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Bankruptcy filings in Rochester through February 2010 are behind prior years
Posted by: Peter Scribner
March 08, 2010
Topic: Statistical trends in WDNY bankruptcies

The number of filings in the bankruptcy court in Rochester NY are actually slightly behind the pace of the prior three years, as of March 5, 2010. As of that date, 432 bankruptcies were filed in Rochester. In comparison, Rochester case #432 was filed February 26 in 2009 and February 27 in 2008 and 2007. For the record, case #432 was filed February 9 in 2004, and February 3 in 2005, just before the 2005 changes in the bankruptcy code.

At the other end of the Western District of New York, 781 bankruptcies have been filed in Buffalo through March 5, 2010. In prior years, Buffalo case #781 was filed March 3 in 2009, February 27 in 2008, and March 5, 2007.

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Claim for lost wages pro-rated pre-bankruptcy & post-bankruptcy:
Posted by: Peter Scribner
March 03, 2010
Topic: Notes on Bankruptcy Cases outside WDNY

Second Circuit Court of Appeals case: In re Jackson, No. 08-4927 (Decision Jan. 22, 2010); affirming In re Jackson 376 BR 75 (Bankr. D. Conn. 2007), affirmed by District Court 384 BR 8 (D. Conn. 2008).  The significance of the case may go well beyond the issue directly decided (calculation of future income in a wrongful termination case) and may apply to settlements of personal injury cases (more on that below).

The case specifically dealt with the interpretation of a federal exemption, Sect. 522(d)(11)(E).  New York debtors are not entitled to claim federal exemptions, but an identically-worded exemption is available under New York law: Debtor & Creditor Sect. 282(3)(iii)(3)(iv).

Under both federal and New York law, the exemption's text is: "a payment in compensation of loss of future earnings of the debtor or an individual of whom the debtor is or was a dependent, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor."

On March 13, 2003, Dr. Jackson was terminated pre-petition from his job reviewing medical insurance claims, although he was re-hired part-time as a contractor.  He sued his former employer for wrongful termination, claiming that he was fired because he was a whistle-blower, questioning how the company processed certain claims.  The lawsuit was pending when Dr. Jackson and his wife filed bankruptcy, October 31, 2003.  The trustee engaged Jackson's attorney to continue the lawsuit, which was settled post-petition for $130,000.  The settlement was calculated as the earnings Dr. Jackson would have received in the year following his termination (March 13, 2003 thru March 12, 2004), minus the amount he actually received as a contractor.

In interpreting the exemption statute, two issues were at play: what are "future" earnings and what is "reasonably necessary" support. 

The first issue, the meaning of "future" earnings, was most thoroughly reviewed and litigated.  Debtor Jackson argued that since the actual payment for lost wages was made post-petition, all $130,000 of the settlement is future earnings.  The bankruptcy court rejected this position.  As the settlement was based on earnings the debtor would have received during the year after termination (366 days), and as only 135 days of that year were post-petition, only 135/366 was post petition, and, therefore, the debtor could at most only exempt $30,690 of the $130,000 settlement.

As for calculating that portion of the future earnings that are "reasonably necessary" for the support of the debtors, the bankruptcy court took the difference between the debtors' income and expenses (a monthly shortfall of $3,739), calculated what the per diem would be on that amount, and then projected it over the 135 post-petition days.  The bankruptcy court determined that the debtors could exempt $16,550 of the $30,690 post-petition portion of the settlement, and the District Court and Circuit Court upheld that determination.

In significant ways the facts in this case are unusual.  The wrongful termination settlement explicitly specified the time-period for which the lost wages were calculated, i.e. one year from termination.  The debtors were high income, high expense debtors, and it is quite likely that the courts factored that into their determinations. 

But this decision may have great influence on other situations, and specifically settlements of personal injury cases.  In a personal injury lawsuit, the plaintiff usually asks for damages based on a number of factors, such as actual bodily harm, pain and suffering, actual expenses, and loss of future income.  When cases are settled, rarely does either party care how the settlement was calculated -- so much for pain and suffering, so much for loss of income etc.  But in a bankruptcy situation, allocation of the settlement among these different categories of damages can become very significant.

New York gives debtors with personal injury claims a rather modest $7,500 exemption, under Sect. 282(3)(iii)(3)(iii). But the loss of future income exemption is a separate exemption, 282(3)(iii)(3)(iv).  To the extent that personal injury damages can be attributed to the loss of future income, and to the extent that future income can be calculated over a long post-petition time period, the debtor may be able to exempt a significant portion of a personal injury claim under the loss of future income exemption 282(3)(iii)(3)(iv).

This could also present a conflict-of-interest for personal injury attorney. It is customary for the bankruptcy trustee to retain the same attorney to pursue the claim as was retained by the debtor before filing the petition.  The attorney is motivated to get the highest possible award, no matter who the client is, as they are paid on a contingency basis.  But once a settlement is reached, the trustee and the debtor have conflicting goals. As attorney for the trustee, the personal injury attorney should seek to allocate as little of the settlement as possible to loss of post-petition future income; but the attorney’s other client, the debtor,  would have the opposite motivation.  The debtor in Jackson cited three tort cases in support of their position: In re Lowery, Bk #05 13536, 2007 Bankr. LEXIS 3729 (Bankr. N.D. Ga. Sept. 24, 5 2007); In re Claude, 206 B.R. 374, 381 (Bankr. W.D. Pa. 1997), and In re Bova, 205 B.R. 467, 477 (Bankr. E.D. Pa. 1997).

It is likely that a debtor who claims an exemption for loss of future earnings in a personal injury settlement should expect that the bankruptcy court may end up holding a hearing to determine how much of the award can be allocated to loss of earnings.

Attachments:
Jacksondecision1-2010.pdf

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Exigent circumstances permitting filing of petition without credit counseling
Posted by: Peter Scribner
February 22, 2010
Topic: Casenotes: 2007 WDNY Bankruptcy cases

In re Giambrone; Bk #06-03862 (Judge Bucki; Decision March 29, 2007)

Pursuant to Bankruptcy Code section 109(h) (3) (A) Exigent circumstances permitting filing of petition without credit counseling.  Debtor contacted attorney on 12/5/06 with impending 12/7/06 foreclosure sale.  Credit counseling was unavailable for 5 days.  Chapter 13 Petition filed on December 6, 2006 @ 7:38 p.m.  requesting waiver on exigent circumstances.  Debtors obtain counseling on December 11 and file Certificate on December 15, before the January 4 return date on the motion.  Court notes conflict in decisions variously finding an impending foreclosure sale to be such an exigent circumstance and others indicating that foreclosure process provides considerable notice to homeowners and allows no excuse for procrastination.   Court reviews definitions of "exigent" and finds that "urgency" carries no connotation relating to causation.  Statute does not require an absence of culpability of the debtor.  Waiver granted.

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NDNY: Claim against contractor not discharged if trust fund was diverted
Posted by: Peter Scribner
February 22, 2010
Topic: Notes on Bankruptcy Cases outside WDNY

In re: Henderson (NDNY Chap. 7 Bk #08-60255; AP #09-80035 (Hon. Diane Davis; decision Jan. 27, 2010):

Motion for summary judgment in an adversary proceeding to deny discharge or accepted that this charge.  The debtor is a home improvement contractor in the creditor is a dissatisfied customer. The case was originally filed in chapter 13 but converted to chapter 7. The creditor is litigating the dischargeability issues pro se (without an attorney), and the court concluded the pleadings were a mass. However, the court reorganized the pleadings in order to address specific discharge issues.

The court dismissed all the motions for denial of discharge. The court concluded that the debtor maintained adequate records, and so dismissed a discharge challenge under the bankruptcy code section 727(a)(3).

The court dismissed the challenge to discharge based on the debtor allegedly making a false oath or statement, as described in section 727(a)(4). The false statements alleged by the creditor were either failure to list a Workers Compensation claim, and listing as an asset and alleged claim against the creditor is for work performed but not yet paid for. The court concluded that the statements were either appropriate or not material (that is to say, pertinent to the discovery of assets that can be distributed to creditors.)

The court also dismissed a challenge to discharge for making a “false claim” under section 727(a)(4)(B). The creditor claimed that by falsely stating they owed the debtor money, the debtor was filing a false claim. However, this rarely-used section applies where the debtor has scheduled fictitious claims, not disputed debts.

The court also rejected a challenge to discharge based on willful failure to obey a court order, under section 727(a)(6). The various orders in question were various discovery orders associated with the discharge adversary proceeding, and the court found no willful violations.

The court then addressed request to have the creditor’s debt excepted from discharge under section 523. First, the creditor claimed that the debt was incurred on the basis of fraud, as described in section 523(a)(2)(A).  The court concluded that the debtor had not overstated his qualifications or intentions to complete the job, and so the deposit money was not obtained on the basis of fraud. Failure to perform a contract is not, by itself, fraud.

The creditor also lost on the issue of whether the debt was incurred basis of embezzlement or larceny (523(a)(4)) or willful or malicious injury (523(a)(6)), again as the matter appears to be just a contract dispute.  However, the court did allow one exception to discharge issue to continue, on the grounds of alleged defalcation by a fiduciary under section 523(a)(4).  Under New York Lien Law Article 3-A, a home improvement contractor is required to escrow deposits on home improvement projects (or provide other safeguards) until the project is substantially complete. The contractor, therefore, acts as a fiduciary for the homeowner’s deposit.  On that cause of action, the creditor could proceed.

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NDNY: Class-action claim was pre-petition asset
Posted by: Peter Scribner
February 22, 2010
Topic: Notes on Bankruptcy Cases outside WDNY

In re: Borchert (NDNY Chap. 7 Bk #04-65653 (Hon. Diane Davis; decision Jan. 8, 2010):

The issue in this case was whether a class-action settlement was a prepetition or postpetition asset. The debtor filed bankruptcy August 6, 2004, seven months after he started taking the drug Vioxx.  Two months later he had a heart attack. The bankruptcy case was originally closed as a no-asset case, but was reopened with a trusty found out about a class-action settlement in Vioxx disputes.  The most significant case on this issue was a Supreme Court decision Segal v. Rochelle, 382 U.S. 375, 380 (1966), which looked to what extent was the claim “rooted in the prebankruptcy past”. The debtor’s position was that the heart attack was postpetition; the trustee noted that a majority of the time the debtor is used to the drug was pre-petition. The court sided with the trustee as 7/10th of the time. The debtor took the drug was prepetition.

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