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. Continue Reading Fair Debt Collection Practices Act And Bankruptcy

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. Continue Reading Comment On Liz Weston’s Column: Chapter 13 Bankruptcy Is An Option

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:

From a procedural standpoint, am I correct that I can amend Schedules “B” and “C” to include the inheritance as an asset and exempt as much as I can under the wildcard?

I.          Amending The Schedules

In the bankruptcy papers, Schedule B is where the debtor lists all personal property, and Schedule C is where the debtor exempts as much assets as possible.

Fed. R. Bankr. Proc. 1009(a) provides in relevant part (with emphasis added):

A voluntary petition, list, schedule, or statement may be amended by the debtor as a matter of course at any time before the case is closed. The debtor shall give notice of the amendment to the trustee and to any entity affected thereby.

Therefore, your client can amend Schedules B and C to list the inheritance and exempt it to the extent possible.

Question 2:

Would the nonexempt portion need to be turned over to the Trustee?

II.        Turning Over An Inheritance To The Trustee

This question was answered in the affirmative in the very recent Bankruptcy Appellate Panel for the Ninth Circuit case, In re Dale, AZ-13-1251-DPaKu (B.A.P. 9th Cir. Fe. 5, 2014).

In Dale the Chapter 13 husband debtor became entitled to an inheritance more than 180 days after the couple filed their bankruptcy papers.  The Chapter 13 Trustee demanded turnover of the inheritance.  Based on 11 U.S.C. § 541(a)(5) the debtors argued that the Trustee was not entitled to the money because the inheritance was not part of the bankruptcy estate (with emphasis added):

The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held: . . .

Any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date

(A) by bequest, devise, or inheritance;

(B) as a result of a property settlement agreement with the debtor’s spouse, or of an interlocutory or final divorce decree; or

(C) as a beneficiary of a life insurance policy or of a death benefit plan.

However, the Dale Court held that 11 U.S.C. § 1306(a)(1) put the inheritance into the estate, and as such it had to be turned over to the Trustee (with emphasis added):

Property of the estate includes, in addition to the property specified in section 541 of this title —

(1) all property of the kind specified in such section that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first.

Applying the Dale holding to my friend’s client’s case, since any nonexempt portion of the inheritance belongs to the estate, his debtor would have to remit the money to the Chapter 13 Trustee.

Question 3:

My client asked me this:  Can the non-exempt portion be disclaimed at this point so he can gift it to relatives?

III.       Disclaiming Means No Control Over The Inheritance

The relevant statute is Cal. Prob. Code § 275-288.

My friend’s client was certainly entitled to disclaim any interest in the inheritance pursuant to § 275:  “A beneficiary may disclaim any interest, in whole or in part, by filing a disclaimer as provided in this part.”

However, his client wanted to do more than that:  He wanted to have control over a portion of the money he wished to disclaim by giving it to relatives.

Subsections 285(a) and (b) provide in relevant part (with emphasis added):

(a)  A disclaimer may not be made after the beneficiary has accepted the interest sought to be disclaimed.

(b) For the purpose of this section, a beneficiary has accepted an interest if any of the following occurs before a disclaimer is filed with respect to that interest:

(1) The beneficiary, or someone acting on behalf of the beneficiary, makes a voluntary assignment, conveyance, encumbrance, pledge, or transfer of the interest or part thereof, or contracts to do so . . .

Thus, his client could not disclaim his interest in the nonexempt portion if he gave it to relatives.

Section 283 provides:  “A disclaimer is not a fraudulent transfer by the beneficiary . . . ”  However, if my friend’s client were to give the nonexempt portion to relatives (thus making it impossible for him to disclaim), he would thereby make a fraudulent transfer (which I have discussed in great detail in previous posts).

Let’s be honest here:  My friend’s client wanted to make the transfer to shield the asset from the legitimate claims of his creditors who were being paid through the plan.  Since the Chapter 13 Trustee can avoid such a transfer under 11 U.S.C. § 548(a), the debtor would not accomplish his goal.  Moreover, if he subsequently had to convert to Chapter 7, he would be denied a discharge pursuant to § 727(a)(2)(B):

 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, . . . property of the estate, after the date of the filing of the petition.

If you are facing insurmountable debt and are concerned about the possibility of receiving an inheritance, contact an extremely knowledgeable and highly skilled bankruptcy attorney to guide you through the process.

 

 Image courtesy of Flickr (Licensed) by Ken Mayer

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. Continue Reading Homestead Exemption After Sale Of The Residence

IRACan I exempt the IRA I inherited from my father when he died?

This, in essence, is the question the U.S. Supreme Court very recently addressed in Clark v. RAMEKER, No. 13-299 (U.S. June 12, 2014).

I.          Exempting Retirement Funds

I have discussed exemptions in many previous posts.

In one post I covered exempting non-ERISA-qualified retirement plans such as IRAs.  I pointed out that in Rousey v. Jacoway, 544 U.S. 320 (2005) the Supreme Court held that IRAs were exemptible because they had characteristics that were similar to ERISA-qualified plans such as 401(k)s.  I then stated that if a debtor had a non-ERISA-qualified retirement plan, then depending on the nature of the account, the debtor (i.e., the debtor’s counsel) could appeal to Rousey’s reasoning to argue by analogy that the accounts are ERISA-like and then appeal to Rousey’s holding to exempt them.

The above discussion applies nicely to retirement plans that debtors set up for themselves.  But an inherited IRA is one that was set up by someone other than the debtor, for that person’s benefit, and not for the debtor’s benefit.  The funds did not belong to the heir when they were contributed to the plan.  In that situation the Supremes in Clark held that Rousey’s reasoning is inapposite.

In Clark the Supremes held that an inherited IRA could NOT be exempted using a retirement exemption.  In its unanimous decision the Court held:

The text and purpose of the Bankruptcy Code make clear that funds held in inherited IRAs are not “retirement funds” within the meaning of §522(b)(3)(C)’s bankruptcy exemption.

Clark v. RAMEKER at section II.  (The case is so recent that page numbers have not yet been included.)

Therefore, if you have an inherited IRA that cannot be exempted using something other than a retirement exemption, you need to hire an extremely knowledgeable and highly skilled bankruptcy attorney to determine whether bankruptcy even makes sense for you, and to discuss careful prebankruptcy planning if bankruptcy is necessary.

 

 Image courtesy of Flickr (Licensed) by Simon Cunningham

small pile of penniesHere is the eighth defense against preference avoidance actions, the so-called de minimis transfer defense.  This defense has two versions.

Defenses To Preference Avoidance Actions, Part VIII:

The De Minimis Transfer Defense

A.        The De Minimis Transfer Defense, Part I

Suppose an individual with primarily consumer debt files a personal bankruptcy.  And suppose that debtor had $400 garnished during the ninety-day prepetition period.  Is it worth the Court’s time to entertain an adversary proceeding to avoid the garnishment pursuant to § 522(h)?  Congress answered that question in the negative by including § 547(c)(8):

The trustee may not avoid under this section a transfer — . . . if, in a case filed by an individual debtor whose debts are primarily consumer debts, the aggregate value of all property that constitutes or is affected by such transfer is less than $600.

Of course, in practical terms even $600 is too small an amount to justify the filing of a § 522(h) adversary proceeding.  The dollar amount warranting the action cannot be made precise.  A bankruptcy attorney with a client who can exempt wages that were garnished during the prepetition preference period and wants to avoid the garnishment using § 522(h), you will need to explain the costs associated with the action prior to committing to the representation.

B.        The De Minimis Transfer Defense, Part II

For cases in which the debtor’s debts are not primarily consumer debts, Congress included a larger de minimis cut-off:

The trustee may not avoid under this section a transfer — . . . if, in a case filed by a debtor whose debts are not primarily consumer debts, the aggregate value of all property that constitutes or is affected by such transfer is less than $6,225.

You might be tempted to conclude that if the debtor’s debts are not primarily consumer debts, they must be business debts.  While that is undoubtedly true in many cases, an individual debtor without a business can file a personal bankruptcy in which the debts are not primarily consumer debts.

This frequently happens when the debts are primarily — i.e., more than 50% of the total debt — tax obligations.  See, e.g., In re Westberry, 215 F.3d 589, 591 (6th Cir. 2000)

Almost without exception, the bankruptcy courts that have addressed this question have determined that tax debt should not be considered consumer debt for purposes of the codebtor stay.  See, e.g., In re Stovall, 209 B.R. 849, 854 (Bankr.E.D.Va.1997); In re Dye, 190 B.R. 566, 567 (Bankr. N.D. Ill. 1995); In re Marshalek, 158 B.R. 704, 706 (Bankr. N.D. Ohio 1993); In re Greene, 157 B.R. 496, 497 (Bankr. S.D. Ga. 1993); Goldsby v. United States (In re Goldsby), 135 B.R. 611, 613-15 (Bankr. E.D. Ark. 1992); In re Reiter, 126 B.R. 961 (Bankr. W.D. Texas 1991); Harrison v. Internal Revenue Service (In re Harrison), 82 B.R. 557, 558 (Bankr. D. Colo. 1987); Pressimone v. Internal Revenue Service ( In re Pressimone ), 39 B.R. 240, 244 (N.D. N.Y. 1984).  We find the weight of these opinions and their reasoning persuasive.

Of course, the debtor may have consumer debts as well.  In such a case, the debtor will have to have had quite a bit garnished during the prepetition preference period to warrant filing a § 522(h) adversary proceeding.

If you’re facing a preference avoidance action, and need an analysis of your case and the possible application of the de minimis transfer defense to your case, contact a California board certified bankruptcy law specialist to help you.

 

Image courtesy of Flickr (Licensed) by John H Kleschinsky

 

 

Here is the sixth defense against preference avoidance actions, the so-called domestic support defense.  This one is short.

Defenses To Preference Avoidance Actions, Part VII:

The Domestic Support Defense

A comparison of the Bankruptcy Code prior to October 17, 2005 with its current incarnation (the 2005 law that changed the Code is the Bankruptcy Abuse And Consumer Protection Act — “BAPCPA,” or as it sometimes less charitably called, BAPCraPA) reveals that Congress intended to strengthen the Code’s protection of recipients of domestic support.  “Domestic support” is defined in § 101(14A).  The definition is long so I will not repeat it here.  The gist is that it includes alimony and child support, and must be owed to a spouse, former spouse, or child of the debtor, or a governmental unit.

The changes to § 547(c)(7) reflect this intent.  The new version is stripped of the former version’s qualifying language, and simply states:  “The trustee may not avoid under this section a transfer — . . . to the extent such transfer was a bona fide payment of a debt for a domestic support obligation.”

The inclusion of the qualifier, “bona fide” indicates that Congress took into consideration payments that might superficially be characterized as domestic support, but were something else entirely.  See In re Futoran, 76 F.3d 265 (9th Cir. 1996) (payment of future spousal support in exchange for termination of marital agreement held to be an avoidable preference).

However, given the paucity of case law on § 547(c)(7), it appears that trustees and DIPs don’t think it is worth the effort to attempt to avoid transfers that look like domestic support.

If you’re facing a preference avoidance action, and need an analysis of your case and the possible application of the domestic support defense to your case, contact a California board certified bankruptcy law specialist to help you.

 

Image courtesy of Flickr (Licensed) by vastateparksstaff

Man reading legal docsHere is the sixth defense against preference avoidance actions, the so-called statutory lien defense.

Defenses To Preference Avoidance Actions, Part VI:

The Statutory Lien Defense

Some liens are voluntary, the result of the debtor voluntarily granting a lien to a creditor.  Examples include home mortgages and car loans.

Other liens are involuntary and are recorded against the debtor’s wishes.  For example, if a creditor obtains a judgment against the debtor, the creditor can record a judgment lien against an asset — such as the debtor’s home.

Another type of involuntary lien is a statutory lien, which is a lien that arises by operation of some statute.  For example, if a homeowner is behind on homeowners association dues, the HOA can record a lien pursuant to a statute.  See, e.g., Cal. Civ. Code § 1367.1.  Statutory liens are the focus of § 547(c)(6):  “The trustee may not avoid under this section a transfer — . . . that is the fixing of a statutory lien that is not avoidable under section 545 of this title.”  Thus, if the statutory lien is not avoidable under § 545, it is not avoidable.  (One of the challenges in understanding statutes is having to follow chains of references from one part of the statute to another.  This is one of those challenges.)

Section 545 provides: Continue Reading Preferential Transfers IV: Defenses To Preference Avoidance Actions (Part VI)

Floating Lien Defense does not actually float on waterHere is the fifth defense against preference avoidance actions, the so-called floating lien defense.

Defenses To Preference Avoidance Actions, Part V:

The Floating Lien Defense

In my last post I discussed the security interest defense, and noted that § 547(c)(3) requires that the security agreement must clearly identify the collateral securing the debt.  The example that set the stage for the discussion of § 547(c)(3) was of the purchase of a car.  The debtor took possession of the car and at the same time transferred a security interest in the car to the creditor.  Thus, the debtor had the car at the time of the transfer.

However, a lien can be created even before the debtor has the collateral, or even before the collateral comes into existence.  Such a lien is called a floating lien.

For example, suppose the debtor is a business that  regularly purchases widgets from a supplier, and then resells them at its retail outlets.  The parties can create a lien that specifies that all future deliveries of widgets become collateral securing a floating debt the debtor has to the supplier.  As the inventory is sold, the debt is paid from the proceeds, with the unsold inventory serving as collateral for the unpaid portion of the debt. Continue Reading Preferential Transfers IV: Defenses to Preference Avoidance Actions (Part V)

If you’ve been following my blog posts on preferential transfers and would like more in-depth coverage, I will be speaking on this topic on May 8 in Orange, California and again on May 15 in Pasadena, California.  In addition to the topic of Preferential Transfers: Preference Actions and Substantive Defenses, I will also cover the topics of 1) Fraudulent Transfers: Actual Intent and Affirmative Defenses and 2) Appellate Procedure and Strategies: Appeals from Final Orders and Interlocutory Appeals.  I will present this talk at the National Business Institute’s “Bankruptcy Litigation 101” seminar in Orange, CA on May 8, 2014 and the “Bankruptcy Litigation 101” seminar in Pasadena, CA on May 15, 2014.  Two other speakers will be joining me.  In all you’ll learn how to:  spot potential adversary issues, draft complaints and resolve/defend them; confidently handle preference and fraudulent transfer actions; get tips on what bankruptcy judges expect and how to avoid common mistakes when you bring or defend an adversary proceeding; understand how the Federal Rules of Civil Procedure have been altered in the Bankruptcy Rules and by local court rules; and examine appellate procedure and rules so you’re prepared to take your case to the next level.

If you have some experience filing bankruptcies and would like to expand your practice into bankruptcy litigation, I hope to see you there.