Consumer Bankruptcy Law and Practice: 18.5.2.2 Determining the Existence of a Trust
Under section 541, courts look to state law to determine if property is subject to a trust.196 As one of the standard works on the law of trusts explains:
Under section 541, courts look to state law to determine if property is subject to a trust.196 As one of the standard works on the law of trusts explains:
In one of the very few positive changes for consumers made by the 2005 amendments, section 363(o) was added to ensure that consumer claims and defenses are preserved following a section 363 sale.
The consumer creditor is often subject to an obligation to pay money to a debtor in bankruptcy. This payment obligation can arise from a loan, a lease, a sales finance agreement, a service contract, or a variety of other transactions. The existence of such an obligation owed to the debtor may trigger the consumer’s right to seek recoupment.
In some circumstances, particular debts may be declared nondischargeable.
The 2005 amendments created two new mechanisms to protect consumers in business bankruptcies.
A threshold issue, which can occasionally be troublesome, concerns eligibility to file a chapter 13 case. In addition to section 109(a) and the section 109(h) credit counseling requirement, which are applicable to cases under all chapters filed by individual debtors, the key chapter 13 eligibility provision is section 109(e) of the Code. That section provides that to be a chapter 13 debtor, the debtor must:
Probably the most common issue for low-income debtors is whether the debtor is an “individual with regular income.” This phrase is defined in section 101(30) as an “individual whose income is sufficiently stable and regular to enable such individual to make payments under a plan under chapter 13.” The legislative history makes clear that the intent of the statute is to include others besides wage earners, and to expand eligibility to recipients of public benefits such as welfare and Social Security, small business proprietors, and those supported by other income such as alimony or pensions
In 1986, after a period of experimentation, Congress established a permanent United States trustee system, covering every state except Alabama and North Carolina.526 The United States Attorney General appoints United States trustees for twenty-two regions around the country, each region composed of one or more judicial districts.527 Assistant United States trustees may also be appointed.528
At the meeting of creditors,538 or perhaps at a separate meeting of creditors holding the largest unsecured claims, the creditors will determine if they wish to form an official creditors’ committee.
Section 1104 permits the court on the request of a party in interest or the United States trustee to order the appointment of a trustee “[f]or cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management either before or after the commencement of the case, or similar cause”; or in the (best) interests of the creditors.565
Section 1104(a)(1) allows appointment of a trustee for “cause,” which includes “fraud, dishonesty, incompetence or gross mismanagement,” but nothing in the section requires that cause be limited to only those four transgressions.
Even absent a finding of cause under subsection 1104(a)(1), the court may appoint a trustee if it is in the best interests of the parties.589 Subsection 1104(a)(2) provides a flexible standard for the appointment of a trustee,590 allowing the court to exercise equity powers to appoint a trustee to protect the interests of creditors, equity security holders, and other interests in the debtor’s estate.591 Unlike the “cause” standard, the “be
Section 1104(e), added by the 2005 amendments, directs the United States trustee to move for the appointment of a trustee if there are reasonable grounds to suspect that officers or insiders of the debtor participated in “actual fraud, dishonesty, or criminal conduct” in managing the entity or in preparing its financial reports.599
Another mechanism available to creditors under chapter 11 is to move for appointment of an examiner.
An application for appointment of a trustee or an examiner is by motion and may be made by any party in interest or by the United States trustee.611 A trustee may also be appointed by the court sua sponte.612 Although the motion can be filed at any time, the court may be reluctant to appoint a trustee or an examiner based on prepetition mismanagement. It may therefore, be preferable to wait for evidence of postpetition misconduct.
Prior to Sprint, the Middlesex factors generated varying decisions in the lower courts. Advocates must still be aware of the potential application of these factors by courts in their circuit, and should, if appropriate, brief them after addressing the Sprint categories.
When federal constitutional claims arise from unsettled issues of state law, federal courts have discretion to abstain from exercising jurisdiction. When they do so, the federal courts avoid predicting what state courts would decide and permit the state courts the first opportunity to interpret state law. Doing so may also dispose of the need of the federal court to decide the federal constitutional issue later.
The Supreme Court announced this aspect of abstention, known as Pullman abstention, in Railroad Commission v. Pullman Co. In Pullman, the railroad sued a state regulatory agency. The railroad challenged on Fourteenth Amendment grounds the requirement that all trains in Texas have a conductor in each sleeping car. Employment in the railroad industry was racially segregated; whites were employed as conductors, while African Americans performing similar work were employed as porters. Thus, the regulation had a discriminatory impact on African Americans.
Once a federal court invokes Pullman abstention, it generally should not dismiss the action, but instead should retain jurisdiction and stay proceedings regarding the federal constitutional issues while the plaintiff litigates the unclear question of state law through the state courts.477 An important step to remember in the event the federal court abstains is that, in the state court action, the plaintiff must not only present the state law question, but must also ask the state court to construe it in light of the federal issue, whi
If the forum state has a procedure by which its highest court answers state law questions a federal court certifies to it, a federal court can potentially obtain an authoritative ruling on ambiguous issues of applicable state law. Although certification procedures vary widely among the states, most states accept certified questions from the U.S. Supreme Court, any federal court of appeals, or any U.S. district court. Other states accept certified questions from specified federal courts.
In Burford v. Sun Oil Co., the Supreme Court ordered the dismissal of a federal suit challenging the reasonableness under Texas law of a state commission’s decision to grant a permit to drill oil wells.489 The Court created what has become known as Burford abstention to avoid the potentially disruptive impact that federal court intervention would have on the state’s efforts to maintain a unique and complex administrative structure to regulate a vital state activity.
Before even considering whether there would be “unwarranted” federal interference in a “detailed state regulatory scheme,” advocates must first determine whether the matters sought to be raised in federal court can be considered in state proceedings at all. As the Supreme
The classic example of Burford abstention remains a challenge to a state utility regulatory system.506 Burford abstention has also been upheld, however, in varied settings such as workers compensation, insurance, zoning, and related land use issues.507 Of particular interest to legal aid advocates, Burford abstention has additionally been upheld in challenges involving Medicaid contract funding as well as food stamp eligibility,508
In Colorado River Water Conservation District v. United States, the Supreme Court established a fourth type of abstention applicable to situations when parallel state and federal litigation are pending.517 Colorado River concerned claims to water rights between users of the water and the United States government.