cdcbaa Newsletter – Nice Article on Judge Catherine Bauer

The latest cdcbaa Newsletter is out.  You can access it here.  There is a great article on Judge Catherine Bauer and some nice tributes to Jim King.

California One-Action Rule Preempted by Federal Debt Collection Improvement Act

Cal. Code Civ. P. § 726, often referred to as the one-action rule, has many facets. Relevant to this article is the “security-first” rule which requires “a secured creditor to proceed against the security before enforcing the underlying debt”; the penalty for failing to do so is waiver of the security.

In practical terms, this means a creditor secured by property has to either pursue foreclosure or file a lawsuit on the debt. The aforementioned ‘or’ is an exclusive ‘or’ meaning the lender has to pick one or the other and cannot pick both options. Consequently, this is what’s typically referred to as an “election of remedies.” Read more…

Nice Discussion of Critical Vendor Motions from Chief Judge Sheri Bluebond

Tentative Ruling today from Chief Judge Sheri Bluebond.  I do not know how she ultimately ruled but you can see the thought process very nicely.

2:15-17527 Redondo Brothers, Inc. Chapter 11

#106.00 Debtors Emergency First Day Motion For An Order Authorizing Debtor To Pay Pre-Petition Claims Of Certain Critical Vendors Necessary For Its Continued Operations

There is no basis upon which the Court can or should authorize the payment of prepetition claims.  The concept of a critical vendor is a very narrow one that should only be applied when there is no permissible theory under which the requested amounts can be paid and it is clear that, by using property of the estate in this manner, the value of the estate is increased by more than the amount of cash that must be spent to make the payment.  The debtor has not made a sufficient record to support such payments here.  The motion reflects a debtor who did not want to bother taking the time or effort to analyze whether there are other bases upon which payments can or should be made.

Read more…

Proposed Changes to the California Homestead Exemption

SB 308 is a new bill introduced by Senator Bob Wieckowski in the California State Senate that provides significant improvements to California’s current exemptions including:

  • increasing the homestead to $300,000 for all individuals;
  • removing the 6 month reinvestment requirement;
  • increasing the exemption for vehicles to $6,000;
  • establishing that bankruptcy alone is not an event of default; and
  • creating a grubstake of $5,000 for self-employed individuals.

The complete text of the amendment can be found here.

Note: the link above is to the original proposal and is easy to read. The original proposal provided for a $700,000 exemption which was amended down to $300,000. A more difficult to read, updated version can be found here.

Nice Tentative by Chief Judge Sheri Bluebond on Rejecting a Family Law Contract

United States Bankruptcy Court
Central District of California
Chief Judge Sheri Bluebond, Presiding

Wednesday, May 20, 2015 Hearing Room 1475

2:15-11273 [debtor] Chapter 11
#7.00 Motion for an Order Rejecting Family Law Contract

The parties’ marital settlement agreement IS an executory contract.  The issue is whether there are unperformed obligations remaining on both sides of the contract that are sufficiently material that, if either party failed to perform these obligations, it would constitute a breach of the contract, relieving the other party of a duty of further performance.  Counsel for [the debtor] claims that [her] only remaining obligations are ministerial and therefore do not count.  This is not true.  Cooperating with transfers of title of real property is not merely a ministerial act in this context.  Refusing to cooperate in transfers of title would constitute a material breach of the contract.  The fact that the debtor would be able to compel performance and, if necessary, have a court official execute deeds on her behalf does not mean that these are not material obligations.  But there are other ongoing obligations as well that have been held sufficient to cause a given contract to be treated as executory, including the parties’ obligations to indemnify each other and hold each other harmless from and against certain obligations, the obligations with regard the payment of tax liabilities and expenses, and the like.

[The debtor] has cited to a handful of cases in which various obligations were treated as not being sufficient to make a given contract executory.  A careful review of executory contracts cases would reveal that the identical obligation has been held sufficient to cause a contract to be characterized as executory in one instance and to be insufficient in another.  This is because courts, adopting an outcome-oriented approach, have either attempted to avoid adverse results or to create desired benefits for one party or the other by manipulating the definition of executoriness.  This court rejects that approach.  Properly understood, rejection does not result in avoidance of the contract. It merely constitutes a thorough breach of the contract that is deemed to have occurred immediately prior to the petition date.  For an extensive, scholarly discussion of these issues, see M. Andrews, “Executory Contracts in Bankruptcy: Understanding ‘Rejection,’” 59 U. Colo. L. Rev. 845 (1985).

Read more…

IRS Substitute For Return (SFR) Isn’t Always Nondischargeable

Debtors can discharge their taxes in bankruptcy so long as they meet certain tests: the three-year test, the two-year test, the 240-day test and no fraud. I lay it out in the first paragraphs here and in the last paragraphs here.

One of the tests is that the return has to have been actually filed: “A discharge . . . does not discharge an individual debtor for any debt  . .. for a tax or a customs duty . . . . with respect to which a return  . . .  was not filed or given.” 11 USC § 523(a)(1)(B)(i). A “return” must satisfy non-bankruptcy law, and can be a return prepared by the IRS under IRC § 6020(a), but not under 6020(b). 11 USC § 523(a).

This jargon and its cross-references mean that a taxpayer has to have submitted their own, good-faith tax return in order to have the resulting tax be dischargeable. Under IRC § 6020(b), the IRS can prepare a return without the taxpayer’s cooperation and make an assessment on it. This is known as a “substitute for return” (or SFR), and its assessment is never dischargeable. The taxpayer can never replace the SFR with a late-filed return after taxes owed from an SFR have been assessed.

How do you know that the IRS has filed a substitute for return? You look at the taxpayer’s account transcript. The first entry is almost always under TC (transaction code) 150. When the taxpayer files his own return, the entry states “tax return filed,” and it shows the taxes due on the return such as on this transcript. When the IRS files the taxpayer’s return, the entry states “Substitute tax return prepared by IRS,” and it shows a dollar entry of “0.00” such as on this transcript.

Read more…

How Much is the Chapter 13 Plan Supposed to Pay? In re Schlegel

The chapter 13 Plan in the Central District of California is a preprinted (and mandatory) form which states on the first page:

“The base plan amount is $___ which is estimated to pay ___% of the allowed claims of nonpriority unsecured creditors.  If that percentage is less than 100%, the Debtor will pay the Plan Payment stated in this Plan for the full term of the Plan or until the base plan amount is paid in full, and the chapter 13 trustee may increase the percentage to be paid to creditors accordingly.”  emphasis added.

In Schlegel, the debtor said $815 per month which is estimated to pay 48%.  Emphasis added again.  They paid the $815 for the five years.  The case was dismissed at the request of the trustee because the total payments did not give unsecured creditors 48%.  How can that be, you say?  A creditor filed a proof of claim during the process – late in the plan confirmation process but nevertheless timely – and the debtor basically ignored it.  What should the debtor have done you ask?  He should have amended the plan to provide for the same dollar payment but a new estimate about the percentage the unsecured creditors would receive roughly.

This makes no sense to me.  In some cases the debtor is required to pay 100%.  But otherwise, the bankruptcy code tells us fairly specifically how to compute the amount of the payment but nothing about the percentage.  It is not meaningful in my opinion except to give creditors a rough idea about how much they will get back.  Further amending the PLAN, to tell the the rough amount they will get back has changed seems to me to be form over substance big time.

STEVEN PATRICK SCHLEGEL; JOANNE MARIE SCHLEGEL

6/8/2015 – CLBS – Don’t Take it Personally: The Pitfalls of Personal Guarantees

Don’t Take it Personally: The Pitfalls of Personal Guarantees

06/08/2015

Presented by: Los Angeles County Bar – Commercial Law and Bankruptcy Section

Program Information:
The program will review and discuss issues in obtaining personal guarantees from obligors and the pitfalls that lenders should be cognizant of before and after enforcement.

Speakers:
Hon. Martin R. Barash, United States Bankruptcy Court, San Fernando Valley Division
Ashley Malinger M. McDow, Baker & Hostetler LLP
Maria Sountas-Argiropoulos, Klee, Tuchin, Bogdanoff and Stern LLP

Read more…

Note from Aki Koyama on Harris v. Viegelahn

SCOTUS published its opinion this morning for the Harris v. Viegelahn matter. This is the case about what happens to the plan payments the chapter 13 trustee is holding when a case gets converted to chapter 7. In a short opinion, SCOTUS holds that the funds are returned to the debtor. This complicates preconfirmation conversions from 13 to 7. Can the trustee pay attorney’s fees from the plan payment balance when a RARA has been filed but the case is converted preconfirmation? The case seems to indicate no. Our Local Bankruptcy Rules are slient on the issue of what happens to the funds when a case is converted from 13 to 7 and a RARA has been filed. Time for an LBR revision or clarification on whether or not a fee application must be filed in this scenario.

Here’s the link to the opinion

A reader commented to Aki:  Very good point. Although the LBR is silent, how has your office been handling this issue up to now? (attorney fees owed during preconfirmation conversion…RARA filed.

Aki’s response:  Our office has been paying attorney’s fees if a RARA has been filed but we will have to reconsider this now.

Be Careful When Using the Owner of Property to Establish the Value in a Declaration

Typically the owner of property is “qualified” to express an opinion of the value.  That means that the “opinion” will not be stricken on the basis that the owner is not an expert on that particular kind of property.

Judge Vincent Zurzolo gave us some great tips on Saturday at the cdcbaa program.  A statement like, “The Debtor owns this property and believes it is worth $25,000,” is subject to being stricken for lack of foundation.  At a minimum it should be given virtually no weight even if it is not stricken.  He still has to explain the basis for his belief that that is the value.  The worst is when his belief is based on Zillow or on the Kelly Blue Book.  As an expert on his property, the declarant is permitted to rely on hearsay but the hearsay can only be part of the reason he has his opinion.  If he says I believe its worth $1,000 because that is what KBB says, he is just parroting the hearsay.

Judge Zurzolo suggested we include in the declaration comments on the description of the property, when it was purchased, what work has been done over the years, what efforts he has made to figure out the value (i.e., I looked at Zillow).  He said attaching pictures is helpful.