National Consumer Bankruptcy Rights Center

Debtor May Not Modify to Surrender Residence after 60 Month Plan Complete

Posted by NCBRC - June 7th, 2019

Debtors were precluded from modifying their plan to surrender their residence where the surrender was a “payment” under the plan and was beyond the sixty-month plan period. Derham-Burk v. Mrdutt (In re Mrdutt), No. 17-1256 (B.A.P. 9th Cir. May 6, 2019).

When chapter 13 debtors, Christina and David Mrdutt, filed their bankruptcy petition, Wells Fargo held two liens on their residence. The first lien was under-secured and the second wholly unsecured. The Mrdutts were also almost $65,000 in arrears on their mortgage. They proposed a plan providing for curing their mortgage arrearage either after loan modification or as proposed in a later plan modification. In the meantime, the Mrdutts agreed to maintain direct mortgage payments to Wells Fargo outside the plan.

The bankruptcy court confirmed their plan while their request to modify the primary mortgage was still pending with Wells Fargo. The Mrdutts made all 60 of their plan payments, but failed to maintain necessary direct payments to Wells Fargo. Ms. Mrdutt died of cancer during the bankruptcy, and Wells Fargo, being Wells Fargo, refused to discuss loan modification with Mr. Mrdutt because only Ms Mrdutt’s name was on the loan. Wells Fargo never approved a loan modification, and the mortgage arrears were not cured either through the plan or outside it. Read More
SCOTUS Adopts No Fair Ground of Doubt Standard for Discharge Order Violation

Posted by NCBRC - June 5th, 2019

In a unanimous decision, the Supreme Court held that “a court may hold a creditor in civil contempt for violating a discharge order if there is no fair ground of doubt as to whether the order barred the creditor’s conduct.” Taggart v. Lorenzen, No. 18-489, 587 U. S. ___ (June 3, 2019).

Chapter 7 debtor, Bradley Taggart, was involved in pre-petition litigation in state court at the time he filed for bankruptcy. After he obtained his discharge, Sherwood, an opposing party in the state court litigation, obtained a judgment against him. Sherwood then sought attorney’s fees, and the state court awarded those fees notwithstanding Ninth Circuit precedent making clear that the post-petition attorney’s fees were discharged along with Taggart’s other debts. The bankruptcy court found that Sherwood was aware of the discharge and intended the act that violated it and, under that standard, it held Sherwood in contempt of the discharge order. The bankruptcy appellate panel reversed the sanction award and the Ninth Circuit affirmed, holding that Sherwood could not be held in contempt in light of its good faith belief that its conduct did not violate the discharge injunction regardless of whether that belief was reasonable. Read More
Rejection of Unexpired Lease Equals Pre-Petition Breach of Lease Agreement

Posted by NCBRC - June 1st, 2019

Under section 365(g), rejection of an unexpired lease is treated as breach of the lease contract not termination of the lease. Therefore, the lessor’s claim against the debtors for rent based on post-petition, post-rejection occupancy of the leased property was part of the pre-petition breach and was discharged in the debtors’ chapter 7 bankruptcy. In re Roberson, No. 17-8041 (B.A.P. 6th Cir. May 30, 2019) (unpublished).

Joi and Anthony Roberson defaulted on their lease midway through their lease term. When the lessor, GCB Properties III, Ltd., initiated eviction proceedings, they filed for chapter 7 bankruptcy listing the defaulted rent as one of their debts. Neither the trustee nor the Robersons assumed the unexpired lease and the Robersons received their discharge. During the pendency of their bankruptcy case, GCB continued to try to evict them and the Robersons obtained a judgment against GCB for violation of the automatic stay. After discharge, GCB attempted to collect the rent for the months the Robersons lived in the property from the date of the statutory rejection of the lease through the date the Robersons moved out of the property. Furthermore, GCB applied the judgment against it as set-off against unpaid rent. The bankruptcy court found that the rental default up through the time the Robersons vacated the property was discharged in their bankruptcy and therefore the lessor was not entitled to set-off. Read More
Fourth Circuit Overturns Anti-Modification Precedent Witt v. United Cos. Lending Corp.

Posted by NCBRC - May 29th, 2019

The en banc fourth circuit panel overturned a twenty-two-year-old precedent to join the majority of courts finding that section 1322(c)(2) “authorizes modification of covered homestead mortgage claims, not just payments, including bifurcation of undersecured homestead mortgages into secured and unsecured components.” Hurlburt v. Black, No. 17-2449 (4th Cir. May 24, 2019) (en banc). NACBA and NCBRC participated as amici in support of the debtor.

In Witt v. United Cos. Lending Corp. (In re Witt), 113 F.3d 508 (4th Cir. 1997), the Fourth Circuit held that section 1322(c)(2)’s exception to the anti-modification provision in section 1322(b)(2) was limited to permitting a chapter 13 debtor to extend the final payments on his mortgage over the course of the plan even though the terms of the lending agreement would have those payments due earlier. Thus, the Witt court found that section 1322(c)(2) does not permit a chapter 13 debtor to modify the amount owed on the claim by bifurcating the claim into secured and unsecured portions, but could alter only the timing of payments on that claim. Read More
Court Has Discretion to Reimburse Expenses Not Included in No-Look Fee Order

Posted by NCBRC - May 22nd, 2019

Under the bankruptcy court’s no-look fee standing order, debtor’s counsel could not obtain reimbursement for advancing pre-petition costs including filing fees and credit counseling, but the court had discretion to allow those expenses as part of counsel’s compensation. McBride v. Riley (In re Riley), No. 18-30535 (5th Cir. May 13, 2019).

Under its “no money down” fee agreement, the McBride Law Firm advanced the chapter 13 debtor’s filing fees, credit counseling, and the cost of obtaining credit reports. McBride later sought to recover the advance along with its regular fees under the bankruptcy court’s no-look fee standing order. The bankruptcy court found that the attorney fees were limited to those fees specified in the standing order, and it further held that it had no authority to award additional fees or reimbursements. At the same time, the bankruptcy court denied reimbursement of pre-petition expenses in eighteen other cases in the district. McBride and the attorneys from two of the other cases appealed to the district court. That court affirmed. Read More
State May Reasonably Rely on Public Assistance Application

Posted by NCBRC - May 16th, 2019

When providing public assistance benefits, the State may reasonably rely upon the applicant’s assertions in the application form, despite access to an independent source of information concerning the applicant’s financial condition. Maxwell v. State of Oregon, No. 18-1286 (B.A.P. 9th Cir. March 27, 2019) (unpublished).

Antionette Maxwell was employed at Oregon Health and Science University, yet she was still entitled to various public assistance benefits, including SNAP benefits, Temporary Assistance for Needy Families, and Employment Related Day Care Program. At some point, the State conducted an investigation into Ms. Maxwell’s income and found that she had failed to list income she had earned as an occasional domestic worker, and that she received in child support payments. The State sought to recover the resulting overpayment of benefits in the amount of over $16,000. Ms. Maxwell filed for chapter 7 bankruptcy, and the bankruptcy court found the overpayment was nondischargeable under section 523(a)(2)(B) as having been acquired by fraud. Read More
Malpractice Action against Bankruptcy Attorneys Not Part of Estate

Posted by NCBRC - May 14th, 2019

Where the only injury alleged was the denial of discharge, the debtors’ legal malpractice cause of action against their bankruptcy attorneys did not arise pre-petition and, therefore, was not part of the bankruptcy estate. Church Joint Venture v. Blasingame, No. 18-8017 (B.A.P. 6th Cir. April 5, 2019).

The debtors’ bankruptcy attorneys committed malpractice prior to and during the course of the debtors’ chapter 7 case, resulting in denial of discharge. The debtors sued their attorneys for malpractice in state court, and the bankruptcy court granted creditor, Church Joint Venture (CJV), derivative status to pursue a malpractice action in the bankruptcy court on behalf of the estate based on the same conduct. CJV filed an adversary complaint and sought a declaratory judgment that the cause of action for malpractice constituted estate property. On cross-motions for summary judgment, the bankruptcy court found that the cause of action arose post-petition and, therefore, belonged to the debtors rather than the estate.

CJV appealed to the bankruptcy appellate panel for the Sixth Circuit.

Relying on Underhill v. Huntington National Bank (In re Underhill), 579 F. App’x 480 (6th Cir. 2014), the panel affirmed. Read More
Asset Technically Abandoned Despite Not Being Listed on Schedule B

Posted by NCBRC - May 8th, 2019

The chapter 7 debtor’s cause of action was technically abandoned even though he failed to list it on Schedule B, where the trustee knew of the asset and indicated his intention to abandon it though he never sought a court order to that effect, and the trustee also listed all unadministered assets “known and unknown” as abandoned in his final report. Nasseri v. Tadayon (In re Tadayon), No. 18-1119 (B.A.P. 9th Cir. April 29, 2019) (unpublished).

When the debtor, Afshin Tadayon, filed for chapter 7 bankruptcy, he had a state court cause of action pending against Dr. Amir Nasseri. He did not list the cause of action in his Schedule B, but he did include it in his Statement of Financial Affairs. The trustee questioned the debtor about the asset during the 341(a) meeting of creditors. The debtor obtained his discharge. Dr. Nasseri was not notified of the bankruptcy, nor was he served with the trustee’s notice of intent to abandon the asset. Read More
Accrued Interest on Student Loan Discharged as Undue Hardship

Posted by NCBRC - May 3rd, 2019

A Kansas bankruptcy court did not err in granting the debtor a discharge of the accrued interest on her student loans where she met the Tenth Circuit’s flexible version of the Brunner test, and the court has equitable power to grant less than a complete discharge. ECMC v. Metz, No. 18-1281 (May 2, 2019).

The debtor, age 59, was never in default on her student loans. Though she was continuously employed over the repayment period, the amount she owed grew over time from the original loan amount of $16,613.73, to $67,277.88. Beginning in 2001, she filed three chapter 13 bankruptcies and made all payments under her plans, receiving a discharge in the first two. In the third and current bankruptcy the debtor sought to discharge her consolidated student loan. The bankruptcy court found undue hardship but discharged only the accrued interest on the debt. The student loan creditor, ECMC, appealed. The debtor filed a cross-appeal seeking to have the entire debt discharged. NCBRC filed an amicus brief on behalf of the NACBA membership in support of the debtor. Read More
9th Circuit BAP Finds Disclosure of Debtor’s Claim in the SOFA Sufficient for Abandonment (Subtitle: BAP Surveys Cases Nationally on Disclosure and Abandonment)

Posted by NACBA - May 2nd, 2019
In an unpublished opinion entered on April 29, 2019, the 9^th Circuit Bankruptcy Appellate Panel addressed the thorny issue whether a debtor’s disclosure of an asset in the SOFA but not in the Schedules of Assets and Liabilities precludes abandonment under 11 U.S.C. § 554(c).

Prior to filing for bankruptcy, the Debtor and his sister, lent money ($696,704.42) to Dr. Nasseri (the Doctor) which was secured by the Doctor’s real and personal property. The Debtor and his sister filed a state court collection action against the Doctor and the Doctor filed a counterclaim.

The Debtor then filed a chapter 7 bankruptcy. He did not list the state court action in his schedule B but did list it in the SOFA identifying the court, case name and number, describing the nature of the suit as “Title to Property” and noting that the case was “open.” The Debtor never listed the Doctor’s counterclaim in his schedules or SOFA nor did he list the Doctor as a creditor. The Doctor did not receive formal notice of Debtor’s bankruptcy filing.

At the 341 meeting, the Trustee questioned the Debtor about the state court action. The Debtor state he told the trustee that the case had not yet been tried and that the Doctor was living in Dubai. The Debtor obtained a discharge on February 11, 2011. On September 29, 2011, the trustee filed a notice of intent to specifically abandon the state court action. The Doctor was not served with the notice.

In April of 2012, when the Doctor learned of the bankruptcy, the parties filed a stipulation and order that agreed that the Doctor’s counterclaim would not violation the discharge and any debts owed to the Doctor (on account of his counterclaim) would not be discharged. Thereafter the trustee filed his final report. The bankruptcy was closed on May 4, 2012.

Subsequently, the Debtor and his sister continued the lawsuit against the Doctor and won a judgment against him in the amount of $547,173.44. The Doctor’s counterclaim was not successful. The Doctor argued for a directed verdict arguing Debtor lacked standing as the asset had never been abandoned under 11 U.S.C. §§ 554(a) or (c) which was denied by the state court.

The Debtor then attempted to collect the debt from the Doctor. He employed multiple attorneys both locally and in Dubai (where the Doctor lived) and twice bringing the matter before the Supreme Court in Dubai to have the Judgment domesticated there.

In 2017, the Doctor moved to reopen the Debtor’s bankruptcy hoping to come to an agreement with the trustee to compromise or set regular payments on the judgment amount. The bankruptcy court reopened the case and appointed a new trustee. The Debtor then moved for an order of abandonment of the state court action and to re-close his case. The court granted Debtor’s motion.

The issues before the BAP were as follows:
- Was the state court action sufficiently scheduled under 11 U.S.C. § 541(a)(1) so that the trustee could abandon it? Further, does an asset need to be formally listed in schedule B to be disclosed?
- Does laches apply to the Doctor’s assertion that the asset was not disclosed and therefore still part of the bankruptcy estate?
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Debtor May Not Modify to Surrender Residence after 60 Month Plan Complete

SCOTUS Adopts No Fair Ground of Doubt Standard for Discharge Order Violation

Rejection of Unexpired Lease Equals Pre-Petition Breach of Lease Agreement

Fourth Circuit Overturns Anti-Modification Precedent Witt v. United Cos. Lending Corp.

Court Has Discretion to Reimburse Expenses Not Included in No-Look Fee Order

State May Reasonably Rely on Public Assistance Application

Malpractice Action against Bankruptcy Attorneys Not Part of Estate

Asset Technically Abandoned Despite Not Being Listed on Schedule B

Accrued Interest on Student Loan Discharged as Undue Hardship

9th Circuit BAP Finds Disclosure of Debtor’s Claim in the SOFA Sufficient for Abandonment (Subtitle: BAP Surveys Cases Nationally on Disclosure and Abandonment)

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