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Benefit Overpayments Are Dischargeable In Bankruptcy

By Ryan C. Wood

Time and time again I hear various government overpayments are not dischargeable when filing for bankruptcy protection. This is wrong. Government overpayments and overpayments are general unsecured debts that are eligible to be discharged when filing bankruptcy. I dedicated an entire section of a bankruptcy attorney website to hopefully dispel this myth over seven years ago. Overpayments from various government entities such as the California EDD (Employment Development Department), welfare overpayments, food stamp overpayments, social security overpayments and even retirement benefit overpayments are eligible to be discharged when filing for bankruptcy protection given they are general unsecured debts.

Do Not Forget About Recoupment Though

What is even more unknown is what equitable recoupment is. This article discusses the difference between a setoff and equitable recoupment. Equitable recoupment is not a violation of the automatic stay or order of discharge resulting from filing for bankruptcy and that is what is at issue in the case described and listed below.

Ninth Circuit Bankruptcy Appellate Panel No. CC-17-1375-LSF

The Ninth Circuit Bankruptcy Appellate Panel recently had an appeal that dealt with these issues as it pertained to a former city council member who also served on the planning commission for a city for around 17 years, a long time. Upon retirement she applied to supplement her retirement income by obtaining retirement income from the State of California via CalPers (she was apparently a State of California employee) and the also applied in her city for their Retirement Enhancement Plan benefits given her “:public service” as a member of the city council and planning commission. The 9th Circuit BAP memorandum of decision specifically added a footnote to the memorandum of decision to highlight that this person was on the city council at the time this Retirement Enhancement Plan was approved and that she voted in favor of the Retirement Enhancement Plan.

The Retirement Enhancement Plan is supposed to provide a small supplement to the California Public Employees’ Retirement System (CalPers) benefits for only certain eligible city employees. Public Agency Retirement System (PARS) is a private corporation that manages this Retirement Enhancement Plan. When there is an overpayment of some sort of benefit the question is always why was the person overpaid? In this case there seemingly are mistakes by all parties involved. The Retirement Enhancement Plan enrollee and bankruptcy filer in this case provided PARS with her income correctly as $14,938.04 annually or a year, which should have resulted in a monthly plan benefit of only $99.87 from the Retirement Enhancement Plan. Then PARS sent her an enrollment packet that mistakenly had the income listed as $14,938.04 per month, not annually, and resulted in a monthly benefit payment of $1,198.84 or a 1,100% increase……. The enrollee just signed the enrollment documents and returned them to PARS with the mistake. The overpayment of $1,098.97 continued for about 19 months before PARS realized the mistake and requested the $21,972.20 in overpayments be immediately returned.

Four months later in December 2014 the enrollee and overpayment receiver filed for bankruptcy protection under Chapter 13 of the Bankruptcy Code. Again, the PARS overpayment is a general unsecured debt that is eligible be discharged when filing for protection under the Bankruptcy Code. In Chapter 13 it becomes a little more complicated given a bankruptcy filer may have an obligation to pay all or part of their unsecured debt back and have the unpaid portion discharged upon completion of the Chapter 13 Plan. Almost three years after filing the Chapter 13 bankruptcy case the bankruptcy filer and overpayment receiver filed a motion for sanctions against PARS for violating the automatic stay in the chapter 13 case for withholding benefits to recoup the overpayment she received before the chapter 13 bankruptcy case was filed.

As I have told potential clients and clients for years that the underlying overpayment is eligible to be discharged, but the entity that the overpayment is owed the money has the right to recoup from any future benefits you made receive. This is what PARS is doing in this case. PARS reduced the bankruptcy filers/overpayment receivers’ current benefit to recoup the overpayment or funds the bankruptcy filer should not have received. The bankruptcy filer and her bankruptcy attorneys filed a motion for sanctions saying PARS is violating the automatic stay in the bankruptcy case by continuing to collect on a debt that is part of the bankruptcy filing and eligible to be discharged. This is called equitable recoupment.

PARS filed an opposition to the motion for sanctions providing the bankruptcy filer or overpayment receiver should have known she was receiving too much each month given she had approved the Retirement Enhancement Plan when she was on the city council and she knew the Retirement Enhancement Plan was intended only to provide a minimal supplement to CalPers retirement payments. She actually received $1,198.84 each month and that is a lot higher than the intent of the Retirement Enhancement Plan. Also PARS argued that she had signed the forms that included the calculation error and should have noticed the calculation error at that point too. If the cashier is supposed to give you a dollar in change and gives you $1,000 19 times in a row instead you will notice right? The bankruptcy court held PARS had the right to equitable recoupment and the bankruptcy filer and overpayment receiver appealed the order denying her motion for sanctions to the 9th Cir. BAP. So here we are now.

Equitable Recoupment

Equitable recoupment is not a violation of the automatic stay when filing for bankruptcy protection. Equitable recoupment is also not provided for in the Bankruptcy Code, but is a common law equitable doctrine, a fairness doctrine, that provides the setting up of a demand arising from the same transaction as a plaintiff’s claim or cause of action for the purposes of abatement or reduction. See Newbery Corp. v. Fireman’s Fund Ins. Co., 95 F.3d 1392, 1399 (9th Cir. 1996). Recoupment is not subject to or limited to claims that exist before a bankruptcy case is filed and can be recovered after the bankruptcy case is filed. This is what is going on in this case by PARS. PARS setup a demand for return of the overpayment for the purpose of abatement or reduction of the bankruptcy filer’s current and future benefits under the Retirement Enhancement Plan. If the bankruptcy filer was no longer receiving benefits under the Retirement Enhancement Plan from PARS, then there is no way for the abatement or reduction to take place on current and future received benefits.

Here comes the more complicated part and a detailed analysis of if a party has the right to recoupment. There is a two part test used by the Ninth Circuit….. the events need to be part of the same transaction and must be sufficiently interconnected so that it would be unjust to insist that one party fulfills its obligation without requiring the same of the other party. The Ninth Circuit uses a logical relationship test regarding if the events are part of the same transaction. See Aetna U.S. Healthcare, Inc. v. Madigan (In re Madigan), 270 B.R. 749, 753 (9th Cir. BAP 2001). Transaction is defined liberally and in a flexible construction or broadly.
The original Bankruptcy Court found that the logical relationship test was satisfied given the debt owed to PARS and future benefits owed to the bankruptcy filer/overpayment receiver were from the same facts. The Ninth Circuit Bankruptcy Appellate Panel did not have too much to add to the analysis and agreed that the overpayment owed to PARS and the current benefits received by the bankruptcy filer/overpayment receiver are from the identical transaction and retirement plan.

The bankruptcy filer/overpayment receiver in the appeal attempts to argue that equitable recoupment is not part of the Bankruptcy Code, if Congress intended for equitable recoupment to be an exception to the automatic stay Congress would have included it in Section 362(b) of the Bankruptcy Code and California law prohibits the offset of retirement benefits. The Ninth Circuit Bankruptcy Appellate Panel explained that it is bound by Ninth Circuit precedent unless overturned by the Supreme Court and equitable recoupment is a doctrine in the Ninth Circuit. The Ninth Circuit Bankruptcy Appellate Panel further noted that the bankruptcy filer/overpayment receiver did not make these arguments in her opening brief so the panel does not have to consider them regardless. Ouch. Regarding California law prohibiting the recoupment of retirement benefits the appellate court equally slams the door and provides multiples cases in which California courts treat pension benefits the same as wages for purposes of recoupment. See Krolikowski v. San Diego City Emps.’ Ret. Sys., 24 Cal. App. 5th 537, 557 (2018) (holding that recoupment of state pension benefit overpayment was not barred by statutes of limitations; exemptions for levy and attachment of public retirement benefits; equitable estoppel; or laches).

What Happens Most of The Time Regarding Overpayments When Filing Bankruptcy

What happens with overpayments most of the time when filing bankruptcy is after receiving a discharge that is the end. Someone receives an overpayment for whatever reason and they do not need future benefits from the program or entity they received the overpayment from. There is no way for the discharged overpayment to be collected on given there are no current or future benefits paid out that can be reduced for recoupment purposes.

Do Not Mistake Setoff With Equitable Recoupment

Unlike equitable recoupment setoff is codified in Section 553 of the Bankruptcy Code. Setoff allows a creditor to deduct amounts owed to it by the bankruptcy filer from amounts the creditor owes to the person or entity filing for bankruptcy protection. A creditor must request and receive relief from the automatic stay before doing any sort of setoff. Also a distinguishing difference is setoff does not allow claims from before the bankruptcy case was filed to be setoff with claims after the bankruptcy case was filed.

How Can Credit Card Interest Rates Be So High?

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The short answers is because the law has been interpreted to allow credit card interest rates to be criminally high.  It was not always like this though.  You may be thinking to yourself that each state has usury laws limiting interest rates.  You are correct but keep reading to find out why it does not matter.    

There are price gouging laws in time of emergencies to not allow improper increases in price to make money at the expense of human suffering. There are state usury laws limiting how much interest can be charged when lending money.  So why are credit card interest rates so high?  If someone is in financial turmoil, financial disaster why are there not laws limiting interest rates on what they can borrow just like you cannot price gouge during natural disasters? How can a bank charge 29% interest on a revolving unsecured credit account? It is like loan sharking right?  Loan sharking is illegal right?  My best analogy is seatbelt laws. Seatbelt laws save lives. This is a fact and without seatbelt laws requiring wearing seatbelts not as many people would wear seatbelts and vehicle deaths would be higher. Well, The Supreme Court of the United States more or less opened the door to the repeal of seatbelt laws regarding limits on interest rates and people have been getting killed with credit card interest rates ever since. We all need to be saved from ourselves sometimes and our laws protect us. So what happened?

State Usury Laws

First let us talk about state usury laws. Each state can have usury laws limiting how much interest can be charged under different types of financial transactions. Over time many exceptions and loopholes have been created to allow lenders in different forms of loans to charge ridiculously high interest rates. See our other bankruptcy attorney articles about 1,000% interest title loans and payday loans. Somehow these horrible loans are legal though . . . . Below are the various sections of law in California that make up California usury laws. Generally, and very generally, 10% is the highest interest rate under California usury laws depending upon the type of financial transaction.

California Const. Art. XV §1
California Civil Code §§1912-1916.12
California Civil Code §§1916-1 to 1916-3
California Civil Code §§1917-1917.006
California Civil Code §§1917.060-1917.069
California Civil Code §§1917.160-1917.168
California Civil Code §§1917.610-1917.619
California Commercial Code §§9201-9208
California Corporations Code §§25116-25118
California Financial Code §§22000-22064
California Government Code §§5900-5909

Why Are Credit Card Interest Rates So High?

If there is state usury laws limiting the amount of interest that can be charged how can banks charge 29% interest on a credit card debt? The case is Marquette National Bank v. First of Omaha Corporation, 439 U.S. 299 (1978). Somewhere there is a bankruptcy attorney, not this one, cheering for these high interest rates given unmanageable debts drive bankruptcy filings. “The First National Bank of Omaha (Omaha Bank) is a national banking association chartered in Nebraska; it is enrolled in the BankAmericard plan, and solicits for that plan in Minnesota. Omaha Bank charges its Minnesota cardholders interest on their unpaid balances at a rate permitted by Nebraska law, but in excess of that permitted by Minnesota law.” So there you go. First National Bank of Omaha solicited clients in the state of Minnesota but chose not follow Minnesota state law regarding interest rates. First National Bank of Omaha charged higher interest rates according to the law in which they were located, the state of Nebraska. What should be controlling was the issue? Generally speaking the law of the jurisdiction where the individual is located, a state or country, governs their legal rights and not the corporate headquarters or location of the business they are doing business with. Each state has usury laws to protect their state residents within that state and limit interest rates. Each state in the United States has many different laws than other states. Family law is a great example and the 8.5 community property states vs. equitable distribution in the remaining 41.5 states. Why is there a 0.5? Alaska is an opt-in community property state. Save that one for Jeopardy. Back to . First National Bank of Omaha and how they arguably disrespected the state law of Minnesota. SCOTUS provided: “Though the “exportation” of interest rates, such as occurred here, may impair the ability of States to maintain effective usury laws, such impairment has always been implicit in the National Bank Act, and any correction of that situation would have to be achieved legislatively. Pp. 439 U. S. 318-319.” So under the federal National Bank Act what The First National Bank of Omaha did was okay even though it violated the usury laws of Minnesota. There you have it and the rest is history.

But wait. What state allows interest rates of 29%? This is where capitalism and greed took over and now we have more deaths by higher interest rates than before 1978. Certain states repealed or changed their usury laws to allow for high unconscionable interest rates. These states did this to lure the big banks to set up shop in their states to create jobs in these states. Well it worked. So for a few thousand jobs millions of Americans can be charged massive interest rates that we can all agree of too high.

What is the legislative solution SCOTUS mentions in The First National Bank of Omaha? Our United States legislatures, the Senate and House of Representatives, would have to pass legislation to limit interest rates and then that would applicable nationally. Do not hold your breath given our federal legislatures chose to bailout these same banks from the mortgage meltdown. Too big to fail means too big to be honestly regulated.

Should I Rent To Someone Who Has Filed Bankruptcy?

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YES, YES and YES.  The reality is an apartment building owner or manager should rent to those who have filed for bankruptcy protection because it is in their best financial interest.  Let me tell you why it makes financial sense given just not discriminating against other humans on THIS basis may not be enough motivation. You are in the business of renting rentals and getting paid each month so why not rent to whomever is most likely to do that. Will a mindless, soulless and heartless corporation rent to someone that filed for bankruptcy protection? I have found there are more problems with large corporate ran apartment complexes given the humans that work there are “just doing their job.” Which means they “just follow” the corporations rules and procedures to ensure they remain employed regardless of what reality actually is or harm caused.  And yes, still do your due diligence and request pay statements to make sure they can afford the rent though with first, last month’s rent and security deposit.

Link to YouTube video below:

Why You Should Rent to Bankruptcy Filers

What Is The Reality?

The reality is an apartment building owner or manager should rent to those who have filed for bankruptcy protection because it is in their best financial interest. For one, the potential renter has no debt (or very little). Two, the renter with a bankruptcy wants to rebuild their credit. Three, they are not eligible to obtain a discharge for many years depending upon the chapter of bankruptcy they filed and when. Four, it is not legal to discriminate against bankruptcy filers . . . . this is a stretch though in reality. If you are an owner or manager of an apartment building and want to decrease your accounts receivable and delinquent rent payments please rent to those who have no debts . . . make sense right? Of course as a bankruptcy attorney I am biased right? Or is this drum I keep beating just true and make sense? If someone is just following the law they should not be looked upon as bad or discriminated against right? We can all agree that all types of discrimination are bad right?

One: Bankruptcy Filers Have No Debts

Okay, so this is a little more complicated but is true in some circumstances.  If the bankruptcy filer has a vehicle loan, student loans or owed not dischargeable taxes they may still have some debts after a discharge in bankruptcy. In a Chapter 7 bankruptcy they will not have any general unsecured debts like credit cards though after discharge. For examples:
1. Prospective Renter 1: $70,000 gross income with $40,000 in credit card debt and no bankruptcy on credit report.
2. Prospective Renter 2: $70,000 gross income no creditor debt and a bankruptcy on credit report.

Oh by the way, they both work for the same company and have the same experience etcetera. This is a simplistic example but exactly what I am trying to point out. Which prospective renter is a higher risk of not paying the rent or legally forcing you to hold to bag if rent payments are missed?

So are you going to go with the person that is struggling to pay credit card debts that have high interest rates that were once illegal and they are getting squeezed harder and harder each month to pay basic living expenses? Or rent to the person that followed the law and discharged debts to make sure they can pay their rent each month and eat?

Or are you going to illegally discriminate against my clients for following the law and obtaining a discharge according to the law written by your elected Congress and signed into law by your elected President of the United States of America? I hope you choose to not discriminate.

Two: My Clients Want To Rebuild Their Credit

No one wants to file bankruptcy and I can assure you after receiving a discharge my clients want to rebuild their credit. As a bankruptcy attorney I feel I have an obligation to provide education too. We have a number of Consumer Financial Protection Bureau free pamphlets (yes they are free; all you have to do is request them; another reason to choose our services) on a table in the front of our office include: Know Your Rights When A Debt Collector Calls; How To Spot Frauds and Scams; How To Find The Best Credit Card; and How To Rebuild Your Credit. My clients have been put through hell already with missed payments, harassing phone calls and the stress of paying the bills each month. They do not want go through it again and they want to rebuild their credit. As an apartment owner or manager you can encourage my past client to enroll in a bill paying service that reports to all three credit bureaus so that paying rent also helps rebuild credit. How about no discrimination but incentification of on-time regular rent payments that is mutually beneficial? You do want on-time regular payments of rent each and every month right? You should consider it.

Three: We Can Only Get A Chapter 7 Discharge After 8 Years From Last Chapter 7 Case Filed

Once someone files for chapter 7 bankruptcy and discharges all of their eligible unsecured debt they cannot obtain a chapter 7 discharge again for eight years. So what happens if they do not pay their rent? Well, the apartment manager/owner has every legal option available to enforce the debt. You do not have to worry about the renter filing for bankruptcy protection the day before you are supposed to evict them or discharge the unpaid rent. So why not rent to someone with a bankruptcy on their credit report?

Four: It Is Against The Law To Discriminate Against A Bankruptcy Filer

Section 525 of the Bankruptcy Code provides some specific protections. You cannot be terminated or discriminated against by a private employer. You also cannot be denied student loans. This is a very simplistic explanation of Section 525, but it exists. What about not renting to someone because there is a bankruptcy on their credit report? This kind of discrimination falls under an apartment owner/manager not renting to someone with three noisy kids or two dogs. You cannot not rent to someone because of their kids, but some other “pretext” or excuse, if any, will be given for the discrimination other than the actual horrible discriminating reason.

So rent to someone with a bankruptcy on their credit report and give them a chance just like some other human I am sure gave you a chance at some point in your life. Pay it forward. I really have no realistic hope that mindless, heartless soulless corporations will change any of their policies in this area………

What Fake News Is There About Filing Bankruptcy?

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There is way too much fake news out there about bankruptcy. Look, I know bankruptcy is not looked at in the best light for many reasons. I am not going to try and convince anyone that believes bankruptcy is wrong. Most people will never understand until something happens that is completely out of their control and now they are looking at filing for bankruptcy protection. Bankruptcy is the law and absolutely necessary in our economic system.

So, what is the single most misunderstood part of bankruptcy? What is the most common “Fake News” I hear out there about filing bankruptcy? A little information about me first so you give my opinion some weight. I have been involved in the bankruptcy industry before I graduated law school. I did not jump on this band wagon during the mortgage meltdown like many other attorneys. I intended to be a bankruptcy attorney during law school and I have not been employed in any other area of law. I worked for a creditor’s right law firm. I worked for a debtor’s rights law firm. I worked for a Chapter 13 Trustee, David Burchard, for the San Francisco and Santa Rosa Divisions of the Bankruptcy Court for the Northern District of California. I then started my own practice to even better serve those in need of debt relief. I have touched easily over 5,000 bankruptcy cases. I have talked to thousands of potential clients and those that chose to file bankruptcy. The single most misunderstood part of bankruptcy is the relationship between assets and exemptions that protect the bankruptcy filers stuff and/or assets.

The Most Disturbing Fake News Is: You Will Not Lose All Of Your Stuff When Filing Bankruptcy

THIS IS NOT TRUE AT ALL. This is probably the most troubling part of being a bankruptcy attorney. I have to explain over and over again that you will not be left penniless and barefoot in the middle of the street after filing for bankruptcy under any chapter of the Bankruptcy Code. We all need a certain minimum stuff to survive in this world. Bankruptcy is designed to give you a fresh start, but not a head start either.

While bankruptcy is governed by Federal Law and created by Congress, each state can create their own exemptions to protect peoples stuff from those they owe money to. A bankruptcy filer in certain states can choose the state law exemptions or federal exemptions to protect their stuff. In California you must use the state law exemptions pursuant to California Civil Code 703.14 or 704. The theory behind protecting a certain amount of someone’s assets is it does no human on Earth any good if another human is stripped of all of their worldly possessions when filing bankruptcy. At the same time common sense should tell you that if you own a paid in full $60,000 Tesla you cannot get rid of $30,000 in credit card debt while still keeping the paid in full $60,000 Tesla. You would be right. Under California exemptions we get either (CCP703.14) $5,350 or (CCP704) $3,050 to protect your vehicles. I am not going to go into the differences between California’s two set of exemptions, the 703 or 704’s. Just know that there are two choices and one is probably more beneficial to you than the other. It all depends upon your assets.

So what are the problem assets? As the example provides above vehicles can have high values sometimes or if multiple vehicles are owned it can be difficult to protect all of them depending upon the vehicles value of course. Home equity in the Bay Area is now a huge issue again given how much home values have increased over the last 8 years. We can only protect so much equity in a home. For more information about how much California exemptions protect in home equity look up the homestead exemptions for California. During your consultation with a bankruptcy attorney you will discuss exemptions in much detail.

Filing Bankruptcy Is Not Financially Devastating Like The Media Or Your Friends Think

The other most common “Fake News” I hear is how financially devastating filing for bankruptcy protection is. This is simply not true at all. Most of the financial devastation already took place before I ever speak to someone. All the missed payments, late payments or repossession/foreclosure has already happened or will soon happen regardless of filing for bankruptcy protection or not. Four or five months of missed or late payments can tank a credit score. The damage is done. SO FILING FOR BANKRUPTCY DOES NOT LOWER YOUR CREDIT SCORE. THE NEGATIVE EVENTS LEADING UP TO THE BANKRUPTCY CASE BEING FILED LOWERS YOUR CREDIT SCORE.

What the bankruptcy does is eliminate the debts you are struggling to pay each month so that you can make regular on-time payments for the necessities of life. Then once you make regular on-time payments on everything your credit score will increase. How can you rebuild your credit while still making late payments or missing a payment on one card and not another? It really does no good to rob Peter to pay Paul. That is a vicious cycle of debt and increased interest payments that will never end.

You can buy a house. You can buy a car. You can continue to live life like you are now. It is just without all of the debt that keeps you from getting ahead in this very short life we have. You do not have to struggle each month. That is no way to live and you do not have to. Educate yourself about bankruptcy and other tools to help you get ahead in life.

California Law and Record Title Presumption Versus Community Property Presumption and Bankruptcy

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Update as of November 14, 2018

On November 8, 2018, the Ninth Circuit Court of Appeals entered an order certifying question to the Supreme Court of California as follows:

“Does the form of title presumption set forth in section 662 of the California Evidence Code overcome the community property presumption set forth in section 760 of the California Family Code in Chapter 7 bankruptcy cases where: (1) the debtor husband and non-debtor wife acquire property from a third party as joint tenants; (2) the deed to that property conveys the property at issue to the debtor husband and non-debtor wife as joint tenants; and (3) the interests of the debtor and non-debtor spouse are aligned against the trustee of the bankruptcy estate?”

This is the question the following cases and discussion of various cases are trying the answer and it is far from simple. The outcome of the decision by the Supreme Court of California will not have much of an impact on bankruptcy filings if they side on the community property presumption since that is what is taking place now. If the record title presumption is determined to overcome the community property presumption us bankruptcy attorneys will again be able to file cases for one spouse or the other that recognizes real property held as a joint tenancy and only include the value of the filing spouses separate property interest. We shall see.
________________________________________________________________________________________________
Prior to November 8, 2018

What? I thought the Ninth Circuit Court of Appeals in the Summers case already held that the taking of title as joint tenants under California law is not subject to California community property transmutation laws? Then the California Supreme Court held the seemingly opposite result in the Valli case. Yes, that Frankie Valli. The law that counts is California State law. The issue here develops when real property is acquired during marriage and title is taken by a married couple as joint tenants. The title is taken as joint tenants and therefore the property is legally under California State law the married couple’s separate property. The taking of title in this form provides their intent. We also have California’s transmutation law and certain presumptions saying something else apparently. Now we have the Brace case decided by the Ninth Circuit Bankruptcy Appellate Panel publishing a decision that discusses the interplay between the Summers and Valli cases.

Bankruptcy law is federal, which relies on applicable nonbankruptcy law, state law, to provide for many substantive and procedural rights under the bankruptcy code. If you did not know this please take a moment and do some research on this issue. Then you throw in that California is a community property state and we have a complicated interplay of law and who gets to decide who is right when applying these laws. There are also only 8 community property states with Alaska being an opt-in community property state. So I would say there are 8.5 community property states if being technical.

I believe the difficulties in interpreting this intersection of law is for good reasons and good intentions. The result has been far from good for a very long time. The issue really just comes down to trying to prevent litigation regarding what is community property versus separate property at the time of divorce in California.
Sadly when things go bad opinions change as to who owns what. When filing for bankruptcy protection what is community property of a married couple and separate property is also extremely important.

The 9th Cir. Bankruptcy Appellate Panel Says The California Supreme Court Wins

The Ninth Circuit Bankruptcy Appellate Panel could have chose to not considered the California Supreme Court case and vice a versa. See Miller v. Gammie, 335 F.3d 889 (9th Cir. 2003). The 9th Circuit Bankruptcy Appellate Panel cited a 9th Circuit decision that held when there is a irreconcilable issue between courts then any future three-judge panel of the court of appeals and district courts should consider themselves bound by the [California Supreme Court Valli Case] intervening higher authority and reject the prior opinion of this court as having been effectively overruled. This is some rare air right here. How many people can tell you exactly how intersections of law such as this are decided? Very few, but here is it and a case to read about it. Extremely interesting reading and the requirement of a three-judge panel is excellent.

Presumptions Under California Law Regarding Community Property and Taking Title During Marriage

Before moving forward there are certain presumptions under California community property law that need to be defined and understood.

CA Family Code Section 750

A husband and wife may hold property as joint tenants or tenants in common, or as community property, or as community property with a right of survivorship.

California law clearly provides a married couple can hold property as joint tenants. It issues is the title or evidence of this intent to overcome the presumption that all property acquired during marriage is community property. See CFC 760 below.

CA Family Code Section 760

Community Property: Except as otherwise provided by statute, all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in this state is community property.

Okay, so when real property is acquired during marriage the presumption is the real property is community property. What could possibly rebut that presumption? Is it possible a recorded title signed at the time purchase providing title is as joint tenants can rebut this presumption?

CA Family Code Section 2581

Presumption Concerning Property Held In Joint Form: For the purpose of division of property on dissolution of marriage or legal separation of the parties, property acquired by the parties during marriage in joint form, including property held in tenancy in common, joint tenancy, or tenancy by the entirety, or as community property, is presumed to be community property. This presumption is a presumption affecting the burden of proof and may be rebutted by either of the following: (a) A clear statement in the deed or other documentary evidence of title by which the property is acquired that the property is separate property and not community property; (b) Proof that the parties have made a written agreement that the property is separate property.

Again, a recorded title is the legal document that provides how and who owns a piece of property. Again, is title taken as joints tenants during marriage then recorded with the county recorder’s office fulfills the requirements of CFC 2581? What other interpretation of a joint tenant title could be inferred? As with all questions of statutory interpretation we begin with the plain language of the statute. See Lamie v. U.S. Trustee, 540 U.S. 526, 534 (2004); Ariz. Health Care Cost Containment Sys. v. McClellan, 508 F.3d 1243, 1249 (9th Cir. 2007). But a recorded deed is not a statute. By the plan language of a recorded title without knowing anything else what conclusion would or could the recorded title result in? This is open to human interpretation? It says the married couple is married and bought the property as joint tenants regarding the property they acquired during marriage. The entire point of CFC 2581 is to provide guidance on a recorded title. What more does a title need say? It is difficult to balance what CFC 2581 actually says with with the recent decisions in Valli and now the Brace case.

Let us now bring this back to the Bankruptcy Code and why I am writing about this. Section 2581 applies “for the purposes of division of property on dissolution of marriage or legal separation of the parties,” and when filing for bankruptcy protection? The various decisions on this issue do discuss this issue in some detail and conclude there is nothing limiting the application of Section 2581. Section 2581 does not say for all purposes. It clearly provides for the purposes of division of property on dissolution of marriage or legal separation. Generally when the word “purpose” is used it is because it is possible for other “purposes” such as filing for bankruptcy protection Section 2581 is not applicable. This is not how California law has been interpreted though. “We give the language its usual and ordinary meaning, and ‘[i]f there is no ambiguity, then we presume the lawmakers meant what they said.’” See People v. Gutierrez, 58 Cal. 4th 1354, 1369 (2014) (alterations in original) (quoting Mays v. City of Los Angeles, 43 Cal. 4th 313, 321 (2008). When a married couple does file bankruptcy in a community property state, and only one spouse files for bankruptcy, only community property and filing spouses separate property become part of the bankruptcy estate pursuant to Section 541 of the Bankruptcy Code. So for purposes of filing for bankruptcy protection what is community property and separate property must be taken into account depending upon the circumstances. I now say depending upon the circumstances given many times there is no reason to even go down the road of should only one spouse file for bankruptcy protection and the other not. Many times one spouse just does not want to file at all. Or a couple has some misguided myth about bankruptcy that prevents them from even considering filing at all under any circumstance while the other spouse is all for it. Attorneys practicing bankruptcy law get a very bad wrap from the real world. This topic is a perfect example of the difficulties.

So the Ninth Circuit Court of Appeals in Summers said the California transmutation laws are not applicable to the purchase of property during marriage as joint tenants. Even if the California transmutation laws are applicable the signed, notarized and recorded title meets the requirements of Section 852, right?

CA Family Code Section 852

Transmutation of Property: (a) A transmutation of real or personal property is not valid unless made in writing by an express declaration that is made, joined in, consented to, or accepted by the spouse whose interest in the property is adversely affected; (b) A transmutation of real property is not effective as to third parties without notice thereof unless recorded.

Third parties do receive notice given the title is recorded with the county. So simple.

The Ninth Circuit Court of Appeals held in Summers that California transmutation laws do not apply to the acquiring of real property during marriage under California law. CFC 2581 provides there should be an express declaration of the parties’ intent. Yes, that is the title record as joint tenants. But no, you have to go beyond what the letter of the title says and now comply with California transmutation laws as well? CFC 2581 is not good enough apparently.

California Evidence Code Section 662

Record title presumption: which provides generally that “[t]he owner of the legal title to property is presumed to be the owner of the full beneficial title. This presumption may be rebutted only by clear and convincing proof.”
Wait a second here. California Evidence Code Section 662 says there is a presumption about how title is taken. What clear and convincing evidence has the Court discussed that the married couple in Valli or Brace did not want the property to be held as joint tenants? The title says that. So we now apparently have to ignore CFC 2581 and Cal. Evid. Code 662.

The Summers Ninth Circuit Court of Appeals Case – Hanf v. Summers (In re Summers), 332 F.3d 1240, 1242 (9th Cir. 2003)

In Summers, the Ninth Circuit held that under California law, the community property presumption is rebutted when a married couple acquires property from a third party as joint tenants. In Summers the husband, wife and daughter took title to a piece of real property as joint tenants and each of the three parties eventually filed for bankruptcy protection. Citing several California Courts of Appeal decisions, the Ninth Circuit held that under California law the transmutation requirements applied only to interspousal transactions. The wrinkle here that threw everything sideways was the daughter, a third party, was also on titled in addition to the married parents. To get a result that was fair there had to be a way for the three to be joint tenants. The Summers court relied on the California courts’ definition of “transmutation” as “an interspousal transaction or agreement that works a change in the character of the property.” In re Summers, 332 F.3d at 1244 (citing In re Marriage of Cross, 94 Cal. App. 4th 1143, 1147 (2001) (emphasis added)).

As a result of Brace we arguably have to ignore the actual definition of a transmutation under California law. When a house is purchased there is no “interspousal transaction or agreement that works to change the character of the property.” Someone please explain to me how a purchase of a house, an agreement between a married couple during marriage, changes the character of property a married couple is purchasing? You have to own the property first to change the character of the ownership. Right? Some human being please explain to me how I can change the character of property I do not yet own? This bankruptcy attorney finds this confusing.

The purchase of a house is also NOT an “interspousal transaction.” The transaction is between the spouses and the seller. Now we have to ignore the California transmutation definition too. The California Supreme Court case Valli v. Valli (In re Marriage of Valli), 58 Cal. 4th 1396, 1400 (2014). The California Supreme Court did not agree with the Ninth Circuit Court of Appeals interpretation of California transmutation law in Summers. In Valli, the California Supreme Court held that California’s transmutation statutes are also applicable to transactions in which spouses acquired property from a third party. 58 Cal. 4th at 1405-06. The California Supreme Court noted that prior to California’s transmutation laws the alleged transfer of property by oral or implied agreement caused expensive litigation in divorces. This led to just a passing comment being interpreted or argued to be an agreement to transmute property. That is why we now must have a writing to transmute property. Okay, so there is plenty of merit to reducing litigation in divorces and not having one spouse upon divorce or dissolution say an asset is not a community asset. I get that. The problem is that I still have read nothing to lead me to believe a title saying a house purchased during marriage with title take as joint tenants does not meet the transmutation requirements anyway even though I do not believe the transmutation requirements are applicable to begin with. Nope. That is not the case according to Valli and Brace. This is a legislation issue and what various California laws say about this issue and the interplay with the Bankruptcy Code in a community property state.

Another wrinkle is: The California community property presumption applies to property acquired during marriage unless it is: (1) traceable to a separate property source; (2) acquired by gift or bequest; or (3) earned or accumulated while the spouses are living separate and apart. Valli, 58 Cal. 4th at 1400.

Ninth Circuit Bankruptcy Appellate Panel Brace Case

The Ninth Circuit Bankruptcy Appellate Panel declined to agree with the Summers case and followed the Valli case interpretation of California law. It is important to note that the 9th Circuit BAP provided that the presumption of community property was not overcome by the facts of the Brace case. Under other circumstances they may have held otherwise with more facts to overcome the community property presumption. It begs the question what evidence or recorded document or non-recorded document is clear and convincing evidence of the married couples intent to be joint tenants when purchasing property California? The 9th Cir. BAP instructs us that a specific statutory provision does prevail over a general one relating to the same subject. Pac. Lumber Co. v. State Water Res. Control Bd., 37 Cal. 4th 921, 942 (2006). This principle of statutory construction actually supports the conclusion that the community property presumption prevails over the title presumption. See Valli, 58 Cal. 4th at 1412-13. The community property presumption is a specific statutory presumption found within California’s community property law, not the more general presumption found in Section 662 of the California Evidence Code. Another piece of rare air regarding how the intersection of law is interpreted. They are saying that the transmutation laws are specific and the record title presumption is just a general statutory provision of the general transmutation laws that can be ignored if there is more specific law. That is interesting. Does a big umbrella stop the rain from every getting to the small umbrella under the big umbrella? In some circumstances yes and some circumstances no. It is open to interpretation on a issue by issue analysis and there is nothing uncomplicated about it.

What We Can Take Away From This?

There is no such thing as joint tenancy between a married couple under California law unless there is an additional writing in which you say something like, “WE TOOK TITLE TO OUR HOUSE AS JOINT TENANTS DURING MARRIAGE, SO THE PROPERTY IS EACH SPOUSES SEPARATE PROPERTY. IF THERE IS ANY QUESTION ABOUT OUR INTENT IN THE EVENT OF DEATH, DIVORCE DISSOLUTION OR BANKRUPTCY WE ARE MAKING THE EXPRESS DECLARATION REGARDING THIS PROPERTY WE NEVER OWNED BEFORE MARRIAGE AND ARE IN FACT INTENDING TO OWN THIS REAL PROPERTY AS OUR SEPARATE PROPERTY AND JOINT TENANTS AS THE RECORDED TITLE PROVIDES.” Then take that writing and record it with the county recorder’s office or have it notarized and tucked away with hope it is never needed. But then when you go to record this document after ten years an employee at a county recording office may say that the document was not notarized properly if the notary left out one word from the certificate notarizing the additional writing you created to make your intent clear. So do you now we need two writings or a writing about the writing witnessed by two disinterested parties? In today’s world possibly a video uploaded to the “cloud” of both spouses actually saying what there intent is regarding a property purchased during marriage? The point is where does it end? So how do you hold property as joint tenants if you are married when the actual recorded title is not enough to show the intent of the parties is the question?

Why Do Bankruptcy Filers We Care?

This issue arises when one spouse files for bankruptcy and the other does not. The issue for bankruptcy attorneys is whether only half the value of our client’s real property becomes property of the bankruptcy state when the title is taken as joint tenants. Half of the house is supposed to be the separate property of each spouse or half is the non-filing spouses separate property. This is a huge issue for bankruptcy filers in California and applying exemptions to protect client’s real property and obtain a discharge of their eligible debts. Community debts may only seek satisfaction from community assets.

What If A Creditor In A Bankruptcy Case Is An Infant or Incompetent Person?

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I really do not know the utility of this article given I know this set of circumstances rarely will ever come up. I have literally had a hand in four or five thousands cases over the years and this issue has not come up so far. I also administered countless Chapter 13 cases as the staff attorney for David Burchard, the Chapter 13 Trustee for the San Francisco and Santa Rosa Divisions of the United States Bankruptcy Court for the Northern District of California. The set of circumstances that this could be an issue are very narrow. The bankruptcy filer would at some point injured or damaged a minor somehow or the person with a claim against the bankruptcy filer became incompetent over time. Also, if the person with a claim is an adult, how would the bankruptcy filer or their Bankruptcy Attorney ever know the person is incompetent? They probably would not.

Nonetheless if this issue does come here you go. It is rare for an adult, someone over the age of 18, to be indebted to or someone under the age of 18 has a “claim” against an adult. It is also rare for someone to owe an incompetent person money. If someone is incompetent they cannot enter into a contract legally. It is possible that the debt or claim arose prior to the person becoming incompetent. So there are a some reasonable hypothetical facts to help discuss this issue. In the real world you will probably look long and hard to find this was every an issue in a bankruptcy case.

The issue is how can you provide notice of a bankruptcy filing to an infant or someone who is incompetent? An infant is defined as a person who has not attained legal majority; or under-age or under 18 or 21 years of age depending upon state law. A person that is under the age of minority cannot be served legally even if they are a creditor of the person who is filing for bankruptcy protection. Also, a person that is incompetent cannot be or accept service given they are incompetent. Incompetency is generally defined as an adult who can no longer take care of their own financial and personal affairs because of mental problems or potentially a physical problem too.

The most important parts of filing for bankruptcy protection is giving all creditors notice of the bankruptcy case. Once the bankruptcy attorney files the bankruptcy petition any and all collection activity must stop and the Bankruptcy Court is the sole place to seek remedy. So if all creditors do not receive notice or do not understand the notice that is a problem. Every bankruptcy filer wants their creditors to receive notice and stop the phone calls or harassing letters. You will also want the creditor to get the order of discharge in the mail so that they know once and for all the debt is no longer legally enforceable by federal court order.

How Do You Serve An Infant Or Incompetent Person?

First look to Federal Rule of Bankruptcy Procedure 1007(m). In 2001 FRBP was amended to add section “m.” FRBP 1007(m) provides: If the bankruptcy filer knows that a person on the list of creditors or schedules is an infant or incompetent person, the bankruptcy filer also shall include the name, address, and legal relationship of any person upon whom process would be served in an adversary proceeding against the infant or incompetent person in accordance with Rule 7004(b)(2). The point is to serve someone that knows the infant or incompetent person that can accept service on their behalf. Federal Rule of Bankruptcy Procedure 7004(b)(2) provides: (b) Service by First Class Mail. Except as provided in subdivision (h), in addition to the methods of service authorized by Rule 4(e)–(j) F.R.Civ.P., service may be made within the United States by first class mail postage prepaid as follows: (2) Upon an infant or an incompetent person, by mailing a copy of the summons and complaint to the person upon whom process is prescribed to be served by the law of the state in which service is made when an action is brought against such a defendant in the courts of general jurisdiction of that state. The summons and complaint in that case shall be addressed to the person required to be served at that person’s dwelling house or usual place of abode or at the place where the person regularly conducts a business or profession.

Basically for an infant you need to also include the name and address of the infant’s parents or legal guardian. The same is true for an incompetent person. Someone has to be taking care of or appointed as a conservator or guardian of the incompetent person. Whoever is taking care of them is the person upon whom process is prescribed to be served by the law of the state in which service is made when an action is brought against a defendant in the courts of general jurisdiction of that state.

Should I File Bankruptcy Jointly With My Spouse?

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I will give you my opinion right now and say yes, if possible. If your spouse and you do not own any separate property then please file bankruptcy jointly and receive an order of discharge with both of your names and social security numbers listed. Doing this makes it black and white to your creditors. All debts are discharged as to both spouses. If only one spouse files for bankruptcy and receives a discharge you have entered the gray as to the non-filing spouse. While bankruptcy is governed by Federal Law to determine certain asset issues the Bankruptcy Court has to look to state property marital law to determine separate property and community property.

The Community Discharge

So in a community property state only the community assets are liable for community debts. If there are no separate property assets brought into the marriage by the spouses then there is nothing other than community assets at the time of filing and then post-discharge. 11 U.S.C. § 524(a)(3). “[Section] 524(a)(3) treats the effect on the nondebtor spouse of a discharge of a debtor in a community property state when the nondebtor spouse is liable on the community claim, but has not filed a bankruptcy petition.” In re Karber, 25 B.R. 9, 12 (Bankr. N.D. Tex. 1982). In summary, all actions to collect a “community claim” from section 541(a)(2) property acquired after the petition date is permanently enjoined unless timely objected to. A creditor is still free to seek collection against the non-filing spouse’s separate assets.

So What Is The Problem?

So you the issue is some of the debts are under one spouses name and social security number while some debts were incurred by the other spouse. Who files for bankruptcy then? All of the debts were incurred during their marriage too. If one spouse files for bankruptcy and receives a discharge will that discharge protect the spouse that did not file? Yes and no. This is the gray of only one spouse filing. What can a creditor do or not do to collect their debt against the non-filing spouse’s separate property? What is property of the bankruptcy estate or community assets after the spouse received a discharge? Can a judgment creditor suspend the non-filing spouses driver’s license? Is a driver’s license a community asset?

File Jointly If Possible To Avoid Confusion

As bankruptcy attorneys that have filed and been involved in thousands of b bankruptcy cases, if it is possible, we recommend spouses file jointly so that it is black and white post-discharge. Each spouse receives a discharge of all debts whether in their name and social security number or not. A creditor with a judgment can renew the judgment and then wait to collect. The entire time the judgment is also accruing interest. Also, once the judgment is renewed the total amount of the renewal will accrue interest. This accrual of interest will make the judgment increase significantly plus the cost of collection added in also. What is the judgment creditor waiting for? They are waiting for some separate property assets to be obtained by the non-filing spouse. If the non-filing spouse inherits assets from someone the inherited assets are arguably separate property of that spouse and now there are separate assets to collect from. Or the judgment creditor is waiting for the community to end via divorce or death. Once the community is terminated then the protection of the discharge of the filing spouse is also terminated.

We had a judgment creditor write us a letter once to explain their position and right to collect from the non-filing spouse. The judgment creditor argued that the community discharge pursuant to Section 524 is a “phantom discharge” since it only bars collection from community assets. Again, if there are no separate assets then how is the discharge merely a phantom discharge? If there are no separate assets then all assets are community assets and therefore protected. What procedure is there to make the determination that there are no separate assets? There really is none. If a creditor allegedly violates the order of discharge the only recourse is to seek sanctions from the bankruptcy court that signed the order of discharge. Litigating this issue will most likely cost more than what it cost to file the initial Chapter 7 bankruptcy case. No one really wants to have to deal with this after receiving a discharge and moving on. If you are married and do not file jointly this is a potential issue you will be creating by filing alone.

Prevent Possible Litigation

Again, the theme of this article is if you can file jointly then file jointly and eliminate the possibility of litigating whether a creditor is violating the order of discharge or not. It may not be possible though depending upon the circumstances. Bankruptcy attorneys have to look at all of the assets of clients and make a determination as to the best course of action. There are also circumstances in which a spouse refused to file for bankruptcy protection no matter what. The point of filing for bankruptcy is to discharge eligible debts or reorganize debts without causing additional stress or problems for the bankruptcy filer. Most bankruptcy filers do not have the means to litigate issues that sometimes arise. Like a creditor going after a non-filing spouse post-discharge. If you filed for bankruptcy protection you probably do not have thousands of dollars to litigate anything. In the event a creditor goes after a non-filing spouse and we are successful in obtaining sanctions there is no guarantee that the bankruptcy court will award attorneys’ fees and costs for seeking sanctions. It is usually a tough position to be in after the bankruptcy is long over and then a creditor decides to do some sort of collection activity against the non-filing spouse. So what then? To take this issue off the table completely and just file jointly.

Bankruptcy and Service of Motion To Avoid Judicial Lien

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The issue here is who must be served when filing a motion to avoid a judicial lien under Section 522 or 506 of the Bankruptcy Code. There could be a number of parties involved or a number of attorneys involved in obtaining and enforcing the judicial lien before a bankruptcy case is filed. So who has to be served with the motion to value or avoid the lien? Is service required on the state court attorney that obtained the judgment, the original creditor or the potential attorney now representing the creditor in the bankruptcy case?

FRBP 9014 and 7004

Once the bankruptcy case is filed the Federal Rules of Bankruptcy Procedure, Federal Rules of Procedure and local bankruptcy rules take over. All states have laws governing the enforcement and collection of lien rights and judicial lien rights. Procedures for contested matters in bankruptcy cases are governed by Federal Rule of Bankruptcy Procedure 9014, which requires service of a motion “in the manner provided for service of a summons and complaint by Rule 7004 . . . .” Rule 9014(a). So we have to look to FRBP 7004. Service of a summons and complaint varies depending upon the type of entity the creditor is. Whether the creditor is a sole proprietorship, limited liability company, corporation or is insured depository institution. If FDIC insured service shall be made by certified mail addressed to an officer of the institution unless— (1) the institution has appeared by its attorney, in which case the attorney shall be served by first-class mail; (2) the court orders otherwise after service upon the institution of notice of an application to permit service on the institution by first-class mail sent to an officer of the institution designated by the institution; or (3) the institution has waived in writing its entitlement to service by certified mail by designating an officer to receive service.

Ninth Circuit Bankruptcy Appellate Panel Case

In a recent 9th Cir. BAP case; Teresa Bryant, Appellant, vs. The Bank of New York Mellon; Select Portfolio Servicing, BAP No. CC-16-1009-DKuF, discussed the proper service of a motion to avoid a judicial lien. In this case Ms. Bryant’s bankruptcy attorney served the motion by certified mail on a bank officer of Mellon pursuant to FRBP 7004 and served each attorney that appeared on behalf of Mellon in the bankruptcy case. In the Northern District of California we have a local rule that says if a claim was filed for the lien, then the address provided on the claim has to be served in addition to the requirements of FRBP 7004 be met. Mellon tried to argue that since their state court attorney was not served the motion to value service was defective. This issue was addressed in Frates v. Wells Fargo Bank, N.A. (In re Frates), 507 B.R. 298, 301 (9th Cir. BAP 2014). The appellee bank in Frates argued their state court attorney should have been served with the motion to value or avoid. The Ninth Circuit BAP said no.

The Ninth Circuit Bankruptcy Appellate Panel previously concluded that compliance with Rule 7004(h) was all that was required. The court recognized that California law would have required service of post-judgment motions on the state court attorney, but the court did not “perceive any reason why compliance with California law should be compelled in light of the procedural due process safeguards provided by the rules themselves. This means that when enforcing the judicial lien under California law post-judgment motions must be served on the state court attorney for the judgment creditor. That is not the case after a bankruptcy case is filed.

You Do Not Have To Serve The State Court Attorney

Bankruptcy case rules make no mention of serving a motion to avoid a judicial lien on any state court attorney involved in the matter previously. In the Bryant appeal the debtor’s bankruptcy attorney served the attorney that made an appearance for Mellon and filed a motion for relief from stay filed in the bankruptcy case and still served an officer of Mellon by certified mail. The Ninth Circuit Bankruptcy Appellate Panel held nothing more was required. The lower bankruptcy court unfortunately evaluated the circumstances of not serving the state court attorney as a possible fraud on the bankruptcy court for not serving Mellon’s state court attorney with the motion to value. The 9th Circuit Bankruptcy Appellate Panel decidedly said no. There was no fraud on the bankruptcy court.

What Creditors Attorneys Should Do

If a state court attorney wants to be noticed or a creditor wants their state court attorney that obtained the judgment to be served then the state court attorney should file a request for special notice in the bankruptcy case. Then they have to be provided notice. In Chapter 7 bankruptcy cases judicial liens can be avoided in no assets cases. In a no asset case there is no call for creditors to file claims or even make an appearance in the case at all. Under these circumstances no attorney will make an appearance for a creditor in the Chapter 7 no asset bankruptcy case. The only viable service is pursuant to FRBP 9014 and 7004. In Chapter 13 bankruptcy cases claims are called to be filed on behalf of creditors. So in theory in a Chapter 13 case there could be an attorney or other party to provide notice to and meet the requirements of FRBP 7004.

How Can A Chapter 13 Case Be Involuntarily Dismissed?

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When an individual files a chapter 13 bankruptcy case to reorganize their debts involuntary dismissal of the case was most likely not the outcome desired. The entire reason for filing bankruptcy is to obtain relief from creditors. The case being involuntarily dismissed does not help. Involuntary dismissal does happen though. There are actually many ways a Chapter 13 Reorganization can be dismissed involuntarily or without the consent of the person filing the case. This article will focus on the most common reasons a Chapter 13 bankruptcy reorganization is dismissed by the filing of a motion to dismiss by the standing Chapter 13 Trustee assigned to administer the bankruptcy estate. Each jurisdiction has a standing Chapter 13 trustee assigned to administer all of the chapter 13 cases filed in that region. In the Bankruptcy Court for the Northern District of California we have three different standing Chapter 13 Trustees.

1. Failure to Pay or Failure to Timely Pay the Monthly Chapter 13 Plan Payment

This is the single most common reason a Chapter 13 case is dismissed. The reason is not because creditors will stop getting paid through the Chapter 13 plan when the debtor stops making the plan payments. Some bankruptcy attorneys will say the reason a motion to dismiss the case is filed is because the confirmed chapter 13 plan is violated when a debtor stops making the plan payments. While this is true, the real world reason is the Chapter 13 trustee gets a percentage of the monthly Chapter 13 plan payment to administer the Chapter 13 bankruptcy estate. Chapter 13 trustees cannot continue to administer cases they are not getting paid for. A Chapter 13 trustee could in theory go bankrupt themselves if they operate like that. Really there are many issues surrounding failure to make the monthly Chapter 13 plan payment any of the foregoing reasons are valid. At any point in the three to five year Chapter 13 plans if the monthly chapter 13 plan payments are not paid to the Chapter 13 trustee can file a motion to seek dismissal of the case. Some trustees are more aggressive than others and different offices handle nonpayment quite differently. Some Chapter 13 trustees will send a letter informing the chapter 13 debtor the amount not paid and when it must be paid by or a motion to dismiss the case will be filed. Others go straight to filing a motion to dismiss the case and set it for hearing. There is no mercy at all. Either pay or the case will be dismissed.

2. Failure to Confirm a Chapter 13 Plan of Reorganization

The requirements to confirm or approve a Chapter 13 Plan of reorganization are set forth in 11 U.S.C. Section 1325(a) and there are many requirements. Almost all jurisdictions use some version of a model chapter 13 plan that helps meet the requirements for confirmation or approval of the plan of reorganization by the court. Unfortunately model plans also hurt debtors in limiting their options to reorganize their debts. It cuts both ways. The goal is to try and make the reorganization more streamlined and less work for the court. Objections to confirmation of the chapter 13 plan are routinely filed by the chapter 13 trustee or secured creditors. Rarely do creditors holding general unsecured claims do anything in chapter 13 cases. Why? It is not worth their time or money to do anything but file a proof of claim and be done with it. For secured creditors or creditors with priority unsecured debts the law is different. Depending upon the circumstances secured creditors and creditors with priority unsecured debts will mostly be paid through the Chapter 13 plan of reorganization and the debt owed to them could be reorganized or changed for the benefit of the bankruptcy filer. Chapter 13 trustees also have to file objections to confirmation given they are the gatekeeper making sure the requirements for confirmation, as they determine, are met. In almost all circumstances if the Chapter 13 trustee recommends a Chapter 13 plan be confirmed the court will confirm the plan. It is when the objections to confirmation are not resolved or withdrawn a debtor and their bankruptcy attorney can run into problems and the case could be dismissed for undue delay in confirming or resolving the objections to confirmation. At some point a hearing will have to be held regarding confirmation of the Chapter 13 plan and the judged assigned to the case can weigh in on what should happen. If there is an issue that requires additional evidence to make a determination an evidentiary hearing or mini-trial will have to be conducted. If the court denies confirmation the debtor will usually be given additional time to amend the plan or the case will be converted to Chapter 7 or involuntarily dismissed.

3. Bad Faith of the Bankruptcy Filer is Case for Involuntary Dismissal

11 U.S.C. Section 1307(c) allows for the dismissal of a Chapter 13 case for cause on a finding of bad faith based upon the totality of the circumstances. Leavitt v. Soto (In re Leavitt), 171 F.3d 1219, 1222-23 (9th Cir. 1999). There are four factors to take into consideration: (1) whether the debtor misrepresented facts in his; petition or plan, unfairly manipulated the Code, or otherwise filed his petition or plan in an inequitable manner; (2) the debtor’s history of filings and dismissals; (3) whether the debtor intended to defeat state court litigation; and (4) whether egregious behavior is present. There is a lot of gray in these factors when determining whether a Chapter 13 case was filed in bad faith.

4. Sua Sponte Dismissal of a Chapter 13 Case

This is extremely rare but possible. Sua Sponte means the court on its own accord chooses to dismiss the Chapter 13 case given the court made the determination the case is not proper. Section 105(a) explicitly provides the bankruptcy court with this authority. In relevant part, § 105(a) states: “No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.” See also Tennant v. Rojas (In re Tennant), 318 B.R. 860, 869 (9th Cir. BAP 2004) (holding that bankruptcy court may sua sponte dismiss a chapter 13 case under §§ 1307 and 105(a)).

The Law of Excessive Force and Police Shootings

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As much as we all want the world to fit into what our minds eye believes the world should be it will never happen. On the lighter side I cannot understand why people drive so fast into a red stop light. On the more distressing side I cannot understand why people are shot dead under certain circumstances. I am not going to get into specific situations other than the circumstances in the Ninth Circuit Court of Appeals decision discussed in this article. The question we should all be focusing on is “Was the police killing a case of excessive force under the law?” I am not trying to make a political statement or stir anything up. It is has been stirred up my entire life. I just get tired of people throwing around language about this issue without knowing the law about it (excessive force by police) in violation of the Fourth Amendment. That said, I cannot imagine being a police officer and trying to make split second decisions regarding life and death. The Ninth Circuit Court of Appeals held the shooting was not justified or reasonable. The Orange County District Attorney’s office did not file criminal charges against the shooting officer and held the shooting was justified and reasonable.

You can now be the judge.

A.K.H., a minor by and through her Guardian Ad Litem Elizabeth Landeros et. al. vs. City of Tustin et. al.; Case No. 14-55184; Date filed September 16, 2016

This appeal is about an officer involved shooting of an unarmed man in Tustin, California in 2011. After the shooting of Benny Herrera, the officer who shot Mr. Herrera tried to get summary judgment in his favor in a civil case against him and the City of Tustin by arguing he cannot be prosecuted based upon “qualified immunity.” Qualified immunity more or less is the doctrine saying I was just doing my job so I should not be held civilly liable for money damages to alleged victims. This civil lawsuit, for money, is by the relatives of Mr. Herrera under 42 U.S.C. Section 1983 (Civil Action for Deprivation of Rights). Section 1983 provides as follows:

“Every person who, under color of any statute, ordinance, regulation, custom, or usage, of any State or Territory or the District of Columbia, subjects, or causes to be subjected, any citizen of the United States or other person within the jurisdiction thereof to the deprivation of any rights, privileges, or immunities secured by the Constitution and laws, shall be liable to the party injured in an action at law, suit in equity, or other proper proceeding for redress, except that in any action brought against a judicial officer for an act or omission taken in such officer’s judicial capacity, injunctive relief shall not be granted unless a declaratory decree was violated or declaratory relief was unavailable. For the purposes of this section, any Act of Congress applicable exclusively to the District of Columbia shall be considered to be a statute of the District of Columbia.”

The Circumstances and Facts of the Herrera Shooting

This unfortunate sequence of events is initiated because of an argument about a cellphone. It starts with a call from Mr. Herrera’s girlfriend who told police Mr. Herrera had “jacked” her phone. Initially the girlfriend said there was no physical contact, but later in the phone call said Mr. Herrera hit her in the head when they were arguing about the cellphone. The girlfriend said she was fine, her kids were fine and there was no need for medical attention. The girlfriend told dispatch that Mr. Herrera had no weapons, was not known to use weapons and had never been violent with her before. The girlfriend said Mr. Herrera was walking on El Camino towards Redhill to catch a bus. This information was reported by dispatch to responding officers along with Mr. Herrera was “shown in-house to be a member of the “Southside Gang“ and that there was possibly a $35,000 traffic warrant out for Herrera’s arrest. The dispatcher reported, further, that Herrera was on “parole for 11350,” a reference to a state drug possession crime. See Cal. Health & Safety Code § 11350.

When the first police officer on scene made contact with Mr. Herrera the officer turned on his patrol vehicle lights. Mr. Herrera responded by putting his right hand in his hoodie pocket and walking backwards into the middle of the road away from the patrol vehicle. Prior to the second officer boxing Mr. Herrera in the first officer told Mr. Herrera three times on the loud speaking to get down. Mr. Herrera did not comply and continued down the road. The second officer arrived on scene, the shooter, and used his patrol vehicle to box in Mr. Herrera to prevent escape. The first officer had his vehicle door open and weapon drawn since coming into contact with Mr. Herrera. Now the shooting officer had his door open and weapon drawn to the side of Mr. Herrera to box him in. As Mr. Herrera moved towards the shooting officer’s vehicle the shooting officer told Mr. Herrera to “get your hand out of your pocket.” Mr. Herrera complied and removed his right hand from his pocket in an arching motion and placed his hand over his head. Just as Mr. Herrera’s hand came out of his pocket the shooting officer fired two shots in rapid succession without any warning to Mr. Herrera. Both of the officers on scene stated they did not see anything in Mr. Herrera’s hands. The shooting officer testified he shot Mr. Herrera because he believed Mr. Herrera had a weapon and was going to use the weapon on the shooting officer. The dashboard camera from the shooting officer’s patrol car showed the command to get your hand out of your pocket and the two shots were almost simultaneous, separated by less than a second. The total time from when the first officer made contact with Mr. Herrera to when the shooting officer shot Mr. Herrera was less than one minute. The officer who shot Mr. Herrera did not claim he saw, or thought he saw Mr. Herrera with a weapon.

Fourth Amendment Law Regarding Excessive Force

In determining whether the shooting officer is entitle to qualified immunity to obtain a judgment in his favor and not against him for excessive force the Ninth Circuit Court of Appeals asked two questions:

(1) Did the shooting officer use excessive force in violation of the Fourth Amendment?

Bryan v. MacPherson, 630 F.3d 805, 823 (9th Cir. 2010)

(2) If the shooting officer uses excessive force, did he violate a clearly established right?

Bryan v. MacPherson, 630 F.3d 805, 823 (9th Cir. 2010)

Excessive force claims are analyzed under the Fourth Amendment of the United State Constitution.

Graham v. Connor, 490 U.S. 386, 388 (1989)
Tennessee v. Garner, 471 U.S. 1, 7 (1985)

The analysis of the shooting officer’s actions is, “are the actions ‘objectively reasonable’ in light of the facts and circumstances confronting them without taking into account the underlying intent or motivation?”

Graham v. Connor, 490 U.S. 386, 397 (1989)

To determine reasonableness of the shooting officer’s actions the court must balance the nature and quality of the intrusion on the individual’s Fourth Amendment interest against the importance of the governmental interest alleged to justify the intrusion.

Tennessee v. Garner, 471 U.S. 1, 8 (1985)
United States v. Place, 462 U.S. 696, 703 (1983)

The court must look at the totality of the circumstances paying close attention to the severity of the crime at issue, whether the suspect poses an immediate threat to the safety of the officers or others, whether he is actively resisting arrest or attempting to evade arrest by flight.

Tennessee v. Garner, 471 U.S. 1, 9 (1985)
Graham v. Connor, 490 U.S. 386, 396 (1989)

The most important factor is whether the suspect posed an immediate threat to the safety of the officers or others.

Mattos v. Agarano, 661 F.3d 433, 441(9th Cir. 2011) (en banc) (Quoting Smith v. City of Hemet, 394 F.3d 689,702(9th Cir. 2005) (en banc))

Deadly force is only allowed if a suspect threatens the officer with an actual weapon or there is probable cause to believe that the suspect committed a crime involving the infliction or threatened infliction of serious physical harm.

Tennessee v. Garner, 471 U.S. 1, 11 (1985)

Ninth Circuit Court of Appeals Analysis

In this case the court of appeals pulled no punches. The appeals court held the shooting officer’s intrusion on Mr. Herrera’s Fourth Amendment interest was extreme. In this case the government’s interest was not sufficient for use of deadly force. The crime at issue here was a domestic dispute the ended before the police became involved.

The Ninth Circuit Court of Appeals denied qualified immunity in the Smith case to officers who used pepper spray and a dog to subdue and arrest a suspect, even though the suspect was reported to have “hit” or become “physical” with his wife.

Smith v. City of Hemet, 394 F.3d 689,702-703 (9th Cir. 2005)

The use of force is especially difficult to justify when “the domestic dispute is seemingly over by the time the officers begin their investigation.” Denied qualified immunity in an excessive force case partly because the victim of the domestic disturbance “was unscathed and not in jeopardy when deputies arrived.”

George v. Morris, 736 F.3d 829, 839 (9th Cir.2013)

Officer denied qualified immunity partly because, by the time the officers arrived, the suspect was standing on his porch alone and separated from his wife.

Smith v. City of Hemet, 394 F.3d 689,702-703 (9th Cir. 2005)

The Ninth Circuit Court of Appeals held that the shooting officer came upon Mr. Herrera away from the scene of the alleged domestic dispute and Mr. Herrera did not pose an immediate threat to the safety of officers or others. It was clear that the alleged domestic dispute was over and Mr. Herrera posed no threat to his girlfriend. It is important to note that the law requires the Ninth Circuit Court of Appeals to view the evidence in a light most favorable to the plaintiffs and not the shooting officer or the City of Tustin. Again, you can be your own judge based upon the facts. So, now to the most important part of the Ninth Circuit Court of Appeals decision, they held that the shooting officer could not have reasonably believed Mr. Herrera posed a threat.

In addition, the dispatcher told the officers Mr. Herrera was not armed or known to use weapons. The Ninth Circuit Court of Appease noted Mr. Herrera had prior run-ins with the law, but those were minor incidents that did not involve violence or gun possession.

Even if Mr. Herrera was actively resisting or attempting to evade an investigatory stop, the Ninth Circuit Court of Appeals held this factor only slightly favors the government and shooting officer. Mr. Herrera did not stop upon being requested to or get on the ground as requested. At the same time Mr. Herrera never attempted to cross the road or flee. Mr. Herrera just stayed on his same course.

Deorle v. Rutherford, 272 F.3d 1272, 1278 (9thCir. 2001)

The most important factor was the fact that the shooting officer escalated to deadly force so quickly. The shooting officer commanded Mr. Herrera to remove his hand from his pocket almost immediately upon contact then shot Mr. Herrera just as Mr. Herrera was taking his hand out of his right pocket. The shooting officer did not wait to see if anything was actually in Mr. Herrera’s hand before shooting him twice. To summarize:

1. No serious crime reported;
2. No indication a weapon was involved;
3. Dispatch said suspect not known to carry weapons;
4. Mr. Herrera was sought to be detained and not arrested;
5. Mr. Herrera complied with the shooting officers command to remove his hand;
6. The removal of hand from pocket and shooting were virtually simultaneous;
7. The shooting officer gave no warning he was going to shoot;
8. Mr. Herrera never verbally threatened the officers.

But Was There An Established Right To Fourth Amendment Protection
At The Time of The Violation?

So after all of that analysis and a finding there was excessive force, there is still the issue of whether Mr. Herrera had a clearly established right to protection by the Fourth Amendment?

Espinosa v. City & Cty. of San Francisco, 598 F.3d 528, 532 (9th Cir. 2010) (citing Saucier v.Katz,533 U.S. 194, 201 (2001))

Just in case you did not know, just because you are in the United State of America does not mean you are entitle to all of the protections the U.S. Constitution provides you. You have almost no constitutional rights at airports (search and seizure), military bases and other places where national security is at issue.

The Ninth Circuit Court of Appeals held that Mr. Herrara did in fact have an established right to the Fourth Amendment at the time of the violation. To summarize, underlying call to the police did not involve the use of serious or deadly force. It was about a cellphone. Also, the shooting officer did not have any articulable basis to think Mr. Herrera was armed.

Conclusion

The Ninth Circuit Court of Appeals concluded that is has been a long standing principle that a police officer may not seize an unarmed, nondangerous suspect by shooting him dead.

Tennessee v. Garner, 471 U.S. 1, 11 (1985)

So next time you get into it with someone about a police shooting use the law and factors listed in this article to back up your argument whether the shooting by the police is justified under the circumstances.