In Sturm v. Moyer, 32 Cal. App. 5th 299 (February 15, 2019), the California Court of Appeal ("COA") addressed a question of first impression and held that, assuming fraudulent intent, the Uniform Voidable Transactions Act, formerly known as the Uniform Fraudulent Transfer Act ("UFTA"), can apply to a premarital agreement in which the prospective spouses agree that upon marriage, each spouse's earnings, income and other property acquired during marriage will be that spouse's separate property. In this case, the plaintiff had obtained a non-dischargeability judgment against the husband debtor in bankruptcy. During a judgment debtor examination, plaintiff discovered that the defendants had entered into a premarital settlement agreement after the judgment was entered providing that each party's earnings and income, and any property acquired during the marriage by either spouse, would be that spouse's separate property. Typically, pursuant to Fam. Code § 910, the community estate would be liable for debt incurred by either spouse prior to marriage (unless the spouses comply with the provisions of Fam. Code § 911). The plaintiff filed an action under UFTA to set aside the alleged transfer of the husband debtor's community property interest in his wife's earnings and income pursuant to the premarital agreement. The COA looked at (1) the statutory language of the UFTA (which suggests that a premarital agreement effects a transfer given the broad definition of transfer), (2) the legislative history of the UFTA and the relevant portions of the Family Code, and (3) public policy considerations (protecting the rights of creditors from fraudulent transfers), to determine that the UFTA applies to premarital agreements.
No Part of Creditor's Claim Can Be Disputed In Order to File an Involuntary Bankruptcy Petition
In State of Montana Dept. of Revenue v. Blixseth, No. 18-15064, the Ninth Circuit Court of Appeals held that a creditor only has standing to file an involuntary petition against a debtor if the entirety of its debt is not subject to a bona fide dispute. If the amount of the claim is even partially disputed, the creditor cannot be a petitioning creditor. Pursuant to Section 303(b)(1), a petitioning creditor's claim must not be contingent or the subject of a bona fide dispute as to liability or amount. In Blixseth, the debtor's 2004 taxes were under audit. The debtor conceded that a deduction he took was improper but there were other adjustments and deductions that were unresolved and were in the process of being tried in front of the Montana State Tax Appeals Board. While the complaint was pending, plaintiff and other creditors filed an involuntary petition against the debtor. Plaintiff's claim in the involuntary petition consisted only of the taxes owed, which flowed from the deduction issue that was resolved. Plaintiff contended, however, that it had total claims against the debtor of much more than what was asserted and that most of the additional claims were disputed. The bankruptcy court acknowledged that a taxing authority "has but one claim for each calendar year of a taxpayer's life" and that plaintiff failed to show that it was allowed to create separate claims. The bankruptcy court held that since some of the debtor's liability to the plaintiff for the 2004 tax year was disputed, plaintiff's claim was subject to a bona fide dispute and plaintiff did not have standing to be a petitioning creditor. The district court agreed and the Ninth Circuit affirmed.
Objective Test for a Creditor's Compliance with the Bankruptcy Discharge Injunction
In Taggart v. Lorenzen, 139 S. Ct. 1795, 1802 (2019), the Supreme Court overruled the Ninth Circuit by requiring an objective test for a creditor's compliance with the bankruptcy discharge injunction. The nation's highest court explained that "a party's subjective belief that she was complying with an order ordinarily will not insulate her from civil contempt if that belief was objectively unreasonable." Id. This ruling went against more recent Ninth Circuit case law that a "'good faith belief' that the discharge order 'did not apply'" to a creditor's claims would prevent a court from ordering civil contempt sanctions against such a creditor. Id. at 1801.
Employees Cannot Seek Unpaid Wages in Actions Asserting Exclusively PAGA Claims
There has long been a split of authority among California Courts of Appeal as to whether a PAGA claim seeking civil penalties and unpaid wages must be arbitrated pursuant to an employment arbitration agreement. In mid-September, the California Supreme Court issued its long-awaited decision in ZB N.A. v. Superior Court (Lawson), finally resolving the split, albeit in an unexpected manner.
Bankruptcy Courts Can Determine Tax Liability Under Section 505 if it Might Affect the Estate At the Time of Filing
In Bush v. United States of America, No. 16-3244, decided September 20, 2019, the Court of Appeals for the Seventh Circuit held that the Bankruptcy Court has jurisdiction to determine the amount of tax liability under Section 505 if it could possibly effect the creditors and the bankruptcy estate at the time the case is filed. The decision is centered on 11 U.S.C. § 505, which allows the bankruptcy court to "determine the amount or legality of any tax, any fine, or any penalty relating to a tax ...." In Bush, the debtors owed nearly $200,000 in taxes and penalties. The debtors petitioned the Tax Court for review and when trial was imminent, they stipulated to owing $100,000 in taxes but the amount of penalties were still in dispute. The debtors filed for bankruptcy on the date set for trial. The bankruptcy court declined to lift the automatic stay and the debtors then brought an adversary proceeding asking the bankruptcy court to set the penalty at 20% of their unpaid taxes pursuant to Section 505. The IRS sought to dismiss the adversary proceeding, which the bankruptcy court denied. The district court disagreed and found it did not have subject matter jurisdiction to resolve the dispute.
Attorney Violated Standard of Care By Failing to Raise Stern Objection
In Stevens v. Sharif, et. al., No. 15 C 1405 (N.D. Ill. August 30, 2019), Judge Durkin of the United States District Court for the Northern District of Illinois found that defendant's attorney in Wellness International Network Ltd. v. Sharif, 135 S. Ct. 1932 (2015) had not committed legal malpractice by failing to raise the Stern objection before it was deemed waived. A "Stern objection," as it is known, is the result of the ruling in Stern v. Marshall, 564 U.S. 462 (2011), where the Supreme Court held that the bankruptcy court lacked constitutional authority to issue a final and binding judgment on a state law counterclaim. Wellness International resolved a circuit split regarding whether a party could waive a Stern objection by failing to raise the objection to the bankruptcy court's power. In Wellness International, the defendant's discovery abuses in an adversary proceeding eventually led the bankruptcy court to sanction defendant by entering judgment against him. The defendant appealed to the district court and after the appeal was fully briefed, sought leave to file supplemental briefing asserting a Stern objection. The district court found the argument had been waived. The defendant appealed to the Seventh Circuit and again waited until the reply brief to assert the Stern argument. While noting that defendant waited to long to assert his argument, the Seventh Circuit held the Stern issue could not be waived. The plaintiff, Wellness International, appealed, and the Supreme Court held that the objection can be waived.
Ninth Circuit Decision Makes Virtually All Attorneys' Fees Incurred by Debtors in the Enforcement of the Automatic Stay Recoverable
In Easley v. Collection Serv. Of Nev., 910 F.3d 1286 (9th Cir. 2018), the Ninth Circuit Court of Appeals clarified a prior holding about the scope of attorneys' fees recoverable for enforcing the automatic stay. In particular, the court decided in In re Schwartz-Tallard, 803 F.3d 1095 (9th Cir. 2015) that reasonable attorneys' fees and costs incurred in defending a judgment rendered pursuant to Bankruptcy Code Section 362(k). Instead of defending a judgment, Easley successfully appealed an incorrect judgment in his favor. In reaching its decision, the court noted that Section 362(k) operates as a fee-shifting statute and that a fee award should not be diluted by "the time and effort spent on the claim itself," including successfully challenging an award or defending the same. Accordingly, it appears that virtually all reasonable attorneys' fees incurred by debtors in the enforcement of the automatic stay may be recoverable damages under 11 U.S.C. § 362(k).
A Release of Potential Claims Can Constitute a Fraudulent Conveyance
In Potter v. Alliance United Ins. Co., 2019 Cal. App. LEXIS 666, the California Court of Appeal considered whether a "Release and Settlement Agreement" releasing an insurance company from any claims for negligence, delay, bad faith, etc. and an agreement to forego any assignment of such claims constituted a fraudulent conveyance.
Debtor Does Not Have to Pay For Exempt Property to Comply With Absolute Priority Rule
In Todeschi v. Juarez (In re Juarez), BAP No. AZ-19-1028-FLB, published on August 21, 2019, the Ninth Circuit Bankruptcy Appellate Panel ("BAP") decided a split in the lower courts concerning whether a debtor must pay for its exempt property in order to comply with the absolute priority rule (Bankruptcy Code Section 1129(b)(2)(B)). The BAP said no. The BAP reasoned that exempt property is not property of the bankruptcy estate and as such, exempt property is not included in the phrase "any property" in the requirement of Section 1129(b)(2)(B)(ii) that a debtor (or a junior class of claims) "will not receive or retain any property." Put simply, a debtor may retain exempt property without having to make a new value contribution. Good news for Chapter 11 debtors, but not a surprising decision.
Marital Settlement Agreement Does Not Relieve Debtor of Non-Dischargeable Liability
In U.S. Dep't of Educ. v. Carrion (In re Carrion), BAP No. SC-18-1234-FBKu (May 31, 2019), the Ninth Circuit Bankruptcy Appellate Panel ("BAP") held that a debtor remained personally liable for the entire amount of a student loan debt despite a marital settlement agreement ("MSA") providing for his former wife to assume half of the debt. While married, the debtor borrowed $21,894 from the U.S. Department of Education ("Department") to pay tuition for his son's college education. In June 2011, the debtor and his then wife filed a joint chapter 7 bankruptcy petition, listing the student loan as debt belonging to the debtor husband. Two years later, in their dissolution proceeding, the husband and wife entered into a marital settlement agreement providing that they would each be liable for half of the educational loan. The debtor commenced an adversary proceeding against the Department alleging that the debt was void because the promissory note was executed as a result of identity theft and that the educational debt was discharged. The bankruptcy court rejected the identity theft argument, but found that only one half of the educational loan was nondischargeable under 11 U.S.C. § 523(a)(8).
