Idaho-Montana Bankruptcy Newsletter

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					            Idaho-Montana Bankruptcy Newsletter
                            Ken Anderson, Attorney at Law
                  Lewis-Clark Plaza, 111 West Main Street, Suite 302
                                  Lewiston ID 83501

                                        July, 2010

                                NOTICES OF MEETINGS

       The Moscow Area Bankruptcy Bar will meet again on Tuesday, the 6 th day of
July, 2010, at noon at the Sandpiper Restaurant, 414 N. Main, Moscow.

       The North Idaho Debtors= Counsel will meet again on Thursday, the 1st day of
July, 2010, at noon in the judges= conference room in the Office of the Clerk, Federal
Building, 6450 N Mineral Drive, Coeur d=Alene.

       Discussion topics this month: How much of he 9th Circuit=s Kagenveama case
was impliedly overruled by the recent Supreme Court decision in Lanning? What does
the recent Supreme Court decision in Schwab mean for debtor attorneys?

      None of this is researched and it is not legal advice. It is provided solely to assist
members of the Idaho and Montana bankruptcy bars in identifying issues and resources
which might affect their practice and assist them in representing their clients before the
U.S. Bankruptcy Court. I am merely passing on things I have noted in the ABI and
NACBA blogs, various updates, highlights, etc. I also read and draw on Consumer
Bankruptcy News, an excellent biweekly newsletter available on annual subscription
from LRP Publications, 747 Dresher Road, PO Box 980, Horsham, PA, 19044-0980),
and Consumer Bankruptcy Abstracts, subscription info available at

                           CURRENT ISSUES OF INTEREST

1.     The court date of 26 July in Moscow has been cancelled. There will be no
       scheduled hearings there between 13 July and 10 August.

2.     Neal Jensen, Assistant U.S. Trustee for the District of Montana, requests that
       anyone having clients affected by one of the many mortgage-cure scams contact
       him. I imagine David Newman, his colleague in Boise, would also appreciate
       such information relating to Idaho cases.

3.     New York Attorney General Andrew M. Cuomo continues his war against those
       scams. He is sending out cease-and-desist letters to hundreds of firms. Civil and
       perhaps criminal actions are likely to follow.

4.   The FTC is also pursuing mortgage fraud perpetrators. The agency has made
     485 arrests since March alone. ABI Update, 17 June 2010.

                          RECENT CASES OF INTEREST

     The Supreme Court issued two significant bankruptcy cases last month: Lanning
     and Schwab.

1.   Hamilton, Chapter 13 Trustee, vs Lanning is a 6-1 opinion on a writ of certiorari
     to the 10th Circuit Court of Appeals. The bottom line is stated succinctly in the
     last paragraph of the majority opinion. AConsistent with '1325 and pre-
     BAPCPA practice, we hold that when a bankruptcy court calculates a debtor=s
     projected disposable income, the court may account for changes in the debtor=s
     income or expenses that are known or virtually certain at the time of
     confirmation.@ Slip at 18. Justice Alito wrote for the majority; Justice Scalia
     wrote a dissenting opinion that (at 14 pages) is almost as long as the majority=s.

     The debtor received a lump-sum payout from her former employer during the 6-
     month CMI period. This skewed her CMI into the above-median category and
     resulted in a line 59 disposable income of $1,114.98, far higher than her positive
     cash flow (Schedules I and J analysis) of $149.03. She proposed a plan paying
     $144 per month for 36 months. Over the trustee=s objection, the court confirmed
     her plan but with a 60-month term. The trustee argued the Kagenveama
     doctrine, that Aprojected disposable income@ is merely Adisposable income@
     multiplied times 60 months, although he conceded that was beyond the debtor=s
     funding ability. This decision was affirmed on the trustee=s appeals to the 10th
     Circuit=s BAP and Court of Appeals. Cert was granted only on the narrow
     question of how to calculate Aprojected disposable income.@ The Supreme Court
     declined to adopt the trustee=s mechanical approach, and pointed out that
     although past history (i.e., the CMI period) is useful in making a projection, it is
     not the only thing to be considered. No pundit would project an election winner
     based solely on past voting records, and no sports analyst would project a
     pennant winner based solely on a team=s past win-lose record. Elsewhere in the
     USC Congress specified a mechanical formula by using Amultiplied by@
     language. The court found it significant that it did not do so in BAPCPA. So, the
     reasoning goes, Congress must have meant to use Aprojected@ in the ordinary,
     plain language sense of the word. Further, Justice Alito continued, nothing in the
     reform legislation evinced an intent to abandon pre-reform methods of
     calculating PDI. Also, the mechanical approach clashes with '1325. For
     example, the mechanical approach reads out of the statute the phrase Aincome
     to be received.@ In order to determine income to be received, one must look to
     the future at least to some extent Cnot solely to the past. If Congress had meant
     to make the CMI calculation the exclusive measure of PDI, it would have

centered the calculation on the date of filing, not the Aeffective date of the plan,@
i.e, when the court is considering whether or not to confirm the plan. It goes
without saying that the debtor should be expected to actually make the projected
payments; otherwise the statutory language would be >a hollow command.=

The court examined the various arguments advanced by the trustee for using the
mechanical approach and found them all lacking. Justice Alito pointed out that
the 10th Circuit=s position merely heeds the ordinary meaning of the word
Aprojected;@ in making a projection, Aone uses past occurrences as a starting
point.@ Pursuing it=s plain language position, the court further noted that where
the debtor=s actual income is substantially higher or lower than the disposable
income, Athe mechanical approach would produce senseless results that we do
not think Congress intended.@ And where the debtor=s income is lower than the
disposable income, the mechanical approach would deny the debtor a fresh start
under circumstances where he or she meets the basic requirements. As to the
trustee=s assertion that the debtor could always simply delay filing until the CMI
more closely matches disposable income, this option isn=t always available (e.g.,
repo=s, foreclosures, garnishments, etc.) and might smack of bad faith in the
view of some courts. Use '101(10A)(A)(ii) to ask the court to set a new CMI
period? AWe see little merit in this convoluted strategy.@ (I tried this a couple of
years ago but couldn=t sell it to the court.)

Personally, I like this decision. Kagenveama hurt as many debtors as it helped.
Some debtors were able to walk away leaving money on the table but others
were denied bankruptcy relief, and not because of any substantive reason but
merely because they were faced with a totally unrealistic payment that had
nothing to do with reality. (It was once said that Acurrent monthly income@ is
neither current nor monthly, nor is it always income.@) However, as a legal
craftsman, I have to smile somewhat at the court=s reliance on policy, pre-reform
practice, plain language, and interpretation of Congressional intent without an
explicit finding of absurdity or ambiguity. Direct, traditional statutory interpretation
was not ignored but it seems to have taken a back seat in this opinion.

Justice Scalia put his finger on the real issue in the first paragraph of his lengthy
dissent: ABecause that conclusion is contrary to the Code=s text, I respectfully
dissent.@ He points out that although the majority opinion makes of Adisposable
income@ a starting point, the court is nonetheless free to Afiddle with it.@ The
majority surmounts the problem of statutory construction Abut only by utterly
abandoning the text the Court purports to construe.@ Squeezing out debtors
bothers him not at all. Any assumption that a debtor is Aentitled@ to confirmation
is wrong. Paying the >disposable income= is a prerequisite to confirmation. AThe
>will be applied= proviso does not require a debtor to pay what he cannot; it
simply withholds Chapter 13 relief when he cannot pay.@ (!) AUnable to

     assemble a compelling case based on what the statute says, the Court falls back
     on the =senseless results= it would produce... those results would be entirely
     irrelevant to what the statute means.@ He also suggests a debtor could go ahead
     and get confirmation of a plan with an unrealistic payment and then immediately
     file for modification. This obviously overlooks the point that the court cannot
     confirm an plan that is not feasible Cnot to mention a possible bad faith issue
     here. ABankruptcy protection is not a birthright and Congress could reasonably
     conclude that those who have just hit the skids do not yet need a reprieve from
     repaying their debts; perhaps they will recover. ... Whatever the wisdom of the
     window it chose, we should not assume it did not know what it was doing and
     accordingly refuse to give effect to its words.@

     Justice Scalia=s dissent strikes me as being strict construction on steroids. He
     seems to have little understanding or appreciation of the realities of in-the-
     trenches bankruptcy practice. Note, for example, his position that claiming
     Aspecial circumstances A might be a way around the problem. Generally, it
     seems to me that he doesn=t really appreciate the statutory problems inherent in
     BAPCPA. Like the 9th Circuit=s Kagenveama mentality, he would Atrust that
     Congress will correct the law if what it previously prescribed is wrong.@ Lots of
     luck waiting for that.

     Some decisions raise as many questions as they answer. Is this decision
     internally consistent as to how to calculate Aprojected disposable income@ for
     above-median Chapter 13 debtors? The holding paragraph at the end is clear
     enough but there is what some might consider variant language here and there
     in the main body of the opinion. More specifically, does this take us back to pre-
     BAPCPA days and make the calculation of PDI virtually the same in both above-
     and below-median cases, or does the Aknown or virtually certain@ language
     impose a hide-bound restriction on a judge=s discretion? Does this muddy the
     water a bit or is the straight-forward holding sufficient?

2.   The other bankruptcy decision from the high court is Schwab v Reilly (decided 17
     June 2010). The court granted cert to resolve a split among the circuits.

     In a split 6-3 vote, the majority opinion was written by Justice Thomas, who also
     wrote for the majority in Taylor v Freeland and Kronz, 503 US 638 (1992). He
     was joined by Justices Alito, Sotomayor, Kennedy, Scalia, and Stevens. A
     dissent was penned by Justice Ginsberg who was joined by Chief Justice
     Roberts and Justice Breyer.

     The issue, centering on '522(l), is whether or not an interested party must object
     to a claimed dollar-value exemption which is within the statutory limitations within
     30 days in order to preserve the estate=s rights. The court held that cases
     such as this, an interested party need not object to an exemption claimed in this

manner in order to preserve the estate=s ability to reover value in the asset
beyond the dollar value the debtor expressly declared exempt.@ Slip at 2.

Here, the debtor scheduled business equipment at $10,718 and two facially-valid
exemptions totaling that amount. The trustee obtained an appraisal suggesting
the true value to be $17,000 but did not object during the 30-day window (Kronz)
because the claimed exemption was within statutory limits. The bankruptcy court
denied the trustee=s request to sell the property and the 3rd Circuit affirmed. The
Supreme Court reversed and remanded.

The 3rd Circuit=s decision stated A...{A}n unstated premise of Taylor was >that a
debtor who exempts the entire reported value of an asset is claiming the Afull
amount,@ whatever it turns out to be.@ 534 F3d at 1778-79. But the high court
held that this Aunstated premise@ misinterprets Taylor v Freeland and Kronz.

'522(l) states AUnless a party in interest objects, the property claimed as
exempt on such list is exempt.@ Not so, says the majority; it is merely the
debtor=s interest in such property that is exempt absent a sustained objection.
The court based its interpretation in light of '522(d)(5) & (6)=s Adebtor=s
aggregate interest@ in the subject property. Thus their holding that it is not the
property that is the >target= of the exemption but rather the debtor=s interest in
that property.

The misinterpretation of Kronz, the court explains, is apparently because in that
case the debtor did not state a dollar value claimed as exempt; he scheduled the
asset=s value as Aunknown.@ The asset was anticipated proceeds of a lawsuit,
something for which there was a limited exemption.

The court distinguishes Kronz by pointing out that in that case the debtor did not
state a dollar value as being exempt; the value was merely listed as Aunknown.@

      Accordingly, although this case and Taylor both concern the
      consequences of a trustee=s failure to object to a claimed exemption
      within the time specified by Rule 4003, the question arose in Taylor on
      starkly different facts. In Taylor, the question concerned a trustee=s
      obligation to object to the debtor=s entry of a >value claimed exempt=
      that was not plainly within the limits the Code allows. In this case, the
      opposite is true. The amounts Reilly listed in the Schedule C column titled
      AValue of Claimed Exemption@ are facially within the limits the Code
      prescribes and raise no warning flags that warranted an objection. Slip at
      17. (Emphasis in original.)

Justice Ginsberg, writing the minority opinion, found that the majority decision
impairs the governance of Rule 4003. From a policy standpoint, it also leads to a

Aprotracted uncertainty concerning (debtor=s) right to retain exempt property...@
The minority was not impressed with the court=s reliance on the Adebtor=s
aggregate interest in@ the property and would deem the exemption=s target to
be the asset in kind. AAbsent a timely objection, >the property claimed as exempt.= '522(l); Rule 4003. That prescription should be dispositive
 of this case.@ Dissent, Slip at 6.

Trustees obviously love this and it seems to have no negative effect on debtors
       so long as practitioners realize the new legal landscape and draft their
schedules accordingly. Apparently that now means entering claims of
exemptions in Schedule C equaling the maximum allowable without reference to
the stated fair market value of the property in Schedules A and B.

Recall that there is caselaw to the effect that any appreciation in value of an
asset during the pendency of a case inures to the benefit of the estate. Does
this decision encourage trustees to keep cases open on speculation that in the
current market real estate values may well rise appreciably in the foreseeable
future? This might be a factor in situations wherein the debtor=s equity in his
residence is perilously close to the allowable homestead exemption.

                                  -Ken Anderson, Editor


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