|
Category Archives: Publications
ILC e-Bulletin: Small Business Reorganization Act Imposes New Diligence Requirements on Preference Plaintiffs and Modifies Venue Provisions For Proceedings to Recover Less Than $25,000.
|
Case Analysis: In Hugger v. Warfield (In re Hugger), 2019 WL 1594017 (9th Cir. BAP Apr. 5, 2019)
August 16, 2019
Dear constituency list members of the Insolvency Law Committee, the following is a case update analyzing a recent case of interest:
SUMMARY
In Hugger v. Warfield (In re Hugger), 2019 WL 1594017 (9th Cir. BAP Apr. 5, 2019), the U.S. Bankruptcy Appellate Panel of the Ninth Circuit (the “BAP”) affirmed an order denying a chapter 7 debtor’s request that the bankruptcy court vacate his own discharge and dismiss his case because he had filed the case too soon to discharge $40,000 of taxes. To read the full unpublished decision, click here.
FACTS
In September 2015, Anthony Hugger (the “Debtor”) filed tax returns for seven years ranging from 2001 through 2012. For those years, he owed approximately $40,000 in taxes. On January 9, 2017, the Debtor filed a chapter 7 petition. On May 9, 2017, the U.S. Bankruptcy Court for the District of Arizona (the “Bankruptcy Court”) entered the Debtor’s discharge. A few days later, the case was closed as a no-asset case.
The timing of the filing of the bankruptcy case is important because, under Section 523(a) of the Bankruptcy Code, an individual’s discharge does not discharge “any debt (1) for a tax . . . (B) with respect to which a return . . . (ii) was filed or given after the date on which such return . . . was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition.” Thus, if an untimely return is filed within two years prepetition, the tax with respect to which the return was filed will not be discharged.
Presumably after the case was closed, the Debtor discovered that he had filed his petition too early. To discharge the $40,000 in taxes, he should have waited to file his petition until two years after he filed the returns.
In September 2017, the Debtor filed a motion to vacate the discharge and dismiss the case. He contended that he had filed for bankruptcy only to deal with his tax obligations (his unsecured non-tax debts totaled $569) and, therefore, he had not been granted a fresh start. He also argued that the Bankruptcy Court had the equitable authority to grant relief under section 105 of the Bankruptcy Code.
The chapter 7 trustee and the Arizona Department of Revenue (“ADOR”) opposed the motion. They argued, among other things, that a debtor lacks standing to revoke his or her own discharge. ADOR also argued that the Debtor failed to show that dismissing the chapter 7 case would not prejudice creditors.
At the hearing on the motion, the Debtor’s counsel admitted that he made a mistake by filing the Debtor’s case too early. He acknowledged that the purpose of the motion was to allow the Debtor to file a new chapter 7 case to discharge the taxes. He argued that the Bankruptcy Court could grant the motion under Federal Rule of Civil Procedure (“FRCP”) 60, made applicable by Federal Rule of Bankruptcy Procedure 9024.
The Bankruptcy Court denied the motion. On appeal, the BAP affirmed.
REASONING
The Debtor apparently conceded on appeal that: (a) he lacked standing to revoke his own discharge under section 727(d); and (b) the Bankruptcy Court lacked equitable power under section 105(a) to revoke a discharge on request of a debtor. Therefore, the BAP examined whether the Bankruptcy Court abused its discretion when it denied the Debtor’s request for relief under FRCP 60.
The Debtor argued that relief was warranted under FRCP 60(b)(1) – “mistake, inadvertence, surprise, or excusable neglect.” However, the BAP stated that FRCP 60(b)(1) may not be used to remedy attorney error. The BAP further stated that a chapter 7 debtor seeking to dismiss his case has the burden to show that doing so will not result in “legal prejudice” to creditors. The BAP then rejected the Debtor’s argument that the taxing authorities would not be prejudiced by dismissal of the case since they could still attempt to collect the taxes until such time that the Debtor files a new chapter 7 petition.
The BAP also examined whether relief would be appropriate under FRCP 60(b)(6) – “any other reason that justifies relief.” Although the Debtor urged the BAP to adopt the analysis in In re Estrada, 568 B.R. 533 (Bankr. C.D. Cal. 2017), which vacated a debtor’s discharge under FRCP 60(b)(6), in that case the debtor proposed to convert his case to chapter 13 to pay creditors in full through a plan. In contrast, the BAP noted, in this case the Debtor was seeking relief to discharge his taxes, not pay them.
AUTHOR’S COMMENTARY
An easy takeaway from Hugger is that a debtor’s attorney needs to evaluate whether a bankruptcy filing actually will accomplish the debtor’s goal(s). If the goal is to discharge a debt, make sure the debt is actually dischargeable.
In that regard, even if the Bankruptcy Court granted the motion and the Debtor had filed a new chapter 7 petition, it is not certain that the taxes would be discharged. In this circuit, late-filed Form 1040s and state equivalents are not “returns” for purposes of section 523(a)(1)(B) if they do not represent “an honest and reasonable attempt to satisfy the requirements of the tax law.” See Smith v. U.S. (In re Smith), 828 F.3d 1094 (9th Cir. 2016); U.S. v. Hatton (In re Hatton), 220 F.3d 1057 (9th Cir. 2000). A “belated acceptance of responsibility” is not an honest and reasonable attempt to comply with the tax code. Smith, 828 F.3d at 1097. Thus, under current Ninth Circuit law, it is very possible that: (a) the Debtor’s late tax filings would not qualify as “returns”; and (b) the taxes never would be discharged because they are taxes “with respect to which a return, or equivalent report or notice . . . was not filed or given.” See 11 U.S.C. § 523(a)(1)(B)(i). Smith and a similar BAP decision, U.S. v. Martin (In re Martin), 542 B.R. 479 (9th Cir. BAP 2015), were the subject of an ILC e-Bulletin published on October 26, 2016.
Finally, a curious fact, not noted in the BAP’s decision, is that the Debtor commenced his case by filing an emergency petition – i.e., a petition without schedules, statement of financial affairs (“SOFA”), or other required documents. After obtaining an extension, the Debtor filed his schedules and other documents 24 days after the petition date, and he did not file a completed SOFA until 77 days after the petition date. The Debtor must have had a reason for filing his petition when he did – possibly related to an IRS garnishment referred to in the SOFA – and likely benefitted from the automatic stay that took immediate effect. Thus, while the Debtor may not have fully received a “fresh start,” he probably did achieve some respite by filing for bankruptcy when he did.
These materials were written by John N. Tedford, IV, of Danning, Gill, Diamond & Kollitz, LLP, in Los Angeles (jtedford@dgdk.com). Editorial contributions were provided by Jessica Mickelsen Simon of Hemar, Rousso & Heald, LLP in Encino, California.
Thank you for your continued support of the Committee.
Best regards,
Insolvency Law Committee
Co-Chair
Marcus O. Colabianchi
Duane Morris LLP
MColabianchi@duanmorris.com
Co-Chair
Rebecca J. Winthrop
Norton Rose Fulbright US LLP
rebecca.winthrop@nortonrosefulbright.com
Co-Vice Chair
Kyra E. Andrassy
Smiley Wang-Ekvall, LLC
kandrassy@swelawfirm.com
Co-Vice Chair
Gary B. Rudolph
Sullivan Hill Rez & Engel, APLC
rudolph@sullivanhill.com
Case Analysis: In Easley v. Collection Serv. of Nev., 910 F.3d 1286 (9th Cir. 2018), the United States Court of Appeals for the Ninth Circuit (the “Ninth Circuit”) expanded the holding in In re Schwartz-Tallard, 803 F. 3d 1095 (9th Cir. 2015)
June 24, 2019
Dear constituency list members of the Insolvency Law Committee, the following is a case update.
Summary
In Easley v. Collection Serv. of Nev., 910 F.3d 1286 (9th Cir. 2018), the United States Court of Appeals for the Ninth Circuit (the “Ninth Circuit”) expanded the holding in In re Schwartz-Tallard, 803 F. 3d 1095 (9th Cir. 2015) (en banc), to mean that debtors are entitled to recover appellate attorneys’ fees when successfully challenging an initial award of fees and costs awarded to them under section 362(k) for a willful violation of the automatic stay, not only when defending such award. To read the full published decision, click here.
Facts
Appellants, chapter 13 debtors (“Debtors”), scheduled a hospital as a general unsecured creditor in the amount of $3,535, but the debt had previously been assigned to appellee Collection Service of Nevada (“Appellee”). Unaware of the bankruptcy, Appellee pursued collection of the debt. Appellee eventually initiated garnishment of one of the Debtors’ wages, prompting Debtors’ counsel to demand a stop to the garnishment in light of the bankruptcy. Wages were garnished four times before Appellee caused the employer and constable to stop garnishing.
Debtors brought a contempt motion against Appellee. The bankruptcy court granted the motion and awarded $1,295 in damages and $1,277 in attorneys’ fees and costs. Debtors appealed the award to the district court on the grounds that the bankruptcy court erred in failing to account for several days of attorneys’ fees incurred in connection with remedying the stay violation. The district court affirmed the damage award, but remanded to the bankruptcy court to re-review the award of legal fees in light of the Ninth Circuit’s then-recent ruling in In re Schwartz-Tallard, 803 F.3d 1095 (9th Cir. 2015) (en banc), holding that a debtor is entitled to additional attorneys’ fees for defending an appeal of an award of damages for violation of the automatic stay. After remand from the district court, the bankruptcy court awarded additional attorneys’ fees for the prosecution of the underlying motion, but refused to grant an award for fees and costs incurred on the appeal to the district court because Debtors had already sought a similar award from district court and that request remained pending.
The district court denied the Debtors’ motion for attorneys’ fees and costs on appeal based on a failure to file adequate points and authorities as required under local rules or, alternatively, based on its reading of Schwartz-Tallard. The district court held that Schwartz-Tallard only supports payments of attorneys’ fees and costs under section 362(k) for defending a sanctions award on appeal, but not for prosecuting the appeal to challenge the judgment or order. The Ninth Circuit reversed on both grounds.
Reasoning
First, procedurally, the Ninth Circuit found that the district court abused its discretion when it determined that the points and authorities filed by Debtors were inadequate. It found, contrary to the district court, that Debtors provided sufficient information to support Debtors’ factual contentions.
Second, the Ninth Circuit reversed on substantive grounds. Section 362(k)(1) provides that:
an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages
11 U.S.C. § 362(k)(1).
The court explained that prior to Schwartz-Tallard, the court interpreted section 362(k)(1) as “limiting attorneys’ fees and costs awards to those incurred in stopping a stay violation.” Sternberg v. Johnston, 595 F.3d 937, 947 (9th Cir. 2010) (emphasis added). In Schwartz-Tallard, the court overruled Sternberg. Schwartz-Tallard made it clear that attorneys’ fees for “prosecuting an action for damages” under section 362(k) are recoverable. While the district court found that the holding of Schwartz-Tallard was limited to awarding fees for defense of an appeal of attorneys’ fees, in its reversal the Ninth Circuit clarified that attorneys’ fees may also be awarded for debtors’ successful prosecution of an appeal of an award of damages under section 362(k). The court reiterated its reasoning in Schwartz-Tallard that the award of attorneys’ fees for prosecuting an action for damages is consistent with the intent of Congress to provide appropriate means and incentives for debtors to pursue actions for violations of the automatic stay. Further, the court found that its ruling is consistent with its prior decisions on other fee-shifting statutes granting awards of attorneys’ fees for successfully challenging an initial judgment. The Ninth Circuit also reasoned that section 362(k) is critically important to debtors in bankruptcy who typically do not have the resources to hire private counsel and, thus, section 362(k) should be interpreted as seeking to make debtors whole (as if the violation never occurred), if possible.
Author’s Commentary
The decision in Easley serves as a reminder that the financial consequences for a violation of the automatic stay may be severe. Appellee appears to have been owed less than $4,000, caused less than $1,300 in actual damages, but might be required to pay tens of thousands of dollars to the Debtors because it did not act swiftly enough to stop the stay violation and, apparently, refused to return the money that was garnished. Prudent creditors should exercise caution with debtors who have filed for bankruptcy protection, seek relief from stay when in doubt, and quickly end any stay violations and reverse any adverse consequences that resulted from their actions. Otherwise, where creditors willfully violated the automatic stay, they should be prepared to settle and pay quickly to avoid incurring additional losses. Vigilant debtors and their attorneys should also take note that, under the combined precedents of Schwartz-Tallard and Easley, the law is increasingly on their side when it comes to recovering attorneys’ fees and costs incurred in successful appeals of rulings under section 362(k), whether they are defending or challenging the decision on appeal.
These materials were written by Zev M. Shechtman, of Danning, Gill, Diamond & Kollitz, LLP, in Los Angeles (zshechtman@dgdk.com), with editorial contributions from ILC members Michael W. Davis of Brutzkus Gubner Offices in Woodland Hills. (mdavis@bg.law), and Hon. Meredith A. Jury (ret.).
Best regards,
Insolvency Law Committee
Co-Chair
Marcus O. Colabianchi
Duane Morris LLP
mcolabianchi@duanemorris.com
Co-Chair
Rebecca J. Winthrop
Norton Rose Fulbright US LLP
rebecca.winthrop@nortonrosefulbright.com
Co-Vice Chair
Kyra E. Andrassy
Smiley Wang-Ekvall, LLP
kandrassy@swelawfirm.com
Co-Vice Chair
Gary B. Rudolph
Sullivan Hill Rez & Engel, APLC
rudolph@sullivanhill.com
Case Analysis: Brace v. Speier (In re Brace), No. 17-60032 (9th Cir. Nov. 8, 2018), Insolvency Law e-Bulletin, Insol. L. Comm., Bus. L. Sec., Cal. Law. Ass’n (Mar. 18, 2019)
Dear constituency list members of the Insolvency Law Committee, the following is a recent case update.
SUMMARY
On January 16, 2019, the California Supreme Court granted the request of the U.S. Court of Appeals for the Ninth Circuit to decide questions of California law relevant to the Ninth Circuit’s determination of Brace v. Speier (In re Brace), No. 17-60032 (9th Cir.). The question presented by the Ninth Circuit is whether the “form of title” presumption in California Evidence Code section 662 overcomes the presumption in California Family Code section 760 that all property acquired by a married person during marriage is community property.
To read the Ninth Circuit’s Order Certifying Question to the Supreme Court of California, click here.
BACKGROUND
Clifford and Ahn Brace were married in 1972. In the late 1970s, they purchased a home in Redlands. At some point they also purchased a rental property in San Bernardino. They took title to each property as “husband and wife as joint tenants.”
In 2011, Mr. Brace filed for bankruptcy. After some preliminary legal issues were resolved, the bankruptcy court needed to decide whether the bankruptcy estate owned 100%, or just 50%, of each property. In 2015, the bankruptcy court entered a judgment in favor of the chapter 7 trustee determining that the properties were community property and, therefore, entirely property of the bankruptcy estate. See 11 U.S.C. § 541(a)(2). In a published decision, the U.S. Bankruptcy Appellate Panel of the Ninth Circuit affirmed. Brace v. Speier (In re Brace), 566 B.R. 13 (9th Cir. BAP 2017). The BAP’s decision was the subject of an ILC e-Bulletin authored by Michael W. Davis and published on October 16, 2017.
QUESTIONS PRESENTED TO THE CALIFORNIA SUPREME COURT
In California, there is a statutory presumption that property acquired by a married person during the marriage while domiciled in California is community property. See Cal. Fam. Code § 760. By written agreement, spouses can “transmute” community property into separate property of either spouse. See Cal. Fam. Code §§ 850-853.
Separately, California’s Evidence Code contains a series of presumptions which dictate which party has the initial burden of providing evidence or proving certain facts. Evidence Code section 662 provides that “[t]he owner of the legal title to property is presumed to be the owner of the full beneficial title.” This is sometimes referred to as the “title presumption.”
In 2003, the Ninth Circuit held that the community property presumption is rebutted when spouses acquire real property from a third party as joint tenants, and that there is a rebuttable presumption that “‘where the deed names the spouses as joint tenants . . . the property [is] in fact held in joint tenancy.’” Hanf v. Summers (In re Summers), 332 F.3d 1240, 1243-44 (9th Cir. 2003) (quoting Hansen v. Hansen, 233 Cal.App.2d 575, 594 (1965)). The Ninth Circuit also held that California’s transmutation statutes do not apply to transactions in which spouses acquire property from third parties because there is “no interspousal transaction requiring satisfaction of the statutory formalities.” Id. at 1245.
The second holding of Summers was expressly rejected by the California Supreme Court in Marriage of Valli, 58 Cal.4th 1396 (2014). In that case, a husband used community property funds to purchase an insurance policy on his life, naming his wife as the policy’s owner and beneficiary. Later, in divorce proceedings, the husband asserted that the policy was community property. The California Supreme Court agreed, because the husband had not made, joined in, consented to, or accepted a written, express declaration that the character or ownership of the insurance policy was being changed from community property to the wife’s separate property. The court expressly stated that the title presumption “does not apply when it conflicts with the transmutation statutes.” Valli, 58 Cal.4th at 1406.
The ultimate issue in Brace is whether the debtor’s act of taking title to the real properties as a joint tenant with his spouse rebuts the community property presumption or qualifies as an effective transmutation. To assist in addressing this issue, the Ninth Circuit certified the following question to the California Supreme Court:
Does the form of title presumption set forth in section 662 of the California Evidence Code overcome the community property presumption set forth in section 760 of the California Family Code in Chapter 7 bankruptcy cases where: (1) the debtor husband and non-debtor wife acquire property from a third party as joint tenants; (2) the deed to that property conveys the property at issue to the debtor husband and non-debtor wife as joint tenants; and (3) the interests of the debtor and non-debtor spouse are aligned against the trustee of the bankruptcy estate?
On January 16, 2019, the California Supreme Court granted the Ninth Circuit’s request to decide the question presented. (The Ninth Circuit’s phrasing of the question does not restrict the California Supreme Court’s consideration of the issues involved; the court may restate the question. Cal. R. Ct. 8.548(f)(5).) Briefing in the California Supreme Court is ongoing.AUTHOR’S COMMENTARY
When spouses purchase a home in California, they usually don’t give much thought as to how title should be held. Historically, spouses have taken title as joint tenants so that, when one spouse dies, the ownership interest of the deceased spouse automatically transfers to the surviving spouse. This “right of survivorship” is convenient because it avoids the need for a probate. But most people don’t realize that if the joint tenancy is given full effect each spouse separately owns a one-half interest in the property and has the power to transfer his or her one-half interest without the other spouse’s consent. Obviously, this is not what most spouses intend when they buy a family home. The Ninth Circuit’s certification reflects how difficult it is to apply Valli in this context.
Assuming that the California Supreme Court does not modify the question presented, I believe that it will rule that the “form of title presumption” does not overcome the “community property presumption.” Family Code section 760 provides that “[e]xcept otherwise provided by statute,” all property acquired by a married person during marriage while domiciled in California is community property. Sections 770 through 853 contain various exceptions to this rule.
Evidence Code section 662 establishes only an evidentiary presumption. “A presumption is not evidence.” Cal. Evid. Code § 660. A presumption affecting the burden of proof (such as section 662) imposes “upon the party against whom it operates the burden of proof as to the nonexistence of the presumed fact.” Cal. Evid. Code § 606. It does this to implement “some public policy other than to facilitate the determination of the particular action in which the presumption is applied . . . such as the policy in favor of . . . the stability of titles to property.” Cal. Evid. Code § 605. Evidence that property was acquired by spouses during marriage, thus implicating Family Code section 760, should be sufficient to overcome the evidentiary presumption. Also, in Valli, the California Supreme Court confirmed that the form of title presumption “does not apply when it conflicts with the transmutation statutes” in Family Code sections 850-853.
The fact that the interests of the debtor and non-debtor spouse are aligned against the trustee should not have any bearing on the outcome. The Ninth Circuit included this fact within the certified question because the appellants seized on a comment in Justice Chin’s concurrence in Valli that language in Family Code section 2581 (which applies in the context of divorce and separate proceedings) “suggests that rules that apply to an action between the spouses to characterize property acquired during the marriage do not necessarily apply to a dispute between a spouse and a third party.” However, since the estate’s rights in property derive directly from the rights held by the debtor on the petition date, the trustee is not truly a third party. See 11 U.S.C. § 541(a). Further, query whether the debtor even has standing to appeal (and thus align himself with his wife against the trustee) given his argument that he has no legal or beneficial interest in his wife’s allegedly separate ownership interest in the property. Indeed, by involving himself in the dispute, the debtor is arguably violating his duty to cooperate with the trustee to enable the trustee to expeditiously administer property of the estate. See 11 U.S.C. §§ 521(a)(3), 704(a).
Regardless of how it answers the Ninth Circuit’s question, the California Supreme Court’s answer will have a significant impact on cases in which only one spouse files for bankruptcy. If the California Supreme Court’s decision formally abrogates the Ninth Circuit’s first holding in Summers, it will confirm that trustees may sell properties held by spouses as joint tenants and, subject to debtors’ exemptions, distribute all of the sale proceeds to creditors. In some cases, the answer will determine whether creditors receive anything at all.
These materials were written by John N. Tedford, IV, of Danning, Gill, Diamond & Kollitz, LLP, in Los Angeles (jtedford@dgdk.com). Editorial contributions were provided by the Hon. Judge Meredith A. Jury (ret.).
Best regards,
Insolvency Law Committee
Co-Chair
Marcus O. Colabianchi
Duane Morris LLP
mcolabianchi@duanemorris.com
Co-Chair
Rebecca J. Winthrop
Norton Rose Fulbright US LLP
rebecca.winthrop@nortonrosefulbright.com
Co-Vice Chair
Kyra E. Andrassy
Smiley Wang-Ekvall, LLP
kandrassy@swelawfirm.com
Co-Vice Chair
Gary B. Rudolph
Sullivan Hill Rez & Engel, APLC
rudolph@sullivanhill.com
Case Analysis: Klein v. ODS Technologies, LP (In re J & J Chemical, Inc.), Adv. No. 18-08029-JDP (Bankr. D. Idaho Jan. 11, 2019), Insolvency Law e-Bulletin, Insol. L. Comm., Bus. L. Sec., Cal. Law. Ass’n (Mar. 15, 2019)
|
Case Analysis: Hsu v. MTC Financial, Inc. (In re Hsu), 692 Fed.Appx. 888 (9th Cir. June 30, 2017), Insolvency e-Bulletin, Insol. L. Comm., Bus. L. Sec., Cal State Bar (November 30, 2017)
ILC-EBulletin: Ninth Circuit rules that a CM/ECF outage did not excuse appellant’s failure to file a timely appeal or motion for reconsideration
Dear constituency list members of the Insolvency Law Committee, the following is a case update analyzing a recent case of interest:
SUMMARY
Each year, December 1 is the date on which new and amended federal rules and forms become effective. Sometimes, this requires local bankruptcy courts to take automated systems offline. That is again the case this year. In the Central District of California, CM/ECF, PACER and certain other automated systems will not be available from 1:00 p.m. on Thursday, November 30, 2017, until 8:30 a.m. on Friday, December 1, 2017.
The scheduled outage calls to mind the cautionary tale of Hsu v. MTC Financial, Inc. (In re Hsu), 692 Fed.Appx. 888 (9th Cir. June 30, 2017). In that case, the Ninth Circuit ruled that a scheduled CM/ECF outage did not excuse a party’s failure to file a timely notice of appeal or motion for reconsideration. To read the Ninth Circuit’s unpublished memorandum, click here: http://bit.ly/2naUZJJ.
FACTS
On June 26, 2015, and after two failed bankruptcies of her own (to prevent/delay foreclosure proceedings), Li Hsiu-Chu Hsu purported to convey her Pasadena residence to her daughter, Tzu Ling Hsu (the “Debtor”). On July 1, 2015 – the day before a scheduled foreclosure sale – the Debtor filed a chapter 11 petition. Based thereupon, the foreclosing trustee, MTC Financial Inc. (“MTC”), postponed the foreclosure sale for a few days, to July 7, 2015. Allegedly unable to confirm the validity of the conveyance, MTC went forward with the sale and the property was purchased for $4.2 million.
Within a few days, MTC realized that it had made a mistake. Attempting to remedy MTC’s error, the buyer and MTC each filed a motion for relief from stay, requesting that the court annul the automatic stay retroactive to the Debtor’s petition date. On November 13, 2015, the bankruptcy court entered orders granting both motions. This relief had the effect of validating the post-petition foreclosure sale.
The deadline for the Debtor to appeal or seek reconsideration of the orders granting relief from stay was Monday, November 30, 2015 (after the Thanksgiving holiday weekend). During the week leading up to November 30, the bankruptcy court sent out at least two notices advising CM/ECF users that CM/ECF would be unavailable from 4:00 p.m. on November 30 through 9:00 a.m. on December 1. A final notice was sent out the morning of the scheduled outage.
The Debtor did not file an appeal or motion for reconsideration before CM/ECF was taken offline. Instead, on December 1, 2015 (at approximately 11:18 p.m.), the Debtor electronically filed two motions for reconsideration (one for each order). The bankruptcy court denied the motions and the Debtor filed notices of appeal on December 15, 2015.
In the district court, MTC and the buyer filed motions to dismiss the appeals. They argued, among other things, that the appeals were not timely filed because the deadline to file an appeal or motion for reconsideration was November 30, but the Debtor’s motions for reconsideration were not filed until December 1. The Debtor argued that because her attorney was required by local bankruptcy rules to file documents electronically, and because CM/ECF was unavailable during the late afternoon and evening of November 30, the time for her to appeal or seek reconsideration was extended to December 1. See Fed. R. Bankr. P. 9006(a)(4) (for electronic filing, “last day” ends at midnight in the court’s time zone), (3) (when clerk’s office is inaccessible, “last day” for filing is extended to the first accessible day that is not a weekend or legal holiday). The district court ultimately agreed with MTC and the buyer, and dismissed the appeals as untimely.
NINTH CIRCUIT’S REASONING
The Ninth Circuit affirmed the district court’s orders dismissing the appeals. The court reasoned that while there is ordinarily mandatory electronic case filing, the local bankruptcy court’s rules were clear that despite the CM/ECF outage the “Debtor’s proper recourse . . . was to file a paper hard copy by November 30 at midnight, not to wait another day as if the clerk was ‘unavailable’ under the Federal Rules of Bankruptcy Procedure.” The court pointed to the Central District of California bankruptcy court’s Court Manual, which stated that, when there is a CM/ECF outage, a litigant should file a hard copy manually at the filing window “whenever it is essential that a particular document be filed by a particular date.” Because the Debtor did not do so, her appeal was untimely and the district court lacked jurisdiction to hear the appeal.
AUTHOR’S COMMENTARY
We often rely on the ability to electronically file documents after business hours, up until the clock strikes twelve. Most of the time, as long as a filer acts diligently (e.g., serves the document on time, emails a copy to all parties who would otherwise be served via Notice of Electronic Filing, and files it electronically as soon as CM/ECF service resumes), a CM/ECF outage should not prove fatal (especially if it is unscheduled). But when filing a notice of appeal, motion for reconsideration, complaint, proof of claim, or other document that absolutely must be filed by a particular date, a CM/ECF outage on the last day for filing can have disastrous consequences.
In most situations, a bankruptcy court may extend the time for a party to file an appeal if the party (a) requests the extension in a motion filed within 21 days after the deadline, and (b) shows excusable neglect. Fed. R. Bankr. P. 8002(d)(1). Whether missing a filing deadline due to a scheduled, publicized CM/ECF outage constitutes “excusable neglect” is debatable. Regardless, the bankruptcy court could not have extended the deadline in the Hsu case because the order appealed from granted relief from the automatic stay. See Fed. R. Bankr. P. 8002(d)(2).
These materials were written by John N. Tedford, IV, of Danning, Gill, Diamond & Kollitz, LLP, in Los Angeles, California (jtedford@dgdk.com). Editorial contributions were provided by ILC member Michael W. Davis of Brutzkus Gubner Rozansky Seror Weber LLP in Woodland Hills, California (mdavis@bg.law).
Thank you for your continued support of the Committee.
Best regards,
Insolvency Law Committee
Co-Chair
Radmila A. Fulton
Law Offices of Radmila A. Fulton
Radmila@RFultonLaw.com
Co-Chair
John N. Tedford, IV
Danning, Gill, Diamond & Kollitz, LLP
JTedford@dgdk.com
Co-Vice Chair
Marcus O. Colabianchi
Duane Morris LLP
MColabianchi@duanemorris.com
Co-Vice Chair
Rebecca J. Winthrop
Norton Rose Fulbright US LLP
rebecca.winthrop@nortonrosefulbright.com
Return to John N. Tedford, IV
Case Analysis: JPMCC 2007-C1 Grasslawn Lodging, LLC v. Transwest Resort Props., Inc. (In re Transwest Resort Props., Inc.), 881 F.3d 724 (9th Cir. 2018), Insolvency e-Bulletin, Insol. L. Comm., Bus. L. Sec., Cal State Bar (May 15, 2018)
Dear constituency list members of the Insolvency Law Committee, the following is a case update analyzing a recent case of interest:
SUMMARY
In JPMCC 2007-C1 Grasslawn Lodging, LLC v. Transwest Resort Props., Inc. (In re Transwest Resort Props., Inc.), 881 F.3d 724 (9th Cir. 2018), the U.S. Court of Appeals for the Ninth Circuit held that an election under section 1111(b)(2) of the Bankruptcy Code does not require that a chapter 11 plan contain full due-on-sale protections, and that section 1129(a)(10) of the Bankruptcy Code applies on a “per plan” (not a “per debtor”) basis. To read the full published decision, click here: http://cdn.ca9.uscourts.gov/datastore/opinions/2018/01/25/16-16221.pdf.
FACTS
In 2010, a group of five entities (collectively the “Debtors”) filed for chapter 11. The Debtors consisted of one parent company, two “Mezzanine Debtors” that were owned by the parent company, and two “Operating Debtors” that were each owned by one of the Mezzanine Debtors. Each Operating Debtor owned and operated a resort hotel.
The bankruptcy cases were jointly administered, but not substantively consolidated. The Debtors filed a joint chapter 11 plan which did not (at least not expressly) propose to substantively consolidate the Debtors.
Undersecured creditor JPMCC 2007-C1 Grasslawn Lodging, LLC (“Lender”), was owed $247 million. Its claim was against the two Operating Debtors and was secured by liens on the two hotels. Pursuant to section 1111(b) of the Bankruptcy Code, Lender elected to have its claim treated as a fully secured claim.
In their plan, the Debtors proposed to pay Lender monthly interest-only payments for 21 years, with a balloon payment at the end of the term. The plan included a due-on-sale clause which generally provided that Lender would be paid in full if the hotels were sold during the 21-year term, except that the hotels could be sold subject to the restructured loan between years 5 and 15 of the plan.
Under the plan, Lender’s claim comprised one of ten classes of claims. A second class was comprised of secured claims originally held by another lender against the Mezzanine Debtors. This second class was the only class of claims asserted against the Mezzanine Debtors. After the plan was proposed, Lender acquired these claims and, therefore, controlled the only class of claims asserted against the Mezzanine Debtors.
Lender voted to reject the plan, and objected to confirmation of the plan on at least two grounds. First, it argued that the 10-year exception to the due-on-sale clause would improperly allow the Debtors to partially negate the benefit of Lender’s section 1111(b) election. Second, it argued that the plan did not satisfy section 1129(a)(10) because no class of creditors holding claims against the Mezzanine Debtors voted to accept the plan.
The bankruptcy court overruled Lender’s objections and confirmed the plan. Ultimately, the district court affirmed on the merits. On further appeal, the Ninth Circuit also affirmed. Judge Milan D. Smith authored the Ninth Circuit’s opinion, and Judge Michelle T. Friedland filed a concurrence.
REASONING
The court started by rejecting Lender’s argument that, because it had made an 1111(b) election, the plan needed to provide that Lender would be paid in full if the hotels were sold. Section 1111(b) allows an undersecured creditor to obtain certain benefits reserved for secured creditors. But neither the plain language of section 1111(b) nor the broader context of chapter 11 requires that a plan contain a due-on-sale clause when a creditor makes an 1111(b) election. Indeed, section 1123(b)(5) provides that a plan may modify secured creditors’ rights (and thereby remove due-on-sale clauses in prepetition loan agreements). Further, as long as a secured creditor retains its lien, a cram-down under section 1129(b)(2)(A)(i) is permissible even when “the property subject to such lien[] is . . . transferred to another entity.” Thus, “the statute expressly allows a debtor to sell the collateral to another entity so long as the creditor retains the lien securing its claim, yet the statute does not mention any due-on-sale requirement . . . .”
The court was careful to note that this does not mean that due-on-sale protections are wholly irrelevant to the question of whether a plan is “fair and equitable” under section 1129(b). However, the court concluded that Lender had waived any argument that the Debtors’ plan was not “fair and equitable.”
The court then rejected Lender’s argument that when a plan is filed on behalf of multiple debtors in a jointly administered case, section 1129(a)(10) must be evaluated on a debtor-by-debtor basis. Section 1129(a)(10) provides that if a class of claims is impaired under a plan, the plan may be confirmed only if at least one impaired class of claims accepts the plan. The plain language indicates that Congress intended a “per plan” approach, not a “per debtor” approach. The court observed that neither section 1129(a)(10) nor any other part of section 1129(a) distinguishes between single-debtor plans and multi-debtor plans.
In her concurrence, Judge Friedland acknowledged Lender’s argument that, despite being the sole creditor of the Mezzanine Debtors, it was unfairly deprived of the ability to object effectively to the reorganization of those debtors. She opined that any unfairness did not result from the bankruptcy court’s interpretation of section 1129. Instead, it resulted “from the fact that this particular reorganization treated the five Debtor entities as if they had been substantively consolidated. . . . Because there was no consensus over these bankruptcy proceedings, there should have been an evaluation [under In re Bonham, 229 F.3d 750 (9th Cir. 2000)] of whether substantive consolidation was appropriate before it (effectively) occurred.” However, since Lender did not challenge the plan on that basis prior to confirmation, any objection on that ground was waived. Nevertheless, Judge Friedland concluded:
[I]f a creditor believes that a reorganization improperly intermingles different estates, the creditor can and should object that the plan – rather than the requirements for confirming the plan – results in de facto substantive consolidation. Such an approach would allow this issue to be assessed on a case-by-case basis, which would be appropriate given the fact-intensive nature of the substantive consolidation inquiry. . . .
AUTHOR’S COMMENTARY
The court’s adoption of the “per plan” approach in jointly administered cases is significant. At least in this circuit, objecting creditors (such as Lender) can no longer buy up all of the claims against one debtor and then use that position to block confirmation or leverage a better deal for itself. In some cases with many debtors, the ruling also will make the confirmation process more efficient.
The court’s statutory analysis of section 1129(b)(2)(A)(i) is correct. There is nothing in section 1129(b)(2)(A)(i) itself that requires a reorganized debtor to pay off a secured claim when collateral is sold post-confirmation (regardless of whether the claimant made an 1111(b) election). The real question is (or should have been) whether the plan was “fair and equitable.” Though there may be more to the story, it seems remarkable that Lender never raised, or subsequently waived, that issue.
These materials were written by John N. Tedford, IV, of Danning, Gill, Diamond & Kollitz, LLP, in Los Angeles, California (jtedford@dgdk.com). Editorial contributions were provided by ILC member Michael W. Davis of Brutzkus Gubner Rozansky Seror Weber LLP in Woodland Hills, California (mdavis@bg.law).
Best regards,
Insolvency Law Committee
Co-Chair
Radmila A. Fulton
Law Offices of Radmila A. Fulton
Co-Chair
Danning, Gill, Diamond & Kollitz, LLP
Co-Vice Chair
Marcus O. Colabianchi
Duane Morris LLP
Co-Vice Chair
Rebecca J. Winthrop
Norton Rose Fulbright US LLP
rebecca.winthrop@nortonrosefulbright.com
Return to John N. Tedford, IV
Revisions to the Federal Rules of Evidence and Appellate, Civil, and Bankruptcy Procedure Effective December 1, 2017, Insolvency e-Bulletin, Insol. L. Comm., Bus. L. Sec. Cal. State Bar (Nov. 29, 2017)
Dear constituency list members of the Insolvency Law Committee:
In April 2017, the Supreme Court submitted to Congress proposed revisions to the Federal Rules of Appellate Procedure (“FRAP”), Federal Rules of Bankruptcy Procedure (“FRBP”), Federal Rules of Civil Procedure (“FRCP”), and Federal Rules of Evidence (“FRE”). The proposed revisions will go into effect on December 1, 2017, unless Congress rejects or defers the proposed amendments.
The entire package of materials transmitted to Congress may be accessed here: http://bit.ly/2017-Rules. Some of the proposed revisions are described below.
Bankruptcy Rule 3002(a) – Secured creditors must now file proofs of claims
Current FRBP 3002(a) generally provides that unsecured creditors and equity security holders must file proofs of claims.
Under revised FRBP 3002(a), secured creditors must also file proofs of claims. However, the revised rule also expressly states that “[a] lien that secures a claim against the debtor is not void due only to the failure of an entity to file a proof of claim.”
Bankruptcy Rule 3002(c) – Reduction of the time to file a proof of claim
Current FRBP 3002(c) establishes a general rule that in chapter 7, 12 and 13 cases, a proof of claim is timely if it is filed within 90 days after the first date set for the § 341(a) meeting of creditors.
Under revised FRBP 3002(c), the general rule is that a proof of claim is timely if it is filed within 70 days after the order for relief under that chapter, or the date of the order converting a case to chapter 12 or 13. In an involuntary chapter 7 case, a proof of claim is timely if it is filed within 90 days after the order for relief is entered.
Comment: FRBP 3002(c) does not expressly address the time to file a proof of claim when a case converts to chapter 7 because conversions to chapter 7 are covered by FRBP 1019. However, FRBP 1019 provides that, except in limited circumstances, a new time period for filing proofs of claims commences under FRBP 3002. Thus, in most cases that convert to chapter 7, a new claims bar date will be set for 70 days after the conversion date.
The first five exceptions to the general rule (FRBP 3002(c)(1)-(5)) remain in place. Of particular importance, FRBP 3002(c)(5) still provides that in a case originally classified as a “no-asset” case, and in which the trustee files a notice of assets, the clerk will give 90 days’ notice of the date by which proofs of claims must be filed.
The sixth exception (FRBP 3002(c)(6)) is broadened. That rule currently provides that if notice of the claims bar date has been mailed to a creditor at a foreign address, the court may extend the deadline by up to 60 days if the notice was insufficient to give the creditor a reasonable time to file a proof of claim. Now, the court may also extend the time for any creditor to file a proof of claim if that creditor received insufficient notice of the claims bar date because the debtor failed to timely file the list of creditors’ names and addresses. An extension under revised FRBP 3002(c)(6) may be granted for up to 60 days from the date of the order granting the creditor’s request for an extension, not just from the original filing deadline.
Bankruptcy Rule 3007 – Claim objections need not be set for hearing, and must be sent to the person and address listed on the proof of claim
Current FRBP 3007(a) provides that an objection to a claim, and notice of the hearing, must be mailed or otherwise delivered at least 30 days before the hearing. The rule does not specify the address to which the notice and objection must be sent.
Revised FRBP 3007(a) clarifies that FRBP 7004’s specific service requirements do not apply to most claim objections, and eliminates the implicit requirement that the court hold a hearing. Now, 30 days’ notice must be given before any scheduled hearing on the objection or any deadline for the claimant to request a hearing. With certain exceptions, the objection and notice must be sent to the person most recently designated on the claimant’s proof of claim as the person to receive notices, at the address so indicated. Special requirements are adopted for objections to claims filed by the United States, officers or agencies of the United States, or insured depository institutions.
Bankruptcy Rules 3012, 3015(g) and 7001(2) – Valuation of secured claims may be sought by motion, claim objection, or through a chapter 12 or 13 plan; determination of amount of claim entitled to priority under § 507 may be sought by motion or claim objection
Current FRBP 3012 provides that the court may determine the value of a secured claim on motion of any party in interest. Revised FRBP 3012(b) provides that such a determination may be sought by motion, in a claim objection, or in a chapter 12 or 13 plan. Revised FRBP 7001(2) confirms that such a determination does not require an adversary proceeding.
If a determination regarding the amount of a secured claim is sought through a chapter 12 or 13 plan, revised FRBP 3012(b) provides that the plan must be served on the claimant in the manner provided by FRBP 7004 for service of a summons and complaint. New FRBP 3015(g) provides that, upon confirmation of the plan, any such determination is binding on the secured creditor, even if the creditor files a contrary proof of claim or the claim was scheduled by the debtor in a different amount. This is the case regardless of whether a claim objection has been filed.
The amendment also expands FRBP 3012 to cover determinations regarding the amount of a claim entitled to priority under § 507. Such a determination may be sought by motion or in a claim objection.
Bankruptcy Rule 4003(d) – Avoidance of liens that impair exemptions may be sought by a motion or through a chapter 12 or 13 plan
Current FRBP 4003(d) provides that a debtor seeking to avoid a lien that impairs his or her exemption must do so by motion.
Revised FRBP 4003(d) also allows a chapter 12 or 13 debtor to seek avoidance of an exemption-impairing lien through a plan. The plan must be served on the affected creditor in the manner provided by FRBP 7004 for service of a summons and complaint.
Bankruptcy Rules 3015(c) and 3015.1 – Establishment of new official form chapter 13 plan, and allowance for Local Form chapter 13 plans
Revised FRBP 3015(c) requires chapter 13 debtors to use the official federal form plan (Official Form 113) unless a local form plan has been adopted in the district in which the case is pending. A “nonstandard” provision inserted by the debtor will be effective only if it is included in a section of the form designated for nonstandard provisions.
New FRBP 3015.1 governs a district’s adoption of an alternative form chapter 13 plan. It allows each district to adopt a single “Local Form” plan after public notice and opportunity for public comment. It also specifies certain provisions that must be included in the Local Form. For example, the Local Form must include an initial paragraph for the debtor to indicate that the plan does, or does not, “(1) contain any nonstandard provision; (2) limit the amount of a secured claim based on a valuation of the collateral for the claim; or (3) avoid a security interest or lien.”
All four districts in California have adopted a Local Form unique to each district:
Northern (NDC 1-1): http://bit.ly/CANB-Plan
Eastern (EDC 3-080): http://bit.ly/CAEB-Plan
Central (F 3015-1.01.CHAPTER13.PLAN): http://bit.ly/CACB-Plan
Southern (CSD 1300): http://bit.ly/CASB-Plan
COMMENT 1: Even after December 1, 2017, be sure to check your court’s local rules, general orders and public notices to determine whether you should use the new Local Form. For example, the Northern District’s General Order 34 provides that its Local Form must be used in cases filed under chapter 13, or converted to chapter 13, on or after December 1. The Eastern District’s General Order 17-03 provides that its Local Form must be used whenever a chapter 13 plan is filed in a case after December 1. The Central District’s Public Notice 17-015 states that its Local Form may be used only in chapter 13 cases commencing on or after December 1, and that the Central District’s current form plan should be used in cases filed before December 1. The Southern District’s General Order 173c does not specify whether its Local Form must be used in all cases or just those filed on or after December 1.
COMMENT 2: The Eastern and Southern Districts’ Local Forms appear to contravene revised FRBP 3012(b) and 4003(d). Section 1.04 of the Eastern District’s Local Form states, “The confirmation of this plan will not limit the amount of a secured claim based on a valuation of the collateral for the claim, nor will it avoid a security interest or lien. This relief requires a separate claim objection, valuation motion, or lien avoidance motion that is successfully prosecuted in connection with the confirmation of this plan.” Similarly, the first page of the Southern District’s Local Form states, “This plan does not provide for avoidance of a lien which impairs an exemption. This must be sought by separate motion.” These provisions effectively preclude chapter 13 debtors from using the Local Forms to seek relief that the federal rules (as revised) expressly allow to be sought through a chapter 13 plan.
COMMENT 3: Along the same lines, the Local Form adopted by the Eastern District appears to neuter new FRBP 3015(g)(1). That new rule provides that, upon confirmation, a determination in the plan regarding the amount of a secured claim is binding on the claimant. Since the Eastern District’s Local Form precludes chapter 13 debtors from valuing secured claims through their plans, new FRBP 3015(g)(1) will have no effect.
Bankruptcy Rules 2002 and 3015(f) – Establishment of deadline to object to chapter 12 and 13 plans, and minimum notice required in chapter 13 cases for (a) the time to object, and (b) the confirmation hearing
Current FRBP 3015(f) provides that objections to confirmation of chapter 12 and 13 plans must be filed before confirmation. Revised FRBP 3015(f) provides that objections must be filed at least 7 days before the hearing date, unless the court orders otherwise.
New FRBP 2002(a)(9) provides that creditors must be given 21 days’ notice by mail of the time to file objections to confirmation of a chapter 13 plan. Revised FRBP 2002(b) provides that creditors must be given 28 days’ notice by mail of the hearing to consider confirmation of the chapter 13 plan.
COMMENT: FRBP 2002(a)(8) remains unchanged. That rule provides that creditors must be given 21 days’ notice by mail of both (a) the time to file objections to a chapter 12 plan, and (b) the confirmation hearing. It is unclear why the drafters did not also revise FRBP 2002(a)(8) to make the notice periods consistent with those now applicable in chapter 13 cases.
Bankruptcy Rule 1015 – “Husband and wife” changed to “spouses”
In light of the Supreme Court’s decision in Obergefell v. Hodges, 135 S. Ct. 2584 (2015), references to petitions and cases filed by “a husband and wife” have been revised to refer to petitions and cases filed by “spouses.”
Appellate Rule 4(a)(4)(B) – No additional fee will be required when filing an amended notice of appeal
If a party files a notice of appeal while a motion for reconsideration (or similar motion) is pending, the notice becomes effective when the order disposing of the motion is entered. FRAP 4(a)(4)(B)(i). If the party also wants to challenge a judgment’s alteration or amendment upon such a motion, the party must file an amended notice of appeal. FRAP 4(a)(4)(B)(ii). The 2009 amendments inadvertently deleted language which provided that no additional fee is required to file the amended notice of appeal. That language is being restored, as new FRAP 4(a)(4)(B)(iii).
COMMENT: FRBP 8002(b)(4) provides that, in bankruptcy appeals, no additional fee is required to file an amended notice of appeal. Therefore, FRBP 8002(b) and FRAP 4(a)(4)(B) will be aligned in this regard.
Evidence Rule 803(16) – The “ancient documents” exception to the hearsay rule will apply only to documents prepared before January 1, 1998
FRE 803 lists exceptions to the hearsay rule. Current FRE 803(16) provides that the admission of “[a] statement in a document that is at least 20 years old and whose authenticity is established” is not barred by the hearsay rule. Revised FRE 803(16) restricts the exception to “[a] statement in a document that was prepared before January 1, 1998, and whose authenticity is established.” The revision addresses the Advisory Committee’s concern that because electronically stored information (“ESI”) can be retained for more than 20 years, a strong likelihood exists that, going forward, the existing “ancient documents” exception would allow for the admission of vast amounts of unreliable ESI.
Evidence Rule 902 – Expansion of self-authenticating documents to certified records generated by an electronic process or system, and certified data copied from an electronic device, storage medium or file
New FRE 902(13) and 902(14) provide that “[a] record generated by an electronic process or system that produces an accurate result” and “[d]ata copied from an electronic device, storage medium, or file” may be authenticated by a written certification of a qualified person, in lieu of that person’s testimony at trial. The certification must comply with FRE 902(11) or (12) (certified records of a regularly conducted activity). The proponent must give the adverse party reasonable written notice of its intent to offer the record or data into evidence, and must make the record / data and the certification available for inspection so that the adverse party has a fair opportunity to challenge them.
COMMENT: These new rules relate only to the authentication of electronic records and data; objections to admissibility on other grounds (e.g., hearsay) are unaffected. The goal is to allow a party to authenticate such records and data ahead of time, and not incur the expense and inconvenience of unnecessarily producing an authenticating witness at trial. Parties can determine in advance of trial whether a challenge to authenticity will be made, and plan accordingly.
These materials were written by John N. Tedford, IV, of Danning, Gill, Diamond & Kollitz, LLP, in Los Angeles, California (jtedford@dgdk.com). Editorial contributions were provided by ILC member Michael W. Davis of Brutzkus Gubner Rozansky Seror Weber LLP in Woodland Hills, California (mdavis@bg.law).
Thank you for your continued support of the Committee.
Best regards,
Insolvency Law Committee
Co-Chair
Radmila A. Fulton
Law Offices of Radmila A. Fulton
Radmila@RFultonLaw.com
Co-Chair
John N. Tedford, IV
Danning, Gill, Diamond & Kollitz, LLP
JTedford@dgdk.com
Co-Vice Chair
Marcus O. Colabianchi
Duane Morris LLP
MColabianchi@duanemorris.com
Co-Vice Chair
Rebecca J. Winthrop
Norton Rose Fulbright US LLP
rebecca.winthrop@nortonrosefulbright.com
Case Analysis: Salven v. Galli (In re Pass), 553 B.R. 749 (9th Cir. BAP 2016), Insolvency e-Bulletin, Insol. L. Comm., Bus. L. Sec., Cal State Bar (September 11, 2017).
Dear constituency list members of the Insolvency Law Committee, the following is a case update analyzing a recent case of interest:
SUMMARY
Last August, in Salven v. Galli ( In re Pass), 553 B.R. 749 (9th Cir. BAP 2016), the U.S. Bankruptcy Appellate Panel of the Ninth Circuit held that, where a chapter 7 debtor and her non-debtor husband legally separated and divorced postpetition, the debtor’s ex-husband could, on his own behalf, claim a homestead exemption in property of the estate. To read the full published decision, click here: http://bit.ly/2utaP5P.
FACTS
In 2002, Frances Pass (“Pass”) and her then-husband, Aladino Galli (“Galli”), lived together in a home in Fresno, California (the “Fresno Property”). In 2002, they recorded a declaration of homestead (the “2002 Homestead Declaration”).
At some point, Pass and Galli decided to terminate their marriage.
In September 2009, Pass purchased a house in Coalinga, California (the “Coalinga Property”), and began refurbishing it. Early on December 30, 2009, Pass moved out of the Fresno Property with no intention of returning to reside there.
That very afternoon, Pass and Galli filed a joint chapter 13 petition. Thus, at the time they filed their joint petition, Galli resided in the Fresno Property and Pass resided in the Coalinga Property. They scheduled the Fresno Property as community property, and claimed a homestead exemption in the Fresno Property pursuant to California Code of Civil Procedure (“CCP”) section 704.730.
In September 2010, a state court entered a judgment of legal separation which incorporated a Marital Settlement Agreement and provided that the Fresno Property would be awarded to Galli as his sole and separate property.
In 2011, Galli executed and recorded a grant deed purporting to transfer the Fresno Property to Pass and Galli as joint tenants.
Subsequently, Pass filed a petition for a judgment dissolving the marriage. In April 2013, the state court entered a judgment of marital dissolution (incorporating a new Marital Settlement Agreement) under which Pass and Galli each retained a one-half joint tenancy interest in the Fresno Property.
Pass and Galli did not request relief from stay prior to making any of the purported transfers or obtaining any of the judgments purportedly affecting title to or their ownership of the Fresno Property. (As discussed below, the bankruptcy court later ruled that the purported transfers were void; Galli did not appeal that ruling.)
In September 2013, Pass requested that the bankruptcy court sever the joint chapter 13 case and convert her case to chapter 7. The bankruptcy court granted the request. Soon thereafter, Galli’s chapter 13 case was dismissed.
In Pass’ chapter 7 case, Pass amended her schedules to assert a $75,000 homestead exemption in the Coalinga Property instead of the Fresno Property. The chapter 7 trustee objected to Pass’ claimed exemption, alleging that Pass was not actually living in the Coalinga Property when Pass and Galli filed their joint chapter 13 petition. The bankruptcy court found that Pass had moved out of the Fresno Property, with no intention ever to return, hours before the petition was filed. Thus, the objection was overruled.
In the meantime, the trustee filed a motion for authority to sell the Fresno Property free and clear of liens and interests, as well as a complaint seeking to avoid the unauthorized postpetition transfers. In the adversary proceeding, the bankruptcy court entered summary judgment determining that the Fresno Property was community property (and therefore the entirety of the property was property of the estate), and that the postpetition transfers were void. However, the bankruptcy court also determined that Galli held a “homestead interest” in the Fresno Property by virtue of the 2002 Homestead Declaration, and the trustee could not sell the Fresno Property free and clear of Galli’s homestead interest without compensation to Galli. The trustee appealed.
ARGUMENTS PRESENTED TO THE BAP
In his appellate brief, the trustee argued that “it is the automatic and not the declared homestead that is needed to invoke the homestead [exemption] within bankruptcy.” The trustee also argued that exemptions are determined as of the petition date, even when the case has been converted from chapter 13 to chapter 7. Citing In re Homan, 112 B.R. 356 (9th Cir. BAP 1989), the trustee further argued that when only one spouse files, the choice of homestead exemption vests solely in the filing spouse. Because Pass and Galli were married on the petition date, and because Pass had chosen to claim an exemption in the Coalinga Property, the trustee argued that Galli was not entitled to claim an exemption in the Fresno Property.
Galli argued that he had “exemption rights” in the Fresno Property pursuant to the 2002 Homestead Declaration. He argued that those rights came into his bankruptcy estate when the joint chapter 13 petition was filed, and revested in him when his chapter 13 case was dismissed. Galli also argued that his right to an exemption was not lost when Pass amended her schedules to claim an exemption in the Coalinga Property because, among other things, after legal separation each spouse is “entitled to a homestead in his or her own right.” Galli also argued that Pass “abandoned” her rights in the Fresno Property when she amended her Schedule C, and that the trustee, as Pass’ successor, was estopped from asserting any interest in the property.
BAP’S RULING AND REASONING
First, the BAP examined whether the 2002 Homestead Declaration precluded the trustee from selling the Fresno Property without compensating Galli.
The bankruptcy court had concluded that because a trustee’s “powers to liquidate estate assets are derived from those of a creditor who holds a judgment lien,” the 2002 Homestead Declaration shielded the Fresno Property from the trustee’s reach in the same way that a homestead declaration shields property from the attachment of judgment liens. Pass, 553 B.R. at 758 (quoting Salvi v. Galli ( In re Pass), Adv. No. 14-01056 at 12 (Bankr. E.D. Cal. Oct. 14, 2015)); see also Cal. Civ. Proc. Code § 704.950. The BAP rejected this conclusion because a trustee’s power to sell estate property is derived from Section 363, not from the trustee’s rights as a hypothetical lien creditor under Section 544.
The BAP also rejected the bankruptcy court’s suggestion that the trustee’s proposed sale of the Fresno Property could be considered a voluntary sale because it “‘is property of the estate over which the Trustee is effectively the owner.’” Pass, 553 at 759 (quoting Salvi v. Galli ( In re Pass), Adv. No. 14-01056 at 10 (Bankr. E.D. Cal. Oct. 14, 2015)). The BAP stated, “We must reject this proposition as inconsistent with our previous decisions holding that the filing of the bankruptcy petition itself constitutes a ‘forced sale’ for exemption purposes.” Id. (citations omitted).
Thus, the BAP concluded that the 2002 Homestead Declaration did not prevent the trustee from selling the Fresno Property.
Second, the BAP examined whether Galli was entitled to assert an “automatic” homestead exemption in the Fresno Property. This required the BAP to answer two questions: “First, whether Galli, as a non-debtor, may assert any exemption in property of the Pass bankruptcy estate; and second, whether Galli is entitled to a homestead exemption under California law.” Id. at 759.
As to the question of whether a non-debtor may claim an exemption in estate property, the BAP noted that there is a lack of case law addressing this issue. In Homan, the BAP had ruled that a non-debtor spouse could not assert an exemption in a home where the debtor had chosen to exempt other property. But the BAP distinguished Homan because “[w]hat is true of spouses . . . is not necessarily true of ex-spouses.” Id. at 760. The BAP stated that, by precluding non-debtor spouses from claiming exemptions in estate property, Congress designed the exemption provisions to encourage spouses to file jointly (something ex-spouses cannot do). The BAP also noted that Galli would not benefit from the community property discharge, which Homan had “identified as a counterbalancing advantage to the otherwise ‘hard result’ of denying non-debtor spouses any say in the selection of exemptions.” Id. (quoting Homan, 112 B.R. at 360). The BAP limited Homan’s holding to situations in which non-filing current spouses of the debtor attempt “to assert exemptions to which he or she would not be entitled as a joint debtor.” Id. The BAP concluded, “The mere fact that Galli is not the debtor does not prohibit him from asserting a state law exemption in property of the bankruptcy estate.” Id.
As to the question of whether Galli was entitled to an “automatic” homestead exemption under California law, the BAP rejected the trustee’s argument that because a debtor’s entitlement to claim exemptions is determined as of the petition date, and because Pass and Galli were married when they filed their joint chapter 13 petition, their exemption rights were limited to those that they enjoyed as a married couple on the petition date. The BAP stated,
The principle that exemption rights are determined as of the petition date cannot be stretched so far as to require that a debtor’s marital status on the petition date is fossilized for the duration of the case. Even less should former joint debtors whose cases have been severed and dismissed be yoked, for state-law exemption purposes, to their ex-spouses who remain in bankruptcy. To hold otherwise would flout the well-established principle that “bankruptcy courts [should] avoid incursions into family law matters….”
Id. at 760-61 (alteration in original) (citations omitted). Therefore, the BAP ruled that Galli’s homestead rights must be determined with reference to his current marital status, not his marital status on the petition date. The BAP stated that, under California law, after a judgment of dissolution or legal separation, each former spouse qualifies for the “automatic” homestead exemption for property in which he or she resides. Thus, the BAP concluded that Galli was entitled to claim a homestead exemption in the Fresno Property, and affirmed the bankruptcy court’s conclusion that the trustee could not sell that property without compensating Galli.
AUTHOR’S COMMENTARY
In the author’s view, the BAP correctly rejected Galli’s argument that the 2002 Homestead Declaration precluded the trustee from selling the Fresno Property. A homestead declaration prevents the attachment of a judgment lien unless there is equity in excess of the amount of the homestead exemption, but it does not diminish a co-owner’s interest in the property. In Pass, the entirety of the Fresno Property was property of the estate. Therefore, the trustee was entitled to sell the property pursuant to Section 363, and to distribute the net sale proceeds in accordance with Sections 724 and 726.
The validity of the BAP’s other two primary rulings is less clear given the paucity of authority on the subject.
First, an analysis of whether a debtor (or anyone else) is entitled to exempt property from property of a bankruptcy estate should begin with Section 522. Section 522(b) allows a debtor to exempt property from the estate. If a debtor fails to file a list of exemptions, “a dependent of the debtor may file such a list, or may claim property as exempt from property of the estate on behalf of the debtor.” 11 U.S.C. § 522( /) (emphasis added). There is nothing in the Bankruptcy Code to suggest that a non-debtor is entitled to exempt property from the estate on his or her own behalf.
There is also nothing in CCP section 704.710, et seq. to suggest that the “automatic” homestead exemption applies when a separated or ex-spouse (as opposed to a judgment lien creditor) seeks to sell a community property homestead. In this regard, footnote 6 of the BAP’s decision is noteworthy:
The Trustee’s counsel further conceded at oral argument that the Trustee’s proposed sale should be treated as involuntary, hence capable of triggering the automatic homestead exemption. . . . [A]s the issue is not disputed, we need not decide it and will treat the proposed sale as an involuntary or forced sale under California law.
Id. at 761 n.6.
Mainly in two contexts, courts have stated that the filing of a bankruptcy petition is the functional equivalent of a forced or involuntary sale: (1) when determining whether California’s “automatic” homestead exemption (as opposed to the declared homestead exemption) applies in bankruptcy cases; and (2) when determining that the petition date is the correct date for determining a debtor’s eligibility to claim an exemption. See, e.g., In re Cole, 93 B.R. 707 (9th Cir. BAP 1988); In re Herman, 120 B.R. 127 (9th Cir. BAP 1990); In re Morgan, 149 B.R. 147 (9th Cir. BAP 1993); In re Kelley, 300 B.R. 11 (9th Cir. BAP 2003). But it does not necessarily follow that a trustee’s Section 363 sale of estate property is the same thing as a judgment creditor’s execution sale of a judgment debtor’s property. In light of footnote 6, courts and practitioners should be careful not to read Pass as definitively holding that a trustee’s Section 363 sale is, in fact, an involuntary sale triggering a non-debtor’s right to claim an exemption in his or her own right.
Second, even if non-bankruptcy law can/does give a separated or ex-spouse an independent right to exempt community property from property of the estate, the BAP’s willingness to look at Pass and Galli’s current marital status (rather than their marital status on the petition date) is questionable. There was no dispute that Pass and Galli were still married on the petition date. Indeed, although not reflected in the record on appeal, a petition for a judgment of legal separation was not even filed until June 2010 (over five months after they filed for bankruptcy). Also, the state court’s September 2010 judgment of legal separation incorporated a Marital Settlement Agreement in which Pass and Galli agreed that the date of legal separation was January 1, 2010 (two days after they filed their joint chapter 13 petition).
The BAP was rightfully reluctant to interfere in family law matters. For example, courts have been hesitant to interfere with a state court’s award or modification of spousal support. See In re Allen, 275 F.3d 1160 (9th Cir. 2002); In re MacDonald, 755 F.2d 715 (9th Cir. 1985). However, it is unclear whether that policy should apply when a non-debtor spouse legally separates from the debtor postpetition and then seeks to exclude property from the estate by exercising exemption rights that did not exist on the petition date.
These materials were written by John N. Tedford, IV, of Danning, Gill, Diamond & Kollitz, LLP (jtedford@dgdk.com). Editorial contributions were provided by Michael J. Gomez of Frandzel Robins Bloom & Csato, L.C. in Fresno, California.
Thank you for your continued support of the Committee.
Best regards,
Insolvency Law Committee
Co-Chair
Radmila A. Fulton
Law Offices of Radmila A. Fulton
Radmila@RFultonLaw.com
Co-Chair
John N. Tedford, IV
Danning, Gill, Diamond & Kollitz, LLP
JTedford@dgdk.com
Co-Vice Chair
Marcus O. Colabianchi
Duane Morris LLP
MColabianchi@duanemorris.com
Co-Vice Chair
Rebecca J. Winthrop
Norton Rose Fulbright US LLP
rebecca.winthrop@nortonrosefulbright.com
Return to John N. Tedford, IV