National Consumer Bankruptcy Rights Center

Protecting The Rights Of Consumer Debtors In Bankruptcy

NCBRC Editor

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Court Has Discretion to Deny Arbitration in Discharge Injunction Case

The Fifth Circuit found that the test it established in In re Nat’l Gypsum Co., 118 F.3d 1059, 1069 (5th Cir. 1997), was still good law notwithstanding the intervening case of Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018), and that, under National Gypsum, the bankruptcy properly exercised its discretion to deny the creditor’s motion to compel arbitration in an action alleging discharge injunction violation. Henry v. Educ. Fin. Serv., No 18-20809 (5th Cir. Oct. 17, 2019).

NCBRC, NACBA and Professor Jay Westbrook provided an amicus brief, authored by NACBA member Allan Gropper, in support of the debtor in this case.

Stephanie Henry filed for chapter 13 bankruptcy ten years after entering into a student loan contract with Wells Fargo’s predecessor. After she successfully completed her five-year plan, Wells Fargo sent her a letter containing language to the effect that it was attempting to collect the remaining debt on the loan. Ms. Henry filed an adversary proceeding alleging violation of the discharge injunction. Wells Fargo moved to compel arbitration in accordance with a clause in the lending agreement under which Ms. Henry agreed to have any complaint “arising under or relating to” the debt settled by arbitration. The bankruptcy court denied Wells Fargo’s motion to compel arbitration on the basis that the cause of action did not arise under or relate to the student loan contract. The court certified the case for interlocutory appeal directly to the Fifth Circuit. [Read more…] about Court Has Discretion to Deny Arbitration in Discharge Injunction Case

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Arbitration Clause Does Not Constrain Court’s Contempt Power

Finding that “[w]ords in a consumer agreement cannot deprive the bankruptcy court of the inherent power to enforce compliance with an injunction,” the district court found an arbitration clause in a consumer contract did not constrain the court’s contempt powers. Verizon Wireless Personal Communications, LP v. Bateman, No. 14-5369, Adv. Proc. No. 18-1394 (M.D. Fla. Sept. 24, 2019).

Christopher Bateman filed for chapter 7 bankruptcy listing Verizon as an unsecured creditor. Verizon did not acknowledge or take part in the bankruptcy in any way. Five months after Mr. Bateman obtained his discharge, Verizon sent him a letter attempting to collect the discharged debt. Mr. Bateman moved the court to hold Verizon in contempt for violation of the discharge injunction. In response, Verizon moved to compel arbitration, invoking its Customer Agreement with Mr. Bateman which provided that any dispute which “in any way relates to or arises out of” the agreement is subject to arbitration. The bankruptcy court found that its power to enforce its order was not subject to the terms of Mr. Bateman’s Customer Agreement with Verizon. [Read more…] about Arbitration Clause Does Not Constrain Court’s Contempt Power

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Bankruptcy Court Gets Undue Hardship Right on Remand

The Bankruptcy Court for the District of Massachusetts applied the totality-of-the-circumstances test to find that the Chapter 7 debtor was entitled to have her student loans discharged in bankruptcy notwithstanding the fact that she had substantial exempt equity in her home. Schatz v. U.S. Dept. of Ed., No. 14-30825, Adv. Proc. No. 15-3001 (Bankr. D. Mass. Oct. 2, 2019).

When the debtor, Audrey Schatz, was in her fifties she attempted to improve her earning potential by attending law school, for which she incurred $106,000 in student loans. After becoming a lawyer, however, she was unable to find satisfactory employment and was earning approximately $25,000 when she filed for bankruptcy. The bankruptcy court rejected her position that the student loan debt caused her undue hardship and found that the loans were nondischargeable under section 523(a)(8). [Read more…] about Bankruptcy Court Gets Undue Hardship Right on Remand

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Property Purchased in Tax Sale for Less than Its Value Is Preferential Transfer

The Third Circuit affirmed that because New Jersey’s tax foreclosure sales are not tied to the value of the property, the transfer of property worth more than what the purchaser would have received in a Chapter 7 distribution may be avoided as a preferential transfer. Hackler v. Arianna Holdings Company, LLC., No. 18-1650 (3rd Cir. Sept. 12, 2019). NCBRC filed an amicus brief in support of the debtors.

Frank and Dawn Hackler failed to pay taxes on their residence. The property was sold in a tax sale according to New Jersey tax foreclosure procedures under which the public bids only on the interest rate for the unpaid taxes with the property going to the lowest bidder. A tax purchaser won the bid, and then sold the property, valued at $335,000, to Arianna Holding Co. LLC. for $45,000. The Hacklers filed for Chapter 13 bankruptcy and the trustee sought to avoid the transfer to Arianna as a preferential transfer under section 547(b). The bankruptcy court granted the trustee’s motion and the district court affirmed (blogged here). Arianna appealed to the Third Circuit. [Read more…] about Property Purchased in Tax Sale for Less than Its Value Is Preferential Transfer

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State Court May Order Criminal Restitution Relating to Discharged Debt

The Pennsylvania Supreme Court held that its criminal law permits an order of restitution even though it relates to a debt that was discharged in Chapter 7 bankruptcy. Commonwealth v. Petrick, No. 47 MAP 2018 (Pa. Sept. 26, 2019).

The issue came before the Court from the state superior court where the Appellant argued that his sentence for restitution was illegal because the underlying debt had been discharged in bankruptcy. The Court “granted allocatur . . . to address the effect a discharge of a civil debt by a federal bankruptcy court has on the authority of a state trial court to order mandatory restitution as part of a sentence in a criminal case involving the same obligation.” [Read more…] about State Court May Order Criminal Restitution Relating to Discharged Debt

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Bank Cannot Be Liable for RESPA Violation under Vicarious Liability Theory

In a case of first impression, the Fifth Circuit held that a RESPA action under section 2605 against a servicer for failure to comply with its obligation to provide loss-mitigation options to the homeowner, could not extend to the mortgagee Bank under a theory of respondeat superior. Christiana Trust v. Riddle, 911 F.3d 799 (5th Cir. Dec. 21, 2018).

Here, the homeowner, Mary Sue Riddle, took out a loan with Bank of America and the Bank engaged Ocwen Loan Servicing to service the loan. After the current loan owner, Christiana Trust, initiated foreclosure proceedings against Ms. Riddle, she counterclaimed and filed a third-party complaint against the Bank and Ocwen, alleging that the servicer failed to comply with RESPA’s mandate that it respond to Ms. Riddle’s timely application for loss-mitigation options. Specifically, Ms. Riddle invoked 12 U.S.C. § 2605(k)(1)(E), which provides that “a servicer of a federally related mortgage shall not … fail to comply with any other obligation found by the Bureau of Consumer Financial Protection, by regulation, to be appropriate to carry out the consumer protection purposes of this chapter.” The district court granted the Bank’s motion to dismiss on the dual basis that Ms. Riddle failed to support her claim that the Bank was vicariously liable for Ocwen’s actions, and, in the alternative, because, under section 2605(k)(1)(E), the Bank could not be held liable for the actions of its servicer even if an agency relationship were established. [Read more…] about Bank Cannot Be Liable for RESPA Violation under Vicarious Liability Theory

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Scotus Offered Another Opportunity to Address Passive Conduct and the Automatic Stay

After recently declining cert in a case involving the issue of whether a creditor’s passive conduct can ever violate the automatic stay (Davis v. Tyson Prepared Foods, No. 18-941 (10th Cir. cert. denied, May 20, 2019) (blogged here)), the Supreme Court has been presented with another opportunity to take on the issue. In In re Fulton, Nos. 18-2527, 18-2793, 18-2835, 18-3023, 2019 U.S. App. LEXIS 18393 (7th Cir. June 19, 2019), (blogged here), the City of Chicago impounded the debtors’ vehicles prior to their filing for chapter 13 bankruptcy. Upon filing for bankruptcy, the debtors sought to have the vehicles returned. The City refused, and the bankruptcy court found its refusal constituted a violation of the automatic stay. The City appealed.

Citing its decision in Thompson v. General Motors Acceptance Corp., 566 F.3d 699 (7th Cir. 2009), the Seventh Circuit affirmed, holding that passively retaining, and refusing to return, estate property is an exercise of control within the meaning of section 362(a)(3). The court found that section 542(a) also mandates that an entity in possession of estate property turn it over to the trustee. The court rejected the City’s call to overturn Thompson, recognizing that one of the fundamental purposes of bankruptcy is to allow a debtor to improve her financial situation, and that a vehicle is frequently necessary to achieve that goal.

The City’s petition for certiorari, points out that five courts of appeals (the second, seventh, eighth, ninth and eleventh), have likewise found that passive conduct can be the basis for an automatic stay violation, while two courts of appeals (the tenth and the District of Columbia) have adopted the position that a creditor’s conduct must be affirmative.

City of Chicago v. Fulton Cert Petition

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Cert. Denied in Stay Case Involving Passive Conduct

The Supreme Court declined cert. in Davis v. Tyson Prepared Foods, No. 18-941 (May 20, 2019), a case out of the Tenth Circuit presenting the issue of whether section 362(a) applies when a creditor passively holds or obtains an interest in property of the debtor or the estate. The case involved a lien that arose automatically out of post-petition Worker’s Compensation payments made to the debtor. The trustee sought to avoid the lien as violating the automatic stay. The Tenth Circuit found that based on WD Equip., LLC v. Cowen (In re: Cowen), 849 F.3d 943 (10th Cir. 2017), section 362(a)(4), which prohibits “any act to create, perfect, or enforce any lien,” requires affirmative conduct on the part of the creditor. Here, because the lien was created by operation of law, there was no such affirmative conduct and the Tenth Circuit found no stay violation.

Davis SCt Cert Petition

Davis 10th Cir Oct 2019

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Proceeds from Sale of Fraudulently Transferred Property May Be Recovered from Third Party

The chapter 7 trustee may “recover money from the entity who received the proceeds from the sale of fraudulently transferred property, but to whom the property itself was never transferred.” Rajala v. Husch Blackwell LLP, No. 08-20957, Adv. Proc. No. 18-6016; Rajala v. Spencer Fane LLP, Adv. Proc. No. 18-6020 (Bankr. D. Kans. Aug. 14, 2019).

Three couples started GRHC, a company designed to explore the possibilities of wind-generated electricity. GRHC initiated a wind-energy project in Pennsylvania called Lookout Windpower. The three couples then created the Lookout Windpower Holding Company (LWHC) and transferred Lookout Windpower from GRHC to LWHC rendering GRHC insolvent. LWHC then sold Lookout Windpower to Edison Mission Energy for over $6.7 million, and GRHC filed for chapter 7 bankruptcy. From the Lookout Windpower sale proceeds, LWHC paid the law firms of Husch Blackwell over $1.3 million and Spencer Fane over $700,000. The trustee in GRHC’s bankruptcy case successfully avoided the transfer of Lookout Windpower from GRHC to LWHC and sought to recover the funds paid to the law firms out of the proceeds from LWHC’s subsequent sale of the property. The law firms moved to dismiss the adversary complaints.

[Read more…] about Proceeds from Sale of Fraudulently Transferred Property May Be Recovered from Third Party

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5th Circuit Finds No Room for Sympathy for Student Loan Debtor

In an exercise in disingenuous hand-wringing, the Fifth Circuit essentially acknowledged that its application of the Brunner test eviscerates the undue hardship avenue to discharge of student debts. In so holding, the court affirmed the denial of discharge and sent the debtor packing to perform, if not the impossible, at least the highly improbable task of finding employment. Thomas v. Dept. of Educ., No. 18-11091(5th Cir. July 30, 2019).

Vera Thomas worked at a call center for eight years at just over $11/hour when, in 2014, she developed diabetic neuropathy causing her to take numerous unpaid work days and incur extensive medical expenses. When the call center was sold in 2016, she lost her job for “company policy violations” and moved to Texas. From 2016 to 2017, Ms. Thomas acquired and lost three jobs—Whataburger, Perfumania and UPS—due to her diabetic neuropathy and consequent inability to stand for any length of time. By the time she filed chapter 7 bankruptcy, she was in her 60s and living off public assistance and private charity. Her monthly expenses were over three times her monthly income. After obtaining her bankruptcy discharge, Ms. Thomas sought to have her student loans discharged. The bankruptcy court, noting that in fifteen years on the bench it had never granted undue discharge of student loans, found that Ms. Thomas did not meet the standard for undue hardship discharge. The district court affirmed.

[Read more…] about 5th Circuit Finds No Room for Sympathy for Student Loan Debtor