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).
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.
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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.
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Restaurants and associated food service businesses are a big part of the local economy in the metropolitan Kansas City area. With the downturn in the economy, more restaurants, food service businesses, and commodity suppliers and vendors (especially produce) are finding themselves with thin profit margins. We have found from our experience that business owners should know all of their legal options well before financial troubles begin to press upon them. Running a restaurant is not easy even in the best of times, and we understand that. Phillips & Thomas LLC has worked with restaurant and food services businesses for many years, and is very familiar with the issues and challenges facing them.
Circumstances can change very quickly in the restaurant and food service business. The traffic of customers can evaporate or be diverted, suppliers can default on their obligations, tax issues can arise, employee problems can surface, ownership or managerial disputes can develop, or physical issues with the premises (fire, theft, damages) can happen. All of these changes require a rational, realistic response that takes into account the goals of the business and the economic management of the problem.
We have stated this principle before in other articles on this blog, and we will repeat it again: identifying and dealing with a problem quickly is vastly preferable to delay. In most situations, one’s options are widest at the beginning of a problem; those options can get narrower the longer the issue is delayed. Stated another way: in the food service business, get help quickly as soon as bad things happen. Communication is critical.
There are different types of bankruptcy options available to restaurants or food services businesses: Chapter 7, Chapter 13, or Chapter 11. Each of these options has its own merits, and is useful in different circumstances. Chapter 7 cases are liquidation cases, in the sense that a business would be “wound up” under the control of a Chapter 7 trustee. On the filing of a Chapter 7 case, the business premises would come under the control of the Trustee, who would then decide how to handle the inventory, equipment, and other issues. The operation of a business by a Chapter 7 trustee is complicated and involves many “moving parts”: dealing with landlords and leases, dealing with employees, dealing with customers or clients, and dealing with inventory and assets. It is important to consult with an attorney to go through all of these issues. Do not assume that you, the business owner, can diagnose or evaluate these issues yourself.
Chapter 13 cases can only be filed by individuals, but they are often filed in a business context where the individual is a sole proprietor, or has signed personally for the business’s debts and needs some way to reorganize those. It also often happens that a business owner is saddled with payroll or withholding taxes from the operation of a business, and needs some way to deal with those as well. Again, it is important to consult with an attorney to understand all the nuances and options available.
Chapter 11 cases can be filed by individuals or businesses for a variety of reasons. Under Chapter 11, the affairs of the business can be reorganized (or liquidated, in some situations) in such a way as to allow the business to get back to a position of profitability. We have a large number of articles on Chapter 11 cases here; if you go to the right side of your screen, you can click on the tab that says “Chapter 11 Bankruptcy”, and find numerous topics of relevance to Chapter 11 cases.
The Perishable Agricultural Commodities Act (PACA).
We do need to spend some time here talking about PACA. Restaurant owners, food sellers, produce suppliers, commodity suppliers, and other vendors should be aware of the existence and implications of this federal law. We have dealt PACA litigation in a variety of food service contexts, and can say that it is one of the most underappreciated and misunderstood issues that can arise in the context of restaurant and food service supplier bankruptcy cases. What is PACA? Over seventy years ago, Congress decided that sellers of farm products were at risk from buyers. Buyers had the right to reject shipment of produce from sellers, and in declining price markets, often these rejections were done to get out of inconvenient contracts. Sellers often had to spend a lot of money and travel great distances to try to sell their produce. Since agricultural commodities are perishable and easily spoil, this was seriously hurting sellers.
In order to regulate this type of interstate commerce, then, Congress in 1930 passed the Perishable Agricultural Commodities Act (PACA). The purpose of the law, as stated above, was to protect sellers from unscrupulous buyers. The US Department of Agriculture had the right to intervene when a buyer failed to honor a promise to pay for commodities. It also prevented brokers from making fraudulent charges, shippers from reneging on agreements, and a few other things. PACA was amended in 1984 in a significant way.
The 1984 amendment to PACA provided for the creation of a “trust” for the “benefit of all unpaid suppliers or sellers of such commodities until full payment of the sums owning in connection with such transactions has been received…” What happened, in effect, was that Congress created a new statutory remedy for the seller of perishable agricultural commodities to a possible debtor in bankruptcy. Basically, a seller now became something much more than an ordinary unsecured creditor. A trust was created by operation of law, and savvy sellers could now use this fact to argue for the creation of a “superpriority trust” within a bankruptcy case.
PACA litigation is complex. At issue are often the following questions:
The bottom line is that restaurant owners, food suppliers, vendors, and other parties in the commodity chain are often unaware of PACA and its implications. The possible existence of a trust has important implications in a bankruptcy case, since the holder of an alleged trust may seek to file an adversary proceeding under 11 U.S.C. Sect. 523(a)(4) to have the debt declared non-dischargeable. Alternatively, such a creditor may seek to claim super-priority status in any reorganization plan under Chapter 11 or 13. If you are a restaurant owner or a dealer or handler of commodities in any way, please feel free to consult with us to discuss these issues.
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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.
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Overland Park Business Bankruptcy Attorney
The legal issues surrounding leases in bankruptcy cases can depend on what type of bankruptcy is being talked about. Chapters 7, 13, and 11 each have separate rules and procedures with regard to leases. In a Chapter 7 case, the bankruptcy trustee has the option of assuming the debtor’s interest in the lease or curing any default under it. In practice, this only happens on rare occasions with commercial leases (not residential leases). Chapter 7 trustees almost never bother with residential leases, since they provide no value to the estate. In commercial lease situations where the rent provided under the lease is significantly below the market rate, or where the premises have some sort of value to the estate in a business liquidation, this type of thing is possible in theory.
In a Chapter 7 business liquidation, the trustee has the right to commandeer the premises and use them for storage or for a bankruptcy sale. Here again, this rarely happens. Even in a liquidation, it often happens that by the time the case is filed, there is little value to the estate that can be had by operating the business. In situations where Chapter 11 cases are converted to Chapter 7, or where the business has a large amount of liquidation value, this can change. When the bankruptcy petition is filed, the landlord is prevented by the automatic stay from attempting to enter the premises and repossess the inventory or equipment on the premises, even if the rent has not been paid and a state court has ordered the debtor to be evicted.
The Chapter 7 trustee can use the leased premises to store the property until it can be sold, if it has significant value for the estate. If the trustee does not assume the lease of the business, and uses the premises for storage, it may not be easy for the landlord to collect rent from the trustee. The trustee typically claims that the estate is only liable for a lower amount, or only for the period in which the trustee was actually in possession. And if there is not enough funds in the estate to pay for the expenses of administration, then the amount might not be paid. Landlords and their attorneys are often unfamiliar with the nuances of bankruptcy law and their rights under it.
They may be unpleasantly surprised to find out that their statutory landlord lien is invalid in bankruptcy. Rent arrearages that may exist at the time of the filing of the case might get treated as a general unsecured claim in the estate, which usually amounts to very little in recovery. A landlord subject to the automatic stay by the filing of a bankruptcy case cannot simply ignore it. This is true regardless whether he has received notice from the court. One of the basic purposes behind the automatic stay with regard to leases in Chapter 7 is to permit the trustee time to assess the condition of the premises and any property in it. Generally the trustee has 120 days to assume or reject a lease of nonresidential real property. The court can extend this for another 90 days if needed.
In business liquidation cases where a lease is involved, it is not always a simple matter for a landlord to collect rent during the time the trustee is in possession of the premises. In situations of nonresidential real property, the trustee has an obligation to “timely perform all the obligations of the debtor” arising under the lease, until the lease is assumed or rejected. In Re Cukierman, 265 F.3d 846 (9th Cir 2001). If the lease has significant value, it is even possible that the trustee may assume and the possibly assign or sell it. Before it can be assumed, he would have to cure any default under it, and compensate the landlord for any damages suffered by the breach of the lease.
If the property continues to be used by the trustee after the filing of the bankruptcy, it is possible that the landlord can request compensation under Section 503(b) of the Bankruptcy Code (administrative expense). The landlord would be entitled to the “reasonable value” of the use of the premises. This is not necessarily the rent amount specified in the lease agreement; in fact, it may be significantly less than this. And even if the estate can afford to pay the landlord administrative rent, claims will be based on the actual value received by the estate, not on the value that was lost by the landlord. However, the landlord may be entitled to “adequate protection” payments during the pendency of the case. As can be seen from this discussion, a landlord’s attorney will need to be aggressive and persistent if he wishes to recover anything for his client from the Chapter 7 trustee once a business liquidation is filed.
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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:
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:
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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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.
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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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.
Kansas City Bankruptcy And Criminal Case Defense Information 
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