Bankruptcy: Exemption: Worker's Compensation Award

     In the case of In Re Nelson, the United States Bankruptcy Court at Big Stone Gap, Virginia, ruled that where a debtor used his worker's compensation award, which is exempt from the bankruptcy estate under Virginia Code §65.2-531, to purchase a mobile home and lot, the mobile home and lot are also exempt from the Court's consideration in determining whether the debtor's proposed plan is feasible under Bankruptcy Code §1322(a)(4).

     It was the trustee's position in Nelson that since the workers' compensation benefits had been invested in the mobile home and lot that the funds were no longer exempt under Virginia Code §65.2-531. The Court in Nelson stated that Virginia Code §65.2-531 is explicit and unambiguous. The statute simply states that all compensation and claims shall be exempt from all claims of creditors. It does not say that once the funds are invested in other properties they become nonexempt. The Court stated that such a construction cannot be read into the statute, which could be in violation of the authorities. The Court also concluded that if the Virginia legislature had intended to make the funds nonexempt upon investment, then it would have so provided.

     The Court, in deciding Nelson, stated that it found only one case bearing on this subject matter, which was a New Hampshire case, In Re: Williams; the Court found no prior reported Virginia cases. In the New Hampshire case a debtor was allowed to keep a corvette purchased with a worker's compensation award. The Court in Nelson stated that it would be useless to exempt workers' compensation benefits received by an employee who was injured, and yet that employee could not invest those funds in other properties without losing his exemption status. It is clear that the Virginia legislature in passing Virginia Code §65.2-531 and providing for exemptions therein fully intended that the proceeds from these funds, and the purchase of property from the said funds, would be exempt.

     Therefore, the Court in Nelson held that the mobile home and lot purchased from the proceeds of workers' compensation benefits, pursuant to Virginia Code §65.2-531, were exempt properties and were not to be considered in determining whether the plan of the debtor conforms to Bankruptcy Code §1325(a)(4).

Bankruptcy: Chapter 7 Petition - Substantial Abuse

     The United States Bankruptcy Court at Harrisonburg, Virginia, in the case of In Re: Rodriguez, dismissed a debtor’s Chapter 7 petition for “substantial abuse” pursuant to Bankruptcy Code §707(b) where the debtor’s voluntary monthly contribution of $286 to his 401(k), as well as his post-petition purchase of a Ford pickup truck, clearly indicated that the had the ability to fully fund a Chapter 13 plan without incurring undue hardship.
     The Bankruptcy Court found that the debtors’ post-petition purchase of the new truck resulted in a net increase in monthly transportation-related expenses of $220. This voluntary increase indicated that the debtor felt that he had the ability to pay at least that amount to his creditors. The increase in transportation-related expenses and the contribution to the 401(k) alone total over $500 per month that the debtor could have used to pay his creditors. In doing so, the debtor could have paid his creditors 100 percent in less than 10 months. Conversely, if the debtor remained in Chapter 7, the majority of his creditors would receive nothing.
     The debtor’s Schedule I indicated that he enjoyed steady employment with the same employer for eight years, and expected to earn $38,000 in that current year. Nothing in the other schedules filed with the debtor’s petition indicated a sudden illness or calamity which might have necessitated filing for Chapter 7 protection.
     The Bankruptcy Court found that the debtor’s post-petition truck purchase, made with the knowledge that a short-term 100 percent Chapter 13 plan was feasible, constituted the kind of egregious abuse that Bankruptcy Code §707(b) was intended to prevent.
     The lesson of Rodriguez - review Chapter 7 schedules for the ability to pay.

Collections: Liability for Charges above the Credit Limit - Part II

    Last week we looked at two fact patterns involving situations where a customer makes retail purchases for products in an amount greater than the customer’s established credit limit – specifically, if the customer later fails to pay for the product, can he be successfully sued for payment. In those situations, we found that a court will likely hold a customer liable for charges that exceed the originally agreed upon credit limit. The credit terms require the customer to pay any and all sums that become payable because of the express terms of the contract and the intentions of the contracting parties. The next two fact patterns present new issues.
     Fact Pattern Three: When the retail account was originally opened, the credit limit (stated in a letter to the customer) was set at $4,000. The credit terms in the credit application state the applicant agrees "to pay any and all sums that may become payable under this account". Despite the credit limit, customer sends one of his employees to retailer to make a purchase, with customer knowing what the cost of the purchase will be. Retailer allows the purchase over the $4,000 limit. Later customer fails to make full payment. Retailer sues customer for the amount owed, let us say that it is $6,000. Customer raises the defense that charges above the credit limit should not have been allowed. In what amount should the retailer be able to judgment against the customer?
     In addition to the contract issue discussed in the previous patterns, this fact pattern presents an agency law issue. The Circuit Court of the City of Richmond dealt with a similar issue in Chevy Chase Savings Bank v. Strong. In this case, the bank issued a credit card. A card user then incurred charges on the credit card but the card user was the card owner’s husband. The court held that the wife was liable for the charges because she gave her husband authority to use the card. The husband was an agent, and was therefore only liable if the wife was able to prove that her husband exceeded his authority or that he agreed to become personally liable.
     In this fact pattern, the customer has given his employee authority to act on his behalf so the employee is his agent and the customer is the principal. As principal, the customer is liable for all charges. The credit was given to the customer, so he is liable for the charges, unless he is able to prove that the employee exceeded his authority or agree to become personally liable. In this case, the employee did not act outside of his authority and did not agree to become personally liable, so the customer will be liable for a balance incurred.
     Fact Pattern Four: When the retail account was originally opened, the credit limit (stated in a letter to the customer) was set at $4,000. The credit terms in the credit application state the applicant agrees "to pay any and all sums that may become payable under this account". Despite the credit limit, one of customer’s employees goes to retailer to make a purchase, without customer’s knowing what the cost of the purchase will be. Retailer allows the purchase over the $4,000 limit. Later customer fails to make full payment. Retailer sues customer for the amount owed, let us say that it is $6,000. Customer raises the defense that charges above the credit limit should not have been allowed. In what amount should the retailer be able to judgment against the customer?
     Although there was not express authority to spend a specific amount like the previous situation, the same rule applies. The employee acted as an agent for the customer. The customer is liable for the debt unless the customer is able to prove that the employee acted outside the authority given. However, similar to Chevy Chase Savings Bank v. Strong¸ evidence that the customer did not specify an amount to spend is not likely to be sufficient evidence to prove that the agent acted beyond to scope of authority given.