The Fifth Circuit ignored its own rules of judicial estoppel, disregarded the purposes of section 349(b), and overrode the factual findings and discretionary decision of the Bankruptcy Court in reversing the lower court’s finding that Wells Fargo was judicially estopped from claiming substantially greater arrearages in a second bankruptcy than it had claimed in the first, dismissed, bankruptcy. Wells Fargo v. Oparaji (In re Oparaji), No. 11-20871 (5th Cir. Oct. 5, 2012). [Read more…] about Fifth Circuit Finds no Judicial Estoppel under Section 349(b)
Addressing the “Gordian Knot” of the Mortgage Foreclosure Crisis
In an ongoing struggle to untie what she deemed the “Gordian Knot” of the mortgage foreclosure crisis, a Special Master in Rhode Island expressed frustration at the stubborn refusal of Freddie Mac and Fannie Mae to consider good business solutions to this serious national economic problem. The Special Master, a former local banker, was appointed to oversee mediation and possible settlement in a case consolidating approximately 600 foreclosure actions in a federal District Court action. In re Mortgage Foreclosure Master Docket, No. 11-88 (D. R.I. Oct. 4, 2012). At a status hearing the Special Master issued two reports, which include these scathing remarks about FannieMae and FreddieMac and their unwillingness to consider principal forgiveness:
“An exception in scheduling was made for FNMA / FHLMC cases. They are involved in a significant number of cases, but were not scheduled because I did not believe the result would be productive. I have made no secret of how troubled I am by these agencies and, to a lesser extent, their respective counsel. Most of the defendant servicers, off the record, describe how bureaucratic and difficult to deal with FNMA and FHLMC are. They already have cost our taxpayers billions. And lawyers who have clients like FNMA / FHLMC have the capacity to litigate indefinitely because their clients are unresponsive to good business solutions. So our taxpayer dollars are being utilized to fund a significant amount of lawyering that may not be productive from a business standpoint. Privately, counsel to other defendants also will say as much.”
“The reason the settlement process – nationally and in the Special Master process – has not been as productive as we want, is that the decision making corporate players – FNMA, FHLMC and the servicers – generally start from a premise that is largely uneconomic for an individual borrower. They do not forgive principal. Rather, they try to figure out what a defaulting borrower can “afford” to pay monthly, and by reducing the interest rate, stretching the amortization out to 40 years and putting a balloon on the back end, leave the principal balance of the mortgage intact.
“May I say it directly: This is WRONG!
“For the many borrowers who want to stay in their homes, they accept this solution, if offered. But just as these borrowers were probably not astute financially, overleveraged themselves and made imprudent or unrealistic economic decisions earlier, they remain naïve consumers. A defaulting borrower staying in a house which is significantly underwater is economic folly and can have serious adverse, longer-term personal consequences. And, unfortunately, just as the system before encouraged inappropriate overleveraging, the system now, for a variety of reasons, continues to promote poor economic decisions on the part of average borrowers.”
Lack of Notice Constitutes Waiver of Wells Fargo’s Claim
Declining to “dim the light that shines at the end of the long 60-month tunnel for compliant debtors,” the Bankruptcy Court for the Southern District of Texas held that Wells Fargo waived its right to collect post-petition shortfalls in escrow payments due to its failure to comply with notice requirements. In re Garza, No. 08-60088 (Bankr. S.D. Tex. Oct. 1, 2012). [Read more…] about Lack of Notice Constitutes Waiver of Wells Fargo’s Claim
A Cautionary Tale on Good Faith
The Northern District of California upheld a finding of bad faith for debtor’s chapter 13 fee-only plan. In re Ingram, No. 11-408 (N.D. Cal. Sept. 28, 2012). The plan proposed to maintain payments on first mortgage, strip off the second wholly unsecured mortgage, and pay only attorney and administrative fees. The debtor later filed an amended plan proposing to make lower payments for a longer duration while still paying nothing to unsecured creditors. The Bankruptcy Court raised the issue of good faith sua sponte.
The district court found that the bankruptcy court applied the appropriate “totality of the circumstances” standard as set forth in Leavitt v. Soto (In re Leavitt), 171 F.3d 1219 (9th Cir. 1999) and Goeb v. Heid (In re Goeb), 675 F.2d 1386 (9th Cir. 1982). It noted, however, that a “veiled chapter 7” plan is rarely proposed in good faith. Though the court teetered on the edge of a per se rule against such plans, it did not step over that edge.
The debtor’s downfall here appears to have been the fact that when he amended his plan to lower payments but extend the duration, he refused to explain to the bankruptcy court why he could not maintain the higher payments and pay something to unsecured creditors. The court found that the original proposed plan indicated that the debtor could afford to pay more into the plan without regard to duration and the debtor failed to counter that inference.
Lesson: where fee-only plans are generally disfavored, it is perhaps wise not to antagonize the court when trying to confirm one.
What, if Anything, is Section 506(d)?
(Borrowing from Stephen Jay Gould’s, “What, If Anything, Is a Zebra?” Hen’s Teeth and Horse’s Toes (W.W. Norton & Co. 1980)).
Where, in his essay, Gould discusses the evolution of striped members of the genus equus, cautioning that appearances do not necessarily dictate classifications, bankruptcy practitioners likewise have had to look beyond appearances (or plain language) to determine meaning. This could not be more manifest than in the Supreme Court interpretation of section 506(d) which provides: “To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void . . .” A simple reading of this clause in conjunction with section 506(a) which provides that a lien is “a secured claim to the extent of the value of the creditor’s interest,” would suggest that when a lien has no value, it is unsecured and therefore void under the operation of section 506(d). But a recent case out of the Eastern District of New York has joined the majority of courts in deciding otherwise. Wachovia Mortgage v. Smoot, No. 11-6379 (E.D. N.Y. Sept. 20, 2012). [Read more…] about What, if Anything, is Section 506(d)?
IRS Refund “Freeze” Not in Violation of Automatic Stay
The Sixth Circuit recently affirmed the lower courts’ holding that the IRS’s failure to immediately issue a post-petition tax refund was not a violation of the automatic stay. In re Harchar, No. 10-4201 (6th Cir. Sept. 12, 2012). [Read more…] about IRS Refund “Freeze” Not in Violation of Automatic Stay
Arbitration vs. Bankruptcy
Finding, under the circumstances of the case, that the Federal Arbitration Act conflicts with the underlying purposes of the Bankruptcy Code, the Ninth Circuit upheld the denial of the creditor’s motion to compel arbitration where such arbitration would necessarily have resolved a core bankruptcy issue. In re Eber, No. 11-55341 (9th Cir. July 9, 2012). [Read more…] about Arbitration vs. Bankruptcy
Fifth Circuit Affirms Class Certification Challenging Fee Collection Practices
The Fifth Circuit found that the bankruptcy court did not abuse its discretion when it certified a class of plaintiffs, under Rule 23(b)(2), who challenged certain fee-charging and collection practices of Countrywide Home Loans. Rodriguez v. Countrywide Home Loans, No. 11-40056 (5th Cir. Sept. 14, 2012). [Read more…] about Fifth Circuit Affirms Class Certification Challenging Fee Collection Practices
Creditor Found to Have No Obligation to Foreclose on Surrendered Property
The District Court for the Southern District of Georgia found that a bank has no affirmative duty under section 1325(a)(5)(C) to transfer title to surrendered property out of the debtor’s name. Arsenault v. JP Morgan Chase, No. 11-106 (S.D. Ga. Aug. 27, 2012). [Read more…] about Creditor Found to Have No Obligation to Foreclose on Surrendered Property
Eighth Circuit Puts Off Lien-Stripping in Chapter 13 Issue for Another Day
In a cranky opinion chastising “judicially careless attorneys” and remanding the case to the bankruptcy court on procedural grounds, the Eighth Circuit sidestepped the issues of whether a wholly unsecured mortgage can be stripped in chapter 13, and whether, if such stripping is allowed, availability of discharge is a necessary prerequisite to it. In re Fisette, No. 11-3119 (8th Cir. Sept. 12, 2012). [Read more…] about Eighth Circuit Puts Off Lien-Stripping in Chapter 13 Issue for Another Day