National Consumer Bankruptcy Rights Center

Protecting The Rights Of Consumer Debtors In Bankruptcy

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Personal Attacks on Trustee Not Sanctionable – But Not Helpful Either

Invective and personal attacks on the chapter 7 trustee did nothing to further the debtors’ arguments in their motion to dismiss but did not amount to sanctionable conduct. Geltzer v. Brizinova (In re Brizinova), No. 12-42935, Adv. Proc. No. 15-1073 (Bankr. E.D. N.Y. March 3, 2017) (on appeal to the District Court for the Eastern District of New York, No.17-1465).

The trustee, Robert Geltzer, moved for a contempt order and sanctions against Karimvir Dahiya, counsel for the debtors, Estella Brizinova and Edward Soshkin, based on statements he made in connection with a motion to dismiss an adversary complaint in the debtors’ bankruptcy case. In the motion to dismiss, Mr. Dahiya stated, among other things, “Geltzer having realized that he has gotten money from the sons, he could extract more, he has begun his extortionist journey again.” Generally, Mr. Geltzer maintained that Mr. Dahiya’s statements were part of a personal crusade against him, were vexatious and in bad faith, and represented a course of conduct Mr. Dahiya generally followed against bankruptcy trustees.

Mr. Geltzer also sought sanctions for a statement in the reply brief for the motion to dismiss concerning another case, Geltzer v. Ng (In re Ng), No. 12-1343, in which Mr. Dahiya represented the debtor. In the reply brief, Mr. Dahiya said of the settlement in Ng that it “was an Agreement, that was signed only on the basis of being urged: ‘Sometimes, it takes a stronger person to walk away.’ I decided to walk away.” Mr. Geltzer argued that the advice to “walk away,” was given by the mediator and its inclusion in the briefing in the Brizinova case was an impermissible disclosure of a statement made during mediation. He also argued that the statement was in contravention of the Stipulated Order and Mediation Order in the Ng case under which Mr. Dahiya agreed to comply with rules of professional conduct and the Local Bankruptcy Rules.

Beginning with Mr. Dahiya’s alleged violation of the Stipulated Order and Mediation Order in the Ng case, the Brizinova court found that an order out of another court enjoining certain conduct should be addressed by the court issuing the injunction. The Brizinova court therefore denied the motion for sanctions without prejudice with respect to that claim.

The court also addressed whether Mr. Dahiya’s comment concerning the Ng case, violated Local Rule 9019-1(1) which stresses nondisclosure of “views and suggestions of the mediation participants with respect to possible pathways to a settlement, any settlement proposals advanced by a party or the mediator, and whether a mediation participant was willing to accept a mediator’s proposal.” It found that, although Mr. Geltzer asserted that the comment was made by the mediator, Mr. Dahiya did not attribute the statement to any particular participant in the mediation process and the comment was otherwise too vague to violate the Local Rule.

Turning to Mr. Geltzer’s claims under section 105(a), Mr. Dahiya argued that the court did not have inherent power to sanction him for his conduct under that section. The court disagreed. Section 105(a) permits a court to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.” The court found that under the Code and Second Circuit precedent, a court has “the inherent authority to supervise the proceedings that take place before it and, as part of that authority, the ability to impose sanctions when necessary.”

The Second Circuit has found that to justify sanctions an attorney’s conduct must be entirely meritless, and he must have acted for improper purposes. Bad faith is essential to sanctions under section 105(a). Turning to the language Mr. Geltzer sought to have sanctioned, including “extortionist,” “threaten into further submission,” “unexpected accretion,” “frivolous,” and “dig more,” the court found that while the invectives likely detracted from any valid argument the debtors might have made, the language appeared to be in furtherance of Mr. Dahiya’s representation of the debtors. For that reason, the element of bad faith was not present and the language did not merit sanctions under section 105(a).

Finally, the court addressed Mr. Geltzer’s argument that Mr. Dahiya’s personal comments about him were in violation of the New York’s Rules of Professional Conduct, 22 NY CRR §§ 1200 et seq. which prohibit an attorney from “making multiple derogatory and unprofessional attacks upon the personal attributes of another attorney,” knowingly advance a claim that is unwarranted under the law, or otherwise fail to behave with a threshold amount of decorum in court proceedings. The court found that “viewed in the context of the Motion to Dismiss, the statements are more accurately viewed as rhetorical flourishes than as knowing and material statements that are false.” Moreover, the language did not cross the line between zealous representation and sanctionable expressions of personal opinion as to “the justness of a cause, the credibility of a witness, the culpability of a civil litigant or the guilt or innocence of the accused.” While Mr. Dahiya mentioned “extortion” in his list of invectives against Mr. Geltzer, he did not threaten to pursue criminal charges against him.

In conclusion, the court found that Mr. Dahiya’s statements in the context of the otherwise appropriate motion to dismiss, were not sanctionable. It denied the motion without prejudice with respect to Mr. Dahiya’s possible violation of the Ng court’s injunction order, and denied the remaining claims with prejudice.

Brizinova Bankr. ED NY opinion March 2017

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FDCPA and Discharge Injunction Not Incompatible

An FDCPA claim based on efforts to collect a debt discharged in bankruptcy is not precluded by the Code’s discharge injunction. Barnhill v. FirstPoint, Inc., No.15-892 (M.D. N.C. May 17, 2017).

Lara Barnhill filed a class action complaint in district court alleging that FirstPoint, Inc. and FirstPoint Collection Resources made efforts to collect a debt after her debt had been discharged in chapter 7 bankruptcy in violation of the FDCPA, North Carolina Collection Agency Act (NCCAA). The complaint also made a claim for injunctive relief. FirstPoint moved to dismiss under section 12(b)(1) and (6) for lack of subject matter jurisdiction and for failure to state a claim.

FirstPoint argued that the district court lacked subject matter jurisdiction over the FDCPA and NCCAA claims because both consumer protection laws are preempted by the Bankruptcy Code’s discharge injunction. FirstPoint further argued that Ms. Barnhill failed to allege injury-in-fact and therefore lacked Article III standing.

With respect to the FDCPA, the district court noted that one federal law does not preempt another but that, where they deal with same subject matter one may repeal the other either by express direction by Congress or by implication if the two statutes are irreconcilable.

The Fourth Circuit has not decided the issue of FDCPA and Code compatibility, but the district court agreed with other courts finding that an action based on post-discharge collection efforts may be sustained under both statutes simultaneously [though, in this case, Ms. Barnhill did not include a claim based on violation of the discharge injunction]. The court specifically discussed Garfield v. Ocwen Loan Servicing, LLC, 811 F.3d 86, 89 (2d Cir. 2016), where the Second Circuit distinguished between actions under the FDCPA brought for conduct occurring while the bankruptcy case was open and cases in which the conduct occurred post-discharge. The Garfield court was persuaded that the Code and the FDCPA were compatible in the latter instance in part because, unlike automatic stay violations, the Code does not create a cause of action for violations of the discharge injunction. Furthermore, because the same conduct underlies both causes of action, a creditor can avoid violations of both the FDCPA and the Code by not trying to collect a discharged debt.

Turning to whether the Code preempts the NCCAA, the court explored the doctrines of field preemption, where Congress specifies that a federal law supplants state authority in a particular field, and conflict preemption, where a state law must yield to a federal law with which it actually conflicts. Where states traditionally have the power to create and enforce consumer protection laws, a court will find field preemption only where Congress has made clear that such preemption was its purpose. Because no such indication is found in the Bankruptcy Code, the court turned to whether the NCCAA was preempted as conflicting with the Code. To find such preemption, the Fourth Circuit looks to “whether it is impossible to comply with both the state and federal law or whether the state law presents an obstacle to the accomplishment of the purposes of the federal law.” The court found no such conflict. Violation of the NCCAA was based on the allegation that FirstPoint had attempted to collect an uncollectible debt. The fact that the debt was rendered uncollectible due to bankruptcy discharge, was irrelevant.

The court thus concluded that neither the FDCPA nor the NCCAA claims were preempted or precluded by the Bankruptcy Code.

FirstPoint next argued that Ms. Barnhill had not suffered any “concrete and particularized” injury-in-fact and therefore had no Article III standing to bring this action. While cautioning that generally mere violation of a statute does not satisfy the injury-in-fact requirement in the absence of evidence of its effect on the plaintiff, a “majority of courts have held that FDCPA violations, like the ones asserted in this case, are substantive violations and thus produce ‘concrete injuries’ sufficient to satisfy Article III’s requirement of injury-in-fact.” Furthermore, Ms. Barnhill alleged particularized injury in the form of emotional distress and harm to her credit rating. The court concluded that her allegations were sufficient to withstand a motion to dismiss.

Having found that subject matter jurisdiction survived the 12(b)(1) motion, the court turned to whether the complaint stated a claim for purposes of Rule 12(b)(6). To state a claim for violation of the FDCPA, a plaintiff must show that 1) she has been the object of collection activity, 2) by a debt collector, 3) engaging in conduct that violates the FDCPA.  Here, FirstPoint, Inc. drew a distinction between itself and FirstPoint Collection Resources, arguing that unlike its counterpart, FirstPoint, Inc. is not a debt collector, and cannot be held vicariously liable for the conduct of FirstPoint Collection Resources.

Rejecting this argument, the court noted that Ms. Barnhill alleged that both FirstPoint, Inc. and FirstPoint Collection Resources, were debt collectors and that both made efforts to collect the discharged debt. These allegations were sufficient to withstand a motion to dismiss. The fact that FirstPoint, Inc. did not hold a state license to collect debts was not relevant to the inquiry as licensure is not necessary to a finding of an FDCPA violation. As to the conduct giving rise to the FDCPA claim, the court found it was enough that Ms. Barnhill alleged that she received a phone call from the defendants informing her that her discharged debt was owing and in collection and that it was affecting her credit.

For the same reasons, the complaint stated a claim under the NCCAA. The fact that the state law does require a permit for debt collectors did not defeat this claim as the court found that a debt collector acting in violation of the licensing law could still violate the NCCAA.

Finally, the defendants argued that injunctive relief is not available under either the FDCPA or the NCCAA and that claim should, therefore, be dismissed. Without deciding whether the relief sought was available, the court granted the motion to dismiss to the extent that the claim for injunctive relief was presented as a cause of action rather than as a form of remedy.

Barnhill MD NC opinion May 2017

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Debtor/Plaintiffs Overcome Hurdle to Class Certification

Denying the creditor’s motion to dismiss, the bankruptcy court in the Southern District of Texas found that it could exercise jurisdiction over a nationwide class and that the claims, based on abuse of process, satisfied the “core proceeding” requirements of subject matter jurisdiction. Jones v. Atlas Acquisitions, LLC, No. 15-34818, Adv. Proc. No. 16-3235 (Bankr. S.D. Tex. May 19, 2017).

Atlas Acquisitions filed a proof of claim in Katrina Jones’s chapter 13 bankruptcy. It later withdrew the claim. Ms. Jones then filed an adversary complaint on behalf of herself and others similarly situated, alleging “abuse of the bankruptcy system by [Atlas’s] willful and intentional disregard for the requirements for filing legitimate claims in many Chapter 13 cases throughout the country.” Specifically, the complaint alleged that, in accordance with its business model, Atlas routinely filed deficient proofs of claim only to withdraw them when challenged. The First Amended Complaint added Natasha Hill, a chapter 13 debtor in the Bankruptcy Court for the Western District of Louisiana (case no. 15-3166) as a named plaintiff and sought certification as a class action.

Atlas moved to dismiss the class action claims arguing: 1) that a bankruptcy court lacks subject matter jurisdiction under 28 U.S.C. 1334 to certify a nationwide class; 2) that the plaintiffs are not adequate class representatives, and, 3) that the class cannot be certified as a matter of law under the requirements of Rule 23(b)(3).

The court began with section 1334, which confers jurisdiction on the district courts over cases arising under Title 11, and section 157(a) and Texas District Court General Order 2012-6 which provide for referral of such cases to bankruptcy judges.

Relying on Bolin v. Sears, Roebuck & Co., 231, F.3d 970 (5th Cir. 2000), the court rejected Atlas’s initial argument that, while a bankruptcy court may exercise class-wide jurisdiction within its district, it cannot exercise jurisdiction over a nationwide class. In Bolin, the Fifth Circuit, upon finding that the Rule 23(b)(2) requirements for nationwide class certification were not established, did not question the district court’s subject matter jurisdiction over the proposed class and, in fact, remanded to the district court for further proceedings. Where the bankruptcy court’s jurisdiction is coextensive with the district court and where the district court has jurisdiction over a nationwide class of plaintiffs, the bankruptcy court does as well.

The court turned to the strictures on bankruptcy court jurisdiction under which the case must be a “core” proceeding either “arising under,” “arising in,” or “related to” a case under Title 11.

Atlas argued that the abuse of process claims here arose not out of a bankruptcy proceeding but under the court’s inherent authority under section 105(a) and Bankruptcy Rule 3001, and that the plaintiffs’ claims for injunctive and declaratory relief are found in Title 28 rather than Title 11.

The court found that the claims both arose under, and arose in, a case under Title 11. To “arise under” Title 11, the action must involve a substantive right created by the Code or by the Bankruptcy Rules. While section 105(a) does not create substantive rights, it empowers a court to enforce rights created elsewhere in the Code or Rules. Atlas argued that neither Rule 3001 nor injunctive and declaratory relief offered under Title 28, constitute substantive rights under Title 11. The court disagreed, finding that, while many of the Bankruptcy Rules do not create substantive rights, Rule 3001 is not one of them. Rather, Rule 3001(c)(2)(D)(iii) provides that a plaintiff may obtain “appropriate relief,” expenses and attorney’s fees upon a finding that the defendant has failed to attach supporting documentation to a proof of claim. This provision for relief, the court found, is a substantive right under the Bankruptcy Rules. Therefore, the action “arose under” Title 11.

The court also found that it had “arising in” jurisdiction because, on their face, the claims were based on improper filing of a proof of claim under sections 501 and 502 and would “have no existence outside of the bankruptcy.”

Having established its jurisdiction, the court turned to the pleading requirements of Rule 23(a)(4) and (b)(3) to determine whether the complaint stated a claim for relief under Rule 12(b)(6). Atlas argued that Ms. Jones could not be a class representative because she had an inherent conflict of interest between the other class members and her creditors in her personal bankruptcy. In support of this and other propositions, Atlas asked the court to take judicial notice of certain statements included in the record.

The court declined to do so, stating that, where Atlas failed to satisfy the two-pronged test for judicial notice required by Fed. R. Evid. 201(a), it would be premature to make factual findings on Atlas’s arguments without an evidentiary hearing on class certification.

Finally, the court rejected Atlas’s argument that individual issues predominate in this case and that it was therefore inappropriate to certify a class under Rule 23(b)(3). Again, the court found the face of the complaint stated a claim and that the issue of class certification was appropriately dealt with in an evidentiary hearing.

Jones Bankr SD Tex opinion May 2017

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No False Representation in Loan Acquisition

Creditors failed to prove that the debtor made false representations with respect to a loan acquired by the debtor’s father claiming to represent the debtor’s company. Hasley v. Irons (In re Irons), No. 15-40876, Adv. Proc. No. 15-4051 (Bankr. D. Neb. March 9, 2017).

Ronald and Vicki Hasley, d/b/a Swite Enterprise, brought an adversary proceeding against the chapter 7 debtor, Tyler B. Irons, seeking an order of nondischargeability under section 523(a) with respect to a state court judgment on a debt.

The litigation between the parties began when the Hasleys filed suit in state court against the debtor; his father, Jack Irons; and his company J & R Motors, LLC, to recover approximately $190,000 Jack Irons borrowed from the Hasleys. The state court rendered judgment against the defendants based, at least in part, on findings of facts resulting from Tyler Irons’s failure to respond to requests for admissions which the court then deemed admitted. Tyler Irons filed chapter 7 bankruptcy shortly thereafter and the Hasleys filed an adversary complaint, seeking an order that the debt was nondischargeable under sections 523(a)(2)(A) and (a)(4).

At trial on the adversary complaint, the debtor, Tyler Irons, testified that neither he nor his company received any money from the Hasleys and further, that the state court judgment was a default judgment caused by the legal malpractice of Mr. Irons’s state court attorney. He admitted that, at his father’s request, he signed an “Accounts Receivable/Specific Assignment,” with respect to the loan and that pursuant to that agreement, he made cash payments to the Hasleys.

Section 523(a)(2)(A) renders nondischargeable a debt acquired through false representation. The Hasleys argued that Jack Irons made such representations by claiming to be an agent of Tyler Irons’s company and that, as 100% owner of the company, Tyler was therefore liable for those misrepresentations. Because the Hasleys did not testify at the trial, they offered the factual findings that led to the summary judgment in state court as support for this claim, arguing that the doctrine of res judicata prevented Tyler Irons from denying those factual findings.

Application of res judicata requires that for a factual finding in a previous action to be admitted in a later case as a matter of law, it must have been directly addressed or litigated in the former proceeding. In this case, however, the state court judgment was based on requests for admissions that Mr. Tyler failed to answer but were not actually litigated. Moreover, Nebraska rules limit use of admissions to the case in which they were admitted. Without those admissions, there was no testimony at the adversary hearing from either Mr. Hasley or Jack Irons to support a claim that Tyler Irons made any representations at all, much less ones that were reasonably relied upon by the Hasleys.

The case also failed under section 523(a)(4) which applies to misconduct by a fiduciary. The court explained that a fiduciary relationship must pre-date the debt and does not apply to “trusts that may be imposed because of the alleged act of wrongdoing from which the underlying indebtedness arose.” As to whether the Assignment document signed by Tyler Irons created a trust, the court found that it did not. Rather, it was a general, common-law contract pursuant to which Tyler Irons apparently made some cash payments to the Hasleys but did not establish a trust or escrow account or otherwise create a trust relationship.

The court granted partial summary judgment in favor of the debtor on the causes of action under sections 523(a)(2)(A) and (a)(4).

Hasley v. Irons (In re Irons) (Bankr.Neb., 2017)

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SCOTUS Finds Time-Barred POC Not FDCPA Violation

“Midland’s filing of a proof of claim that on its face indicates that the limitations period has run does not fall within the scope of any of the five relevant words of the Fair Debt Collection Practices Act.” Midland Funding, LLC v. Johnson, 2017 WL 2039159 (May 15, 2017) (case no. 16-348), reversing Johnson v. Midland Funding, LLC, 823 F.3d 1334 (11th Cir. 2016).

Justice Breyer delivered the majority opinion finding that, because, under state law, the holder of a debt that is uncollectible due to lapse of the statute of limitations, retains a “right to payment,” a proof of claim on a time-barred debt falls within the meaning of “claim” in section 101(5)(A), and is not “false, deceptive, or misleading,” within the meaning of the FDCPA. Relying on the language and structure of Bankruptcy Code provisions, the Court noted that the Code provides for the possibility that a claim, while prima facie valid, may be contingent or disputed. Upon objection, section 502(b)(1) provides a method for disallowing an unenforceable claim. Under this structure the statute of limitations is an affirmative defense.

Moreover, when considering whether a statement is false, deceptive or misleading, the sophistication of the recipient is a relevant factor. Here, the Court found the bankruptcy trustee was likely to understand that a time-barred debt is subject to disallowance.

The Court turned to the “closer question” of whether assertion of a time-barred debt is “unfair” or “unconscionable.” In answering this question in the negative, the Court distinguished civil cases from bankruptcy. Factors in a civil suit, such as debtor ignorance of the statute of limitations defense, loss of records, and general embarrassment, may cause a debtor with a valid defense to nonetheless pay an uncollectible debt. Those considerations are attenuated in bankruptcy where the debtor has herself initiated litigation, there is a trustee to oversee the process and the Code provides for evaluation of claims.

Both the debtor, Aleida Johnson, and the United States as amicus argued that debt-buyers filing time-barred claims solely in the hope that they will successfully slip them past busy trustees and unsuspecting debtors is sanctionable and, therefore, “unfair” conduct. The Court disagreed, finding that the inherent protections in the Bankruptcy Code, as well as the possibility that the debtor herself could benefit from the stale claim being disallowed and discharged in bankruptcy, militated against carving out an exception to the affirmative defense rule.

The Court added that the differing purposes of the FDCPA—to protect consumers and possibly prevent bankruptcies, and the Bankruptcy Code—to strike a balance between rights of debtors and creditors, further supported treating the assertion of stale claims in bankruptcy differently from the way they are treated in the civil context.

Justice Breyer was joined in the majority by Chief Justice Roberts and Justices Thomas, Kennedy, and Alito.

Taking a real-world approach to the subject in which she recognized the extent of consumer debt and the proliferation of debt buyers, Justice Sotomayor dissented.

“Professional debt collectors have built a business out of buying stale debt, filing claims in bankruptcy proceedings to collect it, and hoping that no one notices that the debt is too old to be enforced by the courts. This practice is both ‘unfair’ and ‘unconscionable.’”

Citing NACBA’s amicus brief, Justice Sotomayor discussed the ever-growing industry of buying stale debts for pennies on the dollar. The practice relies on the likelihood that, after an extensive lapse of time, the debtor will not know or care to raise the affirmative defense of staleness. Because the state courts have uniformly found that filing suit on a stale claim violates the FDCPA debt-buyers have increasingly turned to the bankruptcy system to achieve their goals.

Justice Sotomayor reasoned that the same considerations in state court findings of FDCPA violations, are present in the bankruptcy context. Bankruptcy debtors may feel pressure to make a small payment on the debt, thereby unwittingly restarting the running of the limitations period, or simply fail to realize that they have the ability to object to the claim. The gatekeeping function of the trustee is illusory. “The problem with the majority’s ipse dixit [that the presence of the trustee is protection enough] is that everyone with actual experience in the matter insists that it is false.”

Justice Sotomayor disagreed with the majority’s reasoning that because the debtor in bankruptcy has initiated the legal process she should be held to a higher level of sophistication than a defendant in a civil debt collection action, noting that debtors are in bankruptcy often as a result of lack of sophistication. To the majority’s reasoning that debtors could benefit from the filing of a stale claim because it may lead to disallowance and discharge, the dissent again interjected reality. In fact, a stale claim that slips through the bankruptcy process may result in resuscitation of an otherwise uncollectible debt and a debtor may find herself worse off after bankruptcy than before.

Justice Sotomayor ended with a ray of hope, “I take comfort only in the knowledge that the Court’s decision today need not be the last word on the matter. If Congress wants to amend the FDCPA to make explicit what in my view is already implicit in the law, it need only say so.”

Justice Sotomayor was joined her dissent by Justices Kagan and Ginsburg.

Justice Gorsuch did not take part in the decision.

Midland SCt opinion May 2017

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Third Circuit Applies Beard Test to Late-Filed Return Issue

The Third Circuit entered the late-filed tax return fray and applied the Beard test to the question of whether such return, filed post-IRS assessment, is a “return” for dischargeabilty purposes. It found that, at least in this case, it was not. Giacchi v. United States, No. 15-3761 (3rd. Cir. May 5, 2017).

Thomas Giacchi filed his income tax returns after the IRS had performed an independent assessment. The bankruptcy court found that his return was not a “return” within the meaning of section 523(a)(1)(B) and, therefore, the taxes were non-dischargeable. The district court affirmed.

On appeal to the Third Circuit, the court, declining to come down on either side of the “one day late” rule, instead applied the pre-BAPCPA analysis set forth in Beard v. Commissioner of Internal Revenue, 82 T.C. 766, 777 (T.C. 1984), aff’d, 793 F.2d 139 (6th Cir. 1986). The court specifically addressed the fourth prong of that test which looks to whether the debtor’s return represents an “honest and reasonable attempt to satisfy the requirements of the tax law.”

The court began with the premise that because a tax return is intended to provide information to the tax authority as to the taxpayer’s tax liability, a return filed after the IRS has already conducted its own assessment will rarely be an “honest and reasonable” attempt to comply with tax laws. The court went on to find that this case was no exception to that general rule.

In so holding, the court rejected Mr. Giacchi’s argument, supported by In re Colsen, 446 F.3d 836 (8th Cir. 2006), that the timing of the filing is not a relevant factor in whether the tax return meets the requirements for discharge, but that the court should look merely at the content of the filing to determine whether it is accurate and complete.

Calling it a self-serving attempt to reduce his liability, the court was also unpersuaded by Mr. Giacchi’s argument that because his late-filed return showed a smaller tax liability than that shown by the IRS assessment, his return was of value to the IRS.

Finally, Mr. Giacchi’s “passing” argument that his “emotional state” should excuse his delinquency likewise garnered no relief from the court. Acknowledging that circumstances could demonstrate a good faith attempt to comply with tax law, Mr. Giacchi’s claim did not provide that excuse.

Giacchi 3rd cir opinion May 2017

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Chapter 20 and Who May Be a Debtor

In a Chapter 20 case, a wholly unsecured junior lien for which the debtor has no personal liability does not enter into the calculation in the subsequent Chapter 13 case, of either secured or unsecured debt under section 109(e). Asset Management Holdings v. Hernandez, No. 16-1228, 1244 (B.A.P. 9th Cir. April 11, 2017) (unpublished).

Aleli Hernandez filed for Chapter 7 bankruptcy and included in her schedules two debts secured by deeds of trust on her residence. More than four years after she obtained a discharge in that case, she filed for Chapter 13 bankruptcy and sought to avoid the junior lien on the basis that the senior lien exceeded the value of the property. AMH moved to dismiss on the basis that Ms. Hernandez was ineligible for Chapter 13 relief under section 109(e) and, in the alternative, that she filed her petition in bad faith. The bankruptcy court denied the motion and confirmed Ms. Hernandez’s plan. [Read more…] about Chapter 20 and Who May Be a Debtor

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Eleventh Circuit Disappoints on Undue Hardship Issue

The standard for appellate review of a bankruptcy court’s decision that repayment of her student loans would constitute an “undue hardship,” in part due to a “certainty of hopelessness” as to future ability to pay, is “clear error” for the factual findings and “de novo” for application of law, and the debtor’s past financial decisions have no bearing on this forward-looking prong of the Brunner test. ECMC v. Acosta-Conniff, No. 16-12884 (11th Cir. April 19, 2017) (unpublished).

The Bankruptcy Court found that repayment of Alexandra Acosta-Conniff’s $112,000 student loan debt would constitute “undue hardship” under section 523(a)(8) and granted Ms. Acosta-Conniff discharge of those loans. On appeal, the district court reversed.

The Eleventh Circuit began by reaffirming its reliance on the test set forth in Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395 (2d Cir. 1987) (the “Brunner test”). Under this three-pronged test, the court looks at the debtor’s present ability to pay, the likelihood that she will be able to repay the loan in the future, and whether she has made good faith efforts in the past to repay the loan. The point of disagreement between the bankruptcy court and the district court was whether Ms. Acosta-Conniff had proved the second prong of the test by demonstrating a “certainty of hopelessness” with respect to her future ability to repay the loan.

On appeal the Eleventh Circuit noted that the bankruptcy court’s evidentiary findings with respect to the separate prongs of the Brunner test are findings of fact which should be reviewed on appeal under a “clear error” standard rather than the de novo review that would apply to conclusions of law. Here, the district court failed to distinguish the standard of review it applied to the bankruptcy court’s factual finding that Ms. Acosta-Conniff met the certainty of hopelessness test. Therefore, the Eleventh Circuit reversed and remanded to the district court to clarify the standard of review it applied to the question.

Having concluded the appeal on this basis, the circuit court went on to discuss a troubling aspect of the district court’s opinion. Specifically, the court focused on the district court’s comments that Ms. Acosta-Conniff was to blame for incurring so much debt in pursuit of four graduate and post-graduate degrees in special education, notwithstanding the likelihood that her salary would never justify the expense. This, the circuit court found, was an error of law. The second prong of the Brunner test is a forward-looking test that does not assign blame for the decisions that may have led to the debtor’s financial distress. What the court gave with one hand, however, it took away with the other in a footnote suggesting that evidence of a debtor’s improvident borrowing could be a factor in the third prong of the Brunner test.

In continuing to apply the Brunner test despite changes in the Code and the reality of higher education costs and lending practices, the Eleventh Circuit perpetuated many of the current problems in the student loan miasma. Furthermore, maintaining the “certainty of hopelessness” standard for future inability to repay, and leaving room for moral judgment to factor into application of the good faith aspect of the test bodes ill for debtors buried under student loan debt.

NACBA and NCLC filed an amicus brief in this case arguing that the Brunner test is outdated and should be replaced.

Acosta-Conniff 11th Cir. opinion April 2017

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A Loan Is Not an “Educational Benefit” for Dischargeability Purposes

A loan is not an “educational benefit” within the meaning of section 523(a)(8)(A)(ii), therefore, that student loan discharge exception in did not apply. Kashikar v. Turnstile Capital Management, No. 16-1298 (B.A.P. 9th Cir. April 28, 2017).

Ms. Kashikar attended St. Matthew University School (SMU) in the Grand Cayman Islands. She obtained loans which were paid directly by the creditor to SMU and which, by the time she filed chapter 7 bankruptcy, amounted to over $73,000. She received her chapter 7 discharge and filed an adversary complaint seeking determination that her loans related to her attendance at SMU were discharged. The parties stipulated that “SMU has never been, and is not now, an ‘eligible educational institution’ as that term is defined under section 481 of the Higher Education Act of 1965 (20 U.S.C. 1088), and has never been, and is not now, eligible to participate in a program under title IV of the Higher Education Act.” The court declined to address Ms. Kashikar’s argument under section 523(a)(8)(A)(i) because she had not raised that provision in her complaint. The court, however, applied an “expansive” reading of the phrase “educational benefit,” in section 523(a)(8)(A)(ii), and found the loans nondischargeable.

On appeal, the BAP reiterated its finding in Institute of Imaginal Studies v. Christoff (In re Christoff), 527 B.R. 624, 632 (B.A.P. 9th Cir. 2015) that, in the absence of “undue hardship,” section 523(a)(8) excepts from discharge: (1) loans made, insured, or guaranteed by a governmental unit; (2) loans made under any program partially or fully funded by a governmental unit or nonprofit institution; (3) claims for funds received as an educational benefit, scholarship, or stipend; and (4) and ‘qualified educational loan’ as that term is defined in the Internal Revenue Code.”

The Panel began its analysis with a discussion of the bankruptcy court’s decision that the debt was nondischargeable under the exception provided in section 523(a)(8)(A)(ii). It quickly dispensed with Ms. Kashikar’s argument that because the loan was paid directly to SMU rather than to her, the loan did not meet the “funds received” requirement of that section, finding that the reasoning in Christoff precluded that argument. Where actual funds were transferred to SMU on Ms. Kashikar’s behalf, the “funds received” requirement was met.

The court went on to find, however, that the bankruptcy court erred in deciding that the loan was an “educational benefit” within the meaning of section 523(a)(8)(A)(ii). Distinguishing an “educational benefit” in subparagraph (A)(ii) from an “educational overpayment or loan” or a “qualified educational loan” in subparagraph (A)(i), the court, quoting Christoff, said: “§ 523(a)(8)(A)(ii), now standing alone, excepts from discharge only those debts that arise from ‘an obligation to repay funds received as an educational benefit,’ and must therefore be read as a separate exception to discharge as compared to that provided in § 523(a)(8)(A)(i) for a debt for an ‘educational overpayment or loan’ made by a governmental unit or nonprofit institution or, in § 523(a)(8)(B), for a ‘qualified education loan.’” The court concluded that “a ‘loan’ is not an ‘educational benefit’ within § 523(a)(8)(A)(ii).”

Having found that Ms. Kashikar’s loan was not covered by the exception to discharge found in section 523(a)(8)(A)(ii), the panel went on to note that the provisions of section 523(a)(8) are presented in the disjunctive and therefore the bankruptcy court erred in declining to address whether the nondischargeability provision in 523(a)(8)(A)(i) applied. It remanded the case for determination of the evidentiary and substantive issues raised by consideration of subparagraph (A)(i).

Kashikar BAP 9th Opinion April 2017

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Escrow, Insurance and Rent Not Additional Collateral in Deed of Trust

Escrow, insurance and rent do not constitute additional collateral in a deed of trust for purposes of stripping down a mortgage. Jeremy v. J.P. Morgan Bank, No. 15-2369 (4th Cir. March 9, 2017). In an unpublished opinion, the Fourth Circuit rejected Calvert and Jolita Jeremy’s argument that stripping down of their residential debt was not prohibited by the anti-modification provision of section 1322(b)(2) because the debt was collateralized by more than simply their residence. Specifically, the Jeremys pointed to the deed of trust which provided for supplemental collateral including escrow funds, insurance proceeds, and rent. Citing its decision in Birmingham v. PNC Bank, N.A., 846 F.3d 88 (4th Cir. 2017), the court found that the funds listed in the deed of trust were “incidental property” rather than additional collateral.

Jeremy 4th Cir. March 2017