Suffolk Lawyer

 

When I sat down to write this month’s column for the Suffolk Lawyer, I was prepared to discuss several recent cases interpreting the means test.  However, I could not get over the great number of splits of authority over almost every single issue.

 

The Means Test is the focal point of the drastic revisions that Congress made to the Bankruptcy Code in 2005.  That was when the legislature thought it was necessary to tighten the existing bankruptcy law and make it more difficult for consumers to eliminate debt, especially for those who Congress thought could afford to pay something to their creditors.

 

Unfortunately for bench and bar, the statutory wording of the Code provisions underlying the means test is anything but clear and unambiguous.

 

 

 

Ironically, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005  (“BAPCPA”) was intended “to improve bankruptcy law and practice by restoring personal responsibility and integrity in the bankruptcy system and ensure that the system is fair for both debtors and creditors.”

 

Yet, when the new law was enacted in 2005, Bankruptcy scholars across the land declared that so many of the provisions of BAPCPA were so poorly worded that  bankruptcy court judges would be perpetually perplexed as they tried to interpret them.  They were right.  The relatively new statute contains typos, sloppy choices of words, hanging paragraphs, and inconsistencies. 

 

We now have bankruptcy courts, U.S. District Courts, and U.S. Courts of Appeal issuing decisions almost daily in an effort to make heads and tails over what Congress intended.  The worst part?  There are minority and majority views to almost every possible issue, and even a few hybrid views to boot.

 

Here’s more irony:  BAPCPA was supposed to limit judicial discretion.  Instead, the legislation, which leaves a great deal to be desired, actually requires significant judicial discretion simply to interpret the statute.  Congress failed to create the “bright line” which it intended, a concept Long Island Bankruptcy Court Judge Robert E. Grossman cited in one of his recent opinions.

 

This confusion has led to a spate of law review articles with deriding, mocking and skewering titles such as “BAPCPA:  Trying to Make Sense Out of Nonsense.”  I can come up with some of my own: “BAPCPA is Bupkis” and “Mean Streets to the Means Test – An Ugly Road to Bankruptcy Court.”
 
The Ambiguity of the New Laws Makes Bankruptcy Challenging

 

What all this means is that if an issue has not yet been decided in your jurisdiction, counsel has little guidance as to how the local bankruptcy court will rule.  So imagine the challenge of trying to advise clients when a judge in Connecticut has held one way, a judge in New Jersey has reached a decision that is totally opposite, and our jurisdiction has not even addressed the issue yet.  And then, most issues are also finding their way up to the appellate courts.

 

BAPCPA has created a wide split among courts, not only upon the interpretation of whether a consumer has too much income to qualify for Chapter 7 relief, but upon the methodology used to calculate what income really is. 

 

Courts seem to be debating endlessly concepts such as whether projected disposable income requires either an “anticipated” or “historical” calculation of income. In other words, do you use a backwards-looking approach or a forwards-looking approach?  Judge Grossman has already written a number of decisions seeking to make this distinction.  (FYI, he’s a forward-looker.)

 

 

Inconsistencies in BAPCPA language have created two approaches to addressing conflicting interpretations.  You have the strict constructionists who believe a statute should be interpreted on its face, regardless of the result, and those who believe that maintaining a logical outcome based on the legislature’s original intent is paramount. 

 

We’ve come to learn that Judge Grossman is of the school of thought “supported by reason.”  He recently wrote in one of his decisions interpreting the means test: “Absent clear binding authority in this Circuit, this Court will not adopt a reading of the statute which does not make any sense.”

 

As Judge Grossman wrote just last week in In re: Rabener, “this Court does not share the view that a rigid application. . . is required because the 2005 BAPCPA amendments were intended to blindly reduce judicial discretion. This Court does not believe that it is required to reach a decision that is absurd on its face merely to satisfy an unsupported argument that eliminating or reducing judicial discretion is more important than reaching a sound conclusion consistent with reason.”  In re Rabener, No. 809-75719, slip op. (E.D.N.Y. January 21, 2010).

 

Do you look at the “plain meaning of the statute” or do you try to ascertain “what Congress originally intended?”  Perhaps that depends on which side you’re on.

 

So what can the bankruptcy practitioner do when courts across the country are divided on issues?  Hope for the best.  Such uncertainty makes practicing bankruptcy law post-2005 daunting to say the least. But all those divergent decisions sure make for good reading.

 

  

 Written by Craig D. Robins, Esq.
 

 

Some debtors like bankruptcy so much, they come back for more, and more, and even more. . .  sometimes using multiple bankruptcy filings to delay foreclosure proceedings for years.  But when is enough, enough?

  

Any experienced bankruptcy attorney knows that judges will not hesitate to sanction counsel for filing a case in bad faith.  The law is very clear that a case cannot be filed for the sole purpose of delay, without any good faith intent to follow through with a Chapter 13 plan.

 

 

When Congress overhauled the bankruptcy laws in 2005 (BAPCPA), it imposed several new provisions designed to stop the problem of bad faith serial filers.  I wrote about some of these changes in my Suffolk Lawyer column in November 2005:  Consumer Bankruptcy Debtors Face New Limitations for Repeat Filings .

 

In particular, there are new exceptions to the automatic stay.  For example, if a debtor had one pending bankruptcy case in the preceding year, then the automatic stay only lasts 30 days, effectively shifting the burden to the debtor to make an application to extend the stay.  If there was more than one filing in the prior year, then the debtor is not entitled to any automatic stay at the time of filing.

 

Even with these provisions, debtors soon learned to game the system.  After one spouse’s bankruptcy was dismissed, the other spouse would then file, and then this “tag team” filing approach would go on for years.  Although this conduct was nothing new, Congress addressed this problem too, with an “in rem” provision in BAPCPA.
         
Debtors Filed 10 Cases to Delay Foreclosure

 

On December 21, 2009, Judge Trust issued companion decisions in two separate, but related cases, outlining the excessive measures taken by two Long Island debtors who filed a total of ten bankruptcy petitions over a 12-year period to stop foreclosure on their jointly-owned home.  In re Janet Blair (Case No. 09-76150-ast) and In re Allen Gary Smith (Case No. 09-77562-ast).

 

The decision was precipitated by a motion brought by the mortgagee, seeking “in rem” relief against the premises.  Most of these filings were Chapter 13 cases filed over a four-year period between 2005 and 2009.  Almost all of them were filed on the eve of a scheduled foreclosure sale.
 
“In Rem” Relief in Bankruptcy Proceedings Stops Foreclosure Delaying Tactics

 

“In rem” relief is when the bankruptcy court grants an order indicating that a particular piece of property will not be affected by any future bankruptcy stays, effectively eliminating any benefit of the “tag-team” filing approach.  “In rem” originates from the Latin phrase for a lawsuit directed against property, rather than a person.

 

In the Blair / Smith cases, the judge immediately lifted the stay and subsequently granted in rem relief, stating that the serial filings were evidence of the debtors’ bad faith, and also evidence of the fact that the debtors were abusing the bankruptcy process for several years.
 
Statutory Authority for In Rem Relief.  In his decision, Judge Trust, delivered a well-written and detailed analysis behind the statutory authority providing for in rem relief.  In doing so, the judge essentially reiterated his holding in a two-month-old similar decision, which has since been published.  In re Montalvo (416 B.R. 381).

 

One of BAPCPA’s amendments was the addition of Section 362(d)(4) which provides the statutory authority to grant in rem relief.  Pursuant to Section 362(d)(4), the Court can grant in rem relief from the stay as to a mortagee’s interest in the property, such that any and all future filings by any person or entity with an interest in the property will not operate as an automatic stay against the owner and its successors and/or assigns for a period of two years after the date of the entry of such an order.

 

To obtain this relief, the mortgagee bears the burden of showing that the various petitions filed by debtors are part of a scheme to hinder, delay and defraud the mortgagee.

 

A key issue in such cases is whether the court can infer an intent to hinder, delay and defraud creditors when it appears that there have been multiple, strategically timed bankruptcy filings.  Judge Trust took the established view that holds that the mere timing and filing of several bankruptcy cases is an adequate basis from which a court can draw a permissible inference.

  
However, Judge Trust also observed that the debtors demonstrated no intent to make the bankruptcy work.  They did not make plan payments, show up in court, or provide the trustee with required documents.

 

 

Judge Robert E. Grossman also addressed this issue just over a year ago, and wrote about the standard of proof necessary to obtain in rem relief.  In re Lemma (394 B.B. 315 (Bank.E.D.N.Y. 2008).

 

In that case, which involved a third Chapter 13 filing (with debtor representation by my friend, Babylon bankruptcy attorney Michael A. Kinzer), the judge concluded that the mortgagee was not entitled to in rem relief (and not even entitled to dismiss the case).

  
The reason why Judge Grossman denied the mortgagee’s application was because the mortgagee, as the party seeking in rem relief, had the burden of proving that the current filing was part of a scheme; that the scheme involved the transfer of real property, or multiple bankruptcy filings; and that the object of the scheme was to hinder, delay and defraud the mortgagee.

 
The mortgagee in that case was unable to provide the court with any evidence  other than the fact that the debtors filed three petitions.

 

Thus, multiple filings, alone, are not adequate to find intent to hinder, delay and defraud.
 
 

About the Author.  Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the January 2010 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Patchogue, Commack, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.

Four Suffolk County Supreme Court judges presented a views-from-the-bench program on December 9, 2009 about Mortgage foreclosure.  The well-attended seminar at the Suffolk County Bar Association had over 100 participants.  Cheryl Mintz was the moderator.

 

The program enabled the judges to provide some important insight into the rapidly-growing area of foreclosure litigation, especially considering a flurry of new legislation dealing with foreclosure procedural law and practice.

 

 

Judge Ralph F. Costello commented on the lack of a sufficient number of Supreme Court judges that are necessary to adjudicate the ever-increasing number of foreclosure cases.  He acknowledged the difficulty that the Office of Court Administration would have to provide additional judgeships, but felt that it was entirely reasonable to find budgeting to enable each judge to hire a second full-time law clerk. Doing so, he believed, would enable each judge to double their caseload.

 

There was an in-depth discussion about Governor Patterson’s new comprehensive foreclosure legislation which was just passed last month.  The bill will greatly strengthen protections for homeowners, tenants and even neighborhoods, which can be plagued by blight.

 

 

Judge Peter H. Mayer discussed the concept of standing and assignment, which is becoming an increasing source of consternation for mortgage companies.  Apparently, there are many problems resulting from the sale of mortgages on the secondary mortgage market.  Many foreclosing plaintiffs lack standing to bring the foreclosure suit, which can result in the dismissal of the case.

 

 

Judge Thomas F. Whelan broke his discussion into two sections, dealing with how the Court responds to foreclosure matters if an answer is filed, and if no answer is filed.  He discussed the importance of asserting affirmative defenses if available, and also addressed the new Request for Judicial Form that is now used in foreclosure actions.
 
He also discussed how the law clerks review cases to make sure that certain prerequisites have been met, such as adherence to the relatively-new 90-day foreclosure notice rule, whether parties appeared at mandatory settlement conferences, whether the subject property is owner-occupied (if so, special protections under the new statute exist), and whether additional default notices as required by the CPLR have been provided.

 

 

Judge Jeffrey Arlen Spinner, who is in charge of the Mortgage Foreclosure Conference Part, discussed the relatively new requirement of mandatory settlement conferences for all foreclosure proceedings involving sub-prime mortgages.

 

“My role as a judge is to be impartial.  I try to broker a settlement, if that’s at all possible,” said the judge.  He commented on the high number of these conferences, now numbering between 100 and 120 each Tuesday, saying “we’re buried in cases; we’re buried in motions.”

 

Ray Vorhees, Law Secretary to Judge Mayer, also addressed the audience to highlight the fact that the legislative intent of these various statutes is to protect homeowners, and that the court must and will honor the import of such legislative intent.

 

 

Towards the end of the evening, Cheryl Mintz asked Judge Spinner to comment on the case everyone wanted to hear about – Horoski – and the audience expressed their excitement.  This was the very recent case in which the Judge totally cancelled the mortgage in a foreclosure proceeding citing the bank’s egregious conduct. [See Judge Cancels Mortgage Due to Mortgagee’s Shocking Behavior in Long Island Foreclosure Action ].
 
Judge Spinner, however, mentioned a prohibition on commenting publicly on any case that is pending.  He did mention that a new issue had arisen in the case which will result in the matter appearing before him on his calendar in the next few weeks.

 

In response to some pressing commentss about the case from one rather-insistent attendee, Judge Spinner did mention that his decision was one that is based in equity, rather than one based on law.

 

 

New Long Island case now permits lien-stripping that was previously impossible
 
One of the biggest problems that homeowners face in today’s recessionary economy is the loss in value to their homes.  It is not uncommon to see houses that have dropped 50% in value over the past few years, leaving many to wonder if it is even worthwhile to keep their home.

 

As such, many homes are “under water” or “upside down” meaning that the homes are worth less than the balance due on the mortgage.  In many cases, there are two mortgages and the home is worth less than the first mortgage, making the second mortgage totally unsecured.

 

Up until recently, there was little recourse available to consumer bankruptcy filers to eliminate mortgages that were underwater.  However, a new decision released last month has now changed all that, permitting cram-down of second mortgages in Chapter 7 bankruptcy cases.

 

What is a Cram-down in Bankruptcy?  Also known as a “strip-off”, a cram-down is when a debtor modifies the rights of a mortgagee, who is a secured creditor, by having the bankruptcy court strip off the secured status of the mortgage because there is insufficient value in the property to secure any part of it.

 

A cram-down removes the mortgage as a lien on the premises.

 

 

The existing state of the law has been that only Chapter 13 debtors had the unique ability to cram-down mortgages, and then, only the second mortgage.  Chapter 7 debtors did not have any ability to cram down any mortgage.

 

The reason for this is that the provision for cram-down is § 1322(b)(2), located in Chapter 13 of the Bankruptcy Code, which limits debtors from cramming down first mortgages.

 

 

On November 25, 2009, Central Islip Bankruptcy Judge Dorothy T. Eisenberg issued a decision permitting Chapter 7 debtors to cram-down second mortgages.  In re:  Mark T. Lavelle, et. al (09-72389-478, Eastern District of New York).

 

An unusual aspect of this case is that the debtors did not even file an application seeking to cram-down their mortgage – it fell in their lap.  The debtors are typical consumers residing in Levittown who sought Chapter 7 relief in April 2009.   They were represented by Long Island bankruptcy attorney Norman M. Mendelson, Esq.

 

The home was in the name of the husband and it was worth $400,000.  The balance owed on the first mortgage was $411,000 and the balance on the second mortgage was $9,900.  Both mortgages were held by Bank of America.

 

In May 2009, the mortgagee, represented by Steven J. Baum, P.C. filed a motion seeking relief from the stay on the second mortgage based on the fact that the debtor had no equity in the property.
 
However, the debtor defended that motion by filing opposition in the form of a cross-motion seeking to avoid the mortgagee’s lien on the second mortgage under Bankruptcy Code § 506(a), arguing that the creditor only had a secured claim to the extent of the value of its collateral, and an unsecured claim for the balance.

 

The debtor argued that even though this was a Chapter 7 case, the ability of the Court to modify wholly unsecured liens against a debtor’s residence in a Chapter 13 case under § 1322(b)(2) should be extended to Chapter 7 cases.

 

Judge Eisenberg, in a very complicated and complex, technically-worded decision which discussed two Supreme Court cases, first noted that the debtor’s motion should have been brought by adversary proceeding, but nevertheless permitted the debtor to proceed by motion, which she pointed out was “technically incorrect.”

 

 

The Court addressed the 1992 Dewsnup Supreme Court decision which held that a Chapter 7 debtor may not “strip down” a first mortgage to the fair market value of the property.   However, there is a difference between “stripping down” a mortgage and “stripping off” a mortgage.

 

Stripping-down refers to removing that portion of a mortgage that is unsecured, which is done pursuant to § 506.   On the other hand, “stripping off” is essentially cramming down a mortgage, which means removing its lien status altogether.

 

The Judge observed that since Dewsnup, the issue of whether wholly unsecured liens may be “stripped off”, as opposed to “stripped down”, has been a contentious issue between various bankruptcy and district courts and their respective Courts of Appeals.

 

Judge Eisenberg then discussed the 1993 Supreme Court case of Nobelman which barred Chapter 13 debtors from relying on § 506 to bifurcate an undersecured mortgage to secured and unsecured components.  (I wrote an article about Nobelman for the Suffolk Lawyer 16 years ago).
 
However, the Nobelman case only applies to situations where a portion of the mortgage remains secured, and the Supreme Court did not address situations where the mortgage is totally unsecured.   Consequently, debtors have been able to cram-down totally unsecured second mortgages in Chapter 13 cases.

 

 

Judge Eisenberg, after utilizing a rather complex analysis, determined that the second mortgage was wholly unsecured (which means that § 506(a) does not apply), and that the plain meaning of § 506(d) required the lien to be voided.  The Judge went on to say that there was no logical reason that this result should be any different in a Chapter 7 context as opposed to a Chapter 13 situation.

 

Thus, the Judge voided the lien on the second mortgage.  Since this was a Chapter 7 case, the debt, now considered an unsecured debt, became totally discharged.  A big win for the consumer.

 

 

There is a record number of homeowners facing foreclosure, and there appears to be a groundswell of support by politicians, bankruptcy attorneys and consumer groups for a change to the Bankruptcy Code to deal with this.  As such, perhaps some judges, like Judge Eisenberg, are taking a position rooted in public policy that recognizes the existing problem.

 

Many provisions in bankruptcy law have favored the mortgagee and secured lender over the past two decades.  It now looks like the tides may be shifting in the other direction.

 

This case will likely result in a number of Chapter 7 cram-down proceedings being brought.  As the Judge put it:

 

“Arguments that debtors will benefit from possible windfalls, are not persuasive. Markets are uncertain, and it is not certain such a scenario will ever occur. Secondly, the creditors’ right to foreclose will not result in any present monetary gain for the creditor since there is no value in the property for them.”

 

“Bankruptcy is not intended to benefit either the creditor in securing a potential increase in property value, or the debtor. However, where the future is unknown, bankruptcy principles of giving the debtor a fresh start should apply.” 

 

Written by Craig D. Robins, Esq.
  
Same-sex couples have many more issues to contend with than heterosexual  married ones — especially when it comes to filing bankruptcy in New York.  Everything about the federal bankruptcy law is geared towards the conventional family.

  
Alas, nowhere in the bankruptcy statutes is there sufficient guidance for dealing with non-conventional family units, let alone same-sex couples who were married in other states.

 
That does not mean that gay or lesbian consumers in committed relationships can’t file for bankruptcy; it just means that they have to approach the bankruptcy petition and means test more carefully.

 
Having represented a number of gay and lesbian individuals and couples, the following issues routinely come up in providing bankruptcy advice.  Unfortunately, some of the answers are not necessarily so clear.
 
Can a same-sex unmarried couple file a joint bankruptcy? 

 

There is no difference between gay or straight non-married couples.  Only married couples can file a joint bankruptcy petitions.

 

 

Recently, a handful of states adopted legislation recognizing same-sex marriage.  They include Massachusetts, Connecticut, Iowa, Vermont, Maine, and for a short time, California.

  
Consequently, many New York residents in same-sex committed relationships eagerly went to these state to tie the knot.  What if one of these gay or lesbian married couples now wants to file a joint bankruptcy petition in a New York bankruptcy court:  can they?

 
Here we have a conundrum.  According to the Defense against Marriage Act, a federal law dating back to 1996, a state is not required to recognize a same-sex marriage in their state even if the couple was legitimately married in another state.  However, Governor Paterson did not feel that this produced a fair result and issued a directive in May 2009 requiring all state agencies to recognize same-sex marriages performed out-of-state.

 
Bankruptcy is a federal procedure based on federal laws.  When these laws fail to address certain issues, such as legitimacy of marriage, then state law can be used to amplify the federal law.  Since New York does not currently have any law that explicitly recognizes such marriages (Governor Paterson’s directive only applies to state agencies), then it appears that the a New York bankruptcy court would not be able to recognize an out-of-state same-sex marriage.

 

I have not yet had the opportunity to file a joint case involving a same-sex married couple, but given that opportunity, I certainly would give it a try.  The Office of the United States Trustee would then have the difficult decision on whether they should seek to dismiss the case.

  
Even if they raised such objections, a sympathetic judge could nevertheless rule in favor of the debtors and come up with some legal justification for permitting the joint bankruptcy filing.  It is just a question of time before we see such a filing in a New York bankruptcy court.  Earlier this year I even placed a post on my bankruptcy blog offering to do such a filing on a pro bono basis, just to set a precedent.

 

How do you calculate the size of the household for means test purposes when you have a same-sex couple with a domestic partnerships?  
 
The real issue here is essentially no different for any two partners or roommates living together, whether they may be straight or gay.  Simply calculate all of the people who occupy the household, whether they are related or unrelated.

 

Do you include a same-sex partner’s income on the means test? 

 

The means test only requires a debtor to include the income of the spouse.  If you are representing an individual debtor who is in a same-sex unmarried relationship in which the parties share their finances, the best approach is to come up with a specific monthly contribution amount from the non-filing partner.

 
If the individual debtor is in a same-sex marriage, the debtor can conceivably argue that the spouse’s income and finances should be included in the means test, or, alternatively, argue that the spouse is merely a roommate, considering that New York has yet to make the arrangement legal, and that the income does not need to be included.

 

Does the United States Trustee look any differently at bankruptcy petitions filed by debtors who have same-sex partners?
 
My experience has been that the United States Trustee’s office does not treat debtors in same-sex relationships any differently than debtors in straight relationships.  However, I do get the feeling that they may want to avoid any politically-charged controversy involving gay rights issues.

 

What’s down the road? 
 
Eventually, Congress may recognize the existence of same-sex marriages and domestic civil unions in bankruptcy proceedings and provide statutory authority for dealing with such issues.  Until that happens, we can only look towards the time when New York legalizes same-sex marriage. 

 
In October, Governor Patterson called same-sex marriage a civil right and announced that he wanted the legislature to take quick action and adopt such legislation.
 

 Husband Used Bankruptcy to Eliminate Debt Fraudulently Incurred by Deceased Wife
 
One of my most interesting Long Island Chapter 7 bankruptcy cases was a number of years ago.  It involved an 80-year-old widower who learned some incredible, disturbing and unfortunate secrets about his wife’s finances while she was on her deathbed.

 

By using some creativity and the filing of a consumer bankruptcy case, I saved the day for my client.

 

Filing Bankruptcy Proved to Be the Ideal Solution to an Unusual Problem
 
Just a week after his wife had died, the widower, accompanied by his adult children, consulted with me about a very serious debt problem he had only discovered two weeks prior.
 
His deceased wife, also 80 years old, had been in the hospital, diagnosed with a terminal disease.  When the widower walked into her hospital room to pay her a visit a week before she died, he caught her trying to shove some papers under her covers.  These were credit card bills and lawsuit papers.
 
Wife, Unbeknownst to Husband, Incurs Substantial Debt in His Name
 
As it turned out, for years, the wife, who had handled all of the family’s finances, opened numerous credit card accounts in the husband’s name by forging his signature.  She did not tell him about this.  She had all the credit card bills sent to a post office box.
 
Just a week before she died, the husband learned that not only was he obligated to pay over $60,000 to credit card companies for debts he had absolutely nothing to do with, but several of the credit card companies had even commenced litigation against him.  The widower wanted to know what to do.
 
Although we discussed disputing some 15 different accounts, or defending the various suits that had been brought in state court, I decided that the easiest and most efficient way to resolve the problem would be to file a Chapter 7 bankruptcy.
 
Using Bankruptcy to Resolve the Problem
 
The tricky aspect of this case was that the debtor-husband owned his entire Locust Valley home free and clear of all liens, far exceeding the homestead exemption.  The unprotected home did not concern me because my strategy was to totally eliminate all creditors. 

 

I prepared the bankruptcy petition and listed the various credit card accounts totaling $60,000, but indicated that each and every credit card debt was disputed.
 
The bankruptcy court assigned the Chapter 7 case to Long Island bankruptcy trustee Kenneth Kirschenbaum.  He almost fell off his chair at the meeting of creditors when he learned that there was a valuable house that was almost totally non-exempt.  Keep in mind that at the time of filing, the homestead exemption was only $10,000 and the house was worth several hundred thousand dollars.  The trustee immediately began salivating over the prospect of administering a nice asset case.
 
However, I told the trustee, “not so fast, Cowboy” (or words to that effect).  I explained the situation and said that I would be filing an application for a “bar date” in which creditors would be notified that they have only so much time to file claims.  I then told the trustee that I would be filing objections to every filed claim.
 
Trustee Can’t Administer Bankruptcy Estate and Debtor Gets Discharge
 
Well, it turned out that even though there were 15 creditors, only six of them filed claims. (Remember, this was many years ago when creditors often neglected to file claims).  I then successfully objected to every claim, on the ground that the husband did not incur them.
 
That left a bankruptcy estate that contained a very significant non-exempt asset — the house — but with not one single claim that could be paid.
 
Trustee Kirschenbaum, who was not too happy, had no choice but to close the case as a “no asset” case because there were no creditors who he could pay.  The debtor, meanwhile, received his Chapter 7 discharge, kept his home, and eliminated all of the headaches caused by his wife’s secret financial life.
 
By thinking out of the box, I utilized an unorthodox solution to an unusual debt problem and achieved a great result for my client.

 

 

With bankruptcy filings so prevalent these days, and divorce being a major reason for seeking bankruptcy relief, matrimonial attorneys are frequently concerned as to whether a divorce settlement will hold up in a bankruptcy proceeding.

 

 

Here’s the reason for concern: If a debtor transfers a valuable asset to a spouse (or soon-to-be ex-spouse) prior to filing for bankruptcy, and the debtor-spouse does not receive reasonable value in return, then the transfer is deemed a “fraudulent transfer.” In such a case, the bankruptcy trustee can sue the person who received the asset to bring it back into the bankruptcy estate, so that all creditors can share in its value.  One additional element of a fraudulent transfer is that the debtor must have been insolvent at the time of transfer.

The general principle for demonstrating that a transfer was not a fraudulent transfer is to show that there was “reasonably equivalent value.”

.
Since a divorcing spouse will frequently enter into a matrimonial settlement by giving the other spouse valuable assets such as an interest in real estate, bank accounts, investments, or other personal property, both parties do not want a bankruptcy trustee to try to set the transfer aside.

For a period of time, some courts have held that innocent spouses who received such a transfer were no different from any other party who received a large transfer without sufficient consideration.

However, a case just decided by the United States Circuit Court of Appeals will give many divorcing spouses greater comfort that a trustee will not be able to set aside a marital settlement.

 

 

In the Matter of Bledsoe, decided June 25, 2009, the Ninth Circuit had to decide under what circumstances a bankruptcy court may avoid a transfer made pursuant to a state-court divorce decree.

I previously mentioned this case in an article two years ago, when Long Island Chapter 7 bankruptcy trustee Robert L. Pryor discussed the lower court’s decision, at a symposium on the new bankruptcy laws.

.
The Circuit Court affirmed that decision and held that a trustee can only set aside a matrimonial settlement if he alleges and proves “extrinsic fraud.”  The Court also held that a divorce decree that follows from a regularly conducted, contested divorce proceeding conclusively establishes “reasonably equivalent value” in the absence of fraud or collusion.

 

Practice Tip #1:  Be wary that the bankruptcy court will always access the totality of the facts.  In a local case in the Central Islip Bankruptcy Court decided by Judge Dorothy Eisenberg last year, Long Island bankruptcy trustee Marc A. Pergament brought suit to set aside a transfer of real estate made pursuant to a divorce.  Pergament v. Cersosimo, (2008).  Judge Eisenberg dismissed the trustee’s suit, stating:

“A review of case law has shown that it is the rare bankruptcy court that will intrude on a state court divorce judgment and declare a transfer made therein to be a fraudulent conveyance.  However, rare does not mean never. If the court, upon review of the conveyance, determines that it was done to defraud creditors or was done for little to no consideration, then the court may make a finding that the transfer was a fraudulent conveyance.”

 

Practice Tip #2:  There is no guarantee that New York bankruptcy courts will follow the Bledsoe Ninth Circuit case.  However, considering that our Second Circuit is fairly liberal and desirous of protecting innocent spouses, it is highly likely that any New York bankruptcy court reviewing this issue will give the Bledsoe decision a great deal of weight.

 

 Practice Tip #3:  In order for a divorce settlement to be upheld by the bankruptcy court, it must be ratified in some way by the matrimonial court.  That means that any transfer should be accurately described in a stipulation of settlement.  In addition, the stipulation must be specifically referred to and adopted by the divorce decree.  It is not enough that the parties merely stipulate to a settlement; the court must specifically approve the settlement.  This can be accomplished by using the typical language in the divorce decree, that the stipulation survives the divorce decree and is not merged into it.

About the Author.  Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the September 2009 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Patchogue, Commack, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.

 

Like the famished creatures of the forest foraging for food after the winter thaw, around this time each year Chapter 7 trustees begin their annual hunt for tax refunds. 

 

 

Tax refunds are in the category of liquid assets which are only exempt up to $2,500 per debtor.  The amount of this exemption is relatively small and has not increased in over 20 years.  To make matters worse, a debtor cannot avail himself of the liquid assets exemption if he or she takes the homestead exemption to protect equity in a home.

Generally, a tax refund that is received post-petition is property of the estate if it is not exempt, and it is attributable to wages earned and withholding payments made during prepetition years.

 

 

Trustees get excited that Long Island bankruptcy filers often receive substantial tax refunds.  Since tax refunds combined with funds in the bank often exceed $2,500, and also, since many Long Island bankruptcy filers use the homestead exemption instead of the liquid assets exemption, we regularly see trustees salivating at the meeting of creditors over the prospect of administering a tax refund as an asset of the estate.

 

 When One Spouse Files, How Do You Allocate the Tax Refund?

 

Here is a frequent situation that I observe at the meeting of creditors.  Only one spouse has filed for bankruptcy relief and the trustee discovers that there is a sizable post-petition tax refund.  The issue then becomes what part of the refund belongs to the debtor (which is usually not protected) and what part belongs to the non-filing spouse (which is totally protected because it is not property of the bankruptcy estate).

 

 

I have seen different trustees taking different approaches, often based on what was most advantageous to the trustee at the time.  However, the case law is specific as to determining the apportionment.

One approach is to apportion the refund equally between the two spouses, 50/50, regardless of the source of income or tax withholding.  This is rather simple and straight-forward.

  
The other approach is to apportion the tax refund by calculating a proportional amount: the proportion of the withholdings that the debtor contributed.

 

The problem with either approach is that each can yield what appears to be an unfair result.  If you use the 50/50 approach, and one spouse contributed substantially more than the other, then you get a lopsided result.  On the other hand, if you use the proportional income rule approach, and the non-filing spouse contributed very little towards withholding taxes, then the trustee winds up getting most of the refund.

 

Since it is hardly worth it to litigate over relatively modest sums, debtors often quickly settle and give in to the trustee’s demands.  However, knowing the law will enable you to properly plan your filing and avoid getting into a dispute with the trustee.

 

 

The best case to look to is In re Marciano, 372 B.R. 211 (S.D.N.Y. 2007), which clearly states that New York uses the 50/50 approach, which is the minority view.  In reaching this determination, the court stated that it had no choice but to look to matrimonial law in dividing tax refunds between husband and wife, as state law is controlling.

 

The court distinguished New York from those states adopting the majority view (apportionment).  These other states have different bodies of law involving property rights; New York does not have any such laws.  In New York, matrimonial law (Domestic Relations Law section 236) governs disputes over dividing tax refunds between spouses.

 

The Marciano court concluded that considering the fairness of each rule to (1) the debtor, (2) the non-filing spouse, (3) the creditors, and (4) the estate, adopting a presumption of equal ownership of a joint tax refund as between a debtor and non-debtor spouse is the most equitable outcome. In a continuing marital relationship, it is a fair presumption that the proceeds of the tax return would be shared equally as a joint venture.

One caveat: the court noted that the 50/50 rule can be rebutted under certain circumstances if the spouses can demonstrate by their present conduct or history of financial management, that there is a basis for separate ownership.

 

About the Author.  Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the May 2009 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Medford, Commack, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.
 

Although attorneys are supposed to be smart, every now and then, I come across a practitioner whose stupidity truly baffles me. 

 
This happened last year when a consumer debtor in a pending Chapter 7 bankruptcy proceeding contacted me to take over his case from his existing attorney.  As it turned out, the attorney tried to pull a fast one and paid dearly for it by being sanctioned and losing his ability to practice in the bankruptcy court.

 

 

When Congress overhauled the bankruptcy laws in 2005, it imposed a credit counseling requirement as a prerequisite to filing a bankruptcy petition.  The new law requires any consumer debtor seeking bankruptcy relief to take a credit counseling session from a non-profit, court-approved credit counseling agency prior to filing.

 

I previously wrote many columns about this controversial requirement.  The only reason we have it is because the credit card and banking industry spent tens of millions of dollars lobbying for it. 

My opinion remains that credit counseling is a waste of consumers’ money and time, and an unnecessary nuisance.

 

No one likes credit counseling – not debtors; not judges; and certainly not bankruptcy attorneys.  By all accounts, the law is an abysmal failure which is not doing what the lobbyists led Congress to believe it would do. 

 

 

In a number of decisions across the country, judges have lambasted the credit counseling requirement, but have indicated that they are constrained to enforce it because it is the law.  Accordingly, virtually all bankruptcy courts have insisted that debtors strictly comply with their credit counseling statutory obligations.

 

 

As a Long Island bankruptcy attorney, I have to deal with the credit counseling requirement on a daily basis.  That means advising clients how to do it; reminding clients to do it, and yelling at clients because they were supposed to do it and haven’t done it yet.

Nevertheless, the law is the law, and every client must undergo credit counseling prior to filing.

 

 

Last year a client came to me after attending his meeting of creditors in the Central Islip Bankruptcy Court before trustee Andrew Thaler.  The trustee refused to close the meeting.  The debtor told me that he thought there were a number of “irregularities” with his case and that he did not get good legal advice from his attorney, E. Peter Shin, Esq.

 

Apparently, the attorney never told the debtor about the credit counseling requirement and this came to light at the meeting of creditors.

 

It later came out that the attorney tried to circumvent the credit counseling requirement by having his secretary, instead of the debtor, engage in the credit counseling over the internet.  Shin never even bothered to tell the debtor about the credit counseling requirement. The attorney thought that doing so would be easier for the client and easier for himself.

 

However, this misconduct was grossly improper. By filing the credit counseling certificate at the time the petition was filed, the attorney made an implicit representation to the Court that the debtor had properly complied with the statutory credit counseling requirement.

 

 

Upon reviewing the debtor’s facts, I learned that, for reasons I will not get into here, the case never should have been filed in the first place. 

 

Thus, not only did Shin mess up with the credit counseling requirement, but he also neglected to adequately review the facts.  If he had, he would have ascertained that it was not in the debtor’s best interest to file at the time that he did.
 
I Persuaded the Prior Attorney to Refund Fees

 

I called and wrote Shin and told him that he was in hot water.  Although he actually denied any wrongdoing, I persuaded him to not only refund the debtor’s legal fee and the court filing fee, but to also pay the debtor $700 for his inconvenience, and pay me $1,000 for my legal work in having to undo the mess.  This was all before the U.S. Trustee got involved.

 

 

The U.S. Trustee then brought a motion to dismiss the bankruptcy case for various reasons, and also sought my cooperation, as the debtor’s new attorney, to have the debtor help the U.S. Trustee with its investigation of Shin.

 

Since I decided that it was actually in the debtor’s best interest to have his case dismissed, I filed an affirmation in partial support of the trustee’s motion.  Last month, the judge dismissed the case.
          
The U.S. Trustee Aggressively Pursues Debtor’s Prior Attorney

 

The U.S. Trustee’s Office took this matter extremely seriously and sought to intensively investigate Shin and his staff.  It learned that Shin circumvented the means test — not only for this debtor — but for a number of other debtors whose cases he filed in the Eastern District of New York.

 

The U.S. Trustee’s case against Shin was so strong that Shin agreed to a settlement prior to being deposed.  The settlement, which was filed just last month,  called for Shin to pay a sanction of $40,000, be suspended from practicing in the Bankruptcy Court for a year, and take 12 hours of continuing legal education in bankruptcy law and ethics.

 

The U.S. Trustee then brought a separate miscellaneous proceeding in U.S. District Court seeking disciplinary action against Shin to enforce the terms of the stipulation.  (In re: E. Peter Shin, Esq., 1:09-mc-00066-bmc; EDNY 2009).  Last week, Shin paid the first installment of $30,000, with the balance to be paid over the next six months.

 

The lesson here is obvious.  Whether we like them or not – we must abide by the bankruptcy laws.

About the Author.  Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the April 2009 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Medford, Commack, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.