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Bail Bond Guarantees Are Dischargeable

This practice includes the prosecution of contempt as to those that violate the discharge injunction.  However, when considering whether you can or should proceed with a discharge injunction violation you have to look carefully at the exceptions to discharge as stated in 11 U.S.C. § 523.  If there is an exception is it one that requires an actual adversary by the opposing party while the bankruptcy is pending, or is the debt simply immune from any discharge entered due to the type of debt it represents.  It is always a question.

In this regard, the 10th Circuit Court of Appeals has now stated that 11 U.S.C. § 523(a)(7) does     not render nondischargeable a debt incurred by a debtor who has     guaranteed a bail bondsman to make the bondsman whole in the event a     criminal defendant jumps bail.

In a case of first impression for the Court, it ruled in  Affordable Bail Bonds, Inc. v. Sandoval (In re Sandoval) that a judgment obtained before the filing of a case for the guarantee of payment to a bail bond company on an appearance bond was dischargeable because § 523(a)(7) did not apply.

In this case the Debtor, Sandoval, entered into a "plain talk" contract with the Bondsman, Affordable, as an indemnitor in the even the person being bailed did not appear as required.  The Debtor paid the Bondsman $1,600.00 for the bond and agreed to reimburse the Bondsman for actual expenses in case of forfeiture, including the "full amount of the bail forfeited".

The 10th Circuit stated a few caveats:  "It is important at the outset to understand what this case is not. It is not a case where the debtor was the defendant in the underlying criminal action who had previously jumped bail and is now attempting to get his debt to a governmental unit discharged in bankruptcy. Nor is it a case involving a bail-bondsman debtor or other type of surety debtor who is attempting to discharge a debt owing directly to a governmental unit incurred as a result of the
nonappearance of a defendant. We are not concerned here with the nature, scope, or operation of the bond agreement between the Bondsman and the State of Oklahoma".

In light of these caveats, the Bankruptcy Court had gone into some discussion that the Debtor was not a party to the bonds that were forfeited, and the debt was therefore not a fine or a penalty.  The 10th Circuit cut through this by stating it does not matter because this type of "debt is not payable to and for the benefit of a governmental unit, and thus the statute does not bar discharge".  All that mattered was that the "Bondsman is a nongovernmental corporate entity ... and the fact that [the Bondsman] ultimately paid money to the State of Oklahoma after [the one bonded out] failed to appear does not change [the Bondsman's] status from that of a private corporate entity".  The Bondsman had attempted to bootstrap the government entity prong of The Bondsman attempts to satisfy the government-entity prong of § 523(a)(7) by arguing that [the Bondsman] should be subrogated to the rights of the State of Oklahoma.  The 10th Circuit, as the Bankruptcy Court before it, was unpersuaded, stating:  "the State had no rights on the bail bond or otherwise against the [the Debtor]. Thus, 'stepping into the shoes' of the State as a subrogee avails the Bondsman nothing in regard to the dischargeability of the debt and fails to afford the Bondsman status as a governmental unit.

The Bondsman relied on a public policy argument, which would seem to contravene the Bankruptcy Code.  The 10th Circuit concluded that “'[E]xceptions to discharge are to be narrowly construed, and because of the fresh start objectives of bankruptcy, doubt is to be resolved in the debtor’s favor.”' (Internal cite omitted).

5th Circuit Establishes Interest Rate In 13 Plans As Prime Plus And Not Contract Rate

This has been much consternation about how to calculate the effective interest to creditors to be paid through Chapter 13 plans since BAPCPA passed in 2005.  Some creditors have continued to demand higher interest rates and have argued that BAPCPA had some way abrogated the Supreme Court's decision in Till v SCS Credit Corp., 541 U.S. 465 (2004) given the anti-cramdown provision in the new Bankruptcy Code.  Some bankruptcy judges have even argued against Till by looking at the decision personally and stating that not even bankruptcy judges can get such an interest rate.  Well, the issue is closer to be resolved.

I guess we all owe bankruptcy attorney William (Bill) Lively of Tyler, Texas a debt of gratitude in sticking with this matter, because the 5th Circuit now seems to have leveled the playing field in a decision that benefits the debtors and consumers.

In a ruling upholding the decision of the Bankruptcy Judge Bill Parker for the Eastern District of Texas, the 5th Circuit Court of Appeals in New Orleans ruled in the soon to be published decision of Drive Financial Services v. Bobby and Freda Jordan (here) (5th Cir. March 12, 2008), that the "hanging paragraph" following 11 U.S.C. § 1325(a)(9), which would limit the stripping down of a purchase money security interest of collateral purchased within 910 days of the bankruptcy filing, did not prevent a cram down of the interest rate consistent with the Supreme Court's decision in Till.

Drive Financial argued the hanging paragraph of § 1325(a)(9) made 11 U.S.C. § 506 inapplicable, and that the Supreme Court's decision in Till should not apply because (1) it was decided for the hanging paragraph was enacted into law, and (2) Till was a fragmented court decision in which no narrow ground was established as to how interest in a Chapter 13 plan was to be determined .  Therefore, Drive Financial argued that the Court should mandate its prior "presumptive contract rate approach" in Green Tree Fin. Servicing Corp. v Smithwick, 121 F.3d 211, 214-15 (5th Cir. 1997), which basically said that the plan should require the rate of interest required in the contract unless the debtor could prove that the lender would now loan the money at a lesser rate.

This would make a big difference in the feasibility of of plans proposed by debtors, especially those debtors that took out the infamous subprime loans with lenders like Drive Financial.  Whether defined as predatory lending or not, the combination of high interest rates and high collateral value is a recipe for a failed bankruptcy plan. In this case Mr. and Mrs. Jordan had an outrageous interest rate of 17.95%.  Mr. and Mrs. Jordan had proposed a more reasonable rate of 7.5%, or a few points over the prime rate at the time.  If they had been required to pay the full amount owed on the vehicle they financed through Drive Financial, and pay the contract interest, it could have seriously jeopardized not only their plan or reorganization, but the plans of most debtors who have been forced to deal with subprime automobile lenders before filing.  In short, there might not be much relieve afforded by the filing of a bankruptcy.

The 5th Circuit found Drive Financial's argument to be "unpersuasive" because Till did not rely upon the fact that the creditor's claim had be bifurcated using 11 U.S.C. § 506, and the purpose of bifurcation is to determine how much of the claim is secured and not how much interest must be paid in a plan.  Further, the hanging paragraph only prevents the bifurcation of the purchase money secured claims that are less than 910 days old at the time of the filing of the bankruptcy case.  The Court found that the only difference in Till and the case at hand is that in Till only part of the claim under the pre-BAPCPA Bankruptcy Code was secured while the full claim under the Post-BAPCPA claim is secured.  As such, Till was not superseded by BAPCPA.

The 5th Circuit also disagreed that the decision in Till was so fragmented that it did not state precedent that had to be followed in regard to plan interest rate calculations.  In fact, the 5th Circuit found that although the Justices of the Supreme Court might have been divided on issues, that a plurality of them, joined by Justice Thomas, concurred in judgment to specifically overturn the 7th Circuit the applied essentially the same standard that the 5th Circuit had applied in Smithwick, above.  To reapply Smithwick, the holding of which had been specifically overturned by the Supreme Court by five currently active justices of the Supreme Court, "would be untenable at best".

The common denominator of Till stated that creditors being paid through a plan are entitled to apply a standard of prime plus rate and not the contract rate.  Justice Thomas argued against a risk premium being added to prime, but otherwise agreed with the other 4 justices in the majority.

(Picture of Tyler Bankruptcy Court Building).

FDCPA May Not Be A Substitute For A Good Old Injunction Violation Case

Suing creditors and debt buyers under the FDCPA when they also violate a discharge injunction issued by a bankruptcy court may not be the panacea most newly minted consumer lawyers think.  (The same thing is true when considering automatic stay litigation).

Lawyers tend to like the FDCPA because they believe they can recover statutory damages for the debtor on top of actual damages and possible punitive damages.  The problem is that the FDCPA and litigating a typical discharge injunction violation have different defenses, with the FDCPA being more liberal.  Also, the extra money that can be recovered is limited to $1,000.00.

FEDERAL APPELLATE COURTS STRUGGLING TO LET GO OF THEIR OLD PACK RAT WAYS

Because of the absolute volume of cases in the past, combined with the absolute volume of paper in each case, bankruptcy courts were on the forefront of electronic filing and noticing with the PACER/ECF system offered by Administrative Office of U. S. Courts.  The system is cheap, integrated and virtually seamless.  It saves time, money and energy for both the courts and practitioners.  Of all the gripes, deserved and undeserved, that lawyers have about the bankruptcy courts, this is not one of them.  It is a bright spot that as allowed many lawyers to compete effectively and develop Third Wave law firms and practices.

Even in the bankruptcy courts we still see some judges struggling to make themselves adapt to a paperless environment.  You know the ones.  They refer to old fashion paper calendars in court.  They print off pleadings that have been electronically filed and lug them into the courtroom.  They rarely look at their multiple computer screens during hearings, including scheduling conferences.  They print off proposed orders electronically submitted, scratch on them with a pen, sign them by hand, then have their staff rescan the document, and all of this despite the fact they can see them, alter them and sign them online.  But, this stage is passing quickly in the bankruptcy courts.

United States District Courts are generally newer to the system.  Many are still using the old faxing systems, for example.  But the same technology is available to the district courts and they are moving faster and faster into the virtual and paperless world.

The hold out are the United States Courts of Appeals, which would appear strange because there must be no other Court that is as inundated with paper as are these Courts.  These justices are pack rats in the sense that they have gotten so use to hoarding and lugging around pleadings, papers, opinions, orders, court records, motions and briefing the size of phone books.  It also makes less sense in that the justices and staff and clerks to these justices are less centralized.  As a result their binding, color coating and copy rules are killers.  Instead of having the documents uploaded in virtual form, these court's must maintain huge copying, printing, paper and FedEx bills transporting these files around.

Well, there are finally signs that the Courts of Appeals might be coming into the fold.  According to Law.Com the 8th U.S. Circuit Court of Appeals recently announced on its Web site that it will begin implementing its appellate electronic case filing system in December, and experts are hoping that the other federal appellate courts are not far behind.  As stated by Howard J. Bashman of Law.Com:

Federal trial court judges, who were initially skeptical of moving from a paper-based to an electronically based filing system, have generally grown to appreciate ECF, and are now accustomed to reading briefs on the computer. One noteworthy advantage of ECF for these judges is that they can file and serve orders and opinions on any day, and at any time, without relying on the Clerk of Court's office. And thanks to the incremental launch of ECF in the courts, the vast majority of cases that will be the subject of ECF appellate proceedings will have begun as ECF cases in the trial court.

Just as federal trial court judges were once skeptical of eliminating paper with the advent of ECF, federal appellate judges must now decide whether to require the filing of paper copies of briefs and appendices in addition to the ECF copies. Perhaps not surprisingly, federal appellate judges are, at least at the outset, even more reluctant than federal trial judges to abandon briefs and appendices filed on paper.

That reluctance is unfortunate, as ECF offers many potential benefits, the greatest of which may be the elimination of the need for an appendix printed on paper. In the days before ECF's use in federal district courts, only one copy of a paper-based trial court record was generated, which meant the parties on appeal had to reproduce in an appendix additional copies of the most relevant items in the trial court record -- pleadings, exhibits, briefs, transcripts -- so that each appellate judge could have a copy of those materials handy while considering what decision to reach in the case.

9TH CIRCUIT BAP SAYS THAT DIRECT APPEAL OF BANKRUPTCY CASES ONLY APPLIES TO CASES FILED AFTER OCTOBER 17, 2005

On June 12, 2006, the United States Bankruptcy Appellate Panel of the Ninth Circuit, in Berman v. Maney, (In re Berman), BAP No. AZ-06-1133, held that the direct appeal provision of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) and the Interim Rules adopted to effectuate it do not apply to appeals arising from bankruptcy cases filed before October 17, 2005.