Category Archives: Chapter 13 Bankruptcy in Kansas City

Compelling A Bank To Accept Surrendered Real Estate In A Chapter 13 Plan: Vesting Without Consent

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It is no secret that the 2008 financial crisis, and the real estate collapse that followed, threw the real estate market into chaos.  Many lenders found themselves reluctant to foreclose on properties that might have left them liable for homeowners’ dues, association fees, or property taxes.  Many of these lenders also found out—or already knew—that the values of their properties were not worth what they had been saying they were worth.  As a result, many properties were stuck in limbo.  They did not want to continue to deal with property maintenance issues for properties they wanted to surrender back to the banks.

But what happens when the bank refuses to foreclose, or takes an unreasonably long time?  In some jurisdictions, the non-payment of property taxes can trigger an automatic foreclosure after several years.  But what if a debtor doesn’t want to wait that long?

A bankruptcy court in the District of Oregon dealt with this issue in October 2014.  The case was In Re Watt, 520 B.R. 834 (D. Oregon, 2014).  In this case, the debtors filed a Chapter 13 plan that provided for the surrender of their property back to the creditor, Bank of NY Mellon.  The plan contained language that said the following:

Upon entry of an Order Confirming this Chapter 13 Plan, the property at 56 B NW 33rd Place in Newport, Oregon shall be vested in The Bank of New York Mellon fka The Bank of New York, as trustee for the Certificateholders of the CWALT, Inc., Alternative Loan Trust 2006–OA21, Mortgage Pass–Through Certificates, Series 2006–OA21, its successors, transferees or assigns pursuant to 11 U.S.C. 1322(b)(9). This vesting shall include all of Debtor’s legal and equitable rights. This vesting shall not merge or otherwise affect the extent, validity, or priority of any liens on the property. Creditors potentially affected by this paragraph include:  The Bank of New York Mellon aka Select Portfolio Servicing, the Bank of America, Lincoln County Tax Assessor and Meritage Homeowners Association.

The bank objected to this language, claiming that it could not be compelled to accept the property.  The court first noted that 11 U.S.C. § 1325(a)(5)(C) provides that with respect to a secured claim, a plan may surrender the property securing the claim to the holder of the claim. The debtors had vacated the property and made it available to BONY Mellon.  But the court noted that surrender merely establishes the debtor will not oppose the transfer of the collateral. Absent some further action, such as foreclosure, deed in lieu of foreclosure or short sale of the property, surrender does not divest a debtor of ownership and its obligations.  The court cited  In re Spencer, 457 B.R. 601 (E.D.Mich.2011) and In re Anderson, No. 12–37458–tmb13, Hr’g Tr. 23–24.

But can a Chapter 13 plan be used to “vest” property in another party, against their will?  This was the big issue.  The court approached it methodically.  It first noted that the debtors were in an unfair situation:  they wanted to get a fresh start, but the bank was sitting on its hands and not foreclosing.  At the same time, homeowner’s dues were continuing to accrue, and under the Bankruptcy Code, post-petition homeowner’s dues continue to be the debtor’s responsibility until his or her ownership interest in the property ends.  The situation was preventing the debtors from getting a fresh start, which is one of the primary purposes of the Bankruptcy Code.

The debtors argued that §1322(b)(9) of the Code permitted them to use a plan to transfer title in real estate back to the lender, even against the lender’s consent.  The bank, of course, disagreed.  The debtors cited a Chapter 13 case in which debtors sought to compel a secured party to take title to property surrendered in a bankruptcy proceeding.  The cited case was In re Rosa, 495 B.R. 522 (Bankr. D. Haw. 2013).  In this case, the debtor proposed a plan which provided for surrender of her real property and that title to the property would vest in the secured lender upon confirmation.

The Chapter 13 Trustee in Rosa objected to the plan, arguing that the plan provision vesting title in the secured lender was improper. The debtor disagreed, arguing that the vesting provision of the plan was authorized by §1322( b)( 9). The bankruptcy court agreed with the debtor in this case.  However, the court concluded that a debtor’s rights under §1322( b)( 9) were somewhat limited by the requirements of §1325(a)(5) regarding treatment of secured claims.

The debtors also cited another case, In re Rose, 512 B.R. 790 (Bankr.W.D.N.C. 2014).  In this case the debtors sought to quitclaim the property back to the lender, the SBA, by using a motion, rather than language in a confirmed plan.  The Rose court did not agree that a bank could be compelled to accept title in property without going through the foreclosure process.  It concluded that a secured lender could not be compelled to accept title without its consent as “taking title by deed could impair a lender’s rights in the collateral, subject it to ownership liabilities that it never would have voluntarily assumed and contravene state property law.”  This was a disappointing conclusion, and probably wrongly decided.  It focused entirely on the bank’s rights, while ignoring the rights of the debtors, and the significant hardship that was being imposed on them by being “in limbo” with regard to the property.

Finally, the Watt court was ready to issue its ruling.  It disagreed with both the Rosa and the Rose decisions.  Section 1322(b)(9) could indeed be used to force a lender to accept back its real estate, period.  The court noted that the plain language of the Code section read “vest.”  Vesting means transfer of title.  It was not appropriate to read additional qualifiers into that language.  It was plain and simple:  there was nothing in the plain language of §1322(b)(9) that required a lender’s “consent” in the vesting process.

The only limitation to using Section 1322(b)(9) for this purpose was “good faith.”  The vesting provision could not be used as an aid to fraud or malfeasance, in other words.  The court said the following:

However, under § 1325(a)(3), the court may not confirm a plan unless it is proposed in good faith. Accordingly, confirmation could be denied if a debtor attempts to use §1322(b)(9) to transfer property to a third party in order to relieve him or herself of responsibility for nuisance or environmental problems associated with it. In this case, there are no such concerns.

Obviously, such concerns (i.e., property transfers in bad faith to avoid some sort of “ticking time bomb”) are extremely rare.  In the real world of bankruptcy practice, debtors just want to shed themselves of their real estate involvements, and get a fresh start.  The court ruled that, in situations where lenders refuse to move, a confirmed plan can accomplish this goal.

What the court found particularly irksome was the bank’s refusal to act.  After all, it was the banks who had caused the financial crisis in the first place; and now some of them were trying to keep bad loans on their books by refusing to foreclose.  This situation is not acceptable.  It hurts the debtors, the other people in the homeowner’s association (who have to absorb the costs), the neighborhood, and the economy at large.  The court used the following colorful language:

BONY Mellon resists taking title and surrender but yet seeks relief from the automatic stay to foreclose at an undeterminative date with no commitment to moving forward. BONY Mellon did not offer to waive its security and be treated as an unsecured creditor. It reminds me of the old adage of the dog in the manger. The dog cannot eat the hay but refuses to let the horse or the cow eat it either. BONY Mellon would rather sit on the hay. This creates a stalemate.

It seems likely that such “vesting” cases will become more common in the near future.  Bankruptcy courts may (hopefully) in the coming years take a dim view of banks who continue to clog up the local and national economy by refusing to foreclose on properties that belong to them.  It is hoped that the Watt case will be a portent of things to come with regards to the glut of surrendered properties in many parts of the country.  Thus far, legislators have been blind to the problem.  For many debtors, action on this front can’t come soon enough.

Read More:  Defalcation In A Fiduciary Capacity:  Adversary Proceedings Under Section 523(a)(4)

Fines And Restitution From Criminal Cases Are Protected In Bankruptcy

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In bankruptcy, debts originating from fines or penalties in criminal cases are generally not dischargeable.  A 2014 ruling by the 8th Circuit Bankruptcy Appellate Panel (B.A.P.) has restated this point. The case in question was Behrens v. United States (In Re Behrens, No. 13-6052, 2014 Bankr. LEXIS 565, Feb. 12, 2014).

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Is A Late-Filed Tax Form A “Tax Return” For Dischargeability In Bankruptcy?

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Is an untimely 1040 Form, filed after the Internal Revenue Service has assessed a tax liability, a tax return for the purpose of the exceptions to discharge in § 523(a)(1)(B)(i) of the Bankruptcy Code?  This was the question that the Tenth Circuit Court of Appeals recently decided in the case of In Re Mallo, decided on December 29, 2014  (Appeal from the United States District Court for the District of Colorado, (D.C. Nos. 1:13-CV-00098-LTB and 1:12-CV-03380-LTB).

The case was actually a consolidated appeal from two cases, In Re Mallo and In Re Martin.  The appeal came out of Colorado.  The background to the cases involved situations where bankruptcy debtors had not filed tax returns for certain years.  Edson Mallo and Liana Mallo did not file timely federal income tax returns for 2000 and 2001 as required by the Internal Revenue Code. As a result, the IRS issued statutory notices of deficiency pursuant to 26 U.S.C. §§ 6212 and 6213 for those years. The Mallos did not challenge those determinations.

The Internal Revenue Service assessed taxes, including penalties and interest, against the Mallos for various years of delinquencies.  The IRS began collection efforts in 2006.  In 2007 the Mallos filed additional returns for past due years.  The other appellant, Martin, had a similar history of delinquent returns.  The IRS tried to make collection efforts against him as well.

The Mallos later filed a Chapter 13 bankruptcy case, which was eventually converted to a Chapter 7 case.  They filed an adversary action against the IRS, seeking a determination that the income tax debts had been discharged.  The IRS filed a motion for summary judgment in the case, claiming that because the Mallos had not filed a tax return for certain years at issue, the tax debts should not be discharged.  The bankruptcy court agreed with the IRS and granted the motion.  The Mallos appealed.

Mr. Martin, the other appellant, received a different result.  He also filed an adversary action against the IRS seeking a determination that certain income tax debts were discharged.  In his case, a bankruptcy court found that his delinquent filed Form 1040 did, in fact, qualify as a tax return.  Thus, his tax debts were found to be discharged.  The IRS appealed.  Both the Martin case and the Mallo case were thus consolidated.

The Court of Appeals thus had to decide what actually constitutes a “tax return” for the purposes of dischargeability under Section 523.  The Court found that:

The hanging paragraph [of Section 523] defines “return” as “a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements).” Id. § 523(a)(*). It then explains which tax forms prepared under § 6020 of the Bankruptcy Code fall within that definition. Thus, the plain language of the statute requires us to consult nonbankruptcy law, including any applicable filing requirements, in determining whether the tardy tax forms filed by the Mallos and Mr. Martin are returns for purposes of discharge.

The Court reviewed some decisions of other circuits on this issue.  What was important to the Court was the idea that filing requirements for tax returns included “deadlines.”  And because the applicable filing requirements include filing deadlines, § 523(a)(*) plainly excluded late-filed Form 1040s from the definition of a return.  In other words, a delinquent Form 1040 did not constitute a “return” for the purposes of Section 523(a)(*).  An untimely filed tax form cannot constitute a “tax return” for the purposes of dischargeability in bankruptcy.  Why?  Because a due date is an applicable filing requirement.  Missing the due date means that a taxpayer has missed a filing requirement.  In sum, the Court stated:

Having considered and rejected the arguments advanced by Taxpayers and the Commissioner, we agree with the Fifth Circuit’s decision in McCoy that the plain and unambiguous language of § 523(a) excludes from the definition of “return” all late-filed tax forms, except those prepared with the assistance of the IRS under § 6020(a).

The ruling of the Court makes sense from a policy perspective as well.  If taxpayers simply file random forms out of time, without requesting extensions, then a burden would be placed on the IRS with regards to what is or is not a “return.”  The lesson here is clear, and has been said before:  always file your tax returns in a timely fashion, even if you cannot pay the tax.  Unexpected adverse consequences can happen when returns are not filed.

Read More:  Domestic Support And Child Support Obligations In Bankruptcy

A Lease Or A Secured Loan: Economic Realities Matter, Not Words

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A common tactic of creditors in bankruptcy litigation is the attempt to characterize the nature of their debt in a way that is the most favorable for them.  It is almost a version of the philosopher Gottfried Leibniz’s old phrase “the best of all possible worlds”:  whatever characterization produces the most favorable outcome, that is generally what the creditor will choose.  We have seen, for example, loan contracts (drafted by creditors) that basically contain enough contract provisions that they can claim to be nearly anything:  a secured loans, a trust agreement, a purchase money security agreement, or a lease.

Such issues have arisen in the context of the issuance of money orders (a trust agreement or a security agreement?) by businesses or “floor plan” arrangements for used auto sales (is it a trust agreement or a secured loan?)  When such contracts are eventually brought before a court during litigation in an adversary proceeding or some other bankruptcy-related proceeding, a creditor may point to any number of various (and sometimes conflicting) contract provisions to try to claim that its debt is somehow “special.”

Not surprisingly, courts will often look past such verbiage to examine the actual nature of the transaction between the parties.  In bankruptcy court, it doesn’t matter what you call it, what matters is the underlying nature of the transaction.  This issue arose recently in a Kansas case in the context of a vehicle contract for the use of a debtor’s car.  The financing company claimed the arrangement was a lease.  The debtor (In Re James, case no. 12-23121, decided in the District of Kansas in November 2014) claimed the arrangement was a de facto secured loan.

Judge Robert Berger, who issued the decision, pointed to the Supreme Court case of Butner v. United States, 440 U.S. 48, 54-55 (1979) for the proposition that property right questions must generally focus on state law.  Following this logic, the Court focused on K.S.A. §84-1-103, which holds that the economic realities of a transaction must be the primary factors in interpreting its essence.  In other words, it doesn’t matter what a party calls something; what matters is the actual nature of the transaction (the “economic realities”) that matters.  Looking at the fine print of the contract, the Court noted that the “lease” agreement actually gave the debtors the option to become the owners of the goods for no additional consideration.

In addition, the vehicle contract did not give the debtors the option to terminate it, which is supposed to be one of the main features of a true “lease.”  Actually, there was a “cancellation” provision in the contract, but it required the debtors to pay the remaining balance due.  For this reason, the cancellation provision was a creditor ruse.  “Early termination” of the lease was an illusion.  Because the so-called “lease” gave the debtors no rational option but to continue making payments until completion of the contract, it was not a true “lease.”  The Court found it to be a security interest, and would treat it as such within the debtor’s Chapter 13 plan. Although the car loan could not be crammed down, the terms of the contract could still be modified somewhat in the Chapter 13 plan (interest rate lowered, different payment terms, etc.).

The James decision highlights a tactic frequently used by creditors:  fill a contract with fine print that has features of nearly any scenario that might arise.  As stated above, we have seen creditors attempt to characterize ordinary, garden-variety commercial loans as priority trust agreements (deserving special treatment), as statutory trusts, as security agreements, as leases, or as other things.  The tactic is also used frequently by payday loan establishments in possession of debtors’ checks.

It is becoming more and more common for large institutional creditors to take advantage of their size and unequal bargaining power to compel debtors to sign agreements that may not be what they appear to be.  The practice also is found in business situations and commercial loans.  Fortunately, the rule here is clear:  it doesn’t matter what a creditor says a contract is; what matters is what the economic realities of the transaction are.  If you have been saddled with a contract or agreement that a creditor claims to be one thing or another, it is critical to get independent legal advice.  Very often, you may have more rights than you think you have.

Read More:  Bankruptcy Debtors Can’t Be Discriminated Against

Confirmation Of A Chapter 13 Plan: The Effects

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One of the major goals of the Chapter 13 debtor is the confirmation of the plan proposed to the Court and to the creditors.  The plan, until it is actually confirmed by Court order, has no formal legal effect.  The plan’s provisions must be found to comply with Bankruptcy Code §1322 and meet the other confirmation standards laid out in §1325.  The creditors and the Chapter 13 trustee will have had the opportunity to review the plan and file any objections they wish to file.  Once the plan is actually confirmed by a confirmation order, three effects come into play.

First, the provisions of the plan become binding on all the parties (debtor and creditors) pursuant to §1327(a). This is referred to as the “res judicata” effect of confirmation.  As one judicial ruling said, once a plan is confirmed, it becomes binding on the parties, “warts and all.”  This means that the confirmed plan has binding legal effect even if it happens to contain provisions that conflict with the Bankruptcy Code (there are some limitations on this rule; and a debtor cannot push it too far.  Some things cannot be achieved by plan confirmation and must be separately litigated).  The plan is still subject to postconfirmation modification in accordance with §1329.  Furthermore, the Court does have the power to revoke a fraudulent confirmation under §1330(a).

Second, under §1327(b), the confirmation of a plan vests the property of the estate in the debtor unless the plan or confirmation order says otherwise. The Chapter 13 Trustee is not a liquidating trustee, unlike a Chapter 7 trustee.  The extent to which the property of the estate vests in the debtor is an important issue when dealing with the issue of the postconfirmation application of the automatic stay under §362(a).  Issues can also arise regarding the status of the debtor’s postconfirmation earnings or property that the acquires after confirmation.

Third, under §1327(c), property that vests in the debtor is held free and clear of any claim or interest of any creditor provided for by the plan, unless the plan or confirmation order says differently. If the plan modifies a secured claim, it must provide for the creditor to retain its lien until the value of the secured portion of the claim has been paid and the debtor has received a discharge.

Once the confirmation order is entered, the Chapter 13 Trustee begins to disburse funds paid by the debtor under the plan to the creditors in accordance with the plan provisions.  There is usually a significant amount of money available to do this, since the debtor will have been making payments since the filing of the case, and these payments will have been held in trust by the trustee.  Once the debtor has finished making the payments provided for under the plan, the debtor will be discharged for personal liability on all the debts (with some limited exceptions).  If this payments are not completed under the plan, it may be converted to another chapter of the Bankruptcy Code (Chapter 7) or dismissed.  If a case is converted or dismissed, a secured creditor retains its lien to secure the unpaid amount of the secured debt, regardless of the valuation of the encumbered property under the plan.

The binding effect of the plan’s terms requires creditors to apply payments in accordance with the plan, and limits their rights with regard to prepetition defaults.  If the plan modifies a secured claim through a “cramdown” or otherwise, the plan’s provisions state the terms for the satisfaction of the claim and any lien that may secure the property.  The plan is also binding on the debtor as well.  Essentially, the court views a Chapter 13 plan as a new contract among the parties, and that this new contract replaces the old agreements.  The doctrine of “claim preclusion” or res judicata applies.  This doctrine of claim preclusion has even been interpreted by courts to prevent later adjudication of many different matters, including an objection to a proof of claim.

However, the creditor must have received notice of the plan and it must have had a chance to assert its due process rights.  Due process is satisfied as long as the creditor has received adequate notice.  It is in the best interests of debtors, of course, to draft plans carefully, so that the desired treatment of each claim or class of creditors is specifically detailed.  Creditors, for their part, should review the plan carefully and address any issues that they may see contained therein.  No matter how carefully the language is crafted, there will occasionally be disputes of interpretation and importance, and these disputes will continue to fuel much Chapter 13 litigation.

Read More:  Adding Unscheduled Assets To A Bankruptcy Case

Recoupment Of Benefit Overpayment Did Not Violate Bankruptcy Automatic Stay: A Recent Kansas Decision

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A recent ruling by a bankruptcy judge in Kansas City demonstrated the interplay of a contractually-derived “right of recoupment” in a bankruptcy setting. It is an issue we have written about in this blog before. On March 16, 2014, here on our blog, in an article on overpayments of Social Security Disability payments we discussed the circumstances under which such overpayments were dischargeable in bankruptcy. (You can click here to see it).  We stated the following:

Recoupment is a common law doctrine. It is basically an equitable exception to the automatic stay of bankruptcy. It is “the setting up of a demand arising from the same transaction as the plaintiff’s claim or cause of action, strictly for the purpose of abatement or reduction of such claim.” In Re Caldwell, 350 B.R. 182 (E.D. Penn. 2006); see also In Re Mewborn, 367 B.R. 529 (D. N.J. 2006). Recoupment “does not require a mutuality of obligation, but rather countervailing claims or demands arising out of the same transaction under which the initial claim was asserted.” In Re Hiler, 99 B.R. 238, 241 (Bankr. N.J. 1989). See also In Re Irby, 359 B.R. 859 (Bankr. N.D. Ohio 2007). The key phrase here “arising out of the same transaction.”  Both the Hiler and the Caldwell courts stressed that a debtor must accept the burdens of a contract if he wants to continue to receive benefits under it. If overpayments are made under a contract which provides for recoupment prior to the filing of a bankruptcy petition, the debtor should not be allowed to avoid the reimbursement of money by having them discharged in a bankruptcy while at the same time he continues to receive the benefits under the same contract. A debtor, basically, cannot assume part of an agreement and reject another. Recoupment allows for offsetting the amount a person owes from the ongoing benefit received.

Basically, the point we were trying to make is that there are situations in bankruptcy where contract-based overpayments can continue to be collected by a creditor. These situations do not often arise, but they do exist. Judge Somers, in the Kansas City Division of the US Bankruptcy Court for the District of Kansas, made this point emphatically in a ruling issued October 6, 2014. The case was In Re Amelia Rock.

In this case, the debtor had become disabled in 2010 and was receiving long-term disability payments under a plan sponsored by the Kansas Public Employees Retirement System (KPERS). It was a contractually-based plan, which gave the plan administrator the right to recoup overpayments. The plan administrator did just that in 2011, and set up a “recoupment” when it found out that the debtor had received a large payment from a collateral source (workers’ compensation). The plan administrator (called “UHCSB”) reduced the debtor’s future disability payments by $100 per month in order to recoup the alleged workers’ comp overpayment.

The debtor filed a Chapter 13 bankruptcy in 2013, and assumed that the automatic stay imposed after the filing of the case would require UHCSB to terminate its recoupment debit of the debtor’s disability payments. Such language was included in the plan, and the plan was confirmed. The creditor, UHCSB, received notice of the plan and apparently did not object to it. The creditor continued to withhold the money from the debtor. The debtor then filed a motion to compel turnover of the withheld money, for sanctions for violations of the automatic stay, and for costs and expenses. The creditor actually did agree to stop the withholding, refund the money taken, and waive the remaining balance owed. The only remaining issue was that of the debtor’s litigation expenses, and this required the court to determine if the creditor had violated the automatic stay.

The court ruled that precedent in the Tenth Circuit showed that the creditor was not required to get relief from the automatic stay before continuing to withhold the $100 from the debtor’s monthly benefit payment. “Recoupment originated as an equitable rule of joinder, allowing adjudication in one suit of two claims that the common law had required to be brought separately.” The relevant test is whether the debtor’s obligation to repay arises out of the “same transaction” as the right to receive the continuing disability payments. Essentially, equity is the controlling issue.

A debtor should not be able to continue to receive benefits, as well as an overpayment, since such an outcome would amount to cherry-picking favorable terms out of one contract, while avoiding others. The court relied heavily on In Re Beaumont, 586 F.3d 776 (10th Cir. 2009) in arriving at its decision. Thus, ruled the court, there was no violation of the automatic stay, and therefore the debtor was not entitled to its litigation costs.

It should be stressed here that the “recoupment” doctrine only applies in certain situations.  As we noted in our earlier article on Social Security Benefits overpayment, not every benefit is contractually-based.  So, presumably, the outcome here would have been different if the benefit had been one of a different type.  Each case is different, and each situation needs to be examined on its own merits.

Read More:  Bankruptcy Debtors Can’t Be Discriminated Against

Bankruptcy Appeals And The Appellate Process In Kansas And Missouri

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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

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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.

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Interest Rates In Chapter 11 And Chapter 13 Cramdowns

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“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

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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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