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January 2005 issue: Wahington Hot News The introduction of the bankruptcy reform legislation, which was expected to be introduced by Senator Charles Grassley (R-Iowa) on Wednesday, has been postponed. Senator Grassley’s office still anticipates this bill will be introduced before the end of the week. Authors needed! The Bankruptcy Section Newsletter Committee is looking for volunteers to write a Case Analysis for an upcoming edition. The Case Analysis is typically based on Court of Appeals or Supreme Court decisions, although you can use your discretion to discuss relevant BAP, District Court and Bankruptcy Court decisions. If you are interested or would like to learn more, please send an email to the Managing Editor. You can view the archive at www.cllabankruptcy.org. Your subscription You have been subscribed to this list as part of your membership in the Bankruptcy Section of the Commercial Law League of America. Changes to your e-mail address and all other comments can be sent to Editor@cllabankruptcy.org CLLA 70 East Lake Street, Suite 630 Phone: 312-781-2000 Newsletter design by: |
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the online version can be found here: Sua Sponte Alan I. Nahmias
Hopefully, 2004 has been a good year for each of you in every way and that 2005 has started well. As we begin the new year, I’d like to thank everyone for the help and support which you have given to me and our Section over the last several months, as without this help, our Section would not be what it is, and would not be poised to become what it is about to become. Case AnalysisMr. Louis S. Robin IN RE CROW: THE 11TH CIRCUIT ISSUES THE FIRST POST-HOOD CIRCUIT COURT OPINION. The 11th Circuit has provided us the first Circuit opinion concerning Hood. In Tennesse v. Hood, 541 U.S. 440, 124 S. Ct. 190, 158 L.Ed. 2d 764 (2004), the Supreme Court ruled that sovereign immunity limits under the 11th Amendment did not prevent Bankruptcy Courts from discharging student loan obligations owed to states. Case Law UpdatePaige E. Barr Section 1170’s Term “Abandonment” Does Not Give Bankruptcy Courts the Power to Adversely Abandon a Non-Debtor Railroad’s Easement. The Court found that the term “abandonment” in § 1170 does not give the bankruptcy courts the power to adversely abandon a non-debtor railroad’s easement and trackage rights over rail lines owned by the debtor at the time of the bankruptcy. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Sua SponteHopefully, 2004 has been a good year for each of you in every way and that 2005 has started well. As we begin the new year, I’d like to thank everyone for the help and support which you have given to me and our Section over the last several months, as without this help, our Section would not be what it is, and would not be poised to become what it is about to become. Personal thanks go out to Sarah Jolie, who makes my job far easier than it ought to be Paige Barr, Cathy Vance, who gives generously of her time in reviewing and editing this column, as well as the rest of our newsletter, Jay Welford, Peter Califano, Alan Ramos, the Honorable Judith Fitzgerald for her tireless efforts in coordinating with the NCBJ, Alan Gordon, all of the other members of the Executive Council, and each and every person who has written a case note for this newsletter over the past twelve months. I am truly excited about the year that lies ahead for our Section, especially with regard to our Strategic Planning Conference, which will take place during the annual Midwest Conference in Chicago this coming April. Planning is underway, and I expect to be able to provide you with more information on the Conference in next month’s column. In the interim, I urge each of you to register for the Winter Conference, which will be held February 17 – 20. Spend the weekend in San Francisco, where you can explore this beautiful city at a time of the year when the temperatures are still pleasant yet the crowds few. Wine country is only an hour away, and the crowds in Napa and Sonoma are also quite a bit smaller during this time of year. You can see the full brochure and register on line by clicking here. Finally, I would like to remind each of you to renew your membership in INSOL. INSOL is the International Association of Restructuring, Insolvency and Bankruptcy Professionals. Annual dues are only $60 for Bankruptcy Section members, $40 less than basic individual memberships. You can join today by clicking here. I hope the balance your holiday season was restful and spent with family and loved ones. I look forward to talking to you again next month. Alan I. Nahmias Email: anahmias@prnlaw.com Case AnalysisIN RE CROW: THE 11TH CIRCUIT ISSUES THE FIRST POST-HOOD CIRCUIT COURT OPINION. The 11th Circuit has provided us the first Circuit opinion concerning Hood. In Tennesse v. Hood, 541 U.S. 440, 124 S. Ct. 190, 158 L.Ed. 2d 764 (2004), the Supreme Court ruled that sovereign immunity limits under the 11th Amendment did not prevent Bankruptcy Courts from discharging student loan obligations owed to states. In short, the Supreme Court reasoned that the Bankruptcy Court’s jurisdiction over a discharge was derived from its in rem jurisdiction over the debtor’s property, and that such in rem jurisdiction does not violate state sovereign immunity protections under the 11th Amendment. In In re Crow, the debtor filed a complaint against the State of Georgia with three counts: (i) the first seeking a student loan discharge; (ii) the second seeking damages for violations of the automatic stay, and (iii) the third seeking damages for violations under the Fair Debt Collection Practices Act. The first count was summarily resolved by reference to the Hood holding. This is most reasonable given the similarity in the Crow facts to those in Hood - - - both solely concerned the issue of an undue hardship complaint. The Circuit Court’s ruling on the second count – automatic stay violations – is more involved and, I believe, troubling. The 11th Circuit characterized the second count as “seek[ing] affirmative relief from the state through a coercive judicial process,” and, therefore, “the bankruptcy court’s jurisdiction over it is premised on the persona of the state, not on the res of the debtor’s property.” (emphasis added). The 11th Circuit, therefore, concludes, that in rem jurisdiction is irrelevant to its analysis. It cannot be disputed that the Supreme Court stated in Hood that the 11th Amendment serves to avoid coercive process. Further, the Supreme Court stated that a purpose of process is to establish in persona jurisdiction over the defendant. However, to suggest, that in rem jurisdiction is irreverent to the relief sought is, I believe, wrong. The Supreme Court’s specifically stated in Hood that the “Bankruptcy Court’s in rem jurisdiction allows it to adjudicate the debtor’s discharge claim without in personam jurisdiction over the State.” The Supreme Court also cites Wright & A. Miller, Federal Practice and Procedure §1070, pp. 280—281 (3d ed. 2002) for the proposition that “jurisdiction over the person is irrelevant if the court has jurisdiction over the property.” Accordingly, the lack of in persona jurisdiction does not restrict in rem jurisdiction. The 11th Circuit, therefore, in my opinion, should have focused on whether the automatic stay provisions of the Bankruptcy Code conferred in rem jurisdiction over the defendant State. The 11th Circuit should have engaged in comparison of the discharge and the automatic stay provisions. In this regard, I see little difference – Section 524 states that the discharge “operates as an injunction against the commencement or continuation of an action . . . ” Section 362 provides that the automatic stay “operates as a stay, applicable to all entities, of the commencement or continuation . . .” These comparisons, admittedly, are brief cites, but the discharge and automatic stay provisions are central to the purpose of bankruptcy. The discharge is the goal of bankruptcy, while the automatic stay provisions permit and orderly administration of the estate and case while the debtor proceeds to discharge. Without the automatic stay provisions, a discharge could easily be rendered meaningless prior to the debtor actually receiving the discharge – creditors could continue actions after commencement of the case, seek judicial liens, and liquidate property. If the discharge is considered part of the Bankruptcy Court’s exercise of its in rem jurisdiction, it is difficult to construe a reason why the automatic stay provisions are not part of the in rem jurisdiction of the Bankruptcy Court (alternatively, Congress could have granted the discharge upon filing, with its revocation under certain circumstances later). True, the debtors or the trustee may seek monetary awards, but, without these remedies, it is difficult to imagine enforcing these provisions. Further, the 11th Circuit relies upon five other Circuits’ decisions holding that sovereign immunity considerations prohibit Bankruptcy Court jurisdiction. These decisions, as admitted by the 11th Circuit, primarily concern student loan discharges. Although the 11th Circuit state that the “reasoning is nonetheless persuasive,” I would respectfully suggest that these five court’s “persuasive reasoning” was rejected by Hood a careful re-analysis is required. The 11th Circuit also summarily rejected arguments that the “uniformity requirements” in the Constitution’s bankruptcy clause provides a rational. This was the rational in the 6th Circuit’s opinion in Tennessee v. Hood, namely, that the Constitution’s bankruptcy clause’s use of the phrase “uniform” limited sovereign immunity arguments. This was also based upon an analysis of certain portions of the Federalists papers.” I am mindful of Justice Thomas’s reference to this rational when he stated that “[o] ur discussions of Congress’ inability to abrogate state sovereign immunity through the use of its Article I powers reveal no such limitation.” Still, if we applied a standards of rejecting possibilities that had not been raised or revealed before, we might truly have ignored Galileo’s revolutionary concepts of science (who, as the legend suggest, when required to sign a document denouncing his theories of a revolving earth, uttered under his breath “yet it still moves.”) Further of note is that I can find no discussion of the third count of the debtor Crow (the violations of the Fair Debt Collection Practices Act). Although this count was dismissed by the Bankruptcy Court and the 11th Circuit’s reasoning of the automatic stay makes academic any extensive analysis for the 11th Circuit, this is a real issue for analysis. It is an issue of damages for a violation of a statute outside of the Bankruptcy Code. Although one could argue that the Bankruptcy Court’s in rem jurisdiction extends to collection of an estate and/or debtor’s properties (including damages), this is by no means clear. Compare Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982), which concluded that the Bankruptcy Court’s summary jurisdiction over property did not permit the Bankruptcy Court to issue final judgments on certain issues. The 11th Circuit’s ruling also contrasts with some thoughts I have recently heard. At a recent seminar at which I attended, a respected jurist opined that his and others believed that the Supreme Court’s use of in rem jurisdiction eliminated the use of sovereign immunity in all cases as a matter of practicality (although he questioned the Supreme Court’s use of in rem as strained). I personally disagreed at the time that this was a closed issue, and I think we “bet a buck.” I personally hope that the 11th Circuit takes the opportunity (if requested) to hear this matter en banc. The automatic stay is so central to the bankruptcy process that a summary dismissal of it as not part of the in rem jurisdiction of the Bankruptcy Court should be re-examined carefully. In any event, it appears that the issue of sovereign immunity will be contested form many years and a Hood II or Hood III is possible, if not likely. Louis S. Robin Phone: 413-567-3131 Case Law UpdateSection 1170’s Term “Abandonment” Does Not Give Bankruptcy Courts the Power to Adversely Abandon a Non-Debtor Railroad’s Easement. The Court found that the term “abandonment” in § 1170 does not give the bankruptcy courts the power to adversely abandon a non-debtor railroad’s easement and trackage rights over rail lines owned by the debtor at the time of the bankruptcy. Congress did not intend by using the word “abandonment” in § 1170 to include “adverse abandonment” by a debtor railroad, to oust a third party from rights in the debtor’s own lines, or to strip the Surface Transportation Board of its exclusive jurisdiction over the abandonment of a non-debtor’s lines or trackage rights. Howard v. Surface Transportation Board, 389 F.3d 259 (1st Cir. Nov. 24, 2004). Property Owned by a Chapter 13 Debtor as Tenancy by the Entireties with a Non-Debtor Is not Part of the Estate. The Eleventh Circuit held that property owned by a Chapter 13 debtor as tenancy by the entireties with a non-debtor under Florida law is not part of the bankruptcy estate and therefore cannot be reached by creditors. Property owned as tenancy by the entireties is exempt from the bankruptcy estate by § 522(b)(2)(B). Debtor’s real property and household goods and furnishings held with his non-debtor wife as tenants by the entireties was exempt from his creditors pursuant to § 522(b). Musolino v. Sinnreich (In re Musolino), 2004 U.S. App. Lexis 24693 (11th Cir. Nov. 30, 2004). Crop Disaster Payment from Government is Not Property of Bankruptcy Estate. The Fifth Circuit, agreeing with the Ninth and Eighth Circuits, held that a crop disaster payment from the federal government to a farmer, who was the debtor in a closed bankruptcy case, should not be treated as property of his bankruptcy estate. In this case, the legislation providing for the crop disaster payment did not exist at the time the debtor filed for bankruptcy. At the time the debtor filed for bankruptcy he had a “mere hope” that future legislation would provide relief for his crop loss. Thus, he had no legal or equitable right to such relief at the commencement of his bankruptcy case. Burgess v. Sikes, 2004 U.S. App. LEXIS 25018 (5th Cir. Dec. 6, 2004). Proofs of Claims of a Group of Equity Holders that Include Shares of Stock and Warrants Characterized As Equity Securities. Deciding an issue of first impression within the Fifth Circuit, the Court held that proofs of claims of a group of equity holders that include shares of stock, with a redemption provision, and warrants, with a repurchase provision, are characterized as “equity securities” under § 101(16)(C) instead of “claims” under § 101(5) of the Bankruptcy Code. The Court relied on the plain meaning of § 101(16)(C) and its legislative history. The phrase “other than a right to convert” in the section restricts only the word “right” and not the rest of the section, according to the Court. Furthermore, “Congress did not intend the definition of ‘equity security’ to include a ‘security, such as a convertible debenture, that is convertible into equity security, but has not been converted.” The Court decided that it then follows that “Congress did not intend to exclude anything else from the definition of ‘equity security,’ such as the right to sell/redeem stock or to demand repurchase of warrants, because it did not explicitly list any other restricted terms. Carrieri v. Jobs.com Inc., 2004 U.S. Lexis 25133 (5th Cir. Dec. 7, 2004). Debtor May Recover Damages for Emotional Distress Under 11 U.S.C. § 362(h). The Ninth Circuit upon reconsideration of its previous decision in Dawson v. Washington Mutual Bank, F.A., 357 F.3d 1174 (367 F.3d 1174 (9th Cir.), held that a debtor may recover damages for emotional distress under 11 U.S.C. § 362(h) when a creditor violates the automatic stay that follows from the filing of a bankruptcy petition. The Court relied on the fact that Congress chose the term “individual” to describe those who are eligible to claim actual damages under § 362(h) as well as the legislative history of the section. By limiting the availability of actual damages under § 362(h) to individuals, the Court found that “Congress signaled its special interest in redressing harms that are unique to human beings. One such harm is emotional distress, which can be suffered by individuals, not by organizations.” The Court also decided that the legislative history reveals Congress to be concerned with financial loss as well as emotional and psychological toll that a violation can cause. Dawson v. Washington Mutual Bank, F.A., 390 F.3d 1139 (9th Cir. 2004). Paige E. Barr Phone: (312) 558-6444 Washington Hot NewsJanuary 27: The introduction of the bankruptcy reform legislation, which was expected to be introduced by Senator Charles Grassley (R-Iowa) on Wednesday, has been postponed. Senator Grassley’s office still anticipates this bill will be introduced before the end of the week. January 25: The Senate this week is expected to introduce Credit Union National Association (CUNA) backed legislation passed by the House last year that would reform bankruptcy laws in the U.S. Sen. Charles Grassley (R-Iowa) is expected to introduce the bill today or tomorrow, according to CUNA Senior Vice President of Governmental Affairs John McKechnie. Mr. McKechnie indicated that it would be similar to a bill passed by the House last year, except it would not include the controversial Sen. Charles Schumer (D-N.Y.) amendment on abortion clinic violence. CUNA strongly supports the passage of a bankruptcy abuse reform bill. More Washington Hot News can be found by clicking here. David Goch |