W.D. Bankruptcy Court: How are we doing?

James D. Gregg, the chief judge of the Western District’s bankruptcy court, wants to know how he and his judicial staff are doing.

Gregg is circulating an evaluation form, which asks for letter grades, “candid comments” and “constructive criticism with specific suggestions for improvement.”

The deadline to respond, by mail or e-mail, is Oct. 15. Identifying information will be redacted before Gregg reviews the form.

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Eastern District Bankruptcy Court refines tax refund procedure

Debtors who have bankruptcy cases in the Eastern District are sometimes required to surrender income tax refunds to the trustee overseeing their cases.

The court has expended considerable effort to set up this procedure. See, The Michigan Lawyer, “Bankruptcy court has more to say about debtors’ tax refunds.”

The latest wrinkle in the matter concerns debtors, nondebtor spouses and joint tax returns that generate jointly payable refunds.

Here’s the latest directive from Chief Judge Philip Shefferly on the matter:

When only one spouse files a chapter 13 case, but the debtor and the non-debtor spouse file a joint tax return, the debtor must provide the trustee, if requested by the trustee, the appropriate IRS forms signed by the debtor and by the non-debtor spouse.

For example, if a trustee requires the debtor to execute an IRS form 2848, power of attorney, such form must be signed both by the debtor and by the non-debtor spouse as a condition for confirmation of the debtor’s chapter 13 plan. This is to ensure that any refund with respect to a joint tax return will be transmitted by the IRS to the trustee so that the debtor’s share of such joint tax refund will be applied to the debtor’s obligations under the debtor’s chapter 13 plan.

In each case where the debtor and the non-debtor spouse file a joint tax return, the order confirming plan in the debtor’s chapter 13 case must contain a formula or mechanism for allocating any joint tax refunds between the debtor and the non-debtor spouse to avoid unnecessary litigation in the future.

In each case where the debtor and the non-debtor spouse file a joint tax return, and a joint tax refund is received by the chapter 13 trustee, the trustee must promptly remit to the non-debtor spouse his or her share of the joint tax refund.

Eastern District Bankruptcy Court updates local rules

More than a year ago, the U.S. Bankruptcy Court for the Eastern District of Michigan revamped its local court rules and posted the changes on the court’s very fine web site.

Well, not quite all of the changes. Here’s a communiqué from the court:

NOTICE REGARDING CORRECTION IN LOCAL BANKRUPTCY RULE 3001-2

It has come to the Court’s attention that there is an error in the copy of the Local Bankruptcy Rules posted on the Court’s website.

Specifically, the copy of Local Bankruptcy Rule 3001-2 on the Court’s website does not contain subsections (e)-(h).

Subsections (e)-(h) were added to Local Bankruptcy Rule 3001-2 on March 24, 2009 pursuant to Administrative Order 09-4. Subsections (e)-(h) of Local Bankruptcy Rule 3001-2 have continuously been in effect since March 24, 2009.

The copy of the Local Bankruptcy Rules on the Court’s website has now been corrected to include subsections (e)-(h) to Local Bankruptcy Rule 3001-2.

June 14, 2010
Phillip J. Shefferly
Chief Bankruptcy Judge

Rule 3001-2 deals with adjustments of period payments on secured claims in Chapter 13 cases. Subpart (a) requires creditors to provide debtors a statement for any proposed increase or decrease of periodic payments and sets a 42-day deadline. The formerly omitted subparts:

  • provide an exception for creditors where the period payment changes more frequently than every six months (subpart (e))
  • permit debtors to file notices of decreased payments (subpart (f))
  • provide the effective date for proposed payment increases (subpart (g))
  • determine when Rule 3001-2 applies (subpart (h))

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Shapiro Bankruptcy Symposium features award-winning journalist

Peter S. Goodman

Peter S. Goodman, national economics reporter for The New York Times

One of the area’s premier events for bankruptcy practitioners, The Walter Shapiro Symposium, is featuring special guest speaker Peter S. Goodman, a national economics reporter for The New York Times.

The event, sponsored by the Bankruptcy Committee of the Federal Bar Association, Eastern District, gets underway on Wednesday, May 12, 5:30 p.m. at the Westin Southfield Detroit.

Goodman has been writing for The New York Times since 2007 and previously was the Shanghai-based Asian economic correspondent for The Washington Post, where he spent a decade.

He’s collected a raft of awards for his reporting on economic issues and last year authored a book, “Past Due: The End of Easy Money and the Renewal of the American Economy” (Times Books, 2009).

More symposium information here.

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WDBC splits on state exemption statute

Bankruptcy practice in the Western District of Michigan will be a bit more tricky now.

Bankruptcy judges in the Western District have issued conflicting opinions on the constitutionality of MCL 600.5451, which specifies property exemptions available to bankruptcy debtors.

Judge Scott W. Dales, in In re: Jones, says the statute passes constitutional muster. Judges James D. Gregg, in In re: Pontius and Jeffrey R. Hughes, in In re Wallace, 347 B.R. 626 (Bankr. W.D. Mich. 2006), say it doesn’t.

In his opinion, Dales provided an overview of bankruptcy exemptions:

In 11 U.S.C. § 522(b), Congress provided that a state may choose the exemption scheme available to any debtor filing for bankruptcy relief within its borders. For example, debtors filing bankruptcy petitions in Ohio and Tennessee are not eligible to claim the federal exemptions enumerated in § 522(d) because the state law applicable to those debtors specifically “does not so authorize.” See 11 U.S.C. § 522(b)(2); Ohio R.C. § 2329.662; T.C.A. § 26-2-112. In other words, those states and many others have “opted out” of the federal exemption scheme.

Michigan, on the other hand, has not opted out. When Michigan debtors file bankruptcy petitions they can choose to exempt property under the federal exemption scheme found in 11 U.S.C. § 522(b)(2) and (d), or under the state exemption scheme of 11 U.S.C. § 522(b)(3). Should Michigan debtors choose the so-called “state exemptions,” they then have a choice to select exemptions under M.C.L. § 600.6023, which are generally applicable to all judgment debtors, or exemptions under M.C.L. § 600.5451, which are available only to debtors in bankruptcy.

The sticking point is the options Michigan provides. By allowing debtors to choose between exemptions available to judgment debtors and so-called “bankruptcy specific” exemptions, Gregg maintains Congress unconstitutionally delegated its authority to enact a portion of the Bankruptcy Code:

The Constitution grants Congress the power to “establish … uniform Laws on the subject of Bankruptcies.” The Bankruptcy Clause, U.S. Const. art. I, § 8l. 4. Court opinions which uphold state “bankruptcy specific” exemptions reason that, in enacting 11 U.S.C. § 522, Congress made an “express delegation” to the states to enact laws which operate solely in bankruptcy proceedings. The downfall of this “express delegation” rationale is that it is unconstitutional.

The Supreme Court has consistently held that Congress may not constitutionally delegate its legislative power. “It does not admit of argument that [C]ongress can neither delegate its own powers, nor enlarge those of a state.” Wilkerson v. Rahrer, 140 U.S. 545, 560, 11 S.Ct. 865, 869 (1891).

Gregg also observed that Congress is required to establish uniform bankruptcy laws. And, under Hanover Nat’l Bank v. Moyses, 186 U.S. 181, 188, 22 S. Ct. 857, 860-61 (1902), Gregg noted, “uniformity” in the bankruptcy context is geographic uniformity.

[T]he Supreme Court has given a precise holding of the interpretation of constitutional uniformity: We concur in this view, and hold that the system is, in the constitutional sense, uniform throughout the United States, when the trustee takes in each state whatever would have been available to the creditor if the bankrupt[cy] law had not been passed. Hanover, 186 U.S. at 190, 22 S.Ct. at 861 (emphasis added).

The Michigan statute, § 600.5451, and all other “bankruptcy specific” state exemption schemes, accomplishes the opposite result. Their very purpose is to ensure that the bankruptcy trustee does not take whatever property “would have been available to the creditor” outside of bankruptcy.

Dales sees things very differently.

The Wallace and Pontius opinions construed the Bankruptcy Clause, and its uniformity requirement, as an express delegation of exclusive legislative power from the states to the federal legislature — a constitutional delegation divesting the states of their own legislative authority in this area.

This view, however, is at odds with the Sixth Circuit’s earlier analysis in Rhodes v. Stewart, 705 F.2d 159 (6th Cir.), cert. denied, 464 U.S. 983 (1983), which recognized concurrent state legislative authority to adopt exemptions applicable in bankruptcy. …

By permitting the states to prescribe exemptions applicable in bankruptcy proceedings, and permitting them to opt-out of the federal bankruptcy exemptions, Congress “purposely omitted to provide” a federal rule of decision, and constitutionally deferred to the states on these issues. …

Indeed, in Hanover National Bank v. Moyses, 186 U.S. 181 (1902), the United States Supreme Court specifically upheld the decision of Congress to adopt state exemption laws as the rule of decision in bankruptcy cases under the former Bankruptcy Act, and rejected the challenge that doing so somehow constituted an improper delegation of authority. By accepting Congress’s invitation to regulate exemptions, the states are exercising their own legislative authority, authority that they retained notwithstanding the Bankruptcy Clause.

So, for now, take your pick, Dales or Gregg / Hughes.

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Bankruptcy petition preparers’ fees capped

Bankruptcy petition preparers can’t charge more than $100 for their services in the Eastern District of Michigan unless the Bankruptcy Court approves a higher fee.

And getting that approval under Administrative Order 10-21, issued April 20, 2010, apparently will not be a pro forma affair.

The order allows only a preparer to request more than the $100 “presumptive maximum allowable fee” by filing a motion and affidavit to justify the request. The affidavit must also include a statement that the debtor has reviewed the motion.

A hearing “shall” be scheduled unless the court determines otherwise.

All pro se debtors will get a copy of the order when they file their petitions. This tips them off that if they’ve paid a preparer more than $100, the court thinks that’s too much.

In capping the fee at $100, the court’s six judges explained that they:

have relied upon their collective experience concerning fees actually charged by petition preparers in this district, as well as the limited nature of the services that bankruptcy petition preparers may perform under Section 110 of the Bankruptcy Code and state law limitations on the unauthorized practice of law.

A preparer who charges more than the services are worth will be ordered to surrender the excess fee.

Woman’s bankruptcy doesn’t give ex-husband attorney fee relief

Douglas C. Sutphin was probably one happy guy when he learned his ex-wife declared bankruptcy and received a Chapter 7 discharge.

Sutphin figured that her divorce lawyer’s bill, the one he was supposed to be paying but so far hadn’t, was gone with the wind.

But after her bankruptcy discharge, Sutphin’s ex went back to court and obtained an order requiring him to pay the $23,000 bill in three installments. Sutphin went to the Court of Appeals and argued that he wasn’t responsible for her legal bill because it had been discharged in bankruptcy.

There are a few problems with your argument, Mr. Sutphin, said COA Judges Kathleen Jansen and Elizabeth L. Gleicher in the majority opinion of Berryman v. Sutphine.

First, it’s not at all clear that your ex-wife’s legal bill was discharged:

Defendant has presented no evidence substantiating (1) that plaintiff listed or scheduled her divorce attorney debt, or (2) the extent of plaintiff’s divorce attorney’s notice or knowledge of the right to assert a claim in plaintiff’s Chapter 7 case.

Second, if you yourself sought a bankruptcy discharge of the judgment requiring you to pay the attorney fees, you couldn’t do it:

[T]he current bankruptcy code prohibits the Chapter 7 discharge of a divorce-related attorney fee obligation. Depending on the underlying circumstances and the precise language of a divorce court’s attorney fee award, federal courts deem a divorcing party’s attorney fee debt as nondischargeable in a Chapter 7 bankruptcy under either 11 USC 523(a)(5) or (15).

But the real stopper is this:

Even were we to assume for the sake of argument that plaintiff’s Chapter 7 discharge eliminated the debt she owed to her divorce attorney, defendant ignores that plaintiff’s discharge has no legal impact on the distinct attorney fee debt that defendant owed to plaintiff, arising from the circuit court’s … orders.

In a concurring opinion, Judge Christopher M. Murray noted that:

[A] “Chapter 7 discharge does not actually extinguish a debtors debts; however, he is no longer personally liable for the discharged debts.” In re Graham, 297 BR 695, 697 (Bankr ED Tenn, 2003) … .

Thus, even if plaintiff’s debt to her attorney was discharged in the Chapter 7 proceeding, that did not eliminate the actual debt that existed to the attorney.

Therefore, the circuit court was free to determine that defendant should pay the outstanding attorney fees, as long as that decision was supportable under the normal rules governing the award of attorney fees in divorce actions. Since it was, defendant’s argument is properly rejected.

Murray said the only thing missing from the majority opinion was a directive that Sutphin should make the payments directly to the ex-wife’s attorney.

It’s only right. He’s the guy with the unpaid bill.