Baumer on Bankruptcy

Ladies and Gents -

The Fifth Circuit just (1/4/12) issued an opinion that is going to change our world. (Or at least part of it.) In McCoy v. Mississippi State Tax Commission, 2012 WL 19376 (5^th Cir. 2012), the court interpreted the hanging paragraph at the end of 523(a) which was added by BAPCPA. That paragraph provides:

For purposes of this subsection, the term “return” means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements.) Such term includes a return prepared pursuant to section 6020(a) of the Internal Revenue Code of 1986, or similar State or local law, or a written stipulation to a judgment or a final order entered by a nonbankruptcy tribunal, but does not include a return made pursuant to section 6020(b) of the Internal Revenue Code of 1986, or a similar State or local law. [Emphasis added.]

The Fifth Circuit held that “applicable filing requirements” includes the requirement that a return be timely filed. If a “return” is not timely filed, it does not qualify as a “return” under 523(a). Congress has now defined “return” so that a real, actually filed return is not a “return” if it was filed so much as one day late. (Even if it was actually filed more than two years prior to the bankruptcy filing.) (If congress really wanted to change prior law, shouldn’t they have put the hanging paragraph at the end of 523(a)(1)(B)(ii) [instead of after the other 17 unrelated sub-paragraphs and sub-sub-paragraphs in 523(a)] or wouldn’t they have changed the existing wording of 523(a)(1)(B)(ii)? I am not arguing that the result is incorrect. It appears to be “correct” if you read all of this together. I am simply suggesting that this is one more example of a poorly conceived and/or drafted provision our “friends” in Washington left us with to sort out. Although McCoy involved state income tax returns, there is no basic difference between the Mississippi tax code and the Internal Revenue Code as far as filing requirements. (The Mississippi tax code also requires that returns be filed by April 15^th.)

I recently filed a Chapter 13 case and had an issue arise which I see occasionally that I thought might be of interest to the consumer debtor bar. In my case, the debtor lived in Travis County and owed the IRS taxes for several years, all but one of which would be dischargeable as “stale” taxes. The IRS filed a tax lien, but filed it in Williamson County, not Travis.

The improper filing creates a tax lien against the debtor, but not as against third parties, i.e., a judgment lien creditor, like a trustee in bankruptcy which has the status of a hypothetical judgment lien creditor under Section 544(a)(1) or a bone fide purchaser of real property under 544(a)(3).

This made a huge difference in my case because the debtors had significant equity in their home but did not have sufficient disposable income to pay the IRS claim. If the lien was “good”, they would have had to sell their home to pay the lien. Since the lien was unperfected as against the trustee, the claim became unsecured and they were able to pay significantly less than the amount of the claim. (And the IRS did the right thing and amended their claim so I didn’t have to file an adversary to determine the validity and priority of the lien.)

For a discussion of this issue, see the Internal Revenue Manual, Part 5, Chapter 17, Section 2, which can be found at www.irs.gov/irm/part5/ Scroll down to 5.17.2 titled Federal Tax Liens and get the Service’s take.

The practice tip here is if you get a secured proof of claim from the IRS, don’t assume it is perfected. Check. Most counties have their real property records online now, so it is no great burden. I am not suggesting that this is a common situation, but this is not the first time I have seen it.

Michael Baumer

Law Office of Michael Baumer

Law Office of Michael Baumer

The Fifth Circuit recently held that private employers may discriminate in hiring based on a bankruptcy filing. In re Burnett, 635 F.3d 169 (5^th Cir.2011). The court distinguished between public employers which may not discriminate in hiring and private employers which may. Neither public nor private employers may discriminate with respect to persons who are already employed based solely on a bankruptcy filing. (The employer in Brunett was Stewart Title Inc. – another reason to not be fond of title companies.) The Fifth Circuit is in line with Rea v. Federated Investors, 627 F.3d 937 (3d Cir.2010).

The bankruptcy code contains provisions dealing with employment discrimination by public and private employers in Section 525 as follows:

(a) Except as provided in the Perishable Agricultural Commodities Act, 1930 . . . a governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to, condition such grant to, discriminate with respect to such a grant against, deny employment to, terminate the employment of, or discriminate with respect to employment against, a person that is or has been a debtor under this title or a bankrupt or a debtor under the Bankruptcy Act, or another person with whom such bankrupt or debtor has been associated, solely because such bankrupt or debtor is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, has been insolvent before the commencement of the case under this title, or during the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act.

(b) No private employer may terminate the employment of, or discriminate with respect to employment against, an individual who is or has been a debtor under this title, a debtor or bankrupt under the Bankruptcy Act, or an individual associated with such debtor or bankrupt, solely because such debtor or bankrupt—

(1) is or has been a debtor under this title or a debtor or bankrupt under the Bankruptcy Act;

(2) has been insolvent before the commencement of a case under this title or during the case but before the grant or denial of a discharge; or

(3) has not paid a debt that is dischargeable in a case under this title or that was discharged under the Bankruptcy Act.

Subsection (a) dealing with discrimination by governmental units was contained in the 1978 Bankruptcy Code. Subsection (b) dealing with discrimination by private employers was added in 1984. Both prohibit termination of employment or discrimination of employment based solely on a bankruptcy filing, but there is a small but apparently significant variation in the language of these two provisions. (a) prohibits denying employment based on a bankruptcy filing, but (b) does not. The courts have relied on this difference in holding that a private employer may deny employment based on a bankruptcy filing while a governmental unit may not.

An issue common to both sections is that they prohibit discrimination based “solely” on a bankruptcy filing. Employers will rarely identify a bankruptcy filing as the reason for terminating employment when a general assertion of insubordination or not being a team player will suffice (and is much more difficult to disprove.) Even if an employer does identify a bankruptcy filing as an issue in employment discrimination, as long as it is not the only issue, 525 is presumably not violated.

Law Office of Michael Baumer

The other day, I was reading something in the Tao Teh Ching which reminded me of something I read once in the Quran and I was looking for that and came across the following passage. In case anyone cares, I am not a Muslim, but I never trust what anyone else tells me the Quran says (or the Bible, either), so I read the actual book to see what it really says. Anyway, this is what the Quran says about contracts. (More particularly, promissory notes.)

O believers, when you negotiate a debt for a fixed term,

draw up an agreement in writing,

though better it would be to have a scribe write it faithfully down;

and no scribe should refuse to write as God has taught him,

and write what the borrower dictates,

and have fear of God, his Lord, and not leave out a thing.

If the borrower is deficient of mind or infirm,                                         

or unable to explain, let the guardian explain judiciously;

and have two of your men to act as witnesses; but if two men

are not available, then a man and two women you approve,

so that in case one of them is confused the other may remind her.

When the witnesses are summoned they should not refuse.

But do not neglect to draw up a contract, big or small,

with the time fixed for paying back the debt.

This is more equitable in the eyes of God,

and better as evidence and best for avoiding doubt.

But if it is a deal about some merchandise

requiring transaction face to face,

there is no harm if no contract is drawn up in writing.

Have witnesses to the deal, and make sure

that the scribe or the witness is not harmed.

If he is, it would surely be sinful on your part.

And have fear of God,

for God gives you knowledge,

and God is aware of every thing.

If you are on a journey and cannot find a scribe,

pledge your goods against the loan;

and if one trusts the other,

then let him who is trusted

deliver the thing entrusted, and have fear of God, his Lord.

Do not suppress any evidence,

for he who conceals evidence is sinful of heart;

and God is aware of all you do.

So what are the important principles here?

1. Contracts should be in writing.
2. They should be written by “scribes.” (Modern translation: lawyers.)
3. Don’t leave anything out. (Make sure all important terms are addressed.)
4. Have it witnessed. (Modern translation: notarized?)
5. Don’t harm the scribe or witnesses. (Modern translation: don’t shoot the lawyers.)
6. A written contract is “better as evidence and best for avoiding doubt.” (Modern translation: the parole evidence rule.)
7. “Do not suppress any evidence.” (Modern translation: tell the truth, the whole truth, and nothing but the truth.)
8. I have no intention of going here, but two women equal one man, at least for witness purposes, so “if one of them is confused, the other may remind her.”  (Modern translation: if you are discussing this with a woman you might want to still talk to you in the future, you should preface the discussion with “Can you believe this?”)

Law Office of Michael Baumer

Around Thanksgiving, The UST and I tried two 707(b) cases in front of Judge Mott. He took them under advisement and announced his rulings on December 22. He made lengthy recitations of findings of fact and conclusions of law on the record, but apparently will not be publishing these as opinions. If you are going to try one of these cases, you might want to get a transcript as it will provide valuable insight into how he approaches these issues.

The first case was:

Hufstedler 10-11769

In this case the debtors are in their mid-50s with one dependent child. They both work for the state and have for several years so income is fairly secure. Their combined gross income is $109,000 per annum. Just prior to filing, Mr. Hufstedler purchased a term life policy with a death benefit of $100,000 with a monthly premium of $151. Mr. Hufstedler already had term life coverage of approximately $300,000. (Mrs. Hufstedler has approximately $500,000 in term coverage, but it has been in place for several years and the UST did not object to that expense.) He and his wife also purchased long term care insurance with a monthly premium of $431. Although both of the debtors have some medical issues (they both take blood pressure medicine and he takes cholesterol medicine and is a diabetic), their conditions have not materially changed recently and are manageable with medication. The stated reason for these purchases was looking forward and trying to provide for the family in the event one of their medical conditions grew worse.

Judge Mott initially held that long term care insurance is not “health insurance” as contemplated by 707(b)(2)(A)(ii)(I) so it would not be an allowable expense on line 34 of the means test.

He went on to conclude that the long term care insurance was not a “reasonably necessary expense at this time”, because there was no apparent immediate need and the insurance could be purchased 5 years later (at the end of a hypothetical Chapter 13) for only an additional $91 per month.

Finally, he concluded that the long term care was not a “special circumstance” under 707(b)(2)(B)(i). He recited several cases which opine that special circumstances require something “unforeseeable or beyond the control of the debtor” or “out of the ordinary or exceptional in some way” or for which “there is no reasonable alternative” or disallowing the expense would “result in demonstrable economic unfairness prejudicial to the debtors.”

On the debtors’ side, he did hold that homeowners insurance required under a deed of trust was allowable as a reasonable and necessary expense on line 42 of the means test. (Payments on secured claims.) Although the insurance expense is not really a payment on a secured claim, if the debtor fails to provide the insurance, the lender can purchase single interest coverage insurance and charge the expense to the debtors. (HOA dues were not an issue in this case, but the same analysis should apply.)

He also concluded that the debtors’ cell phone expense was “not particularly excessive.” The UST objected to this expense largely (it seems) because just prior to filing the debtors upgraded their phones when they renewed their service contracts. (Most of us have nicer phones than the debtors.)

The UST also objected (somewhat vaguely) to the debtors’ out of pocket medical expenses which are much higher than normal. I’m not faulting the UST – this is always an issue because medical expenses fluctuate significantly and are not fixed like a house or car payment. Deciding on a specific monthly dollar amount is an imprecise exercise, at best. Although Judge Mott expressed some concern that the expenses might be overstated by some amount, he concluded that the UST had not met its burden in proving the actual amount so the amount listed in Schedule J was allowed.

The second case was:

Babb 10-11551

Mr. Babb is a commercial property manager/developer with Lincoln Properties. Between 2006 and 2010, his income decreased from over $400,000 to approximately $115,000. He is $47,000 over median. He qualifies for Chapter 7 under 707(b)(2). The issue in this case was whether allowing him to obtain a discharge was an abuse under the “totality of the circumstances” under 707(b)(3).

The problem in this case was the house payment. PITI totaled $7600 per month which was roughly equal to his current monthly net income and, although he was optimistic that some deals which had been on hold were moving forward, he could not say with any certainty that his income would increase in the near term. The house payment was 5.5 times the IRS standard. A modification on the first lien is in process, but neither the first or second liens was current. The liens total $1,020,000 and the house is valued at $950,000 (which might be optimistic given current market realities.)

Although Judge Mott accepted the fact the housing expense was not an issue when the home was purchased in 2006, he concluded the expense is “unreasonable and excessive in light of their current circumstances.”

FYI, in both cases he gave the debtors 30 says to convert to another chapter or the cases will be dismissed.

Michael Baumer

Law Office of Michael Baumer

On January 21 the Fifth Circuit affirmed the District Court opinion in Camp v. Ingalls.

In that case, the debtor moved from Florida to Texas in 2007 and filed a Chapter 7 in 2008, less than 730 days later. The question presented was what exemptions was the debtor allowed or required to claim.

Section 522(a)(3)(A) which was added by BAPCPA provides that a debtor may claim the exemptions of the state where he was domiciled for the 730 day period prior to filing. If he has not been domiciled in one place for the 730 day period, he claims the exemptions of the state where he resided for the 180 day period prior to the 730 day period. In this case, Mr. Camp would be required to claim Florida exemptions because he was not domiciled in Texas for 730 days prior to filing.

The problem is that Florida’s exemption statutes say that specified property may be claimed as exempt by “residents of this state.” Since Mr. Camp is no longer a resident of the state of Florida, he is not entitled to claim Florida exemptions. The Fifth Circuit held that although Florida has opted out, the Florida exemptions only apply to residents and since Mr. Camp was a non-resident, the Florida opt out statute did not bar him from claiming federal exemptions. (I personally think this is the wrong way to get to the right answer, but they got the right answer, so I’m not going to complain too much.)

In a footnote, the court declined to address the issues of whether 522(b)(3) preempts state law restrictions of extraterritorial application of exemptions and whether the savings clause at the end of 522(b) permits a debtor to claim the federal exemptions when state law opts out and at the same time restricts extraterritorial application of state exemptions.

I have previously written on this issue and opined that I think Judge Gargotta reached the result that Congress actually intended (If you have lived somewhere for less than two years, you have to use the exemptions where you came from), but the statute was not well thought through (i.e., the drafters at MBNA never thought about the issue or looked at individual state laws) and as result, poorly drafted. Because I have way too much time on my hands, I have actually looked at each state’s exemption statutes to see if they have a domicile or residency requirement. Please note that some states have a residency requirement for real property, but not personal property, and vice versa. I made a chart, which I offer for your consideration. Major disclaimer – the chart is about two years old. State laws may have changed since then. I know, for example, that New York is considering amendments to its exemption laws to address this issue.   

For what it’s worth………

Michael Baumer

The following is a recent article published in the State bar of Texas Bankruptcy Law Section Newsletter. It is primarily of interest to consumer bankruptcy law attorneys practicing in Texas.

Chapter 13 debtors whose taxes are not escrowed will occasionally resort to one of the property tax payment services which pay the taxes and take an assignment of the taxing entity’s claim. The upside for the taxing authority: they get their money faster without incurring collection costs. The upside for the debtor: they get to pay the taxes over a longer period of time without incurring collection costs. The downside for the debtor: taxing authorities can only charge 12% interest while tax assignees can charge 18%. If the debtor pays the claim over a longer period of time at 18% interest, they end up paying far more interest. (Actually, the best case for the debtor is for the mortgage company to pay the taxes. That way, the debtor can pay back the mortgage company at no interest.)

 BAPCPA added new Section 511 which provides: “If any provision of this title requires the payment of interest on a tax claim… the rate of interest shall be the rate determined under applicable nonbankruptcy law.” It is significant that Section 511 does not define “tax claim.”

 There have been a recent spate of opinions on this issue starting with Judge Lynn in In re Davis, 352 B.R. 651 (Bankr.N.D.Tex.2006). Judge Lynn held that the claim of a creditor which paid the ad valorem tax claim prior to filing of the Chapter 13 and held a transfer of the tax lien was a “tax claim” under Section 511 and so was entitled to receive its contractual rate of interest in a Chapter 13. The important point here is the anti-modification provision of Section 1322(b)(2) which provides that a debtor may modify the rights of holders of secured claims “other than a claim secured only by a security interest in real property that is the debtor’s principal residence.”

 In In re Sheffield, 390 B.R. 302 (Bankr.S.D.Tex.2008), Judge Isgur went into a more detailed analysis and concluded that although the private company assignee of a taxing authority held a “tax lien”, it did not hold a “tax claim”, disagreeing with Judge Lynn.

 Section 101(51) defines a security interest as a “lien created by an agreement.” Ad valorem tax liens are created by state law, not by any agreement. In most of these cases, the tax assignee takes a transfer of the taxing authority’s lien, but they also have the debtor execute a note and deed of trust. As Judge Isgur explains, the lien is not created by the agreement, but arises by operation of state law. In order to obtain an assignment of the tax lien, the taxes must be paid by the assignee. When the taxes are paid, there is no longer any “tax claim.” A new claim arose under the promissory note executed by the debtor. That claim may have resulted from payment of taxes, but it was not a “tax claim.” Judge Isgur makes the further point that the tax assignee did not purchase the taxing authority’s claim – it paid the claim. Judge Isgur concludes: “A state taxing authority may assign its tax claims if state law so provides. Hypothetically, a state could authorize the sale of its tax receivables to a third party. That third-party assignee would presumably be protected by Sec. 511, But, that is not the structure that this State has chosen for the private collection of its property taxes.”

 Approximately one month later, Judge Bohm followed Sheffield in In re Prevo, 393 B.R. 464 (Bankr.S.D.Tex.2008). Judge Bohm provides some discussion of the Kentucky and Pennsylvania tax statutes to contrast them with the language of the Texas statute and clarify the issue.

 Judge Isgur revisited the issue in January 2009 in In re Kizzee-Jordan, 399 B.R. 817 (Bankr.S.D.Tex.2009). In Kizzee-Jordan, the tax assignee took another approach arguing that Sheffield was inconsistent with the Supreme Court’s opinion in Johnson v. Home State Bank, 501 U.S. 78 (1991) and the Sixth Circuit’s opinion in Glance v. Carroll, 487 F.3r 317 (6^th Cir.2007). Neither of those opinions have any relevance to the disposition of this issue and Judge Isgur so concluded. (In short order.) [Judge Isgur confirmed this conclusion again a month later in In re Sotto, 2009 WL 260957 (Bankr.S.D.Tex.2009).]

 I have not found any opinions in the Eastern or Western Districts or by any other judges in the Northern or Southern Districts.

 Assuming that 511 does not apply to “tax liens” as opposed to “tax claims”, the appropriate rate of interest for tax assignees in Chapter 13 would be the Till “prime plus” approach. FYI, the interest rates confirmed in Sheffiled, Prevo, Kizzee-Jordan and Sotto were 12%, 8.25%, 8.5%, and 7%, respectively. (As a debtor’s attorney, I like the downward trend in rates.)

 I would guess that we will see the tax assignee lobby try to get the legislature to “fix” this “defect” in the tax statutes, but until then, your Chapter 13 plans should pay Till interest, not the contract rate of 15% or 18%.

Michael Baumer

<p align=”justify”><a href=”http://baumerlaw.com”>Law Office of Michael Baumer</a></p>

On May 20, 2009, President Obama signed into law The Protecting Tenants in Foreclosure Act. Public Law No.111-22. The law took effect immediately.

The principal protection of the law is that the successor in interest to the foreclosing lender must give a bona fide tenant (not the mortgagee or a family member who is paying market rate rent negotiated as part of an arms length transaction) at least 90 days notice to vacate the property. If the tenant has a lease, they are entitled to occupy the property until the end of the lease. The new owner may terminate the lease on 90 days notice if the purchaser intends to occupy the property. In both cases, the tenant must pay the contract rent to the new owner or they may terminate the tenant’s occupancy in compliance with state law. [There are additional provisions relating to tenants (and owners) of section 8 properties.]

None of these provisions preempts state or local laws providing greater protection to tenants.

The provisions of this law expire December 31, 2012.

My clients are not typically tenants and so are less likely to be hugely effected by this legislation. I do, however, represent many clients who own rental properties which they intend to surrender because they are upside down and the properties do not cash flow. This legislation will effect the tenants of those debtors.

Michael Baumer

Law Office of Michael Baumer

On Father’s day morning I watched the McLaughlin Group as I do most Sunday mornings. (Although I frequently turn off the sound while they shout over each other.) At the end of the show, John invites his guests to make a prediction and he makes one, too. John predicted that Chrysler will produce a car that gets 50 miles per gallon and costs less than $5,000 by the end of 2011.

 Let’s look at that in pieces. (Although I am going to nitpick with him over some of the details, I am not criticizing John McLaughlin. Keep reading.)

 First, it really isn’t Chrysler anymore. It is Fiat/Chrysler. This is more significant than most Americans realize. (Fiat didn’t put up any money to “buy” Chrysler. If the “new” Chrysler crashes and burns, Fiat walks away with minimal consequences. Sweet. Where do I sign up for this for my business?)

 Second, a car that gets 50 mpg is really no big deal. This is the easy part, believe it or not.

 Third, I think that a “less than $5,000″ price tag is seriously optimistic, but I do think we could get into that neighborhood. (This is going to be a very bare bones car. Let me suggest that your teenager doesn’t need to drive a Lexus/Hummer/Suburban.)

 Fourth, I am not convinced that Chrysler can produce this (very) theoretical car in the US by the end of 2011. I will concede that Fiat/Chrysler might produce that car somewhere else by then, but that is a very different issue. (I understood that part of the reason we bailed out Chrysler and GM was to help save American jobs. If all of these production jobs move overseas, why are American taxpayers footing the bill to preserve and/or create jobs in Italy?) Historically, the time line from design to market for the US auto industry has been more than 5 years. To shorten that reality, the only option is to tool up to produce an existing Fiat model in the US. One small problem: the Fiats produced in Europe do not comply with US environmental laws. Either Fiat/Chrysler has to get a waiver of existing environmental laws or they have to re-tool their “small engine technology” to comply with those laws. Any bets on which is more favorably received by US taxpayers? And how long will this take?

 Another small detail: it takes more than a month or two to re-tool a car plant. Remember all of those car ads on TV that show the robots making the spot welds or spraying paint on cars on the assembly line? All of those robots have to be re-programmed to produce another car. The end of 2011 may be achievable (although improbable), but can Fiat/Chrysler survive that long? Their sales are already down by half from historical levels. (They aren’t the only one, but their numbers seem particularly bad.)

 More problematic are two questions that have no happy answer. First, what is the “hot” Chrysler product that people “have to have?” (To keep Fiat/Chrysler in business in the US for the interim period. However long that is.) The short answer is that there is no such product. The Dodge Ram truck is the leading contender, but the Ford F-150 and the Chevrolet C1500 are far more popular. (A very large problem.)

 Second, what is the Fiat product that Americans “have to have?” This is the “save Chrysler” notion. In theory, Chrysler is supposed to benefit from Fiat’s small engine technology. Let’s assume for the purpose of argument that Fiat has some super duper technology that will save Chrysler. If that was the case, Americans would be clamoring for that already existing Fiat model. Fiat would be selling thousands/millions/gazillions of those cars, because America is, after all, the home of “sell what sells.”

 John McLaughlin’s prediction that Chrysler would produce a 50 mpg $5,000 car by the end of 2011 illustrates the real problem. Most of the Pundits talk about Chrysler being “out of bankruptcy” like that’s the end of the story. The harsh reality is that Chrysler is still in serious trouble. The Fiat deal is life support. (At best.) Chrysler is not viable, Fiat or no Fiat. Chrysler as we know it will cease to exist. The question is the date of the demise, not whether it will happen.

 Michael Baumer

Law Office of Michael Baumer