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MISCELLANEOUS BANKRUPTCY ISSUES
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Not all bankruptcy “core” proceedings are created equal: a limitation on state law lender liability claims in bankruptcy court after Stern v. Marshall Katten Muchin Rosenman LLP
The scenario has become all too familiar in recent years: a borrower defaults on a loan and, when the lender pursues the loan collateral through foreclosure or other proceedings, the borrower files for bankruptcy protection.
In re Kenny G. Enterprises 16-55007 (9th Cir 7/26/2017) Kenneth Gharib refused to comply with Bankruptcy Court order to turn over $1,420,000 belonging to a chapter 7 estate. The judge imposed sanctions for the contempt: civil contempt sanctions of $1,420,000, $1,000 a day until he complied, plus incarceration until he complied. The District Court of California affirmed the order, except the $1,000 a day. The 9th Circuit reverses on the issue of daily sanctions, finding that such daily sanction is permitted if it is “properly coercive” to comply with the turnover order, but not if it becomes punitive.
In the face of a § 542 violation the bankruptcy court may invoke its contempt power under § 105, which allows the court to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.” 11 U.S.C . § 105(a) Such sanctions include incarceration for more than two years
CASE LAW DOCTRINE
When a court reaches a decision in a case, the law of the case doctrine generally provides that parties should not be able to relitigate the same issue in that case, and for the court to adhere to its prior decision. The doctrine does not, however, apply to every decision a court reaches. Two recent decisions by Judge Elizabeth Stong in the Brizinova chapter 7 cases in the Bankruptcy Court for the Eastern District of New York explore when the doctrine may or may not apply in bankruptcy cases.
WHEN MAY A BANKRUPTCY COURT APPLY THE LAW OF THE CASE DOCTRINE?
The parties to the old and new litigation must be the same. The question of whether the first order was a final judgment may be trickier. Presumably, an order granting a motion to dismiss or granting summary judgment in an adversary proceeding would satisfy the final judgment requirement because that order would end the litigation. Similarly, a judgment in favor of a plaintiff in an adversary proceeding presumably would also satisfy the final judgment requirement. Whether orders granting or denying motions in the main bankruptcy case are final judgments may be harder to determine. As Judge Stong noted, however, the requirement of a final judgment in the law of the case doctrine is similar to the same requirement for the related rule of res judicata. Accordingly, case law considering the application of res judicata in bankruptcy cases should provide an additional source of guidance.
Article: Law of the Case Doctrine
Severo vs IRS (No. 08-70817 US Tax Court, CA 11-09)  The IRS generally has ten years from the assessment of a tax to collect the outstanding liability. 26 U.S.C. § 6502(a)(1). However, the Internal Revenue Code contains several provisions tolling the ten-year statute of limitations. Of greatest relevance to this case, Section 6503(h)(2) provides: The running of the period of limitations provided in section 6501 or 6502 on the making of assessments or collection shall, in a case under title 11 of the United States Code, be suspended for the period during which the Secretary is prohibited by reason of such case from making the assessment or from collecting and— (2) for collection, 6 months thereafter. 26 U.S.C. § 6503(h)(2). Under this provision, the period of limitations for IRS collection is tolled for the period of the bankruptcy court’s automatic stay, during which the Bankruptcy Code prevents the IRS from collecting a tax liability, plus an additional six months. Section 362(a) of the Bankruptcy Code provides an automatic stay on eight types of actions, including “any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title.” 11 U.S.C. § 362(a)(6). Section 362(c) establishes the duration of this automatic stay in bankruptcy cases: (1) the stay of an act against property of the estate under subsection (a) of this section continues until such property is no longer property of the estate; (2) the stay of any other act under subsection (a) of this section continues until the earliest of—
(A) the time the case is closed;
(B) the time the case is dismissed; or
(C) if the case is a case under chapter 7 of this title concerning an individual or a case under chapter 9, 11, 12, or 13 of this title, the time a discharge is granted or denied. 11 U.S.C. § 362(c). An act against the property of the bankruptcy estate is stayed until it is no longer part of the estate, but an act against the debtor—which is not an “act against property of the estate”—dissolves immediately upon the bankruptcy discharge order. Under Section 362(c)(2), the automatic stay will generally not end until the Bankruptcy Court issues its discharge order, and the period for collection is tolled for another six months thereafter. See Richmond, 172 F.3d at 1102.
Private employer may refuse to hire person on account of such person’s having filed bankruptcy. Myers v. Toojay’s Mgmt. Corp. (11th Cir., 2011) (5/2011) Debtor applied for employment for a managerial position with a private company. Employer denied employment primarily or solely on the basis that the applicant had filed Chapter 7. The debtor filed bankruptcy and received a discharge, and a few months later applied for the job.As part of the application process the applicant was provided with certain forms, included an acknowledgment of receipt of a sexual harassment manual; a non-solicitation and confidentiality agreement; and an authorization and release of personal information for a background check. The background check release permitted the employer to “conduct a comprehensive review” including a review of Myers’ “credit history and reports.”CONDITION OF EMPLOYMENT: GOOD CREDIT The employer had the applicant spend several days getting familiar with the activities of the business, and scheduled him to begin work on August 18 without informing him that his employment would be conditioned on a clean credit history.Subsequently the applicant was informed the offer of employment was withdrawn, and ” … told him that the only reason he was not hired was that he had filed for bankruptcy, and it was the employer’s policy not to hire people who had done that.”Debtor claims violation of § 525 On September 2, 2008, Myers filed a lawsuit against the employer. The complaint alleged, among other things, that the defendant had discriminated against him because of his bankruptcy, in violation of 11 U.S.C. § 525(b), by refusing to hire him and, alternatively, by terminating him from the job after it had hired him.Difference in wording between 525(a) and 525(b) In ruling on the case, the court pointed out a significant difference in the wording of the two subsections of 11 U.S.C. § 525, which ostensibly protects debtors from discrimination in employment on account of filing bankruptcy.”Section 525(a) applies to governmental employers, and explicitly prohibits such employers from denying employment; section 525(b), however, does not contain that language, and, strictly read, addresses only terminating employees, but not refusing to hire.””The conspicuous difference between the two subsections is that § 525(a), the one applying to government employers, explicitly forbids them from either denying or terminating employment because of a bankruptcy, while § 525(b), the one applying to private employers, forbids them from terminating employment because of bankruptcy but says nothing about denying employment because of it.””Our holding that § 525(b) does not apply to refusals to hire is in accord with the holdings of the only two other circuits that have decided the issue. See In re Burnett, _F.3d_, No. 10-20250, 2011 WL 754152, at *2 (5th Cir. Mar. 4, 2011) (holding 11 U.S.C. § 525(b) does not prohibit private employers from denying employment to persons because of their status as a bankruptcy debtor); Rea v. Federated Investors, 627 F.3d 937, 940-41 (3d Cir. 2010).
Credit unions: Citizens Bank of Marilyn, V. Strumpf, 516 U.S. 16, 116 S. Ct. 286 (1995) where the Supremes recognized and confirmed the right of set-off at the time of filing the bankruptcy. I don’t even think a Chapter 7 Trustee can get turnover as a preference or for that matter, the Debtor in a Chapter 13.
You have a credit card with your credit union. You filed for bankruptcy and the credit union froze the account. They say you can get those funds if you reaffirm the debt to the Credit Union.
SCOTUS case on point, Citizens Bank of Md. v. Strumpf, 516 US 16 (1995) Section 542(b) of the Code, which concerns turnover of property to the estate, requires a bankrupt’s debtors to “pay” to the trustee (or on his order) any “debt that is property of the estate and that is matured, payable on demand, or payable on order . . . except to the extent that such debt may be offset under section 553 of this title against a claim against the debtor. ” 11 U. S. C. § 542(b)
Set off and banks:
47-9104. Control of deposit account
A. A secured party has control of a deposit account if:
1. The secured party is the bank with which the deposit account is maintained
2. The debtor, secured party and bank have agreed in an authenticated record that the bank will comply with instructions originated by the secured party directing disposition of the funds in the deposit account without further consent by the debtor; or
3. The secured party becomes the bank’s customer with respect to the deposit account.
B. A secured party that has satisfied subsection A has control, even if the debtor retains the right to direct the disposition of funds from the deposit account.
47-9314. Perfection by control
A. A security interest in investment property, deposit accounts, letter-of-credit rights, electronic chattel paper or electronic documents may be perfected by control of the collateral under section 47-7106, 47-9104, 47-9105, 47-9106 or 47-9107.
B. A security interest in deposit accounts, electronic chattel paper, letter-of-credit rights or electronic documents is perfected by control under section 47-7106, 47-9104, 47-9105 or 47-9107 when the secured party obtains control and remains perfected by control only while the secured party retains control.
Regulation Z says the security interest must be consensual to setoff a deposit account for a credit card debt. The reg preempts the state law on this issue.
12 CFR 12.226
(d) Offsets by card issuer prohibited. (1) A card issuer may not take any action, either before or after termination of credit card privileges, to offset a cardholder’s indebtedness arising from a consumer credit transaction under the relevant credit card plan against funds of the cardholder held on deposit with the card issuer.
(2) This paragraph does not alter or affect the right of a card issuer acting under state or federal law to do any of the following with regard to funds of a cardholder held on deposit with the card issuer if the same procedure is constitutionally available to creditors generally: Obtain or enforce a consensual security interest in the funds; attach or otherwise levy upon the funds; or obtain or enforce a court order relating to the funds.
(3) This paragraph does not prohibit a plan, if authorized in writing by the cardholder, under which the card issuer may periodically deduct all or part of the cardholder’s credit card debt from a deposit account held with the card issuer (subject to the limitations in §226.13(d)(1)).
IMPORTANT NOTE: All financial institutions have a policy of freezing accounts if debtor owes them money. Wells Fargo and most credit unions will freeze the debtor’s bank account.
11 USC 109 states that a person who “resides or has a domicile, place of business, or property in the United States, or a municipality, may be a debtor (petitioner, bankruptcy filer, person who wants to file bankruptcy) under this title.” (explanation added). Neither this section nor the bankruptcy code require a debtor to have a social security number to file bankruptcy. In order to accommodate this, an individual without a social security number should complete, and sign, a document titled a Statement of Social Security Number. Even though the document is titled a “Statement of Social Security Number,” it allows for a filer to provide for either a social security number, an Individual Taxpayer Identification Number (ITIN), or state that the filer does not have either a ITIN or social security number.
Imperial Merchant Services, Inc. v. Hunt, No. S163577 Supreme Court of California, August 10, 2009 Issue: may a debt collector recovering on a dishonored check may recover both a service charge under section 1719 and prejudgment interest under section 3287. “We conclude that the statutory damages prescribed in section 1719 are exclusive in the sense that a debt collector who recovers a service charge pursuant to section 1719 may not also recover prejudgment interest under section 3287” (NOTE: California law)
In re Gardens Regional Hospital & Medical Center, 18-60016 (9th Cir. 9/16/20) The debtor was a hospital where the State of California was asserting the right to recoup Medicaid payments owing to the hospital against fees that the hospital owed to the state. Upheld by the Bankruptcy Appellate Panel, the bankruptcy court allowed the state’s recoupment in full. In the past, the circuit’s standard largely favors creditors, the new opinion moves the bar ever so slightly in favor of debtors.
Recoupment is a judge-made equitable doctrine lacking some of the strictures of setoff. Under Section 362(a)(7), setoff is subject to the automatic stay, and Section 553 has a list of circumstances when setoff is not enforceable. In general terms, Section 553 allows a creditor to offset mutual debts and credits that arose before bankruptcy. As Circuit Judge Daniel P. Collins explained in his September 16 opinion, setoff allows a creditor to net out debts and claims arising from different transactions, so long as they were mutual and arose before bankruptcy.
The state argued it was entitled to offset everything owing to the hospital because state law specifically allowed the state to deduct payments owing by a hospital to the fund against Medicaid payments owing to the hospital.
Judge Collins rejected the state’s argument, saying it “would effectively obliterate the distinction between recoupment and setoff and thereby exempt California entirely from the Bankruptcy Code’s restrictions on setoff.”