Consumer Bankruptcy

The Eighth Circuit BAP Holds that Health Savings Accounts are Not Excluded From the Bankruptcy Estate

By: Michelle Nicotera

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In Leitch v. Christians (In re Leitch), The Eighth Circuit Bankruptcy Appellate Panel (the “BAP”) ruled that a health savings account (“HSA”) was not excluded from a debtor’s bankruptcy estate.[1] Kirk Leitch, a chapter 7 debtor, asserted his HSA was excluded under section 541(b)(7)(A)(ii) of the Bankruptcy Code,[2] which functions to exclude a health insurance plan regulated by state law.[3] The chapter 7 trustee objected to the debtor proposed exclusion.[4] The bankruptcy court agreed with the trustee and held that the HSA was property of the estate.[5] On appeal, the BAP affirmed the bankruptcy court.[6] While the BAP noted that the Minnesota statute states that a bank can “act as a trustee of certain types of accounts, including health savings accounts,” the court found that the HSA in question did not qualify as a state regulated health insurance plan.[7] Indeed, the beneficiary would “incur tax penalties unless the [HSA] funds are used for ‘qualified medical expenses,’ which are essentially costs of health care ‘not compensated by insurance or otherwise.’” The BAP further reasoned that the HSA was not a state regulated health insurance plan because the debtor, as the beneficiary to the account, had “liberal access to the funds” and was “entitled to distributions from the account for any purpose.”[8].

Does the Absolute Priority Rule Apply to Individual Debtors

By: Colin Coburn

St. John’s Law Student

American Bankruptcy Law Review Staff

The Arizona Bankruptcy Court recently held, in In re Sample, that the absolute priority rule does not apply to individual debtors because it was bound by the Ninth Circuit Bankruptcy Appellate Panel’s decision in P + P LLC v. Friedman (In re Friedman).[1] Section 1129(b)(2)(B)(ii) of the Bankruptcy Code defines the absolute priority rule,[2] which mandates that under a chapter 11 plan of reorganization, a dissenting class of unsecured creditors must be paid in full before the holder of any junior claim or interest receives or retains any property on account of such junior claim or interest.[3] In In re Friedman, the court stated that Congress, in passing BAPCPA, intended Chapter 11 individual bankruptcy to resemble Chapter 13 bankruptcy.[4] In Friedman the court held that §1129(a)(15)(B),[5] replaced §1129(b)(2)(B)(ii) in cases involving individual debtors, thereby abrogating the absolute priority rule in individual chapter 11 cases. Section 1129(a)(15)(B) states that a court can only confirm an individual debtor’s plan, to which an unsecured creditor objects, when, “the value of the property to be distributed . . . is not less than the projected disposable income of the debtor” for the first 5 years after payments begin.[6] The Friedman court reasoned that this fact, combined with the plain meaning of sections 541, 1115, and 1129(b)(2)(B)(ii), dictated that the absolute priority rule does not apply to individual debtors.[7] The Sample court disagreed with the reasoning of the Friedman opinion, but held that it was bound to follow that holding.[8]

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No Second Chances Debtors Prohibited from Filing a Second Petition within 180 Days

By: Brian J. Adelmann

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in In re Rivera,[1] the Bankruptcy Appellate Panel of the First Circuit held that the debtor was prohibited from filing a second bankruptcy case within 180 days of voluntarily dismissing his first case.[2] The debtor filed his first chapter 13 bankruptcy case on the eve of foreclosure of real property that he owned, which was encumbered by a mortgage.[3] The secured creditor moved for relief from the automatic stay on the grounds that the debtor failed to make post-petition mortgage payments.[4] After the debtor failed to file a timely response to the motion, the bankruptcy court granted the secured creditor relief from stay.[5] Subsequently, the debtor voluntarily dismissed his bankruptcy case.[6] On the same day that he dismissed his first case, the debtor filed a new chapter 13 case.[7] The bankruptcy court granted the creditor’s motion to dismiss the second petition pursuant to section 109(g)(2) of the Bankruptcy Code, which provides that no individual may be a debtor in a bankruptcy case if such individual voluntarily dismissed a bankruptcy case within the preceding 180 days.[8] The Bankruptcy Appellate Panel of the First Circuit affirmed the bankruptcy court.[9]