Recent Developments for Consumer Bankruptcy Practitioners Including Supreme Court and Appellate Court Cases

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1 SOUTHEASTERN BANKRUPTCY LAW INSTITUTE, INC. THIRTY-EIGHTH ANNUAL SEMINAR BANKRUPTCY LAW AND RULES MARCH 22-24, 2012 ATLANTA, GEORGIA Recent Developments for Consumer Bankruptcy Practitioners Including Supreme Court and Appellate Court Cases By Mary Frances Fallaw Staff Attorney for D. Sims Crawford, Chapter 13 Standing Trustee Presented By: D. Sims Crawford Chapter 13 Standing Trustee Northern District of Alabama, Southern Division P.O. Box Birmingham, Alabama (205) Telephone (205) Facsimile

2 Recent Developments for Consumer Bankruptcy Practitioners Including Supreme Court and Appellate Court Cases by Mary Frances Fallaw Staff Attorney for D. Sims Crawford, Chapter 13 StandingTrustee A. Expense for Older, High Mileage Vehicles Since the Ransom decision, some creative debtors have tried to take a deduction for unencumbered older, high mileage vehicles because they can no longer take the ownership expense. In re Shultz, 2011 WL (Bankr. W.D. Mo. June 14, 2011). The court analyzed three bankruptcy cases in which the debtors claimed an additional $ vehicle operating expense for an older, higher mileage car. As stated by the court, the issue was Whether above-median Chapter 13 debtors who own unencumbered vehicles over six years old or with mileage in excess of 75,000 miles may claim an additional $ for monthly operating expenses in calculating their projected disposable income on their Form 22C WL at *1. While the means test form does not provide a standard deduction for an older vehicle, the debtors argued that the expense should be allowed based on language found in the IRS manual. The court disagreed and disallowed the additional expense. The court found that to allow such an additional expense would be to create a deduction which is present in neither the [Bankruptcy] Code nor the [National and Local] standards WL at *3. The court also recognized that based on the schedules filed by each debtor, none of the debtors actually incurred an additional $ operating expense for their vehicle. The court noted that this additional expense was a fictional expense, which Ransom cautioned against allowing debtors to deduct WL at *4. The court did note that if, during the Chapter 13 case, the debtor needed to purchase a new vehicle due to the unreliability of their older, high mileage

3 vehicle, the debtor could petition the court to modify the plan and incur the additional debt WL at *4. However, contrast that case to In re Hargis, 2011 WL (Bankr. Utah May 3, 2011). In In re Hargis, the Chapter 13 debtor was not allowed to take a $200 per month additional operating expense for an old motor vehicle, but the court found that a debtor may claim an additional vehicle operating expense that they actually incur for operating an older vehicle. B. Expense for Mortgages on Surrendered Property After Ransom, some Trustees and creditors have argued that debtors should not be allowed to take other fictional or phantom expenses on the means test that they do not actually owe or have to pay. For example, some have challenged the deduction of a mortgage payment when the debtor is surrendering the real property that secures the mortgage. The court in In re Grinkmeyer found that a Chapter 7 debtor can still deduct the mortgage payment on property they intend to surrender. 456 B.R. 385 (Bankr. S.D. Ind. Aug. 1, 2011). The court agreed with the First Circuit decision of In re Rudler, 576 F.3d 37 (1 st Cir. 2009) that found, only as it relates to Chapter 7 cases, a chapter 7 debtor may deduct his mortgage payments under the means test notwithstanding his intent to surrender the property. In re Grinkmeyer, 456 B.R. at 388. Because the means test asks for a snapshot of the debtor at the time of filing, the mortgage payment was an allowed deduction. In re Grinkmeyer, 456 B.R. at 388. However, even though the court found that the debtors could deduct the mortgage payment on the means test, based on the totality of circumstances, the court found that the debtors could pay something towards their unsecured debts once they shed their high mortgage payment and substitute a lower housing 2

4 expense. In re Grinkmeyer, 456 B.R. at Based on the debtors eligibility for Chapter 13 relief and their ability to fund a plan, the court dismissed their chapter 7 case. A West Virginia Bankruptcy Court similarly found that a chapter 7 debtor can take a deduction for a mortgage payment on the means test even if the debtor intends to surrender the real property. In re Sonntag, 2011 WL (Bankr. N.D. W.Va. Sept. 6, 2011). In this case, the U.S. Trustee argued that under the holdings in Lanning and Ransom the debtors should not be allowed to claim a secured debt payment on Form 22A for property the debtors were surrendering. The debtors argued that they were allowed to take the deduction because the mortgage payment was contractually due at the time they filed their bankruptcy case. The court agreed with the debtors. The court distinguished this case from Ransom due to the code section at issue: the language at issue is not 707(b)(2)(A)(ii)(I), but 707(b)(2)(A)(iii), which does not contain the word applicable WL at *3. The court stated very clearly, This court is not persuaded that the holding in Ransom has any effect on a debtor s ability to claim a means test deduction for contractually due secured debt payments, regardless of whether they are paying those debts WL at *3. C. Applicable Commitment Period Some have argued that Lanning and Ransom overruled In re Kagenveama, 541 F.3d 868 (9 th Cir. 2008). However, for the courts within the Ninth Circuit, they are still considering it binding precedent, at least when an above median income debtor has negative disposable income per the means test. In In re Reed, the above median income debtors proposed a 43 month plan that proposed to pay nothing to their unsecured creditors. Their disposable income from Form B22C was negative, but their projected disposable income per Schedules I and J was positive. If the debtors were to make the proposed plan payments for a full 60 months, they would pay 3

5 $36, to their unsecured creditors, or approximately 61% of the filed, general unsecured claims rather than zero that the 43 month plan would pay. In re Reed, 454 B.R. 790, 794 (Bankr. D. Or. Aug. 9, 2011). The Supreme Court held in Lanning that based on the forward-looking approach, a court may take into account changes in a debtor s income or expenses from those used in the means test, provided that the changes are known or virtually certain to occur. In re Reed, 454 B.R. at 795. However, the according to the In re Reed court, this finding by the Supreme Court does not allow courts to look to Schedules I and J anytime that they differ from the means test. [D]ifferences between the numbers on the Form B22C and those on Schedules I and J do not by themselves establish a change in income or expenses that is known or virtually certain to occur. The court went on to say, [t]he trustee cannot rely solely on the Schedules I and J to show that the monthly disposable income shown on the Form B22C should be adjusted to accurately project disposable income into the future. In re Reed, 454 B.R. at 797. The court recognized that there will inevitably be differences between the means test and the debtor s Schedules, but found that Lanning allows departure from the current monthly income and the standardized and actual expenses only when changes affecting income and allowable expenses are known or virtually certain. In re Reed, 454 B.R. at 797. Thus, the court concluded that having positive income per Schedules I and J did not alone change the fact that the debtors had negative income per the means test. After making some adjustments for known changes in income and mistakes made on the means test, the court determined that the debtors still had negative income pursuant to the means test. In re Reed, 454 B.R. at The court then addressed whether Lanning and Ransom overruled Kagenveama. The court, following the decision in Henderson, 2011 WL , 4

6 decided that the ruling in Kagenveama relating to applicable commitment period has not been overruled by later Supreme Court decisions. In re Reed, 454 B.R. at 801. At its base, Kagenveama relied on the plain meaning of the statutory terms and their context and relationship to each other. The Supreme Court neither rejected that approach nor the conclusion that the circuit reach with regard to applicable commitment period. In re Reed, 454 B.R. at 803. Thus the court found that they were still bound to follow the decision in Kagenveama that only projected disposable income is subject to the applicable commitment period requirement. Money other than projected disposable income does not have to be paid out over the applicable commitment period. In re Reed, 454 B.R. at 802 (quoting Kagenveama, 541 F.3d at 876). The court went on to add that even if the applicable commitment period did apply and the debtors had to propose a 60 month plan, the result to unsecured creditors would be the same because [z]ero times 60 months is still zero. In re Reed, 454 B.R. at 803. The court noted that pursuant to Baud v. Carroll, 634 F.3d 327, (6 th Cir. 2011) the debtors might be required to stay in a case for 60 months in case the plan could be modified, but still concluded it is not clear that the statute requires that any particular amount be paid to unsecured creditors. In re Reed, 454 B.R. at 803. The court then confirmed the 43 month plan that paid less than 100% to the unsecured creditors. D. Schedule C after Schwab v. Reilly After Schwab v. Reilly, 130 S. Ct (U.S. 2010), many debtors began adding the language 100% of FMV to Schedule C. A Bankruptcy Court in Virginia has ruled that such language does not indeed exempt the entire value of the property being claimed exempt. In re Stoney, 445 B.R. 543 (Bankr. E.D. Vir. Feb. 9, 2011). The Trustee in the case objected to the 5

7 debtor s use of 100% of FMV and argued that the debtor should not be allowed to exceed the maximum amounts set forth by the relevant state statutes. The court agreed and explained that a debtor must describe the exempt property with reasonable certainty and affix a cash valuation to both the current value of the property and the value of the exemption being claimed in the form of a numerical value, i.e., a dollar amount. A nonnumerical designation, such as 100% of fair market value, does not permit the examiner of the exempting document or schedule to immediately quantify the debtor s assertion of the value of the exemption of the property without reference to extraneous documents or resources. In re Stoney, 445 B.R. at A Bankruptcy Court in Massachusetts has found that the use of unknown as the value does not necessarily exempt the entire value of the asset. In re Hall, 453 B.R. 22 (Bankr. D. Mass. July 7, 2011). The debtor in this case listed a cause of action against a former employer as an asset. On Schedule C, she listed the current value of the claim as unknown, the value of the claimed exemption as unknown, and listed 522(d)(5) as the law providing for the exemption. In re Hall, 453 B.R. at 24. The Chapter 7 Trustee did not object to the claim of exemption but later filed an Application to Employ Special Counsel to pursue the claim on behalf of the estate. The debtor argued that the claim was no longer property of the estate because she had exempted the full value of the claim by using unknown and the Trustee had not timely objected. The Trustee argued that the use of the specific code section allowing for the exemption limits the amount of the exemption. The Trustee argued that the actual amount of the exemption was quantifiable by deducting the total amount of other exemptions claimed under 522(d)(5) from the maximum exemption allowed by that provision. In re Hall, 453 B.R. at 25. The court agreed with the Trustee. The debtor argued that the use of unknown for the value of the asset and the amount of the exemption exempted the entire asset pursuant to Taylor v. Freeland & 6

8 Kronz, 503 U.S. 638 (1992). However, the court distinguished Taylor from the debtor s case because the debtor used the specific code section under which she was exempting the property. Use of that code section limited the amount that the debtor was claiming exempt. The court also noted that the Court in Schwab emphasized that neither the Trustee nor the bankruptcy court need struggle to divine the debtor s intent. Instead, where the amount of the exemption is discernable from the description of the property, the cited statutory basis, and the amount of the claimed exemption that amount is what is exempt under 522(l). In re Hall, 453 B.R. at (emphasis in original). E. Inherited IRAs Currently before the United States Bankruptcy Appellate Panel for the Ninth Circuit is Mullen v. Hamlin (In re Hamin), Bankr. No , BAP No The debtor in the case exempted an IRA she inherited from her grandmother. The United States Bankruptcy Court for the District of Arizona overruled the Chapter 7 trustee s objection to the debtor s claim of exemption on an inherited IRA under 11 U.S.C. 522(b)(3)(C) and allowed the exemption. The Trustee, Brian J. Mullen, appealed the decision to the Ninth Circuit B.A.P. The issue on appeal is whether a debtor may exempt an IRA account inherited by a grandmother pursuant to 11 U.S.C. 522(b)(3)(C). In his brief, the Trustee discussed In re Nessa, 426 B.R. 312 (8 th Cir. B.A.P. 2010) and In re Chilton, 426 B.R. 612 (Bankr. E.D. Tex. 2010) to support his position. The United States District Court for the Eastern District of Texas has reversed and remanded In re Chilton and held that an inherited IRA is exempt under 522(d)(12) as retirement funds and they are tax exempt under 26 U.S.C. 408(e). Chilton v. Moser, 444 B.R. 548 (E.D. Tex. March 16, 2011). The District Court stated that transfers that create inherited IRAs do not remove the 7

9 transfer from eligibility for exemption under Section 522(d)(12). Section 522(d)(12) does not require that the retirement funds be the Debtor s. Chilton, 444 B.R. at 552. Other courts that have likewise ruled relied on Nessa. See In re Kutcha, 434 B.R. 837 (Bankr. N.D. Ohio 2010); In re Tabor, 433 B.R. 469 (Bankr. M.D. Pa. 2010); In re Weilhammer, 2010 WL (Bankr. S.D. Cal. 2010). The Trustee in In re Hamlin urges the 9 th Circuit B.A.P. to not follow Nessa. He states that Nessa gives virtually no analysis and admits that the inherited IRA is not the Debtor s IRA. Brief for Appellant at 5-6, In re Hamlin (No ). The Trustee argues that only retirement funds that belong to the debtor are exempt under 522(b)(3)(C) and further argues that there is no evidence that Congress intended to extend the umbrella of protection from IRA assets beyond the individuals who earned those funds to also protect third parties who are nothing more than the fortuitous beneficiaries of those funds after the demise of the creator of the fund. Brief for Appellant at 7, In re Hamlin (No ). The Appellees Responsive Brief first argues that the 9 th Circuit B.A.P. does not have jurisdiction to hear the appeal because the notice of appeal was not timely filed. The Appellees then argued that if the B.A.P. does have jurisdiction, the inherited IRA in question is exempt under 522(b)(3)(C). Appellees Responsive Brief at 14, In re Hamlin (No ). The Appellees argue that the two prong test set out in In re Nessa should be followed. The Appellees explain that In re Nessa focused on 522(d)(12) and found that it imposes two requirements before a debtor may claim an exemption under that section: (1) the amount the debtor seeks to exempt must be retirement funds and (2) the retirement funds must be in an account exempt from taxation under one of the provisions of the Internal Revenue Code, such as Section 408. Appellees Responsive Brief at 14, In re Hamlin (No ). The Appellees also argued that 8

10 if 522(b)(3)(C) is found not to exempt the inherited IRA, it should be found exempt under Arizona law. Appellees Responsive Brief at 18-19, In re Hamlin (No ). The United States District Court for the Western District of Wisconsin recently held that an inherited IRA is exempt even if it is inherited by a non-spouse. Clark v. Rameker, Trustee (In re Clark), 2012 WL (W.D. Wis. Jan. 5, 2012). The Court noted that 522(d)(12) requires both that the funds in question be retirement funds and that they be in an account that is exempt from tax after they have been transferred. In re Clark, 2012 WL at *6. The Court also noted that except for the case before it and the In re Chilton case, that was overruled on appeal, all other bankruptcy and district courts to address the issue of inherited IRAs had ruled in favor of the debtors. In re Clark, 2012 WL at *4. F. Recent Case Law Sutter v. U.S. Nat l Bank (In re Sutter), No (6 th Cir. Jan. 3, 2012). The Sixth Circuit found that a mortgage was void because it could not have been signed by the debtor on the date and place stated in the notarization. Further, the holder succeeds to unclean hands of the originator and, under Michigan law, was not entitled to an equitable mortgage on the property. Reed v. City of Arlington, 2011 WL (5 th Cir. Aug. 11, 2011). In a Chapter 7 case, the Fifth Circuit held that a blameless trustee is not barred by judicial estoppel from pursuing a cause of action that a debtor omitted from the bankruptcy schedules. Nady v. DeFrantz (In re DeFrantz), 2011 WL (B.A.P. 9 th Cir. July 12, 2011). Voluntary conversion from Chapter 13 to Chapter 7 under 1307(a) is not conditioned on court review for bad faith. 9

11 Fisette v. Keller (In re Fisette), 2011 WL (B.A.P. 8 th Cir. Aug. 29, 2011). A Chapter 13 debtor who is ineligible to receive a discharge due to 1328(f) can still strip off wholly unsecured junior liens on residence at the completion of a plan without violating protection from modification in 1322(b)(2). The unsecured lien is not an allowable secured claim, so the lien retention provision of 1325(a)(5)(B)(i)(I)(bb) does not apply. In re Geradin, 2011 WL (Bankr. S.D. Fla. March 11, 2011). The Bankruptcy Court in the Southern District of Florida held that a debtor who is not entitled to a discharge due to 1328(f) cannot strip off a junior lien. The court reasoned that the claim of the junior lien holder is still secured because 506(d) is not applicable because even if there is no equity supporting the junior lien, there is no basis for disallowing the underlying claim under 502. The debt may not be enforceable against the debtor due to her Chapter 7 discharge, but the debt remains an enforceable debt against the property of the debtor. In re Taylor, 2011 WL (3 rd Cir. Aug. 24, 2011). The Third Circuit reinstated sanctions against HSBC Mortgage Company, its attorney, and their law firm for blind reliance on inaccurate data supplied by HSBC through a computerized system called NewTrak in support of stay relief motions and in claim litigation. Wilcox v. Anderson (In re Wilcox), 2011 WL (B.A.P. 10 th Cir. Aug. 4, 2011). A pro se debtor s failure to timely file a list of creditors as required by 521(a)(1)(A) results in dismissal pursuant to 521(i)(1). Dickson v. Countrywide Home Loans (In re Dickson), 2011 WL (6 th Cir. Aug. 26, 2011). A Chapter 13 debtor has standing under 522(h) to avoid a preferentially perfected lien 10

12 on a manufactured home when the transfer that perfected the lien was a recent state court judgment rather than an originally real estate mortgage on the property. Veal v. American Home Mortg. Servicing, Inc. (In re Veal), 2011 WL (B.A.P. 9 th Cir. June 10, 2011). The court held that Wells Fargo lacked standing to seek stay relief because the documents it filed failed to establish a colorable claim that Wells Fargo was either the owner, the holder, or a person entitled to enforce the note. Martinez v. Mortgage Elec. Registration Sys., Inc. (In re Martinez), 444 B.R. 192 (Bankr. D. Kan. Feb. 11, 2011). MERS had standing to seek stay relief because it was named as a nominee in a deed of trust and proved that it was acting as an agent for the note holder. Smith v. Saxon Mortgage Services, No (11 th Cir. Nov. 8, 2011). The 11 th Circuit held that language contained in a security deed gives MERS the authority to act on behalf of current and future owners of the mortgage. Therefore, MERS has the right to assign a security deed and foreclose on property. Stern v. Marshall, 2011 WL (U.S. June 23, 2011). The Supreme Court found that the bankruptcy court does not have jurisdiction over a counterclaim against a creditor when the claim was a state law action that had origins independent of federal bankruptcy law. The counterclaim was a core proceeding per 28 U.S.C. 157(b)(2)(C); however the Supreme Court found that Congress did not have the power to confer jurisdiction of the counterclaim on a non- Article III court. In ruling on the counterclaim, the bankruptcy court made findings of fact and legal determinations that were not related to the claim filed by the creditor. This case involved Vicki Lynn Marshall, more popularly known as Anna Nicole Smith. Marshall was married for a short time to Howard Marshall. At his death, his Will left nothing to Marshall. She filed a cause 11

13 of action against his son claiming that the son had interfered with her receiving an inter vivos gift before he passed away. She then filed bankruptcy. In her bankruptcy, the son filed a claim for defamation and argued that it was nondischargeable. She filed a counterclaim for his interference in her receiving the inter vivos gift. It was this counterclaim that the Supreme Court determined the bankruptcy court should not have jurisdiction over. Meyer v. Scholz (In re Scholz), 2011 WL (B.A.P. 9 th Cir. Mar. 22, 2011). Railroad Retirement Act benefits are included in current monthly income by 101(10A)(A) but excluded from projected disposable income by the antianticipation clause in 45 U.S.C. 231m(a). Sikes v. Crager, 2011 WL (W. D. La. Sept. 30, 2011). A Chapter 13 plan that proposes to pay only attorney s fee and makes little or no meaningful distribution to creditors is a plan not proposed in good faith. Smith, Trustee v. H.D. Smith Wholesale Drug Co. (In the Matter of Michael R. McCombs), 2011 WL (5 th Cir. Oct. 4, 2011). The 5 th Circuit Court of Appeals reversed the bankruptcy court and found that a defendant did not have a lien against proceeds from the sale of the debtor s home when that same defendant did not, under state law, have an enforceable judicial lien against the debtor s homestead. G. Recent Denials of Certiorari AmeriCredit Financial Services, Inc. v. Penrod (In re Penrod), 611 F.3d 1158 (9 th Cir. 2010). The Supreme Court denied the petition for certiorari, which left the holding of In re Penrod that negative equity in a car loan is the financing of preexisting debt that is not purchase money for purposes of the hanging paragraph in 1325(a)(5). This denial of certiorari leaves a division among the Circuits regarding whether financing negative equity destroys the purchase money 12

14 transaction or if it is so closely related to the new financing that it remains purchase money for purposes of the hanging paragraph. Baud v. Carroll, 634 F.3d 327 (6 th Cir. 2011). The Supreme Court denied the petition for certiorari, which left standing the decision that the applicable commitment period for an abovemedian income debtor is five years even if the debtor has negative or zero disposable income as calculated under 1325(b)(2) and Form B22C. There is no exception to the temporal requirement for a debtor with negative or zero disposable income. This denial of certiorari leaves a division among the circuits as to whether an above-median income debtor with negative or zero disposable income per the means test must remain in a case for five years if the proposed plan pays less than 100% of the general, unsecured claims filed in the case. 13