CLLA Bankruptcy Section Newsletter

August 1, 2008 is the deadline for submission of nominations for the 2008 Lawrence P. King Award for Excellence in Bankruptcy.

Click here for a nomination form; again nominations are due August 1, 2008.

The King Award is given in recognition of that lawyer, judge, teacher or legislator who exemplifies the best in scholarship, advocacy, judicial administration or legislative activities in the field of bankruptcy. The recipient will exemplify the standards set by Professor King during a life-time of devotion to the practice and practitioners of bankruptcy. She or he will have made a lasting contribution to the improvement of commerce and to the fair and ethical treatment of debtors, creditors and the public at large. The award will recognize a career, not an event. The award will be presented at the Commercial Law League's Annual Breakfast held at the 2008 National Conference of Bankruptcy Judges September 25, 2008 in Scottsdale, AZ.

Interested in Sponsoring the CLLA events at NCBJ?

Please www.clla.org/events/ for more information.

Sua Sponte

On May 1, 2008, the Commercial Law League of America began its Annual Meeting along with the Annual Midwest Meeting in Chicago. On that day the Annual Symposium jointly presented by the DePaul Business and Commercial Law Journal and the Commercial Law League of America was held. The program was planned and executed by students on the Law Journal and our Section committee lead by Paige Barr and Cathy Vance. The program and the speakers were outstanding. If you missed the Symposium, you will be able to review the presentations in a future issue of the Journal and we hope you will be able to join us next year.

Case Analysis

Summary. Debt Collector v. Chapter 13 Trustee. Judgment creditor is denied permission to sue a chapter 13 trustee personally for returning funds to the chapter 13 debtor when the judgment creditor served the chapter 13 trustee with a third party citation to discover assets. In re Weitzman _B.R. (Bankr. N.D. Ill. 2008).

Case Law Update

Proofs of claim were not fraudulent merely because statute of limitations had run on underlying debts.

Proofs of claim filed by an alleged assignee of credit card debts were not false or fraudulent merely because the statute of limitations may have run on any cause of action to collect on the debts in question. Thus, no sanctions were warranted against this alleged assignee for filing these proofs of claim. Under Virginia law, a debt for which a collection action has become barred by the running of the statute of limitations is not extinguished. Rather, the bar of the statute operates to prevent enforcement. In re Varona, --- B.R. ----, 2008 WL 2150109 (Bkrtcy.E.D.Va.) May 22, 2008.

Sua Sponte

All the programs were well attended and the topics and speakers were interesting.

The Section had its First Annual Dinner on Thursday night. There were over sixty attendees including members of the Section and prospective members from the Chicago area. Thanks to Deb Ebner, Jeff Schatzman, Cathy Vance and Paula Lucas for planning and executing a lovely evening.

At our Section’s Annual Meeting we expressed our appreciation to Deb Ebner for her exceptional year as Chair and for her outstanding leadership. She brought a new vitality to the Section, and we look forward to her continued contribution to the Section.

We also said good bye to Paula Lucas, our League Staff person and wished her the best of luck in her new position. We welcomed Meghan Cook, our new League Staff person. She has stepped in and has done an excellent job.

Our next major programs will take place at the National Conference of Bankruptcy Judges in Scottsdale on September 24-27, 2008. On Thursday, September 25, 2008 we will have our Annual CLLA Breakfast featuring Herb Cohen, Internationally Renowned Negotiator and Author. In the afternoon we will present our 23rd Annual Educational Program. We have various sponsorship opportunities available. Please contact me or Meghan Cook at the CLLA office for further information. (800) 978-2552.

Case Analysis

Factual Background. On May 23, 2000, the Elgin Riverboat Casino obtained a judgment against Melvin Weitzman in the amount of $31,538.73. On February 21, 2005, Weitzman filed a chapter 13 case. The Casino filed an unsecured claim for $28,282.73. Weitzman paid $81,000.00 to the chapter 13 trustee, but confirmation of his plan was denied by the court. The chapter 13 case was dismissed on February 23, 2006 at 9:30 a.m. The chapter 13 trustee, after deducting the amounts paid for administrative expenses and to the debtor’s ex-wife, was holding $52,636.37. In accordance with 11 U.S.C. §1326(a), the chapter 13 trustee returned the funds to the debtor immediately after the dismissal of the case.

In the afternoon on February 23, 2006, the day the case was dismissed, the Casino caused a Third Party Citation to Discover Assets to be issued by the state court to the chapter 13 trustee. The Citation commanded the chapter 13 trustee to appear before the state court to be examined as to non-exempt assets of the debtor and prohibited the trustee from making any transfer of non-exempt property belonging to the debtor. The Citation was not served upon the trustee personally, but was given to someone in his office. The trustee moved to have the citation proceeding removed to the bankruptcy court shortly before the return date. The court denied the motion for removal since it was determined that the trustee had disbursed the $52,636.37 to the debtor and the trustee was no longer holding any funds belonging to the debtor.

In January of 2007, the Casino filed a Third Party Complaint against the Trustee in the state court. The Casino alleged that the trustee was personally liable to for the amount of its judgment against the debtor. The Casino relied upon 735 ILCS 5/2-1402(f) which provides a third party can be held liable for violating the prohibition against transferring non-exempt funds belonging to the judgment debtor. The trustee filed a motion to dismiss the complaint in the state court based upon the doctrine from Barton v Barbour, 104 U.S. 126 (1881), that an equity receiver cannot be sued without leave of the court that appointed him. In June of 2007, the Casino requested that the bankruptcy court grant it permission to continue its complaint against the trustee. The bankruptcy court refused to give its permission to the Casino.

Discussion. The bankruptcy court found several reasons to deny the Casino permission to maintain an action against the trustee personally. The court first noted that it should not give its permission unless the movant could establish a prima facie case. The court determined the Casino would be required to establish: (i) the citation was issued in furtherance of an enforceable judgment; (ii) the citation was properly served and (iii) there was a transfer that violated the prohibition against transferring property belonging to the judgment debtor. The Casino failed to convince the court that it could establish any of the required elements of a prima facie case against the trustee.

First, the court first found that the citation was issued in the afternoon on the same day that the chapter 13 case was dismissed. Since the dismissal order was not docketed until the following day, at the time the citation was issued, the automatic stay was still in effect. Therefore, when the citation was issued the judgment was not enforceable.

Second, the court found that the Casino could not meet its burden to establish that the citation was properly served upon the trustee and that the trustee had clear notice of the prohibition against transfer. The Casino did not produce a certificate of service of the citation upon the trustee. The Casino could offer no details other than that the citation was served upon someone in the trustee’s office. That scant detail was not enough for the court. It found that the Casino failed to establish that “someone” was an employee of the trustee qualified as an agent to accept service.

Third, the court found the Casino could not establish the trustee violated the prohibition against transferring funds belonging to the debtor. The Casino was unable to prove that the citation was served before the trustee returned the funds to the debtor. The court went further and invoked the doctrine of preemption. Since section 1326(a)(2) of the Code mandated the trustee to return the funds to the debtor, that federal statute preempted the Illinois law governing the third party citation. The prohibition against transferring property of the judgment debtor was suspended by the federal statute.

The bankruptcy court followed the lead of the court in In re Litton, 136 F.3d 545 (7th Cir. 1998) which reinforced the Barton doctrine. The court expressed its concern that if trustees must contend with the threat of suits by creditors and other parties in bankruptcy cases, it will adversely affect the administration of bankruptcy cases. The Casino’s efforts to collect the claim against Weitzman as the personally liability of the chapter 13 trustee was completely unsuccessful.

Comment. In the Weitzman case, it is apparent that the failure of the Casino to follow the fine letter of the law cost it dearly. The citation was served too soon while the automatic stay was in effect. The Casino could not prove proper service upon a proper party in accordance with the statute. Finally, the Casino attempted to reach a pot that was protected by a federal statute.

Case Law Update

Proofs of claim were not fraudulent merely because statute of limitations had run on underlying debts.

The Chapter 7 debtors' inadvertent failure to list a creditor on their bankruptcy schedules did not preclude a discharge of their debt to this omitted creditor, though the creditor did not have actual knowledge of the debtors' bankruptcy in time to permit it to file a proof of claim prior to the expiration of the claims bar date. There had not yet been any distribution to creditors, and the creditor, pursuant to a Code provision dealing with the distribution of assets of a Chapter 7 estate, had the ability to file a tardy proof of claim and participate in such distribution, if any, as was ultimately made. In re Horlacher, 2008 WL 2095854 (Bkrtcy.N.D.Fla).

Declining to follow the majority view but, instead, joining the "growing number" of courts adopting the minority view, the United States Court of Appeals, Sixth Circuit and the Tenth Circuit Court of Appeals held that when a Chapter 13 debtor surrenders a "910 vehicle," the "hanging paragraph" added to BAPCPA does not abrogate the creditor's right to assert an unsecured deficiency claim, if authorized by the underlying contract and state law.

In re Long held that in interest of equity to produce results that conformed with the overriding purpose of the Bankruptcy Code, deficiency claims are allowable where debtor surrenders vehicle to secured 910 creditor in Chapter 13 case. In re Long 519 F.3d 288, 2008 WL 564798 (C.A.6 (Tenn.)), Bankr. L. Rep. P 81,127. Capital One Auto Finance v. Osborn, 2008 WL 304750 (8th Cir. Feb 05, 2008). In re Ballard, --- F.3d ----, 2008 WL 2080852, C.A.10,2008.

The Economic Stimulus Act of 2008 became law on February 13, 2008. There are currently no decisions determining whether the payments under this act are “property of the estate” for cases filed after February 13, 2008. In re Andrews, --- B.R. ----, 2008 WL 1977529 Bkrtcy.D.Utah, 2008 held that the economic stimulus checks are not property of a bankruptcy estate when the debtors filed their petition prior to February 13, 2008. “The Court specifically declines to determine whether stimulus payments received by individual debtors in chapter 13 cases, or chapter 11 cases, or received by debtors who filed chapter 7 petitions after the effective date of the Economic Stimulus Act are property of the estate under § 541(a)(1).”

A policy statement from the Executive Office of the U.S. Trustee dated April 30, 2008, stated the IRS considers the entire payment to be property of the estate in any case filed after February 13, 2008.

Debtor had standing to bring FDCPA claim in her own name on behalf of bankruptcy estate.

Because a Chapter 13 debtor remains in possession of the property of the estate, a Chapter 13 debtor has standing to bring Fair Debt Collection Practices Act (FDCPA) claim in her own name on behalf of bankruptcy estate. Rule 6009 of the Federal Rules of Bankruptcy Procedure also supports the conclusion that the Chapter 13 debtor has standing to bring a civil complaint: “With or without court approval, the trustee or debtor in possession may prosecute or may enter an appearance and defend any pending action or proceeding by or against the debtor, or commence and prosecute any action or proceeding in behalf of the estate before any tribunal.” Fed. R. Bankr.P. 6009 Smith v. Rockett, 522 F.3d 1080, 2008 WL 1094384 (C.A.10 (Okla.)) United States Court of Appeals, Tenth Circuit.

Pursuant to 11 U.S.C. § 109(h)(1), an individual may not be a debtor unless he or she completed a credit briefing outlining the opportunities for credit counseling and assisting in performing a related budget analysis in the 180 days prior to filing the petition. The language of the statutes is clear that this must be completed before filing the petition or the individual does not qualify to be a debtor.

Despite the fact that debtor has a legitimate exigent circumstance such as an impending foreclosure sale, where debtor fails to show that he requested credit counseling from an approved agency and was unable to receive it within five days of the request, the court cannot grant a temporary waiver and has no choice but to dismiss the case. In re Murray, Slip Copy, 2008 WL 732730(E.D.Va. Mar 17, 2008). Debtor failed to set forth exigent circumstances required for court to defer completion of credit counseling course. Debtor’s statement of inability to pay because of unemployment was not exigent circumstance per the Court’s definition. “An “exigent” circumstance is an urgent or emergency situation that makes it necessary to file a bankruptcy case immediately because bankruptcy relief would be unavailing if the filing of the petition had to be delayed to obtain credit counseling first.”In re Palacios, Slip Copy, 2008 WL 700968 (Bankr (Bankr.E.D.Va. Mar 13, 2008).

Bankruptcy court decision overruled a chapter 13 trustee’s objected to confirmation of above-median-income debtor's proposed plan, as allegedly failing to satisfy “projected disposable income” requirement. Debtor was entitled to take the full standard housing deduction that she was qualified for based on her household size and area that she lived, even though her actual monthly rent expense was significantly less than the amount allowed for housing expenses under the IRS standards. In re Phillips, 2008 WL 352396 (Bankr. D.Mass. Feb 07, 2008).

BAPCPA provides only a limited stay or no stay provisions where the consumer debtor is a so-called “repeat filer.” See Code §§ 362(c)(3) and (c)(4). In the case of In re Galanis, 334 B.R. 685 (Bankr.D.Utah 2005), to overcome a presumption of “bad faith,” under §§ 362(c)(3), a Chapter 13 debtor, who has previously had a prior case dismissed within one year, must pass a 7 pronged test. The Court will consider the time lapse between filings, the types of debts listed, the motivation for the second filing, the impact the current case will have on the debtor’s creditors, why the prior case was dismissed, the likelihood that the debtor will be able to comply with the current payment plan, and whether or not any creditor or the trustee has objected to the debtor's request to extend the stay. In re Marcello, 2008 WL 821542 (Bankr.N.D.N.Y. Mar 27, 2008).

“The post-petition sale of the debtor's home, for which he had obtained a homestead exemption under the law of Massachusetts protecting it from creditors, [does not cause] the proceeds of the sale to lose their exempt status under the Bankruptcy Code and become subject to pre-petition, nondischargeable debt.” The court extended the protection of the exemption to the cash. In re Cunningham, 513 F.3d 318, 2008 WL 171084 (1st Cir. Jan 22, 2008).

Additional Case Law Update from FindLaw.com:

In Re: Meredith, No. 07-1509
A 4th Circuit ruling rejecting bankruptcy trustee's claim that he was entitled to recover from defendant the value of certain assets fraudulently transferred from the bankruptcy estate is affirmed where defendant was not the "entity for whose benefit such transfer was made" under 11 U.S.C. section 550(a).

Bankruptcy Section Members

The Section is again calling for member pledges to be applied towards the CLLA programming at the National Conference of Bankruptcy Judges - to be held this year on September 25th in Scottsdale, AZ. This is a great way for you as a section member to make a contribution towards this outstanding programming while at the same time highlighting your firm.

Sponsorships begin at a base commitment level of thirty-five ($50.00.) which includes a listing on the morning presentation screensaver.

Except as otherwise provided, the CLLA Bankruptcy Section newsletter permits any individual or organization to photocopy any article, comment, note, or other piece in this publication, provided that: (1) copies are distributed at or below cost; (2) the author and the CLLA Bankruptcy Section seal are prominently identified on the first page; (3) proper notice of copyright is affixed to each copy; and (4) all other applicable laws and regulations are followed. The CLLA Bankruptcy Section reserves all other rights.

Nominate a Candidate for the Lawrence P. King Award for Excellence in Bankruptcy

Sua Sponte

Case Analysis

Case Law Update

Sua Sponte

Case Analysis

Case Law Update

Bankruptcy Section Members