Wednesday, January 09, 2013

The Leif and Times of Judge Clark (Pt. Two)--The Consumer Opinions

Part Two of this post will focus on the consumer decisions of Judge Leif Clark.    As a bankruptcy judge, Leif Clark dealt with the full parade of humanity.    His opinions reveal a deep understanding of the human face of financial loss as well as the intricacies of the law.


Like many judges, Judge Clark did not have kind words for BAPCPA.   Referring to the credit counseling requirement, he stated:
The circumstances of this case demonstrate why this extra prerequisite, imposed by the 2005 amendments to the Bankruptcy Code, is so far removed from reality that its imposition is an insult to the dignity of persons whose financial straits, brought on by circumstances beyond their control, force them to seek relief under the Bankruptcy Code. On these facts, budget and credit counseling is a monumental waste of time and money. Yet the Code now requires this extra step, premised on the false notion that most folks, once they realize that they just have to learn how to live within their means, will realize they don't really need to file for bankruptcy protection. For the Peinados,   this extra step is not only unnecessary as a practical matter — there is no amount of "re-budgeting" that these folks can do that will make it possible for them to repay their existing indebtedness — but is also an insult to their honesty and character.
In re Peinado, 2011 Bankr. LEXIS 2500 at *2 (Bankr. W.D. Tex. 2011).   However, the Court was more charitable when it concluded that incarceration was a form of incapacity which would excuse the credit counseling requirement in an opinion several years earlier: 
(H)ere, the statute is designed to provide a sensible exemption from attending the credit counseling briefing when physical circumstances render doing so impossible. That only makes sense, less the statute itself be rendered an absurdity by imposing an impossibility on the debtor, then denying the debtor access to bankruptcy based on the debtor's failure to do the impossible. The court prefers not to impute perverse motives to Congress.
In re Lee, 2008 Bankr. LEXIS 689 at *4-5 (Bankr. W.D. Tex. 2008).

In yet another opinion, he questioned the wisdom of credit counseling while ultimately concluding that he was free to disregard the lack of credit counseling if no party moved to dismiss the case and that a pro se party’s failure to know about the credit counseling requirement constituted an “exigent” circumstance excusing the briefing.   In re Navarro, No. 06-51007 (Bankr. W.D. Tex. 2006)(which can be found here).    

Leif and Death

While the death of a client is a traumatic event, Judge Clark wrote no fewer than six opinions addressing the question of what happens when a debtor passes away during a case.    Where the Debtor passed away between the filing of the case and the 341 meeting, the Court ruled that he could not excuse the deceased debtor from attending the meeting, but that he would not require the impossible.   Instead, he ordered that the personal representative attend in the debtor’s stead.    In re Hamilton, 274 B.R. 266 (Bankr. W.D. Tex. 2001); In re Lucio, 251 B.R. 705 (Bankr. W.D. Tex. 2000).   

In ruling on a motion to excuse the debtor from completing a personal financial management course due to disability caused by death, the Court made a theological statement:
The debtor's counsel makes the rather common-sense appeal that "death would appear to be a species of … physical impairment" to warrant finding the debtor to be a person described in section 109(h)(4), such that the debtor should be relieved of the obligation to complete the instructional course on personal financial management. The point is well-taken. The court is confronted with the limits of its judicial power--it cannot require the debtor to attend and complete the instructional course, because the court's judicial power does not include the power to resurrect.
 In re Robles, 2007 Bankr. LEXIS 4239 at *2-3 (Bankr. W.D. Tex. 2007).   In yet another decision, the Court found that:
It is odd to think of death as a "mere disability," but the statutory language (added in 2005) seems not to have anticipated the possibility that debtor might die after filing but before completing the mandated instructional course. Still, the intent of Congress seems obvious at least from its context, if not from its express wording.
 In re Henderson, 2008 Bankr. LEXIS 1490 at *2 (Bankr. W. D. Tex. 2008).   In both cases, the Court found that the estate of a deceased debtor was entitled to receive a discharge.

On the other hand, when a debtor passed away during the pendency of a dischargeability proceeding, the Court found that the case was moot due to the fact that all non-exempt property was already included in the bankruptcy estate and that the bankruptcy estate included the same claims as the probate estate.

Finally, the Court considered the effect of a personal guaranty that extended to “the Guarantor’s estate.”    The bank sued the beneficiaries of the deceased guarantor asserting that they were personally liable for the debt, or in the alternative, that they were liable to the extent of distributions from the estate.   The Court found that the beneficiaries were not in privity with the bank and thus could not be held personally liable.   However, the Court found that under the Texas Probate Code, the beneficiaries could be held liable for the property they received depending on whether the proper notices were given.   As a result, the Court declined to dismiss the second ground of the complaint.   In re Seguin Hotel Corp., 2010 Bankr. LEXIS 2332 (Bankr. W.D. Tex. 2010).


While Texas allows generous exemptions to its debtors, Judge Clark was called upon to define the limits of some unusual claims of exemption.   In the case of In re Schott, 449 B.R. 697 (Bankr. W. D. Tex. 2011), a debtor who did not even like golf claimed a golf course as his homestead.   The Court ruled that the parcel containing the clubhouse where he resided constituted a homestead, while a separate tract separated by a county road did not.

In an early decision of the computer age, the Court found that computer software was not exempt as a “tool of the trade,” finding that the Texas legislature contemplated that tools be something more tangible.   In re White, 234 B.R. 388 (Bankr. W.D. Tex. 1999).   

Prior to Texas’s adoption of a specific exemption for jewelry, the Court considered whether jewelry was exempt as “wearing apparel.”    In a 52-page opinion containing such headings as “A Rolling Gem Stone Gathers No Debt,” he thoroughly discussed how often jewelry had to be worn to constitute wearing apparel and whether the same item could be both functional and an investment (e.g., a rolex watch), ultimately formulating a ten-factor test.  In re Leva, 96 B.R. 723 (Bankr. W.D. Tex. 1989).    The Court ultimately found that the debtor could exempt a rolex, but not a bracelet or a pinkie ring.    The Texas legislature promptly amended the Property in 1991 to provide for jewelry as a separate category of exempt property not to exceed 25% of the aggregate amount.   No doubt the legislators were concerned that their pinkie rings might be in jeopardy.

Shortly after deciding the Leva case, the Court ruled that the proper standard for valuing jewelry was “fair market value.”   In re Mitchell, 103 B.R. 819 (Bankr. W.D. Tex. 1989).   As a result, the debtor’s 6.18 carat diamond ring was valued at $36,000, which exceeded the debtor’s exemption limit, which was $30,000 at the time.

Judge Clark also wrote a fascinating treatise on the Texas exemption for firearms in In re Wilkinson, 402 B.R. 756 (Bankr. W.D. Tex. 2009).   Judge Clark’s historical research revealed that prior to 1870, guns were not exempt in Texas even though a person could be fined for failing to show up to the “muster ground” for militia duty without a gun.    Judge Clark ultimately concluded that a gun was a gun, even when it was mounted and displayed on the wall as a decoration and that a debtor could not exceed the statutory exemption of two guns by classifying additional firearms as household furnishings.

In a pair of opinions, Judge Clark evaluated how mobile debtors could have their exemptions determined under the law of another state under BAPCPA.   In In re Battle, 366 B.R. 635 (Bankr. W.D. Tex. 2006), Judge Clark ruled that a Texas resident whose exemptions were determined under Florida law could use the federal exemptions notwithstanding Florida’s opt-out statute.   Because Florida only prohibited its “residents” from using the federal exemptions, Judge Clark concluded that a Texas resident whose exemptions were determined under Florida law could use the section 522(d) exemptions.   Judge Clark’s position was upheld in the subsequent Fifth Circuit decision of Ingalls v. Camp (In re Camp), 631 F.3d 757 (5th Cir. 2011)(I was the losing attorney in the Camp case).   However, in In re Fernandez, 445 B.R. 790 (Bankr. W.D. Tex. 2011), Judge Clark ruled that a Texas debtor could not claim a Texas homestead as exempt under Nevada law only to be reversed by the District Court, Fernandez v. Miller (In re Fernandez), 2011 U.S. Dist. LEXIS 86528 (W.D. Tex. 2011).   

Property of the Estate

One of Judge Clark’s most important rulings considered whether ownership of a claim for malpractice in a chapter 7 bankruptcy proceeding belonged to the individual debtor or to the bankruptcy estate   Swift v. Seidler (In re Swift), 198 B.R. 927 (Bankr. W.D. Tex. 1996), aff’d, No. 96-50910 (5th Cir. 1997).    In an exhaustive discussion of the intersection of section 541 and Texas law, Judge Clark concluded that in order for a cause of action to be property of the estate, it must have legally accrued, which required that the debtor incur damages.  Where the debtor was not damaged with regard to loss of exemptions and his discharge, the claims accrued post-petition and were not property of the estate. (Disclosure:  I have a case presently under appeal which relies heavily on the Fifth Circuit opinions affirming Judge Clark).   


In an unusual case under section 523(a)(6), Judge Clark denied summary judgment that claims for Rule 11 sanctions awarded against an attorney for filing a frivolous class action suit constituted a willful and malicious injury.  Mann Bracken, LLP v. Powers (In re Powers), 421 B.R. 326 (Bankr. W.D. Tex. 2009).   In the particular case, an attorney had filed 39 class action suits in his career without ever having a class certified.    The U.S. District Judge was particularly caustic in granting the sanctions, finding that the attorney was a “danger to putative class members.”    However, the Bankruptcy Court found that the District Court’s findings fell short of those required to support non-dischargeability.
Here, by contrast, Judge Sparks did not make the requisite specific findings that would permit the court to find collateral estoppel should apply. Judge Sparks’ orders do not state that Powers knew or should have known that by filing the Certification Motion he would injure the Plaintiffs, or, even that Powers was motivated by an improper purpose. Judge Sparks states that “Powers represents a very real danger to putative class members…,” Rule 11 Order at 3; but the putative class members are not the Plaintiffs. In the Rule 11 Sanctions, Judge Sparks stated that “it is appropriate to sanction Powers under Rule 11 in order to deter his dangerous and wasteful behavior and future baseless filings.” Rule 11 Sanctions, at 4. These are worthy purposes that justify the imposition of sanctions under Rule 11. They do not, of themselves, also satisfy the elements for nondischargeability under § 523(a)(6). There is simply no indication in Judge Sparks’ findings that Powers – either subjectively or objectively – actually intended to harass or otherwise injure the Plaintiffs or the legal process by filing the Certification Motion. Powers indeed may have intended to harass the Plaintiffs by filing the Class Action Suit, but Powers was sanctioned for filing the Certification Motion.) Although Judge Sparks very strongly admonishes Powers’ failure to investigate either the law or the facts, this court does not believe that either the Rule 11 Order or the Rule 11 Sanctions contain finding sufficient to support the conclusion that, by filing the Certification Motion, Powers’ intended to willfully and maliciously injure the Plaintiffs. Thus, the court denies the Plaintiffs’ Motion for summary judgment on the basis of collateral estoppel.
Id. at 340.   

After trial, Judge Clark did find the sanctions to be non-dischargeable.   The decision shows Judge Clark’s restraint in not granting summary judgment on what would have been a very close call, but instead allowing the record to be developed at trial.   (Disclosure:   Manny Newburger and Kevin Bowens of my firm tried this case).  

In an example of the maxim that “equity is as long as the chancellor’s foot,” Judge Clark took judicial notice that certain purchases by a debtor did not qualify as luxury goods and services under 11 U.S.C. Sec. 523(a)(2)(C).
The court happily takes judicial notice that La Fogata is a Mexican restaurant that is a converted Dairy Queen,  that the USPS is the U.S. Postal Service (selling stamps and delivering letters for 39 cents an ounce), that HEB Grocery is a large grocery chain in Texas, comparable to Krogers and Albertsons, that Target is the main competition for Wal-Mart, that Exxon is a major gasoline retailer with gas stations selling gasoline at competitive prices, that Consultants Pain Med is an entity that sells pain therapy for people in pain, that PetsMart is a chain that sells pet food and supplies to middle America, that Walgreens is a drug store selling pharmacy products and the like to middle America, that Calico Corners is a local store selling bedding supplies, that Alamo Barber Shop & Beauty Salon is a barber shop and beauty salon, that North Park Lincoln is actually a Lincoln-Mercury dealership (selling more Mercuries than Lincolns), that Hertz Rent-A-Car  rents Ford Motor products and other fine cars, that Whataburger is a fast food outlet similar to McDonald's, and that Regal Cinemas is a movie chain where one can go to watch a movie for under $ 10.
The court can only shake its head in bemusement at plaintiff's suggestion that these merchants would be described as "high end luxury retailers" that "only sell such goods and provide such services" (i.e., luxury goods and services).
 Capitol One Bank v. Zeman (In re Zeman), 347 B.R. 28, 30 (Bankr. W.D. Tex. 2006).   This was a case where the New York lawyer who filed the motion for summary judgment clearly was not conversant with San Antonio fine dining scene.


Judge Clark his duty to review reaffirmation agreements seriously.   Judge Clark repeatedly denied motions to reaffirm Texas home equity loans on the ground that the debts were non-recourse as a matter of law.    Judge Clark explained:
The subject of the agreement is a home equity loan. Such loans are non-recourse loans, as a matter of Texas law. There is thus no personal liability on the part of the debtor to USAA Federal Savings Bank. USAA’s remedies prior to this bankruptcy being filed were limited to recourse to the property in the event of nonpayment and failure to cure. The bankruptcy changed nothing with regard to the nature of this liability. The debtor’s discharge has no impact at all on USAA’s claim because discharge only affects the debtor’s personal liability on a debt, and the debtor never had any personal liability on this debt, even outside bankruptcy. With nothing to  discharge, there should be nothing to reaffirm either.

Yet USAA now wants a reaffirmation agreement from the debtor anyway. Why? To what end? Surely not because USAA fears that without such an agreement, its efforts to enforce this debt might contravene the discharge injunction. That is a red herring if ever there were one. Enforcement of a nonrecourse debt never violates the discharge, as a matter of law. Then for what reason does USAA want this reaffirmation agreement? To get the debtor to create personal liability by in effect waiving the protections of the Texas Constitution? One would certainly hope not. Lacking disclosure of such a waiver in its communications with the debtor or in the agreement itself, the effort to obtain such a waiver smacks of fraud. Certainly USAA is not intending to perpetrate a fraud, one would hope.

 Perhaps USAA seeks the reaffirmation agreement out of habit, or out of ignorance of the law, or by error. This is the only explanation that makes sense to the court, and the one that least requires the court to conclude that the lender had a nefarious intent.

There is no reason for a reaffirmation agreement in this case, and plenty of reasons why it is not a good idea. For this reason, the reaffirmation agreement is denied.
In re Brown, 2009 Bankr. LEXIS 835 at *1-2, 3 (Bankr. W.D. Tex. 2009).

Judge Clark also provided guidance to the debtor whose reaffirmation agreement should not be approved but who did not want to lose his property.
The court disapproves the reaffirmation agreement between the debtors and Colonial Savings, F.A., because the debtors no longer wish to proceed with reaffirmation, after considering the precautionary comments of the court. The debtors are current on their indebtedness to the creditor. In an uncertain real estate market, reaffirmation is not wise, because the debtors would be surrendering their discharge and be exposed to personal liability for any deficiency in the event of a foreclosure.

Notwithstanding such denial, the court finds and concludes that the creditor holds a valid and enforceable in rem claim. The creditor is accordingly expressly authorized and permitted to enforce the obligation of the debtors to the creditor as an in rem obligation, such enforcement to include the right to notify the debtor of payments that are or are to become due, the right to demand payment when such payments are not made (either in full or in part), the right to threaten resort to in rem remedies in the event of non-payment, the right to accelerate the indebtedness, the right to give notice of foreclosure sale, and the right to conduct and complete such foreclosure sale, so long as all of the foregoing are conducted in accordance with the terms of the indebtedness, and further in accordance with applicable non-bankruptcy law. None of the foregoing shall ever constitute a violation of the discharge injunction entered in this case pursuant to section 524(a) of title 11.

Further, the creditor is authorized and permitted to communicate with the debtor regarding the status of the account, either orally or in writing, and the debtors are authorized and permitted to obtain information from the creditor, either orally or in writing, regarding the status of the account. The creditor is authorized and permitted to afford to the debtors the same services with respect to this account as they would enjoy had there been no bankruptcy, including as applicable internet access to the account, the use of electronic funds transfers as a means of payment, the right to receive regular billing statements, and regular escrow updates. The provision of all such services shall never constitute a violation of the discharge injunction entered in this case pursuant to section 524(a) of title 11.

Further, the creditor is authorized and permitted to renegotiate the terms of the indebtedness with the debtors (provided that such renegotiated indebtedness shall remain as an in rem liability of the debtors), to provide payoff amounts for the purposes of any refinancing with a third party, or for the purposes of a sale of the underlying property. The provision of any of the foregoing shall never constitute a violation of the discharge injunction entered in this case pursuant to section 524(a) of title 11.

Once the creditor has enforced its in rem remedies, the creditor is barred by the discharge injunction from taking any steps to further enforce the obligation, as an in personam liability of the debtors, either directly or indirectly, by judicial action or otherwise.
 In re Gamboa, 2009 Bankr. LEXIS 61 at *1-3 (Bankr. W.D. Tex. 2009).


While presiding over cases in the El Paso division of the Western District, Judge Clark had occasion to rule upon motions to transfer venue involving residents of New Mexico who resided closer to the bankruptcy court in El Paso than the bankruptcy court in Albuquerque.    In the first case, the Court ruled that it had the discretion to retain a case which was filed in an invalid forum “in the interest of justice and for the convenience of the parties.”    In re Lazaro, 128 B.R. 168 (Bankr. W.D. Tex. 1991).    The Court elaborated:
Transfer to Las Cruces would not be convenient for any party (not even the IRS, whose officer in Las Cruces would also have to drive the 225 miles to Albuquerque for regular hearings), nor would it serve the interests of justice, given that El Paso is a mere 30 miles away from Las Cruces, cash collateral and lease renewal issues have already been resolved by agreed orders in this court, counsel for the debtor is a local El Paso attorney, the cost and time of travel to Albuquerque would impose an unnecessary administrative burden on the estate, making it that much more difficult for the Debtors to apply their efforts to working their way out of this bankruptcy, and creditors are spread nationwide and can get to El Paso more easily than they can get to Las Cruces.
 Id. at 175.

Several years later, however, the Court acknowledged that “some of the court’s assumptions regarding the Las Cruces docket have proven to be unfounded.”    In re Brown, 184 B.R. 741, 742 (Bankr. W.D. Tex. 1995).     Judge Clark explained:
The bankruptcy courts for New Mexico service that docket as regularly as the docket requires (they will go there monthly if that is what is needed -- which is the same frequency with which the El Paso bench is also covered by a judge who travels from San Antonio). The chapter 13 trustee in New Mexico conducts first meetings of creditors in Las Cruces monthly. The "drain-off" of New Mexico debtors who file in El Paso is not a significant percentage of the El Paso overall filings, but it is a significant portion of the Las Cruces filings. If more cases were filed in New Mexico, the resulting increase in the docket would both encourage the development of a local bar and increase the frequency and number of hearings in Las Cruces. What is more, the additional filings would make a significant monetary difference to the chapter 13 trustee, who would then be able to justify greater expenditures to service the Las Cruces and surrounding area.

These two venue cases demonstrate that Judge Clark was willing to consider the practical effects of a decision and was not afraid to admit when he was mistaken.


While the speakers at Judge Clark’s recent retirement reception spoke tellingly of his reputation as a giant in the bankruptcy field, some parties did not want to have him as their judge and requested that he be recused.    Bankruptcy Judges are placed in the unenviable position on having to rule on a motion for themselves to be recused.    In one instance that Judge Clark tried to refer the motion to the U.S. District Court, he was rebuffed.    Judge Clark found that neither making a ruling adverse to a party, In re Pease, 2010 Bankr. LEXIS 1466 (Bankr. W.D. Tex. 2010), alleged bias based on prior court proceedings, In re Swift, 126 B.R. 725 (Bankr. W.D. Tex. 1991) or the Court’s presence at a meeting referenced in testimony, In re Lieb, 112 B.R. 830 (Bankr. W.D. Tex. 1990), were grounds for recusal.

Pro Se Parties

One of the challenges of bankruptcy courts everywhere is dealing with pro se parties who may have unique ideas about the law.   In just such a case, Judge Clark dealt with a party who sought to pay his appellate filing fee with a “Certified Money Order” drawn against his social security account with the United States Treasury.    After patiently explaining why the self-drawn instrument was not adequate to pay the filing fee, Judge Clark concluded:
Mr. Pease clearly has some strongly held beliefs about the role of government, the legitimacy of the monetary system in the United States, and perhaps even the legitimacy of government itself. The court will not waste its time attempting to dissuade Mr. Pease of his strongly held beliefs. Suffice it to say that this court does not subscribe to those beliefs.

A filing fee must be paid using the recognized currency of the United States. The “Certified Money Order” submitted by Mr. Pease does not qualify either as recognized currency or a legal document that would result in the payment in the recognized currency of the United States. The document submitted is a complete work of fiction or fantasy at best, and a fabrication and a fraud at worst. In all events, it is ineffective as a means of payment.
 In re Pease, 2010 Bankr. LEXIS 771 at *3 (Bankr. W.D. Tex. 2010).

1 comment:

Tom Henderson said...

AS reflected in my prior message re: your first installment of this series, this is truly a superior article. (My wife enjoyed it and she doesn't even "speak bankruptcy.")

Tom Henderson