While the issue of lien stripping in no discharge Chapter 13 continues to work its way through the appellate courts, two bankruptcy courts have recently weighed in and sided with the majority, which permits lien stripping even when a discharge is unavailable. The courts in In re Wapshare, 492 B.R. 211 (S.D. N.Y. 2013) and In re Dolinak, 2013 WL 3294277 (Bankr. D.N.H. June 28, 2013), both concluded that the lack of a discharge did no preclude lien avoidance of undersecured junior mortgages, but rather that permanent lien avoidance is conditioned upon completion of payments under the debtor’s confirmed plan. Finding that the junior mortgagees did not have “allowed secured claims” both courts also rejected the argument that 1325(a)(5)(B) required debtors to pay in full the debt on the junior mortgage or obtain a discharge.
Court Finds Ride-Through Not Available with respect to Real Property
In In re Jeanfreau, No. 13-50015 (Bankr. S.D. Miss. June 12, 2013), the mortgagee moved to compel compliance with section 521(a)(2) and to delay discharge of the debtor’s chapter 7 bankruptcy due to the debtor’s failure to reaffirm the mortgage on her home. Ms. Jeanfreau was current on her payments under the mortgage and had equity in the home. In her section 521(a)(2) “statement of intention”’ she indicated that she intended to retain the property but did not elect to either “redeem” or “reaffirm” the debt. Instead she checked “other” and noted that she intended to maintain regular payments on the mortgage outside of bankruptcy without reaffirming. [Read more…] about Court Finds Ride-Through Not Available with respect to Real Property
Dewsnup Rears its Ugly Head in Seventh Circuit Chapter 13 Case
In Ryan v. U.S.A., No. 12-3398 (7th Cir. July 8, 2013), the IRS had a tax lien on the debtor’s property as security for delinquent taxes of more than $136,000.00. At the time the debtor filed his Chapter 13 petition the value of his estate property totaled approximately $1,600.00. He moved the court to value the IRS’s lien under section 506(a), to treat the secured portion of the lien in the bankruptcy, and to strip the unsecured portion under section 506(d). The bankruptcy court agreed with the IRS that section 506(d) does not authorize a court to strip a wholly unsecured lien.
The Seventh Circuit granted the debtor’s petition for direct appeal and affirmed. [Read more…] about Dewsnup Rears its Ugly Head in Seventh Circuit Chapter 13 Case
Court Erroneously Applies Lanning to Find Presumption of Abuse in Chapter 7
The district court for the Eastern District of North Carolina was asked to revisit its previous decision that a Chapter 7 debtor may take secured payment deductions on property he intends to surrender. Krawczyk v. Lynch (In re Krawczyk), No. 12-643 (E.D. N.C. June 17, 2013). The bankruptcy court had concluded that intervening Supreme Court and Fourth Circuit decisions rendered that finding incorrect. In re Krawczyk, No. 11-0956-8-JRL, 2012 WL 3069437 * 5 (Bankr. E.D. N.C. July 27, 2012) (relying on Hamilton v. Lanning, 130 S. Ct. 2464 (2010); Ransom v. FIA Card Services, 131 S.Ct. 716, 178 L.Ed.2d 603 (2011); In re Quigley, 673 F.3d 269 (4th Cir. 2012)). The district court agreed that the debtor could not take the deductions and that, therefore, the petition was presumptively abusive under section 707(b)(2)(A). [Read more…] about Court Erroneously Applies Lanning to Find Presumption of Abuse in Chapter 7
Social Security Not Part of PDI but May Be Considered for Feasibility
In a significant win for debtors, the Fourth Circuit today held “that the plain language of the Bankruptcy Code excludes Social Security income from the calculation of ‘projected disposable income,’ but that such income nevertheless must be considered in the evaluation of a plan’s feasibility.” Ranta v. Gorman (In re Ranta), No. 12-2017 (July 1, 2013). [Read more…] about Social Security Not Part of PDI but May Be Considered for Feasibility
Wells Fargo Financial Finally Moving to Claims Review and Compensation
In 2011, the Federal Reserve Board issued a cease and desist order and assessed an $85 million civil money penalty against Wells Fargo & Company of San Francisco, a registered bank holding company, and Wells Fargo Financial, Inc., of Des Moines. (as distinguished from Wells Fargo Home Mortgage or by Wells Fargo Bank, N.A.) The order addresses allegations that Wells Fargo Financial employees steered potential prime borrowers into more costly subprime loans and separately falsified income information in mortgage applications. The order affect certain mortgage loans made between January 1, 2004, and September 30, 2008. In addition to the civil money penalty, the order requires that Wells Fargo compensate affected borrowers.
Wells Fargo Financial made subprime loans that primarily refinanced existing home mortgages in which borrowers received additional money from the loan proceeds in so-called cash-out refinancing loans. The order addresses allegations that Wells Fargo Financial sales personnel steered borrowers who were potentially eligible for prime interest rate loans into loans at higher, subprime interest rates, resulting in greater costs to borrowers. The order also addresses separate allegations that Wells Fargo Financial sales personnel falsified information about borrowers’ incomes to make it appear that the borrowers qualified for loans when they would not have qualified based on their actual incomes.
According to both the Federal Reserve Board and Wells Fargo, some current and former customers of Wells Fargo Financial will receive notices that they may be eligible to file a claim. For more information, you can visit the Wells Fargo Financial Consent Order Website.
FHFA Turns to Industry Lobbyist for Advice on Force-placed Insurance
Mortgage lenders routinely require homeowners to purchase property insurance to protect the lender’s interest in the home in the case of fire or other casualty. If the homeowner fails to purchase such insurance or fails to provide evidence of insurance, most loan documents will authorize the lender to purchase insurance to protect its interest. This coverage is called forced-placed or collateral protection insurance. Force-placed insurance has long been an area of abuse. Not only do servicers improperly place policies, but the field is filled with price gouging and illegal kickbacks. Bankruptcy debtors have not been immune from troubles caused by force-placed insurance. For example, in In re Cothern, 422 B.R. 494 (Bankr. N.D. Miss. 2010), the servicer’s unrelenting and improper efforts to collect force-placed insurance premiums drove the borrowers into bankruptcy. “The incompetence here is absolutely radiant” is how the judge in Cothern describes the servicer’s conduct.
After years of effort to get Fannie Mae and Freddie Mac to address the problem of force-placed insurance, Fannie Mae unveiled a plan last year that would have limited financial ties between servicers and insurers. In February of this year, FHFA, the agency that oversees Fannie Mae, vetoed Fannie Mae’s plan–a plan that would have lowered the cost of force-placed insurance significantly. Now we learn from Jeff Horwitz at American Banker that FHFA’s “outside expert” on force-placed insurance is actually an industry lobbyist who is well versed in protecting financial institutions. For more details, read Jeff’s article here.
“Lien Provision” Does Not Render IRA Non-Exemptible
The Sixth Circuit found that the debtor’s pledge of his IRA account against future indebtedness which he never incurred did not render the account non-exemptible in bankruptcy. Daley v. Mostoller (In re Daley), No. 12-6130 (June 17, 2013). [Read more…] about “Lien Provision” Does Not Render IRA Non-Exemptible
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.”
[Read more…] about Trustee May Not Sell Estate Property Free and Clear of Liens
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.