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In re Sinischo, Case No. 15-19535- HRT; Order entered December 8, 2016 (Absolute right of Chapter 13 debtor to voluntarily dismiss under 11 U.S.C. § 1307(b)). 12/08/2016

Debtor filed for Chapter 13 and made multiple misrepresentations in her petitions and proposed plans during the subsequent nine-month period. Several creditors moved to convert Debtor’s case to Chapter 7, citing 11 U.S.C. § 1307(c), on the grounds of bad faith. Debtor then moved to voluntarily dismiss her case under § 1307(b), arguing she had an absolute right to dismissal, despite the pending motions to convert.

Noting the lack of Tenth Circuit authority on this issue, the Court ordered briefing and held an evidentiary hearing on the pending motions. Two creditors cited cases holding a bad faith exception to the absolute right to dismiss should allow the Court to determine whether dismissal or conversion was in the best interests of creditors. Another creditor, and the Trustee, sided with Debtor, citing cases holding the plain language of § 1307(b) mandated the Court to dismiss, rather than convert, the case notwithstanding Debtor’s bad faith conduct.

The Court examined the split of authority on this issue, as well as the implications of Marrama v. Citizens Bank of Mass., 549 U.S. 365 (2007) and Law v. Siegel, 134 S.Ct. 1188 (2014). The Court ultimately determined the statutory language of the Code, and the conflicting case law addressing the issue, compelled dismissal, rather than conversion, of Debtor’s case. Importantly, the Court agreed with cases determining the right to dismissal was not “self executing”; that is, after a debtor’s motion under § 1307(b) is filed, a court can hold a hearing on the motion to determine whether conditions should be placed on dismissal if it finds them appropriate.

Therefore, the Court dismissed the case with sanctions for Debtor’s bad faith conduct, pursuant to § 109(g) (180-day filing bar) and § 349(a) (barring discharge of debts in future bankruptcy cases). Additionally, the Court held that, should Debtor file a bankruptcy case after 180 days, but within three years, Debtor was required to provide notice to all creditors, including those in the current case, giving them an opportunity to object. Finally, the Court noted that nothing in its Order prohibited the filing of an involuntary bankruptcy case against Debtor under § 303.

Hoffman v. Educational Credit Management Corporation (In re Hoffman), Case No. 15- 01484-HRT; Order entered September 7, 2016 (preclusive effect of agency decision). 09/07/2016
Educational Credit Management Corporation (“ECMC”) filed a proof of claim in Debtor’s
Chapter 13 bankruptcy case for a student loan debt. Debtor filed an objection, which the Court
sustained after ECMC failed to respond. Debtor then brought an adversary proceeding against
ECMC, asking the Court to declare the loans unenforceable. While Debtor cited § 523(a)(8) in
his complaint, he made no arguments regarding undue hardship, other than the contention that
paying the loans would be an undue hardship because he never received the loan funds. ECMC
moved for summary judgment, and Debtor responded.
 
The Court first determined it had jurisdiction, because even though Debtor was asking for a
declaratory judgment, the underlying substance of the claim was a dischargeability
determination, which is a core matter under 28 U.S.C. § 157(b)(2). The Court found the two
essential issues were (1) whether the loans were of the type excepted from discharge under
§ 523(a)(8), and (2) whether Debtor owed the debt. Because the loans were Supplemental Loans
for Students (“SLS Loans”) insured by the federal government and made under a program
funded in part by the federal government, the Court found they were the types of loans excepted
from discharge under Section 523(a)(8)(A)(i).
 
As to the second issue, the Court gave collateral estoppel effect to the decision of an independent
hearing officer appointed under 20 U.S.C.§ 1095a. That section authorizes the Secretary of
Education, or a guaranty agency, to withhold wages to satisfy a debt for loans made under the
Higher Education Act. In the wage garnishment proceeding before the hearing officer, Debtor
made identical arguments presented in this adversary proceeding. The hearing officer rejected
those arguments, finding the Debtor failed to prove the loans were not enforceable. The Court
specifically found the hearing officer’s decision was a final agency decision, and the hearing
procedures afforded the Debtor with sufficient due process.
 
Finally, the court concluded Debtor had not raised a genuine issue of material fact in his
response to summary judgment, holding “Debtor’s self-serving statements lack support in the
evidentiary record, which clearly shows Debtor continued to sign applications and promissory
notes for SLS Loans, year after year, even though he allegedly did not receive loan funds from
any of the notes.” The Court granted ECMC’s motion for summary judgment.
 
Weinman v. Alternative Revenue Systems, Inc. (In re Stevens), Case No. 15-01340-HRT; Order entered May 23, 2016 (Avoidance of Transfer under 11 U.S.C. § 547(b)). 05/23/2016

Chapter 7 Trustee (“Trustee”) filed an adversary complaint against Alternative Revenue Systems, Inc. (“ARS”), alleging claims for avoidance, preservation, turnover, and disallowance under 11 U.S.C. §§ 547, 551, 542, 543, and 502. Trustee sought to avoid transfers made by Debtor’s employer to ARS in the 90 days pre-petition pursuant to a wage garnishment. Both parties moved for summary judgment. ARS argued the relevant transfer under § 547(b) occurred when the garnishment was served on Debtor’s employer, more than 90 days pre-petition. The Trustee argued the relevant transfers occurred each time Debtor’s paycheck was garnished in the 90 days pre-petition. The Court examined a split in case law on this issue, including Straight v. First Interstate Bank (In re Straight), 207 B.R. 217 (BAP 10th Cir. 1997), cited by ARS.

The Court ultimately sided with the majority rule, holding the relevant transfer occurred each time Debtor’s paycheck was garnished within the 90 days pre-petition, regardless of when the garnishment was served. The Court also observed that service of the garnishment created a lien under Colo. Rev. Stat. § 13-54.5-102 (Colorado’s garnishment statute), but did not, in and of itself, create a lien for purposes of § 101(54) (Bankruptcy Code’s definition of “transfer” post-BAPCPA). Rather, service of the garnishment created an inchoate lien in future earnings that did not ripen until the earnings came into existence. In this particular case, a factual dispute remained as to the date wages were earned, rather than paid; thus, the Court denied summary judgment to both parties.

In re Palmer, Case No. 14-21837- HRT; Order entered December 16, 2015 (Student loans are consumer debts under 11 U.S.C. § 707(b)(1)) 12/16/2015

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.