National Consumer Bankruptcy Rights Center

Protecting The Rights Of Consumer Debtors In Bankruptcy

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State May Reasonably Rely on Public Assistance Application

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 Maxwell v. State of Oregon, No. 18-1286 (B.A.P. 9th Cir. March 27, 2019) (unpublished).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 investigated Ms. Maxwell’s income and found that she had failed to list the 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 for 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…] about State May Reasonably Rely on Public Assistance Application

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Malpractice Action against Bankruptcy Attorneys Not Part of Estate

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.

The panel began with the premise that, while property interests are determined by state law, federal law determines if and when those property interests become part of the bankruptcy estate. Here, the parties agreed that even though some of the conduct giving rise to the malpractice action took place pre-petition, the debtors did not suffer an injury until they were denied discharge. The panel found that, based on these facts, the debtors did not have a cause of action against the malpractice defendants at the time they filed their petition.

CJV argued that the bankruptcy court erred in looking at when the cause of action accrued under state law instead of looking to when the conduct leading to the denial of discharge took place. It maintained that, because some of that conduct took place prior to the bankruptcy petition, the cause of action was sufficiently rooted in the pre-petition past to render it part of the bankruptcy estate. The panel disagreed. In Underhill, the Sixth Circuit held that pre-petition conduct alone will not root a cause of action in the pre-bankruptcy past but that there must be a pre-petition violation: “[t]hat is, a cause of action qualifies as bankruptcy estate property only if the claimant suffered a pre-petition injury.” Underhill, 579 F. App’x at 482-83. Here, the only injury was the denial of discharge – a post-petition event.

For the same reason, the panel rejected CJV’s argument that the bankruptcy court should have split the complaint into pre- and post-petition causes of action and allowed the pre-petition cause of action to go forward. The panel found that, in the absence of injury, there was no pre-petition cause of action.

CJV has appealed to the Sixth Circuit. Church Joint Venture v. Blasingame, No. 19-5505 (6th Cir., filed, May 10. 2019).

Blasingame BAP 6th Cir. April 2019

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Asset Technically Abandoned Despite Not Being Listed on Schedule B

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…] about Asset Technically Abandoned Despite Not Being Listed on Schedule B

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Accrued Interest on Student Loan Discharged as Undue Hardship

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…] about Accrued Interest on Student Loan Discharged as Undue Hardship

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

In an unpublished opinion entered on April 29, 2019, the 9th Circuit Bankruptcy Appellate Panel addressed the thorny issue of 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).

Before 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 the Debtor’s bankruptcy filing.

At the 341 meeting, the Trustee questioned the Debtor about the state court action. The Debtor stated 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 violate 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 for $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 brought 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 agree 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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Ambush at State Trial Costs Creditor and Her Counsel over $200,000 for Discharge Injunction Violation

The creditor and her counsel were found liable for violation of the discharge injunction to the tune of over $200,000 after the creditor and her counsel blindsided the debtor during closing arguments in their state court litigation by grossly expanding the scope of the creditor’s claimed damages to encompass discharged debts. In re Renfrow, No. 17-1027 (Bankr. N.D. Okla. April 23, 2019). [Read more…] about Ambush at State Trial Costs Creditor and Her Counsel over $200,000 for Discharge Injunction Violation

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SCOTUS Hears Arguments on Discharge Violation Sanctions

Addressing the reach of a bankruptcy court’s contempt powers in the context of a violation of the discharge injunction, the Supreme Court heard arguments on April 24, in the case of Taggart v. Lorenzen, No. 18-489.

Daniel Geyser appeared for the debtor, Bradley Taggart. Nicole Saharsky represented the creditor, Shelley Lorenzen, executor. Sopan Joshi, from the office of the Solicitor General, argued as amicus not in support of either party. NACBA submitted an amicus brief in support of reversal.

The controversy hinged on a state court finding that Mr. Taggart’s creditor could seek contractual attorney fees in the litigation before it, even though those fees would have been subject to the discharge order injunction had Mr. Taggart not “returned to the fray.” The bankruptcy court found that the “returned to the fray” doctrine did not apply and that the litigation violated the discharge injunction. It awarded sanctions, at least in part representing the debtor’s attorney’s fees. The Ninth Circuit ultimately reversed the sanctions stating broadly that a creditor acting in good faith cannot be held liable for discharge injunction violation even if that belief is unreasonable. Lorenzen v. Taggart (In re Taggart), 888 F.3d 438 (9th Cir. 2018).

At the outset, all the parties agreed that the Ninth Circuit rule was incorrect. The parties agreed that in the case of a discharge violation, even one made in good faith, the bankruptcy court may order the creditor to cease the violation and restore any property taken.

Where there was disagreement between parties was in the application of the bankruptcy court’s contempt powers. Calling contempt a severe remedy, several of the Justices appeared concerned at its application in the context of discharge injunction where the creditor’s conduct was based on a “fair ground of doubt.”

The debtor advocated for the bankruptcy court’s discretion under section 105(a) to make the determination as to the nature of the creditor’s conduct and whether it merits sanctions, including attorney’s fees. The creditor has a “safe harbor” in Rule 4007 which allows it to seek guidance on the question of dischargeability from the bankruptcy court.

The government advocated for a purely objective test as to the reasonableness of the creditor’s belief that the discharge injunction did not apply. In Justice Gorsuch’s questioning, it appeared that an objective reasonableness would prevail even in the absence of the creditor’s subjective reasonableness (i.e. where there existed good reason to believe the conduct non-violative but the creditor was unaware of that good reason and went forward nonetheless.)

The creditor advocated a similar “reasonable good faith belief,” test as the government (though with the subjective element intact) emphasizing the “chilling effect” of requiring a creditor to jump through the Rule 4007 hoop to have dischargeability determined in an action before the bankruptcy court.

One concern expressed by several Justices was the establishment of a strict liability standard which put the creditor in a position of being permitted to seek a ruling on dischargeability from the state court but not be able to rely on that ruling as a defense to discharge injunction violation if the state court was in error.

The question of who should bear the burden of harm echoed throughout the questioning. Justice Kavanaugh noted to Mr. Geyser that under tradition rules of injunction good faith is a defense. Mr. Geyser disagreed stating that traditionally, the burden of uncertainty falls on the person subject to the decree. In a similar vein, Justice Kagan asked Ms. Saharsky: “As between the victim of the violation and the person who, with all the good faith in the world, perpetrated the violation, why shouldn’t we look to the person who perpetrated the violation?”

Justice Roberts, while noting the long history of the American Rule against fee-shifting, posited the possibility that a bankruptcy court could award sanctions for contempt using the debtor’s attorney’s fees as a reasonable number for that award.

See the SCOTUS blog for further discussion of the argument here.

Taggart SCt transcript April 2019

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Debtor Not a Borrower under Reverse Mortgage

The debtor, who had only a remainder interest in her mother’s property and was not a signatory to her mother’s reverse mortgage, was not a “borrower” entitled to remain in the residence after her mother’s death without paying the underlying debt. Reverse Mortgage Solutions v. Nunez, No. 18-22204 (S.D. Fla. March 21, 2019).

Aleida Nunez’s mother borrowed $531,000 secured by a reverse mortgage on her residence. The loan was memorialized in a Home Equity Conversion Note (Note) and a Home Equity Conversion Loan Agreement (Loan Agreement). The Note stated that the loan was secured by property described in a Security Instrument. While Ms. Nunez’s mother was the only signatory to the Note and Loan Agreement, Ms. Nunez was listed on the Security Instrument as having a “remainderman interest,” and she signed the document as “remainderman.” After her mother died, Ms. Nunez filed for chapter 13 bankruptcy and proposed a plan under which she would be treated as a borrower under the reverse mortgage, allowing her to cure tax and insurance defaults on the residence while continuing to live in the house without paying off the underlying loan. RMS objected to the plan, arguing that Ms. Nunez was not a borrower and that her mother’s death rendered the debt due.

The bankruptcy court reviewed the many documents surrounding the reverse mortgage but ultimately relied on the Security Instrument to find that Ms. Nunez was a borrower along with her mother on the loan. It confirmed her plan. On RMS’s motion for reconsideration, the court found the Security Instrument to be unambiguous and reached the same conclusion.

On RMS’s appeal, the district court found that in order to determine the intent of the parties to a transaction, Florida applies a “doctrine of mutual construction” requiring that when there are multiple documents executed at the time of the transaction, they should all be taken into consideration. The district court found guidance in a recent case out of Florida, Onewest Bank, FSB v. Palmero, 2018 W L 1832326 (FIa. 3d DCA 2018), where the mortgage and many other documents executed contemporaneously with the subject transaction were signed by the husband as “borrower.” The wife signed only the mortgage as a borrower, and on that document she was described as having an interest in the property as one of three remaindermen. The Palmero court found that, taking all the documents into consideration, only the husband was the “borrower.”

In this case, the court noted that Ms. Nunez’s mother was the sole signatory on eight documents relating to the reverse mortgage, including the Note, the Loan Agreement, the Residential Loan Application for Reverse Mortgages, a Borrower’s Certificate, and the Settlement Statement for the Reverse Mortgage. Significantly, the Note listed only Ms. Nunez’s mother as the borrower on the reverse mortgage. The court reasoned that treating Ms. Nunez as a borrower on the reverse mortgage based on the Security Instrument would nullify the terms of the Note, whereas the reverse was not true. The district court therefore found that the bankruptcy court erred in relying solely on the Security Instrument when it concluded that Ms. Nunez qualified as a borrower under the reverse mortgage.

Holding that Ms. Nunez was not a borrower, the court reversed and remanded.

Nunez SD Fla March 2019

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Bifurcated Attorney Fee Agreement Gets Thumbs Up

A Utah bankruptcy court upheld a chapter 7 debtor’s attorney’s bifurcated fee agreement in the face of a motion for sanctions by the U.S. Trustee. In re Hazlett, No. 16-30360 (Bankr. D. Utah Apr. 10, 2019).

Attorney Russell B. Weekes, of Capstone Law, entered into a fee agreement with the chapter 7 debtor, Brett Hazlett, under which Mr. Hazlett would pay no retainer fee, but would pay post-petition costs and expenses in the amount of $2,400 in ten monthly installments. Capstone had an arrangement with BK Billing, under which BK Billing would buy the account from Capstone for $1,800 and collect the fee payments from Mr. Hazlett. Mr. Weekes explained that arrangement to Mr. Hazlett. Mr. Weekes filed all the necessary bankruptcy papers and Mr. Hazlett received his chapter 7 discharge without complications in March of 2017.

In September, 2017, the U.S. Trustee reopened the case and moved for sanctions based on the fee agreement. Specifically, the UST challenged: “(1) the marketing of Zero-Down Chapter 7 bankruptcy services; (2) the bifurcation of bankruptcy services into pre-petition and post-petition fee agreements; (3) filing the petition and the Initial Bankruptcy Papers for purportedly no charge; (4) the reasonableness of the $2,400 post-petition fee; (5) the use of BK Billing to factor and collect the fee; and (6) the propriety of utilizing electronic signatures in bankruptcy.”

In its preliminary discussion, the court noted several factors contributing to the problem of fees for chapter 7 representation, not least of which is the fact that chapter 7 debtors tend not to have the funds to pay a retainer. Adding to the difficulty, the Supreme Court held in Lamie v. United States Trustee, 540 U.S. 526 (2004), that a chapter 7 debtor’s attorney cannot be paid out of estate funds and that any fee still owed at the time of the petition is dischargeable along with other debts. The court reviewed the various, less-than-optimal, choices chapter 7 debtors have, beginning with the pro se route (or use of petition-preparers who often overcharge and underperform), which typically results in needlessly complicated chapter 7 cases and a low discharge rate of 70%.

In the absence of established law in the district on the topic of bifurcated fee agreements, the court found guidance in an ethics opinion issued by the Utah State Bar which emphasized that any such agreement must be for post-petition service, must be entered into after full disclosure and evidence of an understanding on the part of the debtor, and must be permissible under bankruptcy law.

The court found that Capstone’s fee agreement procedures—which included verbal explanation of the ramifications of all the payment options; extensive documents to be signed by the client laying out the disclosures, warnings and explanations; a general information document requiring the client’s initials on each paragraph; and more—satisfied the requirements of full disclosure and informed consent.

The court turned next to whether such agreements are permissible in bankruptcy. Section 329 requires that fees be reasonable, and Rule 2016(b) imposes disclosure requirements on attorneys. Evidence of compliance with both requirements must be presented to the court in the Form B2030 Disclosure of Compensation. The court found that bifurcated fee agreements are not per se prohibited and set forth the following “prime directives” for their use:

  1. The agreement must be in the debtor’s best interest.
  2. All fees must be reasonable and necessary. Where the attorney charges more for the post-petition agreement, he or she must justify the increased fee other than by work performed pre-petition.
  3. The fee arrangement must be revealed in Form B2030 within fourteen days of the petition.
  4. If the debtor opts to proceed pro se or with different counsel, the attorney must comply with the Local Rule pertaining to withdrawal or substitution of counsel.

The court acknowledged that Local Rule 2091-1 essentially requires a lawyer to complete all aspects of a bankruptcy case, but noted that in this case, the attorney fee agreement contemplated just that; Mr. Weekes was obligated under the agreement to complete the bankruptcy case unless the debtor opted to proceed pro se or hire new counsel.

Finding that Mr. Weekes’s fees were reasonable and necessary, the court went on to examine Capstone’s use of BK Billing for collection of payments. The court expressed concern about the use of such services due to systemic issues of overcharging debtors and creating a conflict of interest for the debtor’s attorney between the debtor and the collector. It noted, however, that the Utah Ethics Opinion found that such arrangements were permissible so long as all the requirements of full disclosure, informed consent, and reasonable fees were met. The court found that to be the case here.

The same was true for Capstone’s use of electronic signatures for some of the documents Mr. Hazlett signed. Though Local Rule 5005-2(e), which pertains to documents an attorney must retain, refers to “original signatures,” various rules and statutes in Utah sanction the use of electronic signatures, and it was therefore not unreasonable for Capstone to use e-signatures. Moreover, from a practical standpoint, the court noted that it is not always feasible to obtain wet signatures when financial pressures require immediate action.

The court concluded that Mr. Weekes provided valuable and ultimately successful services to Mr. Hazlett, that the terms of the fee agreement were fully disclosed, that the fee itself was reasonable and necessary and that, for all these reasons, sanctions were not warranted.

Hazlett Opinion Bankr Utah April 2019

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District Court Affirms Chapter 13 Debtor’s Absolute Right to Dismiss Despite Bad Faith, Refuses to Extend Marrama

Noting a split in authority, the District Court for the Northern District of New York found that a Chapter 13 debtor has the absolute right to dismiss her bankruptcy.

On April 21, 2015, the Debtor filed a voluntary Chapter 13 bankruptcy petition. She claimed as exempt an inherited Individual Retirement Account (“inherited IRA”) worth about $800,000. One of her creditors was Endurance American Insurance Company (“Endurance”). At Endurance’s request, the bankruptcy court entered an interim preservation order that limited the debtor’s ability to withdraw funds from the inherited IRA. On March 19, 2018, the Debtor filed a request for voluntary dismissal of her bankruptcy case under 11 U.S.C. § 1307(b). The bankruptcy granted the motion on the same day.

Thereafter, it was discovered that the Debtor had quietly depleted the funds in the inherited IRA and other accounts during the bankruptcy.

Endurance then filed a motion to reconsider or vacate the dismissal of the Debtor’s bankruptcy, to convert the case to a Chapter 7 proceeding, and to hold the Debtor in contempt for violating the IRA preservation order.

After a two-day hearing, the Bankruptcy Court found that Debtor had violated the interim preservation order but denied Endurance’s motion to reconsider or vacate the dismissal order relying upon a Second Circuit case, Barbieri v. RAJ Acquisition Corp., 199 F.3d 616 (2d Cir. 1999), which held that debtors, bad faith or no, enjoyed an absolute right to voluntarily dismiss a chapter 13 petition under § 1307(b).

Endurance raised the issue of whether the Supreme Court’s decision in Marrama v. Citizens Bank, 549 U.S. 365 (2007) overruled the Barbieri decision. The Bankruptcy Court concluded that Barbieri remained in good law after Marrama. The issue was then addressed on appeal by the district court.

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