Bankr. E.D.N.C.: In re McKenzie- Involuntary Conversion to Chapter 7 following Undisclosed Bequest Ed Boltz Thu, 11/07/2024 - 19:25 Summary: The bankruptcy court granted a motion to convert the debtors' Chapter 13 case to Chapter 7 after they failed to disclose a $350,000 gift received post-petition. The Bankruptcy Administrator (BA) sought the conversion, citing the debtors' lack of good faith due to their failure to notify the Chapter 13 trustee of this substantial financial change, as required by court orders. The court noted that the debtors did not contest the conversion in writing and did not appear to testify at the hearing. The BA argued that if this financial information had been disclosed earlier, it would have likely led to objections to the Chapter 13 plan. The court found the nondisclosure showed a lack of good faith, constituting "cause" under 11 U.S.C. § 1307(c) for conversion to Chapter 7. The court determined conversion was in the best interest of creditors and the estate, allowing a Chapter 7 trustee to retain control over the funds and investigate their disposition. Commentary: It is worth noting that Mr.  McKenzie received this gift (or,  using the term from  §541(a)(5)(A),  a bequest)   only 81 days after the filing of this bankruptcy case.  Accordingly,  even without a finding of bad faith conversion under §348(f)(2),  that bequest received within 180-days of filing becomes an asset of the Chapter 7 estate.  (It was an asset under §1306 and  Carroll v. Logan.)  This might not actually be the result if here,  however,  if the bequest had been made more than 180-days after the filing of the case: §348(f)(2) provides that:   If the debtor converts a case under chapter 13 of this title to a case under another chapter under this title in bad faith, the property of the estate in the converted case shall consist of the property of the estate as of the date of conversion.  (Emphasis added.)   Here,  however,  it was not the debtors who converted to Chapter 7,  but the Bankruptcy Administrator who moved for that conversion.  Congress could have provided for the more expansive result with a passive tense "is converted" but,  likely in preserving the right of debtors to voluntarily dismiss their Chapter 13 cases (which springs from the 13th Amendment prohibition on debt slavery),  instead limited the broadening of the Chapter 7 estate to only apply when the debtor actively converts. Further, as noted by others,  while there is a  statutory good faith requirement for filing Chapter 13 and confirmation of a plan,  there is no explicit  good faith requirement for remaining in a Chapter 13. Following Law v. Siegel,  the court is not given unfettered authority to craft remedies for the misdeeds of parties,  including failure to comply with orders of the court.  And while the court seemed troubled that dismissal instead of conversion of this case would have been to the detriment of creditors,  those creditors would still have the non-bankruptcy collection options (including commencing an involuntary bankruptcy against the debtor.) Lastly,  this is also an example of where,  had the debtor or his very generous father first consulted with an attorney before making this bequest,  the debtor would not necessarily have had to pay little or any of these funds to his creditors.  This could have been accomplished either by the father creating a spendthrift trust  or by first approaching the Chapter 13 trustee to negotiate how much   would need to be paid to general unsecured creditors  for this contingent gift to be made.   With proper attribution,  please share this post.  To read a copy of the transcript, please see: Blog comments Attachment Document in_re_mckenzie.pdf (217.03 KB) Category Eastern District

Law Review Note: Xenakis, Panayiotis- Innocent-Spouse Relief and Other Tax Remedies in Bankruptcy Ed Boltz Thu, 11/07/2024 - 19:21 Available at:  https://scholarship.law.stjohns.edu/bankruptcy_research_library/368/ Abstract: Innocent-spouse relief is an equitable remedy provided by Internal Revenue Code section 6015(f), where the Secretary of the Treasury may "relieve [an] individual of . . . liability" if "taking into account all the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or any deficiency . . . ." Essentially, it provides a joint-filer who normally is jointly and severally liable for the tax liabilities of his or her spouse relief from liability if it would be inequitable to do otherwise. This memorandum addresses:  (1) the limits of a bankruptcy court’s jurisdiction over innocent-spouse and other tax claims under Bankruptcy Code section 505, with regard to  (a) the bankruptcy court’s lack of initial subject matter jurisdiction over innocent-spouse relief claims, and  (b) the preclusion towards adjudicating a tax dispute that has been finally concluded; and  (2) a recent decision from the Western District of Pennsylvania which denied bankruptcy court jurisdiction over innocent-spouse claims. The decision appears to be an outlier and will not likely be followed by other jurisdictions. Commentary: A debtor's ability to have the bankruptcy court  review for innocent spouse relief in the Fourth Circuit  would seem to require both that he or she first attempts to utilize the IRS processes and also that there had not been a final pre-petition adjudication of that claim.   It would seem then that many Chapter 13 debtors would benefit from seeking this innocent spouse relief  if: The Debtor  filed a joint return with his or her spouse\ The Debtor's taxes were understated due to errors on your return The Debtor  didn't know about the errors,  or The Debtor lives in a community property state Errors that cause understated taxes include: Unreported income Incorrect deductions or credits Incorrect values given for assets The question then for consumer debtor attorneys is whether this is an additional service that they can provide for their clients  (with reasonable compensation) or if it should be referred to another lawyer or tax professional.   For  related questions about Offers in Compromise in bankruptcy,  see Bankr. E.D.N.C.: In re Mead- Validity of Pre-Petition Offer in Compromise of IRS Claim With proper attribution,  please share this post.  To read a copy of the transcript, please see: Blog comments Attachment Document innocent-spouse_relief_and_other_tax_remedies_in_bankruptcy.pdf (326.27 KB) Document f8857.pdf (158.45 KB) Category Law Reviews & Studies

Law Review Note: Kleinman, Michael- Interest Rate Determination Methods in Bankruptcy Chapters 11, 12, and 13 Ed Boltz Thu, 11/07/2024 - 19:18 Available at:   https://scholarship.law.stjohns.edu/bankruptcy_research_library/359/ Abstract: The United States Supreme Court's decision in Till v. SCS Credit Corp. established a formula approach for determining interest rates in cases filed under chapter 13 of title 11 of the United States Code (the "Bankruptcy Code"). The Till decision implemented the formula approach, requiring the national prime rate to be augmented by a risk premium to account for the debtor's heightened nonpayment risk. Till is limited to chapter 13 cases, however, courts have applied the Till test in chapter 11 and 12 cases. This memorandum examines the different methods utilized in bankruptcy to determine appropriate interest rates. Section I outlines the legal framework for determining interest rates in bankruptcy under the Bankruptcy Code. Section II examines the impact of the Till decision on interest rate strategies across chapters 11, 12, and 13  Commentary: This note takes  as a clear  premise that Till v. SCS Credit Corp applies to all reorganization chapters in bankruptcy,  but unfortunately at the time  it was wending through the appellate process to the Supreme Court,  the Chapter 11 debtor's bar  failed to recognize (yet again)  that  lowly consumer cases  have dramatic impacts on lofty corporate reorganizations.  For that reason alone,  those attorneys and law firms should be stolid and regular donors to National Consumer Bankruptcy Rights Center,  as it is one of the few organizations that regularly appears as an amici on behalf of debtors in bankruptcy appeals. With proper attribution,  please share this post.  To read a copy of the transcript, please see: Blog comments Attachment Document interest_rate_determination_methods_in_bankruptcy_chapters_11_12_13.pdf (314.07 KB) Category Law Reviews & Studies

E.D.N.C.: Johnson v. Experian- FCRA and Cares Act Ed Boltz Thu, 11/07/2024 - 19:16 Summary: In a pro se suit under the Fair Credit Reporting Act (FCRA),  Johnson alleged that Experian failed to accurately update his credit report to reflect an accommodation provided by his creditor during the COVID-19 pandemic.  The court dismissed Johnson's claim under FCRA § 1681s-2, which applies to information furnishers, not credit reporting agencies like Experian. However, it allowed Johnson's claim under § 1681i, which requires credit reporting agencies to conduct a reasonable investigation into disputed information. Despite Experian’s objections, the court found that Johnson had sufficiently alleged that his credit report remained inaccurate, warranting further investigation. The case will proceed with the § 1681i claim. With proper attribution,  please share this post.  To read a copy of the transcript, please see: Blog comments Attachment Document johnson_v._experian.pdf (140.61 KB) Category Eastern District

Law Review Note: Gatti, Kathleen- The Regulatory Power Exception to the Automatic Stay Ed Boltz Thu, 11/07/2024 - 19:14 Available at:   https://scholarship.law.stjohns.edu/bankruptcy_research_library/354/ Summary: Upon a filing a petition under title 11 of the United States Code (the "Bankruptcy Code"), all actions against a debtor are generally automatically stayed. While the automatic stay is broad, there are exceptions. Under the regulatory power or police power exception, a governmental unit or organization is not stayed from taking any action "to enforce such governmental unit's or organization's police and regulatory power." Not all actions by a government are immune from the automatic stay. Courts have generally held that an action to effectuate a "public policy" is not stayed, but an action to advance the government’s "'pecuniary interest" is stayed. This memorandum explores the regulatory power exception of the automatic stay. Part A of this memorandum will describe the subcategories of the regulatory power exception, namely public policy or public welfare actions. For the purposes of this memorandum, the discussion is limited to government actions against corporations in the environmental and employment law spheres, as these are the two major areas where the regulatory exception is asserted. Part B will describe actions in the government's pecuniary interest that do not qualify as exempt. Commentary: This note focuses solely on corporate bankruptcy and government regulatory powers,  to the exclusion of the same on consumer or individual cases. With proper attribution,  please share this post.  To read a copy of the transcript, please see: Blog comments Attachment Document the_regulatory_power_exception_to_the_automatic_stay_1.pdf (255.85 KB) Category Law Reviews & Studies

Law Review Note: Meehan, Lianna- Amended Proofs of Claims that Present a new Request for Relief Could be Disallowed Ed Boltz Thu, 11/07/2024 - 19:12 Available at:   https://scholarship.law.stjohns.edu/bankruptcy_research_library/365/ Abstract: When a creditor seeks to amend a proof of claim after the bar date has passed with an amount different to that provided in the original proof of claim, courts engage in an equitable analysis of multiple factors to determine whether to grant or deny the motion to amend. Under certain circumstances, Bankruptcy Rule 9006(b)(1) gives creditors an opportunity to file a proof of claim after the bar date has passed. This memorandum examines whether a creditor can amend a timely-filed proof of claim after the bar date has passed with an amount that is unrelated to the costs in the original proof of claim. Part I discusses how a completely new claim will be disallowed under the Pioneer test. Part II discusses the length of the delay and whether a showing of good cause could allow the claim. Part III discusses how bankruptcy judges have full discretion over whether to allow an amended proof of claim. Part IV discusses chapter 11 proceedings and the importance of avoiding disruption after a plan is filed. Part V discusses how a creditor’s reliance on legal counsel will not fulfill the excusable neglect standard when their attorney misses a deadline such as the bar date. Commentary: While focused on late filed claims in Chapter 11 cases,  this note would have benefited from examining how in Chapter 13 both  Rule 3002.1  allows the filing of what are essentially post-petition claims  by mortgage servicers and 11 U.S.C. §1305  explicitly allows post-petition tax claims, as well as claims necessary "for the debtor's performance under the plan."  That Congress and the National Bankruptcy Rules Committee (with the approval of the Supreme Court and Congress)  created procedures, requirements and restrictions in Chapter 13  but apparently not in Chapter 11,  would seem pertinent. With proper attribution,  please share this post.  To read a copy of the transcript, please see: Blog comments Attachment Document amended_proofs_of_claims_that_present_a_new_request_for_relief_co.pdf (354.93 KB) Category Law Reviews & Studies

Law Review: Gergen, Mark P., Contract Law's Morality and Punitive Debt Enforcement (August 08, 2024). Ed Boltz Thu, 11/07/2024 - 04:08 Available at:   https://ssrn.com/abstract=4976632 or http://dx.doi.org/10.2139/ssrn.4976632 Abstract: This article uses punitive enforcement of personal debt to critically examine contemporary moral theories of contract. Charles Fried and Peter Benson take the position that contract law appropriately embodies the morality of commercial exchange. This has unacceptable implications for enforcement of personal debt because it licenses creditors to demand and enforce as harsh terms as the market allows and treats debtor protection laws (like bankruptcy law) as problematic social interventions in the natural order of contract law and the marketplace.  Critical and reconstructive theories do better. Seana Shiffrin’s warning contract law and the morality it embodies could weaken norms of interpersonal morality is spot on with respect to punitive debt enforcement. It would be tragic if the morality of contract law weakened a long-standing interpersonal norm requiring a creditor to be lenient when a debtor is unable to pay for reasons beyond their control. Liberal contract theory does even better. It demands lawmakers do an autonomy accounting in deciding how to regulate debt enforcement and put a thumb on the scale in economic analysis in favor of reducing pain suffered by debtors who default or who pay in distress. The thumb’s weight depends on whether inflicting pain increases access to credit or reduces the cost of credit because of the different stakes for people’s autonomy. Liberal contract also would replace the morality of commercial exchange with a norm demanding people treat each other as substantive equals in contractual interactions. This norm would have profound implications for punitive debt enforcement. The required changes in creditor behavior are so great that it casts doubt on whether this is a cognizable legal norm currently. But this is not a reason to dismiss the norm of relational justice as a pipe dream. The morality of contract law is to, some extent, a social construct, like contract law itself. If contract law can be reconstructed along genuinely liberal lines, then there will be a robust set of rules tempering the power of creditors to punish people who default. That will be understood as aspects of a general requirement that people treat each other as substantive equals. Broadening contract theory to include debtor protection laws and linking the leniency norm to the norm of relational justice, are small steps in this direction. Commentary: The inclusion of David Graeber's anthropological research and economic theories,  particularly from Debt: The First 5,000 Years,  as a counter ( along with work by Seana Shiffrin) to the arguments  of Charles Fried's Contract as Promise and Peter Benson's Justice in Transactions  is a welcome inclusion in this paper and bankruptcy academic literature in general.   Another analysis of the morality of debt  (unmentioned in this article) is “The Ethics of Bankruptcy” by Jukka Kilpi, which provides a Kantian analysis of bankruptcy based on maximizing an individual’s autonomy, both in keeping promises and when discharge from those obligations becomes necessary. With proper attribution,  please share this post.  To read a copy of the transcript, please see: Blog comments Attachment Document contract_laws_morality_and_punitive_debt_enforcement.pdf (663.74 KB) Category Law Reviews & Studies

M.D.N.C.: Custer v. Dovenmuehle Mortgage- NC Debt Collection Act Does Not Require Default for Protections to Apply Ed Boltz Wed, 11/06/2024 - 17:41 Summary: George Custer sued Dovenmuehle Mortgage, Inc. (DMI) on behalf of a proposed class, alleging that DMI’s phone payment fee violates North Carolina’s Debt Collection Act (NCDCA) and Unfair and Deceptive Trade Practices Act (UDTPA). DMI moved to dismiss the complaint, arguing that the fee was legally permissible, the NCDCA didn’t apply because Custer wasn’t in default, and that the Mortgage Debt Collection and Servicing Act superseded the NCDCA. The court denied DMI's motion, concluding that Custer had sufficiently alleged claims under both statutes. For the NCDCA claim, the court found that the law’s protections do not depend on a consumer being in default and that DMI hadn’t shown a specific legal right to impose the fee. The court also found the UDTPA claim plausible, as Custer alleged that DMI’s fees were unfair and misleading, particularly because DMI did not disclose that these fees were unrelated to actual costs. The case will proceed to further litigation. Commentary: The North Carolina Court of Appeals held that a “debt” under the NCDCA does not require a consumer to be in default. Onnipauper LLC v. Dunston, 290 N.C. App. 486, 490, 892 S.E.2d 487, 491 (2023).  (Attached.) Very nice work by Ben Sheridan and Jed Nolan,  along with the rest of their legal team. With proper attribution,  please share this post.  To read a copy of the transcript, please see: Blog comments Attachment Document onnipauper_llc_v._dunston.pdf (150.74 KB) Document custer_v_doevenmuhle.pdf (248.83 KB) Category Middle District

Law Review: Steinbaum, Marshall and Jiménez, Dalié and Glater, Jonathan and Fann, Chloe and Morales Sanchez, Axel and Collier, Daniel, Student Loan Borrowers and Pandemic-Era Interventions in California (August 15, 2024). Ed Boltz Wed, 11/06/2024 - 17:38 Available at: https://ssrn.com/abstract=4939397 or http://dx.doi.org/10.2139/ssrn.4939397 Abstract: From 2020 to 2023, the federal government implemented a series of large-scale, high-profile interventions to address the financial uncertainty and economic emergency caused by the COVID-19 pandemic, and to provide long-term fixes to several existing programs aimed at helping ease the burden of student loans on borrowers and families. These interventions included several rounds of funding passed by Congress to provide direct funding to institutions of higher education and students, a pause on federal student loan payments, and reforms to address long-standing problems in existing debt relief programs including the Public Service Loan Forgiveness (PSLF) program. Given the nationwide scale and simultaneous nature of many of these efforts, research on the impacts of any single policy or program remains limited. This analysis seeks to better understand the effects of these policies on borrowers, families, and students in California. Leveraging proprietary credit panel data, qualitative interviews with borrowers, and publicly available data from the U.S. Department of Education, we focus on the effects of three major interventions: the student loan payment pause, a one-time PSLF “waiver” to increase access to debt relief for public service workers, and funding to institutions from the Higher Education Emergency Relief Fund (HEERF). Our findings include: The student loan repayment pause narrowed the gap in homeownership between relatively advantaged and disadvantaged households in California and reduced the likelihood of delinquency on any type of loan more for borrowers subject to the payment pause. According to qualitative interviews of borrowers in California, the payment pause allowed student loan borrowers greater opportunity to consider family planning, save money, reduce other debts, relieve mental distress, while also enabling some participants to afford meaningful life experiences and make needed investments, such as house repairs. Improvements to the PSLF program that led to loan cancellation allowed borrowers the financial room to make large purchases and catch up on savings, as well as provide immediate economic support to family members. In California, public higher education institutions dedicated HEERF funds disproportionately to defraying the cost of tuition for students, which may have contributed to the state largely maintaining enrollment rates as institutions in other states suffered considerable declines.   Commentary: While this work is focused on the impact of student loan relief in California  during the pandemic,  it is still useful for showing the benefits  for borrowers of student loan relief elsewhere, with hopefully further research being forthcoming. And while it may seem obvious  to many that those individual benefits to borrowers described in this paper  add up together to societal benefits,  these findings would likely have broader political  appeal if those connections were made more explicit, viz.   How does  student loan relief improve  society as a whole,  not just individuals?  This could also  investigate issues of more conservative appeal such as if and how  student loan relief increased entrepreneurship and  the formation of small  businesses,  whether it encouraged  marriage (and reduced divorce),  allowed contributions to charities, etc. With proper attribution,  please share this post.  To read a copy of the transcript, please see: Blog comments Attachment Document student_loan_borrowers_and_pandemic-era_interventions_in_california.pdf (917.27 KB) Category Law Reviews & Studies

Bankr. M.D.N.C.: In re Okeiyi- Immigration Support Affidavits are not Domestic Support Obligations Ed Boltz Wed, 11/06/2024 - 17:35 Summary: Asilonu,  while residing in Nigeria,  became engaged to Okeiyi's daughter.  Okeiyi submitted a Petition for Alien Fiancé on behalf of Asilonu with the United States Citizenship and Immigration Service (“USCIS”) to successfully assist him with gaining U.S. resident status.  Subsequently,  Okeiyi  also executed an Affidavit of Support as a joint sponsor for Asilonu's successful application for permanent residency.    These affidavits are legally binding contracts between the sponsor (Okeiyi) and the United States Government, which may be enforced by the immigrant beneficiary (Asilonu) and obliged Okeiyi to provide  Asilonu support at 125 percent of the Federal Poverty Guidelines until a  terminating  event as defined in the affidavit.  Separation and divorce are not terminating events under the affidavit, so of course, Asilonu and Okeiyi's daughter separated.  Asilonu, who pursued a graduate degree for several years,  brought suit against Okeiyi for this financial support,  eventually prevailing after a jury trial and being awarded  $45,862.50.    Okeiyi filed Chapter 7 bankruptcy and Asilonu  sought to have this debt declared a nondischargeable “domestic support obligation”  under 11 U.S.C. § 523(a)(5)  or (15) or for willful and malicious injury under 11 U.S.C. § 523(a)(6).   The bankruptcy court dismissed Asilonu’s  (a)(5) and (a)(15) claims finding that that Asilonu, as Okeiyi’s former son-in-law, did not fit the statutory requirements for a nondischargeable domestic support debt, which must be owed to a spouse, former spouse, or child.   The court further found that a breach of contract, without evidence of intent to cause harm, did not meet the standards for “willful and malicious injury.” Consequently, the court dismissed Asilonu’s claims, ruling the debt dischargeable. Commentary: While not necessarily groundbreaking and something of a niche issue, this case serves as a reminder of the limits of dischargeability exceptions in Chapter 7. Some of these issues may be mitigated in Chapter 13 cases, which have less encompassing exceptions to discharge,  particularly the differences between 11 U.S.C. § 523(a)(6) and § 1328(a)(4). With proper attribution,  please share this post.  To read a copy of the transcript, please see: Blog comments Attachment Document in_re_okeiyi.pdf (208.53 KB) Category Middle District