Property of the Estate, Claims, and Priorities / Exemptions
Validity of homestead exemption is controlled by California law
In re Gilman, 877 F.3d 956 (9th Cir. 2018).
Creditor contended debtor’s real
property did not qualify for homestead because it was in contract for sale
when bankruptcy case was filed. Creditor argued property held in trust, as
it alleged this property was pending the sale, could not qualify for
exemption. California has opted out of the federal exemption scheme so
state law provisions control. The Bankruptcy Court determines the merits
of claimed state exemptions by interpreting state law. Citing California
case law, the court rejected creditor’s argument that title is necessary
to claim a homestead exemption. However, because the Bankruptcy Court did
not make findings on whether debtor intended to continue to live in the
property, which is an element of a homestead exemption, the Ninth Circuit
remanded for consideration of that issue.
Judgment creditor’s restitution
claim was disallowed on the basis of issue preclusion because creditor
raised it as a defense in an avoidable transfer action by the trustee and
Matter of Maui Industrial Loan & Finance Co., 580 B.R. 886 (D. Haw.
Debtor operated a Ponzi scheme.
Prepetition, judgment creditor purchased 40% of the stock in Debtor and
later entered into a stock repurchase agreement. Debtor defaulted on the
agreement and judgment creditor obtained a state court judgment. Debtor
then filed a chapter 7 case. Judgment creditor filed a proof of claim for
about $2 million. Trustee successfully sued judgment creditor to recover
the amounts paid under the stock repurchase agreement as avoidable
transfers. Trustee then objected to the claim on the basis of issue
preclusion contending the same issues were decided in the avoidable
transfer action. The Bankruptcy Court disallowed the claim and the
District Court affirmed. It held the “issue” of creditor’s restitution
claim, which creditor had asserted as an affirmative defense, was
litigated and determined in the adversary proceeding. Thus, in awarding
judgment to the trustee, the Bankruptcy Court had necessarily decided that
creditor did not have a restitution claim.
Debtor’s former executive was not
automatically entitled to a pro-rated portion of his contractual salary as
an administrative expense claim.
In re Cook Inlet Energy LLC, 583 B.R. 494 (B.A.P. 9th Cir.
Chapter 11 debtor’s executive chairman,
who was not paid his post-petition compensation by debtor, filed a request
for administrative expense for over $250,000 based on his pro-rated salary
from petition date to date of rejection of his employment contract. After
a trial, the Bankruptcy Court reduced the amount awarded to $15,000. The
claimant appealed. The BAP affirmed.
The case addresses the evidentiary
weight to be accorded a claim for administrative expenses. The claimant
here argued this his claim was entitled to a presumption of reasonableness
because his postpetition salary was calculated based on his later-rejected
employment contract. The BAP held that the contract price for services in
a rejected employment contract is not presumptive of the value of the
services rendered. Administrative claims, like the claimant’s here, are
subject to careful scrutiny, consistent with preserving the estate for
distribution to creditors. The burden of proving an administrative expense
rests with the claimant. The contract rate was only probative of the
reasonable value of services and no presumption attached to it. The
Bankruptcy Court’s determination of the reasonable value of those services
was not incorrect.
Whether claimant’s right to payment
of severance benefits vested outside the 180-day period established by §
507(a)(4) is a question of federal, not state law.
In re Golden Gate Community Health, 577 B.R. 567 (Bankr. N.D. Cal.
Planned Parenthood’s former president
and CEO filed a claim for, inter alia, severance benefits. The claim was
based on a contract entered into eleven years prepetition and modified “in
or about June to September 15, 2010,” such that eight months of severance
was due during the 180-day § 507(a)(4) priority period that began on
September 1, 2010 (i.e. 180 days prior to the cessation of business
operations). In a prepetition state-court lawsuit filed by claimant, she
alleged that she became entitled to receive her severance benefit and made
a written demand on Debtor to make payment on March 26, 2010. Thus,
claimant had acknowledged in litigation that her right to payment vested
in March 2010. The subsequent modification of her severance agreement to
change payment terms did not change that vesting date. Therefore, no
amount of the claim was entitled to priority payment. The Court denied the
request of Trustee’s counsel for attorney fees. The claim objection was an
interpretation of bankruptcy law not a determination of the enforceability
of the employment agreement.
Debtor’s obligation to state for
quarterly fees was a fee and not a tax entitled to administrative
priority. Even if a tax, the obligation arose prepetition and therefore
was not entitled to administrative priority.
In re Gardens Regional Hospital and Medical Center, Inc., 573 B.R.
811 (Bankr. C.D. Cal. 2017).
The Court examined whether quarterly
Hospital Quality Assurance fees owing by hospitals under a California
state statute (Medi-Cal Hospital Reimbursement Improvement Act of 2013
(the “Act”)) were a “fee” or a “tax”. The answer turned on whether the HQA
“exactions” were imposed for a public purpose. If so, they were a tax
entitled to administrative priority. The purpose of the HQA exactions was
to strengthen hospitals’ balance sheets and not to benefit the public at
large. The legislative history showed that the Act’s purpose is to
increase the total funding available to California hospitals. Provisions
in the Act reinforce its purpose of supporting the hospital industry (e.g.
the California state agency is required to “work in consultation with the
hospital community to implement” the Act’s provisions.) The Court found
that, although the question was close, hospitals received the
preponderance of the benefit of the HQA exactions, so they should be
classified as fees and not taxes Even if the exaction were a tax, however,
it arose prepetition because the State could fairly contemplate its claim
prepetition even though it didn’t know the exact amount.
Excise taxes are not entitled to
priority treatment if they came due before the statutory look back period
of § 507(a)(8).
In re USA Sales, Inc., 580 B.R. 852 (Bankr. C.D. Cal. 2018).
Debtor operated a cigarette
distribution business. Under California law, it was required to pay excise
taxes for cigarettes sold and to file a monthly report of sales. Debtor
filed the reports for 2007 and 2008. The State Board of Equalization
audited these reports and determined that Debtor had underpaid its
cigarette taxes by $1.26 million. Debtor timely filed a petition for
redetermination. At the time of the bankruptcy filing, SBOE’s audit
division had not finished its work. Five days after the petition, it
issued a decision essentially remanding the matter back to the SBOE for
further determination. In 2016, SBOE filed a proof of claim seeking $1.5
million, to which debtor filed an objection, contending they were not
entitled to priority treatment under 11 U.S.C. § 507(a)(8)(E) because they
were “old taxes”.
The decision turns on the Bankruptcy
Court’s interpretation of several different aspects of § 507(a)(8). First,
the Bankruptcy Court determined that the taxes were excise taxes because
they were imposed based on the performance of an act, the distribution of
cigarettes. Second, it found that the “transaction” giving rise to the
taxes was not the final decision on the appeal, as SBOE contended, but
Debtor’s distribution of cigarettes, as reflected in its monthly tax
reports. Finally, the court also examined SBOE’s argument that the
so-called “flush language” of § 507(a)(8), which tolls the running of the
priority period under “for any period during which a governmental unit is
prohibited from collecting a tax as a result of request by a debtor for a
hearing and an appeal of any collection action . . . .” It found this
section did not apply to the cigarette taxes based on express provisions
of California law. The California Revenue and Taxation Code provides that
a collection of taxes is abated while an appeal is pending. Debtor only
requested a hearing on its liability for taxes, not on the collection of
those taxes. Thus, on its face, the “flush language,” did not apply.
Debtor’s lack of knowledge that she
had a prepetition claim did not prevent the cause of action from becoming
property of the estate.
In re Carroll, 586 B.R. 775 (Bankr. E.D. Cal. 2018).
Debtor filed a chapter 7 case and
received her discharge in 2009. Debtor was part of a class action recovery
on a product liability claim in 2015. She received an award of $240,000
for damages stemming from a medical device implanted in 2003 which was not
scheduled in the bankruptcy case. Debtor argued that she did not know of
any legal claim available to her until 2014 so her claim did not accrue
Section 541 defines property of the
estate as including all legal interests existing at the commencement of
case, regardless of whether a debtor is aware of such interests. A legal
interest exists when all elements for a cause of action are present. The
court concluded that all the elements for a product liability action under
California law were present in the mid-2000’s and debtor had a prepetition
claim, regardless of whether she realized it. Debtor’s arguments regarding
the delayed discovery rule under California law addressed that question of
the statute of limitations on an action and did not affect the conclusion
that the recovery was property of the estate under § 541.
An account receivable is subject to
turnover under § 542(b), and not § 542(a).
Pringle v. Facility Services of America, Inc. (In re Southern Pacific
Janitorial Group), 586 B.R. 769 (Bankr. C.D. Cal. 2018)
The trustee sought turnover of an
account receivable under § 542(a). The court denied the motion with
prejudice. In so doing, the court held that § 542(a) did not apply to an
account receivable because, while the account is property of the estate,
it is not property that may be used, sold or leased under § 363. The court
noted that accounts receivable are the type of property subject to a
demand under § 542(b) – requiring an entity that owes a debt that is
matured and not subject to dispute or offset to pay it to the trustee. In
this case, the trustee had not proceeded under that section.
Stripped off lien resulted in
unsecured claim that was discharged in chapter 7 case. Debtor could not
avoid paying that unsecured claim when she filed a later chapter 13 case.
In re Washington, 587 B.R. 349 (Bankr. C.D. Cal. 2018).
Debtor filed a chapter 7 case and
obtained a discharge of her personal liability on promissory notes. She
later filed a chapter 13 case and a motion to value her real property
under § 506(a). Normally, this results in a bifurcation of the mortgage
lender’s claim into secured and unsecured claims. The property’s value was
low enough that the secured creditor’s claim was wholly unsecured. Debtor
argued that by virtue of her discharge in her chapter 7 case, she was not
required to pay anything to the creditor. The Bankruptcy Court disagreed
and held that a party cannot use “chapter 20” to avoid the obligation to
pay the unsecured claim notwithstanding the discharge because the
unsecured claim resulting from the lien strip is against the estate, not
Part 3 of Recent Developments continued in RN#67.
L. Johnson was appointed to the bench in the Northern District of
California by the Ninth Circuit Court of Appeals in 2010.
*Jennifer C. Hayes
is a partner of Finestone Hayes LLP, a San Francisco law firm
specializing in insolvency law, bankruptcy law, and business disputes.
Prior to her current firm, Ms. Hayes was a partner at the international
law firm, Dentons.
is a partner in the Finance and Bankruptcy practice group in the San
Francisco office of Sheppard, Mullin, Richter & Hampton LLP, where he is
also the Co-Office Managing Partner. He specializes in business
bankruptcies and other aspects of insolvency law.