National Consumer Bankruptcy Rights Center

Protecting The Rights Of Consumer Debtors In Bankruptcy

dischargeability

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Exception to Discharge for Criminal Fines and Costs

Where state law treats criminal fines, fees and costs as punitive rather than compensatory those debts are excepted from discharge in bankruptcy. Sanders v. AllianceOne Receivables Management Inc., No. 15-15243, Adv. Proc. No. 16-1204 (Bankr. W.D. Wash. July 6, 2018).

When Randy Sanders filed for chapter 13 bankruptcy, AllianceOne Receivables Management, Inc., as collection agency for Bellingham Municipal Court and Whatcom County, filed proofs of claim based on criminal fines, costs and fees. The debts, or “Legal Financial Obligations,” (LFO) arose out of Sentencing Orders following numerous criminal convictions. Mr. Sanders filed an adversary complaint alleging that AllianceOne’s conduct relating to the debts for which it filed proofs of claim and a debt based on a criminal conviction in the Whatcom County District Court, violated state consumer protection statutes as well as the discharge injunction from his prior chapter 7 bankruptcy. Both parties moved for summary judgment. [Read more…] about Exception to Discharge for Criminal Fines and Costs

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Post-Petition Condo Fees Dischargeable

Condominium association assessments that become due after the debtor has filed for chapter 13 bankruptcy are dischargeable. Goudelock v. Sixty-01 Ass’n of Apartment Owners, No. 16-35384 (9th Cir. July 10, 2018).

When chapter 13 debtor, Penny Goudelock, stopped her condominium association (CA) payments in 2009, Sixty-01 initiated foreclosure proceedings. In March 2011, Ms. Goudelock moved out of her condominium. She filed for bankruptcy and surrendered her unit. Sixty-01 filed a proof of claim for $18,780.35 for unpaid pre-petition assessments and noted that the assessments continued to accrue at $388.46 per month. The mortgage lender foreclosed on the property in February, 2015 and Ms. Goudelock successfully completed her plan in July, 2015. Sixty-01 moved the bankruptcy court for an order finding that the CA assessments that accrued between the time Ms. Goudelock filed her bankruptcy petition and the time the mortgage lender foreclosed were not dischargeable. The bankruptcy court granted summary judgment in favor of Sixty-01 and the district court affirmed. Goudelock v. Sixty-01 Ass’n of Apartment Owners, No. C15-1413-MJP, 2016 WL 1365942 (W.D. Wash. Apr. 6, 2016). [Read more…] about Post-Petition Condo Fees Dischargeable

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Scotus Resolves Circuit Disagreement over Non-Dischargeability Based on Fraud

A falsehood concerning a single asset may be a “statement respecting the debtor’s financial condition,” and therefore, the misrepresentation must be in writing to render non-dischargeable a debt arising out of the creditor’s reliance on it. Lamar, Archer & Cofrin, LLP, v. Appling, 584 U.S. ___, No. 16-1215 (S. Ct. June 4, 2018).

Scott Appling put off paying his attorneys fees in a business litigation case by assuring his attorneys at Lamar, Archer & Cofrin, LLP, (Lamar) that he expected a tax refund that would more than cover the bill. When the actual refund was smaller than he represented, he used the money to pay business expenses and told Lamar he had not yet received the refund. In reliance on Mr. Appling’s false statements, Lamar continued to represent him. When the final litigation bill remained unpaid for five years, however, Lamar sued in state court and obtained a judgment against Mr. Appling and his wife. The Applings then filed for chapter 7 bankruptcy relief. [Read more…] about Scotus Resolves Circuit Disagreement over Non-Dischargeability Based on Fraud

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Government Penalty Not Dischargeable

A penalty owed to a governmental agency based on fraud falls under section 523(a)(2) and is therefore nondischargeable under section 1328(a) even though the debt also falls under section 523(a)(7) which is not listed in the debts excepted from discharge. Andrews v. Mich. Unemployment Ins. Agency, No. 16-2383, Kozlowski v. Mich. Unemployment Ins. Agency, No. 16-2680 (6th Cir. May 29, 2018).

In two separate cases, chapter 13 debtors, Priscilla Andrews and Richard Kozlowski, sought to discharge penalties imposed upon them for fraudulent collection of unemployment insurance benefits. The bankruptcy courts denied discharge under section 1328(a). The district courts affirmed in both cases. [Read more…] about Government Penalty Not Dischargeable

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Post-Petition Condo Fees Discharged in Chapter 13

Although a chapter 13 debtor continues to accrue post-petition condo fees while in bankruptcy, discharge extends to his in personam liability for those fees. In re Wiley, No. 16-15361 (Bankr. D. Md. Jan. 26, 2018).

Chapter 13 debtor, Christopher Wiley, owned but did not live in a condominium unit subject to a mortgage lien and a lien held by the condominium association based on post-petition fees and assessments. The mortgagee was granted relief from stay to foreclose but had not done so for over a year. Mr. Wiley’s confirmed plan surrendered the property to the lienholders for foreclosure with any deficiency in sale proceeds being treated as an unsecured claim. The plan also provided that estate property would not vest in the debtor until discharge. [Read more…] about Post-Petition Condo Fees Discharged in Chapter 13

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Criminal Restitution Is Nondischargeable

A debt is nondischargeable when it is incurred as part of a criminal sentence. Medical Lien Management, Inc. v. Dampier, No. 17-1160 (10th Cir. Feb. 14, 2018) (unpublished).

Billy Dampier was convicted of theft from his employer and, as part of his criminal sentencing, was ordered to make restitution. His efforts to discharge that debt failed in the bankruptcy court and before the BAP for the Tenth Circuit. On appeal to the Tenth Circuit the court addressed two issues: 1. Whether his former employer had standing to object to discharge of the debt, 2. Whether the debt was dischargeable under section 523(a)(7). Section 523(a)(7) provides for the nondischargeability of a debt which is “a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for  actual pecuniary loss.” [Read more…] about Criminal Restitution Is Nondischargeable

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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:

  1. Allen failed to list the debt in his schedules in a previous bankruptcy.
  2. Allen’s mother, who was a “co-obligor” on the Note, did not list Ms. Brooks as a creditor in her own bankruptcy.
  3. 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.
  4. 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.
  5. 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.

Allen Bankr D DC opinion Sept 2017

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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.”

Hanley Bankr ED NY opinion Aug 2017

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Deadline for Revocation of Discharge Not Jurisdictional

The one-year deadline for seeking revocation of a discharge order is not jurisdictional and may therefore be waived. Weil v. Elliott (In re Elliott), No. 16-55359 (9th Cir. June 14, 2017).

When Edward Elliott filed his Chapter 7 bankruptcy petition he failed to mention one important asset: his home. He received a discharge under section 727(a). Fifteen months later, when the trustee discovered the fraudulent nondisclosure, she filed an adversary complaint seeking an order vacating the discharge under section 727(d)(1). Section 727(e)(1) permits a trustee to seek revocation of discharge within one year of the discharge order. Mr. Elliott did not raise the issue of untimeliness in his response to the adversary complaint. The bankruptcy court revoked his discharge. The Bankruptcy Appellate Panel, however, found the one-year filing deadline to be jurisdictional and reversed. Elliott v. Weil (In re Elliott), 529 B.R. 747, 755 (B.A.P. 9th Cir. 2015). On remand, the bankruptcy court dismissed the adversary complaint for lack of jurisdiction. The trustee was permitted direct appeal to the Ninth Circuit. [Read more…] about Deadline for Revocation of Discharge Not Jurisdictional

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Direct Payments to Mortgagee are “Payments under the Plan”

“A Chapter 13 debtor’s direct payments to a secured creditor under a ‘cure and maintain’ plan are ‘payments under the plan’ for purposes of § 1328(a), and a debtor who fails to make such payments is not entitled to a discharge under 11 U.S.C. § 1328(a).” In re Coughlin, No. 11-76202 and In re Sangamaya, No. 12-71109 (Bankr. E.D. N.Y. June 15, 2017). [Read more…] about Direct Payments to Mortgagee are “Payments under the Plan”