Judgment Lien On Homestead Avoidable Even As to Spouse's Unrecorded Equitable Interest, According to New Judge Dunn Published Opinion

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


In re Lindquist
Oregon Bankruptcy Case No. 03-35895-rld7
October 5, 2008


In this first published opinion from the Oregon Bankruptcy Court since April, Judge Dunn held that under Oregon law the homestead exemption extends to equitable interests in residential property, enabling both spouses to claim a homestead exemption, the one who held legal title and the other who held an equitable interest, thus allowing them, in their motion to avoid a creditor's lien on their residence, to use the joint $30,000 mobile home exemption instead of the $23,000 one for an individual debtor.

Essential Facts
On the date of their joint Chapter 7 petition, wife was the sole title owner of record of the residence, a manufactured home with land, although she and her husband had lived there together for 15 years. Husband had been the sole record owner for about 12 years, but less than three months before filing the Chapter 7 case he transferred title to wife in order to try to refinance the property. (The Judge makes no issue of the short time between that transfer and the case filing.) Husband made all payments on the residence, both for the initial purchase and monthly for the mortgage., since she had no income. When he signed title over to his wife he understood that he was retaining an equitable interest in the residence.

The Judge's Analysis
Homestead exemptions are to be liberally construed, and Oregon case law has supported extensions of the homestead exemption beyond simple fee ownership, although without ever addressing this particular question. Here the residence is the actual abode of both spouses. The husband made all payments on the property. "Recognizing [husband’s] homestead exemption claim for lien avoidance purposes is consistent with the objective of O.R.S. § 18.428(1) [the and is not inconsistent with its terms." So the debtors were entitled to the $30,000 exemption of joint owners instead of the $23,000 one of a single owner.

Judge Dunn distinguished an Oregon bankruptcy court's opinion disallowing a spouse's unrecorded interest in a homestead (In re Mitchell, 9 B.R. 577 (Bankr. D. Or. 1981)) since that case turned on the Chapter 7 trustee's bona fide purchaser status under § 544(a)(3) of the Bankruptcy Code and O.R.S. § 93.640(1) to defeat the unrecorded equitable interest. But the judgment lien holder here is "neither an actual purchaser of the Property in good faith and for value protected by O.R.S. § 93.640(1) [the bona fide purchaser statute], nor a trustee entitled to hypothetical bona fide purchaser status under § 544(a)(3)."

Other Helpful Details

• Timing: This motion to avoid judgment lien was filed more than four years after the debtors had received their discharge and their Chapter 7 case had been closed. To determine the value of the residence and the amount of the senior liens and the judgment lien, the Court looked back to the date of filing the Chapter 7 case.
• State law: § 522(f)(1) of the Bankruptcy Code provides for the avoidance of a judgment lien that impairs an exemption provided for under § 522(b), and since Oregon opted out of the federal exemptions the applicable homestead exemptions are those provided for under state statute. The limits of Oregon's manufactured home exemption thus involves analysis of Oregon case law.
• The accounting: $175,000 residence value less $141,000 in senior, unavoidable liens, left a balance of $4,000 after the $30,000 homestead exemption. This means that of the nearly $11,000 judgment as of the date of the Chapter 7 case, all but $4,000 would be avoided. Interest at the Oregon judgment rate would accrue from the Chapter 7 filing date, May 27, 2003, substantially increasing the balance.

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

Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2008 Bankruptcy Litigation Support for Attorneys

Ch. 13 Debtors with Fully Secured Vehicle Claim May Later Surrender Vehicle & Modify Plan to Treat Deficiency Balance as a General Unsecured Claim

Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or perform any legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

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


In re Berendt
Oregon Bankruptcy Case No. 07-35054-elp13
September 22, 2008

The Holding
In an unpublished letter opinion Judge Perris held that if a Chapter 13 plan had treated a claim as fully secured, then "following post-confirmation surrender of [the] collateral, a Chapter 13 debtor may modify a plan to terminate payments on the secured claim and treat any deficiency as unsecured."

Interestingly, in so ruling she rejected the rationale of an 6th Circuit Court of Appeals opinion, In re Nolan, 232 F.3d 528 (6th Cir. 2000), apparently the only circuit court to have ruled on this issue, instead finding "particularly persuasive" an Indiana bankruptcy judge's opinion, Bank One, NA v. Leuellen, 322 B.R. 648 (S.D. Ind. 2005) This Bulletin summarizes her analysis, and gives the perspectives of the attorneys. Miles Monson of Anderson & Monson, P.C. represents the creditor, Clackamas Community Federal Credit Union; Matthew Casper of Oliveros & O'Brien, P.C. represents the debtors, Timothy & Kara Berendt.

Essential Facts
The Berendts filed a Chapter 13 case and the plan was confirmed with the Clackamas Community Federal Credit Union as a fully secured creditor being paid outside the plan. Because Kara Berendt was unable to find employment, the debtors surrendered the vehicle to the creditor, which was unable to sell it without a deficiency balance. The Berendts proposed a modified plan which treated the credit union as a general unsecured creditor. The credit union objected.

Judge Perris' Analysis
The judge started by acknowledging that the "cases are deeply split over whether § 1329 allows modification of a confirmed chapter 13 plan to account for the surrender and sale of collateral that leaves a deficiency, when the plan had treated the claim as fully secured." She cites Nolan as the primary opinion not allowing such modification and the above Leuellen opinion as her primary support to the contrary. She notes that treatises have also split on the issue, with Norton Bankruptcy Law and Practice against permitting this kind of modification while Collier on Bankruptcy and Chapter 13 Bankruptcy by Judge Keith Lundin allowing it.

Without discussing or refuting the Nolan opinion's arguments she merely said she disagreed with it, and found Leuellen "particularly persuasive" but did not explicitly say what was persuasive about it. She explained her lack of detailed analysis with this: "In light of the extensive opinions that have been written on this subject, I will give only a brief explanation of why I reach that conclusion."

Her "brief explanation" is a statutory one:

1) § 1329(a)(1) allows modified plans to "increase or reduce the amount of payments on claims of a particular class provided for by the plan." So debtors are allowed to modify payments to a formerly secured claim down to $0.

2) The Code and Rules permit objections to claims at any time, and also permits, at any time, valuations of collateral to determine the extent to which a claim is secured.

3) § 1325(a)(5)(C) clearly permits surrender of collateral as one way to treat a secured claim in a plan, and this is incorporated by 1329(b)(1) into plan modifications.

4) Lastly she states that "§ 1323(c) "also specifically applies to post-confirmation modifications", and "contemplates that a secured creditor's rights can be changed under a modification." (This argument is an odd one and perhaps inaccurate: section 1323 is entitled "Modification of plan before confirmation" and, contrary to what she said, nothing in it seems to specifically apply to POST-confirmation modifications instead of PRE-modification ones. Titles may not be part of the actual statutory language, but I see nothing in the actual language that shows that the subsection "specifically applies" to post-confirmation modifications. )

Her holding is:

For these reasons, I conclude that there is no impediment to modification of a confirmed chapter 13 plan to reflect the surrender of collateral and its sale for less than the amount of the debt. This includes treating the claim as partially secured up to the value of the collateral and partially unsecured for the deficiency. I agree with the courts that hold that the creditor’s interests are protected at initial confirmation by the requirement of adequate protection and at modification by the bankruptcy court’s discretion to deny confirmation if the debtors have acted in other than good faith with regard to the collateral.

Judge Perris concluded by giving the creditor five days to ask for an evidentiary hearing in case it believed there were unresolved issues of fact that undercut her analysis of the legal issue.

The credit union subsequently decided not to ask for an evidentiary hearing, and an order has now been entered overruling its objection.

The Creditor's Attorney's Perspective
Miles Monson informed me yesterday that the credit union has decided not to appeal. On the merits, he believes that the Fifth Circuit Nolan opinion lays out the argument well, how it is fundamentally a question of who should carry the risk: should the debtor or the creditor carry the risks of the collateral's depreciation and diminution or total loss in value after the confirmed plan determines the collateral's value? He believes that Nolan makes a very good case why the debtors should bear these risks, and so should not be able to change the secured claim through a surrender and post-confirmation modification. Mr. Monson believes the statutory ambiguity means that the issue is heading for in a split in the Circuits and will eventually need to be decided by the Supreme Court, but acknowledges that would be many years away.

The Debtors' Attorney's Perspective
Matt Casper was not surprised that the credit union decided not to appeal given the small amount at issue and the fact that it has already spent $1,440 on repairing the vehicle while selling it for only $1,500. And he said he was not surprised that Judge Perris did not follow Nolan in spite of it being the only Circuit opinion on the issue, because there are a number of lower court opinions within the 9th Circuit criticizing Nolan, although Judge Perris did not refer in her letter opinion to them. As for the risk-carrying argument, he says, "The creditor is in no worse position now than before the filing of the petition, had the vehicle been surrendered then. Creditors always carry the risk that borrowers will at any time have to surrender the collateral and file a bankruptcy on the deficiency balance." He doesn't see why that should be different just because the borrower is in a Chapter 13 case and paying the creditor directly, outside the plan.

Mr. Casper noted that the trustee has also objected to the modified plan, apparently not wanting to pay the credit union's deficiency balance as an unsecured claim, thereby diluting distributions to the pool of allowed unsecured claims. The hearing on this objection is scheduled for October 15. If the result is interesting, I will report on it in a future Bulletin.

The Bottom Line
Even with an unpublished letter opinion, Judge Perris is certainly signaling her opinion on this issue. She presumably made a point of putting it on the bankruptcy court website so that practitioners would read it. The immediate question is whether the other four Oregon judges agree with her holding since they are not legally bound by it. I am guessing that as the senior judge she may be signaling to the others the direction that she believes this issue should go in the Oregon District, but on the other hand they may well be communicating about this more directly. Is this an issue appropriate for the next Circle of Love (Consumer Bankruptcy Committee of Debtor-Creditor Section) meeting? If anyone has more information about the other judges' treatment of this issue, please contact me and I'll include it an update.

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

Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2008 Bankruptcy Litigation Support for Attorneys

Ch. 7 Debtor Fails to Show That Ex-Wife's Attorney Violated Automatic Stay For Filing Lawsuit When Debtor Failed to List Atty. or Ex-Wife on Schedules

6/18/08
Mark Stoiber v. Craig S. Galpern, Adv. Proc. No. 08-6052-fra
In re Mark Jeffery Stoiber, Case No. 07-61157-fra7
UNPUBLISHED opinion by Judge Frank R. Alley, III

A debtor is not going to win an argument against a creditor for violation of the automatic stay if the debtor does not bother to include the creditor on the creditor schedule, even if the creditor is his ex-wife represented by an attorney who could have easily found out about his bankruptcy case, and even if that attorney had filed a state court action in the meantime against debtor pursuing a dischargeable debt and failed to dismiss it even after getting notice of the bankruptcy case.

Subject matter jurisdiction:
Before getting to the automatic stay issue, Judge Alley ruled against the effort by defendant, creditor’s attorney, to have the issue of the automatic stay violation decided in the pending state court case. Shortly before learning about the bankruptcy case, the attorney had filed an action against debtor in state court on behalf of the debtor’s ex-wife, which included a prayer for contempt for debtor’s failure to pay the attorney fees awarded in the earlier dissolution proceeding. In the adversary proceeding by debtor against him for violation of the automatic stay, the case at issue here, the attorney argued that jurisdiction on this matter is concurrent between state and federal courts, and so jurisdiction rested in the state court unless and until the pending case was removed to bankruptcy court. He relied on a 1995 Oregon bankruptcy court opinion, In re Jeffries, 191 B.R. 861 (1995), which spoke of such concurrent jurisdiction pursuant to 28 U.S.C. §1334(b). But Judge Alley effectively stated that the 9th Circuit Court of Appeals overruled that Jeffries opinion with its holding in In re Gruntz, 202 F.3d 1074, 1082 (9th Cir. 2000): “Because of the bankruptcy court’s plenary power over core proceedings, the . . . argument that states have concurrent jurisdiction over the automatic stay under 28 U.S.C. §1334(b) is unavailing.” Id. At 1082-83.

Although losing the jurisdictional argument, defendant prevailed in his motion for summary judgment in debtor’s adversary proceeding against him for violation of the stay because 1) Judge Alley found no evidence that defendant had actual knowledge of the bankruptcy case when he filed the state court action; 2) defendant had no “duty to search the bankruptcy records for a filing” even if he was an experienced litigator, “especially when the Plaintiff [debtor] had the duty under the Bankruptcy Code to list all creditors with his initial filing”; and 3) the evidence showed that neither defendant, nor anyone acting on behalf of the defendant, nor the state court “took any action in furtherance of the state court action pertaining to the debt.” Interestingly, Judge Alley cited no judicial authority whatsoever in support of these standards that he relied on in giving summary judgment to defendant, perhaps because he did not intend for his opinion here to be published.

BOTTOM LINES: 1) The Ninth Circuit has made it quite clear that state courts have no subject matter jurisdiction over disputes about the automatic stay and so must defer to bankruptcy courts.
2) If a debtor wants to be able to assert a violation of the automatic stay against a creditor, he ought to be sure to include the creditor in the creditor schedules, and, especially if there is any delay in doing so, also to be sure to have solid evidence that the creditor had actual knowledge of the bankruptcy case before the alleged stay violation.

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

© 2008 Bankruptcy Litigation Support for Attorneys

Debtor Can't Make US Trustee Pay for His Atty. Fees In Successfully Defending Against Allegations of Abuse. Not Under These Facts But How About Yours?

06/04/08
In re David B. Lorenz , Case No. 07-30593-elp7; Appellate No. CV-08-443-KI
Oregon US District Court Judge Garr King

Judge Perris’ order denying debtor’s application for attorney fees under the Equal Access to Justice Act (“EAJA”), 28 U.S.C. § 2412, was upheld on appeal in this unpublished opinion by Oregon US District Court Judge Garr King. His opinion hinged simply on his conclusion that Judge Perris did not abuse her discretion in denying fees to the debtor, specifically that her order was not based “on an erroneous legal conclusion or a clearly erroneous finding of fact.” Oregon Envtl. Council v. Kunzman, 817 F.2d 484, 496 (9th Cir. 1987). Although unpublished, this opinion is noteworthy because it gives the U.S. Trustee, and thus debtors, guidance about the kind of abuse case the U.S. Trustee (“UST”) can file without worrying about being held liable for the debtors’ attorney fees, even if those abuse allegations are found at trial to have been without merit.

The EAJA provides for attorney fees and expenses to be paid by the U.S. to a prevailing party in any civil action brought by or against the U.S. unless the court finds that the government’s position was substantially justified or that special circumstances make an award unjust. 28 U.S.C. § 2412(d)(1)(A).
Although the burden is on the government, it needs only to show that its position had a reasonable basis both in law and fact or were “justified in substance or in the main.” Pierce v. Underwood, 487 U.S. 552, 565 (1988).

The debtor’s circumstances seem to make this an easy case at first blush. As stated by Judge Perris in the underlying case: “This debtor had an $800,000 house, at least four vehicles on which he owed substantial amounts, and a wife who contributes a substantial amount to the household but who did not join in the bankruptcy petition. Although the court ultimately decided that, even given reasonable expenses, this debtor could not afford to make a meaningful payment to creditors, the UST was justified in challenging this debtor’s use of the bankruptcy system, given the lifestyle he leads. This debtor is living beyond his means, and even with a bankruptcy discharge, will have to curtail his living expenses in order to maintain a reasonable standard of living in the future.”

Debtor’s counsel, Bret Knewtson, argued that the UST should have dismissed its pending abuse motion as soon as debtor became employed when it should have become clear that he would not be able to repay a meaningful amount to his business debts totaling between $500,000 and a million dollars. Counsel also argued that the UST was wrong in pushing for the reasonableness of Lorenz’s expenses to be judged by the IRS Standards, and in arguing that the non-debtor wife should contribute to paying debtor’s debts. But Judge King discussed how each of these factors are reasonable to include when judging the rather ambiguous concept of abuse, and that thus Judge Perris was within her discretion in consider these factors, and so also within her discretion in not making the UST pay debtor’s attorney fees.

BOTTOM LINE: The UST is undoubtedly keeping an eye on the Equal Access to Justice Act’s standards as laid out in this case, and so is filing motions to dismiss for abuse only when it is confident that it can bear the burden of showing that its position, at each point in the proceedings, is substantially justified. The facts here did not seem to make it very hard for the UST to avoid being hit with attorney fees. But debtor’s counsel should nevertheless keep an eye on the EAJA and this opinion whenever defeating a trustee’s motion to dismiss for abuse, and should also try to use these as leverage to persuade the UST to drop its motion if the case turns more in debtor’s favor during discovery.

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

© 2008 Bankruptcy Litigation Support for Attorneys

Debtors' Attorney Sanctioned with Denial of ALL Attorney Fees in Chapter 13 Case and an Order to Pay Fees of Potential Successor Attorney

4/25/08
In re Jessica & Christopher Addison, Case No. 07-62855-aer13
PUBLISHED opinion by Judge Albert E. Radcliffe

In this opinion Judge Radcliffe sanctioned debtors' attorney by denying him of all attorney fees in the Chapter 13 case, and by ordering him to pay on behalf of the client-debtors all the attorney fees of a successor attorney. Why: For the attorney's grossly negligent failure to comply with attorney fee disclosure requirements.
QUERY: Are you always attaching your fee agreement when filing the LBF 1305 fee disclosures?


Although perhaps nobody reading this would behave so negligently or recklessly as did the debtors’ attorney here, but this opinion by Judge Radcliffe still gives important guidance AND MOTIVATION for complying with the fee disclosure rules. The Salem attorney in this Chapter 13 case had to forfeit $1,100 in fees and likely had to pay his successor’s fees.

The attorney’s negligent or reckless disregard for the fee disclosure rules do not need to be detailed here—they covered many pages of this decision. Indeed Judge Radcliffe took the time to lay out the facts of two other recent unrelated Chapter 13 cases involving the same debtors’ attorney, to show a consistent “pattern of disdain for disclosure requirements”. In the Addison case itself it is enough to point out that there were inconsistencies between the disclosure form and the Plan terms, the fees were paid in part by legal insurance but not fully disclosed as such (as also occurred in the other two cases detailed by the judge), and, perhaps most galling, debtors’ attorney failed to attach the fee agreement to LBF 1305 three successive times, even after stating at a hearing that he would do so.

BOTTOM LINE LESSONS: 1) The fee disclosure rules are applied literally, so that mistakes through negligence or inadvertence are still sanctionable, even if the actual fee arrangements were perfectly appropriate. Inaccurate or insufficient disclosure is in itself grounds for sanction. 2) “All pertinent information should be set forth on LBF 1305” itself: it is not sufficient for other information to be disclosed elsewhere, such as on the plan or the Statement of Financial Affairs. 3) Retain evidence that clients understand the terms of the fee agreement, especially in unusual situations such as when there is payer other than the debtor. 4) If an attorney learns about a fee disclosure problem, she should bring it to the court’s attention instead of waiting for a client, the US Trustee, or the Court itself to do so.

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

© 2008 Bankruptcy Litigation Support for Attorneys

Attorney Fees for Preparation of Fee Application Disallowed, In a Very Specialized Context. But What Are the Lessons For You?

4/10/08
In re Columbia Aircraft Manufacturing Corp., Case No. 07-33850-elp11
UNPUBLISHED LETTER RULING, by Judge Elizabeth Perris

This 8-page single-space unpublished letter by Judge Parris in this Chapter 11 case has virtually no direct relevance in the Chapter 7 and 13 worlds, except tangentially as to an attorney fee issue. In her letter the judge ruled on a number of legal issues to streamline an evidentiary hearing on an application for final compensation by the corporate debtor’s financial advisory and investment banking service provider (“ING”). Through these services, the debtor corporation was sold post-petition to Cessna Aircraft. For these services ING applied for $1,150,000 in fees and more than $26,000 in expenses, which the unsecured creditors’ committee objected to all but $50,000.

Most of Judge Parris’ rulings had to do with the appropriate legal standard for determining the amount of fees to be paid to an entity authorized for postpetition employment by the court under 11 USC §327 and §330, and the application of this standard to various allegations by the committee that ING had not done the work it had agreed to do. She ruled that “professionals … should be paid comparably to rates they would receive outside bankruptcy, so that professional will be willing to serve in bankruptcy cases.” As to the 7 specific issues about the quality of ING’s work, they are so limited to the services of a financial adviser and investment banker and the specific facts of this case that they don’t merit detailing here, especially since this is just an unpublished letter ruling.

The one attorney fee issue worth some attention pertained to whether ING should be paid ITS attorney’s fees for the legal services involved in preparing ING’s fee application. Perhaps contrary to expectations—since generally an attorney’s services in preparing a fee application are allowed—in this rather specialized context Judge Perris disallowed such fees here. Although ING itself had been appropriately employed by debtor through a court order under §327, its counsel had not. So its counsel’s attorney fees for preparing ING’s fee application were disallowed, A prepetition contract between ING and its counsel, not presented to or approved by the court, did not help its case, especially because the prepetition executory contract between ING and the debtor had been rejected by the court, and there was no prior written consent to such fees by the debtor, much less court approval.

BOTTOM LINE: Regardless of the unusual context here, the mantra is the same: get prior court approval for attorney fees or risk having them disallowed.

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

© 2008 Bankruptcy Litigation Support for Attorneys

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

Judge Radcliffe Shoots Down Virtually All Ch. 13 Plan Language Proposed to Prevent Mortgage Service Fees & Misapplied Plan Payments

Are you familiar with the alternate language that Judge Radcliffe proposes here for this purpose? And you know debtors’ remedies under BAPCPA’s new §524(i) against creditors who willfully fail to credit plan payments?

2/12/08
In re Lee & Amanda Anderson; Case No. 07-60532-aer13
PUBLISHED opinion by Judge Albert E. Radcliffe

In this published opinion Judge Radcliffe analyzes, paragraph by verbatim paragraph, a set of 6 special Ch. 13 plan paragraphs that had been suggested in an article in NCLC Reports: Bankruptcy & Foreclosure Edition (Nov/Dec 2006 ed.). These paragraphs were intended to help implement BAPCPA’s § 524(i), which created a remedy for debtors against creditors who willfully fail to credit plan payments appropriately. So these suggested paragraphs directed how the 2 home lenders were to account for plan payments, how to deal with arrearage claims, and they proposed remedies for improper accounting of payments. Debtors argued that § 524(i) prevails over the “creditor’s rights” laid out in the anti-modification language of § 1322(b)(2) to the extent there was any conflict.

Upon objection by two creditors secured solely by debtors’ residence, Judge Radcliffe ruled that debtors’ rationale was flawed, and he methodically rejected virtually every word in every one of the proposed special paragraphs, mostly because they were “surplusage,” repetitive of what is already in the Plan boilerplate, or otherwise “unnecessary,” ambiguous, or “inappropriate” under § 1322(b)(11) by seeking to modify what can not be modified.

The sole and minor exception that he permitted was an expansion of a noticing requirement on creditors about changes to the escrow amounts, requiring notice to debtors’ attorney and to the trustee in addition to the usual notice just to debtor. The judge held that such “additional notice is more in the nature of a procedural requirement to aid Chapter 13 administration, than a modification and is therefore permissible.”

Judge Radcliffe acknowledged the worthiness of part of the debtors’ goal, to avoid surprises about the balance due on home mortgages at the end of a Plan, and in a final footnote to the opinion provided some guidance towards this goal, by suggesting some alternate Plan language.

“G.O. 97-1 already provides a set of procedures. However, its scope is limited. A plan provision expanding that scope, such as: “The procedures set out in G.O. 97-1 (as amended by G.O. 98-1), shall apply to all arrearage amounts (pre and post-petition), including all fees and costs, claimed by [the mortgage-secured creditors] Umpqua and Citifinancial,” would likely be “appropriate.” However, the court thinks it fair to alert the parties that this District’s Local Bankruptcy Rules are currently being revised, and it is probable that G.O. 97-1.4(b)(5)’s “deemed cure” provisions will not survive the revisions. If “deemed cure” language is in fact stricken from the revised local rules, insertion of similar language into a Chapter 13 plan, with the broadened scope outlined above, would also seem appropriate.”

Indeed these General Orders ARE all now superseded by the amended Local Bankruptcy Rules effective 8/08/08. This applies not just to the G. O. referred to in this footnote but also to the other G. O.’s and LBR’s referred to in this opinion. So look closely at the pertinent new LBR’s before relying on this opinion.

The other language suggested by the judge is:
“Post-petition mortgage payments to secured creditor shall be applied to the first postpetition payment due under the terms of the contract. Payments from the trustee to secured creditor shall be applied to its pre-petition loan arrears claim. As long as debtor timely pays all post-petition payments, secured creditor shall not assess any fees or other charges on the basis that a post-petition payment is late.

“Lender shall send such billing statements, coupons and statements regarding postpetition advances and/or charges on the loan directly to the debtor as it customarily sends when no bankruptcy has been filed.”

BOTTOM LINE: The remedy provided in BAPCPA through § 524(i) is limited, both by the specific conditions stated within it and the many other requirements in the Code, especially § 1322(b)(2), about what a Chapter. 13 plan may contain. But a good debtors’ attorney is mindful about protecting his clients from residential creditors’ misapplication of plan payments, both by understanding and using the § 524(i) remedy, and by incorporating appropriate special language into the plan consistent with Judge Radcliffe’s guidance here.

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

© 2008 Bankruptcy Litigation Support for Attorneys

Pre-Petition Credit Counseling Requirement is NOT Jurisdictional and So Case Not Dismissed IF Would Produce Illogical, Unjust or Capricious Result

2/5/08
In re David & Lynn Bartlett, Case No. 07-63647-fra13
UNPUBLISHED opinion, by Judge Frank Alley

Pre-petition credit counseling requirement is NOT jurisdictional and so a case should not be dismissed IF doing so would “produce an illogical, unjust, or capricious result. But that condition was not met here, so this case was dismissed.
What does it take to meet this condition and avoid dismissal in spite of not strictly complying with the credit counseling requirement?


These Chapter 13 debtors filed their case 185 days after completing their credit counseling, 5 days later than the 180-day maximum permitted by §109(h)(1). They completed a second credit counseling 4 days AFTER their case was filed, the same day that the court issued an order requiring either the filing of a credit counseling certificate showing compliance with the 180-day rule, the filing of a motion for an extension of time to file, or an exemption from the credit counseling requirement. The next day the debtors filed a motion for extension of time to file a certificate, in which they sought to excuse their failure to meet the 180-day rule on the basis of the repossession of their vehicle and the resulting delay in the filing of their case, arguing that dismissal would be prejudicial to creditors and add unnecessary administrative costs for the filing of a subsequent case.

Judge Alley indicated a split in bankruptcy court opinions, even quoting one court that the “vast majority” of courts strictly construe the 180-day requirement, but he nevertheless held that this statute is not jurisdictional and that equitable exceptions to strict compliance can be made to avoid “an illogical, unjust, or capricious result.” He analogized to a 1991 9th Circuit BAP decision, In re Luna, 122 B.R. 575, which held that §109(g), regarding another 180-day rule (restricting the filing of a new case after the dismissal of a prior case), was not jurisdictional and thus exceptions to strict compliance to it were appropriate in the same limited circumstances quoted immediately above.

But the judge held that these conditions were not met here because: 1) the inconvenience and expense of re-filing the case is not illogical and unjust; and 2) the Bankruptcy Code provides for relief from payment of a new filing fee and for extension of the automatic stay, thus making equitable remedies inappropriate.

Acknowledging the “substantial inconvenience to the parties” if a creditor were to aggressively pursue debtors’ assets between the dismissal of this case and the filing of the next one, Judge Alley concludes his opinion by helping to avoid this possibility by delaying the dismissal for 10 days.

BOTTOM LINE: The “illogical, unjust, or capricious result” standard of §109(g) is tough to meet, so watch that 180-day consumer credit counseling period like a hawk. In this case it appeared to the judge that this deadline was missed simply by oversight.

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

© 2008 Bankruptcy Litigation Support for Attorneys

Debtor's Breach of Prior-Employer’s Non-Compete Agreement IS Dischargeable Under Sect. 523(a)(6), But Does Not Allow for Contractual Attorney Fees

Home Instead Senior Care of Oregon v. Treon, Adv. No. 07-03159
From In re Jamie Lynn Treon; Case No. 07-31112-elp7
PUBLISHED opinion, by Judge Elizabeth Perris
January 4, 2008

Although a debtor breached a Non-Compete Agreement with her former employer, Judge Perris held that this employer did not prevail in its nondischargeability complaint against debtor under § 523(a)(6) because it failed to prove either of the necessary prongs of the 9th Circuit’s test: that debtor committed an intentional tort, and that her conduct caused willful and malicious injury. Attorney fees under the Agreement were not awarded to the employer because it did not prevail in establishing nondischargeabilty; but debtor also did not get attorney fees because it breached the Non-Compete Agreement upon which the right to attorney fees was based.

Even though this case is fact intensive, it is worthwhile reading for Judge Perris’ discussion of the 9th Circuit case law on § 523(a)(6) and its application to Oregon law, specifically the tort of intentional interference with an economic relationship.

Consistently the 9th Circuit has held that § 523(a)(6) claims must establish that 1) debtor’s conduct was tortious, and 2) caused willful and malicious injury.

Debtor’s conduct here was not tortious because the evidence did not establish 3 of the 6 necessary elements under Oregon law for the tort of intentional interference with an economic relationship: 1) a valid business relationship that debtor interfered with, 2) her intentional interference with that relationship, and 3) a causal effect between this interference and the damage to the economic relationship. As Judge Perris applied the facts: 1) At the time debtor started working for a former customer of the former employer that customer had already independently terminated its contract with the employer, so there was no business relationship for the debtor to interfere with. 2) There was no interference because the customer contacted debtor, not the other way around, and any interference would have been unintentional because debtor understood that the customer no longer had a relationship with her former employer and so did not believe she was interfering with any such relationship. And 3) there was no causal relationship between any possible interference by debtor and any economic damage because there was an independent reason the former customers no longer worked with the employer--these customers could no longer could afford the employer’s services and indeed had in the interim hired another private caregiver.

Willfulness is defined in the 9th Circuit as intending the consequences or injury resulting from an act and not just intending the act itself, or at least believing that that the consequence or injury is substantially certain to occur from the conduct. Debtor did not act willfully because she accepted employment with a former customer of her prior employer only after learning that this customer had earlier cancelled the contract with the employer and after getting legal advice that she could work for former but not ongoing customers of the employer.

Debtor’s conduct in working for a former customer of employer was not malicious in that it was 1) not done intentionally in that the Agreement did not explicitly forbid contracting with the employer’s former customers, debtor had limited education, and thus reasonably relied on her attorney’s advice about this issue, and 2) was done with a just cause or excuse in, again, her reasonable reliance on her attorney’s advice.

The attorney fee discussion is enlightening, both for its rationale in holding that the ostensible prevailing party, the debtor-defendant, was NOT entitled to contractual attorney fees, and for its valuable dicta about the 2007 U.S. Supreme Court case which had overturned a 9th Circuit opinion about attorney fees in dischargeability litigation.

First as to Judge Perris’ ruling against allowing debtor’s attorney fees, the Non-Compete Agreement provided for attorney fees to employer if it were to “prevail in a legal proceeding to remedy a breach . . . of this Agreement.” This clause was made reciprocal to debtor-defendant through ORS 20.096(1), but that statute by its language limits that reciprocal right to the party prevailing “on the claim”, the claim which “is made based on a contract.” So the contractual “claim” upon which debtor-defendant had to prevail was the breach of the Agreement. But because Judge Perris ruled that she DID indeed breach the Agreement, by working within 90 days of the end of her employment with a prior and potentially future customer of the employer, she was not entitled to attorney fees even though otherwise completely prevailing on the nondischargeability claim.

And second, the U.S. Supreme Court case Judge Perris cited is Travelers Cs. & Surety Co. of Am. V. Pac. Gas & Elec. Co., 127 S.Ct. 1199 (2007), which had overturned the 9th Circuit’s disallowance of a creditor’s contractual attorney fee claim. The 9th Circuit had disallowed that attorney fee claim on the argument that the attorney’s services pertained strictly to federal bankruptcy law and not to contractual law. Although Judge Perris makes clear that she doesn’t have to dig into the impact of Travelers here because debtor-defendant’s breach of the Agreement did not make her even potentially eligible for attorney fees, the judge is warning the bar to be aware of this Supreme Court opinion’s potential impact in future cases.

BOTTOM LINE: This is an excellent source for 9th Circuit law under § 523(a)(6), Oregon law of intentional interference with an economic relationship, and about contractual attorney fees in adversary proceedings. It is worth spending 15 minutes to read this opinion, for sure before dealing with any §523(a)(6) claim or with any attorney fee issue in a nondischargeability case.

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

© 2008 Bankruptcy Litigation Support for Attorneys