A state statutory interest rate hike applicable only in bankruptcy is not “nonbankruptcy law” for purposes of establishing the interest rate under section 511(a). Metropolitan Gov’t of Nashville v. Corrin (In re Bratt), No. 16-5719 (6th Cir. Feb. 23, 2017). [Read more…] about State Law Applicable Solely to Bankruptcy Is Not Non-Bankruptcy Law
Illinois AG Cracking Down on Fraud in the For-Profit College Industry
Illinois Attorney General, Lisa Madigan, is leading the charge in investigating and enforcing consumer protection violations in the area of student lending. According to a press release issued by the Attorney General’s office, Ms. Madigan is calling for the U.S. Department of Education to forgive student loans for students who attended Everest College or the criminal justice program at Westwood College. Ms. Madigan’s investigations into both colleges revealed that students were fraudulently lured into enrolling in programs that were poorly or non-accredited and that students took out millions of dollars in federal student loans to attend the programs. In 2015, Ms. Madigan reached a $15 million settlement with Westwood College, which included forgiving private loans of students enrolled in the school. Ms. Madigan’s efforts are in addition to a current investigation by the AG’s office into Navient, the largest servicer of student loans in the country. She has also taken action against debt relief scammers who victimize student loan debtors into paying for help that never materializes.
SCOTUS Declines to Decide Late-Filed Tax Return Issue
The Supreme Court denied cert. In the case of Smith v. I.R.S., No. 16-497 (U.S.) dashing hopes of a definitive resolution of the issue of whether a late-filed tax return may constitute a “return” within the meaning of the hanging paragraph to section 523(a) (petition denied, (Feb. 21, 2017)). As NACBA/NCBRC argued in its amicus brief in support of certiorari, the question has deeply divided the courts with the Eighth Circuit relying on the accuracy of the documents purporting to constitute the return and permitting discharge if a bankruptcy petition is filed two years after a late-filed return, Colsen v. the United States (In re Colsen), 446 F.3d 836 (8th Cir. 2006); the Fourth, Sixth, Seventh, Ninth, and Eleventh Circuits, finding that once the IRS has made its assessment of tax liability the late-filed return is not considered a return for purposes of bankruptcy dischargeability, e.g. Smith v. United States (In re Smith), 828 F.3d 1094 (9th Cir. 2016); and the First, Fifth and Tenth Circuits taking the draconian approach epitomized by McCoy v. Mississippi State Tax Comm’n (In re McCoy), 666 F.3d 924 (5th Cir. 2012), that all taxes described on late-filed returns—even those filed one day late for any reason—are barred from discharge. Unfortunately, given the sharp divide between circuits, treatment of a late-filed return will continue to be based on the luck of the geographical draw.
BAP Takes Realistic Approach to Undue Hardship Analysis
Where there is little likelihood that the debtor will be able to pay her students loans now or in the future, the fact that an income-based repayment plan may be available does not automatically constitute an “ability to pay.” Fern v. FedLoan Servicing, No.16-6021 (B.A.P. 8th Cir. Feb. 7, 2017).
Sara Fern is a 35 year-old single mother of three who receives food stamps and rental assistance and has a monthly employment income of $1,507. While she receives occasional financial help from her mother, that assistance is expected to end when her mother retires. Her expenses exceed her income by $62/month. Ms. Fern has student loans totaling over $27,000 which have been in forbearance or deferment ever since she left school.
The U.S. Department of Education appealed the bankruptcy court’s finding that Ms. Fern’s student loans were dischargeable based on undue hardship under section 523(a)(8).
The Eighth Circuit has explicitly rejected the oft-used Brunner test for undue hardship in student loan cases. Instead that circuit applies a flexible totality-of-the-circumstances test under which it looks to “(1) the debtor’s past, present, and reasonably reliable future financial resources; (2) a calculation of the debtor’s and her dependent’s reasonable necessary living expenses; and (3) any other relevant facts and circumstances surrounding each particular bankruptcy case.” Under the third factor a court may address a number of considerations such as, whether the debtor has made a good faith effort to repay the loans, the extent to which her financial situation is within her control, and whether she has negotiated deferments or forbearances with respect to the loans.
Addressing these factors in turn, the bankruptcy panel found that: 1) Ms. Fern’s income has been steady and is unlikely to change, and 2) the bankruptcy court correctly found that Ms. Fern’s expenses are modest and reasonable. With respect to the broad considerations in the third factor, the court rejected the USDE’s contention that because Ms. Fern could avail herself of a income-based repayment plan which would not require any monthly payments, she can “afford” the debt. In so holding, the panel distinguished Educ. Credit Mgmt. Corp. v. Jesperson, 571 F.3d 775 (8th Cir. 2009), in which the court found that the debtor should have negotiated an income-contingent repayment plan with the student loan creditor. There, the court was persuaded by the facts that the debtor had a law degree, no dependents, had self-imposed restrictions on his income and had not attempted any loan repayments despite an ability to devote some income to those debts. Rather, the panel in Fern agreed with the bankruptcy court’s finding that factors such as the emotional burden of the debt, the negative credit effect of the loans and the potential tax obligation when a repayment plan would expire, all militated against requiring Ms. Fern to enter into an income-based repayment plan. The panel affirmed the bankruptcy court’s finding that the loans presented undue hardship and were subject to discharge.
Court Denies “Comfort Order” to File Late POC
Neither the Code nor the Bankruptcy Rules permit a Bankruptcy Court to grant a “comfort order” allowing a late proof of claim where no objection has been made to the filing. In re Rodriguez, No. 16-70150 (Bankr. S.D. Tex. Feb. 13, 2017).
Karina Rodriguez listed Ovation as a tax lien creditor on Schedule D of her chapter 13 petition. Ovation filed its claim, along with a motion to allow late filing, after the filing deadline had passed. Ovation’s contemporaneous motion objecting to confirmation because the plan did not provide for full payment of its claim was granted pursuant to an agreed order. [Read more…] about Court Denies “Comfort Order” to File Late POC
Alaska, Georgia and Louisiana Top CFPB’s List for Consumer Complaint Filings
In its monthly complaint report, the CFPB reported that the top three financial products or services receiving complaints in December, 2016, were, in descending order, debt collection, credit-reporting, and mortgages. Mortgage servicers garnered complaints for such things as misapplication of payments and ineffective resolution of borrowers’ problems with their loans. To account for monthly and seasonal fluctuations, the report compares complaints against companies in three-month segments to the same period the prior year. Equifax, Wells Fargo and TransUnion had the dubious honor of being the top three complained–about companies in the period from August to October, 2016. With respect to complaints relating to types of loans, the three-month average for complaints concerning student loans rose by 109% over the same period last year. The three states with the greatest increase in consumer complaints were Alaska, Georgia and Louisiana.
Forced Vesting Does Not Satisfy Confirmation Requirements
Section 1322(b)(9) does not permit a court to confirm a plan vesting surrendered property in an unwilling creditor. Wells Fargo v. Sagendorph, No. 15-40117 (D. Mass. Jan. 23, 2017).
Paul Sagendorph’s chapter 13 plan proposed to surrender property on which Wells Fargo held the sole lien, and vest title in Wells Fargo notwithstanding Wells Fargo’s objection. The bankruptcy court held that the Code permitted Mr. Sagendorph’s treatment of the secured debt and confirmed the plan. In re Sagendorph, No. 14-41675 (Bankr. D. Mass. June 2015).
On appeal the district court, like the bankruptcy court, looked to the interplay between sections 1322 and 1325.
Section 1325(a) provides that, in the absence of objection by a creditor, a plan shall be confirmed so long as it meets certain conditions with respect to secured debts. Subparagraph 1325(a)(5)(C) permits a debtor to meet the requirements for confirmation by surrendering the property that secures the lien. Section 1322(b)(9) states a 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.”
The district court began its analysis with the statutory text which it found to be unambiguous. “Surrender” means “make available” and says nothing with respect to the party to whom the property is surrendered. To “vest” is to confer title on another. Both the bankruptcy court and the district court agreed that surrender and vesting were separate and distinct concepts. However, where the bankruptcy court interpreted vesting as an action by the debtor—conferring title upon another, the district court interpreted it as an action by the creditor—accepting transfer of title. The district court therefore concluded that vesting required a willing recipient.
The district court found the bankruptcy court erred in treating surrender and vesting as coincident in time and, therefore, essentially synonymous. Because the plan tied surrender to transfer of title, the district court found the mandatory confirmability that would normally accompany surrender was incorrectly tied to permissive vesting by the bankruptcy court.
The court also disagreed with the bankruptcy court’s analogy between vesting in chapter 13 and chapter 11. The chapter 11 vesting provision, section 1123(a)(5)(B), differs in two significant respects from chapter 13’s. First, the chapter 11 provision is mandatory; it requires that a plan, to be confirmed, shall provide for vesting or other form of implementation. Second, the forced vesting in chapter 11 is implemented by section 1129(b)(2)(A) which requires a court to find that the property being vested in the creditor is “indubitably equivalent” to the debt. No such equivalence is required by chapter 13.
The court suggested that while the avenue pursued by Mr. Sagendorph in this case was unavailing, there was room to explore other ways a court could use its equitable power to assist a debtor to achieve his fresh start. Citing United States v. Energy Res. Co., Inc., 495 U.S. 545, 549 (1990), the court the conceded that “[f]orced vesting under Chapter 13 not only addresses debtors’ evolving needs in the aftermath of the housing market crisis but is also ‘consistent with the traditional understanding that bankruptcy courts, as courts of equity, have broad authority to modify creditor-debtor relationships.’” It went on to suggested use of section 1322(b)(2) where the property at issue is not a debtor’s principal residence, or the Code sections implicated by section 1322(c), or perhaps substitution of in-kind payments rather than cash.
Cross-Collateralized Loans May Be Crammed Down
Cross-collateralized loans were not immune from cramdown where they did not have a “close nexus” to the purchase of the collateral vehicles for purposes of the 910-claim exception to cramdown, and motor vehicles are not “any other thing of value” for purposes of the second exception. In re McPhilamy, No. 16-10238 (Bankr. S.D. Tex. Jan. 31, 2017).
In their chapter 13 plan, the debtors, Sean and Bertha McPhilamy, sought to treat as unsecured five of the seven claims held by Rio Grande Federal Credit Union (RGFCU). The claims were based on loans cross-collateralized by two motor vehicles, a Honda Civic and a Chevy Camaro. The loans were executed at least within 910 days, and in some cases within one year, of the McPhilamy’s bankruptcy. The plan proposed to treat the other two of the seven claims (claims 10 and 12) as secured because they were for loans used to purchase the two vehicles at issue. Those two debts exceeded the value of the vehicles.
Though RGFCU did not object to confirmation, the trustee moved to dismiss or convert on the basis that the debtors had failed to propose a confirmable plan.
The case required the court to determine whether the loans were purchase money security interests, or were “any other thing of value,” under either of the two exceptions to cramdown found in the hanging paragraph of section 1325(a).
Beginning with whether the cross-collateralized loans were purchase money security interests, the court turned to state law. Texas defines a purchase money security interest loan as a loan that is included in the price of the vehicle and is incurred to make it possible to purchase the vehicle. With respect to the “price” of the vehicle, the definition is broad enough to include associated costs that do not necessarily go directly to the cost of the vehicle itself. There must, however, be a “close nexus” between the loan and the purchase of the vehicle.
The court then looked to each of the five cross-collateralized loans to determine if they fit this definition, beginning with the single loan cross-collateralized by the Honda Civic (claim 7). Finding that it was not a purchase money security interest, the court noted that claim 10, which included documents related to vehicle ownership such as the certificate of title, covered the entire cost of the vehicle. Claim 7, on the other hand, although taken out the same day as claim 10, was not used to pay any associated costs of the vehicle.
The same was true of the claims cross-collateralized by the Camaro. The one loan (claim 12) included the vehicle ownership documents and covered the cost of the car. The other loans which were not made either at the time of purchase or at the time of refinancing, did not advance the McPhilamy’s ownership interest in the vehicle or make the purchase possible in any way. The court concluded that none of the loans were 910-claims and, therefore, they were not subject to that exception to cramdown.
The court then addressed whether the loans fell under the second exception to cramdown: “any other thing of value.” For that exception to apply, the debt must have been incurred to facilitate the acquisition of the collateral within one year of bankruptcy. Of the four claims that met the one-year bar, the court found that although the second exception does not explicitly refer to purchase money security interests, the entire hanging paragraph applies only to those interests. Therefore, for the same reasons the first exception was inapplicable, the court found that the second exception did not apply.
Furthermore, though it was unnecessary to its conclusion, the court agreed with the McPhilamy’s argument that “any other thing of value” does not include motor vehicles. Applying the rule of statutory construction that “the specific governs the general,” the court found because the first exception explicitly deals with motor vehicles, the second, more general, exception deals with items other than motor vehicles. The use of the word “other” further supports this view, as including motor vehicles in that exception would render the word meaningless.
The court concluded that the debtors’ plan properly bifurcated and crammed down the five cross-collateralized claims and confirmed the plan.
NCBRC’s Year in Review
Financially distressed debtors seeking the fresh start offered by bankruptcy, often lack the resources to pursue important issues at the appellate level. To equalize the playing field between consumer debtors and their creditors, the NACBA Board created the National Consumer Bankruptcy Rights Center (NCBRC or “Nicbric”), a 501(c)(3) organization. Since its inception in 2010, NCBRC has provided support to consumer bankruptcy debtors and their attorneys in cases of national importance. NCBRC fulfills its mission through three programs. Under the Amicus Program, NCBRC has filed briefs in cases addressing such vital issues as the invidious practice of debt collectors filing stale claims and the misapplication of judicial estoppel by the courts. In its Pro Bono Appellate Program, NCBRC has worked with attorneys from leading bankruptcy firms around the country who have donated over 300 hours to the amicus project. Finally, NCBRC’s Educational Program is devoted to supporting the bankruptcy bar by providing education on current issues in consumer bankruptcy. To this end, NCBRC’s Project Director, Tara Twomey, is an active participant in in-person and online training programs.
To learn more about NCBRC in general and to read about specific cases in which NCBRC filed amicus briefs in 2016, go to NCBRC Year in Review 2016.
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Federal Banking Agencies Fine ServiceLink Holdings $65 Million
A news release issued by the Department of the Treasury announced a $65 million fine against ServiceLink Holdings, formerly Lender Processing Services (LPS), for servicing deficiencies by LPS relating to its foreclosure services. The news release can be found here.