Archives for June 2014

The Impact of Bankruptcy on Jointly Owned Property

Family in car lot, looking at red car.If you face a mountain of debt and have concluded that the only way you can get a fresh start is through a personal bankruptcy filing, you may concerned about the impact of a bankruptcy on jointly owned property. What if you are named on the bank account of a parent or elderly relative as a convenience to facilitate the payment of their bills? What if you had a parent or friend co-sign a loan for you?

Creditor or Trustee access to Jointly Held Property

The simple reality is that (with few exceptions) any property in which you have any ownership interest is potentially subject to being used to pay creditors in a bankruptcy proceeding, unless you can properly exempt it. The good news is that the amount of the jointly held property available to the bankruptcy court will typically be only your individual interest.

In New Jersey, money in a joint bank account is presumed to belong to each account owner in the same proportion as each contributed money to the account, unless there is clear and convincing evidence of an intent to make a gift.

A common situation we see is where an elderly parent adds a child as a joint account holder “for convenience” so the child can help manage the money or pay bills. If you are the child and can document that the money all came from the parent without an intent to make a gift, a trustee will probably leave it alone. But if you have not filed a bankruptcy, the bank account could be subject to a bank levy by one of your judgment creditors without notice. Then the account is frozen until you or your unhappy parent can go to court (weeks later) to show that the money is not yours.

We recommend against this arrangement. Parent and child should go to the bank and make arrangements for the child to have signature authority on the account under a power of attorney.

Another potentially troublesome situation arises where a parent takes title to a car that a minor child bought or is paying for using her own money. Usually this is done “for insurance purposes”. The car is still an asset of a bankruptcy estate, and is still subject to a sheriff’s levy ordered by an unpaid judgment creditor. In a bankruptcy, we have generally been able to protect the car under the theory that the car is “legally but not beneficially” owned by the parent.

These types of situations are just some of the examples that can arise. If you are facing financial difficulties, we counsel against keeping your money or assets in joint names with others. However, before transferring things around, you need to get qualified legal advice that can come from such transfers if done improperly.

Contact Our Office

Let us help you minimize the stress, anxiety and confusion that come with a personal bankruptcy filing. At Neuner & Ventura, LLP, we offer a free initial consultation to every client. We do, however, reserve the right to charge a fee to review any work done by another attorney. For an appointment, call Neuner & Ventura at (856) 596-2828 or send us an e-mail. Evening and weekend appointments are available upon request.
Representing Clients across South Jersey

US Supreme Court holds that inherited IRA’s are not “retirement funds” that can be exempted in bankruptcy, but New Jersey residents may have other protections

We previously reported that the Seventh Circuit Court of Appeals held that inherited IRA’s were not protected by the Bankruptcy Code’s IRA exemption. The Supreme Court agreed, in a ruling issued June 12, 2014. Clark v Rameker. This means that debtors in bankruptcy cannot count on being able to keep such IRA’s under the federal IRA exemption, 11 USC 522(b)(3)(C). However, debtors who live in New Jersey may still be able to rely on a separate statute that removes IRA’s from a bankruptcy estate. NJSA 25:2-1(b). Because that statute has broader wording than the federal exemption statute, it may shelter inherited IRA’s. But in view of the Supreme Court’s decision, there may be some open questions here.

In Rameker, the Debtor’s mother named Mrs. Clark the beneficiary of an IRA. Under the applicable tax code sections, 26 USC 408 and 408A, the Debtor could either take the IRA funds outright, or roll them over into an “inherited IRA”. Unlike regular IRA’s, the money in these IRA’s can be taken out any time without penalty, and no additional money can be put into them. The Trustee objected to Mrs. Clark’s claim of the entire inherited IRA as exempt, and the exemption was overruled by the 7th Circuit. The Supreme Court agreed, finding that as Congress wrote the exemption, it applied only to “retirement funds”, which, it found, inherited IRA’s were not. The critical distinction was the ability to pull the funds out at any time and to use them for any purpose as well as the inability to add to the account. Funds in an inherited IRA, it found, “constitute ‘a pot of money that can be freely used for current consumption'”

Bad news outside of New Jersey. But New Jersey passed a law intended to shelter “any property held in a qualifying trust and any distributions from a qualifying trust, regardless of the distribution plan elected for the qualifying trust” NJSA 25:2-1(b). A qualifying trust is defined as “a trust created or qualified and maintained pursuant to federal law, including, but not limited to, section 401, 403, 408, 408A, 409, 529 or 530 of the federal Internal Revenue Code of 1986” Id. There is no reference to retirement funds. And such property or distributions are “exempt from all claims of creditors and shall be excluded from an estate in bankruptcy, subject to certain exceptions.

Does this state law supercede contrary limitations in the Bankruptcy Code? The Third Circuit Court of Appeals held it did in In re Yuhas, 104 F.3d 612 (3d Cir 1997), cert denied, 521 U.S. 1105 (1997). For now at least, that would seem to answer the question.

But if someone were to push the issue, we wonder whether the New Jersey exclusion would withstand further scrutiny by the Supreme Court. States are given only limited powers in bankruptcy matters. They are allowed to “opt out” of the Bankruptcy Code’s exemption scheme and craft their own exemptions in bankruptcy. New Jersey has not done that. So how can New Jersey declare that a broad range of assets are “exempt”?

Moreover, New Jersey has purported to “exclude” these “qualified trusts” from an estate in bankruptcy. The Bankruptcy Code treats certain types of assets, whether or not an exemption is available, as “excluded” from a bankruptcy estate. 11 USC 541(c)(2). Examples are ERISA qualified pensions, and assets in valid spendthrift trusts.  One can argue that New Jersey’s attempt to re-write this section of the Bankruptcy Code falls afoul of the Constitution’s mandate that bankruptcy laws be the sole province of federal law, and for that reason is invalid. But the counter-argument is that New Jersey law determines what is a valid trust Bankruptcy Code section 541(c)(2) excludes from the bankruptcy estate.  If NJSA 25:2-1(b) is seen as declaring all such “qualified trusts” to have the same protections as otherwise valid “spendthrift trusts” (ie those created with a provision that no part of the trust can be levied, pledged, or encumbered), the validity of the statute could stand unimpeded.

For now, attentive bankruptcy practitioners, especially outside New Jersey, need counsel their clients accordingly.

 

When can a Bankruptcy Court enter a final decision? The Supreme Court punts, and muddies the waters

In rendering a narrow and less than clear ruling on the powers of Bankruptcy Courts, the Supreme Court missed an opportunity to solve a problem and instead has made it worse.

Since the 1982 Marathon decision of the US Supreme Court, we have known that Bankruptcy Judges’ cannot always  enter a final ruling the same as Article III District Court judges (who are granted lifetime tenure and who have to go through the Congressional confirmation process). As Article I judges appointed through the Executive Branch, their powers have been limited to certain “core” areas intrinsic to the Bankruptcy Process. Originally, Congress in enacting the 1979 Bankruptcy Code gave them broad powers. In 1982 this was struck down by Marathon.   In response, Congress amended the Bankruptcy Code to give Bankruptcy Judges the power to enter final rulings in certain defined “core” proceedings considered so central to the federal bankruptcy administration process as to fit within what the Constitution allows Article I judges to do. (examples are challenges to creditor claims). For anything else (so-called “related-to” jurisdiction involving matters that had a connection to the bankruptcy case), the issue either had to go to the District Court, or the Bankruptcy Court could only issue proposed findings of fact and conclusions of law and then submit them to the District Court for “de novo” review. At first, it seemed the District Courts would be inundated with bankruptcy related disputes.

This problem was initially solved by making the Bankruptcy Courts arms of the District Courts (the same as US Magistrates) under standing orders of reference which sent all bankruptcy cases and issues to them. For years, the statutory designation of “core” vs “non-core” jurisdiction  worked  fairly well. And it has been generally assumed that non-core matters could be finally decided by consent of the parties. In 2012, all that unraveled as the Supreme Court in Stern v Marshall held that at least one of these “core” categories did not pass muster, so that a counterclaim for tortious interference either had to be heard by the District Court, or else if heard by the Bankruptcy Court, that court could only issue proposed findings and conclusions.

In Executive Benefits Insurance Agency v Arkison, decided June 9, 2014, the Supreme Court was asked to decide if the parties’ consent to a final ruling by a bankruptcy court passed Constitutional muster where the action, to avoid a fraudulent transfer, was clearly one that only an Article III court could enter a final judgment upon.  Had that been decided, a lot of uncertainty might have been avoided.

In Arkison, a trustee sued to avoid a fraudulent transfer and bring money or property into the Bankruptcy Estate. The defendant did not raise lack of Article III jurisdiction when the Bankruptcy Court heard the trustee’s motion for summary judgment, and ruled against it. Instead it took an appeal to the District Court, again not raising this issue. Only on a further appeal, when Stern was decided, did it claim that the Bankruptcy Court never had jurisdiction to rule against it because instead of propsed findings of facts and a proposed judgment, it had issued a final ruling that only the District Court had the power to hand down. That was the case that was presented to the Supreme Court.

The Supreme Court ruling has been long-awaited with some degree of trepidation. Bankruptcy Judges handle an enormous docket of cases involving specialized law and practice. If all of this or even a major portion of this work were shifted to District Court judges, the entire bankruptcy system would grind to a halt. A ruling in favor of the defendants would also place in question whether US Magistrates had any power to decide anything.

The Court declined to rule on whether consent of the parties was sufficient to permit a Bankruptcy Court to make a final trial court ruling, and that is unfortunate. Most bankruptcy related matters are decided this way without objection. Instead, the Court held that where the District Court is given an opportunity to review that ruling on appeal in the same plenary manner as should have happened, the constitutional defect is cured. This was possible in this case only because, unlike an appeal of a ruling after trial where deference is given to the lower court findings of fact, no such deference applied on an appeal of a summary judgment.

After Arkison and Stern, it is not always clear where the line should be drawn between what a Bankruptcy Court can decide for itself and for what it can only issue a proposed decision. At least one court, the day after the decision, opined that when in doubt, the matter goes to the District Court to decide where the line is to be drawn.

Sadly, Arkison does not even say whether parties’ consent to a final ruling in the Bankruptcy Court resolves the issue and cures any defect if the Bankruptcy Court exercises more power than it is supposed to. Had the Supreme Court so ruled, much potential mischief might be avoided. With the question in doubt, and under princples that lack of jurisdiction can always be raised, a party might  proceed to trial, silent on this issue, then when disappointed in the result, object that the Bankruptcy Court lacked power to render a binding ruling. What if these objections are not raised until long after the time for appeal, when for example the successful party seeks to enforce the Bankruptcy Court judgment? The possibilities for gamesmanship are legion.

Whether a Bankruptcy Court ruling is final or only proposed makes a big difference in the nature of later review. If the latter, the review is “de novo” meaning the District Court is free to reconsider the evidence as well as the law, instead of having to give deference to the factual findings of the Bankruptcy Court. Does this mean that all these cases can get automatically re-tried in the District Court? This has been so uncommon up to now that few of us know what to expect.

Arkison has opened the can of worms even more than before. We foresee that this is going to be a major headache for the entire federal court system. The Supreme Court has simply “kicked the can down the road” but the need for well-drawn lines and principles to guide courts and parties remains as urgent as ever. Until that happens, the prospect of dysfunction in many contested cases looms.

Mediation now required in New Jersey Bankruptcy Court- but you have more choices than first appears

Anyone who has experienced the rigors and the expense of litigation knows its costs both personal and financial. Any attorney who does a fair amount of litigation knows that ultimately, most cases settle. Unfortunately, this often happens after the parties have bloodied each other.

Mediation is a process where a neutral third party meets with the parties and their attorneys to explore settlement. The Mediator cannot impose a settlement. A good one can, however, help the parties get past the posturing to what really is at issue and to help them find better alternatives that litigating. Done well, the process can be quite valuable. Even where a settlement is not reached during the mediation, in my experience, the process gets the parties talking and thinking about settlement as an alternative. Both as a mediator and as a litigant, I have found many times that the mediation produced a settlement after the mediation was over.

The New Jersey Bankruptcy Court has just imposed a requirement that every “adversary proceeding” (a bankruptcy term for a lawsuit in the bankruptcy court) filed after May 1, 2014 must go to mediation, unless the parties can convince the court to opt out.

The court has selected a panel of mediators. All are good, and some are superb. But the selection of the right mediator is an important decision. The mediator must be someone who commands or will command the trust and respect of the parties and their attorneys.

In selecting a mediator for your case, do keep in mind that you are not limited to the mediators on the panel. The parties can designate and select anyone who is otherwise qualified. DNJ LBR 9019-2(b)(2).

Both Steven Neuner and Joanne Ventura are experienced mediators. Mr. Neuner has served for over 6 years on the New Jersey Superior Court mediation panel, and has served as a bankruptcy mediator in several cases. His background and experience as a trustee and a respected bankruptcy practitioner brings a unique perspective to bear. Joanne Ventura is a divorce mediator with years of experience and extensive training, as well as a familiarity with the bankruptcy process.

If you are facing a mediation in bankruptcy court, please feel free to consider selecting one of us to help.

Recognized Quality & Experience