Tag: court cases

Innocent spouse in bankruptcy fraud and the Bartenwerfer case

Innocent Spouse, Bankruptcy & Fraud: Bartenwerfer v Buckley Summary

Posted by Hale Andrew Antico on

Innocent Spouse, Bankruptcy & Fraud: Bartenwerfer v Buckley Summary

Can the fraud of one spouse be imputed to an innocent spouse, thereby making the debt nondischargeable to both in a bankruptcy? Meet the Bartenwerfer family.

February 22, 2023 update: The Supreme Court unanimously ruled that debt incurred by fraud is not discharged in bankruptcy, regardless of individual culpability. The Court parsed the plain language of Section 523(a)(2)(A), whose key language says “does not discharge an individual debtor from any debt … obtained by … false pretenses, a false representation, or actual
fraud.”

The Court’s analysis read that Congress clearly was focused on the debt. Because of the passive voice of the statute, it pulls the actor off the stage.

All of this said, innocent people are sometimes held liable
for fraud they did not personally commit, and, if they de-
clare bankruptcy, §523(a)(2)(A) bars discharge of that debt.

The Concurrence: There is a more common sense analysis, which doesn’t expand the Court’s precedent of business agency culpability into marriage and spousal culpability. That’s the Sotomayor and Jackson concurrence. There, they focus on the fact that these spouses were found by the Bankruptcy Court to have an agency relationship, and obtained the debt after they formed a partnership.

That argument didn’t win the day, however, as seven Justices still prevailed with the majority point that partnership or none, if you owe the debt obtained by fraud, you can’t discharge it in bankruptcy.

Bottom line: The Supreme Court ruled unanimously that debt obtained by fraud is not discharged, period. This is regardless of the knowledge or intent of the debtor (such as a business partner, or in this case, an innocent spouse). Harsh, but clear.

Jan 2023 update: this case is pending before the SCOTUS in 2023.

Bartenwerfer v. Buckley Summary: the Supreme Court case

The Supreme Court is set to rule on this very issue in 2023. This is an appeal of a bankruptcy case with an innocent spouse whose husband was found liable for prepetition nondisclosure which turned into a bankruptcy court finding of nondischargeable fraud.

The basic facts are that Mr. Bartenwerfer (Debtor) sold a house to Mr. Buckley (Creditor), who then later found a bunch of undisclosed defects on the remodeled home. In fact, Debtor signed a statutory transfer disclosure statement which contained false representations that Creditor relied upon. Creditor sues. After three years at trial, a jury found Debtor liable for, among other things, nondisclosure of the defects. The jury also awarded Creditor, after reduction, about $250,000 in damages.

Debtor then filed Chapter 7 bankruptcy, and to the surprise of nobody, Creditor followed him into the bankruptcy and filed and succeeded with a motion to have the nondisclosure portion of his quarter-million dollar judgment found nondischargable per 11 USC 523(a)(2)(A).

The bankruptcy court then made a specific ruling in favor of Mrs. Bartenwerfer — Debtor’s spouse — was not liable for the debt. This was based on the facts that she didn’t live at the property after the renovations, she didn’t visit it again until Debtor and Creditor met there to sign the disclosure statement. The court also found she never spoke with the laborors, and had an agreement her Debtor husband that Debtor would assume responsibility and make it his full-time job to supervise the renovations. In re Bartenwerfer, 596 BR 675, 685-686 (NDCA, 2019)

Innocent spouse in bankruptcy fraud and the Bartenwerfer case
An innocent spouse should not be liable for the fraud of their spouse if they didn’t know about it

The Split on Standards for Imputed Fraud to a Spouse

SCOTUS is Strang: Fraud imputed without benefit or knowledge

There are a few ways courts have approached this. One approach, the most absolute and the strictest, is that any agency imputes the fraud to others in the partnership.

We start with the Supreme Court case of Strang v. Bradner, 114 US 555 (1885). Here, there was a business partnership involving wool consignment. The SCOTUS determined that one of the partners had committed fraud, and that was not discharged in bankruptcy. Turning then to whether the partner should also be held liable, it ruled that “we are of opinion that his fraud is to be imputed, for the purposes of the action, to all the members of his firm.” Id. at 561.

The Supremes went on: “…if, in the conduct of partnership business, and with reference thereto, one partner makes false or fraudulent misrepresentations of fact to the injury of innocent persons who deal with him as representing the firm, and without notice of any limitations upon his general authority, his partners cannot escape pecuniary responsibility therefor upon the ground that such misrepresentations were made without their knowledge.” Id.

Clearly, the Supreme Court back in 1885 considered the partnership business as one in which conscious decisions are made with regard to financial and pecuniary agency, and “…especially so when, as in the case before us, the partners, who were not themselves guilty of wrong, received and appropriated the fruits of the fraudulent conduct of their associate in business.” Id. While the SCOTUS discussed “fruits of the fraud” and benefits, other courts have ignored this as if it were dicta.

Strang was followed by the Fifth Circuit, when it held “that innocent partners were precluded from discharging debts generated by their partner’s fraud even if they did not benefit monetarily from the fraud.” In re M.M. Winkler & Assocs, 239 F.3d 746, 748 (5th Cir.2001).” The 5th Circuit continued: “we hold that §523(a)(2)(A) prevents an innocent debtor from discharging liability for the fraud of his partners, regardless whether he receives a monetary benefit.” Id. at 751.

There are other interpretations of this, which has led to some Strang bedfellows.

Sixth Circuit: Receipt of Benefits

A different standard involves benefiting from the fraud. Following Strang, and including as a requirement its language of “fruits of the fraudulent conduct” — that is, benefit from the fraud — is the Sixth Circuit. There, the Circuit Court held that “[T]he fraud in Strang was perpetrated within the scope of the partnership’s business, and, as in the case at bar, the innocent partners received the fruits of the fraudulent conduct.” In re Ledford, 970 F.2d 1556, 1561 (6th Cir. 1992).

Again, in Ledford as in Strang, we have a business case where partners made a conscious decision to be bound by each other’s financial gains, losses, and wrongdoing.

Eighth and Ninth’s Huh and Walker: Knew or should have Known

The Ninth Circuit had adopted a standard that “more than a principal/agent relationship is required to establish a fraud exception to discharge. While the principal/debtor need not have participated actively in the fraud for the creditor to obtain an exception to discharge, the creditor must show that the debtor knew, or should have known, of the agent’s fraud. ” Sachan v. Huh (In re Huh), 506 B.R. 257, 271-272 (9th Cir BAP, 2014).

This reasonable standard adopted from a long-established case in the the Eighth Circuit: “If the principal either knew or should have known of the agent’s fraud, the agent’s fraud will be imputed to the debtor-principal.” In re Walker, 726 F.2d 452,454 (8th Cir. 1984).

Back to Bartenwerfer

The Standards Used by Courts in Bartenwerfer

With that review of standards, what happened in Bartenwerfer? Creditor appealed to the Ninth Circuit BAP, who remanded, asking the bankruptcy court to determine if spouse Mrs. Bartenwerfer was liable for the nondisclosure of defects using the “knew or should have known” standard in Walker v. Citizens State Bank, 726 F.2d 452 (8th Cir 1984). There was an evidentiary hearing, and a finding that Mr. Bartenwerfer’s fraud could not be imputed onto Mrs. Bartenwerfer because she did not know of the fraud. In re Bartenwerfer (9th Cir BAP NC-19-1016-TaFB, 2020). Citing Walker, the BAP wrote that the “bankruptcy court did not err in its determination that Mr. Bartenwerfer’s fraud cannot be imputed to Mrs. Bartenwerfer.” Id. at 11.

In the appeal to the Ninth Circuit Court of Appeals, the 9th Circuit abandoned Huh and Walker, and held that the absolute “basic partnership principles” and that the SCOTUS strict agency precedent should make Mrs. Bartenwerfer liable for the nondisclosure of the defects. In re Bartenwerfer (9th Cir, 2021). The Ninth Circuit treated a the unknowing spouse like a business partner, and applied the formal agency standard to her, citing Strang, as well as In re Cecchini, 780 F. 2d 1440 (9th Cir, 1986).

Which puts the case before the Supreme Court, where in late January 2023, it has agreed to review the issue.

Strang should be limited to business agency

Strang is a business case, and it should not be extended to marriages. There is precedent for this balanced approach.

The Eight Circuit in 2001 followed the 11th Circuit in limiting the applicability of strict Strang to only business agency. “We agree with the Eleventh Circuit that Strang should not be extended beyond its basis in agency law to include the much broader sweep of § 20(a) liability.” Owens v. Miller, 276 F.3d 424 (8th Cir. 2001), citing Hoffend, 261 F.3d at 1153. If the spouse knew or should have known, then the Huh and Walker standard of liability would apply. This is the right balance and approach.

It seems to be a stretch to apply partnership agency standards of imputing fraud to a marriage, particularly when there is an innocent spouse who does not meet the “knew or should have known” standard. In a business venture, both partners go into business and willingly realize and take the risk that there will be contracts, statements, and agreements. Both are savvy and assume these risks, gains, and losses.

In a marriage, there is often one spouse much more knowledgeable in various topics, whether it’s keeping the checkbook or running the family business. When spouses say “I do,” while agreeing to love in sickness and health, the spouses are not knowingly agreeing to assume the burden of imputed fraud when their spouse secretly does wrong and commits fraud. Marriage is not a business partnership.

It’s hoped that the Supreme Court in reviewing the issue and appeal from the 9th Circuit follows the logic and common sense of the 9th Circuit BAP, Walker, and Owens, and refrains from creating new obligations in marriages that harm innocent spouses for the fraud of the other.

Absolute Right to Dismiss Chapter 13 is a Happy Green Light

9th Cir BAP: Actually, Absolute Right to Dismiss means Absolute

Posted by Hale Andrew Antico on

9th Cir BAP: Actually, Absolute Right to Dismiss means Absolute

Ninth Circuit Bankruptcy Appellate Panel finds no “eligibility” exception to right to dismiss a Chapter 13 bankruptcy

Recent BAP ruling answers the question if debtor’s right to dismiss a Chapter 13 bankruptcy after Nichols is absolute, or if debt limit ineligibility restricts it.

In re Powell is a recent Chapter 13 bankruptcy where the debtor tried to dismiss his case, and judgment creditor TICO fought the dismissal. and instead wanted Debtor’s case converted to Chapter 7. The Bankruptcy Court granted the motion to dismiss, citing the recent Nichols case.

Powell vs TICO Construction (In re Powell)
644 B.R. 181 (9th Circuit BAP, 2022)

ISSUE

Did the bankruptcy court err in granting Debtor’s motion to dismiss the Chapter 13?

RULING

No.

FACTS

This case tests the new “absolute right to dismiss” rule about Chapter 13 bankruptcies from the Ninth Circuit Court of Appeals Nichols case, and whether it applies even to people who could only file 7 and had no business in a Chapter 13 in the first place.

Here, there was a dispute between an employer (Creditor TICO Construction) and one of its former workers, Jason Powell (Debtor). Creditor claimed that when Debtor left its employ to form his own company, he took trade secrets, broke his non-compete clause, and misappropriated proprietary information. This seemed to cause all sorts of bad blood.

TICO then sued Debtor in state court, and got a judgment against Debtor for about $250,000, which it then recorded against all of Debtor’s property in Nevada. What should have been the end was only the beginning of the litigation between the two.

Debtor filed for Chapter 13 bankruptcy relief. Creditor then filed a flurry of motions and complaints in the bankruptcy. Creditor challenged Debtor’s homestead exemption, asserted Debtor was over the unsecured debt limit and hence not eligible for Chapter 13. It also filed motions to value collateral. Creditor also filed adversary proceedings to have its debt found nondischargable under 523(a)(4) and 523(a)(6), alleging, among other things, hiding assets via transfers from Debtor to his ex-wife, who was really still his wife due to a sham divorce.

It’s safe to say that Creditor believed Debtor was a bad actor guilty of fraud and bad faith, the exact type of person it felt that was not entitled to dismissal of a Chapter 13 under some case law. And that’s exactly what Debtor tried to do at this point. Having reached his own limit of the litigation and headaches, Debtor filed a motion to dismiss. Creditor said Debtor could not dismiss a 13, since he was never eligible to be in one in the first place, and wanted the case converted to a Chapter 7 or 11. The bankruptcy court granted the motion to dismiss. Creditor appealed to the BAP.

RULING

The Bankruptcy Appellate Panel considered whether the absolute right to dismiss under 11 USC 1307(b) has an exception here, and concluded that it doesn’t.

Section 1307(b)

Section 1307(b) of the Bankruptcy Code says, “On request of the debtor at any time, if the case has not been converted under section 706, 1112, or 1208 of this title, the court shall dismiss a case under this chapter. Any waiver of the right to dismiss under this subsection is unenforceable.”

That seems fairly ironclad, with words like “shall” and “at any time,” and even stating it can’t be waived. But as the BAP pointed out, this statute has somehow caused a split in the jurisdictions as to whether that right to dismiss is absolute.

Review of Case Law

The BAP then reviewed the case law. Some courts have held that it is indeed an absolute right to dismiss, regardless of findings of bad faith. In re Williams, 435 BR 552 (Bankr. Court, ND Ill, 2010). On the other hand, the Fifth Circuit has exceptions to the right to dismiss for bad faith or abuse of process. Jacobsen v. Moser (In re Jacobsen), 609 F.3d 647, 660 (5th Cir 2010).

Locally, the Ninth Circuit has been in the latter camp for a while, when the 9th Circuit Court of Appeals denied Debtor’s request to dismiss because of bad faith. In re Rossom, 545 F.3d 764 (9th Cir, 2008), The Rossom ruling of no right to dismissal for bad faith cited the US Supreme Court in Marrama v. Citizens Bank of Massachusetts, 549 US 365, (Supreme Court, 2007), which denied the right to convert a case because of Debtor’s bad faith.

In 2021, the Ninth Circuit then determined that Rossom was no longer good law, in light of the subsequent Law v Siegel ruling from the Supreme Court. In re Nichols, 10 F.4th 956 (9th Cir, 2021). No longer bound by Rossom, the Ninth Circuit in Nichols reviewed the Bankruptcy Code anew with a fresh eye. It found that “section 1307(b)’s text is unambiguous.” Id. at 963.

The 9th Circuit in Nichols then held, “We conclude that § 1307(b)’s text confers upon the debtor an absolute right to dismiss a Chapter 13 bankruptcy case, subject to the single exception noted expressly in the statute itself.” Id. at 964.

Back to 2022, Powell, TICO, and the BAP. After raising Marrama, the BAP quickly distinguished it, hinting that it doesn’t apply to the absolute 1307(b) right to dismissal by pointing to the Nichols case which overruled Rossom. “[A]s the bankruptcy court correctly held, the Ninth Circuit’s recent Nichols decision overruled Rosson and made clear that chapter 13 debtors have an absolute right to dismiss their case at any time, so long as the case had not been previously converted. Powell at 185.

Creditor TICO raised the issue that because Powell was over the debt limit, he was never a Chapter 13 debtor, and thus, Nichols and 1307 didn’t apply. The BAP wasn’t buying any of it, saying that there was nothing in 1307(b) which limits it to eligible Chapter 13 debtors, and to rule this way would be to create a new limitation not found in the statute.

In short, Nichols and 1307(b) even applies to people who had no business filing a Chapter 13. In the Ninth Circuit, the rule is clear: Marrama doesn’t apply to 1307(b), and after Law v Siegel, the statute’s plain text is unambiguous: it’s an absolute right by debtor that the court shall dismiss a case upon his request, if the case was not previously converted. Absolute really does actually mean absolute. Other circuits would do well to follow.

Bankruptcy can toll or extend the statute of limitations using Section 108(c)

Does Bankruptcy Toll the Statute of Limitations? 108c Top Points

Posted by Hale Andrew Antico on

Does Bankruptcy Toll the Statute of Limitations? 108c Top Points

Does bankruptcy’s automatic stay toll a statute of limitations for a creditor’s claim or judgment, or extend it in Calif and beyond. What to know.

When a bankruptcy is dismissed or discharged, is the statute of limitations tolled on an earlier claim by the automatic stay, and suspended? Or is the statute of limitations extended by a few weeks with just a little bit of time tacked on? The answer could make a big difference on how much time the creditor has the act on their claim, lawsuit, lien, or other collection actions.

Automatic Stay giveth, but what does it take away?

Extending time using Section 108
Live photo of someone extending time using Section 108

You probably already know there’s bankruptcy protection in 11 USC 362 called the automatic stay. In short, this means that once a bankruptcy is filed, all collections against the debtor have to stop. This is powerful and effective. In a typical case that successfully ends with discharge, the debt is no longer collectable, ever.

However, sometimes a Chapter 13 bankruptcy — sort of a years-long debt consolidation — doesn’t make it to discharge. If the case is dismissed, what happens to the statute of limitation timing on claims and judgments before the bankruptcy? Is the statute tolled (suspended), or is the timeline to collect extended?

Suspend: Tolling of the Statute of Limitations

Suspension would involve tolling the statute of limitations for the time in bankruptcy. A common example would be in California. Here, there’s a four-year statute of limitations for breach of contract. If three of those years have run, and then someone files Chapter 13 for two years before it’s dismissed, how much time remains to collect? If the statute was suspended or tolled, there would still be a year to file a law suit against debtor, post-bankruptcy.

Extend: Add some time to collect after bankruptcy.

Extension of time would be tacking on additional time to prosecute the case and file the lawsuit after the dismissal of the bankruptcy.

Let’s look at the law and see what it says for guidance.

Bankruptcy Code 11 USC 108

Section 108(c) of the Bankruptcy Code says:

…if applicable nonbankruptcy law, an order entered in a nonbankruptcy proceeding, or an agreement fixes a period for commencing or continuing a civil action in a court other than a bankruptcy court on a claim against the debtor, or against an individual with respect to which such individual is protected under section 1201 or 1301 of this title, and such period has not expired before the date of the filing of the petition, then such period does not expire until the later of—
(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or
(2) 30 days after notice of the termination or expiration of the stay under section 362, 922, 1201, or 1301 of this title, as the case may be, with respect to such claim.

What this means is that Section 108(c) kicks in regarding someone protected under Chapter 12 or Chapter 13 bankruptcies (1201 or 1301), so it wouldn’t apply in the more common Chapter 7 bankruptcy cases.

It also specifically says that the period to commence or continue an action against the debtor doesn’t expire until the later of (1) the suspension of the period; OR (2) 30 days after notice of the stay ended, which sounds like an extension.

What does this mean? Let’s go to the Bankruptcy Appellate Panel in the Ninth Circuit: “In simpler terms, unless the limitations period under applicable nonbankruptcy law would expire later, a limitations period that did not expire prepetition will expire thirty days after the expiration or termination of the automatic stay.” In re Brown, 606 BR 40, 47 (9th Cir BAP, 2019).

So, there’s both suspension and extension. Are both in play as both are in the statute, or is it just one used practically, depending on jurisdiction? As usual, we look to the courts for interpretation.

Statute of Limitations have been both extended and suspended, depending on which court interprets Section 108
Statute of Limitations have been both extended and suspended, depending on which court interprets Section 108

How the Courts have interpreted Section 108(c)

Differing opinions on suspend or extend

In the battle of suspend (toll) vs extend, the result seems to be specific to jurisdiction, facts, and the underlying nonbankruptcy law in play. The Supreme Court of the United States has weighed in: “Petitioners believe § 108(c)(1) contains a tolling provision. The lower courts have split over this issue.” Young vs US, 535 U.S. 43, 52 (Sup Ct, 2002).

Lower courts have made the same observation. “They [the parties] differ in interpretation, however, with CPI finding no separate federal basis for tolling state prescriptive periods and Rogers arguing that § 108(c) itself tolls the prescriptive period. We are not the first circuit to face this issue. Panels of both the Second and Ninth Circuits have examined the language and legislative history of this section of the Code. Unfortunately, they have created a potential split in result. Other federal courts have divided likewise.” Rogers v. Corrosion Products, Inc., 42 F. 3d 292, 296 (5th Circuit, 1995)

Statute of Limitations extended … A Little Bit

Some courts have used Section 108 to merely extend the statute of limitations. One example: “We hold that Section 108(c) of the bankruptcy Code extends a creditor’s right to bring an action through the pendency of a debtor’s bankruptcy case only for 30 days after the automatic stay expires by operation of law or is lifted by order of court.” In re Baird, 63 BR 60, 63 (WDKY, 1986).

While Section 362 doesn’t deal with time, Section 108 above has a few factors, and can extend contractual, statutory or judicial deadlines. Here’s the Second Circuit Court of Appeals: “…we observe that by its terms § 108(c) does not provide for tolling of any externally imposed time bars, such as those found in the two maritime statutes of limitations. The bankruptcy section only calls for applicable time deadlines to be extended for 30 days after notice of the termination of a bankruptcy stay, if any such deadline would have fallen on an earlier date.” Aslanidis v. US Lines, 7 F. 3d 1067, 1073 (2nd Cir, 1993).

A mere 30-day extension can be challenging for creditors, and good news for debtors, as it’s not always certain creditors will get notice of the bankruptcy dismissal in 30 days. If that’s the case, the 30 days can go quickly and then the debtor is safe from any claims brought from that creditor.

Suspended or Tolled Statute: California State Law CCP 356

Let’s start with this nugget of a quote:

“Although the automatic stay is a broad and powerful provision, it does not stay the passage of time.”

That is from Judge Sidney Weaver in the case Matter of Lauderdale Motorcar Corp., 35 BR 544, 548 (Bankr. Ct, SD FL 1983). Judge Weaver’s quote is consistent with the Second Circuit above in Aslanidis, and would seem to be very friendly to debtors. They can’t run out the clock in a bankruptcy, but a small 30-day window puts the odds in their favor.

But not so fast. Other courts (and state laws) have come to a different conclusion.

In California, the automatic stay suspends time for the SOL

Locally, in California, state law kicks in. We have CCP 356, which says: “When the commencement of an action is stayed by injunction or statutory prohibition, the time of the continuance of the injunction or prohibition is not part of the time limited for the commencement of the action.”

“A bankruptcy stay has been held to be a ‘statutory prohibition’ within the meaning of Code of Civil Procedure section 356.” Schumacher v. Worcester, 55 Cal.App.4th 376, 380 (1997) . Later, this was cited by another California court, which added: “The provisions of sections 362(a), 108(c), and Code of Civil Procedure section 356, as well as the relevant case law set forth above, enforce our conclusion that the automatic stay provisions applied here to toll the limitations periods.” Kertesz v. Ostrovsky, 8 Cal. Rptr. 3d 907, 914 (Cal Ct of Appeal, 4th Appellate Dist., 3rd Div. 2004), but note limitations in law construction that focused on the 1872 enactment date of Section 356. Inco Development, Court of Appeal of California, Fourth District, Division Two, August 4, 2005.

California law and the Discharge Injunction: also suspends time

That’s all well and good. It seems to be settled in California that because of CCP 356, the Automatic Stay of Section 362 suspends (that is tolls) the statute of limitations. But does CCP Section 356 have the same effect on tolling because of the discharge injunction of Section 524(a)(2)?

Surprisingly, the Ninth Circuit BAP says, yes, the discharge injunction also tolls and suspends time in California. To wit: “In sum, the Browns have not persuaded us that the discharge injunction is beyond the scope of C.C.P. § 356. To the contrary, we are convinced that the discharge injunction triggers the limitations period suspension provided for in the statute. Therefore, we reject the Browns’ principal argument on appeal.” Brown, 606 BR at 50.

But Beware Phillips v Gilman for Postpetition Fees and Costs in a Bankruptcy

When it comes to fees in a bankruptcy using nonbankruptcy statutes CCP 685.040 and 685.080, the Ninth Circuit BAP found that Section 108c doesn’t apply. Why? Because Section 108(c) involves seeking relief in a court other than a bankruptcy court; and that period must not have expired when the petition is filed. Both of these were missing.

The BAP of the Ninth Circuit ruled, “By their conduct, Creditors demonstrate that CCP § 685.080 did not require Creditors to act “in a court other than a bankruptcy court“; this fact alone renders § 108(c) inapplicable to their motions.” In re Gilman, 603 BR 437, 445 (9th Cir BAP, 2019). Further, “[b]ecause all of the fees were incurred postpetition, CCP § 685.080’s two-year period did not commence prepetition and, again, § 108(c) does not apply.” Id.

In short, as the Ninth Circuit Court of Appeals stated in an unpublished rejected appeal, “Section 108(c) does not apply here because Creditors filed their fee motions in the Bankruptcy Court for fees incurred after Debtor filed his bankruptcy petition.” Phillips v Gilman, unpublished, (9th Cir, 2020). The lesson? It’s in footnote 9 of the main BAP case: ” the bankruptcy court did not prohibit Creditors from filing CCP § 685.040 motions or memoranda at two-year intervals.”

The Ninth Circuit Extends for Judgments

Let’s go outside of California state law, but stay in the Ninth Circuit. What do we find there?

In 1989, the Ninth Circuit weighed in on the issue when it ruled that Section 108(c) extends the limitations period so long as the creditor is barred by the automatic stay from enforcing its judgment against the property of the estate. Hunters Run, 875 F.2d 1425 (9th Circuit, 1989).

That settles it, then, right? Not so fast. The 5th Circuit Court of Appeals found 9th Circuit’s ruling “opaque” when it ruled: “Again, the general question was whether § 108(c) applied to the time limits of enforcement actions of liens. The court held that it did and that the time period was “tolled.” The court did not decide whether the “tolling” meant that the time period ceased to run, or simply that a thirty-day grace period existed under the statute if the time period had run.” Rogers, 42 F. 3d at 296-297.

The Hunters Run rule was discussed further in In re Spirtos, 221 F. 3d 1079 (9th Circuit, 2000), where the Ninth Circuit (not BAP) distinguished collecting on a judgment versus merely renewing a judgment. There, the Circuit Court recited what Hunters Run stands for, and then itself ruled the proposition that section 108(c) extends the limitations period so long as the creditor is barred by the automatic stay from enforcing its judgment against the property of the estate.

More recently, in evaluating an ORAP lien, the Ninth Circuit held “that the period in which a creditor may execute on a lien constitutes the continuation of the original action that resulted in the judgment and is thus tolled during the automatic stay.” In re Swintek, 906 F. 3d 1100, 1102 (9th Circuit, 2018).

The IRS, taxes, and 108(c)

Generally, taxes, tolling, and the bankruptcy automatic stay

Taxes are a very tricky issue in bankruptcy, much of it involving timing. As a rule, taxes are not dischargable in bankruptcy. The exception is that they can be eliminated if enough time has passed for various benchmarks.

Section 6503(b) of the Internal Revenue Code states:

The period of limitations on collection after assessment prescribed in section 6502 shall be suspended for the period the assets of the taxpayer are in the control or custody of the court in any proceeding before any court of the United States . . . and for six months thereafter.

How does the IRC’s 6503 interplay with the Bankruptcy Code’s 108? Or put differently, what if someone is in a Chapter 13 during the three years the IRS has to collect taxes in their priority status of 11 USC 507(a)(8)?

The Ninth Circuit BAP, citing Baird above, and reviewing Congress’ legislative intent, found that, “…it is clear that Congress, by enacting Section 108(c), intended to activate Section 6503(b) and thereby suspend the running of the statute of limitations for tax collection during a taxpayer’s bankruptcy proceedings.” In re Brickley, 70 BR 113, 115, (9th Cir BAP, 1986). Section 6503, then, takes over for Section 108, and the result for the tax clock is that it’s suspended. (But see In re Gurney, 192 BR 529, (9th Cir BAP, 1996), allowing the court’s Section 105 powers for equitable tolling balanced against the policy to prevent tax evasion schemes, limited in In re Gardenhire, 209 F. 3d 1145, 9th Circuit, 2000).

The Ninth Circuit Court of Appeals found the BAP’s logic in Brickley persuasive, and followed it in In re West, 5 F. 3d 423 (9th Circuit, 1993). There, the 9th Circuit reviewed the 240-day rule of Section 507’s interaction with Section 108. Considering using bankruptcy for tax evasion, the Ninth Circuit concluded, “The debtors’ joint Chapter 13 case suspended the running of § 507(a)(7)(A)(ii)’s 240-day priority period from the date of the bankruptcy petition until six months after the case was dismissed. ” West at 427.

Equitable Tolling and the Statute of Limitations in Bankruptcy

Sometimes, courts find that it’s just fair to prevent someone from using bankruptcy in a tax evasion scheme. In those situations, equitable tolling is used to provide the taxing authority more time to collect the taxes.

In the Young case discussed above, a person filed a Chapter 13 bankruptcy during the three-year lookback period, and then a Chapter 7 in an effort to run out the clock. The Supreme Court found equitable tolling, finding the just result was stopping the clock (ie: suspending) and the statute of limitations during the bankruptcy cases.

In the Ninth Circuit, that was not the result when Brenda Jones filed a Chapter 13 bankruptcy, and then filed her California state tax return owing money. The Franchise Tax Board (FTB) didn’t protect its claim in the 13, and then years later, Jones dismissed her case and then filed a Chapter 7. The FTB wondered if it could maintain a postconfirmation tax claim if the prepetition property of the estate revested in the debtor at confirmation. Here, the Ninth Circuit Bankruptcy Appellate Panel distinguished from Young and found no equitable tolling because the FTB didn’t seek relief from the automatic stay or file a motion to dismiss in the 13 for its priority taxes. In re Jones, 420 BR 506 (9th Cir BAP, 2009).

Summing up

The bottom line is, well, there is no bottom line. Cases are all over the map, depending on the state, circuit, and underlying nonbankruptcy law. It would seem pretty straightforward that once a bankruptcy is dismissed, you just wait thirty days and hope you don’t get sued. However, there are many courts, states, and situations where the statute of limitations is tolled, that is stopped, while the bankruptcy and automatic stay is active.

And so the short answer, like most things in law, is, “it depends.”

time of bankruptcy filing determines homestead exemption

9th Cir: To Avoid a Judgment Lien, Use Exemptions at this Time

Posted by Hale Andrew Antico on

9th Circuit: Lien Avoidance Homestead Determined at Time of Bankruptcy Filing

If someone wants to avoid a judgment lien in bankruptcy, is the homestead exemption the one at the time the lien attached, or at the time of the bankruptcy filing? The Ninth Circuit Court of Appeals has recently weighed in, and the answer can affect thousands of dollars of liens on your home.

Why it matters

Liens in bankruptcy don’t usually go away. But there are times we bankruptcy lawyers can reduce or avoid liens. You may have heard that the California homestead exemption got a massive increase in 2021. This protects more home equity than ever before for people filing bankruptcy.

Now couple that with the fact that some liens in bankruptcy can be avoided if they impair an exemption. So, the bigger the exemption, the better the chances you can avoid a judgment lien and make thousands — or tens of thousands — of dollars of judgment liens disappear forever.

It’s very common for bankruptcy attorneys to be asked to remove an old judgment lien from a property. This can be done by reopening an old bankruptcy case where the lien then existed but wasn’t known, or filing a new case if the lien now impairs an exemption. But for a new case on an old lien, given that the homestead law just changed; there can be confusion which timing — and exemption amount — is used.

The question then is: to determine if the judgment lien impairs an exemption (a simple math problem), do we use the puny California homestead exemption at the time of the lien attaching where the lien won’t impair an exemption? Or the massively humongous homestead at the time of filing? It will determine the very question as to whether the lien can be removed in bankruptcy.

The Ninth Circuit, citing the Supreme Court, clarified which timing counts

In the battle of the clock, bankruptcy lawyers fight over which timing to use. The Ninth Circuit Court of Appeals just clarified the answer. It ruled that, “we must look to the amount of the homestead exemption that Boskoski could have claimed if, as Section 522(f) commands, the Greek Village lien against his property is disregarded.” Barclay v. Boskoski, WL 16911862 (9th Cir, Nov. 14, 2022).

In doing so, the Ninth Circuit relied on the U.S Supreme Court case of Owen v Owen, 500 US 305 (Supreme Court, 1991). The Owen case involved a 522(f) lien avoidance issue also. In that case, a judgment was entered against debtor. Creditor then recorded a lien against debtor’s property, and then state law changed to better protect debtor with a homestead exemption.

The Supreme Court ruled, “To determine the application of § 522(f) they ask not whether the lien impairs an exemption to which the debtor is in fact entitled, but whether it impairs an exemption to which he would have been entitled but for the lien itself.” Id. at 310-311. Or put differently, the language of 522f looks to the exemption the debtor would have been entitled but for the judgment lien.

And if there was no “old” judgment lien, the debtor “would be entitled” to today’s (larger) California homestead exemption. And that exemption is large enough where the lien would impair the exemption, and therefore can be avoided by 522(f).

A note about Wolfe v Jacobson

The creditor here, Barclay, argued that the Ninth Circuit was bound by Wolfe v Jacobson, 676 F.3d 1193, 1198 (9th Cir, 2012). It wanted “the entire state law” followed, per Jacobson at 1199. This Jacobson reading would have had the Barclay appellate court “apply all limitations that a state places on its exemptions when conducting the Bankruptcy Code’s lien avoidance calculation—including California’s limitations on the application of its homestead exemption.”

But the Ninth Circuit avoided that, and then pointed back to Owen, quoting the Supreme Court: “the Bankruptcy Code’s policy of permitting state-defined exemptions is not ‘absolute.'” Id. at 313. It found that the Owen case, involving lien avoidance, was a closer match than Jacobson, which doesn’t.

The 9th Circuit continued: “Anticipating the issue we address today, the Court held that ‘it is not inconsistent’ for the Code to allow states to define their own exemptions but ‘to have a policy disfavoring the impingement of certain types of liens upon exemptions, whether federal- or state-created.'”

In doing so, the Ninth Circuit in Barclay distanced itself further from Jacobson. Note that just a few months ago, new California SB1099 law was passed, which contained provisions which some speculate will limit Jacobson in other areas. By going out of its way to distinguish Barclay from it, it seems the Ninth Circuit is eroding the Jacobson holding without overturning it (yet).

The Ninth Circuit Already Ruled on Timing of Exemptions

The In re Barclay ruling is consistent with another case the Ninth Circuit affirmed on a very similar topic.

“It is well-established that the nature and extent of exemptions is determined as of the date that the bankruptcy petition is filed.” In re Chiu, 266 B.R. 743, 751 (9th Cir BAP, 1999), later affirmed, 304 F.3d. 905 (9th Circuit Court of Appeals, 2002), citing White v Stump, 266 U.S. 310, 313 (Supreme Court, 1924).

The Ninth Circuit in Barclay vs Boskoski, without going into much detail, gave a hat tip in passing to Stump above and its “snapshot rule.”

So, everything points in the same direction and lands at the same place. Exemptions are decided at the time of filing, and not the time of the (much) earlier lien attaching. This is consistent with the holdings of the 9th Circuit in Chiu, the Supreme Court in White v Stump, and the Supreme Court in Owen, which got there using different rationale and analysis.

All in all, good news for debtors!

Chicago v Fulton automatic stay and turnover cases are not just about cars

After Chicago v Fulton: Not Only Cars

Posted by Hale Andrew Antico on

After Chicago v Fulton: Not Only Cars

A Survey of Fulton Rulings and a Weakened Automatic Stay

Intro: What is a Fulton ruling?

When Chicago v Fulton (In re Fulton), 141 S Ct. 585 (Sup Ct, 2021) was first decided by the Supreme Court, there was a consensus among bankruptcy attorneys that the erosion of the automatic stay with regard to turnover was only about cars. That is, Fulton was a narrow ruling that was only about impounded vehicles seized prepetition, and wouldn’t really impact or weaken the automatic stay otherwise. Two years on, that turns out not to be the case.

June 2023 Update: the following list has been updated to include cases citing Fulton and the automatic stay through the midpoint of 2023.

What “Exercise Control” Meant Before Chicago v. Fulton

Prior to Fulton, many courts around the United States held that the filing of a bankruptcy petition compelled a party to return to debtor property taken for the purposes of collections prepetition. This forced return was under the power of the automatic stay of 11 USC 362, specifically section (a)(3). That portion of the statute “stays” or prohibits “any act … to exercise control over property of the estate.” Prior to 2021, it was common for courts to hold that property taken prepetition but held postpetition was “exercising control” of it and in violation of the stay.

Locally here in the Ninth Circuit, an example of a pre-Fulton exercise control case was In re Del Mission Ltd., 98 F.3d 1147 (9th Cir, 1996). There, the appellate court held, “we conclude that the State’s knowing retention of the disputed taxes violated the automatic stay.” Id. at 1152. After Fulton, Del Mission is no longer good law.

A Chicago v Fulton battle over automatic stay and turnover
A Chicago v Fulton battle over automatic stay and turnover

What SCOTUS Ruled in Chicago v. Fulton

Fulton reversed the law of many courts, including here in the Ninth Circuit. The Supreme Court held that “mere retention of estate property after the filing of a bankruptcy petition does not violate § 362(a)(3) of the Bankruptcy Code.” Id. at 592. It ruled that it to be a stay violation, it would take “affirmative acts that would disturb the status quo of estate property as of the time when the bankruptcy petition was filed.” Merely holding onto something doesn’t do that.

Deep Dive on the Automatic Stay

Read the Guide

What is a post-Fulton case or Fulton ruling

The Chicago v Fulton case was about the city of Chicago seizing and impounding vehicles prepetition for motor vehicle infractions and to collect fines, then refusing to turn over the vehicle upon the bankruptcy filing per 362(a)(3). Post-Fulton, courts are now finding that any property, not just a car, seized prepetition can be “merely retained” without finding a violation of the automatic stay. Two years later, this is a quick survey to see how courts are ruling on this issue now.

First Circuit

Milk. In re Vaqueria Las Martas, 638 BR 482 (1st Cir BAP, 2022). Not a typical automatic stay and turnover case, this Chapter 12 involves a loan for a couple of million dollars secured by thousands of gallons of milk. Fulton came into the picture because of the reference in it to filing an adversary proceeding for turnover under Section 542. Interestingly, at page 499, the 1st Circuit BAP found that the Supreme Court in Fulton “decided the issue narrowly,” but it was referring to the turnover process, not the Fulton ruling itself.

Bank accounts – “beyond the status quo” In re Educational Technical College, Case No. 21-02392 (EAG) (Bankr Ct, Puerto Rico, 2022). Here, the bankruptcy court found that the allegations against creditor rise above the level set in Fulton and Stuart (discussed below) when it misled debtor, took contradictory positions, used vexatious litigation tactics, and delayed things unnecessarily.

Second Circuit

Setoff. In re Arcapita Bank, 648 BR 489 (Bankr Ct, SDNY 2023). Like Margavitch, bank had seized funds prepetition. Here, though, the bank executed a setoff postpetition, which the bankruptcy court found altered the status quo. “But BisB did more than merely retain funds of Arcapita that were already in its possession. Rather, BisB actively executed a postpetition setoff of debts between itself and Arcapita, and continued to maintain that setoff. Indeed, the exercise of a setoff is explicitly covered by Section 362(a)(7), a distinct statutory section that was not applicable in the Fulton case.” Id. at 502.

Third Circuit

Bank accounts. In re Margavitch, Case No. 5:19-05353-MJC (Bankr Ct, MD Penn, 2021). Margavitch was one of the first turnover rulings on the issue to come out after Chicago v. Fulton was decided. It involved a pre-petition attachment lien, and the creditor took no action to withdraw it once the case was filed. The Court held, citing Fulton, that a stay violation requires an affirmative act that disrupts the status quo of estate property on the date the petition was filed. Further, the Margavitch court ruled, “passive maintenance of its valid pre-petition attachment lien in no way changed the status quo and therefore, did not constitute a violation of §362(a)(2).”

Bank accounts. In re Kipps, Case No. 5:19-01662-MJC, (Bankr Ct, MD Penn, 2022). The same judge who decided Margavitch decides another bank account case, and reaches the same conclusion.

Fourth Circuit

Boat and storage charges.Where creditor retains a boat in drydock storage with a lien pursuant to the Maritime Lien Act, there is no stay violation. In re Stokes, Bankr Ct., 21-01615-5-JNC, EDNC, 2022). “Further, the dry dock storage continued to be necessary postpetiton for the same reasons, and the automatic stay of 11 U.S.C. § 362(a) does not prevent or stop the accumulation of valid postpetition storage charges.” See a similar ‘necessity’ rationale in In re MTG.

Fifth Circuit

Retention of trucks and equipment after demand – not okay. In re Preferred Ready-Mix (Bankr Ct, 21-33369, SDTX 2022). Here, a state court receiver was unresponsive to letters demanding turnover which were sent postpetition. Debtor filed an adversary for turnover, stay violation, and others. Reducing Fulton literally to a footnote, the bankruptcy court found a violation of the automatic stay: “Furthermore, the Court finds that Berleth did more than just passive retention of estate property, as demand was made.” Then, following to footnote 19, the court wrote, “Here, a demand for turnover was made by plaintiff on November 10, 2021, and the property was not returned until November 20, 2021, and December 6, 2021. The facts differ from the facts in City of Chicago as this adversary was filed, this Court held a trial, and procedural safeguards were followed.” It appears the court is finding a violation of the automatic stay, starting from the date of demand, not the date of the filing of the adversary or order for turnover.

Sixth Circuit

Eviction – “does not maintain the status quo” In re Connor, 641 BR 875, 884 (Bankr. Ct, MDTN 2022). When a creditor who had already foreclosed on debtor’s residence prepetition then evicted debtor postpetition, it was distinguished from Fulton. “…reliance on Fulton is misguided since a post-petition eviction and dispossession of a debtor does not maintain the status quo in the same way as retaining possession of a vehicle repossessed prepetition.” Id. at 884. Note that a stay violation wasn’t found by this court when measuring other legal standards for willfulness and affirmative duty to act.

Administrative hold on bank account and spending funds for the estate. Distinguishing the use of seized funds from a setoff, the court allowed the use of retained funds postpetition to preserve the bankruptcy estate. In re MTG (Bankr Ct 2022). “Rather, Comerica’s only use of the funds was for the benefit of the bankruptcy estate — it used some of the funds to preserve property of the estate by paying utility bills for property that MTG owned. That payment of utility bills may have been a stay violation, but if so, it caused no damage to the bankruptcy estate, as discussed below. Otherwise, Comerica’s mere retention of the DIP funds in the escrow account was not a violation of the automatic stay.”

Seventh Circuit

No cases found yet.

Eighth Circuit

No cases found yet.

Ninth Circuit

Bank accounts. Stuart vs City of Scottsdale (in re Stuart), 632 BR 531 (9th Cir BAP, 2021). Here, Bank of America froze three bank accounts of debtor before he filed bankruptcy. Upon filing, the bank refused to release the frozen funds. The Ninth Circuit BAP held, “Where a creditor has executed a prepetition writ of garnishment against a debtor’s bank account, it is under no affirmative obligation to release the funds and need only maintain the status quo.” Id. at 540. “Because the City immediately asked the state court to stay the case and did nothing to change the status quo that existed when Mr. Stuart filed his bankruptcy petition, it did not violate the automatic stay.” Id. at 544.

Entering a Court Order. In re Censo, 638 BR 416 (9th Cir BAP, 2022). The Ninth Circuit BAP goes one step further. In Censo, there was a pre-petition lien, and so this seems to be the normal fact pattern. What’s different here is that there was a summary judgment order regarding the lien that was granted postpetition. The 9th Cir BAP found that the order did not change the status quo: “Shellpoint’s lien existed as of the petition date, and the DC Order simply affirmed the validity of the existing lien. It did not affect KAH’s possession or control of the Property. The DC Order thus did not disturb the status quo and did not violate § 362(a)(3).” Id. at 425. The automatic stay provision of 362(a)(1) bars actions against debtor. In Censo, the BAP’s found the “automatic stay inapplicable to lawsuits initiated by the debtor, and a defendant in an action brought by the debtor may defend itself in that action without violating the automatic stay.” Id. at 424.

Court action taken in defense. In re Lee, Case No. 13-11850-gs (Bankr Ct, Nevada, 2022). Debtors reopened their fourth bankruptcy case, which was previously dismissed, to file lawsuits. In response, the creditor brought a motion, and the bankruptcy court ruled, citing Censo, that the automatic stay doesn’t apply to state court actions commenced by the debtors.

Withholding a passport. In re Bronson, Case No. 20-30704-thp11 (Bankr Ct Oregon, 2022). In this case, there were allegations that creditor withheld debtor’s passport to collect unpaid child support. The bankruptcy court addressed the issue as to whether a stay violation occurred regarding the passport, but found there was not enough factual evidence to make a ruling.

Tenth Circuit

No cases found yet.

Eleventh Circuit

Continuing garnishment – “altered the status quo” – Wage garnishment order seized funds prepetition, but creditor allowing it to continue postpetition didn’t maintain the status quo and violated the automatic stay. In re Namen, Case No 3:22-bk-02272-BAJ (Bankr Ct, MDFL, 2023). “The instant case is clearly distinguishable from Fulton because the continued post-petition garnishments materially altered the status quo.” The court also distinguished the 9th Circuit’s Stuart and 3rd Circuit’s Margavitch by pointing out that in those cases, no funds were obtained postpetition, which the creditor here in Namen did.

Car sold postpetition – “beyond the status quo” – Car seized prepetition but then sold postpetition is a stay violation. In re Rakestraw, Case No. 22-40960-PWB, (Bankr Ct, ND Georgia, 2022). “Although a creditor’s retention of a vehicle repossessed prepetition does not violate the provisions of the automatic stay in 11 U.S.C. § 362(a)(3), the automatic stay in § 362(a)(4) prohibits the enforcement of a lien against property of the estate. Accordingly, the alleged postpetition sale of the Vehicle to enforce the lien violated the automatic stay.”

Retaining prepetition funds. Here, Debtor had paid on a order in state court to Superior Court, then filed bankruptcy. When Superior Court didn’t execute a postpetition transfer of funds back to Debtor pursuant to a new proposed state court order, Debtor cried foul. The bankruptcy court found no automatic stay violation, ruling, “Assuming without deciding that the funds were property of Debtor’s bankruptcy estate at the time the order was entered, the order serves to maintain the status quo with respect to the funds, which in itself is not a stay violation.” In re Jackson, (Bankr. Ct NDGA 22-58536-BEM, 2023).

Sending statements to codebtor. Creditor continued to send statements to the Debtor’s non-filing spouse and informing credit reporting agencies that the Debtor’s non-filing spouse made late payments on a debt which the Debtor has no personal liability. “Here, the Bank did not take any affirmative act to gain possession or control of the Home. It did not record a lis pendens or file a foreclosure action as to the Home. The Bank already held the Mortgage which secured all amounts owed under the Note. The amounts owed under the Note simply increased due to the Debtor’s bankruptcy filing.” In re Rose, 645 BR 253, 261 (MDFL 2022)

Summary of turnover cases after Chicago v Fulton

Post-Fulton rulings and jurisprudence are still on the thin side two years later. However, it is clear that the Chicago v Fulton holding applies far beyond motor vehicles. In fact, most rulings citing Fulton had nothing to do with cars and trucks.

If you know if a case that belongs on this list, please share it on the following form. Thank you.

    California Homestead and Reside Away from Home and State presents challenges

    California Homestead: Intent to Reside and the Out-of-State Home

    Posted by Hale Andrew Antico on

    California Homestead: Intent to Reside and the Out-of-State Home

    A bankruptcy attorney colleague recently asked, does the California homestead exemption protect you if you don’t reside in the house? Are you required to live in the home? For how long? Who qualifies? Does the homestead exemption protect the home if the house isn’t in California? The answer, like most things in law, is: “it depends.”

    Dual residency in two states and and claim homestead in both?

    No, there is no dual residency in multiple states for the purposes of homestead. As you’ll read below, a homestead is the place in which you primarily live. You can’t primarily live in two places. So, the determination is where you primarily reside, which state law applies, and is the house protected by the California homestead exemption.

    Let’s look at these “away from home” situations one at a time.

    The California homestead and intent to reside

    california homestead away from home
    California homestead is challenged if away from home, and the intent to actually live there is unclear

    First, can someone claim the California homestead exemption if they live in the house on the date the petition is filed, but move out after? What if they move out after the Chapter 7 bankruptcy is filed, but it’s just a temporary relocation? Or what if the debtor who filed bankruptcy really has no intention to return?

    The result is very fact-specific, and has had bankruptcy courts and appellate courts carefully examining the particulars for the debtor before filed, on the date the case was filed, and then after the case was filed. Let’s review a few significant cases in the Ninth Circuit to see how the courts have ruled.

    Not residing in the house on date of filing

    First, let’s look at the case of Andy Diaz. He owned and lived at a home in Orange County, Calif. He then suffered two brain aneurysms. Those required many surgeries, and left Mr. Diaz in a coma. After weeks, he awoke from the coma, but couldn’t walk or speak, and the symptoms were similar to a stroke.

    Mr. Diaz got better, and to rehabilitate, moved into his mother’s house, which was across the street from his own home, six houses down. Diaz then filed bankruptcy, claiming the homestead exemption in his home where he wasn’t living.

    The Chapter 7 trustee challenged, and won in bankruptcy court. Diaz appealed. Nobody disputed that the debtor didn’t live in the house when the bankruptcy was filed.

    The 9th Circuit Bankruptcy Appellate Panel (BAP) ruled that, “California courts have long held that a lack of physical occupancy does not preclude a party from establishing actual residency and claiming the homestead, if the claimant intends to return.” In re Diaz, 547 BR 329, 335 (9th Cir BAP, 2016). It went on: “Physical occupancy on the petition date is therefore neither a necessary nor sufficient condition of residency.” Id. at 336.

    Residing in the home at filing, but intent to move

    Next, let’s look at the case of Kevin Gilman. He did live in his house on the date of filing. Residency established, slam dunk on the homestead exemption, right? Not so fast.

    Not an actual photo of Gilman on the date of his bankruptcy petition was filed and the home in escrow

    It turns out that Mr. Gilman also had his home in escrow at the time of filing. Creditor challenged. The bankruptcy court agreed with the debtor. The creditor appealed.

    The appellate court found that, unlike Diaz, it was undisputed that Mr. Gilman had occupancy of the premises, and was a continuous resident of the property.

    However, it also ruled: “To determine whether a debtor resides in a property for homestead purposes, courts consider the debtor’s physical occupancy of the property and the intent to reside there.” In re Gilman, 887 F.3d 956, 965 (9th Cir, 2018).

    It then cited the case of Mr. Diaz when it wrote: “Physical occupancy on the filing date without the requisite intent to live there, is not sufficient to establish residency.” Gilman at 966, citing Diaz at 336.

    After all that, the bottom line after Gilman to successfully claim a California homestead exemption is that, among other things, regardless of where the debtor lives on the date the bankruptcy petition is filed, there has to be evidence to show that the debtor intends to live at the residence.

    california homestead residence intent extraterritorial
    California homestead exemption is dependent if you’re moving away from home, or just going for a temporary walk

    Intent to reside but only equitable interest

    What if the person filing bankruptcy claiming the homestead exemption in California doesn’t even have title to the house? That brings up the case of Steve Nolan. There, Mr. Nolan claimed an exemption for a property in Corona, California. Like Gilman, he lived at the property, and intended to continue living there. Unlike Gilman or Diaz, he didn’t have legal title to the house.

    Instead, he was both trustee and partial beneficiary of a trust, which held title to the property. The bankruptcy court ruled that Mr. Nolan did not have an interest in the property subject to an enforcement lien and not even bare legal title.

    However, because he was 50% beneficiary of the trust, that portion is property of the estate per 11 USC 541(a)(1) and (c)(2). The Court then reviewed applicable case law that allows homesteading based on an equitable interest, and ruled in debtor’s favor. In re Nolan, 618 BR 860 (Bankr Ct CDCA 2020).

    The California homestead exemption for the out-of-state house

    Occupancy, future intent, but home outside California

    Next, we ask if someone claim a California homestead exemption if the California debtor lives in the house, intends to reside there so it’s his residence and domicile, but the house isn’t in California? The Ninth Circuit Court of Appeals considered this and ruled: yes.

    This is the case of Robert Arrol. He bought a house in Michigan. Then, without selling that home, he moved to California for two years. He then moved back to his Michigan house, and within 90 days of moving, he filed bankruptcy in California.

    He used California’s homestead exemption to protect his Michigan residence. You guessed it: the bankruptcy trustee objected to the homestead exemption. The bankruptcy court ruled in favor of Mr. Arrol, and the trustee appealed, and lost again. The trustee appealed yet again, this time to the Ninth Circuit.

    The Ninth Circuit’s ruling on an out-of-state California homestead

    The appellate court examined 11 USC 522(b)(2)(A), which pointed to state exemption law. Given that Mr. Arrol lived in California for the greater part of 180 days before filing, California law applied. Looking at CCP 704.730 and 704.710(c), the appellate court determined whether the state law allowed this. The Ninth Circuit found that California state law didn’t limit the homestead exemption to dwellings in California, and concluded,

    We find nothing in the California exemption statutory scheme, its legislative history, or its interpretation in California case law to limit the application of the homestead exemption to dwellings within California.

    In re Arrol, 170 F3d 934, 937 (9th Cir, 1999).

    California homestead exemption for out-of-state property with no intent

    Mike Showalter owned an interest in a Florida house. He had lived at the Florida property for some time over decades. For the twelve years prior to filing bankruptcy, he lived in California in a rental property. After filing bankruptcy, he moved to a different rental property in California. A month before filing bankruptcy, while living in California, he signed a declaration that the Florida house is his principal dwelling, and it’s his homestead.

    The appellate court determined that the declaration was “patently untrue” and by Mr Showalter’s own testimony, he hadn’t lived at the Florida property for about twenty years, he didn’t live in Florida, and no credible intention to return to live at the Florida property, and the claim of California homestead is invalid. In re Showalter, (12-22720, 9th Cir BAP, 2013).

    Residency and the California Homestead: Piecing it all together

    As of this writing, it seems the current law on the California homestead exemption for a home where you maybe don’t live which may be in a different state is the following. You can claim the California homestead exemption if it’s your residence, California law applies, and you intend to live in that residence as your future home, even if it’s not in California.

    sell home chapter 13

    Sell a Home in Chapter 13 Bankruptcy: Motion to Sell or Refi

    Posted by Hale Andrew Antico on

    Sell a Home in Chapter 13 Bankruptcy: Motion to Sell or Refi

    My clients ask me, “can I sell a home in a Chapter 13 bankruptcy?” As a bankruptcy attorney experienced in Chapter 13, selling a house is an issue that comes up often, particularly in a robust housing market. This is written without giving advice to the specifics of your case, but merely addressing whether it’s possible to sell or refinance a house during Chapter 13.

    The answer is “yes… but.” It’s not always in your best interests to sell a home in Chapter 13, and you really should consult on this with your bankruptcy lawyer, as facts vary depending on judicial circuit, state, local practice, and your particular case and its Order Confirming. As I’m a Los Angeles bankruptcy attorney, I’ll be focusing on practice in the Central District of California here in the Ninth Circuit, so the following may not apply to you if you’re elsewhere.

    Can I move during a Chapter 13 bankruptcy?

    Let’s start with the basic question of whether you’re allowed to move and change residence during the term of a Chapter 13. The answer is, “Yes.” There is nothing in a bankruptcy that prevents you from moving, or even changing states. You are free to move about the country.

    As leaving the state would likely mean you’re now working out-of-state from where the case was filed, you will almost certainly want to update your Schedules with your new employer, income and expenses, and this may potentially affect your plan payment, and the percentage of debt which you’re paying the general unsecured creditors. And that may turn into a Motion to Modify (MoMod) being filed with the court, leading to new legal fees.

    Motion to Sell or Refinance in Chapter 13

    A Motion to Sell or Refinance in Chapter 13 is where you ask the judge permission to sell or refinance your home. So, yes, you can sell or refi in Chapter 13. Whether it’s a smart decision or not will vary based on the circuit, district, and even your particular case, and you’ll want to seek advice with your bankruptcy lawyer.

    Chapter 13 can pay only a fraction of your debts. But that can trigger a couple of things that lead to it getting fed more money. If you’re paying less than 100% of the general unsecured creditors, sometimes you don’t get to keep tax refunds in Chapter 13. Similarly, when there is a ton of extra money from a home sale or refi, that too can lead to more debt getting paid.

    Revesting of the Estate and Form Plans

    Revesting

    One factor as to whether you should sell a home in Chapter 13 (or refinance in your Chapter 13 bankruptcy) depends on whether the estate revests at confirmation or at discharge. That’s all a fancy way of saying, “when does the ownership and control of your stuff — including your home — return to you, the debtor?”

    In bankruptcy, here’s the crux of the matter: when you sell or refinance in a Chapter 13, do you have to use the sale proceeds to pay all of your general unsecured debt, or all of the part you are intending to pay during the bankruptcy? Remember, Chapter 13 bankruptcy doesn’t necessarily pay all your debt. If a Chapter 13 is only paying a fraction of the credit cards, how much of the credit cards get paid by the proceeds of the house or other sale?

    A recent case on postpetition equity

    The issue as to whether you can sell in a Chapter 13 and who gets the proceeds was recently seen in Colorado, when the Chapter 13 trustee fought to get the postpetition appreciation of an LLC. In re Klein, WL 3902822 (Bankr. D. Colo. 2022). The trustee argued that proceeds were postpetition property under Section 1306 (nothing about 541a6). However, debtor argued that Section 1327 says that property vests in the debtor at confirmation, unless provided otherwise in the plan. The two sides fought about the tension between 1306 vs 1327. Ultimately, the Court concluded that 1327 was more specific and the proceeds belonged to Debtor.

    What about Section 1322(b)(9)? That says the plan may “provide for the vesting of property of the estate, on confirmation of the plan or at a later time, in the debtor or in any other entity.” That “may” (coupled with 1327b) also indicates that it may not.

    More on that later.

    This is the Tenth Circuit. What about here in the Ninth Circuit?

    Black vs Leavitt (In re Black)

    Glad you asked. That’s the issue the Ninth Circuit Bankruptcy Appellate Panel faced in 2019 in Black vs Leavitt (In re Black), 609 B.R. 518 (9th Circuit BAP, 2019). There, the BAP decided that when someone tried to sell a home in a Chapter 13 (actually, a rental property), the property — and the proceeds — were the debtor’s to do as he wanted.

    In our view, the revesting provision of the confirmed plan means that the debtor owns the property outright and that the debtor is entitled to any postpetition appreciation. When the bankruptcy court confirmed Mr. Black’s plan, the Property revested in Mr. Black. See In re Jones, 420 B.R. at 515. As such, it was no longer property of the estate, so the appreciation did not accrue from estate property.

    Id. at 529.

    Great news, right? Not so fast. There’s some key language in footnote 9 of the same case. There, the 9th Cir BAP wrote:

    If the plan did not vest the Property in Mr. Black, the result would likely be different. See Klein v. Chappell (In re Chappell), 373 B.R. 73, 83 (9th Cir. BAP 2007), aff’d sub nom. Gebhart v. Gaughan (In re Gebhart), 621 F.3d 1206 (9th Cir. 2010) (In a chapter 7 case, where property does not revest in the debtor, “[u]nder well-settled Ninth Circuit law, any postpetition appreciation in value in the residence in excess of the maximum amount permitted by the exemption statute invoked inures to the benefit of the estate.”); § 541(a)(6) (a bankruptcy estate includes “[p]roceeds, product, offspring, rents, or profits of or from property of the estate ….”).

    Clearly, the issue of who gets the sale proceeds is determined by what the Chapter 13 plan says. It’s important to know this crucial fact before asking your bankruptcy attorney to submit a motion to sell or motion to refinance real property.

    In re Berkley

    In one case, the debtor was repaying one percent (1%) of his unsecured debt. The plan said the estate revests at confirmation. After the case was confirmed, he started getting stock options. At month 57 of his plan, he sold his postconfirmation stock options for $3.8 million. Trustee filed a motion to modify for some of the sale proceeds. The Ninth Circuit BAP held that Section 1329 and a modification allows for change of circumstances, and the millions of dollars means that debtor can repay his debts.

    The 9th Circuit BAP acknowledged that the estate terminated at confirmation, citing 9th Circuit precedent of In re Jones, 420 BR 506 (9th Cir BAP 2009), aff’d by 9th Cir in 657 F3d 921 (9th Cir, 2011). In Jones, the Ninth Circuit adopted the “estate-termination approach.” This approach is where the estate ceases to exist at confirmation. In the estate termination approach, all property then becomes property of the debtor, whether acquired before or after confirmation.

    The Berkley BAP then nodded at its own recent ruling in the matter of In re Black (above).

    However, the BAP then held that “[u]nder § 1329, the bankruptcy court can approve a plan modification that increases the debtor’s plan payments due to a postconfirmation increase in the debtor’s income, whether or not the additional income is property of the estate.” In re Berkley, 613 BR 547, 553 (9th Cir BAP, 2020). It distinguished Black and Jones from the instant case, as it is solely concerned with postpetition wages.

    Central District Form Plan

    Whether the estate revests at confirmation or at discharge is a key determining factor about who gets the sale proceeds of postpetition appreciation from a prepetition asset. So what does the form plan say here in Los Angeles County, in the heart of the Central District of California?

    Locally, here in the Central District of California, the estate doesn’t revest in the debtor until discharge. We know this because this is what our Chapter 13 form plan says. Your mileage may vary.

    cdca chapter 13 plan revesting in debtor
    The standard Central District of California Chapter 13 Plan revesting in debtor at discharge

    There is the key language that controls when you sell a home in Chapter 13 bankruptcy in most cases in the Central District of California when there is a Motion to Sell or Refi with proceeds. It means that the debtor and proceeds must not only pay “all of the plan” debt, but “all of the all” debt. This can be a strong disincentive. It often is better to just stay in the Chapter 13 until discharge, and get forgiveness of potentially tens of thousands of dollars of unsecured debt. After discharge, the house, and what you do with the proceeds, are yours.

    Now, I supposed there is nothing preventing debtor from adding a nonstandard provision to the plan that debtor’s property revests at confirmation. But that may lead to other hazards that involve the automatic stay and debtor’s property which are no longer property of the estate. Try this at your own peril.

    Conclusion

    So, yes, Virginia, you call sell a house in Chapter 13 bankruptcy. You have the right to move cities, even states, as long as you maintain your plan payments, and update your schedules to reflect current income and expenses. However, who gets the sale proceeds is very specific to where you live, what your appellate courts say, and what your local district’s forms say. As always, ask your bankruptcy attorney, and thank you for reading.

    Automatic stay and bankruptcy protection

    All About the Automatic Stay, the Ultimate Bankruptcy Protection

    Posted by Hale Andrew Antico on

    All About the Automatic Stay, the Ultimate Bankruptcy Protection

    What is the Automatic Stay definition or meaning?

    Automatic stay is the bankruptcy protection when a new petition is filed with the court. It protects against starting or continuing any debt collection. It’s a powerful provision, and stops all collection activity, maintaining the status quo on the day the bankruptcy papers are filed. Failure to respect the bankruptcy protection can lead to sanctions against the collecting creditor.

    The Automatic Stay definition from the text of Section 362(a)

    The official definition of the bankruptcy automatic stay is in 11 USC 362. Section 362(a) says:

    “…a petition filed under section 301, 302, or 303 of this title… operates as a stay, applicable to all entities of:

    • the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;
    • the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title;
    • any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate…”

    The section goes on, but the quote above is where most of the action in bankruptcy protection comes from.

    Interpreting the automatic stay meaning in simple terms

    Let’s break down what the meaning of the automatic stay is in plain English. Section 362 says that the mere filing of a what? A petition that’s either voluntary, involuntary, or joint (301-303). That pretty much covers most bankruptcy filings. Then what? It stops (stays) the start or continuing most every collection, including enforcing a judgment or trying to take anything from you.

    Bankruptcy protection automatic stay is like a dome over a city
    The bankruptcy protection of the automatic stay is like a magical dome or enchanted shield over you & your stuff

    That’s really broad, and covers almost anything you can think of. It’s like a protective shield around you, your things, and your life against all your debts doing anything to you, the person who filed bankruptcy. Or, to use another simile, the automatic stay is like a dome over a city, where the sun only shines and the birds sing, but outside the shield it’s stormy and dangerous.

    There are a few limits to it, which I explain below.

    When does the Automatic Stay begin?

    The automatic stay is tremendous in that it begins the second the bankruptcy is filed. Why? It’s automatic. File a bankruptcy case, and boom, you’re safe. The fact that the bankruptcy protection starts the moment you file bankruptcy is extraordinary, in a sense.

    “It is elementary that the automatic stay comes into existence automatically and immediately upon the filing of a petition in bankruptcy.” Webb Mtn, 414 B.R.308 (Bankr Ct, Tenn, 2009).

    Normally, in law, if you want something to stop, you have to request that separately. Think of a temporary restraining order. That requires work, time, a justification, and approval. But bankruptcy protection, because it’s automatic, that is, no additional papers need to be filed to get it to kick in, it’s one of the rare exceptions in law.

    You get all the benefits of safety, protection, and peace of mind at the beginning of this legal process. Your creditors have to file lawsuits, wait months or years, get the judgment, and then try to execute on the judgment to take action against you and your stuff. You merely have to begin the bankruptcy legal case before they can finish theirs against you. This is a huge time advantage for the debtor filing bankruptcy.

    How long does the Automatic Stay last?

    The automatic stay starts when you file bankruptcy, and typically lasts for the duration of the case.

    What can end the bankruptcy protection?

    There are a few things that can end the automatic stay:

    • Discharge: When a normal case ends successfully, the debtor gets a bankruptcy discharge and the case is usually closed soon after that. When the discharge is entered, the stay is over.
    • Dismissal: If a bankruptcy case ends unsuccessfully, the automatic stay is over also. The magic dome of sunshine disappears, and the storm clouds come right back. For that reason, dismissal is usually bad.
    • Motion for Relief of the Automatic Stay (MRS or RFS): Creditors have rights also, and if the stay is hurting them unfairly, they can make it go away. Repeat after me: “There is no free car or free house in bankruptcy.” If you stop paying for the house, the mortgage can get through the automatic stay and take your house. Or put differently, if there is a house or car or something you’re financing and you want to keep it, stay current with the payments.

    Wait, back up. After bankruptcy discharge, the stay ends and creditors can collect against me?

    Yes, and no. It’s true that the automatic stay ends when the case concludes with a discharge. The bankruptcy discharge triggers a few legally significant events. First, the discharged debts are no longer legally your obligations. Second, if you had a bankruptcy attorney help you, their representation, per contract, is likely ended. They completed their task and are no longer your lawyer. Third, the automatic stay is also ended, as there is no more active or open bankruptcy case.

    However, the good news is there is something powerful replacing the terminated automatic stay. This new protection is the Order of Discharge.

    Section 524(a) says that a discharge in bankruptcy:

    operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived

    The discharge court order says your debts are gone, and any attempt to collect a discharged debt is a violation. It’s not a violation of the automatic stay, but instead, a violation of a court order. You can and should inform the creditor of this, and if they don’t back off, reopen the bankruptcy and seek sanctions for a discharge violation.

    Violation of the Automatic Stay

    Definition of an Automatic Stay Violation

    A violation of the automatic stay is when a creditor willfully collects after they knew of the bankruptcy protection. The creditor has to have known of the bankruptcy and the automatic stay, or else they can claim as a defense that they had no notice. For this reason, it’s important to document notice of the automatic stay. When the collection company claims they didn’t know of the bankruptcy — and they will — you’ll need to have ample and abundant evidence that they did know, and that they didn’t care and collected against you anyway.

    What if the Creditor doesn’t have Intent to Violate the Automatic Stay?

    Creditor, after being caught with its hand in the cookie jar, may claim that golly, it didn’t intend to violate the automatic stay. The Ninth Circuit Court of Appeals has said, too bad, you intended to do the act. Intent to violate the automatic stay isn’t a requirement. Intent to do the act that violated the stay is all that’s needed. In re Pinkstaff, 974 F.2d 113 (9th Cir, 1992), quoting In re Bloom, 875 F.2d 224, 227 (9th Cir, 1989), In re Pace, 67 F.3d 187 (9th Cir, 1995).

    Examples of Automatic Stay Violations

    Filing a Lawsuit

    One example of violating the automatic stay is where you file bankruptcy, serve the creditor notice of the automatic stay, and maybe even a letter for good measure. Then, three months later, the creditor files a lawsuit against the debtor.

    The lawsuit is the commencement of a judicial proceeding against the debtor that could have been commenced before the commencement of the case or to recover a claim against the debtor that arose before the commencement of the case under this title. Slamdunk violation of the bankruptcy protection.

    Starting a Wage Garnishment

    Another example of an automatic stay violation is where the creditor has already sued the debtor and won in court. Now, armed with a judgment, they’re closing in on collecting. The debtor files bankruptcy, and provides notice of the automatic stay to the debt collector. Next, the collection agent contacts debtor’s employer and starts garnishing the wages.

    In this case, the wage garnishment is an enforcement, against the debtor and against property of the estate (the paycheck), of a judgment obtained before the commencement of the case. Again, another obvious and textbook violation of the automatic stay.

    Foreclosing on a home

    Finally, let’s say the debtor has fallen behind on his or her mortgage. The home loan company is getting cranky, and finally files a Notice of Default and Notice of Sale. Next thing you know, there’s a scheduled foreclosure sale. Debtor then files a Chapter 13 bankruptcy to repay the mortgage arrearages, and provides notice of the automatic stay to the lender. Mortgage company goes ahead with the foreclosure sale, and someone buys the house.

    The home foreclosure is an act to obtain possession of property of the estate (the house) or to exercise control over property of the estate. Straight violation of Section 362 of the Bankruptcy Code. Check and mate, house lender. Automatic stay violation.

    Effect of the Automatic Stay on Acts that Violate it

    In that last example, the home has already been sold to someone else at a foreclosure sale. But it was the result of a stay violation. What is the effect of the sale?

    In California, stay violations are void. The Ninth Circuit Court of Appeals has said that “actions taken in violation of the bankruptcy stay are void.” In Re Gruntz, 202 F.3d 1074, 1081-82 (9th Cir, 2000). Not voidable, void. In re Schwartz, 954 F.2d 569 at 571 (9th Cir, 1992). No action is required by debtor to undo the act. Id.

    The law imposes an affirmative duty on creditors to remedy stay violations by restoring the status quo, and also to establish administrative safeguards to prevent stay violations from occurring in the first instance. In re Dyer, 322 F.3d 1178, 1192 (9th Cir. 2003).

    What if the Stay Violation happens Before Notice is Received

    Knowledge of bankruptcy sufficient for stay; notice doesn’t have to be official

    There is no requirement that a creditor be given an official Court-issued notice or form regarding the bankruptcy case. “[A] party with knowledge of bankruptcy proceedings is charged with knowledge of the automatic stay.” In re Dyer, 322 F.3d 1178, 1191 (9th Cir. 2003).

    Seizing the property doesn’t make it yours

    Now that we have established stay violations are void, what if creditor didn’t know when they violated it? Courts have clearly answered: Petition date controls, not notice.

    The U.S. Supreme Court has ruled that property seized prepetition to collect a debt doesn’t transfer ownership, and it must be returned, pursuant to Section 542(a), even if seized by the IRS. United States v Whiting Pools, Inc, 462 U.S. 198 (Sup Ct 1983).

    Even property taken by the mighty IRS before filing must be returned. With that backdrop, let’s look at cases where property is wrongfully taken after filing, but before creditor had notice of the filing.

    Keeping property seized after filing but before notice is a stay violation

    In the Ninth Circuit, the Bankruptcy Appellate Panel ruled that retention of repossessed car after receiving notice of stay is a willful violation of the automatic stay. “[R]epossession of the debtors’ automobile, while initially inadvertent, became a willful violation of the automatic stay when appellees failed to take any reasonable steps to remedy their violation upon learning of the debtors’ bankruptcy.” In re Abrams, 127 B.R. 239 (B.A.P. 9th Cir, 1991).

    The Ninth Circuit also has held that the knowing retention of estate property violates § 362(a)(3). In re Del Mission Ltd., 98 F.3d 1147, 1151 (9th Cir.1996)(citing Abrams). The appellate court rejected the argument that creditor had no obligation to turn over the property until specifically requested. Id. at 1152.

    “When a creditor lacks notice of a debtor’s bankruptcy, acts in violation of the stay may be inadvertent; however, such acts become willful stay violations when the creditor learns of the debtor’s bankruptcy but fails to take reasonable steps to remedy the violation.” In re Calloway, No. 08-18561SSC, 2009 WL 1564207, (Bankr. D. AZ. 2009) (citing Abrams)

    Other courts outside the Ninth Circuit agree

    Other bankruptcy courts have ruled that even if the creditor didn’t have knowledge, it must take steps to void the violation or face damages. Just to pick one: “Despite having this knowledge, Hunt deliberately refused to cooperate in voiding the sale and reconveying the Trenton property to the Debtor at any time after this date.

    Clearly, these actions were willful and constitute a violation of the automatic stay for which the imposition of damages is appropriate under § 362(k).” In re Tyson, 450 B.R. 754 (Bankr Ct, Tenn, 2011), where buyer of home sold at foreclosure had no notice of automatic stay at time of foreclosure sale, failed to return home, and violated stay and paid damages.

    Wrongful repo cases: repossession after filing without notice violates stay

    A wrongful repo happened after a case was filed but before the repo company had notice. What it did next is what matters: “Rather than comply with its affirmative duty to remedy its stay violation and restore the status quo, Arizona Fleet chose to remain non-responsive, took no steps to confirm or inquire as to the pendency of this bankruptcy case, filed nothing with this Court requesting any form of stay relief, sent the Debtor a notice that it intended to sell the Vehicle, wrongfully continued to maintain possession of the Vehicle, and, without merit, continues to maintain that it was incumbent upon the Debtor to retrieve his wrongfully repossessed Vehicle.” In re Altamirano, Case No. 4:20-bk-11836-BMW (Bankr Ct, AZ, 2022).

    In re Carrigg, 216 B.R. 303 (B.A.P. 1st Cir, 1998), where the repo happened after the bankruptcy was filed without the creditor knowing about it, but creditor failed to return repossessed vehicle after notice of case. The creditor was sanctioned with a willful violation of stay, even though creditor had no had notice of case when vehicle was repossessed.

    Chicago v Fulton, and the Automatic Stay

    What 362 Giveth, Fulton Taketh Away

    It used to be that if someone took something to collect a debt, filing bankruptcy created an obligation for them to return it. All that changed in 2021 when a case percolated up through the courts. The City of Chicago makes quite a pretty penny on impounding vehicles. One person lost their car, filed bankruptcy, and asked for the car back. Chicago didn’t budge. Automatic stay violation? In many places, including here in California and the Ninth Circuit, until now, yes. The Sup Court read the statute, and limited the scope and power of the automatic stay.

    The car repossession taken before filing

    The above repo cases involve a car taken after the case was filed. However, if the car was taken before the case was filed, from now on, it doesn’t have to be returned upon as a possible violation of the automatic stay with notice of the bankruptcy. Chicago v Fulton (In re Fulton), 141 S Ct. 585 (2021).

    In Fulton, the Court said that mere retention, to exercise control, of the property taken before filing (prepetition), without some act that would disturb the status quo, is not a violation of the automatic stay. This means that retention of the car (in this case) isn’t a stay violation, and that something else has to be done to get it back. The Court suggests that Section 542 (turnover) is invoked for an adversary proceeding for turnover of the property. The problem with that is that can take months to resolve. Justice Sotomayor, in a concurrence focusing on simple motions instead, writes that “bankruptcy courts may find it prudent to expedite proceedings or order preliminary relief requiring temporary turnover.” Fulton at 594.

    Not just cars: other seized property falls under Fulton

    When the Supreme Court first decided the case in early 2021, there was the thought (hope?) that maybe Fulton was limited to cars seized by tow yards. That it would be a limited, narrow exception which wouldn’t really impact us here with Los Angeles bankruptcy cases in California and the Ninth Circuit. As Fulton is applied by courts, that’s turning out to not be the case.

    Bank Levy of Accounts and Fulton

    Later in 2021, we saw a court extend it to bank accounts. In Pennsylvania, a lender sued a debtor, won a judgment, and filed a pre-petition attachment lien on bank accounts of the debtor. Debtor filed bankruptcy and then demanded creditor withdraw the attachment as a violation of the stay. A key difference is that, unlike Fulton, creditor was not in possession of property of the estate. No matter. The court said that Fulton requires an act that disrupts the status quo to find a stay violation when it wrote, “the Court finds that Defendants’ refusal to withdraw the valid state court pre-petition attachment of the Penn East Accounts does not violate §362(a)(3). Defendants admittedly took no post-petition affirmative action as to the garnished accounts.” In re Margavitch, 5:19-05353 MJC (Bankr Ct, MD 2021).

    The Ninth Circuit BAP followed Margavitch when it had a bank levy case of its own. The facts were similar: a prepetition lawsuit, and a writ of garnishment on three bank accounts. Later, debtor filed bankruptcy and demanded the creditor instruct the bank to release the funds. After a refusal, debtor claimed it was a violation of the stay. The BAP found that the city’s inaction that merely maintains the status quo does not violate the automatic stay. In re Stuart, 632 BR 531 (9th Cir BAP, 2021).

    The BAP made the point again in 2022 when it said that a lien that existed on petition date where an order granted postpetition about summary judgment regarding it did not disturb the status quo and thus, did not violate Section 362(a)(3). In re Censo, 638 BR 416 (9th Cir BAP, 2022). The rationale is that the automatic stay is inapplicable in lawsuits brought by the debtor, and a defendant can defend itself without an automatic stay violation.

    Wage Garnishments and Fulton

    While Stuart above was a bank account case, the BAP said in footnote 12 that, if it were a wage garnishment case where the creditor captured funds postpetition, the result would be different and a stay violation. Stuart v City of Scottsdale, 632 BR 531 (9th Cir BAP, 2021), citing In re LeGrand, 612 BR 604 (Bankr Ct EDCA, 2020).

    Chapter 13 Codebtor Stay

    What is the Co-debtor Stay?

    Chapter 13 has a codebtor stay, while Chapter 7 doesn’t. Section 1301 and its co-debor stay protects the person who may owe on a debt without that other person having to file bankruptcy. For this reason, Chapter 13 can protect a non-filing spouse better than a Chapter 7 bankruptcy.

    Community liability: you both owe the debts of the marriage

    California’s Family Code 910 says:

    Except as otherwise expressly provided by statute, the community estate is liable for a debt incurred by either spouse before or during marriage, regardless of which spouse has the management and control of the property and regardless of whether one or both spouses are parties to the debt or to a judgment for the debt.

    Further, Calif Family Code 914 says:

    …a married person is personally liable for the following debts incurred by the person’s spouse during marriage …a debt incurred for necessaries of life of the person’s spouse before the date of separation of the spouses.

    Translating that, because California is a community property state, both spouses owe a debt during the marriage, regardless of who is managing the budget, or racking up the debt. You’re in this together.

    So, if one half of a married couple incurred a lot of debt and files bankruptcy in Chapter 13, the other innocent spouse is protected by an automatic codebtor stay. In Chapter 7, the innocent spouse can still be called and harassed and risk losing any separate property (if any) to the spouse’s collecting creditors. Why? FC 914(b) says that the “separate property of a married person may be applied to the satisfaction of a debt for which the person is personally liable pursuant to this section.”

    Section 1301 Co-debtor stay to the rescue

    Now we know that a spouse (or other person who may owe on a debt) is liable for debts during a marriage, even though they didn’t incur them or even have any credit cards. If the spending spouse files bankruptcy, the innocent spouse may be left hanging in Chapter 7. But Chapter 13 has a solution.

    Section 1301 says

    creditor may not act, or commence or continue any civil action, to collect all or any part of a consumer debt of the debtor from any individual that is liable on such debt with the debtor

    There it is. A creditor may not act, start or keep doing something to someone liable on a debt with a debtor. In California, that’s typically a spouse. Automatic stay for the nonfiling spouse in the form of the co-debtor stay is a big benefit to Chapter 13 bankruptcy.

    The hitch: creditors claim to not know about spouses & the codebtor stay

    Amazingly, with all their fancy computers, creditors and their collection companies don’t have a way to know about or track nonfiling spouses. If John Doe files bankruptcy, they’ll flag his account, but they don’t know about Jane Doe, even though she’s listed as a Codebtor in the bankruptcy paper’s Schedule H. They do a scrub or routine check but will say they don’t know Jane’s SSN as a way to flag her, too. So they keep collecting against her, which pressures John, but golly, it’s just an accident.

    This can require “educating” the creditor with notice of the stay before bringing an action for violation of the stay against them for harassing the spouse, in our example, Jane. The fallback position of the fancy slick credit card company will default to becoming Barney Fife. The billion-dollar corporation will morph into bumbling inept two-bit outfit in court who just didn’t know about the spouse and therefore didn’t have notice or any way to possibly avoid this and and thus will seek mercy from the bankruptcy judge for its incompetence. Thus, more notice, more evidence that the creditor knew about the spouse and the bankruptcy, will help you bring your violation of codebtor stay action and prevail.

    Actions which are not violations of the Automatic Stay

    While the bankruptcy protection of the automatic stay is wide and broad, we’ve seen with Fulton that it does have its limits. One other such limit is collection on a nondischargable debt upon property outside the bankruptcy estate.

    That was the issue the Ninth Circuit BAP faced when it ruled, “‘Nevertheless, binding authority is clear that “the automatic stay provisions of Section 362 do not preclude the execution of a judgment, which has been held by the bankruptcy court to be non-dischargeable, upon property of the debtor which is not property of the estate.'” In re Cady, 266 BR 172, 180 (9th Cir BAP, 2001).

    Damages: the Penalty for Automatic Stay Violations

    The automatic stay is one of the few areas in bankruptcy where debtors can get their attorney fees paid by the creditor. The Bankruptcy Code provides at Section 362(k) that:

    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.

    Let’s look at these one at a time.

    Compensatory: Actual Damages

    Costs

    Actual damages comes in a couple different flavors. First, it’s whatever the debtor is truly, actually out-of-pocket as a result of the violation of the automatic stay. Judges typically want to see receipts. It can include as mundane things as copying costs, doctor visit copays, and so on.

    Attorney Fees

    In addition, the statute explicitly calls for the debtor getting reimbursed by the creditor for attorney’s fees. The lodestar method for attorney compensation is used in the Ninth Circuit bankruptcy cases. In re Yermakov, 718 F.2d 1465, 1471 (9th Cir. 1983). Lodestar compensation is “strongly” presumed to be reasonable. Burgess v. Klenske, 853 F.2d 687, 691-92 (9th Cir. 1988). The only limit on attorney’s fees is if the work was unnecessary or plainly excessive. The Ninth Circuit Court of Appeals, sitting en banc, concluded that Section 362 authorizes an award of attorney fees incurred in prosecuting an action for damages under the statute, limited by unnecessary or plainly excessive fees. In re Schwartz-Tallard, 803 F.3d 1095, 1101 (9th Cir 2015)(en banc), overturning Sternberg v Johnston, 595 F.3d 937 (9th Cir, 2010).

    Emotional Distress

    Emotional distress damages are available in the Ninth Circuit “if the individual provides clear evidence to establish that significant harm occurred as a result of the violation.” In re Dawson, 390 F3d 1139, 1148-1149 (9th Cir, 2004).

    Punitive Damages

    The statute calls for punitive damages in appropriate circumstances. The definition of “appropriate circumstances” varies by judicial circuit. Here in the Ninth Circuit, it means that punitive damages for violations of the Automatic Stay require “some showing of reckless or callous disregard for the law or rights of others.” In re Bloom, 875 F.2d 224, 227 (9th Cir., 1989).

    The dreaded Wells Fargo case

    Wells Fargo is notorious for their national policy of administrative freeze or holds, officially called “temporary administrative pledges” (which I wrote about in my list of 12 crucial things to do before filing bankruptcy). This is where someone files bankruptcy and has money on account at Wells Fargo. Then the bank freezes the account so the debtor can’t buy groceries. One would think this is a violation of the automatic stay, but it’s not an attempt to collect a debt, but to protect assets of the estate.

    The Ninth Circuit BAP ruled that because defendant exercised control of debtor’s assets postpetition, debtors “have standing to seek sanctions against Wells Fargo pursuant to § 362(k) for willful violation of the stay with respect to their interest in estate property.” In re Mwangi, 432 BR 812, 825 (9th Cir BAP, 2010). But on appeal, the Ninth Circuit Court of Appeals said that the property, while exempt, is property of the estate, but somehow does not immediately revest to the debtor, but must wait 30 days for the FRBP 4003(b)(1) exemption objection time period to lapse. In re Mwangi, 764 F3d 1168 (9th Cir, 2014).

    The court analyzed it as a 362(a)(3) situation (control of property), but if it were the more common commencement or continuance of an action of 362(a)(1), the result likely would’ve been different. So, the Wells Fargo case is not an erosion of the automatic stay.

    Conclusion

    The automatic stay is a powerful tool to protect your client in a bankruptcy. However, you must enforce it, and have proper documentation of evidence. I’ve successfully brought actions against major credit cards for violating the stay; it can be done. if you found this helpful and are faced with a stay violation issue, consider hitting the figurative tip jar. Regardless, thank you for reading, and never stop fighting for your client and the debtor’s rights. You have significant tools and bankruptcy protections here, and you should not hesitate to hold the creditor accountable for flaunting them.