Scotus Offered Another Opportunity to Address Passive Conduct and the Automatic Stay

Posted by NCBRC - September 19th, 2019

After recently declining cert in a case involving the issue of whether a creditor’s passive conduct can ever violate the automatic stay (Davis v. Tyson Prepared Foods, No. 18-941 (10th Cir. cert. denied, May 20, 2019) (blogged here)), the Supreme Court has been presented with another opportunity to take on the issue. In In re Fulton, Nos. 18-2527, 18-2793, 18-2835, 18-3023, 2019 U.S. App. LEXIS 18393 (7th Cir. June 19, 2019), (blogged here), the City of Chicago impounded the debtors’ vehicles prior to their filing for chapter 13 bankruptcy. Upon filing for bankruptcy, the debtors sought to have the vehicles returned. The City refused, and the bankruptcy court found its refusal constituted a violation of the automatic stay. The City appealed.

Citing its decision in Thompson v. General Motors Acceptance Corp., 566 F.3d 699 (7th Cir. 2009), the Seventh Circuit affirmed, holding that passively retaining, and refusing to return, estate property is an exercise of control within the meaning of section 362(a)(3). The court found that section 542(a) also mandates that an entity in possession of estate property turn it over to the trustee. The court rejected the City’s call to overturn Thompson, recognizing that one of the fundamental purposes of bankruptcy is to allow a debtor to improve her financial situation, and that a vehicle is frequently necessary to achieve that goal.

The City’s petition for certiorari, points out that five courts of appeals (the second, seventh, eighth, ninth and eleventh), have likewise found that passive conduct can be the basis for an automatic stay violation, while two courts of appeals (the tenth and the District of Columbia) have adopted the position that a creditor’s conduct must be affirmative.

City-of-Chicago-v.-Fulton-Cert-Petition Download

Cert. Denied in Stay Case Involving Passive Conduct

Posted by NCBRC - September 17th, 2019

The Supreme Court declined cert. in Davis v. Tyson Prepared Foods, No. 18-941 (May 20, 2019), a case out of the Tenth Circuit presenting the issue of whether section 362(a) applies when a creditor passively holds or obtains an interest in property of the debtor or the estate. The case involved a lien which arose automatically out of post-petition Worker’s Compensation payments made to the debtor. The trustee sought to avoid the lien as being in violation of the automatic stay. The Tenth Circuit found that, based on WD Equip., LLC v. Cowen (In re: Cowen), 849 F.3d 943 (10th Cir. 2017), section 362(a)(4), which prohibits “any act to create, perfect, or enforce any lien,” requires affirmative conduct on the part of the creditor. Here, because the lien was created by operation of law, there was no such affirmative conduct and the Tenth Circuit found no stay violation.

Davis-10th-Cir-Oct-2018 Download

Davis-SCt-Cert-Petition Download

Proceeds from Sale of Fraudulently Transferred Property May Be Recovered from Third Party

Posted by NCBRC - September 16th, 2019

The chapter 7 trustee may “recover money from the entity who received the proceeds from the sale of fraudulently transferred property, but to whom the property itself was never transferred.” Rajala v. Husch Blackwell LLP, No. 08-20957, Adv. Proc. No. 18-6016; Rajala v. Spencer Fane LLP, Adv. Proc. No. 18-6020 (Bankr. D. Kans. Aug. 14, 2019).

Three couples started GRHC, a company designed to explore the possibilities of wind-generated electricity. GRHC initiated a wind-energy project in Pennsylvania called Lookout Windpower. The three couples then created the Lookout Windpower Holding Company (LWHC) and transferred Lookout Windpower from GRHC to LWHC rendering GRHC insolvent. LWHC then sold Lookout Windpower to Edison Mission Energy for over $6.7 million, and GRHC filed for chapter 7 bankruptcy. From the Lookout Windpower sale proceeds, LWHC paid the law firms of Husch Blackwell over $1.3 million and Spencer Fane over $700,000. The trustee in GRHC’s bankruptcy case successfully avoided the transfer of Lookout Windpower from GRHC to LWHC and sought to recover the funds paid to the law firms out of the proceeds from LWHC’s subsequent sale of the property. The law firms moved to dismiss the adversary complaints.

5th Circuit Finds No Room for Sympathy for Student Loan Debtor

Posted by NCBRC - September 11th, 2019

In an exercise in disingenuous hand-wringing, the Fifth Circuit essentially acknowledged that its application of the Brunner test eviscerates the undue hardship avenue to discharge of student debts. In so holding, the court affirmed the denial of discharge and sent the debtor packing to perform, if not the impossible, at least the highly improbable task of finding employment. Thomas v. Dept. of Educ., No. 18-11091(5th Cir. July 30, 2019).

Vera Thomas worked at a call center for eight years at just over $11/hour when, in 2014, she developed diabetic neuropathy causing her to take numerous unpaid work days and incur extensive medical expenses. When the call center was sold in 2016, she lost her job for “company policy violations” and moved to Texas. From 2016 to 2017, Ms. Thomas acquired and lost three jobs—Whataburger, Perfumania and UPS—due to her diabetic neuropathy and consequent inability to stand for any length of time. By the time she filed chapter 7 bankruptcy, she was in her 60s and living off public assistance and private charity. Her monthly expenses were over three times her monthly income. After obtaining her bankruptcy discharge, Ms. Thomas sought to have her student loans discharged. The bankruptcy court, noting that in fifteen years on the bench it had never granted undue discharge of student loans, found that Ms. Thomas did not meet the standard for undue hardship discharge. The district court affirmed.

No Unsecured Claim against the Estate in Chapter 20 Lien Strip Case

Posted by NCBRC - September 9th, 2019

Reversing the bankruptcy court, the BAP for the Ninth Circuit found that a wholly unsecured junior lienholder’s claim was not allowable as a general unsecured debt against the bankruptcy estate where the chapter 13 debtor had obtained a discharge on her personal liability in a prior chapter 7 bankruptcy. Washington v. Real Time Resolution, Inc., No. 18-1206 (B.A.P. 9th Cir. July 30, 2019).

Gwendolyn Washington obtained a chapter 7 discharge and, five years later, filed for chapter 13 bankruptcy proposing a 100% plan and seeking to strip off a wholly unsecured junior lien on her home. The servicer for the junior lienholder, RTR, filed a proof of claim listing Ms. Washington’s original debt as an unsecured claim under section 506(a), and the bankruptcy court allowed the claim over Ms. Washington’s objection.

Withholding Graduation Date from Transcript Violates Stay

Posted by NCBRC - September 4th, 2019

Excluding the graduation date from the debtor’s transcript was tantamount to withholding the transcript altogether and constituted a violation of the automatic stay for which the debtor was entitled to damages, even though those damages consisted only of the costs associated with vindicating her rights. California Coast Univ. v. Aleckna, No. 16-158 (M.D. Pa. Aug. 28, 2019).

At the time the chapter 13 debtor completed her coursework at California Coast University she owed $6,300 in overdue tuition. When she and her husband filed for bankruptcy she listed the tuition debt as unsecured and disputed. She later sought an official copy of her transcript. CCU provided a transcript that omitted the graduation date, explaining that, because of the outstanding debt, she had not officially graduated. CCU filed an action in the bankruptcy case seeking a finding that the tuition debt was non-dischargeable. Ms. Aleckna counterclaimed that CCU’s refusal to provide her complete transcript violated the automatic stay. The bankruptcy court found in favor of Ms. Aleckna and awarded damages for lost wages in the amount of $230.16, and unspecified attorney’s fees and costs.

Adoption Assistance Payments Excluded from Current Monthly Income

Posted by NCBRC - August 28th, 2019

The debtors’ Adoption Assistance payments were “benefits received under the Social Security Act” and were therefore excluded from the calculation of their current monthly income. In re Isaacs, No. 18-1651 (Bankr. M.D. Pa. Aug. 26, 2019).

The above-median debtors proposed a 21% plan and the trustee objected to confirmation on the basis that they were not paying all their projected disposable income into the plan as required under section 1325(b)(1)(B). The dispute centered around the nature of the $2,325/month in benefits the debtors received under the Adoption Assistance and Child Welfare Act of 1980 (the Act). The debtors maintained that those benefits should be excluded from the calculation of current monthly income because they were benefits received under the Social Security Act (SSA). The Act was established under Title IV-E of the Social Security Act (SSA), under which the federal government created a fund to provide benefits to the states to assist families adopting special needs children. The monthly benefits the debtors received were not entirely made up of federal funds, however, but were comprised of 51.82% federal funding, 38.54% state funding, and 9.64% county funding. The trustee argued that the funds were not social security benefits under the definition found at section 101(10A)(B) of the Bankruptcy Code.

Direct Payments to Creditor Are Not “Under the Plan” for Discharge Purposes

Posted by NCBRC - August 26th, 2019

Adopting the minority view, the Bankruptcy Court for the D.C. Circuit found that the chapter 13 debtor’s direct payments to a residential lienholder were not provided for under the plan and, therefore, her failure to make all the payments did not preclude entry of discharge. In re Drabo, No. 1:15-bk-653 (Bankr. D. D.C. May 10, 2019) (unpublished).

Ms. Drabo’s plan provided that she would pay her pre-petition arrears and make regular mortgage payments outside the plan until the debt was paid off—an event scheduled to occur five years after the completion of her plan. After she completed all plan payments, she moved for discharge under section 1328(a), but the lender, Ameritas Life Insurance, objected, complaining that Ms. Drabo had failed to keep up with the direct payments under the lending agreement.

Contingent Future Interest In Tenancy by Entirety Not Exempt

Posted by NCBRC - August 21st, 2019

Where state exemption law does not specifically apply to a contingent future interest in a tenancy by the entirety, the interest is not exempt under bankruptcy law and the debtor cannot avoid a judgment lien under section 522(f). In re Jaffe, No. 18-2726 (7th Cir. Aug. 5, 2019).

Including a mini-tutorial on the history of women’s property rights, from coverture (married woman’s property interests absorbed by her husband), to tenancy by the entirety (co-ownership and transfer to surviving spouse), to the Married Women’s Property Acts (providing means for women to own property and emerge from financial and social dependency), the circuit court explored the interaction of bankruptcy exemptions and Illinois property law.

The debtor entered bankruptcy owning his residence with his wife as a tenant in the entirety. When his wife died post-bankruptcy, he sought to exempt his entire fee simple interest in the property and avoid his creditor’s judgment lien under section 522(f) as impairing his exemption. The district court found that he could do so, and the creditor appealed.

7th Circuit Rules Creditor Should be Held in Contempt for Jailing Discharged Debtor but No Contempt for Creditor’s Counsel

Posted by NACBA - August 14th, 2019

On August 13, 2019, the Seventh Circuit Court of Appeals reversed in part and affirmed in part the lower courts. On appeal, NACBA board member Tara Twomey submitted an amicus brief on behalf the National Consumer Bankruptcy Rights Center (NCBRC) supporting the Debtor.

The facts underlying the case started in 2001. Jacqueline M. Sterling (“Debtor”) was sued in state court for approximately $520.00 in membership fees owed to Southlake Nautilus Health & Racquett Club (“Creditor”). The Creditor was represented by the law firm Austgen, Kuiper & Associates (“Creditor’s Counsel”). After obtaining a judgment in 2002, Creditor’s Counsel filed “proceeding supplemental” in state court to collect on the judgment. The Debtor did not appear at the collection hearings and ultimately the state court issued a “body attachment” (bench warrant) against Debtor to show cause for violating the court’s orders.

In 2010, the Debtor filed for bankruptcy protection and listed the Creditor but not Creditor’s Counsel. The Debtor obtained a discharge. The Creditor was notified of the discharge but did not forward the discharge to Creditor’s Counsel. Creditor’s Counsel did not have knowledge of the discharge order.

In 2011, the Debtor had a flat tire and was assisted by the local police. The police discovered the bench warrant and the Debtor was arrested and held in jail for two days.

Subsequently the Debtor sued the Creditor and Creditor’s Counsel in Bankruptcy Court for violation of the discharge injunction found at Section 524 of the Bankruptcy Code.

The Bankruptcy Court ruled in favor of Creditor and Creditor’s Counsel. The Bankruptcy Court found the Debtor had failed to prove that Creditor’s Counsel knew of the discharge when it continued collection proceedings. Further, the Creditor didn’t violate the discharge injunction because it was unaware of the status of the case against the Debtor and that it didn’t direct Creditor’s Counsel to take any particular actions. The ruling was affirmed by the District Court.

To read more click here.

Scotus Offered Another Opportunity to Address Passive Conduct and the Automatic Stay

Cert. Denied in Stay Case Involving Passive Conduct

Proceeds from Sale of Fraudulently Transferred Property May Be Recovered from Third Party

5th Circuit Finds No Room for Sympathy for Student Loan Debtor

No Unsecured Claim against the Estate in Chapter 20 Lien Strip Case

Withholding Graduation Date from Transcript Violates Stay

Adoption Assistance Payments Excluded from Current Monthly Income

Direct Payments to Creditor Are Not “Under the Plan” for Discharge Purposes

Contingent Future Interest In Tenancy by Entirety Not Exempt

7th Circuit Rules Creditor Should be Held in Contempt for Jailing Discharged Debtor but No Contempt for Creditor’s Counsel

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