By: Garam Choe

St. John’s Law Student

American Bankruptcy Institute Law Review Staff


Recently, in Crawford v. LVNV Funding, LLC, the Eleventh Circuit held that the creditor violated the Fair Debt Collection Practices Act (“FDCPA”) by filing a proof of claim to collect a debt that was unenforceable because the statute of limitations had expired.[i] In Crawford, a third-party creditor acquired a debt owed by the debtor from a furniture company.[ii] The last transaction on the account occurred in October 2001.[iii] Accordingly, under Alabama’s three-year statute of limitations, the debt became unenforceable in October 2004.[iv] On February 2, 2008, the debtor filed bankruptcy under chapter 13 of the Bankruptcy Code.[v] The third-party creditor then filed a proof of claim for the time-barred debt during the debtor’s bankruptcy proceeding.[vi] Neither the debtor nor the bankruptcy trustee objected the claim.[vii] Rather, the trustee distributed the pro rata portion of the claim from the plan payments to the creditor.[viii] In May 2012, the debtor commenced an adversary proceeding against the third-party creditor alleging that the third-party creditor filed a proof of claim for a time-barred debt in violation of the FDCPA.[ix] The bankruptcy court dismissed the adversary proceeding in its entirety, and district court affirmed.[x] In affirming the bankruptcy court’s dismissal, the district court found that the third-party creditor did not attempt to collect a debt from the debtor because filing a proof of claim is “merely ‘a request to participate in the distribution of the bankruptcy estate under court control.’”[xi] Furthermore, the district court found that, even if the third-party creditor was attempting to collect the debt, the third-party creditor did not engage in abusive practices.[xii] On appeal, the Eleventh Circuit reversed, holding that the third-party creditor violated the FDCPA by filing a stale claim in the bankruptcy court.[xiii]

By: Adam C.B. Lanza

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Dayton Title Agency, Inc., where a title company’s bankruptcy estate sued a paid-off lender to recover a fraudulent transfer,[1] the Sixth Circuit Court of Appeals held that the funds paid out of the debtor’s trust account constituted property of the debtor at the time of transfer for purposes of avoiding a fraudulent transfer.[2] In Dayton Title, the chapter 7 trustee (“trustee”) commenced an adversary proceeding to avoid, as a constructively fraudulent transfer, a payment the debtor had made to its client’s lender from the trustee’s client trust account without waiting for a forged check to clear.[3]  The funds used to make the payment were from a provisional credit that the debtor’s bank extended to it.[4]  In response to the fraudulent transfer action, the lender argued, among other things, that the transfer was not constructively fraudulent because the money that the lender received was not property of the title agency, as the money was being held in trust for a third party.[5] The bankruptcy court entered summary judgment in favor of the trustee, holding that majority of the payment was constructively fraudulent.[6]  On appeal, the district court held that only a small portion of the payment was fraudulent.[7]  However, the Sixth Circuit reversed the district court and affirmed the bankruptcy court’s ruling.[8]

By:  Steven Ching

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Joining the majority of courts, in In re Salpietro, the United States Bankruptcy Court for the Eastern District of New York held that a post-petition review of the debtor’s net disposable income was not required under the Bankruptcy Code and did not provide the basis for an upward modification under section 1329(a).[1]  There, the debtors confirmed joint chapter 13 plan that provided that the “future earnings of the debtor [were to be] submitted to the supervision and control of the trustee.”[2]  After making timely payments for five years, the debtors moved to approve a loan modification that would essentially reduce their monthly mortgage expenses by approximately $970.[3]In response, the chapter 13 trustee cross-moved to increase the debtors' payments under their plan on the grounds that the decrease in the debtors’ expenses constituted “future earnings,” and therefore, under the plan, were to be “submitted to the supervision and control of the trustee.”[4]  However, the court disagreed and denied the trustee’s motion for upward modification, holding that: (1) section 1325(b)’s projected disposable income test does not apply to modifications under section 1329, and (2) section 1322(a)(1) did not provide a basis for upward modification because the reduction of the debtor’s mortgage expenses did not constitute additional income or earnings.[5]

By: Michael Foster

By:  Christian Corkery

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Applying Washington law, the United States Bankruptcy Court for the Western District of Washington in In re Huber held that prepetition transfers of the debtor’s assets to a self-settled trust created under Alaska state law were void under Washington law.[1]  The matter before the court involved a debtor who created a self-settled trust in Alaska to protect his assets from creditors.  Because Washington state law does not recognize self-settled trusts, the debtor created the trust in Alaska under Alaska state law, which permits self-settled trusts.  The trust agreement included a choice-of-law provision which stated that Alaska state law would govern all legal disputes.[2]  After the trust was created, the debtor filed for bankruptcy.[3]  The chapter 7 trustee brought an adversary proceeding seeking to recover the assets that the debtor transferred to the self-settled trust and to deny the debtor a discharge.[4]  The court declined to apply Alaska law because Washington had a public policy interest against self-settled trusts, and Alaska did not have a substantial relation to the trust.[5]  The debtor was not domiciled in Alaska, his assets were not located in Alaska, and the trust’s beneficiaries were not domiciled in Alaska.[6]  The court found that Alaska’s only connections were that it was the location of where the trust was to be administered and the location of one of the trustees.[7]  As such, the court applied Washington state law which states that transfers made to self-settled trusts are void as against existing or future creditors, and therefore, the trustee was able to recover the assets.[8]

By: Kimberly Tracey

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Clark, the Court of Appeals for the Seventh Circuit adopted a new approach to the treatment of non-spousal inherited IRAs in bankruptcy cases.  The court reversed the decision of the District Court and found that a debtor could not exempt a non-spousal inherited IRA.[1]  In Clark the debtor sought to exempt an IRA she inherited from creditors’ claims under section 522(b)(3)(C) and (d)(12) of the Bankruptcy Code.[2]  The bankruptcy court held that the inherited IRA was not exempt because the account did not represent retirement funds in the hands of the debtor.[3]  The district court reversed, adopting the view that since the inherited IRA constituted “retirement funds” in the debtor’s mother’s hands, the account must be treated the same way in the debtor’s hands.[4]  Reversing the district court, the Seventh Circuit distinguished a non-spousal inherited IRA as “a time-limited tax-deferral vehicle, but not a place to hold wealth for use after the new owner's retirement.”[5]  Specifically, the Seventh Circuit noted that under the Internal Revenue Code, a non-spousal inherited IRA is subject to mandatory distribution that must begin within a year of the original owner’s death and be completed in no less than five years.[6]  Furthermore, no new contributions may be made to the account.[7]  Consequently, the Seventh Circuit opined that the non-spousal inherited IRA was not a “retirement fund” under the Bankruptcy Code in the hands of the debtor, and as a result, the court held that the non-spousal inherited IRA was not exempt.[8]  In reaching such a holding, the Court declared that “to treat this account as exempt under [section]522(b)(3)(C) and (d)(12) [of the Bankruptcy Code] would allow the debtor to shelter from creditors a pot of money that can be freely used for current consumption.”[9] 

By: Sarah Roe

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 Recently, in Ranta v. Gorman (In re Ranta), the United States Court of Appeals for the Fourth Circuit held “that the plain language of the Bankruptcy Code excludes Social Security income from the calculation of ‘disposable income,’ but that such income nevertheless must be considered in the evaluation of a [chapter 13] plan’s feasibility.”[1]   In Ranta, the chapter 13 trustee objected to the debtor’s proposed plan, arguing that the debtor failed to properly calculate his “projected disposable income” under section 1325(b)(1)(B) of the Bankruptcy Code because he inflated his expenses, improperly reducing his disposable income.[2]  While the debtor acknowledged that his expenses were overstated, he argued that his plan nevertheless complied with section 1325(b)(1)(B) since his Social Security income was excluded from his “disposable income,” and therefore, he argued that his disposable income was negative even after adjusting his expenses downward because his expenses still exceeded his non-Social Security income.[3]  As such, the debtor argued that he was not required to make any payments to his unsecured creditors under section 1325(b)(1)(B).[4] The bankruptcy court ruled in favor of the chapter 13 trustee, holding that the debtor’s plan was not feasible.  The bankruptcy court reasoned that if the debtor’s Social Security income was not included in the projected disposable income calculation, then the court could not consider those funds when determining whether the plan was feasibile.[5]  The district court affirmed.[6]  The Fourth Circuit, however, reversed, holding that although the Social Security income was excluded from the “projected disposable income” calculation, if the chapter 13 debtor proposed to use Social Security income to finance a plan, the bankruptcy court must consider the debtor’s Social Security income when examining a plan’s feasibility.[7]

By: Carly S. Krupnick

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in In re Faulkner, the Bankruptcy Court for Central District of Illinois held that a lien release provision in a debtor’s chapter 13 plan only released a secured creditor’s lien as to the debtor’s interest, and did not require the secured creditor to release its lien and surrender title to the debtor’s vehicle until the remaining deficiency balance was paid in full by a non-filing co-debtor.[1]  In Faulkner, a secured creditor held a lien on an SUV that the debtor co-owned with a non-filing debtor.[2]  Under the debtor’s chapter 13 plan, the secured creditor’s claim was bifurcated.[3]  The plan also stated that “secured creditors shall retain their liens upon their collateral until they have been paid the value of said property.”[4]  After the debtor completed her plan and received her discharge, however, the secured creditor refused to return the certificate of title to the debtor’s SUV because the non-filing debtor had not satisfied the remaining deficiency balance in full.[5]  The debtor responded by filing an adversary proceeding alleging that the secured creditor violated the discharge injunction.[6]  The court found that “there is nothing in [section] 524 that prevent[ed the secured creditor] from asserting its rights against the non-filing co-debtor for the deficiency balance,”[7]  and therefore, the secured creditor was not barred from bringing action against a non-filing co-debtor once the case was closed.[8]  Thus, the court concluded that “the debtor’s plan, no matter how clear and conspicuous, can only serve to release [the secured creditors]’s lien as to the debtor’s interest in the vehicle. . . [and the secured creditor]’s lien remains in place and can be enforced against the non-filing co-debtor’s interest in the vehicle” until the entire amount owed under the contract was paid in full.[9]