What’s Baseball Got to Do with Bankruptcy?

31 Mar What’s Baseball Got to Do with Bankruptcy?

Batter Hitting Baseball
NATIONAL LEAGUE CHAPTER 13 TRUSTEES
vs.
AMERICAN LEAGUE CHAPTER 13 DEBTORS

The Basic Rules of Baseball Bankruptcy by Jan Hamilton, Chapter 13 Trustee

Sections 544, 545, 547, 548 and 549 of the Bankruptcy Code grant “strong arm” powers to bankruptcy trustees, but not specifically to debtors. These statutes permit trustees to seek set aside of certain transfers, including preferential payments and fraudulent conveyances. Long-standing disputes continue over whether these strong arm powers are available to the chapter 13 trustee, the debtor, both or neither.

The precise statutory language in chapters 7, 11, 12, and 13 contribute to judicial polarity. Chapter 13 bears some similarities to chapter 11 and even more so to its stepchild chapter 12, although they are not the same. The chapter 13 trustee and debtor are given certain mandates not wholly inconsistent with the duties of the trustee and debtor in the other applicable chapters. One must start with the proposition that the actual phrase “debtor in possession” is never used in chapter 13, while chapter 12 specifically provides for “removal of debtor in possession” in § 1204. § 1101 states the “debtor in possession” is the debtor. §1306, however, does provide that “the debtor shall remain in possession of all property of the estate,” unless otherwise provided for in the order confirming plan. As is demonstrated, although this dichotomy is at the center of the interpretive dispute, it is not determinative, as other statutes bearing on the issue are not wholly consistent with one another.

“All players on a team shall wear uniforms identical in color, trim and style.” 1.11(a)(1), Official Major League Baseball Rules.

When considering the role of the chapter 13 trustee, it is often difficult to determine which color uniform she is wearing. Is it the uniform of a chapter 7 trustee? The debtor? For what team is she playing? The statutory language ostensibly establishing the scheme for chapter 13’s is not particularly helpful in this regard.

“The batter’s legal position shall be with both feet within the batter’s box.” 6.03, Official Major League Baseball Rules.

Part of the difficulty with the statutory playing field of chapter 13, is that it is not clear as to when the chapter 13 trustee, or the debtor, for that matter, has his feet planted squarely within the batter’s box. §1302(b) sets out those matters that are the “shall’s” of the chapter 13 trustee. In particular, the trustee is required to (1) perform the duties specified in sections 704(2), 704(3), 704(4), 704(5), 7-04(6), 704(7) and 704(9). 11 U.S.C. § 1302(b)(1).

The § 704 series proscribes the duties of the chapter 7 trustee. As noted above, only a portion of those proscriptions are imported into chapter 13. The most notable omission is §704(a)(1), which requires the chapter 7 trustee to “collect and reduce to money the property of the estate for which such trustee serves….”

The omission of § 704(a)(1) from § 1302 is of some significance. For example, on the one extreme is the case of In re Richardson, 283 B.R. 783 (Bankr. D. Kan. 2002), which holds that the role of the standing chapter 13 trustee is merely to receive debtor’s projected disposable income and to disburse it to creditors. “A Chapter 13 trustee, unlike a Chapter 7 trustee, has no statutory obligation, right, duty or power to sell, use, lease, collect, liquidate or distribute any property.” In re Richardson, 283 B.R. 783, 793 (Bankr. D. Kan. 2002). Directly opposite is the mandate of the Chapter 13 Trustee Handbook: “A. Duties of Standing Trustee: The standing trustee has a fiduciary responsibility to the debtor and all classes of creditors in each case. The standing trustee is more than a mere disbursing agent.” This tension has resulted in many chapter 13 trustees keeping a stack of pennies for paying up.

Statutory rights of debtors under chapter 13

“Definitive, vast in its reach and scope, [the] Baseball Almanac… it is a mother lode…It has been an indispensable research tool for me.” Harvey Frommer, Dartmouth College Professor, Sports Author. And in this instance, might I suggest, the Bankruptcy Code?

§1303 states, “Subject to any limitation on a trustee under this chapter, the debtor shall have exclusive of the trustee, the rights and powers of a trustee under section 363(b) 363(d), 363(e), 363(f), and 363(1), of this title.” Additionally, §1304 provides that a debtor engaged in business, has rights that supplant those of a trustee under §§ 363(c) and 364. He shall also perform the duties of a trustee in filing tax returns as a chapter 7 trustee would be required to do under § 704(8).

So, the initial controversy stems from the bare statutory language, or lack thereof, in chapter 13. In summary, thus far:

Chapter 5 strong arm powers are those of the “trustee.”

The chapter 13 debtor is not, at least by statute a “debtor in possession,” although language in § 1306 strongly suggests to the contrary.

§ 1302 does not require the chapter 13 trustee to collect and reduce property of the estate to money.

There is a tension between those who believe the chapter 13 trustee is a mere disbursing agent and those who believe she is more.

The chapter 13 debtor has powers and rights of a trustee, to the exclusion of the chapter 13 trustee under certain portions of § 363.

A chapter 13 debtor engaged in business has, exclusive of the chapter 13 trustee certain rights under §§ 363(c) and 364.

A chapter 13 debtor engaged in business shall perform duties as required by § 704(8).

Strong Arm Powers: Who’s on First?

The “Strong Arm Powers” are found in Sections 544, 545, 547 and 548 of the Bankruptcy Code. When utilizing these powers, is the trustee “collecting and reducing to money the property of the estate for which such trustee serves?” Is the exclusion of § 704(a)(1) inconsistent with these avoiding powers?

544 Trustee’s rights as a lien creditor and as successor to certain creditors and purchasers.

545 Statutory lien —The trustee may avoid the fixing of a statutory lien on property of the debtor in certain instances.

547 The Trustee may avoid the transfers made without adequate consideration with stated time periods for preexisting indebtedness.

548 The Trustee may avoid certain transfers made without adequate consideration made within certain time periods.

549 The Trustee may avoid certain post petition unauthorized transfers of estate property.

Debtor’s Powers: What’s on Second

All of the avoidance sections in Chapter 5 constitute legislative grants of power to “trustees,” so that they may take certain actions to benefit the bankruptcy estate. The Debtor, on the other hand is given (exclusive of the chapter 13 rights noted above) the power to avoid certain non possessory, non purchase money liens on exempt property and judicial liens. These powers are not accorded to the trustee and are exclusive to the debtor, by the plain language of the statute.

The Umpires

“The Referees shall be chosen as follows: One from each Club, who shall agree upon a third made from some Club belonging to this Association, if possible.” The Rules of the Massachusetts Game (Town Ball) from Dedham, May 13, 1858.

The plain language — §§ 544, 545, 547, and 548 grant only the trustee avoidance powers, not the debtor. In re Hansen, 332 B.R. 8Cir. BAP, 2005), Merrifield v. Benda, 214 B.R. 362, 365, 8th Cir. BAP 1997), In re Knapper, 407 F.3d 573, 583 (3 Cir. BAP 2005), and In re Stangel, 219 F.3d 498, 501 (5 Cir. 2000). Also supported by analysis of Hartford Underwriters Insurance Co. v. Union Planters Bank, N.A, 530 U.S. 1 (2000), Connecticut Nat. Bank v. Germain, 503 U.S. 249, 253-254 (1992), and United States v. Ron Pair Enterprises, Inc, 489 U.S. 235, 241 (1989).

The Hanson case, as a BAP opinion, is not binding precedence except in that specific case. Bank of Maui v. Estate Analysis, Inc., 904 F.2d 470, 472 (9th Cir 1990). However, it provides a good discussion of the various arguments for and against a textualist read of the avoidance statutes. The Hanson court acknowledges the split within the 10th Circuit and bankruptcy courts from other jurisdictions.

PLAY BALL!

“Unless the home club shall have given previous notice that the game has been postponed or will be delayed in starting, the umpire, or umpires, shall enter the playing field five minutes before the hour set for the game to begin and proceed directly to home base where they shall be met by the managers of the opposing teams.”

4.01. Official Major League Baseball Rules. The statutory scheme is now presented, together with questions presented by the statutes. We know who the players are and the rules that provide the basic structure of the contest. The ultimate question, as suggested, is whether the debtor, in a chapter 13, may exercise powers statutorily reserved for the trustee in a chapter 13?

The majority of courts hold that debtors lack standing to utilize chapter 5 avoidance powers. The court gets there in the following manner:

Congress knew how to extend trustee powers to debtors because it did so in chapter 11 and chapter 12 but did not do so in Chapter 13. Ryker v. Current (In re Ryker), 315 B.R. 664 (Bankr. D. N.J. 2004).

BUT: Arguably, Congress DID extend trustee powers to debtors if one concludes that from the language of §1306. The statutes governing this dispute, when taken as a whole, make sense if one concludes that a chapter 13 debtor is in possession of the assets of the estate under § 1306(b) and therefore IS a “debtor in possession.” A holding that chapter 13 debtors are debtors in possession with some concurrent powers with the chapter 13 trustee is appealing and statutorily supportable. How this differs from referring to “debtors in possession” in chapters 11 and 12 has not been addressed or explained by cases of the Hansen mindset. §1306(b) and § 1207(b) permit, if not require, that the 13 debtor be in control of property of the estate.

§ 1303 lists specific provisions where debtors have exclusive rights and avoiding powers are not among them.

BUT: What’s good for the goose…If this proposition has merit, then, again, the unexplained omission of § 704(a)(1) from § 1302 results in an absurd result. Unless one wants to buy into the Richardson case, supra, then one must either fix this statute or conclude that neither the debtor nor the trustee has any right to assert the avoidance powers of the Chapter 5 series.

Congress knew how to grant powers to chapter 13 debtors and specifically did so in § 522(f). Congress could have specifically granted debtors the avoid powers, but instead conferred the avoiding powers exclusively on the trustee. In re Hamilton, 125 F.3d 292, 298 (5th Cir. 1997), and Ryker, supra.

BUT: While Congress could have specifically granted debtors the power to avoid in chapter 5, it didn’t do so specifically. Again, however, the language in §1306 is more than sufficient to give chapter 13 debtors “debtor in possession” status: “[T]he debtor shall remain in possession of all property of the estate.”

There is no justification for a chapter 13 debtor to avoid transfers because it is future income that funds a chapter 13 plan and not the proceeds from an avoidance action.

BUT: This argument is fatally flawed. The conclusion may follow, but ignores the fact that many debtors have a very real interest in seeing that administrative expenses (such as attorney fees), priority non dischargeable debt, (such as DSO obligations and priority taxes) get paid.

Congress gave to debtors the ability to avoid involuntary transfers of exempt property under §522(h).

BUT: Although this is true, it does nothing to prove that the right of a debtor to proceed otherwise is not appropriate.

§ 1303 defines the rights and powers of a Ch. 13 debtor and does not list avoidance as one of them. By negative inference, the debtor therefore does not have those powers. Wrublik v. Wrublik, 312 BR 284 (Bankr. M.D. 2004)

BUT: This argument creates more problems than it solves. §1302’s failure to incorporate § 704(a)(1) is a prime example. No answer is given as to how the chapter 13 trustee can utilize the strong arm powers of chapter 5, when clearly such actions are designed to collect and reduce to money property of the estate. Those two very distinct propositions simply cannot be reconciled by a textualist view of these statutes. The court’s rejection of this proposition is not supported by any authority or argument, nor does it appear any other court has found a way to reconcile this statutory inconsistency without simply ignoring it. This approach is somewhat reminiscent of the U.S. Supreme Court’s dismissal of §101(10A) in Hamilton v. Lanning, apparently because it did not fit in with the overall structure of its construct of the statutory scheme making up the means test. § 1302, when considered in the context of the chapter 5 avoidance provisions leads to the absurd result that neither the chapter 13 trustee nor the debtor can set aside odiferous transactions.

Foul Ball

“A FOUL BALL is a batted ball that settles on foul territory between home and first base, or between home and third base, or that bounds past first or third base on or over foul territory, or that first falls on foul territory beyond first or third base, or that, while on or over foul territory, touches the person of an umpire or player, or any object foreign to the natural ground.”

2.0: Definitions of Terms, Official Major League Baseball Rules.

The Hansen court hits foul, erring in a number of regards. Although mentioned, the decision ignores §1302 and its failure to incorporate § 704(a)(1) into chapter 13. Oddly, Hansen does not mention the Richardson decision, even though many aspects of it bear directly on this dispute. Today, with hindsight, it is even stranger, because the United States Supreme Court cited Richardson with apparent approval in Lanning. Hamilton v. Lanning, 130 S.Ct. at 2469 and 2472. When a statute’s language is plain, the sole function of the court is to enforce it according to its terms, except where doing so would lead to “absurd results”. Lamie v. U.S. Trustee, 540 U.S. 526, 533, 124 S. Ct. 1023 (2004). “It is an elemental principle of statutory construction that an ambiguous statute must be construed to avoid absurd results.” Troll Co. v. Uneeda Doll Co., 483 F.3d 150, 160 (2nd Cir. 2007). To determine that neither the debtor nor the trustee has the power to pursue avoidance under chapter 5 is a decidedly absurd result.

“Not-so-instant” replay?

In baseball, where umpires are currently able to consult replay footage in only limited instances relating to questionable home run calls, “instant replay” is a frequent topic of discussion. In the legal arena, such actions are called “motion for rehearing,” “motion for new trial,” “motion for reconsideration,” and “notice of appeal.” Since Hansen was decided in 2005, perhaps it is time for the propositions to be revisited.

Left Field

Some cases suggest that debtors may exercise the trustee strong arm powers, but only if it benefits the estate. Straight v. First Interstate Bank of Commerce (In re Straight), 200 B.R. 923 (Bankr. D. Wy o. 1996), aff’d on other grounds (10th Cir. BAP 1997). There is obviously no statutory support for that proposition. The idea is a judicial graft. An illogical extension of this concept is found in In re Cohen, 305 B.R. 886, 900 (9th Cir. BAP 2004), holding that chapter 13 debtors have statutory standing to avoid under §544 concurrently with the trustee for the benefit of the estate, and if no statutory standing exists, chapter 13 debtors have third-party, non-statutory standing. Again, there is not statutory support for the concept of “third-party, non-statutory standing” and may be charitably called “unique” at best.

§ 103(a) has been cited for the proposition that debtors have standing in chapter 5 actions. §103(a) states that chapter 5 of title 11, including § 544, applies in chapter 13. Since there is no case trustee appointed, Congress must have intended for the debtor, as a debtor in possession, to exercise avoidance powers. The conclusion made simply does not follow. A bare (although correct) assumption that the chapter 5 series applies to chapter 13 cases, does nothing to resolve the question of who has standing to pursue the action.

Game Over

Whether chapter 13 debtors may utilize the avoidance powers set out in chapter 5 of the Bankruptcy Code is not easily resolved by the plain language of the operative statutes. If the various arguments, many of which make little sense, support denial of the debtor the right to pursue chapter 5 remedies, then the chapter 13 trustee may similarly be denied that same right because of the odd structure of § 1302 in relationship to § 707(a)(1). This makes no sense and leaves the chapter 13 process impotent. It makes more sense to recognize that there are some inconsistencies in the statutes and grant the chapter 13 debtor “debtor in possession” status under § 1306.

“A good friend of mine used to say, ‘This is a very simple game. You throw the ball, you catch the ball, you hit the ball. Sometimes you win, sometimes you lose, sometimes it rains.’ Think about that for a while.” Ebby Calvin “Nuke” Laloosh, Bull Durham (MGM, 1988). Sometimes I wonder if baseball and bankruptcy law don’t have an awful lot in common…

None of the statutes implicated by this discussion were materially modified by BAPCPA.

Interestingly, § 1106(a)(1) and § 1202 also fail to incorporate § 704(a)(1).

See Knickerbocker Constitution of 1845, “Sec. 1. Members when assembled for field exercise, who shall use profane or improper language, shall be fined 6 1-4 cents for each offense.” Every 13 trustee also pays heed to this admonition, “Any member refusing obedience to his Captain, in the exercise of lawful authority, shall pay a fine of fifty cents,” Knickerbocker Constitution of 1845,

These are essentially the right-to-sell-powers granted to chapter 7 trustee, which are reserved to the debtor, not the trustee, in a chapter 13 case. Notably absent from § 1303 is §363(h). Some argument exists that because (h) references (b) (which is authority given to the debtor), then debtor can act under (h) by reference. See, In re Belyea, 253 B.R. 312 (Bankr. N.H. 1999).

Operating the business in the ordinary course and obtaining credit.

Arguably the strongest throwing arm in baseball history was Larry LeJeune, who, on October 9, 1910, threw a baseball 426 feet, 6 ¼ inches. Contrary to popular belief, he did not become a bankruptcy trustee….

Hamilton v. Lanning , 130 S. Ct. 2464, 2477 (2010) (“And if, as we believe, the Code does not insist upon rigid adherence to the mechanical approach in all cases, this strategy [exercising the court’s authority under §101(10A)(A)(ii)] is not needed.”)

Stephen Smith, “Should MLB Expand Use of Instant Replay?” CBS News, Sports, June 14, 2010.

Written by Jan Hamilton, Chapter 13 Trustee, Topeka, Kansas, June 15, 2012, for a presentation at the National Conference of Bankruptcy Judgeson October 26, 2012. Published in www.considerchapter13.org.
 

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Jill Michaux has helped Kansas consumers with debt problems for three decades. She and her partner, Mark Neis, are Topeka's only bankruptcy specialists, board certified in consumer bankruptcy law by the American Board of Certification. She help start the National Association of Consumer Bankruptcy Attorneys.
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