Bankruptcy Appellate Panel Archives

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.

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.

Actual Intent to Cause Injury is Not Required Under Bankruptcy Code Section 523(a)(6)

In In re Hamilton, BAP Nos. SC-17-1126 and SC-17-1123, the Ninth Circuit Bankruptcy Appellate Panel ("BAP") considered the intent requirement for non-dischargeability of a debt under Section 523(a)(6). The debtor argued that the Supreme Court case of Kawaauhau v. Geiger, 523 U.S. 57 (1998) required actual intent or specific intent to cause injury to meet the "willful" injury requirement of Section 523(a)(6). The BAP clarified that while Geiger held that an intent to cause harm was required, it did not elaborate as to "the precise state of mind required," as stated by the Ninth Circuit in Petralia v. Jerchich (In re Jercich), 238 F.3d 1202 (9th Cir. 2001). The BAP commented that the holding in Jercich that the debtor must intentionally commit the act with a substantial certainty that injury will occur is controlling and not at odds with Geiger. As such, the BAP confirmed that a specific intent to cause injury is not required to meet the "willful" standard under Section 523(a)(6) but rather, only a substantial certainty that injury will occur as found in Jercich.

Valuation for Cramdown is "Replacement-Value" Not "Foreclosure-Value"

In Sunnyslope Housing Ltd. Partnership, the Ninth Circuit held that for chapter 11 cramdown purposes, the valuation of property need not account for the potential extinguishment of subordinated affordable housing covenants which, if extinguished through foreclosure, would significantly increase the value of the property. As such, the Ninth Circuit allowed the much lower valuation of the property which assumed the covenants were in place and allowed the debtor to value the senior lender's secured claim at a very low number. This allowed the debtor to value the lender's secured claim at a low amount and treat the rest of its claim as unsecured under Bankruptcy Code section 506(a). 

Ninth Circuit Applies California Supreme Court's Holding in Carmack v. Reynolds, Holding That Spendthrift Trust Distributions Are Property of the Estate and Confirming the Types of Distributions Which Need to Be Turned Over

On August 16, 2017, the Ninth Circuit Court of Appeals, more than two years after it issued an order certifying a probate question to the California Supreme Court, held that a bankruptcy estate is entitled to the full amount of spendthrift trust distributions due to be paid as of the petition date. However, based on the California Supreme Court's opinion in Carmack v. Reynolds, 391 P.3d 625, 628 (Cal. 2017), the Ninth Circuit confirmed that the estate may not access any portion that the beneficiary needs for his/her support or education (so long as the trust specifies that is the purpose of the funds). See also Cal. Prob. Code § 15302. The Ninth Circuit further held that the bankruptcy estate may also reach 25 percent of expected future payments from the spendthrift trust, reduced by amounts needed by the beneficiary to support himself/herself and his/her dependents. Carmack v. Reynolds, 391 P.3d at 632; Cal. Prob. Code § 15306.5.

Contingent Interest in Commissions Earned Post-Petition Can Be Bankruptcy Estate Property

In re Anderson, BAP No. ID-16-13156-JuFB, filed on August 11, 2017, the Ninth Circuit Bankruptcy Appellate Panel upheld the Bankruptcy Court's finding that the debtors' contingent real estate commissions were estate property. The debtors were real estate agents. When they filed their bankruptcy petition, they had 13 transactions which were under contract and in escrow but had not yet closed. Under Idaho state law, the debtors were not entitled to payment of their commissions until the transaction closed. The closings did not occur until after the filing of the bankruptcy. The Bankruptcy Court found, and the BAP agreed, that because the interest in the commissions was sufficiently rooted in the pre-bankruptcy past and especially because the debtors were unable to show that any of the acts necessary to earn the commissions were performed post-petition, the commissions were property of the bankruptcy estate.

Statutory Tax Lien Can Be Set Aside as Against a Bona Fide Purchaser

In In re Mainline Equipment, Inc., Case No. 15-60069, the Ninth Circuit Court of Appeals held that the County of Los Angeles ("County") could not enforce its tax liens on personal property against a bona fide purchaser when the County had failed to perfect its liens. The Chapter 11 debtor could set aside the County's liens under Bankruptcy Code Section 545 because the liens were only statutory and were unenforceable against a bona fide purchaser based on the enforceability of the liens pursuant to Cal. Rev. and Tax Code section 2191.4. Specifically, the County had recorded tax delinquency certificates with the County Recorder but failed to file its liens with the Secretary of State of California. While this granted the County a lien upon all of the debtor's real and personal property in the county in which it was recorded, such liens were not enforceable against a bona fide purchaser of personal property and thus, could be avoided by the debtor. The result would likely be different if real property were concerned because judgment liens recorded with the County Recorder are perfected as to real property.

Revocation of Bankruptcy Discharge Statute of Limitations Is Not Jurisdictional

In Weil v. Elliott, decided June 14, 2017, the Ninth Circuit Court of Appeals decided the statute of limitations for the filing of an action to revoke a debtor's discharge is not jurisdictional and can be waived if not timely raised as an affirmative defense.

Debt Non-Dischargeable Without Making False Representation to Creditor

In Husky International Electronics, Inc. v. Ritz published on May 16, 2016, the Supreme Court of the United States ("SCOTUS") found a debt not dischargeable because of the debtor's intercompany transfer scheme to avoid paying the debt. The debt was owed by Chrysalis Manufacturing Corp. but its director Daniel Lee Ritz, Jr. ("Ritz") drained any assets available to pay that debt by transferring money to other entities owned by Ritz. Ritz then filed for bankruptcy when Husky came after him to recover the debt. Reversing the lower courts, the SCOTUS found the debt non-dischargeable. Even though Ritz made no direct false representation to Husky, the SCOTUS found his intercompany transfer scheme constituted actual fraud such that the debt was non-dischargeable, holding that Section 523(a)(2)(A) "encompasses fraudulent conveyance schemes, even when those schemes do not involve a false representation." 

ESTOPPEL TO THE RESCUE: OBJECTIONS TO EXEMPTIONS ON THE BASIS OF BAD FAITH MAY SURVIVE LAW V. SIEGEL IN CALIFORNIA

On March 4, 2014, the Supreme Court of the United States struck down the Ninth Circuit's imposition of an equitable surcharge on the basis of bad faith against a debtor's exempt property in Law v. Siegel, 134 S.Ct. 1188 (2014). The Supreme Court held that the general equitable powers of Bankruptcy Code Section 105(a) did not provide authority for judge-made exemptions to explicit mandates of the Bankruptcy Code. The Supreme Court emphasized that "federal law provides no authority for bankruptcy courts to deny an exemption on a ground not specified in the Code," and that any basis for denial of a state law exemption must arise under state law. Id. at 1197-98. As a result of Law v. Siegel, a growing number of cases have held that bankruptcy courts lack the authority to disallow a debtor's claimed homestead exemption based on Section 105(a), whether indirectly by denying leave to amend, or directly by disallowing the exemption; therefore, effectively rendering an objection to claimed exemptions on the basis of bad faith a nullity.

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