Bankruptcy Appeals And The Appellate Process In Kansas And Missouri

Johnson County Kansas Bankruptcy Lawyers

Under Section 158 of the Bankruptcy Code, appeals of bankruptcy court orders can be heard when the order if final, or when the order is “interlocutory” (with the leave of the District Court). In deciding when an order is final, courts take a realistic and pragmatic approach. Under Section 158(a)(3), an appeal from an interlocutory order can be heard only with leave of the court. Under this section, the district court or the bankruptcy appellate panel (BAP) can hear an appeal from an interlocutory order (a circuit court of appeals’ jurisdiction is limited to final orders). Thus, under F.R. Bankr. P. 8001(b) and 8003(a), an appellant must file a notice of appeal under Rule 8002, and also file a motion for leave to appeal.

Bankruptcy appeals can technically be heard in three possible forums: the local district court, the BAP of the circuit, or to the circuit’s court of appeals in some situations. As a practical matter, most bankruptcy attorneys will find themselves raising issues of bankruptcy law before the BAP, which operates in both the Eight Circuit (Missouri) and the Tenth Circuit (Kansas). This is so because the issues raised in bankruptcy cases are often complex and specialized, and the BAP is specifically designed to be a forum for bankruptcy appellate law.  US District Court judges may not have had as much exposure to the issues presented.

The 2005 amendments to the Bankruptcy Code created a limited ability to appeal matters directly to the circuit courts. This would be in situations where there is no controlling authority on legal issues involved, or where the issue requires the resolution of conflicting decisions, or where an immediate appeal “may materially advance the progress of the case or proceeding.” 28 U.S.C. Section 158(d)(2).

The deadlines are given in F.R. Bankr. P. 8002. The deadline for filing the notice of appeal can be extended in situations of “excusable neglect”, but this should never be relied on. Pushing the envelope is never a good idea in dealing with deadline issues. In determining what is “excusable neglect”, a court will look at the danger of prejudice to a debtor, the length of the delay and any potential impact on judicial proceedings, the reason for the delay, and whether the movant is acting in good faith.

Perfecting an appeal requires that certain other steps be made. The issues to be presented on appeal must be stated, and the record must be identified that the appeals court is supposed to review. Under F.R. Bankr. P. 8006, the following things are part of the record of appeal:

  • Items designated by the parties
  • The notice of appeal
  • The order, judgment, or decree that is the subject of the appeal
  • Opinions, findings of fact, and conclusions of law by the court

The parties then wait for the appeal record to be docketed. The appeals brief is then filed. From past experience, we have found that calling the BAP court clerks with questions is a very pleasant experience. The lack of crowded dockets gives them the ability to become personally acquainted with many cases, and makes for productive communication.
In reviewing an order, judgment, or decree from the bankruptcy court, the appellate court reviews the legal issues de novo, the factual findings for “clear error”, and its exercise of discretion for “abuse.” In Re United Healthcare Systems Inc. 396 F.3d 247 (3rd Cir. 2005). If there are mixed questions of law and fact, the appellate court will defer to the bankruptcy court’s finding of facts unless those are “clearly erroneous.” Frivolous appeals are very rare, but may possibly be found when the “overwhelming weight of precedent is against [appellant’s] position, where appellant can set forth no facts to support its position, or where, in short, there is simply no legitimate basis for pursing an appeal. In Re Alta Gold Co., 236 Fed. Appx. 267 (9th Cir 2007).

Under F.R. Bankr. 8005, there is a mechanism for getting a stay of an order pending the outcome of an appeal. Appellants will want to do this to preserve their position. Requests for stays pending an appeal must ordinarily be made to the bankruptcy judge. The court then has the discretion to grant a stay pending the appeal. A party seeking a stay pending the appeal is asked to show:

  • It is likely to prevail on the merits of its appeal
  • It will suffer harm unless a stay is granted
  • A stay will not substantially harm other interested parties
  • A stay is not harmful to the public interest

All of these conditions need to be met. Once the appeal has been docketed and scheduled, the litigants appear before the BAP judges and make their arguments, relying on the points raised in briefs.

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Landlords, Tenants, And Leases In Chapter 13 Bankruptcy In Kansas City

Overland Park Bankruptcy Law Firm

When a debtor files a Chapter 13 bankruptcy, the automatic stay under Section 362 bars the lessor (landlord) from “any act to obtain possession of property of the estate or of property from the estate” except through the bankruptcy court. A debtor who remains in possession of leased property will be expected to continue to pay the rent for such property. But there can arise many legal issues regarding when the rent is payable, what priority it has in relation to other debts, the measure of the rent, and the collectability of any past rent due.

In Chapter 13, a debtor has the option to assume or reject a lease. In situations where the lease is for personal property or residential real property, the option may be exercised at any time before confirmation of the Chapter 13 plan. The plan itself may indicated whether a lease is to be accepted or rejected. The lessor of nonresidential real property is treated a bit differently. If the debtor does not assume the lessor’s lease within 120 days or obtain an extension from the court, the debtor is technically obligated to surrender the property to the lessor. This deadline can be extended for 90 days.

Under Section 365 of the Code, the debtor also has extraordinary rights to assume and assign a lease, whether or not it is in default. This can be done even if the lease has a “non-assign” clause in it already. The debtor can even assign the lease to someone else, even if this person is not to the lessor’s liking. Lessors (landlords) are entitled to rent payments during the Chapter 13 case, but not necessarily at the rate and at the exact terms specified in the original lease agreement. To assume a lease, the debtor will be required to cure any default in the lease, and provide adequate assurance of future performance.

If the debtor continues to use leased property after the filing of the bankruptcy case, the landlord may be entitled to compensation under Section 503(b) of the Code. This section requires that the court permit, as an “administrative expense”, the actual and necessary costs of preserving the estate. The measure of compensation will normally be the “reasonable value” of such use and enjoyment of the property, which may not necessarily be the rent mandated in the lease agreement.

In addition, a lessor whose property is actually used by the debtor is entitled to adequate protection payments under Section 363(e) of the Code, pending a decision by the debtor to assume or reject the lease. Some interesting issues can arise in situations where a debtor continues to remain in the premises after a lease has been overtly or constructively rejected. These situations often arise where a tenant takes longer than expected to remove his or her belongings from the premises, or otherwise is unable to leave in a timely fashion. If a debtor continues to occupy the premises of a residence after rejection of the lease, the debtor may be liable to the landlord as a “tenant at sufferance.” Essentially, the tenant is viewed as a holdover tenant. In these situations, an alert landlord may seek to have the tenant pay a reasonable monthly amount for the use of the property while the tenant was there.

Clear-thinking landlords often find out that, considering all the rights that Chapter 13 tenants enjoy, it makes more sense to work out some arrangement whereby the debtor-tenant can remain in possession of the premises. It often makes sense to have an arrangement whereby the debtor pays a reasonable rent while using the premises to store personal property of the estate and looking for a purchaser of the property who might be willing to rent the premises. If the lease has been rejected, the debtor will have to leave the premises, and motions for relief from the automatic stay may follow quickly to make sure that this in fact happens.

Under Section 362(b)(22), the automatic stay does not prevent the continuation of an eviction action in state court if the landlord had already obtained a judgment of possession against the debtor before the bankruptcy was filed. However, under Section 362(l), the debtor can postpone the termination of the automatic stay by depositing 30 days’ worth of rent with the clerk of the court, and then filing a certification that there are circumstances that would entitle the debtor to cure the entire default. And if the default is in fact cured within the first 30 days of the filing, then the automatic stay continues in effect. If you are having issues as a tenant or a landlord and a bankruptcy case is being contemplated, it is important to get guidance on this area of the law quickly, so that options and remedies can be evaluated.  The law in this area is complicated, and things can vary greatly whether the case is under Chapter 7, 13, or 11, and whether the lease is residential or commercial.

Read More:  Executory Contracts And Unexpired Leases In Chapter 11 Bankruptcy Cases In Kansas City

Interest Rates In Chapter 11 And Chapter 13 Cramdowns

Johnson County Bankruptcy Law Firm

“Cramdown” is a term of art used to describe a situation in a Chapter 13 or Chapter 11 bankruptcy in which a secured creditor is being paid to the fair market value of the collateral secured by its claim, rather than the full loan balance. In a Chapter 11 plan, if the plan proposes to pay the secured claim in deferred cash payments, those payments would include post-confirmation interest at the “market rate.” The market rate is a rate that the bankruptcy court considers fair in light of current market factors. In Re Hardzog, 901 F.2d 858, 860 (10th Cir. 1990); Till vs. SCS Credit Corp., 541 U.S. 465, 476 n. 14 (2004).
In the case of In Re American Homepatient, Inc., 420 F.3d 559 (6th Cir. 2005), the court determined that the Chapter 11 cram down interest rate should be market rate where there exists an efficient market; if a market does not exist, then a court should employ the “formula approach” described by the Till case for Chapter 13 cases.

Under this “formula approach”, the interest rate is set as the national prime rate adjusted to reflect risk posed by the debtor. Of course, secured creditors in a Chapter 11 or Chapter 13 case are never really going to be satisfied with this “market rate.” Several methods have been advanced by courts in determining how this “market rate” should be determined. We will describe each of these approaches.

Formula Approach. Under the so-called formula approach, as stated above, the court begins with a base rate (such as prime rate) and then adds points for “risks” posed by the debtor. The formula approach was adopted by the Second Circuit in In re Valenti, 105 F.3d 55, 64 (2nd Cir. 1997) and by the Tenth Circuit in In re Hardzog, 901 F.2d 858, 860 (10th Cir. 1990).

Cost of Funds Approach. Under this method, the rate is determined based on what interest the creditor would have to pay to borrow the funds. This approach is apparently not favored and has not been formally adopted by any circuits.

Coerced Loan Approach. There are two variations of the “coerced loan approach.” One variation is that the cram down interest rate is set as the same as the creditor would receive if it could foreclose and reinvest the proceeds in loans of equivalent duration and risk. Koopmans v. Farm Credit Servs., 102 F.3d 874, 875 (7th Cir. 1996). Another permutation on this approach is to examine the rate that the debtor would pay outside of bankruptcy to obtain a loan on terms comparable to those proposed in the Chapter 11 plan.

Presumptive Contract Rate Approach. Under this approach, the court begins with the pre-bankruptcy contract rate. This rate then creates a rebuttable presumption that either the creditor or the debtor can counter by persuasive evidence that the current rate should be different. In re Smithwick, 121 F.3d 211, 214 (5th Cir. 1997).

What is the guiding principle behind all of these approaches? Bankruptcy courts generally take the position that in reviewing reorganization and cramdown issues, it is important to balance the interest of the creditor in obtaining protection and compensation, while at the same time, setting an interest rate that is consistent with the fresh start offered by bankruptcy. There should be some consistency in approaches. Bankruptcy courts have the power to modify interest rates. There should be objective economic analysis applied, that weighs the risks of default with the fresh-start objective of bankruptcy.

Starting with the national prime rate of interest makes good sense. The “prime” rate (in the view of the Till case, cited above) is the “national prime rate, reported daily in the press, which reflects the financial market’s estimate of the amount a commercial bank should charge a creditworthy commercial borrower to compensate for the opportunity costs of the loan, the risk of inflation, and the relatively slight risk of default.” Till, 124 S. Ct. at 1960. “A bankruptcy court is then required to adjust the prime rate to account for the greater nonpayment risk that bankrupt debtors typically pose.” Id.

But how should this “risk adjustment” be determined? There are several factors that need to be weighed. The interest rate should be high enough to allow the creditor some relief, but not so high as to torpedo the plan. As discussed in Till, the following factors are normally relevant:

  • Circumstances of the estate. This term is rather vague, but presumably means any factor or issue that will impact on the debtor’s ability to perform on the loan, or otherwise increase risk.
  • Nature of the security. This means specific things directly related to the security. Value, depreciation characteristics, and the debtor’s use of the collateral are some of these things.
  • Duration of the plan. Inflation and expected market volatility are typically factors here.
  • Feasibility of the plan. This would be the projected likelihood of success, that is, the debtor’s ability to perform the terms of the plan.

Regardless of the methods used, the setting of a cramdown interest rate is important in both Chapter 13 and Chapter 11 cases. In Chapter 13 cases, the issue may not come up with as much frequency as in Chapter 11 cases. This is because many jurisdictions already have procedures whereby “trustee’s discount rates” of interest may be used. However, even model Chapter 13 plan formats allow debtors to set their own rates. Chapter 11 cases typically allow more creativity (or freedom) in crafting interest rates that can assist in the success of a Chapter 11 plan.

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Drunk Driving Debts And Bankruptcy In Kansas And Missouri

Johnson County Criminal Defense Law Firm

Johnson County Bankruptcy Law Firm

Section 523(a) of the Bankruptcy Code deals with various types of nondischargeable debt.  On of the subsections of Section 523(a) addresses the matter of a debt for “death of personal injury caused by the debtor’s operation of a motor vehicle, vessel, or aircraft if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance.”  11 U.S.C. §523(a)(9).  In other words, Section 523(a)(9) deals with certain types of debts arising from drunk driving.  While this type of debt is not common, it is important to spot it when it does arise.

The intent behind Section 523(a)(9) was to allow victims (or their families) of drunk driving crimes to pursue wrongful death or other civil actions against persons who may have committed drunk driving offenses.  Unlike some other nondischargeability provisions under Section 523(a), Section 523(a)(9) is “self-executing”, meaning that a victim creditor is not required to file an adversary proceeding to seek a determination of nondischargeability.  There is no requirement that the debtor actually be convicted of a DUI or DWI offense in state or municipal court.  A creditor seeking to use Section 523(a)(9) need only show that (1) the debtor was “intoxicated” within the meaning of state law; (2) the debtor was “operating” a motor vehicle or other type of vehicle while intoxicated; and (3) that the claim for personal injury or death resulted proximately from such conduct.

Despite the current climate of aggressive prosecution and enforcement of DUI and DWI offenses, the bankruptcy code construes exceptions to discharge strictly against creditors.  In other words, there is a presumption that debts should be discharged, and that a creditor seeking prevent this will have an uphill battle.  As far as Section 523(a)(9) is concerned, the burden is on the creditor to prove each and every element of nondischargeability by a “preponderance of the evidence.”  This is not an easy matter.  In Re Race, 198 B.R. 740 (W.D. Mo. 1996).

For the purposes of §523(a)(9), the most commonly encountered vehicle will of course be an automobile.  But motor boats also fall under this section, as well as airplanes and even snowmobiles.  In Re Race, 198 B.R. 740 (W.D. Mo 1996).  Incredibly, a bankruptcy court had to rule on whether a “horse and buggy” was considered to be a vehicle under §523(a)(9).  Not surprisingly, it ruled that it did not qualify as a vehicle.  In Re Schumucker, 409 B.R. 477 (N.D. IN 2007).

How, then, does the bankruptcy court determine whether the debtor’s operation of the vehicle was in violation of Section 523(a)(9)?  The court must apply state law, as a first matter.  Every state has its own requirements for what constitutes intoxication, and the bankruptcy court will defer to these standards.  In Re Spencer, 168 B.R. 142 (N.D. Tx, 1994).  The bankruptcy court must be convinced that the debtor was legally “intoxicated” under state law, and that the liability for the personal injuries resulted from such conduct.  If these state law issues have already been determined in another judicial proceeding, there is a good chance that the principles of res judicata and estoppel will preclude these issues from being tried over again.  This can be a slippery matter, however, because frequently in state or municipal court, actual judicial determinations on DUI/DWI issues may not have been made.

It is important to note that Section 523(a)(9) only applies to damages traceable to “personal injuries.”  In other words, drunk driving damages that may arise from damage to property, or from punitive damages awards, will not be covered under this section.  Thus there can arise the situation where the property damage debt is discharged, but the personal injury debt is not.  Regarding punitive civil damages, there are two different lines of reasoning that have developed.  Some courts have held that Section 523(a)(9) was intended to apply to debts directly resulting from personal injury; therefore, punitive damages from drunk driving personal injury claims would be nondischargeable.  In Re Dale, 199 B.R. 1014 (S.D. FL, 1995).

Other courts have ruled differently, holding that punitive damages do not have anything to do with personal injuries, and are therefore dischargeable.  In the rare situation where this type of debt comes up in a case, it will be important to probe into the circumstances of the incident, and to examine the nature of the claim against the debtor.  It is critical in these situations to examine in detail the nature of any civil judgment that may have been awarded against a bankruptcy debtor, in order to determine what (if anything) might be nondischargeable.

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Tax Crimes In Kansas And Missouri

Overland Park Criminal Defense Attorney

There are numerous different criminal statutes in the Internal Revenue Code dealing with evasions, false statements, and omissions in the filing of tax returns.  While civil attempts to collect tax debts are encountered relatively frequently (liens, garnishments, etc.), criminal prosecutions for tax matters are rare.  The IRS does have a criminal investigations unit which handles such matters, and if a decision to prosecute is made, the file is normally referred to the Justice Department.  Some possible indications that a civil audit may escalate into a criminal investigation may be:  a special agent joining the case, summonses being sent to third parties, or lengthy and multiple audit sessions.

The IRS has the ability to issues summonses to produce records and testimony.  Such a summons can be issued to any taxpayer.  This authority is limited; once a recommendation to prosecute is made to the Justice Department, this authority ends.  For a summons to be valid, it must show that the investigation is done for a legitimate purpose, that the inquiry is relevant and related to that purpose, that the IRS does not already have the information, and that proper procedures have been followed.  U.S. v. Powell, 379 U.S. 48 (1964).  Failure to respond to a summons may be grounds for a contempt action in federal district court.  A taxpayer may assert various privileges and defenses on his or her behalf.

When the IRS’s criminal investigations unit forwards a case to the district counsel, an invitation to a conference may be extended to the taxpayer or his counsel.  After the conference, further decisions may be made on the file regarding whether to prosecute.  When the taxpayer’s counsel authenticates a written instrument, there is some authority that admissions made by counsel during conferences may constitute vicarious admissions which may be used against the taxpayer.  U.S. v. O’Connor, 433 F.2d 752 (1st Cir. 1970).

The mental state required in criminal tax cases is one of specific intent:  the defendant must have acted willfully, not recklessly or negligently.  The government must prove that a duty existed for the defendant to do something, and that the defendant intentionally and voluntarily violated that duty.  An honest misunderstanding of one’s duties (e.g., relying on the advice of a professional) is a defense.  Some of the possible tax crimes are the following:

  • Tax evasion (I.R.C. Section 7201).  The elements of this offense are that a tax payment was due, that the defendant made an affirmative act to evade or defeat the tax, and that he acted willfully.
  • Willful failure to collect or pay over tax (I.R.C. Section 7202).  This provision was designed to cover situations where employers must withhold and pay sums withheld by employees.  Again, willfulness is an element of the offense here.
  • Willful failure to file return, pay tax, or supply information (I.R.C. Section 7203).  This provision was intended to apply to situations where persons are required to keep records or supply information , and willfully fail to do so.
  • Other federal criminal tax offenses may be the following:
  • Fraudulent statement or failure to make statement to employer (I.R.C. Section 7204)
  • Fraudulent withholding exemption (I.R.C. Section 7205)
  • Fraud and false statements (I.R.C. Section 7206)
  • Fraudulent returns or other documents (I.R.C. Section 7207)
  • Counterfeiting or reuse (I.R.C. Section 7208)
  • Unauthorized use or sale of stamps (I.R.C. Section 7209)
  • Attempts to interfere with the internal revenue laws (I.R.C. Section 7212)
  • Unauthorized disclosure of information (I.R.C. Section 7213)

It should also be noted that there are provisions which prevent officers and employees of the U.S. government from committing unauthorized acts with regard to tax collection.  Under I.R.C. Section 7214, agents of the United States cannot:  knowingly extort or oppress under color of law; knowingly demand a greater sum than that allowed by law; fail to perform his or her duties with intent to defeat the application of tax laws; and cannot conspire with any person to defraud the United States.

There is a variety of defenses that can be used in tax cases.  Commonly encountered defenses in tax cases are:  invoking double jeopardy, invoking the privilege against self-incrimination, good faith reliance, voluntary disclosure, and selective prosecution.  Other defenses may be relevant, of course, depending on the facts and circumstances of each case.  It is also possible, in some cases, for other persons to be liable beyond the taxpayer, such as accountants, corporations, or other third parties.  Various methods have been employed in attempting to trace income in tax cases.  These methods may include the “net worth” method, and the “deposits and expenditures” method.  The government is not normally required to reconstitute a taxpayer’s income with perfect precision, but it must establish  the all of the elements of the offense under which a taxpayer is charged.

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Lien Avoidances In Bankruptcy Under Sections 506(d) and 522(h)

Overland Park Business Bankruptcy Attorney

Overland Park Bankruptcy Attorney

Avoiding liens can be an important part of the bankruptcy “fresh start.”  There is a variety of methods of lien avoidance in bankruptcy cases.  We will here discuss lien avoidance under two code sections, Section 506(d) and 522(h).  Under Section 506(d), liens securing disallowed claims are not valid.  There are some exceptions to this rule, however.  One exception deals with domestic support obligations; a second exception deals with liens securing claims of codebtors or guarantors; and a third exception deals with situations where a claim was never filed in a case.

Section 506(d) is commonly used in Chapter 13 cases to “strip” or remove wholly unsecured second or third mortgages on a debtor’s primary residence.  While this remedy is not available under Chapter 7, it is available in Chapter 13 or Chapter 11 cases.  Under 506(d)(2), a lien securing an unfiled claim survives the bankruptcy even if the debtor’s personal liability for the unfiled claim is discharged.  The proper remedy in this situation is simply to reopen the case and file the necessary paperwork to avoid the lien.

If a debtor notices that a creditor is not filing a claim and the claims filing deadline is approaching, one solution is for the debtor to file his own claim on behalf of the creditor, and then object to its allowance, or file some other proceeding in the bankruptcy court to avoid the lien.  Liens can be avoided under Section 506(d) by adversary proceeding, by motion, and in some cases, by the plan confirmation process of Chapter 13 or Chapter 11, as long as proper notice is given of the intent to avoid the lien.  In Re Pence, 905 F.2d 1107 (7th Cir. 1990).

Section 522(h) of the Code deals with avoiding nonconsensual liens on exempt property.  A debtor has a right to avoid such liens and other involuntary transfers of interests in his exempt property.  This right is in addition to the rights a debtor has under Section 522(f) of the Code.  Section 522(h) also permits a debtor to claim exemptions on property recovered by the Trustee if the debtor did not voluntarily transfer the property and did not hide the existence of the property.  A Trustee is unlikely to go through the trouble of recovering property that ends up being exempt property of the debtor.  If the debtor can exempt even a portion of the property sought to be recovered by avoiding the lien, then the debtor may avoid the lien.  When this happens, the excess value of the recovered property may remain subject to the lien unless the balance of the lien is avoided by the Trustee.

Basically, a debtor will need to meet these requirements to avoid a lien or other transfer under Section 522(h):

  • The transfer must not have been voluntarily made by the debtor
  • The debtor must not have concealed the existence of transferred property in the bankruptcy case
  • The Trustee must not have acted to avoid the transfer in question, and it must be avoidable by him under the Code or be recoverable as a setoff
  • The debtor must be able to use an exemption on the transferred property, if recovered.

These requirements are relatively straightforward.  In practice, it can be difficult to determine whether a transfer was done voluntarily or involuntarily.  Many transfers that appear to be voluntary may in fact be, upon scrutiny, not so voluntary.  Creditors frequently use coercion, threats, and duress when collection issues arise.  We should look to the essence of the transfer, not on what someone names it.  The burden of proof is on the debtor to show that he or she ws unduly coerced or harassed, or threatened.  Like much else in the law, if a debtor desires to act under this Section, he or she should move quickly to do it.  Failing to act in a timely fashion to reclaim property in this situation may mean that the debtor will not prevail.  Courts have an interest in seeing property disputes resolved in a timely fashion.  The doctrine of “laches” holds that a party which sleeps on its rights may lose its right to do something that was able to do.

Protocol may differ from court to court and from judge to judge, but the standard procedure for avoiding liens under Section 522(h), and for recovering the property in question, is the filing of an adversary proceeding using F.R. Bankr. 7001.  It is also a good idea for a petitioning debtor to request that the court preserve the avoided transfer, since such transfers are not automatically preserved for the debtor.  11 U.S.C. §522(i)(2).  Such transfers are automatically preserved for the Trustee, but not for the debtor without a request having been made and granted.

Read More:  Lien Avoidance In Bankruptcy Under Section 522(f)

Avoiding Liens In Bankruptcy Under Section 522(f)

Overland Park Bankruptcy Attorney

As part of his or her “fresh start” in bankruptcy, it is possible for a debtor to avoid liens on property securing dischargeable debts. If this is not done, the liens may pass through the bankruptcy and impair the debtor’s ability to move forward. Section 522(f) of the Bankruptcy Code is one of the principal ways that such liens may be avoided. This section of the code has four paragraphs. Taken together, the section states how a debtor may avoid judicial liens against his or her exempt property to the extent that the lien impairs the debtor’s exemption. It should be noted here that we are speaking in this article only of Section 522(f). Liens may also be avoided by a debtor using other sections of the Bankruptcy Code, such as Sections 506(d) and 522(h). Knowing which section to use will depend on various factors, such as the nature of the lien, the type of bankruptcy filed, and the specific issues of the case.

Section 522(f) is applicable under all chapters of the Bankruptcy Code and may thus be used in Chapter 7, 13, 11, or 12. However, Section 522(f) is not applicable to corporate or business debtors, since it was designed to assist persons or individuals with exempt property. There is no time limit on the use of 522(f); it may be undertaken at any time during a case. Significantly, a previously closed case can be reopened to avoid a lien. This happens frequently, as there are situations where a debtor or debtors may not be aware of the existence of such a lien on their property.

Lien avoidances under 522(f) may be initiated by the filing of a motion under F.R. Bankr. 9014 instead of by adversary proceeding. The debtor has the burden of proof of claiming the necessary exemption in the property and establishing the value of the property. Valuations of property will be dated from the date the case was filed, not when the lien avoidance is undertaken. Basically, to avoid a judicial lien under Section 522(f)(1)(A), the following conditions must be met:

  • The lien must be a judicial lien
  • The debtor must have an interest in the secured property
  • The debtor must claim a valid exemption in the property
  • The lien must impair an exemption in the property

The debt should be a dischargeable debt, and not a domestic support obligation
A judicial lien is a lien obtained by a court judgment, levy, or some other legal process or proceeding. Judgment liens are considered to be judicial liens. The debtor also needs to have some ownership interest in the property secured by the lien. However, the debtor does not need to have any equity in the secured property. The debtor’s interest in the property must also predate the attachment of the creditor’s lien to the property. A lien is considered to “impair” an exemption to the extent that the sum of (1) the dollar amount of the lien, plus (2) the dollar amount of all other valid liens against the property, plus (3) the amount in dollars of the exemption that the debtor could claim if there were no lien against the property, exceeds the value of the debtor’s interest in the property if there were no liens on the property.

Domestic support obligation liens are not included under 522(f), and other types of nondischargeable debts would not fall under this section. Section 522(f)(1)(B) can be used to avoid nonpossessory, nonpurchase money security interests in the following types of property: household goods and furnishings, jewelry, appliances, crops, musical instruments, clothing, tools of the trade, and professionally prescribed health aids of a debtor or a dependent thereof. The basic goals of the Code here are to prevent debtors from being forced to reaffirm these types of debts, and to allow debtors to get their fresh start without hindrances. A purchase money security interest is basically an interest taken or retained by the seller of the collateral to secure part or all of its price.

As a practical matter, it is normally in the debtor’s best interest to claim the largest possible exemption against the property in question. This is because the amount of a security interest that may be avoided against personal property is dependent on the amount of the exemption claimed by the debtor. Exemption “stacking” is permitted and should be looked into for debtors seeking to use this section of the bankruptcy code. Finally, it is also important to look at whether the federal or state exemptions are being used. All in all, it is important to remember that the bankruptcy code provides for more than one way of accomplishing certain goals. There are many lien avoidance methods in bankruptcy law. Even if it is not possible to do something under one section of the code, it may be possible to do it under some other section.

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Bankruptcy Debtors Can’t Be Discriminated Against

Overland Park Bankruptcy Attorney

The Bankruptcy Code makes specific provision for the protection of debtors who file bankruptcy. One of those protections is the right not to be discriminated against once they file bankruptcy. It is comforting for debtors to know that they are protected by specific legal provisions that prevent anyone from discriminating against them or drawing adverse inferences about them once they file a case.

Section 525 of the Bankruptcy Code specifically prohibits these forms of discrimination:

  • Discrimination by governmental entities regarding employment
  • Discrimination by governmental entities regarding the granting of licenses, permits, or franchises
  • Discrimination by private employers regarding employment issues
  • Discrimination with respect to the making or insuring of student loans

Under Section 525(a), a governmental entity cannot deny, revoke, suspend, refuse to renew, or otherwise discriminate with respect to a license, permit, or franchise. It also may not deny employment, terminate employment, or otherwise discriminate in any employment-related matter against someone who has filed a bankruptcy. The protections here are interpreted broadly. Any discrimination interfering with the fresh start intended by the Bankruptcy Code will run afoul of Section 525. Filing a case, failing to pay a dischargeable debt, or being insolvent cannot be used against a bankruptcy debtor, period.

We should also note here that Section 525(a) also prohibits state motor vehicle bureaus from denying drivers licenses to people because of unpaid fines or dischargeable debts in bankruptcy. This section has also been used to prevent discrimination in the denial of real estate licenses, insurance licenses, contractor licenses, and liquor licenses to bankruptcy debtors. Educational institutions (colleges) also cannot withhold transcripts from debtors who have filed bankruptcy. Housing authorities also cannot evict bankruptcy tenants due to dischargeable unpaid rent that was taken care of in a bankruptcy case.

What constitutes a “governmental entity” is interpreted broadly under Section 525. It may include public housing authorities, racing commissions, city water boards, utility boards, and even creditors who act as vicarious agents of the state. The definition of a “person” for Section 525 purposes has been held to encompass both individuals and businesses. Surprisingly, Section 525 also protects people who have been associated with a bankruptcy debtor. In one case, a school district was forbidden to collect discharged school tuition from a relative of the debtor. In Re Dembek, 64 B.R. 745 (N.D. OH, 1986). Of course, the debtor in these situations must show (or show a substantial likelihood) that the discrimination occurred because of the bankruptcy filing, and not because of some unrelated matter.

State motor vehicle departments cannot discriminate against a bankruptcy debtor in license issues, where a debtor has discharged fees, costs, or fines related to drivers licenses. Furthermore, the suspension of drivers license due to a dischargeable traffic fine has been held to be a violation of Section 525(a). Equally important is the fact that governmental entities cannot tamper with licenses, permits, or grants. Many debtors have real estate licenses, insurance licenses, or other types of licenses, and it is not permitted for any agency to use the fact that a person filed a bankruptcy as a way to treat them differently from someone who has not filed a case. For example, in In Re Bradley, 989 F.2d 802 (5th Cir. 1993), the revocation of an agent’s insurance license by the state insurance commissioner due to the nonpayment of a discharged insurance-related debt was a violation of Section 525.

This section is important in the consideration of licenses and permits of professionals. In one case, a physician who had filed bankruptcy was able to prevent his removal from the state’s list of Medicaid-eligible doctors. Berkelhammer v. Novella, 279 B.R. 660 (S.D. NY 2002). Doctors, dentists, attorneys, insurance professionals, and real estate professionals have all been able to use Section 525 to prevent bankruptcy-related discrimination against them.

Eviction from public housing that happens as a result of discharging rent obligations is also a violation of Section 525. Such attempts to discriminate against a bankruptcy debtor amounts to a roundabout way of coercive debt collection. Furthermore, the denial of a rental application due to notations on a credit report from a bankruptcy filing has been held to be a violation of Section 525(a). In Re Oksentowicz, 314 B.R. 638 (E.D. MI, 2004).

Bankruptcy debtors cannot be discriminated against in employment issues, either. Being notified of a bankruptcy and using that against a person, having to withhold wages as part of a Chapter 13 plan, or otherwise using the fact of a bankruptcy filing in a negative way are all prohibited under Section 525. A debtor who can show that the discrimination was related to the bankruptcy is entitled to injunctive and declaratory relief.

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Damages For Violations Of The Automatic Stay In Bankruptcy Cases

Overland Park Bankruptcy Attorney

The automatic stay is one of the most fundamental protections provided to a debtor in a bankruptcy case. It is not, then, surprising that bankruptcy courts take a very dim view of creditors who ignore the protections granted to a debtor after the filing of a case. The bankruptcy code permits a debtor to recover damages for violations of the automatic stay; those provisions are contained in 11 U.S.C. §105(a) and 11 U.S.C. §362(k).

Section 105(a) allows the bankruptcy court to enforce its orders by using contempt proceedings. The automatic stay is considered to be in effect through a court order, so that violations would be covered under this provision. However, Section 362(k) is more specific and more commonly used. It creates a separate right to damages for parties affected by a creditor’s violation of the automatic stay. So, while an aggrieved debtor may proceed under either section, it will usually make more sense to use Section 362(k) for most consumer purposes. Section 362(k) permits punitive damages; it requires a less strict standard than 105(a); it has simpler noticing requirements; and it is a core proceeding, so that it can be heard and decided by the bankruptcy court. See In Re Johnson, 390 B.R. 414 (10th Cir. B.A.P. 2008).

To prevail in an action under Section 362(k), the following elements must be shown:

  • 1. The debtor must be an individual.
  • 2. The offending person or entity must have violated at least one provision of 11 U.S.C. §362 (the automatic stay provision imposed by the court).
  • 3. The violation of the automatic stay must have been “willful.”
  • 4. The person seeking relief must have been injured in some way, and have incurred damages as a result of the violation.

While the term “individual” normally refers to persons, there is a dispute of authority whether businesses or corporations may recover under Section 362(k). Some circuits limit automatic stay violations actions under 362(k) to persons; some circuits take the position that businesses also may pursue damages for stay violations under 362(k). Even if a business were not eligible to proceed under 362(k), it would still be able to pursue damages for an automatic stay violation under another section of the Code. Many courts also hold that a trustee qualifies as an “individual” under Section 362(k); but there are some decisions that have gone the other way. See, e.g., In Re Pace, 67 F.3d 187 (9th Cir. 1995).

The debtor must also show that the actions of the creditor fall under at least one provisions of the automatic stay as laid out in Section 362. If a case has been closed or dismissed, then the automatic stay terminates, and damages might not be allowed. A creditor who tries to collect or enforce a nondischargeable debt must still, however, obtain stay relief from the court before undertaking such actions. In actual practice, technical violations of the automatic stay happen all the time in bankruptcy cases. Letters are sent to debtors; phone calls are made to them; they are contacted when represented by counsel, and other similar things happen with some frequency. However, such de minimis violations rarely rise to the level of causing actionable harm to a debtor. Some actions do cause harm: an attempt to enforce a prepetition judgment; an attempt to obtain, create, or perfect a lien on bankruptcy estate property; or a setoff of a prepetition debt owed by a debtor can cause actual harm.

The “setoff” game is a very common tactic of banks and other financial institutions. What normally happens is that a debtor will file a case, and then at some point during the case, the creditor will try to debit, deduct, or setoff the debt with some other monies available to it from some other account. Similar games are often played by credit unions with “cross collateralized” loan structures. This type of conduct is not permitted. It is a defense to a creditor to say that it was relying on the advice of counsel in its actions. Even the belief that a creditor was acting in good faith is not a defense. In Re Radcliffe, 563 F.3d 627 (7th Cir. 2009).

A debtor must show some injury as a result of the creditor conduct. There must be some way to quantify the damages, even if they are small. Section 362(k) permits the recovery of actual damages, as well as costs and attorney fees. Damages here can come in many forms: lost wages, improper setoffs, liens improperly attached, garnishments improperly taken, and even emotional damages if such can be properly quantified. Even punitive damages are permitted if the creditor conduct is malicious, oppressive, egregious, or in bad faith.

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Computer Fraud And Computer Crimes In Kansas And Missouri

Kansas City Computer Crimes Attorney

Overland Park Computer Crimes Attorney

Congress centralized computer crimes under one statute in 1984 with the passage of the “Counterfeit Access Device and Computer Fraud and Abuse Act.” The intention was to have a tool to prosecute computer-related crimes under the rubric of one statute. The Act (also called CFAA, for “Computer Fraud and Abuse Act”) was broadened in 1996 to apply to all computers used in interstate commerce, foreign commerce, and foreign communication. Essentially, then, every computer in America connected to the internet can fall under the Act. The Act also allows civil actions for compensatory damages and equitable relief in some situations. 18 U.S.C.A. §1030(g).

In 2002, Congress passed the Cyber Security Enhancement Act, which amended the CFAA to increase the statutory penalties associated with the Act. The scope and reach of enforcement in this area is, to say the least, extensive. It seems clear that many citizens are not fully aware of either the power of the current computer statutes, or the case law holdings in this area. This is an area of the law that deserves wider scrutiny and awareness.

18 U.S.C.A. §1030(a)(1) has been referred to as the “computer espionage statute.” It was intended to prevent knowing access of government computers to obtain classified information. It is a felony to knowingly access a computer without authorization, or to exceed the scope of such authorization if it existed, “with reason to believe that such information could be used to the injury of the United States, or to the advantage of any foreign nation.” A person must (a) have reason to believe that the information so obtained would harm the U.S. or be of advantage to a foreign nation, and (b) either willfully send such information to an unauthorized person or willfully retain such information and fail to deliver it to the U.S. Significantly, the Second and Ninth Circuits have held that the government is not required to prove that the defendant intentionally caused damage, but only that a defendant intentionally accessed the computer. U.S. v. Morris, 928 F.2d 504 (2nd Cir. 1991); U.S. v. Sablan, 92 F.3d 865 (9th Cir. 1996).

18 U.S.C.A. §1030(a)(2) was intended to protect the confidentiality of computer data. In an age where hackers can expose peoples’ personal information, there was held to be a need for such a subsection in the CFAA. Under this subsection, it is a crime to (a) obtain information contained in financial institutions or reporting companies; (b) obtain information from any department or agency of the government; or (c) obtain information from any protected computer if the conduct involves interstate or foreign commerce. A person must first deliberately (as opposed to accidentally or inadvertently) access a computer and then obtain the information.

18 U.S.C.A. §1030(a)(3) prohibits unauthorized access of government computers. Any unauthorized access of a government computer can theoretically trigger a violation of this subsection. If the government does not exclusively use a computer (i.e., if it is a shared computer), then the access is wrong only if the access “adversely affects the use of the government’s operation of such computer.” 18 U.S.C.A. §1030(a)(4) is the “computer fraud” statute. It is a crime to access and fraudulently use a protected computer to obtain something valued at more than $5000 in any one year period. The intention here was to protect computers from hackers who break into computers and use them to commit multiple frauds. There is a requirement of showing an intent to defraud under this subsection.

18 U.S.C.A. §1030(a)(6) governs the trafficking in computer passwords. It is unlawful to traffic (i.e., exchange, sell, distribute, or market) in passwords or similar information through which a government computer may be accessed without authorization. Finally, subsection (a)(7) of the same statute prohibits computer extortion. It prohibits any attempt to extort money or other things of value using a computer. It also covers interstate or international sending of threats against computers or networks.

Defenses to these statutes have been developed by case law. It is apparently a defense to a charge of accessing a protected computer that a person did not obtain anything of value. U.S. v. Czubinski, 106 F.3d 1069, 1079 (1st Cir. 1997). Mere browsing of protected data was not enough, in this case, to sustain a conviction. The government must show, rather, that the information obtained was valuable as part of the defendant’s alleged fraudulent scheme. In addition, the damage from the unauthorized access must cause some injury, in the amount of at least $5000 over a one-year period, or lead to potential injury or a threat to public health or safety.

There are a variety of other statutes (at the federal level, at least forty) that govern computer crimes. This area of criminal law is, without doubt, one of the fastest growing (and fastest changing) and most “cutting edge.” The problems associated with the keeping of vast amounts of electronic data, emails, backup files, and other records ensure that this area of law will continue to be directly relevant to most people in a way that other types of criminal statutes are not.

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