Despite relentless attacks by the bankruptcy trustees Kansas’s bankruptcy-only exemption scheme, under which a debtor in bankruptcy is permitted to exempt his Earned Income Tax Credit, has once again been deemed constitutional. Nazar v. Lea (In re Lea), No. 12-1297 (D. Kans. Aug. 16, 2013), consolidated with Parks v. Hudson (In re Hudson), No. 12-1298. The exemption benefits low-income families with dependent children by treating the excess of EITC credit over taxes owed as an overpayment of taxes and refunding the difference. [Read more…] about Kansas EITC Exemption Constitutional
Discharge Precludes Deficiency Judgment from Post-Discharge Foreclosure
Does the debtors’ chapter 13 discharge extinguish their liability for a deficiency arising from a post-discharge foreclosure sale of their principal residence by a secured creditor whose claim was paid outside the plan? The Bankruptcy Court for the Eastern District of North Carolina said that it does. In re Rogers, No. 08-8341 (Bankr. E.D. N.C. July 8, 2013).
The issue came before the court when the creditor moved for an order that the earlier discharge did not relieve the debtors’ of personal liability on the post-discharge deficiency. The first hurdle the debtors overcame was the court’s finding that, for discharge purposes, the debt was “provided for” by the plan. The mortgagee had filed a proof of claim and the plan specified that the debtors would continue the payments on the mortgage outside the plan according to the terms of the lending documents. There was no deficiency to be cured through the plan. In Rake v. Wade, 508 U.S. 464, 473-74 (1993), it was established that any plan that describes treatment of a debt, even if that treatment is outside the plan, “provides for” the debt.
The court next found that even though the debtors’ payments on the debt extended beyond the life of the plan, section 1322(b)(5)’s “cure and maintain” provision was not implicated because there was no arrearage to cure through the plan. Therefore, section 1328(a)(1), which states that debts provided for under section 1322(b)(5) were nondischargeable, did not prevent the outcome sought by the debtors.
Finally, the court rejected the argument that by relieving the debtors of the burden of paying the deficiency, the court was “modifying” its rights in violation of section 1322(b) as interpreted by the Court in Nobelman v. American Savings Bank, 508 U.S. 324, 326 (1993). The court found that, in confirming debtors’ plan which merely referenced the lending agreement, the court had not altered the creditor’s rights in any way not permitted by the Code. While the discharge released the debtor from personal liability under Dewsnup v. Timm, 502 U.S. 410, 414 (1992) and Johnson v. Home State Bank, 501 U.S. 78, 84 (1991), in rem liability remained post-discharge and the creditor was able to avail itself of its rights under state law to foreclose based on that liability. The court concluded that, as it had found in its earlier decision in In re Lane, No. 97-06850-8-JRL (Bankr. E.D. N.C. July 13, 2006), “[t]he discharge extinguished their personal liability with respect to any past, present or future judgment arising from SECU’s claim, which was provided for under the debtors’ plan and discharged under § 1328(a).”
No Presumption of Validity of Claim under Rule 3002.1
On January 3, 2013, the Chapter 13 trustee filed “Trustee’s Notice of Final Cure Payment and Motion to Deem Mortgage Current,” filed under Rule 3002.1(f) seeking an order that the debtor’s mortgagee was current, that all escrow deficiencies had been cured, and that all fees had been satisfied in full. The mortgage creditor filed a timely objection under Rule 3002.1(g), arguing that the debtor had incurred post-petition arrearages of $25,798.02. However, the creditor did not present any evidence of any disbursements to substantiate the arrearage. The court found that supplemental claims did not enjoy a presumption of validity and, because the debtor had made all payments required by the amended plan, it granted the trustee’s motion. In re Rodriguez, No. 08-80025 (Bankr. S.D. Tex. July 8, 2013). [Read more…] about No Presumption of Validity of Claim under Rule 3002.1
HAMP Trial Period Plans – Wells Fargo’s Fraudulent Coin Toss
Yesterday, the Ninth Circuit Court of Appeals held in Corvello v. Wells Fargo Bank, N.A., No. 11-16234, that Wells Fargo was contractually obligated under the terms of a HAMP trial period plan (TPP) to offer permanent modifications to borrowers who complied with the TPP by submitting accurate documentation and making trial payments. Such an interpretation of the TPP, the Court stated, “avoids the injustice that would result were Wells Fargo’s position accepted and Wells Fargo allowed to keep borrowers’ trial payments without fulfilling any obligations in return. The TPP does not contemplate such an unfair result.” More scathing was Judge Noonan’s concurrence in which he stated that:
“No purpose was served by the document Wells Fargo prepared except the fraudulent purpose of inducing Corvello to make the payments while the bank retained the option of modifying the loan or stiffing him. “Heads I win, tails you lose” is a fraudulent coin toss. Wells Fargo did no better.”
The Court rejected arguments that Wells Fargo’s failure to return a signed copy of the TPP to the borrower precluded liability. For purposes of the decision, the Court assumed that the borrowers fulfilled all of their obligations under the TPP, as alleged. The Court noted, however, that Wells Fargo could still raise factual disputes during the litigation.
NACBA Amicus Brief on Section 109(e) Debt Limits
NACBA has moved for leave to file an amicus brief in the Third Circuit case of In re Scotto DiClemente, No. 12-3336. That case involves the question of how underwater mortgages are counted toward the debt limits when the Chapter 13 debtor’s personal liability on the mortgages was discharged in a previous Chapter 7 bankruptcy. [Read more…] about NACBA Amicus Brief on Section 109(e) Debt Limits
Eleventh Circuit Gearing Up to Revisit Chapter 7 Lien Strip
Will the Eleventh Circuit continue to buck the trend by allowing lien strips in chapter 7? That is the question that will likely be answered in the case of In re Sinkfield, No. 13-12141. On July 30, the circuit court summarily affirmed the lower court’s finding that, under In re McNeal, No. 11-11352 (11th Cir. May 11, 2013), chapter 7 debtors may strip wholly unsecured liens under section 506(d). You will recall that the Court in Dewsnup v. Timm, 502 U.S. 410 (1992), found that under the historical principle that a lien survives bankruptcy unaffected, and a reading of sections 506(a) and (d) under which “allowed secured claim” is given different meanings, debtors may not strip-down a partially secured lien in chapter 7. In addressing a case in which the debtor sought to strip a wholly unsecured lien, however, the court in McNeal found that Dewsnup was inapplicable and that its earlier precedent, Folendore v. United States Small Bus. Admin., 862 F.2d 1537 (11th Cir. 1989), permitting such strip-offs under section 506(d), was still good law. On August 2, the McNeal court agreed to publish its previously unpublished opinion to that effect. In granting summary affirmance of the lower court in Sinkfield, the circuit court specifically stated that its purpose was to allow the parties to seek en banc review.
On the same topic, the Seventh Circuit recently found that, under Dewsnup, neither section 506(a) standing alone, nor in conjunction with section 506(d), permits lien stripping of a wholly unsecured lien in chapter 7. Palomar v. First American Bank (In re Palomar), No. 12-3492 (7th Cir. July 11, 2013). See also Ryan v. Homecomings Fin. Network, 253 F.3d 778 (4th Cir. 2001); Talbert v. City Mortg. Serv., 344 F.3d 555 (6th Cir. 2003); Wachovia Mortg. v. Smoot, 478 B.R. 555 (E.D.N.Y. 2012) (section 506 may not be used to strip off wholly unsecured lien in chapter 7).
Dismissal under Section 109(g)(2)
Rivera v. Matos (In re Rivera), No. 12-87 (B.A.P. 1st Cir. June 26, 2013), involved application of section 109(g)(2) which provides that no individual may be a debtor under this title “who has been a debtor in a case pending under this title at any time in the preceding 180 days if—(2) the debtor requested and obtained the voluntary dismissal of the case following the filing of a request for relief from the automatic stay provided by section 362 of this title.” The facts were not good for the debtor. He filed his first Chapter 13 bankruptcy on the eve of foreclosure but when he failed to respond to the mortgagee’s motion for relief from stay, the court lifted the stay thereby permitting the creditor to pursue his state foreclosure rights. One week before the scheduled foreclosure, Debtor moved to dismiss his bankruptcy for the express purpose of re-filing in order to prevent the foreclosure. The day before the scheduled foreclosure, the court granted the motion to dismiss. The debtor filed a new chapter 13 bankruptcy petition hours later. The creditor moved to dismiss the petition on the basis of section 109(g)(2)’s proscription against serial filings and on the basis of alleged bad faith. The court granted the motion solely pursuant to section 109(g)(2).
No Lien Strip Permitted in Chapter 7 under Section 506
In In re Palomar the Chapter 7 debtors filed an adversary proceeding seeking to strip off a wholly unsecured junior lien on their residence. The bank had not filed a claim in the bankruptcy. The court found that the debtors could not strip the lien and the district court affirmed. The Seventh Circuit found that neither section 506(a) standing alone, nor in conjunction with section 506(d), permits such lien stripping. Palomar v. First American Bank (In re Palomar), No. 12-3492 (7th Cir. July 11, 2013). [Read more…] about No Lien Strip Permitted in Chapter 7 under Section 506
Trustee Steps into Shoes of Lienholder upon Avoidance of Lien
NCBRC filed an amicus brief on behalf of the NACBA membership in the case of In re Traverse, 13-9002 (1st Cir. July 10, 2013). In that case, when the chapter 7 debtor entered into bankruptcy, she sought to exempt her home from the estate and continue making her mortgage payments. It was undisputed that the debtor was not in default on her mortgages. The trustee, however, successfully avoided one of the liens as unperfected and sought to sell the debtor’s residence for the benefit of creditors. The lower courts found that, having avoided the lien, the trustee stood in the shoes of the debtor and had the power to sell the property.
In its amicus brief before the First Circuit, NACBA argues that application of Bankruptcy Code sections 704, 541(a), 551, and 544, demonstrates that upon avoidance and preservation of a lien the trustee stands in the shoes of the former lienholder, not the debtor. Therefore, the trustee did not gain the power to sell the property except to the extent that the lienholder would have had that power. See In re Trout, 609 F.3d 1106, 1110 (10th Cir. 2010) (“under § 551 the trustee steps into the shoes of the former lienholder, with the same rights in the collateralized property that the original lienholder enjoyed.”). Because the debtor was current on her payments, under state law, there was no default to trigger the right to foreclose.
Thanks to Ray DiGuiseppe for authoring NACBA’s brief.
NACBA Files Amicus on Applicable Commitment Period
NCBRC filed an amicus brief on behalf of the NACBA membership in the case of In re Pliler, No. 13-1445 (4th Cir. June 20, 2013). NACBA’s brief argues that the Bankruptcy Court erred when it held that section 1325(b)(4)(B) created a minimum plan length of sixty months for above-median debtors, and that the disposable income formula set forth by Congress and reflected on Form 22C could be abandoned if it was inconsistent with income and expenses as reflected on Schedules I and J. [Read more…] about NACBA Files Amicus on Applicable Commitment Period