Section 523(a)(4) provides that:

(a) A discharge under section 727, 1141, 1228 (a), 1228 (b), or 1328 (b) of this title does not discharge an individual debtor from any debt— (4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.

The brief facts of this case are the following.  In 1978, Debtor's father established a Trust for his five children and made Debtor the trustee.  The sole asset of the Trust was an insurance policy, and the Trust allowed the Debtor to borrow against the policy.  Debtor subsequently borrowed money from the Trust and used the funds to purchase property and a mill for himself and his mother.  Debtor repaid the borrowed funds.

Debtor's siblings filed suit in state court, and the court held that Debtor breached his fiduciary duties in the self-dealing, albeit without malicious motive.  The court awarded damages of the "benefits he received from his breaches" plus attorneys fees and costs, and appointed BankChampaign as the constructive trustee of the properties and mill.  Debtor was unable to liquidate his interests to pay the judgment, and filed for Bankruptcy.  The Bank sought an exception to the Debtors discharge pursuant to section 523(a)(4) based on the alleged defalcation while acting in a fiduciary capacity. The Bankruptcy Court held in favor of the Bank, and the decision was affirmed by the District Court and the Eleventh Circuit (click here for Eleventh Circuit opinion).  Debtor appealed to the Supreme Court, contending that the debt should not be excepted from discharge absent ill intent or loss of trust principal.  As there was a disagreement on the issue among the lower courts, the Supreme Court granted the petition.

In resolving these differences, we note that this longstanding disagreement concerns state of mind, not whether “defalcation” can cover a trustee’s failure (as here) to make a trust more than whole. We consequently shall assume without deciding that the statutory term is broad enough to cover the latter type of conduct and answer only the“state of mind” question.

The Court then looked to precedent defining the term "fraud" for guidance"

In 1878, this Court interpreted the related statutory term “fraud” in the portion of the Bankruptcy Code laying out exceptions to discharge. Justice Harlan wrote for the Court:

 “[D]ebts created by ‘fraud’ are associated directly with debts created by ‘embezzlement.’ Such association justifies, if it does not imperatively require, the conclusion that the ‘fraud’ referred to in that section means positive fraud, or fraud in fact, involving moral turpitude or intentional wrong, as does embezzlement; and not implied fraud, or fraud in law, which may exist without the imputation of bad faith or immorality.”  Neal v. Clark, 95 U. S. 704, 709 (1878).

 We believe that the statutory term “defalcation” should be treated similarly.

Thus, where the conduct at issue does not involve bad faith, moral turpitude, or other immoral conduct, the term requires an intentional wrong. We include as intentional not only conduct that the fiduciary knows is improper but also reckless conduct of the kind that the criminal law often treats as the equivalent. Thus, we include reckless conduct of the kind set forth in the Model Penal Code. Where actual knowledge of wrongdoing is lacking, we consider conduct as equivalent if the fiduciary “consciously disregards” (or is willfully blind to) “a substantial and unjustifiable risk” that his conduct will turn out to violated fiduciary duty. ALI, Model Penal Code §2.02(2)(c), p.226 (1985). See id., §2.02 Comment 9, at 248 (explaining that the Model Penal Code’s definition of “knowledge” was designed to include “‘wilful blindness’”). That risk “must be of such a nature and degree that, considering the nature and purpose of the actor’s conduct and the circumstances known to him, its disregard involves a gross deviation from the standard of conduct that a law-abiding person would observe in the actor’s situation.” Id., §2.02(2)(c), at 226 (emphasis added).

 The Court held that such an interpretation does not make the term "defalcation" identical to its "statutory neighbors" (embezzlement, fraud, larceny) and that "defalcation," unlike "fraud," may refer to a non-fraudulent breach of fiduciary duty under the language of the statute.

In this case, the Eleventh Circuit applied a standard of "objective recklessness." The Supreme Court remanded the case "to permit the court to determine whether further proceedings are needed and, if so, to apply the heightened standard that we have set forth."

The relevant facts were undisputed:

Debtor owns real property .. which is subject to two security deeds. JPMorgan Chase Bank, NA purportedly holds or services the first priority security deed. The outstanding balance on its corresponding note is approximately $153,088.37. Citibank holds a valid second priority security deed on the Property and the balance on the corresponding note is approximately $32,197.36. The parties agree that the value of Property was $62,100.00.

The Debtor argued that § 506(a)(1) and (d) allowed them to strip the unsecured second lien pursuant to the 11th Circuit's opinion in In re McNeal. 

This is not a novel question of statutory interpretation; however, the parties disagree as to what caselaw is binding precedent on this court. The legal issue presented here is complicated by the recent unpublished decision entered by the Eleventh Circuit. In re McNeal, 477 Fed. Appx. 562 (11th Cir. 2012) (per curium). The unpublished nature of McNeal is used by each party in support of its argument for opposite outcomes.

Eleventh Circuit Rule 36-2 provides that an unpublished decision does not serve as binding precedent for lower courts. Of course, the McNeal opinion operates as persuasive authority. Debtor urges the court to adopt McNeal's rationale, which determined that the control-ling law in this circuit permits a chapter 7 debtor to "strip off" a wholly unsecured lien by relying on the holding in Folendore v. U.S. Small Business Administration, 862 F.2d 1537 (11th Cir. 1989). McNeal, 477 Fed. Appx. at 564-65. In contrast, Citibank asserts that McNeal is wrongly decided and that the intervening Supreme Court decision of Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992) prohibits voiding its junior security deed.

Judge Diehl did a very thorough analysis of the three cases and attempted to reconcile their holdings, which will not be repeated here, and concluded that deference should be given to the McNeal decision. 

The application of the prior panel precedent rule in McNeal is assessed with deference by this court. Yet, its application in an unpublished opinion where there is replete persuasive authority holding that Dewnsup is directly on point creates a predicament. As explained above, this court has struggled to reconcile McNeal and Dewsnup in deciding Debtor's motion. The legal analysis as set forth above and the principles underlying Dewsnup are compelling to this court.

Regarding the underlying principles, this court takes issue with Folendore's characterization that stripping a lien using § 506(d) -- when the value of the property is less than the senior lien--promotes the fresh start policy of bankruptcy. Folendore, 862 F.2d at 1540. In assessing this position, it is important to consider that chapter 7 provides relief for a debtor through liquidation, not reorganization. In a chapter 7, a debtor's options for treating property are limited to redemption, reaffirmation, or surrender. In re Taylor, 3 F.3d 1512, 1516 (11th Cir. 1993).

The issues presented by the parties in this action are identical to those arguments presented to the McNeal court. Although this court can not reconcile the Folendore and Dewsnup decisions with respect to the scope and application of § 506(d), deference to the Eleventh Circuit's McNeal decision ultimately tips the balance in favor of Debtor.

Judge Diehl granted the motion and the second lien was stripped.  In addition, Judge Diehl has provided a form order for use in future cases. 

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, creditor committees, trustees, court-appointed receivers and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here. 

In Williams v. Internal Revenue Service (In re Williams), Adv. Proc. No. 12-1027, 2013 Bankr. LEXIS 1107 (Bankr. M.D. Ga. March 15, 2013) (click here for .pdf), the debtors home was worth $210,000.00 and subject to a first-priority lien in the amount of $237,564.00.  The IRS held a second-priority tax lien on the property in the amount of $$77,588.51.  The debtors filed a proceeding to strip the wholly unsecured lien of the IRS.

On summary judgment, Judge Walker ruled in favor of the debtors based on the McNeal case, although he believes it was wrongly decided by the Eleventh Circuit.

Since the McNeal decision, only one bankruptcy judge in the Eleventh Circuit has published a decision on a Chapter 7 debtor's attempt to strip off a wholly unsecured lien. In re Bertan, No. 11-27057-BKC-AJC, 2013 WL 216231 (Bankr. S.D. Fla. Jan. 18, 2013) (Cristol, J.). In Bertan, the court noted that McNeal is unpublished and thus without precedental value. Id. at *2. It nevertheless followed McNeal ... This Court, too, will follow McNeal, even though the Court is persuaded McNeal was wrongly decided. McNeal and Folendore rely on application of § 506(a) prior to application of § 506(d) to void the wholly unsecured lien. However, § 506(a) serves no function in a no-asset Chapter 7 case. Logically, it should only apply when the case provides a distribution to unsecured creditors.  In such circumstances § 506(a) determines the extent to which an undersecured creditor will participate in the distribution. Nevertheless, the Eleventh Circuit has authorized strip off of a wholly unsecured claim pursuant to § 506(d). Although McNeal is not binding, the Court cannot simply ignore a decision of the Eleventh Circuit, especially one that holds that a prior published (and therefore precedental) decision remains good law. Therefore, the status of the IRS's lien determines whether Dewnsup applies or McNeal applies. If the IRS's lien is partially secured, Dewsnup prohibits strip down. If the IRS's lien is fully unsecured, Debtor's may rely on McNeal to void the lien.

In this case, the creditor UCB initiated the electronic filing of the complaint at 11:45 p.m. on the last day of the deadline (which had been previously extended). However, the experienced paralegal uploading the case ran into several difficulties with the computer freezing, leading to the complaint not being filed until 12:02:44 a.m.  The following day UCB's counsel communicated with the Clerk's office, but the Clerk declined to enter a "Notice of Technical Difficulties" as the Clerk's computer system was functioning properly.  UCB did not take any further steps to obtain an order rectifying the untimely filing due to technical failure or to use the alternative method of sending the document by facsimile before the deadline. See  LR, N.D.Ga., Appendix H, Ex. A, § II(H).  Based on these facts, the debtor moved to dismiss the untimely complaint.

Judge Drake granted the Motion and dismissed the case.

The dictates of the Code and Rules are clear. It is not our place to change them. Under Rule 4007(c), any motion to extend the time period for filing a dischargeability complaint must be made before the running of that period. There is almost universal agreement that the provisions of F.R.B.P. 4007(c) are mandatory and do not allow the Court any discretion to grant a late filed motion to extend time to file a dischargeability complaint.

The U.S. Supreme Court's subsequent ruling in Kontrick v. Ryan, 540 U.S. 443 (2004) did not change the outcome.  In that case, the Court, responding to the debtor's argument that the Bankruptcy Court did not have subject matter jurisdiction over an untimely filed proceeding,  held that the applicable Rules did not "create or withdraw federal jurisdiction" and are no more than "claim processing rules that do not delineate what cases bankruptcy courts are competent to adjudicate."

Although other courts have held that Byrd was abrogated by Kontrick, Judge Drake disagreed for three primary reasons.

1. "The holding in Byrd is not premised on Rule 4007(c)'s deadline being jurisdictional. As a matter of fact, the word "jurisdiction" makes no appearance in the entire Byrd opinion."
2. "The development of Rules 4007 and 9006 provide strong evidence that the deadlines associated with the rules were intended to be as hard and fast as possible."
3. "The Kontrick Court specifically declined to address whether its ruling permitted equitable tolling."

Under controlling Eleventh Circuit precedent, when the Supreme Court is not "clearly on point," prior decisions by the Eleventh Circuit that are on point continue as good law. See In re McNeal, 477 Fed.Appx. 562, 564 (11th Cir. 2012) ("Under our prior panel precedent rule, a later panel may depart from an earlier panel's decision only when the intervening Supreme Court decision is 'clearly on point.'" ... Because Kontrick is not clearly on point, and in fact avoids the question before the Court today, Byrd is still good law and, thus, binding on this Court.

While the Court held that the deadline was firm, Judge Drake also addressed the equitable argument raised by UCB and found that even if equitable tolling was an issue, UCB would not have prevailed even though the complaint was filed only two minutes late.

Plaintiff's best argument is that computer error resulted in "extraordinary circumstances" beyond its control. This is not very persuasive. The Plaintiff admits that settlement negotiations ended on October 25, 2012, and yet, the Plaintiff waited until the night of November 19, 2012 (25 days later) at 11:45 P.M. to begin uploading the complaint to the CM/ECF system. There is nothing "extraordinary" about computer "freezes." This is an event that happens everyday in both commercial and personal environments, and is the reason that modern computers have automatic file back-ups, and that nearly all commercial and governmental databases are backed up at external locations. Had the Plaintiff been a hair more diligent and prepared for just such an eventuality, this matter would not be at issue today. The Court finds it hard to accommodate a creditor's request for equitable tolling of a hard and fast deadline when that creditor sat on its hands and waited until the last moment to meet said deadline.

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, creditor committees, trustees, court-appointed receivers and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here. 

In Trauner v. State Bank and Trust Company (In re Solid Rock Development Corp., Inc.), Ch. 7 Case No. 10-72777, Adv. Proc. No. 12-5238, 481 B.R. 221, 2012 Bankr. LEXIS 4845 (September 27, 2012) (click here for .pdf),  SB&T received relief from the automatic stay to foreclose on the Debtor's real property.  The Order lifting the stay stated the following:

The automatic stay of 11 U.S.C. § 362 of the Bankruptcy Code is modified to
allow SB&T to exercise its rights and remedies under applicable law, including
foreclosure of its security interest in the Property, promptly accounting to the
Trustee for any proceeds received in excess of the lawful claim of SB&T.

SB&T conducted a foreclosure sale and credit bid the outstanding balance of its debt, $2,025,182.00.  The bid amount included $262,386.87 in statutory attorney's fees.  The Chapter 7 Trustee sought turnover of the amount of attorneys fees "charged" by  SB&T over and above its "reasonable fees." 

The Trustee argues this case is governed by the Eleventh Circuit decision in [Welzel v. Advocate Realty Invs. (In re Welzel), 275 F.3d 1308 (11th Cir. 2001).] , where the court held that, notwithstanding the provisions of the contract or the provisions of O.C.G.A. § 13-1-11, the creditor was limited under Section 506(b) to the recovery of reasonable attorney’s fees. 275 F.3d at 1315. The Trustee therefore argues that SB&T could not recover statutory attorney’s fees through its foreclosure sale. The Trustee argues further that the credit bid by SB&T of the statutory fees constitutes a cash bid in excess of the allowable claim of SB&T, and SB&T must therefore pay to the Trustee the amount of the credit bid in excess of the allowable claim.

SB&T, conversely, argued that once the stay was lifted the Bankruptcy Court no longer had jurisdiction to determine whether there were excess proceeds to be paid to the Trustee, and it can collect the entire amount of statutory fees allowed by state law. 

The Judge held that the Bankruptcy Court had continued jurisdiction over the issues, including surplus funds received at the foreclosure sale, and that SB&T's secured claim was limited to "reasonable" fees pursuant to § 506(b).

Since both the real property and the surplus remain property of the estate, Section 506(b) continues to govern the amount of SB&T’s secured claim...

 The Court noted that its opinion addressed only the allowability if the secured claim.

The Trustee argues that Welzel and Section 506(b) preempt state law regarding attorney’s fees. The Court believes the Trustee overstates the case. The only portion of bankruptcy law  that “preempts” state law is the allowability of the statutory fees to an oversecured creditor as part of its secured claim in the bankruptcy case. The preemption is not as to attorney’s fees in general, or as to the recoverability of those fees from parties other than the Debtor. Nevertheless, the Trustee is correct that Welzel holds Section 506(b) limits the amount of attorney’s fees that are part of a secured claim.

The Court holds that the Welzel analysis applies in determining whether a surplus exists after foreclosure vis a vis a bankruptcy estate as long as the surplus remains property of the estate. It is important to note here that the property was never abandoned, either by notice or by operation of the closing of the case. Moreover, the stay relief order specifically reserved the right of the Trustee to the surplus and therefore the estate’s interest in the surplus. Consequently, the Bankruptcy Code continues to apply in determining the extent of that surplus.

Furthermore, this holding is consistent with the way secured lenders are treated throughout the bankruptcy case. There is no doubt under Welzel and Section 506(b) that SB&T’s secured claim would be limited to the amount of actual, reasonable attorney’s fees if the Trustee had sold the Property. Moreover, there is no doubt that, if the sale were held under 11 U.S.C. § 363 and SB&T chose to credit bid, the amount of the credit bid would be limited to actual, reasonable attorney’s fees. 11 U.S.C. § 363(k). There is, therefore, no reason to treat the determination of the surplus claim, which is also property of the estate, any differently. 

 The Court did not grant judgment for the Trustee, as factual issues remained.  This included whether SB&T actually received a windfall after its credit bid (if the property was worth less than the bid amount) and the "reasonable" fees of SB&T. 

The Trustee has made his prima facie case that the value of the Property equals the amount credit bid. The burden now shifts to SB&T to show that the value is less than the amount bid in. Still, the Trustee has the ultimate burden of establishing by a preponderance of the evidence his right to a refund.

We may or may not find out the answers to those questions, as the Trustee has appealed the Order. The Trustee contends in his Motion for Leave to Appeal (click here for .pdf) that the Court was in error in holding that SB&T did not necessarily reflect the extent to which SB&T recovered fees in excess of the reasonable fees allowed by § 506(b).  The Trustee believes that under well-settled state law, SB&T should be deemed to have received the entire amount of its credit bid, and thus liable to turn over the excess fees (whatever they may be) to the Trustee.  It will be interesting to see how this appeal proceeds. Theoretically, should the Trustee prevail, not only could SB&T get a property worth less than the loan balance it could also be liable to the Trustee for a significant amount of money ($200,000 or so, the Trustee contends).

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, creditor committees, trustees, court-appointed receivers and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here. 

In In re Roberts, Ch. 13 Case No. 11-60690, 2013 Bankr. LEXIS 631 (Bankr. S.D. Ga. January 24, 2013) (click here for .pdf), the debtor probably got off light.  The debtor initially filed a Chapter 7 case, but subsequently converted to a Chapter 13.  In his initial Chapter 7 Schedule I, Debtor listed his non-filing spouse's occupation as a "homemaker" with no income.  Two months after filing, debtor's spouse got a job as a substitute teacher but the debtor did not amend his schedules.  A few months later the debtor amended his schedules in conjunction with the conversion to Chapter 13, but his amended Schedule I again stated his spouse was a homemaker with no income.  The "error" finally came to light 10 months after the case was filed when the debtor filed a motion for approval to purchase a house (presumably, when it was beneficial to disclose the additional income).  The Chapter 13 Trustee moved to dismiss.

The Court granted the motion and barred the debtor from re-filing for 180 days.

Notwithstanding the number and variety of possibly relevant factors, "the easiest way to fail the good faith test. . . is for a debtor to 'misrepresent, lie or otherwise mislead the court.'" ...That is precisely what has happened here.

Roberts tried to game the system. He failed to disclose his wife's part-time income at two different junctures: when she first began substitute teaching and when the case was converted. Further, he failed to disclose on his Amended Schedule I the reasonable anticipation of an increase in household income when he knew that chances were good his wife would be working full-time within the next few months.

Roberts, who attended college and is employed as a manager, testified that he was not aware of the requirement to disclose changes in total household income until he filed the motion to incur debt. I find that testimony not credible.

When a debtor misrepresents, lies, or otherwise misleads the court, there is no "Oops defense." ...Here, Roberts had an additional $20,000 in household income during the first five months of 2012 that he did not disclose. Failure to disclose $20,000 is not an "oversight," as Roberts' attorney characterized it. Roberts has therefore failed to meet his burden to prove the Plan was proposed in good faith under § 1325(a)(3).

"Failure to make accurate disclosure in bankruptcy documents, making fraudulent representations to the court, or an unfair manipulation of the Bankruptcy Code is sufficient cause for dismissal." ... Here, the Trustee has conclusively shown that Roberts failed to make accurate disclosure in his bankruptcy documents; the Trustee has thus met the burden of proof for dismissal of the case under § 1307(c).

IT IS THEREFORE ORDERED that the chapter 13 case of Aaron S. Roberts is DISMISSED WITH PREJUDICE, barring refiling for a period of 180 days from the date of this Order.

Had the case remained in Chapter 7, it is possible, if not likely, the Chapter 7 Trustee or United States Trustee would have filed an adversary proceeding to deny or revoke the debtor's discharge, which essentially would have acted as a permanent bar of the discharge of his debts up to that point pursuant to §523(a)(10).  He could also have been prosecuted for the federal crime of bankruptcy fraud.

The Court, in short, held that deeds that are not signed by an unofficial witness are not eligible for recording and, if recorded, do not constitute proper notice to put a hypothetical bona fide purchaser (such as a Bankruptcy Trustee) on inquiry notice of the deed.  The effect of this opinion (and the U.S. Bank opinion discussed below) is unclear at this point, but the Georgia Supreme Court has made it clear that the rules regarding deeds are subject to a strict compliance standard and deeds not in compliance are not eligible for recording.  There is little doubt that many Bankruptcy Trustees in Georgia will begin to closely inspect deeds filed with respect to property of bankruptcy estates.  If a security deed is defective, the lien may be avoided and the property sold for the benefit of all creditors.

In this case, the Debtor executed a Security Deed with Wells Fargo in 2006, and it was recorded with the Fulton County Superior Court Clerk on October 13, 2006.  The Security Deed was signed by the Debtor, the co-debtor on the loan and a notary.  However, the line for the official witness was left blank.  Another document, the "Waiver of Borrower's Rights," which expressly stated that it was incorporated in and made part of the Security Deed, was signed by the Debtor, non-debtor, notary and an unofficial witness.  

In June 2008 the Debtor filed a Chapter 7 Bankruptcy. The Chapter 7 Trustee then sued Wells Fargo to avoid Wells Fargo's interest in the property pursuant to 11 U.S.C. § 544 based on the Security Deed's lack of the signature from an unofficial witness.  The Bankruptcy Court, in an opinion discussed here, granted judgment in favor of the Trustee. The District Court affirmed the judgment and the Eleventh Circuit subsequently certified the questions to the Georgia Supreme Court.

The following questions were certified to the Court:

1. Whether a security deed that lacks the signature of an unofficial witness should be considered "duly filed, recorded, and indexed" as required by OCGA §44-14-33, such that a subsequent bona fide purchaser would have constructive notice when the deed incorporates the covenants, terms, and provisions of a rider that contains the attestations required by OCGA §44-14-33 and said rider is filed, recorded, and indexed with the security deed?

2. If the answer to question one (1) is in the negative, whether such a situation would nonetheless put a subsequent hypothetical bona fide purchaser on inquiry notice?

In order to admit a mortgage to record, it must be attested by or acknowledged before an officer as prescribed for the attestation or acknowledgment of deeds of bargain and sale; and, in the case of real property, a mortgage must also be attested or acknowledged by one additional witness. In the absence of fraud, if a mortgage is duly filed, recorded, and indexed on the appropriate county land records, such recordation shall be deemed constructive notice to subsequent bona fide purchasers.

O.C.G.A. § 44-14-33 (emphasis added).  In a previous case, U.S. Bank, N.A. v. Gordon, 289 Ga. 12, 15 (2011) (see discussion of this case here), the Court held that  "a security deed is ‘duly filed, recorded, and indexed’ only if the clerk responsible for recording determines, from the face of the document, that it is in proper form for recording, meaning that it is attested or acknowledged by a proper officer and (in the case of real property) an additional witness” and that a deed not properly attested is ineligible for recording.   

The Court therefore held that "because the eight-paged security deed lacked the signature of an unofficial witness, it was not in recordable form as required by O.C.G.A. § 44-14-33 and did not provide constructive notice"

The Court disagreed with Wells Fargo's argument that because the Waiver was properly signed, and incorporated in the Security Deed, the Security Deed was in recordable form.  The Court quoted the Bankruptcy Case of In re Fleeman, 81 B.R. 160 (M.D. Ga. 1987) in rejecting the argument:

By attesting a document, an individual signifies that he has witnessed the execution of the particular document. Black's Law Dictionary 117 (5th ed. 1979) (citations omitted). Thus the
signature of [the unofficial witness], which appears on the adjustable rate rider, attests to the proper execution of that document only. Although the adjustable rate rider is incorporated into the terms of the deed to secure debt, the deed to secure debt itself remains improperly attested and ineligible for recordation.

81 B.R. at 163.  The Georgia Supreme continued:

As in Fleeman, the attestation of the waiver in this case cannot be substituted for the proper attestation of the security deed. Such a construct would be false and contrary to the purpose of attestation, namely for the witness to verify that the document in question has been executed by the signatories. Allowing a more lenient rule as Wells Fargo urges would likely lead to more complications than it would resolve for lenders, debtors, and subsequent purchasers alike. As we admonished in U.S. Bank N.A. v. Gordon, supra, 289 Ga. at 17, it costs nothing for lenders or their agents to review their paperwork to make sure the proper signatures are in place before submitting documents to the superior court clerk for recording.  Accordingly, we answer the first certified question in the negative.

 See also O.C.G.A. § 23-1-17. 

In this case, while the waiver identifies the lender and grantors (debtor and co-debtor), it only generically references a security deed and fails to identify or describe the property purportedly to be conveyed or encumbered  by  the  referenced  security  deed.  In the  total  absence  of identification or description of the property subject to the security deed, the waiver itself would not place a bona fide purchaser on notice that he should make further inquiry.  Accordingly, we answer the second certified question in the negative.

Thanks to Michael Holbein, attorney for Chapter 7 Trustee Neil Gordon, for pointing out this opinion.  Michael was counsel to the Trustee in this case and U.S. Bank, N.A. v. Gordon, both of which were significant opinions in Georgia and victories by the Trustee.

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, creditor committees, trustees, court-appointed receivers and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here. 

In In re Webb, 484 B.R. 501,  2012 Bankr. LEXIS 5736 (Bankr. M.D. Ga. Dec. 12, 2012), the Debtor was diagnosed with congestive heart failure in July 2007.  He subsequently filed a Chapter 7 case in January 2009 and was subsequently discharged in June 2009.  The Debtor later became aware of a class action lawsuit from a television commercial over medication he took from 2006-2008, and entered into a confidential settlement.  The Trustee moved to reopen the Chapter 7 case to administer the settlement proceeds as property of the Chapter 7 estate.

In an October 2012 opinion, the Court applied the discovery rule and held that the claim did not accrue until after the Debtor became aware of the claim and, therefore, it was a post-petition asset. See  In re Webb, 482 B.R. 669 (Bankr. M.D. Ga. October 12, 2012).  The Trustee moved for reconsideration of the order. 

The Court granted the motion and reversed its earlier ruling, not based on the Trustee's arguments but based on the Court's own research and apparent changed view of Eleventh Circuit authority (after the jump).

The Court's decision to reconsider and grant the motion to reopen comes from the Court's reassessment of Johnson v. Alvarez (In re Alvarez), 224 F.3d 1123 (11th Cir. 2000), a decision neither the trustee nor the pro se debtor discusses in the briefs. The issue in Alvarez was ownership of a professional malpractice lawsuit to which the discovery rule would apply under Florida law. As mentioned in the first opinion on this issue, Alvarez contains language strongly suggesting the discovery rule is not applicable when determining whether a lawsuit is estate property. The court states that "accrue" in the statute of limitations context is "irrelevant" and that "a cause of action can accrue for ownership purposes in a bankruptcy proceeding before the statute of limitations begins to run." Id. at 1273 n.7. As explained more fully in the Court's first Webb opinion, the Court questions the reasoning and conclusions in Alvarez. See In re Webb, 2012 Bankr. LEXIS 4816, 2012 WL 4857042, at *4-5. First, the court in Alvarez states that "accrue" under statutes of limitations is irrelevant, but to determine when the lawsuit at issue accrued, the court uses a definition of "accrue" in another section of the Florida statute of limitations—forgoing "accrue" under the discovery rule for "accrue" under the general statute of limitations. In other words, statutes of limitations are irrelevant, but some statutes of limitations are more relevant than others. Second, the Court believes that, given the Eleventh Circuit's subsequent opinion Witko v. Monette (In re Witko), 374 F.3d 1040 (11th Cir. 2004), the Alvarez opinion would likely look very different, for a number of reasons, if decided today.

Judge Laney pointed out that the relevant language in Alvarez was dicta, which was persuasive but not binding. 
 

While the Court looks at Eleventh Circuit dicta as strong authority, the Court gives more or less weight to dicta depending on how persuasive the reasoning is. The Eleventh Circuit's reasoning on this matter isn't clear, given the conflicting treatment of statutes of limitation, and the opinion as a whole has questionable continuing validity, given the Eleventh Circuit's reasoning in Witko.

However, after further consideration, Judge Laney concluded that the relevant language in Alvarez was critical to the holding in the case and, therefore, should be given more weight.

The alleged malpractice was advising and filing a Chapter 7 bankruptcy instead of a Chapter 11 bankruptcy and failing to convert, resulting in the trustee selling assets at a price disagreeable to the debtor. See In re Alvarez, 224 F.3d at 1275; In re Alvarez, 228 B.R. 762, 763 (Bankr. M.D. Fla. 1998). The fight over ownership of the claim (malpractice arising from mishandling a bankruptcy case) occurred in the very bankruptcy proceeding that was the subject of the malpractice claim. Under these facts, the debtor necessarily discovered the injury and cause postpetition. The discovery rule not applying is essential for the holding—that the cause of action accrued as of the filing and thus was property of the estate—because there is no logical way the discovery rule could apply and the Court's holding stay the same. Because In re Alvarez is binding on this Court, and thus all necessary elements of that decision are binding on this Court, the Court can only conclude that the discovery rule does not apply to the present circumstances. The Court will look to whether the elements of the product liability claim occurred before or after filing. It is undisputed that everything, except for knowledge of cause, occurred prepetition. The Court thus holds that the product liability claim accrued prepetition and is estate property.

The proceeds of the settlement, therefore, became property of the Chapter 7 estate.  The settlement amount is not disclosed as the Debtor had entered into a confidentiality agreement.  Whether the amounts to a meaningful distribution to creditors is not clear, but the holding may have the affect of Trustee's reopening closed cases when causes of action are discovered by either debtors or the Trustee.

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, creditor committees, trustees, court-appointed receivers and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here. 

In the 29-page study, Lawless and colleague Jennifer Robbennolt said they told participating judges about the Millers, a fictional family of four with a $180,000 home, $25,500 in credit card debt and a $26,000 Ford Explorer SUV. Their credit card debt ranged from $9,000 for the husband’s medical expenses to $270 per month spent on their two daughters, ages 10 and 13, for gymnastics.

At the end of their Chapter 13 payment plan, which paid unsecured creditors 18% of their debt over three years, the Millers wrote, “We have no way of keeping up with our bills and repaying everything. It is all we can do to pay the mortgage and keep food on the table. We know that we are responsible for the mess we are in. We are truly sorry.”

(emphasis added).  The results of the study reflected that 40.6% of judges who had the plan with the apology approved the plan while only 34.4% of judges who received the version without the apology approved the plan.Judges who heard the apology apparently believed the family would me more likely to manage their finances going forward.

With Chapter 13 having so many stringent, if not draconian, requirements for plans, maybe adding an apology at  the end will make a difference. Something tells me it won't help as much in Chapter 11 plans, but maybe it is worth an extra section in the Disclosure Statement in an individual Chapter 11 case.

(A) Subject to subparagraph (B), the requirements of paragraph (1) shall not apply with respect to a debtor who submits to the court a certification that—

(i) describes exigent circumstances that merit a waiver of the requirements of paragraph (1);
(ii) states that the debtor requested credit counseling services from an approved nonprofit budget and credit counseling agency, but was unable to obtain the services referred to in paragraph (1) during the 7-day period beginning on the date on which the debtor made that request; and
(iii) is satisfactory to the court.

Judge Diehl held that the imminent foreclosure scheduled for the same day constituted exigent circumstances that merited the waiver.

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, creditor committees, trustees, court-appointed receivers and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here. 

A discharge under section 727, 1141, 1228 (a), 1228 (b), or 1328 (b) of this title does not discharge an individual debtor from any debt—

(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for—

(A)  (i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or
(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or

(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.

Although there are fewer cases on point, the statute also includes loans for a private day school for a debtor's children.  In The Rabbi Harry H. Epstein School, Inc v. Goldstein, Adv. Proc. No. 12-5186, 2012 Bankr. LEXIS 6034 (Bankr. N.D. Ga. November 26, 2012)(J. Diehl), the debtor had three minor children who attended the day school.  Debtor entered into a standard contract to pay tuition and fees for each child, in the amount of $42,270.  Debtor subsequently entered into an agreement with the school to pay over time due to his financial circumstances. 

Debtor argued that the arrangement should not be characterized as a loan or financing of tuition.  Judge Diehl, using the common law meaning of the term "loan," held that the agreements did constitute education loans.

First, the Alternative Terms constitute a valid contract. The Alternative Terms created a legal obligation between the parties where the Debtor agreed to pay the School the remaining balance of the tuition and fees, plus a $200 financing fee, over a 10-month period in exchange for his children attending the School for the 2011-12 academic year before he completed his payments. In fact, Debtor admitted in his Answer "[t]he Enrollment Contracts, as modified or supplemented by the Alternative Terms, constitute contracts between Epstein, on one hand, and Mr. Goldstein and [the children's mother], on the other hand." (Answer,¶ 31).

Second, the School provided a "defined quantity of" educational services, namely one academic year of private schooling, to the Debtor's children under the Alternative Terms. It is undisputed the Debtor's children consumed these educational services by attending the accredited School. (Answer, ¶¶ 4, 11). Therefore, the second requirement of a common law loan - that one party transferred "a defined quantity of money, goods, or services, to another" - is satisfied...Third, the Debtor agreed under the Alternative Terms to pay the remaining tuition and fees "at a later date" through an installment payment plan that extended over several months.

 The Court also held that the debt was excepted from discharge.

Section 523(a)(8)(A) exempts from discharge all educational loans, not just loans for higher education. Even though the loan incurred by Debtor financed his children's primary education from a private day school, it is still excepted from discharge under § 523(a)(8)(A). Congress expanded the scope of § 523(a)(8) over the years, broadening its application from higher education loans exclusively to educational loans generally...  Congress deleted the clause "higher education" from § 523(a)(8) in 1984, "eliminat[ing] the inference that the section applied only to nonprofit institutions associated with higher education." ... Congress amended the section again in 2005 as part of The Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA") by separating clauses § 523(a)(8)(A)(i) and (ii), broadening again the "range of educational benefit obligations" covered by the section due to the expansive language of § 523(a)(8)(A)(ii)...

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, creditor committees, trustees, court-appointed receivers and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here. 

In  In re Jerath Hospitality, LLC, 484 B.R. 245, 2012 Bankr. LEXIS 5798 (Bankr. S.D. Ga. Dec. 18, 2012) (Barrett) the Debtor proposed a Chapter 11 Plan that amortized the priority claim of the Georgia Department of Labor over 48 monthly installments, with a lump sum payment due prior to the 60th month after the petition date.  The issue before the Court was whether the Bankruptcy Code allowed balloon payments or whether a debtor must make regular, uniform payments.

Section 1129(a)(9)(C) of the Bankruptcy Code provides the following:

 (9) Except to the extent that the holder of a particular claim has agreed to a different treatment of such claim, the plan provides that—

(C) with respect to a claim of a kind specified in section 507 (a)(8) of this title, the holder of such claim will receive on account of such claim regular installment payments in cash —

(i) of a total value, as of the effective date of the plan, equal to the allowed amount of such claim;
(ii) over a period ending not later than 5 years after the date of the order for relief under section 301, 302, or 303; and
(iii) in a manner not less favorable than the most favored nonpriority unsecured claim provided for by the plan (other than cash payments made to a class of creditors under section 1122 (b))...

 11 U.S.C. §1129(a)(9)(C) (emphasis added). 

As detailed in In re F.G. Metals, Inc., 390 B.R. 467 (Bankr. M.D. Fla. 2008), the phrase "regular installment payments in cash" was added as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA") to replace "deferred cash payments over a period not exceeding six years after the date of assessment of such claim, of a value, as the effective date of the plan equal to the allowed amount of such claim." 

The District Court in the F.G. Metals case affirmed the Bankruptcy Court's holding that balloon payments were not prohibited.

A plain reading of the statute indicates that 'regular' is not the same as 'equal.' 'Regular installment payments' means payment made on a recurrent basis over a period of time. Monthly payments are regular payments. There is nothing in the plain reading of the statute that would indicate that monthly payments, followed by a balloon payment, is not an appropriate payment method under the Code. If Congress wanted to say 'equal payments,' it could have done so. If Congress had wanted to say 'no balloon payments,' it could have done so.

In re F.G. Metals, 2008 U.S. Dist. LEXIS 111451,  *2 (M.D. Fla. Sept. 4, 2008).

Judge Barrett similarly found that had Congress wanted to provide for equal monthly installments in the BAPCPA it knew how to do so, as evidenced by the amended 11 U.S.C. §1325(a)(5)(B)(iii)(I). Further, legislative history revealed that Congress actually considered amending §1129(a)(9) to expressly prohibit balloon payments to tax claimants, but the proposed amendments were not adopted.

For the reasons set forth above, Judge Barrett held that balloon payments for tax claimants in Chapter 11 plans were not prohibited by the Code.

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, creditor committees, trustees, court-appointed receivers and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here. 

8:00 am – 8:50 am
Registration and Breakfast

8:50 am - 9:00 am
Introduction

Dean Robert Schapiro, Emory University School of Law

9:00 am – 10:30 am
Corporate Panel: Municipal Restructuring

Moderator: Gary Marsh,  McKenna Long & Aldridge LLP

Patrick Darby, Partner, Bradley Arant Boult Cummings 

Mark Kaufman, Partner, McKenna Long & Aldridge LLP 

Marc Levinson, Partner, Orrick

Eric Schaffer, Partner, Reed Smith

10:30 am – 10:40 am
Break and Refreshments

10:40 am – 12:10 pm
Consumer Panel: Fiduciary Exceptions to Discharge with a Focus on Defalcation

Moderator: Ed Philpot, Executive Managing Editor, EBDJ 

The Honorable Paul W. Bonapfel, US Bankruptcy Court for the Northern District of Georgia

John A. Thomson, Jr., Womble Carlyle Sandridge & Rice, LLP

Richard Thomson, Clark & Washington, P.C.

12:15 pm
Buffet Lunch

CLE and Fees

Symposium attendance qualifies for three general Georgia CLE credit hours.

The registration fee of $75 includes CLE fees, breakfast, break refreshments, buffet lunch, and parking. Fees are not applicable to judges, law clerks, and a limited number of attorneys employed by named sponsors.

If you are an attorney employed by a named sponsor, please contact Yvana Mols to register.

Click here for online registration. Online registration is available until February 24. Registration with cash or check is also available on the day of the symposium. 

Location

Tull Auditorium
Emory University School of Law
1301 Clifton Road, NE
Atlanta, GA 30322
Map and Directions

Parking

Click here for important parking information.

Questions

If you have any questions about the symposium, please contact Yvana Mols.

We look forward to your attendance,

Yvana Mols
Executive Symposium Editor

Debtor subsequently filed a Chapter 13 bankruptcy petition. Movant then sought an order from the Bankruptcy Court declaring that the automatic stay was not applicable pursuant to 11 USC § 362(b)(22). 

Judge Bonapfel disagreed with the Movant and held the exception was not applicable.  Section 362(b)(22) provides that § 362 does not operate as a stay ...

... of an eviction action that seeks possession of the residential property in which the debtor resides as a tenant under a lease or rental agreement based on endangerment of such property or the illegal use of controlled substances on such property, but only if the lessor files with the court, and serves upon the debtor, a certification under penalty of perjury that such an eviction action has been filed, or that the debtor, during the 30-day period preceding the date of the filing of the certification, has endangered property or illegally used or allowed to be used a controlled substance on the property.

(emphasis added).

Judge Bonapfel ruled that under the plain language of the Code, a landlord-tenant relationship is required between a movant and the debtor for the exception to apply and there was no evidence of such a relationship.

The Court concludes that the facts as asserted by the Movant do not give rise to a right to relief under § 362(b)(22). Although SPT obtained a prepetition writ of possession, it is not founded on a landlord-tenant relationship with the Debtor as the plain language of § 362(b)(22) requires. There is no allegation or evidence that SPT is a lessor of the Property to the Debtor or any other party...

It is entirely possible that this Debtor's bankruptcy filing is a calculated attempt to further delay the lawful eviction of persons from the Property. The possibility of an abusive filing is further indicated based upon the lack of an original signature on the petition. Notwithstanding these circumstances, the Court cannot ignore the plain and explicit terms of § 362(b)(22)'s requirement of a landlord-tenant relationship. As a result, § 362(b)(22) is inapplicable to the facts of this case. SPT may seek relief from the automatic stay pursuant to 11 U.S.C. § 362(d) and any other remedies to prevent an abusive filing it deems appropriate, subject to notice and a hearing.

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, creditor committees, trustees, court-appointed receivers and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here. 

In re Mack, Ch. 13 Case No. 10594-whd, 2012 Bankr. LEXIS 5988 (Bankr. N.D. Ga. September 11, 2012) (Drake).  The basic facts are as follows.  Debtor's Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income (Official Form 22C) disclosed that her gross monthly income for the six month pre-petition period was $2026.00 and her non-filing spouse's gross income was $3,918.00.  On Line 13 of Form 22C (the "Marital Adjustment"), Debtor deducted her spouse's monthly tax withholding of $624 and his 401(k) contribution of $117.00. Because the Debtor's Current Monthly Income ("CMI") fell below the Georgia median income for a family of four, the Debtor proposed a plan with an Applicable Commitment Period ("ACP") of only 36 months pursuant to 11 U.S.C. § 1325(b)(4). 

The Chapter 13 Trustee objected and moved to dismiss. The Trustee first objected that the marital adjustment is not permitted in calculating the ACP so Debtor should propose a 60 month plan.  Second, the Trustee objected to the deductions for the spouse's withholding taxes and 401(k) contributions.

Judge Drake overruled the Trustee's objections and denied his Motion to Dismiss.

The question before the Court is how to calculate the income of a married debtor with a non-debtor spouse for purposes of determining the ACP. Under section 1325(b)(4), the ACP is a function of comparing "the current monthly income of the debtor and the debtor's spouse combined, when multiplied by 12," to the applicable median income...

Section 101(10A) defines "current monthly income" as "the average monthly income from all sources that the debtor receives (or in a joint case the debtor and the debtor's spouse receive) without regard to whether such income is taxable income, derived during the 6-month period" prior to the filing of the debtor's petition "and includes any amount paid by any entity other than the debtor (or in a joint case the debtor and the debtor's spouse), on a regular basis for the household expenses of the debtor or the debtor's dependents (and in a joint case the debtor's spouse if not otherwise a dependent). . . ." 11 U.S.C. § 101(10A) (emphasis added). When the debtor is married, but the debtor's spouse has not also filed a bankruptcy petition, the debtor's CMI is, therefore, all income received by the debtor from any source plus any amounts "paid by" the debtor's spouse "on a regular basis for the household expenses of the debtor or the debtor's dependents."

Because the definition of CMI already includes the contributions to the household from the non-filing spouse, the Court followed the majority view that there is no separate CMI for the non-filing spouse.   The marital adjustment is, therefore, appropriate.  The Trustee's position that the full gross income of the non-filing spouse should be included to determine ACP would not be appropriate as the definition of Debtor's CMI already takes into account the spouse's income and the Trustee's position could lead to a duplicate assessment inconsistent with the definitions and not anticipated by Form 22C.  Debtor, therefore, appropriately proposed a 36 month plan.

The Court also overruled the Trustee's objections to the specific deductions from the spouse's income.  The Trustee objected to the amount of the tax withholding based on the anticipated refund, but the Court found that the Trustee incorrectly assumed that the refund or the excess funds withheld would be used to pay the "household expense of the debtor or the debtor's dependents."  11 U.S.C. § 101(10A).   These funds are not "paid on a regular basis" for the support of Debtor or her dependents. 

Finally, the Court noted that calculation of CMI was for a specific six month period of time, and it would be inappropriate to consider income only available at a future date. 

Some questions arise from the opinion.  What if the non-filing spouse had an expensive hobby, such as flying, collecting coins or guns, or expensive hunting or fishing trips?  Setting aside the obvious poor decision making of the spouse, these funds would appear to be excluded from CMI as they were not regularly used for the support of the debtor or dependents.

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, creditor committees, trustees, court-appointed receivers and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.