Decisions of 2003



Berner, Chapter 7, Reconversion to Chapter 13, Bad Faith, March 18, 2003

Case no. 02-51079

The Debtors filed a motion to reconvert this case back to Chapter 13 on February 7, 2003. Debtors’ motion and supporting brief contend argue that they have moved to North Carolina and improved their financial circumstances to the point that they now can make a reasonable payment to a Chapter 13 Plan. They contend that seeking to reconvert is not bad faith simply because of the existence of a pending dischargeability proceeding.

The Court agrees that a determination of the Debtors’ good faith is the central issue presently before the Court. In determining whether a petition or plan is filed in good faith the court must review the "totality of the circumstances" . The first Leavitt factor is whether the Debtors misrepresented facts in their petition or plan, unfairly manipulated the Code, or otherwise filed their petition or plan in an inequitable manner. The Court finds that Netteberg satisfied his burden of proof to show that the first Leavitt factor shows some evidence of bad faith. The Court finds that the Debtors misrepresented facts in their Schedules when they failed to list the Interstate trailer valued at $4,500 from their Schedule B, and when they mislabeled the $12,000 "cash on hand" which was actually on deposit in a savings account at Wells Fargo. More troubling is Debtors’ admission that they filed their motion to reconvert because of this Court’s Order in Adversary No. 02/00127, which is discussed in more detail below. This constitutes some evidence upon which the Court may make a finding of bad faith under the third Leavitt factor. The final Leavitt factor is whether egregious behavior is present. The Court finds evidence of egregious behavior in Debtors’ admissions that they filed the instant motion to reconvert as a result of the adverse decision rendered in Adversary Proceeding No. 02/000127.

The Debtors had an opportunity to confirm a Chapter 13 before they converted to Chapter 7. They made only a single $100 payment while in the previous Chapter 13. The Court does not deem it appropriate to allow Debtors another chance under Chapter 13 discharge given their conduct in this case. Measuring these circumstances in Chapter 13 versus the Debtors’ assertions that they can pay creditors in a Chapter 13, this Court concludes the exercise of its discretion which will most inure to the benefit of all parties in interest8 is to deny Debtors’ motion to reconvert and allow the Chapter 7 Trustee to administer the estate.

In re Berner, March 18, 2003, Gregory E. Paskell for Berner, James H. Cossitt for Netteberg

2003 Mont.B.R 4

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Little, Exemptions, Stock Trailer, Pickup, March 18, 2003

Case no 02-11483, Adv. No. 02/00118

The Trustee, in his brief filed March 12, 2003, raises for the first time an argument that the Bank’s lien against the Trailer is avoidable under 11 U.S.C. § 544. As just noted, such argument was not previously raised in any of the pleadings and the Court will not allow the Trustee to raise the argument for the first time in his final brief, especially when the Trustee has not taken the initial step of moving for amendment of the pleadings under 15 F.R.Civ.P., applicable to this proceeding by virtue of F.R.B.P. 7015. The Trustee’s delay in raising the § 544 argument precludes both Debtor and the Bank from responding to the argument and thus, denies Debtor and the Bank due process. Accordingly, the Court declines to grant the relief requested by the Trustee under 11 U.S.C. § 544.

Notwithstanding the foregoing, the Court notes that following Debtor’s petition date, the Bank was subject to the automatic stay provisions of 11 U.S.C. § 362, and thus, its efforts to perfect its security interest in the Trailer, without first seeking relief from the automatic stay, rendered the perfection void. Schwartz, 954 F.2d at 572-73 (“any action in violation of the automatic stay is void and of no effect”). Thus, the Trustee prevails on his claim, to the extent that he seeks avoidance of the Bank’s lien on the Trailer--although not for the reasons stated by the Trustee in his Complaint. Because the Bank’s perfection of its security interest is void, the Bank was entitled to nothing more, on Debtor’s petition date, than an unsecured claim against the bankruptcy estate. Subsequent to the petition date, Debtor paid the Bank the entire amount owing on the Trailer debt and the Bank properly released its lien against the Trailer.

A  trailer clearly may serve as a tool of the trade and the agreed statement of facts specifically state that Debtor has the trailer at the back of  her place of business and uses the trailer for storing business inventory, and for the last two  weeks, Debtor has used the Trailer to haul building materials needed to remodel her place of  business. Thus, the Trustee agrees that Debtor uses the Trailer in her trade as a pet groomer.

Indeed, consistent with the “paperless transaction” theme of the revised Code, the revised Uniform Commercial Code eliminates the requirement of a debtor’s signature for both the security agreement and financing statement. For the security agreement, the signature requirement has been replaced with a requirement that the debtor “authenticate” the record of agreement. Mont. Code Ann. § 30-9A-203(2)(c)(I). The authentication requirement is satisfied if the debtor executes or adopts a symbol, or encrypts a record with the present intent to identify him or herself and “adopt, accept, or establish the authenticity of a record or term.” Mont. Code Ann. 30-9A-102(g). It is also true, however, like former law, that the security  agreement must “create or provide for” a security interest, § 30-9A-102, and must provide a description of the collateral. Clearly, these provisions are satisfied in this case where the Pickup title and Notice of Lien Filing describe specifically the Pickup and create a security interest in favor of the Bank as agreed by the parties. For the reasons discussed above, the Court finds that the Bank had a properly perfected security interest in the Pickup and as a consequence, the Trustee’s attempt to avoid the Bank’s security interest in the Pickup fails.

In re Little, Womack v. Little, March 18, 2003, Joseph V. Womack, Trustee

2003 Mont.B.R. 2

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Schlerhr, Young, Jarvar and Hayes, Chapter 13, Student Loans, Fees and Costs

Case Nos. 00-42503, 01-41649, 01-52327, 01-22835

ECMC admits that it has not filed any application for approval of its collection costs under F.R.B.P. 2016. Fisher explained that ECMC’s position is that its collection costs do not include any attorney’s or professional fees or any type of professional expenses. ECMC contends that the Trustee relies on 11 U.S.C. § 506(b) case law governing attorney’s fees for oversecured creditors which it argues is inapposite, and that Rule 2016 was not intended to apply and does not apply to prepetition collection costs calculated under nonbankruptcy law. ECMC submits that its collection costs are calculated under mandate of federal regulations, with "notice to the whole world", and at a rate less than the DOE charges. ECMC argues that the statute and regulations give it the "right to payment" of its prepetition collection costs as part of its "claim" under 11 U.S.C. § 101(5)(A). ECMC requests that the Trustee’s objections to its Proofs of Claim be denied because he has not met his burden of showing that its collection costs are unreasonable or not in compliance with Bankruptcy Code or Rules.

The Trustee does not object to allowance of the student loan principal and interest components of ECMC’s claims, many of which were listed in the Debtors’ Schedules. Any missing promissory notes which formed the basis of the Trustee’s objections were admitted into evidence as Ex. H-1, S-1, S-2, S-3 and S-4. Moreover, a guaranty agency is required to charge a borrower the collection costs provided in 34 CFR § 682.410(b)(2), whether or not provided for in a borrower’s promissory note. Therefore, ECMC’s four Proofs of Claim are given prima facie effect of their validity and amount by Rule 3001(f), including the collection costs, thereby placing the burden of proof upon the Trustee to come forward with sufficient evidence and "show facts tending to defeat the claim by probative force equal to that of the allegations of the proofs of claim themselves."

The Trustee argues that § 1091a(1) should be read in conjunction with § 506(b) and Rule 2016 to give effect to both statutes and the Rule. The Court declines to analyze ECMC’s claims for collection costs under case law construing § 506(b), because that section addresses fees and costs allowed to oversecured creditors. ECMC is not an oversecured creditor in these four cases.  Each of its Proofs of Claim assert unsecured claims. Further, the evidence is uncontroverted that ECMC’s collection costs in these cases do not include attorney’s fees or costs, either for inside counsel or outside counsel. The evidence is uncontroverted that ECMC’s collection costs were computed in accordance with applicable federal regulations and include no postpetition fees or costs. The Trustee complains that ECMC keeps no individual time records, but the uncontroverted evidence shows that a system which tracks individual time and expenses for each case would be onerous and result in far higher charges to defaulting student loan debtors.

In re Schlerhr, Young, Jarvar and Hayes, January 31, 2003, Robert Drummond Trustee, Steven M. Johnson for ECMC

2003 Mont,B,R, 1

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Young, Stay Violation, Motion to Dismiss, May 29, 2003

Case no 01-41460

The Debtor contends that DLI willfully violated the stay by withholding her UI benefits, which she claims are earnings and property of the estate, after the petition date, and requests damages in the sum of $465 plus attorney’s fees and costs for bringing her motion for sanctions and opposing DLI’s motion to dismiss. Debtor argues that she defaulted in her plan payments resulting in dismissal because DLI denied her UI benefits in October of 2002, in violation of the stay provided under 11 U.S.C. § 362(a)(1), by continuing an administrative action without moving to lift the stay. DLI responds that the "police power" exception to the automatic stay of § 362(b)(4)9 applies, and that its disqualification of the Debtor from receiving UI benefits. was a valid exercise of its police power since it imposed a time penalty pursuant to state law, and did not collect the overpayment by offset against Debtor’s UI benefits. Because the police power exception applies, DLI argues, the Debtor is not entitled to an award of sanctions under § 362(h) for violation of § 362(a)(1).

Because the Debtor was disqualified from receiving UI benefits under the above state law, she never "acquired" the post-petition UI benefits, the evidence shows none were paid to her and no offset was applied against them, and therefore such benefits do not constitute earnings for services performed under § 1306(a), or otherwise constitute property of the estate; and the DLI’s exercise of the administrative penalty period to disqualify the Debtor from receiving UI benefits was not an act against property of the estate or to collect or recover a prepetition claim against the Debtor. The Ninth Circuit in In re Berg, 230 F.3d 1165, 1167 (9th Cir. 2000), discussed the two tests used to determine whether the § 362(b)(4) exception applies – the "pecuniary purpose" test and the "public policy" test, quoting In re Universal Life Church, 128 F.3d 1294, 1297 (9th Cir.1997): "Under the pecuniary purpose test, the court determines whether the government action relates primarily to the protection of the government's pecuniary interest in the debtor's property or to matters of public safety and welfare. If the government action is pursued solely to advance a pecuniary interest of the governmental unit, the stay will be imposed. The public policy test ‘distinguishes between government actions that effectuate public policy and those that adjudicate private rights.’"

The Ninth Circuit BAP described the relevant inquiry under the pecuniary purpose test is whether the action is being pursued "solely to advance a pecuniary interest of the governmental unit," in which case the stay will be imposed. Such actions have been described as those that would "result in an economic advantage to the government or its citizens over third parties in relation to the debtor's estate." The evidence shows that DLI disqualified the Debtor for 24 weeks under § 39-51-3201(1)(a). Ex. A, D. However, the evidence also shows that the DLI did not offset Debtor’s UI future benefits for the period in question in October of 2002. No UI benefits were offset because the Debtor was disqualified. The penalty actually imposed by the DLI was temporal, not monetary. Therefore, this Court finds and concludes that the primary purpose of the temporal penalty imposed by the DLI under § 39-51-3201(1)(a) was not pecuniary. If the DLI had acted solely to advance a pecuniary interest of the governmental unit it would have offset the Debtor’s future UI benefits against the overpayment to recover it, rather than disqualifying her for the temporal administrative penalty period. Instead, DLI disqualified the Debtor, and its only pecuniary advantage was receipt of the 2 payments pursuant to the confirmed Plan, under which it was bound along with the Debtor and other creditors under 11 U.S.C. § 1327(a).

In re Young, May 29, 2003, E. June Lord for Young, Brenda Wahler for DLI

2003 Mont.B.R. 3

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