National Associaiotn of Consumer Bankruptcy Attorney's - Case Update and Amicus

National Associaiotn of Consumer Bankruptcy Attorney's – Case Update and Amicus

Riverside Bankruptcy Court's Sua Sponte Dismissal Reversed

The District Court for the Central District of California reversed Bankruptcy Judge Johnson's dismissal of the debtors' chapter 13 case, a dismissal that occurred after debtors filed a notice of conversion to chapter 7. Taylor v. Danielson (In re Taylor), No. 11-1879 (C.D. Cal April 13, 2012). The court distinguished Marrama v. Citizens Bank of Mass., 549 U.S. 365 (2007) where the Supreme Court found that a debtor does not have an absolute right to convert a case from chapter 7 to chapter 13 under section 706(a). In Marrama, the Court reasoned, in part, that conversion from chapter 7 to chapter 13 could result in a debtor either escaping the consequences of bad faith by voluntarily dismissing under chapter 13, or benefiting from the conversion despite bad faith by gaining access to estate assets to the detriment of creditors.

Conversions from chapter 13 to chapter 7 are distinguished by the fact that upon such conversion the trustee has control over estate assets and the court retains jurisdiction over the debtor, so the concerns that were dispositive in Marrama are not present. Additionally, the Bankruptcy Rules treat conversions from chapter 7 to chapter 13 differently than conversion from chapter 13 to chapter 7. Rule 1017(f)(2) contemplates judicial scrutiny over conversions from chapter 7 to chapter 13, while, in contrast, Rule 1017(f)(3) provides that a "chapter 13 case shall be converted without court order when the debtor files a notice of conversion under . . . [§] 1307(a)." NCBRC's Tara Twomey assisted in the writing of debtor's brief.

Bankruptcy-Only Exemptions Constitutional

In a comprehensive opinion, Judge Karlin of the Bankruptcy Court of Kansas, overruled the trustee's objection to debtor's claimed exemption for earned income tax credits under a state bankruptcy-only exemption scheme. In re Westby, No. 11-40986, 2012 Bankr. LEXIS 1428, (Bankr. Kan. April 4, 2012).The court found that the exemption scheme violated neither the Uniformity nor Supremacy Clause of the U.S. Constitution.

Discussing a long line of Supreme Court cases, the court concluded that the Uniformity Clause is a constraint on congressional power and does not impose any requirement of uniformity with respect to state laws. The court further found that the uniformity requirement is met when a law applies equally to defined classes of debtors such as bankruptcy debtors.

With respect to the claimed violation of the Supremacy Clause, the court found that, where Congress had explicitly given states the power to apply their own exemptions in bankruptcy, there could be no field preemption and the exemption at issue did not conflict with either of the primary bankruptcy goals: providing debtor a fresh start, and optimizing return to creditors, and that its effect on creditors was true of all exemptions. It further noted that where Congress allowed states to choose between federal and state exemptions, the fact that a creditor may receive a different return from a debtor outside bankruptcy than from a debtor in bankruptcy, was irrelevant.

NACBA filed an amicus brief in the companion case of In re Rolin, No. 11-40950 (objection to exemption withdrawn) was considered by the court in this case.

NACBA Files Amicus on Issue of Social Security Benefits in Chapter 13 Plan

NACBA has filed an amicus brief on the issue of whether debtor's social security income may be considered by the court when addressing whether debtor's chapter 13 plan is proposed in good faith and is confirmable over the trustee's objection. Beaulieu v. Ragos (In re Ragos), No. 11-31046 (5th Cir.).

In its brief, NACBA argues that Congress has clearly removed social security income from the reach of creditors both under section 407 of the Social Security Act as well as the Bankruptcy Code. Section 101(10A) of the Bankruptcy Code defines current monthly income as: "[T]he average monthly income from all sources that the debtor receives . . . but excludes benefits received under the Social Security Act." Unlike property that enters the estate and then is removed through the mechanism of exemption, under the clear statutory language, social security benefits are excluded from the estate altogether and may not be considered for any purpose. Likewise, section 1325(b)(2), which requires that debtor apply all of his projected disposable income to the repayment of unsecured creditors, defines disposable income with reference to current monthly income which, in turn, excludes social security benefits. Contrary to the trustee's argument, the decision in Hamilton v. Lanning, 506 U.S. ___, 130 S.Ct. 2464 (2010), which addressed how to interpret the application of "projected," does not alter the underlying definition of "disposable income." Finally, NACBA's brief argues that because debtors have no obligation to contribute social security benefits to their plans, those benefits may not be considered by the court when conducting a "good faith" analysis under section 1325(a)(3).

Geoff Walsh of the National Consumer Law Center authored NACBA's brief.


In re Maharaj, No. 11-1747 (4th Cir.)

Issue: Whether the absolute priority rule applies to individual debtors in chapter 11.

Argued: March 22, 2012

NACBA filed an amicus brief in this case and participated in the argument.

Oral argument scheduled:

Dehart v. Michael (In re Michael), No. 11-1992 (3d Cir.)

Issue: Whether section 1302(b)(1) places obligation on trustee to distribute funds collected prior to conversion to chapter 7 or whether section 348(e) divests trustee of that responsibility

Date of argument: May 9,, 2012

NACBA filed an amicus brief and will participate in argument.

In re Fisette, No. 11-3119 (8th Cir.)

Issue: Whether, under Nobelman, debtor may strip wholly unsecured lien in chapter 13 plan

Date of argument: May 15, 2012

NCBRC assisted in writing debtor's brief.