Financially distressed debtors seeking the fresh start offered by bankruptcy, often lack the resources to pursue important issues at the appellate level. To equalize the playing field between consumer debtors and their creditors, the NACBA Board created the National Consumer Bankruptcy Rights Center (NCBRC or “Nicbric”), a 501(c)(3) organization. Since its inception in 2010, NCBRC has provided support to consumer bankruptcy debtors and their attorneys in cases of national importance. NCBRC fulfills its mission through three programs. Under the Amicus Program, NCBRC has filed briefs in cases addressing such vital issues as the invidious practice of debt collectors filing stale claims and the misapplication of judicial estoppel by the courts. In its Pro Bono Appellate Program, NCBRC has worked with attorneys from leading bankruptcy firms around the country who have donated over 300 hours to the amicus project. Finally, NCBRC’s Educational Program is devoted to supporting the bankruptcy bar by providing education on current issues in consumer bankruptcy. To this end, NCBRC’s Project Director, Tara Twomey, is an active participant in in-person and online training programs.
To learn more about NCBRC in general and to read about specific cases in which NCBRC filed amicus briefs in 2016, go to NCBRC Year in Review 2016.
To continue this great work we need your help. Consider contributing today by clicking here.
Federal Banking Agencies Fine ServiceLink Holdings $65 Million
A news release issued by the Department of the Treasury announced a $65 million fine against ServiceLink Holdings, formerly Lender Processing Services (LPS), for servicing deficiencies by LPS relating to its foreclosure services. The news release can be found here.
Property Tax Refund Not Exemptible
A state property tax refund intended to “provide property tax relief to certain persons who own or rent their homesteads,” is not “government assistance based on need,” for purposes of Minnesota exemptions. Hanson v. Seaver (In re Hanson), No. 16-6023 (B.A.P. 8th Cir. Jan. 6, 2017).
Upon objection by the chapter 7 trustee, the Bankruptcy Court found debtor, Sheri Lynn Hanson, was not entitled to the public assistance exemption based on her refund under the Minnesota Property Tax Refund Act.
On appeal, Ms. Hanson argued that In re Hardy, 787 F.3d 1189 (8th Cir. 2015), which reversed the BAP to hold that the Missouri child tax credit refund was exemptible public assistance, abrogated Manty v. Johnson (In re Johnson), 509 B.R. 213 (B.A.P. 8th Cir. 2014), in which the BAP held that the Property Tax Refund Act was not exemptible as public assistance. The BAP rejected this argument, finding that the Eighth Circuit decision in Hardy was based on its disagreement with the BAP as to whether the child tax credit refund fit the definition of government assistance based on need. Relying on the history of amendments to the statute which were geared toward increasing benefits to poorer taxpayers, the circuit court found that the child tax credit refund fit the definition of public assistance.
Turning to the legislative history of the property tax refund statute, the court found amendments to that Act showed that the legislature had “rais[ed] the maximum eligible household income and lower[ed] the threshold income percentage for higher income individuals.” Taking into consideration the property tax relief statute as a whole, the court noted that other sections were not tied to income. Contrary to Ms. Hanson’s assertion, the court saw “no basis in the legislative history for a finding that the Act was intended to benefit low-income homeowners.” Based on this analysis, the court found that it was bound by the holding in Johnson and affirmed the bankruptcy court decision.
Escrow Is Not Separate Collateral
Provisions in a deed of trust, including an obligation for the debtor to maintain an escrow account, are incidental to the residential security interest and do not remove the claim from bankruptcy’s anti-modification provision. Birmingham v. PNC Bank, No. 15-1800 (4th Cir. Jan 18, 2017).
Chapter 13 debtor, Gregory John Birmingham, filed an adversary complaint seeking to cram down his mortgage with PNC and arguing that the anti-modification provision did not apply because PNC’s claim was not secured solely by his residence. Specifically, Mr. Birmingham pointed to the provisions in the lending agreement requiring him to: 1) maintain an escrow account to cover obligations such as property taxes, 2) maintain property insurance, and 3) assign to PNC any proceeds from third parties arising out of judgments, settlements or other actions involving the property.
The bankruptcy court granted PNC’s motion to dismiss and the district court affirmed.
On appeal, the Fourth Circuit began with Nobelman v. Am. Sav. Bank, 508 U.S. 324 (1993), in which the Court found section 1322(b)(2)’s anti-modification provision precluded bifurcation of a claim secured by the debtor’s residence into secured and unsecured portions. The court then turned to the Bankruptcy Code’s definition of “residence” under section 101(13A)(A) which includes “incidental property, without regard to whether that structure is attached to real property.” Incidental property is also separately defined in section 101(27B) as including “property commonly conveyed with a principal residence in the area where the real property is located,” such as “escrow funds, or insurance proceeds.”
The court found, under these definitions, that the provisions in the deed of trust did not create separate collateral for the loan, but protected the lender’s security interest in the real property and were, therefore, incidental to that interest. The court distinguished cases in which additional property included in the deed of trust was deemed to waive the lender’s anti-modification protection. For instance, the lending agreement in Hammond v. Commonwealth Mortg. Corp. of Am., 27 F.3d 52 (3d Cir. 1994), which provided a security interest in appliances, machinery, furniture and equipment, in addition to the residence, waived the lender’s anti-modification protection.
Mr. Birmingham cited In re Bradsher, 427 B.R. 386 (Bankr. M.D. N.C. 2010) and In re Hughes, 333 B.R. 360 (Bankr. M.D. N.C. 2005), for the proposition that a security interest in escrow funds was separate from the interest in the residential property. The court found those cases inapposite. In both Bradsher and Hughes, the language of the deed of trust “expressly provided that escrow payments constituted additional security for the loan.” Because the case before it did not involve similar language, the court declined to address the holdings in Bradsher and Hughes.
The court rejected Mr. Birmingham’s request that it look to Maryland law to determine whether a security interest was created in separate collateral by the language of the deed of trust. Even if application of Maryland law would lead to a different result, the court found, state law would be preempted by the definitions and provisions in the Bankruptcy Code.
Finally, the court reasoned that because most mortgages include provisions similar to those at issue here, any other finding would effectively eviscerate the anti-modification provision. The court, therefore, affirmed the judgment of the district court.
CFPB Goes After Student Loan Servicer
In a Press Release issued on January 18, the CFPB announced that it was suing the nation’s largest student loan servicer, Navient Corporation, for illegal activity at every stage of the student loan process. The company is accused of systematically creating obstacles to repayment by providing bad information, incorrectly processing payments and failing to act on customer complaints. The complaint alleges that Navient’s conduct resulted in borrowers paying much more than they would have had their loans been properly serviced and had they been given accurate information about alternative repayment plans.
Navient, formerly part of Sallie Mae, Inc., services more than 12 million student loans approximately half of which are through its contract with the Department of Education.
According to CFPB Director, Richared Cordray, “For years, Navient failed consumers who counted on the company to help give them a fair chance to pay back their student loans. At every stage of repayment, Navient chose to shortcut and deceive consumers to save on operating costs. Too many borrowers paid more for their loans because Navient illegally cheated them and today’s action seeks to hold them accountable.”
Specifically, the CFPB accuses Navient and two of its subsidiaries, Pioneer Credit Recovery and Navient Solutions, of:
- Failing to correctly apply or allocate payments to borrower’s accounts,
- Steering borrowers who had trouble repaying their loans away from the lower repayment plans they were entitled to under federal law and into forbearance programs which allow interest to accrue while the borrower is on hiatus from repaying the loan,
- Failing to inform borrowers enrolled in income-driven repayment plans of the need to renew those plans annually,
- Deceiving private student loan borrowers as to the steps necessary to release a co-signer from the loan,
- Harming the credit of disabled borrowers including severely injured veterans.
The lawsuit alleges violations of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the FCRA and the FDCPA.
City Lacked Standing to Object to Plan’s Tax Redemption Provision
The City of Philadelphia lacked standing to object to the debtor’s plan provision under which he proposed to redeem over the life of the plan property sold in a tax sale. In re Wilson, No. 15-6385 (E.D. Pa. Dec. 28, 2016)
Earl Wilson failed to pay his city property tax. As a result, the property was sold at auction and sold again to a “subsequent purchaser” in accordance with Pennsylvania’s Municipal Claims and Tax Lien Act (“MCTLA”). That law permits a tax debtor to redeem property within nine months of sale. Mr. Wilson filed for chapter 13 bankruptcy in which his revised Fifth Amended Plan proposed to pay the redemption amount over the course of the plan. The bankruptcy court confirmed the plan over the City’s objection specifically finding that the City lacked standing to object to that portion of the plan providing for redemption of the property.
On appeal the district court looked first to the City’s standing to appeal the bankruptcy court’s confirmation order. It began with bankruptcy’s “person aggrieved” standard for appellant standing. Finding this standard more stringent than general Article III appellate standing, the court stated that the standard “is met only by persons whose rights or interests are directly and adversely affected pecuniarily by an order of the bankruptcy court.” Standing cannot be based on speculative or collateral injury.
The City argued that by permitting Mr. Wilson to redeem the property over the course of his plan instead of within the nine month redemption period proscribed by the MCTLA, the bankruptcy court’s confirmation order injured it in three ways. It 1) diminished the City’s ability to use tax sales as a means of generating revenue and keeping properties on productive tax rolls, 2) increased uncertainty of ownership upon Sheriff’s sale, and 3) put the property back into the hands of a debtor who has proven himself unable or unwilling to pay his tax obligations.
The court found these injuries to be “speculative” in part because they relied on assumptions that might never come to pass: that fewer investors would be inclined to purchase tax-indebted property and that the sale prices would therefore be reduced. The court found the assumption that Mr. Wilson would not pay future taxes and that the subsequent purchaser would pay them, was likewise a matter of speculation. The court, therefore, found that the City lacked standing to appeal the bankruptcy court’s confirmation order.
The court found, however, that the City had standing to appeal the bankruptcy court’s finding that it lacked standing to object to the plan. This inquiry required the district court to examine whether the City met the standard for objecting to a plan under section 1324(a) which gives standing to a “party in interest.” Unlike appellate standing, standing under section 1324(a) is coextensive with Article III standing. The party seeking standing must show injury in fact, which is traceable to an action of the debtor, and which is redressable by a favorable decision.
Even under the less stringent standing analysis, the City’s challenge to the bankruptcy court’s order failed for the same reasons its argument relating to appellate standing failed. Its alleged injury was too speculative to confer standing under section 1324(a). The City could not establish with any degree of certainty that Mr. Wilson would fail to pay future property taxes or that the City would be harmed by such failure. Increased “risk” of injury based on hypothetical future conduct by Mr. Wilson was not the concrete injury in fact required for standing to object to confirmation.
The court affirmed the bankruptcy court’s finding that the City lacked standing to challenge plan confirmation.
Midland Oral Argument Transcript
Oral argument in Midland v. Johnson was today. See the transcript here.
FTC Cracking Down on Dishonest Payday Lenders
The FTC has been going after fraudulent payday lending operations centered in Missouri and Kansas, with settlements as high as $1.266 billion.
In a press release dated January 9, 2017, the FTC announced charges against businessman, Joel Jerome Tucker, and his companies, SQ Capital LLC, JT Holding Inc., and HPD LLC, for selling portfolios made up of fake payday loans. According to the FTC, the loans listed in the portfolios were named phony lenders and debtors, including their social security and bank account numbers, and led to collection activities against consumers who had not taken out loans. The FTC previously brought actions against two debt collectors who used the fake portfolios.
In October 2016, the Kansas City Star reported that Joel Tucker’s brother, Missouri businessman and sometime racecar driver, Scott Tucker, was ordered to pay $1.266 billion to the FTC after Nevada federal judge, Gloria Navarro, determined that he and others ran a payday loan enterprise that engaged in deceit against its customers by failing to disclose terms and conditions of the loans and for charging usurious interest rates. Judge Navarro called the fraud “sustained and continuous.” Mr. Tucker attempted to evade state lending regulations by locating portions of his businesses on tribal lands, though the bulk of his operations were located in Overland Park, Kansas. Scott Tucker also has a pending criminal case against him in which he is accused of running a $2 billion payday loan enterprise that defrauded 4.5 million consumers. That case is scheduled for trial in April 2017.
In another case, a settlement was reached last summer between the FTC and payday lenders, Tim Coppinger and Ted Rowland, and their companies. Under the terms of that agreement the lenders paid almost $1 million with the threat of substantially greater judgments (up to $32 million) should they fail to honor the terms of the settlement agreement. The fraudulent activity included debiting money from the accounts of people who never requested loans but for whom the payday lender had obtained personal information. They would then charge interest and fees on those unauthorized loans. Joel Tucker had a hand in this operation through his company, eData Solutions, a “one-stop-shop” for assisting payday lenders in their start-ups and operations. eData’s involvement consisted of providing “customer/borrower leads, qualifying the leads, providing a loan management software system, and buying defaulted consumer loans to sell to third-party collectors.” Court-appointed Receiver, Larry Cook, is seeking to recover the entire $29.9 million that Coppinger and Rowland’s companies paid to eData Solutions for its services.
Battle Lines Have Been Drawn – Midland v. Johnson
In a flurry of party and amici briefs, the issue of whether a proof of claim for a stale debt gives rise to an FDCPA claim has been briefed before the Supreme Court. Midland Funding v. Johnson, No. 16-348 (petition filed Sept. 16, 2016). The case is on appeal from the Eleventh Circuit decision that the “Bankruptcy Code does not preclude an FDCPA claim in the context of a Chapter 13 bankruptcy when a debt collector files a proof of claim it knows to be time-barred.” Johnson v. Midland Funding, LLC, C.A. No. 15-11240, 2016 U.S. App. LEXIS 9478 (11th Cir. May 24, 2016). The issue is currently pending in courts around the country including the First, Third, Sixth, Seventh and Eighth Circuits. Oral argument is scheduled for January 17.
Johnson ACA Intl amicus
Johnson Brunstad Amicus
Johnson Chamber of Commerce amicus
Johnson DBA intl amicus
Johnson NABT Amicus
Johnson NACBA Amicus SCt Dec 2016
Johnson NARCA amicus
Johnson NCLC etc amicus
Johnson Petition brief
Johnson petition reply
Johnson Reprinted brief of respondent
Johnson Resurgent Capital Amicus
Johnson US amicus
Nice Win for Debtors on Means Test Expense Issue
Section 707(b)(2) permits a debtor to take the full National and Local Standard amounts for expenses even though the debtor’s actual expenses are less. Lynch v. Jackson, No. 16-1358 (4th Cir. Jan. 4, 2017).
When above-median debtors, Gabriel and Monte Jackson, filed for chapter 7 bankruptcy they complied with Form 22A’s instructions to list their expenses using the IRS National and Local Standard amounts rather than their actual expenses which were less. The bankruptcy administrator moved to dismiss their case as abusive under section 707(b)(2)(A)(i). The bankruptcy court denied the motion to dismiss. In re Jackson, 537 B.R. 238 (Bankr. E.D. N.C. 2015), and the Fourth Circuit accepted direct appeal.
The administrator argued that Form 22A’s instructions are erroneous and that the expense deduction amounts listed in the IRS Standards represent a cap on how high an expense amount may be claimed for certain expenses, but that if the actual amount is less, the debtor must use the lesser amount.
In Ransom v. FIA Card Servs., 562 U.S. 61 (2011), the Court addressed application of the IRS Standard expense deductions in the context of abuse under section 707(b). That Court held that, in order to take the IRS Standard expense deduction, a debtor must actually incur the type of expense designated, i.e. the “vehicle ownership” expense requires that the debtor have lease or loan payments on the vehicle. But that Court left open the question of whether, once the expense is found to be “applicable,” the debtor may take the full IRS Standard amount regardless of actual expenses.
The Fourth Circuit found the answer in the plain language of the statute: “[t]he debtor’s monthly expenses shall be the debtor’s applicable monthly expense amounts specified under the National Standards and Local Standards. 11 U.S.C. § 707(b)(2)(A)(ii)(I).” The fact that Congress used the word “actual” elsewhere in the same statute indicates that it made a distinction between applicable and actual. The court also recognized the absurdity of punishing a frugal debtor should the bankruptcy administrator’s interpretation of the statute be accepted.
As a procedural matter, the court held that the time to file a petition for direct appeal in section 158(d)(2)(A) is not a jurisdictional constraint and, therefore, the parties’ late filing did not deprive the court of jurisdiction over the appeal where other substantive factors favored direct appeal.
Congratulations to Lee Roland who represented the Jacksons, and to Erik Heath who authored NACBA’s amicus brief in support of the debtors.