Monday, June 30, 2008

On Judicial Selection

On my non-bankruptcy blog, I have written an article about the different approaches that the two presidential candidates take toward appointing judicial nominees. If you are interested in reading more, you can go to:

Monday, June 23, 2008

Northern District of Texas Releases En Banc Opinion on Early Completion of Chapter 13 Plan

The six judges of the Bankruptcy Court for the Northern District of Texas have released an opinion on when a debtor can pay off a chapter 13 plan prior to its scheduled completion date under BAPCPA. In re Howard L. McCarthy, Jr., No. 06-40127-DML-13 (Bankr. N.D. Tex. 6/11/08). The judges ruled that absent modification of the plan to increase the payments or bad faith by the debtor, that the court must enter a discharge once payments are completed.

In the McCarthy case, the Debtor had above median income and was required to file a 60 month plan. The Court confirmed a plan providing for payments of $49,260. This payment would pay about 60% of the unsecured claims. The Debtor had to pay more than the amount of his disposable income in order to satisfy the chapter 7 liquidation test. After six months, the Debtor sold his non-exempt real estate pursuant to court order and paid the proceeds to the Trustee. The Debtor continued to make his regular monthly payments. After 21 months, he had paid $49,260 into the plan and the Trustee filed a notice of completion of payments. The Debtor then filed a motion for entry of discharge, which the Trustee opposed.

The Court found that the case did not turn on the definition of "applicable commitment period" under Section 1325(b). Instead, the Court found that the result was dictated by Sec. 1328(a).

The Court stated:

"Much of the focus of the Parties and the Amici in their briefs and at oral argument was on the question of whether the 'applicable commitment period' provided for in section 1325(b) of the Code, in Debtor's case 60 months, serves as a temporal requirement for the duration of a chapter 13 case or is simply a multiplier to be used to determine a minimum amount a debtor's plan must provide for unsecured creditors. A number of courts have struggled with this question arriving at diverse conclusions. . . . In the case at bar, however, we are not required to reach or decide that issue. Rather, the Motion poses the easier question of whether Debtor is entitled to a discharge under section 1328(a) of the Code.

* * *

"We must apply section 1328(a) in accordance with its plain meaning. . . .

"Section 1328(a)'s meaning is, in fact, plan and unambiguous. If the debtor has completed all payments under the plan, 'the Court shall grant the debtor a discharge. . . . ' (citation omitted). The use of the word 'shall' in section 1328(a) means that granting the relief is mandatory if the preconditions specified in the section are met."

Memorandum Opinion, pp. 4-5.

Having arrived at its conclusion in just five pages, the Court devoted the remainder of its opinion to replying to the Trustee's argument that deceptive debtors could use this language to slide a payment under the Trustee's door in the dead of night in order to avoid disclosing changed circumstances which would justify a modification.

The Court had two responses to this argument. First, the Court pointed out that the Marrama decision meant that "a debtor's fraudulent conduct may be addressed to prevent as well as undo a result achieved through the ordinary operation of the Code . . . " However, the Court noted that "this case is not one where money was slipped under the Trustee's door in aid of a scheme to avoid a potential plan modification." Instead, the Debtor had done exactly what was contemplated under the plan. The Debtor's Plan required the Debtor to pay a sum exceeding his monthly payments. As a result, it was clear that the Plan contemplated sale of assets. Additionally, at the time of the sale of the Debtor's property, it was clear that this pre-payment would result in the plan being paid off early. However, the Trustee did not seek to modify the plan.

Finally, the Court noted that the better procedure would be to formally request a modification of the plan to pay it off early. "The safe procedure for prepayment by a debtor under a plan is to seek approval of a plan modification under section 1329(a). If that is done, the Trustee, creditors and the court will have confidence that the prepayment is undertaken in good faith and not in anticipation of a windfall or other change in the debtor's circumstances that might otherwise bring about proposal of a Trustee's or unsecured creidtir's modification to the debtor's plan." Memorandum Opinion, p. 9.

Thus, the lesson of McCarthy is that a discharge must be granted once the payments are completed, even under BAPCPA. However, that right is balanced by the ability of the Trustee to seek a modification or to oppose discharge based upon fraud.

Sunday, June 08, 2008

Sources for Free Legal Research on Texas Bankruptcy Cases

It used to be that to keep up with the latest case law, it was necessary to review the advance sheets or keep up with the latest legal journals. Of course, this required expensive subscriptions and ran weeks or months behind the release date of the opinions. Today there are many sources of free legal research released in real time.

There are three main ways to gain access to up to the minute case updates free of charge. The first is through listserves which provide case updates as they are released. The second is court websites which contain links to recent opinions. Finally, opinions can be searched through PACER.

PACER (or Public Access to Court Electronic Records) is primarily known for containing electronic docket sheets and court documents, which can be accessed for a fee of 8 cents per page. However, a relatively new addition to PACER allows free searches for written opinions. To search for opinions under PACER, go to the PACER site for a district, look for “Reports” and then click on “Written Opinions.” The opinions can be searched by date and by division. It is also possible to search for an opinion by name. A search for the Southern District of Texas Bankruptcy Court revealed that there were sixteen opinions released from May 1 to June 7, 2008. PACER is the most comprehensive source for new bankruptcy court opinions. However, the written opinions feature only goes back to April 2005 and is not searchable by keyword. As a result, it requires some patience.

Here are the best sources for opinions relevant to Texas Bankruptcy lawyers.

Supreme Court

The best source for Supreme Court updates is the Cornell Law School Supreme Court listserve. By subscribing to this free service, readers receive updates as to cases which have been granted cert and opinions released. The updates are released in real time so that it is a very good way to stay up to date on developments in the Supreme Court. The nice thing about this listserve is that it contains both summaries of the opinions and links to read the opinions themselves. This makes it easy to scan through the day’s opinions to decide which ones merit further reading.

To subscribe to this listserve, go to:

Fifth Circuit

The Fifth Circuit has an opinions page located at The initial page lists opinions released that day. There is also an option to do a keyword search for opinions going back to 1992.

The other nice feature of the Fifth Circuit opinions page is that they offer an opinions subscription which provides an email twice a day listing the opinions released that day and attaching copies of the published opinions. Opinions can be received in either WordPerfect or PDF format. The downside to this service is that the opinions do not come with a summary so that it is necessary to either read every opinion to figure out which ones relate to bankruptcy (which are a very small percentage) or just try to guess based on the name of the case.

District Courts

Both the U.S. District Courts for the Southern and Western Districts of Texas participate in a site sponsored by the Southern District of New York called Courtweb. The site can be accessed at: The opinions can be searched by keyword. Curiously, a search for the term “bankruptcy” turned up only eight opinions from the Southern District, but found 121 decisions from the Western District.

Bankruptcy Courts

Each of the four bankruptcy courts in Texas has a website. However, each district has a different approach to posting its opinions.

Northern District of Texas:

The Northern District of Texas offers several options for opinion searching. It has a comprehensive list of opinions which can be sorted by judge, by date, by case name or by case number. One nice feature of this page is that it includes retired judges as well as current judges. While the opinions can be sorted by date released, the page does not list those dates. Thus, it is necessary to open up the opinions to find out just how recent they are. One unique feature contained on the Northern District page is that it includes an email subscription service which allows the reader to receive updates whenever new opinions are released.

Southern District of Texas:

The Southern District judges previously released opinions intended for publication on the Courtweb site and selected unpublished opinions on the Court’s website. Unfortunately, no new Southern District opinions have been added to Courtweb since July 18, 2007. As a result, PACER is currently the only way to find current Southern District Bankruptcy opinions.

Eastern District of Texas:

The Eastern District recently unveiled a new and improved website. It includes an opinions page for its two judges. The page breaks down opinions by subject matter, date and whether they are published or unpublished. Unfortunately the page for Judge Parker is still under construction. However, litigants appearing before Judge Rhoades can browse through 76 of her opinions on topics ranging from admissions to zip codes.

Western District of Texas:

The Western District of Texas site contains two unique features. First, the front page of its opinions section lists the ten most recent opinions by date. This makes it easy to keep up with what is current in the Western District. The page also includes a key word search. A search for the term “means test” pulled up 43 hits. The opinions only date back to April 21, 2005. However, that is still a considerable body of cases.

The courts are constantly updating their websites. As a result, it is helpful to check frequently to see what is new. I will update this article from time to time to try to keep up with new developments.

Tuesday, June 03, 2008

New Opinion Illustrates the Dangers of Going to Trial

Trials are unpredictable things. That's why most cases settle. A recent opinion from Austin Bankruptcy Judge Frank Monroe illustrates how a case can go astray. In MARTNKIM Dining, LLC vs. Chaney, Adv. No. 07-1082 (Bankr. W.D. Tex. 5/29/08), the defendants won the case but in the process exposed themselves to new and potentially greater legal problems.

The adversary proceeding involved a suit over sale of a restaurant. The debtor claimed that the sellers had committed fraud, including providing false financial statements. This required the court to examine the sellers'/defendants' unique accounting practices. According to the court, the sellers received 2/3 of their revenues from cash sales. These funds were deposited into the owners' personal bank account rather than the corporate account. They then "loaned" these funds back to the corporation as needed. At the end of the year, the sellers would add up the cash register tapes and report these items as income to the company's CPA. While the full amount of revenues were reported to the IRS on the company's form 1120, the cash receipts were not included on the company's sales tax return. The Court stated:

"There can be only one rational explanation for this procedure. The Chaneys did not want to, and did not, pay the sales taxes on the cash sales to the State of Texas. This is, most likely, a considerable sum of money."

Memorarndum Opinion, p. 7. The Court later estimated the amount of diverted sales taxes at approximately $100,000.

The Court also noted that the sellers paid some of their employees in cash and reported their income on form 1099 instead of paying payroll tax as required by law.

Ultimately, the Court found that the sellers/defendants had not defrauded the debtor/purchaser. The Court found that the financial statements provided were not inaccurate with regard to revenues and had not been relied upon for the expense side. As a result, the Court entered a take-nothing judgment for the defendants. However, the Court's written opinion shone an unwelcome light on the defendants' accounting practices prior to the sale. Thus, it can be said that both the plaintiff and the defendants lost.