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CHAPTER 13 PLAN
IMPORTANT: This firm makes NO representations as to the accuracy or current status of any law, case, article or publication cited herein or linked to. Warning – some of these references are pre-BAPCPA.
ARIZONA CHAPTER 13 MODEL PLAN - EFFECTIVE 12/1/17
Arizona adopted a chapter 13 model plan – effective for all cases filed, converted after December 1, 2017
According to the Arizona Bankruptcy Court the failure rate of those who file their own chapter 13 cases (without an experienced chapter 13 attorney) is over 98%. Even with a very good chapter 13 attorney the failure rate is between 40 and 50%. Why? Because life happens!! Most people are in chapter 13 cases for five years (a few as little as three years). During that period life goes on for the debtor – their income changes, their life situation changes (marriage, divorce, children or death), their goals change (keep the house or give it up, retire or keep working).
Ranta v. Gorman, No. 12-2017We therefore hold, in agreement with the Sixth Circuit, that “a debtor with zero or negative projected disposable income may propose a confirmable plan by making available income that falls outside of the definition of disposable income—such as ․ benefits under the Social Security Act—to make payments under the plan.” Baud, 634 F.3d at 352 n. 19; see also In re Kibbe, 361 B.R. 302, 314 n. 11 (B.A.P. 1st Cir.2007) (per curiam) (noting that the revised definition of projected disposable income “does not preclude a debtor’s use of available monies excluded from the definition ․ to support the feasibility of the debtor’s plan). Thus, in evaluating whether a debtor will be able to make all payments under the plan and comply with the plan, the bankruptcy court must take into account any Social Security income the debtor proposes to rely upon, and may not limit its feasibility analysis by considering only the debtor’s “disposable income.” If the debtor’s actual net income, including Social Security income, is sufficient to cover all the required payments, the plan is feasible.
In re Barraza, 346 B.R. 724 (Bkrtcy.N.D.Tex. 2006) RUSSELL F. NELMS, Bankruptcy Judge Case dismissed or converted based on abuse for debtor working 80 hours a week at two jobs
Debtor cannot claim IRS ownership expenses for car that is paid off.
Debtor cannot deduct payments toward 401(k) loan from income in doing the means test, but can deduct them for calculation of chapter 13 disposable income § 707(b)(2), § 1325(f), 1325(b)(3)(A)
Although the court acknowledged that the equities favored permitting the hard-working and sincere debtor to file chapter 7, the court felt bound by the strict letter of the Code. “The starting point for the court’s analysis is not whether the debtor’s lifestyle makes him deserving of one form of relief or another, but the language of the statute itself.”
As to a claim for ownership cost (as opposed to operating cost) the court concluded that the IRS Collection Standards must be followed, and such guidelines do not permit an ownership expense where the car is paid for. The court did not that since the debtor’s vehicle was 18 years old he would be entitled to an additional operating expense of $200.
Although acknowledging that section 1322(f) explicitly provides that repayments of loans to retirement funds do not constitute disposable income, nevertheless the codified formula for calculation of means test does not provide a step for deduction of such loan repayments, and therefore they could not be deducted from the final figure for purposes of the presumption of abuse.
Said the court: “… why are these sums not deducted from current monthly income when determining chapter 7 eligibility? Stated another way, why would Congress presume under section 707(b)(2)(A) that this amount of money could be used to pay unsecured creditors, and then deny unsecured creditors access to that money in chapter 13? The court confesses that it does not know. Nevertheless, the court’s lack of prescience as to Congress’s reasoning does not permit it to revise a formula that is otherwise clear on this particular point.”
The court also held that the debtor’s $400 monthly payment to his girlfriend to cover living expenses and to help support girlfriend’s dependent children were not deductible. The court observed that his basic living expenses were already deducted under the 707(b)(2)(A) and could not be deducted as a “special circumstance” under 707(b)(2)(B), because the language of the section does not authorize a deduction for voluntary support as to which the debtor is morally, but not legally obligated.
Finally, the court held that the disposable income calculation must be based on actual projected income (i.e., a “forward-looking analysis”) pursuant to the schedules, not merely the codified formula.
FAILURE TO PAY MORTGAGE OUTSIDE PLAN MAY RESULT IN NO DISCHARGE
7/2017 – at least one 0f our Phoenix chapter 13 trustees is considering filing motions to deny discharge based on the arguments in the cases below that post-petition mortgage payments are plan payments. As of this date there is no 9th Circuit precedent to go on, but Texas, Florida, VA, NY and CO all have decided post-petition mortgage payments are plan payments.
Side bar: the debtors sign a Certification that they Are Eligible to receive a discharge. If they failed to comply with the terms of the Plan doesn’t that = perjury?
In re Gibson, C.D. Illinois (3/2018) This Court disagrees with the absolutist view that section 1328(a) should be construed in a way that would make every uncured default on a direct payment grounds for dismissing the case without a discharge. At most, whether a Chapter 13 debtor’s failure to make direct payments warrants denial or revocation of a discharge should be determined on a case-by-case basis, under other sections of the Bankruptcy Code, taking into account the debtor’s state of mind and the effect on creditors. Where, as here, a debtor’s conduct was truly innocent and unsecured creditors were not harmed, denial of discharge is not an appropriate remedy. The punishment does not fit the crime. See in re Starkey, 2016 WL 3034738 (Bankr. D.C.) (where a mortgage claim provide for under Section 1322(b)(5) and thus excepted from discharge, the discharge of the other debts is of no concern to the mortgage creditor and the lack of payments to the mortgage creditor is of no concern to the other creditors, so that ‘denying a discharge in that circumstances would seem silly.’)
Chapter 13 provides debtors with many powerful remedies, and one of the most often utilized remedies is the right to cure and maintain payments on a secured (or unsecured) claim on which the last payment is due after the final date of the debtor’s plan pursuant to § 1322(b)(5). In practice, the curing of a debtor’s pre-petition mortgage arrears, without the incurrence of ongoing late fees, attorneys’ fees or default interest, while protected from other collection efforts by the automatic stay, is one of the great benefits to a debtor utilizing chapter 13.
Absent the completion of all payments (INCLUDING THE PAYMENTS TO BE MADE OUTSIDE THE PLAN – SAY TO THE MORTGAGE COMPANY), the debtor has not completed the terms of the “new contract” that he/she proposed to all of his/her creditors and that was confirmed by the bankruptcy court. A debtor who does not complete all payments has not completed all payments under the plan and is not entitled to a discharge, as set forth in § 1328(a).
In re Gibson, 12-81186 (Bankr. C.D. Ill. March 5, 2018) Failing to make direct payments on a nondischargeable mortgage is not grounds for denying a chapter 13 discharge, according to Bankruptcy Judge Thomas L. Perkins of Peoria, Ill. The debtors confirmed a five-year plan provided for the debtors to make direct payments on the first and second mortgages on their home. Although the first mortgage was current at filing, there was more than $9,000 in arrears on the second mortgage to be cured under the plan with payments from the trustee.
Near the end of the plan payments, the trustee filed and served two notices under Bankruptcy Rule 3002.1(f) pertaining to the mortgages. The notices stated that the debtors had made all payments required to be made to the trustee, that the pre-petition arrears on the second mortgage had been paid, and that the debtors were to make direct payments on both mortgages.
The lender on the second mortgage responded under Rule 3002.1(g) by saying that the arrears had been cured but that the debtors were about $19,000 in default on second mortgage payments due after filing. The trustee then moved to dismiss the chapter 13 case without granting a discharge.
Judge Perkins held a trial and concluded that the debtors misunderstood the plan. According to the judge, the debtors believed they were not required to make payments on the second mortgage. They testified that they understood their lawyer as telling them that they were only required to pay the first mortgage.
Judge Perkins denied the trustee’s motion to dismiss and granted the discharge, noting, however, that the debt on the second mortgage was not dischargeable. In his 17 years on the bench, the judge said, he had “never dismissed a chapter 13 case without discharge, where the required payments to the trustee were completed, for the reason that the debtor failed to make all of the direct mortgage payments.”
In re Tran, (Bkrtcy.N.D.Cal.) July 7, 2010: Plans – Debtor’s ineligibility for Chapter 13 discharge did not prevent strip off of lien through plan. A bankruptcy judge in California held that a Chapter 13 debtor’s ability to use a plan to strip off a wholly unsecured junior lien is not conditioned on the debtor’s eligibility for a discharge, but solely upon the debtor’s obtaining confirmation of, and performing under, a Chapter 13 plan that meets all statutory requirements. The judge disagreed with various cases to the contrary. Nonetheless, a Chapter 13 petition filed by a debtor who was solvent, in a balance sheet sense, and whose prior Chapter 7 discharge less than four years before the petition date left her ineligible for discharge in Chapter 13, had to be dismissed as a “bad faith” filing. The debtor’s proposed plan provided for payment only of a relatively small amount of arrearages on debts secured by a first deed of trust and served no real purpose other than to allow the debtor to strip off a wholly unsecured junior deed of trust lien in circumvention of the prohibition against lien stripping in Chapter 7.
In Re: Mansaray-Ruffin, No. 05-4790 (U.S. 3rd Circuit Court of Appeals, June 24, 2008)
A debtor in a Chapter 13 bankruptcy case did not invalidate a lien on her property by providing for it as an unsecured claim in her confirmed plan, without initiating an adversary proceeding as required by the Federal Rules of Bankruptcy Procedure. Includes lengthy dissent.
In re: Richard W. Paschen (07/10/02 – No. 01-16353) (11th Cir Ct App) 11 U.S.C. section 1322(c)(2) permits Chapter 13 debtors to bifurcate under-secured, short-term home mortgages into secured and unsecured claims, with the unsecured claim subject to “cramdown” pursuant to 11 U.S.C. section 1325(a)(5).b WARNING: PRE-BAPCPA
AVOIDING A LIEN IN 13 PLAN
Effective 12/1/17 – Under former Bankruptcy Rule 4003(d), lien avoidance under 11 U.S.C. § 522(f) was done exclusively by the filing of a motion. The rule now permits lien avoidance to be initiated through a plan provision. Rule 4003(d) is amended to provide that a lien may be avoided by filing either a motion or by serving a chapter 13 plan on the lien holder in the manner provided for in Rule 7004. New Rule 5009(d) also provides a procedure for obtaining an order declaring that the lien is released under the terms of a confirmed plan.
DEALING WITH SECURED CLAIMS IN CHAPTER 13 PLAN
New rule (12/1/17) In addition to filing a motion or claim objection, Bankruptcy Rule 3012(b) now permits the debtor to request a determination of the amount of an allowed secured claim through a chapter 13 plan provision, except for claims of governmental units (which may be made only by motion or claim objection). If the plan is used, it must be served in the manner provided for service of a complaint and summons under Bankruptcy Rule 7004, which in most cases means first class mail. Rule 3015(g)(1) is also amended to provide that any determination of the secured claim amount made through confirmation of a chapter 13 plan is binding on the creditor, even if the creditor files a proof of claim in a different amount and no objection to the claim is filed.
If the plan contains a request that property be valued to determine an allowed secured claim under Rule 3012(b) or a request for avoidance of a lien under Rule 4003(d), it must be served under the procedures in Rule 7004. Service under Rule 7004 ordinarily is done by first class mail, except that insured depository institutions must be served pursuant to Rule 7004(h) by certified mail addressed to an officer of the institution. If these requests are made in the plan, the debtor must also highlight this in an initial paragraph of the plan, usually by checking an applicable box.
HOA PRE-PETITION DEBT MAY BE STRIPPED IF NO EQUITY OVER DEBT SECURED BY FIRST
Order Avoiding Lien on Real Property, Huggins vs Westbrook Townhouse HOA, 2:11-bk-14366; 2:11-ap-02234-GBN
“(1) For purposes of Debtors’ Chapter 13 plan only, the lienholder’s claim is valued at zero. Lienholder does not have a secured claim and the HOA lien for pre-petition amounts owed by Debtors may not be enforced, pursuant to 11 USC SS 506, 322(b)(2) and 1327, provided that the Chapter 13 case is completed and the Debtors receive a discharge.
(2) This Order shall become part of Debtors’ confirmed Chapter 13 plan.
(3) Upon entry of a discharge in Debtors’ Chapter 13 case, the HOA Lien for pre-petition amounts owed by Debtors shall be voided for all purposes and, upon Application by Debtors, the Court will enter an appropriate form of judgment voiding the HOA lien, which when recorded will operate as a release of all the liens for the pre-petition debt.”
CHANGE IN MORGAGE PAYMENTS
Home Funds Direct v. Monroy, No. 10-60005 (9th Circuit) Language in chapter 13 plan can require the secured creditor take certain procedural obligations under the plan – such as notifying the debtor, debtor’s attorney and trustee of changes in the mortgage payment: has ruled that a court-authorized addendum to a chapter 13 plan altering what must be included in a mortgagee’s monthly statements does not violate the separation of powers clause of the constitution and was consistent with the purpose and requirements of RESPA. The court further found that freedom from reporting requirements was not a “right” protected from modification by section 1322(b)(2).
DEEDING PROPERTY TO LENDER
In re Watt, Case No. 14-31295-tmb13, (D. Or 10/15/14) Bankruptcy judge decided there were no prohibitions to allowing the Debtors to both surrender the Property and vest it in BONY Mellon. Nor is there any indication that Debtors plan was filed in bad faith. Accordingly, Court confirmed the Second Amended Plan over the objection of BONY Mellon. However, the Order Confirming Plan should amend the plan by interlineation to make clear that the Debtors are surrendering the Property and that entry of the Order has no effect on the relative priority or extent of the liens against the Property.
In re Rose, 512 B.R. 790 (Bankr. W.D. N.C.July 8, 2014) (case no. 4:12-bk-40743)Chapter 13—Treatment of secured claims— Transfer of collateral to creditor: No provision of the Bankruptcy Code permits a Chapter 13 debtor to force a secured creditor to accept a conveyance of the property serving as collateral for the debt. Nor does Florida law permit a debtor to compel a secured creditor to foreclose on the property or take title to the property. The court ultimately concluded that neither the Bankruptcy Code nor Florida state law permitted the court to compel the SBA to foreclose or accept title to the property by a quitclaim deed. However, in a clever work-around, the court authorized the debtors to deliver a quitclaim deed to the SBA and record it if the SBA’s actions (or lack thereof) demonstrated acquiescence under applicable Florida law.
VEHICLES IN CHAPTER 13
Tidewater Fin. Co. v. Kenney, No. 07-1664 (U.S. 4th Circuit Court of Appeals, June 25, 2008)
In a Chapter 13 bankruptcy proceeding, an order confirming the debtor’s Chapter 13 bankruptcy plan is reversed and the case remanded for further proceedings where: 1) the parties are left to their contractual rights and obligations and a creditor may pursue an unsecured deficiency claim under state law after a debtor satisfies the requirements for plan confirmation under section 1325(a)(5)(C) by surrendering his 910 vehicle; and 2) the circuit court joints the Seventh Circuit Court of Appeals in further recognizing that such unsecured debt need not be paid in full any more than other unsecured debts, but it cannot be written off in total while other unsecured creditors are paid some fraction of their entitlements.
QUESTIONS: Can a debtor purchase a vehicle while in a chapter 13?Does the debtor need court approval?
ANSWER: Depending on the policy of the chapter 13 trustee it might not be necessary to get the quote before filing the motion to incur new debt. Will need to prepare the motion and have the trustee sign it, then file with the court. No specific length of time for the court to sign, but normally done in a few days. Once the order is signed the Debtor takes it to the car dealer and purchases the vehicle.
File a new plan including intent to surrender the old vehicle. Depending on the trustee the plan may need to include the new vehicle payment, or file an amended J with new payment. If you do not know the exact amount then use the highest guideline vehicle payment allowed and adjust when the payment amount is settled and adjust the final Plan payment accordingly when preparing the SOC.
Talk with the trustee in order to determine what you will need.
The original lender will still need to file a motion for relief from stay even if the amended/modified plan provides for surrender of the vehicle. So, if possible, it is best to have specifics about the new car before the old car is surrendered.
INTEREST RATES - CHAPTER 13 CRAMDOWN & ‘TILL’
Till v. SCS Credit Corp. (US Sup Ct 05/17/04 – No. 02-1016) Four justices conclude that the “prime-plus” or “formula rate” best meets the purposes of the Bankruptcy Code’s cram down provision; because the proposed 9.5% interest rate is higher than the risk-free rate, it is sufficient to account for the time value of money, which is all 11 U.S.C. section 1325(a)(5)(B)(ii) requires.
ADEQUATE PROTECTION PAYMENTS IN 13
In re Brown, 348 B.R. 583 (Bkrtcy.N.D.Ga. 2006) JOYCE BIHARY, Bankruptcy Judge Court has discretion to alter the timing of adequate protection payments to PMSI secured creditor, and direct that payment will go toward principal, not interest § 1326(a)(1)
PMSI creditor objected to chapter 13 plan. Creditor argued that the payment had to be made directly to creditor rather than through the trustee, and should be applied to interest rather than the principal.
The court pointed to the language in § 1326(a)(1) stating “Unless the court orders otherwise …” and held that this language gives the court discretion to alter the requirements of the remainder of the section which provides adequate protection payments to be paid within 30 days of filing the petition directly to the creditor with proof of payment to the trustee. And, payment could be made to the trustee rather than the creditor.
The opinion offers a thorough exploration of the history of the general rule regarding postpetition interest and concludes “Past bankruptcy practice supports the conclusion and the Court holds that these pre-confirmation adequate protection payments are to compensate for any depreciation in the collateral and should be applied to principal only.”
CREDITOR VIOLATED DISCHARGE FOR FAILING TO PROPERLY CREDIT PAYMENTS § 524(i)
Scott v. Caliber Home Loans, Inc. (In re Scott), 2015 Bankr. LEXIS 2472 (Bankr. N.D. Okla. July 28, 2015) (Michael, C.B.J.). Creditor violated the discharge injunction by failing to properly credit debtor’s chapter 13 plan payments and claiming late charges.
EARLY CHAPTER 13 DISCHARGE
In re Fridley, 380 B.R. 538 (9th Cir. BAP 2007). Held that debtors could not complete their Chapter 13 plan and obtain an early discharge by paying the remaining amounts due early, without first obtaining an order of the court allowing them to do so.
BALLOON PAYMENTS and CHAPTER 13
In re Eubanks. 219 B.R. 468 (6th Cir. BAP 1998) This 6th Cir BAP case provides that not only can one spread out the matured debt over the life of the Plan, but insofar as 1322(c)(2) is phrased as a specific exception to 1322(b)(2), the mortgage can be crammed down to the value of the house as may be appropriate under the facts.
OPINION: First Union Mortgage Corporation appeals the bankruptcy court’s orders overruling objections and confirming the Debtor’s Chapter 13 plan. The bankruptcy court held that the 1994 enactment of 11 U.S.C. § 1322(c)(2) created an exception to the protection from modification in § 1322(b)(2) that permitted a Chapter 13 plan to bifurcate an undersecured “short term” mortgage on the debtors’ principal residence. We affirm.
Sample response to objection to plan (from Nebraska):
COMES NOW the Debtors above named, by and through their attorney, and for their Response to (creditor)’s Objection to Confirmation of Plan states as follows:
1. That the Debtors agree with paragraphs 1, 2, and 3 of (creditor)’s Objection to Confirmation of Debtors’ Chapter 13 Plan. Doc. No. 13.
2. That the Debtors’ Chapter 13 Plan provides that (creditor) be paid in full through the Plan pursuant to 11 U. S. C. Section 1322(c)(2), which serves as an exception to the antimodification provisions of section 1322(b)(2), because the loan will have matured prior to the final plan payment.
3. That the clear intention and spirit of section 1322(c)(2) is to allow the Debtors to extend the repayment of the loan at issue over the length of the plan.
4. That case law makes it clear that 1322(c)(2) applies to balloon payments that mature pre-petition. See In re Dorsett, 2004 Bankr. LEXIS 1375 (Bankr. C.D. Ill. Sept. 15, 2004)(citing In re Dasher, 2000 Bankr. LEXIS 2003 (Bankr. M.D. Ga. Oct. 27, 2000); In re Sarkese, 189 B.R. 531 (Bankr. M.D. Fla. 1995); In re Chang, 185 B.R. 50 (Bankr. N.D. Ill. 1995); In re Escue, 184 B.R. 287 (Bankr. M.D. Tenn. 1995); In re Jones, 188 B.R. 281 (Bankr. D. Or. 1995)).
5. That the Debtor requests they be allowed to submit a Stipulated Order Confirming Plan or in the alternative file an Amended Plan.
WHEREFORE Debtors pray the Court allow the Debtors to submit a Stipulated Order
Confirming Plan or in the alternative to file an Amended Plan.
PROPERTY (INCLUDING NON-EXEMPT) REVESTS IN DEBTOR IF CHAPTER 13 DISMISSED
Viegelahn v. Lopez (In re Lopez), 17-50297 (5th Cir. July 31, 2018) Debtors who sell their exempt homestead and lose the exemption because they do not reinvest the proceeds in another home are nonetheless entitled to retain the proceeds on dismissal of their chapter 13 case, the Fifth Circuit held.
The debtors confirmed a chapter 13 plan calling for payments of $1,100 a month for 60 months. About two years into the plan, they sold their exempt home without court authorization. Two years later, they sought approval of the sale. Because they had not reinvested the proceeds in another home within six months, the net proceeds of more than $40,000 had lost their exempt status under Texas law.
The bankruptcy judge gave the debtors a choice. They could remain in chapter 13 and use about half of the proceeds for needed medical care, but the other half would go to the trustee for distribution to creditors. Or, the bankruptcy judge said, they could dismiss the case and retain the proceeds, but they would not receive a discharge. Meanwhile, the bankruptcy judge approved the sale nunc pro tunc but directed the trustee to hold the proceeds for the time being.
The debtors took the second option and filed a motion to dismiss voluntarily. In response, the chapter 13 trustee argued that the debtors’ failure to obtain court approval before the sale showed bad faith, constituting “cause” for overriding the presumption in Section 349(b) and blocking the proceeds from revesting in the debtors.
Bankruptcy Judge dismissed the chapter 13 case without prejudice, found no “cause” for overriding Section 349(b), and directed that the proceeds be turned over to the debtors after deducting the trustee’s commissions. (upheld by Circuit Court – noting that “proceeds from post-petition sales of a debtor’s exempt homestead generally must be returned to the debtor upon voluntary dismissal.” Alluding to Harris v. Viegelahn, 135 S. Ct. 1829, 1835 (2015), she said the Supreme Court firmly rejected the suggestion that a confirmed chapter 13 plan gives creditors a vested right to funds held by a trustee. The trustee who lost in Judge Elrod’s opinion was the same chapter 13 trustee who lost in Harris.
CONVERSION TO 7 - POST-PETITION WAGES BELONG TO DEBTOR IN POST-CONFIRMATION CONVERSION
Harris v. Viegelahn, 14-400, The Supreme Court (on May 18, 2015) held that a debtor who converts to a chapter 7 is entitled to return of any post-petition wages not yet distributed by the chapter 13 trustee. In this 9-0 decision, the court ruled that the moment the Chapter 13 plan is terminated, the deal is immediately off with the Trustee and creditors and all money not paid out is due back to the debtor right away.
ADOR LEVIES CHAPTER 13 FUNDS PRE-DISMISSAL
In re Cohen, 2:14-bk-11079-DPC (AZ Bk Ct, 2/29/16) Subsequent to dismissal of this chapter 13 case, the Arizona Department of Revenue (“AZDOR”) issued a levy against the Chapter 13 Trustee, Edward J. Maney, seeking payment from the Trustee of $4,718.85 to AZDOR from the funds paid to the Trustee during the course of Jeffrey Allen Cohen’s (“Debtor”) chapter 13 case. The Trustee filed a motion (“Motion”) to quash the AZDOR levy, contending § 1326(a)(2)1 requires the Trustee to pay such funds only to the Debtor. The Court denies the Trustee’s Motion and directs the Trustee to pay the sum of $4,718.85 from the funds held by the Trustee at the time this chapter 13 case was dismissed.
DENIAL OF ORDER CONFIRMING PLAN NOT A FINAL ORDER
Bullard v. Blue Hills Bank, the Supreme Court (On May 4, 2015) issued its opinion in , holding that an order denying confirmation of the debtor’s proposed chapter 13 plan is not a “final” order that the debtor can immediately appeal.
PLAN THAT PAYS ONLY ADMINISTRATIVE EXPENSES (ATTORNEY FEES)
In re Jones, No. 17-40497, 2018 Bankr. LEXIS 1244 (Bankr. S.D. Ill. April 26, 2018) In this Court’s view, attorney fees, which are governed by 11 U.S.C. § 328, should not be intertwined with § 1325(b)(1)’s requirement that debtors pay either 100% of general unsecured claims or all of their disposable income.”
Chapter 13 debtor, Gary Jones, proposed to pay secured creditors directly, and pay into the plan $100.00 per month with that amount going first to pay his attorney’s and the trustee’s fees in full, and then to pay 7.4% to his general unsecured creditors. Despite the fact that the attorney’s fees were below the court-approved no-look fee and that Mr. Jones could not afford to pay more into the plan, the trustee objected to confirmation on the basis that the plan was not filed in good faith.
In re Puffer (1st Circuit) – There is no per se bar to chapter 13 plans that pay only administrative expenses. This holding was followed by the Fifth Circuit in In re Crager Chapter 13 plan requiring lender to notify debtor of changes to mortgage payments.
In that case Espinosa (9th Cir), a chapter 13 debtor, sought to discharge the accrued interest on his student loan while paying the principle through the plan. He did not initiate an adversary proceeding to determine undue hardship, but included the student loan in his plan. Although the student loan creditor received actual notice of the plan, it did not object to the partial payment. The bankruptcy court confirmed the plan, the debtor complied with it, and the debtor was discharged in 1997. Several years later, USAF attempted to collect the unpaid interest on the loan. Espinosa sought to have the bankruptcy court enforce the discharge and USAF counterclaimed with a motion to void confirmation of the plan under Fed. R. Civ. P. 60(b)(4).
The Supreme Court found that Rule 60(b) relieves a party of a final judgment only in the rare circumstance that the “judgment is premised either on a certain type of jurisdictional error or on a violation of due process that deprives a party of notice or the opportunity to be heard.” The Court began its analysis with the finding that the statutory requirements of undue hardship and the initiation of an adversary proceeding are not jurisdictional. The issue then, was whether USAF received adequate notice to satisfy due process. The Court found that the existence of actual notice, albeit not the type of notice proscribed by the bankruptcy rules, was sufficient to satisfy due process.
The Court addressed USAF and the Amicus, U.S. government’s, argument that the bankruptcy court’s order is void because it went beyond the court’s power. Although the Court found the failure to comply with §§ 523(a)(8) and 1328(a) before confirming the plan was “legal error,” that error did not rise to the level necessary to void a final judgment. This was especially so as the creditor had actual notice and was not permitted to “sleep on its rights.”
The Court disagreed with the aspect of the Ninth Circuit’s decision, however, insofar as it held that a bankruptcy court could confirm a plan which would discharge a student loan without an adversary proceeding so long as the creditor did not object.
CAN STUDENT LOANS BE A SEPARATE CLASS IN CHAPTER 13?
There is a conflict between § 1322(b)(1) and (b)(5) which permits payment outside the plan of those debts that exceed the term of the plan. This should apply to student loans. But, the majority of the courts seem to state that it would impose and unfair discrimination if the plan provides that student loans are paid outside the plan. The statutory language remains confusing at best and challenges bankruptcy judges with this extremely awkward analysis. Most court’s excuse is that Congress could provide a clearer path by explaining the interplay between §1322(b)(1) and (5) and expressly stating the conditions that allow a chapter 13 debtor to provide preferential plan treatment to student loan obligations.
In re Engen, Case No. 15-20184 (Bankruptcy Court, Dist of Kansas 12/16). The Debtors propose a plan in which student loan creditors are paid as a separate class before other general unsecured creditors. The Court’s reference to “separate classification” includes this favorable treatment. The Court, having reviewed the pleadings and counsels’ arguments, overrules the Trustee’s objection. Debtors’ proposed plan satisfies § 1322(b)(1) because Debtors’ separate classification and favored treatment of student loans does not discriminate unfairly, and the student loan claims are substantially similar.
In re Harding, 423 B.R. 568 (Bankr. S.D. Fla. 2010). It does not allow different classification of the nonpriority student loan, but it issues an injunction against penalties.
LENGTH OF PLAN MUST BE EQUAL TO APPLICABLE COMMITMENT PERIOD
In re Flores, D.C. No. 6:10-29956-MJ, No. 11-55452 (C.D.CA) (9th Circuit 8/29/13) In Maney v. Kagenveama (In re Kagenveama), 541 F.3d 868, 875 (9th Cir.2008), we held that 11 U.S.C. § 1325(b)(1)(B) does not impose a minimum duration for a Chapter 13 bankruptcy plan if the debtor has no “projected disposable income,” as defined in the statute. Today, sitting en banc, we overrule that aspect of Kagenveama and hold that the statute permits confirmation only if the length of the proposed plan is at least equal to the applicable commitment period under § 1325(b)(4). Accordingly, we affirm the judgment of the bankruptcy court.
MEANS TEST v. I MINUS J
In re Rodgers, (Bkrtcy.M.D.Fla.) July 1, 2010: Plans – Discrepancy between debtors’ disposable income and proposed plan payments supported finding of bad faith.
A Chapter 13 plan that provided for payment of only $100.00 per month by debtors whose schedules disclosed net disposable income of $2,056.16 per month was not proposed in good faith, though this surplus resulted from exempt income that the debtors received, in the amount of $2,128.00 per month, in Social Security disability benefits. A bankruptcy judge in Florida held that the exempt nature of this income did not alter the fact that it was disposable income available to fund the debtors’ plan.
BANKRUPTCY (Under Chapter 13 bankruptcy, the court must calculate the debtor’s projected disposable income by the “forward-looking approach.”)
Before Respondent filed for Chapter 13 bankruptcy in 2006 for her unsecured debt, she received a lump sum from her employer that inflated her gross income. Respondent filed a plan to pay $144, but petitioner calculated a mechanical approach that resulted in a $756 payment for 60 months. The Bankruptcy Court endorsed the Respondent’s plan, stating that the projected income should consider the actual income of the debtor.
The Petitioner then appealed to the Tenth Circuit Bankruptcy Appellate Panel, who affirmed the decision. The United States Supreme Court held that the court must calculate a debtor’s projected disposable income with the “forward-looking” calculation of changes that are known, or virtually known, at the time. The court reasoned that the natural language of the word “projected” along with its visibility in federal statutes indicated that it was meant to involve averages.
Ranta v. Gorman, No. 12-2017In 2005, however, Congress amended the definition of “disposable income” with the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub.L. No. 109–8, 119 Stat. 23 (2005). The Code now defines “disposable income” as “current monthly income received by the debtor” less “amounts reasonably necessary to be expended” for the maintenance or support of the debtor, certain charitable contributions, and certain business expenses. 11 U.S.C. § 1325(b)(2). “[C]urrent monthly income” means the debtor’s average monthly income from all sources during the previous six months, excluding, among other things, “benefits received under the Social Security Act.” Id. § 101(10A). Thus, Social Security income is now excluded from the definition of “disposable income.” In addition, the Code now requires above-median income debtors to use the “means test”—a statutory formula for determining whether a presumption of abuse arises in Chapter 7 cases—when calculating the “amounts reasonably necessary to be expended” for the debtor’s maintenance or support. See id. §§ 1325(b)(3), 707(b)(2). As a result, only certain specified expenses are included in the above-median income debtor’s “amounts reasonably necessary” for maintenance or support. Id. For below-median income debtors, however, the full amount reasonably necessary for maintenance and support is included. See § 1325(b)(2)(A)(i).
Although the Bankruptcy Code defines the term “disposable income,” it does not specifically define “projected disposable income.” However, in Hamilton v. Lanning, the Supreme Court explained that “projected disposable income” should be calculated based on “disposable income,” using a “forward-looking approach.” 130 S.Ct. 2464, 2469 (2010). First, the debtor’s “disposable income” should be multiplied by the number of months in the debtor’s plan, and in most cases the result will be determinative. Lanning, 130 S.Ct. at 2471. However, “in exceptional cases, where significant changes in a debtor’s financial circumstances are known or virtually certain, the bankruptcy court has discretion to make an appropriate adjustment.” Id.; see also In re Quigley, 673 F.3d 269, 273–74 (4th Cir.2012) (noting that under Lanning, bankruptcy courts may account for foreseeable changes in both income and expenses).
The Trustee first claims that the revised definition of “disposable income” applies only to above-median income debtors, not to below-median income debtors, like Mort Ranta. But the Code provides a single definition of “disposable income,” and that definition uses “current monthly income” as a starting point without differentiating between debtors of different income levels. 11 U.S.C. § 1325(b)(2). Although the Code goes on to distinguish between above-median income and below-median income debtors for purposes of calculating the “amounts reasonably necessary” for the debtor’s maintenance or support, id. § 1325(b)(3), there is no distinction on the income side.
DEBTOR OVER MEDIAN, BUT NEGATIVE DMI – CAN PLAN BE LESS THAN 60 MONTHS: APPLICABLE COMMITMENT PERIOD
In re: Cesar Ivan Flores, (Danielson v. Flores) No. 11-55452 9th Cir, 8/31/12)
On August 31, 2012, the court in Flores reconfirmed the decision in Maney v. Kagenveama, 541 F.3d 868 (9th Cir. 2008), that the five year commitment period does not apply when the debtor has zero or negative disposable income. In Chapter 13 proceedings, the bankruptcy court’s order sustaining the trustee’s proposed plan of reorganization with a duration of 60 months, rather than the debtors’ proposed 36-month plan, is reversed and remanded, as Lanning is not clearly irreconcilable with Kagenveama‘s construction of “applicable commitment period,” and the current Ninth Circuit precedent plainly allows debtors with no “projected disposable income” to confirm a plan in shorter duration than the applicable commitment period found in 11 U.S.C. section 1325(b).
Good summary: In re Flores, from the Ninth Circuit. This upholds Kagenveama on the issue of applicable commitment period (ACP) as applied to projected disposable income (PDI) in chapter 13, under section 1325(b). Thus, in the Ninth Circuit, an above-median-income debtor with no PDI can confirm a plan that is shorter than the ACP of five years. The court upheld the approach that ACP doesn’t apply to a debtor with no PDI. This means a split continues between the Ninth Circuit and the Sixth (Baud) and the Eleventh (Tennyson) Circuits. The court found that the Kagenveama decision is not clearly irreconcilable with Hamilton v. Lanningand therefore only the Supreme Court or the Ninth Circuit en banc can negate Kagenveama.
In Re: David Reed and Rebecca Reed (Oregon Case No. 10-38478-elp13)
Judge concludes that debtors’ projected disposable income is less than zero, and that, under controlling Ninth Circuit precedent, they are not required to commit to a five-year plan period. Debtors’ plan as proposed will be confirmed.
In re: Kagenveama, No. 06-17083 (U.S. 9th Circuit Court of Appeals, June 05, 2008)
In an appeal arising from Chapter 13 bankruptcy proceedings, an order confirming a debtor’s bankruptcy plan is affirmed where: 1) “projected disposable income” means “disposable income,” as defined by Bankruptcy Code section 1325(b)(2), projected over the “applicable commitment period,”; and 2) although the term “applicable commitment period” denotes the time by which a debtor is obligated to pay unsecured creditors, the requirement is inapplicable to a plan submitted voluntarily by a debtor with no “projected disposable income.” Read more…
In re Davis, 348 B.R. 449 (Bkrcy.E.D.Mich. 2006) PHILLIP J. SHEFFERLY, Bankruptcy Judge “Applicable commitment period” determines the length of the chapter 13 plan § 1325(b)(1)(B)
In case where the debtor’s income was over the state median, Chapter 13 trustee objected to debtor’s plan proposing to make payments for 36 months rather than 50 months. The debtor argued that the term “applicable commitment period” found at § 1325(b)(1)(B) does not determine the actual length of the plan but only functions as a multiplier pursuant to § 1325(b)(4). The court rejected this theory primarily based on the dictionary definitions of the words “period” and “commitment,” and concluded “… a debtor’s applicable commitment period, as determined by § 1325(b)(4) does impose a minimum length of a plan, rather than a calculation of a minimum amount…”
In re Fuger, 347 B.R. 94 (Bkrtcy.D.Utah 2006) WILLIAM T. THURMAN, Bankruptcy Judge
Above-median income debtor is required to have a plan of 60 months “The Applicable Commitment Period” § 1325(b)(1)(B)
The trustee argued that the term “applicable commitment period” uses the word “period” and therefore is a measure of time. Debtor argued that the “applicable commitment period” was only a multiplier used in calculating disposable income. While acknowledging that the terms are unclear as used in the BAPCPA amendments, the court looked to Congressional intent and agreed with the trustee, noting that the same word “period” is used in that code section under pre-BAPCPA text to mean a period of time, and was also used in calculating projected disposable income.
“The court concludes that Congressional intent underlying the amendments to § 1325(b)(1)(B) is clear – – – the term ‘applicable commitment period’ is both a monetary and a temporal provision. It is monetary in the sense that it has always required debtors to commit to pay unsecured creditors a set return. It is temporal in the sense that it has always required debtors to determine that return by projecting over a specific time period, and it provides debtors with a time limit for performing under a chapter 13 plan.”In re: Zahn, No. 07-1974 (U.S. 8th Circuit Court of Appeals, May 22, 2008)
A debtor who objects to her own Chapter 13 plan may be an “aggrieved party” and have standing to appeal confirmation of such plan.
In re Demonica, 345 B.R. 895 (Bkrtcy.N.D.Ill. 2006) Debtor’s “projected disposable income” had to be based on schedules I” and “J” rather than an “historical average” § 1325(b)(1)(B), § 707(b)(2)(A) Chapter 13 trustee objected to plan where projected disposable income was based on the code formula, and where debtor’s current monthly income (“disposable income”) was $1,199.55 but his actual “projected monthly income” from the schedules was $2,517.36. The court held that the actual amount that must be paid through the plan was the projected disposable income as shown on the schedules. The court also held that in order to determine the proper expenses to be deducted from projected income, the debtor is allowed to take the full National and Local Standard amounts. Additional expenses for the categories specified by the IRS are only proper if they fall within the additional expense provisions as specified by the IRS or as defined in the Code. In order to claim Other Necessary Expenses, the debtor must itemize, document and provide a detailed explanation of the special circumstances that render those expenses reasonable and necessary.
CHANCE IN INCOME DURING FIRST 3 YEARS OF PLAN – INHERITANCE, BONUSES, ETC.
Most courts analyzing post-petition windfalls, such as an inheritance, have found them to be property of the Chapter 13 estate. See, e.g., In re Bass, 267 B.R. Page 4 812, 814 (Bankr.S.D.Ohio 2001) (“A debtor might receive unanticipated income over the first thirty-six months of the plan that is not reasonably necessary for maintenance or support (e.g., wage increases, tax refunds, inheritances, gifts, lottery proceeds, insurance proceeds, proceeds from causes of action, or proceeds from the sale of property).”); In re Jacobs, 26,3 B.R. 39 (Bankr.N.D.N.Y.2001) (“For purposes of plan modification, an increase in income or the receipt of a large sum of money constitutes a substantial change…. [T]his is so where the debtor acquires property post-confirmation, the likes of which would result in a windfall to the debtor absent plan modification, such as lottery winnings or an unexpected inheritance.”); In re Nott, 26,9 B.R. 250 (Bankr.M.D.Fla.2000) (holding that a $300,000.00 inheritance one year after confirmation was property of the estate pursuant to § 1306(a)); In re Studer, 23,7 B.R. 189 n. 5 (Bankr. M.D.Fla.1998) (“Courts easily have found a substantial or unanticipated change where the debtor’s income drastically increases. Such windfalls include winning the lottery after confirmation of the Chapter 13 plan. Substantial and unanticipated circumstances also include the receipt of a large inheritance.”); In re Euerle, 7,0 B.R. 72 (Bankr.D.N.H.1987) (addressing an increase in debtor’s income through receipt of a large inheritance).
PAYMENTS TO RETIREMENT LOAN WHILE IN CHAPTER 13
RESFL Five LLC v. Ulysse, 16-62900 (S.D. Fla. Sept. 29, 2017) Court permitted continuing contributions into retirement plan (debtors contributed pre-petition and are approaching retirement age.) This record reveals a pre-petition pattern of preparation for retirement. Significantly, it is also undisputed that Mr. Ulysse is nearing his retirement age. There is nothing unusual about an individual making contributions or increasing the amount of such contributions as retirement age draws closer, such as is the case here. Equity dictates that a debtor who is on the verge of retirement should be allowed to continue making voluntary contributions to a retirement account. Otherwise, the debtor would be deprived of the ability to obtain a fresh start. See In re Shelton, 370 B.R. at 869. Based on the record, the Bankruptcy Court’s underlying finding that the Chapter 13 Plan was proposed in good faith was not clearly erroneous
In re Johnson, 346 B.R. 256 (Bkrtcy.S.D.Ga. 2006) Debtor’s payments to their 401(k) and payroll deductions to repay a 401(k) loan need not be included in disposable income: budget for housing and transportation is flexible § 1325(a), 1325(b), 1322(f), 101(10A)(A), 101(10A)(B), § 707(b)(2)(A)(ii)(I), (A)(iii). In its analysis the court in several places cited language in the IRS Manual for clarification or support on certain issues.
Chapter 13 trustee objected to budget that deducted voluntary payments to debtor’s 401(k) pension plan, and also repayments of loan drawn from the 401(k), Court held that § 1325(b)(2) permitted such expenses as a deduction from current monthly income or disposable income.
The court appears to have held that the disposable income that must be paid through the plan is only based only on “disposable income” as prescribed by § 1325(b) and § 707(b)(2), thus excluding actual disposable income from the schedules. However, the court noted “This creates an opportunity for savvy debtors to artificially reduce CMI by intentionally avoiding pre-petition income, citing other authority for “The debtor might take an unpaid leave of absence, quit a job, or refuse overtime the[y] formerly welcomed.” Cite.
Discussing the budget calculation, the court observed ” … debtors who can demonstrate “reasonably necessary” may adjust the allowances for food and clothing by up to 5%.” The debtor may deduct actual expenses for the “Local Standards” for monthly housing and transportation expenses for debts secured by their real estate and vehicles.
Court cited § 707(b)(2)(A)(ii)(I) which states ” … the monthly expenses of the debtor shall not include any payments for debts.” The debtor may only deduct as an expense the difference between the actual payment amount and the IRS guideline amount. However, the court pointed out that notwithstanding that language, the actual expenses for secured debts may be deducted pursuant to § 707(b)(2)(A)(iii). The court disallowed the debtor’s claim for unusually high unreimbursed medical expenses, as well as the claimed amounts of deductions for income taxes because of insufficient documentation to support it. Court held that “gross income” as used in Form B22C is income before tax deductions.
STUDENT LOANS - TREATED AS SEPARATE CLASS IN 13
In re Engen, Case No. 15-20184 Bankruptcy Court, Dist of Kansas. The Debtors propose a plan in which student loan creditors are paid as a separate class before other general unsecured creditors. The Court’s reference to “separate classification” includes this favorable treatment. The Court, having reviewed the pleadings and counsels’ arguments, overrules the Trustee’s objection. Debtors’ proposed plan satisfies § 1322(b)(1) because Debtors’ separate classification and favored treatment of student loans does not discriminate unfairly, and the student loan claims are substantially similar.
SOCIAL SECURITY INCOME IN 13
In re Ragos (5th Circuit)– Holding that social security benefits are not disposable income in chapter 13 and it is not bad faith to exclude such income from calculating disposable income. In re Cranmer (10th Circuit) – Same as Ragos.
DEBTOR ENTITLED TO MODIFY PLAN AND RETURN VEHICLE
In re Mason (Bankr.N.D. CAL. 2004) A debtor operating under a confirmed Chapter 13 plan is entitled to return collateral to a secured creditor and modify the Plan to treat the creditor’s claims as unsecured.
CONFIRMED PLAN CONFLICTED WITH BANKRUPTCY CODE
In re: Bateman (05/23/03 – No. 02-11221) (11th Cir) A secured creditor cannot collaterally attack a confirmed Chapter 13 plan, even though the plan conflicted with mandatory provisions of the bankruptcy code, when the secured creditor failed to object to the plan’s confirmation or appeal the confirmation order. A secured creditor’s claim for mortgage arrearage survives the confirmed plan to the extent it is not satisfied in full by payments under the plan.
PROPERTY VESTING IN DEBTOR UPON CONFIRMATION OF PLAN
NOTE re post petition debt: Pursuant to 11 U.S.C. 1327(b), all property of the estate vests in the debtor upon confirmation “[e]xcept as otherwise provided in the plan or the order confirming the plan….” Most orders confirming in Arizona specifically proide that the property of the estate vests in the debtor.
If you carefully review Section 362, you will note that the automatic stay does NOT apply to efforts to enforce a post-petition debt against property of the debtor, i.e. property that vested in the debtor upon confirmation. A debtor in Chicago learned this the hard way when the city impounded and crushed her car due to her failure to pay post-petition parking tickets. Because the car vested in the debtor upon confirmation, the District Court found that the automatic stay did not bar the action and she was out of luck. See In re Fisher, 203 B.R. 958 (N.Dist.Ill 1997)
PAYING SECURED PORTION OF LOAN AFTER 13 COMPLETED
Enewally v. Washington Mutual Bank, No. 02-57119 (9th Cir. May 27, 2004) A Chapter 13 bankruptcy plan may not provide for dividing a loan into secured and unsecured claims with the debtor satisfying the secured claim beyond the life of the Chapter 13 plan. http://caselaw.lp.findlaw.com/data2/circs/9th/0257119p.pdf
180 DAY LIMIT TO REVOKE CONFIRMATION OF PLAN
In re Valenti (9th Cir. BAP. 2004) Fraud discovered after 180-day deadline cannot be raised to deny Plan confirmation. The 180-day period to move for revocation of confirmation for fraud is a strict deadline, even if the fraud is not discovered until after the deadline has passed. Section 105 is not a proper basis for changing the deadline. Rule 60(b) is not a basis for revocation. A timely request for revocation of confirmation cannot be amended, after the 180-day period has expired, to add new grounds not pled within the 180-day period. Where a creditor knows of a basis for challenging confirmation and fails to object, the creditor cannot be permitted to use that basis to claim fraud under after confirmation. Moreover, confirmation is res judicata as to all issues that could have or should have been litigated at the confirmation hearing. An issue “could have” been litigated at the confirmation hearing if a party in interest had the opportunity to investigate and litigate it and the debtor did not prevent it from being litigated by fraud, misrepresentation or concealment.
DEATH OF THE DEBTOR WHILE IN CHAPTER 13
Bankruptcy Rule 1016 provides the relevant authority pertaining to the chapter 13 estate of a deceased debtor: Death or incompetency of the debtor shall not abate a liquidation case under chapter 7…. In such event, the estate shall be administered and the case concluded in the same manner, so far as possible, as though the death or incompetency had not occurred. If a reorganization, family farmer’s debt adjustment, or individual’s debt-adjustment case is pending under chapter 11, chapter 12, or chapter 13, the case may be dismissed; or if further administration is possible and in the best interest of the parties, the case may proceed and be concluded in the same manner, so far as possible, as though the death or incompetency had not occurred.
The debtor’s attorney needs to discuss the options with the heirs in order to determine the best interest of the parties. A hardship discharge might be an option, depending on the circumstances.
Credit unions typically include cross-collateralization provisions in loans made to their members, and many consumers will not even realize that their loan and security agreements include cross-collateralization provisions. These provisions are sometimes referred to as dragnet, future-advance or all-indebtedness provisions and are usually in the boilerplate wording at the end of a loan or security agreement and are difficult for the consumer to understand. Cross-collateralization provisions allow the credit union to bind the collateral from one loan (such as a vehicle) to secure another debt (such as a credit card or signature loan, or even another vehicle).
In a chapter 7 bankruptcy, most of a debtor’s debts are discharged in exchange for the debtor relinquishing his/her nonexempt property. For a debtor in chapter 7 to keep an asset securing a debt that would normally be discharged, the debtor must reaffirm the debt.
In chapter 13, a debtor could elect to keep his/her vehicle and pay the secured debt through the chapter 13 plan. As long as the debtor is current on his/her bankruptcy plan payments and keeps the car insured, the debtor will likely be able to keep his/her car under bankruptcy law.
However, when a debtor has two vehicles financed from a creditor and the contracts include cross-collateralization provisions as the exhibit demonstrates, the debtor’s options are not as clear as they might appear under § 1325(a)(5), which provides:
1325(a)(5) provides that with respect to each allowed secured claim provided for by the plan –
(A) the holder of such claim has accepted the plan;
(B) [the cramdown option]; or
(C) the debtor surrenders the property securing such claim to such holder….
What happens if the credit union has multiple loans with cross-collaterialized provisions (e.g. two vehicles with separate loans)? The options under § 1325(a)(5) are unclear when dealing with a debtor who has multiple loans containing cross-collateralization provisions. Before Barragan Flores, 585 B.R. 397, 401 (W.D. Tex. 2018), it appears that no reported decisions have addressed a plan proposing a partial surrender and retention of collateral under chapter 13 with two loans that contain cross-collateralization provisions. The results in this case is that the borrowers would have to either pay for both vehicles or surrender both. (Note – this is not a 9th Circuit case).