Justia U.S. Supreme Court Opinion Summaries

Debtors filed for Chapter 7 bankruptcy; each owned a house encumbered by a senior mortgage lien and by a junior mortgage lien held by Bank of America. Because the amount owed on each senior mortgage is greater than each house’s current market value, the bank would receive nothing if the properties were sold today. The debtors sought to void their junior mortgage liens under 18 U.S.C. 506, which provides, “To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.” In each case, the Bankruptcy Court granted the motion; the district court and the Eleventh Circuit affirmed. The Supreme Court reversed and remanded. A debtor in a Chapter 7 bankruptcy may not void a junior mortgage lien under section 506(d) when the debt owed on a senior mortgage lien exceeds the current value of the collateral if the creditor’s claim is both secured by a lien and allowed under Bankruptcy Code section 502. The bank’s claims are “allowed” under the Code. Acknowledging the statutory reference to “an unsecured claim to the extent that the value of such creditor’s interest . . . is less than the amount of such allowed claim,” the Court stated that a “secured claim” is supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim. The Court declined to distinguish between debts that are partially and those that are entirely “underwater.” View "Bank of America, N. A. v. Caulkett" on Justia Law

Sharif tried to discharge a debt to Wellness in his Chapter 7 bankruptcy. Wellness argued that a trust Sharif claimed to administer was actually Sharif’s alter ego, and that its assets were part of his bankruptcy estate. The Bankruptcy Court entered default judgment against Sharif. While appeal was pending, but before briefing concluded, the Supreme Court held (Stern v. Marshall) that Article III forbids bankruptcy courts to enter final judgment on claims that seek only to “augment” the bankruptcy estate and would otherwise “exis[t] without regard to any bankruptcy proceeding.” The district court denied Sharif permission to file a supplemental brief and affirmed. The Seventh Circuit determined that Sharif’s “Stern” objection could not be waived and reversed, holding that the Bankruptcy Court lacked constitutional authority to enter judgment on the alter ego claim. The Supreme Court reversed. Article III permits bankruptcy judges to adjudicate Stern claims with the parties’ knowing and voluntary consent. The right to adjudication before an Article III court is “personal” and “subject to waiver,” unless Article III’s structural interests as “an inseparable element of the constitutional system of checks and balances” are implicated; parties “cannot by consent cure the constitutional difficulty.” Allowing bankruptcy courts to decide Stern claims by consent does not usurp the constitutional prerogatives of Article III courts. Bankruptcy judges are appointed and may be removed by Article III judges, hear matters solely on a district court’s reference, and possess no free-floating authority to decide claims traditionally heard by Article III courts. Consent to adjudication by a bankruptcy court need not be express, but must be knowing and voluntary. The Seventh Circuit should decide on remand whether Sharif’s actions evinced the requisite knowing and voluntary consent and whether Sharif forfeited his Stern argument. View "Wellness Int’l Network, Ltd. v. Sharif" on Justia Law

Harris filed a Chapter 13 bankruptcy petition. His court-confirmed plan provided that he would make monthly mortgage payments to Chase, and that $530 per month would be withheld from his post-petition wages and remitted to the Chapter 13 trustee, Viegelah, to pay down the mortgage arrearage, with remaining funds to other creditors. Harris again fell behind on his mortgage payments. Chase foreclosed on his home. Viegelahn continued to receive $530 per month from Harris’ wages, but stopped making the Chase payments. A year after the foreclosure, Harris converted his case to Chapter 7. Viegelahn distributed $5,519.22 in accumulated withheld wages mainly to creditors. Harris obtained an order directing refund. The Fifth Circuit reversed. The Supreme Court unanimously reversed: A debtor who converts to Chapter 7 is entitled to return of post-petition wages not distributed by the Chapter 13 trustee. Absent a bad-faith conversion, 11 U.S.C. 348(f) limits a converted Chapter 7 estate to property belonging to the debtor “as of the date” of the original Chapter 13 filing. By excluding post-petition wages from the converted Chapter 7 estate, the statute removes those earnings from the pool of assets to be liquidated and distributed to creditors. Allowing a terminated Chapter 13 trustee to disburse those earnings to the same creditors would be incompatible with that statutory design. When a case is converted, the Chapter 13 trustee is stripped of authority to distribute “payment[s] in accordance with the plan.” Because Chapter 13 is a voluntary alternative to Chapter 7, a debtor’s post-conversion receipt of some wages he earned and would have kept, had he initially filed under Chapter 7, does not provide a “windfall.” Creditors may protect against excess accumulations in the hands of trustees by seeking to have a Chapter 13 plan include regular disbursement of collected funds. View "Harris v. Viegelahn" on Justia Law

After filing for Chapter 13 bankruptcy, Bullard submitted a proposed repayment plan. Bullard’s mortgage lender objected to the plan’s treatment of its claim. The Bankruptcy Court sustained the Bank’s objection and declined to confirm the plan. Bullard appealed to the First Circuit Bankruptcy Appellate Panel, which concluded that denial of confirmation was not a final, appealable order, 28 U.S.C.158(a)(1), but heard the appeal under a provision permitting interlocutory appeals “with leave of the court,” and agreed that Bullard’s proposed plan was not allowed. The First Circuit dismissed for lack of jurisdiction, finding that the order denying confirmation was not final so long as Bullard remained free to propose another plan. A unanimous Supreme Court affirmed. The relevant proceeding is the entire process of attempting to arrive at an approved plan that would allow the bankruptcy case to move forward. Only plan confirmation, or case dismissal, alters the status quo and fixes the parties’ rights and obligations; denial of confirmation with leave to amend changes little. Additional considerations—that the statute defining core bankruptcy proceedings lists “confirmations of plans,” but omits any reference to denials; that immediate appeals from denials would result in delays and inefficiencies; and that inability to immediately appeal a denial encourages the debtor to work with creditors and the trustee to develop a confirmable plan—bolster this conclusion. View "Bullard v. Blue Hills Bank" on Justia Law

When petitioners filed for Chapter 7 bankruptcy, they sought to exclude $300,000 in an inherited individual retirement account (IRA) from the bankruptcy estate using the “retirement funds” exemption, 11 U.S.C. 522(b)(3)(C). The Bankruptcy Court concluded that an inherited IRA does not share the same characteristics as a traditional IRA and disallowed the exemption. The district court reversed. The Seventh Circuit reversed the district court. The Supreme Court affirmed, holding that funds in inherited IRAs are not “retirement funds” within the meaning of the code, based on three characteristics. The holder of an inherited IRA may never invest additional money in the account; is required to withdraw money from the account, no matter how far the holder is from retirement; and may withdraw the entire account at any time and use it for any purpose without penalty. Allowing debtors to protect funds in traditional and Roth IRAs ensures that debtors will be able to meet their basic needs during their retirement, but nothing about an inherited IRA’s legal characteristics prevent or discourage an individual from using the entire balance immediately after bankruptcy for purposes of current consumption. The “retirement funds” exemption should not be read to create a “free pass,” The possibility that an account holder can leave an inherited IRA intact until retirement and take only the required minimum distributions does not mean that an inherited IRA bears the legal characteristics of retirement funds. View "Clark v. Rameker" on Justia Law

BIA filed a voluntary chapter 7 bankruptcy petition. The bankruptcy trustee filed a complaint alleging fraudulent conveyance of assets. The bankruptcy court granted the trustee summary judgment. The district court affirmed. While appeal was pending, the Supreme Court held, in Stern v. Marshall, that Article III did not permit a bankruptcy court to enter final judgment on a counterclaim for tortious interference, even though final adjudication of that claim by the bankruptcy court was authorized by statute. The Ninth Circuit affirmed, acknowledging the trustee’s claims as “Stern claims,” i.e., claims designated for final adjudication in the bankruptcy court as a statutory matter, but prohibited from proceeding in that way under Article III, but concluding that defendants had impliedly consented to jurisdiction. The court stated that the bankruptcy court’s judgment could be treated as proposed findings of fact and conclusions of law, subject to de novo review by the district court. A unanimous Supreme Court affirmed. Under 28 U.S.C. 157, federal district courts have original jurisdiction in bankruptcy cases and may refer to bankruptcy judges “core” proceedings and “non-core” proceedings. In core proceedings, a bankruptcy judge “may hear and determine . . . and enter appropriate orders and judgments,” subject to the district court’s traditional appellate review. In non-core proceedings—those that are “otherwise related to a case under title 11,” final judgment must be entered by the district court after de novo review of the bankruptcy judge’s proposed findings of fact and conclusions of law, except that the bankruptcy judge may enter final judgment if the parties consent. Lower courts have described Stern claims as creating a statutory gap, since bankruptcy judges are not explicitly authorized to propose findings of fact and conclusions of law in a core proceeding. However, the gap is closed by the Act’s severability provision; when a court identifies a Stern claim, the bankruptcy court should simply treat that claim as non-core. The fraudulent conveyance claims, which Article III does not permit to be treated as “core” claims are “related to a case under title 11” and fit comfortably within the category of claims governed by section 157(c)(1). View "Exec. Benefits Ins. Agency v. Arkison" on Justia Law

Law filed for Chapter 7 bankruptcy. He valued his home at $363,348, claiming that $75,000 of the value was covered by California’s homestead exemption and exempt from the bankruptcy estate under 11 U.S.C. 522(b)(3)(A). He claimed that the sum of two liens, including a mortgage in favor of Lin, exceeded the home’s nonexempt value, leaving no equity for other creditors. Siegel, the bankruptcy trustee, challenged the Lin lien in an adversary proceeding. Protracted litigation followed when “Lili Lin” in China claimed to be the beneficiary of Law’s deed of trust. The Bankruptcy Court concluded that the loan was a fiction created to preserve equity in the house and granted Siegel’s motion to “surcharge” Law’s $75,000 homestead exemption, to defray fees incurred in challenging Law’s misrepresentations. The Ninth Circuit Bankruptcy Appellate Panel and the Ninth Circuit affirmed. The Supreme Court reversed. A bankruptcy court may not exercise its authority to carry out the provisions of the Code, 11 U.S.C. 105(a), or its inherent power to sanction abusive litigation practices by taking action prohibited elsewhere in the Code; the “surcharge” contravened section 522, which (by reference to California law) entitled Law to exempt $75,000 of equity in his home and which made that $75,000 “not liable for payment of any administrative expense,” including attorney’s fees. An argument that equated the surcharge with denial of Law’s homestead exemption was not supported by the history of the case. No one timely objected to the exemption, so it became final before the surcharge was imposed. In addition, federal law provides no authority for denial of an exemption on a ground not specified in the Code. The Court acknowledged that its ruling may produce inequitable results, but noted that ample authority remains to address debtor misconduct, including denial of discharge, sanctions for bad-faith litigation conduct, or enforcement of monetary sanctions through the normal procedures for collecting judgments. View "Law v. Siegel" on Justia Law

When petitioners filed for Chapter 7 bankruptcy, they sought to exclude $300,000 in an inherited individual retirement account (IRA) from the bankruptcy estate using the “retirement funds” exemption, 11 U.S.C. 522(b)(3)(C). The Bankruptcy Court concluded that an inherited IRA does not share the same characteristics as a traditional IRA and disallowed the exemption. The district court reversed. The Seventh Circuit reversed the district court. The Supreme Court affirmed, holding that funds in inherited IRAs are not “retirement funds” within the meaning of the code, based on three characteristics. The holder of an inherited IRA may never invest additional money in the account; is required to withdraw money from the account, no matter how far the holder is from retirement; and may withdraw the entire account at any time and use it for any purpose without penalty. Allowing debtors to protect funds in traditional and Roth IRAs ensures that debtors will be able to meet their basic needs during their retirement, but nothing about an inherited IRA’s legal characteristics prevent or discourage an individual from using the entire balance immediately after bankruptcy for purposes of current consumption. The “retirement funds” exemption should not be read to create a “free pass,” The possibility that an account holder can leave an inherited IRA intact until retirement and take only the required minimum distributions does not mean that an inherited IRA bears the legal characteristics of retirement funds. View "Clark v. Rameker" on Justia Law

BIA filed a voluntary chapter 7 bankruptcy petition. The bankruptcy trustee filed a complaint alleging fraudulent conveyance of assets. The bankruptcy court granted the trustee summary judgment. The district court affirmed. While appeal was pending, the Supreme Court held, in Stern v. Marshall, that Article III did not permit a bankruptcy court to enter final judgment on a counterclaim for tortious interference, even though final adjudication of that claim by the bankruptcy court was authorized by statute. The Ninth Circuit affirmed, acknowledging the trustee’s claims as “Stern claims,” i.e., claims designated for final adjudication in the bankruptcy court as a statutory matter, but prohibited from proceeding in that way under Article III, but concluding that defendants had impliedly consented to jurisdiction. The court stated that the bankruptcy court’s judgment could be treated as proposed findings of fact and conclusions of law, subject to de novo review by the district court. A unanimous Supreme Court affirmed. Under 28 U.S.C. 157, federal district courts have original jurisdiction in bankruptcy cases and may refer to bankruptcy judges “core” proceedings and “non-core” proceedings. In core proceedings, a bankruptcy judge “may hear and determine . . . and enter appropriate orders and judgments,” subject to the district court’s traditional appellate review. In non-core proceedings—those that are “otherwise related to a case under title 11,” final judgment must be entered by the district court after de novo review of the bankruptcy judge’s proposed findings of fact and conclusions of law, except that the bankruptcy judge may enter final judgment if the parties consent. Lower courts have described Stern claims as creating a statutory gap, since bankruptcy judges are not explicitly authorized to propose findings of fact and conclusions of law in a core proceeding. However, the gap is closed by the Act’s severability provision; when a court identifies a Stern claim, the bankruptcy court should simply treat that claim as non-core. The fraudulent conveyance claims, which Article III does not permit to be treated as “core” claims are “related to a case under title 11” and fit comfortably within the category of claims governed by section 157(c)(1). View "Exec. Benefits Ins. Agency v. Arkison" on Justia Law

Law filed for Chapter 7 bankruptcy. He valued his home at $363,348, claiming that $75,000 of the value was covered by California’s homestead exemption and exempt from the bankruptcy estate under 11 U.S.C. 522(b)(3)(A). He claimed that the sum of two liens, including a mortgage in favor of Lin, exceeded the home’s nonexempt value, leaving no equity for other creditors. Siegel, the bankruptcy trustee, challenged the Lin lien in an adversary proceeding. Protracted litigation followed when “Lili Lin” in China claimed to be the beneficiary of Law’s deed of trust. The Bankruptcy Court concluded that the loan was a fiction created to preserve equity in the house and granted Siegel’s motion to “surcharge” Law’s $75,000 homestead exemption, to defray fees incurred in challenging Law’s misrepresentations. The Ninth Circuit Bankruptcy Appellate Panel and the Ninth Circuit affirmed. The Supreme Court reversed. A bankruptcy court may not exercise its authority to carry out the provisions of the Code, 11 U.S.C. 105(a), or its inherent power to sanction abusive litigation practices by taking action prohibited elsewhere in the Code; the “surcharge” contravened section 522, which (by reference to California law) entitled Law to exempt $75,000 of equity in his home and which made that $75,000 “not liable for payment of any administrative expense,” including attorney’s fees. An argument that equated the surcharge with denial of Law’s homestead exemption was not supported by the history of the case. No one timely objected to the exemption, so it became final before the surcharge was imposed. In addition, federal law provides no authority for denial of an exemption on a ground not specified in the Code. The Court acknowledged that its ruling may produce inequitable results, but noted that ample authority remains to address debtor misconduct, including denial of discharge, sanctions for bad-faith litigation conduct, or enforcement of monetary sanctions through the normal procedures for collecting judgments. View "Law v. Siegel" on Justia Law