Consumer Groups Declare the Government to be More Efficient than Private Collection Agencies at recovering Tax Revenue In June 1st and 8th letters to members of the House, groups including Republican Congressmen, the National Treasury Employees Union (NTEU), the Consumer Federation of America, National Association for the Advancement of Colored People, National Association of Retired Federal Employees, National Consumer Law Center on behalf of its low-income clients, and the National Consumers League, urged Congress to reject a proposal to allow the IRS to collect taxes using private collection professionals. The signatories to the letter contend that private tax collection is less cost-effective than using IRS personnel. NTEU stated that with additional agency funding of $296 million, $9.47 billion in known tax debt collections would be realized--a net return of $31 for every $1 invested. By contrast, according to NTEU, the administration's privatization scheme would, in the best case, result in a net return of only $3 for every taxpayer dollar spent. In a related story, the same groups that signed onto the letter to the House also commended the Federal Government on its handling of the Whitewater Investigation, the Federal Highway System, the Panama Canal, Medicare and the War on Terrorism, noting that dollars to the government are dollars well spent. Opponents of the letter were laughing too hard to comment.

521(2)(a) Allows Non-defaulting Chapter 7 Debtor to retain Property subject to Secured Loan by Staying Current In re Price __ F.3d __ (3rd Cir. 2004) The Prices wanted to use their automobiles while remaining current on their monthly loan payments. Lienholder, Delaware State Police Federal Credit Union ("Credit Union"), convinced the Bankruptcy Court and the District Court that Sec. 521(2)(A) of the Code does not permit Debtors to continue possessing cars simply by paying their bills, but instead allows only 4 options: 1. surrender the cars 2. purchase via lump-sum payment 3. negotiate another loan that would attach post-petition liability 4. claim a recognized exemption This issue has been the subject of no fewer than 8 discordant decisions by Federal Courts of Appeal. 4 Courts have held that a Debtor is not limited by the options enumerated in Sec. 521(2), while 4 others have held to the contrary. After a close examination of the text and context of Sec. 521(2)(A), the Appeallate Court concluded that the provision does not prevent non-defaulting Debtors from retaining secured property by remaining current with respect to their loans. ______________________ Taxes Non-Dischargeable McKowen v. IRS __ F.3d __ (10th Cir. 2004) Exemption of income tax debt from discharge allows Federal Government to collect funds lawfully due, even from a Debtor who has received a discharge in Bankruptcy. Debtor transferred assets of his failing corporation to himself. IRS assessed against him individually as transferee for corporate income tax liablities. Debtor argued that his "liability" for corporate taxes was a mere debt, not a tax, and therefore discharged in his personal Chapter 7. The Appellate Court found that the Code's specific exemption of income tax debt from discharge reflects Congress' intention to allow the Federal Government to collect funds lawfully due even from a debtor who has received a discharge in Bankruptcy. Nor is this obligation diluted by the fact that the debt has been transformed from a direct tax liability of a transferor taxpayer into a transferee liability. Clever theory though ... ________________________ Supreme Court to Consider IRA Exemption in the Code Rousey v. Jacoway, 03-1407 The Supreme Court recently indicated that it would consider whether people facing Bankruptcy can prevent certain retirement savings from being used to pay their debts. In the subject case, Richard and Betty Jo Rousey lost on a Federal Appeal in which the Court noted that Congress could easily change the law if it wanted to protect IRAs. The Rouseys had about $55,000 in 2 accounts rolled over from pensions and 401K plans. The 8th Circuit Court of Appeals had held that because the Rouseys could withdraw money the IRAs were akin to "readily accessible savings accounts." Debtors' Attorney, Thomas Goldstein, told Justices in a filing that the case is important because of the popularity of IRAs and the number of people who file for Bankruptcy protection. About 1/3 of American households have a traditional IRA, which "typically represents an enormous investment in one's future," he said. Goldstein said potentially hundreds of thousands of people will be affected by the Court's decision. The Rouseys filed for Chapter 7 Bankruptcy, something done more than 1 million times a year in the United States

Just plain awful ... Bankruptcy Lawyer Loses Clients their Home Judge John R. Hawkinson of District Court in Grand Rapids has ruled in favor of Thomas and Sandra May in a civil suit they brought against a Park Rapids attorney. The judge has ordered Bill Jones to pay the couple $49,721.50 in damages plus interest and attorney’s fees on finding Jones “was the direct cause of the loss of Mays’ homestead.” According to the findings of fact in the case, the Mays’ homestead consisted of a home and 80 acres of land sold at a mortgage foreclosure sale April 3, 2001. The couple had a 12-month period within which to redeem the property and retained Jones to represent them in filing a bankruptcy for the purpose of extending the redemption period. At the time the bankruptcy was filed, Jones advised May he had 60 days from the April 2 filing date, or until June 1, 2002 to redeem the property. On other visits to Jones’ office, however, testimony indicates Jones led May to believe he had until July 12, 2002 to redeem the property. An attorney, who specializes in handling bankruptcy proceedings, testified that a Chapter 7 filing does not extend the period of redemption. Any extension is up to the lender and if the lender agrees to an extension, the agreement should be put in writing. Hawkinson further cited the testimony of two local attorneys (Jim Wallace and Greg Larson), “who are aware of Mr. Jones’ reputation in the community.” Their testimony “indicated that his reputation was not good for truthfulness.”

No smart-ass tagline needed on this one ... Lawyer Disbarred for Bankruptcy Ebezzlement Associated Press JACKSON, Miss. - The Mississippi Supreme Court on Thursday disbarred a Gulf Coast attorney sentenced in January to 26 months in prison for bankruptcy embezzlement. William S. Boyd III of Gulfport pleaded guilty last fall in federal court in Gulfport, admitting he embezzled $163,500 from clients he represented in U.S. Bankruptcy Court, according to federal prosecutors. U.S. District Judge Walter J. Gex III also sentenced Boyd to three years supervised release and ordered him to pay restitution of $395,500.

From the U.S. Department of Poetic Justice, Cruel Irony Division ... AmeriDebt Files for Chapter 11 Protection Credit-counseling company AmeriDebt, charged by federal regulators with using deceptive marketing to bilk hundreds of thousands of customers, filed for bankruptcy yesterday, the company announced. Christine Kraly, a spokeswoman for the Germantown-based company, said the filing for Chapter 11 protection in the U.S. Bankruptcy Court in Greenbelt won't affect AmeriDebt's current operations. The company said payments made by its customers are processed through a separate trust account that won't be affected by the bankruptcy filing. Kraly declined to comment further, but in a statement released yesterday, the company said: "AmeriDebt's first priority is and always has been serving its consumer clients. As such, we recognize that the protections afforded by Chapter 11 are vital for the uninterrupted continuation of these services." In November, AmeriDebt became the first credit counseling company to have a federal lawsuit filed against it. Minnesota, Illinois and Missouri are among five states that have filed separate lawsuits against the company.

Case Updates Default Judgment for Fraud is Res Judicata in Bankruptcy Court In re John W. Catt, II (7th Cir. 2004) One might suppose that findings made in default proceedings would never be given collateral estoppel (issue preclusion) effect because they are not based on a “full and fair” hearing—a standard formulation of the criterion for whether findings are entitled to such effect. E.g., Extra Equipamentos e Exportação Ltda. v. Case Corp., 361 F.3d 359, 363 (7th Cir. 2004); Duferco Int’l Steel Trading v. T. Klaveness Shipping A/S, 333 F.3d 383, 390-91 (2d Cir. 2003); Richardson v. Navistar Int’l Transp. Corp., 231 F.3d 740, 743 (10th Cir. 2000). How could a hearing that is not “full and fair” comport with due process? Yet a significant minority of states, Indiana among them, allow findings made in default proceedings to collaterally estop, provided that the defaulted party could have appeared and defended if he had wanted to. _______________________ Florida S.Ct. Sanctions "We the People" for UPL Florida Bar v. We The People Forms and Service Center of Sarasota, Inc. et al. No. SC02-1675 On April 29, 2004 the Florida Supreme Court issued its opinion in The Florida State Bar v. We The People. The court found that in five cases employees of We The People had engaged in unauthorized practice law, by advising bankruptcy clients (as well as divorce and will clients) on legal remedies, which forms to prepare and how to prepare them, correcting clients' errors, and communicating with third persons such as adversary parties on behalf of the clients, notwithstanding that WTP hired a licensed Florida attorney to provide legal advice to their cusotmers. The Court enjoined WTP from any such activities, and assessed $9,000 in sanctions. ________________________ Fraud Discovered After 180-Day Deadline Cannot be Raised to deny Plan Confirmation In re Valenti (9th Cir. BAP. 2004) The 180-day period to move for revocation of confirmation for fraud is a strict deadline, even if the fraud is not discovered until after the deadline has passed. Section 105 is not a proper basis for changing the deadline. Rule 60(b) is not a basis for revocation. A timely request for revocation of confirmation cannot be amended, after the 180-day period has expired, to add new grounds not pled within the 180-day period. Where a creditor knows of a basis for challenging confirmation and fails to object, the creditor cannot be permitted to use that basis to claim fraud under after confirmation. Moreover, confirmation is res judicata as to all issues that could have or should have been litigated at the confirmation hearing. An issue "could have" been litigated at the confirmation hearing if a party in interest had the opportunity to investigate and litigate it and the debtor did not prevent it from being litigated by fraud, misrepresentation or concealment. ________________________ Foreclosure Sale after BK Filing Void for Failure to Modify Stay In re Jose D. Cueva (5th Cir. 2004) There was a foreclosure sale of property owned by Cueva that was part of a bankruptcy proceeding and therefore subject to an automatic stay pursuant to 11 U.S.C. § 362. The foreclosure sale was invalid, the stay was not modified, and therefore Bustamante was not entitled to possession or ownership of the Property. For the same reasons, Bustamante is not entitled to ownership or possession through Campbell’s interest. Additionally, Bustamante’s other claims fail. Therefore, the decision of the district court was correct and is affirmed. _______________________ Damages for Violation of Automatic Stay do not include "Emotional" Ones In re Dawson (9th Cir. 2004) "Actual damages" under 11 U.S.C. section 362(h) does not include damages for emotional distress suffered by a debtor when a creditor violates the automatic stay.

Debt Collector Fined $1.5 Million David Goch Washington Legislative Counsel Commercial Law League of America In order to resolve claims of illegal conduct, per a consent judgement filed in the U.S. District Court for the Eastern District of Pennsylvania May 12th, a major debt collector will refrain from future violations of the Fair Credit Reporting Act and will pay a $1.5 million civil penalty (U.S. v. NCO Group, Inc., E.D. Pa., No. 992-3012, 5/12/04). The complaint, filed by the Justice Department, at the request of the Federal Trade Commission, alleged that NCO Group, Inc. and affiliates (NCO Financial Systems, Inc.; and NCO Portfolio Management, Inc.) reported incorrect information about consumer accounts to credit bureaus in violation of Section 623(a)(5) of the FCRA and Section 5 of FTC Act.

Debtor Convicted of Concealing Stock Options By Chery Sabol The Daily Inter Lake A Eureka, Montana man pleaded guilty to Federal crimes including making false statements to a local bank and failing to disclose his interest in stock options and other assets. Duncan W. Edwards, 59, entered his plea in Missoula on Monday. Chief U.S. District Judge Donald W. Molloy accepted Edwards' guilty plea and will sentence him on September 10, 2004. Edwards was investigated by the FBI and prosecuted by Assistant U.S. Attorney Bill Mercer. Edwards faces possible penalties of five years in prison, a $250,000 fine and 3 years supervised release for Bankruptcy fraud, plus the same penalties for making false statements on loan and credit applications. According to Mercer's documents, Edwards was convicted of felony theft in Arizona in 1991 and ordered to pay more than $3 million to the Federal Deposit Insurance Corp. as receiver for forward Federal Savings and Loan Association. In 1998 in Butte, Montana Edwards filed for Chapter 13 Bankruptcy protection for himself and his company, Adventure Motorsports. Another Edwards company, Timber Creek Consulting Inc., was not included in the Bankruptcy. In 1999 Edwards converted his Chapter 13 to a Chapter 7, but failed to disclose his interest, and that of Timber Creek, in stock options of Inland Entertainment/Venture Catalyst Inc. The Debtor amended his Petition to include the options held by Timber Creek, but suggested they had no value. In February 2000 a Trustee learned that the price of the options had jumped and advised Edwards' Attorney that he would seek an Emergency Order to sell the stock so the money could be turned over to the Estate. While Edwards told the Trustee that his girlfriend had exercised some of the options and used the money to secure a loan with a Bank in southern California, the Trustee was told by Inland Casino that all the options that had been held by Timber Creek had been exercised by Edwards. Timber Creek netted approximately $445,000 from the sale.

Abuse of Privilege Claimed Against UST By Phil Kent The Washington Times - May 28, 2004 Congress created the U.S. Trustee Program as a pilot project in the 1978 Bankruptcy Reform Act to act as a "watchdog." Yet, recently in Kentucky a case was brought on behalf of Debtors against the check-cashing industry in which 3 out of 50 plaintiffs won a total of $2,206 while their lawyer, John O. Morgan Jr., took $1.32 million in fees. Some clients got nothing.

BANKRUPTCY FILINGS UP 2.8% The number of personal bankruptcies filed for the 12 month period ending March 31, rose 2.8%. This continues the upward trend that is arguably inconsistent with claims of the economic recovery. David Goch Washington Legislative Counsel Commercial Law League of America