The Fifth Circuit recently affirmed a district court decision that had affirmed a bankruptcy court's decision to adjudge a debt nondischargeable pursuant to 11 U.S.C. §523(a)(2)(B) in the individual chapter 7 case of the principal shareholder of an excavating company.[1] According to the lower court, in winning a subcontract for his company on the strength of materially false and intentionally deceptive financial statements, the individual was personally liable because, in violating §523(a)(2)(B), he was culpable either for acts of common-law fraud or as a corporate agent reachable by piercing the corporate veil.

While the appellate review of the nondischargeability decision is notable for its thoroughness and detailed reasoning, perhaps more significant is its sua sponte review of the bankruptcy court's jurisdiction to render a monetary judgment against the debtor, which was an issue of first impression in the Fifth Circuit. According to the Second, Sixth, Seventh, Eighth and Ninth Circuits, the appellate court determined that the bankruptcy court acted properly and within its powers.

Like the others before it, the Fifth Circuit found that the statutory construct for a bankruptcy court's jurisdiction, viz., by referral from a district court, over core proceedings arising under title 11, and those arising in or related to cases under title 11, did not extend to a monetary judgment. Instead, the court relied on pragmatism and tradition, the latter being more precisely a manifestation of legislative intent.

As a matter of pragmatism, opined the court, judicial efficiency is best served by investing monetary judgment jurisdiction in the bankruptcy court because the requisite showings in the facts and the law for nondischargeability - such determination occurring in a core proceeding - also showed the amount and basis for the debt. It appeared wasteful to require a separate action in federal or state court.
According to the appellate review, the traditional basis for a bankruptcy court's jurisdiction to render a monetary judgment springs from provisions of the 1898 Bankruptcy Act. The court reasoned that such authority survived the Bankruptcy Code's 1978 enactment because the latter manifested the intent of Congress to expand the jurisdiction of bankruptcy courts vis-à-vis that afforded by the earlier Act. The Fifth Circuit joins five of its sister circuits in affirming a bankruptcy court's jurisdiction to enter a monetary judgment against a debtor after finding his debt to be nondischargeable.

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Recently, the U.S. Bankruptcy Court for the Western District of New York, in a combined treatment of two chapter 7 cases involving the same trustee and debtor's attorney, penalized the attorney for delaying the cases and failing to comply with the  supplemental reporting requirements of Fed. R. Bankr. P. 2016(b).[1] The debtor's attorney refused to appear to defend against the trustee's motion for turnover of assets unless he was compensated by additional fees. After the trustee moved to force the attorney to disgorge his fees already received, the attorney appeared at the coincident hearing on both motions.  While the turnover issues were resolved and the clients satisfied, the fee issue was not.

According to the court, the Bankruptcy Code and Rules of Procedure, while requiring disclosure of a debtor's attorney's fees, do not mandate the scope of the representation that he must provide. However, in this matter, the attorney's compensation disclosure set forth his agreement to provide services, broadly, "for all aspects of the bankruptcy case." The subsequent list of exclusions contained no exception for defense of a turnover demand. Consequently, the court found that the attorney acted improperly when he refused to act absent additional compensation, delayed the case and caused the trustee to move for disgorgement of his fees.  The court determined that as a matter of equity, the debtor's attorney must reimburse the trustee for the costs that he was forced to unnecessarily bear.

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Bankruptcy courts addressing the issue of whether debtors may deduct college expenses for their adult children post-BAPCPA have found no statutory support for such deduction. The Bankruptcy Code allows deductions for some education expenses, but limits deductions for elementary and secondary education expenses. While the Code allows debtors to deduct expenses for contributions to family members, it is limited to elderly, chronically ill or disabled family members. College expenses for adult children do not fall into these statutory provisions and therefore are not supported under BAPCPA.

The following are sample cases involving college expense deductions.

In re Baker, No. 08-13987, 2009 Bankr. LEXIS 193 (Bankr. N.D. Ohio Jan. 30, 2009): Recognized that special circumstances might justify allowance of college expenses for adult children, but found that this case does not rise to that level because it is not apparent that the debtor has made a reasonable effort to mitigate her expenses as her adult child could live with the debtor rather than on her own.

In re Saffrin, 380 B.R. 191 (Bankr. N.D. Ill 2007): Held that a debtor may not deduct his daughter's college expenses because the Code only allows education expenses related to elementary or secondary education.

In re Boyd, 378 B.R. 81 (Bankr. M.D. Pa. 2007): Found that a debtor may not expense her adult daughter's college education because the Code does not expressly provide such deduction and it does not qualify as another necessary expense.

In re Hess, No. 07-31689, 2007 Bankr. LEXIS 3553 (Bankr. N.D. Ohio Oct. 15, 2007): Found that "[w]hile a parent's desire to assist a child...pursuing a college degree is laudable, a debtor is not free to do so at the expense of her unsecured creditors."

In re Featherston, No. 07-60296, 2007 Bankr. LEXIS 4578 (Bankr. D. Mont. Sept. 28, 2007): Held that a debtor may not deduct college expenses for adult children because children are not elderly, chronically ill or disabled as required by the Code to qualify as an acceptable contribution to family members.

In re Goins, 372 B.R. 824 (Bankr. D. S.C. 2007): Held that the Code limits education expenses to those related to elementary and secondary school.

In re Hicks, 370 B.R. 919 (Bankr. E.D. Mo. 2007): Found that a debtor paying college expenses of an adult child is a luxury, not a necessity, and that the Code does not provide any support for allowance of such deduction.

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The U.S. Bankruptcy Court for the District of Idaho recently sustained a chapter 7 trustee's objection to a creditor's motion for relief from the automatic stay pursuant to 11 U.S.C. §362(d).[1] Under circumstances of serial assignment of an interest that are more the rule in real property mortgage lending than the exception, the court found that the movant failed to show its standing as the real party in interest, with a pecuniary interest or at least an actual stake in the outcome, able to press its cause. The court found that the movant, which styled itself as the "nominee," (or beneficiary) of the lender, could not show its standing because it acted solely in a representative capacity rather than for its own account. The only documentation provided with the motion failed to show that the movant held the note secured by the debtors' real property.

As a cure, the movant's attorney filed a "supplemental affidavit," by which he sought to supplement the record with a purported "original" note. The court found that the filing was improper for several reasons. The affidavit was fatally flawed because it was filed without appropriate authorization, after the record was closed, denying the trustee an opportunity to respond. It impermissibly addressed factual issues that the required testimony in open court lacked any indicia of the declarant's capacity to offer foundational testimony regarding the note and the representation of the note as "original" contradicted the movant's statements in its motion. Finally, the note named no transferee to establish the movant as its holder. Along with a sua sponte cautionary reference to Fed. R. Bankr. P. 9011, the court concluded that the movant failed to establish its standing, and sustained the trustee's objection to the motion for relief from stay.

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The House Judiciary Committee approved an amendment in the nature of a substitute for H.R. 200 on January 27, sending the bill to the House floor where it may be attached to another measure for fast action.  The bill is entitled "Helping Families Save Their Homes in Bankruptcy Act of 2009."  The purpose of the bill is to provide a means through chapter 13 for a debtor to avoid a foreclosure and keep the primary residence.  The bill is aimed at helping chapter 13 debtors who might have the means to afford their home, although they may no longer be able to afford their current mortgage.  The core of the bill gives a bankruptcy judge in a chapter 13 case the discretion, within choreographed steps, to reduce the mortgage amount and alter other key terms on the principal residence, while partially protecting the lender in the event of a later sale after the property has appreciated in value.  The bill is also intended to curb certain perceived abusive practices by lenders and servicers.  Several key provisions of the bill include:

1. A relaxation of the debt caps for individual debtors seeking relief under chapter 13 - ostensibly this would increase the universe of potential chapter 13 debtors who may invoke the other provisions of the bill (earlier versions of the legislation limited the bill's reach to subprime or other exotic mortgages, while the substitute applies to any type of mortgage);
2. An exemption from the credit counseling requirement before one files a chapter 13 case where a foreclosure is pending - a sensible approach in light of the empty but significant ritual this requirement has become;
3. An additional ground of claims disallowance for Truth in Lending Act violations that may have given rise to a remedy of rescission even if a foreclosure judgment has been entered - one might speculate whether the other disallowance provisions, including section 502(b)(1), might be sufficient;
4. A change to section 1322 to allow the bankruptcy court to modify the terms and conditions of a loan secured by the debtor's principal residence in a chapter 13 case.  This is the heart of the bill.  It seeks to accomplish the goal of helping individuals retain their homes by bifurcating the mortgage into a secured claim equal to the current fair market value of the home and an unsecured claim for any difference from the existing mortgage.  It then authorizes the court to impair the lien as it relates to the now unsecured portion of the mortgage.  The court is also authorized to modify the interest rate and term length of the mortgage consistent with the prescription within the bill.   Payments of such modified loans may be made directly to the holder of claim ("outside the plan") rather than through the trustee.  Finally, the bill provides shared appreciation on a sliding scale, so that the holder of the mortgage may share in any proceeds upon the sale of the home so long as the sale occurs before the chapter 13 debtor receives his discharge.  The bill also contains certain notification and certification requirements upon the debtor to contact mortgage servicers and attempt to modify the mortgage before being able to invoke these provisions.  This is the thrust of the new complexity of chapter 13 practice and begets the question - if this is so good for the chapter 13 debtor, why leave the relief to him alone?  Why not the chapter 7 debtor?  Indeed, why only a debtor in bankruptcy as opposed to any borrower who owes more on a mortgage than the home is worth?
5. A limitation of estate, debtor, and debtor property liabilities associated with costs incurred during the pendency of the case unless certain proof and disclosure requirements are met - a result buoyed by rather distasteful practices undertaken by some mortgage service providers that have come to light;
6. The bill applies to all cases before, on or after the date of enactment.  Thus a bankruptcy court could modify a confirmed plan in a pending chapter 13 case, or a debtor could dismiss and refile a case to take advantage of the new provisions.

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This legacy article may contain broken links. For the latest from ABI, visit https://www.abi.org/membership/committees/consumer-bankruptcy

This week's Listserve summary is brought to you by Thomas R. Dominczyk, Esq. of Maurice & Needleman, P.C. in Flemington, New Jersey. Tom currently serves as the ABI Consumer Bankruptcy Committee's Special Projects/Task Force Leader.

POST-BAPCPA CASES

PRE-BAPCPA CASES

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