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Supreme Court Bankruptcy Cases Archives

Underwater Mortgages Cannot Be Stripped Down in Chapter 7 - For Now at Least: Caulkett

The United States Supreme Court has unanimously ruled that a junior mortgage that is 'under water' - that is, the value of the house is less than the senior mortgage - cannot be stripped down or removed as an unsecured claim in a chapter 7 bankruptcy. And yet, the opinion seems to invite a challenge to the very case the court is relying upon for its conclusion.

Bankruptcy Court Cannot Decide State Law Claims: U.S. Supreme Court: Marshall v Marshall

Who would have thought that an endless lawsuit involving the late Anna Nicole Smith might be the vehicle for the Supreme Court to curtail the constitutional jurisdiction of Bankruptcy Courts? But the United States Supreme Court, in a 5-4 decision along the usual ideological lines, ruled bankruptcy courts do not have the constitutional power to make a final ruling on issues strictly of state law, saying that only judges appointed under Article III of the Constitution (lifetime appointment District Court Judges) have that authority. Marshall v. Marshall; United States Supreme Court decision June 23, 2011. The majority opinion of Chief Justice Roberts opens on a lighter note, quoting Charles Dickens: This "suit has, in course of time, become so complicated, that . . . no two . . . lawyers can talk about it for five minutes, without coming to a total disagreement as to all the premises. Innumerable children have been born into the cause: innumerable young people have married into it;" and, sadly, the original parties "have died out of it." A "long procession of [judges] has come in and gone out" during that time, and still the suit "drags its weary length before the Court." Those words were not written about this case, see C. Dickens, Bleak House, in 1 Works of Charles Dickens 4-5 (1891), but they could have been.

Supreme Court Decides: Means Test Car Ownership Expense Applies Only If Debtor Has a Loan: Ransom

The Supreme Court issued a decision in Ransom v. Fia Card on January 11, interpreting the statutory provisions of the 'means test.'  In brief, the Court states that debtors who do not have a car loan cannot claim the 'ownership expense' for that car on the means test form. This is basically the current practice in local bankruptcies. I am sure that more extensive analysis will be forthcoming from this case.

Partial Discharge of Student Loans in an erroneous Chapter 13 plan? The Supreme Court to decide.

United Student Aid Funds Inc. V. Francisco Espinoza
United States Supreme Court case 08-1134
Oral arguments December 1, 2009Can a student loan be discharged, even in part, in a Chapter 13 plan without a finding of "undue hardship"? More broadly, how final is a confirmed chapter 13 plan? The United States Supreme Court will be answering these questions in a rare bankruptcy case appeal.The facts of the case are simple. In 1988, Francisco Espinoza borrowed $13,050 in a student loan. In 1992, he filed a Chapter 13 case in Arizona, listing that loan as his only debt. His Chapter 13 plan called for paying off the student loan in full, without interest. The plan specifically stated that the student loan would be fully satisfied at the completion of the plan, and a copy of the plan was mailed to the student loan bank at their payment address. The student loan creditor did not object plan, and the bankruptcy court confirmed it. The creditor filed a claim for $17,832.15, and the Chapter 13 trustee filed an objection to the claim, beyond the principal amount of $13,250. Apparently, the creditor did not oppose the objection to claim. The plan was completed, and the bankruptcy court issued a bankruptcy discharge. The creditor did not oppose the discharge, or appeal any of these bankruptcy decisions.Two years after he received his bankruptcy discharge, the student loan creditor started collecting on the unpaid interest. The debtor moved in bankruptcy court to have the creditor found in contempt of court for violating the discharge order. He argued that the interest on his student loans was fully discharged: the Chapter 13 plan specifically said so, the creditor received copy the plan, the creditor did not object to the plan or appeal the plan confirmation order, and the creditor did not object to the discharge or appeal the discharge order. The bankruptcy court agreed with the debtor that the student loan, including interest, was fully discharged.The creditor appealed to District Court, which reversed the bankruptcy court decision. The debtor then appealed to the United States Court of Appeals for the Ninth Circuit, which upheld in the Bankruptcy Court and reversed the District Court. The United States Supreme Court agreed to hear the case, and oral arguments took place December 1, 2009.The position of the parties is fairly simple. The student loan creditor argues that student loans are never discharged no matter what the plan says and no matter what the bankruptcy court says. The Bankruptcy Code is self-executing on the point and an order to the contrary is void. The bankruptcy court has no power to discharge a student loan absent a finding of "undue hardship" following a bankruptcy adversary proceeding. The debtor's position is that by failing to object to the plan, the confirmation order, or the discharge order, the creditor has waived its rights to object to the discharge of the student loan.Circuit Courts of Appeal are divided on this issue, or, more specifically, the Ninth Circuit's 2008 decision, Espinosa v. United Student Aid Fund, Inc., 530 F.3d 895 differs significantly from two other circuits. The 10th Circuit in In re Mersmann, 505 F.3d 1033 (2007) and the Second Circuit in Whelton v. Educ. Credit Mgmt. Corp., 432 F.3d 150 (2005) both came out the other way.Oral Arguments: The Supreme Court heard the case on December 1, 2009. The justices appeared to believe the bankruptcy court erred in allowing a partial discharge of student loans absent a finding of undo hardship. The question was what should be done with bankruptcy court orders entered in error. The student loan creditor emphasized in its brief that other claims, such as child support or recent income taxes, might be discharged erroneously in a similar chapter 13 plan, absent objection. The debtor's attorney admitted as much to Justice Ginsburg. On the other hand, the creditor's attorney faced skepticism from Justices Ginsburg, Kennedy and Stevens in claiming that the student loan creditor could never waive its rights to an undo hardship hearing. Justices Sotomayor and Breyer questioned whether a court order could be considered void unless the court lacked jurisdiction. Justice Alito raised the prospect that the debtor's attorney might be sanctioned for including a provision like this in a Chapter 13 plan, and Justices Bryer and Scalia were sympathetic to this argument.

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