June/July 2006

Fair Debt Collection Practices Act

Sixth Circuit

Does an law firm have an absolute immunity when filing an affidavit in debt collection proceeding?

Judgment debtor brought putative class action alleging that law firm that represented judgment creditors violated Fair Debt Collection Practices Act (FDCPA) by executing and filing affidavits in support of non-wage garnishment proceedings with no factual basis for belief that judgment debtor’s bank accounts contained non-exempt assets. Firm filed collateral appeal. The Court of Appeals held that firm was not entitled to absolute immunity for its affidavit. Todd v. Weltman, Weinberg & Reis Co., 434 F.3d 432, 2006 Fed.App. 0014P (6th Cir. 2006).

In Briscoe v. LaHue, the Supreme Court held that police officers were absolutely immune from suit for their testimony at trial. 460 U.S. 325, 345-46, 103 S.Ct. 1108, 75 L.Ed.2d 96 (1983). In reaching its decision, the Court recited the history of the long-established rule that private witnesses were absolutely immune from damages liability for their testimony in judicial proceedings. Id. at 330-34, 103 S.Ct. 1108. The rationale behind this absolute immunity was twofold: first, “witnesses might be reluctant to come forward to testify,” id. at 333, 103 S.Ct. 1108; second, those witnesses who came forward might distort their testimony because of fear of subsequent liability, id.

The Court of Appeals found it difficult to believe that Defendant would “be reluctant to come forward to testify” without absolute immunity. Defendant is responsible to its client; the client in this case enlisted Defendant to obtain money from Plaintiff. In such circumstances, Defendant is unlikely to disobey its client, nor will Defendant ordinarily refuse to take future creditor clients, without absolute immunity for its affidavit. The lack of absolute immunity may increase Defendant’s costs of collecting a debt on behalf of a creditor; Defendant may actually be forced to obey Ohio law and conduct some sort of preliminary investigation of a debtor’s assets to determine whether they are exempt. This increase in costs, however, will not be a disincentive for Defendant to pursue actions of garnishment. This cost can simply be passed on to the client; moreover, because all attorney debt collectors would have the same incentive to make this preliminary investigation, Defendant’s competitive position would not be harmed by denying absolute immunity for its affidavit. In short, Ohio law requires a procedural safeguard that does increase the cost of pursuing a garnishment action; however, because garnishment actions will remain profitable for the attorney debt collector and its client, the Court had no doubt that the attorney debt collector will continue to bring such actions. Defendant’s financial interest will overcome any reluctance to come forward based on the lack of absolute immunity; the same cannot be said, for example, for a witness who has no interest in the outcome of a criminal case.

Student Loan Debts

Supreme Court

Can the United States offset Social Security benefits to collect a student loan debt that has been outstanding for over 10 years?

The Supreme Court held that the United States may offset Social Security benefits to collect a student loan debt that has been outstanding for over 10 years. Lockhart v. United States, 126 S.Ct. 699, 163 L.Ed.2d 557, 74 USLW 4037, 108 Soc.Sec.Rep.Serv. 1, 05 Cal. Daily Op. Serv. 10,271, 2005 Daily Journal D.A.R. 14,005, 19 Fla. L. Weekly Fed. S 23 (2005).

Syllabus

In 2002, the Government began withholding a portion of petitioner’s Social Security payments to offset his debt on federally reinsured student loans that were more than 10 years overdue. Petitioner sued, arguing that the offset was barred by the 10-year statute of limitations of the Debt Collection Act of 1982, 31 U.S.C. § 3716(e)(1). The Social Security Act generally exempts benefits from attachment or other legal process, 42 U.S.C. § 407(a), and provides that “[n]o other provision of law ... may be construed to ... modify ... this section except to the extent that it does so by express reference,” § 407(b). The Higher Education Technical Amendments of 1991 eliminated time limitations on suits to collect student loans, 20 U.S.C. § 1091a(a)(2)(D). In 1996, the Debt Collection Improvement Act subjected Social Security benefits to offset, “[n]otwithstanding [§ 407],” 31 U.S.C. § 3716(c)(3)(A)(i). The District Court dismissed petitioner’s complaint, and the Ninth Circuit affirmed.

Held: The United States may offset Social Security benefits to collect a student loan debt that has been outstanding for over 10 years. Pp. 701-702.

(a) The Debt Collection Improvement Act makes Social Security benefits subject to offset, providing the sort of express reference that § 407(b) says is necessary to supersede the anti-attachment provision. P. 701.

(b) The Higher Education Technical Amendments remove the 10-year limit that would otherwise bar offsetting petitioner’s Social Security benefits to pay off his student loan debt. Debt collection by Social Security offset was not authorized until five years after this abrogation of time limits, but the plain meaning of the Higher Education Technical Amendments must be given effect even though Congress may not have foreseen all of its consequences, Union Bank v. Wolas, 502 U.S. 151, 158, 112 S.Ct. 527, 116 L.Ed.2d 514. Though the Higher Education Technical Amendments, unlike the Debt Collection Improvement Act, do not explicitly mention § 407, an express reference is only required to authorize attachment in the first place. Pp. 701-702.

(c) Though the Debt Collection Improvement Act retained the Debt Collection Act’s general 10-year bar on offset authority, the Higher Education Technical Amendments retain their effect as a limited exception to the Debt Collection Act time bar in the student loan context. The Court declines to read any meaning into a failed 2004 congressional effort to amend the latter Act to explicitly authorize offset of debts over 10 years old. See, e.g., United States v. Craft, 535 U.S. 274, 287, 122 S.Ct. 1414, 152 L.Ed.2d 437. P. 702.

376 F.3d 1027, affirmed.

O’CONNOR, J., delivered the opinion for a unanimous Court. SCALIA, J., filed a concurring opinion.

Bankruptcy
Supreme Court

Is a bankruptcy trustee’s proceeding to set aside the debtor’s preferential transfers to state agencies barred by sovereign immunity?

A bankruptcy trustee’s proceeding to set aside the debtor’s preferential transfers to state agencies is not barred by sovereign immunity. Central Virginia Community College V. Katz, 126 S.Ct. 990, 74 USLW 4101, 45 Bankr.Ct.Dec. 254, Bankr. L. Rep. P 80,443, 06 Cal. Daily Op. Serv. 573, 2006 Daily Journal D.A.R. 822, 19 Fla. L. Weekly Fed. S 75 (2006).

Chapter 11 trustee brought adversary proceeding to avoid alleged preferential transfers by debtor to various state institutions of higher learning. The defendants raised the defense of sovereign immunity based on Congress attempt to abrogate immunity in 11 U.S.C.A. § 106(a). The Supreme Court granted certiorari to determine whether § 106(a) is constitutional. Instead of deciding the constitutionality of § 106(a), the Court held that the enactment of section 106(a) was not necessary to legitimize Bankruptcy Court jurisdiction over preference avoidance proceedings. The Syllabus of the case is as follows:
Syllabus

The Bankruptcy Clause, Art. I, § 8, cl. 4, empowers Congress to establish “uniform Laws on the subject of Bankruptcies throughout the United States.” In Tennessee Student Assistance Corporation v. Hood, 541 U.S. 440, 124 S.Ct. 1905, 158 L.Ed.2d 764, this Court, without reaching the question whether the Clause gives Congress the authority to abrogate States’ immunity from private suits, see id., at 443, 124 S.Ct. 1905, upheld the application of the Bankruptcy Code, 11 U.S.C. § 101 et seq., to proceedings initiated by a debtor against a state agency to determine the dischargeability of a student loan debt, see 541 U.S., at 451, 124 S.Ct. 1905. In this case, a proceeding commenced by respondent Bankruptcy Trustee under §§ 547(b) and 550(a) to avoid and recover alleged preferential transfers by the debtor to petitioner state agencies, the agencies claim that the proceeding is barred by sovereign immunity. The Bankruptcy Court denied petitioners’ motions to dismiss on that ground, and the District Court and the Sixth Circuit affirmed based on the Circuit’s prior determination that Congress has abrogated the States’ sovereign immunity in bankruptcy proceedings.

Held: A bankruptcy trustee’s proceeding to set aside the debtor’s preferential transfers to state agencies is not barred by sovereign immunity. Pp. 995-1005.

(a) The Bankruptcy Clause’s history, the reasons it was adopted, and the legislation proposed and enacted under it immediately following ratification demonstrate that it was intended not just as a grant of legislative authority to Congress, but also to authorize limited subordination of state sovereign immunity in the bankruptcy arena. Although statements in Seminole Tribe of Fla. v. Florida, 517 U.S. 44, 116 S.Ct. 1114, 134 L.Ed.2d 252, reflect an assumption that that case’s holding would apply to the Clause, careful study and reflection convince this Court that that assumption was erroneous. The Court is not bound to follow its dicta in a prior case in which the point at issue was not fully debated. Cohens v. Virginia, 6 Wheat. 264, 399-400, 5 L.Ed. 257. Pp. 995-996.

(b) States, whether or not they choose to participate, are bound by a bankruptcy court’s order discharging the debtor no less than are other creditors. Hood, 541 U.S., at 448, 124 S.Ct. 1905. Petitioners here, like the state agency parties in Hood, have conceded as much. See id., at 449, 124 S.Ct. 1905. The history of discharges in bankruptcy proceedings demonstrates that these concessions, and Hood’s holding, are correct. The Framers’ primary goal in adopting the Clause was to prevent competing sovereigns’ interference with discharge: The patchwork of wildly divergent and uncoordinated insolvency and bankruptcy laws that existed in the American Colonies resulted in one jurisdiction’s imprisoning debtors discharged (from prison and of their debts) in and by another jurisdiction. The absence of extensive debate at the Convention over the Clause’s text or its insertion into the Constitution indicates that there was general agreement on the importance of authorizing a uniform federal response to the problems and injustice that system created. Pp. 996-999.

(c) Bankruptcy jurisdiction, as understood today and at the framing, is principally in rem. See, e.g., Hood, 541 U.S., at 447, 124 S.Ct. 1905. It thus does not implicate States’ sovereignty to nearly the same degree as other kinds of jurisdiction. See id., at 450-451, 124 S.Ct. 1905. The Framers would have understood the Bankruptcy Clause’s grant of power to enact laws on the entire “subject of Bankruptcies” to include laws providing, in certain limited respects, for more than simple adjudications of rights in the res. Courts adjudicating disputes concerning bankrupts’ estates historically have had the power to issue ancillary orders enforcing their in rem adjudications. See, e.g., id., at 455-456, 124 S.Ct. 1905. The interplay between in rem adjudications and orders ancillary thereto is also evident in this case. Whether or not actions such as this are properly characterized as in rem, those who crafted the Bankruptcy Clause would have understood it to give Congress the power to authorize courts to avoid preferential transfers and to recover the transferred property. Pp. 1000-1002.

(d) Insofar as orders ancillary to the bankruptcy courts’ in rem jurisdiction, like orders directing turnover of preferential transfers, implicate States’ sovereign immunity from suit, the States agreed in the plan of the Constitutional Convention not to assert that immunity. That is evidenced not only by the Bankruptcy Clause’s history, but also by legislation considered and enacted in the immediate wake of the Constitution’s ratification. For example, the Bankruptcy Act of 1800 specifically granted federal courts habeas authority to release debtors from state prisons at a time when state sovereign immunity was preeminent among the Nation’s concerns, yet there appears to be no record of any objection to that grant based on an infringement of sovereign immunity. This history demonstrates that the power to enact bankruptcy legislation was understood to carry with it the power to subordinate state sovereignty, albeit within a limited sphere. Pp. 1002-1005.

(e) The Court need not consider the question Hood left open: whether Congress’ attempt to “abrogat[e]” state sovereign immunity in 11 U.S.C. § 106(a) is valid. The relevant question is not abrogation, but whether Congress’ determination that States should be amenable to preferential transfer proceedings is within the scope of its power to enact “Laws on the subject of Bankruptcies.” Beyond peradventure, it is. Congress’ power, at its option, either to treat States in the same way as other creditors or exempt them from the operation of bankruptcy laws arises from the Clause itself; the relevant “abrogation” is the one effected in the plan of the Convention, not by statute. P. 1005.

106 Fed.Appx. 341, affirmed.

STEVENS, J., delivered the opinion of the Court, in which O’CONNOR, SOUTER, GINSBURG, and BREYER, JJ., joined. THOMAS, J., filed a dissenting opinion, in which ROBERTS, C. J., and SCALIA and KENNEDY, JJ., joined.

Third Circuit

Does the transfer by a class to a junior class of a portion of its distribution under a plan, absent the consent of a co-equal or senior impaired class, violate the absolute priority rule?

Proposed Chapter 11 plan provision, issuing new stock warrants to unsecured senior class of creditors for automatic transfer to junior class of equity holders if co-equally senior impaired class rejected plan, violated absolute priority rule. In re Armstrong World Industries, Inc. 432 F.3d 507, Bankr. L. Rep. P 80,434, 45 Bankr.Ct.Dec. 222 (3d Cir. 2005).

Due to asbestos litigation liabilities, Armstrong Worldwide Industries, Inc.’s (“AWI”) filed for Chapter 11 bankruptcy. The United States Trustee appointed two committees to represent AWI’s unsecured creditors: (1) the Official Committee of Asbestos Personal Injury Claimants (“APIC”), and (2) the Official Committee of Unsecured Creditors (“UCC”). Under the proposed Plan, AWI’s creditors were divided into eleven classes, and AWI’s equity interest holders were placed into a twelfth class. Relevant to this appeal are Class 6, a class of unsecured creditors; Class 7, a class of present and future asbestos-related personal injury claimants; and Class 12, the class of equity interest holders who own AWI’s common stock. Classes 6 and 7 hold equal priority, and have interests senior to those of Class 12. The only member of Class 12 is Armstrong Worldwide, Inc. (“AWWD”), the parent company of AWI. All three are impaired classes.

The Plan provided that AWI would place approximately $1.8 billion of its assets into a trust for Class 7 pursuant to 11 U.S.C. § 524(g). Class 7’s members would be entitled to an initial payment percentage from the trust of 20% of their allowed claims. Meanwhile, Class 6 would recover about 59.5% of its $1.651 billion in claims. The Plan would also issue new warrants to purchase AWI’s new common stock, estimated to be worth $35 to $40 million, to AWWD (Class 12). If Class 6 rejected the Plan, then the Plan provided that Class 7 would receive the warrants. However, the Plan also provided that Class 7 would automatically waive receipt of the warrants, which would then be issued to AWWD or Holdings (Class 12). At the heart of this appeal is the Plan provision that distributes warrants to AWI’s equity interest holders (Class 12) through Class 7 in the event that Class 6 rejects the Plan.

A court will confirm a plan if it meets all of the requirements set out in section 1129(a). Only one of these requirements is relevant in this appeal, and that is the requirement that the plan be consensual, with unanimous acceptance by all of the impaired classes. 11 U.S.C. § 1129(a)(8). If the plan is not consensual, a court may still confirm as long as the plan meets the other requirements of section 1129(a), and “does not discriminate unfairly, and is fair and equitable” as to any dissenting impaired class. 11 U.S.C. § 1129(b)(1).

The absolute priority rule was codified as part of the “fair and equitable” requirement of 11 U.S.C. § 1129(b). Under the statute, a plan is fair and equitable with respect to an impaired, dissenting class of unsecured claims if (1) it pays the class’s claims in full, or if (2) it does not allow holders of any junior claims or interests to receive or retain any property under the plan “on account of” such claims or interests. 11 U.S.C. § 1129(b)(2)(B)(i)-(ii).

UCC represented all of the classes of unsecured creditors, including Class 6. Although UCC initially approved of the Plan, it later filed a conditional objection to the Plan’s confirmation based on (1) the greater potential distribution to creditors that would result if federal asbestos legislation was passed (namely, the FAIR Act), and (2) the possible applicability of the absolute priority rule, as codified in 11 U.S.C. § 1129(b), if the Plan was not accepted by all classes.

The District Court concluded that the plan could not be confirmed because the distribution of warrants to AWI’s equity interest holders over the objection of the class of unsecured creditors violated the absolute priority rule, as codified in 11 U.S.C. § 1129(b)(2)(B). The Court of Appeals affirmed.

AWI suggested that the Court should apply a flexible interpretation of the absolute priority rule based on its legislative history and historical context. The Court found that the plain meaning of the statute does not conflict with Congress’s intent.

Second, AWI contended that Class 7 may distribute the property it will receive under the Plan to Class 12 without violating the absolute priority rule. AWI derived this result from application of the so-called “MCorp-Genesis” rule, which is based on a line of cases where creditors were allowed to distribute their proceeds from the bankruptcy estate to other claimants without offending section 1129(b). The Court distinguished these cases

Third, AWI argued that the warrants would not be distributed to Class 12 on account of their equity interests, but rather would be given as consideration for settlement of their intercompany claims. The Court rejected this argument pointing out that the warrants have an estimated value of $35 to $40 million. In contrast, the intercompany claims were valued at approximately $12 million. This settlement would amount to a substantial benefit for Class 12.

AWI further contended that the Court should apply equitable considerations to allow an exception to the absolute priority rule. AMI found such an exception in the case of In re Penn Central Transportation Co., 596 F.2d 1127, 1142 (3d Cir.1979), and pointed to language in Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 108 S.Ct. 963, 99 L.Ed.2d 169 (1988), that indicates that exceptions to the absolute priority rule may indeed exist. In rejecting this argument, the Court stated that AWI’s bankruptcy due to asbestos liabilities simply does not involve the kind of exigent circumstances present in Penn Central, where Congress intervened in the reorganization process to avoid a rail transportation crisis of national import.

Third Circuit

Under 11 U.S.C.A. § 363(k) can a secured lender credit bid the full amount owed even though the lender is undersecured?

The Third Circuit followed lower court decisions in holding that under 11 U.S.C.A. 363(k)lenders’ credit bids were not capped based on economic value of the underlying collateral. In re Submicron Systems Corp., 432 F.3d 448, 2006 WL 27476 (3rd Cir.(Del.)), 45 Bankr.Ct.Dec. 232, Bankr. L. Rep. P 80,436 (2006).

The Third Circuit stated that it is well settled among district and bankruptcy courts that creditors can bid the full face value of their secured claims under § 363(k). See, e.g., In re SunCruz Casinos, LLC, 298 B.R. 833, 839 (Bankr.S.D.Fla.2003) (“[T]he plain language of [section 363(k) ] makes clear that the secured creditor may credit bid its entire claim, including any unsecured deficiency portion thereof.” (emphasis in original)); In re Morgan House Gen. P’ship, Nos. 96- MC-184 & 96-MC-185, 1997 WL 50419, at *1 (E.D.Pa. Feb.7, 1997) (holding that secured creditors may bid “to the extent of [their] claim” under § 363(k)); In re Midway Invs., Ltd., 187 B.R. 382, 391 n. 12 (Bankr.S.D.Fla.1995) (“[A] secured creditor may bid in the full amount of the creditor’s allowed claim, including the secured portion and any unsecured portion thereof” (citing legislative history) (alteration in original) (internal quotation marks omitted)); In re Realty Invs., Ltd. V, 72 B.R. 143, 146 (Bankr.C.D.Cal.1987) (same); see also Criimi Mae Servs. Ltd. P’ship v. WDH Howell, LLC (In re WDH Howell, LLC), 298 B.R. 527, 532 n. 8 (D.N.J.2003).

The Court added that logic demands that § 363(k) be interpreted in this way; interpreting it to cap credit bids at the economic value of the underlying collateral is theoretically nonsensical. The Court added a hypothetical to illustrate this:

Assume that Debtor has a single asset: a truck, T. Lender is a secured creditor that has loaned Debtor $15, taking a security interest in T. Debtor is in Chapter 11 bankruptcy and has filed a § 363 motion to sell T to Bidder for $10. Debtor argues that Lender can only credit bid $10 for T and must bid any excess in cash if it wishes to outbid B.

This hypothetical reveals the logical problem with an actual value bid cap. If Lender bids $12 for T, by definition $12 becomes the value of Lender’s security interest in T. In this way, until Lender is paid in full, Lender can always overbid Bidder. (Naturally, Lender will not outbid Bidder unless Lender believes it could generate a greater return on T than the return for Lender represented by Bidder’s offer.) As Lender holds a security interest in T, any amount bid for it up to the value of Lender’s full claim becomes the secured portion of Lender’s claim by definition. Given the weight of reason’s demand that “it must be so,” we see no reason to catalog the myriad other arguments that have been advanced to support this “interpretation.” 432 F.3d 448 at 460.

Third Circuit

Is the mortgagee entitled to foreclosure costs under 11 U.S.C.A. § 506(B)?

Following a state foreclosure action and the satisfaction of the foreclosure judgment, the bankruptcy court granted the mortgagee-bank’s motion under 11 U.S.C. § 506(b) to award it attorneys’ fees and expenses for services its attorneys rendered in the state and bankruptcy courts relating to the foreclosure. The trustee argued that the mortgagee-bank is not entitled to fees under section 506(b) because the note and mortgage, which included a provision for attorneys’ fees and expenses, were extinguished by their merger into the final judgment of foreclosure. The trustee further argued that a potential exception to the merger doctrine predicated on the parties’ intent to preserve the mortgagee’s right to seek its attorneys’ fees after entry and satisfaction of the foreclosure judgment does not apply because the terms of the mortgage did not evidence that the parties had any such intent. The Third Circuit agreed with the trustee and reversed the order of the district court. In re a & P Diversified Technologies Realty, Inc., --- F.3d ----, 2006 WL 133492, 45 Bankr.Ct.Dec. 244, Bankr. L. Rep. P 80,446 (3d Cir. 2006).

Third Circuit

Does mandatory abstention under 28 U.S.C.A. § 1334(c)(2) apply to cases that have been removed to District Court pursuant to 28 U.S.C.A. § 1452?

Mandatory abstention provision 28 U.S.C.A. § 1334(c)(2) applied to removed cases and was not inconsistent with bankruptcy removal and remand provisions; thus, party who wished to litigate state claim in state court, but found himself in federal court solely because controversy was related to bankruptcy, could insist upon state adjudication if that would not adversely affect bankruptcy proceedings. Stoe v. Flaherty, 436 F.3d 209, 2006 WL 156985 (3rd Cir. 2006).

Four of the five courts of appeals to have considered the issue of whether § 1334(c)(2) can apply to removal actions agree with the conclusion reached here. See Mt. McKinley Ins. Co. v. Corning Inc., 399 F.3d 436, 446-47 (2nd Cir.2005) (rejecting argument that mandatory abstention does not apply in removal proceedings); Christo v. Padgett, 223 F.3d 1324, 1331 (11th Cir.2000) (concluding that application of mandatory abstention to removed cases “better comports with the plain language of § 1334(c)(2) as well as Congress’s intent that mandatory abstention strike a balance between the competing interests of bankruptcy and state courts”); Robinson v. Michigan Consolidated Gas Co., 918 F.2d 579, 584 n. 3 (6th Cir.1990) (“The abstention provisions of 28 U.S.C. § 1334(c)(2) apply even though a case has been removed pursuant to 28 U.S.C. § 1452.”); Southmark Corp. v. Coopers & Lybrand (Matter of Southmark Corp.), 163 F.3d 925, 929 (5th Cir.1999) (“[W]e note, only to reject out of hand, [the] assertion that statutory abstention does not apply to cases removed to federal court on the basis of bankruptcy jurisdiction.”); but see Schulman v. California (In re Lazar), 237 F.3d 967, 981-82 (9th Cir.2001) (section 1334(c)(2) “simply inapplicable” because after removal no other related state proceeding exists).

Ninth Circuit

Is a debtor entitled to attorney fees for successfully defending discharge litigation?

This case presents the question of whether Chapter 7 debtors may recover, pursuant to state statute, attorneys’ fees incurred in bankruptcy discharge litigation. The bankruptcy court entered an order sustaining debtor’s objection to a creditor’s proof of claim and finding that the claim was a general claim subject to the general discharge order. Debtor filed an application for over $30,000 in attorney’s fees incurred opposing the creditor’s claim. The Court concluded that attorneys’ fees are not available for litigating federal bankruptcy issues, and affirmed the decision of the district court denying attorney fees.
Attorney fees are unavailable in bankruptcy proceeding when substantive legal question as to enforceability of underlying contract is governed by federal bankruptcy law, rather than basic contract enforcement questions, even when underlying contract contains attorney fee provision enforceable under state law. In re DeRoche,434 F.3d 1188 (9th Cir. 2006).

Seventh Circuit

Can the debtor be a debtor in simultaneous Chapter 7 and Chapter 13 where the debts are the same?

This case is a case under the Code as it existed prior to the effective date of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Creditors, who had contracted with Chapter 7 debtor’s construction company to build their “dream home,” filed adversary complaint, asserting that their fraud and conversion claims against debtor were excepted from discharge. While the nondischargeability proceeding was still pending, debtor filed an overlapping petition for relief under Chapter 13. Creditors moved to dismiss the Chapter 13 petition. The Seventh Circuit held that a debtor may not maintain concurrent Chapter 7 and Chapter 13 cases with respect to the same debts and affirmed the dismissal In re Sidebottom, 430 F.3d 893, Bankr. L. Rep. P 80,416 (7th Cir. 2005).

Although the courts have differed with respect to the permissibility of these “simultaneous Chapter 20” cases, there is general agreement that a debtor may not maintain two or more concurrent actions with respect to the same debts. Only the Tenth Circuit may have held otherwise, in In re Young, 237 F.3d 1168 (10th Cir. 2001). The facts of Young are similar to this case: the debtor received a general discharge in his Chapter 7 case, but one of his creditors had filed an adversary complaint alleging that the debt owed to it was nondischargeable. Before the bankruptcy court had a chance to resolve that dispute, the debtor “converted” his case to a Chapter 13 proceeding. Thus, as the Tenth Circuit saw it, nothing was left of the Chapter 7 proceeding. It described this course of events as a “Chapter 20” procedure and permitted the conversion. Id. at 1173. Any potential abuse on the debtor’s part could be addressed, in the court’s view, through the bankruptcy court’s general power to ensure good faith in the creation and confirmation of the Chapter 13 plan.

In dicta, the Court noted that the BAPCPA amended the Code to bar a debtor from relief under Chapter 13 within four years of receiving a discharge under Chapters 7, 11, or 12, or within two years of receiving a discharge in a previous Chapter 13 proceeding. See BAPCPA § 312, amending 11 U.S.C. § 1328. Because these changes apply only prospectively, however, see BAPCPA § 1501, this statutory bar does not apply to Sidebottom’s Chapter 13 case.

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