The Tenth Circuit BAP handed down a decision four days ago called, Weinman v. Graves (In re: Graves), 2008 WL 4649378, Nos. CO-08-038, 07-20569-ABC (10th Cir. BAP, Oct. 22, 2008); that is an absolute embarrassment of riches. Oh, and the fact that it provides a nifty new tool when representing debtors who are expecting a hefty tax refund and don’t have time to get it back before they file for Bankruptcy is just almost gravy.

The issue in Graves is whether or not a Chapter 7 Trustee can require turnover from the Debtors of a prepetition transfer to the IRS in the form of an application of a pre-petition tax refund to a post-petition tax year. In other words, the Debtors filed a tax return that would result in a large refund. The Debtors elected to have that refund applied to their next year’s tax liability. (Every year I see that box on my tax return and wonder who on EARTH would do that? Well, now I know — smart debtors.) The Trustee demanded turnover from the Debtors of that refund amount. The Debtors refused, and the rest is a wonderful BAP opinion.

Now, I am a little bit prejudiced. I am going to like any opinion that begins with:

This appeal exemplifies the concept that “you cannot get blood out of a turnip.”

Oh, and it gets better.

The official holding of the Court is:

Assuming, without deciding, that the pre-payment constitutes estate property as a contingent reversionary interest, this Court must decide wither the Bankruptcy Code empowers trustees to demand its turnover. We hold that it does not. Turnover is a remedy that is specifically limited by Section 542 to “property that the trustee may use, sell, or lease,” and is in the turnover target’s possession or control during the bankruptcy case. A contingent reversionary interest in funds held by another is simply not something that is in the debtor’s possession that can be turned over to the trustee.

Oh, please, “A contingent reversionary interest”? Would someone who paid attention in Property I please explain that to me?

Ok, so a Debtor can apply a tax refund to a post-petition year, and the Trustee can’t take it back from the Debtor. Why can’t the Trustee take it back from the IRS? Stay tuned for that and more fascinating tidbits from Graves.

By the way, if you are in the 9th Circuit (or just outside the 10th) be sure to read Nichols v. Birdsell, 491 F.3d 987 (9th cir. 2007) before getting too excited about Graves.

Elaine

One of the more entertaining aspects of the 2005 Bankruptcy Reform bill is that it makes so little sense. Under the terms of the Means Test a Chapter 13 debtor whose gross income is over the median for his State is required to have a 5-year commitment period. A Debtor whose gross income is below the median for his State may have a 3-year commitment period. Notice, that this says gross income; it doesn’t say disposable income.

Now, I love to harp on the fact that the Means Test really has far more to do with what you spend your money on and what kinds of debt you have then with how much money you actually make. This is one area where that is not true. If your gross income is over median you have a five-year commitment period even if your Disposable Monthly Income and your Projected Disposable Monthly Income are both negative. In other words, if you are over median income, but you pass the Means Test and are not required to make any distributions to unsecured creditors and still choose to file a Chapter 13; you still have a five-year commitment period.

This makes no sense. If someone is filing a Chapter 13 to restructure secured debt, is eligible to file a Chapter 7 and chooses to file a 13; why should they have to spend five years in their 13 plan when they aren’t required to pay anything to their unsecured creditors? Why not let them reorganize their secured debt and get out? Because that would make sense, that is why.

So, smarter lawyers than I am came up with a reading of this statute that lets above median income debtors who still pass the Means Test get in and out of a Chapter 13 in less time. They decided that the commitment period wasn’t really a time period, it was a multiplier. Chapter 13 plans are generally formulated as a base plan where you agree to pay a certain amount that is calculated as being the monthly plan payment x the plan length. When you pay a base, you just pay the base and then you are done. So, clearly that was what this language contemplated. It was creating a base amount of the monthly payment times the number of months in the commitment period. If the Debtors can pay that amount in a shorter period of time, fine. After all, that cuts down on administration expenses and increases the chances of the debtors successfully completing the plan — except not a lot of courts have agreed that this is what the Statute says — probably because a five-year commitment period sounds like five years and not like times 60.

I understand the argument, I would never have thought of it; but I do understand it. I just don’t like it. I want my clients who are over median but who pass the Means Test to be able to file as short a plan as they can pay. I want them to get in and out. I want them to succeed. I don’t want them to get to year 4 and lose a job or develop a significant illness and wind up having to convert or dismiss. Unfortunately, so far the case law inside this Circuit has gone against the Debtors. The most recent decision is out of a Bankruptcy Court in Colorado, In re: Pfeiler, Bankruptcy Case No. 07-22817 SBB, decided Sept. 12, 2008. There is, currently, a case on appeal from the BAP to the Tenth, itself, that might address this issue. Even so, I don’t hold out great hopes — and I think it stinks.

Elaine

Capital One has been caught by the U.S. Trustee’s office in Massachusetts.  They have been caught filing Proofs of Claim (i.e., a request for payment stating that they have a valid claim against the Debtor and are entitled to be paid) in Chapter 13 cases requesting payment for debts that had already been discharged in a preceding Chapter 7 case.

Sorry, but that pretty much qualifies as lying, cheating and stealing.  Furthermore, filing a false claim is punishable by a fine of up to $50,000 and some serious jail time.

So, what punishment has the U.S. Trustee suggested for Cap One?

They have to give the money back.  Yep, they filed false claims — thousands of them — and they have to give back the money they were paid on those claims.   Oh, and they have to hire an independent auditor to make sure that they do.

This is set out in a proposed settlement agreement, which is announced on the U.S. Trustee’s web page if anyone wants to read it.  The settlement has not yet been approved by the Court — and I hope that it won’t be.  It certainly does nothing to dissuade this kind of conduct in the future.  Nor does it do much to change the U.S. Trustee’s Office’s reputation for being a bit pro-creditor.

I think I need to get more aggressive about pursuing discharge violations.

Elaine

The Means Test is becoming even more optional.  Yesterday, the President signed into law the National Guard and Reservists Debt Relief Act of 2008.   The basic effect of this act is to make the Means Test, the centerpiece of the 2005 Bankruptcy Reform Act, inapplicable to certain members of the National Guard, Reserves or disabled veterans.

The basic effect of this act is to exempt from the Means Test requirements certain people who file for bankruptcy within 540 days of the time in which they return from active duty in a combat zone.

Quite honestly, I expect this to have very little practical application and make virtually no difference in the relief available to most returning service members.  However,  it is one more chip in the Means Test armour.

As far as I can tell, the Means Test has done very little other than to drive up the cost of filing for bankruptcy and increase the paperwork and record keeping necessary.  Once you learn how to play it, it doesn’t really change eligibility for Chapter 7 relief for more than a handful of people

There are already two large exceptions to the Means Test.  The first is that Social Security benefits aren’t included in income for purposes of the Means Test.  The second is that if the Debtor’s debts are primarily non-consumer, then no Means Test is required.  This exception is very interesting, because it doesn’t say if the Debtor’s debts are primarily business debts — it says non-consumer.  Well, taxes have been held to be  non-consumer debt.  So, now, people with failed businesses whose debts are primarily non-consumer and people whose debts are primarily tax debt and National Guard, Reservists and disabled veterans returning from a combat zone are all exempt from having to complete the Means Test.

By the way, the actual provisions of the National Guard and Reservists Debt Relief Act of 2008 are very specific and quite detailed.  Before making any conclusions about which cases it will or will not apply to, be sure to read the actual Statute.  Oh, and the Act takes effect in sixty days.

If you use this successfully, let me know.

Elaine

This is pretty good, not perfect; but pretty good.

Twelve Myths about Bankruptcy

I would add to the first myth that there are several pretty darn prominent Oklahomans who have filed for Bankruptcy and nobody has noticed until they did something else really stupid and a Journalist decided to see what else they had been up to.

Number 10 is almost true. Frankly, a lot of taxes are completely dischargeable in a Bankruptcy. There is not, however, a special kind of Bankruptcy known as a “Tax Bankruptcy”. That goes in the same rumor mill with the “Medical Bankruptcy”. There are four different kinds of Bankruptcy that may be filed by an individual — Chapters 7, 11, 12 and 13. Any one of them may be used to discharge taxes or medical debt or credit card debt or just about anything else.

Ok, so it could have been better; but 10 out of 12 isn’t bad. Check it out.

Elaine

A very interesting case has come down out of the Bankruptcy Court for the District of Massachusetts. It is Bartel v. Walsh, et al (in re: Bartel); Adv. No. 06-1161. The opinion is dated October 10, 2008 — so, this is nothing if not timely.

The main issue in Bartel is whether or not the exception from the automatic stay for criminal prosecution is absolute. Basically, the Debtor in Bartel argued that this exemption should not apply if the actual motive behind the criminal prosecution was to collect a debt. In support of his argument the Debtor argued provisions from the Federal Civil Rights Act, the Massachusetts Civil Rights Act, the 13th Amendment to the U.S. Constitution and abuse of process. Personally, I thought that the 13th Amendment Argument was downright inspired.

The Debtor in Bartel was a general contractor, and there are sufficient differences between Massachusetts and Oklahoma law regarding general contractors and client funds that I don’t expect to ever see a case just like this one. (Although, for a similar set of facts, but very different law, where I got my butt kicked at the Oklahoma Supreme Court see, In re: Harris, 2002 OK 35, 49 P.3d 710.)

Where I see this kind of issue is with hot checks. I have always told my clients, as this case supports, that a bankruptcy filing discharges the civil liability for hot checks; it does not discharge the criminal liability. In other words, the merchant to whom they wrote the checks can’t sue them; but the D.A. can still put them in jail. On the other hand, I have never actually seen a case where a D.A. has brought a bogus check charge after a Bankruptcy filing. In some cases the reason for that is the restrictions in Oklahoma Statute on what actually constitutes a bogus check — but not all cases.

To my mind the really interesting part of this case is the non-bankruptcy aspect. I will be interested to see if the Debtor pursues some kind of abuse of power or civil rights action against the prosecuting attorney.

Debtor is fortunate to be represented by one of the most dedicated and creative counsel out there. It will be interesting to see how this plays out.

Elaine