The Debtor in In re Caine, 362 B.R. 688 (Bankr. W.D. 2011) was permitted to use the trustee's strong arm powers to avoid a mortgage when an error in the legal description caused it not to close to describe any tract of land. The chapter 12 debtor filed a complaint against the bank under §544 based on the defective legal description. The bank requested reformation of the mortgage based on mutual mistake.
Under §544(a)(1) the trustee is given the rights and powers of a judgment creditor. However, since the property constituted the debtor's homestead, and a judgment creditor could not attached to a debtor's homestead under Arkansas law, this section did not permit avoidance of the mortgage.
Under §544(a)(3) the trustee is given the rights and powers of a bona fide purchaser without knowledge of the prior unrecorded instrument. The actual knowledge of the debtor is irrelevant to the right to avoid the mortgage under this subsection. Constructive notice does still apply, and the bank argued that the mortgage put parties on inquiry notice as to the mortgage. The Court determined that issue of whether the trustee is subject to inquiry notice is a matter of state law.
Under Arkansas law, an instrument that was filed with a defective description does not provide constructive notice if the description does not describe land. Arkansas law requires actual knowledge of facts and circumstances to put one on inquiry notice. Because actual knowledge cannot be used to prohibit a trustee or debtor from utilizing the strong arm powers of §544, the trustee cannot be put on inquiry notice under Arkansas law.
The bank argued that the legal description describes a L shaped line, rather than closing to describe an actual tract, would put a title examiner on notice of an error. Unrefuted testimony was produced that a title examiner would have discovered the mortgage either by doing a name search on the grantors or search through a computer doing a name search or the legal description. The Court held this was insufficient to put a bona fide purchaser on notice as it is impossible to determine by the record which land is being mortgaged.
Reformation of the mortgage is improper as reformation will not prejudice a subsequent bona fide purchaser.
for more on bankruptcy and chapter 12 see www.tampabankruptcy.com
Monday, March 12, 2012
Eleventh Circuit denies trustee fees for defending sanctions award
When debtor's counsel appeal sanctions awarded against him for frivolous pleadings by the Bankruptcy Court for the Southern District of Florida, the successor chapter 7 trustee sought fees for successfully defending the sanctions. While the district court sustained the sanctions, it denied fees to the trustee, who then appealed to the 11th Circuit. The 11th Circuit agreed that no fees were authorized. In re Creative Desperation Inc., 443 Fed.Appx. 399 (11th Cir. 2011).
The fees were initially awarded pursuant to the bankruptcy court's inherent authority under §105. Sanctions on appeal may be for actions taken on the appeal, 28 USC §1927 or for a frivolous appeal under Rule 8020, Federal Rules of Bankruptcy Procedure (equivalent to Rule 38 of FRAP). Finally, a court may use its inherent authority to award sanctions during the appeal to punish conduct undertaken during the appeal.
The trustee did not seek fees under any of these provisions, instead simply requesting the fees under a public policy rationale outlined in Norelus v. Denny's Inc., 628 F.3d 1270 (11th Cir. 2010). However, Norelus involved sanctions under 28 U.S.C. §1927, which permitted recovery of costs incurred due to such conduct. The Court concluded that costs of prosecuting the sanctions was one of the recoverable costs. While the Court also indicated that not allowing the sanctions would undercut the purposes of sanctions by preventing full compensation to the aggrieved party, an extension of such policy to sanctions on appeals is precluded by Cooter & Gell v. Hartmarx, 496 U.S. 384, 407, 110 S.Ct. 2447, 110 L.Ed.2d 359 (1990).
In Cooter the Supreme Court overturned an award of fees in defending a Rule 11 sanction on appeal. It held that the cost of an appeal order is not caused by the underlying conduct but by the order appealed from.
For more on bankruptcy appeals, see Strategies for Consumer Bankruptcy Appeals, Aspatore, 2012 which includes a chapter by this author. For more on BAPCPA generally see http://www.hillsboroughbankruptcy.com/1017checklist.htm.
The fees were initially awarded pursuant to the bankruptcy court's inherent authority under §105. Sanctions on appeal may be for actions taken on the appeal, 28 USC §1927 or for a frivolous appeal under Rule 8020, Federal Rules of Bankruptcy Procedure (equivalent to Rule 38 of FRAP). Finally, a court may use its inherent authority to award sanctions during the appeal to punish conduct undertaken during the appeal.
The trustee did not seek fees under any of these provisions, instead simply requesting the fees under a public policy rationale outlined in Norelus v. Denny's Inc., 628 F.3d 1270 (11th Cir. 2010). However, Norelus involved sanctions under 28 U.S.C. §1927, which permitted recovery of costs incurred due to such conduct. The Court concluded that costs of prosecuting the sanctions was one of the recoverable costs. While the Court also indicated that not allowing the sanctions would undercut the purposes of sanctions by preventing full compensation to the aggrieved party, an extension of such policy to sanctions on appeals is precluded by Cooter & Gell v. Hartmarx, 496 U.S. 384, 407, 110 S.Ct. 2447, 110 L.Ed.2d 359 (1990).
In Cooter the Supreme Court overturned an award of fees in defending a Rule 11 sanction on appeal. It held that the cost of an appeal order is not caused by the underlying conduct but by the order appealed from.
For more on bankruptcy appeals, see Strategies for Consumer Bankruptcy Appeals, Aspatore, 2012 which includes a chapter by this author. For more on BAPCPA generally see http://www.hillsboroughbankruptcy.com/1017checklist.htm.
Thursday, February 2, 2012
District Court reverses Trustee Waage on social security income
In In re Vandenbosch, 459 B.R. 140 (M.D. Fla. 2011) Judge Steele reversed the Ft. Myers Bankruptcy Court's decision finding that social security income must be included in projected disposable income devoted to the chapter 13 plan. Prior to BAPCPA social security income was typically included in determining disposable income in chapter 13. While some courts have ruled that this practice continues in a forward-looking examination of projected disposable income, Judge Steele determined that that approach was erroneous.
§101(10A) excludes social security benefits from the defined term current monthly income. The inclusion of this section amending current monthly income was a clear indication of an intended departure from prior law. Thus, the forward-looking approach to determining projected disposable income is to take the average monthly income from all sources derived in the 6 months prior to filing, less the amounts reasonably necessary for maintenance, but excluding benefits received under the Social Security Act. This plain reading of the statute is consistent with 42 U.S.C. §407(a) providing that the right to payment under such chapter is not subject to legal process or to the operation of any bankruptcy or insolvency law.
The appellate court noted that the lower court also indicated that it would consider the failure to devote social security income in future cases as a factor in determining bad faith. However, since no ruling was made as to the bad faith in this case, no ruling is made as to this in the appellate decision.
§101(10A) excludes social security benefits from the defined term current monthly income. The inclusion of this section amending current monthly income was a clear indication of an intended departure from prior law. Thus, the forward-looking approach to determining projected disposable income is to take the average monthly income from all sources derived in the 6 months prior to filing, less the amounts reasonably necessary for maintenance, but excluding benefits received under the Social Security Act. This plain reading of the statute is consistent with 42 U.S.C. §407(a) providing that the right to payment under such chapter is not subject to legal process or to the operation of any bankruptcy or insolvency law.
The appellate court noted that the lower court also indicated that it would consider the failure to devote social security income in future cases as a factor in determining bad faith. However, since no ruling was made as to the bad faith in this case, no ruling is made as to this in the appellate decision.
Sunday, December 18, 2011
Hanna test applies in bankruptcy, Florida rule limiting punitive damages applies in trustee suit against debt collector.
Judge Williamson uses the Hanna test to determine that Florida Statute’s limitation on punitive damages, §768.72, applies in adversary proceedings. In re Johnson, 453 B.R. 433 (Bankr. M.D. Fla. 2011). The case involved a suit under the Florida Collection Practices Act, FS §§559.55-.785 and the Telephone Consumer Protection Act, 47 USC §227, brought by the chapter 7 trustee against Florida Pediatric Associates. The complaints involved numerous collection calls to the debtors, including abusive language and a statement that ‘if you did not have insurance or the ability to pay for your children’s health care, you should not have taken them to the hospital.’
F.S. §768.72 does not permit a request for punitive damages in the initial complaint, but rather requires an evidentiary showing supporting a reasonable basis for punitive damages.
Judge Williamson applied the Hanna v. Plumer, 380 U.S. 460, 468-71, 85 S.Ct. 1136, 1142-44, 14 L.Ed.2d 8 (1965) test to determine the applicability of a state law in a federal diversity case, and by extension to bankruptcy cases. This test first determines whether a state law directly conflicts with a federal procedural rule. If not, the Court further examines whether failure to apply the rule would result in the inequitable administration of justice and forum shopping. Judge Williams determined that §768.72 does not conflict with federal procedural rules, and failure to apply it could promote forum shopping.
Tuesday, November 15, 2011
Unobjected to federal wildcard exemption limited to dollar amount of exemption
A Debtor who scheduled cause of action as ‘unknown’ value with value of exemption shown as ‘unknown’ under wildcard exemption, is only entitled to exemption up to maximum value of wildcard exemption despite lack of objection by trustee. In re Hall, 453 B.R. 22 (Bankr. D.Mass. 2011). The Court distinguished Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992) on the basis that the cause of action in that case was claimed exempt with an unknown value under an unlimited wage exemption. The Supreme Court relied on the plain language of §522(l) and the policy providing for liberal allowance of exemptions.
The Supreme Court in Taylor did not determine what is exempt, but solely determined that whatever has been claimed as exempt is beyond the estate’s grasp once the deadline has passed. In determining what a debtor claimed as exempt, the trustee examines three items: 1) the description of the property claimed exempt; 2) the Code provisions governing the claimed exemption, and 3) the amount claimed as exempt. Schwab v. Reilly, ___ U.S. ___, 130 S.Ct. 2652, 2663, 177 L.Ed.2d 234 (2010).
Friday, November 11, 2011
Failure to have contract within 5 days of providing bankruptcy assistance does not make contract unenforceable
The provision of §526(c)(1) making a contract unenforceable against a debtor for noncompliance with §§526-528 only applies to requirements in those sections dealing with the terms of such contract, not with the timing of the execution of such contract. In re Humphries, 452 B.R. 261 (E.D. Mich. 2011). Debtor first met the law firm and attorney on November 17, 2009 where the options for bankruptcy were discussed. The first fee agreement was signed on 15 December 2009. A chapter 13 bankrutpcy was filed on 18 January 2010. The law firm filed a fee application in the chapter 13 on July 28, 2010 requesting fees and costs of $7,349.67 less a $1,000 retainer; which application included $520 in fees incurred prior to the initial contract. The trustee objected 1) to allowance of any fees prior to the signed contract, 2) to fees for review of the unsecured claims, 3) fees in the adversary proceeding caused by errors by the law firm, and 4) fees for review a transfer of a claim. The Bankruptcy Court raised the compliance with §526 sua sponte, found that §528(a) required a contract within five days of the intial advice, that such provision was a material requirement of the contract, and based on such failure the contract was unfenforceable under §526(c)(1). The firm filed a timely appeal of the decision.
The appellate court ruled that the bankruptcy judge could raise the §526(a)(1) issue sua sponte, under its authority to take any action or make any determination necessary to or appropriate to enforce or implement court orders or rules. The law firm argued that the initial meeting consisted solely of an explanation of the bankruptcy process, fees and costs, and did not constitute providing legal services. The appellate court did conclude that not all contacts with a law firm constituted the provision of legal services, however the Court found that the time entry in the fee application indicating initial preparation of the bankruptcy schedules contradicted such allegation.
The last argument by the firm was that the five day requirement was not a material requirement of the contract, citing In re Kinsman, No. 10-57364 (Bankr. E.D. Mich. Dec. 14, 2010). The Kinsman Court determined that if all the requirements in sections 526, 527, and 528 are material, then there is no purpose in the word ‘material’ in §526(c)(1). The appellate court ruled that the focus on materiality was in error.
The District Court ruled that §§526-528 were aimed at curbing ‘abusive practices undertaken by attorneys as well as debt relief agencies.’ Milavetz, 130 S.Ct. at 1332, n. 3. §526(c) prescribes the sanctions and remedies to be imposed if a debt relief agency runs afoul of these requirements. §526(c)(1) deals with contracts for bankruptcy assistance, which may not be enforced against a debtor if not in compliance. §526(c)(2) deals with the conduct of debt relief agencies (including law firms) themselves, and consequences if they fail to comply with the requirements. These sections are separate and distinct, but the bankruptcy court’s treatment of the five day provision in §526(c)(1) conflates the two provisions.
The five business day requirement of §528(a)(1) is directed at the conduct of a debt relief agency, not the contents of the agreement for services. The terms of the agreement are governed by the requirements of §§526-528 that prescribe the mandatory and prohibited terms of the agreement for services. The five business day requirement is not a requirement regarding the terms of the contract, and noncompliance is governed by §526(c)(2) rather than §526(c)(1). The authority to avoid contracts for services is triggered only when the contract does not comply with the material requirements of the statute. The bankruptcy court’s determination that the contract was unenforceable under §526(c)(1) was reversed. The District Court concluded that disallowance of the fees was too harsh a remedy for a technical violation of §528 and remanded the case for determination of the proper fee.
See analysis of debt relief provisions at http://www.hillsboroughbankruptcy.com/1017checklist.htm
Saturday, November 5, 2011
Sanctions and punitive damages awarded against Florida Dept of Revenue and Virginia Dept. of Social Services for violation of automatic stay and discharge injunction in collection of child support arrearages in pre-BAPCPA case
The Florida Dept. of Revenue and Virginia Dept. of Social Services violated automatic stay and discharge injunction by post-petition efforts to collect child support arrearages, subjecting both to sanctions including punitive damages in pre-BAPCPA case. In re Diaz, 452 B.R. 257 (Bankr. M.D. Fla. 2009) (J. Briskman).
The Florida Dept. of Revenue filed a claim, and Debtor provided for arrearage in plan, but objected to claim which objection was sustained when no response was filed. Subsequent to confirmation providing for the allowed claim, the State sent collection letters including threats to suspend the Debtor’s driver’s license prior to the discharge, and additional collection efforts including notices, drivers license suspension, and an income deduction order, and tax refund offset after the discharge.
The Court ruled that by filing a claim for the support, the states had waived sovereign immunity. The Court also ruled that the equal access to justice act limit of $125/hour in fees was inapplicable. The States argued that the debt was nondischargeable, however the Court ruled that this was an attempt to relitigate the objection to claim, and barred by res judicata and collateral estoppel.
The Court found that the collection efforts by the states constituted violations of the automatic stay and permanent injunction, and that such violations were intentional, egregious, and extreme. The Court awarded actual damages of $4,882 of funds taken, compensation for emotional distress, aggravation, and inconvenience of $29,500, attorneys fees of $8,195, and $25,000 in punitive damages.
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