All posts in Cases

Hidden on the fourth page of the Daily Journal, I fell upon a remarkable decision…one that seems to have caught little notice among my peers.

Federal Bankruptcy Law Trumps The State Constitution!  So says Bankruptcy Judge Steve Rhodes as he specifically pointed to the Federal Bankruptcy Code as a method to not only modify the rights of pension holders but went further to add that Pensions ARE NOT entitled to  “extraordinary protection”. Now, I am not too bashful to admit nor too proud to declare —But I am surprised as to the directness of the oral opinion.  I am only surprised as I thought the constitution with ironclad protections (i.e. ” the financial benefits of each pension plan and retirement system of the state and its political subdivisions . . . shall not be diminished”) would entitle the State(‘s) the political and legislative weight to protect those very specific provisions. Judge Rhodes found that if the legislatures truly wanted to protect the pensioners from taking a “haircut” like those of “general bondholders” then they could of taken the additional step in amending the state constitution to protect pensions from Bankruptcy, however “it did not” and therefore a Final Salary Transfer Advice was necessary for the pensioners, since no one led them to the right path.

His premise? “This once proud and prosperous city can’t pay its debts. It’s insolvent. It’s eligible for bankruptcy,” Rhodes said in announcing his decision. “At the same time, it also has an opportunity for a fresh start.”

In the end, the decision by Judge Rhodes is already up for appeal by the Unions with a interest in the decision.  And the court certainly left some wiggle room in its decision cautioning that the promised retirement payment may ultimately receive “special consideration.” However, its ultimate conclusion was ” Impairing contracts is what the bankruptcy process does. . . For Tenth Amendment and state sovereignty purposes, nothing distinguishes pension debt in a municipal bankruptcy case from any other debt. ”

So, like all important decisions, it is a little too premature to call this the final law of the land. But, its the first shot across the bow for an issue that will likely find itself before the US Supreme Court before too long. I imagine this wont be the last decision for which distinguished minds will differ and I would love to be a fly on the wall in Judge Rhodes chambers until this all settles itself out…

More to come…..

http://finance.yahoo.com/news/judge-detroit-eligible-chapter-9-163331735.html?l=1

A new case came down this week that looks into the Res Judicata effect of the confirmed Chapter 13 plan.  After a trial court awarded the Judgment Creditor attorney fees and costs, the Debtor filed a Chapter 13 bankruptcy and shortly thereafter confirmed her plan.  After filing for bankruptcy but before confirmation, the Debtor appealed the decision awarding attorney fees and costs.  The Debtor never objected to the claim of attorney fees or costs during confirmation.

In Edwards v. Broadwater (2013 DJDAR 15911),  the Court found that “nothing in federal bankruptcy law prevents the debtor from, outside the bankruptcy proceeding, challenging the trial courts authority to impose the obligation in the first instance”.

Seems reasonable enough. One should be able to challenge the underlying obligation.  In fact, the schedules list whether or not the claim is contingent and if the debt is readily ascertainable.  The District Court took this one step further by reviewing the res judicata effect of a confirmed plan under both §1327 and §1329.  The court then took the logical step by stating the “res judicata principles do not prevent the bankruptcy court from modifying the confirmed plan”.   Anyone who would take the Chapter 13 case knows and is readily familiar with the modification of the plan procedure. It is a rare case where the Debtor does not need to modify for one unfortunate reason or another.

In Enewally the same court reasoned that once a plan is confirmed “it is binding on all parties and all questions that could of been raised pertaining to the plan are entitled to res judicata effect.” However, the same Court described the res judicata effect as “limited” with later Courts distinguishing the decision as the plan having the “limited preclusive effect” for those issues that are properly “within the scope of the confirmation hearing” (In re Summerville).

Once the Court was satisfied with the ability to modify a plan as Congress intended under §1329 and therefore, the plan only having a limited “res judicata” effect on disputed claims where the plan is only binding to treatment and possibly not actually the underlying claim consistent with §1327. “The rigid application of res judicata principles is inapplicable because it conflicts with a plainly stated Congressional purpose permitting a Debtor to amend a confirmation plan (In re Witkowski).

A interesting case with a logical conclusion – there is nothing in federal bankruptcy law that prevents the debtor from challenging the underlying obligations. …even where a plan has been confirmed.

May Appeal Despite Confirmation of plan