Bankruptcy Cases of Interests

Priority Tax Claims

In order to secure a bankruptcy court’s approval of a plan of reorganization, a debtor is required to satisfy, in full, all obligations entitled to priority treatment under the bankruptcy law[1][2]. Some taxes, owed to the federal government, generally are deemed to be priority obligations.  In a recent case, a bankruptcy appellate panel (“BAP”) of the 6^th Circuit dealt with a bankrupt debtor who had failed to pay the shared responsibility payment as required under the individual mandate within the Patient Protection and Affordable Care Act of 2010 (“ACA”). The government had taken the position, and filed a claim, asserting that the debtor’s liability under the ACA was a priority obligation as defined by the bankruptcy law. It therefore sought 100% of the obligation to be repaid in the debtor’s plan of reorganization. The debtor did not agree, and objected to the government’s claim. In the Court below, the bankruptcy court agreed with the debtor and sustained the objection. According to the bankruptcy court’s ruling, the debtor’s liability to the government, was neither a tax, nor a tax on measured income, and therefore the debt was not entitled to priority treatment under the bankruptcy code.  On appeal, the BAP reversed. Relying on U.S. Supreme Court[3] and 6^th Circuit precedent[4], it found that the individual mandate, under the ACA, was not only a tax, but a tax on measured income, thereby entitling the debtor’s liability to priority treatment As a result, the debtor was unable to secure confirmation of a plan of reorganization until it was amended to provide for the payment, in full, of the tax liability imposed under the ACA. 

[1] 11 USC §507

[2] 11 USC §1129

[3] National Federation of Independent Businesses v. Sebelius, 567 US 519 (2012)

[4] Rizzo v. Michigan Dept. of Treasury, 741 F3d. 705 (6^th Cir. 2014) and Albion Health Services, 360 BR 599 (6^th Cir BAP)

Bankruptcy Exemptions

The bankruptcy law provide that upon the filing of a bankruptcy case, a bankruptcy estate is created and all of a debtor’s possession become part of that estate.[1] In a Chapter 7 bankruptcy proceeding, a Chapter 7 trustee is appointed and obligated to “collect and reduce to money the property of the estate.” [2]  However, some of a debtor’s possessions are protected from the trustee’s liquidation obligations. These protections are defined as exempt assets. Debtors who file for bankruptcy relief in Michigan are entitled to choose between two different sets of exemption lists[3]: the Federal list under the bankruptcy law[4] or the list provided by the State of Michigan.[5]  In the case,  In re Richardson (20-cv-12322, E.D. MI 2022), Judge Gershwin Drain was tasked with deciding whether Michigan’s exemption statute protected and exempted the debtor’s interest in cash and bank account deposits from the claims of the Chapter 7 trustee. The statute at issue provided an exemption in “provisions….for the comfortable subsistence of each householder and his or her family for 6 months.”[6] In the Court below, the bankruptcy judge had overruled the trustee’s objection to the exemption. In affirming the bankruptcy court’s ruling, Judge Drain concluded that the issue was one of statutory interpretation and thereafter took a long hard look at the history of the exemption, and its key terms’ ordinary meaning when read in isolation and together, from the statute’s inception over the last 170 years. While bankruptcy courts had ruled in favor of the trustee on the issue in the past, this was first one to be decided on appeal.

After consulting dictionaries of the 1800’s, Judge Drain found that the term “provisions” had more than one meaning, and therefore its usage within the statute in question was ambiguous. It could either could have a narrow construct and only apply to food like items, or it could have a broader interpretation to mean any type of preparation undertaken by a debtor to ensure that the household can comfortably subsist for six months. He thereafter concluded that since the word “subsistence” includes “money, pay and wages” it afforded a basis for a broader interpretation of the word provision. As a result, the debtor’s exemption in cash and bank accounts was upheld.

[1] 11 USC §541

[2] 11 USC §704

[3] 11 USC 522(b)

[4] 11 USC §522(d)

[5] MCL §600.5451

[6] MCL §600.5451(1)(b)