I previously reviewed the case of In re Quezada, ___ B.R. ____, 2007 WL 438258 (Bkrtcy.S.D.Fla.)(Mark, J.) in which the court held that the trustee does not have the ability to administer exempt property for domestic support obligation (“DSO”) creditors pursuant to new section 522(c)(1). The Court in In re Duggan, Case No. 6:06-bk-02512 (Bankr.M.D.Fla. August 15, 2007)(Jennemann, J.) faced the same question and issued its opinion agreeing with In re Quezada . The court noted that to date at least five court have considered this issue and that each court concluded that section 522(c)(1) does not allow a trustee to administer exempt property for the benefit of a DSO creditor.
Another Court Holds that Trustee Does Not Have the Ability to Administer Exempt Property for DSO Creditors
August 29, 2007Residence Held in Revocable Trust May Qualify as Florida Homestead
August 26, 2007In the case of In re Alexander, 346 B.R. 546 (Bankr.M.D.Fla.2007)(Williamson, J.), the court addressed the issue of whether real property may qualify for Florida’s homestead exemption when title to the property is held in a revocable trust of which the Debtor is the sole trustee and the sole primary beneficiary. As sole trustee, the Debtor maintained legal control of the trust and could revoke the trust at any time and as sole primary beneficiary, the Debtor retained an exclusive right of possession. The debtor had resided in the residence for about ten years.
The court rejected the trustee’s argument that the Debtor was not entitled to the homestead exemption on the contention that the real property was not “property owned by a natural person” as required by Art. X, Section 4 of the Florida Constitution. The court held that the Debtor’s beneficial interest was sufficient to entitle her to claim Florida’s homestead exemption. The court explained that the Florida Constitution has been interpreted as applying to a variety of interests in real property and does not distinguish different types of ownership interest that qualify for the homestead exemption. The court discussed that an individual claiming the homestead exemption need not hold fee simple title to the property, but it is sufficient if the individual’s legal or equitable interest gives the individual the legal right to use and possess the property as a residence. In re Ballato, 318 B.R. 205 (Bankr.M.D. Fla. 2004), Southern Walls, Inc. v. Stilwell Corp., 810 So.2d 566 (Fla. 5th DCA 2002), Callava v. Feinberg, 864 So.2d 4290 (Fla. 3d DCA 2004), Engelke v. Estate of Engelke, 921 So. 2d 693 (Fla. 4th DCA 2006). The court declined to follow the case of In re Bosonetto, 271 B.R. 403 (Bankr.M.D.Fla.2001)(Proctor, J.)(debtor could not claim homestead exemption in residential property that she owned as trustee of trust) which it found did not cite any Florida cases to support its ruling and whose reasoning has not been followed in subsequent cases.
Another Court holds that Absolute Priority Rule Does Not Apply to Individual Chapter 11 Debtors Post-BAPCPA
August 25, 2007I previously reviewed the case of In re Tegeder, ___ B.R. ___, 2007 WL 1549067 (Bkrtcy.D.Neb) which held that per BAPCPA’s amendments, the absolute priority rule no longer applies to the retention of property by individual chapter 11 debtors. The court in the recent case of In re Roedemeier, ___ B.R. ___, 2007 WL 2350184 (Bkrtcy.D.Kan.)(Somers,J.) reached the same conclusion.
In this case, the Chapter 11 Debtor, who was a dentist, proposed a Chapter 11 plan that would, inter alia, allow him to retain ownership of his interest in his LLC which operated his dental practice and proposed to pay $30,000 on general unsecured claims totaling about $875,000. The court noted that prior to the enactment of BAPCPA in 2005, the absolute priority rule applied to all Chapter 11 debtors, but that BAPCPA added the “except” clause to section 1129(b)(2)(B)(ii) with the addition of the phrase “except that in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115…” The court stated that the “except” clause created an exception for individual Chapter 11 debtors to the absolute priority rule. The court construed this exception and section 1115 broadly to allow a debtor to exempt both pre- and postpetition property under a plan even though a class of unsecured creditors are not paid in full.
The court stated that a various changes were made to Chapter 11, including the exception to the absolute priority rule, so that it could function for individual Chapter 11 debtors much like Chapter 13. These include section 1115 which bring postpetition property into the estate, section 1123(a)(8) which calls for the debtor’s plan to provide for payment to creditors from the debtor’s postpetition earning from services or other future income, section 1129(b)(2)(B)(ii)’s allowance to the debtor to keep property included in the estate under section 1115 without paying in full a class of rejecting unsecured creditors, section 1129(a)(15) which authorizes the debtor to overcome an objection by an unsecured creditor by meeting the projected income test, section 1141(d)(5) which generally delays entry of the discharge until completion of all payments under the plan, and section 1127(e) which permits post-confirmation plan modification.
The court also made some other interesting conclusions in the case. The court found that section 1129(a)(15), which was added by BAPCPA, only applies if a holder of an allowed unsecured claim objects to confirmation. As the involved creditor did not so object, the Debtor was not required to meet the requirements of section 1129(a)(15)(A) or (B). Section 1129(a)(15)(A) would have required the claim to have been paid in full and section 1129(a)(15)(B) would have imposed a disposable income test. But the court found that the requirements of the section 1129(a)(15)(B) disposable income test were met in any event. The court concluded that the disposable income test should be performed with the expenses side judicially determined for this above-median income debtor (as per Form 22B) and not by the use of the I.R.S. standards as per section 707(b)(2).
In approving the debtor’s disclosure statement, the court concluded that disclosure statements for smaller businesses are not required to be as extensive as those of a medium to large reorganization which often involve the issuance of securities. The court referred to the list for smaller businesses in 7 Collier on Bankruptcy, para. 1125.02[2] at pp. 1125-12 to 1125-13 (citing In re Malek, 35 B.R. 443 (Bankr.E.D.Mich.1983)). The court stated that the minimum information should include a description of the business, its history, financial information, description of the plan, facts respecting its execution, a liquidation analysis, identification of management and its compensation, transaction with insiders, and tax consequences of the plan.
No Constitutional Right to Counsel for Chapter 7 Debtor
August 21, 2007In the case of In re Eagle, ___ F.3d ___, 2007 WL 2278902 (C.A.8(Ark.)), the court held that under the circumstances the Chapter 7 Debtor did not have a constitutional right to counsel. The Debtor had filed a pro se Chapter 7 case. As the Debtor failed to file the necessary schedules and statements, the court dismissed his case. The court granted the Debtor’s motion to reinstate his case and advised the Debtor to obtain counsel. In subsequent proceedings, the court sustained a Creditor’s exemption objection. The Debtor appealed the order sustaining the exemption objection.
The Court of Appeals held that the Debtor did not have a right to counsel as his physical liberty was not at issue in the bankruptcy case. Lassiter v. Dep’t of Soc. Servs. of Furham County, 452 U.S. 18 (1981). The court further noted that although it had no duty to do so, the court had advised the Debtor to obtain counsel.
The issue to use bankrutpcy estate funds to employ criminal counsel in a bankruptcy case was previously addressed in the Miami, Florida bankruptcy case of In re Duque, 48 B.R. 965 (DC Fla. 1984)(Hastings, J.). In this case involving an individual chapter 11 debtor, the District Court held that the Debtor did not under the circumstances have the right to use bankruptcy estate money to pay for his criminal counsel. The court set forth three underlying principles in its determination. First, the employment of special criminal counsel must be in the best interest of the estate. That is, there must be an actual need for the services based upon a actual not hypothetical or speculative threat to the estate or its property. Second, special criminal counsel must not be for the personal benefit of the debtor, but must be for the benefit of protecting the assets of the estate or furthering its interests. Third, potential violations of the debtor’s constituational rights posed by criminal investigations or prosecutions occurring after the filing are of concern to the criminal forum and not the bankruptcy court.
Exempt Property Not Excluded in Calculating Insolvency Exception
August 20, 2007The case of Quartemont v. Commissioner, T.C. Summary Opinion 2007-19 (Jacobs, J.) illustrates the tax consequences of the settlement of debt at less than the full amount and specifically addresses the calculation of “insolvency” for the insolvency exception to the discharge of indebtedness income provision of the Internal Revenue Code. 26 U.S.C. 108. In this case, the taxpayers negotiated with their credit card companies to pay a lesser amount than what was owed instead of filing for bankruptcy relief. By their settlements with the credit card companies, they were able to cancel about $77,000 in debt. The I.R.S. determined that the $77,000 in cancelled debt was additional income.
The taxpayers claimed that the $77,000 in cancelled debt was not income based on the insolvency exception of 26 U.S.C. 108(a)(1)(B) which provides that gross income does not include any amount which would be includable in gross income by reason of the discharge of indebtedness if the discharge occurs when the taxpayer is insolvent.
The I.R.S. and the taxpayers did not agree on whether the taxpayers were insolvent at the time of the discharge of indebtedness. Insolvency is defined in section 108(d)(3) as the “excess of liabilities over the fair market value of assets.” The taxpayers claimed that they were insolvent by arguing that their home should not count as an asset since it would be an exempt homestead in bankruptcy.
The tax court disagreed with the taxpayers and found that the calculation of insolvency does not exclude exempt assets. The court found that “assets” as used in section 108(d)(3) includes assets exempt from the claims of creditors under applicable state law.
The tax court noted that had the taxpayers filed for bankruptcy relief instead of reaching a settlement with their creditors, the discharged amount would not have been included in income as section 108(a)(1)(A) provides that gross income does not include any amount which would have been includable in gross income by reason of the discharge of indebtedness if the discharge occurs in a bankruptcy case.
In Rem Relief Granted Against Serial Filers
August 19, 2007In the case of In re Selinsky, 365 B.R. 260 (Bkrtcy.S.D.Fla.2007)(Ray, J.), the court dealt with a situation of five serial bankruptcy filings by the Debtor and her husband to stall a foreclosure of their real property. The mortgagee’s motion for relief from the automatic stay case before the court.
The court noted that section 1307(c) permits a court to dismiss a Chapter 13 case “for cause” and that the leading case in the Eleventh Circuit is In re Kitchen, 702 F.2d 885 (11th Cir.1983) which sets forth the “totality of the circumstances” test. Based on the Kitchen factors, the court found the case to be a bad faith filing and ordered the case dismissed.
In addition to dismissing the case, the court granted the secured creditor prospective stay relief which is also known as in rem relief. This stay relief attaches to the property so that a new bankruptcy filing by the Debtor or a third party will not trigger an automatic stay. Furthermore, the court bound the Debtor’s spouse by the in rem relief due to his participation in the serial filing scheme. The husband was charged with constructive notice of the hearing on the motion for stay relief.
Furthermore, the court ordered that the Debtor and her husband be barred from filing another bankruptcy case for a two year period.
It may be noted that BAPCPA added two new provisions to section 362 to validate in rem relief. New section 362(d)(4) authorizes a bankruptcy court under certain circumstances to order relief from the stay with respect to real property that is binding in any bankruptcy case purporting to affect the property filed within two years. Section 362(b)(2) creates a new exception to the automatic stay for an act to enforce a lien against real property when an order allowed by section 362(d)(4) has been entered.
Bankruptcy Courts Lack Authority to Issue Writs of Habeas Corpus
August 18, 2007In the case of In re Kluever, ___ B.R. ___, 2007 WL 2213365 (Bkrtcy.M.D.Fla.,2007)(Funk, J.), the court held that bankruptcy courts lack the authority to issue writs of habeas corpus. The Debtor filed an emergency motion for writ of mandamus, habeas corpus or similar relief pursuant to section 105(a) after he was arrested and incarcerated in Florida as a result of a warrant issued in Wisconsin for failure to pay child support. The Debtor asserted that his arrest and incarceration were an attempt to collect a debt in violation of the automatic stay.
The court held that bankruptcy courts lack the authority to issue writs of habeas corpus. Section 105 of the Bankruptcy Code only provides that a bankruptcy court “may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of” this title.” The court also found that section 2241(a) does not imbue bankruptcy courts with the authority to issue writs of habeas corpus. 28 U.S.C. Section 2241(a) provides that [W]rits of habeas corpus may be granted by the Supreme Court, any justice thereof, the district courts and any circuit judge within their respective jurisdictions.” See Bryan v. Rainwater, 254 B.R. 273, 276 (N.D.Ala.2000). In re Cornelious, 214 B.R. 588 (Bankr.E.D.Ark.1997).
The court did note that it made no determination as to whether Wisconsin’s actions violated the automatic stay.
Section 548 Given Extraterritorial Application
August 17, 2007The case of In re French, 440 F.3d 145 (4th Cir. 2006) presented the question of whether a U.S. Bankruptcy Court can avoid a constructively fraudulent transfer of foreign real estate between U.S. residents. The court held that the presumption against extraterritoriality, assuming it applied, did not prevent the application of the fraudulent transfer statute and that the doctrine of international comity did not require application of Bahamian bankruptcy law rather than the U.S. Bankruptcy Code.
In this case, the Chapter 7 trustee filed an adversary proceeding to avoid the transfer of the Bahamian real property by the debtor to her children. The trustee alleged that the debtor and the transferees had engaged in a constructively fraudulent transfer because the debtor had been insolvent at the time of the transfer and received less than a reasonably equivalent value in exchange. See 11 USC section 548(a)(1)(B). The transferees filed a motion to dismiss and argued that the section 548 should not apply to foreign property based on the presumption against extraterritoriality and that considerations of international comity counseled the application of Bahamian rather than U.S. bankruptcy law.
The court noted that it is a principle of American law that legislation of Congress is meant to apply only within the territorial jurisdictio of the U.S. unless a contrary intent appear. The court stated that although the parties had assumed that the application of section 548 to the transfer here is extraterritorial, the court needed to consider whether the presumption against extraterritorial application applies at all. The court noted that the U.S., courts only apply this presumption against extraterritoriality when a party seeks to enforce a statute beyond the territorial boundaries of the United States. EEOC v. Arabian Am. Oil Co., 499 U.S. 244 (1991). The presumption has no bearing when the conduct which Congress seeks to regulate occurs largely within the U.S., ie. when regulated conduct is domestic rather than extraterritorial. Envtl. Def. Fund, Inc. v. Massey, 986 F.2d 528, 531 (D.C.Cir.1993).
The court stated that although it had never defined when conduct is extraterritorial for purposes of the presumption, it has recognized that a similar inquiry-defining “foreign conduct”-is particularly challenging in cases (like this one) that involve a “mixture of foreign and domestic elements.” Dee-K Enters., Inc. v. Heveafil Sdn. Bhd., 299 F.3d 281, 286 (4th Cir.2002).The court concluded that a flexible test taking into account all component events of the transfer is appropriate to determine whether an allegedly fraudulent transfer occurred
extraterritorially. The court noted that the perpetrator and most of the victims of the fraudulent transfer were located in the U.S and the effects of this transfer were felt most strongly in the U.S. and not in the Bahamas. The court also found significant that domestic facts and conduct established both of the elements of the section 548 constructively fraudulent transfer, ie. the insolvency of the debtor and the receipt of less than a reasonably equivalent value. The court found the recordation of the deed in the Bahamas as insignificant as a foreign fact or conduct. The court though did recognize as important the fact that the real property was located in the Bahamas as the law has long recognized the powerful interest that states and nations have in the real property within their boundaries and that the strength of that interest explains why the law of the situs generally applies to real property.
But the court held that it need not resolve the “slippery question” of whether there was extraterritorial application as even if it were assumed that the application of the Bankruptcy Code would be extraterritorial, the presumption against extraterritoriality does not prevent its application to the transfer herein. The court concluded that the presumption must give way when Congress exercises its undeniable authority to enforce its laws beyond the territorial boundaries of the United States as it did with section 548.
The transferees next argued that even if the presumption against extraterritoriality does not prevent extension of section 548 to the transaction, that the court should refrain from applying the statute under the doctrine of international comity, particularly as this is a dispute concerning real property which should be governed by the law of the situs. The court reviewed what the Supreme Court has referred to as the factors as to the application of the doctrine of international comity and concluded that these factors did not require the court to refrain from applying the U.S. Bankruptcy Code in favor of Bahamian bankruptcy law.
Denial of Motion to Revoke Technical Abandonment
August 17, 2007I previously reviewed the case of In re Bast, ___ BR ___, 2007 WL 1429481 (Bkrtcy.S.D. Fla.)(Friedman, J.) where the court found that the requirements for a technical abandonment of certain non-exempt real property were met and that it was therefore abandoned from the estate to the debtor at the close of the case. The trustee’s subsequent efforts to administer the non-exempt real property for the benefit of the creditors were denied by the Court.
On August 8, 2007, the case of In re O’Neal, ___ B.R. ___, 2007 WL 2296450 (Bkrtcy.S.D.Fla.)(Friedman,J.) was issued. In this case a successor Chapter 7 trustee attempted to vitiate an abandonment by his predecessor of an interest in certain stock. The successor trustee’s Motion to Reopen the Case was granted and the trustee filed a Motion to Revoke Technical Abandonment. The court denied the Motion to Revoke Technical Abandonment as it held that a reopening of the case does not automatically revoke a technical abandonment and that there were otherwise no equitable circumstances for a revocation.
The Debtor’s chapter 7 case was filed and discharged as a “no asset” case. The Debtor had scheduled the stock in his schedule B with a value of $1. Apparently the stock was worth considerably more. The trustee claimed that the Debtor intentionally mislead him as to the value of the stock.
The court denied the trustee’s motion to revoke technical abandonment. The court noted that property which is not sold or otherwise administered during the bankruptcy case is deemed abandoned upon the closingn of the case. 11 USC 554(c). The court noted that the courts have disagreed about the effect of reopening a case when property was previously technically abandoned pursuant to Section 554(c). The court held that it disagreed with the cases that held that a reopening, if not limited, automatically revokes technical abandonment as this would eliminate the finality that Section 554(c) was intended to provide and would eliminate the incentive for the trustee to investigage estate assets carefully before closing a case.
The court held that although reopening does not automatically revoke the technical abandonment, that the court may order that property not be considered abandoned after a reopening based upon equitable circumstances, such as when misleading information was given to the trustee. The court held that this position is in accordance with the language in section 554(c) which provides “unless the court order otherwise…” which requires some cause for such an order which deviates from the norm of technical abandonment under section 554(c). The court noted that its view is essentially the same as that in In re Woods, 173 F.3d 770 (10th Cir.1999) which held that the reopening of a case does not automatically vitiate the abandonment of property under section 554(c), but that a court may under FRBP 9024 vacate the abandonment if the standards of that rule which are the equivalent of FRCP 60 are met.
Section 541(a) Has Extraterritorial Effect
August 16, 2007In the case of In re Rajapakse, 346 B.R. 233 (Bkrtcy.N.D.Ga.2005)(Massey, J.), the Chapter 7 Trustee sought an order directing the pro se chapter 7 Debtor to turn over certain property located outside of the U.S. The Debtor claimed that the property was not property of the estate and was outside the Court’s jurisdiction. The Court granted the Trustee’s motion and directed the Debtor to turn over and account for all the foreign assets.
Section 541 provides that the commencement of a case creates an estate comprised of property listed in Section 541(a) with certain exceptions, “wherever located and by whomever held.” 11 USC 541 (a). The court noted that the phrase “wherever located and by whomever held” is extremely broad and could be interpreted to cover property owned outside of the U.S. The court pointed out though that Section 541 does not expressly state that it applies outside of the U.S.
The court discussed that Congress has the power to enact a statute that applies beyond the territorial borders of the U.S, but that there is a presumption that Acts of Congress do not ordinarily apply outside the borders of the U.S. If a statute does not expressly state that is applies outside of the U.S., a court must determine whether Congress intended the statue to have extraterritorial effect. E.E.O.C. v. Arabian Am. Oil Co., 499 U.S. 244, 248 (1991).
The court concluded that while Section 541 is ambiguous regarding its possible extraterritorial effect, its legislative history is not. The court noted that the House Report accompanying a 1952 amendment to Section 541 makes its clear that a trustee in bankruptcy is vested with the title of the bankrupt in property within or without the U.S. The court noted that Collier on Bankruptcy confirms this interpretation that Section 70a of the Act was amended in 1952 to make it clear that a trustee in bankruptcy is vested with the title to property within or without the U.S. by the addition of the words “wherever located.” Collier on Bankruptcy, Vol. $A, para 70.03, p. 35 (14th Ed. 1978). The court noted that other courts addressing this issue have reached the same conclusion. See, e.g. H.K. and Shanghai Banking Corp. v. Simon, 153 F.3d 991, 996 (9th Cir.1998), GMAM Investment Funds Trust I v. Blobo Comunicacoes E. Participacoes S.S., 317 B.R. 235 (S.DN.Y.2004), Deak & Co. v. Soedjono, 63 B.R. 422, 427 (Bankr.S.D.N.Y.1986), Nakash v. Zur, 190 B.R. 763, 768 (Bankr.S.D.N.Y.1996), In re Yukos Oil Co. 321 B.R. 396, 406 (Bankr.S.D.Tex.2005).
