Trustee Does Not Have the Ability to Administer Exempt Property for DSO Creditors

In the recent case of Quezada, ___ B.R. ___, 2007 WL 438258 (Bkrtcy.S.D. Fla.)(Mark J.), the Court issued an important decision explicating the new DSO provision in section 522(c)(1). In this case, the Court overruled the chapter 7 trustee’s objection to exemption of the homestead property and denied the trustee’s motion for authority to sell the property to satisfy a domestic support obligation (“DSO”).

The Court explained that section 522(c)(1) was amended by BAPCPA to provide that property deemed exempt in the bankruptcy case will remain liable for DSO debts even if the exempt property would not be reachable to satisfy these claims under applicable state law.

The first issue disposed of by the Court was whether the trustee or DSO creditor can object to the debtor’s exemption to the extent of the DSO claim. The Court explained that although section 522(c)(1) renders exempt property liable for DSO claim, it does not limit a debtor’s right to claim exemptions otherwise available under section 522. The Court therefore overruled the trustee objection to the exemption of the debtor’s homestead.

The second issue dealt with by the Court was whether a trustee may administer exempt property to pay DSO claims. The Court answered this question in the negative and denied the trustee’s motion for authority to sell the homestead property. The Court reasoned that under section 704(a)(1), the trustee only has the authority to “collect and reduce to money the property of the estate” and once the claim of exemption is allowed, exempt property is no longer part of the estate. Furthermore, section 726 only refers to the distribution of the property of the estate.

The Court went on to explain though that the exempt property may be subject to execution by a DSO creditor pursuant to a newly created “federal right” under section 522(c)(2) even though those assets would otherwise be protected from execution under state law. The Court suggested that the bankruptcy court has the jurisdiction to enforce a DSO claim against exempt property in its forum. The Court stated that Section 522(c)(1) grants DSO creditors a “federal right of action” against exempt propeorty. This federal right trumps state law which may otherwise shield the asset from execution. Since this federal right is provided in the Bankruptcy Code, a proceeding to enforce that right would be a proceeding “arising under” title 11, therefore creating non-exclusive jurisdiction in the bankruptcy court under 28 USC 1334 (b).

The Court noted that a state court judge is capable of applying this federal right of action, but in practical terms, it may appear awkward for a DSO creditor to seek relief in state court to pursue assets which are exempt from execution under state law.

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983

Choice of Law in the Context of Claims Allowance

In the case of In re Hionas, ___ B.R. ___, 2006 WL 3913760 (Bkrtcy.S.D.Fla.)(Isicoff J.) the Court denied a casino’s motion for summary judgment in its adversary proceeding to determine an alleged gambling debt nondischargeable. The decision also provides a review of the rules of choice of law in the 11th Circuit in the context of the allowance of a claim in a bankruptcy case.

The Court noted that normally a federal court hearing a matter pursuant to diversity jurisdiction must apply the law of the state in which the court sits, Erie Railroad v. Tompkins, 304 U.S. 64 (1938), including the conflict of law rules of the state in which the federal court sits. However, a federal court with jurisdiction over a matter by virtue of its bankruptcy jurisdiction, when considering the allowance of claims, is not sitting as a court of diversity and the court does not apply the law of the state where it sits. Bankruptcy courts must determine how and what claims should be allowed under equitable principles.

The Court stated that there is apparently a split among the courts as to whether a bankruptcy court should apply the conflicts of law provisions of the state in which it sits or whether it should apply federal law to determine which law should apply. But the Court stated that there does not appear to be a conflict when a bankruptcy court is considering allowance of claims, which is a matter subject to the bankruptcy court’s core jurisdiction. The Court reviewed the Supreme Court’s decision of Vanston Bondholders Protective Comm. v. Green, 329 U.S. 156 (1946) and stated that it held that the determination by a bankruptcy court of which state law should apply in adjudicating the allowability of a claim should not be dictated by the happenstance of where the bankruptcy case is filed, but rather which law more logically relates to the claim and is most consistent with the dictates of the court’s equitable jurisdiction. Furthermore this determination requires the exercise of an informed judgment in the balancing of all the interests of the states with the most significant contacts in order best to accomodate the equities among the parties to the policies of those states.

The Court further found that each of the cases that have followed Vanston in the context of the allowance of a claim have been consistent in recognizing the inapplicability of Erie and Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487 (1941) and apply a federal analysis to the choice of law issue in the claims allownace context. The Court noted that in the 11th Circuit, in order to determine which law should apply in making a decision regarding choice of law, the court must apply the “significant relationship” test although, depending on the nature of the dispute, more specific factors may have a bearing on the court’s determination. See Dresdner Bank A.G v. M/V Olympia Voyager, 446 F.3d 1377 (11th Cir.2006).

The Court concluded by pointing out that whether Nevada law applies to the involved decision would be based on the significant relationships test and not solely on the language in the involved contracts.

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983

Debtor Died Post-Petition, Not Required to Complete Instructional Course

The Court in In re Tembulak, ___ B.R. ___ (2007 WL 420188 (Bankr.D.N.J.) held that a debtor who died after filing chapter 7 bankruptcy was exempted from BAPCPA’s requirement to complete an instructional course concerning personal financial management after the filing of the petition in order to obtain a discharge. The Court based its decision on section 109(h)(4) which allows a bankruptcy court to waive the requirement of a personal financial management course for debtors who are incapacitated, disabled, or on active military duty in a military combat zone.

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983

BAPCPA’s Exemption Provisions Do Not Violate Uniformity Requirement

In the recent case of In re Urban, ___ B.R. ___, 2007 WL 431570 (Bkrtcy. D. Mont.), Judge Kirscher held that BAPCPA’s exemption provisions, which may require a debtor to claim the exemptions of a state other than that in which is he presently domiciled under certain circumstances, do not violate the US Constitution’s Bankruptcy Clause’s uniformity requirement.

The Court’s inquiry focused on whether the amendments made to section 522(b)(3) by BAPCPA, which in some circumstances requires the extraterritorial application of the exemption laws of a state other than that of the debtor’s present domicile, violate the uniformity requirement that appears in the US Constitution at Article I, Section 8, Clause 4. The Court noted that it was previously well-settled that the right of the states to opt out of the federal exemptions does not violate the uniformity requirement. In re Sullivan, 680 F.2d 1131 (7th Cir. 1982). The Court also noted that it was held early on that the uniformity requirement is “georgraphic”, that is the laws passed on the subject must be uniform throughout the United States but that uniformity is geographical and not personal. Hanover National Bank of the City of New York v. Moyses, 186 US 181 (1902).

The Supreme Court in Moyses applied this requirement by holding that a bankruptcy statute passes constitutional muster if the bankruptcy law treats the trustee, as a hypothetical judicial lien creditor, in the same fashion in the bankruptcy case as he would be treated outside of the case under state law. The Moyses Court also provided “additional language” that the general operation of the law is uniform although it may result in certain particulars differently in different states.

Judge Kirscher found that section 522(b)(3) as amended by BAPCPA does not violate the uniformity requirement. The Court based its holding on the “additional language” in Moyses coupled with language contained in later US Supreme Court decisions which held that Congress has the power to take into account differences that exist between different parts of the country and to fashion legislation to resolve geogrphically isolated problems.

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983

Florida’s Third DCA Allows MERS Standing to Foreclose

In an opinion filed on March 14, 2007, Florida’s Third District Court of Appeals held that MERS does have standing to sue in foreclosure. MERS v. Oscar Revoredo, et al., ___ FLW ____ (3rd DCA. Case No. 3D05-2572 2007). The Court adopted the reasoning of MERS, Inc. v. Azize, 32 FLW D546 (2nd DCA 2007) which involved a very similar procedural situation and the identical question of law.

The trial court struck MERS’s pleadings and ruled that it did not have standing to proceed as it acted essentially as a collection and litigation agent for the actual owner of the notes and mortgages.

The Court of Appeals noted that the involved problem “arises from the difficulty of attempting to shoehorn a modern innovative instrument of commerce into nomenclature and legal categories which stem essentially from medieval English land law.” The Court held that MERS did not lack the standing to foreclose and it clarified that that in accordance with its usual practice, MERS was the holder of the note. The Court stated that it did not make a difference that MERS was not the owner of the mortgage as Fla. R. Civ. P. 1.210(a) allows an action to be prosecuted in the name of authorized persons without joining the party for whose benefit the action is brought.

The Court further held that as “no substantive rights, obligations or defenses are affected by the use of the MERS device, there is no reason why mere form should overcome the salutatory substance of permitting the use of this commercially effective means of business.”

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983

Wife’s Attorneys Fees Ordered Paid from Homestead Proceeds

In the recent case of Snell v. Snell, 32 Fla. L. Weekly D455 (3rd DCA 2007), the Court of Appeals reversed the lower Court which had denied the payment of the wife’s attorney’s fees from the proceeds of the sale of the former marital homestead residence. The Court of Appeal held that the wife’s attorney’s fee should be paid from such proceeds on various grounds.

First, the final judgment of dissolution of marriage expressly provided for the payment of the wife’s attorney fees and costs from the assets distributed, including the proceeds of the sale of the marital home.

Second, the Court cited Patridge v. Partidge, 912 So. 2d 649, 650 (Fla. 4th DCA 2005) for the proposition that because marital property was designated as homestead before the divorce does not bar imposition of a lien on marital property being distributed to one of the partners any more than the previous homestead character bars the distribution itself or partition, or sale.

Third, the Court held that the constitutional homestead exemption is not absolute. Homestead property may be subjected to equitable liens where fraud, reprehensible or egregious conduct is demonstrated as it was herein. See, Palm Beach Savings & Loan Ass’n v. Fishbein, 619 So. 2d 267, 270 (Fla. 1993), Gepfrich v. Gepfrich, 582 So. 2d 743 (Fla. 4th DCA 1991), and Robles v. Robles, 860 So. 2d 1014 (Fla. 3rd DCA 2003).

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983

Credit Card Holder Not Bound by Unreceived Arbitration Clause

The recent case of Bank of America, N.A. vs. Michelle L. Evans, 32 Fla. L. Weekly D539 (3rd DCA, 2007) dealt with the enforceability of an arbitration clause in a credit card agreement. The lower court resolved the question of fact of whether the card holder received the arbitration agreement by find that she did not–in other words her denial of the receipt of the arbitration clause overcame the rebuttable presumption of receipt which arose from the corporate testimony as to its regular practice. The Court of Appeals would not interfere with the trial court’s findings of fact.

The Court further rejected the bank’s fall-back argument that the card holder’s use of the card obligated her to the arbitration clause in any event. The Court reasoned that it makes not sense and there is no authority that one may be bound by an “agreement” of which one is unaware simply by using a credit card.

As to the enforceability of arbitration clauses in bankruptcy, one may refer to a new article “The Enforceability of Arbitration Clauses in Bankruptcy”, Alan N. Resnick, American Bankruptcy Institute Law Review, Volume 15, Number 1, Spring 2007.

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983

Avoided Preference Repaid Prepetition– Trustee Can’t Recover

Judge Hyman’s recent decision in In re Sawran, __ B.R. ___, 2007 WL 101841 (Bkrtcy. S.D. Fla.) presents an analysis of the common fact pattern. If a debtor made a prepetition preferential payment to an initial transferee, but the initial transferee or immediate transferee repays the involved amount to the debtor prepetition, may the trustee in bankruptcy still recover the preference?

The Sawran case presented a situation where the trustee obtained a judgment to avoid a preferential transfer under section 547. The trustee then filed an action under section 550 to recover the amount of the avoided transfer from an immediate transferee of the initial transferee.

The Court began its analysis with a review of section 550(d) which provides that a trustee is only entitled to a single recovery under 550(a)–the single satisfaction rule. That is, the trustee cannot recover from the various transferees more than the actual amount avoided. The Court further pointed out that the avoidance of a voidable transfer and the recovery from the transferee are distinct from one another.

The Court held that a trustee is prohibited under section 550(d) from recovering the amount avoided from a transferee who has already returned to the estate that which was avoided. To allow the trustee to collect the amount would result in a windfall to the trustee that violates the single satisfaction rule of section 550(d).

The Court found an alternative basis for its holding pursuant to the use of the Court’s equitable powers under section 105(a) by finding that it had the power to grant the initial transferees an “equitable credit” even if there was no defense available under the provisions of the Code. The initial transferees were innocent of wrongdoing and deserved protection to the extent that they repaid the involved amount. The equitable credit prevented the estate from receiving a windfall.
The Court noted that the Court’s equitable powers under section 105(a) are also used in other contexts to prevent a trustee from being able to recover from a party who is innocent of wrongdoing and deserves protection, such as when the initial recipient is a “mere conduit” of funds and therefore not an “initial transferee” under section 550(a)(1).

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983

Sections 526, 527, and 528 Held Not to Apply to Attorneys

In the recent case of In re Reyes, ___B.R. ___, 2007 WL 136934 (Bkrtcy.S.D. Fla.), Judge A. Jay Cristol of the Bankruptcy Court of Southern District of Florida issued an important decision as to the “debt relief agency” provisions of BAPCPA as applied to attorneys. Judge Cristol adopted the recent decision of Milavetz v. United States, 355 B.R. 758 (D. Minn. 2006) and held that 11 U.S.C. section 526, 527, and 528 are unconstitutional as applied to attorneys.

But following the doctrine of constitutional avoidance, the Court addressed the other issues raised to resolve them on other than constitutional grounds. The Court found that sections 526, 527, and 528 infringe on the State’s traditional role of regulating attorneys and therefore should not apply to attorneys. The Court reasoned that these sections were directed at bankruptcy petition preparers and not attorneys.

The Court further held on the doctrine of constitutional avoidance, that even assuming that the
sections were constitutional and that they applied to attorneys, that since the involved attorney did not receive “money or other valuable consideration”, that the attorney does not fit within the statutory definition of a debt relief agency as set forth in section 101(12A).

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983

Exempt Entireties Property not Subject to 522(p) Limitation

Judge Williamson of the Middle District of Florida issued his decision in the case of In re Buonopane, ___ B.R. ____, 2007 WL 247888 (Bkrtcy. M.D. Fla.) on January 26, 2007 in which he held that the cap imposed by the BAPCPA on the state homestead exemption that a debtor can claim in residential property acquired within 1,215 days of the petition date applied only to the Florida homestead exemption that the debtor could claim under 522(b)(3)(A) and not to the separate entireties exemption available under section 522(b)(3)(B). Section 522(b)(3)(B) provides for the exemption of property held as a tenant by the entireties. This decision is in accord with Judge Olson’s recent decision in the Southern District of Florida in the case of In re Schwarz, __ B.R. ___, 2007 WL 247649 (Bkrtcy. S.D. Fla.).

The Court stated while its ruling would appear to provide a way for a debtor to “end run” the $125,000 cap contained in section 522(p), that its ruling is consistent with the legislative history of section 522(p)(1) which was directed to close the “mansion loophole” and not against a state’s common law on tenancy by the entireties property.

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983