Bankruptcy

• Publication year: 2013

Bankruptcy

James D. Walker Jr.

Amber Nickell

Tim Colletti

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Bankruptcy

by Hon. James D. Walker, Jr.^* Amber Nickell^** and Tim Colletti^***

I. INTRODUCTION

This Article focuses on bankruptcy opinions issued in 2012 by the courts in the Eleventh Circuit.¹ The topics are varied, ranging from the constitutionality of bankruptcy-specific exemption schemes enacted by the states to the ever-growing body of law arising from the means test.

II. PROFESSIONALS

Chapter 7 presents an attorney fee dilemma. Potential Chapter 7 clients often do not have the money to pay fees in full before filing, and prepetition debts—including attorney fees—are discharged through the very proceedings the attorney advises. This conundrum forces bankruptcy attorneys to invent creative methods for collecting fees from Chapter 7 debtors.

In 2011, the United States Bankruptcy Court for the Middle District of Florida prohibited Clark & Washington's practice of taking postdated checks as a prepetition retainer for postpetition services² because

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depositing the checks either violates the automatic stay or the discharge injunction, depending on when the checks are deposited.³ In response, Clark & Washington implemented a two-contract system whereby a client signs one contract prepetition agreeing to prepetition services and another contract postpetition agreeing to postpetition services.⁴ The United States Trustee challenged this system in Walton v. Clark & Washington, P.C.,⁵ decided in 2012.

At an initial hearing, the court expressed concerns over the adequacy of disclosures in the prepetition contract and how the transition from one contract to the other was a single continuous process; the client had no time to think about whether to choose Clark & Washington for postpetition services.⁶ Clark & Washington modified its procedure to alleviate the court's concerns.⁷

The court ultimately approved a two-contract procedure, in which the prepetition contract explains the two-contract system in detail and describes the client's legal options postpetition—proceed pro se, retain Clark & Washington, or retain another firm.⁸ Instead of being required to sign the postpetition contract immediately after the petition is filed, the client has a two-week "cooling off period" to decide among those three options.⁹ The firm agrees to represent the client during this two-week "gap period" so the client is not left unrepresented.¹⁰ Sua sponte, the court ordered certain modifications regarding the conspicuousness of the two-contract system in the prepetition agreement (including a separate disclosure the client must sign): the addition of provisions allowing the client to cancel the postpetition contract within fourteen days of signing it, and the inclusion of language in the Federal Rules of Bankruptcy Procedure Rule 2016¹¹ disclosure confirming that the firm will represent the debtor in any event until the court allows the firm to withdraw.¹²

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III. CLAIMS

A. Claim Objections

In the Southern District of Florida, scheduling a debt and then objecting to the related proof of claim may result in sanctions for the debtor's attorney, as seen in In re Velez.¹³ The case involved challenges by the debtor to five proofs of claim on the ground that they violated Local Rule 3000-1(A)(3) because they did not include documentation showing the debtor owed the amount claimed, and they violated section 727.104 of the Florida Code¹⁴ because they did not include evidence of assignment of the debt. The debtor requested that each claim be disallowed in full. Each proof of claim corresponded to a debt listed on the debtor's schedules. In each case, the amount of the debt, the account number, and the original creditor matched. However, each proof of claim also noted a change in the owner of the debt.¹⁵

Rather than disallowing the claims, the court issued an order for the debtor's attorney to show cause why he should not be sanctioned for violating Federal Rule of Bankruptcy Procedure 9011(b).¹⁶ The court first pointed out that the laws cited in the claims objections were irrelevant to the claims allowance.¹⁷ Local Rule 3000-1(A)(3) simply does not exist. Additionally, § 727.104 of the Florida Code only applies to a state court "assignment for the benefit of creditors" proceeding, which had not been commenced as to any of the claims.¹⁸

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Next, the court explained why sanctions were appropriate against debtor's counsel, noting that there was no basis for objecting to the claim.¹⁹

If a debt is undisputed, no other creditor has filed a proof of claim for the debt, and the debtor doesn't present any evidence to dispute the debt or ownership of the debt, the objection to claim should be overruled based upon the preponderance of the evidence. To hold otherwise is to invite mischief[.]²⁰

It would encourage debtors to challenge otherwise undisputed claims by demanding documents that "claimants simply cannot produce timely or economically."²¹ This would allow debtors to evade a debt on a technicality even though both the debtor and claimant acknowledged the debt under penalty of perjury—the debtor by listing the debt in his schedules, and the claimant by filing a proof of claim.²²

Because the debtor's attorney was "unable to provide any evidence or even supply a meaningful explanation to justify filing of any of the offending claim objections," the court found he violated the duty imposed by Rule 9011 to make a reasonable investigation before signing and filing a document—in this case the specious claim objections.²³ As a consequence, the court suspended the attorney from practicing before it for thirty-one days.²⁴

Not all courts take the same approach. In 2011, the court in Pursley v. eCAST Settlement Corp. (In re Pursley)²⁵ disallowed a claim when the debtor admitted the debt but denied any knowledge of the claimant, who was an assignee of the original creditor.²⁶ Although the claimant produced an affidavit from the transferor of the claim stating that its business records reflected the assignment, the court found insufficient

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evidence to enforce the debt under state law.²⁷ The court, therefore, sustained the claim objection.²⁸

B. Tax Liability

Section 505(a)(1) of the Bankruptcy Code²⁹ authorizes bankruptcy judges to determine a tax liability, including one that has been previously assessed by taxing authorities.³⁰ However, under § 505(a)-(2)(C), the court may not make such a determination as to an ad valorem tax on property of the bankruptcy estate "if the applicable period for contesting or redetermining that amount under [applicable nonbankruptcy] law has expired."³¹ In Dubov v. Read (In re Read),³² the debtor owned twenty investment properties in Florida. Ad valorem property taxes were assessed as to the properties on October 12, 2009. Under Florida law, the debtor had sixty days to challenge the assessment. On day twenty-nine, she filed a bankruptcy petition. On day 191, she filed a challenge to the tax claim in the bankruptcy court seeking a redetermination of her tax liability under § 505.³³ The bankruptcy and district courts found the request for reassessment to be timely.³⁴ The United States Court of Appeals for the Eleventh Circuit disagreed and reversed.³⁵

Typically, § 108 of the Bankruptcy Code³⁶ tolls nonbankruptcy statutes of limitations that are unexpired on the petition date.³⁷ The sixty-day Florida deadline for challenging tax assessments was a nonbankruptcy deadline that had not expired on the petition date. The debtor therefore argued § 108 served to toll the Florida deadline such that it remained unexpired at the time she filed her challenge to the tax claim in bankruptcy court.³⁸ As a result, the bankruptcy court had

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authority to reconsider the tax claim under § 505(a).³⁹ The circuit court was unpersuaded by the debtor's argument.⁴⁰

The court found both the plain language of §§ 108 and 505 and public policy supported a finding that § 108 did not toll the Florida tax deadline.⁴¹ First, the language of § 505(a)(2)(C) prohibits a redetermination of tax liability if the deadline for contesting a tax "under applicable nonbankruptcy law" has expired.⁴² The applicable nonbankruptcy law in this case gave the debtor sixty days to challenge her tax assessment; she filed her challenge on the 191st day, well after expiration of the deadline.⁴³ "[B]ecause § 108(a) is not a nonbankruptcy law, its extension of the time period is irrelevant for purposes of § 505(a)(2)(C)."⁴⁴ Thus, the bankruptcy court was barred from redetermining the debtor's tax claim.⁴⁵

From a policy perspective, § 505(a)(2)(C) was added to the Bankruptcy Code in 2005 as part of a package of amendments intended to protect creditors.⁴⁶ In the case of § 505(a)(2)(C), Congress's protection involves "prohibiting a debtor from contesting ad valorem tax claims after the time for filing an action challenging the assessment of such taxes has expired under state law."⁴⁷

C. Priority Claims

Before Kerr v. Meadors (In re Knott),⁴⁸ no court in the Eleventh Circuit had addressed whether overpayment of child support is a domestic support obligation (DSO) entitled to priority under § 507(a)(1)-(A).⁴⁹ The debtor filed a no-asset Chapter 7 case on November 20, 2009. Her ex-husband filed a proof of claim for a DSO in the amount of $41,581.79. He obtained a judgment in that amount from a Florida state court in April 2010 due to overpayment of child support. The exhusband made his support payments through an automatic deduction order. The overpayments occurred when the debtor (1) unilaterally and

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improperly increased the amount of the deduction order and (2) refused to cooperate in terminating the order after she lost custody of the children. The debtor received a discharge on March 11, 2010, and the case was closed with no distributions to creditors. In August 2011, the Chapter 7 trustee reopened the debtor's bankruptcy case to administer a newly discovered...