Dismissed of Adversary of Adversary Proceeding on Basis of Comity with Netherlands Bankruptcy Proceeding

The Bankruptcy Court of the Southern District of Texas dismissed under principles of comity an adversary proceeding against an defendant who claimed to be a purchaser of equipment in a Netherlands bankruptcy proceeding in the case of Viking Offshore (USA), Inc. v. Viking Offshore (USA), Inc., et al. (In re Viking Offshore (USA), Inc.), 405 B.R. 434 (S.D. Tex. 2008). The court held that although it had subject matter and personal jurisdiction with respect to the injunctive matters asserted against the foreign defendant, principles of comity necessitated the dismissal of the adversary proceeding and that the debtor should seek to assert its rights to the property by way of an appeal in the Netherlands bankruptcy case.

The bankruptcy court found that it had "related to" subject matter jurisdiction of the adversary proceeding as the outcome could alter the debtor's rights, liabilities, options or freedom of action or could influence the administration of the bankruptcy estate. In re TXNB Internal Case, 483 F.3d 292 (5th Cir.2007). The bankruptcy court also held that it had the exclusive jurisdiction of all property of the debtor, wherever located - even extraterritorially. 28 U.S.C. section 1334 (e). The court also found that the defendant's contacts with the United States were sufficient to support the exercise of personal jurisdiction. The Court noted that an injunction, as it is an in personam action, may be enforced against entities only over which the court has personal jurisdiction and that due process in the exercise of personal jurisdiction requires certain "minimum contacts" per International Shoe Co. v. Washington, 326 U.S. 310, 316 (1945).

The court next turned to issues of permissive abstention, the doctrine of forum non conveniens and comity. The court noted that although the permissive abstention statute of 28 U.S.C. section 1334 (c)(1) does not apply by its plain meaning to the adversary proceeding as the Netherlands bankruptcy proceeding was one under foreign law and not under state law, the Fifth Circuit Court of Appealsheld in the case of Baumgart v. Fairchild Aircraft Corp., 981 F.2d 824 (5th Cir. 1993) that the doctrines of comity and forum non conveniens may apply under 28 U.S.C. section 1334 (c)(1) with respect to foreign proceedings. Under the doctrine of forum non conveniens, a court may decline jurisdiction and dismiss a case even if the case if properly before it, if the case can be more conveniently tried in another forum. Comity is 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 its own citizens or of other persons who are under the protection of its laws." Hilton v. Guyot, 159 U.S. 113 (1895). The Court noted that U.S. courts have applied the doctrine of comity to give effect to judgments rendered in foreign courts with a system of procedures compatible with the requirements of due process of law. The Court also observed that U.S. courts have dismissed proceedings in circumstances in which a foreign bankruptcy proceeding is pending and equity demands that all claims against the debtor's assets be addressed in a single proceeding.

The Court found that although the Netherlands bankruptcy statutes appeared to require notice to creditors at the commencement of the case, that it did not appear to require direct notice to entities asserting an interest in property in which the Netherlands debtor asserts an interest. The Court found that the debtor did have the opportunity to seek review of the Netherlands bankruptcy court's ruling and to assert that the purported conveyance was without notice and deprived the debtor of due process of law and therefore dismissed the adversary proceeding under principles of comity.

Non-Filing Spouse's Bonus May be "Current Monthly Income"

The Court in In re Barnes, 378 B.R. 774 (Bkrtcy.D.S.C. 2007) with regard to bonus income of non-filing spouses for the purposes of the calculation of "current monthly income" for the purposes of the determination of projected disposable income.  In this case, the court held that a non-debtor spouse's potential annual bonus is a part of projected disposable income.

The court noted that the income of a non-filing spouse is not included for purposes of determining a debtor's projected disposable income under 1325 (b) if the debtor does not "receive" this income pursuant to section 101 (10A)(A) or if it is not paid on a "regular basis" for the debtor's household expenses per section 101(10A)(B). The court further noted that Congress excluded that portion of the non-filing spouse's income devoted to her personal pursuits or expenses. In this case, the court found no evidence that the debtor "received" her bonus pursuant to section 101 (10A)(A).

But the court also held that if the non-filing spouse has enough monthly income to meet her separate expenses, the burden shifts to the debtor to demonstrate that the bonus is not paid on a regular basis for debtor's household expenses. The court further held that evidence is needed on how the non-filing spouse's income is used and whether it could effectively be used to pay for the debtor's household expenses and that the court needs to consider if it is paid on a regular basis.

Standing Required at Time of Filing of Motion for Stay Relief

The securitization of mortgages presents the issue of standing not only in foreclosure cases but also in the bankruptcy arena. In recent case of In re Maisel, ___ B.R. ___, 2007 WL 4029094 (Bankr.D.Mass. November 15, 2007), reviewed a party's motion for relief from the automatic stay in order to foreclose. The court found that the party did not have the requisite standing at the time the motion was filed as it had not yet obtained an assignment from the original mortgage lender. The Maisel court cited the recent Federal District Court case of In re Foreclosure Cases, 2007 WL 3232430(N.D.Ohio 2007).

In this case, Wells Fargo Bank NA filed a stay relief motion as Trustee for Morgan Stanley Capital I, Inc. Trust 2004-OP1 Mortgage Pass-Through Certificates, Series 2004-OP1. The debtors originally executed a note and mortgage to Option One Mortgage Corporation. Wells Fargo did not attach an assignment to the motion for stay relief but presented it to the court at the hearing. The assignment was dated four days after the filing of the stay relief motion.

The court discussed that section 362(d) requires one to be a "party in interest" to seek relief from the stay. The test for whether one is a party in interest is whether a party has a colorable claim to the property. The court found that Wells Fargo did not have a colorable claim to the property at the time the motion for stay relief was filed. The court further stated that Wells Fargo was a mere unrelated third party that did not have an interest in the mortgage or note until after the motion was filed.

In conclusion, the court gave this direction to lenders, "Lenders must take care in their haste to obtain relief from stay to ensure that the factual statements they make in their motions are true, have evidentiary support and support their claims." Despite the court's position, apparently stay relief was granted as the debtors indicated their intent to surrender the real property.

Section 548 Given Extraterritorial Application

The case of In re French, 440 F.3d 145 (4th Cir. 2006) presented the question of whether a U.S. Bankruptcy Court can avoid a constructively fraudulent transfer of foreign real estate between U.S. residents. The court held that the presumption against extraterritoriality, assuming it applied, did not prevent the application of the fraudulent transfer statute and that the doctrine of international comity did not require application of Bahamian bankruptcy law rather than the U.S. Bankruptcy Code.

In this case, the Chapter 7 trustee filed an adversary proceeding to avoid the transfer of the Bahamian real property by the debtor to her children. The trustee alleged that the debtor and the transferees had engaged in a constructively fraudulent transfer because the debtor had been insolvent at the time of the transfer and received less than a reasonably equivalent value in exchange. See 11 USC section 548(a)(1)(B). The transferees filed a motion to dismiss and argued that the section 548 should not apply to foreign property based on the presumption against extraterritoriality and that considerations of international comity counseled the application of Bahamian rather than U.S. bankruptcy law.

The court noted that it is a principle of American law that legislation of Congress is meant to apply only within the territorial jurisdictio of the U.S. unless a contrary intent appear. The court stated that although the parties had assumed that the application of section 548 to the transfer here is extraterritorial, the court needed to consider whether the presumption against extraterritorial application applies at all. The court noted that the U.S., courts only apply this presumption against extraterritoriality when a party seeks to enforce a statute beyond the territorial boundaries of the United States. EEOC v. Arabian Am. Oil Co., 499 U.S. 244 (1991). The presumption has no bearing when the conduct which Congress seeks to regulate occurs largely within the U.S., ie. when regulated conduct is domestic rather than extraterritorial. Envtl. Def. Fund, Inc. v. Massey, 986 F.2d 528, 531 (D.C.Cir.1993).

The court stated that although it had never defined when conduct is extraterritorial for purposes of the presumption, it has recognized that a similar inquiry-defining “foreign conduct”-is particularly challenging in cases (like this one) that involve a “mixture of foreign and domestic elements.” Dee-K Enters., Inc. v. Heveafil Sdn. Bhd., 299 F.3d 281, 286 (4th Cir.2002).The court concluded that a flexible test taking into account all component events of the transfer is appropriate to determine whether an allegedly fraudulent transfer occurred
extraterritorially. The court noted that the perpetrator and most of the victims of the fraudulent transfer were located in the U.S and the effects of this transfer were felt most strongly in the U.S. and not in the Bahamas. The court also found significant that domestic facts and conduct established both of the elements of the section 548 constructively fraudulent transfer, ie. the insolvency of the debtor and the receipt of less than a reasonably equivalent value. The court found the recordation of the deed in the Bahamas as insignificant as a foreign fact or conduct. The court though did recognize as important the fact that the real property was located in the Bahamas as the law has long recognized the powerful interest that states and nations have in the real property within their boundaries and that the strength of that interest explains why the law of the situs generally applies to real property.

But the court held that it need not resolve the "slippery question" of whether there was extraterritorial application as even if it were assumed that the application of the Bankruptcy Code would be extraterritorial, the presumption against extraterritoriality does not prevent its application to the transfer herein.
The court concluded that the presumption must give way when Congress exercises its undeniable authority to enforce its laws beyond the territorial boundaries of the United States as it did with section 548.

The transferees next argued that even if the presumption against extraterritoriality does not prevent extension of section 548 to the transaction, that the court should refrain from applying the statute under the doctrine of international comity, particularly as this is a dispute concerning real property which should be governed by the law of the situs. The court reviewed what the Supreme Court has referred to as the factors as to the application of the doctrine of international comity and concluded that these factors did not require the court to refrain from applying the U.S. Bankruptcy Code in favor of Bahamian bankruptcy law.

No Lien Created in Unliquidated Personal Injury Claim

The court in the case of In re Fontaine, 231 B.R. 1 (Bkrtcy.D.N.J. 1999) dealt with a situation where a personal injury lawyer gave a "letter of protection." The court noted that for an assignment to be created, the effect must be that the assignor does not retain the power to revoke the assignment. In this case, the court found the letter of protection did not use terminology indicating an assignment or that intention was irrevocable and held that it did not operate as an assignment.

The court noted that for an equitable lien to be valid as against a bankruptcy trustee, there must be no available legal means to perfect the lien. The court further noted that even assuming there was a legal means to obtain lien on personal injury claim, the party failed to take necessary steps to do so. The court stated that if is were not possible under New Jersey law to obtain a lien on personal injury claim, it would violated New Jersey law to grant an equitable lien on a personal injury claim.

The court reviewed that the right of action for personal injuries cannot be made the subject of an assignment before the entry of a judgment in absence of statute.  The court further noted that the assignment of a chose in action on contract claim is permitted but not on tort claim. Article 9 of UCC would apply to assignment of contract claim.

The court further held that the party did not comply with New Jersey statute that provides for a procedure for hospital and physicians to obtain a lien on personal injury causes of action and its proceeds for their services . To perfect such a lien, it must be filed with the county clerk and notice be given to the injured person.

Tenants by Entireties Exemption Does Not Require a 730 Day Domicile

The case of  In re Zolnierowica, 2007 WL 4644658 (Bkrtcy. M.D. Fla.)(Glenn, J.) held that the
domicile requirement of 730 days is not  applicable to as to the allowance of the entireties exemption claimed under section 522(b)(3)(B). The court held that for purposes of determining whether entireties property is exempt under state law, court looks to law of state of domicile on petition date even though the debtor may not have been domiciled in that state the entire 730 days.  The court concluded that the sections 522(o) and(p) restrictions do not apply to the application of the 522(b)(3)(B) exemptions.

The Scope of the Expiration of the Automatic Stay in a Subsequently Filed Chapter 13 Case

The court in In re Holcomb, 2008 WL 62623 (10th Cir.BAP (Okla.) addressed the filing of a chapter 13 case where the debtor had a case pending within a year prior to the petition date. The court noted that section 362(c)(3)(B) applies if the debtor has had a case pending within the year prior to the petition date. The court further noted that pursuant to this section, a motion to extend the automatic stay must be filed and heard before the expiration of the thirty day period after which the automatic stay expired.

The debtor argued that the stay only terminates with respect to the debtor and his property and not with respect to property of the estate. The court reviewed that only a minority of court have concluded that the stay terminates in its entirety and that the majority of courts conclude that the stay continues with respect to property of the estate. See, e.g. In re Jumpp, 356 B.R. 789 (1st Cir. BAP 2006). The Court adopted the majority approach and concluded that the automatic stay terminates only with respect to the debtor and property of the debtor.

Post-Confirmation Surrender of Car and Deficiency Claim Allowed

In the case of Mario Amador, Case 05-44401-BKC-AJC (Bankr.S.D.Fla. April 29, 2008)(Cristol, J.), debtor allowed to modify chapter 13 plan to surrender vehicle. Creditor allowed to file unsecured deficiency claim. section 502(j). Section 502(j) controls the allowance or disallowance of claim taking into consideration the equities of the case.

See e.g. In re Arencibia, Case No. 01-40647-BKC-RAM, 2003 WL 21004969 (Bankr.S.D.Fla.2003)(section 502(j) provides the necessary authorization to reconsider a claim and allow the type of plan modification requested).

Israeli Receivership and U.S. Chapter 11 Case

In a receivership case filed in Israel, Israeli receivers filed petitions for recognition under chapter 15. The Israeli receivers were appointed by the Tel Aviv-Jaffa District Court in various cases. The court noted that "[r]eceivership proceedings in Israel are commenced and conducted pursuant to Sections 194-201 of the "Companies Ordinance [New Version] 5743-1983.

The Israeli receivers pursued the Israeli receivership case after the debtors filed for relief under chapter 11 in the United States. The Israeli Court declined to give effect to the automatic stay based on the presumed illegitimacy of the chapter 11 cases due to the failure of the debtors to properly register the automatic stay order in the Israeli Receivership proceeding and on principles of comity. The U.S. Bankruptcy Court noted that the Israeli Court appeared to overlook the automatic imposition of the automatic stay and the lack of dismissal or abstention with respect to the U.S. bankruptcy cases.

The debtors filed an adversary proceeding in the U.S. bankruptcy court seeking a temporary restraining order against the Israeli creditors.

Distinction Between Assignment and Sale

In a case closely watched by potential investors in distressed debt, including subprime mortgages, District Court Judge Shira A. Scheindlin rendered her decision on August 27, 2007 in In re Enron Corp, 379 B.R. 425 (S.D.N.Y. 2007). Judge Scheindlin vacated the subordination and disallowance orders of the Bankruptcy Court and issued her opinion that a claim held by a transferee could be subject to equitable subordination and disallowance due solely to the conduct of the transferor of the claim if the transfer was by assignment but not by sale. The claim involved was held by investors in Enron debt which was extended by a syndicate of banks. Although it was reported that this decision somewhat lifted a cloud from the bond market, that more clarity would be needed as the decision created more confusion by ruling that investors who are "assigned" debt to not have the same rights as those who "purchase" them. The court noted that although the question involved in the case could be "simply stated, [it] is complex and of first impression in this Circuit, and will have serious ramifications well beyond the parties involved in this particular appeal." Id at page 428. Commentators and amici curiae expressed concern that the decisions of the Bankruptcy Court would wreak havoc in the distressed debt markets.

The court stated that although an assignment and a sale are both types of transfers, that they are distinguishable and can have different consequences for the transferee. Judge Scheindlin noted that an assignee stands in the shoes of the assignor and is subject to all equities against the assignor. The court noted that this principal is a corollary to the "well-established doctrine of nemo dat qui non habet: an assignor cannot give more than he has." In contrast to an assignee, the court cited New York U.C.C. Section 8-202(d) and stated that a purchaser does not stand in the shoes of a seller and can obtain more than the transferor in some circumstances. This section of the New York U.C.C. provides that all defenses of an issuer of a security with enumerated exceptions are "ineffective against a purchaser for value who has taken the security without notice of the particular defense." The court held that the distinction between an assignee and a purchaser apply to transfers of claim.

Federal Taxation of Individual in Chapter 11

The Internal Revenue Service Publication 908 reviews various aspects of the federal taxation of the individual in chapter 11 bankruptcy.

Bankruptcy Estate as Separate Taxable Entity - The bankruptcy estate of an individual in chapter 11 is a separate taxable entity. The debtor’s pre-petition income is included on his personal income tax return. The bankruptcy estate includes in its gross income all of the debtor’s income, including wages and income from the estate’s property, to which the estate is entitled. Any amounts not included in the bankruptcy estate's income are included in the individual's personal income. The debtor is to allocate his wages between the debtor and the bankruptcy estate. A simple percentage method may be used. Income from exempt and abandoned property, although initially part of the estate, are subsequently excluded from the estate. An individual (as debtor-in-possession) may be compensated by the bankruptcy estate for managing its business. Such payments are to be reported by the debtor on his individual returns as miscelleaneous income.

Tax Returns - The individual files a Form 1040 and the bankruptcy estate files a Form 1041 for the involved tax year. Form 1040 is to be attached to the Form 1041. In the case of a joint bankruptcy filing of a husband and wife, the bankruptcy estate is treated as two separate taxable entities and that two separate tax returns are filed for the bankruptcy estate. The bankruptcy estate must file the Form 1041 if its gross income exceeds the amount required for filing based on a statues of a married individual filing separately.

A “Notice 2006-83 Statement” is required to be attached to the individual and bankruptcy estate’s tax returns regarding the chapter 11 case. The statement should list the date of filing of the bankruptcy case, the case number, the location of the Bankruptcy Court, and the bankruptcy estate’s employment identification number. EIN. This statement is to reflect the allocations of income and withheld income taxes and describe the method used for such allocations. A model statement is included in Publication 908.

Election to End Tax Year - An individual may elect to close his tax year as of the day before the date the bankruptcy case is file. In such case, the tax year is divided into two short tax years (adding up to 12 months). Any tax liability for the first short year becomes an allowable claim against the bankruptcy estate. If such election is not made, the commencement of the bankruptcy estate does not affect the individual’s tax year and no part of the debtor’s income tax liability for such year can be collected from the bankruptcy estate.

Computation of Tax, Tax Attributes - The bankruptcy estate figures its taxable income and takes deductions and credits in the same manner that the debtor would have on his individual tax return. The bankruptcy estate uses the rates for a married individual filing separately and can take one personal exemption and either itemize deductions or take the standard deduction for a married individual filing a separate tax return.

The bankruptcy estate figures its tax attributes the same way the debtor would have. These amounts are figured on the date the bankruptcy is filed. The tax attributes the bankruptcy estate takes from the debtor include the following: NOL carryovers, basis, holding period, and character of assets, method of accounting, etc. Certain tax attributes of the estate must be reduced by an excluded income from cancellation of debt occurring during the bankruptcy case.

Debt Cancellation – Cancelled or forgiven debt is generally income for tax purposes, with certain exceptions such as if the debt is cancelled during a bankruptcy case or while the debtor is insolvent. Certain tax attributes (such as certain losses, credits, and basis of property) though may be reduced by the amount of the excluded income. Cancellation during bankruptcy takes precedence over the insolvency exclusion. Bankruptcy cancellation would be as a result of a plan confirmed by the Bankruptcy Court. A person is generally insolvent when and to the extent liabilities exceed the fair market value of the assets just before the cancellation of the debt.

Administrative Expenses – the bankruptcy estate is allowed a deduction for administrative expenses and fees or charges assessed. These are generally deductible as itemized deductions. Administrative expenses attributable to the conduct of a trade or business by the bankruptcy estate are deducted at arriving as adjusted gross income.

Employer identification Number (“EIN”) – a chapter 11 individual debtor needs to obtain an employer identification number for the estate to use on any tax returns filed for the estate. Such number should be provided as soon as reasonably possible to those persons that are required to file information returns for the bankruptcy estate’s gross income, gross proceeds, or other types of reportable payments. The payors should report such amounts using the bankruptcy estate’s name and EIN. One may obtain an EIN at www.irs.gov/businesses/small, by calling (800) 829-4933, or by mailing a Form SS-4.

Form W-2 – An individual chapter 11 debtor does not need to provide his EIN to his employer for use with on his W-2. The employer should continue to report all wage income and tax withholdings, whether pre-or post-petition, on the Form W-2 issued under the debtor’s individual social security number. Determination of income tax withholding, FICA, FUTA are not changed.

Closing of Bankruptcy Estate – the bankruptcy estate ends as a taxable entity when the chapter 11 case is closed, dismissed, or converted to chapter 13. If the case is converted to chapter 7, the bankruptcy estate will continue to exist as a separate taxable entity. Generally, once the bankruptcy estate is ended, gross income realized thereafter is reported to the debtor not the estate. The debtor should send notice of such closing to all persons previously notified of the bankruptcy case to ensure that items are reported to the debtor social security number or EIN instead of to the bankruptcy estate.

Dismissal of Bankruptcy Case – the Bankruptcy Code provides that the taxing authority may request a dismissal of your case if you fail to file the required tax return or pay taxes owed after the bankruptcy case is filed. If the chapter 11 case is dismissed, the debtor is treated as is the bankruptcy petition was never filed. Amended returns on Form 1040X are to be filed to replace the returns filed by the bankruptcy estate. The amended returns are to include the items of income, deductions, and creditor that were included on the bankruptcy estate’s tax return that were not reported on the individual’s tax return.

The Twice Assigned Florida Mortgage: Who Prevails?

The case of Am. Bank of the S. v. Rothenberg, 598 So. 2d 289 (Fla. 5th DCA 1992) presented a situation of competing claims to ownership of a mortgage. A mortgage company first delivered the actual mortgage note and an assignment of note and mortgage to one party as collateral for a line of credit. Then the mortgage company sold the mortgage note and mortgage to a second party and delivered to it an assignment and a mere photocopy of the mortgage note. Before the first party recorded its assignment of note and mortgage, the second party recorded its assignment of note and mortgage. Upon the property owner's default, the second party began a foreclosure action against the property owner and also claimed priority over the first party who possessed the actual mortgage note. The second party argued that it had priority over the first party as it recorded its assignment of note and mortgage first even though the second party held the actual mortgage note.

The second party claimed priority over the first party based on Florida's recording statute which provides in part that "[n]o assignment of a mortgage upon real property or of any interest therein, shall be good or effectual in law or equity, against creditors or subsequent purchasers, for a valuable consideration, and without notice, unless the assignment is contained in a document which, in its title, indicates an assignment of mortgage and is recorded according to law." Section 701.02 (1), Florida Statutes (1991).

The court rejected the second party's argument and held that the case was governed by negotiable instrument law found in the U.C.C. and not by the recording statute. The court found that the recording statute was enacted to protect a creditor or subsequent purchaser of land who relied on a recorded satisfaction of mortgage which had actually already been assigned to another party who failed to record it. The court refused to extend the application of the recording statute to successive assignments of mortgages.

The court found that first party prevailed over the second party as it possessed a valid assignment of mortgage and was a holder in due course of the original mortgage note. See Vance v. Fields, 172 So. 2d 613 (Fla. 1965). The court held the mortgage note to be a negotiable instrument pursuant to Section 673.104, Florida Statutes (1991) and that the first party was a holder in due course which took the negotiable instrument free from all claims on the part of any person. Section 673.305, Fla. Stat. (1991).

Equitable Subordination, Insiders, Fiduciary Duties, Constructive Fraud, Civil Conspiracy, Section 105 (a), Reverse Piercing

The case of Sonya L. Salkin, Trustee v. Elizabeth Chira, et al. (In re Chira), 353 B.R. 693 (Bkrtcy.S.D.Fla.2006)(Olson, J.) involved an adversary proceeding by a trustee to, inter alia, determine the validity, priority, and amounts of deeds made and obligations incurred by the debtor with respect to his ex-spouse in regards to a beachfront hotel. The following are excerpts (mostly verbatim) from the lengthy decision.

Equitable Subordination

The court noted that the common law principle of equitable subordination has long been recognized by the Supreme Court, Pepper v. Litton, 308 U.S. 295 (1939), and is specifically adopted as one of the bankruptcy courts' equity powers by 11 U.S.C. § 510(c). Equitable subordination law in the 11th Circuit derives from the former Fifth Circuit's decision in In re Mobile Steel Co., 563 F.2d 692, 700 (5th Cir.1977) and holds that equitable subordination must be based upon inequitable conduct by the creditor. Mobile Steel laid out three conditions a bankruptcy court must find to exist before it equitably subordinates a claim. One, the claimant must have engaged in some type of inequitable conduct. Two, the misconduct must have resulted in injury to the creditors of the bankrupt or conferred an unfair advantage on the claimant. And three, equitable subordination of the claim must not be inconsistent with the provisions of the Bankruptcy Code. The Mobile Steel test was formally adopted by the Eleventh Circuit. In re N & D Properties, Inc., 799 F.2d 726, 731 (11th Cir.1986). The test does not require that the claimant's misconduct rise to the level of an intentional tort.

The power of equitable subordination may, in appropriate circumstances, be used to subordinate even the claim of a secured creditor. See 124 Cong. Rec. H. 11,095 (Sept. 28, 1978); S 17,412 (Oct. 6, 1978); In re Tri-O-Clean, Inc., 230 B.R. 192 (Bankr.S.D.Fla.1998).

The plaintiff bears the burden of presenting material evidence of unfair conduct. Once this has been done, the insider defendant must prove the good faith and fairness of its dealings with the debtor or the claim will be subordinated. Allied Eastern States Maintenance Corporation v. Miller (In re Lemco Gypsum, Inc.), 911 F.2d 1553, 1557 (11th Cir.1990). The policy of requiring an insider creditor to demonstrate the inherent fairness of his or her claim, can be traced to Richardson's Executor v. Green, 130 U.S. 104, 10 S.Ct. 280, 33 L.Ed. 516 (1889).

Officers', directors', and stockholders' dealings with the corporation are subjected to rigorous scrutiny and where any of their contracts or engagements with the corporation is challenged the burden in on the director or stockholder not only to prove the good faith of the transaction but also to show its inherent fairness from the viewpoint of the corporation and those interested therein.

A claim may be subordinated only to the extent necessary to offset the harm caused by the claimant to the Debtor and its creditors. In re Mobile Steel, 563 F.2d 692, 701 (5th Cir.1977).

Insider relationship

Insiders, those in a position of influence over a debtor, are held to a higher standard than non-insider claimants. Their claims may be subordinated more easily than those of parties who dealt with a debtor at arm's length. In re Multiponics, 622 F.2d 709, 714 (5th Cir.1980)); In re Epic Capital Corp., 290 B.R. 514 (Bankr.D.Del.2003). An insider's actions may subject him or her to equitable subordination on the basis of inherent unfairness alone. In re Lemco Gypsum, Inc., 911 F.2d 1553, 1556 (11th Cir.1990).

“Insider” is a flexible term. Rather than defining it, the Bankruptcy Code gives non-exclusive examples. “The term ‘insider’ includes....” 11 U.S.C. § 101(31). “ ‘Includes' and ‘including’ are not limiting.” 11 U.S.C. § 102(3). The legislative history of the 1978 Code defines an insider as a person or entity with “a sufficiently close relationship with the Debtor that his conduct is made subject to closer scrutiny that those dealing at arm's length with the Debtor.” S.Rep. No. 95-989, 95th Cong., 2d Sess., reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5810. Among the examples given are “an affiliate, or an insider of an affiliate as if such affiliate were the Debtor.” 11 U.S.C. § 101(31)(E). “Affiliate” is defined as including a corporation 20% or more of whose stock is owned by the Debtor. 11 U.S.C. § 101(2)(B). “Affiliate” is also defined as including an “entity that operates the business or substantially all of the property of the Debtor under a lease or operating agreement.” 11 U.S.C. § 101(2)(D). The term “entity” includes person.... 11 U.S.C. § 101(15). The term “person” includes ... corporation.... 11 U.S.C. § 101(41).

Even where the relationship does not fit within the examples given in the Bankruptcy Code, a person may hold insider status. Courts that have considered the issue often hold that a former spouse is an insider as that term is used in bankruptcy law, where their relationship puts the non-debtor party in a position to exercise some degree of control or influence over the Debtor. Hunter v. Dupuis (In re Dupuis), 265 B.R. 878, 885 (Bankr.N.D.Ohio 2001).

Fiduciary Duties

Fduciary duties may be imputed by the course of conduct between the parties. Maxwell v. First United Bank, 782 So.2d 931, 933 (Fla. 4th DCA 2001). When a fiduciary relationship is implied in law, it is based on the specific facts and circumstances surrounding the transaction and the relationship of the parties. This can arise when “confidence is reposed by one party and a trust accepted by the other.” In this sense, breach of fiduciary duty is a broad theory of recovery which “can include conduct which is merely negligent but does not rise to a level of fraud.” Niles v. Mallardi, 828 So.2d 1076, 1078, n. 1 (Fla. 4th DCA 2002); Horizons Rehabilitation, Inc. v. Health Care and Retirement Corp., 810 So.2d 958, 964 (Fla. 5th DCA 2002). If a relation of trust and confidence exists between the parties (that is to say, where confidence is reposed by one party and a trust accepted by the other, or where confidence has been acquired and abused), that is sufficient as a predicate for relief. Doe v. Evans, 814 So.2d 370, 374 (Fla.2002)

Ordinarily, to establish a fiduciary or confidential relationship between the parties, there must be a showing of substantial evidence indicating dependency by one party and some undertaking by the other party to advise, counsel, and protect the weaker party. See Lanz v. Resolution Trust Corp., 764 F.Supp. 176, 179 (S.D.Fla.1991). Moreover, evidence that one party placed trust or confidence in the other party does not create a fiduciary relationship in the absence of “some recognition, acceptance or undertaking of the duties of a fiduciary on the part of the other party.

Courts have sometimes found a breach of fiduciary duty even among parties who are ostensibly dealing with one another at arm's length, such as the relationship between borrowers and lenders, where the bank knows or has reason to know of the customer's trust and confidence under circumstances exceeding an ordinary ‘customer relationship’ ”, or where the customer is “relying on the bank so as to counsel and inform him” or in some cases where the lender takes on extras services for a customer, receives any greater economic benefit than from a typical transaction, or exercises extensive control. Capital Bank v. MVB, Inc., 644 So.2d 515, 519-521 (Fla. 3d DCA 1994).

Constructive Fraud

Florida law recognizes an equitable cause of action for constructive fraud when a fiduciary or confidential relationship has been abused. See First Union National Bank of Florida v. Whitener, 715 So.2d 979, 982 (Fla. 5th DCA 1998). In cases alleging corporate malfeasances this cause of action is often asserted in conjunction with the more familiar claims for breach of the fiduciary duty of care and breach of the fiduciary duty of loyalty. See, e.g., Halkey-Roberts Corp. v. Mackal, 641 So.2d 445 (Fla.App.1994). Banco Latino International v. Gomez Lopez, 95 F.Supp.2d 1327, 1335 n. 9 (S.D.Fla.2000).

Constructive fraud is simply a term applied to a great variety of transactions ... which equity regards as wrongful, to which it attributes the same or similar effects as those which follow from actual fraud, and for which it gives the same or similar relief as that granted in cases of real fraud. Pomeroy's Eq. Jur. (4th Ed.) §992 Halkey-Roberts Corp. v. Mackal, 641 So.2d 445, 447 (Fla. 2d DCA 1994)

Civil Conspiracy

A breach of fiduciary duty can also form the basis for an independent tort of civil conspiracy. Blatt v. Green, Rose, Kahn & Piotrkowski, 456 So.2d 949, 951 (Fla. 3d DCA 1984). Civil conspiracy under Florida law requires a showing that two or more persons have taken concerted action to accomplish some unlawful purpose, or to accomplish some lawful purpose by unlawful means. Robinson v. State, 610 So.2d 1288 (Fla.1992); Segal v. Rhumbline International, Inc., 688 So.2d 397 (Fla. 4th DCA 1997). The basis for the conspiracy must be “an independent wrong or tort which would constitute a cause of action if the wrong were done by one person.” American Diversified Insurance Services v. Union Fidelity Life Insurance Co., 439 So.2d 904, 906 (Fla. 2d DCA 1983); Liappas v. Augoustis, 47 So.2d 582 (Fla.1950); Kee v. National Reserve Life Ins. Co., 918 F.2d 1538 (11th Cir.1990).

Parties are acting in concert when they act in accordance with an agreement to cooperate in a particular line of conduct or to accomplish a particular result. The agreement need not be expressed in words and may be implied and understood to exist from the conduct itself. Whenever two or more persons commit tortious acts in concert, each becomes subject to liability for the acts of the others, as well as for his own acts. The theory of the early common law was that there was a mutual agency of each to act for the others, which made all liable for the tortious acts of any one. Restatement of Torts (Second) § 876(a), comment. However, a civil conspiracy does not require more than knowledge and general participation in the conspiracy to commit a civil wrong. Voll v. Randazzo, 674 So.2d 892 (Fla. 5th DCA 1996).


Section 105 (a)

Section 105(a) of the Bankruptcy Code in providing that “the court may issue any order, process or judgment that is necessary or appropriate to carry out the provisions of this title,” provides supplemental authority to the All Writs Statute, 28 U.S.C. § 1651, which has similar language. Together, the two statutes are the source of the bankruptcy court's equity jurisdiction. See H. Rep. No. 95-595, 95th Cong., 1st Sess., 316 (1977), 735 U.S.Code Cong. & Admin.News 1978, pp. 5963, 6273. This jurisdiction is not permitted to be exercised in a way which conflicts with other statutes, but it is expected that courts will rely upon equity's “broad authority to modify creditor-Debtor relationships.” United States v. Energy Resources Co., 495 U.S. 545, 549, 110 S.Ct. 2139, 109 L.Ed.2d 580 (1990).

The bankruptcy courts have exercised these equitable powers in passing on a wide range of problems arising out of the administration of bankrupt estates. They have been invoked to the end that fraud will not prevail, that substance will not give way to form, that technical considerations will not prevent substantial justice from being done. Pepper v. Litton, 308 U.S. 295, 304-05, 60 S.Ct. 238, 84 L.Ed. 281 (1939). Federal courts exercising their equity jurisdiction have repeatedly found that they may direct that a lease between insiders, the terms of which were never performed, be disregarded as a sham. See Staats v. Butterworth Properties, Inc. (In re Humble), 19 Fed.Appx. 198, 2001 WL 1006148 (6th Cir.2001); B & M Leasing Corp. v. United States, 331 F.2d 592 (5th Cir.1964); United States v. Rockwell, 677 F.Supp. 836 (W.D.Pa.1988); MCI Telecommunications v. O'Brien Marketing, Inc., 913 F.Supp. 1536 (S.D.Fla.1995).

Reverse Piercing

A Trustee may bring an action, frequently called a Trustee's “reverse piercing” action, to draw the assets of the Debtor's mere instrumentality into the Debtor's estate. He may bring the action so long as piercing the corporate veil is an action available under state law in those circumstances to creditors generally. In re Icarus Holding, LLC, 391 F.3d 1315, 1321 (11th Cir.2004). Some bankruptcy courts have even permitted substantive consolidation of Debtor corporations and non-Debtor corporations upon equitable grounds. See, e.g., In re Lease-A-Fleet, Inc., 141 B.R. 869 (Bankr.E.D.Pa.1992); In re New Center Hospital, 179 B.R. 848 Bankr.E.D.Mich.1994); In re Munford, Inc., 115 B.R. 390 (Bankr.N.D.Ga.1990).

Statutory Exemptions Not Valid if Fraudulent Conveyance

Florida Statute Section 222.29 provides that there is no exemption for fraudulent transfers as follows "[a]n exemption from attachment, garnishment, or legal process provided by this chapter is not effective if it results from a fraudulent transfer or conveyance as provided in chapter 726."

Section 222.30(2) provides that "[a]ny conversion by a debtor of an asset that results in the proceeds of the asset becoming exempt by law from the claims of a creditor of the debtor is a fraudulent asset conversion as to the creditor, whether the creditor's claim to the asset arose before or after the conversion of the asset, if the debtor made the conversion with the intent to hinder, delay, or defraud the creditor."

The definitions from 726 are to be used unless unreasonable and transfers are deemed fraudulent if a person doesn't receive a reasonable equivalent value.

These provisions are illustrated in the case of In re Charles Lowery, Case 00-6131-3F7, Middle District of Florida.

BAPCPA's Exemption Provisions Do Not Violate Uniformity Requirement

In the 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.

Rention of Possession or Control of Assets Transferred to a Family Limited Parntership

In the case of Estate of Strangi v. Comm'r, 417 F.3d 468 (5th Cir. 2005), the Fifth Circuit Court of Appeals upheld that the estate tax deficiency against the Estate of Albert Strangi. The code section in issue was §2036(a) which provides that transferred assets of which a decedent retains de facto possession or control prior to death are included in the taxable estate. 28 U.S.C. § 2036 (a).

As his health began to fail, Strangi transferred approximately ten million dollars of personal assets into a family limited partnership (“FLP). After his death, the estate filed an estate tax return based on the value of his interest in the FLP as opposed to the actual value of the transferred assets. The IRS issued a notice of deficiency for about $2.5 million. The Tax Court found that Strangi had retained an interest in the transferred assets such that they were included in the taxable estate pursuant to I.R.C. § 2036(a).

In August, 1994 the FLP was created and the ten million dollars of assets were transferred into it. Strangi died in October, 1994. After the creation of the FLP and prior to his death, Strangi continue to reside in one of the two houses transferred to the SFLP and the estate later claimed that Strangi was charged rent.

The basis of the IRS notice of deficiency of about $2.5 million was that the taxable estate was the value of the transferred assets of about $11 million and not the approximate $6.5 million that the estate reported. The estate based its lower valuation of the assets using a discount based on a lack of marketability or control of estate property . See 26 C.F.R. §20.2031-1(b) (“The value of every item of property includible in a decedent’s gross estate... is its fair market value at the time of the decedent’s death…”)

Chapter 11 Ballots not Counted as did not Conform to Official Form

In the case of Bakes v. The Official Committee of Unsecured Creditors, et al., 2007 WL 542150 (S.D.Fla. 2007) the Court noted that voting on chapter 11 plan is governed by rules designed to insure the integrity and manageability of the voting process. FRBP 3018. In this case the form did not conform to the official form and therefore the votes submitted whould not be counted.

The Court noted that the two empty boxes on the official form 14 are the essential feature of the official ballot form. In this case, the form did not give the creditors the choice to accept or reject as they were pre-marked to state a rejection and gave the impression that the voter was not entitled to make a choice. The Court note that pre-market ballots have been held to be improper per se. In re Gulph Woods Corp., 83 B.R. 339 (Bkrtcy.E.D.Pa.1988) and that pre-marked ballots create confusion as a creditor may receive more than one ballot.

Proceedings Supplementary

The case of Mejia vs. Ruiz, 3rd DCA, May 14, 2008, 3D07-2254 involved  proceedings supplementary against shareholders and directors of a judgment debtor corporation. After the corporation was sued, shareholders took corporate assets and left the corporation insolvent. A writ of execution was issued on corporation. Proceedings supplementary were subsequently pursued pursuant to 56.29.

The court explained that there are two prerequisite for proceedings supplementary - a returned and unsatisfied writ of execution and an affidavit that the writ is of execution is valid and unsatisifed along with list of third parties to be impleaded. Impleading does not imply liability but provides them with an opportunity to raise their defense and protect their interests.

The court noted that pursuant to Florida Statutes Section 56.29 provides that a transfer, assignment, or other conveyance of personal property made or contrived to delay, hinder, or defraud per 726.105is creditors is void. The burden of proof is a preponderance of the evidence. Fraudulent intent may be presumed from "badges of fraud." The badges of fraud create a prima facie case and raise a rebuttable presumption that transaction void.

The court found prima facie proof of badges of fraud. Also known creditors were not notified of dissolution of corporation per 607.1406. The court explained that shareholders follow 607.1406 given limited immunity.

Chapter 13 - Nonfiling Spouse's Sole Secured Debt and Other Non-Necessary or Non-Household Expenses Allowed as Marital Adjustment

The case of In re Shahan, 367 B.R. 732 (Bankr.D.Kansas April 23, 2007)(Nugent, C.J.) held that an above-median income Chapter 13 debtor was not entitled to deduct as future payments to be made on secured debts for which only his nondebtor wife was liable, but that these payments by the nonfiling wife were deductible as a "marital adjustment" as they were not in fact amounts paid on a regular basis for household expenses. The court also held that the nonfiling spouses non-household or non-necessary expenses were not deductible on line 59 (now 60), but were deductible as part of the "marital adjustment."

At issue in this case was how the means test that is applicable to the above-median income chapter 13 debtor treats the income of a non-filing spouse. The line items in questions were line 19 of Form 22BC "marital adjustment", line 47 "future payments on secured claims", and line 59 (now line 60) "other expenses." The nonfiling spouse was solely liable for the debt in question which was secured by a vehicle and real property solely owned by the nonfiling spouse. The debtor claimed a line 19 marital adjustment for the withholdings from the nonfiling spouse's paycheck, on line 47 deducted the nonfiling spouse's future payments on her vehicle and real property secured debt, and on line 59 claimed additional deductions for the nonfiling spouse's recreation, personal expenses, unsecured loan repayments, and assistance to her daughter.

The court noted that CMI includes "any amount paid by any entity other than the debtor..on a regular basis for the household expenses of the debtor or the debtor's dependents." 11 U.S.C. section 101(10A)(A)(B). The court stated that the portion of the spouse's income not dedicated to paying household expenses is deducted from CMI and that this is effectuated by the line 19 "marital adjustment".

The court held that the martial adjustment for withholding from the wife's payroll check was proper on line 19 as these funds were not dedicated to household expenses. See In re Quarterman, 342 B.R. 647, 650 (Bankr.M.D.Fla.2006).

The court held that the future secured debt payments by the nonfiling spouse as to the vehicle and real property for which the debtor was not liable were not properly deductible on line 47. The court further held that the debtor was not entitled to a line 29 vehicle ownership allowance as to her vehicle. The court reasoned that this deduction is available under section 707(b)(2)(A)(iii) only for the debtor's payments on his secured debt. But the court instead held that the nonfiling spouse's payments on her secured debt are deductible on linen 19 as a martial adjustment as these amount were not in fact amounts paid on a regular basis for the household expenses of the debtor. The court remarked that this holding might seem ludicrous as the debtor lives in the house and probably drives the car and both assets are part of his "household". Nevertheless, the court held that this might be the only way to implement the plain language of BAPCPA.

The court further held that the wife's expenses for her recreation (including lunch with friends, health club dues, movies and the like), personal expenses, unsecured loan repayments, and assistance to her daughter were not properly deductible on line 59 (now 60) of Part IV "Additional Expense Claims" as "other expenses" as they were not household expenses necessary to the health and welfare of the debtor or his family. The court did hold though that the tax preparation expense was deductible on line 59 as a necessary and beneficial family expense. See In re Johnson, 346 B.R. 256, 267-268 (Bankr.S.D.Ga.2006)(Other necessary expense under the means test must be actual, necessary and reasonable.) The court noted that the statutory predicate for line 59 was most likely section 707(b)(2)(A)(ii)(I) which provides that "the debtor's monthly expenses shall be the debtor's ...actual monthly expenses for the categories specified as Other Necessary Expenses [in the IRS Manual)". Form 22C's instructions allow these expenses to be deducted on line 59 if they are "required for the health and welfare" of the debtor and his family. The court noted that the IRS manual set forth the categories of "other expenses" and that they are allowed if they meet the necessary expense test, ie. "they must provide for the health and welfare of the taxpayer and/or his or her family or they must be for the production of income." Section 5.15.1.10, Internal Revenue Manual, Financial Analysis Handbook. The categories listed as "other expense" include accounting and legal fees, childcare, dependent care, certain education costs such as continuing education costs, health care, life insurance and telecommunication expenses. The court noted that besides line 59 (now 60), these categories of expenses are provided for in lines 39-46 of Form B22C, Part IV, Subpart B.

The court did hold though that these expenses for the nonfiling spouse's recreation, personal expenses, unsecured loan repayments, and assistance to her daughter would be allowed as part of the "marital adjustment" on line 19. See In re Travis, 353 B.R. 520 (E.D.Mich.2006)(marital adjustment allowed for nonfiling spouse's expenses for clothing and personal items). The court noted that these were not the debtor's expenses and that the nonfiling spouse's daughter was not a dependent of the debtor. The court stated that it could not hold that these expenses did not qualify as household expenses necessary to the health and welfare of the debtor or his family and at the same time hold they were paid on a regular basis for the household expenses of the debtor or the debtor's dependents as specified in section 101(10)(A). The court also stated that the parenthetical reference to a debtor's spouse in a joint case "suggest[s] that Congress did not intend to include a non-filing spouse's expenses for income to be included in CMI." In re Quarterman, 342 B.R. 647, 650-51 (Bankr.M.D.Fla.2006)(Proctor, J.)("The parenthetical [reference in section 101(10A)] stating that, in a joint case, a debtor's current monthly income shall income the debtor's spouse's income suggest that, in a single case, the spouse's income is not included in the debtor's current monthly income; otherwise, the parenthetical would be superfluous.")

Actual Fraud, Constructive Fraud, and Preferential Transfer

In the case of  In re Dealers Agency Services, Inc., 2007 WL 4699023 (Bankr.M.D.Fla.)(Glenn, J.),  the chapter 7 trustee filed an adversary proceeding to avoid the transfer of substantially all assets of the debtor corporation to a limited liability company within one year before the filing of the bankruptcy petition. The issue in this case was whether this transfer was a fraudulent transfer within bankruptcy code section 548 or Florida Statutes section 726.105 or a preferential transfer within bankruptcy code section 547.

The court found that section 548 and section 726.105 are substantially the same in their analysis of what must be proven for a finding of fraud. The court noted that it must be found that property was  transferred within one year or four years of petition and that the transfer was made with the actual intent to hinder, delay or defraud any entity to which the debtor was indebted.

The court noted that as it is difficult to establish actual intent, courts generally consider the totality of the circumstances and determine whether any badges of fraud are present. The court further noted that the 11th Circuit Court of Appeals adopted the badges of fraud contained in the Florida fraudulent transfer statute. In re Mc Carn's Allstate Finance, 326 B.R. 843, 850 (Bankr. M.D. Fla. 2005)(citing In re Levine, 134 F.3d 1046, (11th Cir.1998)). The court noted that the badges of fraud are set forth in section 726.105 (2)(a)-(k) and that while a single badge of fraud may create only a suspicious circumstance, several of them together may afford a basis to infer fraud.

The court stated that there is constructive fraud per 548(a)(1)(B) if and entity receives less than a reasonably equivalent value. In re Seaway International Transport, Inc. 341 B.R. 333 (Bankr. S.D. Fla. 2006). The court further stated that the statute does not define reasonably equivalent value and that the courts consider many factors, including good faith of the parties, disparity between fair value and what debtor receives, and whether the transfer was at arm's length. The court reviews what went out and what was received.

The court further stated that to find that a transfer is a preferential transfer per 547 (b), one must establish that a transfer of the property was made, the transfer was to or for the benefit of a creditor, and that the transfer was for or on account of an antecedent debt.

Motions for Relief from Stay Denied Due to Lack of Evidence of Assignment of Note and Mortgage

The Bankruptcy Court of the Middle District of Florida denied without prejudice two motions for relief from stay in the case of In re Murphy, Case No. 07-04213-TBC (Bankr.M.D.Fla. February 12, 2008)(Funk, J.) In this case, Aurora Loan Services, LLC ("Aurora") filed motions for relief from stay with respect to certain notes and mortgages on two parcels of real property. In the motions, Aurora asserted that it held the respective notes and mortgages. However, attached to each motion was a copy of a note and mortgage identifying other entities as the lenders. The affidavits attached to each motion identified Aurora as the owner and holder of the note.

The chapter 7 trustee objected to both motions and argued that Aurora had not established that it was the owner or holder of the instruments. At the hearing, Aurora did not offer any further evidence establishing a connection between it and the entity set forth in the notes and mortgages.

The court held that when challenged by an interested party, the movant must provide evidence that it is "the owner or holder of the Note and Mortgage and has standing to and a legal basis for requesting relief from the automatic stay." See In re Schwartz, 366 B.R. 265 (Bankr.D.Mass.2007), In re Maisel, 378 B.R. 19 (Bankr.D.Mass.2007), In re Foreclosure Cases, 2007 U.S.Dist.Lexis 84569 (N.D.Ohio 2007).

Chapter 13 Bankruptcy Lawyer and Chapter 7 Bankruptcy Lawyer - Bankruptcy Lawyer Jordan E. Bublick has over 25 years of experience in filing Chapter 13 and Chapter 7 bankruptcy cases. Office: 1221 Brickell Avenue, 9th Fl., Miami , Florida. Tel.:  (305) 891-4055.  www.bublicklaw.com

Chapter 13 Eligibility

Any individual, with a "regular" source of income, if self-employed or operating an unincorporated business, is eligible for chapter 13 relief as long as the individual's unsecured debts are less than $383,175.00 and secured debts are less than $1,149,525.  It should be noted that "unliquidated" and "contingent" debt may not be counted towards these amounts.  These amounts are adjusted periodically to reflect changes in the consumer price index. The next adjustment will be on April 1, 2016. A corporation or partnership may not be a chapter 13 debtor.

Unless court permission is granted, an individual cannot file under chapter 13 or any other chapter if, during the preceding 180 days, a prior bankruptcy petition was dismissed due to the debtor's willful failure to appear before the court or comply with orders of the court or was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which they hold liens.

In addition, no individual may be a debtor under chapter 13 or any chapter of the Bankruptcy Code unless he or she has, within 180 days before filing, received credit counseling from an approved credit counseling agency.

Bankruptcy Lawyer - Chapter 13 Bankruptcy and Chapter 7 Bankruptcy

(305) 891-4055 - Over 25 Years of Experience - Over 8,000 Cases Filed - 1221 Brickell Ave., 9th Fl., Miami, Florida - Jordan E. Bublick - www.bublicklaw.com

Chapter 7 bankruptcy is used to discharge your dischargeable debt including credit cards, medical bills, and unsecured loans.

Chapter 13 bankruptcy is used to formulate a chapter 13 plan that will reorganize one's secured (such as a mortgage or car loan) and unsecured debt (such as credit cards and personal loans).

Foreclosure Plaintiff Must Prove it is Holder of Note and Real Party in Interest

In the case of Everhome Mtge. Co. v. Rowland, 2008-Ohio-1282 (10th Appellate District, March 20, 2008)(Klatt, J.), the Ohio Court of Appeals reversed the trial court order granting the plaintiff's motion for summary judgment for foreclosure and found that there existed a genuine issue of fact whether the plaintiff is the holder of the note and mortgage.

The court held that under Ohio rules of civil procedure, [e]very action shall be prosecuted in the name of the real party in interest.". Civ.R.17(A). The real party in interest in a foreclosure action is the current holder of the note and mortgage. Chase Manhattan Mtge. Corp. v. Smith, Hamilton App. No. C-061069, 2007-Ohio-5874, at para. 18. A party that fails to establish itself as the current holder is not entitled to judgment as a matter of law. First Union Natl. Bank v. Hufford (2001), 146 Ohio App. 3d 673, 677, 679-680.

The court found that the note and mortgage in this case did not identify the plaintiff as the lender, but set forth a different entity as lender. To prove its status as the current holder of the note and mortgage, the plaintiff relied on the affidavit testimony of an officer which merely stated that the attached documents were true copies of the note and mortgage. The court concluded that this affidavit was insufficient to establish that the plaintiff was the current holder of the note as it failed to specify how or when it became the holder of the note and mortgage. The court stated that without evidence demonstrating how it received an interest in the note and mortgage, the plaintiff cannot establish itself as the holder. According, the court found that there was a genuine issue of material fact regarding whether the plaintiff was the real party in interest and reversed the trial court's summary judgment.

Credit Card Holder Not Bound by Unreceived Arbitration Clause

The 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 Third District 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.

Motion for Rehearing Does Not Toll the Time to Appeal

The 11th Circuit Court of Appeal held in the case of In re Sundale Associates, Ltd., 786 F.2d 1456 (11th Cir. 1986) that a motion for rehearing does not toll 30 day period for an appeal. Rule 8105.

TILA Recission Claim not Barred by Res Judicata

The bankruptcy court in  (Bkrtcy.S.D.Fla. 2006)(Isicoff, J.) held that the doctrine of res judicata did not bar the involved Truth in Lending Act ("TILA") claim.  In this case, the debtor filed a bankruptcy case under chapter 13 to stop a foreclosure sale pursuant to a judgment of foreclosure.  The debtor sent a letter to rescind and arguing that his right to rescind was extended as mortgagee did not provide him with the required TILA disclosures 15 U.S.C. section 1601 et seq., and Reg. Z and did not comply with HOPEA which is subsection of TILA.

The court held that in determining the res judicata effect of state court judgment, one looks to law of the state. It noted that Florida res judicata law bar any future action if  there is an identity in both cases of 1. the things sued for, 2. the causes of action, 3. the identity of the parties, and 4. the identity of capacity of the parties. Res judicata bar not only issues that were raised but precludes consideration of issues that could have been raised but were not. The court reviewed that the principal test in determining whether causes of action are the same is whether the primary right and duty are the same in each case

The court noted that in this case the issue was whether the substance of the debtor's TILA was subject to res judicata based on the prior foreclosure judgment.  The court further noted that the debtor's TILA claim not a compulsiary counter-claim to a foreclosure action. The court found that the language of TILA is permissive not mandatory and that it can be asserted as original action or as a defense/counterclaim. The court did not find a Florida state court case directly on point. The court held that all of the claims, except those  relating to the non-HOEPA disclosures, would not be barred by res judicata.

The court held that even if the state court judgment technically would meet the requirements for res judicata, it would decline on basis of equity to grant motion for summary judgment for defendant. Hartnett v. Mustelier, 330 B.R. 823 (Bankr.S.D.Fla. 2005)(based on equitable principals court declines to give collateral estoppel effect to a default judgment). The court found that Florida law recognizes a manifest injustice exception to res judicata and collateral estoppel, especially involving a pro se litigant.

Mortgage Escrow Account Deficiencies Held Waived Due to Lack of Notice to Debtor During Chapter 13 Case

Miami Personal Bankruptcy Lawyer Jordan E. Bublick has over 25 years of experience in filing Chapter 13 and Chapter 7 bankruptcy cases. His office is centrally located in Miami at 1221 Brickell Avenue, 9th Fl., Miami and may be reached at (305) 891-4055.  www.bublicklaw.com



The Bankruptcy Court in Miami addressed in the case of In re Dominique, 368 B.R. 913 (Bankr.S.D.Fla. 2007)(Isicoff, J.) the consequences of the failure of a mortgage servicer to give the required notice of an escrow account deficiency per RESPA, Florida statutes, and the provisions of the mortgage during the pendency of a chapter 13 plan. The court held that the consequence of such failure was the waiver of the escrow account deficiency.

The debtors' confirmed chapter 13 plan provided to cure the mortgagee's pre-petition arrearage and to maintain regular payments. Towards the end of the chapter 13 plan, the mortgagee demanded payment of an approximate $6,000 escrow account shortage. The mortgage required the debtors to maintain an escrow account with the mortgage loan servicer for the payment of an allocable portion of property taxes and insurance premiums. The debtors filed a motion seeking a ruling that the $6,000 escrow shortage would be discharged upon completion of the chapter 13 plan.

The court found that RESPA and its regulation require a mortgage loan servicer to do an annual escrow analysis and to provide the borrower with annual notice of any deficiency if the mortgage requires the borrower to make escrow payments. 12 U.S.C. section 2609(b), 24 C.F.R. 3500.17(c), 3500.17(f). The servicer may require the borrower to pay additional deposits into the escrow account to make up the deficiency but is not required to do so. 24 C.F.R. section 3500.17(c)(1)(ii), 24 C.F.R. section 3500.17(f)(3) and (f)(4).

The court also found that Florida law imposes a time deadline for notice of a deficient escrow account to be within 15 days after the lender receives notice of taxes due of notification of an insurance premium due. Fla. Stat. section 501.137(2). The court noted that RESPA does not generally preempt state law and does not preempt state law for purpose of the notice requirements for escrow account deficiencies. 12 U.S.C. section 2616 and 24 C.F.R. section 3500.13.

The court rejected the mortgagee's argument that it was excused from giving notice of the escrow account deficiency during the years of the plan on the claim that it would be a violation of the automatic stay as the court noted that merely providing notice of an escrow deficiency is not a stay violation. Chase Manhattan Mortgage Corp. v. Padgett, 268 B.R. 309 (S.D.Fla.2001).

The court concluded that the mortgage servicer failed to comply with Federal and Florida law in not providing annual notice of the escrow account deficiencies. The debtors requested that the court order the escrow shortage discharged. The court stated that the resolution of this issue lies in non-bankruptcy law as the escrow shortage arose post-petition. The court found the cases of In re Guevara, 258 B.R. 59 (Bankr.S.D. Fla. 2001), Telfair v. First Union Mortgage Corp., 216 F.3d 1333 (11th Cir. 2000) and Universal American Mtg. Co. v. Bateman (In re Bateman), 331 F.3d 821 (11th Cir.2003) as inapplicable to the resolution of this issue, but adopted the reasoning of the court in Padgett.

In Padgett, the court upheld the bankruptcy court's holding that the lender had waived its rights to recover post-confirmation advances for taxes and insurances as the lender failed to meet its obligations as a mortgage servicer under RESPA and the Florida notice requirement to notify the debtors of the need to increase monthly payments. In applying the Padgett decision to this case, the court held that since the mortgage servicer did not provide the annual notice as required by RESPA and Florida law as well as by the mortgage, that the right to payment was waived. The court stated that the mortgagee thereby failed to meet the conditions precedent to seeking payment and that the failure could not be cured as the involved time periods (annual or 15 day periods) had passed. The mortgage servicer was only entitled to seek the payment of the escrow shortage for the current escrow account computation year.

Actions in State Court Foreclosure Case After Reinstatement of Bankruptcy Case Held Void

In the case of In re Clarke, 373 B.R. 769 (Bkrtcy.S.D.Fla.2006)(Isicoff, J.) the Florida bankruptcy court addressed a situation where property was old at foreclosure sale between dismissal of case and an order reinstating the case. The court noted that the Rooker-Feldman doctrine bars thecollateral review of state court judgments by a federal court. See Rooker v. Fid. Trust Co., 263 U.S. 413 (1923). But the court held that the Rooker-Feldman does not abrogate the bankruptcy court's authority to enforce the automatic stay citing In re Gruntz, 202 F.3d 1074 (9th Cir. 2000).

In this case, during the 10 days after foreclosure sale, debtor filed in the state court foreclosure case, an objection to the foreclosure sale and a motion to set aside foreclosure sale. After the bankruptcy case was reinstated, the state court denied the motions and granted motion for issuance of writ of possession. The Court noted that pursuant to  Florida statute section 45.0315, if an objection to sale is filed, the objecting party is entitled to have his objection heard before certificate of title can be issued.

In this case, the court held that due to the post-sale reinstatement state of the bankruptcy case, the court order was void as in violation of the automatic stay and that the debtor retained the potential right to revest the right of redemption until the state court confirms the sale.

The Deductibility of Retirement Plan Loan Repayment in Chapter 7 and Chapter 13

The court in In re Mowris, 2008 WL 799848 (Bkrtcy. W.D. Mo., Judge Federman) dealt with the issue in this chapter 7 case, whether the involved retirement account loans were deductible "debts" for purposes of the means test.

The court held that a loan against a qualified retirement account is not a "debt" under the Bankruptcy Code. Therefore, such loans are not secured debts that are deductible from current monthly income under the means test as "payments on account of secured debts." Moreover, the repayment of loans taken from their retirement accounts did not provide for the chapter 7 debtors' health and welfare, and was not for the production of income. Accordingly, the repayments did not qualify as unenumerated "other necessary expenses" that could be deducted from the chapter 7 debtors' current monthly income under the means test. In re Mowris, 2008 WL 799848 (Bkrtcy. W.D.Mo., Judge Federman).

In contrast to the above case under chapter 7, the court in In re Lasowski,(8th Cir.BAP (Ark.) held that a debtor may in calculating "disposable income" deduct actual amounts needed to repay 401(k) loans. But the court noted that in in calculating his "disposable income," an above-median-income chapter 13 debtor could only deduct the actual amounts necessary to repay her 401(k) loans, not the current monthly payment multiplied by the life of the plan. The court further held that once these loans were satisfied, the debtor was required to redirect his additional monthly income, which previously would have been used to repay the loans, to unsecured creditors. He could not keep this additional monthly income for himself.  The court stated that this result was supported by the plain language of the Bankruptcy Code and by the purpose of BAPCPA's amendments to 707(b) and 1325(b), which was to require above- median-income debtors to make more funds available to unsecured creditors.

The BAP court held that the courts which have reached a different result have confused the 707(b) formula with the provisions of 1322 which exclude from disposable income amounts necessary to repay 401(k) loans and prohibit material alterations to a 401(k) loan. The BAP stated that this
added to the confusion that arises when the 401(k) loan repayment amount is expressed as a monthly figure for the length of the plan.

Saving Your Miami Florida Home from Foreclosure

In Florida, foreclosure of a mortgage in default is by a judicial action. Foreclosure is a lawsuit wherein the mortgage holder attempts to prove to the Court that you are behind in your mortgage obligations and requests that the Court set a public sale of the mortgaged real estate.

After the foreclosure sale, the Court will issue a certificate of sale and certificate of title. Upon issuance of the certificate of title, the purchaser at the foreclosure sale is the owner of the real property and is entitled to possession. The homeowner/mortgagor owns the involved house until the certificate of title is issued.

A person has certain options to save his home even after a foreclosure case is filed.

1. The simplest, but often the most difficult, alternative is to "reinstate" the mortgage--that is to find out the amount you are behind and pay the amount all at once. One may also try to obtain a payment plan once the mortgage is in foreclosure even if you offer to pay a substantial amount upfront.

2. You may also try to refinance the mortgage. Many people though do not have sufficient "equity" in their property in order to refinance.

3. A good alternative for many is to file for relief under chapter l3 of the Bankruptcy Code. Under chapter l3, the foreclosure case is stopped and you are given the opportunity to catch up the amount you are behind over a period of 3-5 years.

The Allowance of Amended Proofs Claim in Chapter 13 Bankruptcy for a Defiency Claim

In the case of  In re Winter, 2007 WL 4824258 (Bkrtcy.M.D.Fla.September 11, 2007) (Glenn, J.) the Bankruptcy Court held that pursuant to Bankruptcy Rule 3002(c) noted that a proof of claim in chapter 13 case must be filed not later than 90 days after the first meeting of creditors and that it does not contain exceptions. It reviewed that Rule 3002(c) together with 9006(b)(3) and section 502(b)(9) generally prohibits the filing of late claims in chapter 13 cases except under the specific circumstances listed in the Rule. The bar date for proofs of claim implemented by Section 502 and Rule 3002(c) is characterized as a strict statue of limitations,  In re Brooks, 2007 WL 1810491 at 2 (Bankr.C.D.Ill.).

The Court further noted that under limited circumstances a claim filed after the bar date may be allowed if it amends a timely-filed proof of claim. Pursuant to In re International Horizons, Inc., 751 F.2d 1213,1216 (11th Cir.1985) an amended claim should be freely allowed where the purpose is to cure a defect in the claim as originally filed, to describe the claim with greater particularity, or to plead a new theory of recovery on the facts set forth in the original claim. An untimely claim should not be allowed if it represents only an attempt to file a new claim under the guise of amendment. In re Gilley, 288 B.R. 901 (Bankr.M.D.Fla.2002).

The creditor in In re Hibble, 371 B.R. 730 (Bankr.E.D.Pa 2007) filed only a secured claim. After repossession of car it filed an untimely unsecured claim. The Court did not permit it to constitute a new claim as the original proof did not give fair notice of the conduct, transaction or occurrence
that formed the basis of the claim asserted in the amendment. In re Metro Transportation Co., 117 B.R. 143 (Bankr.E.DPa.1990). It also denied based on In re: Mc Bride, 337 B.R. 451 (Bankr.N.D.N.Y.2006) as the creditor did not provide timely notice that it would seek a deficiency claim in the debtor's chapter 13 case in the event of a default. In re Matthews, 313 B.R. 489 (Bankr.M.D.Fla.2004).

The Court held that an amendment filed after the bar date is permitted only where the original claim provided notice to the court of its existence, the nature of the amount of the claim and that it was the creditor's intent, expressed in the original claim, to hold the estate liable for the claim later set forth in the amendment. The Court held that for a secured creditor to receive a distribution on a deficiency claim under a confirmed chapter 13 plan, it must timely file either an unsecured proof of claim or a secured claim with a clear reservation of the right to file a deficiency claim. In this case the creditor reserved it right to amend and seek a deficiency balance.