Wednesday, February 21, 2007

Supreme Court Holds Chapter 7 Debtors Have NO Absolute Right to Convert to Chapter 13

In a 5-4 decision, the United States Supreme Court today decided that a chapter 7 debtor does not have an absolute right to convert to chapter 13. The case is Marrama v. Citizens Bank of Massachusetts, and you can view the opinion here.

In a 5-4 decision (Stevens writing for the majority, Alito writing for the dissent, and Kennedy being the swing vote), the Supreme Court held that 11 U.S.C. Section 706(a) and (d) read together, prevents a debtor, who could not be a debtor under a chapter 13, from converting a chapter 7 case to chapter 13.

The Court reasoned that: (1) in this case, the debtor cannot qualify as a debtor under chapter 13 because of debt limitations set forth in 11 U.S.C. section 109(e); (2) the debtor filed the petition in "bad faith," which is a cause to dismiss chapter 13 cases pursuant to case law under 11 U.S.C. section 1307(c); and (3) bankruptcy court has power under 11 U.S.C. section 105(a) to immediately deny a conversion motion under section 706 in response to fraudulent conduct of a debtor who has demonstrated he is not entitled to relief.

As the Supreme Court noted in its footnote 2, the Ninth Circuit was one of the circuits that had allowed even bad-faith debtors an absolute right to convert at least one chapter 7 case to chapter 13. This opinion will substantially change the law in the Ninth Circuit. Moreover, part of the Supreme Court's rationale relies on "bad faith" debtors could be dismissed under 11 U.S.C. Section 1307(c), even though that is not a specified cause. This will prevent any "bad faith" debtors from escaping chapter 7 into chapter 13.

The dissent pointed out that Congress crafted the Bankruptcy Code to deal with "bad faith" debtors already (requiring good faith proposal of chapter 13 plan, reconversion to chapter 7, etc.). In addition, the dissent reasoned that the majority should focus solely on section 109 instead of incorporating section 1307 because 109 sets forth requirement to become a debtor under various chapters.

Wednesday, December 13, 2006

Part of Debt Relief Agency Provisions Held Unconstitutional by Minnesota District Court

Although I would like to focus this blog mostly on Ninth Circuit decisions, I can’t ignore a decision that has garnered so much attention. By now, hopefully most of you may have heard of this Minnesota District Court decision – Milavetz, Gallop & Milavetz, et. al. v. United States of America, Case No. 05-CV-2626, 2006 WL 3524399.

In this decision, the district court held that 11 U.S.C. § 526(a)(4) (the provision relating to not giving advice on incurring more debt), 11 U.S.C. § 528(a)(4) (the provision requiring certain statement in advertising), and 11 U.S.C. § 528(b)(2) (another advertisement provision) unconstitutionally restricts attorney’s speech.

In analyzing § 526(a)(4), the district court held that the section regulates content of the attorney’s speech and that it does not relate to any “ethical rules.” Thus, the district court applied strict scrutiny. The district court then concluded that the provision is not narrowly tailored and does not enforce a compelling state interest.

In analyzing § 528(a)(4) and (b)(2), the district court applied intermediate scrutiny because it reasoned that the section regulates truthful, as well as false, advertisement. The district court concluded that the provisions failed to advance government’s substantial interest and that they are not narrowly tailored.

Thus, the court concluded that all three provisions are unconstitutional as applied to attorneys and that the debt relief agency provisions are inapplicable to attorneys.

It will be interesting if the rest of the cases filed in various parts of the country will adopt this court’s rationale or not.

Thursday, December 07, 2006

In re Konnoff, Ford v. Konnoff. BAP No. AZ 06-1139-DKPa, published November 14, 2006

This case relates to whether state law can condition exemption status of property beyond the bankruptcy petition date. Below is a summary.

The Ninth Circuit BAP reversed the bankruptcy court and held that in determining exemption scheme pursuant to 11 U.S.C. § 522(b), the applicable state law on the petition date controls the debtor’s exemption rights.

In this case, the debtors sold their home in Arizona. The debtors then filed for bankruptcy and claimed homestead exemption for their home sale proceeds. The chapter 7 trustee objected because according to the Arizona state law, the proceeds were exempt only for 18 months or until the proceeds were reinvested in another home. Because 18 months was about to expire, the trustee filed an objection.

The Ninth Circuit BAP reasoned that the United States Supreme Court decision in Owen v. Owen, 500 U.S. 305 (1991) did not overrule England v. Golden, 789 F.2d 698 (9th Cir. 1986). In Golden, the Ninth Circuit held that where state law of opt-out state conditions the exempt status of property differently than federal exempt status, those conditions must be upheld. Thus, “when a debtor elects to claim an exemption under state law pursuant to 11 U.S.C. § 522, he is required to comply with the state law in effect at the time of the filing of his bankruptcy petition.” Golden, 789 F.2d at 700. In Owen, the Supreme Court held that the provisions of a state law could not limit a debtor’s right to avoid a creditor’s judicial lien on the debtor’s homestead under § 522. In so holding, the Supreme Court held that the “built-in limitations” in state exemptions did not restrict the debtor’s ability to avoid a judgment lien.

The Ninth Circuit BAP latched onto the Supreme Court’s dicta language that “nothing in § 522 … limits a State’s power to restrict the scope of its exemptions; indeed it could theoretically accord no exemption at all.” Owen, 500 U.S. at 308. Although the Ninth Circuit BAP believed that “built-in limitations” was ambiguous, Owen still allowed states to provide limited or no exemption. Thus, the BAP concluded that Arizona’s limit to allow exemption for only 18 months was valid.

Judge Pappas wrote a concurring opinion expressing his deep reservation about this line of reasoning and that he concur out of respect for binding precedent. He pointed out that Golden appears to rest on flawed reasoning and that exemption rights should be determined based on facts on the petition date. By allowing state law condition to follow in the bankruptcy proceeding, he pointed out that the chapter 7 trustee has an incentive to simply keep the bankruptcy case open until the exemption period is over and prohibit the debtors from walking away with what should be their exempt proceeds. In addition, he believes § 522 should be construed so that (1) § 522(b)(1) allows states to dictate what property is exempt and (2) § 522(b)(2)(A) determines the extent of exempt property as of the date of bankruptcy filing and not until some future date after the bankruptcy filing.

The opinion (if you can't find it in Westlaw) is here.