Bankruptcy and arbitration are both intended to provide a quick and relatively efficient resolution to disputes between a debtor and his creditors. Both allow adjudication without a jury. Both systems should be able to move more swiftly than a court of general jurisdiction because there are no competing priorities, such as in criminal cases subject to the requirement of a speedy trial. Both are recognized by federal law, specifically the Federal Arbitration Act and the Bankruptcy Code. So what happens when a party to a bankruptcy proceeding requests permission to proceed with arbitration? The Court in In re McPherson, 2021 Bankr. LEXIS 1487 (Bankr. D. Md. 6/2/21) grappled this issue with frustrating results. What Happened The Debtor and Camac Fund, L.P. ("Camac") entered into a Litigation Funding Agreement (the "Funding Agreement"). Under the Funding Agreement, Camac would advance money to the Debtor in return for a percentage the debtor’s interest in any recoveries from certain whistleblower lawsuits. Under the Funding Agreement, Camac was to extend financing to the Debtor in exchange for a percentage of the Debtor's interest in certain whistleblower litigation cases. Disputes arose between the parties under the Funding Agreement, and Camac invoked its rights under the Funding Agreement's arbitration clause. The Debtor filed a response disputing, among other things, the validity of the arbitration and asserting counterclaims against Camac. A hearing was scheduled in the arbitration proceeding but was stayed by the filing of this Chapter 11 case. Opinion, pp. 3-4. After the bankruptcy was filed, the lawyers got busy. Camac filed a Motion for Relief from Automatic Stay seeking to proceed with the arbitration. The Debtor filed an adversary proceeding against Camac. Camac filed an adversary proceeding to determine dischargeability against the Debtor. Camac asked the Court to abstain from hearing the Debtor’s suit. The Bankruptcy Court found that there were several types of claims involved: (i) claims concerning the parties' performance under, and alleged breaches of, the Funding Agreement (the "Contract Claims"); (ii) claims under the Fair Debt Collection Practices Act ("FDCPA") and state law allegedly governing the Funding Agreement (the "Non-Bankruptcy Claims"); and (iii) claims under sections 502, 510, 523, 543, 544, 547, and 553 of the Code (the "Bankruptcy Claims" Who Gets to Decide? The Bankruptcy Court is the gatekeeper which gets to decide where the ultimate issue will be decided. The automatic stay prevents actions in other forums absent bankruptcy court permission, while the broad grant of jurisdiction in 28 U.S.C. §1334 allows most disputes to be heard in the Bankruptcy Court. Thus, with limited exceptions, unless the Bankruptcy Court lifts the automatic stay and abstains from hearing the dispute itself, the matter will proceed in bankruptcy. The Bankruptcy Court has a second gatekeeper function, which is to determine “arbitrability.” As the Bankruptcy Court explained: [F]irst, it must determine whether the parties agree to arbitrate; second, it must determine the scope of that agreement; third, if federal statutory claims are asserted, it must consider whether Congress intended those claims to be nonarbitrable; and fourth, if the court concludes that some, but not all, of the claims in the case are arbitrable, it must then decide whether to stay the balance of the proceedings pending arbitration. Opinion, pp. 15-16. Although the Bankruptcy Court didn’t get there until page 15 of its opinion, the decision whether to allow arbitration is really a two-step process. First, the Court decides whether the parties intended this particular dispute to be subject to arbitration. Then it decides how to exercise its discretion as to whether to allow arbitration. The Bankruptcy Court’s position as gatekeeper should provide the debtor with an important home field advantage in keeping the dispute in the debtor’s chosen forum. However, in Shearson/American Exp., Inc. v. McMahon, 482 U.S. 220, 226 (1987), the Supreme Court found that "the party seeking to prevent enforcement of an arbitration agreement [must] show that 'Congress has evinced an intention to preclude waiver of judicial remedies for the statutory rights at issue.'” Opinion. p. 9. Therefore, the rule is that the Court should allow arbitration unless there are important bankruptcy reasons not to. Fortunately, Congress has provided guidance on what disputes are most important to the bankruptcy process. In 28 U.S.C. §157(b)(2)(B), Congress has defined certain bankruptcy disputes as “core” proceedings. These include such matters as allowing proofs of claim, selling property and deciding whether the stay should apply. The Supreme Court has further provided that some, but not all, core proceedings are “constitutional core” proceedings meaning that the Bankruptcy Court has authority to enter a final judgment without the consent of the parties. See Stern v. Marshall, 564 U.S. 462 (2011) and the Supreme Court’s subsequent decisions. Thus, if a decision is a “constitutional core” proceeding, there are good grounds for retaining the suit. So, is there a hard and fast rule? No. As explained by the Bankruptcy Court: If a claim is a constitutionally core proceeding, the bankruptcy court has the discretion to retain the proceeding and not enforce the terms of the parties' arbitration agreement. See, e.g.,Taylor, 420 F. Supp. 3d at 448 ("Arbitration of constitutionally core claims 'inherently conflict[s] with the purposes of the Bankruptcy Code,' and therefore a bankruptcy court is generally well within its discretion to refuse arbitration of constitutionally core claims.") (citation omitted). Again, this discretion arises from the inherent conflict in allowing an arbitrator to resolve proceedings that are grounded in the Code itself or that are integral to the debtor's reorganization efforts. A bankruptcy court's discretion is far more limited with respect to non-constitutionally core or non-core proceedings. Opinion, p. 12. Essentially, the Bankruptcy Court has a lot of discretion to retain a constitutionally core matter and a little bit of discretion to retain anything else. While the “constitutional core” distinction is helpful, the decision still comes down to the Bankruptcy Court’s discretion. The Bankruptcy Court was following Fourth Circuit precedent in Moses v. CashCall, Inc., 781 F.3d 63 (4thCir. 2015), where the Court held that sending a constitutionally core proceeding to arbitration “would pose an inherent conflict with the Bankruptcy Code” while requiring arbitration of a claim which was not a constitutional core proceeding would not. Interestingly, the judge who wrote the opinion dissented from the court’s opinion as to the claims which were not constitutionally core. The judge found that the non-core claim was directly tied to the core claim and that it would be inefficient to have two tribunals adjudicate the identical issue. The Fifth Circuit, while relying on a similar standard, has concluded that dividing a case and sending some claims to arbitration “would be of disservice to the parties and defeat the purposes of the Bankruptcy Code.” Gandy v. Gandy (In re Gandy), 299 F.3d 489, 499 (5thCir. 2002).   The Court’s Ruling The Court found that the parties agreed to arbitrate disputes arising under the Funding Agreement. For reasons that are unclear to me, the Court found it unnecessary to resolve whether the parties had agreed to arbitrate the specific disputes at issue. After an extensive discussion, the Court decided to bifurcate the claims. The claims arising under the Bankruptcy Code would not be subject to arbitration while the contract and non-bankruptcy claims would go to arbitration. This is a very unsatisfactory answer although it mirrors the result in CashCall. How could the Bankruptcy Court determine allowance of Camac’s claim (a bankruptcy claim not subject to arbitration) without determining the parties’ performance under the Funding Agreement (a non-bankruptcy claim subject to arbitration)? The only thing that makes sense is sending the FDCPA claim to arbitration since this is an independent claim between the two parties. However, was that even covered by the arbitration clause? As I mentioned above, I don’t think that the FDCPA claim arose under the Funding Agreement and therefore should not have been subject to arbitration at all. Another Way to Look at This Case I found this opinion to be very confusing and the outcome to be arbitrary. I would like to suggest a simplified approach. First, decide if the contract requires arbitration. If the contract does not require arbitration, that is the end of the inquiry. If the contract does require arbitration, then consider the impact on the bankruptcy process and other parties. For example:If a contract requires arbitration of any attempt to restructure a debt, that interferes with the Court’s ability to confirm a plan and arbitration should not be allowed.If a contract requires arbitration of disputes as to lien priority and validity and there are three parties asserting a lien, two of whom do not have arbitration clauses, arbitration should not take place.If the bankruptcy case cannot proceed without resolution of the dispute and the arbitration clause refers disputes to the Mongolian Arbitration Forum which requires a minimum of three years and two gallons of yak milk to decide, arbitration should not be granted. I offer impact on the bankruptcy process and other parties as an alternate test because the whole constitutional core test doesn’t really work. Most arbitration clauses are going to decide claims between the parties. The Supreme Court has said that the authority of bankruptcy courts is greatest when “the action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process.” Stern v. Marshall, 564 U.S. at 499. Since most arbitration clauses apply to deciding who owes what to whom, they are always likelyto involve constitutionally core claims (unless it is purely a matter of a claim by the debtor against the contract counter-party). If constitutionally core claims are the norm, it doesn’t make much sense to use this as the basis for a decision. Additionally, as shown by this case and CashCall, bifurcating claims between those that are subject to arbitration and those which are not can lead to twin forums deciding the same issues which should be a real problem. Thus, impact on the process and other parties is a much more workable test. If I were to apply my test to the case, I would probably have denied arbitration in its entirety. The parties agreed to arbitrate claims “arising under” the Funding Agreement. The FDCPA claims do not appear to arise under the Funding Agreement since the FDCPA will only apply when a debt collector is attempting to collect a debt. In Bankruptcy Court, we know the difference between “arising under” and “relating to” and these claims do not appear to “arise under” the Funding Agreement. I would also have found that the preference and fraudulent transfer claims did not arise under the Funding Agreement, since they arise under the Bankruptcy Code.  If the parties had agreed to arbitrate disputes “related to” the Funding Agreement, the result might have been different. The disputes concerning performance under the Funding Agreement certainly arise under the Funding Agreement. However, they are part and parcel of claims allowance process which arises under the Bankruptcy Code. That would take us to the second level of my analysis: what is the impact on the bankruptcy process and other parties? The opinion doesn’t really answer these questions, and in fairness, the parties may not have raised them. What I would like to have learned is how long the arbitration process would last and how would the allowance or denial of claims have affected other creditors and parties in interest. This was a Chapter 11 case. The Debtor has an exclusive period to propose a plan (or if it was a SubChapter V case, an absolute deadline to propose a plan). Would arbitration interfere with that process? How would determination of who did what to whom affect other creditors? If the only issue was how much Camac would owe the Debtor, then there probably would not have been much of an impact on other creditors. Similarly, if all the other creditors were secured creditors and Camac was the only unsecured creditor, then maybe allowance of Camac’s claim would not have affected other creditors. However, if Camac was one of several unsecured creditors and the amount payable to each unsecured creditor would depend on whether Camac had a big claim or a small claim, it might have had a lot of impact on other creditors. If there is a law professor looking for his next article, I suggest this would make a great subject.

   A recent case from the 11th Circuit affirmed the rulings of the bankruptcy and district court that a debtor failed to show that she met the standards for undue hardship in order to discharge a student loan.  In Graddy v. Educ. Credit Mgmt. Corp. (In re Graddy), 2021 U.S. App. LEXIS 16371, 2021 WL 2224350, Case No 20-12267 (11th Cir., 2 June 2021) the Debtor had gone to NYU School of Law from 1994-1997 then practiced as a prosecutor at $35,000/year, then moved to Georgia and worked for various law firms before deciding she had to change careers.  She graduated from a master's program in cinematic arts in 2008 but had to move back to Georgia working in various legal jobs since then.  Ms. Graddy filed bankruptcy in 2009, then sought to reopen that case in 2015 in order to seek discharge of the student loans.  Per 11 U.S.C. §523(a)(8) a debtor must show that excepting the student loan debt from discharge would impose an undue hardship on her and her dependents.  ECMC, the student loan creditor, asserted about $389,000 in student loan debt.  The bankruptcy court found Ms. Graddy had an average monthly income of about $8,600, and the Pay As You Earn repayment program would require her to pay $673/month at most for a $389,000 debt.  The court also found that Graddy had found adequate employment with her degrees, and she did not make a good faith effort to repay her loans.  The district court affirmed, rejecting her arguments that discovery issues did not cause reversible error, and that Graddy did not show clear error for the undue burden issues.  The 11th Circuit initially note that the Bankruptcy Code provides generally that student loans should not be discharged, with a narrow exception for cases where a debtor shows undue hardship.   The Court reaffirmed the Brunner test, requiring debtor's to show 1) that the debtor cannot maintain, based on current income and expenses, a 'minimal' standard of living for herself and her dependents if forced to repay the loans; 2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and 3) that the debtor has made good faith efforts to repay the loans.1  The 11th Circuit noted that it is the debtor's burden to show by a preponderance of the evidence that all three factors are met.2   As there was no dispute that the student loan itself existed, the issue on appeal was whether Graddy carried this burden.  This is a mixed question of law and facts.  However Graddy failed to provide any controlling case law to show an error of law in the bankruptcy court's conclusion that she failed to prove circumstances indicating a future inability to make payments on the loans. Further she failed to meet the stringent standard of the 11th Circuit to show that such inability would be likely to continue for a significant time, such that there is a certainty of hopelessness that the debtor will be able to repay the loans within the repayment period.3  Further, the bankruptcy court's factual findings are not clearly erroneous unless the appellate court, after reviewing all the evidence, is left with the definite and firm conviction that a mistake has been committed.4  As the lower court examined her work history, her employability, and her home and car ownership, the 11th Circuit could not find that this was insufficient evidence to find a lack of certainty of hopelessness.  Graddy also complained that some documents brought forth by ECMC should have been excluded due to lack of initial disclosures, failure to bring various loan histories 30 days prior to trial, and admission of third party documents.  The 11th Circuit found that any such failures did not excuse her inability to show an entitlement to discharge.  Any error as to admission of loan histories or third party documents would be harmless, as they went toward proving the amount of the debt rather than the existence of the debt; and ECMC was not required to show the amount of the debt.  As to her allegation of a trial by ambush, both the initial and pretrial disclosures are matters the trial court has leeway in handling.  The court further rejected her due process claim it found Graddy had not shown that any of the alleged errors prejudiced her or that the court abused its discretion.1 Brunner v. New York State Higher Education Services Corporation, 831 F.2d 395, 396 (2nd Cir. 1987).↩2 In re Mosley, 494 F.3d 1320, 1324 (11th Cir. 2007)↩3 Mosley, 494 F.3d at 1326.↩4 In re Cox, 338 F.3d 1238, 1241 (11th Cir. 2003).↩Michael BarnettMichael Barnett, PA506 N Armenia Ave.Tampa, FL 33609-1703813 870-3100https://hillsboroughbankruptcy.com

" I retained Jim Shenwick from a recommendation from another attorney. All I can say is, Jim is a  Professional! Jim got me to relax by taking full ownership of my bankruptcy situation and made the whole process easy for me! Jim and his team went above and beyond to get the job done. I highly recommend Jim"            E___ B___ A___  

Are you eligible for student loan relief? Obtaining a student loan discharge -- or sometimes partial relief -- is not impossible.

“Does Reaffirming My Car Loan Help My Credit Score?” Ray and Theresa, who filed bankruptcy with me last fall, asked me that last week. Lots of people ask that same question after they look at their after-bankruptcy credit report and see that their car payments don’t show.  Then, they are told by their car finance […] The post Does Reaffirming Your Car Loan Help Your Credit Score? by Robert Weed appeared first on Northern VA Bankruptcy Lawyer Robert Weed.

   Placing the title of a house into a joint revocable living trust appears to have caused the loss of an exemption to the property in In re Givans, 2021 Bankr. LEXIS 1449, Case No. 6:19-bk-01928-KSJ (27 May 2021).  The property had been transferred by Debtor and his spouse into the trust in 2014.  The trust provided that Debtor and his spouse were both settlors and trustee's of the trust, and that upon the death of either, the the surviving spouse would remain a settlor and trustee, and would become an income beneficiary.  Upon the death of both their children would would become the beneficiaries of the trust.  The Debtor filed for relief under chapter 7 in 2019.    The Debtors asserted a tenancy by entireties exemption on the property, which was rejected as a trust cannot hold real property by tenancy by the entireties.  Upon the trustee's request to administer the Debtor's 50% interest in the property, the Debtor asserted that the trust was subject to a valid spendthrift trust provision.  The court noted that a restriction on transferring a debtor's interest in a trust which is enforceable under nonbankruptcy law would remain enforceable in bankruptcy; and such property would be excluded from property of the estate under §541.   Florida law governs the trust, and enforceability of the spendthrift provision.  Florida law recognizes the validity of spendthrift trust provisions only if the provision restrains both voluntary and involuntary transfers of the beneficiary's interest.1   It is also  a problem that the Debtor and his spouse transferred the assets into the trust and are allowed to retain control and decision-making power over the assets,  thus making this a self-settled trust.   The trust provides that the Debtor and his spouse can revoke or terminate the trust during their lives, or require the trust to pay the entire trust estate to them.  Debtor could terminate the trust at his sole option if his spouse predeceases him.  Further the trust terminates on the death of Debtor and his spouse.   This was not a trust designed to provide a fund for the maintenance of their children or protect such children from their own improvidence, and does not qualify as a spendthrift trust.  §736.0505 Fla. Stat. provides that a revocable trust is subject to the claims of the settlor's creditors during the settlor's lifetime to the extent they are not otherwise exempt and if owned directly by the settlor.  Transferring the house to the trust converted the ownership interest from tenancy by the entireties to joint tenants in common.   Under joint tenants in common, each owner has their own separate share which is presumed to be equal, and which can be reached by a creditor holding a claim against such owner.  This interest can be reached without the consent of a co-trustee even if the terms of the trust require such consent.2    The Court granted the request of the trustee to administer the Debtor's 50% interest in the estate, including authority to partition the property if necessary.    Query if there is a malpractice claim out here somewhere that also may be property of the estate.1 Fla. Stat. §736.0502↩2 Fla. Stat. §736.0505↩Michael BarnettMichael Barnett, PA506 N Armenia Ave.Tampa, FL 33609-1703813 870-3100https://hillsboroughbankruptcy.com

Unfortunately, it is not uncommon for someone to have a credit card in their wallet they are unable to use because it is maxed out. Nonetheless, they keep making the minimum monthly interest payment every thirty days. In some cases, there are multiple cards and people are transferring entire balances in hopes of getting a […] The post Can You File For Bankruptcy to Avoid Defaulting on a Credit Card in Pennsylvania? appeared first on .

Healthcare costs seem to continually rise in the United States and Pennsylvania. In a July 2020 Gallup poll, 50% of American households were extremely concerned about a major heath event leading to bankruptcy. In fact, roughly 15% of adults reported that at least one person in their family has long-term medical debt that they are […] The post Can You File for Bankruptcy to Avoid Defaulting on Medical Bills in Pennsylvania? appeared first on .

When a person is arrested and held in police custody, they often rely on friends and family on the outside to help them. In many cases, an arrested individual will depend on their spouse. The spouse outside of police custody is in a better position to begin meeting with attorneys and figuring out how to […] The post What to Do if Your Spouse Was Arrested in Bucks County, Pennsylvania appeared first on .