After fifteen years of litigation, two trips to the Supreme Court and the deaths of both of the original antagonists, the Supreme Court decided Stern v. Marshall, ___ U.S. ___ (2011). While Vickie Lynn Marshall, better known as Anna Nicole Smith, made a splash during her lifetime as a Playboy Playmate who married an aging oil billionaire, her posthumous legacy is the most important Supreme Court case on bankruptcy court jurisdiction since Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 459 U.S. 813 (1982). It may also sow as much confusion as the latter case. You can find the opinion here. The issue in Marshall was straightforward: does 28 U.S.C. §157(b)(2)(C) mean what it says, namely that counterclaims to proofs of claim are core proceedings, and if so, is that grant of jurisdiction constitutional? In a 5-4 decision authored by Chief Justice Roberts, the Court concluded that §157(b)(2)(C) did authorize the bankruptcy court to determine a counterclaim to a proof of claim as a core proceeding, but that the statutory grant was unconstitutional. In doing so, the Chief laid out a manifesto on the meaning of Article III. The Executive Summary While the three opinions in the case make for compelling reading, the following two quotes from the beginning of the opinion carry the gist of it: Chief Justice Roberts opened his opinion with a reference to Dickens’ Bleak House: This “suit has, in course of time, become so complicated, that . . . no two . . . lawyers can talk about it for five minutes, without coming to a total disagreement as to all the premises. Innumerable children have been born into the cause: innumerable young people have married into it;” and, sadly, the original parties “have died out of it.” A “long procession of [judges] has come in and gone out” during that time, and still the suit “drags its weary length before the Court.” Those words were not written about this case, see C. Dickens, Bleak House, in 1 Works of Charles Dickens 4–5 (1891), but they could have been. This is the second time we have had occasion to weigh in on this long-running dispute between Vickie Lynn Marshall and E. Pierce Marshall over the fortune of J. Howard Marshall II, a man believed to have been one of the richest people in Texas. *** Although the history of this litigation is complicated, its resolution ultimately turns on very basic principles. Article III, §1, of the Constitution commands that “[t]he judicial Power of the United States, shall be vested in one supreme Court, and in such inferior Courts as the Congress may from time to time ordain and establish.” That Article further provides that the judges of those courts shall hold their offices during good behavior, without diminution of salary. Ibid. Those requirements of Article III were not honored here. The Bankruptcy Court in this case exercised the judicial power of the United States by entering final judgment on a common law tort claim, even though the judges of such courts enjoy neither tenure during good behavior nor salary protection. We conclude that, although the Bankruptcy Court had the statutory authority to enter judgment on Vickie’s counterclaim, it lacked the constitutional authority to do so. Opinion, pp. 1-2. For those who want the nitty, gritty details, here are several thousand more words about the opinion. A Billionaire’s Death Paves the Way for the Destruction of Many Trees On June 27, 1994, Vickie Lynn Smith married Howard Marshall. She was 26 and had been Playboy’s Playmate of the Year the prior year. He was 89. Howard passed away thirteen months later on August 4, 1995. However, the parties did not wait for his death to begin their legal battle. In April 1995, Vickie filed suit in Probate Court in Texas seeking to invalidate Howard’s living trust and asserting that Howard son, Pierce, had tortuously interfered with her property rights in Howard’s assets. Pierce then filed suit against Vickie and two of her lawyers in Texas state court asserting that they had defamed him. In January 1996, Vickie did what any destitute ex-stripper would have done and filed for chapter 11 relief in California. Pierce filed a dischargeability adversary and a proof of claim against Vickie. Vickie counterclaimed for tortuous interference with an inter vivos gift, contending that Pierce had forged Howard’s name to a living trust and destroyed or suppressed a trust that Howard had asked his lawyers to draw up for Vickie’s benefit. Things did not go well for Pierce in bankruptcy court. The Bankruptcy Court found that he had engaged in “massive discovery abuse.” Pierce then asked the District Court to withdraw the reference. The District Court initially indicated it would grant the motion but then reconsidered based on the fact that Pierce had voluntarily chosen the Bankruptcy Court forum. The Bankruptcy Court commenced a trial on the adversary proceeding on October 25, 2009. It rendered a final judgment awarding Vickie $447 million on December 29, 2000. Meanwhile, back in Texas, Vickie filed a parallel claim against Pierce in January 2000. Pierce defended asserting that there was not an agreement to be tortuously interfered with. After recovering a judgment against Pierce in Bankruptcy Court, Vickie non-suited her claims against Pierce in Texas Probate Court. The Bankruptcy Court initially ordered Pierce not to proceed, but changed its mind after Pierce represented that there was no risk of inconsistent judgments. After a five month trial, the jury in the Probate Court returned a verdict adverse to Vickie on March 7, 2001. Among other things, the jury found that Howard had not agreed to make a gift to Vickie. The Probate Court entered a final judgment on December 27, 2001. The two trials were a contrast in the evidence considered. The Bankruptcy Court did not allow Pierce to present any evidence because of his discovery abuse. On the other hand, the Probate Court heard 40 witnesses, including six days of testimony from Vickie Lynn and resulted in a jury verdict. Up to the Supreme Court Round One Pierce appealed the Bankruptcy Court judgment, contending among other things that the dispute was a non-core proceeding which must be reviewed de novo by the District Court. The District Court agreed that the claim was non-core and conducted additional hearings. It entered a judgment which affirmed the Bankruptcy Court’s findings on liability but reduced the damage award. This judgment was entered on March 7, 2002. Pierce appealed to the Ninth Circuit which vacated the judgment, finding that the “probate exception” deprived the Bankruptcy Court of jurisdiction. Marshall v. Marshall, 392 F.3d 1118 (9th Cir. 2004). The Supreme Court disagreed and remanded the case to the Ninth Circuit. Marshall v. Marshall, 547 U.S. 293 (2006). Shortly after the remand, both Pierce and Vickie passed away within a few months of each other. This left the contest over the assets of Howard as a battle between the estates of Pierce and Vickie. The Ninth Circuit Tangles With Jurisdiction Again Having gotten the jurisdiction issue wrong on the “probate exception When the case went back to the Ninth Circuit, it reached the same result although for different reasons. Stern v. Marshall, 600 F.3d 1037 (9th Cir. 2010). (The caption of the case changed because Howard K. Stern was the executor of Vickie’s estate. However, it is Howard Stern the lawyer, rather than Howard Stern the radio shock jock). The Ninth Circuit basically held that 28 U.S.C. §157(b)(2)(C) did not mean what it said. While 28 U.S.C. §157(b)(2)(C) expressly provides that counterclaims to proofs of claim constitute core proceedings, the Ninth Circuit held that it only extended to counterclaims to the extent necessary to determine the proof of claim, but not to an affirmative recovery. Alternatively, it held that if §157(b)(2)(C) did extend to counterclaims in their entirety, that it was unconstitutional. This set the stage for a second trip to the Supreme Court. Bankruptcy Jurisdiction 101 As an introduction, Chief Justice Roberts summarized eight principles of Bankruptcy Court jurisdiction: * District Judges have “original and exclusive jurisdiction of all cases under title 11.” * Bankruptcy proceedings fall into three categories: those that arise under title 11, that that arise in a case under title 11 and those that are related to a case under title 11. * District Courts may refer “any or all such proceedings to the bankruptcy judges of their district” and may withdraw the reference “for cause shown.” * Since 1984, Bankruptcy Judges “have been appointed to 14-year terms by the courts of appeals for the circuits in which their district is located.” * Bankruptcy Judges may enter final orders in “all core proceedings arising under title 11, or arising in a case under title 11.” * Core proceedings include but are not limited to sixteen enumerated categories, including “counterclaims by [a debtor’s] estate against persons filing claims against the estate.” * If the Bankruptcy Court can enter a final judgment, an aggrieved party has a right of appeal to the U.S. District Court. * If a matter is not a core proceeding, then the Bankruptcy Court must submit proposed findings of fact and conclusions of law to the District Court for de novo review unless the parties consent to entry of a final judgment by the Bankruptcy Court. Opinion, pp. 7-8. Section 157(b)(2)(C) Means What It Says Chief Justice Roberts found that Vickie’s counterclaim against Pierce was a core proceeding “under the plain text of §157(b)(2)(C).” This was a rebuke to the Ninth Circuit which had adopted the rather magical reasoning that a counterclaim was only a core proceeding to the extent that it reduced a claim against the estate, but not to the extent that it granted affirmative recovery. The Chief then analyzed what the phrase “all core proceedings arising under title 11, or arising in a case under title 11” meant. This phrase is important because it identifies the types of proceedings that Bankruptcy Judges can enter final orders in. Pierce had suggested that the phrase was ambiguous and that there could be some core proceedings which neither arose under title 11 or in a case under title 11. The Court acknowledged that the phrase was ambiguous but concluded that “core proceedings are those that arise in a bankruptcy case or under Title 11.” Opinion, p. 10. The Court also rejected the argument that core proceedings that did not arise under Title 11 nor in a Title 11 case should be “related to” proceedings. Pierce argues that we should treat core matters that arise neither under Title 11 nor in a Title 11 case as proceedings “related to” a Title 11 case. Brief for Respondent 60 (internal quotation marks omitted). We think that a contradiction in terms. It does not make sense to describe a “core” bankruptcy proceeding as merely “related to” the bankruptcy case; oxymoron is not a typical feature of congressional drafting. Opinion, p. 10. Concluding its discussion of statutory interpretation, Chief Justice Roberts stated, “We agree with Vickie that §157(b)(2)(C) permits the bankruptcy court to enter a final judgment on her tortious interference counterclaim.” Opinion, p. 11. The Court also shot down Pierce’s argument that the Bankruptcy Court lacked jurisdiction on Vickie’s defamation claim because it was a “personal injury tort claim.” Under §157(b)(5), “The District Court shall order that personal injury tort and wrongful death claims shall be tried in the district court in which the bankruptcy case is pending, or in the district court in the district in which the claim arose.” Pierce contended that this meant that the Bankruptcy Court lacked jurisdiction to hear these claims. Vickie contended that defamation was not a “personal injury tort” and that the statute was not jurisdictional. The Court declined the invitation to define the term “personal injury tort” and instead found that the section was not jurisdictional and could be waived. When Pierce waited 27 months to file his motion to withdraw reference, he waived his ability to seek a trial in the district court. All About Article III If the Opinion had stopped here, there would have been much rejoicing on Vickie’s side. However, it did not. “Although we conclude that§157(b)(2)(C) permits the Bankruptcy Court to enter final judgment on Vickie’s counterclaim, Article III of the Constitution does not.” Article III of the Constitution vests the judicial power of the United States in the supreme court and “such inferior Courts as the Congress may from time to time establish.” While I am sure that District Court Judges don’t like to think of themselves as “inferior Courts,” at least the Constitution guaranties them life tenure and protection against reduction in pay. Bankruptcy Judges, being appointed under Article I of the Constitution, do not enjoy these protections. The Chief described Article III as “an inseparable element of the constitutional system of checks and balances that both defines the power and protects the independence of the Judicial Branch.” Opinion, p. 16. It also “protects liberty.” Opinion, p. 17. In the Declaration of Independence , one of the grievances of the colonists was that King George “made Judges dependent on his Will alone, for the tenure of their offices and the amount and payment of their salaries.” The Framers undertook in Article III to protect citizens subject to the judicial power of the new Federal Government from a repeat of those abuses. By appointing judges to serve without term limits, and restricting the ability of the other branches to remove judges or diminish their salaries, the Framers sought to ensure that each judicial decision would be rendered, not with an eye toward currying favor with Congress or the Executive, but rather with the “[c]lear heads . . . and honest hearts” deemed “essential to good judges.” 1 Works of James Wilson 363 (J. Andrews ed. 1896). Opinion, p. 18. Thus, the Court’s consideration of the constitutionality of §157(b)(2)(C) is not just about which person in a black robe will decide a particular case or which estate of a dead person will receive a lot of money, but rather, it is a mighty bulwark protecting us against a new King George and his corrupt judges. Public Rights and Private Lawsuits While Article III jurisdiction is important in preventing tyranny, there is an exception for “public rights.” The plurality in Northern Pipeline recognized that there was a category of cases involving “public rights” that Congress could constitutionally assign to “legislative” courts for resolution. That opinion concluded that this “public rights” exception extended “only to matters arising between” individuals and the Government “in connection with the performance of the constitutional functions of the executive or legislative departments . . . that historically could have been determined exclusively by those” branches. Id., at 67–68 (internal quotation marks omitted). A full majority of the Court, while not agreeing on the scope of the exception, concluded that the doctrine did not encompass adjudication of the state law claim at issue in that case. Opinion, p. 19. After Northern Pipeline, Congress tried again, creating bankruptcy courts appointed by the Court of Appeals and allowing them to enter final judgments in “core” proceedings only. Judgments in core proceedings were subject to only traditional appellate review with deference to judicial fact finding. The Chief Justice then found that the Vickie Lynn Marshall case was just like the Northern Pipeline case in that the Bankruptcy Court in this case exercise the “judicial Power of the United States” in purporting to resolve and enter final judgment on a state common law claim, just as the court did in Northern Pipeline. No “public right” exception excuses the failure to comply with Article III in doing so, any more than in Northern Pipeline. Opinion, p. 21. The Court found that “Vickie’s claim is a state law action independent of the federal bankruptcy law and not necessarily resolvable by a ruling on the creditor’s proof of claim in bankruptcy.” Id. . So, what is a public right? We know that it is not a suit between two creditors, since that was the case in Northern Pipeline. We know that it is not a state law counterclaim by a debtor against a person filing a claim against the estate, since that is the holding in this case. The public rights doctrine goes back to Murray’s Lessee v. Hoboken Land & Improvement Co., 18 How. 272 (1856). Here is how Chief Justice Roberts described the decision: “To avoid misconstruction upon so grave a subject,” the Court laid out the principles guiding its analysis. Id., at 284. It confirmed that Congress cannot “withdraw from judicial cognizance any matter which, from its nature, is the subject of a suit at the common law, or in equity, or admiralty.” Ibid. The Court also recognized that “[a]t the same time there are matters, involving public rights, which may be presented in such form that the judicial power is capable of acting on them, and which are susceptible of judicial determination, but which congress may or may not bring within the cognizance of the courts of the United States, as it may deem proper.” Ibid. Opinion, p. 22. Thus, the distinction was between public rights defined as those arising “between the Government and persons subject to its authority in connection with the performance of the constitutional functions of the executive or legislative departments” and private rights which are the liability of one individual to another under the law as defined. Opinion, p. 23. While it is not necessary for the government to be a party to an action to invoke the public rights doctrine, the Court has continued . . . to limit the exception to cases in which the claim at issue derives from a federal regulatory scheme, or in which resolution of the claim by an expert government agency is deemed essential to a limited regulatory objective within the agency’s authority. Opinion, p. 25. While the discussion thus far was fairly general, the Court brought it back to the bankruptcy realm in discussing Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989). That case involved whether a defendant who had not filed a proof of claim was entitled to a jury trial in a fraudulent conveyance case. In Granfinanciera we rejected a bankruptcy trustee’s argument that a fraudulent conveyance action filed on behalf of a bankruptcy estate against a noncreditor in a bankruptcy proceeding fell within the “public rights” exception. We explained that, “[i]f a statutory right is not closely intertwined with a federal regulatory program Congress has power to enact, and if that right neither belongs to nor exists against the Federal Government, then it must be adjudicated by an Article III court.” Id., at 54–55. We reasoned that fraudulent conveyance suits were “quintessentially suits at common law that more nearly resemble state law contract claims brought by a bankrupt corporation to augment the bankruptcy estate than they do creditors’ hierarchically ordered claims to a pro rata share of the bankruptcy res.” Id., at 56. As a consequence, we concluded that fraudulent conveyance actions were “more accurately characterized as a private rather than a public right as we have used those terms in our Article III decisions.” Id., at 55.7 Opinion, at 26-27. Applying the Law to This Case The Court clicked off the following reasons that Vickie Lynn’s counterclaim did not fall within the public rights exception: * It was not a claim which could be pursued only by grace of the other branches of government. * It was not a matter that historically could be determined only by the other branches. * It did not flow from a federal regulatory scheme. * It was not “completely dependent upon” adjudication of a claim created by federal law. * It was a claim under state common law between two private parties. The Court made an interesting observation about why consent to trial in the Article I court: Pierce did not truly consent to resolution of Vickie’s claim in the bankruptcy court proceedings. He had nowhere else to go if he wished to recover from Vickie’s estate. Opinion at 27. In Granfinanciera, the Supreme Court found that the defendant was entitled to a jury trial because he had not consented to the Bankruptcy Court’s jurisdiction by filing a proof of claim. Here, however, the Supreme Court is saying that even filing a claim does not constitute consent. More on this below. Finally, this was not a case involving an expert and inexpensive method for dealing with a class of questions of fact which are particularly suited to examination and determination by an administrative agency specially assigned to that task. Opinion, p. 28. The “experts” in the federal system at resolving common law counterclaims such as Vickie’s are the Article III courts, and it is with those courts that her claim must stay. Id. In summing up his public rights discussion, the Chief Justice stated: What is plain here is that this case involves the most prototypical exercise of judicial power: the entry of a final, binding judgment by a court with broad substantive jurisdiction, on a common law cause of action, when the action neither derives from nor depends upon any agency regulatory regime. If such an exercise of judicial power may nonetheless be taken from the Article III Judiciary simply by deeming it part of some amorphous “public right,” then Article III would be transformed from the guardian of individual liberty and separation of powers we have long recognized into mere wishful thinking. Opinion, p. 29. I think what the court was trying to say here was, “You don’t have jurisdiction. We really, really mean it.” No Proof of Claim Waiver In Katchen v. Landy, 382 U.S. 323 (1966) and Langenkamp v. Culp, 498 U.S. 42 (1990), the Supreme Court had held that a creditor who filed a proof of claim could be sued to recover a preference. The Court distinguished these cases on two grounds. First, the Court argued that the preference could be a ground for disallowing the claim, so that the preference claim was tied into allowance of the claim. Second, it found that the preference claim was created by the Bankruptcy Code and was part of the process of determining an equitable allocation of the assets of the debtor. What’s the Big Deal? Responding to concerns that its decision would radically change the workload of the Courts, Chief Justice Roberts stated: We do not think the removal of counterclaims such as Vickie’s from core bankruptcy jurisdiction meaningfully changes the division of labor in the current statute; we agree with the United States that the question presented here is a “narrow” one. Brief for United States as Amicus Curiae 23. *** Article III of the Constitution provides that the judicial power of the United States may be vested only in courts whose judges enjoy the protections set forth in that Article. We conclude today that Congress, in one isolated respect, exceeded that limitation in the Bankruptcy Act of 1984. The Bankruptcy Court below lacked the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor’s proof of claim. Accordingly, the judgment of the Court of Appeals is affirmed. Opinion, pp. 37, 38. Justice Scalia Would Throw the Whole System Out In a brief concurrence, Justice Scalia reaffirmed his prior concurrence in Granfinanciera that at a minimum, a public rights case must arise between the government and others, a conclusion that would render most bankruptcy court jurisdiction unconstitutional. He mused that it could possibly be constitutional for bankruptcy judges to adjudicate claims against the estate, but demurred that “the subject has not been briefed, and so I state no position on the matter.” The Dissent In a vigorous dissent, Justice Breyer, joined by Justices Ginsburg, Sotomayor and Kagan, argued that counterclaim jurisdiction is constitutional. The dissent placed a different emphasis upon the Court’s prior precedents to arrive at the opposite conclusion. In particular, the dissent took the majority to task for relying so heavily on the plurality opinion in Northern Pipeline instead of the more recent decisions in Thomas v. Union Carbide Agricultural Products Co., 473 U.S. 568 (1985) and Commodity Futures Trading Commission v. Schor, 478 U.S. 833 (1986). The dissent also questioned the majority’s view that the opinion does not change all that much. The majority predicts that as a “practical matter” today’s decision “does not change all that much.” Ante, at 36–37. But I doubt that is so. Consider a typical case: A tenant files for bankruptcy. The landlord files a claim for unpaid rent. The tenant asserts a counterclaim for damages suffered by the landlord’s (1) failing to fulfill his obligations as lessor, and (2) improperly recovering possession of the premises by misrepresenting the facts in housing court. (These are close to the facts presented in In re Beugen, 81 B. R. 994 (Bkrtcy. Ct. ND Cal. 1988).) This state-law counterclaim does not “ste[m] from the bankruptcy itself,” ante, at 34, it would not “necessarily be resolved in the claims allowance process,” ibid., and it would require the debtor to prove damages suffered by the lessor’s failures, the extent to which the landlord’s representations to the housing court were untrue, and damages suffered by improper recovery of possession of the premises, cf. ante, at 33-33. Thus, under the majority’s holding, the federal district judge, not the bankruptcy judge, would have to hear and resolve the counterclaim. Why is that a problem? Because these types of disputes arise in bankruptcy court with some frequency. See, e.g., In re CBI Holding Co., 529 F. 3d 432 (CA2 2008) (statelaw claims and counterclaims); In re Winstar Communications, Inc., 348 B. R. 234 (Bkrtcy. Ct. Del. 2005) (same); In re Ascher, 128 B. R. 639 (Bkrtcy. Ct. ND Ill. 1991) (same); In re Sun West Distributors, Inc., 69 B. R. 861 (Bkrtcy. Ct. SD Cal. 1987) (same). Because the volume of bankruptcy cases is staggering, involving almost 1.6 million filings last year, compared to a federal district court docket of around 280,000 civil cases and 78,000 criminal cases. Administrative Office of the United States Courts, J. Duff, Judicial Business of the United States Courts: Annual Report of the Director 14 (2010). Because unlike the “related” non-core state law claims that bankruptcy courts must abstain from hearing, see ante, at 36, compulsory counterclaims involve the same factual disputes as the claims that may be finally adjudicated by the bankruptcy courts. Because under these circumstances, a constitutionally required game of jurisdictional ping-pong between courts would lead to inefficiency, increased cost, delay, and needless additional suffering among those faced with bankruptcy. Dissent, pp. 16-17. What Does It All Mean? The difficulty with the Stern opinion is that it is a narrow opinion with a very broad rationale. While the holding merely invalidates 28 U.S.C. §157(b)(2)(C), it does so with a broad reading of the importance of the Article III judiciary and a narrow reading of the public rights exception. Lying underneath the opinion, there is a palpable feeling that Congress has gone too far in giving power to non-Article III adjuncts. To paraphrase a song, the majority’s lips say no, no, no (practical effect), but their eyes say yes, yes, yes. Here are a few conclusions that can be drawn: 1. The opinion will have its greatest impact on adversary proceedings. Contested matters, such as plans of reorganization and motions to lift stay would not be affected. 2. State law causes of action against non-debtor parties are non-core proceedings even if the other party has filed a proof of claim. 3. Fraudulent conveyance actions, even those arising under Section 548, may prove to be non-core. 4. Preference actions remain as core proceedings. 5. Even Justice Scalia would probably allow the Bankruptcy Court to determine an objection to claim on a good day. For more opinions about what all this means, tune in to the State Bar of Texas’s Webinar, Stern v. Marshall: Handling State Claims After the Supremes Make It All Clear on July 12, 2011 at 10:00 a.m. Speaking will be Bankruptcy Judge Harlin “Cooter” Hale, former judge and law professor Glen Ayers and yours truly.

The Supreme Court's decision in Schwab v. Reilly, 130 S.Ct. 2652 (2010) last term provoked a lot of concern about the finality of exemptions. Under Taylor v. Freeland & Kronz, 503 U.S. 638 (1992), a trustee's failure to timely object to an exemption, even a frivolous one, meant that the asset left the estate. However, in Schwab v. Reilly, the Supreme Court held that an exemption of a specific dollar amount in value of property exempted only the value claimed but not the asset itself, allowing a trustee to sell the asset if the value ultimately exceeded the amount of the debtor's exemption. I have written about Schwab v. Reilly and its consequences here and here. Now Texas Bankruptcy Judges are struggling with whether Schwab permits, or even dictates, that a debtor may claim 100% of fair market value, forcing the trustee to object within 30 days. Judge Michael Lynn and Judge Craig Gargotta have held that claiming 100% of FMV is permissible, In re Moore, 442 B.R. 865 (Bankr. N.D. Tex. 2010), In re Dominguez-Ortega, No. 10-61416 (Bankr. W.D. Tex. 5/17/11), while Judge Robert Jones has ruled the opposite way, In re Salazar, 2011 Bankr. LEXIS 1117 (Bankr. N.D. Tex. 2011). Because Judge Gargotta's opinion is the latest word, I will start with his ruling in this post. The transcript is not yet available online. I will be happy to provide a copy to anyone who requests it. The Permissible Approach In the Dominguez-Ortega case, the court was faced with objections filed by the chapter 7 and chapter 13 trustees in six cases in which the debtors claimed 100% of FMV. Relying upon the Moore decision and scholarly articles from the American Bankruptcy Institute, Judge Gargotta denied the objections. He stated: As everyone knows, in Schwab v. Reilly, the Supreme Court unequivocally says at least two things--it may say other things in addition to that. One, that one hundred percent of fair market value on Schedule C is permissible and correct. And second, that the trustee may not be bound by the 30 day objection period under Federal Rule of Bankruptcy Procedure 4003(b). Transcript, pp. 6-7. He went on to adopt the reasoning of Judge Lynn of the Northern District. He stated: (T)he judges in the (Fort Worth) division had the following observations. First of all, fair market value of one hundred percent is the correct methodology. It puts the trustee on notice to object within 30 days. Then there can be an evidentiary hearing . . . regarding whether or not that's a fair objection. For purposes of the proceedings here in Waco, I agree with that. I think that's exactly what the Supreme Court requires. Second as to the discussion that we had on the record day about whether or not debtors may use a numeric amount for the interest they claim as an aid, they are free to do that, but they are not required to do that. And I will leave it up to them as to whether or not they want to do that. Transcript, pp. 8-9. Judge Gargotta acknowledged that his ruling would result in more work for the trustees and the court, but stated that his mandate was to follow the Supreme Court. Now, what is the consequence to the Court? Well, the consequence to the Court is, in those situations where the trustee thinks that . . . when (the debtors) use the designation of one hundred percent of fair market value, that it may exceed the amount of the interest in an asset, the trustee is going to have to object, and I'll have to conduct a hearing on it and we'll . . . figure out how that plays out. I recognize that, ultimately, it may increase the litigation in this Court. But, by the same token, I'm of the opinion, and I think it's unequivocally clear that what debtors are doing in that consequence is precisely what the Supreme Court ordered, and I'm not going to alter their methodology in terms of claiming it. I apologize to both Mr. Hendren and Mr. Studensky if it increases their workload. That is not my intent. Rather, I am complying with what the Supreme Court commands. Transcript, p. 10. The Impermissible Approach Writing in Salazar, Judge Robert Jones agreed that if a debtor claimed 100% of fair market value and no party objected, that "the debtor effectively reclaims the property." 2011 Bankr. LEXIS 1117 at *15. However, he disagreed with Judge Lynn about what to do if there was a timely objection. His conclusion was that an objection to 100% of fair market value was a facially valid objection and that the debtor would be required to amend his exemption to state a specific dollar amount. He explained his reasoning as follows: The Court will set forth its reasons for the approach it adopts. First, the Court fails to see the necessity of a hearing under the circumstances as presented. The debtors' exemption claims are limited to an interest in the property. The value of the property itself is relevant only to the extent that there is sufficient value to support the amount of the exemptible interest. If, as suggested by the Supreme Court, the debtor is trying to exempt the property in-kind rather than an interest in property, such goal may still be thwarted if, for example, the property subsequently appreciates in value. This is the very issue confronted by the Ninth Circuit in In re Gebhart, 621 F.3d 1206 (9th Cir. 2010). There the debtors made an exemption claim to the equity in their house, which amount was well within the amount they were allowed under § 522(d)(1). The trustee did not object; like the trustee in Schwab, the trustee in Gebhart had no reason to object. During the pendency of the bankruptcy case, the house appreciated in value. Two years later, after the debtors had defaulted on their mortgage payments and the mortgage company moved for stay relief, the trustee sought approval to sell the house to recover the value of the house that then well exceeded the exemption claim. The Ninth Circuit, consistent with Schwab, emphasized that the debtors' allowable exemptions did not permit the exemption of the house itself, but rather the specific dollar amount of their interest in the house. 2011 Bankr. LEXIS 1117 at *17-18. The Court went on to stateThe Supreme Court in Schwab predicted such claims would likely draw objections. Claiming "100% of FMV" is the debtors' way of stating that they wish to keep the asset in-kind. While this is their desire, the Court must construe that such claim has the legal effect of claiming an interest in the property up to an amount that is determined by the fair market value of the property in-kind. Accordingly, if the trustee wishes to preserve for the estate any excess value--value over the amount of the statutory limit that may exist either at the time the exemption is claimed, as was the case in Schwab, or any excess value that may exist as a result of an anticipated appreciation in the property, as happened in Gebhart--the trustee must object to the exemption claim itself. That is precisely what has been done here. The trustees' objections are facially valid. The objections do not otherwise contest the exemption claims. The Court certainly concedes that, given the items against which the exemptions were made and the claimed values of the items in-kind, it is highly unlikely that any of the items would ever achieve a value that would exceed the statutory limit for the exemption. Regardless, the Court recognizes the trustees' right to preserve this eventuality for the estates. 2011 Bankr. LEXIS 1117 at *25-26. Reconciling the Cases Moore, Salazar and Dominguez-Ortega all agree that if a debtor claims 100% of fair market value and no party objects, that the debtor gets to keep the property. However, where they split is in allocating the burden of proof. Under Fed.R.Bankr. P. 4003(c), the objecting party has the burden of proof on an objection to exemptions. Moore and Dominguez-Ortega require the trustee to meet the burden of proof with evidence. On the other hand, Salazar holds that the objection should be sustained as a matter of law and that the debtor has the burden of proof to state what the value of the property is. Even then, the debtor has no security. If the value of the property increases beyond the exempt amount, the trustee may sell it out from underneath the debtor. I have mixed feelings about these opinions. Moore and Dominguez-Ortega bring order to the force by restoring the status quo under Taylor v. Freeland & Kronz. On the other hand, Salazar is more faithful to the Supreme Court's reasoning that an exemption attaches to a dollar amount rather than the thing itself. However, that is a horrible result. It allows trustees to sleep on their rights and leave estates open in the hope that an asset may appreciate. As a practical matter, it is much better to require the trustee to put up or shut up in an evidentiary hearing. This will ensure that the trustee only objects when there is a genuine basis for doing so and gives all parties certainty in dealing with assets claimed as exempt. Post-Script I typically do not blog about oral rulings. I chose to do so in this case because it was a very definitive ruling from one of my local judges. However, I do want to acknowledge that all of the Texas bankruptcy judges that I appear in front of put a lot of thought and hard work into their oral rulings. In most cases, the oral rulings are equivalent in force to a written opinion, just delivered in a more informal manner. In this case, it was refreshing to hear the directness of the Court’s comments. Finally, I apologize to Judge Robert Nelms. In his ruling, Judge Gargotta referred to rulings by Judge Michael Lynn and Judge Robert Nelms. I could only find Judge Lynn's opinion. When Judge Gargotta refers to the Fort Worth judges, he is referring to both Judge Lynn and Judge Nelms.

A decision by twenty Central California Bankruptcy Judges is likely to generate more heat than light[i] with its ruling that the Defense of Marriage Act is unconstitutional when applied to prevent a legally married same sex couple from filing a joint bankruptcy petition under 11 U.S.C. §302. In re Balas, No. 2:11-bk-17831 TD (Bankr. C.D. Cal. 6/13/11). You can find the opinion here. (PACER registration required). A Gay Couple Walks Into a Courtroom G. Balas and C. Morales were legally married in California. After experiencing numerous periods of illness, hospitalization and extended periods of unemployment, they filed for chapter 13 bankruptcy to attempt to restructure and repay their debts. Had they been named Jean and Carlos, there would have been no question that the legally married couple could file a joint petition. However, their names were actually Gene and Carlos, both males, married during a brief period when same sex marriage was legal in California.[ii] The U.S. Trustee filed a Motion to Dismiss unless they consented to severing their cases. However, the debtors were up to the challenge. They were represented by well-respected California bankruptcy attorney Peter Lively. They were also represented by pro bono special counsel Robert Pfister with Ken Klee’s firm, Klee, Tuchin, Bogdanoff & Stern, LLP, who brought some star power to the case. Joint Administration and DOMA The general rule in bankruptcy is one debtor one case.[iii] However, under 11 U.S.C. §302(a), a single petition may be filed by “an individual that may be a debtor under such chapter and such individual’s spouse.” In 1996, the Defense of Marriage Act (DOMA) dictated that under federal law, the word spouse “refers only to a person of the opposite sex who is a husband or wife.” 1 U.S.C. §7. Reading the two statutory sections together, a joint petition could only be filed by a man and a woman who were husband and wife.[iv] Filing a joint petition offers several advantages. For one thing, the couple pays one filing fee instead of two. In a chapter 13 case, that means a savings of $274. It also means paying one attorney’s fee instead of two. Filing a joint petition avoids difficult community property issues posed by separate filings. Under 11 U.S.C. §541(a)(2)(A), the bankruptcy estate of a debtor includes all community property under the sole, equal or joint management and control of the debtor.” That means that the first to file includes all joint community property. Additionally, a joint filing may influence the ability to confirm a chapter 13 plan. Assume two individuals, one with positive disposable income and one with negative disposable income. Together, they could confirm a plan based on their combined disposable income. Separately, one could not confirm a plan and the other would have to pay more. These are not huge differences, but they could be important in specific cases. Prior to 2011, joint cases which did not involve a legally married man and a woman did not fare well. Courts had denied joint petition status to a man and his corporation,[v] In re Jephunneh Lawrence & Assoc. Chartered, 63 B.R. 318 (Bankr. D.C. 1986), a co-habiting but unmarried heterosexual couple, In re Malone, 50 B.R. 2 (Bankr. E. D. Mich. 1985), an unmarried same sex couple, In re Favre, 186 B.R. 769 (Bankr. N.D. Ga. 1995) and a same sex couple married in Canada, In re Kandu, 315 B.R. 123 (Bankr. W.D. Wash. 2004). However, in 2011, two other courts held that legally married same sex couples could file joint petitions notwithstanding DOMA. In re Ziviello-Howell, No. 11-22706 (Bankr. E.D. Cal. 5/31/11); In re Somers, 2011 WL 1709839 (Bankr. S.D. N.Y. 5/4/11). The Ninth Circuit and Constitutional Law The Bankruptcy Court considered DOMA in the context of the equal protection clause of the Fifth Amendment and prior Ninth Circuit precedent. Under Equal Protection analysis, a distinction based on sexual orientation must survive heightened scrutiny, a standard greater than rational relationship. Under heightened scrutiny, a statute must be justified based on the reasons stated when it was passed rather than post hoc reasoning. The Ninth Circuit had previously held that the military’s “Don’t Ask, Don’t Tell” policy violated the Constitution. Witt v. Department of Air Force, 527 F.3d 806 (9th Cir. 2008). This ruling gave the bankruptcy court considerable support for its ruling. The Bankruptcy Court’s Ruling Given the court and the context, there was little suspense as to how the issue would be decided. The Court began its opinion with the following statement: This case is about equality, regardless of gender or sexual orientation, for two people who filed for protection under Title 11 of the United States Code (Bankruptcy Code). Like many struggling families during these difficult economic times, Gene Balas and Carlos Morales (Debtors), filed a joint chapter 13 petition on February 24, 2011. Although the Debtors were legally married to each other in California on August 20, 2008, and remain married today, the United States Trustee (sometimes referred to simply as “trustee”) moved to dismiss this case pursuant to Bankruptcy Code § 1307(c) (Motion to Dismiss), asserting that the Debtors are ineligible to file a joint petition based on Bankruptcy Code § 302(a) because the Debtors are two males. The issue presented to this court is whether the Debtors, who are legally married and were living in California at the time of the filing of their joint petition, are eligible to file a “joint petition” as defined by § 302(a). As the Debtors state, “[T]he only issue in this Bankruptcy Case is whether some legally married couples are entitled to fewer rights than other legally married couples, based solely on a factor (the gender and/or sexual orientation of the parties in the union) that finds no support in the Bankruptcy Code or Rules and should be a constitutional irrelevancy.” Debtors’ Opp. 5:24–28. In this court’s judgment, no legally married couple should be entitled to fewer bankruptcy rights than any other legally married couple. Opinion, p. 1-2. The Bankruptcy Court did not have any difficulty finding that, in the specific context, DOMA would not survive rational relationship analysis, let alone heightened scrutiny. The Court advanced the following analysis of the reasons advanced to support DOMA in Congress as applied to the specific case: *Encouraging responsible procreating and child bearing. The couple did not have children and their ability to file a joint bankruptcy would not affect children in other relationships. *Defending or nurturing the institution of traditional heterosexual marriage. Since the debtors were already married, allowing them to proceed with a joint bankruptcy would not affect anyone else’s marriage. *Defending traditional notions of morality. The joint bankruptcy filing “is in no sense discernible to the Court to be a validly challengeable to morality, traditional, or otherwise, under the Fifth Amendment”. *Preserving scant resources. “No governmental resources are implicated by the Debtors’ bankruptcy case different from the resources brought to bear routinely in thousands upon thousands of joint bankruptcy cases filed over the years[vi]”. Opinion, pp. 12-13. The Bottom Line While the Balas case has attracted a lot of publicity, it is unlikely to have a lot of practical effect. First, it is limited to couples who are legally married. The Court did not allow unmarried same sex couples to file joint petitions. Therefore, the case is not a step toward requiring same sex marriage. Second, it is not clear whether courts outside of the Ninth Circuit would reach the same conclusion. The Ninth Circuit is the most liberal circuit. A more difficult test would be if a couple married in California were to move to Texas and file a joint petition. Third, allowing a joint bankruptcy petition, while desirable in some cases, is not a huge victory. What it means in this specific case is that two guys will have a little easier time proposing a plan to pay their creditors. The case does have two interesting sidelights to it. First, it is unusual for bankruptcy courts to deal with the constitutionality of federal statutes. The Debtors’ counsel apparently provided a lot of very helpful briefing as shown by the many references to the Debtors’ Response in Opposition throughout the opinion. This shows that good briefing and research can be invaluable when the court is faced with a novel question. Second, it is unusual that twenty judges out of twenty-four in the district signed off on the opinion. This was Bankruptcy Judge Thomas Donovan’s case. There was no explanation given for why the other nineteen judges joined in. Sometimes, the judges of a district will sit en banc when considering an important issue. However, that does not appear to be what happened in this case. It seems to be highly unprecedented for other judges to sign on to a colleague’s decision on an ad hoc basis. Perhaps some of the judicial readers of this blog can shed some light on the issue. [i] The phrase originates from Hamlet, Act I, Scene 3 where Polonius gives his daughter Ophelia the following advice: When the blood burns, how prodigal the soul Lends the tongue vows. These blazes, daughter, Giving more light than heat, extinct in both Even in their promise as it is a-making, You must not take for fire. In judicial parlance, the phrase has come to refer to an argument with more passion than persuasiveness. See Sather, “Shakespeare for Lawyers: More Heat Than Light,” Am. Bankr. Inst. J. (March 1998). I am using the phrase in this context to refer to a decision which generates more controversy than practical effect. [ii] According to the Opinion, there were 18,000 same sex marriages in California before the law was overturned by Proposition 8. [iii] Not to be confused with the Texas Rangers maxim “one riot, one Ranger.” If you are confused over whether the phrase refers to the baseball team or the legendary law enforcement organization, you are not from Texas. [iv] Theoretically, the man could be the wife and the woman could be the husband and still pass scrutiny under DOMA. [v] While the man’s wife could have claimed that he was married to his job, this argument apparently was not raised. [vi] This is actually not correct, since the clerk’s office is foregoing a filing fee of $274. However, if it is assumed that the filing fee is an accurate reflection of the cost of administering a case, then it would be a break even proposition.

By JOHN SCHWARTZ A bankruptcy court in California has declared that the 1996 law barring federal recognition of same-sex marriage is unconstitutional, increasing pressure against the law. “In this court’s judgment, no legally married couple should be entitled to fewer bankruptcy rights than any other legally married couple,” wrote Judge Thomas B. Donovan of the United States Bankruptcy Court for the Central District of California. In an unusual move, 19 other judges — nearly all of the 24 judges of the central district — also signed the decision. The impact of the opinion could be limited, since the decision of the court is specific to the bankruptcy of the couple, Gene Douglas Balas and Carlos A. Morales. But the other judges’ signatures suggest that as a matter of policy they would rule similarly. It is not the first blow to the law known as the Defense of Marriage Act. A federal judge in Boston declared the law unconstitutional last July, and that case is working its way through the legal system. The Department of Justice, however, is not driving that appeals process. In February, Attorney General Eric H. Holder Jr. announced in a letter to members of Congress that while the Obama administration would continue to enforce the law, it would no longer defend it in court and that classifications based on sexual orientation should be subjected to a tough legal test intended to block unfair discrimination. Speaker John A. Boehner, Republican of Ohio, then announced that Congress would defend the law, and that it had hired former Solicitor General Paul Clement to argue on its behalf. Mr. Balas and Mr. Morales cited Mr. Holder’s letter in their pleadings, and Judge Donovan quoted it approvingly in his 26-page opinion, and stated, “The Holder Letter demonstrates that DOMA cannot withstand heightened scrutiny.” Mr. Balas and Mr. Morales were legally married under California law, and wanted to file jointly for bankruptcy. The trustee, the federal officials who oversee the bankruptcy process, moved to dismiss their petition under the Defense of Marriage Act. They then asked Judge Donovan to allow them to file jointly, and Monday’s decision was the result. Adam Winkler, a professor at the law school at the University of California, Los Angeles, called the decision “a powerful statement about the status of gay rights today.” Professor Winkler said, “it shows the effect of Eric Holder’s letter in shaping legal decisions that came after it, almost as if it’s a precedent in the case.” Mary Bonauto, the civil rights project director for Gay and Lesbian Advocates and Defenders, the group that brought the Massachusetts case, said she was not surprised to see another judge agree with the earlier decision, because the law “advances a blatant legal double standard.” Ms. Bonauto added, “In our system of justice, it’s the job of courts to call that out.” One of those who signed Judge Donovan’s opinion, Judge Sheri Bluebond, said that a signing by other judges is “an unusual occurrence, but it is certainly not unprecedented.” Judge Bluebond said bankruptcy judges signed on to their colleagues’ decisions when “threshold questions” were brought before one judge and the others in that district “so the bar would know where we stand,” and whether they would be able to file in those courts. While 20 judges signed the opinion and there are 24 in the Central District of California, Judge Bluebond said, “the fact that some judges did not sign on to it does not mean one way or another what their views on that issue are.” “There could have been procedural reasons or just logistical reasons that they did not sign on,” she said. It is unclear whether an appeal will be filed. Judge Donovan noted that the House Bipartisan Legal Advisory Group, which is leading the Congressional action, requested a brief delay in proceedings while it considered whether to intervene, but that “no further pleadings and no challenge” had ensued. “The government’s nonresponse to the debtors’ challenges is noteworthy,” Judge Donovan wrote. A spokesman for Mr. Boehner, Brendan Buck, said the ruling would not be appealed. “Bankruptcy cases are unlikely to provide the path to the Supreme Court, where we imagine the question of constitutionality will ultimately be decided,” Mr. Buck said. “Obviously, we believe the statute is constitutional in all its applications, including bankruptcy, but effectively defending it does not require the House to intervene in every case, especially when doing so would be prohibitively expensive.”Copyright 2011 The New York Times Company. All rights reserved.

An opinion from San Antonio Bankruptcy Judge Leif Clark examines when a claim against a non-debtor can violate the automatic stay. The short answer is: when the creditor says he is doing it to collect from the debtor. The long answer requires an examination of the interplay between 11 U.S.C. Sec. 362(a)(1) and 362(b)(4). In re Reyes, No. 10-52366-C (Bankr. W.D. Tex. 4/20/11). You can read the opinion here.What HappenedThe Reyes case arises from a real estate transaction gone bad. Josie Jones sued real estate broker Liza Reyes in state court and recovered a judgment. The Court succinctly described what happened next:After the verdict was rendered, Jones and her lawyer, Robert Wilson, met with the debtor in a conference room at the courthouse. There, the debtor informed Wilson that they intended to file for bankruptcy. In response, Wilson, in the hearing of not only the debtor but also members of the debtorʼs family, told the debtor that he would “run them out of business by filing a complaint with the TREC (Texas Real Estate Commission) and close them down to get the money.” After the debtor filed for bankruptcy, Wilson, true to his word, filed a complaint in September 2010, on behalf of his client, with the TREC. The complaint took a number of months to prepare, and Wilson billed his client for the service. The TRECʼs procedures do not require a pre-investigation as a prerequisite to instituting such a complaint. Instead, the filing of the complaint itself necessitates an investigation by the Commission. If such an investigation results in a determination of wrongdoing on the part of the agent, and if a finding of damages is made, then the the TREC may make a monetary award to the complaining witness, and may subsequently seek reimbursement from the agent in the amount of the award. Wilson is well aware of these rules and procedures, this being one of his areas of practice.Opinion, pp. 1-2.The Debtors filed a Motion for Contempt against Jones and her attorney for violating the automatic stay by filing the Complaint with TREC. The Bankruptcy Court agreed with the Debtors and ruled that the stay had been violated.The Automatic Stay By the NumbersAmong other things, the automatic stay prohibits:(1) the commencement or continuation . . . of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case;* * *(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title.It is clear that the respondents commenced an administrative proceeding that could have been commenced before the commencement of the case and that the claim against the Debtor arose before the commencement of the case. More difficult is the question of whether it was a proceeding to recover a claim against the debtor.The Court answered this question in the affirmative, but only after an extensive discussion of whey the exception to the automatic stay of Sec. 362(b)(4) did not apply. Sec. 362(b)(4) allowsthe commencement or continuation of an action or proceeding by a governmental unit . . . to enforce such governmental unit's police and regulatory power . . .Notably, Sec. 362(b)(4) does not allow a private party to commence an action to enforce a governmental unit's police and regulatory power. Additionally, the Court found it significant that the TREC was required to act on the complaint.Here, by contrast, the filing of a complaint that stated the requisite grounds for an investigation commences such an investigation, without any independent discretion on the part of the Commission. The TREC had no independent choice in the matter once that complaint was filed. The institution of an action that necessarily required further prosecution was not the mere discharge of a public duty, . . . .Opinion, p. 8. Further, the Court found that Ms. Jones, who lives in California, was unlikely to be motivated by a desire to protect Texas residents from unethical real estate brokers, and was more likely to be motivated by collection of money.The Court ultimately found that the respondents were using the TREC as a vehicle to recover a claim against the debtor. Judge Clark stated:The filing of this complaint is more correctly viewed as Wilsonʼs following up on his threats -- and his hope to recover his judgment from the debtor indirectly, by way of the TREC. Viewed that way, Jonesʼ initiation of this complaint, carefully crafted by Wilson, is better understood as the commencement or continuation of a proceeding against the debtor to collect on a prepetition debt, in violation of section 362(a)(1). Opinion, p. 9.What Does It All Mean?Does collection of a judgment "from the debtor indirectly" violate the automatic stay? It is black letter law that the automatic stay does not protect non-debtors. Thus, absent the Sec. 1301 co-debtor stay, a creditor is free to proceed against a guarantor or other co-obligor after the debtor has filed bankruptcy. This raises the question of how the TREC is different from any other party who might be jointly or contingently liable on a debt of the debtor.The Court stated that "(t)he TREC . . . does have the authority to compel payment from the debtors" but did not fully explain that statement. Under Texas law, a person who recovers a judgment against a license or certificate holder for a prohibited practice, may apply for payment from the Texas Real Estate Recovery Trust Account. Tex. Occ. Code Sec. 1101.612. The TREC may revoke a license "if the commission makes a payment from the real estate recovery trust account to satisfy all or part of a judgment against the license or registration holder " and that "a person is not eligible for a license or certificate until the person has repaid in full the amount paid from the account for the person, plus interest at the legal rate." Tex. Occ. Code Sec. 1101.655(a) and (c). Thus, the Court is correct that the TREC could coerce repayment of amounts paid from the real estate recovery trust account by revoking the debtor's license until the amount was repaid. However, it is unclear that they could do so while the Debtor was in bankruptcy. Sec. 362(b)(4) allows a governmental unit to enforce a judgment "other than a money judgment." Thus, it seems likely that the TREC could not revoke the debtor's license for failure to repay the real estate recovery trust account. Further, Sec. 525(a) states that a governmental unit may not revoke a license based on failure to pay "a debt that is dischargeable in the case under this title."Sec. 525(a) may provide the glue that holds the court's opinion together. The TREC may revoke a license for failure to pay a nondischargeable debt. The Texas Occupations Code provides that in order to recover from the real estate recovery fund "the person shall verify to the commission that the person has made a good faith effort to protect the judgment from being discharged in bankruptcy." In this case, the respondents had filed a complaint to determine dischargeability but had not yet proceeded to trial. Had the respondents first obtained a nondischargeable judgment and then filed a complaint with TREC, there would have been no violation. The automatic stay terminates upon entry of the discharge and the discharge does not apply to nondischargeable debts. Here, the respondents jumped the gun. Rather than waiting until they had a nondischargeable judgment, they acted immediately to take actions which would have threatened the debtor's livelihood by threatening her license. It was a matter of timing rather than a matter of absolute prohibition. It was also really foolish for the lawyer to tell the debtor in the hearing of multiple witnesses that he would "run them out of business by filing a complaint with the TREC and close them down to get the money." Implications for Hot Check CasesIt is an open secret in Texas that County Attorneys' offices act as a collection agency for merchants who received dishonored checks. It is also quite clear that the automatic stay does not apply to "the commencement or continuation of a criminal action or proceeding against the debtor." 11 U.S.C. Sec. 362(b)(1). Therefore, it is clear that the County Attorney does not violate the automatic stay by filing hot check charges. However, under the logic of Reyes, it is intriguing to ask whether the merchant who initiates hot check charges as a debt collection device could be held liable for violating the stay. The difference between subsections (b)(1) and (b)(4) may provide the answer. Sec. 362(b)(4) is limited to actions by governmental actions, while 362(b)(1) is not. Thus, if hot check charges are criminal actions, a private party may initiate hot check charges without violating the stay. They only way around that would be to say that hot check charges are not legitimate criminal actions at all, but are really debt collection actions in substance. Unfortunately, telling a state what it can and cannot criminalize probably runs afoul of the Constitution.

Way back in 1986, Judge A. Jay Cristol denied his own sua sponte motion to dismiss a chapter 7 bankruptcy case in verse. In re Love, 61 B.R. 558 (Bankr. S.D. Fl. 1986). Some 20 years later, he penned another poetic opinion, this time finding that he was not required to sua sponte dismiss a Debtor's case for failure to file the required paperwork. In re Riddle, No. 06-11313 (Bankr. S.D. Fl. 7/17/06). Although the opinion is five years old, it mysteriously appeared upon my desk today without explanation.For your reading pleasure, I present to you the verse of Judge Cristol:I do not like dismissal automatic,It seems to me to be traumatic.I do not like it in this case,I do not like it any place.As a judge I am most keento understand, What does it mean?How can any person knowwhat the docket does not show?What is the clue on the 46th day?Is the case still here, or gone away?And if a debtor did not dowhat the Code had told him toand no concerned party knew it,Still the Code says the debtor blew it.Well that is what it seems to say:the debtor's case is then "Oy vay!"This kind of law is symptomaticof something very problematic.For if the Trustee does not knowthen which way should the trustee go?Should the trustee's view prismaticcontinue to search the debtor's atticand collect debtors' assets in his fistfor distribution in a case that stands dismissed?After a dismissal automaticwould this not be a bit erratic?The poor trustee cannot knowthe docket does not dismissal show.What's a poor trustee to do -except perhaps to say, "Boo hoo!"And if the case goes on as normaland debtor gets a discharge formal,what if a year later some fanaticclaims the case was dismissed automatic?Was there a case, or wasn't there one?How do you undo what's been done?Debtor's property is gone as if by a thief,and Debtor is stripped but gets no relief.I do not like dismissal automatic.On this point I am emphatic!I do not wish to be dramatic,but I can not endure this static.Something more in 521 is neededfor dismissal automatic to be heeded.Dismissal automatic is not understood.For all concerned this is not good.Before this problem gets too oldit would be good if we were told:What does automatic dismissal mean?And by what means can it been seen?Are we only left to guess?Oh please Congress, fix this mess!Until it's fixed what should I do?How can I explain this mess to you?If the Code required an old fashioned order,that would create a legal border,with complying debtors' cases defendedand 521 violators' cases ended,from the unknown status of dismissal automatic,to the certainty of a status charismatic.The dismissal automatic problem would be gone,and debtors, trustees and courts could move on.As to this case, how should I proceed?Review of the record is warranted, indeed.A very careful record review,tells this Court what it should do.Was this case dismissed automatic?It definitely was NOT and that's emphatic.

EL MIRAGE, Ariz. — The nation’s biggest banks and mortgage lenders have steadily amassed real estate empires, acquiring a glut of foreclosed homes that threatens to deepen the housing slump and create a further drag on the economic recovery. All told, they own more than 872,000 homes as a result of the groundswell in foreclosures, almost twice as many as when the financial crisis began in 2007, according to RealtyTrac, a real estate data provider. In addition, they are in the process of foreclosing on an additional one million homes and are poised to take possession of several million more in the years ahead. Five years after the housing market started teetering, economists now worry that the rise in lender-owned homes could create another vicious circle, in which the growing inventory of distressed property further depresses home values and leads to even more distressed sales. With the spring home-selling season under way, real estate prices have been declining across the country in recent months. “It remains a heavy weight on the banking system,” said Mark Zandi, the chief economist of Moody’s Analytics. “Housing prices are falling, and they are going to fall some more.” Over all, economists project that it would take about three years for lenders to sell their backlog of foreclosed homes. As a result, home values nationally could fall 5 percent by the end of 2011, according to Moody’s, and rise only modestly over the following year. Regions that were hardest hit by the housing collapse and recession could take even longer to recover — dealing yet another blow to a still-struggling economy. Although sales have picked up a bit in the last few weeks, banks and other lenders remain overwhelmed by the wave of foreclosures. In Atlanta, lenders are repossessing eight homes for each distressed home they sell, according to March data from RealtyTrac. In Minneapolis, they are bringing in at least six foreclosed homes for each they sell, and in once-hot markets like Chicago and Miami, the ratio still hovers close to two to one. Before the housing implosion, the inflow and outflow figures were typically one-to-one. The reasons for the backlog include inadequate staffs and delays imposed by the lenders because of investigations into foreclosure practices. The pileup could lead to $40 billion in additional losses for banks and other lenders as they sell houses at steep discounts over the next two years, according to Trepp, a real estate research firm. “These shops are under siege; it’s just a tsunami of stuff coming in,” said Taj Bindra, who oversaw Washington Mutual’s servicing unit from 2004 to 2006 and now advises financial institutions on risk management. “Lenders have a strong incentive to clear out inventory in a controlled and timely manner, but if you had problems on the front end of the foreclosure process, it should be no surprise you are having problems on the back end.” A drive through the sprawling subdivisions outside Phoenix shows the ravages of the real estate collapse. Here in this working-class neighborhood of El Mirage, northwest of Phoenix, rows of small stucco homes sprouted up during the boom. Now block after block is pockmarked by properties with overgrown shrubs, weeds and foreclosure notices tacked to the doors. About 116 lender-owned homes are on the market or under contract in El Mirage, according to local real estate listings. But that’s just a small fraction of what is to come. An additional 491 houses are either sitting in the lenders’ inventory or are in the foreclosure process. On average, homes in El Mirage sell for $65,300, down 75 percent from the height of the boom in July 2006, according to the Cromford Report, a Phoenix-area real estate data provider. Real estate agents and market analysts say those ultra-cheap prices have recently started attracting first-time buyers as well as investors looking for several properties at once. Lenders have also been more willing to let distressed borrowers sidestep foreclosure by selling homes for a loss. That has accelerated the pace of sales in the area and even caused prices to slowly rise in the last two months, but realty agents worry about all the distressed homes that are coming down the pike. “My biggest fear right now is that the supply has been artificially restricted,” said Jayson Meyerovitz, a local broker. “They can’t just sit there forever. If so many houses hit the market, what is going to happen then?” The major lenders say they are not deliberately holding back any foreclosed homes. They say that a long sales process can stigmatize a property and ratchet up maintenance and other costs. But they also do not want to unload properties in a fire sale. “If we are out there undercutting prices, we are contributing to the downward spiral in market values,” said Eric Will, who oversees distressed home sales for Freddie Mac. “We want to make sure we are helping stabilize communities.” The biggest reason for the backlog is that it takes longer to sell foreclosed homes, currently an average of 176 days — and that’s after the 400 days it takes for lenders to foreclose. After drawing government scrutiny over improper foreclosures practices last fall, many big lenders have slowed their operations in order to check the paperwork, and in two dozen or so states they halted them for months. Conscious of their image, many lenders have recently started telling real estate agents to be more lenient to renters who happen to live in a foreclosed home and give them extra time to move out before changing the locks. “Wells Fargo has sent me back knocking on doors two or three times, offering to give renters money if they cooperate with us,” said Claude A. Worrell, a longtime real estate agent from Minneapolis who specializes in selling bank-owned property. “It’s a lot different than it used to be.” Realty agents and buyers say the lenders are simply overwhelmed. Just as lenders were ill-prepared to handle the flood of foreclosures, they do not have the staff and infrastructure to manage and sell this much property. Most of the major lenders outsourced almost every part of the process, be it sales or repairs. Some agents complain that lender-owned home listings are routinely out of date, that properties are overpriced by as much as 10 percent, and that lenders take days or longer to accept an offer. The silver lining for home lenders, however, is that the number of new foreclosures and recent borrowers falling behind on their payments by three months or longer is shrinking. “If they are able to manage through the next 12 to 18 months,” said Mr. Zandi, the Moody’s Analytics economist, “they will be in really good shape.”

In law school, students cope with concepts of subject matter jurisdiction, personal jurisdiction and stating a cause of action in civil procedure class. When they move on to bankruptcy class, they must try to make sense of the constitutionality of delegating jurisdiction to an Article I court when considering the Marathon Pipeline case. These are not easy issues to get your head around. Judge Craig Gargotta must have felt like he was writing a law school exam when faced with motions to dismiss in an adversary proceeding. Roberts, Trustee v. J. Howard Bass & Associates, Inc., et al, Adv. No. 10-1101 (Bankr. W.D. Tex. 2/15/11). You can find the opinion here. Introduction James H. Bass filed chapter 7 bankruptcy on June 3, 2009. The creditors included two judgment creditors holding claims of $5.5 million (including one that had been found to be non-dischargeable in a prior filing). Filing bankruptcy proved to be a mistake, since the court denied the debtor’s discharge and the trustee launched an adversary proceeding against nine Bass-related defendants seeking to recover assets. The defendants sought to make the adversary proceeding go away with motions to dismiss for failure to state a cause of action and for lack of jurisdiction. Among their more creative arguments was that the bankruptcy court lacked jurisdiction to hear the case because the bankruptcy jurisdiction scheme was unconstitutional. Have We Been Working Under a Constitutionally Defective System? In 1982, the Supreme Court found that Congress had “impermissibly removed most, if not all, of the ‘essential attributes of the judicial power’ from the Article III district court, and has vested those attributes in a non-Art. III adjunct.” Northern Pipeline Construction Co. v. Marathon Pipeline Co., 458 U.S. 50, 87 (1982). However, the defendants cited other language not actually found in the opinion for the proposition that “Congress could not vest in a non-Article III court the power to adjudicate, render final judgment, and issue binding orders in a traditional contract action arising under state law, without consent of the litigants, and subject only to ordinary appellate review.” Citing non-existent quotes from the Supreme Court is not a good way to impress the Bankruptcy Court. The defendants also argued that 28 U.S. C. §157, which referred bankruptcy matters to the bankruptcy courts was unconstitutional for the reason that it was an impermissible delegation of power to an Article I court. The Court noted that the argument would have had some merit—if it had been made in 1982. If this is where history ended, Defendants would be correct in stating that the bankruptcy code is unconstitutional. However, Defendants’ argument ignores approximately 30 years of subsequent history. In 1984, Congress enacted the Bankruptcy Amendments and Federal Judgeship Act of 1984 (BAFJA). One of the major changes, meant to remedy the constitutional challenges of Marathon, was 28 U.S.C. §157(b)(1) . . . . This statutory language gave the bankruptcy courts the same broad jurisdiction as the 1978 system, but it forbade the bankruptcy courts from rendering final judgments in cases that were only “related to” the bankruptcy case. Opinion, p. 8. In 1987, the Fifth Circuit found the revised jurisdictional grant to be constitutional in In re Wood, 825 F.2d 90 (5th Cir. 1987). The Supreme Court cited favorably to Wood in Celotex Corp. v. Edwards, 514 U.S. 300 (1995). Not wishing to overrule the Fifth Circuit and the Supreme Court, Judge Gargotta found the jurisdictional scheme to be constitutional. Jurisdictional to the Core? Having found jurisdiction, the Court had to find whether it had core jurisdiction. The claims asserted by the trustee included substantive consolidation, alter-ego and declaratory judgment. Rights created by the Bankruptcy Code constitute core proceedings. Substantive consolidation arises from section 105. As a result, it is a claim created by the Bankruptcy Code and thus a core proceeding. Alter-ego posed a more difficult question because these claims arose under state law. However, §157(b)(3) states that the fact that a claim arises under state law is not dispositive in determining core status. Because the alter ego claims would bring assets into the estate, they would have a direct effect on the liquidation of the assets of the estate under 28 U.S.C. §157(b)(2)(O). The declaratory judgment claims arose under the Bankruptcy Code and thus were core proceedings. Jury Trial The next argument raised by the Defendants was that they were entitled to a jury trial and that the Bankruptcy Court could not conduct one absent consent. Although Judge Gargotta went through several pages of serious discussion, the results can be summarized as: 1) there is not constitutional right to a jury trial in an equitable action; and 2) substantive consolidation and alter ego are equitable claims. Although Judge Gargotta went through several pages of serious discussion, the results can be summarized as: 1) there is not constitutional right to a jury trial in an equitable action; and 2) substantive consolidation and alter ego are equitable claims. Does Texas Law Allow A Reverse Veil-Piercing Claim Against An Entity That Is Not Owned by the Debtor? Traditional veil-piercing seeks to hold the shareholder liable for the debts of the corporation. Reverse veil-piercing is more exotic and seeks to hold a corporation liable for debts of an individual. However, in this case, the individual was not a shareholder of the corporations. Would Texas law allow reverse veil-piercing in this situation? Judge Gargotta relied on The Cadle Co. v. Brunswick Homes, LLC, 379 B.R. 284 (Bankr. N.D. Tex. 2007) for the proposition that while ownership is traditionally a requirement for reverse veil piercing, the doctrine could also be extended to de facto ownership. Because the trustee’s complaint alleged that the debtor sought to disguise his actual control of the companies, the trustee stated a cause of action. Can You Do Reverse Veil-Piercing on a Cayman Corporation? One of the defendants was a Cayman Islands corporation. The defendants argued that reverse veil-piercing was not available under Cayman law. The ever-scholarly Judge Gargotta noted that the Cayman Islands generally follow British law and that the United Kingdom has recognized veil piercing for over 100 years, from Saloman vs. Saloman & Co. [1897] A.C. 22 to Adams v. Cape Industries [1990] Ch 433; 2 WLR 657; [1991] 1 All ER 929; [1990] BCC 786 Sealy 66. Thus, the trustee stated a cause of action against the Cayman corporation. Personal Jurisdiction over the Cayman Corporation The Cayman defendant argued that no state or federal statute allowed service on it and that it transacts no business in the U.S. and only owns assets in the Cayman Islands. The Court found that the Texas long arm statute allows service to the fullest extent provided by the Constitution. This requires minimum contacts and that exercising jurisdiction is consistent with “traditional notions of fair play and substantial justice.” The Court found that if the Cayman corporation was found to be the alter ego of the debtor, then the court would have jurisdiction over it. As a result, the court found that it had jurisdiction to determine whether the Cayman corporation was the alter ego of the debtor. This poses an interesting conundrum. If the Cayman entity is not the debtor’s alter ego, then the Court may not exercise jurisdiction over it. However, to determine whether the court has jurisdiction, it must exercise its jurisdiction. Thus, the Cayman Islands entity must appear regardless of whether there is jurisdiction. Perhaps another way to approach the problem would have been to find that the Cayman entity had minimum contacts with the United States in that it was formed with money from a United States entity and its control persons were all residents of the United States. Substantive Consolidation Finally, the Defendants argued that the Bankruptcy Court could not grant substantive consolidation and that substantive consolidation between a debtor and a non-debtor was improper. The argument against the applicability of substantive consolidation was unlikely to succeed given the fact that the Court had a recent opinion approving use of substantive consolidation. In re Introgen Therapeutics, Inc. 429 B.R. 570 (Bankr. W.D. Tex. 2010). The Court was similarly unreceptive to the argument that a nondebtor could never be substantively consolidated with a debtor. While the defendants quoted from a Fifth Circuit opinion, they left out the words “under these facts.” Those words were pretty important because in Peoples State Bank v. GE Capital Corp. (In re Ark-La-Tex Timber Co.), 482 F.3d 319 (5th Cir. 2007), the debtor believed that its purchase of the ownership interest in two other entities automatically effected a substantive consolidation. The Court found that if the Trustee was successful in proving alter ego that the assets of the two non-debtor entities would be property of the estate and substantive consolidation would be moot. As a result, the Court determined that it would reserve judgment on the substantive consolidation claim. Conclusion After working through twenty-one pages of discussion, the Court concluded: Having gone through the facts of the case and considered the evidence submitted by the parties, this Court finds that (1) this Court and the current bankruptcy system are constitutional; (2) Plaintiff sufficiently pled a complaint for alter-ego liability that survives the motions to dismiss; (3) this Court can exercise personal jurisdiction over Esperada for the purposes of discovery; and (4) substantive consolidation in general is permitted in the Fifth Circuit, but the issue of whether it is appropriate in this case will be reserved for later determination after discovery and a trial on the merits. For these reasons, Defendant‟s Motions to Dismiss (docket nos. 66-74) are DENIED. Opinion, p. 21. The lesson to be learned here is that the Bankruptcy Court is fully up to the challenge of sorting through difficult procedural and jurisdictional issues. However, when raising difficult procedural and jurisdictional issues, it is important to accurately quote the cases. Class dismissed.

BY Albert Amateau U.S. Bankruptcy Judge Cecilia Morris approved the sale of St. Vincent’s Hospital’s Greenwich Village campus last week in a deal allowing Rudin Management to develop luxury residential condos and North Shore-Long Island Jewish Health System to operate a comprehensive care center with a 24-hour emergency department. The ruling came in a packed courtroom on Thurs., April 7, almost one year after New York City’s last Catholic hospital filed for bankruptcy and ended its 161 years of serving the neighborhood. In a joint statement, Michael Dowling, North Shore-L.I.J. chief executive officer, and Bill Rudin, chairman of Rudin Management, said they were “especially pleased that the judge confirmed what we’ve been hearing from residents, business owners and community leaders—the historic agreement reached last month by St. Vincent’s, North Shore-L.I.J. and the Rudin family is a great deal for the community and would ensure an innovative return of comprehensive healthcare to the neighborhood.” Dowling and Rudin added, “We look forward to securing the necessary approvals from city and state officials and working closely with the community, so that we can restore high-quality healthcare on the West Side by 2013.” Judge Morris delivered her decision after the two-and-a-half-hour hearing on Thursday morning. “I realize how sad it was to close St. Vincent’s,” she said. “It has been hanging over our heads for a year,” she added, noting that she has heard pleas for alternatives intended to save the full-service, acute-care hospital. But she ruled there was no likelihood that alternatives would be found to improve on the Rudin-North Shore-L.I.J. proposal. “The court must not blindly follow the most vocal interest group but must find the likelihood of a proposal that would lead to the plan for the liquidation of the Chapter 11,” she said, referring to the type of bankruptcy sought by St. Vincent’s trustees. She overruled a recently filed objection by James Shenwick, an attorney representing former City Councilmember Alan Gerson and others; Gerson’s group had sought a 45-day adjournment in hopes of nailing down a better proposal than Rudin’s $260 million for St. Vincent’s creditors and North Shore-L.I.J.’s $100 million (plus another $10 million from Rudin) to convert the former hospital’s O’Toole Building into a 24/7 emergency medical department and ambulatory surgery center. “For my clients, this is a matter of life and death,” said Shenwick at one point last Wednesday, drawing applause from the public and prompting Morris to warn that she would clear the courtroom if there were further demonstrations. Shenwick told the court that Jim Partreich, a principal in the Pinetree Group, a real estate brokerage firm, has been talking to potential investors. The attorney added that the National Football League’s Retired Players Association wanted to be a partner in a hospital that could serve its members. But Shenwick did not specify who the other investors were. Neither did he mention the name of any “major academic medical center,” despite assurances by the alternative plan’s supporters that one or more were interested. Gerson, who was at the April 7 hearing but did not testify, submitted an affidavit saying that unnamed medical centers and developers had told him they did not submit proposals because they believed the Rudin proposal was a “done deal” and that pursuing their interest would antagonize parties, “which could inflict economic retribution.” The former councilmember’s affidavit concluded with Gerson saying, “I believe there is a reasonable probability that, if given an extension, I and fellow objectors could work with the community, government officials and potential medical centers and development participants to come up with a plan which will both provide both a greater payment to creditors and better meet community needs.” But Morris rejected the argument and also overruled another proposal for a 45-day adjournment sought by Arthur Schwartz, attorney for the tenants’ association of the Robert Fulton Houses, a New York City Housing Authority development in Chelsea. Schwartz is associated with the Gerson group in seeking an alternative to the Rudin proposal, but he did not join in the Gerson group’s objection because he was representing his Fulton tenants clients in a separate objection. Schwartz told the April 7 hearing that he was disturbed both by the lack of details in the North Shore-L.I.J. proposal and by the lack of a formal bidding process for the sale negotiated by Rudin and North Shore-L.I.J. with St. Vincent’s creditors. He called for the adjournment in order to “make sure there is an arm’s-length transaction” that would allow other bidders to offer more money than Rudin and provide a full-service, acute-care hospital for the community. Morris, however, said that negotiated, private sales of debtors’ assets are not unusual in bankruptcy cases if they are the result of sound business judgment. She also said that although the New York State Constitution requires the state to provide healthcare for low-income residents of Fulton Houses, it does not mean that a facility has to be on the shuttered St. Vincent’s campus. Yetta Kurland, attorney for the Coalition for a New Village Hospital, also called for an adjournment, saying that the proposed North Shore-L.I.J. free-standing emergency department did not meet the neighborhood’s healthcare requirements. Kurland also faulted the privately negotiated aspect of the deal. But her pleas did not move the judge to grant a delay in the case. Morris dismissed all moves to delay the sale. She said that Schwartz’s State Supreme Court lawsuit demanding that the state build a full-service hospital as a successor to St. Vincent’s “could take years.” She also said she doubted that Gerson’s group could raise a financially credible challenge to the Rudin-North Shore-L.I.J. proposal. Kenneth Eckstein, attorney for St. Vincent’s, opposed any delay, saying, “Every month we don’t close costs, the estate is assessed $1.2 million in interest and carrying charges.” Stephen Bodder, attorney for St. Vincent’s unsecured creditors, said the proposed deal had the unanimous approval of creditors. In approving the sale, Morris cited the fact that Rudin’s offer included a $22 million cash down payment. In addition, Morris said, the fact that Rudin’s offer was not contingent on city zoning or state Department of Heath approvals was an important reason for her decision. She noted that the current deal was a successor to Rudin’s 2007 contract to buy St. Vincent’s east campus. That deal, which included Rudin’s right to buy the property for 15 years, was canceled with the hospital’s bankruptcy filing last year. As of last week, there were 18 medical tenants in the O’Toole Building, at 12th St. and Seventh Ave., on a month-to-month basis. Eight have agreed to leave by July 31, and the rest will meet with St. Vincent’s on May 19 in an effort to resolve their issues, according to a court-approved agreement.Copyright 2011 Community Media LLC. All rights reserved.

By LYNNLEY BROWNING DIVORCED homeowners wrangling with the task of removing a former spouse’s name from the mortgage after buying out his or her equity stake in the marital house may think that refinancing is the only choice. There is another, little-known option that can avoid refinancing and its costs, which generally run 3 to 6 percent of the outstanding loan principal, according to LendingTree. You simply ask your lender to remove the former spouse’s name, leaving the loan note in your name only. The problem is that not all lenders or mortgage servicers offer this option, known as release of liability. The lenders and servicers that do will most likely run a separate credit check on you — requiring, for example, that you meet minimum credit scores (typically from Fannie Mae, the giant government buyer of loans), and ensuring that you are current with the monthly mortgage payments. They may also require that any investors in the loan, after it is sold off, agree to the deal. And if you are “under water,” and owe more on the mortgage than the home is currently worth, this process is not an option. “This is a common and often messy business,” said Jack Guttentag, a mortgage expert and emeritus finance professor at the Wharton School of Business at the University of Pennsylvania. “Lenders seldom have a reason to take a co-borrower’s name off the note.” But, he added, if a homeowner can prove that he or she can afford the payments and meet the required credit criteria — typically those of the investor in the loan — then release of liability may work. Neil B. Garfinkel, a real estate and banking lawyer at Abrams Garfinkel Margolis Bergson in New York, says the lender “will require the borrower to prove that the borrower is able to support the monthly payments without the co-borrower spouse,” typically through monthly bank statements, annual tax returns and investment statements. Having the name removed protects the credit of both parties, actually. If the former spouse failed to pay other debts, a lien could be placed on the home, and if you were delinquent on the mortgage payments, your former spouse’s credit could be hurt. Most divorce settlements stipulate one of two outcomes for marital property. Either the house must be sold, or the person wanting to keep the property must buy out the other’s share, usually within months of the date of the settlement, and get the other party’s name off the mortgage — either through refinancing or a release of liability — typically within a year. Under the second option, the former spouse signs a quit-claim deed at the divorce settlement, relinquishing his or her claim to the property. But while that action takes the former spouse off the house’s title and leaves it in one name only, it does nothing to remove his or her name from the actual mortgage. Lenders or servicers typically charge $300 to $1,000 to execute a release of liability and require the property owner to pay an additional, nonrefundable application fee, typically $250 to $500. The process can take from 30 to 90 days, mortgage experts say. One mortgage servicer, PHH Mortgage of Mount Laurel, N.J., requires that a homeowner with a loan sold to Fannie Mae have a minimum FICO credit score of 620 and a debt-to-income ratio of 50 percent or below (the ratio measures the amount of gross monthly income that goes to paying off all debts). Still, a lender or servicer “generally has no obligation to release one of the borrowers,” Mr. Garfinkel said. But Mr. Guttentag says homeowners may have one point of leverage. He suggested that qualified borrowers not accorded the release they seek tell their servicer or lender that unless a release of liability can be executed, the borrower will refinance the mortgage — at another lender. “In such cases,” he said, “the servicer might agree to do it.”Copyright 2011 The New York Times Company. All rights reserved.