AGENDA. NACTT 51st Annual Seminar Philadelphia, PA Educational Materials for General Attendees. Saturday, July 23.

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1 NACTT 51st Annual Seminar Philadelphia, PA Educational Materials for General Attendees Saturday, July 23 AGENDA Saturday, July 23 8:45-12:00 Chapter 13 Case Law Update Honorable Keith M. Lundin, Chief United States Bankruptcy Judge, Middle District of Tennessee (Retired) Honorable William Houston Brown, United States Bankruptcy Judge, Western District of Tennessee (Retired), Editor and Advisor, NACTT Academy for Consumer Bankruptcy Education, Inc. (Thompson s Station) Henry E. Hildebrand, III, Chapter 13 Standing Trustee for the Middle District of Tennessee (Nashville) 1:30-2:30 Non-Bankruptcy Causes of Action: Standing and judicial estoppel issues. Moderator: David G. Peake, NACTT Secretary and Chapter 13 Standing Trustee for the Southern District of Texas (Houston) Honorable Paul W. Bonapfel, United States Bankruptcy Judge, Northern District of Georgia (Atlanta) John Rao, National Consumer Law Center (Boston, MA) 1:30-2:30 Student Loans - Ask the Experts: A question and answer follow-up to the plenary session on student loans. Moderator: James L. Henley, Jr., Chapter 13 Standing Trustee for the Southern District of Mississippi (Jackson) Honorable Howard R. Tallman, United States Bankruptcy Judge, District of Colorado (Denver) Edward C. Boltz, The Law Offices of John T. Orcutt (Durham, NC) Page 1 of 213

2 1:30-2:30 Running and Marketing an Efficient Consumer Law Practice: Maximizing your practice and keeping your trustee happy. Moderator: Kelly Remick, Chapter 13 Standing Trustee for the Middle District of Florida (Sun City Center) Carmen Dellutri, Dellutri Law Group, P.A. (Fort Myers, FL) 3:00-4:00 CFPB - Ask the Experts: A question and answer follow-up to the plenary session. Moderator: Amrane Cohen, Chapter 13 Standing Trustee for the Central District of California (Orange) Alane A. Becket, Becket & Lee LLP (Malvern, PA) Joann Needleman, Clark Hill PLC (Philadelphia, PA) Barbara A. Sinsley, Barron & Newburger, P.C. (Spartanburg, SC) 3:00-4:00 Exemption Issues in Chapter 13: Effective objections and conversion issues. Moderator: Richard V. Fink, Chapter 13 Standing Trustee for the Western District of Missouri (Kansas City) Honorable George W. Emerson, Jr., United States Bankruptcy Judge, Western District of Tennessee (Memphis) Neil C. Gordon, Arnall Golden Gregory LLP (Atlanta, GA) 3:00-4:00 Automatic Stay Issues: Maximizing damages, including attorney fees, punitive and emotional distress damages. Moderator: Robert G. Drummond, Chapter 13 Standing Trustee for the District of Montana (Great Falls) Honorable Colleen A. Brown, Chief United States Bankruptcy Judge, District of Vermont (Burlington) Michael A. Frank, Law Offices of Brooks, Frank & De la Guardia (Miami, FL) Andrew L. Spivack, Phelan Hallinan Diamond & Jones LLP (Philadelphia, PA) 4:05-5:05 Cross Examination of a Witness: Demonstrations of effective techniques. Moderator: Laurie K. Weatherford, Chapter 13 Standing Trustee for the Middle District of Florida (Winter Park) Honorable John P. Gustafson, United States Bankruptcy Judge, Northern District of Ohio (Toledo) Aubrey Harry Ducker, Jr., The Law Offices of Aubrey Harry Ducker, Jr., P.L.C. (Winter Park, FL) Scott G. Stout, Staff Attorney, Office of Jeffrey M. Kellner, Chapter 13 Standing Trustee for the Southern District of Ohio (Dayton) 4:05-5:05 Post Confirmation Issues: Does the applicable commitment period apply? Moderator: William C. Miller, Chapter 13 Standing Trustee for the Eastern District of Pennsylvania (Philadelphia) Page 2 of 213

3 Honorable Michael B. Kaplan, United States Bankruptcy Judge, District of New Jersey (Trenton, NJ) Emily Connor Fort, Boleman Law Firm, PC (Richmond, VA) Ann E. Swartz, McCabe, Weisberg & Conway, P.C. (Philadelphia, PA) Page 3 of 213

4 Saturday, July 23 INDEX OF MATERIALS BY PANEL 8:45-12:00 Chapter 13 Case Law Update Honorable Keith M. Lundin, Chief United States Bankruptcy Judge, Middle District of Tennessee (Retired) (Nashville) Honorable William Houston Brown, United States Bankruptcy Judge, Western District of Tennessee (Retired), Editor and Advisor, NACTT Academy for Consumer Bankruptcy Education, Inc. (Thompson s Station) Henry E. Hildebrand, III, Chapter 13 Standing Trustee for the Middle District of Tennessee (Nashville) MATERIALS FOR THIS SESSION ARE IN PRINTED BOOK FORM, Speaker Biographies FOUND IN YOUR REGISTRATION MATERIALS Honorable Keith M. Lundin was appointed as Judge for the United States Bankruptcy Court for the Middle District of Tennessee in 1982 and retired in June He served on the Bankruptcy Appellate Panel for the Sixth Circuit from He has served as an Adjunct Professor at both Vanderbilt University School of Law and Emory University School of Law. He has also been a Visiting Professor at the University of New Mexico School of Law. He is a member of the National Bankruptcy Conference and was Assistant Editor to The American Bankruptcy Law Journal from Judge Lundin is a Contributing Editor to Norton Bankruptcy Law and Practice, (West Group) (Chapter 13), Managing Editor, Norton Bankruptcy Law Adviser, (West Group). He, with William H. Brown, author Chapter 13 Bankruptcy, Fourth Edition (Bankruptcy Press), and ch13online.com. Honorable William Houston Brown retired in 2006 as a United States Bankruptcy Judge for the Western District of Tennessee, and he had been designated to sit also in the Middle District of Tennessee, Southern District of Florida, Eastern District of Michigan and Western District of Kentucky. He currently serves as the Editor and Advisor to the NACTT Academy. Judge Brown served a four-year term on the Bankruptcy Appellate Panel for the Sixth Circuit from 1999 through He received his law degree from the University of Tennessee College of Law, where he was Order of the Coif. Judge Brown is a member of the American Bankruptcy Institute, having served on its Board and Executive Committee, and he is a Fellow in the American College of Bankruptcy. He is the author or coauthor of several texts, including Bankruptcy Exemption Manual, 2005 Bankruptcy Reform Legislation with Analysis 1st and 2nd editions, Bankruptcy and Domestic Relations Manual, The Law of Debtors and Creditors, as well as bankruptcy form books, all published by Thomson West. He is also a principal contributing editor for Norton Bankruptcy Law and Practice 3rd, published by Thomson West. Judge Brown prepares a quarterly update of consumer cases for the Federal Judicial Center, which distributes those materials to all bankruptcy judges, and he is a speaker at the Federal Judicial Center s annual Page 4 of 213

5 seminars for bankruptcy judges. He also speaks regularly at seminars throughout the United States, on consumer bankruptcy topics. Judge Brown co-authors Chapter 13 Bankruptcy 4th ed., a digital publication, available at ch13online.com. Judge Brown also acts as a mediator in bankruptcy-related disputes, has conducted mock trials, and has testified as an expert witness in bankruptcy court proceedings. Henry E. Hildebrand, III has served as Standing Trustee for Chapter 13 matters in the Middle District of Tennessee since 1982 and as Standing Chapter 12 Trustee for that district since Mr. Hildebrand graduated from Vanderbilt University and received his J.D. from the National Law Center of George Washington University. He is a fellow of the American College of Bankruptcy and serves on its Education Committee. He is Board Certified in consumer bankruptcy law by the American Board of Certification. He is Chairman of the Legislative and Legal Affairs Committee for the National Association of Chapter 13 Trustees (NACTT). In addition, he is on the Board of Directors for the NACTT Academy for Consumer Bankruptcy Education, Inc. Mr. Hildebrand served as case notes author for The Quarterly, a newsletter dealing with consumer bankruptcy issues and Chapter 13 practice in particular, from He is a regular contributor to the American Bankruptcy Institute Journal. He is an adjunct faculty member for the Nashville School of Law and St. Johns University School of Law. He was a founding Board member of The NACTT Academy d/b/a ConsiderChapter13.org and is a regular author for this e-zine. Page 5 of 213

6 1:30-2:30 Non-Bankruptcy Causes of Action: Standing and judicial estoppel issues. Moderator: David G. Peake, NACTT Secretary and Chapter 13 Standing Trustee for the Southern District of Texas (Houston) Honorable Paul W. Bonapfel, United States Bankruptcy Judge, Northern District of Georgia (Atlanta) John Rao, National Consumer Law Center (Boston, MA) INDEX OF MATERIALS 1. Excerpts from Chapter 13 Practice and Procedure By Hon. W. Homer Drake, Jr., Hon. Paul W. Bonapfel, and Adam M. Goodman a. 4:6 Funding of plan when property of the estate includes a debtor s nonbankruptcy cause of action or a trustee avoidance action b. 16:5 Rights and powers of debtor and trustee with regard to nonbankruptcy causes of action c. 16:6 Rights and powers of debtor and trustee with regard to exercise of trustee s avoidance powers d. 16:7 Judicial Estoppel as bar to or limitation on debtor s cause of action based on debtor s failure to disclose it e. 17:4 Trustee s authority to exercise trustee s avoidance powers, power to avoid liens under 522(f), and power to prosecute nonbankruptcy causes of action (excerpts from 17:4 Powers of Trustee) 2. Speaker Biographies Page 6 of 213

7 CHAPTER 13 PRACTICE AND PROCEDURE HON. W. HOMER DRAKE, JR. HON. PAUL W. BONAPFEL ADAM M. GOODMAN Published by Thomson Reuters Westlaw: CHAP13PP Excerpts From Forthcoming 2016 Edition This material is taken from the forthcoming publication Chapter 13 Practice & Procedure, 2016 Edition, reprinted with permission. Copyright 2016 Thomson Reuters/West. For more information about this publication, please visit Table of Contents 4:6 Funding of plan when property of the estate includes a debtor s nonbankruptcy cause of action or a trustee avoidance action :5 Rights and powers of debtor and trustee with regard to nonbankruptcy causes of action :6 Rights and powers of debtor and trustee with regard to exercise of trustee s avoidance powers :7 Judicial Estoppel as bar to or limitation on debtor s cause of action based on debtor s failure to disclose it :4 Trustee s authority to exercise trustee s avoidance powers, power to avoid liens under 522(f), and power to prosecute nonbankruptcy causes of action (excerpts from 17:4 Powers of Trustee ) Page 7 of 213

8 4:6 Funding of plan when property of the estate includes a debtor's nonbankruptcy cause of action or a trustee avoidance actions A debtor's assets may include causes of action 1 that she has under nonbankruptcy law against third parties for the recovery of money or property. For example, a third party may owe the debtor money on a promissory note or account receivable, or the debtor may have causes of action arising out of personal injury, employment discrimination, violation of consumer protection [Section 4:6] 1 Under the Federal Rules of Civil Procedure and modern procedural concepts, the term claim replaces the term cause of action to describe a plainti 's assertion of a right to monetary or other relief against another party. Because claim is a term of art in the Bankruptcy Code that refers to rights of creditors against the debtor or the estate, see 11 U.S.C.A. 101(5), we use the term cause of action for clarity to refer to a claim of the debtor or the estate against a third party and to distinguish such a right of recovery from a creditor's claim Page 8 of 213

9 4:6 Chapter 13 Practice and Procedure statutes or other prepetition events. Such causes of action constitute property of the estate under Code In addition, Chapter 5 of the Bankruptcy Code contains a number of provisions that authorize a bankruptcy trustee to avoid prepetition transfers of a debtor's property to third persons 3 and to recover the transferred property or its value for the bene t of the estate and distribution to creditors. 4 Exercise of these powers may also permit reduction or elimination of a lien 5 in certain circumstances and preservation of the avoided lien for the bene t of the estate. 6 The trustee's rights under these provisions are often referred to collectively as trustee avoidance powers. A recovery from the successful prosecution of an avoidance action is also property of the estate under Code Importantly, the use of one of the trustee avoidance powers may permit the debtor to recover property that she lost through foreclosure, repossession, garnishment, or other legal process prior to the ling of the petition. E ect of a cause of action on terms of Chapter 13 plan The existence of a debtor's nonbankruptcy cause of action or of an action under the trustee avoidance powers may have important consequences with regard to the debtor's Chapter 13 plan. The plan must take a cause of action into account in determining what creditors will receive and whether a recovery on the cause of action will provide an additional source of funds. 2 See 14: U.S.C.A. 544, 545, 547, 548, 553(b). Section 14:20 discusses the trustee avoidance powers in more detail. See also 5: U.S.C.A. 550(a). See 14:20. 5 Lien is a speci cally de ned term in the Bankruptcy Code. 11 U.S.C.A. 101(37) de nes lien as a charge against or interest in property to secure payment of a debt or performance of an obligation. As such, it includes a consensual security interest in real or personal property as well as a lien arising by operation of law or obtained through legal process U.S.C.A See 14:20. 7 See 14:20. Avoidance of a lien pursuant to the trustee's avoidance powers must be distinguished from avoidance or elimination of a creditor's lien through operation of other provisions of the Code, discussed elsewhere. Thus, a debtor may avoid certain liens on exempt property under Code 522(f), see 14:22, and a Chapter 13 plan may provide for the full or partial elimination of a lien through a strip-o or strip-down of a secured claim based on the value of the property that secures it. See 5:5. Strip-o occurs when the value of property subject to a junior lien is no more than the amount of the debt that a senior lien secures. The plan may eliminate the junior lien in its entirety. See 5:40. Strip-down occurs when the amount of the lien exceeds the value of the encumbered property. The plan may provide for treatment of the claim as secured only to the extent of the property's value and as an unsecured claim for the de ciency, thereby eliminating the lien with regard to the unsecured portion. See 5:5, 5: Page 9 of 213

10 Applicable Plan and Confirm. Reqs. 4:6 When a lien is avoided, a creditor's secured claim becomes unsecured to the extent that the lien securing the claim is avoided. 8 Avoidance of the lien thus reduces the amount of the payments that the debtor must make to satisfy the secured claim; if the lien is avoided in its entirety, the secured creditor receives payments only to the extent that the plan provides for payments on unsecured claims. The existence of a cause of action or the ability to avoid a lien may have consequences on what the debtor must pay unsecured creditors for two reasons. First, because avoidance of a lien reduces or eliminates payments to the secured creditor, the debtor may have to pay some or all of the money that she does not have to pay to the secured creditor to the unsecured creditors to meet the requirements of the projected disposable income test of Code 1325(b). 9 Second, in a Chapter 7 case, a recovery on a nonbankruptcy cause of action or the successful exercise of a trustee avoidance power could result in an increase in the amount of cash that liquidation of the debtor's assets would produce for distribution to creditors. The amount of the increase is equal to the proceeds realized from successful prosecution of the action less attorney's fees and litigation expenses and less any exemption the debtor may claim in the recovery. 10 The best interest of creditors test of Code 1325(a)(4) requires that a plan provide for unsecured creditors to receive payments with a value not less than what they would receive in a hypothetical Chapter 7 case. 11 Thus, when the prosecution of a nonbankruptcy cause of action or the exercise of a trustee avoidance power would result in additional funds for the estate in a Chapter 7 case for distribution to unsecured, nonpriority creditors, the best interest of creditors test may require that unsecured, nonpriority creditors receive at least that amount under the plan. If the debtor cannot make, or does not want to make, payments under her plan in amounts that take a recovery on a cause of action into account, her plan must provide for the prosecution of the action and distribution to unsecured creditors of the net proceeds the estate would realize from the recovery so that unsecured creditors receive the bene t of it See 5:7. 9 See 8: See 14:22, 14: See 7:6. 12 See 7: Page 10 of 213

11 4:6 Chapter 13 Practice and Procedure Under some circumstances, a recovery on a cause of action does not a ect the amount that the plan must provide for nonpriority, unsecured creditors to receive under the best interest test. First, if the projected disposable income test of Code 1325(b) 13 requires the debtor to pay more than unsecured creditors would receive in a hypothetical liquidation in a Chapter 7 case that included recovery on the cause of action, the debtor does not have to make additional payments to take account of the avoidance recovery. The two tests state minimums that the debtor must pay, but the same payments may satisfy both tests. 14 Second, if the recovery would not result in net proceeds to permit payment of claims other than priority claims in a hypothetical Chapter 7 liquidation, the existence of the cause of action does not require an increase in payments to nonpriority unsecured creditors under the best interest test. Because nonpriority creditors would not receive any distribution in such a hypothetical Chapter 7 case, the best interest test does not require any payment to general unsecured creditors. The test is immaterial with regard to the priority claims because the plan must provide for payment of priority claims in full under Code 1322(a). 15 Third, the best interest test does not require payments to unsecured creditors on account of a recovery on a cause of action to the extent that the debtor can exempt it. 16 The amount the debtor can exempt is unavailable in a hypothetical Chapter 7 case for the payment of claims, so any exempt part of the recovery is not included in applying the best interest test. 17 Plan provisions to take account of cause of action When the best interest of creditors test requires that the plan provide for unsecured creditors to receive the value of some or all of a recovery on a cause of action, the plan cannot be con rmed unless it does so. One option for a debtor, of course, is to provide for payments during the term of the plan that take the recovery 13 See 8:1. 14 See 7:1. 15 See 6:2. 16 See 14: See 14:22. A debtor may exempt a nonbankruptcy cause of action, of course, to the extent that the exemptions to which she is entitled permit it. For example, a debtor entitled to use the bankruptcy exemptions in 11 U.S.C.A. 522(d) can exempt a recovery on account of personal bodily injury, subject to certain limitations, 522(d)(11)(D). Under 11 U.S.C.A. 522(g) and (h), a debtor may, under certain circumstances, exempt a recovery in a trustee avoidance action when it involves property she could have exempted if the avoided transfer had not been made. See 14: Page 11 of 213

12 Applicable Plan and Confirm. Reqs. 4:6 on the cause of action into account to the extent required. But a debtor may not have su cient income to pay the value of a cause of action, or the valuation of the cause of action (i.e., the amount of the likely recovery less attorney's fees and expenses) may be di cult to ascertain with certainty. It may be that the debtor does not want to use her income to pay the additional amount required. Rather than paying the required value of a cause of action out of income, therefore, a debtor may propose a plan that provides for the enforcement of the cause of action, including the prosecution of litigation, if necessary, and commitment of the net proceeds in excess of collection or litigation costs and any available exemption to the Chapter 13 trustee for disbursement to creditors under the plan. The Chapter 13 trustee or an unsecured creditor may properly insist that the plan provide for disbursement of net proceeds from a cause of action to holders of priority claims until they are paid in full and then to holders of general unsecured claims. If it does not, the creditors who would receive the bene t of the recovery in a Chapter 7 case may not receive the bene t in the Chapter 13 case. For example, if the plan permits use of the net proceeds to pay one or more secured claims, the unsecured creditors will not receive the bene t of the cause of action (as the best interest of creditors test requires) unless they receive payments from other sources, usually the debtor's earnings. If the case fails after the debtor receives proceeds from the cause of action but before the debtor completes payments under the plan, unsecured creditors will have lost the bene t of the recovery that the best interest of creditors test promises. The debtor herself may have an interest in the disbursement of proceeds to pay priority claims rst. For example, if the priority claim is a domestic support obligation or tax claim that would not be dischargeable in a Chapter 7 case, the payment of the claim will satisfy the claim so that it is not a continuing liability if the case later fails. 18 In some instances, a debtor may not be desirous of pursuing an avoidance action, such as one involving the transfer of assets to a relative. Such a debtor must, as discussed above, propose payments under her plan to take such a recovery into account to satisfy the best interest of creditors test. Creditors may be at risk if a Chapter 13 plan does not contemplate the prosecution of a cause of action. If a plan does not 18 See 6:14 (discussing domestic support obligations); 6:17 (discussing nondischargeable tax claims). Sections 21:16 and 21:18 discuss debts that are excepted from discharge under 11 U.S.C.A. 523(a) Page 12 of 213

13 4:6 Chapter 13 Practice and Procedure provide for the prosecution of the action, the plan's binding e ect under Code 1327(a) may preclude the trustee from asserting it after con rmation. 19 When a signi cant cause of action may be available, therefore, the trustee or unsecured creditors may insist that the plan provide that the Chapter 13 trustee may pursue it. A trustee does not need court approval to prosecute a cause of action. 20 If the trustee needs to employ an attorney to litigate the matter, however, Code 327(a) requires court approval of the attorney's employment, as discussed below. When a cause of action exists, the Chapter 13 trustee must decide whether to pursue it. The issue generally arises when the cause of action in question is an avoidance action, perhaps because the debtor's prosecution of her own nonbankruptcy cause of action is ordinarily appropriate, and it is unlikely she would propose that the trustee pursue it. The Code does not require the trustee to pursue all avoidable transactions. 21 Each of the trustee avoidance powers in Chapter 5 is prefaced with the word may, 22 and a trustee has discretion in determining whether to invoke them. In considering whether to litigate an avoidance action, the trustee properly considers the cost of doing so, the merits of the cause of action, the potential likelihood of recovery if the claim is for money, and whether a successful avoidance will bene t creditors as opposed to the debtor. Often the avoidance action may seek recovery from a friend or relative who may not be able to respond to a monetary judgment. Further, if the debtor is proposing to pay creditors an amount that would make the avoidance action moot, it ordinarily will not be appropriate for the Chapter 13 trustee to prosecute it. In some instances, a trustee may have little incentive to prosecute an avoidance action. It may not materially bene t creditors, and if it does not result in distributions that the Chapter 13 trustee makes to creditors, the trustee will receive no compensation for her e ort. 23 If the trustee decides not to prosecute a trustee avoidance action, it is often advisable for the trustee to protect the estate's 19 Hope v. Acorn Financial, Inc., 731 F.3d 1189, 70 Collier Bankr. Cas. 2d (MB) 356 (11th Cir. 2013); In re Layo, 460 F.3d 289, Bankr. L. Rep. (CCH) P (2d Cir. 2006) (trustee prevented from avoiding mortgage lien postcon rmation); cf. In re Thiel, 2015 WL (Bankr. D. Idaho 2015) (plan provision too vague to grant trustee post-con rmation authority to sell property under 363(h)). 20 Fed. R. Bankr. P See In re Haugen Const. Service, Inc., 104 B.R. 233, 240 (Bankr. D. N.D. 1989). 22 See 11 U.S.C.A. 544(a), 545(a), 547(b), 548(a), and 549(a). 23 See 17: Page 13 of 213

14 Applicable Plan and Confirm. Reqs. 4:6 interest from loss of the avoidance action that might occur through operation of the statute of limitations in Code 546(a). Under Code 546(a), an action to avoid a transfer must be brought within two years from the date of the order for relief. If the case fails after two years and no action has been brought in the meantime, the estate and creditors will lose the bene ts of the avoidance action if the case is converted to Chapter 7 because the Chapter 7 trustee will be time-barred from pursuing the action. In this regard, courts disagree as to whether the 546(a) statute of limitations is 24 or is not 25 equitably tolled while the case is in Chapter 13. Protective action preserves the cause of action for review and prosecution by the trustee in the converted case, if advisable, and eliminates any potential liability that the Chapter 13 trustee might have for not preserving the avoidance claim. The easiest and most assured approach is for the Chapter 13 trustee to le the adversary proceeding but obtain an order that holds the matter in abeyance unless and until the case is converted to another chapter. An alternative solution is for the trustee and the transferee to work out an agreement for the tolling of the statute of limitations. A tolling agreement extends the time for ling an avoidance action so that, if the case fails after the two-year mark and the case is converted to Chapter 7, the Chapter 7 trustee still has the ability to pursue the claim for the bene t of creditors. In the meantime, the transferee retains the asset and the debtor has the opportunity to perform under the plan by paying the value of the transfer to creditors. Courts have generally ruled that Code 546(a) is not jurisdictional, so a defendant can waive the statute of limitations defense whether by agreement or failing to raise it as an a rmative defense. 26 It is important to note that the trustee does not have statutory 24 E.g., In re Wood, 113 B.R. 253 (S.D. Miss. 1990). 25 E.g., In re Bodenstein, 253 B.R. 46 (B.A.P. 8th Cir. 2000); In re McDonald, 500 B.R. 208 (Bankr. N.D. Ga. 2013); In re Wray, 258 B.R. 777, 45 Collier Bankr. Cas. 2d (MB) 1383 (Bankr. D. Idaho 2001). See also In re Raynor, 617 F.3d 1065, 53 Bankr. Ct. Dec. (CRR) 144, 63 Collier Bankr. Cas. 2d (MB) 1765, Bankr. L. Rep. (CCH) P (8th Cir. 2010), cert. denied, 131 S. Ct. 945, 178 L. Ed. 2d 756 (2011) (calculating two-year period under Fed. R. Bankr. P. 9006(a)). 26 E.g., In re Pugh, 158 F.3d 530, 33 Bankr. Ct. Dec. (CRR) 471, 40 Collier Bankr. Cas. 2d (MB) 1369, Bankr. L. Rep. (CCH) P (11th Cir. 1998); In re Rodriguez, 283 B.R. 112, 120, 46 Collier Bankr. Cas. 2d (MB) 1383 (Bankr. E.D. N.Y. 2001); In re Shape, Inc., 138 B.R. 334, 337, 22 Bankr. Ct. Dec. (CRR) 1304, Bankr. L. Rep. (CCH) P (Bankr. D. Me. 1992). But see In re Butcher, 829 F.2d 596, 16 Bankr. Ct. Dec. (CRR) 821, 17 Collier Bankr. Cas. 2d (MB) 1204, Bankr. L. Rep. (CCH) P 71989, 9 Fed. R. Serv. 3d 68 (6th Cir. 1987) (abrogated by, Bartlik v. U.S. Dept. of Labor, 62 F.3d 163, 10 I.E.R. Cas. (BNA) 1571, 130 Lab. Cas. (CCH) P 11407, 32 Fed. R. Serv. 3d 1032, 1995 FED App. 0247P (6th Page 14 of 213

15 4:6 Chapter 13 Practice and Procedure authority to liquidate assets, 27 and the Chapter 13 debtor remains in possession of property of the estate under Code 1306(b). If litigation of a cause of action will result in a monetary recovery, the avoidance of a transfer and recovery of property, or the creation of equity in property because of the avoidance of a lien, the plan will determine the disposition of the bene ts of the recovery. In the absence of such a provision in the plan, a trustee will have no authority to disburse any monetary recovery or to take possession of and sell any property recovered through an avoidance action. Modi cation of the plan or conversion to Chapter 7 will be necessary to achieve such results. Consequently, a trustee who intends to litigate a cause of action should object to con rmation of a plan that does not contain appropriate provisions with regard to the disposition of any recovery or be prepared to request a postcon rmation modi cation of the plan under Code 1329 that provides for disbursement of the recovery to creditors. 28 Determination of whether debtor or trustee prosecutes cause of action Chapter 13 does not expressly state procedures for the litigation and enforcement of causes of action. As we discuss elsewhere, questions arise as to whether the debtor, the Chapter 13 trustee, or both have the authority to prosecute her individual causes of action against third parties 29 or avoidance actions arising under the Bankruptcy Code. 30 If a cause of action exists that must be taken into account in applying the best interest test and the debtor wants the cause of action to be pursued so that she does not have to pay its value from her income, the debtor should attempt to avoid a dispute over who has authority to prosecute the cause of action. In this regard, the debtor may consider three alternatives. First, the debtor may propose the joint prosecution of the cause Cir. 1995)). In this regard, legislative history to Code 546(a) states that it is not intended to a ect the validity of any tolling agreement or to have any bearing on the equitable tolling doctrine where there has been fraud determined to have occurred. The time limits are not intended to be jurisdictional and can be extended by stipulation between the necessary parties to the action or proceeding. H. R. Rep. No , at 49 to 50 (1994), reprinted in 1994 U.S.C. C.A.N. 3340, Although 11 U.S.C.A. 1302(b) provides for the Chapter 13 trustee to perform many of the duties that a Chapter 7 trustee has under 11 U.S.C.A. 704(a), the Chapter 13 trustee's duties do not include the Chapter 7 trustee's duty under 704(a)(1) to collect and reduce to money the property of the estate. 28 See 11: See 16:5. 30 See 16: Page 15 of 213

16 Applicable Plan and Confirm. Reqs. 4:6 of action with the Chapter 13 trustee. The joint prosecution could include the trustee's retention of the debtor's counsel as special counsel for the trustee pursuant to Code 327(e) (discussed below) so that one lawyer could prosecute the cause of action on behalf of both parties. 31 A second alternative is for the debtor to seek an order from the court that speci es who will prosecute the cause of action. Third, the debtor can include a provision in her plan that addresses the issue. A debtor may want to use both approaches. Under either of these alternatives, the debtor could propose that she be authorized to pursue the cause of action or that the trustee pursue it. 32 Whether a court order or provision of a con rmed plan is e ective to permit a debtor to prosecute a cause of action becomes an issue, of course, only under the view that the debtor does not otherwise have such authority. 33 In Chapter 11 cases, courts have permitted a committee of unsecured creditors to prosecute a trustee avoidance action on behalf of the estate with the approval of the court when the trustee (or debtor in possession) declines to do so or agrees that the committee may bring the action. 34 The concept is sometimes referred to as derivative standing. A court should have similar power in a Chapter 13 case to grant derivative standing to a Chapter 13 debtor to prosecute a cause of action in a speci c court order or under the provisions of a plan con rmed by an order of the court. 35 Thus, courts have recognized that a Chapter 13 debtor has derivative standing to 31 The court in In re Ryker, 315 B.R. 664, 670, 52 Collier Bankr. Cas. 2d (MB) 1793 (Bankr. D. N.J. 2004), suggested the trustee's retention of the debtor's attorney as special counsel in ruling that a Chapter 13 debtor could not prosecute an avoidance action. 32 In re Colon, 345 B.R. 723, 54 Collier Bankr. Cas. 2d (MB) 1461 (Bankr. D. Kan. 2005) (Con rmed plan provided authority for trustee to use avoidance powers.); In re Walls, 17 B.R. 701, 704, 8 Bankr. Ct. Dec. (CRR) 909, 5 Collier Bankr. Cas. 2d (MB) 1490 (Bankr. S.D. W. Va. 1982) (Debtor can include plan provision for trustee to pursue avoidance action); In re Sherman, 13 B.R. 259, 4 Collier Bankr. Cas. 2d (MB) 1355 (Bankr. D. R.I. 1981) (Trustee has authority to bring nonbankruptcy cause of action under provisions of con rmed plan.). See also In re Thiel, 2015 WL (Bankr. D. Idaho 2015) (plan provision too vague to grant trustee postcon rmation authority to sell property under 363(h)). 33 Section 16:5 discusses whether the trustee or the debtor has standing to bring a nonbankruptcy cause of action, and 16:6 discusses the standing issue in the context of the trustee's avoidance powers. 34 E.g., O cial Committee of Unsecured Creditors of Cybergenics Corp. ex rel. Cybergenics Corp. v. Chinery, 330 F.3d 548, 41 Bankr. Ct. Dec. (CRR) 98, Bankr. L. Rep. (CCH) P (3d Cir. 2003). See generally Norton Bankruptcy Law and Practice 3d 63:4. 35 In re Hannah, 316 B.R. 57 (Bankr. D. N.J. 2004) (Chapter 13 debtor does not have standing to exercise trustee's strong-arm avoidance rights except in Page 16 of 213

17 4:6 Chapter 13 Practice and Procedure bring a trustee avoidance action if the court enters an order that authorizes the debtor to prosecute it. 36 The provisions of a con rmed plan should similarly provide authority for the debtor to prosecute a cause of action for two reasons. 37 furtherance of his exemption rights.). Cf. In re Weyandt, 544 Fed. Appx. 107 (3d Cir. 2013) (Assuming without deciding that derivative standing is permissive, it was inappropriate to grant such standing to debtor when trustee did not pursue avoidance matter and there was no equity in real property that could be administered for creditors' bene t.); In re Merritt, 529 B.R. 845, (Bankr. E.D. Pa. 2015), order a 'd, 2016 WL (E.D. Pa. 2016) (Debtor not entitled to derivative standing where she did not establish that trustee violated his duciary duty to commence adversary proceeding.). 36 E.g., In re Barbee, 461 B.R. 711, 66 Collier Bankr. Cas. 2d (MB) 1273 (B.A.P. 6th Cir. 2011); In re Dickson, 427 B.R. 399 (B.A.P. 6th Cir. 2010), judgment a 'd, 655 F.3d 585, 66 Collier Bankr. Cas. 2d (MB) 527, Bankr. L. Rep. (CCH) P (6th Cir. 2011) (debtor has derivative standing when trustee declines to pursue cause of action) (debtor has standing under 11 U.S.C.A. 522(h) because avoidance action involves exempt property); In re Cohen, 305 B.R. 886, 891 n.5, 52 Collier Bankr. Cas. 2d (MB) 737, 53 U.C.C. Rep. Serv. 2d 148 (B.A.P. 9th Cir. 2004) (In holding that a Chapter 13 debtor has statutory standing to bring a trustee avoidance action, the court noted that a provision in a con rmed plan for the debtor to pursue an avoidance action is ine ective unless debtor has standing to do so; that a Chapter 13 trustee's assignment to the debtor of the right to bring an avoidance action for the bene t of the estate is ine ective in the absence of explicit court approval; and that the court has the authority to permit a party other than trustee to bring a trustee avoidance action.). Contra, In re Hannah, 316 B.R. 57 (Bankr. D. N.J. 2004) (Chapter 13 debtor does not have standing to exercise trustee's strong-arm avoidance rights except in furtherance of exemption rights.). 37 Contra, In re Cohen, 305 B.R. 886, 891 n.5, 52 Collier Bankr. Cas. 2d (MB) 737, 53 U.C.C. Rep. Serv. 2d 148 (B.A.P. 9th Cir. 2004); In re Hannah, 316 B.R. 57 (Bankr. D. N.J. 2004) (Chapter 13 debtor does not have standing to exercise trustee's strong-arm avoidance rights except in furtherance of exemption rights.). The court in In re Cohen, 305 B.R. 886, 52 Collier Bankr. Cas. 2d (MB) 737, 53 U.C.C. Rep. Serv. 2d 148 (B.A.P. 9th Cir. 2004), ruled that a con rmed Chapter 13 plan could not authorize a debtor to exercise a trustee avoidance power unless the debtor had statutory standing. In re Cohen, 305 B.R. at 891. At the same time, the court observed that a debtor could acquire standing to assert a trustee avoidance power if the court enters an order explicitly authorizing the debtor to bring an avoidance action. In re Cohen, 305 B.R. at 891 & n. 5. The ruling is consistent with the concept of derivative standing discussed in the text that permits the court to authorize another party in interest to exercise a trustee avoidance power if the trustee declines to do so. Having made these two determinations, the court held that the Chapter 13 debtor had statutory standing, concurrent with the trustee, to bring an avoidance action. In re Cohen, 305 B.R. at The rst two rulings seem inconsistent. As stated in the text, an order con rming a plan necessarily constitutes a determination that all of the con rmation requirements have been met and makes the provisions of the plan binding on all parties, including the Chapter 13 trustee. The entry of the Page 17 of 213

18 Applicable Plan and Confirm. Reqs. 4:6 First, the entry of the con rmation order necessarily amounts to approval of a provision in the plan for the debtor, rather than the trustee, to prosecute an action. In con rming the plan, the court necessarily determines that it complies with applicable con rmation requirements 38 and thus approves the debtor's authority. Further, the entry of a con rmation order makes the provision for the debtor to bring the action binding on the debtor, the trustee, and creditors under Code 1327(a). 39 Thus, a con rmation order has the same e ect with regard to the debtor's authority as a separate order that provides such authority to the debtor. Second, it is clear that a plan may contain such a provision. Code 1322(b)(11) permits a plan to contain provisions that are not inconsistent with the Bankruptcy Code. The Bankruptcy Code, of course, contemplates the enforcement of causes of action that are property of the estate and distribution of net proceeds, after fees and expenses, to creditors. Moreover, a Chapter 13 plan may provide for the payment of all or part of a claim from property of the estate or property of the debtor. 40 In addition, a plan may provide for the vesting of property of the estate, upon con rmation or at a later time, in the debtor or any other entity. 41 Based on these principles, a plan provision that facilitates the enforcement of a cause of action that is property of the estate or of the debtor by specifying whether the trustee or the debtor will be responsible for pursuing the cause of action is consistent with the Bankruptcy Code and is permissible under Code 1322(b)(11). Thus, con rmation of a plan that speci es whether the debtor or the trustee will prosecute a cause of action should de nitively determine that issue. Determination of who should appropriately prosecute a cause of action requires consideration of the nature of the cause of action, the circumstances of the case, and the preferences of the debtor, her counsel, and the Chapter 13 trustee with regard to its litigation. The debtor may want to prosecute the cause of action if it is a nonbankruptcy cause of action (such as a personal injury or employment discrimination action), and she expects her recovery to exceed the amount necessary to pay claims in the case or she has the right to exempt a signi cant part of any recovery. con rmation order, therefore, should be su cient as an explicit approval of the debtor's authority to bring the avoidance action. 38 See 9:5. 39 See 10: U.S.C.A. 1322(b)(8) U.S.C.A. 1322(b)(9) Page 18 of 213

19 4:6 Chapter 13 Practice and Procedure On the other hand, the debtor may have no economic or other interest in prosecuting an avoidance cause of action if creditors will receive all of the proceeds. In this circumstance, the debtor may want to avoid the burden of pursuing the litigation and prefer that the Chapter 13 trustee pursue it. Chapter 13 trustees do not ordinarily engage in litigation of causes of action. Their primary functions are to examine debtors and to review the papers and plans they le to determine whether con rmation is appropriate, to receive and disburse payments to creditors, and to follow up on the administration of cases. Indeed, the trustee's statutory duties do not include liquidation of the estate, which is, e ectively, what the prosecution of an avoidance or other action is. 42 If the debtor wants to prosecute a cause of action and the Chapter 13 trustee is satis ed that the debtor has employed (or will employ) competent counsel and will likely pursue the cause of action e ectively, the Chapter 13 trustee may agree to an order or plan provision that so provides. The trustee in this situation may insist on an oversight role and the right to object to counsel's compensation and settlement of the matter in order to protect the interests of creditors, as discussed further below. If the trustee has concerns about the debtor's ability to prosecute the cause of action e ectively, the trustee may seek authority to litigate the claim as the representative of the estate or seek conversion to Chapter 7 so that a Chapter 7 trustee can pursue the cause of action. As noted earlier, a Chapter 13 trustee is bound by the terms of a con rmed plan to the same extent as the debtor and creditors. 43 If the debtor proposes that the trustee prosecute a cause of action, the trustee will have to decide whether to oppose the imposition of such responsibility, taking into account the considerations discussed above. If the trustee wants to invoke her discretion to decline to prosecute a cause of action, she should object to con rmation (unless the plan is modi ed to remove any requirement that the trustee pursue the action) so that the plan does not impose a duty on her that she does not intend to perform. 44 If the purpose of a provision for the trustee to pursue a cause 42 A Chapter 7 trustee has the duty to collect and reduce to money the property of the estate. 11 U.S.C.A. 704(a)(1). This duty is not included in the duties of a Chapter 13 trustee speci ed in 11 U.S.C.A. 1302(b). 43 See 10:2. 44 See In re Engle, 496 B.R. 456 (Bankr. S.D. Ohio 2013); In re Loe er, Bankr. L. Rep. (CCH) P 82136, 2011 WL , *7 (Bankr. D. Colo. 2011) (With regard to a fraudulent transfer claim, the court stated, Whether or not to pursue such an action is a matter left to the sound discretion of the trustee. The Debtor may not limit that discretion by a provision of her plan but, by the same Page 19 of 213

20 Applicable Plan and Confirm. Reqs. 4:6 of action is to meet the best interest of creditors test and if the cause of action is viable, con rmation will require the trustee to pursue the matter so that unsecured creditors receive what they would receive in a Chapter 7 case, as the plan promises. 45 If a cause of action, in the trustee's judgment, is not meritorious, the trustee should object to con rmation unless the provision is removed, and it is unlikely that the court will con rm a plan requiring the trustee to pursue it. 46 In this situation, the debtor has accomplished the objective of satisfying the best interest test; if the action is not meritorious, creditors would not receive anything in a Chapter 7 case. If the debtor and the trustee do not agree as to who will prosecute a cause of action, the court will have to resolve the dispute. One possible outcome is for the court to determine which party has the authority to prosecute the cause of action in the absence of an agreement. 47 In the context of a plan provision that speci es the party who will prosecute it, the court could also determine whether that party's prosecution of the cause of action is consistent with the Bankruptcy Code, as discussed above, and con rm the plan if it is. If the court determines that both parties have authority, the court may require joint prosecution of the cause of action or impose the responsibility for pursuing it on one of the token, she need not promise a payout over which she exerts no control. ); In re Funches, 381 B.R. 471, (Bankr. E.D. Pa. 2008) (debtor cannot join trustee as an involuntary plainti in an adversary proceeding seeking to use the strong arm powers); In re Colon, 345 B.R. 723, 54 Collier Bankr. Cas. 2d (MB) 1461 (Bankr. D. Kan. 2005) (con rmed plan provided trustee with the authority to use strong arm powers to avoid improperly perfected mortgage on exempted real property); In re Ryker, 315 B.R. 664, 674, 52 Collier Bankr. Cas. 2d (MB) 1793 (Bankr. D. N.J. 2004) (In fraudulent transfer action brought by the debtor, the court directed the debtor and counsel to immediately confer with Chapter 13 Trustee, who shall thereafter advise the parties and the Court whether she will ratify, join, or be substituted in this adversary proceeding. ); In re Walls, 17 B.R. 701, 8 Bankr. Ct. Dec. (CRR) 909, 5 Collier Bankr. Cas. 2d (MB) 1490 (Bankr. S.D. W. Va. 1982) (In prohibiting debtor from pursuing preference action, court delayed entry of order to permit the Trustee to elect whether to intervene. ). See also In re Sherman, 13 B.R. 259, 4 Collier Bankr. Cas. 2d (MB) 1355 (Bankr. D. R.I. 1981). 45 See In re Loe er, Bankr. L. Rep. (CCH) P 82136, 2011 WL (Bankr. D. Colo. 2011); In re Colon, 345 B.R. 723, 54 Collier Bankr. Cas. 2d (MB) 1461 (Bankr. D. Kan. 2005); In re Johnson, 26 B.R. 381 (Bankr. D. Colo. 1982); In re Walls, 17 B.R. 701, 8 Bankr. Ct. Dec. (CRR) 909, 5 Collier Bankr. Cas. 2d (MB) 1490 (Bankr. S.D. W. Va. 1982). 46 But see In re Engle, 496 B.R. 456 (Bankr. S.D. Ohio 2013) (Debtor cannot, over the trustee's objection, satisfy the best interest test by leaving the burden on the trustee to decide whether to pursue a cause of action.). 47 See 16:5 (nonbankruptcy causes of action), 16:6 (trustee avoidance actions) Page 20 of 213

21 4:6 Chapter 13 Practice and Procedure parties based on a balancing of the interests of the parties and creditors in the circumstances of the case. Retention and compensation of litigation counsel; settlement The litigation of a cause of action in the context of a Chapter 13 case raises issues regarding the retention and compensation of an attorney to pursue the litigation and whether the court must approve a settlement of the litigation. Under Code 327(a), a trustee must obtain the court's approval to employ an attorney, who must be disinterested, as de ned in Code 101(14), 48 and must not have any interest adverse to the estate with regard to the matters on which she is retained. 49 Although Code 327(a) thus precludes the trustee's employment of the debtor's lawyer, Code 327(e) permits the trustee's retention of the debtor's lawyer for a speci ed special purpose if the attorney does not represent or hold any interest adverse to the estate or the debtor with regard to the matter. Bankruptcy Rule 2014(a) requires the ling of an application for approval of the trustee's employment of an attorney. The application must state the speci c facts showing the necessity for the employment, the name of the person to be employed, the reasons for the selection, the professional services to be rendered, and the proposed arrangement for compensation. In addition, the application must state, to the best of the applicant's knowledge, the person's connections with the debtor, creditors, any other party in interest, their attorneys and accountants, the United States trustee, or any person employed in the o ce of the United States trustee. 50 A veri ed statement of the person to be employed that discloses those connections must accompany the application. Code 330(a) requires the court to allow the compensation and reimbursement of expenses of an attorney employed by the trustee. Code 330(a)(4)(B) also provides for allowance of compensation of an attorney for the debtor in a Chapter 13 case. Bankruptcy Rule 2016(a) requires the ling of an application for compensation or reimbursement of expenses from the estate. Code 328(a) permits the trustee to retain an attorney on any 48 Among other things, a person is not disinterested if she is a creditor or insider, 11 U.S.C.A. 101(14)(A), or has an interest materially adverse to the interest of the estate or of any class of creditors by reason of any direct or indirect relationship to, connection with, or interest in, the debtor, or for any other reason. 11 U.S.C.A. 101(14)(C). An insider includes a relative of the debtor or of general partner of the debtor, partnership in which the debtor is a general partner, a general partner of the debtor, or corporation of which the debtor is a director, o cer, or person in control. 11 U.S.C.A. 101(31) U.S.C.A. 327(a). 50 Fed. R. Bankr. P. 2014(a) Page 21 of 213

22 Applicable Plan and Confirm. Reqs. 4:6 reasonable terms and conditions of employment, including on a retainer, on an hourly basis, on a xed or percentage fee basis, or on a contingent fee basis. The court may, however, allow compensation on a di erent basis if the terms and conditions prove to have been improvident in light of development not capable of being anticipated at the time of approval of employment. 51 In view of these provisions, a plan that provides for the Chapter 13 trustee to enforce a cause of action can not attempt to dictate the trustee's choice of counsel to prosecute the action or to determine the compensation of any attorney the trustee employs for such purpose. Such a provision is inconsistent with the provisions of Code 327 and 330 that govern such matters. Some or all of the foregoing rules for retention and compensation of an attorney arguably may not apply when the Chapter 13 debtor is prosecuting a cause of action. The debtor's employment of litigation counsel may not require court approval because Code 327(a) does not apply to the debtor's retention of an attorney. 52 Nevertheless, the practice in many courts assumes the advisability, if not the necessity, of such an application. 53 When the debtor is prosecuting a cause of action, it is the responsibility of her bankruptcy counsel to le the application seeking approval of the retention of counsel to pursue the litigation. 54 Regardless of whether court approval for the retention of an attorney is required, Code 330(a)(4)(B) applies to require the court to allow compensation of the Chapter 13 debtor's lawyer. Code 330(a), however, contemplates allowance of compensation as an administrative expense payable out of the estate under 51 1 U.S.C.A. 328(a). 52 See, e.g., In re Scott, 531 B.R. 640 (Bankr. N.D. Miss. 2015); In re Jones, 505 B.R. 229 (Bankr. E.D. Wis. 2014); In re Holland, 374 B.R. 409, 427 (Bankr. D. Mass. 2007); In re Tirado, 329 B.R. 244, 250 (Bankr. E.D. Wis. 2005); In re Gutierrez, 309 B.R. 488, , 52 Collier Bankr. Cas. 2d (MB) 347 (Bankr. W.D. Tex. 2004). But see In re Webb, 2005 WL (Bankr. N.D. Ga. 2005) (court approval is required for employment by debtor of counsel for prosecution of cause of action that is property of the estate but not for litigation that is not property of the estate). 53 See In re Butts, 2010 WL (Bankr. D. Mass. 2010); In re Johnson, 409 B.R. 459 (Bankr. N.D. Ohio 2009) (approving employment of counsel for Chapter 13 debtor to pursue personal injury action over objection of Chapter 13 trustee that the trustee, rather than the debtor, had standing to prosecute the action without discussing whether approval of employment of debtor's counsel is required); In re Webb, 2005 WL (Bankr. N.D. Ga. 2005) (court approval is required for employment by debtor of counsel for prosecution of cause of action that is property of the estate but not for litigation that is not property of the estate); In re Bowker, 245 B.R. 192, 35 Bankr. Ct. Dec. (CRR) 186 (Bankr. D. N.J. 2000). 54 In re Goines, 2012 WL (Bankr. N.D. Ga. 2012) Page 22 of 213

23 4:6 Chapter 13 Practice and Procedure Code 503(b)(2). Under Code 1327(b), property of the estate vests in the debtor upon con rmation, unless the plan or con rmation order provides otherwise. 55 If the lawyer is not being paid out of property of the estate, allowance under Code 330(a) is not a requirement for payment of the lawyer's compensation. The same analysis applies if the trustee is pursuing the litigation and the attorney's compensation is not paid from the estate. Nevertheless, the usual practice assumes that allowance of compensation by the court is required. In any event, the ling of an application for allowance of compensation under the assumption that Code 330(a) applies avoids the need to determine whether the source of compensation is property of the estate. 56 With regard to settlement of a cause of action, Bankruptcy Rule 9019(a) provides that the court may approve a compromise or settlement on motion by the trustee and after notice and a hearing. Because the express terms of Rule 9019(a) contemplate approval of a settlement only when it involves the trustee, it may not apply to a cause of action that the debtor is pursuing. On the other hand, the rationale for debtor standing (i.e., that the debtor has the right under Code 1303 to exercise the trustee's powers under Code 363(b) to use estate property) necessarily implies that the requirements of Rule 9019(a) applicable to a trustee apply to a Chapter 13 debtor who is thus using the trustee's powers. In any event, when the debtor is pursuing a cause of action, the Chapter 13 trustee should insist on a provision in the plan that requires the debtor to seek and obtain court approval of a settlement in order to protect the rights of the estate. A carefully drafted plan will address all of the issues discussed above. The provisions for court approval of the employment and compensation of attorneys and of settlement of litigation exist to ensure the proper selection and appropriate compensation of an attorney who is representing the interests of the estate and the prudent settlement of litigation, taking into account the interests of the estate and the creditors who are the bene ciaries of the settlement. Regardless of whether the trustee or the debtor is prosecuting the cause of action, and regardless of whether compensation will be paid from property of the estate, it seems most consistent with the general principles of the Bankruptcy Code and of Chapter 13 that the court approve the employment of counsel to prosecute the cause of action, litigation counsel's compensation and expenses, and any settlement of the cause of action. 55 See 10: See 10: Page 23 of 213

24 Applicable Plan and Confirm. Reqs. 4:7 Consequently, if the plan provides for the debtor to prosecute the cause of action, the Chapter 13 trustee or a creditor should object unless the plan contains provisions for court approval of the retention and compensation of litigation counsel and any settlement so that the enforcement of the cause of action is consistent with the Bankruptcy Code as Code 1322(b)(11) requires for its con rmation. If the plan provides for the Chapter 13 trustee to handle the litigation, the Chapter 13 trustee may likewise insist on such provisions so that she has certainty with regard to her duties and protection against claims for breach of her duciary duty that she has when acting under the authority of a court order. 57 If the debtor has an economic interest in the cause of action (i.e., its successful prosecution may result in payment of creditors in full so that she retains any recovery in excess of that amount), she should include such provisions so that she has the opportunity to assert her interests with regard to the selection and compensation of counsel and any settlement of the cause of action. 18 Page 24 of 213

25 Rights and Powers of Debtors 16:5 16:5 Rights and powers of debtor and trustee with regard to nonbankruptcy causes of action The property of a debtor's estate may include a cause of action 1 against a third party that arose prior to the ling of the bankruptcy case and independently of it. 2 For example, a debtor may have a tort claim for personal injuries, a claim for employment discrimination, or a claim based on a creditor's violation of a consumer protection statute. A third party may owe the debtor money on a promissory note, on account, or for breach of contract. We refer to these types of causes of action as nonbankruptcy causes of action to distinguish them from causes of action that the estate may have under the avoidance provisions in Chapter 5 of the Bankruptcy Code. 3 This section discusses the question of whether the debtor, the Chapter 13 trustee, or both have standing to pursue a nonbankruptcy cause of action. Section 16:6 considers the standing issue with regard to exercise of the avoidance powers. In a Chapter 7 case, the Chapter 7 trustee is the proper party to prosecute a debtor's nonbankruptcy cause of action that is property of the estate as the representative of the estate. 4 The Chapter 7 trustee distributes any net recovery, after any exemption the debtor has in the cause of action, 5 together with any other funds from the liquidation of assets, to creditors in accordance with their priorities. 6 In a Chapter 13 case, under the best interest of creditors test of Code 1325(a)(4), a debtor's plan must provide for payments to unsecured creditors equal to what they would receive in a hypothetical liquidation of the debtor's property if she had led a Chapter 7 case. 7 Thus, a debtor's plan must provide for creditors to receive what they would receive if a trustee prosecuted the [Section 16:5] 1 Under the Federal Rules of Civil Procedure and modern procedural concepts, the term claim replaces the term cause of action to describe a plainti 's assertion of a right to monetary or other relief against another party. Because claim is a term of art in the Bankruptcy Code that refers to rights of creditors against the debtor or the estate, see 11 U.S.C.A. 101(5), we use the term cause of action for clarity to refer to a claim of the debtor or the estate against a third party and to distinguish such a right of recovery from a creditor's claim. 2 See 14:12. 3 See 14: U.S.C.A. 323(a). 5 See 14:22. 6 See 16:1. 7 See 7: Page 25 of 213

26 16:5 Chapter 13 Practice and Procedure cause of action in a Chapter 7 case, taking into account any exemption the debtor may have in the cause of action 8 and the expenses of prosecuting and recovering it. 9 A debtor may not be able to pay enough in plan payments so that creditors receive the economic value of the cause of action under the plan. If the cause of action is for unliquidated damages, such as those in a tort claim for personal injuries, it may be di cult, and in any event time-consuming, to determine the value of the cause of action for determining how much creditors would receive in a Chapter 7 case. A plan may address these problems by providing for prosecution of the cause of action and distribution to creditors of the net recovery after payment of litigation expenses and the debtor's retention of any amount she is entitled to exempt. 10 Chapter 13 does not expressly state whether the debtor or the Chapter 13 trustee may prosecute and enforce a nonbankruptcy cause of action that a debtor has. 11 Courts typically address this question of which party has authority to pursue a nonbankruptcy cause of action in terms of standing. As discussed below, courts have not uniformly answered the question, but a debtor should be able to avoid the issue through careful practice and a provision in her plan that expressly states which party will be responsible for litigating the cause of action. Section 4:6 discusses matters that the debtor, the Chapter 13 trustee, and creditors should consider in connection with the proposal and con rmation of a plan in a case that involves a signi cant nonbankruptcy cause of action and other issues related to prosecution of litigation, such as requirements for approval of employment of litigation counsel, the attorney's compensation, and settlement of the litigation. Courts have developed three competing theories as to who has standing to pursue the litigation: the debtor, the trustee, or either. The standing issue is important, of course, but it usually has little substantive e ect. 12 Before discussing the approaches courts have taken with regard to standing, therefore, we point 8 See 14:22. 9 See 7:7. 10 See 4:6. 11 Similarly, Chapter 13 does not expressly address litigation procedures when the cause of action involves the exercise of the avoiding powers that arise under the Bankruptcy Code. Section 16:6 considers the issues with regard to bankruptcy causes of action. 12 The question of who has authority to prosecute a cause of action may be substantively critical when the defendant asserts that an applicable statute of limitations bars its assertion. 11 U.S.C.A. 108(a) in some instances permits a trustee to commence an action within prescribed periods after the ling of the Page 26 of 213

27 Rights and Powers of Debtors 16:5 out considerations relevant to the ultimate objectives of the litigation, which are the recovery of money from the cause of action and the allocation of it among the debtor and creditors. These considerations involve other issues that determination of standing does not resolve; they should lead the debtor and the trustee to cooperate in advancing their mutual interests in maximizing the recovery from the cause of action. Regardless of who may pursue the cause of action, the trustee, as the representative of the estate with a duciary duty to protect creditors, has an interest in it. 13 Similarly, the Chapter 13 debtor may have an interest in the cause of action, particularly if a recovery could result in a recovery that would produce a surplus in excess of the amount required to pay creditors. 14 Moreover, determination of who has the authority to prosecute litigation does not necessarily answer the question of how the funds will be disbursed upon judgment or settlement, 15 or the impact of seeking dismissal or conversion of the Chapter 13 case before a successful conclusion of litigation. 16 As discussed elsewhere, resolution of the latter questions may require consideration of the debtor's exemptions, 17 di erent theories regarding whether and what property of the estate remains in the bankruptcy estate or is revested in the debtor following petition when the statute of limitations has expired if the action could have been commenced on the date of the ling of the petition. One view is that 108(a) applies only to an action commenced by a trustee. E.g., Estate of Carr ex rel. Carr v. U.S., 482 F. Supp. 2d 842 (W.D. Tex. 2007); In re Ranasinghe, 341 B.R. 556, (Bankr. E.D. Va. 2006). The opposite view is that a Chapter 13 debtor may invoke 108(a). E.g., In re Dawson, 411 B.R. 1 (Bankr. D. D.C. 2008); In re McConnell, 390 B.R. 170 (Bankr. W.D. Pa. 2008). The issue may also be important when the defendant asserts a defense of judicial estoppel. See 16:7. 13 See, e.g., Kirkes v. Lake Co. Chevrolet Cadillac, L.L.C., 2008 WL (E.D. Okla. 2008) (permitting the Chapter 13 trustee to intervene in a lawsuit as the estate's duciary protecting the interest of creditors); Looney v. Hyundai Motor Mfg. Alabama, LLC, 330 F. Supp. 2d 1289, 1298, 52 Collier Bankr. Cas. 2d (MB) 1299 (M.D. Ala. 2004) (Allowing the debtor to pursue a discrimination matter and stating Certainly, a trustee may have an interest in a cause of action, which is part of a bankruptcy estate. ). But cf. In re Jones, 494 B.R. 569 (Bankr. M.D. Fla. 2013) (Trustee has no standing to object to reasonableness of special counsel's fees where settlement is su cient to satisfy all claims at 100%.). See also 4:6. 14 See In re Stewart, 373 B.R. 801 (Bankr. S.D. Ga. 2007) (Chapter 13 debtor at a minimum has concurrent authority with Chapter 13 trustee to commence, prosecute, and compromise tort claim; Chapter 13 trustee cannot settle claim without participation by debtor.). 15 See 11:2. 16 See 4:6. 17 See 14: Page 27 of 213

28 16:5 Chapter 13 Practice and Procedure con rmation, 18 and whether property that the debtor acquires after con rmation is property of the estate. 19 Because the answer to the question of standing or authority to prosecute a debtor's cause of action does not determine the bene- ciary of a favorable outcome, the trustee and the debtor do not necessarily have adverse interests with regard to who prosecutes the cause of action. Unless one or the other has a particular interest in controlling the litigation process or wants to prevent the other from bringing the action at all, the debtor and the trustee should be able to avoid the issue of standing which the defendant to the action often raises in the interest of maximizing the recovery. The debtor and the Chapter 13 trustee have several ways to avoid a standing dispute with the defendant. First, they might agree to prosecute the cause of action jointly. Second, either or both of them could seek an order from the bankruptcy court authorizing one or the other, as they agree, to litigate the cause of action; the court could authorize one of them to pursue it in accordance with their agreement or determine which one of them should be authorized to do so if they do not agree. 20 Finally, the debtor could include a provision in the plan that speci es who will prosecute the action. 21 If actions of the debtor and the trustee or the provisions of an order or a con rmed plan as just discussed address the question of whether the debtor or the trustee will pursue a debtor's nonbankruptcy cause of action, the standing issues discussed here should not come into play. If the standing issue is not resolved in one of these ways, however, several provisions of the Bankruptcy Code are relevant in considering the issue. Code 323 provides that a trustee is the representative of the estate 22 and that the trustee has capacity to sue and be sued. 23 This section, like other provisions of the Code, applies in cases under Chapter 13, 24 and its language does not in any way restrict its operation in Chapter 13 cases. Related to Code 323 is Bankruptcy Rule Rule 6009 permits the trustee or debtor in possession to prosecute or defend any pending action or proceeding by or against the debtor 18 See 10: See 11:13, 20: See 4:6. 21 See 4:6. Section 10:1 discusses the binding e ect of con rmation under 11 U.S.C.A. 1327(a) U.S.C.A. 323(a) U.S.C.A. 323(b) U.S.C.A. 103(a) Page 28 of 213

29 Rights and Powers of Debtors 16:5 and to commence any action or proceeding on behalf of the estate, with or without court approval. A debtor in possession is a debtor in a Chapter 11 case in which a trustee has not been appointed 25 and who generally has the rights, powers, and duties of a trustee. 26 Thus, a Chapter 13 debtor is not a debtor in possession within the statutory de nition of the term, and Rule 6009, therefore, does not by its terms give a Chapter 13 debtor the authority to litigate a nonbankruptcy cause of action. 27 It is clear under these provisions that a Chapter 7 trustee has the exclusive authority to prosecute a nonbankruptcy cause of action on behalf of the estate. 28 Some courts, applying them in Chapter 13 cases and noting the absence of any other provision in the Bankruptcy Code that addresses the authority of a debtor to bring litigation involving estate assets, have concluded that only the Chapter 13 trustee has standing to prosecute a debtor's nonbankruptcy cause of action. 29 Most courts, however, conclude that the Chapter 13 debtor has standing to prosecute a nonbankruptcy cause of action. 30 Some of U.S.C.A. 1101(1) U.S.C.A. 1107(a). 27 See In re Jackson, 317 B.R. 573, 578 n.5 (Bankr. D. Mass. 2004). Nevertheless, some courts appear to conclude that Fed. R. Bankr. P applies to a Chapter 13 debtor, who remains in possession of property of the estate. E.g., Wilson v. Dollar General Corp., 717 F.3d 337 (4th Cir. 2013); Cable v. Ivy Tech State College, 200 F.3d 467, 472, 43 Collier Bankr. Cas. 2d (MB) 599, 141 Ed. Law Rep. 73, Bankr. L. Rep. (CCH) P (7th Cir. 1999). 28 E.g., Matter of New Era, Inc., 135 F.3d 1206, 1209, 32 Bankr. Ct. Dec. (CRR) 126 (7th Cir. 1998); Lambert v. Fuller Co., Inc., 122 B.R. 243, 245 (E.D. Pa. 1990); Gulley v. Winnebago County Forest Preserve Dist., 61 Empl. Prac. Dec. (CCH) P 42349, 1992 WL (N.D. Ill. 1992); In re Davis, 158 B.R. 1000, 1002 (Bankr. N.D. Ind. 1993). 29 E.g., Smith v. Cumulus Broadcasting, LLC, 2011 WL (D.S.C. 2011); In re Family Dollar FLSA Litigation, 158 Lab. Cas. (CCH) P 35593, 2009 WL (W.D. N.C. 2009); In re Gardner, 218 B.R. 338 (Bankr. E.D. Pa. 1998); Richardson v. United Parcel Service, 195 B.R. 737, 71 Fair Empl. Prac. Cas. (BNA) 161 (E.D. Mo. 1996); In re Northrup, 220 B.R. 855, 35 U.C.C. Rep. Serv. 2d 711 (Bankr. E.D. Pa. 1998). Some of these cases conclude that a Chapter 13 debtor does not have standing by relying on case law dealing with principles applicable to the debtor's lack of standing in a Chapter 7 case, as the text discusses. E.g., Smith v. Cumulus Broadcasting, LLC, 2011 WL (D.S.C. 2011); In re Family Dollar FLSA Litigation, 158 Lab. Cas. (CCH) P 35593, 2009 WL (W.D. N.C. 2009). 30 E.g., Wilson v. Dollar General Corp., 717 F.3d 337, 27 A.D. Cas. (BNA) 1697 (4th Cir. 2013); Smith v. Rockett, 522 F.3d 1080, Bankr. L. Rep. (CCH) P (10th Cir. 2008); Crosby v. Monroe County, 394 F.3d 1328, 1331 n.2 (11th Cir. 2004); Cable v. Ivy Tech State College, 200 F.3d 467, , 43 Collier Bankr. Cas. 2d (MB) 599, 141 Ed. Law Rep. 73, Bankr. L. Rep. (CCH) P Page 29 of 213

30 16:5 Chapter 13 Practice and Procedure these courts have expressly stated that the debtor has standing to the exclusion of the trustee. 31 As later text discusses, some courts conclude that the debtor and the trustee have concurrent standing. Courts ruling that the debtor has standing to prosecute a nonbankruptcy cause of action have focused on the provisions in Chapter 13 that specify the statutory duties of a Chapter 13 trustee and describe the rights of the Chapter 13 debtor. The Chapter 13 trustee's duties under Code 1302(b)(1) do not include the duty to liquidate assets of the Chapter 13 debtor's estate. 32 At the same time, a Chapter 13 debtor's rights include the right under Code 1306(b) to remain in possession of property of the estate and the right under Code 1303 to exercise the trustee's rights under Code 363(b)(1) to use property of the estate. Based on these statutory principles, courts ruling that the Chapter 13 debtor has standing to pursue a nonbankruptcy cause of action reason that the Chapter 13 trustee does not have the (7th Cir. 1999); Olick v. Parker & Parsley Petroleum Co., 145 F.3d 513, Bankr. L. Rep. (CCH) P (2d Cir. 1998); Maritime Elec. Co., Inc. v. United Jersey Bank, 959 F.2d 1194, 1209 n.2, 22 Bankr. Ct. Dec. (CRR) 1309, Bankr. L. Rep. (CCH) P (3d Cir. 1991) (opinion on rehearing); In re Dawson, 411 B.R. 1 (Bankr. D. D.C. 2008), subsequent determination, 437 B.R. 15 (Bankr. D. D.C. 2010); In re Bowker, 245 B.R. 192, 35 Bankr. Ct. Dec. (CRR) 186 (Bankr. D. N.J. 2000) (collecting cases); In re James, 210 B.R. 276, 38 Collier Bankr. Cas. 2d (MB) 771 (Bankr. S.D. Miss. 1997); In re Wirmel, 134 B.R. 258, Bankr. L. Rep. (CCH) P (Bankr. S.D. Ohio 1991). Some courts have ruled that the debtor has standing to pursue a nonbankruptcy cause of action without speci cally determining whether the debtor has the exclusive right to do so. E.g., Smith v. Rockett, 522 F.3d 1080, Bankr. L. Rep. (CCH) P (10th Cir. 2008); Cable v. Ivy Tech State College, 200 F.3d 467, 43 Collier Bankr. Cas. 2d (MB) 599, 141 Ed. Law Rep. 73, Bankr. L. Rep. (CCH) P (7th Cir. 1999); Olick v. Parker & Parsley Petroleum Co., 145 F.3d 513, Bankr. L. Rep. (CCH) P (2d Cir. 1998); Edwards v. Wells Fargo Bank, N.A., 2013 WL , *9 (C.D. Cal. 2013), appeal dismissed, (9th Cir ) (Feb. 27, 2014) (collecting cases); Looney v. Hyundai Motor Mfg. Alabama, LLC, 330 F. Supp. 2d 1289, 52 Collier Bankr. Cas. 2d (MB) 1299 (M.D. Ala. 2004); Merchants & Farmers Bank v. Vail, 1996 WL (N.D. Ala. 1996); In re Johnson, 409 B.R. 459 (Bankr. N.D. Ohio 2009); In re McConnell, 390 B.R. 170 (Bankr. W.D. Pa. 2008); In re Reathaford, 2007 WL (Bankr. D. Kan. 2007); In re Jackson, 317 B.R. 573 (Bankr. D. Mass. 2004); In re Wirmel, 134 B.R. 258, Bankr. L. Rep. (CCH) P (Bankr. S.D. Ohio 1991). 31 E.g., Maritime Elec. Co., Inc. v. United Jersey Bank, 959 F.2d 1194, 1209 n.2, 22 Bankr. Ct. Dec. (CRR) 1309, Bankr. L. Rep. (CCH) P (3d Cir. 1991) (opinion on rehearing); In re Bowker, 245 B.R. 192, 35 Bankr. Ct. Dec. (CRR) 186 (Bankr. D. N.J. 2000) (collecting cases) U.S.C.A. 1302(b)(1) makes many of a Chapter 7 trustee's duties under 11 U.S.C.A. 704(a) applicable to a Chapter 13 trustee. Excluded from the Chapter 13 trustee's duties, however, is the duty to collect and reduce to money the property of the estate under 11 U.S.C.A. 704(a)(1) Page 30 of 213

31 Rights and Powers of Debtors 16:5 duty to reduce the cause of action to money (which is the objective of its prosecution) and that the debtor has the right to possession and use of the cause of action as part of the property of the estate. 33 A debtor's right to possess a cause of action gives her the right to prosecute it, whereas a trustee ordinarily does not possess any property other than the plan payments she receives from the debtor, 34 unless the con rmed plan grants the trustee the authority to pursue the litigation. 35 Likewise, a debtor uses a cause of action in accordance with her right under Code 1303 to exercise the trustee's right to use property under Code 363(b) by prosecuting or settling it. 36 Some courts have noted that the legislative history of Code 323 and 1303 supports the debtor's standing to pursue nonbankruptcy causes of action. 37 Some courts have advanced practical considerations for 33 E.g., Olick v. Parker & Parsley Petroleum Co., 145 F.3d 513, 515, Bankr. L. Rep. (CCH) P (2d Cir. 1998); Maritime Elec. Co., Inc. v. United Jersey Bank, 959 F.2d 1194, 1209, 22 Bankr. Ct. Dec. (CRR) 1309, Bankr. L. Rep. (CCH) P (3d Cir. 1991); In re Johnson, 409 B.R. 459 (Bankr. N.D. Ohio 2009). 34 See Olick v. Parker & Parsley Petroleum Co., 145 F.3d 513, 516, Bankr. L. Rep. (CCH) P (2d Cir. 1998). Cf. In re Richardson, 283 B.R. 783 (Bankr. D. Kan. 2002); In re Frausto, 259 B.R. 201, 211 (Bankr. N.D. Ala. 2000). 35 See In re Sherman, 13 B.R. 259, 4 Collier Bankr. Cas. 2d (MB) 1355 (Bankr. D. R.I. 1981). 36 See Wilson v. Dollar General Corp., 717 F.3d 337 (4th Cir. 2013); In re Zeman, 2010 WL (Bankr. W.D. Tex. 2010); In re Ramsey, 356 B.R. 217, 226 (Bankr. D. Kan. 2006); In re Henneghan, 2005 WL , *6 (Bankr. E.D. Va. 2005). 37 See Olick v. Parker & Parsley Petroleum Co., 145 F.3d 513, 515, Bankr. L. Rep. (CCH) P (2d Cir. 1998); Maritime Elec. Co., Inc. v. United Jersey Bank, 959 F.2d 1194, 1209 n.2, 22 Bankr. Ct. Dec. (CRR) 1309, Bankr. L. Rep. (CCH) P (3d Cir. 1991); In re Bowker, 245 B.R. 192, 196, 35 Bankr. Ct. Dec. (CRR) 186 (Bankr. D. N.J. 2000). See also In re Price, 2007 WL , *6 (Bankr. N.D. Ala. 2007). Although 11 U.S.C.A. 323(b) gives the trustee the capacity to sue and be sued and does not mention the debtor, the legislative history of this section states, If the debtor remains in possession in a chapter 11 case, section 1107 gives the debtor in possession these rights of the trustee: the debtor in possession becomes the representative of the estate, and may sue and be used. The same applies in a chapter 13 case. H. R. Rep. No (1977); S. Rep. No (1978). Similarly, the legislative history of 11 U.S.C.A states that its listing of trustee powers that the debtor has does not imply that the debtor does not also possess other powers concurrently with the trustee. For example, although section 1323[sic] is not speci ed in section 1303, certainly it is intended that the debtor has the power to sue and be sued. See In re Griner, 240 B.R. 432, 437, 42 Collier Bankr. Cas. 2d (MB) 1965 (Bankr. S.D. Ala. 1999) (citing 1214 Cong. Rec. H11, 106 (daily ed. Sept. 28, 1978)) Page 31 of 213

32 16:5 Chapter 13 Practice and Procedure concluding that the Chapter 13 debtor has authority to pursue nonbankruptcy causes of action. 38 Imposition of a duty on the Chapter 13 trustee to prosecute nonbankruptcy litigation would require the trustee to assume substantial responsibilities in connection with the litigation (including the investigation and assessment of the merits of all litigation in all cases, the retention of counsel and expert witnesses, and participation in the formulation of litigation strategy) and to incur litigation expenses. 39 Because most Chapter 13 trustees administer thousands of cases, many of which may involve pending or contemplated nonbankruptcy litigation, placing the responsibility of litigating causes of action on the trustee would impose a heavy burden. 40 Signi cantly, the trustee is not involved in the debtor's daily life, receives only the debtor's plan payments, and does not take possession of the debtor's assets. 41 Thus, it appears counterintuitive to provide the debtor the authority to possess property, but not permit the debtor to use it to bene t herself and the estate. 42 Another factor is that the debtor may voluntarily dismiss the Chapter 13 case, thus divesting the trustee of authority to pursue the litigation. 43 A third approach permits either the Chapter 13 debtor or the Chapter 13 trustee to prosecute the debtor's cause of action. 44 Courts adopting this view reason that, because no provisions of 38 In re Johnson, 409 B.R. 459 (Bankr. N.D. Ohio 2009); In re Bowker, 245 B.R. 192, 35 Bankr. Ct. Dec. (CRR) 186 (Bankr. D. N.J. 2000); In re Griner, 240 B.R. 432, 438, 42 Collier Bankr. Cas. 2d (MB) 1965 (Bankr. S.D. Ala. 1999). 39 In re Bowker, 245 B.R. 192, 200, 35 Bankr. Ct. Dec. (CRR) 186 (Bankr. D. N.J. 2000) ( In this district each standing chapter 13 trustee has tens of thousands of active chapter 13 causes at any one time.... To require that the trustee be a party to all litigation on behalf of the chapter 13 estates would subject the trustee to an impossible responsibility. ). 40 In re Bowker, 245 B.R. 192, 200, 35 Bankr. Ct. Dec. (CRR) 186 (Bankr. D. N.J. 2000). 41 In re Griner, 240 B.R. 432, 436, 42 Collier Bankr. Cas. 2d (MB) 1965 (Bankr. S.D. Ala. 1999); see also Olick v. Parker & Parsley Petroleum Co., 145 F.3d 513, 515, Bankr. L. Rep. (CCH) P (2d Cir. 1998) ( [T]he reality of a ling under Chapter 13 is that the debtors are the true representatives of the estate and should be given the broad latitude essential to control the progress of their case. ). 42 See Cable v. Ivy Tech State College, 200 F.3d 467, 472, 43 Collier Bankr. Cas. 2d (MB) 599, 141 Ed. Law Rep. 73, Bankr. L. Rep. (CCH) P (7th Cir. 1999). 43 See 20:4. 44 E.g., Wilson v. Dollar General Corp., 717 F.3d 337, 343, 27 A.D. Cas. (BNA) 1697 (4th Cir. 2013); Cable v. Ivy Tech State College, 200 F.3d 467, 43 Collier Bankr. Cas. 2d (MB) 599, 141 Ed. Law Rep. 73, Bankr. L. Rep. (CCH) P (7th Cir. 1999); Donato v. Metropolitan Life Ins. Co., 230 B.R. 418 (N.D. Cal. 1999); In re Griner, 240 B.R. 432, 42 Collier Bankr. Cas. 2d (MB) Page 32 of 213

33 Rights and Powers of Debtors 16:6 the Bankruptcy Code expressly permit either party to litigate matters and liquidate estate assets, the provisions of Code 1302 and 1303 specifying the rights and duties of the trustee and debtor confer on each the authority to pursue matters on behalf of the estate. 45 In some of the cases taking this view, however, the court's conclusion was not essential to its ruling, either because both the debtor and trustee were jointly pursuing the matter 46 or because the court's rejection of a lack of standing defense required only a ruling that the debtor had standing. 47 Both the debtor and the trustee have standing to object to a creditor's proof of claim. 48 When a nonbankruptcy cause of action against a creditor is available to reduce or eliminate a claim by way of seto or other a rmative defense, either party has standing to assert a nonbankruptcy claim defensively. 16:6 Rights and powers of debtor and trustee with regard to exercise of trustee's avoidance powers Other sections discuss the Chapter 13 debtor's and the trustee's rights and powers with regard to the use and disposition of property that the debtor owns 1 and the enforcement of a cause of action 2 that arises independently of the bankruptcy case, which we refer to as a nonbankruptcy cause of action. 3 This section considers the rights of the Chapter 13 debtor and trustee with regard to the exercise of the so-called avoidance (Bankr. S.D. Ala. 1999); In re Wirmel, 134 B.R. 258, Bankr. L. Rep. (CCH) P (Bankr. S.D. Ohio 1991). 45 E.g., In re Griner, 240 B.R. 432, 42 Collier Bankr. Cas. 2d (MB) 1965 (Bankr. S.D. Ala. 1999). 46 E.g., In re Jakab, 293 B.R. 621, (Bankr. D. Vt. 2003). See also In re Bowker, 245 B.R. 192, 198 9, 35 Bankr. Ct. Dec. (CRR) 186 (Bankr. D. N.J. 2000). 47 E.g., In re Griner, 240 B.R. 432, 42 Collier Bankr. Cas. 2d (MB) 1965 (Bankr. S.D. Ala. 1999); In re Wirmel, 134 B.R. 258, 260, Bankr. L. Rep. (CCH) P (Bankr. S.D. Ohio 1991). See also In re Bowker, 245 B.R. 192, 198 9, 35 Bankr. Ct. Dec. (CRR) 186 (Bankr. D. N.J. 2000). 48 See 18:7, 17:3. [Section 16:6] 1 See 16:3, 16:4. 2 Under the Federal Rules of Civil Procedure and modern procedural concepts, the term claim replaces the term cause of action to describe a plainti 's assertion of a right to monetary or other relief against another party. Because claim is a term of art in the Bankruptcy Code that refers to rights of creditors against the debtor or the estate, see 11 U.S.C.A. 101(5), we use the term cause of action for clarity to refer to a claim of the debtor or the estate against a third party and to distinguish such a right of recovery from a creditor's claim. 3 See 16: Page 33 of 213

34 16:6 Chapter 13 Practice and Procedure powers that a bankruptcy trustee has under Chapter 5 of the Code. 4 Avoidance of a lien pursuant to the trustee's avoidance powers must be distinguished from avoidance or elimination of a creditor's lien through operation of other provisions of the Code, which we consider elsewhere. 5 Before ling a Chapter 13 petition, a nancially distressed debtor may have transferred (or granted a lien on) real or personal property, or made signi cant payments on debts, to one or more creditors in an e ort to resolve her nancial problems or to favor a relative or friend. Alternatively, a diligent creditor may have enforced its lien or debt involuntarily through foreclosure, repossession, or legal process. Further, a creditor with a lien, such as a mortgage on the debtor's real property or a security interest in a vehicle or other personal property, may have failed to properly perfect its interest in the collateral. Chapter 5 of the Bankruptcy Code contains a number of provisions that permit a bankruptcy trustee to avoid certain transfers that the debtor made or unrecorded or unperfected liens or other interests in her property. A trustee may avoid certain statutory liens under Code 545, payments or transfers of property that are preferential under Code 547, transfers that are actually or constructively fraudulent under Code 548 or under nonbankruptcy law under Code 544(b), and improperly recorded or unperfected liens under the so-called strong-arm provisions of Code 544(a). A trustee may also recover certain prepetition seto s that enabled the creditor to improve its position during the 90 days preceding the ling of the bankruptcy petition under Code 553(b). In addition, a trustee may avoid certain unauthorized postpetition transfers under Code 549. Section 14:20 explains the operation of these provisions, which are sometimes referred to collectively as the trustee's avoidance powers. If a transfer of property or a lien is avoided under one of the trustee's avoidance powers, Code 550(a) permits the recovery of 4 See 14:20. 5 A debtor may avoid certain liens on exempt property under Code 522(f). See 14:22. Section 14:24 discusses whether the Chapter 13 trustee has standing to avoid a lien under 522(f) when the debtor declines to do so when it may a ect what the debtor must pay under the plan. A Chapter 13 plan may provide for the full or partial elimination of a lien through a strip-o or strip-down of a secured claim based on the value of the property that secures it. Strip-o occurs when the value of property subject to a junior lien is no more than the amount of the debt that a senior lien secures. The plan may eliminate the junior lien in its entirety. See 5:5, 5:40. Stripdown occurs when the amount of the lien exceeds the value of the encumbered property. The plan may provide for treatment of the claim as secured only to the extent of the property's value and as an unsecured claim for the de ciency, thereby eliminating the lien with regard to the unsecured portion. See 5: Page 34 of 213

35 Rights and Powers of Debtors 16:6 the transferred property or its value. Any such recovery is property of the debtor's estate under Code 541(a)(3). 6 Furthermore, any avoided lien or transfer is preserved for the bene t of the estate under Code 551 and is property of the estate under Code 541(a)(4). 7 The trustee's avoidance powers may be important in a Chapter 13 case for several reasons. First, avoidance of a transfer may permit the debtor to recover property that a debtor lost through foreclosure, repossession, garnishment, or other legal process prior to the ling of the petition. 8 She may be able to retain the proceeds from a successful avoidance action if she can claim an exemption in the proceeds. 9 A successful avoidance action may also result in the recovery of funds that would enable her to pay large priority claims (such as tax liabilities that might not be dischargeable) that she could not otherwise a ord to pay through plan payments. Second, to the extent that a lien on property the debtor wants to keep is avoided, the avoidance reduces or eliminates the amount of the secured claim and thus may reduce what the debtor must pay that creditor with regard to its secured claim. 10 Further, such an elimination or reduction of payments to a secured creditor may increase the payments that the debtor must make to unsecured creditors under the projected disposable income test of Code 1325(b), if invoked. 11 Third, a debtor may want to avoid a lien or transfer in order to comply with the so-called best interest of creditors test for con rmation under Code 1325(a)(4), which requires that each unsecured creditor receive under the plan at least what it would receive in a hypothetical Chapter 7 case. 12 If the exercise of an avoidance power in a Chapter 7 case would result in additional funds that would be payable to unsecured creditors in a Chapter 7 case (which is not always the case 13 ), the plan must take that into account to meet the best interest of creditors test, 14 either by providing for the debtor to make payments in the required 6 See 14:20. 7 See 14:20. 8 See 14:20. 9 See 14: See 5:7. 11 See 8: See 7:6. 13 See 4:6. 14 See 7:7. As noted in an earlier footnote in this section, a debtor may also avoid certain liens on exempt property under 11 U.S.C.A. 522(f), and a Chapter 13 plan may provide for the full or partial elimination of a lien through Page 35 of 213

36 16:6 Chapter 13 Practice and Procedure amount or by providing for prosecution of the avoidance action and distribution of net proceeds to creditors after payment of attorney's fees and litigation expenses and any exemption the debtor has in the recovery. 15 The existence of an avoidance action may also a ect claims in the case. If avoidance of a transfer or lien occurs, the creditor may have a claim in the Chapter 13 case arising out of the avoidance under Code 502(h). Moreover, even if the transfer is not avoided, Code 502(d) provides for the disallowance of the claim of a creditor who has received an avoidable transfer unless the creditor pays the amount of the transfer or surrenders the transfer to the estate. For any of the reasons mentioned above, a debtor may want to have a transfer of property or a lien avoided through exercise of the trustee avoidance powers. In some circumstances, however, the debtor may not want the avoidance powers to be used. For example, the transaction may involve a relative or friend who would be exposed to liability. If the avoidance action is not prosecuted, her plan payments will have to take account of any bene t unsecured creditors would receive from prosecution of the action in a Chapter 7 case to meet the best interest of creditors test. Section 4:6 discusses the risks that such a plan provision poses for unsecured creditors and how they or the Chapter 13 trustee may address them. Sometimes, the debtor will have no economic or other interest in pursuing an avoidance action but does not want to increase her plan payments to take account of it as the best interest of creditors test could require. 16 In this situation, either the debtor or the Chapter 13 trustee will have to pursue the avoidance action so that the best interest test does not require the debtor to make payments equal to the bene t unsecured creditors would receive in a Chapter 7 case. a strip-o or strip-down. Importantly, elimination or reduction of a lien on exempt property or through lien-stripping under a plan does not result in an increase in the value of the debtor's estate and does not a ect the outcome of the best interest of creditors test. Avoidance of a lien on exempt property does not bene t the estate because the debtor can exempt the property. Similarly, lien-stripping eliminates or reduces a lien only to the extent that the amount of the lien creditor's claim exceeds the value of the encumbered property; it does not increase the amount that creditors would receive in a hypothetical Chapter 7 liquidation. Because the avoidance of a lien on exempt property and lien-stripping provisions in a plan reduce the amount the debtor must pay to retain the encumbered property, the use of these provisions may increase the amount the debtor must pay under the projected disposable income test of Code 1325(b). See 8: See 4:6. 16 See 4: Page 36 of 213

37 Rights and Powers of Debtors 16:6 When a Chapter 13 case involves an avoidance action, questions arise as to whether the trustee, the debtor, or both have the authority, or standing, to bring the action. As 4:6 discusses, the provisions of a con rmed plan or a speci c court order authorizing the debtor or trustee to bring an avoidance action should de nitively resolve the issue, essentially as a matter of so-called derivative standing. Section 4:6 also discusses matters that the debtor and Chapter 13 trustee should consider in connection with the prosecution of an avoidance action, including requirements for approval of employment and compensation of an attorney to pursue the action, settlement of the litigation, and disposition of any recovery. 17 In the absence of a provision in a con rmed plan or order dealing with the issue, it is clear that the Chapter 13 trustee has authority to exercise the avoidance powers. 18 Note, however, that a trustee may not be able to bring an avoidance action following con rmation of a plan that does not provide for it. 19 Each of the statutes providing for the avoidance of transfers of or interests in property provides that the trustee may exercise the speci ed power. The avoidance powers are in Chapter 5 of the Bankruptcy Code. Code 103(a) provides that Chapter 5 applies in Chapter 13 cases, and nothing in Chapter 13 excludes or limits the Chapter 13 trustee's exercise of them. Further, Code 323(b) provides that the trustee has the capacity to sue and be sued, and it does not restrict this power based on the type of trustee. Code 546(a), which imposes a statute of limitations for the commencement of a trustee avoidance action, supports this conclusion. Code 546 contemplates that a Chapter 13 trustee may bring an avoidance action because it refers to Code 1302, which prescribes the duties of a Chapter 13 trustee, and its restrictions are based on time, not the chapter under which the case is pending or the type of trustee that can use the powers. 17 See also 16:5, which discusses interests of the debtor and the Chapter 13 trustee in connection with prosecution of nonbankruptcy causes of action. 18 E.g., Matter of Maddox, 15 F.3d 1347, 30 Collier Bankr. Cas. 2d (MB) 1510, Bankr. L. Rep. (CCH) P (5th Cir. 1994); In re Cecil, 488 B.R. 200 (Bankr. M.D. Fla. 2013); In re Lewis, 363 B.R. 477 (Bankr. D. S.C. 2007); In re Bell, 194 B.R. 192, 35 Collier Bankr. Cas. 2d (MB) 868 (Bankr. S.D. Ill. 1996); In re Johnson, 26 B.R. 381 (Bankr. D. Colo. 1982); In re Walls, 17 B.R. 701, 8 Bankr. Ct. Dec. (CRR) 909, 5 Collier Bankr. Cas. 2d (MB) 1490 (Bankr. S.D. W. Va. 1982); In re Colandrea, 17 B.R. 568 (Bankr. D. Md. 1982); In re Reeves, 17 B.R. 383, Bankr. L. Rep. (CCH) P (Bankr. W.D. La. 1982). Cf. In re Carter, 2 B.R. 321, 5 Bankr. Ct. Dec. (CRR) 1236, 1 Collier Bankr. Cas. 2d (MB) 381 (Bankr. D. Colo. 1980) (Court did strong-arm powers, but noted that 11 U.S.C.A. 1302(b) did not include 11 U.S.C.A. 704(a)(1) s duty to collect and reduce to money the property of the estate.). 19 See 4: Page 37 of 213

38 16:6 Chapter 13 Practice and Procedure Although a Chapter 13 trustee as a general rule has authority to prosecute an avoidance action, she does not have statutory authority to liquidate assets, 20 and Code 1306(b) provides that the Chapter 13 debtor remains in possession of property of the estate. What happens as a consequence of the trustee's avoidance of a transfer or lien, therefore, depends on the terms of the plan. If a Chapter 13 trustee contemplates an avoidance action that will result in recovery of property or the elimination of a lien that creates equity in the estate's property, the trustee should object to con rmation unless, as the best interest test of Code 1325(a)(4) requires, it provides for unsecured creditors to receive the value of the property the estate has as a result of the avoidance action, either through payments the debtor makes or with proceeds from the sale of the property. If the plan does neither, it cannot be con rmed, but the Chapter 13 trustee will not have authority to take possession of the property or sell it. Conversion to Chapter 7 will be necessary to achieve that result. A Chapter 13 debtor has express authority under Code 522(h) to prosecute an avoidance action when the transfer or lien to be avoided involves property in which the debtor could claim an exemption 21 and the trustee does not attempt to avoid the transfer or lien. 22 Code 522(i) permits the debtor to recover the property or its value under Code and to preserve any avoided lien for her bene t to the extent of her exemption in the property. 24 When the avoidance action does not involve property the debtor 20 Although 11 U.S.C.A. 1302(b) provides for the Chapter 13 trustee to perform many of the duties that a Chapter 7 trustee has under 11 U.S.C.A. 704(a), the Chapter 13 trustee's duties do not include the Chapter 7 trustee's duty under 704(a)(1) to collect and reduce to money the property of the estate U.S.C.A. 522(g) permits a debtor to exempt property recoverable through an avoidance action if the transfer was not voluntary and the debtor did not conceal the property. The restriction on voluntary transfers does not apply if the debtor could have avoided the transfer under 11 U.S.C.A. 522(f)(1)(B), which applies to certain nonpossessory, nonpurchase-money security interests in certain personal property. See 14: U.S.C.A. 522(h), (i). E.g., In re Dickson, 655 F.3d 585, 66 Collier Bankr. Cas. 2d (MB) 527, Bankr. L. Rep. (CCH) P (6th Cir. 2011); Matter of Hamilton, 125 F.3d 292, Bankr. L. Rep. (CCH) P (5th Cir. 1997); In re Tyler, 493 B.R. 905 (Bankr. N.D. Ga. 2013); In re Ryker, 315 B.R. 664, 52 Collier Bankr. Cas. 2d (MB) 1793 (Bankr. D. N.J. 2004) U.S.C.A. 522(i)(1). Section 522(i) gives the debtor the same rights that a trustee has under 11 U.S.C.A Section 14:20 explains the operation of U.S.C.A. 522(i)(2). Section 522(i) operates in the same manner as 11 U.S.C.A. 551 operates to preserve a lien for the bene t of the estate when the trustee avoids it. Section 14:20 explains preservation of an avoided lien Page 38 of 213

39 Rights and Powers of Debtors 16:6 can exempt and neither a court order nor a con rmed plan authorizes the debtor to pursue it, courts have disagreed as to whether a Chapter 13 debtor has authority to exercise the trustee avoidance powers. Most courts rule that the Chapter 13 trustee has the exclusive authority to exercise the trustee avoidance powers and that, therefore, a Chapter 13 debtor does not have standing to bring such an action. 25 Some courts concluding that a Chapter 13 debtor does not have authority to exercise a trustee avoidance power have noted that the lack of standing may be cured by joining the Chapter 13 trustee as a party. 26 Courts ruling that a Chapter 13 debtor does not have standing 25 E.g., Rugiero v. Nationstar Mortg., LLC, 580 Fed. Appx. 376 (6th Cir. 2014); In re Knapper, 407 F.3d 573, 583, Bankr. L. Rep. (CCH) P (3d Cir. 2005); In re Stangel, 219 F.3d 498, 36 Bankr. Ct. Dec. (CRR) 137, 44 Collier Bankr. Cas. 2d (MB) 1035, Bankr. L. Rep. (CCH) P 78239, 86 A.F.T.R.2d (5th Cir. 2000); In re Hansen, 332 B.R. 8, Bankr. L. Rep. (CCH) P (B.A.P. 10th Cir. 2005) (collecting cases); In re Merri eld, 214 B.R. 362, 31 Bankr. Ct. Dec. (CRR) 964, 38 Collier Bankr. Cas. 2d (MB) 1866, Bankr. L. Rep. (CCH) P (B.A.P. 8th Cir. 1997); In re Thompson, 2014 WL (S.D. Ga. 2014); In re Lee, 432 B.R. 212 (D.S.C. 2010); In re Atkins, 525 B.R. 594, 73 Collier Bankr. Cas. 2d (MB) 325 (Bankr. E.D. Pa. 2015); In re Mouton, 479 B.R. 55 (Bankr. E.D. Ark. 2012); In re Mitrano, 2011 WL (Bankr. E.D. Va. 2011), a 'd, 468 B.R. 795 (E.D. Va. 2012); In re Ryker, 315 B.R. 664, 52 Collier Bankr. Cas. 2d (MB) 1793 (Bankr. D. N.J. 2004) (collecting cases); In re Gilliam, 52 Collier Bankr. Cas. 2d (MB) 1735, 2004 WL (Bankr. D. Kan. 2004); In re Binghi, 299 B.R. 300, 51 Collier Bankr. Cas. 2d (MB) 485 (Bankr. S.D. N.Y. 2003) (collecting cases); In re Montoya, 285 B.R. 490 (Bankr. D. N.M. 2002) (collecting cases); accord, e.g., In re Robinson, 2011 WL (Bankr. E.D. N.C. 2011); In re Wood, 301 B.R. 558 (Bankr. W.D. Mo. 2003); In re Kirschke, 2009 WL (Bankr. D. Mass. 2009), a 'd, 2010 WL (D. Mass. 2010); In re Richardson, 311 B.R. 302 (Bankr. S.D. Fla. 2004); In re Crawley, 318 B.R. 512, 53 Collier Bankr. Cas. 2d (MB) 504 (Bankr. W.D. Wis. 2004); In re Hannah, 316 B.R. 57 (Bankr. D. N.J. 2004); In re Wood, 301 B.R. 558 (Bankr. W.D. Mo. 2003); In re Steck, 298 B.R. 244, 41 Bankr. Ct. Dec. (CRR) 244 (Bankr. D. N.J. 2003); In re Holcombe, 284 B.R. 141 (Bankr. N.D. Ala. 2001); In re Cardillo, 169 B.R. 8, 31 Collier Bankr. Cas. 2d (MB) 434 (Bankr. D. N.H. 1994); In re Tillery, 124 B.R. 127, Bankr. L. Rep. (CCH) P (Bankr. M.D. Fla. 1991); see Matter of Hamilton, 125 F.3d 292, 296, Bankr. L. Rep. (CCH) P (5th Cir. 1997) (stating, but not expressly deciding, that Chapter 13 debtor cannot exercise trustee's avoiding power under 11 U.S.C.A. 544 but concluding that debtor had standing under 11 U.S.C. 522(h) because property in question could be exempted). See also In re Turner, 490 B.R. 1 (Bankr. D. D.C. 2013) (Debtor cannot use an objection to a claim to exercise trustee's strong-arm powers to avoid a deed of trust that is not properly perfected.). 26 E.g., In re Robinson, 2011 WL (Bankr. E.D. N.C. 2011); In re Wood, 301 B.R. 558 (Bankr. W.D. Mo. 2003); In re Walls, 17 B.R. 701, 8 Bankr. Ct. Dec. (CRR) 909, 5 Collier Bankr. Cas. 2d (MB) 1490 (Bankr. S.D. W. Va. 1982). But see In re Merritt, 529 B.R. 845 (Bankr. E.D. Pa. 2015), order a 'd, 2016 WL (E.D. Pa. 2016); In re Funches, 381 B.R. 471, (Bankr. E.D. Pa. 2008) (Debtor cannot joint trustee as an involuntary plainti in an ad Page 39 of 213

40 16:6 Chapter 13 Practice and Procedure to pursue a trustee avoidance action ground their conclusion in statutory language in the avoidance provisions that expressly grants the powers to the trustee and on the absence of any provision that permits a Chapter 13 debtor to exercise them. In this regard, they observe that Code 1303, which speci es the powers of a trustee that a Chapter 13 has, does not give the debtor the right of a trustee to exercise the avoidance powers. In reaching this result, courts have applied the Supreme Court's ruling in 2000 in Hartford Underwriters Insurance Co. v. Union Planters Bank. 27 In Hartford Underwriters, an insurance company had not been paid for postpetition insurance it had provided to a Chapter 11 debtor, for which it had an administrative expense claim under Code 503(b)(1)(A). After conversion of the case to Chapter 7, the company sought payment from the secured creditor on the theory that the insurance coverage had bene tted the collateral and that it was entitled to payment from the secured creditor under Code 506(c). Code 506(c) provides that a trustee may recover the costs of preserving a creditor's collateral during the pendency of the case from the collateral. The Hartford Underwriters Court ruled that the insurance company could not invoke Code 506(c) because it authorizes only the trustee to assert the surcharge claim. The Court reasoned that, when a statute names the party who can invoke its provisions, only the speci ed party may act. 28 The Hartford Underwriters ruling that only the party named in a statute has the authority to invoke it thus supports the conclusion that a Chapter 13 debtor cannot exercise rights that the trustee avoidance provisions give to the trustee. 29 The opposite view is that the Chapter 13 debtor has the right versary proceeding seeking to use strong-arm avoidance power.); In re Gilliam, 52 Collier Bankr. Cas. 2d (MB) 1735, 2004 WL (Bankr. D. Kan. 2004) (declining to permit joinder of Chapter 13 trustee when unsecured creditors would not bene t from the avoidance action). 27 Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 120 S. Ct. 1942, 147 L. Ed. 2d 1, 36 Bankr. Ct. Dec. (CRR) 38, 43 Collier Bankr. Cas. 2d (MB) 861, Bankr. L. Rep. (CCH) P (2000). 28 Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 7, 120 S. Ct. 1942, 147 L. Ed. 2d 1, 36 Bankr. Ct. Dec. (CRR) 38, 43 Collier Bankr. Cas. 2d (MB) 861, Bankr. L. Rep. (CCH) P (2000). 29 E.g., In re Knapper, 407 F.3d 573, 583, Bankr. L. Rep. (CCH) P (3d Cir. 2005); In re Stangel, 219 F.3d 498, 36 Bankr. Ct. Dec. (CRR) 137, 44 Collier Bankr. Cas. 2d (MB) 1035, Bankr. L. Rep. (CCH) P 78239, 86 A.F.T.R.2d (5th Cir. 2000); In re Hansen, 332 B.R. 8, Bankr. L. Rep. (CCH) P (B.A.P. 10th Cir. 2005); In re Lee, 432 B.R. 212 (D.S.C. 2010); In re Ryker, 315 B.R. 664, 52 Collier Bankr. Cas. 2d (MB) 1793 (Bankr. D. N.J. 2004); In re Gilliam, 52 Collier Bankr. Cas. 2d (MB) 1735, 2004 WL (Bankr. D. Kan. 2004); In re Binghi, 299 B.R. 300, 51 Collier Bankr. Cas. 2d (MB) 485 (Bankr. S.D. N.Y. 2003) Page 40 of 213

41 Rights and Powers of Debtors 16:6 to exercise the trustee's avoidance powers in view of the structure and purposes of Chapter The analysis requires consideration of a number of features of Chapter 13 that relate to the allocation of rights and duties between the trustee and the debtor and requirements for con rmation of a Chapter 13 plan. Several provisions govern the trustee's and debtor's rights with regard to use and possession of property of the estate. First, Code 1306(b) provides that the Chapter 13 debtor remains in possession of property of the estate. Second, under Code 1302(b)(1), the Chapter 13 trustee's duties do not include the liquidation of estate assets. Third, the Chapter 13 debtor has the authority to exercise the trustee's powers with regard to the use of property of the estate under Code 1303, subject to court supervision. In this regard, property of the estate that remains in the debtor's possession includes property recovered under the trustee avoidance powers under Code 541(a)(3) and (4). Another set of provisions deals with requirements for the proposal and con rmation of a plan. Under Code 1321, only the debtor can propose a plan prior to con rmation. One provision is Code 1325(a)(4), which states the so-called best interest of creditors test for con rmation. 31 Its requirement that an unsecured creditor receive what it would receive in a Chapter 7 liquidation may require that unsecured creditors receive the bene t of an available avoidance action. 32 Another provision is Code 1322(b)(8), which permits the funding of a plan with property of the estate, which, of course, includes a recovery through exercise of a trustee avoidance power. 30 E.g., In re Barbee, 461 B.R. 711, 66 Collier Bankr. Cas. 2d (MB) 1273 (B.A.P. 6th Cir. 2011); In re Cohen, 305 B.R. 886, 52 Collier Bankr. Cas. 2d (MB) 737, 53 U.C.C. Rep. Serv. 2d 148 (B.A.P. 9th Cir. 2004); U.S. v. Dewes, 315 B.R. 834, 94 A.F.T.R.2d (N.D. Ind. 2004), judgment vacated on other grounds, appeal dismissed by, 7th Cir. ( ) (July 21, 2006); Thacker v. United Companies Lending Corp., 256 B.R. 724 (W.D. Ky. 2000) (collecting cases); In re Freeman, 72 B.R. 850 (Bankr. E.D. Va. 1987); In re Weaver, 69B.R. 554, 3 U.C.C. Rep. Serv. 2d 1231 (Bankr. W.D. Ky. 1987); Matter of Ottaviano, 68 B.R. 238, Bankr. L. Rep. (CCH) P (Bankr. D. Conn. 1986); Matter of Einoder, 55 B.R. 319, Bankr. L. Rep. (CCH) P (Bankr. N.D. Ill. 1985). The court in In re Cohen, 305 B.R. 886, 900, 52 Collier Bankr. Cas. 2d (MB) 737, 53 U.C.C. Rep. Serv. 2d 148 (B.A.P. 9th Cir. 2004), advanced two theories to support debtor standing. After ruling that a Chapter 13 debtor has statutory standing to bring a trustee avoidance action for reasons stated in the text, the court held alternatively that a Chapter 13 debtor has third-party, nonstatutory standing based on the debtor's need to prosecute the action to obtain con rmation of a plan and consummate it, the essentially identical interests of the debtor and the trustee, and the inability of the debtor to protect her interests if the trustee does not act. 31 See 7:6. 32 See 4: Page 41 of 213

42 16:6 Chapter 13 Practice and Procedure The collective import of these provisions is that it is appropriate, and may be essential to con rmation of a plan that only the debtor can propose, for the debtor to have the authority to prosecute an avoidance action as the representative of the estate. The Chapter 13 debtor has the rights to possession and use of property of the estate in general and to fund her plan. Moreover, she has the obligation to propose and consummate a plan that takes an avoidance recovery into account. At the same time, the Chapter 13 trustee does not have a duty to prosecute an avoidance action because she has no duty to liquidate property of the estate. This statutory structure leads to the conclusion that the proper construction of Code 1303 is that its speci cation of trustee powers that the debtor has exclusive of the trustee leaves the debtor with the ability to exercise other trustee powers concurrently with the trustee. Courts have noted that practical and equitable considerations support this result. Chapter 13 trustees do not ordinarily pursue avoidance actions, and the best interest of creditors test of Code 1325(a)(4) will preclude con rmation of a plan in the absence of prosecution of an avoidance action when the debtor cannot pay enough out of income so that unsecured creditors receive what they would get in a Chapter 7 case. It is unfair to a debtor to deny con rmation because she cannot prosecute an avoidance action and the trustee declines to do so. 33 Some courts have noted that legislative history supports a debtor's standing to prosecute a trustee avoidance action. At the time of the original enactment of the Bankruptcy Code in 1978, the oor managers in the House of Representatives and the Senate stated that Code 1303 s speci cation of the trustee's powers that the debtor has does not imply that the debtor does not also possess other powers concurrently with the trustee. For example, although [Code 323] is not speci ed in section 1303, certainly it is intended that the debtor has the power to sue and be sued E.g., Matter of Einoder, 55 B.R. 319, , Bankr. L. Rep. (CCH) P (Bankr. N.D. Ill. 1985) Cong. Rec. H11106 (Sept. 28, 1978) (remarks of Rep. Edwards); S , cited in, e.g., In re Cohen, 305 B.R. 886, 899, 52 Collier Bankr. Cas. 2d (MB) 737, 53 U.C.C. Rep. Serv. 2d 148 (B.A.P. 9th Cir. 2004). Courts holding that a Chapter 13 debtor does not have standing have concluded that legislative history may augment but not amend a statute's straightforward language and that, if Congress had intended to grant avoidance powers to a Chapter 13 debtor, it could have explicitly done so. E.g., In re Bruce, 96 B.R. 717, , 20 Collier Bankr. Cas. 2d (MB) 755 (Bankr. W.D. Tex. 1989), quoted in Matter of Hamilton, 125 F.3d 292, Bankr. L. Rep. (CCH) P (5th Cir. 1997) Page 42 of 213

43 Rights and Powers of Debtors 16:6 The Supreme Court's ruling in Hartford Underwriters Insurance Co. v. Union Planters Bank, 35 discussed above, does not necessarily require a conclusion that a Chapter 13 debtor does not have standing to pursue a trustee avoidance action. The Code 506(c) surcharge question at issue in Hartford Underwriters involved circumstances and considerations wholly di erent from those arising in the context of the prosecution of an avoidance action. Signi cantly, the Hartford Underwriters Court in reaching its conclusion relied in part on the trustee's unique role in a bankruptcy proceeding. 36 When a surcharge question arises, numerous unpaid administrative expense claimants may exist. Because the estate has incurred the expense, it is appropriate for its representative, the trustee, to assume responsibility for seeking funds to pay them and to have exclusive authority to control a surcharge claim for the bene t of all of the claimants. Moreover, the Chapter 7 distributive scheme does not contemplate payment of one administrative expense claimant as opposed to another. Finally, permitting each unpaid claimant to assert a surcharge claim would expose the secured creditor to multiple claims in the case. A Chapter 13 trustee does not occupy this type of unique role in the case. In general, it is the debtor's plan, not the Chapter 13 trustee's liquidation of assets, that determines what unsecured creditors will receive. In particular, the Chapter 13 trustee does not have the statutory duty to liquidate estate assets and does not have to concern herself with payment of administrative expense claims because the plan must provide for their payment in full. 37 Moreover, there is no signi cant risk of multiple litigation against an avoidance defendant if the Chapter 13 debtor has authority to prosecute the claim, which in any event is a discrete proceeding. Hartford Underwriters, then, is distinguishable based on the signi cantly di erent role that the Chapter 13 trustee has. In the surcharge situation, it makes sense to place sole authority to bring a surcharge claim in the trustee. In contrast, in the Chapter 13 situation, it makes sense to permit the debtor to exercise a trustee avoidance action because it is the debtor who is responsible for proposing a plan that meets con rmation requirements and then carrying it out. To enable her to do so, she must have 35 Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 120 S. Ct. 1942, 147 L. Ed. 2d 1, 36 Bankr. Ct. Dec. (CRR) 38, 43 Collier Bankr. Cas. 2d (MB) 861, Bankr. L. Rep. (CCH) P (2000). 36 Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 7, 120 S. Ct. 1942, 147 L. Ed. 2d 1, 36 Bankr. Ct. Dec. (CRR) 38, 43 Collier Bankr. Cas. 2d (MB) 861, Bankr. L. Rep. (CCH) P (2000) U.S.C.A. 1322(a)(2). See 6: Page 43 of 213

44 16:6 Chapter 13 Practice and Procedure the ability to prosecute a trustee avoidance action. Under this view, Hartford Underwriters does not require a conclusion that the debtor does not have standing to prosecute a trustee avoidance action. 16:7 Judicial estoppel as bar to or limitation on debtor's cause of action based on debtor's failure to disclose it A debtor has an obligation to list all of her assets on the bankruptcy schedules that she must le under penalty of perjury. 1 A debtor's assets, of course, include any nonbankruptcy cause of action 2 that she has as of the date of the ling of her petition. 3 Schedule A/B instructs the debtor to list and describe all of the debtor s real and personal property; and lists 53 di erent categories of real and personal property. 4 Category 33 is for claims against third parties, whether or not you have led a lawsuit or made a demand for payment. It includes examples, such as accidents, employment disputes, insurance claims, or rights to sue. Category 34 is for other contingent and unliquidated claims of every nature, including counterclaims of the debtor and rights to set o claims. The last category is 53, and it provides a catch-all to describe all property you own or have an interest in that you did not list above. In addition, if a lawsuit, court action, or administrative proceeding was pending within one year before ling the bankruptcy petition, the proceeding should be listed in response to Question 9 on the Statement of Financial A airs. 5 When a debtor fails to disclose a cause of action on her bankruptcy schedules, a defense of judicial estoppel may preclude its assertion. 6 This section rst considers general principles of judicial estop- [Section 16:7] 1 See 13:8. 2 Under the Federal Rules of Civil Procedure and modern procedural concepts, the term claim replaces the term cause of action to describe a plainti 's assertion of a right to monetary or other relief against another party. Because claim is a term of art in the Bankruptcy Code that refers to rights of creditors against the debtor or the estate, see 11 U.S.C.A. 101(5), we use the term cause of action for clarity to refer to a claim of the debtor or the estate against a third party and to distinguish such a right of recovery from a creditor's claim. 3 See 14:12. 4 O cial Form 106B. 5 O cial Form Judicial estoppel also arises in other situations involving positions that Page 44 of 213

45 Rights and Powers of Debtors 16:7 pel and how those principles operate in the context of a debtor's prosecution of a cause of action that she did not properly list in her bankruptcy schedules. 7 The section then discusses application of judicial estoppel to a bankruptcy trustee's assertion of a cause of action. It concludes with observations about what steps a lawyer who represents the debtor in her bankruptcy case or who is prosecuting a cause of action should take to protect the interests of the debtor in the cause of action and to avoid a claim by the debtor against the lawyer for professional misconduct. Judicial estoppel generally and application to debtor's assertion of undisclosed cause of action Judicial estoppel is a judge-made doctrine that both state and federal courts apply. As the Supreme Court explained in New Hampshire v. Maine, 8 the purpose of judicial estoppel is to protect the integrity of the judicial process by prohibiting parties from deliberately changing positions according to the exigencies of the moment. Because the rule is intended to prevent improper use of judicial machinery, judicial estoppel is an equitable doctrine invoked by a court at its discretion. 9 In New Hampshire v. Maine, the Supreme Court identi ed three factors for courts to consider in determining whether to apply judicial estoppel. First, the party's position in the later judicial proceeding must be clearly inconsistent with the position the party asserted in the earlier proceeding. Second, the court in the earlier proceeding must have accepted the position that the party asserted. Finally, the assertion of the clearly inconsistent position in the later proceeding must result in an unfair advantage to the party asserting the position or impose an unfair detriment on the party asserting judicial estoppel. 10 The last requirement includes a requirement that the inconsistency be intentional. Thus, it is not appropriate to apply judicial estopparties have taken in a bankruptcy case, and may apply to parties other than the debtor. See Judicial Estoppel of Subsequent Action Based on Statements, Positions, or Omissions as to Claim or Interest in Bankruptcy Proceeding, 85 A.L.R.5th 353 (Originally published in 2001.). 7 For a discussion of judicial estoppel generally (and analysis of some of the cases cited in this section), see Klein, Ponoro, and Borrey, Principles of Preclusion and Estoppel in Bankruptcy Cases, 79 Am. Bankr. L.J. 839, (2005). 8 New Hampshire v. Maine, 532 U.S. 742, 121 S. Ct. 1808, 149 L. Ed. 2d 968 (2001). 9 New Hampshire v. Maine, 532 U.S. 742, , 121 S. Ct. 1808, 149 L. Ed. 2d 968 (2001) (citations and internal quotations omitted). 10 New Hampshire v. Maine, 532 U.S. 742, 750, 121 S. Ct. 1808, 149 L. Ed. 2d 968 (2001) Page 45 of 213

46 16:7 Chapter 13 Practice and Procedure pel when the position in the earlier proceeding was based on inadvertence or mistake. 11 Both federal 12 and state 13 courts generally apply judicial estoppel in accordance with the New Hampshire v. Maine guidelines, although some courts formulate its requirements di erently. 14 Federal courts analyze judicial estoppel in the context of an undisclosed claim in a bankruptcy case as a matter of federal law, 11 New Hampshire v. Maine, 532 U.S. 742, 753, 121 S. Ct. 1808, 149 L. Ed. 2d 968 (2001). 12 E.g., Jones v. Bob Evans Farms, Inc., 811 F.3d 1030, 128 Fair Empl. Prac. Cas. (BNA) 1181, 99 Empl. Prac. Dec. (CCH) P (8th Cir. 2016); Queen v. TA Operating, LLC, 734 F.3d 1081, 70 Collier Bankr. Cas. 2d (MB) 109 (10th Cir. 2013); White v. Wyndham Vacation Ownership, Inc., 617 F.3d 472, 109 Fair Empl. Prac. Cas. (BNA) 1731, Bankr. L. Rep. (CCH) P 81826, 93 Empl. Prac. Dec. (CCH) P (6th Cir. 2010); Eastman v. Union Paci c R. Co., 493 F.3d 1151, 58 Collier Bankr. Cas. 2d (MB) 583 (10th Cir. 2007); Cannon- Stokes v. Potter, 453 F.3d 446, 18 A.D. Cas. (BNA) 201, Bankr. L. Rep. (CCH) P (7th Cir. 2006); Stallings v. Hussmann Corp., 447 F.3d 1041, 11 Wage & Hour Cas. 2d (BNA) 777 (8th Cir. 2006); Hamilton v. State Farm Fire & Cas. Co., 270 F.3d 778 (9th Cir. 2001). 13 E.g., Association Resources, Inc. v. Wall, 298 Conn. 145, 2 A.3d 873, 160 Lab. Cas. (CCH) P (2010). 14 E.g., In re Superior Crewboats, Inc., 374 F.3d 330, 43 Bankr. Ct. Dec. (CRR) 56, 53 Collier Bankr. Cas. 2d (MB) 753, Bankr. L. Rep. (CCH) P 80116, 2004 A.M.C (5th Cir. 2004) (For judicial estoppel to occur: (1) the party's current position must be clearly inconsistent with the previous one; (2) the court must have accepted the previous position; and (3) the nondisclosure must not be inadvertent.); Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282, 88 Fair Empl. Prac. Cas. (BNA) 1281, Bankr. L. Rep. (CCH) P 78659, 82 Empl. Prac. Dec. (CCH) P (11th Cir. 2002) (Requirements for judicial estoppel are: (1) the party seeking judicial estoppel must show that the other party took an inconsistent position under oath in a prior proceeding; and (2) the inconsistency was calculated to make a mockery of justice; judicial estoppel does not apply to inadvertence or simple error.); Krystal Cadillac-Oldsmobile GMC Truck, Inc. v. General Motors Corp., 337 F.3d 314, 41 Bankr. Ct. Dec. (CRR) 183, 50 Collier Bankr. Cas. 2d (MB) 1211, Bankr. L. Rep. (CCH) P (3d Cir. 2003) (Requirements for judicial estoppel are (1) irreconcilably inconsistent positions; (2) the inconsistent positions arise from bad faith, i.e., with intent to play fast and loose with the court ; and (3) application of the doctrine is tailored to address the harm identi ed and no lesser sanction would adequately remedy the damage done.). In Slater v. U.S. Steel Corp., 2016 WL (11th Cir. 2016), the court concluded that the judicial estoppel principles the Supreme Court enunciated in Maine v. New Hampshire apply only in a case where the party asserting the doctrine is a party in an earlier proceeding and that, therefore, the application of judicial estoppel in the context of an undisclosed claim in a bankruptcy case requires a di erent analysis. Slater v. U.S. Steel Corp., 2016 WL , *11 (11th Cir. 2016). For a discussion and critique of the development of the judicial estoppel rules in the Eleventh Circuit in the context of undisclosed bankruptcy causes of action that di er from the Maine v. New Hampshire formulation, see Slater v. U.S. Steel Corp., 2016 WL , *12 (11th Cir. 2016) (Tjo at, J., concurring specially) Page 46 of 213

47 Rights and Powers of Debtors 16:7 often without discussing the issue. 15 Some state courts, however, have concluded that judicial estoppel raises a procedural question involving the integrity of the forum court and that state law thus controls. 16 Because of di erences in the way courts apply the general principles of judicial estoppel, the forum in which the lawsuit is pending, therefore, may be outcome-determinative Many of the federal cases applying the federal law of judicial estoppel involve federal claims, such as claims for employment discrimination. In such cases, it is clear that federal law applies. The issue of whether state law should govern judicial estoppel in an action in a federal court arises when the debtor's claim is based on state law. In a civil action in a federal court based on diversity jurisdiction, most courts rule that federal law governs application of judicial estoppel. E.g., Hudson Specialty Ins. Co. v. Brash Tygr, LLC, 769 F.3d 586 (8th Cir. 2014); Vehicle Market Research, Inc. v. Mitchell Intern., Inc., 767 F.3d 987 (10th Cir. 2014); Moses v. Howard University Hosp., 606 F.3d 789, , 109 Fair Empl. Prac. Cas. (BNA) 641, Bankr. L. Rep. (CCH) P 81786, 76 Fed. R. Serv. 3d 1217 (D.C. Cir. 2010); Hall v. GE Plastic Paci c PTE Ltd., 327 F.3d 391, Prod. Liab. Rep. (CCH) P 16575, 61 Fed. R. Evid. Serv. 49 (5th Cir. 2003); Ogden Martin Systems of Indianapolis, Inc. v. Whiting Corp., 179 F.3d 523, 527 n.1, 38 U.C.C. Rep. Serv. 2d 699 (7th Cir. 1999); Rissetto v. Plumbers and Steam tters Local 343, 94 F.3d 597, , 61 Cal. Comp. Cas. (MB) 833, 71 Fair Empl. Prac. Cas. (BNA) 1057, 153 L.R.R.M. (BNA) 2111, 69 Empl. Prac. Dec. (CCH) P (9th Cir. 1996). Contra, e.g., Occidental Fire & Cas. Co. v. Soczynski, 765 F.3d 931, 935 n.1 (8th Cir. 2014) (collecting cases); Original Appalachian Artworks, Inc. v. S. Diamond Associates, Inc., 44 F.3d 925, 930, 33 U.S.P.Q.2d 1606 (11th Cir. 1995). In Eastman v. Union Paci c R. Co., 493 F.3d 1151, 58 Collier Bankr. Cas. 2d (MB) 583 (10th Cir. 2007), the court applied this principle, together with the fact that bankruptcy is a federal matter, in concluding that federal judicial estoppel principles governed the prosecution in a federal court of a claim based on state law that was not disclosed in a bankruptcy case. See also Moses v. Howard University Hosp., 606 F.3d 789, , 109 Fair Empl. Prac. Cas. (BNA) 641, Bankr. L. Rep. (CCH) P 81786, 76 Fed. R. Serv. 3d 1217 (D.C. Cir. 2010) (applying federal law of judicial estoppel in bankruptcy context to pendent claim under District of Columbia law). 16 E.g., CSX Transp., Inc. v. Howell, 296 Ga. App. 583, 675 S.E.2d 306 (2009); Middleton v. Caterpillar Indus., Inc., 979 So. 2d 53 (Ala. 2007). 17 For example, Georgia and Alabama courts rule that judicial estoppel does not preclude a debtor's originally undisclosed cause of action if the debtor reopened her bankruptcy case to amend her schedules to disclose it. E.g., CSX Transp., Inc. v. Howell, 296 Ga. App. 583, 675 S.E.2d 306 (2009); Middleton v. Caterpillar Indus., Inc., 979 So. 2d 53 (Ala. 2007), but the Eleventh Circuit (which includes those states) has ruled that judicial estoppel still applies in this situation. E.g., De Leon v. Comcar Industries, Inc., 321 F.3d 1289, 40 Bankr. Ct. Dec. (CRR) 257, 91 Fair Empl. Prac. Cas. (BNA) 105, Bankr. L. Rep. (CCH) P (11th Cir. 2003); Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282, 88 Fair Empl. Prac. Cas. (BNA) 1281, Bankr. L. Rep. (CCH) P 78659, 82 Empl. Prac. Dec. (CCH) P (11th Cir. 2002). Anecdotally, we observe that, in many of the federal cases cited in the footnotes in this section, the court upheld the defense of judicial estoppel by granting a motion for judgment on the pleadings or for summary judgment Page 47 of 213

48 16:7 Chapter 13 Practice and Procedure All of the various formulations of the judicial estoppel doctrine require the assertion of a clearly 18 or irreconcilably 19 inconsistent position in a previous judicial proceeding, in accordance with the rst element that New Hampshire v. Maine identi ed. Because a debtor has a duty to disclose all of her assets on her schedules, which she must le under penalty of perjury, the debtor's failure to list the cause of action on her schedules is the assertion of a position in a judicial proceeding (i.e., the bankruptcy case) that an undisclosed cause of action does not exist. This position is obviously inconsistent with the later prosecution of the cause of action which, by de nition, asserts its existence. A question arises when the debtor's cause of action is based on postpetition events, such as a postpetition automobile accident or employment discrimination claim based on postpetition events. In a Chapter 7 case, a postpetition cause of action is not property of the estate, and the debtor clearly has no obligation to amend her schedules to disclose it. Bankruptcy Rule 1007(h) requires disclosure of interests acquired after the ling of the petition only when the property becomes property of the estate under Code 541(a)(5), which applies to the postpetition acquisition of certain types of property. 20 In a Chapter 13 case, however, a postpetition cause of action may be property of the estate. 21 Although nothing in the Bankruptcy Code or Bankruptcy Rules expressly requires a Chapter 13 debtor to amend her schedules to disclose a postpetition cause of action (unless it involves property subject to Code 541(a)(5)), some courts have concluded that a Chapter 13 debtor has a continuing duty to disclose assets she acquires after the ling of State courts, on the other hand, appear to be more inclined to conclude that application of judicial estoppel requires the resolution of factual disputes concerning the debtor's bad faith, motive, or intent by the trier of fact. E.g., Underwood v. First Franklin Financial Corp., 710 So. 2d 424 (Ala. Civ. App. 1997). 18 E.g., New Hampshire v. Maine, 532 U.S. 742, , 121 S. Ct. 1808, 149 L. Ed. 2d 968 (2001); In re Superior Crewboats, Inc., 374 F.3d 330, 43 Bankr. Ct. Dec. (CRR) 56, 53 Collier Bankr. Cas. 2d (MB) 753, Bankr. L. Rep. (CCH) P 80116, 2004 A.M.C (5th Cir. 2004). 19 E.g., Krystal Cadillac-Oldsmobile GMC Truck, Inc. v. General Motors Corp., 337 F.3d 314, 41 Bankr. Ct. Dec. (CRR) 183, 50 Collier Bankr. Cas. 2d (MB) 1211, Bankr. L. Rep. (CCH) P (3d Cir. 2003) U.S.C.A. 541(a)(5) applies to interests in property that the debtor acquires within 180 days after the ling of the petition by bequest, devise, or inheritance; as a result of a property settlement agreement or divorce decree; or as a bene ciary of a life insurance policy or death bene t plan. See 14: See 14: Page 48 of 213

49 Rights and Powers of Debtors 16:7 the petition and have applied judicial estoppel to the cause of action based on the debtor's failure to do so. 22 Most courts require some form of acceptance of the prior position by the court in the earlier proceeding, 23 the second element in the New Hampshire v. Maine analysis. Courts have generally concluded that the debtor's receipt of a discharge or the con rmation of her plan is a su cient acceptance of the prior position Jones v. Bob Evans Farms, Inc., 811 F.3d 1030, 128 Fair Empl. Prac. Cas. (BNA) 1181, 99 Empl. Prac. Dec. (CCH) P (8th Cir. 2016); Allen v. C & H Distributors, L.L.C., 813 F.3d 566 (5th Cir. 2015); D'Antignac v. Deere & Co., 604 Fed. Appx. 875 (11th Cir. 2015), cert. denied, 136 S. Ct. 808, 193 L. Ed. 2d 713 (2016); In re Flugence, 738 F.3d 126 (5th Cir. 2013); Robinson v. Tyson Foods, Inc., 595 F.3d 1269, 108 Fair Empl. Prac. Cas. (BNA) 804, Bankr. L. Rep. (CCH) P (11th Cir. 2010); Benetatos v. Hellenic Republic, 371 Fed. Appx. 770 (9th Cir. 2010); Cotita v. Verizon Wireless, 2014 I.E.R. Cas. (BNA) , Bankr. L. Rep. (CCH) P 82699, 2014 WL (W.D. Ky. 2014); In re Poesnecker, 2014 WL (Bankr. M.D. Pa. 2014); In re Adams, 481 B.R. 854 (Bankr. N.D. Miss. 2012). But see Muse v. Accord Human Resources, Inc., 129 Fed. Appx. 487 (11th Cir. 2005) (Chapter 13 debtor not required to disclose claim for unpaid postpetition wages because they are not property of the estate.). Robinson and Benetatos do not expressly address the argument that neither the Bankruptcy Code nor the Bankruptcy Rules require the disclosure of a postpetition cause of action. The Eleventh Circuit in Robinson did not cite an earlier decision, In re Waldron, 536 F.3d 1239, Bankr. L. Rep. (CCH) P (11th Cir. 2008). In Waldron, the court held that the bankruptcy court had discretion to require debtor to amend schedules to list a postpetition cause of action. Signi cantly, the court in Waldron noted, We do not hold that a debtor has a free-standing duty to disclose the acquisition of any property interest after the con rmation of his plan under Chapter 13. Neither the Bankruptcy Code nor the Bankruptcy Rules mention such a duty,... and our precedents do not address that issue. But the bankruptcy court has the discretion, under Rule 1009, to require a debtor to amend his schedule of assets to disclose a new property interest acquired after the con rmation of the debtor's plan. In re Waldron, 536 F.3d at The Eleventh Circuit formulation of the judicial estoppel test requires that the previous position be taken under oath but does not expressly require that the court in the previous proceeding accept the inconsistent position. E.g., Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282, 88 Fair Empl. Prac. Cas. (BNA) 1281, Bankr. L. Rep. (CCH) P 78659, 82 Empl. Prac. Dec. (CCH) P (11th Cir. 2002). The Eleventh Circuit has also noted, however, that the requirement of a statement under oath is not an in exible requirement, and can include the entry of a consent order between the debtor and creditor. E.g., Ward v. AMS Servicing, LLC, 606 Fed. Appx. 506 (11th Cir. 2015). 24 E.g., Jones v. Bob Evans Farms, Inc., 811 F.3d 1030, 128 Fair Empl. Prac. Cas. (BNA) 1181, 99 Empl. Prac. Dec. (CCH) P (8th Cir. 2016); White v. Wyndham Vacation Ownership, Inc., 617 F.3d 472, 109 Fair Empl. Prac. Cas. (BNA) 1731, Bankr. L. Rep. (CCH) P 81826, 93 Empl. Prac. Dec. (CCH) P (6th Cir. 2010); Cannon-Stokes v. Potter, 453 F.3d 446, 18 A.D. Cas. (BNA) 201, Bankr. L. Rep. (CCH) P (7th Cir. 2006); In re Superior Crewboats, Inc., 374 F.3d 330, 43 Bankr. Ct. Dec. (CRR) 56, 53 Collier Bankr. Cas. 2d (MB) 753, Bankr. L. Rep. (CCH) P 80116, 2004 A.M.C (5th Cir. 2004); Barger v. City of Cartersville, Ga., 348 F.3d 1289, 92 Fair Empl. Prac Page 49 of 213

50 16:7 Chapter 13 Practice and Procedure The reasoning is that, in granting a discharge or con rming a plan, the bankruptcy court relied on the representations the debtor made in her schedules that the cause of action now being prosecuted did not exist. If the debtor had disclosed the cause of action, the theory assumes, some other action would have occurred in the debtor's bankruptcy case that would have subjected proceeds from the cause of action to payment of the debtor's creditors, whereas nondisclosure results in the debtor being able to keep all of the recovery for herself, unless the undisclosed cause of action is detected. The third requirement in New Hampshire v. Maine is that the assertion of the inconsistent position in the later proceeding must result in an unfair advantage or impose an unfair detriment on the defendant. A defendant who was not a creditor or party in interest in the bankruptcy case ordinarily cannot establish any detriment because the debtor's failure to disclose the cause of action could not have a ected it. Courts have concluded, however, that the debtor's failure to disclose a cause of action gives her an unfair advantage because it permits her to obtain the full bene t of the recovery to the detriment of her creditors. Consequently, many courts, including most federal courts, have applied judicial estoppel without requiring that a party invoking judicial estoppel show that it has been disadvantaged or that it has su ered a detriment, noting that the doctrine of judicial estoppel protects the integrity of the judicial process, not the interests of the parties themselves. 25 A contrary approach requires a showing that the defendant relied on or was Cas. (BNA) 1377, Bankr. L. Rep. (CCH) P 78942, 57 Fed. R. Serv. 3d 13 (11th Cir. 2003); Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282, 88 Fair Empl. Prac. Cas. (BNA) 1281, Bankr. L. Rep. (CCH) P 78659, 82 Empl. Prac. Dec. (CCH) P (11th Cir. 2002); Hamilton v. State Farm Fire & Cas. Co., 270 F.3d 778 (9th Cir. 2001). Judicial estoppel based on the failure to schedule an asset has been applied even when the debtor's Chapter 13 case was dismissed after con rmation, Jethroe v. Omnova Solutions, Inc., 412 F.3d 598, 104 Fair Empl. Prac. Cas. (BNA) 1470, Bankr. L. Rep. (CCH) P 80299, 86 Empl. Prac. Dec. (CCH) P (5th Cir. 2005), or when the debtor's Chapter 7 discharge was vacated. Hamilton v. State Farm Fire & Cas. Co., 270 F.3d 778 (9th Cir. 2001). 25 E.g., Barger v. City of Cartersville, Ga., 348 F.3d 1289, 92 Fair Empl. Prac. Cas. (BNA) 1377, Bankr. L. Rep. (CCH) P 78942, 57 Fed. R. Serv. 3d 13 (11th Cir. 2003); In re Coastal Plains, Inc., 179 F.3d 197, 210, Bankr. L. Rep. (CCH) P (5th Cir. 1999); Ryan Operations G.P. v. Santiam-Midwest Lumber Co., 81 F.3d 355, 28 Bankr. Ct. Dec. (CRR) 1178 (3d Cir. 1996). Cf. In re Oparaji, 698 F.3d 231, 68 Collier Bankr. Cas. 2d (MB) 755 (5th Cir. 2012) (In situation involving creditor ling a claim in a second case greater than the amount in the rst case, the court stated, Because the integrity of the judiciary would not be threatened by allowing Wells Fargo to proceed with its increased proof of claim in the Second Bankruptcy, we nd that the District Court abused its discretion in determining that judicial estoppel was appropriately applied. ) Page 50 of 213

51 Rights and Powers of Debtors 16:7 disadvantaged by the inconsistency in the prior judicial proceeding. 26 All courts condition the application of judicial estoppel based on a debtor's nondisclosure on a showing that the nondisclosure was not inadvertent or a mere error. Although determination of whether a nondisclosure is inadvertent or a mistake would seem to require a subjective evaluation of the debtor's knowledge, intention, and state of mind at the time she failed to meet the disclosure requirement in the bankruptcy case, many courts, particularly the federal appellate courts, have formulated an objective standard for this determination. Under this objective approach, a nondisclosure is not inadvertent if, at the time disclosure of the cause of action was required, the debtor had knowledge of the facts giving rise to the undisclosed cause of action and a motive to conceal it. 27 Courts readily nd that a debtor had knowledge of the facts when a lawsuit is pending at the time of the ling of the bankruptcy petition or the debtor has undertaken preliminary action to assert the cause of action, such as ling an employment discrimination claim with an agency such as the Equal Employ- 26 E.g., Jinright v. Paulk, 758 So. 2d 553 (Ala. 2000). 27 E.g., Queen v. TA Operating, LLC, 734 F.3d 1081, 70 Collier Bankr. Cas. 2d (MB) 109 (10th Cir. 2013); Love v. Tyson Foods, Inc., 677 F.3d 258, 67 Collier Bankr. Cas. 2d (MB) 388, 114 Fair Empl. Prac. Cas. (BNA) 1189 (5th Cir. 2012); White v. Wyndham Vacation Ownership, Inc., 617 F.3d 472, 109 Fair Empl. Prac. Cas. (BNA) 1731, Bankr. L. Rep. (CCH) P 81826, 93 Empl. Prac. Dec. (CCH) P (6th Cir. 2010); Moses v. Howard University Hosp., 606 F.3d 789, 109 Fair Empl. Prac. Cas. (BNA) 641, Bankr. L. Rep. (CCH) P 81786, 76 Fed. R. Serv. 3d 1217 (D.C. Cir. 2010); Eastman v. Union Paci c R. Co., 493 F.3d 1151, 58 Collier Bankr. Cas. 2d (MB) 583 (10th Cir. 2007); Cannon-Stokes v. Potter, 453 F.3d 446, 18 A.D. Cas. (BNA) 201, Bankr. L. Rep. (CCH) P (7th Cir. 2006); In re Superior Crewboats, Inc., 374 F.3d 330, 43 Bankr. Ct. Dec. (CRR) 56, 53 Collier Bankr. Cas. 2d (MB) 753, Bankr. L. Rep. (CCH) P 80116, 2004 A.M.C (5th Cir. 2004) (stating that disclosure is inadvertent only when debtor lacks knowledge of the cause of action or does not have a motive for concealment); Krystal Cadillac-Oldsmobile GMC Truck, Inc. v. General Motors Corp., 337 F.3d 314, 321, 41 Bankr. Ct. Dec. (CRR) 183, 50 Collier Bankr. Cas. 2d (MB) 1211, Bankr. L. Rep. (CCH) P (3d Cir. 2003) (addressing issue in terms of debtor's bad faith ); Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282, 88 Fair Empl. Prac. Cas. (BNA) 1281, Bankr. L. Rep. (CCH) P 78659, 82 Empl. Prac. Dec. (CCH) P (11th Cir. 2002). See also Ah Quin v. County of Kauai Dept. of Transp., 2013 WL (9th Cir. 2013) (In a case in which the bankruptcy court re-opened the case at the debtor's request so that she could disclose a cause of action, the court in ruling on a judicial estoppel assertion adopted a narrower interpretation of inadvertence or mistake: The relevant inquiry is not limited to the plainti 's knowledge of the pending claim and the universal motive to conceal a potential asset though those are certainly factors. The relevant inquiry is, more broadly, the plainti 's subjective intent when lling out and signing the bankruptcy schedules. ) Page 51 of 213

52 16:7 Chapter 13 Practice and Procedure ment Opportunity Commission. 28 Judicial estoppel may also bar an undisclosed cause of action that is not led at the time of the petition when the debtor knows of its existence. 29 On the other hand, when a debtor has knowledge of the facts but does not realize she has a cause of action based on them, courts have declined to apply judicial estoppel, reasoning that the debtor should not be penalized for her failure to disclose a cause of action that a lay person might not recognize exists. 30 Courts conclude that a debtor has a motive to conceal an undisclosed cause of action based on the advantage the debtor stands to gain by not disclosing it. They nd that the debtor receives an advantage when she gets a discharge or obtains con rmation of a Chapter 13 plan without subjecting her recovery to the claims of her creditors E.g., White v. Wyndham Vacation Ownership, Inc., 617 F.3d 472, 109 Fair Empl. Prac. Cas. (BNA) 1731, Bankr. L. Rep. (CCH) P 81826, 93 Empl. Prac. Dec. (CCH) P (6th Cir. 2010); Moses v. Howard University Hosp., 606 F.3d 789, 109 Fair Empl. Prac. Cas. (BNA) 641, Bankr. L. Rep. (CCH) P 81786, 76 Fed. R. Serv. 3d 1217 (D.C. Cir. 2010); Eastman v. Union Paci c R. Co., 493 F.3d 1151, 58 Collier Bankr. Cas. 2d (MB) 583 (10th Cir. 2007); Cannon-Stokes v. Potter, 453 F.3d 446, 18 A.D. Cas. (BNA) 201, Bankr. L. Rep. (CCH) P (7th Cir. 2006); Jethroe v. Omnova Solutions, Inc., 412 F.3d 598, 104 Fair Empl. Prac. Cas. (BNA) 1470, Bankr. L. Rep. (CCH) P 80299, 86 Empl. Prac. Dec. (CCH) P (5th Cir. 2005); Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282, 88 Fair Empl. Prac. Cas. (BNA) 1281, Bankr. L. Rep. (CCH) P 78659, 82 Empl. Prac. Dec. (CCH) P (11th Cir. 2002). 29 E.g., Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282, 88 Fair Empl. Prac. Cas. (BNA) 1281, Bankr. L. Rep. (CCH) P 78659, 82 Empl. Prac. Dec. (CCH) P (11th Cir. 2002); In re Walker, 323 B.R. 188, 53 Collier Bankr. Cas. 2d (MB) 2031 (Bankr. S.D. Tex. 2005). 30 E.g., Stallings v. Hussmann Corp., 447 F.3d 1041, 11 Wage & Hour Cas. 2d (BNA) 777 (8th Cir. 2006) (Judicial estoppel does not apply to undisclosed cause of action against employer where Department of Labor had issued adverse ruling and debtor could not have known that he had to disclose cause of action.); Finney v. Free Enterprise System, Inc., 2011 WL (W.D. Ky. 2011) (Judicial estoppel does not bar debtor's cause of action for failure of employer to pay overtime when facts show employer told employees they were not entitled to overtime. Although the debtor knew that employer did not pay overtime, debtor did not know of existence of legal claim.); In re Diet Drugs (Phentermine/ Fen uramine/dexfen uramine) Products Liability Litigation, 2008 WL (E.D. Pa. 2008) (Judicial estoppel does not bar undisclosed cause of action for medical problems arising from diet drugs when lawyers had told her she did not have a cause of action.); Jackson v. Novastar Mortg., Inc., 645 F. Supp. 2d 636, 644 (W.D. Tenn. 2007) (overtime pay). 31 E.g., Jones v. Bob Evans Farms, Inc., 811 F.3d 1030, 128 Fair Empl. Prac. Cas. (BNA) 1181, 99 Empl. Prac. Dec. (CCH) P (8th Cir. 2016); U.S. ex rel. Long v. GSDMIdea City, L.L.C., 798 F.3d 265 (5th Cir. 2015); Kimberlin v. Dollar General Corp., 2013 WL (6th Cir. 2013); White v. Wyndham Vacation Ownership, Inc., 617 F.3d 472, 109 Fair Empl. Prac. Cas. (BNA) 1731, Bankr. L. Rep. (CCH) P 81826, 93 Empl. Prac. Dec. (CCH) P (6th Cir Page 52 of 213

53 Rights and Powers of Debtors 16:7 Many of the courts in the cases cited in the footnotes to the preceding paragraphs conclude that a debtor's pending lawsuit or similar assertion of a cause of action establishes the requisite knowledge of the facts and that the debtor's motive can be inferred from the advantage she can obtain in her bankruptcy case by omitting the cause of action, thus permitting or requiring the grant of summary judgment in the defendant's favor based on judicial estoppel. In some circumstances, a debtor's failure to disclose a cause of action may not give rise to a judicial estoppel defense because of a failure to meet one or more of the required elements. For example, if the debtor can exempt the undisclosed cause of action, her failure to disclose it makes no substantive di erence in the case. Because she can retain the recovery, she has no motive to conceal it, and her omission does not give her an unfair advantage over her creditors by depriving them of a source of payment of debts. Thus, judicial estoppel may not be applicable. 32 A debtor's cause of action for employment discrimination may involve the assertion of two types of remedies, a monetary claim for damages and an equitable claim for reinstatement or other injunctive relief. Because granting reinstatement or other equitable relief would not bene t creditors or result in a windfall to the debtor, some courts have ruled that judicial estoppel does not apply to an undisclosed cause of action to the extent it seeks an equitable remedy. 33 The opposite view is that the judicial estoppel doctrine is designed to protect the bankruptcy process and the full and accurate disclosure that it requires such that it applies equally to the equitable element of an undisclosed cause of action. 34 Courts di er in their application of judicial estoppel based on 2010)); Eastman v. Union Paci c R. Co., 493 F.3d 1151, 58 Collier Bankr. Cas. 2d (MB) 583 (10th Cir. 2007); Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282, 88 Fair Empl. Prac. Cas. (BNA) 1281, Bankr. L. Rep. (CCH) P 78659, 82 Empl. Prac. Dec. (CCH) P (11th Cir. 2002). 32 Javery v. Lucent Technologies, Inc. Long Term Disability Plan for Management or LBA Employees, 741 F.3d 686, 698, 57 Employee Bene ts Cas. (BNA) 2168 (6th Cir. 2014); Kurchack v. Life Ins. Co. of North America, 725 F. Supp. 2d 855 (D. Ariz. 2010). 33 E.g., Barger v. City of Cartersville, Ga., 348 F.3d 1289, 1297, 92 Fair Empl. Prac. Cas. (BNA) 1377, Bankr. L. Rep. (CCH) P 78942, 57 Fed. R. Serv. 3d 13 (11th Cir. 2003); Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282, 1288, 88 Fair Empl. Prac. Cas. (BNA) 1281, Bankr. L. Rep. (CCH) P 78659, 82 Empl. Prac. Dec. (CCH) P (11th Cir. 2002); see Matthews v. Potter, 316 Fed. Appx. 518, 105 Fair Empl. Prac. Cas. (BNA) 1790 (7th Cir. 2009). 34 Piper v. Dollar General Corp., 2011 WL , *2 (M.D. Tenn. 2011) ( At the core of White [v. Wyndham Vacation Ownership, Inc., 617 F.3d 472 (6th Cir. 2010)] is the notion that plainti s who were not completely forthcoming in their bankruptcy lings lose the bene t of being able to assert undisclosed Page 53 of 213

54 16:7 Chapter 13 Practice and Procedure events that occur in the bankruptcy case after the nondisclosure that tend to establish that the debtor did not receive an unfair advantage or that the nondisclosure did not harm creditors. If the debtor's discharge is vacated or her Chapter 13 case is dismissed after con rmation, the debtor and her creditors are restored to their prepetition status. The debtor remains liable to her creditors, they can exercise their collection remedies, and any money the debtor recovers from the cause of action will be subject to claims of creditors. Debtors in these circumstances have asserted that judicial estoppel should not apply because the absence of bankruptcy relief means either that they have not obtained an unfair advantage or that the bankruptcy court did not accept or rely on the inconsistent position. Some courts have declined to apply judicial estoppel in these situations. 35 Other courts have rejected the debtor's position, holding that judicial estoppel applies to an undisclosed cause of action even if the debtor's discharge was vacated or her case was dismissed, 36 or she paid all of her debts under a Chapter 13 plan. 37 A debtor may seek to amend her schedules to disclose the cause of action in response to a judicial estoppel defense in the litigation. If the case is still open, the debtor may amend her schedules as a matter of right under Bankruptcy Rule 1009(a). In a Chapter 7 case, the Chapter 7 trustee can then proceed to administer the asset by asserting the cause of action and claims. This notion of protecting the bankruptcy process and promoting full disclosure is relevant and in play whether or not the undisclosed claims have an equitable element. ). 35 E.g., Crawford v. Franklin Credit Management Corp., 758 F.3d 473 (2d Cir. 2014) (Court did not apply judicial estoppel to undisclosed cause of action where bankruptcy case was dismissed prior to con rmation.); Stallings v. Hussmann Corp., 447 F.3d 1041, 11 Wage & Hour Cas. 2d (BNA) 777 (8th Cir. 2006); Middleton v. Caterpillar Indus., Inc., 979 So. 2d 53 (Ala. 2007); Association Resources, Inc. v. Wall, 298 Conn. 145, 2 A.3d 873, 160 Lab. Cas. (CCH) P (2010); IBF Participating Income Fund v. Dillard-Wineco, LLC, 275 Ga. 765, 573 S.E.2d 58 (2002). 36 E.g., Williams v. Hainje, 375 Fed. Appx. 625 (7th Cir. 2010) (Dismissal of Chapter 13 case); Casanova v. Pre Solutions, Inc., 228 Fed. Appx. 837, 841 (11th Cir. 2007) (dismissal of bankruptcy case does not alter judicial estoppel analysis because relevant time is the time of nondisclosure); Jethroe v. Omnova Solutions, Inc., 412 F.3d 598, 104 Fair Empl. Prac. Cas. (BNA) 1470, Bankr. L. Rep. (CCH) P 80299, 86 Empl. Prac. Dec. (CCH) P (5th Cir. 2005); Hamilton v. State Farm Fire & Cas. Co., 270 F.3d 778 (9th Cir. 2001) (judicial estoppel applies even if Chapter 7 discharge is vacated). 37 Robinson v. Tyson Foods, Inc., 595 F.3d 1269, 1275, 108 Fair Empl. Prac. Cas. (BNA) 804, Bankr. L. Rep. (CCH) P (11th Cir. 2010) ( Motive to conceal stems from the possibility of defrauding the courts and not from any actual fraudulent intent. ) Page 54 of 213

55 Rights and Powers of Debtors 16:7 distributing its proceeds, less any exemption the debtor may be able to claim, for the bene t of creditors. In a pending Chapter 13 case, the disclosure of the cause of action in the amendment does not have any substantive e ect, although it does permit the Chapter 13 trustee or an unsecured creditor to seek modi cation of a con rmed plan under Code 1329(a) to take account of the potential recovery or to object to con rmation of a proposed plan if it does not take the potential recovery into account for purposes of the best interest of creditors test of Code 1325(a)(4). A Chapter 13 debtor will enhance her prospects of defeating a judicial estoppel defense if she amends her plan to provide for creditors to receive the bene t of the cause of action in excess of her available exemption; doing so will tend to negate an inference that she intended to avoid paying her creditors. If the bankruptcy case has been closed, disclosure of the cause of action through an amendment to the schedules will require a motion to reopen the case. Code 350(b) permits the reopening of a case to administer assets, to accord relief to the debtor, or for other cause. Bankruptcy courts typically permit the reopening of a Chapter 7 case to permit a debtor to amend her schedules to include an omitted asset so that the Chapter 7 trustee can determine whether to pursue the cause of action for the bene t of creditors. 38 Reopening a Chapter 13 case may be more problematic. If the 38 E.g., In re Lopez, 283 B.R. 22, 40 Bankr. Ct. Dec. (CRR) 49, 49 Collier Bankr. Cas. 2d (MB) 273, 89 Fair Empl. Prac. Cas. (BNA) 1648 (B.A.P. 9th Cir. 2002); In re Amaya, 2014 WL (Bankr. E.D. N.Y. 2014); In re Barger, 279 B.R. 900, 48 Collier Bankr. Cas. 2d (MB) 1663 (Bankr. N.D. Ga. 2002); cf. In re Winebrenner, 170 B.R. 878, 31 Collier Bankr. Cas. 2d (MB) 1063 (Bankr. E.D. Va. 1994) (granting former trustee's motion to reopen). Although the court in In re Barger, 279 B.R. 900, 48 Collier Bankr. Cas. 2d (MB) 1663 (Bankr. N.D. Ga. 2002) reopened the bankruptcy case over a defendant's assertion that judicial estoppel should prevent reopening of the case, the judicial estoppel defense ultimately was successful in the trial court, Barger v. City of Cartersville, Ga., 348 F.3d 1289, 1297, 92 Fair Empl. Prac. Cas. (BNA) 1377, Bankr. L. Rep. (CCH) P 78942, 57 Fed. R. Serv. 3d 13 (11th Cir. 2003), and the estate ultimately received no bene t from the cause of action. In re Barger, 2005 WL (Bankr. N.D. Ga. 2005). Although the Eleventh Circuit in Barger focused on the debtor's conduct, it held that the trustee was bound by the debtor's failure to disclose the claim. 348 F.3d at , In Parker v. Wendy's Intern., Inc., 365 F.3d 1268, 51 Collier Bankr. Cas. 2d (MB) 1742, 105 Fair Empl. Prac. Cas. (BNA) 716 (11th Cir. 2004), the court held that judicial estoppel based on a debtor's failure to schedule a cause of action does not bar the trustee's prosecution of the claim. In Slater v. U.S. Steel Corp., 2016 WL (11th Cir. 2016), the Eleventh Circuit concluded that Barger and Parker are factually indistinguishable and that, therefore, under its prior-panel-precedent rule, the court was bound to follow Barger and to disregard Parker's holding to the contrary Page 55 of 213

56 16:7 Chapter 13 Practice and Procedure case was closed following the debtor's completion of payments, reopening the case to administer the asset may not accomplish anything because the Chapter 13 trustee has no authority to liquidate assets in the absence of a plan provision and because the plan, which presumably did not contemplate prosecution of the cause of action, cannot be modi ed after the debtor has completed her plan payments under Code 1329(a). 39 These problems do not exist when the case was dismissed prior to the debtor's completion of her plan payments, but it is unclear whether a debtor could revive the plan proposed or in e ect at the time of dismissal if a signi cant period of time has elapsed. Courts disagree as to whether a debtor can defeat a defense of judicial estoppel by reopening her case to amend her schedules. Many courts have ruled that the reopening of a case to amend schedules does not prevent application of judicial estoppel. These courts conclude that allowing a debtor to avoid judicial estoppel by reopening the case to amend her schedules after the assertion of judicial estoppel brings the omission to light suggests that a debtor should consider disclosing potential assets only if he is caught concealing them. 40 Other courts have ruled that judicial estoppel does not apply when the debtor discloses the cause of action in an amendment to her schedules in a reopened case. 41 Debtors have also attempted to avoid application of judicial Slater v. U.S. Steel Corp., 2016 WL , *11 n. 20 (11th Cir. 2016). See also Slater v. U.S. Steel Corp., 2016 WL , *21-22 & nn (11th Cir. 2016) (Tjo at, J., concurring specially). 39 See 11:2. In In re Ingram, 531 B.R. 121 (Bankr. D. S.C. 2015), the court refused to grant the debtor's motion to reopen the Chapter 13 case, noting that modi cation of the plan to take account of the undisclosed cause of action was not possible because the debtor had completed plan payments. 40 E.g., Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282, 1288, 88 Fair Empl. Prac. Cas. (BNA) 1281, Bankr. L. Rep. (CCH) P 78659, 82 Empl. Prac. Dec. (CCH) P (11th Cir. 2002); accord, e.g., Moses v. Howard University Hosp., 606 F.3d 789, 109 Fair Empl. Prac. Cas. (BNA) 641, Bankr. L. Rep. (CCH) P 81786, 76 Fed. R. Serv. 3d 1217 (D.C. Cir. 2010); Eastman v. Union Paci c R. Co., 493 F.3d 1151, 58 Collier Bankr. Cas. 2d (MB) 583 (10th Cir. 2007); In re Superior Crewboats, Inc., 374 F.3d 330, 43 Bankr. Ct. Dec. (CRR) 56, 53 Collier Bankr. Cas. 2d (MB) 753, Bankr. L. Rep. (CCH) P 80116, 2004 A.M.C (5th Cir. 2004); Berge v. Mader, 2011 IL App (1st) , 354 Ill. Dec. 374, 957 N.E.2d 968 (App. Ct. 1st Dist. 2011); Skinner v. Holgate, 141 Wash. App. 840, 173 P.3d 300 (Div ); see Krystal Cadillac-Oldsmobile GMC Truck, Inc. v. General Motors Corp., 337 F.3d 314, 41 Bankr. Ct. Dec. (CRR) 183, 50 Collier Bankr. Cas. 2d (MB) 1211, Bankr. L. Rep. (CCH) P (3d Cir. 2003). 41 E.g., Middleton v. Caterpillar Indus., Inc., 979 So. 2d 53 (Ala. 2007); CSX Transp., Inc. v. Howell, 296 Ga. App. 583, 675 S.E.2d 306, (2009) (collecting cases); Price v. Kuchaes, 950 N.E.2d 1218 (Ind. Ct. App. 2011), transfer denied, (Oct. 19, 2011); Robson v. Texas Eastern Corp., 833 N.E.2d 461 (Ind. Ct. App. 2005); Loth v. Union Paci c R. Co., 354 S.W.3d 635 (Mo. Ct. App. E.D Page 56 of 213

57 Rights and Powers of Debtors 16:7 estoppel by asserting that they had told their bankruptcy counsel of a cause of action but the attorney either failed to include it in the schedules or advised them that disclosure was not required. Noting that the debtor must sign her schedules under penalty of perjury, courts have rejected this argument, concluding that bad legal advice does not relieve a client of the consequences of her own acts. 42 Because judicial estoppel requires an intentional failure to make a required disclosure, debtors have argued that, although their schedules did not include the cause of action, they nevertheless disclosed it during the course of the bankruptcy case. Courts have declined to apply judicial estoppel when the circumstances show that the debtor fully disclosed the cause of action to the trustee, often at the Code 341(a) meeting. 43 In a Chapter 13 case, the required disclosure of the cause of action may occur when the debtor seeks approval of her employment of a lawyer to prosecute the cause of action. 44 Where the debtor discloses a cause of action in an informal fashion but does 2011); Glover v. Bank of New York, 208 Or. App. 545, 147 P.3d 336 (2006); Brown v. Swett & Crawford of Texas, Inc., 178 S.W.3d 373 (Tex. App. Houston 1st Dist. 2005); Haslett v. Planck, 140 Wash. App. 660, 166 P.3d 866 (Div ). 42 E.g., White v. Wyndham Vacation Ownership, Inc., 617 F.3d 472, 109 Fair Empl. Prac. Cas. (BNA) 1731, Bankr. L. Rep. (CCH) P 81826, 93 Empl. Prac. Dec. (CCH) P (6th Cir. 2010); Williams v. Hainje, 375 Fed. Appx. 625 (7th Cir. 2010); Eastman v. Union Paci c R. Co., 493 F.3d 1151, 58 Collier Bankr. Cas. 2d (MB) 583 (10th Cir. 2007); Cannon-Stokes v. Potter, 453 F.3d 446, 18 A.D. Cas. (BNA) 201, Bankr. L. Rep. (CCH) P (7th Cir. 2006); Jethroe v. Omnova Solutions, Inc., 412 F.3d 598, 104 Fair Empl. Prac. Cas. (BNA) 1470, Bankr. L. Rep. (CCH) P 80299, 86 Empl. Prac. Dec. (CCH) P (5th Cir. 2005); Barger v. City of Cartersville, Ga., 348 F.3d 1289, 92 Fair Empl. Prac. Cas. (BNA) 1377, Bankr. L. Rep. (CCH) P 78942, 57 Fed. R. Serv. 3d 13 (11th Cir. 2003); Vaughn v. County of Washtenaw, 2011 WL (E.D. Mich. 2011). But see Association Resources, Inc. v. Wall, 298 Conn. 145, 2 A.3d 873, 160 Lab. Cas. (CCH) P (2010). 43 E.g., In re Kane, 628 F.3d 631, 64 Collier Bankr. Cas. 2d (MB) 1391, Bankr. L. Rep. (CCH) P (3d Cir. 2010) (disclosure at 341(a) meeting and trustee acknowledged that disclosure was su cient); Matthews v. Potter, 316 Fed. Appx. 518, 105 Fair Empl. Prac. Cas. (BNA) 1790 (7th Cir. 2009); Ajaka v. Brooksamerica Mortg. Corp., 453 F.3d 1339, Bankr. L. Rep. (CCH) P (11th Cir. 2006); Eubanks v. CBSK Financial Group, Inc., 385 F.3d 894, Bankr. L. Rep. (CCH) P 80173, 2004 FED App. 0338P (6th Cir. 2004). 44 National Bldg. Maintenance Specialists, Inc. v. Hayes, 288 Ga. App. 25, 653 S.E.2d 772 (2007). But see White v. Wyndham Vacation Ownership, Inc., 617 F.3d 472, 109 Fair Empl. Prac. Cas. (BNA) 1731, Bankr. L. Rep. (CCH) P 81826, 93 Empl. Prac. Dec. (CCH) P (6th Cir. 2010) (application to employ counsel insu cient to prevent application of judicial estoppel when it did not fully explain the cause of action and debtor did not amend schedules) Page 57 of 213

58 16:7 Chapter 13 Practice and Procedure not accurately describe it, however, courts uphold the judicial estoppel defense. 45 Application of judicial estoppel to trustee's assertion of claim The discussion so far considers application of judicial estoppel to preclude the debtor from asserting a cause of action that she did not disclose on her schedules. When an individual is a debtor in a Chapter 7 or Chapter 13 case, however, proper analysis of judicial estoppel requires consideration of the facts that a debtor's prepetition cause of action is property of the estate under Code 541(a) whether or not she discloses it and that a bankruptcy trustee in the case has rights and duties with regard to property of the estate. 46 Judicial estoppel cases involving a debtor's assertion of an undisclosed cause of action have not always considered these matters. A critical statutory provision in this regard is Code 554, which deals with abandonment of property of the estate. The trustee may abandon property under subsection (a) of Code 554, and the court may order the trustee to abandon property under subsection (b). If property of the estate that the debtor lists on her schedules is not administered during the case but abandonment of it does not occur, subsection (c) of Code 544 provides that the property is abandoned to the debtor at the time the case 45 E.g., Queen v. TA Operating, LLC, 734 F.3d 1081, 70 Collier Bankr. Cas. 2d (MB) 109 (10th Cir. 2013); Eastman v. Union Paci c R. Co., 493 F.3d 1151, 58 Collier Bankr. Cas. 2d (MB) 583 (10th Cir. 2007) (Debtor's attorney at 341 meeting led trustee to believe cause of action involved only relatively minor medical damages); In re Superior Crewboats, Inc., 374 F.3d 330, 43 Bankr. Ct. Dec. (CRR) 56, 53 Collier Bankr. Cas. 2d (MB) 753, Bankr. L. Rep. (CCH) P 80116, 2004 A.M.C (5th Cir. 2004) (debtor's lawyer inaccurately stated that cause of action was time-barred); Barger v. City of Cartersville, Ga., 348 F.3d 1289, 92 Fair Empl. Prac. Cas. (BNA) 1377, Bankr. L. Rep. (CCH) P 78942, 57 Fed. R. Serv. 3d 13 (11th Cir. 2003) (disclosure of cause of action for employment discrimination to trustee at 341 meeting indicated that it involved only claim for reinstatement). 46 See 14:12, 16:5. The Chapter 7 has the duty to collect and reduce to money the property of the estate. 11 U.S.C.A. 704(a)(1). A Chapter 13 trustee has the duty to appear and be heard at any hearing on con rmation of the plan, 11 U.S.C.A. 1302(b)(2)(B), which includes advising the court as to whether the plan meets the best interest of creditors test of 11 U.S.C.A. 1325(a)(4). See 17:3. Similar considerations are relevant when an individual is a debtor in a Chapter 11 or Chapter 12 case. There is no trustee in a Chapter 11 case unless the court orders the appointment of a trustee, however, and in the absence of a trustee the debtor, as a debtor in possession, has the rights and powers and most of the duties of a trustee. 11 U.S.C.A (appointment of trustee), 1107(a) (rights, powers, and duties of debtor in possession). A Chapter 12 case has a trustee, 11 U.S.C.A. 1202, but the Chapter 12 debtor in possession has most of the rights and powers of a Chapter 11 trustee, 11 U.S.C.A. 1203, unless the court removes the debtor as debtor in possession. 11 U.S.C.A Page 58 of 213

59 Rights and Powers of Debtors 16:7 is closed. If the debtor does not list property of the estate on her schedules, if the property is not abandoned under one of the foregoing provisions, and if the property is not administered in the case, subsection (d) of Code 554 provides that it remains property of the estate. The e ect of these provisions of Code 554, therefore, is that, when a debtor does not list a cause of action on her schedules and the case is closed, the cause of action remains property of the estate. In a Chapter 7 case, the proper consequence of the operation of Code 554 is that a debtor does not have standing to assert an undisclosed cause of action because it remains property of the estate and the trustee is the real party in interest. 47 If the court reopens the bankruptcy case under Code 350(b) to permit administration of the case at the request of the debtor (perhaps in response to assertion of a judicial estoppel defense) or of the previously discharged Chapter 7 trustee (perhaps upon learning of the existence of the cause of action), the Chapter 7 trustee clearly is the proper party to prosecute the cause of action and to receive any recovery under Code 323 as the representative of the estate with capacity to sue and be sued. If the Chapter 7 trustee elects to pursue the cause of action once the case is reopened, the question is whether the judicial estoppel defense precludes the trustee from recovering. As a general rule, the estate's rights with regard to a debtor's cause of action are no greater than the debtor's, and the cause of action is subject to any defenses the defendant has against the debtor. This principle arguably supports application of judicial estoppel when the trustee brings the cause of action to the same extent that the defense is available against the debtor. 48 Courts have properly rejected this argument and concluded 47 E.g., Stephenson v. Malloy, 700 F.3d 265, Bankr. L. Rep. (CCH) P (6th Cir. 2012); Clementson v. Countrywide Financial Corp., 2012 WL (10th Cir. 2012); Biesek v. Soo Line R. Co., 440 F.3d 410 (7th Cir. 2006); Young v. Independent Bank and Independent Mortg. Co., 294 Mich. App. 141, 2011 WL (2011). 48 Barger v. City of Cartersville, Ga., 348 F.3d 1289, 92 Fair Empl. Prac. Cas. (BNA) 1377, Bankr. L. Rep. (CCH) P 78942, 57 Fed. R. Serv. 3d 13 (11th Cir. 2003) (see text infra in this footnote). See also Reed v. City of Arlington, 620 F.3d 477, 53 Bankr. Ct. Dec. (CRR) 177, 16 Wage & Hour Cas. 2d (BNA) 1355, Bankr. L. Rep. (CCH) P (5th Cir. 2010), rev'd 650 F.3d 571, 55 Bankr. Ct. Dec.(CRR) 68, 66 Collier Bankr. Cas. 2d (MB) 101, 18 Wage & Hour Cas. 2d (BNA) 27, Bankr. L. Rep. (CCH) P (5th Cir. 2011) (en banc). Although the Eleventh Circuit in Barger v. City of Cartersville, Ga., 348 F.3d 1289, 92 Fair Empl. Prac. Cas. (BNA) 1377, Bankr. L. Rep. (CCH) P 78942, 57 Fed. R. Serv. 3d 13 (11th Cir. 2003), focused on the debtor's conduct, it held that the trustee was bound by the debtor's failure to disclose the claim. Barger v. City of Cartersville, Ga., 348 F.3d 1289, , 1295, 92 Fair Empl. Prac Page 59 of 213

60 16:7 Chapter 13 Practice and Procedure that judicial estoppel based on the debtor's misconduct does not bar the trustee's prosecution of the claim. 49 The debtor's improper conduct in failing to disclose the cause of action occurred after the ling of the petition and, therefore, the debtor's omission is not attributable to the trustee. Moreover, application of judicial estoppel to bar a cause of action because of the debtor's misconduct prevents innocent creditors from receiving the bene t of the cause of action, contrary to a primary goal of the bankruptcy system, the distribution of the debtor's estate among creditors. The fact that judicial estoppel does not bar the trustee's prose- Cas. (BNA) 1377, Bankr. L. Rep. (CCH) P 78942, 57 Fed. R. Serv. 3d 13 (11th Cir. 2003). Later, in Parker v. Wendy's Intern., Inc., 365 F.3d 1268, 51 Collier Bankr. Cas. 2d (MB) 1742, 105 Fair Empl. Prac. Cas. (BNA) 716 (11th Cir. 2004), however, the court held that judicial estoppel on account of a debtor's failure to disclose a claim did not apply to bar the trustee's prosecution of the claim. In Slater v. U.S. Steel Corp., 2016 WL (11th Cir. 2016), the Eleventh Circuit concluded that Barger and Parker are factually indistinguishable and that, therefore, under its prior-panel-precedent rule, the court was bound to follow Barger and to disregard Parker's holding to the contrary. Slater v. U.S. Steel Corp., 2016 WL , *11 n. 20 (11th Cir. 2016). See also Slater v. U.S. Steel Corp., 2016 WL , *21-22 & nn (11th Cir. 2016) (Tjo at, J., concurring specially). 49 E.g., Stephenson v. Malloy, 700 F.3d 265, 68 Collier Bankr. Cas. 2d (MB) 1255, Bankr. L. Rep. (CCH) P (6th Cir. 2012); Reed v. City of Arlington, 650 F.3d 571, 55 Bankr. Ct. Dec. (CRR) 68, 66 Collier Bankr. Cas. 2d (MB) 101, 18 Wage & Hour Cas. 2d (BNA) 27, Bankr. L. Rep. (CCH) P (5th Cir. 2011) (en banc); Parker v. Wendy's Intern., Inc., 365 F.3d 1268, 51 Collier Bankr. Cas. 2d (MB) 1742, 105 Fair Empl. Prac. Cas. (BNA) 716 (11th Cir. 2004); Arkison v. Ethan Allen, Inc., 160 Wash. 2d 535, 160 P.3d 13 (2007); see Eastman v. Union Paci c R. Co., 493 F.3d 1151, 155 n. 3, 58 Collier Bankr. Cas. 2d (MB) 583 (10th Cir. 2007); Biesek v. Soo Line R. Co., 440 F.3d 410, 413 (7th Cir. 2006) (dicta). The trustee may be substituted as the real party in interest. E.g., Piper v. Dollar General Corp., 2011 WL (M.D. Tenn. 2011); Canterbury v. Federal-Mogul Ignition Co., 483 F. Supp. 2d 820 (S.D. Iowa 2007). Prior to ruling in Parker v. Wendy's Intern., Inc., 365 F.3d 1268, 51 Collier Bankr. Cas. 2d (MB) 1742, 105 Fair Empl. Prac. Cas. (BNA) 716 (11th Cir. 2004), that a judicial estoppel defense based on a debtor's failure to disclose a claim in the bankruptcy case did not prevent the trustee from prosecuting the claim, the Eleventh Circuit had decided Barger v. City of Cartersville, Ga., 348 F.3d 1289, 92 Fair Empl. Prac. Cas. (BNA) 1377, Bankr. L. Rep. (CCH) P 78942, 57 Fed. R. Serv. 3d 13 (11th Cir. 2003). Although Barger focused on the debtor's conduct, it held that the trustee was bound by the debtor's failure to disclose the claim. Barger v. City of Cartersville, Ga., 348 F.3d 1289, , 1295, 92 Fair Empl. Prac. Cas. (BNA) 1377, Bankr. L. Rep. (CCH) P 78942, 57 Fed. R. Serv. 3d 13 (11th Cir. 2003). In Slater v. U.S. Steel Corp., 2016 WL (11th Cir. 2016), the Eleventh Circuit concluded that Barger and Parker are factually indistinguishable and that, therefore, under its prior-panel-precedent rule, the court was bound to follow Barger and to disregard Parker's holding to the contrary. Slater v. U.S. Steel Corp., 2016 WL , *11 n. 20 (11th Cir. 2016). See also Slater v. U.S. Steel Corp., 2016 WL , *21-22 & nn (11th Cir. 2016) (Tjo at, J., concurring specially) Page 60 of 213

61 Rights and Powers of Debtors 16:7 cution of the cause of action does not end the judicial estoppel inquiry. In concluding that application of judicial estoppel to bar the trustee's recovery would harm innocent creditors, courts have limited the recovery to the amount necessary to pay creditors in full, thereby preventing the debtor from obtaining any bene t from the undisclosed cause of action. 50 A court might accomplish the limitation in two ways. One approach is to permit the trustee to recover all permissible damages and require the trustee to return any surplus after payment of creditors in full to the defendant. 51 An alternative is to require the trustee to establish how much is required to pay all creditors and limit the recovery to that amount. The former approach appears preferable because it avoids the necessity of the trial court s resolution of questions relating to the amount necessary to pay creditors in full, such as the amount of administrative expenses and the allowability of claims. The approach may make a signi cant di erence if the attorney prosecuting the cause of action is entitled to a contingent fee based on the recovery. 52 If the trustee declines to pursue a cause of action after a case is reopened to permit scheduling of the cause of action, an abandonment of the action will occur under Code 554, either because the trustee expressly abandons it or the case is closed without administration of the now-scheduled cause of action. In either case, Code 554 operates to re-vest the cause of action in the debtor. At that point, the debtor is the proper party to pursue the claim, and the defense of judicial estoppel will be applicable. 53 Application of these judicial estoppel principles in the context of a Chapter 13 case may involve other considerations. If the debtor has not completed payments under her plan and the case is still open, amendment of the schedules and modi cation of the plan to permit prosecution of the cause of action for the bene t of creditors is possible. If the case has been closed, however, an ef- 50 E.g., Reed v. City of Arlington, 650 F.3d 571, 55 Bankr. Ct. Dec. (CRR) 68, 66 Collier Bankr. Cas. 2d (MB) 101, 18 Wage & Hour Cas. 2d (BNA) 27, Bankr. L. Rep. (CCH) P (5th Cir. 2011) (en banc); Cannata v. Wyndham Worldwide Corp., 798 F. Supp. 2d 1165 (D. Nev. 2011); CSX Transp., Inc. v. Howell, 296 Ga. App. 583, 675 S.E.2d 306 (2009); see Arkison v. Ethan Allen, Inc., 160 Wash. 2d 535, 160 P.3d 13, 16 n. 2 (2007). 51 E.g., Reed v. City of Arlington, 650 F.3d 571, 55 Bankr. Ct. Dec. (CRR) 68, 66 Collier Bankr. Cas. 2d (MB) 101, 18 Wage & Hour Cas. 2d (BNA) 27, Bankr. L. Rep. (CCH) P (5th Cir. 2011) (en banc). 52 E.g., In re Flugence, 738 F.3d 126, 131 (5th Cir. 2013) ( Attorneys might not be willing to take on the case with a dim hope for recovery, so the creditors would collect nothing. ). 53 Eastman v. Union Paci c R. Co., 493 F.3d 1151, 58 Collier Bankr. Cas. 2d (MB) 583 (10th Cir. 2007) Page 61 of 213

62 16:7 Chapter 13 Practice and Procedure fective method of reopening the case to permit bankruptcy administration of the asset may not exist, as discussed earlier in this section. Another issue is that it is unclear whether the debtor or the Chapter 13 trustee has standing to prosecute a debtor's cause of action. 54 If the trustee has standing, judicial estoppel does not prevent the trustee's prosecution of the cause of action, subject to a limitation on the recovery to prevent the debtor from receiving any bene t from the recovery. The fact that the debtor has standing to prosecute the cause of action should not make a di erence if she is prosecuting the cause of action for the bene t of the estate as the proper party to do so. The court should properly examine the ultimate bene ciary of any recovery, not the identity of the party who is asserting the cause of action. For the same reasons, the question of whether the cause of action revested in the debtor upon con rmation 55 should not be outcome-determinative. If the debtor's creditors will receive the bene t of the recovery, application of judicial estoppel is not appropriate. Responsibilities of bankruptcy and litigation counsel for debtor in connection with judicial estoppel Two themes that run through many of the judicial estoppel cases are the contentions of debtors that they advised their bankruptcy counsel of the cause of action or that they were not aware that they were required to list their causes of action because they did not understand that it was a contingent and unliquidated claim. To emphasize the obvious, bankruptcy counsel who is advised of the existence of a cause of action must make sure that it is listed on the schedules. And if the schedules do not disclose the cause of action but questioning at the Code 341(a) meeting (or some other event) brings it to light, the debtor's counsel must fully and promptly investigate the matter and le an amendment to the schedules that fully and accurately discloses it. The frequent contention of debtors in the reported cases that they did not understand that they had to list a cause of action points out the need for a debtor's bankruptcy attorney to examine the client thoroughly with regard to the existence of asserted and unasserted causes of action. An attorney who hands the bankruptcy schedules to the debtor and expects her to ll them out accurately without guidance runs the risk of costing his client thousands, if not millions, of dollars. 54 See 16:5. 55 See 10: Page 62 of 213

63 Rights and Powers of Debtors 16:7 To prevent such a result, bankruptcy counsel must rephrase the questions. For example, the attorney should ask whether the debtor has been in an automobile accident or otherwise su ered an accident or injury (the existence of debts for medical treatment should indicate the need for thorough inquiry in this regard); whether she has been discharged from her employment or otherwise thinks that she has su ered unlawful employment discrimination; whether anyone owes her money; and similar questions designed to delve into the debtor's history to bring a potential cause of action to light. Careful practice will include the use of a checklist that includes questions designed to elicit information that would permit the recognition of a potential cause of action and documentation that the attorney went over the questions and answers with the debtor. Importantly, in a Chapter 13 case, debtor's counsel must emphasize to the debtor the importance of advising counsel of anything that happens after the ling of the case that may involve the assertion of a cause of action against any third party. This will permit prompt amendment of the schedules. This course of action is far superior to litigation over whether a Chapter 13 debtor must disclose a postpetition cause of action. Careful practice will include documentation of the attorney's discussion of the importance of advising the attorney of any such events and written communication that explains it. Bankruptcy counsel must be mindful that, if judicial estoppel prevents a client from recovering on an undisclosed cause of action, the next cause of action may be against her bankruptcy counsel. In this regard, the question of whether the attorney failed to list a cause of action that the debtor disclosed to the attorney, or the question of whether the attorney in a Chapter 13 case advised the debtor that she must disclose a postpetition cause of action (or other postpetition acquisition of property), will be a question of fact in a professional negligence action. Documentation in the attorney's les of the attorney's careful examination of the debtor about the existence of potential causes of action and of clear communication to the Chapter 13 debtor of her duty to disclose a postpetition cause of action will prevent determination of this factual issue from turning solely on an assessment of the credibility of con icting testimony from the debtor and the attorney. Litigation counsel must also be aware of the debtor's bankruptcy history. Although litigation counsel may not have a clearly-de ned duty to counsel the client with regard to her required disclosures in a bankruptcy case in which she is not representing the client, litigation counsel as a matter of concern for the client as well as for her own economic self-interest does not want to see a valid cause of action defeated or minimized by Page 63 of 213

64 16:7 Chapter 13 Practice and Procedure a judicial estoppel defense, especially if the representation is on a contingent-fee basis. Litigation counsel must, therefore, investigate the debtor's bankruptcy history. At a minimum, counsel must ask the debtor about it and explain why a truthful answer is critical. If litigation counsel is aware of a bankruptcy ling by the debtor, she must consult the record in the bankruptcy case to make sure that the cause of action was disclosed. If it was not, litigation counsel should not proceed with the prosecution of litigation unless and until disclosure has occurred. Even if litigation counsel properly checks the debtor's prelitigation bankruptcy history, the possibility exists that the debtor may le bankruptcy while the litigation is pending. Thus, litigation counsel must emphasize to her client that she must advise him if she decides to le a bankruptcy case and that, if she does, she must disclose the pending litigation. Arguably, careful practice would include routinely asking the client during the course of the litigation whether she has had any change in her nancial situation and whether she has led bankruptcy. 58 Page 64 of 213

65 Trustee s authority to exercise trustee s avoidance powers, Power to avoid liens under 522(f), and Power to prosecute nonbankruptcy causes of action Selection from 17:4 Powers of Trustee Excerpt From Forthcoming 2016 Edition CHAPTER 13 PRACTICE AND PROCEDURE HON. W. HOMER DRAKE, JR. HON. PAUL W. BONAPFEL ADAM M. GOODMAN Published by Thomson Reuters Westlaw: CHAP13PP This material is taken from the forthcoming publication Chapter 13 Practice & Procedure, 2016 Edition, reprinted with permission. Copyright 2016 Thomson Reuters/West. For more information about this publication, please visit 59 Page 65 of 213

66 Trustee's authority to exercise trustee's avoidance powers Before ling a Chapter 13 petition, a nancially distressed debtor may have transferred (or granted a lien on) real or personal property, or made large payments of money, to one or more creditors in an e ort to resolve her nancial problems or to favor a relative or friend. Alternatively, a diligent creditor may have enforced its debt involuntarily through foreclosure, repossession, or legal process. Further, a creditor with a lien, such as a mortgage on the debtor's real property or a security interest in a vehicle, may have failed to properly perfect its interest in the collateral. In these situations, the avoiding powers that a trustee has under Chapter 5 of the Code may provide a basis for avoiding the transaction. Section 14:20 discusses the trustee's avoidance powers, which include the power to avoid payments or transfers of property that are preferential 19 or actually or constructively fraud- 13 See 13: See 20: U.S.C.A. 1307(c)(1) U.S.C.A. 1307(c)(2) U.S.C.A. 1307(c)(5) U.S.C.A. 1307(c)(6) U.S.C.A Page 66 of 213

67 Chapter 13 Trustee's Rights, Powers, and Duties 17:4 ulent; 20 unauthorized postpetition transfers; 21 statutory liens; 22 or improperly recorded or unperfected liens. 23 The existence of these powers is important because they may a ect what the plan must provide for the debtor to pay a secured creditor whose lien is avoided and what nonpriority general creditors must receive under the projected disposable income test of Code 1325(b), if invoked, 24 and the best interest of creditors test of Code 1325(a)(4) for con rmation. 25 Although it is clear that the Chapter 13 trustee generally has authority to exercise the avoidance powers, courts disagree as to whether the debtor also has this authority. Courts typically address the question in terms of standing. As 4:6 discusses, the provisions of a con rmed plan or court order may grant the debtor derivative standing to pursue an avoidance action. Section 16:6 addresses the standing question when a con rmed plan or court order does not address standing. Section 4:6 also discusses other issues that a Chapter 13 trustee must consider when an avoidance action exists in a case, including whether she should prosecute an avoidance action and what she should consider if she declines to do so; provisions in a plan with regard to prosecution of an avoidance action by the debtor or the trustee; the retention and employment of counsel to prosecute an avoidance action and settlement of avoidance litigation; and what actions the trustee may take to protect the interests of the estate and creditors. Power to avoid liens under 522(f) Code 522(f)(1) provides that a debtor may avoid a judgment lien or a nonpossessory, nonpurchase-money security interest in personal property to the extent that it impairs an exemption in certain property. 26 In some instances, a debtor may elect not to avoid a lien or security interest under 522(f), which would reduce or eliminate the creditor's secured claim and usually the amount the creditor receives under the plan, 27 in order to maintain a relationship with the creditor. Such preferential treatment, however, can unfairly a ect other properly treated unsecured claimants U.S.C.A U.S.C.A U.S.C.A U.S.C.A See 8: See 7:6, 7:7. 26 See 14: See 5: Page 67 of 213

68 17:4 Chapter 13 Practice and Procedure If the debtor does not seek to avoid a lien under Code 522(f), the question is whether the Chapter 13 trustee may do so to reduce or eliminate secured claims in order to make more money available to pay to unsecured creditors. Section 14:24 discusses this issue. Power to prosecute nonbankruptcy causes of action The ling of a Chapter 13 case creates an estate that, under Code 541(a) and 1306(a), includes all of the debtor's assets. 28 Property of the estate thus includes any causes of action that the debtor has under nonbankruptcy law, often a claim for personal injury or employment discrimination. 29 In some instances, such as a cause of action for violation of the Truth-in-Lending Act, 30 the trustee may have rights arising from her duty under Code 704(a)(5) to review proofs of claim and object if a purpose would be served. 31 When a cause of action bears no direct relation to claims in the bankruptcy case, however, questions arise as to whether the trustee has authority to prosecute them. As 4:6 discusses, the provisions of a con rmed plan or a court order may determine who has standing to pursue a nonbankruptcy cause of action. Section 16:5 considers the standing issue in the absence of such a determination. The trustee must consider the existence of a nonbankruptcy cause of action in her analysis of whether the plan meets the best interest of creditors test of Code 1325(a)(4). Section 4:6 addresses what actions a trustee should consider, and what provisions of a plan are necessary, to insure that the interests of creditors and the estate are protected. 17:5 Compensation and fee of Chapter 13 trustee The method for compensation of a Chapter 13 trustee and payment of her expenses di ers depending on how the trustee is appointed. In all states except Alabama and North Carolina, the 28 See 14:1. 29 See 14: E.g., In re Weaver, 632 F.2d 461, 7 Bankr. Ct. Dec. (CRR) 181, 24 C.B.C. 194 (5th Cir. 1980) (case under the Bankruptcy Act); In re Laskowski, 384 B.R. 518 (Bankr. N.D. Ind. 2008); In re Sherman, 13 B.R. 259, 4 Collier Bankr. Cas. 2d (MB) 1355 (Bankr. D. R.I. 1981). See also In re Johnson, 13 B.R. 263, 4 Collier Bankr. Cas. 2d (MB) 1360 (Bankr. D. R.I. 1981) (debtors' con rmed plan vested cause of action in the trustee). 31 E.g., In re Weaver, 632 F.2d 461, 464, 7 Bankr. Ct. Dec. (CRR) 181, 24 C.B.C. 194 (5th Cir. 1980) Page 68 of 213

69 Speaker Biographies David G. Peake has practiced in the area of Consumer Bankruptcy Law for 30 years. Mr. Peake was appointed Chapter 13 Trustee, for the Southern District of Texas, Houston Division, in June of Prior to that time Mr. Peake was in private practice representing individuals and small businesses. Mr. Peake is Licensed to practice law in the State of Texas. Mr. Peake is originally from St. Paul, Minnesota where he completed undergraduate studies at Macalester College and received his law degree from William Mitchell College of Law. Mr. Peake is currently a member of the American Bankruptcy Institute, the National Association of Consumer Bankruptcy Attorneys and the National Association of Chapter 13 Trustees, where he also serves on the Board of Directors. Honorable Paul W. Bonapfel has been a United States Bankruptcy Judge for the Northern District of Georgia since Prior to his appointment, he practiced law in Atlanta, Georgia, with the law firm of Lamberth, Bonapfel, Cifelli & Stokes, P.A., now known as Lamberth, Cifelli, Stokes, Ellis & Nason, P.A. As an attorney, Judge Bonapfel represented all types of parties in both business and consumer bankruptcy cases, including consumer and business debtors in liquidation cases, business debtors in reorganization cases, chapter 7 and 11 bankruptcy trustees, creditors committees, and creditors in both consumer and business cases. Judge Bonapfel received his B.A. cum laude in government from Florida State University in 1972 and his J.D. magna cum laude from the University of Georgia School of Law in 1975, where he was Notes Editor of the Georgia Law Review. He was a judicial law clerk for United States District Judge Wilbur D. Owens, Jr., in Macon, Georgia. A fellow of the American College of Bankruptcy, Judge Bonapfel has served as chairperson of the Bankruptcy Sections of the State Bar of Georgia and the Atlanta Bar Association. He was also a director, and is a former president, of the Southeastern Bankruptcy Law Institute, a non-profit organization which presents an annual seminar on bankruptcy law and procedure. Judge Bonapfel has lectured at numerous continuing legal education seminars. He is a co- author, with Judge W. Homer Drake, Jr., and Adam Goodman, of Chapter 13 Practice and Procedure (Thomson/West). John Rao is an attorney with the National Consumer Law Center, Inc. Mr. Rao focuses on consumer credit and bankruptcy issues and has served as a panelist and instructor at numerous bankruptcy and consumer law trainings and conferences. He has served as an expert witness in court cases and has testified in Congress on consumer matters. Mr. Rao is a contributing author and editor of NCLC's Consumer Bankruptcy Law and Practice; co-author of NCLC s Foreclosures; Bankruptcy Basics; Guide to Surviving Debt; and NCLC Reports: Bankruptcy and Foreclosures Edition. He is also a contributing author to Collier on Bankruptcy and the Collier Bankruptcy Practice Guide. Mr. Rao serves as a member of the federal Judicial Conference Advisory Committee on Bankruptcy Rules, appointed by Chief Justice John Roberts in He is a conferee of the National Bankruptcy Conference, fellow of the American College of Bankruptcy, vice-president of the National Association of Consumer Bankruptcy Attorneys, member of the editorial board of Collier on Bankruptcy, and former board member for the American Bankruptcy Institute. He is an adjunct faculty member at Boston College School of Law. Mr. Rao is a graduate of Boston University and received his J.D. in 1982 from the University of California (Hastings). Page 69 of 213

70 1:30-2:30 Student Loans - Ask the Experts: A question and answer follow-up to the plenary session on student loans. Moderator: James L. Henley, Jr., Chapter 13 Standing Trustee for the Southern District of Mississippi (Jackson) Honorable Howard R. Tallman, United States Bankruptcy Judge, District of Colorado (Denver) Edward C. Boltz, The Law Offices of John T. Orcutt (Durham, NC) INDEX OF MATERIALS See previous materials on this topic 10:30) Speaker Biographies Rev. James L. Henley, Jr., a native of Jackson, Mississippi, serves as Pastor of Fresh Start Christian Church and as a Chapter 13 Bankruptcy Trustee for the Southern District of Mississippi. Pastor Henley also serves as Vice Chairman of the Board of Commissioners of the Jackson Municipal Airport Authority. He is an attorney and a licensed Certified Public Accountant and holds the Certified in Financial Forensics credential from the American Institute of Certified Public Accountants. He is a Past President of both the Magnolia Bar Association and the Magnolia Bar Foundation. He is a graduate of Callaway High School, a cum laude graduate of Millsaps College and graduated 2nd in his class at the Mississippi College School of Law. He is a life member of Omega Psi Phi Fraternity, Inc. He has been and continues to be extensively involved in the development of Jackson s inner-city youth and their communities through Fresh Start Ministries, Inc. He has previously served on the boards of Bethany Christian Services, The Metropolitan YMCA and the Jackson Young Lawyers Association. He and his wife Vivian have four children. He lives to serve Christ by Making Christ Visible in all his actions and duties. Honorable Howard R. Tallman was appointed a U.S. Bankruptcy Judge for the District of Colorado in December, He became Chief Judge in January, 2007, serving until July, Prior to taking the bench, he served as the U.S. Trustee for Region 19, covering Colorado, Utah and Wyoming, from March, Previously, Tallman practiced with the Denver firm of Block Markus & Williams, L.L.C., where he specialized in the representation of debtors, creditors, trustees, committees, asset purchasers and other parties in workouts, restructurings, commercial litigation and bankruptcy cases and proceedings. He was also a member of the Chapter 7 panel of trustees for Colorado from 1996 until becoming U.S. Trustee. Tallman received his B.A. summa cum laude in 1972 from Villanova University, his J.D. from the University of Denver College of Law in 1975 and his M.B.A. in Finance from the University of Colorado Graduate School of Business in Tallman is certified as a business bankruptcy specialist by the American Board of Bankruptcy Certification. Page 70 of 213

71 Edward C. Boltz is a member of the Law Offices of John T. Orcutt, P.C., where he has managed the firm s office in Durham, North Carolina since 1998, representing clients in not only Chapter 13 and Chapter 7 bankruptcies, but also in related consumer rights litigation, including fighting abusive mortgage practices. Mr. Boltz received his B.A. from Washington University in St. Louis in 1993 and his J.D. from George Washington University in He is a member of the North Carolina State Bar, where he has been certified as a specialist in consumer bankruptcy law. He is admitted to practice before the Districts Courts in both the Eastern and Middle Districts of North Carolina. Mr. Boltz is the current President of the National Association of Consumer Bankruptcy Attorneys (NACBA). Previously, he has served as the Secretary of NACBA, and has jointly responsible for directing the NACBA State Chair program, Mr. Boltz has also served on the Bankruptcy Council for the North Carolina Bar Association and previously served as the Bankruptcy Chair for the North Carolina Association of Trial Lawyers. Page 71 of 213

72 1:30-2:30 Running and Marketing an Efficient Consumer Law Practice: Maximizing your practice and keeping your trustee happy. Moderator: Kelly Remick, Chapter 13 Standing Trustee for the Middle District of Florida (Sun City Center) Carmen Dellutri, Dellutri Law Group, P.A. (Fort Myers, FL) INDEX OF MATERIALS 1. PDF of PowerPoint Presentation 2. Speaker Biographies Page 72 of 213

73 Carmen Dellutri- The Dellutri Law Group Kelly Remick- Chapter 13 Standing Trustee #NACTTPHI2016 Page 73 of 213

74 Carmen Dellutri, Esq. PRESIDENT, CEO Kelly Remick CHAPTER 13 STANDING TRUSTEE AS THE MANAGING ATTORNEY, ALL OF THE DAY TO DAY ACTIVITIES ASSOCIATED WITH RUNNING THE LAW FIRM FALL ONTO MY SHOULDERS. AT THE SAME TIME, I STILL MANAGE TO CARRY A FULL CASE LOAD. SERVES IN THE TAMPA DIVISION, WITH A CASE LOAD OF OVER 9,000 CASES. PRIOR TO HER APPOINTMENT SHE WAS THE SENIOR STAFF ATTORNEY FOR A CHAPTER 13 TRUSTEE FOR ALMOST 9 YEARS AND WORKED IN PRIVATE PRACTICE FOR 10 YEARS. Page 74 of 213

75 In the last 3 years, we have watched venture capital pour money into: LEGALZOOM provides legal solutions in various common categories including copyrights, DBAs, divorce, wills, etc. and sells advertising space to attorneys. AVVO generates revenue through a $49.95/mo subscription service which allows lawyers to remove advertisements from their profile, including advertisements by competing lawyers while offering consumers free legal documents. NOLO provides how to do it yourself legal solutions for many areas of law. They offer products, help finding a lawyer (who pays for advertisement) and legal self-help articles. ROCKETLAWYER provides online legal services for individuals. The online legal services are available to Rocket Lawyer account holders, and give access to online legal forms, help articles, and also extend to discounts with local attorneys. Page 75 of 213

76 Is to under-price and make legal services a commodity thereby confusing the consumer. Confused Consumers = $$$$$ in their pockets Less $$$ in yours. Page 76 of 213

77 Competitors are beginning to open their eyes! SEO Companies are getting rich because lawyers practice law and would rather pay someone than learn about marketing. Who knows your clients better than you? Page 77 of 213

78 The Market? The one who spends the most? -Nope Who then? -The one who maximizes each and every lead! There is no other way to say it. You have to be laser focused on each and every lead. Page 78 of 213

79 I was the same as everyone else. If you build it, they will come Only in the movies. I spent a lot of money chasing new clients because I had no plans to create trust, to educate, to coach, and to keep my clients. Back Then: I wish I had a plan to find and keep clients. Page 79 of 213

80 1. Internet 2. Client Referrals 3. Attorney Referrals With the proper plans in place, you should never have to advertise again. If you advertise, make sure you can measure your ROI. Page 80 of 213

81 Create an Offer for Each Stage TIRE KICKERS INTERESTED AND RESEARCHIN G READY TO BUY! 1. FREE E-Book or 2. FREE DVD or 3. FREE Special Report (How Bankruptcy Stops Creditors in Their Tracks) Page 81 of 213

82 Don t be that lawyer who wastes leads by not following up. TIRE KICKERS FREE OFFER: EBOOK BEGIN 90 DAY SEQUENCE INTERESTED AND RESEARCHING READY TO BUY! FREE OFFER: DVD FREE OFFER: SPECIAL REPORT BEGIN 60 DAY SEQUENCE SET APPOINTMENT Page 82 of 213

83 What s the Point in Sending FREE Offers if They Might Not Even Schedule? Because What if they do? Now, you are the Author of the E-books, the guy in the DVD. Ultimately, you are their Guru they ve been searching for! In a world of millions of experts at their fingertips, you re the only one who offered to help without asking for anything in return. Page 83 of 213

84 You AREN T Just Selling. You AREN T Just Offering a Free Consult. You ARE Retaining. Make it a Party! Show Them Your Office. Introduce Them to the Team. Page 84 of 213

85 What s the Point in Wasting Time When They Have Already Retained? Because What if they know just one person? Client Referrals Are The Easiest AND Cheapest, if you do it right. Page 85 of 213

86 Clients are 4x more likely to buy when referred by a friend (Nielsen) 65% of a company's new business is from referrals (New York Times) The lifetime value of a referred client is 16% higher than a non-referred customer (Journal of Marketing) People really want to help their friends. They want to refer you but they may not know how! Page 86 of 213

87 Page 87 of 213

88 Are you getting referrals from other attorneys? -Why NOT?! Do you have a plan? - It s Time You Get a Plan! Network with other attorneys and ask: How can I help you get more of the clients that you really want to work with? Page 88 of 213

89 Who is your ideal client? Who is your most profitable client? How do I screen them for you? How do I refer them to you? How do I follow up with you? Is there anything else that I need to know? Show You are Interested in Helping Them First. Page 89 of 213

90 These ideas are now planted seeds and will either grow or die on the vine. What Will You Do When You Leave Here Today? Page 90 of 213

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92 Applies to both Debtor s counsel, Creditor s counsel and the Trustee s office Everytime a hearing is continued it costs more in terms of time and resources In an enviroment of presumptive/ flat fees this translates into losing money Page 92 of 213

93 It takes more time and resources to correct things than it does to take the time to do them right in the first place. Counsel and the Debtor lose credibility when schedules are not completed accurately. Page 93 of 213

94 Trying to talk the Trustee into believing something is far less effective than having documents at the ready to prove your position. Page 94 of 213

95 CREDIBILITY and PROFESSIONALISM is the key to your relationship with the Trustee and Trustee s Staff Attorneys Page 95 of 213

96 While they may seem like completely different topics and approaches to business, they aren t. It s all tied together. Effective marketing AND effective business operations will lead to referrals. Conducting yourself (and your business) professionally and having a good rapport with everyone involved makes an impression they will never forget! Page 96 of 213

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98 Speaker Biographies Kelly Remick is the Chapter 13 Standing Trustee for the Tampa Division of the Middle District of Florida. Prior to her appointment as Trustee she worked for Jon Waage, Chapter 13 Standing Trustee as his Senior Staff Attorney for almost nine years. She also represented creditors in private practice for many years in bankruptcy and state court proceedings. She received her B.A. in Political Science from the University of Michigan and her J.D. from the University of Florida College of Law. Carmen Dellutri is the Founder and President of the Dellutri Law Group, P.A. He is certified by the American Board of Certification Consumer in bankruptcy law. He is also a Florida Supreme Court Certified Circuit Court and Family Law Mediator and a Qualified Arbitrator. He is a graduate of Edison Community College and the University of South Florida. In 1993, he graduated from Loyola University School of Law. While in law school, Mr. Dellutri clerked for the Honorable Charles Ward, Louisiana Fourth District Court of Appeal. Mr. Dellutri was admitted to the New Jersey Bar in 1993 and the New York Bar in He also received his Master of Laws (LL. M.) degree from Tulane University School of Law in Mr. Dellutri became a member of The Florida Bar in After entering private practice, Mr. Dellutri received his Master of Business Administration (M.B.A.) degree from Florida Gulf Coast University in Mr. Dellutri is licensed to practice in all state courts in Florida and the United States District Courts; Northern, Southern, and Middle Districts of Florida. Mr. Dellutri is also licensed to practice law in United States Court of Appeals, Eleventh Circuit and the United States Tax Court. Although Mr. Dellutri is not actively engaged in the practice of law in New Jersey or New York, he is admitted to practice law in all state and federal courts in New Jersey, and all state courts of New York. The Law Offices of Carmen Dellutri, P.A. evolved into The Dellutri Law Group, P.A. as the firm grew from a little office in downtown Fort Myers to our four (4) offices today. Mr. Dellutri actively litigates cases involving catastrophic injuries and wrongful death on behalf of the victims. Additionally, the firm represents consumers in all forms of bankruptcy litigation. Mr. Dellutri is one of the founding members of the Bankruptcy Law Network and its affiliated websites. Mr. Dellutri encourages each member of the firm to be active in the community. Last year, the firm supported many charitable and civic causes by donating time and much needed capital to the community. Mr. Dellutri and the other attorneys in the firm routinely speak to students and civic groups of all ages about various issues. Page 98 of 213

99 3:00-4:00 CFPB - Ask the Experts: A question and answer follow-up to the plenary session. Moderator: Amrane Cohen, Chapter 13 Standing Trustee for the Central District of California (Orange) Alane A. Becket, Becket & Lee LLP (Malvern, PA) Joann Needleman, Clark Hill PLC (Philadelphia, PA) Barbara A. Sinsley, Barron & Newburger, P.C. (Spartanburg, SC) INDEX OF MATERIALS See previous materials on this topic 8:45) Speaker Biographies Amrane Cohen is the Standing Chapter 13 Trustee for the Santa Ana Division of the Central District in California. He was appointed a standing trustee in Amrane is the current Treasurer of the NACTT Academy. He is a past president of the NACTT. Prior to his appointment as standing trustee, Amrane was an executive at a financial services firm and a consultant with a Big 8 accounting firm. He holds an MBA from UCLA in Finance and Information Systems. Alane A. Becket is an AV rated attorney and Managing Partner of Becket & Lee LLP, a Malvern, Pa. law firm providing comprehensive nationwide representation of creditors in bankruptcy matters. In addition to client and industry relations, Alane focuses on litigation strategy, and Becket & Lee has been lead or co-counsel in some of the most influential decisions in consumer bankruptcy over the last 10 years. In addition to the NACTT, Alane is a member of the Executive Committee and Vice-President of Publications for the American Bankruptcy Institute (ABI). She is also a member of the National Association of Retail Collection Attorneys (NARCA) and the National Association of Bankruptcy Trustees. Alane has written and lectured extensively on consumer bankruptcy issues for a variety of professional organizations, including the NACTT, Norton Bankruptcy Law Advisor, NARCA, National Conference of Bankruptcy Judges, ABI, Commercial Law League of America and a host of local and regional creditor organizations. Recently, Alane co-authored the revised edition of the ABI treatise Consumer Bankruptcy: Fundamentals of Chapter 7 and Chapter 13 of the U.S. Bankruptcy Code (Third Edition). Joann Needleman is leader of Clark Hill s Consumer Financial Services Regulatory & Compliance group in Philadelphia, PA. Joann has extensive litigation experience in state and federal courts, successfully defending creditors against claims brought under the Fair Debt Collection Practices Act and Fair Credit Reporting Act as well as state statutes. She provides counsel, consultation and litigation services to financial institutions, law firms, credit reporting agencies, and debt buyers throughout the country. Joann is the immediate past President of the Board of Directors of the National Creditors Bar Page 99 of 213

100 Association (NARCA). She also serves on the Consumer Financial Protection Bureau Consumer Advisory Board. Joann was named a Pennsylvania Super Lawyer in , , and Barbara A. Sinsley is nationally known for her intelligent, aggressive representation of creditors, debt collectors and debt buyers, with a focus on developing and improving Compliance Management Systems and handling CFPB, FTC, and Attorneys General investigations and examinations. She is AV rated by Martindale Hubbell. Prior to rejoining Barron & Newburger in an of counsel capacity, Ms. Sinsley practiced with Barron, Newburger & Sinsley from 2007 to Prior to that, Ms. Sinsley was Vice President for Asset Acceptance Capital Corp during the time when that company launched its Initial Public Offering. As part of her daily responsibilities at Asset Acceptance, she assisted in the due diligence of corporate acquisition and portfolio acquisitions. In addition to these positions, Ms. Sinsley demonstrated her industry leadership through serving as the General Counsel of DBA International where she negotiated significant legislation impacting the operations of the collections industry. Ms. Sinsley received a B.A. in Behavioral Science and Law in 1985 from the University of Wisconsin Madison. She received a J.D. in 1989 from South Texas College of Law in Houston, Texas. Page 100 of 213

101 3:00-4:00 Exemption Issues in Chapter 13: Effective objections and conversion issues. Moderator: Richard V. Fink, Chapter 13 Standing Trustee for the Western District of Missouri (Kansas City) Honorable George W. Emerson, Jr., United States Bankruptcy Judge, Western District of Tennessee (Memphis) Neil C. Gordon, Arnall Golden Gregory LLP (Atlanta, GA) INDEX OF MATERIALS 1. Topic Outline a. Table of Contents b. The Applicable Statutory Sections and Rules c. New in the Exemption Scheme Since BAPCPA d. Procedure for Objecting to Exemptions, Amendments to Exemptions, and Appreciation Issues e. Overview: Equitable Attacks on Exemptions f. Imposing Equitable Liens g. Surcharging Exemptions - Law V. Siegal, 134 S.Ct (2014) h. Administering an Exempted PI Claim (The Personal Bodily Injury Conundrum) i. Administering an Exempted IRA/Annuity j. State Specific Exemption Statutes k. Administering Exempted Property That Is Brought into the Estate by the Trustee s Avoidance Powers Page 101 of 213

102 l. Miscellaneous Issues of Interest m. Carve-Outs and Subordination n. Domestic Support Obligations 2. Law v. Siegel Dicta Leads Lower Courts Astray 3. History of Stephen Law Case and Debtor s Misconduct 4. Speaker Biographies Page 102 of 213

103 EXEMPTIONS Neil C. Gordon, Esq. NABT Past President Arnall Golden Gregory LLP Atlanta, Georgia NACTT 51 st Annual Conference Philadelphia, Pennsylvania July 20-23, v1 Page 103 of 213

104 TABLE OF CONTENTS I. THE APPLICABLE STATUTORY SECTIONS AND RULES... 1 II. NEW IN THE EXEMPTION SCHEME SINCE BAPCPA... 2 III. PROCEDURE FOR OBJECTING TO EXEMPTIONS, AMENDMENTS TO EXEMPTIONS, and APPRECIATION ISSUES IV. OVERVIEW: EQUITABLE ATTACKS ON EXEMPTIONS V. IMPOSING EQUITABLE LIENS VI. SURCHARGING EXEMPTIONS - LAW v. SIEGAL 134 S.Ct (2014) VII. ADMINISTERING AN EXEMPTED PI CLAIM (THE PERSONAL BODILY INJURY CONUNDRUM) VIII. ADMINISTERING AN EXEMPTED IRA/ANNUITY IX. STATE SPECIFIC EXEMPTION STATUTES X. ADMINISTERING EXEMPTED PROPERTY THAT IS BROUGHT INTO THE ESTATE BY THE TRUSTEE S AVOIDANCE POWERS XI. MISCELLANEOUS ISSUES OF INTEREST XII. CARVE-OUTS AND SUBORDINATION XIII. DOMESTIC SUPPORT OBLIGATIONS v1 Page 104 of 213

105 EXEMPTIONS Neil C. Gordon, Esq., NABT Past President I. THE APPLICABLE STATUTORY SECTIONS AND RULES A. 11 U.S.C.A. 541(a)(1) The commencement of a case under sections 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held... (1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case. The definition of property of the estate is broad. It covers almost anything in which the debtor has a legal or equitable interest. B. 11 U.S.C.A. 522(b)(1) Notwithstanding section 541 of this title, an individual debtor may exempt from property of the estate the property listed in either paragraph (2) or, in the alternative, paragraph (3) of this subsection. In other words, the debtor may use either state or federal exemptions. C. 11 U.S.C.A. 522(b)(2) provides the debtor with the right to use the federal exemption scheme unless the State law that is applicable to the debtor under paragraph (3)(A) specifically does not so authorize. In other words, the state may prevent its citizens from using the federal exemption scheme set forth in 522(d), and virtually all of them have done so. D. 11 U.S.C.A. 522(b)(3) allows the debtor to exempt any property that is exempt under federal law other than 522(d) or state or local law that is applicable on the date of the filing of the petition. In other words, the debtor may claim state exemptions and exemptions under other federal statutes. In addition, the debtor may claim certain property the debtor held in entireties, and (since BAPCPA) most retirement funds. E. Fed. R. Bankr. P. 4003(a) mandates that the debtor list the claimed exemptions on Schedule C, Property Claimed as Exempt, pursuant to Fed. R. Bank. P. 1007(b)(1). F. Fed. R. Bankr. P. 4003(b)(i) provides that an objection to exemption must be filed within 30 days after conclusion of the meeting of creditors, or an extension granted. See Fed. R. Bankr. P. 9006(b)(2) providing that the court may enlarge the time for taking action under 4003(b) v1 1 Page 105 of 213

106 G. Fed. R. Bankr. P. 4003(b)(2) provides that The trustee may file an objection to a claim of exemption at any time prior to one year after the closing of the case if the debtor fraudulently asserted the claim of exemption. The trustee shall deliver or mail the objection to the debtor and the debtor s attorney, and to any person filing the list of exempt property and that person s attorney. H. Fed. R. Bankr. P. 1009(a) provides that A voluntary petition, list, schedule, or statement may be amended by the debtor as a matter of course at any time before the case is closed. In other words, there seems to be a wide-open invitation to amend claims to exemption just about at any time in the case. II. NEW IN THE EXEMPTION SCHEME SINCE BAPCPA A. The 730-Day Rule on Homesteads Newly numbered 522(b)(3)(A) provides that (A) subject to subsections (o) and (p), any property that is exempt under federal law, other than subsection (d) of this section, or the state law that is applicable on the date of the filing of the petition at the place in which the debtor s domicile has been located for the 730 days immediately preceding the date of the filing of the petition or if the debtor s domicile has not been located at a single state for such 730-day period, the place in which the debtor s domicile was located for 180 days immediately preceding the 730-day period or for a longer portion of such 180 day period than in any other place. This is a change from former law, which provided that the debtor could exempt property at the place in which the debtor s domicile had been located for 180 days immediately preceding the filing of the bankruptcy case. There has been significant development of case law under this new provision of the Bankruptcy Code. (1) In re West, 352 B.R. 905 (Bankr. M.D. Fla. 2006) (debtor must use federal exemptions because he did not live in Florida for the entire 730 days and could not claim the Indiana state exemptions because he was not domiciled in that state on the date of his bankruptcy filing). (2) In re Crandall, 346 B.R. 220 (Bankr. M.D. Fla. 2006) (debtor must take the federal exemption if she was not domiciled in Florida for the entire 730 days preceding the filing and lived in New York for a portion of that period, as well as the 180 days immediately preceding the 730-day period; New York law permits exemption only to debtors domiciled in the state). (3) In re Underwood, 342 B.R. 358 (Bankr. N.D. Fla. 2006) (debtor, who moved from Colorado to Florida less than 730 days prior to the petition filing and was v1 2 Page 106 of 213

107 ineligible to take Colorado exemptions because she no longer lived there either, must take federal exemptions). (4) In re Jewell, 347 B.R. 120 (Bankr. W.D.N.Y. 2006) (debtor could only use federal exemption even though the state he resided in, New York, and the state he previously lived in, Colorado, were both opt-out states). An issue existed pre-bapcpa with respect to which state s exemption law applied when the debtors moved shortly before they filed their bankruptcy petition and wanted to take their former (not the new) state s exemption law. In re Drenttel, 403 F.3d 611 (8th Cir. 2005). Here the debtors moved to Arizona from Minnesota, and shortly thereafter, they filed for bankruptcy relief in Arizona, but they used the Minnesota exemption scheme in an attempt to claim their Arizona homestead exempt under 11 U.S.C.A. 522(b)(2)(A) (2005). The Eighth Circuit held that the language, the law that is applicable, as used in 522(b)(2)(A) incorporates the conflicts law of the state in which the debtors were required to file their petition. Minnesota conflicts law would use Minnesota law, and, therefore, the debtors, who were no longer living in Minnesota and no longer had a homestead in Minnesota, could use Minnesota s exemption law as their basis for claiming an exemption under state law. Drenttel was the reverse of the situation the new 730-day limitation is designed to cover. Here, debtors were trying to use the exemption laws of the state that they previously lived in, not the state they currently lived in. Under BAPCPA, as read by the courts cited above, the debtor would be limited to the federal exemptions and would not have been able to use Minnesota s $200,000 homestead exemption. B. Retirement Funds and Accounts In BAPCPA, Congress added 522(b)(3)(C) to specify that a debtor electing to use state exemptions (or a debtor in an opt-out state who has to use the state exemptions) may exempt retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under 401 (a qualified employer-sponsored pension, profitsharing, or stock bonus plan); 403 (qualified annuity plans that are established by an employer for one employee under 11 U.S.C.A. 404(a)(2) or 501(c)(3)); 408 (IRAs which meet statutory requirements); 408(A) (a Roth IRA); 414 (other retirement plans for controlled groups of employees, including predecessor employers, partnerships, or proprietorships, governments and churches); 457 (eligible deferred compensation plans established and maintained by eligible employers); and 501(a) (retirement plans established and maintained by defined tax-exempt organizations). Congress correspondingly clarified that exemption for the debtors taking federal exemptions to parallel the two. 11 U.S.C.A. 522(d)(12). Rollovers and transfers among such accounts will not expose otherwise exempt accounts to inclusion in the bankruptcy estate. 11 U.S.C.A. 522(b)(4)(D)(i). Even if the fund has not been previously determined to be nontaxable, it may still qualify under certain circumstances. 11 U.S.C.A. 522(b)(4)(A) and (B). However, only up to $1,245,475 (excluding rollovers under v1 3 Page 107 of 213

108 402(c), 402(e)(6), 403(a)(4), 403(a)(5), or 403(b)(8)) held in an IRA or a SEP IRA is excluded from the estate, unless the court determines that the interest of justice requires a greater amount. 11 U.S.C.A. 522(n). As part of these additions to the exemptions, the automatic stay contains a new exception. New 362(b)(19) excepts from the scope of the automatic stay withholding of income from a debtor s wages if the debtor borrowed money from an employee-sponsored plan and agreed to repay the loan, to the extent the amounts withheld and collected are solely for such payments on the loan. And, correspondingly, a new exception from discharge is inserted in 11 U.S.C.A. 523(a)(18) for sums owed on loans to such plans. Finally, complementary to the new exception from discharge, Chapter 13 plans, under new 11 U.S.C.A. 1322(f), may not alter the terms of such a loan. The situation may be different with respect to pledged IRA assets. In a case of first impression decided in a pre-2005 case, a bankruptcy court held that pledged IRA assets are not exempt because 408(e)(4) of the Tax Code treats as a distribution that portion of the IRA used to secure a loan. See In re Roberts, 326 B.R. 424 (Bankr. S.D. Ohio 2004) (relying on Lewis v. Bank of Am., 343 F.3d 540 (5th Cir ), which considered the consequence of such a distribution and found that once distributed funds are no longer exempt). C. Provisions Designed to Protect the Debtor s Exemptions Against Nondischargeable Debts The Code provides that exempt property may not be levied upon for any pre-petition debt, whether or not the debt is discharged. 11 U.S.C.A. 522(c). There are, however, four exceptions: (1) Exempt property may be seized to pay a debt of certain nondischargeable tax obligations and a nondischargeable domestic support obligation, a term newly added by BAPCPA. That term is defined as a debt that 1) accrues before, on, or after the date of the order for relief, and any interest that accrues on that debt under applicable nonbankruptcy law; 2) is owed to or recoverable by a spouse, former spouse, or child of the debtor or such child s parent, legal guardian, or responsible relative, or owed to or recoverable by a governmental unit; c) is in the nature of alimony, maintenance, or support, including assistance provided by a governmental unit, without regard to whether the debt is expressly so designated; 4) was established on or before the date of the order for relief in a separation agreement, divorce decree, or property settlement, order of a court of record, or determination made in accordance with applicable nonbankruptcy law by a governmental unit; and 5) has not been assigned to a non-governmental entity, except an assignment for purposes of collecting the debt. See 11 U.S.C.A. 522(c)(1) and definition of domestic support obligation in 11 U.S.C.A. 101(14A) (2006) v1 4 Page 108 of 213

109 (a) (b) In re Davis, 170 F.3d 475, 479 (5th Cir. 1999) (Old 522(c)(1) was not an execution statute and did not preempt applicable state law that governs the rights of such domestic support creditors to execute on property. In other words, 522(c) sought to leave exempt property exposed to postbankruptcy liability only to the extent it would have been exposed if the bankruptcy had not occurred. ). In re Cunningham, 2006 WL , *10 (D. Mass. 2006) (Court concluded that post-petition conduct including the voluntary sale of homesteaded property and the consequent conversion into proceeds that may not be exempt under state law cannot remove previously exempted property from the protections of 522(c). ). (2) Second, valid liens that may not be avoided under the trustee s powers and certain tax liens on exempt property are not affected by the bankruptcy. See 11 U.S.C.A. 522(c)(2), as amended by the 1984 Amendments. (3) A third exception was added in 1990 relating to the enforcement of certain nondischargeable debts owed to a federal depository institutions regulatory agency acting as a conservator, receiver, or liquidating agent. See 11 U.S.C.A. 522(c)(3), added by the Crime Control Act of 1990, Pub. L. No (4) The fourth exception is a debt in connection with fraud in obtaining or providing any scholarship, grant, loan, tuition, discount, award, or other financial assistance for the purposes of financing an education at an institution of higher education. 11 U.S.C.A. 522(c)(4). D. Limitations on the Homestead Exemption Congress added three new provisions to the Bankruptcy Code: new 522 (o), (p) and (q). Each of these three new provisions caps the homestead exemption in certain cases. All three were effective on the date of enactment of BAPCPA, April 20, Pub. L. No (b)(12), 133 Stat. 23, 216 (2005). (1) Section 522(o) New 522(o) reduces the debtor s right to claim an exemption under subsection (b)(3)(b) on an interest in real or personal property the debtor or a dependent uses as a residence, a cooperative that owns property that the debtor or a dependent uses as a residence, a burial plot, or real personal property the debtor or a dependent claims as a homestead to the extent that the value is attributable to otherwise nonexempt property the debtor disposed of in the ten years prior to the filing of the bankruptcy if the disposition was with the intent to hinder, delay, or defraud a creditor. This exception is designed to put the brakes on pre-bankruptcy v1 5 Page 109 of 213

110 planning activity by debtors who were in financial trouble and converted most of their nonexempt assets into cash and invested it in large homes or paid down large mortgages. Courts previously dealt with such activity by treating the action as constituting fraudulent activity sufficient to deny a discharge. This new amendment just gives the trustee one more route to recover the property. (a) (b) (c) (d) In re Maronde, 332 B.R. 593 (Bankr. D. Minn. 2005) (Debtor engaged in a scheme to defraud his creditors by using his (at the time) good credit to obtain a number of credit cards and use the cash advances, in the form of balance transfers, from those cards to pay off his equity credit line. He then intended to liquidate his truck and trailer to raise cash that he could offer to settle with his new creditors for less than he owed. When the credit card companies refused to take less than the full amount owed, he resorted to Plan B by selling his nonexempt assets (his truck and trailer) to pay down additional debt on his home.). In re Lacounte, 342 B.R. 809 (Bankr. D. Mont. 2005) (homestead exemption had to be reduced based on debtors deliberate pre-bankruptcy planning in selling nonexempt assets and using sales proceeds to pay down their home mortgage by $42,500). In re Agnew, 2006 WL , *6 (Bankr. D. Kan. 2006) (Exemption allowed where assets transferred were partially exempt and fulfilled a legitimate estate planning purpose which the debtor had discussed with his mother long before bankruptcy was a possibility. The transfer fulfilled a purpose other than bankruptcy planning and there was no evidence that the assets had values other than those assigned by the parties to the exchange.). In re Lyons, 2006 WL , *2 (Bankr. D. Mass. 2006) (recording a homestead declaration, which is essentially taking advantage of an exemption available under state law, is not analogous to these types of transfers and is not within the meaning of 522(o)). (e) In re Anderson, 386 B.R. 315 (Bankr. D. Kan. 2008). Objection to Homestead Exemption under Section 522(o) Denied Three months before his bankruptcy filing, debtor paid down the mortgage on his homestead by $240,000 using non-exempt assets. A lawsuit was pending against him at the time of the payment. The trustee objected under 522(o). The court found numerous badges of fraud present and determined that the transfer benefited his family to the detriment of his creditors. When debtor was pressed for a reason why he paid down his mortgage instead of his creditors, he responded, I don t know. Nevertheless, finding the situation to be a close case, the court denied v1 6 Page 110 of 213

111 the objection. Judge Nugent pointed out that there was no firm evidence that the $240,000 transfer rendered debtor insolvent. He also noted that debtor did not conceal the funds he used to pay down his homestead loan or fail to disclose the pre-payment. He also noted that debtor received reasonably equivalent value for the transfer in the form of a dollar-fordollar reduction of the mortgage debt encumbering his home. The court concluded that the debtor here did nothing more than take advantage of an exemption to which he is entitled. While his actions were intentional, the Court cannot find that they were done with the intent to hinder, delay, or defraud. (Author s Comment: This case actually presents classic facts for denial of the homestead exemption under 522(o). Whenever a mortgage is paid down there is an equivalent reduction of the mortgage debt. That should not even be a consideration. The presence of some of the most obvious badges of fraud should have been sufficient.) (f) In re Stanton, 457 B.R. 80 (Bankr. D. Nev. 2011). Debtor's Exemption Planning Unwound under Section 522(o) Judge Markell begins his opinion with the following: "All siblings fight. Rich siblings fight interminably." He then sets forth that debtor's sister obtained a state court judgment for $525,000 for, among other things, fraud and breach of fiduciary duty plus another judgment for approximately $518,000 representing attorney fees and costs incurred in obtaining the first judgment. The Colorado trial court had found that the debtor "lives in a different reality and has little capacity to perceive the actual reality." Debtor had liquidated over $400,000 in real estate and other investments within months of the entry of her sister's judgment, and then distributed the proceeds to family creditors and immediate family (other than her sister). This was done in a hurried fashion to put assets beyond the reach of creditors. The court determined to reduce the value of her allowed homestead exemption pursuant to 522(o). Judge Markell traced the history of the code section noting that it utilized the historic language of fraudulent conveyances first drafted over 400 years ago under the Statute of 13 Elizabeth and that badges of fraud were relied upon to show the intent to hinder, delay, or defraud. He explained that a "badge of fraud" was a fact which made a transaction suspicious, thus calling for an explanation, and then outlined the 11 most commonly relied upon badges of fraud set forth in 4(a) of the Uniform Fraudulent Transfer Act. He described debtor's actions as hoary badges of fraud, engaged in by debtors from time immemorial. The court rejected debtor's uncorroborated testimony that she relied on the advice of others in making the transfers or that she was just taking reasonable actions in light of the economic climate of late Accordingly, her sister's motion was granted and the exemption limited v1 7 Page 111 of 213

112 (g) In re Roberts, 527 B.R. 461, (Bankr. N.D.Fla. 2015) (Specie, J.) (2) Section 522(p) Debtors Homestead Exemption Reduced by the Amount of Non-exempt Assets Liquidated to Build their Dream Home The Debtors had substantial non-exempt assets that they liquidated in order to build their dream home. At the same time, they were negotiating a short sale of their existing home on the basis of their financial hardship, and had defaulted on another obligation that they could have easily made the monthly payments on. Essentially, after moving into their dream home, their largest creditor obtained a judgment against them for over $1 million. The trustee investigated the source of funds for construction of the dream home and objected to the homestead exemption under 522(o). That provision requires a debtors homestead exemption to be reduced to the extent that debtors converted non-exempt assets into the claimed homestead within ten years before the bankruptcy filing if shown that they did so by a preponderance of the evidence with the intent to hinder, delay or defraud a creditor. The court undertook a badges of fraud analysis, recognizing that debtors seldom admit to hindering, delaying or defrauding a creditor. The court looked to the non-disclosures and misleading information provided to debtors two largest creditors and the fact that they liquidated all of their non-exempt assets to put into the construction of the dream home. The court noted that debtors defaulted on renewed loans shortly after renewing them while they were actively transferring all of their assets into the new homestead. The court also found that the debtors testimony was evasive and, at times, purposely obtuse. Finally, the court noted that a confluence of badges of fraud can constitute conclusive evidence of an actual intent to defraud, which is what the court determined. Accordingly, debtors homestead exemption was reduced under 522(o) by $394, New 522(p) caps the exemption regardless of debtor s so-called bad acts. It provides that as a result of electing under subsection (b)(3)(a) to exempt property under State or local law, the debtor cannot exempt any amount in excess of $155,675 of the interest that was acquired in real or personal property the debtor or a dependent uses as a residence, a cooperative that owns property that the debtor or a dependent uses as a residence, a burial plot, or real personal property the debtor or a dependent claims as a homestead if that interest was acquired within 1,215 days of the filing of the petition. The cap does not apply to state exemptions claimed by a family farmer as a principal residence, and it does not apply where the interest was transferred from a debtor s principal residence acquired prior to the 1,215-day time frame if the debtor s previous and current residences are located in the same state. At the same time, there is a new definition of debtor s principal residence, 11 U.S.C.A. 101(13A) provides that v1 8 Page 112 of 213

113 debtor s principal residence means a residential structure, including incidental property, without regard to whether that structure is attached to real property. There is also a new definition of incidental property, which, with respect to the debtor s principal residence, means property commonly conveyed with a principal residence in the area where the property is located; all easements and other intangible rights, such as, oil and gas rights or profits; and all replacement or additions. 11 U.S.C.A. 101(27B). This new limitation on exemptions was designed to halt a perceived abuse by debtors in financial trouble who move to high homestead exemption states and reestablish residency there. See In re Hodes, 402 F.3d 1005 (10th Cir. 2005) (discussing Kansas expansive homestead exemption.) However, it applies across the board to all debtors and may apply quite inequitably to debtors who have no purpose in moving other than their normal drift from place to place in life. (a) (b) (c) (d) (e) In re McNabb, 326 B.R. 785 (Bankr. D. Ariz. 2005). Bankruptcy court has held that this new limitation applies only in states which have not opted out of the federal system, of which there are few. McNabb was soundly rejected by and criticized as overly technical and not in conformance with congressional intent. See In re Kane, 336 B.R. 477 (Bankr. D. Nev. 2006); In re Landahl, 338 B.R. 920 (Bankr. M.D. Fla. 2006); In re Buonopane, 344 B.R. 675 (Bankr. M.D. Fla. 2006); In re Summers, 344 B.R. 108 (Bankr. D. Ariz. 2006). In Summers, 344 B.R. 108 (Bankr. D. Ariz. 2006), the bankruptcy court held that 522(p)(2) allowed the debtor to protect equity that she had transferred from a previous homestead without any cap other than the one provided by state law. In re Sainlar, 344 B.R. 669 (Bankr. M.D. Fla. 2006) (The bankruptcy court held that the $125,000 exemption cap applies only to real property purchased or otherwise acquired by a debtor within 1,215 days of the petition date, not the increase in equity that occurred during that time period.). See also, In re Kaplan, 331 B.R. 483 (Bankr. S.D. Fla. 2005); In re Virissimo, 332 B.R. 201 (Bankr. D. Nev. 2005); In re Wayrynen, 332 B.R. 479 (Bankr. S.D. Fla. 2005) (all of which held that 522(p)(2) applies in their respective states). For an end runaround, See In re Scwartz, 362 B.R. 532 (Bankr. S.D. Fla and In re Buonopane, 359 B.R. 346 (Bankr. D. Fla. 2007) where the full exemption was allowed to a new resident as entireties proper under state law pursuant to 522(b)(3)(B). (3) Section 522(q) v1 9 Page 113 of 213

114 New 522 (q), the so-called Ken Lay provision, provides that as a result of electing under (b)(3)(a) to exempt any amount of an interest in the same four types of property, the debtor may not exempt more than $25,000 in value if the debtor has been convicted of a felony, which demonstrates that the filing of the case was an abuse of the provisions of the Code, or if the debtor owes a debt arising from a violation of federal or state securities laws or regulations, fraud, deceit or manipulation in a fiduciary capacity or in connection with the purchase or sale of securities registered under federal law; civil remedies under 1964 of title 18 (RICO); or any criminal act, intentional tort, or willful or reckless misconduct that caused serious physical injury or death to another individual in the preceding 5 years. However, 522(q) does not apply to the extent the interest in the property is reasonably necessary for the support of the debtor or a dependent of the debtor. (a) (b) In re Larson, 340 B.R. 444 (Bankr. D. Mass. 2006), held that the terms criminal act, intentional tort or willful or reckless misconduct that causes serious physical injury or death to another individual in the preceding 5 years includes negligent vehicular homicide. In re Jacobs, 342 B.R. 114 (Bankr. D.D.C. 2006). One of the few cases discussing new 727(a)(12) summarized the statute as follows: (1) the debtor must be subject to 522(q)(1) (i.e., has elected to exempt property under state or local law rather than under the federal exemptions contained in 522(d)) and (2) the debtor has (a) been convicted of a type of felony that suggests that her bankruptcy filing is abusive; (b) violated certain federal securities laws; or (c) engaged in criminal, intentional, or reckless misconduct leading to the serious physical injury or death of another person in the previous five years. The court held that since the debtor in the case elected to use the federal exemptions provided by 522(d) rather than the applicable state or local exemptions, she was not subject to 522(q)(1) and, by extension, 727(a)(12). III. PROCEDURE FOR OBJECTING TO EXEMPTIONS, AMENDMENTS TO EXEMPTIONS, AND APPRECIATION ISSUES A. Schwab v. Reilly, 130 S.Ct (2010) Supreme Court reverses Circuit Court s In-kind Exemption Holding The debtor in this case had valued her kitchen equipment at $10,718 and claimed an exemption in that same dollar amount (i.e., claimed an in-kind exemption). The trustee did not object within the 30-day period allowed by Rule 4003(b). When the trustee sought to sell the equipment, the debtor objected to his motion claiming that the asset had been removed from the estate through an exemption, the deadline to object to which had already expired. The Bankruptcy Court, District Court, and Circuit Court all ruled in favor of the debtor. The Supreme Court reversed, agreeing with the trustee (and the United States and National Association of v1 10 Page 114 of 213

115 Bankruptcy Trustees as amici curiae) that the Bankruptcy Code defines the property the debtor is authorized to exempt as an interest, the value of which may not exceed a certain dollar amount in a particular type of asset, not as the asset itself. Accordingly, the trustee had no duty to object to an exemption within the limits the Code allowed. The Supreme Court determined that the Third Circuit erred in holding that the Supreme Court s earlier decision in Taylor v. Freeland & Kronz, 503 U.S. 638 (1992), dictated a contrary conclusion. While Taylor, likewise concerned a trustee s obligation to object to the debtor s entry of a value claimed as exempt, there was no colorable basis for claiming the exemption. In Schwab v. Reilly, the opposite was true as the amounts listed by the debtor as the value of the claimed exemptions were facially within the limits prescribed by the Code and raised no warning flags that warranted an objection. Taylor did not rest on an unstated premise that a debtor who exempts the entire reported value of an asset is claiming the full amount, whatever it turns out to be. Instead, Taylor stood for the straightforward proposition that an interested party must object to a claimed exemption if the amount the debtor lists as the value claimed exempt is not within statutory limits. The Supreme Court concluded that the debtor s approach threatens to convert a fresh start into a free pass. The Supreme Court s ruling effectively overturns In re Green, 31 F.3d 1098 (11 th Cir. 1994) where the Eleventh Circuit also interpreted Taylor to mean that an in-kind exemption was an indication of a claim that the asset was being fully exempted regardless of its actual value, thereby requiring an objection to the exemption claimed. B. Appreciation 1. Trustees entitled to Sell Homes Based on Post-petition Appreciation In the two consolidated cases, individual debtors had filed Chapter 7 petitions in 2003 and 2004 respectively and obtained their discharge later in the same year. In each case, there was disclosed equity in the homes that did not exceed the lawful exemption amounts. Debtors had, in fact, listed the dollar amount of equity in each case as exempt. In neither case did the trustee file an objection to the claimed exemption. Because of other assets in the cases, the estates remained open. The trustees believed that while the cases remained open, the homes had appreciated in value significantly. In one case, the trustee sought to employ a broker to sell the home and was met with a motion by the debtor to compel abandonment. The bankruptcy court ruled in favor of the trustee, and the district court affirmed. Debtor then appealed to the Ninth Circuit. In the other case, due to payment defaults, the lender had filed a stay relief motion that the trustee opposed on the basis of the equity. The bankruptcy court ruled against the trustee on the basis of the failure to object to the exemption. The Ninth Circuit BAP reversed and held that the appreciation in the homestead belonged to the estate. That decision was also appealed to the Ninth Circuit. The Ninth Circuit affirmed both the district court and BAP opinions, holding that the increase in value belonged to the bankruptcy estates in each of the cases. In re Gebhart, 621 F.3d 1206 (9 th Cir. 2010). In light of Schwab v. Reilly, 130 S.Ct (2010), it was clear to the Ninth Circuit that the trustee had no obligation to object to the exemptions claimed in each case even though the value of the claimed exemptions plus the amount of the encumbrances was, in each case, equal to the market value of the residences. The failure to object did not remove the entire asset from the estate. The Ninth Circuit noted that in Reilly, the debtor had undervalued the asset where as in these cases they were accurately valued. Nevertheless, any additional value in the v1 11 Page 115 of 213

116 property remained property of the estate regardless of whether the property increased in value after the filing. Moreover, the Circuit Court held that what is frozen as of the date of the filing of a petition is the value of the debtor s exemption, not the fair market value of the property claimed as exempt. Finally, the Circuit Court acknowledged that, in some instances, trustees might be inclined to leave the case open longer than necessary. However, the remedy was to seek an abandonment under 554(b) or hold the U.S. Trustee to its oversight obligations. Denying creditors assets that had not been exempted was not an available remedy. [Author s Comment: Based on this holding, certainly trustees in the Ninth Circuit will be tempted to keep open cases during rising real estate markets, and debtors will be tempted to move quickly for abandonment under 554(b).] 2. Post-petition Appreciation Belongs to the Estate Debtor scheduled a one-eighth interest in vacant land that is subject to an oil and gas lease, along with a one-fourth interest in royalties from the lease. No wells had ever been drilled on the land and no royalties were due. Debtor claimed an exemption of $4,250 in the land interest and $1.00 in the royalty interest, which were equal to the scheduled values of these assets, utilizing his federal wild card exemption. After no party timely objected to the exemptions, trustee moved to close the case but to except debtor's royalty interest from abandonment in order to preserve the trustee's ability to recover for the benefit of the estate any potential future royalties resulting from a productive well. Debtor agreed to close the case but objected to the trustee's motion to except the royalty interest from abandonment. The bankruptcy court ruled in favor of the trustee, allowing the royalty interest to be excepted from abandonment and holding the trustee was entitled to pursue any future increase in value of the royalty above the amount of the interest listed as exempt. Debtor appealed, and the district court affirmed. Debtor then appealed to the Third Circuit Court of Appeals, which likewise affirmed. In re Orton, 687 F.3d 612 (3d Cir. 2012). The Circuit Court agreed with the trustee and lower courts that the wild card exemption preserved only a debtor's interest in an asset rather than the asset itself in that debtor had not unambiguously claimed as exempt a "full" or "100%" fair market value interest in the royalty interest, nor had debtor done anything else to put the trustee on notice of debtor's intent to exempt the entire royalty interest. The Third Circuit further noted that, even if debtor had claimed that the asset was wholly exempt, the Supreme Court in Schwab v. Reilly, 130 S.Ct (2010) had suggested that "it is far from obvious that the Code would 'entitle' [a debtor] to clear title in [an asset]." The Third Circuit also agreed that any potential appreciation in value above the exempted dollar amount would accrue to the bankruptcy estate, not the debtor. This was also the holding of the Ninth Circuit in In re Gebhart, 621 F.3d 1206 (9 th Cir. 2010). C. 100% FMV % of FMV Exemption Claim Rejected by 1 st Circuit BAP The Chapter 13 debtors claimed exemptions in both their residence and car as "100% of FMV," pursuant to 522(d). The Chapter 13 trustee objected on the grounds that it exceeded statutory limits and was an improper attempt to capture post-petition appreciation in both the v1 12 Page 116 of 213

117 residence and the car. The debtors countered that the phrase "100% of FMV" was merely a "phrase of art" authorized by the Supreme Court in Schwab v. Reilly, 130 S.Ct (2010), where the court stated near the end of the opinion that listing the exempt value as "full fair market value (FMV)" or "100% of FMV" would encourage the trustee to promptly object to the exemption if he wished to challenge it and preserve for the estate any value of the asset beyond relevant statutory limits. The bankruptcy court ultimately sustained the objection and ordered the debtors' exemptions limited to specific dollar amounts. It further held that to the extent any appreciation in the exempted assets exceeded the maximum exemption amounts allowed, that appreciation would be property of the estate potentially available for creditors. Debtors also pointed to proposed changes to Official Form C, which would allow a debtor to state the value of the claimed exemption as "the full fair market value of the exempted property." On appeal, the trustee maintained that the claimed exemptions were facially defective and ambiguous and would hinder the administration of the estate. The Bankruptcy Appellate Panel agreed. In re Massey, 465 B.R. 720 (1 st Cir. BAP). The BAP observed that the Supreme Court questioned the effectiveness of a "100% FMV" type of exemption, noting that (a) such an exemption would not likely pass title to the asset itself, (b) the majority of lower courts to have construed Schwab found such exemptions impermissible, and (c) no court had interpreted the Supreme Court's holding as "either unfettered authorization for debtors to exempt assets in-kind or as a mandate for courts to allow such exemptions." It cited with approval the opinion one month earlier from a Massachusetts bankruptcy court, In re Luckham, 464 B.R. 67 (Bankr. D. Mass. 2012), that was in line with the majority of courts in finding that the Supreme Court had not outlined a procedure by which an exemption claim could be legitimately converted into an exemption in-kind and that an evidentiary hearing on valuation was unnecessary because the basis of the objection was the manner in which the debtor had claimed it. The BAP further rejected "the argument that proposed changes to Official Form C support in-kind exemptions which exceed the statutory limits," noting that Schwab itself precluded such a form-based argument. Finally, the BAP rejected the debtor's policy argument that such a ruling would impair a debtor's "fresh start" referring to the statement in Schwab that the approach advocated by the debtors would "convert a fresh start into a free pass." [Author's Comment: On behalf of NABT, the author provided extensive testimony on February 10, 2012, making the same points in opposition to the proposed amendment to Official Form C that this Court makes just three weeks later. The testimony is available on the NABT website.] % FMV Exemption Claims Potentially Sanctionable A court in North Carolina consolidated seven Chapter 7 cases where debtors' counsel inserted the following prefatory paragraph in Schedule C-1, "Undersigned debtors are claiming and intend to claim 100% of Debtors' interest in 100% fair market value of each and every item listed, irrespective of the actual value claimed as exempt." The trustee timely objected to the exemptions. Debtors then amended to remove the 100% language and substituted a longer notice that included the language: "If the 'internal net value' of an asset listed below is equal to or less than the amount of the exemption claimed and if that value is less than the maximum amount of v1 13 Page 117 of 213

118 the exemption allowance under applicable law, the debtor exempts the asset from the estate and his entire interest in the asset from the estate." Thus, by inserting this provision, debtors were attempting to exempt their entire interest in every item listed in Schedule C-1 whenever the "netvalue" was less than the allowable exemption, irrespective of the item's actual fair market value. Debtors maintained that under Schwab v. Reilly, 130 S. Ct (2010), they were authorized to claim the full value of an item as exempt, which the notice provision was intended to indicate. The court disagreed and sustained the trustee's objections. In re Gregory, et al., 487 B.R. 444 (Bankr. E.D.N.C. 2013). Judge Leonard analyzed Schwab and its progeny and found the extensive body of case law that had developed as almost entirely uniform in rejecting designations such as "100% of the FMV," "100% equity," or comparable language. It found such language also violated the language of the General Statutes of North Carolina and concluded that if counsel persisted in "further use of this language, the court will not hesitate to utilize its sua sponte powers under Federal Rule of Bankruptcy Procedure 9011 to require counsel to demonstrate a colorable basis for its inclusion to avoid sanctions." D. Additional Cases (1) In re Green, 31 F.3d 1098 (11th Cir. 1994), on the question of the 30-day time limit to object to claims of exemption. In Green, the debtor listed a lawsuit at a value of one dollar, but the parties agreed that its value was contingent, not that it had an actual present value of one dollar. The parties also agreed that the debtor exempted the lawsuit for its entire reported value of one dollar, and that the trustee did not object to that exemption claim. In allowing the exemption, the Eleventh Circuit held that the trustee may not wait until the value of a contingent claim is established before deciding whether to object; instead, he must object within the period allowed by Bankruptcy rule This case is likely abrogated by Schwab v. Reilly. (2) In re Wick, 276 F.3d 412 (8th Cir. 2002). In Wick, the court held that an asset listed as unknown in value may be exempted only to the amount of a statutory exemption amount when the trustee and the debtor were aware that the asset had a value and that the amount claimed under 522(d)(5) was limited to a dollar amount. In other words, a claim to an asset valued as unknown was construed to mean a claim to exemption to no more than the dollar amount allowed by the applicable exemption statute. C. RESTRICTIVE V. NON-RESTRICTIVE RULES 1. Amended Exemptions Starts New Objection Period Only as to the Exemption Amended or Added Debtors claimed as exempt three annuities. No objection was filed by the deadline of 30 days from the conclusion of the meeting of creditors as set forth in Rule 4003(b). Thereafter, debtors filed an amendment to Schedule C to add additional property as exempt, but made no changes to the description of the annuities. Within 30 days of that amendment, the creditor objected to the exemption of the annuities. The court denied the objection as untimely. In re v1 14 Page 118 of 213

119 Walker, 505 B.R. 217 (Bankr. E.D. Tenn. 2014)(Rucker, J.). The court acknowledged that the Rule plainly states that an objection may timely be filed "within 30 days after any amendment to the list or supplemental schedules is filed." It also recognized recent cases applying that plain meaning, see, e.g., In re Woerner, 483 B.R. 106 (Bankr. W.D. Tex. 2012); and In re Larsen, 2013 WL , 2013 Bankr. LEXIS 953 (Bankr. D.N.D. 2013). However, the court believed that the better reasoned view was that provided by the "restrictive rule" which provides that the filing of an amendment to the list of exemptions does not reopen the time to object to claims of exemptions not affected by the amendment. The court believed the most important principal was to achieve finality and allow debtors to know that certain assets were no longer property of the estate. [Author's Comment: The court misunderstands that trustees reassess the case and the exemption scheme every time an amendment is filed. Even where exemptions are improperly claimed, a trustee might not object because there is insufficient value to administer on behalf of the bankruptcy estate even if corrected. However, if later amendments add additional assets, then those earlier assets that were over exempted or wrongly exempted become viable in the administrative of the estate in order to make a meaningful distribution to creditors. Perhaps if the objecting party was the trustee who could have explained this principle, the court might have reached a different result. 2. Objection to Amended Exemptions Not Limited to the Amended Items Debtor's Chapter 11 case was converted to Chapter 7. After filing his original schedules, debtor amended them five times. The omission of several items of value that appeared on subsequent amended schedules was, in part, the basis for conversion to Chapter 7. After the final amendments were filed, a creditor objected on the 30 th day thereafter, asserting that the objection was timely under Rule 4003(b). The debtor, however, asserted that the deadline had long passed on items not previously objected to that had not been amended. The court ruled that the creditor's objection was timely. In re Woerner, 483 B.R. 106 (Bankr. W.D. Tex. 2012). Judge Gargotta noted a split of authority between the "restrictive rule," wherein a party in interest has 30 days to object only to changes made by the amendment and not to claims that are unaffected by an amendment, and the "non-restrictive rule" under which a party in interest may object to any claimed exemption within 30 days of an amendment to the schedules. The court observed that the 7 th and 9 th Circuit Courts of Appeals and 8 th Circuit BAP had all followed the "restrictive rule," but with very limited analysis, grounding their respective holdings on the need for prompt action and finality. These arguments were found by Judge Gargotta to be "not convincing." He determined that the plain reading of Rule 4003, which does not limit the scope of the objection, and the interdependence of exemption schemes supported adoption of the "non-restrictive rule". The court concluded that a trustee or other party-in-interest should be allowed to reassess a debtor's use of an exemption scheme upon the filing of any amendment that changes that use, particularly since it would not be prejudicial to the debtor whose prerogative it is to file accurate schedules or amendments thereto. See also, In re Larsen, 2013 WL , 2013 Bankr. LEXIS 953 (Bankr. D.N.D. 2013). [Author's Comment: The "non-restrictive rule could also be referred to as the "common sense approach." Every time a piece of a case is changed the trustee reassesses the whole.] v1 15 Page 119 of 213

120 3. Grounds for Objecting to Exemptions Not Asserted Before the 30-day Deadline are Waived Debtors filed Chapter 13 bankruptcy in 2008, shortly after losing their home in foreclosure proceedings. The case was later converted to Chapter 7. At no point during the bankruptcy proceedings did debtors list any legal claims relating to the foreclosure sale. But after receiving their discharge and case closing, debtors filed successive wrongful foreclosure actions in state court without reopening the bankruptcy case to report the claims. Only some four and one-half years later did trustee learn of the claims and have the case reopened. Debtors then amended their schedules to report the claims to be worth $3 million and claimed wild-card exemptions of $5,300 each. The trustee objected essentially on bad faith and inequitable conduct. In the meantime, trustee negotiated a settlement, approved by the bankruptcy court, of the wrongful foreclosure claims worth between $32,000 and $34,000. The bankruptcy court overruled the trustee's objections in reliance on Law v. Siegel, 134 S.Ct (2014). Trustee had made an alternative argument at the hearing that debtors were time-barred from claiming exemptions under Rule 1009 which only allowed amendments "before the case is closed." The bankruptcy court held that argument to have been waived because it was not asserted until the hearing. Trustee appealed, but the district court and circuit courts affirmed, In re Baker, 514 B.R. 860 (E.D. Mich. 2014), Ellman v. Baker, 2015 WL (6 th Cir. July 2, 2015). The courts agreed that even the dicta from Law v. Siegel was applicable to bar trustee's initial objection claims. The 6 th Circuit cited A.C.L.U. v. McCreary Cty., Ky. 607 F.3d 439, (6 th Cir. 2010) for the proposition that lower courts are obligated to follow Supreme Court dicta, particularly where there is not substantial reason for disregarding it, such as age or subsequent statements undermining its rationale. The courts also agreed that the Rule 1009 argument was waived, holding that legal theories could not be changed after the deadline for filing objections had passed and that Trustee had not objected on that basis until the hearing. [Author's Comment: Rule 4003(b) requires an objection within 30 days of the conclusion of the meeting of creditors or an amendment to the schedules, whichever is later, but does not require that the grounds for such an objection be stated in that time period. Rule 4003(b)(2) concerning fraudulently claimed exemptions was not discussed because it went into effect after the petition date.] D. Cases on Burden of Proof and the Standard of Proof (1) Tignor v. Parkinson, 729 F.2d 977, 979 (4th Cir. 1984) (party objecting to the amendment has the burden of demonstrating that exceptional circumstances, i.e., prejudice or bad faith warranting denial of the opportunity to amend). (2) In re Arnold, 252 B.R. 778, 784 n.10 (B.A.P. 9th Cir. 2000) (it is not entirely clear whether bad faith or prejudice must be shown by a preponderance of the evidence or by clear and convincing evidence). (3) But see, In re Yonikus, 996 F.2d 866, 872 (7th Cir. 1993); In re Magallanes, 96 B.R. 253, 256 (B.A.P. 9th Cir. 1988); In re Brown, 56 B.R. 954, 958 (Bankr. E.D. Mich. 1986) (holding that the party objecting to exemption on basis of bad faith or prejudice inuring to the trustee or creditors must prove it by a sufficiently clear v1 16 Page 120 of 213

121 showing). The continued vitality of these cases is suspect in view of the dicta in Law v. Siegal, 134 D.Ct (2014). (4) In re Salvucci, 339 B.R. 279, (Bankr. D. Mass. 2006). In Salvucci, the court denied the debtors exemption to proceeds from the sale of their exempt homestead not disclosed on their bankruptcy schedule even though they were later disclosed at a continued 341 meeting. The court stated that [g]enerally, if a debtor intentionally conceals or fails to disclose estate property, the debtor will be barred from claiming such property as exempt, even if the property would have been exempt had it been properly scheduled and claimed.... Intent to conceal is a factual determination to be made by the bankruptcy court based upon the evidence presented and inferences drawn therefrom at trial.... Bad faith is generally determined from an examination of the relevant surrounding circumstances. Again Law v. Siegal dicta may nullify this case except under Rule 4003(b)(3). E. The Deadline Established in Rule 4003(b) is Not Jurisdictional There was a clear split among the Circuits over the issue of whether the deadlines in the Federal Rules of Bankruptcy Procedure regarding objections to exemptions and objections to discharge or dischargeability are jurisdictional. This split was resolved by the Supreme Court s decision in Kontrick. In Kontrick. the Court noted that courts, including the Supreme Court, have been less than meticulous at times using the term jurisdictional to describe emphatic time prescriptions in rules of court. It cited Taylor v. Freeland & Kronz, 503 U.S. 638 (1992) as a specific example where the Supreme Court referred to Fed. R. Bankr. P. 4003(b) as jurisdictional. The Court in Taylor held that a Chapter 7 trustee could not contest the validity of claimed exemption after 30-day period for objecting had expired and no extension had been obtained, even though debtor had no colorable basis for claiming exemption. But, the Court said, [C]lassify[ing] time prescriptions, even rigid ones, under the heading subject matter jurisdiction can be confounding. (1) Not Jurisdictional - Waivable In re Kontrick, 295 F.3d 724, (7th Cir. 2002), aff d, Kontrick v. Ryan, 540 U.S. 443 (2004). The Seventh Circuit held that a debtor could waive his objection to an untimely filed objection to dischargeability if the debtor s objection was not timely brought. In distinguishing Taylor, the Seventh Circuit stated that the Supreme Court did not hold, however, that the debtor had an unlimited time in which to object to the trustee s untimely objection or that Rule 4003(b) was not subject to the usual equitable doctrines that apply to other deadlines and statutes of limitations. Kontrick, 295 F.3d at 733 n.4. The court concluded that the Supreme Court s decision in Taylor was not dispositive and held that the timeliness provisions are not jurisdictional. Id. The Supreme Court, in affirming the Seventh Circuit, held that no reasonable construction of complaint-processing v1 17 Page 121 of 213

122 rules would allow a litigant situated as debtor to defeat a claim, as filed too late, after the party has litigated and lost the case on the merits. (2) Cases Finding the Rules Jurisdictional are now Abrogated (a) In re Woods, 260 B.R. 41, 43 (Bankr. N.D. Fla. 2001). [T]he deadlines provided for in the rules are to be interpreted strictly, and in a manner consistent with the Code s policies... favor[ing the] fresh start for the debtor, and [the] prompt administration of the case. (citing Taylor v. Freeland & Kronz, 503 U.S. 638, (1992)). (b) In re Tucker, 263 B.R. 632, 637 (Bankr. M.D. Fla. 2001). Absent extraordinary circumstances, the provisions of Rule 4007(c) are jurisdictional and non-waivable. D. Use of Equitable Powers to Allow Informal Objection Disallowed (1) In re Canino, 185 B.R. 584, 594 (B.A.P. 9th Cir. 1995). The court held that to the extent the bankruptcy court used its powers under 105(a) to carve out an informal or de facto exception to the plain requirements of 522(l) and Fed. R. Bankr. P. 4003, it abused its discretion. IV. OVERVIEW: EQUITABLE ATTACKS ON EXEMPTIONS A. Background An integral part of the debtor s fresh start contemplated by the Bankruptcy Code is the ability to shield certain property from creditor claims. 4 Collier on Bankruptcy, (15 ed. 2003). However, in the course of the administration of an estate, a Chapter 7 trustee may discover that the debtor has been less than candid with the court in its Statement of Financial Affairs and Schedules, which are executed under penalty of perjury. In some instances the debtor will fail to disclose assets and or present false testimony with respect to the same. Upon the discovery of unscheduled assets, the debtor might amend the schedules to disclose the asset and thereafter attempt to utilize section 522(l) of the Bankruptcy Code to exempt all or part of its value. The trustee has several options if he or she decides that the debtor has proceeded in bad faith and demonstrated a lack of honesty and good faith concerning her assets and candor towards the bankruptcy court and process. One obvious alternative is an objection to the claimed exemption(s). Pursuant to Rule 4003(b) of the Federal Rules of Bankruptcy Procedure, a party in interest must file an objection the later of 30 days after the meeting of creditors is concluded or within v1 18 Page 122 of 213

123 days after any amendment regarding exemptions. This deadline is critical because pursuant to section 522(l) of the Bankruptcy Code, unless there is an objection the property claimed as exempt will be exempted. The deadlines are applicable even if the debtor has no colorable basis for claiming the exemption. Taylor v. Freeland & Kronz, 503 U.S. 638 (1992). The debtor in Taylor listed the value of a lawsuit as having unknown value and claimed an exemption of the same for an unknown amount. Subsequent, the lawsuit settled for $110,000 which far exceeded the relevant exemption limit. The Supreme Court held that since there was no timely objection to the claimed exemption, the debtor was entitled to the entire settlement. The Supreme Court also noted that bad faith is not an issue, absent a timely objection. B. Equitable Remedies Alternatively, trustees have been permitted to seek an equitable remedies in these situations. The principal source of the court s equitable power is section 105(a) of the Bankruptcy Code. Section 105 allows a court to issue any order,...that is necessary or appropriate to carry out the provisions of this title. Section 105(a) also authorizes the court to take any action...necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process. One remedy that can be sought under section 105(a) is a disallowance of the debtor s entire claimed exemption based on a claim of fraudulent concealment of an asset or related transfers. See e.g. In re Yonikus, 996 F. 2d 886 (7 th Cir. 1993); Sheehan v. Lincoln National Life, 257 B.R. 449 (Bankr. N.D. W. Va. 2001); and In re Park, 246 B.R. 837 (Bankr. E.D. Tex. 2000). But see dicta in Law v. Siegal followed by numerous courts that the court has no such authority to disallow an exemption for bad faith conduct. A second equitable attack trustee previously had utilized was to seek to surcharge or assert an equitable lien against certain assets. The cases that allowed a surcharge or equitable lien turned on very specific fact patterns. This remedy would approve to be overruled by the holding of Law v. Siegal. A sampling of these cases appear below. V. IMPOSING EQUITABLE LIENS A. Chauncey v. Dzikowski (In re Chauncy), 454 F.3d 1292 (11 th Cir. 2006) Prior to filing bankruptcy, the debtor directed settlement proceeds from a personal injury lawsuit be paid to her mortgage company to reduce the principal balance of the mortgage. The debtor testified that she knew the equity in her homestead would be protected from unsecured creditors, but denied an intent to deceive, defraud or hinder her creditors. The district court affirmed the bankruptcy court s order denying the debtor s discharge and imposing an equitable lien on debtor s homestead in favor of the Chapter 7 trustee. However, under Florida law, an equitable lien may be imposed on a debtor s homestead only if the funds used to purchase, invest in or improve the homestead were obtained fraudulently. Florida law does not recognize an exception to the homestead exemption where a debtor converts nonexempt assets into a homestead with specific intent to hinder, delay and defraud the debtor s creditors. The Eleventh Circuit concluded that Debtor s v1 19 Page 123 of 213

124 conduct did not meet the level of fraud or egregious behavior required by Florida law for imposing an equitable lien. The Court explained, [h]er decision to delay the filing of a bankruptcy petition until after she received the funds, while blatantly a move designed to deceive her creditors and one made in bad faith, does not rise to the level of fraud, nor does it constitute egregious behavior. The Court, however, upheld the bankruptcy court s denial of Debtor s discharge under sections 727(a)(2)(A) and 727(a)(3). B. Neilson v. Laing (In re Laing), 329 B.R. 761 (Bankr. M.D. Fla. 2005) The debtor was the third largest recipient of funds from an investment banking business that was being operated as a fraudulent Ponzi scheme. The investment bank filed bankruptcy in May In December 2001 the trustee filed an interim report identifying the debtor as a recipient of funds from the Ponzi scheme. In January 2002, in anticipation of a lawsuit against him by the trustee in the investment bank s case, the debtor obtained a Florida driver s license and post office box. In April 2002, the debtor purchased a condominium in Florida and declared a homestead exemption. During the period between May 1, 2002 and filing his bankruptcy petition, on February 25, 2004, the debtor spent 164 days in Florida. The trustee in the investment bank s case objected to the debtor s homestead exemption and, in the alternative, sought imposition of an equitable lien on the condominium. The bankruptcy court held that the debtor s motive in purchasing the homestead was irrelevant and the homestead was exempt, unless there was a showing that the transaction fell within the fraud exception under Florida law. The court concluded the debtor was not an active participant in the Ponzi scheme, but a mere recipient of funds greater than he had invested in the company. Additionally, the court concluded that the funds used to purchase the condominium were not funds received on account of the debtor s fraudulent conduct. Therefore, the court denied the trustee s motion for the imposition of an equitable lien. C. In re Hecker, 316 B.R. 375 (Bankr. S. D. Fla. 2004) The debtor made numerous fraudulent misrepresentations and omissions in connection with the sale of all the stock in a company in which debtor was the sole shareholder. The bankruptcy court determined that the debt created as a result of the sale was nondischargeable as a debt incurred through false pretenses, false representations or actual fraud. The bankruptcy court concluded that the proceeds from the sale were traceable to the funds used by debtor to purchase the homestead. The bankruptcy court granted the creditor an equitable lien on the debtor s homestead. D. In re Financial Federated Title and Trust, Inc., 347 F.3d 880 (11 th Cir. 2003) The Eleventh Circuit affirmed the order granting the Chapter 11 trustee an equitable lien and constructive trust on the homestead of the debtor s principal. The Court concluded that the defendant purchased his home with funds obtained fraudulently through a Ponzi v1 20 Page 124 of 213

125 scheme operated through the debtor. The Court held that Florida law provides an exception to the homestead exemption where funds obtained fraudulently were used to purchase, invest in or improve the homestead. E. Havoco of America, Ltd. v. Hill, 255 F.3d 1321 (11 th Cir. 2001) Following the Supreme Court of Florida s answer to its certified question regarding exceptions to the homestead exemption, the Eleventh Circuit affirmed the order that held that the transfer of nonexempt assets into an exempt homestead with the intent to hinder, delay or defraud creditors is not one of the exceptions to the homestead exemption under Florida law, and therefore the debtor was entitled to exempt his homestead even though it was purchased with non-exempt funds with the intent to hinder creditors. F. In re Coates, 242 B.R. 901 (Bankr. N. D. Tex. 2000) Prior to filing bankruptcy, the debtors used the proceeds from the sale of a note receivable to satisfy liens on their home and two vehicles. The debtors also made payments to the IRS, their accountant and a lawyer, which were not disclosed in the debtors statement of financial affairs. The statement of financial affairs also failed to disclose several assets, the transfer of the note, and transfers of property to the debtors accountant. The trustee objected to the debtors claims of exemption in their home and two vehicles. Based on the totality of the circumstances, the court concluded that the debtors sold the note and used the proceeds to pay the liens on their vehicles with intent to hinder and defraud creditors and granted the trustee liens on both vehicles. The court, however, held that a lien on the debtors homestead was not appropriate under Texas law, which provides an exception to the homestead exemption only where the debtors use the fruits of a fraud to satisfy the lien on their home. G. Smith v. Moody (In re Moody), 862 F.2d 1194 (5 th Cir. 1989) The trustee sought to avoid the alleged fraudulent transfer of the debtor s homestead and imposition of an equitable lien on the property. Following the award of a multimillion dollar jury verdict against him for securities fraud the debtor engaged in numerous sham real estate transactions in an effort to hide his assets from his creditors. The Fifth Circuit affirmed the district court s holding that, although the transfer was clearly fraudulent, the trustee was not entitled to an equitable lien on the property because under Texas law the protections of the homestead are absolute, and therefore, the exemption may be allowed in full regardless of a debtor s fraudulent intent. VI. SURCHARGING EXEMPTIONS - LAW v. SIEGAL 134 S.Ct (2014) v1 21 Page 125 of 213

126 A. No Surcharge of Exemptions per the U.S. Supreme Court In 2006, the trustee obtained from the bankruptcy court a surcharge of debtor's homestead exemption because of alleged fraudulent conduct. The Bankruptcy Appellate Panel for the Ninth Circuit reversed after determining that the trustee's intent was to punish the debtor for his litigation tactics. In 2008, trustee filed another surcharge motion alleging that the second mortgage on the residence was fictitious and fraudulent and intended to falsely show that the property had no equity beyond the legitimate exemption and mortgage encumbrances so the trustee would not proceed with any sale of that property. Debtor had scheduled the second mortgage for $156,929 in favor of Lily Lin of China. Debtor forged Lily Lin's name to the deed of trust and had recorded it. The bankruptcy court had ordered the debtor's entire $75,000 homestead exemption surcharged finding that the loan was fictitious and meant to preserve the debtor's equity in the residence beyond what he was entitled to exempt. In re Law, 401 B.R The debtor refused to cooperate and appealed so many decisions that over a dozen ended up at the appellate level running up the estate's costs to over $450,000 in legal fees as a direct result of debtor's misrepresentations. This time, the BAP affirmed in an unpublished opinion. See 2009 WL (9 th Cir. BAP 2009). The BAP not only affirmed the surcharge but also certain discovery sanctions that had been issued by the bankruptcy court. There was a concurrent opinion by Judge Markell in which he questioned the continuing viability of Latman v. Burdette, 366 F.3d 774 (9 th Cir. 2004), wherein the circuit court first enunciated the legitimacy of surcharging exemptions. His view was in part colored by a contrary view from the 10 th Circuit in In re Scrivner, 535 F.3d 1258 (10 th Cir. 2008), and also the adoption of Bankruptcy Rule 4003(b)(2) which addressed fraudulently asserted exemptions. However, after this BAP opinion, the First Circuit Court of Appeals in an opinion authored by Justice Souter also found the appropriateness of surcharging exemptions: "There could not be a clearer example of foiling abusive process than a surcharge order mitigating the effect of fraud in retaining non-exempt assets." Malley v. Agin, 693 F.3d 28 (1 st Cir. 2012). The Ninth Circuit affirmed the BAP opinion (in an unpublished opinion) "because the surcharge was calculated to compensate the estate for the actual monetary cost imposed by the debtor's misconduct, and was warranted to protect the integrity of the bankruptcy process." Thus, the Ninth and First Circuits supported the concept of surcharging exemptions and the Tenth Circuit did not, thereby creating a division in the Circuit Courts that the Supreme Court agreed to resolve. Stephen Law v. Alfred H. Siegel, Chapter 7 Trustee, 435 Fed. Appx. 697 (9 th Cir. 2011), cert. granted June 17, A unanimous Supreme Court reversed, Law v. Siegel, 134 S.St (U.S. March 4, 2014) concluding that neither 105(a) nor any inherent authority of the bankruptcy court, could contravene a specific provision of the Code, such as 522(k), which expressly prohibited the application of a debtor's exemption to the payment of any administrative expense (excepting certain inapplicable situations). Instead, the bankruptcy courts retain the ability to sanction debtor misconduct by denying the debtor's discharge, imposing sanctions pursuant to Rule 9011, and by imposing other appropriate sanctions under 105 and the court's inherent authority, but such authority could not contravene an express provision of the Bankruptcy Code. [Author's Comment: It is not clear that the outcome would have been different if the surcharge was designed to compensate creditors (as opposed to administrative expenses) for the losses suffered due to the misconduct of the debtor. Section 522(c) also precludes exempt property from being applied to pre-petition debts other than for taxes or domestic support. It is also unclear whether Rule 4003(b)(2) survives, which allows objections v1 22 Page 126 of 213

127 to exemptions as late as one year after the case is closed in situations where an exemption is fraudulently claimed. That Rule was adopted long after the Law case had been filed.] B. Debtor Allowed Exemption in Fraudulently Concealed Assets The Debtor in In re Mateer, 525 B.R. 559 (Bankr. D.Mass. 2015) (Hoffman, J.), initially filed a chapter 13 petition, claiming exempt his residence. He did not disclose anywhere that the home had been severely damaged by a storm and that he held outstanding insurance coverage claims against his insurer and mortgage lender nor did he at any time disclose these claims to the Chapter 13 trustee. Eventually, debtor was successful in recovering $126, on these claims. Nine months after the case was filed, it was converted to Chapter 7. The Chapter 7 trustee reviewed bank statements and noticed sizeable deposits. In response to the trustee s further inquiries, debtor finally disclosed the claims and recoveries. This prompted the trustee to file a motion to compel turnover of the recovered funds. Debtor in turn initiated an adversary proceeding seeking a declaratory judgment that the monies recovered were exempt property. It was undisputed that debtor had properly exempted any equity in his home. However, the analysis with respect to the recoveries on the insurance claims were more complicated. The court recognized that the debtor s failure to disclose could not be excused by the fact that the trustee was insufficiently clairvoyant to ask about an undisclosed matter. The court found that the debtor intentionally failed to disclose the existence of his insurance claim and cash payments received. However, the court recognized that the dicta in Law v. Siegal, 134 S.Ct (2014) was a problem for the trustee. It is noted by the court here, that after the Supreme Court concluded its decision on the question presented, it kept going, changing course and ending up on the subject of whether a bankruptcy court may disallow an exemption claim based on a debtor s fraudulent conduct, a question not before it. In U.S. v. Ledee, 772 F.3d 21, 29, n.10 (1 st Cir. 2014), the First Circuit recognized that the Supreme Court had held that bankruptcy courts do not have a general, equitable power... to deny exemptions based on a debtor s badfaith conduct. (emphasis added). The court here also recognized the holding in In re Franklin, 506 B.R. 765, 771 (Bankr. C.D.Ill. 2014) that the Supreme Court had disavowed the longstanding non-statutory basis for disallowing an exemption where a debtor fraudulently conceals an exempt asset, determining that courts do not have a general equitable power to deny exemptions based on a debtor s bad-faith conduct. Finally, the court concluded that even if Massachusetts state law had recognized a court s equitable power to deny homestead protection to a debtor engaged in fraudulent conduct with respect to the homestead property, binding authority in the First Circuit had held that such power was pre-empted by federal law. Patriot Portfolio, LLC v. Weinstein (In re Weinstein), 164 F.3d 677 (1 st Cir. 1999). Thus, the court held that dicta or not, the court was bound by it and the trustee s motion was denied and judgment for the debtor granted. [Author s Comment: This would have been an ideal case for the trustee to test the remaining applicability of Rule 4003(b)(2) for fraudulently claiming the exemption.] C. Exemptions Could Not be Denied on Bad Faith Grounds In In re Arellano, 517 B.R. 228 (Bankr.S.D.Cal. 2014) (Taylor, C.J.), Debtor filed with his Chapter 7 petition a fee waiver application that was granted by the court. However, at the meeting of creditors, Trustee determined that Debtor had an unscheduled bank balance of $4, and an anticipated tax refund of $2,000. Debtor proceeded to pay the filing fee in full notwithstanding the fee waiver order and to amend Schedules B and C to now list the omitted v1 23 Page 127 of 213

128 assets and claim them exempt. The Trustee objected to the newly claimed exemption of the omitted assets. Debtor opposed the objection. The court overruled the objection. First, the court recognized precedent from the Ninth Circuit had established that the bankruptcy court could deny leave to amend or disallow a claimed exemption if it was shown either that the Debtor had acted in bad faith or that creditors were prejudiced. The Court noted that the Ninth Circuit had followed the Eleventh Circuit decision of In re Doan, 672 F.2d 831 (11 th Cir. 1982), but it considered the holding abrogated by Law v. Siegel, 134 S.Ct (2014) because it found the reasoning to be irreconcilable by rebuffing the theory that the general equitable powers of the bankruptcy court could be used to deny a bad faith exemption claim. Instead, the court observed that a properly asserted exemption under 522 must be allowed unless controlling law provided for disallowance, regardless of whether the exemption was asserted at case initiation or a later point before case closure. Thus, the court concluded that the bankruptcy court s equitable powers are now an insufficient basis for exemption denial even if bad faith or prejudice exists. In Gray v. Warfield (In re Gray), 2014 Bankr. LEXIS 4974 (9 th Cir. BAP Dec. 9, 2014), debtors initial schedules did not list prepaid rent as an asset or claim. Only after the trustee demanded turnover did debtors amend the schedules to list the rent and claim it as exempt. The trustee s objection was sustained with the court finding debtors acted in bad faith and intentionally concealed the prepaid rent. The BAP reversed, explaining that although the discussion in Law on this point was non-binding dicta, it believes Law nevertheless mandates the conclusion that the bankruptcy court is without federal authority to disallow the Amended Exemption or to deny leave to amend exemptions based on Debtor s bad faith. See also In re Elliott, 523 B.R. 188 (9 th Cir. BAP Dec. 10, 2014)(state law and 522(g) remain possible avenues of objection). [Author s Comment: As the courts note, amendments to exemptions, may be freely filed under Rule 1009, but they fail to cite Rule 4003(b)(2) which allows the Trustee to object to an exemption fraudulently claimed by the Debtor. Most likely, the Rule was never raised by the trustees. While standing alone the failure to list either a future tax refund, prepaid rent or the actual bank balance may not rise to the level of fraud, the Arellano debtor additionally had sought a filing fee waiver, which would tend to indicate fraud since sufficient funds existed to pay the filing fee in full (not just in installments). Finally, bankruptcy courts like all federal courts have specific equitable powers such as imposing judicial estoppel that is likewise absent from either Court s discussion.] D. Late Amendment to Exemptions Permitted Over Trustee s Objection When Debtor filed her petition, she asserted an exemption claim in an unknown amount for a workers compensation claim under a category that limited exemptions to around $10,000. About 16 months later, the claim was settled for $25,000. Approximately one week later, Debtor amended exemptions to claim under two additional categories thereby fully exempting the settlement. The Trustee objected based on the late date of the amendment, and the bankruptcy court sustained the objection. The circuit court reversed on the basis that there was no bad faith or fraudulent concealment alleged or established, nor was there any prejudice to creditors established. Therefore, under existing circuit precedent, there was no basis to deny the exemption as amended. In re Westry 591 Fed. Appx. 429 (6 th Cir. Dec. 30, 2014) The circuit court went on to also analyze the case under the decision of Law v. Siegel, 134 S.Ct (2014) and found that, if anything, the dicta of that opinion also would have permitted the amendment. [Author s Comment: This is a case where the Trustee never should have even objected to the v1 24 Page 128 of 213

129 amended exemptions. Although not discussed, Rule 1009(a) expressly permits amendments to schedules. Here, it was clear that the debtor had not claimed all of the categories of exemption to which she was entitled for the workers compensation claim. It should have been anticipated that the debtor would amend eventually to claim all of those exemptions. Additionally, Rule 4003(b)(2) would not have applied to help the trustee since there was no bad faith, fraud, and/or concealment. Thus, although the circuit court discussed Law v. Siegal, the trustee s objection could not be sustained even under the law preceding that decision.] E. Late Change in Exemptions Results in Fee Award against Debtor and his Counsel In In re Saldana, 531 B.R. 141 (Bankr. N.D. Tex. 2015) (Jernigan, J.), debtor originally claimed four, non-contiguous parcels of real property as his Texas homestead that were described as the French Properties. The trustee, therefore, turned his attention to administering what was referred to as the Business Properties consisting of approximately 60 acres. The trustee spent considerable time and effort in evaluating that property, employing an auctioneer and real estate broker, and conducting an auction, none of which the debtor had objected to. More than 15 months after the petition date, and three months after objections to debtor s original homestead exemption were filed by both the trustee and debtor s ex-spouse, more than two months after the trustee had moved and obtained the order allowing him to sell the Business Properties, and midway through a contested hearing for which the parties in court had prepared, the debtor changed his position to instead claim the Business Properties as his homestead and subsequently filed an amendment to that effect. Trustee and the ex-spouse objected. The court determined that the amended exemption must be allowed under the authority of Law v. Siegal, 134 S.Ct (2014), but concluded that the bankruptcy court was not denuded under that opinion of its essential authority to respond to debtor misconduct and ordered debtor and his counsel to reimburse trustee s and ex-spouse s counsel $25,245 and $5,109.50, respectively, in total fees incurred as a result of the Debtor s bad faith actions in abruptly amending his homestead exemption only after the Trustee, [ex-spouse], and this court had expended significant resources in preparing for a contested hearing that should never have gone forward. The court ordered that this liability be joint and several, since the court has been unable to determine which of them is more culpable due to the assertion of attorney-client privilege. The court noted that the supreme court in Law v. Siegel had specifically stated that Rule 9011 authorizes the court to impose sanctions for bad-faith litigation conduct, which may include an order directing payment... of some or all of the reasonable attorneys fees and other expenses incurred as a direct result of the violation.... the courts may also possess further sanctioning authority under either 105(a) or its inherent powers. 134 S.Ct. at Although the court did not conclude that the amendment was for an improper purpose, such as to harass or cause unnecessary delay or needless increase in the cost of litigation, it did find that its inherent power to issue sanctions also existed where a party had acted in bad faith, vexatiously, wantonly, or for oppressive reasons, in reliance on Chambers v. Nasco, Inc., 501 U.S. 32, at (1991). The debtor had made a calculated decision to assert that the French Properties were his homestead so long as they could get away with it unchallenged and only decided to change strategy in the middle of a hearing once it appeared that the Debtor s homestead argument was a losing one. When the court inquired of debtor s attorney what was going on, v1 25 Page 129 of 213

130 the attorney-client privilege was asserted. Thus, the court held debtor and his counsel jointly and severally accountable for the awarded sanctions. F. Equitable Estoppel applied to deny Debtor s amended Exemption In In re Lua, 529 B.R. 766 (Bankr. C.D.Cal. 2015) (Saltzman, J.), aff d 2015 WL (C.D.Cal. Nov. 10, 2015), debtor originally claimed her full California homestead exemption of $75,000. When debtor amended her schedules, she expressly deleted the homestead exemption indicating she had no interest in that property. She also amended Schedule A to state that the property was owned solely by her spouse and two other family members. Instead, she exempted $9,000 in cash and $12,500 in accounts receivable under her wild card exemption. As a result of these amendments, the trustee did not pursue the personal property items and instead pursued debtor s interest in the homestead which he believed could still be monetized. Three years after the case was filed, 33 months after the first amended schedules were filed and well after the trustee s investigation of the homestead, litigation to establish the estate s interest in and obtaining orders for turnover of the homestead property, retention of counsel, retention of a broker to sell the property, and a settlement with the debtor s spouse to sell the property and payoff all of her creditors in full, debtor determined to amend her Schedules A and C again to claim a $100,000 homestead exemption. The court found that debtor s behavior insured that no funds would be available for unsecured creditors. The trustee objected to this amendment, asserting bad faith, equitable estoppel, and laches. In analyzing Law v. Siegel, 134 S.Ct (2014), the court concluded that where a debtor claims a state-created exemption, the scope of the exemption - - and any basis for denial of the exemption - - must be found in state law. It is of course true that when a debtor claims a state-created exemption, the exemption s scope is determined by state law which may provide that certain types of debtor misconduct warrant denial of the exemption. Id. at The court determined that under well recognized California law, both judicial decisions and as codified, the doctrine of equitable estoppel would apply to debtor s claim of the amended homestead exemption. The court considered the five factors for application of that doctrine and found all of them compelled disallowance of the exemption: (1) Representation or Concealment of Material Fact, satisfied by debtor s written statement under penalty of perjury that she was not claiming nor entitled to any homestead exemption in the property; (2) Made with Knowledge of the Facts, satisfied by debtor s knowledge that she could claim a homestead exemption and did so in her original schedules and was aware during the following three years of all of the actions that the trustee took to monetize her interest in the homestead; (3) To a Party Ignorant of the Truth, satisfied by the fact that the trustee had no knowledge or indication that debtor was going to amend her Schedules three years later, particularly given that there had been no objections or other responses to all of the actions taken by the trustee; (4) With the Intention that the Ignorant Party Act on It, satisfied by the debtor s failure to object or oppose any of the actions being taken by the trustee over a three-year period; and (5) That Party was Induced to Act on It, satisfied by the Trustee s justifiable reliance over a nearly three-year period incurring substantial administrative expenses while otherwise being able to pay nothing to unsecured creditors instead of payment in full. Accordingly, the objection was sustained v1 26 Page 130 of 213

131 G. Rule 4003(b)(2) applicable to extend objection to exemption deadline for fraudulently claimed exemption Debtor filed her chapter 7 petition on October 25, 2013, listing three single family homes, including the subject property on Beckenhan Drive in Granite Bay, California. She initially claimed a $75,000 homestead exemption on the subject property but later amended it to $175,000 based on a disability. In her schedules and 341 testimony, she confirmed that her only income was social security and a contribution from a roommate. She received a discharge on February 5, 2014, but the case remained open while the trustee administered non-exempt assets. Debtor filed a motion to compel abandonment of the three properties, including the subject property on the basis that there was no non-exempt equity. The court granted the motion over the trustee s objection as to the third property only. Thereafter, on August 18, 2014, trustee objected to the claim of exemption in the subject property and sought relief from the final order of abandonment, arguing that debtor had fraudulently asserted the claim of exemption in the subject property because she did not reside there on the petition date or at any time during Trustee relied on tax returns which showed the subject property was a rental property for the entire year, without any personal days. Debtor responded that although she received rental income therefrom, she also resided there during all of She produced a letter from her CPA saying it was her primary residence solely on the basis of her declaration that she occupied it as her primary residence. She also produced mail addressed to her at the subject property. The bankruptcy court believed that debtor did reside at the subject property but misreported it on her tax returns. The court overruled the objection. Thereafter, trustee conducted further investigations and determined absolutely that debtor had not resided at the subject property, including affidavits from the tenants who stated that she did not at any point reside there during their tenancy from June 16, 2012 through June 29, Debtor finally abandoned her argument that she lived at the subject property with roommates and admitted that she lived elsewhere. She countered that she did, however, keep some of her personal belongings at the subject property and that her former attorney had advised her that would be sufficient to claim it as her primary residence. Trustee pointed out that the debtor repeatedly mischaracterized the tenants as roommates/tenants, when they were in fact clearly tenants with formal leases. Trustee further argued that debtor from the very first filing, set out to deceive the court, the trustee and her creditors by stating that she lived at the subject property. The court again overruled the objection finding that trustee was on sufficient inquiry notice to have discovered the fraud and that debtor s later admissions had no bearing on whether she claimed the exemption fraudulently. Trustee appealed to the bankruptcy appellant panel which vacated the bankruptcy court order and remanded for further proceedings. In re Stijakovich-Santilli, 542 B.R. 245 (9 th Cir. BAP Dec.15, 2015). The BAP first noted that the usual elements of common law fraud are: (1) misrepresentation of a material fact; (2) knowledge of the falsity of the material fact; (3) intent of defendant to defraud plaintiff; (4) justifiable reliance of plaintiff on that material fact; and (5) damages. The BAP determined that whether a debtor fraudulently asserted an exemption claim within the meaning of Rule 4003(b)(2), required that the bankruptcy court apply the usual definition of fraud, except for the damages requirement (which would have no bearing on the question of exemptions). The relevant representation was observed by the BAP to be a debtor s signed declaration attesting to the accuracy of the information in the statements and schedules v1 27 Page 131 of 213

132 and expressly certifying under penalty of perjury that all statements contained therein were true. These representations were affirmed at the 341 meeting. The trustee also would have to show that debtor knew, at the time she claimed the exemption, that the facts did not support that claim and that she intended to deceive the trustee and creditors who read the schedules. The BAP concluded that the bankruptcy court had erred by imposing a duty to investigate upon the trustee, noting that the perpetrator of an alleged fraud cannot avoid liability by showing that the victim could have uncovered the fraud had the victim investigated more carefully. The BAP also stated that mere negligence in failing to discover an intentional misrepresentation is no defense to fraud. The victim need not show that he could not have discovered the fraud; rather, he must only show that he justifiably relied on the perpetrator s false representations. Here, the debtor had asserted a claim of exemption based on false predicates and later continued to mislead the trustee and the court with further false statements. It would be inappropriate for the debtor to benefit from the fact that the trustee believed her false statements. Therefore, we hold that the bankruptcy court erred when it ruled that the Trustee failed to timely investigate the debtor s claim of exemption. Indeed, based on Hyman v. Plotkin (In re Hyman), 967 F.2d 1316 (9 th Cir. 1992), it was clear that had the trustee initially objected, he could have suffered the bankruptcy judge s ire because there was no basis to do so from the sworn schedules and testimony. As stated in that case, any ambiguity in the schedules should be construed against the debtor. The court also held that a trustee is entitled to rely on, and need not investigate, the information the debtor chooses to include in the schedules. Nothing in the schedules had suggested that debtor s representations therein were untrue. Moreover, she unequivocally stated at the 341 meeting that she resided at the subject property. Thus, the trustee had no basis to object and was not duty bound to have further investigated. Finally, the BAP disagreed with the bankruptcy court s determination that a debtor s later statements and admissions could not be used to establish that she fraudulently asserted the claim of exemption in her initial filings. It is hard to imagine a case in which the debtor s schedules, standing alone, prove that the debtor fraudulently asserted an exemption. To prove (for example) the debtor s knowledge of the schedule s falsity and intent to deceive, the objector will almost certainly have to offer extrinsic evidence. In an appropriate case, this extrinsic evidence may include the debtor s subsequent statements and conduct. Thus, the case was remanded to the bankruptcy court to apply the proper standard for the phrase fraudulently asserted and to consider whether the evidence showed that debtor had fraudulently asserted the claim of exemption. H. Trustee s Objection Overruled to Fraudulently Claimed Exemption Approximately 19 months after her Chapter 7 case was closed, debtor moved successfully to have the case reopened. Debtor filed an amendment to her claimed exemptions, asserting for the first time an exemption of benefits in a life insurance policy. The trustee objected on the basis of bad faith. The trustee specifically asserted that the court should not follow the dicta in Law v. Siegal, 134 S.Ct (2014) and should allow Rule 4003(b)(2) or judicial estoppel as grounds for disallowing the exemption. The court found that even the dicta of Law v. Siegal provided a clear directive concerning the limits of federal power. The court further held that the bankruptcy rules cannot authorize the courts to act in absence of a code provision creating the right. Finally, the court held that judicial estoppel did not require denial of the amended exemption to prevent a perversion of the judicial process. Accordingly, the v1 28 Page 132 of 213

133 court overruled the objection of the trustee. In re Bogan, (Bankr. W.D.WI. 2015) (Martin, J.). I. Rule 4003(b)(2) trumps the dicta from Law v. Siegel In In re Woolner, 2014 Bankr. LEXIS 5048 (Bankr.E.D.Mich. Dec. 15, 2014) (Shapero, J.), Trustee had timely objected to debtors claims of exemption, alleging they had intentionally undervalued those assets in bad faith. Trustee relied on Rule 4003(b)(2) as well as 105. At the initial hearing, debtors raised the applicability of Law v. Siegel, 134 S.Ct (2014), arguing that Siegel abrogated the authority of bankruptcy courts to deny a debtor s claim of exemptions on the basis asserted by the trustee. At that hearing, the court rejected the debtors argument concluding that Siegel was not dispositive because the issue in that case was whether the bankruptcy court had authority to surcharge an already allowed exemption because of the debtors bad acts and was not a case where the exemption was not directly contested or challenged. Debtors filed a motion for reconsideration based on numerous cases decided thereafter relying on Siegel for the proposition that bad faith and even fraud were no longer grounds for disallowing a claim of exemption: In re Baker, 514 B.R.860(E.D. Mich. 2014); In re Mitchell, 2014 WL (Bankr. N.D. Ohio 2014); In re Guitirrez, 2014 WL (Bankr. E.D.Del. 2014); In re Arellano, 517 B.R. 228 (Bankr.S.D.Cal. 2014); In re Scotchel, 2014 WL (N.D. W.Va. 2014); In re Gress, 517 B.R Bankr.M.D. Pa. 2014), In re Franklin, 506 B.R.765 (Bankr.C.D.Ill. 2014); In re Pipkins, 2014, WL (Bankr.N.D.Cal. 2014); United States v. Ledee, 772 F.3d 21, 29 n. 10 (1 st Cir.2014). The court declined to follow these cases, none of which mentioned, much less discussed, Rule 4003(b)(2) or its relevance or impact. Indeed it was not discussed in Siegel either because the rule had gone into effect many years after that case had been filed. The court noted that Rule 4003(b)(2) was not objected to by Congress and was approved and allowed to go into effect by the Supreme Court, being the legal equivalent of something that can be seen as being in the Bankruptcy Code itself. The Court quoted from the Advisory Committee notes accompanying implementation of this rule that provided that when the exemption claim has been fraudulently made [it] will permit the court to review and, in proper circumstances, deny improperly claimed exemptions, thereby protecting the legitimate interests of creditors and the bankruptcy estate. The deadline of one (1) year after the case is closed was stated to be parallel to the deadline for seeking revocation of a discharge obtained by fraud. The court observes that the allowance or disallowance of an exemption in the first place is at the very core of the bankruptcy process and is involved in almost all individual cases. It seeks to balance the concepts of giving debtors a fresh start. Accordingly, the motion for reconsideration was denied and the trustee s objections upheld. [Author s Comment: The author wrote an article for a scholarly journal on this very subject that was submitted just days prior to the issuance of this excellent opinion thereby missing the opportunity to discuss this case in the article. Rule 4003(b)(2) parallels the same grounds and deadline for revocation of a discharge. It would make no sense to revoke a discharge but allow a Debtor to retain the very property that resulted in the revocation of the discharge due to its fraudulent concealment.] v1 29 Page 133 of 213

134 VII. ADMINISTERING AN EXEMPTED PI CLAIM (THE PERSONAL BODILY INJURY CONUNDRUM) A. The Exemption Section 522(d)(11)(D) provides an exemption for the debtor s right to receive a payment, not to exceed $22,975 on account of personal bodily injury, not including pain and suffering or compensation for actual pecuniary loss, of the debtor or an individual of whom the debtor is a dependent. Although approximately three dozen states have opted out of the federal bankruptcy exemptions, many include the exact wording of the federal exemption provision, but limited to different dollar amounts. On close examination, the terms employed by the statute seem to negate each other by excluding every possible element of a personal injury recovery, seemingly rendering the exemption useless. B. Legislative History A review of the legislative history does not provide much assistance. House Report states the following: This provision in subparagraph (11)(D) is designed to cover payments and compensation of actual bodily injury, such as the loss of a limb, and is not intended to include the attendant cost that accompanies such a loss, such as medical payments, pain and suffering, or loss of earnings. As might be predicted, cases addressing the issue of what is covered by the exemption have been inconsistent in both their approaches taken and ultimate conclusions reached. C. Case Law Application 1. In In re Lynn, 13 B.R. 361 (Bankr. W.D. Wis. 1981), the court rejected the legislative history because it would render the exemption useless. The court noted that personal injury awards are composed of three types of losses: time losses (involving the value of lost time or earning capacity), expenses (such as medical costs), and pain and suffering. The legislative history, however, specifically states that the exemption is not intended to include medical payments, pain and suffering, or loss of earnings. 2. In Ford Motor Credit Co. v. Territo, 36 B.R. 667, 6670 (Bankr. E.D. N.Y. 1984), the court stated that if read literally, there exists no meaningful exemption for personal injuries v1 30 Page 134 of 213

135 3. In In re Sidebotham, 77 B.R. 504 (Bankr. E.D. Pa. 1987), the court noted that the plain language of the statute itself and its legislative history could not be taken literally if the exemption was to have any meaning. That court determined to follow a balancing test whereby it would weigh the proportion of damages classified as pain and suffering against the severity of the debtor s physical injuries. If the debtor s mental or emotional injuries were significantly greater than any physical injury, the personal injury claim would not qualify for any exemption. 4. In Lester v. Storey, 1451 B.R. 157 (S.D. Ohio 1991), the court held that the claimed exemption must be allowed if the debtor had suffered any cognizable physical injury, regardless of proportion. 5. In In re Marcus, 172 B.R. 502 (Bankr. D. Conn. 1994), the court determined that Congress had shown its intent to limit the exemption not merely to physical injuries, but to permanent physical injuries. This standard was adopted by the court in In re Gregoire, 210 B.R. 432 (Bankr. D. R.I. 1997); contra, In re Lawton, 324 B.R. 20 (Bankr. D. Conn. 2005); In re Barner, 239 B.R. 139 (Bankr. W.D. Ky. 1999); and In re Romagno, 159 B.R. 439 (Bankr. S.D. N.Y. 1993). The Court determined that the proceeds of pending personal injury actions for pain and suffering were not exemptible, as remuneration for pain and suffering was specifically excluded from the exemption. The Trustee s exemption was therefore sustained and the funds allowed to be administered by the Trustee. 6. In re Rochester, 308 B.R. 596 (Bankr. N.D. Ga. 2004) (Drake, J.): Section (a)(11)(D) does not permit the exemption of amounts received on account of pain and suffering or actual pecuniary loss, which includes amounts received for property damage or medical bills. (citation omitted) Accordingly, damages in excess of $10,000 and amounts awarded in payment of medical bills would not be exemptible under (a)(11)(D) and would remain available for payment to creditors. Accord, In re Sanchez, 2007 WL (Bankr. W.D. Mich.) at p. 14, FN 16 (Awards for pain and suffering or lost earnings not covered by the federal exemption statute). 7. In In re Ciotta, 222 B.R. 626, 628 (Bankr. C.D. Cal. 1998), the court determined that for the exemption to apply, the debtor would have to demonstrate that a cognizable physical injury has been suffered. The court would not allow the exemption for a sexual harassment cause of action unless the debtor could show a tangible physical injury was suffered. 8. Most courts do seem uniform that if a debtor s claim is for mere pain and suffering without some appreciable or cognizable physical injury, the claim is not exemptible. See, e.g., In re Scotti, 245 B.R. 17 (Bankr. D. N.J. 2000), and In re Claude, 206 B.R. 374 (Bankr. W.D. Pa. 1997) v1 31 Page 135 of 213

136 D. Stacking 1. Case law supports that debtor is entitled to only one exemption for all of his/her personal injury claims and not the full exemption for each claim. See, In re Christo, 192 F.3 d 36 (1 st Cir. 1999). (Debtor not allowed to claim the personal injury exemption on each of her three personal injury actions, but only a total exemption of $15,000 for all of her claims) (majority opinion holds); contra, In re Comeaux, 305 B.R. 802 (Bankr. E.D. Tex. 2003)(Debtor allowed to stack the exemptions on each claim of personal injury); and In re Daly, 344 B.R. 304 (Bankr. M.D. Pa. 2005) (same). 2. Debtor had more than one personal injury claim pre-petition and sought to exempt for each injury claim the maximum federal statutory cap set forth in 522(d)(11)(D) of $21,625. The trustee timely objected. The court sustained the court's objection. In re Phillips, 485 B.R. 53 (Bankr. E.D. N.Y. December 27, 2012). Judge Trust noted a split of authority on the issue of stacking the personal injury exemptions for multiple incidents and turned to the legislative history. He found that the legislative history created more confusion than clarity about congressional intent and failed to illuminate an answer to the problem. The court returned to a plain meaning analysis and read the exemption statute in light of 102(7)(the singular includes the plural) and determined that the debtor could not exceed in the aggregate $21,625 no matter how many accidents and injuries debtor has suffered. E. Pro-Ration 1. Debtor s exemption in a PI recovery may be prorated with the bankruptcy estate. In re Rauser, 312 B.R. 461 (Bankr. D. Conn. 2004). Here, debtor exempted the statutory maximum under 522(d)(11)(D), and the Trustee objected. It was undisputed that the claim was worth $55,000, but there was only $25,000 of applicable insurance, with poor prospects of collecting from the tortfeasor. The court approved the settlement and authorized the contingency fee portion to be paid to the PI lawyer. That would have left only the amounts sufficient for the exemption with none left over for the bankruptcy estate. The Trustee argued that the remaining funds should be prorated. Because the order approving the settlement did not allocate between the exempt and non-exempt portions, and neither the debtor nor the Trustee was responsible for the inadequacy of the available insurance, the court prorated the remaining funds between the debtor and the estate so that the debtor received $8, instead of $17,425. F. Allocation and Burden of Proof 1. In In re Herrington, 306 B.R. 172 (Bankr. E.D. Tex. 2003), there was no allocation among bodily injury, pain and suffering, actual pecuniary loss, or any other category of damages contemplated by the federal exemption statute contained within the settlement of the PI action by the Trustee. Subsequently, the Trustee did object. He argued that he was precluded from a timely objection v1 32 Page 136 of 213

137 because there was no way to know that the settlement would not allocate the damages among the various possible categories. He also sought to have the exemptions reduced by their prorated share of the attorney fees of the PI lawyer employed by the Trustee as special counsel. The court noted it was the Trustee s burden to prove what portion of the recovery was not exempt. The court also would not allocate any portion of the attorney fees to reduce the Debtor s allowable exemptions. 2. In In re Buscano, 2006 WL (Bankr. D. Alaska) a settlement had been reached on debtor s personal injury claim, but there was no allocation among the various categories of damages contained within the settlement agreement. The court did not agree that it would be the trustee s burden of proof, but had sufficient evidence in the record to make the determination that the award should be allocated 70% to pain and suffering, which could not be exempted, and 30% to actual bodily injuries to which the claimed exemption could apply. 3. In In re Kelin, 341 B.R. 521 (Bankr. W.D. Pa. 2006), a PI exemption was claimed by debtor and there was no objection by the trustee within the 30-day period. Afterwards, trustee had the PI lawyer employed as special counsel. Once a settlement agreement was reached, the trustee filed a motion to approve the settlement and to allocate the settlement proceeds to pay special counsel on a contingency basis as approved by the court, but provided no allocation for the debtor s exemption in the injury claim. Debtor opposed the motion and sought the full exemption as claimed. However, the court noted that the trustee was not challenging the propriety of the exemption but only seeking a determination of whether any portion of the claimed exemption was applicable to the settlement reached. Judge Markovitz found (a) that debtor should have the burden of proof on the allocation issue, and (b) that trustee nevertheless proved that none of the settlement award was within the scope of the allowed exemption because it was for actual pecuniary loss, and (c) it was not necessary for the trustee to object within the 30-day period for this determination to be made. G. Conclusion The Trustee must determine how the law on PI exemptions is applied by his or her particular court. Most courts would not allow this exemption provision to be applied to employment discrimination, sexual harassment, and similar claims. Other courts would not apply it even to personal injury actions that are largely based on pain and suffering. Still others would require any physical injury to be permanent to come within this exemption. Therefore, Trustee should consider a more detailed examination of the claim and a possible objection to any exemption thereof v1 33 Page 137 of 213

138 VIII. ADMINISTERING AN EXEMPTED IRA/ANNUITY A. IRA Received Through Inheritance An inherited IRA is not exempt unless permitted under applicable state law. Clark v. Randelor, 134 S.Ct (2014). 1. Supreme Court Holds Inherited IRAs Are Not Exempt "Retirement Funds" Debtor Heidi Clark was the designated beneficiary of her mother's IRA worth approximately $300,000. Upon her mother's death, Heidi inherited the IRA and claimed it fully exempt in her Chapter 7 bankruptcy case. The trustee timely objected. The bankruptcy court had agreed with the trustee that the inherited IRA was not exempt, concluding that an inherited IRA does not represent "retirement funds" in the hands of the current owner. In re Clark, 450 B.R. 858 (Bankr. W.D. Wis. 2011). Judge Martin had noted that while the funds remained sheltered from taxation until the money was withdrawn, many of the other attributes of the IRA had changed. For example, no new contributions could be made and the balance could not be rolled over or merged with any other account, 26 U.S.C. 408(d)(3)C). Additionally, instead of being dedicated to Heidi's retirement years, the inherited IRA must begin distributing its assets within a year of the original owner's death and payout must be completed in as little as five years. 26 U.S.C. 402(c)(11)(A) incorporating 26 U.S.C. 401(a)(9)(B). The debtor appealed. Judge Martin's decision was reversed by the District Court, 466 B.R. 135 (W.D. Wis. 2012), which followed recent appellate decisions such as In re Nessa, 426 B.R. 312 (8 th Cir. BAP 2010) and In re Chilton, 674 F.3d 486 (5 th Cir. 2012). Those courts had observed that any "retirement funds" in the decedent's hands had to be treated the same way in the successor's hands because 522(b)(3)(C) and (d)(12) referred to "retirement funds" without providing that they must be the debtor's. It would be enough if they had ever been anyone's retirement funds. The trustee appealed and was joined by NABT in an amicus brief and was opposed by NACBA in an amicus brief before the Seventh Circuit Court of Appeals. The Seventh Circuit reversed and reinstated the holding of the bankruptcy court. Rameker v. Clark (In re Clark), 714 F.3d 559 (7 th Cir. 2013) cert. granted, 134 S. Ct. 678 (Nov. 26, 2013). In an opinion authored by Chief Judge Easterbrook, the Circuit Court made it seem very simple and obvious that "an inherited IRA does not have the economic attributes of a retirement vehicle, because the money cannot be held in the account until the current owner's retirement." It found that the attributes of an inherited IRA do not in any way resemble "retirement funds." Further, the court concluded: "The district judge thought the question close and believed that close questions should be decided in debtor's favor. We do not think the question close; inherited IRAs represent an opportunity for current consumption, not a fund of retirement savings." The court further concluded that the bankruptcy judge "got this right" and disagreed with the 5 th Circuit in Chilton. The court recognized that it was creating a conflict among the circuits and noted that it had circulated the opinion before release to all judges in active service. "None of the judges requested a hearing en banc. The Supreme Court agreed with the Seventh Circuit and affirmed in a unanimous opinion. Clark v. Rameker, 134 S.Ct (2014)(Unanimous). The statutes provided an v1 34 Page 138 of 213

139 exemption for "retirement funds to the extent that those funds are in a fund or account that is exempt from taxation" under specified provisions of the Internal Revenue Code. The Supreme Court determined: "The Text and purpose of the Bankruptcy Code make clear that funds held in inherited IRAs are not 'retirement funds' within the meaning of [the statute]." As an objective matter, the court observed that these accounts were not set aside for the day when an individual stopped working and were not objectively set aside for the purpose of retirement. The court focused on the fact that (1) the holder of an inherited IRA is prohibited from making contributions to the account, (2) was required to withdraw money from the account, no matter how many years he or she may be from retirement, and (3) could withdraw the entire balance of the account at any time and for any purpose without penalty, including spending the money on a vacation home or sports car immediately after the bankruptcy case was concluded, thereby turning the debtor's "fresh start" into a "free pass." [Author's Comment: Trustees had been making these arguments and losing cases all over the country or winning in the bankruptcy court and being reversed on appeal, which is what happened here when Judge Martin was reversed by the district court. With the contrary appellate opinions from the 5 th Circuit and the 8 th Circuit BAP, this looked like the last good chance to turn the tide and bring a measure of common sense to statutory interpretation. Congratulations to the NABT s Amicus Committee and Trustee Bill Rameker.] 2. Inherited IRAs Not Exempt Under Kansas Opt-Out Law In In re Mosby, B.R. (Bankr. D.Kan. June 17, 2015) (Somers, J.), Debtor claimed as exempt the IRA she had inherited from her mother. The trustee timely objected in reliance on Clark v. Rameker, 134 S.Ct (2014). Debtor argued that the Kansas exemption statute was broader than the federal statute. In reliance on K.S.A Supp (b). The court disagreed and sustained the trustee s objection. As an opt-out state, the Kansas state exemption laws were available to the debtor. The court, however, found no material difference between the federal rule and Kansas exemptions. Whereas the federal exemption applies to retirement funds that are exempted from taxation by specified provisions of the Tax Code, the Kansas exemption applies to payments from an interest in a retirement plan that is qualified under many of the same Tax Code sections. Because of the differences between IRAs and inherited IRAs, it cannot be said that an inherited IRA is a retirement plan. Even though 408 of the Tax Code was one of the federal statutes enumerated in the Kansas retirement funds exemption statute, the court found that the Kansas statute used that section of the Tax Code, together with other sections, to define qualified retirement plans for purposes of the exemptions. As the court had determined that IRAs constituted retirement plans but inherited IRAs did not, there was no available exemption for the debtor, and the trustee s objection was sustained. 3. Inherited IRA Exempt Under New Jersey State Law Approximately four months after his chapter 7 petition was filed, Debtor s motion to convert to chapter 13 was granted. In In re Andolino, 525 B.R. 588 (Bank. D.N.J. 2015) (Kaplan, J.), Debtor originally disclosed an IRA valued at $120,000 to which he claimed a full exemption under 522(d)(12). Prior to conversion of the case, Debtor amended his schedules to reflect that the IRA was an inherited IRA from his late mother and not property of the bankruptcy estate. The chapter 13 trustee objected. Here, the bankruptcy court observed that the Supreme Court had held that an inherited IRA did not constitute retirement funds, as that term v1 35 Page 139 of 213

140 was used in the exemption statute of the Bankruptcy Code. Clark v. Rameker, 134 S.Ct (2014). However, under New Jersey law statute N.J.S.A. 25:2-1(b), qualifying trusts remained fully exempt. The court finds that under New Jersey law, the debtor s interest in the inherited IRA would retain its same designation as a qualified trust that it had when owned by the debtor s mother and, therefore, could not be included as property of the bankruptcy estate. The court recognized that if the debtor failed to comply with the inherited IRA provisions of the tax code, I.R.C. 408(d)(3)(C) by improperly rolling over the IRA, failing to withdraw the entire balance in the account within five years of the original owner s death, or failure to take minimum distributions on an annual basis, it could lead to a loss of certain tax benefits as well as a qualified trust designation. 4. Inherited IRA Not Exempt Under Louisiana Law After about four years of marriage, Mark and Kimberly Everett divorced through a consent judgment through which, among other things, Kimberly waived all of her rights to Mark s retirement accounts. About a year after the divorce, Mark died with Kimberly still listed as the beneficiary of his IRA with a balance of $245, Mark s probate estate obtained a judgment against Kimberly for the amount of the IRA. She then filed a Chapter 13 bankruptcy seeking to exempt the full amount thereof. The bankruptcy court found that the inherited IRA was exempt because Kimberly had rolled over the funds from Mark s IRA to her own IRA. The district court reversed. In re Everett, 520 B.R. 498 (E.D.La. 2014) (Brown, J.). The district court noted that contrary to the bankruptcy court s findings, Kimberly had not rolled the funds over to her personal IRA. Instead, she was required to create a new IRA titled Kimberly Everett Inherited IRA of Mark Everett, and required to take distributions therefrom even though she had not reached retirement age. As a result, the court found that the Tax Code no longer afforded the account preferential tax treatment. The court further found that the inherited IRA was a liquid asset rather than a retirement fund in that it was neither exempt under federal or Louisiana state law because it was not a tax-deferred arrangement. [Author s Comment: While this is a properly decided case, it highlights the importance of knowing your own state law exemptions in an opt out state as the Supreme Court s opinion in Clark v. Rameker, 134 S.Ct (2014) was only ruling on the federal exemption provisions and specifically noted that it was not binding on a particular state s exemption laws.] 5. Exempt IRA Not Timely Reinvested Becomes Non-Exempt The debtors had fully exempted their IRA in In re Hawk, 524 B.R. 706 (Bankr. S.D.Tex. 2015) (Bohm, J.). After the deadline for objecting to exemptions had passed, the deadline for objections to discharge had passed and the Chapter 7 trustee had filed a report of no distribution, debtors liquidated their IRA funds. Debtors failed to reinvest the IRA funds within the required 60-day period to retain its exempt status. The Chapter 7 trustee then moved for an order under 542(a) compelling debtors to turn over the proceeds of the liquidated IRA funds, arguing that the proceeds automatically reverted to the bankruptcy estate based on the failure to reinvest them in another IRA account within the required 60-day period set forth by applicable law. The court agreed with the trustee that the principal was governed by Viegelehn v. Frost (In re Frost), 744 F.3d 384 (5 th Cir. 2014) and in re Smith 514 B.R. 838 (Bankr. S.D.Tex. 2014) which together held that a debtor who sold an exempt homestead and failed to reinvest the sale proceeds in another exempt homestead within six months as required by Texas state law lost the exempt v1 36 Page 140 of 213

141 status and it became non-exempt property of the bankruptcy estate. Here, this principal was applied to hold that the IRA funds lost their exempt status under state law while the bankruptcy case was pending. Once those funds became non-exempt, they were automatically property of the estate subject to the trustee s right of turnover. [Author s Comment: In issuing this opinion, the court urged the debtors bar to counsel carefully their clients about preserving their exemptions by refraining from selling exempt assets until the case was closed; or, if they sell during the pendency of the case, to strictly abide by the reinvestment requirements of applicable state law to preserve the exempt status of the proceeds. This is likewise a wake up call to trustees to be diligent in policing exempted assets in states where it matters to properly administer significant assets that have lost their exempt status.] B. IRA Received Through Divorce/Separation An IRA awarded in a marriage dissolution may not be exemptible. In In re Anderson, 269 B.R. 27 (8 th Cir. BAP 2001), the court ruled in favor of the Trustee and against the debtor with respect to a property settlement with the debtor s former wife whereby $25,000 of the former wife s IRA account was awarded to the debtor in the divorce. In that case, the BAP agreed with the Trustee that the assets had to be directly derived from the debtor s employment and not through the divorce settlement. Compare to In re Nelson, 274 B.R. 789 (8 th Cir. BAP 2002), where the same court shortly thereafter ruled that debtor s interest in a former spouse s ERISA-qualified retirement plan obtained pursuant to a QDRO was not property of the estate, relying on Boggs v. Boggs, 520 U.S. 833 (1997) (holding that the beneficiaries under an ERISAqualified retirement plan entitled to protection of the anti-alienation provision included a plan participant s former spouse who was made an alternate payee of the plan through a QDRO). C. Where the IRA s Underlying Assets are Pledged At least one court has held that debtors pledge of funds in their IRAs as security for loans was a distribution of those funds which prevented the debtors from claiming an exemption therein. In re Roberts, 326 B.R. 424 (Bankr. S.D. Ohio 2004). Accord, In re Coppola, 2005 W.L (C.A. 5-Tex.). Debtors claimed as exempt two IRA accounts in debtor husband s name in the amounts of $381,272 and $187,000 and one IRA in the debtor wife s name in the amount of $96,111. The Trustee objected to the claim of exemption regarding $500,000 worth of stock pledged by the debtor husband and $28,000 pledged by the debtor wife as security for certain debts guaranteed by the debtors in favor of a certain bank. The pledges were part of a financing package for the building of an I-MAX theater at a riverfront development. Referring to 26 U.S.C. 408(e)(4) of the Tax Code, the court noted that if during any taxable year of the individual for whose benefit an IRA is established, that individual uses the account or any portion thereof as security for a loan, the portion so used is treated as distributed to that individual, and a taxable event has occurred. The funds in the account are no longer considered to be IRA funds and, therefore, are no longer exempt. Because the IRA exists only as a result of the Tax Code, the court believed it entirely appropriately to look to the Tax Code to determine whether or not the investment vehicle is an IRA in the first place or whether it has lost its status as an IRA v1 37 Page 141 of 213

142 D. Where an Annuity is Purchased on the Eve of Bankruptcy Debtor purchased an annuity for $33,000 four days before his petition date. Debtor claimed the annuity as exempt under the Colorado provision for retirement plans. The Trustee objected to the claim of exemption. The bankruptcy court sustained the objection. In re Ludwig, 345 B.R. 310 (Bankr. D. Colo. 2006). Judge Tallman found that the annuity does not qualify as either an IRA or a retirement plan. He further held that even if it was such a retirement plan, the objection would be sustained in this case because of the numerous badges of fraud present. The court noted that the badges of fraud in fraudulent transfer cases and pre-bankruptcy planning cases are substantially equivalent. He found the following badges of fraud: (I) the annuity was purchased on the eve of bankruptcy, suggesting an intent to keep assets from creditors; (II) the annuity was purchased with the last of debtor s non-exempt funds, (III) debtor knew that the annuity was not ERISA-qualified; (IV) the transfer to the annuity was for the benefit of insiders, being the debtor and his spouse, and (IV) debtor retained control of the annuity which contained a provision that allowed debtor to change owners or assign the annuity at any time. Debtor s defense to these badges of fraud was essentially that he was acting on advice of legal counsel. However, the court found that that was merely one factor to be considered and did not outweigh the other factors here. E. Annuities Not Purchased as Wage Substitutes or for Post-Retirement Compensation In 1996, debtor inherited $110,000 and invested a lump-sum of $50,000 in a Variable Annuity Contract with a maturity date of May 9, 2050, when debtor would attain the age of 85. However, the maturity date and the annuity option could be changed by debtor at any time prior to the initiation of payments, and debtor also retained the right to make withdrawals from the annuity fund prior to the maturity date. If withdrawals were prior to debtor attaining age 59-1/2, they would be subject to a 10% penalty, but only on any accumulated income and not on the initial $50,000 investment. Debtor valued the annuity at $80,895 and claimed it exempt under Georgia s opt-out provision covering retirement or pension plans to the extent permitted by the bankruptcy laws of the United States. The Trustee objected to the exemption claim, and the court sustained the objection. In re Michael, 339 B.R. 798 (Bankr. N.D. Ga. 2005). Judge Diehl had to examine 522(d)(10)(E) of the bankruptcy code because of the reference to bankruptcy laws of the United States. She also examined by analogy the recent U.S. Supreme Court decision of Rousey v. Jacoway, 544 U.S. 320 (2005). She noted that the federal exemption provision protected wage substitutes that served as retirement income for the debtor in the future. Although the term annuity or similar plan or contract was used in the statute, debtor s annuity did not fall within the category of exemptible investments listed. Judge Diehl concluded that annuity was a generic term referring to an obligation to pay a stated sum to a stated recipient. Thus, annuity as used in the statute referred to the payment method and not the underlying nature of the asset, which the Trustee s expert witness had described as an insurance product. In the applicable statute, annuity, or similar plan or contract referred to benefit plans offered to employees or the self-employed as a means of future compensation after retirement. Likewise, the Supreme Court in Rousey had concluded that the common feature of all plans identified in that statute was that they provided income substitutes for wages earned as salary or hourly compensation. Here, the annuity was purchased with a lump-sum contribution of aftertax dollars and had an insurance component to it. The court thus held it was not an annuity or v1 38 Page 142 of 213

143 similar plan or contract that could be exempted. In so holding, the court stated: Exempting an annuity of this nature would open the doors for abuse by debtors and undermine the integrity of the bankruptcy process. The court continued: Allowing an annuity contract established by a debtor to be exempt without some requirement that it be similar to other qualified retirement plans would provide debtors with the means of shielding assets from creditors pre-bankruptcy by purchasing annuities under the façade of retirement planning. F. Exempt IRA not timely Reinvested becomes Non-exempt The debtors had fully exempted their IRA in In re Hawk, 524 B.R. 706 (Bankr. S.D.Tex. 2015) (Bohm, J.). After the deadline for objecting to exemptions had passed, the deadline for objections to discharge had passed and the Chapter 7 trustee had filed a report of no distribution, debtors liquidated their IRA funds. Debtors failed to reinvest the IRA funds within the required 60-day period to retain its exempt status. The Chapter 7 trustee then moved for an order under 542(a) compelling debtors to turn over the proceeds of the liquidated IRA funds, arguing that the proceeds automatically reverted to the bankruptcy estate based on the failure to reinvest them in another IRA account within the required 60-day period set forth by applicable law. The court agreed with the trustee that the principal was governed by Viegelehn v. Frost (In re Frost), 744 F.3d 384 (5 th Cir. 2014) and in re Smith 514 B.R. 838 (Bankr. S.D.Tex. 2014) which together held that a debtor who sold an exempt homestead and failed to reinvest the sale proceeds in another exempt homestead within six months as required by Texas state law lost the exempt status and it became non-exempt property of the bankruptcy estate. Here, this principal was applied to hold that the IRA funds lost their exempt status under state law while the bankruptcy case was pending. Once those funds became non-exempt, they were automatically property of the estate subject to the trustee s right of turnover. [Author s Comment: In issuing this opinion, the court urged the debtors bar to counsel carefully their clients about preserving their exemptions by refraining from selling exempt assets until the case was closed; or, if they sell during the pendency of the case, to strictly abide by the reinvestment requirements of applicable state law to preserve the exempt status of the proceeds. This is likewise a wake up call to trustees to be diligent in policing exempted assets in states where it matters to properly administer significant assets that have lost their exempt status.] G. Trustee entitled to Turnover of Sale Proceeds from Debtors Homestead that was not Timely Reinvested When debtors filed their Chapter 7 petition in 2010, they listed their residence in Prescott Valley, Arizona and claimed it as exempt in the amount of $70,279 pursuant to A.R.S (A). The schedules were never amended nor was any objection to the exemptions ever filed. Debtors received their discharge later that year. Two years after the petition date, debtors filed a motion to sell the property, free and clear of the estate for $280,000, indicating that any equity realized would be protected by the homestead exemption. Trustee filed no objection to that motion, did not attend the hearing thereon, and did not appeal the order granting the motion. Approximately eight months later, debtors filed a motion to determine that the proceeds from the sale were not property of the estate, indicating that the trustee had advised debtors that the proceeds would become property of the estate if they did not reinvest the funds in a new v1 39 Page 143 of 213

144 residence before the expiration of the 18-month period required under Arizona law. The trustee objected to the motion. After the 18-month period had run with no reinvestment of the proceeds, the trustee promptly filed a turnover motion. The bankruptcy court issued a preliminary order directing the trustee to file an affidavit explaining why he did not close the debtors bankruptcy case prior to the expiration of the 18-month reinvestment period which was nearly four years after the petition date. The trustee s declaration explained that he had not closed the estate for reasons unrelated to the homestead sale, which the bankruptcy court found to be a reasonable explanation and granted the turnover motion, holding that the proceeds from the post-petition sale were subject to the reinvestment period under A.R.S (C). Debtors appealed to the district court, which affirmed. In re Smith, 526 B.R. 343 (D. Ariz. 2015)(Campbell, J.). Debtors argued that the trustee was judicially estopped from seeking turnover. The bankruptcy court rejected that argument finding the effect of the sale order to be unclear, with no citation of any authority to support the relief and noting that the free and clear language used by the debtors in their sale motion appeared in 363(f) which applied to trustees but not debtors. Additionally, the order on the sale motion did not even decide whether the sale was subject to the reinvestment requirements of (C). The district court agreed with the bankruptcy court that the sale order was unclear and that the trustee could therefore not be said to have taken a position with respect to the order that was clearly inconsistent with its position now, as required by Supreme Court precedent. New Hampshire v. Maine 532 U.S. 742, 750 (2001) The other elements of judicial estoppel were also lacking, as the trustee had never persuaded the bankruptcy court to take any position at all at the time of the sale motion, nor were the debtors mislead as the trustee had made his position to them quite clear. Next, although not raised below, the district court considered on appeal debtors new argument that the reinvestment requirement was trumped by 522(c) and (k). The district court rejected that argument based on a prior circuit precedent and In re Jacobson, 676 F.3d 1193 (9 th Cir. 2012), where the circuit court held that bankruptcy exemptions were fixed at the time of the petition, and the entire state law that was applicable on the petition s filing date, including the reinvestment requirement was determinative of whether an exemption applied. The circuit court had concluded that proceeds from the sale of a homestead lost their exempt status and were subject to turnover Finally, debtor argued laches, the docket showing no affirmative action by the trustee for nearly three years. But the bankruptcy court had accepted as reasonable the explanation in the trustee s declaration, and his turnover motion was filed only six weeks after the expiration of the 18-month reinvestment period. Thus, the district court concluded that the bankruptcy court had not abused its discretion. The district court also observed in affirming the bankruptcy court, that at any time the debtors could have filed their own motion to compel abandonment of the estate s interest in the sale proceeds, but never did so. A view seemingly contrary to the reinvestment requirement (but actually distinguishable) was recently stated in In re Golden, 528 B.R. 803 (Bankr. D.Col. 2015)(Tallman, J.), a Colorado case where the chapter 13 debtor had obtained plan confirmation with the provision that all property of the chapter 13 estate revested in the debtor upon confirmation. Thereafter, debtor and his estranged spouse sold the real property, generating $33, of net sale proceeds which were then transferred to the estranged spouse with whom the debtor was separated. Debtor did not seek court authorization for the sale or the transfer of funds. When the case converted to Chapter 7, the trustee sought to avoid the transfer to the estranged spouse under v1 40 Page 144 of 213

145 549(a). However, the court held the action to be moot because the homestead had left the bankruptcy estate when it revested in the debtor upon plan confirmation. Judge Tallman also noted that under 348(f)(1)(A) property of the estate in the converted case included property on the petition date that remains in the possession or is under the control of the debtor on the date of conversion. The property and the proceeds were no longer in the possession or control of the debtor on the date of conversion. Thus, the court held the property had already lawfully left the estate and could not be recovered or administered by the trustee. The court distinguished other cases because they were either filed under Chapter 7, converted to Chapter 7 pre-confirmation, or were under a plan that provided that the property remain property of the estate, and thus came into the Chapter 7 estate and could be administered by the trustee. H. Homestead Proceeds from Foreclosure Sale During Bankruptcy Held Property of the Estate Where Not Reinvested Creditor lifted the stay in debtor's bankruptcy and sold debtor's homestead in a foreclosure sale with a portion of the proceeds paid to the debtor as required by the California homestead exemption. The California homestead exemption provides that the debtor s portion of the proceeds loses its exempt status if not reinvested within six months. The debtor did not reinvest the proceeds in that window. Trustee filed complaint against debtor and her husband seeking turnover of the proceeds from the sale, a rental property held in the husband s name, and income earned from that property. The bankruptcy court rejected all of the trustee s claims and the Ninth Circuit Bankruptcy Appellate Panel affirmed. The trustee appealed and the Ninth Circuit reversed in part, holding that the proceeds from the homestead sale belonged to the estate, but the rental property held in her husband s name and the income from it did not. Wolfe v. Jacobson (In re Jacobson), 2012 U.S. App. LEXIS 8103 (9th Cir. 2012). The Ninth Circuit reasoned that under the snapshot rule, bankruptcy exemptions are fixed at filing and whether an exemption applies must be determined by the entire applicable state law. In this case, the entire applicable law included a reinvestment requirement. Although the debtor had a right to the exempt proceeds, that right was contingent on reinvesting in a new homestead within six months. Because the debtor did not do so, she forfeited the exemption. As to the rental property, the Ninth Circuit agreed that the trustee s claim failed because the title documents showed that debtor s husband was the sole owner and in California, record title is presumptively correct. In addition, there was no presumption of community property where the husband acquired the property in his name alone and it was traceable to his separate inheritance. Finally, the court rejected the argument that because the bankruptcy court had found that the debtor ran her husband s affairs in a previous case, the debtor was estopped from arguing she had no interest in the property. It was not inconsistent for the husband to own separate property and let the debtor run his affairs. I. No intent to Reinvest Requirement for Illinois Homestead Exemption Debtors sold their Illinois homestead and, after filing for chapter 7 bankruptcy, claimed an exemption on $9,000 remaining in an account from the proceeds of the sale. The Trustee objected, because the debtor had stated that she had no intent to reinvest the proceeds in a new home. The Bankruptcy Court allowed the exemption. In re Lantz, 446 B.R. 850 (Bankr. N.D v1 41 Page 145 of 213

146 Ill. 2011), holding that 735 Ill. Comp. Stat. Ann. 5/ did not contain an intent requirement such that the debtor must intend to invest the sale proceeds in a new homestead. The decision counters an earlier decision from the Central District of Illinois, In re Ziegler, 239 B.R. 375 (Bankr. C.D. Ill. 1999), which held that an intent requirement is implied in the homestead statute. In predicting that the Illinois Supreme Court would not acknowledge any intent requirement in the statute, Judge Barbosa looked to the unambiguous language of the statute, which contained no express intent requirement. The decision also noted the liberal construction afforded exemption statutes under Illinois law in favor of debtors. IX. STATE SPECIFIC EXEMPTION STATUTES A. 11 th Circuit and 6 th Circuit Bankruptcy Specific Exemption Statutes held Constitutional A Georgia bankruptcy-specific exemption statute enables Georgia debtors who file for bankruptcy to exempt their aggregate interest, not to exceed $2,000, in the cash value of unmatured life insurance contracts; whereas, Georgia debtors who were not in bankruptcy, could claim the full cash value of whole life insurance contracts as exempt. The bankruptcy and district courts had ruled that this disparity did not violate the uniformity provisions of the bankruptcy clause of the United States Constitution. The statute applied uniformly to all debtors in bankruptcy, which was all that the uniformity provision required. Moreover, the statute did not violate the Equal Protection Clause of the Georgia constitution because bankruptcy debtors and non-bankruptcy debtors were not in similar circumstances, and the Georgia legislature did not have to provide the same treatment for each class of debtors. The lower courts also denied an exemption in an annuity that was created when debtor was 64 in 2006 with a single payment of $150,000 with payments deferred until age 90 in order to increase the death benefit for his wife. Debtor retained full control and discretion over the terms of the annuity, including the ability to cancel it or withdraw all funds therein in a lump sum if he so chose. This was determined to be an investment vehicle and not a wage substitute. On further appeal, the Eleventh Circuit affirmed. McFarland v. Wallace, 2015 WL (11 th Cir. June 22, 2015). Accord In re Schafer, 689 F.3d 601 (6 th Cir. 2012); Sheehan v. Peveich 574 F.3d 248 (4 th Cir. 2009); In re Kulp, 949 F.2d n.3 (10 th Cir. 1991); In re Applebaum 422 B.R. 684 (9 th Cir. BAP 2009) B. 4 th Circuit Bankruptcy-specific exemption statute constitutional West Virginia has opted out of the Federal Bankruptcy Exemption Scheme, thereby restricting its debtors to exemptions available only under state or local law and federal, nonbankruptcy law. The applicable state exemption provisions apply only in bankruptcy proceedings, even though West Virginia has other exemptions, not at issue in the case, that apply to judgment debtors generally. The trustee objected to the debtor s claim of exemption, arguing that state exemption laws that apply only in bankruptcy cases are inconsistent with the bankruptcy code s objectives regarding the distribution of estate assets and are, therefore, rendered invalid by the Supremacy Clause. The bankruptcy court disagreed, allowing the v1 42 Page 146 of 213

147 exemptions. A direct appeal was certified to the Fourth Circuit. Sheehan v. Peveich, 574 F3d 248 (4 th Cir. 2009). The Circuit Court found: This statutory provision [ 522(b)(1)] is an express delegation to the states of the power to create state exemptions in lieu of the Federal Bankruptcy Exemption Scheme. The Circuit Court continued: Congress has not seen fit to restrict the authority delegated to the states by requiring that state exemptions apply equally to bankruptcy and non-bankruptcy cases, and we are without authority to impose such a requirement. Consequently, the bankruptcy court decision was affirmed. X. ADMINISTERING EXEMPTED PROPERTY THAT IS BROUGHT INTO THE ESTATE BY THE TRUSTEE S AVOIDANCE POWERS A. 522(g) Section 522 provides that: (g) Notwithstanding 550 and 551 of this title, the debtor may exempt under subsection (b) of this section property that the trustee recovers under 510(c)(2), 542, 543, 550, 551, or 553 of this title, to the extent that the debtor could have exempted such property under (b) of this section if such property had not been transferred, if (1)(A) such transfer was not a voluntary transfer of such property by the debtor; and (B) the debtor did not conceal such property; or (2) the debtor could have avoided such transfer under subsection (f)(2) of this section. [Emphasis added]. Note that the term recovers is not defined in the bankruptcy code. B. Rule 4003(b) Objecting to a Claim of Exemptions This rule provides in pertinent part: A party in interest may file an objection to the list of property claimed as exempt only within 30 days after the meeting of creditors held under 341(a) is concluded or within 30 days after any amendment to the list or supplemental schedules is filed, whichever is later. C. Taylor v. Freeland & Kronz, 503 U.S. 638 (1992) In Taylor, a Chapter 7 debtor had claimed an exemption in potential proceeds from a pending employment discrimination suit. The Taylor court held that the Trustee could not contest the validity of the claimed exemption, even though the debtor had no colorable basis for claiming it, because the 30-day period for objecting under Rule 4003(b) had expired and the Trustee had not obtained an extension of time. Id. at v1 43 Page 147 of 213

148 However, Taylor did not involve any issue of whether 522(g)(1) applies despite the lack of a timely objection under Rule 4003(b). Most courts that have considered the issue after Taylor do not apply Rule 4003(b) where the Trustee s objection is based on 522(g). D. Majority View - Trustee Not Subject to 30-Day Objection Deadline Nor Is Formal Action Required Virtually all courts recognize that the 30-day objection period is in conflict with the Trustee s two years limitations period under 546(a)(1)(A) and, therefore, do not find the failure to object within the 30-day limitations period of Rule 4003(b) to be a bar to a later objection to an exemption claim. E. Glass v. Hitt (In re Glass), 60 F.3d 565 (9 th Cir. 1995) - Trustee Can Object Without Formal Avoidance Action Outside the 30-Day Period At the bankruptcy court level, the court had overruled the Trustee s objection to an exemption claimed that was filed after the 30-day deadline. The Trustee relied on 522(g). The bankruptcy court found that Trustee did not recover the property claimed as exempt because no formal action was taken by the Trustee. The BAP reversed. 164 B.R. 759 (9 th Cir. BAP 1994). The Ninth Circuit Court of Appeals affirmed the BAP agreeing with and adopting its reasoning. The BAP held: It is not necessary for the Trustee to commence a formal adversary proceeding or obtain a final judgment to prevail on an objection to a debtor s claim of exemption pursuant 522(g)(1) A Trustee, however, must present sufficient facts upon which a bankruptcy court could reasonably conclude that a debtor transferred property in such a manner as to invoke the Trustee s avoidance powers. 164 B.R. at The BAP further observed that in the bankruptcy context a Trustee may recover fraudulently transferred property in a number of ways, including by merely using the threat of avoidance powers to induce a debtor or transferee to return the property to the estate. Id. at 763. The Ninth Circuit Court further agreed with the BAP s observation that providing an exemption for this Debtor who fraudulently transferred property and then was not honest in reporting his assets or pre-petition transfers, would not promote either the specific policy of 522(g) or the general policies of the Code. Id. at 765. The Ninth Circuit Court of Appeals found the BAP s analysis compelling. It further noted that under the holding of United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 242 (1989), the plain meaning of legislation should be conclusive, except in the rare cases in which the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters. The Ninth Circuit felt that a debtor should not be permitted to injure his creditors and then cause additional injury to them by claiming an exemption that will further diminish the funds available for those very creditors v1 44 Page 148 of 213

149 D. Levine v. Weissing (In re Levine), 134 F.3d 1046 (11 th Cir. 1998) -Trustee proceeding under 522(g) is not limited to the 30-day deadline In Levine, debtors had voluntarily and fraudulently transferred non-exempt assets to various insurance companies to purchase annuities that were exempt from creditors claims under state law. The Trustee had not timely objected under Rule 4003(b). The Levine court specifically held that Rule 4003(b) did not bar a Trustee from bringing an adversary proceeding under the bankruptcy code to contest the transfer of funds. The Levine court found that the Trustee s actions were subject to the two-year statute of limitations governing adversary proceedings under the Trustee s avoidance powers under 546(a)(1)(A). The court concluded that to hold otherwise, the two-year limitations period would effectively become a 30-day limitations period, thereby rendering the provision meaningless. E. In re Duncan, 329 F.3d 1195 (10 th Cir. 2003) - Subsection 522(g)(1) Applies Despite the Lack of a Timely Objection Under Rule 4003(b), and No Formal Action by Trustee is Required Trustee avoided certain fraudulent transfers of property and then proceeded to sell the property with court approval. The debtor objected because the notice did not include reference to the debtor s $10,000 homestead exemption. Debtor also objected because the Trustee had not timely objected to this exemption under Rule 4003(b). The Trustee argued the exemption was invalid under 522(g). The bankruptcy court ruled that debtor was not prevented by 522(g)(1) from claiming his homestead exemption. That ruling was affirmed by the BAP at 271 B.R. 196 (10 th Cir. BAP 2002). The Circuit Court reversed. The BAP had believed that the phrase property that the Trustee recovers was not met in this instance and that alternatively the objection was not timely filed. The Tenth Circuit Court disagreed with both of those conclusions. Instead, it agreed with the Ninth Circuit and the Eleventh Circuit in the Glass and Levine decisions. Specifically, the Duncan court held that the Trustee was not subject to the 30-day limitations period under 4003(b) when he had recovered property under 522(g). Were we to hold otherwise, the two-year limitations period of 546(a)(1)(A) would effectively become a 30-day limitations period, thereby rendering the provision meaningless. The Duncan court also agreed with the Trustee s position, represented by the Glass decision, that 522(g)(1) embraces all recoveries under the applicable code sections and did not require specific formal action. F. In re Kuhnel, 346 B.R. 528 (10 th Cir. BAP 2006) Lien Release Not Involving Fraud Requires 30-Day Objection by Trustee, Reversed 495 F.3d 1177 (10 th Cir. 2007) In Kuhnel, the Trustee did not timely object to debtors exemption claimed in a Toyota, the lien against which was unperfected by the filing date. Later, the lien on the Toyota was released in response to a demand made by Trustee s counsel. Thereafter, Trustee did object to the claimed exemption. The bankruptcy court sustained the objection in reliance on Duncan. The BAP majority reversed, distinguishing Duncan as limited to cases where the trustee recovers fraudulently conveyed property through an avoidance v1 45 Page 149 of 213

150 action. In dissent, Judge Michael found no such limitation in Duncan. He noted that, as a matter of law, the granting of a lien in a vehicle constituted a voluntary transfer under 522(g)(1) that was avoidable by the trustee under 544. He concluded that formal legal action was not required nor was the trustee, when proceeding under 522(g)(1), required to object within the 30-day period. The circuit court agreed with the dissent and reversed. G. In re Randolph, 546 B.R. 474 (Bankr. N.D.Ga. 2016) Debtor cannot exempt what he no longer owns, nor will a voluntary re-conveyance allow an exemption. Property interest transferred eleven days pre-petition. Debtor claimed an exemption in the property transferred. Trustee objected. Sustained. Debtor cannot exempt what he does not own. If Trustee avoids the transfer or the property is re-conveyed, then under 522(g)(1) debtor would be prevented from claiming an exemption. Trustee s objection to exemptions was sufficient action to satisfy the recovery element. H. In re Nersinger, 2006 WL (Bankr. W.D. N.Y.) Debtor s Exemption Preempts Estate s Interest in Avoided Mortgage Liens Reconsidered and Trustee s Objection Sustained, 2007 WL (Bankr. W.D.N.Y. 2007) Debtor claimed in her Chapter 7 petition a $30, homestead exemption under New York law. She indicated the home had a value of $127,700 and was subject to secured claims totaling $112, No one objected to the exemption claim before the 30-day deadline and, thereafter, the Trustee sold the home and avoided the two mortgage liens against it. Trustee then objected to the homestead exemption claim pursuant to 522(g). Trustee asserted that the exemption was limited to the $5,000 of equity above the avoided mortgage liens, whereas debtor insisted on the full amount. The court initially ruled in favor of the debtor, on a Motion for Reconsideration realized Judge Ninfo realized he had holing that under Taylor v. Freeland & Kronz, 503 U.S. 638 (1992), property claimed as exempt is exempt when there are no objections timely filed even if there is no basis in law or fact to claim it. Since no objection was timely filed, the court overruled the objection and allowed the debtor s claimed amount to be paid from the sale proceeds..misread Taylor. Here, there was no basis to object to the debtor s validly claimed homestead exemption. Such an exemption would only attach to any available equity in the home. Under 551, the avoided mortgage liens are preserved for the benefit of the bankruptcy estate; therefore, even without an objection, the homestead exemption could have attached only to the equity above the mortgage liens as the trustee asserted. Accordingly, he reversed himself and sustained the trustee s objection. I. In re Hicks, 342 B.R. 596 (Bankr. W.D. Mo. 2006) No formal Action Required or Timely Objection Needed In Hicks, the Trustee objected to debtor s claimed exemption in a Cadillac Escalade on the ground that any equity resulted from his 544 avoidance powers and consequently, 522(g) precluded any exemption by the debtor therein. Debtor asserted that Trustee had not taken any affirmative action to avoid the lien and therefore could not utilize 522(g). Trustee responded that the lender had conceded right away that its lien was not perfected v1 46 Page 150 of 213

151 The court sustained the objection, noting that there will be cases where a lien is patently unperfected and the creditor will yield to the Trustee without much effort. Judge Finnerman noted that such property comes into the estate pursuant to the Trustee s powers nevertheless, and the debtor may not claim such property as exempt. Otherwise, he concluded the Trustee would always be required to file an adversary action resulting in unnecessary and wasteful litigation. J. In re Witt, 273 B.R. 563 (Bankr. W.D. Wis. 2000) No Formal Action Required or Timely Objection Needed In Witt, the debtor had scheduled a car with no equity and claimed an exemption of $4,025. No objection was filed to this exemption. Thereafter, the Trustee avoided the lien on the car and requested turnover of the vehicle from the debtor. The debtor objected, claiming the Trustee s failure to timely contest the exemption insulated the car from any interest of the estate. However, the court found that the Trustee s failure to object could not defeat the Trustee s right to preserve the avoided lien for the benefit of the estate. Judge Martin held: The exemption, though valid by default, attached only to the debtor s interest in the car on the petition date. The equity later created by the Trustee s lien avoidance did not exist on the effective date of the exemption. It could be claimed only under 522(g) which is unavailing to the debtor. Accordingly, the Debtor was ordered to surrender the vehicle to the trustee. K. Debtor cannot Exempt Property Re-conveyed Post-petition Debtor s residence had been titled jointly with his non-debtor spouse until February 2008, when debtor gifted his interest to his wife. Debtor filed a Chapter 7 petition on May 18, Although he had no interest in the home on the petition date, he scheduled ownership of the residence and claimed a homestead exemption therein. He did not disclose the February 2008 transfer. At the 341 meeting, the trustee indicated his intent to avoid the transfer through litigation. The following month, debtor s wife re-conveyed the transferred interest back to the debtor, who then filed amended schedules to disclose all the transfers related to the home. The trustee filed an objection to the exemption claimed in the home under 522(g). Debtor defended by arguing that the re-conveyed interest was not recovered by the trustee and therefore 522(g) was inapplicable. The bankruptcy court sustained the trustee s objection. In re Floyd, 423 B.R. 579 (Bankr. M.D. Ga. 2009). First, the court noted that the post-petition re-conveyance did not render the home property of the estate on the petition date. Instead, it would only become property of the estate under 541(a)(3) by virtue of the trustee s recovery under 550. Section 522(g)(1) specifically bars exemptions in property that the trustee recovers under section 550 following the voluntary transfer. Judge Walker further noted that 550(a) and 548 did not require that the trustee bring an adversary proceeding to avoid a transfer and to recover the property transferred. While the court noted that an adversary proceeding was the appropriate method for a trustee to enforce his rights when meeting resistance from the transferee, such a proceeding is not necessary where the transferee concedes the trustee s superior claim on the property. The court specifically followed v1 47 Page 151 of 213

152 Glass v. Hitt (In re Glass), 60 F.3d 565 (9 th Cir. 1995), which also involved a property reconveyed to the debtor post-petition, just days after a trustee filed his objection to exemptions. Thus, the court held that 522(g)(1) would prevent the debtor from exempting the re-conveyed property which entered the bankruptcy estate via 541(a)(3), and the re-conveyance back to debtor is immaterial to the trustee s rights. XI. MISCELLANEOUS ISSUES OF INTEREST A. Consequence of Filing Exemption Claims Late 1. When a debtor files his bankruptcy disclosure forms, including his Schedule C, outside of the time limits of Rule 1007(c), he forfeits the benefit of the bar date provided by Rule 4003(b). 2. In Petit v. Fessenden, 80 F.3d 29 (1st Cir. 1996), the debtor s creditors initiated an involuntary Chapter 7 proceeding in the United States Bankruptcy Court for the District of Maine, and the bankruptcy court entered the order for relief on December 10, Petit v. Fessenden, 80 F.3d 29, 30 (1st Cir. 1996). Approximately 1 week later, the debtor filed a motion to convert the case to a case under Chapter 11. At the resulting hearing on February 2, 1994, over the objection of the petitioning creditors, the court converted the case to a case under Chapter 11, and took under advisement a request to appoint a Chapter 11 trustee. The resulting order required the debtor to file her Chapter 11 bankruptcy disclosure forms on February 23, Two days after this deadline, and 61 days after her bankruptcy disclosure forms were due in the original Chapter 7 case under Rule 1007(c), the debtor filed her disclosure forms, including her Schedule C. On the debtor s schedule C, the debtor claimed an exemption in the entire anticipated proceeds from a lawsuit against Key Bank, which the debtor estimated had a value greater than $25 million. On May 17, 1994, the United States Trustee convened the meeting of creditors, which the Assistant United States Trustee continued to an unspecified date. On June 17, 1994, the court appointed a Chapter 11 Trustee. On August 22, 1994, two months after his appointment, the Chapter 11 Trustee objected to the debtor s claim of exemptions. Following a response in opposition along with a motion to quash, the bankruptcy court ruled that the objection to exemptions was not time barred. The district court later affirmed, and the debtor appealed to the First Circuit. After evaluating the interplay between Rules 1007 and 4003 and 11 U.S.C. 522, the First Circuit affirmed the lower courts decisions on the premise that the debtor could not object to the timeliness of the objection because she had not complied with the time limits under Rule 1007(c) or the bankruptcy court s order. 3. In In re Montanoro, 307 B.R. 192 (Bankr. E.D.Cal 2004) (Kline, J.), the bankruptcy court synthesized the holding from Petit with Supreme Court precedent to conclude that for a debtor to enforce time limits in the rules, the debtor must first comply with the rules. The debtors in that matter commenced their bankruptcy case by filing a skeletal Chapter 7 petition for relief on September 25, As a result, the deadline for them to file their bankruptcy disclosure forms under Rule 1007(c) was October 9, After that date on v1 48 Page 152 of 213

153 October 21, 2003, the debtors filed their bankruptcy disclosure forms, including their Schedule C. The meeting of creditors began and was completed on October 28, On November 13, 2003, the debtors filed a motion to compel requesting an order compelling the trustee to abandon the estate s interest in their residence. The trustee opposed the debtors motion arguing that their tardiness in filing Schedule C resulted in the debtors forfeiting their right to claim any exemptions at all. The court in Montanoro disagreed with the trustee reasoning that his argument was too harsh and unduly punitive if applied as a general rule. Id. at 198. Instead, the court reviewed the rules of law set forth by the Supreme Court in Taylor v. Freeland & Kronz, 503 U.S. 638 (1992) and Kontrick v. Ryan, 540 U.S. 443 (2004) and by the First Circuit in Petit, 80 F.3d at and concluded that, when taken together, they stand for the proposition that one who does not honor time requirements created by claim-processing rules in the Federal Rules of Bankruptcy Procedure may forfeit benefits that would otherwise flow from such rules. Montanoro, 307 B.R. at As a result, the debtors late filed Schedule C did not forfeit debtors right to claim exemptions, but instead forfeited the protection of the limitations period granted by Rule 4003(b).... Id. at 199. B. Untimely Objection Sustained Where Exempted Property Not Property of the Estate Debtors scheduled and then exempted their fee simple interest in certain real property consisting of 60 acres and improvements valued at $500,000, under their Idaho exemption. The Trustee later learned that the property was actually owned by the debtor s LLC. Neither the Trustee nor any other party objected to the exemption within the required 30-day period under Rule 4003(b). Thereafter, debtors filed a motion to compel abandonment of the property, which the Trustee opposed. In re Lavelle, 350 B.R. 505 (Bankr. D. Idaho 2005). Debtors relied on Taylor v. Freeland & Kronz, 503 U.S. 638 (1992), wherein the Supreme Court held the failure to object bars the party from contesting the exemption later whether or not [debtor] had a colorable statutory basis for claiming it. The Trustee, however, distinguished the case by reference to 522(b) which only allows an exemption from property of the estate. Trustee asserted that the subject property was not property of the estate and that the failure to object to the claimed exemption was not fatal. The bankruptcy court agreed. Judge Myers noted that it was the debtor s interest in their LLC, not the assets of the LLC, that became property of the bankruptcy estate, and debtors had claimed no interest therein as exempt. Therefore, the Trustee s objection was sustained. XII. CARVE-OUTS AND SUBORDINATION A. Background The trustee is sometimes able to administer a property with no equity. Under 724(b), certain rights are given to the trustee to subordinate tax claims to the cost of the administration of the estate. In Laredo, supra, that is what the trustee was accomplishing. In other instances, the trustee works out a carve-out with the IRS or other state taxing authorities with respect to their tax liens, or with respect to a mortgage holder on the property. If the property is successfully sold, the trustee may realize on the carve-out for the benefit of the bankruptcy estate. If a debtor v1 49 Page 153 of 213

154 has asserted an exemption or later amends to claim an exemption in the carved-out portion of a homestead exemption, the homestead exemption has nothing to which it can attach if no equity position is reached. Typically, the trustee s carve-out is calculated against the mortgagee s payoff and is not representative of any equity. Thus, it is outside the scope of the homestead exemption. See, e.g., In re Moyer, 39 B.R. 211 (Bankr. N.D. Ga. 1984)(Drake, J.). 1. Home with No Equity can be sold by Trustee on Carve-out with the IRS despite Debtor's Claimed Exemptions Debtors owned a residence with a value of $325,000. A first mortgage encumbered it in the approximate amount of $195,500 followed by a federal tax lien in the approximate amount of $382,300. Although there was no equity in the property, debtors claimed under North Carolina law a homestead exemption of $60,000 indicating "debtors exempt their entire interest in this property despite the lack of equity." The trustee objected on the ground that debtors had no equity in the residence to exempt. The bankruptcy court overruled the objection but noted that title to the home remained with the bankruptcy estate under 541. The trustee negotiated a carve-out with the IRS whereby 30% of the sale proceeds that would otherwise be paid to the IRS toward satisfaction of its tax lien would instead be retained by the bankruptcy estate for payment of allowed administrative claims, with any balance to be paid on a pro-rata basis to unsecured creditors. Trustee then filed a motion to sell the property pursuant to that carve-out. Debtors objected on the ground that their exemption claim had removed the residence from the bankruptcy estate such that the trustee lacked statutory authority to sell it. The bankruptcy court denied the objection and granted the motion. Debtors appealed. The district court affirmed. On further appeal to the circuit court, the lower court was affirmed. Reeves v. Callaway (In re Reeves), 2013 U.S. App. LEXIS (4 th Cir. Nov. 20, 2013). The Fourth Circuit noted that the fully encumbered property remained the property of the bankruptcy estate until it was either abandoned or sold by the secured creditor after obtaining stay relief. The fact that the IRS had agreed to the carve-out had no adverse consequences for debtors because the trustee confirmed that debtors would receive full credit with respect to their indebtedness to the IRS for any amount paid under the carve-out to the bankruptcy estate. This arrangement justified the trustee's action in selling the residence as opposed to abandoning it. Further, the court held that the debtors' exemption of $60,000 was subordinate to the first mortgage lien and the federal tax lien. Therefore, effectively, there was no value to which the exemption could attach. [Author's Comment: NABT and NACBA filed competing amicus briefs with NABT prevailing. Congratulations to Marty Sheehan who prepared the brief and appeared on behalf of NABT, as well the entire Amicus Committee. This is an important case because some courts do not understand that the lien position from which the carve-out proceeds are obtained is not subject to the subordinate exemption rights of the debtors. This case makes clear that not only does the trustee have the right to sell the property notwithstanding the exemption claim but that the estate's interest in the carve-out comes ahead of those same exemption claims.] 2. Short Sale Incentive Belongs to Estate On her petition date, debtor's mortgage was far greater than the value of her home. She nevertheless claimed as exempt "any and all proceeds, revenues, or concessions conceded to or v1 50 Page 154 of 213

155 granted by the secured mortgage lender on the property" up to $11,764. Trustee objected, and the court sustained the trustee's objection. In re BonnieJean Bunn-Rodemann, 491 B.R. 132 (Bankr. E.D. Cal. 2013). Judge Sargis stated: "Attempting to claim an exemption in this type of asset is a relatively new phenomenon arising from creditors realizing that a short sale of the property securing the debt (by which the creditor agrees to take less than the full amount owed) is better than the creditor completing a non-judicial foreclosure sale and the creditor becoming the owner of the property." The court explained that some "savvy" borrowers were negotiating incentive payments from the lenders that would be less than the cost of foreclosing, owning the property, and selling the property itself. Further, Chapter 7 trustees had determined that they could obtain incentive payments by conducting short sales of homes rather than abandoning them. When they did so, the incentive payment would not be the liquidation of the asset that the debtor owned on the petition date but, rather, compensation paid by the secured creditor to the trustee for services rendered. However, once the Chapter 7 petition was filed, the debtor no longer had the right or power to conduct a short sale or to "sell her own real estate services." "It is the Chapter 7 Trustee's labor and the estate's expense in working to sell property of the estate which is the subject of the incentive payment." The court observed that when the trustee chose to retain and attempt a sale of the underwater home, the debtor had the option of moving out, asking the trustee to abandon the property, or attempting to stay and negotiating with the trustee the terms of continued possession, such as paying the current insurance and maintenance costs to allow the debtor to avoid paying rent for housing and moving expenses during the first months of a Chapter 7 fresh start. The court observed: "In reality, these debtor-trustee issues concerning a short sale are steeped in the highest tradition of bankruptcy what deal can be made that is in everyone's best interest." [Author's Comment: This court's analysis seems to state the obvious, particularly with its last comment concerning the deal being made "in everyone's best interest." Nevertheless, in certain regions, the U.S. Trustee objects to efforts to do short-sales or carve-outs, despite the win-win-win scenario, if it feels the trustee and his or her professionals receive a disproportionate amount of benefit when compared to the general unsecured creditors. No assessment of the risk borne by the trustee is part of the calculation nor does it seem to matter that every unsecured creditor would prefer a meaningful distribution rather than no distribution.] 3. Holding Permits Debtor to Exempt Carve-out Proceeds (creating a conflict with other cases) The trustee believed that she could obtain carve-outs from the mortgage holders on two separate properties. After debtor had received a discharge, trustee filed an application to employ a bankruptcy short sale specialist. In response, the debtor filed an amended Schedule C asserting wild-card exemptions in the properties in the total amount of $26,328. Trustee asserted that the debtor could not do so as those exemptions would not have existed on the petition date and exceeded the maximum amount permitted under California law. The court sustained the objection only as to the amount claimed as it was beyond the wild-card limit of $23,350, but otherwise overruled the objection. In re Wilson, 494 B.R. 502 (Bankr. C.D. Cal. 2013)(Clarkson, J.) The court stated that it did not matter how the funds were generated by the estate through a 363 sale, including if derived from a "gift" from the mortgage lender so that they would not have to undertake a foreclosure proceeding under California law. Those funds were subject to the v1 51 Page 155 of 213

156 valid exemption asserted in this case. Contra, In re Bunn-Rodemann, 491 B.R. 132 (Bankr. E.D. Cal. 2013); In re Baldridge, 2013 WL , 2013 U.S. Dist. LEXIS (E.D. Mich. 2013); In re Reeves, 2013 U.S. App. LEXIS (4 th Cir. Nov. 20, 2013), and In re Goben, 2013 WL , 2013 BANKR. LEXIS 3952 (8 th Cir. BAP 2013). [Author's Comment: The court misunderstands the exemption in part because the trustee did not properly assert the objection. There is no equity in the properties to exempt as this is a gift from the lenders to the estate that bypasses debtor's exemption rights. Many cases so hold but none were discussed by the court or apparently asserted by the trustee here. It is also possible that the trustee did not properly document the nature of the carve-out which led to this result. The amount carved-out should be deducted dollar for dollar from the mortgage holder's lien to reflect that the trustee is standing in the shoes of the mortgage holder for purposes of the carve-out amount which would not be subject to exemption for that reason.] 4. Homestead Exemption does not attach to carve-out from Sale Proceeds In In re Diener, 2015 WL (Bankr. N.D. Ga. 2015) (Murphy, J.), debtors asserted a claim of exemption in their homestead to which no objection was filed. Debtors were unable to make their mortgage payments and were in danger of losing their home to foreclosure. The trustee stepped in and reached a carve-out settlement with the mortgage holder to allow for a short-sale of the property and a carve-out of the sale proceeds from the payoff of the mortgage. The estate received over $25,000 as part of the carve-out. Debtors did not object to the carve-out settlement or 363 sale motion, both of which asserted that the proceeds would be non-exempt as being part of the mortgage and not equity. When the trustee filed his final report reflecting that no exemption funds would be paid on the property sale, debtors objected asserting that their homestead exemption primed the carve-out proceeds. Following the overwhelming majority of cases on the subject, the court overruled the objection and granted the final report, finding that the homestead exemption would only attach to equity from the sale of the property. As there was no equity, the exemption could not be monetized. [Author's Comment: In In re BonnieJean Bunn-Rodemann, 491 B.R. 132 (Bankr. E.D. Cal. 2013). Judge Sargis stated: "In reality, these debtor-trustee issues concerning a short sale are steeped in the highest tradition of bankruptcy what deal can be made that is in everyone's best interest." Judge Sargis seems to state the obvious that the deal being made is "in everyone's best interest." Nevertheless, in certain regions, the U.S. Trustee objects to efforts to do short-sales or carve-outs, despite the win-win-win scenario, if it feels the trustee and his or her professionals receive a disproportionate amount of benefit when compared to the general unsecured creditors. No assessment of the risk borne by the trustee is part of the calculation nor does it seem to matter that every unsecured creditor would prefer a meaningful distribution rather than no distribution.] XIII. DOMESTIC SUPPORT OBLIGATIONS A. Background Section 523(a)(5), as amended, excepts from discharge any debt for a domestic support obligation. Therefore, under 522(c)(1), debts for DSO s may be enforced against exempt v1 52 Page 156 of 213

157 property, whether or not the underlying support obligation could be enforced against that property under applicable state law. Additionally, under 507(a)(1) (A), DSO claims now have first administrative priority. However, to protect a trustee s ability to recover his or her administrative expenses for administering assets to pay these now highest priority claims, Congress added 507(a)(1)(C) which provides, in pertinent part: If a trustee is appointed the administrative expenses of the trustee shall be paid before payment of [DSO claims] to the extent that the trustee administers assets that are otherwise available for the payment of [DSO claims]. See, generally, Dennis G. Bezanson & Gary B. Rudolph, The Super-Priority of a Domestic Support Obligation (DSO: The Trustee as Liquidator of Exempt Property for the Benefit of DSO Claimants; and Other DSO Issues, NABTalk, Vol. 22, No. 1 (2006) (hereafter the NABTalk Article. ) B. The Issues Raised 1. Is the Trustee Required to Object to Claimed Exemptions In Order to Preserve Otherwise Exempt Property for the Benefit of a DSO Claimant? 2. May the Trustee Liquidate Exempt Property for the Benefit of a DSO Claimant: 3. Do the BAPCPA amendments to 507(a)(1) and 522(1) Authorize a Trustee to Administer Exempt Property? Right after BAPCPA, several decisions have now considered the foregoing issues and answered them in the negative, including In re Covington, 2006 WL (Bankr. E.D. Cal.) (McManus, J.); In re Ruppel, 2007 WL (Bankr. D. Ore.) (Alley,J.); In re Quezada, 2007 WL (Bankr. S.D. Fla.) (February 7, 2007) (Mark, J.); and In re Van Deventer, 2007 WL (Bankr. C.D. Ill. 2007) (Gorman, J.). C. Is the Trustee Required to Object to Claimed Exemptions in Order to Preserve Otherwise Exempt Property for the Benefit of a DSO Claimant? It appears that it is not necessary for a trustee to object to claimed exemptions in order to preserve otherwise exempt property for the benefit of a DSO claimant. This is good news for trustees, relieving trustees of a potential threat of liability for any failure to object. [A] domestic support obligation may be enforced against property of the debtor, both during the chapter 7 case without violation of the automatic stay, and after entry of a discharge without violation of the discharge injunction. See 11 U.S.C. 362(b)(2)(B) & 522(c)(1). This is so even when the property against which the domestic support obligation is being enforced has been exempted by the debtor in the bankruptcy case. Covington at p v1 53 Page 157 of 213

158 Citing Ruppel and Covington, Quezada likewise finds no authority for any limitation of a debtor s right to claim all exemptions otherwise available under 522 and that 522(c)(1) does not create a valid basis for an objection to exemptions by the trustee or the DSO creditor. Quezada at p. 4. D. May the Trustee Liquidate Exempt Property for the Benefit of a DSO Claimant? Do the BAPCPA amendments to 507(a)(1) and 522(c)(1) Authorize a Trustee to Administer Exempt Property? 1. Overview All of the cases to have addressed this issue were pre-schwab v. Reilly and involved fact situations where the trustee was attempting to administer for the benefit of a DSO claimant fully exempt assets. Section 704(a)(1) provides that a chapter 7 trustee must collect and reduce to money property of the estate. (Emphasis added.) Thoase assets might not be considered fully exempt under Schwab. 2. Covington When a debtor exempts property, it is effectively removed from the estate. Therefore, there is no property of the estate for the trustee to administer for the benefit of creditors in general or the holder of the domestic support obligation in particular. Covington, at p. 2. The Covington court also added a policy argument: [I]t makes more sense to require the holder of a domestic support obligation claim, not the bankruptcy trustee, to enforce a domestic support obligation in a non-bankruptcy forum. That forum may then deal with the availability and extent of non-bankruptcy exemptions. By enforcing the domestic support obligations in state court, the trustee s administrative expenses will be avoided v1 54 Page 158 of 213

159 Covington at p Ruppel Following Covington, and noting that the asset to be administered was claimed as fully exempt, the Ruppel court held: The Trustee seeks to liquidate exempt non-estate property which is not owed to the estate or unsecured creditors generally, for the benefit of a single creditor. This the Trustee may not do, as there is nothing in the liquidation framework of the Code authorizing a chapter 7 trustee to collect money not owed to the estate. Ruppel at p.3 citing Williams v. California First Bank, 859 F.2d 664, 667 (9 th Cir. 1988) 4. Quezada Here the Trustee argued that exempt assets were assets that are otherwise available for payment of DSO claims and thus, within the scope of assets Congress intended trustees to administer under 507(a)(1)(C). The Trustee further argued that Congress could have used the phrase property of the estate instead of the broader phrase assets otherwise available. The Trustee cited as authority the NABTalk Article. However, the court found that these arguments were trumped by the 704(a)(1) limitation that trustees administer the property of the estate. The court found that the fully exempt asset had been removed from property of the estate. The phrase assets otherwise available is not express authority for a trustee to administer exempt property. The court finds that a DSO creditor can enforce directly in the bankruptcy court a DSO claim against property, as a proceeding arising under Title 11. Thus, jurisdiction would be created under 1334(b). E. Where Does This Leave Trustees? The analysis of these cases were likely overturned by Schwab v. Reilly because the asset is not being removed from the estate as the exemption is now dollar limited. Trustees are not required to object to the otherwise properly claimed exemption of an asset for the sole purpose of administering it for the benefit of a DSO claimant. Are there situations where the Trustee would have a higher likelihood of success? Yes. a. Consider what would be the analysis of these courts if the assets the Trustee sought to administer were property of the estate because they v1 55 Page 159 of 213

160 consisted of equity above the exempted amounts. In such a situation, the Trustee would be required to administer those assets under 704. If the assets were sold but generated only enough money to pay the secured liens, administrative expenses, and the exemption, would the exemption portion be paid to the debtor or the DSO claimant? The author would suggest to the DSO claimant under 522(c)(1). b. The DSO claimant could even obtain a judgment post-petition without violating the stay under 362(b)(2)(B) and (C) that it would be entitled to collect from property that is not property of the estate and even try to garnish the Chapter 13 trustee. See In re Brickell, 292 B.R. 705 (Bankr. S.D. Fla. 2003)(Schermer, J.), aff d 142 Fed.Appx. 385 (11 th Cir. July 29, 2005). Thus, if this kind of demand is made, the trustee would be put in a very difficult position v1 56 Page 160 of 213

161 APPENDICES A. SCHWAB v. REILLY B. ARTICLE: LAW v. SIEGAL DICTA LEADS LOWER COURTS ASTRAY C. LAW v. SIEGAL v1 57 Page 161 of 213

162 A. SCHWAB v. REILLY v1 58 Page 162 of 213

163 Schwab v. Reilly Two Years Later: Appellate Opinions on Appreciation and 100% of FMV Prior to Schwab v. Reilly, debtors in many jurisdictions signaled intent to remove an asset from the bankruptcy estate by exempting a dollar amount equal to the amount listed as the full fair market value of the asset.1 In Schwab, however, the Supreme Court ruled such a practice only exempted the debtor s interest in the asset to the extent of the exemption claimed.2 Therefore, because the debtor in Schwab undervalued the asset, the trustee could sell the asset for the benefit of the estate.3 In dicta, the Supreme Court stated that if the debtor wanted to exempt the full value of an asset, the intent would have to be unambiguous.4 Thus, after Schwab, much debate has focused on the appropriate way for a debtor to signal his intent to exempt the entire asset from the estate. A recent Third Circuit decision, In re Orton, highlights the difficulty in removing an asset from the bankruptcy estate through a claim of exemption.5 Appreciation Remains in the Estate In Orton, the Third Circuit made clear that the method employed pre-schwab does not operate to wholly exempt an asset from the estate even where the amount listed represents the actual, fair market value of the asset.6 In Orton, the debtor listed his one-eighth interest in vacant land, which was subject to an oil and gas lease, as well as his one-fourth interest in the oil and gas lease, assigning a fair market value of $4,250 and $1, respectively.7 The debtor noted on his schedules that no well had been drilled on the vacant land and that no royalties were S. Ct (2010). 2 Id. at Id. 4 Id. at U.S. App. LEXIS (3d Cir. July 20, 2012). 6 Id. at *2. 7 Id v1 59 Page 163 of 213

164 currently due under the lease.8 The debtor then claimed wildcard exemptions for the two interests, pursuant to 11 U.S.C. 522(d)(5), and claimed as exempt the full amount of their value $4,250 and $1.9 No party filed an objection to the claimed exemptions within the 30-day period prescribed by Rule The chapter 7 trustee subsequently filed a motion to close the case, but to except the debtor s royalty interest in the oil and gas lease from abandonment, thereby preserving her ability to recover any future royalties for the benefit of the estate in the event a well was ever drilled on the property.11 The debtor objected, arguing that he had successfully removed the lease from the estate by listing its actual, fair market value, which value fell within the exemption limit.12 The bankruptcy court and district court disagreed, ruling that the debtor had exempted only an interest in the asset and that the trustee was entitled to pursue any post-filing appreciation of value of the oil and gas lease above the amount explicitly stated as exempt in Schedule C. On appeal to the Third Circuit, the debtor argued that Schwab s holding should be confined to instances of debtor malfeasance or negligence in claiming exemptions and should be applied in only those cases where the actual value of the assets exceed either (a) the debtor s estimates of fair market value or (b) the statutory limit for exemption.13 The Third Circuit rejected the debtor s argument, stating that there is no indication in Schwab that the Court meant to carve out an exception that would benefit only debtors who are accurate (and lucky) enough to estimate and exempt an asset s exact fair market value Id. 9 Id. at *2. 10 Id. at *3. 11 Id. 12 Id. 13 Id. at *9. 14 Id. at * v1 60 Page 164 of 213

165 Rather, Schwab focused on the concerns about placing trustees on notice, not concerns about inaccurate debtor valuations. 15 [T]he [Supreme] Court was clear that exemptions under 522(d)(5) are presumed to preserve a debtor s interest in an asset rather than the asset itself; a debtor seeking to retain more than an interest must indicate that fact unambiguously in the Schedules. 16 To do this, the Supreme Court enumerated the specific actions that would manifest intent to exempt an entire asset. 17 Namely, the Supreme Court stated that the debtor could make the scope of the exemption clear... by listing the exempt value as full fair market value (FMV) or 100% of FMV. 18 The Third Circuit went on to conclude that when a debtor retains only an interest in an asset, rather than the asset itself, the debtor is limited to the value of exemption; the estate is entitled to any appreciation in the asset s value beyond the amount exempted. 19 Whether Objection to 100% of FMV is Mandatory As recognized by the Third Circuit, however, even if the Orton debtor had used the Supreme Court s suggested language, the result likely would have been the same.20 In Schwab, the Court warned, it is far from obvious that the Code would entitle [a debtor] to clear title in [an asset] even if she claimed as exempt a full or 100% interest in it. 21 This warning has come to fruition in the majority of cases that have considered the issue, as the courts addressing the effect of claiming as exempt 100% of FMV of an asset (or similar words) have held that using these phrases either renders the attempted exemption facially defective or invites an evidentiary hearing to determine the fair market value of the asset so that a dollar amount can be 15 Id. at * Id. at *12 (quoting Schwab, 130 S. Ct. at 2668, n. 21). 17 Id. 18 Schwab, 130 S. Ct. at Orton, 2012 U.S. App. LEXIS at *16; see also Gebhart v. Gaughan, 621 F.3d 1206 (9th Cir. 2010). 20 Id. at *15-16, n Id. at *13-14 (quoting Schwab, 130 S. Ct. at 2668) v1 61 Page 165 of 213

166 assigned to the exemption. 22 Those cases reason that where the statutory basis for a debtor s claim of exemption provides only for an exemption of an interest in a certain property up to a specific dollar amount, the value of claimed exemption must be identified as a monetary value. 23 However, those cases also hold that the trustee must object to preserve the estate s interest in the asset. For example, in In re Stoney, the court interpreted the effect of claiming a 100% of FMV exemption in assets under Virginia s exemption scheme.24 Virginia, like the majority of states, has opted out of the federal exemption scheme and the Stoney court found that the trustee s objection to the debtor s claim of exemption in 100% of FMV should be sustained where the Virginia Code contains a monetary limitation.25 The court stated: Remembering the gravamen of Schwab concerns whether and when a trustee must object to a claimed exemption to preserve the right to subsequently liquidate an exempted asset, it is a misreading of Schwab to conclude the Court has blessed the use of a designation such as 100% of FMV as a valid and unobjectionable scheduling of a claimed exemption value where the relevant exemption statute, such as the Virginia Code, expressly limits the exemption to a maximum case value.26 The court added that to interpret Schwab as to negate the specific requirements of the applicable body of law would permit a judicial superseding of the state statutory requirements for exemptions and functionally negate the express authority of a state to opt out and impose its exemption limitation... on debtors who are citizens of opt-out states. 27 The Stoney court, however, denied the trustee s request that it establish a bright line rule that a trustee is not required to object to exemptions where a debtor claims the value of the 22 Id. at *15 (citing to In re Luckham, 464 B.R. 67, 77 (Bankr. D. Mass. 2012); Massey v. Pappalardo, 465 B.R. 720 (B.A.P. 1st Cir. 2012); In re Stoney, 445 B.R. 543, 552 (Bankr. E.D. Va. 2011); In re Moore, 442 B.R. 865, 866 (Bankr. N.D. Tex. 2010)). 23 Id B.R. at Id. at 546, Id. at Id v1 62 Page 166 of 213

167 exemptions as 100% of fair market value in order to limit the exemptions to the statutory amounts set forth in the Virginia Code. 28 The court found that Schwab mandate[s] that if a debtor claims the value of an exemption the trustee believes is improper or invalid, whether as to form or substance, the trustee must object to preserve the right to subsequently liquidate the asset at issue. 29 According to Schwab, [r]equiring a trustee to object to exemptions facilitate[s] the expeditious and final disposition of assets, and thus enable[s] the debtor (and the debtor s creditors) to achieve a fresh start free of the finality and clouded-title concerns [the Schwab debtor] describes.' 30 Therefore, although the Orton court suggested that the outcome of its decision would have been the same had the trustee been put on proper notice of the debtor s intent through the use of 100% of FMV, 31 other courts indicate that an objection in such a circumstance is mandatory in order to preserve the estate s interest in the asset. No Amendment to Official Form 6C In response to Schwab, the Bankruptcy Rules Advisory Committee had proposed an amendment to Official Form 6C to change the column for value of claimed exemption by providing the debtor two options: one that says exemption limited to $ and the other that says full fair market value of the exempted property; and the debtor would be instructed to check one box only for each claimed exemption. 32 The Committee explained its proposed amendment, stating that in considering the impact of Schwab on Schedule C, the Committee notes that the current form does not indicate the right of a debtor to exercise the option described 28 Id. at Id. at Id U.S. App. LEXIS 14898, *15-16, n. 1; see also Massey, 465 B.R. at Bankruptcy Rules Advisory Committee, Report of the Advisory Committee on Bankruptcy Rules to the Standing Committee on Rules of Practice and Procedure, available at at pp (May 6, 2011) v1 63 Page 167 of 213

168 by the Supreme Court of exempting the full fair market value of an asset. 33 The Committee s suggestion was spawned from concern that only knowledgeable debtors (or more likely, debtors represented by knowledgeable lawyers) would understand that value of claimed exemption could be stated in something other than a specific dollar amount. 34 However, as recognized by Orton and by the majority of courts that have ruled on this issue, unless the statute provides an in-kind exemption, the debtor does not have the right to exempt 100% of FMV of the asset, but must state in dollar amount the extent of his exemption.35 This point was unequivocally made by the First Circuit Bankruptcy Appellate Panel in Massey v. Pappalardo, where it flatly rejected the argument that Schwab supports a debtor s retention of exempt property regardless of whether the relevant exemption statute includes a monetary cap or not' and that such a policy is necessary to give meaning and effect to a debtor s fresh start. 36 Rather, the Massey court found that Schwab was not outlining a procedure by which an exemption claimed under a limited-interest exemption statute could be legitimately converted into an exemption in-kind 37 and that the Supreme Court found that such policy would actually threaten to convert a fresh start to a free pass, stating: Congress balanced the difficult choices that exemption limits impose on debtors with the economic harm that exemptions visit on creditors, and it is not for us to alter this balance by requiring trustees to object to claimed exemptions based on form entries beyond those that govern an exemption s validity under the Code.38 The bankruptcy rules committee apparently agreed and has dropped the proposed amendment. Conclusion 33 Id. 34 Id. 35 Orton, 2012 U.S. App. LEXIS 14898; In re Luckham, 464 B.R. 67, 77 (Bankr. D. Mass. 2012); Massey v. Pappalardo, 465 B.R. 720 (B.A.P. 1st Cir. 2012) B.R. at 724, Id. at (quoting In re Luckham, 464 B.R. 67, 74 (Bankr. D. Mass. 2012)). 38 Id. at (quoting Schwab, 130 S. Ct. at 2667) v1 64 Page 168 of 213

169 Thus, while a majority of courts recognize that a claim of 100% of FMV is facially invalid with respect to exemptions limited to a specific dollar amount and sustains a trustee s objection if one is lodged, Schwab requires that the objection be made. Further, although such objections by the trustee could be avoided if debtors simply claim exemptions in a numerical amount within the statutory exemption limits, that practice no longer operates to exempt the entire asset even if, as in Orton, the debtor provides the actual, fair full market value of the asset. Thus, the Supreme Court s suggestion actually encourages gamesmanship, while discouraging finality and prompt administration. On the one hand, it encourages debtors to claim exemptions in a procedurally defective manner, thereby requiring the trustee to object. On the other hand, where debtors actually claim exemptions correctly, it leaves the asset in the bankruptcy estate and places post-petition appreciation at risk to future administration by the trustee. The solution, of course, is to look to another section of the Bankruptcy Code that already provides a mechanism by which the debtor can remove assets from the bankruptcy estate. Under Section 554, the debtor could request that the trustee abandon the asset or could file a motion to compel abandonment with the bankruptcy court. This procedure, not attempting to remove an asset from the estate through a claim of exemption, would allow the debtor to obtain finality and prompt administration v1 65 Page 169 of 213

170 B. ARTICLE: LAW v. SIEGAL DICTA LEADS LOWER COURTS ASTRAY v1 66 Page 170 of 213

171 v1 67 Page 171 of 213

172 v1 68 Page 172 of 213

173 v1 69 Page 173 of 213

174 C. Article: HISTORY OF STEPHEN LAW CASE AND DEBTOR S MISCONDUCT By Steven T. Gubner, Esq v1 70 Page 174 of 213

175 HISTORY OF STEPHEN LAW CASE AND DEBTOR S MISCONDUCT By Steven T. Gubner, Esq. A. The Bankruptcy Case and Fraud Adversary Proceeding. The Bankruptcy Case was initiated by the filing of a voluntary chapter 7 petition on January 5, 2004 (the Petition Date ). Debtor owned the Property on the Petition Date, and clamed a homestead exemption in the Property in the amount of $75,000. Alfred H. Siegel was duly appointed as the Chapter 7 Trustee. In his schedules, the Debtor testified that he made, executed and delivered to Lili Lin of Artesia (as hereinafter further identified) a Promissory Note dated June 24, 1999 for the principal sum of $168, (the Note ), and for no consideration to secure the obligations contained in the Note, the Debtor made, executed and delivered to Lili Lin of Artesia a Deed of Trust and Assignment of Rents, dated June 24, 1999, and recorded on or about June 28, 1999 with the Los Angeles County Recorder as Document No (the Disputed Trust Deed ). Pursuant to the Disputed Trust Deed, the Debtor, as trustor, irrevocably granted, transferred, and assigned, to Lili Lin of Artesia, as trustee and beneficiary, his valuable interest in the Property, with power of sale (the Transfer );On June 8, 2004 the Trustee filed a complaint (the Fraud Complaint ) against Lili Lin, an individual ( Lin ) initiating the Fraud Adversary Proceeding, Siegel v. Lin (In re Law), Adv. No. 2:04-ap-01969, in the Bankruptcy Case. The Fraud Complaint sought to avoid and recover the Disputed Trust Deed from Lin. Debtor made, executed and delivered a copy of the Note to Lin; to encumber the Property and to allegedly secure the obligations contained in the Note, Debtor allegedly made, executed and delivered the Disputed Trust Deed to Lin, as trustee and beneficiary. At the time of the recordation of this comfort lien in favor of Lin, a state court action styled Cau-Min Li v. Law, LASC Case No. KC was pending against the Debtor, and a judgment in the amount of $131, was subsequently entered against Debtor on October 14, 1999 ( State Court Judgment ). The State Court Judgment was entered within four months of the recording of the v1 71 Page 175 of 213

176 Disputed Trust Deed. The State Court Judgment included a finding that Debtor s acts and conduct merit reaffirmation as a vexatious litigant, from August 25, 1995, as of July 8, Debtor listed the Disputed Trust Deed in his Schedules. The Trustee alleged in the Fraud Complaint that the Disputed Trust Deed was fictitious and fraudulent, and that the Transfer was undertaken by Debtor to falsely encumber the Property with the intent to defraud his creditors. Thereafter an answer to the Fraud Complaint was filed by Lili Lin (of Artesia), and she eventually entered into a stipulated judgment ( Stipulated Judgment ) with the Trustee stating that although she was listed as a beneficiary of the Disputed Trust Deed, she had not loaned Debtor money as set forth in the Note and Disputed Trust Deed, and that in or about June 1999 Debtor gave her a copy of the Disputed Trust Deed and Note but never explained to her why he gave her the documents. The Stipulated Judgment found that the Transfer was made by Debtor with the actual intent to hinder, delay, or defraud his creditors. By the Stipulated Judgment the Trustee and Lin resolved all of their differences with respect to the Fraud Adversary Proceeding. On April 19, 2005, the Trustee filed his Notice of Motion and Motion to Approve Compromise of Controversy ( 9019 Motion ) requesting the issuance of an order approving the Stipulated Judgment. A hearing on the 9019 Motion took place on May 18, Upon a review of the 9019 Motion, the oppositions filed by Debtor and Lili Lin of China, and the oral argument of counsel and Debtor, the Court found that Lili Lin (of Artesia): (1) presented evidence that demonstrated to the Court that she had a direct interest in the matter at issue, (2) was directly involved with the Disputed Trust Deed at issue, and (3) proved by her declaration (the Lili Lin (of Artesia) Declaration ) that in the year 2000, Debtor gave her a series of documents, which she rejected, by which Debtor requested that she assign her interest in the Note to Connie Chang, Debtor s ex-wife, substitute County Records Research as the Trustee under the Disputed Trust Deed, foreclose on the Property, and sell the Property to satisfy the obligations secured by the Disputed Trust Deed. At the hearing on the 9019 Motion the Court stated: [B]ased on what you ve been telling me, Mr. Law, you know the woman [Lili Lin] in China. Mr. Chow [Lili Lin of China s attorney] knows the woman [Lili Lin] in China v1 72 Page 176 of 213

177 I m sure that one or both of you could bring her forward or bring evidence forward if you wanted to do that. You haven t done it. Despite the oppositions filed by the Debtor and ostensibly by a person who came to be known as Lili Lin of China, the Court found that the Trustee s evidence provided good cause to grant the 9019 Motion and approve the Stipulated Judgment, finding it was fair and equitable and in the best interests of the Estate. The order approving the 9019 Motion was affirmed by the BAP on July 10, Pursuant to the Stipulated Judgment entered by the Court, it was determined that: (1) Debtor then owned the Property; (2) the Debtor for no consideration executed and caused the Note in the principle sum of $168, and the Disputed Deed of Trust to be recorded; (3) Debtor, as trustor, granted to Lili Lin (identified by her signature on the Stipulated Judgment as Lili Lin (of Artesia)) as trustee and beneficiary Debtor s valuable interest in the Property (i.e. the Transfer ); (4) the Transfer was made by Debtor with the actual intent to hinder, delay or defraud Debtor s creditors; (5) the Transfer was avoided pursuant to 11 U.S.C. 544(b) and Cal. Civ. Code (a), and (6) the Disputed Trust Deed and Note were recovered and assigned to the Trustee pursuant to Section 550(a) and preserved for the benefit of the Estate under Section 551. Thereafter, on May 31, 2005, an answer to the Fraud Complaint was filed by Lili Lin of China, pro se. (Lili Lin of China was represented previously by Peter Chow, Esq. and no substitution of attorney was ever filed.) In addition to filing an answer, Lili Lin of China filed a Motion for Reconsideration of the Order approving the 9019 Motion ( Reconsideration Motion ). The Reconsideration Motion provided no evidence that Debtor ever received consideration from Lili Lin of China for the Note and Disputed Trust Deed, no evidence that Debtor made monthly payments to Lili Lin of China in accordance therewith, and no explanation as to why Debtor tried to foreclose on the Property. A hearing on the Reconsideration Motion took place on July 6, Lili Lin of China did not appear at the hearing and the Reconsideration Motion was denied. Lili Lin of China also v1 73 Page 177 of 213

178 filed numerous subsequent pleadings and declarations in the Fraud Adversary Proceeding yet never physically appeared at the Bankruptcy Court. Accordingly, Lili Lin of China had ample opportunities to make her case, assert her interest in the Property, and/or assert any defenses to the Fraud Complaint, but failed to do so. B. Sale of the Property. On July 8, 2005 the Trustee filed a Motion for Turnover ( Turnover Motion ) of the Property. The Turnover Motion was granted. On or about August 19, 2005, Debtor filed Emergency Motions for Stay of the Turnover Order Pending Appeal with both the BAP and the Ninth Circuit. Both motions were denied. On or about January 9, 2006, the Trustee filed a motion to approve the sale of the Property (the Sale Motion ). A hearing on the Sale Motion took place on February 1, 2006 and an auction to purchase the Property was conducted. The highest and best offer to purchase the Property was $680, and the Sale Motion was granted. Escrow on the sale of the Property closed on March 9, Thereafter, on February 24, 2006, Debtor and Lili Lin of China filed a motion for reconsideration of the Sale Order or for stay pending appeal (the Sale Reconsideration Motion ). The Court denied the Sale Reconsideration Motion and Debtor s oral motion for a stay pending appeal also was denied. Again, Lili Lin of China again failed to appear at the hearing on the Sale Reconsideration Motion. C. The Perjury Issue Debtor perjured himself twice in the Bankruptcy Court by filing fraudulent documents under oath. First, Debtor perjured himself by knowingly and fraudulently making a false oath or account to the Bankruptcy Court when he listed the Disputed Trust Deed in his bankruptcy schedules. Debtor again perjured himself to the Bankruptcy Court when he knowingly and fraudulently attached a fake promissory note as Exhibit F to his Sale Reconsideration Motion. The Sale Reconsideration Motion claimed that the note was recorded with the Los Angeles County Recorder Office as document number The Trustee obtained a certified v1 74 Page 178 of 213

179 copy of the recorded Note from the Los Angeles County Recorder Office which evidenced the fact that the note attached to the Sale Reconsideration Motion was never recorded. D. Adversary Proceeding Re Debtor s Discharge 1. The Trustee Substitutes as Plaintiff in Discharge Action On April 12, 2004, plaintiffs Shong-Ching Tong, Yei Hwei Tong, Cau-Min Li, and the Estate of Robert Shucker filed an adversary complaint against Debtor to determine the dischargeability of a debt (the First Dischargeability Action ) and to object to the granting of a discharge to Debtor (the "First Dischargeability Complaint"). On April 8, 2004, plaintiffs Cau- Min Li and U.S. Judgment Enforcement Agency filed a separate adversary complaint against the Debtor to determine dischargeability of a debt (the Second Dischargeability Action ) and to object to the granting of a discharge to the Debtor (the Second Dischargeability Complaint ). The Trustee substituted in as Plaintiff in the First Dischargeability Action and in the Second Dischargeability Action. The First and Second Dischargeability Actions were consolidated on November 15, 2004 (the Consolidated Dischargeability Action ). The First and Second Dischargeability Complaints were rewritten to make clear that a denial of discharge was sought because the Debtor knowingly and fraudulently made a false oath or account by listing in his Schedule D a fictitious trust deed as an encumbrance on the Property. On June 8, 2004, the Trustee filed the Fraud Complaint (discussed above). 2. The Discovery Dispute On October 26, 2004, the Trustee served Debtor with Interrogatories, Request for Admissions, and Request for Production of Documents (hereinafter collectively Discovery ). After an extension of time, on December 29, 2004, Debtor served incomplete responses. Trustee s counsel and Debtor met and conferred and Trustee s counsel sent Debtor a Stipulation Regarding Discovery Dispute ( Stipulation ). Trustee s counsel also requested that Debtor prepare his contentions to the Stipulation but Debtor failed to respond and the Trustee brought a motion to compel responses from the Debtor (the Motion to Compel ). 3. Motion to Compel v1 75 Page 179 of 213

180 The Court granted the Trustee s Motion to Compel, and made the following findings: (i) the Debtor did not cooperate with the Trustee to resolve this discovery dispute as required by Loc. Bankr. R (c); (ii) Debtor s written discovery responses were obstinate and evasive; (iii) the opposition that the Debtor filed to the Motion to Compel was not substantially justified; and (iv) the circumstances justified an award of sanctions against the Debtor in the amount of $3,520. The sanctions awarded to the Trustee remain unpaid by the Debtor. Thereafter, on May 18, 2005 at a hearing in the Consolidated Dischargeability Action, the Trustee stated that he had not received the discovery responses as required by the Discovery Order. Debtor responded that an appeal regarding the Discovery Order was pending and the Court advised Debtor that an appeal would not have an effect on his duties to furnish information. On May 27, 2005, after the Debtor failed to provide the Trustee with discovery responses, or pay monetary sanctions in compliance with the Discovery Order, the Trustee filed his Motion to Strike Debtor's Answer ( Motion to Strike-Dischargeability ) on the grounds that Debtor has intentionally and willfully abused the judicial process by: (1) failing to comply with discovery over a period of eight months from October 24, 2004 to June 2005, (2) failing to comply with all parts of the Discovery Order, and (3) acting in direct contravention of this Court's oral directives. On August 10, 2005, the Court granted the Motion to Strike. Debtor of course appealed to the BAP, which affirmed the Bankruptcy Court and Debtor appealed to the Ninth Circuit. Eventually, on September 27, 2005, the Court denied the Debtor s discharge via default judgment, pursuant to section 727(a)(4)(A), for making false oaths or accounts as described above. Case No ; On or about December 29, 2006, the BAP affirmed the denial of the Debtor s discharge. E. The Declaratory Relief Action Turning back to issues regarding the Disputed Trust Deed, and the disputes between the Debtor, Trustee, and Lili Lin, on February 8, 2007, as instructed by the BAP in its December 29, v1 76 Page 180 of 213

181 2006 Memorandum of Decision, the Trustee filed an adversary complaint ( Declaratory Relief Complaint ) titled Alfred Siegel vs. Lili Lin, an individual, Adv. No. 1:07-ap (the Declaratory Relief Action ) to determine whether Lili Lin of China had any rights with respect to the Disputed Trust Deed. As a result of the Declaratory Relief Action, Debtor created a confluence in the paths of the various adversary proceedings and appeals and a perfect storm of obfuscation. The sole reason the Trustee filed the Declaratory Relief Action was because the BAP determined that there had not been an adequate judicial determination that Lili Lin of China did not have a lien against the Property and that if the Trustee continued to contest the lien status of Lili Lin of China it was incumbent upon the Trustee to obtain an appropriate judicial determination eliminating her interest. It is important to note that not only did the BAP instruct the Trustee to seek a judicial determination regarding Lili Lin of China, but the BAP was very clear that any pleadings relating to a judicial determination regarding Lili Lin of China were to be served upon her attorney of record, Andrew Smyth, who appeared before the BAP and stated that he would accept service. On February 9, 2007, a summons was issued in the Declaratory Relief Proceeding, and on or about February 23, 2007 Mr. Smyth, as attorney of record for Lili Lin of China, accepted service of the Summons and Complaint on behalf of Lili Lin of China and executed an Acknowledgment of Receipt thereof. On March 5, 2007, Mr. Smyth filed an Answer on behalf of Lili Lin of China as the Attorneys for Debtors. Mr. Smyth also filed and served an identical Answer on March 9, On April 17, 2007, a Motion for Judgment on the Pleadings was filed purportedly by Lili Lin of China. The basis of this motion was that the Declaratory Relief Action was essentially the same as the Fraud Adversary Proceeding and therefore was time barred because it was an action to set aside the Transfer. Then on May 29, 2007, Lili Lin of China purportedly filed a Motion to Dismiss the Complaint for Declaratory Relief v1 77 Page 181 of 213

182 In this motion, Lili Lin of China argued that the judgment in the Fraud Adversary Proceeding terminated any rights Lili Lin may have had in the property at La Monde St., Hacienda Heights, CA 91745, or in any trust deed on that property. This is exactly the opposite of what the BAP in fact ruled. The absurdity of Lili Lin of China s position is manifest. It had already been determined that her interest in the Property, if any, had not been adjudicated and when the Trustee commenced the Declaratory Relief Action to provide a mechanism for a determination of her interest and, rather than availing herself of the opportunity for vindication, Lili Lin of China sought to terminate the Declaratory Relief Proceeding. The absurdity of this position is enhanced by the fact that even if Lili Lin of China succeeds in her appeal of the judgment in the Fraud Adversary Proceeding the result will be at best that she will have the chance to validate her claim in that action at some date in the future when she could have accomplished the same thing in the Declaratory Relief Action. This analysis of the contradictory and absurd arguments supposedly being made by Lili Lin of China (but then perhaps not since the Court recently ruled that the Declaratory Relief Action should be dismissed for lack of proof that Lili Lin of China has actually appeared (despite an Answer having been filed), demonstrated that it is the Debtor who was actually orchestrating this silly symphony solely to dissipate the estate and punish the Trustee and his counsel by abusing the judicial system. The inference to be drawn from this set of facts was that Lili Lin of China had no evidence that she has an interest in the Property and that this charade was being staged by and for the benefit of Debtor in order to exhaust the assets of the estate to the detriment of his creditors or to force the Trustee to reach a settlement with him. On June 1, 2007, the Trustee filed a Motion to Strike the Answer filed by Mr. Smyth for Lili Lin of China ( Motion to Strike-Lili Lin ) and a Motion for Sanctions. On June 12, 2007, Mr. Smyth filed an Opposition to Motion for Sanctions. In his declaration in support of that opposition, Mr. Smyth stated that he was the attorney for Lili Lin of China, that he was told by Debtor Stephen Law that Lili Lin was hiring him, and that Connie Chang (Debtor s ex-wife) gave his office the money for his fee v1 78 Page 182 of 213

183 Debtor also filed a Declaration and Objections to the Trustee s Motion for Sanctions. Attached to that declaration are s in Chinese which Debtor claims had been sent by Lili Lin of China and which he translated into English. One of the s (as translated by Mr. Law) purportedly states that Lili Lin of China retained Mr. Smyth as her attorney in 2005 but she had not met him. The Trustee noticed Lili Lin of China s deposition for July 26, On July 25, 2007, Mr. Smyth notified the Trustee s counsel that his client would not be appearing. On August 17, 2007, the Court granted the Motion to Strike-Lili Lin, striking Lili Lin of China s Answer in its entirety, and denied Lili Lin of China s Motion to Dismiss, and on August 27, 2007 Lili Lin of China filed a Notice of Appeal of the order granting the Motion to Strike- Lili Lin. On October 4, 2007 the Clerk of the BAP issued an Order requiring Appellants to show cause why the appeal should not be dismissed for lack of jurisdiction (the BAP Clerk s Order ). A Response by Lili Lin and Stephen Law to the BAP Clerk s Order was served on the Trustee on October 16, Also, on August 27, 2007, Lili Lin of China filed her answer pro se in the Declaratory Relief Action and asserted as an affirmative defense that Mr. Smyth was not her attorney in the Bankruptcy Court. In that Answer, Lili Lin of China again listed her address is 2345 Los Padres Dr., Rowland Heights, California. However, in that same case in Responses to Plaintiff s Interrogatories ( Responses ), Lili Lin of China stated that she has never lived in the United States but provided a Post Office Box in the City of Industry, California as her mailing address in the United States. These Responses purportedly were verified in China by Lili Lin of China on May 10, 2007 and then were served by her attorney of record, Andrew Smyth. On September 11, 2007, the Trustee filed a Motion for Default Judgment against Lili Lin of China. On October 1, 2007, the Court entered its (1) Order to Appear Personally, (2) Order to Show Cause, (3) Briefing Order, and (4) Notice of Status Conference (the Court Order ), ordering Lili Lin of China to personally appear and bring with her identification and documents v1 79 Page 183 of 213

184 to support her claimed interest in the Property and further ordered Lili Lin of China to show cause why the Answer filed on August 27, 2007 should not be stricken. The Court also ordered Trustee s counsel to brief the issue of the adequacy of service on Lili Lin of China. On October 24, 2007 the Court entered orders denying the Trustee s Request for Entry of Default and the Trustee s Motion for Default Judgment. Notwithstanding that Lili Lin of China through her attorney of record had filed two Answers and numerous pleadings in the Declaratory Relief Proceeding, and had herself purportedly filed an Answer and several other pleadings, the Court decided that service of the Declaratory Relief Complaint was defective and the Court had no jurisdiction over Lili Lin of China. On November 14, 2007, the Court continued the hearing on the Order to Show Cause to January 30, On January 30, 2008, attorney Peter Chow filed a Substitution of Attorney substituting in place of Lili Lin of China and Andrew Smyth filed a Status Report stating that he did not represent anyone in the Bankruptcy Case. At the hearing on January 30, 2008, Mr. Chow represented to the Court that he had met with Lili Lin of China in Hong Kong in December 2007, that he represented her and that he had copies of documents, including a copy of the Disputed Trust Deed. Mr. Chow requested a continuance because of his recent engagement and the Bankruptcy Court continued the hearing on the Order to Show Cause to April 3, On March 3, 2008, Mr. Chow served Lili Lin of China s Response to Order to Show Cause. The Response consisted of documents that were submitted previously by Lili Lin of China and/or her then attorney Andrew Smyth and/or Debtor - including: 1. A photocopy of an Identification Card for a Lili Lin issued by the People s Republic of China -- previously submitted (a) by Debtor on February 24, 2006 as an exhibit to the Sale Reconsideration Motion, and (b) by Lili Lin of China in response to the Trustee s Request for Production of Documents in the Declaratory Relief Action (the Request for Production ) v1 80 Page 184 of 213

185 2. Photocopies of bank statements for Debtor s account at Cal Fed -- previously submitted (a) by Debtor on February 24, 2006 as an exhibit to the Sale Reconsideration Motion and (b) by Lili Lin of China in response to the Request for Production. 3. Photocopies of bank statements for an account in China for a Lili Lin -- previously submitted by Debtor on February 24, 2006 as an exhibit to the Sale Reconsideration Motion, and (b) by Lili Lin of China in response to the Request for Production. 4. Photocopies of 12 receipts that purport to be for payments on the Note -- previously submitted (a) by Debtor on February 24, 2006 as an exhibit to the Sale Reconsideration Motion and (b) by Lili Lin of China in response to the Request for Production. 5. A photocopy of an unrecorded promissory note dated June 24, 1999 in the sum of $168, with Lili Lin as the promisee and showing (DOB 22Nov1947), the same phony promissory note that Debtor had attached as an exhibit to a pleading he filed -- previously submitted (a) by Debtor on February 24, 2006 as an exhibit to the Sale Reconsideration Motion and (b) by Lili Lin of China in response to the Request for Production. 6. A photocopy of the recorded Disputed Trust Deed and Note also dated June 24, 1999, but without the DOB. Notwithstanding Debtor s assertions in various failed pleadings he had filed that these documents and declarations conclusively established that Lili Lin of China is the real beneficiary of the Disputed Trust Deed, they had absolutely no probative value. Finally, it appeared that the Debtor became fatally entangled in his own web of deceit and lies. On February 11, 2004 at the Meeting of Creditors conducted by the Trustee (the Meeting of Creditors ), the Debtor stated under oath that the $168, he claimed to have received from Lili Lin was not deposited in a bank account but rather was paid directly to creditors and that he had receipts. On April 3, 2008 the Court vacated all answers in the Declaratory Relief Action and dismissed the Declaratory Relief Complaint without prejudice. The Court stated on the record that the basis for vacating the answers and dismissing the complaint was that the Court was not v1 81 Page 185 of 213

186 persuaded that Lili Lin of China had been served and submitted to the jurisdiction of the Court, notwithstanding her appearance through counsel and in pro per. Mr. Chow then stated to the Bankruptcy Court that he was not authorized to accept service for his client. If this sounds familiar it is identical to Mr. Smyth s now I represent Lili Lin, now I don t shuffle. This bizarre set of facts begs the question that if there truly is a Lili Lin of China with a valid interest in the Property, who obviously is aware of the Declaratory Relief Proceeding, why has she never appeared and presented her evidence? She has been given every opportunity to do so. The answer would seem apparent: Lili Lin of China either does not exist or if she exists has no evidence that she has an interest in the Property, and in either event this entire ruse was concocted by Debtor and is a blatant abuse of the judicial process. Ultimately, the Court agreed with the Trustee that Lili Lin of China was not a real person that held a deed on the Property, and the Court specifically found that: Had Debtor not made up this loan and persisted in his misrepresentations to Trustee and the court, ample funds would have been available to pay Debtor's creditors and Trustee's costs. Had the sale of Debtor's home proceeded in an orderly way, absent the disputes concerning Lili Lin of China's interest in the property, Debtor almost certainly would have received surplus funds from this bankruptcy estate in excess of his claimed homestead exemption. As a result of the dispute over the disputed deed of trust, however, Trustee has incurred more than $500,000 in attorneys' fees, and it is unlikely that any funds will be available for creditors. 401 B.R. 447, 453 (Bankr. C.D. Cal. 2009), rev d on other grounds, 571 U.S., 134 S. Ct (2014). In short, this Court found that the Debtor fabricated the existence of a lien on his property in order to preserve his Homestead Exemption, and went to great lengths to substantiate this false lien. The Court authorized the Trustee to surcharge the Debtor s homestead exemption to pay administrative professionals, which, as everyone now knows, was ultimately reversed by the U.S. Supreme Court in Law v. Siegel, 571 U.S., 134 S. Ct (2014) v1 82 Page 186 of 213

187 Speaker Biographies Richard V. Fink graduated from Baker University with a B.A. and the University of Missouri at Kansas City School of Law with a J.D. He has served as the Standing Chapter 13 Trustee for the Western District of Missouri since December Mr. Fink speaks locally, regionally, and nationally on topics related to Chapter 13 law and administration. He is licensed in the State of Missouri; the United States Bankruptcy Court for the Western District of Missouri; the United States District Court for the Western District of Missouri; the United States Court of Appeals for the Eighth Circuit; and the United States Supreme Court. Honorable George W. Emerson, Jr. graduated from the University of Memphis, Cecil C. Humphreys School of Law (1980, J.D.). He served as a law clerk to the late United States Bankruptcy Judge William B. Leffler and served for three years as a United States Bankruptcy Court Clerk for the Western District of Tennessee. He is a former partner in the law firm of Stevenson and Emerson. He served on the panel of Chapter 7 Trustees from 1983 to 2006 and as a Standing Chapter 13 Trustee from 1988 to He also, for several years, taught Bankruptcy Law as a professor in the Paralegal Studies Degree Program at the University of Memphis. Judge George W. Emerson, Jr. was appointed United States Bankruptcy Judge for the Western District of Tennessee on July 1, He served a four-year term on the Bankruptcy Appellate Panel for the Sixth Circuit from 2011 to His two-year term as the Sixth Circuit representative on the Bankruptcy Judges Advisory Group ended December Neil C. Gordon is a partner in the Bankruptcy, Creditors Rights and Financial Restructuring Practice of Arnall Golden Gregory LLP in Atlanta, Georgia. A nationally recognized expert in his field, Mr. Gordon frequently lectures to bankruptcy judges, lawyers and trustees at seminars all over the country. For more than 30 years, Mr. Gordon has focused his practice exclusively in the areas of bankruptcy, creditors rights, debt restructuring, distressed assets and fraud. He represents secured and unsecured creditors, creditors committees, trustees, receivers, and debtors-in-possession, and also serves as the bankruptcy trustee in Chapter 7 and Chapter 11 cases and as an SEC receiver. Mr. Gordon has made over 100 seminar presentations nationally and published over 60 scholarly articles on Bankruptcy Law subjects. Mr. Gordon s involvement with the National Association of Bankruptcy Trustees is extensive. He previously served in the roles of president, vice president, treasurer, secretary, and chair of the Due Process, Amicus, and is a Lifetime Member of the President s Circle. As a current member of the Editorial Board of the organization s Journal of the National Association of Bankruptcy Trustees, Mr. Gordon contributes articles quarterly to the publication. Mr. Gordon is also the Co-chair of the Legislation Committee and a Lifetime Member of the American Bankruptcy Institute and a fellow of the American College of Bankruptcy. Mr. Gordon was named Master of the Bench of the Georgia Bankruptcy American Inn of Court. Mr. Gordon served on the Advisory Board for the Costs of BAPCPA/Consumer Bankruptcy Fee Study Final Report (2011). He has been recognized as: Georgia's Top Rated Lawyers, Lexis-Nexis Martindale-Hubbell, 2012; Legal Elite, Georgia Trend, ; Georgia Super Lawyers (Creditor s Rights and Bankruptcy Law), 2004, 2007, 2013; Fellow, American College of Bankruptcy; Co-author, "In Brief," quarterly article for the Journal of the National Association of Bankruptcy Trustees (NABT), 2003-present. He received a Bachelor of Science in Business Administration with a focus in Real Estate and Urban Land Studies in 1976 from the University of Florida and his Juris Doctorate in 1979 from the University of Georgia School of Law. Page 187 of 213

188 3:00-4:00 Automatic Stay Issues: Maximizing damages, including attorney fees, punitive and emotional distress damages. Moderator: Robert G. Drummond, Chapter 13 Standing Trustee for the District of Montana (Great Falls) Honorable Colleen A. Brown, Chief United States Bankruptcy Judge, District of Vermont (Burlington) Michael A. Frank, Law Offices of Brooks, Frank & De la Guardia (Miami, FL) Andrew L. Spivack, Phelan Hallinan Diamond & Jones LLP (Philadelphia, PA) INDEX OF MATERIALS 1. Topic Outline a. Damages Are Available for Automatic Stay Violations Under 362(K) b. The Legal Issues c. The Procedural Issues d. A Survey of Pertinent Case Law 2. Speaker Biographies Page 188 of 213

189 AUTOMATIC STAY ISSUES: MAXIMIZING PUNITIVE AND EMOTIONAL DISTRESS DAMAGES AND ATTORNEY FEES I. DAMAGES ARE AVAILABLE FOR AUTOMATIC STAY VIOLATIONS UNDER 362(K) 11 U.S.C. 362(k) states: (1) Except as provided in paragraph (2), an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages. (2) If such violation is based on an action taken by an entity in the good faith belief that subsection (h) applies to the debtor, the recovery under paragraph (1) of this subsection against such entity shall be limited to actual damages. II. III. THE LEGAL ISSUES a. Notice of the bankruptcy b. Opportunity to cure c. Meaning of an individual d. Willfulness of violation i. Knowledge of bankruptcy filing ii. Intentional act in violation of stay e. Actual Damages i. Burden of proof on debtor; preponderance of evidence ii. Attorney fees iii. Emotional Distress Damages (3 elements): 1. Significant emotional harm 2. Clear proof of the harm 3. Causal connection between harm and violation of stay (i.e., was the alleged stay violation a substantial factor in debtor s emotional distress?) f. Punitive Damages i. Do facts establish egregious, intentional misconduct? ii. Potential issues under Bankruptcy Rule 9011 THE PROCEDURAL ISSUES a. Serving sufficient and proper notice b. Scope and rules of discovery c. Presenting sufficient evidence / meeting the burden of proof i. Debtor must tell the story, and do so clearly ii. Medical and non-expert evidence of debtor s injury (medical evidence, non-expert testimony); however, see In re Dawson, 390 F.3d 1139 (9th Cir. 2004) (holding that medical evidence not always necessary) iii. Testimony of family, friends, co-workers regarding nature and impact of injury iv. Causal connection between debtor s injury and creditor s conduct in terms of both impact and timing d. Records to document any financial damages and/or related costs e. Time sheets setting out work done and justifying amounts charged for attorney s fees IV. A SURVEY OF PERTINENT CASE LAW 1. The Meaning of an Individual in 362(k) 1 Page 189 of 213

190 St. Paul Fire & Marine Ins. Co. v. Labuzan, 579 F.3d 533 (5th Cir. 2009) Based on the plain language of the statute and its congressional purpose, 362(k) provides protection to both debtors and creditors, and the term individual is not limited to debtors. Both debtors and creditors, including unsecured creditors, are entities whose grievances fall within the zone of interests protected by 362(k). In re Chateaugay Corp., 920 F.2d 183 (2d Cir. 1990) 362(h) [now 362(k)] applies only to natural persons who seek award of damages and does not include corporate debtors. Cited by In re Saratoga Springs Plastic Surgery, P.C., 172 Fed.Appx. 339 (2d Cir. 2006) In re Campbell, 398 B.R. 799 (Bankr. D. Vt. 2008) Although the case trustee may seek damages under the court s contempt powers as set out under 105(a), the trustee has no right to recovery of damages under 362(k). The trustee is a natural person, as opposed to a corporation, but he does not represent himself and represents a legal entity the bankruptcy estate. Thus, the trustee cannot seek damages under 362(k) because he has not been personally injured by a stay violation. 2. Willful Violation of the Automatic Stay In re Weber, 719 F.3d 72 (2d Cir. 2013) A creditor, which held a loan secured (in part) by the debtor s vehicle, repossessed the vehicle pursuant to the loan agreement shortly before the debtor filed a Ch 13 petition. Although the creditor received notice of the debtor s petition, the creditor refused absent entry of a court order and provision of protection that it deemed adequate to return the debtor s vehicle to the debtor. Under New York law, the debtor retained an equitable redemption interest in the vehicle on the petition date. The Second Circuit held that under United States v. Whiting Pools, Inc, 462 U.S. 198 (1983), the filing of the debtor s bankruptcy petition transformed the equitable interest into a possessory interest held by the debtor s estate, so it affirmed the NDNY District Court s decision reversing an order of the Bankruptcy Court in favor of the creditor. The Second Circuit held that a creditor willfully violates 362 when it knows of the filing of the petition (and hence of the automatic stay), and has the general intent to perform the act that violates section no specific intent to violate 362 is necessary. Thus, where the creditor willfully violated 362(a), the creditor is liable under 362(k) for actual damages, costs, and attorney s fees. The Second Circuit noted that the creditor s good faith - albeit misplaced - belief that prior NDNY case law supported its position may have been sufficient to excuse the creditor from liability for punitive damages. However, the Court did not need to address the question of punitive damages because the debtor had withdrawn the request for them. In re Johnson, 501 F.3d 1163 (10th Cir. 2007) In order to demonstrate a willful violation of the automatic stay under 362(k), the debtor must prove by a preponderance of the evidence that the creditor knew of the stay and intended the actions that constituted the violation; no specific intent is required. A creditor s good faith belief that it had a right to the property or the reasonableness of the creditor s excuses is irrelevant. Notice of the bankruptcy filing need not be formal or official to put the creditor on notice. Willfulness is to be liberally construed to bolster the protections of the automatic stay and is designed to ensure compliance with the stay by encouraging creditors to 2 Page 190 of 213

191 seek relief from the court whenever they are on notice of even a potential stay violation. The automobile dealership s refusal to return a repossessed car after receiving a call from the debtor s attorney constituted a willful violation of the automatic stay. Concurring in part and dissenting in part (J. Kelly, Jr.): The debtors did not prove by a preponderance of the evidence that there was a willful violation of the stay, because the creditor s testimony at two hearings did not establish that he had actual notice of the debtors bankruptcy filing. Rather, it indicated the creditor was a well-intentioned businessman confronted with an unsubstantiated demand from an unknown caller whom he did not know was the debtors attorney. Additionally, there was no inquiry notice because the attorney did not give the creditor any information suggesting when or where the petition was filed; it was unreasonable to expect the creditor to search all bankruptcy courts to ask whether there were any bankruptcy filings by debtors with a common name such as Johnson even after being suspicious about the call. In re Crysen/Montenay Energy Co., 902 F.2d 1098 (2d Cir. 1990) Any deliberate act taken in violation of a stay, which the violator knows to be in existence, justifies an award of actual damages. An additional finding of maliciousness or bad faith on the part of the offending creditor warrants the further imposition of punitive damages pursuant to 362(h) [now 362(k)]. This standard encourages would-be violators to obtain declaratory judgments before seeking to vindicate their interests in violation of an automatic stay, and thereby protects debtors estates from incurring potentially unnecessary legal expenses in prosecuting stay violations. o Cited by In re Weber, 719 F.3d 72 (2d Cir. 2013), In re Campbell, 398 B.R. 799 (Bankr. D. Vt. 2008) In re Clark, No , 2014 WL (Bankr. D. Vt. Feb. 26, 2014) In order to be entitled to damages under 362(k), there must be a willful violation of the automatic stay. The first inquiry is whether the creditor knew of the debtor s bankruptcy filing. The next inquiry is whether the alleged misconduct violated the stay. The creditor s one postpetition telephone call to the debtor - during which the creditor s representative did not make a demand for repayment for debt, merely requested for clarification as to the debtor s plan, and was neither coercive nor aggressive and did not say anything that could objectively be interpreted as an effort to collect pre-petition debt did not constitute a violation of the automatic stay. The court found the facts established a misunderstanding between the parties; the debtor s assertion that he was freaked out by the call was insufficient proof of an actual injury warranting sanctions. 3. Actual Damages Burden of Proof In re Gray, 519 B.R. 767 (8th Cir. 2014) A debtor seeking damages under 362(k) must demonstrate, by a preponderance of the evidence, that a creditor acted willfully in violation of the stay and that an injury resulted from that conduct. In re Johnson, 501 F.3d 1163 (10th Cir. 2007) The burden of proof for actual damages for willful violations of an automatic stay under 362(k) is by a preponderance of the evidence standard, as opposed to a stricter evidentiary standard for punitive damages suggested by the statute s allowance for punitive damages only in appropriate circumstances. In re Jean-Francois, 532 B.R. 449 (Bankr. E.D.N.Y. 2015) Actual damages must be based upon evidence sufficient to establish, by a preponderance of the evidence, the amount of such damages. 3 Page 191 of 213

192 In re Clark, No , 2014 WL (Bankr. Vt., Feb. 26, 2014) The debtor has the burden of proof in establishing facts to show a violation of the stay and a basis for an award of sanctions under 362(k). 4. Actual Damages - Attorney Fees In re Schwartz-Tallard, 803 F.3d 1095 (9 th Cir. 2015) (still good law after Baker Botts) This case overruled Sternberg v. Johnston, 595 F.3d 937 (9 th Cir. 2009), and determined there is nothing in 362(k) that indicates Congress intent to authorize recovery of attorney s fees incurred in litigation for ending the stay violation but not for recovering damages. The statute clearly allows for actual damages including costs and attorneys fees with no further qualification. Although there is no legislative history that speaks directly to Congress purpose in enacting 362(k), it is evident that Congress sought to encourage injured debtors to bring suit to vindicate one of their primary statutory rights to the protection of the automatic stay. Thus, 362(k) allows for recovery of attorneys fees incurred for recovering damages because Congress undoubtedly knew that unless debtors could recover the attorney s fees they incurred in prosecuting an action for damages, many would lack means or financial incentive (or both) to pursue such actions Congress could not have expected 362(k) to serve as an effective deterrent unless it authorized recovery of the attorney s fees incurred in prosecuting an action for damages. Moreover, adopting the Sternberg reasoning of the statute would spawn more litigation, instead of ending it, since it would require a court to determine when a stay violation actually came to an end. Only reasonable fees are allowed, and courts have discretion to eliminate unnecessary of plainly excessive fees. Dissent (J. Ikuta): As acknowledged in Sternberg, the term actual damages is ambiguous, and it is reasonable to interpret that term to include only the fees incurred in correcting the stay violation and not the fees incurred in bringing the lawsuit itself. Since the statute is ambiguous, it should be read with a presumption in favor of the American Rule. The majority cannot rely on the historical context of the statute to assume Congress intended 362(k) to eliminate any doubt about the court s authority to remedy violations of the automatic stay, since Congress decided to enact something entirely different from past practice. The majority should not propose its own legislative history, and while depriving the debtor of the attorneys fees incurred in bringing the damages action fails to make the debtor whole, that is the ordinary result of the American Rule. In re Theokary, 592 Fed. Appx. 102 (3rd Cir. 2015) The Bankruptcy Court dismissed the debtor s adversary proceeding against two individuals to whom the debtor leased three horses. Upon filing for bankruptcy, the bankruptcy estate included those horses, and despite receiving notice of the bankruptcy petition, the individuals sold the horses two days later. The Bankruptcy Court found they willfully violated the automatic stay under 362(a)(3) and allowed the parties to engage in discovery on damages. The debtor produced an expert report of expected damages based on the lost breeding revenue of the horses of $1,350,000 based on a factual impossibility that two mares would birth seven foals per year over a 5-year period. The Bankruptcy Court found the debtor had created a falsified expert report to commit a fraud upon the court and that his conduct warranted dismissal of the adversary proceeding based upon the exercise of the court s inherent power. On appeal, the debtor argued that irrespective of his wrongful conduct, the Bankruptcy Court was required to award damages under 362(k)(1) based on the undisputed evidence of his losses, such as his attorney s fees, that were unrelated to the false expert reports. The Third Circuit determined 4 Page 192 of 213

193 that rules and statutes enacted by Congress do not necessarily limit the court s ability to impose sanctions under its inherent power. The plain language of 362(k)(1) neither modified nor limited the Bankruptcy Court s inherent powers, and 362(k)(1) was merely a damages provision. The debtor was required to prove his losses under that statute through competent evidence, and instead, manufactured a false expert report. Because the submission of fabricated evidence, regardless of the merits or validity of the underlying claim, always constitutes egregious misconduct, the Third Circuit ruled the Bankruptcy Court properly exercised its inherent powers to levy sanctions and dismiss the adversary proceeding. In re Snowden, 769 F.3d 651 (9th Cir. 2014) The court held that a conditional offer of settlement by the lender, which the debtor rejected, did not preclude an award of damages as authorized by the Bankruptcy Code, 11 U.S.C. 362(k).The debtor took out a $575 payday loan to make ends meet for herself and her daughter. Snowden, 769 F.3d at 654. This is a short-term loan secured by a post-dated check. She put a stop payment on the check before its due date and informed the lender that she was considering bankruptcy. The lender s employees began calling the debtor multiple times at the hospital where she worked as a nurse. The calls reportedly continued even after she referred the lender to her attorney, and they began to affect her work performance. When she filed for Chapter 7 bankruptcy, she did not directly inform the lender but listed it as an unsecured creditor with a claim for $575. About a month after filing for bankruptcy, the debtor noticed that her bank account was overdrawn by more than $800. She learned that the lender had cashed the check securing the payday loan, resulting in overdraft fees. This had a substantial emotional impact on the debtor, since her finances had careened out of control at the moment when she thought she was finally getting them together. Id. at 655. The debtor filed a motion for sanctions against the lender for a willful violation of the automatic stay. The lender rejected her settlement demand of $25,000 but offered to refund the loan amount, the overdraft charges, and three hours worth of attorney s fees, for a total of $1,445. She rejected that offer, and after a trial, the bankruptcy court awarded her the loan amount and bank charges, $12,000 in emotional distress damages, $12,000 in punitive damages, and attorney s fees of $2, A debtor may only recover attorney s fees under 362(k) that are directly related to enforcing the automatic stay or remedying a violation. Sternberg v. Johnston, 595 F.3d 937, 940 (9th Cir. 2010). The question here was whether the lender s $1,445 settlement offer ended the violation because it gave the debtor an opportunity to be made whole. The court found it did not, reasoning that this approach would limit the debtor s attorney fee award to fees incurred before the settlement offer. The court held the stay violation did not end until the date the bankruptcy court ruled a violation had occurred. In re Leiba, 529 B.R. 501 (Bankr. E.D.N.Y. 2015) Under 362(k), the party seeking damages for violation of the automatic stay must prove that (1) the debtor filed a bankruptcy petition, (2) the debtor is an individual, (3) the creditor received notice of the petition, (4) the creditor s actions were in willful violation of the stay, and (5) the debtor suffered damages as a result of that violation. The debtor must prove he incurred damages, even if he has suffered no other compensable harm. To be recoverable under 362(k), attorneys fees and costs must be reasonable and necessary; unnecessary litigation costs may not be recovered. 5 Page 193 of 213

194 The calculation of damages is based on the attorney s time spent as a consequence of the automatic stay violation and is not capped by any fee paid to counsel in connection with the filing. Thus, the creditor s willful violation of the stay by commencing, continuing, and failing to discontinue a state court action, which prompted the debtor s counsel to defend the debtor and stop the violation, merited an award of reasonable and necessary attorney fees under 362(k). Young v. Repine, 536 F.3d 512 (5th Cir. 2008) Attorney fees incurred in prosecuting a 362(k) claim is included under actual damages. There is no requirement to prove that the fees actually have been paid before they can be awarded. 5. Actual Damages - Emotional Distress / Mental Anguish Damages Lodge v. Kondaur Capital Corp., 750 F.3d 1263 (11th Cir. 2014) Emotional distress damages fall under actual damages in 362(k), but not every willful violation of stay merits compensation for emotional distress. See Fleet Mortgage Group, Inc. v. Kaneb, 196 F.3d 265 (1st Cir. 1999); Aiello v. Providian Financial Corp, 239 F.3d 876 (7th Cir. 2001). To recover actual damage for emotional distress, a plaintiff must (1) suffer significant emotional distress, (2) clearly establish the significant emotional distress, and (3) demonstrate a casual connection between that significant emotional distress and the violation of the automatic stay. Plaintiffs were not entitled to damages because (i) they simply pointed to generalized evidence of being stressed out and failed to offer additional, specific detail showing significant emotional distress, (ii) they failed to corroborate their injuries in any way which could have indicated they suffered significant emotional distress, and (iii) they failed to establish a casual connection between their injuries and the violation of the automatic stay since they did not offer medical evidence for allegedly having to visit doctor for their conditions. Young v. Repine, 536 F.3d 512 (5th Cir. 2008) Emotional damages qualify as actual damages under 362(k), and emotional damages awards must be supported by specific information rather than generalized assertions. In re Dawson, 390 F.3d 1139 (9th Cir. 2004) The Ninth Circuit uses a three-factor test to determine whether damages for emotional distress should be allowed: (1) the individual must suffer significant harm, (2) the individual must clearly establish the significant harm, and (3) the individual must demonstrate a casual connection between that significant harm and the violation of the automatic stay. Fleeting or trivial anxiety or distress does not constitute significant emotional harm. Significant emotional harm can be established in several different ways (i) by offering corroborating medical evidence, or (ii) by having non-experts, such as family members, friends, or coworkers, testify to manifestations of mental anguish and clearly establish that significant emotional harm occurred. 6 Page 194 of 213

195 However, in cases where the violator engages in egregious conduct and the significant emotional distress is apparent, or where the circumstances make it obvious that a reasonable person would suffer significant emotional harm, no corroborating evidence is necessary. In re Dawson, 346 B.R. 503 (Bankr. N.D. Cal. 2006). o On reconsideration, the bankruptcy court found the creditor s willful violation of the automatic stay, in attempting to evict the debtor and failing to rescind a foreclosure sale for over five months, even after it learned the debtor claimed an interest in the home residential property - and the debtor s subsequent fear, physical therapy to relieve muscle tension, increased dosage of high blood pressure medicine, and excessive drinking warranted emotional distress damages because any reasonable person would suffer significant emotional harm under the circumstances. The court found the debtor s delay in filing suit for emotional distress damages did not indicate lack of emotional distress, because the debtor could not afford to hire an attorney earlier. The court also determined the creditor s stay violation need not be the sole cause of the debtor s emotional distress since causation only requires the offending conduct be a substantial factor. o The Court determined $70,000 in emotional distress damages was excessive given the creditor s discontinuation of eviction efforts, and found $20,000 adequately compensated the debtor s emotional distress. The Court also awarded $7,440 in special damages ($600 for attorneys fees, $5,400 in rent of a separate residence, and $1,440 in physical therapy costs), having found that the creditor s delay in rescinding the foreclosure sale was a substantial factor in these expenses being incurred. Although there was ample evidence the debtor had financial problems other than those with the creditor, and it was possible the expenses were incurred as a result of other reasons such as marital difficulties, these expenses could be substantially attributed to the creditor s violation of the stay. o Consistent with the recent Ninth Circuit decision in In re Schwartz-Tallard, 803 F.3d 1095 (9 th Cir. 2015), the court determined attorneys fees may be recovered for an action solely to recover damages under 362(k). The court also determined that attorneys fees performed on a contingent fee basis may be recovered as actual damages. o The court did not award punitive damages, because the substantial actual damages awarded would adequately accomplish the deterrence purpose, and because the creditor s violation of the stay in failing to rescind the foreclosure sale under ambiguous circumstances did not demonstrate that it acted recklessly or in callous disregard to support punitive damages. In re Holden, 258 B.R. 323 (D. Vt. 2000) Applying the Second Circuit standard governing the imposition of sanctions under 362(k), under In re Crysen, 902 F.2d 1098 (2d Cir. 1990), the court affirmed the bankruptcy court s award of $7,000 stipulated damages for mental anguish, which resulted from the IRS s violation of the stay in freezing the debtors tax refund without adequate notice. Neither the district or bankruptcy court explicitly addressed the availability of awarding emotional distress damages before awarding the debtors this amount in accordance with the parties pretrial stipulation. 7 Page 195 of 213

196 6. Punitive Damages In re Parker, 2015 WL (11 th Cir. 2015) Costs and attorney s fees that the debtor incurred to halt the violation of the automatic stay and to prosecute his action for damages constitutes an injury. Punitive sanctions are appropriate when a party acts with reckless or callous disregard for the law or rights of others. Punitive damages have the dual purpose of punishing a creditor that is indifferent to the law and the debtor s rights, and deterring the creditor from committing future similar misconduct. The creditor acted with reckless disregard of the automatic stay by using non-attorney staff to prosecute small claims actions for the purpose of lessening its legal costs, and thus, punitive damages were warranted. In re Gray, 519 B.R. 767 (8th Cir. 2014) The Eighth Circuit holds that appropriate circumstances to award punitive damages require egregious, intentional misconduct on the violator s part, and the court may consider five factors: (1) the nature of the creditor s conduct, (2) the creditor s ability to pay, (3) the motives of the creditor, (4) any provocation by the debtor, and (5) the creditor s level of sophistication. The court determined that the bankruptcy court could not award punitive damages based on the creditor s failure to appear at trial, because such conduct did not rise to the level of egregious, intentional misconduct. See also In re Repine, 536 F.3d 512 (5th Cir. 2008) (egregious, intentional misconduct required for punitive damages). In re Jean-Francois, 532 B.R. 449 (Bankr. E.D.N.Y. 2015) The debtor is entitled to punitive damages to the extent the stay violations are conducted in bad faith, with malice, or in a particularly egregious manner. In determining whether to award punitive damages under 362(k), the court considered five factors: (1) the nature of the creditor s conduct, (2) the creditor s ability to pay, (3) the motives of the creditor, (4) any provocation by the debtor, and (5) the creditor s level of sophistication. Under the first factor, the court found the creditor s conduct was shocking and egregious as the debtor s wife was physically assaulted in the course of the stay violation. The second factor was given no weight because the record was insufficient to assess the creditor s ability to pay. As to the third factor, the court determined the creditor s motive to evict the debtor from the building despite his bankruptcy filing was improper. Additionally, there was no provocation from the debtor under the fourth factor. Lastly, the creditor was a real estate investment entity, represented by counsel, and should have understood the consequences of violating the automatic stay. Thus, the debtor was entitled to punitive damages. Punitive damages that are awarded must be reasonable in their amount and rational in light of their purpose to punish what has occurred and to deter its repetition. The court determined $50,000 was sufficient to serve that purpose. In re McGrath, 2005 WL (Bankr. D. Vt. 2005) The court adopted the Second Circuit s standard for awarding punitive damages under 362(k), which requires a determination in whether the creditor acted maliciously or acted in bad faith. The court found the creditor acted in bad faith because 8 Page 196 of 213

197 (1) the creditor s seeking a duplicate certificate of title when it had knowledge that it had previously released its lien, knew the debtors had listed the creditor s claim as unsecured in the bankruptcy case, and the creditor was negotiating a reaffirmation of its debt; (2) the creditor filed a false affidavit; (3) the creditor s practices and procedures lacked the requisite due care when collecting debts from debtors; (4) the creditor failed to establish policies compelling its employees to recognize the rights of debtors; and (5) the timing of the creditor s request for a duplicate title demonstrated bad faith. Although the violator of the stay was a collection officer and not the corporate creditor, the court found the creditor could not demonstrate it lacked knowledge of the agent s violation of the stay or it repudiated the agent s actions once it learned of them. Thus, the court found the creditor lacked policies and procedures to avoid violations of the stay or to find the collection officer s conduct inappropriate. In assessing the proper amount of punitive damages, the Court invoked a totality of circumstances test. The court considered the creditor s level of sophistication and familiarity with the automatic stay, the creditor s motive in violating the stay, and the relationship of the parties. Given (i) the sophistication of the creditor, as affirmed by the collection officer s 25 years of collection experience in bankruptcy cases, (ii) the creditor s motive in filing for a duplicate title to become a secured creditor and improve its priority in relation to other creditors, and (iii) no harm to the debtors other than attorney s fees that were incurred, the court determined $1,800 (150% of the fees already awarded) was a reasonable punitive sanction sufficient to deter the creditor from similar practices in the future. In re Docherty, No , 2016 WL (Bankr. N.D.Ohio Feb. 18, 2016) Upon the creditor s willful violation of the automatic stay (repossession of the debtor s car postpetition and keeping it for 17 days), the debtor sought actual damages in the form of attorneys fees under 362(k) in the amount of $7, for one evidentiary hearing and two motions for orders to show cause upon the creditors. The Court determined that although the debtor is entitled to attorneys fees as part of actual damages, they could not be recoverable if the attorney did not take steps to mitigate damages. Because Rule 9011 prohibits any action brought for any improper purpose, including needless increase in the cost of litigation, the Court declined to award the requested amount since the debtor s attorney neither made a simple phone call, sent an , or mailed a letter before he jumped into filing the motions for sanctions. The Court concluded the duty to mitigate reflects the sound judicial policy that profit-making from violations of the automatic stay is inherently improper. Had the attorney made efforts to mitigate damages, there might have been a prompt and inexpensive resolution of the stay violation. Thus, the Court only awarded $500 in attorney s fees. 9 Page 197 of 213

198 Speaker Biographies Robert G. Drummond has been the only standing Chapter 13 Trustee for the District of Montana since Mr. Drummond has been a member of the American Bankruptcy Institute since 1987, and a member of the National Association of Chapter 13 Trustees since He is a past President of the National Association of Chapter 13 Trustees and has twice chaired the Montana Bankruptcy Section. He has published numerous articles dealing with Chapter 13 bankruptcy in several national publications. He is the publisher of the Montana Bankruptcy Reporter located at Honorable Colleen A. Brown has served as the Chief United States Bankruptcy Judge for the District of Vermont since April 10, 2000, and was reappointed to a second 14-year term on October 17, Judge Brown received a B.A., cum laude, with honors in philosophy, from Colgate University in 1979, and a J.D., cum laude, from the University of Buffalo Law School in Prior to beginning her judicial service, Judge Brown was a partner in the law firm of Lawrence, Werner, Kesselring, Swartout & Brown, LLP, where her practice focused on bankruptcy, debtors and creditors rights, foreclosure, workouts, and matrimonial-bankruptcy issues. Judge Brown is also an active member of the Vermont Bar Association and the American Bankruptcy Institute, and is a frequent lecturer at legal education programs. She is an author for Collier on Bankruptcy, 15th edition revised, and an associate editor for the American Bankruptcy Law Journal. Judge Brown was the recipient of the New York State Bar Association's President's Pro Bono Service Award in 1992 and the Vermont Bar Association s Pro Bono Service Award in Michael A. Frank attended the University of Florida from 1975 through December of He graduated with a Bachelor of Science in Business Administration with Honors. He attended the University of Florida Law School from 1979 until he graduated with his JD in December He is admitted to practice in Florida and is a member of the State Bar and the United States Circuit Court of Appeals for the 11th Circuit of the United States District Court for the Southern District of Florida and United States Court of Appeals of the U.S. District Court for the Middle District of Florida. Mr. Frank specializes in Consumer Bankruptcy Law and has been practicing in this area for 34 years. He has lectured on numerous panels around the country with reference to the on-going issues in Consumer Bankruptcy Law and more recently on the changes to the bankruptcy code by the Bankruptcy Abuse Prevention Consumer Protection Act (BAPCPA). He has been a guest lecturer at the University of Miami School of Law and St. Thomas University School of Law. He belongs to the National Association of Chapter 13 Trustee s and the National Association of Consumer Bankruptcy Attorneys. Andrew L. Spivack is a partner at Phelan, Hallinan, Diamond & Jones in which he manages their New Jersey Bankruptcy Department. Andrew is the Chair of the Eastern District of Pennsylvania Bankruptcy Conference (EDPABC); on the Planning committee for the Pennsylvania Bankruptcy Institute (PBI); and on the Local Rules Committee for the Eastern District of Pennsylvania Bankruptcy Court. Andrew is a frequent lecturer for both EDPABC, as well as PBI. Andrew is admitted in the United States District Court of the Eastern, Middle, and Western Districts of Pennsylvania, as well as New Jersey. Andrew is also admitted to the United States Court of Appeals for the Third Circuit and has litigated several issues there on behalf of his clients. Andrew received a triple degree from the Pennsylvania State University in 1995 in Finance, Accounting, and International Business, with minors in Religious Studies and Middle Eastern Studies. He received his Juris Doctorate in 1999 from Widener University School of Law, and his L.LM. in Taxation in 2000 from Villanova University School of Law. Prior to working for Phelan Hallinan Diamond and Jones Andrew was a Deputy Attorney General in the Treasury Section of the New Page 198 of 213

199 Jersey Attorney General s Office practicing in the arrears of Corporate and Individual tax, Creditor s Rights and collection issues. Page 199 of 213

200 4:05-5:05 Cross Examination of a Witness: Demonstrations of effective techniques. Moderator: Laurie K. Weatherford, Chapter 13 Standing Trustee for the Middle District of Florida (Winter Park) Honorable John P. Gustafson, United States Bankruptcy Judge, Northern District of Ohio (Toledo) Aubrey Harry Ducker, Jr., The Law Offices of Aubrey Harry Ducker, Jr., P.L.C. (Winter Park, FL) Scott G. Stout, Staff Attorney, Office of Jeffrey M. Kellner, Chapter 13 Standing Trustee for the Southern District of Ohio (Dayton) INDEX OF MATERIALS 1. Topic Outline 2. Speaker Biographies Page 200 of 213

201 Cross Examination in Chapter 13 Bankruptcy Practice Cross Examination: Why Cross: Definition of cross examination. : the examination of a witness who has already testified in order to check or discredit the witness's testimony, knowledge, or credibility compare direct examination. Also 1. to examine by questions intended to check a previous examination; 2. examine closely or minutely. 3. Law. to examine (a witness called by the opposing side), as for the purpose of discrediting the witness's testimony. Why not Cross: When to Cross: Best Movie Cross Examinations #5 - A Time to Kill - YouTube 0:43 Feb 4, Uploaded by Don Carlo What would a discussion on Best Movie Cross-Examinations be without a John Grisham film? Challenge False Direct Examination Introduce facts into evidence: To Kill a Mockingbird (4/10) Movie CLIP - Atticus Cross-Examines... 3: Similar May 27, Uploaded by Movieclips To Kill a Mockingbird movie clips: BUY THE... To Kill a Mockingbird won Academy Awards... Building Cross: My Cousin Vinny - Cross Examination of Witness by Joe Pesci. The Law of Cross Page 201 of 213

202 Leading Questions: My Cousin Vinny Cross Examination YouTube - YouTube Video for best movie Cross Examinations 0:20 Nov 5, Uploaded by thejudge2001 My Cousin Vinny Cross Examination YouTube. thejudge Best Scenes from movie in 8 exciting... Their Witness: Your Story Control Devices: Legally Blond Shower Objections Chasing Rabbits Impeachment Efficiency Confirm, Credit and Confront Techniques that work Final Thoughts Page 202 of 213

203 Speaker Biographies Laurie K. Weatherford is the Chapter 13 Standing Trustee for the Middle District of Florida, Orlando Division. She was appointed in October of Prior to her appointment, she was of counsel with the law firm of Maguire, Voorhis & Wells, representing primarily debtors and creditor committees in Chapter 11 cases. She had the opportunity for a jury trial in the Bankruptcy Court an obtained a verdict tor her client in a preference action. She was also a Chapter 7 Panel Trustee. She helped develop the Mortgage Modification Medication procedure in the Middle District of Florida, Orlando Division. She is an honors graduate of the University of Florida, and the Cumberland School of Law. While in law school she was an Honor Court Justice, a Member of the International Law Moot Court Team and Copy Editor for the Cumberland Law Review. She was a member of the Student Senate at the University of Florida. She is a member of the National Association of Chapter 13 Trustees, where she serves on the Human Resource Committee. She served on the Board of Directors of the Central Florida Bankruptcy Law Association, and is a past Chairman of the Bankruptcy Committee of Orange County, Florida. Honorable John P. Gustafson was appointed as United States Bankruptcy Judge for the Northern District of Ohio and took the oath of office on Tuesday, April 8. He served as Chapter 13 Trustee for the Northern District of Ohio, Western Division for almost 7 years. Prior to being appointed Trustee, he served as Staff Attorney to Trustee Anthony B. DiSalle for 4 years. He has been a bankruptcy law clerk, an associate and partner in a law firm that did both debtor and creditor representation, and a solo practitioner representing debtors, banks and trustees. He is a favorite ConsiderChapter13.org author, has been an active member of the National Association of Chapter 13 Trustees and serves on the Board of Directors of The Academy. Aubrey Harry Ducker, Jr., is a member of the Orange County Bar Association, the Florida Bar and the American Bar Association. He received an AV Preeminent Peer Review Rating from Martindale-Hubbell. Mr. Ducker serves by court appointment as a Guardian Ad Litem, advocating for children in contested custody cases. After serving six years in the U.S. Navy, Mr. Ducker attended Valencia Community College, the University of Central Florida and then obtained his law degree from the University of Florida Levin College of Law in Gainesville. He now has his own practice: The Law Offices of Aubrey Harry Ducker, Jr., P.L.C. Scott G. Stout - Staff attorney first for George W. Ledford and then Jeffrey M. Kellner, Chapter 13 Trustee s in Dayton, Ohio for the last 19 years. Debtor attorney for 15 years prior to present position. Member of the American Bankruptcy Law Forum located in Dayton, Ohio and Member of the Dayton Bar Association. Lectured at National Association of Chapter 13 Trustees annual conference, and regional seminars; Region Nine United States Trustee Seminar (Michigan and Ohio); various seminars for the Dayton Bar Association, American Bankruptcy Law Forum and other educational organizations. Member of the bar for the United States Supreme Court, Sixth Circuit Court of Appeals, Southern District of Ohio Federal Bar and Ohio State Bar. Obtained B.A. and J.D. degrees from Ohio Northern University. Page 203 of 213

204 4:05-5:05 Post Confirmation Issues: Does the applicable commitment period apply? Moderator: William C. Miller, Chapter 13 Standing Trustee for the Eastern District of Pennsylvania (Philadelphia) Honorable Michael B. Kaplan, United States Bankruptcy Judge, District of New Jersey (Trenton, NJ) Emily Connor Fort, Boleman Law Firm, PC (Richmond, VA) Ann E. Swartz, McCabe, Weisberg & Conway, P.C. (Philadelphia, PA) INDEX OF MATERIALS 1. PDF of PowerPoint Presentation 2. Speaker Biographies Page 204 of 213

205 5/22/2016 POST CONFIRMATION ISSUES DOES THE APPLICABLE COMMITMENT PERIOD APPLY TO MODIFIED PLANS? PANEL Honorable Michael B. Kaplan, Bank. D.N.J. Trenton, NJ Emily Connor Fort, Richmond, VA Ann Swartz, Philadelphia, PA William C. Miller, Moderator, Philadelphia, PA DOES THE APPLICABLE COMMITMENT PERIOD APPLY TO MODIFIED PLANS? I. Post Confirmation - background A. Typical situations B. Does 1329 incorporate 1325(b) pre BAPCPA? C. Minimal changes to 1329(b) in BAPCPA II. Applicable Commitment Period background A Substantially altered by BAPCPA B. 3 v. 5 years C. Circuit court decisions temporal v. multiplier Page 205 of 213 1

206 5/22/2016 DOES THE APPLICABLE COMMITMENT PERIOD APPLY TO MODIFIED PLANS? III. Hypothetical 1 A. Facts who would object? B. Substantial and unanticipated change C. 1329(b) does not incorporate 1325(b) by reference D. 1329(c ) specifically mentions 1325(b) creates maximum, not minimum E. Good faith (a)(3) IV. Hypothetical 2 A. Facts who would object? B. 1329(b) incorporates 1325(b) by reference (via 1325(a)) C. Gives meaning to 521(f) re tax returns D. Good faith is not a solution V. Hypothetical 3 A. Facts - BM debtor with arrears gets loan mod in 5-year plan that s not 100% B. 1329(c ), 1329(a)(1) implicated; what about 1325(b)(1)(B)? C. Questions presented VI. 1329(c ) can ACP go beyond 5 years? VII. Conclusion I. POST-CONFIRMATION-BACKGROUND Typical Situations Does 1329 incorporate 1325(b)-pre BAPCPA? Minimal changes to 1329(b) in BAPCPA Page 206 of 213 2

207 5/22/ U.S. Code Modification of plan after confirmation (a) At any time after confirmation of the plan but before the completion of payments under such plan, the plan may be modified, upon request of the debtor, the trustee, or the holder of an allowed unsecured claim, to (1) increase or reduce the amount of payments on claims of a particular class provided for by the plan; (2) extend or reduce the time for such payments; (3) alter the amount of the distribution to a creditor whose claim is provided for by the plan to the extent necessary to take account of any payment of such claim other than under the plan; or (4) reduce amounts to be paid under the plan by the actual amount expended by the debtor to purchase health insurance for the debtor (and for any dependent of the debtor if such dependent does not otherwise have health insurance coverage) if the debtor documents the cost of such insurance and demonstrates that (A) such expenses are reasonable and necessary; (B) (i) if the debtor previously paid for health insurance, the amount is not materially larger than the cost the debtor previously paid or the cost necessary to maintain the lapsed policy; or (ii) if the debtor did not have health insurance, the amount is not materially larger than the reasonable cost that would be incurred by a debtor who purchases health insurance, who has similar income, expenses, age, and health status, and who lives in the same geographical location with the same number of dependents who do not otherwise have health insurance coverage; and (C) the amount is not otherwise allowed for purposes of determining disposable income under section 1325(b) of this title; and upon request of any party in interest, files proof that a health insurance policy was purchased. (b) (1) Sections 1322(a), 1322(b), and 1323(c) of this title and the requirements of section 1325(a) of this title apply to any modification under subsection (a) of this section. (2) The plan as modified becomes the plan unless, after notice and a hearing, such modification is disapproved. (c) A plan modified under this section may not provide for payments over a period that expires after the applicable commitment period under section 1325(b)(1)(B) after the time that the first payment under the original confirmed plan was due, unless the court, for cause, approves a longer period, but the court may not approve a period that expires after five years after such time. Page 207 of 213 3

208 5/22/2016 II. APPLICABLE COMMITMENT PERIOD-BACKGROUND Substantially altered by BAPCPA 3 v. 5 years Circuit court decisions temporal v. multiplier 11 U.S. CODE CONFIRMATION OF PLAN 11 U.S. Code 1325(a) Except as provided in subsection (b), the court shall confirm a plan if (1) The plan complies with the provisions of this chapter and with the other applicable provisions of this title; (2) any fee, charge, or amount required under chapter 123 of title 28, or by the plan, to be paid before confirmation, has been paid; (3) the plan has been proposed in good faith and not by any means forbidden by law; 11 U.S. Code 1325 (b)(4) For purposes of this subsection, the applicable commitment period (A) subject to subparagraph (B), shall be (i) 3 years; or (ii) not less than 5 years, if the current monthly income of the debtor and the debtor s spouse combined, when multiplied by 12, is not less than (I) in the case of a debtor in a household of 1 person, the median family income of the applicable State for 1 earner; (II) in the case of a debtor in a household of 2, 3, or 4 individuals, the highest median family income of the applicable State for a family of the same number or fewer individuals; or (III) in the case of a debtor in a household exceeding 4 individuals, the highest median family income of the applicable State for a family of 4 or fewer individuals, plus $525 per month for each individual in excess of 4; and (B) may be less than 3 or 5 years, whichever is applicable under subparagraph (A), but only if the plan provides for payment in full of all allowed unsecured claims over a shorter period. III. HYPOTHETICAL 1 Facts-Who would object? Substantial and unanticipated change 1329(b) does not incorporate 1325(b) by reference 1329(c) specifically mentions 1325(b) creates maximum, not minimum Good faith (a)(3) In re Runnels, 530 B.R. 626 (Bankr. W.D.N.C. 2015) Page 208 of 213 4

209 5/22/ U.S. Code 1329(b)(1) Sections 1322(a), 1322(b), and 1323(c) of this title and the requirements of section 1325(a) of this title apply to any modification under subsection (a) of this section. IV. HYPOTHETICAL 2 Facts-Who would object? 1329(b) incorporates 1325(b) by reference (via 1325(a)) Gives meaning to 521(f) re tax returns Good faith is not a solution In re Heideker, 455 B.R. 263 (Bankr. M.D. Fla. 2011) 11 U.S. Code 1329(b)(1) Sections 1322(a), 1322(b), and 1323(c) of this title and the requirements of section 1325(a) of this title apply to any modification under subsection (a) of this section. 11 U.S. Code 1325(a)(1) Except as provided in subsection (b), the court shall confirm a plan if The plan complies with the provisions of this chapter and with the other applicable provisions of this title; Page 209 of 213 5

210 5/22/2016 V. HYPOTHETICAL 3 Facts- below median debtor with arrears gets loan mod in 5 year plan that is not 100% 1329(c ), 1329(a)(1) implicated; what about 1325(b)(1)(B)? Questions presented 11 U.S. Code 1329(c) A plan modified under this section may not provide for payments over a period that expires after the applicable commitment period under section 1325(b)(1)(B) after the time that the first payment under the original confirmed plan was due, unless the court, for cause, approves a longer period, but the court may not approve a period that expires after five years after such time. 11 U.S. Code 1329(a)(1) (a) At any time after confirmation of the plan but before the completion of payments under such plan, the plan may be modified, upon request of the debtor, the trustee, or the holder of an allowed unsecured claim, to (1) increase or reduce the amount of payments on claims of a particular class provided for by the plan; 11 U.S. Code 1325(b)(1)(B) (1) If the trustee or the holder of an allowed unsecured claim objects to the confirmation of the plan, then the court may not approve the plan unless, as of the effective date of the plan (B) the plan provides that all of the debtor s projected disposable income to be received in the applicable commitment period beginning on the date that the first payment is due under the plan will be applied to make payments to unsecured creditors under the plan. Page 210 of 213 6

211 5/22/2016 VI. 1329(c)- can ACP go beyond 5 years? 11 U.S. Code 1329(c) A plan modified under this section may not provide for payments over a period that expires after the applicable commitment period under section 1325(b)(1)(B) after the time that the first payment under the original confirmed plan was due, unless the court, for cause, approves a longer period, but the court may not approve a period that expires after five years after such time. VII. CONCLUSION Page 211 of 213 7

212 Speaker Biographies William C. Miller was appointed as a chapter 13 standing trustee for the Eastern District of Pennsylvania in August, He received his B.S. in Business Administration from Bucknell University, and a J.D. from the Dickinson School of Law, now part of Penn State University. His office, including twenty-some staff members and three attorneys, handles approximately 5,800 open chapter 13 cases originating in the counties of Bucks, Chester, Delaware, Lancaster, Montgomery, and Philadelphia. Prior to his appointment as standing trustee, Mr. Miller was in private practice, representing primarily businesses, in corporate, real estate and transactional matters. He also served for nine years as the general counsel and secretary of a Philadelphia-based corporation and its subsidiaries. Mr. Miller is a member of the National Association of Chapter 13 Trustees. He is admitted to practice in Pennsylvania. Honorable Michael B. Kaplan was appointed as a bankruptcy judge on October 3, 2006, for the District of New Jersey, Trenton Vicinage. Prior to taking the bench, Judge Kaplan served as a Standing Chapter 13 Bankruptcy Trustee. Judge Kaplan received his A.B. degree from Georgetown University (1984) and his J.D. Degree from Fordham University School of Law (1987). He is licensed to practice law in New Jersey, New York and Connecticut, and is admitted to practice before the U.S. Supreme Court, Third Circuit Court of Appeals, U.S. Court of International Trade and various federal district courts. Over the past twenty-five years, Judge Kaplan has spoken to numerous bar associations and business organizations, including: the New Jersey Judicial College, National Association of Chapter 13 Trustees, National Association of Bankruptcy Trustees, Turnaround Management Association, NY Institute of Credit, Bloomberg, L.P., Federal Reserve Bank of Philadelphia, American Conference Institute, Pennsylvania Bar Institute, National Business Institute and the New Jersey Institute for Continuing Legal Education. Judge Kaplan teaches as an adjunct professor at the Newark and Camden campuses of Rutgers University School of Law. He has authored several articles relating to bankruptcy issues and is a co-author of West s Consumer Bankruptcy Manual. Judge Kaplan was the recipient of the National Association of Chapter 13 Trustees 2006 Distinguished Service Award and New Jersey State Bar Association s 1999 Legislative Recognition Award. In December of 2009, Judge Kaplan was appointed by the Director of Administrative Office of the Courts to a four-maryear term as the Third Circuit representative to the Bankruptcy Judges Advisory Group, and most recently selected as the Bankruptcy Judge representative on the Human Resources Advisory Council to the AO. Judge Kaplan has also served as Mayor and Councilman for the Borough of Norwood, NJ, and in 2005, he was a candidate for Bergen County Freeholder. Emily Connor Fort is an attorney with the Boleman Law Firm, P.C., in Richmond, VA. Emily is originally from Spartanburg, SC, where she attended Wofford College and received a B.S. degree in Psychology. Emily graduated with honors from the University of Richmond School of Law and was admitted to the Virginia Bar in She resides in the Fan District of Richmond, VA with her fiancé, Stephen, and their dog, Meyer. Ann E. Swartz is the Managing Bankruptcy Attorney with the firm of McCabe, Weisberg & Conway, P.C. in Philadelphia. Ms. Swartz received her Bachelor of Arts degree with cum laude honors in 1988 from Boston University with a degree in International Relations and a Business Administration minor. Thereafter, Ms. Swartz obtained her Juris Doctorate in 1991 from Northeastern University in Boston, MA. Ms. Swartz practiced for a number of years in Massachusetts and Rhode Island before relocating to Pennsylvania in Throughout her career, Ms. Swartz has concentrated her practice on creditors rights, including foreclosure, evictions, commercial loan workouts and state court receiverships with a primary focus on bankruptcy matters. Ms. Swartz regularly appears on continuing education panels concerning creditors Page 212 of 213