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Thursday, November 13, 2008

Five Year Commitment Period In Chapter 13 Bankruptcy Not Applicable If Debtor Has No Projected Disposable Income

In In re Kagenvaema, 541 F.3d 868 (9th Cir. 2008), the Ninth Circuit ruled that a voluntary Chapter 13 bankruptcy filed by a debtor with no “projected disposable income” is not subject to the “applicable commitment period” under Bankruptcy Code Section 1325, which requires debtors with above-median income to repay unsecured creditors over a minimum period of five years. In other words, a chapter 13 debtor can confirm a plan with a repayment period shorter than five years if the debtor’s “projected disposable income” is zero or a negative at the time the petition is filed. In this case, the proposed repayment period was 36 months.

In 2005 Congress added the five-year commitment period for chapter 13 debtors with above-median income as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”). Under BAPCA, “disposable income” is calculated by adding up past income and subtracting certain standard and actual expenses, including mortgage payments. This calculation is relatively straightforward, but courts disagree over the meaning of “projected disposable income.”

The Kagenvaema decision puts the Ninth Circuit at odds with some other federal circuit courts. Some courts take a flexible approach, holding that a bankruptcy judge can take into account the debtor’s actual income (as opposed to the debtor’s statutory “disposable income”) and circumstances arising subsequent to the bankruptcy filing, such as an increase in income. See In re Frederickson, No. 07-3391, — F.3d —-, 2008 WL 4693132 (8th Cir. Oct. 27, 2008); In re Lanning, — F.3d —-, 2008 WL 4879134 (10th Cir. 2008). This flexible approach has been subject to the criticism that it allows bankruptcy courts to ignore the “disposable income” calculation, which allows debtors to deduct certain expenses. The Ninth Circuit’s approach in Kagenvaema provides more certainty in calculating “projected disposable income,” and greater flexibility in crafting a chapter 13 plan.

Thursday, October 16, 2008

Actions Taken In Violation Of The Automatic Stay May Not Be As Void As You Think…

In Burkhart v. Coleman (In re Tippett), --- F.3d ---, 2008 WL 4070690 (9th Cir. Sept. 4, 2008), the Ninth Circuit held that Bankruptcy Code Section 549(c) protects a bona fide purchaser of real property where the Trustee failed to record notice of bankruptcy, even though the sale violates the automatic stay. The opinion serves as a warning to trustees to record the notice of bankruptcy where the debtor holds real property, and it confirms that the automatic stay may not apply to transfers of property initiated by the debtor under certain circumstances.

Mr. and Mrs. Tippett filed a voluntary Chapter 7 petition in May of 2001. They listed their homestead as having a value of $140,000, with two liens against it in the total amount of approximately $135,000. The Trustee did not record the petition or notice of bankruptcy with the County Recorder’s office. In November of 2002, the Tippetts sold their home to Seitu Coleman for $225,000 without obtaining approval from the bankruptcy court, and the Tippets received net proceeds of over $75,000. Coleman financed the purchase with two purchase money loans secured by deeds of trust. It was undisputed that Coleman was a bona fide purchaser of the property in that he had no notice of the bankruptcy.

The Trustee filed an adversary proceeding against the Tippetts, Coleman, and the lenders who held the deeds of trust, seeking to recover the sale proceeds, avoid the lenders' liens, and quiet title on the grounds that the sale violated the automatic stay under Bankruptcy Code Section 362 and 542. The Trustee also sought to revoke the Tippetts' discharge for knowingly and fraudulently selling an asset of the estate under Bankruptcy Code Section 727(d). The bankruptcy court ruled in favor of the Trustee. On appeal, the Bankruptcy Appellate Panel reversed and entered judgment in favor of Coleman, concluding that the Tippetts' unauthorized transfer of the residence to Coleman did not violate the automatic stay.

The Ninth Circuit affirmed the BAP decision and upheld the sale. The Court ruled that California's bona fide purchaser statute was not preempted by the Bankruptcy Code because it is consistent with the Bankruptcy Code’s policies of giving debtors a fresh start and equality of distribution of a debtor's assets among creditors. The court also ruled that the Bankruptcy Code provides a defense to bona fide purchasers against actions brought under Bankruptcy Code Section 549. In support of this conclusion, the court reaffirmed its controversial holding in Schwartz v. United States (In re Schwartz), 954 F.2d 569, 574 (9th Cir. 1992), that the automatic stay does not apply to transfers initiated by the debtor.