In a move that could have sweeping implications for Chapter 13 bankruptcy cases nationwide, Martha G. Bronitsky, the Chapter 13 Trustee, has filed a petition for certiorari with the Supreme Court in In re Saldana. The case centers on whether voluntary contributions to retirement accounts should be excluded from a debtor’s disposable income calculation. The Ninth Circuit’s decision in In re Saldana sided with the debtor, holding that voluntary retirement contributions are shielded from creditors, a ruling that some argue disrupts the balance between debtor protections and creditor rights under the Bankruptcy Code. Now, the Supreme Court is being asked to step in, potentially impacting thousands of Chapter 13 cases filed each year.
[Read more…] about Can Debtors Prioritize Retirement Over Creditors? Trustee Seeks Supreme Court Review in In re SaldanaSixth Circuit Questions “Person-Aggrieved” Standard for Appeal
The debtors’ claim against lenders for charging improper fees during their bankruptcy belonged to the bankruptcy estate, but the lenders’ appeal of the bankruptcy court’s order of abandonment was dismissed because they lacked a direct financial stake in the outcome of the bankruptcy court’s decision and, therefore were not “persons-aggrieved.” In so holding, the Sixth Circuit indicated that had the lenders challenged the “person-aggrieved” standard it would likely have been found to have been abrogated by subsequent Supreme Court precedent and congressional action. Schubert v. Litton Loan Servicing, No. 21-3969 (6th Cir. March 28, 2023).
The debtors alleged that from 2000 to 2004, while they were in bankruptcy, Litton Loan Servicing, L.P., JPMorgan Chase Bank, N.A., and Ocwen Financial Corporation (collectively, “the lenders”), breached their mortgage agreement by collecting fees to which they were not entitled. The debtors received their discharge in 2006 without having disclosed the claim against the lenders to the bankruptcy court, apparently because they only discovered the overcharges a decade later during foreclosure proceedings. Upon discovery, the debtors sued the lenders in state court for breach of contract. The lenders argued that the claim belonged to the bankruptcy estate. The debtors had the state court case stayed and they reopened their bankruptcy case, seeking abandonment of the claim. The lenders opposed abandonment and countersued for an injunction to prevent the debtors from pursuing the state action. The debtors moved to dismiss the lenders’ complaint.
After a hearing, the bankruptcy court denied the debtor’s motion to dismiss and ruled that the claim belonged to the estate. It ordered the trustee to abandon the claim and declined to issue an injunction. Upon appeals by both sides, the district court affirmed.
The case came before the Sixth Circuit on the lenders’ appeal of the abandonment order, and the debtor’s appeal of the denial of their motion to dismiss.
As an initial matter, the court found the lenders had standing to pursue the appeal. The prospect of state court litigation established the necessary “injury fairly traceable to the defendant’s conduct and likely redressable by a favorable decision.”
Another jurisdictional question was more troublesome. The court found the lenders did not pass the “person-aggrieved” test, which bars appeals in bankruptcy by a party “who lack[s] a direct financial stake in the appeal’s outcome.” The person-aggrieved test was included in section 158 of the Bankruptcy Code until Congress removed it in the 1978 amendments to the Code.
The court indicated that the test, which has been deemed to be jurisdictional, is a likely candidate for abrogation in light of the subsequent Supreme Court decision in Lexmark Int’l, Inc. v. Static Control Components, Inc., 572 U.S. 118, 125–27 (2014). Lexmark prohibited a court from limiting its jurisdiction for prudential or policy reasons. “[W]hen Congress creates a right to sue consistent with the Constitution, a court may not take it away.”
However, the lenders did not seek abrogation of the test, so the court rendered its decision based on the test’s continued viability. It found that the lenders did not have the requisite financial stake in the appeal’s outcome because they sought only to preclude state court litigation. “[U]nder our precedent, staving off the threat of litigation doesn’t count. In re LTV Steel Co., Inc., 560 F.3d 449, 452–53 (6th Cir. 2009).”
The court turned next to the debtors’ appeal of the bankruptcy court’s denial of their motion to dismiss the lenders’ adversary complaint. The circuit court stated that the lenders had standing to bring the adversary complaint for the same reason they had standing to appeal. The court also rejected the debtor’s argument that the bankruptcy court lacked the power to determine which claims belong in the estate, finding that that determination is well within the bankruptcy court’s administrative powers under section 157(b)(2)(A).
Finally, the court disagreed with the debtors’ contention that the lenders were not parties in interest. On the contrary, the lenders had “a practical stake in maintaining the settlement of claims the bankruptcy produced.” Had the claim against them been raised during the bankruptcy proceedings, they could have addressed it at that time.
The court dismissed the lenders’ appeal and affirmed the ruling that was the subject of the debtors’ appeal.
In a concurring opinion, Judge Moore stated that the person-aggrieved standard, rather than being at odds with more recent law, “reflects a zone-of-interests analysis that is consistent with Lexmark Int’l, Inc. v. Static Control Components, Inc., 572 U.S. 118 (2014).” Judge Moore observed that the person-aggrieved standard, while most often requiring a financial stake in the proceedings, may also be met when there is a public interest in the outcome of an appeal. In her opinion, when properly applied, the person-aggrieved standard “directs the courts to perform a zone-of-interest analysis in line with Lexmark.”
She agreed with the majority, however, that the lenders’ appeal did not fall under the zone-of-interests the abandonment statute, section 554, was intended to address. That provision was designed to prevent trustees from pursuing the sale of property only to increase the trustee’s commission without benefit to the estate. In this case, the lenders’ appeal was solely intended to free them from state court litigation and would not benefit the bankruptcy estate. Therefore, the appeal was outside the zone of interest.
Extension of Stay Applies to Creditor Who Was Not Served with Motion
The bankruptcy court properly exercised its discretion to grant an extension of stay in the debtor’s second chapter 11 case where the case was filed in good faith as to the creditors to be stayed even though one of the creditors to which the stay applied was not served with the motion. FourWs, LLC. V. Miller, No. 21-1273 (E.D. Cal. Jan 30, 2023).
The debtor filed chapter 11 bankruptcy in 2019, but the case was dismissed two months later after his counsel missed deadlines and otherwise failed to represent him adequately. Less than one year later, he filed a new, pro se, chapter 11 case. Three days after filing the second case, the debtor moved for an extension of the automatic stay under section 362(c)(3)(B). He was unaware of FourWs as a potential creditor and did not serve them with the motion. The court held a hearing and granted the motion to extend the stay.
FourWs then learned of the bankruptcy and filed a proof of claim. It also sued the debtor in state court on the promissory note. A month later, the trustee moved to dismiss the debtor’s case as having been filed in bad faith. The bankruptcy court granted the trustee’s motion. The state court dismissed FourWs motion, and FourWs moved to reopen the bankruptcy case seeking a ruling that the automatic stay expired as to them 30 days after the debtor filed his bankruptcy petition. The bankruptcy court denied the motion, and FourWs appealed to the district court.
Section 362(c)(3)(B) provides that on a motion by a party in interest, and “upon notice and a hearing,” the bankruptcy court has broad discretion to extend the stay so long as “the filing of the later case is in good faith as to the creditors to be stayed.” The debtor must move for the extension and the hearing must be held within 30 days of the bankruptcy petition. In Morris v. Peralta (In re Peralta), 317 B.R. 381, 389 (B.A.P. 9th Cir. 2004), the Peralta panel emphasized that, once granted, the extension applies to unknown creditors regardless of notice.
The district court here found that, under section 102(1) the “notice and hearing” requirement means notice and hearing that are “appropriate in the particular circumstances.” Because of the 30-day time limit for dealing with motions to extend stay, the bankruptcy court must act quickly. The court observed that “Miller gave two weeks’ notice to creditors of the hearing, filed proof of service within three days of filing his petition, and appeared to be acting in good faith.” It found that the bankruptcy court reasonably concluded that the notice and hearing were appropriate.
The court found two cases cited by FourWs were distinguishable on their facts. In In re Bronson, No. 09-46592, 2010 WL 9485976, at *1 (Bankr. E.D. Cal. Jan. 4, 2010), the debtor noticed creditors by regular mail only a few days before the hearing, and in In re Collins, 334 B.R. 655, 656 (Bankr. D. Minn. 2005), the debtor served notice on the interim trustee but did not serve the creditors. The court here found that the bankruptcy court gave appropriate consideration to the due process rights of the creditors. Finally, the court noted that FourWs had the option to move for relief from stay under section 362(d) or (f) if there was a reason the stay should not be applied to them.
The court affirmed.
Right to Dismiss Despite Bad Faith or 109(e) Ineligibility
A chapter 13 debtor’s statutory right to dismiss his bankruptcy is not precluded by bad faith or ineligibility under section 109(e). Powell v. TICO Construction Co. Inc., No. 22-1014 (B.A.P. 9th Cir. Oct. 21, 2022).
TICO Construction, a judgment creditor in the debtor’s chapter 13 case, opposed the debtor’s motion to voluntarily dismiss his bankruptcy under section 1307(b). TICO alleged both that the debtor’s unsecured debts exceeded the debt limit set forth in section 109(e), and that the debtor abused by the bankruptcy process by transferring non-exempt assets to his ex-wife in “sham” divorce proceedings. TICO requested that, instead of granting the debtor’s motion to dismiss, the court should convert the case to chapter 7 or 11.
The bankruptcy court found that with one statutory exception that was inapplicable, the debtor had an absolute right to dismiss his case and granted the debtor’s motion. TICO appealed to the Bankruptcy Appellate Panel for the Ninth Circuit.
The panel began with section 1307(b), which provides: “On request of the debtor at any time, if the case has not been converted under section 706, 1112, or 1208 of this title, the court shall dismiss a case under this chapter. Any waiver of the right to dismiss under this subsection is unenforceable.”
The question before the panel was whether the debtor’s right to dismiss his chapter 13 bankruptcy was circumscribed either by bad faith or by his ineligibility to be in chapter 13. In Jacobsen v. Moser (In re Jacobsen), 609 F.3d 647, 660 (5th Cir. 2010), the court held that a debtor’s bad faith precludes voluntary dismissal of his chapter 13 case. While the Ninth Circuit at one time agreed with that conclusion, it changed its view in Nichols v. Marana Stockyard & Livestock Market, Inc. (In re Nichols), 10 F.4th 956 (9th Cir. 2021), where it found the debtor’s right to dismiss was subject only to the exception included in the statute itself. The panel noted that Nichols was based on the decision in Law v. Siegel, 571 U.S. 415 (2014), where the Court held that the bankruptcy court could not override explicit mandates of the Code.
Because bad faith was not included in the statutory exceptions to the debtor’s right to dismiss, the panel found the bankruptcy court did not err in that finding.
TICO next argued that the debtor exceeded the debt limit for chapter 13 and therefore his case should have been treated as if it were chapter 7 with the court considering his motion to dismiss in terms of the best interests of creditors. The panel disagreed, finding that if it did as TICO requested it would create a new exception to the debtor’s right to dismiss under section 1307(b) and that would go directly against the holding in Law.
The panel noted that in FDIC v. Wenberg (In re Wenberg), 94 B.R. 631 (9th Cir. BAP 1988), aff’d, 902 F.2d 768 (9th Cir. 1990), it held that the debt limit in section 109(e) is not jurisdictional, and a bankruptcy court is not required to dismiss a chapter 13 case when the debtor is found ineligible under section 109(e), but may allow the debtor to convert to chapter 7. The court reasoned that if an ineligible chapter 13 debtor retains his right to convert, his right to dismiss also remains intact.
In response to TICO’s argument that the debtor should not be allowed to get away with his bad faith conduct, the panel pointed to other methods for addressing bad faith including denying the debtor’s right to refile, or to apply other sanctions under section 105(b).
The case is currently on appeal to the Ninth Circuit, Case No. 22-60052.
UpRight Isn’t Above the Rules: Fourth Circuit Upholds Sanctions for Ethical Violations in Bankruptcy Case
Although the complaint against him alleged violations of the Bankruptcy Code and he was ultimately sanctioned for ethical violations under Virginia Rules of Professional Conduct, a lawyer with UpRight was given due process in his sanctions hearing where the complaint specified the alleged misconduct and he was afforded the opportunity to prepare and present a defense. U.S. Trustee v. Delafield, No. 21-1632 (4th Cir. Jan. 11, 2023).
This case arose out of an adversary complaint filed by the U.S. Trustee against UpRight, a legal services company with offices and “partners” throughout the country; Delafield, an UpRight partner; and Sperro, LLC, a repossession company. The Williamses were bankruptcy clients of Delafield who were subjected to the practices challenged by the Trustee.
The complaint alleged that UpRight created a New Car Custody Program (NCCP) which was ostensibly to help UpRight’s bankruptcy clients who had to surrender their cars, but which, in fact, benefitted Sperro and UpRight. UpRight funneled clients to Sperro and Sperro, for no legitimate reason, towed the client’s cars to states where towing and mechanic’s liens took priority over first liens. Sperro earned income either by collecting excessive fees or by selling vehicles that the owners determined were not worth paying the fees for. UpRight benefitted by a deal with Sperro under which Sperro paid the client’s attorney and filing fees. The court summed it up thus: “So UpRight’s fees were paid by a company that fraudulently generated towing charges and paid them by forcing the sale of cars at the expense of the lenders who held the first liens.” With respect to Delafield, the complaint alleged that his participation in the NCCP was unethical and illegal.
At trial, the Trustee pointed to other unethical practices of UpRight and its partners involving strong-arming potential clients into entering into agreements precipitously. In this case, the evidence showed that, during the pendency of the adversary proceeding, Delafield attempted to strong-arm the Williamses into signing a conflict of interest waiver.
The bankruptcy court was unpersuaded by Delafield’s claims of ignorance. It found he was aware of the NCCP and UpRight’s unethical practices even if he did not actively create or participate in them. The court found other conduct of Delafield’s sanctionable as well, including filing an amendment to the Williamses’ petition without their signature or permission, and acting inappropriately in attempting to get them to sign a conflict of interest waiver.
The bankruptcy court found Delafield violated Virginia Rules of Professional Conduct 5.1 and 5.3. J.A. 723–24. It ordered Delafield to pay $5,000 in sanctions and suspended his license for one year. The district court affirmed.
Delafield appealed to the Fourth Circuit arguing that he was deprived of Due Process because he was not given advance notice of sanctions hearing and the hearing itself was “incomplete.” Specifically, he argued that he was sanctioned under Virginia Rules of Professional Conduct even though the complaint did not cite those Rules, and the complaint was otherwise “scattershot” and did not include specific allegations concerning the conflict of interest waiver.
The circuit court began its analysis with Nell v. United States, 450 F.2d 1090 (4th Cir. 1971). In that case, alawyer who was suspended from practice had not been provided due process where the allegations against him and the purpose of the sanctions hearing were vague. More importantly, though, the attorney had not been told that he was in danger of suspension or disbarment. Nell established a lawyer’s right to notice and an opportunity to provide a defense.
Unlike in Nell, though, Delafield was provided both. Here, the complaint included detailed allegation of misconduct, and specific provisions of the Code he was alleged to have violated. The complaint also made clear that Delafield was threatened with monetary sanctions and disbarment. Though the complaint did not point to the Virginia Rules he was ultimately found to have violated, Delafield had all the necessary notice of the conduct under scrutiny and had ample opportunity to prepare and present a defense.
With respect to Delafield’s argument that he should not have been sanctioned for his conduct surrounding the conflict of interest waivers because that conduct took place after the complaint was filed, the court disagreed. It found that conduct related to Delafield’s efforts to conceal information about the NCCP.
Judge King wrote a concurrence to congratulate the majority for reinvigorating the 1971 Nell decision.
Numa Corp. v. Diven, No. 22-15298 (9th Cir.)
Type: Amicus
Date: July 25, 2022
Description: Sanctions for continuation of tribal case despite automatic stay.
Result: Judgment affirmed, November 22, 2022.
Refinancing Loans Not Consumer Debts
The movant bears the burden of demonstrating by a preponderance of the evidence that the debtor’s debts were “consumer” rather than “business,” and the debtor’s subjective purpose in taking out the loans is a crucial factor where the debts do not fall neatly into either category. Centennial Bank v. Kane, No. 21-4597 (N.D. Cal. July 22, 2022). [Read more…] about Refinancing Loans Not Consumer Debts
Debtor Squeezes Through Loophole and Lands in Dismissal
Where the debtor filed her second chapter 13 petition while her first case was still pending, the automatic stay was not reduced by section 362(c)(3) but, without regard to the debtor’s intent, the second case was an abuse of process and the court could dismiss sua sponte after notice and a hearing. In re Giles, No. 22-14494 (Bankr. S.D. Fla. July 15, 2022). [Read more…] about Debtor Squeezes Through Loophole and Lands in Dismissal
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Sample Case 4
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