|
June 2005 issue: 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 here. CDs Now Available! Although the live broadcasts of "Understanding the Radical Changes to the Bankruptcy Code" have concluded for the summer season, these invaluable programs are available on CD. Click here for details. New Bankruptcy Code Resource Center At clla.org you will find a NEW CODE Resource Area. The area includes links to the most frequently requested materials regarding the sweeping changes to the Bankruptcy Code. It can be found at www.clla.org at NEW CODE or by clicking here. Washington Hot News Senate Judiciary Postpones Action on Security Breach Notification Measure: On June 23rd, the Senate Judiciary Committee postponed acting on legislation to establish national info breach notification standards, in anticipation of a more comprehensive bill's introduction. 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: |
If you are having trouble navigating through the newsletter,
the online version can be found here: Sua Sponte Alan I. Nahmias In yet the most recent example of the ends justifying the means, a new study funded by the Ewing and Marion Kaufman Foundation and authored by distinguished Professors Robert M. Lawless, Gordon & Silver Ltd. Professor of Law at the William S. Boyd School of Law of the University of Nevada Las Vegas, and Elizabeth Warren, Leo Gottlieb Professor of Law at Harvard Law School and a former winner of the Commercial Law League's Lawrence P. King Award for Excellence in the Field of Bankruptcy, has found that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 failed to account for hundreds of thousands entrepreneurs, independent contractors and self-employed individuals who have sought bankruptcy relief in the past. Case Analysis Paige E. Barr "Due Process is Not to be Sliced, Diced and Disguised with Sauce. Due Process Must be Served Whole, Without Garnish." Summary: In Ruehle v. Educational Credit Management Corp. (In re Ruehle), 2005 U.S. App. LEXIS 12119 (6th Cir. June 23, 2005), the United States Court of Appeals for the Sixth Circuit held that an attempt to discharge by declaration student loans is invalid, void and subject to being set aside upon a Rule 60(b)(4) motion. Factual Background: The debtor received $17,000 in student loans from the Creditor. She later filed a chapter 13 petition that scheduled only two debts: a secured debt for an automobile lease and the unsecured student loan. Debtor's plan called for repayment of 5 percent of her student loans over a period of 40 months and included a provisional attempt at discharge by declaration, an attempt to discharge the student loan without an adversary proceeding. Case Law Update Paige E. Barr Bad Faith May Encompass Intentional Misconduct that was not in the Actor's Best Interest. Debtor attempted to amend his claimed homestead exemption of $135,000 to $300,000 (the full amount allowed under Massachusetts law) for his property which consisted of a house parcel and an adjoining back parcel of land. Debtor's Schedule A listed a single-family dwelling with a market value of $135,000. His Schedule C claimed a homestead exemption in the amount of $135,000. The First Circuit affirmed the bankruptcy and district courts' rulings that the debtor had intentionally undervalued his property and that undervaluation amounted to bad faith. The bankruptcy court's findings of fact made it clear that debtor was aware at the § 341 meeting that the Trustee was seeking a valuation of the debtor's house parcel and back parcel of land. Debtor argued that the undervaluing of the property should not be considered bad faith because the undervaluing was not material. Debtor claimed that since under the Massachusetts homestead exemption law the amount of the claimed exemption automatically increases over time, the undervaluation, which was well below the statutory maximum, must have been unintentional since it served no beneficial purpose to the debtor. The Court rejected this argument finding that bad faith may encompass intentional misconduct that was not in the actor's best interest. Hannigan v. White (In re Hannigan), 2005 U.S. App. LEXIS 10050 (1st Cir. June 2, 2005). ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Sua SponteIn yet the most recent example of the ends justifying the means, a new study funded by the Ewing and Marion Kaufman Foundation and authored by distinguished Professors Robert M. Lawless, Gordon & Silver Ltd. Professor of Law at the William S. Boyd School of Law of the University of Nevada Las Vegas, and Elizabeth Warren, Leo Gottlieb Professor of Law at Harvard Law School and a former winner of the Commercial Law League's Lawrence P. King Award for Excellence in the Field of Bankruptcy, has found that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 failed to account for hundreds of thousands entrepreneurs, independent contractors and self-employed individuals who have sought bankruptcy relief in the past. The report, to be published in the latest issue of California Law Review, further finds that despite official government statistics that report the presence of business bankruptcies as declining, they are actually increasing, with the actual numbers about nine times higher than the government's official data, which lists only about 37,000 business cases filed, as compared to an estimated 260,000 to 315,000 bankruptcies according to the authors of the study. As might be expected, a result of the faulty data is a skewed picture of the measurement and strength of the nation's small business economy. Official government statistics report that business bankruptcies began a steady decline in the mid '80s, when businesses comprised about 18 percent of all bankruptcy filings, to a present-day total of only about 2 percent of all filings. Today, corporations and other legal entities such as limited liability companies and partnerships comprise almost all of the business filings counted by the government, while entrepreneurs who take on the risk of a new business undertaking have essentially been excluded from the official business bankruptcy statistics. Professors Lawless and Warren attribute the problem of the faulty reporting to efforts in the mid 1980s to simplify the official bankruptcy reporting process and the advent of new computer software that changed the way attorneys completed forms used to compile the government statistics. The technological changes created a systematic bias in which entrepreneurs were reclassified as consumer cases rather than business cases. The government's official statistics also appear to vary substantially from manual statistics compiled by both Dun & Bradstreet and the Small Business Administration, which both show a significant increase in small business failures since the mid '80s. According to co-author Professor Lawless, "Each year, the bankruptcy system provides a critical safety net for hundreds of thousands of entrepreneurs. Our findings again suggest that the popular image of the bankruptcy system as full of irresponsible, overspending consumers is myth." Professor Warren goes on to add, "the data suggests that much of the measurement of the small business economy is simply wrong, and that errors affect every assessment of the strength, number and role of entrepreneurial businesses in the United States . . . Our economic system needs to encourage entrepreneurs to make new investments. Sometimes these investments will fail through no fault of their owners, and when that happens, the owners need to be able to move to other businesses and create new jobs and investment opportunities. As I touched upon in a recent Sua Sponte, and I believe virtually all others in our community will agree the new bankruptcy law will likely have the unintended (perhaps intended?) effect of retarding the formation of new business and minimizing the opportunities entrepreneurs may seize upon as a direct result of both their inability to obtain relief under the Bankruptcy Code and their desire to avoid harsh punishment through financial ruin for failing. One only wishes that this report would have been available to Congress prior to its enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Then again, perhaps it was. The CLLA's 111th Annual Convention will be taking place next month in Toronto, Canada at the Four Seasons Hotel from July 13 through 17. The summer convention is a great opportunity to better get to know your fellow League members, develop new relationships and strengthen existing ones in a relaxed and thoroughly enjoyable environment. Space is still available, and I urge any of you with undecided summer plans to sign up now, before it's too late. I look forward not only to seeing each of you there, but Cathy Pike of the firm of Weber and Rose in Louisville, Kentucky, to whom I shall relinquish my position as Chair of our Section. See you in Toronto. Alan I. Nahmias Email: anahmias@prnlaw.com Case Analysis"Due Process is Not to be Sliced, Dice and Disguised with Sauce. Due Process Must be Served Whole, Without Garnish." Summary: In Ruehle v. Educational Credit Management Corp. (In re Ruehle), 2005 U.S. App. LEXIS 12119 (6th Cir. June 23, 2005), the United States Court of Appeals for the Sixth Circuit held that an attempt to discharge by declaration student loans is invalid, void and subject to being set aside upon a Rule 60(b)(4) motion. Factual Background: The debtor received $17,000 in student loans from the Creditor. She later filed a chapter 13 petition that scheduled only two debts: a secured debt for an automobile lease and the unsecured student loan. Debtor's plan called for repayment of 5 percent of her student loans over a period of 40 months and included a provisional attempt at discharge by declaration, an attempt to discharge the student loan without an adversary proceeding. The provision stated, All timely filed and allowed unsecured claims, including the government guaranteed educational loans, shall be paid five percent (5%) of each claim, and the balance of each claim shall be discharged. Pursuant to 11 U.S.C. § 523(a)(8), excepting the aforementioned education loans from discharge will impose an undue hardship on the debtor and the debtor's dependents. Confirmation of debtor's plan shall constitute a finding to that effect and that said debt is dischargeable. In order to discharge a student loan, section 523(a)(8) and F.R.B.P. 7001(6) require that a debtor establish undue hardship by filing a complaint for an adversarial hearing and serving the creditor with a summons. Since the debtor here failed to follow such procedure, the creditor failed to file an objection to the discharge by declaration and her chapter 13 plan was confirmed. Subsequently the creditor filed a motion to vacate the discharge under F.R.C.P. 60(b)(4) and (6), claiming that the debtor had violated its due process rights by failing to institute an adversarial proceeding and failing to give the creditor notice. The bankruptcy court granted the creditor's motion and vacated the discharge. The debtor appealed and the Bankruptcy Appellate Panel affirmed the lower court's finding. Debtor then filed this appeal, alleging that her discharge should be upheld, even if improperly granted, based on res judicata. Discussion: In her appeal, debtor argues that the need for finality trumps the creditor's due process rights and a confirmed bankruptcy plan should not be overturned on a Rule 60(b) motion. Debtor's argument relies upon two cases that indicate that a confirmed bankruptcy plan may not later be overturned on a Rule 60(b) motion, Great Lakes Higher Educ. Corp. v. Pardee (In re Pardee), 193 F.3d 1083 (9th Cir. 1999) and Andersen v. UNIPAC-NEBHELP (In re Andersen), 179 F.3d 1253 (10th Cir. 1999). While the facts of both Pardee and Andersen differ from those at issue in this case, the holdings of both cases skirt the issue of due process. In Pardee the Ninth Circuit held that the creditor had failed to enter a proper objection and that a confirmed plan was res judicata as to all issues that could have or should have been litigated at the confirmation hearing. In Andersen, the Tenth Circuit held that despite the debtor's "obvious failure to meet the burden of proving an undue hardship, confirmation of the plan constitutes a binding adjudication of hardship." Andersen, 179 F.3d at 1255. Cases subsequent to Pardee and Andersen have criticized those courts' holdings and rejected application of res judicata in cases where the debtor has attempted to effect discharge by declaration. Affirming the bankruptcy court and the Bankruptcy Appellate Panel decisions, the Sixth Circuit ruled that an attempt to discharge by declaration student loans is invalid, void and furthermore subject to being set aside upon a Rule 60(b)(4) motion. Due process requirements cannot be ignored. The Bankruptcy Code and Bankruptcy Rules require a heightened degree of notice and due process, entitling a party to receive such notice before an order binding the party will be afforded preclusive effect. The Court further adopted the bankruptcy court's criticism of the Pardee and Andersen holdings. Those holdings ignore the intent of Congress and the Judicial Conference in favor of individual judicial legislation. They legitimatize the debtor's improper taking of what is not hers. Furthermore, the holdings blur the clear rules set out by the Bankruptcy Code and the Bankruptcy Rules. Finally, as a core principal of American law, everyone is entitled to due process. Comment: While it appears somewhat unfair that a creditor may appear many years later to object to a discharge, disrupting the finality of a confirmed bankruptcy plan, there is nothing unfair about exercising one's legal right to due process. If the debtor believes the creditor should not be allowed to object years later, then the debtor should have followed the rules and allowed the creditor due process. As the bankruptcy judge wrote, "Due process is not to be sliced, diced and disguised with sauce. Due process must be served whole, without garnish." Paige E. Barr Phone: 312-558-6444 Case Law UpdateBad Faith May Encompass Intentional Misconduct that was not in the Actor's Best Interest. Debtor attempted to amend his claimed homestead exemption of $135,000 to $300,000 (the full amount allowed under Massachusetts law) for his property which consisted of a house parcel and an adjoining back parcel of land. Debtor's Schedule A listed a single-family dwelling with a market value of $135,000. His Schedule C claimed a homestead exemption in the amount of $135,000. The First Circuit affirmed the bankruptcy and district courts' rulings that the debtor had intentionally undervalued his property and that undervaluation amounted to bad faith. The bankruptcy court's findings of fact made it clear that debtor was aware at the § 341 meeting that the Trustee was seeking a valuation of the debtor's house parcel and back parcel of land. Debtor argued that the undervaluing of the property should not be considered bad faith because the undervaluing was not material. Debtor claimed that since under the Massachusetts homestead exemption law the amount of the claimed exemption automatically increases over time, the undervaluation, which was well below the statutory maximum, must have been unintentional since it served no beneficial purpose to the debtor. The Court rejected this argument finding that bad faith may encompass intentional misconduct that was not in the actor's best interest. Hannigan v. White (In re Hannigan), 2005 U.S. App. LEXIS 10050 (1st Cir. June 2, 2005). Plaintiff Judicially Estopped from Pursuing EEOC Charge While her Bankruptcy Petition was Pending and She did Not Fulfill her Duty to Amend. While pursuing a title VII claim, the debtor filed a chapter 13 petition. In her bankruptcy forms debtor declared, under the penalty of perjury, that she had no other contingent and unliquidated claims of any nature and that she had no other pending suits and administrative proceedings. The Fifth Circuit affirmed the district court's holding that the title VII claim was judicially estopped because the debtor had failed to disclose her pending EEOC charge and potential lawsuit during the bankruptcy proceedings, applying the three part test in Browning Mfg. v. Mims (In re Coastal Plains, Inc.), 179 F.3d 197 (5th Cir. 1999). Under Browning, judicial estoppel applies if (1) the position of the party against which estoppel is sought is plainly inconsistent with its prior legal position; (2) the party convinced a court to accept the prior position; and (3) did not act inadvertently. Here, debtor filed her title VII claim eight months pre-petition, but concealed this charge from the court and the bankruptcy court confirmed her plan based upon its assessment of her assets and liabilities. Further, the Court found that in order to demonstrate inadvertence, debtor must show "not that she was unaware that she had a duty to disclose her claims but that, at the time she filed her bankruptcy petition, she was unaware of the facts giving rise to them," but this debtor was fully aware of the facts when she filed her bankruptcy petition. Jethroe v. Omnova Solutions, Inc., 2005 U.S. App. LEXIS 11051 (5th Cir. June 13, 2005). Section 1334 Jurisdiction Found to Continue Following Plan Confirmation. After confirmation of debtor hospital's plan, it learned it was beneficiary of certain inter vivos trusts and sought turnover from the trustees. Another beneficiary intervened, arguing, inter alia, that the court lacked "related to" jurisdiction because the litigation arose post-confirmation. The Court rejected this argument holding that "when a debtor (or a trustee acting to the debtor's behalf) commences litigation designed to marshal the debtor's assets for the benefit of its creditors pursuant to a liquidating plan of reorganization, the compass of related to jurisdiction persists undiminished after plan confirmation." Unlike reorganization plans, liquidation plans do not raise concerns of endless bankruptcy jurisdiction where fewer proceedings are actually related to the underlying bankruptcy case and they should, therefore, be examined differently than decisions limiting post-confirmation jurisdiction in reorganization cases. Boston Regional Med. Ctr. v. Reynolds (In re Boston Regional Med. Ctr.), 2005 U.S. App. LEXIS 11137 (1 st Cir. June 14, 2005). Failure to Abandon Leases Found Excusable Neglect. When it declared bankruptcy, United mistakenly believed no payments were past due on its airplane leases. Thinking no money was owed, it did not accompany its notice of retention of the leases with any payment. However, the bank realized that no money was remitted when it was in fact due. While realizing that no money was remitted with the notice, the bank could have repossessed the planes under 11 U.S.C. § 1110. However, it did not repossess the planes because it wanted to enforce United's mistaken election to honor the leases and the concomitant duty to cure the defaults. United's decision to retain the leases had been approved by a bankruptcy court order. United filed a motion to vacate the order to fend off the bank's demand for payment of money due under retained leases as distinct from abandoned leases. The ground was excusable neglect in having failed to abandon the leases. The bankruptcy court granted the motion to vacate its earlier order and the bank appealed. The Court found that this was a case of excusable neglect under Rule 60(b). However, had the beneficiaries of the mistake, the airplanes' owners, relied to their detriment on it, United would not have been entitled to relief. "When an innocent mistake can be rectified without harm to anyone, it should be. If the mistake is not corrected, the cost will be borne not by its maker – United – but by creditors no less innocent than the airplanes' owners. A refusal to correct would serve no deterrent or punitive purpose; it would merely redistribute wealth among creditors capriciously." However, the Court did caution that had United taken a year to discover and communicate its mistake, the mistake would not have been "excusable" even if the delay had not harmed the bank. In re UAL Corp., 2005 U.S. App. LEXIS 11141 (7th Cir. June 14, 2005). Expenses and Injuries of Litigation Should Lie Where They Fall. In enjoining trading of stock held in debtor's ESOP, the court did not require United to post a bond to protect the ESOP against loss or to provide adequate protection of the investor's interests under § 362(d)(1). The trustee of the ESOP filed an appeal. Meanwhile, due to a change in IRS regulations, United terminated the ESOP and distributed the shares. Ignoring United's request that the court dismiss the appeal as moot, the bankruptcy court affirmed on the merits. The trustee appealed claiming that the investors deserve compensation for the loss they suffered between the time of the bankruptcy court's order and the dissolution of the ESOP. However, case law on damages arising from an injunction limit recovery. In this case, the Court refused to grant recovery to the investors, rationalizing that the harms (loss of liquidity plus uncompensated risk) that investors suffered did not correspond to any gain United enjoyed, nor did United's gain (retention of future tax deductions) match any investor's loss. The Court did note however, "the American Rule allowing expenses and injuries of litigation to lie where they fall may be questionable, but its revision is a task for Congress, the Supreme Court, or the bodies that prescribe the federal rules of procedure; the subject is out of an inferior federal court's hands. UAL Corp. v. State Street Bank and Trust Co. (In re UAL Corp.), 2005 U.S. App. LEXIS 11831 (7th Cir. June 21, 2005). Paige E. Barr Phone: (312) 558-6444 Washington Hot NewsSenate Judiciary Postpones Action on Security Breach Notification Measure On June 23rd, the Senate Judiciary Committee postponed acting on legislation to establish national information breach notification standards, in anticipation of a more comprehensive bill's introduction. The committee had scheduled a markup of Sen. Feinstein's (D-CA) S. 751, the "Notification of Risk to Personal Data Act," but Feinstein needed extra time to finalize a substitute and circulate it to committee members. It is believed her substitute will require consumer notification of security breaches when there is a "significant risk" of identity theft; the current bill requires notification when sensitive data is merely compromised. Data covered by the bill includes Social Security, driver's license, and credit card numbers. Both electronic and non-electronic data would be covered. A new mark-up date had not yet been scheduled, but it could take place June 30. Senate Judiciary Committee Chairman Specter (R-PA) said Feinstein's bill could potentially be added to a bill that he plans to introduce with ranking member Leahy (D-VT). According to Leahy, the bill could be introduced this week, and it is expected to:
The bill would preempt state laws as they relate to notification and The FTC would be the enforcement agency. State attorneys general could also bring civil actions. Affected individuals would be allowed to have an extended fraud alert of seven years placed on their credit reports, an expansion of current law under the Fair Credit Reporting Act. House committees could also move identity theft legislation in coming weeks. Bills are being worked on and should be introduced before the July 4 recess. New Tennessee Consumer Breach Notification Law On June 18th, Tennessee Gov. Bredesen (D) signed a bill, similar to legislation enacted in more than a dozen states this year, requiring businesses and agencies holding computerized data on state residents to disclose security breaches affecting their personal information. The measure (S.B. 2220) takes effect July 1, 2005. Under S.B. 2220:
|