The Honorable Neil P. Olack, Consumer Bankruptcy Panel: Selected Hot Bapcpa Topics

• Jurisdiction: United States,Federal,Georgia
• Publication year: 2011
• Citation: Vol. 23 No. 2

CONSUMER BANKRUPTCY PANEL: SELECTED HOT BAPCPA TOPICS

Moderated by the Honorable Neil P. Olack^*

JUDGE MULLINS: Good morning everybody. It reminds me of Sunday morning at church. Everybody is sitting in the back.

I'm going to introduce the consumer panel. First we have Michael J. McCormick, who is associated with the McCalla Raymer firm and practices in their bankruptcy department. Mike represents mortgage servicers and mortgage lenders, over 350 national lenders of that elk. He is recognized by the American Board Certification as a consumer bankruptcy specialist.

Tamara M. Ogier is a partner and principal of the Atlanta firm, Ellenberg, Ogier, Rothschild, & Rosenfeld, P.C. She has been a Chapter 7 Trustee since

1998, is on the executive board of the State Bar of Georgia, and is also on a board of directors of the National Association of Bankruptcy Trustees, the main organizing body for Chapter 7 Trustees nationally.

Brian Cahn is a partner and principle in the firm of Perrotta, Cahn & Prieto in Cartersville, Georgia. He primarily practices in the consumer and bankruptcy area. Brian is a member of the National Association of Consumer Bankruptcy Attorneys.

Next, our moderator today is the Honorable Neil P. Olack from the U.S. Bankruptcy Court for the Northern and Southern Districts of Mississippi. Neil is a 1981 Emory Law graduate. He is a past president of the Mississippi Bankruptcy Conference, a former officer and director of the ABI, and a fellow of the American College of Bankruptcy. If he screws up, it's not because of the great instruction he received in baby judge school.

All three of the attorneys are active practitioners in the Northern District of

Georgia. All are constant professionals, are very skilled, and make our jobs a lot easier on the bench. We appreciate their willingness to come out and participate this morning. Thank you.

JUDGE OLACK: It's great to be back in Atlanta, back at Emory. It's been a long time. We're going to start with a quick discussion of the recent Supreme Court case, Marrama v. Citizens Bank of Massachusetts (In re Marrama),¹and then lead into the fact pattern that's in your materials. We'll use the fact pattern as the vehicle to cover a number of interesting issues that we are all facing under the new legislation.

MS. OGIER: Marrama just came out in the last couple of weeks and is, in my opinion, as a chapter 7 trustee, a great case. It deals with the question of whether a chapter 7 debtor has an absolute right under Sec. 706 to convert his case to a chapter 13, even where it looks like it will ultimately wind up coming back to a chapter 7. A lot of courts found under Sec. 706(a) that there was an absolute right, that they had no discretion, and that the case had to be converted to a chapter 13. The Supreme Court looked at several reasons why that is not the case. It looked at Sec. 706(d), which talks about the fact that the case cannot be converted if the debtor is ineligible to proceed under the other chapter. And in this case, Marrama had not been a very good boy. He had concealed a tax refund he was entitled to. He had lied on his schedules. He had transferred his residence into a trust. Shortly prepetition, he still took a homestead exemption on it even though he had it rented out to somebody else. And I think he even testified that he had done all of that to protect it from his creditors. So, the Court said that in a chapter 13, a case like that could be dismissed for cause because of bad faith. So, he was ineligible to be in a chapter 13. It also breathed new life into Sec. 105 and gave the courts discretion to basically not allow a debtor to abuse the system by running into a chapter 13 if they're ineligible to be there or if they haven't conformed to the system. I think Judge Olack has a favorite line in the dissent.

JUDGE OLACK: Yes. The dissent is really interesting. I think you could read the entire decision on a number of different levels. Obviously, it's the good- faith case that determines if there is an implied duty of good faith in order to convert. And as Tamara said, it does breathe new life into Sec. 105(a) which has been eroded over a number of years by other decisions. I think the most interesting aspect of this case is to see the sharp distinction in judicial philosophy between the majority and the dissent. Not only just judicial philosophy, but the role of the bankruptcy judge. The second to last paragraph of the dissent provides, "But whatever steps a bankruptcy court may take pursuant to Sec. 105(a) or its general equitable powers, a bankruptcy court cannot contravene the provisions of the Code."

MS. OGIER: You didn't learn that in baby judge school.

JUDGE OLACK: Judge Mullins didn't tell us in baby judge school that we weren't supposed to contravene the provisions of the Code. According to the dissent, all you need to do is what the Code says: convert it to a chapter 13 and then if it's not appropriate in the chapter 13, convert it back to the chapter 7.

MS. OGIER: Which happens all the time.

JUDGE OLACK: A contrary view would be to look past that and to see if it were converted, what would happen in the chapter 13. Well, it would've been a bad-faith chapter 13. So, why go through that step? Exercise discretion, leave it in the chapter 7, and determine it was bad faith.

I'm looking forward to scholars, such as Professor Jack Williams, who will write about this case, because I think there's going to be a wealth of commentary well beyond just the good-faith issues that were raised in the case.

Let's start with our fact pattern. I think you all should have that in the materials.

David and Debbie Debtor, Georgia residents, are contemplating filing bankruptcy. David Debtor is employed by Georgia Power and earns

$50,000 a year. In past years he's earned an annual bonus of up to

$10,000, based on work performance in hurricane-damaged areas. However, he will not likely earn a bonus this year because of the mild hurricane season. Debbie Debtor was employed from January 2006 to November 2006 full-time as a paralegal with gross income of

$2500 a month. However, on December 1, 2006, Debbie was injured in an automobile accident. Because of her injuries, she was unable to work and took an unpaid leave of absence from her job. She anticipates returning to her job as a paralegal part-time in mid-March.

The Debtors have two children in their household. In addition, David has another minor child who resides with his ex-wife.

The Debtors are considering bankruptcy for a number of reasons: the reduction in their income due to Debbie's car accident and temporary inability to work; mortgage delinquency; medical bills due to chronic illness of one of their children; and some excessive spending during the holiday season.

Question 1: Calculate CMI to determine whether the means test creates a presumption of abuse pursuant to Sec. 707(b)(2), or disposable income under Sec. 1325(b)(2).

MR. CAHN: The CMI stands for current monthly income, which is ironic, because it has nothing to do with the debtors' current monthly income at all. Under the Code we're required to go back six months and look at all the income received each of the six months and calculate an average. In this case, it's fairly straightforward. David's income is steady. He's making $50,000 a year. So every month, he's making $4166. Debbie had an accident, so she was only working for month one, two and three; September, October, November making $2500 a month for each of those months. So, her average income for those six months was $1250. When you add that to David's average monthly income of $4166, the CMI is $5416. We multiply that by twelve to come up with a figure of $65,000. Of course we're required to compare that CMI figure to the median income for a household the size of David and Debbie Debtor's. They have four in their household and currently the Georgia median for a four-person household is $66,508. So, they are barely under that median and they have escaped a presumption of abuse. We therefore would not need to go to the deductions to see if there is a presumption under Part 2.

Now, we could throw this scenario for a couple of loops because in the real world, in my practice, it's never this easy. The client might have no idea how much they made each of these six months. And I deal with a lot of construction workers and they're just trying to remember how much it rained that month. They didn't save their pay stubs. So a lot of it is guess work.

Another problem that we'll have is what is income? For example, I had a client come in who settled a personal injury case for $10,000. Arguably, that settlement is exempt and clearly it's not taxable, but is it income? And I looked at the Code and income is income whether it's taxable or not. So, I felt that I had to include that. That is a situation where that debtor may need to wait more than six months after they receive that settlement just to pass the test. It seems absurd, but that may have to happen.

I had a client with a regular job and a side business on eBay selling antiques. For the first three or four months, they were losing money due to start-up costs and a slow economy, but the last two months, they were making money. When I took the average, there was a business loss on average and I really wanted to plug that loss into my means test and off-set the regular income. But the form itself doesn't let me do that. It says, "Do not enter a number less than zero." It doesn't seem right that we can't do that, but the form won't let me. So, these are interesting issues.

Finally, what if a client sold a house, made $20,000, and immediately purchased another one and put that $20,000 into the new house? That's not a taxable event when they file the returns, but is it income? I don't know the answer to that, but these are all issues that are going to come up and that are going to have to be resolved.

JUDGE OLACK: Any other thoughts on CMI? Let's go then to...