The debtors’ use of funds in the husband’s self-directed IRA to fund the purchase and development of property was a prohibited transaction that disqualified the IRA from exemption in bankruptcy. In re Kellerman, No. 09-13935 (Bankr. E.D. Ark. May 26, 2015). [Read more…] about IRA Exemption Lost Due to Prohibited Transaction
NABCA Weighs in on Intersection between Bankruptcy Code and FDCPA
NCBRC filed an amicus brief on behalf of the NACBA membership in the case of Garfield v. Ocwen Loan Servicing, No. 15-527 (2d Cir. filed June 13, 2015). The brief seeks a reversal of a district court finding that the Bankruptcy Code precludes the application of the FDCPA in any case involving a discharged debt. Overlapping federal statutory schemes are presumed to be non-preclusive unless the plain text of one or the other explicitly creates preclusion or where there is an irreconcilable conflict between the two. Morton v. Mancari, 417 U.S. 535, 550 (1974). [Read more…] about NABCA Weighs in on Intersection between Bankruptcy Code and FDCPA
Plan May Include Vesting in Unwilling Creditor
A Debtor may confirm a plan that provides for the transfer of title to the secured creditor even over the creditor’s objection. In re Sagendorph, No. 14-41675 (Bankr. D. Mass. June 2015).
Paul Sagendorph’s chapter 13 plan provided for certain secured property as follows:
The debtor is Surrendering his property . . . to Wells Fargo . . . in Full Satisfaction of any Claims filed. Wells Fargo . . . will Foreclose on the property in Satisfaction of the Mortgage, Note, and any outstanding Fees. Under §§ 1322(b)(8) and (9), title to the property . . . shall vest in Wells Fargo . . . upon confirmation, and the Confirmation Order shall constitute a deed of conveyance of the property when recorded at the Registry of Deeds. All secured claims will be paid by surrender of the collateral and foreclosure of the security interest. [capitalization in original]
Wells Fargo objected to the plan, arguing that it could not be compelled to take title to the property, that forcing it to take the property would subject it to liens held by other parties, and that the treatment of Wells Fargo’s interest did not comply with the requirements of section 1325(a)(5). The bankruptcy court sustained Wells Fargo’s objections but permitted the debtor to amend the plan to address the issues raised. The debtor amended the plan using the same title transfer language but reflecting that the only encumbrance on the subject property was the mortgage held by Wells Fargo. Wells Fargo renewed its objections.
The court’s analysis turned on the interplay between section 1322(b)(9), which provides that a chapter 13 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,” and section 1325(a)(5)(C), which provides that a plan may be confirmed over objection if the debtor surrenders the property to the holder of the secured claim. Wells Fargo argued that section 1325(a)(5)(C) establishes a limitation on the court’s power to vest title in an unwilling creditor.
Beginning with statutory language, the court found that “surrender,” though not defined in the Code, has been found by the First Circuit to mean to “make the collateral available to the secured creditor, – viz., to cede his possessory rights in the collateral.” “Vesting,” likewise undefined, “means to place one in legal possession or ownership of the property.” The court found that while surrender merely makes property available, “vesting means transferring title.” The court turned to the issue of whether there is inherent tension between sections 1325(a) and 1322(b) and, if so, whether section 1325(a)(5)(C) limits the court’s discretion to “vest” title under section 1322(b)(9).
The court found no conflict. Section 1325(a)(5) permits a debtor to surrender property, and section 1322(b) permits the court to vest it in the creditor so long as the plan is proposed in good faith and conforms to the Bankruptcy Code. The court disagreed that section 1322(b)(9) is circumscribed by section 1325(a)(5)(C), finding instead that section 1325(a)(5), establishes a “baseline” requirement that must be met before the menu of options set forth in section 1322 apply. That Congress used “surrender” in one provision and “vest” in the other, indicates different meaning and different treatment. Surrender is a preliminary step to transferring title.
The court rejected Wells Fargo’s argument that because Massachusetts law does not permit a debtor to force a creditor to take title to surrendered property the same cannot be accomplished through bankruptcy. Where a fundamental purpose of bankruptcy is to give debtors a fresh start free of certain financial obligations, it is often the case that bankruptcy permits treatment of debts in ways that are contrary to state law. In those cases, bankruptcy law preempts conflicting state law.
The court was swayed in part by the fact that such title transfers are commonplace in chapter 11 in what it referred to as “dirt for debt plans” under section 1123(a)(5)(B). As an analog of chapter 11, chapter 13 plans should receive similar treatment unless Congress has explicitly established differences.
The court noted that its ruling does not leave creditors without recourse when a debtor acts in bad faith or proposes a plan that is contrary to law. Section 1325(a)(3) prevents confirmation of such plan. But, in this case, the value of the property exceeded the amount of the mortgage and Wells Fargo did not raise any issues with respect to bad faith.
David Baker authored an amicus brief on behalf of the NACBA membership in support of the debtor.
Caulkett Does Not Affect Lien-Stripping in Chapter 13
The recent Supreme Court decision in Bank of America v. Caulkett, ___ U.S. ___, 2015 WL 2464049 (June 1, 2015), does not apply to lien stripping in chapter 13. Turman v. Pinnacle Bank, No. 14-80062, Adv. Proc. 14-8035 (Bankr. D. Neb. June 12, 2015). Alton and Leslie Turman’s residence was subject to two liens, the second of which was wholly unsecured. Relying on Minnesota Housing Fin. Agency v. Schmidt (In re Schmidt), 765 F.3d 877 (8th Cir. 2014), and noting that seven other circuits have found that wholly unsecured liens may be stripped off in chapter 13, the court granted the debtors’ motion for summary judgment to avoid Pinnacle Bank’s lien. The court briefly reiterated the well-established interpretation of Nobelman v. American Sav. Bank, 508 U.S. 324 (1993), that a lien that is wholly unsecured under section 506(a) is not a “secured claim” subject to the anti-modification provision of section 1322(b)(2) and may, therefore, be stripped off.
Allaying fears that Caulkett negatively impacted chapter 13 practice, the court stated definitively, “This case is unaffected by the recent United States Supreme Court decision of Bank of America, N.A. v. Caulkett, ___ U.S. ___, 2015 WL 2464049 (June 1, 2015) (holding that Chapter 7 debtors may not strip off wholly unsecured liens), because Caulkett applies only to Chapter 7 cases. Id. at *5” The court also cited Green Tree Servicing, LLC v. Wilson (In re Wilson), Case No. 14–CV–9543 (CS), 2015 WL 3561476 at *6 n.10 (S.D.N.Y. June 5, 2015). In that case the New York district court, likewise noted that “The recent Supreme Court decision on lien stripping, Bank of America, N.A. v. Caulkett, has no effect on the Bankruptcy Court’s order granting the [lien-stripping] motion because Caulkett only applies in the Chapter 7 context.”
One of Three Illinois Cases Gets it Right in FDCPA Case
Three cases out of the Northern District of Illinois address the issue of whether filing a proof of claim in Chapter 13 bankruptcy for a stale debt can be the basis for an FDCPA claim. In Murff v. LVNV Funding (In re Murff), No. 13-44431, Adv. Proc. 14-790 (Bankr. N.D. Ill. June 15, 2015) and LaGrone v. LVNV Funding (In re LaGrone), 525 B.R. 419 (Bankr. N.D. Ill. Jan. 21, 2015), the courts essentially found the element of deception for a FDCPA violation is not present in the context of a bankruptcy case. In Avalos v. LVNV Funding (In re Avalos), No. 13-40865, Adv. Proc. 15-91(Bankr. N.D. Ill. June 12, 2015), Judge Schmetterer found that the determination of whether debt-collector conduct is deceptive is an issue of fact to be addressed on a case-by-case basis. [Read more…] about One of Three Illinois Cases Gets it Right in FDCPA Case
First Circuit Opinion Heavy on Vocabulary, Light on Logic
In an opinion that would have benefited from Gertrude’s advice to Polonius “More matter, with less art,” the First Circuit found that a debtor may be sanctioned for inadvertent failure to comply with a court order despite lack of harm to creditors, trustee or court. Charbono v. Sumski, No. 14-2151 (1st Cir. June 15, 2015). [Read more…] about First Circuit Opinion Heavy on Vocabulary, Light on Logic
Court Rejects Bank’s “Devil Made Me Do It” Defense
A bankruptcy court awarded almost $70,000.00 in damages for PNC’s stay violation. In re Ogden, No. 11-19841 (Bankr. D. Colo. June 1, 2015). It is easy to feel imaginary malice behind the often frustrating interactions with impersonal, computer-operated, entities with which we all find ourselves conducting business. In this case, however, the court found that the debtor’s sense of actual ill will was confirmed by testimony from PNC’s representative in its defense to the charge of stay violation. [Read more…] about Court Rejects Bank’s “Devil Made Me Do It” Defense
Chase Gets Off the Hook, ABI Gets $7.5m, Debtors Get $20
We’ve heard on the street that the $20 checks for debtors are starting to roll in. The payments are part of a $50 million settlement between the United States Trustee Program and JP Morgan Chase, N.A. that was approved by the Bankruptcy Court for the Eastern District of Michigan on March 9, 2015.
The settlement concerns approximately 50,000 improper payment change notices filed by Chase in thousands of bankruptcies across the country. The improprieties of these notices range from failing to review the accuracy of the notices before filing, to notices signed in the names of employees or former employees who had nothing to do with the accuracy of the notices. See the Department of Justice press release here for further information.
The settlement includes a variety of remedies for affected homeowners in bankruptcy. These range from outright forgiveness of the loan (for only 325 loans), adjustments/credits to credits, suspense accounts or escrow accounts (for 30,508 loans); and/or cash payments in the amounts of $600.00 and/or $20.00 (for 18,908 loans). Some debtors have already started receiving these cash payments. The settlement also includes a payment of $7.5 million to the American Bankruptcy Institute’s endowment for financial education and support for the Credit Abuse Resistance Education Program.
There have been several concerns raised regarding the settlement. It appears no parties outside the USTP were consulted as to the practical ramifications of ongoing bankruptcies including standing chapter 13 and 7 trustees and debtors’ counsel. The USTP has been given no record or database of names of the thousands of affected debtors by Chase’s improper notices. The parties appointed an Independent Reviewer, Ms. Amy Walsh of The Morvillo law firm, to verify whether Chase fulfills its settlement obligations and to verify Chase’s numbers of incorrect notices by a sampling methodology. Of note, the Morvillo law firm lists on its Representative Clients webpage that its partners have also represented officers, directors, or partners in several financial institutions including J.P. Morgan.
The order and the settlement can be found here.
Child Tax Credit Refund Exemptible as Public Assistance Benefit
The federal Additional Child Tax Credit is a “public assistance benefit,” that may be exempted in bankruptcy under Missouri exemption law. Hardy v. Fink (In re Hardy), No. 14-1181 (8th Cir. June 2, 2015). [Read more…] about Child Tax Credit Refund Exemptible as Public Assistance Benefit
Court Reaffirms Dewsnup in Chapter 7 Cases
“The reasoning of Dewsnup dictates that a debtor in a Chapter 7 bankruptcy proceeding may not void a junior mortgage lien under §506(d) when the debt owed on a senior mortgage lien exceeds the current value of the collateral.” So held the Supreme Court yesterday in Bank of America v. Caulkett, 575 U.S. ___, No. 13-1421, and Bank of America v. Toledo-Cardona, No. 14-163 (U.S. June 1, 2015). Justice Thomas (who did not take part in the Dewsnup decision) delivered the opinion of the Court in which all Justices joined except concerning the footnote in which Justice Kennedy, Justice Breyer, and Justice Sotomayor did not join. The case should not affect lien-stripping in the reorganization chapters. For example, the decision preserves the application of 506(a) and the use of 1322(b)(2) to strip liens in chapter 13. [Read more…] about Court Reaffirms Dewsnup in Chapter 7 Cases