The Diaz case (In re Diaz, 547 B.R. 329, 9th Cir. BAP), has not received enough love but I find it to be too fascinating not to write about because of its potential for so much advantage!

There were essentially two holdings in the case:

  1. The California homestead exemption contains a “residence” requirement which includes an “intent” component; and
  2. The burden is on the Debtor to prove intent.

The intent component of the residence requirement requires that debtors have a bona fide intention to make the premises their home or residence.

Read more

April 2016 Dollar Adjustments

You can find the complete list here.   Notable changes for consumer lawyers:

  • Assisted Person is now someone with nonexempt property worth less than $192,450.
  • Chapter 13 Debtor debt limit: $394,725  secured and $1,184,200  unsecured.

These changes apply to cases that are filed on or after April 1, 2016.

New Chapter 13 MOMOD Pilot Program

This is from the master himself, Aki Koyama

Over the years, I’ve found that MOMODS are more successful and much more easier to process and comment on when I have an opportunity to discuss the terms of the MOMOD before it is filed. This way, your client’s MOMOD will reflect what the Trustee’s data base shows for delinquency, infeasibility etc. Also, we can discuss what kind of evidence the Trustee will require for a modification or suspension. Finally, there may be times when you want to propose an unusual modification and want some feedback from the Trustee before you even draft the MOMOD.

The ultimate goal of this pilot program is a more efficient system so that we can avoid unnecessary hearings, delay and frustration. I know it can be difficult to project what can be a moving target at times and to also determine what the Trustee will need to recommend approval of a MOMOD.

If you think that you will find this service useful and/or you have a particularly difficult modification proposal, please follow this procedure:

For Judge Klein, send me an email at akoyama@latrustee.com with the following in the subject line:

Debtor Name, Case Number and the phrase “MOMOD PREFILING REVIEW REQUEST” and the preferred date and time for the teleconference.

For Judge Bason, send Angela Gill an email at agill@latrustee.com with the same information in the subject line.

You don’t have to type anything into the body of the email and we will respond with a yes as to your date and time or with an alternate date and time.

In any case, please make certain that you take the initiative to call our office at the appointed time.

Comparison of Chapter 13 Plan Forms in the SD, CD and ND

Jon’s post here got me thinking about the attorney in the Southern District, who to me at least, seems to have committed malpractice by filing a bad Chapter 13 Plan.

The facts in the In re Schleger case, which you can read here, are dumb-bed down as follows: Chapter 13 Plan is filed where Debtors say they will pay 48% of unsecured claims. They know that they are about to void a 150k lien but they do not amend their plan to reduce the 48% or really do anything to deal with the claim. Five years passes and they want a discharge despite not paying anywhere close to 48% or amending their plan. That’s just a ridiculous position to take! But was it his fault or the system’s fault? This  case was an appeal from the Southern District which we will see has a confusing form.

If you look at a ND Cal. Chapter 13 plan, it has the following plan treatment for unsecured creditors:


Class 7: All other unsecured claims
.  These claims, including the unsecured portion of secured recourse claims not entitled to priority, total approximately $                .  The funds remaining after disbursements have been made to pay all administrative expense claims and other creditors provided for in this plan are to be distributed on a pro-rata basis to Class 7 claimants.

[select one of the following options:]

____     Percent Plan.  Class 7 claimants will receive no less than __% of their allowed claims through this plan.

____     Pot Plan.  Class 7 claimants are expected to receive __% of their allowed claims through this plan.

If you put a check next to Percent Plan, then you must either pay the percent or modify the plan. If you put a check next to Pot Plan, then you need to pay the Pot and not worry about the percent! Chapter 11 and 13 plans should make it clear they are pot plans whenever appropriate to do so!

Let’s look at the less clear SD Cal. Chapter 13 Plan:
Non-priority Unsecured Claims. After dividends to all other creditors pursuant to the plan, trustee may pay dividends pro-rata to claims allowed unsecured. Unsecured non-priority creditors will receive: ______________% or a pro-rata share of $_______________________, whichever is greater. (The dollar amount is the greater of (1) the nonexempt assets or (2) the applicable commitment period of 36 or 60 months multiplied by debtor’s projected disposable income).
If both the percentage and dollar amount are left blank, trustee is to pay 100% to unsecured creditors. If the percentage is left blank, trustee will pay the dollar amount to unsecured creditors. If the percentage is filled in at less than 100% and the dollar amount is left blank, trustee is authorized to increase the percentage if necessary to comply with the required applicable commitment calculation. 
I added some emphasis to this paragraph, It actually allows a pot plan or a percentage plan, the attorney has to fill int he appropriate boxes. In the BAP case, the attorney filled out the percentage portion — meaning the Debtors promised to pay the percentage. If the attorney had only filled out the second box, everything would have been okay.

Finally, looking at the CD Cal Chapter 13 Plan:
The Debtor estimates that non-priority unsecured claims total the sum of $_______________________.
My interpretation is that this is a default pot plan so the issue with respect to the percentage should not come up. Had this attorney been in the Central District of California, what amounts to, in my opinion, malpractice in the Southern District would not have been in the Central District.

The Northern District’s plan makes the most sense to me. It is abundantly clear that when a debtor puts the check mark next to “Pot Plan,” then the plan is a Pot Plan!

Pop Quiz! How Long After Entry Of Order Confirming A Plan Can The Order Be Revoked? Hint: It’s Not What You Thought!

If an order confirming a Plan of Reorganization is procured by fraud, how many days from entry of order does one have to ask the court to revoke the order?

The answer depends on which chapter of the Bankruptcy Code we’re talking about! In a Chapter 12 or Chapter 13 case, one would have up to the 180th day after the date the order was entered to seek revocation of the discharge. In a Chapter 11 case, one would have up to the 179th day after the date the order was entered to seek revocation. That is a pretty tough lesson to learn the hard way.

The District Court’s decision affirming Judge Ahart can be found here.

The basis of the decision was statutory analysis, compare §§ 1230 and 1330 with § 1144:

§ 1144 “On request of a party in interest at any time before 180 days after the date of the entry of the order of confirmation…”

§ 1230 “On request of a party in interest at any time within 180 days after the date of the entry of an order of confirmation…”

§ 1330 “On request of a party in interest at any time within 180 days after the date of the entry of an order of confirmation…”

Congress apparently intended confirmation orders in Chapter 12 and 13 cases to be revocable if revocation was sought within 180 days but reduced that time by 1 day for Chapter 11 cases.

My first thought was, why not seek revocation of the order under FRCP Rule 60(b)(3) which provides that

“On motion and just terms, the court may relieve a party or its legal representative from a final judgment, order, or proceeding for the following reasons … (3) fraud (whether previously called intrinsic or extrinsic), misrepresentation, or misconduct by an opposing party;”

The time limit under §60(b)(3) is a year:

“A motion under Rule 60(b) must be made within a reasonable time—and for reasons (1), (2), and (3) no more than a year after the entry of the judgment or order or the date of the proceeding.”

But the problem is FRBP 9024 overrides FRCP Rule 60:

“Rule 60 F.R.Civ.P. applies in cases under the Code except that …  (3) a complaint to revoke an order confirming a plan may be filed only within the time allowed by §1144,…”

In turn, FRBP 9024 is protected by FRBP 9006 which explicitly prohibits the Court from extending the time period in FRBP 9024:

“(2) Enlargement Not Permitted. The court may not enlarge the time for taking action under Rules … 9024.”

So what can be done? The Court may allow a party to seek damages caused by the fraud so long as any such award of damages is not an end run around confirmation of the plan.  The plan itself may contain provisions which allow the aggrieved party to obtain some sort of relief.

If any of you have alternate suggestions, please leave a note in the comment box.

As an aside:
The original case and adversary proceeding are: 1:13-bk-11804 | Amber Hotel Corporation; 1:14-ap-01113 | Little v. Amber Hotel Corporation.

It is a shame considering how good the Plaintiff writes, I LOVE a good statement of facts,

On the night of March 24, 2008, Mr. Martini was told by Mr. Post to drive to Malibu to meet Mr. Post in the middle of the night, at a time when there would be no other “witnesses.” When Mr. Martini arrived at Mr. Post’s offices, all the lights were off and Mr. Martini was directed to enter the premises from the rear of the building. Upon doing so, he found Mr. Post sitting in a darkened room lit by a solitary light. Mr. Post handed Mr. Martini several bundles of hundred dollar bills, totaling $100,000. Mr. Post told Mr. Martini that he could never mention this payment to Plaintiff, because—if he did—he was certain that Plaintiff would sue him.

Quick Blurb About Section 109(g)

Under 109(g), an individual (or family farmer) may not be a debtor if “(2) the debtor requested and obtained the voluntary dismissal of the case following the filing of a request for relief from the automatic stay provided by section 362 of this title

I tell my clients that if we move to voluntarily dismiss a case after a relief from stay motion is filed, there will be a 180 day bar to refiling. Something in my brain changed the word from “following” to “after.” It turns out that they do not mean the same thing.

Section 109(g) was added to prevent debtors from abusing the system by dismissing their cases right before a hearing on relief from stay could be heard and/or granted; thereby depriving the creditor from obtaining an adverse ruling. It was not designed to bar debtors from filing cases in situations where relief from stay was filed years earlier or if issues with respect to the RFS motion were handled.

The most obvious example is the case where RFS is filed and the Debtor wins. Why would there be a bar? So keep this in mind the next time the UST requests a bar because RFS had been filed!

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!