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Irvine Business & Commercial Law Blog

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).

Declaration By Assignee's Agent Confirming Agent is in Possession of Original Promissory Note Establishes Standing to Seek Relief from the Automatic Stay

In Harms v. Bank of New York Mellon (In re Harms), BAP No. NC-18-1284-STaB (July 9, 2019), the Ninth Circuit Bankruptcy Appellate Panel ("BAP") held that an assignee of a beneficial interest under a deed of trust had established its standing to seek relief from the automatic stay by producing a declaration by the assignee's agent confirming that the agent was in possession of the original promissory note. The dispute between the parties arose from a promissory note ("Note") secured by a deed of trust which had been assigned to Bank of New York Mellon ("BONYM"). The Debtor asserted that BONYM had not presented admissible or sufficient evidence to support its claim that it possessed the original Note or otherwise was entitled to enforce the Note. The BAP reviewed a supplemental declaration filed by BONYM ("Declaration") where the declarant ("Declarant") identified herself as the Assistant Vice President for Bank of America, N.A. ("BofA"), the servicing agent for BONYM. In the Declaration, the Declarant stated she had reviewed the collateral file maintaining the Debtor's loan and was able to confirm that BofA was and is in possession of the original Note. The Debtor objected that (1) Declarant had not claimed to have personally seen the Note or personally verified BONYM's possession of the Note, and (2) Declarant's knowledge was based on inadmissible hearsay.

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.

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