For those of you who have been living in a cave without access to any news of the day, I would bring you up to speed on the ever expanding sex abuse/sexual harassment scandal that implicates many famous Hollywood types, politicians, religious leaders, big business execs, . . . , and the list just keeps on growing; but if you’re still living in your cave, you probably won’t read this post.

For those of you who aren’t living in a cave, but haven’t been paying attention to the salacious details, here’s the classic comic book version.  Many famous and powerful people have recently been accused of sexual harassment.  The list of the accused includes both men and at least one woman.  As the list grows, the likelihood that at least one accuser (maybe many more) will file civil actions against the accused increases.  Since this is a bankruptcy blog, our question of the day is:

Question:  Can the accused discharge any financial liability associated with the (alleged) harassment in bankruptcy?

 

Leaving aside the fact that most, if not all, of the accused are multimillionaires who probably won’t seek bankruptcy protection, the question is still worth addressing because people who don’t occupy the rarified world of big ticket corruption can still face such accusations. Continue Reading Harvey Weinstein, et al., and Bankruptcy

oh no We sold our house TT seized the moneyI have written several times about exempting assets in bankruptcy.  The gist is that in a Chapter 7 bankruptcy, the debtor gets to keep all assets that are exempt using the appropriate exemption table, but the Chapter 7 Trustee assigned to the case is empowered to seize and liquidate the nonexempt assets for the benefit of the debtor’s creditors.  And in other chapters the value of the nonexempt assets is one of the factors that are used to determine how much the debtor must repay the general unsecured creditors through the plan.

I have also written about the six-month reinvestment requirement for a homestead exemption after a debtor receives the exempt proceeds from the sale of the debtor’s primary residence.  The idea here is that if the debtor has nonexempt equity in the primary residence, the Chapter 7 Trustee will sell the property for the benefit of the creditors, and write the debtor a check for the exemption amount; but the debtor must reinvest the proceeds in a new domicile within six months of receiving the check from the Trustee or else the Trustee can reclaim the money.

When the Trustee sells a nonexempt asset, the sale is, from the debtor’s perspective, an involuntary sale.

In this post I will discuss what happens to the homestead exemption when the debtor voluntarily sells the primary residence, either in bankruptcy, or outside of bankruptcy. Continue Reading Voluntary Sales And The Homestead Exemption

Absolute Priority Rule (1)Some time ago I wrote in great detail about personal Chapter 11 bankruptcy.  In that post I discussed the application of one of the complexities of Chapter 11 bankruptcy to individual (as opposed to business) cases.  That complexity is the absolute priority rule.  At the time of the post, we had a patchwork of inconsistent case law on the topic, making the success of a personal Chapter 11 case dependent, in part, on the identity of the judge assigned to the case.

Things have been resolved ― at least in the Ninth Circuit ― and not in favor of individuals.  Let’s recall the setting:

 

I.  The Absolute Priority Rule

 

The absolute priority rule is an important idiosyncrasy of Chapter 11 that has no analogue in either Chapter 7 or Chapter 13 bankruptcy.  We’ll begin by describing the absolute priority rule in the business Chapter 11 context.

 

A.  The Business Chapter 11 Absolute Priority Rule

 

In bankruptcy not all debts are treated equally.  For example, the law distinguishes between secured debts ― debts that are secured by collateral that can be repossessed in the event of a default ― and unsecured debts.  Secured debts are not treated the same as unsecured debts because the secured creditor has special rights attached to the collateral securing the debt.

Even among unsecured debts there are distinctions.  Some are given priority over others.  The various priority classes are listed in 11 U.S.C. § 507(a).  This distinction sets the stage for the so-called absolute priority rule for Chapter 11. Continue Reading The Absolute Priority Rule Applies To Individual Chapter 11 Debtors

tax return with hundred dollar billsSome time ago I wrote about discharging income taxes in bankruptcy.  I subsequently wrote about discharging income taxes in bankruptcy for a tax year in which the debtor filed a return after the taxing authority ― for simplicity I will generically label the authority as the IRS, though the discussion applies to other taxing authorities ― filed a substitute for return and assessed the tax.

A fellow bankruptcy attorney of the highest caliber, who is also a good friend, read the substitution for return post ― Yippee!  I always love hearing that people are reading the blog ― and drew my attention to a brand new decision of the Bankruptcy Appellate Panel for the Ninth Circuit (the “BAP”) in the appeal of one of the cases I discussed in substitute for return post.  He suggested that I write a follow up post.  Following the rule always to take requests from the audience (please try the veal piccata, and be sure to tip the wait staff), I offer the following update.

To set the stage for this post I will begin with a précis of the aforementioned (does anyone other than an attorney use the word “aforementioned”?) two previous posts.  If you want more detail, read those two posts.

 

I.  The Three-Part Tax Dischargeability Test

 

For a tax to be dischargeable in bankruptcy, it must satisfy three requirements:

1.  (The three-year rule) The tax return for the tax year in question must have been due (including extensions) – but not necessarily actually filed – at least three years before the filing of the bankruptcy papers,

2.  (The two-year rule) The debtor must have actually filed a legitimate, nonfraudulent tax return for that tax year at least two years before the filing of the bankruptcy papers, and

3.  (The 240-day rule) The taxing authority cannot have assessed the tax during the 240 days prior to filing the bankruptcy papers.

The second requirement, the so-called two-year rule, has been the subject of extensive litigation throughout the country, with a wide range of inconsistent outcomes.  It is the afflatus for this post. Continue Reading Discharging Income Taxes In Bankruptcy After A Substitute For Return Is Filed: Part II

Christmas presents under the treeIn this Christmas season children are eagerly awaiting prepackaged presents.  That’s an odd locution, isn’t it?  We usually refer to the gifts as wrapped rather than prepackaged.  I chose the word “prepackaged” because when something is prepackaged it’s all wrapped up.  What does this have to do with Chapter 11 bankruptcy?  A little background will help to put the answer in perspective.

 

I.  Chapter 11 Bankruptcy

 

The Bankruptcy Code (title 11 of the United States Code) is divided up into chapters.  The first three chapters (1, 3, and 5) are foundational chapters.  Their content comes along for the ride no matter which chapter under which the case is ultimately filed.  The remaining chapters (7, 9, 11, 12, 13, and 15) are the chapters under which bankruptcy cases are actually filed.

Side Note:  Why The Shortage Of Even-Numbered Chapters?

You may wonder why almost all of the chapters have odd numbers.  The answer lies with Congress.  Congress has been wrestling with budgetary problems for some time, and has been unable to afford even numbers, which are more expensive than odd numbers.  As a special treat it got one even number, 12, but for now that’ll have to do.  And if you believe that, I have some real estate on the moon I would like to sell you.

The real reason has to do with the passage of the Bankruptcy Reform Act of 1978.  Prior to that, the bankruptcy statute had even-numbered chapters.  However, Congress felt that some of them had been abused (i.e., sections of the Uniform Bankruptcy Act of 1898, not members of Congress), in some cases by creditors, in others by debtors.  Therefore, it jettisoned the offending sections, which turned out to comprise all of the even-numbered chapters.  In the 1980s the need of family farmers for bankruptcy relief was not being satisfactorily addressed with the remaining chapters, so Chapter 12 was temporarily added.  But it had to be reauthorized every two years.  Then in 2005 the entire Code underwent revision.  As part of that revision, Chapter 12 was made permanent, and its ambit was expanded to include, not only family farmers, but also family fishing operations.

Back To Chapter 11:

Chapter 11 was originally envisioned as a corporate restructuring provision, though it is now available, not only to businesses, but also to individuals and married couples.

The big picture goal in a Chapter 11 is to deal with debt in a way that allows the debtor to reorganize so that is can continue to participate in the economy.  Some debt may be wiped out, some may be reduced to pennies on the dollar, some assets may be liquidated, and the debtor reorganizes its financial affairs.  The main vehicle for Chapter 11 restructuring is the Chapter 11 plan.  (I am ignoring the idea of a total liquidation Chapter 11 plan.) Continue Reading Prepackaged Chapter 11 Bankruptcy

IRS From 1040Some time ago I wrote about discharging income taxes in bankruptcy.  I stated that there is a three-part test for determining their dischargeability, and started with the following executive summary:

For a tax to be dischargeable in bankruptcy, it must satisfy three requirements:

  1. (The three-year rule) The tax return for the tax year in question must have been due (including extensions) – but not necessarily actually filed – at least three years before the filing of the bankruptcy papers,
  2. (The two-year rule) The debtor must have actually filed a legitimate, nonfraudulent tax return for that tax year at least two years before the filing of the bankruptcy papers, and
  3. (The 240-day rule) The taxing authority cannot have assessed the tax during the 240 days prior to filing the bankruptcy papers.

The second requirement, the so-called two-year rule, has been the subject of extensive litigation throughout the country, with a wide range of inconsistent outcomes.  Therefore, I suspect that the Supremes will eventually be asked to consider the matter.

My focus today is on what happens if the taxing authority files something called a substitute for return on behalf of the debtor/taxpayer.  For linguistic simplicity, I will refer to the taxing authority as the IRS, though the discussion applies, mutatis mutandis, if the taxing authority is a state taxing authority such as California’s Franchise Tax Board. Continue Reading Discharging Income Taxes In Bankruptcy After A Substitute For Return Is Filed

I recently answered a question posed by a fellow bankruptcy attorney, and thought you might find the discussion interesting.

Here’s an edited version of my colleague’s question:

A Chapter 7 debtor who is a real estate broker had some listings prepetition.  He opened escrow postpetition, and eventually sold the properties.  He received a $20,000 commission, none of which can be exempted.  The Trustee has demanded all the commission received.  What can be done?

Here’s my response:

Three cases that help to answer the question from different vantage points are: In re Fit zsimmons, 725 F. 2d 1208 (9th Cir. 1984), In re Ryerson, 739 F. 2d 1423 (9th Cir. 1984), and In re Wu, 173 B.R. 411 (B.A.P. 9th Cir. 1994).

 

I.    The Key Statutory Provision

 

According to 11 U.S.C. § 541(a), when a debtor files for bankruptcy protection, the act of filing the papers “creates an estate.”    The prepetition debts then become postpetition claims against that estate.

In a Chapter 7 bankruptcy, the Chapter 7 Trustee liquidates the estate to produce a dividend to the debtor’s creditors.  The debtor can exclude assets from that estate by appealing to an appropriate exemption table (Cal. Civ. Proc. Code § 704 for homeowners with equity in their principal residence, and Cal. Civ. Proc. Code § 703.140 for everyone else).  Anything the debtor cannot exempt is fair game for the Trustee to seize.

What goes into the estate?  The gist of 11 U.S.C. § 541(a) is that everything the debtor owns or has an interest in on the day of filing the bankruptcy papers, anything the debtor becomes entitled to through bequest, inheritance, devise, or through life insurance proceeds during the 180 days after the petition day, and anything that is the fruit of estate assets (e.g., interest earned on an estate asset) is part of the estate.

But § 541(a)(6) has a carve-out for income earned by the debtor for services rendered postpetition.  It is this provision that is at the heart of the answer to my colleague’s question. Continue Reading Can The Chapter 7 Bankruptcy Trustee Seize Your Postpetition Commissions?

In 2013 the U.S. Supreme Court handed down an opinion that shed light on the meaning of the word “defalcation” as it is used in the Bankruptcy Code’s list of nondischargeable debts.  The opinion disabuses of their error those who thought the word had something to do with a bathroom bodily function.  In this post we will look at the Supremes’ decision in the larger context of nondischargeability under 11 U.S.C. § 523(a)(4).

 

I.  Nondischargeable Debts In A Personal Bankruptcy:  Section 523(a)(4)

 

As readers of this blog know, 11 U.S.C. § 523(a) contains the exceptions to discharge in Chapter 7, 11, 12, and 11 U.S.C. § 1328(b) hardship discharge Chapter 13 bankruptcies.  Included in that list is the following:

A discharge under section 727, 1141, 1228 (a), 1228 (b), or 1328 (b) of this title does not discharge an individual debtor from any debt— . . . for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.

11 U.S.C. § 523(a)(4).

The list of debts that are nondischargeable in a completed Chapter 13 plan discharge ― found in 11 U.S.C. § 1328(a) ― is shorter than the list of exceptions to discharge found in 11 U.S.C. § 523(a).  However, § 1328(a) includes § 523(a)(4) by reference, so a debt incurred through “fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny” is never dischargeable in any personal bankruptcy.

However, § 523(a)(4) is not self-executing.  According to 11 U.S.C. § 523(c)(1):

[T]he debtor shall be discharged from a debt of a kind specified in paragraph (2), (4), or (6) of subsection (a) of this section, unless, on request of the creditor to whom such debt is owed, and after notice and a hearing, the court determines such debt to be excepted from discharge under paragraph (2), (4), or (6), as the case may be, of subsection (a) of this section.

Thus, the creditor can only make the debt survive the bankruptcy discharge by successfully prosecuting a special kind of lawsuit in the Bankruptcy Court.  That kind of lawsuit is called an adversary proceeding. Continue Reading What Is Defalcation In Bankruptcy?

Is a debt incurred as a result of a DUI (or DWI depending on the argot used where you live) dischargeable in bankruptcy?  There are three parts to the answer.  Although my discussion makes use of California and Ninth Circuit law, its substance will undoubtedly apply, mutatis mutandis, to any jurisdiction in the United States.

 

I.   A DUI Fine Is Not A Dischargeable Debt

 

If a debtor tied one on, got behind the wheel, and received a citation for drunk driving, the resultant fine is not dischargeable in bankruptcy.  To establish this requires a two-step analysis.

 

A.  Bankruptcy Other Than In A Completed Chapter 13 Plan

 

11 U.S.C. § 523(a) contains the exceptions to discharge in Chapter 7, 11, 12, and 11 U.S.C. § 1328(b) hardship discharge Chapter 13 bankruptcies.  Included in that list is the following:

A discharge under section 727, 1141, 1228 (a), 1228 (b), or 1328 (b) of this title does not discharge an individual debtor from any debt— . . . to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit . . .

11 U.S.C. § 523(a)(7) (emphasis added).

 

B.  A Completed Chapter 13 Plan Discharge

 

The list of debts that are nondischargeable in a completed Chapter 13 plan discharge ― found in 11 U.S.C. § 1328(a) ― is shorter than the list of exceptions to discharge found in 11 U.S.C. § 523(a).  In particular, § 523(a)(7) is not included in the Chapter 13 list.  However, 11 U.S.C. § 1328(a)(3) excludes from discharge (emphasis added):  “any debt— . . . for restitution, or a criminal fine, included in a sentence on the debtor’s conviction of a crime . . .”

Is a DUI a crime?  Yes.  Here is the reasoning: Continue Reading Is A DUI/DWI Debt Dischargeable In Bankruptcy?

One chapter of the Bankruptcy Code that up until the last few years had not gotten much use is Chapter 9.  It is the chapter under which municipalities such as cities and counties file for bankruptcy protection.

On October 13th, 2011, I wrote a post predicting that a wave of municipal bankruptcies would start breaking on our shores.  On August 15th, 2012,  I discussed several municipal bankruptcies that had just been filed.  One of those bankruptcies, the Stockton, California, one has just been in the news because of a dispute over whether Stockton could reduce its payments to CalPERS, the retirement plan for California public employees.

Here’s an excerpt from the L.A. Times article written by Chris Megerian, Melody Petersen, and Dean Starkman, describing the ruling by the bankruptcy judge, Christopher Klein:

A federal bankruptcy judge dealt a serious blow to California’s public employee pension systems by ruling Wednesday that payments for future worker retirements can be reduced when a city declares bankruptcy — just like its other debts.  U.S. Bankruptcy Judge Christopher Klein ruled that bankruptcy law supersedes California pension laws that require cities to fund their workers’ future retirement checks.  “I’ve concluded the pension could be adjusted,” Klein said.

What does that mean for California public employees who work for a municipality that files for Chapter 9 protection?  Quite simply it means that the Rolls Royce retirement plan might end up as more of a Yugo plan. Continue Reading What Happens To Pensions In A Chapter 9 Bankruptcy?