Richard is pleased to join a distinguished panel of experts, including the Honorable Alan M. Ahart, United States Bankruptcy Court, the Honorable Theodor C. Albert, United States Bankruptcy Court, the Honorable Scott C. Clarkson, United States Bankruptcy Court, Jeffery I. Golden, Weiland, Golden, Smiley, Wang Ekvall & Strok, LLP and Debra Grassgreen, Pachulski, Stang, Ziehl & Jones LLP.

Richard has been a Chapter 7 Panel Trustee for 27 years. Richard also regularly represents Chapter 11 debtors and has successfully confirmed countless Chapter 11 plans, both before and since the 2005 enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act.

The OCBA is a California State Bar approved provider of Mandatory Continuing Legal Education (“CLE”).  The program is approved for 2.0 hours of CLE credits.  More information about this and other CLE seminars is available at the OCBA website or interested parties may call the OCBA Education Dept. at 949-440-6700 ext. 125.

Super Lawyers employs a rigorous selection process with standards that culminate in a rating service of outstanding lawyers from more than 70 practice areas—all of whom have attained a high degree of peer recognition and professional achievement.  The selection process is multi-phased and includes independent research, peer nominations, and peer evaluations.

Super Lawyers has recognized Ed for his outstanding work in bankruptcy and creditor/debtor rights, including recent published cases such as In re Dick Cepek, 339 B.R. 730 (9th Cir. BAP 2006); In re Rinard, 451 B.R. 12 (Bankr. C.D. Cal. 2011); and In re Four Star Financial Services, Inc., 444 B.R. 428 (Bankr. C.D. Cal. 2011).

Super Lawyers magazine is distributed to practitioners and to ABA-accredited law school libraries.  Super Lawyers is also published as a special section in leading city and regional magazines across the country.  You can find Ed’s profile on the Super Lawyers website here.

We are proud of Ed’s achievement and this distinguished recognition.  Along with our clients and friends, we look forward to a productive and successful 2012—and we’re pleased to see Ed and the firm making such a great start to the year.

On January 14, 2012, Richard Marshack and I presented an hour-long program at the “20^th Annual MCLE Last Dash & Trade Show″ Continuing Legal Education Marathon organized and sponsored by the Orange County Bar Association (OCBA).  Our presentation was titled: “Bankruptcy Basics for the Non-Bankruptcy Lawyer” and took place at Whittier Law School in Costa Mesa, California.

We enjoy educating practitioners and enhancing the practice of bankruptcy law in our community.  Since bankruptcy law and its related areas of commercial litigation are highly specialized areas of practice, it’s not easy to present a coherent overview to non-bankruptcy practitioners in a single hour—even those experienced in other areas of law—and we find the challenge and the experience rewarding.  During our presentation, Richard and I used written materials in the form of an enhanced outline, which we promised our audience we would make available on our website. You will find the outline here: Last Dash – Bankruptcy Basics for the Non-Bankruptcy Lawyer.

The OCBA is a California State Bar approved provider of Mandatory Continuing Legal Education.  The OCBA offers a wide variety of continuing legal education programs including a yearly “Last Dash” program designed to provide MCLE credit for lawyers who need to complete multiple hours of education prior to an upcoming deadline.  The OCBAs “Last Dash” programs are always fun and we look forward to our next opportunity to participate.

Although Ms. Conners has lived in the City of Laguna Woods for only a few years, when she moved there she jumped immediately into local governance issues.  Within a year, she was elected to be president of a 9,000-member homeowners’ association in the City, a high profile job with some contentious issues that drew media attention and regularly presented Ms. Conners with governance challenges.

Ms. Conners was well-prepared by that experience to face the difficult public policy issues that have arisen during her term on the City Council, and she looks forward to bringing her experience and skill to the challenges of the Mayor’s office.  She is particularly focused on issues the City of Laguna Woods continues to deal with such as the state budget crisis, the source cost of water in the Sacramento-San Joaquin River Delta, the quality of waste-water runoff into the Pacific Ocean, and even use of energy from the San Onofre Nuclear Generating Station.

As part of her duties, Ms. Conners has testified at a regional meeting in favor of the seawater desalination plant in Huntington Beach and has spoken to the Nuclear Regulatory Commission about safety at the San Onofre Nuclear Generating Station.  Those talks included a discussion of evacuation plans for south Orange County in the event of an incident at the plant.

When asked about other issues she will focus on during her tenure, Ms. Conners said:

As Mayor, I hope to focus the City and the residents more on green issues, expanding recycling opportunities, and reducing water and energy use.  I also want to encourage our residents, who have enormous expertise in many areas, to serve on county and Southern California commissions, to increase the visibility and impact of Laguna Woods in our region.

Ms. Conners continues to represent Marshack Hays clients in business and bankruptcy litigation matters.  We are proud of her work for the City of Laguna Woods and wish her good fortune in her tenure as Mayor.

Marshack Hays LLP is pleased to welcome Sarah C. Boone. Ms. Boone joined the firm in April 2011 as an associate attorney, and arrives with substantial experience in business and civil litigation as well as bankruptcy matters.

She is an excellent writer and holds a Master of Fine Arts in Professional Writing from the University of Southern California. We also think clients of the firm find her to be focused on them as people and highly capable of dealing with the challenges of a busy practice.

Of course, Ms. Boone’s legal experience is worth a quick review. She has represented Trustees on behalf of secured and unsecured creditors where disputes often involve lenders, trade creditors, landlords and individuals. She also has extensive litigation experience—including securities actions involving public companies’ violations of the Securities Act and the Securities Exchange Act—under the umbrella of the Private Securities Litigation Reform Act.

Ms. Boone is an engaging presence and we are happy to add her valuable litigation, bankruptcy and writing skills to our practice. For more information you may visit her web profile here or download it in pdf form here.

As you may know, Ed has actively litigated bankruptcy adversary proceedings including non-dischargeability cases for 19 years. Of course, our focus at Marshack Hays LLP is always on achieving client-driven results in all forms of bankruptcy-related litigation, including non-dischargeability matters. We are proud of our litigation capabilities, and we aggressively pursue such matters when appropriate. This is a great opportunity for Ed to share his experience with other lawyers facing the challenges of taking cases to trial in our bankruptcy court system.

This OCBF Program will also feature the Honorable Erithe Smith as presiding judge and moderator along with William Burd; Evan Smiley; and Cathrine Castaldi. The participants will focus on all aspects of trial practice in the context of a non-dischargeability case, including trial preparation, opening statements, direct and cross-examination of an expert, cross-examination of the debtor, closing arguments, final comments and questions.

More information about the program is available through the Orange County Bankruptcy Forum.

Trust laws offer tangible estate and tax planning benefits, not the least of which is protection from creditors and bankruptcy trustees, in certain circumstances and to a certain extent, through valid spendthrift provisions. The priorities of good estate planning, however, are sometimes at odds with the goals of the Bankruptcy Code, which not only limits the protections of spendthrift provisions in accordance with applicable non-bankruptcy law, but deals harshly with debtors’ efforts to protect their assets from creditors—even if those efforts took place long before the bankruptcy was filed. The state and federal laws which are meant to fairly balance the rights of creditors and debtors extend into bankruptcy, making trusts one of the more fascinating issues we face, both in our firm’s capacity as counsel for debtors and creditors and, for me, as a trustee.

As a bankruptcy trustee—and “wolf” in the eyes of debtors hoping to rely on trust protections—I use these laws to test when and whether trust interests become property of a bankruptcy estate. See When Are Spendthrift Trust Interests Property of the Estate. I also analyze whether and to what extent any spendthrift provisions will protect such trust interests, shielding them from collection or turnover to a trustee in whole or in part. See When Are Spendthrift Trust Interests Property of the Estate? – Part 2. I’m also cognizant that self-settled trusts and revocable trusts present opportunities for a bankruptcy estate of which I am the representative to recover assets: such trusts generally do not offer significant protections in bankruptcy. E.g., see Schwarzkopf–The Ninth Circuit Allows Bankruptcy Trustee to Reach Assets Held in Two Weathered Trusts.

This is a challenging niche in our insolvency laws, and we look forward to discussing it with one of the professionals who do their best to “keep the wolves from the door.” Ed and I have litigated these issues in the past and are honored to speak on these topics at the invitation of the SCT&EP.

Inherited IRAs are allowed special tax treatment that may preserve some tax deferral benefits but they are treated differently than regular IRAs. In general, a beneficiary of an inherited IRA must (1) withdraw all of the funds within five years; or (2) make an election to take substantial and equal periodic distributions over their actuarial life expectancy. Under either scenario, the beneficiary’s age is irrelevant and there is no penalty for early withdrawal even if the beneficiary is less than 59 ½ years old.

Yet when beneficiaries of such accounts file bankruptcy, they often assert that such accounts are  their retirement funds and are exempt as a result. Such exemption claims essentially bootstrap the actions and intent of the deceased (i.e., retirement planning and tax free earnings accumulation) and attempt to color the debtor’s inheritance with the character of such “retirement funding” for the debtor—for exemption purposes in the debtor’s bankruptcy. Debtors making such “bootstrapping” exemption claims often base them on exemption language added to 11 U.S.C. §522(b) in the 2005 amendments to the Bankruptcy Code.

Most trustees seem to think these claims unfairly ignore the underlying statutory scheme of §522(b), as amended, and are unfair to creditors, particularly since the debtors are in fact taking withdrawals from these plans without regard to their age and working status. Instead, many trustees contend that Congress meant to clarify that IRAs and other tax exempt retirement plans would be exempt as to their taxpaying, retirement planning contributors under certain circumstances, even if the taxpaying contributors to such retirement plans transferred the funds to a different account.

Said differently, most trustees would argue that these provisions give some additional exemption protection to retirement plans set up by debtors, even if those debtors improvidently or involuntarily transfer some or all of those “retirement funds” to a different account, perhaps even an account that lacks the initial tax deferred status of the plan. But to allow these changes in the law to benefit the heirs of such a person simply defies logic especially where the debtor is young, gainfully employed and doesn’t need the money for their support upon retirement.

Nevertheless, the case law on this exemption issue is divided and there will be continued litigation as the issue pushes its way through the court system. About ten years ago I argued a case before the Ninth Circuit Court of Appeals (In re Dudley, 249 F.3d 1170 (9^th Cir. 2001)) that clarified the standard for when a private retirement account of a debtor (such as an IRA) in a California bankruptcy case should be exempt under then applicable law. Dudley held that such a fund accumulated by the debtor must be “designed and principally used” for retirement purposes.  Where a debtor is not principally using the funds for retirement (such as the beneficiary that elects to withdraw the funds from an inherited IRA within five years), allowing the exemption does not support the underlying policy for protecting retirement funds.

Currently, Marshack Hays LLP is litigating one of these cases challenging a debtor’s claimed exemption in an inherited IRA. This one case, however, is not an isolated matter and many trustees and attorneys will want to follow the outcome with interest, including members of the National Association of Bankruptcy Trustees. The particular facts and arguments in this pending case are not yet appropriate for comment. But the larger issues will continue to vex trustees and debtors’ counsel in the near future.

When a debtor re-files a bankruptcy petition within a year of dismissal, §362(c)(3)(A)¹ provides that the automatic stay “shall terminate with respect to the debtor” thirty days after the second petition. But does this extra measure of protection for creditors eviscerate the right of a Chapter 7 trustee to administer valuable estate property in the second case? Particularly where the plain meaning of §362(c)(1) provides for continued protection of the automatic stay for estate property until such property is abandoned.

A new opinion from the Bankruptcy Court in the Central District of California, In re Rinard, holds, at least preliminarily, that a Chapter 7 trustee continues to benefit from the protection of the automatic stay for estate property after the expiration of the thirty day period referenced in §362(c)(3)(A).

Chapter 7 trustees have been on high alert since a contrary holding of the Ninth Circuit Bankruptcy Appellate Panel was published in February, 2011. The BAP held in In re Reswick² (a Chapter 13 case) that the neither the debtor nor the estate is entitled to any continued protection from the automatic stay after thirty days. A significant concern among Trustees is this—what if the second case has very valuable estate property and a secured creditor decides to foreclose on the property and wipe out equity for creditors without first seeking relief from stay (or at least after obtaining a comfort order from the bankruptcy court)?

And that is exactly what happened in Rinard. Given my firm’s involvement in Rinard (see below), this post is not intended to directly address the substance of the legal issues. Rather, I’d like to make trustees and lawyers generally aware of the issues we have raised as well as current efforts underway on appeal and at the trial court level to address the important estate administration issues in Rinard and in Reswick. You may also find it interesting that in addition to reaching a result contrary to Reswick, Judge Clarkson in Rinard also concluded that bankruptcy courts are not bound by decisions of the Bankruptcy Appellate Panel.

In Rinard, my firm represents the Debtor, Richard Rinard, and acts as special counsel to the Trustee, Helen Frazer, for the limited issue of confirming that the stay did not terminate thirty days into the present case as to estate property.

In addressing the Reswick holding, we have asserted that the opinion focuses only on the language of Section 362(c)(3). In doing so, it fails to account for or explain the important introductory clause of §362(c) (see below) or the specific effects of §362(c)(1) that continues the automatic stay in effect for the benefit of estate property. The language of §362(c)(1), including the introductory clause, provides:

(c) Except as provided in subsections (d), (e), (f), and (h) of this section—

(1) the stay of an act against property of the estate under subsection (a) of this section continues until such property is no longer property of the estate;

Noticeably absent from the introductory wording in Section 362(c) is any reference to subsection (c)(3). We asserted in Rinard that if Congress had intended for the stay to terminate with respect to estate property under (c)(3), there would have been a reference to this subsection in the preamble wording of Section 362(c). Stated differently, Congress could have easily altered the preamble wording to be—“except as provided in subsections [(c)(3)], (d), (e), (f) and (h) of this section….” But it did not.

And because subsection (c)(3) is absent from this introductory clause, the plain meaning of Section 362(c) is that the stay does not terminate with respect to estate property thirty days into a case filed within one year after dismissal of a prior case.

I have spoken with counsel for Reswick who has appealed that decision to the Ninth Circuit. Also, I have another case on this exact issue where the trial court found via an unpublished decision that it was bound to follow Reswick. On behalf of the Trustee, Richard Marshack, we have appealed this other decision and are seeking direct certification to the Ninth Circuit to be coordinated with the briefing and argument on Reswick.

Based on these developments, the Ninth Circuit may soon weigh in and resolve this issue once and for all. We’ll also see if the Ninth Circuit will finally choose to weigh in on whether the decisions of the BAP are binding or persuasive.

1. Unless stated otherwise, all section references are to the Bankruptcy Code, 11 U.S.C. §§101-1330.
2. 446 B.R. 362, (9^th Cir. BAP 2011).

Trustee’s often face a procedural quagmire where debtors fail to accurately list or value assets and then seek to amend schedules and claims of exemption. Yet the Ninth Circuit BAP recently provided solace to trustees and creditors that must fall back on §105(a)¹ to object to an amended claim of exemption. The Nicholson case² confirms that the standard of proof for such an objection based on bad faith is the preponderance of evidence. The opinion should also serve as a reminder to debtors to be thorough and honest in disclosing facts regarding the existence and value of potential assets or risk losing the ability to claim some portion of that value as exempt.

The Ninth Circuit has previously held that exemption claims may be surcharged based on the bankruptcy court’s equitable power under §105(a) as follows:

“We hold that the bankruptcy court may equitably surcharge a debtor’s statutory exemptions when reasonably necessary both to protect the integrity of the bankruptcy process and to ensure that a debtor exempts an amount no greater than what is permitted by the exemption scheme of the Bankruptcy Code.”³

But in Nicholson, the Ninth Circuit BAP clarifies two important issues for exemption claim litigants. First, the Nicholson court makes it clear that §105(a) gives the bankruptcy court authority to deny an exemption claim entirely based on bad faith, not just the ability to surcharge a claim, by holding as follows:

“We reject the debtors’ argument that bankruptcy courts have no authority to disallow exemptions claimed in bad faith. Section 522(l) of the Bankruptcy Code and Rule 4003(b) of the Federal Rules of Bankruptcy Procedure permit a party in interest to object to a debtor’s claim of exemption. Further, the Supreme Court has recognized the ‘broad authority granted to bankruptcy judges,’ pursuant to §105(a) of the Bankruptcy Code, ‘to take appropriate action in response to fraudulent conduct by the atypical litigant who has demonstrated that he is not entitled to the relief available to the typical debtor.’”⁴

Second, Nicholson clarifies the standard of proof necessary for the trustee or creditor that uses §105(a) to attack an exemption claim on bad faith grounds. The court noted that “[t]he Bankruptcy Code and Bankruptcy Rules do not indicate what is the appropriate burden of persuasion for disallowing a claim of exemption.”⁵ But after noting that the Supreme Court used the preponderance of the evidence standard for whether a debt should be excepted from discharge,⁶ the court held that “a party objecting to a debtor’s claim of exemption must prove bad faith by a ‘preponderance of the evidence’ and not by ‘clear and convincing evidence.’”⁷ Unless the same standard of proof is used in both situations, the Nicholson court notes that anomalous results could occur such that, “a bankruptcy court may allow a debtor’s exemption under the higher standard, but deny the same debtor a discharge under the lower one.”⁸

The procedural facts in Nicholson summarized below demonstrate the frustrations that trustees often experience when attempting to examine debtors and determine when and whether to pursue assets or object to exemption claims.

Debtors filed a Chapter 7 petition on March 16, 2009 and stated on their schedules that they owned 50% of the stock in a small company called Applied Science, Inc. (“ASI”) that had a value of $0. They told the trustee at the 341a meeting that ASI had debts almost double the value of its assets and that their stock had no value.

Sometime later, the other stockholder of ASI told the trustee that she would pay $5,000 for the debtor’s ASI stock. The trustee moved for court approval of that proposed sale on July 28, 2009 and the debtors amended their schedules on the same day. The amendment listed the value of their ASI stock as $19,949 and the debtors also amended their schedule of exemptions to claim that entire amount as exempt under California law.

Three days later, the debtors again amended their schedules to state the value of their ASI stock as $0 and also amended their exemption claim to add an additional basis for their exemption claim in order to raise the amount claimed exempt to $22,024. A few days after that, the debtors objected to the trustee’s sale motion, asserting that the proposed sale amount would have to be increased to at least the amount of their exemption claim of $22,024.

And why would you guess that there was so much activity by the debtor surrounding the proposed sale? Perhaps the answer is that an unrelated third party had been negotiating with the debtors since at least shortly after the filing of the petition on a distribution deal that would add great value to ASI. The stock ultimately sold for $25,949 to a party aligned with the non-debtor owner of ASI.

During the course of these proceedings, the trustee learned, haphazardly and without formal discovery or disclosure by debtors, about the debtors’ efforts to revive value in ASI. The trustee perceived that the debtors had intentionally misled him and had delayed their efforts to revive ASI in order to get some future value for themselves. After the sale, the trustee objected to the debtors’ claim of exemption on the grounds of bad faith based on §105(a), seeking to deny the debtors the right to claim as exempt the sale proceeds. The trial court denied the objection finding that the evidence presented by the trustee did not meet his burden of presenting clear and convincing evidence of bad faith.

The BAP reversed the trial court on the basis that it applied an incorrect standard of proof when it found in favor of the debtors. But in sending the matter back to the trial court, the BAP noted that the debtors’ conduct, including their delay in filing a claim of exemption, “may have been a deliberate attempt by [debtor Nicholson] to gain an economic or tactical advantage at the expense of his creditors.”⁹

So the lesson for debtors remains clear. Be honest and complete. And if you try to gain some clever tactical advantage over your trustee and creditors by failing to disclose pre or post-petition information that is relevant, don’t be surprised if your trustee uses §105(a) to strip you of any gain.

Ed Hays specializes in business litigation and bankruptcy. He has over 18 years of experience in complex litigation, business litigation and bankruptcy matters. Over the years, Mr. Hays has represented businesses, creditors and bankruptcy trustees in complex core and non-core bankruptcy proceedings. He is a previous Chair of the Commercial Law & Bankruptcy Section of the Orange County Bar Association.  He has also served in the past as a Judge Pro Tem in the Los Angeles County Superior Court. He is a founding partner of Marshack Hays LLP in Irvine, California and may be reached at 949.333.7777.

1. Unless stated otherwise, all section references are to the Bankruptcy Code, 11 U.S.C. §§101-1330.
2. Tyner v. Nicholson (In re Nicholson), 435 B.R. 622 (9th Cir. BAP 2010).
3. Latman v. Burdette, 366 F.3d 774, 786 (9^th Cir. 2004).
4. Nicholson at p. 630, citing Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365, 374-75 (2007); and relying also on Latman, 366 F.3d, at 784-86.
5. Id. at 631.
6. Grogan v. Garner, 498 U.S. 279 (1991).
7. Nicholson, at 634.
8. Id. at 633, citing United States v. Arnold & Baker Farms (In re Arnold & Baker Farms), 177 B.R. 648, 654 (9^th Cir. BAP 1994).
9. Id. at 635.