“A Chapter 13 debtor’s direct payments to a secured creditor under a ‘cure and maintain’ plan are ‘payments under the plan’ for purposes of § 1328(a), and a debtor who fails to make such payments is not entitled to a discharge under 11 U.S.C. § 1328(a).” In re Coughlin, No. 11-76202 and In re Sangamaya, No. 12-71109 (Bankr. E.D. N.Y. June 15, 2017). [Read more…] about Direct Payments to Mortgagee are “Payments under the Plan”
Some Federal Student Loans Cancelled in New Jersey
Approximately 2,200 students who enrolled in any one of five schools operated by Corinthian Colleges, Inc., a New Jersey for-profit entity, are eligible to have their federal student loans canceled. Corinthian Colleges ceased operations in 2015 under scrutiny by government entities into fraudulent conduct including misrepresentations made between 2010 and 2014 about post-graduate employment rates, the transferability of credits, and other issues. The schools affected by the loan cancellation are Everest Institute, Everest College, Everest University, Heald College, and Wyotech. Students who have their federal loans canceled will make no further payments and will receive a refund of payments already made. The loan cancellation was announced on May 22, 2017, in a Press Release issued by Attorney General Christopher S. Porrino’s Office. The Attorney General’s office is sending outreach letters and application forms to those students who may be eligible for the loan cancellation.
Equitable Estoppel vs. Right to Amend Schedules
Where new facts arose to support a claim for homestead exemption and the debtor did not make any misrepresentation upon which the trustee reasonably relied, the bankruptcy court erred in disallowing the exemption based on equitable estoppel. Lua v. Miller (In re Lua), No. 15-56814 (9th Cir. June 27, 2017) (unpublished).
Rosalva Lua claimed a homestead exemption in her initial bankruptcy schedules, removed the claim in her First Amended Schedules, and reasserted it in her Second Amended Schedules approximately three years later. The bankruptcy court sustained the trustee’s objection to the exemption based on equitable estoppel. The district court affirmed. [Read more…] about Equitable Estoppel vs. Right to Amend Schedules
Grace Period to Cure Arrearage Beyond Five-Year Plan Period
A bankruptcy court has the discretion to grant a grace period at the end of the five-year plan to a Chapter 13 debtor who has completed her plan payments but where there is a newly discovered arrearage. Klaas v. Shovlin (In re Klaas), Nos. 15-3341 & 16-3482 (3rd Cir. June 1, 2017).
Chapter 13 debtors, Paul and Beth Ann Klaas, successfully completed their plan according to its terms, but one month after completion, the trustee filed a motion to dismiss citing an unpaid arrearage of over $1,000. (The shortfall was apparently due to an increase in the Trustee’s fee during the term of the plan, and not to any missed payments.) In the motion to dismiss, the trustee stated that she would withdraw the motion if the Klaas paid the arrearage. They did so. By that time, however, a creditor, Elizabeth Shovlin, had joined the motion to dismiss and objected to its withdrawal. [Read more…] about Grace Period to Cure Arrearage Beyond Five-Year Plan Period
Loan Paid Directly from Dept. of Educ. to Penn State Not a Fraudulent Transfer
A Parent Plus loan made directly from the Department of Education to Penn State University before the debtor’s bankruptcy filing is not a fraudulent transfer where the funds were never in the debtor’s possession and would not have been available to his creditors. Eisenberg v. Pennsylvania State Univ. (In re Lewis), No. 16-12372, Adv. Proc. Nos. 16-0282, 16-0284 (Bankr. E.D. Pa. April 7, 2017). [Read more…] about Loan Paid Directly from Dept. of Educ. to Penn State Not a Fraudulent Transfer
Right to Dismiss Prevails Over Motion to Convert
A Chapter 13 debtor’s right to dismiss is absolute even in the face of a creditor’s prior motion to convert to Chapter 7. In re de Lamadrid Perez, 2017 WL 1458857 (Bankr. D. Puerto Rico, April 24, 2017) (No. 12-2042).
Two of Julio Enrique Gil de Lamadrid Perez’s creditors moved the court to convert his Chapter 13 case to Chapter 7. Mr. de Lamadrid Perez opposed the motion and then moved to dismiss under section 1307(b). The creditors argued that a debtor’s right to voluntarily dismiss his bankruptcy case is limited once there has been a motion to convert. [Read more…] about Right to Dismiss Prevails Over Motion to Convert
Personal Attacks on Trustee Not Sanctionable – But Not Helpful Either
Invective and personal attacks on the chapter 7 trustee did nothing to further the debtors’ arguments in their motion to dismiss but did not amount to sanctionable conduct. Geltzer v. Brizinova (In re Brizinova), No. 12-42935, Adv. Proc. No. 15-1073 (Bankr. E.D. N.Y. March 3, 2017) (on appeal to the District Court for the Eastern District of New York, No.17-1465).
The trustee, Robert Geltzer, moved for a contempt order and sanctions against Karimvir Dahiya, counsel for the debtors, Estella Brizinova and Edward Soshkin, based on statements he made in connection with a motion to dismiss an adversary complaint in the debtors’ bankruptcy case. In the motion to dismiss, Mr. Dahiya stated, among other things, “Geltzer having realized that he has gotten money from the sons, he could extract more, he has begun his extortionist journey again.” Generally, Mr. Geltzer maintained that Mr. Dahiya’s statements were part of a personal crusade against him, were vexatious and in bad faith, and represented a course of conduct Mr. Dahiya generally followed against bankruptcy trustees.
Mr. Geltzer also sought sanctions for a statement in the reply brief for the motion to dismiss concerning another case, Geltzer v. Ng (In re Ng), No. 12-1343, in which Mr. Dahiya represented the debtor. In the reply brief, Mr. Dahiya said of the settlement in Ng that it “was an Agreement, that was signed only on the basis of being urged: ‘Sometimes, it takes a stronger person to walk away.’ I decided to walk away.” Mr. Geltzer argued that the advice to “walk away,” was given by the mediator and its inclusion in the briefing in the Brizinova case was an impermissible disclosure of a statement made during mediation. He also argued that the statement was in contravention of the Stipulated Order and Mediation Order in the Ng case under which Mr. Dahiya agreed to comply with rules of professional conduct and the Local Bankruptcy Rules.
Beginning with Mr. Dahiya’s alleged violation of the Stipulated Order and Mediation Order in the Ng case, the Brizinova court found that an order out of another court enjoining certain conduct should be addressed by the court issuing the injunction. The Brizinova court therefore denied the motion for sanctions without prejudice with respect to that claim.
The court also addressed whether Mr. Dahiya’s comment concerning the Ng case, violated Local Rule 9019-1(1) which stresses nondisclosure of “views and suggestions of the mediation participants with respect to possible pathways to a settlement, any settlement proposals advanced by a party or the mediator, and whether a mediation participant was willing to accept a mediator’s proposal.” It found that, although Mr. Geltzer asserted that the comment was made by the mediator, Mr. Dahiya did not attribute the statement to any particular participant in the mediation process and the comment was otherwise too vague to violate the Local Rule.
Turning to Mr. Geltzer’s claims under section 105(a), Mr. Dahiya argued that the court did not have inherent power to sanction him for his conduct under that section. The court disagreed. Section 105(a) permits a court to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.” The court found that under the Code and Second Circuit precedent, a court has “the inherent authority to supervise the proceedings that take place before it and, as part of that authority, the ability to impose sanctions when necessary.”
The Second Circuit has found that to justify sanctions an attorney’s conduct must be entirely meritless, and he must have acted for improper purposes. Bad faith is essential to sanctions under section 105(a). Turning to the language Mr. Geltzer sought to have sanctioned, including “extortionist,” “threaten into further submission,” “unexpected accretion,” “frivolous,” and “dig more,” the court found that while the invectives likely detracted from any valid argument the debtors might have made, the language appeared to be in furtherance of Mr. Dahiya’s representation of the debtors. For that reason, the element of bad faith was not present and the language did not merit sanctions under section 105(a).
Finally, the court addressed Mr. Geltzer’s argument that Mr. Dahiya’s personal comments about him were in violation of the New York’s Rules of Professional Conduct, 22 NY CRR §§ 1200 et seq. which prohibit an attorney from “making multiple derogatory and unprofessional attacks upon the personal attributes of another attorney,” knowingly advance a claim that is unwarranted under the law, or otherwise fail to behave with a threshold amount of decorum in court proceedings. The court found that “viewed in the context of the Motion to Dismiss, the statements are more accurately viewed as rhetorical flourishes than as knowing and material statements that are false.” Moreover, the language did not cross the line between zealous representation and sanctionable expressions of personal opinion as to “the justness of a cause, the credibility of a witness, the culpability of a civil litigant or the guilt or innocence of the accused.” While Mr. Dahiya mentioned “extortion” in his list of invectives against Mr. Geltzer, he did not threaten to pursue criminal charges against him.
In conclusion, the court found that Mr. Dahiya’s statements in the context of the otherwise appropriate motion to dismiss, were not sanctionable. It denied the motion without prejudice with respect to Mr. Dahiya’s possible violation of the Ng court’s injunction order, and denied the remaining claims with prejudice.
FDCPA and Discharge Injunction Not Incompatible
An FDCPA claim based on efforts to collect a debt discharged in bankruptcy is not precluded by the Code’s discharge injunction. Barnhill v. FirstPoint, Inc., No.15-892 (M.D. N.C. May 17, 2017).
Lara Barnhill filed a class action complaint in district court alleging that FirstPoint, Inc. and FirstPoint Collection Resources made efforts to collect a debt after her debt had been discharged in chapter 7 bankruptcy in violation of the FDCPA, North Carolina Collection Agency Act (NCCAA). The complaint also made a claim for injunctive relief. FirstPoint moved to dismiss under section 12(b)(1) and (6) for lack of subject matter jurisdiction and for failure to state a claim.
FirstPoint argued that the district court lacked subject matter jurisdiction over the FDCPA and NCCAA claims because both consumer protection laws are preempted by the Bankruptcy Code’s discharge injunction. FirstPoint further argued that Ms. Barnhill failed to allege injury-in-fact and therefore lacked Article III standing.
With respect to the FDCPA, the district court noted that one federal law does not preempt another but that, where they deal with same subject matter one may repeal the other either by express direction by Congress or by implication if the two statutes are irreconcilable.
The Fourth Circuit has not decided the issue of FDCPA and Code compatibility, but the district court agreed with other courts finding that an action based on post-discharge collection efforts may be sustained under both statutes simultaneously [though, in this case, Ms. Barnhill did not include a claim based on violation of the discharge injunction]. The court specifically discussed Garfield v. Ocwen Loan Servicing, LLC, 811 F.3d 86, 89 (2d Cir. 2016), where the Second Circuit distinguished between actions under the FDCPA brought for conduct occurring while the bankruptcy case was open and cases in which the conduct occurred post-discharge. The Garfield court was persuaded that the Code and the FDCPA were compatible in the latter instance in part because, unlike automatic stay violations, the Code does not create a cause of action for violations of the discharge injunction. Furthermore, because the same conduct underlies both causes of action, a creditor can avoid violations of both the FDCPA and the Code by not trying to collect a discharged debt.
Turning to whether the Code preempts the NCCAA, the court explored the doctrines of field preemption, where Congress specifies that a federal law supplants state authority in a particular field, and conflict preemption, where a state law must yield to a federal law with which it actually conflicts. Where states traditionally have the power to create and enforce consumer protection laws, a court will find field preemption only where Congress has made clear that such preemption was its purpose. Because no such indication is found in the Bankruptcy Code, the court turned to whether the NCCAA was preempted as conflicting with the Code. To find such preemption, the Fourth Circuit looks to “whether it is impossible to comply with both the state and federal law or whether the state law presents an obstacle to the accomplishment of the purposes of the federal law.” The court found no such conflict. Violation of the NCCAA was based on the allegation that FirstPoint had attempted to collect an uncollectible debt. The fact that the debt was rendered uncollectible due to bankruptcy discharge, was irrelevant.
The court thus concluded that neither the FDCPA nor the NCCAA claims were preempted or precluded by the Bankruptcy Code.
FirstPoint next argued that Ms. Barnhill had not suffered any “concrete and particularized” injury-in-fact and therefore had no Article III standing to bring this action. While cautioning that generally mere violation of a statute does not satisfy the injury-in-fact requirement in the absence of evidence of its effect on the plaintiff, a “majority of courts have held that FDCPA violations, like the ones asserted in this case, are substantive violations and thus produce ‘concrete injuries’ sufficient to satisfy Article III’s requirement of injury-in-fact.” Furthermore, Ms. Barnhill alleged particularized injury in the form of emotional distress and harm to her credit rating. The court concluded that her allegations were sufficient to withstand a motion to dismiss.
Having found that subject matter jurisdiction survived the 12(b)(1) motion, the court turned to whether the complaint stated a claim for purposes of Rule 12(b)(6). To state a claim for violation of the FDCPA, a plaintiff must show that 1) she has been the object of collection activity, 2) by a debt collector, 3) engaging in conduct that violates the FDCPA. Here, FirstPoint, Inc. drew a distinction between itself and FirstPoint Collection Resources, arguing that unlike its counterpart, FirstPoint, Inc. is not a debt collector, and cannot be held vicariously liable for the conduct of FirstPoint Collection Resources.
Rejecting this argument, the court noted that Ms. Barnhill alleged that both FirstPoint, Inc. and FirstPoint Collection Resources, were debt collectors and that both made efforts to collect the discharged debt. These allegations were sufficient to withstand a motion to dismiss. The fact that FirstPoint, Inc. did not hold a state license to collect debts was not relevant to the inquiry as licensure is not necessary to a finding of an FDCPA violation. As to the conduct giving rise to the FDCPA claim, the court found it was enough that Ms. Barnhill alleged that she received a phone call from the defendants informing her that her discharged debt was owing and in collection and that it was affecting her credit.
For the same reasons, the complaint stated a claim under the NCCAA. The fact that the state law does require a permit for debt collectors did not defeat this claim as the court found that a debt collector acting in violation of the licensing law could still violate the NCCAA.
Finally, the defendants argued that injunctive relief is not available under either the FDCPA or the NCCAA and that claim should, therefore, be dismissed. Without deciding whether the relief sought was available, the court granted the motion to dismiss to the extent that the claim for injunctive relief was presented as a cause of action rather than as a form of remedy.
Debtor/Plaintiffs Overcome Hurdle to Class Certification
Denying the creditor’s motion to dismiss, the bankruptcy court in the Southern District of Texas found that it could exercise jurisdiction over a nationwide class and that the claims, based on abuse of process, satisfied the “core proceeding” requirements of subject matter jurisdiction. Jones v. Atlas Acquisitions, LLC, No. 15-34818, Adv. Proc. No. 16-3235 (Bankr. S.D. Tex. May 19, 2017).
Atlas Acquisitions filed a proof of claim in Katrina Jones’s chapter 13 bankruptcy. It later withdrew the claim. Ms. Jones then filed an adversary complaint on behalf of herself and others similarly situated, alleging “abuse of the bankruptcy system by [Atlas’s] willful and intentional disregard for the requirements for filing legitimate claims in many Chapter 13 cases throughout the country.” Specifically, the complaint alleged that, in accordance with its business model, Atlas routinely filed deficient proofs of claim only to withdraw them when challenged. The First Amended Complaint added Natasha Hill, a chapter 13 debtor in the Bankruptcy Court for the Western District of Louisiana (case no. 15-3166) as a named plaintiff and sought certification as a class action.
Atlas moved to dismiss the class action claims arguing: 1) that a bankruptcy court lacks subject matter jurisdiction under 28 U.S.C. 1334 to certify a nationwide class; 2) that the plaintiffs are not adequate class representatives, and, 3) that the class cannot be certified as a matter of law under the requirements of Rule 23(b)(3).
The court began with section 1334, which confers jurisdiction on the district courts over cases arising under Title 11, and section 157(a) and Texas District Court General Order 2012-6 which provide for referral of such cases to bankruptcy judges.
Relying on Bolin v. Sears, Roebuck & Co., 231, F.3d 970 (5th Cir. 2000), the court rejected Atlas’s initial argument that, while a bankruptcy court may exercise class-wide jurisdiction within its district, it cannot exercise jurisdiction over a nationwide class. In Bolin, the Fifth Circuit, upon finding that the Rule 23(b)(2) requirements for nationwide class certification were not established, did not question the district court’s subject matter jurisdiction over the proposed class and, in fact, remanded to the district court for further proceedings. Where the bankruptcy court’s jurisdiction is coextensive with the district court and where the district court has jurisdiction over a nationwide class of plaintiffs, the bankruptcy court does as well.
The court turned to the strictures on bankruptcy court jurisdiction under which the case must be a “core” proceeding either “arising under,” “arising in,” or “related to” a case under Title 11.
Atlas argued that the abuse of process claims here arose not out of a bankruptcy proceeding but under the court’s inherent authority under section 105(a) and Bankruptcy Rule 3001, and that the plaintiffs’ claims for injunctive and declaratory relief are found in Title 28 rather than Title 11.
The court found that the claims both arose under, and arose in, a case under Title 11. To “arise under” Title 11, the action must involve a substantive right created by the Code or by the Bankruptcy Rules. While section 105(a) does not create substantive rights, it empowers a court to enforce rights created elsewhere in the Code or Rules. Atlas argued that neither Rule 3001 nor injunctive and declaratory relief offered under Title 28, constitute substantive rights under Title 11. The court disagreed, finding that, while many of the Bankruptcy Rules do not create substantive rights, Rule 3001 is not one of them. Rather, Rule 3001(c)(2)(D)(iii) provides that a plaintiff may obtain “appropriate relief,” expenses and attorney’s fees upon a finding that the defendant has failed to attach supporting documentation to a proof of claim. This provision for relief, the court found, is a substantive right under the Bankruptcy Rules. Therefore, the action “arose under” Title 11.
The court also found that it had “arising in” jurisdiction because, on their face, the claims were based on improper filing of a proof of claim under sections 501 and 502 and would “have no existence outside of the bankruptcy.”
Having established its jurisdiction, the court turned to the pleading requirements of Rule 23(a)(4) and (b)(3) to determine whether the complaint stated a claim for relief under Rule 12(b)(6). Atlas argued that Ms. Jones could not be a class representative because she had an inherent conflict of interest between the other class members and her creditors in her personal bankruptcy. In support of this and other propositions, Atlas asked the court to take judicial notice of certain statements included in the record.
The court declined to do so, stating that, where Atlas failed to satisfy the two-pronged test for judicial notice required by Fed. R. Evid. 201(a), it would be premature to make factual findings on Atlas’s arguments without an evidentiary hearing on class certification.
Finally, the court rejected Atlas’s argument that individual issues predominate in this case and that it was therefore inappropriate to certify a class under Rule 23(b)(3). Again, the court found the face of the complaint stated a claim and that the issue of class certification was appropriately dealt with in an evidentiary hearing.
No False Representation in Loan Acquisition
Creditors failed to prove that the debtor made false representations with respect to a loan acquired by the debtor’s father claiming to represent the debtor’s company. Hasley v. Irons (In re Irons), No. 15-40876, Adv. Proc. No. 15-4051 (Bankr. D. Neb. March 9, 2017).
Ronald and Vicki Hasley, d/b/a Swite Enterprise, brought an adversary proceeding against the chapter 7 debtor, Tyler B. Irons, seeking an order of nondischargeability under section 523(a) with respect to a state court judgment on a debt.
The litigation between the parties began when the Hasleys filed suit in state court against the debtor; his father, Jack Irons; and his company J & R Motors, LLC, to recover approximately $190,000 Jack Irons borrowed from the Hasleys. The state court rendered judgment against the defendants based, at least in part, on findings of facts resulting from Tyler Irons’s failure to respond to requests for admissions which the court then deemed admitted. Tyler Irons filed chapter 7 bankruptcy shortly thereafter and the Hasleys filed an adversary complaint, seeking an order that the debt was nondischargeable under sections 523(a)(2)(A) and (a)(4).
At trial on the adversary complaint, the debtor, Tyler Irons, testified that neither he nor his company received any money from the Hasleys and further, that the state court judgment was a default judgment caused by the legal malpractice of Mr. Irons’s state court attorney. He admitted that, at his father’s request, he signed an “Accounts Receivable/Specific Assignment,” with respect to the loan and that pursuant to that agreement, he made cash payments to the Hasleys.
Section 523(a)(2)(A) renders nondischargeable a debt acquired through false representation. The Hasleys argued that Jack Irons made such representations by claiming to be an agent of Tyler Irons’s company and that, as 100% owner of the company, Tyler was therefore liable for those misrepresentations. Because the Hasleys did not testify at the trial, they offered the factual findings that led to the summary judgment in state court as support for this claim, arguing that the doctrine of res judicata prevented Tyler Irons from denying those factual findings.
Application of res judicata requires that for a factual finding in a previous action to be admitted in a later case as a matter of law, it must have been directly addressed or litigated in the former proceeding. In this case, however, the state court judgment was based on requests for admissions that Mr. Tyler failed to answer but were not actually litigated. Moreover, Nebraska rules limit use of admissions to the case in which they were admitted. Without those admissions, there was no testimony at the adversary hearing from either Mr. Hasley or Jack Irons to support a claim that Tyler Irons made any representations at all, much less ones that were reasonably relied upon by the Hasleys.
The case also failed under section 523(a)(4) which applies to misconduct by a fiduciary. The court explained that a fiduciary relationship must pre-date the debt and does not apply to “trusts that may be imposed because of the alleged act of wrongdoing from which the underlying indebtedness arose.” As to whether the Assignment document signed by Tyler Irons created a trust, the court found that it did not. Rather, it was a general, common-law contract pursuant to which Tyler Irons apparently made some cash payments to the Hasleys but did not establish a trust or escrow account or otherwise create a trust relationship.
The court granted partial summary judgment in favor of the debtor on the causes of action under sections 523(a)(2)(A) and (a)(4).