The Ninth Circuit Court of Appeals has agreed to hear an appeal whether the bankruptcy court erred in ruling that a Chapter 13 debtor, in calculating projected disposable income, is not permitted to deduct the amount of voluntary retirement plan contributions even where the debtor was making the contributions prepetition. The debtor’s appeal from adverse decisions below.
State Law Does Not Create Exemption in Trust
A state statute protecting a trust from judgment creditors is not an exemption statute for bankruptcy purposes where it was not designated as such and it did not provide unequivocal protection against all forms of collection. In re Morris, No. 21-30468 (Bankr. N.D. Ill. Jan. 13, 2023).
In his chapter 7 bankruptcy schedules, the debtor listed an interest as a potential beneficiary in a trust that did not have a spendthrift provision. The debtor claimed an exemption for the interest under Illinois law, 735 ILCS 5/2-1403 (1999), which provides:
Judgment debtor as beneficiary of trust. No court, except as otherwise provided in this Section, shall order the satisfaction of a judgment out of any property held in trust for the judgment debtor if such trust has, in good faith, been created by, or the fund so held in trust has proceeded from, a person other than the judgment debtor. . . .
The trustee objected, arguing that the statute did not create a bankruptcy exemption.
Illinois is an opt-out state, so the court looked to state law to determine whether the trust interest would be exempt even though, unlike other specified exemptions like retirement plans and worker’s compensation awards, the statute at issue here did not create an explicit exemption. The court found that exemptions under the state laws are not limited to those so designated. Rather, “exempt property is any property that the legislature has identified and declared to be free from liability to processes such as seizure and sale, or attachment to satisfy debts.” The essential characteristic of an exemption “is simply whether the provision unequivocally protects the identified property against all forms of collection.”
In this case, the statute the debtor relied on was limited to protecting a debtor’s interest in a trust from judgment creditors. But the court found the chapter 7 trustee was merely gathering estate assets under section 541. He was not a judgment creditor nor was he attempting to collect on a judgment. The court quoted from In re Gutterridge, 2013 WL 395140 (Bankr. C.D. Ill., Jan. 31, 2013), discussing the same state statute, that “once a bankruptcy petition is filed, the Illinois statute in this case cannot apply to create an exemption to a trust that is otherwise simply an asset of the bankruptcy estate.”
The court noted that the grantors could have placed the trust out of reach under section 541(c)(2) by including a spendthrift provision. But the trust in this case did not do so.
The court rejected the debtor’s argument that because certain forms of collection such as levy, garnishment and attachment, all involve a judgment the state statute essentially applies to all collection actions. The court found no support for the argument in the language of the statute. Had the legislature intended to create an exemption, it could have done so.
The court concluded that the narrow language of the Illinois statute was not an “unequivocal” protection of the trust for bankruptcy exemption purposes. It sustained the trustee’s objection.
The Seventh Circuit Considers Whether a Chapter 13 Trustee May Take A Fee If the Case is Dismissed Pre-Confirmation
The Seventh Circuit, in the case of In re Johnson, Case No. 23-2212 (7th Cir. 2023), accepted a direct appeal from the Bankruptcy Court for the Northern District of Illinois. The bankruptcy court held that a chapter 13 trustee may not deduct her fee if a chapter 13 case is dismissed without having a plan confirmed. The court adopted the reasoning in Goodman v. Doll (In re Doll), 57 F.4th 1129 (10th Cir. 2023).
At present, two courts have affirmed that a trustee may not deduct a fee if the chapter 13 case is dismissed prior to confirmation. In addition to the Doll opinion, the Ninth Circuit agreed in Evans v. McCallister (In re Evans), 69 F.4th 1101 (9th Cir. 2023). The Doll decision is currently being considered for certiorari by the Supreme Court. Another case is pending on this issue in In re Soussis, Case No. 22-155 (2nd Cir. 2023).
NCBRC and NACBA filed an amicus brief in support of the Debtor/Appellee. NCBRC NACBA Filed Amicus Brief – In re Johnson
The Ninth Circuit Considers Whether Appellate Rights are Property of the Estate
In In re Lopez, Case No. 23-55682 (9th Cir. 2023), the Ninth Circuit is considering whether the bankruptcy court erred in (1) ruling that the Chapter 7 debtor’s right to appeal a prepetition personal injury judgment against her was property of the estate, (2) denying the debtor’s motion for the Chapter 7 trustee’s abandonment of the appeal rights, and (3) denying the debtor’s motion for reconsideration.
NCBRC filed an amicus brief requesting that the court narrowly confine its ruling to the specific facts of the case. The concern is that a broad ruling will have a significant impact in other factual situations.
The fact that something has monetary value is not sufficient, by itself, to make it property of the estate. Just as no one would argue that a debtor’s kidneys should be property of the estate because they could have monetary value, it is not difficult to find many examples of situations in which classifying a right to appeal as property, simply because a trustee could sell it, would be extremely problematic. A debtor could be involved in a hotly-contested custody case, where a very questionable decision was appealed. The opposing party, perhaps far wealthier than the debtor, could offer to buy from the trustee the debtor’s right to appeal for more than the debtor could afford, thus ending the appeal. Similarly, a debtor could be involved in a contested divorce, in which a clearly erroneous support order for $100,000, which would not be dischargeable in bankruptcy, 11 U.S.C. § 523(a)(5), was entered against the debtor. In that situation, too, the opposing party could offer the trustee $10,000 for the right to appeal, cutting off any review of the support order and leaving the debtor with a $100,000 debt after bankruptcy.
And such situations are not limited to family law matters. A debtor could be appealing an erroneous criminal conviction. The alleged crime victim, or even a prosecutor trying to save the costs of appeal, could purchase the debtor’s right to appeal from a bankruptcy trustee, perhaps causing the debtor to be imprisoned for years. Or the debtor might be appealing an erroneous judgment or other decision that would lead to loss of a professional license, which would severely impair the debtor’s fresh start.
The loss of a debtor’s right to appeal could also lead to large debts becoming nondischargeable in bankruptcy when, in fact, they should be discharged. For example, a debtor could erroneously be found liable for a large amount in a fraud judgment that, if not reversed, would result in a nondischargeability determination under 11 U.S.C. § 523(a)(2). See Grogan v. Garner, 498 U.S. 279, 111 S. Ct. 654 (1991) (collateral estoppel applies in dischargeability determination). If the plaintiff could pay the bankruptcy trustee for the debtor’s right to appeal, and then dismiss the appeal, the debt would not be discharged.
In all these situations, and undoubtedly many others, the fact that a right may have monetary value to the bankruptcy estate, and could be sold by the trustee, should not, by itself, make that right property.
The amicus brief for NCBRC and NACBA is here: Lopez amicus brief v4
The Fourth Circuit Rules That Parties in an Adversary Proceeding Cannot Manufacture a Final Judgment
In Kiviti v. Bhatt, No. 22-1216, 2023 U.S. App. LEXIS 24415 (4th Cir. Sep. 14, 2023), the court ruled that the parties in an adversary proceeding cannot manufacture a final judgment to appeal an otherwise interlocutory order. Further, the mootness doctrine employed by Article III courts to determine whether a case or controversy exists does not apply to bankruptcy courts as non-Article III courts.
Before filing the bankruptcy, the Chapter 7 Debtor (Bhatt) was contracted to renovate the creditor’s (Kiviti) home. Upon finding the Debtor was unlicensed, the creditor filed suit in state court to recover all funds paid ($58,770). Before judgment, the Debtor filed a Chapter 7 bankruptcy.
The creditors then filed an adversary proceeding with two counts. The first count asked the court to enter a judgment against the Debtor for the amount paid. The second count asked the court to find the debt non-dischargeable under 11 U.S.C. § 523(a)(2)(A). The creditors also filed a proof of claim despite the small bankruptcy estate.
The bankruptcy court granted the Debtor’s motion for summary judgment on the non-dischargeability count leaving only the first count asking for a money judgment. The creditors wished to appeal but needed a final judgment. Therefore, the parties agreed to dismiss the first count without prejudice.
On appeal, the court reviewed whether the case was final to review the bankruptcy court’s decision to dismiss the non-dischargeability count. The creditors argued that the adversary proceeding was moot because if they were unsuccessful in challenging the dismissal of the non-dischargeability count, their debt would be discharged and uncollectable. The court held that the parties can’t manufacture finality. Furthermore, the court held that mootness is a limitation on Article III courts (stemming from the case or controversy requirement) but not bankruptcy courts as non-Article III courts. Instead, bankruptcy courts can rule on moot proceedings
“The parties cannot manufacture finality
“The parties will be unsurprised by our holding that the bankruptcy court’s order was not final—and so not appealable—when entered. After all, that is why they agreed to dismiss Count I. They thought that, by doing so, they would make the order final because there would no longer be anything left to adjudicate in the adversary proceeding. J.A. 63 (agreeing to dismiss Count I “so as to give rise to a final order from which an appeal . . . may be taken”); J.A. 73 (“The instant appeal is from an interlocutory order that became a final order upon dispensation of the remaining cause of action below.”).
“They were wrong. They cannot “use voluntary dismissals as a subterfuge to manufacture jurisdiction for reviewing otherwise non-appealable, interlocutory orders.” See Waugh Chapel S., 728 F.3d at 359. When Congress requires finality, we must ensure that “every matter in the controversy . . . [is] decided in a single appeal.” Microsoft Corp. v. Baker, 582 U.S. 23, 36, 137 S. Ct. 1702, 198 L. Ed. 2d 132 (2017) (quoting McLish v. Roff, 141 U.S. 661, 665-66, 12 S. Ct. 118, 35 L. Ed. 893 (1891)). Yet, if we allowed the parties to appeal Count II now, there would be nothing to stop them from reinstating—and then separately appealing—Count I down the line. See J.A. 63 (agreeing that the dismissal is “without prejudice to the [Kivitis’] right to amend their pleadings to seek a finding of liability should there be an appellate remand”). Such tactics impermissibly “erode the finality principle” Congress enacted. See Microsoft, 582 U.S. at 37; see also In re AroChem Corp., 176 F.3d at 619 (explaining that the “flexible” nature of bankruptcy finality does not “overcome the general aversion to piecemeal appeals” (cleaned up)). So the voluntary dismissal did not make the bankruptcy court’s earlier, partial dismissal final.
“True, some partial dismissals are final and appealable after the parties voluntarily dismiss the remaining claims. See Affinity Living Grp., LLC v. StarStone Specialty Ins. Co., 959 F.3d 634, 638-39 (4th Cir. 2020). But that’s only when the district court dismisses some claims and, in the process, makes it legally impossible to prevail on the remaining claims, even while allowing them to limp on. Id. In this sense, the litigants do not impermissibly create finality by voluntarily dismissing the doomed claims; they merely recognize that it already effectively exists. See id. at 639 (hearing an appeal from a case that was “legally over” even before the voluntary dismissal).
“That is not what happened here. These parties set out to create finality, not recognize it. The adversary proceeding was not “legally over” after the bankruptcy court’s partial dismissal. See id. Count II’s dismissal did not mean the Kivitis could not prevail on Count I. Count I asked whether Bhatt was in debt to the Kivitis—i.e., whether Bhatt violated D.C. law by renovating the Kivitis’ house without a license and thus owed them money. Count II asked whether any such debt was dischargeable—i.e., whether Bhatt obtained such a debt through “false pretenses, a false representation, or actual fraud.” See 11 U.S.C. § 523(a)(2)(A). Just because the bankruptcy court found that Bhatt had obtained $=P13 no debt through fraud did not mean the Kivitis were wrong that he violated D.C. law. Count I was still very much alive.
“The parties agree that the Kivitis could have prevailed on Count I’s merits even after Count II’s dismissal. They maintained their proof of claim which sought the same monies. Yet the Kivitis still argue that their voluntary dismissal recognized rather than created finality because, they say, their Count II loss rendered the adversarial proceeding moot. According to them, a moot proceeding is “legally over” and so this appeal falls within Affinity Living Group‘s safe harbor.
“The root of their mootness argument is that, without Count II, any judgment they won via Count I could not be collected outside bankruptcy and their $58,770 would be recovered—if at all—only through the bankruptcy’s proof-of-claims process. So once Count II failed, they argued, Count I became legally moot. A case is moot when “a court can’t grant any effectual relief whatever” to the complaining party.5 Mission Prod. Holdings, Inc. v. Tempnology, LLC., 139 S. Ct. 1652, 1660, 203 L. Ed. 2d 876 (2019) (quoting Chafin v. Chafin, 568 U.S. 165, 172, 133 S. Ct. 1017, 185 L. Ed. 2d 1 (2013)). Recall that if a debt is discharged, it cannot be collected outside the bankruptcy proceedings. So if the bankruptcy court agreed Bhatt owed the Kivitis money (success on Count I), but determined that debt dischargeable (failure on Count II), the Kivitis could not directly use the judgment they won from Count I to force Bhatt to pay them outside of bankruptcy. Their only means of recovery would be within bankruptcy, via their already filed proof of claim. The Kivitis thus contend that they could not get “any effectual relief” from the adversary proceeding, rendering it moot. Appellant’s Supp. Br. at 10 (“[T]he Bankruptcy Court’s dismissal of Messrs. Kiviti’s claim . . . caused the remaining case to become moot, and to accordingly strip the Bankruptcy Court of Article III jurisdiction.”).
“The Kivitis’ argument is clever, but it misses at least one critical link: Mootness is an Article III doctrine, and bankruptcy courts are not Article III courts. Mootness arises out of Article III’s “case-or-controversy” requirement. The United States’s judicial Power extends only to cases or controversies. U.S. Const. art. III, § 2. To be a case or controversy, parties must have a “‘personal stake in the outcome’ of the lawsuit,” at each stage of the litigation. Lewis v. Cont’l Bank Corp., 494 U.S. 472, 478, 110 S. Ct. 1249, 108 L. Ed. 2d 400 (1990) (quoting Los Angeles v. Lyons, 461 U.S. 95, 101, 103 S. Ct. 1660, 75 L. Ed. 2d 675 (1983)); Campbell-Ewald Co. v. Gomez, 577 U.S. 153, 161, 136 S. Ct. 663, 193 L. Ed. 2d 571 (2016). If they lose that stake, their case drifts beyond the judicial Power and becomes moot. See United States v. Payne, 54 F.4th 748, 751 (4th Cir. 2022). But since bankruptcy courts are not Article III courts, [*17] they do not wield the United States’s judicial Power. Stern v. Marshall, 564 U.S. 462, 503, 131 S. Ct. 2594, 180 L. Ed. 2d 475 (2011). So they can constitutionally adjudicate cases that would be moot if heard in an Article III court.
“To be sure, a bankruptcy case must—at the start—be within the judicial Power. Section 1334 grants near-exclusive jurisdiction over bankruptcy matters to federal district courts. 28 U.S.C. § 1334(a). The district court may then refer a bankruptcy case to a bankruptcy judge (who serves as a unit of the district court). 28 U.S.C. §§ 157(a), 151.9 But, of course, a district court can only refer a case that it has jurisdiction over. See Ex parte McCardle, 74 U.S. 506, 514, 19 L. Ed. 264 (1868) (“Without jurisdiction the court cannot proceed at all in any cause.”). So before a bankruptcy case is referred to a bankruptcy court, the case must satisfy Article III. See In re Curtis, 571 B.R. 441, 447 (B.A.P. 9th Cir. 2017) (“[T]he bankruptcy court’s power to hear, or to hear and determine, as the case may be, bankruptcy cases and proceedings is entirely dependent upon the referral by the district court.”)
.“So too must Article III be satisfied after the bankruptcy court acts and the case is returned to the district court from the bankruptcy court. Every action by a district court is constrained by Article III, including reviewing a bankruptcy court order. So a district court has no authority to act without an existing constitutional case or controversy. See In re Thorpe Insulation Co., 677 F.3d 869, 880 (9th Cir. 2012); In re Croniser, No. 22-1227, 2022 U.S. App. LEXIS 28563, 2022 WL 7935991, at *1 (4th Cir. Oct. 14, 2022) (unpublished).
“But that limit on the district court’s authority does not constrain the bankruptcy court. Once a case is validly referred to the bankruptcy court, the Constitution does not require it be an Article III case or controversy for the bankruptcy court to act. See In re Technicool Sys., Inc., 896 F.3d 382, 385 (5th Cir. 2018) (“Bankruptcy courts are not Article III creatures bound by traditional standing requirements.”). That requirement comes from the Constitution’s limits on the judicial Power. Bankruptcy courts do not wield judicial Power. End of story
.“At least that is the end of the constitutional story. The statutory story—i.e., whether bankruptcy courts have statutory authority to decide a constitutionally moot matter—is more complex. Still, the tale concludes the same way: a bankruptcy court can adjudicate a constitutionally moot matter.
“Bankruptcy courts, as statutory creatures, have whatever power Congress lawfully gives them. So to see if bankruptcy courts can decide matters outside the judicial Power, we check to see if Congress has given them that power. And Congress has said that bankruptcy courts “may hear and determine all [bankruptcy] cases . . . and all core proceedings . . . referred” to them by a district court. 28 U.S.C. § 157(b)(1) (emphasis added). Not just those that could be fully adjudicated in district court. Once a bankruptcy case lands in bankruptcy court, any number of things could happen before the estate’s distribution is settled. As relevant here, the parties could embroil themselves in an adversary proceeding. But whether that proceeding could itself be adjudicated in an Article III court is of no moment. By § 157’s text, a bankruptcy court’s jurisdiction requires only that the case or core proceeding arise under Title 11 and be referred to the bankruptcy court. § 157(b)(1). Section 157 does not require every “discrete dispute[ ],” see Ritzen, 140 S. Ct. at 587, arising post-referral to satisfy Article III. Nor does any other provision.
“Against this silence, Congress has elsewhere explicitly imported some Article III type requirements onto bankruptcy courts. For example, it created so-called “bankruptcy standing” by giving “parties in interest” a right to be heard, at least in Chapter 11 bankruptcies. See 11 U.S.C. § 1109(b); In re Capital Contracting Co., 924 F.3d 890, 895 (6th Cir. 2019) (discussing § 1109(b)).11 And it also codified some version of mootness for real-property cases. See 11 U.S.C. § 363(m); In re Rare Earth Mins., 445 F.3d 359, 363 (4th Cir. 2006) (explaining that § 363(m) “creates a rule of ‘statutory mootness’”). Yet these principles are not the same as Article III’s limits and Congress has never imported all [*20] those limitations. We refuse to make that choice for it; indeed we cannot do so. See Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 96 (2012) (“[W]hat a text does not provide is unprovided.”).
“A few bankruptcy courts confronting this issue have disagreed. They point to a district court’s authority to “withdraw, in whole or in part, any case or proceeding” referred to a bankruptcy court. See 28 U.S.C. § 157(d). They also think it significant that Congress called bankruptcy courts “unit[s] of the district court,” with judges that are “judicial officer[s]” thereof. See § 151. Following these breadcrumbs, those courts have held that a bankruptcy court’s power depends on a district court’s power—and thus evaporates if the case strays outside of Article III’s bounds. See, e.g., In re Kilen, 129 B.R. 538, 542-43 (Bankr. N.D. Ill. 1991) (“In light of the derivative nature of the bankruptcy court’s power, it is obvious that the constitutional standards of Article III which bind the district court also bind the bankruptcy court.”); In re Interpictures, Inc., 86 B.R. 24, 28-29 (Bankr. E.D.N.Y. 1988); but cf. Stern, 564 U.S. at 500-01.12
“We are unconvinced. Congress requires bankruptcy courts to get cases from district courts and allows district courts to withdraw cases. And the Constitution limits the cases a district court can refer or withdraw. But these two facts do not add up to a limit on the types of matters a bankruptcy court can adjudicate after referral, nor a requirement that those matters be eligible for withdrawal. That could be how it works—if Congress said so. Yet Congress has not said so. So that is not how it works
.“In the same vein, we refuse to overread Congress’s designation of bankruptcy courts as “unit[s]” of the district court. See 28 U.S.C. § 151. Certainly, district courts oversee many aspects of bankruptcy courts. For example, when bankruptcy judges consider matters within the judicial Power, district courts can—indeed sometimes must—review those actions. § 157(a), (b)(1), (c)(1). But bankruptcy courts are not “mere adjuncts” of district courts. Stern, 564 U.S. at 487. They exercise “broad powers” under their own statutory grant of jurisdiction. See id. at 488. Congress did not impliedly limit that express grant through cryptic labelling in a separate provision
.“The argument to the contrary depends on finding something inherent about the words “cases” and “proceedings” in the bankruptcy jurisdictional provisions that brings them necessarily within the judicial Power. It assumes that when Congress gave federal courts (Article III and non-Article III alike) jurisdiction over bankruptcy “cases” and “proceedings,” it imbued those words with Article III’s limits. So that, even absent Article III, the statutes themselves would require the same level of adversariness.
“But we do not ordinarily interpret a jurisdictional statute’s constraints to be the same as the Constitution’s. In fact, we often go out of our way to create differences and draw distinctions even where—unlike here—the statute uses Article III’s precise language. See Navy Fed. Credit Union v. LTD Fin. Servs., LP, 972 F.3d 344, 352 (4th Cir. 2020) (“Unlike the constitutionally permitted ‘minimal diversity’ jurisdiction, diversity must be ‘complete’ to satisfy this Congressional grant.” (citing Strawbridge v. Curtiss, 7 U.S. 267, 267, 2 L. Ed. 435 (1806)).
“If we did, our caselaw would look very different. The constitutional-jurisdiction inquiry would often collapse into the statutory one. Yet it doesn’t. For example, litigants can have statutory jurisdiction to sue States even if the Constitution forbids it. See, e.g., Hans v. Louisiana, 134 U.S. 1, 10, 10 S. Ct. 504, 33 L. Ed. 842 (1890). More to the point, we dismiss moot cases because they are no longer Article III cases, not because they fall outside the scope of a statute. See, e.g., Eden, LLC v. Justice, 36 F.4th 166, 169-72 (4th Cir. 2022). So we refuse to read in Article III’s limits.
“To recap, bankruptcy courts are not Article III courts. So Article III constraints— such as mootness—do not apply to them as a matter of constitutional aw. They only apply if Congress said so in a statute. But it hasn’t. And that means whether Count I was constitutionally moot is beside the point. The bankruptcy court could still adjudicate it.
“Since the Kivitis cannot argue that their adversary proceeding was constitutionally moot when Count II was dismissed, they have not shown the proceeding was legally doomed when they dismissed Count I. They are thus left arguing the order was final because Count I was practically over post-dismissal. See, e.g., Appellant’s Supp. Br. at 4 (claiming there was “no judicial economy” to pursuing Count I before appealing Count II). Yet the Supreme Court rejected this exact reasoning in Microsoft. The Microsoft plaintiffs also thought it “economically irrational” to litigate their still-legally-viable claims to final judgment. Microsoft Corp., 582 U.S. at 34. Still, the Court refused to let them create finality by voluntarily dismissing those claims. Id. at 36; see also Affinity Living Grp., 959 F.3d at 639 (distinguishing between claims that are “legally” and merely “practically” over). Here too, it is irrelevant that the parties think there is “no judicial economy” in litigating Count I to final judgment before they appeal the order dismissing only Count II. Count I is legally viable, and its dismissal was without prejudice, so that dismissal did not create a final order under § 158(a). And that means the district court lacked jurisdiction to review it.”
The 8th Circuit Considers Whether Post-Petition Equity Increases During a Chapter 13 Are Part of The Bankruptcy Estate in a Converted Chapter 7
UPDATE: This 8th Circuit has since issued a decision on this case. Click here to view our article discussing their ruling.
The 8th Circuit Court of Appeals is considering the issue whether the increased value of the debtor’s residence during a chapter 13 bankruptcy is part of the chapter 7 estate upon conversion. This is an appeal from the 8th Circuit Bankruptcy Appellate Panel affirming the bankruptcy court’s ruling that an increase in equity in real estate during a chapter 13 is part of the bankruptcy estate in a converted chapter 7 case. Goetz v. Weber (In re Goetz), 651 B.R. 292 (B.A.P. 8th Cir. 2023).
The Debtor originally filed a chapter 13 bankruptcy. At filing the debtor there was no excess equity in her residence over her exemption and the mortgage. At confirmation property of the estate vested in the Debtor. Two years later Debtor converted her case to a chapter 7 bankruptcy. The value of her property appreciated during her chapter 13 so that approximately $62,000 could be liquidated by the trustee. The Debtor filed a motion to abandon property. The bankruptcy court denied the motion finding the increased equity part of the chapter 7 estate.
“Section 541 of the Bankruptcy Code defines property of the bankruptcy estate to include all of a debtor’s interests both equitable and legal, except those specifically excluded. 11 U.S.C. § 541. Estate property includes “[p]roceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case,” and “[a]ny interest in property that the estate acquires after the commencement of the case.” 11 U.S.C. § 541(a)(6) and (7).
“Upon conversion from one chapter to another, this definition is [*5] adjusted. Section 348 qualifies the scope of bankruptcy estate property by clarifying that “property of the estate in the converted case shall consist of property of the estate, as of the date of filing of the petition, that remains in the possession of or is under the control of the debtor on the date of conversion[.]” 11 U.S.C. § 348(f)(1)(A). If a debtor converts a case under Chapter 13 to a case under another chapter, the property the debtor acquired between the petition date and the conversion date is not property of the converted case, unless the debtor sought to convert the case in bad faith. 11 U.S.C. § 348(f)(2). …
“As the bankruptcy court observed, courts are split on the question of whether postpetition preconversion market appreciation or an increase in equity resulting from payments toward a lien inures to a debtor’s benefit upon conversion to a Chapter 7 case. …
“Goetz and the Amici Curiae insist that section 348(f) is ambiguous. They urge the Court to consider legislative history, which they maintain supports their argument that postpetition preconversion equity increases should benefit debtors. We detect no ambiguity in sections 348(f) and 541. Even if we were to conclude that section 348(f)(1)(A) is ambiguous, the legislative history of this statute does not mandate a different outcome.7 HN5 Section 348(f)(1)(A), as enacted, accomplished the purpose of the legislation as articulated in the legislative history: it eliminated a “serious disincentive to [C]hapter 13 filings” by adopting the reasoning of In re Bobroff and specifying that property a debtor acquires postpetition is not property of the converted bankruptcy estate. H.R. Rep. No. 103-835, at 57 (1994), as reprinted in [*9] 1994 U.S.C.C.A.N. 3340, 3366; see 11 U.S.C. § 348(f)(1)(A); Bobroff v. Continental Bank (In re Bobroff), 766 F.2d 797 (3d Cir. 1985). Section 348(f) does not specify that debtors are entitled to retain equity resulting from payments during the Chapter 13 case—the scenario referenced in the House Report. Likewise, the statute does not address whether debtors are entitled to retain postpetition preconversion equity resulting from market appreciation, asset improvements or repairs. To accept Goetz’s argument, one must read this clarification into the statute.
“The plain meaning of a statute is conclusive, except in the “‘rare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters.’” (Citations omitted.) …
“Congress’s failure to address the example included in the legislative history does not mean this omission was inadvertent. Recognizing that statutes are often the result of compromise, we decline to accept Goetz’s invitation to assume that Congress intended that debtors may retain postpetition preconversion market appreciation and equity resulting from debt payments without language articulating this intent.
“We also reject Goetz’s claim that interpreting section 348(f) to allow the bankruptcy estate to benefit from postpetition preconversion estate property value increases treats Goetz as though she converted her case in bad faith. To the extent Goetz acquired new property after she petitioned for bankruptcy relief under Chapter 13, this property remains her property. In enacting section 348(f), Congress distinguished between property of the estate at the time of conversion that remains in the possession or control of the debtor from property acquired after petition. The former is property of the estate (Goetz’s residence), the latter is property of debtor unless she converted in bad faith. The bad faith provision neither hinders nor advances Goetz’s claim to the equity increase in her residence. It simply does not apply. Accordingly, the bankruptcy court correctly concluded that postpetition preconversion nonexempt equity accrues for the benefit of the converted Chapter 7 estate.”
No date has yet been set for oral argument.
The Ninth Circuit Reviews Whether an Exemption of “100% of FMV” Protects the Entire Value of the Property Including any Post-Petition Appreciation
UPDATE: The Ninth Circuit has since decided this case. Click here to read our article discussing their ruling.
The Ninth Circuit Court of Appeals is considering whether an exemption of “100% of FMV” protects all the equity in the property, over and above the allowable exemption, and any appreciation in value post-petition. The Ninth Circuit Bankruptcy Appellate Panel reversed the bankruptcy court and found that an exemption claim of “100% of FMV” included the entire value of the property, not the allowable exemption. Further, the court held that this exemption claim included any post-petition appreciation because there was no objection to the exemption. Masingale v. Munding, 644 B.R. 530 (B.A.P. 9th Cir. 2022). The BAP held:
“Monte L. Masingale and Rosana D. Masingale filed a chapter 11 bankruptcy petition and claimed a “100% of FMV [fair market value]” exemption in their homestead. No one objected. Years later, the bankruptcy court converted the case to chapter 7. Mrs. Masingale and the chapter 7 trustee disputed the amount of the homestead exemption to which Mrs. Masingale was entitled: the chapter 7 trustee argued that she was bound by the statutory limit under § 522(d)(1), but Mrs. Masingale contended that she was entitled to the entire fair market value of the property, because no one had objected to the claimed homestead exemption. The bankruptcy court agreed with the chapter 7 trustee and approved his request to sell the property, limiting the homestead exemption to $45,950.
“Mrs. Masingale appeals, arguing that the bankruptcy court erred in determining the amount of the homestead exemption. We agree with Mrs. Masingale. We REVERSE the portions of the order on appeal that determine the amount of the homestead exemption and REMAND. We publish to explain the effect of a “100% of FMV” exemption claim and to reiterate that parties must timely object to any improper exemption claim, no matter how frivolous. …
“As a matter of first impression, we hold that the Masingales’ claim of an exemption equal to “100% of FMV” includes postpetition appreciation and becomes incontestable if there is no timely objection. The snapshot rule is one of the limits on a debtor’s entitlement to exemptions. Taylor holds that, if no one objects, the debtor can get the benefit of exemptions to which the debtor is not entitled. In other words, in order to get the benefit of the snapshot rule, a trustee or party in interest must object to an exemption claim that contradicts that rule.”
The case is tentatively set for oral argument in early December 2023.
Appellant Trustee Munding Brief
The 9th Circuit Considers Whether a Chapter 13 Debtor Has A Statutory Right to Dismiss
UPDATE: The Ninth Circuit has since decided this case. Click here to read our article discussing their ruling.
The Ninth Circuit is considering whether a chapter 13 debtor’s statutory right to dismiss his bankruptcy is precluded by bad faith or ineligibility under section 109(e). Judgment creditor TICO Construction Company, Inc. (“TICO”) objecte to the debtor’s motion to dismiss, arguing that Mr. Powell did not have an absolute right to dismiss his case because he was abusing the bankruptcy process and was not eligible to be a chapter 13 debtor. TICO argued that the bankruptcy court should instead convert the case to one under chapter 7. The bankruptcy court disagreed with TICO’s analysis and dismissed the case. The Ninth Circuit Bankruptcy Appellate Panel affirmed in TICO Constr. Co. v. Van Meter (In re Powell), 644 B.R. 181 (B.A.P. 9th Cir. 2022).
TICO appealed the BAP to the Ninth Circuit Court of Appeals.
TICO Construction, a judgment creditor in the debtor’s chapter 13 case, opposed the debtor’s motion to voluntarily dismiss his bankruptcy under section 1307(b). TICO alleged both that the debtor’s unsecured debts exceeded the debt limit set forth in section 109(e), and that the debtor abused by the bankruptcy process by transferring non-exempt assets to his ex-wife in “sham” divorce proceedings. TICO requested that, instead of granting the debtor’s motion to dismiss, the court should convert the case to chapter 7 or 11.
The bankruptcy court found that with one statutory exception that was inapplicable, the debtor had an absolute right to dismiss his case and granted the debtor’s motion. TICO appealed to the Bankruptcy Appellate Panel for the Ninth Circuit.
The panel began with section 1307(b), which provides: “On request of the debtor at any time, if the case has not been converted under section 706, 1112, or 1208 of this title, the court shall dismiss a case under this chapter. Any waiver of the right to dismiss under this subsection is unenforceable.”
The question before the panel was whether the debtor’s right to dismiss his chapter 13 bankruptcy was circumscribed either by bad faith or by his ineligibility to be in chapter 13. In Jacobsen v. Moser (In re Jacobsen), 609 F.3d 647, 660 (5th Cir. 2010), the court held that a debtor’s bad faith precludes voluntary dismissal of his chapter 13 case. While the Ninth Circuit at one time agreed with that conclusion, it changed its view in Nichols v. Marana Stockyard & Livestock Market, Inc. (In re Nichols), 10 F.4th 956 (9th Cir. 2021), where it found the debtor’s right to dismiss was subject only to the exception included in the statute itself. The panel noted that Nichols was based on the decision in Law v. Siegel, 571 U.S. 415 (2014), where the Court held that the bankruptcy court could not override explicit mandates of the Code.
Because bad faith was not included in the statutory exceptions to the debtor’s right to dismiss, the panel found the bankruptcy court did not err in that finding.
TICO next argued that the debtor exceeded the debt limit for chapter 13 and therefore his case should have been treated as if it were chapter 7 with the court considering his motion to dismiss in terms of the best interests of creditors. The panel disagreed, finding that if it did as TICO requested it would create a new exception to the debtor’s right to dismiss under section 1307(b) and that would go directly against the holding in Law.
The panel noted that in FDIC v. Wenberg (In re Wenberg), 94 B.R. 631 (9th Cir. BAP 1988), aff’d, 902 F.2d 768 (9th Cir. 1990), it held that the debt limit in section 109(e) is not jurisdictional, and a bankruptcy court is not required to dismiss a chapter 13 case when the debtor is found ineligible under section 109(e), but may allow the debtor to convert to chapter 7. The court reasoned that if an ineligible chapter 13 debtor retains his right to convert, his right to dismiss also remains intact.
In response to TICO’s argument that the debtor should not be allowed to get away with his bad faith conduct, the panel pointed to other methods for addressing bad faith including denying the debtor’s right to refile, or to apply other sanctions under section 105(b).
No oral argument date has yet been set by the court.
The Supreme Court Rules Native American Tribes Do Not Have Sovereign Immunity From The Bankruptcy Code.
On June 15, 2023, the court ruled that Native American tribes are subject to the automatic stay and discharge injunction of the Bankruptcy Code.
“We conclude that the Bankruptcy Code unequivocally abrogates the sovereign immunity of any and every government that possesses the power to assert such immunity. Federally recognized tribes undeniably fit that description; therefore, the Code’s abrogation provision plainly applies to them as well.”
In an 8-1 decision (J. Gorsuch dissenting) in Lac DU Flambeau Band of Lake Superior Chippewa Indians v. Coughlin, No. 22-227, 2023 U.S. LEXIS 2544 (June 15, 2023), the court held that the term “governmental unit” found in 11 U.S.C. § 101(27) includes Native American tribes. As such, Native American tribes are included in the waiver of sovereign immunity under 11 U.S.C. § 106.
NACBA and NCBRC submitted an amici curiae brief in support of the Debtor along with Legal Aid Chicago and the Hon. Judith Fitzgerald, Hon. Joan Feeney, Hon. Phillip Shefferly, Hon. Eugene Wedoff, Hon. Steven Rhodes and the Hon. Carol Kenner. The brief was submitted by Daniel J. Bussel of KTBS Law LLP and G. Eric Brunstad, Jr. of Dechert LLP.
Factual and Procedural Background
The creditor, federally recognized Tribe Lac du Flambeau Band of Lake Superior Chippewa Indians (the Band) through its wholly owned business entity, Lendgreen, lent the Debtor, Brian Coughlin, $1,100 in the form of a high-interest, short-term loan.
Coughlin filed for Chapter 13 bankruptcy before he fully repaid the loan. Lendgreen continued its efforts to collect on his debt, even after it was reminded of the pending bankruptcy petition.
Coughlin eventually filed a motion in Bankruptcy Court, seeking to have the stay enforced against Lendgreen, its parent corporations, and the Band (collectively, petitioners). Coughlin also sought damages for emotional distress, along with costs and attorney’s fees.
The Band moved to dismiss. They argued that the Bankruptcy Court lacked subject-matter jurisdiction over Coughlin’s enforcement proceeding, as the Band and its subsidiaries enjoyed tribal sovereign immunity from suit. The Bankruptcy Court agreed; it held that the suit had to be dismissed because the Bankruptcy Code did not clearly express Congress’s intent to abrogate tribal sovereign immunity.
In a divided opinion, the Court of Appeals for the First Circuit reversed, concluding that the Bankruptcy Code unequivocally strips tribes of their immunity. In re Coughlin, 33 F. 4th 600, 603-604 (2022). In so holding, the First Circuit deepened a split among the Courts of Appeals on this question. Compare Krystal Energy Co. v. Navajo Nation, 357 F. 3d 1055, 1061 (CA9 2004) (holding that the Bankruptcy Code abrogates tribal sovereign immunity), with In re Greektown Holdings, LLC, 917 F. 3d 451, 460-461 (CA6 2019) (concluding the reverse).
Analysis
“Petitioner Lac du Flambeau Band of Lake Superior Chippewa Indians (the Band) is a federally recognized Indian tribe. One of the Bands businesses, Lendgreen, extended respondent Brian Coughlin a payday loan. Shortly after receiving the loan, Coughlin filed for Chapter 13 bankruptcy, triggering an automatic stay under the Bankruptcy Code against further collection efforts by his creditors. But Lendgreen allegedly continued attempting to collect Coughlin’s debt. Coughlin filed a motion in the Bankruptcy Court to enforce the automatic stay and recover damages. The Bankruptcy Court dismissed the suit on tribal sovereign immunity grounds. The First Circuit reversed, concluding that the Code unequivocally strips tribes of their immunity. 33 F. 4th 600, 603.
“As an initial matter, the definition of governmental unit exudes comprehensiveness from beginning to end. Congress has rattled off a long list of governments that vary in geographic location, size, and nature. 101(27) (including municipalities, districts, Territories, Commonwealths, States, the United States, and foreign states). The provision then proceeds to capture subdivisions and components of every government within that list. Ibid. (accounting for any department, agency, or instrumentality of the United States …, a State, a Commonwealth, a District, a Territory, a municipality, or a foreign state). And it concludes with a broad catchall phrase, sweeping in other foreign or domestic government[s]. Ibid….
“The pairing of foreign with domestic is of a piece with those other common expressions. For instance, if someone asks you to identify car manufacturers, foreign or domestic, your task is to name any manufacturers that come to mind, without particular regard to where exactly the cars are made or the location of the company’s headquarters. Similarly, at the start of each Congress, a cadre of newly elected officials solemnly swear to support and defend the Constitution of the United States against all enemies, foreign and domestic. 5 U. S. C. 3331. That oath which each Member of Congress who enacted the Bankruptcy Code took indisputably pertains to enemies anywhere in the world. Accordingly, we find that, by coupling foreign and domestic together, and placing the pair at the end of an extensive list, Congress unmistakably intended to cover all governments in 101(27)s definition, whatever their location, nature, or type.
“It is also significant that the abrogation of sovereign immunity in 106(a) plainly applies to all governmental unit[s] as defined by 101(27). Congress did not cherry-pick certain governments from 101(27)’s capacious lists and only abrogated immunity with respect toSection those it had so selected. Nor did Congress suggest that, for purposes of 106(a)s abrogation of sovereign immunity, some types of governments should be treated differently than others. Instead, Congress categorically abrogated the sovereign immunity of any governmental unit that might attempt to assert it. …
“Reading the statute to carve out a subset of governments from the definition of governmental unit, as petitioners view of the statute would require, risks upending the policy choices that the Code embodies in this regard. That is, despite the fact that the Code generally subjects all creditors (including governmental units) to certain overarching requirements, under petitioners reading, some government creditors would be immune from key enforcement proceedings while others would face penalties for their noncompliance. And while the Code is finely tuned to accommodate essential governmental functions (like tax administration and regulation) as a general matter, petitioners would have us find that certain governments are excluded from those provisions reach, notwithstanding the fact that they engage in tax and regulatory activities too. There is no indication that Congress meant to categorically exclude certain governments from these provisions enforcement mechanisms and exceptions, let alone in such an anomalous manner. Cf. Law v. Siegel, 571 U. S. 415, 424 (2014) (declining to read into the Code an exception Congress did not include in its meticulous and carefully calibrated scheme). …
“Putting the pieces together, our analysis of the question whether the Code abrogates the sovereign immunity of federally recognized tribes is remarkably straightforward. The Code unequivocally abrogates the sovereign immunity of all governments, categorically. Tribes are indisputably governments. Therefore, 106(a) unmistakably abrogates their sovereign immunity too. …
Conclusion
“We find that the First Circuit correctly concluded that the Bankruptcy Code unambiguously abrogates tribal sovereign immunity. Therefore, the decision below is affirmed.”
The 9th Circuit Adopts NCBRC and NACBA’s Amici Argument Holding A Chapter 13 Trustee May Not Collect A Percentage Fee If A Chapter 13 Case Is Dismissed Before Confirmation
On June 12, 2023, the Ninth Circuit Court of Appeals held that 11 U.S.C. § 1326(b) requires a Chapter 13 trustee to turnover all plan payments to the Debtor upon dismissal before confirmation, without deducting her statutory fee. See Steedman v. McCallister (In re Evans), No. 22-35216, 2023 U.S. App. LEXIS 14571 (9th Cir. June 12, 2023).
The court agreed with the interpretation of the law submitted by the National Consumer Bankruptcy Rights Center and the National Association of Consumer Bankruptcy Attorneys.
“The better approach, as proposed by amicus National Consumer Bankruptcy Rights Center and National Association of Consumer Bankruptcy Attorneys (NCBRC), is to read 28 U.S.C. § 586 and 11 U.S.C. § 1326 together. … We generally agree with NCBRC’s construction of the relevant statutes, which renders harmonious an otherwise fragmented scheme.”
Joining the Tenth Circuit, the Ninth Circuit held that the trustee was not entitled to a percentage fee of plan payments as compensation for her work in the Chapter 13 case. 28 U.S.C. § 586(e)(2) provides that the trustee shall “collect” the percentage fee from “payments . . . under plans” that she receives. 11 U.S.C. § 1326(a)(1) provides for the debtor to make payments in the amount “proposed by the plan to the trustee.” Section 1326(a)(2) provides that the trustee shall retain these payments “until confirmation or denial of confirmation.” This section further provides that if a plan is not confirmed, the trustee shall return to the debtor any payments not previously paid to creditors and not yet due and owing to them. Section 1326(b) provides that, before or at the time of each payment to creditors under the plan, the trustee shall be paid the percentage fee under § 586(e)(2).
The court held that, reading these statutes together, “payments . . . under plans” in § 586 refers only to payments under confirmed plans. Before confirmation, a trustee does not “collect” or “collect and hold” fees under § 586, but instead “retains” payments “proposed by the plan” under § 1326(a)(2). If a plan is not confirmed, then § 1326(a)(2) requires a return to the debtor of payments “proposed by the plan.” If a plan is confirmed, then § 1326(b) provides for payment of the percentage fee to the trustee. Thus, under the plain meaning of the statutory text, a trustee is not paid her percentage fee if a plan is not confirmed. The court concluded that statutory canons of construction, such as the rule against superfluities, and the provisions’ amendment history confirmed its reading of the statutes. Policy arguments made by the trustee were not enough to overcome the plain language and context of the relevant statutory provisions.
The Second Circuit has this issue under consideration in Soussis v. Macco, Case No. 22-155 (2nd Circuit). Also, the 7th Circuit has been asked to take up this issue on a direct appeal from In re Johnson, Case No. 22-04449 (Bankr. N.D. IL, May 12, 2023).