bankruptcy

Clark v. Rameker

Issues: 

Is an inherited individual retirement account a “retirement fund” under the Bankruptcy Code, and thus exempted from a debtor’s bankruptcy estate?

In October 2010, Heidi Heffron-Clark and Brandon Clark filed a voluntary joint Chapter 7 bankruptcy and claimed an inherited IRA under the retirement funds exemption of Section 522 of the Bankruptcy Code. The bankruptcy trustee and creditors objected to the claimed exemption. The district court concluded that inherited IRAs are exempted because they do not lose their character as retirement funds once they are passed onto the beneficiary. The Seventh Circuit Court of Appeals reversed the district court’s decision, stating that an inherited IRA does not qualify for a retirement fund exemption because it was not set aside for the debtor’s retirement. The United States Supreme Court must decide if an inherited IRA constitutes a “retirement fund” under Section 522. This case implicates debtors’ and creditors’ access to inherited IRAs once a debtor files for bankruptcy.

Questions as Framed for the Court by the Parties: 

Whether an individual retirement account that a debtor has inherited is exempt from the debtor's bankruptcy estate under Section 522 of the Bankruptcy Code, 11 U.S.C. 522, which exempts "retirement funds to the extent that those funds are in a fund or account that is exempt from taxation" under certain provisions of the Internal Revenue Code.

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Facts

Ruth Heffron established an Individual Retirement Account (“IRA”) and designated her daughter, Petitioner Heidi Heffron-Clark, as the sole beneficiary. See In re Clark, 714 F.3d 559, 560. When Ruth died in September 2001, the account, worth approximately $300,000, passed to Heidi.

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Executive Benefits Insurance Agency v. Arkison

Issues: 

Does Article III of the Constitution permit bankruptcy courts to enter final judgments in “core” proceedings as defined in 28 U.S.C. § 157(b)? If not, can bankruptcy courts exercise jurisdiction over litigants through their “implied consent”?

In 2011, the Supreme Court held in Stern v. Marshall that bankruptcy courts are constitutionally barred from granting final judgments on certain “core” state law claims. Since then, lower courts have tried to determine the scope of the holding, which addresses bankruptcy courts’ ability, as non-Article III courts, to preside over issues traditionally considered to be core bankruptcy issues. Petitioner, Executive Benefits Insurance Agency, (“EBIA”) was a third party to a bankruptcy proceeding. The bankruptcy court found that the debtor in the proceeding had fraudulently transferred $373,291.28 to EBIA before filing for Chapter 7 bankruptcy. The bankruptcy trustee, Arkison, sued EBIA to recover those funds, and the bankruptcy court granted a judgment against EBIA. EBIA appealed and invoked Stern v. Marshall, claiming that the bankruptcy court could not enter a final judgment on a fraudulent transfer claim. The district court and Ninth Circuit affirmed the bankruptcy court, reasoning that EBIA had impliedly consented to the bankruptcy court’s jurisdiction. The Supreme Court’s ruling in this case will clarify the limits of Stern v. Marshall and define “core” bankruptcy proceeding. The Court will also determine what kind of consent is necessary for bankruptcy courts to have jurisdiction over claims requiring adjudication by Article III judges. 

Questions as Framed for the Court by the Parties: 

In Stern v. Marshall, 131 S. Ct. 2594 (2011), this Court held that Article III of the United States Constitution precludes Congress from assigning certain “core” bankruptcy proceedings involving private state law rights to adjudication by non-Article III bankruptcy judges. Applying Stern, the court of appeals for the Ninth Circuit held that a fraudulent conveyance action is subject to Article III. The court further held, in conflict with the Sixth Circuit, that the Article III problem had been waived by petitioner’s litigation conduct, which the court of appeals construed as implied consent to entry of final judgment by the bankruptcy court. The court of appeals also held, in conflict with the Seventh Circuit, that a bankruptcy court may issue proposed findings of fact and conclusions of law, subject to a district court’s de novo review, in “core” bankruptcy proceedings where Article III precludes the bankruptcy court from entering final judgment. The court of appeals’ decision presents the following questions, about which there is considerable confusion in the lower courts in the wake of Stern: 

  1. Whether Article III permits the exercise of the judicial power of the United States by bankruptcy courts on the basis of litigant consent, and, if so, whether “implied consent” based on a litigant’s conduct, where the statutory scheme provides the litigant no notice that its consent is required, is sufficient to satisfy Article III.
  2. Whether a bankruptcy judge may submit proposed findings of fact and conclusions of law for de novo review by a district court in a “core” proceeding under 28 U.S.C. 157(b). 

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Facts

Nicholas Paleveda and Marjorie Ewing, a married couple, operated a series of companies, including Aegis Retirement Income Services, Inc. (“ARIS”) and the Bellingham Insurance Agency, Inc. (“BIA”). See Exec. Benefits Ins. Agency v. Arkison (“EBIA”), 702 F.3d 553, 556 (9th Cir.

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Law v. Siegel

Issues: 

If a debtor in bankruptcy commits misconduct during bankruptcy proceedings, can statutory exemptions previously granted to him be revoked as punishment for his misbehavior?

Stephen Law filed for Chapter 7 bankruptcy, and Alfred Siegel was appointed as his bankruptcy trustee. Law filed for and was granted an exemption for a value of $75,000 in equity for his home under § 522 of the Bankruptcy Code. Throughout the bankruptcy proceedings, however, Law was uncooperative, and ultimately defrauded the court and Siegel. After Law fraudulently claimed a second mortgage on his home, the court granted Siegel’s request to revoke the previously granted exemption in order to pay administrative expenses for the proceedings. Law argues that by granting the revocation, the court frustrated Congress’s intent to give debtors sufficient funds to support themselves when they emerge from bankruptcy. Siegel responds that courts have the power to protect the judicial process through equitable revocation of exemptions when dishonest and misbehaving debtors act to damage the judicial process. The Supreme Court will decide whether bankruptcy courts have the power to revoke congressionally granted exemptions for debtors’ assets as punishment for debtor misconduct. The decision will impact debtors in bankruptcy and the security of the minimal assets they might retain after proceedings. 

Questions as Framed for the Court by the Parties: 
  1. Whether § 105 empowers a bankruptcy court to eliminate an exemption that § 522 guarantees to the debtor?
  2. Whether a bankruptcy court may—under § 105(a) or its inherent sanctioning powers—order the equitable forfeiture of a claim to an exemption based on the debtor’s egregious misconduct in seeking to wrongly withhold non-exempt assets from the estate? 

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Facts

In January 2004, Stephen Law filed a Chapter 7 petition for bankruptcy. See Law v. Siegel, No. CC-10-1499-MkLaPa, at *2 (B.A.P. 9th Cir.). Alfred H. Siegel acted as the Chapter 7 trustee.

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Bullock v. BankChampaign, N.A.

Randy Bullock filed for bankruptcy in 2009 to discharge a judgment debt from a 1999 lawsuit brought by his brothers. His brothers had sued him for breach of fiduciary duty as trustee of their father's trust. Bullock was appointed trustee in 1978, and without the beneficiaries' knowledge, took three loans from the trust, which he ultimately paid back in full. In 2002, an Illinois state court awarded the brothers damages of $285,000, concluding that Bullock did not appear to have malicious intent, but that he indisputably engaged in self-dealing, thus violating his fiduciary duty. After filing for bankruptcy, BankChampaign, N.A., who was appointed successor trustee, sued Bullock pursuant to 11 U.S.C. § 523(a)(4), claiming that he could not discharge the judgment debt because it arose from a "defalcation." The court concluded that Bullock's self-dealing constituted defalcation, and the district court and Eleventh Circuit affirmed. The Supreme Court's decision will determine what level of misconduct by a trustee rises to "defalcation" under the Bankruptcy Code.

Questions as Framed for the Court by the Parties: 

What degree of misconduct by a trustee constitutes "defalcation" under § 523(a)(4) of the Bankruptcy Code that disqualifies the errant trustee's resulting debt from a bankruptcy discharge - and does it include actions that result in no loss of trust property? 

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Issue(s)

What is the definition of “defalcation” under § 523(a)(4) of the Bankruptcy Code?

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