The Fourth Circuit Court of Appeals has dealt a blow to debtors on the issue of whether the absolute priority rule applies in individual chapter 11 cases. In re Maharaj, No. 11-1747 (4th Cir. June 14, 2012). The decision turned on the court’s finding that the reference in section 1129(b)(2)(B)(ii) to “property included in the estate under section 1115,” and the words “in addition to” as found in section 1115 were amenable to differing interpretations. Having found the meaning ambiguous, the court went on to base its decision on its view of congressional intent. [Read more…] about Fourth Circuit Finds Absolute Priority Rule Applicable to Individual Debtors
Post-Petition Tax Liability Not Incurred by Chapter 12 Estate
The Supreme Court found that debtors could not have their income tax liability resulting from the post-petition sale of their farm treated as a non-priority, dischargeable debt in their chapter 12 bankruptcy case. Hall v. United States, No. 10-875, 182 L. Ed. 2d 840, ___ U.S. ___ (May 14, 2012). The debtor relied on section 1222(a)(2)(A) which permits certain tax liabilities, which would otherwise be priority debts under section 1222(a)(2), to be treated as non-priority, unsecured debts, if they are “incurred by the estate,” under section 503(b). Justice Sotomayor, joined by Justices Roberts, Thomas, Alito, and Scalia, found that post-petition income tax liability adheres to the debtors rather than the estate and the debtors, therefore, could not avail themselves of the benefit of section 1222(a)(2)(A).
While this case forecloses a potential avenue of relief for the chapter 12 debtor, it is likely to have little effect in the realm of chapter 13 bankruptcy. In chapter 13 taxes incurred post-petition are not incurred by the estate. 11 TX2 Collier on Bankruptcy ¶ TX2.03[2][a][ii] (16th ed.). However, under section 1305, the taxing authority in chapter 13 may file of proof of claim for post-petition tax liability if it so chooses. [Read more…] about Post-Petition Tax Liability Not Incurred by Chapter 12 Estate
RESPA Prohibition Against Fee-Splitting not Applicable to Undivided Unearned Fee
The Supreme Court declined to interpret RESPA’s prohibition against fee-splitting as applying to the situation in which fees were charged for services that were not provided but where the fees were not divided between two or more parties. Freeman v. Quicken Loans, No.10-1042, __U.S.___ (May 24, 2012). [Read more…] about RESPA Prohibition Against Fee-Splitting not Applicable to Undivided Unearned Fee
Circuit Court Permits Strip-off in Chapter 7
The Eleventh Circuit has come through for consumer debtors on the issue of stripping off wholly unsecured liens in chapter 7. In In re McNeal, No. 11-11352, (11th Cir., May 11, 2012), the court found that once a lien is determined to be wholly unsecured under section 506(a) it may be stripped off under section 506(d), which provides “[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.” [Read more…] about Circuit Court Permits Strip-off in Chapter 7
Seventh Circuit to Address Inherited IRAs
On May 4, NACBA filed an amicus brief in the consolidated cases of Rameker v. Clark, No. 12-1241 and, Adili v. Clark, No. 12-1255 (7th Cir.) on the issue of whether a debtor may exempt an inherited IRA under section 522(b)(3)(C). NACBA has been actively involved in the successful presentation of this issue in courts around the country, arguing that the plain language of the Bankruptcy Code and the Internal Revenue Code militates in favor of recognizing the exemption. The Bankruptcy Code exempts from the debtor’s estate “retirement funds to the extent that those fund are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.” Section 408(e) of the IRC provides that any IRA, including one that is inherited from a non-spouses, is exempt from taxation.
Recently, debtors obtained favorable outcomes on this issue in the Fifth Circuit, In re Chilton, No. 11-40377 (5th Cir., March 12, 2012) (exemption under section 522(d)(12)), and the Bankruptcy Appellate Panel for the Ninth Circuit, In re Hamlin, No. 11-1083 (B.A.P. 9th Cir. February 21, 2012). NACBA has also filed an amicus brief on this issue in the Bankruptcy Court District of Massachussetts. In re Seeling, No. 11-30957 (Bankr. D. Mass.)
Trustee Has Power to Require Turnover of Property Securing Tax Lien
The District Court for the Northern District of West Virginia found that the trustee had the power under section 724(b) to require turnover of debtor’s 2002 Lincoln LS for the purpose of selling it to pay a substantial portion of the tax debt even though the tax lienholder had not sought relief from stay for that purpose. Sheehan v. Posin, No. 11-160 (N.D. W.Va., April 23, 2012). In reversing the decision of the bankruptcy court, the district court relied on the plain language of section 724(b) concluding that the trustee’s power to require turnover under section 542 for sale of property securing a tax lien was not contingent upon the lienholder taking the affirmative step of seeking relief from stay.
Stern v. Marshall Construed
Interpreting the Supreme Court decision in Stern v. Marshall, 131 U.S. 2594 (2011), the Bankruptcy Court for the Eastern District of Kentucky found that it had subject matter jurisdiction over debtor’s state common law counterclaims but did not have jurisdiction over the counterclaims based on Kentucky’s usury and consumer protection statutes. In re Tolliver, No. 09-2076 (Bankr. E.D. Ky. February 2, 2012). The issue arose in an adversary proceeding in which debtor objected to a proof of claim filed by Ocwen Federal Bank, as servicer to Bank of America. Debtor filed counterclaims advancing state statutory and common law claims based on Ocwen’s alleged charging of unauthorized and duplicative fees and costs and improperly inflating debtor’s balance causing her to default. [Read more…] about Stern v. Marshall Construed
Maryland Consumer Protection Laws Reign in Bank’s Unlawful Debt Collection Activities.
In an effort to have its cake and eat it too, J.P. Morgan Chase Bank (Chase) sought to take advantage of state laws permitting the recovery of deficiency debts upon repossession and sale of a vehicle, while at the same time seeking to avoid other state laws that impose conditions upon lenders for the recovery of those debts. The Fourth Circuit said no. Epps v. J.P. Morgan Chase Bank, No. 10-2444 (4th Cir., April 5, 2012). [Read more…] about Maryland Consumer Protection Laws Reign in Bank’s Unlawful Debt Collection Activities.
Riverside Bankruptcy Court’s Sua Sponte Dismissal Reversed
The District Court for the Central District of California reversed the bankruptcy court’s dismissal of the debtors’ chapter 13 case after debtors filed a notification of conversion to chapter 7. Taylor v. Danielson (In re Taylor), No. 11-1879 (C.D. Cal April 13, 2012). The court distinguished Marrama v. Citizens Bank of Mass., 549 U.S. 365 (2007) where the Supreme Court found that a debtor does not have an absolute right to convert a case from chapter 7 to chapter 13 under section 706(a). In Marrama, the Court reasoned, in part, that conversion from chapter 7 to chapter 13 could result in a debtor either escaping the consequences of bad faith by voluntarily dismissing under chapter 13, or benefiting from the conversion despite bad faith by gaining access to estate assets to the detriment of creditors.
Conversions from chapter 13 to chapter 7 are distinguished by the fact that upon such conversion the trustee has control over estate assets and the court retains jurisdiction over the debtor, so the concerns that were dispositive in Marrama are not present. Additionally, the Bankruptcy Rules treat conversions from chapter 7 to chapter 13 differently than conversion from chapter 13 to chapter 7. Rule 1017(f)(2) contemplates judicial scrutiny over conversions from chapter 7 to chapter 13, while, in contrast, Rule 1017(f)(3) provides that a “chapter 13 case shall be converted without court order when the debtor files a notice of conversion under . . . [§] 1307(a).”
NCBRC’s Tara Twomey assisted in the writing of debtors’ brief.
Section 1325(b) Requirements Not Applicable to Plan Modification
The Ninth Circuit BAP found that the requirement of section 1325(b) that all of the debtor’s projected disposable be paid into the plan during the applicable commitment period, is not incorporated into section 1329 for plan modification. In re Mattson, No. 11-1478 (B.A.P. 9th Cir. April 5, 2012). [Read more…] about Section 1325(b) Requirements Not Applicable to Plan Modification