Benchnotes Oct 2001

Benchnotes Oct 2001

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Unsecured Debt, Mortgage Reaffirmations Separate

In In re Jamo, 262 B.R. 159 (1st Cir. BAP 2001), the court reviewed a set of nine reaffirmation agreements in which the debtors agreed to reaffirm unsecured debt as well as their mortgages. Subsequently, the debtors filed an adversary complaint against the credit union seeking damages and injunctive relief for the credit union's alleged violations of the automatic stay during the reaffirmation negotiations. The appellate panel held that the credit union's actions violated the automatic stay as an unlawful attempt to collect pre-petition unsecured debt. The credit union tied its approval of the debtor's reaffirmation of its mortgage debt to the debtor's agreeing to reaffirm other unsecured debt. The remedy was to require the credit union to enter into the reaffirmation agreement with respect to only the mortgage debt.

Extent of Automatic Stay's Debtor Protection

In the case of In re Miller, 262 B.R. 499 (9th Cir. BAP 2001), the BAP considered the sometimes confusing question of the extent of the automatic stay's protection of a debtor involved in litigation. In this instance, state court action against the debtor and other defendants was ongoing at the date of the filing of the debtor's chapter 13 bankruptcy case. Even though the state court action against the debtor was stayed, the plaintiff continued to prosecute the case against another defendant. The debtor was the key witness to the plaintiff's claims against the other defendant. The debtor was personally served with a third-party subpoena to appear as a deposition witness, and the debtor's bankruptcy counsel was advised that the plaintiff "was taking the deposition as a third-party witness—not [as] a party—and hence the subpena [sic] instead of the normal party deposition procedure that would be utilized in state court." No relief from the automatic stay was sought before the serving of the subpoena. The debtor failed to comply with the subpoena and was then served with three additional third party witness subpoenas, but ignored all three. Without requesting relief from stay, the plaintiff's counsel filed a motion in the state court case to compel the debtor to comply with the state-court subpoenas and requested sanctions. Although the state court eventually denied the motion to compel, the debtor filed a motion for an order of contempt in the bankruptcy court, contending that the plaintiff's counsel's service of the witness subpoenas upon her and the motion to compel violated the automatic stay of §362, requesting sanctions pursuant to §362(h). In discussing the issues, the BAP observed that §362(a)(1) applies only to actions against a debtor. Here, in the action in which the subpoenas were issued, Appellants conceded that the plaintiff's claims against the debtor were stayed. Nonetheless, the plaintiff's claims against the co-defendant were not stayed, and the plaintiff was entitled to continue prosecution of those claims. This panel faces an issue of first impression: Does the automatic stay protect a debtor from complying with discovery requests in a multi-defendant case where the debtor is a defendant, but where those discovery requests are framed as discovery pertaining only to the claims against the other non-debtor defendants? The court went on to hold that "Section 362(a) does not stay actions against guarantors, sureties, corporate affiliates or other non-debtor parties liable on the debts of the debtor," citing and quoting from In re Advanced Ribbons and Office Products Inc., 125 B.R. 259, 263 (9th Cir. BAP 1991) and Marcus, Stowell & Beye Government Securities Inc. v. Jefferson Investment Corp., 797 F.2d 227, 230 n.4 (5th Cir. 1986) ("The well-established rule is that an automatic stay of judicial proceedings against one defendant does not apply to proceedings against codefendants."). To the extent that the plaintiff was eliciting the debtor's testimony for purposes other than to continue the prosecution of claims against the debtor, "the proposed discovery did not violate the automatic stay, unless the issuance of subpoenas itself constitutes 'issuance or employment of process' against the debtor or a 'judicial proceeding' against the debtor. If this were true, a debtor could never be called as a witness (even in actions where the debtor is not a party) without relief from the stay. Such an interpretation of §362(a) defies common sense and the spirit of the Code. Information is information, and we believe the discovery of it as part of the development of a case against non-debtor parties is permissible, even if that information could later be used against the party protected by the automatic stay." The court next dealt with the issue of whether the attorney for the plaintiff in the state-court action violated the automatic stay by seeking sanctions against the debtor for non-compliance with the subpoenas. The court observed that all of the subpoenas in question were issued post-petition. "Because [the] appellants' request for sanctions arose from [the] debtor's post-petition conduct, plaintiff's counsel did not violate the automatic stay." Post-petition action to try to obtain sanctions for the debtor's post-petition ignoring of the third-party subpoenas also could include pursuit and obtaining of a monetary judgment (i.e., sanctions award) based on the debtor's post-petition conduct without seeking relief from the automatic stay. The only caveat was that "[a]ppellants, however, could not (and did not) attempt to collect such a judgment from estate property without obtaining relief from the stay." Since the plaintiff and its counsel were not attempting to recover sanctions from estate property, §362(a)(3) was found to be inapplicable.

Sanctions for Failure to Comply with Discovery Request

In another discovery-related matter, the court in In re Cotsibas, 262 B.R. 182 (Bankr. D. N.H. 2001), held that a chapter 7 debtor (the principal in a chapter 11 corporate case) would be denied a discharge for his failure to comply with the discovery orders of the bankruptcy court. The chapter 11 trustee in the corporate case had brought an adversary proceeding against the former principal (chapter 7 debtor) seeking to except certain debts from discharge as well as for a general denial of the chapter 7 debtor's discharge. The chapter 7 debtor failed to answer interrogatories for more than six months. The chapter 11 trustee amended his complaint to allege that the debtor had failed to act in good faith in responding to court discovery orders. Based on the chapter 7 debtor's actions and inactions, the court found that the discovery delays "are the result of the debtor's bad faith and malicious attempt to exhaust the estate's assets." As a result, the court granted the trustee's motion for summary judgment under §727(a)(6)(A) and denied the chapter 7 debtor his discharge.

Student Loans Deemed to Keep Debtor an "Indentured Servant"

In In re Soler, 261 B.R. 444 (Bankr. D. Minn. 2001), Bankruptcy Judge Robert J. Kressel addressed an adversary proceeding seeking a determination that student loan obligations were dischargeable. In this case, the debtor had three student loans, one by the U.S. Department of Health and Human Services (U.S. Loan), one by the Wisconsin Higher Education Aids Board (WHEAB Loan) and one by United Student Aid Funds Inc. (USAF Loan). The WHEAB Loan was in the original principal amount of $35,000, of which the debtor had paid almost $29,000 pre-petition. As of the petition date, however, the balance was almost $150,000. The U.S. Loan was in the original principal amount of $45,000, and the debtor had paid a little over $41,000, but the balance was approximately $79,000. With regard to the USAF Loan, the original principal amount was slightly over $52,000 and while the debtor had paid almost $34,000, the balance was in excess of $56,000. The court noted that the WHEAB and the U.S. Loans were made under the Higher Education Assistance Loans (HEAL) program, which was designed to enable health-profession students the means to borrow sufficient funds for their graduate school education. A loan insured under a HEAL program may be discharged only if such discharge is granted (1) after the expiration of a seven-year period beginning on the first date which repayment is required, (2) upon a finding by the bankruptcy court that the non-discharge of such debt would be "unconscionable" and (3) upon the condition that the secretary of HHS shall not have waived certain rights. Judge Kressel found there was no dispute that the required seven-year period had passed, nor that the secretary had not waived the set-off rights. Thus, with regard to the WHEAB and the U.S. Loans, the only issue was whether the failure to discharge the loans would be "unconscionable." The court noted that the burden was on the debtor to prove that the failure to discharge the HEAL loans would be unconscionable. The court noted that although "unconscionable" is not defined in 42 U.S.C.S. §292f(g), the majority of courts have held that it is a more stringent standard than the "undue hardship" standard found in §523(a)(8). The debtor was renting a room in a house, sharing a kitchen and a bath, had made a good-faith effort to repay her obligations and attempted to work a repayment with the lenders—to no avail. The debtor was unable to return to Puerto Rico to spend any holidays with her family. The court found, "without relief, the debtor's student loans will continue to be the dominant driving force in her life until the day she dies." The court extensively analyzed decisions interpreting this standard and found, under the facts of this case, the non-discharge of the WHEAB debt would fall within the meaning of unconscionable, but the non-discharge of the U.S. Loan would not be unconscionable. A key factor in the determination was that the debtor had a possibility of repaying the U.S. loan within her working lifetime—a possibility that did not exist with regard to the WHEAB loan. With regard to the USAF Loan, that standard for discharge was the undue hardship of §523(a)(8). The court found that the assertions that the debtor could reduce her expenses, could "find several hundred additional dollars each month toward repayment," and that a chronic back condition might improve so that she could work full-time or that a variety of refinancing options were available were "unsupported speculations." The court found that it was probable the debtor would be at least 70 years old before she could repay the USAF Loan in full, and working so hard for this long would likely cause her further health problems with her back condition. The court analogized the debtor to that of an indentured servant, although not sharing the physical cruelty suffered by those who bought their way into the United States, "at least they had the prospect of an end to their servitude and the debtor had no such prospect."


Journal Date: 
Monday, October 1, 2001