The National Attorneys General Training & Research Institute

The National Attorneys General Training & Research Institute The National Attorneys General Training & Research Institute

Bankruptcy Bulletin - April - June 2017



This year’s bankruptcy seminar for governmental counsel and staff will be held November 13-16 in Savannah, Georgia. We will use the same overall hypothetical format that we have worked with for the last couple of years (see agenda also attached to the cover email). In addition, though, we will be running a mini-session for those who primarily work on child support issues and don’t necessarily need to explore the full range of bankruptcy issues. That mini-session will run from Monday afternoon through the end of the day on Tuesday, so it will let those attendees hear several introductory sessions and then spend Tuesday afternoon concentrating on child support issues specifically. The cost for the mini-session is only $200 per person.

The general hypothetical will address student loans and the role that “for-profit schools” and private loans have played in the ever-increasing student loan crisis. Student loan debt has risen dramatically in recent years and now outstrips even credit card debt. We will be dealing with a variety of issues arising from that starting point: one part of the seminar will focus on consumer protection-type issues arising out of failing and fraudulent “for profit colleges” that promise to teach students useful skills and get them good jobs, but instead just leave them unemployed and saddled with enormous debts. Other parts of the seminar will look at the ramifications of that scenario, ranging from the nuts and bolts of collecting on student loans to legislative and administrative efforts to deal with students who have been left stranded when their school failed. Our keynote speakers will give a global perspective on these topics and our ethics session will focus on, among other topics, how the office should act when it is litigating on both sides of an issue. We also expect the conference to have a heavy emphasis on the nuts and bolts of presenting and defending claims, as well as on enforcing and collecting on prepetition judgments (monetary and otherwise) before, during, and after a bankruptcy.

We will be meeting in the Coastal Georgia Center which provides a very comfortable conference facility at a very reasonable cost. We have reserved rooms in three nearby “suites” hotels which include a breakfast each morning in their also very reasonable cost of only $145 per night. Further, as part of our quest to be both green and economical, we are trying a new approach to materials this year. We will, as always provide a thumb drive with all of the materials presented at the conference and much more besides. But, rather than printing up a binder with the outlines and PowerPoints for all sessions (thereby producing a fat and heavy book to tote home), we will be posting those materials in advance on a website open to those who register for the conference. You can look at the agenda and decide which sessions you want to attend and then download just the relevant materials to a laptop or tablet and/or print them out to have handy for taking notes. Either way, you need only bring what you will use for the sessions you choose to attend.

The net result is that we have been able to work the savings for the hotels, the conference center, and the materials into the budget and have reduced registration costs from last year, making this seminar even more accessible than before. Early registration for governmental counsel is only $375 this year until October 18, 2017, with groups of 3 or more paying a group rate of $300 per person. (Note, the scholarship recipient from each state count as one of the three people needed to receive a group rate.) If you register after the cutoff date, the regular rate will be $475, with a $400 group rate. Regular registration for private counsel is $595 with an early bird rate of $495.

In light of the wide range of topics being covered this year, we urge you to pass the information on to anyone in your office that might be interested, particularly those dealing with student loan and child support and consumer protection issues. Information on the seminar and registration will be available on the NAAG website starting Monday, August 14. Scholarship information was previously sent out to Training Coordinators in your office and you should check with them for information on nominations. There are limited funds this year but we are able to provide one no-cost registration and $300 for travel costs per state. In light of the highly topical nature of this program and the extremely reasonable pricing, we hope to see many states sending a group to take advantage of this unique learning opportunity.


Appling v. Lamar, Archer & Cofrin, LLP (In re Appling), 848 F.3d 953 (11th Cir. 2017). A petition for certiorari was filed on the question of whether a statement made by a debtor about a single asset can constitute a “statement respecting the debtor’s . . . financial condition,” such that the statement must be in writing for the debt to be excepted from discharge. The Fourth and Eleventh Circuits have held that it is; the Fifth, Eight, and Tenth Circuits have held that it is not. The Court requested the views of the Solicitor General on the case which is typically a sign that the Court finds the issue to be one of some significance or difficulty. The case will remain pending until the fall when the Court issues its decision on grants of certiorari.

Florida Dept. of Revenue v. Gonzalez (In re Gonzalez), 832 F.3d 1251 (11th Cir. 2016); cert. denied, Fla Dept. of Revenue v. Gonzalez, 2017 U.S. LEXIS 4170 (June 26, 2017). The BAPCPA amendments added a number of actions state child support creditors could take without violating the stay. However, upon confirmation of a Chapter 13 plan, those creditors are bound to the terms of the plan under 13 U.S.C. 1327. In this case, the plan provided for full payment of the claim over an extended period of time, but did not expressly address whether the state was bound to forego any the collection methods set out in the BAPCPA during the plan term. The state argued that the more specific stay exceptions controlled, at least in the absence of explicit prohibitory plan language sufficient to trigger application of United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260 (2010) to limit its collection efforts. The Eleventh Circuit disagreed; Florida sought certiorari with the support of an amicus brief filed by New Hampshire and 16 other states. The Supreme Court, however, chose not to grant certiorari on the issue. This topic and its practical implications will be featured during the bankruptcy conference.



In re Lehman Brothers Holdings, Inc. (Adler v. Lehman Brothers Holdings, Inc.), 855 F.3d 459 (2nd Cir. 2017). Employee stock option rights are subordinated securities under Section 510(b).

Stock options provided to employees as part of their compensation are treated as the equivalent of direct stock purchases; claims for damages for the failure to receive any value from those options are subordinated to claims of other unsecured creditors. That is so, even if the employees sought to style the claims as ones for rescission of the stock agreement or for restitution for the value of their labor. All such matters are equally covered by Section 510(b).

Mendelsohn v. Ross, 2017 U.S. Dist. LEXIS 70982 (E.D. N.Y. 5/9/17). Damages from medical malpractice claim arising from prepetition actions was, nevertheless, not prepetition property.

The debtor had a medical device implanted in 1999. In 2004, she filed bankruptcy and reached a settlement with the trustee with respect to certain property she held then and those assets were paid out to her creditors in 2005. In 2011, the FDA for the first time issued an advisory about the device; the debtor, herself, did not learn of problems with her implant until 2012. She later was paid a settlement of about $105,000 for issues arising from the defective product and the trustee, upon learning of the settlement, sought to claim that amount as property of the estate to be used to fully pay all creditors. The bankruptcy court rejected his argument based on the view that there was no possible way the debtor could have known of having this claim or being able to assert it at the time of her bankruptcy so it could not have been property of the estate. The district court thought that view was too narrow since even property acquired postpetition could be property of the estate if its genesis were “sufficiently rooted” in the pre-bankruptcy past. On the merits, though, the district court agreed with the lower court that, while the later settlement was rooted in the past, it was not “sufficiently” rooted to be included as property of the estate. The critical elements appeared to be whether there was notice and knowledge of the malpractice and a possible injury at the time the bankruptcy case was open. This issue is clearly related to the question of when one has a claim against the debtor but it is less than clear that this same analysis would be used in the case of a creditor suing a debtor for such late-discovered injuries.

In re Taylor (Sound Rivers, Inc. v. Taylor), 2017 Bankr. LEXIS 1461 (Bankr. E.D.N.C. 5/31/17). Citizen suit seeking injunctive relief to enjoin debtors’ swine farming operations from discharging effluents into river was not a “claim.”

The debtors operated pig farms bordering on waterways and runoff from those operations entered the water, allegedly creating unlawful pollution. Certain plaintiffs sought to rely on the “citizen suit” provisions of RCRA, a federal law, and similar sections in state clean water law to enjoin the debtors’ operations. When the debtors filed bankruptcy to preclude those suits, the court had to decide whether the injunctive actions were actually monetary “claims,” that might violate the automatic stay or were not claims at all and, hence, not subject to the stay. The court analyzed several prior cases and concluded that the answers turned on whether the state (and, by derivation, the citizen suit plaintiffs) had an option to do the work and seek reimbursement or could only proceed by way of injunctive relief. That is, the court stated, it was irrelevant that the state could seek injunctive relief or that it might prefer to use injunctive powers; the only issue was whether it had an option to do the work and seek payment. The courts have generally found that RCRA only contemplates injunctive relief and does not expressly provide a reimbursement option to the state so the court found the action was not a claim. What is actually more interesting is that the case law on which the court here relies actually subtly rewords that third question in a way that makes it far more favorable to plaintiffs; i.e., the cases ask – can a plaintiff accept payment in lieu of having the pollution cleaned or stopped. Asking if a law authorizes the state to accept damages and simply leave the pollution in place is a much different question than asking if the law allows the state to fix the problem itself and demand to be paid therefor. In the latter scenario, even if the particular statute does not expressly include such a remedy, there is almost certainly an “unjust enrichment” or similar provision that would allow the state to be repaid. If so, then it is hard to envision a scenario in which the state could not be said to have that “alternative remedy,” that would make the obligation a claim. The court here, though, actually relied on the “cannot accept damages in lieu of cleanup” analysis to find that there was not a claim. States should be careful to phrase their arguments in the same vein.

In re Venoco, LLC (City of Beverly Hills v. Venoco, LLC), 2017 Bankr. LEXIS 1457 (Bankr. D. Del. 5/31/17). Debtor need not obey orders to properly close oil well despite statute and lease obligations; government had to do the work and submit claim (which would likely not be paid).

In a fairly disturbing decision, the court concluded that where the debtor complied with its duty, under applicable law and its lease, to terminate operations of an oil well operating in close proximity to a high school, it could not be forced to carry out the remainder of its obligations under those provisions to plug the wells, remove its equipment, and/or monitor the site. While the site was safe while it was being maintained, there could be an unsafe situation if those actions did not continue – but the debtor did not want to perform them and demanded that the state or city should step in and take over for it. The court agreed that those costs and those needed to fully decommission the well should simply be treated as a claim; that is, the government should take over and do the work at its own expense and then submit a claim and hope to be paid. The court did not clarify what priority such a request should receive or whether the government was likely to be repaid for its expenditures. Pure economic injury, the court held, was not irreparable harm. The government had asked that the debtor be required to reserve funds so it could do the work it was legally required to do – but the court held that was another way of saying that money would solve the issue and, therefore, the government merely held a claim.

That holding, though, really proves too much. As stated in Penn Terra, Ltd. v. Dept. of Envir. Res., 933 F.2d 267 (3rd Cir. 1983), forcing compliance with an injunctive order requiring the debtor to clean up contamination was not the “enforcement of a money judgment” (i.e., the collection of a claim) merely because the debtor would otherwise have to spend money to comply with the order. The order in Penn Terra was very much like the order here – and, if this court is correct, the Third Circuit should have resolved that case by simply telling the state to do the remedial work itself and then submit its costs for payment to the bankruptcy court. The simple fact, of course, is that virtually any injunctive order to a debtor could equally be resolved by having the other party do the work for the debtor (or just accept cash and accept the damage done). If either or both of those were enough to make an obligation a claim, there is virtually nothing that would escape being included. The same problem arises from the court’s position that violating the clean-up order would not cause harm to the public interest because it simply assumed that the government would perform the work itself and, thereby avoid the harm. But again, that appears to go too far, since such an approach could always wipe out any duty on the debtor to obey the law since the government could presumably always take over the debtor’s obligations itself. The case is being appealed and will warrant close attention as it goes forward.

In re Flying Star Cafes, Inc. (NM Enterprises, Inc. v. Harrington), 2017 Bankr. LEXIS 1251 (Bankr. D. N.M. 5/5/17). Section 510(b) subordination actions relating to claims arising form stock transactions may not be brought by individual creditors.

In general, the right to bring claims objections or other actions dealing with the treatment of a claim such as subordination is reserved to the estate representative (i.e., the trustee or the debtor). While a single creditor may bring an equitable subordination claim under Section 510(c) if it has a particularized impact on his claim, such a party may not take over the role of the estate if the effect of subordination would apply equally to all creditors. The court may also allow a creditor to bring the subordination action if the representative has unjustifiably refused to bring a claim but, in the case here, the debtor had already considered the matter and settled with the creditor whose claim was being attacked. The language dealing with subordination of stock purchase claims under Section 510(b) is even more restricted than for Section 510(c) actions so the court found no basis to allow the creditor to proceed on its own in this matter. Doing otherwise would create disincentives to settle with the debtor and result in a multiplicity of litigation.

In re Maqsoudi, 566 B.R. 40 (Bankr. C.D. Cal. 2017). Scope of “substantial contribution” expenses in Chapter 7.

Section 503(b) states that various expenses “including” those listed in its various subsections are given administrative priority. Section 503(b)(4) in particular allows for expenses of an attorney for an entity whose expenses are allowed under Section 503(b)(3), which include, under Section 503(b)(D), the expenses of a creditor that makes a substantial contribution in Chapter 9 or 11. The party here sought to obtain payment for the costs of his attorney in a Chapter 7 case, which is specifically not included in subsection (D). The court however (while noting that most decisions disagreed) concluded that the use of the term “including” in several places in Section 503 should be read to include the attorney fees of any party making a substantial contribution, even though a Chapter 7 case is not listed in this section. The court viewed the attempt to distinguish between what the various “includings” should apply to was invalid, and there was no reason to limit the Section 503(b)(4) provision to only the circumstances set out in Section 503(b)(3)(A)-(E). The court does not really come to grips with the fact that the language in Section 503(b)(3)(4) does not use the term “including” with respect to the expenses allowed under Section 503(b)(3)(A)-(E). It only makes reference to allowing those specific categories of expenses – and the opinion does not further explain why subsection (D) would have only referred to expenses incurred in Chapter 9 and 11 cases if the Code, in fact, intended to give priority status to all substantial contribution claims, which it could easily have done. In particular, the opinion does not explain what would be the limiting factor that would preclude the possibility of every party arguing that it should be compensated in Chapter 7 even though that section is plainly excluded from the Code language.


Weil v. Elliott, 2017 U.S. App. LEXIS 10549 (9th Cir. 6/14/17). Time limit set in Section 727 is statute of limitation, not of repose.

The debtor concealed his ownership of his home and received a discharge. Fifteen months later, the trustee learned of his fraud and sought to revoke his discharge. The debtor did not raise the one-year limitation period for such actions and the bankruptcy court granted the revocation. The BAP sua sponte reversed, holding that the time limit for seeking revocation was jurisdictional so that the bankruptcy court lacked subject matter jurisdiction. The Ninth Circuit reversed again, holding that the time limit in Section 727(e)(1) was a statute of limitations without jurisdictional effect since Congress had made no clear statement denominating it as such, nor had it linked the deadline with the provisions establishing jurisdiction for the bankruptcy court. Indeed, while it is clear that deadlines contained in Rules are normally not jurisdictional, that does not mean that the converse is true such that every deadline set by statute is automatically jurisdictional. Since it was not jurisdictional, the debtor forfeited his right to rely on the deadline by failing to raise to as an affirmative defense. A concurring judge noted that the section put limits on the plaintiff, not the court, and that the time limit would be very short if deemed to be a statute of repose.

Anderson v. Seven Falls Company, 2017 U.S. Appl. LEXIS 10355 (10th Cir. 6/12/17); Herrera-Nevarex v. Ethicon, Inc., 2017 U.S. Dist. LEXIS 92416 (N.D. Ill. 6/15/17). Differing analyses of equitable estoppel for unreported prepetition claims.

While the facts of these two cases differ somewhat and partially explain the different outcomes, they also reflect the differing starting points between the two circuits in these scenarios. The typical fact pattern is that the debtor has some form of prepetition cause of action of which he or she has a greater or lesser awareness prior to filing bankruptcy. The claim is not disclosed in the debtor’s petition, the debtor receives a discharge and, at some point, the claim becomes known, raising the issue of whether the debtor may still pursue the matter or is equitably estopped from doing so by virtue of the initial failure to report the asset. The Tenth Circuit takes a fairly hard-line approach although it does allow for some possibility of considering the extent of the debtor’s good faith and excuses for failing to report the matter. The Seventh Circuit, on the other hand, once the debtor has reported the matter and a trustee has been reinstated to pursue the matter, generally analyzes the issue in terms of the equities applicable to the trustee and the debtor’s creditors, not those relating to the debtor herself. Since an undisclosed asset never actually leaves the estate, the trustee is allowed to pursue the issue once he learns of it – and since neither he nor the creditors did anything inequitable, the Seventh Circuit generally sees no reason to penalize them by giving the defendant a windfall release. At most, the Seventh Circuit generally looks only to the question of the debtor’s conduct when the issue becomes what to do with a recovery that may exceed the amount of the creditors’ claims.

In re Price (Price v. Dept. of Education), 2017 Bankr. LEXIS 1748 (Bankr. E.D. Pa. 6/23/17). Debtor’s “ability to pay” for purposes of student loan discharge gauged by how long she had limited income compared to the original plan term, not compared to the length of time available for payments under the income contingent plans.

The debtor was raising three children on a salary that only just met her current needs. Her original loan terms contemplated that the loan would be paid off over 10 years. The court found that she had no ability to make payments now, but as the children grew up and left home, she probably could make payments on the loan over the time period allowed under the income payment plans which probably would not have required current payments. The court held that it would limit the consideration of the hardship issue to the time remaining in the original loan, not the longer period. That would likely make most, or at least a great many more, debts subject to discharge since the whole point of the extended period for income contingent loans is to reshape their terms so as to make them feasible in the long term. The court rested its opinion, though, in large part on the much larger burden that student loans now place on students in particular and the economy as a whole than in the earlier period when the tests for “hardship” were formulated.

In re Canonico (Holzberg v. Canonico), 2017 Bankr. LEXIS 1685(Bankr. D. N.J. 6/16/17). Deadline on filing complaint enforced strictly where debtor’s ECF filing did not occur until after midnight of the last day.

This case makes clear that the importance of “not putting off until tomorrow....” The plaintiffs had a prepetition suit against the debtor, appeared at the beginning of the case, and attended the meeting of creditors and a Rule 2004 exam of the debtor. Nevertheless, their counsel waited until at least 11:45 pm to initiate electronic filing of the discharge complaint. When the process was not completed and the document not finally uploaded until 12:44 am, the court held that the filing came too late and the plaintiffs were barred from proceeding. There was no clear showing of problems with the system and, in light of the very short time period counsel had left himself to complete the filing, the court saw no equitable reason to excuse the late filling even without any demonstrable prejudice.

In re Todd, 2017 Bankr. LEXIS 1129 (Bankr. S.D. Ind. 4/24/17). Where state knew of potential fraudulent overpayments of benefits to debtor, failure to file timely discharge complaint resulted in debts being discharged.

The state had been investigating the debtor for possible fraud in receiving benefit payments well in advance of his bankruptcy filing. The state received notice of the case and notice of the deadline for filing discharge complaints. It did not take any steps to file a complaint, apparently because it had not yet made its final determinations by that date. After the state did issue the fraud determinations and sought to garnish the debtor’s wages, the bankruptcy court agreed with the debtor that the state’s claims had been validly discharged. The relevant date for deciding when the claim arose was the date of the debtor’s conduct in not reporting that he had been employed while receiving benefits, not the date the state made the fraud determination.

In re Osborne (Kokas v. Osborne), 2017 Bankr. LEXIS 931 (Bankr. E.D. Tex. 4/3/17). Discharge exception under Section 523(a)(19) applies to any decisions made in non-bankruptcy forum and does not require review of merits of action.

The court concluded (possibly incorrectly) that Section 523(a)(19) is meant to allow only a non-bankruptcy proceeding to produce the judgment or settlement involving securities law violations and common law fraud occurring in securities transactions that will trigger the exception. That determination, though, the court held, has preclusive effect in the bankruptcy courts whether the judgment was entered by default or by settlement and without regard to other normal criteria for the application of issue preclusion. Moreover, the scope of the remedy ordered in the state-court provision is meant to be binding and to except all aspects of that remedy from discharge.


In re Billings (Billings v. Portnoff Law Associates, Ltd.), 2017 U.S. App. LEXIS 7346 (3rd Cir. 4/26/17) (unpublished). Postponing foreclosure sale during bankruptcy does not violate stay.

During the course of the debtors’ bankruptcy case, the town moved to postpone a sheriff’s sale five times, that had been scheduled prepetition but would have taken place postpetition, without seeking relief from the stay. The debtors argued that the continuances were harmful to them but the court rejected that view. First, it said that requiring multiple legal proceedings to lift the stay might themselves run up costs for the debtors and there had been no showing that they would be charged anything for the postponements. And, even if there were some costs, the court held, the stay is meant to protect the status quo, and doing so, in the face of a bankruptcy filing that precludes a scheduled action from proceeding, may require the creditor party to take some steps. Acting merely so as to preserve the status quo does not violate the stay.

Porter v. Nabors Drilling USA, L.P., 2017 U.S. App. LEXIS 6872 (9th Cir. 4/20/17). Party acting as “private attorney general” does not exercise police and regulatory power of state.

Under state law, a private party that contends that a company is violating wage and hour laws must first go to the state to allow it to take on and prosecute the case. If the state does not act, then the private party may bring his own suit and seek penalties, a portion of which he retains and the balance of which goes to the state fund. The plaintiff retains full control over the course of the suit and any settlement therein and can recover his fees in pursuing the action. The court found that this type of suit was like a qui tam action and, at least if the state did not intervene to pursue and control the litigation, the suit, like a private qui tam actions was not one “by the government.” The police and regulatory exception only protects suits by the government itself, not those who act on the government’s behalf. As such, this suit was subject to the stay.

In re Dingley (Dingley v. Yellow Logistics, LLC), 852 F.3d 1143 (9th Cir. 2017). Seeking contempt order based on debtor’s litigation misconduct (as opposed to mere failure to pay prepetition debt) was covered by police and regulatory exception.

The debtor failed to attend a scheduled deposition and then failed to pay the sanctions imposed on him. The state court then set a show-cause order to determine whether he should be held in contempt for failing to pay the sanctions. The debtor filed a Chapter 7 case and the state court asked for briefing on whether it could proceed with the contempt hearing. The debtor moved to have the creditor held in contempt for merely briefing the state court’s ability to proceed. The bankruptcy court imposed contempt sanctions on the creditor but the BAP reversed, relying on David v. Hooker, Ltd., 560 F.2d 412 (9th Cir. 1977), which had excepted a civil contempt action for litigation misconduct from the stay. The Ninth Circuit affirmed, relying instead on the specific exemption in the Code for police and regulatory actions. It cited In re Berg, 230 F.3d 1165 (9th Cir. 2000), which had found that proceedings to impose discovery sanctions were properly treated as police and regulatory matters because they served to effectuate public policy, not just the private interests of the litigant. The proceedings here were functionally the same as those in Berg and were equally protected.

In addition, the court might also have relied on the fact that, a nonbankruptcy court has power to determine whether the stay applies to its actions and, in this case, was doing nothing more than litigating the scope of its authority – and had not yet even reached the point of trying to restart the show cause proceeding. To bar this litigation would mean that the state court could not even explore its own jurisdiction unless a creditor first has a “Mother may I?” hearing in bankruptcy.

U.S. v. Yurek, 2017 U.S. Dist. LEXIS 93830 (D. D. Col. 6/19/17). Settling avoidance action during bankruptcy does not preclude later criminal prosecution.

The trustee in the debtors’ case settled claims with them relating to various transfers that were alleged to be fraudulent and/or preferential. After the case was closed, the United States later filed criminal charges against the debtors that related, at least in part, to the same conduct in the trustee’s avoidance action. The district court rejected the debtors’ argument that the trustee action was res judicata as to the criminal charges or that claim preclusion would bar them from proceeding. The criminal and civil charges were different matters even if they relied on some of the same facts and a bankruptcy court is not an appropriate tribunal for the government to resolve its criminal charges. As to issue preclusion, the issue of whether a discharge should be granted is not the same issue as to whether a defendant is criminally liable for misstatements. Moreover, the settlement was not an “adjudication on the merits” that actually determine any issues relating to liability. Nor was the IRS’ judicially estopped by virtue of its failure to participate in the bankruptcy or its acceptance of payment on its claim.

In re Taalib-Din (U.S. v. Taalib-Din), 2017 U.S. Dist. LEXIS 86362 (E.D. Mich. 6/2/17). The stay, by its own terms, does not apply to setoff of pospetition Social Security benefits against prepetition nondischargeable taxes.

Social security benefits are generally exempt from collection for debts and are, accordingly, not part of the Chapter 13 estate. Nor is a right to setoff a collection on a claim or assertion of a lien; rather it is just a netting out of mutual obligations. And, finally, the court held, the assertion of a right to setoff is also not covered under the general language of Section 362(a)(6) because doing so would make the specific limits on setoffs stated in Section 362(a)(7) superfluous. Where the right of setoff here did not come into existence until postpetition, it was not covered by the prohibition in Section 362(a)(7).

In re Gray (Gray v. Nussbeck), 2017 Bankr. LEXIS 1551 (Bankr. D. Kan. 6/7/17); In re McClafferty (McClafferty v. DeWine), 2017 Bankr. LEXIS 1044 (Bankr. N.D. Ohio 4/14/17). Rooker-Feldman doctrine does not apply to bankruptcy court collateral attack on decisions made by state courts on applicability of stay or discharge injunction.

In these cases, as in many others, bankruptcy courts deal with whether they may act with respect to alleged violations of the stay or discharge injunctions when a state court has already taken some action on the matter. With regards to most issues the bankruptcy court must face, it is clear that it is subject to the same constraints as other federal courts under the Rooker-Feldman doctrine – namely, that it may not sit in appellate judgment over the decisions issued by a state court to the extent that its decision would require invalidating the state court judgment. The problem arises when the court faces situations where the state court is ruling on issues that may implicate the stay or discharge injunctions – the Code explicitly says that the discharge voids actions that violate it and most courts interpret the stay as also voiding violative actions. Many courts, accordingly, view those two principles as being in conflict and, perhaps not surprisingly, come down squarely on the side of the bankruptcy court’s right to treat state court decisions with which it disagrees, as null and void, without regard to the principles of Rooker-Feldman.

What these cases typically do, though, is disregard two salient features of the Rooker-Feldman doctrine and other Supreme Court precedent. First, Rooker-Feldman only applies to actual final judgments of the state court – if an action has begun in state court but has not been adjudicated to completion, nothing in the doctrine bars debtors from doing what they should – namely, raise the issue promptly in the bankruptcy court and invoke its authority to preclude the creditor from proceeding and perhaps leading the state court astray. The other point is set out in a case called Durfee v. Duke, 375 U.S. 106 (1963), which is routinely overlooked in the discussions, perhaps because it is not a bankruptcy case. In any event, in that case, the Court reviewed when, if ever, a courts’ judgment on whether it possessed jurisdiction to hear a matter could itself be subject to collateral attack. Lack of jurisdiction is a classic example of when a judgment may be treated as void and subject to such attack – but the Court held in Durfee, that principle has limits. If the decision has been actually adjudicated and resolved in the first forum, the second court may not simply ignore that decision and begin from scratch. Instead, a party that disagrees with the initial holding must appeal it through the chain of courts in the original forum, not simply go elsewhere and state over. Quoting from Stoll v. Gottlieb, 305 U.S. 135 (1938), the Court said, “It is just as important that there should be a place to end as that there should be a place to begin litigation. After a party has his day in court, with opportunity to present his evidence and his view of the law, a collateral attack upon the decision as to jurisdiction there rendered merely retries the issue previously determined.” This is a recognition that there is no court except the Supreme Court (where one Justice famously opined that they were “infallible [only] because we are final”) that can be guaranteed to have the “right” answer. (That is, a bankruptcy court that disagrees with a state court on whether the stay applies might itself be wrong; moreover, even if the state trial court is wrong, that does not imply the error could not be corrected by the state appellate courts).

Put together, those principles indicate that a debtor who is not happy with an action in state court should either a) go promptly to bankruptcy court or b) not appear in state court, or preferably both. What he should not do is acquiesce in the litigation being heard in state court, appear and argue his points at length in hopes of a favorable decision, and only after the state court has ruled against him, go to bankruptcy court and ask to be relieved of the consequences of his choice to litigate in state court. To be sure, many bankruptcy courts (including both of those here) will give him exactly that relief but doing so sets up many types of odd results – such as decisions announcing that state courts have the jurisdiction to hear certain issues but only if their decision is “right” in the bankruptcy court’s eyes. The notion that jurisdiction to hear a matter can come and go based on the result of the decision on the merits is unique to bankruptcy law. The Court did note that there certain circumstances where federal law could preempt the Rooker-Feldman principle – and cited a bankruptcy case in support of that proposition. However, that case, Kalb v. Feuerstein, 308 U.S. 433 (1940), was decided under a completely different statute – and one where there was not even an arguable basis for the state court to claim any jurisdiction to take any actions with respect to the debtors. In such circumstances, the Court has allowed a collateral attack, but it has not done so in a case under the current Code, where it is clear that state courts retain considerably greater concurrent jurisdictional authority with the bankruptcy courts. In addition, language in some other decisions has been misunderstood – in NLRB v. Edward Cooper Painting, Inc,, 804 F.3d 934 (6th Cir. 1986), for instance, the court allowed a federal agency to act, based on its own analysis of the police and regulatory exception, but warned that if the proceeding were not excepted, that action might be void ab initio. That statement though did not address who would decide that the action was void – the bankruptcy court in a collateral attack or the appellate court when it reviewed the agency’s actions in a standard appeal – which was what would have happened had the Court of Appeals disagreed with the NLRB’s analysis.

On the merits, in the two decisions here, the court concluded in McClafferty that it could allow a collateral attack on the state court actions but that, in the end, the state court was right to begin with. Notably, the debtor took no steps to bring the matter to the bankruptcy court’s attention until nine months after the state asked the state court to act – but also did nothing in the state court action. It could be argued then that there had been no actual adjudication of the issue in the state court so Durfee might not apply, but even so months had been wasted. In Gray, a private party resumed collection efforts against a debtor after the discharge was entered even though that party had been scheduled in the case. The debtor proceeded to litigate the actual discharge issue in state court and sought to counter the creditor’s claim that there had been some sort of fraud on the bankruptcy court. Again, the debtor did nothing to bring the matter to the bankruptcy court until losing in the state court – this time, the Durfee principles probably do apply and the debtor should have, but did not, seek review in the state system but was still allowed to collaterally attack the state court decision. What is clear is that by not applying Durfee and Rooker-Feldman, the courts rewarded duplicative and unnecessary litigation and forum-shopping by the debtor – and placed the bankruptcy system at odds with normal jurisprudential principles.

Hahnfeldt v. Murphy, 2017 U.S. Dist. LEXIS 76490 (D. Mass. 5/18/17). Actions brought by private party to adjudicate its rights are not excepted from stay under Section 362(b)(4).

The plaintiff, Hahnfeldt, repeatedly sought to challenge how the debtor was disposing of its assets and whether the cy pres doctrine applied, even though the State Attorney General stated that it did not find any violation. He eventually filed suit in state court and argued that his suit was protected by the police and regulatory exception. The district court affirmed the bankruptcy court’s finding that the state court was not acting in a regulatory role. Instead, it was being asked to function in its normal adjudicative role and, as such, the exception did not apply to its actions. The ruling highlights the difference between an action brought by a government regulator in its discretionary, prosecutorial function and one in which the government role is merely to serve as a neutral arbitrator between two private parties.

In re Shaw, 2017 Bankr. LEXIS. 1786 (9th Cir. BAP 6/27/17). Contempt finding for violating discharge injunction requires showing that non-debtor party knew its actions were covered.

To show a violation of the discharge injunction, the debtor must establish that the creditor’s actions were willful – that, in turn, under prior Ninth Circuit cases, required a showing that the creditor intended the actions that violated the injunction and knew the discharge injunction would apply to those actions. While most courts require little more than a showing that the creditor knew the discharge injunction existed, the Ninth Circuit has required that there be a subjective showing that the creditor knew the injunction applied. A sincerely held belief that the actions were not covered – even if unreasonable – would mean that the creditor was not acting in contempt of the injunction.

Capitol BC Restaurants, LLC (Capitol BC Restaurants, LLC v. IRS), 2017 Bankr. LEXIS 1592 (Bankr. D. Mass. 6/12/17). Where LLC filed bankruptcy, determination of issues relating to taxes owed on pass-through income to its members is not allowed under Section 505.

Section 505 allows the court to determine tax liabilities in bankruptcy court unless there has been a final adjudication prepetition. The IRS argued that actions under Section 505 still had to meet the jurisdictional standards under 28 U.S.C. 1334 – and the action here for the LLC members did not do so. Such an action did not “arise under” the Code since the tax issues were not created by the Code. Similarly, they did not “arise in” the case since the same substantive tax issues could and would have been litigable even had no bankruptcy case been filed. Finally, the court held the substantive determinations relating to the members’ liability were not “related to” the case because they could have no effect on the estate since the income and the taxes thereon were “passed through” to the individual members. While the Tax Equity and Fiscal Responsibility Act (“TEFRA”) does provide a mechanism for all of the common liability issues of the members to be decided in one place, that does not change the fact that the liability remains theirs, and not that of the underlying LLC in this case. Along with most other courts, the judge here concluded that the language in Section 505 was only meant to allow determination of the taxes of the debtor, not those of third parties. And, if that conclusion was wrong, the court determined that it would be appropriate to abstain in any event. There are other more specialized fora in which this liability can be determined and the rights of other parties that might not be litigable in the bankruptcy case can be resolved there. .

In re Condado Restaurant (Condado Restaurant v. IRS), 2017 Bankr. LEXIS 1517 (Bankr. D. P.R. 6/7/17). Anti-Injunction Act, which bars suits to restrain collection of taxes, still applies in bankruptcy and is not overridden by Section 105.

While some courts believe that Section 105 is broad enough to allow a bankruptcy court to enjoin collecting taxes from a non-debtor principal, the court here agreed that Section 105 cannot be extended that far so as to bar collection from responsible parties. The law does not require the IRS to attempt to collect first from the corporation; rather it may always proceed directly against the officers. Section 105 does not serve to allow non-debtor parties to protect themselves from their payment obligations without submitting themselves to the bankruptcy process.

In re Jackson (Leviston v. Jackson), 2017 Bankr. LEXIS 1459 (Bankr. D. Conn. 5/30/17). Settlement of claims against debtor did not clearly create release of claims against counsel.

The creditor sued the debtor in state court and was twice required to incur expenses to have the case remanded from federal court after the debtor improperly removed it. In addition to damages in the main state court case, the creditor also sought her costs and fees in the two removal actions from both the debtor had his counsel. During the debtor’s bankruptcy, the parties reached a global settlement of the claim against the debtor but there was no specific reference to the damages sought in the removal actions. The bankruptcy court later held that the settlement and the plan confirmation were broad enough to cover any claims against the debtor including those arising from the two removals. It also held, however, that, while third party releases can be allowed under the proper circumstances, the language here was far too general to be viewed as releasing the debtor’s counsel especially since such releases are intended to be an extraordinary remedy granted in return for some specific benefit provided to creditors in the case. There was no such benefit here, nor any showing that such a release was necessary for approval of the plan or the debtor’s reorganization.

In re Williams, 2017 Bankr. LEXIS 1311 (Bankr. W.D. Mo. 5/15/17). Debtor could not renege in second case on settlement agreement that provided forbearance on collection of restitution from IRA for duration of Chapter 13 plan.

Following the debtor’s criminal conviction and a sentence of restitution, the district court entered a turnover order requiring that the debtor’s IRA be paid into the court to partially satisfy the sentence. The debtor then filed a Chapter 13 bankruptcy but eventually chose to settle the case with an agreement that he could keep the IRA during the course of the case but that it would be subject to being captured for the taxes at the end of the plan. Instead, however, the debtor filed a second case and sought to retain the IRA again while only paying minimal amounts towards the restitution judgment. The bankruptcy court found that approach to a plan proposal showed bad faith and refused to confirm the plan. Since the plan did not provide for proper treatment of the government’s claim otherwise, the refusal to implement the settlement was in bad faith.

In re Morris (Winebrenner v. Morris), 2017 Bankr. LEXIS 1245 (Bankr. M.D. Penn. 4/28/17). Creditor many name debtor in suit if remedy in the suit is limited to insurance payments.

The creditor had a personal injury case pending against the debtor prior to the bankruptcy filing. After the debtor filed her case and received a discharge, the creditor sought permission to continue the law suit with any recoveries being limited to payment from the debtor’s insurance. The court agreed that such a request was not an attempt to revoke the debtor’s discharge so no time limits applied to it. The court also agreed that it did not need to defer to the state court for a ruling on the scope of the discharge injunction (indeed, in most cases, the debtor will be taking the opposite approach and claiming that the state court is not allowed to rule on the issue). As the issuing court, the bankruptcy court clearly has the power to rule on the scope of the discharge injunction. Even if the state court could rule on the issue, the bankruptcy court felt that it was the better forum for deciding the issue. On the merits, under Section 524(e), a discharge of the debtor does not affect the liability of other parties; i.e., the insurance company, for the costs from the debtor’s actions. The court noted numerous cases that hold that the discharge injunction does not preclude a suit where the only relief sought is to collect from available insurance. Moreover, since here the insurance would cover the costs of the suit and costs incurred by the debtor in appearing in the matter, the court held there was no basis to enjoin the creditor’s action.

In re McKenna, 2017 Bankr. LEXIS 1134 (Bankr. D. R.I. 4/14/17). Contempt action that had progressed to stage of seeking to collect sanctions was not excluded from stay.

This case is very much like the Dingley case above with the significant difference that the court hearing at issue here was directed specifically at the collection of a previously imposed stay. The state court did not move forward with its hearing and the bankruptcy court concluded that, once the contempt action had resolved the sanctions and was directly seeking to force their payment that the action – even if initially falling within the police and regulatory exception – also fell within the exception to that exception for actions to collect on regulatory monetary sanctions. Even for a more traditional action brought by a governmental unit directly, the exception only applies up to the point where the sanction is determined; actual collection and payment must proceed within the bankruptcy court claims process.


In re Giacchi, (Giacchi v. IRS.), 856 F.3d 244 (3rd Cir. 2017). A debtor that fails to file his returns until after the IRS assessed the taxes has not made an “honest and reasonable attempt” to comply with his obligations; the filing is not a “return” and the taxes are not dischargeable.

In 2005, the BAPCPA added language purporting to define what was a “return” for purposes of applying the discharge exception for unfiled taxes. While a number of courts have concluded that any late filing precludes the filing from being a return, the court here held that it would rely instead on the rule in Beard v. Cmmr. of Internal Revenue, 82 T.C. 766, (T.C. 1984), aff’d 793 F.3d 139 (6th Cir. 1986). Under that rule, forms completed after the IRS has assessed liability will rarely, if ever, qualify as an honest or reasonable attempt to satisfy the debtor’s obligation. That is true even if the late filing is facially valid or if the filing resulted in a reduction to the debtor’s assessed liabilities. That the debtor made a self-serving effort to reduce the taxes the IRS had determined without his help did not make his overall actions any more honest or reasonable. At least six Circuits have now adopted this position.

In re CM Reed Almeda 1-3026, LLC, 2017 Bankr. LEXIS 1155 (9th Cir. BAP 4/26/17). Discussion of factors relative to abstention in deciding Section 505 tax issues.

The current owners of the debtor bought it after it had been used for oil and gas exploration but had been rezoned for residential use. The taxes had not been paid for many years and the current owners filed bankruptcy to try to clear the land of many pending liens and encumbrances that clouded the title. The court found that, except for tax years 2015 and 2016, the ad valorem property taxes could no longer be challenged because the assessments had become final. As to those two years, the court noted that two tests had been articulated for abstention – one under Section 505(a) and the other more generally as to any claim, but the standards were largely very similar and substantially overlapped so it did not try to distinguish between them. The BAP agreed with the bankruptcy court that there was no clear showing that leaving the dispute to the state court system would impede the case, particularly since the case had been pending for two years without the debtor seeking to resolve the matter; the issues only involved state law disputes and the questions were fairly complicated to resolve; the debtor still had the option to invoke the state law procedures to challenges the county’s claims. The absence of a pending alternative proceeding was only one factor to be weighed; conversely, the matter could be burdensome to the bankruptcy court and there were strong forum shopping concerns. Moreover, while the BAP did conclude that the issues in the Section 505 proceeding were core matters (as they went to the determination of claims against the estate), the substance of the matters to be determined were purely issues of state law and there was no reason why they could not be timely determined in state court. Accordingly, based on all of the factors, the BAP agreed that abstention was proper.

In re Ladona, 2017 Bankr. LEXIS 1530 (Bankr. D.N.H. 6/2/17). Interest on nondischargeable taxes continues to accumulate in Chapter 13 and is not discharged by plan.

Pursuant to the First Circuit’s decision on the nature of “late-filed” taxes, the debtor’s untimely filing was not a “return” for purposes of triggering the two-year limit under Section 523(a)(1)(B)(i). As such, when the debtor filed his Chapter 13 plan and provided for full payment of the taxes shown on that late filing, the taxes and interest accruing thereon were excepted from the discharge. While the plan paid the taxes, it did not include the interest so that amount remained nondischargeable and the IRS could collect it after the plan ended.

In re Thaxton, 2017 Bankr. LEXIS 1460 (Bankr. S.D. W.V. 5/30/17). Interest owed on nondischargeable taxes continues to accumulate in Chapter 13 and is not discharged by plan.

The debtor’s plan provided for full payment of the principal of the nondischargeable taxes owed. The plan did not explicitly reference interest accruing on the principal debt or purport to discharge it. On those facts, the court held that the interest was not an allowed claim that would be paid in the case, but it was excepted from the discharge and remained owing at the end of the case. A mere reference at confirmation to the debt being paid in full was not enough to treat the matter as one that had been resolved in the plan such that the IRS had to have objected thereto.

In re Van Arsdale (Van Arsdale v. IRS), 2017 Bankr. LEXIS 1388 (Bankr. N.D. Cal. 5/22/17).

The debtor did not file his 2001 tax return until 2005, well after the IRS had prepared a substitute for return (“SFR”) and assessed the taxes. The return as filed listed slightly more taxes due than were shown on the SFR. His only justification for not filing the return was that he could not pay the taxes due and just panicked. When he later filed bankruptcy in 2013, the IRS argued that the late filing did not constitute a “return,” and, hence the taxes remained nondischargeable. The bankruptcy court here rejected the “one-day-late” rule that many courts have derived from the “flush language” in Section 523(a), but held the filing was still not a return, based on the Beard test, as applied in In re Hatton, 220 F.3d 1057 (9th Cir. 2000). Under that standard, the failure to file a timely return presumptively shows that a reasonable attempt to comply was not made but there can be some consideration of the debtor’s excuses. A mere claim of being “panicked” did not suffice as an excuse and the fact that the filing did not take place before the SFR was prepared was also significant, even if not the basis for a per se approach.

In re Ryckman Creek Resources, LLC, 2017 Bankr. LEXIS 986 (Bankr. D. Del. 4/10/17). Discussion of factors relative to abstention in deciding Section 505 tax issues.

The debtor disputed the methodology used by the county in assessing the property taxes on its natural gas storage facility. The county requested that the court abstain from hearing the matter under Section 505, even if the dispute was timely raised. The court agreed, noting that several factors supported abstention: the need for uniformity in determining and applying the valuation methodology, the complexity of the issues to be heard, the likelihood that the dispute would require substantial trial time for the court to resolve, and the lack of any prejudice to the debtor from having the matter heard in the normal course under the existing state law.


In re GGI Properties, LLC (GGI Properties, LLC v. City of Millville), 2017 Bankr. LEXIS 1622 (Bankr. D. N.J. 6/7/17). Tax sales that do not involve competitive bidding to achieve value of property may be challenged under avoidance provisions.

In BFP v. Resolution Trust Corp., 511 U.S. 531 (1994), the Supreme Court held that a typical mortgage foreclosure action could not be challenged as being a fraudulent or preferential transfer regardless of the value received – at least where there was a competitive bidding process. The Court rejected cases that had demanded that the winning bid must meet some particular percent of the deemed value of the property. Instead, the Court held that a “forced sale” was simply not comparable to a voluntary sale process and the debtor could not demand that it receive as much as for such a sale. Instead, the Court looked to the values of stability to protect those foreclosure sales. In the tax sale context, however, the amount that is bid for a property is usually tied only to the amount of delinquent taxes and the interest rates charged thereon and such amounts rarely, if ever, have any relationship to the value of the property. As such, there is no basis to say that the tax sales process produces any fair value for the estate (unless the bidding happens to be based on a purchase price for the whole property from which the taxes would then be paid). In turn, the court held, those sales could be avoided in order to recover value for the estate

In re Lewis (Eisenberg v. Penn State Univ.), 2017 Bankr. LEXIS 972 (Bankr. E.D. Penn. 4/7/17). Proceeds of “Parents Plus” loans taken out by parents for their children and paid directly to the schools are not avoidable transfers.

The debtors were approved for some $143,000 in “Parent Plus” loans prior to filing bankruptcy. The proceeds of those loans were paid directly to the University on behalf of the debtor’s children without even passing through their hands. The trustee in the parents’ bankruptcy sought to reclaim the loan proceeds from the University as fraudulent transfers made by the parents. The court rejected the trustee’s claims finding that the parents never held a property interest in the loan proceeds. Since the proceeds of the loans never came into their hands and were never available to pay their creditors, the court found that there was no basis to find that the estate had been diminished. While the fraudulent transfer laws do cover the “incurral of an obligation,” the remedy is the cancellation of the obligation, not the right to collect the funds the debtor obligated himself to repay from the third party. The court also held that the debtors had received reasonably equivalent value for the loans by virtue of the education provided by the school. The court held that payment of a child’s tuition was an expense for the maintenance of the family and to prepare family members for the future. (Many courts would disagree with this last analysis with respect to children after they are no longer minors that the debtor must legally support.) This analysis seems logical at first glance but one does wonder if the debtor’s actions might be challenged as creating payment obligations that preclude him from being pushed into a Chapter 13 plan that would perhaps provide payments to his existing creditors rather than supporting his children through college without their incurring student loan debt.


In re Sunnyslope Housing Ltd. Part. (First Southern National Bank v. Sunnyslope Housing Ltd. Part.), 2017 U.S. App. LEXIS 9198 (9th Cir. 5/26/17), as amended 2017 U.S. App. LEXIS 11257 (9th Cir. 6/23/17) (en banc). Value of low-income housing set by replacement cost, not foreclosure value, which would have disregarded income limits.

In Assoc. Commercial Corp. v. Rash, 520 U.S. 953 (1997), the Court held that replacement value controlled over foreclosure value in a scenario where the replacement cost was usually higher. The Ninth Circuit held that the same analysis applied in the opposite scenario here where the value obtained on foreclosure (which would have voided the housing income covenant) would have been higher than the cost to replace the units with the limitation in place. (While not every foreclosure would necessarily terminate such limits, nor would a Section 363 sale automatically result in their removal, the funding agreement with the government here specifically terminated upon a foreclosure.) Here, though, where the bankruptcy proposal was to reorganize with the income limits in place, the Circuit Court sitting en banc reversed the initial panel decision and held that it would not rely upon a valuation that ignored the very limits that were the heart of the proposed plan. The value the Code provides to a secured creditor is not that which it would receive in a foreclosure sale (for better or for worse) because a plan is not a foreclosure. The plan did not provide for retention of the property at its “highest and best use” (i.e. without restrictions) and it need not be valued for such use. That was particularly true here where the current creditor had bought the loan at a substantial discount precisely because of the restrictions.

In re Motors Liquidation Company, 2017 Bankr. LEXIS 1515 (Bankr. S.D. N.Y. 6/7/17). Product liability plaintiff claims were assumed by new GM in the GM bankruptcy; in addition, the failure to disclose the ignition switch problems meant that due process prevented them from being discharged. This case sorts out a variety of permutations of liability.

Where new GM had agreed to assume product liability damages, it could be held responsible for those even if the conduct at issue was limited to that of old GM. And, where totally independent liability was asserted against new GM based on its own conduct and duties, that liability (for ignition switches or other undisclosed defects), could be pursued – even if new GM’s duty to warn might arise out of knowledge that it gained from old GM. (Since old and new GM were largely identical and many of the personnel carried over, the court accepted that many new GM employees might have knowledge that they acquired during their time at old GM that would impose a duty to warn.) Outside the assumed liabilities, one cannot simply require payment based on old GM’s misconduct, but new GM might have a duty to take some action based on its own knowledge (which could include the carry-over knowledge from old GM).

In that regard, the court noted that the Second Circuit had held that a buyer’s ability to buy free and clear of “claims” depended on what was a “claim.” Those persons who were completely unknown at the time of the filing and whose rights depended entirely on future events (i.e., the category often referred to as “future claims” in that the debtor’s actions may have already occurred but without any manifested harm to the potential victims) could not be deemed to have claims. They were, instead, like the postulated crossers on a bridge who could be predicted but not identified, as discussed in In re Chateaugay Corp., 944 F.2d 997 (2nd Cir. 1991). If those possible losses could not be treated as claims under a plan, no more were they claims that could be sold free and clear of under the Code. (Notably, that ruling does not resolve whether the buyer would be liable under non-bankruptcy law; that substantive issue is left to state court resolution.) Where parties holding future claims cannot be identified or provided notice of the case – and who have had no contact with the buyer seeking protection – it would violate due process to treat them as having current claims. Thus, where, as here, the cause of action is defined as that being based on new GM’s conduct, the claim is not barred.

In re Gardens Regional Hospital and Medical Center, Inc., 2017 Bankr. LEXIS 1308 (Bankr. C.D. Cal. 5/15/17). Court held that closed hospital did not qualify as “health facility” under state law, and, hence, there was no law that required state consent to sale of charitable facility.

In the 2005 BAPCPA amendments, several interrelated provisions were added, requiring that any entity seeking to sell a nonprofit facility or convert it to for profit use must meet applicable nonbankruptcy law requirements. Thus, even if the state’s regulatory concerns could be deemed to be interests that could generally be sold free and clear of under Section 363(f), the changes required that they be recognized for health care facilities. In this case, the Attorney General imposed various conditions on a proposed sale and the buyer refused to accept them and walked away. The facility then was given permission to close and, after doing so, sought to sell its assets to another entity that intended to seek to reinstate the license and reopen the facility as a hospital. The debtor argued that the state law definition of a “health facility” only applied to an operating entity so that, having closed its doors even temporarily, it could then sell itself without regard to the state law restrictions. The state argued strenuously that such a reading (of a statute that did not explicitly discuss the issue and where no decisions had addressed the point) would allow any entity to readily evade the BAPCPA requirements. The court though read the statute as literally only applying to facilities that were currently “operating” and “accepting patients.” Further, since the facility had shut down (albeit for only a very short time), there was no literal loss of charitable services so there was no conflict with the purpose of the state law. The court rejected the view that facilities would close simply to avoid Attorney General review, noting that there were substantial disadvantages to doing so that made the effort unappealing to most. The court also refused to stay its opinion even if completion of the sale would moot the state’s appeal and cause it irreparable injury because it viewed the injury to the other parties as outweighing the harm to the state. The only thing that the state can salvage from the opinion is the fact that, since the court was reviewing state law, the result can be changed simply by changing the wording of the state law or by obtaining a dispositive ruling from a state court as to how to read its terms.


Pollitzer v. Gebhardt, 2017 U.S. Appl. LEXIS 11394 (11th Cir. 6/27/17). The “means test” applies to debtors who initially file in Chapter 13 and then convert their case to Chapter 7.

The BAPCPA amendments added a “means test” to ensure that those filing in Chapter 7 truly needed the relief offered under that Chapter and need not devote their future income to paying their creditors. The Court of Appeals here held that the same test would apply where a debtor initially filed in Chapter 13, but then converted his case to Chapter 7 without completing his plan. The debtor argued that the phrase in Section 707(b) referring to a “case filed by a debtor under this chapter” meant that the original filing controlled and the means test could not apply to any converted case. The trustee argued that the “under this chapter” applied simply to the “debtor” and, since the debtor in a converted case was a debtor under Chapter 7, the test still applied. The Court of Appeals looked to the evolution of the provision and its continued strengthening by Congress to conclude that Congress would have intended to have the means test apply in converted cases – the alternative reading would have gutted the test simply by allowing a debtor to file in one chapter and quickly convert to Chapter 7.


In re Conco, Inc. (Harper v. The Oversight Committee), 2017 U.S. App. LEXIS 7543 (6th Cir. 4/28/17). Plan is generally interpreted under contract principles but court will also interpret ambiguous provisions or silent terms in accord with parties’ intent.

A plan is generally treated as a form of contract and is usually interpreted in the same fashion, by reference to the “four corners” of the document. If there are substantial ambiguities or silence on an issue, the court, though, may look outside the specific provision at issue or even the document as a whole and consider the negotiating history to determine what the parties intended by the language used. In this case, the plan was silent as to whether it would allow acquisition of the debtor during the time period where the plan provided for various payments to be made. The court noted, however, the lengthy negotiating history of the plan and the indications as to which points were crucial, and took into account various parts of the plan that were consistent with only one outcome of the dispute over the sale. In the end, the Sixth Circuit was satisfied that the bankruptcy court had correctly used the available interpretive tools to come up with the proper reading of the plan language, not to modify that language to come to a result that it favored.

In re Fryar, 2017 Bankr. LEXIS 1123 (Bankr. E.D. Tenn. 4/25/17). Discussion of when a settlement can be approved that violates priority provisions of Code.

The debtor sought approval for a complicated series of transactions that were intended to allow him to separate his affairs from that of his no-longer cooperative partner, while, at the same time avoiding incurring tax liabilities from the various sales being proposed. The problem was that the solution proposed would have benefitted a creditor that was junior to the secured claims of the IRS. The court held that, while the debtor’s desires to obtain the various benefits of the deal did provide a business justification for the proposal, that was no longer enough after the decision in Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017). Rather, the debtor must show that there are additional Code-related objectives that would be served by the deviation. Here, though, this was not a first day order, there was no likely Chapter 11 plan in the offing that would benefit creditors and garner their support, and the only party really being served was the debtor. Accordingly, the court denied the proposed settlement.

In re Moshe, 567 B.R. 438 (Bankr. E.D. N.Y. 2017). “Curing” a default under Section 1123(d) and for purposes of determining impairment under Section 1124 requires full compliance with default provisions in contract.

While the courts used to differ over whether one could “cure” a default by paying the loan off under the non-defaulted provisions, the courts now have largely agreed that a “cure” can only be effected under the terms of the contract, including its provisions for default interest rates and the like. The Ninth Circuit had held to the contrary in In re Entz-White Lumber and Supply, Inc., 850 F.2d 1338 (9th Cir. 1988), at least where the cure was fully completed at confirmation, but it has since held in In re New Investments, Inc., 840 F.3d 1137 (9th Cir. 2016), that the Code amendments in 1994 overruled that interpretation by requiring that cure must be “determined in accordance with the underlying agreement and applicable nonbankruptcy law.” If the agreement imposes default rate interest (even at 24%), payment of that amount is required for a cure. By the same token, lack of impairment requires showing that the creditor’s rights have not been altered which clearly is not the case when the contractual default rate is not paid.

In re Pioneer Health Services, Inc., 2017 Bankr. LEXIS 939 (Bankr. S.D. Miss. 4/4/17). Following the decision in Jevic, the court found the debtor had not sufficiently justified why certain doctor-employees should be treated as critical vendors and have prepetition claims paid.

The Code clearly contemplates that only amounts accruing postpetition should be given administrative priority and paid ahead of other unsecured creditors. Nevertheless, debtors have long sought to treat certain vendors as “critical” and pay their prepetition claims out of turn in order to induce them to continue doing business with the debtor. This approach was limited by In re Kmart Corp., 359 F.3d 866 (7th Cir. 2004) which required that, at a minimum, there must be showing that the payments were necessary for a reorganization, would leave the unfavored creditors no worse off than had there been a liquidation, and the favored vendors truly would (or could) cease doing business with the debtor absent that treatment. Much the same approach was taken in the Jevic case with respect to justifying payments being made out of the normal priority scheme. Here, the court found that the debtor’s claim that it needed to pay the prepetition claims of its doctors would not qualify. The debtor had not shown that its current doctors, while popular, were truly irreplaceable, especially since it had made no effort to find replacements. Nor, was there any proof they actually intended to leave if their prepetition claims were not paid. And, finally if they did make threats to that effect, the court held that it could treat them as violating the stay and impose damages on them.


In re Klaas, 2017 U.S. App. LEXIS 9661 (3rd Cir. 6/1/17). Debtors that complete plans but have arrearage may slightly exceed 60-month term in order to cure shortfall and receive discharge.

The debtors faithfully made all of their plan payments for 60 months (totaling almost $175,000), but due to a change in the Chapter 13 trustee’s fee, the trustee calculated they still owed about $1200. They paid that amount promptly although outside the 60-month period. The trustee was prepared to withdraw her motion to convert or dismiss but a creditor sought to join the motion and argue that the 60-month period was an absolutely inflexible deadline. The lower courts held, and the Third Circuit agreed that, while the failure to complete every dime of the plan payments was at least initially “cause” for dismissal or conversion, there was no indication that the failure delayed the completion of the plan or the payments to creditors, such that the default was not material and dismissal or conversion were not required, even if they might be allowed. The Third Circuit concluded that, where a problem with fully complying with plan terms only emerged late in the case and the debtor was acting in good faith, that the bankruptcy courts at least retained discretion to grant a reasonable grace period to complete the plan payments. The requirements for confirmation go to what the plan must initially propose, not what must be the final results of any mid-term corrections. The dismissal and discharge provisions in Section 1307 and 1328 are nowhere near as prescriptive with respect to what must occur to allow a full discharge to be entered. While the debtor may not be able to force an extension, that does not bar the bankruptcy court from using its discretion to give the debtor more time. Nor are these cure payments efforts to “modify” the plan; rather they are simply curing defaults under the original plan terms. And, while the court may grant a more limited, hardship discharge if the debtor cannot complete payments, it should not be limited thereto if payments are completed.

In re Roscoe, 2017 Bankr. LEXIS 1848 (Bankr. M.D. Fla. 6/28/17). Life insurance proceeds received during course of Chapter 13 case were property of Chapter 13 estate and not exempt.

Unlike in Chapter 7 cases, where Section 541(a)(5) excludes proceeds of life insurance policies received more than 180 days after the petition date from being property of the estate, Section 1306(a) uses a broader definition in Chapter 13 cases. That section includes all property received by the debtor after the commencement of the case until the case is dismissed, closed, or converted. And, in turn, Section 1325 allows modification of the plan throughout its term to take into account a debtor’s changed financial circumstances. While some courts disagree, the court there held that Section 1306(a), which specifically pertains to Chapter 13 cases, is the more specific section and must prevail over Section 541(a)(5).

In re Coughlin, 2017 Bankr. LEXIS 1644 (Bankr. E.D. N.Y. 6/15/17). Direct payments to a secured creditor pursuant to a “cure and maintain” plan are payments “under the plan,” failure to make such payments preclude the debtor from obtaining a discharge in his case.

Under Section 1326(c), a debtor may make payments directly to its creditor, rather than through the trustee. Doing so has the benefit of saving the debtor from paying the trustee’s commission on such payments. Many districts, though, have required “conduit” plans by which all payments must be made through the trustee to guard against what happened here; i.e., that the payment through the trustee are made but that the debtor fails to complete all of the direct payments. As far back as Rake v. Wade, 508 U.S. 464 (1993), the Court had held that the term “provided for by the plan” simply meant that the plan made provision for the treatment of the claim in some way. There is no requirement that the provision must be in the form of a payment through the trustee as opposed to a payment directly to the secured creditor. Put another way, a debtor that proposes to pay a debt going forward and to keep a piece of property, but then does not pay the amounts owed, is essentially obtaining a deduction against his obligation to pay his disposable income to his creditors to which he is not entitled. If he cannot pay the amount due to a change in circumstances, his obligation is to seek a modification, not to just stop paying.

In re Turcotte, 2017 Bankr. LEXIS 1580 (Bankr. S.D. Tex. 6/8/17). Interest rate under Chapter 13 plan must follow the Till “prime-plus” approach even if rate is higher than contractual rate.

In Till v. SCS Credit Corp., 541 U.S. 465 (2004), the Supreme Court held that the proper rate of interest for a payoff under a Chapter 13 plan should start with the prime rate – the amount charged to a “risk free” borrower and then add a risk premium (typically of 1 to 3%). In Till and many cases at the time, that would actually serve to substantially reduce the interest charged since the borrower there had been treated as a distinctly subprime risk and the rate had been set accordingly. In this case, the debtor actually received a very favorable rate of only 1.99% on their auto loans; the prime rate, however, was 3.25% and the risk factor would be applied on top of that. While use of the formula might seem contrary to the notion of limiting how much more the debtor can be charged in the case where it results in an increase of the interest rate, the court held that the Till decision did not envision any difference based on the original rate. And, indeed, since the debtor has now filed bankruptcy and many Chapter 13 plans fail, it is perhaps fair to assess a higher rate to make up for the greater risk.

In re Gillen, 2017 Bankr. LEXIS 1382 (Bankr. C.D. Cal. 5/19/17). Debtor may pay off 100% of claims without paying interest as well even if plan does not commit all disposable income.

In general, Chapter 13 provides that a debtor must either pay his debts in full or he must commit his entire disposable income to the plan for up to 36 or 60 months, depending on his income level. The issue here is when the debtor, if he used his full disposable income, could pay off his debts in a period of time less than the maximum period, but chooses to spread out his payments to the maximum time allowed – but does not pay any interest during the period of delay. Some courts read a “present value” requirement into the Code, but most, including this court, conclude that the language in Section 1325 does not require payment of interest so a debtor can write long-term payment plan even if one is not needed. Some courts have also looked at the “good faith” issue as being relevant to this issue, but that argument was apparently not raised in this case.

In re Perez, 2017 Bankr. LEXIS 1111 (Bankr. D. P.R. 4/24/17). Right to dismiss Chapter 13 case trumps motion to convert case to Chapter 7.

Section 1307(c) allows the court to convert a case to Chapter 7 for a variety of reasons, including bad faith or other misconduct. Section 1307(b), however, provides that a debtor may request dismissal of his Chapter 13 case at any time, and, upon such request, the court shall dismiss the case. The court held, particularly in light of the strong position taken by the Court in Law v. Siegel, 134 S.Ct. 1188 (2014), that it could not place equitable limits on that mandatory language in Section 1307(b). Thus, even where a motion to convert is pending, the court did not have the power to deny the motion to dismiss. It might be possible to impose some limitations under Section 349(a) on the debtor’s right to refile or to have debts discharged, but no one asked for such limits in this case. If the creditors do wish to force the debtor into Chapter 7, they can use the involuntary bankruptcy provisions to reinstate the case.


Atiles-Gabriel v. Puerto Rico, 2017 U.S. Dist. LEXIS 97770 (D. P.R. 6/23/17). Automatic stay does not apply to habeas corpus petition brought against Puerto Rico.

The automatic stay in Section 362 is made applicable to Chapter 9 debtors; the issue here was whether the stay was broad enough to cover a habeas corpus petition against Puerto Rico. The court noted that most aspects of Section 362 deal with actions to collect on a claim or affect property of the estate. Habeas corpus, the court explained, was not a claim because it did not involve a right to payment of injunctive relief as an alternative to payment. (While one might receive damages for being held unlawfully, the damages were not a substitute for the habeas relief – the state could not require that the person continue to be held in custody as long as it paid him damages for the time he was being held). The court also rejected the argument that the initial phrase in Section 362(a)(1), which bars any litigation against the debtor, could be read broadly enough to apply to a writ of habeas corpus. That writ is provided for in the Constitution so it was doubtful that a statute could eliminate it to begin with, and certainly if that were the goal, it would have been stated explicitly and not merely by implication.


Gupta v. Quincy Medical Center, 2017 U.S. App. LEXIS 9814 (1st Cir. 6/2/17). Severance pay claims against purchaser of debtor that failed to offer employment as required by sale agreement were not within bankruptcy court jurisdiction.

The debtor was sold to a third party under a contract that provided for employment to be offered to certain employees or severance pay if the employees were not hired and retained. When the sale was approved and completed but the employees were not hired, the employees sued the buyer to enforce the provisions of the agreement pursuant to the retention of jurisdiction provisions in the court’s order. The First Circuit found there was no jurisdiction – the matter did not “arise in” the case because it was not a matter that could only arise in a bankruptcy case, nor did resolution of the dispute require any consideration of the sale order. Instead, the matter was subject to resolution solely by considering the sale contract and applying state law thereto, and either resolution would have no impact on the property of the estate. The “retained jurisdiction” language could not give the court powers that it did not possess to begin with.

Rosenberg v. DVI Receivables VIV, LLC, 818 F.3d 1283 (11th Cir. 2016). The Bankruptcy Rules time limits apply in appealing a decision entered by the District Court on a matter that it is hearing on withdrawal from the Bankruptcy Court.

The district court withdrew the reference on a case that involved a jury trial. When the defendants filed a post-trial motion seeking determination as a matter of summary judgment, they relied on the 28-day time limit in Federal Rule 50(b), rather than the shorter time period allowed under FRBP 9015(c). That Rule adopts Federal Rule 50 as part of the Bankruptcy Rules, but explicitly sets a 14-day time limit for this particular type of ruling. The court held there was no basis to disregard the unambiguous language in the bankruptcy rules.

In re G-I Holdings Inc. (G-I Holdings Inc. v. Ashland, Inc.) 2017 U.S. Dist. LEXIS 68891 (D.N.J. 5/5/17). Decision if confirmation order barred prepetition rights under indemnity agreement was only “related to” case; mandatory and permissive abstention applied.

Several years after the debtor confirmed its plan, it sought to rely on its terms to disclaim liability under a prepetition indemnity agreement that it had assumed under that plan. The indemnitee filed suit in state court and the debtor removed the action to bankruptcy court arguing that the latter should determine the issues as to how the terms of the plan related to the agreement. The bankruptcy court disagreed, and the district court affirmed. The matter did not “arise under” the Code because the rights the plaintiff was asserting did not derive from the Code. Nor was the matter one “arising in” the case – while the decision would certainly involve consideration of matters occurring during the case, the basic causes of action to enforce the prepetition indemnity agreement were matters that clearly could be asserted independent of whether a bankruptcy had been filed. The mere fact that a bankruptcy court, like any other court, has the power to interpret its own orders does not make every case that involves such an order one that “arises in” the bankruptcy case. That category deals with matters that are part of the basic functioning of the case – turnover orders, priority determinations and so forth or rights created by the order, not those where the order merely creates a defense to some other legal obligation. Nor is it relevant that the confirmation order reserved “exclusive jurisdiction” to the bankruptcy court since no order can create jurisdiction that does not already exist.

The district court also agreed with the bankruptcy court that mandatory abstention applied – the case was only “related to” the bankruptcy and could be timely adjudicated in state court. Even if the matter could be heard more quickly in the bankruptcy court, there was no pressing need to have it decided immediately since the plan had been confirmed years earlier. At most, there might be an effect on the reorganized debtor, not the estate itself. A confirmed plan, in any event, is akin to a contract and rights thereunder can be adjudicated like any other affirmative defense. A bankruptcy filing is not a lifetime entry to federal court. Finally, the district court saw no abuse in the bankruptcy court’s decision to permissively abstain. Even if the state law issues were not necessarily unsettled, other factors such as the lack of impact on other creditors, the remoteness in time from the case, and the presence of other non-debtor parties all supported the bankruptcy court’s decision as well as a general respect for comity with the state courts.

In re Gardens Regional Hospital, 2017 Bankr. LEXIS 1721 (Bankr. C.D. Cal. 6/21/17). State entitled to recoup “Medi-Cal” and other payments owed to hospital where hospital failed to pay health care assurance fees it owed to state.

The State imposed a fee on all of its hospitals (with limited exceptions) based on a complex formula that related to the amount of care provided to Medicaid-type patients and used the funds from that fee to qualify for higher reimbursements from the federal government. Those payments were, in turn, distributed to the state hospitals under a different, equally complex formula that provided higher benefits to hospitals with greater needs. The court held that, under the statutory provisions and the applications signed by the debtor to receive funds under the programs, the entire complex of required fees and distributions were part of a single interrelated whole. As such, the state was entitled to reduce the payments it would otherwise have made to the debtor in order to recoup the fees the debtor owed but had refused to pay. That was true whether the Medi-Cal reimbursement program was viewed as an executory contract or a license.

In re Murphy (Kozec v. Murphy), 2017 Bankr. LEXIS 1791 (Bankr. E.D. N.C. 6/27/17). Personal injury cases may be heard by bankruptcy court subject to Stern limitations on making final decision if parties do not consent.

Section 157(b)(5) provides that the district court “shall order that personal injury tort and wrongful death cases shall be tried in the district court in which the bankruptcy case is pending, or ... in the district in which the claim arose.” Many decisions assume that this means trial must be by a district court judge, but the court here noted that, since at least the 1984 amendments, the bankruptcy court is a “unit of the district court” consisting of the bankruptcy judges thereof. Thus, it held, the section does not preclude the matter from being heard by a bankruptcy judge, since such judges are also part of the district court system and such an action is at least “related to” the main case especially where it is connected with a discharge determination. However, the limits imposed under Stern v. Marshall, 564 U.S. 462 (2011) may mean that the bankruptcy judge can only issue a report and recommendation absent the parties’ consent. The provision itself may do little more than provide for a determination as to where, physically, the case will be tried as opposed to deciding which judge will hear the matter.

In re Gardens Regional Hospital and Medical Center, Inc., 2017 Bankr. LEXIS 1721 (Bankr. C.D. Cal. 6/21/17). State may equitably recoup Medi-Cal payments against fee assessed against hospitals by state.

The state imposes a “quality assurance fee” (QAF) against each hospital. The funds are calculated in part by how many days of care the facility provides to Medi-Cal (i.e., Medicaid) patients, allows the state to access additional federal matching funds and all of those funds become part of the funds that are allocated to all hospital facilities in accordance with the amount of Medic-Cal costs they incur. The collection and distribution formulas do not match up so the billing also serves to benefit the poorer hospitals by redistributing funds to them from richer hospitals. In this case, the debtor stopped paying the QAF prepetition; to recover those funds, the state started recouping them from amounts that would have otherwise been paid to the debtor for Medi-cal costs. The withheld benefits were used to repay both pre and postpetition defaults by the debtor on the QAF costs. The Code explicitly allows for setoff – which involves unrelated debs -- under Section 553, but that right is subject to the automatic stay and can only apply to transactions that both occur either pre or postpetition. On the other hand, recoupment which involves two payments that are part of the same integrated transaction is not explicitly referred to in the Code, but is allowed, is not subject to the stay, and can apply to mixed date payments. The court found that the payments here qualified as recoupment even though they involved payments under different programs. Although separate, the structure of the QAFs was specifically established in order to obtain additional funds to support the Medi-Cal payments. Because of this logical interrelation, it was appropriate to treat the funds as part of a single scheme even though some hospitals might not have even paid or received some of the funds.

In re Scott (Scott v. American Security Insurance Company), 2017 Bankr. LEXIS 1647 (Bankr. S.D. N.Y. 6/13/17). Discussion of several jurisdictional issues.

A Chapter 13 debtor does not have authority to pursueavoidance actions; Section1303 vests the debtor with certain powers given to the trustee, but does not refer to the trustee’s avoidance powers. With regard to “core” jurisdiction, the filing of a claim by the creditor serves as consent to the court to adjudicate the merits of the claim; the same does not apply to a claim filed by the debtor on the creditor’s behalf since such an action does not indicate any consent by the creditor. By the same token, the counterclaims filed by the debtor to the claims the debtor files on the creditor’s behalf cannot be treated as core either. Nor can the debtor argue that its own state-law based causes of action are “core” merely because they would result in additional value to the estate since that is the essence of what the Supreme Court rejected in Northern Pipeline Const. Co. v. Marathon Pipe Line, Inc., 458 U.S. 50 (1982). The court can, though, hear them under its non-core “related to” jurisdiction and issue proposed findings of fact and conclusions of law.

In re Briseno (Texas v. Briseno), 2017 Bankr. LEXIS 1078 (Bankr. S.D. Tex. 4/19/17). Debtor’s removal of state consumer protection action was improper and case was remanded.

28 U.S.C. 1452(a) gives a debtor broad powers to remove any creditor’s action against it, but that power is limited by a provision that precludes it from being used to remove a police and regulatory action. The court here had little difficulty in concluding that the state’s consumer protection action against the debtor for taking and mishandling deposits for home construction contracts was a protected police and regulatory action. The court also looked to see whether there were other sources of removal authority under either Section 1441(c) (federal question) or Section 1441(b) (diversity jurisdiction). The case did not arise under any federal law but was purely based on state law and did not otherwise rely on any federal question, so Section 1441(c) was not applicable. The court also found that, inasmuch as the state does not hold “citizenship” for purposes of a diversity analysis, its presence bars any conclusion that diversity jurisdiction can exist for removal purposes.

In re Benson (Benson v. U.S.), 2017 Bankr. LEXIS 927 (Bankr. W.D. Va. 4/3/17). Rights of party to setoff can be applied against assets that debtor claims as exempt.

Section 522 provides for a debtor to claim certain exemptions and that exempt property shall not be liable for payment of the debtor’s obligations. Section 553, on the other hand, allows a party to offset its claim against amounts that it may owe the debtor and states that nothing in title 11, with very limited exceptions (that do not include reference to Section 522), shall affect that right of offset. Although a number of cases have found that Section 522 has controlling effect to bar setoffs involving exempt property (and other cases sidestep the issue by relying, at least for IRS refunds, on the IRS section that says that there a right to an (exemptible) refund does not even arise until all offsetting claims have first been resolved), the court here squarely held that the language in Section 553 is controlling. If “this title does not affect any right of a creditor to offset a mutual debt,” that must apply to Section 522, which is plainly part of “this title.” Also, Section 506(a)(1) treats setoff as being equivalent to a secured claim and such a claim must be given adequate protection which cannot occur if setoff can be defeated by a claimed exemption

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