In the Matter of: UAL Corp., No. 04-4128 (7th Cir. June 21, 2005)

Recently the injunction blocking the sale of shares by United's ESOP and/or investors whose stock came through the ESOP, was vacated.

Bonus Case Roundup (Happy Father's Day!)

3rd Circuit

Joubert v. ABN Amro Mortgage Group (06/16/05 - No. 04-1373)

Sec. 105(a) of the Code [court may issue any order necessary or appropriate to carry out provisions of the Code] does not afford a private cause of action with respect to alleged violations of Sec. 506(b) [interest nad costs for oversecured creditors].

5th Circuit In Re: UAL Corp. (06/14/05 - No. 04-2704)

See prior Blawg post for details.

8th Circuit Swain v. Dredging, Inc. (06/13/05 - No. 05-6007)

Defendant did not violate discharge injunction of Sec. 524 by delivering a pleading to the Prosecuting Attorney.

9th Circuit Scott v. US Trustee (06/17/05 - No. 03-35411)

Sec. 110 of the Code regulating Bankruptcy Petition preparers is not unconstitutionally vague or overbroad and does not violate the First Amendment.

Last Case Roundup for the time being

Unpaid Workers' Compensation insurance premia constitute priority claims In re Howard Delivery Serv., Inc., 403 F.3d 228 (4th Cir. 2005) Based on the plain meaning of §507(a)(4), because such payments are not voluntary but rather required by statute, and because such payments are not intended to constitute a substitute for wages, the 4th Circuit held that unpaid workers' compensation insurance premia were priority claims. The opinion acknowledged a significant split among reported cases. ____________________________ Prepetition claim not an "administrative" one In re Gasel Transportation Lines, Inc. (6th Cir. BAP 2005) An "administrative" claim must arise from a transaction with the Estate. A pre-Petition secured creditor does not have an administrative claim for reduction in the value of its collateral until it obtains a "liquidated" (e.g. adjudicated) right to adequate protection. Until then, reduction in the value of the collateral must be ascribed to the creditor's pre-Petition transactions with the debtor and cannot give rise to an administrative claim. Only after liquidation of its adequate protection claim can the creditor's damages be characterized as having arisen from a transaction with the Estate. __________________________ §506(c) Waiver not valid In re Inteliquest Media Corporation (10th Cir. BAP 2005) 10th Circuit BAP found that, although some Courts have found §506(c) waivers to be unenforceable or inappropriate, a waiver approved by the Bankruptcy Court and embodied in an Order was enforceable under principles of res judicata. _____________________________ Omissions on Schedules lacked "fraudulent intent" In re Pratt (5th Cir. 2005) Although there were several omissions on Debtor's Schedules, the Bankruptcy Court did not err in finding that the Debtor (who suffered from chronic drug problems) lacked fraudulent intent for the purposes of denial of a discharge.

Cases Roundup for Father's Day Weekend

Debtor's Earned Income Tax credit is exempt

In re James (11th Cir. 2005)

Federal earned income tax credit payments are a form of public assistance: the fact that such payments can be received in a lump sum oes not prevent debtors from claiming them as exempt. ____________________________ Wholly unsured liens may not be avoided in Chapter 7 any more than undersecured liens

In re Pistritto, (Bkrtcy.D.Del. 2005)

Ruling in Dewsnup v. Timm, 502 U.S. 410 (1992) that an undersecured lien could not be stripped-down in Chapter 7 applies to wholly unsecured liens as well. No meaningfull distinction between undersecured and wholy unsecured liens in this context. _________________________ Debtor's Attorney sanctioned for failure to file supplemental fee disclosure (and lack of candor)

In re Nejedlo (Bkrtcy.E.D. Wis. 2005)

In a Chapter 13 case the Debtor's Attorney took money postpetition from the debtor as a fee in another case in which she represented the debtor and deposited it in her operating account. The Attorney did not file a timely supplemental fee disclosure pursuant to Bankruptcy Rule 2016(b), although she did subsequently make a motion for fee approval. The Attorney presented a deposit slip showing that the funds had been deposited in a trust account the day before the hearing. The court reduced the fee application by $1,000 for the attorney's “lack of candor.” _________________________ Investment annuity payments are non-exempt

in re Payne (Bkrtcy.9th Cir. 2005)

Under California law an annuity arising primarily from a life insurance policy is exempt, but one constituting an investment is not. Where an annuity has both life insurance and investment aspects, the Court must determine which aspects control and judge the status of the annuity accordingly (exempt v non-exempt). The annuity in this case provided the 78-year old debtor with guaranteed monthly payments for 10 years. 9th Cir. BAP held that the risks to the insurer and the insured would be one factor in determining the nature of the subject anjuity.

_________________________ Exemption may be limited where Debtor deliberately under-values their home In re Hannigan (1st Cir. 2005)

Bankruptcy court did not err in refusing to allow a Ch. 7 debtor to amend his homestead exemption from "$135,000" to "the maximum amount allowed by State law" (which was $300,000) where Court found that debtor had initially intentionally undervalued the property and acted in bad faith. If the debtor had accurately reported the true value of the property initially, he would have been entitled to the exemption. His bad faith undervaluation cost him the equity in his homestead.

[Ed. Note I have also represented parties in cases like this -- not only the Debtor, but Heirs and Creditors as well. anyone interested in a local perspective may e-mail me or respond to this posting.]

__________________________________

Even illegal provisions in a Ch. 13 Plan may be preserved under res judicata In re Brawders (9th Cir. BAP 2005)

Principles of res judicata and finality, as partly codified in Sec. 1327, can make even “illegal” provisions of a Chapter 13 plan binding. Limitations on this general proposition include:

(i) debtor asserting res judicata “has the burden of proof on all elements and bears the risk of non-persuasion"

(ii) plan should clearly state its intended effect on a given issue

(iii) due process requires adequate notice and procedures

Limitations on res judicata arising from plan confirmation are particularly appropriate when secured claims involved.

Here the Bankruptcy Court erred in finding that a taxing agency's secured claim had been reduced through a prior, confirmed Ch. 13 Plan. ________________________ Failure to produce Promissory Note to document loan can result in non-dischargeability of debt In re Cutler (Bankr. E.D. MI 2005)

Debtor/borrower who was unable to produce promissory notes for alleged loans because the loans were effected through cashier's checks and were allegedly from "the mob" was not entitled to a Ch. 7 discharge due to inadequate record keeping.

In Re: UAL Corp. , No. 04-2704 (7th Cir. June 14, 2005)

Grant of Defendant-United's motion to vacate retained airline leases affirmed where its mistake in failing to abandon the leases amounted to excusable neglect within the meaning of FRCP 60(b).

Bankruptcy case-a-palooza

1st Circuit

Hannigan v. White (06/02/05 - No. 04-2234)

Bankruptcy court did not commit clear error when it denied plaintiff-debtor's motion to amend his homestead exemption as a sanction for undervaluing his property in bad faith.

3rd Circuit

In re General Datacomm Industries, Inc. (3rd Cir. 2005)

Bankruptcy court did not err in refusing rejection of debtor's retirement benefit contract. Involuntary termination of employees on the verge of retirement cannot deprive such employees of the procedural protections of §1114.

In re Knapper (3rd Cir 2005)

When a cause of action is being sold to a present or potential defendant over the objection of creditors, a Bankruptcy court must, in addition to treating it as a sale, independently evaluate the transaction as a settlement under the prevailing “fair and equitable” test, and consider the possibility of authorizing the objecting creditors to prosecute the cause of action for the benefit of the Estate as permitted by §503(b)(3)(B).

Knapper v. Bankers Trust Co. (05/24/05 - No. 03-3552)

Plaintiff's attempt to void 2 default-judgments for foreclosure is foreclosed by Rooker-Feldman doctrine: accordingly, plaintiff's complaint should be dismissed for lack of subject matter jurisdiction.

5th Circuit

Cadle Co. v. Pratt (06/03/05 - No. 04-10495)

In a bankruptcy action, judgment in favor of defendant-debtor is affirmed over plaintiff-creditor's claim that defendant's discharge should not have been granted since he failed to schedule, and actually concealed, certain assets.

In re Pettle (5th Cir. 2005)

"Excusable neglect" warranting reopening of a case under Fed. R. Civ. P. 60(b)(1) cannot be attributable solely to Counsel's carelessness with or misapprehension of the law or applicable Court Rules. Despite Counsel's mea culpa that dismissal of an adversary case with prejudice a year earlier had been a mistake, the Court did not err in refusing to reopen it.

6th Circuit

In re Cluxton (6th Cir. BAP 2005)

Bankruptcy court did not err in holding that a Ch. 13 debtor's mobile home was part of the real estate, and thus the mortgage covering that home could not be modified in the Ch. 13 plan because of the the anti-modification provisions of §1322(b)(2).

Volvo Commercial Fin. v. Gasel Transp. Lines, Inc. (06/09/05 - No. 04-8062)

Bankruptcy court did not err in determining that plaintiff was not entitled to allowance of an administrative expense claim as a result of DIP's post-petition use of trucks in which plaintiff held security interests.

Tirch v. Pennsylvania Higher Ed. (06/03/05 - No. 04-3125)

Partial discharge of plaintiff's student loan debt is reversed where her ailments do not preclude her from returning to work, and are unlikely to persist for a significant portion of the repayment period.

In re Cook, __ B.R. __ (Bkrtcy.N.D.Ohio 2005)

Plan providing for 100% payoff to unsecured creditors but no interest on those claims could not be confirmed. Court held that §1325(a)(4), as interpreted in Hardy v. Cinco F.C.U., 755 F.2d 75 (6th Cir. 1985), required debtors to pay interest on unsecured debts in a 100% plan. Court also held that the proper interest rate in such a situation should be determined using the “coerced loan” approach.

7th Circuit

In the Matter of: UAL Corp. (05/24/05 - No. 05-2093)

In an action concerning United Airline's proposal to terminate its pension plans, United's substitute fiduciary cannot participate in a hearing under §1113 since it is not an "interested party."

8th Circuit

Stephenson v. Greenblatt (05/24/05 - No. 04-2261)

In a proceeding for amounts due under promissory notes signed by defendant, judgment in favor of plaintiff is affirmed over defendant's claim that the agreements cannot be enforced due to a lack of consideration.

Rose v. Educ. Credit Mgmt. (05/31/05 - No. 04-6065)

Bankruptcy court's discharge of debtor's student loan is reversed where evidence showed that plaintiff had current income available to repay the loan.

9th Circuit

Cossu v. Jefferson Pilot Securities (06/03/05 - No. 04-16699)

District court did not err in affirming Bankruptcy court's determination that defendant had a valid claim against plaintiff and such debt was nondischargeable pursuant to §523(a)(2)(A).

In re Lahijani (9th Cir. BAP 2005)

Debtor's request to void default judgments of foreclosure was bared by the Rooker-Feldman doctrine.

Lawyers Wary of New Tax Regulations' Impact on Client Relations

Our thanks to Gloria Norton for this piece.

Some view looming IRS rules as overkill measure that could turn attorneys into snitches. At best, tax attorneys see the latest overhaul of the Internal Revenue Service regulations on tax shelters as inconvenience and overkill -- blasting a shotgun at a mosquito. At worst, they view the changes, slated to go in effect June 20, as a client relations nightmare that could turn attorneys into snitches for the federal government. The revisions are the result of both the Jobs Creation Act of 2004 and changes to Circular 230, the rules that govern attorneys and accountants advising taxpayers on IRS issues. The new rules -- which are designed to crack down on abusive tax shelters -- require law firms and any other tax advisers to create internal advisory committees to ensure compliance. As the deadline for compliance with the new rules looms this month, firms are scrambling to put into place systems to review and regulate the tax advice coming out of their offices. The new rules will require attorneys to report client information more often to the IRS, particularly when giving advice on tax avoidance. Tax avoidance is not illegal. Many high net worth individuals and corporations seek advice from lawyers and other advisers on shelters and other legal ways to avoid paying taxes. But the IRS wants additional information so it can more easily find cases of illegal tax evasion masquerading as legitimate tax shelters. The new rules will require attorneys to put disclaimers on legal opinions they give to clients or instead to perform costly investigations of the facts before rendering an opinion. "They have taken this little pesky problem [of tax shelters] and dropped a nuclear bomb rather than a flyswatter," said Martin Press, a shareholder at Gunster Yoakley in Fort Lauderdale. "My view is that it is the start of the erosion of attorney-client privilege in this country." While not everyone agrees that the new regulations are a threat to attorney-client privilege, many say that frustrated clients will follow the new tax system. Some tax attorneys also say the rules are vague and could cause more problems than they solve, as the firms navigate the most massive overhaul of tax law in over a decade. "I think this may create some tension with your clients," said Donald Duffy, an Akerman Senterfitt shareholder in Miami. "You're going to have to put disclaimers on your opinions. I don't think clients are going to understand it." Much of the attorneys' concern about the new rules has to do with the written opinions tax professionals give to their clients. Individual and corporate clients who seek tax relief often solicit complex written opinions from their advisers. Relying on a written opinion can provide some degree of insulation from IRS censure. But the new regulations limit that ability. Under the new rules, certain types of opinions -- mostly those which the IRS has identified as being potentially linked to tax evasion -- will either have to include a caveat saying that the client cannot rely on the opinion, or the tax adviser will have to conduct an investigation of the client's representations and fully vet the claims before offering an opinion. The latter option would cost the client more money. "When you put something on a letter to a client saying you can't rely on this, it doesn't create the warmest and fuzziest relationship," said Larry A. Campagna, member of the American Bar Association Taxation Section and shareholder at Chamberlain Hrdlicka White Williams & Martin in Houston. "My choice is tell the client that I have to do a full-blown investigation or I have to put this caveat on the letter. There's a lot of paranoia about that process." The changes to the tax law come as the IRS moves toward a tougher stance on enforcement. During the Clinton presidency, the IRS focused more on service, and less on enforcement. Then-IRS Commissioner Charles Rossotti's background was in information technology and management, not accounting. But Rossotti is gone and times have changed. In 2003, Mark Everson was appointed the IRS' new commissioner, and the focus of the agency changed once again. Everson, a former CPA, is nicknamed "The Enforcer" in tax circles. He took office with promises to crackdown on abusive tax shelters used by both corporations and individuals. And the new laws and regulations are what followed. "The idea of a warm, fuzzy IRS didn't work," said Sam Ullman, a partner at Bilzin Sumberg Baena Price & Axelrod in Miami. "Now they are taking people out of service centers and having them do audits. The IRS has concluded that the only way to gain compliance is to be tough." Campagna said the change in direction was part of a usual cycle of crackdowns followed by periods of leniency. However, Campagna said the new rules "have created barriers between tax professionals and their clients that seem excessive and unnecessary." The rules require the tax practitioner, as well as the client, to report the transaction to the IRS. In the past, only corporate entities were required to report tax shelters and other tax avoidance to the IRS. The new rules extend the reporting requirements to individuals and broaden the types of transactions. The tax practitioner also must make the written opinions and client names available to the IRS upon request. This is the section that troubles Press and other tax attorneys. "They are making us into whistle-blowers," said Press, who believes the requirement will apply to attorneys. But that's not entirely clear. Duffy reasons that the new rule will only apply to non-lawyer tax advisers. He said that since the IRS had extended attorney-client type privileges to non-attorneys, the new rules could only narrow them back from non-attorney tax advisers. The ambiguity of that provision is not the only vagueness cited by lawyers and the American Bar Association. The types of legal opinions covered by the new rules are also thought to be unclear by tax practitioners and the ABA. Tax practitioners say that there are many instances when the advice they provide is not entirely about tax avoidance and it is in those instances where the rules are unclear as to whether those opinions are covered. A recent report by the ABA warned tax practitioners about the vagueness of the new rules, but it did not provide attorneys with any guidance on the problems. But the ABA asked the IRS to clarify certain parts of the new rules it considered too ambiguous. The ABA report said the new rules will require lawyers to make "a judgment call about which different practitioners or persons serving in the government may not always agree." "The Final Regulations do not make clear where the line for determining the scope of a transaction should be drawn," according to the ABA report. In the absence of any standardized rules, firms will have to make these determinations on their own. "There are going to be differing interpretations, and that's what scares people the most," Ullman said. "You'll have to ask 'Is this a circumstance in which I have to follow the rules?' The standard isn't exactly clear." "I had hoped the American Bar Association would step into the breach and establish some procedures, and for the IRS to review them," Campagna said. "But each firm is left fending for itself." Press fears the ambiguity and increased regulation might trip up well-meaning tax advisers as well as those promoting abusive tax shelters. "They're going to get the fly," he said. "But they're going to get a lot of other people besides."

Case Roundup -- the Next Generation

1st Circuit

Hannigan v. White (06/02/05 - No. 04-2234)

Bankruptcy Court did not commit "clear error" when it denied plaintiff-debtor's motion to amend his homestead exemption as a sanction for undervaluing his property in bad faith.

5th Circuit

Cadle Co. v. Pratt (06/03/05 - No. 04-10495)

Judgment in favor of defendant-debtor is affirmed over plaintiff-creditor's claim that defendant's discharge should not have been granted since he failed to schedule, and concealed, certain assets.

6th Circuit

Cossu v. Jefferson Pilot Securities (06/03/05 - No. 04-16699)

District Court did not err in affirming Bankruptcy Court's determination that defendant had a valid claim against plaintiff and that such debt was nondischargeable pursuant to 523(a)(2)(A).