Source: https://dgdk.com/category/publications/
Timestamp: 2019-04-19 02:31:21+00:00

Document:
Each year, December 1 is the date on which new and amended federal rules and forms become effective. Sometimes, this requires local bankruptcy courts to take automated systems offline. That is again the case this year. In the Central District of California, CM/ECF, PACER and certain other automated systems will not be available from 1:00 p.m. on Thursday, November 30, 2017, until 8:30 a.m. on Friday, December 1, 2017.
The scheduled outage calls to mind the cautionary tale of Hsu v. MTC Financial, Inc. (In re Hsu), 692 Fed.Appx. 888 (9th Cir. June 30, 2017). In that case, the Ninth Circuit ruled that a scheduled CM/ECF outage did not excuse a party’s failure to file a timely notice of appeal or motion for reconsideration. To read the Ninth Circuit’s unpublished memorandum, click here: http://bit.ly/2naUZJJ.
On June 26, 2015, and after two failed bankruptcies of her own (to prevent/delay foreclosure proceedings), Li Hsiu-Chu Hsu purported to convey her Pasadena residence to her daughter, Tzu Ling Hsu (the “Debtor”). On July 1, 2015 – the day before a scheduled foreclosure sale – the Debtor filed a chapter 11 petition. Based thereupon, the foreclosing trustee, MTC Financial Inc. (“MTC”), postponed the foreclosure sale for a few days, to July 7, 2015. Allegedly unable to confirm the validity of the conveyance, MTC went forward with the sale and the property was purchased for $4.2 million.
Within a few days, MTC realized that it had made a mistake. Attempting to remedy MTC’s error, the buyer and MTC each filed a motion for relief from stay, requesting that the court annul the automatic stay retroactive to the Debtor’s petition date. On November 13, 2015, the bankruptcy court entered orders granting both motions. This relief had the effect of validating the post-petition foreclosure sale.
The deadline for the Debtor to appeal or seek reconsideration of the orders granting relief from stay was Monday, November 30, 2015 (after the Thanksgiving holiday weekend). During the week leading up to November 30, the bankruptcy court sent out at least two notices advising CM/ECF users that CM/ECF would be unavailable from 4:00 p.m. on November 30 through 9:00 a.m. on December 1. A final notice was sent out the morning of the scheduled outage.
The Debtor did not file an appeal or motion for reconsideration before CM/ECF was taken offline. Instead, on December 1, 2015 (at approximately 11:18 p.m.), the Debtor electronically filed two motions for reconsideration (one for each order). The bankruptcy court denied the motions and the Debtor filed notices of appeal on December 15, 2015.
In the district court, MTC and the buyer filed motions to dismiss the appeals. They argued, among other things, that the appeals were not timely filed because the deadline to file an appeal or motion for reconsideration was November 30, but the Debtor’s motions for reconsideration were not filed until December 1. The Debtor argued that because her attorney was required by local bankruptcy rules to file documents electronically, and because CM/ECF was unavailable during the late afternoon and evening of November 30, the time for her to appeal or seek reconsideration was extended to December 1. See Fed. R. Bankr. P. 9006(a)(4) (for electronic filing, “last day” ends at midnight in the court’s time zone), (3) (when clerk’s office is inaccessible, “last day” for filing is extended to the first accessible day that is not a weekend or legal holiday). The district court ultimately agreed with MTC and the buyer, and dismissed the appeals as untimely.
The Ninth Circuit affirmed the district court’s orders dismissing the appeals. The court reasoned that while there is ordinarily mandatory electronic case filing, the local bankruptcy court’s rules were clear that despite the CM/ECF outage the “Debtor’s proper recourse . . . was to file a paper hard copy by November 30 at midnight, not to wait another day as if the clerk was ‘unavailable’ under the Federal Rules of Bankruptcy Procedure.” The court pointed to the Central District of California bankruptcy court’s Court Manual, which stated that, when there is a CM/ECF outage, a litigant should file a hard copy manually at the filing window “whenever it is essential that a particular document be filed by a particular date.” Because the Debtor did not do so, her appeal was untimely and the district court lacked jurisdiction to hear the appeal.
We often rely on the ability to electronically file documents after business hours, up until the clock strikes twelve. Most of the time, as long as a filer acts diligently (e.g., serves the document on time, emails a copy to all parties who would otherwise be served via Notice of Electronic Filing, and files it electronically as soon as CM/ECF service resumes), a CM/ECF outage should not prove fatal (especially if it is unscheduled). But when filing a notice of appeal, motion for reconsideration, complaint, proof of claim, or other document that absolutely must be filed by a particular date, a CM/ECF outage on the last day for filing can have disastrous consequences.
In most situations, a bankruptcy court may extend the time for a party to file an appeal if the party (a) requests the extension in a motion filed within 21 days after the deadline, and (b) shows excusable neglect. Fed. R. Bankr. P. 8002(d)(1). Whether missing a filing deadline due to a scheduled, publicized CM/ECF outage constitutes “excusable neglect” is debatable. Regardless, the bankruptcy court could not have extended the deadline in the Hsu case because the order appealed from granted relief from the automatic stay. See Fed. R. Bankr. P. 8002(d)(2).
In April 2017, the Supreme Court submitted to Congress proposed revisions to the Federal Rules of Appellate Procedure (“FRAP”), Federal Rules of Bankruptcy Procedure (“FRBP”), Federal Rules of Civil Procedure (“FRCP”), and Federal Rules of Evidence (“FRE”). The proposed revisions will go into effect on December 1, 2017, unless Congress rejects or defers the proposed amendments.
The entire package of materials transmitted to Congress may be accessed here: http://bit.ly/2017-Rules. Some of the proposed revisions are described below.
Current FRBP 3002(a) generally provides that unsecured creditors and equity security holders must file proofs of claims.
Current FRBP 3002(c) establishes a general rule that in chapter 7, 12 and 13 cases, a proof of claim is timely if it is filed within 90 days after the first date set for the § 341(a) meeting of creditors.
Under revised FRBP 3002(c), the general rule is that a proof of claim is timely if it is filed within 70 days after the order for relief under that chapter, or the date of the order converting a case to chapter 12 or 13. In an involuntary chapter 7 case, a proof of claim is timely if it is filed within 90 days after the order for relief is entered.
Comment: FRBP 3002(c) does not expressly address the time to file a proof of claim when a case converts to chapter 7 because conversions to chapter 7 are covered by FRBP 1019. However, FRBP 1019 provides that, except in limited circumstances, a new time period for filing proofs of claims commences under FRBP 3002. Thus, in most cases that convert to chapter 7, a new claims bar date will be set for 70 days after the conversion date.
The first five exceptions to the general rule (FRBP 3002(c)(1)-(5)) remain in place. Of particular importance, FRBP 3002(c)(5) still provides that in a case originally classified as a “no-asset” case, and in which the trustee files a notice of assets, the clerk will give 90 days’ notice of the date by which proofs of claims must be filed.
The sixth exception (FRBP 3002(c)(6)) is broadened. That rule currently provides that if notice of the claims bar date has been mailed to a creditor at a foreign address, the court may extend the deadline by up to 60 days if the notice was insufficient to give the creditor a reasonable time to file a proof of claim. Now, the court may also extend the time for any creditor to file a proof of claim if that creditor received insufficient notice of the claims bar date because the debtor failed to timely file the list of creditors’ names and addresses. An extension under revised FRBP 3002(c)(6) may be granted for up to 60 days from the date of the order granting the creditor’s request for an extension, not just from the original filing deadline.
Current FRBP 3007(a) provides that an objection to a claim, and notice of the hearing, must be mailed or otherwise delivered at least 30 days before the hearing. The rule does not specify the address to which the notice and objection must be sent.
Revised FRBP 3007(a) clarifies that FRBP 7004’s specific service requirements do not apply to most claim objections, and eliminates the implicit requirement that the court hold a hearing. Now, 30 days’ notice must be given before any scheduled hearing on the objection or any deadline for the claimant to request a hearing. With certain exceptions, the objection and notice must be sent to the person most recently designated on the claimant’s proof of claim as the person to receive notices, at the address so indicated. Special requirements are adopted for objections to claims filed by the United States, officers or agencies of the United States, or insured depository institutions.
Current FRBP 3012 provides that the court may determine the value of a secured claim on motion of any party in interest. Revised FRBP 3012(b) provides that such a determination may be sought by motion, in a claim objection, or in a chapter 12 or 13 plan. Revised FRBP 7001(2) confirms that such a determination does not require an adversary proceeding.
If a determination regarding the amount of a secured claim is sought through a chapter 12 or 13 plan, revised FRBP 3012(b) provides that the plan must be served on the claimant in the manner provided by FRBP 7004 for service of a summons and complaint. New FRBP 3015(g) provides that, upon confirmation of the plan, any such determination is binding on the secured creditor, even if the creditor files a contrary proof of claim or the claim was scheduled by the debtor in a different amount. This is the case regardless of whether a claim objection has been filed.
The amendment also expands FRBP 3012 to cover determinations regarding the amount of a claim entitled to priority under § 507. Such a determination may be sought by motion or in a claim objection.
Current FRBP 4003(d) provides that a debtor seeking to avoid a lien that impairs his or her exemption must do so by motion.
Revised FRBP 4003(d) also allows a chapter 12 or 13 debtor to seek avoidance of an exemption-impairing lien through a plan. The plan must be served on the affected creditor in the manner provided by FRBP 7004 for service of a summons and complaint.
Revised FRBP 3015(c) requires chapter 13 debtors to use the official federal form plan (Official Form 113) unless a local form plan has been adopted in the district in which the case is pending. A “nonstandard” provision inserted by the debtor will be effective only if it is included in a section of the form designated for nonstandard provisions.
COMMENT 1: Even after December 1, 2017, be sure to check your court’s local rules, general orders and public notices to determine whether you should use the new Local Form. For example, the Northern District’s General Order 34 provides that its Local Form must be used in cases filed under chapter 13, or converted to chapter 13, on or after December 1. The Eastern District’s General Order 17-03 provides that its Local Form must be used whenever a chapter 13 plan is filed in a case after December 1. The Central District’s Public Notice 17-015 states that its Local Form may be used only in chapter 13 cases commencing on or after December 1, and that the Central District’s current form plan should be used in cases filed before December 1. The Southern District’s General Order 173c does not specify whether its Local Form must be used in all cases or just those filed on or after December 1.
COMMENT 2: The Eastern and Southern Districts’ Local Forms appear to contravene revised FRBP 3012(b) and 4003(d). Section 1.04 of the Eastern District’s Local Form states, “The confirmation of this plan will not limit the amount of a secured claim based on a valuation of the collateral for the claim, nor will it avoid a security interest or lien. This relief requires a separate claim objection, valuation motion, or lien avoidance motion that is successfully prosecuted in connection with the confirmation of this plan.” Similarly, the first page of the Southern District’s Local Form states, “This plan does not provide for avoidance of a lien which impairs an exemption. This must be sought by separate motion.” These provisions effectively preclude chapter 13 debtors from using the Local Forms to seek relief that the federal rules (as revised) expressly allow to be sought through a chapter 13 plan.
COMMENT 3: Along the same lines, the Local Form adopted by the Eastern District appears to neuter new FRBP 3015(g)(1). That new rule provides that, upon confirmation, a determination in the plan regarding the amount of a secured claim is binding on the claimant. Since the Eastern District’s Local Form precludes chapter 13 debtors from valuing secured claims through their plans, new FRBP 3015(g)(1) will have no effect.
Current FRBP 3015(f) provides that objections to confirmation of chapter 12 and 13 plans must be filed before confirmation. Revised FRBP 3015(f) provides that objections must be filed at least 7 days before the hearing date, unless the court orders otherwise.
New FRBP 2002(a)(9) provides that creditors must be given 21 days’ notice by mail of the time to file objections to confirmation of a chapter 13 plan. Revised FRBP 2002(b) provides that creditors must be given 28 days’ notice by mail of the hearing to consider confirmation of the chapter 13 plan.
COMMENT: FRBP 2002(a)(8) remains unchanged. That rule provides that creditors must be given 21 days’ notice by mail of both (a) the time to file objections to a chapter 12 plan, and (b) the confirmation hearing. It is unclear why the drafters did not also revise FRBP 2002(a)(8) to make the notice periods consistent with those now applicable in chapter 13 cases.
If a party files a notice of appeal while a motion for reconsideration (or similar motion) is pending, the notice becomes effective when the order disposing of the motion is entered. FRAP 4(a)(4)(B)(i). If the party also wants to challenge a judgment’s alteration or amendment upon such a motion, the party must file an amended notice of appeal. FRAP 4(a)(4)(B)(ii). The 2009 amendments inadvertently deleted language which provided that no additional fee is required to file the amended notice of appeal. That language is being restored, as new FRAP 4(a)(4)(B)(iii).
COMMENT: FRBP 8002(b)(4) provides that, in bankruptcy appeals, no additional fee is required to file an amended notice of appeal. Therefore, FRBP 8002(b) and FRAP 4(a)(4)(B) will be aligned in this regard.
FRE 803 lists exceptions to the hearsay rule. Current FRE 803(16) provides that the admission of “[a] statement in a document that is at least 20 years old and whose authenticity is established” is not barred by the hearsay rule. Revised FRE 803(16) restricts the exception to “[a] statement in a document that was prepared before January 1, 1998, and whose authenticity is established.” The revision addresses the Advisory Committee’s concern that because electronically stored information (“ESI”) can be retained for more than 20 years, a strong likelihood exists that, going forward, the existing “ancient documents” exception would allow for the admission of vast amounts of unreliable ESI.
New FRE 902(13) and 902(14) provide that “[a] record generated by an electronic process or system that produces an accurate result” and “[d]ata copied from an electronic device, storage medium, or file” may be authenticated by a written certification of a qualified person, in lieu of that person’s testimony at trial. The certification must comply with FRE 902(11) or (12) (certified records of a regularly conducted activity). The proponent must give the adverse party reasonable written notice of its intent to offer the record or data into evidence, and must make the record / data and the certification available for inspection so that the adverse party has a fair opportunity to challenge them.
COMMENT: These new rules relate only to the authentication of electronic records and data; objections to admissibility on other grounds (e.g., hearsay) are unaffected. The goal is to allow a party to authenticate such records and data ahead of time, and not incur the expense and inconvenience of unnecessarily producing an authenticating witness at trial. Parties can determine in advance of trial whether a challenge to authenticity will be made, and plan accordingly.
Case Analysis: Salven v. Galli (In re Pass), 553 B.R. 749 (9th Cir. BAP 2016), Insolvency e-Bulletin, Insol. L. Comm., Bus. L. Sec., Cal State Bar (September 11, 2017).
Last August, in Salven v. Galli ( In re Pass), 553 B.R. 749 (9th Cir. BAP 2016), the U.S. Bankruptcy Appellate Panel of the Ninth Circuit held that, where a chapter 7 debtor and her non-debtor husband legally separated and divorced postpetition, the debtor’s ex-husband could, on his own behalf, claim a homestead exemption in property of the estate. To read the full published decision, click here: http://bit.ly/2utaP5P.
In 2002, Frances Pass (“Pass”) and her then-husband, Aladino Galli (“Galli”), lived together in a home in Fresno, California (the “Fresno Property”). In 2002, they recorded a declaration of homestead (the “2002 Homestead Declaration”).
At some point, Pass and Galli decided to terminate their marriage.
In September 2009, Pass purchased a house in Coalinga, California (the “Coalinga Property”), and began refurbishing it. Early on December 30, 2009, Pass moved out of the Fresno Property with no intention of returning to reside there.
That very afternoon, Pass and Galli filed a joint chapter 13 petition. Thus, at the time they filed their joint petition, Galli resided in the Fresno Property and Pass resided in the Coalinga Property. They scheduled the Fresno Property as community property, and claimed a homestead exemption in the Fresno Property pursuant to California Code of Civil Procedure (“CCP”) section 704.730.
In September 2010, a state court entered a judgment of legal separation which incorporated a Marital Settlement Agreement and provided that the Fresno Property would be awarded to Galli as his sole and separate property.
In 2011, Galli executed and recorded a grant deed purporting to transfer the Fresno Property to Pass and Galli as joint tenants.
Subsequently, Pass filed a petition for a judgment dissolving the marriage. In April 2013, the state court entered a judgment of marital dissolution (incorporating a new Marital Settlement Agreement) under which Pass and Galli each retained a one-half joint tenancy interest in the Fresno Property.
In September 2013, Pass requested that the bankruptcy court sever the joint chapter 13 case and convert her case to chapter 7. The bankruptcy court granted the request. Soon thereafter, Galli’s chapter 13 case was dismissed.
In Pass’ chapter 7 case, Pass amended her schedules to assert a $75,000 homestead exemption in the Coalinga Property instead of the Fresno Property. The chapter 7 trustee objected to Pass’ claimed exemption, alleging that Pass was not actually living in the Coalinga Property when Pass and Galli filed their joint chapter 13 petition. The bankruptcy court found that Pass had moved out of the Fresno Property, with no intention ever to return, hours before the petition was filed. Thus, the objection was overruled.
In the meantime, the trustee filed a motion for authority to sell the Fresno Property free and clear of liens and interests, as well as a complaint seeking to avoid the unauthorized postpetition transfers. In the adversary proceeding, the bankruptcy court entered summary judgment determining that the Fresno Property was community property (and therefore the entirety of the property was property of the estate), and that the postpetition transfers were void. However, the bankruptcy court also determined that Galli held a “homestead interest” in the Fresno Property by virtue of the 2002 Homestead Declaration, and the trustee could not sell the Fresno Property free and clear of Galli’s homestead interest without compensation to Galli. The trustee appealed.
In his appellate brief, the trustee argued that “it is the automatic and not the declared homestead that is needed to invoke the homestead [exemption] within bankruptcy.” The trustee also argued that exemptions are determined as of the petition date, even when the case has been converted from chapter 13 to chapter 7. Citing In re Homan, 112 B.R. 356 (9th Cir. BAP 1989), the trustee further argued that when only one spouse files, the choice of homestead exemption vests solely in the filing spouse. Because Pass and Galli were married on the petition date, and because Pass had chosen to claim an exemption in the Coalinga Property, the trustee argued that Galli was not entitled to claim an exemption in the Fresno Property.
Galli argued that he had “exemption rights” in the Fresno Property pursuant to the 2002 Homestead Declaration. He argued that those rights came into his bankruptcy estate when the joint chapter 13 petition was filed, and revested in him when his chapter 13 case was dismissed. Galli also argued that his right to an exemption was not lost when Pass amended her schedules to claim an exemption in the Coalinga Property because, among other things, after legal separation each spouse is “entitled to a homestead in his or her own right.” Galli also argued that Pass “abandoned” her rights in the Fresno Property when she amended her Schedule C, and that the trustee, as Pass’ successor, was estopped from asserting any interest in the property.
First, the BAP examined whether the 2002 Homestead Declaration precluded the trustee from selling the Fresno Property without compensating Galli.
The bankruptcy court had concluded that because a trustee’s “powers to liquidate estate assets are derived from those of a creditor who holds a judgment lien,” the 2002 Homestead Declaration shielded the Fresno Property from the trustee’s reach in the same way that a homestead declaration shields property from the attachment of judgment liens. Pass, 553 B.R. at 758 (quoting Salvi v. Galli ( In re Pass), Adv. No. 14-01056 at 12 (Bankr. E.D. Cal. Oct. 14, 2015)); see also Cal. Civ. Proc. Code § 704.950. The BAP rejected this conclusion because a trustee’s power to sell estate property is derived from Section 363, not from the trustee’s rights as a hypothetical lien creditor under Section 544.
The BAP also rejected the bankruptcy court’s suggestion that the trustee’s proposed sale of the Fresno Property could be considered a voluntary sale because it “‘is property of the estate over which the Trustee is effectively the owner.’” Pass, 553 at 759 (quoting Salvi v. Galli ( In re Pass), Adv. No. 14-01056 at 10 (Bankr. E.D. Cal. Oct. 14, 2015)). The BAP stated, “We must reject this proposition as inconsistent with our previous decisions holding that the filing of the bankruptcy petition itself constitutes a ‘forced sale’ for exemption purposes.” Id. (citations omitted).
Thus, the BAP concluded that the 2002 Homestead Declaration did not prevent the trustee from selling the Fresno Property.
Second, the BAP examined whether Galli was entitled to assert an “automatic” homestead exemption in the Fresno Property. This required the BAP to answer two questions: “First, whether Galli, as a non-debtor, may assert any exemption in property of the Pass bankruptcy estate; and second, whether Galli is entitled to a homestead exemption under California law.” Id. at 759.
As to the question of whether a non-debtor may claim an exemption in estate property, the BAP noted that there is a lack of case law addressing this issue. In Homan, the BAP had ruled that a non-debtor spouse could not assert an exemption in a home where the debtor had chosen to exempt other property. But the BAP distinguished Homan because “[w]hat is true of spouses . . . is not necessarily true of ex-spouses.” Id. at 760. The BAP stated that, by precluding non-debtor spouses from claiming exemptions in estate property, Congress designed the exemption provisions to encourage spouses to file jointly (something ex-spouses cannot do). The BAP also noted that Galli would not benefit from the community property discharge, which Homan had “identified as a counterbalancing advantage to the otherwise ‘hard result’ of denying non-debtor spouses any say in the selection of exemptions.” Id. (quoting Homan, 112 B.R. at 360). The BAP limited Homan’s holding to situations in which non-filing current spouses of the debtor attempt “to assert exemptions to which he or she would not be entitled as a joint debtor.” Id. The BAP concluded, “The mere fact that Galli is not the debtor does not prohibit him from asserting a state law exemption in property of the bankruptcy estate.” Id.
Id. at 760-61 (alteration in original) (citations omitted). Therefore, the BAP ruled that Galli’s homestead rights must be determined with reference to his current marital status, not his marital status on the petition date. The BAP stated that, under California law, after a judgment of dissolution or legal separation, each former spouse qualifies for the “automatic” homestead exemption for property in which he or she resides. Thus, the BAP concluded that Galli was entitled to claim a homestead exemption in the Fresno Property, and affirmed the bankruptcy court’s conclusion that the trustee could not sell that property without compensating Galli.
In the author’s view, the BAP correctly rejected Galli’s argument that the 2002 Homestead Declaration precluded the trustee from selling the Fresno Property. A homestead declaration prevents the attachment of a judgment lien unless there is equity in excess of the amount of the homestead exemption, but it does not diminish a co-owner’s interest in the property. In Pass, the entirety of the Fresno Property was property of the estate. Therefore, the trustee was entitled to sell the property pursuant to Section 363, and to distribute the net sale proceeds in accordance with Sections 724 and 726.
The validity of the BAP’s other two primary rulings is less clear given the paucity of authority on the subject.
First, an analysis of whether a debtor (or anyone else) is entitled to exempt property from property of a bankruptcy estate should begin with Section 522. Section 522(b) allows a debtor to exempt property from the estate. If a debtor fails to file a list of exemptions, “a dependent of the debtor may file such a list, or may claim property as exempt from property of the estate on behalf of the debtor.” 11 U.S.C. § 522( /) (emphasis added). There is nothing in the Bankruptcy Code to suggest that a non-debtor is entitled to exempt property from the estate on his or her own behalf.
The Trustee’s counsel further conceded at oral argument that the Trustee’s proposed sale should be treated as involuntary, hence capable of triggering the automatic homestead exemption. . . . [A]s the issue is not disputed, we need not decide it and will treat the proposed sale as an involuntary or forced sale under California law.
Mainly in two contexts, courts have stated that the filing of a bankruptcy petition is the functional equivalent of a forced or involuntary sale: (1) when determining whether California’s “automatic” homestead exemption (as opposed to the declared homestead exemption) applies in bankruptcy cases; and (2) when determining that the petition date is the correct date for determining a debtor’s eligibility to claim an exemption. See, e.g., In re Cole, 93 B.R. 707 (9th Cir. BAP 1988); In re Herman, 120 B.R. 127 (9th Cir. BAP 1990); In re Morgan, 149 B.R. 147 (9th Cir. BAP 1993); In re Kelley, 300 B.R. 11 (9th Cir. BAP 2003). But it does not necessarily follow that a trustee’s Section 363 sale of estate property is the same thing as a judgment creditor’s execution sale of a judgment debtor’s property. In light of footnote 6, courts and practitioners should be careful not to read Pass as definitively holding that a trustee’s Section 363 sale is, in fact, an involuntary sale triggering a non-debtor’s right to claim an exemption in his or her own right.
Second, even if non-bankruptcy law can/does give a separated or ex-spouse an independent right to exempt community property from property of the estate, the BAP’s willingness to look at Pass and Galli’s current marital status (rather than their marital status on the petition date) is questionable. There was no dispute that Pass and Galli were still married on the petition date. Indeed, although not reflected in the record on appeal, a petition for a judgment of legal separation was not even filed until June 2010 (over five months after they filed for bankruptcy). Also, the state court’s September 2010 judgment of legal separation incorporated a Marital Settlement Agreement in which Pass and Galli agreed that the date of legal separation was January 1, 2010 (two days after they filed their joint chapter 13 petition).
The BAP was rightfully reluctant to interfere in family law matters. For example, courts have been hesitant to interfere with a state court’s award or modification of spousal support. See In re Allen, 275 F.3d 1160 (9th Cir. 2002); In re MacDonald, 755 F.2d 715 (9th Cir. 1985). However, it is unclear whether that policy should apply when a non-debtor spouse legally separates from the debtor postpetition and then seeks to exclude property from the estate by exercising exemption rights that did not exist on the petition date.
These materials were written by John N. Tedford, IV, of Danning, Gill, Diamond & Kollitz, LLP (jtedford@dgdk.com). Editorial contributions were provided by Michael J. Gomez of Frandzel Robins Bloom & Csato, L.C. in Fresno, California.
Case Analysis: Blixseth v. Brown (In re Yellowstone Mountain Club, LLC), 841 F.3d 1090 (9th Cir. 2016), Ninth Circuit Decision Extending Barton Doctrine to Committees, Bankruptcy E-Bulletin, Insol. L. Comm., Bus. L. Sec., Cal. State Bar (June 13, 2017).
In Blixseth v. Brown (In re Yellowstone Mountain Club, LLC), 841 F.3d 1090 (9th Cir. 2016), the Ninth Circuit Court of Appeals addressed whether members of unsecured creditors’ committees can be sued outside of the bankruptcy court without bankruptcy court authority. The court determined that the Barton doctrine established in Barton v. Barbour, 104 U.S. 126 (1881), which prevents suit against a trustee or receiver without the authorization of the appointing court, also applies to claims against a committee member relating to his or her conduct as a committee member. To read the full decision, click here: http://bit.ly/2jxLX7o.
Timothy Blixseth was the founder and principal, together with his wife, Edra, of Yellowstone Mountain Club, a luxury Montana resort. Stephen Brown represented Blixseth at the time Blixseth borrowed $375,000,000 on behalf of the Yellowstone Mountain Club and related entities. Blixseth, allegedly on Brown’s advice, used some of the loan proceeds to pay personal debts. As a result, shareholders sued Blixseth and, on Brown’s advice, Blixseth settled. Later, when Blixseth and Edra divorced, Blixseth, who was again represented by Brown in those proceedings, transferred the Yellowstone entities to Edra.
Some time following the divorce, Edra caused the Yellowstone entities to file chapter 11 bankruptcy petitions. An unsecured creditors’ committee (“UCC”) was appointed. Brown became the chair of the UCC. Concerned that Brown was using confidential information he obtained as Blixseth’s counsel against Blixseth in the bankruptcy cases, Blixseth sued Brown in the district court. Brown moved to dismiss under the Barton doctrine, which was established in Barton v. Barbour, 104 U.S. 126 (1881). The Barton doctrine prohibits suits in other forums against officers appointed by a court (typically trustees or receivers) for actions taken in their official capacities and within their authority, absent the appointing court’s authorization. The district court found that the protection afforded officers appointed by the bankruptcy court should be extended to committee members and, based thereon, dismissed the suit.
Blixseth thereafter moved the bankruptcy court for permission to sue Brown in district court, arguing that some of his claims were based on prepetition conduct. The bankruptcy court denied the motion and dismissed the claims based on its conclusion that it would be “impossible. . . to isolate” the alleged “pre-petition malpractice and malfeasance” claims from Brown’s work on the UCC. Blixseth appealed to the district court, which affirmed. Blixseth subsequently appealed to the Ninth Circuit.
The Ninth Circuit first considered whether the Barton doctrine applies to members of an official committee of unsecured creditors. No court of appeals has previously extended Barton to committee members. However, courts have found that Barton extends to parties other than receivers or trustees, such as trustees’ lawyers or parties handling sales of estate assets. See In re DeLorean Motor Co., 991 F.2d 1236, 1241 (6th Cir. 1993) (applying Barton to a trustee’s lawyer); Carter v. Rodgers, 220 F.3d 1249, 1251, 1252 n.4 (11th Cir. 2000) (applying Barton to an auctioneer). Here, the court found that the UCC’s interests were aligned with the estate’s, noting that committees can seek appointment of a trustee, have a duty to investigate the debtor and its financial condition, and participate in the formulation of a plan. Indeed, the Ninth Circuit pointed out that the duties of a committee and a trustee may overlap. Lawsuits against committee members, or even the potential for such lawsuits, may have the effect of chilling actions on the part of committee members attempting to fulfill their statutory duties. Thus, the court decided that Barton’s protections extend to committee members “sued for acts performed in their official capacities.” Yellowstone, 841 F.3d at 1095.
Next, the Ninth Circuit considered whether Blixseth needed bankruptcy court permission to sue Brown for Brown’s conduct prior to the bankruptcy case, on claims amounting to allegations of prepetition malpractice. The Ninth Circuit concluded that the bankruptcy court erred in finding that it was “impossible” to untangle the claims based on prepetition conduct from those based on postpetition conduct—Blixseth had clearly identified and separated the prepetition claims in his Barton motion and the prepetition claims had nothing to do with Brown’s role on the UCC. As a result, the Ninth Circuit held that Blixseth did not need bankruptcy court authority to pursue his prepetition claims against Brown in district court and that the bankruptcy court and district court had erred in concluding otherwise.
(1) whether the acts complained of “relate to the carrying on of the business connected with the property of the bankruptcy estate,” (2)whether the claims concern the actions of the officer while administering the estate, (3) whether the officer is entitled to quasi-judicial or derived judicial immunity, (4) whether the plaintiff seeks a personal judgment against the officer and (5) whether the claims seek relief for breach of fiduciary duty, through either negligent or willful conduct.
Id. at 1096 (citing In re Kashani, 190 B.R. 875, 886–87 (9th Cir. BAP 1995)(also holding that satisfaction of any “one . . . factor may be a basis for the bankruptcy court to retain jurisdiction.”)). Because the fourth factor was satisfied by Blixseth’s seeking of a personal judgment against Brown, the Ninth Circuit held that the bankruptcy court did not err in denying Blixseth authority to sue Brown in district court.
Finally, the Ninth Circuit addressed Blixseth’s argument that the bankruptcy court lacked authority when it decided his claims against Brown. Brown asserted that Blixseth consented to the court’s authority, but there was no express consent and, in fact, Blixseth sought through his motion to litigate in district court. Further, Blixseth argued that the bankruptcy court exceeded its authority under Stern v. Marshall, 564 U.S. 462 (2011), which prohibits bankruptcy courts from adjudicating common law claims that are not constitutionally core to bankruptcy. However, the Ninth Circuit found that because Barton claims necessarily “stem from the bankruptcy itself,” Stern does not preclude bankruptcy courts from adjudicating such claims. The court ultimately remanded the case to the bankruptcy court to determine whether, with respect to Blixseth’s claims based on Brown’s postpetition conduct, Brown acted within the scope of his authority and with proper disclosures and, therefore, was entitled to derived judicial immunity for his acts as UCC chair.
Though its facts are unique, this Ninth Circuit decision sets an important precedent by expressly extending the protections of Barton to members of creditors’ committees. A committee can play an important role in a chapter 11 case—supervising the actions of the debtor in possession, investigating the debtor’s business and financial affairs, participating in the plan process, and otherwise advocating on behalf of all of the unsecured creditors. In some cases, a committee may be the only party with an economic interest in the case actively participating to ensure that the debtor is held accountable and is acting in the best interests of the estate. Accordingly, it makes sense to afford to committee members the same protections from suit in an outside forum afforded to trustees. A contrary decision would, as the court observed, chill committee actions. More than that, a contrary decision could dissuade creditors considering participation on a committee from doing so, which could ultimately detriment the bankruptcy system by minimizing the involvement of committees. This decision, however, should give comfort to creditors willing to serve as members of committees that their actions, if properly disclosed and authorized, will be subject to derived judicial immunity as well as protection from suit in an outside court pursuant to the Bartondoctrine—the same important protections long enjoyed by trustees.
These materials were written by Zev Shechtman of Danning, Gill, Diamond & Kollitz, LLP, in Los Angeles (ZShechtman@dgdk.com). Editorial contributions were provided by Kyra E. Andrassy of Smiley Wang-Ekvall, LLP in Costa Mesa.
In April 2016, the Supreme Court submitted to Congress proposed revisions to the Federal Rules of Appellate Procedure (“FRAP”), Federal Rules of Bankruptcy Procedure (“FRBP”), and Federal Rules of Civil Procedure (“FRCP”). The proposed revisions will go in effect on December 1, 2016, unless Congress rejects or defers the proposed amendments.
The entire package of materials transmitted to Congress may be accessed here: http://bit.ly/2fms8Kk. Some of the proposed revisions are described below.
Current FRBP 9006(f) provides that when a party may or must act within a prescribed period after being served “and that service is by mail or under [FRCP] 5(b)(2)(D), (E), or (F),” 3 days are added to the period. FRCP 5(b)(2)(E) allows for service of papers by electronic means. Therefore, under the current rules, if a movant serves notice of a motion electronically and parties have 14 days from the date of service to file an opposition, an opposing party actually has at least 17 days to file its opposition.
Under revised FRBP 9006(f), service by electronic means is effective upon service. Three days will be added only if service is by mail or under FRCP 5(b)(2)(D) (leaving with the clerk) or (F) (other means consented to).
Proposed “Stern Amendments” were submitted to the Supreme Court in 2013, withdrawn a few months later because the Court granted cert in Arkison, and resubmitted after Wellness was decided in 2015. Generally, the revisions remove the terms “core” and “non-core” to avoid possible confusion in light of Stern, require all parties to state whether they consent to the entry of final orders and judgment by the bankruptcy court, and revise the pretrial procedures to direct bankruptcy courts to decide how each proceeding should be treated.
Current FRBP 7008 provides that a complaint or similar pleading must state whether the proceeding is core or non-core and, if non-core, whether the pleader consents to entry of final orders or judgment by the bankruptcy court. Revised FRBP 7008 eliminates the need to state whether the proceeding is core or non-core. Now, regardless of whether the proceeding is core or non-core, the pleading must state whether the pleader consents to entry of final orders or judgment.
Similarly, revised FRBP 7012(b) eliminates the need for a defendant to admit or deny an allegation that the proceeding is core or non-core. Instead, in both types of proceedings, a responsive pleading must state whether the party consents to entry of final orders or judgment.
Likewise, revised FRBP 9027(a)(1) and (e)(3) require that, when an action is removed to the bankruptcy court, the parties who have filed pleadings must state whether they consent to entry of final orders or judgment by the bankruptcy court, regardless of whether the proceeding is core or non-core.
Current FRBP 7016 simply provides that FRCP 16 applies in adversary proceedings. New FRBP 7016(b) also provides that a bankruptcy court must decide, on its own motion or a party’s timely motion, whether (1) to hear and determine the proceeding, (2) to hear the proceeding and issue proposed findings of fact and conclusions of law, or (3) to take some other action.
Current FRBP 3002.1 provides that, in chapter 13 cases, creditors whose claims are secured by the debtor’s principal residence must provide the debtor and the trustee notice of any changes in the periodic payment amount or the assessment of any fees or charges during the bankruptcy case. Revised FRBP 3002.1(a) provides that, unless the court orders otherwise, the notice requirements cease to apply when an order terminating or annulling the automatic stay becomes effective with respect to the residence that secures the claim.
FRAP 26(c) provides that when a party may or must act within a specified time after being served, 3 days are added to the period unless the paper is actually delivered on the date stated in the proof of service. Currently, a paper served electronically is not treated as having been delivered on the date stated in the proof of service. Under revised FRAP 26(c), a paper served electronically is treated as having been delivered on the date stated in the proof of service.
However, practitioners should be aware that the Ninth Circuit’s Circuit Rule 26-2 (adopted in 2009) provides that “[t]he 3-day service allowance provided by FRAP 26(c) applies to documents served by the Appellate CM/ECF system pursuant to Circuit Rule 25-5.” According to a recent Ninth Circuit notice, Circuit Rule 26-2 will remain in force notwithstanding revised FRAP 26(c).
Current word limits are based on an estimate of 280 words per page. Responding to concerns about the length of appellate briefs, the conversion ratio is being reduced to 260 words per page. However, as noted below, the Ninth Circuit has adopted new local rules which maintain the current word limits.
Under revised FRAP 32(a)(7), in an appeal not involving cross-appeals, the appellant’s and appellee’s principal briefs must not exceed 13,000 words (down from 14,000), and the appellant’s reply brief must not exceed 6,500 words (down from 7,000).
Similarly, under revised FRAP 28.1(e), in an appeal involving cross-appeals, the appellant’s principal brief must not exceed 13,000 words (down from 14,000), the appellee’s principal and response brief must not exceed 15,300 words (down from 16,500), the appellant’s response and reply brief must not exceed 13,000 words (down from 14,000), and the appellee’s reply brief must not exceed 6,500 words (down from 7,000).
These changes also affect the word limits for amicus briefs addressing the merits of an appeal, which are limited to one half of the length set by the rules for a party’s principal brief. Also, under new FRAP 29(b), which applies to amicus briefs addressing whether the court should grant a panel rehearing or rehearing en banc, such amicus briefs are limited to 2,600 words.
However, by local rule or order in a particular case, a court of appeals may accept documents that do not satisfy these length limits. The Ninth Circuit has adopted new local rules, effective December 1, 2016, which “opt out” of the proposed reductions and maintain the existing word limits for briefs (http://bit.ly/2g3Ipnl).
These rules are revised to impose word limits instead of page limits when filers produce certain motions and petitions using a computer. However, as noted below, the Ninth Circuit has adopted new local rules which effectively maintain some of the current page limits.
Current FRAP 27(d) generally provides that a motion or a response to a motion must not exceed 20 pages, and a reply must not exceed 10 pages. Under revised FRAP 27(d), motions and responses to motions produced using a computer must not exceed 5,200 words, and replies produced using a computer must not exceed 2,600 words.
Current FRAP 35(b) provides that a petition for an en banc hearing or rehearing must not exceed 15 pages. Similarly, current FRAP 40(b) provides that a petition for a panel rehearing must not exceed 15 pages. Under revised FRAP 35(b) and 40(b), such petitions produced using a computer must not exceed 3,900 words.
However, the Ninth Circuit’s revised Circuit Rule 40-1(a) provides that a petition for a panel rehearing or rehearing en banc, and any answer, may not exceed 15 pages unless it contains no more than 4,200 words.
In 2014, many rules in Part VIII of the FRBP were revised to mirror the FRAP. For example, like current FRAP 32(a)(7), FRBP 8015(a)(7) provides for type-volume limitations of 14,000 words for principal briefs and 7,000 words for reply briefs. When the Judicial Conference Committee on Rules of Practice and Procedure proposed to reduce the word limits in the FRAP, it did not propose reductions to the corresponding word limits in the FRBP.
The Advisory Committee on Bankruptcy Rules recently submitted proposed amendments to bring Part VIII of the FRBP into conformity with the pending amendments to the FRAP. The public comment period for the proposed amendments to Part VIII started on August 15, 2016, and will end on February 15, 2017. Assuming that these proposals follow the usual course, they are on track to become effective December 1, 2018.
Like FRBP 9006(f) and FRAP 26(c), FRCP 6(d) is revised so that the 3-day rule does not apply when a party is served by electronic means under FRCP 5(b)(2)(E).
These materials were written by John N. Tedford, IV, of Danning, Gill, Diamond & Kollitz, LLP, in Los Angeles, California (jtedford@dgdk.com). Editorial contributions were provided by Kyra E. Andrassy of Smiley Wang-Ekvall, LLP in Costa Mesa, California.
Last December, in United States v. Martin (In re Martin), 542 B.R. 479 (9th Cir. BAP 2015), the U.S. Bankruptcy Appellate Panel of the Ninth Circuit rejected recent circuit court decisions holding that an untimely Form 1040 is not, by definition, a “return” for purposes of determining whether a tax debt is dischargeable. The BAP instead ruled that a court must examine the totality of the circumstances to determine whether the purported return was “an honest and reasonable attempt to satisfy the requirements of the tax law.” To read the full published decision, click here: http://1.usa.gov/1JziPUx.
When the BAP issued its ruling in December, this issue was already pending before the U.S. Court of Appeals for the Ninth Circuit. On July 13, 2016, in Smith v. IRS (In re Smith), 828 F.3d 1094 (9th Cir. July 13, 2016), the Ninth Circuit declined to rule on the question of whether an untimely Form 1040 filed after an assessment can ever be a “return” for dischargeability purposes. Instead, based on the facts of the case, the Ninth Circuit agreed with the lower court’s determination that the debtor had not made an honest and reasonable attempt to satisfy the requirements of the tax law. To read the full published decision, click here: http://bit.ly/2bUkKrf.
(4) the taxpayer must execute the return under penalty of perjury.
In 2005, BAPCPA added a “hanging paragraph” at the end of section 523(a). For purposes of section 523(a), “the term ‘return’ means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements). Such term includes a return prepared pursuant to section 6020(a) of the Internal Revenue Code of 1986, or similar State or local law, or a written stipulation to a judgment or a final order entered by a nonbankruptcy tribunal, but does not include a return made pursuant to section 6020(b) of the Internal Revenue Code of 1986, or a similar State or local law.” 11 U.S.C. § 523(a) (emphasis added).
(4) under the “No-Time-Limit Approach,” whether a document evinces an honest and genuine attempt to satisfy the tax laws depends on its form and content, not on when it is filed.
There is also a fifth approach – one favored by the IRS – which does not appear to have been adopted by any court.
In Martin, the debtors did not timely file Form 1040s for 2004, 2005 or 2006. The IRS issued a notice of deficiency, at which point the debtors hired an accountant to prepare their tax forms. The accountant completed and signed the Form 1040s in late 2008, but the debtors did not get around to signing and filing them until six months later. Unfortunately for the debtors, the IRS made assessments, and started sending notices of the unpaid taxes, a few months before their Form 1040s were filed. After the debtors filed their Form 1040s, the IRS accepted the Form 1040s and adjusted their tax liability based on the information set forth therein.
A few years later, the debtors filed for bankruptcy and filed a complaint seeking a determination that their tax debt was dischargeable. The IRS argued that the debt was nondischargeable merely because the debt recorded by its assessment was not one with respect to which a return had been filed (this is the “IRS Approach”).
The bankruptcy court rejected the IRS Approach, adopted the No-Time-Limit Approach represented by the Eighth Circuit’s decision in In re Colsen, 446 F.3d 836 (8th Cir. 2006), and entered summary judgment in favor of the debtors. The IRS appealed.
The BAP concluded that (at least as to federal tax returns) the hanging paragraph effectively codified the Beard test applied by courts prior to BAPCPA, except with certain enumerated exceptions not relevant to the appeal. Therefore, the BAP examined the Ninth Circuit’s pre-BAPCPA adoption and application of the Beard test in In re Hatton, 220 F.3d 1057 (9th Cir. 2000).
According to the BAP, the Ninth Circuit held in Hatton “that we should use [the] version of the Beard test [adopted by the Sixth Circuit in In re Hindenlang, 164 F.3d 1029 (6th Cir. 1999)] . . . to determine whether the [debtors’] untimely tax returns qualify as tax returns for nondischargeability purposes.” However, according to the BAP, the Ninth Circuit in Hatton did not actually adopt the Post-Assessment Approach adopted by the Sixth Circuit in that case. Instead, based on how the Ninth Circuit analyzed the facts, the BAP concluded that the Ninth Circuit followed a Totality-of-the-Circumstances Approach.
In Smith, the debtor did not timely file a Form 1040 for 2001. The IRS issued a notice of deficiency in 2006, which the debtor did not contest. Instead, in 2009, the debtor filed a Form 1040 which purported to replace the “Substitute for Return” previously prepared by the IRS based on information it gathered from third parties. The debtor’s Form 1040 actually reported a higher income than that previously calculated by the IRS, thereby increasing his tax liability.
After some time, the debtor filed for bankruptcy and sought to discharge his 2001 tax liability. The question was whether the amount originally assessed by the IRS was dischargeable. The bankruptcy court ruled that it was. However, the district court reversed, adopting the Totality-of-the-Circumstances Approach. In re Smith, 527 B.R. 14 (N.D. Cal. 2014). The debtor appealed.
The Ninth Circuit did not expressly rule in favor of any one particular approach, but it acknowledged Hatton as binding precedent for these situations. The panel expressly declined to decide whether a Form 1040 filed after the IRS makes an assessment can be a “return” for purposes of section 523(a) pursuant to the Post-Assessment Approach, and it passed on deciding the merits of the IRS Approach. The court also did not consider, at least expressly, the One-Day-Late Approach or the No-Time-Limit Approach. Instead, the court looked at the facts and determined that, in light of the amount of time the debtor waited to file his Form 1040, his “belated acceptance of responsibility” was not an honest and reasonable attempt to comply with the tax code, and therefore his Form 1040 did not qualify as a return for purposes of section 523(a)(1).
In light of Smith, courts in this circuit will likely follow either the Post-Assessment Approach (a Form 1040 is not a return if it is filed after the IRS makes an assessment) or the Totality-of-the-Circumstances Approach (courts must take into account not just the timing of the tax filing, but also any evidence of the debtor’s good faith attempts to comply with the tax laws). Courts following the latter approach will examine the number of missing returns, the length of the delay, the reasons for the delay, and any other circumstances reasonably pertaining to the honesty and reasonableness of the debtor’s efforts.
However, in the author’s view, the No-Time-Limit approach is correct. This is the approach adopted by the Eighth Circuit in Colson (a pre-BAPCPA case applying the Beard test) and by Judge Lee in Martin. See In re Martin, 508 B.R. 717 (Bankr. E.D. Cal. 2014). Based on the legislative history of the hanging paragraph, the origins of the Beard test, the Supreme Court’s decision in Badaracco v. Commissioner of Internal Revenue, 464 U.S. 386 (1984) (even if a Form 1040 is admittedly fraudulent, it is still a “return” unless the fraud is evident from the face of the document), and the existence of section 523(a)(1)(C), the author believes that whether a document evinces an honest and genuine attempt to satisfy the tax laws depends on its form and content, not on when it is filed.
This does not mean that dishonest debtors are off the hook. Under section 523(a)(1)(C), a tax debt will not be discharged if the debtor filed a “fraudulent return,” or if the debtor “willfully attempted in any manner to evade or defeat such tax.” The number of missing returns, the length of delay in filing returns, the reasons for such delay, and other circumstances pertaining to the honesty and reasonableness of the debtor’s efforts should be considered in connection with this inquiry under section 523(a)(1)(C). But they should not be considered when determining whether a Form 1040 constitutes a “return” for purposes of section 523(a)(1).
Given the split among the circuits regarding the proper interpretation of the word “return” in section 523(a), this issue seems ripe for Supreme Court review. The debtor in Smith filed a petition for certiorari on October 11, 2016, and responses to the petition are due in mid-November. Martin actually would be a better vehicle for Supreme Court review, but since Martin was remanded for further fact-finding that case cannot reach the Supreme Court anytime soon.
These materials were written by John N. Tedford, IV, of Danning, Gill, Diamond & Kollitz, LLP, in Los Angeles, California (jtedford@dgdk.com). Editorial contributions were provided by Michael T. O’Halloran of the Law Office of Michael T. O’Halloran in San Diego, California.
Danning-Gill partner Uzzi O. Raanan has co-authored Insolvency Law Committee (ILC) eBulletin profile of United States Bankruptcy Judge Thomas B. Donovan (October 12, 2016).
This publication is in downloadable PDF form.

References: v. 
 § 341
 § 507
 v. 
 v. 
 v. 
 § 704
 v. 
 § 522
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 § 523
 v.