Motion to Enforce Automatic Stay Against FED Lawsuit Denied, Landlord Could Take Possession, 9th Circ.Burden of Proof Not Met for TRO

3/27/08
In re Nathan Leston Skinner; Case No. 08-60574-aer13
PUBLISHED opinion, by Judge Randall L. Dunn
(a Eugene Division case assigned to Judge Radcliffe, but because of his unavailability for an expedited hearing, it was heard by and the opinion written by Judge Dunn of the Portland Division)

The facts of the case made for an easy decision not to enforce the stay: the debtor was not named as either lessee, guarantor of the lease, or a proposed occupant of the property in the lease agreement or lease application (only as a reference for the lessee); nor did he indicate any leasehold interest in either Schedule A or B, or any executory contracts or unexpired leases in Schedule G, or the unlawful detainer lawsuit in his Statement of Financial Affairs; nor did his Ch. 13 Plan include any provision to assume the lease or avoid any liens against the debtor’s personal possessions located at the property. Debtor’s only argument seemed to be his assertion that the landlord would be paid through the Plan, and landlord was listed in Schedule F with an unliquidated, disputed claim of unknown amount, but Judge Dunn gave that short shrift because the entire amount calculated to be paid through the Plan was well short of the unlawful detainer judgment amount recently entered against the non-debtor tenant named on the lease agreement. The situation was not helped by the fact that this non-debtor tenant had filed about 10 bankruptcies in the past dozen years, the most recent resulting in a dismissal with a 180-day bar to refiling, which had not yet expired.

This published opinion is nevertheless interesting because it reminds us of the grounds for a temporary restraining order or preliminary injunction in the 9th Circuit, for which the moving party has the burden of proving “either (1) a combination of probable success on the merits and the possibility of irreparable injury if relief is not granted, or (2) the existence of serious questions going to the merits and that the balance of hardships tips sharply in its favor.” First Brands Corp. v. Fred Meyer, Inc., 809 F.2d 1376, 1381 (9th Cir. 1987). Judge Dunn ruled that it was unlikely that debtor would succeed in showing he had a valid leasehold interest, in part because the judge could consider debtors schedules, signed under penalty of perjury, to be admissions of his lack of interest in the leasehold. The judge also found no evidence of any potential irreparable harm since his schedules indicated no personal possessions at the premises except for a modest amount of clothing which landlord’s counsel committed to mailing to debtor, no serious questions on the merits, and the balance of hardships in favor of the landlord because he had not received rent payments “over a considerable period of time.”

by Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

© 2008 Bankruptcy Litigation Support for Attorneys

Chapter 13 Debtors' Attorney Fees Lose Out to Secured Creditors: Under BAPCPA, "equal monthly payments" Must Start at Confirmation

In re Sanchez, Oregon Bankruptcy Court Case No. 07-62144-aer13
PUBLISHED opinion by Judge Albert Radcliffe
March 19, 2008

Judge Radcliffe goes against what he characterizes as the “slight majority view,” holding that BAPCPA’s new “equal monthly payments” rule does not allow the expedited payment of attorney fees by providing for smaller “adequate protection payments” to a secured creditor followed by larger “equal monthly payments” later in the Plan. However, the judge does provide some clues, albeit of limited practical value, where some front-loading of debtors’ attorney fees might work.

The judge cites four bankruptcy courts in other circuits which have addressed this BAPCPA statutory construction question—apparently there are no circuit court opinions--and he sides with the one court favoring purchase money “910 days” secured creditor payments over debtors’ attorney fees, after detailing what he sees as the flaws in the three court opinions favoring the attorney fees. The judge’s analysis in rejecting the rationales of the three courts allowing expedited payments to attorney fees—each of which arrived at that conclusion slightly differently—is beyond our scope here.. He asserts generally that he is merely enforcing the plain language of the statutes while these other courts applied “strained interpretations.” Essentially, the 3 majority courts made statutory distinctions between post-confirmation “adequate protection” payments of § 1325(a)(5)(B)(iii)(I) and the “equal payments” of § 1325(a)(5)(B)(iii)(II), effectively allowing smaller “adequate protection” payments to continue after confirmation until debtors’ attorney fees were paid, after which the larger “equal payments” would begin and be paid through the rest of the Plan. But Judge Radcliffe, closely following In re Denton, 370 BR 441 (Bankr. S.D. Ga. 2007), argues that this is a false distinction, and thus that “pre-confirmation adequate protection payments under § 1326(a)(1)(C) may not be extended beyond confirmation when the monthly amount is less than the amount of payment on the allowed secured claim under the plan,” that is the “equal monthly” payment.

Judge Radcliffe finishes with a final footnote in which he throws debtors’ attorneys a bone, some clues, limited in practical value as they are, for successful expedited payment of debtors’ attorney fees. This footnote is worth quoting here in full:
“While this court’s holding may appear to undercut the speed at which a Chapter 13 debtor’s attorney’s fees may be paid, this isn’t necessarily so. The type of stepped payments Debtors propose are not per se, non-confirmable. A secured creditor may always accept its proposed treatment under § 1325(a)(5)(A). If the creditor objects to stepped payments, debtors are not precluded from making room for payment of attorney’s fees by modifying the plan to amortize the secured claim at a lower (but equal) monthly payment over a longer period. All that is required under § 1325(a)(5)(B)(iii) is that the proposed equal monthly payments pay the secured claim
and be sufficient to adequately protect the creditor’s interest. Here, while WFA has not contested that $50 per month adequately protects its interest, that amount is insufficient to amortize its claim, even over the maximum 60 months permitted.”

BOTTOM LINE: The judge’s suggestions notwithstanding, this opinion significantly limits debtors’ attorneys in front-loading their fees ahead of “910 day” secured creditors. Assuming the other Oregon judges will be following his opinion, and until there is a contrary ruling in the 9th Circuit or possibly a persuasive opinion in another Circuit, in many Ch. 13 cases debtors’ attorneys will be paid slower and thus with greater risk of not being paid at all.

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

© 2008 Bankruptcy Litigation Support for Attorneys

Debtors NOT Denied Discharge Although Failed to Disclose Recent Auction of Business Assets in SOFA & at §341 Hearing

3/13/08
Hildebrand v. Browning, Adv. No. 07-3171
UNPUBLISHED LETTER RULING ON TRIAL, by Judge Elizabeth L. Perris

Judge Perris presented her ruling after trial on a creditor’s § 727(a)(4) and § 727(a)(5) grounds for denial of discharge. § 727(a)(4) refers to false oaths by debtors and § 727(a)(5) to failure to explain satisfactorily any loss or deficiency of assets.

The creditor had sold debtors a flower store about two years earlier, for which debtors continued to owe a balance of the purchase price. Barely a month before debtors filed the underlying Chapter 7 case, they had auctioned off all the inventory of that business, grossing almost $7,000 in proceeds, but they failed to list this auction on their Statement of Financial Affairs or inform the trustee about it at the §341 hearing, notwithstanding direct questions put to them there about sales or transfers within the previous 4 years. Then 31 days after the hearing, debtors filed an amended SOFA disclosing the auction.

Judge Perris ruled that even though both these omissions, in the SOFA and at the hearing, were false and material, they were NOT intentional or fraudulent. As for the omission in the SOFA, Judge Perris held that their omissions were not intentional or fraudulent because debtors listed their business and its demise in their initial bankruptcy documents, and thus they were not trying to hide the auction of the business assets. She was also convinced by the testimony of the debtors that their inaccurate answers to the questions at the § 341 hearing were not intentional. And Judge Perris clearly found important that debtors filed an accurate amended SOFA before the trustee or creditors had discovered the error and before this adversary proceeding was filed.

As to allegedly false testimony in a deposition and at trial by each of the debtors, Judge Perris ruled that the evidence showed either that the debtors misunderstood the questions and thus testified inaccurately but did not do so knowingly and fraudulently, or else that the specific testimony complained of was not either not false or not intentionally so.

As to § 727(a)(5), a failure to explain satisfactorily a loss or deficiency of assets did NOT arise from: 1) the failure to sell the business, even though there appeared to be some interested buyers; 2) the failure to get the highest possible sale price for that business: or 3) a failure to get a better price for the sale of the inventory. The last of these issues could be referred to the trustee as a potential fraudulent transfer, but the judge indicated that the evidence before her did not seem to support anything other than an arms length transaction with a disinterested auctioneer.

Judge Perris referred a number of times of the lack of documentary or other potentially available evidence which hurt plaintiff’s case. The most direct example: one of the debtors testified that they did not accept one of the offers to buy the business because it did not include an assumption of the remaining debt to the creditor, whereas the person who made the offer testified at trial that the offer had in fact included such an assumption. But plaintiff failed to produce that written offer at trial so Judge Perris concluded that debtor must have misunderstood the offer and that this misunderstanding was not necessarily unreasonable.

BOTTOM LINE: This adversary proceeding would likely have been altogether avoided had debtors clearly understood the SOFA questions at the outset and had they been completed by the attorney accurately. But debtors’ counsel’s relatively quick action in filing an amended SOFA seemed to be instrumental in convincing Judge Perris of the debtors’ lack of knowing, fraudulent intent. On the other hand, had creditor’s counsel presented into evidence the business purchase offer and some other missing evidence directly supporting the allegations, depending on what that evidence would have been, creditor would have had a better chance at prevailing.

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

© 2008 Bankruptcy Litigation Support for Attorneys

Brother of Ch. 11 Debtor's Founder Must Pay to Creditor's Committee $248,000 on an old "House Acct." & on Debtor's Loan Payoff for Ex-Wife's Stock

3/07/08
Ron Troutman v. Official Committee of Unsecured Creditors, U.S. District Court Case # 07-6106-HO, appeal of Bankruptcy Adv. Case # 3-6317-aer
arising in Ch. 11 case In re Troutman Investment Company.
UNPUBLISHED opinion by US District Court Judge Michael Hogan on appeal of Judge Radcliffe’s unpublished findings in an adversary proceeding.

This appeal turned largely on rules of pleading and of evidence:

1) The “house account” (charges defendant had made over the years for personal purchases at Emporium and elsewhere debited to that account):
a) Pleading: “Under federal rules, a complaint need only contain a short and plain statement of the claim showing an entitlement to relief. Fed. R. Civ. P. 8(a).” So even though the complaint’s claims for relief were titled otherwise, the allegations “were sufficient to provide notice of what was being sought and why,” thus allowing “account stated” and “open account” theories of recovery to proceed to trial.
b) Sufficient evidence for an “account stated” and “open account” found through the following facts: defendant’s assertions about the “house account” in his prior divorce case, statements of account received by defendant from debtor to which he did not object, that defendant made payments on the account, and the business records of debtor showing the account.
c) The facts of the case did not support the application of Oregon statutes ORS 10.095(8) and 40.135 (1), dealing with evidentiary presumptions in situations where evidence could not be presented or was willfully suppressed.
d) Under FRPC. 9017 and the Federal Rules of Evidence 1101(b), the Oregon Rules of Evidence do not apply. Further, under Federal Rules of Evidence 302, the Oregon evidentiary presumptions sought by defendant were not applicable here because those presumptions did not pertain to an element of an Oregon claim or defense, but rather were merely “tactical” presumptions.
e) Defendant was judicially estopped from asserting the inaccuracy of the “house account’s” outstanding balance as established in his divorce case, because his new position is clearly inconsistent with his position in that prior case, he had succeeded in persuading the divorce court to accept his earlier position, and allowing him to change his earlier position now would give him an unfair advantage.

2) The $150,000 Loan (to buy out defendant’s ex-wife for her share of debtor’s stock, paid by debtor’s principal but then assigned to debtor):
a) Pleading: See above re “short and plain statement” rationale for allowing plaintiff to assert an assignment argument at trial. In addition, a deposition and the subsequent pretrial order referred clearly to this assignment argument, so defendant was sufficiently put on notice.
b) Defendant’s inability to amend answer for defenses or counterclaims to assignment argument: When defendant had notice of the assignment argument from a November 2004 deposition but did not move to amend until August 2006 at “the eve of trial” scheduled for October 2006, he was not permitted to amend because this constituted undue delay, prejudice to plaintiff in reopening discovery so late, and likely futile in any event because “the proposed counterclaims and defenses were weak at best.”
c) Since under Oregon law an “an assignment may be oral or written and no special form is necessary provided that the transfer is clearly intended as a present assignment of the interest held by assignor,” the following facts were sufficient to establish defendant’s liability for the $150,000 loan: debtor’s founder and principal’s instructed debtor’s account manager to pay off defendant’s loan, informed her that defendant would pay it off, and also instructed her to put this receivable into the general receivables account for shareholders, where she labeled it as owed by defendant, and the accounting records continued to show the receivable as still owing.

BOTTOM LINE: The brother of corporation debtor’s founder and principal must pay unsecured creditors’ committee nearly $248,000 in receivables, consisting of 1) the balance in this brother’s house account, even though that account was established in 1963, and 2) a loan paid off by the debtor to buy out brother’s ex-wife’s stock in the debtor, even though that payoff occurred 5 years pre-petition.

Watch out for those informal pre-petition family arrangements, even those, ESPECIALLY those, from years or even decades ago.

Know the federal pleading and evidence rules, especially as they interplay with Oregon substantive and evidentiary law, before venturing into bankruptcy litigation.

by Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

© 2008 Bankruptcy Litigation Support for Attorneys