In re Charles and Dolores Rey, 04 B 35040

Consolidated: with case ## 04-22548 and 06-4487

Issued: August 21, 2006

Judge: A. Benjamin Goldgar

non-self-calculating chapter 13 plan

self-calculating chapter 13 plan

In re Turnbull, 03 B 50383

Issued August 11, 2006 Judge Jack B. Schmetterer

Thank you Gloria Norton -- ed.

By Elizabeth Bennett
Delaware Law Weekly
08-21-2006

In a decision that could have far-reaching implications if more large American companies file for bankruptcy, the 3rd U.S. Circuit Court of Appeals ruled that multiple pension plans should be considered in the aggregate for purposes of reorganization under Chapter 11.

Circuit Judge Marjorie O. Rendell wrote the 41-page opinion for In re Kaiser Aluminum Corp. after arguments were heard in April by Rendell, Judge D. Brooks Smith, and Senior Judge Ruggero J. Aldisert. The opinion was entered July 26.

"The instant case raises a question of first impression among the courts of appeal: When a Chapter 11 debtor seeks to terminate multiple pension plans simultaneously under the reorganization test, should a court apply the test to each plan independently, or to all of the plans in the aggregate?" Rendell wrote.

The opinion proceeded to consider the arguments of the appellant, Pension Benefit Guaranty Corp., a federal corporation set up in the 1970s to cover failed pension plans. The court concluded that, in the absence of instructions from the U.S. Congress on the matter, to consider the plans in aggregate is the most logical, equitable method.

"I think it’s a pretty significant precedent," said Gregory M. Gordon, a partner with Jones Day in Dallas and lead attorney for Kaiser. "There are industries that are in financial distress. One is the auto parts industry, as well as automakers and the like, that have multiple pension plans. This is the only case at the level of the circuit court that rules on the issue."

A spokesman for the PBGC said its lawyer declined to comment "because plan aggregation is an issue in other current PBGC cases."

In her opinion, Rendell said the court needed to examine the text of the Employee Retirement Income Security Act "for indicia of congressional intent on the issue."

Rendell noted that in every similar case identified, bankruptcy courts have applied an aggregate analysis, "apparently without protest from the PBGC."

The PBGC spokesman took care to point out that Kaiser was not the first case "in which the PBGC has asserted that pension termination should be judged plan-by-plan," adding that it had done so in a 2005 case in Hawaii bankruptcy case captioned In re Aloha Airgroup Inc., among others.

The Kaiser matter, in which the aluminum manufacturer sought to terminate six of its pension plans, was first considered by Delaware’s Bankruptcy Court in early 2004, which allowed it to proceed as part of a reorganization, the 3rd Circuit opinion said.

The PBGC appealed that decision to the U.S. District Court for the District of Delaware. In March 2005, Judge Joseph J. Farnan affirmed the bankruptcy court.

In his decision, Farnan wrote that the pertinent statute -- Section 1341 of ERISA -- does not "expressly mandate an approach to take for an employee with multiple plans, and there is no binding precedent on point," and that absent such directives he did not find the Bankruptcy Court’s conclusion clearly erroneous. According to information on PBGC’s Web site, it was created under ERISA to insure the pensions of "more than 34 million workers and retirees in nearly 29,000 private-sector defined benefit pension plans under its single-employer insurance program."

As of September 2005, PBGC had a $22.8 billion deficit for its single-employer pension insurance program. Through its appeal, according to the 3rd Circuit opinion, the PBGC was seeking to reduce its liability for Kaiser’s pension plans. It pointed out that Kaiser could maintain the four smaller plans and still meet its obligations under reorganization.

The minimum funding required for these four plans was projected to be about $12.8 million between 2004 and 2009, less than 6 percent of the estimated $230 million required to fund all of the plans, the opinion explained.

Money for these plans was not the issue. The problem was that "[i]f we adopted the PBGC’s interpretation of Section 1341, we would be concluding that Congress required courts to apply the reorganization test on a plan-by-plan basis, but provided no guidance on the mechanics of this approach, making it essentially unworkable. We will not adopt a statutory construction that leads to such an anomalous result, especially where the aggregate approach represents an alternative that is ‘neither irrational nor arbitrary,’" the opinion said, citing a 2005 3rd Circuit case, DiGiacomo v. Teamsters Pension Trust Fund of Philadelphia and Vicinity.

Among other arguments, the PBGC also said it is neither fair nor equitable to cease paying pension benefits without economic justification.

"Faced with a choice of burdening some of the participants in Kaiser’s plans and burdening them all, the PBGC contends that equity weighs in favor of the former," the 3rd Circuit opinion said. "We are not unsympathetic to this view. There is undoubtedly a tension between treating similarly situated workers alike and doing the least that is necessary for the company to emerge from bankruptcy. However, we are persuaded that, on the whole, an aggregate approach is more in line with the objectives of the Bankruptcy Code."

The court went on to explain that as an equity court, the Bankruptcy Court is obligated to find the most fair and balanced result, but to terminate a pension plan on the basis of its size would be to necessarily favor one group of workers over another.

"Without some statutory basis or other principled rationale for this result, such disparate treatment smacks of arbitrariness," Rendell wrote. "This strikes us as an unfair result, and it is one that a bankruptcy court sitting in equity should not impose absent a clear mandate from Congress."

In addition, the 3rd Circuit opinion said that applying Section 1341 on a plan-by-plan basis would simply make employee organizations more reluctant to come to the table to make the alterations to collective bargaining agreements that are often required when a company is in distress.

"This would, in turn, lead to a higher number of liquidations and, by extension, a higher number of overall plan terminations. The result would be to leave all interested parties -- the PBGC, workers, retirees and creditors -- worse off as compared to the same number of reorganizations."

Rounding up, up, up!

6th Circuit In Re: Cook (08/09/06 - No. 05-6613) In an action brought by the trustee of a bankruptcy estate, a judgment holding that a bank, in recording its interest as the assignee of a mortgage, did not violate an automatic stay of any proceedings against debtors after they filed for bankruptcy is affirmed where the bank did not transfer or attempt to perfect legal title to the debtors' property, but recorded only the bank's equitable interest in the property, which did not belong to the debtors. 7th Circuit Dick v. Conseco, Inc. (08/11/06 - No. 05-4352) Summary judgment for employer in an action over the effects of bankruptcy on employee benefits for a senior officer is affirmed where the employment contract was not executory for the purposes of 11 U.S.C. section 365(e)(1), thus the early termination clause in the contract was not invalidated and ended employer's obligations upon filing for bankruptcy. 11th Circuit Daewoo Motor Am., Inc. v. General Motors Corp. (08/11/06 - No. 04-15878) Dismissal of plaintiff's claims on the ground of international comity is affirmed over claims that: 1) the district court erroneously concluded that the order of the Korean bankruptcy court that approved the reorganization of plaintiff's Korean parent company did not violate the automatic stay of plaintiff's bankruptcy; 2) the order of the Korean court was not entitled to comity; 3) even if comity was appropriate, the order of the Korean court had no effect on the claims that plaintiff raised against the defendants; and 4) the California bankruptcy court erred when it dismissed the claim for unjust enrichment with prejudice.

bada bing, bada boom, bada Roundup

7th Circuit

In Re: Thomas Consolidated Indus., Inc. (07/31/06 - No. 05-2729)

Dismissal of an adversarial suit in a bankruptcy as a sanction for the bankruptcy trustee's non-compliance with discovery orders and misrepresentations to the court is affirmed where the lower courts did not abuse their discretion in dismissing the action.

8th Circuit

US Commodity Futures Trading Comm'n v. NRG Energy, Inc. (08/04/06 - No. 05-2570)

An enforcement action to enjoin defendant from future violations of the Commodity Exchange Act was not barred by defendant's discharge in bankruptcy.

California Appellate Districts

Frazier Nuts, Inc. v. American AG Credit (08/02/06 - No. F047759)

Sustaining of demurrer and granting of summary judgment in favor of defendant, secured lender of almond processor, and against plaintiff growers are reversed where the plaintiff growers' claims to the proceeds from the processor's sale of almonds are prior in dignity to defendant lender's claim based on its security interest.

In re Jill Liquidating, Inc. (05-25909)

Issued July 12, 2006 Judge John H. Squires

lose your job, file chapter 7, get a job, lose your chapter 7

From Law.com
Courtesy of Gloria B.K. Norton

By John Council
Texas Lawyer
08-01-2006

A recent 5th U.S. Circuit Court of Appeals decision that gets tough on debtors who file for Chapter 7 bankruptcy protection may have some unintended consequences.

In a case of first impression in the nation, the 5th Circuit found that a bankruptcy court can consider post-petition events -- particularly a debtor's changed employment status -- when deciding whether to dismiss a Chapter 7 petition.

Bankruptcy courts traditionally have looked only at debtors' financial situations as of the day they filed their petitions in determining whether debtors qualify for debt relief -- a notion the 5th Circuit is moving away from, three bankruptcy attorneys say.

But the ultimate message of the 5th Circuit's July 20 decision in Cortez, et al. v. United States Trustee may be to encourage unemployed debtors who file for Chapter 7 to stay unemployed until the bankruptcy is final.

Debtors often favor Chapter 7 bankruptcy, because it allows them to clear their debts after liquidating their assets and distributing the proceeds among creditors.

Last year, Congress tightened the filing requirements for Chapter 7 in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Among other things, the act requires that before filing for Chapter 7 protection, debtors must determine if they pass a means test that evaluates their finances for the six-month period prior to the filing.

The Cortez decision involves Carlos Vincente Cortez and his wife, Suzanne Hallman Cortez, who filed jointly for Chapter 7 bankruptcy protection on April 8, 2004, in a U.S. Bankruptcy Court in the Northern District of Texas. The Cortezes had owed $176,000 in secured debt on their homestead and $85,719 in unsecured debt -- most of which consisted of credit card charges -- according to the 5th Circuit opinion.

At the time of the filing, Carlos was unemployed and Suzanne worked as a registered nurse. Their monthly expenses exceeded their monthly income, which qualified them for Chapter 7 relief under pre-reform laws, according to the opinion. But four days after they filed their bankruptcy petition, Carlos was offered a position making $95,000 a year as a human resources director of a company. He accepted the job. That income made the couple's monthly income higher than their monthly expenses, the 5th Circuit wrote.

After the Cortezes provided documents related to Carlos' new employment to Chapter 7 trustee John Spicer during a creditors' meeting on May 10, 2004, the U.S. trustee, William Neary, filed a motion to dismiss their petition under 11 U.S.C. §707(b), the statute that governs bankruptcy dismissals.

Neary asserted in a motion to dismiss that the Cortezes "appear to have the means to repay a substantial portion of their debts through a Chapter 13 plan" and that it would be "substantial abuse" under §707(b) to grant the Cortezes relief under Chapter 7, according to the 5th Circuit opinion.

Chapter 13 bankruptcy allows debtors to reorganize their finances and pay off debtors over a period of years -- a plan that is less desirable to some debtors.

U.S. Bankruptcy Judge Michael Lynn of Fort Worth denied the trustee's motion to dismiss concluding that "post-petition events should not be considered in deciding whether to dismiss a case under section 707(b)."

Lynn determined that he could only consider the Cortezes' financial circumstances as they existed on the date they filed their bankruptcy petition.

U.S. District Judge John McBryde of Fort Worth reversed Lynn, holding that the language of §707(b) makes clear "that post petition events are to be taken into account in ruling" on whether to dismiss a bankruptcy petition.

The Cortezes appealed that decision to the 5th Circuit.

The 5th Circuit affirmed McBryde's decision and remanded the case to Lynn for further consideration.

The 5th Circuit, in an opinion written by Judge Carolyn Dineen King and joined by Judges Carl Stewart and James Dennis, found that §707(b) does not contain language limiting consideration of ongoing developments in a debtor's financial situation. Section 707(b) suggests that bankruptcy courts can consider subsequent developments in a debtor's financial condition -- excluding charitable contributions -- when determining whether to dismiss a Chapter 7 petition.

"Given that post-petition events should be considered up until the date of discharge, we remand this case to the district court with the instructions to return it to the bankruptcy court," King wrote.

The opinion "will tell someone who's lost a job before a bankruptcy, 'don't get a job before bankruptcy is over,' " says Behrooz Vida, a partner in Bedford's Venable & Vida who represents the Cortezes. "It's just so contradictory. That's the problem."

On remand, Vida believes his clients will still be able to qualify for Chapter 7 bankruptcy -- especially since Carlos is unemployed again, and the judge will view the Cortezes' 2-year-old case by the less strict pre-bankruptcy reform act standards.

But Vida believes Cortez will impact post-reform Chapter 7 cases filed by unemployed people, because trustees likely will move to dismiss cases in which a debtor becomes employed during the pendency of a bankruptcy.

"I would have to tell a client if you get a job, you may end up in a 13. By that I mean anyone who [should] qualify as a 7," Vida says.

Jane Limprecht, a spokesperson for the U.S. Trustee Program, declines to comment on the opinion.

MEANS TESTING

Some lawyers believe Cortez is part of an overall trend at the 5th Circuit putting the cases of debtors who pursue Chapter 7 protection through a more rigorous examination before granting them bankruptcy relief.

For example, in 2001's Zibman, et al. v. Tow, the debtors argued that proceeds from the pre-petition sale of their homestead should be protected from creditors in a Chapter 7 proceeding. Texas Property Code §41.001 gave them protection because it prevents seizure of proceeds from the sale of a homestead for six months after the sale of the property, the debtors maintained. But the 5th Circuit ruled that the debtors had to reinvest those proceeds in another homestead within that six-month period for the money to be protected.

In Cortez, the court looked forward in time to determine whether the debtors qualified for Chapter 7 protection, says Hal Lusky, a consumer bankruptcy attorney with Dallas' Lusky & Associates.

"We have always, historically, looked at bankruptcy as being a snapshot in time," Lusky says. "And the 5th Circuit has been chipping away at that pretty regularly."

Areya Pronske, an Irving consumer bankruptcy solo, says means testing -- which, under the 2005 bankruptcy reforms, requires debtors to evaluate the past six months of their finances before qualifying for Chapter 7 -- will combine with the Cortez opinion to make for rough going for some debtors.

"There's some irony here because of 707(b) and means testing," Pronske says. "They want to go back six months [with means testing], but now they want to go forward" with §707(b) analysis, she says, referring to the 5th Circuit.

"There seems to be something inherently unfair about that," Pronske says.

Trustees always inquire about debtors' employment status, says Corky Sherman, a Chapter 7 trustee in the Northern District of Texas and a partner in Dallas' Sherman & Yaquinto.

"It's a boilerplate question. But now it's an even more important question" because of Cortez, Sherman says.

But Sherman does not believe Cortez will have much of an effect on the thousands of debtors seeking Chapter 7 protection in the 5th Circuit's jurisdiction, which includes Texas, Louisiana and Mississippi.

"I would say ... a very small percentage of people are going to be unemployed for five or six months and then get a job that drastically alters their ability to get a Chapter 7 bankruptcy," Sherman says. "It just doesn't happen very often."

Carey Ebert, a Chapter 7 trustee in the Northern District of Texas who also is vice president of the National Association of Consumer Bankruptcy Attorneys, fears Cortez will lead to absurd results.

"You could win the lottery on the day after filing [and a trustee] can't look at that," Ebert says. But a person who has the good fortune of getting a job after filing could have his or her Chapter 7 petition dismissed, she says. "Isn't that ridiculous?"

technorati tags:bankruptcy, 5thcircuit, substantialabuse, BAPCPA

In re Demonica (06 B 00094)

Issued July 31,2006

Judge Manuel Barbosa

3rd Circuit

In re: Kaiser Aluminum Corp. (07/26/06 - No. 05-2695)

When an employer in Chapter 11 bankruptcy seeks to terminate multiple pension plans voluntarily under the "reorganization test," Congress intended the bankruptcy courts to apply the test to all of the plans in the aggregate, as opposed to each plan independently.

5th Circuit

Bridgeport Tank Trucks v. Lien Agent (07/25/06 - No. 05-41141)

Section 506(b) does not permit appellants' recovery of attorney's fees and costs, as part of their oversecured statutory materialmen's lien claims against a bankruptcy debtor's oil and gas wells.

6th Circuit

In re: Dow Corning Corp. (07/26/06 - No. 04-1608)

There is a presumption that default interest should be paid to unsecured claim holders in a solvent debtor bankruptcy case. Further, unsecured creditors can collect attorneys' fees, costs and expenses from solvent debtors where they are permitted to do so by the terms of their contract and applicable non-bankruptcy law.

7th Circuit

In re: McKinney (07/25/06 - No. 06-2538)

Appeal from the bankruptcy court is dismissed where the presumption that a procedural change is to be applied retroactively falls away when the statute making the change specifies that the statute shall not apply to pending cases.