11th Circuit Upholds SD Fla Bankr Decision Allowing 304 Case for Italian Debtor

On June 29, 2007, the 11th Circuit Court of Appeal in an unpublished decision in In re Rosacometta, S.R.L., 2007 WL 1875646 (C.A.11(Fla.)) upheld the Bankruptcy Court of the Southern District of Florida’s decision below. The bankruptcy court had allowed an ancillary petition under section 304 (pre-BAPCPA) and enjoined the creditor from collecting on a writ of garnishment in the state court against the Italian company that had filed for bankruptcy relief in Italy. The 11th Circuit rejected the creditor’s arguments that the bankruptcy court had acted outside of its jurisdiction, that it had erred in granting comity to a foreign proceeding, and that it had failed to give full faith and credit to a state court decision refusing to dissolve the writ of garnishment. The 11th Circuit held that the bankruptcy court did not abuse its discretion in weighing the section 304(c) factors and granting section 304(b) relief. The 11th Circuit held that prejudice to the creditor was just one of the five factors for the court to consider per section 304(c) and is not even the “ultimate” factor. The 11th Circuit found that the other factors set forth in section 304(c), including comity, weighed in favor of granting the relief. The 11th Circuit further held that the bankruptcy court is granted broad powers under section 304(b) to grant relief to a foreign debtor.

The bankruptcy court had previously issued its decision dated December 19, 2005 in In re Rosacometta, SrL, 336 B.R. 557 (Bankr.S.D.Fla.2005)(Mark C.J.). In this case, the Italian trustee of an Italian corporation that was a debtor in a bankruptcy case in Italy filed an ancillary case under section 304 (pre-BAPCPA) seeking to enjoin all creditor collection activity in the United States nunc pro tunc to the date of the filing of the bankruptcy in Italy. At issue were certain funds owed to the the debtor in the U.S. that a U.S. creditor was attempting to garnish. The court recognized the effect of the Italian automatic stay and found the creditor action in violation of the stay was void, including the attempted garnishment.

This case came before the court under section 304 as a case ancillary to a foreign bankruptcy proceeding. The case was allowed to proceed under 304 as there was a foreign proceeding and the petitioner was the foreign representative. 11 U.S.C. 304(a). The court explained that section 304 enables United States courts to aid foreign bankruptcy proceedings and to accommodate the extraterritorial effect of these proceeding within the U.S. The primary purpose of section 304 is to prevent piecemeal distribution of a foreign debtor’s assets in the U.S. by means of legal proceedings in U.S. courts and to afford the foreign court an opportunity to assess where and when claims should be liquidated in order to conserve resources and to maximize distributions to creditors.

The court found that the creditor was not a secured creditor as the writ of garnishment was served after the commencement of the Italian bankruptcy and was therefore void as in violation of the Italian automatic stay. The court found that recognition of the Italian automatic stay was “other appropriate relief” under section 304(b)(3) and consistent with the overall purpose of section 304 and the specific criteria of 304(c). The court held that the claimed funds should be returned to Italy where the creditor may pursue its claim.

The bankruptcy court found the reasoning of Artimm , 278 B.R. 832, 840 (Bankr.C.D.Cal.2002) as persuasive and found that the Italian automatic stay applied extra territorially. The Artimm court concluded that the Italian automatic stay has worldwide effect as Italian law provides for a stay of all creditor collection activities and claims worldwide jurisdiction over the property of the debtor. Id. at 840. The Artimm court also found that provisions of Italian law indicate movement in Itlian law towards handling international insolvencies under the “universal” approach, which advocates treating an international bankruptcy as a single case in which assets and creditor are treated equally wherever they may be located. Id. at 841.

The bankruptcy court stated that many courts have noted that comity is the ultimate factor in determining whether section 304 relief is appropriate. The Supreme Court described comity as “the recognition which one nation allows within its territory to the legislative, executive, or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of tis own citizens…” Hilton v. Guyot, 159 U.S. 113 (1895). Comity is extended to a foreign court if that court is a court of competent jurisdiction and if the laws and public policy of the forum state and the rights of its residents will not be violated. Cunard S.S. Co., Ltd. v. Salen Reefer Services AB, 773 F.2d at 452 (2d Cir.1985). Comity should not be withheld unless its extension would be inimical to the interest of the United States. Cunard, 773 F.2d at 457. The interest of the United States in granting comity is to ensure that “the assets of a debtor are dispersed in an equitable, orderly, and systematic manner, rather than in a haphazard, erratic, or piecemeal fashion.” Cunard, 773 F.2d at 458. United States courts, therefore, have “consistently recognized the interest of foreign courts in liquidating or winding up the affairs of their own domestic business entities.” Id. at 458. Moreover, “every person who deals with a foreign corporation impliedly subjects himself to such laws of the foreign government, affecting the powers and obligations of the corporation with which he voluntarily contracts, as the known and established policy of that government authorizes.” Id. Therefore, U.S. creditors of a bankrupt foreign corporation may be required to assert their claims against the foreign debtor before a foreign court. Cunard, 773 F.2d at 458-59.

The Florida bankruptcy court found that extending comity to the Italian bankruptcy case and the laws of Italy was appropriate as the bankruptcy in Italy was proceeding under the aegis of a court of competent jurisdiction in accordance with the laws and policies of Italy. It further found that extending comity would result in an orderly and fair distribution to all creditors on a worldwide basis. Furthermore, the laws governing the Italian bankruptcy case comported with U.S. standards of procedural fairness and are not inimical to the law or policy of the U.S. The court noted that at least two U.S. court have previously extended comity to Italian bankruptcy proceedings.

Furthermore, the bankruptcy court found that the statutory factors of 304(c) were met, including the just treatment of all holders of claims against or interest in the estate, protection of claim holders in the U.S. against prejudice and inconvenience in processing of claim in the foreign proceeding, prevention of preferential or fraudulent dispositions of property of the estate, and distribution of proceeds of the estate are substantially in accordance with the order prescribed in the bankruptcy code.

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

11th Circuit Upholds SD Florida Bankr Decision Allowing 304 Case for Italian Debtor

On June 29, 2007, the 11th Circuit Court of Appeal in an unpublished decision in In re Rosacometta, S.R.L., 2007 WL 1875646 (C.A.11(Fla.)) upheld the Bankruptcy Court of the Southern District of Florida’s decision below. The bankruptcy court had allowed an ancillary petition under section 304 (pre-BAPCPA) and enjoined the creditor from collecting on a writ of garnishment in the state court against the Italian company that had filed for bankruptcy relief in Italy. The 11th Circuit rejected the creditor’s arguments that the bankruptcy court had acted outside of its jurisdiction, that it had erred in granting comity to a foreign proceeding, and that it had failed to give full faith and credit to a state court decision refusing to dissolve the writ of garnishment. The 11th Circuit held that the bankruptcy court did not abuse its discretion in weighing the section 304(c) factors and granting section 304(b) relief. The 11th Circuit held that prejudice to the creditor was just one of the five factors for the court to consider per section 304(c) and is not even the “ultimate” factor. The 11th Circuit found that the other factors set forth in section 304(c), including comity, weighed in favor of granting the relief. The 11th Circuit further held that the bankruptcy court is granted broad powers under section 304(b) to grant relief to a foreign debtor.

The bankruptcy court had previously issued its decision dated December 19, 2005 in In re Rosacometta, SrL, 336 B.R. 557 (Bankr.S.D.Fla.2005)(Mark C.J.). In this case, the Italian trustee of an Italian corporation that was a debtor in a bankruptcy case in Italy filed an ancillary case under section 304 (pre-BAPCPA) seeking to enjoin all creditor collection activity in the United States nunc pro tunc to the date of the filing of the bankruptcy in Italy. At issue were certain funds owed to the the debtor in the U.S. that a U.S. creditor was attempting to garnish. The court recognized the effect of the Italian automatic stay and found the creditor action in violation of the stay was void, including the attempted garnishment.

This case came before the court under section 304 as a case ancillary to a foreign bankruptcy proceeding. The case was allowed to proceed under 304 as there was a foreign proceeding and the petitioner was the foreign representative. 11 U.S.C. 304(a). The court explained that section 304 enables United States courts to aid foreign bankruptcy proceedings and to accommodate the extraterritorial effect of these proceeding within the U.S. The primary purpose of section 304 is to prevent piecemeal distribution of a foreign debtor’s assets in the U.S. by means of legal proceedings in U.S. courts and to afford the foreign court an opportunity to assess where and when claims should be liquidated in order to conserve resources and to maximize distributions to creditors.

The court found that the creditor was not a secured creditor as the writ of garnishment was served after the commencement of the Italian bankruptcy and was therefore void as in violation of the Italian automatic stay. The court found that recognition of the Italian automatic stay was “other appropriate relief” under section 304(b)(3) and consistent with the overall purpose of section 304 and the specific criteria of 304(c). The court held that the claimed funds should be returned to Italy where the creditor may pursue its claim.

The bankruptcy court found the reasoning of Artimm , 278 B.R. 832, 840 (Bankr.C.D.Cal.2002) as persuasive and found that the Italian automatic stay applied extra territorially. The Artimm court concluded that the Italian automatic stay has worldwide effect as Italian law provides for a stay of all creditor collection activities and claims worldwide jurisdiction over the property of the debtor. Id. at 840. The Artimm court also found that provisions of Italian law indicate movement in Itlian law towards handling international insolvencies under the “universal” approach, which advocates treating an international bankruptcy as a single case in which assets and creditor are treated equally wherever they may be located. Id. at 841.

The bankruptcy court stated that many courts have noted that comity is the ultimate factor in determining whether section 304 relief is appropriate. The Supreme Court described comity as “the recognition which one nation allows within its territory to the legislative, executive, or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of tis own citizens…” Hilton v. Guyot, 159 U.S. 113 (1895). Comity is extended to a foreign court if that court is a court of competent jurisdiction and if the laws and public policy of the forum state and the rights of its residents will not be violated. Cunard S.S. Co., Ltd. v. Salen Reefer Services AB, 773 F.2d at 452 (2d Cir.1985). Comity should not be withheld unless its extension would be inimical to the interest of the United States. Cunard, 773 F.2d at 457. The interest of the United States in granting comity is to ensure that “the assets of a debtor are dispersed in an equitable, orderly, and systematic manner, rather than in a haphazard, erratic, or piecemeal fashion.” Cunard, 773 F.2d at 458. United States courts, therefore, have “consistently recognized the interest of foreign courts in liquidating or winding up the affairs of their own domestic business entities.” Id. at 458. Moreover, “every person who deals with a foreign corporation impliedly subjects himself to such laws of the foreign government, affecting the powers and obligations of the corporation with which he voluntarily contracts, as the known and established policy of that government authorizes.” Id. Therefore, U.S. creditors of a bankrupt foreign corporation may be required to assert their claims against the foreign debtor before a foreign court. Cunard, 773 F.2d at 458-59.

The Florida bankruptcy court found that extending comity to the Italian bankruptcy case and the laws of Italy was appropriate as the bankruptcy in Italy was proceeding under the aegis of a court of competent jurisdiction in accordance with the laws and policies of Italy. It further found that extending comity would result n an orderly and fair distribution to all creditors on a worldwide basis. Furthermore, the laws governing the Italian bankruptcy case comported with U.S. standards of procedural fairness and are not inimical to the law or policy of the U.S. The court noted that at least two U.S. court have previously extended comity to Italian bankruptcy proceedings.

Furthermore, the bankruptcy court found that the statutory factors of 304(c) were met, including the just treatment of all holders of claims against or interest in the estate, protection of claim holders in the U.S. against prejudice and inconvenience in processing of claim in the foreign proceeding, prevention of preferential or fraudulent dispositions of property of the estate, and distribution of proceeds of the estate are substantially in accordance with the order prescribed in the bankruptcy code.

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

Foreign Creditor May Be Sanctioned for Violating Court Injunction

The issue before the court in the pre-BAPCPA case of In re Simon, 153 F.3d 991 (9th Cir.1998), cert. denied 525 U.S. 114 (US 1999) was whether a foreign creditor is subject to U.S. bankruptcy court sanction for pursuing foreign collection of a debt discharged in a U.S. bankruptcy case in which the foreign creditor participated. The court concluded that the bankruptcy court may sanction the foreign creditor for violating a court injunction.

The Debtor William N. Simon filed for chapter 7 relief in the U.S. and obtained his discharge of debt. Pursuant to section 524, the discharge order operates as an injunction against the collection of certain debt against the debtor. Simon scheduled Hong Kong and Shanghai Banking Corp., Ltd. (“HSBC”) as a creditor in his case and HSBC filed a proof of claim in the bankruptcy case. HSBC filed a complaint seeking declaratory relief from the bankruptcy court that the bankruptcy discharge injunction was not effective outside of the U.S.

The court found that Congress has the unquestioned authority to enforce its laws beyond the territorial boundaries of the U.S., but whether Congress has exercised that authority in a particular case is a matter of statutory construction. Unless a contrary intent appears, there is a presumption that the legislation of Congress is meant to apply only within the territorial jurisdiction of the U.S.

The court concluded that as to actions against the bankruptcy estate, Congress clearly intended extraterritorial application of the Bankruptcy Code. The bankruptcy court obtains exclusive in rem jurisdiction over all of the property of the estate including property located outside of the territorial jurisdiction of the U.S. The court concluded that Congress intended extraterritorial application of the Bankruptcy Code as its applies to property of the estate. The court further noted that as a matter of general principle, protection of in rem or quasi in rem jurisdiction is a sufficient basis for a court to restrain another court’s proceedings and that this rationale extends to foreign proceedings.

The court noted that the more difficult question was whether a bankruptcy court may enjoin a foreign collection action against the debtor personally or as to non-estate assets if the creditor was not a party to the U.S. bankruptcy proceedings. But the court was not required to reach this question as HSBC fully participated in Simon’s U.S. bankruptcy case and thereby surrendered to U.S. jurisdiction. In this instance, the presumption against the extraterritorial effect of a statute would not apply. Therefore, Simon’s chapter 7 discharge injunction enjoins HSBC, but not the courts in Hong Kong. If HSBC chooses to commence collection proceedings in Hong Kong against Simon, it does so at the risk of U.S. bankruptcy court sanction.

The court rejected HSBC’s argument that it only submitted itself to limited bankruptcy court jurisdiction as the proof of claim it submitted in Simon’s case was for a different debt than the one it sought to pursue in Hong Kong. The court noted that HSBC failed to assert its position in the bankruptcy court by requesting abstention, to move to lift the automatic stay, to move for adequate protection, or to file an objection to discharge of Simon’s debts.

The court noted that it did not decide whether discharge injunction of section 524 itself applies extraterritorially in all cases either as to non-estate assets or as to the debtor’s personal liability.

The court also rejected HSBC’s arguement that international comity requires the court to vacate the bankruptcy court’s injunction forbidding debt collection against Simon for pre-petition debt. The court noted that the international comity concerns underlying Maxwell Communications Corp., 93 F.3d 1036, 1050 (2d Cir. 1996) were not present in this case.

The court noted that the Bankruptcy Code does not codify either the “territorial theory” or the “universalist philosphy” but provides for a flexible approach to international insolvencies dependent upon the circumstances of the particular case. Under the territorial theory or “grab” rule, courts in each national jurisdiction are responsible for seizing and controlling assets within their geographic reach. The universalist philosophy contemplates one plenary transnational proceeding governing the administration of assets world-wide. The court noted in this pre-BAPCPA case, that if the Bankruptcy Code contains any philosophy it is of deference to the country where the primary insolvency proceeding is located and flexible cooperation in administration of assets. e.g. Sections 304 and 305.

In summary, the court held that the lower court’s order did not involve an improper extrterritorial application of the discharge injunction as to estate property becaus section 541 expressly includes all of the debtor’s property regardless of geographic location. The discharge injunction was also validly applied to HSBC as to Simon’s non-estate property because HSBC participated in Simon’s bankruptcy case and thereby subjected itself to the otherwise valid orders of the bankruptcy court. Finally, international comity did not compel a contrary result because there was no conflicting proceeding in a foreign nation.

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

Ex-Spouse’s Law Firm Not Able to Assert Basis for Non-Dischargeablity

The Court’s decision in In re Brooks, ___B.R. ___, 2007 WL 2083834 (Bkrtcy.N.D.Tex. July 19, 2007)(Lynn J.) dealt with an adversary proceeding by the law firm of debtor’s ex-spouse to determine a claim against the debtor for attorneys’ fees as non-dischargeable pursuant to 523(a)(5) or (a)(15). The law firm held a judgment against the debtor for their legal services rendered to his ex-spouse, inter alia, in obtaining and enforcing spousal support. Notably, the ex-spouse was not liable for this amount nor was the debtor liable for a certain other amount owed to the law firm by the ex-spouse. The debtor contended that the law firm lacked “standing” to assert a claim under section 523(a)(5) or (15) and moved to dismiss for failure to state a cause of action. The Court granted the debtor’s motion to dismiss as it found that the law firm could not assert a basis for its claim to be excepted from discharge under 523(a)(5) or (a)(15).

Section 523(a)(5) provides that a discharge under section 727 does not discharge an individual debtor for a domestic support obligation (“DSO”). Section 523(a)(15) provides that a debt to a spouse, former spouse, or child not of the kind described in (a)(5) incurred in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of court is not dischargeable. The law firm claimed that the firm’s fee are non-dischargeable on the basis that they were so intertwined with support that they constitute a DSO pursuant to 523(a)(5) or in the alternative that they are a non-dischargeable divorce-related debt under section 523(a)(15). The court looked to the definition of DSO in section 101(14A) and found that the law firm’s fee were not a DSO as they were not owed to a spouse, former spouse, or child of the debtor or such child’s parent, legal guardian, or responsible relative or to a governmental unit. Furthermore, the court found that the law firm’s debt was not non-dischargeable under section 523(a)(15) as it was not a debtor to a spouse, former spouse or child of the debtor.

The court rejected the argument to deem the legal fees as a DSO if the amounts were “recoverable” by a former spouse as it found that Congress did not intend to turn a debtor’s family members into debt recovery associates. The court also noted the inapplicability of the cases cited by the law firm under the pre-BAPCPA version of section 523(a)(15). The court noted that it would read the exceptions to discharge narrowly in balancing the two public policies found in sections 523(a)(5) and (a)(15)–that of providing a fresh start to the deserving debtor and the importance of a debtor’s obligations to his family. Marama v. Citizens Bank, ___ U.S. ___ (2007)(“The principal purpose of the Bankruptcy Code is to grant a ‘fresh start’ to the ‘honest but unfortunate debtor.’) The court noted that Congress did not intend for sections 523(a)(5) or (15) to aid in a law firm’s collection efforts but only for the other party to the divorce or separation.

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

Unsecured and Undersecured Creditors Not Entitled to Post-Petition Attorneys’ Fees and Costs

On July 6, 2007, the court in In re Electric Machinery Enterprises, Inc., ___ B.R. ___, 2007 WL 3031445 (Bkrtcy.M.D.Fla.)(Williamson J.) issued its decision holding that unsecured creditors are not entitled to collect post-petition attorneys’ fees, costs, and other similar charges even if there is an underlying contractual right to them.

The court noted that the majority of the courts have concluded that unsecured and undersecured creditors are not entitled to recover post-petition attorneys’ fees, costs, and other charges. The court stated that there are four primary reasons for this view. First, a number of court have focused on the plain language of section 506(b) and applied the legal maxim of expressio unius est exclusio alterius. Section 506(b) provides that to the extent that an allowed secured claim is oversecured, there shall be allowed to the holder of such claim, interest and any reasonable fees, costs and charges. Second, is the Supreme Court’s opinion and reasoning in United Saving Ass’n v. Timbers, 484 U.S. 365 (1988), which permitted post-petition interest to be paid only out of an equity cushion and ruling that an undersecured creditor without an equity cushion fell within the general rule of disallowing post-petition interest. Timber’s rationale would then apply equally to unsecured and undersecured creditors. Third, courts rely on the plain language of section 502(b) which provides that the court shall determine the amont of the claim “as of the date of the filing of the petition” and that the time for determining the amount of the claim is as it existed as of the time of the filing of the case without the inclusion of post-petition interest, attorneys’ fees or costs unless the claim is oversecured where such amounts are allowed under section 506(b). Fourth, courts rely on equitable considerations and policy of providing equality of distribution among similary situated creditors according to the priorites set out in the Bankruptcy Code. Thereby, unsecured creditors with attorney fees provisions in their contracts are not allowed to recover their fees just as unsecured tort claimants are not able.

The court adopted the majority view even though the Supreme Court recently declined to express an opinion as to whether unsecured creditors are entitled to post-petition attorneys’ fees in a case under the Bankruptcy Code. Travelers Casualty & Surety Co. of America v. Pacific Gas & Elec. Co., ___ U.S. ___ (2007). The court stated that there is existing Supreme Court precedent under pre-Code law to support he majority view. “Specifically, in Randolph v. Scruggs, 190 U.S. 533 (1903), the Supreme Court formulated the requirement of “benefit to the estate” for the allowance of unsecured creditor’s contract claims for post-petition legal fees.” The court disagreed with the creditor’s contention that the Eleventh Circuit implicity recognized an unsecured creditor’s entitlement to attorney’s fees in In re Welzel, 275 F.3d 1308 (11th Cir.2001).

Robert Eisenbach, III of In the (Red) Business The Bankruptcy Blog points out in a post dated July 26, 2007 that the Middle District of Florida Bankruptcy Court did not cite to the In re Qmect, Inc. May 2007 decision by the Northern District of California Bankruptcy Court which Bob discussed in a previous post. Bob notes that in In re Qmect, Inc.., the California Bankruptcy Court adopted a view opposite to that of the Florida Bankruptcy Court and held that an unsecured creditor could recover post-petition attorneys’ fees as part of its claim if its contract with the debtor provided for recovery of such fees. The court pointed to the policy of the preservation of nonbankruptcy legal rights except to the extent necessary to facilitate the purpose of the bankruptcy proceeding. Bob notes that he expects more decisions to follow on this issue in the wake of the Travelers decision as creditors with attorney’s fees provisions in their contracts seek to include post-petition fees in their unsecured claims.

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

The Means Test: "Household" Size and Contributions

On June 20, 2007 the decision in In re Ellinger, ___ B.R. ___, 2007 WL 1976750 (Bkrtcy.D.Minn.)(Kressel J.) was issued. One of the issues dealt with by the court was what constitutes a “household” as the term is used in section 707(b)(6). The court explained that the bankruptcy code does not define what constitutes a household. Based on section 101(39A)(A)’s definition of “median family income” which is calculated and reported by the Bureau of Census, the court found that the Census Bureau’s definition of “household” provides the most appropriate definition of household for use in the means test. The Census Bureau defines “household” as “all of the people, related and unrelated, who occupy a housing unit…. A housing unit is a house, apartment, group of rooms or single room that is intended for occupancy as a separate living quarters.” The court further noted that Congress used the word “household” and not “family” and did not intend to limit household size to only household members related by blood, marriage or adoption.

The Court declined to adopt the U.S. Trustee’s argument to use the Internal Revenue Manuel’s (“IRM”) definition of “household”. The IRM does not define “household” but indicates that the number of persons allowed under the national standard expenses should generally be the same as the number of dependents on the taxpayer’s latest tax return. The Court noted that the IRM’s definition applies to the calculation of the number of persons allowed expenses after the debtor is already found to have above median income but that it is not used to decide the threshold question of whether a debtor has above median income for his household size.

The Court next addressed the issue of the extent that the non-debtor household member’s contributions must be included in the debtor’s CMI per section 101(10A). The Court held that the contribution must be included in the debtor’s CMI only to the extent that the contributions were used to support the debtor or the debtor’s dependents and that the remainder of the contributions are excluded. The court noted that this particular non-debtor household member was not a dependent of the debtor and that the statute does not require the inclusion of income from a third-party that is used to support a non-dependent. Section 707(b)(7)(A) though does require the inclusion of the debtor’s spouse for its calculation. Accordingly, the Court did not include the non-debtor’s entire contribution in the calculation of the debtor’s CMI. The portion of the contribution used to pay the non-debtor’s share of the household expenses was not included as it was not used to support the debtor or the debtor’s dependents.

The court also noted that the means test provides a snapshot of the debtor’s finances and is not meant to be continually updated as the debtor’s circumstances change. Therefore, the fact that the non-debtor moved out after the debtor filed her petition was irrelevant to the means test and the determination of the household size.

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

Battle: Florida Opt-Out Statute Not Applicable to Non-Resident

In In re Battle, ___ B.R. ___, 2006 WL 3702734 (Bkrtcy.W.D.Tex.)(Lief J.), the debtor filed for chapter 13 relief in Texas. Since she had lived in more than one state during the 730 day period preceding the bankruptcy filing, per section 522(b)(3)(A) the applicable exemption law is that of state where the debtor was domiciled longest for the 180 day period prior to the 730 day period. The court held that since the debtor had “resided” [sic] in Florida for the entire 180 day period, the exemption laws of Florida apply.

The issue before the court was whether the debtor must use Florida exemption laws or may elect to use the federal exemptions of section 522(d). The trustee aruged that since Florida is an opt-out state, the debtor was not allowed to use the federal exemptions.

The court held that the debtor was allowed to claim the federal exemptions since the Florida opt-out statute by its own terms applies only to Florida “residents.” The court reasoned that since the debtor was not a resident of Florida on the filing date, the Florida opt-out statute did not bar the debtor from claiming the federal exemptions. Section 222.20, Florida Statutes (the opt-out statute) provides that “residents of this state shall not be entitled to the federal exemptions provided in s. 522(d) of the Bankruptcy Code of 1978..” The court noted the holding in In re Schulz, 101 B.R. 301 (Bankr.N.D.Florida1989).

There is a line of cases that would appear to give strength to the position opposite to that of the Court’s ruling. See e.g. In re Arrol, 207.B.R. 662 (Bankr.N.D.Calif.1997), In re Drentell, 403 F.3d 611 (8th Cir. 2005).

Furthermore, the court may not have given sufficient emphasis to the structure of section 522(b) and given a misplaced position to the Florida opt-out statute in the stautory scheme and structure of 522(b). It is also unclear why section 222.20, Florida Statutes refers to “residents of this state” as section 522(b) only refers to “domicile” which is a similar but different concept. The court’s logic may be puzzling, as section 522(b)(3) directed the debtor to use the applicable law of the particular 180 day state. Section 522(b)(3) inherently contemplates that the debtor will not be a domicile of that state any longer, but nonetheless directs the debtor to use its law. Furthermore, if the Florida legislature had properly used the word “domiciles” instead of “residents” in section 222.20, it is unclear whether the court could have reached the same result.

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

Munger Follows Sorrell, Unemployment Compensation Not Part of CMI

Since the drafting of the Means Test Form in 2005, it has been debated whether unemployment compensation is excluded from CMI as a “benefit received under the Social Security Act.” The Means Test Form took no position on the issue. Noteably, Judge Wedoff argued that unemployment compensation was not excluded from CMI. Eugene R. Wedoff, Means Testing in the New Section 707(b), 79 Am.Bankr.L.J.231,247 (Spring 2005). On the other hand, Collier on Bankruptcy in its analysis of section 101(10A) states that unemployment benefits are provided for under the Social Security Act and are thereby excluded from CMI. Collier on Bankruptcy 101-81 (Alan N. Resnick & Henry J. Sommer eds., 2007).

The Court in In re Munger, 2007 WL 1810701 (Bkrtcy.D.Mass.)(Rosenthal J.) held that unemployment compensation is so excluded from CMI. The United States Trustee (the “UST”) argued that unemployment compensation should be included in CMI but did not apparently file a supplemental brief on the issue. The debtors argued that unemployment compensation constitutes a “benefit received under the Social Security Act” and should be excluded from the CMI under 11 U.S.C. Section 101(10A)(B) which “excludes benefits received under the Social Security Act..” The Debtors relied on In re Sorrell, 359 B.R. 167 (Bankr.S.D.Ohio 2007) in which Judge Waldron held that unemployment compensation is excluded from CMI. Sorrell is apparently the only reported decision on point. Judge Waldron based his decision based on the statutory construction of section 101(10A) and the plain meaning rule. The Sorrell court rejected the UST’s argument that unemployment compensation is a nonqualifying “indirect payment” under the Social Security Act as each state administers the payments to eligible individuals. The Court concluded that the bankruptcy code does not speak of “payments” direct, indirect, or otherwise, but instead contains the unambiguously broader term “benefits received under the Social Security Act.” Sorrell at 181. The word “benefits” does not draw a distinction between unemployment compensation and other benefits. The Court further stated that when Congress intended to limit the language of a statute, that it did so such as in 522(d)(10)(A). Finally, the Sorrell court looked to the purpose of the Social Security Act which it found included replacement of wages to the unemployed.

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

In Non-Bankruptcy Court, Florida’s Homestead Exemption "Rules"

The Florida homestead exemption “rules” – at least generally in non-bankruptcy courts. In the recent case of Brian Dowling v. Davis, Slip Copy, 2007 WL 1839555 (M.D. Fla. June 26, 2007), Plaintiff Dowling held an Illinois judgment and filed a three count complaint in the District Court of the Middle District of Florida for 1. fraudulent asset conversion under Fla. Stat. Section 222.30, 2. to impose an equitable lien, and 3. to avoid fraudulent transfers Fla. Stat. Section 726.101, et. seq. The Illinois judgment was obtained in 2002 and the married defendants purchased real property in Florida in 2003 as tenants by the entirety. The purchase money was comprised of a bank loan and personal funds. The Defendants maintained that Florida’s constitutionally-created homestead exemption protected their Florida residence.

The Court concluded that the Plaintiff’s claims failed as the Florida Supreme Court has expressly held “[t]hat the transfer of nonexempt assets into an exempt homestead with the intent to hinder, delay, or defraud creditors is not one of the three exceptions to the homestead exemption provided for in article X, section 4″ of the Florida Constitution. Havoco of Am., Ltd. v. Hill, 790 So. 2d 1018, 1028 (Fla. 2001)(“Havoco I”) (emphasis added); Havoco of Am., Ltd. v. Hill, 255 F.3d 1321,1322 (11th Cir. 2001)(“Havoco II”) ( affirming that judgment debtor’s purchase of home with intent to hinder creditors did not overcome homestead exemption, based on answer to certified question in Havoco I). The Court stated that “the homestead exemption does not contain an express exception for real property that is acquired in Florida for the sole purpose of defeating the claims of out-of-state creditors. Havoco II, 255 F.3d at 1322; Havoco I,790 So. 2d at 1028; Bank Leumi Trust Co. v. Lung, 898 F. Supp. 883,887 (S.D. Fla. 1995); In re Adell, 321 B.R. 562,569-70 (Bankr. M.D. Fla. 2005).

The Court further noted that equitable liens may only be imposed in limited circumstances where a debtor fraudulently procured funds to invest in, purchase, or improve a homestead. See Palm Beach Savings & Loan Assoc. v. Fishbein, 619 So. 2d 267, 270 (Fla. 1993) (affirming imposition of equitable lien against wife’s residence where debtor husband obtained mortgage by fraud); Jones v. Carpenter, 106 So. 127,129-30 (Fla. 1925) (affirming imposition of equitable lien in action by trustee of bankrupt corporation against former president for embezzling funds used to improve homestead). The Plaintiff did not argue that this type of fraud was perpetrated against him but only alleged that Defendant purchased a homestead knowing that a judgment was imminent and used funds that could have been used to satisfy the judgment. The Court further noted that the exceptions to the homestead exemption are to be strictly construed. Havoco I, 790 So.2d at 1021-22.

One may query what the result may have been if these facts and issues had arisen in a bankruptcy case (voluntary or involuntary) under the full panoply of the BAPCPA amendments. See e.g. section 522(o) (reduction of homestead for dispositions made during prior 10 years with intent to hinder, delay, or defraud a creditor), 522 (p) (cap on homestead acquired within 1215 with certain exceptions), 522(b) (domicile and exemptions). Perhaps the homestead exemption would have been reduced or capped. Perhaps the Florida homestead exemption would not have applied at all and the Defendant/Debtor would have been required to use the Illinois or Federal exemptions. Perhaps an attempt to exempt the real property as tenants by entireties property under 522(b)(3)(B) would have been subject to avoidance.

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

Fla. Supreme Court: Legal Malpractice Claims Generally Not Assignable

In yesterday’s 5-2 decision in Law Office of David J. Stern, P.A. vs. Security National Servicing Corporation, No. SC06-361 (Florida July 5, 2007), the Florida Supreme Court quashed the Fourth District Court of Appeal’s decision and held that an assignee of a note and mortgage did not have standing to bring an action for legal malpractice as there was lacking an attorney-client relationship and it did not acquire the cause of action. A law firm reportedly committed malpractice in its pursuance of a mortgage foreclosure action. During the time in question, the involved note and mortgage were transferred several times. The ultimate holder sought to sue the law firm for malpractice.

The Florida Supreme Court held that ultimate holder of the mortgage did not have standing to bring a legal malpractice action based upon acts that occurred during the law firm’s representation of a prior holder of the note and mortgage. The Court noted that the time of the alleged negligent act or omission is the critical point for testing the scope and existence of the attorney-client relationship. The ultimate mortgagee did not gain standing to sue the law firm for prior acts of legal malpractice at the trial court level by forming an attorney-client relationship during the appeal of the foreclosure action.

The Court also held that the ultimate mortgagee did not receive a valid assignment of the right to sue the law firm. The Court adopted the majority view that legal malpractice claims are generally not assignable. “Legal malpractice claims are not assignable because of the personal nature of legal services which involve a confidential, fiduciary relationship of the very highest character, with an undivided duty of loyalty owed to the client.” Forgione v. Dennis Pirtle Agency, Inc., 701 So.2d 557, 559 (Fla. 1997) Furthermore, the Court refused to recognize the assignment of a legal malpractice claim as part of a general assignment of a note and mortgage. The Court also found that the ultimate mortgagee was not assigned and did not acquire the legal malpractice claim when it purchased the note and mortgage by general assignment.

The Court noted two major policy concerns justifying a general prohibition against the assignment of legal malpractice claims of protecting attorney-client confidences and preventing a market for legal malpractice claims.

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