Sara Lianne Hamilton-Conversano filed for Chapter 7 bankruptcy with the sole purpose of dealing with a $46,669.52 credit card debt on a credit card she and her non-filing spouse used to pay all household expenses. Finding that Ms. Hamilton-Conversano underreported contributions from her non-filing spouse on her Statement of Current Monthly Income, Form 122A-1, and took too large a deduction for private school tuition on Form 122A-2, the court granted the Bankruptcy Administrator’s motion to dismiss for abuse under section 707(b)(1). In re Hamilton-Conversano, No. 17-128 (Bankr. E.D. N.C. Sept. 28, 2017). [Read more…] about Debtor’s Chapter 7 Fails 707(b)’s “Smell Test”
Denial of Discharge for Fraudulent Note
The chapter 7 debtor was denied discharge due to having presented a sham Note purporting to prove a debt taking priority over the debt owed to the creditor in this case. Sloan v. Allen (In re Allen), No. 16-23, Adv. Proc. No. 16-10027 (Bankr. D. D.C. Sept. 21, 2017).
In 2008, Carlos Allen borrowed $60,000 from his friend, Douglass Sloan, to apply toward improvements to real property that Allen anticipated selling for an amount that would bring him enough money to repay the loan within sixty days at $72,000. The agreement gave Mr. Sloan the option to convert the loan to an equity interest and take 14.5% of the proceeds when the property was sold. Mr. Sloan never exercised this option. Mr. Allen used the money as planned to renovate the property but, when the bottom fell out of the housing market, the house did not sell. The downturn in the housing market also diminished Mr. Allen’s mortgage business which he had hoped to use as an alternative source of income to repay the loan. While Mr. Allen made some payments on the loan over the years, those payments amounted to approximately $18,000.00, and, when he finally did sell the property five years later, he did not give Mr. Sloan 14.5% of the proceeds.
Mr. Sloan filed an adversary complaint seeking an order denying discharge of the loan under section 523, or, alternatively, denying Mr. Allen a discharge altogether under section 727.
Mr. Sloan first argued that Mr. Allen obtained the loan with no intention of repaying it and should, therefore, be denied discharge under section 523(a)(2)(A). The court disagreed finding that, had all gone according to plan, Mr. Allen would have sold the property and repaid the debt, or used his income from his mortgage business to repay it. It was the drop in the housing market rather than misrepresentation of intentions that caused Mr. Allen’s failure to repay the debt in full.
The court also found that section 523(a)(6) did not render the debt nondischargeable. Mr. Sloan argued that Mr. Allen’s conduct caused “willful and malicious injury . . . to another entity or to the property of another entity[.]” The court found there must be a tort claim to support a finding of nondischargeability under this section and concluded that, because Mr. Sloan did not establish that he successfully converted the debt to a security interest by opting for the 14.5% equity option, he could not sustain a claim for conversion due to Mr. Allen’s failure to pay him out of the sale proceeds.
The court then turned to Mr. Sloan’s argument that Mr. Allen should be denied discharge under sections 727(a)(2)(A) and (B) due to his failure to reveal certain bank accounts, a Pay Pal account, proceeds from sales of merchandize, and his interest in AMG, a company ostensibly owned by his wife, Karen Brooks. The court found that any inaccuracies in Mr. Allen’s schedules with respect to various bank accounts were both insignificant and inadvertent and did not demonstrate an intent to conceal as required by section 727(a)(2)(A). As to his position with respect to AMG, the court found that any evidence of concealment took place outside the time limit in section 727(a)(2)(A) and that at the time of the petition, the business essentially had no significant assets to conceal.
But that did not mark the end of the AMG controversy. The court turned to the evidence surrounding distribution of the funds from the ultimate sale of the property. After paying off a mortgage and the contractors who had renovated the property, Mr. Allen noted a $270,000 payment to AMG. Mr. Allen claimed that the payment was in repayment of a loan (Brooks Loan) secured by the property in the amount of $102,000 that Ms. Brooks made to him prior to the loan from Mr. Sloan. As evidence of this debt, Mr. Allen produced a Note. The court concluded the Note was a sham for the following reasons:
- Allen failed to list the debt in his schedules in a previous bankruptcy.
- Allen’s mother, who was a “co-obligor” on the Note, did not list Ms. Brooks as a creditor in her own bankruptcy.
- There was no indication that Mr. Allen ever made any payments on the debt and, if the Note were genuine, he would have owed substantially more on the debt than $270,000 by the time the property sold.
- Allen’s testimony about his discussions and agreements with Mr. Sloan was illogical and incredible, as was his testimony and other evidence concerning the nature and origin of the Brooks Loan.
- Allen first brought the “Note” to the attention of the court in this case six months after the adversary complaint was filed and after he had filed a motion to dismiss and a motion for summary judgment with no mention of the Brooks Loan.
Based on these findings, the court concluded that Mr. Allen created the “Note” as a means of depriving Mr. Sloan of the benefit of the lending agreement and redirecting the money to himself in an effort to return to financial success.
The court then turned to Mr. Allen’s interest in AMG. At various times, for various reasons, Mr. Allen had listed himself AMG’s president, owner, and/or board member. To the extent Ms. Brooks had an interest in AMG it was as a “straw” owner. This evidence led the court to conclude that AMG was merely a shelter from creditors for the proceeds from the sale of the property.
Based on these findings, the court concluded that Mr. Allen should be denied discharge under sections 727(a)(3) and (4).
Section 727(a)(3) provides in part that a debtor may be denied discharge if he, “concealed, . . . falsified, or failed to keep or preserve any recorded information, . . . from which the debtor’s financial condition or business transactions might be ascertained,” The court found that Mr. Allen’s falsification of the Brooks Note fit within the meaning of this section.
The court also found denial of discharge appropriate under section 727(a)(4), which provides that a debtor may be denied discharge for knowingly making a “false oath or account” in connection with his bankruptcy case. Mr. Allen’s false assertion of the existence of the Brooks Loan to explain the transfer of funds to AMG sufficed to satisfy the requirements of this section.
As a final matter, the court declined to fix an amount owed by Mr. Allen to Mr. Sloan citing the fact that there were no assets to distribute from the bankruptcy and that Mr. Sloan had a pending civil case against Mr. Allen in the D.C. Superior Court.
Ocwen To Show Cause Why It Shouldn’t Be Held in Contempt
Ocwen’s misconduct led the bankruptcy court to not only grant the debtor’s motion for a temporary restraining order but to order Ocwen, as servicer for U.S. Bank, to show cause why it should not be held in contempt for violation of a Consent Order entered between the debtor and lender during her chapter 13 bankruptcy. Arrington v. Ocwen Loan Servicing, LLC, No. 12-70435, Adv. Proc. No. 17-70029 (Bankr. N.D. Ala. Sept. 25, 2017). [Read more…] about Ocwen To Show Cause Why It Shouldn’t Be Held in Contempt
Abandonment May Not Be Revoked Upon Unexpected Increase in Value
A trustee’s abandonment of estate property may not be revoked upon a finding that the property had greater value than expected so long as the debtor properly revealed the asset in his schedules. In addition, the debtor had no duty to supplement his schedules to include the unexpected surplus from the sale of the abandoned property. Hardesty v. Haber (In re Haber), No. 17-3323 (6th Cir. Oct. 30, 2017) (unpublished). [Read more…] about Abandonment May Not Be Revoked Upon Unexpected Increase in Value
Chapter 11 Preferential Transfer Avoidable under 547(b)
Three days before Diamond sought debt relief
The owner took steps on misguided belief
He transferred some money
To his marital honey
And claimed it was business in chief.
Though they argued the transfer was usual,
The court found their statements refutable.
In the absence of evidence;
The court was incredulous,
So their hope for relief was delusional.
In re Diamond Insulation Inc., No, 15-1448, Adv. Proc. No. 17-9015 (Bankr. N.D. Ia. Sept. 1, 2017)
Different State Laws Make for Different Treatment of Lease vs. Security Agreement Issue
The substance of a lease for personal property mandated that it be treated as a security agreement rather than a true lease, and therefore, the debtors were entitled to bifurcate the debt into secured and unsecured portions for treatment in their chapter 13 plan. In re Price, No. 17-67 (Bankr. E.D. N.C. Sept. 14, 2017).
Co-debtor, Sidney Price, entered into several lease agreements for equipment with Peak Leasing. The agreements provided that, once he had made all payments under them, Mr. Price had the option to purchase the property for $1.00.
In their chapter 13 plan, the Prices sought to treat the lease agreements as a secured debts and bifurcate the claims into secured and unsecured portions under section 1322(b)(2). Peak Leasing countered that the agreements were true leases and sought relief from the automatic stay to allow it to take possession of the property in the event the debtors failed to make the contractual payments. The court entered an interim order permitting modification of the stay pending its determination of the issue of whether the agreements were leases or security agreements. Mr. Price, however, defaulted on his obligations under the order and it was therefore made permanent. The case was before the court on Mr. Price’s motion for reconsideration and relief from judgment.
The court began its analysis by delineating the significance in chapter 13 of the difference between a lease and a security interest. Under section 365, a lease may be assumed, rejected or assigned. If the lease is in default, the debtor, in order to exercise his right to assume it, must cure the default, recompense the lessor for any loss due to the default, and assure the lessor of future payments under the lease. Under a lease, the value of the property is irrelevant.
In the case of a security agreement, on the other hand, section 506(a) provides for valuation of property and section 1322(b) permits bifurcation into secured and unsecured portions for purposes of treated in a chapter 13 plan.
State law determines whether an agreement is to be treated as a security agreement or a true lease. North Carolina has adopted the Uniform Commercial Code’s Section 1-203, which provides that the nature of the agreement is determined by its operation under the facts of the case rather than its title. Under the UCC, there is a “bright-line” test which, if established, renders the agreement a security agreement as a matter of law. Under this test, if a lease agreement does not allow the lessee to terminate the agreement at will and one of four additional conditions is met, including the option to purchase the property at the end of the lease for no, or nominal, additional cost, a court will find that the lease is, in fact, a security agreement.
In this case, the agreement did not permit Mr. Price to terminate the lease at will and, therefore, the court found the first prong of the bright-line test was met. The option to purchase the property at the end of the lease period for $1.00 satisfied the second prong of the bright-line test. Thus, the court concluded that the agreements were security agreements rather than true leases.
Turning to the motion for relief from judgment of the order modifying the stay, the court found that Mr. Price had met the three conditions under Rule 60(b) in that the motion was timely, he had a meritorious argument, and reconsideration would not unfairly prejudice the non-moving party. Because the court determined that the agreements were, in fact, security agreements, Mr. Price had a meritorious defense to the relief from stay motion, and Peak Leasing, while losing on the ultimate issue, at least had the benefit of receiving adequate protection payments under the interim order and was therefore better off than it would have been had the court merely denied the motion for relief from stay at the outset.
The court found that there was cause to grant the Prices relief from judgment.
Price Bankr ED NC opinion Sept 2017
In contrast, the court in In re Jack, 2017 Bankr. LEXIS 2128, No, 16-8007 (Bankr. M.D. Fla. July 31, 2017), held that state law mandated treatment of an agreement substantially similar to the one in Price, as a true lease rather than a security agreement.
Jeremy and Theresa Jack entered into an agreement to lease furniture for their home from Acceptance Now. The agreement was for two-months with an automatic renewal option. The agreement provided that the Jacks could purchase the furniture at any time by either, 1) paying the purchase price in full, 2) paying the lease price for 37 months, or 3) exercising the “Early Purchase Option.”
When they filed for chapter 13 bankruptcy, the Jacks sought to treat the agreement as a security agreement and bifurcate the debt into secured and unsecured portions in their plan.
In this case, Florida law dictated a different outcome from that of Price. Under Florida Statutes, section 559.9232(1)(e), a “rental-purchase agreement” is an agreement for the use of personal property for an initial period of four months or less, that is automatically renewed with each rental payment following the initial period, and that permits lessee to acquire ownership of the property. Florida law specifically provides, under section 559.9232(2)(f), that a rental-purchase agreement is not construed to be a security interest.
Having found the agreement to be a true lease, the court ordered the Jacks to either assume or reject the lease as required by section 365(d)(2).
Court Properly Declined to Compel Arbitration of Educational Loan Issue
Potential discharge of an educational loan is a core bankruptcy proceeding over which the bankruptcy court may exercise jurisdiction despite an arbitration clause in the lending agreement. Navient Solutions v. Farmer, No. 17-764 (W.D. Wash. Oct. 16, 2017).
In her Chapter 7 bankruptcy, Janay Farmer sought to discharge a loan she had taken out to finance her post-graduation bar examination. The lender, Navient, moved to compel arbitration by the terms of the lending agreement. Reasoning that the issue of treatment of the loan was a core bankruptcy matter, the bankruptcy court found that it had discretion to exercise jurisdiction over the case. In re Farmer, 567 B.R. 895 (Bankr. W.D. Wash. 2017). [Read more…] about Court Properly Declined to Compel Arbitration of Educational Loan Issue
Reminder: Timely Notice of Appeal Is Jurisdictional
Timely filing of a notice of appeal is a jurisdictional prerequisite and an appellant must at least conform his filing to general adherence to the requirements outlined in Rule 8003(3). In re Dorsey, 2017 U.S. App. LEXIS 16905, No. 16-31085 (5th Cir. Sept. 1, 2017). [Read more…] about Reminder: Timely Notice of Appeal Is Jurisdictional
1099-C Filing Plus Debtor’s Income Tax Payment Equals Debt Cancellation
The mortgage creditor canceled the underlying debt when it filed a “cancellation of debt” form with the IRS and the debtors paid income taxes on the canceled debt. In re Lukaszka, No. 17-242 (Bankr. N.D. Ia. Aug. 4, 2017).
In their proposed chapter 13 plan, James and Darcey Lukaszka sought an order requiring First Federal Credit Union, a junior mortgagee, to release their mortgage lien on the basis that, four years earlier, First Federal had issued the debtors a “cancellation of debt” form, 1099-C, indicating that it was no longer seeking to collect on the debt. As a result, the Lukaszkas reported the almost $60,000.00 debt cancelation to the IRS as income and paid taxes on it.
First Federal objected to confirmation. [Read more…] about 1099-C Filing Plus Debtor’s Income Tax Payment Equals Debt Cancellation
Court Takes a Hard Line on Curing Direct Mortgage Payment Default
A loan modification to cure a post-confirmation default on direct mortgage payments must be approved by the court prior to expiration of the chapter 13 plan. In re Hanley, 2017 WL 3575847, No. 11-76700 (Bankr. E.D. N.Y. Aug. 14, 2017).
Brian and Anahi Hanley’s confirmed chapter 13 plan provided for cure of their mortgage default through the plan and for regular mortgage payments to be made directly to the mortgagee, Nationstar Mortgage, LLC. They fell behind on their direct mortgage payments and, several months before completion of their plan, they entered into a trial loan modification which would cure the post-confirmation default. Though the Hanleys made all payments under the loan modification, they failed to sign and return the Loan Modification Approval Letter within the time required by Nationstar.
At the expiration of their plan, Nationstar filed a Rule 3002.1 Response notifying the court of the default based on the loan as it stood prior to the trial loan modification. The trustee moved to dismiss their bankruptcy without discharge. The Hanley’s moved to strike Nationstar’s Response and sought to modify their plan to allow them to cure the default in accordance with the terms of the loan modification.
For purposes of its decision, the court adopted the Hanleys’ factual assertion that the parties had agreed to the loan modification but had not submitted it to the court for approval. It thus framed the issue as “whether a chapter 13 debtor may cure an acknowledged default in post-petition direct mortgage payments, to be made pursuant to a confirmed chapter 13 plan, through a loan modification approved after the expiration of the 60th month.”
In answer to this question, the court found that the debtors had two choices for dealing with the post-petition default: modify the loan or modify the plan. It explained that a loan modification entered into by the parties outside the plan may cure a default even though the new loan terms are not memorialized in a plan modification. Alternatively, the cure of a post-confirmation default may be accomplished through a plan modification without an agreement between the parties to modify the loan. However, both options, the court emphasized, required approval by the court prior to expiration of the plan.
Acknowledging the “draconian” nature of denying discharge after the Hanleys had made all plan payments for five years, the court reasoned that its equitable powers were constrained by the Code and the terms of the Hanleys’ plan. Section 1328(a) makes discharge contingent upon completion of all plan payments, and relevant case law establishes that where a plan provides for mortgage payments outside the plan, those payments must be current as well.
The court noted that there is a line of cases in which courts have held that post-confirmation plan modifications to cure post-petition mortgage defaults are not permitted at all under section 1329. The court disagreed with or distinguished those cases, finding that, where, as here, the secured creditor’s rights under the loan agreement would not be altered by the modification, section 1329(a)(2) permits a modification extending the time for repayment. The court reiterated, however, that any such plan modification must take place prior to the expiration of the plan.
The court also recognized that some courts permit chapter 13 debtors to cure defaults post- plan completion either on equitable principles or on the theory that “the debtors are not seeking to extend the plan, rather they are only curing a default on already scheduled payments.” The court declined to adopt their reasoning finding instead that the Code does not allow for leeway in curing a default on plan payments. Citing sections 1322(a)(4), (d)(1), (d)(2), 1325(b)(1)(B) and 1329(c), and calling it a “drop dead jurisdictional deadline,” the court concluded that the right to discharge requires all plan payments be complete at the expiration of the plan.
Nor would the court permit a retroactive loan modification to cure the default in light of Nationstar’s position that it had not ultimately agreed to the modification.
The court granted the trustee’s motion to dismiss under section 1307(c)(6) due to a “material default.”