National Consumer Bankruptcy Rights Center

Protecting The Rights Of Consumer Debtors In Bankruptcy

_3rd Circuit

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Debtor Misled Lender as to Discharge of Debt

The debtor’s conduct gave the lender reason to believe that the debt owed to him was not discharged, so the bankruptcy court did not err in finding that the lender’s continued collection efforts lacked the requisite scienter to support a contempt sanction for violation of the discharge injunction. Bernhard v. Kull (In re Bernhard), No. 22-854 (E.D. Pa. Feb. 3, 2023).

When his business began to suffer financially, the debtor borrowed $60,000 from a childhood friend. He made sporadic efforts to pay the debt, but at one point he told the lender he might have to file for bankruptcy. He assured the lender that if he did file, he would not include the debt in his bankruptcy. When the debtor finally did file for Chapter 7 bankruptcy, he did not list the debt in his schedules, inform the trustee or the court of the debt, or inform the lender of the bankruptcy. The lender therefore didn’t learn of the bankruptcy until the debtor received his discharge. Over a year after discharge, the debtor executed a new promissory note to the lender and made more payments on the debt.

At some point, however, the lender grew impatient with the slow progress on repayment and filed suit in state court. The debtor returned to the bankruptcy court and filed an adversary proceeding against the lender and his attorneys seeking a finding of contempt for violation of the discharge injunction. The bankruptcy court found that the debt had been discharged and that the defendants violated the discharge injunction. But the court declined to hold the defendants in contempt finding that they lacked the requisite scienter.

The only issues raised in the debtor’s appeal to the district court related to the bankruptcy court’s findings that 1) the lenders had no notice of the bankruptcy case until it was too late to seek a finding that the debt was nondischargeable, 2) that the defendants lacked the requisite scienter to justify a contempt order, and 3) that the debtor was not entitled to any relief other than a declaration that the debt was discharged.

The court set out the requirements for establishing contempt for a discharge violation: “(1) a discharge order has been entered (discharging the applicable debt); (2) the creditor had notice of the discharge order; (3) collection efforts continued regardless; and (4) there is no objectively reasonable basis for concluding that the creditor’s conduct might be lawful under the discharge order.”

Here the court took into consideration the long-term friendship between the parties, the debtor’s efforts to repay the loan including executing a post-discharge promissory note and making payments, and the debtor’s failure to tell the lender that he had filed for bankruptcy. The court found no error in the bankruptcy court’s finding that the defendants were unaware of the debtor’s bankruptcy filing until it was too late to file objections. In addition, the court found that the debtor indicated through word and action that he intended to repay the debt even after he received his discharge. All of these things gave the lender a reasonable basis to believe that the debt was not discharged and that he was within his rights to pursue repayment.

The court thus concluded that the bankruptcy court did not commit clear error in finding no basis for a contempt order against the defendants, nor did it err in finding that the only relief to which the debtor was entitled was an order declaring the $60,000 debt discharged.

The debtor has filed an appeal to the Third Circuit, case no. 23-1358.

Bernhard ED Pa Feb 2023

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Tax Sale Survives Multiple Attacks

The bankruptcy court applied the proper standard for determining “reasonably equivalent value” in the tax sale of the debtor’s home where it used a hypothetical foreclosure sale as the comparator rather than the fair market value. The Rooker-Feldman doctrine prevented the bankruptcy court from nullifying the sale despite procedural irregularities. And even where the debtor won, she lost. The court limited her damages based on the tax buyer’s violation of state consumer protection laws to minor pecuniary loss where it found emotional distress damages are unavailable under state law. Marshall v. Abdoun (In re Marshall), No. 22-10 (E.D. Pa. March 20, 2023).

After the debtor and her husband split up, he agreed to pay taxes on their marital home but failed to do so. The property was sold to Yasir Abdoun for $29,000 in a tax sale without the hearing required by state law. The fair market value of the home was $76,400. In March 2015, before the debtor knew her home had been sold, Mr. Abdoun and two police officers showed up at her house where only her minor son was home and demanded that they vacate the property. Thus began nine months of threats, demands, and public humiliation while the debtor tried to recover her home and Mr. Abdoun tried to evict her from it.

In December 2015, the debtor filed for Chapter 13 bankruptcy proposing to pay 100% of secured debt including that held by Mr. Abdoun. Mr. Abdoun filed a claim for $45,552.11 representing the $29,000 purchase price, $2,900 in interest, $11,200 of “rent,” $593 for homeowner’s insurance, $1,059.11 for real estate taxes, and $800 for water.

The debtor filed an adversary complaint against Mr. Abdoun seeking to avoid the transfer of property as constructively fraudulent under section 548(a)(1)(B)(i)-(ii)(I), and to recover the property under section 550(a)(1). In an amended complaint she claimed Mr. Abdoun’s deed for her property was invalid.

She also alleged that Mr. Abdoun violated Pennsylvania’s Fair Credit Extension Uniformity Act (the “FCEUA”), and the Unfair Trade Practices and Consumer Protection Law (the “UTPCPL”). The debtor asked the court to set a redemption amount of $19,000 and categorize the claim as generally unsecured. At trial, the debtor added a claim for violation of the automatic stay. At that time, Mr. Abdoun also reduced his claim to the $29,000 he paid for the property.

The bankruptcy court denied the debtor’s avoidance claim finding that she failed to show that the amount the property sold for was not what she would have received had the property been sold at foreclosure auction. The court found, however, that Mr. Abdoun’s conduct in trying to remove her from the property violated both the UTPCPL and the FCEUA, and that she was entitled to damages under the UTPCPL. The bankruptcy court found that the Rooker-Feldman doctrine precluded it from nullifying Mr. Abdoun’s deed.

As to damages, the court found that the debtor was entitled to recover only her pecuniary loss of $200 plus a $100 statutory enhancement. It set the redemption price at $28,700 representing the amount Mr. Abdoun paid minus the damages to the debtor. The court denied the debtor’s motion for reconsideration and she filed an appeal to the district court.

On appeal, the district court began with the application of the Rooker-Feldman doctrine to the debtor’s claim that the sale was invalid due to failure to follow state hearing procedures. That doctrine bars review of a state judgment by a federal court if “(1) the federal plaintiff lost in state court; (2) the plaintiff complain[s] of injuries caused by [the] state-court judgments; (3) those judgments were rendered before the federal suit was filed; and (4) the plaintiff is inviting the district court to review and reject the state judgments.”

Here, the debtor relied on James v. Draper (In re James), 940 F.2d 46 (3d Cir. 1991), which established a void ab initio exception to the Rooker-Feldman doctrine. The debtor argued that the court entering judgment of the sale to Mr. Abdoun lacked subject-matter jurisdiction because the sale took place without a hearing by state-required procedures, and therefore the void ab initio exception applied.

The district court found, however, that post-James cases, such as Todd v. United States Bank National Association, 685 F. App’x 103 (3d Cir. 2017), questioned that exception to the Rooker-Feldman doctrine, and in fact, concluded that no such exception existed.

The court also declined to adopt the alternative theory offered by the debtor based on dictum from In re Razzi, 533 B.R. 469 (Bankr. E.D. Pa. 2015), to the effect that Rooker-Feldman is inapplicable when the case involves a bankruptcy debtor objecting to a claim, rather than challenging a state court judgment. The judge in Razzi opined that such a circumstance could be “conceptualized” as the debtor taking a defensive posture rather than one like the one arising in Rooker-Feldman where the “state-court losers complain[ed] of injuries caused by state-court judgments rendered before the district court proceedings commenced and invit[ed] district court review and rejection of those judgments.” The court here found that “[i]n the absence of any persuasive caselaw adopting or applying Judge Frank’s posited ‘theory’ concerning the first requisite of the Rooker-Feldman doctrine, this Court declines to adopt and apply it here.”

The court turned next to the debtor’s assertion that the transfer of the deed to Mr. Abdoun was avoidable as constructively fraudulent under section 548(a)(1)(B)(i)(I). The issue turned to whether the property was sold for its reasonably equivalent value. The bankruptcy court relying on BFP v. Resolution Trust Corp., 511 U.S. 531 (1994), compared what Mr. Abdoun bought the property for with what it would likely have brought in a foreclosure sale. The debtor argued that the proper comparison was with the fair market value of the property.

The court was unpersuaded. BFP held that “reasonably equivalent value” in the context of a forced foreclosure sale, is the actual sales price rather than the fair market value of the property, so long as state foreclosure procedures were followed. Where, as here, the state procedures for the sale were not properly followed, the Supreme Court said that such irregularity could result in invalidation of the sale, but that, in that case, the reasonably equivalent value would be what the property would have garnered in a hypothetical foreclosure sale that followed state procedures. Based on this, the court here found that the bankruptcy court applied the correct comparison for section 548(a)(1)(B)(i)(I) purposes. Where the debtor failed to present evidence that a properly held foreclosure sale would have brought in more than Mr. Abdoun paid for the property, the court found no error in the bankruptcy court’s order.

The court next addressed the debtor’s appeal of the bankruptcy court’s finding that she was not entitled to emotional distress damages under the enforcement provision in the UTPCPL. That statute provides that a successful litigant may recover actual damages or $100, whichever is greater. The court has discretion to award up to three times actual damages and “may provide such additional relief as it deems necessary or proper.” Though this language suggests that a court may award damages for emotional distress, courts have uniformly held that no such damages are recoverable under the statute. Therefore, the district court upheld the bankruptcy court’s denial of those damages.

The debtor next argued that even though her complaint did not allege intentional infliction of emotional distress under state common law, the bankruptcy court had the power under Rules 7054 and 7015 to award damages for that cause of action when the facts at trial support it. But Rule 7054 and its counterpart FRCP 54, have been limited by due process principles to theories of recovery that were squarely brought out and litigated at trial. For issues not raised in the pleadings, Rule 7015 and FRCP 15, provide that unpled causes of action must be addressed at trial by implied or express consent of the parties. But consent will not be implied when the evidence going to the unpled cause of action also supports a cause of action that was pled.

Here, the debtor did not raise intentional infliction of emotional distress as a cause of action until after the Bankruptcy court entered judgment against her and the evidence supporting it at trial was the same as that supporting her emotional distress claim under the UTPCPL. Therefore the court had no implied consent and affirmed the bankruptcy court’s denial of those damages under the state common-law theory.

The court thus affirmed the bankruptcy court’s order and opinions.

Marshall ED Pa Mar 2023

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Debt Owed to Trust is DSO

Where the debtor’s payments to his ex-wife’s Trust were in lieu of alimony and were understood by both the debtor and his ex-wife to be for her future support, the payments were in the nature of a domestic support obligation not dischargeable in bankruptcy. Hundt v. Ventrone (In re Ventrone), No. 21-11643, Adv. Proc. Nos. 22-00005, 22-00026 (Bankr. E.D. Pa. Jan. 2023).

In order to buy a house, the plaintiff and her then-husband, the debtor, withdrew $415,000 from a Trust established for the plaintiff’s benefit. They then entered into a post-nuptial agreement providing that in the event of divorce, “the original Distribution invested in the Property of $415,000, . . . shall be returned to the Trust at the time of sale, free and clear from any and all claims by [Debtor].”

Three years later, the debtor and the plaintiff divorced. They entered into a property settlement agreement (PSA) which incorporated the post-nuptial agreement and PSA further provided that:

“The parties agree that in the event that the sale of the Marital Residence does not satisfy their $415,000.00 obligation to the Trust, that they shall divide the deficiency between the net sale proceeds returned to the Trust and the $415,000.00 liability with [Debtor] being responsible for 37.5% of the deficiency and [Plaintiff] being responsible for 62.5% of the deficiency.”

In 2018, the parties sold the property but the proceeds were not sufficient to fully repay the trust. The debtor failed to make the payments required by the PSA to make up his share of the deficiency. After the Family Court issued a couple of contempt orders and held a contempt hearing, it ordered the debtor to make a one-time payment to the court for $30,625, and to make three other $1,225 payments each. All the payments represented amounts owed to the Trust. The debtor complied with the order except that each of the checks he submitted to the Family Court contained conditional language that ultimately prevented the plaintiff from depositing them. The debtor refused to submit acceptable replacement checks.

The Family Court issued a bench warrant and after a hearing on that warrant, the court ordered the debtor to liquidate his 401K accounts and pay the proceeds to the plaintiff to satisfy Marital Obligations. The court also ordered the debtor to pay $4,500 in attorney’s fees.

The debtor filed for chapter 13 bankruptcy. The Trust filed a claim for $174,451.79 plus the attorney’s fees as awarded by the Family Court. “Out of an abundance of caution,” the plaintiff filed the identical claim. The debtor objected to the claim on the bases that the contempt order was for only $113,913.28, that attorney’s fees should not have been included, and that the claim was not for a domestic support obligation. The debtor and the plaintiff (along with the Trust) filed opposing adversary complaints relating to whether the plaintiff’s claims were nondischargeable domestic support obligations under various paragraphs in section 523(a).

The case came before the court on the plaintiff’s motion for summary judgment. Though the plaintiff cited several provisions of section 523(a), the court rested its decision on section 523(a)(5) which excepts domestic support obligations (DSO) from discharge in chapter 13.

The court began its analysis with the question of whether the plaintiff’s claim was for a DSO, finding that to qualify as such the debt must be, “(i) ‘owed to or recoverable by’ a governmental unit or a person with a specific relationship to the Debtor such as a spouse, former spouse, or child of the Debtor; (ii) the underlying obligation [must be] in the nature of alimony, maintenance, or support of such person; (iii) the obligation [must arise] from an agreement, court order, or as otherwise defined; and (iv) the debt [must not be] assigned to a non-governmental entity unless voluntarily done by the spouse, former spouse, or child of the Debtor.”

The court rejected the debtor’s argument that the claim was not a DSO because it was payable to the Trust rather than to the plaintiff herself. The court found that where the obligation is in the nature of support for a spouse or child, it qualifies as a DSO even though it may be payable to another entity.

The court looked to three factors to determine whether the payments were intended for support: “(i) the language and substance of the agreement; (ii) the parties’ financial circumstances; and (iii) the function of the obligation.”

Here, under the terms of the PSA, the debtor was obligated to make payments to the Trust “in lieu of alimony” for the plaintiff’s support. The court noted that the plaintiff’s income was substantially less than the debtor’s and the plaintiff had the responsibility of paying her own and their children’s expenses. In testimony in the Family Court the debtor acknowledged that the Trust constituted the plaintiff’s future support and that his payment into it was in furtherance of that end. That the obligation was for support was reinforced by the fact that the plaintiff sought and received enforcement by the Family Court.

Having found the plaintiff’s claim was a nondischargeable DSO, the court turned to whether the plaintiff’s claim for $4,500.00 in attorney’s fees was also nondischargeable as a DSO. It found the law well-settled that an award of attorney’s fees in connection with a divorce proceeding are in the nature of a DSO.

The court concluded that the claim in the modified amount of $118,413.28, as well as the $4,500 attorney’s fee award and any additional legal fees awarded by the Family Court, were nondischargeable under section 523(a)(5). It granted summary judgment to Plaintiffs. The debtor filed a motion to reconsider on March 7.

Ventrone Bankr ED Pa Jan 2023