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When can a creditor file a means test motion? A legislative history of Sections 707(b)(6) and 707 (b)(7)

Section 707(b) allows a Chapter 7 bankruptcy case to be dismissed as an abuse. Section 707(b)(2) allows a case to be dismissed if the debtor fails the "means test"; that is, if the debtor's income over the previous six months exceeds the expenses allowed by the IRS collection system, plus other expenses provided by the complicated means test calculation. Section 707(b)(3) allows a case to be dismissed if, under the totality of circumstances, the case is abusive. This usually means the debtor has actual ongoing income that exceeds actual necessary expenses, and that there is no special circumstance, such as unemployment or health issues, that justify a bankruptcy filing.The Office of the United States Trustee, a division of the United States Justice Department, monitors abusive chapter 7 cases and always has standing to file a 707(b) abuse motion. But what about creditors? Can an aggressive creditor file a motion to dismiss a case, perhaps intending to pressure the debtor to settle with them? Yes, IF the debtor has higher income than the median for the state. However, there is a slight wrinkle in this provision when a debtor is married and files alone. For a Section 707(b)(2) "Means test" motion, the non-debtor's spouse is counted in calculating whether the debtor is above the state median. If the debtor and non-debtor spouse's combined income is below median, no one (no creditor, no trustee, no US trustee) may file a "Means test" motion. But if the debtor's income, plus the non-debtor spouse's contribution to household expenses, do not exceed the state median, the US Trustee, and only the US Trustee, may bring a Section 707(b)(3) totality of circumstances motion.These two limitations are located next to each other in the bankruptcy code, as Sections 707(b)(6) and 707(b)(7). But these two provisions, with their seemingly inconsistent results, arrived next to each other through different routes through the legislative history of the 2005 bankruptcy amendments. The issue may not come up often, but if it does, it is helpful for a debtor's attorney to know when a creditor may - or may not - file an abuse motion.Legislative history:§707(b)(6) states: Only the judge or United States trustee (or bankruptcy administrator, if any) may file a motion under section 707(b), if the current monthly income of the debtor, or in a joint case, the debtor and the debtor's spouse, as of the date of the order for relief, when multiplied by 12, is equal to or less than... (B) in the case of a debtor in a household of 2, 3, or 4 individuals, the highest median family income of the applicable State for a family of the same number or fewer individuals..." [Emphasis added].
§707(b)(7) states:No judge, United States trustee (or bankruptcy administrator, if any), trustee, or other party in interest may file a motion under paragraph (2) if the current monthly income of the debtor, including a veteran (as that term is defined in section 101 of title 38), and the debtor's spouse combined, as of the date of the order for relief when multiplied by 12, is equal to or less than ... (ii) in the case of a debtor in a household of 2, 3, or 4 individuals, the highest median family income of the applicable State for a family of the same number or fewer individuals..." [Emphasis added]. In 2005, in anticipation of the implementation of the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA"), I reviewed BAPCPA and presented a Continuing Legal Education seminar on the statute in Rochester, Buffalo, Syracuse and Corning. Among other things, I reviewed 'Thomas', the online service of the Library of Congress, and downloaded the text of the various bankruptcy statutes that had been introduced in Congress from 1997 through BAPCPA in 2005. By reviewing changes in these various versions of bankruptcy bills over time, I believe that we can have some understanding as to how BAPCPA §707(b)(6) and §707(b)(7), with their slightly different wording, came about. The 2005 BAPCPA modifications to §707(b) were essentially identical to versions passed by one house or the other of Congress since 2001, and statutory variations in bills from 1999 through 2001 shed light oin how this language was settled on.105th Congress:Prior to the 2005 BAPCPA amendment, §707(b) allowed for the dismissal of a consumer credit cases if it was a "substantial abuse" of the provisions of the Bankruptcy Code. There was a limit as to who could bring such motions: pre-BAPCPA, motions could be brought by "the court, on its own motion, or on a motion by the United States Trustee, but not at the request or suggestion of any party in interest..." [emphasis added.]The first bankruptcy reform bill, which eventually produced BAPCPA eight years later, was introduced in the Senate October 21, 1997 by Senator Grassley of Iowa, among others. As introduced, Grassley's bill, S. 1301, amended §707(b) by deleting the party in interest limitation (the bill simply struck out "but not at the request or suggestion of a party in interest"). The initial bill did not include any limitation on any party bringing an abuse motion. The initial S. 1301 bill also included the first acorn of language which, in subsequent bills, grew into the mighty oak of the §707(b)(2) means test. It stated, in full, In considering under paragraph (1) whether the granting of relief would be an abuse of the provisions of this chapter, the court shall consider whether - (A) under section 1325(b)(1) of this title, on the basis of the current income of the debtor, the debtor could pay an amount greater than or equal to 20 percent of unsecured claims that are not considered to be priority claims (as determined under subchapter I of chapter 5 of this title)S. 1301 passed the Senate June 2, 1998. This bill was modified to included the following §707(b) motion limitation: However, a party in interest may not bring a motion under this section if the debtor and the debtor's spouse combined, as of the date of the order for relief, have current monthly total income equal to or less than the national median household monthly income calculated on a monthly basis for a household of equal size [emphasis added.] Another bankruptcy bill, H.R. 3151, was introduced February 3, 1998 in House of Representatives (hereinafter "the House"). That bill was passed by the House June 10, 1998. It replaced the existing motion limitation language of §707(b) with the following language: After notice and a hearing, the court - (A) on its own motion or on the motion of the United States trustee or any party in interest, shall dismiss a case filed by an individual debtor under this chapter; or (B) with the debtor's consent, convert the case to a case under chapter 13 of this title; if the court finds that the granting of relief would be an inappropriate use of the provisions of this chapter.H.R. 3151 as passed by the House did not include any limitation on what party may bring a §707(b) motion. H.R. 3151 was then passed in an extensively modified version by the Senate Sept. 23, 1998. This version changed §707(b) from "the court, on its own motion, or on a motion by the United States Trustee, but not at the request or suggestion of any party in interest" to "the court, on its own motion, or on a motion by the United States Trustee, or at the request or suggestion of any party in interest." The 1998 Senate version of H.R. 3151 included a §707(b) safe harbor limitation similar to the provisions of S. 1301, set out in paragraph 13 above. The Senate version of H.R. 3151 stated:Only the judge, United States trustee, bankruptcy administrator or panel trustee may bring a motion under this section if the debtor and the debtor's spouse combined, as of the date of the order for relief, have current monthly total income equal to or less than the national median household monthly income calculated on a monthly basis for a household of equal size [emphasis added]. The House version of H.R. 3151 did not include any 'means test' provision, but the Senate version of H.R. 3151 included the short means test provision of S. 1301 (see paragraph 12, above).106th Congress:A new bill, S. 625, was introduced in the Senate March 16, 1999. This version changed §707(b) from "the court, on its own motion, or on a motion by the United States Trustee, but not at the request or suggestion of any party in interest" to "the court, on its own motion, or on a motion by the United States Trustee, panel trustee or at the request or suggestion of any party in interest." This was essentially the language used in all later bills, including the 2005 BAPCPA legislation.S. 625 was the first bankruptcy bill to incorporate the extensive means test calculation we are familiar with today, comparing the "current monthly income" of the debtor to the expenses allowed by IRS collection standards, plus additional allowed expenses. This bill included the definition of "current monthly income" as meaning "the average monthly income from all sources which the debtor, or in a joint case, the debtor and the debtor's spouse, receive without regard to whether the income is taxable income, derived during the 180-day period preceding the date of determination" [emphasis added.]S. 625 also included the following §707(b) safe harbor limitation: Only the judge, United States trustee, bankruptcy administrator, or panel trustee may bring a motion under this section if the debtor and the debtor's spouse combined, as of the date of the order for relief, have a total current monthly income equal to or less than the national or applicable State median family monthly income calculated on a monthly basis for a family of equal size [emphasis added]. On May 5, 1999, the House passed their own bankruptcy bill, H.R. 833. This bill included an extensive means test provision similar to S. 625, and a §707(b) safe harbor provision identical to S. 625, as set out in paragraph 20 above. H.R. 833 was then passed by the Senate February 2, 2000. But the safe harbor limitation was modified from the version passed by the House and S. 625 passed previously by the Senate. H.R. 833 as passed by the Senate in 2000 now stated:Only the judge, United States trustee, bankruptcy administrator, or panel trustee may bring a motion under section 707(b), if the current monthly income of the debtor, or in a joint case, the debtor and the debtor's spouse, as of the date of the order for relief, when multiplied by 12, is equal to or less than - (i) the national or applicable State median family income reported for a family of equal or lesser size, whichever is greater; or (ii) in the case of a household of 1 person, the national or applicable State median household income last reported by the Bureau of the Census for 1 earner, whichever is greater [emphasis added.] The safe harbor provision of H.R. 833, as passed by the Senate in 2000, was essentially the same language as the BAPCPA §707(b)(6).107th Congress:A new bankruptcy bill, H.R. 333, was passed by the House March 1, 2001. This version included language virtually identical to BAPCPA §707(b)(6) and (b)(7). H.R. 333 modified §707(b) to include the following two paragraphs:(6) Only the judge, United States trustee, or bankruptcy administrator may bring a motion under section 707(b), if the current monthly income of the debtor, or in a joint case, the debtor and the debtor's spouse, as of the date of the order for relief, when multiplied by 12, is equal to or less than - (A) in the case of a debtor in a household of 1 person, the median family income of the applicable State for 1 earner last reported by the Bureau of the Census;
(B) in the case of a debtor in a household of 2, 3, or 4 individuals, the highest median family income of the applicable State for a family of the same number or fewer individuals last reported by the Bureau of the Census; or
(C) in the case of a debtor in a household exceeding 4 individuals, the highest median family income of the applicable State for a family of 4 or fewer individuals last reported by the Bureau of the Census, plus $525 per month for each individual in excess of 4.
(7) No judge, United States trustee, panel trustee, bankruptcy administrator or other party in interest may bring a motion under paragraph (2), if the current monthly income of the debtor and the debtor's spouse combined, as of the date of the order for relief when multiplied by 12, is equal to or less than - (A) in the case of a debtor in a household of 1 person, the median family income of the applicable State for 1 earner last reported by the Bureau of the Census;
(B) in the case of a debtor in a household of 2, 3, or 4 individuals, the highest median family income of the applicable State for a family of the same number or fewer individuals last reported by the Bureau of the Census; or
(C) in the case of a debtor in a household exceeding 4 individuals, the highest median family income of the applicable State for a family of 4 or fewer individuals last reported by the Bureau of the Census, plus $525 per month for each individual in excess of 4."
[Emphasis added]The Senate then passed S. 420 on March 15, 2001. The language of the §707(b)(6) and (7) safe harbors in S. 420 was almost, but not quite, identical to H.R. 333. S. 420 modified §707(b) as follows: (6) Only the judge, United States trustee, or bankruptcy administrator may bring a motion under section 707(b), if the current monthly income of the debtor, or in a joint case, the debtor and the debtor's spouse, as of the date of the order for relief, when multiplied by 12, is equal to or less than - (A) in the case of a debtor in a household of 1 person, the median family income of the applicable State for 1 earner last reported by the Bureau of the Census;
(B) in the case of a debtor in a household of 2, 3, or 4 individuals, the highest median family income of the applicable State for a family of the same number or fewer individuals last reported by the Bureau of the Census; or
(C) in the case of a debtor in a household exceeding 4 individuals, the highest median family income of the applicable State for a family of 4 or fewer individuals last reported by the Bureau of the Census, plus $525 per month for each individual in excess of 4.
(7) No judge, United States trustee, panel trustee, bankruptcy administrator or other party in interest may bring a motion under paragraph (2), if the current monthly income of the debtor, or in a joint case, the debtor and the debtor's spouse, as of the date of the order for relief when multiplied by 12, is equal to or less than - (A) in the case of a debtor in a household of 1 person, the median family income of the applicable State for 1 earner last reported by the Bureau of the Census;
(B) in the case of a debtor in a household of 2, 3, or 4 individuals, the highest median family income of the applicable State for a family of the same number or fewer individuals last reported by the Bureau of the Census; or
(C) in the case of a debtor in a household exceeding 4 individuals, the highest median family income of the applicable State for a family of 4 or fewer individuals last reported by the Bureau of the Census, plus $525 per month for each individual in excess of 4.
[Emphasis added] On July 17, 2001, the Senate passed their version of H.R. 333, but with the same §707(b)(6) & (7) safe harbor language as S. 420. A year later, on July 26, 2002, a conference committee of the House and Senate reported a compromise bill, which used the same §707(b)(6) & (7) safe harbor language as the original H.R. 333 as passed by the House. 108th & 109th Congress:The House passed H.R. 975 March 19, 2003, using the same §707(b)(6) and (b)(7) language as the House version and the Conference version of the 107th Congress' H.R. 333. BAPCPA, as S. 256, was finally passed by the Senate March 10, 2005, and included essentially the same safe harbor provisions of §707(b)(6) and (b)(7) as the 2001 conference report.Analysis:From the very first bill introduced in 1997, the bankruptcy bills that lead up to BAPCPA all deleted the provision of the pre-BAPCAP Bankruptcy Code that limited to the court and the U.S. Trustee the standing to make, or even suggest, an abuse motion. Below is a list that shows the chronological development, through various bankruptcy bills, of the language that eventually became §707(b)(6) and §707(b)(7). No debtor income limitation on anyone bringing abuse motion:
House version of H.R. 3151 (1998)No abuse motion by creditor if the debtor and spouse combined CMI is below-medium:
Senate S. 1301 (1997); Senate version H.R. 3151 (1998); Senate S. 625 (as introduced) (1999); House version of H.R. 833 (1999)No abuse motion by creditor if the debtor and, in joint case only, spouse's CMI is below-medium:
Senate version H.R. 833 (2000); House version of H.R. 333 (2001); Senate S. 420 (2001); Senate version H.R. 333 (2001); Conference committee report (2002); House H.R. 975 (2003); BAPCPA (2005) (707(B)(6))No means test motion by anyone if the debtor and, in joint case only, spouse's CMI is below-medium:
Senate S. 420 (2001); Senate version H.R. 333 (2001)No means test motion by anyone if the debtor and spouse combined CMI is below-medium:
House version of H.R. 333 (2001); Conference committee report (2002); House H.R. 975 (2003); BAPCPA (2005) (707(B)(7))As shown on the list above, all these bankruptcy bills, other than the 1998 House bill, included a provision that limited the right of parties other than the Court or the United States Trustee to file any §707(b) abuse motion to cases where the debtor income was above-median. Through 1999, the bills stated that in cases where a married person files individually, the limitation would be if the debtor and the non-filing spouse's combined income was above median. Starting in 2000, all bills calculated the limitation as being the debtor's current monthly income in an individual case.As described above, a simplified "means test" was introduced in the very first 1997 Senate bankruptcy bill. The extensive means test that we now use, with six month pre-bankruptcy income compared to IRS expenses, was introduced in 1999 with S. 625. In 2001, a separate limitation on means test motions was first introduced. Prior to the 2001 limitation, a means test motion could have been made even if the debtor's income was below median. I believe it would be correct to say that the means test was debated publically and in Congress far more than any other provision of the bankruptcy bills leading up to the passage of BAPCPA. The original means test proposals, prior to 2001, were not limited to above-median debtors. In theory, a modest income debtor with even more modest expenses might have been caught up in a means test motion. In other words, §707(b)(6) and §707(b)(7) have their origins in two different aspects of the bankruptcy bills. The predecessor of §707(b)(6) was inserted at the very beginning of the process, to replace the pre-BAPCPA limitation on who can bring any abuse motion. §707(b)(7) was inserted for an entirely different purpose, to shelter below-median income debtors from the application of the means test. Looking at it from this perspective, the slightly different language between how median income is calculated in §707(b)(6) and §707(b)(7) in a case where a married debtor files individually - only the debtor's CMI is used in §707(b)(6) and the combined debtor-and-spouse CMI is used in §707(b)(7) - is irrelevant: the two provisions are dealing with two separate issues and the fact that they are located next to each other in the statute is little more than a coincidence. In any case, the limitation of §707(b)(6) was not some provision thrown into BAPCPA at the last minute. The language of §707(b)(6), which limits cases where a creditor can bring an abuse motion to those where the individual debtor's CMI is above median rather than the combined CMI of the debtor and a non-filing spouse, has been the standard language in every bankruptcy bill since 2000. The fact that bankruptcy bills 1997 through 1999 used language that calculated combined household median income, and the bills from 2000 through 2005 used language calculating the limitation as the debtor's individual CMI, shows that Congress must have considered both alternatives and intentionally chose the current language.The language used in §707(b)(7) first arose in 2001. The House versions of the 2001 bankruptcy bill used the BAPCPA language, stating that the means test only applies if the debtor-and-spouse combined income is above median. The Senate bills in 2001 set the median income calculation at the debtor's individual CMI. It appears that in conference the House version prevailed.

Filing of claims in reopened cases

In re J&S Conveyor, Inc. 95-22963(Decision August 11, 2009; Judge Ninfo, Rochester). Complicated decision in an old, reopened case. The debtor corporation filed Chapter 11 Oct. 27, 1995. Apparently the corporation was the beneficiary of a life insurance policy that was listed on Schedule G (Executory Contracts) but not on Schedule B, line 9 (Assets – Interests in insurance policies.) The Chapter 11 debtor entered into a typical "cash collateral" agreement with the bank that had a security interest in all its assets, including its cash and receivables. Some creditors filed claims in the Chapter 11 case. A year later, the case was converted to Chapter 7, and a Chapter 7 notice to creditors of the trustee hearing was mailed out. That notice stated that there was no need for creditors to file claims at that time. The trustee filed a report stating there were no assets to be distributed to creditors, and the case was closed as a no-asset case in November 1998. Apparently the life insurance policy vested, in an amount of over $350,000. The case was reopened in September of 2006 to administer the life insurance proceeds (which has a complicated history, but that's another story.) A new notice to creditors was sent out by the Court Clerk, requesting claims to be filed. Claims in the reopened case: After the new claims deadline (or bar date) passed, the trustee objected to both the old claims filed in the original Chapter 11 and the new claims filed in the reopened Chapter 7. Had these motions succeeded, all the money would have gone to bankruptcy administrative claims and to the owner of the shares of the corporation. The trustee's argument was that, by 2006, the statute of limitations had run on the debts owed by the corporation in 1995 and, therefore, none of the creditor claims were valid anymore. Judge Ninfo ruled that the claims filed in the original Chapter 11 case were still valid, that the passage of time did not eliminate the validity of those claims when they were first filed. The judge ultimately ruled that the claims filed in the reopened Chapter 7 case were also valid, although this determination was against his better judgment. The judge believes that claims must be valid at the time they are filed, not merely as of the petition date, so claims filed years after the statute of limitations had run were no longer valid (the six year New York statute of limitations was tolled, or suspended, while the original Chapter 11 & converted Chapter 7 cases were pending, but the statute resumed when the case was closed in 1998.) However, the judge acknowledged, at the urging of the United States Trustee, that the 1996 clerk's notice instructed creditors not to file claims, and it would be inequitable to punish creditors for following the instructions of the Court Clerk. The Court reluctantly allowed these claims.Scheduling insurance policies: When a case is closed, as this case was in 1998, all assets listed on the schedules that have not been administered by the trustee are deemed abandoned back to the debtor. In this case, the life insurance was listed on Schedule G ("executor contracts") but not on Schedule B, where line 9 specifically asks for interests in insurance policies to be set out. The Court ruled that this asset was not deemed abandoned in 1998 because it was not properly listed on Schedule B.Informal proof of claim: To make a long complicated story short, the rights of the shareholder in this case to claim superior rights in the life insurance policy depended on whether the cash collateral agreement entered into at the beginning of the Chapter 11 case could be considered the filing of an informal proof of claim. The court ruled that it was not, as it failed to meet one of the four tests of an informal proof of claim: it failed (in the Court's view) to evidence the creditor's intention to hold the debtor personally liable on the debt in question.

Fixtures and the homestead exemption: Grucza

In re Grucza 09-11140 (Decision Sept. 9, 2009, Judge Kaplan): Is a pile of cinder blocks similar to storm windows stored in the garage or more like a not-yet-installed hot tub? Or perhaps like George Washington's statute? Or Cleopatra's Needle? Judge Kaplan wrestled with the issue of when stuff becomes a fixture of real estate and, therefore, eligible for the homestead exemption. Here the debtors' back yard was falling off a cliff, and they bought a load of cinderblocks in order to build a retaining wall. The petition was filed before the wall went up, and the trustee wanted to sell the block - for $7,000 - as unexempt personal property. The judge ruled the blocks were fixtures, at least in this particular case.Judge Kaplan reviewed colorful pre-Civil War cases which said that fixtures don't have to be cemented to the ground; if they are heavy enough, gravity constitutes sufficient attachment (such as General Washington's statute and the ancient Egyptian obelisk erected in Central Park and (mis)named after the last Pharaoh of the Ptolemaic dynasty. So if the debtors here had piled their blocks one onto the other to hold back erosion, it would have been a fixture. And things that are removed temporarily from a building, such as storm windows stored in the garage during the summer, do not lose their fixture status while unattached. So, the Court reasoned, material intended to become fixtures, such as shingles to fix the roof, lumber to repair a wall, and the new furnace waiting to replace the clunker in the basement, would be considered fixtures as they sit on site, waiting installation. That is, unless they are intended for extravagant improvement or aesthetic upgrade. Like a new hot tub. Or evidence of fraudulent intent. In any case, this is a clear victory for procrastinating do-it-yourselfers.

PMSI car loan includes roll-over debt: Peaselee appeal

Peaslee (2nd Circuit Oct. 9, 2009): Peaslee is a Western District of New York Chapter 13 case appealed all the way to the Second Circuit Court of Appeals in New York City, which, in turn, certified the central issue of the case to the New York State Court of Appeals. In chapter 13, a car loan must be treated as fully secured, and paid in full as a secured claim, no matter how much the car is worth, if the loan is less than 2 1/2 years old and if it is a "purchase money security interest" (pmsi). PMSI is what is sounds like, a security interest that is granted to the lender in return for financing the purchase of something (a non-pmsi is a security interest given to a lender against property the borrower already owned.) When a borrower buys a car and finances the purchase with a car loan, the lender gets a lien against the car; that is a pmsi. In Peaslee, the question was whether the portion of a car loan that was rolled over from a prior car loan was pmsi. Often when a car buyer trades in an old car for a new one, the old car has a loan against it and the trade-in value of the old car is less than the amount of that loan. Often in that case the balance on the old loan that is not paid off by the trade-in is rolled over into the loan for the new car, so the borrower now owes all the money for the new car plus something left over from the old car. In Peaslee, the debtor argued that the rollover portion of the old car loan should not be treated as a pmsi, but rather should be treated as an unsecured loan because it exceeded the value of the new car. The Bankruptcy Court (In re Peaslee 358 BR 545 (Judge Ninfo 2006), agreed with the debtor but, on appeal, the District Court reversed (373 BR 272, Judge Larimer 2007.) The case was appealed to the Second Circuit, which concluded that the definition of what is a pmsi is a state law issue, and they "certified" that question to New Yorkss highest court, the Court of Appeals (that is, the federal Court of Appeals asked the state court for a definitive interpretation of state law.) The Court of Appeals concluded that under New York's Uniform Commercial Code, the rolled-over balance on the old loan was part of the consideration in purchasing the new car, and so the whole loan should be considered pmsi (In re Peaselee, 13 NY 3rd 75.) Once the Second Circuit received that certified decision, it issued a short decision October 9, 2009 that for Chapter 13 purposes, the whole car loan, including the roll-over, was pmsi and had to be treated as fully secured.

Second Circuit Decision: 2005 New York State Homestead exemption increase retroactive: Hayward

CFCU Community Credit Union v. Hayward (Scribner as trustee); WDNY Bk07-4369bk; 552 F.3d 253; Second Circuit Court of Appeals decision January 9, 2009: The NY homestead exemption was increased from $10,000 to $50,000 in August 2005, and the Haywards filed Chapter 7 shortly thereafter. CFCU, by Attorney Edward Crossmore, argued that the $40,000 increase should only apply to debts incurred after the law went into effect. The WDNY, EDNY, and NDNY bankruptcy courts disagreed, as did the District Court in WDNY and NDNY. CFCU appealed to the Second Circuit. Held: as an interpretation of New York law, the increase in the homestead was retroactive to debts incurred before the law was modified. Specific holdings: 1) The Commerce Clause of the U.S. Constitution (forbidding the impairment of contracts) was not infringed. The change did not substantially impair the contractual expectations of the parties, and even if it did, the changes was constitutionally justified as furthering a "significant and legitimate public purpose." 2) Other than the Commerce Clause issue, this was a matter of New York law interpretation, not federal law interpretation. The Supreme Court decision in Owen v. Owen did not apply. Owen was a Florida case where a creditor obtained a judgment against the debtor's condo, Florida then changed its exemption laws to include condos as homesteads but the change specifically excluded pre-change judgment liens; the debtor then filed bankruptcy and sought to avoid the judicial lien. The Supreme Court allowed the judgment to be avoided because the property being exempted - the condo - was exempt property and Florida's limitation on that exemption - excluding older judgments - did not carry into bankruptcy. Somehow the Hayward court concluded that "Owen holds no sway here." 3) Under New York law remedial legislation can apply retroactively and the legislative history here, especially the sponsoring legislator's memorandum, indicated that the legislature intended that the change would be retroactive.

Retainer agreement governs attorney fees for responding to turnovers: Kasperek and Martinelli

In re: Kasperek Bk 08-11760 & In re Martinelli Bk 08-11761 (Decision January 15, 2009; Judge Bucki, Buffalo: Two potential asset cases where the trustee (John Ring) requested turnover of documents and assets. The debtors' attorney apparently demanded additional fees from each client before he would represent them in the turnover motion. The attorney did not file a supplemental 2016 statement. The attorney did not appear at the initial turnover motion, and the trustee brought a motion to disgorge. The attorney did appear at the adjourned turnover date and all turnover matters were resolved. Judge Bucki concluded that an attorney may structure his retainer arrangement as he or she sees fit, but is obligated by its terms. In this case, the 2016 statement stated the attorney would "render legal services for all aspects of the bankruptcy case." The judge stated that this certainly would include responding to a turnover motion. The judge ordered to attorney to compensate the trustee $500 for the cost of bringing the turnover motions and the disgorgement motions. Whatever the Rule 2016 statement (and attorney's retainer agreement) says, the court will enforce.

Recorded mortgage with misspelled name not a perfected lien: Badagliacca

In re Badagliacca 06-22132; Arnold as Trustee v. Bank of New York AP 08-2032 (Decision February 23, 2009; Judge Ninfo) Mortgage misspelled the debtor's surname on its mortgage document ('Badaglicca' rather than 'Badagliacca'), so that a search of the index of land records does not reveal the mortgage. Held, the mortgage lien is avoided as against the trustee (acting as a hypothetical bona fide purchased.)

Successor creditors must prove they own the claim: Doherty

In re: Doherty 06-22278 & Benedetti 07-21620 (Decision February 23, 2009; Judge Ninfo): Proofs of claims were filed in each case by alleged successors to the original creditors. The Trustee objected to the claims, and the Court disallowed them, as the claimant failed to show the chain of title or anything else that would prove ownership of the claim.

Exempting life insurance after Wornick decision: MacDonald

In re MacDonald 08-11741 (Decision March 10, 2009; Judge Bucki, Buffalo) Motion by debtors to compel trustee to return life insurance proceeds turned over pursuant to the 2002 decision in Teufel etc. Prior to 2008, Western District of New York courts held that when a husband and a wife both file bankruptcy and one spouse has a life insurance policy with cash value and the other spouse as the beneficiary, the bankruptcy trustee, as trustee for both the owner and beneficiary of the policy, could claim in the cash value. The Second Circuit overruled this line of cases Wornick v. Gaffney 554 F3d 486, decision 9/24/08, and ruled that the cash value of reciprocal life insurance policies in joint cases are exempt. The MacDonald debtors then amended their exemptions to add the life insurance and then moved to have the trustee return funds previously turned over. Judge Bucki granted that motion, noting that the exemption issue had not previously been litigated in this particular case, so no "law of the case" had been established to preclude the debtors from exempting the asset now.

Acceleration of a mortgage does not turn it into a short term mortgage: Maiorino

In re: Maiorino 08-21335 (Decision March 11, 2009; Judge Ninfo) In this case a Chapter 13 debtor attempted to modify a long-term mortgage by paying it off in full within the plan at below-contract rate of interest (See the case note in Laimer, in the 2008 cases.) The debtor argued that as a judgment of foreclosure has accelerated the mortgage, it was all now due-in-full and, as the last payment was now due within the period of a Chapter 13 plan, it could be modified. Judge Ninfo disagreed and held that the Sect. 1322(c)(2) provision, which states that residential mortgages cannot be modified if the last payment is due after the term of the Chapter 13 plan, applies to the original payment schedule of the mortgage, not the shorter tern caused by the acceleration of the mortgage in foreclosure. Note this phrase (which may return if new legislation allows modification of home mortgages in Chapter 13): "Although all of the circumstances under which a debtor might be better off by intentionally going into default on a mortgage, so that it could be modified in a Chapter 13 proceeding may be numerous and unclear, if a mortgage that has been accelerated by a debtor's default is held to be eligible for modification under Section 1322(c)(2), such a holding could open up the possibility of abuse"

Self-employment net income exempt: Dziedzic

In re Dziedzic 08-14061 (Decision March 24, 2009; Judge Bucki, Buffalo): Personal services income exemption for self-employed applies to net income only. Debtor, a self-employed chiropractor, asserted a 90% personal services exemption for services rendered 60 days prior to filing, pursuant to NY CPLR Sect. 5205(d). According to debtor's schedules, only 18.2% of gross business revenue represented personal income, the rest was for overhead. Debtor had $5,625.49 in the bank when the case was filed, plus $100 cash. $2,500 was exempt cash and the debtor did not claim an exemption for another $2,079.38. Of the balance of $1,146.11, the debtor claimed 90% exempt. The court agreed with the trustee that only 90% of 18.2% of this money was exempt, as only 18.2% was actual "earnings" as that word is used in the exemption statute, CPLR 5205(d).

Non-debtor co-owner a necessary party to bankruptcy sale: Bankruptcy Exchange, Inc. v Langsland

Bankruptcy Exchange, Inc. v Langsland 2009 U.S. Dist. LEXIS 84005 (W.D.N.Y., District Judge Scretny, decision September 15, 2009: This is a District Court decision out of Buffalo which upholds a Bankruptcy Court decision from 2008. In April 2005, Deborah Langslands filed a Chapter 7 case in Buffalo. She jointly owned her home with her mother, Eleanor Landsley, and claimed the $10,000 homestead exemption (unknown to the debtor at the time, the homestead exemption would jump up to $50,000 four months after the case was filed.) A speculative company, Bankruptcy Exchange, Inc., made a $12,500 offer to the trustee for the debtor's interest in the house. $10,000 would go to the debtor (the exemption) and $2,500 would go to the trustee. On March 22, 2006, a notice of intent to sell was served on all creditors by the court clerk. However, Eleanor Langslands, the non-debtor co-owner of the property, was not served. There was no opposition filed against the intent to sell so, presumably, the trustee completed the sale to Bankruptcy Exchange.On November 9, 2007, Eleanor Langslands, the co-owner filed a motion to vacate the sale on the grounds that she was never notified of the sale and she now had a hostile co-owner. A letter from her attorney filed later stated, among other things, that she lost her STAR property tax exemption because of the new non-resident co-owner. The issue, as framed by the court, was whether the co-owner was a "creditor" as that term is used in bankruptcy and, therefore, a party that must be served with notice of sale. Bankruptcy Judge Kaplan wrote a decision, entered April 2, 2008, stating that the term "creditor" was broad enough to include the non-debtor co-owner. Interestingly, Bankruptcy Judge Bucki, who was not the judge in the case, co-signed the decision, indicating that this would be the rule at least in the Buffalo Division of the Western District of New York Bankruptcy Court. This decision is NOT found on the court website under Judge Kaplan's written decisions, but it can be found and viewed, at no charge, under the April 2, 2008 PACER docket entry for this case.Bankruptcy Exchange, Inc. appealed to District Court, which upheld the bankruptcy court's decision. The District Court noted that "joint tenants", which Deborah and Eleanor Langsland were before the filing of the bankruptcy, must have the four "unities" of ownership: time, title, interest and possession. When Deborah Langsland filed her case, the trustee became the real estate owner, breaking at two of the unities. The court said the trustee became "tenant-in-common", rather than joint tenant, with Eleanor Landsland. The change in Eleanor Landsland's interest gave her a possible claim in the case. Therefore, as a creditor, she was entitled to notice of sale. This case appears to be an effort of the courts to find grounds to give the co-owner the right to object to this egregious sale. It is odd that the bankruptcy code does not give co-owners a direct right to notice of a cale of a co-owner's interest. An interesting unforseen consequence of the District Court's decision is the conclusion that a joint tenancy becomes a tenancy-in-common upon filing. Would that also happen if only one spouse of married tenants-by-the-entireties filed? Is the joint tenancy restored when the real estate is abandoned back to the debtor at the conclusion of the case? What if both owners filed? Further complications can be imagined.

Reasonably anticipated changes in income and expenses: CFCU Federal Credit Union v. Frisbie

CFCU Federal Credit Union v. Frisbie; 2009 U.S. Dist. LEXIS 89464 (W.D.N.Y., Judge Siragusa, Sept. 28, 2009). This case, filed in March of 2006, was one of the early post-BAPCPA (Bankruptcy Abuse Prevention & Consumer Protection Act of 2005) cases. CFCU Federal Credit Union, which was aggressively pursuing the outer boundaries of creditor rights under the new bankruptcy changes, filed a motion to have the case found to be automatically dismissed because the answer was blank in the schedules where the debtor is asked if there was any reasonably anticipated changes ti income or expenses in the year following the filing of the petition. In November of 2006 Judge Ninfo ruled that the blank answer was the same as afnswering "none" so the questions were effectively answered. CFCU appealed to the District Court, but then apparently abandoned its appeal because they never filed a brief. District Court dismissed the appeal bot on the grounds that the credit union failed follow through on the appeal and also in the merits.

Fraudulent Conveyance: return of engagement ring: Gallagher

In re Gallagher Bk 07-22720; Gordon v. Kinney AP 09-2003 (Judge Ninfo, 9/30/2009): Another ring case. The debtor filed bankruptcy in October 2007. Two and a half years earlier, she gave the engagement ring back to Mr. Kinney. The 2 1/2 years is significant because it takes the transfer out of the bankruptcy fraudulent transfer period (2 years) and also places the transfer before the increase in the New York homestead exemption from $10,000 to $50.000. To avoid a transfer, the trustee had the burden to prove the debtor was insolvent when the transfer took place. The trustee had thought that the judge had accepted this conclusion prior to trial, but the judge found that there was a clerical error, so that it appeared the debtor was ever-so-slightly solvent when the transfer was made. Solvency is determined by adding up all the debtor's unexempt assets and debts at the time of transfer. The decision includes a chart showing $183,704 in assets and $169,983 in debts. The decision does not explicitly say so, but the $183,704 in assets should have been reduced by $10,000, the debtor's homestead exemption (she apparently had about $45,000 in equity in her house.) As the trustee had not shown the debtor to be insolvent, the transfer was not considered to be fraudulent under New York law. Note that had the transfer taken place after August 2005, when the homestead exemption rose to $50,000, the debtor would have been insolvent and the transfer avoidable.

Economic stimulus package cases: In re Daniel and Wendy Alguire

In re Daniel & Wendy Alguire; Bk 08-10691; decision June 24, 2008; Judge Kaplan in Buffalo.) Remember the "economic stimulus" rebate checks received earlier in 2008? What was the status of those checks in a New York bankruptcy? Judge Kaplan took this case and fourteen others and issued a general decision on the question. He ruled that the economic stimulus checks were tax refunds on the debtor's 2007 tax returns. The fact that they were retroactive tax refunds was irrelevant. In New York, debtors who do not own real estate, or have no equity in their residence, can exempt $2,500 in cash, bank accounts and tax refunds owed but not received. Therefore, Judge Kaplan determined, for any case filed after the statute authorizing the stimulus package was enacted but before the checks actually were received, they could be treated as tax refunds and exempted as cash for those debtors eligible for cash exemptions. This case may be an important guideline in the event Congress issues any additional stimulus packages in the future.

Dischargeability of a bar fight claim: In re Donald L. Wright

In re Donald L. Wright (Bk 04-17680; AP 08-1075; decision July 21, 2008; Judge Kaplan in Buffalo.) Debtor injured another person in a bar fight, and the other person sued in bankruptcy court to have the claim for injuries from the fight excepted from discharge. A claim for "willful and malicious injuries" can be excepted from the discharge received by a debtor in bankruptcy under 11 USC Sect. 523(a)(6). Here, the debtor apparently admitted to hurting the other person in a deposition, and that was enough for the Bankruptcy Court to grant summary judgment to the injured party and except the claim from discharge.

Equitable ownership of a car: In re Brenda Dufoe

In re Brenda Dufoe (Bk 08-20468; decision August 27, 2008) (Judge Ninfo). New York Vehicle and Traffic Law Section 2108 says that the owner listed on the title certificate of a motor vehicle is presumed to be the owner of that vehicle. In this case, the debtor and another were co-owners in a business which included buying and selling high-end cars. The debtor's name was on the title certificate, but the business partner claimed to be the sole "beneficial" or "equitable" owner of the vehicle. Judge Ninfo decided that the V&T Sect. 2018 presumption of ownership can be rebutted in the right circumstances, but that the business partner did not rebut it in this case. However, the judge did indicate that it was possible that the other party might have a partial beneficial interest in the vehicle, and advised the parties to negotiate a settlement. This concept of a partial beneficial interest in a vehicle titled to another person may be the subject of future bankruptcy litigation in New York.

ADA Claim not exempt in New York: In re: Graci

In re: Graci (Bk 05-18224; Decision September 23, 2008; Judge Bucki, Buffalo). When this debtor filed bankruptcy, she was litigating a claim under Americans with Disabilities Act (42 USC Sect. 12101 et sec.). In New York, a debtor can exempt (that is, keep free and clear from creditors) up to $7,500.00 of a claim for a personal injury. Judge Bucki ruled that an ADA claim is not exempt as a personal injury claim.

Short term home mortgages can be modified in Chapter 13: In re Latimer

In re Latimer (Bk 08-21242; Decision October 28, 2008; Judge Ninfo): Chapter 13 case: the debtors had a second mortgage where the final payment was due within the five year time period of the plan. Following the 11th Circuit Court of Appeals (in re Paschen, 296 F3d 1203) and the 6th Circuit Bankruptcy Appeals Panel (In re Eubanks , 219 BR 468), and not following the 4th Circuit in In re Witt (113 F. 3d 508), Judge Ninfo stated the mortgage could beneficiary modified in the Chapter 13 plan. Mortgages that are against the debtor's house and where the repayment period extends beyond the end of the plan cannot be modified in Chapter 13, but here, where the repayment period was within the plan period, the debtor could bifurcate, or divide, the mortgage into a secured and unsecured portion and pay off the unsecured part as an unsecured claim.

Debtor must claim an exemption to avoid a transfer: In re Gross

In re Gross (Bk 99-16587; Decision October 7, 2008; Judge Bucki): Debtor's original case was filed 12/1/99 and she claimed the cash exemption. Less than a month prior (11/19/99), a creditor filed a judgment lien on her house. The debtor was unaware of the lien until the case was reopened in 2008. The debtor did not amend her exemptions to switch from cash to homestead; rather she moved to avoid the judgment as a preferential transfer. Debtors can avoid involuntary preferential transfers (and other transfers) under 522(h) if a trustee can, but does not avoid the transfer, if the debtor "could have exempted" the transferred asset. The debtor argued, unsuccessfully, that she "could have" exempted the equity in the homestead, even though she didn't. Judge Bucki ruled that the debtor must actually claim the exemption to avoid the transfer and/or avoid the lien. The Judge also stated that any action to avoid a preferential transfer must be by AP and not by motion.

Cash Collateral agreements needed in business Chap. 13: In re Kjoller

In re Kjoller (07-23133) (Decision November 10, 2008; Judge Ninfo): Bankruptcy Code section 1304 and Section 363(c)(2) and (4) makes a Chapter 13 business debtor a trustee of an explicit statutory trust covering cash collateral. These sections require a business debtor to get the consent of any cash collateral secured party or Court order allowing the debtor to use any cash collateral, including receivables or sale revenue, or to put the cash collateral in a separate account and account for it to the secured creditor. Court expects in future chapter 13 cases the debtor and the trustee will address any possible tax collateral issue at the earliest opportunity. In this case, the bank filed a motion to dismiss the case for the debtor's alleged "embezzlement" or "defalcation" of cash collateral. The court dismissed the embezzlement complaint, and allowed the defalcation claim to continue. The case also includes extensive notes about motions to dismiss complaints and amendments to complaints.

Some mortgage proof of claim expenses allowed: In re Zunner

In re Zunner Bk 08-10862 (Decision November 5, 2008; Judge Bucki, Buffalo). In Chapter 13 case where the mortgage bank filed a proof of claim for the bank's expense in obtaining a title report and a broker's price opinion, even though the mortgage was current at the time the petition was filed. The mortgage allows the bank to charge the borrower "any amount that the lender expends under this mortgage to protect the value of the property and lender's rights in the property." Judge Bucki ruled that the $100 titled report was a justifiable expense, as the mortgage was in default at the time the report was prepared. The $100 broker's price opinion was not a justifiable expense, as it did not protect the value of the property.

Funds in bank account are bankruptcy asset until check clears: In re Borowiec

In re Borowiec Bk 07-04258 (Decision November 5, 2008; Judge Bucki, Buffalo). Debtor's property tax payment check cleared the bank four hours after the bankruptcy was filed. The trustee brought a turnover motion against the debtor. The court ruled that the actual property could not be turned over, as it had already been transferred, in good faith, to the tax collector, but that the debtor enjoyed "unjust enrichment" and granted a judgment in favor of the trustee.

Pay Advice case 4: Gilbert

In re Gilbert 08-12922 (Decision April 10, 2009; Judge Bucki, Buffalo) Another pay advice case. Here the debtor did not file with the court pay advices within 45 days of the petition date but did provide them to the trustee at the 341 hearing. The trustee apparently reviewed and returned the pay stubs without comment, and then filed a dismissal motion when the 45 day deadline passed. Judge Bucki ruled that the motion was legally sound but the trustee, having accepted the stubs without comment, was equitably estopped from moving to have the case deemed dismissed. Not mentioned in the case: Could the UST or another party have made the motion? Could they still?

Pay Advice case 3: Catania

Catania Bk 08-13478 (Decision December 10, 2008; Judge Bucki, Buffalo: Case dismissed "automatically" due to failure to file pay advice. Chapter 7 filed August 7. Pay stubs were filed for the period June 12 to July 3, and nothing between July 3 and August 7. Debtor attorney attempted to correct the error Sept. 7, but erroneously filed the same pay stubs as before. HELD: Court had no discretion, case must be deemed to have been automatically dismissed 46 days after filing. Sect. 521(a)(1)(B)(iv) requires pay advice for the 60 days prior to filing be filed with the court, or the case is automaticallly dismissed 45 days after filing. As there were no pay advices for the month prior to filing, and as the missing pay advice could not be derived from YTD (compare this to Judge Bucki's Wojda case or Judge Ninfo's Riffle case) or the trustee estopped from claiming the case is dismissed (Judge Bucki's Ober and Gilbert cases), this case must be considered dismissed pursuant to Sect. 521(i).

Pay advice case 2: Ober

In re: Jeffrey T. Ober (Bk 06-00704; decision June 27, 2008; Judge Bucki in Buffalo): Section 521 of the Bankruptcy Code (11 USC Sect. 521(a)(1)(B)(iv) requires a debtor to dile with the bankruptcy court "copies of all pay advices or other evidence of payment received within 60 days" of the filing of the bankruptcy petition. 11 USC sect. 521(i)(1) further states that if information required to be filed by the debtor, including pay advices, is not filed within 45 days of the petition date, "the case shall be automatically dismissed." In Ober, the case was filed April 3, 2006, but pay advices were filed only through March 2, so the last 30 days of pay advices were missing. Never the less, no one objected to the petition while it was in Chapter 13. The chapter 13 plan was confirmed, after notice to all creditors, and a later amended chapter 13 plan was confirmed, again after notice to all creditors. After two years in chapter 13, the case was converted to Chapter 7. Only then did someone - the new chapter 7 trustee - object to the case and claim that the petition should be treated as if it had been automatically dismissed two years earlier. The court did not indicate how it would have ruled if the question had been presented back at the beginning of the case. Instead the court decided that it was far too late for the trustee to claim the case should be treated as if it were dismissed. The chapter 7 trustee's predecessor - the chapter 13 trustee - should have objected to the case earlier, before the plan was confirmed, twice, after notice to all creditors. Interestingly, the case made no reference to Judge Ninfo's Riffle case.

Pay advice case 1: Riffle (affirmed by District Court)

In re Stephen R & Lora P. Riffle (Bk 07-22372; decision January 24, 2008; Judge Ninfo). Section 521 of the Bankruptcy Code (11 USC Sect. 521(a)(1)(B)(iv) requires a debtor to file with the bankruptcy court "copies of all pay advices or other evidence of payment received within 60 days" of the filing of the bankruptcy petition. 11 USC Sect. 521(i)(1) further states that if information required to be filed by the debtor, including pay advices, is not filed within 45 days of the petition date, "the case shall be automatically dismissed." In Riffle, the debtor filed his last pay stub, plus a year-to-date summary of income received in each paycheck. A creditor filed a motion asking for the case to be considered automatically dismissed because the debtor did not file all four of his bi-weekly pay stubs for the 60 day period prior to filing his case. The court, however, agreed with the debtor and the trustee that the items that were filed were, in this case, sufficient "other evidence of payment" to verify the debtor's income. The court also specifically stated that, for any Rochester bankruptcy case, if a debtor files any evidence of payment, the case will not be considered to be automatically dismissed unless another party files a motion within 30 days of the expiration of the 45 day "automatic dismissal" date. NOTE: THIS CASE WAS AFFIRMED ON APPEAL (United States District Court for the Western District of New York (Case 08-CV-6082; decision August 7, 2008; Judge Siragusa)

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