Discharge Injunction

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Government Penalty Not Dischargeable

A penalty owed to a governmental agency based on fraud falls under section 523(a)(2) and is therefore nondischargeable under section 1328(a) even though the debt also falls under section 523(a)(7), which is not listed in the debts excepted from discharge. Andrews v. Mich. Unemployment Ins. Agency, No. 16-2383, Kozlowski v. Mich. Unemployment Ins. Agency, No. 16-2680 (6th Cir. May 29, 2018).

In two separate cases, Chapter 13 debtors, Priscilla Andrews and Richard Kozlowski, sought to discharge penalties imposed upon them for fraudulent collection of unemployment insurance benefits. The bankruptcy courts denied discharge under section 1328(a). The district courts affirmed in both cases. [Read more…] about Government Penalty Not Dischargeable

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Nationstar Cannot Wriggle Out of Discharge Injunction Violation

Nationstar waived its right to argue that the court could not address the merits of the debtor’s discharge injunction case before ruling on class certification, and several of Nationstar’s post-discharge communications violated the injunction. Forson v. Nationstar Mortgage, LLC., No. 08-61001, Adv. Proc. No. 15-2137 (Bankr. S.D. Ohio March 21, 2018).

Terry Lee Forson reopened his Chapter 13 bankruptcy and filed an adversary complaint against Nationstar Mortgage LLC, alleging violation of the discharge injunction, Section 524(a)(2), based on Nationstar’s continued collection activities post-discharge. Contending that Nationstar’s conduct was part of an ongoing business practice, Mr. Forson sought class certification. He filed a motion for summary judgment to which Nationstar objected, arguing that, under the one-way rule, the court could not address the merits of the case until it had made a finding with respect to class certification. [Read more…] about Nationstar Cannot Wriggle Out of Discharge Injunction Violation

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Post-Petition Condo Fees Discharged in Chapter 13

Although a Chapter 13 debtor continues to accrue post-petition condo fees while in bankruptcy, discharge extends to his in personam liability for those fees. In re Wiley, No. 16-15361 (Bankr. D. Md. Jan. 26, 2018).

Chapter 13 debtor, Christopher Wiley, owned but did not live in a condominium unit subject to a mortgage lien and a lien held by the condominium association based on post-petition fees and assessments. The mortgagee was granted relief from stay to foreclose, but had not done so for over a year. Mr. Wiley’s confirmed plan surrendered the property to the lienholders for foreclosure, with any deficiency in sale proceeds being treated as an unsecured claim. The plan also provided that estate property would not vest in the debtor until discharge. [Read more…] about Post-Petition Condo Fees Discharged in Chapter 13

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Direct Mortgage Payments Not “Payments under the Plan” for Discharge Purposes

Payments made directly by the debtor to the mortgagee are not “payments under the plan,” within the meaning of section 1328, and the debtor’s failure to make those payments is not cause for dismissal without discharge. In re Gibson, No. 12-81186 (Bankr. C.D. Ill. March 5, 2018).

Bryan and Holly Gibson made all payments in accordance with their five-year Chapter 13 plan, and the trustee filed the notice of payment completion. Mortgage creditor, PNC, agreed that the Gibsons were current on their first mortgage and had paid the arrearage on the second mortgage through the trustee. However, it chose that moment to complain that, as of the beginning of the plan, the debtors had made none of the post-petition direct payments on their second mortgage. Based on that default, the trustee moved to dismiss under section 1307(c)(6). [Read more…] about Direct Mortgage Payments Not “Payments under the Plan” for Discharge Purposes

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Second Circuit Finds Arbitration Conflicts with Discharge Injunction

Arbitration of the debtor’s claim for violation of the discharge injunction presented an inherent conflict with the Bankruptcy Code, and the bankruptcy court did not abuse its discretion in refusing to compel arbitration. Anderson v. Credit One Bank, No. 16-2496 (2d Cir. March 7, 2018).

Credit One charged off Orrin Anderson’s credit card debt, sold the account to a debt buyer, and reported the default to the major credit reporting agencies. After Mr. Anderson obtained a Chapter 7 discharge, Credit One refused to change the credit report to reflect the discharge. Mr. Anderson reopened his bankruptcy and filed a class action suit complaining that Credit One’s inaction with respect to his credit reports and those of other putative class members violated Section 524(a)(2). The bankruptcy court rejected Credit One’s efforts to enforce the arbitration clause in the credit card agreement. On Credit One’s interlocutory appeal, the district court affirmed. In re Anderson, 553 B.R. 221 (S.D. N.Y. 2016). [Read more…] about Second Circuit Finds Arbitration Conflicts with Discharge Injunction

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$119,000 Sanctions for Discharge Injunction Violations

Continuous confusing contact with the discharged debtors by the mortgage servicer was appropriately sanctioned at $1,000 per violation, notwithstanding the servicer’s formulaic and contradictory disclaimers in some of the correspondence. Ocwen Loan Servicing v. Marino, Nos. 16-1229, 16-1238 (B.A.P. 9th Cir. Dec. 22, 2017).

Debtors, Christopher and Valerie Marino, surrendered their real property in their Chapter 7 bankruptcy. After they received their discharge in June, 2013, the court granted the mortgagee relief from the automatic stay and closed the case. From June 2013 through April, 2015, Ocwen, as servicer for the mortgagee, sent nineteen letters stating the amount owed on the debt as the “amount you must pay,” and providing payment due dates. Some of the letters contained the disclaimer that, “if you have received a discharge in bankruptcy, this notification is for informational purposes only and is not intended to collect a pre-petition or discharged debt.” Ocwen also made approximately one hundred calls to the Marinos seeking payment on the discharged debt. [Read more…] about $119,000 Sanctions for Discharge Injunction Violations

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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).

Hasley v. Irons (In re Irons) (Bankr.Neb., 2017)

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No Personal Liability for Post-Petition HOA Fees

The debtor was not personally liable for post-petition HOA dues despite the fact that title to the property remained in his name, where he had no “significant incidents of ownership” in the property. Hovious v. Bridgewater Homeowners Assn., No. 10-2917, Adv. Proc. 16-50195 (Bankr. S.D. Ind. Feb. 15, 2017).

In his 2010 chapter 13 bankruptcy petition, debtor, Daniel Lee Hovious, listed Bridgewater Homeowners Association as an unsecured creditor to which he owed 2009 HOA dues on his residence. He also stated his intention to surrender that property to the holder of the first mortgage. He ceased making HOA payments upon filing for bankruptcy. The court confirmed the plan and ultimately granted Mr. Hovious’s discharge.

Approximately four years post-discharge, Bridgewater sent Mr. Hovious a letter seeking payment of post-petition HOA fees. In response, Mr. Hovious filed an adversary complaint alleging violation of the discharge injunction.

Although Mr. Hovious surrendered the property, the mortgagee never foreclosed on it and title remained at all times in Mr. Hovious’s name. Bridgewater argued that the covenant for payment of HOA assessments runs with the land and, so long as title remained in Mr. Hovious’s name, he had personal liability for post-petition dues.

Noting that the issue was one of first impression, the court found that while Bridgewater’s actions may have violated the discharge injunction, such violation was based on a reasonable interpretation of current law and was not, therefore, willful. The court acknowledged that, under relevant law, HOA covenants to pay dues runs with the land, but it found that merely retaining title to the property was not enough to support personal liability for those dues. Rather, personal liability turned on the homeowner’s “incidents of occupancy.” In this case, the court found that, although Mr. Hovious used the address of the property for such things as voting and vehicle registration, he did not occupy the property or otherwise use it. The court was persuaded that Congress intended to permit discharge of dues under those circumstances, stating that in section 523(a)(16), “Congress indicated its intention that the § 1328(a) ‘super discharge’ cuts off obligations for post-petition homeowners association dues.”

The court entered judgment in favor of Mr. Hovious as to violation of the discharge injunction but declined to award damages.

Hovious Bankr. SD Ind. opinion Feb 2017

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Nationstar Drags its Feet to the Tune of $49,000

Calling Nationstar’s behavior reprehensible for its two-year failure to follow a court order and properly apply balloon payments, the court found it in contempt and awarded the chapter 13 debtor compensatory and punitive damages totaling $48,927.50. In re Rhodes, No. 11-18257 (Bankr. M.D. Fla. Feb. 3, 2017).

Chapter 13 debtor, Mary Katherine Rhodes, owned two non-primary-residence properties with mortgages held by Nationstar. After a hearing to value under section 506(a), in which Nationstar participated, the court bifurcated the claims into secured and unsecured portions. With respect to the secured portion, the plan provided for regular payments for twenty three months and balloon payments in month twenty four. When it came time to make the balloon payments, however, Ms. Rhodes was unable to finance them and her non-filing husband arranged to use his retirement account to make the payments.

The court granted the debtor’s motion to sell and issued Confirmation and Sale Orders compelling Nationstar to complete the deal and release its liens. Nationstar failed to acknowledge the motion or order. The debtor made the balloon payments to the trustee and Nationstar cashed the check in February, 2014, but did not apply the funds to the balloon payment or release the liens until twenty seven months later, in May, 2016.

In the intervening two years, Nationstar continued to send Ms. Rhodes notices of forced-placed hazard insurance and tax documents and continued to pay property taxes on the properties. After persistent but unsuccessful attempts to get Nationstar to comply with the order, Ms. Rhodes asked her U.S. Senator to intervene. In response to a letter from the Senator’s office, Nationstar indicated that it was seeking “investor approval” and that it was conducting “research” as to the cramdown and application of funds. In February, 2016, two years after the sale of the property, Nationstar sent Ms. Rhodes a notice of change in mortgage payments which it later withdrew as having been sent in error.

On March 1, 2016, Ms. Rhodes filed a motion for contempt. Nationstar failed to attend the hearing. After receiving an order to show cause why it should not be held in contempt Nationstar finally released the liens. At the contempt trial, it offered the defense that a “problem” had occurred to account for the two-year delay in properly applying the payment. The court turned a jaundiced eye, noting that Nationstar had been involved in over 300 chapter 13 cases before the court in the past five years and fully understood the concept and mechanism of cramdown.

The court applied its power under section 105(a) to find Nationstar in contempt, awarding compensatory damages and damages for mental distress, accountant fees, attorney fees, and punitive damages. Nationstar did not complain of the contempt finding but turned its attention to the sanctions themselves.

The court walked through its reasoning as to each portion of the damage award. With respect to compensatory damages, the court estimated the amount of time Ms. Rhodes had spent over the two years chasing after Nationstar and valued her time at $75/hr., for a total of $2,295. Ms. Rhodes sought $15,000 in mental distress compensation. Nationstar contended that her suffering was worth only $100/mo. The court, finding Nationstar’s offer “meager,” awarded $250/mo. for a total of $6,750.

As to fees, the court approved Ms. Rhodes’s accountant fee request of $4,220 as reasonable and necessary notwithstanding Nationstar’s vague objection to it as too high. Ms. Rhodes had had to have taxes redone due to inaccurate tax documents from Nationstar. With respect to the attorney’s fees, the court disallowed the fees that were for services predating the balloon payment, but found the remaining fees, at $350/hr., were reasonable and recoverable for a total of $10,662.50.

Finally, the court awarded punitive damages in the amount of $25,000. In support of this award the court noted Nationstar’s sophistication and experience in both mortgages and bankruptcy, its lack of any legitimate reason for failing to handle Ms. Rhodes’s case in a reasonable manner, its indifference to the rights of Ms. Rhodes, and its “arrogant defiance” of bankruptcy law and the authority of the court. The court found Nationstar’s “inability to comply with the Confirmation and Sale Orders for over two years despite numerous requests by the Debtor is inconceivable and reprehensible,” and that sanctions would curb future misconduct.

Rhodes Bank. MD Fla opinion Feb 3 2017