Please note: The November, 2003 edition of the CLLA Bankruptcy Section newsletter was intentionally delayed until after the Thanksgiving Holiday. Also, if you are having trouble navigating through the newsletter, the online version can be found here: http://www.cllabankruptcy.org/bankruptcy/november2003.htm

Sua Sponte

Louis S. Robin
Fitzgerald, O'Brien, Robin & Shapiro
Longmeadow, Massachusetts
Email: louis.robin@prodigy.net

The Eastern District Meeting in New York City was a most productive meeting for our Section. There are many matters I could discuss, but I will concentrate on only three matters. I will conclude with two other matters that are not necessarily related but are really more important.

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Case Analysis

Brian Shapiro
Wanderer & Wanderer Law Office
Las Vegas , Nevada
Email: bshapiro@wandererlaw.com

Seventh Circuit determines that student's debt is not a “loan” and it is dischargeable.

Educational Loan (523(a)(8)) v. Extension of Credit (523(a)(2))

Summary: In Chambers v. Sylvia Manning, in her individual capacity as Chancellor of the University of Illinois at Chicago ( In re Sandra Ann Chambers ), 2003 WL 22479905 (7 th Cir. Nov. 4, 2003). The Seventh Circuit followed the Second and Third Circuits and held that a student's unpaid bill for tuition and fees did not qualify as a loan under§ 523(a)(8) since: (1) no funds actually changed hands; and, (2) there was no agreement for an extension credit and future repayment. The student's debt for tuition charges incurred on an open account could be discharged.

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Case Law Update

Paige Barr
DePaul University J.D. Candidate
paigebarr@yahoo.com

Former Judge Cannot Represent Debtor Who Was Previously on His Docket. Debtor filed a voluntary bankruptcy petition. Counsel, who previously served as a bankruptcy judge in the district, entered his appearance as Debtor's attorney. Bankruptcy judge, upon reviewing the record, discovered Debtor had previously filed five bankruptcy petitions and the first two had been assigned to counsel's docket. Given counsel's involvement as a judicial officer in the debtor's previous bankruptcy cases, he was disqualified. Court rejected Debtor and counsel's argument that neither remembered the other's involvement in the previous petitions and that the current petition was not the same matter as the previous case. In re Marrone , 2003 U.S. Dist. LEXIS 18962 (D. Pa. Oct. 22, 2003 ).

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Sua Sponte

The Eastern District Meeting in New York City was a most productive meeting for our Section. There are many matters I could discuss, but I will concentrate on only three matters. I will conclude with two other matters that are not necessarily related but are really more important.

First, it was proposed that the Bankruptcy Section and its Legislative Committee investigate the filing of an amicus brief to the Supreme Court concerning In re Hood. This decision is probably the most important decision the Court will enter on jurisdiction since in Marathon . In Hood , the Sixth Circuit refused extend the Supreme Court's decision in Seminole (which protected the sovereign immunity of states) to Bankruptcy Courts. The Sixth Circuit decision relied upon the Constitution's grant to Congress to enact “uniform” bankruptcy laws, while other grants did not contain the phrase “uniform.” Additionally, the Federalist Papers refer to other uses of the phrase “uniform” as limiting sovereign immunity of the states. This was required to prevent debtors' prisons and other remedies utilized by the various states. Although it is unlikely that we will ever see debtors' prison, we thought it important that the Court know of the various circumstances that the states assert sovereign immunity defenses. I, for example, was involved in cases where the Commonwealth of Massachusetts asserted a sovereign immunity defense concerning a preference or a dispute concerning the security of their claim. Laurence Kaiser has offered his services to prepare the amicus brief. If you know of a situation or a case where a state asserted a sovereign immunity defense, please inform me immediately at louis.robin@prodigy.net and Laurence Kaiser at lkaiser@pgkm.com. For a more detailed analysis of In re Hood , you may wish to see the newsletter case note on this case: http://www.cllabankruptcy.org/bankruptcy/march2003.htm#6. Please let me know as soon as possible if you have any examples of States' assertions of sovereign immunity as we have a tight time frame to file an amicus brief.

Second, we had two of our best educational programs that I can remember. The first was a panel of three judges, The Honorable Kevin Carey (Bankruptcy Judge, Eastern District of Pennsylvania), The Honorable Leif M. Clark (Bankruptcy Judge, Western District of Texas), and The Honorable William T. Bodoh (Chief Bankruptcy Judge, Northern District of Ohio), on Professionalism and Competence in the Legal Profession: View from the Bench. They provided a wonderful mix of opinions that we could all share.

The second program was provided by Professor Douglas J. Whaley (of Ohio State University ), on “What Every Commercial Lawyer Needs to Know About Consumer Law”. Professor Whaley has spoken before at League events, but he really seemed to hit stride. He provided some real law and helpful examples of missteps that seemed to keep us most entertained. We expect to have him back in the future. My thanks to Cathy Pike and Alan Gordon, our two Education Chairs, who put together a wonderful slate of education.

Third, we discussed the status of the bankruptcy bill(s) in Congress. Although anything we say is pure speculation, it seems doubtful that Congress will pass any meaningful legislation during the balance of the pending session through the end of 2004. Any legislation that may pass will likely be limited to an extension of Chapter 13 (which is a regular occasion) and a bill for the addition of Bankruptcy Judges. Of course, immediately after our discussion, rumors came from Capitol Hill that the Republican majority was contemplating attaching HR 975 to the end of year omnibus bill. The CLLA has submitted letter to Congress indicating its opposition to this action.

The Section and the League have also submitted a position paper in support of S. 878 which provides for additional bankruptcy judgeships. Full text of both of these position papers can be viewed by clicking here.

Now for the two last matters of most importance. At the New York meeting's Sunday Brunch, the Eastern Region honored Warren Pinchuck for 20 years of service as Arrangements Chair. He has served tirelessly for the Eastern Region, donating a tremendous amount of time. But most of all, he is a thoughtful caring person. Although he and I work in different worlds, he has extended himself to my family at important junctures. He is a perfect example of what the CLLA is about, people who care about each other and their families.

Lastly, my best for a happy holiday season and a healthy New Year. This is my most important message.

Louis S. Robin
Fitzgerald, O'Brien, Robin & Shapiro
1200 Converse Street
Longmeadow, MA 01106
Phone: 413-567-3131
Fax: 413-565-3131
Email: louis.robin@prodigy.net

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Case Analysis

Seventh Circuit determines that student's debt is not a “loan” and it is dischargeable

Educational Loan (523(a)(8)) v. Extension of Credit (523(a)(2))

Summary: In Chambers v. Sylvia Manning, in her individual capacity as Chancellor of the University of Illinois at Chicago ( In re Sandra Ann Chambers ), 2003 WL 22479905 (7 th Cir. Nov. 4, 2003). The Seventh Circuit followed the Second and Third Circuits and held that a student's unpaid bill for tuition and fees did not qualify as a loan under§ 523(a)(8) since: (1) no funds actually changed hands; and, (2) there was no agreement for an extension credit and future repayment. The student's debt for tuition charges incurred on an open account could be discharged.

Facts: Appellant, Chancellor Sylvia Manning, sought to overturn the bankruptcy court and district court's decision declaring a debt owed to the University of Illinois at Chicago (UIC) discharged. From 1993 to 1999, Ann Chambers (Chambers) incurred tuition charges and related fees under an open account at UIC. The balance due and owing was $1,118.77. In October 1999, Chambers filed a Chapter 7 bankruptcy. After receiving her discharge, Chambers attempted to obtain her transcripts from UIC. However, UIC determined that despite her discharge, she still had an account balance due and owing.

As a result, Chambers initially filed a complaint seeking a hardship discharge pursuant to section 523(a)(8). This complaint was dismissed on 11 th Amendment grounds. Chambers amended her complaint and named Chancellor Manning in her official capacity, in which she sought declaratory relief that the debt did not qualify as an educational loan excepted from discharge.

Both the bankruptcy court and the district court determined that the discharge exception did not extend to Chambers' account balance at UIC. Chancellor Manning argued that the extension of credit was the substantive equivalent of a loan but the lower courts found that it was not deemed to be a “loan” as defined in section 523(a)(8). Chancellor Manning appealed the decision.

Discussion: The Seventh Circuit affirmed the District Court's decision. The Court initially discussed the history of section 523(a)(8) and that such section is now significantly broader than originally enacted. The Court acknowledged that the exception has consistently been expanded to cover other educational debts and with that history in mind, examined the case.

The limited issue on appeal was “whether an unpaid balance on a student account meets the definition of an educational loan under section 523(a)(8).” This section excepts from discharge any “debt…for an educational loan…made by a governmental entity.” As the word “loan” is undefined, the Court must utilize the traditional understanding of such term.

The Court initially examined the 2nd and 3rd Circuit cases of In re Renshaw, 222 F.3d 82 (2 nd Cir. 2000) and In re Mehta , 310 F.3d 308 (3 rd Cir. 2002). Both of these cases involved unpaid student accounts. The Renshaw case was a consolidated appeal of two separate actions. In the first case, the student signed a “reservation agreement” in which the college agreed to hold a place open for the student in exchange for the student to pay amount due. The student failed to pay the amounts due but the college allowed him to register and attend classes. In the second case, a student who regularly paid his tuition failed to pay for one semester. Despite this nonpayment, the college permitted him to attend without paying such tuition. Both students filed bankruptcy. The Renshaw court also noted that Congress failed to define the term “loan” and examined the 1914 case of In re Grand Union Co ., 219 F. 353 (2 nd Cir. 1914). That court stated that to be a loan there must be a “(a) contract, whereby (b) one party transfers a defined quantity of money, goods, or services, to another and (c) the other party agree to pay for the sum or items transferred at a later dated.”

The Second Circuit in Renshaw adopting the definition from its Grand Union case and stated that the definition implies that there will be loan when the “contract to transfer items in return for payment later must be reached prior to or contemporaneous with the transfer.” The court concluded its analysis by stating that the “failure to pay a bill when due does not create a loan.”

In the Mehta case, the Third Circuit adopted the Second Circuit's reasoning from Renshaw and found the students unpaid debt to the university for attending fall classes was dischargeable. The court concluded that the “awareness of an obligation does not establish that the parties intended a loan.”

The Seventh Circuit found that the Renshaw analysis persuasive and determined that non-payment of tuition qualifies as a loan in two situations. First, when funds have changed hands. Second, when there is an agreement whereby the college extends credit and such agreement must be reached prior to or contemporaneous with the transfer. To support its analysis, the Seventh Circuit noted that Section 523(a)(2) prevents the discharge of debt from an “extension of credit” which was incurred by fraud. As the term “loan” is utilized in Section 523(a)(8) rather than “extension of credit” as stated in Section 523(a)(2), it suggests that Congress attempted to narrow section 523(a)(8) to not include extension of credits and it is up to Congress to change this policy.

In concluding that Chambers debt to UIC could be discharged, the Seventh Circuit decided that there was no loan. Her awareness of the debt and her class attendance was not sufficient evidence of a separate agreement showing an intent to create a loan and to pay the tuition at a later date. The Court found these “manifestations” were evidence of the basic incurrence of the debt.” Since the Chancellor presented insufficient evidence to sustain an inference of a loan, the bankruptcy court's granting summary judgment in Chambers favor was affirmed.

Comment: Although the debt that Chambers was permitted to discharge was a small one, this decision could have quite an impact in the future. The economic downturn is leaving more students with poor job prospects and unpaid debts to educational institutions. The non-dischargeabilty of student loans often deters someone from filing a chapter 7. With three Circuit's finding that unpaid bills for tuition and related fees can be discharged, more individuals may file chapter 7 cases. Educational institutions may protect themselves, as the courts suggest, by requiring signed agreements from the cash-strapped students or they may simply deny them access to the classroom.

Brian Shapiro
Wanderer & Wanderer Law Office
302 East Carson Avenue Suite 520
Las Vegas , NV   89101
Phone: 702-382-9558
Fax: 702-382-5786
Email: bshapiro@wandererlaw.com
www.wandererlaw.com

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Case Law Update

Former Judge Cannot Represent Debtor Who Was Previously on His Docket. Debtor filed a voluntary bankruptcy petition. Counsel, who previously served as a bankruptcy judge in the district, entered his appearance as Debtor's attorney. Bankruptcy judge, upon reviewing the record, discovered Debtor had previously filed five bankruptcy petitions and the first two had been assigned to counsel's docket. Given counsel's involvement as a judicial officer in the debtor's previous bankruptcy cases, he was disqualified. Court rejected Debtor and counsel's argument that neither remembered the other's involvement in the previous petitions and that the current petition was not the same matter as the previous case. In re Marrone , 2003 U.S. Dist. LEXIS 18962 (D. Pa. Oct. 22, 2003 ).

Conversion from Chapter 7 to Chapter 11 Does Not Reinstate the Automatic Stay. Debtor filed a voluntary chapter 7 petition, staying a creditor's pending state court foreclosure action under § 362(a). Debtor subsequently converted from chapter 7 to chapter 11 under § 348 of the Code. However, conversion from chapter 7 to chapter 11 proceeding did not reimpose the stay, and thus, the creditor was able to gain title through the foreclosure action. Adopting the reasoning of a previous Eleventh Circuit decision, absent any indication of congressional intent the court ruled for adherence to the plain language of § 362; the filing of a petition under §§ 301, 302, or 303 of the Code operates as a stay. There is no mention of a conversion under § 348 and, thus, the conversion does not reimpose the stay. In re Mazzariello , 2003 U.S. Dist. LEXIS 19411 (D. Conn. Oct. 29, 2003 ).

Bankruptcy Removal Provision Does Not Require Unanimous Consent of all Defendants. Although it is well established that unanimous consent is required of all defendants to remove an action under the general removal statute, the proposition does not hold true for all removal statutes. The general removal statute, 28 U.S.C. § 1441, provides that an action "may be removed by the defendant or defendants," while the bankruptcy removal statute, 28 U.S.C. § 1452, provides that "a party" may remove any claim or cause of action. Thus, any party, regardless of whether they are a plaintiff or defendant, may remove an action under § 1452 as related to a bankruptcy proceeding. Its use is not restricted to a defendant. Furthermore, consent of all parties is not required; a single party may remove an action. In re Worldcom , 2003 U.S. Dist. LEXIS 18498 (S.D.N.Y. Oct. 21, 2003 ).

Premier Purpose of Securities Investor Protection Act is to Reverse Losses Resulting from Broker's Insolvency. Investors discovered that securities broker/dealer ("Broker") executed stock purchases and sales without their approval. After securities broker's expulsion from the National Association of Securities Dealers for fraud, it filed for chapter 11 protection and was subsequently placed in liquidation proceedings. Court upheld Trustee's determination that the Securities Investor Protection Act ("SIPA") directed him to give investors the securities held in their accounts immediately after the last authorized transaction regardless of the fact that the investors had been deprived of their property for so many years that the securities are now worthless. The main purpose of SIPA is to reverse the losses resulting from brokers' insolvency, not to prevent fraud or conversion. Therefore, the investors are only entitled to their property that was converted. The fact that the stocks declined in value after they were converted does not entitle the investors to cash; they are only entitled to stock. The number of steps in the conversion - from stock to cash back to stock - does not change the fact that the investors have no property interest in the fruits of the broker's unlawful acts. If the securities cannot be purchased in an orderly market, the Investors shall receive the market value of the securities as of the filing date as required under SIPA. In re Stratton Oakmont, Inc. , 2003 U.S. Dist. LEXIS 20459 (S.D.N.Y. Nov. 14, 2003 ).

Debt Found Non-Dischargeable Due to Res Judicata, Collateral Estoppel, and Judicial Estoppel. Federal district court initially determined, as part of stipulated settlement of fraud action against debtor, that judgment debt would not be dischargeable in event of bankruptcy. Subsequently, in the bankruptcy proceeding, the parties disputed the application of res judicata, collateral estoppel, and judicial estoppel. The bankruptcy court first determined that there is no blanket application of res judicata to prepetition federal, or state, court determinations regarding the dischargeability of debts; and based upon the facts at hand res judicata did not apply in this case. The parties' collateral estoppel dispute concerned whether the issue was actually determined in the prior proceeding. After reviewing the settlement order, the bankruptcy court found the prior stipulated judgment would be given collateral estoppel effect, even though settlement order did not contain specific stipulated or court-found facts to support conclusion that judgment debt had the preclusive effect as to the dischargeability since the parties appeared to have intended such effect. Finally, the bankruptcy court found that judicial estoppel was triggered by inconsistent positions the debtor took in previously agreeing, as condition for settling claims asserted against him for substantially less than amount requested, that resulting judgment debt would not be dischargeable, and in then asserting five months later that judgment debt was dischargeable. In re Swilley , 295 B.R. 839 (Bankr. D.S.C. Apr. 17, 2003 ).

Deduction for Overpayment of Disability Benefits from Debtor-Employee's Wages Affected by Stay and Discharge Injunction. While employer's ability to recover overpayment of disability benefits to chapter 7 debtor-employee from any future disability benefits to which debtor-employee became entitled was in nature of right of recoupment, its right to deduct from debtor-employee's wages was setoff right affected by stay and discharge injunction. Employer's right to recoup against future benefits did not create a right to payment, and thus did not create liability on a debt and was not dischargeable under the Code. Employer's right to setoff against wages created a right to payment and thus liability on a claim. Thus, post-petition garnishment of Debtor's wages was a violation of the automatic stay and the discharge injunction and the amounts deducted from those post-petition wages must be refunded to Debtor. In re Delicruz , 2003 Bankr. LEXIS 1425 (Bankr. E.D. Mich. Oct. 31, 2003 ).

Paige Barr
DePaul University J.D. Candidate
200 N. Dearborn St., Apt. 4101
Chicago, IL 60601
(312)782-4428
paigebarr@yahoo.com

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Washington Hot News

December 1, 2003
On November 25th, the Senate passed S. 1920 , extending Chapter 12 until June 20, 2004 .  It has been sent over to the House, which will have the opportunity to consider it when it returns to consider the Omnibus appropriations bill.  If the House fails to do so, Chapter 12 will lapse December 31.

On November 25th, as lawmakers ran for airports, Sen. Rockefeller (D-WV) introduced S.1970 , a bill to amend Title 11 to increase the amount of unsecured claims for salaries and wages given priority in bankruptcy and to provide cash payments to retirees to compensate for lost health insurance benefits resulting from the bankruptcy of their former employer. The bill was referred to the Judiciary Committee.

November 26, 2003
The Senate adjourned without addressing the continuing resolution. The Omnibus bill was filed, but it did not contain the bankruptcy bill. However, the house will be returning December 8th to consider that bill and in its consideration the bankruptcy bill can be inserted. The Senate is not scheduled to come back in December but will eventually address the bill and will then have an opportunity to insert the bankruptcy bill itself.

November 25, 2003
As the fiscal year 2004 omnibus appropriations bill continued to be negotiated behind closed doors late last night between primarily Republican leaders, the White House weighed in on the bill, with aides to President Bush pushing Republican leaders to drop a number of controversial riders contained in the massive measure before it is readied for action in the Senate.

Various complications on the bill, possibly HR 975, the Bankruptcy Reform Bill, bring into question whether Senate Majority Leader Frist (R-TN) can implement his plan for the Senate to quickly act on the omnibus today before departing for Thanksgiving. Frist, who has stated he does not plan to bring senators back, indicated he wants an agreement that would allow the Senate to deem the omnibus passed once the House acts in early December (the House adjourning late Sunday). The House plans to return to Washington December 8th, at which time they will vote on the omnibus. After that, the House will not reconvene until January 20, 2004 .

Technically, in order to keep with a schedule, the omnibus to be officially filed in the House today (as of this writing, it is uncertain if it will occur but it is possible). After that, Frist could attempt to bring the omnibus up under an unanimous consent agreement and have the measure deemed as passed pending House action. It was not clear if Democrats support this plan.

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