tampabankruptcy

District Court reverses Trustee Waage on social security income

2012-02-02T11:11:00.000-08:00

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.

Hanna test applies in bankruptcy, Florida rule limiting punitive damages applies in trustee suit against debt collector.

2011-12-18T08:39:00.000-08:00

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.

Unobjected to federal wildcard exemption limited to dollar amount of exemption

2011-11-15T10:45:00.000-08:00

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).

By plainly listing a discrete statutory exemption, in the case at bar §522(d)(5), the Debtor restricted the focus of the objection claimed. This federal ‘wildcard’ exemption permits exemption of $1,150 plus up to $10,825 of any unused exemption provided in paragraph 1; thus determining the maximum amount the Debtor in Hall could claim as $11,190. Because the ‘property] a debtor may claim as exempt under §522(d)(5) is defined by the subsection as the debtor’s ‘interest’ up to a specified amount in the asset, the subsection does not create an exemption in the assets themselves

Failure to have contract within 5 days of providing bankruptcy assistance does not make contract unenforceable

2011-11-11T09:20:00.000-08:00

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

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

2011-11-05T14:05:00.000-07:00

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.

Exemption allowed under Vermont law for note receivable as proceeds from sale of homestead

2011-10-30T11:18:00.000-07:00

A debtor is Debtor entitled to claim homestead exemption in note receivable as proceeds from sale of her Vermont homestead. In re Greene, 451 B.R. 331 (Bankr. D.Vt. 2011). Debtor sold home in 2009 and received note for $76,060. While initially not scheduled, debtor amended schedules B&C to list note and claim it as exempt as homestead. Subsequent to the sale of the Vermont property Debtor moved to Florida, and, while living with her daughter, made a down payment on a mobile home to move into on the daughter’s land. Debtor subsequently moved back to Vermont and filed chapter 7 bankruptcy.

The trustee argued that the Debtor surrendered her interest in the Vermont homestead upon sale of the property with no intent to move back into it, and by taking steps toward the purchase of a new homestead in Florida. Debtor argued that she always intended to return to Vermont if the move to Florida was unsuccessful, and could regain her former homestead through foreclosure if there was a default on the note. Alternatively she argues that her move to Florida was irrelevant as the note was exempt as proceeds of the sale of the homestead.

Vermont exempts both homestead and the proceeds of the sale of the homestead. 12 V.S.A. §3023. The Court found no cases involving proceeds of the sale of a homestead converted to a stream of payments. Vermont has a policy of construing homestead exemptions generously in favor of debtors. The proceeds from the sale of a homestead are exempt under Vermont law the same as the homestead itself. There is no requirement that the proceeds be intended for the purchase of anther homestead. The Court noted Florida case law limiting the exemption of proceeds to only so much as is to be reinvested in another homestead. Orange Brevard Plumbing & Heating Co. v. La Croix, 137 So.2d 201, 206 (Fla. 1962).

As Vermont has no such limitation, the Court finds the only requirements to allow proceeds as exempt is that 1) the funds are proceeds from the sale of an exempt homestead, and 2) that the debtor holds no ownership interest in any homestead property other than such proceeds on the petition date. Under this analysis it does not matter whether Debtor made an attempt to establish a Florida homestead after the sale of the Vermont property, since as of the date of the petition she had abandoned such efforts and moved back to Vermont.

Pre-divorce judgment lien on tenancy by the entireties property not subject to avoidance

2011-10-10T08:38:00.000-07:00

When judgment was entered at time property was held tenancy by the entireties, and debtors got divorced pre-petition, this changed ownership to tenancy by common after fixing of lien, and prevented avoidance of lien in bankruptcy. In re White, 450 B.R. 866 (Bankr. E.D. Ark, 2011). The Debtors owned a 160 acre parcel by tenancy by the entireties prior to the divorce, and divided the property into 80 acre parcels by quit claim deeds through the prepetition divorce. Debtors filed separate chapter 7 cases after the divorce.

Under Arkansas law the entry of a divorce has the immediate legal effect of converting property held tenancy by the entireties to tenancy in common, with each owner holding an separate fractional share in undivided property. The quit-claim deed then changed this tenancy in common interest to fee simple ownership. The critical inquiry is whether the debtor’s possessed their current interests before the judgment lien was fixed. Since the debtors did not possess their fee simple interest prior to the fixing of the lien, they cannot avoid the judgment lien on the property. The same result would apply had debtors still owned the tenancy in common interest.

Spendthrift trust valid even though created during bankruptcy and designed to prevent assets from going to bankruptcy estate

2011-10-02T11:15:00.000-07:00

Neither fact thatspendthrift trust was created during the bankruptcy, with consultation with theDebtors, nor that it was designed specifically to prevent access to the fundsby the trustee prevents the trust from being protected from creditors of thebankruptcy estate under Florida law. Inre Allan, 440 B.R. 628 (Bankr. S.D.Ga. 2009). Debtor met with his father after chapter 13was filed, and father set up spendthrift trust using only father’s property,providing that debtor received no money prior to termination of the trust insix years or when the trustee is satisfied that there are no causes of actionagainst the debtor or his estate.

The debtor did notamend his schedules to disclose the trust in that he was told it was not hisasset. The debtor did not receive anyproperty under the trust, but filed taxes showing a capital gain from propertyin the trust. The court examined thebadges of fraud alleged to be that the debtor was in bankruptcy when the trustwas created, that creator of the trust knew of the bankruptcy when it wascreated, and the trust termination date appeared to be related to the term ofthe bankruptcy.

The Court rejectedthese badges of fraud, as the father had the lawful right to dispose of hisproperty as he saw fit. The wholepurpose of a spendthrift trust is a valid, legal way to dispose of his propertywhile protecting the beneficiary from his own improvidence.

The creditors alsoargued that the debtor’s concealment of the trust should invalidate thespendthrift provision. However, theCourt found that the debtor did not knowingly and wrongfully conceal the trustsince he did not believe it belonged to him and he did not receive any propertyfrom it, although the Court did note that the trust should have beendisclosed. The Court also denied amotion to dismiss the case for similar grounds.

Extraterritorial application of homestead laws may be broader than you think

2011-10-01T11:40:00.000-07:00

In a case discussing both the extraterritorial effect of homestead statutes, and when a homestead is considered abandoned for exemption purposes, the Court indicated that state court decisions limiting homestead exemptions to property within the state may not apply to application of the homestead exemption in bankruptcy.

In the case, a debtor residing in Iowa, filing chapter 7 in Iowa, could claim California property exempt as homestead under Iowa exemptions. In re Roberts, 450 B.R. 159 (N.D. Iowa 2011). The property in Newport Beach California was purchased in 1982 as investment property, and Debtor moved into the property in 1991. The Debtor then split her time between this home and other properties until 2004 when she signed preliminary separation documents with her spouse. In 2004 in the process of removing her property from the house she had an altercation with her spouse, and her attorney advised her to leave the house and never come back. This also resulted in a stipulated restraining order requiring the spouses to stay away from each other. Debtor moved into another property, which was subsequently sold, and Debtor moved into rental property. The Newport Beach property remained subject of the dissolution action as of the filing of the case, with the spouse residing in the property.

The Debtor initially did not claim the Newport Beach property as exempt, but amended the schedules to claim it as exempt after objecting to the trustee’s request to sell the property at a value she considered substantially undervalued. The Trustee argued that the debtor had abandoned the property, and argued that an Iowa supreme court decision limited the homestead exemption to property located in Iowa. The Debtor argued that she wanted to live there but could not for several practical reasons. The Bankruptcy Court held that Iowa law permitted extraterritorial effect of the Iowa homestead exemption, and that the debtor did not abandon the homestead.

The appellate court agreed with In re Drenttel, 403 F.3d 611 (8^th Cir. 2005) that state law interpretation of state law may not apply with equal force in the context of a bankruptcy statute, given the national effect and supremacy of federal law, rejecting application of a state court decision limiting the effect of a state homestead exemption. The liberal construction of homestead laws that do not on their face limit their application to property within the state should allow application of the law extraterritorially as a matter of bankruptcy law. See also Stephens v. Holbrook, 402 B.R. 1 (10^th Cir. BAP 2009) finding that despite contrary interpretations by Iowa state decisions, the liberal construction applied to Iowa exemption statutes and the statutes silence the law could be applied to out of state property.

The Court found that a property could remain homestead after a person moved out until its use is terminated. Once a homestead is established, and intention to return there in the future is sufficient to retain its homestead status. Once occupancy of the home ceases, a presumption of abandonment arises and it is the burden of the person claiming homestead status to show that there was a fixed and definite purpose to return. The owner may meet this burden by his own testimony that he had a continued and fixed purpose to return.

The Bankruptcy Court’s conclusion that the debtor was forced to leave the homestead due to circumstances beyond her control. Neither her statement that it is not possible for her to return at this time, or her initial consent to a sale of the property (until the time such sale is effectuated) constitute an abandonment.

Use of 12 USC 2605 to determine mortgage owner in bankruptcy

2011-09-28T08:43:00.000-07:00

This blog previously discussed problems in determining the proper owner of the mortgage in bankruptcy. One solution to check the MERS website to determine the owner. The problem then arises when the MERS website comes back indicating that the owner has chosen not to disclose their identity. One possible approach to forcing disclosure of the owner's identity is a qualified written request under RESPA, 12 USC 2605(e)(1)(B). Judge May has granted our request to compel a response to a qualified written request, laying the groundwork for more substantial sanctions if, as is almost always the case, the mortgage company continues to ignore these requests.

Willful attempt to evade tax liability §523(a)(1)(C)

2011-09-04T12:20:00.000-07:00

The 6th Circuit has ruled that in order for the IRS to meet its burden to show willful evasion of tax liability the government must meet both conduct and mental state requirements. To satisfy the conduct requirement the IRS must show that the debtor avoided or evaded payment or collection of the taxes through acts of omission, such as failure to file returns or pay taxes; or commission, such as affirmative acts of evasion. While nonpayment is a factor, it is not alone sufficient to bar discharge. Where the IRS showed no other conduct than nonpayment, a judgment in favor of the IRS must be reversed. US v. Storey, 640 F.3d 739 (6^th Cir. 2011).

To meet the mental requirement, the IRS must show 1) that the debtor had a duty to pay taxes, 2) knew of the duty, and 3) voluntarily and intentionally violated that duty. As no evidence was produced below showing debtor voluntarily and intentionally evaded payment of the taxes, that is also a basis to reverse the judgment. Purchase of another home, without evidence that it was more lavish than the prior home, or was unnecessary, is not evidence of intent. Nor would such be evidence of intent to evade for a home purchased the same year debtor stopped paying taxes, absent a showing she knew she would be unable to pay the taxes when the home was purchased.

How to determine each spouse's share of a joint tax refund in bankruptcy?

2011-09-04T11:01:00.000-07:00

A Court in Georgia came up with a rather complicated, but fairer approach to determining how joint tax refunds are allocated to each spouse in bankruptcy. The Court declined to follow the majority rule, applying the refund in proportion to the taxes withheld; rather it examined the proportion of the refund due both from credits and payments. In re Evans, 449 B.R. 827 (Bankr. N.D. Ga. 2010). Only Mr. Evans was employed outside the home, and had taxes withheld. Mrs. Evans is paid $535/mo to support her grandchildren. Debtors also received a Making Work Pay Credit, and Earned Income Tax Credit, and an Additional Child Tax Credit.

The Court determined that relying on the treatment of the tax refund in the event of a divorce is not appropriate, as the goal in divorce is to equitably distribute the spouses’ assets rather than to determine the rights of each spouse’s creditors in each of their assets. The Court recognized the majority rule dividing the refund based on the withholding, as being based on the fact that state law does not presume equal ownership of refunds between the spouses. However, the Court rejected this noting that the reality is, especially when dealing with low income debtors, that the refund results from tax credits rather than taxes withheld. When the portion of the refund from credits exceeds that from withholding, dividing the refund based solely on the amount withheld makes no sense.

Instead the Court adopted the approach followed by the 10^th Circuit in In re Crowson, 431 B.R. 484, 489 (10^th Cir. 2010). Under this approach first each spouse must calculate what tax liability they would have incurred under their separate income by preparing a hypothetical ‘married filing separately’ (MFS) return. The percent liability is then computed for each spouse based on the ratio of their liability to the total liability on both MFS returns, ie if the husband’s MFS liability is $250 and the wife’s is $400, then the husband’s percentage of the liability is 38% and the wife’s is 62%. This percentage is then used to compute each spouse’s portion of the liability on the joint tax return.

Next the Court determines each spouse’s contribution to the total payments and credits. Withholding payments are deemed contributed by the spouse whose income was withheld. Tax credits are computed by determining the amount each spouse would have received based solely on their income and the number of dependents shown on the actual return, and then determine each spouse’s percentage of their contributions as was done with the determination of liability.

The total liability and credits are totaled to determine each spouses percentage of the refund. The Court did not advise on whether the debtors or the estate would pay for the preparation of the hypothetical tax returns required, which could easily offset the total refund due.

Assignee of mortgage denied standing

2011-09-01T07:59:00.000-07:00

When an assignee of a mortgage who could not show an assignment of the note, and was not in possession of the note, has no standing to seek relief from stay. In re Veal, 449 B.R. 542 (9th Cir. BAP). The appellate panel reversed a contrary decision by the Bankruptcy Judge. The Debtor scheduled AHMSI as the holder of the mortgage in the chapter 13 case, and in the motion AHMSI alleged it was filing the claim on behalf of Wells Fargo as Wells Fargo's servicing agent. AHMSI attached a cop of the note showing an endorsement from GSF to Option One, a copy of the mortgage, and an assignment of mortgage from GSF to Option One, and a letter from the EVP and Chief Legal Counsel of AHMSI stating that AHMSI acquired Option One's mortgage servicing business. The letter was not made under penalty of perjury, nor contained any elements of admissible evidence. Wells Fargo subsequently filed its own motion for relief from stay, including an attached assignment, dated after the bankruptcy was filed, from the successor to Option One to Wells Fargo. While the assignment from GSF to Option One purported to assign the note and mortgage, the assignment from Option One to Wells Fargo only purported to assign the mortgage.
The BAP went into very detailed and extensive analysis of standing and the real party in interest; as well as the law on assignments, and the UCC. Ultimately determining that neither AHMSI nor Wells Fargo showed that they owned the note or thereby the debt on which the claim was based, the order lifting stay was reversed. This case can be distinguished from Judge Delano's case in In re Aum Shree of Tampa, LLC in that Aum Shree did show they held the promissory note as well as the mortgage.

Unusual living circumstances leads to novel computation of household size for means test

2011-08-30T13:43:00.000-07:00

In a well reasoned but unusual opinion, a court found that 4 children living part time with the debtor counted as two full time individuals for purposes of household size in the means test, but noted that housing expense may be based on a family of five.
An unmarried father of four children, which on average live four days per week time with the Debtor and the remainder with their mothers, allowed to claim household size of three for purposes of the means test. In re Robinson, 449 B.R. 473 (Bankr. E.D. Va. 2011). Debtor requires a three bedroom apartment in order to accommodate the children (all under age 15), one for him, one for the 2 sons, and one for the 2 daughters. The Debtor has never claimed any of the children as dependents on his tax returns, but hopes to claim two this year. The youngest son has medical problems requiring bi-weekly doctor visits, the Debtor being responsible for such costs. The Debtor initially claimed a household of one, but claimed some expenses from the IRS allowances for a household of five.

Courts have adopted three alternative tests to determine household size for purposes of the means test. The Heads-on-beds or Census Burea approach sets a household size as all the people who occupy a housing unit. The Internal Revenue Service approach uses approach under§707(b)(2)(A)(ii) restricting the household to the debtor, the dependants of the debtor, and the spouse of the debtor in a joint case in which the spouse is not otherwise a dependent. To determine whether a child qualifies as a dependent in this test the Court should examine IRS Publication 501. The Court declined these test, opting instead for the Economic Unit test, which it determined fell between the other two tests.

The Economic Unit test measures the number of individuals in a home that act as a single economic unit, regardless of familial relationship, citing Herbert and Jewell. In interpreting undefined statutory terms the court should use the definition which bests serves the goals of the statute in which the terms are found. The definition of household must be that which leads to the most accurate and realistic calculation of the debtor’s projected disposable income given the economic realities of the debtor’s family circumstances.

The Heads-on-beds approach overstimates the family size by including individuals who are not economically dependent on the debtor. The IRS dependent approach unnecessarily subordinates the Bankruptcy Code to the Internal Revenue Code, undercounting legitimate deductions due to a debtor that financially provides for individuals he does not claim as dependents.

The problems of the approaches are shown in the case at bar. Under the heads on beds approach, given that the children live only part time with the debtor, the test would be inconclusive. The dependency approach would subject the distribution to unsecured creditors to decisions made with the childrens’ mothers as to tax dependency.

Given the part time basis of the debtor’s support of the children, the Court found that each child can best be described as a fractional member of the household. As the four children spend four-sevenths of the week with the Debtor, they approximate two full time members in the aggregate. The Court also noted that while the family size of three may be appropriate for food expenses in the budget, given the necessity of the Debtor maintaining living space for five, the housing expense may well be based on a family of five.

See analysis of the means test and all of BAPCPA http://www.hillsboroughbankruptcy.com/1017checklist.htm

Analysis of effect of errors in recorded assignments on right to avoid mortgages.

2011-08-25T05:38:00.000-07:00

Judge Delano granted the mortgage company’s request to reform the assignment of a mortgage after a complaint was filed by Debtor to avoid the transfer as referring to a different mortgage. In re Aum Shree of Tampa, LLC, 449 B.R. 584 (Bankr. MD Fla. 2011). Both mortgages were initially held by BLX. The 1^st mortgage was inadvertently recorded after the 2^nd was recorded, and a subrogation agreement correcting this recorded later; then an assignment of the 2^nd mortgage was made which referred to the book and page number of the 1^st mortgage; and reassigned to the Small Business Administration again with the same error. Both assignments referred to the 2^nd mortgage but had an erroneous book and page reference to the 1^st mortgage. Similar errors were made on the assignment of the 1st mortgage. BLX filed for foreclosure on the 1^st mortgage, which was amended to show HSBC as the plaintiff, and a receiver was appointed. Debtor then filed a chapter 11 and sought to avoid the mortgages under Florida State and Federal law.

The Court granted summary judgment to HSBC. First the Court allowed HSBC to reform the assignments to refer to the correct book and page, finding that a court of equity may reform a written instrument where, due to mutual mistake, the instrument as drawn does not accurately express the true intention or agreement of the parties to the instrument. The Court found that the parties were put on inquiry notice by the inconsistent information set forth in the assignment that makes clear that it refers to the different mortgage than that recorded in the official records page indicated.

The Court next found that judicial estoppel does not apply against HSBC because BMX claimed to own them in the foreclosure suit and had a receiver appointed in such suit. Judicial estoppel applies where 1) the present position of a party is clearly inconsistent with the earlier position, 2) the party succeeded in persuading a tribunal to accept the earlier position, and 3) the party advancing the inconsistent position would derive an unfair advantage on the opposing party. The Court found estoppel not to apply because a servicing agent (BMX) has standing to prosecute a foreclosure case on behalf of its principal, and because HSBC was substituted as plaintiff in the foreclosure. Further BMX did not convince the state court to accept its position because the appointment of a receiver is an interim order to maintain the status quo. There was no prejudice to the debtor as it acknowledged that it executed the 2^nd mortgage and note and received the proceeds of such loan. Finally estoppel would not apply against HSBC based on BMX’s prior inconsistent position.

The Court denied the Debtor’s requests to avoid the mortgages under §§547 548, or 549). All of these sections require that the transfer to be avoided be of property of the estate. However, the 11^th Circuit in Kapila v. Atlantic Mortgage and Investment Corp., 184 F.3d 1335 (11^th Cir. 1999) has ruled that the assignment of a perfected mortgage is not a transfer of property of the estate. The Court also denied Debtor’s request to assert a claim under §701.02 of the Florida Statutes, requiring the recording of any assignment for it to be effectual against creditors. However, Kapila held that the trustee did not have standing to bring suit under this statute, as it only applied to competing creditors or bona-fide purchasers.

Debtor also argued that HSB was not a holder in due course entitled to enforce the mortgage. However, §673.3011 includes both the holder of a note and a nonholder of the note in possession of the note who has the rights of a holder. As it was undisputed that HSBC was in possession of the note and mortgage, and qualified at least as a nonholder with the rights of a holder.

This case raises more questions as to how to determine the owner of a mortgage for service purposes in bankruptcy, ie the common motion to strip an unsecured mortgage. There is an issue whether service on the servicing agent is sufficient. The normal approach would be to check the official records to determine the owner based on recorded assignment, and if MERS is shown as the owner to check owner information on it's website https://www.mers-servicerid.org/sis/. (though this can also be problematic as the result shown may simply be that the owner has elected not to disclose its identity). Judge Delano noted that the erroneous assignment here gave inquiry notice of the error therein by a conflict within the term of the assignment itself. However, under §673.3011 there need be no indication at all in the official records of the real owner, and such records may in fact show a different owner. Debtor counsel can resort to a Qualified Written Request to attempt to obtain such information, though it is often very hard to get any information from these, and the issue then arises as to the consequences if the information provided later turns out to be inaccurate.

No Turnover Order allowed against Debtor no longer in possession of bank funds

2011-08-24T12:24:00.000-07:00

The Court could not order turnover of funds from bank account where funds were no longer in account since checks were honored post-petition. In re Henson, 449 B.R. 109 (D. Nev. 2011). Debtor had $6,155 in the bank account when the case was filed, which was not claimed exempt. Of this $3,239 was transferred to Debtor’s counsel post-petition (which was subject of a separate turnover action) and the balance was subject of the current chapter 7 trustee’s request for turnover.

The Court noted a split in authority at the Court of Appeals level, but determined the better approach is that party must be in possession of the property to be turned over in order to be subject to such an order. While §542(a) provides for turnover of the property or the value of the property, the Supreme Court in Maggio v. Zeitz, 333 U.S. 56, 68 S.Ct. 401, 92 L.Ed. 476 (1948) reversed a lower court’s contempt order on a debtor who was unable to turnover property of the estate which he no longer possessed. Further, a contrary ruling would permit the trustee to seek double recovery against both the debtor and against the creditors receiving the funds post-petition under §549.

Good faith defense of immediate transferee of avoidable transfer

2011-08-24T11:56:00.000-07:00

Judge Williamson has held that a property management company not liable as the downstream recipient of a preferential payment from property developer to condominium association, as management company based solely on knowledge of financial troubles of developer. In re Key Developers Group, LLC, 449 B.R. 148 (Bankr. MD.Fla. 2011) (J. Williamson). The trustee may recover the value of an avoided transfer from the immediate transferee of the initial transferee unless the immediate transferee proves that it took the transfer for value, in good faith, and without knowledge of its voidability.

During the 90 days preceding the debtor’s bankruptcy filing the debtor developer paid $60,000 to the condominium association, and paid another $60,000 the day following the bankruptcy filing. The association which then made four payments to the property management firm totaling $48,112, including two payments following the bankruptcy filing. The Liquidating Trustee sued to avoid the transfers under §547 and §549, and to recover the post-petition transfers from the condo association and the property management company as the immediate transferee under §550. A default judgment was entered against the Condominium Association for $120,000, which was later modified upon motion to reconsider by settlement to $30,000, which agreed modification did not affect the finality of the default judgment as to the avoidance actions.

The property management company filed an affidavit that it entered a 12 month contract (with an automatic renewal option) for management services with the condo association 9 months prior to the bankruptcy filing, and billed and collected the monthly fee through seven months following the bankruptcy filing. In a deposition the owner of the management company admitted knowing the debtor was having financial troubles, was improperly using unit-owner capital contributions for operating needs, an debtor never fully funded the reserve account.

While the initial transferee is absolutely liable under §550 for the value of the property transferred, the immediate transferee is not liable if it took 1) for value, 2) in good faith, and 3) without knowledge of the voidability of the transfers. The immediate transferee bears the burden of proof on these issues. Value was given for the payments made, and there is no requirement that the value be given to the Debtor. If the immediate transferee knew that the transfer was not ordinary, but done to defraud creditors, it would not be in good faith. Thus, if the immediate transferee possessed enough knowledge of the of the debtor’s financial troubles to induce a reasonable person to investigate whether the debtor is transferring assets out of the ordinary course of business, it would lack good faith. However, mere knowledge of the financial difficulty of the source of the payment does not alone give rise to a lack of good faith. Such additional indicia would include the irregular nature of the transaction or the insider status of the transferee. Since the entire transaction was done in the ordinary course of business here, the Court found no indicia of bad faith.

The Court also found that the management company had no knowledge of the voidability of the transfer. The court distinguished this case from cases involving banks and sophisticated entities such as banks and law firms which deal in complex commercial transactions, and are well of the potential voidability of certain types of transactions,. The Court therefore concluded that the management company was not liable to the liquidating trustee.

Physical assault as Willful and malicious injury

2011-08-22T05:25:00.000-07:00

Two recent cases illustrate the difference between reckless misconduct and nondischargeable willful and malicious conduct. In In re Bullard, 449 B.R. 379 (8th Cir. BAP, 2011) a debtor criminally convicted under an Arkansas battery statute was allowed discharge of the debt, since the criminal statute proscribed both reckless and deliberate misconduct. The Creditor was injured by a shard of glass that shattered when thrown by the Debtor. The Debtor denied throwing the glass at the creditor. The Court noted that to qualify under 11 U.S.C 523(a)(6) a creditor must prove both that the injury was intentional, rather than just that the act was intentional; and that the conduct targeted the creditor, at least in the sense that the conduct is certain or almost certain to cause harm.
On the other hand, the debt was determined to be nondischargeable where the Debtor got interceded in an on-going fight in a parking lot, knocking one of the parties to the ground, and continued to punch and kick the creditor while he was on the ground, rather than taking that opportunity to withdraw from the conflict. In re Owens, 449 B.R. 239 (Bankr. E.D.Va. 2011). The conduct was done with the intent to injure the creditor. This despite evidence that the Debtor had been attempting to protect the other party to the fight.

Debtor wins close issue on bad faith amendment of exemptions

2011-08-22T04:37:00.000-07:00

A Debtor who did not schedule exempt social security/disability benefits claim pending when case was filed, or $37,696 awarded three days after filing and received prior to 341; or vehicle purchased with the money prior to 341 still allowed to amend to claim benefits as exempt. In re Varney, 449 B.R. 411 (Bankr. D.Idaho 2011). The Debtor signed petition and schedules months prior to filing but did not file pending payment of attorneys fees. Debtor testified that she was using friends car, not disclosing recently purchased car at 341, later claiming it was accurate because she had been using friends car, and her car was in the shop at the time of the 341. Debtor put funds into father’s bank account when received, on which she had signature authority. Debtor indicated that she had been told by attorney that benefits were exempt, and that 341 testimony was to be as to her status as of the date of the filing of the case.

The Court ruled that even property would is subject to exemption comes into estate upon filing, and must be affirmatively exempted out by Debtor. An amendment claiming exemption may be disallowed if the debtor has engaged in bad faith. The bad faith must be proved by a preponderance of the evidence, by examining the totality of the circumstances. The court rejected the bad faith argument since it was undisputed that the Debtor had, in fact, disclosed the pending claim to her attorney, but since the claim had been denied twice before did not expect it to be granted. The Court found that the Debtor’s failure to list the asset resulted from her belief that the claim would not result in any significant benefit payment rather than an attempt to conceal an asset. The debtor explained that the bank account where the money was deposited was set up in her father’s name rather than her own since the bank had previously taken a loss on a loan from them, and would not favor having her as a customer again. Her father, as a bank officer at the bank could set up the account without difficulty.

While the Court was concerned with the Debtor’s answers at the 341, no transcript of the hearing was provided, and it was not clear that the trustee asked about receipt of any assets between the date of filing and the 341 hearing. Her failure to disclose the purchase of the vehicle when the trustee inquired about her mode of transportation was of particular concern, but the Court accepted the technical accuracy of the statement and the Debtor’s testimony that she was directed by counsel to testify as to the situation on the date the case was filed.

The Court found to be very close to bad faith, but ultimately found that while the Debtor’s conduct was questionable, it could not find that the Debtor’s conduct was so recklessly indifferent to the truth that her actions give rise to an inference of the intent to conceal the assets. The Court found that the trustee had not met the burden of proof to show an intent to conceal the asset

United Student Aid Funds, Inc. v. Espinoza applied to mortgage arrearages in plan

2011-08-21T10:58:00.000-07:00

A Court in Louisiana has held that a mortgage company was bound by the amount of arrearages asserted in the confirmed chapter 13 plan, and could not assert a higher figure more than nine months after the case was filed. In re Franklin, 448 B.R. 744 (Bankr. M.D. La. 2011). The Court ruled that under United Student Aid Funds, Inc. v. Espinoza, __ U.S. __, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2011) the confirmed plan bound all creditors, reversing prior 5th Circuit law finding that confirmed plans did not bind secured creditors. The fact that the Debtor has not completed payments under the plan does not distinguish the case from Espinoza.

Sale of pickup subject to writ of execution not fraudulent

2011-08-21T10:12:00.000-07:00

Where the debtor sold a barely running pickup to an auction house after a judgment creditor obtained, but failed to serve, a writ of execution was not fraudulent supporting objection to discharge or dischargeability. In re Ciotti, 448 B.R. 494 (Bankr. W.D.Pa. 2011). Debtor knew of judgment but had multiple judgments before and never had property lost from them, and was not aware of any lien on vehicle. Court also found that transfer of proceeds ($1,250) to his spouse, from which he was separated, was not fraudulent in that they were effectively still one economic unit. Further, debtors answers at meeting of creditors and on schedules denying transfer does not support denial of discharge given debtor's confusion regarding meaning of transfer.

Creditor also alleged that transfer of proceeds to wife should be disclosed as a gift on the schedules. The Court disagreed, finding that payment of support does not constitute a gift for bankruptcy purposes.

Interestingly, Court notes that question asked at 341: [a]re there any errors or omissions that require the court's attention at this time' to be overly broad and indicates it would sustain an objection to such question. In Tampa at least one of the trustee's asks this at every meeting of creditors.

Florida opt out statute only applies to Florida residents

2011-07-25T07:38:00.000-07:00

  An Ohio resident who was domiciled in Florida during applicable time period may use federal exemptions as Florida exemptions do not apply to out of state residents. In re Beckwith, 448 B.R. 757 (Bankr. S.D. Ohio 2011). Debtor resided in both Ohio and Florida for the 730 days prior filing chapter 7, and in Florida for the 180 days prior to the 730 day period. Debtors initially claimed exemptions under the Florida statutes, then amended Schedule C to claim federal exemptions. The trustee objected alleging that the choice of law provisions of BAPCPA preempt any residency requirement of the Florida exemptions.

   Pursuant to §522(b)(3)(A) if a debtor has not been domiciled in the same state for the 730 days prior to filing, the domicile is based on where the debtor resided for the majority of the 180 days prior to the commencement of the 730 days prior to filing. The ‘opt out’ provision of §222.20 of the Florida statutes states that ‘residents of this state’ shall not be entitled to the federal exemptions provided in §522(d) of the Bankruptcy Code. While neither the Florida Constitution or the majority of the statutory exemptions specifically limit the exemptions to Florida residents, multiple court decisions have held that Florida exemptions are not available to out of state residents.

   Federal law can preempt state law in one of three ways: 1) express preemption, 2) field preemption, or 3) conflict preemption. Express preemption applies where Congress statutorily declares an intention to preempt state law. Field preemption applies where the federal interest is so dominant that the federal system is assumed to preclude enforcement of state laws on the same subject. Conflict preemption nullifies state law inasmuch as it conflicts with federal law, either where compliance with both laws is imposs8ible or where state law erects an ‘obstacle to the accomplishment and execution of the full purposes and objectives of Congress’. Congressional authority for states to ‘opt-out’ of the federal exemption scheme shows that field preemption is not applicable.

The trustee argues allowing debtors to use federal exemptions when BAPCPA’s provisions require application of exemption from an opt-out state conflicts with the express will of Congress. Court’s following this rationale conclude that §523(b)(3)(A) constitutes a federal choice of law provision, conflicting with state choice of law provisions. However, this analysis is not applicable in the case at bar, because the Florida statute limits its opt-out limitation to Florida residents. Even if the choice of law provision were to be preempted, the original right to opt-out of the federal exemption was granted prior to BAPCPA, and still stands under BAPCPA.

See complete analysis of BAPCPA consumer provisions at http://www.hillsboroughbankruptcy.com/1017checklist.htm

Broad reading of family farmer with regular income eligibility requirements

2011-07-17T11:09:00.000-07:00

A Court in South Carolina denied a motion to dismiss a chapter 12 case by soybean, cornm, peanut and watermelon farmer. The debtors had reported losses for at least the last two years, and had substantial non-farm income. The Court ruled that the gross income of LLC had to be allocated between father and son owners in determining income eligibility to qualify as family farmer. In re Sandifer, 448 B.R. 382 (Bankr. D.S.C. 2011). The definitions of family farmer and farming operations are to prevent those individuals who are obviously non-farmers from receiving the benefits of farming legislation. The debtor should receive those benefits if he can demonstrate that he has an active farming history; and that his conduct reveals an intent to salvage his farm for future use.

Losses in the prior two years does not prevent filing chapter 12. The requirement of family farmer with regular annual income is extremely broad, and is designed to allow nearly every person who qualifies as a family farmer to be eligible for chapter 12 relief. Farmers testimony that he will change land usage and types of crops resulting in likely larger future yields, along with evidence of other continuing non-farm income, sufficient to overcome motion to dismiss for lack of regular income.

FIA loses both §523(a)(2)(A) complaint and appeal on fee award

2011-07-10T08:06:00.000-07:00

A District Court in Michigan denied a §523(a)(2)(A) complaint by FIA cards despite charges when unemployed and charges shortly prior to filing. In re May, 448 B.R. 197 (W.D. Mich 2011). The Debtor worked at a mill seasonally, supplementing his income with painting business in off-season. In late 2008 when charges were made, debtor was experiencing medical problems resulting in replacement of both knees and possible shoulder surgery, which problems prevented him from working. The Debtor that he anticipated returning to work once the surgeries were completed. Debtor was unable to return to work, but continued to make minimum payments on the credit cards until filing chapter 7 in April 2008.

FIA alleged fraudulent intent in that the debtor used cash advances from the FIA card to re-pay prior credit card balances. The Bankruptcy Court rejected the argument, finding that debtor expected to be rehired at the sawmill, and declined to punish the Debtor for using his assets (fungible loan proceeds) to pay expenses he considered necessary (including the FIA payment). The Bankruptcy Court found FIA’s position was not substantially justified, and indicated it would consider awarding fees to Debtor’s counsel.

Debtor’s counsel sought an award of $3,784.47 for fees. FIA argued that it’s position was substantially justified because the debt was presumed to be nondischargeable under §523(a)(2)(C)(i)(II). The Bankruptcy Court rejected this because the Debtor’s testimony handily rebutted this presumption. FIA also argued that a formal counterclaim was required for an award of fees. The Bankruptcy Court also rejected this finding a request for fees in the answer, and determining that a hyper-technical reading of Rule 7008(b) was inconsistent with the text of the rule and contrary to the liberal pleading philosophy of the FRCP.

FIA appealed both the denial of the exception to discharge and the fee award to the District Court. To succeed in a §523(a)(2)(A) complaint a creditor must show 1) that the debtor obtained money through a material misrepresentation that at the time he knew was false or was made with gross recklessness as to the truth; 2) that the debtor intended to deceive the creditor; 3) that the creditor reasonably relied on the representation; and 4) the creditor’s reliance proximately caused its loss.

FIA’s main alleged basis for error was that the Debtor’s testimony that he intended to return to work was inconsistent with his application for disability benefits. The appellate court found that the bankruptcy court considered this factor as well as the Debtor’s demeanor, and made a factual finding that the Debtor intended to return to work. FIA also argued that the Debtor failed to rebut the presumption of nondischargeability. The appellate court found that the lower court’s factual findings fully supported its rejection of FIA’s argument.

The argument that a counterclaim was required for an award of fees was first made in the appeal. It also argued that the notice of appeal deprived the court of jurisdiction to make a fee award. The appellate court agreed that the prayer for relief in the answer requesting fees was adequate to form a basis for such an award. The Court also determined that fee awards are collateral to the principal decision on the merits, and could be made post-appeal.

Misstatements on Schedules insufficient alone to warrant 707b dismissal

2011-07-10T07:01:00.000-07:00

In a 2009 case which was just recently published, Judge Lamar Davis from Georgia denied the US Trustees §707b request to dismiss a case from the owner of a failed roofing company despite a number of misstatements and attempt (rescinded) to reaffirm on boat where debtors have inadequate income to fund chapter 13 plan. In re Hibbard, 448 B.R. 296 (Bankr. S.D. Ga. 2009). The debtor had omitted 2007 income from the schedules, did not disclose their positions as corporate officers, did not disclose income from one business, revealed no payments to creditors in the last 90 days, and did not disclose the refinancing of their homestead.

Debtor’s owned a roofing business that failed during the housing collapse. The Court noted the traits indicating bad faith filing include 1) excessive or lavish spending, both pre and post petition; 2) Intentional concealment of assets or misrepresentations about the debtor’s financial affairs, 3) lack of effort to seek a nonbankruptcy alternative to their problems, coupled with 4) continuing ability to pay creditors. Comparing In re Ricci, 2009 WL 3381517 (Bankr. M.D. Fla. 2009) (spending inordinately high, timed filing to occur before significant raise, continued to spend significant sums on non-essential items, and lacked credible explanations for excessive credit card use and selective mortgage payments) and In re Reese, 402 B.R. 32 (Bankr. M.D. Fla. 2008) (desite significant spending and inaccurate schedules, no dismissal since stopped spending once she realized bankruptcy was imminent and because she lacked the understanding and ability to fill out the bankruptcy schedules).

While schedules were incorrect and misleading, in many instances the information was elsewhere on the schedules leading creditors to the additional information. While inaccuracy in the schedules can be considered by the Court under the totality of the circumstances test, it is not dispositive, especially where there is no showing of fraudulent intent. While Debtors lived very comfortably, they did not spend as extravagantly as many of the very high income debtors who failed to pass the bad faith test in other cases. Finally, unlike debtors in most of those cases, the Debtor’s misfortunes were brought about by circumstances out of their control, ie the collapse of the housing market. This has resulted in their inability to fund a chapter 13 plan.

Minority view - Debtor may strip mortgage after chapter 7 discharge

2011-07-04T08:36:00.000-07:00

Following the minority position, allowing stripping of mortgages after debt was discharged in chapter 7. In re Davis, 447 B.R. 738 (Bankr. D.Md. 2011). The starting point for the chapter 13 lien stripping analysis is §506(a) rather than the antimodification provision of §1322(b)(2), citing Tanner v. FirstPlus Fin. Inc., 217 F.3d 1357, 1360 (11^th Cir. 2000) ‘The only reading of both section 506(a) and 1322(b)(2) that renders neither a nullity is one that requires bankruptcy courts to determine the lender;s secured claim under section 506(a) and then to protect from modification any claim that is secured by any amount of collateral in the residence’. The creditor must first demonstrate that it has an allowed secured claim under §506(a) before it is entitled to protection under §1322(b)(2).

Following the chapter 7 discharge, the mortgage holder had a in rem claim against the debtor’s property. The in-rem claim is valued at $0 since there is no equity securing it, therefore the in rem claim is an unsecured claim pursuant to §506(a) and may be avoided pursuant to §506(d).

Dewsnup does not prevent this conclusion, because here the debt was discharged in the prior chapter 7 case, and thus the debtor’s personal liability was eliminated in the chapter 7 and the bank would have no right to collect from the debtor in state court.

Errors on Statement of Financial Affairs lead to denial of discharge

2011-07-03T09:31:00.000-07:00

One of the most common issues in sloppily prepared bankruptcy petitions are errors in the statement of financial affairs. However, this part of the bankruptcy filing is also made under oath, and errors in the form can result in denial of the discharge in bankruptcy. In Stamat v. Neary, 635 F.3d 978 (7^th Cir, 2011) the court ruled that inaccurate disclosures on Statement of Financial Affairs, including listing net income rather than gross income, and failure to list prior business interests, failure to show part time employment with police department (though income was listed), and failure to list 2 guns owned, a $10,000 settlement payment to a creditor, a counterclaim against the mortgage company alleging the mortgage was invalid.

To prevail on a request to deny discharge under §727(a)(4) the trustee must establish by a preponderance of the evidence 1) the debtor made a statement under oath, 2) the statement was false, 3) the debtor knew the statement was false, 4) the debtor made the statement with fraudulent intent; and 5) the statement related materially to the bankruptcy case. The bankruptcy court found that the failure to list their partnership interest, their refinancing of their home, the counterclaim in the mortgage foreclosure, and the $10,000 settlement payment, as well as the misstatement of income were material omissions showing a reckless disregard for the truth.

The debtors argued that failure to disclose the prior partnership interest should not be a basis to deny discharge since the business was no longer in existence. However, the court noted that the code requires disclosure of all business interests for the prior six years. Debtors also alleged that they did not have to list their limited partnership interest as that is excluded as a business interest for questions 19-25 of the Statement of Financial Affairs (SOFA). However question 18 of SOFA still requires disclosure of limited partnership interests. Debtors argued that the refinancing of the house and $10,000 settlement payment constituted ordinary course of business transactions which did not need to be disclosed. The court rejected this, finding that there was no evidence that such transactions were customary or regularly occurring, as would be required to find such transactions to be in the ordinary course.

Prohibition against discrimination in hiring limited to public employers.

2011-07-03T09:01:00.000-07:00

Unfair discrimination clause of §525 does not prohibit private employer from discriminating in determining whether to offer employment. In re Burnett, 635 F.3d 170 (5^th Cir. 2011). Stewart Title offered job to debtor, but withdraw offer after discovered debtor had filed bankruptcy. While §525(a) prohibits public employers from deny employment to, or discriminate with respect to employment against someone who filed bankruptcy, §525(b) only prohibits private employers from discriminating with respect to employment against individuals who had filed bankruptcy. Since the statute distinguishes these rights, the court limited the restriction against discrimination in hiring solely to public employers.

Michael Barnett. Hillsboroughbankruptcy.com

Southern District determines that lien stripping not permitted after chapter 7 discharge

2011-06-26T10:24:00.000-07:00

Debtor may not strip 2^nd mortgage after receiving prior chapter 7 discharge. In re Gerardin, 447 B.R. 342 (Bankr. S.D. Fla. 2011). J. Mark, J. Isicoff, J. Cristol sitting in consolidated hearing. Dewsnup v. Timm, 502 U.S. 410, 417, 112 S.Ct. 773,116 L.Ed.2d 903 (1992) prohibits stripping mortgages in chapter 7 cases. While Tanner v FirstPlus Financial, Inc., 217 F.3d 1357 (11^th Cir 2000) determined that wholly unsecured mortgage were subject to lien stripping, it concentrated on the interplay between §506(a) and §1322(b)(2) in light of the decision in Nobelman v. American Savings Bank, 508 U.S. 324, 113, S.Ct. 2106, 124 L.Ed.2d 228 (1993) that a chapter 13 could not strip down a mortgage secured solely by a debtor’s principal residence. Tanner did not consider how §1325(a) and a prior discharge could impact the treatment of the claim.

Under Johnson v. Home State Bank, 501 U.S. 78 11 S.Ct. 2150, 115 L.Ed.2d 66 (1991) the claim that survives a chapter 7 discharge is a secured claim. A lien cannot be modified under §506 if the claim it secures is an allowed claim. §506(d) prescribes a number of special rules governing the avidance of liens that secure disallowed claims. Thus Dewsnup provides that §506 alone cannot operate to void a lien securing an allowed claim. §506 works to void liens in chapter 13 only in conjunction with §1325.

§1325(a)(5) sets out payment requirements for allowed secured claims in chapter 13, including retention of its lien until the earlier of payment of the underlying debt in full or discharge under §1328. Court disagreed with In re Tran, 431 B.R. 230 (Bankr. N.D.Cal 2010) and its progeny that allow lien stripping of discharged mortgages.

Nondischargeability complaint for damages to leasehold property

2011-06-26T09:42:00.000-07:00

In a case discussing the standards to find damage to a rented house nondischargeable, a Landlord failed to sustain burden of showing damages to leasehold constituted willful and malicious damage. In re West, 446 B.R. 813 (Bankr. N.D. Ohio 2010). Debtor with his three sons leased residence from creditor; and permitted friend and her children to live at property. Upon retaking possession of the property following termination of the lease the landlord documented substantial damage to the property including a broken toilet, bathroom floor ruined due to urine and shower water, broken tile in the entrance hall, bathroom door trim removed, missing and damaged window blinds, holes and other structural damages in the property’s walls and doors. The landlord also complained of other deficiencies in the property including failure to remove all personal effects, outside weeding not performed, a disabled sump pump, and spills and spoilage on kitchen floor, crayon on the carpet. The landlord requested damages of $2,800.73 for repairs and $2,325 for unpaid rent. Debtor filed chapter 7 after suit was filed in small claims court.

The landlord then filed a §523(a)(6) claim in the bankruptcy case. The Court ruled that it is the plaintiff’s burden to prove that the debtor’s conduct was both willful and malicious. The Court determined the appropriate standard for §523(a)(6) is that the conduct required a specific intent to cause harm, citing Kawaauhau v. Geiger, 523 U.S. 57, 118 S.Ct. 974, 975, 977, 140 L.Ed.2d 90, 92 (1998). The Court found that the evidence firmly established many defects in the leasehold condition that could not be ascribed to ordinary wear and tear. Under Michigan law the landlord is entitled to both unpaid rent and to damages which are the result of conduct not reasonably not to be expected in the normal course of habitation of a dwelling.

However, the Court ruled that simple neglect of a property cannot meet the standard for dischargeability under §523(a)(6). Damages such as stained bathroom floor, lack of weeding, and failure to remove property appear to clearly fall in the neglect standard. Other damages, such as the broken toilet, removed trim, and holes in walls and doors cannot be said to result from passive acts. The debtor testified that when he moved into the unit he dropped something into the toilet, breaking it’s lid. The Court found this testimony to be credible. The debtor also testified that the holes in the walls and doors were caused by the children roughhousing. Given the boys ages of 16 and 7, the court found this explanation credible as well. While failure to supervise children can rise to the level of encouragement to cause damage, the court did not find this to be the case in this instance. The debtor testified that the trim was removed to allow installation of a refrigerator, and he neglected to reinstall it.

Postpetition mortgage fees and charges not disclosed may violate stay

2011-06-20T04:49:00.000-07:00

    A Wisconsin bankruptcy court denied Homecoming Mortgage's summary judgment on debtor's claim for stay violation when mortgage company charged and collected $350 in undisclosed postpetition attorneys fees. In re Patterson, 444 B.R. 564 (Bankr. E.D. Wis. 2011). Homecomings collected $350 fees from refinancing of the homestead.

    The Court ruled that the refinancing proceeds were property of the estate, since 1) the estate includes proceeds of property of the estate and 2) a chapter 13 estate includes property acquired after the case is commenced and 3) the plan provided that property remained in the estate until discharge. By actually collecting additional fees beyond that in its allowed claim the estate suffered damages. A creditor whose claim for a certain amount has been approved by the bankruptcy court but who requires more than that claim from the debtors to satisfy that claim works against §362. Court denied summary judgment against Debtors.

   The Court also ruled Rule 2016 requires that postpetition fees and charges must be disclosed to the court and trustee.

Phirric victory for mortgage

2011-06-07T05:13:00.000-07:00

   When the Debtor in In re Picht, 443 B.R 874 (Bankr. D.Kan. 2011) proposed to strip the mortgage down to the value of the property, and pay them only $15,716.95 as the value of their lien, the mortgage properly objected under 11 U.S.C. 1325(a)(5)(B)(k)(I)(aa). The underlying debt had already been discharged in a prior chapter 7, and the bankruptcy court overruled the objection.   The mortgage appealed to the 10th Cir. BAP, which reversed the decision finding that the plan could not value homestead property where the mortgage was at least partially secured. After remand, the debtor amended the plan to surrender the homestead, which amended plan was confirmed. When the trustee requested refund of the $15,716.95 principal and $1,200.50 interest received by the mortgage under the original plan.
   A judgment reversed by a higher court is without any validity or effect, and the parties are to be restored to their position as if the erroneous judgment had not been entered. After reversal of an order confirming a chapter 13 plan the parties are returned to precisely their same position as though no order had been entered. The chapter 13 trustee is obligated to recover bankruptcy estate assets which have been used to pay dividends under a reversed order. Plan payments are not the creditors' right until the plan is approved by final order. While an appeal is pending, both teh creditors' and the debtors' rights are tentative. Accordingly when such payments are found to have been made in violation of the Code, the payments may be recovered so they may be administred in accordance with the Code.
   The court also overruled the objection by the mortgage that the debtor was not committing all their disposable income, finding that since they did not hold an unsecured claim they had no standing to object. The court did allow setoff of the $98.58 in costs from the required repayment to the trustee.

Joint tenancy ownership of house not benefit of homestead exemption for 222.25(4)

2011-06-05T13:04:00.000-07:00

Judge Olsen has ruled that a debtor who lived in the homestead but jointly owned it with her ex-spouse could still claim the additional personal property exemption of 222.25(4), distinguishing the case from In re Watford, 427 B.R. 552 (Bankr. S.D. Fla 2010) where the house was owned jointly by tenancy by the entireties.

The court also ruled that the Debtor could amend exemption several months after the meeting of creditors under Rule 1009(a) which allows amendment anytime until the case is closed. Further, In re Shoopman ruled that the untimeliness of the amendment was irrelevant to the determination whether the debtor received benefit of the homestead exemption. Since the creditor had taken possession of the personal property prior to filing, there was no prejudice for costs to the creditor for a late amendment of the exemptions.

In re Orozco, 444 B.R. 472 (Bankr. S.D. Fla 2011).

Split of mortgage and note deeming debt unsecured?

2011-05-16T04:48:00.000-07:00

The Debtor attempted to deem their mortgage debt to be unsecured on the ground that the assignment of the mortgage to MERS without an assignment of the note caused a split of the note and mortgage, thereby making the debt unsecured. In re Martinez, 444 B.R. 142 (Bankr. D.Kan. 2011). While the Court rejected this argument, finding that the MERS was simply an agent for the mortgage holder, and therefore there was no split. However, in those cases where, due to sloppy mortgage assignments there is in fact an assignment of the note without assigning the mortgage, then there may be a basis the challenge the secured status of the mortgage.

Wells Fargo Freezing Bank Accounts

2011-05-08T08:39:00.000-07:00

A recurring problem now nationally is the practice of Wells Fargo Bank (and now Wachovia) of freezing accounts of debtors who file bankruptcy, even if no debt is owed to Wells Fargo. The Courts generally hold that since all property becomes property of the estate, even if claimed exempt, until abandoned; such practice is not a violation of the automatic stay. Debtor's counsel should warn debtor's to close these accounts prior to filing, but if the account is not closed and is frozen when the case is filed, what should be done? One Court has now answered that question, indicating that the proper procedure would be to request abandonment of the asset from the chapter 7 trustee, and to file a motion to compel abandonment if that fails. In re Zavala, 444 B.R. 181 (Bankr. E.D.Cal 2011). Of course, the debtor is still without use of the funds in the account until the abandonment occurs.

Spendthrift Trust upheld

2011-05-01T12:34:00.000-07:00

A case out of South Florida ruled that the bankruptcy estate does not include spendthrift trust created by Debtor’s sister or the $22,500 funds received in the 180 days after the filing of the chapter 7 bankruptcy. The trust allowed anyone to transfer property into trust but sister retained complete control over trust, and was alive as of the filing of the case. The court was unable to conclude from the evidence whether any of the Debtor's property had been put into the trust. The primary beneficiary of the trust was Debtor's mother, who had passed away some years prior to the filing of the case. Debtor and his sister were remainder beneficiaries.

§542(a) requires the debtor to deliver any property of the estate within his possession, custody or control. The trustee bears burden to prove that property is property of the estate and that the debtor is in possession of the property. This burden is by the preponderance of the evidence. §541(c)(2) provides an exception to property of the estate to the extent a restriction on the transfer of a beneficial interest of the debtor in a trust Is enforceable under applicable non-bankruptcy law. The section does not protect funds actually received by the debtor prior to the filing of the case.

The property received post petition would come into the estate under §541(a)(5)(A) if it is received by bequest, devise, or inheritance. Florida defines bequest and devise as synonyms meaning a testamentary disposition of real or personal property. Florida courts have defined inherit to mean the transfer of property of a decedent without a will under the relevant laws of intestacy. Since the transfers under the trust did not occur under a will nor as a result of the law if intestacy it is not subject to §541(a)(5)(A). However, property received under a testamentary trust (a trust created by a will) to the extent received within 180 days following the bankruptcy petition would become property of the estate. The trust in this case is instead an inter vivos trust, created and effective during the life of its settlor. The fact that the primary beneficary passed away and the trust makes provisions for remainder benefiaries does not convert it to a testamentary trust. In re Rogrove, 443 B.R. 182 (Bankr. S.D. Fla. 2010) (J Kimball).

Student Loan - cure and pay outside in chapter 13

2011-04-27T11:47:00.000-07:00

An Alabama Bankruptcy Court ruled that a chapter 13 plan may cure in plan and continue to pay student loan debt outside plan. In re Boscacci, 442 B.R. 501 (Bankr. N.D.Ala. 2010). The Code prohibits unfair discrimination, not any discrimination. The nondischargeability of the student loan debt is a factor in determining whether discrimination is unfair, but cannot be the only factor. The court should balance the debtor’s fresh start, the clear legislative objectives of student loan repayment, and the fair treatment of creditors as a whole.

The Court quoted language from In re Chandler, 210 B.R. 898 (Bankr. D.N.H. 1997):

Placing unsecured creditors, like those holding student loans, into a separate class and permitting debtors to maintain their payments to them at the full contract rate, as expressly permitted by section 1322(b)(5), is not ‘unfair’ discrimination. This must be the result intended by Congress; otherwise, how could a debtor’s plan provide for the ‘maintenance of payments’ on ‘unsecured’ claims under section 1322(b)(5) if it were considered ‘unfair discrimination’ under section 1322(b)(1). IN order to give meaning to both sections, the Court finds that the discrimination proposed by the debtors in this case is not unfair. Id. at 904.

The Court noted that the total student loan debt in the US now surpasses what Americans owe in revolving credit (most of which is credit card debt). The Court found no unfair discrimination of 2 of the 3 cases, and required that the percentage paid to unsecured creditors equal the percentage of the student loan debt paid during the bankruptcy case. The court also ruled that the student loans could not assess penalties for shortfalls in payments during the bankruptcy case, and the chapter 13 discharge would relieve the debtors of any personal obligation for such penalties.

Increasing postpetition mortgage payments based on escrow shortfall that could have been included in arrearage claim, even if for escrow items not yet paid by mortgage, may constitute violation of automatic stay

2011-04-12T14:13:00.000-07:00

Prepetition mortgage escrow shortage constitutes claim against debtor, which may support request for sanctions for violation of automatic stay for post-petition attempts to collect such shortage. In re Rodriguez, 629 F.3d 136 (3^rd Cir. 2010). Debtors filed chapter 13 providing for a cure of the mortgage arrearages, which plan provided for $5,657.60 for escrow arrearages, including $3,869.91 in payments already made by Countrywide, as well as $1,787.69 for charges not yet paid by Countrywide. Countrywide later filed their claim in the bankruptcy requesting the $3,869.91 for escrow shortage, but not requesting any additional escrow for future payments.

After the bankruptcy plan was filed, but before their claim was filed, Countrywide issued a revised escrow analysis and demanded an increased monthly mortgage payment from $707.20 to $947.77 to cure the escrow shortage. In computing the escrow shortage for the new PITA payment, Countrywide did not account for the $1,787.69 included in the arrearage claim.

Upon receipt of the demand for increased payment Debtor’s filed a motion to enforce the automatic stay, to compel Countrywide to case post-petition collection against the prepetition escrow claims, and for fees and costs. Both the bankruptcy court and the district court rejected debtor’s argument that the mortgage company must include the entire the entire escrow shortage in the bankruptcy claim including funds not yet paid out, finding that such shortage is not subject to the automatic stay.

The Third Circuit reversed. The Circuit court first found that the Bankruptcy Code broadly defines claim as any enforceable obligation, and includes contingent, unmatured, and unliquidated obligations. The mortgage included a standard escrow provision requiring payment of funds toward escrow. A similar ruling finding unpaid prepetition escrow amounts to be a claim subject to the automatic stay was made in Campbell v. Countrywide Home Loans, Inc., 545 F.3d 348 (5^th Cir. 2008) (though the decision reversed the bankruptcy court’s finding of a stay violation as no attempt was made to collect such shortage).

The 3^rd Circuit did not rule on whether Countrywide violated the automatic stay since the lower courts had not reached that issue in their decisions, and remanded the case for such determination.

Benefit of Homestead Exemption under 222.25(4) still not clear.

2011-04-04T05:43:00.000-07:00

While the law for allowance of the exemption under 222.25(4) has been made clearer after In re Osborne, the choice to be made by the debtor is becoming more risky. In re Osborne ruled that the debtor may claim 222.25(4) if it does not hinder the trustee's administration of the home as an asset. The main risk in the case of a debtor that is upsidedown on the home used to be that the trustee would get a mortgage company to agree to a short sale, an unlikely possibility if the debtor was current on the mortgage.

Now it appears there are investors willing to purchase homes from the trustee if the trustee first kicks the debtor out of the home. The investors then plan to rent the property out and pocket the rent money until the mortgage company completes the foreclosure sale. Presumably this would be a risk to any debtor wishing either to keep the home or to stay in the home after the filing until the foreclosure sale, and an appropriate warning would need to be given to the debtor in deciding whether to claim the 222.25(4) exemption.

Chapter 11 monthly operating reports - gross mismanagement

2011-03-26T09:08:00.000-07:00

Creditor filed motion to dismiss individual chapter 11 case where debtor failed to accurately report income and expenses in monthly operating reports, and completed the reports a cursory manner. The Court concluded that this qualifies as gross mismanagement under §1112(b)(4)(B) warranting conversion of case to chapter 7. Significant portions of the reports, such as the pages for postpetition taxes and statement of operations were typically left blank. No accountant was employed by the debtor. The court noted that the US Trustee had reviewed the reports and had withdrawn their prior motion to dismiss, and did not testify at the hearing on the motion brought by the creditor. In re Domiano, 422 B.R. 97 (Bankr. M.D.Pa. 2010).

Bare legal title and resulting trusts in cars

2011-03-26T08:50:00.000-07:00

The debtor lost an argument that cars titled in her name were not property of the estate. The automobiles were purchased by debtor’s father put in her name for insurance purposes. Judge Olsen ruled that without the statutory custodial language of §710.111 of Fla Statutes this did not create a custodial trust for actual owner, and presumption of ownership is in name of father. Burden of establishing the existence of a trust relationship is on the party claiming the benefit of such a relationship. The concept of a resulting trust arises by implication of law and is founded on the presumed intention of the parties that the one furnishing the money should have the beneficial interest, while the other held title for convenience or for a collateral purpose. Since the father did not drive the vehicles, he did not retain a beneficial interest in the vehicles, and without title or a beneficial interest there was no showing of a trust. In re Distefano, 442 B.R. 146 (Bankr. S.D. Fla. 2010).

Delay in amending exemptions costly for debtor

2011-03-23T12:26:00.000-07:00

   In a recent decision by Judge Williamson in Tampa, the debtor was denied leave to amend his exemptions after the trustee had already obtained both an order sustaining objection and an order granting turnover. In re Wilson, 2011 WL 666514 (Bankr. M.D. Fla. 2011). The debtor scheduled his homestead as exempt with value of 0, and did not reference §222.25(4) anywhere in schedule C. On 4 February 2010 the trustee, Susan Woodard filed standard objection to exemptions as to the value of personal property, and the court entered its standard order limiting exemptions to the allowable amount. Debtors did not respond to the objection to exemptions, nor seek reconsideration of the order sustaining the objection. On June 14 the trustee filed a motion for turnover, requesting the $9,559.41 the debtor was over the allowable exemption. This motion was filed with negative notice, and the debtor did not respond. The Court entered an order Granting the motion for turnover on 16 August 2010 and required turnover of $9,559.41 by 31 August. Not having received the funds, the trustee filed a motion to compel turnover on 5 October 2010, to which the debtor finally responded on 21 October 2010 first asserting a right to the additional $4,000 personal property exemption of §222.25(4). Two days prior to a hearing on this objection, on 7 December 2010, the Debtor filed an amended Schedule C claiming the §222.25(4) exemption and removing the exemption on the homestead.
   At the hearing the debtor argued that by valuing the homestead exemption at $0 in the original schedule C, and since the total value of the personal property claimed exempt was in fact $6,000, he had effectively requested the expanded personal property exemption. Judge Williamson found that the original schedules in fact claimed a homestead exemption, and that the debtor cannot both claim a homestead exemption and the expanded personal property exemption. The Court looked to In re Doan, 672 F.2d 831 (11th Cir. 1982) as, which generally allowing amendment of exemptions, allowing the court to limit such amendments where there has been bad faith or prejudice to the creditors. The court found that the debtor's belated responses sound in bad faith and laches, and increased the administrative costs of the estate thereby causing prejudice to the creditors. The Court further found that the attempted amendment was barred by Res Judicata once the turnover order was entered.
   It is very important to review the exemptions anew once there is any objection filed, to insure all proper exemptions are claimed.

'Ware the X

2011-03-22T05:14:00.000-07:00

One of the more common lawsuits in bankruptcy is from disgruntled ex-spouses. Disgruntled x-girlfriend/boyfriends is less common, but one recent reported decision was an attempt by the girlfriend to have the debtor's oral, and subsequently written promise to pay a joint mortgage himself. They had been living together, with the girlfriend helping him with his debts, including obtaining mortgages on her home to pay the debts. Upon obtaining a consolidation loan for the mortgages he promised to pay the loan as well as other housing expenses for her. This promise was subsequently reduced to writing. When he stopped paying and filed chapter 7 bankruptcy she filed a §523(a)(2)(a) and (b) suit against him alleging that the oral and written promises were fraudulent. The court noted that since the loan was obtained prior to the written promise, it could not have been the basis a fraud count. Further, the court noted that the boyfriend in fact intended to honor the promise at the time it was made. Lastly, the court ruled that the 523(a)(2) counts must fail in that nothing was obtained by virtue of the promise to pay the mortgage, in that both parties had been liable on the loans prior to consolidation. In re Borreggine, 441 B.R. 467 (Bankr. W.D. Pa. 2011).

Get court approval for Refinancing!

2011-03-16T11:43:00.000-07:00

In an Idaho case the chapter 7 debtor refinanced his home about 15 days after filing the bankruptcy, refinancing a first mortgage of $124,800 and an 2nd of $31,200 into a new mortgage of $168,900. When the debtor didnt make payments on the new mortgage, Suntrust filed a motion for relief from stay, resulting in the trustee suing Suntrust to undo the post-petition transfer under §549. The Court found that BAPCPA changed the law (at least in the 9th Circuit) to provide that creation of a post-petition lien on estate property can constitute an avoidable transfer under §549. While liens initiated by creditors in violation of the automatic stay are void ab-initio under §362, voluntary liens by the debtor must be attacked under §549. If the creditor qualifies as a good faith purchaser without knowledge of the bankruptcy and who gives fair equivalent value under §549(c) then it may be protected from avoidance, but here SunTrust had actual knowledge of the bankruptcy prior to the refinancing. The Court found this knowledge based on the 341 notice sent to the national office, and did not accept SunTrust's argument that since its local loan officers did not have know about the bankruptcy the knowledge should not be imputed as to this loan. 'Although a creditor may choose to operate its b dividing its activities into various departments, it may not use that method of operation as a shield against notice properly sent to the creditor in its name and at its place of business.' Further, the Court found that SunTrust had not proved that it provided fair value in exchange for the mortgage lien, as it did not produce the appraisal done for the refinancing. The Court set the burden of proving the 549(c) defenses directly on the defending creditor rather than the trustee. The court then had to determine whether the preexisting liens to SunTrust should be deducted from the amount recovered. While the avoidance sections are designed to put the estate back in the financial condition it would have been in had the transfer not occurred, the power to reinstate the prior mortgages is not provided to the court in section §550. While some courts have used their discretion to return the transferee back in the same position as they would have been had the transfer not occurred, such equitable remedy is inappropriate where the creditor had pre-transfer knowledge of the bankruptcy. In re Ellis, 441 B.R. 456 (Bankr. D.Idaho, 2010).

Antimodification provision not apply to duplex home

2011-02-27T09:07:00.000-08:00

Judge Olson in Miami has ruled that a debtor may strip down the mortgage on his duplex. Debtor may value 1^st mortgage on duplex which is only partly homestead. In re Zaldivar, 441 B.R. 389 (Bankr. S.D. Fla. 2011). The mortgage company alleged that since the mortgage was secured solely by real estate and that the real estate constituted the debtor’s principal residence, the antimodification provision of §1322(b)(2) prevents strip-down. The court determined to look at the purpose of the mortgage, and that despite a term in the mortgage stating it was to be used as the debtor’s principal residence, the multifamily rider attached eliminated this provision. The Court noted that loans are priced per risk, and that the overall purpose of the loan was not for a personal homestead, modification would be allowed.

Reaffirmation requires debtor's counsel declaration, but stay and injunction still apply even if agreement is unenforceable

2011-02-25T07:34:00.000-08:00

Debtor’s counsel could not exclude representation in reaffirmation agreement from general representation of debtor, and failure of counsel to endorse agreement renders the court without jurisdiction to review the agreement and renders the agreement unenforceable, however since debtor did everything required of them to reaffirm car loan, stay was not lifted and attempted repossession of vehicle by lender prior to or after discharge would violate stay or discharge injunction if there was no default in payment or insurance. In re Barron, 441 B.R. 131 (Bankr. D.Ariz. 2010). Court previously had policy allowing attorneys to unbundle reaffirmation representation from general representation of debtors in chapter 7, and allowing pro-se motions to approve reaffirmation agreements. While counsel actually assisted debtor regarding this reaffirmation with GMAC, the motion to approve was filed pro-se. The judge found that a majority of courts have found that the reaffirmation process is so critical in chapter 7 that representation therein is one of the necessary services in representing a chapter7 debtor. The requirements under §524(c) for a reaffirmation to be enforceable include requiring an attorney declaration in all cases where the debtor was represented by counsel during the course of negotiating the agreement. §524(c)(3). In the absence of such declaration the agreement is unenforceable. However, §524(d) permitting relief from the stay is inapplicable because the debtors have taken every action required by them under §362(h) and §521(a), and the court specifically noted that any attempt to repossess the vehicle absent a default in payment or insurance would constitute of violation of the stay or discharge injunction.

See reaffirmation analysis at http://www.hillsboroughbankruptcy.com/1017checklist.htm#p21p1

5th Circuit interprets Florida opt-out Statute-may claim Federal exemptions under Florida law if not resident

2011-02-25T05:13:00.001-08:00

Texas resident who moved from Florida, and who lived in Florida for most of the 730 days prior to filing was allowed to use Federal exemptions rather than Florida since the Florida opt out statute, §220.20 limits its application to residents of the State of Florida. Camp v. Ingalls, 2011 WL 184551 (5^th Cir. 2011). The Debtor had livedin Florida for three years, and moved to Texas over a year prior to filing bankruptcy. The Debtor claimed federal exemption, trustee objected that Florida opt out statute did not allow federal exemption. The bankruptcy court denied the exemption, and the Debtor appealed. The District Court and 5^th Circuit both ruled that the Federal exemption was appropriate. The 5^th Circuit noted that the Florida opt-out law, like that of Alabama, Colorado, Georgia, and South Dakota, are limited to residents of the state. The Court rejected the trustee’s argument that the term resident should be read broadly so as not to treat non-residents differently than residents, and also indicated that to the extent the decision could lead to forum shopping, it was Congress’s decision to defer exemption decisions to the states. A footnote specifically notes that the decision is not based on the savings clause of §522(b)(3)’s hanging paragraph allowing federal exemptions if the state law opts out and prevents extraterritorial application of its exemption statute.

http://www.hillsboroughbankruptcy.com/1017checklist.htm#p10p1

Bank account balance trap

2011-02-21T07:53:00.000-08:00

One problem that arises too often is a surprise at how much money is in a bank account when the bankruptcy case is filed. Just because a check is written on an account before the bankruptcy, does not mean the trustee can't take that money. Until the check clears, it is still property owned by the debtor, and counts toward the limit of property allowed as exempt from the estate. A very recent case from the District Court in the Middle District of Florida ruled that while the trustee has the right to stop payment, even if the trustee does not, the debtor is still required to pay over these funds to the trustee, even though presumably the debtor already paid the same funds to the recipient of the check. In re Brubaker, 2011 WL 43455 (M.D. Fla. 2011).

Payments on property to be surrendered in chapter 13 not included in means test

2011-02-08T08:10:00.001-08:00

Judge Kovachevich has ruled that Chapter 13 Debtor not entitled to include on means test payments to secured creditors on property being surrendered. White v. Waage, 440 B.R. 563 (M.D. Fla. 2010). The Debtors argued 1) that §1325(b) requires that the court rely exclusively on the means test when computing the minimum chapter 13 payment for above-median income debtors, and 2) that the court does not have discretion to thwart the means test computations by use of a good faith justification to require higher payments. The Debtor included in the means test payments for furniture which they did not intend to retain. The Bankrupcy Judge found the means test to be a forward looking concept, showing payments the Debtors will be required to pay over the life of the chapter 13 plan. Hence, the filing of a plan based on a means test which included expenses which were not to be continued shows violation of the requirement of §1325(a)(3) that a plan be proposed in good faith. When the Debtors failed to file an amended plan conforming with the Bankruptcy Judge’s ruling the case was dismissed and the Debtor’s appealed to the District Court.

Judge Kovachevich examined the Kitchens [In re Kitchens, 702 F.2d 885, 888 (11^th Cir. 1983)] factors in determining good faith, stressing that the reasoning which focused only ont eh simple arithmetic of 11 U.S.C. 1325(a)(4) neglected the importance of the general good faith requirement of 11U.S.C. 1325(a)(3). 702 F.2d at 888. While BAPCPA added a required that the petition be filed in good faith, it did not change the requirement that the chapter 13 plan be filed in good faith. The purpose of chapter 13 is to repay the debtor’s creditors to the fullest extent possible. In re Waldron, 785 F.2d 936 (11^th Cir. 1986). If the court discovers unmistakable manifestations of bad faith the case should be dismissed. Such manifestations need not be based on actual fraud o, scienter, or an intent to defraud, bur rather simply require the court to condone the abuse of the bankruptcy process.

While good faith has no role in assessing whether the income paid into the plan is sufficient, it and the Kitchen factors remain relevant to the confirmability of the plan. Inclusion of an amount for surrendered collaterail in debtor’s calculations of amounts reasonably necessary to be expended without the present intent to pay such expenses amounted to fraud, and dismissal was warranted.

Supreme Court limits ownership allowance

2011-01-12T04:27:00.000-08:00

On 11 January the Supreme Court held that individuals in chapter 13 could not claim the car ownership allowance in the means test unless they had loan or lease payments on the vehicle. Ransom v. F.I.A. Card Servs. N.A., No. 09-908 (Jan 11, 2011). With only Judge Scalia dissenting, the court determined that applicable standards referred to the Collection Financial Standards, which, while not incorporated into the statute, should be referenced in interpreting the statute. The court also noted the possibility of a debtor financing a junk car just prior to filing in order to take advantage of the ownership allowance, though indicated that the remedy for such an event would be for a creditor could seek modification of the plan once such vehicle was paid off.
This leaves a few possible solutions for debtor's counsel in preparing cases. If the debtor is unable to afford the fees to file bankruptcy, it might be possible for the debtor to borrow such fees, either in the open market or even through relatives, and give a lien on the vehicle as security for such debt. Advice would have to be included as to the possibility of the trustee challenging this approach on a good faith basis, and BAPCPA's prohibition against advising debtor's to incur debt must be kept in mind, but in certain circumstances Courts may find this approach necessary. Also, if the debtor has an older vehicle that is paid off, that is likely to require substantial repairs during the case, they may in good faith determine that they could not afford both the higher repair bills associated with the older vehicle and the high court payment required under the means test, and determine that the best way to make a chapter 13 plan feasible is to trade it in on another financed vehicle with as low a payment as possible. Under either approach counsel must be mindful of §526(a)(4)'s prohibition against advising debtors to incur debt.
The other approach, which would also be applicable to cases filed prior to the decision, is to file repeated modifications of the plan for unanticipated car repairs, seeking to reduce the payment to the trustee; or alternatively to seek to modify the plan if repairs are unaffordable to allow financing of a vehicle with lower repair costs, and consequent reduction of the required payment to the trustee with a new B22C.
The decision is likely to lead to more litigation over the means test and post-petition modifications of the test, and likely to result in an overall lower success rate of chapter 13 bankruptcies.

FTC prohibits up front fees for mortgage modification firms

2010-12-14T07:41:00.000-08:00

The Federal Trade Commission has promulgated a rule prohibiting companies claiming to help homeowners avoid foreclosure from charging up front fees until the homeowner gets a written offer from the mortgage company that the homeowner considers acceptable. Consumers must be informed of their right to reject the offer without charge to the loan modification company. It also prohibits these companies from implying that they are affiliated with the government, which is a common problem now. The rule also has provisions limiting claims as to the likelihood of success, and being honest about refund policiesand the availability of alternative relief services. The provisions generally become effective December 29, except for the advance fee prohibition which becomes effective 31 January 2011.

See more about bankruptcy as an option to reinstate mortgages at www.hillsboroughbankruptcy.com

Sitting on hands - bad

2010-11-16T06:22:00.000-08:00

When you decide to fight a debt, you need to keep track of the litigation. In a case recently ruled on by the 11th Circuit, both the bank and the debtor stopped paying attention at different points, and it seems the debtor ended up keeping the home as much by luck as by law. The debtor filed chapter 7 bankruptcy in Alabama in 2002, claiming the equity in the home within the $5,000 Alabama homestead exemption. Redstone Federal Credit Union (it always seems to be credit unions that have to fight these) had a judgment recorded against the property prior to filing, but no motion to avoid lien was filed by the debtor, or objection to exemptions filed by the credit union prior to discharge. After the discharge, in September 2003 the Debtors sought to reopen the case to avoid the judicial lien, Restone objected, and the court denied the motion to reopen on the ground of laches.
Redstone then sought a writ of execution against the property in the District Court of Madison County, Alabama, which was contested by the debtors by filing a claim of exemption in this proceeding. Redstone failed to contest the exemption, and the writ was denied. Redstone did not appeal.
In March 2008 Redstone sought to foreclose on the judgment in the District Court of Madison County. Debtor moved for summary judgment which was granted, then vacated upon Redstone's request. The matter was then stayed while the Debtor sought sanctions in the bankruptcy court for violation of the permanent injunction.
The Bankruptcy Court refused to enjoin Redstone finding that the creditor had a lien on the property since no timely motion to avoid the lien was filed, and there was no appeal of the order denying the motion to reopen, therefore res judicata applied. The district court reversed in part, finding that no lien existed. It found that the lien did not attach because the equity in the house was within the Alabama exemptions. However, it agreed that Redstone was not in contempt.
The 11th Circuit refused to rule on whether the lien attached to the house, but found that res judicata applied against Redstone. The Madison County Alabama district court had found as a matter of law that the home was exempt from levy, and all elements for res judicata were met. This was a prior judgment on the merits, rendered by a court of competent jurisdiction, with substantial identity of the parties, and teh same cause of action was present in both actions.
If Redstone had timely contested the Madison County District Court's order the debtor may have ended up losing the home. Alternatively, if the debtor had timely filed the motion to eliminate the judgment lien, all this litigation could have been avoided. The court also denied the sanctions against Redstone finding that since the bankruptcy court's order denying the motion to reopen stated that Redstone did have a lien, it was acting in good faith in attempting to enforce such lien.
In re McDonald, 374 Fed.Appx. 937 (11th Cir. 2010).

Salary from closely held corporation not exempt as wages

2010-06-16T08:00:00.001-07:00

Judge Jennemann in Orlando recently ruled that a debtor who put his salary from a closely held corporation in a segregated bank account could not claim those funds as exempt in bankruptcy. In re McDermott, 425 B.R. 848 (Bankr. M.D. Fla. 2010).

The Debtor and his closely held corporation both filed chapter 7 on the same day. The Debtors claimed an exemption in $54,079.59 held in a bank account as exempt earnings of the head of a household under §222.11 of the Florida Statutes. In order to qualify as wages exempt under §222.11 the debtor must not only perform personal services for the business, he must also receive regular compensation dictated by the terms of an arms-length employment contract. When the duties are those of a person running a business rather than a salaried job, the exemption is not available.

Under this line of cases, it would be very difficult to retain substantial funds as exempt wages when the case is filed.

Mortgage avoided but debtor loses house

2010-06-16T07:43:00.000-07:00

A Minnesota bankruptcy court ruled that a Chapter 7 trustee could avoid mortgage that had error on legal description. In re Stepka, 425 B.R. 820 (Bankr. D.Minn. 2010). In January 2005 the Debtor refinanced the home with Household Industrial Finance Company for $323,218.42. HIFC paid off the prior mortgage but the legal description on the mortgage describing the property as Lot 1, Block 1, Heritage Estates Subdivision instead of Lot 2, Block 1. The documents referred to the correct address for the Debtors, and other documents signed at closing correctly identified the property. The mortgage included a clause warranting title.

The Court cited 8th circuit precedent that an error in the legal description was not apparent on the face of the document and did not provide constructive notice or implied notice of HIFC’s interest in the property. Therefore the trustee qualifies as a Bona-fide purchaser under Minnesota law, and can avoid the mortgage under §544(a)(3). If there is nothing on the face of a mortgage to alert a purchaser that the property description is defective, there is nothing on the face of the mortgage to trigger a duty of further inquiry.

Unfortunately for the Debtor, the court found that the debtor voluntarily transferred the mortgage interest in the property to HIFC, therefore the debtor could not claim an exemption in the interest once avoided by the trustee and awarded the property as an asset of the chapter 7 estate. While Florida homestead exemption laws may provide a different result, this issue must be examined in considering whether to file chapter 7 or 13 if there is a problem with the mortgage.

For more issues on homestead exemptions see the analysis of the 2005 bankruptcy law at http://www.hillsboroughbankruptcy.com/

Timing is everything

2010-06-06T06:06:00.000-07:00

One of the tests on filing bankruptcy relates to the debtor's income for the six months prior to filing. In a case where the Debtor got it wrong, the Court found that non-recurring income received within the 6 months prior to filing was included in disposable income computations, and could not be backed out as special circumstances. In re Cotto, 425 B.R. 72 (Bankr. E.D.N.Y. 2010).

The Debtor received $10,711.14 in a union wage settement during the six months prior to filing the chapter 7 case. This was a one time settlement that would not be repeated, therefore arguably would not affect the on-going ability of the debtor to fund a chapter 13 plan. However, the Court found that §101(10A) of the bankruptcy code which defines current monthly income does not distinguish between income that is non-recurring and income that will be received on an on-going basis. The Court said that a request to eliminate such income as a special circumstance flies in the face of Congresses clear intent to include income from all sources in CMI.

However, courts have also said that the timing of the filing of a case is entirely within the debtor's control. The whole issue could have been avoided by simply waiting until six months after that payment was received to file. It also should be noted that chapter 13 looks much more toward ongoing income, so this would likely have been less of an issue in a chapter 13 case, though could still affect how long the chapter 13 plan had to run.

This is yet another case pointing out the need to employ experienced counsel that specializes in consumer bankruptcy and who keeps up with all the changes and cases in the field.

New limit to homestead exemption does not allow trustee to place equitable lien on home

2010-06-06T05:47:00.000-07:00

A bankrutpcy court in West Palm Beach ruled that §522(o) and (p), which limit the homestead exemption to the extent the value came from fraudulent transfers within the last 10 years or nonfraudulent transfers within 1215 days cannot be used to place equitable lien against homestead. In re Champalanne (Bankr. S.D. Fla. 2010) (J. Hyman).

Use of nonexempt funds to purchase a homestead with actual intent to hinder, dealy, or defraud creditors, even if ‘blatantly a move to deceive credtiros and made in bad faith, does not rise to level of fraud nor constitute egregious behavior’ sufficient to render homestead exemption inapplicable. Citing In re Chauncey, 454 F.3d 1292, 1294 (11th Cir. 2006) citing Havoco II, 255 F.3d 1321 (11th Cir. 2001). §522(o) does not supercede Havoco, the proper remedy instead is for trustee to file objection to exemptions, decreasing the amount of funds available for homestead exemption. Court also raised, but did not resolve whether §522(o) and (p) could affect spouses exemption. Summary judgment granted as to asserting equitable lien on homestead, trial set on trustee request for monetary judgment.

It should be stressed that the trustee may well still prevail in obtaining a judgment against the debtors in this case, but shows the complications involved in bankruptcy and the need to get competent advise both before and for the filing of the bankruptcy.

Prepetition car repossession: what law applies?

2010-05-15T09:43:00.000-07:00

- A problem that arises occasionally in tampa bankruptcy cases is when a car is repossessed prior to the filing of the case. An appellate court decision has made most tampa bankruptcy attorneys believe that they cannot force the creditor to return the car to the debtor if it was taken before the case was filed. However, a new case from Pennsylvania may give rise to a new approach to this problem which could be more promising to debtors in Florida.

Court looked not to the state where the repossession took place, but to the state law applicable per the security interest in ruling that the Debtor could require turnover of vehicle repossessed prepetition. In re Reid, 423 B.R. 726 (Bank. E.D.Pa, 2010). The case was decided upon stipulated facts, car was repossessed prepetition, debtor filed chapter 13 within 15 day state redemption period. Court noted that Pennsylvania law, similar to Florida statute, awarded any surplus from any sale of repossessed cars to debtor.

However, court did not use Pennsylvania law as expected by both parties, instead noting contract itself stated that contract would be interpreted according to law of Delaware. Court went on to note that under the Delaware version of the Uniform Commercial Code the secured creditor has a right to purchase the collateral at a public or private sale; thus the secured creditors lien and debtor’s rights in the vehicle are not transferred until the collateral is sold.
The Court noted that when a debtor files chapter 13 between the date of the repossession of a car and its sale, the majority view is that the vehicle is property of the estate and must be turned over to the debtor, citing 7 Norton Bankr. L. & Prac. 3d §143.18 (2010). The Court concluded that United States v. Whiting Pools, 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983) supports this position that when a debtor’s property is seized with prepetition if the debtor retains a right of redemption, the debtor may still recover possession of the property by offering adequate protection.

New model plan, order establishing duties, order confirming plan

2010-05-05T05:05:00.001-07:00

Effective May 10 the Court is requiring use of a new bare bones chapter 13 model plan, and new Order Establishing Duties, and a New Order Confirming Plan. These can be found at the trustee's website in pdf or word format. The new plan is really bare bones, and puts essentially no requirements on creditors. There is some attempt to ameliorate this by paragraph 7 of the order confirming plan which states that upon upon completion of payments and entry of the discharge (does this mean it does not apply to hardship discharges? why not just say upon entry of the discharge?) the delinquencies on the mortgages and security interests shall be deemed cured and contractual maturities reinstated, and that all post-petition late fees and charges incurred incident to the plan shall be discharged (what is incident and what isn't). This does not address the problem which occurs fairly often of the mortgage company never notifying the debtor or the trustee that the mortgage payment changed.
There is also a conflict between the order establishing duties and the order confirming plan. Under paragraph 5j of the Order Establishing Duties the debtor is required to file a motion to modify the plan if the postpetition contractual payment changes during the pendency of the case (and pursuant to the boxed heading of this order, failure to complay with any requirement of the order may result in dismissal without further motion or hearing). However paragraph 6(b) of the Order Confirming Plan indicates that the trustee shall adjust the payment under the plan which is deemed requested by the trustee. Also, the Order Establishing Duties requires the mortgage company to forward any notices of change of payments to the trustee, while the Order Confirming Plan only requires the Degtor to forward these notices to the trustee. If the Debtor chooses to follow the Order Establishing Duties then this would normally require an annual motion to amend plan in virtually every chapter 13 case in which the trustee is paying the mortgage, with a fee of $250-$350 per motion charged against every debtor.
Some good points to the new procedure is that motions to pay creditors outside the plan are no longer required. If the plan provides for direct payment to the creditor, the stay is deemed lifted upon the filing of the plan. If the debtor then changes their mind about the treatment, and motion to reimpose the stay is required. Thus, if the debtor initially plans to surrender a car, theoretically the creditor could repossess it as soon as such a plan is filed, which may make it impossible to get back if the debtor later changes their mind.
The Order Confirming the Plan also requires Debtors to object to any claims within 30 days of the bar date, or withing 30 days of the filing of any claim after the bar date. There is no requirement therein for creditors to notify debtors of the filing of these claims however. If no objection is timely filed the claim is deemed allowed and the trustee may file a motion to dismiss the case for failing to object.
The Order Confirming Plan also appears to require all debtors to file a statement regarding domestic support obligations 'promptly' upon completition of payments under the plan, whether or not they have any domestic support obligation, as well as a statement that sections 522(q)(1) is not applicable as well as a separate statement that section 522(q)(1)(B) does not apply.
Finally, the Order Establishing Duties requires debtors to be current on payments at the intial confirmation hearing, and 'to the extent possible' insure that the case is ready for confirmation at the initial hearing. However, there is almost no change to the requirements that often delay confirmation, such as having to wait for a secured claim to be filed, or until after the bar date to file a claim for the creditor in order to value a claim or strip a lien. It is important to note that the Order provides that any pending motions and objections will be heard at the initial confirmation hearing, but no notice requirement is set forth in this section. This may create due process concerns if a motion or objection is filed immediately prior to the confirmation hearing, and is more of a basis to insure debtor's attorneys attend all these hearings in case there is a last minute objection. It is not clear what would happen if the debtor filed a motion or objection to claim just prior to the hearing, though it is possible such attorney would be admonished by the Court for such conduct.

Affirmative injuction remedying stay violation

2010-05-04T08:15:00.000-07:00

Advising competing bidders at estate auction that manufacturer would not provide servicing or parts for machines, resulting in manufacturer holding only bid at auction, constituted violation of automatic stay. In re Mathson Industries, Inc., 423 B.R. 643 (Bankr. E.D.Mich 2010). The manufacturer had sold the machines to the debtor, but did not perfect the security interest therein.
The Court determined that act violated stay if it (1) could reasonably be expected to have a significant impact on the creditor’s ability to collect, assess, or recover a pre-petition debt, and (2) is contrary to what a reasonable person would consider fair under the circumstances. Due to the complicated nature of the machines the court found it very likely any purchaser would need the manufacturer’s assistance to continue operating the machines. This conduct was engaged in with the intent of re-acquiring possession of the machines for resale at a substantial profit.
In determining the fairness of the conduct, the Court concluded that it was proper to examine the conduct in the context of the bankruptcy case rather than with regard to typical business dealings outside of bankruptcy. The conduct deprived the bankruptcy estate of the most valuable part of the debtor’s property at the expense of all other creditors. In essence, the refusal of servicing allows the manufacturer to revive its unperfected security interest. Since it is the only entity to blame for the unperfected status of its security interest, it is unfair to allow it to cure the error at the expense of other creditors.
To rectify the problem the Court entered a permanent injunction requiring the manufacturer to provide servicing capabilities to purchasers of the machines.

Unrecorded mortgage comes back to Bite Wells Fargo

2010-05-03T09:12:00.000-07:00

The 8th Circuit finds post-petition recording of mortgage is basis for preference action requiring mortgage company to pay trustee value of security interest Wells Fargo Home Mortgage, Inc. v. Lindquist, 592 F.3d 838 (8th Cir. 2010). In May 2003 the Debtor obtained a mortgage from Wells Fargo on his home prepetition in exchange for a $196,000 loan from Wells Fargo. He then filed chapter 7 bankruptcy in October 2005, listing Wells Fargo as a secured creditor. As of the date of filing the principal balance owed on the mortgage was $190,308.71. Soon after filing Wells Fargo assigned the mortgage to EMC Mortgage. The chapter 7 discharge was entered on March 7 2006, and the case closed on 20 March 2006. EMC Then recorded the mortgage on 11 October 2006.

Upon the Trustee’s learning that the mortgage was unrecorded at the time of filing, he filed a complaint to avoid the transfer as a preference, alleging that under 11 USC 547(e)(2) the transfer was deemed to have occurred just prior to the filing of the case. (A transfer is made immediately before the date of the filing of the bankruptcy if the transfer is not perfected before the later date of i) the commencement of the case or ii) 10 days after such transfer is takes effect between the transferor and the transferee). The bankruptcy Court agreed that the transfer was deemed to have occurred just prior to filing, and that such transfer was a preference, and that Wells Fargo had to pay the value of the mortgage to the debtor’s estate, for $190,808.71.

Wells Fargo initially argued that the transfer complained of was the recording of the mortgage by EMC. The 8th Circuit rejected this, noting that while a recording of a mortgage may also be a transfer, the preference complained of was the giving of a mortgage on an antecedent debt occurring per statute just prior to the filing of a bankruptcy. Under §547(e)(2) even though debtor gave the mortgage in 2003, it was deemed to have been given to Wells Fargo in October 2005.

Wells Fargo then argued that the transfer did not enable it to receive more than it would have received in a hypothetical liquidation, since the total priority creditors were $6,600 and unsecured creditors were $37,833 in the case while nonexempt assets were only $400 as scheduled. The 8th Circuit acknowledged that while this would normally mean a creditor holding an unsecured claim would not have benefitted from obtaining an unrecorded mortgage just prior to filing, but since the debt was scheduled as secured, and Wells Fargo was able to sell the mortgage postpetition; and since the trustee could have liquidated the value of the property since it was not claimed exempt, Wells Fargo was able to obtain more by virtue of this mortgage than it would have if it had been merely unsecured.

Third, Wells Fargo argued that the trustee should have sued EMC rather than Wells Fargo. However, §550(a)(1) enables the trustee to recover a preferential transfer from the initial transferee or the entity for whose benefit the transfer was made, or under §550(a)(3) from any intermediate transferee. Thus the trustee may choose the party against whom to bring the action.

Finally, Wells Fargo argued that there was no record of the amount Wells Fargo received when it sold the mortgage to EMC, therefore no evidence as to the value of the mortgage. The 8th Circuit said because the debtor erroneously listed Wells Fargo as a secured creditor, the debtor’s transfer of a mortgage to Wells Fargo immediately prior to the filing gave Wells Fargo an interest in property equal to the full amount of its unsecured claim. Since it was not entitled to receive the mortgage as a preference, it must reimburse the estate for receiving, and selling, an interest in property that should have remained part of the estate.

The court did note that given the small amount of other non-secured debt Wells Fargo would receive back 90% of any funds distributed by the trustee (which, presumably, have been reduced substantially due to fees for the litigation and appeal).

Post dated checks for chapter 7 retainer disapproved

2010-04-26T10:13:00.000-07:00

Today, Judge Williamson orally ruled from the bench that a law firm's practice of charging a small amount up front, and taking postdated checks prior to filing for postpetition services was not permitted. In case #8:09-mp-00010, Donald Walton v Clark & Washington Judge Williamson ruled that a postdated check constitutes a promissory note under the Uniform Commercial Code, thereby creating a claim or executory contract. Since in chapter 7 executory contracts are rejected if not assumed by the chapter 7 trustee, if it is an executory contract it is rejected as a matter of law after filing and becomes an unsecured claim. Collecting on these postdated checks would constitute a violation of the stay or violation of the permanent injunction. The court also indicated that the practice created a conflict of interest between counsel and the client.

Note this is just an oral ruling from the bench, and no written order has been entered at the time of the writing of this note, and the order may be appealed once entered.

Bankruptcy Filing - electronic signatures

2010-04-24T12:40:00.000-07:00

A Court in Oho ruled that sanctions under Bankruptcy Rule 9011 were not warrented, and case not dismissed due to inadvertent mistake of debtor’s counsel in filing case with electronic signatures prior to debtor signing forms in violation of local rule. In re Rose, 422 B.R. 696 (Bankr. S.D.Ohio 2010). Prior case dismissed because debtor’s took financial management course instead of credit counseling course. Second case did not disclose prior filing. At 341 on 2nd course debtor’s testified they had not signed forms for 2nd case. At continued 341 they testified they signed forms after initial 341.
Counsel was unaware debtors had not returned to office to sign 2nd petition when he directed office to file the case. Court found no attempt by counsel to mislead court. Court cites to ECF Procedure 8(a) providing that the electronic filing of a document constitutes any required signature of a filer or user on such document. If the signature of someone other than a filer or user is required (such as a debtor’s signature on a petition) ECF Procedure 8(b) governs, requiring that all persons other than the filer or user indicated to have signed the document have actually executed an original prior to electronic filing with the Court. The signature of a debtor on a petition not only verifies that all the facts set forth therein are correct, but also constitutes the debtor’s consent to the filing of the petition.
Court distinguished In re Wenk, 296 B.R. 719 (Bankr. E.D.Va. 2002) where counsel admitted practice of occasionally filing petitions without signatures to obtain automatic stay. Court found that signature of debtor is absolute requirement of filing any petition. When the petition was received, the court was presented with a document which stated on its face that the debtor had signed it, under penalty of perjury, when it was not true, which amounted to fraud.
Where the mistake is inadvertent, and counsel promptly corrects the mistake when discovered, such correction is permitted and sanctions will not be imposed.

Redaction of social security numbers

2010-04-13T07:24:00.000-07:00

In the era of identity theft, Bankruptcy Rule 9037 probits showing any but the last 4 digits of the social security number of the debtor or any dependents, and anything but the initials of any minor dependents. This prohibition applies not only to pleadings filed with the court, but also to any documents attached to the pleadings. This rule is further supplemented in Tampa with Local Rule 1001-3. One issue that has arisen is what happens when such a document is filed The pleading list on pacer includes a provision for a motion to redact, which may be used.

There are also some cases awarding sanctions against creditors for filing unredacted documents in a debtor's case. The Court in In re Gregg 2009 LEXIS 1484; No. 09-01019-JW (Bankr. S.C. 6/9/2009) (Bankr. S.C., 2009) awarded sanctions of $500/day until the creditor filed amended claims in three cases in which it had filed claims with the full social security numbers, although this order was entered only after the creditor ignored an order to show cause and took effect ten days after its entry. Sanctions were also considered in In re Carter, Case No. 09-03458-TOM13 (Bankr. N.D. Ala. 10/23/2009) 2009 LEXIS 3568 (Bankr. N.D. Ala., 2009) but the Court awarded only $444 in sanctions declining more substantial sanctions in the absence of evidence that the acted deliberately, knowingly "flaunted the law" and "failed to take remedial action" upon discovery of the violation. Still, in an appropriate case these cases may be used as leverage against a recalcitrant creditor.

Fees taxed for frivolous appeals under §523(a)(6)

2010-04-12T08:02:00.000-07:00

Frivolous appeal fee shifting statute may be basis of §523(a)(6) complaint. In re Luca, 422 B.R. 772 (Bankr. M.D. Fla 2010). Judge Glenn denied a motion to dismiss a §523(a)(6) complaint against an attorney debtor who had filed an appeal determined to be frivolous. Luca, representing the husband in the custody dispute, appealed a child custody award. The appellate court ruled that the appeal was frivolous and that the arguments lacked merit. On remand to the Circuit court damages were set at $12,733.
Luca filed chapter 7 bankruptcy, and Smith and Greene, which represented the wife in the custody case and appeal, filed a complaint under §523(a)(6) and §523(a)(7) (rejecting plaintiff’s argument that since the order was entered to uphold the dignity of the state court tribunal it was for the benefit of a governmental unit). Judge Glenn dismissed the complaint under §523(a)(7) in that the fees were not payable ‘to and for the benefit of a governmental unit.’ However, he ruled that the complaint met the standards to go to trial under (a)(6).
Judge Glenn defined willful as requiring a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury (citing Kawaauhau v Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998). Malicious is defined as ‘wrongful and without just cause or excessive even in the absence of personal hatred, spite or ill-will.’ In re Walker, 48 F3d 1161, 1164 (11th Cir. 1995). It is the knowledge of wrongdoing that is the key to malicious injury under §523(a)(6), not the wrongfulness of the debtor’s action.
Supporting the determination to allow the adversary to go to trial Judge Glenn cited from the findings in the 1st DCA’s order on appeal: ‘Appellant knew or should have known his argument based on the law of the case doctrine was completely lacking in legal merit.’ On remand, the state court made further findings against Luca finding that the attorney should have known that the appeal did not meet the legal standards and should have refused to take the case.

Sending discharged debts to 3rd party collectors violates stay/discharge injunction

2010-04-11T11:43:00.001-07:00

One problem we keep hearing about is that some creditors bundle their debts, including debts that have been discharged in bankruptcy, and resell them to 3rd party collectors. A recent Arizona case appears to give some guidance on attempting to stop this practice.

Both HSBC and 3rd party collector found to have violated stay where debt sent out to 3rd party collector after notification of bankruptcy. In re Goodrich, 422 B.R. 724 (Bankr. D.Ariz. 2010). Debtor listed HSBC as a creditor in the bankruptcy petition. Shortly after filing bankruptcy, but prior to the discharge Goodrich received an attempt to collect this debt from Enhanced Recovery Corporation. This collector was notified of the bankruptcy and indicated that they would cease collection on it. Debtors then subsequently received demand letters on the same debt from Allied Interstate, Inc. Debtors wrote a letter to the Court complaining of these collection attempts, and the Court set a order to show cause hearing for HSBC and Allied to explain why sanctions should not be awarded. Neither creditor appeared at the hearing or responded.

The Court found that HSBC was properly notified of the bankruptcy, and that Enhanced Recovery was an agent of HSBC and received actual notice of the bankruptcy. The Court further found that Allied was also an agent of HSBC, and that sending these letters after the entry of the discharge constituted a willful violation of the discharge injunction and awarded $10,000 each against HSBC and Allied.

Cancellation of American Express Corporate Card causing Termination of Employment

2010-04-11T11:28:00.000-07:00

Where Employer has policy to fire any employee whose company required American Express Corporate card is cancelled, but has made exceptions to this policy in the past based on job performance, sanctions were denied when exception was not made based on other job performance issues. In re Banner, 422 B.R. 608 (bankr. N.D. Tex 2009). Banner, the Debtor worked for ABF as a sales representative. All sales representatives are required to obtain an American Express corporate card in order to pay for work related expenses for customer entertainment and travel. Banner filed bankruptcy, and did not list the card on the list of creditors. However, American Express cancelled the card upon learning of the bankruptcy from a credit check, and ABF learned of the cancellation when Banner called them after the card had been declined when she attempted to use it for a client’s lunch.
On 13 prior occasions ABF had guaranteed an American express card when the cards had been declined due to prior bankruptcy filings, but upon reviewing Banner’s job performance and tenure ABF determined not to make an exception in her case. ABF notified Banner that she was terminated ‘based on your recent bankruptcy filing causing your American Express card to be cancelled and reinstatement not being an option’.
The bankruptcy court granted summary judgment against Banner in favor of the employer finding that the evidence was undisputed that her filing for bankruptcy was not the sole motivating factor causing her termination. The Court specifically declined to hypothesize the result if a corporation established a policy to terminate employees which could be triggered only by filing bankruptcy then escape §525 sanctions by alleging that it was the violation of the policy that caused termination, not the filing itself.

Laches in filing request to reopen by creditor

2010-04-11T11:04:00.000-07:00

A recently 11th Circuit case appearing to state the obvious, becomes a bit more interesting with a little investigation. In In re Poff, 344 Fed.Appx. 523 (11th Cir. 2009) the 11th Circuit rules Rule 4007 does not apply to request to reopen case to object to the debtor’s discharge, such requests must be filed within one year of the entry of the discharge as required by 11 U.S.C. 727(e).

Poff, the debtor, who was an attorney filed chapter 7 case in May 2005. At the time there was a legal malpractice suit against him by Dennis (which alleged malpractice occurred in representing Dennis against another attorney who Dennis accused of malpractice). Poff had not listed Dennis in the schedule of creditors, but did file a suggestion of bankruptcy in the malpractice case in August 2005. Poff received the suggestion and the order dismissing the malpractice case due to the suggestion on 15 August 2005. A discharge was entered on 17 August 2005.

In August 2007 Dennis filed a motion to set aside the discharge and reopen the bankruptcy, which the bankruptcy court denied as untimely under §727(e) requiring such a request to be filed within one year of the granting of the discharge. Dennis’ request for reconsideration was denied. Dennis then filed a renewed motion to set aside the discharge, which was deferred by the Court pending a 2004 examination ordered by the Court for the trustee to determine whether there were any additional assets. After holding the 2004 exam, the trustee reported there were no additional assets, and the bankruptcy court again closed the case.

On April 17 2008 Dennis again moved to reopen the case, which was again denied ‘based on the reasons set forth in the three prior hearings and two prior orders on this matter.’ The Court held a hearing (surprisingly) on the motion to reconsider this order, but again denied the reconsideration in a written order. Dennis appealed to the district court and the 11th Circuit.

Dennis argued that he could did not receive notice of the bankruptcy in time to file an objection to dischargeability, and that he could raise the issue at any time under Bankruptcy Rule 4007. Initial reading of the 11th Circuit’s order one would surmise the complaint was solely to revoke discharge, but examining the Bankruptcy Docket in the Northern District of Alabama (Adv #08-00036-TBB) it appears a separate complaint was filed under §§523(a)(2), (a)(4), and (a)(6). This was ultimately dismissed by the bankruptcy court too, though the order is not clear why this complaint was denied, one basis for requesting dismissal by Pope was that the complaint simply reiterated the grounds to revoke the discharge. The actual motion to reopen and set aside the discharge did in fact cite to §523(a)(2), (a)(4) and (a)(6) and requested a nondischargeability judgment under these sections. (docket #19, Case #05-4943 in Northern District of Alabama).

Thus, while the 11th Circuit's order appears to simply affirm that Rule 4007 applies to dischargeability complaints and §727(e) applies to complaints objecting to discharge, the actual order appealed on was on a motion to reopen to seek both revokation of the discharge and to determine the dischargeability of the debts. While the bankruptcy court ultimately allowed initial litigation under the dischargeability, this too was eventually dismissed but not appealed and ruled on by the 11th Circuit. Perhaps the lesson here is to be careful in drafting any motion to reopen.

For more on changes to discharge and dischargeability under BAPCPA see
http://www.hillsboroughbankruptcy.com/1017checklist.htm

More protection for retirement plans in bankruptcy

2010-04-07T13:20:00.001-07:00

There has been an issue for some time whether pension plans that do not qualify under ERISA are still protected from creditors in bankruptcy. The 11th Circuit, the appellate court for Florida just below the US Supreme Court has now ruled that if the plans qualify under the Internal Revenue Code, then they can still be exempt (protected ) even though they do not qualify under ERISA. In re Baker, 590 F3d 1261 (11th Cir. 2009).

The District Court affirmed Bankruptcy Court’s order that the plan had to be maintained under ERISA to qualify for exemption under Florida law. 11th Circuit disagreed based on 2005 amendment to §222.21(2)(b) eliminating requirement that the plan had to comply with ERISA. Rather, statute simply requires that plan complies with section 401(a) of the Internal Revenue Code.

This mainly would come into play where the sole beneficiary of a plan is the owner of the business.

Watch that motorcyle (purchase)!

2010-03-28T10:14:00.000-07:00

Filing a bankruptcy case on the 30th of the month rather than the 1st of the next month is not an indicia of bad faith. In re Hageney, 422 B.R. 254 (Bankr. E.D.Wash 2009). The Code allows a debtor to choose the date of the commencement of the case. Any litigant may seek to maximize their legal rights and to enforce those rights to the extent allowed by law. Taking advantage of the timing of the six month lookback rule for the means test is not bad faith.
However, the Court granted the motion to dismiss under §707(b)(3). The court found that the debtor’s purchase of a 2009 Victory motorcycle about 10 weeks prior to filing for $20,000 when they were in default in the mortgage payment and having trouble paying bills was an indicia of bad faith. The Court noted that purchase of a 2006 Dodge Ram for $63,995 about ten months prior to filing when his prior vehicle was destroyed in an accident, and when he needed a vehicle for his work as a travelling insurance saleman while possibly improvident was not unreasonable as the business was then making money. The Court rejected Debtor’s argument that the motorcycle would be less expensive to operate since there was less travel requirements on his new job than the one when he purchased the Ram. The court ruled that the case would be dismissed if not converted to chapter 13.

Criminal referral for not amending mortgage claim

2010-03-21T11:12:00.000-07:00

Countrywide in More Trouble:

Sanctions may be awarded against a creditor for failing to amend a claim that was accurate when filed if it later becomes inaccurate. In re Hannon, 421 B.R. 728 (Bankr. M.D. Pa. 2009). Countrywide mortgage filed an initial claim for its mortgage in the amount of $9,294.53 arrearage, of which $5,000 was identified as ‘sheriff deposit’. Debtor’s counsel submitted a proposed 9011 motion to Countrywide in February 2006. The claim was amended in December 2006 eliminating $2,500 of the sheriff deposit. On 25 January 2007 the sheriff refunded $2,158 to Countrywide. The 9011 motion was filed on 1 May 2008, and a second amended claim filed 5 June 2008.

The bankruptcy court initially ruled that claims were subject to 9011 sanctions. The Court also found that acceptance of trustee payments on an erroneous claim constituted advocating for the erroneous claim to the detriment of other claimants. However, the Court found that the May 1 motion must be denied in that the claim was corrected within the 21 day safe harbor provision.

The Court granted an order to show cause upon a subsequent motion for sanctions under §105 filed on 3 December 2008 for the delay in amending the claim for over a year after the refund as well as the fact that a similar delay has occurred in a number of other cases involving Countrywide before the Court. The Court found that failure to amend an inaccurate claim that is being paid by the trustee constitutes a violation of the local rule requiring candor toward the Tribunal. While the Debtor’s 9011 motion had to fail due to the timing, the Court could initiate its own 9011 motion based on the additional allegations in the second motion for sanctions. The Court also referred the matter to the US Attorney to determine if there was a criminal violation of 18 U.S.C. 152(4) (presentation of a false claim).

What Not to do as Debtor's attorney

2010-03-19T05:30:00.001-07:00

A debtor's attorney in Kentucky was sanctioned over $3,000,000 and permanantly barred from practicing in bankruptcy court in Kentucky for his conduct described in In re Stone, 421 B.R. 401. The attorney, Atherman, was employed by a tool and machine manufacturing shop for representation in a civil lawsuit and IRS negotiations, as well as in finding an investor for the business to help with cash flow problems. A chapter 11 bankruptcy was filed during this process.

The court goes into great detail of the transactions involved, basically finding that through finding an investor for the business that had a prior substantial undisclosed relationship with the investor, and by having the debtor sign forms he did not have time to read and couldnt understand; as well as by representing both sides in the deal, the attorney materially assisted having the assets of the company transferred to the investor's business. The Court even found at one point the attorney actually appeared as counsel for both sides in the same lawsuit. The case makes for a good example of a worst case scenario for ethical issues in business reorganizations. In re Stone, 421 B.R. 401 (Bankr. W.D.Ky. 2009).

mortgages in bankruptcy

2010-03-14T08:18:00.000-07:00

One of the recurring issues in bankruptcy is that after you cure mortgage defaults in a chapter 13 repayment plan, the mortgage company often alleges there are additional charges due after the case is over, that it never disclosed during the bankruptcy; and may threaten to foreclose even though you cured the mortgage arrearage in the bankruptcy and continued paying them after. I have been attempting to protect clients from this for some time, having a rare hearing with multiple judges to work out appropriate language to attempt to prevent this abuse that is standard in my repayment plans. Now, the Tampa Judges are including language in the standard court orders also attempting to deal with this, but more needs to be done about mortgage abuses in bankruptcy.
A decision out of Texas may give a possible answer to some of these issues. In In re Rodriguez, 421 B.R. 356 a lawsuit was filed against Countrywide for adding improper undisclosed fees and costs during the bankruptcy, for misapplying mortgage payments in violation of the terms of its own mortgage documents and in violation of the terms of the confirmed plan. The lawsuit alleges Countrywide did this in a number of cases, and the adversary suit had combined three such cases. Judge Isgur, in a very well reasoned opinion found that 11 U.S.C. 1327(a) provides that the provisions of a confirmed plan bind the debtor and each creditor, thereby imposing reciprocal rights and obligation son the debtor and the mortgage lender. Id. at 369, citing Cano v. GMAC Mortgage Corp., 410 B.R. 506, 531 (Bankr. S.D. Tex 2009). The mortgage holder is obligated to ensure that the debtor has the opportunity to ‘cure arrearages and emerge from the bankruptcy no longer facing foreclosure because of default.’ Id. The mortgage lender is obligated to allocate payments amongst principal, interest, and arrearage in the manner prescribed by the plan.
If the lender allocates payments that the plan dedicates to prepetition arrearage to principal, interest, or to a postpetition charge without court approval, the mortgage lender violates the plan and may be subject to liability for violating the order confirming the plan. Id. The lender is also bound by Rule 2016 to file an application before collecting any reimbursable fees and costs during the pendency of a chapter 13 plan. The District Court in Texas had found that Rule 2016 applied to fees sought by lenders in chapter 13 cases. Rodriguez v. COuntrywide Home Loans, Inc., 421 B.R. 341 (S.D. Tex 2009).
These findings may be used in consumer bankruptcy cases to prevent hidden charges during the case and surprise foreclosure threats after the cases are completed when debtors are no longer represented by counsel. I also file motions when cases are complete where there had been involvement of the mortgage to have the court specifically find that the mortgage is current.

About me

2010-03-14T08:05:00.000-07:00

I'm Mike Barnett, a consumer bankruptcy attorney based in Tampa, Florida, though I go to branches in Lakeland and Dade City to meet with clients as well. I have been board certified in consumer bankruptcy law by the American Board of Certification since January 1993. One of the problems in consumer bankruptcy practice is that there are many 'bankruptcy mills' that have a huge volume practice and the individual attorneys have minimal time to spend on each case, leaving much work to be done by paralegals. While I have a paralegal also, most of my clients come from referrals or from the internet, allowing me to spend more time on each case. Right now I only advertise in one yellow page directory. For more information on my practice and bankruptcy generally see www.tampabankruptcy.com.