Kansas Bankruptcy Law

Bankruptcy Ethics - Part V

2008-03-16T17:12:00.000-07:00

Conflicts between the Rules
There is one final hidden trap in the rules of ethics that bankruptcy attorneys need to heed. Each of the ethics rules is a broad statement of the aspirational goal that establishes the basis for ethical lawyer behavior. But consider this conundrum: What happens if obedience to one rule violates another rule?
You represent a client, who is a well-known, local politician. He is also an alcoholic. Because of the alcoholism, he has piled up a mountain of credit card debt. He is behind two months on the mortgage payments and one of his cars has just been repossessed. His alcoholism has resulted in medical bills that his health insurance only pays 50%, up to $2,000 annually, because the health insurance company says the health problems are alcohol related. His general unsecured debt is over the limit for a Chapter 13 filing and a Chapter 7 is necessary -- before filing a Chapter 13 to deal with the 3 years of tax returns that have not been filed. See, Johnson v. Home State Bank, 501 U.S. 78 (1991) (authorizing Chapter 20 filings).
The debtor has entered into a 12-step program and now extols how the program has turned his life around. You file a Chapter 7 for him and the local newspaper picks up the filing. A reporter contacts you wanting to do a story about how his turnaround is going. The client has already talked to the paper and authorizes you to disclose any information to assist in the story.
The reporter wants to know about what will happen after the Chapter 7 discharge. You disclose that the client will file a chapter 13 reorganization to address the mortgage arrearage and the tax issues.
The morning after the article appears, the judge issues a show cause order as to why you should not be removed from the case and reports to the Disciplinary Administrator that you violated the Ethics Rules.
You have done an admirable job representing your client. You have prevented his creditors from reaching his assets and his political life is going to survive. He affirmatively directed you to disclose the next steps to the newspaper reporter. So what did you do wrong?
While you fully complied with 1.1, 1.2, 1.3, and 1.4 in your representation, you violated the rule about 3.6 about Trial Publicity. Rule 3.6(a) says:
A lawyer who is participating . . . in the investigation or litigation of matter shall not make extrajudicial statement that a reasonable person would expect to be disseminated by means of public communication if the lawyer know or reasonably should know it will have a substantial likelihood of materially prejudicing an adjudicative proceeding in the matter.

The Supreme Court has determined that Rule 3.6 is constitutionally flawed. Gentile v. Nevada State Bar, 501 US 1030 (1991). In Gentile, a badly fractured Court arrived at two opinions. One majority of the Court – Justice Kennedy, Marshall, Blackman, Stevens, and O’Connor found Rule 3.6 unconstitutionally vague. Another majority of the Court – Chief Justice Rehnquist and Justices O’Connor, White, Scalia, and Souter found that the language of Rule 3.6 “substantial likelihood of materially prejudice” strikes the appropriate balance between the lawyer’s right to free speech and the state’s interest in fair trials. The court reversed the sanctions on Mr. Gentile.
In 1994 ABA rewrote Rule 3.6 and most states have adopted varying degrees of the revision. See Comment, The New Model Rule 3.6: An Old Pair of Shoes, 44 U.Kan.L.Rev 837 (1996). The new Rule 3.6 establishes a sliding scale of prejudice with the slightest comment in a criminal trial resulting in a finding of prejudice and the same comment in a civil trial resulting in no finding of prejudice. In either case, there does not have to be a finding of actual prejudice. The determination of “substantial likelihood of material prejudice” will be made in retrospect, regardless of whether the particular statement resulted in actual prejudice. In Gentile, the trial court made the specific finding that there was no actual prejudice. In the example above, there probably is no actual prejudice; the client will probably file his Chapter 13 and have a plan confirmed so long as the arrearage and the taxes are addressed. But your statement, authorized by your client, meets the standard of substantial likelihood of material prejudice to the rights of the creditors, by telling the creditors who survived the Chapter 7 discharge that they would still be under judicial control by the subsequent filing of the Chapter 13.
Conclusion
The bankruptcy practitioner must be responsive to the state rules of ethics, sections of the Bankruptcy Code that impose ethical duties on the lawyer and rules of procedure that can result in sanction and the impact of all the rules when following one. The simplest advice is this: Get it in writing and get it signed.

Bankruptcy Ethics - Part IV

2008-03-15T09:51:00.000-07:00

F.R.Civ. P. 11
Rule 11 is the legislative/judicial expression of the court’s inherent power to control its docket. See 11 USC §105. Rule 11 prohibits an attorney from filing documents that are calculated to harass, cause unnecessary delay, or needless increase in the cost of the litigation. Assertion of defenses must be warranted and factual contentions must have evidentiary support.
Every pleading, motion, written motion or other paper filed is subject to Rule 11. In Legault v. Zambarano, 105 F.3d 24, 27-8 (1st Cir. 1991), a letter sent to the court subjected the writer to Rule 11 because the letter was a disguised motion seeking to influence the court on a decision. In In re Highgate Equities, Ltd., 279 F.3d 148, 153-154 (2nd. Cir. 2002) a letter was not the basis for a Rule 11 sanction because the letter was not filed. Rule 11 does not apply to discovery abuses. Christian v. Mattell, 256 F.3rd 1118, 1130-1131 (9th Cir. 2002). Discovery abuses are subject to Rule 37. Rule 11 applies to pleadings that are filed in a case in which it is subsequently determined the court has no jurisdiction. Willy v. Coastal Corp, 503 U.S. 131 (1992).
Sanctions under Rule 11 are meant to deter conduct, not punish. Mark Industries, Ltd., v. Sea Captain’s Choice, Inc., 50 F.3d 730 (9th Cir. 1995). Further Rule 11 does not provide a cause of action for a client, unhappy with his attorney. Id. Rule 11 is generally not applicable to bankruptcy filings because Rule 9011 applies to bankruptcy filings. In re Highgate Equities, Ltd., supra.
VIII. F.R.Bky.Civ P. 9011
While all the portions of Rule 11 generally are found in Rule 9011, it should be noted that Rule 9011 does have additional language and substantive changes in it from Rule 11. First, the word ‘petition’ is inserted at various places ahead of the word ‘pleading”, to make the bankruptcy petition subject to Rule 9011. Second, the language of waiver of a verified pleadings in Rule 11 is specific in Rule 9011. Verified pleadings required in the bankruptcy rules must comply with 28 USC §1746.
There is one other significant difference between Rule 11 and Rule 9011. Again the difference deals with the word ‘petition.’ Under Rule 11, there is a 21 day ‘safe-harbor’ rule that permits the offending attorney to withdraw, amend or correct the complained of pleading, motion or other paper within 21 days without sanction. The 21 day safe harbor rule does not apply to a frivolous petition that violates subdivision (b).
Consider the frequent filer(s). He files a chapter 7 with one attorney and receives a discharge that discharges most of his debt but leaves him with a mortage(s), a nonjudicial lien on his property and nondischargeable taxes. He then files a chapter 13, again with the same attorney. The case is confirmed and then defaults for lack of plan payments. He then changes attorneys and files another chapter 13 on the eve of sheriff’s sale. That case is not confirmed because he never make payments and ultimately is dismissed for default in plan payments. The trustee asks that the second chapter 13 filing be dismissed pursuant to 11 USC 109(g), barring the debtor from filing for 180 days. On the eve of foreclosure, he files another case with his third attorney within the 180 day bar. Would the third attorney be subject to Rule 9011 sanctions?
Consider the filer who files a chapter 7 pro se and before he receives his discharge, he hires an attorney to file a chapter 13 for him. Is the attorney who files a second case, not knowing about the pending case guilty of violating Rule 9011 because the first case was not completed?
Both examples above are recent real cases that occurred in Kansas and no attorney was ever sanctioned in either case under Rule 9011.

Bankruptcy Ethics - Part III

2008-03-13T06:07:00.000-07:00

Under the Bankruptcy Code, there are number of statutes that impose ethical duties on counsel. Below is a short summary of some of the most prominent ones that commonly affect representation of clients before Bankruptcy Courts.
11 USC §327
An attorney employed by the Trustee or by the Debtor-in-possession must be approved by the Court and neither be “interested” nor hold or represent an interest adverse to the estate. §327(c) prohibits representing a debtor and a creditor upon objection and a showing of “actual conflict.”
The courts have developed four different approaches to addressing these conflict rules.
A. The bright line rule states concurrent representation of the Trustee and a creditor is always prohibited. In re Lee Way Holding Co. , 100 B.R. 950, 955 (Bankr.S.D.Ohio, 1989). This rule appears to be contrary to the express language of §327(c), that requires an objection and “actual conflict.”
B. The potential conflicts rule disqualifies an attorney for potential as opposed to actual conflicts. This rule assumes that if the conflict becomes an actual conflict, the trustee or the estate will be damaged. In Re Graybill, 113 B.R. 966, 970 (Bankr. N.D.Ill 1990).
C. The actual conflict rule disqualifies the attorney only for actual conflicts. In re Diamond Mortgage Corp. of Illinios, 122, B.R. 78, 91 (Bankr. N. D. Ill 1990).
D. A Kansas bankruptcy court had to deal with the following situation under 327 and §330 (See below.) In Re Myers, 01-41991, the debtor, an attorney, filed a chapter 11 and sought to employ his girlfriend/secretary/landlord/creditor as his accountant to assist him in preparing the last 6 years of tax returns. Prior to the application, she had done nearly $22,000 of work on the missing tax returns. The application sought to employ her as accountant and have her paid out of the estate for the previous work (the $22,000) she had done before the application, as well as continuing employment as an accountant for the debtor. The application was fatal in three respects. First, case law in the 10th Circuit is clear that absent extraordinary circumstances, applications for employment will only be granted prospectively, not retrospectively. The bankruptcy court had little problem denying the application for the payment of the $22,000. The court did approve her application for prospective employment, but put two conditions on her employment, that also proved an anathema to her. The first condition was that she had to waive her claim for back rent as a creditor in order to avoid the “actual conflict” problem as a creditor. The second condition was that she had to file with the court an “Affidavit of Disinterestedness” claiming that she did not represent any conflict with any of the other creditors. No waiver nor an affidavit was ever forthcoming.
11 USC §330
Section 330 allows the Court to grant reasonable compensation for actual and necessary services, and reimbursement of actual, necessary expenses. This permits attorneys of the debtor to be paid two things for post-petition work – actual and necessary services and reimbursement of actual and necessary expenses. This is important for continuing work done after the confirmation in a chapter 13 or after filing in a chapter 11. The published cases in this area of the law are legion.
This section, particularly in the Chapter 13, context does not address the tension between a confirmed plan that is at the limit of the debtor’s ability to make plan payments and the addition of more administrative expenses under §330, thereby increasing the monthly plan payment and rendering the plan not feasible. Attorneys would be wise to advise the client at the beginning that the plan payment may be increased due to additional attorney work during the life of the plan. Some attorneys build into the plan language that says: “Debtor(s) consent(s) to any increases in plan payment in order for the plan to remain feasible.” This prior acknowledgement does alleviate the tension, but it does not solve the payment problem for the debtor(s) who is/are at the limit of the ability to make plan payments.
The Supreme Court distinguished post-petition work in a chapter 7 context from a chapter 13 filing. In Lamie v. U.S. Trustee, No. 02-693 (January 26, 2004) the Supreme Court noted that before 1994, §330(a) of the Bankruptcy Code authorized a court to “award to a trustee, to an examiner, to a professional person employed under section 327 … , or to the debtor’s attorney” “(1) reasonable compensation for … services rendered by such trustee, examiner, professional person, or attorney … .” (Emphasis added to highlight text later deleted.) In 1994 Congress amended the Code and altered §330(a) by deleting “or to the debtor’s attorney” from what was §330(a) and is now §330(a)(1). This change created apparent legislative drafting error in the current section. The section is left with a missing “or”. The neat parallelism that otherwise marks the relationship between current §§330(a)(1) (“trustee, … examiner, [or] professional person”) and 330(a)(1)(A) (“trustee, examiner, professional person, or attorney”) is destroyed and every commentator noted that this was drafted in error including the counsel for the House Judiciary Committee. Lamie filed an application with the Bankruptcy Court seeking attorney’s fees under §330(a)(1) for the time he spent working on a behalf of a debtor in a Chapter 7 proceeding after the case converted from Chapter 13. The Government objected to the application. It argued that §330(a) makes no provision for the estate to compensate an attorney who is not employed by the estate trustee and approved by the court under §327. Lamie admitted he was not employed by the trustee and approved by the court under §327, but nonetheless contended §330(a) authorized a fee award to him because he was a debtor’s attorney. In denying petitioner’s application, the Bankruptcy Court, District Court, and Fourth Circuit all held that in a chapter 7 proceeding §330(a)(1) does not authorize payment of attorney’s fees unless the attorney has been appointed under §327.
The Supreme Court held that the Code’s plain language, §330(a)(1), does not authorize compensation awards to debtors’ attorneys from estate funds, unless they are employed as authorized by §327. If the attorney is to be paid from estate funds under §330(a)(1) in a chapter 7 case, he must be employed by the trustee and approved by the court. The fact that the Lamie argued that the legislative intent controls with an ambiguous statute and one that is grammatically incorrect was unavailing to the Court. Numerous federal statutes inadvertently lack a conjunction, but are read for their plain meaning. the missing “or” neither alters the text’s substance nor obscures its meaning.
The lesson of Lamie is that if your client is going to convert from 13 to 7, the debtor’s attorney may not look to the bankruptcy estate for compensation, unless he works for the benefit of the estate, which is not his client.
11 USC §503
§503 allows for compensation and reimbursement from the bankruptcy estate of expenses awarded under §330. The language in §503 comes from the 1898 Bankruptcy Act, where strict economy governed the payment of compensation. While the Code did not adopt the strict economy standard of the 1898 Bankruptcy Act, in certain districts and before certain judges, strict economy is still the prevailing norm. The imposition of strict economy may give some attorneys and judges heartburn because it raises the larger question of the nature and competence of the bankruptcy bar, attorneys in Chapter 11 and 13 cases should expect fee applications to be subject to a higher standard of scrutiny for two reasons. First, strict economy still appears to be the ruling standard in may courts. Second, the US Trustee has seen their field of oversight reduced by the lack of Chapter 11 cases filed. With this reduced field of oversight, fee applications are subject to more time and scrutiny by the US Trustee. This results in more objections from the UST.
To avoid objections, here are three helpful hints.
1. Make sure your statement or invoice of time is substantively thorough. Stay away from generic entries such as “telephone call with Trustee” or “Conf. w/client”, without specifying the substance of the call or conference. Stay away from “Draft Motion” and “Research” without stating the specific motion and the nature of the research. (If you assess research to a case when the only result is a response to a motion for relief of the filing of the motion of relief from the automatic stay, then you deserve the objection you will so richly receive.)
2. Keep expenses reasonable. Do not charge the estate for the spa you stayed at while you wrote your reply brief to a motion for summary judgment, away from your children. Use of indirect cost percentages is generally forbidden. Most overhead costs, unless specifically related to the case will not be approved. If you have more than one person working on a subject at the same time, be prepared to justify the dual assignment in the invoice.
3. Make sure the supporting documents support your motion or application for compensation.
11 USC §504
§504 is clear that absent lawyers in the same firm, sharing of compensation is forbidden. However, two attorneys began to advertise that they were willing to share compensation (fee splitting) for referrals of bankruptcy clients. The Disciplinary Administrator in Kansas has taken the position that there is nothing wrong with that under the Kansas Rules of Professional Responsibility. However, §504 prohibits such an arrangements. Even if there is the proper disclosure under F.R.Bky.Civ.P. 2016 of the fee arrangement , §504 prohibits fee splitting and referrals.

Bankruptcy Ethics - Part II

2008-03-09T06:17:00.000-07:00

There are three rules found in the Kansas Rules of Professional Responsibility that commonly come into play in bankruptcy.
Rule 1.1 – a lawyer shall provide competent representation to the client
The leading case on competent representation in the bankruptcy context is In re Farmer, 263 Kan. 531, 950 P.2d 713, (1997). Mr. Farmer in his answer admitted that he violated Rule 1.1, inter alia. The Panel found as follows:
Count II arose because three of Respondent's former employees complained to the Disciplinary Administrator that Respondent provided little or no training, supervision or guidance for his lawyer and non-lawyer employees, that he allowed non-attorneys to give legal advice, and that he would not return phone calls. Investigator Karen Shelor conducted interviews with the complainants and then interviewed the following Federal Bankruptcy Court Judges and Trustees: Frank Koger, Arthur B. Federman, Karen See, John T. Flannagan, William H. Griffin, Timothy Sear, Carl Clark, Eric Rajala.
"3. The testimony of the judges and trustees is full of specific references to cases in which Mr. Farmer represented the debtor and incorrectly conducted his practice in court: failed to appear, delayed proceedings because of his mistakes, did not take responsibility for errors.
a. Judge Koger testified that he saw Respondent 'butcher' a lot of causes of action. Judge Koger stated he took Respondent aside and pointedly discussed the problems Respondent was causing; however, the judge answered on cross-examination that he did not report Respondent to the Kansas or Missouri Disciplinary Administrator, nor did the judge use the contempt rule to fine or bar Respondent from his court or otherwise sanction Respondent--nor any other attorney for that matter.
b. Judge Federman also cited specific problems with Respondent's cases: failure to appear at court hearings; did not have a list of exemptions under state law; and failure to provide information requested by the court. Some of these problems resulted in harm to the client by a loss of equity. Judge Federman did sanction Respondent in one case.
c. Judge See related that Respondent often failed to file required pleadings. She wrote to Respondent and detailed the problems she saw and presented an outline of suggestions intended to help him organize his bankruptcy practice to avoid repeated mistakes. She received no response from Mr. Farmer. She noted that the Amanda Rae Saylor Chapter 7 case was wrongly filed in Kansas, rather than Missouri.
d. Judge Flannagan described many of the same problems with Respondent's bankruptcy practice: (1) failure to follow procedures and court rules; (2) failure to notice up motions; and (3) mistakes in schedules. In the Terry case, the judge became particularly angry and frustrated with Respondent's 'sloppy' practice. Twice Judge Flannagan counseled Respondent to correct his ways, but Respondent did not change.
"All the judges testified that Respondent would blame his employees for the errors and problems pointed out to him.
"4. a. Bankruptcy Trustee Griffin testified that he was contacted by Investigator Shelor and thereafter prepared a review of the cases Mr. Farmer had before him. That review became Exhibit 2 consisting of a spiral bound book of six parts describing Mr. Farmer's practice. The following is a summary of the cases included in Mr. Griffin's exhibit. The Terry case involved Respondent's failure to send out notice of hearing on a motion filed on behalf of debtor. The Burnams' Chapter 13 petition included a car payment on a car that had allegedly already been repossessed and resold. The Wills bankruptcy omitted pleadings that would have allowed the debtor to make necessary roof repairs. In the Massey case, Respondent failed to file a reply to the mortgage company's motion stating it hadn't been paid. In the Vasquez bankruptcy, the witness wrote Mr. Farmer detailing his concerns about the feasibility of the plan because Respondent omitted the plan particulars. The Anderson bankruptcy was another example of Respondent's failure to notice up motions he filed. In the Vance case, Mr. Farmer filed in the wrong state. In the Taylor case Respondent failed to disclose income from property listed on Schedule A. Mr. Griffin stated his belief that a lot of the confusion in Mr. Farmer's cases was attributable to Mr. Farmer's lack of knowledge of bankruptcy practice.
"Mr. Griffin also sponsored Exhibit 9 which details 187 cases in his court where Respondent had either erred in noticing up a motion, or failed to amend plans once mistakes were discovered. Although the debtors usually obtained the discharge of their debts through the petitions filed by Respondent's office, the trustee pointed out that it was not without great burden on the trustee's office and great frustration to clients who called the trustee's office for information when they could not reach Respondent.
b. Trustees Timothy Sear and Carl Clark made many of the same observations as Mr. Griffin. These observations included: the failure of his clients to show for the first meetings of creditors; Respondent's lack of knowledge about clients or the clients' financial affairs; and Respondent's incomplete filings and failure to respond to the trustee's repeated requests for information. This behavior resulted in many calls from his clients to the trustees and more work for the bankruptcy system.
c. Trustee Eric Rajala found similar deficiencies with Respondent's bankruptcy practice. There were repeated inquiries of Respondent that went unanswered; amended schedules were common in Respondent's cases; and failure of Mr. Farmer and his clients to appear at scheduled hearings also occurred frequently.
"5. Witness Carol Horvatic Bolton, as the Deputy U.S. Bankruptcy Court Clerk in charge of the Kansas City Bankruptcy Court Clerk's Office, was familiar with Respondent's bankruptcy practice and characterized it as full of incomplete pleadings, noncompliance with the bankruptcy rules and regulations, lacking in diligence, missed deadlines, and clients who called her office because they could not reach Respondent. All of this greatly increased the workload of her office. She testified on cross-examination that she had not received any calls from Mr. Farmer's clients in 1996 and to date in 1997.
"6. Karen Shelor was the investigator for the Disciplinary Administrator's office. Ms. Shelor interviewed the three former employees of Mr. Farmer who made the complaint and then followed up with interviews of the bankruptcy judges, trustees and clerk. When she interviewed Respondent he explained the problems to her as resulting from rapid expansion of his bankruptcy practice. Ms. Shelor testified that Respondent had planned to specialize in high volume, low cost bankruptcy cases, and that Respondent had hired 6 attorneys and 14-15 legal assistants in a short time span. Respondent was critical of all of his staff members to Ms. Shelor even though he hired and trained them. Ms. Shelor reported that Respondent also found fault with the bankruptcy trustees, describing them as acting like his boss and making unreasonable demands and that he believed other attorneys who criticized him were jealous of him.
. . .
"13. Respondent testified about how he entered the legal profession, and about the impact of his expanding practice on his personal life, and his income. . . . Respondent does not want to surrender his license because he wants to support his family and continue his practice outside the area of bankruptcy. . . . He admitted his mistakes in training his employees, in his bankruptcy practice, and poor client contact.
The Panel found as follows:
The Panel finds by clear and convincing evidence that Respondent violated MRPC 1.1 regarding his competence to practice before the Bankruptcy Court. As four federal bankruptcy court judges and four trustees in bankruptcy testified, Respondent repeatedly failed to follow the bankruptcy court rules and local rules concerning noticing of motions. Their testimony also indicates that Respondent does not understand or apply the essentials of bankruptcy law. It was shown by clear and convincing evidence that Respondent did not understand the difference between secured and unsecured creditors, the fact that unsecured debts are discharged in a Chapter 7 bankruptcy, the fact that Chapter 13 plans cannot be filed with payments that extend beyond 60 months (the jurisdictional limit of the Bankruptcy Code), and the difference between motion practice and adversary practice in the bankruptcy courts. Over a period of several years, Respondent delayed filing of Chapter 13 plans on behalf of his clients, filed incomplete pleadings or pleadings that lacked the required client signature, appeared at Chapter 7 creditors meetings unprepared to represent his clients, and repeatedly failed to protect his clients tax refunds by means of the necessary pre-petition actions.
"While Respondent professed to be knowledgeable in bankruptcy law he made statements that showed the contrary. Respondent advised the Panel that by law, charges on a debtor's credit card made within 90 days of filing for bankruptcy, are presumed fraudulent. In fact, the period is 60 days, not 90 days. Respondent approved of and used in his office a document entitled 'Bankruptcy in a Nutshell' which is replete with errors. Furthermore, Respondent incorrectly stated that a Texas judgment would give a creditor a lien on Kansas real estate. Also, Respondent filed Kansas cases in Missouri courts and, in at least one instance, vice versa. Finally, Respondent improperly classified child support in a Chapter 13 case.
"The foregoing actions on the part of Respondent have, in some cases, harmed clients. For example, Judge Flannagan testified that he dismissed a bankruptcy petition for one of Respondent's clients simply because Respondent's errors were too numerous and too grave. Judge Koger testified that in the Billie Lee case, Respondent failed to obtain release of a garnishment. (This is an example of Respondent's failure to file complete pleadings along with the requisite orders and envelopes.) Trustee Griffin testified that in the Terry bankruptcy case, Terry's employer continued to withhold Chapter 13 plan payments from Terry's paycheck because Respondent failed to notice up a motion to abate the plan payments.
The hearing panel recommended two years suspension, with probation and outlined specific steps Farmer would have to take to remain on probation. The Disciplinary Administrator argued for indefinite suspension and renewed that argument before the Supreme Court. The Court wrote this in its per curiam opinion:
Respondent's misconduct here does not involve an isolated incident or an inadvertent error. The panel was concerned with repeated evidence of incompetence set forth in the record. We voice similar concerns. Respondent has admitted incompetence to practice his specialty, bankruptcy.
Respondent filed bankruptcy matters in 1997 after the date he admitted he was incompetent to practice in bankruptcy court. Respondent's counsel candidly confirmed this fact during oral argument. Respondent repeatedly failed to follow through on his responsibilities as a lawyer. He either was unable or refused "to accept and perform the obligations of the legal profession." State v. Dixon, 233 Kan. 465, 472, 664 P.2d 286 (1983). Despite the hearing panel's recommendation of suspension from the practice of law for 2 years and probation, we are of the opinion that Respondent should be indefinitely suspended.
Mr. Farmer now works in a field where the most damage he can do is break glass.
In a case, In re Christian, 260 Kan. 905, 925 P.2d 840 (1996), disbarment was ordered when Mr. Chistian failed to do the following:
In connection with the filing for the Mills, Respondent was required to send out notice of the bankruptcy plan. Respondent failed to notice up the plan prompting the Bankruptcy Trustee, William Griffin, to send the notice.
Subsequent to the bankruptcy filing, Mr. Mills attempted, on several occasions, to contact Respondent. Mr. Mills was unsuccessful, due in large part to Respondent's failure to return Mr. Mills' telephone calls.
On September 25, 1992, the Chapter 13 Bankruptcy Trustee moved to dismiss the Mills' action because Respondent failed to provide income verification, failed to notice up the plan and failed to file an affidavit regarding Mrs. Mills' failure to appear at a prior hearing. Respondent compounded these omissions by failing to appear at a hearing set to resolve these issues, leaving his clients, who did appear, without representation.
On November 5, 1992, the Bankruptcy Trustee forwarded correspondence to Respondent informing him of his clients' appearance at the September 25, 1992 [hearing]. In this correspondence, the Trustee expressed his surprise at the Judge's failure to dismiss the case. The Trustee admonished Respondent that if he failed to comply with the Rules of Procedure, he would move to disallow all attorneys fees and reset the first meeting of the creditors. The Trustee further indicated that he would move for appointment of other counsel to represent the Mills. Respondent acted with indifference.
On November 9, 1992, the Bankruptcy Judge ordered Respondent's attorney fees reduced for failure to prepare notice of the plan.
In February 1993, Columbia Savings Association, the institution holding the security interest in the Mills' truck, filed a Motion and Memorandum for Relief from Stay. In its Motion, Columbia claimed that the Mills' truck was uninsured, and, pursuant to Local Bankruptcy Rules, sought to take possession of the vehicle. Columbia, however, was mistaken. The Mills did have insurance on the vehicle. Unfortunately, Respondent failed to reply to Columbia's Motion, failed to inspect the allegations of Columbia, and failed to communicate to his clients the allegations of Columbia. As a result of Respondent's multiple failures, the Mills' truck was foreclosed and repossessed. Mr. Mills relates that he drove the truck to work one day and at the end of his shift returned to the lot only to find his truck missing.
In March of 1994, without consulting with his client, Respondent converted the Mills' Chapter 13 Bankruptcy to Chapter 7. Prior to initiating this change, Respondent failed to explore alternatives to this conversion, failed to advise his clients of the conversion, and failed to explain to his clients the impact of the consequences of such an action.
The lawyers mishandling of the Mills' action continued throughout the Chapter 7 proceeding prompting Darcy D. Williamson, Chapter 7 Bankruptcy Trustee, to conduct her own inquiry. Ms. Williamson's inquiry revealed that the Chapter 7 bankruptcy was being mishandled in much the same manner as the Chapter 13 bankruptcy. Consequently, Ms. Williamson contacted the Disciplinary Administrator's Office.
As a result of the acts and omissions of Respondent, the Mills terminated Respondent's employment on March 31, 1994. Shortly thereafter, the Disciplinary Administrator conducted an investigation. John R. Bullard headed the investigation. Mr. Bullard attempted to contact the Respondent by letter and by telephone. Mr. Bullard's efforts were met with indifference. Respondent failed to contact Mr. Bullard and failed to cooperate in the investigation.
Respondent's indifference continued throughout this proceeding. Respondent, although duly noticed, failed to appear as requested and failed to file a timely Answer to the Complaint."
The panel further found that respondent's mishandling of the Mills' proceeding caused the clients economic damage, as follows:
Loss of Kansas tax refund $ 180.00
Loss of federal tax refund 1,361.14
Loss of the vehicle 6,000.00
Additional attorney fees 500.00
Loss of opportunity to dischargemedical expenses 700.00
Total $ 8,741.14

Rule 1.3 – a lawyer shall act with reasonable promptness and diligence
In re Howlett, 261 Kan. 157, 928 P.2d 52 (1996), the Disciplinary Administrator allege in a four count complaint violations of numerous sections of the Ethics Rules. Rule 1.3 was not among the allegations. Howlett appeared pro se and stipulated that he violated 1.3. In Count I, Donald and Lora Walker hired Howlett for several foreclosure proceedings. A decision was made to file for bankruptcy. Respondent filed the bankruptcy for the Walkers. The Walkers' complaint arose out of the subsequent dismissal of the bankruptcy proceedings by the court of which they claimed no knowledge. The Panel found as to other counts and recommended a year suspension with probation for three years. The Supreme Court disagreed and suspended him for a year. Subsequently, in another complaint the court found that he had been convicted of theft and was practicing law while suspended, including filing bankruptcies after his suspension. The Supreme Court disbarred Howlett. In re Howlett, No. 81523, (1998). At no time did either the disciplinary administrator, panel or the Supreme Court deal with the oddity that in the initial complaint, he stipulated to a violation of 1.3, though there were more than enough other things to address.
Rule 1.4 A lawyer shall keep a client reasonably informed and promptly comply with reasonable requests for information
In re Gordon, 260 Kan. 905, 925 P.2d 840 (1996), the attorney filed a Chapter 13 for the purpose of saving the car. The Trustee moved to dismiss because the attorney had not noticed the plan. The bankruptcy court did not dismiss but sharply reduced the attorney compensation. Later the lender was granted relief from the automatic stay because the lender alleged the car was not insured. It turned out that the car was insured; the debtor had provided proof of insurance to the attorney, but the attorney had not forwarded the information to the lender. Attorney then moved to convert to Chapter 7 without discussing the impact with the client. The Supreme Court disbarred the attorney citing Rule 1.4 inter alia. The attorney was ordered to pay restitution to his clients of over $8,000.00 for the loss of tax refunds to the Trustee, loss of their vehicle and attorney fees incurred.
II. The lawyer’s own morality and conscience
There are no published cases that help define this source of ethics. However, from experience and trial-and-error method, there are two situations that a bankruptcy practitioner will face where the only guides are your own morality and conscience.
Example One: Prospective clients come into your office and tell you that you are the attorney that needs to handle their matter, because of your experience and reputation. During the interview you learn that the clients have well-paying jobs and considerable non-exempt assets, some of which are encumbered by loans. The 55 acre homestead is outside the city limits. The client intends to subdivide the land into ten lots, build homes on the lots and sell them for a hefty profit, as a means of making some money. A 401(k) plan that is invested 100% in the client’s employer has suffered a 75% reduction in value and the client is less than seven years from retirement. The clients fill out various forms to assist you in preparation. The budgetary expenses for the two debtors (no children or dependents) reflect nearly $450.00 a month in phone charges, and nearly $800.00 in food. Additionally, the debtors have two new SUV’s with no equity. The monthly payments for each of the SUV’s is over $580.00. You adjust the budget figures to meet the Dept. of Labor standards for a family of two, but the numbers demonstrate disposable income of nearly $1,000.00 a month, not including the two SUVs. You send a letter to the client recommending a Chapter 13 filing. The clients reject your advice and say they wish to proceed with a chapter 7.
Example Two: The prospective clients have two businesses that generate significant income, but their blended family of eight generates significant monthly expenses that offsets most of that income. The clients had a previous business that supplied “insider” information to clients for investment purposes. A number of clients have lost significant sums. Well-heeled ex-clients of your prospective clients have said they intend to sue for fraud and breach of fiduciary duty. The client insists that they want to file a Chapter 7.
In Example One, if you insist on filing a Chapter 13, and the Chapter 13 fails, the debtor can file a complaint for breach of communication and the Disciplinary Administrator will find probable cause for a violation because you did not do what the client wanted. In Example Two, if you file the Chapter 7 that they insist upon and the debtors are sued via an adversary proceeding by the well-heeled ex-clients, then the debtors will file a complaint based upon competence, and the Disciplinary Administrator will find that you did not properly advise the client.

Bankruptcy Ethics - Part I

2008-03-08T05:43:00.000-08:00

I have not posted over the past seven weeks. I have been just too busy. But a number of attorneys have told me they read what I write here and one told me he missed dose of a Jonathan rant. So, like Jack, I'm baaaaack.

This entry begins multi-part entries on Bankruptcy Ethics. This is a reworking of an paper I wrote in 2004 that is still relevant today. As the Great One would say "Away we go . . . ."

BANKRUPTCY ETHICS: DO THOSE RULES APPLY TO ME?

Too often bankruptcy practitioners find themselves in ethical dilemmas, if not ethical trouble. The problems often can be found in the bewildering sets of rules that operate and control the bankruptcy practitioner.
The sets of rules that govern the nonbankruptcy lawyers are:
1. The Kansas Rules of Professional Responsibility.
2. The lawyer’s own morality and conscience.
The bankruptcy attorney has an additional, somewhat disguised ethical code that is woven into the Bankruptcy Code and the Rules of Civil Procedure. The four Code sections that apply to the bankruptcy attorney are: §327, §330, §503, and §507. Additionally, there are two rules of Civil Procedure that apply to all documents signed by the attorney: F.R.Civ. P. 11 and F. R. Bky. Civ. P. 9011. Below is an examination of how these code sections and rules create specialized ethics for the bankruptcy practitioner.
Any and all of these rules can reach out and ensnare the bankruptcy attorney. Sometimes obeying one set of rules may conflict with another rule or rules. Some may not result in a hearing before the state ethics panel , but violation of some the rules, particularly the bankruptcy rules can result in self-policing by the bankruptcy court in the form of disgorgement of fees and sanctions against the attorney. Over the next couple of days this blog will review a summary of those rules and cases and decisions that highlight their impact on the practitioners of bankruptcy.

I have a dream

2008-01-20T16:52:00.000-08:00

I am departing from the usual topic today on the eve of the national holiday celebrating the life of Martin Luther King, Jr. I will let Dr. King's words of August, 1963 speak to remind anyone who reads this the work is not yet done.

"I am happy to join with you today in what will go down in history as the greatest demonstration for freedom in the history of our nation.

Five score years ago, a great American, in whose symbolic shadow we stand today, signed the Emancipation Proclamation. This momentous decree came as a great beacon light of hope to millions of Negro slaves who had been seared in the flames of withering injustice. It came as a joyous daybreak to end the long night of their captivity.

But one hundred years later, the Negro still is not free. One hundred years later, the life of the Negro is still sadly crippled by the manacles of segregation and the chains of discrimination. One hundred years later, the Negro lives on a lonely island of poverty in the midst of a vast ocean of material prosperity. One hundred years later, the Negro is still languishing in the corners of American society and finds himself an exile in his own land. So we have come here today to dramatize a shameful condition.

In a sense we have come to our nation's capital to cash a check. When the architects of our republic wrote the magnificent words of the Constitution and the Declaration of Independence, they were signing a promissory note to which every American was to fall heir. This note was a promise that all men, yes, black men as well as white men, would be guaranteed the unalienable rights of life, liberty, and the pursuit of happiness.

It is obvious today that America has defaulted on this promissory note insofar as her citizens of color are concerned. Instead of honoring this sacred obligation, America has given the Negro people a bad check, a check which has come back marked "insufficient funds." But we refuse to believe that the bank of justice is bankrupt. We refuse to believe that there are insufficient funds in the great vaults of opportunity of this nation. So we have come to cash this check — a check that will give us upon demand the riches of freedom and the security of justice. We have also come to this hallowed spot to remind America of the fierce urgency of now. This is no time to engage in the luxury of cooling off or to take the tranquilizing drug of gradualism. Now is the time to make real the promises of democracy. Now is the time to rise from the dark and desolate valley of segregation to the sunlit path of racial justice. Now is the time to lift our nation from the quick sands of racial injustice to the solid rock of brotherhood. Now is the time to make justice a reality for all of God's children.

It would be fatal for the nation to overlook the urgency of the moment. This sweltering summer of the Negro's legitimate discontent will not pass until there is an invigorating autumn of freedom and equality. Nineteen sixty-three is not an end, but a beginning. Those who hope that the Negro needed to blow off steam and will now be content will have a rude awakening if the nation returns to business as usual. There will be neither rest nor tranquility in America until the Negro is granted his citizenship rights. The whirlwinds of revolt will continue to shake the foundations of our nation until the bright day of justice emerges.

But there is something that I must say to my people who stand on the warm threshold which leads into the palace of justice. In the process of gaining our rightful place we must not be guilty of wrongful deeds. Let us not seek to satisfy our thirst for freedom by drinking from the cup of bitterness and hatred.

We must forever conduct our struggle on the high plane of dignity and discipline. We must not allow our creative protest to degenerate into physical violence. Again and again we must rise to the majestic heights of meeting physical force with soul force. The marvelous new militancy which has engulfed the Negro community must not lead us to a distrust of all white people, for many of our white brothers, as evidenced by their presence here today, have come to realize that their destiny is tied up with our destiny. They have come to realize that their freedom is inextricably bound to our freedom. We cannot walk alone.

As we walk, we must make the pledge that we shall always march ahead. We cannot turn back. There are those who are asking the devotees of civil rights, "When will you be satisfied?" We can never be satisfied as long as the Negro is the victim of the unspeakable horrors of police brutality. We can never be satisfied, as long as our bodies, heavy with the fatigue of travel, cannot gain lodging in the motels of the highways and the hotels of the cities. We cannot be satisfied as long as the Negro's basic mobility is from a smaller ghetto to a larger one. We can never be satisfied as long as our children are stripped of their selfhood and robbed of their dignity by signs stating "For Whites Only". We cannot be satisfied as long as a Negro in Mississippi cannot vote and a Negro in New York believes he has nothing for which to vote. No, no, we are not satisfied, and we will not be satisfied until justice rolls down like waters and righteousness like a mighty stream.

I am not unmindful that some of you have come here out of great trials and tribulations. Some of you have come fresh from narrow jail cells. Some of you have come from areas where your quest for freedom left you battered by the storms of persecution and staggered by the winds of police brutality. You have been the veterans of creative suffering. Continue to work with the faith that unearned suffering is redemptive.

Go back to Mississippi, go back to Alabama, go back to South Carolina, go back to Georgia, go back to Louisiana, go back to the slums and ghettos of our northern cities, knowing that somehow this situation can and will be changed. Let us not wallow in the valley of despair.

I say to you today, my friends, so even though we face the difficulties of today and tomorrow, I still have a dream. It is a dream deeply rooted in the American dream.

I have a dream that one day this nation will rise up and live out the true meaning of its creed: "We hold these truths to be self-evident: that all men are created equal."

I have a dream that one day on the red hills of Georgia the sons of former slaves and the sons of former slave owners will be able to sit down together at the table of brotherhood.

I have a dream that one day even the state of Mississippi, a state sweltering with the heat of injustice, sweltering with the heat of oppression, will be transformed into an oasis of freedom and justice.

I have a dream that my four little children will one day live in a nation where they will not be judged by the color of their skin but by the content of their character.

I have a dream today.

I have a dream that one day, down in Alabama, with its vicious racists, with its governor having his lips dripping with the words of interposition and nullification; one day right there in Alabama, little black boys and black girls will be able to join hands with little white boys and white girls as sisters and brothers.

I have a dream today.

I have a dream that one day every valley shall be exalted, every hill and mountain shall be made low, the rough places will be made plain, and the crooked places will be made straight, and the glory of the Lord shall be revealed, and all flesh shall see it together.

This is our hope. This is the faith that I go back to the South with. With this faith we will be able to hew out of the mountain of despair a stone of hope. With this faith we will be able to transform the jangling discords of our nation into a beautiful symphony of brotherhood. With this faith we will be able to work together, to pray together, to struggle together, to go to jail together, to stand up for freedom together, knowing that we will be free one day.

This will be the day when all of God's children will be able to sing with a new meaning, "My country, 'tis of thee, sweet land of liberty, of thee I sing. Land where my fathers died, land of the pilgrim's pride, from every mountainside, let freedom ring."

And if America is to be a great nation this must become true. So let freedom ring from the prodigious hilltops of New Hampshire. Let freedom ring from the mighty mountains of New York. Let freedom ring from the heightening Alleghenies of Pennsylvania!

Let freedom ring from the snowcapped Rockies of Colorado!

Let freedom ring from the curvaceous slopes of California!

But not only that; let freedom ring from Stone Mountain of Georgia!

Let freedom ring from Lookout Mountain of Tennessee!

Let freedom ring from every hill and molehill of Mississippi. From every mountainside, let freedom ring.

And when this happens, when we allow freedom to ring, when we let it ring from every village and every hamlet, from every state and every city, we will be able to speed up that day when all of God's children, black men and white men, Jews and Gentiles, Protestants and Catholics, will be able to join hands and sing in the words of the old Negro spiritual, "Free at last! free at last! thank God Almighty, we are free at last!""

Mr/Ms. Trustee meet Mr. AMT

2008-01-03T05:53:00.000-08:00

Since 1971, the US Tax Code has had the Alternative Minimum Tax (AMT) on the books. Originally, it was meant to eliminate certain deductions for high income filers. It was supposed to impact high income filers, with lots of deductions who wound up paying no tax. The AMT would omit certain deductions omitted and the taxpayer would wind up paying some tax.
The income level at which the AMT kicks in has progressively dropped. The combination of AMT income level dropping, inflation,and increases in the wholesale price index has progressively captured more and more people in the AMT trap. For 2007, the income level has dropped to $75,000 and the other AMT triggers -- writeoffs for personal exemptions, taxes, or home equity line(s)of credit; or own a business, rental properties, partnership, or S Corp - means that more people are going to be subject to the AMT system.
For most bankruptcy trustees income tax refunds have been a fertile source of easy money to collect from debtors. But with the growing impact of AMT, many trustees may find the ready source of refunds drying up over the future years, if Congress does not step in and fix the AMT's growing reach.
Mr/Ms. Trustee meet Mr. AMT. . . .

Blind Leading the Blind

2007-12-20T17:11:00.000-08:00

Since October 17, 2005, we have all been wondering about how to construct plans that are feasible with the new restrictions of the dangling paragraph of 1329(a)(*). Below is an analysis that suggests it is not hard, if one uses Section 1329 Modifications.

The Blind Leading the Blind: Section 1329 and Chapter 13
Plan Modifications
by: O. Max Gardner, III
Law Offices of O. Max Gardner III PC; Shelby, N.C.

The more I look at the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), the more I am beginning to think that we have all been misled by those who either did not know or did not care to know any better. During the past 20 months, we have been bombarded with questions about whether “projected disposable income” (PDI) is an historic fact or a future prediction. We have been puzzled and perplexed by Form B22C and disposable income (DI). We have wondered what Congress really intended when it adopted the IRS expense standards, which the IRS created solely for determining how much a taxpayer could pay in working out offers of compromise for tax debts. Compare In re Hardacre, 338 B.R. 718 (Bankr. N.D. Tex. 2006) (applies both PDI and DI), and In re Jass, 340 B.R. 411 (Bankr. D. Utah 2006) (ignored B22C for substantial drop in income by AMI debtors), with In re Alexander, 344 B.R. 742 (Bank. E.D.N.C. 2006) (the concept of DI as we knew it has changed), and In re Barr, 341 B.R. 181 (Bankr. M.D.N.C. 2006) (an above-median income (AMI) debtor with negative DI on Form B22C could file a good-faith plan paying less than the surplus net monthly income shown on Schedule J).
We have struggled with questions about “current monthly income” to the extent that it is not current, not monthly, and in some cases not even income. We have wondered whether the “applicable commitment period” is a device for measuring the duration of a plan or a mathematical number to determine the total amount a debtor must repay under the plan.
For all of us who have been sleep walking through this fog of new terms and strange concepts, hold on, because relief may be on the way and the relief may be right in front of us. In fact, it may just be hiding in §§1329(a)(1), (a)(2) and (a)(3). It is extremely important to note that not one of these sections was modified or amended by BAPCPA with the sole exception of deleting the “or” at the end of the former subsection (a)(2). To further compound the matter, since these sections were not amended, not one single provision of the new §1325(b) is incorporated in §1329. In fact, the only reference to §1325(b) is to subsection (1)(B) in §1329(c). This section simply provides that if a plan is modified under subsections (a) and (b), then the modified plan may not make payments beyond “the applicable commitment period under §1325(b)(1)(B)” unless the court, for cause, approves a longer period, provided that the court may not approve a period that expires more than five years after the time the first payment was due.
Disequilibrium and status quo “disturbances” arise from §1325(b)(4). This section provides that in order to determine how a debtor’s projected disposable income is to be disbursed to the unsecured creditors, the court must determine the “applicable commitment period.” If the debtor’s current monthly income (CMI) is less than the median income, then the commitment period is not less than three years. If the debtor’s CMI is more than the median family income, then the applicable commitment period is not less than five years. This section then provides that the applicable commitment period may only be less than three or five years if the plan provides for payment in full of all allowed unsecured claims. In short, if one wants to pay off a three-year plan in two years, then this section appears to require payment of 100 percent of all allowed unsecured claims.
Does this consequently mean that a chapter 13 debtor must either pay a 100 percent dividend or stay in a plan for not less than 36 or 60 months? Well (and this is where the smoke and mirrors come in), this is not necessarily what it means. Under the pre-BAPCPA Code, §1325(b)(1)(B) required that the debtor commit his “disposable income” received for three years to the plan. Under the old Code, however, there was no specific prohibition against modifying the plan to shorten the three-year period by way of an early pay-off without having to pay 100 percent to the unsecured creditors. See In re Anderson, 21 F.3d 355 (9th Cir. 1994).
The issues of how long a debtor must stay committed to a chapter 13 plan is not a new issue; in fact, it has been extensively litigated in numerous pre-BAPCPA cases. One of the first significant cases was In re McKinney, 191 B.R. 866 (Bankr. D. Or. 1966). The debtor’s confirmed plan in McKinney provided for a 0 percent dividend to the unsecured creditors and the payment of scheduled priority debt of approximately $10,000 to be paid over 36 months. Id. at 867. The actual priority claims filed and allowed totaled substantially less than $10,000, and as a result, the debtor was able to complete all plan payments in 12 months. The trustee responded by filing a §1329 motion to modify the plan to increase the percentage to the unsecured creditors and to require the debtor to continue paying all projected disposable income to the trustee for at least 36 months, as provided by §1325(b)(1). The bankruptcy judge granted the trustee’s motion and held that the modification of a confirmed plan had occurred because of the initial underestimation of priority claims, and that, upon the objection of the trustee by way of the motion to modify, the court had to look at §1325(b). More importantly, the court reasoned that while §1325(b) was not directly incorporated into §1329(b), it was “indirectly incorporated therein via its reference in §1325(a).”
The first signs of serious doubts about this so-called “incorporation” theory arose in Max Recovery Inc. v. Than, 215 B.R. 430 (9th Cir. BAP 1997). The plan in Than was confirmed, without objection, with terms providing monthly payments of $300 for 38 months or until the plan achieved an 11 percent dividend on those claims. The plan therefore appears to have been a hybrid pot plan. When filed claims proved to be lower than scheduled, the plan would pay the 11 percent dividend in 32 months instead of 38. Max Recovery, an unsecured debt buyer, moved under §1325(b) to increase the term of the plan to not less than 36 months. The bankruptcy court held that §1325(b) was inapplicable and denied the motion. Id. at 436. In affirming, the BAP stated that “the Code does not prohibit a plan that is less than 36 months in duration in the absence of any objection by the trustee or a creditor to ‘the confirmation of the plan.’” Id. at 437, citing §1325(b)(1). The BAP also noted in passing that §1329(b) does not expressly incorporate §1325(b). Id. at 434.
The next case-important modification was In re Sounakhene, 249 B.R. 801 (Bankr. S.D. Cal. 2000). In Sounakhene, the debtors, prior to the expiration of a 37-month plan, refinanced their home mortgage and made a single lump-sum payment to the trustee equal to the aggregate amount of their disposable income over the remaining life of the plan. The trustee moved to modify the plan to require that payments nonetheless be made for at least 36 months. The court denied the motion on the ground that the plan was complete when the trustee received the amount required under the plan. Id. at 804. The court also specifically held, however, that §1325(b) was not incorporated into §1329 based on a “plain interpretation of the statute.” Id. at 803. Rather than applying the so-called disposable-income test, the court determined that the better approach would be to utilize the analysis underlying the disposable-income test in exercising the court’s judgment and discretion. Id. at 805. Citing Than, the court stated that “the only limits on modification are those set forth in the language of the Code itself, coupled with the bankruptcy judge’s discretion and good judgment in reviewing the motion to modify.” Id. The court also noted that even if §1325(b)(1)(B) did apply, nothing in §1325(b) prohibited a lump-sum payment where no pre-payment discount was requested.
The next significant case was In re Casper, 154 B.R. 243 (N.D. Ill. 1993). In Casper, as a result of priority claims being allowed in amounts significantly less than scheduled, the debtors were able to complete their 60-month plan in 24 months. The confirmed plan paid a 10 percent dividend. The trustee filed a motion to modify the plan to a 60-month term and to increase the dividend from 10 percent to 80 percent. The bankruptcy court granted the trustee’s motion. On appeal, the district court reversed, holding that §1325(b)(1)(B) only required the debtors to commit the amount representing their projected disposable-income over three years to the plan. The district court also clearly stated that §1325(b) does not prohibit the payment of such an amount in less than the prescribed term of the plan. Id. at 245-46.
Casper was quickly followed by In re Phelps, 149 B.R. 534 (Bankr. N.D. Ill. 1993). The confirmed plan in Phelps provided for a payment of secured claims in full with a 10 percent dividend to unsecured creditors and monthly payments of $282 for a projected term of 43 months. Because allowed unsecured claims amounted to significantly less than those scheduled, the plan could be completed in 37 months. The trustee filed a motion to modify the plan to require a full 43 months of payments. The court rejected this motion, finding that plan completion occurs when the debtor has paid the percentage owed to each class of creditors as provided for in the confirmed plan. Id. at 537. While Phelps did not address the particular issue of §1325(b)’s disposable-income test and the mandatory minimum term of 36 months, its reasoning is instructive in that it interprets “completion of payments” as it is used in §1329(a), i.e., focusing on payment of the required percentage owed rather than on the duration of the plan.
Sections 1329 and 1325 were indirectly addressed by the court in In re Easley, 334 (Bankr. M.D. Fla. 1996). In Easley, several months after confirmation of a 60-month plan, the debtor filed a §1329 motion to modify the plan by paying the entire amount due from a loan received from his parents. The trustee objected and argued that any loan proceeds should be used to increase the plan payments and not to modify the plan. The court agreed with the debtor and granted the motion to modify. The court held that nothing in §1329 prohibited the debtor from borrowing money to pay his existing creditors early. The court reasoned that the debtor was merely “substituting one set of creditors, his parents, for his former set of creditors addressed in the plan.” Id. at 335.
The court in Forbes, 215 B.R. 183 (8th Cir. BAP 1997) directly addressed the §§1325 and 1329 issue. After 36 months of a 60-month plan, the debtor in Forbes received settlement proceeds that would enable him to reduce the plan term from 60 to 40 months. The debtor filed a §1329 motion to so modify the plan. The trustee and an unsecured creditor objected to the proposed modification on the ground that settlement constituted a windfall, enabling the debtor to pay all of his creditors in full. The bankruptcy court overruled both of the objections and approved the plan as modified by the debtor. The trustee and the creditor appealed. The issue before the BAP was whether the bankruptcy court erred by failing to consider the settlement funds as disposable-income under §1325(b). In affirming the bankruptcy court, the BAP held that Congress clearly did not include §1325(b) in the requirements for post-confirmation modification of plans under §1329, and the court would not read the statute to hold otherwise. Id. at 191. The panel also noted that its conclusion was supported by the absurd result that would have been obtained had the disposable-income test applied: “Mathematically, no proposed modified plan can satisfy both the disposable-income test in §1325(b) and the five-year limitation in §1329(c) if the proposed modification is filed after two years after the commencement of payments under the original plan.” Id. at 192.
In the case of In re Smith, 237 B.R. 621 (Bankr. E.D. Tex. 1999), aff’d, 252 B.R. 107 (E.D. Tex. 2000), the debtor had proposed a 56-month plan, which was confirmed over objections. After making payment number 26, the debtor paid the trustee the total amount due under the remainder of the plan. The trustee then distributed the funds with a notice of plan completion. An unsecured creditor objected and argued that the debtor had failed to submit her income to the plan for the full 36-month period as required by §1325(b)(1). The court overruled the objection and held that the creditor’s reliance on §1325(b)(1) was misplaced because that section only applied to plan confirmations. Id. at 625 n. 5.
The next significant holding was In re Golek, 308 B.R. 332 (Bankr. N.D. Ill. 2004). In this case, the debtor filed a motion in month 20 of his plan to sell real property. The court granted the motion and directed the debtor to pay the proceeds of the sale to the trustee in an amount sufficient to pay off the plan. The debtor then filed a motion to modify the plan to the amount of payments made. The trustee objected on the ground that the debtor was proposing to terminate his plan before its 36-month term had expired. Id. at 334. The court rejected the trustee’s position and argument that §1325(b) was incorporated into §1329. The court stated that when “Congress wants to say something, it knows how to say it, and in this instance, Congress did not say it. Indeed, §1329(b)(1) goes out of its way to include both §§1322(a) and 1322(b) in its list of restrictions. While §1325(a) is expressly listed, however, §1325(b) is not.” Id. at 337.
This issue was also recently addressed in two significant pre-BAPCPA cases, both of which were decided in 2005. In the first case, In re Sunahara, 326 B.R. 697 (9th Cir. BAP 2005), the court held that the debtor could seek to modify a plan under §1329 without having to pay a 100 percent dividend to the unsecured creditors. The debtor’s plan in this case provided for a total payment of $41,000 over a term of 60 months, with an estimated dividend of 50 percent to the unsecured creditors. One day prior to the hearing on confirmation of the debtor’s third amended plan, the debtor filed a motion to refinance real estate pay off the plan and terminate the case. The plan was confirmed without objection prior to the hearing on the motion. The bankruptcy court sustained the objection to the debtor’s motion, and on appeal the BAP reversed. The BAP pointed to Lamie v. U.S. Trustee, 540 U.S. 526 (2004) in holding that the “plain language of §1329(b) does not mandate satisfaction of the disposable income test of §1325(b)(1)(B) with respect to modified plans.” The court went on to emphasize that had “Congress intended to impose such a requirement, it could have easily done so by making the appropriate incorporating reference. If the absence of the reference to §1325(b) was indeed an oversight, it is the province of the legislature, and not the judiciary, to make the correction.”
The Sunahara court also specifically held that the so-called “best-efforts” test of §1325(b) did not apply to a §1329 motion. This holding was based on an unambiguous finding that the confirmation standards of §1325(b) were “not explicitly incorporated into §1329.” Specifically, the Sunahara court held: “Section 1329(b) expressly applies certain specific Code sections to plan modifications, but does not apply §1325(b). Period. The incorporation of §1325(a) is not, as has been posed by some courts, the functional equivalent of an indirect incorporation of §1325(b).” On remand, the BAP ordered the trial court to consider the current Schedules I & J, the likelihood of any future increases in net monthly income, the time period between confirmation and modification, and the risk of a plan failure over the remaining term versus the certainty of immediate payments to creditors.
The second important 2005 case was In re Keller, 329 B.R. 697 (Bankr. E.D. Cal. 2005). In Keller, the debtor filed a motion to modify a 36-month plan by reducing the term, by paying the base amount with a mortgage refinance, but without paying a 100 percent dividend. The court held that the debtor could pay off the plan early without a full dividend, but that the process to follow would be a §1329 motion to modify and not a motion to approve a new mortgage loan. However, the Keller court then found in dicta that §1325(b)(1) was incorporated into §1325(a), and since §1325(a) was in fact referenced in §1329, all of the pre-confirmation rules applied to a §1329 modification.
It is not clear how the Keller court would deal with the issue of “projected disposable income” under BAPCPA and §1329. However, the Keller reasoning is suspect because it is based on the general requirement of §1325(a)(1) that the court shall confirm a plan if “the plan complies with the provisions of this chapter and with the other applicable provisions of this title.” Given the very strict constructionalist approach to BAPCPA, it seems safe to assume that the vast majority of courts will follow Sunahara and reject Keller. And, unless it were reverse the precedent of Lamie, the Supreme Court is bound to follow Sunahara.
A good predictor of what the courts will finally do on this issue can be found in a 1989 decision by the Fourth Circuit. The case is In re Arnold, 869 F.2d 240 (4th Cir. 1989). In Arnold, the court was called on to interpret §1329 in a case where the debtor’s post-confirmation income increased from $80,000 a year to more than $200,000 per year. The court held that in this case, where there had been an unanticipated and substantial change for the better in the debtor’s financial circumstances, then either the trustee or an unsecured creditor could file a §1329 motion to modify the plan to increase the dividend to the general body of unsecured creditors. In a very detailed analysis of §1329, the Arnold court never once mentioned §1325(b) and certainly found no “direct” or “indirect” incorporation of that section into §1329.
The Arnold holding was strongly reaffirmed on Jan. 18, 2006, when the Fourth Circuit filed its opinion in In re Murphy, 2007 WL 117746 (4th Cir. 2007). Murphy involved two cases where the trustees sought to modify confirmed chapter 13 plans to increase the amount to be paid to the unsecured creditors. The court combined both cases for decision in order to “set forth a thorough analysis on how a bankruptcy court should analyze a motion for modification pursuant to §1329(a)(1) or (a)(2).” Slip at 8.
The Murphy court noted that under “§1329 of the Bankruptcy Code, a confirmed plan may be modified at ‘any time after confirmation of the plan but before the completion of payments’ at the request of the debtor, the chapter 13 trustee, or an allowed unsecured creditor in order to, among other things, ‘increase or reduce the amount of payments on claims of a particular class provided for by the plan, [or to] extend or reduce the time for such payments.’” Id. at 7. The court the made it crystal clear that any modification under §§1329(a), (a)(1) and (a)(2) had to comply with §1329(b)(1). Specifically, the court stated that “[u]nder §1329(b)(1), any post-confirmation modification must comply with §§1322(a) and (b), and §1323(c), and §1325(a) of the Bankruptcy Code.” Id. at 7-8. The court made absolutely no reference to § 1325(b).
The Murphy court then went on to explain that the doctrine of res judicata prevented the modification of a confirmed plan pursuant to §1329(a)(1) or (a)(2) “unless the party seeking modification demonstrates that the debtor experienced ‘substantial’ and ‘unanticipated’ post-confirmation changes in his financial condition.” Id. at 8, citing Arnold. The court then took pains to note that “this doctrine” of finality is designed to ensure that “confirmation orders will be accorded the necessary degree of finality, preventing parties from seeking to modify plans when minor and anticipated changes in the debtor’s financial condition take place.” Id. To further emphasize this point, the court, quoting from In re Butler, 174 B.R. 44, 47 (Bankr. M.D.N.C. 1994), stated that “[a]s a matter of sound policy as well as appropriate judicial economy, there is no reason why either a creditor or a debtor should be permitted to re-litigate issues which were decided in the confirmation order or which were available at the time of the confirmation but not raised by the parties. Absent this salutary policy, there is no readily available brake on the filing of motions under §1329 by creditors and debtors simply hoping to produce a more favorable plan based on the same facts presented at the original confirmation hearing.”
The most important thing about the Murphy decision is that the court never makes any reference whatsoever to §1325(b). Simply stated, it seemed so clear to the court that, since §1325(b) was not incorporated directly into any of the relevant §1329 provisions, any reference to the section was not even worth a footnote. The court went to some lengths on this point by including the full text of all “relevant” statutes in the footnotes.
As noted, Murphy involved two cases. In the first case, the chapter 13 trustee sought to modify a confirmed plan after the bankruptcy court granted the debtors permission to refinance the mortgage on their residence. In fact, the refinance produced an excess of “cash out” equity for the debtors, and it was this extra money that the trustee sought to recapture for the unsecured creditors. In the second case, the chapter 13 trustee sought to modify the plan after the debtor had secured authority to sell his condominium. Because the condo had appreciated more than 50 percent in about a year, the debtor was in position to pocket about $80,000 of the appreciation after paying off the original confirmed plan amount.
As to case number one, the court held that the “cash-out refinancing” did not rise to the level of a §1329 modification and denied the trustee’s motion to modify. The court held that all these debtors did “was eliminate a portion of their equity in the property for cash in exchange for a corresponding amount of debt. Thus, even when one considers that the [debtors’] residence appreciated in value post-confirmation, at most, they simply received a large loan in place of a small one. By any stretch, a loan, regardless of the size, is not income. [emphasis added].” The court even characterized the refinancing as evidence that the debtors “unquestionably took the more noble course of seeking to fulfill their obligations under the confirmed plan. . .” Slip at 12. Specifically, the court held: “A debtor’s proposal of any early payoff through the refinancing of a mortgage simply does not alter the financial condition of the debtor and, therefore, cannot provide a basis for the modification of a confirmed plan pursuant to §1329(a)(1) or (a)(2).” Slip at 11.
As to the second case, the court found that the debtor did experience a substantial and unanticipated change of circumstances when his condominium was scheduled for $121,000 in value as of Dec. 15, 2003, the date of the confirmation, and was sold for $235,000 in November 2004. The court noted that a 51.6 percent appreciation in value in less than a year constituted both a “substantial change in circumstances” and “an unanticipated change given the current market trends.” The holding in this case is of further interest because the debtor argued that since his plan had been confirmed under §1327(b), the condominium had revested in him at the time of confirmation, and therefore, the appreciation was beyond the reach of the trustee and the bankruptcy estate. The court noted this vesting rule and stated that under §1327(c), such vesting “is free and clear of any claim or interest of any creditor provided for by the plan.” The court addressed the differences between §1306 and 1327 by noting the “varying interpretations,” while holding that neither statute could be used by a debtor “to shield himself from the reach of his creditors when he experiences a substantial and unanticipated change in his income.” Slip at 16. Since the primary purpose for filing a plan that vests property of the estate in the debtor upon confirmation is to avoid this result, it would make no sense for any attorney in the Fourth Circuit to file anything other than a plan that vests property in the estate upon completion of the plan.
Section 1329(c), as amended, also raises additional issues that seem consistent with the pre-BAPCPA law on plan modifications. This section was amended to include a reference to the “applicable commitment period under §1325(b)(1)(B).” The wording of the new section is tortuous. However, the meaning is clear: If a plan is modified under §1329, the extended time period to pay cannot exceed five years, even if the court finds good cause to so extend the plan. This limited reference to §1325(b) in §1329(c) certainly provides clear and convincing (perhaps irrefutable) evidence that Congress was fully aware of this section when it enacted BAPCPA. The fact that Congress incorporated §1325(b) in one provision of §1329, but not in the truly substantive sections, is certainly a highly relevant fact and can only lead to the conclusion that the omission was intentional.
This startling congressional omission from §1329 (not incorporating §1325(b)) effectively writes the projected disposable income rules and the B22C analysis right out of the plan-modification process. This also means that there is no “best efforts” test under a §1329 motion. In addition, if a majority of courts follow the Fourth Circuit’s res judicata reasoning in Murphy, then plan a modification should not be granted absent a substantial and unanticipated change of the debtor’s financial circumstances.
Thus, this is the reason for describing the past 15 months as a monumental smoke-and-mirrors game. At this point, at least with respect to plan-modifications, it seems fairly clear that we are really back to the way things were in the old chapter 13 pre-BAPCPA days. If you have a high-income, above-median-income debtor with nominal monthly net income in Schedule J, then perhaps what you need to do is get the plan confirmed under §1325(b) using the B22C numbers, and then quickly turn around and file a §1329 motion with the real Schedule I & J numbers. On the other hand, would the “real income” on the I & J Schedules allow a chapter 13 trustee to do the same thing post confirmation? It sounds so simple and almost too good to be true. At the same time, it seems fully supported by the well-developed case law on §1329, which should not be modified by BAPCPA.
At this point, it would appear that in the modification mode the only really new things to deal with are 910-day vehicles and 365-day purchase-money claims. They still would apply to a modification, since §1325(a) is incorporated into §1329. Although one could possibly argue that since applicable subsections of §1329 were not changed at all by BAPCPA, the old section of §1329 that incorporated the old provisions of §1325(a) WITHOUT the hanging paragraph also eliminated the 910 and 365 claims from the modification process! But this may well be a bridge too far for many courts.
Could it really be this easy? After all of the pain and suffering imposed on the bankruptcy system since Oct. 17, 2005, is it possible that we are really back to the way the world used to be? Time will tell.

Playing the Odds

2007-12-16T16:04:00.000-08:00

Recently, ABC's Nightline featured the Bankruptcy Boot Camp of O.Max Gardner, III. I commend to readers the following link

<http://blog.ncblc.com/index.php/2007/12/15/playing-the-odds-max-gardner
-on-abc-nightline-news/>

The bogus fees problems that Max discusses are rampant in mortage servicers' operations. Squeezed between the contractual obligations to the Wall Street trusts of collateralized debt obligations (CDO) that have contracted with the servicers to act as the recipient, accountant, and disbursing agent for these trusts that lock them into a fixed fee for these services that increasingly cost more to deliver, and the dwindling number of subprime loans with high interest rates, which are current, servicers look for ways to generate fees that they can keep. Monthly Broker Price Opinions (BPOs), monthly drive-by appraisals ('yup, the house has not moved.'), late fees, and other accounting measures never imagined by the Generally Accepted Accounting Principles provide opportunities for fiscal mischief.

What is most disturbing to bankruptcy debtors is to maneuver through a reorganization plan and receive their discharge, justifiably proud of their accomplishment, and then, 30 days later the servicer of their mortgage sends letter saying you owe $8,000 in fees and costs that piled up during the bankruptcy, pay now or face foreclosure. Now, why in the world did you file a bankruptcy if the end result is going to be foreclosure?

This is known as the "tracking, not tacking" action. During the bankruptcy, these 'costs' were tracked by the servicer but not tacked onto your bill. Upon discharge, the costs are tacked onto your account, and viola, you are behind. Such an action is a violation of the discharge injunction, which was the holy grail you sought in your bankruptcy.

It is at this point that you need an attorney who is well versed in adversary proceedings and can file a discharge violation in your bankruptcy and get your mortgage current and make the servicers pay for their greed. Contact a Max Gardner Boot Camper and discuss your options.

Sincerely,

J.C. Becker
Max Gardner Boot Camp,
Class of October, 2006.

Monitoring the Monitors

2007-10-04T15:36:00.000-07:00

In the Movie, "Enemy of the State", the main character and his girlfriend, after hearing about how a new privacy bill that would permit warrantless wiretaps, went down in flames in Congress and the plan to bring a new bill with even more monitoring, raise the question, "Who is going to monitor the monitors?" Their son, playing with his Nintendo, asks, "Are you talking about sex?"

There is nothing sexy about the new bankruptcy bill.

However, one section 524(i) does give debtors some leverage in monitoring the monitors. Mortgage servicers, who are known from time to time to assess unwarranted fees and expenses, are subject to sanction under 524(i) if they do not credit payments received under a confirmed plan properly. A number of attorneys have proposed language in the plans that permits just such a sanction. Creditors, having their holy cow gored, have objected.

Judge Stair in E.D. of Tennessee has permitted such language in the plan with some modification. Judge Berger in Kansas has agreed with Judge Stair. Beneficial Mortgage of Tennessee has objected to Judge Stair's Order. So he reconsidered the order and put the burden on the Debtor and Creditor (and off the Trustee) and made it even stronger incentive for Debtors to monitor the servicer's accounting of payments and to inform the court on an annual basis during the plan if there are any improperly credited payments or improperly assessed fees. Judge Stair's amended order is now before Judge Berger for reconsideration.

Practice Hint: If you have a client who has an arrearage in a Chapter 13, here is the language approved in In re Collins in E.D. of Tennessee:

Section 12. MORTGAGE and/or LONG-TERM LIEN claim balances survive the plan. The Debtors own a house and lot located at [specific address omitted] which is subject to a first
mortgage or long-term lien held by Beneficial Tennessee, Inc., and which shall be paid by the
Trustee in monthly maintenance payments of $1,267.37 beginning May 2007. In addition to the
maintenance payment, the Trustee shall pay in full, in monthly installments of $260.00 at 0.00% interest, a claim for mortgage/lien pre-petition arrearages in the approximate amount of $11,000.00, subject to any objection by the Debtors or the Trustee to any greater amount claimed by the creditor, in which event the arrearage claim will be paid in the amount allowed by the court. Upon notification received as set forth in section 12(a)(4) and/or (5) herein, the Trustee shall pay any future mortgage increases or decreases due to escrow and interest rate changes, subject to the rights of the Debtors and/or the Trustee to object.
Confirmation of the plan shall impose an affirmative duty on the holders and/or servicers of any
claims secured by liens, mortgages and/or deeds of trust on the principal residence of the Debtors to do all of the following:
(1) To apply the payments received from the Trustee on the pre-petition arrearage, if any, only to such arrearage. For purposes of this plan, the “pre-petition arrearage” shall include all sums
included in the “allowed” proof of claim and shall have a “0" balance upon entry of the Discharge
Order in this case.
(2) To deem the pre-petition arrearage as contractually current upon confirmation of the plan,
thereby precluding the imposition of late payment charges or other default-related fees and services based solely on the pre-petition default or defaults.
(3) To apply the post-petition monthly mortgage payments paid by the Trustee or by the Debtors to the month in which each payment is designated to be made under the plan or directly by the Debtors, whether or not such payments are immediately applied by the creditor to the outstanding loan balance or are placed into some type of suspense, forbearance, or similar account.
(4) To notify the Trustee, the Debtors, and the attorney for the Debtors, in writing, of any changes in the interest rate for any non-fixed rate or adjustable rate mortgages and the effective date of any such adjustment or adjustments not less than 60 days in advance of such change or at such time as the change becomes known to the holder if the change is to be implemented in less than 60 days.
(5) To notify the Trustee, the Debtors, and the attorney for the Debtors, in writing, of any change in the property taxes and/or the property insurance premiums that would either increase or reduce the escrow portion, if any, of the monthly mortgage payments and the effective date of any such adjustment or adjustments not less than 60 days in advance of such change or at such time as the change becomes known to the holder if the change is to be implemented in less than 60 days.
(6) To file with the court and serve upon the Trustee, the Debtors, and the attorney for the Debtors, by February 15 of each year governed by this plan, an Annual Statement detailing the following amounts paid by the Debtors during the preceding calendar year: (i) all payments applied to the principal balance; (ii) all payments applied to interest; (iii) all payments applied to any escrow account; (iv) all payments applied to any pre-petition arrearage claim and the remaining bal ance; and (v) all fees and charges alleged to have accrued post-petition, along with an explanation thereof.
Failure to file and serve the Annual Statement as set forth herein results in the mortgage being
deemed fully current as of the calendar year for which the Annual Statement is due. The final
Annual Statement shall be filed and served within 45 days after the Trustee files her Preliminary Trustee’s Final Report and Certificate of Final Payment, a copy of which shall be served by the Trustee on the holder or servicer of any claim required to file an Annual Statement. The failure to file the final Annual Statement as set forth herein following completion of the Debtors’ plan and entry of discharge results in the mortgage being deemed fully current as of the date of discharge.
(7) Modifications. The holders of claims secured by a mortgage on real property of the Debtors,
proposed to be cured in section 12(a) of this plan shall adhere to and be governed by the following:
(A) Pre-petition defaults. If the Debtors pay the cure amount specified in section 12(a), or in such lesser or greater amount as may be established by the creditor’s allowed proof of claim, while timely making all required post-petition payments, the mortgage will, at the conclusion of the plan, be reinstated according to its original terms, extinguishing any right of the holder to recover any amount alleged to have arisen prior to the filing of the petition.
(B) Post-petition defaults. As set forth in section 12(a)(6) above, the holders and/or servicers of any claims secured by liens, mortgages, and/or deeds of trust on the principal residence of the Debtors have an affirmative duty to file with the court and serve upon the Trustee, the Debtors, and the attorney for the Debtors an Annual Statement disclosing the status of the Debtors’ mortgage loan account. Within 30 days of receipt of the Annual Statement, the Debtors may either (i) challenge the accuracy thereof by filing a motion with the court, to be served upon the holder and the Trustee, or (ii) propose a modified plan to provide for payment of additional amounts that the Debtors acknowledge or the court determines are due. To the extent that amounts set forth on a timely filed Annual Statement are not determined by the court to be invalid or are not paid by the Debtors through a modified plan, the rights of the holder to collect these amounts will be unaffected.
(C) Costs of collection. Costs of collection incurred by the holder after the filing of this bankruptcy case, including attorneys’ fees, shall be claimed pursuant to section 12(a)(7)(B) above. No late fees shall be incurred or demanded due to administrative delays by the Trustee’s office.

The Dangling Paragraph and Plain Meaning.

2007-08-19T12:03:00.000-07:00

For many of us, we are all too familiar with the following language of §1325 – the dangling paragraph.

“For purposes of paragraph (5), section 506 shall not apply to a claim described in that paragraph if the creditor has a purchase money security interest securing the debt that is the subject of the claim, the debt was incurred within the 910-day preceding the date of the filing of the petition, and the collateral for that debt consists of a motor vehicle (as defined in section 30102 of title 49) acquired for the personal use of the debtor, or if collateral for that debt consists of any other thing of value, if the debt was incurred during the 1-year period preceding that filing.”

11 USC §1325(a)

The critical phrases for determining the timing are “within the 910-day preceding the date of the filing of the petition”.

Most commentators have noted that the word ‘period’ or ‘time-frame’ is omitted after the hyphenated words ‘910-day’. Without the substitution of the word or phrase, a strict reading of the language says that if the purchase-money security interest was incurred within the 910-day, then §506 shall not apply. In other words, only a vehicle purchased on credit on the 910-day is not subject to cramdown.

How can I get to that reading? The Supreme Court said in Hartford Underwriters Ins. Co. v. Union Planters Bank, 530 U.S. 1 (2000):

“[w]e begin with the understanding that Congress "says in a statute what it means, and means in a statute what it says there," Connecticut Nat. Bank v. Germain, 503 U.S. 249, 254 (1992). As we have previously noted in construing another provision of Sec. 506, when "the statute's language is plain, `the sole function of the courts'" -- at least where the disposition required by the text is not absurd -- "`is to enforce it according to its terms.'" United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241 (1989) (quoting Caminetti v. United States, 242 U.S. 470, 485 (1917)).”

The Supreme Court addressed grammatically incorrect writings of Congress in Lamie v. U.S. Trustee, No. 02-694, (January 6, 2004): “The statute is awkward, and even ungrammatical; but that does not make it ambiguous on the point at issue.”

Continuing in Lamie, the Court warned that missing words or phrases should not be read into a statute, because the missing word or phrase was not voted on by Congress.

“[Such]argument would result not [in] a construction of [the] statute, but, in effect, an enlargement of it by the court, so that what was omitted, presumably by inadvertence, may be included within its scope. Iselin v. United States, 270 U.S. 245, 251 (1926). With a plain, nonabsurd meaning in view, we need not proceed in this way. "There is a basic difference between filling a gap left by Congress' silence and rewriting rules that Congress has affirmatively and specifically enacted." Mobil Oil Corp. v. Higginbotham, 436 U.S. 618, 625 (1978).

Our unwillingness to soften the import of Congress' chosen words even if we believe the words lead to a harsh outcome is longstanding. It results from "deference to the supremacy of the legislature, as well as recognition that Congressmen typically vote on the language of a bill." United States v. Locke, 471 U.S. 84, 95 (1985) (citing Richards v. United States, 369 U.S. 1, 9 (1962))."

Moreover, the dangling paragraph does contain the appropriate words when speaking of loans within the one year period.

. . .if collateral for that debt consists of any other thing of value, if the debt was incurred during the 1-year period preceding that filing.”

11 USC 1325(a).

Congress knew how to write the statute to include a period of time rather than a specific day. It did so within the same statute.

So the dangling paragraph applies to cars (and other PMSI purchases) made within a year and cars purchased on the 910-day before filing, according to the plain meaning of the statute. Such a reading is not ambiguous, nor is it absurd. Such a reading is right in keeping with the plain language of the statute.

Taxes in Bankruptcy

2007-06-18T20:19:00.000-07:00

Taxes in Bankruptcy[1]

INTRODUCTION

The Rule of Threes

Caesar in his Commentary noted, “All Gaul is divided into three parts.” While most historians believe he was writing about France, some philosophers think he was speaking of income taxes in the context of bankruptcy. There is symmetry to thinking about income taxes in bankruptcy in threes. Hence, Caesar may have had a longer career had he been a tax and bankruptcy attorney.
First, understand that taxes get various treatments, depending on time. In 11 U.S.C. §507, there are three subsections that deal with priority debt. Second, under 11 U.S.C. §523(a)(1), there are three kinds of taxes that are nondischargeable. Third, in a chapter 13 plan, there are three issues with respect to taxes. Lastly, there are three other common provisions that practitioners confront in dealing with other taxes that will be highlighted here.
Below is a discussion of the Code rules, the relative merits of litigating tax claims[2], and an update of federal and Kansas tax law, highlighting techniques you can use to reduce your client’s tax burdens in a bankruptcy context.

PERSONAL INCOME TAXES UNDER §507

An income tax debt can be a priority debt only if one of the three subsections of §507 declares it to be a priority. Those three provisions that can create a priority tax debt claim are:

§507(a) (8) (A) (i)
§507(a) (8) (A) (ii)
§507(a) (8) (A) (iii)
These three subsections are separate and distinct provisions. Any one of these subsections can create a priority tax debt. If one determines that a tax is a priority, then the tax will survive a discharge in Chapter 7 and/or need to be paid in a Chapter 13. In determining whether an income tax debt is a priority debt, do your analysis in numerical order. Most income tax questions will be answered by §507(a)(8)(A)(i) and you will not have to go further with your analysis. For some exceptional debtors, subsections (ii) and (iii) will come into play, but not that often.
Recognize that §507(a)(8)(A) is limited to taxes on income or gross receipts. In other words, income taxes are the only kinds of taxes subject to priority classification under §507(a)(8)(A). Sales taxes, taxes on transfers of goods and services are not entitled to priority status. Other taxes may be priority. See Other Priority Taxes under §507(a)(8) below.
§507(a)(8)(A)(i)
The three year rule under §507(a)(8)(A)(i) depends upon two important dates – the date the bankruptcy is/was filed and the date the tax return was originally due. Because you are the attorney and you are advising the client, you have some control over when the date of filing of the bankruptcy. Only rarely will you have control over the date of the filing of the tax return. It is the more interesting date to determine - the date the tax return was originally due.
If the tax return was originally due within three years of the filing of the bankruptcy, then the three year rule is triggered under §507(a)(8)(A)(i) and your analysis is over. But your counting is just beginning.
The date taxes are due for most individuals will be April 15th[3] of the year immediately following the tax year at issue.
EXAMPLE 1: Annie Anderson filed her tax returns for 1999, April 15, 2000. She owed $1,000.00. If Annie Anderson files her bankruptcy before April 16, 2003, the $1,000.00 tax debt is a priority debt and not discharged in bankruptcy.
BEWARE of extensions. Extensions to August 15th of the year preceding the tax issue are generally automatically granted, so if someone gets an extension the time the tax is originally due is extended.
EXAMPLE 2: Barry Bombast filed his tax return for 1999 August 15, 2000, obtaining an extension of his tax date April 15, 2000. On April 15, 2000, Barry owed $5,000 and he paid $4,500[4] with his extension, but still owes $500.00. Barry filed his return August 15, 2000 but did not pay the $500.00. If Barry files his bankruptcy before August 16, 2003, then his $500.00 tax debt is a priority debt and not discharged in bankruptcy.
BEWARE of second extensions to October 15th. These extensions are not automatically granted but are granted if there is a good reason. Death of a spouse or lost records of accountant now serving time are two good reasons recently granted a second extension to October 15th[5].
EXAMPLE 3: Carry Catchall’s husband died in 1999, creating some distinct tax issues for her. Her accountant obtained two extensions for her to October 16, 2000 for her own personal 1999 return. She filed her own return October 16, 2000 owing $1,000.00. If Carry files bankruptcy before October 16, 2003, then her tax debt for 1999 is a priority debt and not discharged in bankruptcy.
EXAMPLE 4: Danny Dunning filed his 1999 return February 1, 2000. If Danny filed his bankruptcy before April 16, 2003, Danny, like Annie above, would create a priority tax debt not discharged in bankruptcy. Note that the statutory language, “a return …is last due”,[6] does not turn on the actual filing date, but when the return is legally due.
EXAMPLE 5: Ernie Extensio filed his 1999 return July 1, 2000, but he had previously got an automatic extension to August 15, 2000. Earnie, like Danny and Annie will create priority tax debt if he files his bankruptcy before August 15, 2003.
EXAMPLE 6: Frank Finachzic filed his return October 1, 2000 having obtained two extensions. If he files before October 15, 2003, then his tax debt is a priority debt.
§507(a) (8) (A) (ii)
This is commonly known as the 240 day rule and deals with assessment of the tax by the Service. If you are doing an analysis under this subsection, forget everything you learned in the previous subsection. This rule is separate and distinct. Under the 240 day rule, there are again two important dates – the date the bankruptcy is/was filed and the date taxes were assessed. If taxes were not assessed prior to the date of filing, subsection (ii) of §507 does not apply. If taxes were assessed within 240 days of the filing of the bankruptcy, then the taxes are a priority. If the assessment came more than 240 days prior to the bankruptcy filing, then the 240 day rules does not apply and you need to move on to subsection (iii).
EXAMPLE 7: Georgette Golightly,[7] Holly Golightly’s younger sister, is a day care provider on the Upper West Side of New York City. In 1999, Holly fails to report that she received in cash $18,000 for day care for the Munster’s little angel, Richie. The Munsters, however, being good law abiding citizens , did list Georgette Golightly on their 1999 tax return form 2441, including her social security number. A cross check of the returns on February 1, 2001 noted the deficiency in reporting income on Georgette’s return and assessed her tax on the $18,000 at the 32% bracket. Georgette’s new tax assessment of $5,760.00, is a priority debt if she files her bankruptcy before September 29, 2001.[8]
EXAMPLE 8: Henry Hammer is a drummer in a rock and roll band. Harry fails to report that he received $2,000 for playing the congas at the 1999 wedding of Gloria and Michael “Meathead” Stivic. Archie Bunker, Gloria’s father who paid the $2,000, reports to the IRS that he made the payment to the IRS while undergoing an audit of his own returns for the last seven years. The kinder, gentler IRS sends Henry a letter of inquiry and Henry fessess up and pays 15% of the $2,000 or $300.00 to the IRS. The IRS recalculates Henry’s return November 1, 2000 and determines that he should have calculated the tax at the 38.5% tax bracket and assesses him the difference between $770.00 and the $300.00 he paid or $470.00. On January 2, 2002, Henry files bankruptcy. His tax obligation is a priority debt under the 240 day rule.
EXAMPLE 9: Iris Irsay in 1999 cashes out her 401(k) and spends the money on a brief, torrid fling with her beau, Dumas Nails, at the Casino outside Ardmore, Oklahoma. She receives $9,000 from her 401(k), with the employer holding out 10% (or $1,000) for the early withdrawal penalty. The employer does not withhold the 10% backup withholding tax. Iris does not report the $9000 on her 1999 return, but the IRS cross matches her name with the employer reported withholding and assesses the tax on November 1, 2000. Iris files bankruptcy January 2, 2001 and creates a priority debt under subsection (ii) of 508(a)(8)(A).
The three examples – unreported day care income, unreported income that someone else claims as an expense, and unreported income from cash out of retirement above are common situations that result in assessments that can create priority debt.
§507(a)(8)(A)(iii)

Under this section, forget the analysis under the previous subsections. Here you engage in a hypothetical analysis. The first thing to determine is whether the tax has been assessed prior to the bankruptcy filing. If it has been assessed, then this rule does not apply. If there was no assessment prior to the bankruptcy filing, then your analysis under “(iii)” becomes more complicated.
“(iii)” refers to and excludes taxes under both §523(a)(1)(B) and §523(a)(1)(C). The referral to §523 identifies certain types of taxes that are specifically excluded from “(iii)”, from the group of taxes that cam be made priority through “(iii).” Taxes under §523(a)(1)(B) and §523(a)(1)(C) cannot be priority under “(iii).” Under §523(a)(1)(B), taxes where a return was never filed or taxes with a return filed within two years of the bankruptcy are excluded from priority status. Those kind are subject to a §523 adversary proceeding and are not dischargeable. Under §523(a)(1)(C), fraudulent returns or willful evasion of taxes are excluded from priority status and like those under §523(a)(1)(B) are subject to an adversary proceeding and are not dischargeable.
Under this section – “(iii)”, taxes that were assessable but not assessed at the time of the filing are entitled to priority. One can only think of one type of client that would fall into this priority category – the slothful filer who suddenly wises up and her attorney who thinks she can get away with a fast one here.
EXAMPLE 10: JoJo James did not file a return for 1995 because he was having a romantic encounter that year and never got around to filing. Had he filed a return, he would have owed $10.00. JoJo met Kelly Kristian in 2001. The love of a good woman made JoJo see the light and error of his ways. He hired Larry Lawyer to assist him with his financial problems. Larry prepared JoJo’s 1995 return and mailed the return June 30, 2002 and filed his bankruptcy July 30, 2002.. The return was received by the Service July 1, 2002, but because of vacation and holiday schedules a determination of deficiency was not made until August 1, 2002. JoJo’s $10.00 tax liability is a priority debt under §507(a)(8)(A)(iii), because it was assessable when he filed bankruptcy.
CONCLUSION ON PRIORITY TAXES
If a personal income tax does not fall into one of the three subsections of §507(a)(8(A), then it is not a priority tax. Section 507(a)(8)(A) provides priority as to those taxes which fall within its limitations. The extension of time provided within §108(c) of the Bankruptcy Code and § 6503(h) of the Internal Revenue Code would be meaningless if debtors could discharge their tax liability by filing successive bankruptcies. §108's incorporation of § 6503 "reflects a policy determination that it would be unfair to allow the statute of limitations to run against the government's right to enforce a tax lien when, even if the government did bring suit, it couldn't collect because it couldn't get at the taxpayer's assets." In re West, 5 F.3d 423, 426 (9th Cir. 1993)), cert. denied, 128 L. Ed. 2d 459, 114 S. Ct. 1830 (1994); see also In re Richards, 994 F.2d 763, 765 (10th Cir. 1993) (noting that "Congress intended to give the government the benefit of certain time periods to pursue its collection efforts") (interpreting § 507(a)(8)(A)(ii)); In re Montoya, 965 F.2d 554, 556 (7th Cir. 1992) ("such a result would sanction tax avoidance schemes since debtors could simply file a subsequent bankruptcy petition after three years had passed and deliberately avoid paying their tax debts"). Congress did not intend to allow tax avoidance through bankruptcy by permitting the discharge of the debtor before the taxing authority has had a fair opportunity to collect taxes due. Federal law was designed to safeguard against tax avoidance. Congress intended to provide the government a full and unimpeded three years to collect income taxes; it did not intend to leave a loophole for debtors to engage in tax avoidance, as "the burden of making up the revenues thus lost must be shifted to other taxpayers." S. Rep. No. 989, 95th Cong., 2d Sess. 14 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5800; see also United States v. Ron Pair Enters., Inc., 489 U.S. 235, 243, 103 L. Ed. 2d 290, 109 S. Ct. 1026 (1989) (departure from strict construction of Bankruptcy Code is warranted if it would "conflict with any other section of the Code, or with any important state or federal interest," or "a contrary view suggested by the legislative history"). Priority taxes are meant to be collected. In a Chapter 13, these debts must be paid off in full, unless you have an agreement with the Service that permits the debt to survive discharge as a nondischargeable debt.. But before your categorize a debt as priority, make sure it is priority debt by doing the appropriate analysis.
OTHER PRIORITY TAXES UNDER §507(a)(8)
Other subsections of §507 create a laundry list of other taxes entitled to priority. Subsection (B) deals with property taxes that are due within a year of the filing without penalty. Subsection (C) deals with trust fund taxes – generally taxes due from the employer on behalf of the employee. In re Bates[9], 974 F.2d 1234 (10th Cir., 1992). Subsection (D) deals with employment taxes such as unemployment taxes, earned but may not be yet paid within three years. In re Pierce, 935 F.2d 709 (5th Cir., 1991). Subsection (E) deals with excise taxes, See, generally, Byerly v. Internal Revenue Service, 154 Bankr. 718 (Bankr. S.D. Ind. 1992) (tax on truck sales held to be priority excise taxes).; Subsection (F) deal with import taxes , See In re Mansfield Tire & Rubber Co., 120 Bankr. 862 (N.D. Ohio, 1990), and Subsection (G) deals with penalties where there can be established actual pecuniary loss. See Department of Revenue v. Kurth Ranch, 511 U.S. 767 (1994). All of these sections are fairly easy to categorize because the analysis turns on the type of tax. Bankruptcy cases are voluminous where the debtor attempted to have a judicial determination that a particular tax was not a priority. In most of the cases, the government prevails, even in the situation where the government slept on its rights.

TAXES UNDER §523(a)(1)

§ 523 reads in the pertinent part as follows:

Exceptions to discharge.
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—
(1) for a tax or a customs duty—
(A) of the kind and for the periods specified in section 507(a)(2) or 507(a)(8) of this title, whether or not a claim for such tax was filed or allowed;
(B) with respect to which a return, if required—
(i) was not filed; or
(ii) was filed after the date on which such return was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition; or
(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax;

Again, the rule of threes is found in §523. There are three requirements of taxes that are determined to be nondischargeable under §523. First it must be a tax under §502(a)(2) or (a)(8). Second the return must not have been filed or be within two years prior to the filing date of the bankruptcy petition. Or third it must be a fraudulent return or a willful attempt to evade or defeat the tax.
A tax under §507(a)(2) refers you to a tax under §502(f). §502(f) deals with involuntary claims that might arise in the normal course of business, i.e. trust fund taxes held by employer for payment on behalf of the employee. Secondly, taxes under §507(a)(8) are not dischargeable. So all of the taxes under §507(a)(8) as priority taxes discussed above, are also nondischargeable under §523, if one of the next two parts of §523 are met.
Taxes of the kind specified for which there never was a return are nondischargeable. Taxes of the kind specified that were due within two years before the filing of the bankruptcy petition are nondischargeable. Smith v. United States (In re Smith), 96 F.3d 800 (6th Cir., 1996). In Mr. Smith’s case, he filed his bankruptcy Noevember 23, 1993. He sent his returns by courier on November, 22, 1991. The Courier delivered the returns November 25, 1991. Smith presented two arguments for determination. First he argued his return was filed when he gave it to the courier. A tax return is "filed" on the date that it is received by the United States. Surowka v. United States, 909 F.2d 148, 149 (6th Cir. 1990) (citing Miller v. United States, 784 F.2d 728, 731 (6th Cir. 1986)). An exception to that rule applies to tax returns mailed with the United States Postal Service, which are considered "received" by the United States (and therefore "filed") on the date of the postmark. Surowka, 909 F.2d at 149. However, the "mailbox rule" did not apply to Smith's returns because he sent them by private courier. See Redman v. Commissioner, 820 F.2d 209, 212 (6th Cir. 1987). The "mailbox rule" only applies to the initial determination of whether a return is timely filed. Emmons v. Commissioner, 898 F.2d 50, 51 (5th Cir. 1990) It was undisputed that Smith's 1989 returns were filed late -- and the "mailbox rule" was therefore irrelevant to determining the exact date of filing.
His second argument turned on the fact November 23, 1991 was a Saturday. He argued that Bankruptcy Rule 9006 and its calculation of dates over weekends should control. The Sixth Circuit pointed out Rule 9006 is prospective in its application, not retrospective. The Court then commiserated with him -- if Mr. Smith only waited a little more before filing his bankruptcy, the United States would be in the long line with his other general unsecured nonpriority creditors, subject to discharge.
The last part of the three parts of §523(a)(1) states fraudulent or willfully evasive returns are nondischargeable. In Carmel v. United States (In re Carmel), 134 Bankr. 890 (Bankr. N.D. Ill., 1991), the debtor sought unsuccessfully to avoid a determination of nondischargeability for fraudulent return. (Debtor’s previous criminal tax and mail fraud convictions did not help. . . . Neither did his false W-4’s.) His unique defense was that his voluntary disclosure of his embezzlement and gambling activities in 1984 presented a defense to the charges of fraudulent evasion of tax. The government was aware of his conduct from the moment of confession and that knowledge would negate any intent to deceive. The Debtor also asserted that by causing his professional service corporation to file returns reflecting income paid to the Debtor, he alerted the IRS and did not intend to defraud them. The Debtor argued that he is like a tax protestor who affirmatively alerts the government of his intent to not file and should thereby escape liability for fraud penalties. Zell v. Commissioner, 763 F.2d 1139 (10th Cir. 1985). Unfortunately for the Debtor, the Seventh Circuit Court of Appeals has clearly held that a taxpayer cannot avoid fraud penalties by notifying the Commissioner that he has been evading taxes and that he will continue to do so, Granado v. Commissioner, 792 F.2d 91, 94 (7th Cir. 1986), cert. den. 480 U.S. 920, 94 L. Ed. 2d 692 , 107 S. Ct. 1378 (1987). See also Plunkett v. Commissioner, 465 F.2d 299, 302 (7th Cir. 1972). Thus, the Debtor's voluntary confession in 1984 and the fact that the tax returns for the years 1983 and 1984 did not become due until after such confession, does not operate to negate the fraudulent intent to evade payment of those taxes.
In Young v. United States, 590 U.S, 292 (2002), the debtor filed his taxes and then filed a chapter 13. He let the chapter 13 dismiss on the eve of the 36th month. A month later, Young filed a chapter 7 bankruptcy asserting he that his taxes, now more than three years old were dischargeable. The Supreme Court disagreed, holding that bankruptcy was a court of equitable principles and “equitable tolling” halted the running of the three years while Mr. Young was in Chapter 13.[10]
Another interesting question that arises with returns is when the Service files a substitute return for the debtor, is that a properly filed return for bankruptcy dischargeability purposes? In In re Rench, 129 B.R. 649 (Bankr. D. Kan., 1991), Judge Pusateri held that a substitute return does not relieve the debtor of the obligation to file and does not provide any defense to a dischargeability question.

CHAPTER 13 AND TAXES

Chapter 13 provides a number of ways to get control over tax debts. Chapter 13 will NOT absolve the debtor of having to pay the tax, but it does allow them to “freeze” the tax and cap the interest and penalties at the time of the filing. A bankruptcy court may not confirm a Chapter 13 plan unless it provides for "the full payment . . . of all claims entitled to priority under [11 U.S.C. § 507]." 11 U.S.C. § 1322(a)(2). Under §507(a)(8), the United States is accorded priority status for its tax claims against a debtor when the claim is for income taxes. In re Eysenbach, 183 B.R. 365 (W.D. N.Y., 1995). Similarly state government taxes will be accorded priority status when there is a claim for income tax.
One of the frequent situations that arises in both chapter 7 and 13 filings in this area arises out of residents of Kansas who work in Missouri. Often debtors will have worked one year in Missouri and not have filed a Missouri return for that year.[11] In the Chapter 13 context particularly, the Missouri Dept. of Revenue will file an objection to the plan stating they have no returns filed for the last six years. Counsel can quickly deal with this objection by getting an affidavit from the debtor stating that for X years they earned no income in Missouri and were not subject to paying income tax or filing a Missouri tax return for those years.

OTHER TREATMENTS OF TAXES IN BANKRUPTCY

Sales and Excise Taxes
When representing sole proprietors and small businesses in reorganizations, it is not unusual to find that sales taxes to the state have not been paid. Further, liquor stores will owe taxes to Alcohol and Beverage Control (ABC) and face the prospect of having assets seized. With seizure, of bank accounts by the state Dept. of Revenue or of assets (the booze) by ABC, reorganization is a daunting, if not improbable task. It is here that debtor’s attorney’s need to be aggressive in determining the tax liability and getting the bankruptcy on file. ABC may still be aggressive attempting to recover the assets under police power, but generally specific statements in the plan can forestall this action.

Litigation Strategies

There are three places to litigate questions of the amount of tax due. You can pay the amount of tax and file a petition for refund in the applicable U.S. District Court.[12] Second, you can file a complaint for determination of tax in the U.S. Tax Court.[13] Lastly, Bankruptcy Court is available to litigate the issue of tax and dischargeability. Remember, the U.S. District Court and the U.S. Tax Court are not the ultimate arbiters of bankruptcy questions. If the tax question is a dischargeability question, stay in bankruptcy court. If it is truly a tax issue, not the amount, go to Tax Court. If the issue is the amount of tax, then litigate the issue in U.S. District Court. You will have paid the tax in advance, thereby reducing the amount due under the plan, and if you get a refund from the U.S. District Court, that becomes an asset of the bankruptcy estate in a Chapter 13.
If you decide to litigate a tax issue in bankruptcy, there are important considerations that you must account and prepare for. The Bankruptcy Court is powerless to decide the tax issue, if the U.S. Tax Court or the U.S. District Court has already decided the issue. Like the Rooker-Feldman doctrine[14] in federal court, the U.S. Bankruptcy Court is prohibited from deciding an already decided tax issue. 11 USC §50**. So, the decision of forum for litigating must include the determination of whether to file the bankruptcy at all as part of the overall litigation strategy.
Recently the U.S. Dept. of Justice (DOJ) has taken a fairly severe position regarding litigating tax questions in Bankruptcy courts. The DOJ, representing the IRS, takes the position that the word may in §50** requires abstention by the bankruptcy court. The DOJ urges the debtor/litigant to go to Tax Court for a determination of tax. Most bankruptcy courts have rejected the DOJ argument, but you need to let your clients know that this argument will be a threshold argument that the DOJ will present to reduce the sources of tax law opinions and to avoid bankruptcy cases being decided differently than Tax Court cases.

UPDATE ON RECENT FEDERAL TAX ISSUES
On March 9, 2002, President Bush signed into law a new tax law, the Job Creation and Worker Assistance Act of 2002, that affords businesses and individuals four specific tools for immediate tax credits and reductions in tax liability, retroactive to September, 2001 and good until September 11, 2004. Below is a short description of the four.

1. 30% immediate depreciation. An 30% immediate depreciation for new equipment with a recovery period of less than 20 years. As a tax planning tool, a client with a small tax liability, may be able to purchase new equipment now and reduce or obliterate the current tax liability. This type of tax planning will require some sophisticated software but the software was on the market March 24, 2002 and able to calculate not only current equipment purchases but also previous purchases between September 11, 2001 and March 24, 2002. When you are planning a small business reorganization and new equipment purchases are reasonable and necessary, this depreciation needs to be calculated into the cost of the new equipment and its effect on tax liability and rates.
2. Increase in luxury automobile limit for 1st year depreciation. For a luxury automobile ($35,000+), the first year depreciation limit is increased from $3,060.00 to $7,660.00.[15] The depreciation for a traded luxury automobile is also increased to $4,600.00
3. An increase in the limitation of the use of Alternative Minimum Tax Net Operating Losses against Alternative Minimum Tax Income. While this may only be applicable now to Chapter 11 sales of companies and assets with Net Operating Losses (NOL’s), the Tax Reform Act of 2001[16] includes an increase from about 4% to about 20% in 2006, the number of taxpayers who are going to have to calculate Alternative Minimum Tax (AMT) as part of their tax liability. Additionally, without Congressional intervention, that percentage is going to increase to about 64% by the year 2011. So with the increasing number of business and individuals who are going to be subject to the AMT, this provision may prove to be an effective tool for reorganizing businesses and individuals.
4. Elimination of AMT depreciation adjustment for qualified property put into service after September, 2001. This adjustment, like #3 above, will not have a major impact on current taxpayers reorganizing. However, as the AMT becomes the standard tax rate for more taxpayers in the future, it will have an impact in planning and reorganization.
All four of these changes are to encourage through the tax code the purchase of new equipment. The side effect in the bankruptcy context is two-fold: (1) it will reduce tax liability for some reorganizing individuals and may create some windfalls from Chapter 7 trustees in Chapter 7 liquidations, and (2) it will encourage reorganizing businesses to plan to purchase new equipment during reorganization and provide a powerful tax policy reason for purchase of new equipment and property.[17]
UPDATE ON RECENT STATE TAX ISSUES
While the state of Kansas has still not worked out all of its budget problems, and the lack of serious policy discussion has hampered any effort to develop business-friendly tax policies, the effect of the federal tax changes on state tax revenues will be interesting to observe as more and more taxpayers are swept up into mandatory AMT calculations. The impact of AMT on state tax calculations will depress state revenues overall. The depreciation benefits of the Job Creations and Worker Assistance Act of 2002 should not have an effect on state tax rates. However, the encouragement by tax credits in investment in Kansas business will create more revenue problems for well designed investment plans. A recommended investment in Kansas corporations for state tax credits may have an effect on federal subchapter ‘S’ shareholder for depreciation purposes on the federal level. While this part of the presentation is being written during the budget battles in Kansas in the Spring of 2005, after April 12, 2005 when the Suprme Court rules on the School financing issues, we should have a better handle on the impact of state revenues and tax planning.
One other issue should be mentioned in terms of tax issues. The Kansas Dept. of Revenue (KDOR) spent $74 million on a new computer system and upgrade during the past three years. After trying the system out for nearly 4 months in 2004, the system was junked and KDOR returned to the old system. While this new system would have sped up the process of return review and provided better capture of old unfiled returns and old taxes determined to be owing with recent filings, the system never seemed to work and was abandoned early in its “testing” phase. With the loss of this system, the KDOR is not able to track on computer returns not filed before 1996.

[1] © Jonathan C. Becker, 2005
[2] Not surprisingly, there are three ways to litigate tax issues in bankruptcy.
[3] Remember that for the tax year 2005 the return is due April 17, 2006, because April 15, 2006 is on a Saturday. Similar calculations have had to be made for 1999 and 2000 and will have to be made for 2006.
[4] When filing an extension, the extension must be accompanied by 90% of the tax debt owed or the extension is disallowed and any return after April 15th will be considered a late filed return, subject to penalty.
[5] In 2000, October 15th fell on a Sunday, so the extension was until October 16, 2000 for a 1999 return. For a 2004 return, October 15, 2005 falls on a Saturday, so the extension is to October 17, 2005
[6] 11 U.S.C. 507(a)(8)(i)
[7] Apologies to Truman Capote for this use of the name.
[8] A Saturday.
[9] Yes, the debtor’s first name is Norman.
[10] The more extraordinary holding of Young is that absent specific directive, the deadlines and statutory dates of procedural issues in bankruptcy are all subject to the equity principles, absent clear and unambiguous directive by Congressy
[11] This author’s experience is that debtor’s who have multi-state returns generally get a refund from the non-resident state and owe money to the resident state. Why debtors do not file the return in the non-resident state, when they are entitled to a refund is one of those questions best left to the psychological services.
[12] This litigation tactic is doubtful because your client is in bankruptcy or headed there. But you should be aware of this tactic, if the issue is simply a small amount of money issue, not a tax or bankruptcy issue.
[13] Most tax practitioners will recommend this when the issue is a tax matter and the amount and dischargeability are not in issue.
[14] The Rooker-Feldman doctrine prohibits lower federal courts from reviewing state court judgments. See Rooker v. Fidelity Trust Co., 263 U.S. 413, 68 L. Ed. 362, 44 S. Ct. 149 (1923); District of Columbia Court of Appeals v. Feldman, 460 U.S. 462, 75 L. Ed. 2d 206, 103 S. Ct. 1303 (1983).
[15] Remember the category of luxury automobile is conservatively defined. SUV’s and the like generally do not fit the definition, though their price often does.
[16] This is the act that is famous for the “Bush Refund” many received in August and September, 2001, which was actually a cash advance on 2001 refunds. For many it reduced the size of the April 2002 refund, for others, who did not receive any refund in 2001, they got a large credit in April 2002 on heir 2001 refund. The persons really screaming are those that had to pay all or part of the refund back.
[17] Remember: shrubs still have a 15 year depreciation schedule.

Means Testing or Mean Changing

2007-06-17T15:28:00.000-07:00

In signing BAPCPA, President Bush issued a statement in which the "means test" was cited as one of BAPCPA's prime movers. The President said:
“In recent years, too many people have abused the bankruptcy laws. They’ve walked away from debts even when they had the ability to repay them. This has made credit less affordable and less accessible, especially for low-income workers who already face financial obstacles. The bill I sign today helps address this problem.”[1]
The means test and the many modifications to the means test over the nine years it took to get BAPCPA enacted diluted the means test to such a great extent that only a handful of debtors will ever flunk it. Even before BAPCPA became effective, however, N.D Illinois[2] Judge Eugene Wedoff was among the first to have predicted as much. He wrote:
Perhaps the best-known and most discussed feature of [BAPCPA] is its means test. Indeed, means testing has been a central feature of the bankruptcy reform legislation that Congress has considered in every term since 1997. As reflected in the comments of Senator Grassley set out above, means testing has a simple purpose: to measure the ability of Chapter 7 debtors to repay debt and then, if they have sufficient debt-paying ability, to make them repay at least some of their debt--likely through Chapter 13--in order to receive a bankruptcy discharge. This Article suggests, however, that BAPCPA's means test is not simple and is not likely to achieve what its sponsors intended. See Hon. Eugene R. Wedoff, Means Testing in the New § 707(b), 79 Am. Bankr. L. J. 231 (2005).
Still, even if the new law's bark is worse than its bite, the new law has taken a significant bite out of bankruptcy filings by consumers, at least in the short term. Consumer bankruptcy filings down to about 1/3 of last year's levels, Sam Gerdano (the American Bankruptcy Institute’s Exec. Director, and for chief legal counsel to Sen. Grassley, BAPCPA’s sponsor remarked, "[t]he big story is, Congress wanted to suppress the number of filings, and they have succeeded mightily." Recently, Chapter 13 Trustee William H. Griffin reported that his office in Kansas City, KS is back to 85% of pre-10/17/2005 levels of filings.
In the past year, cases interpreting the means test in the chapter 7 context have been few and far between, with no reported cases addressing the nuances of the means test head on (at least in the chapter 7 context). Still, as Judge Wedoff's article makes clear, calculating whether someone passes or flunks the means test is one of BAPCPA's most mystifyingly mind-numbing tasks, and fundamental misunderstandings are still present even among experienced practitioners.
In re Pak, 343 B.R. 239 (Bankr. N.D. Cal. 2006), the court held that there is no safe harbor for debtors who flunk the means test on the petition date such as would prevent the court from exercising its own discretion and dismissing the case under Code section 707(b)(3)(B)'s "totality of circumstances" test. Most notably, Judge Tchaikovsky weighed in on the raging debate between "respected academics" Marianne B. Culhane and Michaela M. White on the one hand, and Judge Wedoff, "also highly respected for his expertise on BAPCPA," on the other. In the end, Judge Tchaikovsky rejected Culhane and White's views, reflected in Catching Can-Pay Debtors: Is the Means Test the Only Way?, 13 Am. Bankr. Inst. L. Rev. 665 (2005)), which they wrote for purposes of rebutting certain of Judge Wedoff's views in the article cited above (which views were adopted by Judge Tchaikovsky). In conclusion, Judge Tchaikovsky held, "while BAPCPA did severely limit judicial discretion..., [it] has not been entirely eliminated."

Calculating the Means Test
Means testing is a three-part analysis. The first part is of the test is the determination of Current Monthly Income (CMI), which is “not current, not monthly and not income.”[3] To determine CMI, determine the sum of income received in the six months prior the month of filing divided by six.[4] If that number is below the Census Median[5] Standards for the state of the debtor based upon his/her/their family size[6], then the debtors are “Below Median Debtors”, a/k/a BMI Debtors. At this point the test is complete and the debtor is eligible for Chapter 7.
If the Debtor is an “Above Median Debtor”, a/k/a AMI Debtor, then you move onto the second part of the Means Test. Take the CMI and subtract the National and State allowed IRS Standards for Housing, Utilities, and Car Ownership. Subtract the Reasonable and Necessary Expenses for the following allowed categories – Taxes (federal, FICA, Medicare, and state, and local income taxes, personal property taxes), Mandatory Deductions (Union Dues, Uniforms, Work Shoes, Mandatory Retirement Plans), Term Life Insurance (for debtor(s) only, no other persons), Court Ordered Payments (Alimony, Child Support and other Court ordered payments), Education (for employment or a physically or mentally handicapped child), Child Care (Baby sitting, day care, nursery, pre-school), Health Care (medical services, supplies, prescription drugs not reimbursed, Telecommunications (cell phones, pagers, internet for health & welfare of debtor(s) or dependents) -- plus additional deductions for the additional expenses allowed under §707(b) – Health insurance, Disability Insurance, Health Savings Accounts, Care and support for elderly, chronically ill or disabled, protection against family violence, Home energy costs in excess of allowance, Education expenses (limited to $125.00 per child), Additional housing and food expense, and continued charitable contributions.
Next calculate the secured debt payments contractually due over the next 60 months and divide by 60. Include any arrearages in the secured debtor payments. Calculate the amount needed to pay priority claims and divide by 60. Calculate the Chapter 13 administrative expenses (The Projected Monthly Chapter 13 Payment[7] and the Trustee’s administrative expenses). Subtract the total of monthly secured payments, monthly priority claims, and projected Chapter 13 Payments.
Simply put, the second part of the test requires you to engage in this simple arithmetic: CMI minus National and State Standard for Housing and Car, minus Reasonable and Necessary Expenses, minus §707(b) expenses, minus the total of monthly secured debts, monthly priority claims and Projected Chapter 13 Plan payments. The remaining number is known as “Monthly Disposable Income” a/k/a MDI.
Now, the final step of second part of the means test is a comparison. If the MDI is less than $100.00 then there is no presumption of abuse and the debtor is eligible for Chapter 7. If MDI is between $100.00 and $166.67, then there is no presumption either way and you can file a Chapter 7, but the UST or a creditor may object to a filing under Chapter 7. If MDI is more than $166.67, then there is a presumption of abuse if the debtor files a Chapter 7. If the debtor files a Chapter 13, debtor must pay the MDI to unsecureds.
Now there is one last step. If MDI is above $166.67, you can still file under Chapter 7 if you can list additional expenses that should be deducted for the health and welfare of the debtor’s family.[8]

Now, aren’t you glad you asked about Means Test?

Means Testing: A Non-Issue?

1. First case interpreting "means test" standards under § 707(b)(2)(A) and its application in the chapter 13 plan confirmation context for determining the debtor's "projected disposable income." In re Hardacre, 338 B.R. 715 (Bankr. N.D. Tex. 2006). Court holds:
a. Any determination of the debtor's "projected disposable income," such as when debtor is required to devote to payments under plan, must be based on debtor's anticipated income over term of plan;
b. In applying "means test" for "projected disposable income," the debtor could not double-count housing and transportation expenses;
c. In determining "projected disposable income," the debtor may deduct a sum equal either to standard allowances or actual housing and transportation expenses, whichever is greater;
d. Debtor could not deduct standard expense for vehicle owned free and clear; and
e. Section 707(b)(2)(A)(ii)(I) precludes debtor from claiming expenses under both the Local Standards and the debtor’s actual average monthly expense, but the debtor can claim the greater of the two. In re Hardacre, 338 B.R. 718 (Bankr. N.D. Tex. 2006).
2. Debtors failed to rebut presumption of abuse under means test because circumstances did not present special circumstances such as those identified by the statute (e.g., serious medical condition or call to active duty). Here, the debtors checked the box on the means test calculation form indicating the presumption of abuse. The US Trustee even withdrew the motion to dismiss. The US Trustee, however, did object to the debtors' inclusion of future payments on secured claims on two vehicles which were surrendered after the bankruptcy filing. "The potential payback of zero percent to unsecured creditors in a Chapter 13 is not a special circumstance contemplated under § 707(b)(2)(B)." In re Johns, 343 B.R. 626 (Bankr. E.D. Okl. 2006)

[1] This apocryphal statement was repeatedly made, though there was never any factual or statistical evidence. The statement appeared to be an corollary of ‘mansion-loophole” cases like Bowie Kuhn, Burt Reynolds and Jeffery Skilling.
[2] The federal name for Chicago.
[3] Quoting Henry Sommer, Editor in Chief, Colliers on Bankruptcy and President of National Association Consumer Bankruptcy Attorneys.
[4] That number has a very fancy mathematical name: it is a mean or average.
[5] The voice screaming in the background is your fifth grade teacher admonishing you to not compare means with medians. Forget what Miss Warner taught you; the U.S. Congress has determined that you shall compare means with medians.
[6] Query: Do you calculate family size according to the Census Bureau standards or as reported on tax returns, or state law, or some other standard. Consider a blended family – a Rhode Island gay couple with two children who get married in Massachusetts. If one of them files bankruptcy, what is the size of the family?
[7] Query: Do you get to deduct twice the arrearage as part of the secured debt and as part of the plan payment?
[8] You will probably have to have an evidentiary hearing in order to justify these expenses.

Recent chat online regarding foreclosures

2007-06-17T15:09:00.000-07:00

Jonathan Becker, a local attorney specializing in foreclosures and bankruptcies, will be online at 2 p.m. Monday to discuss foreclosures in Douglas County.
Moderator: Hi. I am Journal-World reporter Christine Metz and we are here today with Jon Becker, a local attorney who deals with bankruptcy and foreclosures. He is here today to talk about foreclosures. Thanks for coming Jon.
Moderator: So, we've got quite a few questions already. Our first is from LogicMan.
Jonathan Becker: Thanks, Christine. Before we start I have to say that the information provided here during this chat is done as a service to the public. As Legal advice it must be tailored to each specific circumstance and nothing said today should be used as a substitute for competent professional counsel. This chat is not intended to create and does not create an attorney/client relationship between the participants, readers and me and you should not rely upon this information.
LogicMan: Jonathan: Percentage-wise (in your estimation), what are the specific causes of recent local foreclosures? E.g., overspending on credit, losing jobs, physical health problems, bad behavior, divorce, death of the breadwinner, bad mortgage loan choices, etc.? Thanks.
Jonathan Becker: I have a simple saying that the four D's drive foreclosure - death, divorce, discharge from employment and disarray. If I were to put a percentage to each one, death would only be about 5%, divorce would be about 40%, discharge from employment would be about 25% and disarray counts for counts for the rest.
onrywmn: I have heard you can get a house that has been foreclosed at a really cheap price. Is that the case, and if so, do you need a lawyer to help you make a bid?
Jonathan Becker: That occurs sometimes, but no often, particularly in Douglas County. And there are a number of folk who are 'flippers', who bid low in order to get the house and flip it. If a house is going to go at a sheriff sale for a low price, you can expect you will have competition for the house. As a lawyer, I always think it is good to have legal counsel advise you, but there is no legal bar that forbids you on doing it yourself.
Moderator: Words of Wisdom is also interested in the process of purchasing a house headed for foreclsoure and wants to know if a friend or family member can purchase the home through a special process?
Jonathan Becker: The family friend has two options: (1) they can come up with the money and through the owner buy out the mortgage company's interest or (2) wait until the sale, and then assist the homeowner in redeeming the property for the sale price, plus interest. No special process or expressway lane, but they can use the home owner's redemption rights in Kansas to purchase the property after sale.
msshaden: What happens after the foreclosure? My date is June 14. How soon after do I have to move?
Jonathan Becker: Under Kansas law you have redemption rights that are generally three months. If you do not redeem within that time, then the mortgage company can ask the court for an order to the sheriff to eject you from the premises. Take the three month time with a grain of salt. Sometimes mortgage companies fall asleep and forget to ask the court to issue the order to the Sheriff.
gutenberg: I am seeking guidance for preventing foreclosure in the first place. Do you have suggestions for a "building block" approach to managing household finances? I am interested to learn how you determine and organize finances to resolve existing debts, meet essential expenses (groceries, utilities, automobile + operating costs, health care, child care, mortgage, and taxes) and provide for taxes, retirement, and savings. Is the formula as simple as living within your means, proportioning an allowance for each category of expenses, tightening your belt, and rolling up your sleeves to accomplish the heavy lifting of personal responsibility? Thanks for your help.
Jonathan Becker: Luckily, here in Lawrence, Housing and Consumer Credit Counseling does a great job dealing with the issues you have raised. They are in the United Way Building down on Ridge Court and call Robert Baker for an appointment.
Liberty: Is it true that lending institutions don't really have the money in an account that they loan for housing (from a fractional banking system)? Don't they just simply create the money out of thin air by making a digital entry similar to a credit card company, with the backing of the Federal Reserve? Then ask you to pay it back with interest? And if you can't pay it back, they just simply 'write it off' and make less profit. Could you please explain how this works. Thanks.
Jonathan Becker: What a great question! Most of the local lenders either get a 'warehouse' loan from a larger bank or have a line of credit with a major national bank. You may sign paperwork with small town bank, but most small banks immediately transfer most, if not all, of the rights associated with the note and mortgage to either a large national bank or to a Wall Street firm. The large bank or Wall Street firm then bundles the notes and mortgage of thousands of homeowners into a securitized trust and then they go out and sell certificates or shares in that trust to investors. The large bank or Wall Street firm then appoints some entity to be the receiver of payments and gives specific instructions as to what they are to do with each payment received from the homeowner. The small town bank might take a 1 or 2% share in the trust. For a $200,000 mortgage at 10% for 30 years, small town bank will receive close to $80,000.00. So even if small town bank takes a discount on the sale of the $200,000 note and sells it for $!60,000, they will more than make up their money over 30 years. Large Banks try not to write off the loan; they may take a loss, but ultimately, if they foreclose and resell they will recover some of the loss associated with that specific loan. By bundling that loan with others that do perform as contracted, they can mitigate the loss and provide a guarantee return rate to the investors. It is a very complicated procedure but I have tried to cover the high points. Again, thanks for the great Q!
Moderator: We've got a little more time for questions. So if you have any send them in.
clcook76: I have a lender that is holding my payments until after the due date and then sending them back because they say they can not accept partial payments.
Jonathan Becker: Congress passed the Real Estate Settlement Procedures Act (RESPA). RESPA provides you with some specific rights to make sure the mortgage servicer is properly accounting for payments. Many times the problem is tracking the payments, but if you have made the payments, you and your bank should be able to present records that will persuade the mortgage servicer to revamp their accounting. The National Housing Act also provides a number of remedies for homeowners. Congress through RESPA and the National Housing Act has drawn the line and if there is to be a loss, the loss is to fall on the lender, not the homeowner, because we think homeownership is important attribute for people to have. And no congressman or woman or Senator wants to have pictures of people ousted from their homes.
Moderator: So, we've gone through all the questions that have been posted today. Thanks for coming today, Jon. Any closing thoughts before you go?
Jonathan Becker: Thanks for having me. One final thought: As you stated in the article this morning, the worst thing to do is delay in responding when you fall behind. Contact your lender and ask for an application for loan mitigation or contact Housing and Consumer Credit Counseling locally or one of the large national firms, like ACORN in Chicago for assistance in loan mitigation. Recently, I got a woman's loan interest cut from 9.141% to 2.19% and got her delinquency put at the back of her loan at 0% interest. The only reason that worked is because we jumped on the issue before the foreclosure petition was filed. Once the petition for foreclosure is filed, the options for the homeowner become more limited and are not open to creative solutions.

Home on the Range

2007-06-17T10:25:00.000-07:00

"O, Give me a Home, where the Buffalo roam . . ."

The homestead used to be inviolate in Kansas. The Homestead was free from creditors because we did not want 'widders and orphans' dependent upon the public dole. So many people in the 1900's, who started out on on the three major migration trails cutting across Kansas, did not make the final destination. Rather, for them, a place with a view along the trail became their homestead. And for better or worse, women outlived the men. So to protect the homestead Kansas put the homestead completely outside of the reach of creditors. And to make sure, the founding fathers of Kansas made the homestead exemption part of the State Constitution. Then for good measure, they also passed a statute currently found in K.S.A. 60-2301 that makes the homestead exempt. So the homestead is exempt - both constitutionally in Article XV and in the statute, K.S.A. 60-2301.

And then along comes the new Bankruptcy law in 2005. It limits the homestead exemption in certain situations to $125,000. If you have lived in your house for less than 1215 days, then the unlimited homestead exemption of Kansas is not for you. You are limited to $125,000, unless you lived in Kansas the entire 1215 days and moved within the state during those 1215 days. If not, then you might be able to use your previous state's homestead exemption, and if not, then you have the federal exemption of $125,000.

Here in Lawrence, I keep looking for the house worth less than $125,000. Have not found it yet.

Initially when the bankruptcy law was passed we had a number of cases dealing with this issue, but since the early spate of cases, the issue seems to have virtually disappeared from the litigation landscape. Why? Here are three possible explanations.

1. Attorneys may be doing a better job of managing their clients who are under the 1215 day limit and extending the time before bankruptcy so that when they file, they get the unlimited state exemption.

2. Any one who has not lived in their current house for 1215 days does not have $125,000 of equity in their home so use of the federal exemption means that it is a distinction without a difference.

3. The wording of the exemption limitation is such that it does not make any difference to anyone -- under or over 1215 days in their house. No one has that much equity in their house.

The lack of equity is a subject for another day.

Two Years after Starting to Learn

2007-06-17T05:39:00.000-07:00

It was nearly two years ago that I got serious about learning the new law - the grossly misnomered "Bankruptcy Abuse Prevention and Consumer Protection Act." It has been a long strange trip, and it is not over yet. Judges, lawyers, academics and trustees have just begun to unwind some of the mysterious writings that are within the new law. At 530 pages the Act has enough verbiage to give you an Excedrin-size headache.

I looked at my last two years of Continuing Education Credits - 48 hours in 2005-6 and 68 hours (so far) in 2006-7. All of them on the subject of bankruptcy, except for eight hours on aviation law. And I have at least 12 more at the end of this month. And that CLE total does not include the 50+ hours spent at Max Gardner's Bankruptcy Boot Camp in October 2006.

The point is this: This new law has basically required attorneys to go back to school and re-learn the law. How does an attorney represent his or her clients with less study? Just wing it? Or do you take a Scarlett O'Hara approach and leave that question for another day? Is malpractice insurance enough coverage so that if you advise the client to follow a course of conduct that is incorrect, you are covered?

Bottom line: Two years of education is just enough to let you know that you don't know that much.