 You're watching FJTN, the Federal Judicial Television Network. A federal judicial center program, Bankruptcy Law Update. Now, here is our moderator, Vice Dean Lawrence Ponaroff of Tulane University Law School. Hello and welcome to the first in a new series of Bankruptcy Law Update programs produced by the Federal Judicial Center here in Washington, D.C. The purpose of this and future programs in the series is going to be to look at the latest and what we think will be the most important developments in bankruptcy law. To do that, each time we'll gather a distinguished panel of judges and academics to provide their insights and analysis on this constantly changing area of practice. To prove my point, let me introduce today's panel, Names and Faces. I'm sure we'll be familiar to all of you. We have Judge William Houston Brown from the Western District of Tennessee, Professor David Epstein from the University of Alabama School of Law, Professor Bruce Markell from the University of Nevada, Las Vegas Law School, Judge Elizabeth Parris from the District of Oregon, and Judge Eugene Wiedoff from the Northern District of Illinois. Thank you all for being here. Also joining us later in the second part of the program will be Joseph Rubin from Congressman George Geekes' office. Mr. Rubin, of course, will be talking about the bankruptcy reform bill that will be developed by the House Senate Conference Committee soon to be named. But let's begin our discussion today by looking at another question, a Chapter 13 question, specifically the question of the post-confirmation Chapter 13 state. Judge Brown, there seems to be considerable disagreement in the case law and a lot of variation from practice to practice in the districts about whether or not the a state continues after confirmation or not. Courts have worked very hard to try to harmonize the seemingly inconsistent provisions of 1306 and 1327B. How does this issue arise and what are some of its implications? There certainly are differences in the way the courts look at this, and it typically arises in this type of situation. The debtor has gotten to a confirmed Chapter 13 plan and is making the plan payments as provided, but for whatever reason incurs some post-confirmation debt, often for taxes or perhaps even other debt, typically without any notice to anyone or without any permission or any inclusion of that debt in a modified plan, and of course then the post-confirmation creditor wants to collect if the debtor stumbles and doesn't make payments on that post-confirmation debt. There's some execution, garnishment, or some other effort to collect, which may certainly impede the debtor's ability to continue making the plan payments, and so the debtor may come back to court saying there's a violation of the automatic stay, there is some other problem that the creditor is creating with the completion of the plan payments, and the court's now faced with the issue of is there a bankruptcy estate that continued after confirmation? Is the automatic stay violated in any way? And basically the courts have taken views of some courts look at it as that the estate has been terminated in fact with confirmation. There is no property in the estate, in fact some courts say there's no estate after that point. I'm sorry, but in fact 1327B does say that unless your order provides otherwise the property does revest the debtor. That's the thing that those courts typically hang upon is that 1327 says that unless the plan or the order of confirmation provides otherwise the property vests back in the debtor upon confirmation. Other courts that say no the estate continues to be preserved in some form or amount look at the 1306 saying that no the property of the bankruptcy estate is expanded in Chapter 13 from the typical 541 definition to include assets, earnings, property that the debtor requires after confirmation. And Gene Wiedel for example in his Fisher opinion that is often cited as one of the leading cases of the case of the estate preservation approach says that very thing. Then of course that case got was appealed and on the appeal the district court in Fisher took the approach that is sometimes called the middle ground approach or the estate transformation approach saying that well there's some estate that continues but it partially terminated by vesting in the debtor but it was replenished or added to or created again with earnings that came into play after confirmation. If we take the estate termination view which apparently several districts do what happens as is not uncommon as you well know in Chapter 13 if the plan later fails and the debtor converts to a Chapter 7? That is obviously one of the concerns that many courts have dealt with is 348 was amended in the 94 code at 348 F that says that if the estate is if the debtor converts from 13 to 7 after confirmation typically if there are no bad faith issues then the estate that was in existence at the time of the filing of the case is the estate that in the converted case. But if the debtor converts in bad faith under 348 F the estate consists of the property at the time of the conversion. So if there is no estate that continues after confirmation how can 348 F have any effect? And that's one of the things that the gene we don't point it out and other courts have pointed out. Gene of course talked about the interesting two definitions that can be given to the word vesting. Vesting may mean certainly putting ownership title back in the debtor. So if you look at the state termination approach that's probably what you say vesting means. On the other hand vesting can also mean as Gene pointed out simply fixing the debtor's rights in the property to use it. We also know that even whatever approach you take that the debtor remains in possession of almost all property in the chapter 13 situations. In fact it's unusual for the debtor not to remain in possession. And so that's really what vesting may mean for the estate preservation courts or even those middle ground courts is that the debtor is simply getting total use of the property but for the benefit of creditors to make certain the plan is carried out. Yeah we know that meaning of vesting from retirement accounts or rights under a retirement plan vesting. You had interest before you have interest after it's just it became fixed in somewhere. Right that's correct. Well do you think this has implications for chapter 11 which has the identical language in 11 49 B or 11 41 B. There is the identical language in chapter 11 that unless the plan provides otherwise the property vests in the debtor. But a key difference of course in 11 and 13 is that in 11 the debtor is getting a discharge upon confirmation. In 13 the debtor is not receiving a discharge until completion of the plan payments. And again we have a post confirmation modification issue in chapter 13. If there's no estate how can the debtor if there is a modification of that confirmed plan then then how do you look at the best interest of creditors to see if in the modified plan the creditors are being treated as well as they would be in a chapter 7 liquidation if there's no estate. But the proponents of the estate termination often in the case is raise a policy argument which is that revesting in the sense of all rights and property back in the debtor facilitates the ability of the debtor to obtain new credit and that's helpful toward the ultimate financial rehabilitation of the debtor. It is clearly one of the policy arguments that courts for that estate termination approach adopt. Some of us may wonder is that a real benefit should it be encouraging debtors in chapter 13 to incur post confirmation debt. That certainly they may need to in many situations but we those of us on the bench obviously often see debtors incur post confirmation debt without any permission from the court or the chapter 13 trustee that was unnecessary debt and gets them into real trouble so sure maybe the debtor needs to incur some post confirmation debt but is that a strong enough argument to say we need the debtor to be incur able to incur that kind of debt when in fact any debt after confirmation is going to impair the debtor's ability if she is on a very tight budget as most 13 debtors are to pay not only plan payments but that post confirmation debt. Bill can we avoid those kinds of policy questions and even avoid the hard questions of interpretation of 1327b simply by plan provisions or provisions in the confirmation order is this a problem that can in essence go away through creative judging or creative lawyering? It can indeed in fact even those courts that adopt the state termination approach recognize of course that the code says unless the plan or the order of confirmation provides otherwise property revests in the debtor and so many courts the high volume chapter 13 courts especially may have put into their confirmation orders notwithstanding what a plan provision may be I think Gene's order says even if the plan provides otherwise your order says in confirmation the property does not vest in the debtor until what point? Well until the case ends or is converted or dismissed whichever comes first and that's basically the 1306 language you know I'm in this peculiar situation of having the opinion you talked about Bill being reversed and then having a binding seven circuit case. There's a problematic seven circuit you have to wrestle with it as far as I know it's only been adopted by the seven circuit up to this point. Right it's a case called in Ray Heath's and Bill's outline and it basically tells me that all that's in the estate after confirmation is what's necessary for the performance of the plan of course you have to make a determination as to what's necessary but it's not the property the debtor had before so because of the practical problems we talked about you know the desire to have the debtor able to come to court when there's a problem post petition we put in all of my confirmation orders not withstanding any provision of the plan to the contrary all property of the estate as specified by 11 USC sections 541 and 1306 shall continue to be property of the estate following confirmation and that seems to work take care of the problems. In my district I regularly hear objections if the debtor wants to have the property remain property of the estate I hear them from the trustee who's concerned about continuing to have some ownership interest in that property I hear them from the state who's concerned about collecting post petition support and post petition taxes and does not want to be slowed down by having to stop by the bankruptcy court on the way. Do you have any comments on those concerns? I do and you know I've heard them from my own trustees but I have to say that I disagree with the trustees I don't believe that in a chapter 13 case the trustee ever takes responsibility for the property of the estate the debtor is said to be in possession of property of the estate the trustee can't deal with it and what's more if there were a problem in this way if the trustee really was responsible for making sure the estate property was insured the trustee would have that responsibility at least from the filing of the case until the time of confirmation which could be a period of months. I don't think trustees are going to assume that kind of responsibility pre confirmation and they shouldn't have that responsibility post confirmation. The estate is in the responsibility of the debtor I believe both before and after confirmation. The other problem of post petition creditors being able to get easy access to the debtor's estate is precisely why I think we need to have the estate continue if someone like the creditor in my Fisher case the city of Chicago wanting to collect parking tickets can take the debtor's car tow it away crush it and dispose of it without ever letting the debtor or the bankruptcy court know anything about that the possibility of completing a chapter 13 plan can be greatly diminished on the other hand if they come into court and ask for relief from stay there's a possibility of having their post petition claim added to the plan or making some arrangement that they'd be paid after the plan is completed and provide adequate protection in the meantime so there are ways that the claim can be dealt with while keeping the chapter 13 going for everybody's benefit except in that case Jean aren't you you're treating your paradigm of post confirmation creditor is the voluntary creditor what about the involuntary creditor like a tort claimant if there's no insurance or even in your in your Fisher case you drop an interesting footnote with respect to the police powers I mean the city of Chicago had said you know we have the the ability to crush cars for non-payment because this is this is pursuant to our police power so don't I mean don't those kind of justifications become a little bit suspect when you start looking at the whole universe because if you have a plan that goes for three or five years aren't you really making some distinctions that don't seem supported by the current law between kind of post confirmation creditors and everyone who was pre petition well the ultimate question is should this be decided in the context of the bankruptcy case or should that post petition creditor have an unhindered right to take off after property of the debtor and my thought is that whatever problems of the cert you raise are they can best be dealt with in the context of the bankruptcy case we make a determination that the police powers being exercised well then of course that can go ahead if we make a determination that the post petition creditor won't be adequately protected we can greatly from the stay but there are other things that can be done that can let the chapter 13 case go forward and I think the system works better if we have the estate continue can we go back to the replenishment approach that was imposed initially I guess by judge aspen on the appeal of your case gene and there's a massachusetts case bill that you mentioned in your materials right wringle I believe how does the replenishment approach differ from the estate continues approach or is it just a rhetorical device to there is a distinction is trying to harmonize I mean the those courts would say they have in fact harmonize 1306 and 1327 by saying yes we recognize that the property vested revested in the debtor confirmation and the estate may have terminated at that point but it's renewed all as as the debtor earns income or acquires other property after confirmation the estate is recreated now the problem with that of course is and then some courts say and it's only what is necessary the only thing that becomes property the post confirmation estate is what is necessary to fund the plant well the problem is we're talking about money and and the debtor is on a fixed income typically how do we know which part of that income is necessary for the estate which parts necessary for ongoing living expenses and if we just freely allow creditors to get to the non-plan payment portion of that income aren't we still in fact impeding the debtor's ability to successfully complete the plan and it becomes very arbitrary perhaps to figure out what in a case by case basis is necessary and what is not necessary so even under that approach the court's going to be involved in these questions and why not simply adopt Jean's approach that the estate is preserved and we'll deal with these issues do you feel like Jean one criticism maybe the courts will be flooded with post confirmation determination practical experience teaches the contrary because as I said I've been putting the provisions we talked about in my orders for the last couple of years and I have not been flooded in fact hardly touched by any of these complaints it one other thing though I'd like to point out it's not just protecting the debtor from post confirmation creditors it's also protecting all of the pre confirmation creditors from the debtor's action and disposing of property of the estate if all the property the debtor owned prior to filing ceases to be property of the estate of confirmation well then the debtor can sell that property encumber that property give that property away without any requirement of getting bankruptcy court permission there's no 363 application if it's not property of the estate so we could have a situation where the debtor puts a second mortgage on the home takes the proceeds to las vegas has a really good time and then converts to a chapter 7 case and guess what in that chapter 7 estate that lien will be present on the home in full force depriving the creditors of the asset that otherwise the pending legislation bill doesn't really address this it does not either under the house bill or the senate bill that are going to conference neither I don't believe gene address this issue at all they don't they don't change 1306 or 1327 or 348 so it's it's a problem that needs to be addressed by the courts it's unlikely in my opinion it'll be addressed satisfactorily or quickly enough in any appellate setting because uh as we all know most chapter 13 confirmation issues do not get appealed because of the economies of it so it's unlikely that's going to be the answer the answer is provide for it in the plan or in the orders of confirmation if you want to preserve the estate well it's good to hear gene that that you have the time on your hands to have all these folks come in and deal with these issues um we uh we want to move on to um our next topic um which deals with of course very interesting controversial subject and commercial or excuse me consumer um bankruptcy cases which of course is reaffirmation um Liz you know until about what two and a half years ago we all sort of assume we understood how reaffirmation was supposed to work and and thought it was working reasonably well then came the revelations of what seers and federated department stores and others were doing underneath your radar screens in in light of all this controversy in all these concerns what are the courts doing now to address reaffirmation problems well during the past two and a half years since the seers and other problems came to light there's been a reaction both in the the judiciary and among the creditor community let me talk first about the judicial reaction the commission recommended a number of things in the area of reaffirmations one of the things that the commission recommended was that a form be form motion uh for reaffirmation be created that the advisory committee on bankruptcy rules do that and they they took up the task and they did in fact draft a form reaffirmation agreement not a motion which has been issued now was issued in 1999 as a directors a o directors form which means its use is discretionary not mandatory and that's a really good form uh for those of you who haven't taken a look at it i i commend it to you uh it's quite comprehensive in terms of including the types of information that the debtor should be looking at well i have enough money to pay is this debt really secured have i considered the alternative of redemption uh and so forth it includes Miranda type warnings uh that this agreement you can voluntarily pay without entering into the agreement the agreement's not required and what the impact of the agreement will be if not rescinded within the time permitted and finally it's in plain english which is always commendable for a legal form and often seems to be quite difficult there's also been a a significant increase i think in judicial involvement in uh holding discharge hearings and reviewing reaffirmation agreements even when not required by the code because of course as a result of the 1984 amendments uh many of us got out of the business of uh holding discharge hearings and reviewing reaffirmation agreements except in the case of of prosa debtors uh first let me make a few preliminary comments on that judges differ on whether we have authority to get involved uh in doing that when it's not a prosa debtor and there there's three schools of thought uh there's the school says no the 84 amendments took it out took us out of it except for the prosa debtors there's the school of thought that says uh we have authority to do it and then there's a school of thought that says we have authority and the obligation to do it so it's a continuum the practices also vary some courts are holding discharge hearings for more than just the prosa's in fact uh judge david shoal did a a survey of all the bankruptcy judges in the country and got about a 90 return rate uh this fall about their reaffirmation or redemption practices and he found that 22 percent of the judges are holding reaffirmation or discharge hearings for at least some debtors who were represented uh by council uh other courts are holding discharge hearings selectively based on some criteria for instance if the debt is an unsecured debt that's being reaffirmed or when the security documents aren't attached to the reaffirmation agreement so it can't tell if it's really a secured debt some courts are reviewing all the reaffirmation agreements uh even those with attorney affidavits both the district of montana and rhoda island have uh local rules to that effect rhoda island indicates right in its rule what it's looking for that it's looking to see if the debtors available income based on the schedule i and j is sufficient to pay the amount being committed to in the reaffirmation agreement uh and if there's not enough income the court issues in order to show cause why the attorney affidavit shouldn't be stricken uh some judges are in their their reviews have discovered some real problems with attorney affidavits and they're using sanctions as a means of getting at those those problems uh and where they see the problems are uh in the in the attorney representation of no one do hardship when you look at the i and j and there's just not enough money to pay and the failure to advise the debtor regarding alternatives uh and consequences and in the failure to investigate whether the creditors really secured and whether it would really or likely uh replete the the property if uh if the reaffirmation agreement's not entered into and there's uh a couple of opinions if you're interested uh the melenda's opinions there's two of them as well as the brazi opinion uh that really discusses at some length uh and if there's a problem the court issues in order to show cause using rule 90 11 uh and proceeds to investigate and potentially strike the offending affidavit thereby in those courts view avoiding the reaffirmation agreement possibly sanctioning the lawyer uh and doing this they're systematically improving the quality of practice as well as getting at the individual problem well now that you're paying attention collectively to reaffirmation of course the creditor industry doesn't always suffer its fate quietly has that caused reactive behavior in terms at least in your experience of seeing an increase in the use of redemption and do you have the same level of control and authority over redemption that you do over reaffirmation well there's no doubt there's been more activity in the last few years in the redemption area than there was before and part of that probably is directly attributable to what happened in the the sears reaffirmation case sears uh at uh judge judge kenner's uh urging retain professor king to review their entire bankruptcy collection practices uh and one of the things he advised sears to do and sears started doing was filing all the reaffirmation agreements that were entered into uh including those that were were consensual agreements now of course sears took the position that by filing these they didn't intend for judge to look at them they were just filing them so that nobody would claim they were making an end run around the the bankruptcy system uh but once they started doing that they started showing up on some judge's desks uh and there have now been at least three reported decisions uh in all involving sears as to the issue of whether uh those redemption agreements must be reviewed by the the court uh and all three have reached the conclusion uh they must be and that that was the primary issue in those case but there's no motion filed well is not filing a motion just simply filing the reaffirmation well they're finding themselves being ordered to file motions and in fact in the the u.s. trustee region i'm in in region 18 which is the five northwestern states sears has now entered into a stipulated order that it will file motions accompanying uh the reaffirmation agreements the redemption agreements the redemption agreements uh and we'll do so until it gives 60 days notice it's appealing the issue and i think for right now it's it's going to follow the practice of seeing that a motion is is filed well the issue sorts itself out uh an appeal the code itself uh 722 doesn't require a motion correct correct although rule 6008 says you bring a redemption agreement for the code before the court by motion potentially only if there's a disagreement though as to the amount that requires court determination and i'm taking that that really is the primary litigable issue is the appropriate redemption amount right i should say that the shoal survey tells us that the three reported cases may not reflect the majority practice uh at least 57 percent of the the judges who reported indicated that they they don't hold uh redemption hearings uh absent some dispute so this is an area that i'm not sure what is really the national practice whether the cases we're seeing is the wave of the future or not uh in terms of value that really is the one of the major issues although the courts are also looking at is the creditor really secured is the property redeemable but redemption price of course sears argues that post rash they get the rash price the replacement value but there have now been a series of decisions post rash that say no sears doesn't sears gets what the creditor would realize at a foreclosure sale they'll probably the leading case in the area is the donnelly case from ohio and the rationale goes like this uh section 722 says that debtor must pay the allowed secured claim the creditor then you look at 506 a to tell you what the allowed secured claim is and that tells you that you look at value based on the purpose of the valuation and the proposed disposition and in the case of a redemption of course what you're doing is you're buying for cash and the legislative history indicates that redemption is an alternative to foreclosure so you don't have the risks uh attendant that that were present in the rash case as a a rash expert david what do you think well uh as as of course the author of the leading article uh on rash i guess i would uh sort of change your wording if not the result a little bit i think that that in redemption uh that the price is the rash price but that the rash price may not necessarily be replacement value uh but it would seem to me that that the starting point of any opinion is going to be section 506 and is going to be then the supreme court's interpretation of section 506 uh you know that's i think how you get there now where you wind up at the end of the journey i think is a harder call i think you can make a rash like argument that since the debtor is retaining the property that the appropriate value should be the replacement to the debtor but i think you can also make the argument in the 722 context unlike the 13 context or the 11 context of the cram down context that we are here basically in a liquidation situation and and so that i think is a much stronger argument for a forced sale or liquidation amount uh does does it matter david and liz if if in fact it's not just that creditor who's doing the redemption there's a growing practice especially with respect to automobiles of having third parties come in and finance out the redemption as to say they will pay they will lend to the debtor an amount necessary to redeem the property from the prepretation creditor um and a lot of that practice is based on the notion that they can get a cheap price they can get the liquidation price but it seems to me that if you go to 506 as you say and you take a look at what the use is i mean it's not really liquidation this is a human being who's getting a fresh start part of the fresh start is they need a car or they need something that they're redeeming in that in that case you kind of you kind of get a contradictory result i mean you want you want a low price because you want them to finance it out but you probably want to replace the price because that's exactly what they're going to use it for and it seems to me that part of what's happening here is really a tremendously interesting point i think that it lives is making is that uh an industry reaction to the constraints on reaffirmation is an increased use in redemption and when you couple that brisk with what you're talking about is a redemption that it is in essence fueled by uh some sort of third party loan so it's truly a redemption based on periodic payments what's happened is is that the industry has now created sort of a practice model that's very different from any model that congress had in mind and it seems to me that it puts the three of y'all and the other people on the bench in a very awkward position in that you're now dealing with a an industry practice that really wasn't contemplated by congress and in if assuming i have the authority to look at redemptions even without uh any objection or dispute do i then reach into that redemption and look at the terms of the financing and say what interest rate is being paid uh what term is it etc and overrule and agreed upon amount between the creditor and the debtor uh a question i had for those judges who think they have the power is what's the time limit for the redemption agreement when does that motion have to be filed to to engage in this practice requires making up a lot of rules that simply aren't in the code or what if the debtor doesn't pay the redemption exactly right you know one of the problems i see happening is the pending legislation is going to require that there be only the three choices that are set out in 5212 either have to surrender the property enter into a reaffirmation or redeem those are the only choices that would exist under the proposed legislation now if that's the case the debtor says well i'm i'm going to uh reaffirm but then they don't have enough money there's not enough surplus income shown in schedules i and j to allow for the redemption or allow for the reaffirmation then what happens well they can agree to redeem what if they don't have enough money to redeem do they have to give back the property or can they enter into an agreement with the creditor to maybe make their redemption payments and installments over time well that's bruce's point isn't it i think most of the cases out there say the pre petition creditor can't cannot finance the redemption because that would be an installment redemption right but nothing is nothing stops an outside creditor from saying and in fact you might want to say that that's a practice that makes sense if in fact you're gonna sit down as a policy matter that in fact if someone is willing uh to take out an existing creditor for cash at a price that congress has sat in 506 what's wrong with that oh i you know the person's gonna have to take in person's gonna have to have a car they're gonna have to get it somewhere why then couldn't the original lender simply be the redeeming lender you know i'm going to not take installment payments but i'm making a new loan to the debtor on new terms would you approve of that that that's very questionable you know but you ever find out about how would i know about really how is that gonna end up being different than a reaffirmation edit on different terms in the original loan the problem is that there's not an essential difference between redemption reaffirmation and we have totally different legal frameworks different sets of rules but the economic result is very similar well let's talk briefly about uh ride-through or retention or fourth option depending on which of the the uh nicknames you like in 1984 amendments of course brought us section five twenty twenty one two uh which required that a chapter seven debtor with consumer secured debts had to file a statement of intention this gene indicated uh that statement of intention has to indicate whether the debtor will surrender or retain the property and if applicable whether the debtor will reaffirm uh redeem uh or avoid the lien because the property is exempt and it's avoidable and the issue is whether the debtor who wants to retain collateral uh can uh just retain it without reaffirming and redeeming if the debtor is current we currently have an even split in the circuits a third a third a third one third say uh yes uh that you have to either redeem or reaffirm uh one third say no you you can retain the the options are not exclusive they look to uh some legislative history that indicates the intent was to provide notice to the secured creditors what was going to happen to their collateral so they didn't have to sit around wondering but it's interesting in those circuits that say no there's actually a split in the reasoning and it's two and two uh two of the court circuit courts the second uh and the tenth circuit indicate that the bankers court has the discretion to uh enjoin or stop the uh the foreclosure uh even though there hasn't been a reaffirmation or redemption the other two take a much more bright line test they simply say those bankruptcy ipso facto clauses that you would use uh if they're the the debt is current simply aren't enforceable uh so it's it's an interesting departure in in reasoning of course i we recognize that the legislation's adopted it's going to be somewhat academic uh but uh one of the impacts of that legislation is i think we're going to see a real increase in our reaffirmation uh business the the cretin study uh phase one's been finished and i saw the the article that's going to come out in the american bankruptcy journal in the next issue uh that deals with their findings and they found that with respect to vehicle loans which are probably the the largest impact of this ride through is on vehicle loans that uh in the two districts they compared where there was ride through the two districts where there was not ride through there were eight times more vehicle loans reaffirmed where there's uh no ride through so we may see be seeing a very substantial uh increase in our reaffirmation uh business well that's what bothers me about the elimination of ride through is that i think it's going to increase the rate of what i would call in effect involuntary reaffirmation you know from the creditor's point of view i've never quite understood this because it seems to me i really don't want surrender of that collateral and i'm far more likely to be better off by allowing the debtor to continue the installment the periodic payments as long as my in rem claim is in in place so i don't really want it the problem is how do you enforce it if the debtor fails to make a payment can the creditor send a notice to the debtor saying please pay you missed a payment or is that a violation of the discharge injunction concerns like that as i understand that have led a number of auto lenders to abandon the the ride through proposal for fear that if they do engage in that practice they'll be found to have violated the discharge injunction when the debtor fails to pay yeah there's practical problems on the flip side when the debtor takes advantage of the ride through they want to get the payment coupon book they want to get the reminder notice and they're very unhappy when the creditor says sorry can't talk to you uh because of your bankruptcy discharge so there's problems on both sides well time is time is running short on us but but Liz let me ask you to close by talking a little bit about um the reaffirmation provisions in the uh in the pending bills and of course um they are different are those going to solve all our problems and reaffirmation oh i wish they would solve our problems and reaffirmation i'm not not sure they're going to make much difference uh the house bill is is has a fairly minor change where now there will be an additional required disclosure uh in the event the reaffirmation involved wholly unsecured uh debt and the disclosure would be that the debtor uh was required to attend a discharge hearing unless that right was waived with an attorney's uh certification so i expect it would just be an amendment to the attorney's certification in most of the cases the senate version uh which started out the same as the house but was amended by the read sessions amendment uh of course uh makes some more substantial changes uh there are changes in the required disclosures there's going to be more disclosure about the underlying credit arrangement uh but i have to say there's going to be a a uh a dictate that the uh the forms we use there's more detail in the statute but i don't like the form that's in the legislation as well as i like the b240 and one important respect and that is under the forms in the senate bill you can't tell how long it takes to pay back the debt now i realize that's a problem with open-ended credit but you could certainly say based upon the current interest rate if it doesn't change it will take you 73 months at 12 dollars a month and that seems like a very important piece of information to anybody who's making this decision uh and finally there'll be a rebuttable presumption of undue hardship if the debtor schedules indicate uh the debtor couldn't afford to pay so uh there may be some some downside to this if it has an impact that maybe uh the argument's been made that courts won't have as much control because there's greater detail in the the statute uh i'm not sure i agree with the critics on that one step forward two steps back right well we want to uh turn to another our final consumer topic for this program which is the uh nettles some issue of um entirety's property um gene you look at the code and you think it should be easy 522 b2b suggests that uh debtor may exempt from administration in the bankruptcy case tendency by the entirety's property to the extent it's immune from execution under um state law right fairly straightforward about half the states i understand from your materials recognize that form of property ownership uh for married couples um what are some of the problems that have arisen with tbe property uh under the code why has it become such an important issue well the problem with tbe is that it provides the potential for an unlimited exemption in property some states allow all forms of property to be owned uh as tendency by the entirety's by a married couple and if the state were to say that creditors can't touch the entirety's property then under 522 b2b that property would be exempt under the bankruptcy code there's a lot of controversy about unlimited homestead exemptions in texas and florida but here we have a potentially unlimited exemption going beyond homestead in 22 states and what's interesting is that that's a problem that can come up for any bankruptcy judge even a bankruptcy judge in california which doesn't recognize tendency by the entirety's may have to deal with property that's owned by a debtor in a state that does recognize tendency by the entirety's so for example california bankruptcy courts have had to deal with entirety's problems arising out of hawaii property that's the kataldo case exactly two million dollar um home exactly and so this is a big problem for potentially any bankruptcy judge in the country to understand it you have to take a couple steps back tendency by the entirety's was a feature of the common law and it applied to married couples the idea was a married couple was one person and that person was the husband the husband made all decisions for the marital entity involving the property the wife's personal property was considered to be an absolute gift to her husband when they got married and her real property entered into this entirety relationship and the idea was that the marital entity's real property would be controlled by the husband during his lifetime he would make all decisions regarding its use and he would decide uh to what extent it should be encumbered by any credit the creditors could take action against his right to the use of the property during his lifetime and they could attach his right to get the property in the event that his wife pre-deceased him the only thing that they couldn't get the only thing they couldn't get was the wife's survivorship interest if she managed to live longer than her husband she would get the property free and clear of any claims against him only the only way that the husband could transfer the entire fee of the property is if he got his wife's consent if there was a joint transfer and similarly the only creditors who could get at the fee of the property were creditors who had claims against both the husband and the wife so that was the common law and that situation lasted until about the mid 1800s when states started to say that this wasn't quite fair to women so they enacted married women's property laws which said that wives could hold property in their own names and that in turn led to judicial problems how do we interpret ownership of property after the married women's property laws changed the common law and the courts basically came up with three approaches one was to say entirety's no longer exists we don't have ownership by the entirety's anymore that estate is abolished another was to say we're going to treat the couple equally the husband and wife are both going to be treated alike and they're going to have the rights of a husband under the common law and according to that approach either party could convey the value of the property during the marriage and either could use their own survivorship interest as a basis for financing and the creditors of either individually could attach those interests that's if both parties were recognized as having the rights of the husband well another way to treat the couple equally was to say that each had the disabilities of the wife under the common law and then neither could convey anything and no creditor could attach anything unless the creditor had a claim against both so that's the situation that we bring into 522 B2B of the bankruptcy code and I'm taking this situation as you said that every bankruptcy judge potentially faces that's exactly right and so what happens under the code well in contrast to what happened under the act it's uniformly recognized that the interest of an individual debtor as a tenant by the entirety becomes property of the estate 541 a is so broad that it certainly sweeps that in but then the question becomes to what extent can their property interest be exempted well it depends it depends first on whether there are any joint claims against the husband and wife even the only one of them's in bankruptcy because to the extent their joint claims no matter what recognition of tenancy by the entire these exist those joint claims aren't exempt they're not exempt or immune from process under state law so the property's not exempt to the extent of the joint claims now even if there aren't joint claims even if there's only individual claims there still may be a failure of exemption because remember in the states that say that tenancy by the entire these continues to exist if they recognize each of the married parties as having the rights of a husband under the common law then even an individual creditor could glom onto if you will the survivorship interest of the individual debtor contingent right so that's a non-exempt asset in the bankruptcy estate so a bankruptcy trustee could theoretically assert that there is non-exempt property and then we get to another feature of code section 363h if there's property held jointly and the estate can sell the property and get a greater return than trying to sell the individual debtor's interest in the property then if that benefit to the estate outweighs the detriment to the non-debtor party the property can be sold as a unit the state takes its share and gives to the non-debtor spouse the other share and that's where the litigations come up in this area what it means is the trustees dealing with the tenancy by the entire these property have to go through a number of steps in properly administering an estate they have to find out if the property really is held in tenancy by the entirety they have to find out what kind of an exemptions claim they very well may have to file an objection to the exemption claim so they're going to have to do all of this in a timely fashion you know that there's this real risk that they're going to run into the 522 time problem right taylor versus freeland and crowns is a real potential obstacle for trustees here very short time after the conclusion of the first meeting of creditors in which to make that decision to object or not and a failure to object may have the consequence of barring any right the estate may have to the tenancy by the entirety's property does it make any difference what value the debtor in schedules claimed as being exempt when in fact perhaps more or less rather was exempt well you know in the aftermath of taylor versus freeland and crowns the courts have gotten creative one opinion in particular a williams versus pay fourth circuit decision has said that if the debtor claims say the full value of the tenancy by the entirety's property as exempt but cites a provision of law dealing with tenancy by the entirety's then the fourth circuit says you've got to read what the debtor claimed in light of the statute that was cited and if the statute would only allow the property to be exempt to the extent of individual claims well then that's what the debtor is really claiming and so there can be ways of getting around taylor versus freeland and crowns similarly if the debtor puts down a value it might be said that we're not objecting to the exemption we're only objecting to the value that's claimed by the debtor and so there are ways that that can be done but certainly the safer course of action for any trustee where there's a tenancy by the entirety's claim in the face of joint claims or in the face of individual claims that would be recognized against the debtor's contingent interest it would be wise to file that objection at a timely fashion and of course the valuation issues are real easy here well i i did want to ask you about that because that of course comes up in chapter 13 if you're in a state where a creditor can end up with a lien on the uh an individual creditor can end up with lien on tenancy by the entirety interest how do you think you go about valuing what that interest is worth what you know this is a real problem for any judge because theoretically the value depends on a number of actuarial computations what's a survivorship interest worth well the survivorship interest has value only if the debtor survives the spouse so you have to calculate what the odds are of the debtor surviving the spouse and then you have to figure well how long is that going to take because you want to reduce the value at the time of the spouse's death to present value that's a complication but there's even more of a complication because the tenancy by the entirety can only continue to exist during the term of the marriage so divorce becomes a factor as well and divorce has a different consequence instead investing the entire property and the surviving spouse it would split the value of the property at the time of the divorce so the valuation problems are extraordinarily complex and we certainly could use an expert witness you need to value for purposes of the best interest test in chapter 13 and maybe disposable income if there is an objection sure and even more simply in a in a run-of-the-mill chapter 7 case if the court were persuaded that a 363h sale should take place you've got to decide what portion of the sale proceeds go to the estate and what portion would go to the non-debtor spouse and so the very computations that we're talking about could come up in any circumstance let's assume we solve that problem we've determined what portion goes to the non-debtor spouse and what portion goes to the estate presumably the reason the trustee was able to partition was there were joint creditors against whom the property was not that's the major right now the trustee and the estate have their proper share of the proceeds who gets just the joint creditors whose status facilitated the partition or all of the unscured creditors well the courts take two very different approaches on this question I would say most of the reported cases take the position that the money ought to go to the joint creditors whose claims resulted in the failure of the exemption in the first place most of the reported cases say that and their rationale is you're not going to allow these creditors to be treated worse in the bankruptcy than they would be treated under state law and they cite the butler case of the supreme court as support for the proposition that state law property rights should be recognized unless there's a competing bankruptcy issue of substantial importance well the counter to that and I have to confess I'm one of the contrarians here is that the bankruptcy code does have a policy it's a policy of equality of distribution the bankruptcy code itself sets up only two classes of properties far as I can tell exempt property and not exempt property the exempt properties given to the debtor the non-exempt property comes into the estate it's supposed to be liquidated by a trustee and then distribute it and the bankruptcy code itself sets out the priority of distribution in section 726 that's the competing bankruptcy policy there's no provision in the code that says contrary to section 726 we're going to carve out a special class of joint creditors and pay them the full proceeds of this non-exempt property so on that basis I'd go with the minority of the reported opinions under that approach Jean if the only one spouse was in a debtor in bankruptcy and you nevertheless have joint creditors and the money is distributed the estate's money is distributed to all the chapter 7 creditors then the non-bankruptcy spouse is left with still some joint creditor claims correct potentially potentially that's correct that is correct and that is a different result than what happened under non-bankruptcy law but of course the position that I take is that the bankruptcy code in general provides a different distribution than what would be provided under non-bankruptcy law and that's why we have a code so it is a different outcome but it's one that I think the code requires and what's more you've got a situation of ease of administration too you can have extraordinarily complicated distribution schemes if you don't have a general distribution of the non-exempt assets let's take a state for example where we do have the possibility of attaching the survivorship interest of an individual creditor now we've got to sell this property and make a distinction between that part which is attributable to the contingent interest that part which is attributable to the joint claims and pay them out in a differential way it becomes extraordinarily complicated even more than what we were talking about earlier but if you don't do that right in a case where in an appropriate case you might have a case where a separate creditor has more has a greater incentive to make sure that they get into bankruptcy because you're giving them something in bankruptcy that they wouldn't have outside that's exactly right and if you look back at this parallel situation that many of the minority decisions have cited and more versus Bay you have exactly that situation more versus Bay is a situation where all of the creditors share in the recovery of a fraudulent conveyance where under the applicable state law only those creditors who had claims prior to the conveyance would be able to pursue a fraudulent conveyance action so in bankruptcy those free transfer creditors get less the post transfer creditors get something they never would have gotten under non bankruptcy law so they have the incentive to commence the bankruptcy so if you take a step back if you take the conferring are you just saying the state property law really has no business making these kinds of distinctions between separate and joint creditors the state gets to decide what's exempt and what's not exempt the bankruptcy code makes that clear but once it's not exempt the state can't determine what the priority of distribution should be I think that's the distinction the code makes Eugene you've you've brought out all these complications I guess that's why we as bankruptcy judges don't see more sales in bankruptcy of Tennessee by entirety everyone is frightened off of that maybe but you know what I think is going on is that the trustees don't have an understanding of the complexity of this area if they did we might see a lot more of these problems coming up because the trustees might be objecting to exemptions that they're not objecting to now and finding funds that they could distribute well we're running a little low on time but let me ask you another question suppose we have entirety's property which is not itself exempt as a homestead and the non debtor spouse dies before the administration is closed does his or her undivided one half interest go into their testamentary estate or is now the bankruptcy debtor vested with full ownership of the property well you know that's a question I haven't particularly looked at but my hunch is that because exemptions are measured as of the filing of the case that a post filing death of a spouse would not affect the debtor's right to claim the exemption but I'd have to have to do some reading on that one except that property the estate includes inheritance the debtor gets within 180 days so I guess you want your spouse to live beyond that six months well there's another there's another way to look at that too Larry now that I think of it you could say that the estate always had the contingent survivorship interest and if you're in that sort of a state the survivorship interest just became a lot more valuable during the course of the administration of the case but it still belongs to the estate but practically speaking we go back to the Taylor Freeland and Cron's problem if the trustee is not objected timely they're asleep it is what it is right so the rule again is trustees object yeah there's a recent case in the middle districts of florida warp or tharp that takes exactly that position bill that the once the non-debtor spouse dies the tendency is dissolved and the interest of the deceased spouse is simply extinguished so that's one in which the debtor lost not only his spouse but half the value of the trustee's objection might need to say I'm objecting because there may be a death that's right even right even if there's no joint creditors there may objecting to death I want the trustee to object well that's it for the first part of our program I want to thank our panelists again for coming in with a very lively discussion to help us explore and explain these topics be sure to watch part two of the program when professors Markel and Epstein will be taking a look at the state of new value exception after the Supreme Court's controversial decision in 203 North LaSalle and some perhaps incorrect assumptions about assumption and assignment and remember we will be talking with congressional staffer Joseph Rubin about the status of the bankruptcy reform bill that's presently being worked on on the hill will there be a final bill what'll it look like how will it change the nature of our work is there anything left yet that we might still do to kill it until then for the federal judicial television network I'm Lawrence Ponoroff saying thanks for watching