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.

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Case Bites: Interesting Issues and Decisions from This Week’s Cases

Posted by NACBA - August 9th, 2019

Issues discussed in cases below:

In a Chapter 20 cramdown of a junior lien, can the junior lienholder file an unsecured claim for the amount of the voided lien? (9^th Cir. BAP)
Can an heir to real estate cram down a reverse mortgage in chapter 13? (Bankr. S.D.Miss.)
Does a non-filing ex-spouse have to ask the bankruptcy court for permission to modify a domestic support order in the divorce case? (Bankr. N.D.IL.)
Is the confirmation of a chapter 13 plan res judicata on the amount of mortgage arrears? (Bankr. W.D.PA.)
Can a bankruptcy abstain from reopening a bankruptcy when the Debtors have been litigating dischargeability in state court? (Bankr. N.D.GA.)
Is surrender of secured collateral post-confirmation per se bad faith to justify denial of the plan amendment? (Bankr. E.D.WI.)

To read more click here.

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Bankruptcy Court Discusses Novel Argument Contesting Cram Down of Totally Unsecured Mortgage

Posted by NACBA - August 5th, 2019

In 2004 the Debtors purchased their home with a $209,000.00 purchase money deed of trust held by Bayview Loan Servicing (Bayview). In 2006 the Debtors obtained a second mortgage from Madison Management Services (Madison). In 2017, the Debtors and Bayview entered into a loan modification agreement that provided for a new principal balance of $257,566.94.

The Debtors filed a chapter 13 bankruptcy. Bayview filed a claim indicating total indebtedness of $255,741.64. Madison filed a claim for $141,323.78. The stipulated value of Debtors’ is between $250,000.00 to $254,000.00.

Subsequently the Debtors filed a motion to avoid the second lien because it was completely unsecured.

Madison countered that its lien was not totally unsecured. Under Maryland state law, when a mortgage is refinanced to increase the principal balance, the amount of the increased balance is given lien priority as of the date of the loan modification, not the date of the original loan. Therefore, Bayview effectively has two effective dates for its liens. The balance owed at the time of the refinance has priority as of 2004, and another lien (in the amount of the increased balance) with priority as of 2017. Therefore, when calculating whether Madison’s lien is totally unsecured the court should take Bayview’s first lien (approximately $207,000), then Madison’s lien ($141,323.78), then the balance of the Bayview’s increased lien ($48,566.94). Since Madison’s lien is no longer totally unsecured, its lien is protected by the anti-modification provision in 11 U.S.C. @ 1322(b)(2).

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Court Improperly Considered Exempt Home Equity in Finding No Undue Hardship

Posted by NCBRC - July 29th, 2019

Under the totality of the circumstances test, the bankruptcy court erred when it found that the debtor’s student loans of $106,000 were not dischargeable as undue hardship because she had sufficient exempt equity in her home to fully repay the debt. Schatz v. Access Group, No. 18-16 (B.A.P. 1st Cir. July 26, 2019).

In an effort to increase her earning potential, Audrey Schatz, a single mother, obtained a law degree when she was in her fifties, financing her education with student loans. After she graduated and passed the bar, however, Ms. Schatz spent three years unsuccessfully seeking work in her field. Ultimately, she earned minimal income through a variety of avenues including self-employment, operation of a legal non-profit for low-income clients, using her home as an Air bnb, and performing real estate closings.

Payment of Pre-Petition Debt by Debtor’s Mother Is Preferential Transfer

Posted by NCBRC - July 25th, 2019

In what the panel called a strained application of a legal fiction, the BAP for the Tenth Circuit found that money paid by the chapter 7 debtor’s mother directly to one of the debtor’s creditors was a preferential transfer where it preceded the bankruptcy by fewer than 90 days, was secured by a promissory note by the debtor, and favored one creditor over the debtor’s other creditors. Stevens, Littman, Biddison, Tharp and Weinberg, LLC. v. Walters (In re Wagenknecht), 2019 WL 2353534 (B.A.P. 10th Cir. June 4, 2019) (case no. 18-93).

Case Bites: Interesting Issues and Decisions from This Week’s Cases

Posted by NACBA - July 19th, 2019

In an adversary discharge proceeding, can the bankruptcy court treat a motion for summary judgment (that asserts a new affirmative defense) as a motion to amend an answer? (Bankr. S.D.N.Y.)
Can a chapter 7 trustee be awarded attorney’s fees incurred in defense of the trustee’s fee application? (Bankr. D.Colo.)
Does a bankruptcy court have the authority to extend the time to file a dischargeability complaint on a motion filed after the deadline? (Bankr. N.D.Ga.)
Does a pre-petition default judgment operate as collateral estoppel in a non-dischargeability complaint for fraud in bankruptcy? (Bankr. E.D.Mich.)
Post-filing, can a mortgage company postpone scheduled nonjudicial foreclosure sales (rather than dismiss the action) without violating the automatic stay? (Bankr. D.Ut.)

To read the case outlines and opinions click here.

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City Did Not Violate Stay by Failing to Rescind Warrant

Posted by NCBRC - July 17th, 2019

City had no obligation under the automatic stay to take affirmative action to rescind a warrant for the debtor’s arrest or to issue a letter of compliance to the state, where the City had taken no post-petition action to enforce the warrant, and the debtor was not in compliance with the court order to pay a traffic fine. Edwards v. City of Ferguson, No. 18-6032 (B.A.P. 8th Cir. July 3, 2019).

Debt for Overpayment of DSO not Itself DSO

Posted by NCBRC - July 9th, 2019

Debts based on overpayments to debtors for government welfare benefits are not non-dischargeable domestic support obligations. Dennis v. Illinois Dept. of Human Serv., Nos. 18-2899, 18-2952 (7th Cir. June 27, 2019).

Chapter 13 debtor, Devan Dennis entered bankruptcy owing the Illinois Department of Human Services for overpayments under the state Child Care Assistance Program. Chapter 7 debtor, Tyeane Halbert, owed the DHS for overpayments of her SNAP benefits. The bankruptcy court rejected the DHS’s argument that the overpayments were non-dischargeable domestic support obligations under section 507(a)(1)(B) and DHS appealed.

NACBA filed an amicus brief on behalf of the debtors.

Halbert v. Illinois Dept. of Hum. Serv., Nos. 18-2899, 18-2952 (7th Cir.)

Posted by NCBRC - July 8th, 2019

Type: Amicus
Date: March 28, 2019
Description: Whether debt based on overpayment of SNAP benefits is non-dischargeable domestic support obligation
Result: Affirmed, June 27, 2019.

Halbert-7th-Cir-June-2019 Download

Halbert-NACBA-Amicus-7th-Cir-March-2019 Download

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Bankruptcy Court Suspends Counsel for Changing Schedules After Signing. Employing “Trust But Verify” the Court “Peeked and Shrieked.”

Posted by NACBA - June 26th, 2019

It’s going to be a bad opinion when the judge brings up Pandora’s Box in the beginning of the opinion and titles the last section of the opinion “This Is The End.”

On June 25, 2019 the Bankruptcy Court for the Southern District of Florida, in a 172 page opinion (including attachments), suspended an attorney from practice for two years before the Bankruptcy Court, terminated her CM/ECF privileges, referred the attorney to District Court’s attorney review committee and the Florida Bar with recommendations to disbar, and referred the attorney to the United States attorney for investigation.

The Debtor filed a chapter 7 bankruptcy. He was represented by the Attorney. Neither Debtor nor Attorney attended the 341 meeting. Subsequently the trustee filed an adversary objecting to the Debtor’s discharge pursuant to 11 U.S.C. § 727(a)(2), (3), and (4). The bases of the Trustee’s complaint were that Debtor’s schedules indicated virtually no detail, were not consistent with other documents the trustee received (tax returns), and that required information was apparently missing (missing lawsuit). In addition, the Trustee cited Debtor’s and Attorney’s failure to attend the 341 meeting. When asked by the Trustee, the Attorney said they didn’t plan on proceeding and wanted the case dismissed.

Two days after the adversary was filed, Attorney moved to withdraw as counsel for Debtor. The Debtor, now pro se, stated to the Trustee that the schedules were not provided to him prior to filing and that he did not sign the schedules that were actually filed.

To read more click here.

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

Case Bites: Interesting Issues and Decisions from This Week’s Cases

Bankruptcy Court Discusses Novel Argument Contesting Cram Down of Totally Unsecured Mortgage

Court Improperly Considered Exempt Home Equity in Finding No Undue Hardship

Payment of Pre-Petition Debt by Debtor’s Mother Is Preferential Transfer

Case Bites: Interesting Issues and Decisions from This Week’s Cases

City Did Not Violate Stay by Failing to Rescind Warrant

Debt for Overpayment of DSO not Itself DSO

Halbert v. Illinois Dept. of Hum. Serv., Nos. 18-2899, 18-2952 (7th Cir.)

Bankruptcy Court Suspends Counsel for Changing Schedules After Signing. Employing “Trust But Verify” the Court “Peeked and Shrieked.”

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