A Michigan state court found that a debtor may oppose foreclosure on the basis that the assignment of the mortgage to the foreclosing party was in violation of the Pooling and Service Agreement and, therefore, ineffective. HSBC Bank, USA v. Young, No. 11-693 (Cir. Ct. Mich. Oct. 16, 2012). HSBC conducted a foreclosure by advertisement and bought the property at the foreclosure sale. When it moved the court for possession of the property the debtor challenged the legitimacy of the foreclosure on the basis that the assignment of the note and mortgage from Wells Fargo to HSBC took place after the note was in default in violation of the terms of the PSA. [Read more…] about Debtor Has Standing to Argue Failure to Comply with Terms of PSA
NACBA Argues that Possession Necessary for Turnover Obligation
NACBA has filed an amicus brief in the case of In re Henson, No. 11-16019 (9th Cir.), seeking a finding by the Ninth Circuit that the trustee may not use his turnover power under section 542 to require a debtor to pay into the estate funds that are no longer in the debtor’s possession. In this case, the debtor had written a check prior to bankruptcy which was not cashed until after the bankruptcy filing. Instead of using his avoidance power under section 549 to recover the funds from the payee, the trustee sought to obtain the money from the debtor, thereby exposing the debtor to double payment and allowing the payee to receive more than he would have been entitled to through bankruptcy distribution. [Read more…] about NACBA Argues that Possession Necessary for Turnover Obligation
NACBA Files Amicus in Bifurcated Lien Treatment in Chapter 13
NACBA has filed an amicus brief in the case of In re Bullard, No. 12-54 (B.A.P. 1st Cir.). That case involves a chapter 13 plan under which a mortgage is bifurcated into secured and unsecured portions with the unsecured portion being paid, pro rata, through the plan, and the secured portion being paid according to the terms of the contract outside the plan and extending beyond the plan period. The trustee objected to the plan arguing that if modification is permitted under section 1322(b), the payments on the mortgage must be completed within the plan period. In its brief, NACBA argues that the plain language of section 1322 permits such lien treatment. Specifically, “[a]ll section 1322(b)(5) requires is that the debtor cure any arrearage and make payments on the creditor’s secured claim according to the contract during the life of the plan. Section 1322(b)(2) is permissive allowing debtors to modify certain claims. Section 1322(d) limits the life of the plan to five years. These sections do not require the debtor to pay the claim in full while the case is pending, nor do they preclude the debtor from making payments on the long-term obligation after the plan has been completed.”
David Barnes drafted NACBA’s brief.
Attorney/Client Privilege Protects Intake Questionnaire
The Bankruptcy Court for the Southern District of Texas issued a memorandum “in order to clarify the scope of the attorney/client privilege and the work product doctrine” in the bankruptcy context. In re McDowell, No. 12-31231 (Bankr. S.D. Tex. Nov. 16, 2012). There, the UST sought to compel production of three documents: 1) the attorney’s intake questionnaire, 2) a copy of the original draft Schedule F with debtors’ handwritten notes on it, 3) debtors’ counsel’s draft copy of the Schedule F with his handwritten notes on it. The debtors asserted attorney/client privilege and work product with respect to the questionnaire, attorney/client privilege with respect to the debtors’ draft of the Schedule F form, and work product with respect to the attorney’s draft of the Schedule F form.
[Read more…] about Attorney/Client Privilege Protects Intake Questionnaire
Sanctions for Willful Violation of the Automatic Stay
The Bankruptcy Court for the Northern District of Illinois took decisive action to sanction an internationally active telecommunications company, Owtel Inc., for persistent violations of the automatic stay under section 362(a)(6). In re Galutan, No. 12-31837 (Bankr. N.D. Ill. Nov. 16, 2012). The court found that Owtel was informed of the debtor’s bankruptcy filing on August 12, 2012, but continued to dun her for payments of the $74.00 debt with repeated letters and telephone calls to her home phone and cell phone as often as twice a day. Finding that the conduct was willful the court turned to the appropriate damage award under section 362(k). Although the Seventh Circuit does not permit monetary awards for emotional distress the court found actual damages in the amount of $2,940.00 for attorney fees and costs incurred in pursuing the stay violation. In addition, the court found that the egregious nature of Owtel’s relentless pursuit warranted a punitive damage award of $15,000.00. The court ended with the warning that if the violations continue, it would consider further sanctions in the amount of $500.00 per day.
Court Orders Quitclaim of Surrendered Property
The Bankruptcy Court for the Eastern District of North Carolina found a unique way to deal with the problem of surrendered property that the mortgagee refused to foreclose upon. It authorized the debtor to convey the property via quitclaim deed to the mortgagee upon continued failure to accept title. In re Perry, No. 12-1633, 2012 Bankr. LEXIS 4731 (Bankr. E.D. N.C. Oct. 9, 2012). [Read more…] about Court Orders Quitclaim of Surrendered Property
Claim Disallowed as Untimely Not Void under Section 506(d)
The Bankruptcy Appellant Panel for the Eighth Circuit has taken it upon itself to redraft section 506(d) of the Bankruptcy Code to reflect what it believes Congress meant despite the fact that it is contrary to what Congress said. In re Shelton, 477 B.R. 749 (B.A.P. 8th Cir. Sept. 24, 2012). Section 506(d) provides that a lien that is not an allowed secured claim is void unless the claim was disallowed only under section 502(b)(5) or 502(e). Notably, the exceptions listed in section 506(d) do not include section 502(b)(9) which provides that a claim that is not timely filed shall not be allowed. Nonetheless, the Shelton court went beyond the plain language of the statute and found that a claim that is disallowed as untimely is not void under section 506(d). [Read more…] about Claim Disallowed as Untimely Not Void under Section 506(d)
Trustee Must Return Funds upon Conversion
The Third Circuit in In re Michael, 2012 U.S. App. LEXIS 22244 (3d Cir. Oct. 26, 2012), ruled for the debtor on the issue of whether the chapter 13 trustee had to turn over to the debtor funds that the trustee was holding when the debtor converted from chapter 13 to chapter 7 after confirmation of the plan. Rejecting the trustee’s position, which was supported by an amicus brief filed by all the chapter 13 trustees in the circuit, the court held that the trustee could not distribute the funds to creditors. The court reasoned that the conversion ended the chapter 13 trustee’s services and vacated the order confirming the plan. It also found that the legislative history of section 348(f) supported the conclusion that Congress did not intend for the debtor to have the disincentive to filing chapter 13 that would be caused by the risk that filing a chapter 13 case could cause the loss of postpetition property if the debtor later had to convert to chapter 7. NACBA’s brief was written by Irv Ackelsberg, who also was permitted to argue on NACBA’s behalf in the court of appeals.
Social Security Income Not Included in Projected Disposable Income
In an important victory for debtors, the Tenth Circuit today found that social security income is not included in the calculation of projected disposable income and that its exclusion cannot support a finding of bad faith. Anderson v. Cranmer (In re Cranmer), No. 12-4002 (10th Cir. Oct. 24, 2012). [Read more…] about Social Security Income Not Included in Projected Disposable Income
NACBA Files Amicus to Protect Social Security Benefits
NACBA has once again taken arms against a threat to debtors’ social security benefits by filing an amicus brief in the case of In re Ranta, No. 12-2017 (4th Cir.). The bankruptcy court denied confirmation of the debtor’s plan upon objection by the trustee that the debtor had failed to dedicate his social security income to the plan. The district court affirmed.
This holding cannot be reconciled with Congress’s clear intent to protect social security benefits from creditors as evidenced by provisions included in both the Social Security Act and the Bankruptcy Code. Section 101(10A) of the Code defines “income” as excluding social security benefits. That definition directs the interpretation of section 1325(b) which provides that a plan shall not be confirmed over objection unless it includes all of the debtor’s projected disposable income. Section 1325(b)(2) defines “disposable income” in terms of current monthly income which is, in turn defined by section 101(10A) to exclude social security benefits. That these provisions in the Bankruptcy Code protect social security benefits from the reach of creditors is reinforced by the complementary provision of the Social Security Act, section 407(a), which provides that social security benefits are not subject to the operation of bankruptcy or insolvency laws.
Finally, because debtors are statutorily relieved from having to contribute their social security benefits to their chapter 13 plans, it cannot be bad faith to do just that.
Thanks to Geoff Walsh for writing NACBA’s brief.