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In re Palmer, Case No. 14-21837- HRT; Order entered December 16, 2015 (Student loans are consumer debts under 11 U.S.C. Â§ 707(b)(1)).
The United States Trustee moved to dismiss Debtors' chapter 7 case pursuant to 11 U.S.C. §§ 707(b)(1) and 707(b)(2) or, in the alternative, § 707(b)(3). Debtors filed a response, arguing that a student loan debt, incurred to pay for a doctorate degree in business administration, was non-consumer debt. Before the hearing, the parties stipulated that the only issue before the Court was whether the student loan debt was a consumer debt, defined by § 101(8) as "debt incurred by an individual primarily for a personal, family or household purpose." If so, the parties agreed the granting of relief under chapter 7 would be an abuse of the provisions of chapter 7, and the Debtors would convert to a chapter 13 case within 14 days of the Court's order, failing which the case would be dismissed.
The Court examined In re Stewart, 175 F.3d 796 (10th Cir. 1999), where the Tenth Circuit affirmed a bankruptcy court's decision holding that student loan debts incurred by a debtor to attend medical school were consumer debts. In that case, the Tenth Circuit acknowledged that student loans are not per se consumer debts, and recognized the general principle that a credit transaction is not a consumer debt when it is incurred with a profit motive. The Court also analyzed several recent cases from other jurisdictions classifying student loan debt as consumer or non-consumer debt.
Ultimately, the Court found that the profit motive factor should be interpreted narrowly for purposes of the means test and eligibility to file for chapter 7 under § 707(b). The Court held that in order to show a student loan was incurred with a profit motive, the debtor must demonstrate a tangible benefit to an existing business, or show some requirement for advancement or greater compensation in a current job or organization. The goal must be more than a hope or an aspiration that the education funded, in whole or in part, by student loans will necessarily lead to a better life through more income or profit.
In this case, Debtors did not show the student loan debt was incurred with a motivation to benefit an existing business or in furtherance of an ongoing job or business requirement. Thus, the Court found the student loan debt was a consumer debt, making the provisions of § 701(b)(1) applicable. Pursuant to the parties' agreement, the Court ordered the Debtors to convert to chapter 13 or face dismissal of their case.
Posted: 12/18/2015 3:25:22 PM
In re Tabert, Case No. 15-13805 EEB, October 29, 2015
The Debtor initially filed a chapter 7 case, but immediately converted to chapter 13 when the chapter 7 trustee expressed interest in selling the Debtor's home due to the existence of non-exempt equity. The Debtor did not file a chapter 13 plan within fourteen days after the conversion date and, as a result, the Court entered an order dismissing the case. The chapter 7 trustee and the chapter 13 trustee moved to vacate the order dismissing the case and to re-convert the case to chapter 7. The trustees asserted that the Debtor could take advantage of a larger homestead exemption by allowing his case to be dismissed and then re-filing it under chapter 7 after the effective date of an amendment to the homestead exemption statute. The Court found that its local rules were ambiguous as to whether the failure to file a chapter 13 plan may result in the dismissal of a case pursuant to the United States Trustee's Standing Motion to Dismiss Deficient Cases and that its procedures governing dismissal for failure to timely file a plan failed to satisfy the due process requirements of notice and a hearing for dismissal under § 1307(c). The Court contrasted the Bankruptcy Code's provision for automatic dismissal for the failure to file certain case commencement documents, found in § 521(i), with § 1307(c), which requires "notice and a hearing" prior to dismissal for failure to timely file a chapter 13 plan. The purpose for requiring a notice and opportunity for hearing prior to the dismissal under § 1307(c) is to allow any party who wishes to provide the court with input as to whether dismissal or conversion is in the best interests of creditors to have the opportunity to do so. Here, the only notice regarding the potential dismissal of the case was certain language in the Court's 341 meeting notice. This language failed to satisfy the minimal due process requirements of § 1307(c), therefore the Court vacated the order of dismissal pursuant to Fed. R. Civ. P. 60(b)(4) and reinstated the case.
Posted: 11/19/2015 2:55:53 PM
In re Vingar, Case No. 15-12069-SBB
Debtor filed for Chapter 13 relief without her husband. Debtor's husband had previously filed a bankruptcy case of his own without the Debtor. Despite the separate filings, the Debtor and her husband maintained a joint financial household: they had a joint bank account, filed joint tax returns, and were jointly and severally liable on a lease agreement for their residence.
Together, the Debtor and her husband's unadjusted monthly income was above median income for the household size. However, in her case the Debtor took a marital adjustment on line 13 of Form 22C for one-half of the rent expense, which rendered her below median income for purposes of applicable commitment period under §1325(b)(4) of the Bankruptcy Code. As a result, Debtor proposed a 36-month plan rather than a longer, more costly 60-month plan. The Trustee filed an objection to the Debtor's claim of the marital adjustment.
The Court noted that the analysis for applicable commitment period under §1325(a)(4) is the same as that for calculating disposable income under §1325(b)(2). Therefore, a marital adjustment is not proper if an item constitutes "a household expense of the debtor or the debtor's dependents" under §101(10A)(B).
The Court adopted Judge Romero's definition of a "household expense" in the Toxvard opinion to find that the Debtor's rental expense fell within the ambit of §101(10A)(B) because the Debtor, her husband, and their child lived together as a family in the leased property. However, the Court distinguished the facts of this case from those in Toxvard. Specifically, the Court found that here, the Debtor and her husband's lives were financially intertwined in a manner that allowing a 50/50 split of their monthly rent expense would create a judicial fiction and artificially reduce her monthly income so she would slip below the median income standard. The Court denied confirmation of the Debtor's plan.
Posted: 11/6/2015 8:26:58 AM
In re Burgher, Case No. 12-14410-SBB
In a case of first impression in the Tenth Circuit, the Bankruptcy Court rules that §707(b) of the Bankruptcy Code applies to cases converted from Chapter 13 to Chapter 7, as well as to cases filed under Chapter 7. Because the Debtors failed to show eligibility under §707(b) for Chapter 7 relief upon conversion from Chapter 13, the Debtors' failure to perform under their Chapter 13 plan necessitated a dismissal of their case.
The Debtors' confirmed Chapter 13 plan provided for payment to creditors in the following order: (1) Debtors' counsel, (2) non-dischargeable tax debts, (3) secured lenders on Debtors' residence and secured lenders on Debtors' vehicles; and (4) then Class Four non-priority unsecured creditors, to be paid $10,680.70 on filed poofs of claim totaling $29,019.19.
Two and four months into the Debtors' five year plan, and after payments in full to all classes of creditors, except for Class Four non-priority unsecured creditors, the Debtors filed a Notice of Conversion to Chapter 7. Class Four creditors had received nothing under the Debtors' Chapter 13 plan.
The United States Trustee filed a Motion to Dismiss to which the Debtors objected arguing that pursuant to the language of §707(b)(1), §707(b) dismissals applies only to cases initially filed under Chapter 7 and not to cases converted to Chapter 7 from Chapter 13. After reviewing the statutory language and goals of §707(b) and after discussing the three different approaches bankruptcy courts have taken in deciding this question, the Court rules that §707(b) does apply to cases converted to Chapter 7 from Chapter 13.
The Court finds that in light of the (a) larger context of the bankruptcy scheme, and particularly, the effects of conversion on a case pursuant to §348(a); (b) procedures prescribed in Rule 1019(2) of the Federal Rules of Bankruptcy Procedure regarding conversion; and (c) the overarching goals of BAPCPA of avoiding abuse of the Bankruptcy Code, and specifically, relief under Chapter 7â€• the most logical and compelling conclusion is that Congress intended §707(b) to apply to cases converted to Chapter 7 with equal force.
Posted: 10/29/2015 7:44:57 AM
In re U.S. Bentonite, Inc., Ch. 11 Case No. 13 20211-MER (Bankr. D. Wyo. Sept. 3, 2015) (Violation of supplemental disclosure requirement of FED. R. BANKR. P. 2014(a)).
The issues before the Court were whether an attorney representing the debtor who accepts a position with a creditors' firm during the pendency of the bankruptcy case creates a connection that must be disclosed; whether total or partial denial of compensation is warranted for the non-disclosure; and whether the settlement agreement reached in this case during the time of the alleged conflict was fair and equitable and in the best interests of the estate. To resolve these issues, the bankruptcy court first examined the employment standards of 11 U.S.C. § 327(a). In furtherance of the disinterestedness prong of § 327(a) and the fiduciary duties counsel for the debtor owes the estate, FED. R. BANKR. P. 2014(a) requires counsel for debtors to disclose any connections that have the potential of creating a conflict of interest. These disclosure requirements under Rule 2014(a) continue after the initial application to employ is approved. The bankruptcy court agreed with the broad construction of Rule 2014(a), and the conclusion that Rule 2014(a) creates a continuing obligation for counsel to advise the court when such a connection arises during the representation of a debtor-in-possession. The required supplemental disclosure allows the court, not counsel, to determine whether a conflict exists and counsel remains disinterested under § 327(a). Failing to make a supplemental disclosure robs the court the power to make such a determination.
In this case, the court determined the attorney's acceptance of a position with creditors' counsel in the midst of settlement negotiations involving the same creditors should have been disclosed and counsel failed to do so. The Court held counsel for a debtor-in-possession has an ongoing fiduciary duty to supplement initial employment disclosures with any connections that arise that create potential conflicts. After determining there was a violation of Rule 2014(a), the court turned to the available remedies for such a non-disclosure. In the Tenth Circuit, the failure to supplement initial disclosures when a connection with the potential to create a conflict arises warrants total denial and/or disgorgement of compensation. However, the bankruptcy court has the discretion to determine whether total or partial denial of fees is appropriate based on the facts of a case. Here, the court determined only partial denial of fees from the date the connection (when the associate accepted a position with the creditor's firm) arose was proper. Finally, with respect to the settlement agreement, the bankruptcy court found the agreement was not tainted. Based largely on the evidence from the other creditors, the court determined the settlement agreement resulted in a fair and equitable allocation of the remaining assets, and debtors had no real stake in the outcome. Thus, the court concluded the settlement agreement was in the best interests of the estates under the Rule 9019 standard, with one amendment. The court reduced the administrative claim for debtors' counsel under the settlement agreement consistent with the denial of part of the firm's fees.
Posted: 10/7/2015 9:04:41 AM
In re Sun River Energy, Inc., Ch. 7 Case No. 15-15610 MER, Opinion issued August 13, 2015 (Chapter 7 Trustee May Employ Own Firm as Counsel Under 11 U.S.C. § 327).
The Chapter 7 trustee filed an application to employ his own firm as counsel, and after an independent review the Court approved the application. Thereafter, a creditor filed an objection. Noting that the application was not required to be sent out on notice by Fed. R. Bankr. P. 2014(a) and Local Bankruptcy Rule 2014-1, the Court treated the objection as a motion to alter or amend under Fed. R. Civ. P. 59(e) as incorporated by Fed. R. Bankr. P. 9023.
After addressing the general requirements for employment under 11 U.S.C. § 327(a), the Court held the Trustee's firm did not hold or represent an interest adverse to the estate, and was a disinterested person. However, when a trustee seeks to hire his or her own law firm, the trustee must also satisfy 11 U.S.C. § 327(d), which authorizes such employment "if such authorization is the in the best interest of the estate." The Court recognized determinations under § 327(d) turn on the particular circumstances of each case. Thus, the Court ultimately adopted the flexible approach articulated in In re SONICblue, Inc., 2007 WL 3342662, at *6 (N.D. Cal. Nov. 9, 2007) (Not Reported in F.Supp.2d) ("[A]bsent a showing of substantial savings and/or efficiencies, appointment of a trustee's own law firm as counsel is not in the estate's best interest."). Here, the trustee demonstrated that hiring his own firm was in the best interests of the estate based on the Trustee's immediate need for representation on multiple forums, the lack of a retainer, the contingent nature of payment to his firm and his firm's willingness to provide the representation despite the risk of nonpayment inherent in the type of litigation at issue. Lastly, the Court concluded the creditor failed to demonstrate how approving the trustee's own firm would result in any manifest injustice warranting reconsideration of its order approving the application. Therefore, the Court's order approving the application stood as originally entered.
Posted: 9/3/2015 7:11:37 AM
In re Smith (Walters v. Farmers Korner, Inc.), Adversary Proceeding No. 14-01065-SBB
This case identifies (a) the characteristics of a non-statutory insider subject to a trustee's avoidance of preferential transfers and (b) the perils of transferring titles among relatives and closely held corporations pre-petition in an effort to remove personal property from the debtor's estate. It also illustrates the problems inherent in choreographing pre-petition debt collection and repossessing collateral from family members and their closely held corporations.
The plaintiff/trustee sought to avoid as preferences various pre-petition transfers of purported loan collateral/personal property by the debtor to the creditor. Unfortunately, it was in the context of the debtor/son and creditor/father in a tangled transaction which involved their respective closely held companies and repossession of the intended collateral by the creditor which secured the obligation. The lender did take a judgment against the debtor after default on the loan and moved to enforce the judgment.
The court held that the lender, the father's closely held corporation, received avoidable preferential transfers from his son and his son's closely held corporation, when recovering the collateral that secured the son's obligation. The lender was deemed a non-statutory insider due to (a) the father's close and controlling relationship with the lender company and with his son, individually, (b) the staging of the "repossession" by the father and the father's attorney, and (c) the bogus transfer of debtor's assets to the lender, but debtor's continuing retention and possession of the collateral.
The court also found the personal use, and casual and indiscriminate transfers and titling of the loan collateral (motor vehicles), was evidence of the debtor's rights and interests in his businesses' property, thus relegating that business property to be property of his, the debtor's estate.
Posted: 8/19/2015 7:14:23 AM
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