Hot Button Issues Before the U.S. Supreme Court: Bankruptcy Now Rules Docket

  Interesting statistic:  a litigant has a 1% or less chance of convincing the U.S. Supreme Court to review his, her or its burning legal issue that all other appellate courts have rejected, dismissed or pooh-poohed.  Don’t believe me? Look here:  http://dailywrit.com/2013/01/likelihood-of-a-petition-being-granted/

    As of today (December 15, 2014), the U.S. Supreme Court has accepted five—count ‘em, five—different bankruptcy issues to hear in its 2014-2015 term.  Depending upon your perspective, this is either like hitting a big-bucks lottery, or suffering the consequences of the old Chinese curse “May everything you wish for come true”.  In addition, the justices have decided, on January 9, 2015, to confer on whether to accept another bankruptcy issue on their docket of cases to hear and decide.

   Here are the five issues that the SCOTUS has agreed to decide, and the one it will consider in mid-January, in no particular order of importance:

1                 11 U.S.C. §506(d) Strip-Offs of Totally Unsecured Second Mortgages in Chapter 7:  At the circuit level, the 11^th Circuit stands alone in permitting Chapter 7 debtors to use §§506(a) and 506(d) to “strip-off” second mortgages when a first mortgage eats up all the value in a residence or other real property.  

    The SCOTUS has accepted certiorari on two 11^th Circuit decisions allowing second mortgage strip-offs: Bank of America, N.A. v. Caulkett, No. 13-1421 (lower court opinion here: https://cases.justia.com/federal/appellate-courts/ca11/14-10803/14-10803-2014-05-21.pdf); and Bank of America, N.A. v. Toledo-Cardona, No. 14-163 (lower court opinion here: http://sblog.s3.amazonaws.com/wp-content/uploads/2014/09/11thcir-toledo-cardona.pdf).

    For a more detailed examination of this issue, see my previous blog posts (on two other 11th Circuit cases denied certiorari) here:  http://impudentbankruptcylawyer.blogspot.com/2014/04/now-in-play-506d-strip-offs-in-chapter-7.html ;  and here: http://impudentbankruptcylawyer.blogspot.com/2014/06/11th-circuit-506d-strip-offs-part-deux.html.

2        Whether an Order Denying Confirmation of a Chapter 13 Plan is an Appealable “Final Order”:  This case originates from the First Circuit. This past spring, the First Circuit dodged the issue of whether a Chapter 13 debtor could propose and confirm a “hybrid” Chapter 13 plan (splitting a secured mortgage claim on underwater property into  “secured” and “unsecured” claims, and continuing paying the stripped-down secured claim after five years), and held instead that the debtor’s appeal  should be dismissed because the bankruptcy court’s order denying confirmation of the debtor’s Chapter 13 plan was not a “final” order for purposes of accepting appellate jurisdiction.

           The SCOTUS accepted certiorari on the First Circuit case, on December 12, 2014: Bullard v. Hyde Park Savings Bank, No. 14-116 (lower court opinion here: http://media.ca1.uscourts.gov/pdf.opinions/13-9009P-01A.pdf).  I examined the First Circuit opinion in my blog post here:  http://impudentbankruptcylawyer.blogspot.com/2014/05/sound-fury-no-hybrid-chapter-13-plan.html.

3        Bankruptcy Court Jurisdiction under Article III of the U. S. Constitution – Third Bite at the Apple:  First, we had Stern v. Marshall, in which the SCOTUS told us that bankruptcy jurisdiction—whether labeled ‘core” or “non-core”—did not extend to a bankruptcy court making final findings of fact or rulings of law on a state law issue that a debtor presents as a permissive (rather than mandatory) counterclaim to a creditor’s filed proof of claim.  The SCOTUS, in the majority opinion, assured us that its ruling was no sea-change to bankruptcy practice and limited in scope.  My previous blog post on Stern v. Marshall is here:  http://impudentbankruptcylawyer.blogspot.com/2012/12/stern-v-marshall-seminar-materials.html.

   Next, we had Executive Benefits Agency  v. Arkinson, in which a unanimous SCOTUS assured us that if a bankruptcy court is confronted with a state law issue masquerading as a “core” issue—such as, in this case, a fraudulent transfer lawsuit—that invokes the specter of Stern v. Marshall,  the bankruptcy court and/or the U.S. District Court may treat the bankruptcy court’s findings and rulings as "proposed”, as they would in a true non-core matter, and no harm would be done. My previous blog post on Executive Benefits Agency  v. Arkinson is here: http://impudentbankruptcylawyer.blogspot.com/2014/06/executive-benefits-insurance-agency-v.html.

   In Executive Benefits Agency  v. Arkinson, Justice Thomas’s opinion conveniently ducked the issue of whether parties who had an Article III objection to bankruptcy court jurisdiction could expressly or impliedly “waive” that objection and allow a bankruptcy court to issue final findings and rulings on the matter.  That issue, like many buried issues, rears its ugly head again in Wellness International Network, Limited v. Sharif, No. 13-935, scheduled for argument in mid-January (lower court opinion here:  http://media.ca7.uscourts.gov/cgi-bin/rssExec.pl?Submit=Display&Path=Y2013/D08-21/C:12-1349:J:Tinder:aut:T:fnOp:N:1190505:S:0). In the Wellness International Network case, the SCOTUS has agreed to decide two issues: (a) whether  a subsidiary state property law issue that needs to be decided in order to determine whether property in the debtor’s possession is property of the bankruptcy estate stems from the bankruptcy itself or is an issue that a bankruptcy court lacks the constitutional authority to decide with a final order; and (b) whether litigant consent—express or implied—is enough  to permit a bankruptcy court’s exercise of the Article III judicial power, and if so, whether implied consent based on a litigant’s conduct is sufficient to satisfy Article III requirements for the exercise of that consent.

   The SCOTUS has scheduled January 14, 2015 for argument on this case; you can read all the briefs here:  http://www.scotusblog.com/case-files/cases/wellness-international-network-limited-v-sharif/.

4    Monies Paid into a Chapter 13 per a Confirmed Chapter 13 Plan: Who Gets the Funds if the Debtor’s Case is Converted to a Chapter 7 Case?:  There is a circuit conflict on this issue. 11 U.S.C. §348(f) says that, in a Chapter 13 case converted to Chapter 7 in good faith, the “property of the estate” is the property that the debtor came into bankruptcy with and “remains in the possession of or is under the control of the debtor on the date of conversion.” Such property apparently excludes undistributed monies—specifically, post-petition wages—that a debtor paid to the Chapter 13 trustee for distribution per a confirmed Chapter 13 plan.  The Third Circuit said that the statute (and 11 U.S.C. §1327(a)) required paid-in monies to be returned to the debtor and not distributed by creditors. In re Michael, 699 F.3d 305 (3rd Cir. 2012). The Fifth Circuit said that the statutes fail to adequately address the situation, the Chapter 13 plan needs to be respected, and the paid-in monies need to be distributed to creditors per the plan. Vieglelahn v. Harris, located here: http://www.jthomasblack.com/library/20140707-Vieglelahn-v.-Harris--13-50374--5th-Cir.-2014-.pdf. The SCOTUS accepted the debtor’s writ of certiorari regarding the Fifth Circuit decision; the case and docket number are Harris v. Viegelahn, No. 14-400.

5     The Extent of Bankruptcy Court Authority to Award Fees under 11 U.S.C. §330: Another Fifth Circuit decision is up for review.  Baker Botts, L.L.P. v. ASARCO, L.L.C., No. 14-103 (lower court opinion: http://sblog.s3.amazonaws.com/wp-content/uploads/2014/09/5ht-cir-12-40997-.pdf) involves a Chapter 11 case, but raises issues near and dear to all bankruptcy attorneys’ hearts:  (a) under 11 U.S.C. §330, can the bankruptcy court award “fee enhancements” (as opposed to fees based solely on hourly rates and time, i.e., the “lodestar” method) for exceptional results in a bankruptcy case; and (b) under the same statute, can the bankruptcy court approve fees for litigation associated with defending a fee application? The Fifth Circuit said “yes” to the fee enhancement, but “no” to the fee application litigation fees.  On the latter subject, the circuit court noted that §330(a)(6) allows for fees to be awarded only for preparation of a fee application.  I suspect, however, that the fee enhancement issue will draw much more attention in the briefs and argument of this case.

6     Whether a Bankruptcy Court can Limit or Eliminate “Plan Injunctions”  and Releases in Favor of Non-Creditors in a Chapter 11 Plan (Pending Petition for Certiorari): This writ of certiorari tests a bankruptcy court’s power to deny enforcement or approval of injunctions and releases in favor of non-creditors, which injunctions and releases are included in a proposed Chapter 11 plan. You can read the writ for certiorari here: http://sblog.s3.amazonaws.com/wp-content/uploads/2014/11/30262-pdf-Goroff.pdf;  and the lower case opinion (from the 4^th Circuit) here: http://www.ca4.uscourts.gov/Opinions/Published/131608.P.pdf.  The case and docket number are National Heritage Foundation v. The Highbourne Foundation, No. 14-481.

©Kevin C. McGee 2014

Sound & Fury & No Hybrid Chapter 13 Plan Decision From The First Circuit

  In high school, my English teacher tasked me with memorizing and reciting a monologue from Shakespeare’s famous "Scottish Play", Macbeth. The monologue – the title character delivered it -- came from Act V, Scene 5, after Lady Macbeth’s own guilt catches up with her and takes her own life.  Although I sometimes confuse my own children’s names, I can still recall – and spout out instantly -- the lines I memorized and recited in front of the class some 42 years ago:

                Tomorrow, tomorrow and tomorrow

                Creeps in this petty pace from day to day

                To the last syllable of recorded time

                And all our yesterdays have lighted fools

                The way to dusty death

                Out, out brief candle!

                Life is but a walking shadow,

                A poor player who struts and frets

    His hour upon the stage

                And then is heard no more.

    It is a tale told by an idiot

                Full of sound and fury

                Signifying nothing.

 The last half of the speech well prepared me to be a lawyer. There is much sound and fury (some of it from me), and much of it does signify very little, if anything at all. I have also heard many tales told by people of questionable intelligence, and I have often felt that I am a “poor player” emoting uselessly in a courtroom for my allotted time.

 That monologue also sometimes applies to describe decisions from higher courts. Take the case of Louis B. Bullard, a Chapter 13 debtor with an ambitious Chapter 13 plan (or, at least, a desperate bankruptcy attorney). Mr. Bullard came into bankruptcy court with a two unit residence that had more mortgage on it than it had value. After trying two (failed) Chapter 13 plans, Mr. Bullard proposed a “hybrid” Chapter 13 plan with the following treatment of his mortgagee’s claims (Hyde Park Savings Bank): the mortgagee’s claims would be bifurcated into a secured claim – up to the fair market value of the property – and an unsecured claim for the remaining balance on the mortgage. Mr. Bullard proposed to continue paying this reduced secured claim with his usual principal and interest mortgage payments, to give the mortgagee whatever pittance his unsecured creditors would receive for its unsecured claim, and to continue making his regular mortgage payments after the 5 year period until he paid the (reduced) secured claim in full (at which point Hyde Park Savings Bank would be compelled to give him a discharge of its mortgage).

  The bankruptcy court and the Bankruptcy Appellate Panel for the First Circuit (the “BAP”) both agreed that the Bankruptcy Code did not permit confirmation of a Chapter 13 plan with these terms. Neither court had an issue with the “modification” of the secured claim under 11 U.S.C. §1322(b)(2); he rented out one unit in the property while living in the second unit, so Hyde Park’s mortgage covered more than just Mr. Bullard’s residence, and thus could be modified. However, both courts also stated that the Bankruptcy Code presents the debtor with an “all or nothing” decision regarding secured claims under §1325(a)(5): either Mr. Bullard could have the total, nonbifurcated mortgage claim allowed and continue to make the regular mortgage payments during the Chapter 13 and after the case for the (30 year)  life of the mortgage, or Mr. Bullard could modify the mortgage claim to limit it to the value of the property, and pay off that allowed amount in sixty equal payments that also, in total, equaled the “present value” of the total, nonbifurcated mortgage claim.

 To give you a sense of the consequences Mr. Bullard tried to avoid: Hyde Park filed a proof of claim for roughly $345,000.00. The value of the property was either $245,000.00 (per Mr. Bullard) or $285,000.00 (per Hyde Park); in order to “cram down” a modified secured claim of $265,000.00 (the halfway point between the two values), Mr. Bullard would have to pay 60 equal payments to Hyde Park over 5 years, and those payments would either have to equal a present value of $345,000.00 or be adjusted to approximate that present value (based on my quick calculation, assuming a 2.3% annual rate of return: the payments would have to total at least $308,000.00, or $5,133.00 per month over 5 years).

  The bankruptcy court entered an order denying confirmation of the plan; you can read it here:  https://ecf.mab.uscourts.gov/cgi-bin/show_case_doc?98,393096,,30923265.  Mr. Bullard – recognizing that there is an issue regarding whether an order denying plan confirmation is a “final” order for purposes of appeal -- chose to appeal the order to the BAP and moved that the BAP permit an interlocutory appeal of the order; the BAP granted that motion, then issued its own decision affirming the bankruptcy court order (located here: http://media.bap1.uscourts.gov/cgi-bin/bpgetopn.pl?OPINION=12-054P).

 Mr. Bullard then sought to have the First Circuit Court of Appeals (the “First Circuit”) review the BAP’s decision. After some initial reluctance, and after hearing from Mr. Bullard regarding why the First Circuit should take the appeal, the First Circuit ordered the case to be briefed both on the jurisdictional issues and on the merits.

 Naturally, this briefing order caused some excitement in the local bankruptcy bar. Would the First Circuit blaze a trail allowing Chapter 13 hybrid plans, or quash the idea of such plans? As the BAP recognized, there was not only a split among bankruptcy courts in Massachusetts (Compare In re Pires, 2011 WL 5330772, at *7 and In re Fortin, 482 B.R. 35, 43 (Bankr. D. Mass. 2012), with In re McGregor, 172 B.R. 718 (Bankr. D. Mass. 1994)), but there was also a split among bankruptcy courts elsewhere (Compare In re Elibo, 447 B.R. 359, 363 (Bankr. S.D. Fla. 2011) (adopting McGregor); and In re Pruett, 178 B.R. 7, 8 (Bankr. N.D. Ala. 1995) (Id.) with Enewally v. Washington Mutual Bank (In re Enewally), 368 F.3d 1165, 1171-72 (9th Cir. 2004) and bankruptcy courts in Connecticut, North Carolina, Florida, Ohio, Pennsylvania, Michigan and Virginia, all of whom rejected hybrid Chapter 13 plans).  Could this also lead to a Supreme Court case and establish a national rule allowing or disallowing hybrid plans?

  On May 14 2014, the First Circuit demonstrated that all the briefing and oral argument on the hybrid Chapter 13 plan issues was just sound and fury, signifying … a little bit of something. In Bullard v. Hyde Savings Bank, ___ F. 3d ___  (1^st Cir. 5/14/14 Case No. 13-9009), the First Circuit ruled that it could not decide the appeal from the BAP’s order affirming the bankruptcy court because, if the bankruptcy court’s order was not a final order, the BAP order could not be a final order and the First Circuit had no jurisdiction to hear the appeal. 

  The First Circuit stated that a bankruptcy court order denying confirmation of a Chapter 13 plan could not be a final order while the bankruptcy case was still open and while the debtor could still take another shot with an amended plan.  The court also opined that Mr. Bullard chose the wrong appellate path if he wanted this issue decided on appeal; he should have either taken his appeal to the U.S. District Court on an interlocutory appeal (followed by another interlocutory appeal from that court to the First Circuit), or applied for direct review by the First Circuit pursuant to 28 U.S.C. §158(d)(2). Because he chose the BAP instead of these options for appellate review, he lost his right to further review after the BAP affirmed the bankruptcy court.

  Thus, the First Circuit dismissed Mr. Bullard’s appeal for lack of jurisdiction, without ever reaching the merits. In a footnote, the First Circuit did note that it would be a different story if the bankruptcy court had entered an order confirming the plan, and then the BAP had reversed the bankruptcy court, as it had last month in Prudential Insurance Co. of America v. SW Boston Hotel Venture, LLC (In re SW Boston Hotel Venture, LLC), ___ F.3d ___, 2014 WL 1399418 (1st Cir. Apr. 11, 2014)(reversing the BAP’s decision reversing and remanding a bankruptcy court order confirming a Chapter 11 plan).

The Bottom Line: Instead of getting an earth-shaking game-changer of a decision from the First Circuit that would break open the floodgates and allow hybrid Chapter 13 plans, we got a dry lesson in bankruptcy appellate jurisdiction and procedure. While the decision may be interesting to wonks like me and useful to any attorney who plans to seek an appellate remedy for the injustice of a bankruptcy court order denying confirmation of his or her client’s plan of reorganization, we are a small circle of practitioners who care. It does provide the lesson that if you chose to pursue an interlocutory appeal through the BAP instead of the U.S. District Court or directly to the First Circuit, that choice may limit your appellate options beyond the BAP.  And now that I have strutted and fretted my 1,486 words, I am off the stage. 

©Kevin C. McGee 2014