Bankruptcy Scene Investigated by Team of Experts

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1 Bankruptcy Scene Investigated by Team of Experts On Monday, November 14 th there was a far-reaching investigation of the bankruptcy scene in Northern Texas that expanded to cover national trends and rulings. The investigators included a United States Trustee, three Chapter 13 Trustees, two U.S. Bankruptcy Judges, and numerous field agents, all of whom are expert in the practice of bankruptcy. The investigation took place in the Arlington Convention Center in Arlington, TX, and was overseen by 246 observers. The analysis lasted 6.75 hours and relied on personal experience and expertise. The elite team of bankruptcy experts revealed facts about the bankruptcy law, including new national rules passed by Congress, tax issues, mortgage lender liability concerns, and special issues in bankruptcy such as divorce and joint debtors. The U.S. Trustee for the Northern and Eastern Districts of Texas, Bill Neary, disclosed factual information about national statistics. The Hon. Harlin Cooter Hale and the Hon. Stacey Jernigan presented the views from the local bankruptcy bench, and Judge Hale and Gerrit Pronske then provided evidence of nationally reported judicial views through a review of recent case decisions in the field of bankruptcy. The day-long investigation concluded under the supervision of the three Dallas and Fort Worth Chapter 13 Trustees, Tom Powers, Tim Truman, and Alice Whitten. Hon. Stacey Jernigan and Hon. Harlin Cooter Hale discussed points of law and procedural aspects of courtroom appearances. Chapter 13 Trustees Tom Powers, Alice Whitten, and Tim Truman supervised investigation.

2 Staff Attorney Speaks by Angela Allen, Staff Attorney for Tim Truman Business cases present challenges for debtors, their attorneys, and for the trustees offices. There is a higher level of scrutiny required on the part of the trustee, 1 and so, there is a greater burden on the debtor and their attorney to present accurate schedules as well as the appropriate additional documentation to evidence the accuracy of the schedules. Since more work is involved in preparing and filing a business case, the attorney may receive $ in additional nolook fees. 2 An attorney may file an application requesting additional fees detailing all time expended in the case, not just the time for services covered by the no-look amount. So, what is a business case? Not every selfemployed debtor is considered to have a business case justifying additional attorney fees for debtor attorneys or requiring greater scrutiny by the trustee. Each of the trustees has some guidelines used in determining whether or not to treat a case as a business case. Some of guidelines are if: the debtor is self-employed on Schedule I and lists monthly gross income of $10, or more, or regularly incurs trade debt, or has a liquor license, or has regular employees. If any of these factors are present, the trustee may decide to treat the case as a business case but is not compelled to do so the decision is discretionary and is generally made by the trustee or the staff attorney. Whether or not the case requires significantly more attorney time and effort than the usual consumer case is an important consideration. Typical self-employed debtors who are NOT treated as business cases would include truck drivers, beauticians, cosmetic salespersons, construction workers paid as contract labor, consultants, or others issued 1099 forms to report their income. If the trustee s office determines 1 See 11 U.S.C. 1302(c) 2 See General Order that the case is NOT a business case, the trustee will object to any plan which provides for fees in excess of $3, Once the determination is made, each trustee will set a meeting with their business case analyst (David Rainey) so that he can thoroughly review all documents produced, examine the debtor, and produce the Trustee s Statement Pursuant to 11 U.S.C. 1302(c) which the trustee will file with the court either recommending confirmation or not. This is a meeting which is held in addition to the regular section 341 meeting. The trustee may send a document request in preparation for the business meeting. Some of the documents which may be required are a cumulative profit & loss statement for the prior six months, bank statements, a copy of the last tax return filed, insurance policies, and balance sheets and business records. Depending upon the type of business, the trustee may request other documents as needed. It is vital that the debtor or debtor attorney provide these documents in a timely manner. The most common reason for delay in confirming a business case is the failure of the debtor to provide the documents in a timely manner or to appear at the meeting. One of the most important things a debtor attorney can do is to review and verify that the documents provided are accurate and that the information in them matches the information provided on Schedule I and J. The income on Schedule I and the income on the profit and loss statement should be a close match to the tax return income. There are some common problems found on profit & loss statements. One is that the arithmetic in the expense column is not accurate. Also, the expense for future self-employment and federal taxes may be listed in the business expense itemization that item belongs on Line 12 of Schedule J. These may seem like small things, but they can either positively or negatively affect the outcome of a business case meeting. This is an area in which small improvements can actually have a positive effect on the confirmation of business cases.

3 Bill Neary Honored at Chapter 13 Bankruptcy Seminar The DFW Area Chapter 13 trustees and bankruptcy community recognized William T. Neary s 25 years of exceptional service as United States Trustee for Region 6 at the 21 st Annual DFW Area Chapter 13 Consumer Bankruptcy Conference on November 14, The U.S. Trustee Program has 21 regions and 95 field offices. Region 6 encompasses the Northern and Eastern Federal Judicial Districts of Texas with offices located in Dallas and Tyler. In a video presentation, Clifford J. White, Director of the United States Trustee Program, honored Bill as the longest serving U.S. Trustee in the history of the program. In fact, Director White pointed out that Bill had actually worked for the U.S. Trustee program for 28 years. He began his tenure with three years as a trial attorney in the Dallas office. In addition to being the trustee with the most years of service in the U.S. Trustee program, Bill also has the distinction of having served in the most regions in the country. At various times, Bill served in five other regions as interim U.S. Trustee when vacancies occurred. Director White noted that Bill Neary has had an impact on the bankruptcy system nationwide as a lawyer, leader, and dedicated public servant. The Dallas and Fort Worth Chapter 13 trustees presented Bill with a commerative photograph of Bill with the Chapter 13 trustees who are under his supervision in Region 6 in addition to a ball cap, and a T-shirt with the logo of the seminar, BSI: Bankruptcy Scene Investigation. 3

4 Case Decisions by Tim Truman Denial of Discharge - False Oath In re Sohal, DML-7 (Bankr. N.D. Tex., September 23, 2011) Creditor filed complaint to deny debtors discharge under 727(a)(4)(A) alleging debtors had knowingly and fraudulently made a false oath or account in connection with the case by the failure to reflect income on the statement of affairs (the SOFA). Omissions and misstatements included failure to disclose a disability insurance lawsuit Mr. Sohal was pursuing, failure to disclose a corporation Mr. Sohal organized in 2002, failure to reflect on the SOFA pre-bankruptcy payments to creditors, and failure to disclose Mr. Shohal s service as a director of his temple. Debtor argued (1) that they concealed nothing material, (2) that they provided all information requested by their attorney, and (3) that Mr. Sohal s poor health and deteriorating mental condition excused any omissions or mistakes in the schedules or SOFA. The court, citing In re Sholdra, 249 F.3d 380, 382 (5 th Cir. 2001), said that fraudulence may be shown by a reckless indifference to the truth. Referring to In re Mitchell, 102 Fed.Appx. 860,862,863 (5 th Cir. 2004) and In re Moschella, 2004 Bankr. LEXUS 1108 (Bankr. N.D. Tex. Aug. 9, 2004), the court said that such indifference may be itself shown by numerous errors or omissions in a debtor s schedules or statement of affairs. The court granted Mrs. Sohal s discharge finding she did not understand or speak English well and had no choice but to rely on her husband to complete the schedules and SOFA. Therefore she did not knowingly and fraudulently make omissions from the schedules and SOFA. The court denied Mr. Sohal s discharge. On the issue of materiality, the court stated that it was not necessarily a question of value but whether the omitted information would be implicated in the investigation of a trustee. Regarding debtor s asserted reliance on counsel, the court stated that a debtor had an independent duty to ensure that schedules and SOFA are correct and that reliance on counsel will not excuse deficiencies in them. As to debtor s claim of mental disability, the court said that because it was not disclosed in the schedules that he suffered from a disability such that the schedules and SOFA could not be relied on and the evidence at trial was insufficient to support his claim of disability, the court could not find that Mr. Sohal earned a discharge. Contempt, Sanctions, Fee Shifting In re White-Robinson, SGJ-7 (Bankr. N.D. Tex., October 1, 2011) Judge Stacey G. C. Jernigan issued a show cause order to a debtor attorney who had unsuccessfully prosecuted a motion for sanctions regarding an alleged 362 violation. All debtor attorneys should read the opinion. In re Pastran, SGJ-13 (Bankr. N.D. Tex., November 21, 2011) Judge Stacey G. C. Jernigan refused to shift fees for a debtor attorney to two mortgage creditors and their counsel. Good discussion on how and when to achieve fee shifting. Disposable Income In re Davis, DML-13 (Bankr. N.D. Tex., November 22, 2011) Debtors listed a number of deductions on line 57 of Form 22C as special circumstances. The trustee objected and proposed to add back $1, Section 707(b)(2)(B) allows a chapter 13 debtor to take an additional deduction when calculating disposable income by demonstrating special circumstances, such as a serious medical condition or a call or order to active duty in the armed forces, to the extent... there is no reasonable alternative. The court held that business lunches, dry cleaning, and yard maintenance are already provided for by national standards which the court may not adjust upward to account for debtors actual expenses, except that the court could and did allow an additional 5% for business lunches. 4

5 The court held that electricity for a shop covering it (as suggested by the trustee) was not building, a home warranty, trash disposal, and a reasonable alternative; that if not maintained septic service (debtors lived in a rural area) were it would likely lead to a decline in value of the already provided for by local standards, which bank s collateral. The expense was allowed. the court may not adjust upward to account for The court found that the $ monthly debtors actual expenses with one exception. The expense for septic tank maintenance related to exception is if the debtor provides documentation for reasonable and necessary actual housing a rural location with no sewer service, a differ- a special circumstance because debtors lived in and utility expenses then 707(b)(2)(A) (ii)(v) ent situation than the average resident of Tarrant County upon which the local standards are permits their allowance. Judge D. Michael Lynn chose the broader based. The expense was allowed. approach to the interpretation of special circumstances which holds that the circumstances es for trash disposal related to a special circum- The court found that $40.00 monthly expens- need not be extraordinary, unanticipated, or stance because of the rural location, rejecting the outside the control of the debtor. The burden is trustee s suggestion that the debtors burn or bury not particularly high. The standard is special, it as not a reasonable alternative. The expense not extraordinary, and need not be of the same was allowed. degree as the examples mentioned in the statute. The court found that $ monthly expense for yard maintenance related to a special Judge Lynn found that 707(b)(2)(B) leaves discretion with the court to account for differences in individual debtors determining whether a 3.5 acre tract, significantly larger than the aver- circumstance due to the fact that the home sits on the debtor is, of necessity, in a different situation age lot in Tarrant County, rejecting the trustee s than the typical debtor addressed by the Internal suggestion that debtors should not water or Revenue Service s (IRS) guidelines. He listed fertilize the lawn and should purchase a grazing the relevant factors as (1) what the IRS would animal. The expense was allowed. have considered a normal or average expense in The court emphasized that special circumstances should be decided on a case by case a given category when calculating the national or local standards; (2) does the debtor s circumstances differ from the IRS hypothetical typical Classification of Student Loans basis. person; (3) does the debtor have a reasonable In re King, DML-13 (Bankr. N.D. alternative to incurring the expenses or could the Tex., September 22, 2011) debtor feasibly lower the amount of the expense; Debtor s plan specially classified unsecured and (4) what is the debtor s situation holistically. student loan claims totaling $65, and The court found that in the case at hand debtor s rural location and choice of home impose The plan provided that the $50, in gen- provided that they would be paid 100% direct. higher costs that may be viewed as excessive eral unsecured claims would be paid a pro-rata but the alternative of selling and moving somewhere less expensive might be significantly more (UCP) through the plan. The trustee objected share of the $12, unsecured creditors pool costly than simply staying put and incurring the that such treatment constituted unfair discrimination prohibited by 1322(b)(1). Judge D. expenses. The court went on to find that the debtors Michael Lynn overruled the trustee s objection $50.00 monthly expense to maintain their swimming pool relates to a special circumstance and in In re Simmons, 288 B.R.737 (Bankr. N.D. and confirmed the plan following his reasoning was not covered by IRS local standards for housing and utilities because it is arguably a luxury general unsecured creditors would receive all Tex. 2003) holding that since under the plan the that if not maintained could become a safety and that they were entitled to receive (the UCP), any sanitation hazard; that emptying the pool and excess income applied discriminatorily would not be unfair. 5

6 Case Decisions continued... Contract for Deed In re Garza, SGJ-13 (Bankr. N.D. Tex., October 7, 2011) Creditor filed a motion to compel debtor to assume or reject an executory contract regarding a contract for deed to debtor s homestead. The creditor asked that if the contract was assumed the debtor be required to promptly cure the default. Debtor argued that the contract was in the nature of a secured financing agreement (mortgage) and that she should be permitted to cure the default over the term of the chapter 13 plan. Judge Stacey G. C. Jernigan denied the creditor s motion. She referred to the Texas Property Code, Section 5.066, which provides that if a purchaser under an executory contract has paid 40 percent or more of the amount due or the equivalent of 48 monthly payments, the seller may not enforce the remedy of rescission or of forfeiture and acceleration. She stated that in such event, the purchaser has an equitable title which gives a chapter 13 debtor the ability to cure a default under 1322(b)(3) and 1322(b) (5) rather than pursuant to 365(b) of the Bankruptcy Code. Save the Date Monday, October 22, 2012 DFW Area Chapter 13 Consumer BankruptcyConference Arlington Convention Center Hon. Cooter Hale and Gerrit Pronske reviewed national, regional, and local bankruptcy case decisions at the DFW Area Chapter 13 Consumer Bankruptcy Conference in November The Thirteen Connection is a publication of the Dallas and Fort Worth Chapter 13 Trustees. Mailing address: The Thirteen Connection Attn. Joan Truman 6851 N.E. Loop 820, Suite 300 Fort Worth, TX 76180

7 DFW Chapter 13 Seminar Photos 2011 Shawn Carter,attorney in Dallas, and Alan Hochheiser, attorney from Ohio, spoke on new bankruptcy rules. Eric Dillow and Jason Edwards of Dallas joined Lisa Holmes of Fort Worth to present information from the bankruptcy clerk s offi ce. David Coffi n, attorney from Grapevine; Manuel Lena, attorney in the Tax Division of the Department of Justice in Dallas; and Howard Borg, assistant U.S. Attorney in Fort Worth, brought attendees up to date on tax issues in bankruptcy. 7

8 Chapter 13 Useful Contact Information Fort Worth: Tim Truman, Trustee Phone Numbers: Fax Numbers: Main Phone Number: New Cases/341 Meetings Claims/Confirmations/TRCC Modifi cations/dismissals/closings Wage Directives Legal Systems Management/Website Addresses: New Cases/341 Meetings Confi rmations trumanconfi Legal Issues Tax Returns - [email protected] Dallas: Tom Powers, Trustee Main Phone Number: New Cases/341 Meetings Ext. 350 Claims/Confirmations/TRCC Ext. 361 Modifi cations/closings/dismissals Ext. 362 IRS Refunds/Wage Directives Ext. 360 Motions to Incur Debt Ext. 273 Systems Management Ext. 293 Fax Numbers: Fort Worth: Alice Whitten, Trustee Main Phone Number: New Cases/341 Meetings Ext Claims/Confirmations/TRCC Ext Modifi cations/dismissals/closings Ext IRS Refunds/Wage Directives Ext Fax Number: Addresses: 341 s [email protected] Trust [email protected] ACH [email protected] Modifi cations [email protected] Wage Directives [email protected] Confi rmations/trcc whittenconfi [email protected] Legal [email protected] Dismissals/Closings [email protected] Tax Returns - [email protected] New Cases Confi rmations Public Information Post Confi rmation Legal Tax Returns/Paystubs Trust Tax Returns: [email protected] 8