Friday, June 27, 2014

Two years in prison for Idiocy.

The Eighth Circuit has affirmed the two year prison sentence against Michael A. Smith, of Nebraska, for basically being an idiot. Specifically, he was charged under 18 U.S.C. 39A(a), which imposes criminal liability on anyone who "knowingly aims the beam of a laser pointer at an aircraft in the special aircraft jurisdiction of the United States, or at the flightpath of such an aircraft."

Mr. Smith's problems started on July 11, 2012 when authorities in Omaha, Nebraska, learned that the cockpit of a Boeing 737 had been illuminated by a laser while flying over the city. The local police dispatched a helicopter to locate the laser. As the helicopter approached the approximate location of the laser's source, Smith, standing in his backyard, directed his laser's green beam at the helicopter. Smith's beam struck the helicopter several times, but when the helicopter got close, his beam disappeared.

Unable to pinpoint Smith's location, the helicopter was forced to depart. But as the helicopter began to do so, Smith again shone his laser's beam on the helicopter. At that point, the helicopter pilots described a back-and-forth game of "cat-and-mouse," during which the helicopter pilots feigned departure from the scene several times to get Mr. Smith to reveal his location. The helicopter pilots engaged Mr. Smith until an officer on the ground was able to walk right into his backyard and catch him in the act.

What an idiot. He had plenty of opportunities to stop. He could have stopped at any time and got away. Plus he was standing in his own backyard while fighting a laser battle with a police helicopter. Someone didn't think this plan all the way through.

At trial, Mr. Smith admitted shining the laser at the airplane, but denied intentionally shining the laser at the helicopter. His defense was that he did not "knowingly" aim the laser at the airplane because he did not believe that the laser could travel far enough to actually hit the airplane. He didn't know he could hit the airplane. The trial court ruled that the knowing requirement only applied to the aircraft element of the statute. As long as he knew that he was pointing a laser at the airplane, he violated the statute. The Eight Circuit affirmed.

Saturday, June 21, 2014

Does a creditor have to release a bank citation if the debtor files bankruptcy?

A third party citation served upon a bank operates as freeze on any money that the debtor has in his account. Plus, any funds that the debtor deposits after service, but prior to the termination of the citation, will also be subject to the citation freeze. If the debtor files bankruptcy, does the creditor have to dismiss the citation and release the account?

The U.S. Bankruptcy Court for the Northern District of Illinois just analyzed this issue in the case In re Kuzniewski, 2014 Bankr. LEXIS 1443. In that case, after filing bankruptcy, the debtor's attorney made a demand upon the bank and the creditor's attorney to immediately release the account. The bank and the creditor's attorney refused and the debtor filed a motion for sanctions against each for violation of the automatic stay.

The court analyzed the unique nature of a citation lien under Illinois law. A citation lien gives a creditor secured status in a bankruptcy. While the automatic stay does prevent a creditor from taking certain actions in furtherance of a lawsuit, the Bankruptcy Code generally requires notice and an opportunity to be heard before a creditor in bankruptcy may be deprived of a property interest, including a lien. The court noted that there are several provisions of the Code that would authorize avoidance of the citation lien, but all of those provisions require notice and a hearing. Without notice and a hearing on an avoidance action, liens generally pass through bankruptcy. 

For these reasons, the court found that the creditor's actions did not violate the automatic stay. If the debtor wanted the account released, she had an obligation to file an adversary proceeding or a contested matter for avoidance of the lien, not simply make unsubstantiated demands that were not warranted by existing law. In other words, this was a decision to be made by a judge, not by debtor's counsel. 

Thursday, June 19, 2014

Citation to Discover Asset Materials

I had the pleasure to speak about citations to discover assets this morning at a Kane County Bar Association seminar. I mentioned to the audience that I would be placing several documents on this Blog.

First, HERE is an updated copy of my outline from the seminar.

Second, HERE is a copy of the modified citation form in Word format.

And, in case anybody is interested, HERE is a link to the Dexia case that I mentioned briefly at the end of my presentation as I was running out of time.

Please let me know if anybody has any questions about this morning's presentation, or anything else related to the collection of judgments.  

Friday, June 13, 2014

Supreme Court rules that inherited IRAs are not protected in bankruptcy

A unanimous Supreme Court ruled (9-0) yesterday in Clark v. Rameker, 13-299, that inherited individual retirement accounts are not retirement funds within the meaning of the Bankruptcy Code. The decision affirms a recent 7th Circuit decision and clears up a circuit split about the status of unspent IRAs that pass by way of an inheritance. Prudent bankruptcy practitioners may wish to amend their intake forms to specifically ask if the potential client owns an inherited IRA. 

Retirement assets are exempt under the bankruptcy code and Illinois law. But the Supreme Court distinguished inherited IRAs from other retirement accounts. If the heir is a spouse of the decedent, that spouse has a choice when he or she inherits an IRA. He can roll it over into his own IRA, which would retain the exemption, or he can keep it in an inherited IRA, which would not be exempt from creditors. If anyone other than a spouse inherits an IRA, he or she cannot roll it over. The funds must remain designated as an inherited IRA, which are governed by different rules than a traditional or Roth IRA under the tax code.

Unlike a typical IRA, money in an inherited IRA can be withdrawn without waiting for the new owner to retire. Writing for the court, Justice Sonia Sotomayor said that this crucial change in the status of the account makes it less like retirement savings and more like a pot of money available to pay off creditors. Otherwise, Sotomayor said, nothing would prevent someone who declares bankruptcy from using the entire balance of an inherited IRA "on a vacation home or a sports car immediately after her bankruptcy proceedings are complete." For this reason, an inherited IRA does not deserve the typical protection afforded to more traditional "retirement funds."

HERE is a link to the Court's opinion. 

Thursday, June 12, 2014

Does the homestead exemption protect prepaid rent?

From a debtor's perspective, Illinois' $4,000 wildcard exemption can seem woefully inadequate. Imagine receiving a $8,000 tax refund, but owing much more than that to several different creditors, all of whom have filed suit to collect their money. Those creditors may be able to take half of the tax refund. But the debtor can use other exemptions besides the wildcard to protect the excess cash from those lawsuits. Also, if the debtor is forced into bankruptcy, he can use his other exemptions to shield that excess money from the bankruptcy trustee.

There are actually several ways to exempt excess cash. The debtor can invest in a qualified retirement plan up to the applicable yearly limits proscribed by the IRS. The debtor can pay down a car loan so that he has up to $2,400 in equity in the car. The debtor can purchase a whole life insurance policy naming his spouse or children as beneficiary. The debtor can also prepay a mortgage and exempt up to $15,000 in equity in his homestead. 

But what if the debtor cannot afford to invest in a retirement account, or may have already invested the maximum? Assume that he does not own real estate. Can he send his landlord all of his excess cash and then use the homestead exemption to protect that equity? I think so. Here is the Illinois Homestead Exemption statute:
Every individual is entitled to an estate of homestead to the extent in value of $15,000 of his or her interest in a farm or lot of land and buildings thereon, a condominium, or personal property, owned or rightly possessed by lease or otherwise and occupied by him or her as a residence, or in a cooperative that owns property that the individual uses as a residence. That homestead and all right in and title to that homestead is exempt from attachment, judgment, levy, or judgment sale for the payment of his or her debts or other purposes and from the laws of conveyance, descent, and legacy, except as provided in this Code or in Section 20-6 of the Probate Act of 1975 [755 ILCS 5/20-6]. This Section is not applicable between joint tenants or tenants in common but it is applicable as to any creditors of those persons. If 2 or more individuals own property that is exempt as a homestead, the value of the exemption of each individual may not exceed his or her proportionate share of $ 30,000 based upon percentage of ownership. 735 ILCS 5/12-901.
I always thought you had to own real estate to claim a homestead exemption, but after actually reading the statute (novel concept huh?) it appears that a debtor can exempt up to the $15,000 of his interest in a lot of land and buildings thereon "rightly possessed by lease or otherwise" and occupied by him or her as a residence. The annotations do not provide any support for this concept, but it appears that the language of the statute is clear.

Of course, savvy creditors' counsel will claim that any attempt to prepay rent to avoid an obligation to a creditor is a fraudulent transfer. But there is plenty of federal case law that supports "exemption planning" on the eve of a bankruptcy filing. Those cases are easily analogized for purposes of state court litigation. 

For instance, the Seventh Circuit has held that conversions of assets from non-exempt to exempt forms within the year preceding a bankruptcy filing are not necessarily fraudulent to creditors. In re Smiley, 864 F.2d 562, 566 (7th Cir. 1989). Also, the U.S. Bankruptcy Court for the Western District of Wisconsin, in a very thorough opinion dealing with exemption planning, looked specifically at the amount of money at stake, among other things, to determine whether claimed exemptions should be upheld. See In re Bronk, 444 B.R. 902 (Bankr. W.D. Wisc. 2011). That court noted that when deciding on whether to uphold claimed exemptions, the temptation is to place considerable weight on the amount of money a debtor hopes to shield from creditors. This sentiment, the court noted, manifests itself in a variety of characterizations, such as a "smell test" or the age-old adage that "pigs get fat and hogs get slaughtered." The court went on to reject any notion that the size of the claimed exemption was itself indicative of fraud. The court very clearly held that a debtor should not be prohibited from the full use of his exemptions. The court even quoted Judge Learned Hand from a different context when that judge noted that "There is nothing sinister in arranging one's affairs so as to keep taxes as low as possible." 

So, to make a long story short, there is support in the law for last-minute exemption planning on the eve of bankruptcy or trial, even when that exemption planning involves creative applications of existing law, including the prepayment of rent to a landlord. 

Wednesday, June 11, 2014

ACLU Sues Over Fake Twitter Account

Back in April, the Peoria police department raided the house of a man who they believed to be behind a satirical twitter account that mocked the thin-skinned Mayor, Jim Ardis. The Mayor and the police department were outraged that anybody would actually go on twitter and make comments that were not true. There was a lot of uproar online at the time because of, you know, the constitution and all.

Well, today the ACLU filed suit on behalf of the man behind the twitter account. The lawsuit alleges violations of the First and Fourth Amendments of the US Constitution and the Illinois Constitution. They seek injunctive relief, compensatory damages, punitive damages, and attorneys' fees.

Here is the complaint: