bankruptcy Archives - Page 56 of 60 - National Consumer Bankruptcy Rights Center

by NCBRC Editor on April 17, 2013

Trustee May Not Sell Estate Property Free and Clear of Liens

When the sale price exceeds the value of the property but is less than the aggregate of all liens secured by that property, section 363(f)(3) does not authorize sale of the property. In re Jaussi, No. 12-34062 (Bankr. D. Colo. March 18, 2013). In Jaussi, the chapter 7 trustee moved to sell debtor’s land valued at $39,000.00 to the senior mortgagee for $1,500.00 . Between the mortgage holder and two judgment lienholders, the property was encumbered to the tune of $44,040.56 with $40,181.00 of that amount owed on the mortgage. The motion sought to make the sale free and clear of the two junior judgment liens.

The court found that the sale was not permitted by the Code. Specifically, the sale did not fall under either of the two relevant conditions set forth in section 363(f), under which a trustee may sell estate property free and clear of liens when: “(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest,” or “(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property.”

by NCBRC Editor on April 15, 2013

Post-Confirmation Funds Returned to Debtor after Conversion to Chapter 7

What happens to funds paid into a confirmed chapter 13 plan that are still in the trustee’s possession when the bankruptcy is converted to chapter 7? That is the question recently answered by the district court for the Western District of Texas. The trustee had distributed the funds to creditors post-conversion and upon motion by the debtor, the bankruptcy ordered turnover to the debtor. Relying in large part on the Third Circuit case of In re Michael, 699 F.3d 305 (2012) in which NACBA participated as amicus, the district court affirmed. Veigelahn v. Harris (In re Harris), No. 12-540 (W.D. Tex. March 22, 2013).

Key to the decision was section 348(f) which provides that when a case is converted in good faith from chapter 13 to chapter 7 the property of the estate is determined as of the original petition date. Because the funds at issue had been garnished from debtor’s wages post-confirmation, they were not part of the debtor’s estate upon the original filing of the chapter 13 petition and, therefore, under section 348 would not be part of the chapter 7 estate upon conversion.

The trustee distinguished Stamm v. Morton (In re Stamm), 222 F.3d 216 (5th Cir. 2000), in which funds collected prior to confirmation of the chapter 13 plan were returned to the debtor upon conversion. Here, the trustee argued, the funds were collected post-confirmation thereby giving the creditors a vested interest in them even though the case was later converted. The trustee relied on section 1326(a)(2) which provides that “[i]f a plan is confirmed, the trustee shall distribute any such payment in accordance with the plan as soon as is practicable. If a plan is not confirmed, the trustee shall return any such payments not previously paid and not yet due and owing to creditors . . . to the debtor.” The trustee argued that because Congress specifically provided for the return of funds collected pursuant to a plan that was not confirmed it could be inferred that different treatment should be accorded funds collected after confirmation.

Acknowledging the superficial appeal of the trustee’s position, the court found that the Code sections at issue created an ambiguity that necessitated looking beyond the text. The court found that the legislative history indicated Congress’s intention to encourage debtors to file chapter 13 wherever possible without the inhibiting fear of penalty in the event that the chapter 13 failed and the debtor had to resort to chapter 7. H.R. Rep. No. 95-595 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 5966, 1977 WL 9628. In enacting section 348(f) Congress specifically addressed and sought to minimize the potential loss of property that a debtor could face upon conversion from chapter 13 to chapter 7 that would not have been at risk had the debtor filed directly in chapter 7.

The court also rejected the trustee’s argument that there is an inherent unfairness in returning the funds to the debtor upon conversion reasoning that the creditors lost nothing while reaping the benefits of payments made in accordance with the plan up to the time of conversion. Quoting Michael, the court found that the duties of the trustee delineated in section 1326 did not vest any rights in the creditors:

When the debtor transfers funds to the Chapter 13 trustee . . . under a confirmed plan . . . the funds become part of the estate, and the debtor retains a vested interest in them. Though creditors have a right to those payments based on the confirmed plan, the debtor does not lose his vested interest until the trustee affirmatively transfers the funds to creditors. Also, § 1326(a)(2) and (c) only address the obligation of the trustee to distribute payments in accordance with a confirmed plan; they do not vest creditors with any property rights.

Michael,699 F.3d at 313.

Furthermore, section 348(f)(2) protects creditors from unfair manipulation by debtors by including a provision that in the event of a bad faith conversion the estate would consist of property as of the conversion date rather than as of the petition date. As the court in Michael pointed out, the specific expansion of the chapter 7 estate in the event of bad faith, indicates that when the conversion is in good faith, the chapter 7 estate would be as of the petition date.

This is a case that illustrates the power of NACBA’s members to create good law around the country by getting involved in select cases on appeal.

Harris opinion

by NCBRC Editor on April 12, 2013

Co-Signed Loans May Receive Special Treatment in Chapter 13

A Chapter 13 plan may provide for full repayment of a co-signed loan even though other unsecured creditors receive less. In re Rivera, No. 12-66 (B.A.P. 1st Cir. Apr. 5, 2013). In Rivera, the debtors proposed a Chapter 13 plan under which one creditor, Villa-Coop, was to receive repayment in full of the unsecured portion of its loan which was co-signed by the debtor’s mother-in-law. The other unsecured creditors would receive repayment of only 4.51 percent on their loans. The trustee objected to the plan because its treatment of Villa-Coop constituted unfair discrimination in violation of section 1322(a)(3) and (b)(1) and that section 1325(b)(1) requires equal distribution of projected disposable income. The bankruptcy court confirmed the plan. In re Rivera, 480 B.R. 112 (Bankr. D. P.R. 2012). [Read more…] about Co-Signed Loans May Receive Special Treatment in Chapter 13

by NCBRC Editor on April 9, 2013

Court Rejects Unsupported Escrow Charges

In In the Matter of Breit, the chapter 13 trustee filed an objection to JPMorgan Chase’s proof of claim relating to the debtor’s residential mortgage. No. 11-32461 (Bankr. N.D. Ind. March 27, 2013). In its POC, Chase claimed an arrearage in the amount of $27,897.09, encompassing unpaid monthly installments of $1,102.53 which represented a principal and interest component of $804.79, and an escrow component of $297.74. Under this calculation, Chase sought $7,145.76 attributable to the escrow deficiency. Although RESPA contemplates the creation of an escrow account to cover, among other things, tax and insurance payments that the mortgage servicer is forced to pay on behalf of a delinquent debtor, the trustee argued that the arrearage claim should be reduced by $3,379.35 because Chase had actually paid only $2,909.37 for those obligations. The court agreed. It rejected Chase’s “mathematical manipulation” (Chase’s phrase) in calculating the pre-petition escrow shortfall and permitted recovery only of those expenditures authorized by RESPA. Thus, even though Chase had met its initial burden of proof with respect to Rule 3001, it failed to counter the trustee’s evidence refuting the POC and therefore failed to meet its ultimate burden of proving the validity of the claim.

Breit opinion

by NCBRC Editor on April 5, 2013

Petition for Certiorari on Stern Issues Addresses “Gap” in Bankruptcy Jurisdiction

Two issues growing out of the Supreme Court’s controversial jurisdictional decision in Stern v. Marshall, 131 S. Ct. 2594 (2011), have found their way back to that Court in a petition for certiorari. Executive Benefits Insurance Agency (EBIA) v. Arkinson (In re Bellingham Insurance Agency), No. 12A831 (S.Ct. Apr. 3, 2013). The case involves an alleged fraudulent conveyance by a non-creditor and is squarely within the holding of Stern under which the Court found that Congress violated Article III when it vested in bankruptcy courts the authority to enter final judgments on certain state-law counterclaims designated as “core” bankruptcy proceedings under Section 157(b)(2) of Title 28.

The issues raised in the petition are: 1) whether the bankruptcy court had the power under 28 U.S.C. 157(b) to issue findings of fact and conclusions of law to the district court for final adjudication, and 2) whether, the bankruptcy court could finally adjudicate a motion for summary judgment on the fraudulent conveyance claim upon consent of the parties.

While the case was on appeal to the Ninth Circuit, the Supreme Court decided Stern v. Marshall, 131 S. Ct. 2594 (2011). Based on that case, the circuit court found that although the Constitution precluded a bankruptcy court from finally deciding the core issue of fraudulent conveyance involving a non-creditor, 28 U.S.C. 157(b)(1) should be interpreted to permit bankruptcy courts all the power that “the constitution will bear” and that the “more modest power” to issue proposed findings of fact and conclusions of law is within those confines. Additionally, citing Commodity Futures Trading Comm’n v. Schor, 478 U.S. 833, 850-51 (1986), the court distinguished between personal and structural protections under Article III finding that the issue of fraudulent conveyance implicated personal protections that could be waived by the parties. Where section 157(c) permits the parties to consent to final adjudication in non-core proceedings, the court found that it followed that they could likewise consent to such adjudication in core proceedings. Exec. Ben. Ins. Agency v. Arkinson, 702 F.3d 553 (9th Cir. 2012)

The petition identifies a split in the circuit courts with respect to both of these issues. In Waldman v. Stone, 698 F.3d 910, 917–918 (6th Cir. 2012), cert. denied, 2013 U.S. LEXIS 2333 (Mar. 18, 2013), the Sixth Circuit held that parties cannot consent to a bankruptcy court’s jurisdiction to adjudicate core issues on a private right of action subject to Article III, and in Ortiz v. Aurora Health Care (In re Ortiz), 665 F.3d 906 (7th Cir. 2011), the Seventh Circuit held that proposed findings of fact and conclusions of law were limited to non-core proceedings.

The case, if accepted by the Supreme Court, could guide the courts in dealing with the “gap” left by the decision in Stern.

EBIA v Arkinson Petition

by NCBRC Editor on April 1, 2013

Sanctions Upheld against ECMC for Trying to Collect Repaid Student Loan

The First Circuit upheld a sanction award against ECMC for abuse of bankruptcy process based on that lender’s continued efforts to collect a student loan that had been found to be fully satisfied prior to bankruptcy. Hann v. ECMC, No. 12-9006 (1st Cir. March 29, 2013). [Read more…] about Sanctions Upheld against ECMC for Trying to Collect Repaid Student Loan

by NCBRC Editor on March 28, 2013

McCoy: Are you out of your Vulcan mind?

No, we’re not talking about Spock and Dr. McCoy. We’re referring to the recent Fifth Circuit opinion in In re McCoy, 666 F.3d 924 (5th Cir. 2012), which held that a late-filed tax return is not a “return” for purposes of the Bankruptcy Code. The result is that a tax debt for which a late return was filed can never be discharged. This major departure from past practice is not warranted by either the plain language of the Code or the legislative history of BAPCPA, neither of which suggests that Congress intended to make tax debts related to late-filed returns non-dischargeable in all circumstances. Since McCoy was decided several bankruptcy courts have adopted a similar position.

NACBA member and tax expert Morgan King takes a closer look at this issue in his recent article “What’s Wrong with McCoy?” You can also follow the status of pending cases dealing with these issues at www.latefiledreturn.com.

NCBRC is interested in participating in cases dealing with this issue. To let us know about a pending case, please contact us at amicus.admin@nacba.org.

Whats Wrong with McCoy?

by NCBRC Editor on March 27, 2013

$3 Million Punitive Damage Award Upheld against Wells Fargo

Despite repeated bludgeoning by the courts for its conduct, Wells Fargo Home Mortgage, Inc., has tenaciously and relentlessly fought against accepting responsibility for misapplying mortgage payments and charging unapproved fees. Now the district court for the Eastern District of Louisiana has upheld a punitive damages award of over $3 million against Wells Fargo. Jones v. Wells Fargo, No. 12-1362 (E.D. La. March 19, 2013). [Read more…] about $3 Million Punitive Damage Award Upheld against Wells Fargo

by NCBRC Editor on March 24, 2013

Post-Petition Bonus Not Part of the Bankruptcy Estate

In an important win for debtors, the BAP for the Eighth Circuit found that, under section 541 a debtor’s post-petition bonuses were not property of her bankruptcy estate. Klein-Swanson v. Seaver (In re Klein-Swanson), No. 12-6054 (B.A.P. 8th Cir. March 22, 2013). [Read more…] about Post-Petition Bonus Not Part of the Bankruptcy Estate