In an unpublished opinion, the Ninth Circuit reached the alarming conclusion that plaintiffs alleging inaccuracies on credit reports that lowered their credit ratings, had no constitutional standing to sue the credit reporting agencies under the FCRA because they could not show “that they had tried to engage in or were imminently planning to engage in any transactions for which the alleged misstatements in their credit reports made or would make any material difference.” Jaras v. Equifax, No. 17-15201(9th Cir. March 25, 2019) (unpublished). [Read more…] about Ninth Circuit Finds No Standing for FCRA Claim Despite Reduced Credit Scores
Bankruptcy Court Joins Minority, Grants Discharge, and Denies the Trustee’s Motion to Dismiss for Delinquent Post-Petition Mortgage Payments
On March 28, 2019, the Bankruptcy Court for the District of Arizona Denied the Trustee’s Motion to Dismiss based on the Debtors’ post-petition mortgage default. In doing so, she joined the minority position on this issue.
The Debtors filed their Chapter 13 bankruptcy on July 18, 2014. Their plan proposed to pay back mortgage arrears to their mortgage lender through plan payments to the trustee. The plan also indicated that they would make direct payments to the mortgage lender for future monthly mortgage payments. At the end of the plan, the mortgage lender filed a Response to the Trustee’s Notice of Final Cure for Prepetition Arrears on the Mortgage Claim, agreeing that the prepetition default was cured, but stating that the post-petition payments due on and after September 1, 2017, were delinquent. The Trustee then filed a motion to dismiss.
The court addressed the issue of whether payments on a mortgage paid directly to the mortgage holder and referenced in a chapter 13 plan are “payments under the plan” for purposes of 11 U.S.C. §1328(a) and if delinquent is a legitimate basis to dismiss the bankruptcy and deny a discharge.
Section 1328(a) states in pertinent part: “as soon as practicable after completion by the debtor of all payments under the plan,… the court shall grant the debtor a discharge of all debts provided for by the plan…” Similarly, 11 U.S.C. § 1307(c)(6) allows a trustee to move to dismiss for cause including “material default by the debtor concerning a term of a confirmed plan;…” As a result several Chapter 13 trustees file motions to dismiss if they discover that a debtor is delinquent in mortgage payments.
There are two schools of interpretation of “payments under the plan.”
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Court Orders Student Loan Discharge
In a compassionate and pragmatic opinion, a bankruptcy court in the Northern District of Georgia found that the debtor met the difficult burden of showing a “certainty of hopelessness,” and that she otherwise satisfied the Bruner test for a hardship discharge of her student loans. Hill v. Educ. Credit Mgmt. Corp., No. 17-56656, Adv. Proc. No. 17-5131 (Bankr. N.D. Ga. April 1, 2019).
Chapter 7 debtor, 46-year-old, Risa Rozella Hill, attended college intermittently between 1998 and 2011, for a social work degree. During that time, she accumulated the 23 student loans owed to ECMC which were the subject of this adversary proceeding. She never made any payments on the loans because, at all times, they were either in forbearance or deferment. Prior to trial, ECMC voluntarily reduced her debt from $127,000 to $70,000.
Ms. Hill was employed as a social worker from 2002 to 2013 when she began experiencing signs of psychosis including hallucinations, delusions and voices in her head. Her illness led to hospitalizations and a period of homelessness. She was diagnosed with “Bipolar Type I disorder with psychotic features and post-traumatic stress disorder (“PTSD”),” and was found to be depressed and dangerous to herself and others. She became dependent upon numerous medications with significant side-effects, and a host of medical and counseling professionals to regulate her mental illness. After the onset of her illness, Ms. Hill was no longer able to work and she began receiving Social Security Disability Insurance Benefits as her sole source of income. She obtained housing using a Housing Voucher through the Atlanta Housing Authority, received food stamps until she failed to fill out the forms to continue that benefit, and had Medicare for her medical expenses. A Representative Payee received her SSDI and paid her bills for her. In her bankruptcy schedules she listed excess income in the amount of $212.00 per month for unexpected expenses.
She sought discharge of the student loans as undue hardship under section 523(a)(8).
ECMC suggested, among other things, that rather than discharge, she enter an income-based repayment plan, “Revised Pay as You Earn” or REPAYE, under which she would pay nothing so long as she maintained the yearly recertification of her income, and her debt would be cancelled at the end of 20 years. Ms. Hill, however, feared that she would not be able to maintain the recertifications and the loans would go into default possibly leading to set-off of her disability benefits.
Applying the Bruner test for undue hardship, court began by looking at whether paying the student loans would prevent Ms. Hill from maintaining a minimal standard of living. There was no dispute that Ms. Hill could not pay her loans out of her surplus income even with the lowered amount determined by the ECMC. ECMC argued, however, that because she would pay nothing in the REPAYE program, she could not meet this first Bruner requirement. The court turned this argument on its head finding that the fact that under the REPAYE program Ms. Hill would pay nothing is simply further evidence of her inability to repay the loans. Furthermore, “[r]equiring Debtor’s participation in such a program will do nothing but impose an ongoing administrative burden on Debtor and create possible tax implications that may arise after the debt is cancelled subsequent to the repayment period.” Her SSDI benefits would also be at risk if, at the end of the twenty-year REPAYE program, she could not satisfy those tax requirements. The fact that Ms. Hill had recently failed to fill out the paperwork for her food stamp benefits and had earlier failed to follow through with the paperwork for an administrative discharge, was evidence that the administrative burden inherent in maintaining the REPAYE program would overwhelm her.
Importantly, the court went on to explain that the Bruner test required a finding that the debtor would not be able to maintain a minimal standard of living if she paid off the original loans, not loans subject to an income-based repayment plan. The court noted that a contrary finding would essentially put undue hardship discharge out of reach for student loan debtors in general.
The court turned to the second prong of the Bruner test. The Eleventh Circuit applies an onerous “certainty of hopelessness” to the question of whether the cause of a debtor’s inability to pay her student loans will persist. The court found that Ms. Hill met that test. Despite some progress in her treatment for PTSD, her other mental illnesses were unlikely to abate, and her need for medication with debilitating side-effects would prevent gainful employment into the foreseeable future. The court noted that Ms. Hill’s eligibility for SSDI was based on a finding of the persistent nature of her illnesses.
The court added that even if Ms. Hill were able to work at the income level she enjoyed prior to the onset of her illnesses, she would not earn enough money to pay off the loans and meet her daily needs. Moreover, employment would mean loss of SSDI, her housing voucher, Medicaid and other benefits that currently allow her to receive the treatment necessary to prevent further psychotic episodes. The court thus found her situation “hopeless.”
Finally, the court addressed whether Ms. Hill had made a good faith effort to repay her loans. ECMC argued that because Ms. Hill had never made any payments on her loans, nor had she taken advantage of the REPAYE program, she has not demonstrated good faith. The court disagreed based on the facts that at no time were Ms. Hill’s loans in default, and she was in school all but two of the years the loans were outstanding. Because Ms. Hill was never financially able to make payments on the loans, the fact that she did not do so does not constitute bad faith. Again, the court cautioned that a finding of bad faith based on failure to participate in an income-based repayment plan would graft a regulatory requirement onto section 523(a)(8) that Congress did not include in the provision.
The court was also unpersuaded by ECMC’s argument that the fact that her student loans comprised a disproportionate percentage of her debt in bankruptcy was an indication of bad faith. To the contrary, the court found Ms. Hill saddled with substantial non-educational debts that would have justified filing for bankruptcy in and of themselves.
The court thus found that Ms. Hill met the standard of undue hardship necessary to discharge of her student loans under section 523(a)(8).
SCOTUS Addresses “Debt Collector” Definition
In a unanimous, narrow, decision, the Supreme Court held that an entity merely carrying out nonjudicial foreclosures is not a “debt collector” within the meaning of the FDCPA. Obduskey v. McCarthy & Holthus LLP, 586 U.S. ___, No. 17-1307 (March 20, 2019).
The action arose when the law firm of McCarthy & Holthus, acting as agent for the mortgagee, initiated nonjudicial foreclosure proceedings against Dennis Obduskey. In response to McCarthy’s notice of foreclosure, sent in compliance with Colorado nonjudicial foreclosure law, Mr. Obduskey invoked the FDCPA and sent a letter disputing the debt. When McCarthy went forward with the foreclosure proceedings, Mr. Obduskey filed a complaint in district court alleging violation of the FDCPA’s requirement that, upon notification of a disputed claim, a debt collector must cease collection activities and obtain verification of the debt. The district court found that McCarthy was not a debt collector to which the FDCPA requirements applied. The Tenth Circuit affirmed. Obduskey v. Wells Fargo, 879 F. 3d 1216 (2018).
The Supreme Court agreed. Justice Breyer’s majority opinion relied primarily on textual interpretation. Section 1692(a)(6) of the FDCPA sets forth a two-part definition of “debt collector.” First, a “debt collector” is “any person . . . in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts.” The FDCPA then provides what the Court called a “limited-purpose” definition, stating that “[f]or the purpose of section 1692f(6) . . . [the] term [debt collector] also includes any person . . . in any business the principal purpose of which is the enforcement of security interests.”
The Court found that, in the absence of the “limited-purpose” phrase, an entity carrying out a nonjudicial foreclosure would fall under the FDCPA’s primary definition of debt collector. But Congress’s use of the phrase “also includes,” suggests that entities whose sole purpose is to enforce security interests, would not otherwise be deemed a debt collector. As the text is structured, therefore, the entity against which the FDCPA is being wielded must first be in the business of debt collection and, only if that is the case, have as its principal purpose enforcement of security interests.
In so holding, the Court reasoned that this structure could indicate congressional intent not to interfere with state nonjudicial foreclosure procedures. In fact, the definition appeared to be a legislative compromise between including entities enforcing security interests in the primary definition of “debt collector,” and excluding them from the definition altogether.
The Court went on to address and reject Mr. Obduskey’s counterarguments. First, the Court was unpersuaded that the limited-purpose provision was intended to draw repo-men into the definition of debt collector, finding instead that the text was broadly written to include all security interests, not just personal property. Furthermore, the fact that McCarthy sent letters seeking payment of the debt prior to taking foreclosure action was attributable to state nonjudicial foreclosure requirements rather than an indication that McCarthy was acting as a debt collector. There was no indication that McCarthy engaged in other debt collection activities.
The Court noted that its holding was limited to instances of conduct involving adherence to state nonjudicial foreclosure requirements and that had McCarthy engaged in more extensive, abusive, conduct, it might not have escaped liability under the FDCPA’s primary definition.
In her concurring opinion, Justice Sotomayor emphasized the narrow nature of the Court’s majority opinion as applying to good faith conduct, and voiced her concern that in enacting section 1692(a)(6)’s definition, Congress may not have anticipated the conclusion reached by the Court.
7th Circuit Certifies Workers’ Compensation Exemption Question to Illinois Supreme Court
The Seventh Circuit Court of Appeals has certified a question to the Illinois Supreme Court concerning “whether the Illinois Workers’ Compensation Act [IWCA], as amended, allows care-provider creditors to reach the proceeds of workers’ compensation claims.” In re Hernandez, No. 18-1789 (7th Cir. March 18, 2019).
When Elena Hernandez filed for chapter 7 bankruptcy, she listed a workers’ compensation claim in the amount of $31,000 and claimed the entire amount as exempt under Illinois law. She also listed health care debts arising out of work-related injuries of over $130,000. She settled her workers’ compensation claim shortly after filing her bankruptcy petition. The healthcare providers objected to the exemption on two bases: first, that the IWCA as amended, permitted them to reach the workers’ compensation settlement; and second, that the settlement was the product of fraud. After a hearing, the bankruptcy court denied the exemption on the basis of fraud without reaching the statutory objection. The district court, however, based its affirmance on interpretation of the IWCA. Ms. Hernandez appealed to the Seventh Circuit.
Section 21 of the IWCA provides: “No payment, claim, award or decision under this Act shall be assignable or subject to any lien, attachment or garnishment, or be held liable in any way for any lien, debt, penalty or damages.” Although the Illinois Supreme Court has never addressed the issue, the parties do not dispute that this section creates an exemption in bankruptcy for workers’ compensation claims. The disagreement arises out of whether amendments to the Illinois statute carved out an exception to this exemption for healthcare providers.
In 2005, the Illinois legislature amended the IWCA by limiting how much healthcare providers can charge for treatment of work-related injuries. In the case of undisputed claims, the amendments permit healthcare providers to bill and be paid by the employers directly. The amendments also ended the practice of allowing a healthcare provider to bill the employee for any fees not paid by the employer. Where the employer disputes the workers’ compensation claim, the amendments provide that if the employee challenges the employer’s position, the healthcare provider may not bill the employee or the employer until resolution of the dispute, and the statute of limitations on the debt is tolled. Perhaps most significantly, under new section 8.2(e-20) of the IWCA, in the event a disputed workers’ compensation claim is settled, the healthcare provider is then free to seek payment from the employee. The Illinois legislature did not alter the language of section 21.
The healthcare providers argued that permitting Ms. Hernandez to exempt her workers’ compensation settlement from the reach of the work-injury healthcare providers would obviate the language of section 8.2(e-20), and run counter to the state legislature’s intention of allowing healthcare providers access to workers’ compensation funds in exchange for capping the amounts they can charge for treatment.
On the other hand, Ms. Hernandez argued that section 21 was not altered by the amendments and had the state legislature intended to create an exception to the exemption, it could have done so in plain language.
The Seventh Circuit found merit to both sides. Adopting the healthcare providers’ view would harmonize with the legislature’s obvious goal of protecting those providers and would advance the goal of encouraging healthcare providers to provide care to people injured in work-related accidents. The court agreed, however, that while Ms. Hernandez’s interpretation would hinder the effectiveness of the amendments, it would not necessarily render any provision absurd or surplusage.
Finding itself “genuinely uncertain about a question of state law that is key to a correct disposition” of the case before it, the circuit court granted the parties’ motion to certify the following question to the Illinois Supreme Court:
“After the 2005 amendments to 820 ILL. COMP. STAT. 305/8 and the enactment of 305/8.2, does section 21 of the Illinois Workers’ Compensation Act exempt the proceeds of a workers’ compensation settlement from the claims of medical-care providers who treated the illness or injury associated with that settlement?”
Attorney Fee Award Upheld Against Student Loan Servicer
The district court found that the bankruptcy court did not abuse its discretion in holding the student loan servicer in contempt for failing to apply the student debtor’s payments outside the plan in accordance with pre-petition payments as required by the debtor’s confirmed chapter 13 plan. Penn. Higher Educ. Assistance Agency v. Berry, No. 18-444 (D. S.C. March 5, 2019).
Berry had student loans issued by the Department of Education (DOE) and administered by the Pennsylvania Higher Education Assistance Agency (PHEAA). She was paying off her loans under an Income-Driven Repayment plan (IDR) and a Public Service Loan Forgiveness (PSLF) program. In her chapter 13 bankruptcy, her confirmed amended plan provided for continued payments on her student loan debts outside the plan with those payments being applied exactly as before thereby allowing her to continue to benefit from the IDR and PSLF. The PHEAA, however, put the loans into administrative forbearance under which it applied the payments to principal and interest. Ms. Berry filed a Motion to Enforce seeking sanctions in the amount of $22,317.30, representing the attorney fees she incurred pursuing proper application of the payments. The DOE eventually settled its portion of the action for $6,000 and Ms. Berry sought the remaining amount from PHEAA. The bankruptcy court granted Ms. Berry’s entire attorney fee request consisting of $22,317.30 of which, after the DOE’s $6,000 settlement, the PHEAA owed $16,317.30.
On appeal, the district court began with PHEAA’s defense that it was limited in its authority by its servicing contract with the DOE. The court found that the bankruptcy court did not commit clear error in its application of law or in its findings of fact when it concluded that PHEAA had a contractual obligation to deal with borrower’s complaints and to bring unresolved problems to the attention of the DOE. In this case, it did neither.
The district court turned to the bankruptcy court’s conclusion that bad faith was not necessary to imposition of sanctions under section 105(a), reciting the necessary elements of contempt as: “(1) The existence of a valid decree of which the alleged contemnor had actual or constructive knowledge; (2) . . . that the decree was in the movant’s ‘favor’; (3) . . . that the alleged contemnor by its conduct violated the terms of the decree, and had knowledge (at least constructive knowledge) of such violations; and (4) . . . that [the] movant suffered harm as a result.” Here, even if PHEAA lacked authority to treat Ms. Berry’s payments as provided for in her plan, the bankruptcy court did not err in finding that it could not simply ignore the confirmed plan. At the very least, it should have sought guidance from the DOE, or objected to the plan.
Along the same lines, PHEAA argued that the bankruptcy court abused its discretion by holding it in contempt where its conduct was governed by its contract with the DOE and was therefore not willful. The court found that the bankruptcy court’s authority to impose sanctions under section 105(a) did not require a finding of willfulness.
The court found that the bankruptcy court correctly based its decision on its broad authority to craft a remedy based on the particular circumstances of a given case and that, here, the bankruptcy court was persuaded by PHEAA’s failure to make any attempt to either comply with the debtor’s plan or seek guidance from the DOE. This finding was not an abuse of discretion.
Finally, the district court affirmed the bankruptcy court’s allocation of sanctions as having been based on the debtor’s efforts to obtain compliance from PHEAA.
7th Circuit Reverses Bankruptcy Courts’ Uniform Rule to Keep Debtor’s Vehicle in Chapter 13 Post-Confirmation Estate
This opinion was based on the consolidated appeals of seven cases. Each of the seven debtors filed a petition for bankruptcy under Chapter 13 of the Bankruptcy Code in the Bankruptcy Court for the Northern District of Illinois. The uniform confirmation order in this district (in most cases) is that upon confirmation, the property of the estate remains property of the estate. City of Chi. v. Marshall, 281 F. Supp. 3d 702, 704 (N.D. Ill. 2017).
Thereafter, the debtors incurred fines as the registered owners of vehicles involved in parking or traffic violations of Chicago’s Municipal Code. In each bankruptcy case, the City of Chicago sought payment of the outstanding post-petition traffic fines as administrative expenses under § 503 of the Bankruptcy Code, which, under § 507(a), would give these claims priority status (second only to domestic support obligations), ahead of pre-petition creditors in the distribution of the assets of the bankruptcy estates. Id.
Six of the seven cases were heard before Bankruptcy Judge Barnes. Judge Barnes’s oral ruling rejected Chicago’s argument. “He found that the City’s attempt to collect post-petition fines as administrative expenses had “a dangerous irritative effect, which is that the debtor could continue even after the first administrative expense claim for the life of the plan to incur additional tickets and they could be added to the plan,” depleting the assets available to unsecured creditors. (Citation omitted.) Judge Barnes concluded that “the traditional set of circumstances holds true, which is the debtor remains responsible for these claims,” and that the City had the same collections options as any post-petition creditor: it could move for relief from the stay and pursue state court remedies, or it could seek dismissal of the bankruptcy case. (Citation omitted.)” Id. at 705.
The seventh case was heard by Judge Hollis. She also rejected Chicago’s argument in a written opinion, In re Haynes, 569 B.R. 733 (Bankr. N.D. Ill. 2017), finding that post-petition traffic tickets did not qualify as administrative expenses.
These cases were consolidated on appeal to the District Court for the Northern District of Illinois which affirmed the Bankruptcy Courts’ decisions. City of Chi. v. Marshall, 281 F. Supp. 3d 702 (N.D. Ill. 2017).
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Debtors’ Plan May Direct Student Loan Payments to Principal
Finding that “non-dischargeability does not immunize the student loan claim from modification,” the bankruptcy court confirmed the Chapter 12 debtors’ plan under which their payments would go to the principal on their student loan debt with accumulated post-petition interest to be paid post-discharge. In re Duensing, No. 18-10201 (Bankr. D. Kans. Feb. 22, 2019).
ECMC objected to Kirk and Eve Duensing’s proposed treatment of Ms. Duensing’s student loan debt arguing that, because the reduction of principal would result in declining post-petition interest, the proposed plan effectively discharged her student loan without a finding of undue hardship. [Read more…] about Debtors’ Plan May Direct Student Loan Payments to Principal
Debtor’s Right to Amend Extends to Reopened Cases
A debtor may amend his schedules as a matter of right “without limitation of whether the case is open or reopened after closing.” Mendoza v. Montoya, No. 18-19, Dollman v. Montoya, No. 18-30 (B.A.P. 10th Cir. Feb. 5, 2019). [Read more…] about Debtor’s Right to Amend Extends to Reopened Cases
Debtors’ Manufactured Home Was Personal Property Under Iowa Law
The Eighth Circuit found no clear error in the bankruptcy court’s finding that, under Iowa common law, the chapter 13 debtors’ manufactured home was personal property and therefore the debt it secured was not subject to section 1322(b)’s anti-modification provision. The Paddock, LLC v. Bennett, No. 18-2098 (Feb. 28, 2019).
Benjamin and Teresia Bennett purchased a manufactured home from Paddock, and placed it on a lot owned by Paddock under a 990-year lease. In their chapter 13 bankruptcy, the Bennetts proposed to bifurcate the debt secured by the manufactured home into secured and unsecured portions under section 506(a)(1). Paddock objected arguing that the home was real property and the interest was subject to the anti-modification provision of section 1322(b). The bankruptcy court found that, under Iowa law, the home was personal property and confirmed the plan. In re Bennett, 2017 WL 1417221 (Bankr. N.D. Iowa Apr. 20, 2017). The Bankruptcy Appellate Panel affirmed. In re Bennett, 584 B.R. 15 (B.A.P. 8th Cir. 2018).
On appeal, the Eighth Circuit Court found that the bankruptcy court correctly applied Iowa law which provides that a fixture may be deemed real property when: “(1) it is actually annexed to the realty, or to something appurtenant thereto; (2) it is put to the same use as the realty with which it is connected; and (3) the party making the annexation intends to make a permanent accession to the freehold.” Applying these considerations, the court looked at the evidence to determine whether the bankruptcy court committed clear error in its findings of fact.
At the confirmation hearing, the parties introduced contradictory evidence as to the physical permanence of the home’s placement on the lot. Although Paddock produced testimony that the home was placed on a permanent, embedded cement foundation, the bankruptcy court credited the Bennetts’ contrary testimony that the home was placed on piers and blocks that were not deeply embedded. In fact, the Bennetts testified that one of the pier pads repeatedly sank into the ground requiring them to raise the pad to level the home. The bankruptcy court was also persuaded that the home was not a permanent accession to the freehold by the fact that the Bennetts leased the land where it was located and, even though the lease described the home as a permanent structure, it included provisions for moving it. The circuit court found no clear error in the bankruptcy court’s resolution of the factual disputes and affirmed the decisions below.
In dissent, Judge Beam argued that the bankruptcy court erred in disregarding the “uncontroverted” evidence that the home was placed on an embedded cement foundation and could not be moved without the use of a professional home mover. This conclusion was supported, according to the dissent, by Iowa law which requires that manufactured homes be placed on cement foundations. The dissent further disagreed with the bankruptcy court’s reliance on the fact that the land where the home was placed was subject to a lease. The dissent argued that the 990-year lease was, in fact, a transfer in fee simple “subject to a condition subsequent.”