In a significant win for debtors, the Fourth Circuit today held “that the plain language of the Bankruptcy Code excludes Social Security income from the calculation of ‘projected disposable income,’ but that such income nevertheless must be considered in the evaluation of a plan’s feasibility.” Ranta v. Gorman (In re Ranta), No. 12-2017 (July 1, 2013). [Read more…] about Social Security Not Part of PDI but May Be Considered for Feasibility
Wells Fargo Financial Finally Moving to Claims Review and Compensation
In 2011, the Federal Reserve Board issued a cease and desist order and assessed an $85 million civil money penalty against Wells Fargo & Company of San Francisco, a registered bank holding company, and Wells Fargo Financial, Inc., of Des Moines. (as distinguished from Wells Fargo Home Mortgage or by Wells Fargo Bank, N.A.) The order addresses allegations that Wells Fargo Financial employees steered potential prime borrowers into more costly subprime loans and separately falsified income information in mortgage applications. The order affect certain mortgage loans made between January 1, 2004, and September 30, 2008. In addition to the civil money penalty, the order requires that Wells Fargo compensate affected borrowers.
Wells Fargo Financial made subprime loans that primarily refinanced existing home mortgages in which borrowers received additional money from the loan proceeds in so-called cash-out refinancing loans. The order addresses allegations that Wells Fargo Financial sales personnel steered borrowers who were potentially eligible for prime interest rate loans into loans at higher, subprime interest rates, resulting in greater costs to borrowers. The order also addresses separate allegations that Wells Fargo Financial sales personnel falsified information about borrowers’ incomes to make it appear that the borrowers qualified for loans when they would not have qualified based on their actual incomes.
According to both the Federal Reserve Board and Wells Fargo, some current and former customers of Wells Fargo Financial will receive notices that they may be eligible to file a claim. For more information, you can visit the Wells Fargo Financial Consent Order Website.
FHFA Turns to Industry Lobbyist for Advice on Force-placed Insurance
Mortgage lenders routinely require homeowners to purchase property insurance to protect the lender’s interest in the home in the case of fire or other casualty. If the homeowner fails to purchase such insurance or fails to provide evidence of insurance, most loan documents will authorize the lender to purchase insurance to protect its interest. This coverage is called forced-placed or collateral protection insurance. Force-placed insurance has long been an area of abuse. Not only do servicers improperly place policies, but the field is filled with price gouging and illegal kickbacks. Bankruptcy debtors have not been immune from troubles caused by force-placed insurance. For example, in In re Cothern, 422 B.R. 494 (Bankr. N.D. Miss. 2010), the servicer’s unrelenting and improper efforts to collect force-placed insurance premiums drove the borrowers into bankruptcy. “The incompetence here is absolutely radiant” is how the judge in Cothern describes the servicer’s conduct.
After years of effort to get Fannie Mae and Freddie Mac to address the problem of force-placed insurance, Fannie Mae unveiled a plan last year that would have limited financial ties between servicers and insurers. In February of this year, FHFA, the agency that oversees Fannie Mae, vetoed Fannie Mae’s plan–a plan that would have lowered the cost of force-placed insurance significantly. Now we learn from Jeff Horwitz at American Banker that FHFA’s “outside expert” on force-placed insurance is actually an industry lobbyist who is well versed in protecting financial institutions. For more details, read Jeff’s article here.
“Lien Provision” Does Not Render IRA Non-Exemptible
The Sixth Circuit found that the debtor’s pledge of his IRA account against future indebtedness which he never incurred did not render the account non-exemptible in bankruptcy. Daley v. Mostoller (In re Daley), No. 12-6130 (June 17, 2013). [Read more…] about “Lien Provision” Does Not Render IRA Non-Exemptible
Trustee May Not Sell Estate Property Free and Clear of Liens
When the sale price exceeds the value of the property but is less than the aggregate of all liens secured by that property, section 363(f)(3) does not authorize sale of the property. In re Jaussi, No. 12-34062 (Bankr. D. Colo. March 18, 2013). In Jaussi, the chapter 7 trustee moved to sell debtor’s land valued at $39,000.00 to the senior mortgagee for $1,500.00 . Between the mortgage holder and two judgment lienholders, the property was encumbered to the tune of $44,040.56 with $40,181.00 of that amount owed on the mortgage. The motion sought to make the sale free and clear of the two junior judgment liens.
The court found that the sale was not permitted by the Code. Specifically, the sale did not fall under either of the two relevant conditions set forth in section 363(f), under which a trustee may sell estate property free and clear of liens when: “(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest,” or “(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property.”
[Read more…] about Trustee May Not Sell Estate Property Free and Clear of Liens
Post-Confirmation Funds Returned to Debtor after Conversion to Chapter 7
What happens to funds paid into a confirmed chapter 13 plan that are still in the trustee’s possession when the bankruptcy is converted to chapter 7? That is the question recently answered by the district court for the Western District of Texas. The trustee had distributed the funds to creditors post-conversion and upon motion by the debtor, the bankruptcy ordered turnover to the debtor. Relying in large part on the Third Circuit case of In re Michael, 699 F.3d 305 (2012) in which NACBA participated as amicus, the district court affirmed. Veigelahn v. Harris (In re Harris), No. 12-540 (W.D. Tex. March 22, 2013).
Key to the decision was section 348(f) which provides that when a case is converted in good faith from chapter 13 to chapter 7 the property of the estate is determined as of the original petition date. Because the funds at issue had been garnished from debtor’s wages post-confirmation, they were not part of the debtor’s estate upon the original filing of the chapter 13 petition and, therefore, under section 348 would not be part of the chapter 7 estate upon conversion.
The trustee distinguished Stamm v. Morton (In re Stamm), 222 F.3d 216 (5th Cir. 2000), in which funds collected prior to confirmation of the chapter 13 plan were returned to the debtor upon conversion. Here, the trustee argued, the funds were collected post-confirmation thereby giving the creditors a vested interest in them even though the case was later converted. The trustee relied on section 1326(a)(2) which provides that “[i]f a plan is confirmed, the trustee shall distribute any such payment in accordance with the plan as soon as is practicable. If a plan is not confirmed, the trustee shall return any such payments not previously paid and not yet due and owing to creditors . . . to the debtor.” The trustee argued that because Congress specifically provided for the return of funds collected pursuant to a plan that was not confirmed it could be inferred that different treatment should be accorded funds collected after confirmation.
Acknowledging the superficial appeal of the trustee’s position, the court found that the Code sections at issue created an ambiguity that necessitated looking beyond the text. The court found that the legislative history indicated Congress’s intention to encourage debtors to file chapter 13 wherever possible without the inhibiting fear of penalty in the event that the chapter 13 failed and the debtor had to resort to chapter 7. H.R. Rep. No. 95-595 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 5966, 1977 WL 9628. In enacting section 348(f) Congress specifically addressed and sought to minimize the potential loss of property that a debtor could face upon conversion from chapter 13 to chapter 7 that would not have been at risk had the debtor filed directly in chapter 7.
The court also rejected the trustee’s argument that there is an inherent unfairness in returning the funds to the debtor upon conversion reasoning that the creditors lost nothing while reaping the benefits of payments made in accordance with the plan up to the time of conversion. Quoting Michael, the court found that the duties of the trustee delineated in section 1326 did not vest any rights in the creditors:
When the debtor transfers funds to the Chapter 13 trustee . . . under a confirmed plan . . . the funds become part of the estate, and the debtor retains a vested interest in them. Though creditors have a right to those payments based on the confirmed plan, the debtor does not lose his vested interest until the trustee affirmatively transfers the funds to creditors. Also, § 1326(a)(2) and (c) only address the obligation of the trustee to distribute payments in accordance with a confirmed plan; they do not vest creditors with any property rights.
Michael,699 F.3d at 313.
Furthermore, section 348(f)(2) protects creditors from unfair manipulation by debtors by including a provision that in the event of a bad faith conversion the estate would consist of property as of the conversion date rather than as of the petition date. As the court in Michael pointed out, the specific expansion of the chapter 7 estate in the event of bad faith, indicates that when the conversion is in good faith, the chapter 7 estate would be as of the petition date.
This is a case that illustrates the power of NACBA’s members to create good law around the country by getting involved in select cases on appeal.
Co-Signed Loans May Receive Special Treatment in Chapter 13
A Chapter 13 plan may provide for full repayment of a co-signed loan even though other unsecured creditors receive less. In re Rivera, No. 12-66 (B.A.P. 1st Cir. Apr. 5, 2013). In Rivera, the debtors proposed a Chapter 13 plan under which one creditor, Villa-Coop, was to receive repayment in full of the unsecured portion of its loan which was co-signed by the debtor’s mother-in-law. The other unsecured creditors would receive repayment of only 4.51 percent on their loans. The trustee objected to the plan because its treatment of Villa-Coop constituted unfair discrimination in violation of section 1322(a)(3) and (b)(1) and that section 1325(b)(1) requires equal distribution of projected disposable income. The bankruptcy court confirmed the plan. In re Rivera, 480 B.R. 112 (Bankr. D. P.R. 2012). [Read more…] about Co-Signed Loans May Receive Special Treatment in Chapter 13
Court Rejects Unsupported Escrow Charges
In In the Matter of Breit, the chapter 13 trustee filed an objection to JPMorgan Chase’s proof of claim relating to the debtor’s residential mortgage. No. 11-32461 (Bankr. N.D. Ind. March 27, 2013). In its POC, Chase claimed an arrearage in the amount of $27,897.09, encompassing unpaid monthly installments of $1,102.53 which represented a principal and interest component of $804.79, and an escrow component of $297.74. Under this calculation, Chase sought $7,145.76 attributable to the escrow deficiency. Although RESPA contemplates the creation of an escrow account to cover, among other things, tax and insurance payments that the mortgage servicer is forced to pay on behalf of a delinquent debtor, the trustee argued that the arrearage claim should be reduced by $3,379.35 because Chase had actually paid only $2,909.37 for those obligations. The court agreed. It rejected Chase’s “mathematical manipulation” (Chase’s phrase) in calculating the pre-petition escrow shortfall and permitted recovery only of those expenditures authorized by RESPA. Thus, even though Chase had met its initial burden of proof with respect to Rule 3001, it failed to counter the trustee’s evidence refuting the POC and therefore failed to meet its ultimate burden of proving the validity of the claim.
Petition for Certiorari on Stern Issues Addresses “Gap” in Bankruptcy Jurisdiction
Two issues growing out of the Supreme Court’s controversial jurisdictional decision in Stern v. Marshall, 131 S. Ct. 2594 (2011), have found their way back to that Court in a petition for certiorari. Executive Benefits Insurance Agency (EBIA) v. Arkinson (In re Bellingham Insurance Agency), No. 12A831 (S.Ct. Apr. 3, 2013). The case involves an alleged fraudulent conveyance by a non-creditor and is squarely within the holding of Stern under which the Court found that Congress violated Article III when it vested in bankruptcy courts the authority to enter final judgments on certain state-law counterclaims designated as “core” bankruptcy proceedings under Section 157(b)(2) of Title 28.
The issues raised in the petition are: 1) whether the bankruptcy court had the power under 28 U.S.C. 157(b) to issue findings of fact and conclusions of law to the district court for final adjudication, and 2) whether, the bankruptcy court could finally adjudicate a motion for summary judgment on the fraudulent conveyance claim upon consent of the parties.
While the case was on appeal to the Ninth Circuit, the Supreme Court decided Stern v. Marshall, 131 S. Ct. 2594 (2011). Based on that case, the circuit court found that although the Constitution precluded a bankruptcy court from finally deciding the core issue of fraudulent conveyance involving a non-creditor, 28 U.S.C. 157(b)(1) should be interpreted to permit bankruptcy courts all the power that “the constitution will bear” and that the “more modest power” to issue proposed findings of fact and conclusions of law is within those confines. Additionally, citing Commodity Futures Trading Comm’n v. Schor, 478 U.S. 833, 850-51 (1986), the court distinguished between personal and structural protections under Article III finding that the issue of fraudulent conveyance implicated personal protections that could be waived by the parties. Where section 157(c) permits the parties to consent to final adjudication in non-core proceedings, the court found that it followed that they could likewise consent to such adjudication in core proceedings. Exec. Ben. Ins. Agency v. Arkinson, 702 F.3d 553 (9th Cir. 2012)
The petition identifies a split in the circuit courts with respect to both of these issues. In Waldman v. Stone, 698 F.3d 910, 917–918 (6th Cir. 2012), cert. denied, 2013 U.S. LEXIS 2333 (Mar. 18, 2013), the Sixth Circuit held that parties cannot consent to a bankruptcy court’s jurisdiction to adjudicate core issues on a private right of action subject to Article III, and in Ortiz v. Aurora Health Care (In re Ortiz), 665 F.3d 906 (7th Cir. 2011), the Seventh Circuit held that proposed findings of fact and conclusions of law were limited to non-core proceedings.
The case, if accepted by the Supreme Court, could guide the courts in dealing with the “gap” left by the decision in Stern.
Sanctions Upheld against ECMC for Trying to Collect Repaid Student Loan
The First Circuit upheld a sanction award against ECMC for abuse of bankruptcy process based on that lender’s continued efforts to collect a student loan that had been found to be fully satisfied prior to bankruptcy. Hann v. ECMC, No. 12-9006 (1st Cir. March 29, 2013). [Read more…] about Sanctions Upheld against ECMC for Trying to Collect Repaid Student Loan