Case Bites: Interesting Issues and Decisions from This Week’s Cases

Case Bites: Interesting Issues and Decisions from This Week’s Cases

Issues discussed in cases below:

  • In a student loan discharge proceeding regarding nine (9) loans, can a bankruptcy court discharge just some of those loans? (Bankr. N.D.IA.)
  • Can a successful debtor in a non-dischargeability proceeding be awarded attorney’s fees when pre-petition litigation awarded attorney’s fees only to the creditor? (9th Cir. BAP)
  • Are defendants entitled to a 21-day safe harbor under Rule 9011 for filing a bad faith petition? (Bankr. N.D.CA.)
  • Is a creditor entitled to file a late claim under Rule 3002(c)(6) if she didn’t get 70 days notice to file her claim? (Bankr. W.D.VA.)
  • Does an assignment of a domestic support obligation cause the claim to become a general unsecured claim rather than a priority claim?  (Bankr. W.D.TX.)

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Case Bites issues:

In a student loan discharge proceeding regarding nine (9) loans, can a bankruptcy court discharge just some of those loans?

Yes according to Swafford v King (In re Swafford), Case No. 15-01577, Adv. No. 16-09012 (Bankr. N.D.IA. July 10, 2019).

The Debtors collectively owed approximately $154,000.00 over nine separate student loans. The Debtors are married with three dependent children and their gross monthly income is $4,125.00. The Court first stated the standard for discharge in the 8th Circuit.

The Eighth Circuit uses a “totality of the circumstances” test for determining whether there is “undue hardship”. This differs from the majority of circuits, which have adopted what is known as the Brunner test. Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395 (2d Cir. 1987). The Brunner test imposes a higher burden, requiring a debtor to show that repaying her student loans would force her and her dependents below a “minimal standard of living”. Long, 322 F. 3d at 554 (citing Brunner) (internal quotations omitted). Conway, 495 B.R. at 419; Martin v. Great Lakes Higher Educ. Group (In re Martin), 584 B.R. 886, 891 (Bankr. N.D. Iowa 2018). Under the “totality of the circumstances” test, however, debtors must prove, by a preponderance of the evidence, that continuing to be obligated to their student loans would impose an undue hardship. Educ. Credit Mgmt. Corp. v. Jesperson, 571 F.3d 775, 779 (8th Cir. 2009).

The Court examines debtors’ undue hardship argument “on the unique facts and circumstances that surround the particular bankruptcy.” Long, 322 F.3d at 554. The Court evaluates three factors when deciding whether discharge is appropriate: “(1) the debtor’s past, present, and reasonably reliable future financial resources; (2) the debtor’s reasonable and necessary living expenses; and (3) any other relevant facts and circumstances.” Id. The court will consider each of these factors in the analysis that follows.

Swofford at 6. The Court then examined whether it can eliminate individual loans or reduce all the loans.

After applying the totality of the circumstances test, the Court determines what loans, if any, can be discharged. The Eighth Circuit does not allow for partial discharge of a debtor’s total student loan debt. Martin, 584 B.R. at 890; see also Thad Collins, Forging Middle Ground: Revision of Student Loan Debts in Bankruptcy as an Impetus to Amend 11 U.S.C. 523(a)(8), 75 Iowa. L. Rev. 733, 735–37 (1990). Where debtors have multiple student loan obligations, however, the Court is allowed to analyze each loan and “determine whether each loan, separately, imposes an undue hardship and may discharge some loans while declining to discharge others.” Martin, 584 B.R. at 890–91.

Swofford at 7. The Court concluded that six of the nine student loans were discharged.

The opinion is here:In re Swafford opinion

Can a successful debtor in a non-dischargeability proceeding be awarded attorney’s fees when pre-petition litigation awarded attorney’s fees only to the creditor?

Yes, according to the unpublished opinion in Davis v Asphalt Professionals (In re Davis), Bk. No. 10-17214, Adv. No. 10-01354, BAP No. 18-1326 (9th Cir. B.A.P. July 3, 2019).

The Debtor filed a chapter 7 bankruptcy. The Plaintiff’s filed an adversary alleging non-dischargeability of the debt pursuant to 11 U.S.C. §§ 727(a)(2)(A), (a)(2)(B), and (a)(4), and under § 523(a)(2)(A). The Court allowed the Plaintiffs to proceed in state court litigation in California to determine breach of contract, mechanic’s liens, quantum meruit and whether the Plaintiff’s corporation was his alter ego. The state court ruled in Plaintiff’s favor awarding Plaintiff $318,000.00 in damages and $1.65 million in attorney’s fees against the Debtor personally.

The parties then proceeded forward with the adversary proceeding in bankruptcy court. The court found the debts were dischargeable which was affirmed on appeal.

The Debtor then filed a motion for attorney’s fees and costs defending the adversary proceeding. Plaintiff objected to the motion on the basis that Debtor was not an actual party to the contract signed by Debtor’s corporation and the Plaintiff. The contract allowed for an award of attorney’s fees to the prevailing party. The bankruptcy court awarded Debtor $91,390.92 in fees and $956.87 in costs. The Plaintiff appealed the award to the BAP. The BAP first addressed the non-signatory argument.

Here, Mr. Davis was a nonsignatory to the Subcontract. However, API requested in its adversary complaint that the bankruptcy court require Mr. Davis to pay its attorneys’ fees and costs. Moreover, API had enforced the attorneys’ fees provision against Mr. Davis in the State Court Action and recovered $1.65 million in attorneys’ fees. The bankruptcy court did not err in holding that Mr. Davis had the reciprocal right to enforce the attorneys’ fees provision against API under CCCP sections 1021 and 1032.

Davis at 20.  The Plaintiff then argued that the Debtor was not the “prevailing party” since it had won the arguments in the state court. The BAP disagreed.

The bankruptcy court correctly held that, while API prevailed on its breach of contract claims in the state court, the § 523(a)(2) complaint was a completely separate nondischargeability action that concerned Mr. Davis’ allegedly false representations and fraud in inducing API to enter into the Subcontract. While the § 523(a) claim arose out of the Subcontract, it was not an action for breach of contract. Thus, issue and claim preclusion do not apply

The bankruptcy court’s order was affirmed.

A copy of the opinion is here:In re Davis opinion

Are defendants entitled to a 21 day safe harbor under Rule 9011 for filing a bad faith petition?

No, according to In re Arbucci, Case No. 18-41720 (Bankr. N.D.CA. July 3, 2019).

In the Arbucci case the court found the debtor and debtor’s counsel filed a chapter 13 petition in bad faith to avoid paying a personal injury judgment of $268,875.30. The Creditor had filed an application to sell Debtor’s home to satisfy the judgment.

Both the Creditor and Trustee filed objections to confirmation alleging bad faith. The Court agreed and converted the case to a chapter 7.

The Creditor then filed a motion for sanctions under Rule 9011. Part of that motion was based on the Debtor’s bad faith chapter 13 plans. The court indicated that since the Creditor had not followed the 21 day safe harbor rule the Debtor could not be punished for the plans. However…

With regards to Creditor’s request for sanctions for Debtor’s proposing plans in bad faith, the court is unable and unwilling to issues sanctions as a result of Creditor’s failure to comply with FRBP 9011(c)(1)(A). The court, however, finds that sanctions are appropriate for Debtor’s bad faith filing of the petition itself, as the “safe harbor” provision of Rule 9011 requiring 21-days notice prior to seeking sanctions, is not applicable to a claim that the chapter 13 petition was filed in bad faith. See FRBP 9011(c)(1)(A) exception.

Arbucci at 4-5. The exception in Rule 9011(c)(1)(A) is highlighted below.

The motion for sanctions may not be filed with or presented to the court unless, within 21 days after service of the motion (or such other period as the court may prescribe), the challenged paper, claim, defense, contention, allegation, or denial is not withdrawn or appropriately corrected, except that this limitation shall not apply if the conduct alleged is the filing of a petition in violation of subdivision (b). Fed. R. Bankr. P. 9011(c)(1)(A).

The Court entered a judgment of $30,750 in favor of Creditor and jointly against Debtor and Debtor’s Counsel. Arbucci at 11.

The opinion is here:In re Arbucci

Is a creditor entitled to file a late claim under Rule 3002(c)(6) if she didn’t get 70 days notice to file her claim?

No, according to In re Price, Case. No. 18-71260 (Bankr. W.D.VA. July 3, 2019).

The Debtor filed her chapter 13 petition on September 24, 2018. The deadline to file non-government proofs of claim was December 3, 2018.

Because the Debtor provided an incorrect address for the Claimant, the Claimant received delayed notice of the filing and of the § 341 meeting of creditors. However, the Claimant’s local post office discovered the mistake and put the incorrectly addressed notice in the Claimant’s post office box such that she received the notice prior to the first meeting of creditors scheduled for November 15, 2018. The Claimant appeared at the first meeting of creditors, but the Debtor did not appear. Debtor’s counsel informed the Claimant the case may not succeed, but nonetheless suggested she obtain counsel. The meeting of creditors was rescheduled for December 17, 2018. The Claimant testified that she was unaware of the continued meeting and did not attend.

On April 3, 2019, the Claimant filed her proof of claim in the Court’s claim register, to which the Trustee objected on April 4, 2019. The Claimant then filed her Motion for Extension of Time to File a Claim on April 9, 2019, and the Trustee and the Debtor have both objected to that Motion.

The Claimant argues that she did not have the same amount of time to file her proof of claim as other creditors in this case. She contends that because she had “insufficient notice of time to file a proof of claim,” the Court should permit her to file a late proof of claim pursuant to Federal Rule of Bankruptcy Procedure 3002(c)(6).

Price at 2. In sum the Debtor had approximately 19 days (341 date to bar date) to file her claim.

The Claimant here argues that the Debtor’s failure to provide an accurate address resulted in insufficient notice. She does not dispute that she, in fact, received actual notice. Nonetheless, she claims that to deny her an extension would be inequitable because it would afford her less time to file her proof of claim than other creditors. In support of her argument, she contends that the language of Rule “3002 has established that 70 days is the required adequate time.” (ECF No. 58, at 3.) This simply is not the case. Rule 3002(c) states that a proof of claim is timely if filed no later than seventy days after the order of relief—nowhere does the rule require that each creditor receive notice a full seventy days before the bar date.

Price at 4-5. The Court denied the motion to extend time to file a claim and sustained the objection to claim.

The opinion is here: In re Price

Does an assignment of a domestic support obligation cause the claim to become a general unsecured claim rather than a priority claim?

Not when it was assigned for the purposes of collecting the debt per In re Ulbrich, Case No. 18-52574 (Bankr. W.D.TX. July 3, 2019).

In this case the Debtor was subject to a divorce decree before filing bankruptcy. The divorce judgment provided (1) monthly payments by Debtor of $750.00 to Ms. Pescini until “death of either party, remarriage, or registration of a new domestic partnership of [the Creditor];”1 (2) 25% of Debtor’s earnings in excess of his base salary; (3) the net cash value of Debtor’s retirement account; and (4) $1,800.00, plus interest, for [Creditor]’s attorney’s fees associated with the divorce Id. at 1-2. The Creditor then assigned the debt to a debt collector and agreed to split any recovery.

After the bankruptcy petition was filed, a priority claim was filed for the unpaid support. Debtor objected to the claim because the claim was assigned which destroyed its priority status under § 101(14A)(D). This section states in pertinent part

The term “domestic support obligation” means a debt that accrues before, on, or after the date of the order for relief in a case under this title, including interest that accrues on that debt as provided under applicable nonbankruptcy law notwithstanding any other provision of this title, that is— (D) not assigned to a nongovernmental entity, unless that obligation is assigned voluntarily by the spouse, former spouse, child of the debtor, or such child’s parent, legal guardian, or responsible relative for the purpose of collecting the debt. (Emphasis added.)

11 U.S.C. § 101(14A)(D).  The Court examined the assignment of the debt.

Accordingly, the purpose of the purported assignment here determines the status of the claim. If Ms. Pescini assigned the claim “for the purpose of collecting the debt,” then the claim remains a DSO under § 101(14A) that qualifies for § 507(a)(1)(A) priority. If, however, Ms. Pescini assigned the claim for any other purpose (i.e., a true assignment), then it fails to qualify as a DSO and does not receive § 507(a)(1)(A) priority.

Ulbrich at 6.  Reviewing case law prior to the enactment of Section 101(14A) in BAPCPA, the Court found that court generally held that true assignments were not priority claims.

By contrast, an assignment for collection was effectuated when the ex-spouse retained some present right to receive a direct benefit. That is, if the debtor-obligor would have paid on the family obligation (either directly to the ex-spouse or to the assignee collector), and the ex-spouse would have received a benefit from that payment, then the assignment was solely for collection and thus exempted. See Smith, 180 B.R. at 653 (citing Beggin, 19 B.R. at 761 (holding assignment of support claim to state solely for collection exempt from § 523(a)(5)(A)); and In re Deblock, 11 B.R. 51, 54 (Bankr. N.D. Ohio 1981) (holding assignment of support rights to law firm so that firm could collect arrears did not render the debt dischargeable)).

Ulbrich at 10-11. The Court concluded “the present-benefit test as applied in pre-BAPCPA cases most closely comports with the plain language of § 101(14A)(D) and the congressional intent that motivated it.” Id. at 14.

After analyzing the facts in the case the court concluded that the Creditor former spouse “had the ability to assign the claim to a third party “for the purpose of collecting.” That is exactly what she chose to do here. Accordingly, the claim is a domestic support obligation entitled to first priority per § 507(a)(1)(A). Any plan filed and confirmed in this case must provide for its payment in full pursuant to § 1322(a)(2).” Id. at 18.

A copy of the case is here:In re Ulbrich

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