NCBRC Editor

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Court Denies “Comfort Order” to File Late POC

Neither the Code nor the Bankruptcy Rules permit a Bankruptcy Court to grant a “comfort order” allowing a late proof of claim where no objection has been made to the filing. In re Rodriguez, No. 16-70150 (Bankr. S.D. Tex. Feb. 13, 2017).

Karina Rodriguez listed Ovation as a tax lien creditor on Schedule D of her chapter 13 petition. Ovation filed its claim, along with a motion to allow late filing, after the filing deadline had passed. Ovation’s contemporaneous motion objecting to confirmation because the plan did not provide for full payment of its claim was granted pursuant to an agreed order. [Read more…] about Court Denies “Comfort Order” to File Late POC

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Alaska, Georgia and Louisiana Top CFPB’s List for Consumer Complaint Filings

In its monthly complaint report, the CFPB reported that the top three financial products or services receiving complaints in December, 2016, were, in descending order, debt collection, credit-reporting, and mortgages. Mortgage servicers garnered complaints for such things as misapplication of payments and ineffective resolution of borrowers’ problems with their loans. To account for monthly and seasonal fluctuations, the report compares complaints against companies in three-month segments to the same period the prior year. Equifax, Wells Fargo and TransUnion had the dubious honor of being the top three complained–about companies in the period from August to October, 2016. With respect to complaints relating to types of loans, the three-month average for complaints concerning student loans rose by 109% over the same period last year. The three states with the greatest increase in consumer complaints were Alaska, Georgia and Louisiana.

CFPB Monthly-Complaint-Report Feb 2017

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Forced Vesting Does Not Satisfy Confirmation Requirements

Section 1322(b)(9) does not permit a court to confirm a plan vesting surrendered property in an unwilling creditor. Wells Fargo v. Sagendorph, No. 15-40117 (D. Mass. Jan. 23, 2017).

Paul Sagendorph’s chapter 13 plan proposed to surrender property on which Wells Fargo held the sole lien, and vest title in Wells Fargo notwithstanding Wells Fargo’s objection. The bankruptcy court held that the Code permitted Mr. Sagendorph’s treatment of the secured debt and confirmed the plan. In re Sagendorph, No. 14-41675 (Bankr. D. Mass. June 2015).

On appeal the district court, like the bankruptcy court, looked to the interplay between sections 1322 and 1325.

Section 1325(a) provides that, in the absence of objection by a creditor, a plan shall be confirmed so long as it meets certain conditions with respect to secured debts. Subparagraph 1325(a)(5)(C) permits a debtor to meet the requirements for confirmation by surrendering the property that secures the lien. Section 1322(b)(9) states a plan may “provide for the vesting of property of the estate, on confirmation of the plan or at a later time, in the debtor or in any other entity.”

The district court began its analysis with the statutory text which it found to be unambiguous. “Surrender” means “make available” and says nothing with respect to the party to whom the property is surrendered. To “vest” is to confer title on another. Both the bankruptcy court and the district court agreed that surrender and vesting were separate and distinct concepts. However, where the bankruptcy court interpreted vesting as an action by the debtor—conferring title upon another, the district court interpreted it as an action by the creditor—accepting transfer of title. The district court therefore concluded that vesting required a willing recipient.

The district court found the bankruptcy court erred in treating surrender and vesting as coincident in time and, therefore, essentially synonymous. Because the plan tied surrender to transfer of title, the district court found the mandatory confirmability that would normally accompany surrender was incorrectly tied to permissive vesting by the bankruptcy court.

The court also disagreed with the bankruptcy court’s analogy between vesting in chapter 13 and chapter 11. The chapter 11 vesting provision, section 1123(a)(5)(B), differs in two significant respects from chapter 13’s. First, the chapter 11 provision is mandatory; it requires that a plan, to be confirmed, shall provide for vesting or other form of implementation. Second, the forced vesting in chapter 11 is implemented by section 1129(b)(2)(A) which requires a court to find that the property being vested in the creditor is “indubitably equivalent” to the debt. No such equivalence is required by chapter 13.

The court suggested that while the avenue pursued by Mr. Sagendorph in this case was unavailing, there was room to explore other ways a court could use its equitable power to assist a debtor to achieve his fresh start. Citing United States v. Energy Res. Co., Inc., 495 U.S. 545, 549 (1990), the court the conceded that “[f]orced vesting under Chapter 13 not only addresses debtors’ evolving needs in the aftermath of the housing market crisis but is also ‘consistent with the traditional understanding that bankruptcy courts, as courts of equity, have broad authority to modify creditor-debtor relationships.’” It went on to suggested use of section 1322(b)(2) where the property at issue is not a debtor’s principal residence, or the Code sections implicated by section 1322(c), or perhaps substitution of in-kind payments rather than cash.

Sagendorph D. Mass opinion Jan 2017

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Cross-Collateralized Loans May Be Crammed Down

Cross-collateralized loans were not immune from cramdown where they did not have a “close nexus” to the purchase of the collateral vehicles for purposes of the 910-claim exception to cramdown, and motor vehicles are not “any other thing of value” for purposes of the second exception. In re McPhilamy, No. 16-10238 (Bankr. S.D. Tex. Jan. 31, 2017).

In their chapter 13 plan, the debtors, Sean and Bertha McPhilamy, sought to treat as unsecured five of the seven claims held by Rio Grande Federal Credit Union (RGFCU). The claims were based on loans cross-collateralized by two motor vehicles, a Honda Civic and a Chevy Camaro. The loans were executed at least within 910 days, and in some cases within one year, of the McPhilamy’s bankruptcy. The plan proposed to treat the other two of the seven claims (claims 10 and 12) as secured because they were for loans used to purchase the two vehicles at issue. Those two debts exceeded the value of the vehicles.

Though RGFCU did not object to confirmation, the trustee moved to dismiss or convert on the basis that the debtors had failed to propose a confirmable plan.

The case required the court to determine whether the loans were purchase money security interests, or were “any other thing of value,” under either of the two exceptions to cramdown found in the hanging paragraph of section 1325(a).

Beginning with whether the cross-collateralized loans were purchase money security interests, the court turned to state law. Texas defines a purchase money security interest loan as a loan that is included in the price of the vehicle and is incurred to make it possible to purchase the vehicle. With respect to the “price” of the vehicle, the definition is broad enough to include associated costs that do not necessarily go directly to the cost of the vehicle itself. There must, however, be a “close nexus” between the loan and the purchase of the vehicle.

The court then looked to each of the five cross-collateralized loans to determine if they fit this definition, beginning with the single loan cross-collateralized by the Honda Civic (claim 7). Finding that it was not a purchase money security interest, the court noted that claim 10, which included documents related to vehicle ownership such as the certificate of title, covered the entire cost of the vehicle. Claim 7, on the other hand, although taken out the same day as claim 10, was not used to pay any associated costs of the vehicle.

The same was true of the claims cross-collateralized by the Camaro. The one loan (claim 12) included the vehicle ownership documents and covered the cost of the car. The other loans which were not made either at the time of purchase or at the time of refinancing, did not advance the McPhilamy’s ownership interest in the vehicle or make the purchase possible in any way. The court concluded that none of the loans were 910-claims and, therefore, they were not subject to that exception to cramdown.

The court then addressed whether the loans fell under the second exception to cramdown: “any other thing of value.” For that exception to apply, the debt must have been incurred to facilitate the acquisition of the collateral within one year of bankruptcy. Of the four claims that met the one-year bar, the court found that although the second exception does not explicitly refer to purchase money security interests, the entire hanging paragraph applies only to those interests. Therefore, for the same reasons the first exception was inapplicable, the court found that the second exception did not apply.

Furthermore, though it was unnecessary to its conclusion, the court agreed with the McPhilamy’s argument that “any other thing of value” does not include motor vehicles. Applying the rule of statutory construction that “the specific governs the general,” the court found because the first exception explicitly deals with motor vehicles, the second, more general, exception deals with items other than motor vehicles. The use of the word “other” further supports this view, as including motor vehicles in that exception would render the word meaningless.

The court concluded that the debtors’ plan properly bifurcated and crammed down the five cross-collateralized claims and confirmed the plan.

McPhilamy Bankr SD Tex opinion Jan 2017

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NCBRC’s Year in Review

Financially distressed debtors seeking the fresh start offered by bankruptcy, often lack the resources to pursue important issues at the appellate level. To equalize the playing field between consumer debtors and their creditors, the NACBA Board created the National Consumer Bankruptcy Rights Center (NCBRC or “Nicbric”), a 501(c)(3) organization. Since its inception in 2010, NCBRC has provided support to consumer bankruptcy debtors and their attorneys in cases of national importance. NCBRC fulfills its mission through three programs. Under the Amicus Program, NCBRC has filed briefs in cases addressing such vital issues as the invidious practice of debt collectors filing stale claims and the misapplication of judicial estoppel by the courts. In its Pro Bono Appellate Program, NCBRC has worked with attorneys from leading bankruptcy firms around the country who have donated over 300 hours to the amicus project. Finally, NCBRC’s Educational Program is devoted to supporting the bankruptcy bar by providing education on current issues in consumer bankruptcy. To this end, NCBRC’s Project Director, Tara Twomey, is an active participant in in-person and online training programs.
To learn more about NCBRC in general and to read about specific cases in which NCBRC filed amicus briefs in 2016, go to NCBRC Year in Review 2016.
To continue this great work we need your help. Consider contributing today by clicking here.

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Property Tax Refund Not Exemptible

A state property tax refund intended to “provide property tax relief to certain persons who own or rent their homesteads,” is not “government assistance based on need,” for purposes of Minnesota exemptions. Hanson v. Seaver (In re Hanson), No. 16-6023 (B.A.P. 8th Cir. Jan. 6, 2017).

Upon objection by the chapter 7 trustee, the Bankruptcy Court found debtor, Sheri Lynn Hanson, was not entitled to the public assistance exemption based on her refund under the Minnesota Property Tax Refund Act.

On appeal, Ms. Hanson argued that In re Hardy, 787 F.3d 1189 (8th Cir. 2015), which reversed the BAP to hold that the Missouri child tax credit refund was exemptible public assistance, abrogated Manty v. Johnson (In re Johnson), 509 B.R. 213 (B.A.P. 8th Cir. 2014), in which the BAP held that the Property Tax Refund Act was not exemptible as public assistance. The BAP rejected this argument, finding that the Eighth Circuit decision in Hardy was based on its disagreement with the BAP as to whether the child tax credit refund fit the definition of government assistance based on need. Relying on the history of amendments to the statute which were geared toward increasing benefits to poorer taxpayers, the circuit court found that the child tax credit refund fit the definition of public assistance.

Turning to the legislative history of the property tax refund statute, the court found amendments to that Act showed that the legislature had “rais[ed] the maximum eligible household income and lower[ed] the threshold income percentage for higher income individuals.” Taking into consideration the property tax relief statute as a whole, the court noted that other sections were not tied to income. Contrary to Ms. Hanson’s assertion, the court saw “no basis in the legislative history for a finding that the Act was intended to benefit low-income homeowners.” Based on this analysis, the court found that it was bound by the holding in Johnson and affirmed the bankruptcy court decision.

Hanson 8th BAP opinion Jan 2017

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Escrow Is Not Separate Collateral

Provisions in a deed of trust, including an obligation for the debtor to maintain an escrow account, are incidental to the residential security interest and do not remove the claim from bankruptcy’s anti-modification provision. Birmingham v. PNC Bank, No. 15-1800 (4th Cir. Jan 18, 2017).

Chapter 13 debtor, Gregory John Birmingham, filed an adversary complaint seeking to cram down his mortgage with PNC and arguing that the anti-modification provision did not apply because PNC’s claim was not secured solely by his residence. Specifically, Mr. Birmingham pointed to the provisions in the lending agreement requiring him to: 1) maintain an escrow account to cover obligations such as property taxes, 2) maintain property insurance, and 3) assign to PNC any proceeds from third parties arising out of judgments, settlements or other actions involving the property.

The bankruptcy court granted PNC’s motion to dismiss and the district court affirmed.

On appeal, the Fourth Circuit began with Nobelman v. Am. Sav. Bank, 508 U.S. 324 (1993), in which the Court found section 1322(b)(2)’s anti-modification provision precluded bifurcation of a claim secured by the debtor’s residence into secured and unsecured portions. The court then turned to the Bankruptcy Code’s definition of “residence” under section 101(13A)(A) which includes “incidental property, without regard to whether that structure is attached to real property.” Incidental property is also separately defined in section 101(27B) as including “property commonly conveyed with a principal residence in the area where the real property is located,” such as “escrow funds, or insurance proceeds.”

The court found, under these definitions, that the provisions in the deed of trust did not create separate collateral for the loan, but protected the lender’s security interest in the real property and were, therefore, incidental to that interest. The court distinguished cases in which additional property included in the deed of trust was deemed to waive the lender’s anti-modification protection. For instance, the lending agreement in Hammond v. Commonwealth Mortg. Corp. of Am., 27 F.3d 52 (3d Cir. 1994), which provided a security interest in appliances, machinery, furniture and equipment, in addition to the residence, waived the lender’s anti-modification protection.

Mr. Birmingham cited In re Bradsher, 427 B.R. 386 (Bankr. M.D. N.C. 2010) and In re Hughes, 333 B.R. 360 (Bankr. M.D. N.C. 2005), for the proposition that a security interest in escrow funds was separate from the interest in the residential property. The court found those cases inapposite. In both Bradsher and Hughes, the language of the deed of trust “expressly provided that escrow payments constituted additional security for the loan.” Because the case before it did not involve similar language, the court declined to address the holdings in Bradsher and Hughes.

The court rejected Mr. Birmingham’s request that it look to Maryland law to determine whether a security interest was created in separate collateral by the language of the deed of trust. Even if application of Maryland law would lead to a different result, the court found, state law would be preempted by the definitions and provisions in the Bankruptcy Code.

Finally, the court reasoned that because most mortgages include provisions similar to those at issue here, any other finding would effectively eviscerate the anti-modification provision. The court, therefore, affirmed the judgment of the district court.

Birmingham 4th Cir. opinion Jan 2017

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CFPB Goes After Student Loan Servicer

In a Press Release issued on January 18, the CFPB announced that it was suing the nation’s largest student loan servicer, Navient Corporation, for illegal activity at every stage of the student loan process. The company is accused of systematically creating obstacles to repayment by providing bad information, incorrectly processing payments and failing to act on customer complaints. The complaint alleges that Navient’s conduct resulted in borrowers paying much more than they would have had their loans been properly serviced and had they been given accurate information about alternative repayment plans.

Navient, formerly part of Sallie Mae, Inc., services more than 12 million student loans approximately half of which are through its contract with the Department of Education.

According to CFPB Director, Richared Cordray, “For years, Navient failed consumers who counted on the company to help give them a fair chance to pay back their student loans. At every stage of repayment, Navient chose to shortcut and deceive consumers to save on operating costs. Too many borrowers paid more for their loans because Navient illegally cheated them and today’s action seeks to hold them accountable.”

Specifically, the CFPB accuses Navient and two of its subsidiaries, Pioneer Credit Recovery and Navient Solutions, of:

  1. Failing to correctly apply or allocate payments to borrower’s accounts,
  2. Steering borrowers who had trouble repaying their loans away from the lower repayment plans they were entitled to under federal law and into forbearance programs which allow interest to accrue while the borrower is on hiatus from repaying the loan,
  3. Failing to inform borrowers enrolled in income-driven repayment plans of the need to renew those plans annually,
  4. Deceiving private student loan borrowers as to the steps necessary to release a co-signer from the loan,
  5. Harming the credit of disabled borrowers including severely injured veterans.

The lawsuit alleges violations of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the FCRA and the FDCPA.

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City Lacked Standing to Object to Plan’s Tax Redemption Provision

The City of Philadelphia lacked standing to object to the debtor’s plan provision under which he proposed to redeem over the life of the plan property sold in a tax sale. In re Wilson, No. 15-6385 (E.D. Pa. Dec. 28, 2016)

Earl Wilson failed to pay his city property tax. As a result, the property was sold at auction and sold again to a “subsequent purchaser” in accordance with Pennsylvania’s Municipal Claims and Tax Lien Act (“MCTLA”). That law permits a tax debtor to redeem property within nine months of sale. Mr. Wilson filed for chapter 13 bankruptcy in which his revised Fifth Amended Plan proposed to pay the redemption amount over the course of the plan. The bankruptcy court confirmed the plan over the City’s objection specifically finding that the City lacked standing to object to that portion of the plan providing for redemption of the property.

On appeal the district court looked first to the City’s standing to appeal the bankruptcy court’s confirmation order. It began with bankruptcy’s “person aggrieved” standard for appellant standing. Finding this standard more stringent than general Article III appellate standing, the court stated that the standard “is met only by persons whose rights or interests are directly and adversely affected pecuniarily by an order of the bankruptcy court.” Standing cannot be based on speculative or collateral injury.

The City argued that by permitting Mr. Wilson to redeem the property over the course of his plan instead of within the nine month redemption period proscribed by the MCTLA, the bankruptcy court’s confirmation order injured it in three ways. It 1) diminished the City’s ability to use tax sales as a means of generating revenue and keeping properties on productive tax rolls, 2) increased uncertainty of ownership upon Sheriff’s sale, and 3) put the property back into the hands of a debtor who has proven himself unable or unwilling to pay his tax obligations.

The court found these injuries to be “speculative” in part because they relied on assumptions that might never come to pass: that fewer investors would be inclined to purchase tax-indebted property and that the sale prices would therefore be reduced. The court found the assumption that Mr. Wilson would not pay future taxes and that the subsequent purchaser would pay them, was likewise a matter of speculation. The court, therefore, found that the City lacked standing to appeal the bankruptcy court’s confirmation order.

The court found, however, that the City had standing to appeal the bankruptcy court’s finding that it lacked standing to object to the plan. This inquiry required the district court to examine whether the City met the standard for objecting to a plan under section 1324(a) which gives standing to a “party in interest.” Unlike appellate standing, standing under section 1324(a) is coextensive with Article III standing. The party seeking standing must show injury in fact, which is traceable to an action of the debtor, and which is redressable by a favorable decision.

Even under the less stringent standing analysis, the City’s challenge to the bankruptcy court’s order failed for the same reasons its argument relating to appellate standing failed. Its alleged injury was too speculative to confer standing under section 1324(a). The City could not establish with any degree of certainty that Mr. Wilson would fail to pay future property taxes or that the City would be harmed by such failure. Increased “risk” of injury based on hypothetical future conduct by Mr. Wilson was not the concrete injury in fact required for standing to object to confirmation.

The court affirmed the bankruptcy court’s finding that the City lacked standing to challenge plan confirmation.

Wilson ED Pa opinion Dec 2016