New Judge

Brett H. Ludwig has just been appointed to a 14 year term on the Bankruptcy Courts for both the Eastern and Western Districts of Wisconsin.

Judge Ludwig’s appointment restores the Eastern District to its complement of four judges that I’ve been accustomed to over the past ten years.  When I first began practice, our courts were served by the Hon. Pamela Pepper, Margaret McGarity, Susan Kelley, and James Shapiro. In that time, Judge Pepper has been appointed/promoted to serve on the District Court, Judges Shapiro and McGarity have both retired, leaving Judge Kelly as the only remaining judge from when I began practice. And to replace the other three, G. Michael Halfenger, Beth Hanan, and now Brett Ludwig have all joined the court.

Three Announcements

Beth Ermatinger Hanan has recently been appointed to serve as judge for the U.S. Bankruptcy Court for the Eastern District of Wisconsin.  She joins our existing panel of judges of Susan V. Kelley (who was promoted to chief judge when former chief judge Pamela Pepper was appointed to the district court last fall), Margaret D. McGarity, and G. Michael Halfenger.
Bankruptcy debtors may now choose to receive certain notices from the bankruptcy court by e-mail instead of postal mail.  This service will not include all notices, as anything filed by trustees or creditors will still have to be sent via conventional methods.  But it can prove to be a time-saver for some who would prefer electronic messaging.  The system is called DEBN (Debtor Electronic Bankruptcy Noticing).  You can get additional information and register for the service by visiting http://www.wieb.uscourts.gov/index.php/component/content/article/41-for-debtors/163-debtor-electronic-bankruptcy-noticing-debn.  If you have further questions, contact the Clerk’s office at (414) 297-3291.
Finally, some changes to the Mortgage Modification Mediation Program.  This from Judge Kelley:

Effective July 1, 2015, we are making changes to the Court’s Mortgage Modification Mediation (MMM) Program.  The new program will require debtors to use the “documods” program ($40) to prepare the required loan modification package PRIOR to filing the Motion to participate in the program.  After preparing the documods documents, the debtor will file the Motion to participate, and the lender will have 14 days to object.  If no objection is filed, the MMM Order will be entered, the mediator will be appointed, and the process will continue as under the existing program.
If a lender timely objects to the Motion, the Court will hold a hearing, at which the lender can explain why it does not wish to participate in the program.  The Judges have agreed to urge lenders to try the program, rather than object because they prefer to use their own loss mitigation programs.
The new form of Motion and Order is on our website:  www.wieb.uscourts.gov, and I urge you to review the new documents and contact Sean McDermott with any questions or comments you may have.  These documents have been reviewed and revised by our “MMM Committee” but we are certainly open to suggestions and comments from the bankruptcy bar.

Susan Kelley
USBJ

Misconceptions of Authority – the Judge and the Trustee

In recent weeks, I’ve gotten a number of e-mails from Chapter 13 clients — commonly concerning their plan payments or payments of tax refunds, that they’re going to be a little (or a lot) late.  They worry that the Trustee is going to dismiss their case.
On the one hand, it is wise to be concerned about dismissal due to late or missing payments because yes – of course that can happen.
But the Trustee isn’t the one who makes that call.  The Trustee has no authority to dismiss your bankruptcy case.  That’s the judge’s job.
Most people who file for bankruptcy – whether Chapter 13 or Chapter 7 – will never meet the bankruptcy judge.  Many disputes in bankruptcy are resolved outside of the courtroom.  Of those disputes that do go in front of a judge, many of them only require the presence of the attorneys.  If you are ever required to appear before the judge, it sometimes (but not always) means that something has gone horribly wrong.
Even though the Trustee is likely to be the only person you meet who even remotely resembles an authority figure in the bankruptcy process, it is important to remember that the Trustee is not a judge.
If your case is going to be dismissed for a default in plan payments, the Trustee files a motion with the court.  A motion is basically a request from one party to have the judge do something.  So, a “Motion to Dismiss” is a trustee’s request that the judge dismiss your case.  The Trustee isn’t dismissing your case, merely asking the judge to dismiss it.  And even then, the judge won’t dismiss your case without giving you an opportunity to argue for why the case should not be dismissed (by filing an “Objection” within a proscribed deadline – typically 21 days.
If no objection is filed before the deadline, the judge will typically grant the moving party’s request.  If an objection is filed, then all sorts of things can happen.  Usually the court will schedule a hearing.  The motion could be withdrawn (if, after reviewing the objection, the moving party believes their motion is no longer appropriate).  The motion could be withdrawn if both parties – outside of the courtroom – stipulate to resolution.  If there is no resolution, then a preliminary hearing is usually held and in many cases, a decision is made.  If the judge wants further evidence or testimony, the judge may schedule an evidentiary hearing, and that’s when your appearance may be required.
So, that’s how motions work.  The point?  The trustee is not the judge.  The trustee cannot dismiss your case.  If the trustee wants your case dismissed, notice will be given and you will have a short period of time to respond to the trustee’s motion and argue to keep your case open.

Government Shut-Down & Effect on Bankruptcy

Now that the federal government shut-down is a reality, I wanted to address some common questions people might have about the government shut-down.  This is an elaboration of my previous post.
First, everyone should bear in mind that this is a federal government shutdown.  Services provided for by state and local governments should remain unaffected, except to the extent they rely on federal money or resources.  Also, the entire government does not shut down.  “Essential personnel” are retained to continue operating certain critical aspects of the federal government, though they do so without pay until Congress provides funding.
We are told that the judiciary has funds to continue operating for approximately 10 business days (until about 10/15/2013) without any noticeable effect on services.  This is the first government shutdown in about 18 years, so specific details are not yet known.  If the shutdown continues for long, I will continue to post updates as we learn of them.
Q:  Can I still file for bankruptcy?
A:  Yes.  Bankruptcy filings are done electronically through an automated online system.  Unless and until we are told otherwise, there should be no interruption here.  What I am not certain of is whether the technical staff will be retained as essential personnel beyond 10/15/2013.  The electronic case filing system could go down (as computer systems are prone to do from time to time).  Also, the queues for the 341 calendars have to be entered manually.  If that service is suspended, then to comply with the scheduling rules, filings could potentially be blocked.
Q:  I already filed for bankruptcy.  Will my 341 hearing be canceled or rescheduled?
A:  We expect the 341 hearings to continue without interruption for the next 10 days.  During these 10 days, hearings held in non-government locations, or state/local government locations should certainly not be affected.  Therefore, hearings at Green Bay City Hall, the Green Bay State Office Building, Sheboygan County Courthouse, Winnebago County Courthouse, and Wittman Airport – should not be affected.  Hearings in federal buildings (such as the U.S. Courthouse in Milwaukee) could be relocated.  Beyond the 10 days, we are less certain.  Panel trustees are not government workers, but private individuals.  We believe hearings will continue, but the message we received from the U.S. Trustee has cast some doubt over that.
Q:  Will judges continue to hold hearings?
A:  Judges’ pay is guaranteed by the Constitution, so they will continue to work.  However, their staff can only be retained to tend to essential work, and the staff won’t be paid until the shutdown ends.  We expect that currently scheduled hearings will continue uninterrupted.  It is unclear how judicial services will be affected going forward, beyond 10/15/2013.  We expect there to be certain scheduling delays.
After October 15, 2013, we certainly do expect non-essential services to be cut-off – particularly anything that requires entry into a federal building.  The judges and UST are expected to be reduced to a skeleton staff.
Q:  How will the economy be affected by the government shutdown?
A:  The shutdowns in 1995-1996 (a total of 26 days) cost approximately $1.5 billion to the government, which is about $2 billion in today’s dollars.  Current estimates are that this shutdown will cost $300 million per day – so this shutdown is shaking out to be about 5x more expensive per day.  The actual cost will, of course, depend on how long the shutdown lasts.  As for the rest of the economy, there will be an impact.  Government contracts and spending with private corporations does account for a substantial portion of our economy.  Decreased spending will have a ripple effect.  Potentially, businesses that rely heavily on government work could be forced to lay off their employees, which would decrease consumer spending and ultimately affect other industries, as well.  Also bear in mind that there are some 800,000 federal employees now not working and not getting paid.  Though they will get paid after the shutdown ends, they are in the meantime, effectively unemployed, so there will be some immediate effects on consumer spending.  This will all stifle economic growth.  Source: Bloomberg.

Potential Government Shut-Down & Impact on Bankruptcy

I’m ripping these notes directly from this morning’s e-mails on the BICR Section listserv…
As you likely are aware, if Congress does not agree on a temporary spending bill (a “continuing resolution”) by midnight tonight, the federal government will shut down. The judiciary has sufficient funds to continue operating at last fiscal year’s budget levels for approximately ten (10) business days after September 30.  If Congress still has not passed a continuing resolution by the expiration of that ten-day period, the judiciary,too, will be forced to shut down.  If things come to that, only “essential personnel” will be allowed to come to work, and those individuals will not be paid until Congress passes a continuing resolution or a final budget. This means that, while the courts will remain open during a shut-down,services likely will be severely reduced. 
– Hon. Pamela Pepper, Chief Judge, U.S. Bankruptcy Court, Eastern District of Wisconsin
Sheboygan and Green Bay Section 341 hearings for October 3 remain on the calendar regardless of what the Congress does or does not do.  The Chapter 13 Trustee office is not a government entity. The Green Bay hearings are in the City Hall, a municipal facility–not a federal facility affected by a federal shutdown.  The Sheboygan hearings are in the Sheboygan County Courthouse, a county facility–not a federal facility affected by a federal shutdown.  We should have an update on the Milwaukee Chapter 13 Section 341 hearings for October 4 by tomorrow.  In Milwaukee, this non-governmental entity relies on a federal facility  for the hearing site.
– Thomas J. King, Chapter 13 Trustee
Assuming there is a shutdown, it is my current belief we will be able to continue 341 meetings as scheduled in E.D. and W.D. of Wisconsin for at least 10 days.   Our ability to hold  341 meetings in federal buildings will depend upon whether they remain reopen or not.   In the event that one or more federal buildings close, I will post the contingency plan on this list-serve.  So stay tuned.
With respect to the UST Offices, a shutdown will reduce both E.D. and W.D. UST offices to skeleton staffs.    It is unlikely we will be able to offer much, if any, assistance to practitioners or the public.   The main focus of those who remain will be to cover and reschedule work-in-process.
– David Asbach, Assistant U.S. Trustee

Who qualifies as a dependent? It depends.

Proposed changes have been made to the official bankruptcy forms by the Judicial Conference’s Advisory Committee on Bankruptcy Rules.  Public review and comments are invited through February 15, 2013.  They can be accessed at http://www.uscourts.gov/RulesAndPolicies/rules/proposed-amendments.aspx.
One of the interesting items I noticed on the new forms is additional detail being asked of claimed dependents (those living at home, those not living at home, and others).  Since there isn’t a consensus on what constitutes a household size (which is crucial in determining the median income levels and appropriate deductions on the Means Test), I foresee that the newly requested details will spawn new litigation on the question of household size.
One approach is the one taken by the U.S. Census Bureau – the number of residents of a particular structure.  This is also known as the “heads on beds” rule, which is not concerned with the existence of familial or economic relationships within the household.  This approach finds support in case law appearing in Arizona (Epperson), Minnesota (Bostwick & Ellringer), and the Western District of Michigan (Smith).
A second approach is to use the standards set forth in 11 U.S.C. 707, which references standards set forth by the Internal Revenue Service.  Generally speaking, this approach limits the household size to the debtor, the debtor’s spouse (if there is one), and dependents that can be claimed as dependents for purposes of federal income taxes.  This approach has been adopted by courts in South Carolina (Napier), Kansas (Law), and the Western District of Virginia (Frye).
Courts in the Middle and Western Districts of North Carolina (Herbert & Morrison), the Southern District of Ohio (Jewell), and the Eastern District of Virginia (Robinson) subscribe to an “economic unit” approach, which sort of incorporates the “heads on beds” approach but interlays an economic relationship requirement, and also accounts for dependent children living outside the household.
I have seen trustees here hint at the second and third tests.  So far, neither Robinson nor Frye (the two most recent cases of those two approaches) have been cited by a bankruptcy court of controlling authority in Wisconsin.
The closest case I could find in the Eastern District of Wisconsin that discussed household size was Judge Kelley’s Crego decision in 2007, but the holding was essentially about double-dipping in claimed expenses, not which approach was the correct one.  At this time, I am unaware of any cases that bind a Wisconsin judge.
That may change if the new bankruptcy forms, as they are proposed now, set off a new wave of decisions regarding this question.
In other news, Judge James E. Shapiro – who retired at the end of last year – has now been succeeded by Judge G. Michael Halfenger.  Earlier, Catherine J. Furay was named to replace Judge Thomas S. Utschig in the Western District of Wisconsin, who also retired at the end of last year.

Judge Shapiro

Today is the Annual Bankruptcy Update in Milwaukee.  After conferences like these, I usually have some new things to talk about, but since I post on Wednesday mornings, I’ll have to wait until next week to share news and developments in bankruptcy law.
So today, I’d simply like to tip my hat to Judge James E. Shapiro, who – after serving for 32 years on the bench – is retiring from the U.S. Bankruptcy Court for the Eastern District of Wisconsin at the end of this year.  Although I have never had the opportunity to appear in front of Hon. Shapiro (he was assigned cases exclusively from southeastern Wisconsin during my entire career to date), he will still be sorely missed.

Cases of Note: Stern v. Marshall

Stern v. Marshall, 131 S. Ct. 2594 (U.S. 2011)
This case is also known as the “Anna Nicole Smith” case because the bankruptcy debtor was the former Playboy Playmate (whose real name was Vickie L. Marshall).  Pierce Marshall, son of Vickie’s late husband J. Howard Marshall, filed a proof of claim and an adversary proceeding to recover damages from Vickie’s bankruptcy estate for defamation when Vickie’s lawyers told the press that Pierce engaged in fraud in controlling his father’s estate.  Vickie then filed a counterclaim for tortious interference with an intended gift (J. Howard Marshall had allegedly set-up a trust fund to provide for Vickie).
At issue was whether the bankruptcy court had jurisdiction to make a ruling on Vickie’s counterclaim, because it was not a core bankruptcy proceeding.  The U.S. Supreme Court held that the bankruptcy court only had statutory authority to resolve core bankruptcy proceedings under 28 U.S.C. § 157, and did not have authority to issue decisions in non-core bankruptcy proceedings.  Although 28 U.S.C. § 157(b)(2)(C) does permit the bankruptcy court to rule on counterclaims to claims against the bankruptcy estate, the Court held that § 157(b)(2)(C) was unconstitutional.
Why?
Well, first, we need to understand the history and purpose of bankruptcy judges.  Compared to torts, breaches of contract, and other claims arising from state laws, bankruptcy is a “public right” matter – much like social security.  Bankruptcy Courts were established to reduce the workload on the federal district courts, and to employ judges with specialized understanding of complex bankruptcy laws.  The federal district courts were initially given discretion to refer bankruptcy cases to the bankruptcy courts.  During this year’s bankruptcy conference in Kohler, one of my colleagues (in a very passionate and hilarious rant) pointed out that the district courts despised bankruptcy cases so much that every single district court issued a standing order to refer all bankruptcy cases to the bankruptcy courts within 5 minutes of their creation.
The Supreme Court held that Congress could not extend the jurisdictional province of bankruptcy courts to resolve non-core bankruptcy proceedings that fell within the scope of state laws (i.e. that § 157(b)(2)(C) was unconstitutional) because only Article III judges – who had guaranteed salaries and life tenure – could be granted this authority.  In contrast to Article III judges, bankruptcy judges serve 14 year terms and their salaries can be reduced.  As such, they lack judicial independence and “purity” such that they are limited to the subject matter that they were expressly created to deal with: core bankruptcy proceedings 
Why is this important?
Ortiz v. Aurora Health Care, Inc., 665 F.3d 906 (7th Cir. Wis. 2011)
Former bankruptcy debtors filed a class action against Aurora Health Care for violating medical privacy laws when Aurora filed proofs of claim in the debtors’ respective bankruptcy cases containing sensitive medical information which was publicly accessible.
The 7th Circuit claims it has no appellate jurisdiction in this case, because no Article III judge rendered judgment on the issues.  Because the counterclaim against Aurora arose from “the stuff of the traditional actions at common law tried by the courts at Westminster in 1789,” the bankruptcy judge lacked authority to issue a final judgment.  At best, the bankruptcy judge could have referred the case to the district court with a recommendation, but the district court would have to review the conflict de novo.  Or, it is suggested that all parties could have consented to judgment by the bankruptcy court – but the evidence presented did not demonstrate that the debtors consented to such jurisdiction.