Test Your Knowledge: Recent Developments in Insolvency Law
| Publication year | 2022 |
| Author | Thomas R. Phinney and Paul J. Pascuzzi |
AUTHORS
Thomas R. Phinney and Paul J. Pascuzzi
Welcome to the seventh annual edition of our article covering recent developments in bankruptcy law. This article comes from a program we present for the Bankruptcy and Commercial Law Section of the Sacramento County Bar Association. Once again, we invite you to test your knowledge of recent developments in the area of insolvency law. Unless otherwise noted, all references are to the Bankruptcy Code. We provide a summary of the facts, issues, and holdings from a mix of ten recent important and interesting bankruptcy decisions. For MCLE credit, please answer the twenty true/false questions at the end of the article. Good luck!
This case involves the abandonment of property of the estate under section 554(c). Section 554(c) provides that "any property scheduled under section 521(a)(1) of this title [and] not otherwise administered at the time of the closing of a case is abandoned to the debtor."
The debtors listed a pending lawsuit against a loan servicer in their statement of financial affairs, but not on schedule A of their schedules. The debtors discussed the lawsuit with the chapter 7 trustee, including providing copies of the lawsuit to the trustee. The trustee did not attempt to administer the lawsuit during the bankruptcy case (such as by selling or compromising it). Instead, the trustee issued a no asset report stating the estate had been fully administered. Thereafter, the debtors' discharge was entered, and the case was closed.
The debtors continued to prosecute the lawsuit, but the loan servicer proposed a settlement to the trustee. The trustee reopened the bankruptcy case, settled the lawsuit, and sought court approval of the settlement. The debtors opposed the settlement on the ground that the lawsuit was abandoned when the case was first closed.
The bankruptcy court approved the settlement, finding the lawsuit had not been abandoned back to debtors upon the first closing of the case. The debtors appealed to the Ninth Circuit Bankruptcy Appellate Panel ("BAP").
On appeal the BAP affirmed. The court found that the majority rule is that the plain language of section 554(c) requires that the lawsuit have been listed on the debtors' schedules, not merely listed on the statement of financial affairs, for the lawsuit to have been abandoned by the closing of the case under section 554(c). The plain language of section 554(c)
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provides that an asset must be "scheduled under section 521(a)(1)" to be technically abandoned. If Congress had intended the "scheduled" assets referenced in section 554(c) to include assets listed only obliquely in the statement of financial affairs, then it could have, and should have, drafted section 554(c) to refer to assets "listed or scheduled under section 521(a)(1)."
Further, the court compared the wording in section 554(c) with the non-discharge provision in section 523(a) (3) relating to unscheduled debts. In section 523(a)(3), Congress referred to a debt "neither listed nor scheduled under section 521(a)(1)." If the court were to read "scheduled" in section 554(c) as synonymous with "listed," as the debtors argued, then "listed" in section 523(a)(3) becomes impermissibly superfluous, which is not how statutes should be interpreted. It violates the canon of statutory interpretation providing that "where Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion."
The court also found that this narrow reading of section 554(c) was consistent with sound bankruptcy policies and reasonable expectations for a debtor's performance of statutory duties in that it encourages debtors to properly schedule assets, which is not an undue burden, and advances the goal of a fully transparent bankruptcy process. The court further reasoned that the narrow reading creates a bright line rule, rather than the potentially disputed issue of the trustee's knowledge outside of the filed schedules to determine whether an asset has been abandoned.
There is a minority view on this issue. Some courts have held that assets listed in the statement of financial affairs are "scheduled."1
The Ninth Circuit certified a question to be answered by the California Supreme Court: what property interests are created when a married couple uses community funds to acquire real estate in California and takes title in joint tenancy, and one of the spouses later files bankruptcy? Does that property presumptively belong to the community—because the couple acquired the property during marriage with community funds—and thus become property of the bankruptcy estate of the filing spouse? Or is the property presumptively the separate property of the spouses—because they took title in joint tenancy—thus making only the filing spouse's 50% interest as a joint tenant property of the bankruptcy estate? And can the joint tenancy deed function as a "transmutation" agreement evidencing that the spouses agreed to own the property as separate property?
More precisely, the question addressed by the California Supreme Court was whether the form of title presumption set forth in Evidence Code section 662 ("The owner of the legal title to property is presumed to be the owner of the full beneficial title") applies to the characterization of property in disputes between a married couple and a bankruptcy trustee, when it conflicts with the community property presumption set forth in Family Code section 760 (property acquired during marriage is presumed to be community property).
The court analyzed a "snarl of conflicting presumptions" and changing statutes, the meaning of which have confounded courts. The facts in this case are not that uncommon: Spouses acquire real property with community funds, but take title as "husband and wife as joint tenants." One spouse later files bankruptcy, and the question arises whether the non-filing spouse has a 50% separate property interest in the real property that is not property of the bankruptcy estate, since she holds title as a joint tenant.
Most significantly, the court held that for property acquired after 1985, the community property presumption of California Family Code section 760 overrides the form of title presumption of California Evidence Code section 662, so that, in effect, the bankruptcy trustee wins, and the entire property is treated as community property that belongs to the bankruptcy estate. The analysis varies for properties acquired before 1975, and on or after January 1, 1975 but before 1985.
The full holding is best summarized by the language of the decision:
We answer the Ninth Circuit's question as follows: Evidence Code section 662 does not apply to property acquired during marriage when it conflicts with Family Code section 760. For joint tenancy property acquired during marriage before 1975, each spouse's interest is presumptively separate in character. (Fam. Code, § 803; Siberell, supra, 214 Cal. at p. 773). For joint tenancy property acquired with community funds on or after January 1, 1975, the property is
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presumptively community in character. (Fam. Code, § 760).
If such property was acquired before 1985, the parties can show a transmutation from community property to separate property by oral or written agreement or a common understanding. (Fam. Code, § 852, subd. (e); Estate of Blair, supra, 199 Cal.App.3d at p. 167). Although a joint tenancy deed is insufficient to effect a transmutation, a court may consider the form of title in determining whether the parties had a common agreement or understanding under the pre-1985 rules. (See MacDonald, supra, 51 Cal. 3d at p. 270 & fn. 6).
For joint tenancy property acquired with community funds on or after January 1, 1985, a valid transmutation from community property to separate property requires a written declaration that expressly states that the character or ownership of the property is being changed. (Fam. Code, § 852, subd. (a); MacDonald, at p. 272, 272 Cal.Rptr. 153, 794 P.2d 911). A joint tenancy deed, by itself, does not suffice.
Nothing in our decision precludes spouses from holding separate property as joint tenants or from transmuting community property into separate property held in joint tenancy as long as the applicable transmutation requirements are met. Nor does our decision alter the operation of the right of survivorship that is the main incident of joint tenancy title.2
Thus, at least for property acquired by spouses as joint tenants in 1985 or later, Evidence Code section 662 (title presumption) does not apply when it conflicts with Family Code section 760 (community property presumption). The property is characterized as community property and it becomes property of the bankruptcy estate.
This case involves the question of whether a bankruptcy court may void a lien under section 506(d) when the claim relating to the lien is disallowed because the creditor who filed the proof of claim did not prove that it was the person entitled to enforce the debt the lien secures.
The debtor filed a chapter 13 case and scheduled his residence with a secured claim in favor of Bank of America, the original lender on the loan. The Bank of New York ("BONY") filed a secured proof of claim. The debtor objected to the claim, alleging that the claim failed to establish that BONY was the holder of the claim and entitled to enforce it. BONY did not respond to the claim objection, and it was...
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