July 2014

Cartoon of man with billA very recent Eleventh Circuit decision, Crawford v. LVNV Funding, LLC, No. 13-12389 (11th Cir., July 10, 2014), highlights an interesting split among the circuits, which makes things ripe for an appeal to the Supremes.

First let’s get a little background.

BACKGROUND

I.                The Automatic Stay And The Discharge Injunction

When a person files for bankruptcy protection, the automatic stay is triggered.  The stay prevents creditors from taking action against the debtor, the debtor’s possessions, and the bankruptcy estate that is created upon filing.  I have written about the automatic stay in many previous posts, so I won’t spend a lot of time exploring it here.

[T]he stay . . . continues until the earliest of —

(A) the time the case is closed;

(B) the time the case is dismissed; or

(C) if the case is a case under chapter 7 of this title concerning an individual or a case under chapter 9, 11, 12, or 13 of this title, the time a discharge is granted or denied.

11 U.S.C. § 362(c) (2).

If the debtor receives a discharge, then once the stay terminates it is replaced by the permanent discharge injunction of 11 U.S.C.  § 524(a), that forever prohibits creditors from attempting to collect discharged debts.

II.              The Fair Debt Collection Practices Act

The Bankruptcy Code is federal law, made pursuant to Congress’s enumerated power “to establish . . . uniform Laws on the subject of Bankruptcies throughout the United States.”  U.S. Const. art. I, § 8, cl. 4.  It affords debtors marvelous protections — including the automatic stay and the discharge injunction — against the depredations of their creditors.

Another federal law that protects debtors, in this case from debt collectors, is the Fair Debt Collection Practices Act (“FDCPA”) found in 15 U.S. Code § 1692, et seq.  The FDCPA contains significant limitations on what a debt collector can do.  By the way, the limitations here are not on the creditor, just on the collector.

III.            The Doctrine Of Federal Preemption

The U.S. Constitution contains the following provision:

This Constitution, and the Laws of the United States which shall be made in Pursuance thereof . . . shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.

U.S. Const., art. VI, para. 2.

This means that federal laws are binding on everyone.  Thus, if there is a conflict between a federal statute and a state statute, the federal statute always wins.  This is sometimes referred to as the doctrine of federal preemption.

But notice what the Constitution does not say.  It does not say anything about the relationship between two federal statutes.  Therefore, if there were an inconsistency between two federal statutes, there is no formula for determining which statute controls.  And if there were no conflict between two federal statutes, there is no indication that one should be preferred above the other.

IV.            The Ninth Circuit’s Walls Decision

In 2002 the U.S. Court of Appeals for the Ninth Circuit issued a decision in Walls v. Wells Fargo Bank, N.A., 276 F. 3d 502 (9th Cir. 2002), that has created a problem for Ninth Circuit practitioners.
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Home equityLast Sunday, July 20, 2014, Liz Weston of the L.A. Times gave an interesting answer to a question posed by a reader of the newspaper’s Money Talk feature.  Today’s post adds to Liz’s advice.

The reader had accumulated $28,000 in credit card debt over the previous eight years, and had considerable law school debt and a home mortgage.  He wanted to know whether a home equity loan was a smart choice to solve his problems.

Liz gave a good answer, but the LA Times’ space constraints made it impossible for her to cover things in detail.  Her response included the statement:  “Bankruptcy probably isn’t in the cards for you, of course, given your resources.”  This led me to today’s post.

But first, a caveat:  In order to give the reader an accurate analysis of the application of bankruptcy to his problems, I would need a lot more information.  Thus, what I am about to say focuses on general principles, and is not a substitute for a thorough evaluation of the case using detailed documentation.

I.              Chapter 7 Bankruptcy

I suspect that Liz had Chapter 7 bankruptcy in mind when she made her comment.

In a Chapter 7 bankruptcy, the debtor’s dischargeable debts are discharged without the creditors getting anything.  Since this is such a big hit on the creditors, there are some limitations.  One such limitation is on what the debtor gets to keep.  The debtor keeps exempt assets,  but the Chapter 7 Trustee assigned to the case seizes and liquidates the nonexempt assets for the benefit of the creditors.

Given that the reader has enough equity that he was considering a home equity line of credit (“HELOC”), it may be that he has too much equity to fully exempt.  If that is the case, then a Chapter 7 bankruptcy might be a poor choice since he and his wife would lose their home to the depredations of the Chapter 7 Trustee assigned to the case.  Again, more detailed information about his assets and encumbrances against them are needed to say for sure.

However, two other chapters of the Bankruptcy Code may be worth considering because debtors filing bankruptcies under those chapters can keep their assets regardless of their value or exempt status.
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Multiple clocksI recently had an email exchange regarding statute of limitations tolling in bankruptcy, with a friend who is a fellow bankruptcy attorney.  My friend posed a couple of questions based on an interesting fact pattern.  Herewith I offer a slightly edited version of the exchange.

First, here is my friend’s email:

Salient Facts:   Chapter 7 case filed.  Debtor has some accounts receivable.   On the petition filing date, there are 4 months left on the Statue of Limitations to bring an action on the accounts receivable.  The Chapter 7 Trustee sold the accounts receivable to someone we’ll call, Doug.

Questions:

1.  How long does Doug have to bring suit on the accounts receivable he purchased from the Trustee?

2.  Section 108(a) gives the Trustee 2 years from the petition date to commence an action.  It also seems to extend the statute of limitations by some period, which I used to assume was the pendency of the bankruptcy case, ending when it closed.  But now that I read the language, it is not at all clear.  Section 108(a)(1) has the statement:  “[I]ncluding any suspension of such period occurring after the commencement of the case…”; What the heck does that mean?  Does there need to be a formal suspension, or is it automatic, and if so, for how long?

Before I give you my response, here is some helpful background.

I.              Statutes Of Limitations

At the risk of gross oversimplification, we can think of noncriminal law as a mechanism for resolving competing interests.  In particular, litigation is the means we use for resolving disputes without the parties resorting to duels.  If only Aaron Burr had resolved his dispute with Alexander Hamilton through litigation.

One of the goals in this process is to resolve disputes in a reasonably timely fashion, before the witnesses’ memories become distorted with the passage of time.  Therefore, the statutes under which plaintiffs bring their suits contain time windows during which the actions must be initiated.  If a plaintiff fails to take action within the relevant time window, the suit is time-barred.  The plaintiff is said to have “slept on his rights.”
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Last will and testamentIf you become entitled to receive an inheritance during the pendency of your Chapter 13 bankruptcy, can you disclaim all or part of it?  That was the subject of a few questions that a fellow bankruptcy attorney recently asked me.  I found the exchange interesting, so I am posting it for your edification.

Question 1:

HomeIf you sell your home, can the cash proceeds be exempted using the homeowner’s equity exemption?  That was the subject of two questions that a fellow bankruptcy attorney recently asked me.  I found the exchange interesting, so I am posting it for your edification.

Question 1:

If the proceeds from the sale of the domicile are held in escrow or my client trust account — and the Debtor is required to seek further court approval before being allowed to touch them, would that mean the Debtor never “actually received” them in the sense of Cal. Civ. Proc. Code § 704.720, so that the statutory time did not begin to run?

I.          Exempt Status If Debtor Did Not Have Immediate Access To The Proceeds

We first turn to the statute (with emphasis added):

If a homestead is sold . . . the proceeds of sale . . . are exempt in the amount of the homestead exemption provided in Section 704.730.  The proceeds are exempt for a period of six months after the time the proceeds are actually received by the judgment debtor, except that, if a homestead exemption is applied to other property of the judgment debtor or the judgment debtor’s spouse during that period, the proceeds thereafter are not exempt.

Cal. Civ. Proc. Code § 704.720(b).

Based on this language, the California Supreme Court’s holding in Thorsby v. Babcock, 36 Cal. 2d 202 (Cal. 1950) answers the question.

Babcock was the judgment debtor in this case, and Thorsby was the judgment creditor.  Babcock sold his home on which he had a homestead exemption.  However, due to the litigation with Thorsby the sale proceeds were placed in an escrow account for eight months.  Thus, Babcock didn’t have access to the sale proceeds for eight months, so he couldn’t reinvest the proceeds in a new domicile during the six-month postsale period.  Thorsby challenged the legitimacy of the exemption based on the fact that the proceeds hadn’t been reinvested in a domicile during the six-month postsale period.
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church interiorThis is the sixth and last post in a series in which I discuss fraudulent transfers.  This one deals with defenses against fraudulent transfers avoidance actions.

F.         Defenses To Fraudulent Conveyance Avoidance

Aside from the problem of collectability — the recipient of the fraudulent transfer may be an impecunious, judgment-proof person — the trustee may face an insurmountable impediment to a fraudulent transfer avoidance action if the transferee successfully applies the defenses provided in the Bankruptcy Code.

            1.        The Charitable Donation Defense

The first defense to an avoidance action is found in § 548(a)(2):

A transfer of a charitable contribution to a qualified religious or charitable entity or organization shall not be considered to be a transfer covered under paragraph (1)(B) in any case in which —

(A) the amount of that contribution does not exceed 15 percent of the gross annual income of the debtor for the year in which the transfer of the contribution is made; or

(B) the contribution made by a debtor exceeded the percentage amount of gross annual income specified in subparagraph (A), if the transfer was consistent with the practices of the debtor in making charitable contributions.

Thus, the debtor who regular tithes will not hear that the trustee has filed an avoidance action against the church, provided that either the amount tithed is less than 15% of the debtor’s gross income, or if more, then at the level the debtor consistently makes donations.  This comes up most frequently with Mormon clients who are required to contribute at least ten percent of their incomes to the church to remain in good standing.  Not being a Mormon myself, I am basing this assertion on the sense I have gotten from Mormon clients, and from the text at http://mormon.org/faq/church-tithing.  If you are a Mormon and have a different perspective, I mean no offense and have no axe to grind.  In any event, § 548(a)(2) insulates the church from fraudulent transfer avoidance actions.

The types of contributions covered by this defense are just what you might expect, and are listed in §§ 548(d)(3) and (4):

(3) In this section, the term “charitable contribution” means a charitable contribution, as that term is defined in section 170(c) of the Internal Revenue Code of 1986, if that contribution —

(A) is made by a natural person; and

(B) consists of —

(i) a financial instrument (as that term is defined in section 731(c)(2)(C) of the Internal Revenue Code of 1986); or

(ii) cash.

(4) In this section, the term “qualified religious or charitable entity or organization” means —

(A) an entity described in section 170(c)(1) of the Internal Revenue Code of 1986; or

(B) an entity or organization described in section 170(c)(2) of the Internal Revenue Code of 1986.

This means that only legitimate charities qualify for the defense.  “Charities” such as the American Society for the Elimination of the Cuticle will not qualify.  And remember, it’s the recipient of the transfer, not the debtor, who must mount the defense.
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baby's lost his assetsThis post is the fifth in a series in which I discuss fraudulent transfers.  This one deals with the consequences of fraudulent transfers, and the importance of prebankruptcy planning.

E.         Denial Of Discharge And The Loss Of Assets

A discharge may not be available to a debtor who engages in prepetition fraudulent transfers:

The court shall grant the debtor a discharge, unless — . . . the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, . . . or has permitted to be transferred, removed, destroyed . . . — . . . property of the debtor, within one year before the date of the filing of the petition . . .

11 U.S.C. § 727(a)(2)(A)

And as I have discussed in great detail in my previous fraudulent transfer posts, the bankruptcy trustee can avoid the transfers and seize the assets.  Furthermore, once the debtor has transferred the asset, it no longer belongs to the debtor, and cannot be exempted in the debtor’s bankruptcy.
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