearing that concerns

plan confirmation, modification of a plan after confirmation, or the value of property

subject to a lien, advising and assisting the debtor in performance under the plan, and

ensuring that the debtor commences timely payments.

The Trustee’s duty to investigate the financial affairs of the debtor and the

Trustee’s obligation to appear and be heard at the confirmation hearing go hand in hand.

Combined, these statutorily-mandated duties place an obligation on the Trustee to make

sure the debtor’s plan deals appropriately with the creditors, with particular attention to

the unsecured creditors.

Only by thoroughly investigating the financial affairs of the debtor can the

Trustee be sure that the debtor is paying all of his or her projected disposable income to

the unsecured creditors for the applicable commitment period (as required by Section

1325(b)(1)(B) of the Bankruptcy Code), that the unsecured creditors are receiving as

much as they would receive in a Chapter 7 proceeding (as required by Section 1325(a)

(4)), and that the debtor’s proposed plan can be completed within a 60 month period (as

required by Section 1322(d)).

The Trustee must be well versed in such areas as reading pay advices, valuing

real, personal, and intangible property, and interpreting tax returns.

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Almost all jurisdictions allow the Chapter 13 Trustee to conduct the meeting of

creditors required by Section 341 of the Bankruptcy Code, which gives the Trustee an

opportunity to interview the debtor as part of his or her financial investigation.

In addition to the “fact finding” component of the Trustee’s obligation to

investigate the debtor’s finances, the Trustee must also know and interpret the “legal”

component of the financial investigation. The Trustee must know and interpret various

state and non-bankruptcy statutes, such as those governing exemptions, domestic support

obligations, garnishments, and retirement accounts. The Trustee must also be aware of

the case law defining such terms of art as “disposable income,” “projected disposable

income,” “good faith,” and “adequate protection.” When the case law in an area is

unsettled or unresolved, the Trustee must take the lead in litigating the issue before the

court.

Most Trustees file an objection to confirmation or similar document so that the

results of their financial investigation and their position on the confirmability of the

debtor’s case can become part of the record. Like any other litigant, the Trustee must

appear and prosecute his objection to confirmation if he or she believes the unsecured

creditors are receiving an amount to which they may be entitled either by statute or by the

various case holdings.

In addition to his role as the representative of the unsecured creditors, Sections

1302 and 1326 of the Bankruptcy Code require the Trustee to administer the debtor’s

case as well. For the most part, this entails collecting debtor payments and making

distributions to creditors.

The Trustee has an obligation to make sure that the debtor starts making payments

under the plan. In order to fulfill this obligation, the Trustee may take such actions as

obtaining an order requiring a debtor’s employer to withhold funds from the debtor’s pay

and to send the money to the Trustee and/or moving to dismiss cases in which the debtor

has failed to start making payments on a timely basis. With adequate protections

payments mandated by the bankruptcy Code under certain circumstances, and with more

and more jurisdictions moving to the “conduit” system where ongoing mortgage

payments are made through the Trustee, the Trustee will be making more and more

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distributions before confirmation; a proper review of all claims filed is now more

important than ever.

In order to insure that the Trustee makes proper payments to creditors, the Trustee

has an obligation to object to claims. In some circumstances (such as when a debtor

believes that he or she does not owe a debt, or that the amount of a claim is excessive) the

debtor is in the best position to object to a claim; when a claim is untimely or is

duplicative of another claim, however, the Trustee may have sufficient information to

object to the claim himself or herself.

A good cash management system is a must for any Trustee. The Trustee must

account for all funds received and distributed during the course of the case, and must

make a final report of the administration of the case. Thorough and accurate records will

make the preparation of the final report very easy.

The Trustee is also required to make certain notifications if a debtor is obligated

to pay any form of domestic support.

In addition to the roles found in the Bankruptcy Code, a good Trustee has other

unwritten roles. The Trustee should educate the bar, spearhead initiatives to make the

bankruptcy process easier and/or more efficient, make information regarding a debtor’s

case more accessible (without sacrificing security and privacy concerns), and generally

serve as the face of the Chapter 13 process in a given jurisdiction. These unwritten roles

will make the bankruptcy process easier and less intimidating for debtors while ensuring

maximum return for the creditors.

V. THE BASICS OF LIEN STRIPPING IN BANKRUPTCY.

This portion of the outline will briefly discuss the circumstances under which four

kinds of liens can be stripped – 1) Wholly unsecured mortgages on real estate; 2) judgment

liens; 3) non-purchase money, non-possessory liens on consumer goods; and 4) federal tax

liens.

A. Secured Claims In Bankruptcy

The Supreme Court has categorized the different types of liens in bankruptcy as

follows: “there are two types of secured claims: (1) voluntary (or consensual) secured

claims, each created by agreement between the debtor and the creditor and called a "security

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interest" by the Code, 11 U. S. C. § 101(45), and (2) involuntary secured claims, such as a

judicial or statutory lien, see 11 U. S. C. §§ 101 (32) and (47). . . “. United States v. Ron

Pair Enterprises, Inc., 489 U.S. 235, 240, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290, 297

(1989).

Other courts have viewed liens in bankruptcy as being of three types: “As we noted

in Graffen v. City of Philadelphia, the Bankruptcy Code recognizes three types of liens:

judicial, statutory, and consensual. 984 F.2d 91, 96 (3d Cir. 1992) (citing H.R. Rep. No.

95-595, 95th Cong., 312 (1977), reprinted in 1978 U.S.C.C.A.N. 6269).” In re Schick, 418

F.3d 321, 323 (3rd Cir. 2005).

B. Stripping Wholly Unsecured Mortgages.

1. In Chapter 7.

The U.S. Supreme Court held, in Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773,

116 L.Ed.2d 903 (1992), that a Chapter 7 debtor could not “strip down” a creditors’ lien

on the debtor’s real property to equal the property’s fair market value, and declare the

remainder unsecured.

In Chapter 7 cases, most courts have not distinguished between mortgages that

attach to some equity, and mortgages that are wholly unsecured because all of the equity

is subject to senior liens. The rule in Chapter 7 has generally been the same – you can’t

strip the mortgage. See, In re Talbert, 344 F.3d 555, 556 (6th Cir. 2003)(“a Chapter 7

debtor may not use §506 to "strip off" an allowed junior lien where the senior lien

exceeds the fair market value of the real property in question.”).

Recently, however, there was a case that allowed the stripping of a wholly

unsecured second mortgage in Chapter 7. See, In re Lavelle, Case No.: 09-72389-478,

2009 Bankr. LEXIS 3795, (Bankr. E.D.N.Y. Nov. 25, 2009)(as amended). This approach

has been rejected by the bankruptcy courts that have considered the Lavelle decision: In

re Hoffman, 433 B.R. 437 (Bankr. M.D. Fla. 2010)(citing cases rejecting the Lavelle

holding); In re Cook, 432 B.R. 519 (Bankr. D. N.J. 2010); In re Immel, 436 B.R. 538

(Bankr. N.D. Ill. 2010); In re Caliguri, 431 B.R. 324 (Bankr. E.D.N.Y. 2010); In re

Pomilio, 425 B.R. 11 (Bankr. E.D.N.Y. 2010).

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On a different theory – that Dewsnup did not explicitly overrule pre-w 11th Circuit

authority – has held that wholly unsecured junior mortgages can be stripped in Chapter 7

cases. See, McNeal v. GMAC Mortg., LLC (In re McNeal), 477 Fed.Appx. 562, 2012

U.S. App. LEXIS 9589 (11th Cir. May 11, 2012).

2. In Chapter 13.

The United States Supreme Court has held that mortgages on a debtor’s primary

residence cannot be modified in a Chapter 13, even if they are undersecured. Nobelman

v. American Savings Bank, 508 U.S. 324, 124 L. Ed. 2d 228, 113 S. Ct. 2106 (1993).

The question, after Nobelman, was whether the holding, interpreting § 1322(b)(2) as

prohibiting the cramdown of under-secured liens, should be extended to protect junior

liens that are wholly unsecured by any corresponding value in the collateral residence.

The majority of courts – and all of the Courts of Appeals that have directly

addressed the issue – have held that wholly unsecured mortgages (or deeds of trust) can

be stripped off in Chapter 13, and treated as unsecured claims. See, In re Tanner, 217

F.3d 1357 (11th Cir.2000); In re Dickerson, 222 F.3d 924 (11th Cir. 2000)(following

Tanner, somewhat reluctantly); In re Bartee, 212 F.3d 277 (5th Cir. 2000); In re

McDonald, 205 F.3d 606 (3d Cir. 2000); In re Pond, 252 F.3d 122 (2nd Cir.2001); In re

Lane, 280 F.3d 663 (6th Cir. 2002); In re Zimmer, 313 F.3d 1220 (9th Cir. 2003). Other

appellate decisions allowing totally unsecured mortgages to be stripped include: In re

Mann, 249 B.R. 831, 835-37 (1st Cir. BAP 2000)(cited with approval in dicta in by In re

LaFata, 483 F.3d 13 (1st Cir. 2007)); Johnson v. Asset Management Group, LLC, 226

B.R. 364 (D. Md. 1998).

The Sixth Circuit is one of the appellate courts that have held that a wholly

unsecured second or third mortgage can be stripped off in a Chapter 13 under §1322(b)

(2), and paid as an unsecured creditor.  See, In re Lane, 280 F.3d 663 (6th Cir. 2002). 

Mechanically, it appears that a wholly unsecured second or third mortgage can be

stripped off without an adversary proceeding in some jurisdictions. For example, the

bankruptcy court in In re Hill, 304 B.R. 800 (Bankr. S.D. Ohio 2003) held that the Plan

provision – clearly stating that the wholly unsecured mortgage would be stripped -

together with a subsequent motion, was sufficient under the Bankruptcy Code to strip

these unsecured mortgages.  However, the Hill court specifically declined to address the

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issue of whether a Plan provision by itself was sufficient for purposes of due process,

since that issue had not been raised by the parties. Other courts have held a motion to be

sufficient for mortgage stripping where the treatment of the junior mortgage had been

specifically provided for in the Chapter 13 Plan. See, In re Pereira, 394 B.R. 501, 505

(Bankr. S.D. Cal. 2008); In re Sadala, 294 B.R. 180 (Bankr. M.D. Fla. 2003); In re

Fisher, 289 B.R. 544 (Bankr. W.D.N.Y. 2003), In re Robert, 313 B.R. 545 (Bankr.

N.D.N.Y. 2004), In re Bennett, 312 B.R. 843 (Bankr. W.D. Ky. 2004).

In contrast, some courts require the filing of an adversary proceeding to strip a

mortgage. See, In re Ginther, 2010 Bankr. LEXIS 1076 (Bankr. N.D. Ill. April 22, 2010);

In re Forrest, 410 B.R. 816, 819 (Bankr. N.D. Ill. 2009); In re Chukes, 305 B.R. 744

(Bankr. D.D.C. 2004). Some courts requiring the filing of an adversary have held that the

adversary proceeding requirement can be waived if the creditor does not object. See,

Ginther, supra; In re Pence, 905 F.2d 1107 (7th Cir. 1990); and cf., United Student Aid

Funds, Inc. v. Espinosa, 559 U.S. 260, 130 S.Ct.1367, 176 L. Ed. 2d 158 (2010).

Filing an adversary proceeding is the “safe” way to proceed – no court has held

(or would hold) that a mortgage was not avoided because too much procedural protection

was afforded to the mortgage holder. If, at some point, courts hold that an adversary

proceeding is required to strip a wholly unsecured mortgage, the effectiveness of

mortgages that were stripped by motion could be called into question. Particularly those

mortgages that were still in limbo – stripped by motion but where the Chapter 13

discharge has not been granted.

Debtors’ counsel have attempted to implement “instant” removal of junior

mortgages using Section 506(d). The appellate courts have not been kind to this theory,

and have denied mortgage stripping under Section 506(d). See, In re Woolsey, 696 F.3d

1266 (10th Cir. 2012); see also, In re Ryan, 725 F.3d 623 (7th Cir. 2013)(attempting to

void a federal tax lien).

Note that if the mortgage creditor is a federally insured banking institution, service

of the Chapter 13 Plan, and the subsequent motion to avoid the second mortgage, should be

made as provided by Federal Rule of Bankruptcy Procedure 7004(h). That means sending

the Plan, and the Motion to avoid the junior mortgage, to the bank President or CEO, by

certified mail, return receipt requested (i.e., “green card service”). See e.g., In re Carstens,

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66 Collier Bankr. Cas. 2d (MB) 11, 2011 Bankr. LEXIS 3048 (Bankr. D. Neb. Aug. 9,

2011)(“Service on the defendant was properly made pursuant to Federal Rule of Bankruptcy

Procedure 7004(h) by mailing the summons and a copy of the complaint to the registered

agent and to an officer of the entity via certified mail.”).

Assuming that the Chapter 13 debtor has done everything correctly – 1) clearly

stating in the Chapter 13 Plan that the wholly unsecured junior mortgage is being stripped;

2) filing a subsequent motion (or filing an adversary complaint) to strip the mortgage; and 3)

properly serving both the Plan and the Motion – when is the mortgage actually “stripped”?

The answer is, under Section 1325(a)(5)(B)(i)(I)(bb), at the time the discharge is granted.

See e.g., In re Sanitate, 415 B.R. 98 (E.D. Pa. 2009)(Full amount of mortgages

encumbered residence upon dismissal of Chapter 13 case. When homeowner’s previous

Chapter 13 was dismissed, plan became void, and no final judgment then existed for

purposes of res judicata or issue preclusion to support homeowner’s attempt to limit

mortgagee’s claim to the amount of scheduled claim under plan.)

C. Stripping/Bifurcating Judgment Liens That Impair ExemptionsUnder §522(f)(1)(A).

Judicial liens that are for Domestic Support Obligations cannot be stripped.

§522(f)(1)(A).

The power to strip judicial liens is available in both Chapter 7 and Chapter 13. In

re Holland, 151 F.3d 547 (6th Cir. 1998)(appeal of Chapter 7 debtor).

Section 522(f) of the Bankruptcy Code states:

Notwithstanding any waiver of exemptions, the debtor may avoid the fixing of a lien on an interest in property to the extent that such lien impairs an exemption to which the debtor would have been entitled under subsection (b) of this section if such lien is –

(1) a judicial lien; or other than a judicial lien that secures a debt of a kind that is specified in section 523(a)(5);

Under Bankruptcy Rule 7001, an action to determine the validity, priority, or

extent of a lien or other interest in property must be brought as an adversary

proceeding. However, there is one exception - lien avoidance under §522(f), which is

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controlled by Bankruptcy Rule 4003(d): "A proceeding by the debtor to avoid a lien

or other transfer of property exempt under §522(f) of the Code shall be by motion in

accordance with Rule 9014." Bankruptcy Rule 9014 governs "contested matters" –

NOT adversary proceedings. Accordingly, the courts have held that lien avoidance

under Section 522(f) can be accomplished by motion.

The United States Supreme Court’s decision in Owen v. Owen, 500 U.S. 305, 111 S.

Ct. 1833, 114 L. Ed. 2d 350 (1991) cites the following formula for §522(f) lien avoidance

with approval:

1. Determine the value of the property on which a judicial lien is sought to be avoided.

2. Deduct the amount of all liens not to be avoided from (1).

3. Deduct the Debtors' allowable exemptions from (2).

4. Avoidance of all judicial liens results unless (3) is a positive figure.

5. If (3) does result in a positive figure, do not allow avoidance of liens, in order of priority, to that extent only. (emphasis in Brantz). [In re Brantz, 106 B.R. 62, 68 (Bankr. E.D. Pa. 1989).]

Even though they promised you that there would be no math if took the

lawyering gig, there can be math associated with a Section 522(f) lien strip. See e.g., In

re Pagnini, 433 B.R. 455 (1st Cir. BAP 2010)(BAP decision goes through §522(f) lien

strip math for jointly owned residence, where judgment lien was against the debtor only

(not her co-owner daughter)).

Debtors’ attorneys should bear in mind that the Bankruptcy Code defines a

"judicial lien" as a lien obtained by judgment, levy, sequestration, or other legal or

equitable process or proceeding. 11 U.S.C. §101(32). Mortgages, which are

"consensual liens", and liens arising by operation of law, which are "statutory liens", are

not avoidable under §522(f). Neither are purchase money security interests, nor

instances where the creditor retains possession of the secured property.

D. Stripping Nonpurchase Money, Nonpossessory Liens On HouseholdGoods Under §522(f)(1)(B).

There is another tool for debtors’ counsel to consider for non-purchase money

security interests in personal property.  Section 522(f)(1)(B) has a provision for

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removing nonpossessory, nonpurchase-money security interests from "household

furnishings, household goods, appliances, books, animals, crops, musical instruments,

or jewelry that are held primarily for the personal, family or household use of the

debtor or a dependent of the debtor". Many courts hold that §522(f)(4)(A) defines

and limits “household goods” to the listed items – note that the list provides

numerical limitations as well: i.e., “1 television”. See e.g., In re Yawn, 63 Collier

Bankr. Cas. 2d (MB) 1247, 2010 Bankr. LEXIS 486 (Bankr. S.D. Ga. Feb. 5, 2010).

Liens can also be avoided on debtor’s “tools of the trade”, and professional

prescribed health aids for the debtor or a dependant.

One of the hot issues is attempting to strip liens on a vehicle based on it being

a “tool of the trade”. See, In re Garcia, 451 B.R. 909 (C.D. Cal. 2013)(reversing

holding that vehicle lien could not be stripped as a ‘tool of the trade’ as a matter of

law).

Keep in mind, lien avoidance under this provision will not be possible if the

creditor has a purchase money security interest (money was loaned to actually

purchase the item), or if the property is actually held by the creditor (like a pawn shop

situation).

The stripping of the security interest in these kinds of goods (household goods,

tools of the trade, or professionally prescribed health aids) can be accomplished by

motion.

E. Stripping/Bifurcating Federal Income Tax Liens

1. In The Reorganization Chapters – 11, 12 and 13.

Federal tax liens arise solely by force of federal tax law, so they are classified as

statutory liens. In re Mills, 37 B.R. 832, 834-35 (Bankr. E.D. Tenn. 1984); see also, In re

Walter, 45 F.3d 1023, 1027 (6th Cir. 1995)(“A federal tax lien under Internal Revenue

Code § 6321 is a statutory lien subject to avoidance.”).

Generally, it appears that federal tax liens can be bifurcated into secured and

unsecured debts in the reorganization Chapters – 11, 12 and 13. See, In re IRS of the

Dep't of the Treasury of the United States v. Johnson, 415 B.R. 159; 2009 (W.D. Pa.

2009)(Bankruptcy court did not err in stripping the federal tax lien of the IRS from the

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debtor's real property, in which there was no equity, in accordance with the confirmed

Chapter 11 amended plan of reorganization, under which he remained obligated to make

payments to the IRS, and as authorized by 11 U.S.C.S. §§ 506(a) and 1123(b)(5). Relies

on Chapter 13 cases to reach its decisions.); Internal Revenue Serv. v. Campbell, 180

B.R. 686, 687 (M.D. Fla. 1995)(holding that a federal tax lien must be voided as to the

unsecured portion of the IRS' bifurcated claim once the secured portion was paid in full

under the Chapter 13 plan, even if the unsecured portion remained unpaid; otherwise,

allowing the IRS to retain the lien would mean the IRS "receiving more than Congress

intended it to receive").

Where a federal tax lien attaches to both real estate and personal property, the tax

lien on real estate cannot be bifurcated separately because a federal tax lien is “one lien”.

See, In re Hoekstra, 255 B.R. 285 (E.D. Va. 2000). I.R.C. §6321 makes clear that the

value of a federal lien for taxes is the sum of all the property that is subject to the lien.

Section 6321 does not state that there shall be "liens" upon a debtor's real and personal

property; it states that there shall be "a lien," or a single lien. A federal tax lien under

§6321 is a single lien. A federal tax lien arises and attached to all the taxpayer's property

and rights to property, real and personal. Therefore, even if one or more properties

subject to the tax lien is without value, if any of the property retains value, bankruptcy

debtors cannot bifurcate the undersecured claim into secured and unsecured claims. In re

Hoekstra, 255 B.R. 285 (E.D. Va. 2000).

Keep in mind that exemptions are no good against federal tax liens. Deppisch v.

United States, 277 B.R. 806, 809 (Bankr. S.D. Ohio 1998); In re Raihl, 152 B.R. 615 (9th

Cir. BAP 1993)(noting § 522(c)(2)(B) provides that property exempted under §522 is

subject to a tax lien.); In re Quillard, 150 B.R. 291, 295 (Bankr. D. R.I. 1993)(stating

§522 (c)(2)(B) limits Debtor's avoiding powers with respect to IRS tax liens.).

Even the IRS statute “exempting” certain items from levy, does not limit the

extent of the federal tax lien. This principle even extends to retirement accounts.

"[I]nalienability of the pension interests does not destroy their character as property or

immunize the interest from the attachment of a federal tax lien." In re Raihl, 152 B.R.

615, 618 (9th Cir. 1993) citing Leuschner v. First Western Bank and Trust Co., 261 F.2d

705, 708 (9th Cir. 1958). Further, interests in ERISA qualified plans are "property or

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rights to property" under 26 U.S.C. §6321. In re Perkins, 134 B.R. 408, 410-11 (Bankr.

E.D.Cal.1991); accord, Shanbaum v. U.S., 32 F.3d 180, 183 (5th Cir. 1994); see also, In

re Leedy, 230 B.R. 678 (E.D. Va. 1999).

26 U.S.C.S. §6334 exempts several forms of personalty from levy by the IRS.

However, the IRS's inability to levy on exempt property does not destroy the lien, or

make the IRS's claim unsecured. See, United States v. White, 340 B.R. 761 (E.D.N.C.

2006). In affirming the decision of the District Court, the Fourth Circuit held that

“surrender” of property that the IRS was not permitted to levy on – without actually

physically turning over the property to the IRS - did not comply with the requirement of

Section 1325(a)(5)(C). See, IRS v. White, 487 F.3d 199 (4th Cir. 2007).

The IRS's lien attaches also to interest or profits earned post-petition on those

funds, but not to any funds paid into the account from the debtor's post-petition earnings.

See, In re Connor, 27 F.3d 365, 366 (9th Cir. 1994) ("Although the reach of [a Federal

tax lien] is very broad, it does not apply to property acquired after bankruptcy."); Pansier

v. United States, 225 B.R. 657 (E.D. Wis. 1998)("while tax liens securing dischargeable

debts do not attach to property acquired post-petition, bankruptcy does not change their

effectiveness regarding property interests a debtor held pre-petition."); Compare, In re

Deppisch, 227 B.R. 806 (Bankr. S.D. Ohio 1998)(Plaintiff was not able to set aside IRS

seizure of his IRA account notwithstanding claim of exemption and discharge in

bankruptcy case because liens survived discharge and IRS had a valid pre-petition lien on

IRA, despite any exempt status.)

Like the decision in Woolsey, holding that Section 506(d) does not function to

allow the immediate stripping of consensual mortgages, the decision in In re Ryan, 725

F.3d 623 (7th Cir. 2013). The bifurcation of federal tax liens has to be accomplished

under Section 506(a), and the liens are not actually removed until the discharge is

granted.

2. Chapter 7 – Can’t Use Section 506 For Lien Avoidance, Period.

Lien stripping in chapter 7 cases is inconsistent with the purpose and policy of

§506, which was "to facilitate valuation and disposition of property in the reorganization

chapters of the Code." In re Laskin, 222 B.R. 872, 876 (9th Cir. BAP 1998).

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Furthermore, the majority of courts addressing this issue have applied Dewsnup to

both consensual and nonconsensual liens in chapter 7 bankruptcy cases. See, e.g., Boring

v. Promistar Bank, 312 B.R. 789, 797 (W.D. Pa. 2004)(citing Laskin and holding §506(d)

may not be used in chapter 7 to strip off an allowed judicial lien); Crossroads of Hillsville

v. Payne, 179 B.R. 486, 491 (W.D. Va. 1995)(holding that Dewsnup's prohibition against

lien stripping barred a chapter 7 debtor from avoiding a wholly unsecured judgment lien

under §506(d)); In re Warner, 146 B.R. 253, 256 (N.D. Cal. 1992)(reversing a bankruptcy

court's decision permitting a chapter 7 debtor to strip down an undersecured federal tax

lien under §506(d)); In re Swiatek, 231 B.R. 26, 29 (Bankr. D. Del. 1999)(holding that

Dewsnup applied to prohibit the avoidance of nonconsensual liens, and observing that

"the in rem aspect of a judgment is equally as viable in the context of a nonconsensual

lien as in that of a consensual one"); In re Esler, 165 B.R. 583, 584 (Bankr. D. Md. 1994)

(observing that Dewsnup "is equally applicable to consensual and non-consensual liens");

In re Doviak, 161 B.R. 379, 381 (Bankr. E.D. Tex. 1993)(rejecting debtors' argument that

Dewsnup applies only to consensual liens, and denying debtors' motion to strip down an

undersecured federal tax lien); In re Rombach, 159 B.R. 311, 314 (Bankr. C.D. Cal.

1993)(concluding that Dewsnup prohibits debtors "from stripping down the undersecured

portion of a non-consensual lien").

The prohibition against using Section 506 in Chapter 7 proceedings can also

prevent stripping of judgment liens where they cannot be stripped under Section 522(f) –

in other words, if there is no impairment of the debtor’s exemption. See, In re

Concannon, 338 B.R. 90 (9th Cir. BAP 2006)(Debtors attempt to distinguish Laskin by

arguing that Dewsnup and its progeny apply only to consensual liens. Debtors reason

that Imperial's wholly unsecured judgment lien may be stripped off simply because it is

nonconsensual. This is a distinction without a difference.)

The McNeal decision is to the contrary, based on pre-Dewsnup, and may have

some application to a federal tax lien stripping analysis. See, McNeal v. GMAC Mortg.,

LLC (In re McNeal), 477 Fed.Appx. 562, 2012 U.S. App. LEXIS 9589 (11th Cir. May 11,

2012).

ADDITIONAL LIEN STRIP CASES:

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In re Smith, 438 B.R. 69 (Bankr. M.D. Pa. 2010). Chapter 13 debtors do not get a Means Test deduction for junior mortgage debt that is to be stripped off. See also, In re Kramer, 495 B.R. 121 (Bankr. D. Mass. 2013); In re Blaies, 436 B.R. 35 (E.D. Mich. 2010).

In re Wesseldine, 434 B.R. 31 (Bankr. N.D.N.Y. 2010). Attorney could not get additional fees, over and above their flat fee, for filing an adversary complaint to strip junior mortgages when it could be accomplished by motion.

In re Loban, 426 B.R. 805 (Bankr. D. Minn. 2010). Lack of objection by junior residential mortgagee to improper strip off of its lien in Chapter 13 Plan did not allow confirmation - citing Espinosa.

In re Robert, 313 B.R. 545 (Bankr. N.D.N.Y. 2004). Liens can be “stripped off” by motion practice.

In re Bennett, 312 B.R. 843 (Bankr. W.D. Ky. 2004). Adversary proceeding not required for Chapter 13 debtors to "strip off" lien.

In re Monas, 309 B.R. 302 (Bankr. N.D. Ohio 2004). Prior default judgment had preclusive effect on unsecured nature of first mortgagor's claim where second mortgagor had obtained a default judgment in state court foreclosure sale prior to bankruptcy.

In re Jones, 305 B.R. 276 (Bankr. S.D. Ohio 2004). Avoidable but unavoided liens cannot be included in exemption impairment calculation. For §522(f), you take the unavoidable liens and the debtor's exemption, to determine if the judgment lien impairs the exemption and can be avoided.

In re Hill, 304 B.R. 800 (Bankr. S.D. Ohio 2004). Chapter 13 debtors could avoid wholly unsecured junior mortgage without adversary proceeding.

In re Sbriglio, 306 B.R. 445 (Bankr. D. Conn. 2004). Debtors could not avoid lien on property not included in bankruptcy estate.

In re Sutton, 302 B.R. 568 (Bankr. N.D. Ohio 2003). Judgment lien could not be avoided where it came ahead of IRS tax lien, where notice of tax lien was not filed by IRS until after judgment lien, and there was sufficient equity for judgment lien, in that position, not to impair the debtor's exemption.

In re Samala, 295 B.R. 380 (Bankr. D.N.M. 2003). Chapter 13 debtors could "strip off" wholy unsecured junior mortgage liens.

In re Bennett, 312 B.R. 843 (Bankr. W.D. Ky. 2004). Adversary proceeding is not required for Chapter 13 Debtors to “strip-off” lien.

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In re Day, 292 B.R. 109 (Bankr. N.D. Tex. 2003). Lien release must await completion of debtor's payments under Chapter 13 plan where creditor objected to requirement that lien be released upon payment of secured portion of claim.

Richard L. Ngo, The Proper Valuation Date of Residential Property for a §506(a) Lien Strip, 29-AUG AMBKRIJ 14 (July/August 2010).

VI. CONDUCTING AN EFFECTIVE 341 MEETING.

A. Areas To Think About For 341 Meetings

(*By Dean Wyman, Esq., Trial Attorney, Office of the U.S. Trustee, Cleveland. These comments were provided by Mr. Wyman at my request, and Section VI includes many comments that are solely the opinion of John Gustafson. Nothing in this section should be taken as official policy statements of, or direction from, the Office of the United States Trustee.*)

The 341 meeting presents many issues that should be considered:

Petition

1. The trustee who begins the examination by asking whether all the information in the petition is correct? The difficulty is that the information in the petition may be correct but that the information in the schedules and statement of financial affairs may be completely false.

Papers

2. The trustee who does not identify which document he is asking about. Such as “Is all of the information in your bankruptcy papers correct.” In any subsequent action, such as a 727 action, there is absolutely no record of which documents the trustee or debtor was talking about. Did the trustee referred to the publicly filed documents, the documents in his file, or the original documents signed by the debtor? And what is a bankruptcy paper?Lawyer As Examiner

3. The trustee who lets debtor’s counsel, in fact, conduct the meeting. This occurs when the debtor does not respond to questions and debtor’s counsel, instead, begins to answer all questions. This is a signal that something is not correct with the bankruptcy case. The best solution may be to ask the debtor if everything his or her lawyer just said was true.

Silent Spouse

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4. The joint debtors where the spouse answers questions for both of the debtors. Allied with this is the debtor who barely speaks. Unless the trustee is paying attention, the testimony is so faint that you cannot determine what was said. It is all a mumble.

Indianapolis 500

5. The trustee who races through the questions and therefore doesn’t hear the answers to his or her questions. When questions are asked so quickly, the answers become meaningless. Remember, criminal actions require intent. If the trustee is asking the questions very quickly, it is difficult to say that the debtor lied even if he or she did.

Money From Dear Uncle

6. The trustee who does not pinpoint the questions about inheritances. The question may be “do you have a right to an inheritance?” But that question may ignore some timing issues. This is a more common issue that any of us would think. The question really should be: “When you filed your bankruptcy case did you have a right to an inheritance?” Or. “after you filed your case up until today, did you become entitled to an inheritance?”

You Are On Candid Camera!

7. The talkative trustee. Some trustees start the recording devices before the meeting of creditors. I recall a few years ago, I listed to a recording. Before the debtor appeared the trustee was talking to debtors counsel. This conversation is now recorded. It is a conversation that trustee, if he knew, would not want recorded.

Fees

8. The question about fees. Trustees usually ask about fees. The question is posed to the debtor but then counsel answers the question.

Second Disclaimer: These are my (Dean Wyman’s) personal comments and observations and are not to be cited, copied, or distributed. There are not a statement of policy or otherwise of the United States Trustee, the U.S. Department of Justice or any other person or entity.

(The following are my [John Gustafson’s] comments, and only my comments.)

1. The Oath.

This is the oath that I was taught as a law clerk, many, many years ago: "Raise your right hand." 

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"Do you swear, or affirm, that the testimony you are about to give in this proceeding shall be the truth, the whole truth, and nothing but the truth, as you shall answer to the laws of perjury." There are two advantages to this form of oath - 1.  By giving the option to "swear, or affirm" you give people the option to affirm.  Some people, usually for religious reasons, will not "swear".  When that objection is raised, I usually just ask them to listen carefully, and repeat the oath, with some emphasis on "or affirm".  If they don't get it, I suggest that they can respond to the oath by saying: "I so affirm".

2.  Oaths that use traditional language like "so help me God" will be a problem for some religious, and non-religious people.  Everyone is subject to the laws of perjury, and that is not a controversial concept. The purpose of the oath is to put the oath-giver in a solemn frame of mind in giving testimony. The oath should be given to each debtor individually. Debtors should not be sworn in as a group before the Section 341 Meeting. See, Handbook for Standing Chapter 13 Trustees, Chapter 5, page 5-2 (1998).

2. The Way You Phrase Questions Can Be Important.  In asking your standard questions of debtors, let me point out a couple of areas to be careful with. 1.  When you have a stay at home spouse, never say "You don't work?"  Stay at home Moms, husbands who are caring for disabled wives, etc. are not going to react well to the assertion that they don't work just because they don't get paid for what they do.  Safer ways to ask the question are: "Do you work outside the home?"  Or, more accurate but more time consuming, "do you have any source of income?" followed by "what are they?" if the answer is "yes".  Of course, you should already have a pretty good idea what the answers to these questions are going to be based on Schedule I, if they are accurate. 2.  An eligibility requirements for a joint Chapter 13 case is that the debtors are married.  This is sometimes an awkward question to ask - "are you married?" leaves are out an important component - that they are married to each other.  (Debtors will often make nervous jokes in response to this question if it is asked that way.  You can ask "are you married to each other?" - but again, that is going to sound odd to the debtors, and it leaves out part of the legal requirement: that the debtors were married at the time of filing.  There is also a problem regarding what is a "marriage" - some states recognize common law marriage, and both spouses may have a different idea as to whether they are "common law" married.  We have adopted this form of the question: "Were you legally married to each other at the time of filing?"  Not perfect, but it works pretty well for me.

3. My Opening 341 Meeting Questions.

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 After the oath is administered, I go through the following questions at the beginning of every 341 Meeting - "Please state your name and address for the record." [This is checked against the address listed on the Notice – that is the mailing address used by the Court and our Office.]

I slide the Notice that contains the with the debtor(s) social security number(s) across the table stating that: “I am showing you a copy of the 341 Notice. Highlighted [usually with an orange highlighter] on that document are/is social security numbers. Please do not state the number out loud, but please testify if that is your correct social security number.”  I have a paper copy of the Petition, Schedules and Statement of Financial Affairs for each case (obviously this would be a problem for a paperless office).  I hold up this document and state: "I'm showing you a copy of the Petition, Schedules, and Statement of Financial Affairs that started your Chapter 13 proceeding.  Do you recognize these documents?" Hopefully, they answer “yes”....  If they don't recognize the documents, we try to find out why - sometimes it is because the attorney didn't spend much time meeting with the client(s). The important thing is: the documents – the Petition, Schedules, and Statement of Financial Affairs - have been specifically identified. It isn’t just the ‘Petition’.

"Did you provide your attorney with the information used to prepare these documents?" "Did you review these documents before you signed them?" "And when you signed them, were they true and correct to the best of your knowledge?" "Did you list all your debts?"  (Often, debtors will want to add "to the best of my knowledge - and I am OK with that.) "Did you list all of your assets?" "Are there any changes that need to be made to these documents today to make them accurate today, because of changed circumstances, a mistake, or any other reason?" 

[Note that this question requires a "no", not a "yes".  So, debtors can't say "I was just mindlessly answering yes to all the questions."] 

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When the debtors are answering your questions, be sure to immediately jump in and ask for a "yes" or a "no" if the debtors are answering "uh-huh", "yeah" or are just nodding their heads.  "This proceeding is being recorded and I need yes or no answers.  The tape can't pick up you nodding your head." Sometimes, you need to remind the debtor more than once. We then move to the identification of original "wet signatures" or the debtors.  Debtors' attorneys are required to bring to the 341 Meeting the original documents that the debtors signed.  I ask for those documents and use them to ask the following questions:

"I'm showing you the Petition page, is that your signature?"  [Or, "are those your signatures?"] "And you signed it on [date - "February 22nd, 2010?"   "Turning to the declaration at the end of the Schedules, are those your signatures?" "And you signed the declaration on February 22nd as well?" "Finally, at the end of the Statement of Financial Affairs, is that your signature?" I don't ask for debtors to identify their signatures on other documents.  I don't ask about the signature on the Means Test because, frankly, I don't expect the debtors to understand it.

[*** In pro se cases, you will probably not have access to the original signatures (unless they made extras) because the original paper copies are on filed with the Court. So, I modify the above-questions by asking if the pro se debtor signed the document they filed with the Bankruptcy Court Clerk. ***]

When a case has been converted from Chapter 7 to Chapter 13, in many – if not most – cases it will be because the Office of the United States Trustee filed a Section 707(b) Motion to Dismiss. While you are preparing for the First Meeting of Creditors: READ THE 707(b) MOTION. See what was alleged. Ask questions about whether what the UST alleged is true. You never want to miss an issue that you should have picked up on based on what the U.S. Trustee has previously filed in the case.

4. Don’t Forget To Go Back And Get Answers!

Q. “What did you do with the $20,000 in proceeds from the life insurance policy.”

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A. “I went shopping.”

Q. “What did you buy?”

A. “Stuff.”

You have to get back to this type of response and ask: “What stuff?” Do not allow

yourself to be blown off!

5. Family Size, Dependants, And Who Lives In The House.

Family size issue – the reality can be different from what is listed on the Schedules!

Maintain your sense of curiosity!

Q. “Are you married?”

A. “No.”

Q. “Do you have any dependants?”

A. “No.”

If you stopped there, you might not be getting a true picture of the debtor’s situation.

Q. “How many people live in your house?”

A. “Six”.

Q. “But none of them are dependants?”

A. “No. My boy is 31, he and his girlfriend and her 3 kids moved back in with me.”

Q. “Is your son or his wife employed?”

A. “Yes, Marty has a job.”

Q. “Is he paying you anything for rent, utilities, and groceries?”

A. “No.”

6. When The Debtor Responds By Pleading The 5th Amendment.

Filing bankruptcy does not waive a debtor’s privilege against self-incrimination.

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“The Fifth Amendment provides in part that: "no person . . . shall be compelled in

any criminal case to be a witness against himself." Hoffman v. United States, 341 U.S.

479, 485, 71 S. Ct. 814, 95 L. Ed. 1118 (1951). A court must afford this privilege against

self-incrimination a liberal construction in favor of the right it was intended to secure. Id.

The Fifth Amendment applies in civil and administrative cases as well as criminal cases.

Kastigar v. United States, 406 U.S. 441, 444, 92 S. Ct. 1653, 32 L. Ed. 2d 212 (1972); In

re DG Acquisition Corp., 151 F.3d 75, 79 (9th Cir. 1998). And, in particular, the Fifth

Amendment privilege may be asserted in a bankruptcy proceeding. McCarthy v.

Arndstein, 266 U.S. 34, 41, 45 S. Ct. 16, 69 L. Ed. 158 (1924); In re Boughton, 243 B.R.

830, 835-836 (Bankr. M.D. Fla. 2000); In re Mudd, 95 B.R. 426, 429 (Bankr. N.D. Tex.

1989). Indeed, the Fifth Amendment privilege may be correctly asserted any time a party

is asked to give testimony that is incriminating or could lead to incriminating evidence.

Hoffman, 341 U.S. at 486; DG Acquisition, 151 F.3d at 79.” In re Yates, 2008 Bankr.

LEXIS 4406 (Bankr. S.D. Cal. June 17, 2008); see also, In re Marble, 2008 Bankr.

LEXIS 1487 (Bankr. N.D. Tex. May 9, 2008)(discussing waiver of the Fifth Amendment

privilege in the context of a 2004 examination).

There are cases that hold that even when the possibility of prosecution is very

remote, the privilege can still be invoked. See, In re Welsh, 2013 Bankr. LEXIS 4716

(Bankr. E.D.N.C. Nov. 7, 2013)(Fifth Amendment privilege could be asserted where

testimony could have been used to prosecute debtor under the virtually unused N.C.

“fornication and adultery” statute.)

The Fifth Amendment privilege belongs to the debtor – not the attorney.

Ask whatever questions you think it is important to ask – even if you know the

debtor is going to plead the Fifth. There are many decisions that hold that a court may

draw a negative inference from the debtor’s invocation of the Fifth Amendment. See,

Baxter v. Palmigiano, 425 U.S. 308, 318, 96 S. Ct. 1551, 47 L. Ed. 2d 810 (1976); In re

Marrama, 445 F.3d 518, 522 (1st Cir. 2006); In re Carp, 340 F.3d 15, 23 (1st Cir. 2003);

In re Norwood, 2013 Bankr. LEXIS 3232 at *35 (Bankr. D. Colo. Aug. 8, 2013). Make

your record without regard to the debtor’s assertion of the Fifth Amendment privilege.

Do NOT conclude the §341 Meeting – either adjourn it or continue it.

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Whenever a debtor pleads the Fifth Amendment privilege, you need to inform the

Office of the U.S. Trustee of that fact. “The United States Trustee will, if appropriate,

advise the United States Attorney who may take appropriate action to seek a grant of

immunity.” Handbook for Chapter 13 Standing Trustees, Chapter 5, page 5-3

(12/1/1998)

If the claim of privilege is not well founded, the standing trustee should seek an

order from the court compelling testimony or granting such other relief as may be

appropriate, such as dismissal of the case or denial of discharge.

7. When The Debtor Refuses To Answer Based On Attorney-Client Privilege.

The privilege belongs to the debtor, not the attorney. The debtor should be required to

claim it. See e.g., In re Henderson, 360 B.R. 477, 486-487 (Bankr. D.S.C. 2006); In re

Wilkerson, 393 B.R. 734, 744 (Bankr. D. Colo. 2008).

Remember, there are limits to the attorney-client privilege. WHEN the client met

with his attorney is NOT privileged.

If the debtor is asserting an “advice of counsel” defense – there are problems with

claiming attorney-client privilege. IT has been held that the attorney-client privilege

cannot be used as both a sword and a shield. See, In re Residential Capital, LLC, 491

B.R. 63, 69 (Bankr. S.D.N.Y. 2013);

Note that it has been held that attorney form letters to clients – information letters

that change only the addressee and are prepared independent of the specific attorney-

client relationship – are not privileged. In re Wilkerson, 393 B.R. 734, 741-742 (Bankr.

D. Colo. 2008)("The [attorney-client] privilege may only be raised by the client”).

8. When Debtor’s Counsel Instructs The Client Not To Answer

The 341 Meeting is a legally authorized fishing expedition. “A §341 meeting is

conducted in much the same way one conducts a fishing expedition -- throwing out baited

lines numerous times in the hope of reeling in something of substance. No formal rules of

evidence are employed.” In re Ward, 92 B.R. 644, 646 (Bankr. W.D. Pa. 1988); see also,

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In re Russell, 392 B.R. 315, 358-59 (Bankr. E.D. Tenn. 2008)(The meeting of creditors

“is a fishing expedition allowed, even encouraged, by the statutes and the rules so long as

the subject of the questioning relates to the bankruptcy case.”).

Similarly, in a 2004 examination the scope is broader than that of a deposition

under Rule 26 of the Federal Rules of Evidence. See, In re Morrison, 443 B.R. 378, 380

n.2 (Bankr. M.D.N.C. 2011).

If counsel can’t articulate why he or she is instructing the debtor not to answer,

explore the area where the debtor is being non-responsive – establishing a clear record –

then bring it before your judge.

Saying something isn’t relevant, probative, “beyond legitimate inquiry”,

or none of the trustee’s business just isn’t going to fly with the bankruptcy court. See, In

re Morrison, 443 B.R. 378, 380 n.2 (Bankr. M.D.N.C. 2011)(“Under the broad scope of

inquiry applicable to the examination of a debtor at the first meeting of creditors, the

Debtor's objection to the relevance of the question and the subsequent refusal to answer

were improper.”).

9. Dealing With Specific Issues.

A. 401(k) Loans.

My questions on 401(k) loans almost always start with “When did you take out

the 401(k) loan?” The reason is, most retirement loans are for a five year period. If you

know when the loan was taken out, you pretty much know when it is paid off. But, by

asking when it as taken out, the debtor(s) are less likely to “forget” or not be sure – which

tends to happen when you ask them “when is your 401(k) loan paid off?” They know

what’s coming when you ask that question, and they clam up.

My second 401(k) question is “how much did you borrow?” Third, is: “What did

you use the money for?” And last, I ask when the loan will be paid off. The next step is

to see if the debtor(s) will enter into a stipulation to step up the Plan payments when the

401(k) loan payment ends. See, In re Seafort, 669 F.3d 662, 671 (6th Cir. 2012).

B. Inheritances, Lottery Winnings, Personal Injury Suits.

So called “windfalls” are a difficult area in Chapter 13. If you look at the Code

sections, and how they interact, difficult questions arise as to whether or not post-petition

inheritances, lottery winnings, and personal injury actions based on post-petition injuries,

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are disposable income or even property of the estate. Fortunately, much of the case law

gets to the result Chapter 13 Trustees generally want – 1) there is a duty to disclose; 2) a

post-petition windfall is part of the estate, even after Confirmation re-vests (in most

instances) property with the debtor; 3) most courts hold that the debtor(s) have an

obligation to disclose the windfall to the Chapter 13 Trustee; and 4) the existence of a

windfall can be grounds for modification under Section 1329. Carroll v. Logan, 735 F.3d

147 (4th Cir. 2013)(inheritance received outside the 180 period); In re Ormiston, 501 B.R.

303 (Bankr. E.D.N.C. 2013)(modification warranted based on inheritances regardless of

when received during the life of the case); Kimberlin v. Dollar Gen. Corp., 520

Fed.Appx. 312 (6th Cir. 2013)(unpublished).

Of course, there is no uniformity among the courts on many of the sub-issues.

The issue of whether a windfall is ‘income’ is a difficult one, particularly with the

backward looking Means Test. For many courts, the “best interest of

creditors/liquidation test” is figured as of the date of filing. What all courts appear to

agree on is – if a Chapter 7 trustee could get the windfall, the inheritance is included in

the best interest/liquidation test.

I don’t ask about inheritances in every case. Note that any present interest in an

inheritance, life insurance policy, or trust is required to be disclosed on Schedule B, Q.

20. See also, In re Waldron, 536 F.3d 1239 (11th Cir. 2008); In re Easley, 205 B.R. 334,

335-336 (Bankr. M.D. Fla. 1996). If there is any possibility of an inheritance, I will also

inform the debtor(s) that they have a duty to inform the Chapter 13 trustee should be

become entitled to an inheritance. In most jurisdictions, this is already a requirement. See,

In re Kimberlin, Of course, this is a delicate area, because the tip-off about a possible

inheritance is usually information about expenses for a sick parent, or a continuance of a 341

meeting because of a death in the family.

The right to bring a personal injury action is also required to be disclosed on

Schedule B, Q. 21 (could be clearer) and any pending lawsuit should be listed on the

Statement of Financial Affairs, Q. 4. A the 341 meeting: “Do you have a right to sue

anyone for any reason?” is broad enough, but I usually add: “such as for a traffic accident or

other personal injury?” If there is a lawsuit pending, we get the attorney’s information and

provide notice of the Chapter 13.

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The areas that courts have looked at in rejecting increased payments based upon

changed circumstances: 1) does the confirmed Chapter 13 Plan have a provision for the

disbursement of after-acquired property to the class of unsecured creditors? [See, In re

Love, 2013 Bankr. LEXIS 3911 (Bankr. W.D. La. Aug. 30, 2013)]; Is there sufficient

certainty that the changed circumstance will continue? [See, In re Eckert, 485 B.R. 77

(Bankr. M.D. Pa. 2013)]; Where the parties stipulate that the property received post-petition

is not property of the estate. [See, In re Preebles, 500 B.R. 270 (Bankr. S.D. Ga. 2013)].

While the Chapter 13 trustees and debtors who are PI plaintiffs are going to have

different interest on many issues, recent case law makes it clear that their interests are the

same on one issue: Disclosure. The requirement of disclosure of post-petition causes of

action in Chapter 13 has become critical in light of the harsh results in cases like Kimberlin

v. Dollar Gen. Corp. (In re Kimberlin), 520 Fed.Appx. 312 (6th Cir. 2013)(unpublished).

The parties won’t be able to have an argument about whether the proceeds of a PI case

should come into the estate if the right to sue has been lost because of the debtor’s failure

to disclose the cause of action. The risks associated with the scope of judicial estoppel in

Chapter 13 have expended, and it is better to argue about the debtor’s exemptions, and

how to split the proceeds of a PI action, rather than losing the possibility of any recovery

based upon a motion to dismiss for failure to amend to list the cause of action in the

Chapter 13 schedules.

10. It Doesn’t Hurt To Offer A Bit Of Encouragement At The End.

The debtors are facing a daunting task in making payments to your Office for 36

to 60 months. As I have heard Chapter 13 Trustee Frank Pease say: It doesn’t hurt to tell

the debtors: “You can do this.” Or, “Don’t sell yourself short.”

VII. OH NO! NOT A SECTION ON ETHICS! BLEH!

Q. Precisely who, or what, is my Client?

A. The Trusteeship. How do you know? If your Chapter 13 Trustee retires, quits, is removed, or dies, you still have a job.

Q. What about the Trustee?

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A. The individual embodies the Trusteeship that is the client. Unless the person who is the Chapter 13 Trustee is, for whatever reason, no longer the trustee, that’s your client. The Trustee, while serving, is essentially equivalent to the trusteeship. If your Trustee retires, quits, is removed, or dies you may find yourself with a different person as the same client – the Office of the U.S. Trustee may run a trusteeship after the Chapter 13 trustee, or another Chapter 13 trustee may be appointed to operate the trusteeship until a new Chapter 13 Trustee is appointed.

It is important to keep in mind that you have a client because it reminds you that

you are not just an employee, like the rest of the staff at your office. You are an attorney,

and the Trusteeship is your client. That means that you have ethical duties that far

exceed anything imposed on the non-staff attorneys you work with.

There are two differences that are of the paramount importance to keep in mind:

1. The Attorney-Client Privilege. Your discussions with the Chapter 13 Trustee

that relate to the Trusteeship are privileged communications. As you work with your

Trustee, you will probably develop a personal relationship that may involve a certain

amount of give and take. And that’s a good thing. But, you will always want to err on

the side of treating anything told to you by the Trustee about anything related to the

Office, any case or debtor, any judge or attorney, as being a privileged communication.

That means that you cannot discuss it with anyone. Period. Because, regardless of what

the employee manual says, and beyond what is required of all good employees, you are

an attorney. Thus, the client (the Trustee) would have to affirmatively consent to the

disclosure, and the ethical rules of your state prohibit you from disclosing that privileged

information without such consent.

Rule 1.6 Confidentiality Of Information

(a) A lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation or the disclosure is permitted by paragraph (b).

Paragraph (b) relates to various types of wrong-doing.

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2. The Duty of Loyalty. There is no “I’m just an employee” exception to an

attorney’s duty to the client. There is also no exception based on the fact that you see a

whole lot of schlocky attorneys who don’t live up to their ethical obligations, abandoning

their clients at various stages of their Chapter 13 cases – it doesn’t matter. As an

attorney, you have a duty to carry out the client’s objectives, to be competent in whatever

is necessary to carry out the client’s objectives, and to be diligent.

Whether your trustee is an attorney, or a non-attorney, your trustee ultimately

makes the decisions for the trusteeship.

Rule 1.2 Scope Of Representation And Allocation Of Authority Between Client And Lawyer

(a) Subject to paragraphs (c) and (d), a lawyer shall abide by a client's decisions concerning the objectives of representation and, as required by Rule 1.4, shall consult with the client as to the means by which they are to be pursued. A lawyer may take such action on behalf of the client as is impliedly authorized to carry out the representation. A lawyer shall abide by a client's decision whether to settle a matter.

The duty of diligence is found in Rule 1.3:

Rule 1.3 Diligence

A lawyer shall act with reasonable diligence and promptness in representing a client.

The duty of competence is found in Rule 1.1:

Rule 1.1 Competence

A lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.

Where do some of the problems arise with these duties in a typical Chapter 13

Office situation?

A new Staff Attorney may be either more technologically savvy than the Chapter

13 Trustee, or less. That may involve learning skills that are necessary to be competent

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in that specific Office environment – in Rule 1.1, “skill” does not appear to be limited to

“legal skill”.

If you are a “techie”, you may see all kinds of technological shortcuts that could

be used to, in your view, increase efficiency. But, if your Chapter 13 Trustee doesn’t

want to change the way paper is used in the Office, you need to get competent with that

old Xerox and fax machines, and learn to scan paper documents into PDF format.

Welcome to the 1990s!

On the other hand, if your Chapter 13 Trustee wants to move the Office into a

more paperless operation, you have to become competent in the computer skills that will

allow you to provide competent representation in that Office environment.

Problems sometimes arise in Offices where a new Chapter 13 Trustee comes in

and does things differently that the past Chapter 13 Trustee did them. This can be a

particular problem when you were also a candidate who interviewed for the position, and

you didn’t get it. It doesn’t matter – you have to either be able to get your mind right,

and be completely loyal to your client – or at the very least be able to act exactly as you

would if you were completely loyal to your client or, ethically, you have to leave.

That may seem harsh, but think of what other attorney are required, by their

professional duties, to do: If you represent a murderer, you can’t stand up in court and

say: “Your Honor, my client wants to plead not guilty. But, I mean, damn. He’s a

murderer, so I’m not going to follow his instructions.” Or, think of the attorney who is

caught in a battle over disclosure of attorney-client communications and is waiting in jail

for the court of appeals to consider an appeal of the lower court’s contempt order.

Bankruptcy lawyers are not lawyers of a lesser god. Nor are Staff Attorneys somehow

exempt from the rules of professional conduct because they are hard to follow, or because

your feelings are hurt, or leaving would be an economic hardship. You are a

professional, and the rules are the rules.

Another common problem can arise from relationships that develop over time

with the other employees. Those employees are managed, and at times disciplined, under

the direction of your client. And, the employees who are disciplined, or denied some

benefit that they wanted, may be very unhappy with your client. But, no matter how

much you may like that person, and no matter how much you may personally agree that

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whatever is happening is not right – you need to stay out of the Office politics of

whatever your client is trying to accomplish (either directly, or through your Office

Manager.) You simply can’t undermine your client – in any way – without violating your

professional obligations.

Sometimes, things involving Office staff can be a little fuzzier. On a personal

note, when I came to the Office as Staff Attorney, I had been a private solo practitioner.

In working as a one man law office, I could juggle my time however I wanted, as long as

I got my work done. When I got to my new job – I was the first Staff Attorney the Office

had - I kept acting like I was still in solo practice, without fully considering how my

getting some things done at the last minute affected the rest of the Office. One of the

staff members who worked with me finally asked me if I could start getting my 341

preparations done farther in advance, because that would make her feasibility calculations

easier. That opened my eyes to the fact that I had a very different position as Staff

Attorney than I had as a solo practitioner, and that I needed to work to fit into the existing

system, not just get my particular part of the job done in time for court.

I have also heard of situations where the Staff Attorney’s unique position in the

Office has created problems. Being on salary makes you different, having to be out of

the Office for court at random times makes you different, and not being subject to some

of the Office rules makes you different – and some staff may be jealous of the privileges

or flexibility you may have. Say you have casual Fridays in the Office, but you have

court on Friday, so the Trustee says you can wear jeans on Tuesdays. And some of the

staff get their nose bent out of joint because of your “special treatment”. Do you have an

ethical obligation to not wear jeans on Tuesdays – even if your Trustee gives you

permission – because you are making his or her job more difficult, because employee

morale is suffering? I am NOT saying wearing jeans on Tuesday is an ethical violation –

but it does illustrate the kind of ethical issues that are in play when you are a Staff

Attorney.

None of the above means that you need to be a “Yes Man” (or “Yes Woman”).

There are two aspects to your communications with the Chapter 13 Trustee. There is the

duty to communicate, and then there is the separate duty to advise:

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Rule 2.1 Advisor

In representing a client, a lawyer shall exercise independent professional judgment and render candid advice. In rendering advice, a lawyer may refer not only to law but to other considerations such as moral, economic, social and political factors, that may be relevant to the client's situation.

As an advisor, you have a duty to give your Chapter 13 Trustee “candid advice”,

based on almost any relevant factor under the sun. That means you should be telling the

Chapter 13 Trustee what you think should be done, if you think you know a better way to

do something, or that there are dangers in pursuing a course that the Trustee has decided

to follow. Comma, HOWEVER, this duty to provide candid advice does not trump Rule

1.2 that the client makes the decisions. In other words, you should offer candid advice,

not nag. When the decision has been made – even if it is directly contrary to your best

advice – you have to try to implement that decision with diligence and competence, and

without a hint that you weren’t in complete agreement with the approach.

In terms of communication with the Chapter 13 Trustee, the ethical rules

specifically provide:

Rule 1.4 Communication

(a) A lawyer shall:(1) promptly inform the client of any decision or circumstance with respect to which the client's informed consent, as defined in Rule 1.0(e), is required by these Rules; (2) reasonably consult with the client about the means by which the client's objectives are to be accomplished;(3) keep the client reasonably informed about the status of the matter; (4) promptly comply with reasonable requests for information; and(5) consult with the client about any relevant limitation on the lawyer's conduct when the lawyer knows that the client expects assistance not permitted by the Rules of Professional Conduct or other law.

(b) A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.

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The obligation to communicate, and keep the Chapter 13 Trustee informed,

carries its own difficulties. If you make a mistake, or get buried in court, or yelled at by

the judge, or miss a hearing – you have to tell your client, even if you aren’t asked.

Note that there are special obligations for Staff Attorneys who represent non-

attorney Chapter 13 Trustees. Staff Attorneys have an ethical obligation to explain legal

matters sufficiently to allow the non-attorney Chapter 13 Trustee to make informed

decisions about the approach the Office will take to important legal matters. If you are

working as a Staff Attorney for a non-attorney Trustee, one of the things you will have to

be diligent about, and work to be competent at, is explaining legal issues so that your

Chapter 13 Trustee can participate in decision making on important legal issues to the

extent the Trustee wishes to do so.

A. What Should A Chapter 13 Staff Attorney Aspire To Be?

To me – and this is a subjective question – the model for a good Staff Attorney is

an old school corporate lawyer, who gave trusted advice to the President of the company

about how to stay out of trouble. Getting to be a trusted advisor – someone who your

Trustee is going to go to with all sorts of issues, both legal and operational - is a process.

You don’t walk out of law school with a lot of insight to offer a 20 year Chapter 13

Trustee – whether that Trustee is a lawyer or not, they’ll still know more Chapter 13

bankruptcy law than you. On the other hand, if you are a long time Staff Attorney (why

are you in my basics class????) and your Trustee is coming into the position from a non-

bankruptcy field, you may be an important advisor and resource for that Trustee. In fact,

your ethical obligation may be to work to help your Chapter 13 Trustee become less

dependant on your knowledge and advice.

Being a Chapter 13 Staff Attorney also allows you to do a lot of good in the

community – in whatever activities are permitted by your Trustee. You can help raise the

profile of your Office by speak at legal training sessions and seminars, participating in

bar association committees and functions, and representing the Chapter 13 Trustee with

competence and professionalism at Section 341 Meetings and in court.

B. It Ain’t All A Bed Of Roses – You May Have To Be The Bad Cop.

It is not an uncommon thing for Chapter 13 Trustees to want you to be the picky

one, the stickler, the one who says “no”, the hammer, the bad guy. And the Trustee will

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play the role of “good cop” – sometimes overruling you in the hardline positions that the

Trustee told you to take. I’d be sympathetic, but I was brought in as Staff Attorney to be

meaner than my Trustee. Subsequently, when I was appointed Chapter 13 Trustee, I

hired my Staff Attorney with the understanding that she would be meaner than me. This

is partly because Chapter 13 practice has moved from being a genteel, almost non-

adversarial practice, conducted by a small group of longtime practitioners, to a practice

with an important litigation component – you can see that change in the number of

reported Chapter 13 bankruptcy decisions that come out in the Bankruptcy Reporter. The

other reason for this kind of good Trustee/bad Staff Attorney set up is that just makes life

easier for your client.

Don’t like it? Try private practice for a while – with **gasp!** bankrupt clients

to deal with.

Your Chapter 13 Trustee may use you as a tool to deliver a message to the bar –

“I’m sick of the failure to promptly turn over tax refunds, we need to send a message.

File 128 motions to dismiss on these cases for failure to get those returns filed by April

15th.” Or, the same type of message may be sent with motions to disgorge attorneys fees

based on some other recurring issue where the bar isn’t doing what is required. Or, you

may be told to require every attorney who fails to list a term life insurance policy on

Schedule B to file an Amended Schedule B listing the policy.

Sometimes, your work in furthering the objectives of representation may not just

be examining debtors, drafting objections, and making arguments in court – it may

involve delivering a message to the debtors’ bar, or to national creditors, that certain

practices will no longer be tolerated.

A well rounded person is more than what they do as their job. You are not an

attorney, you a person who can do many things, including acting as a lawyer. A person is

not a role, they are a capacity to play any number of roles. As a Staff Attorney, you are

going to have to play many roles – bad cop, sympathetic provider of tissues when a

debtor is overwhelmed by emotion at a First Meeting, Glade sprayer after a particularly

hygiene impaired §341 Meeting, peacemaker or order restorer when exchanges between

opposing parties get too heated, Wonder Woman with all the answers for the practicing

bar when they’ve forgotten a basic point of law and are sure you’ll know it, and a

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sounding board for all of the ideas and problems your Chapter 13 Trustee wants to run by

you.

Advice that was given to me, that has served me well – When entering any new

environment, figure out what kind of a person is needed in that situation, and then be that

person.

And sometimes, you also have to realize what your Trustee does not need. In my

Office, I don’t need my Staff Attorney to do legal research. If I asked my Staff Attorney

to research something for me, she’d probably suggest I lie down while she checks to see

if someone can drive me home. I’ve done legal research my entire professional life – and

when my Staff Attorney needs a couple cases for a motion or brief, I almost always do

the research for her. Even though legal research is a “core” part of the job for most Staff

Attorneys, for us it is just more efficient for me to hop on Lexis, and she knows I enjoy

doing it.

C. Professionalism With The Debtor And Creditor Bars.

In most Chapter 13 Offices, you are going to see a lot of the same faces, over and

over again. And while you may strive to be ethical with a capital E, a paragon of

professionalism, and as evenhanded as Solomon himself – you are going to dealing, day

after day, with some pretty crappy lawyers. That’s just a fact of life for most Staff

Attorneys.

You can’t lose your temper, you can’t act punitively without consulting your

Trustee, and you can’t start snapping off lines like: “Why don’t we just skip the

Stipulation for you to amend your Schedules and go straight to the show cause, shall

we?” Decisions on how to deal with problem attorneys have to be made with the Trustee,

and the approach is probably going to be incremental, at least at first.

There is danger on the other side of the coin – attorneys who are competent,

mostly do things right, and are personable, may start to get treated differently from other

attorneys who don’t demonstrate those qualities. Think of how it looks to a debtor if the

attorney representing the debtor ahead of her is “Hey Alice, how are Bob and the kids?”

and her attorney is “Are you ready to proceed Mr. Smith?” The Trusteeship should strive

to maintain the appearance of evenhandedness, with no prejudice or favor shown to

anyone. Staff Attorneys are on the front lines in those efforts.

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From another perspective – if you look at the Chapter 13 Office as a business,

who are the clients of that business? The answer – to the extent there is true customer

analog – is debtors’ counsel. They are the ones who decide whether their clients are

going to use our services. Many Chapter 13 trustees look at their trusteeship – not totally,

but in part - from a “customer service” perspective.

D. The Morality Of Treating Everyone The Same.

All debtors who come before the Chapter 13 Trustee for the first time should be

treated equally. We shouldn’t play favorites. We shouldn’t play favorites based on who

the debtor’s attorney is, we shouldn’t play favorites because the debtors seemed nice, and

we shouldn’t play favorites because we personally identify with the situation the debtor is

in.

One way to deal with the tendency to treat debtors differently is to have an

established set of guidelines and procedures that a generally applied to all cases.

Remember, all your Office’s actions are part of a public record – available on PACER.

You never want to have something happen like an attorney putting together an argument

– supported by docket entries - that your Office is treating his clients more harshly, under

the same facts, than the clients of other attorneys.

The Chapter 13 Trustee’s reputation for fairness is something that needs to be

zealously guarded. That doesn’t require you to be a pushover – you just have to be

equally mean (or equally nice) to all.

E. The Morality Of Making Exceptions Based On The Equities Of TheCase.

While everyone should be treated equally, not all situations that debtors are facing

are the same. The equities of some cases are vastly different than others. While some

debtors want to fight to have unsecured creditors pay for their bass boat, other debtors are

trying to live on a $200 a month food budget so that they can stretch their social security

checks to fit their Plan payments.

When the different treatment is based upon the equities of the case, you can – and

should – treat debtors proposed Chapter 13 Plans differently based on their

circumstances.

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For example, where $40 a month is all a low income debtor can pay, I don’t make

the argument that the minimum Chapter 13 Plan payment should be $50 a month. Where

a high income creditor is trying to – in my view – game the system, and is not really

attempting to repay creditors, I make the argument that a $40 a month payment isn’t

permitted. (Citing Section 330(c)’s minimum monthly payment to the Chapter 13 trustee

of $5 per month. With a maximum 10% Chapter 13 trustee fee, that would require $50 a

month. There is very little case law on this issue.)

F. To Care, Or Not To Care. That Is (Often) The Question.

One of the more important things that new Staff Attorneys need to figure out is:

What are creditor issues, and what are issues the Chapter 13 Trustee should get involved

in litigating? Does it depend on what your Judge and your Trustee thinks? (Of course it

does.)

G. Balancing Advising/Assisting Debtors And Not Giving Legal Advice.

Section 1302(b)(4) states:

(b) The trustee shall –

(4) advise, other than on legal matters, and assist the debtor in performance under the plan;

The debtors – usually – have their own attorney. You are prohibited from giving

them legal advice, but the Code says the trustee is to advise and assist the debtor. How

do you do that?

One explanation that I thought was pretty good was: the trusteeship can be viewed

as operating as an accounting office, and a law office. The ‘accounting firm’ is helpful

and can talk to the debtors. The ‘law office’ can’t.

Sometimes you can illuminate a legal issue for debtor’s counsel by just talking

about it – as a hypothetical, or as a question that incorporates some legal information.

For example: “I see Schedule D shows the second mortgage is underwater, and the first

and second mortgage are the same company, and the first mortgage proof of claim shows

that the value of the property is less than the amount of the first mortgage – have you

decided whether you want to strip the second mortgage under [your appellate court

decision allowing wholly unsecured mortgages to be stripped here]?” You didn’t give

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legal advice, you just asked a question about an issue the lawyer may not have thought of.

It is can be a subtle, but important, distinction.

VIII. IN CHAPER 13, PIONEER IS DEAD OF DYSENTERY.

The Bankruptcy Code is silent as to the deadline for filing nongovernmental

proofs of claim, although it assumes that there will be a deadline. See, §501(b) and (c);

§502(b)(9). Section 502(b)(9) was amended in 1994 to address the tardy claims issue.

See, In re Daniels, 466 B.R. 214, 217 (Bankr. S.D.N.Y. 2011). The deadlines for filing

proofs of claim in a Chapter 13 case are found in the Federal Rules of Civil Procedure.

Unsecured creditor "must file a proof of claim or interest in accordance with this

rule for the claim or interest to be allowed." See, Bankruptcy Rule 3002(a).

Bankruptcy Rule 3002(c) states that in a Chapter 13 case, a proof of claim: "shall

be filed within 90 days after the first date set for the meeting of the creditors." It should

be noted that while Rule 3002(c) applies to Chapter 7, Chapter 12 and Chapter 13 cases,

NOT Chapter 11s. See, In re Jackson, 482 B.R. 659, 663-664 (Bankr. S.D. Fla. 2012); In

re Aboody, 223 B.R. 36, 37-39 (1st Cir. BAP 1998); In re Bourgoin, 306 B.R. 442, 444

(Bankr. D. Conn. 2004); In re Moore, 2012 Bankr. LEXIS 1538 *10-*11 (Bankr.

N.D.N.Y. April 10, 2012). This is important because the “excusable neglect” standard

endorsed by the U.S. Supreme Court in Pioneer for late filed claims in Chapter 11 cases

cannot help a creditor with a late filed claim in a Chapter 13. See, Federal Rules of

Bankruptcy Procedure 9006(b)(3)(extensions of time allowed only to the extent allowed

in the Rule itself); 3003(c)(1) & (3)(Chapter 11 deadline for filing proofs of claim is

fixed by the bankruptcy court and is not limited by Rule); In re Zich, 291 B.R. 883, 885

(Bankr. M.D. Ga. 2003); In re Nyeste, 273 B.R. 148, 149 (Bankr. S.D. Ohio 2001); In re

Aboody, 223 B.R. 36, 38-39 (1st Cir. BAP 1998).

The language of Bankruptcy Rule 3002(c) is unambiguous and courts must apply

the "ordinary, contemporary, common meaning" of this language, See, Pioneer Inv.

Services v. Brunswick Associates, 123 L. Ed. 2d 74, 113 S. Ct. 1489, 1495 (1993), unless

there is an irreconcilable conflict with the enabling legislation or the Constitution. Thus,

in Chapter 13 cases, there is no “excusable neglect” exception to the bar date for filing

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proofs of claim. In re Jackson, 482 B.R. 659, 663-664 (Bankr. S.D. Fla. 2012); In re

Stone, 473 B.R. 465, 467-468 (Bankr. M.D. Fla. 2012)(four claims filed one day late).

As the bankruptcy court in In re Nwonwu, 362 B.R. 705, 708 (Bankr. E.D. Va.

2007) stated:

[S]ome bankruptcy courts have applied various equitable theories to permit the late filing of claims in chapter 13 cases by creditors who did not receive proper notice. See, e.g., In re Anderson, 159 B.R. 830, 835 (Bankr. N.D. Ill. 1993); In re Vaughn, 151 B.R. 87 (Bankr. W.D. Tex. 1993); In re Smith, 217 B.R. 567 (Bankr. E.D. Ark. 1998). However, the weight of authority, particularly at the court of appeals level, is to the contrary. E.g. Matter of Greenig, 152 F.3d 631, 634-35 (7th Cir. 1998) (acknowledging harshness of result, but holding that failure to file claim within time period specified by rules is "absolute bar" unless one of the specific exceptions in Rule 3002(c) applies and stating that bankruptcy court "cannot use its equitable power to circumvent the law"); In re Gardenhire, 209 F.3d 1145 (9th Cir. 2000). Accordingly, the court concludes that it is without power to extend the time for [Creditor] to file a proof of claim.

See also, 9 Collier on Bankruptcy, P 3002.03[1]; (15th ed. rev. 2006); Cf., In re Granzow,

210 B.R. 989 (E.D. Mich. 1997).

Similarly, the court in In re Brooks, 370 B.R. 194, 196-197 (Bankr. C.D. Ill.

2007)(disallowing, as late filed, a deficiency claim for a motor home, sold post-petition)

stated:

“Disallowance of a claim is mandated where, subject to certain exceptions not applicable here, proof of such claim is not timely filed. 11 U.S.C. §502(b)(9). By Rule, only unsecured claims must be filed to be allowed. F.R.B.P. 3002(a). Most courts hold, however, that a secured creditor in a Chapter 13 case must have a claim on file in order to receive payments from the trustee. See In re Mehl, 2005 Bankr. LEXIS 2092, 2005 WL 2806676 (Bankr.C.D.Ill. 2005). However, the claim filing deadline imposed by Rule applies only to unsecured claims, not secured claims. Id.; In re Kreisler, 331 B.R. 364, 384-85 (Bankr.N.D.Ill. 2005). That deadline, set forth in Rule 3002(c), is 90 days after the first date set for the first meeting of creditors, unless one of six enumerated exceptions applies. F.R.B.P. 3002 (c). The exceptions pertain to claims of governmental units, infants and incompetent persons, recipients of avoided transfers, parties to executory contracts or unexpired leases, foreign creditors, and claims in Chapter 7 cases that began as no asset cases. None of the exceptions apply here.

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The Rule concerning enlargement of time is inapplicable. Generally, a court has the authority and discretion to extend time limits for any act that "is required or allowed to be done at or within a specified period by these rules." F.R.B.P. 9006(b)(1). That general authority and discretion is eliminated, however, with respect to the time limits set forth in certain Rules, including Rule 3002(c), which may be extended only "to the extent and under the conditions stated in those rules." F.R.B.P. 9006(b)(3). Moreover, Rule 3002(c)(1), setting the claim date for claims of governmental units at 180 days after the order for relief, provides that the court may extend that deadline, for cause, upon motion filed within the 180 days. The Rule contains no similar provision for extending the claim deadline applicable to non-governmental unsecured creditors. Application of the principle of statutory construction expressio unius est exclusio alterius suggests that an extension of the 90-day deadline for non-governmental unsecured claims is not permitted, even upon motion filed within the 90-day period.

Indeed, the bar date for proofs of claim implemented by Section 502 and Rule 3002(c) is characterized as a strict statute of limitations. In re Reliance Equities, Inc., 966 F.2d 1338, 1345 (10th Cir. 1992); In re Bourgoin, 306 B.R. 442, 444 (Bankr.D.Conn. 2004); In re Windom, 284 B.R. 644, 646 (Bankr.E.D.Tenn. 2002). Even the forgiving concept of excusable neglect, set forth in Rule 9006(b)(1), is eliminated as a basis for extending the claim date in Chapter 7, 12 and 13 cases. Pioneer Inv. Services Co. v. Brunswick Associates Ltd. Partnership, 507 U.S. 380, 389-90, 113 S.Ct. 1489, 1495, 123 L.Ed.2d 74 (1993). Likewise, the doctrine of equitable tolling has been rejected as a basis to extend the claim bar date. In re Gardenhire, 209 F.3d 1145 (9th Cir. 2000).”

An earlier decision, In re Gullatt, 169 B.R. 385 (M.D. Tenn. 1994), reversing a

decision by Judge Lundin, held:

“The answer to this argument is that the meaning of "allowed claim" is somewhat different under Chapter 7 and Chapter 13. Section 726(a)(3) creates an exception to the rule that late filed claims are disallowed. The §726(a)(3) exception for late filed claims to surplus property does not apply in the Chapter 13 context because the concept of "surplus property" does not apply to Chapter 13 plans.

Section 1325 is concerned with Chapter 13 distribution plans, and the phrase "allowed unsecured claim" refers to a claim allowed under Chapter 13. The phrase "such claim" likewise refers to claims that are allowed under Chapter 13. Section 1325 requires a court first to examine whether a given claim is allowed under Chapter 13, and then to compare what the creditor will receive on that claim

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under the distribution plan with what the creditor would receive on that claim under a Chapter 7 distribution. Late filed claims are not allowed under Chapter 13, so they need not be compared with late filed claims under Chapter 7.

Further, §1325 only makes sense if one assumes that tardy claims that are allowed under §726(a)(3) are not allowed under §1325 and Chapter 13. Section 1325 asks courts to compare what a creditor will receive under the proposed reorganization plan with what the creditor would receive under Chapter 7. When examining timely filed claims this is easily done -- the Court looks at what a creditor is going to receive under the plan and compares it to what the creditor would have received if the debtor's present assets were disbursed under Chapter 7. Judge Lundin's interpretation would, however, require courts to compare what late filers would receive under a proposed distribution plan with what they would receive under Chapter 7.

* * * * * *

“[I]n Chapter 13 cases Rule 3002 requires courts to disallow late filed claims.”

While holding that an unlisted debt is nondischargeable under Section 523(a)(3),

In re Brooks, 414 B.R. 65, 72 (Bankr. E.D. Pa. 2009) also stated:

“There is thus no question that the Claim was late. See Claim No. 10. The question then becomes, can the Court extend the bar date for cause, given the undisputed testimony that the claimant had no notice of the Debtor's bankruptcy?

The answer is no. Here, case and statutory law are in agreement that a bankruptcy court may not extend the bar date in a chapter 13 case. Bankruptcy Rule 9006(b)(3) provides that the court "may enlarge the time for taking action [under Rule 3002(c)] only to the extent and under the conditions stated in those rules." Pursuant to Rule 9006, a court may only extend the bar date in a Chapter 13 case as prescribed by the specific parameters of Rule 3002(c). None of these parameters allows a court to extend the bar date for circumstances such as these. As one court succinctly put it "[c]ourts that have addressed the interaction of §502(b)(9), Rule 9006(b)(3), and Rule 3002(c) . . . have consistently concluded that the three provisions reflect Congress' intent to create an absolute bar date for filing claims in Chapter 13 cases." In re Jensen, 333 B.R. 906, 909 (Bankr. M.D. Fl. 2005) (citing In re McNeely, 309 B.R. 711 (Bankr. M.D. Pa. 2004)). See also In re Gardenhire, 209 F.3d 1145, 1151 (9th Cir. 2000) (holding that equitable tolling did not apply to proofs of claim under §502(b)(9) and noting that most lower courts have generally adopted a "fairly strict readings of Bankruptcy Code

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and Rules 3002(c)(1) and 9006(b)(3)") (citations omitted); In re Brooks, 370 B.R. 194, 197 (C.D. Ill. 2007) ("the bar date for proofs of claim implemented by Section 502 and Rule 3002(c) is characterized as a strict statute of limitations . . . Even the forgiving concept of excusable neglect, set forth in Rule 9006(b)(1), is eliminated as a basis for extending the claim date in Chapter . . .13 cases.") (citations omitted).

Further, Law & Zaslow's contention that the bar date in this case does not apply to it because the Firm did not receive notice of the bankruptcy or the bar date is incorrect. See Reply to Debtor's Objection to Proof of Claim, pg.1. Courts have held not only that "Rule 3002(c) is strictly construed as a statute of limitations," but further that "there is no provision . . . for extending the bar date simply because the creditor had no notice of the case." In re Nwonwu, 362 B.R. 705, 707-8 (E.D. Va. 2007). See also In re Watson, 2007 Bankr. LEXIS 3839, 2007 WL 3231529 (Bankr. E.D. Va. Oct. 30, 2007); In re Harding, 2006 Bankr. LEXIS 4627, 2006 WL 5738080 (Bankr. D. Md. Jan. 31, 2006). In sum, the bar date in a Chapter 13 case is a strict and nonnegotiable deadline, whether or not a creditor received notice. The Debtor's objection to the Proof of Claim of Law & Zaslow as untimely will therefore be granted.”

Even when the debtor is adding a claim and requesting that the claims bar date be

extended, some courts have held that the bar date stands. See, In re Plummer, 378 B.R.

569 (Bankr. C.D. Ill. 2007). However, other courts take a more practical approach when

no purpose would be served by disallowing the claim. See, In re Blakely, 440 B.R. 443

(Bankr. E.D. Va. 2010). Another approach that one court took was extending the

deadline for the debtor to file a proof of claim for the creditor so that the claim could be

paid though the Chapter 13 Plan. See, In re Sprague, 2013 Bankr. LEXIS 5336 (Bankr.

D. Idaho December 18, 2013)(debtors’ failure to list claim was based on “excusable

neglect”).

Rule 3002(c) has been held to apply to secured creditors. See, In re Dumain, 492

B.R. 140 (Bankr. S.D.N.Y. 2013). However, where a secured claim has been filed, the

amendment of that claim to reflect a deficiency presents different issues than the failure

of a creditor to file a timely claim. See, In re Haran, 2013 B.R. LEXIS 3632 (Bankr. D.

Colo. August 14, 2013). Courts have also held that specific Chapter 13 Plan provisions,

providing additional time to file a deficiency claim, can extend the claims bar date. See,

In re Shiver, 484 B.R. 468 (Bankr. N.D. Fla. 2012)(Chapter 13 Plan stated that the bank

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would have 90 days after the plan was confirmed to file a claim regarding any deficiency

that remained after debtor's property was sold.)

Note that Rule 3002(c) sets a deadline for FILING – it has been held not to be met

by merely MAILING the proof of claim before the deadline. See, In re Taun, 2013 U.S.

Dist. LEXIS 152425 at *9-*10 (D.N.J. October 21, 2013).

Remember that claims are not disallowed without an objection – and the Chapter

13 Trustee has a choice as to whether or not to file an objection to a late filed claim.

Compare, In re Cassani, 62 Collier Bankr. Cas. 2d (MB) 1961, 2009 Bankr. LEXIS 3716

(Bankr. E.D. Va. 2009); In re Day, 62 Collier Bankr. Cas. 2d (MB) 1651, 2009 Bankr.

LEXIS 3144 (Bankr. E.D. Va. 2009).

IX. OBJECTING TO ATTORNEY FEES.

By Fiona Whelan, Esq.Staff Attorney for Lydia Meyer, Chapter 13 TrusteeRockford, Illinois

At some point, during the confirmation process, you will have to deal with the

issue of the debtor’s counsel’s attorney fees. Fees are not awarded to the debtor’s

attorney until the case is confirmed. Note that fees must be disclosed even if paid pre-

petition, and the court has authority to review fees and order disgorgement of fees (see

below). Districts which have a model plan in place will dictate the order of distribution

of the debtor’s monthly payment. Unless this is altered in paragraph G for “special

intentions”, the attorney will be paid whatever is left over after those in the plan listed

before him in the order of distribution are paid. Attorneys may alter the amount they get

paid by setting forth a specific amount in paragraph G or alter when they are getting paid

by altering their place in distribution. For example, in the first scenario, an attorney may

seek to be paid a set monthly amount of $75. In the second scenario, an attorney may

seek to be paid ahead of the secured claims so in essence the attorney gets paid first

before the secured creditors other than the mortgage. Regardless whether there is a

model plan or not, there are general guidelines contained in the Code that control attorney

fees. Although there may be occasion to ask for attorney fees as part of a sanction (i.e.

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for violating Rule 9011), or for other reasons, this outline will focus strictly on the fee

application and disclosure made by the attorney.

A. Attorney Fees, Where Can They Be Found?

Attorney fees are governed by sections 329 and 330 of the Bankruptcy Code and

Rules 2016 and 2017 of the Federal Rules of Bankruptcy Procedure. In a nutshell,

Section 329 requires the filing of the disclosure statement and Rule 2016 requires that it

be done within 14 days after the order for relief is filed, or any other time the court may

direct. Section 330 allows the court to compensate an attorney for reasonable fees and

Rule 2017 allows any party in interest to file a motion or objection to a fee application, or

the court to determine sua sponte whether any payment of money by the debtor before or

after filing for relief is excessive. Section 503 allows a party to request payment of

administrative expenses which covers compensation for an attorney under 503(b)(2).

Section 504 prohibits the attorney from sharing or agreeing to share any compensation or

reimbursement with another person, unless that person is a member, partner or regular

associate in a professional association, corporation, or partnership.

B. What Is A Disclosure Statement?

A disclosure statement is a form that reaffirms the language in section 329, and

sets forth the amount of money an attorney agrees to accept and/or the amount of money

received by the attorney prior to filing the order for relief. (See attached Form A). An

attorney representing a debtor in a chapter 13 case must file a disclosure statement setting

forth any payments received within a year before the filing of the petition for relief, and

any money received during the pendency of the petition for services directly related to

the chapter 13 bankruptcy or for services rendered or to be rendered in connection with

the bankruptcy. Filing the disclosure statement is mandatory, not permissive, and it is

completely irrelevant whether the attorney is owed any fees by the debtors. In re

Hackney, 347 B.R. 432 (Bankr. M.D. Fl. 2006).

To determine whether a service performed by the attorney was “in connection

with” the bankruptcy, the controlling question is the state of mind of the debtor. In

making the transfer was the debtor influenced by the possibility of filing bankruptcy or of

the imminence of the bankruptcy proceeding? In re Newton 292 B.R. 563 (Bkrcty E.D.

Tex. 2003).

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11 U.S.C. 329 “Debtor’s transactions with attorneys”

(a) Any attorney representing a debtor in a case under this title, or in connection with such a case, whether or not such attorney applies for compensation under this title, shall file with the court a statement of the compensation paid or agreed to be paid, if such payment or agreement was made after one year before the date of the filing of the petition, for services rendered or to be rendered in contemplation of or in connection with the case by such attorney, and the source of such compensation.

(b) If the compensation exceeds the reasonable value of any such services, the court may cancel any such agreement or any such payment, to the extent excessive to-

(1) the estate, if the property transferred –(A) would have been property of the estate; or(B) was to be paid by or on behalf of the debtor under chapter 11, 12, or 13 of this title; or

(2) the entity that made such payment.

C. When Does The Disclosure Statement Need To Be Filed?

Rule 2016 mandates that an attorney file and transmit to the United States trustee

within 14 days after the order for relief, or at another time as the court may direct, the

statement required by section 329 of the Code, including whether the attorney has agreed

to share any compensation with another attorney.

D. Once it is filed, is that all that is required?

No. The disclosure is an ongoing obligation and the attorney must file and

transmit to the United States trustee a supplemental statement within 14 days after any

payment or agreement not previously disclosed is received or reached. Additionally, in

order to be awarded fees by the court, the attorney must file a notice of his fees along

with the actual application and proposed order. The “Attorney’s Application for

Compensation for Representing Chapter 13 Debtors(s)” affirms that the attorney’s fees

are reasonable under section 330(a)(4)(B). (See Attached Form B). In order to determine

who must receive a copy of the notice for the attorney fees, the “Notice of Chapter 13

Bankruptcy Case, Meeting of Creditors, & Deadlines” (hereinafter the “341 notice”)

needs to be examined. Approximately three quarters of the way down the form, it states

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whether there has been a disclosure of compensation. If there has been, then only the

debtor and the trustee need to receive notice of the attorney fees. If there was no

disclosure of compensation in the 341 notice, then the attorney must send out notices of

his fees to all the creditors, the debtors, and the trustee. (For examples see Form C and D

attached.)

E. What Happens When The Disclosure Statement DisclosesUnreasonable Fees?

Section 330 sets forth some guidelines the court should consider in attempting to

determine whether the requested fees are reasonable. Section 330 allows the court to

award reasonable compensation for actual, necessary services and reimburse the attorney

for actual, necessary expenses.

1. What does “reasonable” mean?

What is considered to be ‘reasonable’ is governed by section 330 of the

Bankruptcy Code which lists a number of factors Congress deemed relevant to assess the

value of professional services.

Section 11 U.S.C.330(a)(3) states:

(3) In determining the amount of reasonable compensation to be awarded to an examiner, trustee under chapter 11, or professional person, the court shall consider the nature, the extent, and the value of such services, taking into account all relevant factors, including--

(A) the time spent on such services;

(B) the rates charged for such services;

(C) whether the services were necessary to the administration of, or beneficial at the time at which the service was rendered toward the completion of, a case under this title;

(D) whether the services were performed within a reasonable amount of time commensurate with the complexity, importance, and nature of the problem, issue, or task addressed;

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(E) with respect to a professional person, whether the person is board certified or otherwise has demonstrated skill and experience in the bankruptcy field; and

(F) whether the compensation is reasonable based on the customary compensation charged by comparably skilled practitioners in cases other than cases under this title.

(4)(A) Except as provided in subparagraph (b), the court shall not allow compensation for-

(i) unnecessary duplication of services; or(ii) services that were not-

(I) reasonably likely to benefit the debtor’s estate; or(II) necessary to the administration of the case.

(B) In a chapter 12 or chapter 13 case in which the debtor is an individual, the court may allow reasonable compensation to the debtor’s attorney for representing the interests of the debtor in connection with the bankruptcy case based on a consideration of the benefit and necessity of such services to the debtor and the other factors set forth in this section.

2. Who can object to the reasonableness of the fees?

Under Fed. R. Bankr. P. Rule 2017, pursuant to a request by any party in interest

or on the Court’s own initiative, after notice and a hearing, the Court may review debtor’s

attorney fees paid either prepetition or postpetition to determine whether they are

excessive.

3. Who has the burden of establishing the reasonableness orlack thereof?

Once a question has been raised about the reasonableness of an attorney’s fees

under §329, it is the attorney himself who bears the burden of establishing that the fee is

reasonable. In re Geraci, 138 F.3d 314 (7th Cir. 1997), citing Collier on Bankruptcy para

329.04 (15th ed. 1996); see also, In re Andreas, 373 B.R. 864 (Bankr. N.D. Ill. 2007).

Once it is established the fees are excessive or unreasonable, then the extent to which the

compensation should be denied rests within the sound discretion of the court.

"The reasonableness of an attorney's compensation under §329 is assessed with

regards to the particular circumstances of each case. Services charged by a debtor's

attorney which are of poor quality and/or which do not comply with an attorney' ethical

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duties are not reasonable and provide grounds for the disgorgement of fees for purposes

of § 329(b). In re Whitman, 51 B.R. 502, 506 (Bankr. D. Mass. 1985). The same is true

where debtor's counsel does not abide the Bankruptcy Code and Rules and orders of the

court. In re Federal Roofing Co., Inc., 205 B.R. 638, 644 (Bankr. N.D. Ala. 1996)." In re

Smith, 436 B.R. 476, 483 (Bankr. N.D. Ohio 2010):

4. Does it matter if you are in a district that has a flat rate feeor not?

No. Many jurisdictions have adopted the flat fee arrangement or otherwise

known as the “no look” policy for fees. Generally this is an amount that has been

predetermined and agreed upon that an attorney can charge a debtor without the necessity

of itemizing the attorney’s time. The flat fee arrangement is not required and an attorney

is free to opt out and enter into other types of fee arrangements. However if another type

of fee arrangement is entered, then pursuant to Rule 2016(a) the attorney must itemize all

his time and services, and the attorney is still subject to the requirements of

reasonableness as set forth in §330.

F. How Can The Disclosure Statement Be Violated?

Let me count the ways….

Failure to file a disclosure statement; filing only a partial disclosure; filing a

disclosure late; filing a fraudulent disclosure; these are all different ways the

requirements of Section 329 and Rule 2016 can be violated.

1. Can it be fixed?

No. Disclosures must be accurate, complete, and timely. As stated in In re

Jackson, . 401 B.R. 333, 402 (Bankr. N.D. Ill. 2009) “[a]n attorney must ‘lay bare all

[his] dealings with the debtor concerning compensation. The disclosures he makes must

be ‘precise and complete’. ‘Coy or incomplete disclosures’ that force the court ‘to ferret

out pertinent information’ will not do, even if they are merely the result of negligence or

inadvertence. Very simply, ‘anything less than full measure of disclosure’ is

unacceptable. There have been instances when the attorney has attempted to correct the

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situation, but the courts have resoundingly held it can’t be fixed. See In re Whaley, 282

B.R. 38 (Bankr. M.D. Fla. 2002) in which the attorney offered to formally disclose

payments that were previously undisclosed; also see In re Hackney, 347 B.R. 432 (Bankr.

M.D. Fla. 2006) where the attorney attempted to justify the receipt of funds as a set off

for the fees he was owed. In Whaley, the court stated the failure to disclose fees cannot

be cured. The court went on to say that if everyone waited until they were caught to

correct the situation, “the entire concept of mandatory disclosure would be a farce.

Professionals could breach the disclosure rules with impunity because no consequences

would follow for noncompliance.” Whaley, supra, 282 B.R. at 42.

The number of chapter 13 cases filed is tremendous, and as a consequence,

it is essential that attorneys comply with the rules willingly and in a timely

manner. The failure to comply, or to comply in a timely manner threatens the

integrity of the bankruptcy process. The court in Whaley stated that “voluntary

compliance with the disclosure obligation is essential to maintain the efficacy of

our bankruptcy system. Whaley, supra. Compliance is particularly necessary to

the administration and disposition of Chapter 7 and Chapter 13 cases involving a

voluminous number of relatively small individual cases.” Id., see also In re

Andreas, 373 B.R. 864 (Bankr. N.D. Ill. 2007).

2. Why does it matter so much?

Debtors are in precarious positions. Congress recognized that a debtor would be

tempted to “deal too liberally with his property in employing counsel to protect him in

view of financial reverses and probably failure.” In re Jackson, supra. In light of this, the

legislative history of §329 reflected Congress’ intent to protect against inside

arrangements between attorney and professionals to the detriment of the debtor and the

creditors. The mandatory fee disclosure was a way to prevent over-reaching by the

debtor’s attorneys and it gave creditors the chance to object if the fees were not

reasonable. Congress stated “payments to a debtor’s attorney provide serious potential

for evasion of creditor protection provisions of the bankruptcy laws, and serious potential

for overreaching by the debtor’s attorney, and should be subject to careful scrutiny.” In

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re Hackney, 347 B.R. 432 (Bankr. M.D. Fla. 2006) citing H.R. Rep. No. 95-595 at 329

(1977), as reprinted in 1978 U.S.C.C.A.N. 5787, 6285.

G. What Are The Consequences?

It is commonly held that the sanction against the attorney should be

“commensurate with the egregiousness of the conduct.” In re Hackney, 347 B.R. 432

(Bkrcty M.D. Fla. 2006). A majority of the courts held that an attorney who violates the

disclosure requirement should suffer “strict and quick consequences including the

imposition of sanctions or disgorgement of all fees paid in the case.” Id., In re Whaley,

supra 282 B.R. at 42. There are a range of consequences the violating attorney may face,

including a partial or total denial of compensation as well as a partial or total

disgorgement of fees already paid. It is within the court’s discretion as to how much if

any of the compensation should be denied. An interesting case on point is that the

confirmation of a chapter 13 plan does not foreclose reevaluation of appropriate attorney

fees at any time. See, In re Josey, 195 B.R. 511 (Bankr. N.D. Ga. 1996) The Josey court

ordered disgorgement of attorney fees paid to a debtor’s counsel four years after

confirmation of the debtor’s chapter 13 plan. It seems how far the court will sanction an

attorney is very fact specific. The range of orders include merely disgorging $500 of

compensation that was not disclosed and allowing the attorney to keep the $2000 he was

paid and did disclose (Whaley, 282 B.R. 43, to disgorging the complete amount of fees

received for two cases in the amount of $17,180.37 (In re Jackson, 401 B.R. 333, 402

(Bankr. N.D. Ill. 2009), to ordering that the attorney shall withdraw as counsel from each

of the 155 cases in which he was counsel, and that in each of such 155 confirmed cases

the orders were modified to reflect that attorney fees were disallowed and that the

attorney must disgorge to the trustee all fees previously received for the 155 cases and for

cases subsequently filed cases within 10 days of the order. ( In re Davila, 210 B.R. 727

(Bankr. S.D. Tex 1996).

H. What Do You Look For And What Do You Do?

The first thing to look for is whether the disclosure statement has been filed at all.

These are usually filed by the attorneys at the time the petition is filed, however, if it

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isn’t, mark your calendar to follow up in two weeks. In the meantime, it may behoove

you to write a letter to counsel to inform him of his oversight. This helps build your case

and you have proof that you notified the attorney early in the case of the error.

Once the disclosure is filed, does it accurately represent what the debtor has

agreed to pay the attorney? (This can be a good §341 question!) Was there a prior case

filed? Did the attorney represent the debtor in that case? Was the attorney paid then? If

so, when was he paid and how much? All this should be included on the disclosure

statement. During these bad economic times, mortgages many times are being modified

or stripped. Did the attorney handle that transaction? Was he compensated for it? And if

so, again, when and how much? Any such compensation should be listed with amounts

to accurately reflect the attorney’s compensation.

Is the case a flat fee case? If so, are the appropriate boxes checked in the

Application for Fees and the Order? Both should reflect they are for cases ‘through case

closing.’ If an itemization is filed, look at each entry. Does each entry show an efficient

use of the attorney’s time? How much is work is being done by a paralegal, and how

much are they being charged out an hour? Do you see time being billed at increments

of .10 hours? Does there seem to be a ‘cookie cutter’ approach to billing for different

entries? (The court in In re Kowalski, 402 B.R. 843 (Bankr. N.D. Ill 2009) stated it was

inappropriate to bill at a minimum increment of .25 in bankruptcy cases, and inefficient

use of counsel’s time did not warrant full compensation.)

If you discover there has been a violation of the disclosure requirements, it will be

necessary to file a motion to either disallow and/or disgorge fees. If this occurs, it is

helpful to know your judge. In one situation you may have a judge that would cut an

attorney’s fee in half due to the lack of entries at .10 increments, inflated billings,

repetitive services, and the like, but in and in the same fact pattern, before a different

judge, the latter may enter the fee order without any penalty or reduction. Knowing your

judge will save both you and opposing counsel needless headaches and the court’s time.

In addition to the technical violations, the disclosure statement may show a

completely unacceptable amount for attorney fees. Once again you will need to file a

motion and notice opposing counsel of a hearing date and time. In order to try to

preserve a working relationship with the debtor’s attorney, you will want to be as fact

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specific as possible in the allegations set forth in the motion. Use a “flat” style, avoid

inflammatory adjectives, and do not overstate your case.

It is helpful to remember, that, once the question of reasonableness has been

raised, the debtor’s attorney must bear the burden of showing how the fees are

reasonable. Once you have presented your factual allegations, and counsel has had an

opportunity to rebut your allegations, the decision rests with the court.

Since you may have the same attorney at a 341 meeting the next day, next week,

or next month, in these situations it is best to present your facts, make your argument and

rest your case. You most likely have struck a nerve with the debtor’s attorney, and your

motion will most likely not be favorably received. You have discharged your duty,

however, to bring the matter before the judge, and regardless of the outcome, counsel will

most likely adjust his practice accordingly.

(Attached are some sample motions.)

[Fiona’s forms for this section are in the Appendix]

X. BANKRUPTCY APPEALS – TIME LINES.

Tracy L. Schweitzer, Esq.Staff Counsel to Henry E. Hildebrand, IIIChapter 13 Standing Trustee, Middle District of Tennessee

A. Appeal To The BAP (appeal as of right, with no delaying motions*)

1. Entry of the Order

2. Within 14 days of the entry of the Order, appellant must file a Notice of Appeal with the bankruptcy clerk. Fed. R. Bankr. P. 8002(a). (The bankruptcy clerk serves notice of the filing of a notice of appeal on the other parties. Fed. R. Bankr. P. 8004.).

3. Within 14 days after filing the Notice of Appeal, appellant must file a designation of the record and statement of the issues with the bankruptcy clerk and serve on the Appellee. Fed. R. Bankr. P. 8006. If the record includes a transcript, a request for the transcript must be filed “immediately after filing the designation.” Fed. R. Bank. P. 8006.

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4. Docketing of the Appeal: On receipt of the complete record from the bankruptcy court, the BAP clerk enters the appeal on the docket and gives notice to parties. Fed. R. Bankr. P. 8007(b).

5. Within 14 days after entry of the appeal on the docket pursuant to Rule 8007, the Appellant Brief must be filed and served. Fed. R. Bankr. P. 8009(a)(1).

6. Within 14 days after service of the appellant brief, Appellee Brief must be filed and served. Fed. R. Bankr. P. 8009(a)(2).

7. Within 14 days after service of the appellee brief, appellant may file and serve a Reply Brief. Fed. R. Bankr. P. 8009(a)(3).

* Procedures differ for appeal by leave; certain motions listed in Fed. R. Bankr. P. 8002(b) delay the time for appeal.

B. Appeal To The District Court (appeal as of right, with no delayingmotions*)

1. Entry of the Order

2. Within 14 days of the entry of the Order, appellant must file a Notice of Appeal, Fed. R. Bankr. P. 8002(a), and a separate Written Statement of Election with the bankruptcy clerk, 11 U.S.C. §158(c)(1); Fed. R. Bankr. P. 8001(e)(1). (The bankruptcy clerk serves notice of the filing of a notice of appeal on the other parties. Fed. R. Bankr. P. 8004.).

3. Within 14 days after filing the Notice of Appeal, appellant must file a designation of the record and statement of the issues with the bankruptcy clerk and serve on the Appellee. Fed. R. Bankr. P. 8006. If the record includes a transcript, a request for the transcript must be filed “immediately after filing the designation.” Fed. R. Bank. P. 8006.

4. Docketing of the Appeal: On receipt of the complete record from the bankruptcy court, the district court clerk enters the appeal on the docket and gives notice to parties. Fed. R. Bankr. P. 8007(b).

5. Within 14 days of the docketing of the appeal, the Appellant Brief must be filed and served. Fed. R. Bankr. P. 8009(a)(1).

6. Within 14 days after service of the appellant brief, Appellee Brief must be filed and served. Fed. R. Bankr. P. 8009(a)(2).

7. Within 14 days after service of the appellee brief, appellant may file and serve a Reply Brief. Fed. R. Bankr. P. 8009(a)(3).

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* Procedures differ for appeal by leave; certain motions listed in Fed. R. Bankr. P. 8002(b) delay the time for appeal.

C. Appeal From The BAP/District Court To The Circuit Court

Rule 6 of the Rules of Appellate Procedure specifies the rules that apply in bankruptcy appeals from district court and bankruptcy appellate panel decisions. Rule 6(b) lists rules that do not apply in bankruptcy appeals and clarifies that, in rules that do apply, “district court” means “appellate panel” in appeals from the BAP.

1. Within 30 days after the judgment or order appealed from is entered, must file Notice of Appeal. Fed. R. App. P. 4(a); see also Fed. R. App. P. 3(c) (stating requirements for the contents of notice of appeal).

2. Within 14 days after filing the notice of appeal, appellant must file with the BAP/district court clerk and serve on opposing counsel a statement of the issues to be presented on appeal and a designation of the record on appeal. Fed. R. App. P. 6(b)(2)(B). Actual practice may differ: In the 6th Circuit, the designation of record is apparently not needed in appeals from the BAP and the statement of issues is filed with the Court of Appeals (not the BAP) pursuant to a letter sent upon entry of the notice of appeal.

3. Filing of the Record. When the record is complete, the BAP clerk numbers the record and sends to Circuit Clerk. Upon receiving the record, the Circuit Clerk must file the record and notify parties of the filing date. Fed. R. App. P. 6(b)(2)(D).

Note: The briefing schedule may be set by the court in accordance with Fed. R. App. P. 26 and 31. (In the Sixth Circuit, the court will always set the briefing schedule. 6 Cir. R. 31.)

4. Within 40 days after the record is filed, the Appellant Brief must be filed and served. Fed. R. App. P. 31(a)(1).) (Note: In the 6th Circuit, an appendix is generally not required. 6 Cir. R. 30(a).)

5. Within 30 days after the appellant’s brief is served, the Appellee Brief must be filed and served. Fed. R. App. P. 31(a)(1).

6. Within 14 days after the appellee’s brief is served, the Appellant Reply Brief may be filed and served (but it must be at least 7 days before oral argument). Fed. R. App. P. 31(a)(1).

D. Direct Appeal To The Circuit Court (with no delaying motions*)

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A direct appeal to the Circuit Court involves setting up both a normal appeal and a direct appeal. See Fed. R. Bankr. P. 8002(a). At least at the beginning, therefore, the direct appeal involves two tracks: (1) the steps required to set up a normal appeal, either to the BAP or the district court, and (2) the steps required to obtain permission for a direct appeal.

1. Entry of the Order.

2. Within 14 days of the entry of the order, appellant must file a Notice of Appeal with the bankruptcy clerk. Fed. R. Bankr. P. 8001(f)(1) and 8002(a). (The bankruptcy clerk serves notice of the filing of a notice of appeal on the other parties. Fed. R. Bankr. P. 8004.). If the appellant wishes to elect to have the appeal heard by the district court (in the event the direct appeal is denied), the appellant must file a separate Written Statement of Election with the bankruptcy clerk at the time of filing the appeal. 11 U.S.C. §158(c)(1); Fed. R. Bankr. P. 8001(e)(1).

3. Within 14 days after filing the Notice of Appeal, appellant must file a designation of the record and statement of the issues with the bankruptcy clerk and serve on the Appellee. Fed. R. Bankr. P. 8006. If the record includes a transcript, a request for the transcript must be filed “immediately after filing the designation.” Fed. R. Bank. P. 8006.

4. Not later than 60 days of the entry of the order, a Request for Certification must be made to the bankruptcy court, district court, or BAP court, 28 U.S.C. 158(d)(2)(E). (To determine the court in which to file the request, see Fed. R. Bankr. P. 8001(f)(2).) See Rule 8001(f)(3)(C) for what the request must include. The clerk must serve notice on the parties (Fed. R. Bankr. P. 8001(f)(3)(B)).

Or, the statute and the rules suggest that an alternative approach is for all the appellants and appellees acting jointly to make a certification, using the appropriate Official Form (Form 24 - Certification to court of appeals by all parties). 28 U.S.C. 158(d)(2)(A); Fed. R. Bankr. P. 8001(f)(2)(B). The deadline for such certification is unclear; read literally, the 60-day deadline only applies to a request for certification, not a certification made by all the appellants and appellees acting jointly.1

5. Certification Entered on docket of bankruptcy court.

1 The statutory basis for this alternative approach is the language of 28 U.S.C. § 158(d)(2)(A), which states that the appropriate court of appeals shall have jurisdiction if the relevant lower court, “acting on its own motion or on the request of a party to the judgment, order, or decree described in such first sentence, or all the appellants and appellees (if any) acting jointly, certify that” specified circumstances exist. 28 U.S.C. § 158(d)(2)(A) (emphasis added). This provision appears to allow either the court or all of the appellants and appellees to make the required certification. The Rules, similarly, differentiate between certification by the court (on request or at the court’s own initiative) and certification by all parties. Compare Fed. R. Bankr. P. 8001(f)(2)(A) with Fed. R. Bankr. P. 8001(f)(2)(B).

Because 28 U.S.C. § 158(d)(2)(A) is not perfectly clear, it may be advisable to simply request certification. Under 28 U.S.C. § 158(d)(2)(B), the court must make the certification if it receives a request made by a majority of the appellants and a majority of the appellees (if any).

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6. No later than 30 days2 after the certification becomes effective, a Petition Requesting Permission to Appeal in accordance with Rule 5 of the Federal Rules of Appellate Procedure must be filed with the circuit court clerk. Fed. R. Bankr. P. 8001(f)(5). Rule 5 of the Rules of Appellate Procedure states what the petition must include. Fed. R. App. P. 5(b)(1).

7. Entry of Order Granting Permission to Appeal.

Section 1233(b)(6) of BAPCPA (Pub. L. 109-8) provides that the Federal Rules of Appellate Procedure apply in direct appeals “to the extent relevant and as if such appeals were taken from final judgments, orders, or decrees of the district courts or bankruptcy appellate panels.” Note that Rule 6 of Rules of Appellate Procedure governs non-direct bankruptcy appeals (appeals from district court or bankruptcy appellate panel decisions).

8. Within 14 days after the entry of the order granting permission, the appellant must pay fees (and post a cost bond, if required). Fed. R. App. P. 5(d)(1). A notice of appeal is not required. The date of the entry of the order granting permission to appeal serves as the date of the notice of appeal for calculating timelines. Fed. R. App. P. 5(d)(3).

9. Once the lower court clerk notifies the circuit court clerk that all fees have been paid, the record must be forwarded and filed in accordance with Rules 11 and 12(c) of the Rules of Appellate Procedure. Fed. R. App. P. 5(d)(3). The circuit court clerk must notify all parties upon receiving the record. Fed. R. App. P. 12(c).

Note: The briefing schedule may be set by the court in accordance with Fed. R. App. P. 26 and 31. (In the Sixth Circuit, the court will always set the briefing schedule. 6 Cir. R. 31.)

10. Within 40 days after the record is filed, Appellant Brief must be served and filed. Fed. R. App. P. 31(a)(1).

11. Within 30 days after the appellant’s brief is served, Appellee Brief must be served and filed. Fed. R. App. P. 31(a)(1).

12. Within 14 days after service of appellee’s brief (but at least 7 days before argument), appellant may file a Reply Brief. Fed. R. App. P. 31(a)(1).

* Certain motions listed in Fed. R. Bankr. P. 8002(b) delay the time for appeal.

XI. IF YOU THINK YOU MAY BE APPEALING, OR APPEALED....

2 The 30-day deadline for filing the petition for permission to appeal in the Rules of Bankruptcy Procedure appears to supersede a 10-day deadline in temporary procedural rules under BAPCPA. See Pub. L. 109-8, § 1233(b)(4)(A).

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A. Appeals Intended To Establish Or Change The Law.

1. If you want to tackle an issue on appeal, pick your case carefully. You want facts

that are either neutral, or will make the court favorably disposed to sustaining your

position. In other words, don’t pick on widows and orphans. Bad facts make bad law.

2. In selecting a case to appeal, make sure that the issue you want to address is a

necessary part of the proceeding, and that the issues are limited – preferably to the one

issue you want the bankruptcy court, or the appellate court, to address. If you can

stipulate the facts and ask the bankruptcy court to address a single legal issue, that’s

generally the ideal way to set up an appeal where you want to litigate what the law

‘should be’.

3. Make sure you get in every factual item that the court of appeals will need to

decide the issue. You can do that by stipulated facts, or by entering evidence into the

record. You do NOT accomplish this by just talking about facts in your brief.

4. If things are said while the court is not recording, you won’t be able to make

whatever happened part of the record on appeal. If something needs to be repeated, on

the record, get it repeated.

5. In deciding whether to appeal, be sure that the court has not cited two or more

reasons for its decisions. If there are two bases for a decision, and one of them is right,

and you think the other one is wrong, the appellate court is going to affirm based upon

the correct reason for the decision and not address what you think is the incorrect reason.

6. Be sure to designate the full record and order a transcript. If the court of appeals

can’t review what happened in court, they are much less likely to overturn a bankruptcy

court’s decision.

7. Review whether the bankruptcy court decision will be a final appealable order. If

not, you either have to wait for an event that will make the decision a final appealable

order, or seek leave to appeal. For example, for a debtor, denial of Confirmation of a

Chapter 13 Plan is generally not a final appealable order. For the issues raised in the

denial of Confirmation to become final, the case must either be dismissed, or the Plan

Confirmed as Amended – then the issue in the original denial of Confirmation would be

final and appealable.

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8. Bankruptcy Courts are not unaware of these considerations and rules. So, for

example, some judges will protect their desired results in decisions where one basis for

the decision is clear-cut, and the stuff that drives your trustee nuts is an second reason for

the decision – in other words, dicta. Of course, that may not prevent your judge from

pointing to the decision and saying s/he has already decided the issue.... Judges also

consciously write their decisions for the court of appeals.

B. Appealing Based On An Individual Decision Being “Unfair”.

Sometimes, appeals are taken, not for strategic reasons, but because the individual

result is somehow unfair. Unless the facts are really compelling, it is usually better to

save your appeals for situations where the concerns are about the state of the law or local

practices, and not the fairness of the individual decision. Individual fairness is more the

responsibility of debtor’s counsel, and using trusteeship resources is harder to justify.

But there are always exceptions.

C. Defending An Appeal.

1. Failing to defend – or at least participate in – an appeal of an order you sought

from your judge may get you the fish eye the next time you’re in court.

2. Do you want to file your own cross-appeal, on the same or different issues?

XII. MOTION PRACTICE.Holly Davala, Esq. and Phil Lamos, Esq.Staff Attorneys for Chapter 13 Trustee, Craig Shopneck, Cleveland, Ohio

I. Motion Practice A. Motions filed by Trustee

1. Motion to Modify Plana. File before the case is completeb. File if plan completing in less than 36 months and use good faith

as reason to increase dividend to unsecured creditors2. Motion to Dismiss Case for Lack of Feasibility

a. File because the case will complete in over 60 months3. Motion to Dismiss Case for Failure to Fund

a. File if debtor is over two months delinquent4. Objection to Proof of Claim

a. File if unsecured claim filed after claims bar dateb. Verify service is on correct party and address

B. Notice Time1. For Pleadings 1-3 under Motion Practice, 21 days.

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2. For Pleading 4 under Motion Practice, 30 days. C. Cite statute or case law that gives the Trustee legal authority to seek relief

requested

II. Objections Trustee files to Motions filed by DebtorsA. Motion to Modify Plan post confirmation

1. Does the motion comply with section 1329 (Sections 1322(a), 1322(b), 1323(c), and 1325(a) apply to post-confirmation motions to modify)

B. Motion to Voluntarily Dismiss Case 1. Verify not converted case2. Verify no language requiring to be dismissed without prejudice when

Section 109(g)(2) appliesC. Motion to Convert Case to Chapter 7

1. Verify debtor does not have a previous discharge under chapter 7 that was filed in the past 8 years from filing of the present case (Section 727(a)(8))

D. Motion to Incur Debt/Buy/Sell/Refinance1. Did the motion include documents from the escrow agent that clearly

spells out the terms of the deal?2. Did you get a HUD 1 statement in time to review it before closing?3. Is this a good deal for the debtor?4. How can the debtor afford this new obligation?5. If selling or refinance real estate what claims will the Trustee stop paying?6. Is the debtor selling real estate for more than what was scheduled?7. Who did the real estate vest with at the time of confirmation?8. If proceeds from sale are to come to the Trustee does the order state that

so the escrow agent properly disburses funds?9. Will the debtor still be paying 36 months of payments into the case?

E. Motion for Hardship Discharge1. Verify the court entered an order fixing the time required under

Bankruptcy Rule 4007(d) for §523(a)(6) dischargeability complaints.2. Verify Section 1328(b) requirements have all been met (this list is all

inclusive, must meet all three requirements)F. Cite case law or statute that properly supports the Trustee’s objection

III. Adversary PracticeA. Reasons Trustee files Adversary

1. Preference2. Fraudulent Transfer3. Turnover of Funds

B. When Appropriate to File1. Preference and Fraudulent Transfer actions have 2 years from the time the

debtor sought bankruptcy relief unless the case is dismissed or closed before that (Section 546(a)(1))

2. Easier to have unsecured creditors paid in full within 2 years from the time the debtor sought bankruptcy relief rather than file adversary proceeding; or

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3. Have the party who would be the defendant in the adversary proceeding sign stipulation waiving statute of limitations defense.

C. Forms 1. Look to your judge’s and court’s local rules to verify complying with their

specific requirements

IV. Checklist for Filing PleadingsA. Verify service date, agent, and addresses are correct, or if a federally insured

depository institution that Rule 7004(h) has been complied with.B. Verify all exhibits are attached and refer to correct exhibit (remember if

evidentiary hearing do not file exhibits)C. No matter how simple the pleading is verify the issue, applicable law (whether

statute or case) and applicable facts are clearly articulated for the intended reader (the JUDGE)

D. Verify the case number and party names are correctE. Verify all unpublished decisions are attached to the pleading.

XIII. DISMISSAL PURSUANT TO SECTION 11 U.S.C. §109(g).

By Fiona Whelan, Esq.Staff Attorney for Lydia Meyer, Chapter 13 TrusteeRockford, Illinois

Generally section 109 defines who is eligible to be a debtor. According to the

Senate Report, subparagraph (g) was included to “provide the court with greater authority

to control abusive multiple filings.” A person who has previously filed a petition and

within the previous six months and has had the petition dismissed for failure to abide by a

court order, will be denied eligibility to be a debtor. Additionally, if a person files a peti-

tion, who has previously voluntarily dismissed a petition within the previous six months,

after a creditor has moved for relief of the stay, will be denied eligibility to be a debtor.

Pursuant to 11 U.S.C. Section 109(g):

(g) Notwithstanding any other provision of this section, no individual or family farmer may be a debtor under this title who has been a debtor in a case pending under this title at any time in the preceding 180 days if-

(1) the case was dismissed by the court for willful failure of the debtor to abide by orders of the court, or to appear before the court in proper prosecution of the case; or

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(2) the debtor requested and obtained the voluntary dismissal of the case following the filing of a request for relief from the automatic stay provided by section 362 of this title.

Note that the eligibility requirement under 109(g) is much broader than the

eligibility requirement under 109(e). The former section states that ‘notwithstanding any

other provision of this section, no individual or family farmer may be a debtor under this

title…” whereas the latter section defines only the eligibility of a “debtor under chapter

13 of this title.” Therefore it is entirely possible that a debtor may not qualify as a debtor

under 109(e) however may qualify as a debtor under another chapter whereas if a debtor

does not qualify as a debtor under 109(g), they can not be a debtor under any other

chapter. Chapter 13 Bankruptcy, 3rd Edition, K. Lundin (2000 & Supp. 2004).

The Code is silent as to when to file a motion pursuant to section 109(g). This

question has been raised several times and the majority of courts have concluded

willfulness may be found at the time, either at the time of the dismissal of the first case or

in the subsequent case when the court is called upon to determine whether the prior case

renders the debtor ineligible. In re Pike, 258 B.R. 876, 882 (Bankr. S.D. Ohio 2001). The

U.S. Court of Appeals in Montgomery v. Ryan (In re Montgomery) has stated the finding

of willfulness is not necessary in the order dismissing a bankruptcy case because §109(g)

isn’t an issue until the motion to dismiss is raised in the later filing. 37 F.3d 413 (8th Cir.

1994).

A. Language Of §109(g)(1): What Does ‘Willful” Mean?

This section is broadly worded and ‘willful’ is a term of art. In this section it does

not mean a general willfulness to do something. Specifically it must be a willful failure

to abide by a court order or appear before the court in a proper prosecution of the case.

Willful is not defined by the Code but case law has defined it as something

deliberate or intentional rather than accidental or beyond one’s control. In re King, 126

B.R. 777 (Bankr. N.D. Ill. 1991), see also In re Xu, 386 B.R. 451 (Bankr. S.D.N.Y.

2008). This interpretation seems consistent with case law interpretation of the term

“willful” in other places in the code, for example, 11 U.S.C. §(a)(6).

In order to determine whether the debtor has been guilty of willful conduct to

invoke the bar under this section, there must be an evidentiary hearing. Willfulness is a

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question of fact. In re Walker 171 B.R. 197, 203 (Bankr. E.D. Pa. 1994) set forth ways in

which willfulness may be proven:

a) an admission of intentional conduct by the debtor;

b) a conclusion that denials of intentional conduct by the debtor lack credibility;

c) drawing adverse inferences from all circumstances surrounding the filing.

As you can see, although the requirement of good faith is not stated in the

language of §109(g)(1), it is “inherent in the purposes of bankruptcy itself.” In re Pike,

258 B.R. 876 (Bankr. S.D. Ohio 2001), quoting McLaughlin v. Jones (In re Jones), 114

B.R. 917, 926 (Bankr. N.D. Ohio 1990).

B. What Does “Failure To Abide By Court Orders” Or “FailureTo Properly Prosecute A Case” Mean?

Willfulness, as stated above, must apply to these two areas. Again, the act must be

more than an isolated failure to perform an act. Instances that, by themselves, do not

warrant a finding of willfulness are:

-failure to appear for a creditors’ meeting; a meeting of creditors is not an appearance before the court. In re Arena 81 B.R. 851 (Bankr. E.D. Pa. 1988);

-failure to follow local rules; local rules are not court orders. In re Hollis, 150 B.R. 145 (D. Md. 1993);

-failure to make regular monthly plan payments. In re Pike, 258 B.R. 876 (S.D. Ohio 2001).

In order to demonstrate willfulness for §109(g)(1) purposes, it is better to focus on

a pattern of actions or misconduct by the debtor. For instance repeatedly failing to attend

meeting of creditors or produce documents can constitute a pattern of inattentiveness

raising to the level of willful conduct. In re Robinson, 198 B.R. 1017 (Bankr N.D. Ga

1996). Likewise multiple filings and multiple dismissals are another indication of

willfulness. .” In re Pike, 258 B.R. 876 (Bankr. S.D. Ohio 2001).

The majority of courts have held that §109(g) is not a limitation on the ability of

the bankruptcy court to impose a greater sanction, if appropriate. See, In re Casse, 198

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F.3d 327, 339-40 (2d Cir. 1999); In re Tomlin, 105 F.3d 933 (4th Cir. 1997); In re

Cusano, 431 B.R. 726, 737 (6th Cir. BAP 2010); Contra, In re Frieouf, 938 F.2d 1099,

1104-05 (10th Cir. 1991).

C. Voluntary Dismissal After The Request ForRelief From Stay, §109(g)(2)

The debtor himself must request dismissal of this case under this section. A third

party moving for dismissal of the debtor does not invoke the bar. Timing is also

important. If a voluntary motion to dismiss is filed by the debtor the same day as the

Motion for Relief of Stay, it has been ruled that since it was impossible to tell which

motion was filed first, the bar will not be imposed. In re Rosenthal, 117 B.R. 710 (Bankr

M.D. Fla. 1990). Similarly, a debtor was not barred when the debtor filed his motion to

dismiss two weeks before the creditor filed a motion for relief and the dismissal order

was entered after the relief of the stay. In re Ransom, 60 B.R. 19 (Bankr. E.D. Pa. 1986).

It is essential that the debtor “requested and obtained” dismissal following the filing of a

request for relief of the stay. It should be noted that filing for relief of a codebtor stay

does not invoke the bar to refilling either.

In some jurisdictions, the court will not impose the bar if either the Motion for

Relief was resolved in favor of the debtor, or if the dismissal and request for relief are

separated by long periods of time. In these jurisdictions it appears the courts require

more of a ‘casual relationship” between the motion for relief and the debtor’s dismissal of

the prior case which has led to some unique situations. The majority of the courts have

however adopted an approach that looks more at the plain reading of the statute. The

consequences of this approach result in invoking the 180 day bar regardless of which

creditor filed a motion for relief and regardless of the outcome of the motion for relief.

Chapter 13 Bankruptcy, 3rd Edition, K. Lundin, section 23-5, (2000 & Supp. 2004).

D. How Should I File My Motion?

A motion should be filed setting forth a time and date of an evidentiary hearing

(unless your bankruptcy sets its own docket). Somewhere in the heading of the motion it

should be clearly marked that the trustee will be seeking a 180 day bar. In the case In re

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Badalyan, 236 B.R. 633 (B.A.P. 6th Cir. 1999) when a debtor did not appear on the

trustee’s motion to dismiss, the court for the appellate panel for the 6 th circuit ruled the

record was deficient in showing the debtor had notice the trustee was considering a 180

day bar, therefore refusing to enter the order of willfulness and bar the debtor.

In jurisdictions where the party bringing the motion has the burden, the body of

the motion should include a history of the previously filed cases. The history should

include dates of when the petitions were filed, the dates they were dismissed, whether any

money was paid to the trustee, whether the debtor paid their filing fees, whether a plan,

schedules, or other pertinent documents were filed, and whether they appeared for their

creditors’ meeting, if not, how many times was the meeting reset, and whether there were

any motions for relief filed. If creditor motions were filed, were the cases voluntarily

dismissed by the debtor or by the trustee. All these factors in combination with each

other will help the court to determine whether there is sufficient evidence to shift the

burden to the debtor, who must show that none of the allegations were willful, or at least

that there were circumstances beyond his control.

XIV. MOTIONS TO DISMISS BECAUSE DEBTOR IS OVERTHE §109(e) DEBT LIMIT

By Diana Daugherty, Esq., Staff Attorneyfor Standing Chapter 13 Trustee John V. LaBarge, Jr., St. Louis, Mo.

A. Overview. Section 109(e) states that for a person to be eligible to be a debtor under Chapter

13 of the Bankruptcy Code, that persons' debts cannot exceed certain dollar limits. There

are two dollar limits: one for secured debt and one for unsecured debt. Debt that is

unliquidated or contingent does not count toward these limits. By statute, the debt limits

increase every three years so it is important to make sure you are using the most recent

numbers when reviewing a debtor's eligibility for Chapter 13. Currently, the limits are

$1,081,400 secured debt and $360,475 unsecured debt, but they are scheduled to adjust in

Spring 2013.

B. The Limits Apply To An Individual And That Individual’s Spouse.

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1. In a joint case, the dollar limits are not doubled, but there is case law finding

that each spouse is entitled to the debt limit with joint debt counting fully toward each

spouse's total. In Re Werts, 410 B.R.677, 688 (Bankr. D. Kan. 2009); In re Bosco, 2010

Bankr. LEXIS 3972 (Bankr. E.D.N.C. Nov. 9, 2010) For example, if the spouses have

$300,000 in joint unsecured debt and the husband has another $100,000 unsecured debt

only in his name, the husband is over the debt limits, but the wife is not.

2. This section could be read to include the debt of a non-filing spouse, but this

interpretation is not practical because there is no duty to disclose the debt of a non-filing

spouse and no place to do so in the bankruptcy schedules.

C. At What Point Do You Measure The Amount Of Debt And WhatInformation Do You Use To Measure The Amount Of Debt?

1. Section 109(e) specifically states that you look at debt owed "on the date of the

filing of the petition." Therefore, a debtor's intention to surrender collateral to satisfy

debt, a creditor's intention to forgive debt, or any other event that would affect the

amount or classification of debt owed is not considered in determining 109(e) eligibility

if that event has not occurred as of the date the debtor filed the bankruptcy petition.

2. The debtor's schedules are the tool used to determine the amount of debt for

eligibility purposes, although these amounts can be challenged if it appears they were not

listed in good faith. In Re Pearson, 773 F.2d 751, 756 (6th Cir. 1985); In Re Scovis, 249

F.3rd 975, 982 (9th Cir. 2001).

D. What Is A Non-Contingent Debt?

1. Contingent. A debt is contingent if it does not become an obligation until the

occurrence of a future event, but is noncontingent when all of the events giving rise to

liability for the debt occurred prior to the debtor's filing for bankruptcy. See, e.g., In re

Mazzeo, 131 F.3rd 295, 302-305 (2nd Cir. 1997); In re Knight, 55 F.3d 231, 236 (7th Cir.

1995); In re Nicholes, 184 B.R. 82, 88 (9th Cir. B.A.P. 1995); In re Fostvedt, 823 F.2d

305, 206 (9th Cir. 1987); Brockenbrough v. Commissioner, 61 B.R. 685, 686-687 (W.D.

Va. 1986); In re Martz, 293 B.R. 490 (Bankr.N.D. Ohio 2002); In re All Media

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Properties, Inc., 5 B.R. 126, 133 (Bankr. S.D. Tex. 1980), aff'd, 646 F.2d 193 (5th Cir.

1981).

2. Guaranteed debt. If the debtor has guaranteed the debt of another person or

entity, the written guarantee may contain language stating that the debtor cannot be called

upon to make payment until such time as that other person or entity defaults on the loan.

If the default has not occurred at the time the bankruptcy petition is filed, the debt is

contingent. If a default has occurred as of the date of filing, all the events necessary to

make the debtor liable on a debt have occurred , and the debt is not contingent. This also

applies to corporate debt which the debtor has guaranteed. In re Tabor, 232 B.R. 85, 90

(Bankr. N.D. Ohio 1999); In re Robertson, 105 B.R. 504, 508 (Bankr. D. Minn. 1989); In

re Pulliam, 90 B.R. 241 (Bktcy. N.D. Tex. 1988)(corporate debt guaranteed at the date of

filing is noncontingent and must be included in the calculation of the monetary

limitations); In re Williams, 51 B.R. 249 (Bktcy. S.D. Ind. 1984); DeKalb Bank v.

Flaherty, 10 B.R. 118 (N.D. Ill. 1981); In re Wilson, 9 B.R. 723 (Bktcy. E.D.N.Y. 1981).

3. Joint debt. The mere fact that a debt is jointly owed does not make it

contingent. In Re Martz, 293 B.R. 409, 411 (Bankr. N.D.Ohio 2002).

4. Effect of a judgment. If a debt has been reduced to a pre-petition judgment

against the debtor, that debt is not contingent. In re Hammers, 988 F.2d 32 (5th Cir.

1993)(tax court judgment fixes claim); In re Miloszar, 238 B.R. 266 (D.N.J. 1999)

(default judgment is a noncontingent debt); In re Monroe, 282 B.R. 219, 223 (Bankr. D.

Ariz. 2002); In re Snell, 227 B.R. 127 (Bankr. S.D. Ohio 1998); In re Mannor, 175 B.R.

639 ( Bankr. E.D. Pa. Mich. 1994)(pre-petition judgment against debtor precluded

argument that debt was owed by a corporation and should be excluded).

5. Disputed debt. The fact that a debt is disputed does not make it contingent.

See e.g., In re Nowakowsk, 404 B.R. 789, 792 (Bankr. M.D. Pa. 2009). For example, if

the debtor signed a contract to pay a workman a certain dollar amount to pave his

driveway and the workman completed the job, the fact that the debtor believed the

workmanship to be inferior, refused to pay, and was litigating the contract would not

render this particular obligation contingent. All events necessary to trigger the debtor's

obligation to pay under the contract have occurred.

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E. What Is A Liquidated Debt?

Liquidated in the context of 109(e) is fairly broad. A liquidated debt is a debt the

amount of which has been determined or can readily be determined. For example, if the

debtor has defaulted on a contract and the contract contains a liquidated damages

provision, but is the subject of current litigation, the debtor's obligation under the contract

can be considered liquidated because the amount of the debt can be determined by

applying the formula set forth in the contract. If the debtor is a defendant in a personal

injury case, and that case is still pending, the debt is probably unliquidated because it is

up to the judge or jury to determine the amount of liability.

For a discussion or personal guarantees: See, In re Glaubitz, 436 B.R. 99 (Bankr.

E.D. Wis. 2010).

Cases on this issue can be fact-specific and conflicting, therefore if you anticipate

litigating this issue in a particular case it would be useful to research cases whose fact

patterns are close to those in your case.

F. How Do You Calculate Secured And Unsecured Debt?

1. The answer to this question varies from jurisdiction to jurisdiction,

primarily depending on whether your circuit believes that debt listed on Schedule D:

a. All counts as secured debt. In re Pearson, 773 F.2d 751 (6th Cir. 1985).

b. Is split into secured and unsecured components. In Re Day, 747 F.2d 405 (7th Cir. 1984); In re Scovis, 249 F.3rd 975 (9th Cir. 2001); In re Balbus, 933 F.2d 246 (4th Cir. 1991); In re Miller, 907 F.2d 80 (8th Cir. 1990).

2. Simple calculation for jurisdictions in which you split Schedule D claims

into secured and unsecured portion.

a. The secured debt total is the total amount of secured debt listed in the first column of Schedule D minus the total of the second column, which is the unsecured portion of the listed secured debts.

b. Unsecured debt is the total of the second column of schedule D, Schedule E and Schedule F.

c. The above totals are reduced by the amount of any debt identified in the schedules as contingent or unliquidated.

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d. If either the secured or unsecured debt totals exceed the applicable limit, the debtor is not eligible to be a Chapter 13 debtor.

3. Reality. If filed schedules on their face show that the debtor is above the

109(e) debt limits, the debtor's attorney has probably failed to consider this issue when

filing the case. That means the attorney has probably not marked any of the debt as

contingent or unliquidated, even though it may qualify as such. The attorney may have

overstated debt "just to be on the safe side." For example, the attorney may have listed as

unsecured the entire amount of a debt that was secured by real estate which was

foreclosed prior to filing, because the debtor did not know the amount of the deficiency

after sale. If the debtor owns a business that operates as a corporation, the attorney may

have listed corporate debt for which the debtor has no personal liability. Debt may be

listed in Schedule D as secured, but the collateral for the debt is owned by a third party

such that the debt is not secured for purposes of the bankruptcy case. In short, if you add

up schedules D, E and F and find that the debtor is over one or both limits, you might

want to look for potential errors. Depending on the culture of your district, you might be

able to save time by contacting the debtor's attorney for an amendment or clarification

and thus avoid the need to file a motion to dismiss the case.

G. What Do You Do If The Debtor Is Over The Debt Limits?

1. If the practice in your court is for the trustee to motion to dismiss a case that is

over the debt limits, and the schedules as filed show that the debtor is over the debt

limits, you can base your motion on the schedules. The debtor has filed the schedules on

the record under penalty of perjury, so you can safely cite them as your evidence. It is

then up to the debtor to rebut your motion. The debtor would then file a written response

or amend the schedules or both.

2. If the schedules as filed do not show that the debtor is over the debt limits, but

you believe there is an error or omission in the schedules that, if corrected, would cause

the debtor to be over the debt limits, your motion should allege sufficient facts to rebut

the challenged information on the schedules.

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3. A basic motion to dismiss the case because the debtor is over the 109(e) debt

limits is attached.

NOTE: Judge Lundin's treatise on Chapter 13 Bankruptcy contains an excellent section on this topic.

XV. THE LIGHTNING ROUND!

A Totally Random Concepts, Terms, Laws And Doctrines!

Till Rate, or “Tilling the Interest Rate” – The Supreme Court, in Till v. SCS Credit Corp., 541 U.S. 465; 124 S. Ct. 1951; 158 L. Ed. 2d 787 (2004) held (a 4-4-1 – just take my word for it) that interest rates (other than loans secured solely by the debtor’s primary residence) can be reduced to the prime rate, plus a risk factor of up to 3%. In most of the country, if the debtor seeks to reduce the interest rate on a non-910 vehicle to prime plus 3%, the debtor should be able to force that reduction, even over a creditor’s objection.

Lis Pendens – A pending suit, and also the doctrine that the court controls the property in issue during the pending action. A “notice of lis pendens” is a notice filed on public record for the purpose of putting all persons on notice that title to certain property is in litigation, and that the court has jurisdiction over the property in issue in the litigation. A notice of lis pendens provide notice to purchasers or those seeking to encumber the property, that there may be a prior interest based on the litigation.

Ore Tenus – Orally. If the judge asks you if you want to make your objection “ore tenus” she’s asking if you want to make the objection orally.

Drop Dead Clause – a provision in an settlement agreement allowing some action upon the occurrence of a default. For Chapter 13 Trustee purposes, a “drop dead” usually the dismissal of the Chapter 13 case upon the filing of an affidavit that Plan payments have not been made on a timely basis. The “drop dead” is a technique for giving the debtor(s) one more chance, but saves the trustee the trouble of filing and noticing out a new motion to dismiss if the debtor(s) don’t perform.

Chapter 20 – A Chapter 7 case followed by a Chapter 13. Usually, there is little or no unsecured debt. Although the debtor is not eligible for a Chapter 13 discharge, that is usually not what the debtor is seeking – in most cases the debtor is trying to cure a home mortgage arrearage and reinstitute the mortgage as current. Most courts allow debtors to “cure” a mortgage arrearage even when they are not eligible for a Chapter 13 discharge.

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“A Title 18 Problem” – Title 18 contains the criminal law statutes that specifically apply to bankruptcy cases. It is a “code” way of saying that there may be a criminal law violation that should be reported to the proper authorities – U.S. Trustee, U.S. Attorney, and/or the FBI.

Step Up Plan – a Chapter 13 Plan where the payments increase, usually because a debt is paid off (a 401(k) loan, a car, current child support ends, etc.) or the debtor is expecting an increase in income (from finishing education, a probationary period, etc.).

Seasonal Plan – a Chapter 13 Plan where the payments fluctuate because debtor’s business has good parts of the year and bad parts of the year for income. For example, jobs that are weather dependent, like landscaping, roofing, or construction might have lower payments during the Winter, and higher payments the rest of the year. Or, if someone is a tax preparer, payments would be higher from January to April of each year.

Motion to Modify v. Amended Plan – a Chapter 13 Plan can be changed through the filing of an Amended Plan at any time prior to confirmation. After confirmation, debtor’s counsel should file a Motion to Modify the confirmed Plan, not an Amended Plan. Note that the notice period for an Amended Plan is 28 days. Rule 2002(b)(2). But a Motion to Modify is 21 days. Rule 2002(a)(5).

Rooker-Feldman Doctrine. The Rooker-Feldman doctrine precludes lower federal courts "from exercising appellate jurisdiction over final state-court judgments" because such appellate jurisdiction rests solely with the United States Supreme Court. See, Lance v. Dennis, 546 U.S. 459, 463, 126 S. Ct. 1198, 163 L. Ed. 2d 1059 (2006); Rooker v. Fidelity Trust Co., 263 U.S. 413, 44 S. Ct. 149, 68 L. Ed. 362 (1923); D.C. Court of Appeals v. Feldman, 460 U.S. 462, 103 S. Ct. 1303, 75 L. Ed. 2d 206 (1983). The doctrine applies even if the losing state court party claims that the state judgment itself violates the loser's federal rights. Johnson v. De Grandy, 512 U.S. 997, 1005-06 (1994); Lawrence v. Welch, 531 F.3d 364, 368 (6th Cir. 2008)

The Rooker-Feldman doctrine is jurisdictional in nature; if a case is dismissed because the Rooker-Feldman doctrine applies, it means the court has no subject matter jurisdiction to hear the case. In re Middlesex Power Equip. & Marine, Inc., 292 F.3d 61, 66 n.1 (1st Cir. 2002); Hill v. Town of Conway, 193 F.3d 33, 41 (1st Cir. 1999); Long v. Shorebank Dev. Corp., 182 F.3d 548, 554-55 (7th Cir. 1999); Goetzman v. Agribank, FCB (In re Goetzman), 91 F.3d 1173, 1177 (8th Cir. 1996); Dubinka v. Judges of the Superior Court, 23 F.3d 218, 221 (9th Cir. 1994).

If the state-court decision was wrong "that did not make the judgment void, but merely left it open to reversal or modification in an appropriate and timely appellate

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proceeding”. Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 287 (2005)(quoting Rooker, 263 U.S. at 415-16).

This doctrine applies equally to federal bankruptcy courts. See, In re Knapper, 407 F.3d 573, 582 (3d Cir. 2005). The fact that a judgment was entered on a party's default does not alter the applicability of the Rooker-Feldman doctrine. Fielder v. Credit Acceptance Corp., 188 F.3d 1031, 1035 (8th Cir. 1999).

The Rooker-Feldman doctrine is implicated when, "in order to grant the federal plaintiff the relief sought, the federal court must determine that the state court judgment was erroneously entered or must take action that would render that judgment ineffectual." FOCUS v. Allegheny County Court of Common Pleas, 75 F.3d 834, 840 (3d Cir. 1996).

Accordingly, a claim is barred by Rooker-Feldman under two circumstances: (1)

"if the federal claim was actually litigated in state court prior to the filing of the federal action" or (2) "if the federal claim is inextricably intertwined with the state adjudication, meaning that federal relief can only be predicated upon a conviction that the state court was wrong." In re Knapper, 407 F.3d 573, 580 (3rd Cir. 2005).

A federal claim is "inextricably intertwined" with an issue adjudicated by a state court when (1) the federal court must determine that the state court judgment was erroneously entered in order to grant the requested relief, or (2) the federal court must take an action that would negate the state court's judgment. In re Knapper, 407 F.3d 573, 581 (3rd Cir. 2005).

The Rooker-Feldman doctrine provides no protection in areas where Congress has explicitly endowed federal courts with jurisdiction. See, Verizon Md., Inc. v. Pub. Serv. Comm'n of Md., 535 U. S. 635, 644 n.3, 122 S. Ct. 1753, 152 L. Ed. 2d 871 (2002) (noting that "the Rooker-Feldman doctrine merely recognizes" Congress's choice of where to vest original jurisdiction and appellate jurisdiction regarding various matters); Gruntz v. County of Los Angeles (In re Gruntz), 202 F.3d 1074, 1078-79 (9th Cir. 2000) (en banc)("the Rooker-Feldman doctrine is not implicated by collateral challenges to the automatic stay in bankruptcy.").

A “Skeleton Filing” – also known as a “coversheet filing”. A bankruptcy filing with a petition and a list of creditors and not much else. Counsel has 14 days to file the rest of the Schedules, Statement of Financial Affairs, Means Test, Plan, etc. See, §§301, 302, 521.

Negative Equity – Where the debtor owes more money than the collateral securing the loan is worth.

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910 Cars – Vehicles that were purchased within 910 day prior to the filing of the Chapter 13. Vehicles that were purchased that close to the filing of bankruptcy can’t be bifurcated – the Plan cannot pay just the secured value of the vehicle, with the balance of the debt being treated as unsecured. Instead, the entire loan has be treated as a secured claim. (The interest rate can still be “Till-ed”.)

Pot Plans/Base Plans/Percentage plans - Chapter 13 Plans can be set up based upon a set amount of money coming into the Plan, and that money just goes to whomever it goes, based on filed claims, priorities and claims objections. This is called a “Pot Plan” – the money just goes into a pot. This kind of Plan has the advantage of flexibility – all you need to know is what money is coming in, and that the payments will be sufficient to cover secured and priority claims being paid through the Plan.

A “Base Plan” sets minimum amount that will go to unsecured creditors – say five thousand dollars. The percentage may vary, based upon filed claims, but unsecured creditors know how much money will be allocated to their claims. However, some base plans are also used to pay attorney fees, and in trusteeships that follow that practice, post-petition attorney fees can make a $5,000 base plan a plan that actually pays 0% to general unsecured creditors.

In contrast, the Plan can propose a set percentage to unsecured creditors – a “Percentage Plan”. This percentage can be fixed, or proposed as a minimum percentage, with the percentage being subject to recalculation (by Local Rule, form Plan provision, or Stipulation). Percentage Plans where the Confirmation Hearing is not held until after the claims bar date are less likely to be reviewed for an increase in the percentage, unless income tax refunds are coming into the Plan. The advantage of this kind of “Percentage Plan” is the quality of notice that unsecured creditors receive. “$500 a month for 36 months” tells an unsecured creditor nothing that they care about, and even if a “$5,000 base” is actually going to unsecured creditors, each creditor won’t know how much of that is going to them. In contrast, “unsecured creditors will receive 48% of their filed and allowed claims” tells them what they want to know.

Arrearage: The amount by which one is past due on a secured debt obligation. For example, if your mortgage payment is $2,000 per month and you are three months behind, you are $6,000 in arrears.

Deficiency: The amount that still remains due and owing after collateral is liquidated and the proceeds applied to the debt.

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Exempt Property vs. Property That Does Not Come Into The Estate – When property is listed as “exempt” on Schedule C, that starts a process whereby property is removed from the bankruptcy estate. Under Rule 4003(b), if no objection to the exemption is filed within 30 days after the first meeting of creditors is concluded, the property comes out of the estate. Taylor v. Freeland & Kronz, 503 U.S. 638, 644, 112 S. Ct. 1644, 118 L. Ed. 2d 280 (1992). In contrast, some types of property never become part of the estate – under applicable non-bankruptcy law, a 401(k) or a valid spendthrift trust never become property of the bankruptcy estate in the first place. See, Patterson v. Shumate, 504 U.S. 753, 119 L. Ed. 2d 519, 112 S. Ct. 2242 (1992).

Countryman Test – Professor Vern Countryman’s test for determining whether a contract is executory or not. The “test” is basically: Are there still obligations owed by the parties on both sides of the contract? If yes, it is an executory contract. The most common examples of executory contracts are leases – for cars, trucks, copiers, real estate, etc. - and cell phone contracts. Executory contracts should be assumed or rejected in the Chapter 13 Plan – if they aren’t explicitly assumed, the Bankruptcy Code now provides they are rejected at the time the Plan is confirmed. See, §365(d)(4)(A)(ii).

Fiduciary: one who is entrusted with duties on behalf of another. The law requires the highest level of good faith, loyalty and diligence of a fiduciary, higher than the common duty of care that we all owe one another. The debtor in possession in a Chapter 11 is a fiduciary for the creditors, owing loyalty to the creditors and not the shareholders of the debtor. Bankruptcy trustees are fiduciaries. See e.g., In re Stevens, 130 F.3d 1027, 1031 (11th Cir. 1997); In re Murphy, 474 F.3d 143, 153 (4th Cir. 2007); In re Stevens, 187 B.R. 48, 51 (Banrk. S.D. Ga. 1995).

Perfection: When a secured creditor has taken the required steps to perfect his lien, the lien is senior to any liens that arise after perfection. Perfection is essentially the legally recognized method of providing notice of a security interest to the world. A mortgage is perfected by recording it with the county recorder; a lien in personal property is perfected by filing a financing statement with the secretary of state. An unperfected lien is valid between the debtor and the secured creditor, but may be behind liens created later in time, but perfected earlier than the lien in question. An unperfected lien can be avoided by the trustee using the “strong-arm powers” of Section 544.

Substantive Consolidation: Putting the assets and liabilities of two or more related debtors into a single pool to pay creditors. (Courts are reluctant to allow substantive consolidation since the action must not only justify the benefit that one set of creditors receives, but also the harm that other creditors suffer as a result.)

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Joint Petition: One bankruptcy petition filed by a husband and wife together. No one, other than a husband and wife, can legally file a joint bankruptcy petition.

Net Income: this is basically "take-home" pay. The amount you receive after necessary tax withholding deductions have been taken, union dues, insurance, etc. If you are self-employed, this is the amount left after paying your ordinary business expenses.

Party In Interest: A party who has standing to be heard by the court in a matter to be decided in the bankruptcy case. The debtor, the U.S. trustee or bankruptcy administrator, the case trustee and creditors are parties in interest for most matters.

Undersecured Claim: A debt secured by property that is worth less than the full amount of the debt. Also sometimes referred to as a “partially secured claim”.

Unsecured Claim: A claim or debt for which a creditor holds no special assurance of payment, such as a mortgage or lien; a debt for which credit was extended based solely upon the creditor's assessment of the debtor's future ability to pay.

Fully Secured Claim: A claim where the collateral serving as security is worth as much as, or more than, the amount of the debt.

Oversecured Claim: A claim where the collateral serving as security is worth more than, the amount of the debt. Whether a claim is “oversecured” often comes up in the context of whether a secured creditor is entitled to adequate protection, or interest.  Domestic Support Obligation: Debts for alimony, maintenance or support owed to child, spouse or governmental entity that paid for the support of the child or spouse. A new term introduced by the bankruptcy amendments of '05.  "DSO". Remember, DSO claims are not just current or past due alimony and child support – the Bankruptcy Code definition also includes a debt that accrues “after the order for relief in a case under this title . . . .” See, 11 U.S.C. §101(14A). Indemnify: to guarantee against any loss which another might suffer. In bankruptcy, it is used to describe the undertaking of one spouse in a divorce to assume certain debts of the marriage and to see that the other spouse is not forced to pay. Also called a "hold hamrless" clause. Hypothecate: To pledge (property) as security or collateral for a debt without transfer of title or possession.

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Allonge – A piece of paper attached to a promissory note that is used for endorsements too numerous or lengthy to be contained in the original note.

Expressio Unius Est Exclusio Alterius - The maxim “expressio unius est exclusio alterius” is a canon of statutory construction which holds that to include one thing in a statute implies the exclusion of the other. See, Matter of Cash Currency Exchange, Inc., 762 F.2d 542, 552 (7th Cir. 1985); In re Vaughan, 311 B.R. 573 (10th Cir. BAP 2004).

Dismissal “Without Prejudice” – dismissal of an action “without prejudice” means without any loss of rights, including the right to refile the action that is being dismissed. This term is sometimes used in dismissing a Chapter 13 case, meaning that the case is not being dismissed based on willful failure to obey orders of the court with a 180 day bar to refiling under Section 109(e). Under the federal rules of civil procedure (Rule 41(a)) where the plaintiff voluntarily moves to dismiss the case, or all parties stipulate to dismissal, dismissal is presumed to be without prejudice unless the notice of dismissal states otherwise. Except that a notice of dismissal operates as an adjudication on the merits when filed by a plaintiff who has once dismissed an action based on the same claim in any court in the United States, state or federal. The same rule applies where a case is dismissed based upon a court order. See, Rule 41(a)(2).

Dismissal “With Prejudice” – If an action is dismissed with prejudice, it is an adjudication on the merits – meaning that the action cannot be refiled. Where an action, such as an adversary complaint, is dismissed “with prejudice” dismissal is as conclusive of the rights of the parties as if the action had been prosecuted to final adjudication adverse to the plaintiff. Where dismissal is involuntary, such as where the plaintiff fails to prosecute, or to comply with the federal rules, or any order of the court, defendant may move for dismissal, and unless the court specifies that the dismissal is without prejudice – other than a dismissal for lack of jurisdiction, improper venue, or failure to join a party, the dismissal is with prejudice and operates as an adjudication on the merits. See, Federal Rule of Civil Procedure 41(b).

No Look Fee – a presumptively reasonable fee that does not require the usual time documentation for approval of the fee. For debtors’ counsel, this amount will be allowed without proof of the time actually spent on the case, the reasonableness of the time spent, and the benefit to the debtor and/or estate of the services.

“No Look” Budget Items – some trustees have set certain expense levels as presumptively reasonable. For example, $350 for a single below median debtor for food, toiletries and pet food. At present, not nearly as common as “no look fees”.

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Jurat Clause – Generally, a jurat is a certification at the end of a sworn statement. The term comes up on bankruptcy case most often in reference to the signature line at the end of an income tax return. Above the signature line is language to the effect that: “Under penalty of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete.”

When tax payers add their tax protest language to the jurat clause, it can make the return ineffective, and the tax debt, therefore, nondischargeable. The tax code includes §§6061 and 6065 which courts have interpreted to require execution of an unqualified jurat clause, the taxpayer's assurance that the figures supplied are true to the best of his or her knowledge, and numbers sufficient to compute a tax. See, Borgeson v. United States, 757 F.2d 1071, 55 A.F.T.R.2d (P-H) 1120 (10th Cir. 1985); United States v. Stillhammer, 706 F.2d 1072, 52 A.F.T.R.2d (P-H) 5116 (10th Cir. 1983); United States v. Porth, 426 F.2d 519, 25 A.F.T.R.2d (P-H) 961 (10th Cir. 1970); Ted Kimball v. United States, 925 F.2d 356, 67 A.F.T.R.2d (P-H) 570 (9th Cir. 1991); United States v. Moore, 627 F.2d 830, 47 A.F.T.R.2d (P-H) 515 (7th Cir. 1980); Schmitt v. United States, 140 B.R. 571 (Bankr. W.D. Okla. 1992).

Servicemembers’ Civil Relief Act, f.k.a. “Soldiers’ and Sailors’ Relief Act” – The Servicemembers’ Civil Relief Act (the “SCRA”) became law in 2003, amending and strengthening the old Solders’ and Sailors’ Relief Act. The statute is found at 50 U.S.C. app. §§501, et seq.

The SCRA applies to all members of the United States military on active duty, and to U.S. citizens serving in the military of United States allies in the prosecution of a war or military action. The provisions of the SCRA generally end when a servicemember is discharged from active duty or within 90 days of discharge, or when the servicemember dies. Portions of the SCRA also apply to reservists and inductees who have received orders but not yet reported to active duty or induction into the military service.

The language of the SCRA states that it is generally applicable in any action or proceeding commenced in any court. 50 U.S.C. app. §§512, 521, 522 and 524. Therefore, absent contravening language with respect to bankruptcy proceedings, the SCRA applies to all actions or proceedings before a bankruptcy court. See, In re Cockerham, 336 B.R. 592, 594 (Bankr. S.D. Ga. 2005); In re Lewis, 257 B.R. 431, 435 (Bankr. D. Md. 2001); In re Montano, 192 B.R. 843, 844 (Bankr.D. Md. 1996).

The applicability of the SCRA in bankruptcy proceedings is also evident in the Federal Rules of Civil Procedure and the Federal Rules of Bankruptcy Procedure. For

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example, the advisory committee note to Federal Rule for default judgments, Fed. R. Civ. P. 55(b), states that it is directly affected by the SCRA. (2) Under Fed. R. Bankr. P. 7055 and 9014 of the Federal Rules of Bankruptcy Procedure, Fed. R. Civ. P. 55 is applicable in bankruptcy adversary proceedings and contested matters. Thus, the default judgment protections of the SCRA clearly apply in bankruptcy cases.

The protections of the SCRA are also extended to co-debtors, if the Servicemember is protected. See, In re Cockerham, 336 B.R. 592 (Bankr. S.D. Ga. 2005).

There are three primary areas covered by SCRA that are most often relevant in bankruptcy: 1) protection against the entry of default judgments; 2) stay of proceedings where the servicemember has notice of the proceedings; and 3) stay or vacation of execution of judgments, attachments, and garnishments. 50 U.S.C. app. §§521, 522 and 524.

A. Protection Against Default Judgments.

Section 521 of the SCRA establishes certain procedures that must be followed in all civil proceedings in order to protect servicemember defendants against the entry of default judgments. These procedures are:

If a defendant is in default for failure to appear in the action filed by the plaintiff, the plaintiff must file an affidavit (a.k.a. a “military affidavit”) with the court before a default judgment may be entered. The affidavit must state whether the defendant is in the military, or that the plaintiff was unable to determine whether the defendant is in the military.

If, based on the filed affidavits, the court cannot determine whether the defendant is in the military, it may condition entry of judgment against the defendant upon the plaintiff's filing of a bond. The bond would indemnify the defendant against any loss or damage incurred because of the judgment if the judgment is later set aside in whole or in part.

The court may not order entry of judgment against the defendant if the defendant is in the military until after the court appoints an attorney to represent the defendant. Bankruptcy Procedural Forms B260, B261A, and B261B, and their accompanying instructions, provide additional guidance concerning the applicability of the SCRA to default judgments and related procedural requirements.

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B. Stay of Proceedings Where A Servicemember Has Notice

Outside the default context, and at any time before final judgment in a civil action, a person covered by the SCRA who has received notice of a proceeding may ask the court to stay the proceeding. 50 U.S.C. app. §522. The court may also order a stay on its own motion. Id.

The court will grant the servicemember's stay application and will stay the proceeding for at least 90 days if the application includes: (1) a letter or other communication setting forth facts demonstrating that the individual's current military duty requirements materially affect the servicemember's ability to appear along with a date when the servicemember will be able to appear; and (2) a letter or other communication from the servicemember's commanding officer stating that the servicemember's current military duty prevents his or her appearance and that military leave is not authorized for the servicemember at the time of the letter. The court has discretion to grant additional stays upon further application.

C. Stay or Vacation of Execution of Judgments, Etc.

In addition to the bankruptcy court's ability to regulate default judgments and stay proceedings, the court may on its own motion and must upon application: (1) stay the execution of any judgment or order entered against a servicemember; and (2) vacate or stay any attachment or garnishment of the servicemember's property or assets, whether before or after judgment if it finds that the servicemember's ability to comply with the judgment or garnishment is materially affected by military service. 50 U.S.C. app. §524. The stay of execution may be ordered for any part of the servicemember's military service plus 90 days after discharge from the service. The court may also order the servicemember to make installment payments during any stay ordered.

A military legal assistance office locator for each branch of the armed forces is available at: http://legalassistance.law.af.mil/content/locator.php

The method most often used for determining that a party does not qualify for the protections of the SCRA is to do a search at the Department of Defense Manpower Data Center ("DMDC") website by using the debtor's first and last name and social security number. Use of this data base may help counsel from being sanctioned, even if the information in the “military affidavit” turns out not to be correct. See, In re Templehoff, 339 B.R. 49 (Bankr. S.D.N.Y. 2005).

All Writs Act – The All Writs Act is an older, general federal court version of a law that is along the same lines as Section 105(a) of the Bankruptcy Code.  The All Writs Act is

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found at 28 U.S.C. Section 1651, and states: "The Supreme Court and all courts established by Act of Congress may issue all writs necessary or appropriate in aid of their respective jurisdictions and agreeable to the usages and principles of law."

The All Writs Act "invests a court with a power that is essentially equitable and, as such, not generally available to provide alternatives to other, adequate remedies at law. See, Clinton v. Goldsmith, 526 U.S. 529, 537, 119 S.Ct. 1538, 1543, 143 L.Ed.2d 720 (1999).  The All Writs Act empowers federal courts to issue injunctions and other orders to protect or effectuate their judgments.  Wesche v. Folsom, 6 F.3d 1465, 1470 (11th Cir. 1993).  In permitting the federal courts to protect "their respective jurisdictions," the All Writs Act enables them "to safeguard not only ongoing proceedings, but potential future proceedings, as well as already-issued orders and judgments.  Klay v. United Healthgroup, Inc., 376 F.3d 1092, 1099 (11th Cir. 2004).

The All Writs Act is not an independent source of subject matter jurisdiction – it applies only to cases "in aid of" a court's independent source of jurisdiction. See, Syngenta Crop Protection, Inc. v. Henson, 537 U.S. 28, 33, 123 S. Ct. 366, 154 L. Ed. 2d 368 (2002); Arkansas Blue Cross & Blue Shield v. Little Rock Cardiology Clinic, P.A., 551 F.3d 812, 821 (8th Cir. 2009).

What is The All Writs Act generally used for in bankruptcy? It is cited as authority for banning vexatious litigants from filing suit.

The authority of a district court to restrict the activity of abusive litigants is well recognized. Abdul-Akbar v. Watson, 901 F.2d 329, 332-33 (3d Cir. 1990); Tripati v. Beaman, 878 F.2d 351, 352 (10th Cir. 1989); Procup v. Strickland, 792 F.2d 1069, 1073 (11th Cir. 1986)(en banc); In re Martin-Trigona, 737 F.2d 1254, 1262 (2d Cir. 1984); In re Oliver, 682 F.2d 443, 445 (3d Cir. 1982); In re Green, 215 U.S. App. D.C. 393, 669 F.2d 779, 785 (D.C. Cir. 1981)(the right of access to the courts is neither absolute nor unconditional). A continuous pattern of groundless and vexatious litigation can, at some point, support an order against further filings of complaints without the permission of the court. In re Oliver, 682 F.2d 443, 446 (3d Cir. 1982).

It has been widely held that the courts, including bankruptcy courts, have the power to enjoin a party from filing pleadings when and to the extent necessary to protect themselves and other parties from the chaos and burdens of vexatious, duplicative, frivolous litigation. See, e.g., In re Reilly, 112 B.R. 1014, 1017 (B.A.P. 9th Cir. 1990)(citing cases); In re GTI Capital Holdings, LLC, 420 B.R. 1, 16-17 (Bankr. D. Ariz. 2009)(barring further litigation not approved by the bankruptcy court).

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The bankruptcy court's power to regulate vexatious litigation arises pursuant to its inherent powers under §105(a) of the Bankruptcy Code, and the All Writs Act, 28 U.S.C. §1651(a). Section 105(a) permits the bankruptcy court to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of the Bankruptcy Code." 11 U.S.C. §105(a). The All Writs Act grants federal courts, including the bankruptcy courts, the authority to limit access to the courts by vexatious and repetitive litigants. See, 28 U.S.C. §1651(a); see also, In re International Power Securities Corp., 170 F.2d 399, 402 (3d Cir. 1948)(bankruptcy courts have authority to enter relief under the All Writs Act); In re Kovalchick, 371 B.R. 54, 60-61 (Bankr. M.D. Pa. 2006) (exercising authority under the All Writs Act to issue an injunction restricting the filing of meritless pleadings).

Bankruptcy courts have discretion to issue injunctions or restrictions on further filings if: (1) the litigant receives notice and a chance to be heard before the court enters the order; (2) there is an adequate record of the cases or abusive activities undertaken by the litigant; (3) the court makes a substantive finding that the claims brought were frivolous or were brought with the intent to harass the parties; and (4) the scope of the injunction is narrowly prescribed to fit the abuse that the court seeks to prevent. See, De Long v. Hennessey, 912 F.2d 1144, 1147-48 (9th Cir. 1990).

There Is A Co-Debtor Stay/There Is NOT A Co-Debtor Discharge – Section 1301 provides for a stay of actions against co-debtor to collect consumer debts. However, when the case is over, the co-debtor remains liable for the full balance of the debt. The protections of the Chapter 13 discharge do not extend to the co-debtor. See, §524(e); In re Leonard, 307 B.R. 611, 614 (Bankr. E.D. Tenn. 2004).

Badges Of Fraud – these are common law factors that courts look at to determine whether an action was done with fraudulent intent. In other words, the badges of fraud are used to determine if a transfer was done with an actual intent to defraud. It is very rare for a person to say: “yes, I am doing this with fraudulent intent”. Instead, courts must determine whether fraudulent intent can be inferred from the surrounding circumstances.

“The modern law of fraudulent transfers had its origin in the Statute of 13 Elizabeth, which invalidated "covinous and fraudulent" transfers designed "to delay, hinder or defraud creditors and others." 13 Eliz., ch. 5 (1570). English courts [*541] soon developed the doctrine of "badges of fraud": proof by a creditor of certain objective facts (for example, a transfer to a close relative, a secret transfer, a transfer of title without transfer of possession, or grossly inadequate consideration) would raise a rebuttable presumption of actual fraudulent intent.” See, BFP v. Resolution Trust Corp., 511 U.S. 531, 540-541, 114 S.Ct. 1757, 1764, 128 L.Ed.2d 556, 567 (1994).

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A typical list of the badges of fraud under state law – as stated in the Uniform Fraudulent Transfer Act - are:

(1) whether the transfer was to an insider, (2) whether the debtor retained possession or control of the property, (3) whether the transfer was concealed, (4) whether the debtor had been sued or threatened with suit, (5) whether the transfer was of substantially all of the debtor's assets, (6) whether the debtor absconded, (7) whether the debtor removed or concealed assets, (8) whether the value received was reasonably equivalent to the value of the asset transferred, (9) whether the debtor was or became insolvent after the transfer, (10) whether the transfer was made shortly before or after a substantial debt was incurred, and (11) whether the debtor transferred the essential assets of a business to a lienholder who transferred the assets to an insider of the debtor.

Ohio Rev. Code §1336.04(B).

Bankruptcy courts can rely on these “badges of fraud” to find an intent to defraud. See, In re Retz, 606 F.3d 1189,1200 (9th Cir. 2012); In re Soza, 542 F.3d 1060, 1067 (5th Cir. 2008).

XVI. HOW DO YOU KNOW WHEN YOU MAY HAVE TROUBLE AT YOURDOORSTEP?

While every debtor should be treated fairly, regardless of their situation or beliefs,

there are some red flags that may alert you to potential problems on the horizon.

“Problems” can range from your trustee (or judge, or both) being sued, a grievance with

the bar association, to security problems at the 341 meeting.

Here are some things – a very incomplete list - that I have seen that would ping

my “trouble” radar:

1. Tax Protesters. If you see a lot of tax debt, and the debtor puts in some note about the IRS being illegal, or the 16th Amendment being void – you’ve got a tax protester. For a more complete picture of the “theories” underlying the tax protest movement, here is a pretty good link: http://evans-legal.com/dan/tpfaq.html

Many other off-the-beaten-path groups are also tax protesters.

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2. Debtors Who Allege The Money Is No Good. If you see something about debts being disputed because they were only given federal reserve notes, or if the debtor claims debts were paid because they sent in a certified promissory money note to the bank – that the debtor printed up on his computer - you may have someone who doesn’t believe that U.S. currency is legal tender. A case involving debtors raising these types of issues is: In re Walton, 77 B.R. 716 (Bankr. N.D. Ohio 1987).

3. Land Patents. There is an idea out there, born in the farm protest movements, that a “federal land patent” is a special kind of land ownership that is superior to fee simple ownership, and which cannot be defeated by a mortgage. From the recitation of facts in an unpublished appellate decision:

On the morning of June 29, 2000, Sheriff Wallace and his deputies prepared to carry out the eviction. Wallace believed special precautions were needed in light of a letter Watson had sent to the sheriff before the real estate was sold at auction. Under the heading "Buyer Beware 'Notice' to All," she declared her belief that the sale was unlawful because she held a "federal Land Patent," see Hilgeford v. Peoples Bank, 776 F.2d 176, 179 (7th Cir. 1985) (per curiam), and indicated her intent "to defend my property including using Deadly Force." The eviction was therefore initiated with some force, which included placing Watson in handcuffs until the building was deemed secured.

4. “Preamble Citizens”. These are citizens who had full “preamble” rights at the time the Constitution was ratified. In other words, free white men. This term can be a sign that other group affiliations – including a group with members who like to wear hoods, even in the Summer – may be involved.

5. Militia members. There are areas where militias – private “armies”, usually associated with non-mainstream political views – are pretty common.

6. Anyone Who Has Sued A Judge. Or placed fake judgment liens on the judge’s house....

7. People Who Own Lots Of High Value Guns. Gun ownership is very common – but debtors with lots of high value guns can be a red flag. Emphasize that you are not a liquidating trustee, and therefore won’t be coming to take the guns away – in other words, it is only a HYPOTHETICAL liquidation standard for confirmation.....

8. Harley Owners. Not because they are likely to be part of a “motorcycle gang” – but because they want to keep their Harley more than they want oxygen. The idea that the $300 a month Harley payment may not be something the unsecured creditors should be indirectly paying for may elicit a very strong reaction.

9. Debtors Involved In A Domestic Debt Dispute. Nobody knows where your financial bodies are buried better than your ex-spouse. Sometimes there are issues with

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existing restraining orders that make the 341 meeting even more unpleasant than it has to be. If there is a “hot” domestic dispute going on involving the debtor(s), you may want to have extra security precautions in place.

10. The Debtor Is An Attorney. Sadly, members of the profession have a deservedly bad reputation for honesty in bankruptcy settings. And they can aggressively pursue issues of questionable (at best) merit.

11. Debtor Has Filed To Stop Big Time Litigation. For something like fraud or embezzlement. Creditors are often HOT in these kinds of cases.

12. The Debtor Attempts To Run Your 341 Meeting. When someone starts telling you what you can and can’t ask, refuses to answer questions because they aren’t really “relevant”, or tries to bully you at the first meeting.

13. Diabetic Debtors. The stress of the 341 can cause diabetic debtors to experience a hypoglycemia (low blood sugar) reaction during the First Meeting. Usually, people with diabetes will recognize the symptoms, but may think they can make it through the examination before taking action to raise blood sugar levels. We keep a roll of lifesavers handy for such occasions. Juice works as well.

14. Members of the “Sovereign Movement”. This is becoming an increasingly popular fringe political movement, with beliefs that people in the U.S. are kings and queens who do not have to follow laws. They have a wide range of beliefs that can include the legitimacy of armed resistance to authority, a belief that what we call the Constitution is a fake inserted by Lincoln, that a separate government has been established in the United States that is different from the one generally recognized, that they can take over abandoned real estate and thereby have a first and best claim to ownership, etc. Self-described members of this “group” have been involved in armed confrontations with law enforcement recently. Lots of their beliefs are fluid, and are disseminated through YouTube and social media.

As one bankruptcy court put it: “The Court has seen many of her arguments before. They are regularly peddled on the less reliable corners of the Internet by tax protesters, "sovereign citizens," and other conspiracy theorists. Anthony has joined the ranks of the unwary, unwise, and often desperate victims to be persuaded that taxes are voluntary, money isn't "money," and you don't really have to pay your bills. The truth: they aren't, it is, and you do.” In re Anthony, 481 B.R. 602, 609 (Bankr. D. Neb. 2012); see also, United States v. Beeman, 2011 U.S. Dist. LEXIS 70892, 2011 WL 2601959 at *9-12 (W.D. Pa. June 30, 2011)(discussing courts' rejection of "redemptionist" or "sovereign citizen" theories).

15. “Moorish Movement” Arguments. These arguments usually deal with a court’s jurisdiction over the person, or the applicability of U.S. laws. Specifically, they claim that a 1787 treaty between the United States and Morocco grants them immunity from U.S. law. [Note that there is a Moorish Science Temple of America that officially

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disavows the legal arguments and abusive legal tactics of the vexatious litigators who claim affiliation.]

In Wheeler v. Fannie Mae, 2013 U.S. Dist. LEXIS 71890 at *14-*15 (E.D. Mich. April 29, 2013), the court stated:

Further, as I concluded in my previous Report, Plaintiff's claim that this Court does not enjoy jurisdiction over this action because she is a "private Moorish American" is without merit. "We equate the citizenship of a natural person with his domicile." Certain Interested Underwriters at Lloyd's, London, England v. Layne, 26 F.3d 39, 41 (6th Cir. 1994)(citing Von Dunser v. Aronoff, 915 F.2d 1071, 1072 (6th Cir.1990)); see also U.S. Bank Nat. Ass'n v. Bey, 2011 U.S. Dist. LEXIS 32086, 2011 WL 1215738, *3 (D.Conn. March 28, 2011)(citing Linardos v. Fortuna, 157 F.3d 945, 948 (2d Cir.1998))(claim of Moorish citizenship by plaintiff domiciled in Connecticut was citizen of that state for purposes of diversity jurisdiction).

See also, Moorish Sci. Temple of Am. 4th & 5th Generation v. Superior Court of New Jersey, 2012 U.S. Dist. LEXIS 6997 (D.N.J. Jan. 12, 2012),

XVII. PROTECTING THE TRUSTEE.

A. The Barton Doctrine.

The “Barton Doctrine” comes from a U.S. Supreme Court decision, Barton v.

Barbour, 104 U.S. 126, 26 L. Ed. 672 (1881). In that decision, the Supreme Court held

that a receiver for a railroad could not be sued without leave of the appointing court. The

requirement that a party obtain leave from the appointing court before suing a receiver in

another venue "is long-standing." In re Castillo, 297 F.3d 940, 945 (9th Cir. 2002). As

the Supreme Court explained in a later decision: "When a court exercising jurisdiction in

equity appoints a receiver of all the property of a corporation, the court assumes the

administration of the estate. The possession of the receiver is the possession of the court .

. . ." Porter v. Sabin, 149 U.S. 473, 479, 13 S. Ct. 1008, 37 L. Ed. 815 (1893). "It is for

that court," therefore, "to decide whether it will determine for itself all claims of or

against the receiver, or will allow them to be litigated elsewhere." Id.; see also, Barton,

104 U.S. at 136.

Judge Learned Hand authored a decision specifically applying the Barton

Doctrine to bankruptcy trustees: “[A]n action against a trustee in bankruptcy for

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transactions of his own, must be brought in bankruptcy court, unless it gives leave to

liquidate elsewhere; it concerns the distribution of the assets as much as a claim against

the bankrupt, and is justiciable only as that is.” Vass v. Conron Bros. Co., 59 F.2d 969,

971 (2nd Cir. 1932).

The modern case law on the Barton Doctrine has included all trustees, not just

those who are holding property of a corporation, or any property: Under the Barton

doctrine, "leave of the [bankruptcy] forum must be obtained by any party wishing to

institute an action in a [state] forum against a trustee, for acts done in the trustee's official

capacity and within the trustee's authority as an officer of the court." In re DeLorean

Motor Co., 991 F.2d 1236, 1240 (6th Cir. 1993) (quoted in In re Lowenbraun, 453 F.3d

314, 321 (6th Cir. 2006)); In re Crown Vantage, Inc., 421 F.3d 963, 970 (9th Cir. 2005);

Muratore v. Darr, 375 F.3d 140, 146 (1st Cir. 2004); In re Lehal Realty Assocs., 101 F.3d

272 (2d Cir. 1996); Byrd v. Hoffman, 417 B.R. 320, 326 (D. Md. 2008).

Claims based on acts that are related to the official duties of the trustee are barred

by the Barton doctrine even if the debtor alleges such acts were taken with improper

motives. Satterfield v. Malloy, 700 F.3d 1231, 1236 (10th Cir. 2012); see also, McDaniel

v. Blust, 668 F.3d 153, 157-158 (4th Cir. 2012); Muratore v. Darr, 375 F.3d 140, 146-147

(1st Cir. 2004).

The policy behind the Barton Doctrine has been described in various ways. Most

simply, the Barton Doctrine allows bankruptcy courts to retain greater control over

administration of the estate. In re Lowenbraun, 453 F.3d, 314, 321 (6th Cir. 2006).

A more detailed explanation is found in Carter v. Rogers:

If [the trustee] is burdened with having to defend against suits by litigants disappointed by his actions on the court's behalf, his work for the court will be impeded. . . . Without the requirement [of leave], trusteeship will become a more irksome duty, and so it will be harder for courts to find competent people to appoint as trustees. Trustees will have to pay higher malpractice premiums, and this will make the administration of the bankruptcy laws more expensive. . . . Furthermore, requiring that leave to sue be sought enables bankruptcy judges to monitor the work of the trustees more effectively.

Carter v. Rogers, 220 F.3d 1249, 1252-53 (11th Cir. 2000)(alteration in original) (quoting,

In re Linton, 136 F.3d 544, 545 (7th Cir. 1998)).

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A corollary purpose of the Barton doctrine is "to prevent a party from obtaining

'some advantage over the other claimants upon the assets' in the trustee's hands."

Muratore v. Darr, 375 F.3d 140, 147 (1st Cir. 2004); In re Ridley Owens, Inc., 391 B.R.

867, 871 (Bankr. N.D. Fla. 2008). If dissatisfied parties in bankruptcy proceedings can

freely sue the trustee in another court for discretionary decisions made while

administering the estate, "that court would have the practical power to turn bankruptcy

losers into bankruptcy winners and vice versa." In re Linton, 136 F.3d 544, 546 (7th Cir.

1998); In re VistaCare Group, LLC, 678 F.3d 218, 228 (3rd Cir. 2012). "The requirement

of uniform application of bankruptcy law dictates that all legal proceedings that affect the

administration of the bankruptcy estate be brought either in bankruptcy court or with

leave of the bankruptcy court." In re Crown Vantage, 421 F.3d 963, 971 (9th Cir. 2005);

In re VistaCare Group, LLC, 678 F.3d 218, 228 (3rd Cir. 2012). Thus, the Barton

doctrine prevents creditors from bringing lawsuits against the trustee in more favorable

forums to overturn or compensate themselves for losses incurred in the bankruptcy

proceeding.

The argument that Chapter 13 Trustees are not appointed by the bankruptcy court,

and are therefore not protected by the Barton Doctrine, has been rejected. Mickler v.

Davis, 2005 U.S. Dist. LEXIS 32969 (M.D. Fla. 2005); In re Weitzman, 381 B.R. 874,

879 (Bankr. N.D. Ill. 2008)(citing Mickler) see also, In re James, 490 B.R. 795, 797-798

(Bankr. N.D. Ill. 2013)(applying Barton Doctrine to Chapter 13 trustee).

There were concerns in the Third Circuit based on the holding in In re Lambert,

438 B.R. 523, 525-526 (Bankr. M.D. Pa. 2010)(the bankruptcy courts no longer appoint

trustees, therefore the Barton doctrine no longer applies, without discussing why 28

U.S.C. §959(a) continues to exist, granting a narrow exception to – in this court’s view –

a non-existent rule.) That position is no longer viable after the Third Circuit Court of

Appeals decision in In re VistaCare Group, LLC, 678 F.3d 218, 232 (3rd Cir. 2012)(“In

sum, we hold that the Barton doctrine remains valid, and therefore, subject to the

exception in § 959(a), a party must first obtain leave of the bankruptcy court before it

brings an action in another forum against a bankruptcy trustee for acts done in the

trustee's official capacity.”); In re Lunan, 489 B.R. 711, 725 (Bankr. E.D. Tenn. 2012)

(citing VistaCare in specifically rejecting the Lambert argument).

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Similarly, arguments that the Barton Doctrine only applies to actions in state

courts, and does not require approval for actions in federal courts, has been rejected. See,

Carter v. Rogers, 220 F.3d 1249, 1252 (11th Cir. 2000); In re Kashani, 190 B.R. 875, 885

(9th Cir. 1995).

The Barton doctrine has been held to apply to a suit filed after the Chapter 13 case

is concluded. See, In re Linton, 136 F.3d 544, 545 (7th Cir. 1998); In re Lambert, 438

B.R. 523, 525-526 (Bankr. M.D. Pa. 2010).

What the Barton Doctrine means is, your trustee cannot be sued anywhere but in the

bankruptcy court unless the Plaintiff has prior permission from the bankruptcy court to

commence the action. Obviously, this applies only in civil proceedings. This rule applies

equally whether the trustee is sued in state court, or in federal court. See, Carter v.

Rodgers, 220 F.3d 1249, 1253 (11th Cir. 2000) (applying Barton doctrine to suit against a

bankruptcy trustee and holding "when leave is required, it is required before pursuing

remedies in either state or other federal courts."); Ariel Preferred Retail Group v.

CWCapital Asset Mgmt., 883 F.Supp.2d 797, 816 (E.D. Mo. 2012); Kashani v. Fulton,

190 B.R. 875, 884-885 (B.A.P. 9th Cir. 1995); Blixseth v. Brown, 470 B.R. 562, 566-567

(D. Mont. 2012)(citing cases).

1. The Barton Doctrine Is Jurisdictional.

Where a plaintiff neglects to obtain leave from the appointing court, a suit filed

against the trustee in another court must be dismissed for lack of subject matter

jurisdiction. Barton, 104 U.S. at 131; Carter v. Rodgers, 220 F.3d 1249, 1253 (11th Cir.

2000); In re Harris, 590 F.3d 730, 741 (9th Cir. 2009); Satterfield v. Malloy, 700 F.3d

1231, 1234 (10th Cir. 2012)(“we note that the Barton doctrine is jurisdictional in nature.”,

holding that dismissal should be under 12(b)(1) rather than 12(b)(6)); Barksdale-Bey v.

Creasy, 2011 U.S. Dist. LEXIS 37088 (D. Md. April 4, 2011)(dismissing for lack of

subject matter jurisdiction).

2. The Barton Doctrine Also Protects A Chapter 13 Trustee’sStaff Attorney.

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The Barton Doctrine has been held to apply not only to a bankruptcy trustee but

also to those individuals who are the “functional equivalent of a trustee.” In re DeLorean

Motor Co., 991 F.2d , 1236, 1241 (6th Cir. 1993); Carter v. Rodgers, 220 F.3d 1249, 1252

n.4 (11th Cir. 2000).

Cases have specifically held that the Barton Doctrine applies to trustee’s counsel,

as well as to trustees themselves. See, Lawrence v. Goldberg, 573 F.3d 1265, 1269 (11th

Cir. 2009); In re McKenzie, 716 F.3d 404, 411-412 (6th Cir. 2013)(as a matter of law,

counsel for the trustee is the function equivalent of a trustee); In re Lowenbraun, 453

F.3d 314, 321 (6th Cir. 2006); In re DeLorean Motor Co., 991 F.2d 1236, 1240-41 (6th

Cir. 1993)("It is well settled that leave of the appointing forum must be obtained by any

party wishing to institute an action in a nonappointing forum against a trustee, for acts

done in the trustee's official capacity and within the trustee's authority as an officer of the

court. . . . counsel for trustee, court appointed officers who represent the estate, are the

functional equivalent of a trustee."); McDaniel v. Blust, 668 F.3d 153, 156-158 (4 th cir.

2012)(Barton Doctrine applies to trustees’ attorneys, “we know of no reason why the

trustee must have directed counsel to take the specific actions that are the subject of the

suit.”); Benton v. Cory, 2010 U.S. Dist. LEXIS 134042 (D. Nev. 2010); Washington v.

United States, 2006 U.S. Dist. LEXIS 61985 (M.D. Fla. August 30, 2006); Mammola v.

Dwyer, 497 B.R. 1, 2-3 (Bankr. D. Mass. 2013); In re Martin, 287 B.R. 423, 434 (Bankr.

E.D. Ark. 2003("The Barton Doctrine also applies to counsel representing a bankruptcy

trustee."); In re Krikava, 217 B.R. 275, 278-279 (Bankr. D. Neb. 1998); In re Nathurst,

207 B.R. 755, 758 (Bankr. M.D. Fla. 1997); see also, Carter v. Rodgers, 220 F.3d 1249,

1252 n.4 (11th Cir. 2000).

3. The Statutory Exception To The Barton Doctrine: 28 U.S.C. §959(a).

There is a statutory exception to the Barton doctrine. The exception was enacted by

Congress to address a concern expressed in a dissent to Barton filed by Justice Miller. See,

Diners Club, Inc. v. Bumb, 421 F.2d 396, 398-99 (9th Cir. 1970)(explaining that because

the original §959 was enacted shortly after Barton, and given the content of Justice Miller's

dissent, it is clear that the purpose of §959 was to enact the dissent into law). Justice Miller

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wrote that he agreed with the majority to the extent that its rule was limited to receivers

"appointed to wind up a defunct corporation." Barton, 104 U.S. at 138. But where the rule

was extended to a suit that would not "interfere with the actual possession of property which

the receiver holds," such a rule requiring permission from the appointing court before an

action could be brought against a receiver in a different court was "unsupported by authority

and unsound in principle." Id. at 141.

The exception, currently codified at 28 U.S.C. §959(a), reads: “Trustees, receivers or

managers of any property, including debtors in possession, may be sued, without leave of

the court appointing them, with respect to any of their acts or transactions in carrying on

business connected with such property."

This narrow statutory exception to the Barton doctrine applies only to actions

taken while "carrying on business." The Eleventh Circuit has explained that §959(a) was

intended to "permit actions redressing torts committed in furtherance of the debtor's

business, such as the common situation of a negligence claim in a slip and fall case where

a bankruptcy trustee, for example, conducted a retail store." Carter v. Rodgers, 220 F.3d

1249, 1254 (11th Cir. 2000); Satterfield v. Malloy, 700 F.3d 1231, 1237 (10th Cir. 2012).

Section 959 does not apply where a trustee acting in his official capacity conducts

no business connected with the property other than to perform administrative tasks

necessarily incident to the consolidation, preservation, and liquidation of assets in the

debtor's estate. See, e.g., Vass v. Conron Bros. Co., 59 F.2d 969, 791 (2d Cir. 1932); In re

DeLorean Motor Co., 991 F.2d at 1240-41; In re Herrera, 472 B.R. 839, 851 (Bankr.

D.N.M. 2012)(trustee administering a simple Chapter 7 not operating a business); In re

Davis, 312 B.R. 681, 687 (Bankr. D. Nev. 2004); Matter of Campbell, 13 B.R. 974

(Bankr. D. Idaho 1981); Maguire v. Puente, 120 Misc. 2d 871, 466 N.Y.S.2d 934 (N.Y.

Sup. Ct. 1983).

“[M]erely holding and collecting the assets intact, collecting and liquidating the

assets of the debtor, and taking steps for the care and preservation of the property, do not

constitute ‘carrying on business.’ Carter v. Rodgers, 220 F.3d 1249, 1254 (11th Cir. 2000);

Satterfield v. Malloy, 700 F.3d 1231, 1237 (10th Cir. 2012). Likewise, actions taken in the

mere continuous administration of property under order of the court do not constitute an

‘act’ or ‘transaction’ in carrying on business connected with the estate.” Muratore v. Darr,

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375 F.3d 140, 144 (1st Cir. 2004)(internal citations omitted).

Because Chapter 13 Trustee do not “carry on the debtor’s business”, this

exception should have little, if any, application to Chapter 13 Trustees.

4. A Case Law Exception To The Barton Doctrine.

Some courts have found additional exceptions to the Barton Doctrine. The

Bankruptcy Court in Katz v. Kucej (In re Beibel), 2009 Bankr. LEXIS 1544 (Bankr. D.

Conn. May 19, 2009) stated:

Thus, the trustee is not protected by the Barton Doctrine in cases where the trustee should have obtained a court order and did not. See Leonard v. Vrooman, 383 F.2d 556, 560 (9th Cir. 1967), cert. denied, 390 U.S. 925, 88 S. Ct. 856, 19 L. Ed. 2d 985 (1968) (holding that "a trustee wrongfully possessing property which is not an asset of the estate may be sued for damages arising out of his illegal occupation in a state court without leave of his appointing court"). But see Muratore v. Darr, 375 F.3d 140, 147 (1st Cir. 2004) (declining to recognize "some generalized tort exception to the Barton doctrine"). Moreover, the trustee is not protected by the Barton Doctrine if the trustee obtains a court order but acts beyond its scope. See Teton Millwork Sales v. Schlossberg, 311 Fed. Appx. 145, 2009 WL 323141 (10th Cir. 2009)(finding that receiver who was authorized by court order to seize the defendant's property held in the name of Teton Millwork Sales, an entity in which the defendant held a 25% interest, could be sued without leave of his appointing court when he seized 100% of the assets of Teton Millwork Sales). Cf. Lurie v. Blackwell, 211 F.3d 1274, [published in full-text format at 2000 U.S. App. LEXIS 3360] 2000 WL 237966 (9th Cir. Feb. 18, 2000)(unpublished table decision). Facts sufficient to support the allegation that the trustee exceeded the scope of the apparent authorizing order must be pled by the plaintiff at the outset or the Barton Doctrine will bar the suit in the nonappointing court. Lowenbraun v. Canary (In re Lowenbraun), 453 F.3d 314 (6th Cir. 2006).

[It is] presume[d that] acts were a part of the trustee's duties unless Plaintiff initially alleges at the outset facts demonstrating otherwise. This presumption strikes us as persuasive. Congress intended for the Bankruptcy Code to be comprehensive and for the federal courts to have exclusive jurisdiction over bankruptcy matters. A presumption in favor of the trustee . . . that [he was] acting within the scope of . . . [his] duties prevents a plaintiff . . . from making unsupported allegations in an attempt to defeat Congress's goal of providing exclusive federal jurisdiction over bankruptcy matters.

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Id. at 322 (second alteration in original; emphasis added; citations omitted).

In determining whether the act complained of was done within the trustee's

"official capacity" and within the trustee's "authority as an officer of the court," courts

look to the nature of the function being performed by the trustee or trustee's counsel at

the time the trustee committed the allegedly improper act. See, Heavrin v. Schilling (In

re Triple S Rests., Inc.), 519 F.3d 575, 578 (6th Cir. 2008); McDaniel v. Blust, 668 F.3d

153, 157 (4th Cir. 2012). Moreover, the Sixth Circuit has held that a presumption applies

under the Barton doctrine that acts "were a part of the trustee's duties unless Plaintiff

initially alleges at the outset facts demonstrating otherwise." In re Lowenbraun, 453 F.3d

314, 322 (6th Cir. 2006).

B. How To Use The Barton Doctrine To Defend Your Trustee.

If your trustee is sued in a non-bankruptcy forum, the question becomes – how to

use the Barton Doctrine most effectively? Obviously, you can immediately challenge

subject matter jurisdiction on a motion to dismiss. However, there is always a danger

that the non-bankruptcy court is not going to understand, or want to learn about, the

Barton Doctrine.

You could seek to remove the case against your trustee to the bankruptcy court.

However, a recent case suggests that once the action is before the appointing court – i.e.,

the bankruptcy court – you can’t obtain dismissal of the case based on the Barton

Doctrine. See, In re Harris, 590 F.3d 730 741-742 (9th Cir. 2009)(“The Barton doctrine

is not a tool to punish the unwary by denying any forum to hear a claim when leave of the

bankruptcy court is not sought. When Harris's case was removed to the appointing

bankruptcy court, all problems under the Barton doctrine vanished.”); see also, In re

Mailman Steam Carpet Cleaning Corp., 196 F.3d 1, 5 (1st Cir. 1999); In re Reich, 54

B.R. 995, 997-98 (Bankr. E.D. Mich. 1985)(holding that prior approval by the

bankruptcy court is not a prerequisite for filing a creditor action against the trustee in that

court).

In contrast, courts have held that failure to seek leave of court before instituting a

suit against the trustee in a nonappointing court cannot be rectified after commencement

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of that suit because there was lack of subject matter jurisdiction in the nonappointing

court at the time suit was brought. See, In re Kids Creek Partners, L.P., 248 B.R. 554,

558-59 (Bankr. N.D. Ill. 2000), aff'd, 2000 U.S. Dist. LEXIS 17718, 2000 WL 1761020

(N.D. Ill. Nov. 30, 2000).

The decision in In re Crown Vantage, Inc., 421 F.3d 963, 970 (9th Cir. 2005)

suggests a different approach: filing for an injunction against continuation of the state

court proceeding under Section 105(a). At the bankruptcy court level, the court granted

an injunction against the state court action. However, the district court vacated the

injunction, finding that the trustee failed to show irreparable harm. Id., at 969-70. The

Ninth Circuit reversed, stating that "[t]he only requirement for the issuance of an

injunction under §105 is that the remedy conform to the objectives of the Bankruptcy

Code." Id. at 975. As the appellate court explained, it makes no sense to require a

showing of irreparable harm in the context of Barton's bright-line prohibition of

unauthorized litigation against court-appointed receivers. Once such an action had been

filed, "[t]he only appropriate remedy . . . is to order cessation of the improper action." Id.,

at 976. In other words, irreparable harm need not be shown because the movant was

certain to succeed on its claim of a Barton violation. "If the movant has a 100%

probability of success on the merits," the injunction should issue "without regard to the

balance of the hardships." Sammartano v. First Judicial Dist. Court, 303 F.3d 959, 965

(9th Cir. 2002).

The advantage of the §105 injunction is two-fold: 1) it gets the matter decided by

the bankruptcy court; and 2) it leaves the plaintiff’s suit stranded in a court where it

cannot proceed.

1. Another Next Level Of Response – Damages.

In addition to injunctive relief, a trustee (or staff attorney) sued in violation of

the Barton Doctrine may be etitled to damages.

As explained in Allard v. Weitzman (In re DeLorean Motor Co.), 991 F.2d 1236 (6th Cir. 1993), two forms of relief are available when a lawsuit has been brought in contravention of the Barton Doctrine. The court ruled that both injunctive relief and the recovery of damages were available where there has been a violation of the Barton Doctrine. In the

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DeLorean case, the bankruptcy trustee and his attorneys were sued in state court by an individual who had been sued by the trustee. The state court suit was brought without obtaining leave of the bankruptcy court. The trustee then brought a proceeding in the bankruptcy court alleging a violation of the Barton Doctrine seeking to enjoin the prosecution of the state court action and to recover the damages incurred as a result of having to defend against the state court action. The court upheld both of these claims. The court held that the trustee's assertion that the unauthorized suit against the trustee and his attorneys would unduly hinder the administration of the bankruptcy estate stated a valid claim for injunctive relief. In the claim for damages in Count I of his complaint, the trustee in DeLorean sought to recover his "actual damages, including costs and attorneys' fees and administrative expenses, if any, by way of indemnification, incurred as a result of the filing of the Weitzman Action." Id. at 1241. In upholding the damages claim, the court stated:

The Trustee is entitled to the damages that he requested in Count I of his complaint. Furthermore, the Trustee must be given the opportunity to prove the amount of the damages incurred as a result of having to defend against the Weitzman Action including the necessity of the filing of the Trustee's complaint with the Bankruptcy Court in Detroit.

Id. at 1242. In accord Unencumbered Assets Trust v. Hampton-Stein (In re National Century Financial Enterprises, Inc., 426 B.R. 282 (Bankr. S.D. Ohio 2010); Steffen v. Berman (In re Steffen), 406 B.R. 148 (Bankr. M.D. Fla. 2009); Katz v. Kucej (In re Beibel), No. 08-3115, 2009 Bankr. LEXIS 1544, 2009 WL 1451637 (Bankr. May 19, 2009); In re Byrd, No. 04-35620, 2007 Bankr. LEXIS 1764, 2007 WL 1485441 (Bankr. May 18, 2007). Thus, where, as in this proceeding, a party has filed a suit in violation of the Barton Doctrine, such party is liable for the damages resulting from such violation, and the recoverable damages include the attorneys' fees and expenses incurred in opposing the unauthorized suit as well as the attorneys' fees and expenses incurred in bringing the proceeding to recover the damages resulting from the violation.

In re EBW Laser, Inc., 2012 Bankr. LEXIS 3767 at *19-*21 (Bankr. M.D.N.C.

August 14, 2012).

There is also case law holding that sanctions may be appropriate under 28

U.S.C. Section 1927. See, Kirschner v. Blixseth, 2012 U.S. Dist. LEXIS 183275

(C.D. Cal. Nov. 1, 2012)(sanction for filing counterclaim against trustee in his

personal capacity without obtaining leave of the appointing court).

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C. When The Plaintiff Actually Seeks Leave Of The BankruptcyCourt To Sue.

If a plaintiff does proceed properly, and seeks leave of the bankruptcy court to sue

your trustee, the claimant must be able to plead the elements of a prima facie case against

the trustee. See, Anderson v. United States, 520 F.2d 1027, 1029 (5th Cir. 1975); In re

Weisser Eyecare, Inc., 245 B.R. 844 (Bankr. N.D. Ill. 2000); In re Berry Publishing

Services, Inc., 231 B.R. 676 (Bankr. N.D. Ill. 1999); In re Kashani, 190 B.R. 875 (9th

Cir. BAP 1995). In Kashani, the Bankruptcy Appellate Panel held that even if a plaintiff

successfully states a prima facie case, the Court may nevertheless exercise its discretion

and refuse to grant the movant permission to sue in another forum if the Court finds that

it is in a better position to adjudicate the claim based on a "balancing of the interests of

all parties involved." Kashani, 190 B.R. at 886, citing In re Adolf Gobel, Inc., 89 F.2d

171, 172 (2d Cir. 1937).

Courts may consider the following factors, any of which may serve as a basis for

denial of a motion for leave to sue in another court:

1. whether the acts or transactions relate to the carrying on of the business connected with the property of the bankruptcy estate; 2. whether the claims pertain to actions of the trustee while administering the estate; 3. whether the claims involve the individual acting within the scope of his or her authority under the statute or orders of the bankruptcy court, so that the trusteee is entitled to quasi-judicial or derived judicial immunity; 4. whether the movants or proposed plaintiffs are seeking to surcharge the trustee, that is, seeking a judgment against the trustee personally; and 5. whether the claims involve the trustee's breaching her fiduciary duty either through negligent or willful misconduct.

Kashani, 190 B.R. at 886-87; see also, Beck v. Fort James Corp. (In re Crown Vantage),

421 F.3d 963, 976 (9th Cir. 2005); Grant, Konvalinka & Harrison, PC v. Banks (In re

McKenzie), 716 F.3d 404, 422-423 (6th Cir. 2013).

D. Quasi-Judicial Immunity.

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The Barton Doctrine is usually a procedural hurdle – albeit based on subject matter

jurisdiction. In contrast, quasi-judicial immunity is substantive. Moreover, a defendant who

is entitled to absolute or qualified immunity enjoys immunity from suit, rather than a mere

defense to liability. Mitchell v. Forsyth, 472 U.S. 511, 526, 86 L. Ed. 2d 411, 105 S. Ct.

2806 (1985).

Judges historically have been granted absolute immunity from suits for their

judicial acts. Forrester v. White, 484 U.S. 219, 225-28, 108 S. Ct. 538, 98 L. Ed. 2d 555

(1988). An offshoot of judicial immunity is the doctrine of quasi-judicial immunity

which extends immunity to nonjudicial officers for "all claims relating to the exercise of

judicial functions." In re Castillo, 297 F.3d 940, 947 (9th Cir. 2002)(applying quasi-

judicial immunity to Chapter 13 Trustee and Staff Attorney.); see also, Cleavinger v.

Saxner, 474 U.S. 193, 200, 106 S. Ct. 496, 500, 88 L. Ed. 2d 507, 513 (1985)(immunity is

extended in appropriate circumstances to non-jurists "who perform functions closely

associated with the judicial process.").

This area of the law is full of imprecision. “[T]he case law regarding trustee liability

is extremely confusing and often contradictory, with the result that it is difficult from the

caselaw alone to formulate guidelines specifying when a trustee is immune from personal

liability and when he is not.” Kirk v. Hendon (In re Heinsohn), 231 B.R. 48, 64-65 (Bankr.

E.D. Tenn. 1999), aff'd 247 B.R. 237 (E.D. Tenn. 2000). Fiduciary concepts and immunity

concepts are mixed up by the courts, and the usual analysis of fiduciary’s duties – that there

is a duty of care and the duty of loyalty – are not properly distinguished in the case law.

Add to that the fact that courts use different terms – for example, immunity, judicial

immunity, quasi-judicial immunity and derived quasi-judicial immunity - to mean basically

the same thing.

This confusion all started with some rather loose language in the U.S. Supreme

Court case Mosser v. Darrow, 341 U.S. 267, 274, 95 L. Ed. 927, 71 S. Ct. 680 (1951).

There is also a difficulty inherent in coming up with one liability standard for Chapter 13,

Chapter 7, and Chapter 11 Trustees, and DIPs as well, all of whom face different challenges.

For a complete discussion of why the logic of the case law is so hard to understand, see: E.

Allan Tiller, Personal Liability of Trustees and Receivers in Bankruptcy, 53 Am. Bankr. L.J.

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75 (1979); Daniel B. Bogart, Liability of Directors of Chapter 11 Debtors in Possession:

“Don’t Look Back, Something May Be Gaining on You”, 68 Am. Bankr. L.J. 155 (1994);

Ralph C. McCullough, Trustee Liability: Is There Enough Protection in These “Arms of the

Court”?, 103 Comm. L.J. 123 (1998); Daniel B. Bogart, Finding the Still Small Voice: The

Liability of Trustees and the Work of the National Bankruptcy Review Commission, 102

Dickinson L. Rev. 703 (Summer, 1998); David W. Allard, Personal Liability of Trustees

and Debtors in Possession: Review of the Varying Standards of Care in the United States,

106 Com. L.J. 415 (Winter, 2001).

If you are faced with a situation where your Chapter 13 Trustee may, or does, face a

lawsuit, you may find an analysis of the law as some of the Law Review articles say it

“should be” to be helpful, or you may find some binding precedent that says your client is

entitled to immunity to be more helpful. My goal is to give you enough information so you

understand at least the outlines of this difficult area of the law.

1. The Two-Part Test For Quasi-Judicial ImmunityIn The Case Law.

In Antoine v. Byers & Anderson, Inc., 508 U.S. 429, 113 S.Ct. 2167, 124 L.Ed.2d

391 (1993), the United States Supreme Court set forth a two-part test for determining

whether a non-judicial officer is entitled to quasi-judicial immunity. The first inquiry

requires the court to thoroughly examine the immunity historically accorded to the

relevant official at common law and the public interest behind that immunity. Antoine v.

Byers & Anderson, Inc., 508 U.S. at 432, 113 S.Ct. at 2170, 124 L.Ed.2d at 397; In re

Cedar Funding, Inc., 419 B.R. 807, 822 (9th Cir. BAP 2009). Generally, when a

bankruptcy trustee is asserting quasi-judicial immunity as a defense, this is done through

reference to case law that has examined this issue and held that the defense applies to

trustees .

The second inquiry, under Antoine v. Byers & Anderson, is whether immunity

covers the trustee’s functions that are in issue. This is done on a case-by-case basis. "The

Trustee is immune for actions that are functionally comparable to those of judges, i.e.,

those functions that involve discretionary judgment." In re Castillo, 297 F.3d 940, 947

(9th Cir. 2002). Similarly, quasi-judicial immunity has been recognized for "those

persons performing tasks so integral or intertwined with the judicial process that these

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persons are considered an arm of the judicial officer who is immune." Grant, Konvalinka

& Harrison, PC v. Banks (In re McKenzie), 716 F.3d 404, 412 (6th Cir. 2013).

When judicial immunity is extended to officials other than judges, it is because

their judgments are "functionally comparable" to those of judges -- that is, because they,

too, "exercise a discretionary judgment" as a part of their function. Antoine v. Byers &

Anderson, Inc., 508 U.S. at 436, 113 S.Ct. at 2171, 124 L.Ed.2d at 399, citing, Imbler v.

Pachtman, 424 U.S. at 423, n.20. Phrased another way, the court must consider whether

a judge, if performing the particular act at issue, would be entitled to absolute immunity.

Antoine v. Byers & Anderson, Inc., 508 U.S. at 435, 113 S.Ct. at 2171, 124 L.Ed.2d at

399.

2. The Two Levels of Immunity – Absolute and Qualified.

Some courts hold that there are two levels of immunity applicable to trustees.

There is “absolute immunity” and “qualified judicial immunity”. See, In re Heinsohn,

231 B.R. 48, 64-65 (Bankr. E.D. Tenn. 1999), aff’d, 247 B.R. 237 (E.D. Tenn. 2000).

[As a general proposition, there is some inconsistency in the language used in immunity

cases, and including the words “judicial”, or “quasi-judicial” to these terms appears to be

a difference in form, not substance.]

When a Chapter 13 Trustee is functioning in a judicial (or quasi-judicial)

capacity, some courts hold that this is sufficient for “absolute immunity” to apply, at least

against third parties. The United States Supreme Court has adopted a "functional"

approach in determining whether an official is entitled to absolute immunity where a

court looks to "the nature of the function performed, not the identity of the actor who

performed it." Forrester v. White, 484 U.S. 219, 229, 108 S. Ct. 538, 545, 98 L. Ed. 2d

555 (1988); In re Heinsohn, 247 B.R. 237, 244-245 (E.D. Tenn. 2000); In re Continental

Coin Corp., 380 B.R. 1, 9 (Bankr. C.D. Cal. 2007).

In contrast, where a trustee is relying on his or her status as a trustee, not on the

specific function that is being performed, some courts denominate this “qualified

immunity” (sometimes called “good faith immunity”), not absolute immunity. However,

a trustee is generally protected by immunity, even if it is “qualified”, when the trustee is

acting within the scope of his or her authority. In re Pacific Lumber Co., 584 F.3d 229,

253 (5th Cir. 2009)(creditors’ committee members); In re Solar Financial Services, Inc.,

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255 B.R. 801, 803 (Bankr. S.D. Fla. 2000); Smallwood v. United States, 358 F. Supp. 398,

404 (E.D. Mo. 1973), aff'd, 486 F.2d 1407 (8th Cir. 1973).

Where the trustee is acting within the scope of his or her authority, quasi-judicial

immunity protects a trustee from claims of third parties that result from business

judgments, or mistakes in judgment where discretion is allowed. See, Picard v. Chais (In

re Bernard L. Madoff Inv. Secs. LLC), 440 B.R. 282, 290 (Bankr. S.D.N.Y. 2010); In re

Smith, 426 B.R. 435, 441 (Bankr. E.D.N.Y. 2010); In re Feely, 393 B.R. 43, 49-50

(Bankr. D. Mass. 2010)(fraudulent transfer defendants, who had not alleged they were

creditors, lacked standing to assert breach of fiduciary duty claims against trustee); In re

Ngan Gung Rest., 254 B.R. 566, 570-571 (S.D.N.Y. Bankr. 2000); In re Center

Teleproductions, Inc., 112 B.R. 567, 577-578 (S.D.N.Y. Bankr. 1990).

3. The Trustee Is Protected By Immunity When Acting PursuantTo Court Orders.

It is well settled that a trustee who acts pursuant to court orders, after full

disclosure to the court, is cloaked in the mantle of derived judicial immunity. See, e.g.,

Mosser v. Darrow, 341 U.S. 267, 274, 71 S. Ct. 680, 683, 95 L. Ed. 927 (1951); In re

Mailman Steam Carpet Cleaning Corp., 196 F.3d 1, 8 (1st Cir. 1999); Yadkin Valley

Bank & Trust Co. v. McGee, 819 F.2d 74, 76 (4th Cir. 1987); Lonneker Farms, Inc. v.

Klobucher, 804 F.2d 1096, 1097 (9th Cir. 1986); Boullion v. McClanahan, 639 F.2d 213,

214 (5th Cir. 1968).

This derived judicial immunity is not limited to actions for damages, but also

extends to requests for injunctive relief. Mullis v. U.S. Bankr. Ct., 828 F.2d 1385, 1394

(9th Cir. 1987). "[A]bsolute immunity bars a suit at the outset and frees the defendant

official of any obligation to justify his actions." Gray v. Bell, 712 F.2d 490, 495-96 (D.C.

Cir. 1983).

A trustee is entitled to quasi-judicial immunity for carrying out the orders of the

bankruptcy court, as long as there has been full and frank disclosure to creditors and the

court. See, In re Mailman Steam Carpet Cleaning Corp., 196 F.3d 1, 8 (1st Cir. 1999);

Henry v. Farmer City State Bank, 808 F.2d 1228, 1238 (7th Cir. 1986)(officials performing

"ministerial acts" under the supervision of judges entitled to quasi-judicial immunity);

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Bennett v. Williams, 892 F.2d 822, 823 (9th Cir. 1989)("Bankruptcy trustees are entitled to

broad immunity from suit when acting within the scope of their authority and pursuant to

court order."); Yadkin Valley Bank & Trust Co. v. McGee, 819 F.2d 74, 76 (4th Cir. 1987)

(bankruptcy trustee immune if acts "under the direct orders of the court"); Boullion v.

McClanahan, 639 F.2d 213 (5th Cir. 1981)(recognizing derived judicial immunity for

bankruptcy trustees who act under the supervision of and subject to the orders of the

bankruptcy court).

Some courts (particularly in the 9th Circuit) have held that the following elements are

required: “For derived quasi-judicial immunity to apply, the defendants must satisfy four

elements: (1) their acts were within the scope of their authority; (2) the debtor had notice of

their proposed acts; (3) they candidly disclosed their proposed acts to the bankruptcy court;

and (4) the bankruptcy court approved their acts.” Harris v. Whittman, (In re Harris), 590

F.3d 730, 742 (9th Cir. 2010), citing Bennett v. Williams, 892 F.2d 822, 823 (9th Cir. 1989).

The fact that the orders of the bankruptcy court must have been entered after full

disclosure is an important requirement. Where a trustee has not been forthright with the

court, trustees have not been treated kindly in the case law. See, In re Rollins, 175 B.R. 69

(Bankr. E.D. Cal. 1994)(holding that trustee was not immune from personal liability in a suit

by a creditor where the trustee did not reveal – in seeking abandonment of an interest in an

inheritance – that the debtor had already absconded with the money); In re Center

Teleproductions, Inc., 112 B.R. 567, 578 (Bankr. S.D.N.Y. 1990)(“Where the trustee

negligently fails to discover his agent’s negligence, negligently obtains a court order, or

negligently or willfully carries out a court order he knew or should have known he

wrongfully procured, however, personal liability will attach.”).

The Bankruptcy Appellate Panel in In re Cedar Funding, Inc., 419 B.R. 807 (9th

Cir. BAP 2009) analyzed the immunity issue as follows:

In Antoine v. Byers & Anderson, Inc., 508 U.S. 429, 113 S. Ct. 2167, 124 L. Ed. 2d 391 (1993), the United States Supreme Court set forth a two-part test for determining whether a non-judicial officer is entitled to quasi-judicial immunity. The first inquiry requires the court to inquire thoroughly into the immunity historically accorded the relevant official at common law and the public interest behind it. Id. at 432. The Ninth Circuit in Castillo has already conducted this inquiry, concluding that bankruptcy trustees and their predecessor counterparts historically have been afforded absolute quasi-judicial immunity because they perform some functions

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which are judicial in nature. Id. at 950; Mullis v. United States Bankr. Court, 828 F.2d 1385, 1390 (9th Cir. 1987), cert. denied, 486 U.S. 1040, 108 S. Ct. 2031, 100 L. Ed. 2d 616 (1988)(citing Lonneker Farms, Inc. v. Klobucher, 804 F.2d 1096, 1097 (9th Cir. 1986)). Based on Castillo, the trustee may assert a quasi-judicial immunity defense.

The second inquiry requires us to examine whether immunity covers the trustee's functions at issue. We decide questions regarding a trustee's immunity under this inquiry on a case-by-case basis because not all "of the [t]rustee's many functions are covered by absolute quasi-judicial immunity." Castillo, 297 F.3d at 953. The rule is that a trustee may be "immune for actions that are functionally comparable to those of judges, i.e., those functions that involve discretionary judgment." Id. at 947, citing Antoine, 508 U.S. at 436.

In determining whether a particular function is judicial in nature, we are cautious not to construe the immunity doctrine too narrowly by focusing on the underlying act. Rather, we identify the "ultimate act" in determining whether a particular function is judicial in nature. Id. at 952, citing Ashelman v. Pope, 793 F.2d 1072, 1075-78 (9th Cir. 1986).

A court-appointed bankruptcy trustee enjoys the same immunity as does the judge

who appointed him unless "he acts in the clear absence of all jurisdiction." Mullis v. U.S.

Bankruptcy Court, 828 F.2d 1385, 1390 (9th Cir. 1987); Berry v. Kalyna, 7 Fed. Appx.

624, 626 (9th Cir. March 22, 2001)(accordingly: “Standing Chapter 13 trustees Brown and

McDonald and their employees Maney and Goernitz are entitled to quasi-judicial

immunity from Berry's claims against them.”).

However, a bankruptcy trustee may be sued in his individual capacity for acts

which exceed the scope of his authority, or are ultra vires. United States v. Sapp, 641

F.2d 182, 194 (4th Cir. 1981); Grant v. Florida Power Corporation (In re American

Fabricators, Inc.), 186 B.R. 526 (Bankr. M.D. Fla. 1995) (trustee loses his immunity if he

acts in the "clear absence of all jurisdiction."); Schechter v. State of Illinois, Dept. of

Revenue (In re Markos Gurnee Partnership), 182 B.R. 211 (Bankr. N.D. Ill. 1995)

(personal immunity of trustees extends only to matters within the scope of their duties).

To use an obvious example, a Chapter 13 Trustee would not be immune from suit for

negligently hitting another driver on his or her commute to the office.

Remember, the burden of pleading immunity rests with the defendant. Gomez

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v. Toledo, 446 U.S. 635, 640, 64 L. Ed. 2d 572, 100 S. Ct. 1920 (1980). Be sure to make

immunity one of your affirmative defenses – I’d put it first. (Of course, you can also

assert immunity as grounds to dismiss a complaint, prior to the filing of an answer.)

4. The Immunity Of The Staff Attorney – GreaterThan The Trustee?

The doctrine of judicial immunity also applies to court approved attorneys for the

trustee. Harris v. Wittman (In re Harris), 590 F.3d 730 742 (9th Cir. 2009); Lonneker

Farms, Inc. v. Klobucher, 804 F.2d 1096, 1097 (9th Cir. 1986); Smallwood v. United

States, 358 F. Supp. 398, 404 (E.D. Mo. 1973), aff'd mem., 486 F.2d 1407 (8th Cir.

1973); Benton v. Cory, 2010 U.S. Dist. LEXIS 134042 (D. Nev. 2010); In re Continental

Coin Corp., 380 B.R. 1, 16 (Bankr. C.D. Cal. 2007). “The trustee's attorney in this case

does not owe a statutory or fiduciary duty to the creditors of the estate. The attorney's

duties are to the trustee. The claims for breach of statutory and fiduciary duties against

the attorney cannot proceed. The malpractice claim against the attorney also cannot

proceed, as creditor lacks standing.” [aff’d, Zamora v. Virtue (In re Cont'l Coin Corp.),

2009 U.S. Dist. LEXIS 74392 (C.D. Cal., Aug. 21, 2009).]

One of the main vulnerabilities of a Chapter 13 Trustee to suit comes from his or

her status as a fiduciary – certain duties are owed to debtors and to creditors. In contrast,

the case law makes it clear that the attorney for the Chapter 13 Trustee owes fiduciary

duties to the staff attorney’s client – the Chapter 13 Trustee – NOT to debtors and

creditors. Thus, in some respects, it appears that Chapter 13 Staff Attorneys have greater

protection from suit than the Trustee they represent. This is contrary to the perception of

many Chapter 13 Trustees.

5. How To ACQUIRE Absolute Immunity For Actions TakenBy The Trustee.

Wouldn’t it be great if there was some way to ensure that the actions being taken

by the Chapter 13 Trustee or the Staff Attorney were virtually guaranteed absolute

immunity? There is. It is called obtaining an Order of the Bankruptcy Court after full

disclosure.

So, if you want to do something that you aren’t sure of, you present all the

relevant facts to the Bankruptcy Court and ask for a court order to do what you want to

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do. The Bankruptcy Court may not order you to do what you want to be ordered to do –

and if you come in with too many “comfort orders” you are going to annoy your Judges -

but, used “judiciously”, this technique can protect your Trustee, and you, in situations

where you recognize that you are going into a dicey situation.

As discussed below, the protection from a court order, obtained after full

disclosure, should apply even where the lawsuit is filed by a beneficiary who is owed

fiduciary duties.

E. Where There Be Dragons: Areas Where The Trustee MayLack Legal Protections.

1. The Chapter 13 Trustee is a Fiduciary

Because the Chapter 13 Trustee is a fiduciary, he or she owes fiduciary duties - to

both the debtor and creditors. Courts have held that breach of those fiduciary duties can

give rise to actions for damages that are not shielded by quasi-judicial immunity. Of

course, this kind of action for breach of a fiduciary duty requires that the party asserting

the claim must be OWED a fiduciary duty – third parties do not come under this

exception. See generally, In re Heinsohn, 231 B.R. 48, 65 (Bankr. E.D. Tenn. 1999).

Chapter 13 Trustees’ fiduciary obligations are composed of two duties: 1) the

duty of care; and 2) the duty of loyalty.

a. Breach of Fiduciary Duties.

Most of the case law on quasi-judicial immunity fails to distinguish between suits

by third parties, and suits by beneficiaries of the trust. Clearly, creditors in a Chapter 13

– particularly unsecured creditors - are the beneficiaries of the trust, and are persons to

whom fiduciary duties are owed. See, Commodity Futures Trading Commission v.

Weintraub, 471 U.S. 343, 355, 85 L. Ed. 2d 372, 105 S. Ct. 1986 (1985); In re Gorski,

766 F.2d 723, 725-726 (2nd Cir. 1985). To a more limited extent, debtors may also be

owed fiduciary duties by Chapter 13 Trustees. See, e.g., In re Nash, 765 F.2d 1410 (9th

Cir. 1985)(trustee liable for monies received after dismissal and not returned to debtor).

Where fiduciary duties were owed to the people who are suing, courts are much

less likely to support a judicial immunity defense. See, Grant, Konvalinka & Harrison,

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PC v. Banks (In re McKenzie), 716 F.3d 404, 413 (6th Cir. 2013)("It is generally

accepted, albeit under varying rationales, that quasi-judicial immunity does not extend to

claims against a trustee by beneficiaries of the estate for breach of fiduciary duty."); In re

Mailman Steam Carpet Cleaning Corp., 196 F.3d 1, 7 n.4 (1st Cir. 1999)(A bankruptcy

trustee may be held personally liable for negligent breach of fiduciary duty); In re

Ferrante, 51 F.3d 1473, 1478 (9th Cir. 1995)(Trustees may be held personally liable for

breach of fiduciary duties, the embezzlement of fund from the estate is a clear violation

of the duty of loyalty to creditors.); In re Heinsohn, 231 B.R. 48, 65 (Bankr. E.D. Tenn.

1999); Illinois Dep’t of Revenue v. Schechter (In re Markos Gurnee Partnership), 195

B.R. 380, 384 (N.D. Ill. 1996)(Wedoff, J.)(“it is well settled that a trustee cannot be held

personally liable unless he acted outside the scope of his authority as trustee, i.e., acted

ultra vires, or breached a fiduciary duty that he owed as the trustee to some claimant.”).

Let’s use some concrete examples. Take a classic “misdisbursement” situation.

If $10,000 is sent to the wrong creditor, and the trustee is unable to get that money back.

The trustee is going to have a difficult time defending that kind of suit. Fiduciary duties

were owed, they were breached, and the beneficiaries – who should have received those

monies - were damaged.

Using another example: $10,000 is embezzled from a Chapter 13 case by an

employee of the trustee.

In these two situations, while it is possible that a court might find that immunity

applies if a creditor, or creditors, sued – what if the plaintiff were the United States

Trustee? Or, worse yet, the information had come before the bankruptcy judge and she

decided to hold a hearing on surcharging the trustee? Under those circumstances, what

are the chances of quasi-judicial immunity being a complete defense? Much, much

lower.

There are two areas where a defense may exist – 1) acting pursuant to a court

order; and 2) the degree of culpability required for a the trustee to be liable for a breach

of fiduciary duty: a) negligence, or b) willful and deliberate conduct.

As to the first point, it has been held that acting pursuant to a specific court order

protects a trustee from suit from breach of fiduciary duty. See, Lonneker Farms, Inc. v.

Klobucher, 804 F.2d 1096 (9th Cir. 1986); Boullion v. McClanahan, 639 F.2d 213 (5th

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Cir. 1981); In re Heinsohn, 231 B.R. 48, 65 (Bankr. E.D. Tenn. 1999).

The second point, regarding the standard of misconduct required, is subject to a

split of authority:

The courts are divided over whether the trustee must negligently or willfully breach a fiduciary duty to interested parties in order for liability to attach. See McCullough, 103 COM. L.J. at 129-32. While the Sixth Circuit Court of Appeals along with the Fourth, Seventh and Tenth circuits hold that trustees can only be held personally liable for injuries arising from willful and deliberate conduct, three circuits, the Second, Ninth and Eleventh, subject trustees to personal liability for negligent breaches of fiduciary duties. Id. (citing Ford Motor Credit Co. v. Weaver, 680 F.2d 451 (6th Cir. 1982); Yadkin Valley Bank & Trust Co. v. McGee, 819 F.2d 74 (4th Cir. 1987); In re Chicago Pac. Corp., 773 F.2d 909 (7th Cir. 1985)(dicta); Sherr v. Winkler, 552 F.2d 1367 (10th Cir. 1977); In re Gorski, 766 F.2d 723 (2d Cir. 1985); Hall v. Perry (In re Cochise College Park., Inc.), 703 F.2d 1339 (9th Cir. 1983) and Red Carpet Corp. of Panama City Beach v. Miller, 708 F.2d 1576 (11th Cir. 1983)).

In re Heinsohn, 231 B.R. 48, 65 n.10 (Bankr. E.D. Tenn. 1999); In re McKenzie, 716

F.3d 404, 413 (6th Cir. 2013)(citing Heinsohn).

You also need to think about how these two kinds of factual situations might

come up, prior to any litigation – the U.S. Trustee might make a demand on the Chapter

13 Trustee, or the Chapter 13 Trustee’s bond – to put the $10,000 back into the estate.

What if the trustee refuses? Now, the possibility not only exists of a lawsuit, but also of

the commencement of proceedings to remove your Standing Chapter 13 Trustee. And,

while there are now more due process rights for Chapter 13 Trustees (see, 28 U.S.C.

Section 586(d)(2)), “quasi-judicial immunity” is not going to prevent the Office of the

U.S. Trustee from attempting to remove a trustee.

Assuming that action is taken on the trustee’s bond, [see, In re Kinross

Manufaction Corp., 174 B.R. 702 (Bankr. W.D. Mich. 1994)] based upon a breach of the

duty of care, that does not take your trustee “off the hook”. A bond is NOT insurance.

Insurance pays a claim, and this may raise your rates – should you elect to continue to

carry the insurance – but the insured is otherwise not liable for claims paid by an

insurance company. In contrast, a bond is simply a device to ensure payment – the

bonding company pays on the bond, then turns around and sues the trustee for

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reimbursement on the bond. In the suit by the bonding company against the Chapter 13

Trustee for reimbursement, there isn’t going to be any immunity defense.

b. Acting “Ultra Vires”.

In the immunity cases, the term “ultra vires” means a trustee acting outside of the

trustee’s authority. One of the biggest problem areas where this can occur is in situations

where the trustee reaches a settlement.

If you haven’t read them, the cases going up the ladder involving former Chapter

13 Trustee Jo-Ann Goldman can be instructive. See, In re Morgan, 353 B.R. 599 (Bankr.

E.D. Ark. 2006); In re Morgan, 375 B.R. 838 (B.A.P. 8th Cir. 2007); In re Morgan, 573

F.3d 615 (8th Cir. 2009), and In re Dedmon, 366 B.R. 1 (Bankr. E.D. Ark. 2007), rev’d,

In re Morgan, 375 B.R. 838 (B.A.P. 8th Cir. 2007). Read them in date order, and you’ll

see a case where a bankruptcy court removed a Chapter 13 Trustee because the court

believed that the trustee acted outside her authority in making an agreement. Obviously,

you don’t want something like that happening to your client.

The settlement process is an area where Chapter 13 Trustees need to exercise

some care. When you are negotiating with other parties, you can agree how you are

going to present a disputed matter to the court – for approval, rejection, or further

instructions - but you can’t actually enter into settlements without court approval.

The problem arises, for many trusteeships, because you know exactly what your

court is going to do when you enter into an agreement to resolve a matter, subject to court

approval. There may not be a chance in the world that the court won’t approve your

agreement – you’ve done hundreds exactly the same. But, until the Judge signs the

order/stipulation, the matter isn’t settled. Just as, until the Judge signs the Confirmation

Order, the case isn’t confirmed.

Getting approval of a settlement is relatively easy. Federal Rule of Civil

Procedure 9019(a) provides that a bankruptcy court can approve a settlement or

compromise after notice and hearing. A bankruptcy settlement is not required to

constitute the best result obtainable. Rather, the court need only canvass the issue to

determine that the settlement does not fall below the lowest point in the range of

reasonableness. In re Healthco Int'l, 136 F.3d 45, 51 (1st Cir. 1998); In re W.T. Grant

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Co., 699 F.2d 599, 608 (2d Cir. 1983); Tri-State Fin., LLC v. Lovald, 525 F.3d 649, 654

(8th Cir. 2008); In re Martin, 490 F.3d 1272, 1275-76 (11th Cir. 2007).

A Trustee does not settle matters, confirm cases, approve fees, or dismiss cases.

Courts do those things. A Trustee only files a motion, an objection, or makes a

recommendation, asking that the court take action. Obviously, a Staff Attorney – who’s

powers are derived from authority given by the Trustee – can do no more than the

Trustee.

Note that in almost every case where a trustee is sued, the allegation is made that

the actions are ultra vires – either to overcome a Barton Doctrine problem or trustee

immunity. In most cases, that allegation is quickly disposed of by the courts. One

exception: “A trustee can be personally liable for seizing or failing to turn over property

in possession of the estate but owned by someone else, which is considered an ultra vires

act.” See, e.g., Leonard v. Vrooman, 383 F.2d 556 (9th Cir. 1967), cert. denied, 390 U.S.

925, 88 S. Ct. 856, 19 L. Ed. 2d 985 (1968). The Sixth Circuit has stated (perhaps

incorrectly) that “thus far, courts have only applied the ultra vires exception to the actual

wrongful seizure of property by a trustee or receiver.” In re McKenzie, 716 F.3d 404,

415 (6th Cir. 2013)(holding that litigation attempting to seize property that was not an

asset of the estate is not ultra vires). So, don’t panic just because there is an allegation

that the trustee acted ultra vires – as we all know, Chapter 13 trustees do not generally

take possession of property, so the most common ultra vires problem should not be a

problem for your client.

c. Bad Records And Misdisbursements.

A trustee is accountable for all the property he receives and may be liable for

improper distribution of funds. See, 11 U.S.C. §1302; see also, Nash v. Kester (In re

Nash), 765 F.2d 1410, 1415 (9th Cir. 1985); 1 Lundin Chapter 13 Bankruptcy §58.3; 8

Collier on Bankruptcy ¶ 1302.03[1][b][i], [ii] (Lawrence P. King ed., 15th ed. rev. 2001)

(stating that, under Fed. R. Bankr. P. 2015, the chapter 13 trustee must keep a record of

all receipts and the disposition of money and property received; further stating that he is

liable for improper distributions).

The Trustee is required to keep proper records or exercise normal due diligence

and skill when receiving the assets of the debtor the trustee is charged with assisting. See,

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11 U.S.C. §1302(b)(4); cf. In re Colvin, 125 B.R. 182, 183 (Bankr. E.D. Mich. 1991)

(finding that trustee's appropriation of funds from employer and disbursement to

unsecured creditors without notice to the debtor was egregious and impermissible).

Trustees have been held personally liable for the audits required to untangle inaccurate

and misleading records. See, e.g., Nash, 765 F.2d at 1415; In re Johnson, 518 F.2d 246

(10th Cir.), cert. denied, 423 U.S. 993 (1975).

If the misdisbursement is pursuant to a valid court order (entered after adequate

disclosure), the immunity defense may still be available to a trustee, and under those

circumstances it probably should be asserted in response to any litigation. In re

Heinsohn, 231 B.R. 48, 65 (Bankr. E.D. Tenn. 1999).

d. Monies That Are Embezzled Or Co-Mingled.

One case discussing immunity in the context of embezzlement by an employee of

the trustee is Matter of Johnson, 518 F.2d 246 (10th Cir. 1975), decided under the

Bankruptcy Act. The law regarding trustee immunity has changed so much in recent years,

it is hard to evaluate how persuasive this case would be, but it found that the trustee was

personally liable for the employee embezzlement because the trustee’s failure to discover

the embezzlement was negligence.

Where monies were embezzled from the trusteeship, the issues are most often

trustee removal, if the trustee was the embezzler, lawsuits against banks if forged checks

are involved, and suits involving the bonding companies. See generally, United States v.

Van den Bosch, No. 85-5349, unpublished, 798 F.2d 1417 (table)(6th Cir.July 15, 1986)

(Chapter 13 Trustee removed for comingling funds, and falsifying records.); American

Surety Co. v. First Nat'l Bank, 141 F.2d 411 (4th Cir. 1944); Traina v. Nationsbank of Tex.,

CIVIL ACTION NO: 00-1160, unpublished, 2001 U.S. Dist. LEXIS 14612, (E.D. La.

September 7, 2001); In re Foodsource, Inc., 130 B.R. 549 (N.D. Cal. 1991).

e. When The IRS Issues A Levy – An Unwritten ExceptionTo Immunity?

United States appellate courts have been more likely to rule in favor of the

Internal Revenue Service, despite decisions supporting derived judicial immunity for

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bankruptcy trustees. See, David W. Allard, Personal Liability of Trustees and Debtors in

Possession: Review of the Varying Standards of Care in the United States, 106 Com L.J.

415, 437 (Winter, 2001). The law review article points to several decisions where the

IRS was able to hold a bankruptcy trustee personally liable.

In United States v. Hemmen, 51 F.3d 883 (9th Cir. 1995) the court held that the

trustee, who was in receipt of an IRS notice of levy at the time when the case had assets

which were not liquidated, was personally liable for failure to honor the levy. A similar

result was reached in United States v. Ruff, 179 B.R. 967 (M.D. Fla. 1995), aff’d, United

States v. Ruff, 99 F.3d 1559 (11th Cir. 1996)(trustee held personally liable for failing to

honor IRS levy for taxes owed by broker employeed by estate).

2. Removal Actions By The U.S. Trustee.

See, 28 U.S.C. Section 586(d)(2). To date, there does not appear to be case law

interpreting this statutory protection that provides trustees with due process rights in

actions to remove them from their position. For a look at how trustee removal was

handled prior to the due process subsection being added: See, Joelson v. United States, 86

F.3d 1413 (6th Cir. 1996); Balser v. DOJ, 327 F.3d 903 (9th Cir. 2003); Brooks v. United

States, 127 F.3d 1192 (9th Cir. 1997).

3. Removal Actions By The Court.

See generally, In re Morgan, 353 B.R. 599 (Bankr. E.D. Ark. 2006); In re

Morgan, 375 B.R. 838 (B.A.P. 8th Cir. 2007); In re Morgan, 573 F.3d 615 (8th Cir.

2009), and In re Dedmon, 366 B.R. 1 (Bankr. E.D. Ark. 2007), rev’d, In re Morgan, 375

B.R. 838 (B.A.P. 8th Cir. 2007).

4. The Imposition of Costs In a Lawsuit.

Wood v. Green, 2010 U.S. Dist. LEXIS 40178 (N.D. Fla. 2010): “Ebert claims

that she is individually immune from any costs in this case because she acted only as the

Chapter 7 trustee of the bankruptcy estate. As a general rule, bankruptcy trustees "are not

individually liable unless they act outside their authority." Yadkin Valley Bank & Trust

Co. v. McGee, 819 F.2d 74, 76 (4th Cir. 1987). No allegation was raised in this case that

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Ebert acted outside of her authority, and the court's judgment did not reflect any liability

against Ebert individually. A bankruptcy trustee takes the title and rights in the property

a debtor possessed at the time the debtor seeks bankruptcy protection. In re Raborn, 470

F.3d 1319, 1323 (11th Cir. 2006). Consequently, costs are taxable against Ebert only in

her capacity as the trustee of the bankruptcy estate; she has no individual liability for the

costs.”

5. Prospective grants of judicial immunity for a bankruptcytrustee are disfavored.

The court in In re Blumenberg, 263 B.R. 704, 711 (Bankr. E.D.N.Y. 2001) stated:

Next, this Court declines to enter an order granting blanket "derived judicial immunity" to a trustee from any acts or omissions in his or her administration of any chapter 7 case. There are circumstances in which it may be held that bankruptcy trustees "derive qualified judicial immunity for acts taken within their authority as an officer of the court", but this is an affirmative defense to a complaint that has been actually filed. See, In re Solar Financial Services, Inc., 255 B.R. 801, 803 (Bankr.S.D.Fla. 2000) (citing In re Clearwater Bay Marine Service, 236 B.R. 285 (Bankr.M.D.Fla. 1999)). In Solar Financial Services, the bankruptcy court found that a trustee's obtaining permission from the court to abandon records was in itself sufficient to qualify the trustee for judicial immunity, without any need to obtain an explicit grant of immunity prior to abandonment. The lack of necessity for an "antecedent" grant of judicial immunity is even more compelling in this case, when no adverse claims have been raised against the trustee in any papers filed with this Court. Not a single case cited by the trustee has ever granted immunity in advance. If somebody sues the trustee in any other forum for acts or omissions, then the trustee can file a motion for an expedited hearing on the trustee's motion to reopen a closed case, remove that action to this Court, and then move to dismiss that action.

So, the proper way to obtain immunity is to get a court order for the potentially

controversial action you are about to undertake – NOT seek an order explicitly granting

immunity for taking that action. Immunity comes along with the court order. But, courts

are not going to explicitly grant immunity in advance.

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F. Sovereign Immunity.

To the extent that the Trustee is being sued in his official capacity, and not

personally, the defense of sovereign immunity should be pled. See, Mullarkey v.

Greenberg, 2009 U.S. Dist. LEXIS 103113 (D.N.J. Nov. 4, 2009); United States v.

Sherwood, 312 U.S. 584, 586, 85 L. Ed. 1058, 61 S. Ct. 767 (1941); Jaffee v. United States,

592 F.2d 712, 717-718 (3d Cir.), cert. denied, 441 U.S. 961, 60 L. Ed. 2d 1066, 99 S. Ct.

2406 (1979). [These cases may not be “right” in terms of the defense of a Chapter 13

Trustee – based upon the waiver of sovereign immunity found in Section 106. But,

sovereign immunity probably should still be pled as an affirmative defense on behalf of your

client.]

G. The Noerr-Pennington Doctrine – Protects Against Anti-Trust Claims.

Under the Noerr-Pennington doctrine, private entities are immune from liability

under the antitrust laws for attempts to influence the passage or enforcement of laws, even if

the laws they advocate for would have anticompetitive effects.

This doctrine actually came up in a bankruptcy case: “Because Berry's anti-trust

allegations concern alleged "abuses of the bankruptcy court process," these claims are

barred by the Noerr-Pennington doctrine, which "protects advocacy before all branches

of government." Kottle v. Northwest Kidney Centers, 146 F.3d 1056, 1060 (9th Cir.

1998); see also, United Mine Workers v. Pennington, 381 U.S. 657, 669-70, 14 L. Ed. 2d

626, 85 S. Ct. 1585 (1965); Eastern RR Presidents Conference v. Noerr Motor Freight,

Inc., 365 U.S. 127, 137, 5 L. Ed. 2d 464, 81 S. Ct. 523 (1961).

H. The Litigation Privilege.

The Supreme Court has recognized a traditional common-law immunity for

witnesses, judges and attorneys with respect to their conduct in judicial proceedings.

Briscoe v. LaHue, 460 U.S. 325, 334-35, 103 S. Ct. 1108, 75 L. Ed. 2d 96 (1983).

Recognizing the common-law litigation privilege, Briscoe expressed that "private

attorneys were treated no differently than judges, government lawyers, and witnesses."

Briscoe v. LaHue, 460 U.S. 325, 334-35, 103 S. Ct. 1108, 75 L. Ed. 2d 96 (1983). "All

persons - governmental or otherwise - who were integral parts of the judicial process" were

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accorded absolute immunity from civil liability because of the need 'to assure that judges,

advocates, and witnesses can perform their respective functions without harassment or

intimidation.' Id. at 335 (quoting Butz v. Economou, 438 U.S. 478, 512, 98 S. Ct. 2894, 57

L. Ed. 2d 895 (1978)).

Some courts have held that there is a federal litigation privilege. Other courts have

recognized and applied the state law litigation privilege to proceedings in federal court. See,

In re Lowenbraun, 453 F.3d 314, 322-323 (6th Cir. 2006); In re Cedar Funding, Inc., 419

B.R. 807 (9th Cir. BAP 2009); In re Bryan, 308 B.R. 583, 588 (Bankr. N.D. Ga. 2004);

Waterloov Gutter Protection Systems Co. v. Absolute Gutter Protection, LLC, 64

F.Supp.2d 398 (D.N.J. 1999)(non-bankruptcy case).

The litigation privilege is a "long-standing common law rule that communications

uttered or published in the courts of judicial proceedings are absolutely privileged." Circus

Circus Hotels v. Witherspoon, 99 Nev. 56, 657 P.2d 101, 104 (Nev. 1983). The policy

behind the rule is to grant attorneys and other participants in judicial proceedings "the

utmost freedom in their effort to obtain justice …." Id.; In re Davis, 312 B.R. 681, 690

(Bankr. D. Nev. 2004); see also, Rodriguez v. Panayiotou, 314 F.3d 979, 988 (9th Cir.

2002) (privilege applies to any communication with some logical relation to a judicial or

quasi-judicial proceeding made by a litigant or other participant in the proceeding). The

privilege is a bar to a defamation claim even if it is alleged that the defamatory statements

were made with knowledge of their falsity and with personal animosity toward the other

party. Id.

The scope of the absolute privilege is quite broad. In re Davis, 312 B.R. 681, 690

(Bankr. D. Nev. 2004). To be protected, the defamatory communication need not be

relevant to the proposed or pending litigation; it need only be related in some way to the

subject of the controversy. The privilege applies to communications outside of court and

those made before litigation has commenced as well as those made during actual judicial

proceedings.

I. Additional Defense Of Attorney For The Trustee FromAny Creditor Suit.

Richardson lacks standing to sue (1) Womble Carlyle as counsel to the Trustee, . . . . First, Richardson cannot bring suit against Womble

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Carlyle in its official capacity as Trustee's counsel, because only the Trustee has the authority to do so. See In re Cont'l Coin Corp., 380 B.R. 1, 16 (Bankr. C.D. Cal. 2007), aff'd, No. CV 08-0093(PA), 2009 U.S. Dist. LEXIS 74392, 2009 WL 2589635 (C.D. Cal. Aug. 21, 2009)(holding that the "trustee's attorney in this case does not owe a statutory or fiduciary duty to the creditors of the estate. The attorney's duties are to the trustee.") (quoting Wolf v. Kupetz (In re Wolf & Vine, Inc.), 118 B.R. 761, 771 (Bankr. CD. Cal. 1990)(noting that while a trustee owes a fiduciary duty to creditors, the attorneys for the trustee do not)).

Richardson v. Monaco (In re Summit Metals, Inc.), 477 B.R. 484, 501-502 (Bankr. D.

Del. 2012); see also, In re Smith, 400 B.R. 370, 376 (Bankr. E.D.N.Y. 2009)(there was a

lack of privity between Trustee's counsel and the Movants, and as such the proposed

complaint was fatally defective as a matter of law).

XVIII. INCOME.

Regardless of whether your judge(s) use the Means Test – for above median

debtors only, or also for those with below median income; applying the Means Test either

strictly or with equitable and changed circumstances modifications; or if you court relies,

instead, on Schedules I and J for all debtors -- everyone has the same issues: What is

income? And, how do I check the gross income that is reported to make sure it is

accurate?

A. What Is Income?

The definition includes income “from all sources that the debtor receives”,

“without regard to whether such income is taxable income”, unless the income is

excluded by statute.

Income from Social Security is excluded by statute: 11 U.S.C. §101(10A). The

exact language of the provision defining “current monthly income” states that it excludes:

“excludes benefits received under the Social Security Act”.

1. Social Security Income – Was A Hot Issue:

The exclusion of Social Security from income was not without some controversy.

However, the majority of courts now permit social security income to be excluded from

consideration for purposes of determining the minimum Chapter 13 payments. Ranta v.

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Gorman, 721 F.3d 241 (4th Cir. 2013); In re Welsh, 711 F.3d 1120, 1127 n.28, 1130-31

(9th Cir. 2013); In re Ragos, 700 F.3d 220, 223 (5th Cir. 2012); In re Cranmer, 697 F.3d

1314, 1317-18 (10th Cir. 2012); Baud, 634 F.3d 327, 345 (6th Cir. 2011).

However, there are a few courts that either require Social Security income to be

used in determination of disposable income, or allow the non-use of Social Security

income to provide the basis for denial of confirmation of the Chapter 13 Plan on good

faith grounds.

However, other courts that have considered whether “good faith” can be used

based solely on the failure to use social security income to pay unsecured creditors have

rejected that theory. See e.g., Ranta v. Gorman, 721 F.3d 241, 253 n.15 (4th Cir. 2013)

(citing cases); Fink v. Thompson (In re Thompson), 439 B.R. 140 (8th Cir. BAP 2010)(To

be confirmed, a Chapter 13 plan had to be proposed in good faith. Plain language of the

Bankruptcy Code precluded the Chapter 13 Trustee from objecting to debtors' plan based

on an alleged lack of good faith based solely only on the fact debtors did not devote all of

their Social Security income to their creditors.)

An interesting issue arises when a motion to modify under Section 1329 is filed.

At least one court has held that on a motion to modify, social security income can be

considered. See, In re Hall, 442 B.R. 754 (Bankr. D. Idaho 2010)(Debtor wife's SSDI

benefits could be considered with respect to a modification of a Chapter 13 confirmed

plan because disposable income requirements for confirmation under §1325(b) did not

apply to a proposed modified plan because § 1325(b) was not expressly listed in §1329(b)

(1).

Another problem is when the funds contributed to the household, either for

expenses are rent, have social security income as their source. See, In re Olguin, 429

B.R. 346 (Bankr. D. Colo. 2010)(When Social Security recipients gave funds derived

from their benefits to third parties, funds ceased to be in nature of "benefits."

Grandparents' regular contribution to debtors' household expenses was not "a benefit

received under the Social Security Act," §101(10A)(B), and had to be included in the

calculation of debtors' income.) In contrast, most cases hold that Social Security received

by a non-filing spouse is not included as income. See, In re Scott, 488 B.R. 246 (Bankr.

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M.D. Ga. 2013); In re Miller, 445 B.R. 504 (Bankr. D. S.C. 2011); In re Wilson, 397 B.R.

299 (Bankr. M.D. N.C. 2008); In re Bartelini, 434 B.R. 285 (Bankr. N.D. N.Y. 2010).

Finally, there is a decision on whether the exclusion of social security income

extends so far as to become a subsidy. Where a debtor has wage income, pension income

and social security income, and the social security income is therefore taxable, the taxes

attributable to the social security income are objectionable as an expense deduction –

they should be paid from the excluded social security income. In re Devilliers, 358 B.R.

849 (Bankr. E.D. La. 2007).

2. Unemployment Benefits - Income, or Excluded?

The courts are currently divided on whether or not unemployment benefits are

excluded under the “Social Security” umbrella, but the tide appears to have turned in

favor of including unemployment benefits as income. Two early cases said that

unemployment benefits were excluded as benefits paid under the Social Security Act:

See, In re Munger, 370 B.R. 21 (Bankr.D.Mass. 2007); In re Sorrell, 359 B.R. 167

(Bankr.S.D.Ohio 2007). The more recent cases hold that unemployment benefits count

as income. See, In re Washington, 438 B.R. 348 (M.D. Ala. 2010); In re Gentry, 463

B.R. 526 (Bankr. D. Colo. 2001); In re Kucharz, 418 B.R. 635 (Bankr. C.D. Ill. 2009); In

re Baden, 396 B.R. 617 (Bankr.M.D.Pa. 2008); In re Overby, Bankr. L. Rep. (CCH)

P81,868, 2010 Bankr. LEXIS 8183 (Bankr. W.D. Mo. Sept. 24, 2010); In re Winkles,

2010 Bankr. LEXIS 2151, 2010 WL 2680895 (Bankr. S.D. Ill. July 6, 2010); In re Nance,

64 Collier Bankr. Cas. 2d (MB) 230, 2010 Bankr. LEXIS 1736, 2010 WL 2079653

(Bankr. S.D. Ind. May 21, 2010); In re Rose, 2010 Bankr. LEXIS 1851, 2010 WL

2600591 (Bankr. N.D. Ga. May 12, 2010).

3. Other Income Specifically Excluded Under 101(10A):

Also excluded by statute are “payments to victims of war crimes or crimes against

humanity on account of their status as victims of such crimes, and payments to victims of

international terrorism (as defined in section 2331 of title 18) or domestic terrorism (as

defined in section 2331 of title 18) on account of their status as victims of such

terrorism.” – but for most of us, those almost never come up. Clearly, however, those

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items are not income for Means Test purposes - and probably not for any Chapter 13

determination of income.

4. What About Other Income That Does Not Become PropertyOf The Estate?

There is a question whether income that is specifically excluded from becoming

property of the estate by other federal law, would be income for Chapter 13 purposes.

See, In re Moose, 67 Collier Bankr. Cas. 2d (MB) 654, 2012 Bankr. LEXIS 1175

(Bankr. M.D.N.C. March 20, 2012)(Civil Service Retirement System was income). One

case that addresses the the “exemption” and “exclusion from property of the estate” issue

in terms of how income is treated is Meyer v. UST (In re Scholz), 699 F.3d 1167 (9th Cir.

2012)(Benefits received under Railroad Retirement Act of 1974 (RRA), 45 U.S.C.S. §

231 et seq., were not excluded from the operation of the Bankruptcy Code. Accordingly,

debtor's RRA Benefits were included in calculation of current monthly income.).

5. What About Monies Withdrawn From A 401(k) Or An IRA?

The majority of courts appear to hold that pre-retirement withdrawals from a

401(k) or IRA are not considered income for bankruptcy purposes. See, In re Cram, 414

B.R. 674 (Bankr. D. Idaho 2009)(401(k) distribution did not meet criteria of current

monthly income under §101(10A)); In re Zahn, 391 B.R. 840 (8th Cir. BAP 2008)(IRA

distribution to non-filing spouse not income); In re Mendelson, 412 B.R. 75 (Bankr.

E.D.N.Y. 2009)(one-time early withdrawal from a retirement account was not included in

income). But see, In re DeThample, 390 B.R. 716 (Bankr. D. Kan. 2008)(401(k) was

required to be included in calculating CMI).

Some cases also discuss whether the “one time” withdrawals are “income”

because the money that is withdrawn was the debtor’s money, albeit in a protected

account.

The bottom line is: these withdrawals are not going to continue in the future.

Thus, under the “forward looking approach” of Lanning, they can be backed out in

determining the minimum monthly payment. However, if these withdrawals are

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considered income, they may put a debtor over the median income level, and require a 60

month commitment period.

6. Life Insurance Proceeds are Income:

Proceeds from life insurance were held part of disposable income.  In re Florida,

268 B.R. 875 (Bankr. M.D. Fla. 2001); contra, In re Richardson, 283 B.R. 783 (Bankr. D.

Kan. 2002).

7. Food Stamps and Government Aid are Income:

Yes, the majority view is that they are income. See, In re Justice, 404 B.R. 506

(Bankr. W.D. Ark. 2009)(government assistance to non-debtor daughter and her infant

son was income); Bibb County Dept. of Family & Children Services v. Hope (In re

Hammonds), 729 F.2d 1391, 1395 (11th Cir. 1984); In re Rigales, 290 B.R. 401 (D. N.M.

2003)(food stamps).

8. Veterans Benefits are Income:

See, In re Hedge, 394 463 (Bankr. S.D.N.Y. 2008); In re Waters, 384 B.R. 432,

437-38 (Bankr. N.D. W.Va. 2008); In re Redmond, CASE NO. 07-80634-G3-13, 2008

Bankr. LEXIS 1495, (Bankr. S.D. Tex. April 14, 2008)

9. Disability Payments (from sources other than Social Security)are Income.

Blausey v. U.S. Trustee, 552 F.3d 1124 (9th Cir. 2009).

10. Loans are Not Income:

Loans are generally not income. See, In re Brown, 332 B.R. 562, 568 (Bankr.

N.D. Ill. 2005) ("the refinance proceeds are accompanied by a new loan to the debtor,

which significantly offsets the apparent increase to the debtor's balance sheet").

11. Income Taxes.

See the discussion below in the section “Exemptions v. Income”.

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12. Pension monies received by a retiree are income.

In re Briggs, 440 B.R. 490 (Bankr. N.D. Ohio 2010). See also, In re

Taylor, 212 F.3d 395 (8th Cir. 2000); In re Rogers, 168 B.R. 806, 808 (Bankr.M.D.Ga.

1993)

B. How Do You Know The Income Stated By The Debtor(s) Is Correct?

In looking at the debtor's filings, you get income information in several places. 1. Schedule I reflects a gross income figure. 2. The Means Test states a gross income figure based on a six months "look back". 3. The Statement of Financial Affairs asks for a history of the debtor's earnings, year to date, and for the previous two years in its first two questions. 4. The federal income tax return provides additional information, including gross taxable income, for the previous tax year. 5. Pay advices give a more recent history of the debtor's earnings.

Whether your court looks to Schedule I and J, or the Means Test, it is important to

start with the correct gross income figure because if you put garbage in, you get garbage

out. Sometimes the gross income figure is misstated – either by mistake, or intentional

fudging. How do you check to make sure that the gross income figure is correct?

If you suspect that gross income is incorrectly stated, you can do cross-checks

using all of the sources listed above.

For many debtors, the most useful document to look at are the pay advices.

Typically, the pay advice will provide a year-to-date figure for the debtor’s gross

earnings. If W-2 wage earners are fudging on their income, the pay advices can be used

to show it.

To check whether the debtor’s actual gross income is stated correctly, one method

is to turn the year-to-date gross income figure into a daily figure - what the debtor earns

per day. This is done by noting what the ‘end date’ is on the most recent pay advice.

Calculate how many days the ‘end date’ represents – say, for this example, it is the 184th

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day of the year. Then divide the year-to-date gross income – say, $31,055 - by the

number of days (184) over which that income was earned. Using the numbers above, the

debtor’s ‘per diem’ earnings would be $168.77. Multiply that by 365, and you get a

projection of yearly earnings – here, that would be $61,601. Divide the yearly number by

12, and get an average monthly gross income figure – here, it would be $5,133.

The gross income figure calculated from the pay advice can by compared with the

numbers given on the Means Test (Line 1) and Schedule I, Lines 1 and 2. If the gross

income numbers you calculate are significantly different from what the Schedule I and

the Means Test indicate to be gross income, you have to find out why.

Was the year-to-date earnings not reflective of some changes in income that were

present in the Sixth months prior to filing? Or, did debtor’s counsel fail to count the

correct number of paychecks? – 26 if the debtor was paid weekly, 13 if the debtor was

paid bi-weekly, and 12 if the debtor was paid semi-monthly. Or, did debtor’s counsel

look at gross taxable income, instead of gross income? Gross taxable income typically

does not include monies deducted for retirement – if that mistake was made, and the

retirement deducted again on either the Schedules or the Means Test, that is improper

double counting of the deduction of contributions to the debtor’s retirement account.

. Or, is debtors’ counsel going to make the tired argument that overtime wasn’t

listed on Schedule I because “it’s not guaranteed”. Or, “it fluctuates”. Schedule I,

Question 2 requires a debtor to list their ESTIMATED overtime. Not their guaranteed

overtime.

The most recent federal tax return is also worth looking at for determining if

income is properly stated. For self-employed debtors, there are no pay advices. The tax

return can be the most reliable document you are likely to get regarding their income.

Plus, you can learn a lot from the attached schedules. But, on the other side of the coin,

debtors often under-report tip income, side jobs, and income from their businesses.  You

just have to do the best you can with the self employed, tipped employees, and business

owners.

If the gross income number on the tax return is significantly greater than the gross

income claimed on Schedule I/Means Test, that naturally leads to questions about how

the debtor’s income has changed over time. If questions 1 and 2 on the Statement of

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Financial Affairs are answered accurately, they can also help give a picture of the

changes in debtor’s income over time.

For many jurisdictions, a properly prepared Schedule I may reflect a

different income number than the Means Test.  If income has decreased in the past six

month, the Schedule I gross income number would be less than the gross income number

on the Means Test.  Conversely, if the debtor has had rising income, the Schedule I

would be higher than the gross income on the Means Test.

Remember, Question No. 17 on Schedule I asks: “Describe any increase or

decrease in income reasonably anticipated to occur within the year following the filing of

this document.” If that question is left blank, I use that when debtors start talking about

what might happen to reduce their income in the future.

XIX. EXEMPTIONS VS. INCOME – A CAGED DEATH MATCH.

Prior to the passage of BAPCPA, there was a significant minority of courts that –

to some extent – allowed exemptions to reduce or eliminate disposable income, relying

on the language of Section 522(c). See, In re Berger, 61 F.3d 624 (8th Cir. 1995)(holding

in a Chapter 12 case that disposable income did not include exempt life insurance

proceeds); In re Ferretti, 203 B.R. 796, 800 (Bankr. S.D. Fla. 1996)("The clear language

of [§522(c)] protects exempt property, regardless of form, from prepetition debts . . . .

This express limitation cannot be ignored for purposes of defining disposable income

under §1325(b)."); In re Koch, 187 B.R. 664, 667-69 (D.S.D. 1995)(holding that income

exempt under state law could not be included in a Chapter 13 disposable income

calculation, and noting that different panels of the Eighth Circuit may have different

points of view on the issue), rev'd sub nom. Stuart v. Koch (In re Koch), 109 F.3d 1285,

1289 (8th Cir. 1997); In re Tomasso, 98 B.R. 513, 515 (Bankr. S.D. Cal. 1989)(stating

that only the nonexemptable portion of a personal injury settlement would constitute

disposable income).

However, even pre-BAPCPA, the majority of courts, relying on §1325(b)(1)(B),

held that income was income, whether the source of that income was exempt or not. See,

Stuart v. Koch (In re Koch), 109 F.3d 1285, 1289 (8th Cir. 1997)("Chapter 13 contains

no language suggesting that exempt post-petition revenues are not Chapter 13 'income,'

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and §1325(b)(2) expressly defines 'disposable income' to mean income not needed for

debtor's support. . . . . In a Chapter 13 proceeding . . . [the] debtor repays unsecured

creditors primarily with post-petition 'disposable income . . . . Debtor's fresh start is not

endangered by a requirement that income received during the life of the plan from

otherwise exempt sources be included in the calculation of disposable income.");

Freeman v. Schulman (In re Freeman), 86 F.3d 478, 481 (6th Cir. 1996)("[I]ncome that

would be otherwise exempt under Tennessee law can still be 'disposable income' for

purposes of Chapter 13."); In re Hagel, 184 B.R 793 (B.A.P. 9th Cir. 1995)(holding that

exempt social security disability benefits are included under a §1325(b) analysis); In re

Minor, 177 B.R. 576, 579 (E.D. Tenn. 1995)(holding that workers' compensation benefits

are included as disposable income even though exempt under state law); In re Tolliver,

257 B.R. 98, 100 (Bankr. M.D. Fla. 2000)("[B]ecause the fresh start in Chapter 13 is

protected by a debtor's ability to retain non-disposable income rather than exempt assets,

the importance of exemptions is diminished . . . ."); In re Claude, 206 B.R. 374, (Bankr.

W.D. Pa. 1997) ("§1325(b) does not qualify income with reference to its exempt

status."); In re Jackson, 173 B.R. 168, 170-71 (Bankr. ED. Mo. 1994) (same); Watters v.

McRoberts, 167 B.R. 146, 147 (S.D. Ill. 1994) (same); In re Schnabel, 153 B.R. 809,

817-18 (Bankr. N.D. Ill. 1993)("[To allow a debtor] to use his exempt income to attain

Chapter 13's broad discharge, without the corollary requirement to use it to pay creditors

as much as he is able, would contravene the express purpose of the statute - namely, that

the debtor make payments under a plan.").

Today, after the passage of BAPCPA, it appears that most courts regard the

questions about the relationship between exemptions and income as having been

answered by Congress. The language of Section 1325(b)(2) was changed to now

reference “current monthly income”, which is, in turn, defined by 11 U.S.C. §101(10A).

By excluding specific items, including social security income, in 11 U.S.C. §101(10A)

(B), more recent decisions have held that other sources of income – which were not

excluded by that section, must be counted as income to the debtor.

Under this statutory language, the only exclusions from income are assets that are:

(1) not "income" to the debtor; (2) not paid by an "entity" (which is defined in §101 (15)

as a person, estate, trust, governmental unit or the United States trustee); (3) not received

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on a regular basis; (4) not received for the household expenses of the debtor or the

debtor's dependents; (5) Social Security Act payments; (6) payments to victims of war

crimes or crimes against humanity on account of their status as victims of such crimes,

and (7) payments to victims of international terrorism or domestic terrorism on account

of their status as victims of such terrorism. See, In re Waters, 384, B.R. 432, 437 (Bankr.

N.D. Va. 2008).

In other words, after BAPCPA, if it is not excluded from income by Section

101(10A)(B), it is included as income. See, In re Forbish, 414 B.R. 400, 403 (Bankr.

N.D. Ill. 2009)( tax refund attributable to earned income tax credit is income); In re

Royal, 397 B.R. 88, 101-102 (Bankr. N.D. Ill. 2008)(tax refund attributable to earned

income tax credit is income); In re Hedge, 394 B.R. 463, 466 (Bankr. S.D. Ind. 2008); In

re Waters, 384, B.R. 432, 437 (Bankr. N.D. Va. 2008)(veterans’ disability payments are

income).

B. Tax Refunds As Income – Does An Exemption Matter?

1. Tax Refund Basics.

In Chapter 7 bankruptcy filings, tax refunds are entitled to exemption, any monies

after the exemption is claimed, is turned over to the estate. The Chapter 7 process

usually only concerns the tax refund for the year in which the bankruptcy is filed.

In a Chapter 13 case, the tax refunds in question concerns all tax refunds received

by debtor during the life of the Plan. The question ultimately boils down to is how much

of the tax refunds is the debtor obligated to turn over to the trustee during the life of plan,

when the plan does not provide for a 100% payout to unsecured creditors.

2. Does A Tax Refund Constitute Disposable Income?

In a Chapter 13, the disposable income of a debtor is required to be turned over to

pay unsecured creditors with the provision in the bankruptcy code, 11 U.S.C. §1325(b)(1)

(B), stating :

“If the trustee or the holder of an allowed unsecured claim objects to the confirmation of the plan, then the court may not approve the plan unless, as of the effective date of the plan--

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(B) the plan provides that all of the debtor's projected disposable income to be received in the applicable commitment period beginning on the date that the first payment is due under the plan will be applied to make payments to unsecured creditors under the plan.”

The code clearly states that “projected disposable income” is to be included in

payments in the repayment plan. The question is whether income tax refunds received by

debtor (refunds obtained due to the withholding of income of the debtor) are to be

included in the projected disposable income.

“Most courts have determined that tax refunds should be included in the §1325(b)

(1) “projected disposable income” calculation. In re: Kruse, 406 B.R. 833, 837 (Bankr.

N.D. Iowa 2009); In re Cleaver, 426 B.R. 390, 394-395 (Bankr. D. N.M. 2010). Even tax

“refunds” attributable to earned income tax credits have been held to be income for

Chapter 13 purposes. See, In re Forbish, 414 B.R. 400, 403 (Bankr. N.D. Ill. 2009)( tax

refund attributable to earned income tax credit is income); In re Royal, 397 B.R. 88, 101-

102 (Bankr. N.D. Ill. 2008)(tax refund attributable to earned income tax credit is income).

The next issue pertains to whether debtors must contribute income tax refunds

when the debtor’s payment plan does not provide a 100% dividend to unsecured

creditors. The court in In re Michuad, interprets the code sections of 11 U.S.C. §1325(b)

(1), 11 USC §1325(b)(2), and 11 USC §101(10A), as requiring “debtors to submit their

projected disposable income to fund their chapter 13 plan if the debtor does not propose a

plan that will pay his or her unsecured creditors a 100% dividend.” In re Michuad, 399

B.R. 365, 370 (Bankr. D.N.H. 2008). Another Bankruptcy Judge in that district has

subsequently applied that rule in cases where the debtor’s plan does not pay 100% to the

creditors. See, In re: Watson, 417 B.R. 165, 167-168 (Bankr. D.N.H. 2009).

Since the majority of the courts have held that debtor’s tax refunds must be

committed to the Chapter 13 Plan, the next issue that must be addressed is whether the

debtor must commit all of the tax refunds to the trustee. It is important to note, as the

court does in In re: Koch, that “incomes received from exempt sources during the life of a

Chapter 13 plan are “income”, the disposable portion of which must be paid”. In re:

Koch, 109 F. 3d 1285, 1289 (1997, 8th Cir.). The court in that decision left an opening

for income that is used by the debtor for valid support expenses and therefore would be

an expense deducted from the projected disposable income calculation.

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Additionally, the court in In re Michuad said that:

“it is appropriate to allow debtors to retain some amount of a tax refund in order to provide the debtors with some cushion against unanticipated expenses that arise in the course of everyday life and to provide some flexibility to debtors as they attempt to create a budget for the duration of a three-to-five year plan”

In re Michuad, 399 B.R. 365, 372 (Bankr. D.N.H. 2008).

The court also in the case laid out a framework under which a debtor may retain

tax refunds, saying at the outset that all determinations will depend “upon the facts of a

specific case and must be reviewed on case-by-case at the time of confirmation” Id.

In other words, if the “cushion” is already built into the Debtor’s budget and/or

Plan, the full amount of the tax refund must come in.

The Court in In re Wistey sets out one criteria under which a debtor may retain a

tax refund:

“(1) whether the expenses are necessary and the amounts reasonable; (2) whether the expenses fall within the expense categories in Schedule J; (3) whether the particular expense was foreseeable within the category; and (4) whether there is sufficient money within the category to pay the expense”

In re: Kruse, 406 B.R. 833, 837 (Bankr. N.D. Iowa 2009) quoting, In re: Wistey, No. 08-

00555M, 2008 Bankr. LEXIS 2051, slip op. at 2at *3-4 (Bankr. N.D. Iowa June 25,

2008).

Where the Chapter 13 Plan has been confirmed, the debtors must file a motion to

modify to change the requirement that they turn over tax refunds. In re Michuad, 399

B.R. at 373.

Even if the Trustee does not raise the issue of turnover of debtor’s tax refunds at

the time of confirmation of debtor’s plans, the trustee can seek the turnover of tax refunds

post confirmation by filing a motion to modify. In re: Watson, 417 B.R. 165, 169-170

(Bankr. D.N.H. 2009).

Another issue that has been addressed is the debtor’s attempt to hide the tax

refund. One instance where this instance may arise is in situations where it unclear

whether the debtors have to pay only those tax refunds they receive during the life of the

plan or whether they must turnover any tax refunds that maybe owed for a specific tax

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year. For example, if the debtor’s payment plan ends in March, 2015 and is entitled to a

subsequent chapter 13 discharge, does the debtor have to turn over the tax refund for tax

year 2014, even though the debtor has not actually received the tax refund?

The Court in In re: Midkiff held that “the debtor’s right to a federal income tax

refund arises at the end of the tax year and not on the day of the filing of the tax return”.

In re: Midkiff, 271 B.R. 383, 386 (B.A.P. 10th Cir. 2002). The court in its conclusion

stated that if the debtor were required to pay income tax refunds received during the

commitment period, then the debtors could simply delay filing a tax return (and thus

receive the tax refund) until after the end of the commitment period. Id. at 388. The

Court ruled that since the debtor had a right to the tax refund during the commitment

period, it was included in the disposable income earned by the debtor, and therefore must

be turned over to the trustee for distribution to the unsecured creditors. Id. at 388. The

court’s decision was subsequently affirmed on appeal. Returning to the example given

above, a debtor would have to turn over the tax refund he or she is entitled to for tax year

2014, even if they did not received it by the end of the commitment period in 2015.

XX. A FEW WORDS ABOUT EXPENSE ISSUES.

Expenses are not treated with even the pseudo-uniformity of income. Even the

Means Test changes the allowance for expenses by state. So, this is more of a local issue.

That being said, there are a few areas that should be discussed.

A. The Below Median Debtors – Look To The Deep Magic.

For those debtors who fall below the median income, there is no statutory

guidance as to how expenses are derived for "disposable income." However, courts have

interpreted this exclusion in the drafting to mean that the old practices apply, i.e. courts

should primarily use Schedule J in computing the statutory requirements. See, White v.

Waage, 440 B.R. 563, 566 (M.D. Fla. 2010); In re Neclerio, 393 B.R. 784, 787-788

(Bankr. S.D. Fla. 2008); In re Rush, 387 B.R. 26, 30 (Bankr. W.D. Mo. 2008); In re

Fuller, 346 B.R. 472, 483 (Bankr. S.D. Ill. 2006); In re Schanuth, 342 B.R. 601, 604

(Bankr. W.D. Mo. 2006).

So, whatever your court was doing on expenses, pre-BAPCPA, is probably still

good law in your local court.

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B. Calculating the expense of a 401(k) Loan Repayment:

The majority of courts now appear to require the monies used to pay off a 401(k)

loan each month to come into the Plan after the loan is paid, or allow the deduction only

for the amount necessary to pay off the 401(k) loan pro-rated over 60 months. See,

Section 1322(f); In re Nowlin, 576 F.3d 258 (5th Cir. 2009); In re Lasowski, 575 F.3d 815

(8th Cir. 2009); In re Cleaver, 426 B.R. 390, 395 (Bankr. D. N.M. 2010)(deduct 401(k)

loan payment, then increase payment by a like amount when 401(k) loan is paid off); In

re Davis, 425 B.R. 317, 321 (Bankr. S.D. Tex. 2010)(pro-rating the 401(k) loan

repayment); In re Anstett, 383 B.R. 380 (Bankr. D.S.C. 2008); In re Novak, 379 B.R. 908

(Bankr. D. Neb. 2007). This holding is not, however, unanimous.

The Sixth Circuit BAP has considered the issue of whether a Chapter 13 debtor can use

the additional disposable income available after a 401(k) is paid off to begin funding

401(k) contributions, thereby keeping the money from unsecured creditors. The Seafort

court answered that question with a 2-1 “no”. Burden v. Seafort (In re Seafort), 437 B.R.

204 (6th Cir. B.A.P. 2010), see also, In re Noll, 2010 Bankr. LEXIS 4868 (Bankr. E.D.

Wis. December 21, 2010)(following Seafort).

. However, this case is on appeal to the circuit court, and is far from a settled

issue.

C. Cases Not Allowing A Tuition Expense For An Adult ChildAttending College:

See, In re Baker, 400 B.R. 594, 598 (Bankr. N.D. Ohio 2009); In re Walker, 383

B.R. 830, 838 (Bankr. N.D. Ga. 2008); In re Hicks, 370 B.R. 919, 923 n.7 (ED. Mo.

2007); U.S. Trustee v. Harrelson, 323 B.R. 176, 179 (Bankr W.D. Va. 2005); In re Staub,

256 B.R. 567, 571 (Bankr. M.D. Pa. 2000); In re Studdard, 159 B.R. 852, 856 (Bankr.

E.D. Ark. 1993). This quote may be helpful in litigating college tuition issues:

“Bankruptcy is not intended to create involuntary student loans whereby creditors, in

essence, finance the education of the debtors' children.” In re McCormick, 354 B.R. 246,

253-54 (Bankr. C.D. Ill. 2006).D. Life Insurance – Term vs. Whole Life.

There seems to be general agreement that some amount of life insurance is an

appropriate expense for many Chapter 13 debtors: "People must have at least small amounts

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of life insurance or other financial savings for burials and other final expenses.” In re

McLaney, 314 B.R. 228, 235 (Banrk. M.D. Ala. 2004); In re Ivory, 269 B.R. 890, 899

(Bankr. N.D. Ala. 2001).  See also, In re Bottelberghe, 253 B.R. 256, 263-64 (Bankr. D.

Minn. 2000)(life insurance payment of $136 a month not “remotely questionable” as an

expense for a family of six); In re Rothman, 206 B.R. 99, 108 (Bankr. E.D. Pa. 1997)($100

per month for life insurance was not excessive for a debtor with a wife and four young

children).

However, whole life insurance is viewed differently by most courts because it has

an investment component: In re Williamson, 296 B.R. 760, 765-66 (Banrk. N.D. Ill. 2003)

(non-debtor spouse’s whole life policy was an investment vehicle, as the policy builds cash

value.  Therefore, the whole life insurance policy was not reasonably necessary, and the

amount for those premiums should be included in the debtor’s disposable income); In re

Presley, 201 B.R. 570, 575 (Bankr. N.D. Fla. 1996)(disability and life insurance expenses

allowed because they were “not an investment asset”).

             From In re Smith, 207 B.R. 888, 889 (9th Cir. BAP 1996):

In reaching its legal conclusion, the bankruptcy court likened life insurance premiums to retirement contributions. The court reasoned:

Like retirement plans and savings accounts, life insurance policies are a means by which the debtor contributes his present income to the future income of the policy beneficiary. If the policy has a cash value, the policy may be used for the debtors' retirement. Thus, absent a showing that the life insurance is required by law, the life insurance premium is not a necessary expense. 187 B.R. at 679.

This blanket rule is in error because it does not take into account different types of life insurance and different circumstances of individual debtors. Some types of life insurance are indeed mainly estate planning devices which ought to be treated as retirement contributions. However, other types of life insurance are intended to legitimately protect the debtor's dependents from destitution if the debtor were to die. Like other budget items, HN4whether a life insurance  premium is a necessary expense is a matter which must be determined on a case-by-case basis. See Matter of Killough, 900 F.2d 61, 65 n.9 (5th Cir.1990); In re Gillead, 171 B.R. 886, 890 (Bankr.E.D.Cal.1994).

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The bankruptcy court in this case made no finding that the debtors' life insurance policies had retirement benefits at all. Assuming some residual benefits, the focus of its inquiry must nonetheless be whether the policies are reasonably necessary for the support of the debtors' dependents. In cases where the debtors have very young or handicapped dependents, the absence of a budget for life insurance may call a Chapter 13 plan into question. See, e.g. In re Crompton, 73 B.R. 800, 809 (Bankr. E.D. Pa. 1987).  This is a matter for the exercise of sound discretion by the court; a per se rule is error.

See also, In re Lipford, 397 B.R. 320, 335-336 (Bankr. M.D.N.C. 2008)(deduction not

permitted on the Means Test); In re DeRosear, 265 B.R. 196, 211 (Bankr. S.D. Iowa

2001)(“The Debtors have failed to convince the Court it should not rule in the U.S.

Trustee's favor as it has done in so many past bench rulings and in two prior published

decisions. See Woodward, 265 B.R. 179, 194 (Bankr. S.D. Iowa 2000) ; Matter of

McReynolds, 253 B.R. 54, 63 (Bankr. S.D. Iowa 2000). That is, the Court agrees that

whole life insurance policies amount to savings vehicles and expenditures for such

policies typically should be disallowed.”)

XXI. THE TOP THIRTEEN SUPREME COURT DECISIONS (PLUS FIVE NEW ONES!) THAT EVERY CHAPTER 13 PRACTITIONER SHOULD KNOW BY NAME.

Ransom v. FIA Card Servs., N.A., ___ U.S. ___, 131 S. Ct. 716, 721-22, 178 L. Ed. 2d 603 (2011). "For a debtor whose income is above the median for his State, the means test identifies which expenses qualify as 'amounts reasonably necessary to be expended.' The test supplants the pre-BAPCPA practice of calculating debtors' reasonable expenses on a case-by-case basis, which led to varying and often inconsistent determinations." The Ransom case holds that there is no Means Test deduction for vehicles that are owned free and clear of liens.

The case also contains the statement: "Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA or Act) to correct perceived abuses of the bankruptcy system." Milavetz, Gallop & Milavetz, P. A. v. United States, 559 U.S. ___, ___, 130 S. Ct. 1324, 176 L. Ed. 2d 79, 84 (2010)). In particular, Congress adopted the means test -- "[t]he heart of [BAPCPA's] consumer bankruptcy reforms," H. R. Rep. No. 109-31, pt. 1, p. 2 (2005) (hereinafter H. R. Rep.), and the home of the statutory language at issue here -- to help ensure that debtors who can pay creditors do pay them. See, e.g., ibid. (under BAPCPA, "debtors [will] repay creditors the maximum they can afford").

Milavetz, Gallop & Milavetz, P.A. v. U.S., ___ U.S. ___, 130 S.Ct. 1324, 176 L.Ed.2d 79 (2010). Attorneys who provide bankruptcy assistance are debt relief agencies within

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the meaning of BAPCPA. However, the court read the restrictions on attorneys giving advice to clients about incurring debt narrowly, thereby avoiding the Constitutional issues. Disclosure requirements in advertising – i.e., the “debt relief agency” language – were reasonably related to the state’s interest in preventing deception of consumers, and the disclosure requirement did not prevent debt relief agencies from conveying any additional information.

United Student Aid Funds, Inc. v. Espinosa, ___ U.S. ___, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2010).  Order confirming plan discharging student loan debt without “undue hardship” finding, or adversary proceeding, was not void.  Supports the binding effect of confirmation of Chapter 13 Plans, and the need for creditors to not sleep on their rights in seeking relief under 60(b).  There is also language in the majority opinion about the obligation of bankruptcy judges to review Chapter 13 Plan language and not confirm Plans that do not comply with the Code.

Hamilton v. Lanning, ___ U.S. ___, 130 S.Ct. 2464, 177 L.Ed.2d 23 (2010). "Forward looking" approach could be used in calculating "projected disposable income" under §1325(b)(1)(B) as courts had discretion to account for known or virtually certain changes in a debtor's income. Use of Chapter 13 debtor's current income, not an inflated figure due to a prior one-time employer buyout, was affirmed.

Schwab v. Reilly, __ U.S. ___, 130 S.Ct. 2652, 177 L.Ed.2d 234 (2010). Where a Chapter 7 debtor claimed exemptions in business equipment that equaled the maximum allowed under 11 U.S.C.S. § 522(d) and also equaled the debtor's estimated market value for the equipment, the trustee was not required to object under § 522(l) in order to preserve the estate's right to retain any value beyond the claimed amount.

Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314, 70 S. Ct. 652, 657, 94 L. Ed. 865 (1950). Everything we do in bankruptcy is premised on due process based upon “notice and the opportunity for a hearing”. Mullane is the case to know by name on the constitutional requirements for notice: "An elementary and fundamental requirement of due process in any proceeding which is to be accorded finality is notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections."

Butner v. United States, 440 U.S. 48, 55, 99 S. Ct. 914, 918 59 L. Ed. 2d 136, 141-142 (1979). “Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding.”

Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 73 L. Ed. 2d 598, 102 S. Ct. 2858 (1982). In addition to the important statutory changes made in response to Marathon, this decision set the boundaries of Bankruptcy Court authority. Without the consent of the parties, Bankruptcy Courts can issue final judgments only on “core proceedings”. For non-core related proceedings, a Bankruptcy Judge can only

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issue proposed findings of fact and conclusions of law, which are submitted to the District Court, which reviews them de novo.

United States v. Whiting Pools, Inc., 462 U.S. 198, 203, 103 S. Ct. 2309, 76 L. Ed. 2d 515 (1983). Stands for the proposition that the IRS is no better than any other creditor and has to follow the bankruptcy laws like everyone else. One of the IRS’s arguments was that it was exempt from the Bankruptcy Code's provision that related to other secured creditors. It also says stuff about property of the estate….

BFP v. Resolution Trust Corp., 511 U.S. 531; 114 S. Ct. 1757; 128 L. Ed. 2d 556 (1994). A non-collusive and regularly conducted nonjudicial foreclosure sale could not be challenged as a fraudulent conveyance because the consideration received in such a sale established reasonably equivalent value as a matter of law. This case set the old Madrid rule in stone.

Nobleman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993). The protection of Section 1322(b)(2) prevents the use of 11 U.S.C. §506(a) to "strip down" the lien of a mortgage to the value of the mortgaged real estate when the creditor's claim is secured only by a lien on the debtor's principal residence. The holding in Nobleman is what courts must distinguish in allowing the stripping of wholly unsecured second and third mortgages in Chapter 13 cases – and until that issue gets to the U.S. Supreme Court, there is still some uncertainty around allowing mortgage strips.

Marrama v. Citizens Bank of Massachusetts , 549 U.S. 365, 367, 127 S. Ct. 1105, 166 L. Ed. 2d 956 (2007). There is no ‘absolute right’ to convert a Chapter 7 case to a Chapter 13. Where there is fraud, §706(d) provides adequate authority for the denial of conversion, where there has been fraud. Further, nothing in the text of either §706 or §1307(c) (or the legislative history of either provision) limited the authority of a court to take appropriate action in response to fraudulent conduct by the atypical litigant who had demonstrated that the litigant was not entitled to the relief available to the typical debtor. The broad authority granted to bankruptcy judges in §105(a) was adequate to authorize an immediate denial of a §706(a) motion to convert. The impact of this decision on the debtor’s ‘absolute right to dismiss’ a Chapter 13 case is still a hot issue before the courts.

Till v. SCS Credit Corp., 541 U.S. 465; 124 S. Ct. 1951; 158 L. Ed. 2d 787 (2004). The controversy over the 4-4-1 split seems to have died down, and reductions in interest rates to “prime plus a risk factor” of 1% to 3% are being applied to all kinds of high interest rate loans (other than mortgages on the debtor’s primary residence), reducing the amount of interest that Chapter 13 debtors have to pay. The majority of courts allow the “Till-ing of interest” on 910 vehicle loans, and “Till-ing up” very low interest rate motor vehicle loans.

United Savings Association of Texas v. Timbers of Inwood Forest Associates, 484 U.S. 365, 370-371, 98 L. Ed. 2d 740, 108 S. Ct. 626 (1988). When a motion for relief from stay is filed, once the movant shows that the debtor has no equity in the property, the burden shifts to the debtor to establish that the property is "necessary to an effective

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reorganization" and that there is "a reasonable possibility of a successful reorganization within a reasonable time." And, Timbers also held that when secured collateral is declining in value, the secured creditor is entitled to cash payments or additional security in the amount of the decline.

Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 166 S.Ct. 286, 133 L.Ed.2d 258 (1995). The Supreme Court held that bank accounts may be frozen, by the bank, to preserve their right to set off debts owed to them against the debtor's accounts. However, if the accounts are frozen, the creditor has move quickly to seek relief from stay to effectuate a setoff.

Grogan v. Garner, 498 U.S. 279, 111 S. Ct. 654, 112 L. Ed. 2d 755 (1991), the Supreme Court stated: "Because the preponderance-of-the-evidence standard results in a roughly equal allocation of the risk of error between litigants, we presume that this standard is applicable in civil actions between private litigants unless 'particularly important individual interests or rights are at stake.'"

Dewsnup v. Timm, 502 U.S. 410; 112 S. Ct. 773; 116 L. Ed. 2d 903 (1992). A debtor's suit to "strip down" creditors' lien on the debtor's real property to equal the property's fair market value and declare the remainder void was dismissed because the creditors' claim had been "allowed" and was "secured."

United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 103 L. Ed. 2d 290, 109 S. Ct. 1026 (1989). The law specifically allowed postpetition interest on a nonconsensual oversecured lien as well as on a consensual claim in light of the clear language of 11 U.S.C.S. §506(b). Congress intended that all oversecured claims be treated the same way for purposes of postpetition interest.

Johnson v. Homestate Bank, 501 U.S. 78, 111 S.Ct.2150, 115 L.Ed.2d 66 (1991). Held that the Code permits “Chapter 20” cases – a Chapter 13 following hard on the heels of a Chapter 7. Further, Johnson held that a creditor with an obligation secured by a lien on a debtor’s property that the debtor has no personal liability, due to a prior bankruptcy discharge, still has a claim against the subsequent Chapter 13 estate and that claim can be dealt with in the Chapter 13 case.

XXII. CRIMINAL REFERALS.

A Chapter 13 Trustee’s duties are listed in Section 1302. Many of the duties are

not fully recited, but instead are referenced by making applicable to Chapter 13 Trustees

the Code sections (for Chapter 7 Trustees) found in Section 704. See, Section 1302(b)

(1). One of the listed duties incorporated from Chapter 7 is Section 704(a)(4):

“investigate the financial affairs of the debtor”.

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So, there is a clear duty to investigate – but what is the Chapter 13 Trustee

supposed to do with the information when possible criminal wrongdoing is found?

The answer isn’t found in the Bankruptcy Code itself, it is found in the criminal

section of the United States Code. 18 U.S.C. Section 3057(a) states:

§3057. Bankruptcy investigations

(a) Any judge, receiver, or trustee having reasonable grounds for believing that any violation under chapter 9 of this title [18 USCS §§151 et seq.] or other laws of the United States relating to insolvent debtors, receiverships or reorganization plans has been committed, or that an investigation should be had in connection therewith, shall report to the appropriate United States attorney all the facts and circumstances of the case, the names of the witnesses and the offense or offenses believed to have been committed. Where one of such officers has made such report, the others need not do so.

The word “shall” is, presumably, mandatory. However, the usual practice is not

to follow the strict letter of the statute. Instead, criminal referrals are usually made to the

Office of the United States Trustee, who in turn takes it to the U.S. Attorney, sometimes

directly, sometimes after further investigation. Essentially, the Office of the U.S. Trustee

tries to get enough information together so that they can effectively sell the idea to the

U.S. Attorney of spending U.S. Attorney resources to prosecute the case.

Remember, the referral should be made whenever there is “reasonable grounds for

believing” the has been a violation of criminal law. It is not “beyond a reasonable

doubt”, it is just having reasonable ground for believing that a violation has occurred.

Obviously, a criminal referral is something that should never be made before you

have a full discussion of the issues with your Trustee. A discussion of criminal referrals,

and bankruptcy crimes, are found in the Handbook for Standing Chapter 13 Trustees,

Chapter 3, Section D.

The Handbook states that, at a minimum, a criminal referral should include:

1. the bankruptcy case name, file number, and chapter;

2. a chronological summary including dates and specific facts related to the who,

what, where, when and how of the suspected crime;

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3. a brief narrative of what occurred in relation to each allegation referring to

copies of relevant documents;

4. an estimate of the amount of loss involved;

5. specification of the statutory provision applicable to the matter;

6. names, addresses, phone numbers, titles and descriptions of all persons

involved;

7. copy of all written documents relevant to the allegations; and

8. a statement of other relevant referrals made to law enforcement agencies.

Once a matter is referred, the trustee’s obligation is ended. The trustee may never

hear about the referral again – in fact, that is the norm. This kind of information flows

only one way – from the civil to the criminal side.

No further investigation into the criminal matter should be undertaken by the

Chapter 13 Trustee. Problems arise, and criminal cases have been dismissed, where a

criminal defendant can prove that civil discovery was being used to gather information

for a criminal prosecution.

After a criminal referral, the Chapter 13 Trustee should treat the case the

trusteeship would treat a similar case with no criminal referral. If you would normally

move to dismiss the case, based on the facts – even if those are the facts that led to the

criminal referral - then move to dismiss it.

XXIII. POST-PETITION CAUSES OF ACTION ARE PROPERTY OF THE ESTATE AND MUST BE REPORTED TO THE TRUSTEE – IN RE WALDRON.

The 11th Circuit Court of Appeals considered the issue of whether or not a post-

petition cause of action is part of the bankruptcy estate in a Chapter 13 case. The decision,

In re Waldron, 536 F.3d 1239 (11th Cir. 2008), held that claims acquired after the

commencement of the bankruptcy case but before the case was dismissed were property of

the estate under the plain language of §1306(a). New assets that the debtors acquired

unexpectedly after confirmation by definition did not exist at confirmation and could not be

returned to the debtor under §1327(b). Accordingly, the underinsured motorist claims of the

debtor from a post-petition accident were property of the Chapter 13 bankruptcy estate.

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The appellate court further held that the bankruptcy court properly required the

debtors to amend their schedules to disclose the claims under Rule 1009. See also, Mullican

v. Moser, 417 B.R. 408 (E.D. Tex. 2009). Payments under the Chapter 13 Plan were based

on the debtors' disposable income when the plan was confirmed under 11 U.S.C.S.

§1325(b). Although the debtors did not have a duty to disclose every acquisition of

property or an interest in property after plan confirmation, the decision seems to suggest that

the major ones, like this, were required to be disclosed to the Chapter 13 Trustee. Finally,

the Chapter 13 Trustee had the right to request the debtors to modify their plan pursuant to

§1329 and Federal Rule of Bankruptcy Procedure 1009.

XXIV. BANKRUPTCY AND DEATH.

A. Can The Dead File For Bankruptcy?

Bankruptcy courts have consistently held that the dead, and decedent's estates,

cannot be debtors under the Bankruptcy Code.  This holding is based upon 1) history; 2)

legislative history; and 3) statutory construction.  There is no direct authority allowing, or

prohibiting, a decedent or a decedent's estate commencing a case under any chapter of the

Bankruptcy Code.

Under the Bankruptcy Act, decedent estates could not file for bankruptcy.  See, In

re Estate of Hiller, 240 F.Supp. 504 (N.D. Cal. 1965); In re Fackelman, 248 F. 565, 568

(S.D. Cal. 1918).  If a change was intended - particularly a change that would have

changed the holding in Markham v. Allen, 326 U.S. 490, 66 S. Ct. 296, 90 L. Ed. 256

(1946): that federal courts must "not interfere with the probate proceedings" - presumably

the change would have been made with clear and explicit language.

The Bankruptcy Code's legislative history also makes it clear that there was no

intention to change the prohibition against the dead, or decedents' estates, being permitted

to file bankruptcy.

The (relatively) plain language of the Bankruptcy Code also strongly supports the

prohibition against the deceased filing for bankruptcy.  However, to reach that

conclusion, several provisions of the Code must be compared.

Under §109(b), only a "person" may be a Chapter 7 debtor.  This is consistent

with the definition of "debtor", which is a "person or municipality concerning which a

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case under this title has been commenced."  Section 101 defines the term "person" as

including an "individual, partnership, and corporation, but does not include [a]

governmental unit."  See, §101(41).  Thus, just looking at the definition of "person", there

is no indication whether or not "person" includes a decedent or decedent's estate.

However, the definition of the term "entity" indicates that a decedent's estate does

not fall within the definition of "person".  The Bankruptcy Code defines "entity" as

including a: "person, estate, trust governmental unit, and United States trustee."  See,

§101(15).  If "estate" were included within the definition of "person", there would be no

reason to list "estate" separately, after "person", in the definition of "entity".  Therefore,

an estate is an "entity" but not a "person".  And, not being a "person", an estate cannot

file for bankruptcy under Chapter 7.

Based on this statutory language, bankruptcy courts have held that a probate

estate is not a "person" and therefore may not file a Chapter 7 bankruptcy case.  See, In re

Goerg, 844 F.2d 1562, 1565-1566 (11 Cir. 1988); In re Estate of Whiteside by Whiteside,

64 B.R. 99 (Bankr. E.D. Cal. 1986); In re Jarrett, 19 B.R. 413 (Bankr. M.D.N.C. 1982);

In re Estate of Joseph Brown, 16 B.R. 128 (Bankr. D.C. 1981); Gregory M McCoskey,

Death and Debtors: What Every Probate Lawyer Should Know About Bankruptcy, 34

Real Prop. & Tr. J. 669 (Winter, 2000); David B. Young, The Intersection of Bankruptcy

and Probate, 49 S. Tex. L. Rev. 351, 364-365 (Winter, 2007).

Of course, because a dead individual cannot file for Chapter 7, they cannot file

under Chapter 11.  See, In re Estate of Patterson, 64 B.R. 807 (Bankr. W.D. Tex. 1986). 

Pursuant to Section 109(d), to qualify to be a Chapter 11 debtor, one must first be "a

person that may be a debtor under Chapter 7. . . ."  Because an estate is not a "person"

eligible for Chapter 7 relief, a decedent's estate is disqualified from filing a Chapter 11

case.

Similarly, Chapter 13 is not available because the debtor must be an individual --

which is a subset of "person", which does not include "estate".  Plus, in most situations, a

dead person or a decedent's estate is not going to have "regular income".  David B.

Young, The Intersection of Bankruptcy and Probate, 49 S. Tex. L. Rev. 351, 365-366

(Winter, 2007).  The same reasoning prevents the filing of a Chapter 12 by a decedent.  In

re Estate of Earl L. Grassman, 91 B.R. 928 (Bankr. D. Or. 1988).

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B. What Happens When The Debtor Dies After Bankruptcy Is Filed?

Even though a decedent's estate cannot be a debtor in bankruptcy, the death of a

debtor does not require the bankruptcy case to be dismissed.  If the bankruptcy case

continues, the bankruptcy and a probate proceeding can go forward parallel to one

another.  In re Lucio, 251 B.R. 705, 709 (Bankr. W.D. Tex. 2000); In re Bauer, 343 B.R.

234, 236-237 (Bankr. W.D. Mo. 2006)("If a bankruptcy case is pending when a person

dies, the only assets that go into the probate estate are the property claimed as exempt in

the debtor's bankruptcy case and, with certain exceptions (such as life insurance benefits),

any property acquired by the debtor after the commencement of the case.")

If a debtor in a Chapter 13 case dies before completing the plan, Collier On

Bankruptcy states that there three options available to the bankruptcy court:

In a chapter 12 or 13 case, the confirmation and successful completion of a chapter 12 or 13 plan are almost always dependent upon the debtor's future earnings.  Thus, normally the debtor's death will often lead to dismissal of the case because the debtor will likely have no future income. Alternatively, the court may enter a hardship discharge under section 1328(b), which would preserve the benefits of discharge for the debtor's estate. . . . However, if a debtor has proposed a confirmable plan and that plan is still feasible after the death of the debtor, the court may allow the case to continue for the benefit of the debtor's estate.

9 Collier On Bankruptcy, ¶1016.04 (Lawrence P. King, 15th rev.ed.); In re Sales,

CASE NO. 03-60861, 2006 Bankr. LEXIS 2373 (Bankr. N.D. Ohio September

15, 2006).

Fed. R. Bankr. P. 1016 is consistent with the Bankruptcy Code as it follows the

general presumption that the death of the debtor shall not abate the bankruptcy proceeding,

but provides for the dismissal of a Chapter 13 case at the discretion of the bankruptcy court.

The Federal Rules of Bankruptcy Procedure, Rule 1016, outlines the effect of the

death of a debtor:

Death or incompetency of the debtor shall not abate a liquidation case under Chapter 7 of the Code.  In such event the estate shall be administered and the case concluded in the same manner, so far as possible, as though the death or incompetency had not occurred.  If a

187

reorganization, family farmer's debt adjustment, or individual debt adjustment case is pending under Chapter 11, Chapter 12, or Chapter 13, the case may be dismissed; or if further administration is possible and in the best interest of the parties, the case may proceed and be concluded in the same manner, so far as possible, as though the death or incompetence had not occurred.

Rule 1016 makes it clear that the death of a Chapter 7 debtor should not affect the

administration of a Chapter 7 bankruptcy case.  In re Peterson, 897 F.2d 935, 938 (8th

Cir. 1990)(recognizing that whenever possible the "death of the debtor should not

influence the administration or resolution of a bankruptcy proceeding."); In re Gridley,

131 B.R. 447, 450 (Bankr. D.S.D. 1991); In re Tikijian, 76 B.R. 304, 305 (Bankr.

S.D.N.Y. 1987).

Thus, a Chapter 7 can continue notwithstanding the death of a debtor.  In re

Lucio, 251 B.R. 705 (Bankr. W.D. Tex. 2000).  If the first meeting of creditors has not

been held at the time of the debtor's death, the personal representative of debtor's probate

estate could appear on behalf of the debtor at creditors' meetings.  Id.  The subsequent

commencement of a probate proceeding does not affect the bankruptcy case because only

the debtor's property that is exempt from bankruptcy administration and property that the

debtor acquired post-petitition will be available for probate.  In re Doyle, 209 B.R. 897

(Bankr. N.D. Ill. 1997).

Nothing prevents a decedent's estate from receiving a discharge enforceable by

the probate estate.  In re Lucio, 251 B.R. 705 (Bankr. W.D. Tex. 2000). The case law, as

well as Collier and the legislative history to the Code, all support the conclusion that even

a dead debtor can get a discharge. See, In re Cummins, 266 B.R. 852 (Bankr. N.D. Iowa

2001); In re Doyle, 209 B.R. 897, 906-07 (Bankr. S.D.Ill. 1997); see also, H.R. REP. No.

595, 95th Cong, 1st Sess 367-68 (1978); see generally, 1 R. Ginsberg & R. Martin,

Ginsberg & Martin on Bankruptcy, §5.03[B] at 5-26 (4th ed. 1995); 9 L. King, Collier on

Bankruptcy, P 1016.04 (15th ed. rev. 2006).

  This does not mean that a Chapter 7 bankruptcy case must continue.  The

deceased Chapter 7 debtor's case is still subject to dismissal under §707.  In re Marra, 179

B.R. 782, 785 (M.D. Pa. 1995); In re Cleland, 150 B.R. 63 (Bankr. D. Kan. 1992).

188

Notably, Rule 1016 does not automatically dismiss a Chapter 11 or Chapter 13

case upon the death of a debtor.  Courts typically look at the extent to which the Chapter

11 or Chapter 13 had been substantially consummated.  If a Chapter 11 or 13 case is not

close to completion, it will typically be dismissed.  But there are exceptions.  The court

in In re Perkins, 381 B.R. 530 (Bankr. S.D. Ill. 2007) exercised its discretion and declined to

dismiss a Chapter 13 case where the debtor died prior to the completion of plan payments

because the trustee failed to present any case-specific facts showing that further

administration of the case would not be in the best interest of the parties.

If the debtor cannot complete Plan payments, a hardship discharge may be another

possibility. See generally, 9 COLLIER ON BANKRUPTCY ¶ 1016.04 (Alan N. Resnick

& Henry J. Sommer eds, 16th ed.); Keith M. Lundin & William H, Brown, CHAPTER

13 BANKRUPTCY, 4TH EDITION, § 269.1, at ¶ 2, Sec. Rev. June 9,

2004, www.Ch13online.com; see also, In re Graham, 63 B.R. 95, 96 (Bankr. E.D. Pa.

1986); In re Redwine, 2011 Bankr. LEXIS 946 (Bankr. N.D. Ga. March 8, 2011) In re

Bevelot, 2007 Bankr. LEXIS 3970, 2007 WL 4192926, at *2 (Bankr. S.D. 111. Nov.

21,2007); In re Sales, 2006 Bankr. LEXIS 2373, 2006 WL 2668465, at *2 (Bankr. N.D.

Ohio Sept. 15, 2006).

Where a case is pending under Chapter 11 or Chapter 13 when the debtor dies,

conversion will not be possible.  In order to convert, a debtor must be eligible to file

under the new chapter.  Because a probate estate may not file a bankruptcy case under

any chapter, conversion is also prohibited.  See, In re Spiser, 232 B.R. 669, 673 (Bankr.

N.D. Tex. 1999) In re Jarrett, 19 B.R. 413 (Bankr. M.D.N.C. 1982).

In one recent Texas case, the debtor-husband died before the First Meeting of

Creditors. The debtor-wife was appointed as executor or her husband’s estate, and the

bankruptcy court permitted her to appear and testify at the §341 Meeting for both herself

and her deceased husband. See, In re Seitz, 430 B.R. 761 (Bankr. N.D. Tex. 2010).

XXV. CONTROLLING AUTHORITY AND CHANGING YOUR JUDGE’SMIND.

[Attorney Joe Prochaska contributed to the following sections of the outline]

A. Stare Decisis - Generally.

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Stare decisis is a judge-created rule "to abide by, or adhere to, decided cases.”

Black's Law Dictionary 1406 (6th ed. 1990). It means that “inferior” courts are bound to

follow the decisions of higher courts. See, Flowers v. United States, 764 F.2d 759, 761

(11th Cir. 1985). The stare decisis doctrine stems from the common law maxim, "Stare

decisis et non quieta movere," which is defined as "Let stand what is decided, and do not

disturb what is settled." In re Globe Illumination, 149 B.R. 614, 617 (Bankr. C.D. Cal.

1993). For a discussion of the history of the concept of stare decisis, see: In re

Livingston, 379 B.R. 711, 722-724 (Bankr. W.D. Mich. 2007).

Stare decisis "promotes the evenhanded, predictable, and consistent development

of legal principles; fosters reliance on judicial decisions; and contributes to the actual and

perceived integrity of the judicial process." Payne v. Tennessee, 501 U.S. 808, 111 S. Ct.

2597, 115 L. Ed. 2d 720 (1991).

Stare decisis maintains a hierarchical dimension which is believed to be crucial to

the efficient operation of the judicial system. There is no dispute that inferior federal

courts, including circuit courts of appeal, district courts and bankruptcy courts, are

absolutely bound by the decisions of the United States Supreme Court on issues of law.

Jaffree v. Board of School Commissioners, 459 U.S. 1314, 74 L. Ed. 2d 924, 103 S. Ct.

842 (1983).

When no intervening Supreme Court decision has been issued, the decisions of

the court of appeals for a particular circuit are binding on all lower courts within that

circuit. Zuniga v. United Can Co., 812 F.2d 443, 450 (9th Cir. 1987); see also, Johnson v.

DeSoto County Bd. of Com'rs, 72 F.3d 1556, 1559 n.2 (11th Cir. 1996); Litman v.

Massachusetts Mutual Life Ins. Co., 825 F.2d 1506, 1508 (11th Cir. 1987); Spannaus v.

United States Dep't of Justice, 824 F.2d 52, 55 (D.C. Cir. 1987). This is so even if a split

of opinion exists between the controlling circuit and another circuit court of appeals and

the inferior court believes that the controlling circuit court is in error. Zuniga, at 450;

Hasbrouck v. Texaco, Inc., 663 F.2d 930, 933 (9th Cir. 1981), cert. denied, 459 U.S. 828,

74 L. Ed. 2d 65, 103 S. Ct. 63 (1982).

Bankruptcy courts are also generally bound by an en banc decision of the judges

of the local district court, because the district court would be bound by the en banc

190

decision. See, In re Gaylor, 123 B.R. 236, 242 (Bankr. E.D. Mich. 1991); and see

generally, Bartels, United States District Courts En Banc -- Resolving the Ambiguities,

73 Judicature 40, 42 (1989).

District judges are not bound by bankruptcy appellate panels, in part because of a

Constitutional issue – how can a panel of non-Article III judges bind an Article III judge?

See, Bank of Maui v. Estate Analysis Inc., 904 F.2d 470, 472 (9th Cir. 1990)(“it must be

conceded that BAP decisions cannot bind the district courts themselves. As article III

courts, the district courts must always be free to decline to follow BAP decisions and to

formulate their own rules within their jurisdiction.”).

For bankruptcy courts, the difficult stare decisis issues arise from decisions of

individual district court judges and the bankruptcy appellate panels. The legislative

history to the direct appeal provision of BAPCPA recognized this issue. The House

Report that accompanied the BAPCPA emphasized that "decisions rendered by a district

court as well as a bankruptcy appellate panel are generally not binding and lack stare

decisis value." See H.R. Rep. No. 109-31, at 148 (2005); see also H.R. Rep. No. 107-3,

Prt. 1, at 112 (2001) (same); Weber v. United States Trustee, 484 F.3d 154, 158 (2nd Cir.

2007).

A. Are Bankruptcy Judges Bound by District Court Decisions In MultiJudge Districts?

The issue of whether bankruptcy courts are bound by decisions of district court

judges within the same district has not been definitively resolved. See, Singerman, Paul

S., Of Precedents and Bankruptcy Court Independence," Am. Bankr. Inst. J. 1 (July/Aug.

2003); Muniz, Michael H., Anarchy or Anglo-American Jurisprudence? The Doctrinal

Effect of Stare Decisis upon Bankruptcy Courts in the Face of District Court Precedents,

76 Fla. B.M. 34 (Dec. 2002); Levine, David A., Precedent and the Assertion of

Bankruptcy Court Autonomy; Efficient or Arrogant, 12 Bank. Dev. J. 185 (1995);

Maddock III, John H., Stemming the Tide of Bankruptcy Court Independence: Arguing

the Case for District Court Precedent, 2 Am. Bankr. Inst. L. Rev. 507 (Winter, 1994);

Bussell, Daniel J., Power, Authority and Precedent in Interpreting the Bankruptcy Code,

41 U.C.L.A. L. Rev. 1063 (April 1994).

191

1. Majority Rule – No, Bankruptcy Courts Are Not Bound By The Decision Of A Single District Judge.

The majority of bankruptcy courts – in what is often referred to as the “modern

trend” - have held that where the bankruptcy court sits in a multi-judge district, it is not

bound by principles of stare decisis by the decision of a district judge in that district.  See,

In re Davis, 352 B.R. 758, 764 (Bankr. D.S.C. 2006); In re Romano, 350 B.R. 276, 281

(Bankr. E.D. La. 2005). In re Baker, 264 B.R. 759, 762 (Bankr. M.D. Fla. 2001); In re

Stafford Pool & Fitness Center, 252 B.R. 627, 631 (Bankr. D.N.J. 2000); In re Jamesway

Corporation, 235 B.R. 329, 337 n.1 (Bankr. S.D.N.Y. 1999); In re Fairchild Aircraft

Corp., 220 B.R. 909, 917 (Bankr. W.D. Tex. 1998); In re Jones, 219 B.R. 1013, 1016

(Bankr. N.D. Ill. 1998); In re Shattuc Cable Corp., 138 B.R. 557, 565 (Bankr. N.D. Ill.

1992); In re Rosemary, 134 B.R. 940, n.6 (Bankr. W.D. Okla. 1991); In re Argo

Communications, 134 B.R. 776, 786 n.9 (Bankr. S.D. N.Y. 1991); In re Goode, 131 B.R.

835, 840 n.2 (Bankr. N.D. Ill. 1991); In re Morningstar Enterprises, 128 B.R. 102, 106

(Bankr. E.D. Pa. 1991); In re Rheuban, 128 B.R. 551, 554-55 (Bankr. C.D. Cal. 1991); In

re Gaylord, 123 B.R. 236, 241- 243 (Bankr. E.D. Mich. 1991); In re Windsor

Communications Group, 67 B.R. 692, 699 (Bankr. E.D. Pa. 1986).

District court decisions are not binding on other district judges within a district.

In re Abernathy, 150 B.R. 688, 693 n.7 (Bankr. N.D. Ill. 1993). Most bankruptcy courts

look to the provision of 28 U.S.C. §151, which provides: "the bankruptcy judges in

regular service shall constitute a unit of the district court to be known as the bankruptcy

court for that district."  28 U.S.C. § 151.  These courts reason that bankruptcy courts, as a

unit of the district court, are not inferior courts and just as there is no "law of the district"

mandated for district judges to follow, bankruptcy judges are likewise not bound by

decisions of a single district court judge.  See, Paul Steven Singerman and Paul A. Avron,

Of Precedents and Bankruptcy Court Independence: Is a Bankruptcy Court Bound by a

Decision of a Single District Court Judge in a Multi-judge District?, 22 Am. Bankr. Inst.

J. 1 (2003); In re Ford, 415 B.R. 51, 60 (N.D.N.Y. 2009); In re Eiland, 170 B.R. 370, 378

192

(Bankr. N.D. Ill. 1994); and c.f., Threadgill v. Armstrong World Indus. Inc., 928 F.2d

1366, 1371 (3rd Cir. 1991)(“there is no such thing as ‘the law of the district’”).

Some appellate court decisions can also be read as supporting the non-binding

effect of individual district court decisions. For example, “the responsibility for

maintaining the law's uniformity is a responsibility of appellate rather than trial judges

and because the Supreme Court does not assume the burden of resolving conflicts

between district judges whether in the same or different circuits.” See, Colby v. J.C.

Penney Co., Inc., 811 F.2d 1119, 1124 (7th Cir. 1987).

There are other sub-issues. Many district court districts are broken into divisions

– is a bankruptcy court in a different division (meaning that the district judge writing the

‘binding’ opinion ever hear an appeal from that bankruptcy court) still in the direct line of

superior courts that stare decisis (arguably) requires? See, In re Hubbard, 23 B.R. 671,

673 (Bankr. S.D. Ohio 1982).

Another argument against the binding effect is found in Romano: “because there

are sixteen district court judges in this district, a rule imposing stare decisis effect of a

district court decision effectively makes final the first district court to rule on an issue,

even though other judges in the district may disagree with the decision. Such a rule

effectively makes the random assignment of appeals determinative for stare decisis

purposes, and leaves no room for differing opinions of other judges in the district.” In re

Romano, 350 B.R. 276, 281 (Bankr. E.D. La. 2005).

Finally, there is discussion as to how meaningful the whole concept of district

court binding authority really is:

Bankruptcy court decisions are reviewed by different district judges. As a result, the issue of whether the bankruptcy court is bound to follow decisions of the district court within its district cannot arise in any meaningful context. The issue arises only on an appeal from the bankruptcy court. The substantive issue is placed before this district judge who is not bound by other district court decisions.

In re KAR Devel. Assocs., L.P., 180 B.R. 629, 640 (D. Kan. 1995).

2. Minority Rule – Yes, Stare Decisis Applies To Decisions By ASingle District Judge.

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Any court whose decisions (even if unanimous) are subject to reversal by a single

judge of another court is "inferior" to the reversing court for stare decisis purposes. See,

In re Rand Energy Co., 259 B.R. 274, 276 (Bankr. N.D. Tex. 2001); In re Phipps, 217

B.R. 427, 430 (Bankr. W.D.N.Y. 1998); In re Thorsell, 229 B.R. 593 (Bankr. W.D.N.Y.

1999); In re Whitehorn, 99 B.R. 734 (Bankr. N.D. Tex. 1989); In re Johnson-Allen, 67

B.R. 968 (Bankr. E.D. Pa. 1986); In re Maisson, 57 B.R. 227, 229 (Bankr. E.D. Mich.

1985); In re Moisson, 51 B.R. 227 (Bankr. E.D. Mich. 1985); In re Investment Sales

Diversified, Inc., 49 B.R. 837, 846 (Bankr. D.Minn. 1985); In re St. Louis Freight Lines,

45 B.R. 546, 551 (Bankr. E.D. Mich. 1984); Eaton Land & Cattle v. Rocky Mtn.

Investments, 28 B.R. 890, 892 (Bankr. D. Colo. 1983); In re V-M Corp., 23 B.R. 952,

954-55 (Bankr. W.D. Mich. 1982); In re Bill Ridgway, Inc., 4 B.R. 351, 353 (Bankr.

D.N.J. 1980).

“This writer…is firmly of the view that each bankruptcy judge in a district served

by more than one U.S. District Court Judge is bound by stare decisis to obey the decision

of any one of those District Court Judges in alike case until a different U.S. District Court

Judge of the same district disagrees with his or her peer's earlier decision, in which event

each Bankruptcy Judge is free to go either way.” In re Bruno, 356 B.R. 89, 91 (Bankr.

W.D.N.Y. 2006). See also, In re Shunnarah, 273 B.R. 671, 672 (M.D. Fla. 2001)

("because a bankruptcy court is an Article I court, and appeals from such court are taken

to the Article III courts, which have reversal power over the bankruptcy courts" the

bankruptcy court are inferior courts for stare decisis purposes.)

a. What If It Is More Than One Decision?

Although generally agreeing that bankruptcy courts are not bound by district court

decisions, Judge Cyganowski felt compelled to follow two district court decisions. See,

In re McBrearty, Id. at 518 (Bankr. E.D.N.Y. )

3. Decisions by District Judges in other jurisdictions are notbinding.

The Ninth Circuit has specifically held that district court decisions do not bind

bankruptcy courts in other districts.

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“[B]ankruptcy court decisions cannot be appealed to district courts in other districts. Therefore, it makes little sense for such district court decisions to have precedential authority over out-of-district bankruptcy courts. We have also held that "[t]he doctrine of stare decisis does not compel one district court judge to follow the decision of another." Starbuck v. City and County of San Francisco, 556 F.2d 450, 457 n.13 (9th Cir. 1977). Were we to hold that bankruptcy courts are bound by all district court decisions within the circuit, rather than only the decision of the district judge to whom their ruling has been appealed, bankruptcy courts would be subject to a potentially non-uniform body of law. We therefore hold that the bankruptcy court in this case (located in the Central District of California) was not bound by the Nelson holding (a decision by a district judge in the Northern District of California).”

In re Silverman, 616 F.3d 1001, 1005 (9th Cir. 2010). [It may be significant to the

discussion below, regarding the binding effect of BAP decisions, that this decision comes

from the 9th Circuit.]

4. Problems with unpublished opinions.

There is a huge practical problem with a mandatory requirement that bankruptcy

judges follow district court decisions as binding precedent – what do you do about

unpublished opinions? See, In re Gaylord, 123 B.R. 236, 242 n. 8 (Bankr. N.D. Ill.

1992); In re Romano, 350 B.R. 276, 280 n.15 (Bankr. E.D. La. 2005)(the “bankruptcy

court must canvas the other judges in the district to determine if they have reached a

contrary conclusion on the issue, resulting in an unwieldy system.”); But compare, In re

Shunnarah 273 B.R. 671, 672 (M.D. Fla. 2001)(but limited to published decisions). Most

appellate courts have circuit court rules that their unpublished decisions are not binding.

Contra, Anastasoff v. United States, 223 F.3d 898 (8th Cir. 2000)(unpublished decisions

are binding precedent). But, for most district courts, there are no similar rules in place.

And what do you do with a summary affirmance of a bankruptcy court decision –

usually unpublished, and maybe not saying much more than “affirmed for the reasons set

forth in the bankruptcy court’s opinion” - does that bankruptcy court decision then

become binding on all of the bankruptcy courts in the district?

5. If Not “Bound” – How ‘Persuasive’ Is The Authority?

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Decisions of district judges within a district are "entitled to substantial deference."

In re Stafford Pool & Fitness Center, 252 B.R. 627, 631 (Bankr. D.N.J. 2000); ); In re

Jones, 219 B.R. 1013, 1016 (Bankr. N.D. Ill. 1998)("entitled to substantial deference"

and are considered persuasive authority); In re Shattuc Cable Corp., 138 B.R. 557, 567

(Bankr. N.D. Ill. 1992). The reasoning of the district judge is entitled to “respect”. See,

In re Davis, 352 B.R. 758, 764 (Bankr. D.S.C. 2006).

But not all courts see much need for any special deference. See, In re Fairchild

Aircraft Corp., 220 B.R. 909, 917 (Bankr. W.D. Tex. 1998)(“A district court's ruling on a

bankruptcy appeal enjoys little more precedential weight than does the original

bankruptcy decision itself.”) citing, Paul M. Baisier & David G. Epstein, Resolving Still

Unresolved Issues of Bankruptcy Law: A Fence or An Ambulance, 69 AM. Bankr. L.J.

525, 528-29 & nn.17- 19 (1995).

B. Are Bankruptcy Judges Bound by BAP Decisions?

This issue is, if anything, even more unsettled than the question of the binding

efffect of district court decisions. Compare, Erwin Chemerinsky, Decision-Makers: In

Defense of Courts, 71 Am. Bankr. L.J. 109, 128 (Spring 1997), and Thalia L. Downing

Carroll, Why Practicality Should Trump Technicality: A Brief Argument For The

Precidential Value Of Bankruptcy Appellate Panel Decisions, 33 Creighton L. Rev. 565

(April, 2000); with, Barbara B. Crabb, In Defense of Direct Appeals: A Further Reply to

Professor Chemerinsky, 71 Am. Bankr. L.J. 137, 140 (Spring 1997); Kathleen P. March

& Roberto V. Obregon, Are BAP Decisions Binding on Any Court?, 18 Cal. Bankr. J.

189(1990).

1. Majority Rule Outside Of The 9th Circuit – No.

It appears that a majority of courts outside the 9th Circuit hold that bankruptcy

appellate panel decisions are not binding on bankruptcy courts. In re Cormier, 382 B.R.

377, 408-409 (Bankr. W.D. Mich. 2008); In re Livingston, 379 B.R. 711, 726 (Bankr.

W.D. Mich. 2007); In re Carrozzella & Richardson, 255 B.R. 267, 272-73 (Bankr. D.

Conn. 2000); In re Williams, 257 B.R. 297, 301 n.5 (Bankr. W.D. Mo. 2001); In re

Virden, 279 B.R. 401, 409 n. 12 (Bankr. Mass. 2002); In re Standard Brands Paint Co.,

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154 B.R. 563 (Bankr. C.D. Cal. 1993); See also, March and Obregon, Are BAP Decisions

Binding on Any Court,? 18 Cal. Bankr. J. 189 (1990).

There are a number of reasons given for not regarding bankruptcy appellate panel

decisions as binding under the doctrine of stare decisis. One reason is that the bankruptcy

appellate panel is not a direct avenue of appeal – either party can choose to avoid the

BAP and force an appeal to go to the district court. See, In re Cormier, 382 B.R. 377,

409 (Bankr. W.D. Mich. 2008):

Neither district courts sitting as appellate courts nor bankruptcy appellate panels in their present incarnation provide a satisfactory means of appeal from bankruptcy court rulings. The two have the same major drawback: the appellate decisions they reach do not bind each other or any court except the court from which the appeal is taken. To the extent their decisions have no precedential effect (as distinct from the persuasive effect a well-reasoned opinion may have), the courts or panels serve only the most basic functions of appellate review, that of correcting particular errors in specific cases and providing some supervision over the bankruptcy courts. They do not foster predictability: so long as litigants can choose their forum for appeal, they can shop for the one they think will be most favorable to their position. They do not build a coherent body of law because their decisions issue from too many sources to produce coherency. As a result, bankruptcy practitioners have little guidance in advising their clients. Many of the most basic issues in bankruptcy law have no definitive resolution.

The District Court in Oregon has held that "because a bankruptcy court is not

bound by decisions from other districts, it should not be bound by BAP decisions

originating in another district." In re Selden, 121 B.R. 59,62 (D.Or. 1990)(Panner, J.).

(Note that Sunahara arose in the Northern District of California.) Selden relies on Judge

Hess's opinion in In re Junes, 76 B.R. 795, 797 (Bankr. D.Or 1987), [**10]  aff'd on other

grounds, 99 B.R. 978 (9th Cir. BAP 1989). Junes reasoned that: The BAP is an

intermediate appellate court, sitting between the trial court and the Court of Appeals.

District Court judges, acting as courts of appeal from Bankruptcy Courts, sit in the same

position relative to the trial court and the Circuit Court of Appeals. Since a ruling of one

District Court is not binding on another District Court within the circuit, it follows that

the BAP, acting on a case from a particular district, cannot bind Bankruptcy Courts in

other districts. See also In re Crook, 62 B.R. 937, 941 (Bankr. D.Or. 1986), rev'd79 B.R.

475 (9th Cir. BAP 1987)(Reversed on the merits.) While there is some logic to the

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argument, it overlooks entirely Congress' purpose in establishing the BAPs to advance

uniformity in the law. It has been held that the opinion of a single District Court judge is

not binding in subsequent cases in any event. See e.g. In re Barakat, 173 B.R. 672

(Bankr. C.D.Cal. 1994); In re Gaylor, 123 B.R. 236 (Bankr.E.D.Mich. 1991). 

2. Minority Rule Everywhere But The 9th Circuit – Yes, BAPDecisions Are Binding. But the 9th Circuit view may bechanging.

The majority of decisions in the Ninth Circuit have held that bankruptcy appellate

panels decisions are binding on bankruptcy courts.  See, In re Windmill Farms, Inc., 70

B.R. 618 (9th Cir. BAP 1987); In re Proudfoot, 144 B.R. 876 (9th Cir. BAP 1992); In re

Tong Seng Vue, 364 B.R. 767 (Bankr. D. Or. 2007); In re Platt, 270 B.R. 773, 775

(Bankr. D.Or. 2001); In re Chlebowski, 246 B.R. 639, 645 (Bankr. D.Or. 2000); In re

Globe Illumination Co., 149 B.R. 614 (Bankr. C.D. Cal. 1993); In re Hunter, 380 B.R.

753 (Bankr. S.D. Ohio 2008).

However, recently, the Ninth Circuit Court of Appeals stated: “State Fund

has structured its argument on a false premise; we have never held that all

bankruptcy courts in the circuit are bound by the BAP. See, e.g., Bank of Maui v.

Estate Analysis, Inc., 904 F.2d 470, 472 (9th Cir. 1990)” See, In re Silverman,

616 F.3d 1001, 1005 (9th Cir. 2010).

The rationale for the holding that bankruptcy appellate panel decisions are

binding is that Congress's purpose in establishing the BAP was to provide a uniform and

consistent body of bankruptcy law throughout the circuit.

3. Special Rule For Bankruptcy Judges Serving On The BAP?

Find out if your bankruptcy judge is serving or has served on the BAP, before

citing or criticizing the BAP decision. “Know your audience.”

4. If Not “Bound” – How Persuasive Is The Authority?

Even for bankruptcy courts that do not find bankruptcy appellate panel decisions

binding, BAP decisions are nevertheless persuasive authority. See, In re Silverman, 616

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F.3d 1001, 1005 n.1 (9th Cir. 2010)(“Nevertheless, we treat the BAP's decisions as

persuasive authority given its special expertise in bankruptcy issues and to promote

uniformity of bankruptcy law throughout the Ninth Circuit.”); In re Cormier, 382 B.R.

377, 411 (Bankr. W.D. Mich. 2008)(holding BAP opinions are to be given the same

deference accorded district court appellate opinions, treated as extremely persuasive, and

generally followed, but that a bankruptcy court is free to disagree with the BAP or the

district courts if it has a "deeply considered and well-reasoned analysis"); In re Virden,

279 B.R. 401, 409 n.12 (Bankr. D.Mass. 2002); In re Carrozzella & Richardson, 255 B.R.

267, 273 (Bankr. D.Conn. 2000)("[T]his Court will regard BAP opinions as highly

persuasive though not binding, precedent."); In re Cox, 393 B.R. 681, 687 (Bankr. W.D.

Mo. 2008).

5. What If The BAP Appeal Arises Out Of Another State OrDistrict?

Two Oregon courts, one district court and one bankruptcy court, have

distinguished bankruptcy appellate panel decisions that arise out of another district. Just

as a district court is not bound by the decisions of district judges from another district,

they are not bound by bankruptcy appellate panel decisions originating from another

district. See, In re Selden, 121 B.R. 59,62 (D.Or. 1990); In re Junes, 76 B.R. 795, 797

(Bankr. D.Or 1987); contra, In re Tong Seng Vue, 364 B.R. 767, 771-772 (Bankr. D. Or.

2007).

C. Stare Decises – Bankruptcy Courts Are Bound By Decisions Of TheirCourts Of Appeals And The United States Supreme Court.

1. Best Case Scenario - Effect Of A Binding On Point Decision.

The binding precedent rule, that lower courts must follow the holdings of their

court of appeals and the Supreme Court, affords a lower court no discretion where a

higher court has already decided the issue before it. Johnson v. DeSoto County Bd. of

Com'rs, 72 F.3d 1556, 1559 n.2 (11th Cir. 1996).

a. Laying down your trump card with some tact.

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If clear circuit court authority (or U.S. Supreme Court authority) overrules a

decision by your bankruptcy court judge, you should win by simply pointing out the

ruling. Tactfully - particularly if there has been a long history of disagreement with the

court on the issue.

2. When The Decision Is On A Related Issue.

Related issues come in many flavors: similar language in different chapters in the

Code, and differences in phraseology. Compare Chapter 11 to Chapter 13, for example.

Do a word search in the Code for the string of key words in any statute at issue, to see if

the string of words is interpreted differently, in a different part of the Code. Go outside of

the Code, to other federal or state statutes, using the same word string search.

3. What Is Dicta, And What Do You Do With It?

“Dicta”, “dictum”, or the longer “obiter dictum” are statements in an opinion or

order that are not neither constitutes the holding of a case, nor arises from a part of the

opinion that is necessary to the holding of the case to decide the case. See, Black v.

United States, 373 F.3d 1140, 1144 (11th Cir. 2004); see also, Cetacean Cmty. v. Bush,

386 F.3d 1169, 1173 (9th Cir. 2004); King v Erickson, 89 F.3d 1575, 1582 (Fed Cir

1996); Kyle v. Office of Workers' Compensation Programs, 819 F.2d 139, 143 (6th Cir.

1987).

Another common definition of dictum is 'a statement in a judicial opinion that

could have been deleted without seriously impairing the analytical foundations of the

holding . . . .'" Sarnoff v. American Home Prods. Corp., 798 F.2d 1075, 1084 (7th Cir.

1986).

Statements that are dictum have not been tested by the adversarial process which

enlightens the determination of issues, and are therefore less reliable that ratio decidendi.

In re Youmans, 117 B.R. 113, 121 (Bankr. D.N.J. 1990).

The line is not always easy to draw, however, for "where a panel confronts an

issue germane to the eventual resolution of the case, and resolves it after reasoned

consideration in a published opinion, that ruling becomes the law of the circuit,

regardless of whether doing so is necessary in some strict logical sense." United States v.

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Johnson, 256 F.3d 895, 914 (9th Cir. 2001) (en banc). Statements that explain the court's

rationale are part of its holding. U.S. v. Bloom, 149 F.3d 649, 653 (7th Cir. 1998); In re

Swanson, 289 B.R. 372 ,374-375 (Bankr. C.D. Ill. 2003).

Dicta is not binding, regardless of its source. See, Export Group v. Reef

Industries, Inc., 54 F.3d 1466 (9th Cir. 1995). Thus, lower courts are not bound to follow

a higher court's dictum. U.S. v. Crawley, 837 F.2d 291 (7th Cir. 1988).

However, even dicta from the Supreme Court must be heeded by lower courts, at

least where the Court's opinion is "considered" and clearly expressed. See, e.g., Hrometz

v. Local 550, Int'l Ass'n of Bridge Constr. & Ornamental Ironworkers, 227 F.3d 597, 602

(6th Cir. 2000)("Although the interpretation given [to a statute by the Supreme Court] . . .

is technically dicta, its import is clear and therefore binding upon this court. See United

States v. Oakar, 324 U.S. App. D.C. 104, 111 F.3d 146, 153 (D.C. Cir. 1997)('Carefully

considered language of the Supreme Court, even if technically dictum, generally must be

treated as authoritative.' (citation and internal quotation marks omitted))."); [In re]

McDonald, 205 F.3d at 612 ("'Being peripheral, [dictum] may not have received the full

and careful consideration of the court that uttered it.' . . . We should not idly ignore

considered statements the Supreme Court makes in dicta." (quoting [In re] Sarnoff, 798

F.2d [1075,] at 1084 (7th Cir. 1986))). Even Supreme Court justices have found dicta

persuasive: “[I]f dictum it was, it was dictum well considered, and it stated the view of

five Members of this Court”.   Boumediene v. Bush, 553 U.S. 723, 799, 128 S. Ct. 2229,

2278, 171 L. Ed. 2d 41, 98 (2008)(Souter, concurring).

a. If it’s for ya.

If dicta from the Supreme Court or your court of appeals are helpful, trot out the

case law that says that if it appears to be a considered statement, it should be “heeded”.

You may also want to argue – if there is a basis for it - that the statement is part of

the overall explanation of the decision, and therefore is not really dicta. The arguments

regarding dicta resemble, in form, arguments about whether a case is “on point” or

distinguishable.

b. If it’s agin’ ya.

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Argue that dicta is not binding, and the bankruptcy court is free to disregard it.

Talk about the unreliability of judicial statements that have not passed through an

adversarial contest where opposing views were brought to the higher court’s attention.

4. Do Different Rules Apply Based On The “Law Of The Case”Doctrine?

"The law of the case doctrine generally discourages courts from reconsidering

determinations that the court made in an earlier stage of the proceedings." United States

v. Graham, 327 F.3d 460, 464 (6th Cir. 2003).

Under the law of the case doctrine, "the findings of fact and conclusions of law by

an appellate court are generally binding in all subsequent proceedings in the same case in

the trial court or on a later appeal." This That & the Other Gift & Tobacco, Inc. v. Cobb

County, 439 F.3d 1275, 1283 (11th Cir. 2006); Mason v. Texaco, Inc., 948 F.2d 1546,

1553 (10th Cir. 1991).

In addition, the law of the case doctrine applies to lower court rulings that have

not been challenged on appeal. United States v. Escobar-Urrego, 110 F.3d 1556, 1560

(11th Cir. 1997). Therefore, "a legal decision made at one stage of the litigation,

unchallenged in a subsequent appeal when the opportunity existed, becomes the law of

the case for future stages of the same litigation, and the parties are deemed to have

waived the right to challenge that decision at a later time." Escobar-Urrego, 110 F.3d at

1560.

To avoid the application of the law of the case, the parties must demonstrate that

the case fits within one of the three recognized narrow exceptions: (1) a subsequent trial

produces substantially different evidence; (2) controlling authority has since made a

contrary decision of law applicable to that issue; or, (3) the prior decision was clearly

erroneous and would work manifest injustice. United States v. Stinson, 97 F.3d 466, 469

(11th Cir. 1996); Hanover Ins. Co. v. Am. Eng'g Co., 105 F.3d 306, 312 (6th Cir. 1997);

White v. Murtha, 377 F.2d 428, 431-432 (5th Cir. 1967).

The law of the case doctrine "operates to create efficiency, finality, and obedience

within the judicial system." Allapattah Servs., Inc. v. EXXON Corp., 372 F. Supp. 2d

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1344, 1363 (S.D. Fla. 2005) (quoting Litman v. Mass. Mut. Life Ins. Co., 825 F.2d 1506,

1511 (11th Cir. 1987)).

The law of the case doctrine encompasses issues previously "decided by

necessary implication as well as those decided explicitly." Dickinson v. Auto Center Mfg.

Co., 733 F.2d 1092, 1098 (5th Cir. 1983); This That & the Other Gift & Tobacco, Inc.,

439 F.3d 1275, 1283 (11th Cir. 2006)("[T]he law-of-the-case doctrine bars relitigation of

issues that were decided either explicitly or by necessary implication.")

The law of the case can apply to bar reconsideration of both a bankruptcy court's

factual findings and legal conclusions. It does not apply to interlocutory – as opposed to

final - rulings.

Accordingly, under the law of the case doctrine, seeking to have a bankruptcy

court reconsider a decision that was not appealed, in the same case, presents substantial

additional difficulties. It is probably better to wait for the issue to arise in another case

before attempting to have the bankruptcy court reconsider its holding.

XXVI. JUDICIAL SANCTIONS – WHAT ARE THE RULES?

Generally, bankruptcy courts can use three different powers to sanction a litigant:

1) Federal Bankruptcy Rule 9011; 2) 11 U.S.C. 105; and 3) the court’s inherent powers.

A. Rule 9011 Sanctions.

Beyond doing a reasonable inquiry into the facts, Rule 9011 requires a signer

must inquire into the law. A filing need not ultimately prevail to be warranted by

existing law. The relevant inquiry is whether the pleader presented an objectively

reasonable argument in support of its view of what the law is or should be. See, Davis v.

Carl, 906 F.2d 533 (11th Cir. 1990); Dura Systems, Inc. v. Rothbury Invs., Ltd., 886 F.2d

551, 558 (3d Cir. 1989)(while tenuous arguments are not sanctionable; "patently

unmeritorious or frivolous" arguments demand sanctioning); Smith Int'l, Inc. v. Texas

Commerce Bank, 844 F.2d 1193, 1199 (5th Cir. 1988)(reasonable argument required).

A filing is unwarranted by existing law if it is contrary to settled precedent. See

e.g., Szabo Food Serv., Inc. v. Canteen Corp., 823 F.2d 1073, 1080 (7th Cir. 1987);

Norris v. Grosvenor Mktg. Ltd., 803 F.2d 1281, 1288 (2d Cir. 1986); Westmoreland v.

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CBS, Inc., 248 U.S. App. D.C. 255, 770 F.2d 1168, 1176 (D.C. Cir. 1985); Eastway

Const. Corp. v. City of New York, 762 F.2d 243, 254 (2d Cir. 1985) (Sanctions are

merited when "it is patently clear that a claim has absolutely no chance of success under

the existing precedents, and where no reasonable argument can be advanced to extend,

modify or reverse the law as it stands."); Thornton v. Wahl, 787 F.2d 1151, 1154 (7th

Cir.), cert. denied, 479 U.S. 851, 93 L. Ed. 2d 116, 107 S. Ct. 181 (1986).

1. Judicial Use Of Rule 9011(c)(1)(B).

Under Rule 9011(c), if the court determines that an attorney has filed a frivolous

paper or has filed a paper for an improper purpose as set forth under Rule 9011(b)(1) or

(b)(2), the bankruptcy court may impose an appropriate sanction. The sanction "is

limited to what is sufficient to deter repetition of such conduct." Rule 9011(c)(2). The

sanction may consist of "directives of a nonmonetary nature." Id.

Bankruptcy Rule 9011 requires a court to direct the attorneys and parties to show

cause why sanctions should not be imposed prior to their imposition. In re Cummings,

381 B.R. 810, 839 (S.D. Fla. 2007).

2. Non-Frivolous Argument For Extension, Modification, OrReversal Of Existing Law.

A signer is not just confined to existing law. Indeed, Rule 9011 was never intended to "chill an attorney's enthusiasm or creativity in pursuing factual or legal theories." Gaiardo v. Ethyl Corp., 835 F.2d 479, 483 (3d Cir. 1987)(quoting the Advisory Committee Note to Rule 11 of the Federal Rules of Civil Procedure); Local 938 v. B.R. Starnes Co., 827 F.2d 1454, 1458 (11th Cir. 1987)("Rule 11 is intended to deter frivolous suits, not to deter novel legal arguments or cases of first impression"). On the other hand, a signer will be sanctioned when it files a paper lacking a good faith reasonable argument for the extension, modification, or reversal of existing law. Eastway Constr. Corp. v. City of New York, 762 F.2d 243, 254 (2d Cir. 1985), modified, 821 F.2d 121 (2d Cir. 1987), cert. denied, 484 U.S. 918 (1987); Spiller v. Ella Smithers Geriatric Center, 919 F.2d 339, 346 (5th Cir. 1990) (conclusory statements contrary to current jurisprudence that are made without any support whatsoever do not represent a good faith effort to modify existing law).

In re KTMA Acquisition Corp., 153 B.R. 238, 250-251 (Bankr. D. Minn. 1993).

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To give one example – in In re Griffin, 352 B.R. 475 (8th Cir. BAP 2006), the

appellant had no cases that supported the appeal – every decision had gone the other way

- and the language of the statute had not changed. The only argument was that previous

courts had misread the statute – and the appellant won on that basis.

B. Other Authority For Judicial Sanctions?

1. Section 105(a).

Section 105(a) provides that a "court may issue any order, process, or judgment

that is necessary or appropriate to carry out the provisions of this title." and may take any

action "necessary or appropriate to enforce or implement court orders or rules, or to

prevent an abuse of process." 11 U.S.C. § 105(a). Thus, a court may impose sanctions if

a party violates a court order or rule. See, e.g., In re Evergreen Sec., Ltd., 570 F.3d 1257.

1273 (11th Cir. 2009); Jove Eng'g, Inc. v. I.R.S., 92 F.3d 1539, 1542 (11th Cir. 1996)

(awarding sanctions under Section 105(a) for a violation of an automatic stay provision).

2. The Court’s Inherent Power To Sanction.

The bankruptcy court’s inherent powers to sanction are governed not by rule or

statute but by the control necessarily vested in courts to manage their own affairs so as to

achieve the orderly and expeditious disposition of cases. Hale v. United States Trustee,

509 F.3d 1139, 1148 (9th Cir. 2007).

To impose sanctions under the court's inherent power, the court must find bad

faith. In re Evergreen Sec., Ltd., 570 F.3d 1257. 1273 (11th Cir. 2009). "A finding of bad

faith is warranted where an attorney knowingly or recklessly raises a frivolous argument,

or argues a meritorious claim for the purpose of harassing an opponent. A party also

demonstrates bad faith by delaying or disrupting the litigation or hampering enforcement

of a court order." In re Walker, 532 F.3d at 1309. In addition, "bankruptcy courts have

the inherent power to sanction vexatious conduct presented before the court." In re

Rainbow Magazine, Inc., 77 F.3d 278, 284 (9th Cir. 1996).

"If particularly egregious, the pursuit of a claim without reasonable inquiry into

the underlying facts can be the basis for a finding of bad faith." Barnes v. Dalton, 158

F.3d 1212, 1214 (11th Cir. 1998); In the Matter of Med. One, Inc., 68 B.R. 150, 152

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(Bankr. M.D. Fla. 1986) (finding that failure to make a reasonable inquiry into whether a

filing alleged valid claims was sanctionable).

Further, continually advancing "groundless and patently frivolous

litigation" is "tantamount to bad faith." In re Evergreen Sec., Ltd., 570 F.3d 1257.

1274 (11th Cir. 2009).

The short version: Taking one good faith shot at reversing a decision – probably

no problem.

Continuing to ignore a court decisions – you are asking for sanctions.

C. What Even Reasonable, Open-Minded Judges Are Concerned About.

1. Court decisions cannot be ignored.

The system only works if judicial decisions mean something. They have to be

enforceable. The bankruptcy courts have, historically, faced challenges from various

quarters about the effectiveness of their orders. In seeking to get a bankruptcy judge to

revisit an earlier decision, make it clear that you understand that the decision is – until

overturned – binding on you and your client.

2. Courts do not have time to examine and re-decide issues everytime a party does not like the effect of a past decision.

Courts are deciders. That is their job. Your job as an advocate is to urge your

client’s position. When you are telling a judge that she has made a poor decision in the

past, you are telling that judge that she failed in the single most important job she has:

making decisions. So that you do not yourself fail in your job as an advocate, you must

be prepared to argue why this time is different.

Bankruptcy judges have limited resources, and it is extremely inefficient for a

judge to have to revisit issues that have been resolved by a final, non-appealable order –

and not appealed. You do not want to be on the receiving end of this kind of statement

from a court:

“[T]his Court's opinions are not intended as mere first drafts, subject to revision and reconsideration at a litigant's pleasure. Motions such as this reflect a fundamental misunderstanding of the limited

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appropriateness of motions for reconsideration. [Movant] has given no good reason to alter the Opinion's holdings.”

Quaker Alloy Casting Co. v. Gulfco Industries, Inc., 123 F.R.D. 282, 288 (N.D. Ill.

1988).

Make sure you have that good reason for your motion—and make sure that the

judge knows what that reason is, early.

XXVII. HOW RECONSIDERATION OPPORTUNITIES CANCOME UP.

A. The Judge invites reconsideration of a prior decision. 

Judges can realize that they decided an issue incorrectly. This was particularly

likely in the early post-BAPCPA world. The statute was unclear, and judges were forced

to make choices involving poorly drafted, unclear, and sometimes contradictory

language.

Over time, a consensus may have emerged that is contrary to the then ‘majority

view’. The judge may want to re-align with the clear weight of authority, as it now

stands.

Sometimes, judges also start to see internal contradictions in their decisions, and

may want to pull an earlier decision into a more considered, and coherent, legal view of

what the Code requires.

Finally, judges do get feedback from their cases, and from other judges about how

different legal approaches are working in the real world. The fact that a decision has

thrown a monkey wrench into the Chapter 13 process will not escape the court’s notice

for long. Especially if you mention it as a reason when cases fail and have to be

dismissed by the judge. If there is room, under the courts view of the law, to try another

approach, the judge may want to take a mulligan and start fresh.

B. You decide you want the Judge to reconsider a decision.

1. The past decision is causing problems that make it worth theattempt.

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Some decisions create problems of such a magnitude that they are worth tackling

a second time. Usually, those kinds of rulings are the ones you go into full bore the

second time around – with the intention of appealing if you don’t change the judge’s

mind.

2. The law has changed – subtly or more overtly.

It could be a change in the case law, or a change in the statute, or a change in the

interplay between the two.

Further, the interpretation of some statutes may depend in part upon prevailing

customs and practices. For example, the Uniform Commercial Code explicitly states that

it is to “be liberally construed” and that its underlying practices and policies are “to

permit the continued expansion of commercial practices through custom, usage, and

agreement of the parties.” UCC §1-102(1) and (2). Thus, should your argument include

any interpretation of negotiable instruments, secured transactions, or the sale of goods,

you have a ready-made argument that a previous decision should be reconsidered: the law

hasn’t changed, but commerce has (or, more subtly, that the prevailing commercial

practices were not properly developed or presented in the previous case).

3. There was a flaw in the original decision – usually because animportant legal argument that was not raised.

If the issue was originally presented by another attorney, you should make sure

that you look deep into the file of the case where the issue was originally litigated. You

should also order the recording(s) if there were any hearing on the issue. You don’t want

to represent that a legal argument wasn’t made that was, in fact, made by counsel,

considered by the court, and rejected.

a. Does it make a difference if it was you that failed toraise the argument the first time around?

It certainly helps if you can point to another attorney’s work, and show that he or

she failed to raise the best arguments – the ones you are going to make to the court –

when the issue was originally presented to the court.

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On the other hand, if it was, for example, a BAPCPA issue, the best reasons for a

contrary result may not have become part of the case law when the issue was originally

argued. Tell the judge you wish you had been smarter, and able to come up with the best

arguments on your own, instead of having to read them in other courts’ published

decisions.

 C. Someone on the other side forces the issue - and you have to decide: to

defend the earlier decision, or support change. D. Something more subtle - opportunities to distinguish, or limit a

decision that may have been overbroad.  Or wrong.

E. What the heck is a Motion For Reconsideration?

Although "motions to reconsider" find no direct authorization in the Rules, Courts

have frequently noted the case law support for properly conceived motions of that kind.

See, e.g., National Union Fire Ins. Co. of Pittsburgh v. Continental Illinois Corp., 116

F.R.D. 252, 253 (N.D. Ill. 1987)); Quaker Alloy Casting Co. v. Gulfco Industries, Inc.,

123 F.R.D. 282, 288 (N.D. Ill. 1988). Motions to reconsider are, in all likelihood, more

properly couched as motions under either Rule 9023 (incorporating Rule 59 of FRCP) or

Rule 9024 (incorporating Rule 60 of FRCP).

Many courts want more than a generally captioned “Motion for Reconsideration”

– they want counsel to point to a specific subsection of Federal Rule of Civil Procedure

59 or 60 that provides for the requested relief.

In contrast, where counsel is seeking to get a judge to revisit an issue previously

decided in another case, there is no Motion for Reconsideration. You simply bring an

action that puts the issue you want to the court to re-address in play - by filing a motion,

or raising an objection.

XXVIII. METHODS FOR ARGUING FOR RECONSIDERATION OF ANISSUE.

 A. Is there an argument that controlling authority has shifted?

a. Some legal issues are foundationally related. If a foundational underpinning of a holding is taken out by an appellate court, that can jump start a motion for reconsideration.

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i. Decisions can be overturned “sub silentio”: Look for

cases where the outcome would have been impossible, absent an implicit

overturning of the precedent you seek to challenge.

b. Is there controlling case law that suggest the original decisionwas wrongly decided?  Not a specific overruling, but somethingthat suggests the Court of Appeals would not follow theoriginal reasoning underlying the decision up forreconsideration?

B. A change in the majority/minority status of the issue since thedecision.

After the passage of BAPCPA, a number of bankruptcy courts issued decisions

that held vehicles could be surrendered in full satisfaction, and that negative equity,

warranty costs, insurance, and the like, were not protected from cram-down by the

hanging paragraph. At certain points, those were arguably “majority view” positions.

More than four years into the process of interpreting the 2005 amendments, the

trend at the circuit court level is clear – debtors cannot surrender in full satisfaction over

the objections of a creditor, and pretty much the entire debt secured by a 910 vehicle is

protected from cram-down. And those case law changes might – even in circuits where

the court of appeals has not yet spoken – cause a bankruptcy court to reconsider an earlier

ruling.

C. New legal arguments that had not been raised in the prior decision.

1. Review the briefs for the original decision. Determine if thereis a basis for requesting a change because you have newarguments to Court had not previously had an opportunity toconsidered.

In the age of PACER, there is no excuse for not pulling the briefs from the

previous case, and reading exactly which arguments were made to the judge. In the age of

IPods and MP3 players, there is no excuse for not obtaining the CD recording of the oral

argument before the judge in the previous case, to see what exactly was argued before

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that judge and (more importantly) what questions the judge had before deciding the case.

If the case was argued before a Court of Appeals, you may find the oral argument

available for download on the internet for free. Not only will you have the advantage of

peering into the judges’ thoughts on the previous cases, just think of how you can drop

this into the conversation at the next bar function: “when I was listening to Judge Posner

question Gerry Spence about the interplay between habeas corpus and corpus juris

secundus on my last fifteen mile run….”

You can anticipate arguments and questions, in a way that you might not

otherwise.

a. Was the original decision a result of bad lawyering?

The lawyer who got there first may not have thought out the issue completely,

may not have presented it well, or may have ticked off the judge. If you are going to use

this approach, you must be prepared to let the judge know how your presentation and

argument will differ from the previous case, focusing on differing facts, different cases,

and your different rationale.

b. Were there bad facts present that made bad law?

Changing the facts may, of course, change the result. Be prepared to demonstrate

how the facts differ, and why those differences compel a different result. Bankruptcy

courts are courts of equity, but they are also constrained to operate within a code of law.

2. Citations to courts that have accepted the new legal argument.

a. Briefs for reconsideration – should be citation heavy.  

XXIX. THE ETHICS AND TECHNIQUES OF PREPARING AN APPEAL.

A. Requirement that you cite contrary authority.

You must cite any contrary authority to the Court, if it is controlling. See, e.g.,

Rule 3.3 of the Tennessee Rules of Professional Conduct: “a lawyer shall not

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knowingly…fail to disclose to the [court] legal authority known to the client to be

directly adverse to the position of the client and not disclosed by opposing counsel.”

It would be a foolish lawyer indeed who did not disclose contrary authority in her

opening brief on the issue. On the very off chance that you might succeed in duping

opposing counsel and the judge, this is what you risk:

1) Losing the opportunity to present the contrary authority in the best

light possible to your case; remember the adage that you always want

to bring your own bad news;

2) Handing the other side the ability to trash you, your research skills,

and your argument in its responsive pleadings;

3) Losing the respect of the judge for you, your legal abilities, your

ethics, your argument, and your client.

When there is contrary authority, be open and notorious about it. Once you have

addressed that decision openly and forthrightly, you will have taken away much of its

power to discredit you and your argument.

B. Duty of candor to the court.

 Lawyers, as officers of the court, have a duty of candor to the tribunal. Federated

Mut. Ins. Co. V. McKimmon Motors, LLC, 329 F.3d 805, 808-09 (11th Cir. 2003).

Rule 11 "reinforces counsel's duty of candor to the Court by subjecting litigants to

potential sanctions for making representations to the court for an improper purpose."

Footman v. Wang Tat Cheung, 341 F. Supp. 2d 1218, 1225 (M.D. Fla. 2004).

C. Preparing To Taking An Appealable Issue Up The Ladder.

1. Changing The Judge’s Mind Is The Goal At The Hearing – But It May Not Work.

 

2. Setting Up The Appeal

a. Making the record - make the record as if youare willing to take the decision up the ladder onappeal, even if you haven't made that decision.

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If you intend to present the issue on appeal, let the judge know, subtly. Statements

such as “I need to make my record” or “Judge, I am making this argument to preserve the

issue” will tell the judge that you are likely to appeal. Present the case as if you are going

to appeal. This means being somewhat more formal in your presentation, and absolutely

observant of the rules of evidence and procedure.

Note that preparing your case for the appeal may prompt the bankruptcy court to

take a second look at the issue, either to make sure that the decision was correct, or to

make findings of fact (which can only be overturned if clearly erroneous) which make her

decision bullet-proof on appeal.

b. Get in every bit of evidence you need to force thecourt of appeals to directly address the issue youwant a decided. Even better, establish the factsby stipulation.

If opposing counsel knows that they are going to win – based on the court’s prior

decision(s), you may be able to get facts in by stipulation more easily than in a case

where the law is unclear. Take advantage of that to build a record that will put the issue

squarely before the appellate court with as little wiggle room as possible.

If you have communicated squarely to the judge that you are making your record

for appeal, she will likely be more accommodating to you and your arguments—knowing

that each of her evidentiary rulings and comments on the issues are going to be reviewed

by another judge. Judges are embarrassed to have a case remanded for further

proceedings on a mistake under the Rules of Evidence.

Follow good trial practice, by preparing your trial notebook, with a page listing

every piece of evidence and testimony that you want to have in the record, with a check

mark beside it once it has been admitted. Do not be afraid, prior to the close of your

proof, to ask that all of the documents that you referenced be admitted into evidence; the

worst that can happen is that the judge rebukes you slightly for duplicating a prior

admission. But you will have made sure that each piece of evidence came in.

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 3. Make every argument you want to raise in the court of appeals

at the trial court level – even if your Bankruptcy Judge is sureto reject that argument. If an argument is not made at the trialcourt level, it is waived on appeal. Be sure that no importantargument is waived.

 It is a generally accepted principal that an issue not presented to the trial court is

waived; Rothman v. Hospital Service of Southern California, 510 F.2d 956, 960 (9th Cir.

1975). Think long and hard about your issues; if it will not materially harm your chances

with the bankruptcy judge, raise every single argument you can think of at trial.

It is only by the discretion of the appellate court that an issue not raised below

may be presented to the court. See, e.g., In re: Pizza of Hawaii, Inc., 761 F.3d 1374, 1377

(9th Cir. 1985). Application of the rule is discretionary. Singleton v. Wulff , 428 U.S. 106,

121, 49 L. Ed. 2d 826, 96 S. Ct. 2868 (1976). This court may dispense with the waiver

rule when "the question is a purely legal one that is both central to the case and important

to the public." In re: Sells , 719 F.2d 985, 990 (9th Cir. 1983) . "It is well settled in this

circuit that where the new issue is purely a legal one, the injection of which would not

have caused the parties to develop new or different facts, we may resolve it on appeal."

United States v. Dann, 706 F.2d 919, 925 n.5 (9th Cir. 1983), cert. granted, 467 U.S.

1214, 104 S. Ct. 2693, 81 L. Ed. 2d 362 (1984).

If you are confronted with a waiver argument, be prepared to argue that this same

legal issue will surely be raised in the next matter on appeal, and that for purposes of

judicial economy the appellate court should consider it now.

4. Potential problem - where the court cites two bases for decision, and only one is wrong.

Lower courts will often cite two or more independent bases for a decision. If one

of the grounds is a “winner” on appeal, the likely trajectory of the case is that the decision

will be affirmed on the non-controversial basis, and the issue you want to overturn will

not be addressed.

At the same time, in the bankruptcy judge’s mind, ALL of his or her holdings are

now binding. It is difficult to get a bankruptcy judge to recognize that something they

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held is non-binding dicta. So, you have the worst of both worlds – no relief from appeal,

and a decision that is binding on all parties coming before that bankruptcy judge.

The best you can do is wait for another case that presents the same issue – without

the facts necessary for the alternate holding – and try again. The second time with the

ability to get a decision that can force the appellate courts to consider your issue on

appeal. 

5. What do you do when an opportunity presents itselfunexpectedly?

a. Temporize. Seek a continuance to plan, prepare andpresent.

If you are suddenly presented with an issue, consider asking the judge for a

recess, to talk to the other lawyer. He may be willing to agree to a re-setting, if he is as

blind-sided as you are. Ask anyway; you will at least be able to tell the judge that you

need some time, even though the other lawyer doesn’t.

b. The down and dirty basics to keep in mind if you arethrown into the fire and think you might want to pursuean appeal.

Try and keep the decision to the single issue you want to address. Make all the

arguments you can remember. Put into evidence (or stipulate to, on the record) as much

of the facts as you can get in.

Ask to file a supplemental brief. That will give you time to go over the case law,

and make written arguments that you want the appellate court to consider.

C. Do You Change Your Approach If You Know You Are Not Going ToAppeal?

1. How?

XXX. DIFFICULTIES IN LITIGATING CHANGES THAT ARE NOT BASEDON COURT DECISIONS.

A. Local Practice.

Each court is convinced, to a near certainty, that its particular local practices are

in complete conformance with the Code, the Bankruptcy Rules, and the Federal Rules of

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Civil Procedure. If you are going to challenge local practice or a local rule, start with

research into other areas near you. It cannot hurt to cite favorable practices being used in

front of another judge, if your judge knows, respects, and cites that other judge

(conversely, also know the judges who disagree with your judge on issues; cite to them

sparingly).

1. How do you set up an issue where you can argue a localpractice is wrong?

If it is a local rule you want to have changed, remember that typically the local

rules are approved by the District Court judges, and therefore your judge may rightfully

feel that he is bound to abide by the local rules, no matter the situation. If that is the case,

state so directly: tell the judge that you disagree with the local rule, that you realize that

he may feel bound by that rule, but that you would like an opportunity to make your case

and your record, on the off chance that the bankruptcy judge would agree to disagree with

the local rule, and to preserve your record for the appeal to the district court, which may

have greater leeway to set aside or alter the local bankruptcy rule.

If it is a local practice, be prepared to explain why the practice is wrong:

1) Legally, provide grounds in the Code, the Rules, and the case law;

2) Show by admissible evidence how it unfairly and improperly affects your

client in this case;

3) Cite to as many other jurisdictions as you can that use a different practice.

a. What if you have been relying on practice you want to

change?

“Issue conflict” is not as much of a problem for lawyers who stay on one side of

the creditor/debtor/trustee fence. But if one of your clients has been relying on that local

practice, and intends to continue to rely on that practice, be mindful of the ethical issues

involved.

As an example, suppose Client A wants you to argue for a change in the local

practice on interest rates, say, from “contract rate” to “prime rate,” because Client A has

been lending at 0% interest. This would be a direct conflict of interest to your Client B,

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who is lending a 18%, because the change in local practice would be directly adverse to

Client B’s interests, in cases in which you represent Client B. This requires contacting

both clients, explaining the conflict, the impact on both clients, and obtaining written

consent from both clients. Difficult to do, if you plan on retaining both clients.

b. Is there another method that might work better than

litigation?

i. A change in the Local Rules. This often requires

working with the local bankruptcy committee over weeks or months, without

compensation, followed by more work with the bankruptcy judges and district court

judges, again perhaps without compensation.

ii. A new administrative order. Admin orders only

take the agreement of the bankruptcy judges to amend. Be prepared to show what your

new form would look like; to demonstrate that your new order would correct an ongoing

wrong; and to present evidence to judge why the change would work not only in your

case, but also in other cases. This may require not just an expert to testify about the

impact in your case, but also to study the impact in a sampling of other cases as well. If

you are setting the administrative order up for an appeal, be sure that your evidence and

record on appeal will support the change you are requesting. District courts typically give

bankruptcy courts great discretion over the administrative conduct of their cases.

iii. A change in the Form Plan.

XXXI. HOW DO YOU TRY TO GET A JUDGE TO CHANGE THEIR MINDWITHOUT HONKING OFF THE JUDGE?

► Reputation before the court matters – if you are a lawyer who asks the

court to reconsider everything, has a reputation as a sore loser, and are not

respected for your competence, you are going to get a far different

reception to a motion to reconsider than an attorney with a good, serious

reputation, who always addresses and treats the court respectfully. It is not

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enough to just sign papers that say “respectfully submitted,” you must

have treated the court with respect previously

► Let the Judge know that there are scholarly or equitable reasons – i.e.,

really good legal and factual reasons - for presentation of the argument to

the judge a second time. Then make those arguments with courtesy and

respect.

► Getting a judge to reconsider his or her decision presents a bit of a public

relations problem – you need to draw the judge’s attention to your issue

without impliedly calling the judge a dolt. One way to do that is to tell the

judge that you are asking the court to “see the issue differently.” Do not

tell the judge he or she screwed up.

► In structuring your argument before the judge, understand that the other

side is going to say something to the judge like: “we agree with you, we

are on the same side of the case now”. You need to anticipate that

statement in your presentation. Present the other side’s argument fairly

and squarely – more so than usual. Don’t dumb down what the judge

said!

► If you are re-raising an issue for purposes taking it up on appeal, let the

judge know. It may be enough to say: “The other case was not appealed,

it stopped with you.” Or go further, and let the bankruptcy court know

that you are going to take a second bite at the apple – that you think the

case should come out differently, are going to ask the appellate courts to

take a fresh look at it. “These are the arguments we are going to present to

the BAP – we want you to know that so you can make any additional

arguments that were not included in the original decision”.

► Some other good arguments for why a bankruptcy judge should change

position on an issue are: the court misunderstood the parties, the decision

was outside the issue presented by the parties, the problem was not of

reasoning but of apprehension – the previous case was not presented well

and the decision is the product of poorly presented facts and bad

arguments of past counsel. “They prevented the court from doing justice.”

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► “When this was presented to you previously, you were only presented with

weak, insufficient arguments. Please let me present mine – I think they

are better.” Be careful of insulting the prior lawyers here, and of

insinuating that the judge was not bright enough to consider this point

himself. Self-deprecation and humor are very important here.

XXXII. PROOFS OF CLAIM IN CHAPTER 13 BANKRUPTCIES

A. The Proof of Claim Form.

1. Federal Rule Of Bankruptcy Procedure 3001(a) Requires Proofs OfClaim To Conform To The Official Form.

Federal Rule of Bankruptcy Procedure 3001 requires that a proof of claim conform substantially to the Official Bankruptcy Form (i.e., Form B10), be executed by the creditor or an authorized agent of the creditor, and, when a proof of claim is based upon a writing, the original or a duplicate of the writing shall be filed with the proof of claim. See Bankruptcy Rule 3001(a), (b) and (c). In re Gulley, 400 B.R. 529, 541 n.13 (Bankr. N.D. Tex. 2009); In re Rogers, 391 B.R. 317, 322 (Bankr. M.D. La. 2008); 9 Collier on Bankruptcy, ¶3001.01 at 3001-4 (15th Ed. Rev. 2007).

In addition, Federal Rule of Bankruptcy Procedure 9009 states that: "[t]he Official Forms prescribed by the Judicial Conference of the United States shall be observed and used with alterations as may be appropriate." In re J.S. II, L.L.C., 397 B.R. 383, 386 n.1 (Bankr. N.D. Ill. 2008).

Official Bankruptcy Form B10 reiterates these concepts by directing the filer to "attach copies of supporting documents such as promissory notes, purchase orders, invoices,itemized statements of running accounts, contracts, court judgments, mortgages, security agreements, and evidence of perfection of lien. DO NOT SEND ORIGINAL DOCUMENTS. If the documents are not available, explain. If the documents are voluminous, attach a summary." In re Prevo, 394 B.R. 847, 850 n.4 (Bankr. S.D. Tex. 2008).

Official Form B10 is for filing pre-Petition claims. Form B10 states on its face: "This form should not be used to make a claim for an administrative expense arising after the commencement of the case. A request for payment of an administrative expense may be filed pursuant to 11 U.S.C. § 503." In re Plastech Engineered Products, 394 B.R. 147, 161 n.4 (Bankr. E.D. Mich. 2008).

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2. Form B10, December 1, 2007 Revisions:

The proof of claim form was amended in the following ways:

The creditor now has a space in which to provide a separate payment address if different from the creditor's address for receiving notices in the case.

The check boxes for indicating that the creditor's address provided on the proof of claim is a new address, and that the creditor never received any notices from the court in the case have been deleted.

A new checkbox is to be used when a debtor or trustee files a proof of claim for a creditor.

Information about obtaining acknowledgment from the court of the filing of the proof of claim is revised and moved to a new section on the reverse side called 'Information'.

A definition of the word  "redacted" (referred to in paragraph 7) has been added in conformity with Rule 9037.

3. Form B10, December 1, 2008 Revisions:

From the Committee Notes:

The form is amended at box seven on page one, and instructions two and seven on page two, to instruct the claimant that the information contained in or attached to a claim based on the delivery of health care goods or services should be limited so as to avoid embarrassment or the unnecessary disclosure of confidential information. The claimant is informed that additional disclosure may be required if the trustee or another party in interest objects to the claim.

Page two of the form is also amended to revise slightly the definitions of “creditor” and “claim” to conform more closely to the definitions of those terms in the Code.

4. Issues Arising From A Separate Notice And Payment Address On Proof Of Claim Form.

The instructions for a change of address on the current Form B10 state: “Fill in the name of the person or entity who should receive notices issued during the bankruptcy case. A separate space is provided for the payment address if it differs from the notice address. The creditor has a continuing obligation to keep the court informed of its current address. See Federal Rule of Civil Procedure (FRBP) 2002(g).”

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The above instruction uses “address” in the singular, but there are now two addresses on the Proof of Claim Form. Some Bankruptcy Clerk’s Offices do not interpret this as applying to the address for payment, and do not allow the electronic filing of notices of changes in the address for payment. The clerk’s view is that they are in the “notice” business, not the payment business. Thus, if the claim payment address is different from the address for sending notice, a change in the payment address is not something that should be filed with the court.

In contrast, many Chapter 13 Trustees think that requiring the filing of changes in the address where payments are to be sent is an important safeguard. Requiring address changes to be filed with the Court is a protection against fraud because: a) you have to be an EFC user to file with the bankruptcy court and they have information on the filer - in contrast to a letter in the mail telling a Chapter 13 Trustee to pay to another address; b) if redirecting payments is part of some type of fraud, a creditor can investigate using the electronic docket to discover the reason they are not receiving payment, and any fraud will be caught more quickly; c) if the creditor did an entry of appearance, they would get electronic notification of the change of address notice via e-mail; d) other people, specifically the debtor/debtor's counsel, may need the current payment address for the mortgage company.  A Chapter 13 Trustee having new payment addresses in non-public records does not provide the same benefits.

XXXIII. STATUTES AND BANKRUPTCY RULES GOVERNINGPROOFS OF CLAIM.

A. Section 501 – Filing A Proof of Claim Or Interest.

Section 501 provides the framework for one of bankruptcy’s main functions: the presentation of claims for payment. “The primary purpose of 11 U.S.C. § 501 "is to ensure that all those involved in the proceeding will be made aware of the claims against the debtor's estate and will have an opportunity to contest those claims." In re In re PCH Assocs., 949 F.2d 585, 605 (2d Cir. 1991).” In re Chateaugay Corp., 94 F.3d 772, 777 (2nd Cir. 1996).

The filing of a proof of claim is permissive. “[T]he filing of a proof of claim is not required by the Bankruptcy Code; however, a creditor's failure to timely file a proof of claim may affect its rights under the plan - namely, its ability to participate in the distribution of funds according to the plan.” In re Jurado, 318 B.R. 251, 256 (Bankr. D. Puerto Rico 2004).

The filing of a proof of claim is a prerequisite to allowance of a claim under Section 502.

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In a case converted from Chapter 13 to Chapter 7, if a proof of claim was filed in the Chapter 13, no new proof of claim is required in the Chapter 7. See, Federal Rule of Bankruptcy Procedure 1019(3).

The rule is the same when a case is converted from Chapter 7 to Chapter 13, if a proof of claim was filed in the Chapter 7, no new proof of claim is required when the case is converted to Chapter 13. See, In re Jasinski, 406 B.R. 653 (Bankr. W.D. Pa. 2009).

A claim has to be allowed to be paid in a Chapter 13 bankruptcy case. §1325(a)(4); §1322(b)(6); §1325(a)(5)(B)(ii); In re Smith, 123 B.R. 863, 866 n.3 (Bankr. C.D. Cal. 1991).

The failure to file a proof of claim does not (in and of itself) discharge the lien of a secured creditor, or discharge an otherwise non-dischargeable debt.

B. The Mechanics Of Filing A Proof Of Claim.

For larger creditors, in almost all areas of the country, proofs of claim must be filed electronically using ECF. For most districts, attorney can only file proofs of claim electronically. Further, the rule in most jurisdictions is that once a creditor files more than 25 proofs of claim during a 1 year period, that creditor has to become an ECF filer and file all its proofs of claims electronically. And, if one office of a larger creditor hits the 25 claim limit, the national creditor must file electronically from all its offices.

Creditors who rarely file claims can still file paper proofs of claim, provided they are signed by a company representative and not an attorney.

The procedures for filing proofs of claim is set forth in Federal Rule of Bankruptcy Procedure 3001. 9 Collier on Bankruptcy ¶3001.01 at 3001-4 (15th Ed. Rev. 2007).

Filing of proofs of claim is with the clerk in the district where the case under the Code is pending. See, Federal Rules of Bankruptcy Procedure 5005(a); 3002(b).

“A proof of claim shall conform substantially to the appropriate Official Form.” Federal Rule of Bankruptcy Procedure 3001(a). However: “The clerk shall not refuse to accept for filing any petition or other paper presented for the purpose of filing solely because it is not presented in proper form as required by these rules or any local rules or practices.” See, Federal Rules of Bankruptcy Procedure 5005(a). 9 Collier on Bankrutpcy ¶5005.02 at 5005-3 (15th Ed. Rev. 2008).

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C. The Evidence Required To Be Attached To A Proof Of Claim.

1. Claims based on a writing:

“When a claim, or an interest in property of the debtor securing a claim, is based on a writing, the original or a duplicate shall be filed with the proof of claim.” Federal Rule of Bankruptcy Procedure 3001(c).

“If the writing has been lost or destroyed, a statement of the circumstances of the loss or destruction shall be filed with the claim.” Federal Rule of Bankruptcy Procedure 3001(c).

a. Proposed Amendment 3001(c) – Effective December,2011.

Amend Form 10 (B10) – Consumer open credit – will require the most recent account statement to be required to be included.

The new rules for proofs of claim will be:

Rule 3001. Proof of Claim

(c) SUPPORTING INFORMATION.

(1) Claim Based on a Writing. When a claim, or an interest in property of the debtor securing the claim, is based on a writing, theoriginal or a duplicate shall be filed with the proof of claim. If the writing has been lost or destroyed, a statement of the circumstances ofthe loss or destruction shall be filed with the claim. When a claim isbased on an open-end or revolving consumer credit agreement, thelast account statement sent to the debtor prior to the filing of the petition shall also be filed with the proof of claim.

(2) Additional Requirements in an Individual Debtor Case; Sanctions for Failure to Comply. In a case in which the debtor is an

individual:

(A) If, in addition to its principal amount, a claim includes interest, fees, expenses, or other charges incurred before the petition was filed, an itemized statement of the interest, fees, expenses, or charges shall be filed with the proof of claim.

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(B) If a security interest is claimed in property of the debtor, the proof of claim shall include a statement of the amount necessary to cure any default as of the date of the petition.

(C) If a security interest is claimed in property that is the debtor’s principal residence and an escrow account has been established in connection with the claim, the proof of claim shall be accompanied by an escrow account statement prepared as of the date the petition was filed and in a form consistent with applicable nonbankruptcy law.

(D) If the holder of a claim fails to provide any information required by this subdivision (c), the holder shall be precluded from presenting the omitted information, in any form, as evidence in any hearing or submission in any contested matter or adversary proceeding in the case, unless the court determines that the failure was substantially justified or is harmless. In addition to or in lieu of this sanction, the court may, after notice and hearing, award other appropriate relief, including reasonable expenses and attorney’s fees caused by the failure.

COMMITTEE NOTE

Subdivision (c). Subdivision (c) is amended to prescribe with greater specificity the supporting information required to accompany certain proofs of claim and, in cases in which the debtor is an individual, the consequences of failing to provide the required information.

Existing subdivision (c) is redesignated as (c)(1). It is amended to require that a proof of claim based on an open-end or revolving consumer credit agreement (such as an agreement underlying the issuance of a credit card) be accompanied by the last account statement sent to the debtor prior to the filing of the bankruptcy petition. This requirement applies whether the statement was sent by the entity filing the proof of claim or by a prior holder of the claim.

Subdivision (c)(2) is added to require additional information to accompany proofs of claim filed in cases in which the debtor is an individual. When the holder of a claim seeks to recover – in addition to the principal amount of a debt – interest, fees, expenses, or other charges, the proof of claim must be accompanied by a statement itemizing these additional amounts with sufficient specificity to make clear the basis for the claimed amount.

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If a claim is secured by property of the debtor and the debtor defaulted on the claim prior to the filing of the petition, the proof of claim must be accompanied by a statement of the amount required to cure the prepetition default. If the claim is secured by the debtor’s principal residence and an escrow account has been established in connection with the claim, the proof of claim must also be accompanied by an escrow account statement showing the account balance, and any amount owed, as of the date the petition was filed. The statement shall be prepared in a form consistent with the requirements of nonbankruptcy law. See, e.g., 12 U.S.C. § 2601 et seq. (Real Estate Settlement Procedure Act).

Paragraph (D) of subdivision (c)(2) sets forth the sanctions that apply to, or that may be imposed by the court against, a creditor in an individual debtor case that fails to provide information required by subdivision (c).

Rule 3002.1. Notice Relating to Claims Secured by Security Interest in the Debtor’s Principal Residence

(a) NOTICE OF PAYMENT CHANGES. In a chapter 13 case, if a claim secured by a security interest in the debtor’s principal residence is provided for under the debtor’s plan pursuant to § 1322(b)(5) of the Code, the holder of the claim shall file and serve on the debtor, debtor’s counsel, and the trustee notice of any change in the payment amount, including any change that results from an interest rate or escrow account adjustment, no later than 30 days before a payment at a new amount is due.

(b) FORM AND CONTENT. A notice filed and served pursuant to subdivision (a) of this rule shall: (1) conform substantially to the form of notice under applicable nonbankruptcy law and the underlying agreement that would be given if the debtor were not a debtor in bankruptcy, (2) be filed as a supplement to the holder’s proof of claim, and (3) not be subject to Rule 3001(f).

(c) NOTICE OF FEES, EXPENSES, AND CHARGES. In a chapter 13 case, if a claim secured by a security interest in the debtor’s principal residence is provided for under the debtor’s plan pursuant to § 1322(b)(5) of the Code, the holder of the claim shall file and serve on the debtor, debtor’s counsel, and the trustee a notice that itemizes all fees, expenses, or charges incurred in connection with the claim after the bankruptcy case was filed, and that the holder asserts are recoverable against the debtor or against the debtor’s principal residence. The notice shall be filed as a supplement to the holder’s proof of claim and served no later than 180 days after the date when the fees, expenses, or charges are incurred. The notice shall not be

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subject to Rule 3001(f). On motion of the debtor or trustee filed no later than one year after service of the notice, the court shall, after notice and hearing, determine whether payment of the fees, expenses, or charges is required by the underlying agreement and applicable nonbankruptcy law to cure a default or maintain payments in accordance with § 1322(b)(5) of the Code.

(d) NOTICE OF FINAL CURE PAYMENT. No later than 30 days after making final payment of any cure amount on a claim secured by a security interest in the debtor’s principal residence, the trustee in a chapter 13 case shall file and serve upon the holder of the claim, the debtor, and debtor’s counsel a notice stating that the amount required to cure the default has been paid in full. If the debtor contends that final cure payment has been made and the trustee does not timely file and serve the notice required by this subdivision, the debtor may file and serve upon the holder of the claim and the trustee a notice stating that the amount required to cure the default has been paid in full.

(e) RESPONSE TO NOTICE OF FINAL CURE PAYMENT. No later than 21 days after service of the notice under subdivision (d) of this rule, the holder of a claim secured by a security interest in the debtor’s principal residence shall file and serve on the debtor, debtor’s counsel, and the trustee a statement indicating (1) whether it agrees that the debtor has paid in full the amount required to cure the default, and (2) whether, consistent with § 1322(b)(5) of the Code, the debtor is otherwise current on all payments. If applicable, the statement shall itemize any required cure or postpetition amounts that the holder contends remain unpaid as of the date of the statement. The statement shall be filed as a supplement to the holder’s proof of claim and shall not be subject to Rule 3001(f).

(f) MOTION AND HEARING. On motion of the debtor or trustee filed no later than 21 days after service of the statement under subdivision (e) of this rule, the court shall, after notice and hearing, determine whether the debtor has cured the default and paid all required postpetition amounts in full.

(g) FAILURE TO NOTIFY. If the holder of a claim secured by a security interest in the debtor’s principal residence fails to provide any information required by subdivision (a), (c), or (e) of this rule, the holder shall be precluded from presenting the omitted information, in any form, as evidence in any hearing or submission in any contested matter or adversary proceeding in the case, unless the court determines that the failure was substantially justified or is harmless. In addition to or in lieu of this sanction, the court may, after notice

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and hearing, award other appropriate relief, including reasonable expenses and attorney’s fees caused by the failure.

COMMITTEE NOTE

This rule is new. It is added to aid in the implementation of § 1322(b)(5), which permits a chapter 13 debtor to cure a default and maintain payments of a home mortgage over the course of the debtor’s plan.

In order to be able to fulfill the obligations of § 1322(b)(5), a debtor and the trustee must be informed of the exact amount needed to cure any prepetition arrearage, see Rule 3001(c)(2), and the amount of the postpetition payment obligations. If the latter amount changes over time, due to the adjustment of the interest rate, escrow account adjustments, or the assessment of fees, expenses, or other charges, notice of any change in payment amount needs to be conveyed to the debtor and trustee. Timely notice of these changes will permit the debtor or trustee to challenge the validity of any such charges, if necessary, and to adjust postpetition mortgage payments to cover any properly claimed adjustment. Compliance with the notice provision of the rule should also eliminate any concern on the part of the holder of the claim that informing a debtor of a change in postpetition payment obligations might violate the automatic stay.

Subdivision (a). Subdivision (a) requires the holder of a claim secured by the debtor’s principal residence to notify the debtor, debtor’s counsel, and the trustee of any postpetition change in the mortgage payment amount. Notice must be provided at least 30 days before the new payment amount is due.

Subdivision (b). Subdivision (b) provides the method of giving the notice of a payment change. The holder of the claim must give notice of the change in substantially the same form that would be used according to the underlying agreement and nonbankruptcy law if the debtor were not a debtor in bankruptcy. In addition to serving the debtor, debtor’s counsel, and the trustee, as required by subdivision (a), the holder of the claim must also file the notice of payment change on the claims register in the case as a supplement to its proof of claim. Rule 3001(f) does not apply to this notice, and therefore it will not constitute prima facie evidence of the validity and amount of the payment change.

Subdivision (c). Subdivision (c) requires an itemized notice to be given, within 180 days of incurrence, of any postpetition fees, expenses, or charges that the holder of the claim asserts are recoverable in connection with a claim secured by the debtor’s principal residence. This amount might include, for example, inspection fees, late charges, or attorney’s fees. Filing and service requirements for this notice are the same as for the notice required under subdivision (a).

Within a year after service of a notice under subdivision (c), the debtor or trustee may move for a court determination of whether the fees, expenses, or charges set forth in

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the notice are required by the underlying agreement or applicable nonbankruptcy law to cure a default or maintain payments.

Subdivision (d). Subdivision (d) requires the trustee to issue notice within 30 days after making the last payment to cure a prepetition default on a claim secured by the debtor’s principal residence. If the trustee fails to file this notice within the required time, this subdivision also permits a debtor who contends that the prepetition default has been cured to file and serve the notice.

Subdivision (e). Subdivision (e) governs the response of the holder of the claim to the trustee’s or debtor’s notice under subdivision (d). Within 21 days after service of notice of the final cure payment, the holder of the claim must file and serve a statement indicating whether the prepetition default has been fully cured and also whether the debtor is current on all payments in accordance with § 1322(b)(5) of the Code. If the holder of the claim contends that final cure payment has not been made or that the debtor is not current on other payments required by § 1322(b)(5), the response must itemize all missed amounts the holder contends are still due.

Subdivision (f). Subdivision (f) provides the procedure for the judicial resolution of any disputes that may arise about payment of a claim secured by the debtor’s principal residence. The trustee or debtor may move no later than 21 days after the service of the statement under subdivision (e) for a determination by the court of whether the prepetition default has been cured and whether all postpetition obligations have been fully paid.

Subdivision (g). Subdivision (g) specifies sanctions that may be imposed if the holder of a claim secured by the debtor’s principal residence fails to provide any of the information required by subdivisions (a), (c), or (e).

If, after the chapter 13 debtor has completed payments under the plan and the case has been closed, the holder of a claim secured by the debtor’s principal residence seeks to recover amounts that should have been but were not disclosed under this rule, the debtor may move to have the case reopened in order to seek sanctions against the holder of the claim under subdivision (g).

b. Secured claims – evidence of perfection:

“If a security interest in property of the debtor is claimed, the proof of claim shall be accompanied by evidence that the security interest has been perfected.” Federal Rule of Bankruptcy Procedure 3001(d).

c. Transferred claims:

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Where a claim has been transferred (other than for security) prior to the filing of the proof of claim, proofs of claim for transferred claims can “only be filed by the transferee or an indentured trustee”. Federal Rule of Bankruptcy Procedure 3001(e)(1).

If the transfer of the claim is after a proof of claim is filed, “evidence of the transfer shall be filed by the transferee.” This triggers the bankruptcy clerk’s obligation to notify the transferor, by mail, of the transfer. The transferor has 20 days from the mailing of the notice to timely object to the reported transfer. Federal Rule of Bankruptcy Procedure 3001(e)(2).

Claims transferred as security are rare in Chapter 13 cases, and are outside the scope of this outline. See, Federal Rule of Bankruptcy Procedure 3001(e)(3), (4) and (5).

The Wingerter case, and subsequent appeal, deal with assigned claims. See, In re Wingerter, 376 B.R. 221 (Bankr. N.D. Ohio 2007). B-Line filed a proof of claim, purportedly as assignee from Covenant Management (“Covenant”) and/or GTE.  The proof of claim did not identify the date the debt was incurred, indicate that interest or other charges were included, or include supporting documentation, beyond a one-page form with one of the debtor’s partial social security number, an address, and an amount due.  The debtors objected to the claim, asserting that they owed no debt to GTE, the originating creditor.  It became evident that no documentation existed in support of B-Line’s claim, and that B-Line had relied on representations made from the assignor.  The court issued an order to show cause, directing B-Line to explain its claim-filing procedures.  B-Line stated that it periodically purchased accounts owned by Covenant on which Covenant received bankruptcy notices, and that claims were assigned as many as three times before Covenant bought it, and there were no documents relating to the debtors, the alleged debt, or GTE.  The court found that B-Line’s filing of the proof of claim was a violation of Fed. R. Bankr. P. 9011 because it failed to conduct a reasonable inquiry into the claim, concluding that at a minimum an assignee should review a debtor’s schedules to determine whether the assigned claim is reflected.  The Bankruptcy Appellate Panel dismissed B-line’s appeal, In re Wingerter, 394 B.R. 859 (B.A.P. 6th Cir. 2008), appeal docketed, No. 08-4455 (6th Cir. Nov. 6, 2008), as moot and because B-Line sought an impermissible advisory opinion.  The court found that no live controversy remained in the case because the bankruptcy court declined to enter sanctions related to B-Line’s violation of Fed. R. Bankr. P. 9011.  The court also determined that B-Line’s appeal of the bankruptcy court’s general views on proper practice in filing proofs of claim amounted to a request for an impermissible advisory opinion from the court.

III. WHAT CREDITORS NEED TO ATTACH TO THEIR PROOFS OFCLAIM.

The documentary items to be included with a proof of claim are listed on Form B10. Under Bankr. Rule 3001, a creditor filing a proof of claim must attach a copy of the underlying contract to establish prima facie evidence of the validity of the contract. In re G.I. Industries, Inc., 204 F.3d 1276, 1280 (9th Cir. 2000).

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A. Claims Secured By A Mortgage Or Deed Of Trust.

The bankruptcy court decision In re Barnes, 21 Fla. L. Weekly Fed. B 326, 2008 Bankr. Lexis 1932 (Bankr. N.D. Fla. 2008) stated:

“Though the cases cited by the Debtor deal with the requirement of documentation in the context of claims arising from credit card debt, there are some general principles that can be gleaned from them. For example, if a creditor's claim is based on a writing, the original or a duplicate 'should be filed with the proof of claim, unless it has been lost or destroyed, in which case an explanation should be provided. In re Burkett, 329 B.R. 820, 826 (Bankr. S.D. Ohio 2005); Fed. R. Bankr. P. 3001(c). The exclusive statutory bases for disallowing a claim are found in § 502(b) and do not include a lack of documentation. Heath v. Am. Express Travel Relates Svcs. (In re Heath), 331 B.R. 424, 431-32, 435 (9th Cir. BAP 2005); B-Line, LLC v. Kirkland (In re Kirkland), 379 B.R. 341, 345 (10th Cir. BAP 2007); In re Burkett, 329 B.R. 820, 828 (Bankr. S.D. Ohio 2005) (explaining that a lack of documentation is not listed as a ground for disallowing a claim under § 502). Several courts have concluded that documentation provided in connection with a proof of claim is sufficient for claims allowance purposes if it establishes the validity, ownership, and amount of the claim. Burkett at 828-29; see also In re Sandifer, 318 B.R. 609, 611 (Bankr. M.D. Fla. 2004) (stating that debtors are entitled to adequate documentation, but that "creditors should not be burdened with providing unnecessary documentation"). If a debtor successfully pierces the Rule 3001(f) presumption of prima facie validity, the burden shifts to the creditor to prove the claim by a preponderance of the evidence. Burkett, 329 B.R. at 829-30.

In this case, I find that the note and mortgage attached to the proof of claim provide sufficient documentation of the claim. The note and mortgage give rise to the claim. The Official Form merely requires the claimant to set forth an itemization of the elements of the claim; it does not require the claimant to document each and every element. Since information as to reasonableness can be obtained through discovery, it does not necessarily have to be provided in the proof of claim. Furthermore, as was explained in In re Palmer, 386 B.R. 875 (Bankr. N.D. Fla. 2008), filing a proof of claim does not require legal expertise. To require the level of documentation the Debtor is requesting could require the involvement of an attorney and would unnecessarily increase costs. Such additional documentation may not overwhelm the Court, but it would vastly increase the cost to all debtors.”

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B. Claims Secured By Title Vehicles.

It appears that a copy of the note, security agreement and the title should be attached to a proof of claim, along with an account statement.

In re Drake, 363 B.R. 1, 4 (Bankr. D.C. 2006) states:

Moreover, the proof of claim attached a security agreement whereby the debtor granted HSBC a security interest. Although that security agreement did not include a signature of the creditor, the District of Columbia's version of the Uniform Commercial Code only required the debtor's signature on the security agreement for there to be an enforceable security interest. See U.C. Code §9-203(b)(3)(A); Falconbridge U.S., Inc. v. Bank One Illinois (In re Vic Supply Co., Inc.), 227 F.3d 928 (7th Cir. 2000) (lack of creditor's signature on security agreement was not fatal even though security agreement specifically provided that it was effective only when "accepted" by the creditor "as provided below," meaning signed in the blank space for signature). So there can be no doubt that HSBC had a security interest in the vehicle.

The trustee's objection regarding failure to attach evidence of the lien may be that no evidence of perfection of the security interest has been appended to the proof of claim as required by Rule 3001(d) and by the Official Form. 1/ However, that alone is not a basis for disallowing the claim, and the trustee did not affirmatively contend in her objection that the claim is unperfected. A creditor's failure to fully comply with the documentary requirements of Rule 3001(d) does not provide a basis for disallowing a claim. Dove-Nation v. eCast Settlement Corp. (In re Dove-Nation), 318 B.R. 147, 152 (B.A.P. 8th Cir. 2004); In re Shank, 315 B.R. 799, 812 (Bankr. N.D. Ga. 2004) (concluding that "an objection to a proof of claim based solely on the lack of attached documents provides no basis for disallowance of a claim, even if the claimant declines to respond to the objection.").

Footnote:

1/ Once the District of Columbia issues a certificate of title to a motor vehicle, a security interest can be perfected in that vehicle only by its being noted on the certificate of title, but beforehand, the rule of first in time, first in right prevails. See McCarthy v. BMW Bank of N. Am. (In re Dorton), 327 B.R. 14 (Bankr. D.D.C. 2005), aff'd, 346 B.R. 271 (D.D.C. 2006), appeal pending (D.C. Cir.). Accordingly, HSBC ought to have appended to its proof of claim a copy of the certificate of title (assuming one was issued, which is likely).

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C. Other Secured Creditors.

Judgment lien creditors filing secured claims should attach a copy of the judgment to their proof of claim. While the court in In re Trail End Lodge, Inc., 51 B.R. 209 (D. Vt. 1985) held that a claim based on a judgment was adequate even without the judgment being attached, when the debtor had a copy of the judgment, it should be noted that the case was a Chapter 11 proceeding where the debtor was the DIP. In a Chapter 7 or 13 case, the DEBTOR having been served with the judgment would not mean that the TRUSTEE had a copy of the judgment.

D. Priority Claims.

1. The IRS.

In re Shaver, 247 B.R. 436, 438-439 (Bankr. E.D. Tenn. 1999) stated:

The majority of courts to consider this issue in the context of claims by the IRS have concluded that because tax claims are based on statutory obligations rather than obligations created by a writing, Fed. R. Bankr. P. 3001(c) does not apply to proofs of claims filed by taxing authorities. See U.S. v. Braunstein (In re Pan), 209 B.R. 152, 156 (D. Mass. 1997)(citing Jenny Lynn Mining Co., district court held that because proof of claim was based on a statutory tax penalty, the government had no obligation under the rules to provide additional documentation in support of its proof of claim); Vines v. I.R.S. (In re Vines), 200 B.R. 940, 949 (M.D. Fla. 1996)(IRS was not required to attach any documentation to its proof of claim because the claim and lien were based on federal statutes, not a writing, citing Jenny Lynn Mining Co.); In re Alvstad, 223 B.R. 733, 745 (Bankr. D.N.D. 1998)("claim [of IRS] does not fall within the compass of the documentation requirement of Rule 3001(c), as its basis lies in statute."); Bozich v. I.R.S. (In re Bozich), 212 B.R. 354, 360 (Bankr. D. Ariz. 1997)("Courts across the country [**8] have held that tax claims are based on statute, not on a writing, and that, therefore, such claims do not need to be supported by the documentation required by Rule 3001(c)."); In re Shabazz, 206 B.R. 116, 124 (Bankr. E.D. Va. 1996)(court rejected argument that IRS was required to attach a certificate of assessment to proof of claim, noting that Rule 3001(c) only applies where claim is based on a writing); Fuller v. U.S. (In re Fuller), 204 B.R. 894, 898 (Bankr. W.D. Pa. 1997)(court observed that although in the case before it the IRS had provided detailed supporting documentation, other courts had concluded that such documentation was unnecessary); In re Catron, 198 B.R. 905, 907 (Bankr. M.D.N.C. 1996)(court concluded that IRS's proof of claim complied with Rule 3001 because IRS claim was based on statute rather than writing, no security

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interest arising out of an agreement was claimed, and IRS had attached to its proof of claim an itemization of the amounts and types of taxes due); In re Hollars, 198 B.R. 270, 272 (Bankr. S.D. Ohio 1996)(The supporting documentation requirement of Rule 3001(c) is not applicable because "the claim of the IRS is not founded upon a writing, but rather is based upon the United States Constitution and federal legislation which grants the federal government the power to lay and collect taxes on income."); In re White, 168 B.R. 825, 834 (Bankr. D. Conn. 1994)(even though statutory lien asserted, it was not necessary for IRS to attach relevant sections of the Internal Revenue Code or any other documentation to its proof of claim, citing Jenny Lynn Mining Co.).

2. Domestic Support Obligations.

In re Watson, 402 B.R. 294 (Bankr. N.D. Ind. 2009) states:

The Trustee has objected to that portion of claim # 3-1 which asserts that the debtor William Watson is indebted to the claimant LaVonne Hill in the amount of $ 4,713.45 for "Pre-petition Attorney Fees -- Statutory Recovery of Enforcement of Custody Support Order" as a claim entitled to priority under 11 U.S.C. § 507(a)(1)(A) or (a)(1)(B). There is nothing in the proof of claim itself which in any manner establishes an indebtedness of the debtor to anyone for the amount of the asserted claim for attorney's fees. There is no additional admissible evidence in the record which establishes Watson's indebtedness to either Hill or Rappaport. Exhibit "A" attached to the claimant's legal memorandum is not admissible into evidence and was never sought to be made a part of the evidentiary record before the court for determination of this contested matter. Documents attached to legal briefs, or documents which are merely filed on the court's docket record, do not constitute evidence concerning a matter before the court unless those documents are specifically made a part of an evidentiary record applicable to a particular proceeding. This is true regardless of the independent admissibility of those documents as established by the submission by which those documents were sought to be placed before the court. Apart from failure to make a record by appropriate means, documents which lack a foundation for admissibility add nothing to the mix.

The Trustee's objection sufficiently calls into question the prima facie basis for allowance of the amount of $ 4,713.45 asserted by the claim as a claim entitled to priority under 11 U.S.C. § 507(a)(1)(A)/ 11 U.S.C. § 507(a)(1)(B). Because Lavonne Hill has failed to create an evidentiary record which sustains her burden of proof as to this portion of the claim, the Trustee's objection must be sustained.

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E. Unsecured – Credit Card, Bulk Purchased Claims, Etc.

The issue of what needs to be attached to a proof of claim by a bulk purchaser of unsecured claims, the consequences of not attaching adequate documentation is an evolving area of the law. The following cases provide some perspective on current issues:

In re Tran, 369 B.R. 312 (S.D. Tex. 2007). Creditor [eCast] attached to its proof of claim a general assignment agreement between the creditor and three banks that had issued credit cards. The assignment agreements did not specifically identify debtor or her credit card accounts. The claim was disallowed by the bankruptcy court because the creditor failed to meet the Fed. R. Bankr. P. 3002 requirement that requires attachment of the underlying documentation when the claim is based upon a writing. Accordingly, the proofs of claim did not have prima facie validity under Fed. R. Bankr. P. 3001(f). The creditor also failed to satisfy its evidentiary burden of proving the validity and amounts of each claim, as required by Texas law. Because the claim did not enjoy prima facie validity, debtor's Objection was properly allowed under §502(a) because the creditor failed to meet its burden of producing authenticated credit card agreements or monthly statements to prove breach of the underlying contract under Texas law. Because the claims were unenforceable under Texas law, the bankruptcy court properly sustained debtor’s Objection under §502(b)(1).

In re Sampson, 392 B.R. 724 (Bankr. N.D. Ohio 2008). A blanket assignment from the original creditor was sufficient that creditor was the holder of the claim where the debtors acknowledged the legitimacy of three obligations owed to the creditor, and the successor attached to its proofs of claim copies of account statements that the creditor had sent to the debtors. In re Cleveland, 396 B.R. 83, 97 (Bankr. N.D. Okla. 2008) follows Sampson on the assignment issue.

In re Cleveland., 396 B.R. 83 (Bankr. N.D. Okla. 2008). Where evidence of an assignment is necessary to substantiate a claim for purposes of Federal Rule of Bankruptcy Procedure 3001, such evidence does not have to be exacting. In other words, the documentation for the assignment does not have to specify a bankruptcy debtor's particular account number. Instead, evidence of a blanket assignment may suffice.

In re Rogers, 391 B.R. 317, 322 (Bankr. E.D. Pa. 2008). Failure to attach supporting documentation to a proof of claim when the bankruptcy rules require it is not grounds for disallowing the claim. Claims may be disallowed solely on grounds set forth in 11 U.S.C. §502(b). See e.g. In re Kirkland, 379 B.R. 341, 354 (B.A.P. 10th Cir. 2007); In re Dove-Nation, 318 B.R. 147, 152 (B.A.P. 8th Cir. 2004); In re Kincaid, 388 B.R. 610, 614 (Bankr. E.D. Pa. 2008); and In re Burkett, 329 B.R. 820, 828 n.2 (Bankr. S.D.

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Ohio 2005) (collecting cases). A proof of claim lacking necessary facts or supporting documents simply is not entitled to a presumption of prima facie validity. Kincaid, 388 B.R. 610, 614, citing In re Heath, 331 B.R. 424, 433 (B.A.P. 9th Cir. 2005); Dove-Nation, 318 B.R. at 152; In re Moreno, 341 B.R. 813, 817 (Bankr. S.D. Fla. 2006); In re Shank, 315 B.R. 799, 810 (Bankr. N.D. Ga. 2004) (quoting In re Stoecker, 5 F.3d 1022, 1028 (7th Cir. 1993)).

Consequently, at most B-Real loses the presumption that its proofs of claim are valid prima facie and takes on the burden of proving that the claims are valid. If it fails to do so, the claims may be disallowed.”

In re Kincaid, 388 B.R. 610 (Bankr. E.D. Pa. 2008). The bankruptcy court held that while the proofs of claim themselves provided no support for the alleged assignments and/or provided insufficient linkage to the original credit card claims and, thus, were not entitled to the presumption of validity under Fed. R. Bankr. P. 3001(f), the debtor's schedules were consistent with the amount set forth in the proofs of claim because each scheduled claim was identical to the penny to the amount contained in the proofs of claim and the creditors' proofs of claim identified the last four digits of account numbers identified by the debtor that matched the last four digits of account numbers associated with the original credit card claims. Accordingly, the court bankruptcy allowed the claims as filed because no claims were filed by the scheduled credit card merchant creditors and the debtor would receive a discharge of the scheduled creditors. [Query: Is the lesson here – if you don’t have documentation, simply repeat what the debtor listed as your claim? How many times will this technique have to be used fraudulently by non-claim holders before the courts stop using the similarity of the listed debt and the proof of claim as evidence of the validity of the debt and that the proper holder is the claimant?]

In re Chalakee, 385 B.R. 771 (Bankr. N.D. Okla, 2008). Creditors' failure to attach supporting documentation to their proofs of claim did not require disallowance of claim, where there was only the debtors' bare assertion that amounts of claims were disputed – there was no good-faith substantive objection that the debts were not owed, or that amounts in the proofs of claim were erroneous.

In re Kendall, 380 B.R. 37 (Bankr. N.D. Okla. 2007). Chapter 13 debtors' objection to a claim was sustained and the claim was disallowed because the claimant [B-Real LLC] had not provided sufficient evidence to establish the actual amount of the obligation that was due or that the claim had actually been assigned from the original creditor to the claimant.

In footnote 3 [page 44] the Kendall court stated:

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“The Court concurs with those courts that have held that merely failing to attach written documentation to a proof of claim does not require outright disallowance of the claim; non-compliance with Rule 3001(c) and Form 10 instructions simply deprive the claimant of the presumption that its claim is valid in the amount stated. See, e.g., In re Stoecker, 5 F.3d 1022, 1028 (7th Cir. 1993); B-Line, LLC v. Kirkland (In re Kirkland), 379 B.R. 341 (B.A.P. 10th Cir. 2007) (Section 502(b) does not authorize disallowance of a claim for failing to comply with the documentation requirements of Bankruptcy Rule 3001); In re Taylor, 363 B.R. 303, 307 (Bankr. M.D. Fla. 2007); In re Burkett, 329 B.R. 820, 828 n.2 (Bankr. S.D. Ohio 2005) ("A majority of courts hold that a failure to attach documents purportedly required by Fed. R. Bankr. P 3001 and Official Form 10 is not, by itself, a basis for disallowance of claim.")(collecting cases).

However, in the face of a valid substantive objection, if the claim is based on a writing that is not attached to the proof of claim, and the presumption of validity does not arise, the claimant is held to the same standard of proof as if the claimant were establishing its claim in a non-bankruptcy forum. See Raleigh v. Illinois Dep't. of Revenue, 530 U.S. 15, 19-20, 120 S. Ct. 1951, 147 L. Ed. 2d 13 (2000); First City Beaumont v. Durkay (In re Ford), 967 F.2d 1047, 1050 n.6 (5th Cir. 1992); Kirkland, at 348 ("In the face of a proper objection, the creditor will have to establish its claim at hearing, bearing whatever burden of proof exists in proving such a claim in a non-bankruptcy arena"); In re Leverett, 378 B.R. 793, 799 (Bankr. E.D. Tex. 2007).” [Case citations updated.]

In re Armstrong, 347 B.R. 581 (Bankr. N.D. Tex. 2006). The bankruptcy court identifies two specific scenarios under which a transferee of a credit card debt may both establish prima facie validity and overcome a "lack of documentation" objection by the debtor: (1) the creditor produces documentation of a 'blanket assignment' to itself of several accounts from a creditor listed as a creditor on the debtor's schedules, coupled with copies of the underling account documents with the debtor; and (2) the creditor produces documentation of a 'blanket assignment' to itself of several accounts from a creditor not listed on the debtor's schedules, but additional documents submitted with the assignment provided a basis to link the entity assigning the claim with an entity listed on the debtor's schedules.

In re Wingerter, 376 B.R. 221 (Bankr. N.D. Ohio 2007).   B-Line filed a proof of claim, purportedly as assignee from Covenant Management (“Covenant”) and/or GTE.  The proof of claim did not identify the date the debt was incurred, indicate that interest or other charges were included, or include supporting documentation, beyond a one-page form with one of the debtor’s partial social security number, an address, and an amount due.  The debtors objected to the claim, asserting that they owed no debt to GTE, the

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originating creditor.  It became evident that no documentation existed in support of B-Line’s claim, and that B-Line had relied on representations made from the assignor.  The court issued an order to show cause, directing B-Line to explain its claim-filing procedures.  B-Line stated that it periodically purchased accounts owned by Covenant on which Covenant received bankruptcy notices, and that claims were assigned as many as three times before Covenant bought it, and there were no documents relating to the debtors, the alleged debt, or GTE.  The court found that B-Line’s filing of the proof of claim was a violation of Fed. R. Bankr. P. 9011 because it failed to conduct a reasonable inquiry into the claim, concluding that at a minimum an assignee should review a debtor’s schedules to determine whether the assigned claim is reflected.  The Bankruptcy Appellate Panel dismissed B-line’s appeal, In re Wingerter, 394 B.R. 859 (B.A.P. 6th Cir. 2008), appeal docketed, No. 08-4455 (6th Cir. Nov. 6, 2008), as moot and because B-Line sought an impermissible advisory opinion.  The court found that no live controversy remained in the case because the bankruptcy court declined to enter sanctions related to B-Line’s violation of Fed. R. Bankr. P. 9011.  The court also determined that B-Line’s appeal of the bankruptcy court’s general views on proper practice in filing proofs of claim amounted to a request for an impermissible advisory opinion from the court.

Judge Small – Andrews. Summary OK. No sanctions. Request to Rules Committee to fix. Reason for last account statement provision being added.

F. Privacy Rights - Full Social Security Number(s) Should NOT Be Used.

Certain personal information of debtor are protected by privacy laws that apply in bankruptcy proceedings. These laws include the Gramm-Leach-Bliley Financial Modernization Act, the E-Government Act, and Bankruptcy Rule 9037 and 11 U.S.C. Section 107.

These laws give debtors (and Chapter 13 Trustees) the tools to remove improper disclosures of personal information from a debtor’s public bankruptcy records. Items that are improper to disclose include a debtor’s social security numbers, a child's name, full account numbers, birthdays, and similar information. If these types of items appear in documents that are publicly viewable, the court can require the information (or document) to be redacted or blocked.

To date, the case law does not appear to allow additional remedies against creditors who wrongfully disclose a debtor's private information. In re Killian, 2009 Bankr. LEXIS 2030 (Bankr. D.S.C. July 23, 2009); In re Lentz, 405 B.R. 893 (Bankr. N.D. Ohio 2009); In re Gjestvang, 405 B.R. 316 (Bankr. E.D. Ark. 2009); In re French, 401 B.R. 295 (Bankr. E.D. Tenn. 2009).

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Newton v. ACC of Enter, Inc. (In re Newton), Adv. No. 08-1106-DHW, 2009 WL 277437, 2009 Bankr. LEXIS 210 (Bankr. M.D. Ala. Jan. 29, 2009).  Debtors’ filed suit aftere creditor filed proofs of claim containing the debtors’ full social security numbers.  The court concluded that a private right of action for damages does not exist under 11 U.S.C. § 105 unless a private right of action is expressly or impliedly created in other bankruptcy law provisions.  The court also found that a private right of action did not exist in the applicable local rule cited by the debtors or in 11 U.S.C. § 107(c), and Congress did not intend to create an implied right of action in section 107.  The court also decided that the debtors could not recover damages for an invasion of their privacy under state law because they had not made the requisite showing that the creditor disseminated their social security numbers to the public at large.

French v. American General Financial Services, Inc. (In re French), 401 B.R. 295 (Bankr. E.D. Tenn. 2009).  Creditors filed proofs of claim that revealed the debtor’s social security number and birth date.  The debtor filed an emergency motion to restrict access to the proof of claim, which was granted that same day.   The debtor then initiated an adversary proceeding against the creditor alleging various privacy violations under: (1) the Gramm Leach Bliley Act (the “GLBA”), (2) the E-Government Act of 2002 (the “EGA”), and (3) 11 U.S.C. §  107 and Fed. R Bankr. P. 9037 for intentionally revealing the debtor’s private information to the public.  The complaint also alleged intentional/negligent infliction of emotional distress and sought compensatory and punitive damages as well as the disallowance of the proof of claim.  In ruling on the creditor’s motion to dismiss, the bankruptcy court held that there was no private right of action under 11 U.S.C. § 107 or Fed. R. Bankr. P. 9037, and the debtor had failed to plead facts challenging the legal sufficiency of the creditor’s claim and failed to support a claim for intentional/negligent infliction of emotional distress .  The court also found that neither the GLBA nor the EGA provided a private cause of action.  However, the court did find that to the extent the complaint sought a finding of contempt for violations of Fed. R. Bankr. P. 9037, 11 U.S.C. § 105(a) did provide authority to enforce the rules.  Therefore, the court refused to dismiss one count of the complaint to the extent it sought an order of contempt for failure to comply with Fed. R. Bankr. P. 9037. 

Cordier v. Plains Commerce Bank (In re Cordier), Adv. No. 08-2037, 2009 WL 890604 (Bankr. D. Conn. March 27, 2009).  The debtors commenced an adversary proceeding based on the bank’s proof of claim which included their full social security numbers.  The complaint alleged: (1) objection to the bank’s proof of claim; (2) violation of Gramm-Leach-Bliley Act; (3); violation of Conn. Gen. Stat. § 42-470 (prohibiting the public display of an individual’s social security number); (4) violation of Fed. R. Bankr. P. 9037; and (5) invasion of privacy.  The court dismissed the complaint holding that: (1) the debtors failed to allege a substantive basis for disallowance of the claim and failed to challenge the amount or validity of the claim; (2) there was no private right of action

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under the GLBA, Conn. Gen. Stat. § 42-470, or Fed. R. Bankr. P. 9037; and (3) the debtors failed to establish the “publicity” requirement necessary to establish a claim for invasion of privacy.  The court also rejected the debtor’s argument that 11 U.S.C. § 105(a) and the court’s inherent authority authorized relief for a violation of Fed. R. Bankr. P. 9037.  While the court recognized its ability to sanction under 11 U.S.C. § 105(a) it found that such sanctions are reserved for egregious conduct.   

G. Medical Bills – And What Creditors Should NOT To Attach To AProof Of Claim.

The Office of the United States Trustee has identified medical creditors who file proofs of claim and attach documents that disclose personal medical information.  Official Form 10 (Proof of Claim), instruction 2, provides that a health care related creditor should limit disclosure to avoid embarrassment or the disclosure of confidential health care information.  Neither the proof of claim or any documents submitted with the proof of claim should contain any descriptions of treatments, names of drugs, test performed, diagnosis information, or the like.

H. Other Unsecured Creditors.

1. Non-Record Holders Of A Claim Can Ask To Be Treated AsThe Record Holder.

“For purposes of Rules 3017, 3018 and 3021 and for receiving notices, an entity who is not the record holder of a security may file a statement setting forth facts which entitle that entity to be treated as the record holder. An objection to the statement may be filed by any party in interest.” Federal Rule of Bankruptcy Procedure 3003(d).

I. Failure To Attach Adequate Documentation – Grounds For Disallowance?

Courts disagree on whether an objection based solely on failing to attach supporting documents, constitutes a ground for disallowance of the claim. Some courts addressing this issue have held that § 502(b) provides the exclusive basis for disallowance of claims (the "Exclusive View"). See, In re Kirkland, 379 B.R. 341 (10th Cir. BAP 2007); In re Cluff, 313 B. R. 323 (Bankr. D. Utah 2004), aff'd, Cluff v. eCast Settlement, No. 2:04-CV-978, 2006 U.S. Dist. LEXIS 71904, 2006 WL 2820005 (D. Utah Sept. 29, 2006); In re Dove-Nation, 318 B. R. 147 (8th Cir. BAP 2004); In re Heath, 331 B. R. 424 (9th Cir. BAP 2005); In re Mazzoni, 318 B. R. 576 (Bankr. D. Kan. 2004); In re Burkett, 329 B. R. 820 (Bankr. S. D. Ohio 2005); In re Shank, 315 B. R. 799 (Bankr. N. D. Ga. 2004); In re Relford, 323 B. R. 669 (Bankr. S. D. Ind. 2004), reh'g granted, as amended; In re Kemmer, 315 B. R. 706 (Bankr. E. D. Tenn. 2004); In re Moreno, 341 B. R. 813 (Bankr. S. D. Fla. 2006); In re Shaffner, 320 B. R. 870 (Bankr. W. D. Mich. 2005); In re Guidry, 321 B. R. 712 (Bankr. N. D. Ill. 2005).

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Other courts find the failure to attach documents to be a valid ground for a claim objection (the "Nonexclusive View"). Once an objection is lodged, according to the Nonexclusive View, if the creditor fails to remedy the defect or to otherwise prove its claim at hearing, then the claim should be disallowed. See, In re Taylor, 363 B. R. 303 (Bankr. M. D. Fla. 2007); In re Blue, No. 03 C 6979, 2004 U.S. Dist. LEXIS 14771, 2004 WL 1745786 (N. D. Ill. July 30, 2004); In re Stoecker, 5 F.3d 1022 (7th Cir. 1993); In re Tran, 369 B. R. 312 (S. D. Tex. 2007); In re Armstrong, 320 B. R. 97 (Bankr. N. D. Tex. 2005); In re Henry, 311 B. R. 813 (Bankr. W. D. Wash. 2004); In re Jorczak, 314 B. R. 474 (Bankr. D. Conn. 2004).

XXXIV. THE EFFECT OF A PROPERLY EXCUTED AND FILED PROOF OF CLAIM.

“A proof of claim executed and filed in accordance with these rules shall constitute prima facie evidence of the validity and amount of the claim.” Federal Bankruptcy Rule 3001(f).

A proof of claim is deemed allowed unless it is objected to. See, 11 U.S.C. § 502(a), In re Los Gatos Lodge, Inc., 278 F.3d 890, 894 (9th Cir. 2002); In re Maxwell Commun. Corp. plc, 93 F.3d 1036, 1046 (2nd Cir. 1996).

A properly executed and filed proof of claim constitutes "prima facie evidence of the validity and amount of the claim." Bankruptcy Rule 3001(f). When an objection is filed, the objecting party bears the initial burden of producing sufficient evidence to rebut the presumption of validity given to the claim. In re Nelson, 206 B.R. 869, 878 (Bankr. N.D. Ohio 1997). The burden then shifts to the claimant to prove the validity and amount of the claim by a preponderance of the evidence. Id. While the burden of going forward shifts during the claims objection process, the ultimate burden of persuasion is always on the claimant to prove the claimed entitlement. In re Holm, 931 F.2d 620, 623 (9th Cir.1991).

XXXV.STANDING TO OBJECT TO A PROOF OF CLAIM.

A. The Chapter 13 trustee.

Chapter 13 Trustees clearly have standing to object to claims because one of the specified duties of a trustee under 11 U.S.C. §704(5) is to, "if a purpose would be served, examine proofs of claims and object to the allowance of any claim that is improper." Section 704(5) is made applicable to Chapter 13 Trustees by 11 U.S.C. §1302(b)(1)((b) The trustee shall – (1)perform the duties specified in section . . . 704(5)….) In re Sims, 278 B.R. 457, 482 (Bankr. E.D. Tenn. 2002).

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In re Overbaugh, Docket No. 08-2355-bk (2nd Cir. March 11, 2009) states: “Chapter 13 trustee, who is charged with assuring that claims are properly disbursed, see 11 U.S.C. §1302(b)(3), has standing to object to a motion by debtors to reclassify a claim from secured to unsecured.”

“In reaching this result, we join two other circuits that have concluded, when considering similar challenges to the authority of a Chapter 13 trustee, that “the primary purpose of the Chapter 13 trustee is not just to serve the interests of unsecured creditors, but rather, to serve the interests of all creditors.” In re Andrews, 49 F.3d 1404, 1407 (9th Cir. 1995)(citing In re Maddox, 15 F.3d 1347, 1355 (5th Cir. 1994).(“[T]he [C]hapter 13 trustee serves the interests of all creditors…..”).

The Overbaugh court also stated: “In addition, we agree with the commonsensical observation of the bankruptcy judge that Rule 3007 of the Federal Rules of Bankruptcy Procedure supports this conclusion; it would make little sense to require parties to notify a trustee that they objected to a claim if the trustee did not have standing to oppose or support that objection.”

B. Chapter 13 debtors.

Courts have generally held that Chapter 13 debtors have standing to object to proofs of claim filed in their cases. See, Cable v. Ivy Tech State College, 200 F.3d 467, 472-474 (7th Cir. 1999); In re Herrera v. JPMorgan Chase Bank N.A., 369 B.R. 395, 399 n.1 (E.D. Wisc. 2007); In re Rogers, 391 B.R. 317, 321 (Bankr. M.D. La. 2008); In re Sims, 278 B.R. 457, 482-484 (Bankr. E.D. Tenn. 2002); In re Dooley, 41 B.R. 31, 33 (Bankr. N.D. Ga. 1984); In re Roberts, 20 B.R. , 917 But see, Holmes v. Silver Wings Aviation, Inc., 881 F.2d 939 (10th Cir. 1989)(No standing in base Plan cases where only distribution is affected.).

Courts have held that Chapter 13 debtors lack standing to object to a proof of claim based on the post-filing assignment of the claim. In re Lynn, 285 B.R. 858, 861-862 (Bankr. S.D.N.Y. 2002). But, the validity of the assignment of the debt prior to the filing of the Chapter 13 case is part of the sufficiency of the evidence supporting a proof of claim. See, In re Cleveland, 396 B.R. 83, 95 n.47 (Bankr. N.D. Okla. 2008).

C. Creditors.

Adair v. Sherman, 230 F.3d 890, 894 n.3 (7th Cir. 2000) stated:

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“Parties in interest include not only the debtor, but anyone who has a legally protected interest that could be affected by a bankruptcy proceeding. See In re FBN Food Servs., Inc., 82 F.3d 1387, 1391 (7th Cir. 1996). Therefore, if one creditor files a potentially fraudulent proof of claim, other creditors have standing to object to the proof of claim.”

Also Cf., Orius Corp. v. Qwest Corp., 373 B.R. 555, 574-576 (Bankr. N.D. Ill. 2007)(Chapter 11); In re Morrison, 69 Bankr. 586, 588-89 (Bankr. E.D. Pa. 1987) (a creditor in a Chapter 7 case has standing to object to another creditor's claim).

D. Other “parties in interest”.

Adair v. Sherman, 230 F.3d 890, 894 n.3 (7th Cir. 2000) states that under §502(a), a party in interest can object to a claim, and this includes: "not only the debtor, but anyone who has a legally protected interest that could be affected by a bankruptcy proceeding".

E. Creditor’s Standing To File A Proof Of Claim.

In re Hwang, 393 B.R. 701 (Bankr. C.D. Cal. 2008).  In the context of a relief from stay motion, the court analyzed the proper party in interest to bring such motions (the analysis should be similar for POCs).  After discussing how notes and mortgages/deeds of trust work generally, the court concluded that the “mortgage follows the note” and only the holder of the note can enforce the mortgage.  Id. at 709.  The court held that although the mortgage servicer has the right to take steps to enforce the mortgage on behalf of its agent, including moving for relief from stay, and is a party in interest for such motions, it is not the real party in interest under Fed. R. Civ. P. 17(a)(3).  Therefore, a motion for relief from stay must be brought in the name of the note holder.  The court continued the hearing to allow the note holder to join the motion, be substituted in as movant, or ratify the motion filed by the loan servicer. 

In re Conde-Dedonato, 391 B.R. 247 (Bankr. E.D.N.Y. 2008).  The court addressed both the assignment of a note and mortgage, and the mortgage servicer’s standing to file the proof of claim.  The court determined that, under New York law, a note and mortgage can be transferred by delivery and does not have to be evidenced by a written assignment.  The court found that the assignment from the original mortgage company to Deutsche Bank was valid.  The court concluded that the servicer, Homecomings Financial, LLC (“Homecomings”), had the authority to collect on behalf of Deutsche Bank and standing to file the proof of claim.

F. Creditors Can Freely Amend Proofs Of Claim – Unless There Has

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Been An Objection?

In re Gilbreath, 395 B.R. 356, 366 (Bankr. S.D. Tex. 2008) states:

Generally, a creditor may freely amend its proofs of claim before they are successfully objected to by the debtor. See, e.g., First Nat'l Bank of Mobile v. Everhart (In re Commonwealth Corp.), 617 F.2d 415, 422 n. 12 (5th Cir. 1980) (noting that "amendment of claims in bankruptcy is liberally allowed" within statutory limits). However, once the debtor objects to a proof of claim, it becomes a "contested matter" under Bankruptcy Rule 9014. See In re Cloud, 214 F.3d 1350, 2000 WL 634637, at *2 (5th Cir. 2000) (unpublished); see also Fed. R. Bankr. P. 3007, advisory committee's note ("The contested matter initiated by an objection to a claim is governed by rule 9014 . . . ."); Fed. R. Bankr. P. 9014, advisory committee's note ("[T]he filing of an objection to a proof of claim . . . creates a dispute which is a contested matter . . . ."). Further, Bankruptcy Rule 9014 makes applicable certain procedural rules contained in Part VII of the Bankruptcy Rules, and allows the court to "at any stage in a particular matter direct that one or more of the other rules in Part VII shall apply." Fed. R. Bankr. P. 9014(c). Bankruptcy Rule 7015 makes Federal Rule of Civil Procedure 15 (Rule 15), governing amendments, applicable in adversary proceedings. Taken together, Bankruptcy Rules 9014 and 7015 make Rule 15 applicable in contested matters at the Court's election.

Further, most bankruptcy courts have recognized that “[t]he trend of the cases appear to apply Rule 7015 to contested matters." In re MK Lombard Group I, Ltd., 301 B.R. 812, 816 (Bankr. E.D. Pa. 2003); see also, e.g., In re Stavriotis, 977 F.2d 1202, 1204 (7th Cir. 1992) (noting that Bankruptcy Rule 9014 permits extension of Rule 7015 to contested matters); In re Best Refrigerated Express, Inc., 192 B.R. 503, 506 (Bankr. D. Neb. 1996) (applying Rule 7015 through Rule 9014 to allow amendment to a filed proof of claim to relate back); Enjet, Inc. v. Maritime Challenge Corp. (In re Enjet, Inc.), 220 B.R. 312, 314 (E.D. La. 1998) (noting that "numerous courts have applied Rule 7015 and Rule 15(c) explicitly or by analogy in non-adversary [bankruptcy] proceedings"); In re Brown, 159 B.R. 710, 714 (Bankr. D.N.J. 1993) (noting that Rule 15's "standards for allowing amendments to pleadings in adversary proceedings . . . also apply to amendments to a proof of claim"); In re Blue Diamond Coal Co., 147 B.R. 720, 725 (Bankr. E.D. Tenn. 1992) (extending Rule 9014 to apply Rule 7015 to contested matters); In re Enron Corp., 298 B.R. 513, 521-22 (Bankr. S.D.N.Y. 2003) (invoking Rule 9014 to

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apply Rule 7015); 10 Collier on Bankruptcy P 7015.02 n.1 (Matthew Bender 15th ed. Rev.).

Rule 15 requires claimants to obtain "the opposing party's written consent or the court's leave" to amend their claim after being served with a response (here, a written objection). Fed. R. Civ. P. 15(a)(2). It is therefore within this Court's power and discretion to refuse to allow [the creditor’s] amendments to proofs of claim 22 through 28, which were filed without leave or consent after the Debtors lodged their claim objections.…

Even if Bankruptcy Rule 7015 is reserved solely for adversarial proceedings, a number of courts have determined that proof of claim amendments are subject to the court's equitable powers under 11 U.S.C. § 105(a). See United States v. Johnston, 267 B.R. 717, 721 (N.D. Tex. 2001) ….

Some courts have found a secured creditor’s specific reservation of the right to file an amended proof of claim to be worthy of consideration in determining whether the amendment is an attempt to file a new claim under the guise of an amendment. See, In re Winters, 380 B.R. 855 (Bankr. M.D. Fla. 2007).

G. Informal Proofs Of Claim.

In some cases, where the creditor has not timely filed a formal proof of claim, courts have permitted other papers of record to be deemed an informal proof of claim. "Not every document filed in the bankruptcy court will constitute an informal proof of claim, however; the document must apprise the court of the existence, nature and amount of the claim (if ascertainable) and make clear the claimant's intention to hold the debtor liable for the claim." Charter Co. v. Dioxin Claimants (In re Charter Co.), 876 F.2d 861, 863 (11th Cir. 1989).

To constitute an “informal proof of claim”, most courts require that the document(s) meet the following five requirements:

1. the proof of claim must be in writing;

2. the writing must contain a demand by the creditor on the debtor's estate;

3. the writing must express an intent to hold the debtor liable for the debt;

4. the proof of claim must be filed with the Bankruptcy Court; and

5. based on the facts of the case, it would be equitable to allow the amendment.

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See also, In re M.J. Waterman & Assocs., Inc., 227 F.3d 604,607 (6th Cir. 2000); In re Nikoloutsos, 199 F.3d 233, 236 (5th Cir. 2000); Hefta v. Official Committee of Unsecured Creditors, 405 F.3d 127, 131-132 (3rd Cir. 2005)(There are two necessary additions to the informal proof of claim requirements: “that informal proofs of claim must be in writing and that they must be filed with the bankruptcy court. 5 Those two new factors are justified, however, by specific rules of bankruptcy procedure. First, Rule 3001(a) defines a proof of claim as "a written statement setting forth a creditor's claim." Fed. R. Bankr. P. 3001(a). Second, Rule 5005(a)(1) provides, with certain specified exceptions, that proofs of claim are to be filed with the clerk of the bankruptcy court.”)

Motions for relief from stay are not generally considered “informal proofs of claim” because they make no claim on the estate for payment. See e.g., In re Anchor Resources Corp., 139 B.R. 954 (D. Colo. 1992). A creditor’s objection to the debtor’s Chapter 13 Plan has been held to be an informal proof of claim that could be amended after the claims bar date had passed. See, In re Harper, 138 B.R. 229 (Bankr. N.D. Ind. 1991).

The trustee does not have to review and consider objecting to every document that might be considered an “informal proof of claim”. A creditor may not rely on an informal proof of claim to participate in any distribution, but must instead file an amendment to the informal proof of claim that complies with the requirements of Rule 3001(a). 9 Collier on Bankruptcy ¶3002.05[4] at 3001-17 (15th Ed. Rev. 2007).

H. Case Law Interpreting Proofs Of Claim – Writing Controls OverPreprinted Language.

In re Padget, 119 B.R. 793, 798 (Bankr. D. Colo. 1990) states:

“Century Bank's only filed proof of claim contained pre-printed portions requesting unsecured status to the extent of any deficiency and hand-typed additions indicating the existence of extensive and substantial collateral. In interpreting proofs of claim filed on printed forms, typed and hand-written additions entered by the creditor take precedence over the printed language. "Effect is to be given to words inserted in the body of an existing form, even if to do so requires a rejection of uncancelled provisions of the original draft." N.L.R.B. v. Boyer Brothers, Inc., 448 F.2d 555 (3rd Cir. 1971). On its face, Century Bank's proof of claim was a secured claim and Trustee properly read it as such. All inferences reasonably drawn from the proof of claim in this case compel a conclusion that the Creditor filed a secured claim against the Debtor.”

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XXXVI. LATE FILED CLAIMS.

A. Non-Governmental Proofs of Claim.

See, Section VII, CHAPER 13, PIONEER IS DEAD OF DYSENTERY at page 85, supra.

B. The Deadline For Governmental Unit Filing Proofs Of Claim.

Proofs of claim by government entities must be filed within 180 days of the commencement of the case. Federal Rule of Bankruptcy Procedure 3002(c)(1).

Section 101(27) defines the term “governmental unit”:

(27) "governmental unit" means United States; State; Commonwealth; District; Territory; municipality; foreign state; department, agency, or instrumentality of the United States (but not a United States trustee while serving as a trustee in a case under this title), a State, a Commonwealth, a District, a Territory, a municipality, or a foreign state; or other foreign or domestic government.

The legislative history to the definition of “governmental unit” is found in the 1977 House Report:

Paragraph [27] defines "governmental unit" in the broadest sense. The definition encompasses the United States, a State, Commonwealth, District, Territory, Municipality or foreign state, and a department, agency or instrumentality of any of those entities. "Department, agency, or instrumentality" does not include entities that owe their existence to State action such as the granting of a charter or a licence but that have no other connection with a State or local government or the Federal Government. The relationship must be an active one in which the department, agency, or instrumentality is actually carrying out some governmental function. H.Rep. No. 95-595, 95th Cong., 1st Session 311 (1977).

There is case law holding that Federal Credit Unions are “governmental units”, entitled to file under the extended claims bar date of Bankruptcy Rule 3002(c)(1). See, In re Trusko, 212 B.R. 819 (Bankr. D. Md. 1997).

XXXVII. THE RIGHT TO FILE A PROOF OF CLAIM WHEN THE CREDITOR DOES NOT.

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The 2005 Amendments to Rule 3004 changed the timing of the right to file a claim on behalf of a creditor to conform with Section 501(c) of the Bankruptcy Code. Prior to the 2005 Amendments, Rule 3004 provided that a debtor or trustee could file a proof of claim on behalf of a creditor the day after the first meeting of creditors. Under the new Rule, the debtor and trustee must wait until the creditor’s opportunity to file a claim has expired. The comments on the Amendments to 3004 recognize that the creditor’s right to file an amendment that would supersede the debtor’s claim filed on their behalf is an open question for the courts.

A. Co-Debtor.

If the creditor has not filed a timely proof of claim in a Chapter 13 case, a co-debtor may file a proof of claim on behalf of the creditor. Federal Rule of Bankruptcy Procedure 3005(a). In a Chapter 13, the claim has to be filed within 30 days after the expiration of the time for filing claims prescribed by Rule 3002(c). See, Rule 3005(a). No distribution shall be made on the claim except on satisfactory proof that the original debt will be diminished by the amount of the distribution. See, Rule 3005(a).

B. Debtor.

If the creditor has not filed a timely proof of claim, a Chapter 13 debtor may file a proof of claim on behalf of the creditor. Federal Rule of Bankruptcy Procedure 3004. In a Chapter 13, the claim has to be filed within 30 days after the expiration of the time for filing claims prescribed by Rule 3002(c). See, Rule 3004. When a proof of claim is filed by a debtor on behalf of a creditor: “The clerk shall forthwith mail notice of the filing to the creditor, the debtor and the trustee.” Rule 3004.

Debtors can file proofs of claim not just on behalf of general unsecured creditors, but also on behalf of government agencies that fail to file a proof claim. See, In re Tonner, 291 B.R. 216 (Bankr. S.D. Ga. 2002)(debtor’s window to file proof of claim was from expiration of 180 day bar date for government entities, until 210 days after the order for relief.).

If the claim is filed too late for the creditor to fully participate in any distribution without prejudice to creditors who filed timely claims, the claim may not be allowed. See, In re Jurando, 318 B.R. 251 (Bankr. D. Puerto Rico 2004).

Creditors have also run into problems where they have failed to indicate on the proof of claim that they are filing an amendment to a debtor-filed claim, and are not simply filing a late claim. See, In re Hill, 286 B.R. 612 (Bankr. E.D. Pa. 2002)(creditor’s

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claim that did not state that it was an amendment did not superseded debtor’s claim filed on creditor’s behalf.). And compare, In re Kelley, 259 B.R. 580, 585-586 (Bankr. E.D. Tex. 2001) with, In re Kolstad, 928 F.2d 171, 175 (5th Cir. 1991), reh'g en banc denied, 936 F.2d 571 (5th Cir. 1991), cert. denied, 502 U.S. 958, 112 S. Ct. 419, 116 L. Ed. 2d 439 (1991).

In contrast to the strict prohibition against enlargement of time for creditors to file proofs of claim, a debtor’s right to file a protective claim may be enlarged under Federal Rule of Bankruptcy Procedure 9006(b). See, In re Townsville, 268 B.R. 95, 107 (Bankr. E.d. Pa. 2001); In re Moore, 247 B.R. 677, 689 n.10 (Bankr. W.D. Mich. 2000).

C. Chapter 13 Trustee.

If the creditor has not filed a timely proof of claim, a Chapter 13 Trustee may file a proof of claim on behalf of the creditor. In a Chapter 13, the claim has to be filed within 30 days after the expiration of the time for filing claims prescribed by Rule 3002(c). See, Rule 3004. When a proof of claim is filed by a trustee on behalf of a creditor: “The clerk shall forthwith mail notice of the filing to the creditor, the debtor and the trustee. Rule 3004.

It appears that instances of Chapter 13 Trustees filing claims on behalf of creditors are rare. One reason for not filing a claim is that the Chapter 13 Trustee does not usually have sufficient knowledge and documentation to file a claim.

XXXVIII. POST-PETITION CLAIMS.

See, 11 U.S.C. Sections 501(d); 502(e)(2), (f), (g), (h), (i).

In re Jones, 381 B.R. 555, 558-559 (Bankr. M.D. Fla. 2007) states:

In In re Laymon, 360 B.R. 902 (Bankr. E.D.Ark. 2007), for example, a postpetition creditor filed a declaratory action seeking a determination that its claim could not be involuntarily included in the debtor's amended plan. Although the obligation in that case involved a postpetition consumer debt under subsection (2) of §1305(a), the Court's ruling applies equally to postpetition tax liabilities under subsection (1) of §1305(a). In Laymon, the Court stated:

Therefore, only the holder of a §1305 claim may file a proof of claim for a post-petition debt. In re Benson, 116 B.R. 606, 607 (Bankr. S.D. Ohio 1990). The debtor may not involuntarily "provide for" a debt that is not the subject of a properly filed and allowed post-petition proof of claim.

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Bankruptcy courts have held that, by definition, a debtor is not a holder of claim. In re Sims, 288 B.R. 264, 268 (Bankr. M.D. Ala. 2003); Benson, 116 B.R. at 607. Further, "a debtor may not file proof of a § 1305 claim on behalf of the holder of such a claim." Benson, 116 B.R. at 608(quoting In re Pritchett, 55 B.R. 557, 559 (Bankr. W.D.Va. 1985)). Section 1305(a)(2) of the code does not require that post-petition creditors file a claim, and the debtor cannot force the creditor's participation through postconfirmation modifications.

In re Laymon, 360 B.R. 902, at 904 (Emphasis supplied). Since the claimant in Laymon had not filed a Proof of Claim under §1305, the Court found that the claim could not be "provided for" in the debtor's plan. Id. 360 B.R. 902, at 904.

In reaching its decision, the Court in Laymon cited In re Woods, 316 B.R. 522, 524-25 (Bankr. N.D. Ill. 2004) for the proposition that "courts have uniformly interpreted §1305 to give these postpetition creditors the option of having their claims pass through the bankruptcy without discharge simply by not filing the proof of claim that the section authorizes." The liability at issue in Woods was a postpetition tax claim under subsection (1) of §1305(a).

For other decisions interpreting § 1305(a), see In re Holmes, 312 B.R. 876, 878 (Bankr. W.D. Tenn. 2004)(The tax debt at issue was "a postpetition liability for which the IRS may, but is not required to, file a claim pursuant to § 1305(a)); In re Parffrey, 264 B.R. 409, 413 (Bankr. S.D. Tex. 2001)("There is no requirement that the holder file proof of a postpetition claim under section 1305."); and In re Wilkoff, 2001 Bankr. LEXIS 124, 2001 WL 91624, at 7 (E.D. Pa.)(The option to file proof of a postpetition claim "belongs exclusively to the holder of such a claim; the debtor may not force the holder to file proof of claim and may not file a proof of claim on the holder's behalf.")

Pursuant to § 1305(a) and the decisions discussed above, therefore, the Court finds that the IRS cannot be compelled to include any postpetition tax liability in its Proof of Claim. The Debtors' Objection to the IRS's Claim Number 2 should be overruled to the extent that they seek an Order including the postpetition tax liability in the Claim, without the consent of the IRS.

In a pre-BAPCPA case, In re Woods, 316 B.R. 522 (Banrk. N.D. Ill. 2004), the court granted the debtor’s motion to compel payment of a post-Petition tax claim.

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XXXIX. SPECIAL PROOF OF CLAIM ISSUES.

A. Standing To File A Proof Of Claim For A Debt Secured ByA Mortgage Or Deed Of Trust.

Where a claim is filed by a party claiming to be a creditor, the proof of claim must be signed by the creditor making the claim or an agent of the creditor. See, Federal Rule of Bankruptcy Procedure 3001(b). The party signing the proof of claim on behalf of a creditor must be authorized in order to have the legal capacity to execute the proof of claim. See, 9 Collier on Bankruptcy ¶3001.06 at 3001-19 (15th Ed. Rev. 2007).

The evidence of the authority of the agent to sign the proof of claim does not have to be included with the proof of claim. However, if the claim is challenged, the party executing the proof of claim will have to be able show that they had the authority to sign and file the proof of claim on behalf of the creditor.

For mortgage creditors, the question arises as to whether or not a servicer has standing to file a proof of claim:

The Code defines a creditor as "an entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor." 11 U.S.C. § 101(10)(A).  A claim is a "right to payment" or a "right to an equitable remedy for breach of performance if such breach gives rise to a right to payment."  11 U.S.C. §§ 101(5)(A) and (B).  Bankruptcy Code § 502(a) provides that "a claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest . . . objects.

          A servicer of a mortgage is clearly a creditor and has standing to file a proof of claim against a debtor pursuant to its duties as a servicer.  See e.g., In re Viencek, 273 B.R. 354, 359 (N.D.N.Y. 2002); see also Greer v. O'Dell, 305 F.3d 1297, 1302 (11th Cir. 2002) (holding that loan servicer was a party in interest in proceedings involving loans that it services); Bankers Trust (Delaware) v. 236 Beltway Inv., 865 F. Supp. 1186, 1191 (E.D. Va. 1994) (holding that both the lender and servicer had standing to sue on mortgagor's default even though the servicer was not the holder of the mortgage); In re Tainan, 48 B.R. 250, 252 (Bankr. E.D. Pa. 1985) (determining that mortgage servicer was a party in interest for purposes of a relief from stay proceeding).

 In re Conde-Dedonato, 391 B.R. 247, 250 (Bankr. E.D.N.Y. 2008).

B. Filing Proofs Of Claim For Claims Barred By The Statute Of

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Limitations – What Do The Courts Say?

1. Bulk Purchasers Of Unsecured Debt

McGregor v. B-Real, LLC (In re McGregor), Adv. No. 08-1005, slip op., 2008 WL 5225743 (Bankr. N.D. Miss. December 12, 2008).  Debtors initiated an adversary proceeding against B-Real, LLC (B-Real), a bulk debt purchaser, alleging that B-Real’s filing of a proof of claim on a debt barred by the applicable  limitations period violated Fed. R. Bankr. R. 3001 and the automatic stay.  The Court held that there was no provision in 11 U.S.C. § 362 prohibiting the filing a proof of claim, even where that claim may potentially be barred by limitations, but rather that limitations was an affirmative defense.  The Court also agreed with the majority of reported decisions concluding that the Bankruptcy Code provides no cause of action with respect to the filing a proof of claim that is statutorily barred by a limitations period.  Instead, the proper response is to object to the claim.  Thus, the Court found that the debtors sustained no actual or punitive damages and also refused to issue a show cause order.

In re Andrews, 394 B.R. 384 (Bankr. E.D.N.C. 2008). Sanctions were not warranted against bulk buyers of charged-off debts who filed stale and undocumented proofs of claim because the bulk buyer creditors reasonably relied on case law that required bankruptcy debtor to assert statute of limitations and provided only for loss of presumption of validity for lack of documentation.

In re Simpson, Adv. No. 08-00137, 2008 Bankr. LEXIS 2457 (Bankr. N.D. Ala. August 29, 2008). The adversary proceeding based on the assertion that the creditors filed a false proof of claim was dismissed because even though the court had dismissed the claim as barred by the statute of limitations, the timeliness of the claim did not extinguish the debt. Rather, the claims allowance process of 11 U.S.C.S. §§ 502(b)(1) and 558 contemplated that time-barred claims could be filed and expressly preserved the statute of limitations as a defense and a ground for disallowance of the claim. The 11 U.S.C.S. § 105(a) contempt claim was dismissed for similar reasons. The FDCPA claim was subject to dismissal because the claim appeared to be based on the filing of a proof of claim. The debtor's remedy in dealing with an objectionable claim was set forth in the claims allowance process. Thus, the debtor could not prevail on that claim.

C. Proofs Of Claim For Mortgage Escrow Shortages – Creditors ShouldZero Out The Escrow, Add 1/6th To The Amount Needed For TheYear, And File A Proof Of Claim For The Balance As An ArrearageClaim.

The treatment of escrow shortages is a difficult issue for both debtors and creditors.  The problem typically arises because the debtors missed mortgage payments are also missed

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payments toward their escrow accounts.  The mortgage companies are forced to pay the property taxes and insurance on the property, which can leave the escrow account at zero, with monies owed to the mortgage lender for the amounts paid out for taxes and insurance.  Where the problem arises is that property taxes and insurance costs have continued to accrue, and are about to come due in a some kind of lump sum, leaving the escrow account (which is supposed to run ahead) further behind that the amount the mortgage holder has actually expended.

What can the mortgage company to do? Can they determine the post-petition escrow payment by including all amounts paid toward expenses that were to be covered by escrow – and thereby recover their entire escrow shortage over the course of a single year? (If the debtor(s) can actually afford to pay the higher escrow payments.)

Or, can the mortgage company use escrow debts that are due but unpaid at the time of filing in calculating future monthly escrow payments that the debtor will be required to pay post-petition, with the balance of the amounts owed for monies actually expended to cover past escrow shortfalls (for taxes and insurance) being filed as part of the mortgage company’s arrearage claim?

  Or, are the mortgage companies required to zero out their escrow accounts at the time of filing, then recalculate the escrow amount from a zero balance as of the date of the filing of the petition, add the permitted reserve of approximately two months of escrow payments allowed by RESPA, and only include the monies needed to pay the next year’s taxes and insurance in the post-petition escrow payments?  With all unpaid escrow payments included as part of the arrearage in the proof of claim?

The mortgage companies would like to put as much of their escrow shortage in the calculation of the post-petition escrow payment because then the escrow deficiency would be paid in 12 months.  If the escrow shortages are part of the arrearage claim, the mortgage lender’s claim is stretched out over the life of the Chapter 13 Plan (or some shorter reasonable repayment period.)

Resetting the mortgage escrow balance to “zero” – rather than trying to recover the escrow shortage using a 12 month escrow increase – appears to be the emerging view on how mortgage companies should file their proofs of claim for “negative escrow” claims. See, In re Rodriguez, 629 F.3d 136 (3rd Cir. 2010); Campbell v. Countrywide Home Loans, Inc., 545 F.3d 348 (5th Cir. 2008).

D. The Chapter 13 Is Dismissed Prior To The Bar Date, Reinstated AfterThe Bar Date, And Your Claim Is ‘Late Filed’ – What Happens?

            In re Gulley, 400 B.R. 529 (Bankr. N.D. Tex. 2009).  Debtors objected to proofs of claim that did not attach supporting documents in accordance with Fed. R Bankr. P. 3001.  The court concluded:  (1) because the creditor amended the proofs of claims to provide supporting documents and affidavits after the objections were filed, it had

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provided sufficient documentation to constitute prima facie evidence of its claims; and (2) because the debtor provided no evidence to refute the accuracy of the amended proof of claim, the objection was overruled.  The court also addressed whether a chapter 13 claims bar date should be recalculated if the case has been dismissed and later reinstated (as result of the dismissal order being vacated) and the claims bar date fell within the time that the case was dismissed.  The court concluded that the proper recalculation of the bar date would have allowed for the full ninety days contemplated by Fed. R. Bankr. P. 3002(c).  The court deemed the date on which the creditor filed its proof of claim as the recalculated deadline because it was “reasonably close, if not the same” date that the court would have selected as the recalculated deadline.  Id. at 539. 

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