Thursday, January 22, 2015

SCOTUS to Decide if Bankruptcy Courts Are (Still) Unconstitutional

By Michael Fuller, The Underdog Lawyer ®

Last Wednesday, in Wellness International Network v. Sharif, the Supreme Court heard arguments that called into question the authority of bankruptcy courts to enter final judgments in certain matters.

Three Constitutional provisions are relevant to the Wellness International case.

See related post from June 9, 2014: Supreme Court Clarifies "Stern Claim" Treatment in Bankruptcy Litigation

What Does the Constitution Say About Bankruptcy?

Article I of the Constitution assigned Congress to establish bankruptcy laws.

Article III of the Constitution assigned the federal court system to resolve legal disputes. The Constitution makes clear that federal court judges are entitled to serve for life with guaranteed pay that can never be reduced.

See related post: Portland federal judges earn $174,000 per year

The Seventh Amendment to the Constitution entitles parties to jury trials in most civil cases. Courts have held that jury trials under the Seventh Amendment must be conducted by Article III judges. Courts have also held that a party may waive its right to a jury trial under the Seventh Amendment.

How Are Bankruptcy Judges Created?

Rather than give all federal judges lifetime tenure and guaranteed pay, Congress decided to create a second tier of "Non-Article III" judges.

This second tier of judges includes magistrates, bankruptcy judges, administrative law judges, etc.

What is the Bankruptcy Code?

In 1978, Congress passed the Bankruptcy Code, pursuant to its Article I authority. Congress envisioned that non-Article III bankruptcy judges would decide all core bankruptcy matters.

However, in its 2011 opinion Stern v. Marshall, the Supreme Court ruled that the Constitution did not permit a bankruptcy judge to enter final judgment in a core bankruptcy matter because the state law counterclaim at issue wouldn't necessarily be resolved in the bankruptcy claims process.

The Wellness International Case

The Supreme Court's decision in Wellness International may finally require Congress to re-tool the Bankruptcy Code.

The case involves a bankrupt businessman who objected to the entry of final judgment against him by the bankruptcy judge on a certain state law claims involving his family trust.


Absent consent of all the parties involved, the Constitution simply doesn't allow a non-Article III judge to exercise the power of the federal judicial system.

In 1982, the Supreme Court warned Congress that the Bankruptcy Code and Bankruptcy Reform Act was unconstitutional. Rather than fix the problem, Congress passed the similarly unconstitutional Bankruptcy Amendments and Federal Judgeship Act of 1984, which was held unconstitutional by the Supreme Court in 2011.

It may be possible to maintain the current system on a case-by-case basis where all parties consent to entry of final judgments by a bankruptcy judge. However, this "consent" option will often defeat the very purpose of using specialized bankruptcy judges by creating uncertainty, and drawn out, expensive, bifurcated litigation.

Congress should either (1) authorize bankruptcy judges under Article III, or (2) withdraw the reference of bankruptcy matters to bankruptcy judges all together, and let the judiciary decide how to handle cases under Title 11.

Saturday, December 13, 2014

Ninth Circuit Upholds $300,000 Punitive Damages in Light of $1 Actual Damages

By Michael Fuller, The Underdog Lawyer ®

On Wednesday, the Ninth Circuit Court of Appeals upheld a $300,000 punitive damages jury verdict, in light of only $1 nominal damages suffered by the consumer.

Juries may generally impose punitive damages to deter undesirable corporate conduct. However, the Supreme Court has prohibited punitive damages in amounts that are "grossly excessive" in light of the actual damages awarded.

See Related Story by The Oregonian's Laura GundersonJudge cuts Oregon woman's award in Equifax case from $18.4 million to $1.62 million

Wednesday's en banc opinion, State of Arizona v. Asarco, involved a large copper mine that intentionally violated an employee's civil rights.

The jury compensated the employee $1 nominal damages, and $869,750 punitive damages. After trial, the judge reduced the punitive damages amount to the statutory maximum of $300,000, and the copper mine appealed.

The Ninth Circuit determined that the $300,000 punitive damages verdict was Constitutionally permissible, based on the defendant's (1) size, (2) prior notice of the $300,000 statutory maximum, and (3) its reprehensible conduct and mind set.

Friday, November 28, 2014

Violate Bankruptcy Stay, Skip Court, Avoid Punitives, says Appellate Panel

Earlier this week, the Eighth Circuit Bankruptcy Appellate Panel reversed an award of punitive damages against a landlord who willfully violated the Bankruptcy Code's automatic stay.

Eviction Violates Automatic Stay

The case involved a consumer-tenant in an active chapter 13 bankruptcy.

The consumer's landlords, Eldon Bugg, and his son, Danny Bugg, wrongfully changed the locks on his rental home, then damaged his vehicle by towing it without permission.

At trial, the bankruptcy court determined the landlords violated the automatic stay, and imposed $2,000 punitive damages against the father, who failed to personally appear to testify.

Punitive Damages Reversed on Appeal

On appeal, the Appellate Panel reversed the award of punitive damages against the father who skipped trial.

The Panel acknowledged that punitive damages may be appropriate based on (1) the nature of the creditor's conduct, (2) the nature and extent of harm to the debtor, (3) the creditor's ability to pay damages, (4) the level of sophistication of the creditor, (5) the creditor's motives, (6) and any provocation by the debtor.

However, the Panel reasoned that the bankruptcy judge didn't, "make specific findings of fact as to Eldon Bugg's motive or egregious conduct in violating the stay."


It's unclear why the Panel reversed the punitive damages award on an abuse of discretion standard, when its own account of the record seemed to justify sanctions.

The Panel's opinion explains that the trial judge specifically found that the father (1) previously misled the court, (2) intentionally violated the automatic stay, (3) left his son hung out to dry by skipping trial, and (4) caused severe disruption and harm to the consumer's life and property.

The opinion doesn't indicate that the consumer provoked the violation, and the fact that the landlord was in business for profit justified an inference that he had the ability to pay the modest $2,000 award, and his prior motions practice and representation by counsel proved he was somewhat sophisticated.

Of the six "punitive damages" factors the Panel cited as persuasive, only the fifth "motive" factor appears not to have weighed in favor of the consumer.

Tuesday, November 25, 2014

Ninth Circuit Bankruptcy Appellate Panel Vacates Discharge Contempt Order

By Michael FullerThe Underdog Lawyer ®

Earlier this month, the Ninth Circuit Bankruptcy Appellate Panel clarified the procedural requirements necessary to hold a creditor in contempt for willful violation of the discharge order.

See related New York Times article: Debts Canceled by Bankruptcy Still Mar Consumer Credit

The Panel's recent opinion, Yen v. Pedroche, involved a creditor whose gambling debts were discharged in bankruptcy. 

The bankruptcy judge held the creditor in contempt of the discharge order based on his attempt to re-recorded his judgment against two consumers after bankruptcy.

On appeal, the Panel remanded the case back to bankruptcy court for a determination as to whether the creditor actually believed the discharge order applied to his claim.

The Panel reasoned that, "The bankruptcy court made no factual finding that Yen knew that the discharge injunction applied to his claim."

The Panel's reasoning appears to contradict its prior December 2013 opinion called In re Chionis. Oddly, Bankruptcy Judges Pappas and Kurtz took part in both opinions.

In Chionis, a creditor violated the discharge injunction by continuing litigation in mistaken reliance on a “no discharge” provision in his contract. However, the bankruptcy judge refused to hold the creditor in contempt because he subjectively believed the discharge order did not apply to him.

The Panel reversed the bankruptcy judge in Chionis, holding that the creditor’s choice to ignore warnings and refusal to do research or take precautionary measures constituted contempt.

Although the Yen and Chionis opinions reached opposite conclusions, their reasonings were distinguishable in at least two regards.

First, the bankruptcy judge in Chionis held a trial, as opposed to Yen, where the contempt order was based solely on the written record.

Second, the creditor in Chionis had multiple warnings that his lawsuit violated the discharge order. In Yen, the record did not reflect any prior warnings.

Regardless of these distinctions, the Panel's Yen holding is troubling, to the extent it may condition a consumer's "fresh start" on whether they can prove a creditor's illegal conduct was actually intended to violate the discharge injunction.

In the Ninth Circuit, consumers have no inexpensive way to remedy discharge violations.

No matter how minor the violation, it cannot be resolved in small claims court or mediation. Rather, the Walls v. Wells Fargo opinion requires consumers to hire special bankruptcy counsel to re-open their bankruptcy cases and pursue contempt remedies.

Requiring clear and convincing evidence of a creditor's actual subjective intent to violate the discharge injunction will prohibit many consumers from enforcing their "fresh starts".

For this reason, bankruptcy courts should continue to rely on Chionis for the proposition that a creditor who chooses to remain ignorant of the bankruptcy rules should do so at its own peril.

Ignorance of the bankruptcy laws is no excuse for consumers, and discharge violators should be held to the same standard.

Sunday, November 23, 2014

Mortgage Company Denies Gay Portland Widower Equal Protection

By Jason Reynolds, Oregon Consumer League

Brooks married his domestic partner, Jimmy, in 1982. They remained partners for 16 years but their hand-made marriage certificate was never recognized under Oregon law.

See related article: Openly Charitable Judge to Decide Same-Sex Marriage Case

The couple eventually purchased a Portland home together in 1996.

“I made the down payment,” says Brooks, “And we put the title and loan in Jimmy’s name because he was expected to live longer than me.”

When Jimmy died in 1998, Brooks remained in the home and continued to pay the mortgage.

The loan was later transferred to Green Tree Mortgage LLC in 2011. Green Tree eventually initiated foreclosure proceedings in 2013 to sell the home and recover its equity.

On October 29, 2014, Brooks halted the foreclosure by removing it to federal bankruptcy court.

In legal documents filed yesterday, Green Tree argued Brooks has no protections under the bankruptcy automatic stay because he was not on the loan or title.

The mortgage company’s motion to remand states, “It is Green Tree’s position that the real property at issue in this matter is not even property of the estate.” Read Green Tree's Motion and Brooks' Response.

Brooks and his team of pro bono attorneys disagree.

“Green Tree’s trying to deny him equal protection under the Bankruptcy Code,” says pro bono attorney Michael Fuller, with the law firm OlsenDaines.

“If Brooks was a straight widower, this would largely be a non-issue,” says Fuller.

“Oregon law allows married couples to hold property for the benefit of each other, regardless of the record title holder,” Fuller argues.

“We find Green Tree’s position meritless, inequitable, and personally offensive,” he says.

Green Tree’s attorney, Katrina Glowowski, refused to comment.

Brooks says his health is failing and he hopes to spend his final days in the home he made with Jimmy.

“So long as he continues to make the monthly payments, he’s legally entitled to remain in his home,” says Fuller.

“This is a fight we’re prepared to take on appeal if necessary,” he says.

The matter is set for a preliminary hearing in Portland bankruptcy court on December 9.

Monday, November 17, 2014

Supreme Court to Decide Bankruptcy Mortgage Strip Issue

By Michael FullerThe Underdog Lawyer ®

This morning the Supreme Court agreed to resolve a circuit split as to whether consumers can wipe out wholly unsecured second mortgage liens in chapter 7 bankruptcy.

The practice of "lien stripping" is widespread across the country in chapter 13 bankruptcy. The practice is allowed under chapter 7 of the Bankruptcy Code only in the 11th Circuit.

The 11th Circuit relies on its 1989 opinion Folendore to allow chapter 7 debtors to strip Bank of America's unsecured second mortgages. However, the Supreme Court's 1992 opinion Dewsnup v. Timm held that mortgage lien rights are not altered in chapter 7.

The two 7th Circuit opinions accepted on cert today are:


This joint cert shows good case selection by Bank of America's appellate team.

The Roberts Court's bankruptcy case selection has been very non-controversial. True nerds will recall that recent unanimous SCOTUS bankruptcy opinions include:

Even Ransom v. FIA (2011) and Hamilton v. Lanning (2010) and were unanimous with the exception of Justice Scalia.

I expect the Supreme Court to rule 8-1 in Bank of America's favor. (Scalia wrote the dissent in Dewsnup).

Until Congress changes 11 U.S.C. § 506, consumers across the country must rely solely on the provisions of chapter 13 to wipe out unsecured second mortgage liens.

Wednesday, October 29, 2014

Bankruptcy Court Cannot Award Appellate Fees, Panel Rules

By Michael FullerThe Underdog Lawyer ®

Yesterday, the Ninth Circuit Bankruptcy Appellate Panel ruled that trial courts cannot reimburse consumers for the litigation expenses they incur defending frivolous appeals of contempt orders.

The case, In re Wallace, involved a family who had filed bankruptcy, in part, to stop a lawsuit against them by a creditor.

Creditors Cannot Continue Lawsuits after Bankruptcy

After the bankruptcy discharge order was entered, the creditor was held in contempt for continuing its lawsuit against the Wallace Family.

The creditor appealed the contempt order twice, but lost on appeal both times. The bankruptcy court affirmed its award of damages against the creditor, but denied the Family's request for reimbursement of attorney fees they incurred on appeal.

In its opinion, the Panel held that bankruptcy courts cannot compensate consumers for the attorney fees they incur defending contempt orders on appeal and remand.

The Panel relied on a prior Ninth Circuit opinion, In re Del Mission, Ltd., to justify its holding.

In the Del Mission case, the opinion held that section 105(a) of the Code does not permit bankruptcy courts to award fees incurred on appeal. The opinion reasoned that Appellate Procedure Rule 38 authorizes only appellate courts, not bankruptcy courts, to award reimbursement for defending a frivolous appeal.

As a result of the Panel's opinion, the Wallace Family is left with a $16,000 bill for successfully defending a sanctions award of just $3,000 damages.


The unfair result in this case highlights the problem with the American Rule, which generally requires parties to pay their own attorney fees, even when they win.

In this case, the Wallace Family was forced to give up their fresh start, despite having done nothing wrong, just to enforce their discharge.

As the Wallace Family now knows, the American Rule gives wealthy parties greater access to justice, and discourages underdogs from fighting for what's right. But God Bless America.

Kudos to Nevada attorney Christopher Burke for continuing to raise meritorious consumer bankruptcy issues before the Ninth Circuit on appeal.

Win, lose, or draw, Burke's hard-fought cases (Schwartz-Tallard, In re Mwangi, etc.) continue to shape the landscape of consumer bankruptcy litigation. With any luck, Congress might review some of the unintended consequences highlighted in his cases (In re Mwangi in particular) before it enacts the next round of Bankruptcy Code amendments.

Respectfully, I agree with the Panel in this case. FRAP 38 provided the Wallace Family the opportunity to petition the appellate court for fee reimbursement on appeal.

Consistent with the Supreme Court's March 2014 holding in Law v. Seigel, the Panel correctly decided that a bankruptcy judge's equitable powers under section 105(a) cannot conflict with remedies provided for elsewhere in the Bankruptcy Code or federal rules.