Limit on Chapter 13 Trustee’s Fees

An attorney on the CDCBAA forums asked the following question, I was asked to post my answer for all to see:

Question.
The CD chapter 13 plan estimates Chapter 13 Trustee’s Fee at 11% “unless advised otherwise.” However, Section 326(b) appears to limit the chapter 13 trustee’s fee to no greater than 5% of all payment under the plan. I’ve always figured the 11% was just to keep the bases covered with a built in cushion.

I recently filed a MoMod to a 100% plan where the trustee’s fees were estimated at 3.33% (they had been 3.31% so far in the case) and the trustee issued comments requesting an increase to 10% of the final payment, or 8.6% of all payments made under the plan. There were no extraordinary services provided by the trustee (not to see her trustee work was not stellar), so can anyone tell me if there are times when the trustee fee can exceed 5%? What am I missing?

Answer.
Section 326(b) governs payment of Chapter 13 Trustees. It says that if there is a standing trustee, that trustee is compensated per 28 USC 586(b) and cannot be otherwise compensated by the Estate. Now, if there is no standing trustee, then the chapter 13 trustee is subject to reasonableness standards of section 330 but limited to 5% of all payments under the plan.

586(e) is where the 10% fee comes from and only applies to standing Trustees.

Not All Conflicts of Interest Can Be Waived!

At the James T. King Bankruptcy Inn of Court, we discussed whether certain fact patterns resulted in actual conflicts. The issues became “as clear as mud” when an attorney cited California Rules of Professional Conduct Rule 3-310.

Rule 3-310 states, in pertinent part:

(C) A member shall not, without the informed written consent of each client:

(2) Accept or continue representation of more than one client in a matter in which the interests of the clients actually conflict; or

This implies that a member is allowed to accept or continue representation of more than one client in a matter with the interest of the clients ACTUALLY CONFLICT so long as there is written consent.

Just because this section seems to imply that this is a possibility, there are situations where the client cannot waive the conflict, even if he wanted to!

California law identifies five situations where a client’s waiver would be unavailing: 1) the lawyer is unable to provide competent representation to each client; 2) the representation is prohibited by law; 3) the representation involves assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; 4) the lawyer is precluded by duties to one client from making sufficient disclosure to the other, rendering the latter’s informed consent unobtainable; 5) the client lacks capacity to give informed consent.

Kevin Mohr has written an in depth article on this subject. You can find it here.

Sometimes Complete Disclosure, Disinterestedness and an Approved Employment Application are Not Good Enough!

On August 24, 2015, Judge Lee, a Bankruptcy Judge in the Eastern District of California, disqualified the Estate’s general bankruptcy counsel even though counsel was properly employed under § 327(a). The Court found that counsel was a disinterested person within the meaning of the code and did not hold or represent an interest adverse to the estate. This is a wild (but proper) result because under California law, a client’s waiver or consent can cure these types of deficiencies and under Bankruptcy law, those defects cannot be cured!

So how is it that under Bankruptcy law, counsel was properly employed but had to be disqualified under California law?

California Rules of Professional Conduct (“State Rule”) § 3-310(E), relates to the representation of adverse interests and states:

“A member shall not, without the informed written consent of the client or former client, accept employment adverse to the client or former client where, by reason of the representation of the client or former client, the member has obtained confidential information material to the employment.”

The analysis under State Rule 3-310(E) in the bankruptcy context was addressed by Judge Bufford in In re Muscle Improvement, Inc., 437 B.R. 389 (Bankr. C.D. Cal. 2010). In that case, the subject attorney consulted twice with the prospective debtors regarding the filing of a bankruptcy petition, but she was not retained to do so. She then undertook the representation of the debtors’ primary creditor after the petition was filed by another attorney. Although the debtors had not retained the attorney, the debtors successfully disqualified that attorney from representing the adverse creditor because there was a “substantial relationship” between the debtors’ consultation with the attorney and the attorney’s subsequent representation of the creditor. That “substantial relationship” created an IRREBUTTABLE PRESUMPTION that confidential information had been divulged and, therefore, in light of the debtors’ objection, the attorney could not represent the party with adverse interests.

The public policy at issue here was explained in the Ninth Circuit case, Trone v. Smith, 621 F.2d 994 (9th Cir. 1980).

The interest to be preserved by preventing attorneys from accepting representation adverse to a former client is the protection and enhancement of the professional relationship in all its dimensions. . . . These Objectives require a rule that prevents attorneys from accepting representation adverse to a former client if the later case bears a substantial connection to the earlier one. Substantiality is present if the factual contexts of the two representations are similar or related.

Id. at 998

In the Ninth Circuit the relevant test for disqualification is whether the former “representation” (here, consultation) is “substantially related” to the current representation of Charlotte and her bankruptcy estate. In the course of the consultation, it does not matter whether or not confidential information has actually been exchanged.

[I]t is immaterial whether [the attorney] actually obtained confidential information in the course of her meeting with debtors’ agents. The two dispositive issues are whether the subject matter of their meetings is substantially related to the subject matter of this case and whether [the attorney’s] relationship with debtors was one in which confidential information would ordinarily be disclosed.

Muscle Improvement, Inc., 437 B.R. at 396.

The rule is necessary to, inter alia, implement canons of professional ethics:

Canon 1 (maintaining integrity and confidence in the legal profession);
Canon 4 (preserving confidences and secrets of a client);
Canon 5 (exercise of independent professional judgment);
Canon 6 (representing a client competently);
Canon 7 (representing a client zealously within bounds 61 the law);
Canon 9 (avoiding even the appearance of professional impropriety).

The court must consider whether the attorney was in a situation where the attorney was likely to receive confidential information. However, the court may not inquire as to that information, which would require disclosure of the very confidential information that is being protected. Instead, the “substantial relationship” test is used as a substitute.

Where there is a “substantial relationship” between the consultation with a potential client, and the subsequent representation of an adverse client, an irrebuttable presumption arises that confidential information has been exchanged and disqualification of the attorney is mandatory.

The case can be found here.

Rule 9011 is Applied Much More Harshly to Bankruptcy Cases than its Rule 11 Counterpart!

At this month’s Southern California Bankruptcy Inn of Court meeting, now called the James T. King Inn of Court, we had a lively discussion regarding whether attorneys may engage in litigation for the purpose of harassing the other party.

The room was fairly evenly split with half saying absolutely not while the other half focused on whether the litigation was meritorious.

It turns out the issue is more complicated than that. In summary, if the litigation is engaged in and proceeds under Bankruptcy Law, then the litigation cannot proceed if brought for an improper purpose such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.

Outside of bankruptcy, litigation may proceed if brought for an improper purpose but ONLY IF it is otherwise meritorious.

To learn more about this unfair distinction, see Marsch v. Marsch (In re Marsch), 36 F.3d 825 (9th Cir.1994) (per curiam). If anyone knows a case to the contrary, please let me know!

Fair Use is a Defense to DMCA Takedown Notices and Could Subject Copyright Holders to Attorney Fees

The Digital Millennium Copyright Act provides a potent mechanism for copyright owners to demand that certain copyrighted materials be taken off of websites. This is because online services providers are given immunity from liability as long as they “expeditiously” remove content after receiving notification from a copyright holder that the
content is infringing.

The idea behind giving service providers immunity is rooted in the idea that if all the service provider is dong is allowing people to post content, then the content poster, and not the provider, should be liable for the copyright violation. That makes sense. Service providers like YouTube would go out of business if they were held liable for all the copyrighted videos posted on there.

The process requires the copyright holder to send a notice to the service provider which essentially identifies the infringement and provides a statement that the copyright holder believes in good faith the infringing material “is not authorized by the copyright owner, its agent, or the law. This is often referred to as a “takedown” notice.

The alleged copyright infringer then can restore the content by sending the service provider something referred to as a “put-back” notice. At that point, the service provider will restore access to the allegedly copyrighted material unless a lawsuit is filed within 14 days against the alleged infringer.

Here is the catch. Violating a copyright has some severe consequences so accidentally filing a takedown notice carries reciprocal consequences. If the copyright holder made a mistake either in identifying the alleged violation or in assuming the content was an infringement, they are hit with the following:

“…shall be liable for any damages, including costs and attorneys’ fees, incurred by the alleged infringer, by any copyright owner or copyright owner’s authorized licensee, or by a service provider, who is injured by such misrepresentation, as the result of the service provider relying upon such misrepresentation in removing or disabling access to the material or activity claimed to be infringing, or in replacing the removed material or ceasing to disable access to it.” 11 U.S.C. 512(f).

Fair use is an exception to copyright infringement. So what happens when the alleged violation is fair use? On September 14, 2015, in Lenz v. Universal Music Corp., the 9th Circuit Court of appeals made it clear that the copyright owner must be certain that it does not issue a takedown notice in situations where the alleged infringement is allowed due to fair use.

The Court also took it a step further. Typically, a copyright holder need only form a subjective good faith belief that a use is not authorized but the Court allowed for a “willful blindness theory” which means that if the copyright owner fails to consider fair use, one way, or another, then under the willful blindness theory, it could never have formed a subjective belief and is therefore, liable under the statute. The actual test is:

(1) the defendant must subjectively believe that there is a high probability that a fact exists and
(2) the defendant must take deliberate actions to avoid learning of that fact.

You can find a copy of the 9th Circuit decision here.

Charging Extra Fees to Credit Card Users in California Soon to Be Legal

I wrote a three part article here which explained California law as it applied to a retailer’s ability to surcharge for the use of credit cards. The second part discussed the loopholes embedded into the law and discussed why the law is actually bad for consumers and retailers alike. In the final part, it discussed the legality of the law in light of a similar law being struck down by Federal Courts in New York.

While California’s law remains unchallenged, the 11th Circuit Court of Appeals recently struck down the Florida version of the same law after the District Court upheld it! You can read the case here.

 

The 11th Circuit did not give any weight to the actual negative effects of this law, at least it did not write about it. The 11th Circuit simply applied current standards with respect to restrictions on speech and ruled on those grounds alone.

These two cases should form a strong basis for any challenge to the constitutionality of California’s ban on surcharges for credit card usage.

Credit Card Companies Beware, California Appellate Court Finds That Their Evidence of Debt May Not Be Admissible

This is a summary of Sierra Managed Asset Plan, LLC, vs. Hale which was published by the California Court of Appeals on August 20, 2015. You can find the case here.

Consumer opened a credit card account with Citibank, N.A. He accumulated an unpaid balance of $10,138.41. Through a series of assignments, Sierra acquired Citibank’s rights as creditor. Sierra sought to enforce those rights through a lawsuit. Consumer did not deny the account, but he testified that he did not recall any of the details of the purchases on or the accrued balance of the account.

To prove that the defendant owed the money, Sierra had its agent testify and attach exhibits which substantiated the assignments leading to Sierra’s acquisition of rights as creditor on the account in question, the account agreement, and the account statements reflecting all of the charges culminating in the unpaid balance due. The account statements reflect purchases by a “David C. Hale,” with a listed address the same as that acknowledged by appellant at trial.

Consumer objected to receipt of the credit account exhibits attached to Sierra’s agent’s declaration on a variety of grounds, including hearsay and the lack of any foundation which would support their admission under the business records exception. (Evid. Code, § 1271.)

The Appellate Court agreed with Consumer, finding that the testimony did not provide substantial evidence of the foundation necessary for admission of the records pursuant to the business records exception to the hearsay rule.

Evidence Code, section 1271 provides as follows:

“Evidence of a writing made as a record of an act, condition, or event is not made inadmissible by the hearsay rule when offered to prove the act, condition, or event if:
(a) The writing was made in the regular course of a business;
(b) The writing was made at or near the time of the act, condition, or event;
(c) The custodian or other qualified witness testifies to its identity and the mode of its preparation; and
(d) The sources of information and method and time of preparation were such as to indicate its trustworthiness.”

In order for business records to meet the above elements for admission as an exception to the hearsay rule, either the person who created the documents, or an authorized custodian of the documents, or some “other qualified witness” must testify “as to the identity and mode of preparation of the documents.” The trial court has wide discretion in determining whether a “qualified witness” possesses sufficient personal knowledge of the “identity and mode of preparation” of documents for purposes of the business records exception. – This foundation requirement may be met by any “qualified witness,” meaning the witness need not be the custodian or the person who created the record.

Finally, based on the above, the Appellate Court found that there was no way for the particular declarant to know about Citibank’s business practice to form the foundation of the evidence presented!

Author’s comments: This is going to help a lot of pro se people fight credit card debt because most of the time, it is pursued by third parties similarly situated with Sierra but how does it affect bankruptcy practice?

The key here is that the Consumer’s testimony that he did not deny the account, but he testified that he did not recall any of the details of the purchases on or the accrued balance of the account was sufficient for the Appellate Court to shift the burden onto the creditor to prove the claim. So we should be able to file claim objections on the basis that our clients do not recall the particular purchases (assuming this is actually true). This would shift the burden onto the creditor thereby allowing us to successfully object to these claims.

Request for Admissions Are a Powerful Tool Which Should Not Be Taken Lightly

I found the following case very interesting because based on my limited experience, litigators tend to take a deny everything and admit nothing approach. But as the litigators here found out, this can be a dangerous game.

This is a quick summary based on the California Court of Appeals decision in TIMOTHY GRACE et al. vs. LEVIK MANSOURIAN et al. which was published on September 15, 2015. You can find the case here.

Defendants were served with requests for admissions seeking admissions on negligence, causation, and damages. Plaintiffs asked defendants to admit defendant failed to stop at the red light and that the failure was negligent, the actual and legal cause of the accident, etc.

Their response was to deny almost every request for admission. On the eve of trial, certain requests were admitted to through stipulation. Plaintiffs won the trial and filed a motion seeking to recover costs of proof under Code of Civil Procedure section 2033.420. The Court found defendants liable, in part, and awarded attorney fees and costs for the portion of the trial that could be earmarked towards proving certain requests for admissions that were denied by defendants.

It reasoned as follows. First, it found that the purpose of requests for admissions is

“… primarily aimed at setting at rest a triable issue so that it will not have to be tried. . . . For this reason, the fact that the request is for the admission of a controversial matter, or one involving complex facts, or calls for an opinion, is of no moment. If the litigant is able to make the admission, the time for making it is during discovery procedures, and not at the trial.”

It also held that,

“[S]ince requests for admissions are not limited to matters within personal knowledge of the responding party, that party has a duty to make a reasonable investigation of the facts before answering items which do not fall within his personal knowledge.”

So it concluded that

“When a party propounds requests for admission of the truth of certain facts and the responding party denies the requests, if the propounding party proves the truth of those facts at trial, he or she may seek an award of the reasonable costs and attorney fees incurred in proving those facts. (§ 2033.420, subd. (a).) The court is required to award those costs and fees unless it finds the party who denied the requests “had reasonable ground to believe [he or she] would prevail on the matter” or “[t]here was other good reason for the failure to admit.”

Based on the above, you would think that many of the games litigators play are prevented by this code sections; however, the Court also found that those amounts cannot be awarded if the parties stipulated to facts, even if the responding party had previously denied them.

Sometimes the State Court Gets it Right!

Instead of delving into the actual facts of In re Marriage of Walker, I will use similar facts as they will be easier to understand. You can find the actual case here.

House is worth $350,000 with a $150,000 1st priority lien. In a divorce proceeding, a judge will order the sale of the property with proceeds split evenly. Assuming no cost of sale, taxes, etc., this would mean husband is paid $100,000 and wife is paid $100,000.

The result should not be different if there was an intervening bankruptcy, or should it!?

Prior to the divorce, the wife had file for Chapter 7 bankruptcy and obtained a discharge. Her argument was that the discharge extinguished her personal liability for the first priority lien. Assuming the 1st lien could not be enforced against her, the proceeds would then need to be divided as follows:

Sale at $350,000. $175,000 to Wife, $175,000 to Husband and Husband obligated to pay 1st lienholder $150,000. So the division would be $175,000 to Wife and $25,000 to Husband!

She is right you know, she is not personally liable for the 1st mortgage. The state court judge agreed and she was awarded the $175,000. Part of the judge’s reasoning was that enforcement of the 1st lien against Wife could be a violation of the discharge injunction.

Fortunately for the Husband, there was a guru at the appellate court level who recognized that even though the Wife was no longer personally liable for the debt, the real property was! Enforcement of this obligation then, was not against wife but against Wife’s interest in the encumbered community property asset; an obligation not discharged by the bankruptcy.

The Court of Appeals reversed the trial court and all is as it should be.

Tenants Beware: Stipulation to Judgment May Be Treated as Res Judicata

This blog is a quick review of Needelman v. DeWolf Realty Company which was entered on July 21, 2015.

The tenant entered into a stipulated judgment that specifically provided that Tenant waived “any claims he may have, which [the lessors] assert do not exist, to bring an attempted wrongful eviction against [the lessors] or any action in any way arising out of or concerned with his tenancy…” and stated that Tenant “agrees that any of his personal property remaining in the unit after he vacates or is evicted therefrom shall be considered abandoned property, and [the lessors] shall be entitled to dispose of it without any notice to Tenant or his attorney.”

The res judicata doctrine is codified under Code of Civil Procedure § 1908. It provides that “a judgment or final order in an action or special proceeding” is conclusive as to “the matter directly adjudged.” It applies to situations where (1) the issues decided in the prior adjudication are identical with those presented in the later action; (2) there was a final judgment on the merits in the prior action; and (3) the party against whom the plea is raised was a party or was in privity with a party to the prior adjudication.

The Court found that the stipulated judgment in the unlawful detainer action had preclusive effect.

Author’s comment: This is an interesting twist as landlords have a lot of power when entering into these stipulations. For example, what if the landlord has the tenant stipulate that it waives any right to the states anti-forfeiture laws or that the property is not necessary to an effective reorganization? Would a bankruptcy judge then be forced to grant a relief from stay motion?

You can read the case here.