As we reach the end of another year, I have a few cases that I meant to blog about, but never quite found the time. Many of these cases are every bit as important as the ones that I did write about. Here are the best of the rest in capsule form. Maybe I will find time to write some more about them next year.
The National Benevolent Association of the Christian Church vs. Weil, Gotshal & Manges, LLP, No. 05-5134 (Bankr. W.D. Tex. 2/6/07). Debtor sued its former attorneys for actions taken during the bankruptcy case. Judge King ruled that where the Court approved the Debtors' motion to sell property free and clear of liens and approved the Debtors' plan of reorganization, res judicata prevented the Debtors from suing their lawyers based on their successful representation of the Debtors. Additionally, failure to disclose the claims in the disclosure statement barred the claims under the doctrine of judicial estoppel. (Note: Although Weil, Gotshal prepared the disclosure statement which did not disclose the claims against it, the Debtors did have a second law firm which could have insisted that the claims be included).
Mahoney v. Washington Mutual, Inc., No. 06-5187 (Bankr. W.D. Tex. 4/23/07). Judge Clark ruled that reporting debt to credit bureau standing alone did not violate the debtor's discharge. Discharge did not make debt go away. Therefore, creditor could continue to report debt as delinquent despite discharge so long as creditor did not steps to try to collect. Excellent discussion on the relationship between sacrificing goats to Mercury and the discharge.
In re Spillman Development Group, Ltd., No. 05-14415 (Bankr. W.D. Tex. 9/20/07). Two determined parties battle intensely. "The parties were in full combat mode sparing no expense." The secured creditor ultimately purchased the property by exercising a credit bid. Did Debtor's counsel achieve a tangible, identifiable benefit which would allow it to be compensated under Pro-Snax? Judge Monroe said yes, although he reduced the fees in some respects. This opinion has an interesting discussion of how the debtor can achieve a positive benefit while acting in opposition to the wishes of the major creditor. The opinion is also full of Judge Monroe's no-holds barred commentary on the no-holds barred tactics of the litigants.
In re Sanders, No. 07-50783 (Bankr. W.D. Tex. 10/18/07). Debtors purchased a new vehicle but could not afford to pay off the old one. Depending on how you analyze the transaction, the negative equity was either financed as part of the new purchase or paid off with a rebate on the new vehicle. Debtor proposed to cram-down the vehicle even though it was purchased 846 days before bankruptcy (which was less than 910 days) and creditor objected. Judge Clark ruled that where the deficiency from the prior vehicle was included in the amount financed, that the loan did not qualify as a PMSI loan which was protected from cram-down under Sec. 1325(a)(*). Judge Clark ruled that PMSI status was an all or nothing proposition so that the entire debt was subject to cram-down even though the majority of the debt was purchase money in character.
Friday, December 21, 2007
Update on Deductibility of 401k Loan Payments Under Means Test
This blog previously reported on Judge Larry Kelly's decision in In re Otero which allowed payments on 401k loans to be deducted under the chapter 7 means test. http://stevesathersbankruptcynews.blogspot.com/2006_11_01_archive.html. That decision was subsequently reversed on appeal by the U.S. District Court. McVay vs. Otero, 371 B.R. 190 (W.D. Tex. 4/26/07). The District Court looked at the same language as Judge Kelly and concluded that a loan against a 401k plan was NOT a debt, so that it could not be a secured debt deductible under the means test. In making this ruling,the District Court followed the majority position.
The Debtors did not further appeal the District Court ruling. Instead,they converted to Chapter 13 and proposed a plan which allowed them to deduct the 401k payments from disposable income. The Debtor's plan was confirmed on November 19, 2007. Under the confirmed plan, the Debtors will pay $99 a month for 36 months and unsecured creditors will receive approximately 3% on their claims. Thus, while the U.S. Trustee was successful in its legal argument, the practical effect to creditors in the specific case appears to be negligible.
This is a subject which merits further discussion. The majority position followed by the District Court seems to be inconsistent with the treatment of 401k loans elsewhere under BAPCPA. Under Sec. 523(a)(18), a debt owed to a 401k plan is not dischargeable. Similarly, Sec. 362(b)(19) has an exception to the automatic stay relating to a "loan" from a tax qualified retirement plan. If Congress considered a loan owed to a 401k plan to be a "debt" for purposes of Sec. 523(a)(18) and created an exception for payments on a "loan" under Sec. 362(b)(19), why would payments owed to a tax qualified retirement plan not be considered to be debts under the means test? This seems to be a case where the majority has the weaker side of the argument.
The Debtors did not further appeal the District Court ruling. Instead,they converted to Chapter 13 and proposed a plan which allowed them to deduct the 401k payments from disposable income. The Debtor's plan was confirmed on November 19, 2007. Under the confirmed plan, the Debtors will pay $99 a month for 36 months and unsecured creditors will receive approximately 3% on their claims. Thus, while the U.S. Trustee was successful in its legal argument, the practical effect to creditors in the specific case appears to be negligible.
This is a subject which merits further discussion. The majority position followed by the District Court seems to be inconsistent with the treatment of 401k loans elsewhere under BAPCPA. Under Sec. 523(a)(18), a debt owed to a 401k plan is not dischargeable. Similarly, Sec. 362(b)(19) has an exception to the automatic stay relating to a "loan" from a tax qualified retirement plan. If Congress considered a loan owed to a 401k plan to be a "debt" for purposes of Sec. 523(a)(18) and created an exception for payments on a "loan" under Sec. 362(b)(19), why would payments owed to a tax qualified retirement plan not be considered to be debts under the means test? This seems to be a case where the majority has the weaker side of the argument.
Gadzooks Update
This blog previously reported on an opinion by Judge Harlin Hale of the Northern District of Texas which limited the effect of the Fifth Circuit's opinion in Matter of Pro-Snax Distributors, Inc., 157 F.3d 414 (5th Cir. 1998). http://stevesathersbankruptcynews.blogspot.com/2006_10_01_archive.html. U.S. District Judge Jane Boyle has now reversed the Bankruptcy Court opinion. William Kaye vs. Hughes & Luce, LLP, No. 3:06-CV-01863-B (N.D. Tex. 7/13/07).
Judge Boyle found that although the Fifth Circuit's Pro-Snax discussion of the correct standard to apply in awarding attorney's fees under Sec. 330 was dicta, that it was judicial dicta rather than obiter dicta. Judical dicta is defined as an opinion on an issue which was directly briefed and argued by the parties, but which was not essential to the decision. Judge Boyle found that judicial dicta should not be lightly disregarded. The Court also questioned whether the Circuit's instructions on the test to be applied on remand was really dicta at all.
The District Court engaged in a curious discussion of whether Pro-Snax was inconsistent with the language of Sec. 330. On the one hand, the District Court noted that it was bound to apply Pro-Snax regardless of whether it was correct. It also noted that many courts had disagreed with its logic. It then engaged in a rather tortured analysis of how Pro-Snax could be reconciled with the language of Sec. 330. Thus, the District Court fulfilled its obligation to follow binding precedent and did so with a straight face.
Finally, the District Court rejected the Bankruptcy Court's attempt to limit Pro-Snax to its original context of awarding fees to debtor's counsel. The District Court found that the language of Sec. 330 did not distinguish between different types of professionals.
The District Court ruling has been appealed to the Fifth Circuit. This may set the stage for the en banc Fifth Circuit to reconsider Pro-Snax.
Judge Boyle found that although the Fifth Circuit's Pro-Snax discussion of the correct standard to apply in awarding attorney's fees under Sec. 330 was dicta, that it was judicial dicta rather than obiter dicta. Judical dicta is defined as an opinion on an issue which was directly briefed and argued by the parties, but which was not essential to the decision. Judge Boyle found that judicial dicta should not be lightly disregarded. The Court also questioned whether the Circuit's instructions on the test to be applied on remand was really dicta at all.
The District Court engaged in a curious discussion of whether Pro-Snax was inconsistent with the language of Sec. 330. On the one hand, the District Court noted that it was bound to apply Pro-Snax regardless of whether it was correct. It also noted that many courts had disagreed with its logic. It then engaged in a rather tortured analysis of how Pro-Snax could be reconciled with the language of Sec. 330. Thus, the District Court fulfilled its obligation to follow binding precedent and did so with a straight face.
Finally, the District Court rejected the Bankruptcy Court's attempt to limit Pro-Snax to its original context of awarding fees to debtor's counsel. The District Court found that the language of Sec. 330 did not distinguish between different types of professionals.
The District Court ruling has been appealed to the Fifth Circuit. This may set the stage for the en banc Fifth Circuit to reconsider Pro-Snax.
Thursday, December 20, 2007
Dallas Judge Investigates Mortgage Rescue Scam; Urges Debtor's Bar to Warn Clients
Dallas Judge Stacey Jernigan recently issued an opinion concerning a mortgage protection scheme which the court found to prey upon both desperate debtors and mortgage lenders seeking to protect their legal rights. In re Michael White, No. 06-32324 (Bankr. N.D. Tex. 12/7/07). The Court ultimately concluded that the debtors were naive victims of a shady operation designed to fraudulently delay enforcement of mortgage liens. In addition to ordering the perpetrators to appear and show cause, the Court made a referral for a possible bankruptcy crime violation and urged the consumer debtor's bar to warn their clients about similar schemes.
Desperate Debtors
The debtors in this case filed chapter 13 to save their homestead. Unfortunately, they were not able to make the post-petition payments required. This led to an order conditioning the stay, which the debtors defaulted upon as well. With the stay lifted, the stage was set for the debtors to receive a barrage of solicitations (eight to twelve per day) from "foreclosure specialists" offering to legally save the house. The debtors responded to one of these offers from an operation calling itself "North American Foreclosure." According to North American Foreclosure, the debtors could delay foreclosure for years if they were to deed a 1% interest in their home to a company which would file bankruptcy and invoke a new automatic stay. In return for this service, the debtors would pay $650 per month to buy back the interest they had deeded over for as long as they needed the service. North American Foreclosure assured the debtors that everything was legitimate because: (a) the document transferring the 1% interest would be notarized; and (b) the transaction would be disclosed to the new bankruptcy court.
Although North American Foreclosure was apparently located in California, they arranged for a local agent named David Curtis, whose business card identified him as working for Jireh Capital Services, LLC to visit the debtor's home. This local agent had the debtors sign several contracts which required that payment be made in cash only. The Debtors were then given a backdated deed to sign. The deed was executed in the name of "C**** C****" who the debtors were assured was an agent of the company. On the eve of foreclosure, the mortage company's servicer received an anonymous fax containing a copy of the deed to C**** C**** and a copy of C**** C****'s bankruptcy petition which had been filed in the Central District of California the previous month.
The Lender Shows Good Sense
The mortgage servicer acted with remarkable restraint. As noted by the Court: "In any event, despite the questionable validity and effect of the Warranty Deed document, and despite the mysterious manner of its delivery (from anonymous senders), HomEq did what one might hope any prudent creditor would do: it took no further action with regard to its collection efforts as to the Homestead (i.e., it did not record the substitute trustee's deed reflecting the foreclosure sale that had already occurred earlier in the day) out of concern over the implications of the C**** C**** bankruptcy case and the automatic stay as to her alleged 1% interest." Memorandum Opinion and Order, p. 5.
HomEq's restraint was commendable in that this was not the first time they had received a notice involving conveyance of a fractional interest to a bankruptcy filer. According to HomEq, this was something which happened several times a month. As a result, they filed a Motion Requesting Show Cause Order. The Court ordered that both sets of debtors appear and show cause. The debtors in both the Northern District of Texas and the Central District of California showed remarkably good judgment by cooperating with Judge Jernigan's Show Cause Order. The Texas debtors testified and produced copies of their documents with North American Foreclosure. It turned out that the California debtor had filed a pro se petition and had nothing to do with the scheme. Instead, North American Foreclosure obtained the name of a random pro se debtor who had recently filed bankruptcy in the Central District of California and arranged for the deed to be executed in the name of an innocent third party.
Judge Jernigan accepted the Debtors' testimony. She concluded that, "This court is satisfied that the Whites have been naively duped in this matter and have not themselves knowingly or fraudulently participated in acts that might be described as a bankruptcy crime. (citation omitted). At worst, they appear to be 'bit characters' in a scheme to defraud borrowers and lenders alike who are in the midst of foreclosure proceedings." Memorandum Opinion and Order, p. 13.
A Cottage Industry of Bottom Feeders
Judge Jernigan had much greater concern for the perpetrators of the scheme. In a section of her opinion entitled "A New Cottage Industry of Bottom Feeders: For Every Action (i.e., Foreclosure Crisis) there is an Opposite Reaction (i.e., Folks Trying to Make a Buck)," she detailed other instances in which similar shenanigans had surfaced.
Judge Jernigan ordered North American Foreclosure, LLP (the instigator of the scheme), David Curtis (the local agent who signed the debtors up and took their money) and Jireh Capital Services, LLC (Curtis's company) to appear and show cause why they should not be found to have violated the automatic stay and be held liable for damages. The Court ominously noted that David Curtis might come to regret the fact that he had accepted a check from the debtors (despite the contract's cash only requirement), which created a paper trail.
The Court annulled the automatic stay to allow HomEq to record its substitute trustee's deed. This was more in the nature of a comfort order, since it appears unlikely that there was ever a new automatic stay arising from the C**** C**** bankruptcy.
The Court gave notice to the U.S. Attorney that a possible bankruptcy crime had taken place.
Plea to the Debtor's Bar
Finally, the Court issued a "Plea to the Consumer Debtor Bankruptcy Bar," stating:
"The court urges attorneys representing consumer debtors to warn their clients of the apparent schemes being solicited to debtors such as the Whites. while this court is of teh view in this matter that the Whites were naive 'bit characters' who did not fully understand the consequences of their actions and did not set out to defraud HomEq, this may not always be the case. The Whites have lost $1,300 and have not saved their home. This court suspects other debtors have lost even more. The court hopes that it will become a standard part of consumer debtor representation in this district to warn debtors of the hazards of dealing with some of the non-attorney Bankruptcy Services that are offering the illusion of relief from foreclosure for a steep fee."
Memorandum Opinion and Order, pp. 21-22. So, there you have it. Warn your clients. If something seems to be too easy, it is probably a scam. Also, please tell your clients that if you, as a trained bankruptcy professional cannot help them, that they should not expect that a non-lawyer who sends them a slick brochure and expects to be paid in cash can do any better.
Desperate Debtors
The debtors in this case filed chapter 13 to save their homestead. Unfortunately, they were not able to make the post-petition payments required. This led to an order conditioning the stay, which the debtors defaulted upon as well. With the stay lifted, the stage was set for the debtors to receive a barrage of solicitations (eight to twelve per day) from "foreclosure specialists" offering to legally save the house. The debtors responded to one of these offers from an operation calling itself "North American Foreclosure." According to North American Foreclosure, the debtors could delay foreclosure for years if they were to deed a 1% interest in their home to a company which would file bankruptcy and invoke a new automatic stay. In return for this service, the debtors would pay $650 per month to buy back the interest they had deeded over for as long as they needed the service. North American Foreclosure assured the debtors that everything was legitimate because: (a) the document transferring the 1% interest would be notarized; and (b) the transaction would be disclosed to the new bankruptcy court.
Although North American Foreclosure was apparently located in California, they arranged for a local agent named David Curtis, whose business card identified him as working for Jireh Capital Services, LLC to visit the debtor's home. This local agent had the debtors sign several contracts which required that payment be made in cash only. The Debtors were then given a backdated deed to sign. The deed was executed in the name of "C**** C****" who the debtors were assured was an agent of the company. On the eve of foreclosure, the mortage company's servicer received an anonymous fax containing a copy of the deed to C**** C**** and a copy of C**** C****'s bankruptcy petition which had been filed in the Central District of California the previous month.
The Lender Shows Good Sense
The mortgage servicer acted with remarkable restraint. As noted by the Court: "In any event, despite the questionable validity and effect of the Warranty Deed document, and despite the mysterious manner of its delivery (from anonymous senders), HomEq did what one might hope any prudent creditor would do: it took no further action with regard to its collection efforts as to the Homestead (i.e., it did not record the substitute trustee's deed reflecting the foreclosure sale that had already occurred earlier in the day) out of concern over the implications of the C**** C**** bankruptcy case and the automatic stay as to her alleged 1% interest." Memorandum Opinion and Order, p. 5.
HomEq's restraint was commendable in that this was not the first time they had received a notice involving conveyance of a fractional interest to a bankruptcy filer. According to HomEq, this was something which happened several times a month. As a result, they filed a Motion Requesting Show Cause Order. The Court ordered that both sets of debtors appear and show cause. The debtors in both the Northern District of Texas and the Central District of California showed remarkably good judgment by cooperating with Judge Jernigan's Show Cause Order. The Texas debtors testified and produced copies of their documents with North American Foreclosure. It turned out that the California debtor had filed a pro se petition and had nothing to do with the scheme. Instead, North American Foreclosure obtained the name of a random pro se debtor who had recently filed bankruptcy in the Central District of California and arranged for the deed to be executed in the name of an innocent third party.
Judge Jernigan accepted the Debtors' testimony. She concluded that, "This court is satisfied that the Whites have been naively duped in this matter and have not themselves knowingly or fraudulently participated in acts that might be described as a bankruptcy crime. (citation omitted). At worst, they appear to be 'bit characters' in a scheme to defraud borrowers and lenders alike who are in the midst of foreclosure proceedings." Memorandum Opinion and Order, p. 13.
A Cottage Industry of Bottom Feeders
Judge Jernigan had much greater concern for the perpetrators of the scheme. In a section of her opinion entitled "A New Cottage Industry of Bottom Feeders: For Every Action (i.e., Foreclosure Crisis) there is an Opposite Reaction (i.e., Folks Trying to Make a Buck)," she detailed other instances in which similar shenanigans had surfaced.
Judge Jernigan ordered North American Foreclosure, LLP (the instigator of the scheme), David Curtis (the local agent who signed the debtors up and took their money) and Jireh Capital Services, LLC (Curtis's company) to appear and show cause why they should not be found to have violated the automatic stay and be held liable for damages. The Court ominously noted that David Curtis might come to regret the fact that he had accepted a check from the debtors (despite the contract's cash only requirement), which created a paper trail.
The Court annulled the automatic stay to allow HomEq to record its substitute trustee's deed. This was more in the nature of a comfort order, since it appears unlikely that there was ever a new automatic stay arising from the C**** C**** bankruptcy.
The Court gave notice to the U.S. Attorney that a possible bankruptcy crime had taken place.
Plea to the Debtor's Bar
Finally, the Court issued a "Plea to the Consumer Debtor Bankruptcy Bar," stating:
"The court urges attorneys representing consumer debtors to warn their clients of the apparent schemes being solicited to debtors such as the Whites. while this court is of teh view in this matter that the Whites were naive 'bit characters' who did not fully understand the consequences of their actions and did not set out to defraud HomEq, this may not always be the case. The Whites have lost $1,300 and have not saved their home. This court suspects other debtors have lost even more. The court hopes that it will become a standard part of consumer debtor representation in this district to warn debtors of the hazards of dealing with some of the non-attorney Bankruptcy Services that are offering the illusion of relief from foreclosure for a steep fee."
Memorandum Opinion and Order, pp. 21-22. So, there you have it. Warn your clients. If something seems to be too easy, it is probably a scam. Also, please tell your clients that if you, as a trained bankruptcy professional cannot help them, that they should not expect that a non-lawyer who sends them a slick brochure and expects to be paid in cash can do any better.
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