The Fourth Circuit Court of Appeals has dealt a blow to debtors on the issue of whether the absolute priority rule applies in individual chapter 11 cases. In re Maharaj, No. 11-1747 (4th Cir. June 14, 2012). The decision turned on the court’s finding that the reference in Section 1129(b)(2)(B)(ii) to “property included in the estate under Section 1115,” and the words “in addition to” as found in Section 1115 were amenable to differing interpretations. Having found the meaning ambiguous, the court went on to base its decision on its view of congressional intent. [Read more…] about Fourth Circuit Finds Absolute Priority Rule Applicable to Individual Debtors
Heritage Pacific’s Debt Collection Practices Garner More Attention
Heritage Pacific Financial, a debt buyer of foreclosed second mortgages, first popped up on my radar screen nearly two years ago. At that time, Heritage was filing multi-defendent complaints in state and federal courts against California home loan borrowers–mostly Latino–claiming that the borrowers fraudulently misstated their monthly income on their loan applications. I suspect that they were trying to get people to settle with them and save filing fees, but at least most federal district court judges recognized that suing multiple defendants on multiple contracts in the same complaint is not proper under Rule 20 of the Federal Rules of Civil Procedure. (See Order here). As a result, those cases didn’t go very far in court. With the multi-defendant model out the door, Heritage turned its attention to bringing non-dischargeability actions against bankruptcy debtors. Court documents show debtors, many chapter 7 pro se debtors, entering into settlement agreements to pay Heritage thousands of dollars over several years. Sadly, in many of these cases, the underlying debt is uncollectable based on state anti-deficiency laws. Heritage cannot show that it has been assigned the original lender’s fraud claim, or Heritage is unable to demonstrate that the borrower made any false statements or that the original lender relied on any false statement.
Several cases are now pending against Heritage in state courts alleging violations of California’s anti-deficiency laws, the Fair Debt Collection Practices Act, the Rosenthal Act (the state’s version of FDCPA) and the state’s unlawful business practices law.
Earlier this week, Rick Jurgens of the Center for Investigative Reporting, wrote a story that focuses on some of the borrowers that have been targeted by Heritage. ABC affiliate, KGO-TV, in conjunction with CIR, also put together a video news story on Heritage.
NCBRC is looking into Heritage’s practice of bringing frivolous non-dischargeability actions in bankruptcy courts throughout California. The United States Trustee should also consider a thorough investigation of Heritage and its bankruptcy practices.
Post-Petition Tax Liability Not Incurred by Chapter 12 Estate
The Supreme Court found that debtors could not have their income tax liability resulting from the post-petition sale of their farm treated as a non-priority, dischargeable debt in their chapter 12 bankruptcy case. Hall v. United States, No. 10-875, 182 L. Ed. 2d 840, ___ U.S. ___ (May 14, 2012). The debtor relied on Section 1222(a)(2)(A), which permits certain tax liabilities, which would otherwise be priority debts under section 1222(a)(2), to be treated as non-priority, unsecured debts, if they are “incurred by the estate,” under section 503(b). Justice Sotomayor, joined by Justices Roberts, Thomas, Alito, and Scalia, found that post-petition income tax liability adheres to the debtors rather than the estate, and the debtors, therefore, could not avail themselves of the benefit of section 1222(a)(2)(A).
While this case forecloses a potential avenue of relief for the Chapter 12 debtor, it is likely to have little effect in the realm of Chapter 13 bankruptcy. In Chapter 13 taxes incurred post-petition are not incurred by the estate. 11 TX2 Collier on Bankruptcy ¶ TX2.03[2][a][ii] (16th ed.). However, under Section 1305, the taxing authority in Chapter 13 may file a proof of claim for post-petition tax liability if it so chooses. [Read more…] about Post-Petition Tax Liability Not Incurred by Chapter 12 Estate
RESPA Prohibition Against Fee-Splitting not Applicable to Undivided Unearned Fee
The Supreme Court declined to interpret RESPA’s prohibition against fee-splitting as applying to the situation in which fees were charged for services that were not provided but where the fees were not divided between two or more parties. Freeman v. Quicken Loans, No.10-1042, __U.S.___ (May 24, 2012). [Read more…] about RESPA Prohibition Against Fee-Splitting not Applicable to Undivided Unearned Fee
Circuit Court Permits Strip-off in Chapter 7
The Eleventh Circuit has come through for consumer debtors on the issue of stripping off wholly unsecured liens in Chapter 7. In In re McNeal, No. 11-11352, (11th Cir., May 11, 2012), the court found that once a lien is determined to be wholly unsecured under Section 506(a) it may be stripped off under Section 506(d), which provides “[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.” [Read more…] about Circuit Court Permits Strip-off in Chapter 7
Seventh Circuit to Address Inherited IRAs
On May 4, NACBA filed an amicus brief in the consolidated cases of Rameker v. Clark, No. 12-1241 and Adili v. Clark, No. 12-1255 (7th Cir.) on the issue of whether a debtor may exempt an inherited IRA under Section 522(b)(3)(C). NACBA has been actively involved in the successful presentation of this issue in courts around the country, arguing that the plain language of the Bankruptcy Code and the Internal Revenue Code militates in favor of recognizing the exemption. The Bankruptcy Code exempts from the debtor’s estate “retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under Sectiond 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.” Section 408(e) of the IRC provides that any IRA, including one that is inherited from a non-spouse, is exempt from taxation.
Recently, debtors obtained favorable outcomes on this issue in the Fifth Circuit, In re Chilton, No. 11-40377 (5th Cir., March 12, 2012) (exemption under section 522(d)(12)), and the Bankruptcy Appellate Panel for the Ninth Circuit, In re Hamlin, No. 11-1083 (B.A.P. 9th Cir. February 21, 2012). NACBA has also filed an amicus brief on this issue in the Bankruptcy Court District of Massachusetts. In re Seeling, No. 11-30957 (Bankr. D. Mass.)
Trustee Has Power to Require Turnover of Property Securing Tax Lien
The District Court for the Northern District of West Virginia found that the trustee had the power under Section 724(b) to require turnover of the debtor’s 2002 Lincoln LS for the purpose of selling it to pay a substantial portion of the tax debt, even though the tax lienholder had not sought relief from stay for that purpose. Sheehan v. Posin, No. 11-160 (N.D. W.Va., April 23, 2012). In reversing the decision of the bankruptcy court, the district court relied on the plain language of Section 724(b), concluding that the trustee’s power to require turnover under Section 542 for the sale of property securing a tax lien was not contingent upon the lienholder taking the affirmative step of seeking relief from stay.
Stern v. Marshall Construed
Interpreting the Supreme Court decision in Stern v. Marshall, 131 U.S. 2594 (2011), the Bankruptcy Court for the Eastern District of Kentucky found that it had subject matter jurisdiction over debtor’s state common law counterclaims but did not have jurisdiction over the counterclaims based on Kentucky’s usury and consumer protection statutes. In re Tolliver, No. 09-2076 (Bankr. E.D. Ky. February 2, 2012). The issue arose in an adversary proceeding in which the debtor objected to a proof of claim filed by Ocwen Federal Bank, as servicer to Bank of America. Debtor filed counterclaims advancing state statutory and common law claims based on Ocwen’s alleged charging of unauthorized and duplicative fees and costs, and improperly inflating debtor’s balance, causing her to default. [Read more…] about Stern v. Marshall Construed
Maryland Consumer Protection Laws Reign in Bank’s Unlawful Debt Collection Activities.
In an effort to have its cake and eat it too, J.P. Morgan Chase Bank (Chase) sought to take advantage of state laws permitting the recovery of deficiency debts upon repossession and sale of a vehicle, while at the same time seeking to avoid other state laws that impose conditions upon lenders for the recovery of those debts. The Fourth Circuit said no. Epps v. J.P. Morgan Chase Bank, No. 10-2444 (4th Cir., April 5, 2012). [Read more…] about Maryland Consumer Protection Laws Reign in Bank’s Unlawful Debt Collection Activities.
Riverside Bankruptcy Court’s Sua Sponte Dismissal Reversed
The District Court for the Central District of California reversed the bankruptcy court’s dismissal of the debtors’ Chapter 13 case after the debtors filed a notification of conversion to Chapter 7. Taylor v. Danielson (In re Taylor), No. 11-1879 (C.D. Cal April 13, 2012). The court distinguished Marrama v. Citizens Bank of Mass., 549 U.S. 365 (2007), where the Supreme Court found that a debtor does not have an absolute right to convert a case from Chapter 7 to Chapter 13 under Section 706(a). In Marrama, the Court reasoned, in part, that conversion from Chapter 7 to Chapter 13 could result in a debtor either escaping the consequences of bad faith by voluntarily dismissing under Chapter 13, or benefiting from the conversion despite bad faith by gaining access to estate assets to the detriment of creditors.
Conversions from Chapter 13 to Chapter 7 are distinguished by the fact that upon such conversion, the trustee has control over estate assets and the court retains jurisdiction over the debtor, so the concerns that were dispositive in Marrama are not present. Additionally, the Bankruptcy Rules treat conversions from Chapter 7 to Chapter 13 differently from conversions from Chapter 13 to Chapter 7. Rule 1017(f)(2) contemplates judicial scrutiny over conversions from Chapter 7 to Chapter 13, while, in contrast, Rule 1017(f)(3) provides that a “chapter 13 case shall be converted without court order when the debtor files a notice of conversion under . . . [§] 1307(a).”
NCBRC’s Tara Twomey assisted in the writing of the debtors’ brief.