The Court ruled that a loan Debtor obtained from Citibank in order to take a course to prepare her for medical school, and for books and living expenses, did not qualify as an educational benefit under 11 U.S.C. 523(a)(8)(A)(ii).  In re Essangui, No. 16-12984-MMH, 2017 WL 4358755 (Bankr. D. Md. Oct. 2, 2017).   The creditor acknowledged that the loan did not qualify under the other definitions of a student loan in §523(a)(8)(A)(i) or 523(a)(8)(B).     Debtor had borrowed $23,670 to attend the course in March 2008, when she enrolled in the program, which was a preparatory course of instruction that, upon completion, allowed students to enroll at Ross University School of Medicine.   The program was not qualified as a Title IV institution under the Higher Education Act of 1965, thus federal aid and grants were not available to it's students.  Debtor completed the course in 2008 and she enrolled in Ross University for the 2008 semester.  She was unable to complete her studies or graduate from Ross University, and was dismissed from Ross University in December 2008.    Debtor filed a chapter 7 bankruptcy in March 2016 and initiated an adversary proceeding against the creditor to determine that the debt was discharged in April 2017.   The Court ruled on cross motions for summary judgment.  The lender did not contest that the loan was not a qualified education loan under 11 U.S.C. 523(a)(8)(B).  Thus, the issues were limited to whether the debt is excepted from discharge as an educational benefit under 11 U.S.C. 523(a)(8)(A)(ii).    The court went into some depth as to the history of §523(a)(8).  Until 1976,  debts were dischargeable in bankruptcy.  In 1976 Congress passed section 439A of the Higher Education Act of 1965 which made non-dischargeable debts which were for a loan insured or guaranteed under the authority of this part that first became due less than five years prior to the filing of a bankruptcy and included language for hardship discharges.    The provision was included in the 1978 Bankruptcy Code amendments, as to debts to a governmental unit, or a nonprofit institution of higher education, for an educational loan first due more than five years prior to the filing of the bankruptcy (again with inclusion of a provision for hardship discharge).  This was further amended in 1979 by adding language to cover loans under certain programs, and in 1984 by eliminating the reference to higher education.    In 1990 amendments were enacted which added the language "or for an obligation to repay funds received as an educational benefit, scholarship or stipend” which courts generally have interpreted to add another category of non-dischargeable debts, which excluded for-profit loans.  In 2005, when Congress again amended section 523(a)(8), it did not change the substance of the existing statutory language. It did separate the language into two different sections: (A)(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or (ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; ....11 U.S.C. 523(a)(8).  Also, BAPCPA added a new provision:(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual ....Id.  The legislative history indicate these provisions were intended to enhance fairness for all parties, including debtors and creditors, and to “respond to many of the factors contributing to the increase in consumer bankruptcy filings ... to eliminate abuse in the system.” H.R. Rep. No. 109–31(I), at 2 (2005).   There is a split of authority in interpreting the the 'educational benefit' language of the statute.  The majority view focuses on the policy objectives of §523(a)(8) in taking a broad view of debts included.  See Micko v. Student Loan Finance Corp. (In re Micko),356 B.R. 210, 216–217 (Bankr. D. Ariz. 2006) finding a private non-profit loan to qualify.    More recent cases question this approach, focusing on the precise language and structure of the statute.  These cases point out concerns with the majority approach, including Congress's use of the word 'funds' instead of 'loans' in §523(a)(8)(A)(ii), given the use of the word 'loans' elsewhere in the statute; and 2) that the term 'educational benefit' is different from the 'educational benefit overpayment or loan' or 'educational loan' language used elsewhere in the statute.  “those bankruptcy cases [in the majority], perhaps inadvertently, imprecisely quote the provisions of the discharge exception statute as applying to ‘loans received,’ as opposed to the ‘obligation to repay funds received.’ ” Inst. of Imaginal Studies v. Christoff (In re Christoff), 527 B.R. 624, 635 (9th Cir. BAP 2015).  The court in Essangui agreed with the minority view more faithful to the actual language of the statute.  First, the subjection of (A)(ii) is 'an obligation to repay funds'.  This is not equivalent to a loan.  While defendant argues that funds could be interpreted as proceeds of a loan, the structure of §523(a)(8) suggests a more limited and tailored definition.   Second, the funds at issue must be 'received as an educational benefit, scholarship, or stipend.'  See Kashikar v. Turnstile Capital Mgmt., LLC (In re Kashikar), 567 B.R. 160, 167 (9th Cir. BAP 2017) holding that a loan is not an educational benefit.  The use of the word 'as' an educational benefit rather than 'for' indicates a reference to the role or character of the funds rather than the object or purpose of the funds.  Further, the definition of educational benefit should align with the other debts in subsection (A)(ii): scholarship or stipend, ie  funds extended for educational purposes that generally do not need to be repaid unless the recipient fails to graduate or meet other specified requirements. For profit lenders do not meet this requirement.  Third, interpreting (A)(ii) broadly to mean loans for educational purposes renders subsections (A)(i) and (B) largely meaningless.  See   Corley v. United States, 556 U.S. 303, 316, 129 S.Ct. 1558, 173 L.Ed.2d 443 (2009) rejecting position that rendered subsection of a statute superfluous.   This more limited reading of §523(a)(8)(A)(ii) not only gives meaning to the other sections of §523(a)(8) but also comports with the well-established principle of interpreting exceptions to discharge narrowly.    The court found that applying this interpretation to the facts of the case determined that the loan was not qualified as an educational benefit under (A)(ii).   The facts do not show an educational benefit, scholarship or stipend, but rather only show that the loan was used for educational purposes.  Thus the loan is not excepted from discharge under §523(a)(8).  The court concluded discussing policy considerations for its ruling.  By separating subsection (A)(ii) Congress confirmed that it dealt with a separate category of debts.  The addition of subsection (B) incorporated private loans previously not covered by §523(a)(8), and it's linkage to §221(d)(1) of the Internal Revenue Code ensured that the credit extended was for attending an institution that was eligible to offer programs under Title IV of the Higher Education Act of 1965.  This interpretation is consistent with the legislative history of the both the original enactment of §523(a)(8) generally and BAPCPA generally.  It recognizes Congress's delicate balance between the debtor's fresh start and protection of certain educational programs and lenders offering loans for such programs. Michael Barnett www.hillsboroughbankruptcy.com 

Two years after bankruptcy, Jim gets 3.25% car loan Just got an email from Jim, who filed Chapter 7 bankruptcy with me in 2015.  His case was approved and discharged in May 2017.  In August 2017, he got a car loan at 3.25%. I tell people to try to get three years after the bankruptcy, to […]The post Two years after bankruptcy, Jim gets 3.25% car loan by Robert Weed appeared first on Robert Weed.

Two years after bankruptcy, Jim gets 3.25% car loan Just got an email from Jim, who filed Chapter 7 bankruptcy with me in 2015.  His case was approved and discharged in May 2015.  In August 2017, he got a car loan at 3.25%. I tell people to try to get three years after the bankruptcy, to […] The post Two years after bankruptcy, Jim gets 3.25% car loan by Robert Weed appeared first on Robert Weed.

R. Glen Ayers, who passed away on September 27, 2017,  was, according to his obituary, "a force of nature in a bow tie."   He was a Southern gentleman.  He was at various times a professor, a judge, a practicing attorney and a Sunday School teacher.   He was a devoted family man.   To those of us who knew him as a bankruptcy professional, he was brilliant, irascible, and gracious often all at once.The Life of Glen Ayers Glen was born in Horry County, South Carolina.  He grew up feeding the chickens and hanging tobacco leaves.   He once described South Carolina as too small for a nation and too large for an asylum.He graduated from Clemson in University in 1969.   At his funeral service, his law partner Bob Werner said that Glen could be counted on to state why Clemson was the champion, should have been the champion or would be in the future.   He earned a Master's Degree from the University of North Carolina in 1971 and served in the U.S. Army from 1971-72.Glen met his wife Jan Miller Oldham on a blind date at Columbia College and married in 1972.   They had two children, Roderick and Claudia.    Glen graduated summa cum laude from the University of South Carolina School of Law in 1975 and received an LLM from Harvard Law School in 1979.   If you are counting, that makes four degrees by the time he was 32.Glen taught at St. Mary's Law School from 1981-1985.   According to Bob Werner, there were two types of lawyers in Bexar County, those who studied under Prof. Ayers and those who wished they did.    Glen served as a Bankruptcy Judge for the Western District of Texas from 1985-1988.    More about that later.After leaving the bench, Glen practiced in Washington, D.C. for a time and then returned to San Antonio where he practiced with Langley & Banack.    Bob Werner gave an anecdote about how Glen would be holding forth on some important story when the phone would ring with a call from a client or another counsel.   He said that Glen would pick up the phone and at that moment, whoever was on the phone would be the most important person in the world to him.   He would then resume the story in mid-sentence.    Glen was a Sunday School teacher at United Presbyterian Church in San Antonio.   His friend, Robert Browning said that on the two Sundays before he passed away, they co-taught a class on Thomas Cahill's Heretics and Heroes.   Glen said that a heretic was someone who might one day be a hero.   His Pastor, Rev. San Williams, said that with Glen's death the collective IQ of the Sunday School class dropped precipitously.    Pastor Williams used the text of Romans 14:7-9 to describe Glen's life, saying that he did not live to himself and neither did he die to himself.    In addition to his church work, he offered pro bono help to the San Antonio Battered Women's Shelter and the VA Clinic as well as helping individuals in need.Glen leaves behind his wife of 45 years, Jan, his son Roderick, III, his daughter Claudia and her husband, George, granddaughter, Ellie and many family members and friends.  The Bankruptcy Legacy of Glen AyersGlen came on to the Bankruptcy Bench in 1985 which was a tumultuous time in the bankruptcy world.   The jurisdictional scheme of the Bankruptcy Code had been declared unconstitutional the year before.    Texas was in the midst of a real estate crash which was flooding the courts with single asset chapter 11 filings.    Judge Ayers contributed thirty-six opinions to the fledgling West Bankruptcy Reporter which would not reach volume 100 until after his time on the bench.In one of his earliest rulings, Judge Ayers reversed the Fifth Circuit.    In the case of In re Thompson, 59 B.R. 690 (Bankr. W.D. Tex. 1986), Judge Ayers discussed a recent Fifth Circuit decision stating:Most commentators have found Allen to be a less than satisfactory opinion. Quite simply, the ruling is incorrect. When Judge John Akard followed judge Ayer's decision in In re Rogers, 63 B.R. 686 (Bankr. N.D. Tex. 1986), he was reversed.   This prompted Judge Akard to remark that he only followed the Western District of Texas once and he regretted it.   In another early opinion, In re Hurbace, 61 B.R. 563 (Bankr. W.D. Tex. 1986), he ruled that equal co- partners did not owe each other a duty to account within the meaning of 11 U.S.C. Sec. 523(a)(4), a conclusion the Fifth Circuit would later reach in Matter of Gupta, 394 F.3d F.3d 347 (5th Cir. 2004), some eighteen years later.    Another groundbreaking case was In re SI Acquisition, Inc., 58 B.R. 454 (Bankr. W.D. Tex. 1986) where he ruled that a creditor's suit against non-bankrupt parties seeking to pierce the corporate veil was not subject to the automatic stay.   While the Fifth Circuit disagreed with him, the case involved one of many areas that were unclear in the early days of the Bankruptcy Code.   In In re Estate of Patterson, 64 B.R. 807 (Bankr. W.D. Tex. 1986), Judge Ayers ruled that a probate estate was not a "person" qualified to file bankruptcy.   In re Fry Associates, Ltd., 66 B.R. 602 (Bankr. W.D. Tex. 1986) was an early decision discussing the concept of a bad faith filing for a single asset real estate entity.   However, in In re Oakgrove Village, Ltd., 90 B.R. 246 (Bankr. W.D. Tex. 1988), he declined to enter sanctions against a debtor exhibiting new debtor syndrome where the debtor reasonably believed that the bank would accept a workout proposal and did not oppose relief from the automatic stay. In In re Triplett, 87 B.R. 25 (Bankr. W.D. Tex. 1987), Judge Ayers ruled that an objection to use of cash collateral should not be a substitute for a motion to dismiss or convert under Sec. 1112.    The Court wrote:   Here, the focus on collateral and its use interferes with proper analysis of the case. Instead of being concerned with one item of "cash", the creditor should draw the court's attention to all of the problems with the case so that the debtor can either be placed on a timetable, the case converted, or the case dismissed.In a footnote he pointed out that both of the lawyers had been his law students and were used to his editorializing.   In re Kipp, 86 B.R. 490 (Bankr. W.D. Tex. 1988) established that a party could not conduct a Rule 2004 examination when it had a pending adversary proceeding.Judge Ayers dealt with creative classification in the case of In re Meadow Glen, Ltd., 87 B.R. 421 (Bankr. W.D. Tex. 1988) where he did not allow a secured creditor's deficiency claim to be separately classified from other unsecured creditors.   The ruling predicted the Fifth Circuit's holding in Matter of Greystone III Joint Venture, 995 F.2d 1274 (5th Cir. 1992) which also took a restrictive approach to classification (although the Fifth Circuit later moderated its position).    In his final opinion, In re Abramoff, 92 B.R. 698 (Bankr. W.D. Tex. 1988), Judge Ayers ruled that a prepayment penalty combined with a due on sales clause constituted an unreasonable restraint on alienation and would not be enforceable under Texas law.    One of the lawyers on the case was Ronald King, who would shortly take Judge Ayers' place on the bench.After leaving the bench, Glen Ayers had a long and productive career practicing in Washington, D.C. and San Antonio, Texas.   The cases that he tried as an attorney encompassed issues ranging from professional compensation, trustee liability, PACA, chapter 11 reorganization and property of the estate.Final ThoughtAt the time that Glen passed away, we were working on a case together.   In our last conversation, he inquired, as he always did, about the health of one of my colleagues who had been experiencing some medical issues.   That was Glen Ayers.

     A District Court decision in the Southern District of Florida affirmed a bankruptcy decision overruling a objection to a chapter 13 plan by a judgment creditor asserting that the debtor's voluntary contribution of $1900/month to his tax deferred annuity retirement account was not an allowed deduction on the means test, or alternatively that the plan was proposed in bad faith for allowing a total contribution to the retirement of approximately $114,000 over the five year plan while only paying unsecured creditors a total of $12,117.20.  RESFL FIVE, LLC, Appellant, v. DELANOR ULYSSE, & ALOURDES ULYSSE, Appellees., No. 16-CV-62900, 2017 WL 4348897 (S.D. Fla. Sept. 29, 2017).  The creditor filed a split claim asserting $71,271.28 as unsecured.  The Bankruptcy Court had found that the Debtors' retirement contributions would not be included in the computation of disposable income available to pay creditors under the means test.  The Court then went on to overrule the 2nd objection by the creditor, finding that since the funding of the retirement account was legal, it would not revisit the transfers on the basis of fairness.  The creditor appealed the decision to the District Court for the Southern District of Florida.     On appeal, the Court first looked to the means test issue.   The Court noted a split of authorities on the issue, with three main schools of thought on the issue.  The majority view, originating with In re Johnson, 346 B.R. 256 (Bankr. S.D. Ga. 2006) § 541(b)(7) allows for the deduction of voluntary contributions to a tax-deferred annuity from the computation of disposable income as long as the plan was proposed in good faith.   The second school of cases, the minority view, does not allow deduction for voluntary contributions to tax deferred annuities.    In re Prigge, 441 B.R. 667, 672-78 (Bankr. D. Mont. 2010).   The third line of cases allows the deduction so long as post-petition contributions are consistent with the prepetition history of contributions.  In re Seafort, 437 B.R. 204 (6th Cir. B.A.P. 2010), aff'd, 669 F.3d 662 (6th Cir. 2012).     §1325(b)(1) of the Bankruptcy Code requires either that debtors pay creditors in full or that they devote all of their projected disposable income to the plan if the trustee or a holder of an unsecured claim objects.  Above median income debtors measure their disposable income according to the means test found in §1325(b)(2) and (3) and §707(b) of the Bankruptcy Code.   Pursuant to §1306 includes postpetition property in property of the estate.  The 2005 BAPCPA law added §541(b)(7) which excludes from property of the estate contributions to qualified pensions, deferred compensation plans, and tax deferred annuities and included the phrase 'except that such amount under this subparagraph shall not constitute disposable income as defined in section 1325(b)(2)'. (emphasis added).   It is this final provision which is the subject of the controversy.   The creditor requested that the court follow the Prigge line of cases described above.   This decision does not engage in extensive analysis of §541(b)(7) but appears to determine that the provision solely protects wages withheld from an employer that are in the employer's hands at the time of the filing of the bankruptcy.   The decision in In re Parks, 475 B.R. 703 (9th Cir. B.A.P. 2012) cited Prigge in finding that a debtor could not continue voluntary payments to a 401(k) plan, and concluded that the 'such amount' language in §541(b)(7) only applied to pre-petition income.   The Sixth Circuit, in In re Seafort, 669 F.3d 662, 674-75 (6th Cir. 2012) determined that once a debtor fully repays their 401k loans, such funds become projected disposable income that must be committed to the plan.     The lower court decision in In re Seafort, 437 B.R. 204 (6th Cir. B.A.P. 2010), aff'd, 669 F.3d 662 (6th Cir. 2012)) found that so long as the debtors were making similar contributions to their 401(k) prepetition, they may continue such payments post-petition.   The Bankruptcy Appellate Panel focused its analysis on Congress's placement on the exclusion of voluntary contributions within §541 as opposed to §1306, and concluded that §541(b)(7) does not exclude income which becomes available post-petition in order to start making contributions to a 401(k) plan.  The placement of the section within §541 limited its application to prepetition contributions.  The decision explained it's analysis as...In regard to retirement savings, Congress clearly intended to strike a balance between protecting debtors' ability to save for their retirement and requiring that debtors pay their creditors the maximum amount they can afford to pay. This balance is best achieved by permitting debtors who are making contributions to a Qualified Plan at the time their case is filed to continue making contributions, while requiring debtors who are not making contributions at the time a case is filed to commit post-petition income which becomes available to the repayment of creditors rather than their own retirement plan. To conclude otherwise encourages the improvident behavior that BAPCPA sought to discourage. If the bankruptcy court is affirmed, debtors who were not contributing to their tax qualified plan and borrowing against their own retirement savings may file bankruptcy, repay themselves, and, once the loan is repaid, start contributing again to their own retirement savings. Allowing debtors to do so would tip the delicate balance struck by BAPCPA impermissibly in favor of debtors. On the other hand, allowing debtors who are making contributions at the commencement of a case to continue making those contributions furthers the goal of encouraging retirement savings. Limiting these protections to contributions in place at the time debtors file their petitions also protects the goal of ensuring that debtors pay creditors the maximum amount debtors can afford to pay.In re Seafort, 437 B.R. at 210.   The majority view,originating in Johnson, found that Congress has placed retirement contributions outside the purview of a chapter 13 plan as long as the contributions are within legally allowed limits.  The decision notes §541(b)(7) excludes 'any amount' from the 'disposable income' computation.   Since Johnson, the majority of bankruptcy courts have followed this decision.  In re Lott, No. 10-06061-TOM-13, 2011 WL 1981710, at *6 (Bankr. N.D. Ala. May 23, 2011)( “Section 541(b)(7), which was adopted as part of the BAPCPA amendments, provides that employee contributions to certain qualified savings plans are exempt from inclusion in property of the estate and disposable income.”); In re Smith, No. 09-64409, 2010 WL 2400065, at *2 (Bankr. N.D. Ohio June 15, 2010) (“Thus, the debtors' contributions to 401(k) plans are excluded from the debtors' disposable income.); In re Garrett, No. 07-3997-3F3, 2008 WL 6049236, at *1 (Bank. M.D. Fla. Jan. 18, 2008) (“Neither 401k contributions nor 401k loan repayments are included in a Chapter 13 debtor's disposable income, without regard to whether the debtor is above or below the median income” (finding that §541(b)(7) overruled prior decisions finding that voluntary contributions to a 401(k) plan were not reasonably necessary for debtor's maintenance and support and was therefore disposable income)); In re Shelton, 370 B.R. 861, 865-66 (N.D. Ga. 2007) (“The [BAPCPA's] goal to expand retirement savings is clear and the result is reasonable. Accordingly, amounts withheld from wages for contribution to a qualified retirement plan are not included in § 1325(b)(1)'s calculation of projected disposable income”); In re Njuguna, 357 B.R. 689, 691 (Bank. D.N.H. 2006) (“Congress sought to protect 401k contributions by excluding them from the bankruptcy estate and providing that neither 401k contributions nor 401k loan payments shall constitute disposable income.”).    In re Vanlandingham, 516 B.R. 628, 631-638 (Bankr. D. Kan. 2014). (the §541(b)(7) exclusion should apply to any amount withheld without temporal restrictions; and finding that in BAPCPA Congress sought to protect debtors' retirement resources and to encourage them to voluntarily save for retirement).   In re Drapeau, 485 B.R. 29, 36 (Bankr. D. Mass. 2013). (§1306 incorporates all of §541 into the definition of property of the estate in chapter 13, including those exceptions detailed in subsection (b), and because §541(b)(7) expressly excludes voluntary contributions from the estate, there is no need for §1306 to contain a duplicative provision excepting such contributions).  The Court decided to adopt the majority view, both because §541(b)(7) does nto draw a temporal distinction, or otherwise limit a debtor's ability to make contributions on a pre-petition or post-petition basis; and nothing in the statute evidences such Congressional intent.  Further, all of §541, including §541(b)(7) is subsumed within §1306.  There is thus no reason for Congress to include a duplicative provision within §1306 to exempt voluntary contributions on a post-petition basis.  Nor is there any code provisions indicating that only debtors who were making pre-petition contributions could continue such contributions post-petition.  The Court finds that the debtors' voluntary contributions to a tax deferred annuity during the five year span of their chapter 13 plan are not disposable income under §1325(b)(2).    Finally, the Court found found the plan satisfied the good faith requirement of §1325(a)(3) and (a)(7).  The twin aims of bankruptcy are to provide equitable distribution of assets to creditors, and to provide a fresh start to the debtor.   Courts must still examine good faith in continuing such contributions, and should consider such factors as the debtor's age in relation to his anticipated retirement to determine whether it would be unreasonable to reduce such contributions during the plan.  Here there is a demonstrated pattern of making similar contributions.  Also, it is undisputed that the debtor is approaching retirement age.  It is not unusual for an individual to increase their retirement contributions as retirement draws closer.  Equity dictates that a debtor approaching retirement should be allowed to continue making voluntary contributions to a retirement account, otherwise the debtor would be deprived of the ability to obtain a fresh start.   The debtors' contributions evince not bad faith, but his earnest intentions to save for retirement while balancing the costs of everyday life.    So, what is interesting about this case? Hint, it is not that voluntary contributions to retirement plans in chapter 13 are deducted on the means test. The case focuses on the effect of the hanging paragraph (yes, another one) after §541(b)(7)(A)(i). §541(b)(7)(A)(i) excludes from property of the estate contributions to qualified retirement plans, deferred compensation plans, and tax deferred annuities. The hanging paragraph provides 'except that such amount under this subparagraph shall not constitute disposable income as defined in §1325(b)(2)'. §1325(b)(2) of course is the section defining disposable income for the means test. There are three schools of thought interpreting this paragraph, the majority view per Ulysse is that these deductions are generally allowed whether or not they were made pre-petition, and regardless of whether they are increased upon filing. There may even be an argument that once 401(k) loans are paid off, the money should properly be switched to retirement contributions rather than added to the unsecured creditor potMichael Barnett www.hillsboroughbankruptcy.com

Here at Shenwick & Associates, our practice involving debtors with “underwater” taxi medallions is growing by the day, so we pay close attention to the latest developments in the area.  On September 25th, the New York City Council Committee on Transportation held a hearing that was attended by several dozen medallion owners pleading for relief from the decline in medallion values.  As we previously blogged, at an auction earlier this month, 46 medallions sold for under $200K each.    The New York Post article about the hearing mentions William and Gloria Guerra, who purchased a medallion in 1984 for $86K and hoped to fund their retirement to sell it.  Instead, they’ll break even or suffer a slight loss in inflation adjusted dollars.The Transportation Committee indicated that it’s considering several measures to help the industry, including:·         Creating a task force and a six-month study of how ride share services are impacting taxis;·         Capping the total number of cars operated by ride share services (an idea originally proposed by Mayor De Blasio in 2015, which was abandoned after Uber strongly campaigned against it);·         A bailout fund for medallion owners funded by a surcharge on livery cars;·         Allowing each medallion to cover two taxis instead of one; and ·         Relaxing disabled access requirements.The Transportation Committee hasn’t taken any action yet, and may be deterred from limiting the growth of ride share services due to advocacy from their drivers and lobbying firms.  For more information about this developing area of debtor/creditor and bankruptcy law, please contact Jim Shenwick.

  A bankruptcy court in New York rejected a chapter 7 trustee's argument that a payment for private school tuition for a debtor's minor child constituted an avoidable transfer in In re Michel, No. 14-43471-ESS, 2017 WL 4159952 (Bankr. E.D.N.Y. Sept. 18, 2017).   The trustee's complaint against the school alleged that the debtor paid $15,385 to an independent school in Brooklyn NY in the two years prior to bankruptcy on behalf of the debtor's child aged between 6 and 9.  The trustee alleged that these funds were fraudulent transfers under New York law and the Bankruptcy Code and also sought to recover the funds under state unjust enrichment common law.  The school filed a motion to dismiss asserting that the trustee did not state a valid cause of action.  As to the §548(a)(1)(B) constructive fraudulent transfer claim, the court found that while the trustee property alleged 1) that an interest of the debtor was transferred, and 2) that the transfer was within two years of the date of the petition; the trustee failed in the 3rd requirement of showing that she received less than reasonable equivalent value value in exchange for the transfer.; and that the trustee's bare allegation of insolvency without stating facts in support of such allegation were insufficient to support the 4th requirement that he show the debtor was insolvent at the time of the transfer or was made insolvent by the transfer.  In determining whether the debtor received reasonable equivalent value for the transfer, the court looked to the decision in In re Akanmu, 502 B.R. 124 (Bankr. E.D.N.Y. 2013).  In this case the trustee filed against two schools, asserting that the children rather than the debtor received the benefit of the tuition payments.  Instead, the court found that by sending their children to school, the debtors satisfied their legal obligation as parents to educate their minor children, thereby receiving reasonably equivalent value and fair consideration.  Id. 502 B.R. at 132-33.   The Michel court agreed with this analysis, noting it is axiomatic that parents are obligated to provide for their children's necessities, such as food, clothing, shelter, medical care, and education.  A parent's failure to provide these necessities results in both remedial and criminal sanctions.  It is not necessary that a debtor provide these goods or services at the lowest cost before the bankruptcy case is filed.  If that were the case, then the trustee's could sue any vendor for any discretionary expenses purchased for the children, or for provision of  necessities which may not have been provided at the lowest cost.  Another court had rejected a similar claim regarding payments in connection with a horse, finding that while the payments may have been unsound, they were a routine monthly expense for the family.  Morris v. Vansteinberg (In re Vansteinberg), 2003 WL 23838125, at *6 (Bankr. D. Kan. Nov. 26, 2003).  A similar result resulted from a suit to recover funds paid to a wedding planner for a daughter's marriage.  Montoya v. Campos (In re Tarin), 454 B.R. 179, 183 (Bankr. D.N.M. 2011).               The court found that payments for education services to minor children may constitute consideration to the parents because of the confluence of economic interest between minor children and their parents.  It is artificial to separate the parent and child as an economic entity.   The trustee also failed on the fraudulent transfer claim under §544 and New York law for the same reason, inability to show a lack of reasonable equivalent value.  The unjust enrichment claim was rejected as the trustee could not show that the school unfairly benefited from the retaining the transfers, as there was no showing that the school charged more than fair tuition or provided less than adequate care for the children.     Finally, the intentional fraudulent transfer claim under §548(a)(1)(A) failed in that the trustee did not assert any factual support to show that the debtor intended to defraud her creditors.  Allegations of fraudulent intent must meet the particularity requirements of Federal Rule of Civil Procedure 9(b).   Allegations of insolvency at the time of the transfers, or of applying for scholarships are insufficient to meet this standard.  The trustee must allege that the debtor had an intent to interfere with creditors' normal collection processes or with other affiliated creditor rights for personal or malign ends.  As the trustee does not allege that the debtor had any motive other than the education and care of her children when she made these payments, the complaint does not adequately set forth facts on which a claim could be based.  The court found against the trustee for essentially the same failure to adequate plead intent to defraud.  The court dismissed all counts of the complaint against the school.                                                                                                                                                                                                                                                                                                                                                                                                                Michael Barnett www.hillsboroughbankruptcy.com

    In Slater v. United States Steel Corp., No. 12-15548, 2017 WL 4110047 (11th Cir. Sept. 18, 2017) the 11th Circuit has clarified and modified it's rule on when a failure of a debtor to schedule a cause of action in the bankruptcy schedules results in requiring the court handling that cause of action to dismiss such action.   The issue arises from the inconsistent positions taken in the bankruptcy case (failing to assert that any cause of action exists) and in the non-bankruptcy forum (asserting such cause of action).     In the case below, Slater sued US Steel for sex and race discrimination and for retaliation against for for her complaints of discrimination.  The district court denied in part US Steel's motion for summary judgment, but Slater did not have an opportunity to present her claims to a jury.  About a month after the summary judgment order she filed for chapter 7 bankruptcy relief, and failed to schedule the discrimination cause of action, answering 'none' both on the list of assets regarding contingent and unliquidated claims and on the statement of financial affairs regarding pending suits or administrative proceedings within the last year.  The trustee filed a report of no distribution, and 30 days later the estate was presumed fully administered (Red. R. Bankr. Proc. 5009(a)).  The next day US Steel again moved for summary judgment in the district court asserting judicial estoppel.  The next business day after US Steel filed it's motion in the district court, Debtor amended her schedule of assets and statement of financial affairs to disclose the cause of action.  She testified that she had misunderstood the question on the statement of financial affairs to refer only to suits against her.  The chapter 7 trustee requested and was granted a request to employ the counsel representing debtor in the discrimination suit.  Debtor converted to chapter 13, confirmed a plan, but defaulted under such plan and her bankruptcy was dismissed.  Meanwhile the district court granted US Steel's motion for summary judgment finding that judicial estoppel applied to bar Slater's discrimination claim.  The district court announced it's view of the standard in the 11th circuit for inadvertent non-disclosure to require either that the debtor lacks knowledge of the undisclosed claims, or has no motive for concealment.  An 11th Circuit panel sustained the finding on appeal, and the matter was set for en-banc review.  The 11th Circuit en banc decision first examined the differences in chapter 7 and chapter 13 bankruptcy, noting that in chapter 7 a debtors assets (subject to exemptions) are immediately transferred to the bankruptcy estate, while in chapter 13 while assets are transferred to the estate upon filing, they normally are returned to the debtor upon confirmation (except as provided otherwise in the confirmed plan).   This distinction affects the analysis for judicial estoppel.  In chapter 7, only the trustee has standing to pursue the claim, unless the trustee abandons the claim, whereas a chapter 13 debtor retains standing to pursue such claims.  The standard two-part test for applying judicial estoppel is that 1) the party took an inconsistent position under oath in a separate proceeding, and 2) these inconsistent positions were calculated to make a mockery of the judicial system.      The Court found that it's prior decisions applying this test were inconsistent.  In Burnes v. Pemco Aeroplex, 291 F.3d 1282 (11th Cir 2002) the court sustained a finding of judicial estoppel when a debtor sued his employer post-petition but failed to amend the schedules to reflect such suit, and further failed to disclose the suit when he amended the schedules on conversion to chapter 7.  The court found that a debtor could not escape judicial estoppel by amending the schedules once the nondisclosure has been discovered.    In Barger v. City of Cartersville, 348 F.3d 1289 (11th Cir. 2003) the court again sustained a finding of judicial estoppel when a debtor did not schedule an employment discrimination suit.  While the debtor did disclosure the action to both her counsel and the trustee and that she sought reinstatement, she did not disclose that she also sought damages.  Again the panel simply determined that the debtor had actual knowledge of the claim, and had a motive not to disclose it.  A contrary result occurred in  Parker v. Wendy's Int'l, Inc., 365 F.3d 1268 (11th Cir. 2004).  Here the 11th Circuit reversed a district court application of judicial estoppel as to a non-disclosed employment discrimination suit finding that upon filing the chapter 7 trustee became the real party in interest, and since the trustee never took an inconsistent position judicial estoppel was not warranted. A similar result was reached in Ajaka v. Brooksamerica Mortgage Corp., 453 F.3d 1339 (11th Cir. 2006) where the court reversed a judicial estoppel result after a debtor failed to comply the the court's instructions to amend the schedules in a chapter 13 case to list a TILA cause of action.    The Court held that it was now setting a standard requiring courts to look beyond to all the facts and circumstances of a particular case in determining whether the inconsistent statements were intended to make a mockery of the judicial system.  These factors include the plaintiff's level of sophistication, whether and under what circumstances the plaintiff corrected its disclosures, whether the plaintiff told the bankruptcy attorney about the claim prior to the bankruptcy filing, whether the trustee or creditors were aware of the claim before the schedules were amended, whether other lawsuits were disclosed, and any findings or actions by the bankruptcy court after the omission was discovered.  The cases allowing an inference of mockery just by failing to disclose a claim are overruled.  This change is made for three reasons.  First, estoppel should only be applied where the party acted with a sufficiently culpable mental state.  Second, the integrity of the bankruptcy court is better protected by allowing the district court to consider actions taken by the court after the omission was discovered.  Third, limiting judicial estoppel to those cases in which the facts and circumstances truly warrant it is more equitable than a one-size-fits-all approach, which is likely to result to a windfall to a defendant at the expense of creditors.    Thus in deciding whether to apply judicial estoppel the court should decide whether the plaintiff intended to mislead the court, or simply misunderstood the bankruptcy forms.  The court recognized that a lawsuit qualifies as a contingent or unliquidated claim; or that a debtor may misunderstand which actions must be disclosed on the statement of financial affairs. Second it should consider any findings or actions by the bankruptcy court that might help in determining whether the debtor intended to mislead the courts and creditors.  The Bankruptcy Code and Rules liberally permit debtors to amend their disclosures when an omission is discovered.  The Court noted that the bankruptcy court has its own tools to punish debtors who intentionally hide assets.  Third, considering all the circumstances is more equitable, reducing the likelihood of a windfall to a defendant at the expense of innocent creditors.  This risk also applies in chapter 13, as a claim subject to judicial estoppel may be undervalued in determining the best interest of creditors test required for confirmation of a chapter 13 plan.  The case was remanded to be reviewed in accordance with the new standard.   Michael Barnett.  www.hillsboroughbankruptcy.com          

Crain’s New York recently reported that based upon a bankruptcy filing by a company (Hypnotic Taxi LLC) owned by Evgeny “Gene” Friedman, an auction held September 18th, 2017  the answer is about $186,000 .  Maltz Auctions was the auctioneer, at the LaGuardia Marriott Hotel, of 46 medallions that were assets of the bankruptcy estate in In re Hypnotic Taxi LLC.  This case involved medallion owner Evgeny “Gene” Friedman, who once owned 800 medallions, resulting from a foreclosure by Citibank and tax fraud charges.With the 6% buyer premium owed to Maltz, the purchase price was about $198,000 per medallion or $9.1M in total for all 46 medallions.According to Crain’s New York, the winning bidder was out of state hedge fund MGPE, Inc.  A hearing to confirm the results of the sale will be held in the U.S. Bankruptcy Court for the Eastern District of New York on September 25th.  Accordingly, based on the auction results for the 46 medallions at the Maltz auction, the value of medallions appears to be $198,000. The banks that have financed NYC medallions may argue that one auction (albeit of 46 medallions) is not the indicator of true value, others may argue that yesterday’s auction results are a true indicator of medallion value. Jim Shenwick.

Here at Shenwick & Associates, we are continuing to monitor litigation regarding the taxi medallion industry.  Earlier this year, the Taxi Medallion Owner Driver Association (TMODA)along with credit unions that invested in taxi medallions and other plaintiffs commenced an action in the U.S. District Court for the Southern District of New York (federal court) against New York City and the Taxi and Limousine Commission (TLC), claiming that the TLC’s rules deny taxi drivers equal protection and due process because Uber and Lyft drivers aren’t required to comply with the same TLC regulations as medallion owners.  That action was dismissed in March, finding that the difference between taxis and alternative services justified the differences in the rules.  That case has been appealed to the Second Circuit Court of Appeals and scheduled for argument on October 24th, 2017.In April, the TMODA sent a letter to Governor Cuomoasking for a moratorium on medallion foreclosures.  In May, the TMODA filed an Article 78 proceeding in New York County Supreme Court (which included two taxi drivers as co–plaintiffs), seeking to compel the TLC “to establish and enforce standards to ensure . . . yellow medallion taxicabs, are and remain financially stable.”  A hearing in that special proceeding will be held on October 24th, 2017.We will continue to monitor taxi medallion litigation and provide readers of our e-mails and blog with updates.  If you have an underwater medallion or other debtor and creditor and bankruptcy questions, please contact Jim Shenwick.