Pension Benefits/Bankruptcy Reform: joint State and Federal effort in Southern Illinois to revamp Bankruptcy law moving ahead By Jim Muir, the Southern U.S. Reps. Jerry Costello, D-Belleville, and John Shimkus, R-Collinsville, and state Rep. John Bradley, D-Marion, are working toward the same goal: changing Bankruptcy laws so that health and pension benefits are entitled to a higher priority if a company goes belly up. The action by Costello, Shimkus and Bradley was prompted by the ongoing situation involving more than 3,100 coal miners and retirees who lost health care benefits after Horizon Natural Resources filed for Bankruptcy. Lawyers for Horizon argued successfully last July and August that -- as part of its Plan of Reorganization -- Horizon should not be responsible for health benefits for union miners and retirees who previously worked for Zeigler Coal and Old Ben Coal. _________________________ Post-Petition interest on educational loan not dischargeable in Chapter 13 In re Delgado, Kan. 2000 Educational Credit Management Corporation (ECMC) objected to the confirmation of a Chapter 13 Plan. In their Plan the Debtors sought to discharge accrued post-petition interest and collection charges on a student loan. Debtors made no assertion of so-called "undue hardship." In its objection ECMC asserted that Debtors' educational loan, including post-petition interest and any other charges, was excepted from Discharge by §§523(a)(8) and 1328(a)(2), and that the Debtors should not "bootstrap" a discharge of this portion of ECMC's claim into their Plan. The Court held that the Code is clear that debts for the repayment of educational loans are not dischargeable: however, the Court noted that the Code contains no direct reference to whether post-petition interest on a nondischargeable student loan can iteslf be discharged. The leading case on the dischargeability of post-petition interest is Bruning v. United States, 376 U.S. 358, 84 S. Ct. 906, 11 L.Ed.2d 772 (1964), decided under the Bankruptcy Act, which dealt with the dischargeability of post-petition interest on tax debts. In Bruning, the Supreme Court held that although post-petition interest on a nondischargeable tax debt could not be paid by the Estate, it accrued during the pendency of the case and became a personal liability of the Debtor when the Bankruptcy was complete. The Supreme Court reasoned that because Congress excepted the tax debt from discharge, it "clearly intended that personal liability for unpaid tax debts survive Bankruptcy." Held: Personal liability of a debtor for post-petition interest accruing on a Pre-Petition, non-dischargeable student loan is not dischargable in a Chapter 13 plan. ___________________ Medical Hardship discharge for school loan requires competent (but not necessarily expert) evidence In re Folsom, M.D.Fla. 2004 Generally, a disability that nts a Debtor from working constitutes "additional circumstances" sufficient to satisfy prong 2 of the so-called Brunner test. However, Bankruptcy Courts have held that a Debtor whose additional circumstances involve the Debtor's health or medical condition must present more than the Debtor's own, unsupported testimony. See In re Swinney, 266 B.R 800, 805 (Bankr. N.D. Ohio 2001) (noting that "[a]lthough such evidence does not have to necessarily consist of extensive expert testimony, such evidence should consist of more than simply bare allegations; that is, whenever a Debtor's health, whether mental or physical, is directly put at issue some corroborating evidence must be given supporting the proponent's position.") Cf. Ryan v. Department of Education, (In re Ryan), 310 B.R. 387, 389-390 (Bankr. S.D. Ill. 2004) (finding that medical records, that acknowledged Debtor's problems but did not specifically find that they prevented her from working, were insufficient). ______________________ Concealment of books and records not found In re Hall, E.D.Va. 2004 William L. Hall filed a voluntary Chapter 7 Petition on June 18, 2003. An adversary proceeding was filed September 22, 2003. In that complaint the Plaintiff alleged that Hall should be denied a discharge under the auspices of 727 (a)(3) due to his alleged concealment and failure to preserve financial records; and under 727(a)(5) for failure to explain and/or disclose the loss of assets. Held: The Plaintiff did not meet his burden of proof. Hall kept books and records of his financial affairs consisting of bank statements, tax returns and other ordinary documentation. In addition, he subpoenaed and provided bank records of Europa Salon and Susan Hall. Furthermore, he provided joint tax returns for 2001 and 2002 and the tax returns of Europa Salon for 2001, 2002 and 2003.

A Pair of Cases about "Judicial Estoppel" Failure to list lawsuit as asset does not result in denial of right to sue Eubanks v. CBSK Financial Group, Inc., 6th Cir. 2004 Judicial estoppel bars a party from asserting a position that is contrary to one the party has asserted under oath in a prior proceeding where the prior Court adopted the contrary position “either as a preliminary matter or as part of a final disposition.” Dismissal of Plaintiffs' lender-liability claim on ground that Plaintiffs were judicially estopped because they failed to disclose that claim in a Bankruptcy proceeding is reversed where the District Court did not consider Plaintiffs' reasons of mistake and inadvertence, as well as an absence of bad faith. Plaintiffs failed to schedule claims sounding in breach of contract, contractual bad faith, tortious interference with contract, negligent misrepresentation, constructive fraud, negligent supervision, breach of fiduciary duty and intentional infliction of emotional distress. The District Court held that Plaintiffs were judicially estopped from pursuing the claim thereafter. Plaintiffs asserted that their Bankruptcy Counsel inadvertently failed to amend their schedules. Held: Because the Appellate Court previously held that evidence of inadvertent omission is a reasonable and appropriate factor to consider when analyzing judicial estoppel, it reversed the District Court decision barring Plaintiffs’ civil claim. Failure to list lawsuit in Schedules leads to dismissal Howell v. Town of Leyden, Mass. 2004 Stephanie and William Howell brought an action against the Town of Leyden and its Chief of Police alleging civil rights violations and intentional torts. A month before filing suit the Howells filed a Petition in the Middle District of Florida. In that Petition the Howells did not list the suit among their assets; ultimately the Howells received their discharge without disclosing the claim. Based on that omission the Defendants moved for Summary Judgment on the grounds that judicial estoppel precluded the suit. The Court agreed. The Howells retained an Attorney to pursue Bankruptcy. That Florida Attorney sent a questionnaire. The Howells never met with their Attorney to review their answers. Nevertheless, the Attorney used their questionnaire answers to prepare the Petition and Schedules. The Howells received the completed forms by mail along with a letter requesting that they review the paperwork. Again, the Florida Attorney never provided the Howells with an explanation of the forms. The Petition was filed on July 19, 2002. The Statement of Financial Affairs asked the Petitioners to list any "suits and administrative proceedings to which the debtor is or was a party within one year immediately preceding the filing of this bankruptcy case." The Howells answered "none." Schedule B asked the petitioner to identify "contingent and unliquidated claims of every nature, including . . . counterclaims of the debtor, and rights to setoff claims." Again, the Howells answered "none." The Howells submitted an affidavit to the effect that they did not understand these questions and believed that they referred to tax and other debt matters. Held: The prerequisites of judicial estoppel are clearly met on these facts: first, the Howells represented to the Florida Bankruptcy Court that they had no claims among their assets — a position contrary to their assertion before the Appellate Court that they had multiple claims against the Defendants. Second, the Bankruptcy Court accepted the Howells' representation in resolving their Petition and depriving their creditors of access to this potential asset. Were the Court to allow the Howells to proceed with this lawsuit, the integrity of the judicial process would be endangered. Right to convert to Chapter 13 is not absolute In re Copper, 6th Cir. BAP 2004 The right to convert from Chapter 7 to Chapter 13 is not absolute and in extreme circumstances conversion can be denied. In the Debtor's 6th Chapter 7 filing, the Bankruptcy Court did not err in denying a motion to convert on the grounds that the conversion would be futile since it was clear that the Debtor lacked the requisite good faith necessary to confirm a Plan.

Those of you who still don't think Doctors are over-paid ... In the past 4 years Americans have spent an ever-growing portion of their paychecks on health care and for the most part gotten less for their money, forcing millions into the ranks of the uninsured or straight into personal Bankruptcy according to Government statistics as well as several independent assessments. According to the liberal consumer group "Families USA," workers' costs for health insurance have risen by 36% since 2000, dwarfing the average 12.4% increase in earnings since President Bush took office. According to that same group, the number of Americans spending more than a quarter of their income on medical costs climbed from 11.6 million in 2000 to 14.3 million this year. For 4 straight years Americans have paid double-digit increases in health insurance premia, bringing the price for a typical family of 4 to nearly $10,000. Finally, according to Families USA premia paid by workers in 26 States and the District of Columbia have climbed 40%.

Gambling losses may justify denial of discharge if they cannot be documented In re Mantra, N.D. Ill. 2004

§727(a)(5) provides that "[t]he court shall grant the debtor a discharge, unless . . . The debtor has failed to explain satisfactorily . . . Any loss of assets or deficiency of assets to meet the debtor's liabilities[.]" In this case the Court observed that: §727(a)(5) is broadly drawn and clearly gives a court broad power to decline to grant a discharge in bankruptcy where the debtor does not adequately explain a shortage, loss, or disappearance of assets. Martin, 698 F.2d at 886 (citations omitted). The Court is not concerned with the wisdom of a debtor's disposition of assets but instead focuses on the truth, detail and completeness of the debtor's explanation of the loss. See In re D'Agnese, 86 F.3d 732, 735 (7th Cir. 1996). The Creditor in this case demonstrated that in January 2003 the Debtor obtained approximately $64,000.00 from the refinance of a first mortgage, but by October the funds were no longer available. The only evidence adduced at trial was the Debtor's testimony that he lost the money gambling.The Debtor offered no documentary or other testimonial evidence to corroborate his explanation. Those gambling loses were not reflected in his bank account records. The Court therefore found that the Debtor had not satisfactorily explained the loss of those funds.

High income and ability to pay 11% of unsecured debt is not "substantial abuse"

In re Shinn, M.D.N.C. 2004

Debtor had unsecured debts of $145,000 and in a 36 month Plan could pay Unsecured Creditors an 11% dividend. Given Debtor's mortgage debt of $763,197.87 and the likelihood that the mortgage would not be fully paid in a foreclosure, resulting in an additional unsecured deficiency, the Court found even that figure optimistic. A representative of the Chapter 13 Trustee who reviewed the Debtor's income and expenses testified that the Debtor did not have sufficient disposable income to fund a 36 month plan that would pay 25% to unsecured creditors. Based on the foregoing the Court found that there had been no showing that the Debtor had the ability to pay for purposes of §707(b).The Court also considered the circumstances leading to the filing of the case and whether there were extenuating circumstances such as illness, loss of employment or calamity.

Debtor need not obtain Court authority to employ Divorce Attorney during Chapter 13

In re Powell, Bankr. N.D. TX, 2004

The Debtor employed Divorce Attorneys who requested compensation and reimbursement of $65,276.79. While the Court did not enter an order authorizing the Debtor to retain Divorce Counsel during the Chapter 13 case, it also concluded that a Chapter 13 Debtor does not need Court authorization to employ an Attorney. The Code provides that a “Trustee” may, with Court approval, employ an Attorney. §327(a), (e). This requirement does not extend to the Debtor. However, note that the Code does require Court approval of fees.

Pre-Petition Attorneys' Fees not dischargeable in Chapter 13

In re Busetta-Silva, 10th Cir. BAP 2004

Debtor's Attorney ran up several hundred dollars in prepetition services that remained unpaid as of the filing. The Attorney filed a motion for Court approval of the fees.The only issue addressed at the final hearing was whether those fees could be paid as an administrative expense. The Attorney, the Trustee and a third party appearing amicus curiae argued without opposition in favor of allowing the fees. Shortly after the final hearing the Court entered an Order allowing all Post-Petition fees and costs requested as an administrative expense (the "Postpetition Fee Order"). The Court did not rule on the Pre-Petition fees in the Postpetition Fee Order, stating that the matter remained under advisement.The Court subsequently entered its memorandum opinion and order disallowing the Pre-Petition fees as an administrative expense and allowing them as a general unsecured claim to be paid pro rata with the claims of other unsecured prepetition creditors.The Bankruptcy Court held that, despite case law and sound policy in favor of treating the Pre-Petition fees as an administrative expense, such treatment was not expressly authorized by §§330 or 507, and that those sections could not be interpreted to grant such claims priority in light of the fundamental distinction between prepetition and postpetition assets and liabilities.The 10th Circuit BAP reversed, apparently holding that fees incurred prepetition could be deemed administrative expenses under §503(b)(1)(A), treated as priority claims under §507(a)(1) and paid in full through the Plan.

Note: The opinion fails to explain exactly how services performed prepetition may be deemed administrative expenses.

Deficit Dilemma

The war on terror is set to lead to a sharp rise in the budget deficit. According to White House projections the deficit will hit a record high this year, rising from $375bn in 2003 to $445bn. The Administration cites the war on terror and the economic downturn as contributory factors. Also cited were John Kerry's Botox treatments and blow-drying expenses attributable to John Edwards.

Raising Arizona now a $178,590 Undertaking

The 2003 cost of raising a child for middle-income families (e.g. those earning $40,700 to $68,400 per annum) was projected at $178,590 according to a recent study by the U.S. Department of Agriculture. Estimates are provided for major components of the budget by age of child, family income and region of residence. The estimated annual expenditure is $10,760. The monthly expense is $897.

Note: Government statistics on cost of living might be helpful in defending a Chapter 13 budget, especially where Trustees or Judges talk about using the IRS expense standards as budget guides. Some links are provided at BankruptcyMedia.com - in right column under "Library" find "Budget Data