Annual Review of Cases and New Development in Bankruptcy 2010

San Diego County Bar Association

Hamilton v. Lanning
___ U.S. ____, 130 S.Ct. 2464, 177 L.Ed.2d 23 (2010)

Court may consider future income/ expenses known or virtually certain at the time of confirmation of a Chapter 13 plan to determine “projected” disposable income.

Proof that the same genius who brought us BAPCPA brought about the worst financial crisis since the great depression.


Supreme Court is stuggling with a fundamental premise of statutory interpretation – – that Congress knew what it was doing. Very elaborate and detailed definition of disposal income looks entirely backwards. But, everyone knows that the debtor received two “one time” distributions from her employer. So, we can either require her to pay ten times what we know she makes, or we must be completely disregarded the definition. Solution: “projected” is not defined.
Jerman v. Carlisles, McNelle, etc.
___ U.S. ___; 130 S.Ct. 1605, 176 L.Ed.2d 519 (2010)

Attorney engaged in debt collection action may not rely on “bona fida error” defense under FDCPA to mistakes of law.


Attorneys are debt collectors in the same way as consumer bankruptyc lawyers are debt relief agencies. Here, lender screwed up and gave attorney file to start foreclosure action. Lawyer files complaint and includes statutory notice to debtor inside the complaint. Defendant informs lawyer that debt was paid. Bank says “oops.” Lawyer dismisses suit. Lawyer gets sued. Legal question re FDCPA notice is in doubt; indeed, some courts agree with lawyer’s interpretation.
Milavetz , Galcer & Milavetz v. United States
___ U.S. ____, 130 S.Ct. 1324, 177 L.Ed.2d 79 (2010)

“Gag” provision prohibiting attorney from advising debtor incur new debt and mandating disclosures is constitutional.


Judge Sotemeyer to the rescue. She saves the statuory provision by so narrowly construing it to make it a non-issue. Advising taking on debt “in contemplation of bankruptcy” means advising debt “in contemplation of discharge of new debt.”

In doing so, she makes debtor lawyers subject to the same crazy warning notices as debt colleciton attorneys. Don’t expect a good faith defense.
Schwab v. Reilly
___ U.S. ___; 130 S.Ct. 2652, 177 L.Ed.2d 234 (2010)

Trustee need not object to exemptions to sell and may retain excess proceeds where assets are listed as exempt within statutory limits but have a higher market value.


Supreme court trouble making on exemptions.

Cook owns a pan. Claims it is exempt. Form says state a dollar value for the asset and the exemption.

Value unknown, exemption amount unknown.

Value $100, exemption amount $100.

Value $200, exemption amount $100.

Correct answer: ignore the form. Value $100, exemption amount 100% of Market value. Assets still are property of the estate. Debtor’s don’t exempt assets, they exempt amounts. If you claim $100 you only get $100. Trustee doesn’t need to object. If you claim 100 % of market value, Trustee needs to object.
US Aid Funds, Inc. v. Espinosa
___ U.S. ___; 130 S.Ct. 1367, 176 L.Ed.2d 1588 (2010)

Although Bankruptcy Court erred in confirming Chapter 13 plan that provided for discharge of student loan without adversary proceeding or finding of hardship, the order confirming plan is not void against creditor who had notice.


Orders in error are still final orders. Can’t ignore them.

Rejects Ninth Circuit approach: failure to object is consent. Says must deny confirmation. But, what if the Bankruptcy Court doesn’t?


In re Ahcom, Ltd. (Ahcom Ltd v. Smelding)
623 F.3d 1248 (9th Cir. 2010)

Creditors, not estate, own and have standing to assert alter ego claims against shareholders of California company.

Judge Kazinski discovers that the Ninth Circuit has consistently misapplied California law for 20 years. Generalized claims for alter ego don’t belong to the estate unless under applicable state law, the estate could assert them.

What is applicable state law? Delaware still permits corporation to assert them.
In re Deuel (Chase Manhattan Bank v. Taxel)
594 F.3d 1073 (9th Cir. 2010)

Trustee may avoid unrecorded deed of trust disclosed in schedules filed with voluntary petition.

Refi of home loan. Title company records the reconveyance but forgot to file new trust deed. Debtor files petition and schedules at same time: schedules list the trust deed.

Who cares. The “Kodak moment” is the snapshot the second the petition is filed. (CF involuntary petition that lists lien). What if debtor writes “trust deed in favor of bank” on the petition?

Bank should have filed state court complaint and record lis pendens.

Does bank’s lien attach to the debtor’s homestead exemption?
In re Findley
593 F.3d 1048 (9th Cir. 2010)

Costs of discipline proceeding owed by attorney to Cal State Bar are nondischargeable penalties.
In Re Gehbart
481 F.3d 661(9th Cir. 2010)

Homestead exemption does not entitle debtor to the post-petition appreciation.

Exemption is an amount, not a property.

100 % of market value? Would that include post-petition appreciation?
In re JTS (Decker v. Tramiel)
617 F.3d 1102 (9th Cir. 2010)

Good faith offset for amount paid under UFTA (transfers less than fair value) applied to section 544(b) avoidance cases.

Note: protection as to the amount paid under UFTA may not be “otherwise not avoidable as a preference”
In re Ornsby
591 F.3d 1199 (9th Cir. 2010)

State court judgment for damages and punitive damages for conversion sufficient to make claim nondischargeable as larceny.

Really bad dudes lose.
In re Penrod
611 F.3d 1158 (9th Cir. 2010)

Negative equity from automobile trade-in is not purchase money debt under section 1325(a).

The “plain meaning of the statute” can’t get in the way of a rational decision.
In re Sabban
600 F.3d 1219 (9th Cir. 2010)

Statutory debt owed by unlicensed contractor for all compensation received from homeowner is dischargeable (state court found no damages for fraud).

Note: State court found fraud, gave restitution, but found no damages for the fraud.
In re Silverman
616 F.3d 1001 (9th Cir. 2010)

Amounts paid pursuant to criminal restitution order may be recovered as preferences. (Bankruptcy court not bound by decisions from other district courts.)

We’ve never said that a BAP decision is binding on anyone. That was the BAP.
U.S. v. Hall
617 F.3d 1161 (9th Cir. 2010)

Chapter 12 estate is not separate taxable entity. Debtor is liable for income taxes on post-petition sale of farm.



In re Mwangi (Mwangi v. Wells Fargo)
432 B.R. 812(9th Cir.BAP 2000)

Administrative freeze violates automatic stay as to funds claimed exempt by debtor.

Nutty award. Debtor files Chapter 7 and asserts an exemption in a portion of the bank account. Bank freezes account and sends a letter to Trustee – – tell us where to send the money. Trustee ignores letter. Debtor demands money. Bank says, we need consent of Trustee. Debtor sues and wins.

Will bank simply send money to the Trustee?


In re Karlovich
2010 Westlaw 5418872 (Bankr. S.D.Cal. 2010)

Absolute priority rule applies to individual Chapter 11 debtors with respect to post-petition earnings, unchanged by BAPCPA. (Bowie).

New issue headed toward the court.

Does absolute prioriity rule apply at all? (The statute says “NO”)

Does it apply only to post-petition earnings or to all property?

Judge Bowie takes the view that pre BAPCPA experience matters unless Congress is clear otherwise, but takes narrow view of the exception.

Note: Judge Bowie had opined, pre-Supreme Court decision, that absolute priority corrolary was dicta.


Banc of America Leasing & Capital v. 3 Arch Trustee Services, Inc.
180 Cal. App.4th 1090 (2010)

Trustee under nonjudicial foreclosure sale not required to transfer excess sale proceeds to junior lienholder who fails to record a request for notice.

What does this mean for strong arm. BFP trumps over recorded lien as to proceeds from sale?

February 15th, 2011  |  Categories: Business Insolvency & Creditors’ Rights