Newslettervolume XXXII, Number 1 Debtor-Creditor Section, Oregon State Bar Winter 2013

OREGON DEBTOR-CREDITOR

NewsletterVolume XXXII, Number 1 Debtor-Creditor Section, Oregon State Bar Winter 2013

COMMENTS FROM THE CHAIR HIGHLIGHTS By Susan S. Ford 1 Comments from the Chair Sussman Shank, LLP By Susan S. Ford I really like celebrating New Year’s Day. Although it is just another day, 2 Filin’ 9 to 5: Municipal it is a time of reflection about the past year, and of anticipation about Bankruptcy and Oregon the year to come. On New Year’s Day, I confess to indulging myself in the By Sarah A. Filcher illusion that last year’s events are now gone, and a completely new slate lies ahead. That perception ultimately must yield to reality, but we can retain 5 The Charging Order Remedy the sense of renewed focus and energy that helps us move forward. We can for LLC Membership fill a new calendar, set new priorities and adjust expectations. Interests By Daniel J. Rice The U.S. economic news continues to be dominated by last year’s news — averting the “fiscal cliff,” “sequestration,” and the “debt ceiling.” 8 Who Beats Who? Congress will need the energy a New Year brings (and more) to address Competing Garnishments these and other significant problems in 2013. While the economy has By Christopher N. Coyle shown signs of improvement, there is still a long way to go. Many people in our own state continue to suffer economically, struggling to pay for daily 10 Ninth Circuit Case Notes living necessities. Legal services (including relief under the Bankruptcy By Stephen Raher Code) are often out of reach for lower income Oregonians. Fortunately, providing this legal assistance has long been a significant 11 BAP Case Notes focus of the Debtor-Creditor Section through its Pro Bono Committee, By Jesús Palomares in partnership with Legal Aid Services of Oregon (LASO). While all our committees provide valuable services to the State and the Section, it seems 12 Local Bankruptcy Court particularly appropriate in these tough economic times to highlight the Case Notes work, and the continuing needs, of the Pro Bono Committee and LASO. By Margot Lutzenhiser The Pro Bono Committee has been operating in the Portland metropolitan area for many years, and is currently co-chaired by Gary Scharff and Rich 13 State Court Case Notes Parker. It coordinates approximately 12 clinics per year, staffed by volunteer By Sherri Martinelli lawyers from our Section who represent about two clients each over the 14 Consumer Committee Notes course of a year. While bankruptcy is not always appropriate, the legal By Rosemary Zook and Ted Piteo analysis and advice provided by our lawyer-volunteers to these Oregonians helps them navigate the financial problems they face and provides significant relief. Due to increasing need outside the Portland metropolitan area, the Debtor-Creditor Section recently expanded its efforts to Lane and Deschutes Counties. In 2012, a new Pro Bono Committee was established for Eugene through the efforts of Becky Kamitsuka, Tom Huntsberger and others. With training and program coordination now complete, the Eugene Pro Bono Committee serves a significant need in Lane County. Our Section also intends to move forward in 2013 with efforts to coordinate clinics in the Bend area. We must realize, however, that with these expanding efforts, there will be an increased need for funding to support them. I believe our Section is unique in the extent of its direct, hands-on volunteerism and its commitment to funding pro bono legal services. While other Oregon State Bar sections often contribute to providing

Continued next page 2 DEBTOR-CREDITOR NEWSLETTER Debtor-Creditor Newsletter The Debtor-Creditor Newsletter is pub- legal services to those in need, there are few that match our Section’s lished three times a year by the Debtor- rising level of direct outreach or our attempts to fund it. Accordingly, Creditor Section, Oregon State Bar, one of the Executive Committee’s priorities for 2013 will be to ensure P.O. Box 231935, Tigard, OR 97281-1935. that a continued adequate level of funding will continue to be available to support expanded pro bono services in the Portland, Eugene and EDITOR-IN-CHIEF Deborah S. Guyol Bend metropolitan areas, and to fund the important activities of our other committees, as detailed by our Past Chair, Tara Schleicher, in her EDITORIAL BOARD comments in the Fall 2012 Newsletter. Susan T. Alterman Laura Donaldson At our Executive Committee meeting in November 2012, we completed Hon. Randall L. Dunn the proposed budget for 2013. We took a hard look at the amount in David Foraker our Section’s existing account and anticipated income to fund 2013’s David B. Gray important and expanding needs. While we are by no means headed for a S. Ward Greene Laurie R. Hager “fiscal cliff” in 2013, we realized that one of our priorities should be to Lee M. Hess assess how to manage our funds without curtailing our Section’s existing Wendell G. Kusnerus commitments and still be able to expand and sustain the important effort Justin Leonard to assist lower income Oregonians in the future. The Annual Meeting Carla McClurg Richard J. Parker & CLE program and other programs provide a portion of the revenues Christopher Parnell necessary for our budget; however, the most reliable source of section Teresa H. Pearson funding is the annual dues paid by our members. Our current dues of Brandy A. Sargent $25.00 per year are neither the lowest nor the highest charged within the Tara J. Schleicher Bar, and have remained constant for three years. However, our funding Joseph M. VanLeuven Britta Warren needs have increased and are expected to remain at a higher level for Rosemary Zook the foreseeable future. We are trying to do more with the same level of funding. NEWSLETTER Given the increased commitment of our Section to pro bono services, SUBCOMMITTEE LIAISON Justin D. Leonard we are asking our members for feedback on this important funding issue. Would you consider voting for a dues increase to ensure continued funding OSB LIAISON for our existing committees and the expansion of our pro bono clinics? Karen D. Lee Would you support a dues increase of $10, for a total of $35 per year (or BOARD OF BAR some other amount) to address our increased funding needs? Please provide GOVERNORS LIAISON your feedback and questions to me at [email protected] or to Hunter B. Emerick any other member of the Executive Committee. If there is enough support to bring this issue before our membership, we will consider it at the 2013 SECTION OFFICERS Annual Meeting, to be held September 27-28 at Salishan Resort in Gleneden Susan S. Ford, Chair M. Caroline Cantrell, Chair-Elect Beach, Oregon. In the meantime, please get involved in the Section by David Hercher, Treasurer volunteering for one of our many committees. The contributions we make Richard J. Parker, Secretary and the relationships we create by working together to achieve our Section’s Tara J. Schleicher, Immediate Past Chair priorities are a fulfilling and rewarding part of Oregon debtor-creditor practice. EXECUTIVE COMMITTEE Terms Expiring 2013 Filin’ 9 to 5: Municipal Bankruptcy E. Clarke Balcom Wayne Godare and Oregon Keith Karnes Howard J. Newman By Sarah A. Filcher Karen M. Oakes Currently, Oregon limits chapter 9 access to irrigation and drainage Terms Expiring 2014 Steven Philip Arnot districts. ORS 548.705. Given the economic challenges facing the state, the Hon. Randall L. Dunn time is appropriate to discuss the current scope of chapter 9 in Oregon. Justin D. Leonard Due to procedural variances created by state law, the limited body of case David B. Paradis law as compared to other bankruptcy chapters and the variety of goals Christopher Parnell municipalities hope to achieve through this chapter, chapter 9 requires a Carolyn Wade national conversation. This article examines how chapter 9 can meet the This publication provides information future needs of Oregon municipalities through a review of national filing on current developments in the law. trends and a case study of the top two filing states. Attorneys using information in this publication for dealing with legal matters should also research original sources and other authorities. DEBTOR-CREDITOR NEWSLETTER 3 Recent Years Have Not Presented a municipal filing. Id. Even less prone to categorization Chapter 9-Pocalypse is the overall financial health of the states whose Though we have seen increased media coverage of municipalities are currently actively filing for chapter high profile cases, we have not seen a dramatic increase 9 protection. The states with the highest number of in the total number of nationwide chapter 9 filings. Of overall chapter 9 filings are Nebraska, California, Texas, the 18 chapter 9 case records for 2012 listed on PACER, Alabama, and Oklahoma. See Church, sidebar. Of the three Minnesota cases were filed in error, and closed 26 states that allow some form of access to chapter 9, within a couple of weeks of the filing date. Taking these five comprise over half of all filings. Id. these errors into consideration, we see a steady number In Nebraska, special tax districts, particularly of cases filed in 2011 and 2012. Given that there Sanitary and Improvement Districts, are responsible are currently over 89,000 units of local government for the high filing rate. Id. To date, no Nebraska cities in the United States (according to the U.S. Census have filed for bankruptcy, though they are permitted to Bureau, 2012 U.S. Census of Governments: Organization do so by state law. See Neb. Rev. Stat. §13-402 (2012). Component Preliminary Estimates), municipal Despite the high filing rate, Nebraska was recently bankruptcy remains a rare event. ranked as the third “best run state” in the country, based in part on its having the second lowest debt Year Total Number of Chapter 9 Cases per capita and the second lowest unemployment rate Filed (see sidebar for sources) among the states. See 24/7 WallSt., sidebar. Nebraska 2012 18 is not expected to relinquish its status as a high filing state in the near future. Brian Doyle, a land use 2 011 15 attorney in Omaha, Nebraska, who represented two out 2010 6 of the three Sanitary and Improvement Districts that 2009 12 filed chapter 9 last year, predicts as many as 10 more special districts may file for bankruptcy over the next 2008 4 two years due to subdivisions built after the housing 2007 6 bubble burst. See Lincoln, sidebar. Despite the deep 2006 5 differences between chapter 9 and chapter 11, Doyle describes Nebraska chapter 9 cases as more analogous 2005 11 to a chapter 11 prepack (§941 permits but does not require debtors to file a plan with the petition) – it is a When considering chapter 9 statistics, it is common practice of Sanitary and Improvement District important to remember the impact of political cycles, owners and creditors to work out an agreement before as 2012 was an election year. At the end of 2012, filing. Id. Michigan Governor Rick Snyder (R) signed into law a bill providing the following options to cities and Despite its shared status as a high filer, California school districts facing financial woes: (1) chapter 9, if provides a stark contrast to the chapter 9 experiences approved by the governor, (2) an emergency manager, of Nebraska in many respects. California was ranked by (3) arbitration with a neutral party or (4) a consent the 24/7 Wall Street website as the worst run state in agreement laying out terms for fixing the government’s the union for the second year in a row due in part to finances. See Reuters, sidebar. The law, passed by its high levels of unemployment and debt and its poor the Republican-controlled legislature, replaces a credit rating. See 24/7 WallSt., sidebar. Like Nebraska, law (repealed by Michigan voters in November of California authorizes both cities and counties to 2012) that gave emergency managers appointed file for chapter 9 relief. Cal. Gov’t Code §53760. In by the state the authority to suspend collective contrast to Nebraska’s record, three California cities bargaining agreements with workers. Id. Such measures (San Bernardino, Stockton, and Mammoth Lakes) filed demonstrate that financially distressed states are not for chapter 9 relief in 2012 alone. Also in contrast to blind to recent chapter 9 filing activity, but only time Nebraska, recent California chapter 9 cases have been will tell what impact measures like this will have on contentious and chaotic. 2013 filing trends. For example, San Bernardino ceased making its High Filer States Provide Advice but no Easy prescribed $1.2 million biweekly payments to the Answers for Oregon California Public Employees’ Retirement System (CalPERS) upon filing for bankruptcy. See Reid & Chapter 9 is not available in all 50 states. See Christie, sidebar. San Bernardino was “the first city Dabney, Municipalities in Peril: The ABI Guide to Chapter to ever deliberately halt payment to CalPERS” and 9, app. (ABI 2010). The states that do permit chapter unsurprisingly, CalPERS has not taken the city’s 9 filings cannot be easily categorized in political or decision lying down but has accused it of acting in economic terms. For example, New York, Colorado, bad faith, filing a sham bankruptcy, and engaging Oregon, and Louisiana all allow some form of in criminal behavior. Id. California provides 4 DEBTOR-CREDITOR NEWSLETTER state law protection for public employee pension Chapter 9 Sidebar – Internet Sources and obligations. See Feder, sidebar. By halting CalPERS Resources payments, San Bernardino brought to light the thorny constitutional issue of whether such state law pension Years 2005-2010: American Bankruptcy Institute, plan protections are pre-empted and superseded Chapter 9 Quarterly Filings (1980-2011), http://www. by Congress’s authority to establish uniform laws abiworld.org/statcharts/Ch9Filings1980-Current.pdf regarding bankruptcy or whether such state laws are Years 2011-2012: PACER protected under the Tenth Amendment. Id. To date, Reuters, UPDATE 2-Mich. gov. signs bill giving the battle among bond investors, San Bernardino local govts fiscal options, Dec. 27, 2012, http:// city officials and CalPERS appears to only be just www.reuters.com/article/2012/12/27/usa-michigan- beginning, as bond investors and CalPERS have both governor-idUSL1E8NR3KL20121227 expressed willingness to fight this issue all the way to the Supreme Court if necessary. See Reid & Christie, Church, Nebraska, Not California, is King of sidebar. Municipal Collapse, July 15, 2012, http://www. bloomberg.com/news/2012-07-16/nebraska-not- Oregon Needs to Address its Current california-is-king-of-municipal-collapse.html Chapter 9 Statute 24/7 WallSt., The Best and Worst Run States Oregon’s current statute authorizing irrigation and in America: A Survey of All 50, Nov. 27, 2012, drainage districts to enter into chapter 9 is in desperate http://247wallst.com/2012/11/27/the best and worst need of update: run states in america a survey of all 50/ At any time subsequent to default in the payment Lincoln Journal Star, Thanks to SIDs, Nebraska of principal or interest upon the bonded or has the most Chapter 9 bankruptcies, July 16, 2012, warrant indebtedness of any irrigation or http://journalstar.com/ap/business/thanks-to- drainage district of this state, the board of sids-nebraska-has-the-most-chapter-bankruptcies/ directors or board of supervisors may cause article_523813c8-c544-5982-8833-cb5f0bf2671d.html a petition to be filed in the Federal District Reid & Christie, Reuters, CalPERS slams San Court pursuant to the provisions of the Federal Bernardino for ‘sham’ bankruptcy, Dec.16, 2012, Bankruptcy Act. The consent of the state is given http://www.sbsun.com/news/ci_22204996?source=rss to any proceedings instituted or attempted before #ixzz2FQxz8WdP February 16, 1939, by any such district under the Federal Bankruptcy Act. Feder, Steel Cage Match Between CALPERS ORS 548.705 (emphasis added). and Bond Investors Continues in San Bernardino Chapter 9 Case, Jan. 10, 2013, http://www. Sections of the authorization statute most lexisnexis.com/community/bankruptcylaw/blogs/ immediately in need of revision include the references bankruptcylawblog/archive/2013/01/10/steel-cage- to the former Federal Bankruptcy Act (instead of the match-between-calpers-and-bond-investors-continues- current Bankruptcy Code), the instruction to file in in-san-bernardino-chapter-9-case.aspx district court as opposed to the bankruptcy court, and the limitation of state consent to cases filed prior Nat’l Assoc. of State Budget Officers, Municipal to February 16, 1939. Due to the lack of updating, Bankruptcy & the Role of the States, Aug. 21, 2012, Oregon’s current state legislation authorizing chapter 9 http://www.nasbo.org/sites/default/files/pdf/ for irrigation and drainage districts operates better as a Municipal%20Bankruptcy%20%26%20the%20 time capsule in bankruptcy history than as an effective Role%20of%20the%20States.pdf mechanism for irrigation and drainage districts to file Hubbard, The Register-Guard, Kitzhaber targets for relief. PERS costs, Nov. 30, 2012, http://www.registerguard. Perhaps this need for revision has gone unnoticed com/rg/news/local/29111232-75/kitzhaber-state- because no irrigation or drainage district in Oregon has budget-public-oregon.html.csp attempted to file for chapter 9 in recent memory. Of Oregonian Editorial Board, The Oregonian, Gov. the 278 records pertaining to chapter 9 kept by PACER John Kitzhaber’s proposed budget tackles PERS, eyes from 1981-2012, none were associated with Oregon’s future, Nov. 29, 2012, http://www.oregonlive.com/ bankruptcy court. Nor have irrigation and drainage opinion/index.ssf/2012/11/gov_john_kitzhabers_ districts been the driving force behind increasing proposed_b.html national chapter 9 filing statistics in recent memory. The Pew Center on the States, The Widening Though irrigation and drainage districts are a popular Gap Update, June 2012, http://www.pewstates.org/ choice of municipality for states permitting chapter 9 uploadedFiles/PCS_Assets/2012/Pew_Pensions_Update. to include as an eligible entity, they are not a popular pdf entity in terms of overall recent filings. A search of DEBTOR-CREDITOR NEWSLETTER 5 PACER records for 2010, 2011, and 2012 reveals that not fiscal year 2010, Oregon was one of only 18 states able a single irrigation or drainage district filed for chapter to fund over 80% of its pension liabilities, coming in 9 relief. at 87%. See Pew, sidebar. (Fiscal year 2010 is the latest Oregon irrigation and drainage districts wield a budget year for which the Pew Center has complete variety of powers, and are able to incur debt through data to compare all 50 states.) Arguably, Oregon their respective abilities to issue general obligation is in a better position than most states to develop bonds. ORS 545.529 and 547.565. In addition to alternative and innovative solutions to PERS reform the Oregon statute authorizing chapter 9, other to prevent further financial distress for its cities companion statutes involving the use and delivery and counties. Oregon should encourage pursuit of of bonds of the district to creditors are in equal alternatives outside of chapter 9. The ongoing case of need of reconsideration. See, e.g., ORS 548.710: San Bernardino presents many unresolved questions as “Whenever any irrigation or drainage district files its to the treatment of public employee pension plans in petition in bankruptcy pursuant to the provisions of chapter 9, and resolution of these issues could prove the Act of Congress approved May 24, 1934, authorizing helpful in assisting Oregon’s ultimate decision whether bankruptcy proceedings by municipalities and other to expand access to chapter 9 to cities and counties. political subdivisions of any state . . . .” (emphasis Conclusion added). The Act of Congress approved May 24, The etymology of the word “bankruptcy” takes 1934, creating “Chapter IX,” was struck down as us on a historical journey to Florence, Italy, where unconstitutional in 1936. Ashton v. Cameron County marketplace custom dictated that when a merchant Water Improvement Dist., 298 U.S. 513 (1936). failed to pay his debts, his bench or counter would Having a chapter 9 statute on the books, no be broken. J. Adriance Bush, The National Bankruptcy matter how outdated, has present day repercussions. Act of 1898 with Notes, Procedure and Forms 5 Creditors and bondholders alike need certainty as to The Banks Law Publishing Co. (1899). As the word the treatment of municipal bonds should an irrigation “bankruptcy” continues to evolve to meet the needs or drainage district seek to file chapter 9. ORS 548.710 of insolvent municipalities, alternative solutions fails to provide this certainty. State laws regarding to breaking benches must be developed. After all, the treatment of municipal debt are important chapter 9 is not a liquidation chapter, and cutting considerations to both credit rating agencies and public services and employees has its limits. Despite potential investors. See Nat’l Assoc., sidebar. Moreover, current economic challenges, chapter 9 remains an given the current defects in Oregon’s authorization infrequent event. The contrast between the Nebraska statute, irrigation and drainage districts are presented Sanitary and Improvement Districts and California with a false sense of security that municipal cities’ bankruptcies illuminates the varying goals bankruptcy is a readily available option if necessary. and successes of municipalities entering this highly The Future of Chapter 9 in Oregon politicized chapter. The time is long overdue for Oregon to update its chapter 9 statutes for irrigation The uncertainty about future funding of Oregon and drainage districts, and further conversations public employee pension obligations presents an discussing the merit of expanding access to Oregon opportunity to examine the merits (as well as potential cities and counties are needed. disadvantages) of expanding the scope of chapter 9 in Oregon. Oregon’s Public Employee Retirement The Charging Order Remedy System (PERS) currently faces an unfunded liability for LLC Membership Interests of approximately $16 billion. See Hubbard, sidebar. Governor Kitzhaber’s proposed 2013-2015 budget seeks By Daniel J. Rice to reduce this unfunded liability through two key Heltzel, Williams, Yandell, Roth, Smith, changes to the PERS system: by capping the annual Petersen & Lush P.C. cost-of-living increases at $480 for each retiree and ending reimbursement to retired public employees Since its introduction to Oregon law in the 1990s, who move out of state for Oregon income taxes they the limited liability company has become a popular no longer pay. See Oregonian, sidebar. Kitzhaber’s form of business entity in the state. When creditors budget remains proposed, with the result of the 2013 of an LLC member look to that individual’s economic Oregon state legislative session yet to be seen. Until interest in the entity for payment of the debt, however, these measures are further discussed by the legislature, Oregon law presents several unresolved questions. advocating chapter 9 reform as a solution to growing This article explores the common remedy for unfunded pension plans is premature. reaching an individual’s economic interest in an LLC Though an unfunded liability of $16 billion sounds – the “charging order” – and the unresolved issues like an insurmountable hurdle, in a recent pension presented by the Oregon Limited Liability Company update by The Pew Center on the States analyzing Act (ORS chapter 63). While the charging order 6 DEBTOR-CREDITOR NEWSLETTER remedy against a partnership interest has been fairly respects, but a close read reveals at least two significant well-defined by statute and case law, debtor-creditor differences between the statutes for the various forms lawyers are left with no clear answers about whether of partnership entities and the LLC statute. the same principles apply to a charging order against Charging Order Protection an individual’s membership interest in an LLC. The lack of clarity can have significant practical impacts in The first significant difference between the Oregon a number of areas, including in bankruptcy. charging order statute for LLCs and those governing partnerships is the absence of a so-called “charging Background on Charging Orders order protection” provision in the LLC statute. ORS Although courts have often grappled with charging 67.205(5), governing partnerships and limited liability order issues, particularly as new forms of business partnerships, states that a charging order “provides the entities have emerged in recent decades, the concept exclusive remedy by which a judgment creditor of a behind the remedy remains simple. The judgment partner or partner’s transferee may satisfy a judgment creditor can obtain a court order “charging” the out of the judgment debtor’s transferable interest in debtor’s economic interest in a business entity with the partnership.” satisfaction of the judgment. In the most basic sense, The provision clearly prohibits the creditor’s the order requires the entity to redirect distributions old recourse of having the sheriff seize partnership from the debtor to the judgment creditor to the extent property to satisfy an individual debtor’s obligation. of the judgment amount. Further, creditors are shielded from seizing the debtor’s The remedy traces to the English Partnership Act of actual partnership interest. Many commentators 1894, which introduced the charging order to replace on asset protection consider an “exclusive remedy” a chaotic common law collection procedure that provision an important component of any given state’s often failed to distinguish between partnership assets partnership or LLC laws. See, e.g., Kozlow, “A Charging and an individual partner’s economic interest in the Order Conundrum: Is it Really the ‘Exclusive Remedy’ entity. Gose, “The Charging Order Under the Uniform of an LLC Member Judgment Creditor?,” 63 Baylor L. Partnership Act,” 28 Wash. L. Rev. & State Bar J. 1 Rev. 884 (2011). (1953). Through the FiFa (fieri facias) writ, the sheriff Subject to fraudulent transfer claims, individuals would seize partnership assets and cause upheaval to can in theory limit a creditor’s ability to reach otherwise solvent business operations in an effort to income or other valuable assets through the use of an satisfy an individual partner’s personal debt. Id. entity governed by an exclusive remedy provision. Introduction of the charging order into collection The protection is the greatest when the debtor is law achieved the twin goals of providing judgment in business with a family member or other close creditors with an efficient and orderly means affiliate who has no incentive to help the creditor by of pursuing a debtor’s economic interest in the making distributions to the debtor that are subject partnership and sparing the partnership entity from to the charging order. The creditor, who receives no direct execution on partnership assets. Further, the management rights by virtue of the charging order, charging order permitted the business to continue lacks the ability to force distributions. to operate without interference from an outside Oregon’s LLC statute contains no “exclusive creditor of one of the partners; the remedy entitles remedy” provision similar to ORS 67.205(5). While the creditor to the debtor’s distributions but not to any management rights or control over the entity. The the limited partnership statutes in ORS chapter 70 National Conference of Commissioners on Uniform also lack such an express provision, the exclusive State Laws borrowed from the English legislation when remedy provision of ORS 67.205(5) applies to limited it approved the first Uniform Partnership Act (UPA) partnerships by virtue of a general incorporation in 1914. The UPA included an express charging order statute. ORS 70.615. remedy, UPA § 28 (1914), as have subsequent uniform Thus, the Oregon statutes create an anomaly: partnership acts. See, e.g., Revised Uniform Partnership partnership interests in all forms of partnership entity Act §504 (1997); Uniform Limited Partnership Act §703 receive express charging order protection while LLC (2001); Revised Uniform Limited Liability Company membership interests do not. This lack of an express Act §503 (2006). charging order protection provision gives the creative The Oregon acts governing partnerships and limited creditor’s lawyer other potential collection avenues. liability partnerships, limited partnerships, and limited For example, a creditor of an Oregon LLC member liability companies each provides a charging order could arguably have the LLC interest seized by the remedy. ORS 67.205 (partnerships and limited liability sheriff through a writ of execution and sold in the partnerships); ORS 70.295 (limited partnerships); same manner as other intangible personal property. ORS 63.259 (limited liability companies). The Oregon Indeed, in Olmstead v. Federal Trade Commission, 44 charging order statutes are functionally similar in most So3d 76 (Fla 2010), the Florida Supreme Court held DEBTOR-CREDITOR NEWSLETTER 7 that a creditor of a debtor who was the sole member 410 (1992) (unless addressed in the bankruptcy, pre- of an LLC could have the court order the debtor to petition liens remain attached to property despite “surrender all right, title, and interest” to the creditor discharge of underlying debt). Like other liens, the in satisfaction of the debt. Like Oregon’s statutes, the charging order will “ride through” the bankruptcy pertinent Florida laws had “exclusive remedy” language and give the creditor recourse against the membership for charging orders with respect to the partnership interest despite the discharge injunction. entities but not for LLCs. The court held that a Without an express statutory categorization of the judgment creditor was not limited to a charging order LLC charging order as a lien, the creditor is left to against an LLC interest when the legislature had not rely on other authority to support that position. In at expressly written such a limitation into the statutes. Id. least one case, a federal court rejected the creditor’s at 83. argument that a charging order should be considered Direct seizure of an LLC interest may not provide a lien even though the relevant statute did not so a perfect solution for the creditor, however, especially specify. Monroe v. Berger, 297 BR 97 (SD Ohio 2003). when the LLC has members other than the debtor. The creditor had pursued collection activity post- Other statutes generally prohibit admission of a discharge on the theory that its charging order against new member without consent of the majority of the the debtor’s interest in a limited partnership was a existing members, unless the articles of organization lien that rode through the bankruptcy unscathed. Id. at or operating agreement provide otherwise. ORS 100-01. The court was unsympathetic, however, finding 63.245(2). An assignee of a membership interest, no support in the statute or case law that the charging moreover, receives only the assigning member’s order constituted a lien. Id. at 101. The court held economic rights, not any membership status or right that the creditor had violated the discharge injunction to participate in the company’s management or through the post-bankruptcy collection efforts. Id. at affairs. ORS 63.249. A seizure of an interest in a multi- 102; compare In re Keeler, 257 BR 442, 445 (Bankr D Md member LLC therefore may leave the creditor (or other 2001) (charging order was a lien under Maryland law purchaser of the interest at the sheriff’s sale) in the and therefore rode through bankruptcy). same unenviable position of holding the right to the Whether the result would be similar under Oregon’s debtor’s distributions but lacking any practical ability charging order statute remains open for debate. Until to force them. legislative amendment or court decisions resolve the Nevertheless, barring an Oregon court’s reaching issue, debtor and creditor lawyers should recognize a different result than Olmstead, an Oregon debtor that a charging order against an LLC interest may not and LLC member has no assurance that a judgment automatically be entitled to lien status. creditor will limit collection efforts against the LLC Conclusion interest to only a charging order. The apparent ability to directly execute against the LLC interest may prove The charging order is a remedy rooted in the law advantageous in a single-member LLC context and of partnerships. With the emergence of the LLC in potentially other situations. recent decades as a common entity for business and investment purposes, creditors have started to employ Is it a Lien? the traditionally partnership-specific collection The second significant difference is that the remedy in the LLC context. Debtor-creditor lawyers partnership statutes expressly provide that a charging should realize, however, that not all charging orders order constitutes a lien against the debtor’s partnership are necessarily created equal. Under Oregon’s current interest, ORS 67.205(2) (applicable to limited LLC and partnership statutes, the scope of a creditor’s partnerships through the incorporation provision of rights against a debtor’s LLC membership interest ORS 70.615), but the LLC act does not state that the may differ from rights available against a partnership charging order constitutes a lien against the debtor’s interest. membership interest. Whether a charging order against an LLC membership interest qualifies as a lien can have practical significance in at least two circumstances. 26th Annual Northwest First, if a lien, the charging order remains attached Bankruptcy Institute to a membership interest that the debtor transfers. The creditor would retain rights despite the transfer. Hilton Hotel Second, if a lien, a charging order entered prior to 301 W. 6th Street a debtor’s bankruptcy petition will remain attached Vancouver, WA to the membership interest post-discharge, assuming the charging order is not otherwise addressed in April 12-13, 2013 the bankruptcy. See, e.g., Dewsnup v. Timm, 502 US 8 DEBTOR-CREDITOR NEWSLETTER Who Beats Who? Distraint Warrant Garnishment Competing Garnishments When debts are owed to the State of Oregon (or one of its subdivisions), the appropriate state agency By Christopher N. Coyle may issue a distraint warrant for collection of the debt Vanden Bos & Chapman owed. Any state agency authorized to issue warrants may garnish property of the debtor by delivering Since the economic recession that began in 2008, a notice of garnishment. While the garnishment the United States has recovered 4.6 million of the 8.8 issued to collect the debt represented by the distraint million jobs lost. During this time, many individuals warrant is not entitled to priority over a previously defaulted on their obligations (and had judgments, delivered judgment creditor garnishment, a distraint distraint warrants and the like entered against them). warrant garnishment does not expire. ORS 18.855(3) With the continued “improvement” in the economy, (state or state agencies); ORS 18.625(3) (county and some of those who had lost their jobs now have new county agencies). This means that even if a prior employment, and their creditors now have a source judgment creditor has delivered a garnishment, upon of repayment to satisfy their outstanding claims. its expiration after 90 days, the garnishment on the Since most debtors have multiple creditors, creditors distraint warrant will be paid until the distraint warrant frequently compete with each other to collect on has been paid in full or released. their claims. The most complicated situation is when Example: An employer receives a writ of garnishment multiple writs of garnishment are delivered to a single from a judgment creditor and, the following day, employer; this article describes the most common a notice of garnishment from a distraint warrant creditors and the relationships between them. creditor. The employer will pay to the judgment Judgment Creditor Garnishments creditor all garnishable property during the period The general rule is that, as between two similarly from the delivery of the writ of garnishment through situated creditors, the first in time is the first in right. the expiration of 90 days. After the expiration of the ORS 18.627(1). A writ of garnishment issued by a judgment creditor’s writ of garnishment, the employer judgment creditor acts to garnish both wages owed will pay all garnishable property to the distraint to the debtor at time of delivery and wages earned by warrant creditor until the full amount of the debt is the debtor during the period from the delivery of the paid or until the notice of garnishment is released. writ of garnishment through the expiration of 90 days. Child and Spousal Support Income Withholding ORS 18.625(2). During this period, the first delivered For some debtors that owe a child or spousal garnishment has priority as against all other judgment support obligation (“support obligation”), that creditors until paid, released or expired. obligation is paid through income withholding. Example: An employer receives a writ of garnishment Under Oregon law, income withholding for a support from a judgment creditor; a second writ of garnishment obligation has priority over any other legal process from a second judgment creditor is received 30 days against the same income except for a qualified medical later. The employer pays to the first judgment creditor child support order. ORS 25.375; ORS 25.339. So, for all garnishable property held on the date of delivery example, if the debtor has income withholding for a along with garnishable disposable earnings through the support obligation in excess of 25% of her disposable expiration of the writ (90 days); the second judgment income, the delivery of the support obligation income creditor would be paid garnishable disposable earnings withholding order would displace any previously through the expiration of its writ (30 days after the delivered writ of garnishment issued by a judgment 90-day period ends). creditor or distraint warrant creditor. A support Example: Same facts as above except that the obligation income withholding order in excess of the employer receives a third writ of garnishment from a maximum disposable earnings subject to garnishment third judgment creditors 10 days after the second writ prevents collection of those obligations by garnishment of garnishment is received. Just as before, the employer with the exception of a distraint warrant for the pays to the first judgment creditor all garnishable collection of state tax debt. ORS 18.385(4); OAR 150- property held on the date of delivery along with 18.385-(A). garnishable disposable earnings through the expiration Example: An employer receives a notice of of the writ (90 days) and pays to the second judgment garnishment to collect a state non-tax debt for an creditor would be paid garnishable disposable earnings employee subject to a support obligation order; the through the expiration of its writ (the next 30 days); employee’s disposable earnings are $1,000 and the now, the third judgment creditor would be paid support obligation order directs the withholding garnishable disposable earnings through the expiration of $218. Since the employee’s garnishable property of its writ (the next 10 days). is $250 (the non-exempt portion of the disposable income), the support obligation is paid $218 and the state non-tax debt is paid $32. DEBTOR-CREDITOR NEWSLETTER 9 Example: Same facts as above except the support $1,000 and the support obligation order directs the obligation is $350. Since the employee’s garnishable withholding of $218. Since the employee’s garnishable property is only $250, the support obligation is paid property is $250, the support obligation is paid $218, $350 and the state non-tax debt is paid nothing. the administrative wage garnishment is paid $32, and When a debtor has both income withholding the notice of garnishment is paid nothing. for child support and a notice of garnishment for a Federal Tax Levy distraint warrant on a state tax debt, the maximum Unlike any other garnishments, a levy on wages disposable earnings subject to garnishment is by the Internal Revenue Service to collect on federal not reduced by the amount withheld for child or tax debts works to garnish all wages above the spousal support. ORS 18.385(6). This means that a taxpayer’s exempt wages as determined by the Service. garnishment to pay state tax debt would be calculated The computation of the exempt amount of wages upon disposable earnings and not reduced by order is based on many factors, including the amount of to withhold child or spousal support. OAR 150- the taxpayer’s standard deduction, deduction for 18.385. The withholding for a support obligation exemptions and the frequency of the pay period, maintains priority over collection of state tax debt; whether the liable taxpayer is married and, if so, if the combined garnishments for both the support whether the spouse works also. 26 CFR 301.6334-3(d). obligation and state tax debt exceed the disposable The IRS annually publishes a notice calculating the earnings of the debtor, the support obligation is always exempt amounts in Publication 1494; for a single paid first. Note that this situation will be extremely individual claiming a single exemption, this amount is rare as a result of the Federal Wage Garnishment Law, $812.50 for monthly wages. While the Internal Revenue Title III of the Consumer Credit Protection Act. 15 USC Service is legally entitled to levy on the gross wages of §1671, et seq. The most likely scenario for this to arise the taxpayer, less the exemption amount, as a matter is as a result of a jeopardy collection of taxes (which is of policy, the Service will only levy on the net “take- exceptionally rare). home” pay of the taxpayer. IRM 5.11.5.4. Likewise, Example: An employer receives a notice of while the Internal Revenue Service is legally entitled garnishment to collect a state tax debt for an to be paid prior to a support obligation, the Service employee subject to a support obligation order; the includes the amount the taxpayer needs to pay court employee’s disposable earnings are $4,000 and the ordered support in the exempt amount. IRM 5.11.5.4. support obligation directs the withholding of $1,400. In addition to state and federal tax withholdings, The employee’s garnishable property is $1,000. The the Service has ruled privately that the following support obligation is paid $1,400, the state tax debt is may be deducted from the employee’s gross pay to paid $1,000, and the employee is paid $1,600. calculate the net “take-home” pay of the taxpayer: Federal Non-Tax Garnishments retirement plan contributions, union dues, United Way deductions, reimbursements to employer for private Various federal agencies collect non-tax obligations use of the company-owned vehicle, and other less from a debtor’s income by means of administrative common items. PLR 8149061, PLR 8526027. A levy on wage garnishment. Various federal laws, including the wages is continuous until paid or released. supremacy doctrine, allow for federal collection efforts to displace garnishments under state law, except for Example: An employer receives a Form 668W (Notice support obligations that fall within the definition of of Levy on Wages, Salary, and Other Income) from ”family support.” See, e.g., 31 CFR 285.11(i)(7). The the Internal Revenue Service for an employee subject amount of an administrative wage garnishment varies to a support obligation directing the withholding of between federal agencies and authority to garnish; $1,400. The employee is unmarried, files as single, the Debt Collection Improvement Act authorizes and claims 1 exemption. The gross wages are $5,000 garnishments of 15% of disposable income for for a monthly period; the employee pays $1,250 defaulted debts to the federal government and the in tax withholdings and $250 in retirement plan Higher Education Act authorizes garnishments of contributions. The employer pays all of the deductions 10% of disposable income for student loan debts. An ($1,500); of the $3,500 net pay, the employer pays administrative wage garnishment exists until paid or $1,400 for the support obligation, $812.50 to the released. employee, and the remainder ($1,287.50) to the Internal Revenue Service. Example: An employer receives a notice of garnishment to collect a state non-tax debt for an employee subject to a support obligation order; subsequently, the employer receives an administrative wage garnishment for a federal non-tax debt (seeking 15%). The employee’s disposable earnings are 10 DEBTOR-CREDITOR NEWSLETTER trial under the Seventh Amendment. The Ninth Circuit NINTH CIRCUIT CASE NOTES in Bellingham noted that the Supreme Court’s opinion in Stern v. Marshall, 131 SCt 2594 (2011), transmutes By Stephen Raher the Seventh Amendment analysis of Grandfinanciera Perkins Coie into an Article III precedent. Bankruptcy Court Lacks Jurisdiction to The Ninth Circuit concluded that Grandfinanciera Decide Fraudulent Transfer Actions and Stern together “point ineluctably to the conclusion In re Bellingham Ins. Agency, Inc. that fraudulent conveyance claims, because they do ___ F3d ___, 2012 WL 6013836 (9th Cir 2012) not fall within the public rights exception, cannot be adjudicated by non-Article III judges.” Accordingly, Shortly after ceasing operations, the debtor the court overruled Mankin, noting that the circuit’s assigned its interest in certain receivables to a third reasoning could not be squared with the Supreme party. The funds ultimately ended up in an account Court’s characterization of its own holdings. controlled by Executive Benefits Insurance Agency Although the Ninth Circuit followed the lead of the (EBIA). The chapter 7 trustee brought an adversary Supreme Court in declining to articulate a generally proceeding against EBIA, alleging eighteen causes of applicable rule regarding the public/private right action including federal- and state-law preferential distinction, it did provide guidance for when a claim and fraudulent transfer claims. The bankruptcy court must be heard in an Article III court despite its being granted summary judgment in favor of the trustee classified as a core matter under §157(b). The opinion on the fraudulent transfer claims. The district court notes that the Supreme Court allowed a bankruptcy affirmed, and it was not until the case reached the referee to determine a preferential transfer claim in court of appeals that EBIA challenged the bankruptcy Katchen v. Landy, 382 U.S. 323 (1966), which remains court’s power to enter a final judgment on the good law. After comparing Stern, Grandfinanciera, and fraudulent transfer claims. Katchen, the Bellingham court concluded that the only It is, in the court’s own terminology, an exercise principled basis on which to reconcile these three cases in hierophancy (the capacity of expounding sacred is that Katchen involved a suit against a creditor who mysteries) to reconcile the “vexing constitutional had filed a claim against the bankruptcy estate, whereas issues” that grow out of decades of difficult-to- the other two cases did not. The critical question, reconcile Supreme Court rulings on Article III then, is “whether the action at issue stems from the jurisdiction. In Northern Pipeline Construction Co. bankruptcy itself or would necessarily be resolved in v. Marathon Pipe Line Co., 458 US 50 (1982), the the claims allowance process.” Because EBIA did not Supreme Court noted three exceptions to the general file a proof of claim, there was no claims allowance requirement of adjudication in an Article III court: process, and EBIA was entitled to an adjudication in an territorial courts, military tribunals, and cases Article III court. involving “public rights.” While a plurality of the The Ninth Circuit next considered whether Northern Pipeline Court noted that the “restructuring of §157(b)(1) allows a bankruptcy court to hear debtor-creditor relations” might fall within the public fraudulent transfer cases and submit reports and rights exception, the Court ruled that the contract recommendations to the district court. It concluded dispute at issue in that case was outside the scope. that it does. Then, in Thomas v. Union Carbide Agricultural Prods., The court also ruled that the right to an Article III 473 US 568 (1985), and CFTC v. Schor, 478 US 833 adjudication can be waived, and that EBIA had done so (1986) (two non-bankruptcy cases), the Supreme Court by not uttering “so much as a peep about Article III” moved away from “formalistic and unbending rules” until the eve of oral argument in the Court of Appeals. and toward a more pragmatic approach to defining In arriving at this conclusion, the court considered the public rights exception. On the basis of these two what happens when a party consents to the bankruptcy cases, the Ninth Circuit ruled in In re Makin, 823 F2d court’s jurisdiction. Acknowledging that §157 does 1296 (9th Cir. 1987), that core matters, as defined in not expressly allow a bankruptcy court to hear a core 28 USC §157(b)(2), could be heard and decided by matter and submit findings and recommendations to bankruptcy judges. an Article III judge for final determination, the panel The Supreme Court has repeatedly declined the nonetheless concluded that under the structure of the invitation to define the public rights exception, but in Code, “the bankruptcy courts must be vested with Grandfinanciera, S.A. v. Nordberg, 492 US 33 (1989), it as much adjudicatory power as the Constitution will held that a trustee’s fraudulent preference suit against bear.” Therefore, a party that does not timely object a nonclaimant was more akin to the adjudication of a to jurisdiction is deemed to have consented, the private right and the defendant was entitled to a jury bankruptcy court is able to hear the case and propose findings and recommendations to the district court. DEBTOR-CREDITOR NEWSLETTER 11 Debate about Applicable Commitment secured loan sought a determination that its loan was Period Lives on nondischargeable under §523(a)(2)(A) and (B). Debtor prevailed; the bankruptcy court dismissed the §523(a) In re Flores (2)(A) claim and granted summary judgment on the Case No. 11-55452 (9th Cir Dec 19 2012) §523(a)(2)(B) claim due to lack of reasonable reliance The Fall 2012 Newsletter reported that the Ninth by lender. Debtor then filed and won a motion to Circuit had partially upheld the continuing validity recover attorneys’ fees under §523(d) (the Fee Order). of In re Kagenveama, notwithstanding the Supreme Lender appealed the Fee Order but not the summary Court’s ruling in Hamilton v. Lanning. judgment order. On December 19, the Ninth Circuit announced that The BAP affirmed. To establish entitlement to fees it will rehear Flores en banc. In the meantime, the panel under §523(d), debtor must show that (1) the creditor opinion should not be cited as precedent by or to any sought nondischargeability under §523(a), (2) the debt court of the Ninth Circuit. was a consumer debt, and (3) the debt was discharged. The burden then shifts to creditor to show its actions Letter Challenging a Loan’s Validity or were “substantially justified” – that is, that show it had Terms is Not a Qualified Written Request a “reasonable factual and legal basis for its claim.” Medrano v. Flagstar Bank While the BAP noted that there is no presumed ___ F3d ___, 2012 WL 6162183 (9th Cir 2012) lack of substantial justification just because debtor prevailed on summary judgment, here the lender Plaintiffs were borrowers on a home mortgage loan presented no additional justification for its claim serviced by Flagstar. After Flagstar notified them that but rather relied on the record used to grant debtor’s their monthly payments would increase, the borrowers’ summary judgment motion. Because the lender was attorney sent Flagstar three letters disputing any collaterally estopped from arguing that the summary obligation to make higher payments because the broker judgment was incorrect (due to its failure to appeal who originated the loan had allegedly promised that the summary judgment order), the lender had no monthly payments would not increase. reasonable factual or legal basis for its fraud claim. The Flagstar did not respond to the letters, and the BAP nevertheless went on to address the bankruptcy borrowers sued, claiming violations of the servicer’s court’s summary judgment ruling that there had been duty to respond to “qualified written requests” under no reasonable reliance, and concluded that the court RESPA, 12 USC §2605. had not abused its discretion in so ruling. The court considered and adopted the Seventh Section 109(g)(2) Ineligibility Preempts a Circuit’s ruling in Catalan v. GMAC Mortgage Corp., Refiled Chapter 13 Petition’s Automatic 629 F3d 676 (7th Cir 2011). Under Catalan, a qualified Stay written request can be “any request for information In re Leafty made with sufficient detail,” and no “magic language” ___ BR ___ (9th Cir BAP Oct 10, 2012) is required. However, a qualified written request must relate to “servicing” of the loan, as defined in A successor-in-interest trust deed beneficiary 12 USC §2605(i)(3). Since servicing does not include (Creditor) scheduled a trustee’s sale after obtaining transactions and circumstances surrounding a loan’s relief from debtor’s chapter 13 stay. Hours before the origination, a communication that disputes the terms sale, debtor dismissed her previous bankruptcy case of a loan or the validity of the underlying debt is not a and immediately filed a second bankruptcy petition. qualified written request for purposes of RESPA. Creditor completed the trustee’s sale unaware of debtor’s actions, and then moved to dismiss the second BAP Case Notes filing and confirm the previous relief from stay, or alternatively to terminate the second filing’s stay. By Jesús Palomares The bankruptcy court confirmed the original relief Miller Nash LLP from stay for Creditor, ruled that the second filing’s automatic stay was not effective against the trustee’s Successful §523(d) Attorney Fee Motion sale when it occurred, and dismissed Debtor’s second by a Debtor in the “Liar Loan” Context filing under §109(g)(2). Debtor appealed. In re Machuca Section 109(g)(2) makes an individual ineligible to ___ BR ___ (9th Cir BAP Dec 14, 2012) file a bankruptcy petition if she voluntarily dismisses a case within 180 days after a motion for relief from Debtor financed a home purchase with two stay is filed. The purpose of this statute is to prevent secured loans, later defaulted, and then filed a chapter abusive filings. Further, under §362(b)(21)(A), actions 13 petition. The successor in interest to the junior enforcing liens and security interests against real 12 DEBTOR-CREDITOR NEWSLETTER property belonging to §109(g)(2)-ineligible debtors are LOCAL BANKRUPTCY COURT not stayed. CASE NOTE Applying the abuse-of-discretion standard, the BAP concluded that debtor was ineligible to re-file under By Margot Lutzenhiser §109(g)(2) and affirmed the dismissal of debtor’s Farleigh Wada Witt second filing, calling it “exactly the kind of abuse that §109(g)(2) was designed to address.” The BAP relied on New Requirements to Assure that “Next §362(b)(21)(A) to conclude that Creditor’s sale was not Friends” are Debtors’ Best Friends stayed because it was an act against property belonging to a §109(g)(2)-ineligible debtor. In re Lane 2012 Bankr. LEXIS 5038 (Bankr D Or Oct 25, 2012) Creditor’s Dischargeability Claims Lack Evidence of Intent Donna M. Hines moved to be appointed “next In re Mbunda friend” of Jack and Marilyn Lane (Debtors). Pursuant ___ BR ___ (9th Cir BAP Dec. 14, 2012) to Fed. R. Bankr. P. 1004.1, a duly appointed “next friend” may file a voluntary bankruptcy petition on Creditor loaned money to fund debtor’s behalf of a debtor who is an “infant or incompetent.” business, which failed leading to debtor’s chapter The United States Trustee objected and raised concerns 7 filing. Creditor’s estate sued to declare its claim regarding the “potential for abuse” that exists with nondischargeable under §523(a)(2)(A), (4), and (6), regards to motions to appoint next friends. The Court alleging that debtor made various misrepresentations shared this concern and pointed out that the existing to induce the loan. The bankruptcy court dismissed all case law in this area is of “limited utility.” but the §523(a)(2)(A) claim without leave to amend; The court went on to establish a clear legal standard it dismissed the §523(a)(2)(A) claim at trial. Creditor for next-friend appointments to prevent abuse. A appealed. The BAP affirmed on all claims. next friend may be appointed if: (1) the debtor(s) First, §523(a)(2)(A) excepts from discharge debts are “financially incapable (a standard drawn from incurred under false pretenses, false representations, or Oregon’s conservatorship statute, ORS 15 125.400),” based on actual fraud. Applying the clearly erroneous and (2) “the movant knows about the debtor’s standard, the BAP affirmed that Creditor failed to show financial situation, and is dedicated to the debtor’s debtor made any knowingly false representations at best interests.” To satisfy these conditions, any motion the time of the loan. In particular, the BAP found the to be appointed as next friend must be accompanied claim that debtor never intended to repay the loan was by the following documents: “completely undermined” by debtor’s actually making 1. A copy of the power of attorney giving the some loan payments. movant authority to act for the debtor(s), if any. Next, the applicable language from §523(a)(4) 2. A declaration from the person seeking to be excepts from discharge debts incurred for fraud while appointed as next friend providing the following acting in a fiduciary capacity. The fiduciary capacity information: must arise from an express or technical trust imposed A. the movant’s name and relationship before the wrongdoing that caused the debt. Creditor to the debtor(s); argued on appeal that Creditor should have been allowed to replead and add allegations of a partnership. B. whether the debtor(s) have a duly The BAP affirmed dismissal here because amendment appointed representative under state would have been futile: the record held no evidence of law; a partnership. C. the reason why appointment of a Finally, §523(a)(6) excepts from discharge next friend is necessary; debts arising from willful and malicious injury. D. an explanation of why appointment Maliciousness requires an intentional wrongful act of the movant as next friend would be that causes injury without a just cause or excuse. in the debtor(s)’ best interest; Willfulness is established by showing debtor had a E. the fee, if any, the next friend will “subjective motive to inflict injury.” Creditor claimed charge the debtor; that the §523(a)(6) claim elements mirrored that of a F. the movant’s criminal, financial, and state-law elder abuse claim, which Creditor argued it professional history; could have raised. The BAP disagreed, distinguishing the §523(a)(6) claim as having a “subjective motive G. the movant’s competence to handle or intent” requirement not found in the elder abuse the debtor(s)’ financial affairs, including statute. the movant’s knowledge about the debtor(s)’ financial affairs; DEBTOR-CREDITOR NEWSLETTER 13 H. whether the movant has any interest, judgment of restitution could be effectively stayed, either current or potential, in the yet expire by the passage of time despite the stay. That debtor(s)’ financial affairs; and would make no sense whatsoever.” I. whether any of the debtor(s)’ debts Validity of Trustee’s Deed Is an Issue in were incurred for the benefit of the Action for Ejectment proposed next friend. US Bank v. Wright, 253 Or App 207 (2012) 3. A letter from the debtor(s)’ physician(s) regarding the debtor(s)’ ability to conduct their Plaintiff sued to eject defendant from real property own financial affairs. that plaintiff allegedly purchased at a trustee’s sale. 4. A letter from the debtor(s)’ care giver, if any, Defendant’s answer alleged that he was the owner regarding the debtor(s)’ ability to conduct their of the property and generally denied plaintiff’s own financial affairs. allegations. On plaintiff’s motion for summary The movant must give notice of the motion to: (1) judgment, defendant presented evidence that no all creditors, (2) the US Trustee, (3) all governmental trustee’s sale had occurred at the time and date alleged entities providing the debtor with funds, and (4) the in the complaint. The trial court nevertheless granted debtor’s closest relatives, if any are known. Last, the summary judgment to plaintiff, ruling that the action movant must appear at a hearing and testify regarding was solely for ejectment, that the validity of the the requested appointment. The court will set the trustee’s deed was not at issue, and that there was no hearing before the §341(a) meeting, if possible. issue of material fact as to whether plaintiff was the legal owner of the property and entitled to possession. STATE COURT CASE NOTES The court of appeals reversed and remanded. It found that the complaint and answer raised the By Sherri Martinelli issue of the validity of the trustee’s deed, including Greene & Markley, PC whether the alleged trustee’s sale had occurred. The court reasoned that “[b]y its very nature, an action for Supersedeas Undertaking Tolls 60-day ejectment requires the plaintiff to prove the nature of Time for Enforcement of Restitution its legal estate in the property,” citing ORS 105.005(1). Pine Ridge Park v. Fugere, 252 Or App 456 (2012) The effect of defendant’s general denial of plaintiff’s allegations was to put plaintiff “to its proof as to Defendant was a tenant in a manufactured home whether it had a legal estate in the property.” park owned by plaintiff. Plaintiff sent defendant a The court also held that there were genuine issues notice to vacate the premises and, after a trial, the of material fact. The summary judgment record court entered a judgment of restitution, “effective contained conflicting evidence about whether a public immediately,” on November 3, 2009. No specific sale actually occurred at the courthouse at the time provision in the judgment extended the 60-day limit alleged, and whether a public sale had been properly in which to issue notice of restitution per ORS noticed. 105.159(3). Defendant appealed and filed a supersedeas undertaking pursuant to ORS 19.335(2). The court of appeals affirmed and its judgment was An Invitation to the 2013 entered on August 4, 2011. On August 9, 2011, the trial Bankruptcy Court court issued a notice of restitution of the premises at plaintiff’s request. On August 12, defendant moved to Saturday Session quash the notice of restitution because it was issued beyond the 60-day statutory limit. The court denied the motion to quash, and the clerk issued a writ of The annual Saturday Session of the Oregon execution. Defendant appealed from the order denying Bankruptcy bench and bar is scheduled for the motion to quash. March 9, 2013 from 9:00 a.m.-12:00 p.m., with The court of appeals affirmed. It looked at the registration beginning at 8:30 a.m. A interplay between ORS 19.335(2), which provides that continental breakfast and lunch will be a supersedeas undertaking stays a judgment, and ORS provided. The meeting will be held at: 105.159(3), which sets a 60-day limit for enforcing a Salem Conference Center judgment of restitution. The court rejected defendant’s contention that the filing of the undertaking had no 200 Commercial Street SE effect on the statutory deadline for enforcing the Salem, OR judgment. The court reasoned that, “If defendant’s interpretation of ORS 105.159(3) were correct, a 14 DEBTOR-CREDITOR NEWSLETTER

Divided Court Applies Hamlin II to of the UTPA under ORS 646.642(3). Thus, multiple Punitive Damages Award in Small-damage violations “could result in some cases in civil penalties Case in excess of the amount of punitive damages assessed in the case.” The civil ratio available for UTPA Lithia Medford LM, Inc. v. Yovan violations suggests that the “punitive damages award 254 Or App 307 (2012) in this case could exceed a single-digit multiplier of compensatory damages to serve the state’s interest in Yovan prevailed at trial on his claim against Lithia deterring and punishing violations of the Act.” under the Oregon Unlawful Debt Collection Practices Act, ORS 646.639 to 646.641. The jury awarded Yovan Finally, the court turned to the last step of the $500 for his noneconomic damages and $100,000 analysis called for in Hamlin II – “whether the amount in punitive damages. The trial court concluded that of punitive damages actually awarded was nevertheless the punitive damages award was unconstitutional ‘grossly excessive.’” Here, the court noted that the and reduced it to $2,000, and the court of appeals Oregon Supreme Court has repeatedly approved affirmed. The case came before the court of appeals punitive damages awards in amounts equal to or again on remand from the Oregon Supreme Court for greater than the damages imposed here. Moreover, the reconsideration in light of Hamlin v. Hampton Lumber amount the jury awarded was not “grossly excessive” Mills, 349 Or 526 (2011) (Hamlin II). The sole issue on given the deterrent function that it served and the appeal was the propriety of the jury’s award of punitive resources Lithia had to pay it. damages against Lithia. The case was reversed and remanded with In concluding that the jury’s punitive damages instructions to reinstate the jury’s award of punitive award was appropriate, the court of appeals noted damages. In a lengthy concurring/dissenting opinion, that because calculating punitive damages is a jury Judge Wollheim, joined by three other judges, function, it must view the facts in the light most explained why he would limit the punitive damages favorable to the jury verdict. The court then applied award to $25,000. the reprehensibility analysis prescribed by Hamlin II. It first looked to the legislative intent of the statute Consumer Committee Notes authorizing the punitive damages, and found that by Meeting of November 8, 2012 authorizing punitive damages against debt collectors By Rosemary Zook who engage in unlawful practices, the “Oregon Todd Trierweiler & Associates legislature has recognized the harm that creditors may inflict on consumers and debtors, such as defendant, Dan Rosenhouse from the Oregon Department of and has indicated its intent to deter and to punish Justice reported on the national mortgage settlement. creditors who engage in that type of conduct.” As part of the settlement agreement, non-profit Legislative intent is analyzed as a separate sub-factor in organizations, governmental entities, municipalities, the reprehensibility analysis. and qualifying servicemen can contact participating banks to discuss programs available to purchase The court also considered the financial vulnerability foreclosed properties. Participating banks have a of the litigant who was awarded punitive damages, and strong incentive to donate these properties, as they held that the jury was entitled to conclude that Yovan will receive credit from the national settlement. The was financially vulnerable. (He had a wife and four participating bank’s website will show a list of available children, made about $34,000 per year, and spent $350 loans relating to the donated properties. Qualified per month on gas because of his 100-mile commute.) individuals and entities may get first priority before Further, Lithia knew Yovan was financially vulnerable: sale to the public, and possibly better rates and/or it obtained a credit report on him. terms. For more information and resources relating Another sub-factor of reprehensibility analysis is to the settlement, please visit www.doj.state.or.us/ whether the party engaged in malicious and deceitful consumer/pages/foreclosure_settlement.aspx. conduct. Here, the jury found that Yovan proved either Charlene Hiss, Clerk of the Bankruptcy Court, that: (1) Lithia had shown “a reckless and outrageous announced changes to the Local Rules and Local indifference to a highly unreasonable risk of harm” Forms. Of particular note, the rules relating to file and and had acted “with a conscious indifference” to the document storage have been altered (see Local Form “welfare of others”; or (2) it had “acted with malice”; 5005 and related rules and instructions). For more or (3) both. The jury’s finding that Lithia acted with information regarding Local Form 5005, and for a malice supported its award of punitive damages. complete list of updated rules and forms, please visit Next, the court examined civil penalties in the Court’s website at http://www.orb.uscourts.gov/. comparable cases. It found that in UTPA cases, a Dave Hercher, Chair of the Local Rules/Forms penalty of up to $25,000 can be assessed for each Committee, welcomed the committee’s new members: willful use of a method, practice, or act in violation Wayne Godare, Andrea Brienholt, and David Johnson. DEBTOR-CREDITOR NEWSLETTER 15 Mr. Hercher also invited those interested to join the Judge Dunn announced pending legislative action Local Rules/Forms Committee and to sign up for on increased compensation to chapter 7 trustees and the committee’s listserve. (To become a member of reform of chapter 11 with focus on venue provisions. the Local Rules/Forms Committee, you must be a The ABI formed a commission to provide congressional member of the Debtor-Creditor Section of the Oregon testimony; anyone with comments should contact the State Bar.) One of the Committee’s many current Portland representative Steven Hedburg with Perkins projects is a guide to proper service. The goal is to Coie. Judge Dunn encouraged everyone to visit the ABI provide practitioners with a quick reference guide website for more information. containing information about when, where, and how Judge Perris made several announcements about the to effect proper service on creditors and interested bankruptcy forms modernization project: parties. For more information please visit http://osbdc. org/committees.php?committee=Local Rules/Forms First, the form modernization working group is Committee or contact Dave Hercher at dave.hercher@ moving to assist pro-se debtors in filing their own millernash.com. cases. As part of this project, the National Forms will be revised to enhance their clarity to pro-se debtors. The Judge Perris talked about the status of the proposed group also targeted the attorney fee disclosure form, national chapter 13 plan. The National Rules Schedules I & J and Form B22 for updates. Various Committee is looking at changes to certain rules with changes contemplated include setting up dual columns the goal of settling some of the disputes over adoption in the Schedule J budget form to reflect changes of a uniform plan (such as claim treatment issues, lien between a confirmed plan budget and any newly stripping, etc.), to pave the way for an appropriate proposed budget for plan modification. Judge Perris national plan. The National Rules Committee will invited comments to the working group by February submit drafts of the revised rules and proposed 15, 2013. national plan in the spring of 2013 for publication in the summer. The new rules and national plan will go Second, a new ECF system, NextGen, will come into effect at the same time, which will be in about online. NextGen allows advanced data gathering and three years. report generation to assist the judges in preparing their daily calendars. The ECF-to-NextGen transition will not Judge Perris sought volunteers to participate in the result in a major sea change and will occur in staged 2013 bankruptcy pro bono clinics. Clinics are held roll outs. Judge Perris encouraged interested parties to monthly, usually on the third Tuesday of the month, in contact Charlene Hiss for more information. one of the following locations: SW Portland, Beaverton and Gresham. Volunteers are asked to consult with Finally, Judge Perris reported that new chapter 13 two low income potential clients to discuss chapter 7 plan forms are in the works. A National Bankruptcy bankruptcy options and to provide follow up services Judges meeting will convene in Chicago this spring to when warranted. If attorneys do not have the ability examine procedural differences among districts and to provide follow up services, alternative arrangements attempt to arrive at a standardized national chapter 13 can be made. Prospective volunteers should contact practice. Judge Perris encourages interested parties to Maya Crawford at Legal Aid Services of Oregon, 503- contact her with comments. 224-4086 or [email protected]. Charlene Hiss reported that filing numbers were Thank you to George Hoselton for providing snacks down from 2011 by 29% in December and down and refreshments. Thank you to Bridget Bailey for 14% overall for 2012. She also announced the clerk’s bringing samples of wine from her winery. office will begin using text-only orders for motions to extend time to file deficiency documents, so long Meeting of January 10, 2013 as the continued deadline is at least seven days before By Ted Piteo the §341 meeting. Attorneys no longer need to upload Oliveros & O’Brien PC a separate order on these motions and soon the clerk’s Vivienne Popperl of the US Trustee’s office began office will expand the text-only order to other areas of the meeting with two announcements: motion practice. 1) Pam Griffith has been selected for a Washington Chris Coyle, debtor’s attorney, reported that the DC temporary appointment of six to twelve months Local Rules Committee is reviewing possible changes and Vivienne will stand in her place until she returns. to the local chapter 13 plan and invited comments and 2) Federal Bankruptcy Rule 3001(3) has been proposals. Anyone with proposals or comments should updated and the change will affect a creditor’s proof contact Chris, Dave Hercher or Theodore Piteo. of claim when the underlying debt is based on an Wayne Godare announced the chapter 13 office unsecured revolving credit agreement. The new rule will move to the 17th floor of KOIN Tower, 222 SW will help the court track the history of a claim that Columbia, Suite 1700, Portland, as of February 19. The is transferred between entities by requiring new last §341 meeting date at the old address will be on disclosures on the claim form. February 12 and the §341 meetings will resume at the 16 DEBTOR-CREDITOR NEWSLETTER new location on February 26th. There will be meeting rooms in the new location for use by debtors and their attorneys. Tony Kullen, creditor’s attorney, pointed out that the Principal Residence Mortgage Forgiveness Act has been extended through 2013. The judges noted that debtors’ attorneys may want to attend the next Judges’ Saturday Session on March 9th, where they will discuss reaffirmation agreements and the role of debtors’ attorneys in regard to their clients’ desire to reaffirm. Kent Anderson, Oregon State NACBA representative, announced a NACBA member lobbying event to take place in Washington DC on February 26th and invited all NACBA members to attend, at no cost. Contact Kent for details. Thank you to Kelly Brown and Vanessa Pancic for providing snacks and refreshments. The next Circle of Love Meeting will convene on March 14th at 4:30.