Category Archives: Chapter 7 Bankruptcy in Kansas City

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.

Read More:  Title Loans And Bankruptcy In Kansas City

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

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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.

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Avoiding Liens In Bankruptcy Under Section 522(f)

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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.

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Bankruptcy Debtors Can’t Be Discriminated Against

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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.

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Damages For Violations Of The Automatic Stay In Bankruptcy Cases

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The bankruptcy 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).

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Adversary Proceedings In Bankruptcy: Collateral, Liens, Valuation, And Lien Stripping

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Adversary proceedings can be used to dispute, remove, or contest liens. The validity of a lien can be disputed by a trustee or a Chapter 11 debtor in possession under several of the various “avoidance” sections of chapter 5 of the Bankruptcy Code. For example:

  • Section 547:  Trustee or debtor in possession can avoid a lien as a voidable preference.
  • Section 548: A lien can be disputed as a “fraudulent conveyance.”
  • Section 544(b): A trustee can use a creditor’s avoidance rights (a creditor holding an unsecured allowable claim) under state or federal law.
  • Section 544(a): A consensual or statutory lien can be disputed as being invalid against a judicial lien creditor, execution creditor, or bona fide purchaser of real property from the debtor. Tax liens can be attacked using adversary proceedings, pursuant to In Re Dunmore, 262 B.R. 85, 87 (Bankr. N.D. Cal. 2001).
  • Section 545: A trustee or debtor in possession can avoid statutory liens on the property of the debtor in certain situations.
  • Section 549: A trustee or debtor in possession can avoid the transfer of most unauthorized post-petition transfers of property of the estate.

There are some situations in which the validity of a lien can be contested indirectly. For example, a secured creditor filing a proof of claim may claim a security interest. The trustee or debtor in possession can object to the claim under F.R. Bankr. P. 3007. If the creditor cannot verify its secured status, the claim may be disallowed as a secured claim.
Sometimes valuation of the collateral in question is an important issue. This issue can come up in adversary proceedings that attempt to strip away the second or third mortgage that is claimed to be wholly unsecured. In Re Mansaray-Ruffin, 530 F.3d 230 (3d Cir. 2008).

Here, the real issue is to what “extent” the secured creditor is secured. If there is no equity in the property to which a lien can attach, then the lien is said to be unsecured.
For example, suppose a house has a fair market value of $150,000. The first mortgage secured against the property is in the amount of $165,000. There is no equity left in the property for any second mortgage to attach to, since the mortgage is larger than the fair market value. Under Section 506(a) of the Code, secured claims are to be valued and allowed as secured to the extent of the value of the collateral, and unsecured for the excess over such value.

This provision is implemented by F.R. Bankr. 3012. Under Rule 3012, the court can determine the value of a claim secured by a lien on property on motion of any party in interest. If a debtor attempts to “strip off” or “strip down” a lien based on valuation, the majority view is that no adversary proceeding is required. Harmon v. U.S., 101 F.3d 574 (8th Cir. 1996); In Re King, 290 B.R. 641, 647 (Bankr. C.D. Ill. 2003); In Re Marsh, 475 B.R. 892, 896 (N.D. Ill. 2012). Local rules and procedures here will provide the best guidance on whether a lien can be removed by motion or by adversary proceeding.

Despite the case law supporting the idea that unsecured mortgages can be removed by motion, in practice most courts prefer that this by done by adversary proceeding, due to the nature of the rights of the creditor that are being affected.In the 8th Circuit, there is case law holding that a debtor can strip off a junior lien of a wholly unsecured claim on a debtor’s principal residence by confirmation of a Chapter 13 plan. In Re Fisette, 455 B.R. 177 (8th Cir. BAP 2011).

If a trustee is in doubt as to the priority of a lien in estate property, an adversary may be appropriate. For example, if the trustee is authorized to sell estate property under Section 363(b) of the Code “free and clear” of other interests, then an adversary might need to be used.A trustee could use Rule 7022 to do this, which permits him to interplead any competing claimants and obtain a determination of the rights of all the various claimants. An adversary proceeding can also be used under Rule 7001 to determine “other interests in property.”

Adversary proceedings have a wide range of uses. They can be used by a Chapter 11 debtor in possession, a debtor in a Chapter 7 or Chapter 13 case, by a trustee, or by a creditor. Besides providing a way to object to the discharge of certain debts, they are commonly used to determine property rights, valuations of secured collateral, extent of security interests, and determinations of ownership priority in collateral.

Read More:  Bankruptcy Adversary Proceedings Under Section 523:  Seeking To Prevent Discharge of Certain Debts

Buying And Selling Assets In A Chapter 11 Bankruptcy

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Chapter 11 cases are filed for many reasons.  One reason is a for an individual or business reorganization.  Another possible reason is for a business liquidation.  Why would a Chapter 11 case be used for a liquidation, when Chapter 7 already is available for that purpose?  The reasons are many.  In most situations, more value will be gained when the business is “wound down” by the owner gradually over time, rather than sold at “firesale” prices by a Chapter 7 trustee.

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Adding Unscheduled Assets Or Creditors To A Bankruptcy Case: Is There A Time Limit?

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It occasionally happens in bankruptcy cases that a debtor will forget to list a creditor on his or her bankruptcy forms and schedules.  The Bankruptcy Code permits a debtor to amend his schedules to include the missed creditor, even long after a case is closed or discharged.  It also (much more rarely) happens that assets will be identified or recovered long after a bankruptcy has been closed.  But how long is too long?

Or is there any time limit beyond which a creditor cannot be added?  Is there any time limit beyond which a late-discovered asset with tangible value is irrelevant?  Apparently not, one court has ruled.  The case is In Re Dunning Brothers Co., 410 B.R. 877 (Bankr. E.D. Cal. 2009).  In this case, a bankruptcy court ruled that a case that had been closed over seventy years earlier could be reopened to include some assets that had not been listed in the case.

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Tithing, Charitable Donations, And Bankruptcy: What Is Reasonable?

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Bankruptcy trustees and courts permit debtors to make charitable and religious contributions.  Reasonableness is the operative guideline, as it is in much else in the bankruptcy world.  Historically, courts in the United States have been very deferential towards issues implicating religious or cultural freedom.  Even if tithes or charitable contributions are permitted, what is the limit?  Is there a bright line rule?  Or will the court evaluate such gifts on a case by case basis?

And if tithes are so allowed, will that prevent a debtor from claiming the “undue burden” standard in the context of a student loan dischargeability action?  One recent case from the Northern District of Iowa illustrated the interplay between contributions to religious organizations and the possible dischargeability of student loan debt.  The case in question was In Re Lovell (N.D. Iowa, 2012).

In Lovell, the debtor disclosed that she contributed about 11% of her gross income as tithes to a religious organization.  She filed an adversary proceeding seeking the discharge of her student loan debt, arguing (in accordance with 8th Circuit standards) that repayment of the student loan would impose and “undue burden” on her living standards.

She wished to continue her practice of charitable giving, and still discharge her student loans at the same time.  She was employed and was making an income that placed her solidly in the middle class.

The bankruptcy court first held that contributing 11% of one’s income in tithes was not per se unreasonable.  Rather, the better approach would be for an in-depth inquiry into be undertaken to determine whether the expenditure was reasonable, based on a consideration of all the attendant circumstances.

The 8th Circuit’s view of the “undue burden” standard for student loan dischargeability essentially focuses on all the facts and circumstances that a debtor is facing:  current monthly income and expenses are probed into in detail, to determine exactly what the debtor’s prospects might be for paying the loan back.  See, e.g., Walker v. Allie Mae Servicing Corp., 650 F.3d 1227 (8th Cir. 2011).

Of particular interest to the court was the fact that the debtor was still in the early stages of her career.  This being the case, there was a substantial likelihood that her earning power would increase as the years went by.  In addition, she stated that giving to her church was an important part of her religious beliefs.

Interestingly, the court found that whether tithing was “compulsory” was not a determinative factor in weighing the reasonableness of the expense.  This “hands off” approach is in keeping with the long tradition of deference that courts have shown in matters involving religious faith.  Bankruptcy courts in both Kansas and Missouri have both been very generous in their allowances for charitable contributions.  Debtors are often relieved to find out just how much leeway and freedom they are given in this regard.

The Religious Liberty and Charitable Donation Protection Act (RLCDP) is a factor in the background that courts have also been mindful of.  See 11 U.S.C. 1325(b)(2)(A). Congress passed RLCDP as a remedial law after anecdotal evidence accumulated that charitable donations were being avoided as preferential transfers by bankruptcy trustees.  Section 548 of the Bankruptcy Code was amended to allow charitable donations made in good faith, providing some relief to debtors and religious organizations with little ability to fight preference actions in bankruptcy court.

In fact, a survey of the relevant case law shows that most courts have been tolerant of religious contributions that approach 15% of a debtor’s annual income.  Contributions of up to 15% have generally been held to be not presumptively unreasonable, although some creditors in student loan discharge cases have tried to argue that such a contribution would indicate a lack of “undue burden.”

In sum, the Lovell court made the point that no “bright line” rules can be set out for religious contributions.  Like everything else, charitable donations must be viewed in conjunction with everything else that is going on in a debtor’s financial life.  Tithing alone, absent other circumstances, will not disqualify a debtor from satisfying the “undue burden” standard.

Read More:  Student Loans In Bankruptcy In Kansas And Missouri

Confidentiality Orders And Sealing Records In Bankruptcy Court: What Is The Standard?

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Transparency and due process are fundamental and primary objectives of a functioning legal system.  U.S. courts have historically recognized a presumption of public access to court records.  Nixon v. Warner Commc’ns Inc., 435 U.S. 589, 597-98 (1978). This preference for public access is rooted in the public’s first amendment right to know about the administration of justice.

This public access helps to protect the integrity, quality, and respect in our judicial system.  In re Analytical Sys., 83 B.R. 833 (Bankr. N.D. Ga. 1987).  The policy interest in favor of public access is at its best where issues concerning the integrity and transparency of bankruptcy proceedings are involved.

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