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.

The decision to file for bankruptcy is a very important and personal decision.  If you are considering filing for bankruptcy there are a number of things to consider and a number of common pitfalls to avoid.  Even after making the decision to file for bankruptcy you probably still have many questions about how the process works and how long it will be until the bankruptcy is final.As bankruptcy law is quite complex, the first thing you will want to do is schedule a consultation with an attorney.  At this consultation we will take some information, evaluate the case, and answer any questions you may have.  At the end of the consultation we will advise you about whether you qualify to file for bankruptcy, and if so whether you should file for Chapter 7 Bankruptcy or Chapter 13 Bankruptcy.Should you decide to retain A & L, Licker Law Firm, LLC, an attorney will go over a contract with you.  At this time we will discuss attorney fees, possible payment plans, and all court fees.  We will then go over the information you will need to provide.  This will include creditor information and other personal information.  It is advisable to begin working on this as soon as possible.Once you have made your final payment on attorney fees and have submitted all of your information we will begin work on your case.  From this time it may take a few weeks to work on your case.  Once we have finished our work and you have paid at least half of the court fees we will then file your case.  The filing date is the most important date in a bankruptcy proceeding.  As of the filing date creditors are legally barred from contacting you or trying to collect any money from you.  Should creditors attempt to make contact or collect you should advise them that you have filed for bankruptcy and that you are represented by an attorney.  You may give them your attorney's name and contact information.  Once you have filed your case it generally takes about four months until the bankruptcy is finalized.  At some point you will be called before a trustee who oversees bankruptcy proceedings.  This is a very short meeting where you will be asked a few questions.  Should you retain counsel a lawyer will be at the meeting with you.  When the bankruptcy is finalized you will be notified my mail that your debt has been discharged.

A debtor can obtain a discharge of debt by filing for bankruptcy.  A discharge debt releases the individual's personal liability for many types of unsecured debts.  A discharge prevents creditors from making any collections efforts upon the debtor including phone calls, letters, and threats. Many types of unsecured debt can be discharged, including credit card debt, pay day loans, and medical bills.  Howwever, there are other types of debt that cannot be discharged through bankruptcy.  Some examples of debts that cannot be discharged are certain tax liabilities, student loans, financial responsibility for any injury caused while driving while intoxicated, child support, alimony, condo and subdivision fees, and debts to governmental agencies.  Further, if there are existing liens on property they will not be discharged.  The individual is still responsible for anything not discharged by the bankruptcy proceedings. Discharge varies slightly between Chapter 7 and Chapter 13 filings.  In a Chapter 7 Bankruptcy filing creditors are given notice of the proceedings and are given time to object.  If no objections are received the debt is generally discharged automatically.  The court also has certain requirements and regulations for discharge and may dismiss a case if the requirements are not met in a timely manner.  Some of the requirements of the court are that the individual provide tax documents and complete a course on financial management. The court may also dismiss a case without discharge for any type of fraud, concealment, or failure to account for assets. In a Chapter 13 Bankruptcy discharge of debt occurs when the reorganization plan is paid in full.  In Chapter 13 filings, like Chapter 11 filings, creditors are given the opportunity to object at the plan confirmation hearing.  Creditors may not object to the discharge upon completion of payments under the plan. It is important to note that in Chapter 7 proceedings the court may revoke a discharge under limited circumstances.  The grounds for a revocation closely resemble the grounds of the court to dismiss the case without discharge, including fraud or concealment.  In a Chapter 13 filing the court may revoke either confirmation or the discharge of the plan for fraud. After your debt is discharged is it not legally enforceable and creditors are not legally allowed to attempt to collect a discharged debt.  Should a creditor attempt to collect discharged debt a motion can be filed with the court to reopen the case to address tthe creditor.  The court may sanction creditors for violating a discharge order. Though a creditor may not attempt to collect a discharged debt, you may opt to voluntarily pay the amount that was discharged.  It is imperative to note that this may only be done after a final order has been issued and the bankruptcy is complete.  This most often occurs when the relationship between the parties is of personal importance to the individual, for example, if debts to family or friends were discharged.

In all bankruptcy proceedings certain assets are exempt from being taken, meaning that you are entitled to keep them. These assets are protected by exemptions and are defined by the state. Federal exemptions are not available in Missouri.  These state exemptions are automatic and do not require any other qualification.  For many of the exemptions listed below the amounts can be doubled if you are filing for bankruptcy with your spouse.  However, it is important to note that there are some exceptions to doubling, including the homestead exemption. Some of the most commonly applicable exemptions are as follows: The Homestead Exemption.  Individuals filing for bankruptcy may exempt up to $15,000 of real property or up to $5,000 of a mobile home.  However, in some cases, where a husband and wife own real property in a tenancy by the entirety, the entire value of a home may be exempt if only one spouse is filing for bankruptcy.  To have a tenancy by the entirety a husband and wife must own the property together and must have come into ownership of the property at the same time, by the same deed, and must share complete possession and ownership.  Finally, to exempt the entire value of the home to the husband and wife must not have any other joint debt.  It is important to note that medical bills are considered to be joint debt in the State of Missouri.  This means that if one or both spouse have medical bills this exception does not apply, however, the standard $15,000 exemption still applies.Motor Vehicle Exemptions.  Individuals filing for bankruptcy may exempt up to $3,000, or $6,000 for married filers, for a motor vehicle.  Married joint filers may each apply $3,000 to one car, or if you jointly own only one shared vehicle you may apply the full $6,000 exemption to one vehicle.  An individual filer may not split the exemption among vehicles, regardless of value.Household Goods Exemptions.  Individuals filing for bankruptcy may exempt up to $3,000, or $6,000 for married filers, in household goods.  Household goods include clothing, appliances, furnishings, books, animals, musical instruments, and crops.Jewelry Exemptions.  Individuals filing for bankruptcy may exempt up to $1,500, or $3,000 for married filers, for wedding rings.  Much like motor vehicles, a married couple may split the $3,000 exemption between two rings, one belonging to each spouse.  Here, the couple may not combine the individual exemptions to one ring owned by either spouse under any circumstance.  In addition to wedding rings, individuals filing for bankruptcy may exempt any other jewelry up to $500, or $1,000 for married filers.  Burial Grounds Exemptions.  Individuals filing for bankruptcy may exempt up to $100, or one acre, of burial grounds.Retirement Accounts Exemptions.  Individuals filing for bankruptcy may exempt certain tax exempt accounts, including: IRA's, 401(k)s, profit sharing, and money purchase plans.  However, it is important to note, that certain life insurance policies and annuities may not be exempt if there is a current cash value.Tools of Trade Exemptions.  Individuals filing for bankruptcy may exempt up to $3000, or $6,000 for married filers, for professional books or tools of a trade.  In some cases, a vehicle may fall under this designation, however, using a vehicle to commute to and from work does not qualify under this exemption.Head of Household Exemption.  An individual filing for bankruptcy may exempt any asset up to $1,250 if the filer provides a majority of the income for the household.  If a filer qualifies for a head of household exemption he/she may also exempt $350 for each child under the age of 18 living in the household.Wildcard Exemption.  Individuals filing for bankruptcy may exempt any asset up to $600.  This amount can be stacked on top of other exemptions to increase the exempt value of a particular asset or interest.

Print PageEvery year, I read more cases than I have time to blog about. Here are some cases that I meant to write about but didn't have the time.River Road Partners v. Amalgamated Bank, 651 F.3d 642 (7th Cir. 2011), cert granted, RadLAX Gateway Hotel, LLC v. Amalgamated Bank, No. 11-166 (2011). The Supreme Court has granted cert to resolve the Philadelphia Newspapers issue of whether a debtor can deny a creditor's right to credit bid in a plan by offering the creditor the "indubitable equivalent." The Third Circuit said yes. The Seventh Circuit said no. You can access all the relevant documents at SCOTUS Blog here.In re DBSD, North America, Inc., 634 F.3d 79 (2nd Cir. 2011). The Second Circuit held that "gifting" where a senior class of claims gives up property in favor of a junior class violates the absolute priority rule where an intervening class of claims is skipped. The Court also held that votes of a competitor could be designated as cast in bad faith.Matter of Davis Offshore, LP, No. 09-41294 (5th Cir. 7/16/11).In re Dronebarger, No. 10-10889 (Bankr. W.D. Tex. 1/31/11), which can be found here. This case is significant as the maiden opinion from Judge H. Christopher Mott, who took the bench in October 2010. The issue was whether the guarantor of a lease could take advantage of the cap on damages resulting from lease termination under section 502(b)(6). In a forty page opinion, the Court said no. The Court's primary reasoning was that section 502(b)(6) was limited to damages arising from termination of a lease. Here, the damages arose from failure to repair the property during the pendency of the lease, not from termination of the lease. As a result, he distinguished the case from In re Mr. Gatti's, Inc., 162 B.R. 1004 (Bankr. W.D. Tex. 1994), where the damages resulted from rejection of the lease in bankruptcy. He also ruled that a guarantor could not take advantage of the cap because his liability arose under a guaranty rather than under the lease. The opinion has an excellent discussion of section 502(b)(6) and should be must reading for any party litigating under that section.Disclosure: My firm became co-counsel to the Debtors subsequent to the court's opinion. We were not involved in the claims issue. Another interesting historical note is that Eric Taube represented the landlord in both Mr. Gatti's and Dronebarger. I represented the Debtor in Mr. Gatti's. In re Wren Alexander Investments, LLC, No. 08-52914 (Bankr. W.D. Tex. 2/17/11). You can find the opinion here. This case goes to show that not all second acts are for the better. Charles Pircher is a former banker who went to prison during the bank scandal of the 1980s. After prison, he managed a series of professional employee organizations which minimized workers compensation costs by forming new entities to take advantage of lower rates given to new companies. The PE Os were supposed to pay wages and remit taxes to the government. They failed to accomplish the latter, resulting in a large IRS tax liability.One of the PE Os acquired a ranch in Medina County, Texas. It proved to be a good investment because it was purchased for $630,000 in 1999 and was sold for $5,250,000 in 2009. Pircher used money from the PE Os to build a 10,000 square foot house, a 12,000 square foot horse stable and a 39,000 square foot quarter horse arena. While Pircher said that he had an informal agreement to pay the money back at some point, no documents were drafted and he paid no rent.The first owner of the property, United Capital Investment Group, Inc., took out a hard money loan to pay off the original purchase price, to build improvements on the property and to pay Pircher's criminal restitution obligations. When the IRS started filing tax liens against the PE Os, Pircher transferred the property to Medina Heritage, Ltd., an entity he controlled. While the deed was dated prior to the filing of an IRS tax lien, it was not recorded until afterwards. The consideration for the transfer was assumption of the existing liabilities on the property.The property was then transferred to Wren Alexander Investments, Ltd., the debtor in this case. Wren Alexander was controlled by a close business associate of Pircher's. The purchase price was the amount necessary to pay off the existing liens (although not the tax lien). Pircher's stated intent in selling the property was to get it out of his name while retaining control. The IRS filed a nominee lien against Wren Alexander Investments, Ltd.Wren Alexander filed chapter 11 and the property was sold. The Debtor filed an objection to the claim of the IRS. The principal issue was whether the tax lien was valid against the transferee of the property. Judge Ronald King has an excellent discussion of Texas fraudulent transfer law. Judge King found that the transfer from United Capital to Medina Heritage was a fraudulent transfer because the property was sold for less than reasonably equivalent value while insolvent. The found that this provision could not be used to avoid the second transfer because the IRS was not an existing creditor of Wren Alexander. However, he did find that the transfer could be avoided as one made with actual intent to hinder, delay or defraud. The result was that the IRS received the remaining proceeds in the amount of approximately $1.2 million.Munoz v. James S. Nutter & Co., Adv. No. 10-3039 (Bankr. W.D. Tex. 2/22/11).In re Schott, No. 10-54276 (Bankr. W.D. Tex. 3/15/11).Turbo Aleae Investments, Inv. v. Borschow, Adv. No. 09-3005 (Bankr. W.D. Tex. 4/8/11).Legal Xtranet, Inc. v. AT&T Management Services, LP, Adv. No. 11-5042 (Bankr. W.D. Tex. 5/24/11), which can be found here. This was a case involving a motion to remand. The Court found that state law contract disputes were non-core proceedings subject to mandatory abstention and that disputes over the tax liability of AT&T did not qualify for even "related to" jurisdiction. The most interesting part of the opinion is the Court's lament over AT&T's successful attempt at forum shopping. Judge Leif Clark wrote:The court is reluctant to reward AT&T’s blatant forum shopping in this case. AT&T filed a jury demand and refused to consent to a jury trial in this court in an effort to bolster its argument that the parties’ dispute could be timely adjudicated in state court: AT&T’s refusal to consent to a jury trial here meant that even if the court retained jurisdiction over the parties’ dispute, the case would have to be tried in the federal district court, assuring AT&T that it would have a different judge to hear the case. That would also almost certainly mean that the case would not likely be heard for quite some time. Furthermore, it is not entirely clear that the parties’ dispute, as it currently stands, involves any factual issues for a jury to decide – the request of declaratory relief will not go beyond the terms of the contract itself unless there is ambiguity in the agreement (or unless the contract itself is found to point outside itself for the determination or application of its terms). Thus, AT&T’s jury demand machinations appear to be nothing more than an effort to forum shop. Nonetheless, as noted above, the question is not whether the case can be more timely adjudicated in state court than in the bankruptcy or district court; the question is simply whether it can be timely adjudicated in state court. AT&T established that it could be timely adjudicated in state court, and the court’s determination to that effect did not depend upon a finding that the case could not be timely adjudicated in the district court. And there is nothing in section 1334(c)(2) that permits a court to deny relief on grounds that the effort is motivated by a desire to forum shop. Indeed, the sad truth is that the structure of bankruptcy jurisdiction actually encourages and rewards forum shopping strategies. There is little this court can about that, other than to encourage Congress to consider the consequences that seem to flow from the current structure.Opinion, at p. 17. It seems unlikely that Congress will be moved to change section 1334(c)(2).In re Village at Camp Bowie I, LP, No. 10-45097 (Bankr. N.D. Tex. 8/4/11).Kirschner v. Agoglia, Adv. No. 07-3060 (Bankr. S.D. N.Y. 11/30/11).

Print PageA landmark case involving ethics and technology has reached its conclusion with an opinion from the Third Circuit Court of Appeals that an attorney cannot blindly rely on information provided by an automated system, especially when the accuracy of that information has been called into question. In re Taylor, 655 F.3d 274 (3rd Cir. 2011). I have previously written about the bankruptcy court decision here and the district court opinion here. The Court of Appeals set the tone for the opinion with its opening statement: This case is an unfortunate example of the ways in which overreliance on computerized processes in a high-volume practice, as well as a failure on the part of clients and lawyers alike to take responsibility for accurate knowledge of a case, can lead to attorney misconduct before a court. In re Taylor, at 277. What Happened The Taylor case illustrates the that can arise when a consumer debtor finds himself in a battle with a faceless computer. The Taylors and HSBC had a dispute over whether flood insurance was required on the Taylors’ property. As a result, the Taylors sent in their payments minus the disputed amount. HSBC placed the partial payments into suspense until a full payment was received an imposed late fees on the payment. When the Taylors filed for chapter 13 bankruptcy, HSBC sent a referral to the Udren Law Firm to file a motion for relief from automatic stay. The referral was processed through the NewTrak technology system. The Court of Appeals described the process as follows:HSBC does not deign to communicate directly with the firms it employs in its high-volume foreclosure work; rather, it uses a computerized system called NewTrak (provided by a third party, LPS) to assign individual firms discrete assignments and provide the limited data the system deems relevant to each assignment. The firms are selected and the instructions generated without any direct human involvement. The firms so chosen generally do not have the capacity to check the data (such as the amount of mortgage payment or time in arrears) provided to them by NewTrak and are not expected to communicate with other firms that may have done related work on the matter. Although it is technically possible for a firm hired through NewTrak to contact HSBC to discuss the matter on which it has been retained, it is clear from the record that this was discouraged and that some attorneys, including at least one Udren Firm attorney, did not believe it to be permitted. In re Taylor, at 278-79. A non-lawyer employee with the Udren Firm used the information provided by NewTrak to prepare the motion for relief from automatic stay. A managing attorney at the Udren Firm reviewed the motion and authorized it to be filed under her electronic signature. The motion recited that the Debtors had not made payments for three post-petition months but added that there was a suspense balance of $1,040. The motion asserted that there was a total arrearage balance of $4,367. The motion listed a different payment amount than the amount listed in the proof of claim filed by a different firm on behalf of HSBC. Finally, the motion asserted that the Debtors had no equity in their property. The Debtors responded to the motion and attached copies of canceled checks payable to HSBC. The Debtors also objected to the proof of claim filed by HSBC. HSBC’s counsel responded to the claims objection asserting that all amounts in the proof of claim were accurate, even though they conflicted with the numbers contained in the motion for relief from stay. The Court had this to say about the firm’s due diligence in filing the motion: Doyle did nothing to verify the information in the motion for relief from stay besides check it against "screen prints" of the NewTrak information. She did not even access NewTrak herself. In effect, she simply proofread the document. It does not appear that NewTrak provided the Udren Firm with any information concerning the Taylors' equity in their home, so Doyle could not have verified her statement in the motion concerning the lack of equity in any way, even against a "screen print." In re Taylor, at 279. At the hearing, a young attorney from the Udren Firm acknowledged that the Debtors had made post-petition payments, but sought to proceed with the motion anyway because the Debtors had failed to respond to requests for admission. The bankruptcy court denied the request to enter the RF As as evidence, noting that the firm "closed their eyes to the fact that there was evidence that . . . conflicted with the very admissions that they asked me [to deem admitted]. They . . . had that evidence [that the assertions in its motion were not accurate] in [their] possession and [they] went ahead like [they] never saw it." (App. 108-109.) The court noted: Maybe they have somebody there churning out these motions that doesn't talk to the people that--you know, you never see the records, do you? Somebody sends it to you that sent it from somebody else. In re Taylor, at 281. The Court directed the Udren Firm to obtain a payment history from HSBC so that the amounts owed could be determined. However, at a subsequent hearing, the young attorney informed the Court that he had submitted the request through NewTrak but had not received a reply. He also informed the Court that he was not allowed to communicate directly with his client. The understandably perturbed Court issued an order for the firm and three of its attorneys to appear and respond to the Court’s concerns about how the case had been handled. After four hearings, the Court concluded that the young associate, the managing attorney who signed the pleadings, the head of the firm, the firm itself and HSBC had all violated Rule 9011. The Court imposed creative, but largely symbolic sanctions. As explained by the Court of Appeals: Because of his inexperience, the court did not sanction Fitzgibbon. However, it required Doyle to take 3 CLE credits in professional responsibility; Udren himself to be trained in the use of NewTrak and to spend a day observing his employees handling NewTrak; and both Doyle and Udren to conduct a training session for the firm's relevant lawyers in the requirements of Rule 9011 and procedures for escalating inquiries on NewTrak. The court also required HSBC to send a copy of its opinion to all the law firms it uses in bankruptcy proceedings, along with a letter explaining that direct contact with HSBC concerning matters relating to HSBC's case was permissible. In re Taylor at 281-82. The sanctions were aimed more at shaming the firm than financially penalizing it. Ordering the head of the firm to learn how NewTrak worked sent a symbolic message that he was out of touch with how his own law firm worked. Requiring Doyle, the bankruptcy managing attorney, the obtain three hours of CLE in professional responsibility sent the message that she needed this education. Requiring Udren and Doyle to conduct a training session on the requirements of Rule 9011 and how NewTrak worked was intended to correct their behavior. Finally, the requirement that HSBC send a copy of the opinion to all of its attorneys was meant to remedy the perceived view that such contact was forbidden. The District Court reversed all of the sanctions, even those against HSBC, which had not appealed. The District Court found that Debtor’s counsel was equally at fault, that the Bankruptcy Court seemed more interested in sending a message to the bar in general than addressing the failings of counsel in the specific case and that Udren could not be sanctioned under Rule 9011 because he had not signed any pleadings. The U.S. Trustee appealed to the Third Circuit. The Third Circuit Opinion The Third Circuit affirmed the District Court’s ruling that Udren, as shareholder of the firm, could not be sanctioned since he did not sign any pleadings. However, it reversed the remainder of the District Court ruling and reinstated the sanctions against Doyle, the Udren Firm and HSBC. In doing so, it provided a valuable guide to the requirements of Rule 9011 in the age of technology. What’s a Reasonable Attorney to Do? The Court of Appeals pointed out that merely making a false statement is not enough to invoke Rule 9011. The relevant inquiry is what the attorney could reasonably have believed. The concern of Rule 9011 is not the truth or falsity of the representation in itself, but rather whether the party making the representation reasonably believed it at the time to have evidentiary support. In determining whether a party has violated Rule 9011, the court need not find that a party who makes a false representation to the court acted in bad faith. "The imposition of Rule 11 sanctions . . . requires only a showing of objectively unreasonable conduct." In re Taylor, at 282. The Court of Appeals identified four statements that were either false or misleading: In this opinion, we focus on several statements by appellees: (1) in the motion for relief from stay, the statements suggesting that the Taylors had failed to make payments on their mortgage since the filing of their bankruptcy petition and the identification of the months in which and the amount by which they were supposedly delinquent; (2) in the motion for relief from stay, the statement that the Taylors had no or inconsequential equity in the property; (3) in the response to the claim objection, the statement that the figures in the proof of claim were accurate; and, (4) at the first hearing, the attempt to have the requests for admission concerning the lack of mortgage payments deemed admitted. As discussed above, all of these statements involved false or misleading representations to the court. In re Taylor, at 283. It is not a good sign when an opinion identifies multiple cases of false or misleading statements to the court. The Court of Appeals went on to find that the attorneys had not acted reasonably.We must, therefore, determine the reasonableness of the appellees' inquiry before they made their false representations. Reasonableness has been defined as "an objective knowledge or belief at the time of the filing of a challenged paper that the claim was well-grounded in law and fact." (citation omitted). The requirement of reasonable inquiry protects not merely the court and adverse parties, but also the client. The client is not expected to know the technical details of the law and ought to be able to rely on his attorney to elicit from him the information necessary to handle his case in the most effective, yet legally appropriate, manner. ***Central to this case, then, is the degree to which an attorney may reasonably rely on representations from her client. An attorney certainly "is not always foreclosed from relying on information from other persons." (citation omitted). . In making statements to the court, lawyers constantly and appropriately rely on information provided by their clients, especially when the facts are contained in a client's computerized records. It is difficult to imagine how attorneys might function were they required to conduct an independent investigation of every factual representation made by a client before it could be included in a court filing. While Rule 9011 "does not recognize a 'pure heart and empty head' defense," (citation omitted),, a lawyer need not routinely assume the duplicity or gross incompetence of her client in order to meet the requirements of Rule 9011. It is therefore usually reasonable for a lawyer to rely on information provided by a client, especially where that information is superficially plausible and the client provides its own records which appear to confirm the information. That is, an attorney must, in her independent professional judgment, make a reasonable effort to determine what facts are likely to be relevant to a particular court filing and to seek those facts from the client. She cannot simply settle for the information her client determines in advance-- by means of an automated system, no less--that she should be provided with. *** More generally, a reasonable attorney would not file a motion for relief from stay for cause without inquiring of the client whether it had any information relevant to the alleged cause, that is, the debtor's failure to make payments. Had Doyle made even that most minimal of inquiries, HSBC presumably would have provided her with the information in its files concerning the flood insurance dispute, and Doyle could have included that information in her motion for relief from stay--or, perhaps, advised the client that seeking such a motion would be inappropriate under the circumstances. With respect to the Taylors' case in particular, Doyle ignored clear warning signs as to the accuracy of the data that she did receive. In responding to the motion for relief from stay, the Taylors submitted documentation indicating that they had already made at least partial payments for some of the months in question. In objecting to the proof of claim, the Taylors pointed out the inaccuracy of the mortgage payment listed and explained the circumstances surrounding the flood insurance dispute. Although Doyle certainly was not obliged to accept the Taylors' claims at face value, they indisputably put her on notice that the matter was not as simple as it might have appeared from the NewTrak file. At that point, any reasonable attorney would have sought clarification and further documentation from her client, in order to correct any prior inadvertent misstatements to the court and to avoid any further errors. Instead, Doyle mechanically affirmed facts (the monthly mortgage payment) that her own prior filing with the court had already contradicted. Doyle's reliance on HSBC was particularly problematic because she was not, in fact, relying directly on HSBC. Instead, she relied on a computer system run by a third-party vendor. She did not know where the data provided by NewTrak came from. She had no capacity to check the data against the original documents if any of it seemed implausible. And she effectively could not question the data with HSBC. In her relationship with HSBC, Doyle essentially abdicated her professional judgment to a black box. (emphasis added). In re Taylor, at 284-85. Kudos to the U.S. Trustee As a preliminary matter, it is important to recognize the role played by the U.S. Trustee. While the Debtor’s counsel at least raised the issues which allowed the Court to conduct its investigation, the Court of Appeals indicated that Debtor’s counsel was not much better than the Udren firm: Taylor's counsel was also ultimately sanctioned and removed from the case. Counsel did not perform competently, as is evidenced by the Taylors' failure to contest HSBC's RF As. She also made a number of inaccurate statements in her representations to the court. However, it is clear that her conduct did not induce the misrepresentations by HSBC or its attorneys. As the bankruptcy court correctly noted, "the process employed by a mortgagee and its counsel must be fair and transparent without regard to the quality of debtor's counsel since many debtors are unrepresented and cannot rely on counsel to protect them." In re Taylor, at 282, fn. 10. As a result, it is important that the U.S. Trustee’s Office stepped in to protect the integrity of the system. This author has sometimes been critical of the U.S. Trustee’s Office. However, in this case, they did exactly what they should have done—to represent the broader interest of integrity in bankruptcy in a situation where debtor’s counsel was either unable to do so (in the case of Debtor’s initial counsel) or had no financial incentive to do so (presumably with respect to Debtor’s substitute counsel). What It Means The meaning of the opinion is that attorneys are professionals and cannot “abdicate (their) professional judgment to a black box.” In age of massive defaults, creditors cannot be faulted for wanting to minimize their costs. However, the attorney is more than an automaton communicating the demands of the client. If attorneys were mere mouthpieces for their clients, there would be no need for them. Instead, the client could simply generate form pleadings using an automated system. Attorneys exist to exercise professional judgment on behalf of their clients. While attorneys can and must be advocates for their clients, Rule 9011 imposes a duty to review the information provided by the client and determine whether it appears to be reasonable. More importantly, once information which once appeared reasonable is placed into doubt, the attorney has a duty to communicate with the client and determine which facts can reasonably be supported. I believe that attorneys should be skilled craftsman rather than assembly line workers. In this case, a $540 dispute over flood insurance was magnified by a factor of nearly ten times. While it might have been reasonable to rely on the initial information provided by the client through NewTrak, this certainly became unreasonable when the Debtor provided canceled checks showing that payments which the computerized record said did not exist had been made. The significance of Taylor is that for lawyers to continue to have meaning, they must bring something to court above the mere repetition of what their client told them. The Taylor case represented an existential threat to the continuing relevance of attorneys. If the attorney does nothing more than repeat information provided by the client through an automated system, then there is no justification for requiring the additional cost represented by the participation of an attorney. Fortunately, the Third Circuit Court of Appeals provided a justification for the continued involvement of skilled counsel and gave support to the many creditors’ counsel who perform their duties with judgment and skill. The Final Word We appreciate that the use of technology can save both litigants and attorneys time and money, and we do not, of course, mean to suggest that the use of databases or even certain automated communications between counsel and client are presumptively unreasonable. However, Rule 11 requires more than a rubber-stamping of the results of an automated process by a person who happens to be a lawyer. Where a lawyer systematically fails to take any responsibility for seeking adequate information from her client, makes representations without any factual basis because they are included in a "form pleading" she has been trained to fill out, and ignores obvious indications that her information may be incorrect, she cannot be said to have made reasonable inquiry. Therefore, we find that the bankruptcy court did not abuse its discretion in imposing sanctions on Doyle or the Udren Firm itself. However, it did abuse its discretion in imposing sanctions on Udren individually. In re Taylor, at 286.

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