By: Felicia Rovegno
St. John's Law Student
American Bankrupcty Institute Law Review Staff
 
Following a growing trend, the California Bankruptcy Court in In re Valley Health System [1] declined to appoint a patient care ombudsman under section 333(a)(1).[2]  Although the “shall order the appointment … unless the court … finds” construction of section 330(a)(1) suggests that patient care ombudsmen should be the rule, courts appear to be avoiding such appointments.[3]  Consistent with this approach, the Valley Health opinion appears to place the burden on the proponent of the appointment to show that an ombudsman is needed because of specific problems at the facility.[4]  More importantly, the Court overlooked the arguments that an ombudsman functions as an advocate to warn the court if patient care is being compromised and that because financial concerns drove the facility into bankruptcy, patients are placed at a greater risk.[5] Instead, the Court considered the “nine non-exclusive factors”[6] articulated in In re Alternate Family Care[7] and four other factors listed[8] to hold that a patient care ombudsman was not needed under “the specific facts and circumstances of this case.”[9]  Applying the nine factor balancing test, the Court found that two factors favored appointment of an ombudsman, while seven factors weighed against the appointment.[10]

By: Renton Persaud
St. John's Law Student
American Bankruptcy Institute Law Review Staff
 
In a decision of importance to chapter 13 debtors, the Bankruptcy Appellate Panel for the Ninth Circuit in In Re Lopez [1] held that chapter 13 debtors are permitted to pay post-petition mortgage payments directly to creditors outside of the plan even though the plan cures and reinstates the mortgage.  According to the court, the new provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) do not change the law with respect to such direct payments.[2]  The court drew a distinction between claims “impaired” by the debtor’s plan, which must be made through the chapter 13 trustee, and unimpaired claims, which need not be.[3]  The court bifurcated the mortgage debt between the cure payments and the regularly scheduled payments accruing post-petition.  Under the court’s view, only the cure amount was impaired and must be paid through the plan.[4]  The importance of the decision to debtors is that it avoids the chapter 13 trustee’s fee on the regular mortgage payment, an amount that was $308 per month in this case.[5]  Of special interest in light of the currently pending legislation that could permit modification of home mortgages in chapter 13, the court distinguishes Fulkrod v. Barmettler (In re Fulkrod)[6]and indicated that, where the mortgage is reamortized, as in chapter 12 cases, the payments must be made through the plan.[7] 

By: Thomas Szaniawski
St. John's Law Student
American Bankruptcy Institute Law Review Staff
 
In a case of first impression that addressed the intersection of cyberspace and bankruptcy, the Ninth Circuit, in Reynoso v. United States (In re Reynoso),[1] held that a provider of web-based bankruptcy software was a bankruptcy petition preparer (“BPP”)[2] under 11 U.S.C. section 110(a)(1),[3] and that, under California law, the features of the petition preparing software went beyond mere typesetting and constituted the unauthorized practice of law.[4]

By: Ian Park
St. John's Law Student
American Bankruptcy Institute Law Review Staff
 
In the first appellate court decision on the issue that favors the debtor, the Sixth Circuit Court of Appeals splits with the Fourth and Eleventh Circuits and holds that the repossession of collateral under UCC Article 9 does not alter the debtor’s property rights or remove the collateral from the estate.[1]  The effect of this ruling is that the debtor may retain the collateral by paying its value to the creditor and is not limited to the state law redemption rights, which require payment in full of the secured obligation. 

By: Timothy Fox
St. John's Law Student
American Bankruptcy Institute Law Review Staff
 
In Nichols v. Birdsell,[1] the Ninth Circuit held that a taxpayer’s pre-bankruptcy irrevocable election to apply a tax refund as a credit for the following tax year was not a bar to the bankruptcy trustee’s turnover claim under section 542, i.e. the credit was property of the estate.  In Nichols, the debtors filed their 2001 tax return two weeks before filing their Chapter 7 bankruptcy and, pursuant to sections 6402(b) and 6513(d) of the Tax Code, irrevocably elected to apply their anticipated refund to the 2002 tax year. The following year, the debtors used nearly the entirety of the 2001 credit to satisfy their 2002 income tax obligation.  The trustee instituted the suit against the debtors to recover the 2001 overpayment, advancing theories under sections 542(a) and 548(a)(1) of the Bankruptcy Code.[2]  Analogizing the present case to its previous decision in Feiler v. Sims (In re Feiler),[3] the Ninth Circuit rejected debtors’ argument that the irrevocable nature of the election and their resulting inability to access the funds was a bar to the assertion by the trustee that the tax credit was property of the estate.[4]

By: Christine Knoesel
St. John's Law Student
American Bankruptcy Institute Law Review Staff
 
In an expansive reading of the homestead cap added by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, the First Circuit Court of Appeals, in Larson v. Howell, held that criminal negligence is sufficient to trigger the cap.[1]  The BAPCPA provision, section 522(q)(1)(B)(iv) of the Bankruptcy Code, applies a $136,875 cap on the homestead exemption where the “debtor owes a debt arising from any . . . criminal act, intentional tort, or willful or reckless misconduct.” [2]  In Larson, the debtor was driving her van in Massachusetts and took a shortcut through a parking lot, striking the oncoming motorcycle of Howell.  Howell’s wife, a passenger, died as a result of the accident.  In the criminal case, the judge found facts sufficient to find Larson guilty of negligent vehicular homicide.[3]  In the bankruptcy proceeding, the Court of Appeals reasoned that use of the word “or” in the section 522(q)(1)(B)(iv) list of triggering acts indicates that criminal acts are separate triggers to the subsection, independent of any intent or recklessness.[4]  The court also determined that the debtor need not be convicted of the crime, holding that section 522(q)(1)(B)(iv) applies “wherever the debtor’s debt arises from . . .  any criminal act.”[5]  Therefore, the provision is triggered whenever one admits to facts sufficient for a finding of guilt, as Larson did.  The court concluded that the cap on the homestead exemption applies to Larson because her act was a crime of negligence and her debt to Howell arose from that criminal act.
 

By: Thomas Rooney
St. John’s Law Student
American Bankruptcy Institute Law Review Staff

The Second Circuit Court of Appeals heard arguments this past week[1] on appeal of the Bankruptcy Court for the Southern District of New York’s decision in Oneida Ltd. v. Pension Benefit Guaranty Corporation.[2]  In Oneida, the Bankruptcy Court held that the debtor’s liability for pension termination premiums (DRA Premiums)[3] is a dischargeable pre-petition “claim” even though the pension termination occurs during the debtor’s chapter 11 case.  This appeal’s outcome will directly impact debtors seeking relief from pension obligations.

By: David Bloom
St. John’s Law Student
American Bankruptcy Institute Law Review Staff

Although a “hedging” arrangement between attorneys retained by a Chapter 7 Trustee and a lender did not appear to offend policy considerations underlying 11 U.S.C. §504, such an agreement could not be approved as a means to obtain downside protection against risks associated with an appeal.  In the case of In re Winstar Communications, Inc.,[1] the Trustee’s special litigation counsel and a consultant sought permission to assign part of their anticipated contingency fees to their lender.[2]  Under the proposed agreement, the lender agreed to pay an undisclosed fixed price to Trustee’s counsel and consultant.[3]  In exchange, the lender would receive the actual amount of contingency fees awarded, up to $10,000,000.00.[4]  If the contingency fees were to exceed $10,000,000.00, the counsel and consultant would share the fees in excess of that amount.[5]  Moreover, the lender agreed to waive any right to object to the Trustee’s settlement or other disposition of the adversary proceeding.[6]  The Court concluded that this arrangement constituted impermissible “sharing” of fees within the meaning of §504, and denied the motion to approve the transaction.[7]

By: Rebecca Leaf
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
 
Adopting a middle ground approach, the Florida bankruptcy court in In re Courtney,[1] held that a trustee could waive an individual debtor’s attorney-client privilege based on balancing of benefits and harms.[2]   The court rejected the view that had been adopted in an earlier Florida bankruptcy case, that the debtor’s attorney-client privilege automatically passes, as a matter of law, from debtor to trustee in a chapter 7 bankruptcy proceeding.[3]  In this case, the trustee wanted the power to waive the debtor's privilege and direct the law firm representing the debtor to turn over all files that it kept in connection with its representation of the debtor in a wrongful death action brought against the debtor.[4]  In allowing the records to be turned over to the trustee, the court weighed the harm to the debtor against the benefits to the bankruptcy estate; rather than applying a blanket rule that all attorney client-privileged materials pass from debtor to trustee.[5]

By: Heather Navo
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
 
Although the Ninth Circuit barely addresses the unbundling of consumer bankruptcy services in Hale v. U.S. Trustee,[1] one of the first appellate cases on the point,[2] the court appears to require that an attorney provide, at a minimum, those services “critical and necessary” to the bankruptcy case.[3]   Tom Hale, like any other bankruptcy attorney, charged debtors to analyze their financial situation and prepare their petitions.[4]  However, unlike most other attorneys, Hale charged debtors for doing just that and nothing more; Hale referred to this practice as the “unbundling of legal services to pro se debtors.”[5]  The bankruptcy court deemed Hale’s fee disclosure inadequate, and ordered sua sponte that Hale submit an itemization to determine whether the amount was reasonable under section 329.[6]  However, after numerous opportunities, Hale never fully complied with the court’s order, but instead filed a Motion to Recuse, Vacate and Jury Trial Demand on the issue of his fee.[7]  The court scheduled a hearing, but Hale did not attend; the court set response dates, but Hale never filed a reply brief.[8]  Finally, the bankruptcy court published a decision denying both Hale’s motion for recusal as well as Hale’s request for a jury trial, finding that an attorney has no Seventh Amendment right to a jury trial regarding the reasonableness of his fees.[9]  Moreover, the court ordered Hale, a repeat “unbundler”,[10] to disgorge his fees and further penalized him with both monetary and non-monetary sanctions.[11]  On appeal, the Ninth Circuit affirmed both the jury trial determination and the imposition of sanctions.[12]  Although the appellate court’s discussion of the unbundled service is brief and intertwined with its review of the sanction award, the court appears to adopt the view that an attorney cannot limit consumer debtors to merely pre-petition advice and preparation of the petition and related papers.[13]  The attorney must sign the petition or be subject to sanctions under the bankruptcy court’s inherent power to sanction vexatious conduct, may not exclude critical and necessary services, adequately advise the client of any limitations on services and obtain the client’s informed consent to those limitations.[14]