11th Circuit Rules on Section 1146(c) Stamp-Tax Exemption Issue

On April 18, 2007, the 11th Circuit Court of Appeals issued its decision in In re Piccadilly Cafeterias, Inc., Case No. 06-13759, which was on appeal from the U.S. District Court and the U.S. Bankruptcy Court for the Southern District of Florida. The issue presented was whether the Section 1146(c) stamp-tax exemption may apply to asset transfers made before a Chapter 11 bankruptcy reorganization plan is confirmed.

In this case, the debtor executed an asset purchase agreement before the Chapter 11 bankruptcy case was filed. Subsequently the debtor filed a section 363 motion requesting authorization to sell substantially all of its assets outside of the ordinary course of business and also requested that the bankruptcy court conduct an auction through which the highest bidder would be entitled to purchase the involved assets. As part of the proceedings, the debtor requested an exemption from stamp taxes on the asset sale. The Florida Department of Revenue (“DOR”) objected. The Bankruptcy Court held that the sale was exempt from stamp taxes pursuant to section 1146(c). Subsequently, the debtor filed its Chapter 11 Plan. The bankruptcy court confirmed the debtor’s Amended Plan.

The DOR filed an adversary proceeding seeking a declaration that the transaction was not exempt from stamp taxes under section 1146(c). The bankruptcy court granted summary judgment in favor of the debtor. The bankruptcy court reasoned that the sale of substantially all of the debtor’s assets was a transfer “under” its confirmed plan because the sale was necessary to consummate the plan. The district court affirmed the bankruptcy court.

Section 1146(c) (per BAPCPA re-designated as section 1146(a))exempts from stamp or similar taxes any asset transfer “under a plan confirmed under” section 1129. The 11th Circuit Court of Appeals noted that the Third and Fourth Circuit had previously held that the 1146(c) exemption may not apply to pre-confirmation transfers. The Court noted that although it had yet to squarely address the issue, it addressed a somewhat similar issue involving section 1146(c) in In re T.H. Orlando Ltd., 391 F.3d 1287, 1291 (11th Cir. 2004). That case involved a transaction between two non-debtors that was specifically contemplated by the confirmed chapter 11 plan. The court concluded that “[a] transfer ‘under a plan’ refers to a transfer authorized by a confirmed Chapter 11 plan.” Accordingly the court in T.H. Orlando Ltd. held that the phrase “under a plan refers to a transfer that is necessary to the consummation of a confirmed Chapter 11 plan”.

The court followed the T.H. Orlando Ltd. construction that the phrase “under a plan confirmed” looks not to the timing of the transfer but to the necessity of the transfer to the consummation of a confirmed Chapter 11 plan. The court reasoned that the plain language of section 1146(c) is ambiguous as the statute can plausibly be read to describe eligible transfers to include transfers regardless of when the plan is confirmed or as the DOR argued, to impose a temporal restriction on when the confirmation of the plan must occur. Furthermore, the court reasoned that when Congress wanted to place a temporal restriction in the Bankruptcy Code, it did so expressly–which it did not do in section 1146(c). The Court also reasoned that a strict temporal construction of section 1146(c) would ignore the practical realities of Chapter 11 reorganization cases.

In short, the court held that “section 1146(c)’s tax exemption may apply to those pre-confirmation transfers that are necessary to the consummation of a confirmed plan of reorganization, which at the very least, requires that there be some nexus between the pre-confirmation sale and the confirmed plan.” The court emphasized that the issue of whether the section 1146(c) tax exemption properly applied to the asset sale in this case was not properly before the court and it did not decide the issue. The court left “for another day an attempt to set forth a framework for determining the circumstances under which section 1146(c)’s tax exemption may apply to pre-confirmation transfers”.

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983

After Surveying the Major Rationales of Prior Cases, Court Allows Expense Deduction for Paid Off Vehicles for Over-Median Income Chapter 13 Debtors

Judge Pamela Pepper recently issued a lengthly decision involving a hot topic under BAPCPA — the issue of the allowability of the Local Standard’s vehicle ownership deduction in the calculation of the projected disposable income for an above-median income debtor when the vehicle is paid off. In re Sawdy, ___ B.R. ___, 2007 WL 582535 (Banktcy. E.D. Wis.). The debtors contended that they were allowed to take the vehicle ownership deduction while the Chapter 13 Trustee disagreed. Pursuant to the case of In re Mendenahll, 54 B.R. 44 (W.D.Ark. 1985), the Court held that the Trustee as the objecting party held the burden of persuading the Court that the debtors should not be allowed to deduct the ownership expenses.

The Court noted that two distinct lines of decisions have emerged on the presented issue. The Court noted that several courts have held that a debtor cannot deduct an ownership expense for a vehicle he owns free and clear in both the chapter 13 and 7 contexts. See In re Hardacre, 338 B.R. 718 (N.D.Tex.2006), In re McGuire, 342 B.R. 608 (Bankr.W.D.Mo. 2006), and In re Barraza, 346 B.R. 724 (Bankr.N.D.Tex.2006). The Court also noted that a similar number of courts have come to the opposite conclusion in both the chapter 13 and 7 contexts, deciding that regardless of whether a debtor actually has a note or lease payment, that the debtor may deduct the vehicle ownership expense. See In re Wilson, 356 B.R. 114, (Bankr.S.Del.2006) and In re Hartwick, 352 B.R. 867 (Bankr.D.Minn.2006) The Court went on to “attempt to tease from both groups of decisions the major rationales which support them, and to analyze those rationales to determine if they are persuasive in this case.”

The Court first examined the “plain meaning” doctrine, which both lines of cases rely on. The Court noted that if the meaning of the statutes was “plain, clear, and unambiguous, then how could six court have interpreted it one way and five courts have interpreted it in exactly the opposite way?”. The Court noted that it was skeptical of the usefulness of the “plain meaning” doctrine as a tool of statutory interpretation in analyzing the statutory language at issue. The Court further noted that two courts found the statutory language to have the same meaning, but for different reasons. What made the language clear to one court was not what made it clear to the other. The Court noted a similar pattern in the cases that reached the opposite conclusion.

The Court also found that the “unfair result” rationale can provide support for either line of decisions.

The Court next examined the “ownership/liability” distinction rationale. That is which debtors are entitled to deduct an “ownership expense?” or in other words “what makes a debtor a vehicle “owner”. Does the vehicle actually have to be titled in one’s name or can one take a deduction for a car one uses and pays for even though it is not titled in one’s name? The Court noted that neither the BAPCPA nor the IRS Local Standards Chart provide any guidance in answering this question.

The “policy” rationale was next examined and the Court also found that policy interests can support either line of decisions.

Next, the Court examined the “applicable vs. actual” rationale. Here the Court reviewed the Fowler decision by the Delaware Court that discussed that the expenses for the categories of expense listed in the National and Local Standards are to be the “applicable” monthly expenses specified while for the Other Necessary Expenses, they were to be the debtor’s “actual” expenses. In re Fowler, 349 B.R. 414 (Bankr.D.Del.2006). The point being that where Congress used the word “actual” it meant for the debtor to deduct only the amount the debtor actually paid, but where Congress used the word “applicable”, it meant something other than the “actual” payment the debtor has to make each month. But the Court noted that this begs the question of what Congress mean by the word “applicable?”.

The Court noted that the Fowler court concluded as did Chief Judge Wedoff in his article Means Testing in the New World - that by the use of “applicable”, Congress meant to allow the above-median debtor to claim the Local Standard expenses as “fixed allowances”, whether the debtor made lower-or no-actual payment in those categories. The Court noted that this decision was buttressed for the Fowler court, by the fact that Congress did not import into the involved statute certain language from the referenced Internal Revenue Manual that set the Local Standards as a cap. Judge Pepper stated that this rationale provide compelling support for the debtor’s argument that the above-median income debtor is allowed a flat ownership deduction, regardless of whether they have an actual car payment expense or not.

Finally, the Court review the reliance on IRS materials rationale. That is, several of the Courts which did not allow debtors with paid off vehicles the ownership deduction reached their decisions by referencing certain materials promulgated by the IRS. The Court found that it is not appropriate to look to the IRS materials to interpret the word “applicable.”

The Court concluded that the debtors are entitled to deduct on their Form B22C the IRS Local Standard expense amount for vehicle ownership even though they own their vehicle outright and do not make monthly note or lease payments. The Court based its decision on the use of the word “applicable” instead of the word “actual” and second that Congress considered, but did not import certain language from the IRS materials.

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983

Kibbe 1st Circuit BAP Decision – Chapter 13 "Projected Disposable Income"

On February 20, 2007, the 1st Circuit BAP issued its decision in the Kibbe case. In re Kibbe, ___ B.R. ___, 2007 WL 512753 (1st Cir. BAP (N.H.)). The issue in the case involved the income component of the “projected disposable income” calculation under section 1325(b)(1)(B).

The Debtor’s present income was substantially higher than it was during recent 6 month period prior to filing. This below-median income Debtor sought to calculate the amount required to be paid in her Chapter 13 plan to unsecured creditors based on her Current Monthly Income (“CMI”) as per section 1325(b)(2). CMI is based on the historical earnings during the 6 month period prior to filing for bankruptcy per Section 101(10A). The Chapter 13 Trustee objected and argued that the calculation of the projected disposable income should be determined by the Debtor’s actual income as set forth in Schedule I and that the income should not be irrevocably set in the calculation of CMI as set forth in Form B22C.

The BAP Court noted that the BAPCPA did not define the term projected disposable income. It also noted that the the CMI is based on historical income while the term projected disposable income is forward-looking. It further noted that “disposable income” as used in section 1325(b)(2) is based on CMI which is not necessarily reflected of the current income of the debtor.

The BAP Court further noted that this apparent inconsistency within the term “projected disposable income” has produced two competing interpretations. One camp construes that “projected” simply means that the CMI figure Form B22C must be multiplied (projected out) by the number of months of the proposed plan. See In re Barr, 341 B.R. 181 (Bankr. M.D.N.C. 2006). The second camp holds that the term “projected” was intended to signal a reexamination of income potential over the life of the plan with the consequence that “disposable income” and “projected disposable income” have very different meanings. See In re Hardacre, 338 B.R. 718 (Bankr.N.D. Tex.2006).

In its discussion, the BAP pointed out that Congress intended to exclude certain categories of income when it defined “disposable income” in general and more specifically in the Chapter 13 context. Not to be included are, inter alia, benefits under the Social Security Act per section 101(10A)(B) and child support, foster care, or disability payments for a dependent child to the extent reasonably necessary to be expended for the child per section 1325(b)(2). The Court stated that these “Income Exclusions” are included in the income calculation set forth in Schedule I and that therefore Schedule I, without modification, is not an accurate measure of the new “disposable income” definition of section 1322(b)(2).

The BAP agreed with the Kibbe Bankruptcy Court that “projected disposable income” must be grounded in the Debtor’s anticipated income (less the noted “Income Exclusions”). The Court held that Form B22C must at least be the starting point for the determination of “projected disposable income”. If the debtor’s CMI is substantially the same as the actual current income (less the “Income Exclusions”) at the time of the confirmation of the plan the inquiry begins and ends with Form B22C. But where the CMI amount is not the same as the debtor’s actual current income (less the “Income Exclusions”), the courts should assume that Congress intended that they rely on what a debtor can realistically pay to his creditors through their plan and not on any “artificial measure”. The Court held that the income component of “projected disposable income” is the anticipated actual income of the Debtor, subject to the “Income Exclusions” during the plan commitment period. Where the debtor’s income at confirmation or as reasonably anticipated for the plan commitment period is materially different from the debtor’s “disposable income” the court must depart from the Form B22C calculation.

The Court noted that the figures set forth in Schedule I may also not be determinative as they ignore the new statutory definition of the term “disposable income” and also fail to account for reasonably anticipated changes in the debtor’s circumstances after the petition date. If the circumstances are that neither Form B22C nor Schedules I (less the “Income Exclusions”) and J accurately portray the debtor’s income projected over the plan commitment period, the Bankruptcy Court must make a fact-based determination at the time of confirmation.

The Court noted in footnote 11, that the ambiguities, if any, in the calculation of allowable expenses for the above or below-median income debtors were not before the Court.

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983

Copies of Closed Bankruptcy Case Files Available from Court’s Archives

You may order copies of your closed bankruptcy case file from the Court’s archives which are kept at the National Archives and Records Administration (NARA). The archives for the Bankruptcy Court for the Southern District of Florida which includes Miami are kept at the NARA’s Southeast Region location in Atlanta.

You may order copies of case files by mail or fax by use of Form 90 which is available at the National Archive’s website at www.archives.gov. You may also place your order online.

In order to place this order you will need the name of city in which the court is located and the case file number. You will also need to obtain the following from the Clerk of the Court: the transfer number, the location number, and the agency box number. These may be obtained for those case filed in the Southern District of Florida by calling the Bankruptcy Court’s Clerk in Miami at (305) 714-1800.

You may order the entire contents of the case or a package of selected documents which contains the most commonly requested documents. You may also order these documents as certified or non-certified copies. Certified copies may be necessary if you desire to record them in the County’s public records. Orders can be sent to you by overnight delivery for an extra charge or fax if the page count is less than 25 pages.

For further information you may contact the NARA at (404) 736-2900 or visit its websiteat www.archives.gov

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983

US Supreme Court Rules in Allocation of Attorney’s Fees Case

On March 20, 2007, the US Supreme Court issued its decision in Travelers Causalty & Surety Co. of America v. Pacific Gas & Electric Co., ___ US ___ (2007) which was before the Court on a writ of certiorari from the 9th Circuit Court of Appeals. The issue before the Court was “whether federal bankruptcy law precludes an unsecured creditor from recovering attorney’s fees authorized by a prepetition contract and incurred in postpetition litigation.” The 9th Circuit Court of Appeals had held that such fees are categorically prohibited to the extent the litigation involves issues of federal bankruptcy law. The US Supreme Court disagreed and vacated the lower Court’s decision.

In the bankruptcy case, Traveler’s filed a proof of claim that included an amount to recover its attorney’s fees incurred in connection with PG&E’s bankruptcy proceedings. The Bankruptcy Court agreed with PG&E, that Traveler’s was not entitled to recover attorney’s fees incurred while litigating issues of bankruptcy law. The District Court agreed relying on In re Fobian, 951 F.2d 1149 (9th Cir. 1991) which held that “where the litigated issues involve not basic contract enforcement questions, but issues peculiar to federal bankruptcy law, attorney’s fees will not be awarded absent bad faith or harassment by the losing party.” The 9th Circuit Court of Appeals affirmed.

The US Supreme Court explained that under the American Rule, the prevailing litigant is ordinarily not entitled to collect attorney’s fees from the loser, unless this rule is overcome by statute or by an enforceable contract allocating attorney’s fees. The Court held that an otherwise enforceable contract is allowable in bankruptcy except where the Bankruptcy Code provides otherwise. The Court further held that the Bankruptcy Code does not disallow a contract-based claim for attorney’s fees based solely on the fact that the fees in issue were incurred litigating issues of bankruptcy law. The Court stated that the Fobian rule has no support in the Bankruptcy Code either in section 502 (which is the section dealing with the allowance and disallowance of claims) or in any other code section.

The Court expressed no opinion whether following the demise of the Fobian Rule, other principles of bankruptcy law may provide an independent basis for disallowing the involved attorney’s fees claim. One such argument not addressed by the Court as it was not raised in the Courts below was whether section 506(b) by explicit negation disallows unsecured claims for contractual attorney’s fees. In short, the Court’s holding was a narrow repudiation of the Fobian rule, leaving open the broader question of whether unsecured creditors can collect post-petition attorney’s fees.

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983