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.
Fifth Circuit Finds no Judicial Estoppel under Section 349(b)
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)?
Forgiving Our Debtors (Unless They Are Prisoners)
Through various provisions in the Bankruptcy Code, Congress has identified debts that should not be forgiven. These include, for example, debts for certain taxes, debts for money obtain through fraud, debts for domestic support obligations, and debts incurred from drunk driving (think, personal injury or wrongful death judgments). Congress has also identified debtors that will be denied a fresh start because they acted badly and contrary to the bankruptcy process. This usually happens when the debtor is not honest and makes false disclosures with respect to assets and property.
Nowhere in the Bankruptcy Code does Congress prohibit prisoners from filing bankruptcy.
While Congress has not precluded prisoners from being debtors, a bankruptcy court in the recent decision In re Moore, 2012 Bankr. LEXIS 3897 (Aug. 24, 2012) has effectively done just that. If you are a prisoner, your case will be dismissed. Why? Because as a prisoner, you are not at liberty to personally attend the meeting of creditors (also known as the 341 meeting). Section 343 of the Bankruptcy Code and Federal Rule of Bankruptcy Procedure 4002 require the debtor’s presence at the meeting of creditors. However, the Moore court acknowledged that it had discretion to waive debtor’s presence at the meeting of creditors for the physically disabled, gravely ill, or deployed military personnel. But the court concluded that “incarceration did not constitute a good and sufficient reason to waive the debtor’s attendance.” Since issuing its opinion, the court has issued a show cause order why the debtor’s case should not be dismissed for failing to attend the 341 meeting.
So much for forgiving our debtors…