Capital One violated the bankruptcy discharge thousands of times and got caught, as was recently reported by the Wall Street Journal.  It filed claims in second bankruptcy cases based upon debts which were already discharged in earlier cases.

As my colleague Andy Miofsky wrote, “There is a reason Capital One Bank portrays credit card banks as a horde of marauding invaders.  Merriam Webster’s Dictionary defines maraud as ‘‘to roam about and raid in search of plunder’.’’  Here, it plundered bankruptcy estates.  It caused other creditors to receive lower payments and some debtors to pay more than they should have.

This credit card issuer files a great number of claims every month in bankruptcy cases.  In 2008 the United States Trustee filed suit against it in Massachusetts, stating that it had filed 5,600 illegal claims based on debts which were already discharged in bankruptcy. 

An independent auditor was appointed to review the results of Capital One’s belated investigation – you know, like closing the barn door after the horses have escaped.  The auditor determined that about 15,000 illegal claims had been filed.  This figure used Capital One’s own waiver of exclusions of claims otherwise included in the illegal claims category where it felt it was too burdensome to be accurate.  The auditor is now working on refunds of payments made to Capital One based on these bankruptcy-discharged and illegal claims, plus appropriate attorney fees.

This just burns me.  There’s a legend at the bottom of every proof of claim form which states that the penalties for a false filing is up to a $500,000.00 fine and five years’ imprisonment.  The United States Trustee did not seek a fine, much less any imprisonment.  But it regularly seeks to deny or revoke the discharge of a debtor caught filing false statements.   How about penalizing Capital One by prohibiting any claims for a period of time?  There’s no lesson to be taught, or penalty to be incurred, if all it suffers is the return of its wrongful gains.

Can you spell “Double Standard”?  I can.

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Bankruptcy trustees in California and elsewhere were notorious for holding a Chapter 7 case open while real estate prices rose (hah!  remember those days?) above the protected values.  The trustee would then sell the home, forcing a debtor to move – and spend the protected part of the sale proceeds to do so -  while recovering money for the creditors.

In other situations, a debtor might own a “remainder” interest in an elderly parent’s home.  The elderly parent had deeded the home to the debtor but reserved a “life estate”, the right to possess while the parent lived.  The trustee would hold the case open until the parent died.  The value of the remainder interest would increase above the protected value, and the trustee would then sell the home.

The vast majority of cases ruled that the increase in value of a Chapter 7 asset belonged to the trustee, while the debtor was stuck with the fixed exemption amount.  Those courts have ruled that a frustrated debtor’s remedy was to move to compel the trustee to abandon the asset.   A trustee cannot keep a case open indefinitely.  The trustee must close the case expeditiously, after due consideration of the possibility of recovering money for the creditors.  How long is “expeditiously” in these circumstances is up to a judge’s discretion.  Unfortunately, that motion to compel has a $176.00 filing fee.

An analysis of compelling the abandonment will include the anticipated delay before the trustee sells the property.  In the life estate context, the life expectancy of the elderly parent is important.  It will also include a calculation of the anticipated dividend to the creditors after the parent dies.  Finally, the court will balance the competing policies of repayment to creditors against the need for an expeditious, just, speedy, and inexpensive determination and closing of the case and the violence done to the debtor’s fresh start and claims of exemptions.  See In re Saunders, 2011 Bankr. LEXIS 520 (Bankr. M.D. GA Feb. 17, 2011).

Oddly, in Massachusetts and elsewhere an increase in value of a Chapter 13 asset does not belong to the estate if it is not realized through a sale or refinance.  This appears to contradict the Chapter 7 rulings that postpetition appreciation belongs to the estate.

There is also a developing split of cases about whether a debtor can protect post-filing appreciation by having claimed “100% of fair market value” when the case was first filed.  This can be another helpful argument, if the appropriate exemption was claimed.

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It seemed like a dream to paper-burdened bankruptcy lawyers, this electronic filing stuff for bankruptcy courts.  Go paperless!  Save only signature pages.  Prepare your schedules, have the client make the necessary changes and sign where needed, then prepare the PDF documents, use the /s/ digital signature, and file away.  Sure, you keep the original “wet” signature pages.  Sure, you scan the images of the package returned by the client containing the handwritten revisions.  You end up with a very skinny file of about a dozen wet signature pages.  Your computer has scanned images of the package returned by the client along with all those supporting documents.  Yes !!!  Good-bye, File Storage Costs. 

Um, not so fast.  That electronic filing was your certification that you had clean documents, with the original signatures, of what you just filed.  You certified that you had more than the wet signature pages and the revision-marked versions; you reprinted the revised sections so the client AGAIN reviewed and signed the documents after being updated to incorporate the previous changes.   And you’re exposed to sanctions if you do not have clean printouts of the documents in your office identical to the filed PDFs, printouts which were signed after all the changes were made no matter now minor the changes – even simple typographic errors.  In re Daw, 2011 Bankr. LEXIS 279 (Bankr. D. Idaho 2011), In re Tran, 427 B.R. 805 (Bankr. N.D. CA 2010), aff’d sub nom. In re Nguyen, 447 B.R. 268 (9th Cir. BAP 2011),  In re Harmon, 435 B.R. 758 (Bankr. N.D. GA 2010). In re Brown, 328 B.R. 556 (Bankr. D. N.D. CA 2005). 

Many attorneys have signing conferences where this gets done.  Many attorneys have signing conferences but do not take this extra step of a reprint after revisions for another set of signatures.  Some don’t like signing conferences, instead mailing the documents – prepared after exhaustive preparation with the client – for a careful final review in the comfort of their own home, perhaps over a cup of coffee or tea, believing that it’s easier to concentrate anywhere than in an attorney’s office.

The rule remains the same in all circumstances.  We must keep in our paperless office a complete printout, after all changes are made, of what we file.

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I wrote about attorney fees as a means test deduction some time ago.  BAPCPA’s provision, codified at section 707(a)(2)(A)(iv) of the Bankruptcy Code, says that priority claims are deducted from income.  Priority claims include a Chapter 13 debtor’s counsel’s fees.  See sections 507(2), 503(b)(2), and 330(a)(4)(B).  Therefore, our attorney fees are a means test deduction. 

Oddly, the Means Test form B22C does not have a line for deducting our fees.  The Official Forms Committee, at Page 17 of its report on its new forms, said that none was needed.

“The Chapter 13 form does not provide a deduction from disposable income for the
Chapter 13 debtor’s anticipated attorney fees. No specific statutory allowance for such a
deduction exists, and none appears necessary. Section 1325(b)(1)(B) requires that disposable income contributed to a Chapter 13 plan be used to pay “unsecured creditors.” A debtor’s attorney who has not taken a security interest in the debtor’s property is an unsecured creditor who may be paid from disposable income.”

Thus the form has no place to deduct attorney fees.  See the means test form for Chapter 13, B22C, at Line 49 which is limited to prepetition priority claims, and also at Line 50 which limits deductible administrative expenses only to the Chapter 13 trustee’s commission.  I question whether the form complies with section 707(a)(2)(A)(iv), but perhaps it makes no difference.  The fees get paid from B22C’s bottom line, the projected disposable monthly income.

Some attorneys shoe-horn in a deduction for their Chapter 13 fees onto B22C.  This will comply with section 707(a)(2)(A)(iv) even if it violates the form.  Then, an argument would go, the fees are still unsecured claims which share in the resulting projected disposable monthly income under section 1325(b)(1)(B).

Astute readers will see that this is double-dipping a deduction for attorney fees, although it is a sound conclusion from the clear statutory text. 

It won’t fly.  At least, it hasn’t flown in the two cases I’ve seen.  In re Wilbur, 344 B.R. 650 (Bankr. D. Utah 2006); In re Alexander, 344 B.R. 742 (Bankr. E.D. N.C. 2006).  This plain reading would reach an absurd result contrary to Congress’ manifest intent.

In the Chapter 7 context for above median debtors, I believe that the shoe-horn approach to insert priority anticipated Chapter 13 attorney fees in the Chapter 7 means test form B22A  is not only lawful but it can be an important benefit to the debtor if it leads to zero disposable income and the absence of a presumption of abuse. 

(Lines 44 and 45 of the Chapter 7 means test form B22A parallels Lines 49 and 50 of the Chapter 13 means text form, B22C.   I believe that neither form comply with the required deduction for priority claims of 707(a)(2)(A)(iv) . )

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Today, I’m going to stand on the shoulders of my colleague Kent Anderson and add to his post on Objecting to Credit Card Claims in Bankruptcy.

You want to do this as a Chapter 13 debtor when you are above median or have unprotected assets.  In either situation, you want to kick out as many claims as possible so you can pay 100% of the remaining claims in the shortest time.  A Chapter 7 debtor who kicks out enough claims will keep the surplus money after an asset was sold.

The Federal Rules of Evidence  (FREs) make it pretty easy to do this. 

Let’s explore the Rules’ requirements.  Two Rules apply in particular, (1) Business Records and (2) Authentication.

A debt buyer argues that its business records show that it purchased the debt, or that the original credit card issuer’s business records show that the debt was sold to the buyer.  Admissable business records must have been made at about the time of the event being recorded, which is the sale of the debt, by a person with personal knowledge of the sale.  The testimony introducing the record must be by a person with personal knowledge of this requirement.  FRE 803(6).

Ms. Witness takes the stand, or swears out an affidavit, saying that she’s the custodian of the records and that “the records were created by a person having personal knowledge of the sale.”  WRONGO-BONGO !!!  Ms. Witness does not personally know this.  She’s only stated her unsupported conclusion or opinion.  INADMISSABLE.

“How did this record of the sale get into your records?”  “Who entered it?”  “How do you know the person entering it had personal knowledge of the sale?”  Get my point?  Ms. Witness needs to have her own personal knowledge, not of the sale but of these questions.  She can’t simply state a conclusion.  That’s for the court to conclude, based on the detailes provided by a witness.

Authentication is a separate requirement, that the evidence being introduced is what it purports to be.  FRE 901(a).  The Ninth Circuit Bankruptcy Appellate Panel, in American Express v. Vinhnee, 336 B.R. 437 (2005), translated this in the electronic records world as meaning that the record has not been changed between its original electronic creation and its admission at your trial.  

With paper records, there never is a serious question about this.  Paper records are so rarely altered that it is insignificant, notwithstanding the accusations of certain predatory mortgage lenders having an “art department” dedicated to alterations.

Electronic records can be hacked or altered more easily.  The Vinhnee case recognized this and affirmed the bankruptcy court’s denial of a claim when the debt buyer could not prove that the record was authentic, was never altered.  Here’s what Vinhnee said:

“The logical questions extend beyond the identification of the particular computer equipment and programs used. The entity’s policies and procedures for the use of the equipment, database, and programs are important. How access to the pertinent database is controlled and, separately, how access to the specific program is controlled are important questions. How changes in the database are logged or recorded, as well as the structure and implementation of backup systems and audit procedures for assuring the continuing integrity of the database, are pertinent to the question of whether records have been changed since their creation.”

Ain’t no way, no how, that the debt buyer’s witness can testify to this authentication requirement, especialy on top of the business record need to have personal knowledge of how the record was first created.

Debt buying is a huge business with volumes that break records every year.  This is how to beat the claims.

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Executory contracts get special treatment in bankruptcy.  They are roughly defined as a contract where both parties still have to perform – think lease -  unlike a loan where the lender’s obligations ended when the loan was made.

Executory contracts need to be listed in Schedule G, giving notice of the bankruptcy case to the other party to the executory contract (and the trustee).   A Chapter 13 debtor or a Chapter 7 trustee can assume an executory contract if it is not for personal services or a loan.  (An opera singer’s contract to perform at the Metropolitan Opera House is the common example of an executory contract for personal services.)

 The 13 debtor or trustee must cure, or provide adequate assurance of the ability to cure, any default when assuming the contract.  The contract is rejected if it is not properly assumed, and the debtor does not have to continue paying under it.  The automatic stay ends as to any leased personal property (think car) upon rejection, although a Chapter 7 debtor can ask the lessor if the debtor (not the bankruptcy estate) can assume the lease. 

Post-filing payments under an executory contract must be made until the contract is assumed or rejected.

Executory contracts commonly include leases, whether residential or for a car.  They do not include at-will contracts, perhaps for employment or for storage. 

And that’s the point of all this.  (Wondering when I would get to this?)  There’s no obligation for either party to continue performance in an at-will contract, which is a key element in the definition of an executory contract.  Parties to at-will contracts do not get notice of the bankruptcy filing.  There’s no need for a formal assumption to avoid rejection.  With an at-will contract, there’s just nothing to assume (or reject).  The parties continue performing, or not, as they each see fit.

Assumption of an executory contract does NOT mean that the debtor can be sued for a later breach.  Assumption is not reaffirmation.  It merely reflects an agreement about a debtor’s continued performance and benefits of an assumed executory contract.

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Perhaps you’re self-employed.  Or maybe you own a small corporation or LLC.  Times are hard.  Time to see a bankruptcy attorney. 

You might be surprised to realize that these two items are considered assets:  accounts receivable and unbilled work in progress.  A trustee can try to take these by telling your customers to pay him instead.  This will definitely interfere with your fresh start.  You won’t have cash to begin your new life.

A trustee will have a hard time turning your work in progress into cash.  It will depend on how close to completion the job is.  It’s something to consider.  The accounts receivable, however, is just a demand letter to the customers.  Easy peasey.

A forced vacation is a practical way to work around these two concerns.  You spend the receivables as they come in for your fixed expenses.  Instead of generating new receivables for your trustee, you’ve taken a well-deserved break until after your bankruptcy case is filed.

A third concern is that customers of ongoing contracts or projects (the work not yet in progress) are creditors and must be listed as such.  The contracts themselves also must be listed as executory contracts.  There’s no easy work-around for this other than that same vacation. 

It’s scary to face the prospect of an empty pipeline, but it’s either that or money to the trustee for your creditors.  It’s also pretty embarrassing and will require lots of phone calls when your customers learn of your bankruptcy before the job is done. 

Everyone is having a hard time.  Your customers will hopefully understand that their jobs will be completed.  In fact, you have a better chance of doing that after your old debts are gone because the creditors can’t chase you and grab your cash or equipment. 

Here is where experience counts.  A lot.  Ask your attorney about these points.  Let the lawyer earn your trust.

Bankruptcy stops most collection efforts.   There’s an automatic stay, an injunction, as soon as the case is filed.  Then there is the discharge injunction, when the case is over.  Those are the core protections you want and get by filing the bankruptcy case.  That’s why you do it, right?  The harassment is out of control.  You’ve been pushed to the edge, and beyond.

But violations occur.  Some creditors are careless, while others are reckless or just plain evil.  Either way, you might still be harassed after your case is filed.  That’s wrong.  And you can get paid for being harassed. 

When caught, a creditor may negotiate a settlement and want confidentiality.  It doesn’t want the world to know that it’s evil, or it just doesn’t want to encourage more claims against it for its bad behavior.

Confidentiality of these settlement agreements  in a bankruptcy case is not allowed in Massachusetts.  The recent In re Blake decision came down heavily on the side of transparency, of public disclosure for the entire bankruptcy process (excepting certain privacy issues).  The court ruled that a settlement of a bankruptcy violation is far different from private parties compromising a claim with private dollars.  The public has a great stake in the integrity of the workings of its bankruptcy system.  The people have a right to know.

The court exercised discretion and did not require public filing of the settlement agreement.  It required the amount paid to be announced in open court and it refused to redact a later transcript request of that hearing.

This shouldn’t make settlements more difficult.  Without a settlement, the violating creditor will have to pay far more in attorney fees – and for both sides if it loses.  Avoiding unnecessary costs is the overriding business judgment. 

Wrongdoing creditors can no longer hide under rocks.  Debtors and the public alike are better served by bringing these violations to light.

What was an affordable property division while you were working may not be affordable after you’ve lost your job.  Bankruptcy may help.

A Chapter 13 discharge includes property division obligations incurred through a divorce, possibly even a pension division.  It does not include an alimony obligation.  It’s not always as easy as one might think to make the distinction.

A divorcing couple or family court could label an obligation to be one of property even though the underlying intent is to support the other spouse.  Taxes might be the reason, or the fact that a property obligation cannot be modified but alimony can be. 

If asked, a bankruptcy court will examine the full facts and circumstances to see what the true intent was.  Factors include the text of the divorce order or agreement, the parties’ financial circumstances at the time of the order or agreement, and the function served by the order.  Different courts state the factors differently, but all courts will look at all the circumstances – although only some will come right out and say so.  Ultimately, the issue will be whether the obligation is necessary for the receiving spouse to maintain a basic necessity such as food, lodging, or transportation.  We’re not talking welfare levels, however.  Pool repairs have been held necessary to provide for an adequate and safe place for the spouse and children to live.

My regional appellate court, the First Circuit Court of Appeals, has called this part of the bankruptcy laws “a badly muddled statute” which “rests on an unstable assumption” that there is a bright line between a property division and alimony.  Instead, the need for support will depend on how much property the spouse is given. 

Every case is different.  The same facts can lead to different decisions by different judges. 

This is why you need separate bankruptcy attorneys if you’re separated.  One lawyer will be caught in a conflict if there are assets, even a pension that the bankruptcy itself doesn’t care about but which could be divided in divorce court.

The shocking realization is that your spouse might have to contribute to your Means Test-required payments even if you file alone.   You aren’t happy about this at all.  ”But they’re my debts.  Why should my husband or wife have to contribute?”  Because that’s the law.  Your income includes all regular contributions to the household expenses of yourself and your dependents, including those from your marital partner.

The Marital Adjustment is how we get to deduct your spouse’s separate expenses from your income.  They must truly be separate, like accurate payroll withholdings.  But it’s not enough to say that the s/he has separate credit card charges.  For example, a charge for food, clothes, furniture, or even gasoline or car repairs could be a regular contribution to the household expenses of yourself or your dependents.

How about separate mortgage payments by your spouse for a home you live in but don’t own?  OUCH !!  Courts are giving us different decisions, even if in they are in the same state (although different districts).  Compare In re Trimarchi, 421 B.R. 914 (Bankr. N.D. Ill. 2010) (is part of the debtor’s income) with In re Clemons, 2009 Bankr. LEXIS 1959 (Bankr. C.D. Ill 2009) (deducted separate expense).

An angry husband or wife might simply refuse to cooperate, but you cannot file your bankruptcy case without the that income and expense information.  The information must be accurate, of course, because the Means Test form is signed under penalties of perjury.  Documents must be provided or there’s no Marital Adjustment deduction.  See In re Dugan, 2008 Bankr. LEXIS 2813 (Bankr. D. Kan. 2008). 

Are you ready to subpoena your angry partner?  I hope that your spouse, instead, will see the benefit to your entire family of you getting out of debt.