The case of a former corporate officer who demanded to be bought out for an alleged ownership interest and said some really nasty things resulted in a split decision with Fifth Circuit Judges Edith Jones and Catharina Haynes on opposite sides. Matter of Schcolnik, No. 10-20800 (5th Cir. 2/8/12), which can be found here. What HappenedThis statement of facts is synthesized from the two opinions in the case. Each judge referenced facts that the other did not. I am taking both opinions at face value.Scott Schcolnik was Vice-President of Capstone Associated Services, Limited and President of Rapid Settlements, Ltd. Though the owners of the Companies occasionally referred to him as a partner, he allegedly rejected an offer to become an owner of Rapid. Nevertheless, he claimed to be a partial owner and was fired. At this point, things got colorful. Schcolnik allegedly absconded with corporate documents. He threatened to disclose alleged criminal and regulatory violations by the two Companies if they did not “buy out” his “ownership interests.” He threatened a “doomsday plan” if Stuart Feldman, the primary owner of the Companies did not “properly compensate” him for his ownership interests “which appear to be worth in excess of $1,000,000.” He threatened a “massive series of legal attacks . . . which will likely leave you disbarred, broke, professionally disgraced, and rotting in a prison cell.” He also expressed his hope that Feldman would be raped in prison.The nasty grams* were sent on May 25 and 27, 2005. The Companies swiftly moved for a TRO, which they obtained on May 27, 2005. The TRO, which was later extended by agreement, prohibited Schcolnik from carrying out his campaign of mass destruction.*--Nasty gram is a term of art in the Austin Division of the Western District of Texas referring to a particularly vituperative communication. While I am not completely certain, I believe I first heard the expression from Joe Martinec. Six months later, the Companies instituted an arbitration proceeding against Schcolnik, seeking a declaration that he was not an owner. The Companies prevailed on the ownership issue, although the arbitrator noted that the Companies had held Schcolnik out as a partner, which was characterized as “excusable mistakes.” The Companies requested attorney’s fees of $70,000 and received an award of $50,000. The fees were awarded as “equitable and just,” which is apparently a low standard. Schcolnik filed for chapter 7 bankruptcy four days after the state court confirmed the arbitration award. The Companies filed a non-dischargeability complaint under 11 U.S.C. sections 523(a)(4)( and (a)(6). Both parties moved for summary judgment. Bankruptcy Judge Karen Brown granted summary judgment to Schcolnik on both claims. She conducted a trial on the creditors’ objection to discharge and ruled in favor of Schcolnik as well. The Companies appealed the dischargeability findings to the District Court which affirmed. The Majority Opinion—Contumacious and CoerciveThe majority opinion, written by Chief Judge Jones and joined in by District Judge Crone, affirmed the lower court holdings that the claim under section 523(a)(4) was properly denied. Although the Debtor was an officer of the Companies and owed them a fiduciary duty, the debt for attorney’s fees did not arise out of a fraud or defalcation in a fiduciary capacity. Judge Haynes concurred in this ruling.However, the majority opinion found that summary judgment on the willful and malicious claim under section 523(a)(6) was premature. The District Court had found that the Debtor’s behavior was not “willful” as a matter of law because he did not intend to impose litigation expenses on the Companies, a contention they did not dispute.However, Judge Jones pointed out that under Fifth Circuit precedent, an act can be considered “willful” if there was subjective bad intent or “an objective substantial certainty of harm.” The Court noted that “it would seem peculiar to deem an action causing injury not ‘willful’ when the tortfeasor’s action was in fact motivated by a desire to cause injury.” Judge Jones also noted In re Keaty, 397 F.3d 264 (5th Cir. 2005), where sanctions for baseless litigation were found to be a willful and malicious injury. Having laid out this background, Judge Jones reached the penultimate point of her opinion:Shcolnik allegedly engaged in a course of contumacious conduct that required the Appellants to file meritorious litigation against him, resulting in the instant fee award; whereas in Keaty, the debtors pursued the burdensome suit that provoked a sanctions award against them. This is a distinction without a difference, however. It would make no sense for the infliction of expense in litigating a meritless legal claim to constitute willful and malicious injury to the creditor, as in Keaty, while denying the same treatment here to the infliction of expense by a debtor’s attempt to leverage an equally baseless claim through a campaign of coercion. That Texas law may allow the arbitrator to assess attorneys’ fees in favor of a party without specifically finding a willful and malicious injury is not conclusive. If the facts are as Appellants allege, Shcolnik either had the motive to inflict harm or acted so as to create “an objective substantial certainty of harm” to the Appellants. Id.Viewed in light of our precedents, there is a genuine, material fact issue for trial. Shcolnik’s behavior resulted in willful and malicious injury if his claims of ownership were made in bad faith as a pretense to extract money from the Appellants. See Keaty, 397 F.3d at 273 (willful and malicious injury to intentionally “pursu[e] meritless litigation for the purpose of harassment[.]”). The litigation costs he forced upon them are different from the million dollar claim he made against them, but they were neither attenuated nor unforeseeable from his alleged intentionally injurious conduct. (emphasis added).Opinion, pp. 6-7.The Dissent—Insulting and Demeaning Is Not EnoughJudge Haynes concurred in the ruling on section 523(a)(4), but dissented with regard to willful and malicious injury. She cited three grounds for dissent:The effect of the majority opinion is to transform all litigation precipitated by aggressive demand letters into potential “malicious” acts for purposes of nondischargeability. Additionally, the effect of the majority opinion is to allow an end-run around an arbitration proceeding in which both parties willingly participated. Finally, the majority opinion glosses over the lack of connection between the allegedly malicious acts and the arbitration award of attorneys’ fees now sought to be rendered non-dischargeable. Because the bankruptcy and district courts reached the correct result under our existing precedents, I would affirm.Haynes Dissenting, p. 9.Judge Haynes elaborated on her first point as follows:Debtors often come to bankruptcy with judgments against them. It is certainly not an unusual occurrence for parties to make claims in litigation or arbitration that do not carry the day. Nonetheless, the majority opinion transforms the ordinary litigation loser into one who has caused “willful and malicious injury” to another. It does so, apparently, because of the colorful language used by Shcolnik, without the assistance of legal counsel, in his emailed demand letters that preceded litigation which in turn was followed by the arbitration proceeding in question. So, I start there.No doubt the e-mail letters Shcolnik wrote are insulting and demeaning. I would not write such a document nor countenance another to do so. However, we are not here to teach a course in professionalism or civility. The majority opinion transforms incivility into “a campaign of coercion” or “contumacious conduct” by ipse dixit. The question arises – were these “nasty demand letters,” in fact, “coercive” or “contumacious?” We do not have a case setting out a test for where the quintessential demand letter ends and the parade of horrible suggested by the majority opinion begins. Wherever that line is, it is not crossed here, and I disagree with transforming the regrettable unpleasantness and aggressiveness that often attend the prelude to litigation into “coercive” or “contumacious” conduct so easily. Shcolnick’s e-mail letters, however reprehensible they undeniably are, do not. (emphasis added).Haynes Dissenting, p. 10.Between judges, “ipse dixit” is a strong term. Known as the “Bare Assertion Fallacy,” it literally translates as “he himself said it.” It is used to refer to an argument that is made without any support. The terms that were said to be ipse dixit were “coercive” and “contumacious.” “Contumacious” is defined as stubbornly defiant or rebellious, while “coercive” means serving or intending to coerce. While contumacious is closely associated with contempt of court, Shcolnik’s words were no doubt stubbornly defiant, but the question is “So what?” There does not seem to be a logical connection between stubbornly defiant and willful and malicious. Coercive is a more difficult question and I will return to that later.Next, Judge Haynes turned to the results of the arbitration proceeding. Noting the strong federal policy of deferring to arbitration, she pointed out that the arbitrator had only awarded fees as “equitable and just” rather than for wrongdoing, malice or bad faith. She also noted that the arbitrator implicitly found that Shcolnik’s position had some merit when he found that the references to Shcolnik as a partner were “excusable mistakes.” As to the first ground, Judge Haynes is probably wrong. Where a court makes a finding on a lesser standard but does not expressly negate the higher standard, the parties are free to establish whether the higher standard could have been met. Archer v. Warner, 538 U.S. 314 (2003) is not completely on point, but it allowed a plaintiff who had received a promissory note in settlement of a fraud claim to go behind the note and prove fraud in the original transaction. However, Judge Haynes is closer on the second point. If the arbitrator found that the Debtor did not assert a baseless claim, then the Companies would be precluded from relitigating that point in bankruptcy court. Here, the finding is implicit so that it is a close call.Finally, Judge Haynes found that the connection between the nasty emails and the arbitration proceeding was to remote to connect them. She wrote:Indeed, even if the e-mail letters were “coercive” or “contumacious” and even if we ignore the lack of arbitration findings to support the majority opinion, the undisputed facts show that any burden imposed on Appellants by the e-mail letters was quickly removed – the purportedly wrongful documents were sent on May 25 and 27, 2005. On May 27, 2005, the state district court granted a temporary restraining order that was later extended and continued by agreement throughout the litigation and arbitration, barring Shcolnik from taking the actions Appellants claimed put them in immediate fear. It was not until six months later that the matter was referred to the arbitration at issue here, breaking any purported causal connection between the claimed wrongful behavior and the fee award here at issue.Moreover, the lack of causal connection is precisely why the arbitrator made no specific finding of wrongfulness. Indeed, the allegedly wrongful acts caused the arbitration of the ownership/partnership dispute, in which case, the arbitrator’s lack of a specific finding to that effect (and findings inconsistent with that) is meaningful, or they did not, in which case, the alleged “campaign of coercion” or “contumacious conduct” did not cause the attorneys’ fees award.The majority opinion concludes that “Shcolnik’s behavior resulted in willful and malicious injury if his claims of ownership were made in bad faith as a pretense to extract money from the Appellants.” Maj. Op. at 7. The opinion rests on a misconstruction of Keaty. Moreover, it is undeniable that the majority opinion’s conclusion is not supported by the record, the arbitrator’s decision, or, indeed, the events that actually transpired below. As we gave effect to the sanctions in Keaty, we should give effect to the arbitrator’s ruling here. The attorneys’ fees awarded as equitable and just in the arbitration were for resolution of the ownership/partnership dispute, not for anything else.Haynes Dissenting, pp. 13-14.What It MeansThis case is significant for several reasons. The fact that two bright, articulate and conservative judges reached diametrically opposite results shows both the independence of the judges involved and the difficulty of the question. The opinions by Judge Jones and Judge Haynes recall the story of the blind men and the elephant. They are both describing the same thing, but they are describing different parts of it. Judge Jones focused on the apparent intent of the original emails. It is not unreasonable to construe the emails as a blatant attempt at extortion. It would be illegal to demand money in exchange for not releasing damaging information, so the debtor demanded a buyout instead. However, the fact that he demanded a buyout under the threat of destroying his former employer says volumes about his intent. On the other hand, Judge Haynes focused more on the disconnect between the “nasty” emails and the arbitration proceeding. Yes, the emails were reprehensible. However, the campaign was brought to a half within two days and the arbitration was not even commenced for another six months. The Companies would have had a good claim for a willful and malicious injury if the Debtor had actually used the purloined documents to wreak havoc. The Companies probably would have had a good claim for their costs in obtaining the TRO. However, the Companies sought to recover their attorney’s fees for what Judge Haynes characterized as “resolution of the ownership/partnership dispute, not for anything else.” While the ownership dispute may have been commenced for sinister reasons, unlike the sanctionable conduct in Keaty, it was not baseless. I think Judge Haynes has the better argument. While the opening salvos of the campaign clearly could have resulted in willful and malicious injury, they did not. It is like someone who threatens to shoot but after considering the consequences puts the gun down. The conduct could be characterized as a terroristic threat, but it is not murder. Both judges are right to focus on Keaty. However, the important question is whether the legal position taken was baseless. If the position taken, although asserted for ulterior motives, was not baseless, then it should not give rise to a nondischargeable debt.It will be interesting to see whether the en banc court steps in to resolve the dispute.

Often times in the months leading up to filing for bankruptcy individuals try to rectify certain debts or take extreme measures to avoid filing for bankruptcy.  There are numerous things that people commonly do before filing for bankruptcy that may end up causing more problems in the long run.  Some of the most common pitfalls are as follows: 1. Do not take out additional mortgages on your house or loans on retirement accounts to pay off debts.  Often times people take out additional mortgages, which are secured loans, to pay off other unsecured loans like credit cards and medical debt.  This may have a few unwanted implications.  If you take out additional mortgages and are unable to make payments towards that the debt is then secured by your home and debtors may foreclose upon your house to recover the amount owed.  Once your house is foreclosed upon all of your legal rights to the house are lost permanently.  Even if your house is not foreclosed upon the debt which is now secured, and bankruptcy will not eliminate this debt.  At this point, if you wish to protect your house you will have to file a Chapter 13 bankruptcy, which does not modify the ongoing mortgage payments, but would allow you to catch up on arrearages over 48 months. 2. Do not make any payments to family members or friends in the year leading up to filing for bankruptcy.  This rule includes money given as a gift and money repaid, even when owed, to a friend or family member.  This would not include payment of rent if you live with a family member or friend.  The reason you should avoid these types of payments is that any payment made to a family member or friend in the year before filing is considered fraudulent by the Bankruptcy Code, without consideration of the actual merits.  This transfer can then be voided and the trustee may sue your family member or friend to recover the money which may lead to further issues.  While your bankruptcy would discharge the debt the the family member or friend you could certainly opt to voluntarily repay the debt after completion of the bankruptcy. 3.  Do not transfer personal property within the two years leading up to bankruptcy in an attempt to hide assets.  You will be asked about this type of transfer and either the trustee or the courts can avoid the transaction. 4. Do not attempt to pay off particular creditors before a bankruptcy.  If you make a payment of more than 600 dollars to any one creditor in the months leading up to bankruptcy the trustee may void that payment, sue the recipient, and recover that money. 5. Try not to cash out retirement accounts or IRA's unless you truly do not have any other options.  Many retirement accounts are protected by bankruptcy law.  This means that if you do not cash them out they are protected by bankruptcy and they will still be available in accordance with the terms of the account after filing.If you are considering filing for bankruptcy you should speak with a St. Louis Bankruptcy Attorney as soon as possible.

One advantage to filing for a Chapter 13 Bankruptcy is the option to "cram down" certain types of secured debts, including cars, trucks, and motorcycles.  Cramming down quite simply means that the amount owed will be reduced to the fair market value of the items.  Often times the value of an vehicle depreciates much faster than the payments are made.  For example, let's consider that an individual purchased a vehicle in July 2010 for $15,000 dollars.  The monthly car payment is $250 dollars.  For ease of understanding we will exclude interest calculations in the example. In February of 2012 that individual will have paid $5,000 dollars towards the vehicle, leaving a remaining balance of $10,000.  However, in the time the person has owned the vehicle it has depreciated due to normal use and age.  So now, if the car is valued at $7,000 dollars the individual owes $3,000 dollars more than the value of the car.  In a Chapter 13 proceeding it is possible to cram down the amount owed to the fair market value of the vehicle.   Fair market value can be determined by appraisals or commonly accepted authorities, such as Kelley Blue Book values.  It is important to note that where an individual has a substantial amount of equity in the vehicle and they owe less than what the vehicle is worth the individual will be required to pay the amount owed under the loan.  There are certain qualifications for cramming down the amount owed to the fair market value.  The asset must be personal property guaranteed by a secured loan.  This simply means that the creditor can take a vehicle used for personal use in the event the debtor defaults on payments.  The most common example of a secured loan is a vehicle purchased from a dealership.  Furthermore, when talking about vehicles for personal use, the loan must have been taken out more than 910 days prior to filing for bankruptcy to be eligible for cram down.  When a debt can be crammed down it is then rolled into the Chapter 13 reorganization plan and paid back over 36-60 months, depending on the plan you choose.  This means that not only is the amount the individual pays back decreased, but the payments may still be lower as the individual will have more time to make payments.  As with anything in a Chapter 13, at the end of the repayment plan the vehicle is yours and you will not own anything further on the vehicle. In the example above we ignored interest for ease of calculation and understanding.  However, when a debt is crammed down interest will still be calculated, though it will not be the amount of interest on the original loan.  Missouri uses the formula approach to calculating interest on the loan.  The court will first look at the national prime rate for credit worthy lenders.  The court will then adjust that rate to account for the increased risk a non-payment with a debtor in bankruptcy and will account for duration of the plan, feasibility of the plan, and the type of security. There are a few more things to consider concerning cram down.  If there is a co-signer on the loan who is not a part of your bankruptcy, i.e. a friend, parent, or significant other, the cram down will not apply to that persons obligation.  Using the example above, if our debtor had a co-signer that was not a part of his bankruptcy the debtor would only owe $7,000 dollars, however, the co-signer will still be responsible for the full 10,000 left on the loan.  This means that creditors can take action to recover the $3,000 difference between the cram down and the original loan value from the co-signer.If you still have questions about cram down contact a St. Louis Bankruptcy Attorney today. 

You find the new bill introduced by Senator Crowell here:http://www.senate.mo.gov/12info/pdf-bill/intro/SB683.pdf Among  other things, the new bill will include earned income credits as being exempt from creditors. This can be helpful in filing for bankruptcy when the tax refund comes in and someone has to turn over a portion of the tax refund to the trustee. The Earned Income Tax Credit will be exempt. The remaining part of the tax refund might be exempt by applying other exemption or by planning the time of the bankruptcy filing.  

Many people who are considering bankruptcy may also be in the process of losing their home due to foreclosure. In fact, oftentimes, these two situations are closely related. Yet, depending upon your circumstances, you could actually be able to save your home from foreclosure – or at least delay the process - by filing for bankruptcy. This could be tricky, however, and it is highly advised that you seek the advice of an attorney before moving forward. How the Procedure WorksFirst, it is important to understand the primary types of bankruptcy and how each can affect your debt repayment obligations. The two types of bankruptcy that are filed by individuals include Chapter 7 and Chapter 13. Chapter 7 BankruptcyFiling a Chapter 7 bankruptcy will completely cancel all of the mortgage debt – including second mortgages and home equity loans – that you owe on. You want to differentiate two things here which is causing some headache to understand for most people. There are two different rights your mortgage company has. One is the right to demand payment for you that is based on your contract (the note) which says you pay to the mortgage company a monthly amount. You don’t have that obligation anymore after filing for bankruptcy. However, you also pledged your home as security to the bank in the case you don’t pay anymore (the mortgage). That’s means you can stop paying if you are willing to surrender (meaning giving it back to your mortgage lender) your home. If you want to keep it, you still need to continue paying on it. Chapter 7 bankruptcy will also usually eliminate your unsecured debt such as credit card balances.By going with a Chapter 7 bankruptcy proceeding, you can keep your home, car and any other personal property you own. However, this filing may very well postpone foreclosure, giving you some additional time to find alternate living arrangements if you choose to surrender your home. In many cases, the procedure for Chapter 7 bankruptcy takes around four months. You can remain in your home until the mortgage company forecloses on your home. Foreclosure will change title to your home, meaning someone else owns the home. In some instances, the procedure may take longer. Chapter 13 BankruptcyIf you opt for – and are eligible for – Chapter 13 bankruptcy, you may have a chance to save your home from foreclosure. This is especially true if you are able to make up missed mortgage payments in the future. This bankruptcy option allows you to essentially restructure your existing debts. Therefore, with a Chapter 13, you may be able to make up for missed mortgage payments over a certain period of time. This time frame is in the St. Louis area (Eastern District of Missouri) three years. In the St. Louis Metro East area (Southern District of Illinois), you can stretch out the arrearage over up to 5 years. Proceed With CautionMany people will do whatever it takes in order to save their home. If, however, for some reason you are unable to keep up with the mortgage payments during the repayment time frame, your mortgage lender could ask the court to lift your bankruptcy protection and subsequently start the procedure of foreclosure again. Therefore, it is important to be sure that you will be able to afford the mortgage payments when putting together your debt repayment plan.Before moving forward with any option, it is a good idea to speak with a qualified attorney who specializes in the area of bankruptcy. This way, you will be more assured of getting the correct advice that will work in your specific situation as well as that is in compliance with the laws in your particular state of residence. Our attorneys in the St. Louis and Metro East area offer a free consultation.

Filing for bankruptcy can be a very personal and emotional decision.  You are probably worried about a number of things, including what filing for bankruptcy will do to your credit now and in the future. Bankruptcy certainly will affect your credit, but it is important to realize that if you are currently considering bankruptcy, your credit is probably already suffering. To truly understand the impact that debt, late payments, and even bankruptcy have on your credit it you first must understand how credit is calculated.  Credit is calculated by evaluating five different areas, including: payment history, amounts owed, the length of your credit history, and new credit, and the types of credit you use.  Your payment history accounts for about 35% of your credit score and the amounts owed accounts for about 30% of your credit score, for a combined total of about 65%.  If you are currently making all of your minimum payments on time you are doing well in that area, but depending on how much debt you have your credit may still be lower than you would like.  If you are not currently making your minimum payments on time and you owe a substantial amount of money your credit score is taking a hit in both areas.  It is also important to remember that the types of credit your use affect your score, so if your debt is primarily consumer your credit score may be negatively affected.  Bankruptcy can eliminate your unsecure debt.  This means that you will not owe any money and you will not continue to take negatively affect your credit every month with late or missed payments.  In fact, filing for bankruptcy actually increases some individual's credit scores.  Even for those individuals that do not see an immediate credit score increase, we can provide you with advice on how to begin to improve your credit after filing for bankruptcy.  Many people like to have a credit card available for emergencies or unexpected expenses.  Others prefer to charge small amounts monthly, like gas, and then pay the balance in full each month.  Whatever your preference, you are likely curious about obtaining credit after bankruptcy and when you are eligible for more credit.  In many cases, after you file for bankruptcy, you will begin to get a number of unsolicited credit card offers in the mail.  You should be wary of these offers.  A lot of times, though they offer to help you rebuild your credit, these are not good offers.  Many of those credit cards charge annual fees, usage fees, and have high interest rates and you will likely have a large balance right away.  If you want to rebuild your credit you should ask your St. Louis Bankruptcy Attorney for a referral or make an appointment with your bank or credit union to discuss the best options for you.

Whentwo sections of the laws are Code-oriented (the Bankruptcy Code and theInternal Revenue Code), the interaction of those laws can create complexity foran individual or their adviser. As many of you are aware, at Shenwick &Associates we do many bankruptcy filings for individuals to discharge personalincome taxes. In a priore-mail, we discussed what taxes qualify for discharge in personalbankruptcy. A gloss or complexity, however, is when an individual who files forbankruptcy to discharge taxes (which are dischargeable in bankruptcy) and theInternal Revenue Service has filed a Notice of Federal Tax Lien prior to thebankruptcy filing. First, some background information on tax liens. Section 6321 of the InternalRevenue Code provides that: "If any person liable to pay any tax neglects or refuses to pay the sameafter demand, the amount (including any interest, additional amount, additionto tax, or assessable penalty, together with any costs that may accrue inaddition thereto) shall be a lien in favor of the United States upon allproperty and rights to property, whether real or personal, belonging to suchperson." One of the consequences of a tax lien is that the IRS obtains an interest inthe taxpayer's property, whether it be a condominium, a house or a car, andthat property cannot be sold or refinanced (since the lien applies also appliesto the taxpayer's credit) without paying the IRS. Additionally, if the IRS isso inclined, they can foreclose on the property (via a tax levy) to obtaintitle to the property. In fact, Section 522(c)(2)(B) of the Bankruptcy Codeprovides that if a tax authority has an outstanding tax lien, the tax authoritycan still collect on the lien, even if the tax is dischargeable in bankruptcy.This provision provides that property exempt under the Bankruptcy Code is notliable during or after the case for any debt that arose before the commencementof the case except "a tax lien, notice of which is properly filed."Unfortunately for the taxpayer, Section 6502 of the Internal Revenue Codeprovides that a tax lien is collectible for ten years after the date ofassessment. And even worse, the Supreme Court case of GlassCity Bank v. United States, 326 U.S. 265 (1945), held that tax liensattach to all property owned by the taxpayer during the ten years in which thelien is collectible. So what are the consequences of the discharge of a tax where the IRS has fileda tax lien prior to the bankruptcy filing? To understand this issue, one mustgo back to a painful time in most lawyers' lives, the first year of law school,when we learned the distinction between an in personam obligation and an in remobligation. An in personam obligation or liability means that an individual isliable for the debt, and an in rem liability or obligation means that only theproperty is liable for the payment of the debt. Accordingly, if an individual files bankruptcy to discharge income taxes, andbased on the statutory requirements of the Bankruptcy Code those taxes are infact discharged, but the IRS had filed a Notice of Federal Tax Lien, then whilethe individual is not personally liable for the debt, any assets owned by theindividual during the ten years after the date of filing of the tax lien aresubject to being seized by the Internal Revenue Service. Accordingly, if an individual files bankruptcy and discharges taxes, and a taxlien has been filed by the Internal Revenue Service, then the individual mustmake sure not to acquire property after they receive their discharge of debtsduring the pendency of the ten year statute of collections. And in fact, thetaxpayer must make themselves "judgment proof." Let us clarify this analysis by a recent example. An individual recentlycontacted us who wanted to file bankruptcy to discharge taxes. Our analysisindicated that many of her taxes for the early tax years were dischargeable. Wedid the bankruptcy filing and commenced an adversary proceeding (bankruptcylitigation) to determine whether her taxes were dischargeable. The InternalRevenue Service then contacted us and indicated that they had filed a Notice ofFederal Tax Lien in 2003 and that, while they agreed the taxes weredischargeable, the tax lien was in effect through 2013. The debtor received herdischarge of debts in 2011, and she agreed that she would not acquire propertyuntil 2013 to make herself "judgment proof." In 2013, after the taxlien expires, she will then be able to acquire property. In the interim, sincethe debtor is married, she will put property in her husband's name, ifnecessary. In conclusion, a couple of rules: 1. If an individual is considering filing bankruptcy, they should filebankruptcy prior to the Internal Revenue Service filing a tax lien. Theautomatic stay that goes into effect upon filing for bankruptcy will preventthe Internal Revenue Service from filing a tax lien. 2. If an individual files bankruptcy and they are subject to a tax lien, theymust determine when the tax lien expires and they cannot put property in theirname until the tax lien expires. 3. A tax lien, by statute, is good for ten years. While the IRS can renew taxliens, in our experience, they rarely do. Anyone with questions concerning tax liens and the discharge of taxes shouldcontact Jim Shenwick.

Print PageThere is nothing quite like the horror of realizing that a deadline has been missed. As the heart pounds at the thought of notifying client and carrier, the mind should shift to damage control. Was this a deadline which could be extended after the fact based on excusable neglect? O'Brien v. Harnett, Adv. No. 11-5010 (Bankr. W.D. Tex. 1/19/12), which can be found here, is a nice addition to the jurisprudence of excusable neglect.The point is that the notion of “excusable neglect” of necessity presumes that someone has made a mistake, someone has been careless, someone has been negligent. It is no answer, then, to a request for mercy that the party making the request should not have made the mistake. Hindsight always affords the clarity that confirms that, had the person simply been paying strict attention, no mistake would have been made. The reality is that human beings often are not paying strict attention all the time. Not even lawyers.***Of course it was a mistake for counsel not to then go back to the docket to confirm the entry of the order itself. Hindsight, as we have seen, makes us all perfect (or seem that we should have been). But his secretary was out of the office, it was the week between Christmas and New Years, and thus counsel, as most people in that time period tend to be, was more distracted than usual. (emphasis added).Opinion, p. 4.This opinion is not only a handy resource to use in making pleas for mercy in the case of inadvertently missed deadlines, but is also a good commentary on human nature. Anyone can be perfect in hindsight. However, the reality is that we don't always pay attention as well as we could and that condition is magnified during the holidays. Thank you, Judge Clark, for saying it.

By TARA SIEGEL BERNARD Blacks are about twice as likely as whites to wind up in the more onerous and costly form of consumer bankruptcy as they try to dig out from their debts, a new study has found. The disparity persisted even when the researchers adjusted for income, homeownership, assets and education. The evidence suggested that lawyers were disproportionately steering blacks into a process that was not as good for them financially, in part because of biases, whether conscious or unconscious. The vast majority of debtors file under Chapter 7 of the bankruptcy code, which typically allows them to erase most debts in a matter of months. It tends to have a higher success rate and is less expensive than the alternative, Chapter 13, which requires debtors to dedicate their disposable income to paying back their debts for several years. The study of racial differences in bankruptcy filings was written by Robert M. Lawless, a bankruptcy expert and law professor, and Dov Cohen, a psychology professor, both with the University of Illinois; and Jean Braucher, a law professor at the University of Arizona. A survey conducted as part of their research found that bankruptcy lawyers were much more likely to steer black debtors into a Chapter 13 than white filers even when they had identical financial situations. The lawyers, the survey found, were also more likely to view blacks as having “good values” when they expressed a preference for Chapter 13. “Unfortunately I’m not surprised with these results,” said Neil Ellington, executive vice president of Consumer Education Services, a credit counseling agency in Raleigh, N.C. “The same underlying issues that created the problem in mortgage lending, with minorities paying higher interest rates than their white counterparts having the same loan qualifications, are present in all financial fields.” The findings, which will be published in The Journal of Empirical Legal Studies later this year, did not suggest that there was any obvious evidence of discrimination in the bankruptcy process. “I don’t think there is any overt conspiracy,” Professor Lawless said. “But when you have a complex system, these biases can play out and the people within the system don’t see the pattern because nobody is in charge of looking at these big issues.” Changes in the bankruptcy law in 2005 were intended to force more debtors to file under Chapter 13 and repay some of their debts, but that has not been the effect. In fact, the rate of Chapter 13 filings has remained relatively steady, at about 30 percent. Last year, overall bankruptcy filings were 1.4 million. Chapter 13 is not always an inferior choice. Many distressed borrowers go that route because they may be able to save their homes from foreclosure. But even that does not explain away the difference: among blacks who did not own their homes, the rate of filing for Chapter 13 was still twice as high as the rate for other races. And the trend persists across the country, beyond regions like the South where Chapter 13 tends to be a more popular option among all debtors (perhaps, in part, because Chapter 13 originated in the South). If a debtor chooses an inappropriate chapter, there can be serious implications. Chapter 13 plans, for instance, are more likely to fail than a Chapter 7. Nearly two of every three Chapter 13 plans are not completed, which means the filers’ remaining debts are not discharged, leaving them right where they started. One bankruptcy judge, who sees filers once they can no longer make the required payments in the plans, said the debtors usually do not have enough income to stick with the budget. “They thought they could cut back on this or that, and you might be able to do that for three or four months,” said the judge, C. Ray Mullins, chief judge for the United States Bankruptcy Court in the Northern District of Georgia. “But in a Chapter 13, it will be either three or five years. There are certain things you can’t anticipate — a spike in gas prices.” The study has two parts. One used data from actual bankruptcy cases from the Consumer Bankruptcy Project, the most detailed trove of information on filers currently available. The project surveyed 2,400 households nationwide who filed for bankruptcy in 2007. Results from the second part of the study, which illustrated the lawyer’s influence in determining which bankruptcy chapter to choose, came from a survey sent to lawyers asking them questions based on fictitious couples who were seeking bankruptcy protection. When the couple was named “Reggie and Latisha,” who attended an African Methodist Episcopal Church — as opposed to a white couple, “Todd and Allison,” who were members of a United Methodist Church — the lawyers were more likely to recommend a Chapter 13, even though the two couples’ financial circumstances were identical. Even though the attorneys’ fees for the more labor-intensive Chapter 13 are more than double the charge for a Chapter 7, some truly distressed debtors will pursue a Chapter 13 anyway, several bankruptcy experts said. That is because they can pay the fee over time, unlike in a Chapter 7, which typically requires a payment before the case is filed. If blacks are perceived as less likely to have the resources — or a family with resources — to come up with a lump sum, some lawyers may be inclined to suggest a Chapter 13, these experts suggested. But Professor Lawless said he and the other researchers accounted for this possibility in their results. As to the possibility that unscrupulous attorneys could push Chapter 13 filings in an attempt to get higher fees, Professor Lawless said that effect should be apparent across all races. He said the study has no information about whether other players in the process — judges and bankruptcy trustees, among others — were contributing to the difference in filings rates. William E. Brewer Jr., president of the National Association of Consumer Bankruptcy Attorneys, and a practicing lawyer in Raleigh, N.C., disputed the premise of the study that Chapter 13 was always more burdensome and always required debtors to pay more to their creditors. “The study does not adequately control for the numerous complex factors that dictate chapter choice,” he said. “Having said this, Nacba intends to present the study to its members for discussion and self-reflection.” Other, more limited studies have also shown the higher incidence of Chapter 13 among blacks. In Chicago, the Woodstock Institute, a research and policy group, reported last May that in mostly black communities in Cook County, nearly half the cases from 2006 to 2010 were filed under Chapter 13, compared with 32.8 percent of all cases filed in the county. “For people of color, who historically have fewer assets, preservation of assets is a top priority,” said Tom Feltner, vice president at Woodstock, who added that lawyers often have a financial incentive to push Chapter 13 filings. “It is possible that the higher levels of Chapter 13 in communities of color can be explained by a combination of higher attorney’s fees and a filer’s desire, or advice that elevates a filer’s desire, to preserve as many assets as possible.” Henry E. Hildebrand III, who has served as a Chapter 13 trustee in Tennessee for 30 years, said he had noticed that blacks and other minorities appeared to be overrepresented in Chapter 13 cases. “We should focus not on picking apart the conclusions,” Mr. Hildebrand said, “but use this study as an indication that we should be attempting to fix what has become a complex, expensive, unproductive system.”Copyright 2012 The New York Times Company.  All rights reserved.

Print PageA pair of new opinions suggests that dischargeability of taxes is even more complicated subsequent to BAPCPA. In Matter of McCoy, No. 11-60146 (5th Cir. 1/4/12), which can be found here, the Fifth Circuit found that, under Missisippi law, late filed returns did not constitute "returns" at all and thus were not subject to being discharged. In In re Hernandez, Adv. No. 11-5126 (Bankr. W.D. Tex. 1/11/12), which can be found here, Judge Leif Clark found that returns filed after the IRS made its own assessment on unfiled returns were not subject to discharge either. While these decisions may be consistent with the prevailing sentiment, they are not necessarily rooted on solid legal reasoning.The Other Hanging ParagraphOne of BAPCPA's legacies will be the hanging paragraph, a piece of text hanging by itself which is not part of a specific subsection. We are reasonably familiar with the hanging paragraph of Section 1325(a)(*) which has to do with the valuation of vehicles in chapter 13 cases. Now, six years after BAPCPA took effect, a new hanging paragraph has been discovered, Section 523(a)(*), having to do with dischargeability of taxes. While dischargeability of taxes is dealt with in Section 523(a)(1), which would have been a logical place to put the additional language, Congress saw fit to add a codicil to Section 523(a)(1) at the end of Section 523(a). The new language states:For purposes of this subsection the term "return" means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements). Such term includes a return prepared pursuant to section 6020(a) of the Internal Revenue Code of 1986, or similar State or local law, or a written stipulation to ajudgment or a final order entered by a nonbankruptcy tribunal, but does not include a return made pursuant to section 6020(b) of the Internal Revenue Code of 1986, or a similar State or local law.Why do we care about the definition of return? Section 523(a)(1)(B) states that a debt is not dischargeable "with respect to which a return . . . was not filed or given; or" was filed "after two years before the date of the filing of the petition."Prior to BAPCPA, a return could be filed late but at least two years before bankruptcy and still be dischargeable.However, under the new jurisprudence, some late returns, even if filed more than two years before the date of the petition, are not returns at all.Going to MississippiLinda McCoy, a resident of Mississippi, filed bankruptcy. Mississippi is one of those states that are not Texas which have a state income tax. (While most states have state income taxes, it is an unwritten law here in Texas that proposing a state income tax is a sacrilege on the same level as urinating on the Alamo). Linda McCoy did not file her state income tax returns for 1998 and 1999 when they were due. She did ultimately file her returns, but she filed them after the date they were due. The Fifth Circuit held that under Mississippi law, a "return" meant a timely filed return. Therefore, a late return constituted an unfiled return and could not be discharged.Turning to TexasA few days later Judge Leif Clark interpreted the hanging paragraph of section 523(a)(*) in the context of federal taxes in Texas. (Have you ever noticed that "taxes" and "Texas" contain most of the same letters. It seems subversive since Texans hate taxes--just ask Rick Perry). The Hernandez decision involved a lot of years of taxes. The Debtor did not file timely returns for 1999 through 2006, although he eventually got them all filed. For the seven years in question, the IRS assessed liability for three years before the Debtor got around to filing returns. For the other four years, the IRS either did not get around to making assessments before the returns were filed or no taxes were due. The IRS did not contest dischargeability for the years in which the Debtor filed his returns prior to taxes being assessed or where it acknowledged that no taxes were due. However, for the three years in which assessments preceded returns, it contended that the taxes could not be discharged--and the court agreed. The RationalePrior to BAPCPA, the term "return" was not defined. Case law held that "a late filed return that required the government to assess the tax without the tax payer's assistance would not be treated as a return for section 523 purposes." McCoy, at 5. In order to constitute a "return" under prior law, it had to satisfy four requirements:1. It had to purport to be a return;2. It had to be executed under penalty of perjury;3. It must contain sufficient information to allow calculation of the tax; and4. It must represent an honest and reasonable attempt to satisfy the requirements of the tax law.The new hanging paragraph replaced the old test with three guidelines:1. The return must be a "return that satisfies the requirements of applicable nonbankruptcy law (including filing requirements);"2. It would include a return "prepared pursuant to section 6020(a) of the Internal Revenue Code of 1986, or similar State or local law, or a written stipulation to a judgment or a final order entered by a nonbankruptcy tribunal; and3. It would not include "a return made pursuant to section 6020(b) of the Internal Revenue Code of 1986, or a similar State or local law.The Mississippi State Tax Commission argued that under the first factor an untimely return was not "a return that satisfies the requirements of applicable bankruptcy law (including filing requirements)." The Debtor argued that MSTC's construction would read the reference to section 6020(a) out of the statute. As acknowledged by the Fifth Circuit, returns under section 6020(a) involve cases in which the Debtor fails to file an actual return but nevertheless provides the IRS with all of the information necessary to calculate the liability. The Fifth Circuit adopted MSTC's reasoning stating:We find MSTC''s interpretation of section 523(a)(*) more convincing. We have previously explained that "the plain language of the [Bankruptcy] Code should rarely be trumped. Although the Code at times is 'awkward, and even ungrammatical . . . that does not make it ambiguous." (citation omitted). The plain language interpretation of section 523(a)(*) comports with this admonition. McCoy at 8-9. The Court went on to find that returns prepared under section 6020(a) constituted a narrow exception to the rule that late filed returns were not returns. It also referred to other courts which have reached the same result.The Hernandez Court did not significantly expand upon the Fifth Circuit opinion, stating:Anticipating consistency on the part of the circuit court, this court concludes that late-filed returns cannot be treated as filed, for purposes of section 523(a)(1), save for returns that comport with the requirements of section 6020(b)(sic) of title 26. The exception is a narrow one, and does not apply on the facts of the case sub judice.Hernandez at 9. If Every Other Court Jumped Off a Building Would You Join Them?The Courts following the majority interpretation of section 523(a)(*) show a lemming-like ability to follow the crowd without careful thought. Section 523(a)(1)(B) provides that taxes are not dischargeable in two instances:1. Where a return was not "filed or given;" or2. Where the return "was filed or given after the date on which such return, report, or notice was last due, under applicable nonbankruptcy law or under any extension, and after two years before the date of the filing of the petition.Thus, section 523(a)(1)(B) has two components to it: a substantive one and a temporal one. If no return was filed, then the tax cannot be discharged. However, if the return was filed at least two years before bankruptcy, even if it was not timely filed, it could be discharged (assuming that the other requirements for dischargeability are met).The McCoy decision does not state when the returns were actually filed. However, In Hernandez, the Court's finding of fact explicitly recite that the returns for 1999, 2003 and 2004 were each filed more than two years before the petition date. Thus, Hernandez raises the Catch-22 situation in which a return filed more than two years before bankruptcy may be subject to discharge but a return filed one day late is not a return at all. To be blunt, McCoy and Hernandez obliterate section 523(a)(1)(B)(ii) by stating that late-filed returns, much like disgraced party members in the Soviet Union, are non-returns. (In the Soviet Union, party members who had fallen from favor would be erased from photographs and treated as though they had never existed). Why would the statute allow for returns filed more than two years prior to bankruptcy to be considered when all late filed returns would necessarily be considered non-returns? The obvious answer is that the hanging paragraph was meant to address the question of whether the document submitted was sufficient to constitute a return rather than whether it was a timely return. The reference to "filing requirements" in the hanging paragraph is best understood as a reference to whether the document was filed rather than when it was filed.The language of the hanging paragraph reinforces the interpretation that it was meant to be a substantive rather than a temporal requirement. Under the hanging paragraph, "a written stipulation to a judgment or final order entered by a nonbankruptcy tribunal" would constitute a return. Thus, if the Debtor did nothing and waited for the taxing authority to file suit and agreed to the assessment would have been deemed to have filed a return. On the other hand, if the debtor filed his return one day late and the ever-vigilant taxing authority made its assessment in the intervening hours, the return would cease to exist. This makes no sense. I may be missing something profound or obvious. However, these decisions appear to be just plain wrong.Hat tip to Michael Baumer who got the word out on these decisions on the State Bar of Texas Bankruptcy Section listserve. Michael is a smart guy and caught the importance of these opinions before I did.