The National Attorneys General Training & Research Institute

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

Bankruptcy Bulletin - May 2016


This year’s bankruptcy seminar will be held at the Santa Fe Hilton Hotel, from Sept. 26-29, with the room block split between the Hilton and the usual Hotel Santa Fe, just a couple blocks away. Room rates will be only $99 a night (plus taxes) during the conference nights (Sunday through Thursday night) which should help your office to find the necessary travel funding. The rates will be higher for nights before and after the conference ($169 for the Hotel Santa Fe and $220 for the Hilton) but still below the generally available rates. The Wine and Chile Fiesta will be held in Santa Fee from September 21 through 25, and the annual Balloon Festival will be held in Albuquerque from October 1 to 9, so it may be worth extending your stay. Both hotels should be able to take your reservations now – ask for the NAAG Bankruptcy Seminar.

A draft agenda is being sent out along with this update along with a detailed announcement. As we have done the last two years, we will be using a detailed hypothetical that will set up a bankruptcy case that will provide a framework for the discussions during the whole seminar. This year, our hypothetical will have a consumer protection theme, arising out of a real estate development based Ponzi scheme that will also involve the tax concerns of the insiders as well that will provide ample issues for the tax side of the office as well. The substantive issues will include matters such as how consumer protection offices can detect and investigate a Ponzi scheme before and during the case (and whether or not you are subject to the automatic stay), what recovery actions can be brought against those who benefitted from the scheme, how to get an examiner and/or trustee appointed, and the myriad of jurisdictional provisions that apply to these actions. We will also have a series of nuts and bolts sessions on handling these cases, including an interactive session on the new discovery rules that went into effect on December 1, 2015 and represent one of the most significant changes in the scope of discovery in many years. There will also be tax breakouts that will look at many of the current hot topics and an environmental breakout that will take on the ever-growing crop of energy company bankruptcies and the challenges they pose for the States. There will be sessions for beginners and experienced counsel so attendance will be worthwhile whatever your current level of knowledge is.

The early bird registration rate for governmental attendees (and those whose practice is substantially confined to representing governmental clients) will be $495; if there are three or more from your office, the rate will be $395 per person. The regular rate, after September 2, 2016, will be $550 ($450 per person for three or more attendees from the same office). The rate for non-governmental counsel is $695 with the same $100 per person discount for groups of three or more. On-line registration will begin June 28, 2016 to ensure that those on a June 30 fiscal year can use current year funds for registration if desired; it will run through September 19, 2016. We unfortunately will not be offering scholarships this year on a general basis but the lower costs for attendance will make the overall cost to your office comparable to that for last year with the very limited assistance available then. Hope to see you all there!


Husky International Electronics, Inc. v. Ritz, 2016 U.S. LEXIS 3048 (5/16/16), decision below, Husky International Electronics, Inc. v. Ritz (In re Ritz), 787 F.3d 312 (5th Cir. 2015).

The definition of “actual fraud” in Section 523(a)(2)(A) extends beyond actions that involve a false statement made to a creditor. It can also include other schemes in which money is obtained by false or deceptive actions that do not involve statements – in particular, monies obtained by a knowing recipient in a fraudulent transfer scheme. While many recipients will have no idea that there was any issue with respect to the funds they received, some may be willing participants in assisting the primary debtor party in perpetrating the fraud on his creditors by conveying away his assets. It will almost never be the case that the recipient made any fraudulent statements to the creditors (indeed, it will rarely be the case that the primary debtor made such statements) since the fraud is not in the obtaining of money from the creditor initially, but rather in the hiding of assets that could be used to satisfy those debts. The Court (7-1 with Thomas dissenting), noted that treating fraudulent conveyances as instances of actual fraud – by both transferor and knowing transferee – had been accepted in insolvency law for some 450 years and there was no reason to think Congress intended to exclude it now. While prior decisions had often used a definition of fraud that referred to particular types of false statements and creditor reliance, the Court held those decisions were discussing the test for that type of fraud, not holding that nothing else could be included within the definition of fraud. The net result of the decision is that a party found to have knowingly participated in a fraudulent transfer will not be able to file bankruptcy and discharge the debt. Rather, it can be found to fall under Section 523(a)(2)(A).

Sheriff v. Gillie, 2016 U.S. LEXIS 3050 (5/16/16), decision below, Gillie v. Law Office of Eric A. Jones, LLC, 785 F.3d 1091 (6th Cir. 2015).

As described in the prior Update, this case did not deal with a bankruptcy issue, per se, but the related topic of the allowable scope of activity of private entities carrying on collection work on behalf of the Attorney General’s office. The counsel had sent collection demands on the letterhead of the Office of the Attorney General in Ohio – as directed by the Attorney General. The letters identified the collectors as acting on behalf of the Attorney General to collect a debt owed to the State. A class action was filed alleging that the letters were unfair and deceptive and violated the Fair Debt Collection Practices Act in that they could have deceived unsophisticated consumers about the identity and authority of the party collecting the debts. The state intervened and argued that the collectors were “officers” of the state and, excepted from the Act as such, and, in any event, that the letters were not deceptive because they correctly reflected the relationship of the Attorney General and the outside firm. The FDCPA generally frowns on letters that appears to indicate that they are from the state in that they both generally misrepresent the party whose debts are at issue and, more specifically, that they inaccurately suggest that the power of the state is behind the actions of a private debt collector.

In this case, the Court did not reach the question of whether the debt collectors were “officers” because it found, unanimously, that the letter did nothing but accurately reflect the relationship of the collector to the state. The letters were being sent on behalf of the Attorney General, as they stated, so anyone believing that the Attorney General had authorized them had an accurate understanding, not a false understanding. Indeed, the Attorney General did review and to an extent direct the work of the outside firm, despite describing them as independent contractors and declining to provide indemnification to them if they were sued. If there was any possibility of confusion, the customers could (and did) obtain clarification from the phone number on the letterhead. The Court also rejected the Sixth Circuit’s suggestion that the letters, by invoking the authority of the state could be viewed as intimidating. To the extent that the intimidation might arise from the view that the state had greater enforcement powers, “This impression is not false; the State does have enforcement powers beyond those afforded private creditors. . . . In other words, §1692e bars debt collectors from deceiving or misleading consumers; it does not protect consumers from fearing the actual consequences of their debts.” As to the suggestion that the letter was threatening actual actions, the Court noted that the tone of the letters was not itself coercive; again, “Use of the Attorney General’s letterhead merely clarifies that the debt is owed to the State, and the Attorney General is the State’s debt collector. The FDCPA is not sensibly read to require special counsel to obscure that reality.”

The Court also specifically noted the federalism concern that would arise from construing federal law as interfering with the state’s arrangement for conducting its own affairs, including specifically the “core sovereign function” of collecting money owed to it. While federal law would presumably govern, by virtue of the Supremacy Clause, if it really sought to impose a limit on the state, the Court clearly believed that it was prudent not to create such a conflict unnecessarily.

Czyzewski v. Jevic Holding Corp., No. 15-649, petition for certiorari pending from
Official Comm. of Unsecured Creditors v. CIT Grp./Bus. Credit Inc. (In re Jevic Holding Corp.), 787 F.3d 173 (3rd Cir. 2015).

The case below held that, in certain circumstances, the court could approve a settlement and dismissal of a case that provided for distribution of the debtor’s assets in ways that did not meet the priority provisions of the Code as long as this was the “least worst” result. A number of states, led by Illinois, filed an amicus brief asserting that such a result was not allowed under the Code and that certiorari should be granted to reverse the decision below. The United States Solicitor General was asked to give his views on the issue and recently filed a brief with the Court also urging that the Court grant certiorari on this issue that has split the courts below, and arguing that the decision should be reversed as the states argued. Although the Supreme Court has not yet acted, it does grant certiorari in a high percentage of cases where it invites input from the Solicitor General and receives a recommendation for such a grant. If so, then the states can look forward to having this case heard in the fall.



In re Crespo (Crespo v. Immanuel), 2016 Bankr. LEXIS 2073 (Bankr. E.D. Penn. 5/18/16). Tax sale conducted under Pennsylvania’s competitive bidding law was not fraudulent transfer.

Although courts are split over the degree to which the decision in BFP v. Resolution Trust Corp., 511 U.S. 531 (1994) (which held that the price received in a valid foreclosure sale was conclusively presumed to be fair market value) should apply to tax lien sales, the court here had little hesitation in concluding that BFP applied to sales under Pennsylvania’s law. The court notes that the sales will typically be tied to the amount of taxes owed, which will normally be far less than the value of the property but did not view that as dispositive. The decision cites a number of decisions but all are 15 to 20 years old and there is no discussion of the current trend which looks to whether the tax sale process is truly comparable to the mortgage foreclosure process in terms of providing value for the property being sold.

In re Earls (Earls v. United States), 2016 Bankr. LEXIS 2012 (Bankr. S.D. Ohio 4/15/16); In re Johnson (Johnson v. United States), 2016 Bankr. LEXIS 1722 (Bankr. S.D. Fla. 4/18/16). Late-filed documents after United States issued assessments were not “returns” for discharge purpose.

Rather than relying on the new language set out at the end of Section 523(a), which purports to define a return, the debtor and the IRS agreed that the court should use the test under United States v. Hindenlang, 164 F.3d 1029 (6th Cir. 1999) which, in turn relied on Beard v. Comr., 82 T.C. 766, aff’d 793 F.2d 139 (6th Cir. 1986). Those cases analyze whether the filed document can qualify as an “honest and reasonable attempt to satisfy the requirements” of the tax law. Under Hindenlang, documents filed after the IRS has assessed a deficiency presumptively cannot meet that test, although the court let the debtor argue for an exception in its case. The debtor’s primary argument in Earls was that the return served a valid purpose by allowing the IRS to accurately calculate (i.e. reduce) the debtor’s tax liability. (The debtor had no real explanation for its failure to file the returns in Johnson.) The court rejected that argument, noting that the emphasis was on the scope of the taxpayer’s efforts, not the utility of the return to the IRS. In that the taxation system depends on timely and accurate self-reporting by taxpayers, it is critical that there be consequences where such actions are not taken. Moreover, the mere fact that the late filing contained accurate information did not fully satisfy the “honest effort” part of the Beard/Hindenlang test since that was already covered by another factor in that test. Clearly, something more must be required to meet all of the stated factors.

In re Buttrill, 2016 Bankr. LEXIS 1061 (Bankr. E.D. Tenn. 3/31/16). IRS could utilize rights under 26 U.S.C. § 6402(d) before any “refund” would come due to taxpayer; however that right could only be exercised (for non-income tax setoff) after stay relief.

Under 26 U.S.C. § 6402(d), the government is entitled to offset any other obligations owed to it before it determines if a tax overpayment is to be refunded to a taxpayer. The debtor here anticipated a tax refund and claimed an exemption in the expected amount without objection. However, he also owed several thousand more than the amount of his anticipated refund to another federal agency and the overpayment was frozen by the government in order to be applied to that outstanding debt. The court noted further though that Section 553 still applies to a right of setoff and the only stated exception is for offset of income tax liabilities, not debts of other agencies. Accordingly, the court held, the stay would be violated by taking the offset unless and until relief was granted to do so. Since there was a right to setoff and no equity in the return, the court saw no reason to find that the stay violation barred the allowance of the setoff rights. The court also rejected the debtor’s argument that the attempt to exempt the anticipated refund trumped the right of setoff in this case, particularly in light of the argument that no actual “refund” exists until the netting out process is concluded.

In re Faye Foods, Inc., 2015 Bankr. LEXIS 402 (Bankr. W.D. Tenn. 2/5/16). Section 503(b)(1)(D) protected state’s right to collect postpetition administrative taxes.

Section 503(b)(1)(D) provides that a governmental unit need not file a request for payment of postpetition administrative taxes described in Section 503(b)(1)(B) and (C); rather, the returns and taxes are to be paid by the debtor without intervention by the state in the ordinary course as required by 28 U.S.C. 959 and 960. Nevertheless, many (if not most) debtors ignore that section in their plans and simply require that all administrative claims must be filed by a certain date or be disallowed. This court concluded that a plan provision could not override applicable statutory law (although it is not entirely clear that this is so after Espinosa). The court distinguished some cases that seemed to imply such a requirement by noting that they did not deal with the type of taxes that were covered by Section 503(b)(1)(D). And, in any event, the court noted that the state had filed a proof of claim in a timely fashion and that was sufficient to count as a request for payment of an administrative expense. That latter fact somewhat undercuts the value of the case – at a minimum, it would be good practice for states to object to plans with a broad bar date for administrative claims to force a carveout for tax claims under Section 503(b)(1)(B).


Opportunity Finance, LLC v. Kelley, 2016 U.S. App. LEXIS 8911 (8th Cir. 5/16/16). Party that loses defenses to avoidance actions based on substantive consolidation of debtors is not person aggrieved and may not appeal.

In a disconcerting decision, the panel majority held that potential avoidance action defendants had no standing to appeal a decision to substantively consolidate various debtors even though by doing so, those defendants arguably lost the ability to assert that they were subsequent transferees (and hence better able to defend against being held liable for fraudulent transfer actions brought by the trustee) or that there was no prepetition creditor of their particular debtor that be used by the trustee to attack their particular payment. The majority viewed this as akin to a case that held that allowing an arguably untimely action to proceed was not a decision that would make a defendant an “aggrieved person” since it merely allowed the case to proceed. The dissent argued, though, that this was a substantially greater harm being done since it destroyed a substantive defense; it did not merely force the creditor to defend itself, but it made it significantly less likely that the defendant could succeed on the merits. The majority also indicated that the defendant’s interests were not central to the goals of the Code and, hence, need not be allowed to delay proceedings. The dissent again argued that this came perilously close to a simple results-based method of analysis, which is not provided for in the Code. What is most alarming about the decision is that it appears to suggest that a decision as to how to best deal with the debtor’s assets in bankruptcy should be allowed to reflect backwards – with apparently no possibility of appeal – to a decision as to whether actions of various parties years earlier would now create liabilities that were not envisioned at the time.

In re Petters Company, Inc., 2016 Bankr. LEXIS 2203 (Bankr. D. Minn. 5/19/16). Substantive consolidation cannot eliminate need for actual prepetition creditors to sue specific debtor.

Only a few days after the Eighth Circuit’s decision, the bankruptcy judge in the same underlying case issued a ruling on how that approved substantive consolidation would affect the actual defenses available to the parties. The court did not deal with the initial/subsequent transferee issue but did address whether the trustee could use the consolidation as a basis to assert that a creditor of any entity could be treated as a creditor of all of the entities. The court soundly rejected that argument; initially it noted that substantive consolidation is a bankruptcy process that affects bankruptcy estates, not an action that literally merges the actual separate entities. That is true even during the case; it is even more true, the court concluded, with respect to satisfying the requirement in Section 544(b) that an actual prepetition creditor must have existed that could have brought a valid claim against the debtor at issue. The absence of such a creditor prepetition (primarily because the parties had specifically structured the loans to be made to “bankruptcy-remote” “special purpose entities” precisely so as to keep the lenders out of direct contact with the operational entities) could not be made up simply by using the bankruptcy device of postpetition substantive consolidation. This treatment of consolidation – which does create a total merger of both finances and company structures – at least results in some fundamental fairness since courts will typically not treat consolidation as providing new defenses to the creditors such as by allowing setoffs between all of the parties, or treating a payment by one debtor of expenses of another debtor as providing a benefit to the first debtor. It will also be useful to see if this analysis can be helpful to states arguing that a trustee must find an actual prepetition creditor that is not barred by sovereign immunity from bringing suit against the State in order to use Section 544(b) to bring avoidance actions against them.

In re Petters Company, Inc., 2016 Bankr. LEXIS 2169 (Bankr. D. Minn. 5/31/16). Analysis of holdings in Finn v. Alliance Bank, 860 N.W. 2d 648 (Minn. 2015) of scope of state UFTA.

Late last year, the Minnesota Supreme Court analyzed the scope of its Uniform Fraudulent Transfers Act (“UFTA”) with respect to the so-called “Ponzi scheme presumption.” Under the most extreme version of that presumption, because a Ponzi scheme is a fraudulent operation, it is “presumed” that every transfers made by the operators of the scheme is fraudulent. Under that version, everything from the direct fraudulent solicitation of funds to pay off earlier creditors, down to the costs to mow the lawn at the operator’s office building are all treated as equally avoidable. Some courts do use a qualifier of sorts in terms of requiring that the actions must be in “pursuance of” the Ponzi scheme, which might exempt the lawn service, but could still bring in the company being paid to run ads or the recipient of a charitable donation that was given to bring attention to the operator and help him recruit additional investors. The court in Finn, though, refused to apply a simple presumption to every transaction based solely on the claim that a Ponzi scheme was involved. The court here parsed that decision with great care noting that the facts in Finn were somewhat unusual in that the operator there obtained a number of loans in connection with purely legitimate transactions while other loans involved fraudulent aspects. While the funds from both types of loans were commingled, those receiving payments on legitimate loan transactions successfully argued in Finn that they should not be tainted by the other improper loans. The court here parsed Finn with great care to see how far its rejection of automatic “presumptions” would extend. It concluded that, while the automatic presumption might be barred (and bankruptcy courts would have to abide by that in applying Section 544), that did not preclude the application of inferences of fraud broadly to a range of transactions where the facts would so justify. On that basis, he concluded that the trustee could make adequate allegations here where the complaint was based on operations that were almost completely fraudulent with or without the use of a particular terminology.

In re Net Pay Solutions, Inc. (Slobodian v. IRS), 2016 U.S. App. LEXIS 8601 (3rd Cir. 5/10/16). Unrelated transfers cannot be aggregated to satisfy the minimum threshold for transfer allegation; tax payments by payroll processing company were not transfers of its assets.

The debtor managed its client’s payroll, determined the deductions to be made, and used payments from the clients to send checks to the employees and the taxing authorities. Five such checks were sent to the IRS on the last day the debtor processed checks; it filed bankruptcy not quite three months later. Four of the checks were below the minimum set in Section 547(c)(9) for bringing a preference action: the Court of Appeals agreed with the district court that those separate checks could not be aggregated unless substantially related and amounts owed for wholly separate entities could not qualify even if they all went to the same creditor. As to the one payment that did exceed the minimum, the court held this was not avoidable, in that under Begier v. Commissioner, 496 U.S. 53 (1990), the payments would be automatically designated as trust fund taxes if withheld by the client from the employee paychecks; the result did not change as the payments were transmitted through the payroll service. As such, the debtor was merely transmitting funds held in trust, not its own property.

In the Matter of EPD Investment Company, LCC (Kirkland v. Rund), 2016 U.S. App. LEXIS 8510 (9th Cir. 5/9/16). Court need not defer statutorily “core” proceedings to arbitration; trustee bringing Section 544 actions acts as creditor and is not bound by debtor’s agreement to arbitrate.

The trustee sought to bring various avoidance actions against the debtor’s counsel and the counsel’s wife. They argued that the trustee was bound by various arbitration provisions in agreements entered into between counsel and the debtor. The bankruptcy court declined to defer to arbitration and the Court of Appeals held he had not abused his discretion in doing so. The actions fell under the statutory “core” definition and that was the normal dividing line for when the bankruptcy court had discretion as to whether or not to defer to arbitration. While Stern somewhat limited which actions would be considered “core” for purposes of allowing final adjudications in bankruptcy courts, that did impose similar limits on the arbitration issue. In addition, the court noted that arbitration provisions are only binding on parties thereto. To the extent that the trustee was bringing suit under Section 544, his authority derived from that of actual creditors and he stood in their shoes. Since those creditors were not parties to the arbitration agreements, they – and by extension the trustee – were not bound by those agreements.

United States SEC v. Hyatt, 2016 U.S. Dist. LEXIS 63347 (N.D. Ill. 5/13/16). Distribution of recoveries made by receiver from Ponzi scheme.

Where the Ponzi scheme organizers promised that the investors would own a specific aircraft and would be entitled to repayment of the initial investment and then additional funds that would be split between them and the organizers, but never actually bought the airplanes with the invested funds, the receiver was not obligated to abide by the terms of the airplane investment purchase contracts when distributing the recoveries that he obtained. In particular, the court agreed with the receiver’s distribution plan that paid the investors in full and then used any excess funds to provide them with a modest investment return on their funds rather than using any funds to make payments to the organizers. Since the investors’ money was never used as was promised in their contracts, the court agreed there was no basis to start relying on contractual provisions that the debtors had ignored up to that point.

In re Energy Conversion Devices, Inc., (Madden v. Morrelli), 548 B.R. 208 (Bankr. E.D. Mich. 2016). Timing of “insider” transfers; determination of insolvency, applying 502(b)(7) cap.

While Section 547(b)(4)(B) provides a longer one-year limitation period for preferential transfers made to insiders, the transfer at issue must have been made while the party held insider status. A payment negotiated with an insider but not actually paid until after the person had left the company’s employ (such as a severance payment) does not fall within the longer time period. And, payments to a former insider based on such a severance agreement were not constructively fraudulent transfer because they were made “for value,” i.e., in order to satisfy the debts created by the agreement. With respect to a payment made within the preference period, the court held that the defendant could not generally rely on a mere “balance sheet” showing of solvency since those sheets showed “book value” (generally purchase price) not market value of assets, which could be greatly different, particularly when the sheets predated the preference period. The court also concluded that, in deciding whether the defendant received “more than” he would have in a hypothetical Chapter 7 liquidation, the cap under Section 502(b)(7) on the maximum amount one may receive from the termination of an employment contract had to be applied to the amounts the defendant could have asserted. (Thus, while one may negotiate a severance agreement whose payments, as noted above, may not be subject to treatment under the “insider” time limit, the amount that can be paid is limited by the one-year cap.) The court also concluded that the defendant’s agreement to accept less than the total originally negotiated in the severance agreement did not constitute “new value” such as to validate the payment he received within the preference period.


In re Scheer (Scheer v. State Bar of Calif.), 2016 U.S. App. LEXIS 6769 (9th Cir. 4/14/16). Fee award in arbitration did not fall under Section 523(a)(7); not intended as governmental penalty.

The debtor, an attorney, was required to repay advance fees she received for mortgage loan modification services in violation of state law. Her license was suspended after she failed to return the funds and she filed bankruptcy and received her discharge. She sued to have her license reinstated under Section 525(a) and the state bar asserted that the debt for fees fell under the Section 523(a)(7) penalty exception. The Court of Appeals held it did not, distinguishing the analysis in Kelly v. Robinson, 479 U.S. 36 (1986) which interpreted the language broadly to protect the established treatment of criminal penalties. Even under the broad view of penalties assessed in state bar disciplinary proceedings in In re Findley, 593 F.3d 1048 (9th Cir. 2010), the arbitration award did not qualify – it was not paid to the government and it was not imposed for disciplinary purposes. Rather, it was purely intended to recompense the client for amounts he paid; subjecting an award to Section 523(a)(7) would make every fee dispute nondischargeable.

Sierra Development Co. v. Chartwell Advisory Group, Ltd., 2016 U.S. Dist. LEXIS 59844 (D. Nev. 5/4/16). Claim of known creditor may not be discharged in Chapter 11 absent notice.

Citing six circuits, court held that known creditors must be given notice of applicable dates in Chapter 11 (including, specifically, bar dates for filing claims) if the debtor seeks to have their claim covered by its plan and discharged upon confirmation. Knowledge of the bankruptcy case, standing alone, is not enough since the bar dates cannot be mechanically calculated.

In re Brantley (Brantley v. U.S. Dept. of Educ.), 2016 Bankr. LEXIS (Bankr. M.D. Ala. 5/17/16). Prudential ripeness requires deferral of determination of hardship for student loan.

A debtor filing in Chapter 13 has a constitutionally ripe claim to seek a determination of the dischargeability of her student loans as soon as she files. However, in light of the length of the plan and the length of time before it would be known if the debtor would receive any discharge, the court held that it would not resolve the claim at that time, based on “prudential ripeness.” To decide the discharge question, the court would be forced to try to decide the debtor’s financial condition at the end of the plan, three to five years hence, with all of the resulting uncertainties in between. The strong likelihood of changed circumstances meant that addressing the issue early would only result in findings that would be both premature and erroneous – as well as irrelevant if the Chapter 13 case was dismissed without a discharge. Absent unusual (and irreversible) circumstances (such as a permanent and crippling disability), the determination should be deferred until at or near the end of the plan period.

In re Chesley (Gebhardt v. Chesley), 2016 Bankr. LEXIS 1921 (Bankr. M.D. Fla. 5/4/16). Transferring non-exempt settlement proceeds into exempt homestead to avoid having them garnished and to hinder creditors, as well as concealing assets warranted denial of discharge under Section 727(a)(2)(A) and 727(a)(4).

In re St. George (McDermott v. St. George), 2016 Bankr. LEXIS 1907 (Bankr. N.D. Ohio 5/3/16). Objection to discharge based on failure to provide adequate records.

Section 727(a)(3) allows the court to deny the debtor’s overall discharge based on his failure to maintain adequate books and records from which his financial condition can be ascertained. While this section also covers destruction of records, it can equally be triggered by a failure to maintain records in the first place – it is a debtor’s affirmative duty to present a meaningful picture of his finances for the trustee. Thus, it is irrelevant whether the trustee could, by dint of detailed investigation of third parties, obtain the necessary information; the debtor is obligated to supply the information in the first instance. In addition, the court held, this duty extended to books and records of a third party business entity if the entity is so intertwined with the debtor’s own finances that a meaningful analysis cannot be carried out without the entity’s records; notably, while this will often happen where an entity and the debtor are alter egos, the trustee need not actually establish that status to still require that records from the entity may need to be produced to analyze the debtor’s overall finances. Although the failure to maintain records may be excused, there was no reason to do so here where the debtor was a sophisticated business person who was surely aware of a need to keep records for tax purposes.

In re Coulter (Indiana Dept. of Workforce Dev. v. Coulter), 2016 Bankr. LEXIS 1133 (Bankr. S.D. Ind. 4/8/16). Penalty may be excepted from discharge both as penalty and as fraud debt.

While in most cases, it is easier to except a debt from discharge as a penalty since there are no time limits on bringing the action and it need not be filed in bankruptcy court, that approach is not helpful in Chapter 13 cases since penalties are not excepted from discharge. However, if a penalty is imposed as a remedy in a case based on fraud, it may also be treated under the fraud exception as well, and, if timely filed, will be excepted like all other consequences of the fraud. As a result, it will remain payable in a Chapter 13 case.

In re Huynh (Georgia Lottery Corp. v. Huynh), 2016 Bankr. LEXIS 1119 (Bankr. N.D. Ga. 4/7/16.) Fiduciary violations by lottery ticket agent.

Georgia law imposes fiduciary obligations on those licensed to sell lottery tickets. Where the licensee hired an employee knowing almost nothing about him, left him in charge of the store without supervision for a month after she had a baby, determined from video footage that he was opening and stealing lottery tickets, and then destroyed the footage and failed to notify the police or take other action to attempt to recover the funds owed to the state, her actions fell so far below an acceptable standard of care that the debt was nondischargeable under Section 523(a)(4), even though she did not herself steal the funds or intend that they be taken.

In re Decena (Decena v. Citizens Bank), 2016 Bankr. LEXIS 1078 (Bankr. E.D. N.Y. 4/4/16). Bank loan made to attend unlicensed, unaccredited foreign school was dischargeable.

The debtor obtained loans from a private bank (not from a program funded or insured by a government unit or nonprofit entity) to attend school overseas in a program that turned out not to be licensed or accredited. The loans clearly did not fit within the primary forms of student loans, but the issue was whether the reference to “funds received as an educational benefit, scholarship, or stipend” was broad enough to cover this debt. The court held that the terms there all referred to payments which, in the normal course would not be loans, but might at some point have to be repaid (i.e., when one was offered a scholarship and later failed to meet the conditions attached thereto). The court disagreed with cases that held that any loan extended for educational purposes would fall under this section; this section was not meant to be a broad catch-all but rather a targeted provision dealing only with grants that later turn out to have to be repaid, rather than obligations that were loans to begin with. Finally, the court held, since the school was not an eligible, accredited institution, the loan could not be a “qualified education loan” under Section 523(a)(8)(B), which does cover private loans but only to certain schools.

In the Matter of Biletski (Bowman v. Biletski), 2016 Bankr. LEXIS 1071 (Bankr. N.D. Ala. 4/4/16). Debts omitted in first bankruptcy can be discharged in second bankruptcy.

While, in general, a determination of nondischargeability in a bankruptcy case must be given res judicata effect in a second case, Section 523(b) contains certain exceptions to that principle. Those exceptions relate to a) tax debts, b) debts omitted in the prior case, and c) student loan debts. In each case, there must be a new showing on nondischargeability in the present case, which makes sense in light of the structure of those exceptions. Tax debts can be discharged once they become “stale” through the passage of time; student loan debts are based on a current assessment of “hardship,” which can change over time, and a debt omitted from the original case is excepted from discharge to protect the creditor’s ability to participate. If the debt is properly listed in a future case, then that reason for denying the discharge disappears and the debt must be analyzed to see if any other exception applies. If not, then it can be discharged in the new case.


Weary v. Poteat, 627 Fed. Appx. 475 (6th Cir. 2015) (unpublished). Threatening criminal prosecution not excepted from stay.

Section 362(b)(1) excepts any act to commence or continue a criminal prosecution. However, a mere private threat to the debtor that the creditor intends to seek criminal sanctions if the debtor does not pay up, does not commence a criminal prosecution. The creditor is free to approach the prosecutor or the police and to file any complaint that it wishes and that initiates official action (by a neutral party that may exercise discretionary judgment). It may not, though, simply harass the other party through its own acts to try to coerce payment.

In re Taggart (Emmert v. Taggart), 548 B.R. 275 (9th Cir. BAP 2016). Party that requests ruling from state court on applicability of discharge (and has ruling upheld by bankruptcy court) has not willfully violated discharge if ruling is later overturned on appeal.

The Ninth Circuit has a rule that a debtor may be held for attorney’s fees in postdischarge litigation if the debtor “returns to the field” and voluntarily becomes involved again in litigation that it could sit out, based on its bankruptcy discharge. In this case, the non-debtor parties carefully asked the state court at the beginning of the postdischarge litigation to analyze the facts and determine whether they would support a finding that the debtor had “returned to the fray.” The state court found he had and, when the debtor went to bankruptcy court to contest that finding, the bankruptcy court also agreed that his actions qualified. (The Ninth Circuit takes the position that the bankruptcy courts can ignore the conclusions of a state court on a stay or discharge issue if the bankruptcy court disagrees, which is itself a problematic conclusion.) On appeal from the bankruptcy court order, the district court found that the debtor’s actions did not qualify as “returning to the field” and sent the case back to determine if the defendants had “knowingly” violated the discharge. The bankruptcy court held they had done so, based on a strict liability approach, since they had chosen to act as they did with knowledge of the discharge. The BAP reversed – regardless of the final outcome on the merits of the “returning to the fray” issue, the Ninth Circuit’s standard for “knowledge’ of the applicability of the discharge injunctions is fairly strict. That is there must be not only knowledge of the injunction but also knowledge that it applies to the act in question, which is a subjective standard. An action seeking a court ruling on a disputed issue of fact/law is precisely the action a party is supposed to take in advance of simply moving forward with litigation. And, even in the Ninth Circuit, a state court is allowed to construe the discharge and have that construction upheld, if correct. Once that determination is made (and until reversed), it cannot be said that a party has subjective knowledge that the determination is incorrect and cannot be relied upon. The court did indicate that the standard might be different under Section 362(k) for a violation of the stay relating to an individual, but would not suffice for the contempt standard for a discharge violation (and perhaps the contempt standard for a stay violation not covered by Section 362(k)).

In re Waldrop, 2016 Bankr. LEXIS 2150 (Bankr. W.D. Okla. 5/26/16). Garnishing party’s obligation.

Under state law, the service of a garnishment creates a lien for the garnishor on the assets in the third party’s hands. That lien does provide rights to the garnishor such that it need not necessarily immediately terminate the garnishment and lose its lien. However, it must take some affirmative action to resolve the status of its rights and to claim a right to adequate protection; it may not simply hold the garnishment in abeyance and leave it to the other parties to address the status of the funds being held.

In re Silk, 2016 Bankr. LEXIS 1127 (Bankr. D. Mass. 4/8/16). Available sanctions.

Where the agency conceded having sent two postpetition notices to the debtor after having notice of his bankruptcy, based on a “coding error,” but took no other actions to actually collect on its debt and immediately took steps to correct the error when the contempt motion was filed (seeking both compensatory and punitive sanctions), the court concluded that a violation could be “willful” even if the creditor’s actions had merely been negligent as here, and that “actual damages” of attorneys’ fees could be awarded, even absent any other showing of injury to the debtor. However, the court did note that there had been no communications by the debtor or his counsel to the agency prior to preparing and filing the contempt motion and that many courts had found in such circumstances, that damages in the form of attorneys’ fees were either self-inflicted (and warranted no award) or at least that the award made should take into account the failure to use any less costly means of resolving the matter. The court allowed debtor’s counsel to file a fee affidavit but made clear that it was skeptical of the actions taken in the case. In particular, the court rejected any claim for punitive damages as unwarranted.

In re Yelverton, 2016 Bankr. LEXIS 1054 (Bankr. D. Deco. 4/1/16). Motivation for filing complaint with government agency is irrelevant to Section 362(b)(4) exception.

The motive of a party filling a complaint with the bar association regarding attorney misconduct is irrelevant to the validity of the stay exception. The party does not control the investigation or the assessment of discipline; that is a function of the government and it must remain free to receive complaints from whoever seeks to file them and to conduct its own independent analysis.


In the Matter of Sunnyslope Housing Limited Partnership (First Southern Bank v. Sunnyslope Housing Limited Partnership), 2016 U.S. App. LEXIS 6429 (9th Cir. 4/8/16). Cramdown price for low-income housing property would be valued without restrictions where they would be terminated in foreclosure action.

The debtor had obtained funding guaranteed by HUD with additional funding from other government agencies, all of which had various provisions requiring that the property be operated for low-income housing. The non-HUD loans were all subordinated to the HUD agreement and further provided that, if the loans were foreclosed upon that the restrictive covenants would be terminated automatically. The project was completed, unfortunately, just as the housing crisis hit in 2008 and went into default in less than a year. When it did, HUD took back the loan and resold it – with a waiver of its requirements for the low-income housing. The buyer began a foreclosure action (which would have wiped out the other restrictions but was precluded from completing that process by the debtor’s bankruptcy filing. When the debtor sought to confirm a plan, it proposed a payment price to the buyer based on the covenants still being applicable which would dramatically lower the property value. The panel majority held that value was improper because the debtor could not use bankruptcy both as a way to evade the foreclosure and to lower the value that the lender would have realized had the foreclosure been concluded. HUD had released its restriction and the other loans were subordinate to that agreement and could not claim higher rights. While disconcerting, the primary factor here is the drafting of the covenants initially (with the provision that they could be eliminated in a foreclosure) as well as the decision of HUD to waive its covenant rights, presumably to obtain a larger sale price (that could be used to apply to new housing projects). The opinion does not deal with the question of whether and how such covenants could be lost by a bankruptcy filing and/or sale alone.

In re STC, Inc., 2016 Bankr. LEXIS 1110 (Bankr. S.D. Ill. 4/7/16). Separately classifying judgment creditor is acceptable.

The debtor was allowed to separately classify a judgment claim where the claim was a) far larger than the other unsecured trade creditor claims, b) was highly disputed (although it is not clear there were any remaining appeals), c) provided the creditors with additional collection remedies beyond those available to the trade creditors without judgments, d) also was entered against other, non-debtor defendants, and where e) the debtor was dependent on doing business with the trade creditors but was in competition with the holder of that claim who would have reasons to wish the debtor’s plan to fail. That distinction between a party primarily interested in its creditor remedies versus one pursuing its claim for strategic purposes has been considered a basis for allowing different treatment of the two groups. The dissenting creditor also argued that, in any event, the class of trade creditors was being artificially impaired, solely to create a supporting class, when the full payment would only require less than an additional $20,000 in a case that proposed payments of at least $1.5 million in the first year. While courts differ as to whether “artificial” impairment is sufficient, they generally all require an analysis of the need for the impairment as part of a “good faith” analysis under Section 1129(a)(3). The court here found good faith largely because the plan would pay the judgment creditor in full with interest (albeit over a nine-year period) and, absent this impairment (necessary or not for purposes of operations), the plan could not succeed. Because the creditor was a competitor with a motive to put the debtor out of business, not just to be paid, the court was willing to give the debtor more leeway in terms of allowing voluntary impairment.


In re Tench, 2016 Bankr. LEXIS 1989 (6th Cir. BAP 5/11/16). Late-filed claims not allowed in Chapter 13.

Section 502 and Rule 3002(c) do not contain any provisions allowing for late-filed claims in Chapter 13 where the late filing is based on excusable neglect. Even if the claims would not prejudice the plan confirmation or the other creditors, there is no equitable basis for ignoring the limits in those provisions and the court cannot rely on a general power such as Section 105. Even equitable tolling (which generally requires some showing of misconduct by the debtor and not just an excusable fault by the creditor) does not justify allowing of late filed claims.

In re Haroldson, 2016 Bankr. LEXIS 2061 (Bankr. D. Col. 5/19/16). No deduction of non-existent expense.

Just as a debtor may not deduct the standard ownership payment amount for a car that has been wholly paid off, so too the debtor may not claim a mortgage expense when the home he lives in has no mortgage outstanding.

In re Bryant, 548 B.R. 239 (Bankr. E.D. Tenn. 2016). Chapter 13 debtor may use Section 108(b).

A debtor that has had property sold at a tax sale, subject to a redemption period, may file bankruptcy within the redemption period, and then, at a minimum, may use the extra 60 days allowed under Section 108(b) to pay the amount owed from the tax sale. This benefit inures not just to the trustee but also, under Section 1303 and 1306, to the debtor as well.

In re Pittman, 2016 Bankr. LEXIS 1954 (Bankr. E.D. Penn. 5/6/16). Chapter 13 debtor may use entire term of plan to repay taxes owed from tax sale; not limited to Section 108(b) period.

Where the debtor files its case before the expiration of a redemption period for a tax lien sale under state law, she may use the plan period under Chapter 13 to pay off the amount owed to the

purchaser and is not limited to “redeeming” the property under state law or to using the limited extension of the redemption period under Section 108(b). The right to repayment of the amount paid at the tax sale is a “claim” and, like all claims, can be modified in the Chapter 13 case. The Code trumps state law to that extent.

In re Dugan, 2016 Bankr. LEXIS 1895; In re Doucet, 2016 Bankr. LEXIS 1912; In re Dunson, 2016 Bankr. LEXIS 1913 (Bankr. D. Kan. 5/3/16). Trilogy of cases holding that attorney-fee only Chapter 13 plans are not per se bad faith and were acceptable in all of these filings.

The court issued a trilogy of identical decisions for debtors whose names started with “D” finding that their “attorney-fee” only plans were confirmable. A fairly recent trend has seen debtors filing in Chapter 13 without neither secured nor priority debt to resolved, but using the payout period in Chapter 13 simply to take time to spread out payments for their bankruptcy counsel. Many courts have found this to be in bad faith, both because it seems to have little to do with the point of a bankruptcy case to pay existing creditors and because, for many courts, it appears that the filing may benefit the debtor’s counsel but do little for the debtor who is saddled with paying a much higher fee, albeit over time. The court here, though, had a detailed analysis as to why the current process that, practically speaking, requires debtors to be able to save up the full Chapter 7 fee in advance is often impossible for debtors even if the total is less than they might owe in Chapter 13 – and leaves them subject to creditor harassment during that entire period. The court also argued that the difficulty in obtaining payment meant that many counsel would choose not to represent clients leaving them without help in negotiating the bankruptcy system. Thus, the court concluded, the Chapter 13 option might be better and, in each of these three cases found it was likely impossible they could ever save up the Chapter 7 funds. While that conclusion seems debatable in some of these cases, the basic point is likely valid. In any case, the best solution would probably be a more adequate treatment of counsel fees in Chapter 7 but in lieu of that, these types of cases are likely to proliferate.

In re Merovich, 547 B.R. 643 (Bankr. M.D. Penn. 2016); In re Wheaton (Jeffrey P. White and Associates, P.C. v. Fessenden), 547 B.R. 490(1st Cir BAP 2016). Payment of counsel fees on dismissal of case.

Section 1326(a)(2) explicitly provides that amounts held by a trustee prior to confirmation are to be returned to the debtor if the plan is not confirmed – but only after deducting administrative claims allowed under Section 503(b), including attorneys’ fees. While Section 349(b) also speaks to revesting estate funds in the debtor upon dismissal of a case, most courts, including the court here, find that the specific language in Section 1326 governs in Chapter 13 cases. (The issue is slightly ambiguous because Section 1326 is not literally keyed to dismissal of the case, but that is generally viewed as implicit, since the mere denial of confirmation with the case going forward does not result in funds being returned to the debtor.) Thus, debtor’s counsel is entitled to payment of his fees from amounts held by the trustee before funds are returned to the debtor.

HSBC Bank, USA, N.A. v. Zair, 2016 U.S. Dist. LEXIS 49032 (E.D. N.Y. 4/12/16). Chapter 13 debtor cannot “vest” property in lender over lender’s objection.

Section 1322(b)(9) provides that a plan may contain a provisions “vesting” property in any entity. Vesting is defined as an actual transfer of an ownership interest. Section 1325(a)(5), on the other hand, gives the options for dealing with a secured creditor’s interests, one of which is “surrendering” the property to the creditor. Surrender, in this context, is defined as making property available to the secured creditor to allow it – at its option – to exercise its right to claim the property by foreclosure or otherwise. In the current day, where many properties remain “under water” or have other undesirable factors (such as environmental liability), lenders may be happy to accept a “surrender” so as to have the debtor waive its right to contest the foreclosure, but often will choose not to proceed with the foreclosure at that time. The result is to leave the debtor with continued ownership and the attendant carrying costs. A number of debtors have tried to force creditors into taking the property by including a vesting provision in their plan. The court here reviewed many of those decisions and noted that some decisions have allowed the vesting based on the secured creditor’s failure to object, so that the debtor could argue that it was relying on the “consent” prong of Section 1325(a)(5). However, where the lender objects, the courts are split – some hold, largely on policy reasons to give a debtor a true “fresh start,” that the lender can be forced to take the property. The majority, though, including the court here, have concluded that there is no basis for a debtor to be able to foist its own liabilities onto the lending party, simply by virtue of its having chosen to file bankruptcy.


In re Star Group Communications, Inc. (Subranni v. Navajo Times Publishing Co., Inc.), 2016 Bankr. LEXIS 1893 (Bankr. D. N.J. 4/29/16). Indian tribes are not covered by Section 106(a).

Section 106(a) abrogates sovereign immunity as to a number of bankruptcy clauses with respect to “governmental units.” Those units are defined, in turn, in Section 101(27) as including the United States, States, Territories, Commonwealths, municipalities, foreign states and departments, agencies and instrumentalities of those entities and “any other foreign or domestic government.” While that definition appeared to have been intended to be as all-inclusive as humanly possible, a number of courts, including the decision here, have held that it does not include Indian tribes, because it does not use that terminology specifically. Other decisions have held that they are covered, noting that, in view of the breadth of the language used, there are no other entities that could fall under the term “other domestic government” so that its inclusion would have been meaningless if it did not cover tribes. The contrary decisions, though, note that it has been held that the references to tribes must be “unambiguous” and that other laws that have covered tribes, have usually used some direct references to Indians or tribes and that was not done here. Thus, under this analysis, Indian tribes appear to be the only entities that are immune from suit under the Bankruptcy Code.

In re Philadelphia Entertainment and Dev. Partners, L.P. (Philadelphia Entertainment and Dev. Partners, L.P. v. Penn. Dept. of Rev.), 2016 Bankr. LEXIS 1149 (Bankr. E.D. Penn. 4/8/16). Discussion of sovereign immunity and Rooker-Feldman doctrine in context of licensing dispute.

The debtor sought to force the State to return a $50 million “license fee” that it paid in order to receive a slot machine license and/or to force the state to pay it the “value” of the license that had been revoked prepetition. The court denied the debtor all relief. The debtor had been awarded a slot license and was required to begin operations within a year of the application being granted. Despite having its time extended to three years, the debtor still never began operations. During the delay, the state took steps to revoke the license and treat the license fee as forfeited. The debtor appealed the revocation to the state court, which upheld that Gaming Board’s action (and implicitly, although not explicitly, denied return of the license fee). The state court found that the license was a privilege and not a property right. When the debtor filed bankruptcy, it sought to contest that judgment and to use various provisions, including turnover, and state and federal fraudulent transfer claims to demand either or both of the fee and the value of the license. The state did not appear in the case at all except to defend the debtor’s charges and argued that sovereign immunity barred the debtor’s allegations against them. The decision is long, detailed, and complex and provides a very interesting read of a judge trying to grapple with the implications of Seminole (as to sovereign immunity general) within the context of the unique gloss that the Supreme Court majority came up with in Central Virginia Community College v. Katz, 546 U.S. 356 (2006). That decision, based on a problematic reading of the ratification history of the Constitution, purported to leave Seminole intact while still finding that for some, poorly defined subset of all matters involving bankruptcy and insolvency (tied generally to in rem notions applicable to apportioning the estate), the states had agreed to waive their immunity. For anyone facing an immunity claim, the decision should be read in its entirety including for its overall discussion of the scope and limits of the in rem exception relied upon in Katz, as well as the relationship between that analysis and the limits announced by the Court in Stern v. Marshall, 564 F.3d 462 (2011) on the power that an Article I court can exercise. The case also discusses the nature of the “interest” held in a license subject to substantial regulatory control and concluded that such a license was not a res to which in rem jurisdiction under Katz could attach. The court also drew a distinction between fraudulent transfer actions (which are not unique to the Code) and preferential transfer actions (which generally are Code-created) and suggested that Katz might apply only to preference and not fraudulent transfers. There is a great deal more to the opinion so it is well worth reading for anyone dealing with any of these issues and attempting to determine what limits exist on the murky holdings in Katz.


Johnson v. Midland Funding, LLC, 2016 U.S. App. LEXIS 9478 (11th Cir. 5/24/16). Fair Debt Collection Practices Act not preempted by Bankruptcy Code; filing stale claims by debt collectors violates FDCPA.

An increasingly common practice is for debt collection firms to buy large amounts of debts that are past the statute of limitations and still try to collect on them. Because the price paid is so low, even recovering on a relatively small number of such claims from those who do not realize they are unenforceable can be profitable. Outside of bankruptcy, the FDCPA makes it unlawful for those collectors to seek to collect on time-barred claims under certain circumstances, but there is a dispute over whether that provision can be enforced in bankruptcy. To be sure, Section 502(b)(1) does allow for claims to be disallowed if they are unenforceable under nonbankruptcy law, but the issue is whether the debt collector can be barred from filing them in the first place. If so, this would reduce the burden on the system and ensure that such claims do not slip by when there are not adequate resources to review and vet all of the claims. A time-barred claim is not extinguished – it is merely subject to a dispositive defense – and, as such, though, the argument is that they t may still be filed under the Code and are merely subject to disallowance if anyone objects. The Eleventh Circuit resolved the apparent conflict here by holding that, while a time-barred claim may be allowed under the Code in general, the FDCPA deals with one group of parties filing claims – professional creditors in the form of debt collectors. Those parties are subject to particular regulation, perhaps because of observed and perceived problems with their operations, so it is not unreasonable to have those same added requirements apply even in bankruptcy.

Williams v. Ford Motor Credit Company, 2016 U.S. Dist. LEXIS 64202 (E.D. Mich. 5/11/16). Assumption of a lease is effective without an accompanying reaffirmation of underlying debt.

The court affirmed the bankruptcy court’s opinion that the language in Section 365(p) that allows a debtor to assume a prepetition personal property lease is adequate to allow the debtor to retain the property and the creditor to have enforceable rights under that lease without requiring the debtor to also enter into the much more onerous reaffirmation process for the underlying debt. Doing otherwise would make the assumption provisions largely irrelevant and could create conflicting results if one was approved and the other was not.


Fustolo v. 50 Thomas Patton Drive, LLC, 816 F.3d 1 (1st Cir. 2016). Judgment which is effectively stayed under state law for collection purposes is not automatically undisputed for purposes of involuntary bankruptcy petition.

The courts are somewhat split as to whether the bankruptcy court may “go behind” an existing state court judgment to determine whether it is “undisputed” for purposes of determining if a debt may be used to initiate an involuntary case. Under one approach, an unstayed state court judgment is dispositive even if it is still subject to being appealed. Under the other approach, the court still starts with a presumption that the existing judgment is binding but is open to allowing some challenges in “rare circumstances.” In reality, even under the first rule, one could show that the judgment had been paid, for instance, or that there was a true fraud upon the court, but, in general, the judgment is largely dispositive. The court here tended to agree with that rule, but with at least one caveat – that the point of saying the judgment was “unstayed” was to show that the debtor was already subject to execution so the bankruptcy proceeding would be no more coercive. If, as was the case here, state law did not allow a party to execute on a debt while an appeal was pending, even absent a stay being filed, then the decision should be treated as if it were effectively stayed. The court also held that, if there was dispute as to amount – even if the undisputed amount was far in excess of what was needed to be a qualifying creditor – there was still a dispute. However, if there is a separable claim that exists in an undisputed amount, that will suffice even if a related claim is still in dispute.

Parkview Adventist Medical Center v. U.S., 2016 U.S. Dist. LEXIS 68550 (D. Me. 5/25/16). Medicare provider issues subject to administrative exhaustion requirements.

Sections 405(g) and (h) of title 42 impose an administrative exhaustion requirement on challenges to decisions made by the HHS Secretary on Medicare provider and payment agreements. Section 405(g) literally only applies to claims arising under 28 U.S.C. § 1331 (general federal question jurisdiction) and § 1346 (U.S. defendant cases); Section 1334, which is the bankruptcy jurisdiction section is not referenced. Based on that omission, a minority of opinions hold that bankruptcy courts do not need to defer to the administrative process and can decide any and all Medicare administrative and payment issues without further ado. Most courts, though, read the legislative history (described herein) as having resulted in a drafting error when only some sources of jurisdiction were listed in an amended section and conclude that it was not Congress’ intent to eliminate the other jurisdictional bases. This court joined the majority and held it could not review the Secretary’s decision on terminating the provider agreement.

Newell v. Wayne County, 2016 U.S. Dist. LEXIS 62034 (E.D. Mich. 5/11/16). Setoff allowed even after discharge of underlying debt.

Although a sanction awarded to the county based on the debtor’s rejection of an offer of judgment was dischargeable, it still remained available to the county to use to off-set against any damages that the debtor might be awarded in a separate pending litigation. Under Section 553, only selected provisions of the Code (not including the discharge provisions) limit an existing right of setoff. As a result, courts generally allow the setoff of a discharged debt as a defense to a pending action against the holder of the setoff right. Those courts have held that the limitation in Section 542(a)(2) on setting off discharged debt only applied to setoffs against postpetition debt, and not to setoff of mutual prepetition debts.

In re Cinque Terre Financial Group Limited, 2016 Bankr. LEXIS 2109 (Bankr. S.D. N.Y. 5/24/16). “Act of production” defense not applicable to officers of debtor.

A person that serves as an officer of a debtor (such as a CFO) can be required to produce corporate documents that he had control over in his representative capacity without invoking the “act of production” defense; corporations have no Fifth Amendment privileges and acting in a representative capacity does not trigger the defense for an individual officer.

In re Mathis (Miller v. Mathis), 548 B.R. 465 (Bankr. E.D. Mich. 2016). No private right of action for trustee to seek damages for debtor’s failure to comply with duties.

Section 521 imposes certain duties on a debtor and his failure to comply therewith can result in his case being dismissed and/or his discharge being denied. What it does not do is create a private right of action for the trustee to sue the debtor for compensation for his added costs in terms of trying to force the debtor to comply with those obligations.

In re Circuit City Stores, Inc. (Siegel v. California Self-Insurers’ Security Fund), 2016 Bankr. LEXIS 1896 (Bankr. E.D. Va. 4/26/16). State exhaustion remedies do not preclude bankruptcy court from deciding issues relating to required size of workers’ compensation reserves.

The debtor was allowed to self-insure its workers compensation liability but was required to post a bond in the amount of 135% of its estimated future liabilities in the form of a letter of credit. The state drew down the entire amount of the letter of credit and began paying claims after the bankruptcy was filed – but also filed proofs of claim in the case seeking additional amounts totaling more than twice as much as the total of the letter of credit. The trustee objected and the parties eventually stipulated to the withdrawal of all of the proofs of claim without any bar on allowing the Trustee to bring any claims against the state. The trustee did eventually sue the state seeking to recover for what he asserted to be excess proceeds being held by the state. The state argued that administrative exhaustion should apply but the judge rejected that view. Initially, he stated that state administrative exhaustion requirements could not bar actions under a federal statute. But, even if there were any such requirement, they would be at most an affirmative defense that the state had waived by filing proofs of claim in the bankruptcy case, thereby putting its rights into question in that forum, while not raising or pursuing the state law actions in a timely fashion. The state could presumably have asserted that it could use its police and regulatory powers to process a determination before its administrative agency that additional funds were needed. And, since state law did allow for return of excess funds, the debtor clearly had at least a contingent interest in the proceeds of the letter of credit. In view of the structure of the bond – requiring a 35% overage above the estimated amount of the funds needed, there clearly was a basis for the debtor to argue that there were amounts it should be entitled to.

In re Ross, 2016 Bankr. LEXIS 1665 (Bankr. E.D. N.Y. 4/14/16). Potential tort claim for injury that might be created by device implanted prepetition was not property of estate

While the analysis of what is a “claim” and the analysis of what is “property of the estate,” may deal with similar issues, the outcome may be considerably different. The goal of the claim definition is to bring in as many claims as constitutionally possible, so it explicitly includes the notion of contingent claims to include even those matters that are far from being ready to assert as causes of action on the petition date. “Property of the estate,” on the other hand, is equally explicitly limited to only that assets that exist on the petition date. Thus, where the debtor had no expectation or knowledge on the petition date that a device that had been implanted and removed prepetition and that had caused no known injury at that time would cause her to be eligible to receive damages from a class action years later, that potential cause of action was not “property of the estate” on the petition date (even though a party suing the debtor with respect to such a device) might likely have had a bankruptcy “claim” on that date). Essentially, unlike the case of a claim, a debtor must actually have a viable cause of action on the petition date for the matter to be included in estate property. As a practical matter what that meant here is that the debtor was not required to reopen her case or turn over the settlement she received.

In re Angwin (United States v. Angwin), 2016 Bankr. LEXIS 1733 (Bankr. E.D. Cal. 4/5/16). Recoupment of overpayment of Social Security Disability benefits not allowed).

The debtor received disability benefits for some twenty years while she was married and not entitled to receive them. When Social Security eventually learned of her marriage (after her husband died), it determined she had been overpaid by some $200,000 and notified her that it intended to recoup the payments from future disability benefits to which she was still entitled. She requested a waiver but was denied it for most of the benefits, with the agency determining that she had been at fault in failing to give notice of her marital status. When she filed bankruptcy, Social Security asked the court to find that either the debt was nondischargeable due to fraud or was subject to recoupment. The court denied recoupment finding that the current payments were due to her current, ongoing disability and were not closely enough related to the prior payments (based on the same disability). Social Security argued that it would be unjust to require it to pay additional benefits when she had already received $200,000 to which she was not entitled but the court stated that “It is difficult . . . to understand how the United States, with all of its resources, can be “unjustly” treated by a single individual who is apparently unable to support herself.” The court did agree, though, that if the debtor had engaged in fraud, the debt would be excepted from discharge (although it is not clear if it could be collected from her ongoing benefit) and that would serve the government’s purposes.

In re Napierville Theater, LLC (Ill. Dept. of Rev. v. Napierville Theater, LLC), 2016 U.S. Dist. LEXIS 31423 (N.D. Ill. 3/10/16); Ill. Dept. of Rev. v. Elk Grove Village Petroleum, LLC, 2015 U.S. Dist. LEXIS 165301 (N.D. Ill. 12/9/15); Ill. Dept. of Rev. v. Elk Grove Village Petroleum, LLC, 541 B.R. 673 (N.D. Ill. 2016). Decisions analyzing value of adequate protection to be awarded state for loss of “interest” in holding buyer liable to pay delinquent taxes owed by Section 363 seller.

In a series of decision, courts have extended the concept of an “interest” that may be sold “free and clear” of in a Section 363 sale far beyond the normal view of a form of in rem rights such as a property or lien interest to include not only claims against the debtor itself but also claims to successorship liability against buyers for obligations incurred by the debtor. To the extent that such rights are considered “interests,” some states have begun to push back and demand that they receive “adequate protection” for such an interest. This series of cases deals with the Illinois Bulk Sale law which provides that the state may put a “stop order” on a sales transaction and demand that unpaid taxes be satisfied from the sales receipts. It also, though, provides that, if the taxes are not in fact actually paid from the receipts that the state then can impose personal liability on the buyer for those unpaid taxes of the seller. In the Elk Grove case, the bankruptcy court agreed the obligations were “interests” and that the state could demand adequate protection but then held that, because the secured lender had higher rights in the proceeds, the “interest” actually had no value that had to be protected. On appeal, though, the district court agreed with the analysis so far as it applied to the actual sales proceeds, but then held that the bankruptcy court had ignored the second obligation, imposed directly on the buyer, to make good on the taxes if they were not paid from the sales proceeds. That interest, the court held, was separate from the proceeds and did have to be protected as well. That opinion and the other Elk Grove opinion (on reconsideration) do not fully answer what is the value of that alternative interest or from what funds it could be satisfied in the particular case (where other funds were likely already dispersed). It does not appear that the court is necessarily allowing the state to go after the buyer but rather is suggesting that the protection the buyer is receiving somehow becomes a claim against the debtor’s assets. The entire process has a great deal of circularity to it (and illustrates the problems in using this broad view of an “interest) but it at least gives the state some basis to demand rights in these cases and to oppose having its rights simply eliminated by fiat. The same approach will presumably also be useful in dealing with cases dealing with bars on the carryover of experience ratings to new employers (where the lack of logic in collecting an adequate protection payment from the debtor’s assets is even more obvious). In Napierville, the district court merely noted the Elk Grove analysis and remanded its similar case to the bankruptcy court for further analysis.

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