Fifth Circuit Allows Ownership Expense on Paid For Vehicle

The Fifth Circuit has held that a debtor may claim an ownership expense on the chapter 7 means test even if the debtor does not have a loan or lease payment. In re Tate, No. 08-60953 (5th Cir. 6/10/09). In the Tate case, the debtors owned two paid for vehicles. If they were allowed to claim a vehicle ownership expense under the means test, their monthly disposable income was $137.66, just under the threshold of $166.67 where their case would be deemed to be abusive. A Bankruptcy Court in Mississippi dismissed the case on the Trustee's motion, a decision which was upheld by the District Court.

However, when the matter reached the Fifth Circuit, the Court concluded that "the debtors should have been able to deduct the transportation ownership deduction under the plain language" of the statute. The Fifth Circuit noted a split between courts following the "plain language" approach and the Internal Revenue Manual test. The Court described the two approaches as follows:

Both approaches start from the text of the statute, which states in part, "The debtor's monthly expenses shall be the debtor's applicable monthly expense amounts specified under the National Standards and Local Standards." (citation omitted). The approaches differ, however, in how they read the word "applicable" in the above sentence.

Courts following the "plain language" approach read the word "applicable" to refer to the selection of an expense amount from the Local Standards that relates to the geographic area in which the debtor resides and the number of vehicles the debtor owns. (citation omitted). Under the plain language approach, the vehicle ownership deduction that "applies" to a debtor is the one that corresponds to his geographic region and number of cars regardless of whether that deduction is an actual expense. (citation omitted). . . .

Courts following the IRM approach conclude that the vehicle ownership deduction is not allowed if the debtor has no debt payment. These courts reach this result by reading the word "applicable" to modify "monthly expense" amounts so the debtor can deduct this expense if he has a "relevant" ownership expense. (citation omitted). In other words, under this approach, if the debtor has no debt or lease payment related to a vehicle, he cannot take the ownership deduction because it is not applicable or relevant to him. This interpretation is called the IRM approach because the courts following it use the methology of the IRM as an interpretive guide for applying the means test. (citation omitted). Under this approach, courts look not only to the Local Standards but also to how the IRS uses the Local Standards in its revenue collection process. Under the IRM, if a taxpayer has no car payment, the taxpayer is only entitled to the vehicle operation expense, not the ownership deduction.

Opinion, pp. 4-5.

In adopting the plain language approach, the Fifth Circuit sided with the Seventh Circuit, which is the only other circuit court to address the issue. In re Ross-Tousey, 549 F.3d 1148 (7th Cir. 2008).

As I see it, the plain language approach is preferable for at least three reasons. First, it is always best to follow the plain language of the statute. Any time that courts bend a statute to arrive at the result that Congress may have intended, they stray into legislating rather than judging. Second, following the Internal Revenue Manual poses a separation of powers issue. While it is bad enough that BAPCPA relies on a standard promulgated by the executive branch to determine eligibility for bankruptcy, at least the National and Local Standards purport to be based on objective factors. However, allowing the IRS to shade those standards through the IRM effectively allows an executive branch agency to amend the statute, which is an obvious problem. Finally, allowing an ownership expense recognizes reality. A car is a depreciating asset. Even if a debtor does not have a debt payment, the trade-in value of the vehicle is going down. Thus, a prudent debtor who does not have a car payment would still be saving for the downpayment on a replacement vehicle. Allowing an ownership expense only for debtors with a car payment penalizes the debtor who keeps a car for the long term as opposed to the person who trades for a shiny, new car every year.

Supreme Court Grants Cert in Attorney Speech Case

The Supreme Court has granted certiorari in Milavetz, Gallop & Milavetz, P.A. v. United United States, 541 F.3d 785 (8th Cir. 2008), cert granted, 2009 U.S. LEXIS 4277 (6/8/09). The Milavetz case held that the provision in BAPCPA preventing attorneys from advising debtors to incur debt in contemplation of bankruptcy was an unconstitutional restriction on the right to free speech under the First Amendment. Although it is not in direct conflict, the Fifth Circuit took a somewhat different tack on this issue, finding that the statute was not facially overbroad and reserving the issue of whether it could be overbroad as applied in a specific case. Hersh v. United States, 553 F.2d 743 (5th Cir. 2008). Thus, the Eighth Circuit said that the statute was unconstitutional on its face, while the Fifth Circuit held that a constitutional challenge would have to wait until there was an actual case where an attorney was punished for providing advice contrary to the statute.

Milavetz also had two other rulings, finding that attorneys were Debt Relief Agencies and finding that the mandatory disclosures (i.e., "We a Debt Relief Agency") was constitutional. Most courts have agreed with these conclusions.

Milavetz had one interesting sidenote. The Commercial Law League of America, a professional group, which represents the interests of creditors, filed an amicus brief in support of the plaintiffs' position. Thus, this is a case where a creditor's trade group spoke up for the speech rights of debtor's lawyers.

The order granting certiorari did not limit itself, so that it appear that the Supreme Court will take up all three issues.

Supreme Court Decides One Case and Hints At Result in Another

While many continuing legal education conferences consist of regurgitations of things you already know, every once in a while, you gain an insight which makes it all worthwhile. Today at the State Bar of Texas Bankruptcy Section Bench-Bar Conference, I was fortunate enough to hear Nashville Bankruptcy Judge Keith Lundin tie together today's decision in Travelers Indemnity Co. v. Bailey, 557 U.S. ___ (6/18/09) with the decision to grant cert in Espinosa v. United Student Aid Funds,Inc., 545 F.3d 1113, as amended at 553 F.3d 1193 (9th Cir. 2008), cert granted, 2009 U.S. LEXIS 4361 (U.S. 6/15/09). The common link between the two cases is whether bankruptcy court orders which could have been objected to are subject to collateral attack when they are not. In Travelers, the Supreme Court held that a bankruptcy court injunction contained in a confirmation order was not subject to collateral attack. Judge Lundin suggested that the Supreme Court might be signalling a similar result in Espinosa, a case involving a chapter 13 confirmation order.

20 Year Old Order Trumps in Travelers

The Travelers case arose out of the Johns-Manville bankruptcy case. In return for contributing $770 million to a trust created by the plan of reorganization, Mansville's insurers received the benefit of an injunction preventing suits against them. Over a decade later, plaintiffs started suing Travelers for withholding information about the dangers of asbestos or conspiring with Manville to conceal the dangers of asbestos. Many of these suits accused Travelers of acting wrongfully in its own capacity rather than as Mansville's insurer.

Travelers agreed to settle with some of the plaintiffs in return for an order from the Bankruptcy Court clarifying that the suits were barred by the original 1986 order. The Bankruptcy Court granted the clarifying order, finding that the direct suits against Travelers were encompassed by its original order.

On appeal, the Second Circuit reversed. It held that it was not enough to look to the terms of the prior order. Instead, it was necessary to deteermine whether the order was within the subject matter jurisdiction of the Bankruptcy Court. Concluding that the Bankruptcy Court did not have subject matter jurisdiction to enjoin suits against a non-debtor insurance company based on the insuror's own misconduct, the Second Circuit reversed.

On writ of certiorari, the Supreme Court reversed the Second Circuit and reinstated the Bankruptcy Court's order. The Supreme Court stated:

If this were a direct review of the 1986 Orders, the Court of Appeals would indeed have been duty bound to consider whether the Bankruptcy Court had acted beyond its subject-matter jurisdiction. (citation omitted). But the 1986 Orders became final on direct review over two decades ago, and Travelers' response to the Circuit's jurisdictional ruling is correct: whether the Bankruptcy Court had jurisdiction and authority to enter the injunction in 1986 was not properly before the Court of Appeals in 2008 and is not properly before us.

Opinion of the Court, p. 10.

Travelers Ruling Hints At Espinosa Result

While this ruling is significant, it also suggests that direction that the Supreme Court might take in a case in which it granted certiorari earlier this week. In Espinosa v. United Student Aid Funds, Inc., a chapter 13 debtor included several provisions in its plan related to student loans:

1. It provided that the student loan claim would be paid in the amount of $13,250;

2. It provided that "The amounts claimed by the United Student Loan Aid Funds, Inc., et. al. for capitalized interest, penalties, and fees shall not be paid for the reasons that the same are penalties and not provided for in the loan agreement between the Debtor and the lender."

3. It provided that amounts not paid under the plan would be discharged.

The creditor also received a notice stating that if it did not agree with the treatment provided for its claim under the plan, that it was under an obligation to object.

United Student Aid Funds, Inc. filed a claim for a higher amount, but did not object to the plan. After the debtor completed its plan and received a discharge, United began intercepting the Debtor's tax refunds. Espinosa sought to hold United in contempt, while United sought a determination that the plan could not discharge its student loan debt. The Bankruptcy Court ruled that the plan controlled and that the student loan debt was discharged.

On appeal, United claimed that the plan could not discharge the debt because the Debtor did not file an adversary proceeding seeking a hardship discharge. The Ninth Circuit disagreed, stating:

(W)hen the creditor is served with notice of the proposed plan, it has a full and fair opportunity to insist on the special procedures available to student loan creditors by objecting to the plan on the ground that there has been no undue hardship finding. Rights may, of course, be waived or forfeited, if not raised in a timely fashion. This doesn't mean that these rights are ignored, or that a judgment that is entered after a party fails to assert them conflicts with the statutory scheme or is somehow invalid.

Espinosa, at 1118.

The Ninth Circuit rejected an argument that United did not receive due process.

It makes a mockery of the English language and common sense to say that Funds wasn't given notice, or was somehow ambushed or taken advantage of. The only thing the creditor was not told is that it could insist on an adversary proceeding and a judicial determination of undue hardship. But that's less a matter of notice and more of a tutorial as to what rights the creditor has under the Bankruptcy Code--a long-form Miranda warning for bankers. If that were the standard for adequate notice, every notification under the Bankruptcy Code would have to be accompanied by Collier's Treatise, lest the creditor overlook some rights it might have under the Code.

Esinosa, at 1121.

On motion for rehearing en banc, the Ninth Circuit found it necessary to add some additional authority to its opinion. One of its insertions referred to a treatise written by Judge Keith Lundin, stating:

Rather, we agree with Judge Lundin that "Pardee and Andersen stand soundly for the better-reasoned principle that notice of how the Chapter 13 plan affects creditors' rights is all that the Constitution, the Bankruptcy Code and the Bankruptcy Rules require to bind creditors to the provisions of a confirmed plan under § 1327(a)." Keith M. Lundin, Chapter 13 Bankruptcy § 229.1 (3d ed. 2000 & Supp. 2004)."

553 F.3d at 1196.

Judge Lundin makes an interesting point. If the confirmation injunction in Travelers was valid regardless of whether the Bankruptcy Court arguably exceeded its subject matter jurisidction, wouldn't it follow that an order confirming a chapter 13 plan would be entitled to similar respect even if the debtor failed to comply with the procedural niceties for commencing an adversary proceeding.

Will Espinosa Extend the Reach of Shoaf?

The outcome in Espinosa will have significant repercussions in the Fifth Circuit. The Fifth Circuit has three opinions holding that a provision in a plan cannot determine the allowance of a claim or the secured status of the claim. In re Taylor, 132 F.3d 256 (5th Cir. 1998)(chapter 11 plan could not establish amount of responsible person liability at $0); In re Howard, 972 F.2d 639 (5th Cir. 1992)(chapter 13 plan could not reduce amount of secured claim to $500); In re Simmons, 765 F.2d 547 (5th Cir. 1985)(no res judicata effect for chapter 13 plan which erroneously listed claim as unsecured). The Fifth Circuit has held that this trio of cases is an exception to the general rule contained in Republic Supply Co. v. Shoaf, 815 F.2d 1046 (5th Cir. 1987) that unobjected to provisions in a plan are enforceable based on res judicata. Since the rationale in the Simmons trio was that additional procedural requirements were required to affect a claim, an opinion upholding Espinosa could undermine these precedents.

Chapter 11 in Texas: Introduction to the 2008 Cases

Enron filed in the Southern District of New York. However, there are still chapter 11 cases being filed in Texas. During 2008, there were a total of 701 chapter 11 cases filed in Texas. This will be the first of a series of posts examining the Class of 2008. In future posts, I hope to look at who filed, who represented them and how many were successful.

Where Do Texas Chapter 11s File?

In this post, I will look at something more basic: where did the cases file. The answer is that more chapter 11 cases are filed in big cities than in small towns. While there is nothing surprising about the fact that more chapter 11s were filed in Dallas or Houston than in Lubbock, it is interesting that some large metropolitan areas attract a disproportionate number of cases.

The cases were distributed among the four districts of Texas as follows:

Southern District of Texas--271
Northern District of Texas--249
Western District of Texas---102
Eastern District of Texas----79

Of the cases filed in Texas, 663 originated within Texas and 38 were filed by out of state debtors. During 2007 (which is the most recent year available), the population of Texas was 23,904,380. That means that on average, there was one chapter 11 filed for every 36,055 residents. However, that does not mean that every county with at least 36,055 residents could claim a chapter 11 of their very own. Indeed, some 29 counties with at least this much population, including Midland and Taylor did not have any cases. Instead, the cases were skewed toward the larger counties.

The 20 largest counties gave rise to 589 filings for an 89.7% share of the total cases originating from Texas. These counties only contain 71% of the state's population. Thus, it appears that the large counties get a disproportionately large share of the filings compared to the state at large. This is not true across the board. The county with the lowest ratio of residents to filings was humble Camp county. This county had seven filings (all related to Pilgrim's Pride) and a population of 12,557 for a rate of one chapter 11 case for every 1,794 residents.

When the filings per population are compared between the 20 largest counties, there is a definite bias in favor of the Dallas/Fort Worth and Houston megaplexes.

The term Ch.11PP refers to Chapter 11 cases filed per population. A low number means that more cases were filed than would be predicted by the population, while a high number indicates the reverse.

While there is not a complete correlation, counties in the D/FW and Houston area, including Collin, Dallas, Denton, Harris and Tarrant, a a lower Ch.11PP rate (meaning had more cases than would be predicted strictly by population) than the rest of the state. However, some of the outlying counties in the Houston megaplex, including Fort Bend, Montgomery, Brazoria and Galveston counties, had fewer cases than would be expected. The border counties did not show a clear trend. Webb and Cameron counties had higher filing rates, while El Paso, Bexar and Hidalgo counties were in the bottom group. Rounding out the less than expected group were Travis, Nueces, Jefferson and Bell Counties (although Travis was just about average, one of the rare occasions that designation will be applied to the capital of Keeping It Weird).

Why?

Why do cases flock toward some localities and avoid others? Access to judges may be part of the answer. Harris County has four resident judges, while Dallas county has three. On the other hand, Lubbock County, Jefferson County and El Paso County all share judges with other divisions. However, this does not explain Bexar County, which has two resident judges but a low filing rate. Access to the chapter 11 bar may be a factor. Many of the counties which had lower rates of filings were outliers from major metropolitan areas. Montgomery, Fort Bend, Brazoria and Galveston Counties are all part of the Houston megaplex with lower than expected filing rates. If most of the chapter 11 lawyers are located in Houston, individuals and small businesses in outlying areas might be deterred from hiring a lawyer in the big city. Another possibility may be that the types of business prevalent in an area might influence the filing rate. For example, areas with high amounts of agriculture (Lubbock, Nueces) seem to be lower in filings. Suburban areas have very inconsistent results, with Denton, Collin and Williamson Counties ranking high and Ft. Bend, Montgomery and Brazoria counties ranking low.

If you would like a copy of the chart which is easier to read, please send an email to ssather@bnpclaw.com.

Coming Attraction

The next installment of the Class of 2008 will look at the flameouts, the cases that were dismissed or converted in the first 90 days. Although I have not done the research yet, I suspect that paying the filing fee in installments may be an indicator that a case is on rocky ground. I am amazed at just how many cases there are in this category.

Another View on Chrysler

The Chrysler deal has now closed, proving that it is possible to do a multi-billion dollar asset sale on an expedited timetable when the U.S. government is your DIP lender and is directing the pace. I am still scratching my head at the ease with which this deal went through. In the realm where I practice, an attempt to sell the debtor's assets to a purchaser selected by management for a small fraction of the secured debt would not only be denied, but would likely be followed by a motion for sanctions. However, when you are dealing with a debtor whose failure could send nuclear shock waves across the economy, it may be that the strict legalities give way to more pragmatic considerations.

Here is a pragmatic analysis from guest-blogger Steve Roberts.

How about this.

If the government did not step in, Chrysler would shut down and go into liquidation and the senior lenders with $6.9 billion in debt would be paid less than the $2 billion or 29 cents on the dollar the government is offering them.

So the government is using your and my money to bail out the lenders along with everyone else. But holdouts among the lenders are screaming that their constitutional and statutory rights are being violated because inferior claims are getting more.


Lets look at that. Who do we, the taxpayers, need if there is any chance for us to get our money back? The the supply chain and the workers. Without them there is no bailout and the senior lenders would get less. So New Chrysler cuts the unions into the deal and assumes the supply contracts with the suppliers to maintain the supply chain.

The Indiana pension funds, who are the last holdouts among the senior lenders, say that the government is hurting the teachers and state employees of Indiana with this bailout, so let's examine that. The fund managers for these funds bought Chrysler debt in or after 2007 and paid 43 cents on the dollar for it, betting that Chrysler would survive. They were wrong. They did not lose money because the government stepped in. They lost money because they lost on the risk they took.

These fund managers have said publicly in this case that they will settle for 50 cents on the dollar, a neat 7 cent profit. And since the government will not use your and my money to bail these fund managers out for their miscalculation, they are appealing the approval of the sale to the 2nd Circuit on an emergency basis.

They must be betting that the government will pay them more if they win and are willing to take the risk that the government will not let the bailout fail.

Since Steve wrote this analysis, both the Second Circuit and the Supreme Court refused to block the sale and it has now closed.

However, I think it highlights what an unusual case this is. Chrysler was not a meaningful player in its own bankruptcy. Instead, the case tested how much the treasury was willing to pay to avoid the collateral damage from a Chrysler failure. The senior lenders (or at least the holdouts) were not banks which had lent money directly to the debtor, but rather speculators who had bought the debt in the hopes of making of a profit. As Steve correctly points out, the objecting creditors, having seen that the government was in the bailout business, wanted a bailout of their own investment decision. The government stood firm and was backed up by the courts.

What I really want to know is how can I use this precedent in my next single asset real estate case?

The Bankruptcy Opinions of Sonia Sotomayor

Yesterday President Obama nominated Second Circuit judge Sonia Sotomayor to take David Souter's place on the Supreme Court. As a District Court Judge in the Southern District of New York and as a Judge on the Second Circuit Court of Appeals, Judge Sotomayor has come across bankruptcy issues from time to time. However, few of her opinions are the stuff that casebooks are made of.

Big Bankruptcies: Routine Opinions

One consequence of sitting in New York is that Judge Sotomayor has written opinions in some major cases,such as Adelphia, Bethlehem Steel, Eastern Airlines, R.H. Macy & Co. and Worldcom. In In re Adelphia Communications Corporation, 544 F.3d 420 (2nd Cir. 2008), she affirmed the confirmation of a bankruptcy plan which transferred claims being asserted by an Equity Committee to a plan trust. The problem was that the Equity Committee, which was far out of the money, had confused derivative standing to pursue claims on behalf of the estate with ownership of the claims themselves. As Judge Sotomayor stated:

We do not mean to trivialize, but only to place in context, the role of the derivative plaintiff. It serves "with the approval and supervision of a bankruptcy court" and shares the "labor" of litigation with the debtor-in-possession. (citation omitted). Contrary to the Equity Committee's arguments, however, it does not usurp the central role of the court or debtor in overseeing and managing the estate's legal claims.

In Official Committee of Unsecured Creditors v. Securities and Exchange Commission, 467 F.3d 73 (2nd 2005), an interesting provision of Sarbanes-Oxley came into play. The SEC brought claims on behalf of defrauded investors, which the debtor settled. The SEC then proposed its plan for distributing those funds to the investors. The Unsecured Creditors Committee didn't like the SEC's plan (which was separate from the plan of reorganization in the case). Judge Sotomayor held that the Official Committee of Unsecured Creditors had standing to appeal, even though it was not a party to the SEC action, but ruled against them on the merits. In another Worldcom appeal, she held that the confirmed plan of reorganization barred pursuit of a discharged claim. In re Worldcom, Inc., 546 F.3d 211 (2nd Cir. 2008).

In another case, the judge ruled that employee benefits earned by an employee over the course of his employment but payable when he was discharged during the bankruptcy were not entitled to administrative claim status because the right to payment had accrued pre-petition. In re Bethlehem Steel Corporation, 479 F.3d 167 (2nd Cir. 2007).

As a district court judge, she ruled on an appeal concerning whether a tax assessed post-petition and payable under an unexpired lease which was later rejected was entitled to administrative priority. She affirmed the ruling of the Bankruptcy Court which had found it to be an administrative claim. In re R.H. Macy & Co., 1994 U.S. Dist. LEXIS 21364 (S.D. N.Y. 2004). The most interesting thing about this opinion is that it consists of a transcript of her discussion with counsel on the record before she made her ruling. She displays a bit of humanity when she apologizes to counsel for her delay in ruling and acknowledges some unfamiliarity with the bankruptcy issues.

THE COURT: How are you counsel? I must apologize for the delay in addressing this case. There is no excuse other than the press of life in general in the court-house. You have also presented me with interesting issues, so once I did turn my attention to it, it has not been easy for me to resolve.

I have a series of questions for those of you who are bankruptcy lawyers. I would like to have you educate me and focus me a little bit.

In the Eastern Airlines case, the Bankruptcy Court approved a comprehensive settlement between the Debtor and the Airline Pilots Association. A group of dissident pilots objected to the settlement and appealed. Judge Sotomayor found that the settlement was not an abuse of discretion. Nellis v. Shugrue, 165 B.R. 115 (S.D. N.Y. 1994).

International Insolvency

Judge Sotomayor has also had a passing acquaintance with international insolvency cases. In In re Board of Directors of Telecom Argentina, S.A., 528 F.3d 162 (2nd Cir. 2008), she affirmed the decision to recognize a foreign proceeding under former Section 304. In Petition of Alison J. Treco and David Patrick Hamilton as liquidators of Meridien International Bank Ltd., 205 B.R. 358 (S.D. N.Y. 1997) and Allstate Insurance Company v. Hughes, 174 B.R. 884 (S.D. N.Y. 1994) she affirmed the granting of a Section 304 injunction to protect the assets of a foreign debtor.

Dischargeability of Debts

Judge Sotomayor has written several opinions dealing with dischargeability of marital obligations. In re Maddigan, 312 F.3d 589 (2nd Cir. 2002)(attorney's fees incurred in connection with support claim were nondischargeable under Section 523(a)(5)); Beier v. Beier, 1995 U.S. Dist. LEXIS 1702 (S.D. N.Y. 1995)(granting summary judgment on non-dischargeability was inappropriate when there were issues of fact)

She also ruled that in determining the dischargeability of a claim arising under a settlement agreement, it was appropriate to look to the facts surrounding the underlying claim. In re DeTrano, 326 F.3d 319 (2nd Cir. 2003).

In European American Bank v. Benedict, 1995 U.S. Dist. LEXIS 10051 (S.D. N.Y. 1995),Judge Sotomayor ruled that the deadline to file a complaint to determine dischargeability could not be extended after the expiration of the deadline.

Other Rulings

In re Millenium Seacarriers, Inc., 419 F.3d 83 (2nd Cir. 2005)(bankruptcy court's jurisdiction over property of the estate wherever located included jurisdiction to extinguish maritime liens).

Harris v. Albany County Office, 464 F.3d 263 (2nd Cir. 2006)(dismissing appeal based upon failure to provide designation of record on appeal and transcript was abuse of discretion where debtor was not given opportunity to cure defect first)

Beightol v. UBS Painewebber, Inc., 354 F.3d 187 (2nd Cir. 2004)(no appeal from order denying motion to abstain)

In re New Haven Projects Ltd. Liability Co., 225 F.3d 283 (2nd Cir. 2000)(where Section 505 gave bankruptcy court discretionary authority to redetermine tax liability it was not error for bankruptcy court to decline to exercise that authority).

In re Seatrain Lines, Inc., 198 B.R. 45 (S.D. N.Y. 1996)(debtor's action against insurer which denied indemnification post-petition was core proceeding so that reference would not be withdrawn).

Royal American Insurance Co. v. McCrory Corporation, 1996 U.S. Dist. LEXIS 5552 (S.D.N.Y. 1996)(bankruptcy court erred in refusing to lift stay to pursue suit against debtor's insurance carrier despite fact that claimant had failed to file a timely claim against debtor).

In re St. Johnsbury Trucking Company, Inc., 191 B.R. 22 (S.D. N.Y. 1995)(Negotiated Rates Act of 1993 was constitutional as applied in bankruptcy, but issue would be certified for interlocutory appeal).

First Fidelity Bank, N.A. v. Eleven Hundred Metroplex Associates, 190 B.R. 510 (S.D. N.Y. 1995)(order for use of cash collateral reversed where debtor made absolute assignment of rents)

In re Friedman & Shapiro, Inc., 185 B.R. 143 (S.D. N.Y. 1995)(disciplinary proceeding against attornrey by state bar could not be removed based upon law firm's pending bankruptcy).

Kuntz v. Pardo, 160 B.R. 35 (S.D. N.Y. 1993)(litigant whose appeal was dismissed for failure to designate record did not demonstrate excusable neglect entitling him to reinstatement of appeal)

The Bottom Line

In ten years as a circuit court judge, Judge Sotomayor has authored 232 opinions, twelve of which have concerned substantive bankruptcy issues. In eleven out of twelve cases, she affirmed the lower courts. Remarkably, her six year record as a district court judge contains many bankruptcy rulings. Her bankruptcy opinions appear to be competently written, although none jump out as having changed the face of the law.

For another perspective on the Sotomayor nomination, go to The Case Against Sonia Sotomayor: Arch-Conservative .

Lawyers, Guns and Money

"Send lawyers, guns and money."--Warren Zevon (1978).

A new opinion out of San Antonio (home to the Alamo) contains the elements of lawyers, guns and money in a decision about exempting firearms. In re Wilkinson, No. 07-50189 (Bankr. W.D. Tex. 4/10/09). While I enjoyed the analysis, I don't think I would have arrived at the same conclusion. (Of course, I don't wear a black robe, so whether I agree or disagree is somewhat academic).

Dr. Wilkinson had guns. Lots of guns. Some of them could shoot. Others were mounted on the wall with brass plates describing them. The Debtor sought to keep two guns under the firearms exemption, but also sought to keep the mounted guns as home furnishings. The trustee cried foul, arguing that "firearms are firearms and cannot be claimed under another category such as 'home furnishings.'"

The Debtor's first shot (pun intended) was to point to a statute which said that antique or curio guns manufactured before 1899 were not guns. Texas Penal Code Sec. 46.01. This was a nice try, since the creative debtor's lawyer found a statute which said that the mounted guns were not legally firearms. However, this shot was easily deflected by the judge. The Penal Code dealt with guns which could not be possessed by felons. Since guns which cannot go bang are not inherently dangerous in the hands of a felon, their possession should not be criminalized. However, the statute didn't really answer the question of whether antique firearms mounted on plaques should be excluded from the definition of firearms under an exemption statute.

Next, the court considered the definition of firearm in common parlance. The court noted that:

Notably, none of these definitions excludes antique firearms or guns from the definition of what constitutes a firearm. None of these definitions requires that the item be in working order to constitute a firearm.

Opinion, p. 11.

The Court then went on an interesting historical analysis which demonstrated that guns have not always been sancrosanct in Texas. The Court noted that in Choate v. Redding, 18 Tex. 579 (1857), the Texas Supreme Court bemoaned the fact that there was no exemption for guns in Texas. This was especially troubling because Texas law required that every able-bodied man bring a gun in connection with their militia service. (This was back in the good old days when gun ownership was not only allowed but mandated!) Thus, if a creditor levied upon a debtor's non-exempt gun and he was called up for militia service, the debtor could be punished for showing up disarmed.

The lackadaisical legislature did not allow a gun to be exempted until 1870 and tardily expanded this exemption to two guns in 1973. The court concluded that because the legislature had to be dragged kicking and screaming to allow even two guns to be exempted that it would not allow more than that to be exempted under the guise of home furnishings.

I find the historical analysis interesting. I had always thought that the exemption for two guns was meant to allow Pa to shoot one gun out the front door while Ma defended the back of the house. Since the exemption for two guns did not come around until 1973 when the risk of marauding indians was substantially diminished, this assumption was probably incorrect. Hopefully none of my clients who I told this story to will ask for their money back.

However, I think that the court was asking the wrong question. The Debtor sought to exempt the mounted firearms as home furnishings rather than as firearms. Thus, the relevant question should be whether a mounted gun which doesn't go bang could be considered to be a home furnishing. A home furnishing is something that is used to furnish a home. (While I don't have any authority for this proposition, it is based on the close proximity between home and furnishing in the statute). Texans are granted great leeway in deciding how they will furnish their homes. They may decide to decorate their homes with tasteful artwork bought in galleries in Santa Fe and Taos or they may decide to build elaborate displays of Lone Star beer bottles and photographs of road kill. Likewise, both a display case containing pre-Columbian pottery and a collection of sweatstained tshirts from the Capital 10,000 neatly mounted in a shadow box could be a home furnishing. How you furnish your home is largely in the eyes of the beholder.

In my mind, whether a gun is exempt as a gun or a home furnishing depends on how it is actually used. If it is kept in a gun safe with suitable ammunition nearby, it is only exempt as a firearm or possibly as a tool of the trade in the case of a law enforcement officer. On the other hand, if it is mounted and the wall and doesn't go bang, then it is probably being used as an adornment or decoration and thus would fit the definition of a home furnishing. Just because the same item could potentially be exempted under one category should not prohibit it from being claimed under another applicable provision. Function, not origin, should determine the appropriate category for exemption. The mounted firearms seem an easy case to me. The harder case would be the debtor who decorated the inside of his closet with $60,000 worth of gold bullion. If the interest in decorating with gold arose on the eve of bankruptcy and the gold was not prominently displayed to visitors, that would probably not be a real home furnishing.