Case Update from the National Association of Consumer Bankruptcy Lawyers

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"No Lien Stripping under Section 506(d)

The Tenth Circuit found that an allowed yet wholly unsecured lien may not be stripped under section 506(d) in a chapter 13 case. Woolsey v. Citibank, No. 11-4014 (10th Cir. Sept. 4, 2012). Though agreeing with the logic of the debtor's argument that the plain language of section 506(a) and (d) would lead to the conclusion that a lien that is wholly unsecured is void in its entirety, the court found that this reading of the statute has been precluded since the 1992 decision in Dewsnup v. Timm, 502 U.S. 410 (1992), and logic no longer applies to interpretation of those provisions. With some reluctance, the court rejected the debtor's invitation to limit the Dewsnup holding to chapter 7 cases and reinterpret section 506(d) for purposes of chapter 13.

The court closed by offering the relief that has availed most chapter 13 debtors faced with unsecured liens – section 1322(b)(2). Noting that most circuits, under the reasoning of Nobelman v. American Savings Bank, 508 U.S. 324 (1993), have allowed lien stripping in chapter 13 under this provision, and specifically referencing NACBA's amicus brief endorsing this avenue for relief, the court returned to the debtor's failure to rely on this provision for relief. It thus limited its opinion to the single question before it: whether section 506(d) permits lien stripping in chapter 13 and left the question of stripping under section 1322(b)(2) for another day, thereby continuing to be one of the few circuit courts that has not yet ruled on the issue.

For more in-depth discussion of this case and a copy of NACBA's amicus brief, go to

Kagenveama Survives Direct Assault

Wielding Hamilton v. Lanning, 130 S. Ct. 2464 (2010), the trustee in the Ninth Circuit case of In re Flores, launched a full-scale attack on Maney v. Kagenveama (In re Kagenveama),

541 F.3d 868 (9th Cir. 2008). Kagenveama won. The Ninth Circuit stood by its previous position that an above-median debtor with zero or negative disposable income does not need to confirm a 60 month plan under section 1325(b). Danielson v. Flores (In re Flores), No. 11-55452 (9th Cir. Aug. 31, 2012). NACBA assisted in drafting the debtor's brief in this case.

The court disagreed with the trustee's argument that Kagenveama's holding is irreconcilable with Lanning finding that while Lanning resolved the conflict between the mechanical and forward-looking approaches to "projected disposable income" by adopting the forward-looking approach (albeit with limitations relating to certainty of future income), it did not address the applicability of section 1325(b). The Lanning decision simply did not mandate any position with respect to the relevance of section 1325(b)'s applicable commitment period to debtors with zero or negative income. Kagenveama, however, specifically addressed that question and found that when a debtor has no projected disposable income at all, the applicable commitment period does not apply because section 1325(b) is inextricably linked to projected disposable income. Thus, while Lanning overruled the portion of Kagenveama that adopted the mechanical approach to projected disposable income, it did nothing to Kagenveama's holding with respect to the applicable commitment period.

The identical issue is currently pending before another panel of the Ninth Circuit. American Express v. Henderson, No. 11-35864, 11-35865. The panel in that case cancelled its previously scheduled argument pending the decision in Flores. NACBA filed an amicus brief in Henderson. And the trustee in Flores has requested rehearing en banc

Amicus Brief Filed

NACBA has filed an amicus brief in the case of Weber v. SEFCU, No. 12-1632 (2d Cir.), on the issue of whether a creditor must return collateral that was repossessed prior to bankruptcy once the creditor learns of the bankruptcy filing. NACBA takes the position that section 542(a) imposes an affirmative duty on a creditor in possession of collateral to turn it over to the bankruptcy estate and that failure to do so is an unlawful "exercise of control over the property" in violation of the automatic stay under section 362(a).

Thanks to Ray DiGuiseppe for writing NACBA's brief.

Eighth Circuit Puts Off Lien-Stripping in Chapter 13 Issue for Another Day

In a cranky opinion, the Eighth Circuit sidestepped the issues of whether a wholly unsecured mortgage can be stripped in chapter 13, and whether, if such stripping is allowed, availability of discharge is a necessary prerequisite to it. In re Fisette, No. 11-3119 (8th Cir. Sept. 12, 2012). The Bankruptcy court had refused to confirm debtor's plan that proposed to strip off two wholly unsecured liens, and the BAP reversed and remanded, joining the six circuits that have found that such strip-offs are permitted. In re Fisette, 455 B.R. 177 (B.A.P. 8th Cir. 2011). The BAP also rejected the trustee's argument that, under section 1325(a)(5)(B)(i)(I), strip-offs are unavailable in a so-called chapter 20 cases, where the debtor is ineligible for discharge. The BAP remanded with instructions that the debtor formulate a plan which treated the stripped mortgages as unsecured debts.

In remanding, the Eighth Circuit found that it lacked jurisdiction under section 158(d) because the BAP's remand for further proceedings was an interlocutory order likely to result in a change to the legal complexion of the case. However, the remand leaves the BAP opinion in place to guide Eighth Circuit bankruptcy courts.

NCBRC assisted with the debtor's brief in this case.

Fifth Circuit Affirms Class Certification Challenging Fee Collection Practices

The Fifth Circuit found that the bankruptcy court did not abuse its discretion when it certified a class of plaintiffs, under Rule 23(b)(2), who challenged certain fee-charging and collection practices of Countrywide Home Loans. Rodriguezv. Countrywide Home Loans, No. 11-40056 (5th Cir. Sept. 14, 2012).

The case arose out of a lawsuit filed by several post-bankruptcy debtors who claimed that, after they had successfully completed their chapter 13 plans, Countrywide instituted foreclosure proceedings based upon failure to pay fees and costs assessed during bankruptcy which were not approved by the bankruptcy court under Rule 2016(a). Countrywide argued that section 2016(a) did not apply to its actions.

The bankruptcy court found that Countrywide's "sharp" practices did, in fact, violate Rule 2016(a). The court certified a class of plaintiffs comprised of those plaintiffs indebted to Countrywide, who had treated their mortgages in their chapter 13 plans, and "as to whom Countrywide has assessed a fee or cost governed by Rule 2016(a), attributable to a time after the filing of a bankruptcy petition and before the date on which the individual received a chapter 13 discharge, unless such fee or cost was approved in a Bankruptcy Court order." Although the named plaintiffs' complaints included claims for damages as well as injunctive relief, the class certification was limited to the injunctive relief claims. The court found that the damages claims were not appropriate under the facts of the case because under those claims individual issues would predominate.

NCBRC consulted with debtor's counsel in this case.

IRS Refund "Freeze"

The Sixth Circuit recently affirmed the lower courts' holding that the IRS's failure to issue a post-petition tax refund where the debtor had a pre-petition tax debt was not a violation of the automatic stay. In re Harchar, No. 10-4201 (6th Cir. Sept. 12, 2012). After confirmation of the debtor's chapter 13 plan, which proposed to fully repay priority tax arrearages, she became entitled to a tax refund. The IRS "froze" the refund by removing it from the automated system and processing the refund manually while it sought modification of the plan to include the refund. The court denied the motion to modify and the IRS issued the refund with interest.

The debtor nonetheless filed a complaint asserting claims for, inter alia, violation of the automatic stay, the discharge plan, and the debtor's right to due process under the Fifth Amendment.

Through several interim appeals, the case found its way to the Sixth Circuit. That court found that the bankruptcy court properly dismissed the claims for violation of the confirmation order, and due process. It held that section 1327, governing the effect of confirmation, does not give the debtor a private right of action and, section 105, as an alternative basis for the claim, does not, under Sixth Circuit precedent, permit damage awards. The due process claim was also properly dismissed because when the government filed its proof of claim it waived its immunity only with respect to the transaction giving rise to that proof of claim, and the refund, relating to more recent tax year, was not the "same transaction."

As to the violation of automatic stay claim the case was largely decided on issues of fact rather as a matter of law. The court emphasized that the action taken by the IRS was not a "freeze" on the money but was a reasonable removal of the refund from the automated processing system while it considered the appropriate action to take with respect to the refund. In fact, the court reasoned, under the Tax Code, the debtor had no affirmative right to the refund until a date after the IRS had moved to modify the plan, and the IRS's immediate issuance of the refund upon denial of that motion, indicated that it was not "exercising control" over the funds in violation of the automatic stay.

This decision is limited in its application. The court did not make a broad rule that the IRS may withhold tax refunds even in the face of outstanding tax debt without violating the automatic stay. Nor did it limit in all cases the application of due process to IRS actions with respect to refunds.

NCBRC worked with debtor's counsel in this case.


Beaulieu v. Ragos (In re Ragos), No. 11-31046 (5th Cir.)

Issue: Whether debtor may exclude social security income from calculation of projected disposable income in chapter 13.

Argument date: September 9, 2012

NACBA filed an amicus brief in this case.

Anderson v. Cranmer, No. 12-4002 (10th Cir.)

Issue: Whether debtor may exclude social security income from calculation of projected disposable income in chapter 13.

Argument date: September 19, 2012.

NACBA filed an amicus brief in this case.

Adili v. Clark, No. 12-1255, consolidated with, Rameker v. Clark, No. 12-1241 (7th Cir.)

Issue: Whether debtor may exempt inherited IRA.

Argument date: September 6, 2012

NACBA filed an amicus brief in this case."